<PAGE> 1
================================================================================
FORM 10-Q
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
----------------------
(Mark One)
[ X ] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE
SECURITIES AND EXCHANGE ACT OF 1934
For the quarterly period ended March 31, 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 7027-3413
(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 May
14, 1996 was 8,696,207.
================================================================================
<PAGE> 2
HARCOR ENERGY, INC.
INDEX TO FORM 10-Q
FOR THE QUARTER ENDED MARCH 31, 1996
<TABLE>
<CAPTION>
Part I - Financial Information Page
------------------------------ ----
<S> <C>
Item 1. Financial Statements
Consolidated Balance Sheets as of March 31,
1996 (unaudited) and December 31, 1995 1
Consolidated Statements of Operations for the Three
Months Ended March 31, 1996 and 1995 (unaudited) 3
Consolidated Statement of Stockholders' Equity
for the Three Months Ended March 31, 1996 (unaudited) 4
Consolidated Statements of Cash Flows for the
Three Months Ended March 31, 1996 and 1995 (unaudited) 5
Notes to Unaudited Consolidated Financial Statements 7
Item 2. Management's Discussion and Analysis of
Financial Condition and Results of Operations 12
Part II - Other Information
---------------------------
Item 6. Exhibits and Reports on Form 8-K 21
</TABLE>
<PAGE> 3
HARCOR ENERGY, INC.
CONSOLIDATED BALANCE SHEETS
AS OF MARCH 31, 1996 (UNAUDITED) AND DECEMBER 31, 1995
ASSETS
<TABLE>
<CAPTION>
March 31, December 31,
1996 1995
----------- -----------
<S> <C> <C>
CURRENT ASSETS:
Cash and cash investments . . . . . . . . . . . . . . . . . . $ 3,976,750 $12,204,460
Accounts receivable . . . . . . . . . . . . . . . . . . . . . 3,699,634 3,829,548
Prepaids and other . . . . . . . . . . . . . . . . . . . . . 398,385 282,833
---------- ----------
Total current assets . . . . . . . . . . . . . . . . . . . . 8,074,769 16,316,841
---------- ----------
PROPERTY AND EQUIPMENT, at cost,
successful efforts method:
Unproved oil and gas properties . . . . . . . . . . . . . . . 5,211,556 5,039,553
Proved oil and gas properties:
Leasehold costs . . . . . . . . . . . . . . . . . . . . . . 55,670,301 54,793,930
Plant, lease and well equipment . . . . . . . . . . . . . . 18,120,654 16,858,402
Intangible development costs . . . . . . . . . . . . . . . 19,371,617 18,547,293
Furniture and equipment . . . . . . . . . . . . . . . . . . . 262,740 256,211
---------- ----------
98,636,868 95,495,389
Less - accumulated depletion,
depreciation and amortization . . . . . . . . . . . . . . . (24,354,217) (22,647,657)
---------- ----------
Net property, plant and equipment . . . . . . . . . . . . . . 74,282,651 72,847,732
---------- ----------
OTHER ASSETS . . . . . . . . . . . . . . . . . . . . . . . . . 4,413,029 5,066,904
---------- ----------
$86,770,449 $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 MARCH 31, 1996 (UNAUDITED) AND DECEMBER 31, 1995
LIABILITIES AND STOCKHOLDERS' EQUITY
<TABLE>
<CAPTION>
March 31, December 31,
1996 1995
----------- -----------
<S> <C> <C>
CURRENT LIABILITIES:
Short-term debt . . . . . . . . . . . . . . . . . . . . . . . $ 595,876 $ 378,695
Accounts payable and
accrued liabilities . . . . . . . . . . . . . . . . . . . . 5,689,828 14,612,813
---------- ----------
Total current liabilities . . . . . . . . . . . . . . . . . . 6,285,704 14,991,508
---------- ----------
LONG-TERM BANK DEBT . . . . . . . . . . . . . . . . . . . . . . 7,500,000 5,600,000
---------- ----------
OTHER LIABILITIES . . . . . . . . . . . . . . . . . . . . . . . 240,169 316,469
---------- ----------
14-7/8% SENIOR SECURED NOTES . . . . . . . . . . . . . . . . . 63,180,433 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 March 31,
1996 and December 31, 1995,
respectively . . . . . . . . . . . . . . . . . . . . . . . 869,621 863,121
Additional paid-in capital . . . . . . . . . . . . . . . . . 28,734,380 29,163,670
Accumulated deficit . . . . . . . . . . . . . . . . . . . . . (20,040,508) (19,812,549)
---------- ----------
Total stockholders' equity . . . . . . . . . . . . . . . . . 9,564,143 10,214,892
---------- ----------
$86,770,449 $94,231,477
========== ==========
</TABLE>
The accompanying notes are an integral part
of these consolidated financial statements.
-2-
<PAGE> 5
HARCOR ENERGY, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
FOR THE THREE MONTHS ENDED
MARCH 31, 1996 AND 1995
(UNAUDITED)
<TABLE>
<CAPTION>
Three Months Ended
March 31,
---------------------------------
1996 1995
---------- ----------
<S> <C> <C>
REVENUES:
Oil and gas revenues . . . . . . . . . . . . . . . . . . . . . . $5,956,058 $3,683,309
Gas plant operating
and marketing revenues . . . . . . . . . . . . . . . . . . 1,623,785 1,785,306
Interest income . . . . . . . . . . . . . . . . . . . . . . . . . 10,310 6,833
Other . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 6,413 8,282
--------- ---------
7,596,566 5,483,730
--------- ---------
COSTS AND EXPENSES:
Production costs . . . . . . . . . . . . . . . . . . . . . . . . 1,436,729 1,263,087
Gas plant operating
and marketing costs . . . . . . . . . . . . . . . . . . . 956,190 1,410,349
Engineering and geological costs . . . . . . . . . . . . . . . . 101,007 88,665
Depletion, depreciation and
amortization . . . . . . . . . . . . . . . . . . . . . . . . . 1,706,560 1,346,247
General and administrative expenses . . . . . . . . . . . . . . . 720,795 665,900
Interest expense . . . . . . . . . . . . . . . . . . . . . . . . 2,642,541 1,129,996
Other . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 260,703 -
--------- ---------
7,824,525 5,904,244
--------- ---------
Loss before provision for income tax. . . . . . . . . . . . . . . (227,959) (420,514)
Provision for income taxes . . . . . . . . . . . . . . . . . . . . - -
--------- ---------
Net operating loss . . . . . . . . . . . . . . . . . . . . . . . (227,959) (420,514)
Dividends on preferred stock . . . . . . . . . . . . . . . . . . . (132,500) (335,242)
Accretion on redeemable preferred
stock . . . . . . . . . . . . . . . . . . . . . . . . . . . . . - (80,986)
--------- ---------
NET LOSS APPLICABLE TO COMMON
STOCKHOLDERS . . . . . . . . . . . . . . . . . . . . . . . . . . $ (360,459) $ (836,742)
========= =========
NET LOSS PER COMMON SHARE . . . . . . . . . . . . . . . . . . . . . $ (0.04) $ (0.12)
========= =========
</TABLE>
The accompanying notes are an integral part
of these consolidated financial statements.
-3-
<PAGE> 6
HARCOR ENERGY, INC.
CONSOLIDATED STATEMENT OF STOCKHOLDERS' EQUITY
FOR THE THREE MONTHS ENDED MARCH 31, 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 exchanges. . - - 65,000 6,500 (6,500) -
Cancellation of
warrants . . . . . . - - - - (290,290) -
Preferred stock
dividends. . . . . . - - - - (132,500) -
Net loss for the
three months ended
March 31, 1996 . . . - - - - - (227,959)
----- --- --------- ------- ---------- ----------
Balance,
March 31, 1996 . . . 65,000 $650 8,696,207 $869,621 $28,734,380 $(20,040,508)
====== === ========= ======= ========== ==========
</TABLE>
THE ACCOMPANYING NOTES ARE AN INTEGRAL PART
OF THESE CONSOLIDATED FINANCIAL STATEMENTS.
-4-
<PAGE> 7
HARCOR ENERGY, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE THREE MONTHS ENDED
MARCH 31, 1996 AND 1995
(UNAUDITED)
<TABLE>
<CAPTION>
Three Months Ended
March 31,
-------------------------------
1996 1995
---------- ----------
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net Loss . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ (227,959) $ (420,514)
Adjustments to reconcile net loss
to net cash provided by operating
activities:
Depletion, depreciation and
amortization . . . . . . . . . . . . . . . . . . . . . . . . . 1,706,560 1,346,247
Amortization of deferred charges . . . . . . . . . . . . . . . . 239,574 117,441
Engineering and geological costs . . . . . . . . . . . . . . . . . . 101,007 88,665
Other . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 260,703 -
---------- ---------
2,079,885 1,131,839
Changes in working capital, net
of effects of non-cash transactions . . . . . . . . . . . . . . . (2,167,741) (187,421)
---------- ---------
Net cash provided by (used in)
operating activities . . . . . . . . . . . . . . . . . . . . . . . (87,856) 944,418
---------- ---------
CASH FLOWS FROM INVESTING ACTIVITIES:
Engineering and geological costs . . . . . . . . . . . . . . . . . . (101,007) (88,665)
Additions to property and equipment . . . . . . . . . . . . . . . . (9,635,408) (18,341)
---------- ---------
Net cash used in investing activities . . . . . . . . . . . . . . . (9,736,415) (107,006)
---------- ---------
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from increase in debt . . . . . . . . . . . . . . . . . . . 1,900,000 -
Dividends on preferred stock . . . . . . . . . . . . . . . . . . . . (132,500) (70,000)
Other . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . (170,939) (13,313)
---------- ---------
Net cash used in financing activities . . . . . . . . . . . . . . . . 1,596,561 (83,313)
---------- ---------
Net increase (decrease) in cash . . . . . . . . . . . . . . . . . . (8,227,710) 754,099
Cash at beginning of period . . . . . . . . . . . . . . . . . . . . . 12,204,460 899,198
---------- ---------
Cash at end of period . . . . . . . . . . . . . . . . . . . . . . . . $3,976,750 $1,653,297
========= =========
</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 THREE MONTHS ENDED MARCH 31, 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 $451,000 and
$969,000 during the three months ended March 31, 1996 and 1995, respectively.
SUPPLEMENTAL INFORMATION REGARDING NON-CASH INVESTING AND FINANCING
ACTIVITIES - THREE MONTHS ENDED MARCH 31, 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 (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 March 31, 1996, the Company had accrued capital costs and a
capitalized lease aggregating $1,649,000 which are not reflected in investing
activities.
SUPPLEMENTAL INFORMATION REGARDING NON-CASH INVESTING AND FINANCING
ACTIVITIES - THREE MONTHS ENDED MARCH 31, 1995
During the three months ended March 31, 1995, the Company paid
"in-kind" dividends on its Series D Redeemable Preferred Stock consisting of
$235,000 in newly-issued Series D Preferred Stock and issued detachable
warrants to purchase shares of common stock which were valued at $45,000. The
Company also paid dividends on its Convertible Series E Preferred Stock
consisting of $30,000 in newly-issued unregistered shares of the Company's
common stock. In addition, the Company incurred an accretion charge of $81,000
on its Series D Preferred Stock during the period.
Pursuant to the terms of its bridge loan facility, the Company issued
to its secured lender 50,000 shares of its common stock which was valued at
$156,000 and recorded to deferred financing costs.
The accompanying notes are an integral part
of these consolidated financial statements.
-6-
<PAGE> 9
HARCOR ENERGY, INC.
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
MARCH 31, 1996
(1) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
PRINCIPLES OF CONSOLIDATION -
The accompanying consolidated financial statements for the three
months ended March 31, 1995 include the accounts and results of HarCor Energy,
Inc. ("HarCor") and its wholly-owned subsidiaries, Warrior, Inc. ("Warrior")
and HTAC Investments, Inc.(collectively, the "Company" or "HarCor" unless the
context specifies otherwise). The accompanying consolidated financial
statements for the three months ended March 31, 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 are 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
-7-
<PAGE> 10
Company's consolidated results of operations, cash flows and changes in
stockholders' equity for the three-month periods ended March 31, 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 March 31, 1996 and 1995
comprised the following (amounts in thousands):
<TABLE>
<CAPTION>
1996 1995
------ ------
<S> <C> <C>
Accrued development costs. . . . $ 1,553 $ 365
Accrued interest payable . . . . 2,124 931
Trade accounts payable and other 2,013 2,969
------ ------
$ 5,690 $ 4,265
====== ======
</TABLE>
CAPITALIZED INTEREST COSTS-
Interest costs of $172,000 for the three months ended March 31, 1996
have been capitalized as part of the historical costs of unproved oil and gas
properties.
NEW ACCOUNTING STANDARD: IMPAIRMENT OF LONG-LIVED ASSETS-
In September 30, 1995, the Company adopted the provisions of Statement
of Financial Accounting Standards No. 121 ("SFAS 121"), "Accounting for the
Impairment of Long-Lived Assets and for Long-Lived Assets to be Disposed Of."
SFAS 121 requires the Company to review its oil and gas properties whenever
events or changes in circumstances indicate that the carrying amount of such
assets may not be recoverable. If the carrying amount of any of the Company's
oil and gas properties (determined on a field-by-field basis) is greater than
its projected undiscounted future cash flow, an impairment loss is recognized
down to the properties' fair values. There were no write-downs pursuant to
SFAS 121 in the current period.
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.
-8-
<PAGE> 11
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 8,685,000 and
7,226,000 for the three-month periods ended March 31, 1996 and 1995,
respectively.
(2) LONG-TERM DEBT
Availability under the Company's credit agreement with ING Capital 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 is currently $10 million, and ING Capital has no obligation
to increase the borrowing base above this amount. Availability under the
credit agreement, which was amended in March 1996, will terminate on June 30,
1997, 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
$7.5 million outstanding under this facility at March 31, 1996. The effective
interest rate on the balance outstanding was 8.125% at that date. Amounts
advanced under this facility bear interest at an adjusted Eurodollar rate plus
2.50%.
See Notes to Consolidated Financial Statements included in Item 8. of
Part II of the Company's December 31, 1995 Report on Form 10-K for a complete
description of the Company's New Credit Agreement.
(3) SENIOR SECURED NOTES
On July 24, 1995, the Company consummated the sale (the "Note
Offering") of 65,000 units (the "Units") consisting of $65 million aggregate
principal amount of its 14-7/8% Senior Notes due July 15, 2002 (the "Notes")
and warrants to purchase 1,430,000 shares of common stock at $3.85 per share.
Each Unit consists of a $1,000 principal amount Note and 22 warrants to
purchase an equal number of shares of common stock.
The Company used the net proceeds of approximately $61 million from
the sale of the Units (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.
-9-
<PAGE> 12
The differing amount 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.
See Notes to Consolidated Financial Statements included in Item 8. of
Part II of the Company's December 31, 1995 Report on Form 10-K for a complete
description of the Company's Senior Secured Notes.
(4) COMMITMENTS AND CONTINGENCIES
RISK MANAGEMENT AND HEDGING ACTIVITIES-
The Company utilizes financial instruments as a hedging strategy to
protect against the effects of volatility in crude oil and natural gas
commodity prices. 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, 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.
-10-
<PAGE> 13
As of March 31, 1996, the Company was a party to various 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; 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; and oil hedges
covering notional volumes of approximately 243 MBOE, 98 MBOE and 29 MBOE for
1996, 1997 and 1998, respectively, at prices ranging from $15.80/Bbl to
$18.75/Bbl.
(5) STOCKHOLDERS' EQUITY
WARRANT EXCHANGES -
During the current 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. Additionally, in March
1996, 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 in exchange for the issuance of 99,750 new
warrants with the same exercise price.
PREFERRED STOCK DIVIDENDS -
The Company has paid dividends on preferred stocks for the three
months ended March 31, 1996 and 1995 as follows:
<TABLE>
<CAPTION>
Three Months Ended March 31,
----------------------------
1996 1995
-------- -------
<S> <C> <C>
8% Convertible (Series A, B, C) . . . $ 65,000 $ 70,000
9% Redeemable (Series D). . . . . . . - 235,242
4%/9% Convertible (Series E) . . . . 67,500 30,000
------- -------
$132,500 $335,242
======= =======
</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 first
quarter 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 first quarter 1995 were paid, at the option of the Company, in shares of
common stock of the Company in lieu of cash. Dividends on the Series E
Preferred were paid in cash for the current quarter. The coupon rate on the
Series E increased from 4% per annum to 9% per annum effective July 1, 1995.
-11-
<PAGE> 14
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 MARCH 31, 1996 AND 1995
REVENUES - The Company's total revenues increased $2,113,000 (39%)
from $5,484,000 in first quarter 1995 to $7,597,000 in the current period.
The Company's oil and gas revenues increased $2,273,000 (62%) from
$3,683,000 in the first three months of 1995 to $5,956,000 in the current
period. Oil revenues increased $941,000 (52%) from $1,800,000 in first quarter
1995 to $2,741,000 in the current period due to higher oil production and
slightly higher prices. Oil production increased 46,700 barrels (42%) from
111,500 barrels in the first three months of 1995 to 158,200 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 48,600 barrels during the current period as compared
to the first quarter of 1995. Oil production from the Company's Permian and
other properties declined slightly (1,900 barrels) in the aggregate due to
normal production declines. The average price received for oil was $17.33 per
barrel during first quarter 1996 compared to $16.15 per barrel for the same
period in 1995.
The Company's gas revenues increased $1,332,000 (71%) from $1,883,000
in the first three months of 1995 to $3,215,000 in the current period also due
to increased production and higher prices. Gas production increased 574,000
Mcf (50%) from 1,157,000 Mcf in first quarter 1995 to 1,731,000 Mcf in first
quarter 1996 primarily due to the continued drilling and development of the
Bakersfield Properties, which contributed an incremental 523,000 Mcf during the
current period as compared to first quarter 1995. Gas production from the
Company's South Texas Properties increased 50,000 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 $1.86 per Mcf in first
quarter 1996 as compared to $1.62 per Mcf in the first three months of 1995.
During the first quarter of 1996, the Company realized revenues of
$1,624,000 from its natural gas processing plant. These revenues consisted of
$1,131,000 from the sale of 2,615,000 gallons of processed natural gas liquids
(NGLs), $468,000 from the resale of natural gas purchased from third parties,
and $25,000 in gas processing fees. During the first quarter of 1995, the
Company realized revenues of $1,785,000 from the natural gas plant,
-12-
<PAGE> 15
consisting of $1,139,000 in the resale of natural gas purchased from third
parties, $622,000 from the sale of 1,561,000 gallons of NGLs, and $24,000 in
gas processing fees. Although total gas plant revenues decreased slightly in
the current period, the plant's net operating margin increased $303,000 (83%)
due to an increase in NGLs sales as a result of higher lease production.
The Company realized total interest and other income of approximately
$17,000 in the first quarter of 1996 as compared to $15,000 during the first
three months of 1995.
COSTS AND EXPENSES - Total costs and expenses increased $1,920,000
(32%) from $5,904,000 in first quarter 1995 to $7,824,000 in the current
period.
The Company's production costs increased $174,000 (14%) from
$1,263,000 in the first three months of 1995 to $1,437,000 in the current
period. This was primarily due to the continuing development of the
Bakersfield Properties and resulting increase in number of producing wells in
that area. Production costs on the Company's South Texas and Permian properties
decreased slightly in the current period.
During the first quarter of 1996, the Company incurred costs of
$956,000 resulting from the operations of its natural gas processing plant.
These costs included $359,000 from the purchase of natural gas for processing
and resale and $597,000 of direct operating expenses. During the first quarter
of 1995, the Company incurred costs of $1,410,000 in the operations of its
natural gas processing plant, consisting of $958,000 from the purchase of
natural gas for processing and resale and $452,000 of direct operating
expenses. This represents a decrease of $454,000 (32%) in plant costs during
the current period.
The Company incurred engineering and geological expenses of $101,000
and $89,000 during the three months ended March 31, 1996 and 1995,
respectively.
The Company's depletion, depreciation and amortization ("DD&A")
expense increased $360,000 (27%) from $1,346,000 in first quarter 1995 to
$1,706,000 in the first quarter of 1996 as a result of increases in depreciable
oil and gas assets due to costs incurred in the continued development of the
Bakersfield Properties. The DD&A rate per BOE for oil and gas reserves was
$3.60 per barrel of oil equivalent ("BOE") in the current period as compared to
$4.26 during first quarter 1995.
The Company's general and administrative expenses increased slightly
in the current period ($55,000 or 8%) due to the Company's continued growth and
expansion.
The Company's interest expense increased $1,513,000 from $1,130,000 in
first quarter 1995 to $2,643,000 in first quarter 1996. This was due to the
refinancing of the Company's bank debt
-13-
<PAGE> 16
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 Note
Offering.
Total dividends on preferred stock were $132,000 in the first three
months of 1996, as compared to $335,000 in the first quarter of 1995. First
quarter 1996 dividends consisted of cash, while first quarter 1995 dividends
consisted of $70,000 in cash, $235,000 in Series D Preferred Stock and $30,000
in common stock of the Company. The Company also incurred a non-cash charge of
$81,000 attributable to accretion on its Series D Redeemable Preferred Stock in
1995. The Series D Redeemable Preferred Stock was redeemed in July 1995.
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 first quarter 1996 was
$228,000 while net loss attributable to common stockholders was $360,000 ($.04
per share) after preferred dividends. In first quarter 1995, the Company had a
net operating loss of $421,000 and net loss to common shareholders of $837,000
($.12 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 three months ended March 31, 1996,
the Company used net cash from operations of $88,000 as compared to $944,000
cash flows generated from operations during the same period in 1995. The
Company realized net proceeds of $1,597,000 from financing activities during
the current period, which consisted primarily of a draw-down on its credit
facility net of dividends and miscellaneous financing costs. During the first
quarter of 1995, the Company had nominal financing activities. The Company
utilized a net of $9,736,000 for investing activities in the current year as
compared to $107,000 during 1995.
WORKING CAPITAL - The Company had net working capital of $1,789,000
with a current ratio of 1.3:1 at March 31, 1996 as compared to net working
capital of $1,325,000 and a current ratio of 1.1:1 at December 31, 1995.
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
-14-
<PAGE> 17
available for capital expenditures, debt service and repayment and dividend
payments.
During the three months ended March 31, 1996, the Company generated
discretionary cash flow of $2,080,000 (before non-cash changes in working
capital of $2,168,000). This compares to $1,132,000 (before non-cash changes
in working capital of $187,000) 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 144 producing wells in this area at March 31, 1996, as
compared to 96 producing wells at March 31, 1995. As a consequence of these
drilling activities and the acquisition of certain additional interests in
these properties in July 1995, HarCor's share of sales production from the
Bakersfield Properties averaged 1,336 BPD and 13,895 Mcfd during the first
quarter of 1996, showing increases of 68% and 72%, respectively, over first
quarter 1995 average rates of 796 BPD and 8,085 Mcfd. Additionally, first
quarter 1996 production rates on the Bakersfield Properties demonstrated a
continuing increase over fourth quarter average production rates of 1,174 BPD
and 11,734 Mcfd.
The Company also realized a net operating margin of $668,000 on its
gas plant operations in first quarter 1996 as compared to $365,000 in first
quarter 1995. This was primarily due to increased gas production volumes from
the Bakersfield Properties processed through the plant, resulting in increased
sales of NGLs in the current quarter.
The Company expects further improvement in operating cash flows in
future periods as a result of its continuing drilling and development program.
As of March 1996, all of the wells drilled on the Bakersfield Properties were
completed and producing. The Company anticipates resuming its drilling and
development program towards the end of the second quarter and has initiated the
drilling of its first horizontal well on the property. See "Capital
Expenditures and Future Outlook" which follows.
FINANCING ACTIVITIES: CREDIT AGREEMENT - Availability under the
Company's credit agreement with ING Capital is limited to a "borrowing base"
amount. The borrowing base is determined semi-annually by ING Capital, at its
sole discretion, and may be established at an amount up to $15 million. The
borrowing base is currently $10 million and ING Capital has indicated to the
Company that it anticipates raising the borrowing base to the $15 million limit
of the facility. Availability under the credit agreement, which was amended in
March 1996, will terminate on June 30, 1997, 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. The Company drew down $1.9 million on this facility
during the current period and there was $7.5 million outstanding at March 31,
1996. The effective interest rate on the
-15-
<PAGE> 18
balance outstanding was 8.125% at that date. Amounts advanced under this
facility will bear interest at an adjusted Eurodollar rate plus 2.50%. The
Company repaid $2 million of the outstanding balance under the credit agreement
subsequent to March 31, 1996 from cash flows generated by operations.
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.
See Notes to Consolidated Financial Statements included in Item 8. of
Part II of the Company's December 31, 1995 Report on Form 10-K for a complete
description of the Senior Secured Notes and the Credit Agreement.
FINANCING ACTIVITIES: 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.
-16-
<PAGE> 19
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 secured credit
agreement.
The Company also used an aggregate of $303,000 for the payment of
dividends and miscellaneous financing costs during the current period.
RESULTS OF HEDGING ACTIVITIES - The Company's hedging activities
during the three months ended March 31, 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 AND FUTURE OUTLOOK - The Company incurred a total
of $9,736,000 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, $8,188,000 related to costs accrued
but unpaid at December 31, 1995.
The Company intends to spend an estimated $56.6 million for capital
expenditures to develop the proved reserves of the Bakersfield Properties over
the next five years, of which $16 million is planned to be spent during 1996,
$12 million in 1997 and $28.6 million thereafter. The Company plans to fund
1996 and future capital expenditures from operating cash flows and borrowings
under its credit agreement, of which $4.5 million is currently available.
The Company currently anticipates that total additional drilling
necessary to develop the Bakersfield Properties will result in approximately
178 new wells. The projected total development costs for the existing proved
reserves assigned to the Bakersfield Properties after 1996 are estimated at
approximately $41 million net to the Company based on current drilling costs.
The Company also plans to spend approximately $1.5 million to drill
two horizontal wells on these properties during 1996. The first of these wells
is currently being drilled 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. A second horizontal well is
planned to evaluate its applicability to 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. The Company currently estimates that there is potentially 9 MMBOE in
reserves outside the current proven areas of these fields that may be recovered
with future drilling. No assurances can be given, however, that any of such
wells will be drilled, or
-17-
<PAGE> 20
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.
Based on current engineering estimates, the Company anticipates
producing from its existing proved producing properties approximately 744,000
barrels of oil and plant products and 6.3 Bcf of gas during 1996 and 516,000
barrels of oil and plant products and 4.5 Bcf of gas during 1997. If the
Company adheres to its planned drilling and development program and capital
expenditure schedule as described herein and is successful in these efforts,
the Company anticipates producing from its existing proved undeveloped
properties an additional 250,000 of barrels of oil and plant products and 1.6
Bcf of gas in 1996 and 595,000 barrels of oil and plant products and 3.9 Bcf of
gas in 1997. These production estimates are based on reports prepared by
independent petroleum engineers as of January 1, 1996, and do not take into
account risk factors such as deviations in the projected rates of declines on
currently producing wells or less than anticipated production from development
drilling activities and potential decreases in future oil and gas prices.
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 planned 3-D
seismic program. The 3-D seismic is currently being shot and processing of
data from this seismic program should commence in May 1996, and drilling could
begin in the third 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 anticipates entering into an agreement
with a 3-D seismic company to jointly explore the Hostetter Field. This
partner in turn has provided the Company with a similar opportunity in one of
its current exploration projects. The Company and this 3-D seismic partner
have also agreed to purchase jointly a 15% working interest in a 3-D
seismic/exploration project in Reeves County, Texas, the first phase of which
is currently being 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 its 3-D seismic partner have also
jointly formed a geologic team to assist them in the evaluation of these 3-D
projects.
The Company expects that its available cash, expected cash flows from
operating activities and availability under its New Credit Agreement will be
sufficient to meet its financial obligations and fund its planned developmental
drilling and exploration activities for the foreseeable future, provided, that
-18-
<PAGE> 21
(i) there are no significant decreases in oil and gas prices beyond current
levels or anticipated seasonal lows, (ii) there are no significant declines in
oil and gas production from existing properties other than declines in
production currently anticipated based on engineering estimates of the decline
curves associated with such properties, (iii) drilling costs for development
wells with respect to the Bakersfield Properties do not increase significantly
from the drilling costs recently experienced by the operator in such 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.
In the event incremental cash flows from the Bakersfield Properties
are not sufficient to fund both increased debt and development costs, or
results from developmental drilling are not as successful as anticipated, then
the Company will either (i) curtail its developmental drilling and/or
exploration activities or (ii) seek alternative financing to assist in its
developmental drilling activities.
The Company intends to continue efforts to acquire additional
interests in selected producing oil and gas properties if and when these
opportunities become available. Any such acquisitions would require borrowings
under the New Credit Agreement and possibly additional debt or equity financing
if needed.
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 for 1996 and 1997, 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.
-19-
<PAGE> 22
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 in
the Company's filings with the Securities and Exchange Commission. 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.
-20-
<PAGE> 23
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
-21-
<PAGE> 24
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: May 14, 1996 /s/ Francis H. Roth
-------------------------------
Francis H. Roth
President and Chief
Operating Officer
Date: May 14, 1996 /s/ Gary S. Peck
-------------------------------
Gary S. Peck
Vice President-Finance
Chief Accounting Officer
-22-
<PAGE> 25
INDEX TO EXHIBITS
<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION
- - ------- -----------
<S> <C>
27 - Financial Data Schedule
</TABLE>
<TABLE> <S> <C>
<ARTICLE> 5
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> DEC-31-1996
<PERIOD-START> JAN-01-1996
<PERIOD-END> MAR-31-1996
<CASH> 3,976,750
<SECURITIES> 0
<RECEIVABLES> 3,699,634
<ALLOWANCES> 0
<INVENTORY> 0
<CURRENT-ASSETS> 8,074,769
<PP&E> 98,636,868
<DEPRECIATION> 24,354,217
<TOTAL-ASSETS> 86,770,449
<CURRENT-LIABILITIES> 6,285,704
<BONDS> 63,180,433<F1>
<COMMON> 869,621
0
650
<OTHER-SE> 8,693,872
<TOTAL-LIABILITY-AND-EQUITY> 86,770,449
<SALES> 7,579,843
<TOTAL-REVENUES> 7,596,566
<CGS> 2,392,919<F2>
<TOTAL-COSTS> 2,392,919
<OTHER-EXPENSES> 2,528,362<F3>
<LOSS-PROVISION> 260,703<F4>
<INTEREST-EXPENSE> 2,642,541
<INCOME-PRETAX> 0
<INCOME-TAX> 0
<INCOME-CONTINUING> 0
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (360,459)
<EPS-PRIMARY> (0.04)
<EPS-DILUTED> (0.04)
<FN>
<F1>14 7/8 Senior Secured Notes Due 2002
<F2>OIL & GAS PRODUCTION COSTS & GAS PLANT COSTS
<F3>EXPLORATION DD&A GENERAL & ADMINISTRATIVE
<F4>WRITE-DOWN OF LONG-TERM INVESTMENT
</FN>
</TABLE>
