<PAGE> 1
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FORM 10-Q
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
(Mark One)
[ X ] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES AND EXCHANGE ACT OF 1934
For the quarterly period ended September 30, 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
November 14, 1996 was 14,924,408.
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<PAGE> 2
HARCOR ENERGY, INC.
INDEX TO FORM 10-Q
FOR THE QUARTER ENDED SEPTEMBER 30, 1996
<TABLE>
<CAPTION>
Part I - Financial Information Page
------------------------------ ----
<S> <C>
Item 1. Financial Statements
Consolidated Balance Sheets as of September 30,
l996 (unaudited) and December 31, 1995 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1
Consolidated Statements of Operations for the Three
Months Ended September 30, 1996 and 1995 (unaudited) . . . . . . . . . . . . . . . . . . . . . . . . . 3
Consolidated Statements of Operations for the Nine
Months Ended September 30, 1996 and 1995 (unaudited) . . . . . . . . . . . . . . . . . . . . . . . . . 4
Consolidated Statement of Stockholders' Equity
for the Nine Months Ended September 30, 1996 (unaudited) . . . . . . . . . . . . . . . . . . . . . . . 5
Consolidated Statements of Cash Flows for the
Nine Months Ended September 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 . . . . . . . . . . . . . . . . . . . . . . . . . 14
Part II - Other Information
---------------------------
Item 6. Exhibits and Reports on Form 8-K . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 26
</TABLE>
<PAGE> 3
HARCOR ENERGY, INC.
CONSOLIDATED BALANCE SHEETS
AS OF SEPTEMBER 30, 1996 (UNAUDITED) AND DECEMBER 31, 1995
----------------------------------------------------------
ASSETS
<TABLE>
<CAPTION>
SEPTEMBER 30, DECEMBER 31,
1996 1995
------------ ------------
<S> <C> <C>
CURRENT ASSETS:
Cash and cash investments . . . . . . . . $ 8,697,259 $ 12,204,460
Accounts receivable . . . . . . . . . . . 3,958,932 3,829,548
Prepaids and other . . . . . . . . . . . 277,017 282,833
------------ ------------
Total current assets. . . . . . . . . . . 12,933,208 16,316,841
------------ ------------
PROPERTY AND EQUIPMENT, at cost,
successful efforts method:
Unproved oil and gas properties . . . . . 5,513,976 5,039,553
Proved oil and gas properties:
Leasehold costs . . . . . . . . . . . . 57,137,396 54,793,930
Plant, lease and well equipment . . . . 18,859,349 16,858,402
Intangible development costs . . . . . 26,637,052 18,547,293
Furniture and equipment . . . . . . . . . 337,358 256,211
------------ ------------
108,485,131 95,495,389
Less - accumulated depletion,
depreciation and amortization . . . . . (27,476,829) (22,647,657)
------------ ------------
Net property, plant and equipment . . . . 81,008,302 72,847,732
------------ ------------
OTHER ASSETS . . . . . . . . . . . . . . . 3,392,706 5,066,904
------------ ------------
$ 97,334,216 $ 94,231,477
============ ============
</TABLE>
The accompanying notes are an integral part
of these consolidated financial statements.
-1-
<PAGE> 4
HARCOR ENERGY, INC.
CONSOLIDATED BALANCE SHEETS
AS OF SEPTEMBER 30, 1996 (UNAUDITED) AND DECEMBER 31, 1995
----------------------------------------------------------
LIABILITIES AND STOCKHOLDERS' EQUITY
September 30, December 31,
1996 1995
------------- ------------
CURRENT LIABILITIES:
Short-term portion of 14-7/8% Senior
Secured Notes . . . . . . . . . . . . . $ 7,984,000 $ -
Short-term debt . . . . . . . . . . . . . 324,178 378,695
Accounts payable and accrued
liabilities . . . . . . . . . . . . . . 7,885,872 14,612,813
------------ ------------
Total current liabilities . . . . . . . . 16,194,050 14,991,508
------------ ------------
LONG-TERM BANK DEBT . . . . . . . . . . . . - 5,600,000
------------ ------------
OTHER LIABILITIES . . . . . . . . . . . . . 7,887 316,469
------------ ------------
14-7/8% SENIOR SECURED NOTES . . . . . . . 52,340,764 63,108,608
------------ ------------
COMMITMENTS AND CONTINGENCIES (Note 4)
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;
14,055,266 and 8,631,207 shares
outstanding at September 30, 1996
and December 31, 1995, respectively . . 1,405,527 863,121
Additional paid-in capital . . . . . . . . 49,725,549 29,163,670
Accumulated deficit . . . . . . . . . . . . (22,340,211) (19,812,549)
------------ ------------
Total stockholders' equity. . . . . . . . . 28,791,515 10,214,892
------------ ------------
$ 97,334,216 $ 94,231,477
============ ============
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
SEPTEMBER 30, 1996 AND 1995
(UNAUDITED)
-----------------------------------------
<TABLE>
<CAPTION>
Three Months Ended
September 30,
-------------------------------
1996 1995
----------- -----------
<S> <C> <C>
REVENUES:
Oil and gas revenues............................................. $ 5,115,231 $ 3,779,944
Gas plant operating and marketing revenues....................... 1,434,761 1,006,726
Interest income.................................................. 80,228 64,202
Other............................................................ 69,140 23,313
----------- -----------
6,699,360 4,874,185
----------- -----------
COSTS AND EXPENSES:
Production costs................................................. 1,200,392 1,281,165
Gas plant operating and marketing costs.......................... 765,111 628,306
Engineering and geological costs................................. 61,145 55,497
Depletion, depreciation and amortization......................... 1,510,881 1,933,714
General and administrative expenses.............................. 655,886 741,401
Interest expense................................................. 2,491,667 2,350,027
Other............................................................ 109,166 306,907
----------- -----------
6,794,248 7,297,017
----------- -----------
Loss before provision for income taxes and
extraordinary item............................................ (94,888) (2,422,832)
Provision for income taxes......................................... -- --
----------- -----------
Net operating loss before extraordinary item....................... (94,888) (2,422,832)
EXTRAORDINARY ITEM - Loss on early extinguishment of debt.......... (2,108,013) (1,888,433)
----------- -----------
Net loss......................................................... (2,202,901) (4,311,265)
Dividends on preferred stock....................................... $ (132,500) $ (195,918)
Accretion on redeemable preferred stock............................ -- (1,981,821)
----------- -----------
NET LOSS APPLICABLE TO COMMON STOCKHOLDERS......................... $(2,335,401) $(6,489,004)
=========== ===========
NET LOSS PER COMMON SHARE BEFORE EXTRAORDINARY ITEM................ $ (0.02) $ (0.55)
=========== ===========
NET LOSS PER COMMON SHARE AFTER EXTRAORDINARY ITEM................. $ (0.19) $ (0.78)
=========== ===========
</TABLE>
The accompanying notes are an integral part
of these consolidated financial statements.
-3-
<PAGE> 6
HARCOR ENERGY, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
FOR THE NINE MONTHS ENDED
SEPTEMBER 30, 1996 AND 1995
(UNAUDITED)
<TABLE>
<CAPTION>
Nine Months Ended
September 30,
--------------------------
1996 1995
----------- -----------
<S> <C> <C>
REVENUES:
Oil and gas revenues . . . . . . . . . . . . . . . . . . . . . . . $16,572,159 $10,835,771
Gas plant operating and marketing revenues . . . . . . . . . . . . 4,849,677 4,161,067
Interest income . . . . . . . . . . . . . . . . . . . . . . . . . . 91,948 85,120
Other . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 151,454 37,029
----------- -----------
21,665,238 15,118,987
----------- -----------
COST AND EXPENSES:
Production costs . . . . . . . . . . . . . . . . . . . . . . . . . 3,874,081 3,810,785
Gas plant operating and marketing costs . . . . . . . . . . . . . . 2,751,581 2,832,456
Engineering and geological costs . . . . . . . . . . . . . . . . . 226,297 237,513
Depletion, depreciation and amortization . . . . . . . . . . . . . 4,855,589 4,376,576
General and administrative expenses . . . . . . . . . . . . . . . . 2,197,610 1,957,449
Interest expense . . . . . . . . . . . . . . . . . . . . . . . . . 7,809,860 4,587,717
Other . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 369,869 306,907
----------- -----------
22,084,887 18,109,403
----------- -----------
Loss before provision for income taxes
and extraordinary item . . . . . . . . . . . . . . . . . . . . . (419,649) (2,990,416)
Provision for income taxes . . . . . . . . . . . . . . . . . . . . -- --
----------- -----------
Net operating loss before extraordinary item . . . . . . . . . . . (419,649) (2,990,416)
EXTRAORDINARY ITEM -- Loss on early extinguishment of debt . . . . . (2,108,013) (1,888,433)
----------- -----------
Net loss . . . . . . . . . . . . . . . . . . . . . . . . . . . . . (2,527,662) (4,878,849)
Dividends on preferred stock . . . . . . . . . . . . . . . . . . . . $ (397,500) $ (866,760)
Accretion on redeemable preferred stock . . . . . . . . . . . . . . . -- (2,146,812)
----------- -----------
NET LOSS APPLICABLE TO COMMON STOCKHOLDERS . . . . . . . . . . . . . $(2,925,162) $(7,892,421)
=========== ===========
NET LOSS PER COMMON SHARE BEFORE EXTRAORDINARY ITEM . . . . . . . . . $ (0.08) $ (0.78)
=========== ===========
NET LOSS PER COMMON SHARE AFTER EXTRAORDINARY ITEM . . . . . . . . . $ (0.30) $ (1.03)
=========== ===========
</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 NINE MONTHS ENDED SEPTEMBER 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) -
Issuance of common stock
pursuant to equity offering - - 5,359,059 535,906 21,256,169
Cancellation of warrants - - - - (290,290) -
Preferred stock dividends - - - - (397,500) -
Net loss for the nine months
ended September 30, 1996 - - - - - (2,527,662)
------ ------ ---------- ---------- ----------- ------------
Balance, September 30, 1996 65,000 $ 650 14,055,266 $1,405,527 $49,725,549 $(22,340,211)
====== ====== ========== ========== =========== ============
</TABLE>
The accompanying notes are an integral part
of these consolidated financial statements.
-5-
<PAGE> 8
HARCOR ENERGY, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE NINE MONTHS ENDED
SEPTEMBER 30, 1996 AND 1995
(UNAUDITED)
<TABLE>
<CAPTION>
Nine Months Ended
September 30,
--------------------------
1996 1995
------------ ------------
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net Loss . . . . . . . . . . . . . . . . . . . $(2,527,662) $(4,878,849)
Adjustments to reconcile net loss to net
cash provided by operating activities:
Depletion, depreciation and
amortization and impairment . . . . . . . 4,855,589 4,376,576
Amortization of deferred charges . . . . . . 727,528 364,276
Engineering and geological costs . . . . . . . 226,297 237,513
Loss on early extinguishment of debt . . . . . 2,108,013 1,888,433
Other . . . . . . . . . . . . . . . . . . . . 369,869 298,753
----------- -----------
5,759,634 2,286,702
Changes in working capital, net of
effects of non-cash transactions . . . . . . (2,961,466) (477,114)
----------- -----------
Net cash provided by operating activities . . 2,798,168 1,809,588
----------- -----------
CASH FLOWS FROM INVESTING ACTIVITIES:
Engineering and geological costs . . . . . . . (226,297) (237,513)
Additions to property and equipment . . . . . (17,649,797) (5,122,494)
Other . . . . . . . . . . . . . . . . . . . . -- 10,181
----------- -----------
Net cash used in investing activities . . . . (17,876,094) (5,349,826)
----------- -----------
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from long-term debt . . . . . . . . . 4,400,000 64,647,700
Repayment of bank debt . . . . . . . . . . . . (10,000,000) (39,300,000)
Redemption of Redeemable Preferred Stock . . . -- (10,995,361)
Redemption of Senior Secured Notes . . . . . . (3,644,000) --
Decrease in other debt and liabilities . . . . (363,099) (24,498)
Issuance of common stock . . . . . . . . . . . 21,792,075 --
Increase in other assets . . . . . . . . . . . (216,751) (3,004,407)
Dividends on preferred stock . . . . . . . . . (397,500) (331,661)
----------- -----------
Net cash provided by financing activities . . 11,570,725 10,991,773
----------- -----------
Net increase (decrease) in cash . . . . . . . (3,507,201) 7,451,535
Cash at beginning of period . . . . . . . . . 12,204,460 899,198
----------- -----------
Cash at end of period . . . . . . . . . . . . $ 8,697,259 $ 8,350,733
=========== ===========
</TABLE>
The accompanying notes are an integral part
of these consolidated financial statements.
-6-
<PAGE> 9
HARCOR ENERGY, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE NINE MONTHS ENDED SEPTEMBER 30, 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
$9,879,000 and $2,182,000 during the nine months ended September 30, 1996 and
1995, respectively.
SUPPLEMENTAL INFORMATION REGARDING NON-CASH INVESTING AND FINANCING ACTIVITIES
- - NINE MONTHS ENDED SEPTEMBER 30, 1996
The Company incurred non-cash charges of $370,000 in connection with
the write-off of a long-term investment which is not reflected in investing
activities.
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 September 30, 1996, the Company had accrued capital costs
aggregating $3,555,000 which are not reflected in investing activities in this
statement of cash flows.
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).
SUPPLEMENTAL INFORMATION REGARDING NON-CASH INVESTING AND FINANCING ACTIVITIES
- - NINE MONTHS ENDED SEPTEMBER 30, 1995
The Company incurred a non-cash charge of $261,000 in connection with
the write-off of a long-term investment which is not reflected in investing
activities.
In connection with the early adoption of a new accounting standard,
the Company wrote down the carrying value of oil and gas properties by $608,000
which is not reflected in investing activities.
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<PAGE> 10
The Company had accrued capital expenditure costs of $2,406,000 at
September 30, 1995 which are not reflected in investing activities.
Pursuant to the terms of its bridge loan facility, the Company issued
to its secured lender 75,000 shares of its common stock to which was ascribed a
value of $253,000 and reflected in deferred financing costs.
In connection with the refinancing of its long-term debt, the Company
incurred a non-cash charge of $1,888,000 in writing off all of the deferred
financing costs associated with the extinguished debt. Also in connection with
this refinancing, the Company issued warrants to which a value of $580,000 was
ascribed. These changes to deferred financing costs and addition to equity
resulting from the issuance of warrants are not reflected in financing
activities.
The Company's payment of dividends on its Series D Preferred Stock
included "in-kind" dividends consisting of $476,000 in newly-issued Series D
Preferred Stock. Dividends paid on the Convertible Series E Preferred Stock
included newly-issued unregistered shares of the Company's common stock to
which a value of $60,000 was ascribed. These portions of dividend payments as
described are not reflected in financing activities. The Company also incurred
aggregate non-cash accretion charges of $2,147,000 on its Series D Preferred
Stock which are not reflected in financing activities.
The accompanying notes are an integral part
of these consolidated financial statements.
-8-
<PAGE> 11
HARCOR ENERGY, INC.
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
SEPTEMBER 30, 1996
(1) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
PRINCIPLES OF CONSOLIDATION -
The accompanying consolidated financial statements for the nine months
ended September 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 nine months ended September 30, 1996 include the
accounts and results of HarCor, and Warrior and HTACI 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.
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
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<PAGE> 12
changes in stockholders' equity for the three-month and nine-month periods
ended September 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 September 30, 1996 and
December 31, 1995 were comprised of the following (amounts in thousands):
<TABLE>
<CAPTION>
September 30, December 31,
1996 1995
------------- ------------
<S> <C> <C>
Accrued development costs. . . . . . . $ 3,555 $ 8,188
Accrued interest payable . . . . . . . 2,710 4,217
Trade accounts payable and other . . . 1,621 2,208
------- -------
$ 7,886 $14,613
======= =======
</TABLE>
CAPITALIZED INTEREST COSTS-
Interest costs of $474,000 for the nine months ended September 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.
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 12,216,000 and
8,344,000 for the three months ended September 30, 1996 and 1995, respectively,
and 9,874,000 and 7,658,000 for the nine months ended September 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
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<PAGE> 13
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
$15 million at September 30, 1996. Availability under the Credit Agreement will
terminate on June 30, 1997 (unless renewed by ING), and 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. 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. There were no borrowings outstanding under
the Credit Agreement at September 30, 1996.
(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 stock. The warrants became immediately
detachable upon the closing of the Note Offering.
The difference between the face value of the Notes ($65 million at the
close of the Note Offering and $53.7 million at September 30, 1996) 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
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<PAGE> 14
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 redeemed
$3,290,000 of the Notes on August 31, 1996 for an aggregate redemption price of
$3,619,000. On October 21, 1996 the Company further redeemed $7,984,000 of the
Notes for an aggregate redemption price of $8,782,000.
(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 September 30, 1996, the Company was a party to gas contracts
covering volumes of approximately 0.5 Bcf for the remainder of 1996 and 1.48
Bcf for 1997 at prices ranging from $1.68/MMBtu to $2.07/MMBtu. The Company
also has a gas contract covering 0.5 Bcf for the remainder of 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 open-position oil
hedges covering notional volumes of approximately 43,000 barrels for the
remainder of 1996, 98,000 and 58,000 barrels for 1997 and 1998, respectively,
at prices ranging from $17.25/Bbl. to $18.05/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.
Pursuant to an agreement with the underwriter of the Company's Note Offering, a
warrant to purchase
-12-
<PAGE> 15
350,000 shares of the Company's common stock at $3.85 per share was returned to
the Company and canceled, and a warrant for 99,750 shares with the same terms
was issued to a related party in exchange.
PREFERRED STOCK DIVIDENDS -
The Company has paid dividends on preferred stocks for the nine months
ended September 30, 1996 and 1995 as follows:
<TABLE>
<CAPTION>
Nine Months Ended
September 30,
-----------------------
1996 1995
-------- ---------
<S> <C> <C>
8% Convertible (Series A, B, C) . . . . . . . . . . . . . $195,000 $200,000
9% Redeemable (Series D) . . . . . . . . . . . . . . . . . - 539,000
9% Convertible (Series E) . . . . . . . . . . . . . . . . 202,500 128,000
-------- --------
$397,500 $867,000
======== ========
</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 in additional shares of Series D Redeemable Preferred Stock. The Series D
Redeemable Preferred Stock was redeemed by the Company in July 1995. Dividends
on the Series E Preferred Stock for 1995 were paid in shares of common stock of
the Company for the first six months of 1995 and cash for all periods
thereafter. The coupon rate on the Series E increased from 4% per annum to 9%
per annum effective July 1, 1995.
CONVERSION OF SERIES E PREFERRED STOCK- In October 1996 the holder of
the 9% Series E Junior Convertible Preferred Stock, pursuant to the terms
thereof, elected to convert all of its 30,000 shares of the Series E Preferred
Stock into 857,143 shares of common stock of the Company.
(6) 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. On August 28, 1996, the
underwriters of the Equity Offering exercised an over-allotment option to sell
an additional 300,000 shares of Common Stock. The Company realized net
proceeds of approximately $22.5 million from the Equity Offering after
underwriters' discount and before direct expenses. There were 14,055,266 total
primary common shares outstanding effective with the completion of the Equity
Offering.
The Company immediately used $10 million of the proceeds from the Equity
Offering to repay the total outstanding under its Credit Agreement at that time.
Pursuant to the terms of its Note Offering completed in July 1995, the Company
used an aggregate of $11.3 million of the proceeds from the Equity Offering to
redeem a portion of its Senior Secured 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.
-13-
<PAGE> 16
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 SEPTEMBER 30, 1996 AND 1995
REVENUES - The Company's total revenues increased $1,825,000 (37%)
from $4,874,000 in third quarter 1995 to $6,699,000 in the current period.
The Company's oil and gas revenues increased $1,335,000 (35%) from
$3,780,000 in the third quarter of 1995 to $5,115,000 in the current period.
Oil revenues increased $516,000 (30%) from $1,719,000 in third quarter 1995 to
$2,235,000 in the current period due to higher levels of oil production and
higher unit prices. Oil production increased 16,700 barrels (16%) from 102,900
barrels in the third quarter of 1995 to 119,600 barrels in the current period.
The increased production was primarily a result of the continued drilling and
development of the Bakersfield Properties, which contributed an incremental
14,300 barrels during the current period as compared to the third quarter of
1995. Oil production from the Company's Permian and other properties increased
approximately 2,400 barrels in the aggregate in the current period. The average
unit price received for oil was $20.42 per barrel during third quarter 1996
(exclusive of hedging charges of $207,000) compared to $16.72 per barrel for
the same period in 1995.
The Company's gas revenues increased $820,000 (40%) from $2,060,000 in
the third quarter of 1995 to $2,880,000 in the current period also due to
increased production and higher unit prices. Gas production increased 93,000
Mcf (7%) from 1,305,000 Mcf in third quarter 1995 to 1,398,000 Mcf in the
current quarter primarily due to the continued drilling and development of the
Bakersfield Properties, which contributed an incremental 65,000 Mcf during the
current period. Additionally, gas production from the Company's South Texas
Properties increased 42,000 Mcf during the current period due to developmental
drilling. Gas production from the Company's Permian and other properties
decreased slightly in the current period. Average unit prices received for gas
increased in the current period to $2.06 per Mcf as compared to $1.58 per Mcf
in the third quarter of 1995.
During the current quarter, the Company realized revenues of
$1,435,000 from its natural gas processing plant and gas marketing activities.
These revenues consisted of $1,038,000 from the sale of 2,473,000 gallons of
processed natural gas liquids (NGLs), $367,000 from the resale of natural gas
purchased from third parties, and $30,000 in processing fees. During the third
quarter of 1995, the Company realized revenues of $1,007,000 from the gas
-14-
<PAGE> 17
plant and gas marketing activities, consisting of $256,000 in the resale of
purchased natural gas, $723,000 from the sale of 2,139,000 gallons of NGLs,
and $28,000 in gas processing fees. The plant's net operating margin (see
plant costs under "Costs and Expenses" which follows) increased $287,000 (75%)
in the current period due primarily to increased NGLs sales as a result of
increased inlet volumes from higher lease gas production, improvements in
operating efficiency, and higher NGL prices.
The Company realized total interest and other income of $149,000 in
the third quarter of 1996 as compared to $87,000 during the third quarter of
1995.
COSTS AND EXPENSES - Total costs and expenses decreased $503,000 (7%)
from $7,297,000 in third quarter 1995 to $6,794,000 in the current period.
The Company's oil and gas production costs decreased slightly ($81,000
or 6%) from $1,281,000 in the third quarter of 1995 to $1,200,000 in the
current period although oil and gas production levels increased during the same
period. 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 increased slightly in the
aggregate during the current period. The Company's total aggregate production
cost per barrel of oil equivalent ("BOE") decreased from $4.01 per BOE in third
quarter 1995 to $3.40 per BOE in the current period.
During the third quarter of 1996, the Company incurred costs of
$766,000 resulting from the operations of its natural gas processing plant and
gas marketing activities. These costs included $410,000 for the purchase of
natural gas for resale and $356,000 of direct fixed and variable operating
expenses. During the third quarter of 1995, the Company incurred costs of
$628,000 from gas plant and gas marketing activities, consisting of $220,000
from the purchase of natural gas for processing and resale and $408,000 of
direct operating expenses.
The Company incurred engineering and geological expenses of $61,000
and $55,000 during the three months ended September 30, 1996 and 1995,
respectively.
The Company's total depletion, depreciation and amortization ("DD&A")
expense decreased $423,000 (22%) from $1,934,000 in third quarter 1995 to
$1,511,000 in the third quarter of 1996. This was due to the inclusion of a
$608,000 charge in third quarter 1995 pursuant to the adoption of SFAS 121
(Accounting for the Impairment of Long-Lived Assets). Exclusive of this
charge, DD&A expense increased $185,000 (14%) in the current period 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 $4.15 in the current period as compared to an estimated
$3.55 per BOE during third quarter 1995 (exclusive of the SFAS 121 charge).
-15-
<PAGE> 18
The Company's general and administrative expenses were $656,000 and
$741,000 for the three months ended September 30, 1996 and 1995, respectively,
representing a decrease of $85,000 (12%) in the current period.
The Company's interest expense increased $142,000 (6%) from $2,350,000
in third quarter 1995 to $2,492,000 in third 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. This higher cost debt
was outstanding during the entire current quarter (exclusive of the $3,290,000
redeemed on August 31st) as compared to approximately two months of third
quarter 1995. Dividends on preferred stock were $132,000 in the third quarter
of 1996 as compared to $196,000 in the third quarter of 1995.
EXTRAORDINARY ITEM - The Company incurred an extraordinary charge of
$2,108,000 in the current period resulting from the early redemption of
$11,274,000 of its Senior Secured Notes. This charge consisted of a $1,127,000
premium pursuant to the terms of the Notes and redemption, $295,000 in
acceleration of accretion relating to the redeemed portion of the Notes, and a
$686,000 write-off of deferred financing charges and miscellaneous expenses.
The Company incurred in the prior period a non-cash charge of $1,888,000
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 before extraordinary item
was $95,000 for the three months ended September 30, 1996. Net loss after
extraordinary item was $2,203,000 while net loss attributable to common
stockholders was $2,335,000 ($.19 per share) after preferred dividends. For
the three months ended September 30, 1995, the Company had a net operating loss
of $2,423,000 and net loss to common stockholders of $6,489,000 ($.78 per
share) after preferred dividends and accretion.
COMPARISON OF RESULTS FOR THE NINE MONTHS
ENDED SEPTEMBER 30, 1996 AND 1995
REVENUES - The Company's total revenues increased $6,546,000 (43%)
from $15,119,000 during the first nine months of 1995 to $21,665,000 in the
current period.
The Company's oil and gas revenues increased $5,736,000 (53%) from
$10,836,000 in the first nine months of 1995 to $16,572,000 in the current
period. Oil revenues increased $2,185,000 (42%) from $5,244,000 in first nine
months of 1995 to $7,429,000 in the current period due to higher levels of oil
production and higher average unit prices. Oil production increased 93,000
barrels (29%) from approximately 316,000 barrels in the first nine months of
1995 to 409,000 barrels in the current period. The increased production was a
result of the continued drilling and development of the Bakersfield Properties,
during 1996. The Company's drilling activities in that area included
twenty-two successful wells during the current nine months, including its first
horizontal well. Oil production from the Company's Permian and other
properties remained flat in the aggregate from period to period. The average
unit
-16-
<PAGE> 19
price received for oil was $19.33 per barrel during the first nine months
of 1996 (exclusive of hedging charges of $487,000) compared to $16.58 per
barrel for the same period in 1995.
The Company's gas revenues increased $3,552,000 (64%) from $5,591,000
in the first nine months of 1995 to $9,143,000 in the current period also due
to higher levels of production and higher average unit prices. Gas production
increased 1,094,000 Mcf (31%) from 3,561,000 Mcf in first nine months of 1995
to 4,655,000 Mcf in the first nine months of 1996 primarily due to the
continued drilling and development of the Bakersfield Properties, which
contributed an incremental 947,000 Mcf during the current period as compared to
the same period in 1995. Gas production from the Company's South Texas
Properties increased 156,000 Mcf during the current period due to developmental
work, while gas production from the Company's Permian and other properties
remained flat from period to period. Average unit prices received for gas were
$1.96 per Mcf in nine months 1996 as compared to $1.57 per Mcf in the first
nine months of 1995.
During the first nine months of 1996, the Company realized revenues of
$4,850,000 from its natural gas processing plant and gas marketing activities.
These revenues consisted of $3,211,000 from the sale of 7,604,000 gallons of
NGLs, $1,539,000 from the resale of natural gas purchased from third parties,
and $100,000 in processing fees. During the first nine months of 1995, the
Company realized revenues of $4,161,000 from gas plant and gas marketing
activities, consisting of $1,913,000 in the resale of natural gas, $2,165,000
from the sale of NGLs (5,977,000 gallons), and $83,000 in gas processing fees.
The plant's net operating margin (see plant costs under "Costs and Expenses"
which follows) increased $769,000 (58%) due primarily to increased NGLs sales
as a result of increased inlet volumes from higher lease gas production,
improved operating efficiencies and higher NGL prices.
The Company realized total interest and other income of approximately
$243,000 in the first nine months of 1996 as compared to $122,000 during the
same period in 1995.
COSTS AND EXPENSES - Total costs and expenses increased $3,976,000
(22%) from $18,109,000 in first nine months of 1995 to $22,085,000 in the
current period.
The Company's oil and gas production costs increased slightly in the
aggregate ($63,000 or 2%) from $3,811,000 in the first nine months of 1995 to
$3,874,000 in the current period although production increased significantly in
the current period. 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 remained
flat from period to period. The Company's total aggregate production cost per
BOE declined from $4.18 per BOE for the first nine months of 1995 to $3.27 per
BOE in the current period.
-17-
<PAGE> 20
During the first nine months of 1996, the Company incurred costs of
$2,752,000 resulting from its natural gas processing plant and gas marketing
activities. These costs included $1,405,000 from the purchase of natural gas
for processing and resale and $1,347,000 of fixed and variable direct operating
expenses. During the first nine months of 1995, the Company incurred costs of
$2,832,000 in gas plant and gas marketing activities, consisting of $1,634,000
from the purchase of natural gas for processing and resale and $1,198,000 of
direct operating expenses.
The Company incurred engineering and geological expenses of $226,000
and $237,000 during the nine months ended September 30, 1996 and 1995,
respectively.
The Company's total DD&A expense increased $479,000 (11%) from
$4,377,000 in first nine months of 1995 to $4,856,000 in the first nine months
of 1996. DD&A in 1995 included a $608,000 charge pursuant to the adoption of
SFAS 121 (Accounting for the Impairment of Long-Lived Assets). Exclusive of
this charge, DD&A expense increased $1,087,000 (29%) in the current period 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 $3.85 in the current period
as compared to $4.18 during first nine months of 1995 (exclusive of the SFAS
121 charge).
The Company's general and administrative expenses were $2,197,000 and
$1,957,000 for the nine months ended September 30, 1996 and 1995, respectively,
representing an increase of $240,000 (12%) in the current period, which is a
result of the Company's continued growth and expansion during the year.
The Company's interest expense increased $3,222,000 from $4,588,000 in
first nine months of 1995 to $7,810,000 in first nine months of 1996. This was
due primarily 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.
This higher cost debt was outstanding for the entire nine months of 1996
(exclusive of the $3,290,000 redeemed on August 31st) as compared to
approximately two months during the comparable period in 1995. Also affecting
interest expense in the current period was an increase in amortization of
deferred financing costs resulting from the July 1995 refinancing.
Dividends on preferred stock were $397,000 in the first nine months of
1996, as compared to $867,000 in the first nine months of 1995. Dividends in
1996 were comprised entirely of cash, while 1995 dividends consisted of
$332,000 in cash, $475,000 in Series D Preferred Stock and $60,000 in common
stock of the Company. The Series D Preferred Stock is no longer outstanding
which accounts for the lower dividends during the current period.
EXTRAORDINARY ITEM - The Company incurred an extraordinary charge of
$2,108,000 in the current period resulting from the early redemption of
$11,274,000 of its Senior Secured Notes. The charge consisted of a $1,127,400
(10%) premium pursuant to the terms of the Notes and redemption, $295,000 in
acceleration of accretion
-18-
<PAGE> 21
relating to the redeemed portion of the Notes, and a $686,000 write-off of
deferred financing charges and miscellaneous expenses. In 1995 the Company
incurred a non-cash charge of $2,147,000 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 before extraordinary item
was $420,000 for the nine months ended September 30, 1996. Net loss after
extraordinary item was $2,528,000, while net loss attributable to common
stockholders was $2,925,000 ($.30 per share) after preferred dividends. For
the nine months ended September 30, 1995, the Company had a net operating loss
of $2,990,000 and net loss to common stockholders of $7,892,000 ($1.03 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 nine months ended September 30, 1996,
the Company generated net cash from operations of $2,798,000 as compared to
$1,810,000 during the same period in 1995.
The Company utilized a total of $17,876,000 for investing activities
in the current period, which consisted mainly of developmental drilling
activities, as compared to $5,350,000 during the first nine months of 1995.
The Company realized net proceeds of $11,571,000 from financing
activities during the current period. The Company raised net proceeds of
approximately $21,792,000 in an equity offering and used an aggregate of
$10,221,000 to repay debt ($5,600,000 net), redeem a portion of the Senior
Secured Notes ($3,644,000) and pay preferred dividends and miscellaneous
activities ($977,000). During the same period in 1995 the Company realized net
proceeds from financing activities of $10,992,000. This consisted of
$64,648,000 raised in the 14-7/8% Senior Secured Note Offering and an aggregate
of $53,656,000 used to repay bank debt ($39,300,000), redeem the Series D
Preferred Stock ($10,995,000) and pay an aggregate of $3,361,000 in transaction
costs, preferred dividends and miscellaneous activities.
WORKING CAPITAL - The Company had a working capital deficit of
$3,261,000 with a current ratio of 0.8:1 at September 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 September 30, 1996, was an aggregate
of $8,872,000 relating to the redemption of a portion of the Company's
long-term Senior Secured Notes in October 1996, which was therefore classified
as short-term at September 30, 1996.
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,
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<PAGE> 22
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.
During the nine months ended September 30, 1996, the Company generated
discretionary cash flow of $5,760,000 (before changes in other working capital
of $2,961,000). This compares to $2,287,000 (before changes in other working
capital of $477,000) 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's drilling
activities in that area included twenty-two successful wells during the current
period, including its first horizontal well. The Company had a total of 157
producing wells in this area at September 30, 1996, as compared to 105
producing wells at September 30, 1995. As a consequence of these drilling
activities and the acquisition of certain additional interests in these
properties in July 1995, the Company's production from the Bakersfield
Properties averaged approximately 1,075 BPD and 11,400 Mcfd for the first nine
months of 1996, showing increases of 48% and 44%, respectively, over the prior
period's average rates of 725 BPD and 7,900 Mcfd.
The Company also realized a net operating margin of $2,098,000 on its
gas plant operations and marketing activities in first nine months of 1996 as
compared to $1,329,000 in first nine months of 1995. This was primarily due to
increased NGLs sales as a result of increased inlet volumes from higher lease
gas production levels, improved operating efficiencies and higher NGL prices.
The Company expects further improvement in operating cash flows in
future periods as a result of its continuing drilling and development program.
As of September 30, 1996, all of the wells drilled on the Bakersfield
Properties were completed and producing. The Company resumed its vertical
drilling and development activity on the Ellis lease in the second quarter with
a 15 well program that was completed during the third quarter. The Company is
currently drilling additional vertical wells on the Bakersfield Properties. 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
$15 million at September 30, 1996, and there was no balance outstanding under
the Credit Agreement at that date. Availability under the Credit Agreement
will terminate on June 30, 1997 (unless renewed by ING), at which
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<PAGE> 23
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. 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 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. The Company believes that it was in compliance
with all of the covenant provisions under the Credit
Agreement at September 30, 1996.
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.
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.
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<PAGE> 24
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 redeemed $3,290,000 of the Notes on August 31, 1996, for an
aggregate redemption price of $3,619,000. On October 21, 1996, the Company
further redeemed $7,984,000 of the Notes for an aggregate redemption price of
$8,782,000. There are currently $53,726,000 Senior Secured Notes outstanding.
The Company anticipates that it will save approximately $1.8 million in future
annualized interest costs as a result of the redemption of these Notes.
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. On August 28, 1996, the
underwriters of the Equity Offering exercised an over-allotment option to sell
an additional 300,000 shares of the Company's common stock. The Company
realized net proceeds of approximately $22.5 million from the Equity Offering
after underwriters' discount and before direct expenses.
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
used an aggregate of $12.4 million to redeem $11.3 million of its 14-7/8% Senior
Secured Notes (see preceding "Senior Secured Notes"). The remaining net proceeds
to the Company, along with availability under the Credit Agreement, 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 nine months ended September 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 approximately $17.6 million in drilling, development and
related expenditures during the current period, the majority of which were
related to the continued development of the Bakersfield Properties. Of this
amount, $8.2 million related to payment of costs incurred and accrued at
December 31, 1995.
Based on current engineering estimates, the Company anticipates that
as of September 30, 1996, total additional drilling necessary to develop the
proven reserves of Bakersfield Properties will result in approximately 158 new
wells at an estimated capital cost of $48 million based on current drilling
costs. Approximately $5.5 million is planned to be spent during the remainder
of 1996, $12 million in 1997 and $30 million thereafter. These future
development costs for the Bakersfield Properties also include additional costs
for full development of a waterflood project in the Diatomite Formation on the
Ellis Lease. During July, 1996 water injection was initiated in the waterflood
pilot project area with completion of the installation of the
-22-
<PAGE> 25
entire project anticipated by January 1, 1999. These estimates may vary as the
Company further evaluates the results of drilling activities and results of
future operations.
Results of the Company's first horizontal well which was drilled in
the second quarter are continuing to be evaluated before a decision is made to
further test the Diatomite Zone with a second horizontal well or test the
applicability of horizontal development for producing the deeper Reef Ridge
Shale zones on the Ellis Lease. If results are favorable, 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
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 - In furtherance of its 3-D seismic/exploration
efforts, 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 in South Texas; the Terrebonne Parish area of South
Louisiana; and an area in Reeves County, Texas. The Company has working
interests of 22.7%, 7.5% and 12.5% in these projects, respectively. The
projects' area of mutual interest covers approximately 160,000 acres and will
entail shooting 3-D seismic data over approximately 200 square miles. 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 15-month period.
<TABLE>
<CAPTION>
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>
The Company expects to commence drilling two wells in the Hostetter
Field and one well in Reeves County by year-end. Drilling should commence in
the Terrebonne Parish area by the end of the first quarter 1997.
-23-
<PAGE> 26
FINANCIAL COMMITMENTS - 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. The Company also intends to
explore other financial alternatives to redeem additional of its 14-7/8% Senior
Secured Notes with lower-cost debt which would provide the benefit of future
interest cost savings. Any such acquisitions, projects or Note redemptions
would require borrowings under the Credit Agreement and possibly additional
debt financings if needed.
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
-24-
<PAGE> 27
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.
-25-
<PAGE> 28
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
-26-
<PAGE> 29
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934,
the Registrant has duly caused this report to be signed on its behalf by the
undersigned, thereunto duly authorized.
HARCOR ENERGY, INC.
Registrant
Date: November 14, 1996 /s/ Francis H. Roth
-----------------------------
Francis H. Roth
President and Chief
Operating Officer
Date: November 14, 1996 /s/ Gary S. Peck
------------------------------
Gary S. Peck
Vice President-Finance
Chief Accounting Officer
-27-
<PAGE> 30
INDEX TO EXHIBIT
EXHIBIT NO. DESCRIPTION
----------- -----------
27 Financial Data Schedule
<TABLE> <S> <C>
<ARTICLE> 5
<MULTIPLIER> 1
<CURRENCY> U.S. DOLLARS
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> DEC-31-1996
<PERIOD-START> JUL-01-1996
<PERIOD-END> SEP-30-1996
<EXCHANGE-RATE> 1
<CASH> 8,697,259
<SECURITIES> 0
<RECEIVABLES> 3,958,932
<ALLOWANCES> 0
<INVENTORY> 0
<CURRENT-ASSETS> 12,933,208
<PP&E> 108,485,131
<DEPRECIATION> 27,476,829
<TOTAL-ASSETS> 97,334,216
<CURRENT-LIABILITIES> 16,194,050
<BONDS> 52,340,764<F1>
0
650
<COMMON> 0
<OTHER-SE> 28,791,515
<TOTAL-LIABILITY-AND-EQUITY> 97,334,216
<SALES> 6,549,992
<TOTAL-REVENUES> 6,699,360
<CGS> 1,965,503<F2>
<TOTAL-COSTS> 1,965,503
<OTHER-EXPENSES> 2,227,912<F3>
<LOSS-PROVISION> 2,491,667
<INTEREST-EXPENSE> (227,388)
<INCOME-PRETAX> 0
<INCOME-TAX> 0
<INCOME-CONTINUING> 0
<DISCONTINUED> 0
<EXTRAORDINARY> (2,108,013)
<CHANGES> 0
<NET-INCOME> (2,335,401)
<EPS-PRIMARY> (0.19)
<EPS-DILUTED> (0.19)
<FN>
<F1>14 7/8% Senior Secured Notes due 2002
<F2>Oil and Gas Production costs and Gas Plant costs
<F3>Exploration, DD&A, General & Admin.
</FN>
</TABLE>
