<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, 1997.
OR
[ ] TRANSITION 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 May
14, 1997 was 15,170,836.
================================================================================
<PAGE> 2
HARCOR ENERGY, INC.
INDEX TO FORM 10-Q
FOR THE QUARTER ENDED MARCH 31, 1997
------------------------------------
<TABLE>
<CAPTION>
Part I - Financial Information Page
------------------------------ ----
<S> <C>
Item 1. Financial Statements
Consolidated Balance Sheets as of March 31,
1997 (unaudited) and December 31, 1996 1
Consolidated Statements of Operations for the Three
Months Ended March 31, 1997 and 1996 (unaudited) 3
Consolidated Statement of Stockholders' Equity
for the Three Months Ended March 31, 1997 (unaudited) 4
Consolidated Statements of Cash Flows for the
Three Months Ended March 31, 1997 and 1996 (unaudited) 5
Notes to Unaudited Consolidated Financial Statements 8
Item 2. Management's Discussion and Analysis of
Financial Condition and Results of Operations 15
Part II - Other Information
---------------------------
Item 6. Exhibits and Reports on Form 8-K 25
</TABLE>
<PAGE> 3
HARCOR ENERGY, INC.
CONSOLIDATED BALANCE SHEETS
AS OF MARCH 31, 1997 (UNAUDITED) AND DECEMBER 31, 1996
------------------------------------------------------
ASSETS
<TABLE>
<CAPTION>
March 31, December 31,
1997 1996
------------- -------------
<S> <C> <C>
CURRENT ASSETS:
Cash and cash investments ..................................... $ 2,241,240 $ 1,593,330
Accounts receivable ........................................... 3,807,651 8,894,240
Prepaids and other ............................................ 447,617 185,618
------------- -------------
Total current assets .......................................... 6,496,508 10,673,188
------------- -------------
PROPERTY AND EQUIPMENT, at cost, successful efforts method:
Unproved oil and gas properties ............................... 4,175,212 4,079,779
Proved oil and gas properties:
Leasehold costs ............................................. 57,168,192 56,934,690
Plant, lease and well equipment ............................. 20,258,509 19,194,951
Intangible development costs ................................ 29,522,025 28,918,323
Furniture and equipment ....................................... 391,961 373,772
------------- -------------
111,515,899 109,501,515
Less - accumulated depletion,
depreciation and amortization ............................... (30,552,329) (28,876,525)
------------- -------------
Net property, plant and equipment ............................. 80,963,570 80,624,990
------------- -------------
OTHER ASSETS .................................................... 3,510,670 3,328,364
------------- -------------
$ 90,970,748 $ 94,626,542
============= =============
</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, 1997 (UNAUDITED) AND DECEMBER 31, 1996
------------------------------------------------------
LIABILITIES AND STOCKHOLDERS' EQUITY
<TABLE>
<CAPTION>
March 31, December 31,
1997 1996
------------ ------------
<S> <C> <C>
CURRENT LIABILITIES:
Current portion of long-term
bank debt ............................... $ 575,000 $ 385,500
Other short-term debt ..................... 34,200 --
Accounts payable and accrued
liabilities ............................. 6,309,743 10,348,318
------------ ------------
Total current liabilities ................. 6,918,943 10,733,818
------------ ------------
LONG-TERM BANK DEBT ......................... 1,725,000 1,700,000
------------ ------------
14-7/8% SENIOR SECURED NOTES ................ 52,459,498 52,400,131
------------ ------------
COMMITMENTS AND CONTINGENCIES
STOCKHOLDERS' EQUITY:
Preferred stock, $.01 par value -
1,500,000 shares authorized;
30,000 shares outstanding ............... 300 300
Common stock, $.10 par value -
25,000,000 shares authorized;
15,170,836 and 15,110,836
shares outstanding at March 31,
1997 and December 31, 1996,
respectively ............................ 1,517,084 1,511,084
Additional paid-in capital ................ 50,110,612 49,891,612
Accumulated deficit ....................... (21,760,689) (21,610,403)
------------ ------------
Total stockholders' equity ................ 29,867,307 29,792,593
------------ ------------
$ 90,970,748 $ 94,626,542
============ ============
</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, 1997 AND 1996
(UNAUDITED)
-------------------------------------
<TABLE>
<CAPTION>
Three Months Ended
March 31,
---------------------------
1997 1996
----------- -----------
<S> <C> <C>
REVENUES:
Oil and gas revenues ................ $ 5,035,478 $ 5,956,058
Gas plant operating
and marketing revenues ....... 1,570,616 1,623,785
Interest income ..................... 10,311 10,310
Other ............................... 10,328 6,413
----------- -----------
6,626,733 7,596,566
----------- -----------
COSTS AND EXPENSES:
Production costs .................... 1,213,895 1,436,729
Gas plant operating
and marketing costs .......... 897,274 956,190
Engineering and geological costs .... 149,143 101,007
Depletion, depreciation and
amortization ...................... 1,675,804 1,706,560
General and administrative expenses . 670,361 720,795
Interest expense .................... 2,170,542 2,642,541
Other ............................... -- 260,703
----------- -----------
6,777,019 7,824,525
----------- -----------
Loss before provision for income tax (150,286) (227,959)
Provision for income taxes ............ -- --
----------- -----------
Net operating loss .................. (150,286) (227,959)
Dividends on preferred stock .......... (60,000) (132,500)
----------- -----------
NET LOSS APPLICABLE TO COMMON
STOCKHOLDERS ........................ $ (210,286) $ (360,459)
=========== ===========
NET LOSS PER COMMON SHARE ............. $ (0.01) $ (0.04)
=========== ===========
</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, 1997
(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, 1996 ........ 30,000 $300 15,110,836 $1,511,084 $ 49,891,612 $(21,610,403)
Issuance of common stock .......... -- -- 60,000 6,000 279,000
Preferred stock dividends ......... -- -- -- -- (60,000) --
Net loss for three months
ended March 31, 1997 ............ -- -- -- -- -- (150,286)
------- ----- ---------- ---------- ------------ ------------
Balance, March 31, 1997 ........... 30,000 $300 15,170,836 $1,517,084 $ 50,110,612 $(21,760,689)
======= ===== ========== ========== ============ ============
</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, 1997 AND 1996
(UNAUDITED)
-------------------------------------
<TABLE>
<CAPTION>
Three Months Ended
March 31,
-----------------------------
1997 1996
----------- ------------
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net Loss .................................. $ (150,286) $ (227,959)
Adjustments to reconcile net loss
to net cash provided by operating
activities:
Depletion, depreciation and
amortization ........................ 1,675,804 1,706,560
Amortization of deferred charges ...... 211,150 239,574
Exploration costs ......................... 149,143 101,007
Other ..................................... 7,917 260,703
----------- ------------
1,893,728 2,079,885
Changes in working capital, net
of effects of non-cash transactions ..... 3,644,309 (2,167,741)
----------- ------------
Net cash provided by (used in)
operating activities .................... 5,538,037 (87,856)
----------- ------------
CASH FLOWS FROM INVESTING ACTIVITIES:
Exploration costs ......................... (149,143) (101,007)
Additions to property and equipment ....... (4,777,678) (9,635,408)
----------- ------------
Net cash used in investing activities ..... (4,926,821) (9,736,415)
----------- ------------
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from long-term bank debt ......... 300,000 1,900,000
Repayment of other debt ................... (51,300) --
Dividends on preferred stock .............. (60,000) (132,500)
Other ..................................... (152,006) (170,939)
----------- ------------
Net cash provided by
financing activities ................... 36,694 1,596,561
----------- ------------
Net increase (decrease) in cash ........... 647,910 (8,227,710)
Cash at beginning of period ............... 1,593,330 12,204,460
----------- ------------
Cash at end of period ..................... $ 2,241,240 $ 3,976,750
=========== ============
</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, 1997 AND 1996
(UNAUDITED)
--------------------------------------------------
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION (ALL DOLLAR AMOUNTS HAVE BEEN
ROUNDED TO THE NEAREST THOUSAND) -
HarCor Energy, Inc. (the "Company") made interest payments of $4,038,000
and $4,668,000 during the three months ended March 31, 1997 and 1996,
respectively.
The Company received payment of $4,674,000 in January 1997 relating to the
sale of oil and gas properties effective December 1996. The proceeds from sale
and disposition of assets is reflected in cash flows in the current period.
SUPPLEMENTAL INFORMATION REGARDING NON-CASH INVESTING AND FINANCING
ACTIVITIES - THREE MONTHS ENDED MARCH 31, 1997
The Company issued an aggregate of 60,000 restricted shares of common
stock on behalf of certain of its directors which was valued as deferred
compensation of $285,000 and is not reflected in financing activities.
Included in investing activities are payments of $4,725,000 relating to
drilling costs which were accrued but unpaid at December 31, 1996. At March 31,
1997, the Company had accrued capital costs aggregating $2,059,000 which are
not reflected in investing activities.
SUPPLEMENTAL INFORMATION REGARDING NON-CASH INVESTING AND FINANCING
ACTIVITIES - THREE MONTHS ENDED MARCH 31, 1996
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.
-6-
<PAGE> 9
Included in investing activities 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.
The accompanying notes are an integral part
of these consolidated financial statements.
-7-
<PAGE> 10
HARCOR ENERGY, INC.
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
MARCH 31, 1997
(1) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
PRINCIPLES OF CONSOLIDATION -
The accompanying consolidated financial statements for the current
period include the accounts and results of HarCor Energy, Inc. ("HarCor") and,
for the three months ended March 31, 1996, its wholly-owned subsidiaries,
Warrior, Inc. ("Warrior") and HTAC Investments, Inc. ("HTAC") (collectively,
the "Company" or "HarCor" unless the context specifies otherwise). Warrior and
HTAC had no material operations and were merged into HarCor in March 1996.
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, 1996 (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
-8-
<PAGE> 11
intercompany transactions) necessary to present fairly the Company's
consolidated results of operations, cash flows and changes in stockholders'
equity for the three-month periods ended March 31, 1997 and 1996.
The results of operations for an interim period are not necessarily
indicative of the results to be expected for a full year.
GAS BALANCING -
Natural gas revenues are recorded on the entitlement method based on
the Company's percentage ownership of current production. Each working interest
owner in a well generally has the right to a specific percentage of production,
although actual production sold may differ from an owner's ownership
percentage. Under entitlement accounting, a receivable is recorded when
underproduction occurs and a payable when overproduction occurs.
CAPITALIZED INTEREST COSTS -
Interest costs of $95,000 for the three months ended March 31, 1997
have been capitalized as part of the historical costs of unproved oil and gas
properties.
ACCOUNTS PAYABLE AND ACCRUED LIABILITIES -
Accounts payable and accrued liabilities at March 31, 1997 comprised
the following (amounts in thousands):
<TABLE>
<S> <C>
Accrued development costs ............... $2,059
Accrued interest payable ................ 1,694
Trade accounts payable and other ........ 2,557
------
$6,310
======
</TABLE>
STOCK COMPENSATION PLANS -
The Company accounts for its Stock Compensation Plans by applying
provisions of Accounting Principles Board ("APB") Opinion No. 25, "Accounting
for Stock Issued to Employees"; accordingly, no compensation expense has been
recognized for awards granted under these plans. The Company has elected not to
apply SFAS No. 123, "Accounting for Stock Based Compensation",
-9-
<PAGE> 12
which would result in additional compensation expense in the statement of
income for the current period.
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 15,130,000 and
8,685,000 for the three-month periods ended March 31, 1997 and 1996,
respectively.
CHANGES IN ACCOUNTING PRINCIPLES -
In October 1996, the American Institute of Certified Public
Accountants issued Statement of Position No. 96-1, "Environmental Remediation
Liabilities," which establishes new accounting and reporting standards for the
recognition and disclosure of environmental remediation liabilities. The
provisions of the statement are effective for fiscal years beginning after
December 15, 1996. The impact of this new standard is not expected to have a
significant effect on the Company's financial position or results of
operations.
In February 1997, the Financial Accounting Standards Board ("FASB")
issued Statement of Financial Accounting Standards ("SFAS") No. 128 - "Earnings
per Share" effective for interim and annual periods after December 15, 1997.
This statement replaces primary earnings per share ("EPS") with a newly defined
basic EPS and modifies the computation of diluted EPS. The Company's basic and
diluted EPS computed using the requirements of SFAS 128 are the same as the
Company's currently disclosed primary EPS.
In February 1997, the FASB issued SFAS No. 129 - "Disclosures of
Information about Capital Structures" which is applicable to all entities that
issue securities other than ordinary common stock and is effective for all
periods ending after December 15, 1997. There are no additional disclosures
required of the Company at this time relating to the issuance of SFAS No. 129.
-10-
<PAGE> 13
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.
(2) LONG-TERM DEBT
Availability under the Company's current credit facility, entered into
in July 1995 (the "Credit Agreement"), is limited to a "borrowing base" amount
which 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 was $15
million at March 31, 1997. Availability under the Credit Agreement will
terminate on June 30, 1997, 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. The Company
has entered into discussion with ING concerning renewal of the Credit
Agreement. Amounts advanced under this facility bear interest at an adjusted
Eurodollar rate plus 2.50% or Prime Rate (as determined by ING Capital) plus
0.5% at the Company's option. There was $2.3 million outstanding under the
Credit Agreement at March 31, 1997. The effective interest rate on the balance
outstanding was 8.26% at that date.
The Credit Agreement contains certain customary and usual covenants
and restrictions which impose limitations on the Company with respect to, among
other things, dividends, financial condition and ratios, use of borrowings and
additional debt incurrence. 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
-11-
<PAGE> 14
of the Company. All assets not subject to a lien in favor of the lender are
subject to a negative pledge, with certain exceptions.
(3) SENIOR SECURED NOTES
THE NOTES -
The Company's 14-7/8% Senior Secured Notes, which were issued in July
1995 (the "Notes"), bear interest at the rate of 14-7/8% per annum and are
payable semi-annually on January 15 and July 15 of each year. 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, dated July 24, 1995,
between the Company and Texas Commerce Bank National Association, as Trustee
(the "Indenture"). All of the obligations of the Company under the Notes and
the Indenture are secured by a second priority lien on substantially all of the
assets of the Company securing its bank debt.
There were a total of $53.7 million Notes outstanding (face value) at
March 31, 1997. The difference between the face value of the Notes and the
balance sheet amount recorded herein is the result of an initial allocation to
paid-in capital of the value ascribed to the warrants at the close of the Note
Offering. This amount is being amortized through interest expense over the life
of the Notes.
EXCESS CASH FLOW OFFER -
In the event that the Company has excess cash flow (as defined) in excess
of $2 million in any fiscal year, beginning with the fiscal year ending
December 31, 1996, the Company will be required to make an offer to purchase
Notes from all Holders in an amount equal to 50% of all such excess cash flow
for such fiscal year (not just the amount in excess of $2 million) at a
purchase price equal to 101% of the principal amount thereof, plus accrued and
unpaid interest thereon ("Excess Cash Flow Offer"). The
-12-
<PAGE> 15
Company may credit the principal amount of Notes acquired in the open
market and retired prior to the Excess Cash Flow Offer against such required
Excess Cash Flow Offer, provided that each Note may only be so credited once.
Excess cash flow for this purpose is generally defined as net cash flow
provided by operations less capital expenditures and payments on scheduled
indebtedness.
(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 will continue to utilize hedging techniques to ensure that a
substantial portion of its production remains effectively hedged. Gains or
losses under the hedging agreements are recognized in oil and gas production
revenues in periods in which the hedged production occurs with such agreements
settling on a monthly basis.
As of January 31, 1997, the Company was a party to various gas
contracts covering volumes of approximately 2.9 Bcf and 0.3 Bcf for 1997 and
1998, respectively, at fixed prices ranging from $1.68/MMBtu to $2.07/MMBtu or
indexed prices; and oil hedges covering notional volumes of approximately 288
MBOE and 29 MBOE for 1997 and 1998, respectively, at fixed prices ranging from
$17.25/Bbl to $18.51/Bbl or indexed prices.
EMPLOYEE SEVERANCE OBLIGATION -
Concurrent with the Company's engagement of investment bankers to pursue
its potential sale, the Company's Board of Directors approved in March 1997 a
severance arrangement for all of the Company's employees. The purpose of this
severance arrangement is to maximize shareholder value in any potential sale
process and retain personnel necessary to effect an orderly transition in the
event of sale. The severance arrangement would be effected only in the event
the Company is sold or a change of control occurs. The total financial impact
of this severance
-13-
<PAGE> 16
arrangement, if effected, would result in a decrement of approximately
$0.10 per common share to any potential sales proceeds on a fully-diluted
basis. (See Note 6.)
(5) ISSUANCE OF COMMON STOCK -
In February 1997 the Company issued an aggregate of 60,000 restricted
shares of common stock on behalf of certain of its directors as deferred
compensation which will be amortized for a period of three years. The deferral
period may be accelerated under certain circumstances.
(6) PREFERRED STOCK DIVIDENDS -
The Company paid cash dividends on preferred stocks for the three months
ended March 31, 1997 and 1996 as follows:
<TABLE>
<CAPTION>
Three Months Ended
March 31,
---------------------
1997 1996
-------- --------
<S> <C> <C>
8% Convertible (Series A, B, C) ..... $ 60,000 $ 65,000
9% Convertible (Series E) ........... -- 67,500
-------- --------
$ 60,000 $132,500
======== ========
</TABLE>
During the fourth quarter of 1996, both the Series A Preferred Stock
and the Series E Preferred Stock were converted into shares of common stock of
the Company and therefore paid no dividends in the current period.
(7) STRATEGIC ALTERNATIVES -
In March 1997 the Company announced that it had engaged a group of
investment bankers to pursue the potential sale of the Company. There can be no
assurances that this process will result in the sale of the Company. In the
event the Company is sold, there can be no assurances as to the amount or form
of consideration that the Company's shareholders would receive in such a
transaction. The Company intends to continue conducting its business without
regard to any potential outcome of the proposed sale.
-14-
<PAGE> 17
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
---------------------------------------------
All dollar amounts referenced in this Item 2. discussion have been rounded
to the nearest thousand.
COMPARISON OF RESULTS FOR THE THREE MONTHS
ENDED MARCH 31, 1997 AND 1996
REVENUES - The Company's total revenues decreased $970,000 (13%) from
$7,597,000 in first quarter 1996 to $6,627,000 in the current period.
The Company's oil and gas revenues decreased $921,000 (15%) from
$5,956,000 in the first quarter of 1996 to $5,035,000 in the current period due
to decreased oil and gas production in the current period. Oil and gas
production was lower in the current period as compared to first quarter 1996
for the following reasons: (i) first quarter 1996 included the effect of higher
initial production rates resulting from the initial phases of the Company's
development drilling program on the Bakersfield Properties; (ii) the conversion
of twelve producing wells to water injection wells beginning in the latter part
of 1996 as part of the Ellis waterflood project on the Bakersfield Properties;
(iii) normal production rate declines on the older phase development wells on
the Bakersfield Properties; and (iv) lost production from the sale of a
substantial portion of the Company's Permian Basin properties in December 1996.
Oil revenues decreased $807,000 (29%) from $2,741,000 in first quarter
1996 to $1,934,000 in the current period. Oil production decreased 61,400
barrels (39%) from 158,200 barrels in the first quarter of 1996 to 96,800
barrels in the current period due to the reasons noted above. A decrease in
volumes of 44,900 barrels was attributable to the Bakersfield Properties while
oil production from the Company's other properties decreased 16,500 barrels in
the aggregate due to the sale of the Permian Basin properties. The effect of
lower production in the current period was somewhat mitigated by higher unit
prices. The average unit price received for oil was $21.83 per barrel during
first quarter 1997 (exclusive of hedging charges of $178,000) compared to
$17.33 per barrel for the same period in 1996.
-15-
<PAGE> 18
The Company's gas revenues decreased $114,000 (4%) from $3,215,000 in
the first quarter of 1996 to $3,101,000 in the current period also due to
decreased production. Gas production decreased 495,000 Mcf (29%) from 1,731,000
Mcf in first quarter 1996 to 1,236,000 Mcf in the current quarter primarily due
to the reasons noted above related to the Bakersfield Properties, which
declined 489,000 Mcf in the current period. Gas production from the Company's
South Texas and other properties remained the same in the current period. The
effect of lower production in the current period was somewhat mitigated by
higher unit prices. Average unit prices received for gas increased in the
current period to $2.51 per Mcf as compared to $1.86 per Mcf in the first
quarter of 1996.
During the current quarter, the Company realized revenues of
$1,571,000 from its natural gas processing plant and gas marketing activities.
Gas plant revenues consisted of $1,101,000 from the sale of processed natural
gas liquids (48,000 barrels at an average composite price of $22.94 per
barrel), $437,000 from the resale of natural gas purchased from third parties,
and $33,000 in processing fees. During the first quarter of 1996, the Company
realized revenues of $1,624,000 from gas plant and gas marketing activities
which consisted of $1,131,000 from the sale of natural gas liquids (62,300
barrels at an average composite price of $18.16 per barrel), $468,000 from the
resale of natural gas purchased from third parties, and $25,000 in gas
processing fees.
The Company realized total interest and other income of $21,000 in the
first quarter of 1997 as compared to $17,000 during the first quarter of 1996.
COSTS AND EXPENSES - Total costs and expenses decreased $1,048,000
(13%) from $7,825,000 in first quarter 1996 to $6,777,000 in the current
period.
The Company's oil and gas production costs decreased $223,000 (15%)
from $1,437,000 in the first quarter of 1996 to $1,214,000 in the current
period due to a decrease in oil and gas production volumes in the current
period as discussed in REVENUES above. The Company's total aggregate production
cost per barrel of oil equivalent ("BOE") was $3.91 per BOE in the current
period as compared to $3.22 in first quarter 1996.
-16-
<PAGE> 19
During the first quarter of 1997, the Company incurred costs of
$897,000 resulting from the operations of its natural gas processing plant and
gas marketing activities. These costs included $596,000 for the purchase of
natural gas for resale and $301,000 of direct fixed and variable operating
expenses. The Company's gas plant costs for first quarter 1996 totaled $956,000.
The Company incurred engineering and geological expenses of $149,000
and $101,000 during the three months ended March 31, 1997 and 1996,
respectively.
The Company's total depletion, depreciation and amortization ("DD&A")
expense decreased slightly (2%) from $1,706,000 in first quarter 1996 to
$1,676,000 in the first quarter of 1997 due to decreased levels of oil and gas
production in the current period. The DD&A rate per BOE for oil and gas
reserves was estimated at $5.23 in the current period as compared to an
estimated $3.60 per BOE during first quarter 1996. The increase in DD&A per BOE
was due to increased costs resulting from the continuing development of the
Bakersfield Properties.
The Company's general and administrative expenses were $670,000 and
$721,000 for the quarters ended March 31, 1997 and 1996, respectively,
representing a decrease of $51,000 (7%) in the current period.
The Company's interest expense decreased $472,000 (18%) from
$2,643,000 in first quarter 1996 to $2,171,000 in first quarter 1997 due to the
retirement of $11.3 million of the Company's 14-7/8% Senior Secured Notes in
the third quarter of 1996. Dividends on preferred stock were $60,000 in the
first quarter of 1997 as compared to $132,000 in the first quarter of 1996. The
decrease in dividends was due to the conversion of the Company's Series A and
Series E Preferred Stock into common stock of the Company during the fourth
quarter of 1996.
NET LOSS - The Company's net operating loss was $150,000 for the
quarter ended March 31, 1997, while net loss attributable to common
stockholders after preferred dividends was $210,000 or $.01 per share. For the
quarter ended March 31, 1996, the Company had a net operating loss of $228,000
and a net loss attributable to common stockholders of $360,000 ($.04 per share)
after preferred dividends.
-17-
<PAGE> 20
LIQUIDITY AND CAPITAL RESOURCES
SUMMARY - The Company's sources of working capital have primarily been
cash flow from operations and a combination of debt and equity financings as
needs for capital have arisen. During the three months ended March 31, 1997,
the Company generated net cash from operations of $5,538,000 as compared to
$88,000 used in operations in 1996. The Company realized net proceeds of
$37,000 from financing activities during the current period as compared to net
proceeds from financing activities of $1,597,000 during first quarter 1996. The
Company utilized a total of $4,927,000 in investing activities in the current
period, which consisted mainly of developmental drilling activities, as
compared to $9,736,000 during first quarter 1996.
WORKING CAPITAL - The Company had a working capital deficit of
$422,000 with a current ratio of 0.94:1 at March 31, 1997 as compared to a
working capital deficit of $61,000 and a current ratio of 1:1 at December 31,
1996.
OPERATING ACTIVITIES
CASH FLOWS - Discretionary cash flow is a measure of performance which
is useful for evaluating exploration and production companies. It is derived by
adjusting net income or loss to eliminate the non-cash effects of exploration
expenses, depletion, depreciation, amortization and non-recurring charges, if
applicable. The effects of non-cash working capital changes are not taken into
account. This measure reflects an amount that is available for capital
expenditures, debt service and dividend payments.
During the three months ended March 31, 1997, the Company generated
discretionary cash flow of $1,894,000 (before changes in other working capital
of $3,644,000). This compares to $2,080,000 (before non-cash changes in working
capital of $2,168,000) during the same period in 1996. The decrease in the
current period's revenue as compared to first quarter 1996 was primarily due to
decreased oil and gas production resulting from the following factors: (i)
first quarter 1996 included the effect of higher initial production rates
resulting from the initial phases of the Company's development drilling program
on the Bakersfield Properties;(ii) the conversion of certain producing
-18-
<PAGE> 21
wells to water injection wells on a waterflood project on the Bakersfield
Properties beginning in the latter part of 1996, (iii) production declines on
older of the Bakersfield development wells, and (iv) lost production from the
sale of a substantial portion of the Company's Permian Basin Properties in
December 1996. In spite of these factors negatively impacting production, the
Company's current quarter production was relatively flat in the aggregate as
compared to the prior two quarters.
The effect of the current period's decline in production volumes was
partially mitigated by interest expense savings as a result of the retirement
of a portion of the Company's 14-7/8% Senior Secured Notes and higher unit
prices realized for oil and gas production. (See RESULTS OF OPERATIONS.)
The Company is continuing to drill additional wells on the Bakersfield
Properties with plans to drill 30 additional wells on the Ellis lease, 6 new
Truman lease wells and 2 Tisdale lease wells in 1997. During the first quarter
drilling activity included 4 new wells on the Ellis lease and one new well on
the Truman lease. (See DEVELOPMENTAL DRILLING ACTIVITIES which follows.)
Production in the first half of 1997 will continue to be negatively impacted by
production losses resulting from the conversion of additional producing wells
to injector wells on the Ellis lease waterflood project. However, the Company
anticipates a favorable response in the second half of 1997 resulting from its
continued drilling on the Ellis and Truman leases and anticipated response from
the waterflood project that was initiated during the latter part of 1996.
RESULTS OF HEDGING ACTIVITIES - The Company's hedging activities
during the three months ended March 31, 1997 have not had a material effect on
the Company's liquidity or results of operations. (See Note 4 of "Notes to
Consolidated Financial Statements" included herein.)
FINANCING ACTIVITIES
SUMMARY - The Company realized net proceeds of $37,000 from financing
activities during first quarter which consisted of $300,000 from long-term bank
debt; uses of financing proceeds consisted $60,000 for the payment of preferred
dividends and $203,000 in miscellaneous financing activities.
-19-
<PAGE> 22
CREDIT AGREEMENT - Availability under the Company's Credit Agreement
is limited to a "borrowing base" amount which 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 was $15 million at March 31, 1997, and there
was $2.3 million outstanding under the Credit Agreement at that date.
Availability under the Credit Agreement 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 has entered
into discussions with ING concerning renewal of the Credit Agreement. Amounts
advanced under this facility bear interest at an adjusted Eurodollar rate plus
2.50% or Prime Rate (as determined by ING Capital) plus .5% 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 March 31,
1997.
14-7/8% SENIOR SECURED NOTES - The Company's $53.7 million (face
value) of 14-7/8% Senior Secured Notes (the "Notes") bear interest at the rate
of 14-7/8% per annum and is payable semi-annually on January 15 and July 15 of
each year. 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:
-20-
<PAGE> 23
<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.
CAPITAL EXPENDITURES AND INVESTING ACTIVITIES
DEVELOPMENTAL DRILLING ACTIVITIES - The Company incurred a total of
approximately $2.0 million in drilling, development and related expenditures
during the first quarter of 1997, the majority of which were related to the
continued development of the Bakersfield Properties. Based on current
engineering estimates, the Company anticipates that as of December 31, 1996,
total additional drilling necessary to completely develop the proven reserves
of Bakersfield Properties over future years will result in approximately 176
new wells at an estimated capital cost of $59 million (based on current
drilling costs). Approximately $14 million is planned to be spent during the
remainder of 1997, and $45 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 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.
-21-
<PAGE> 24
The Company is also involved in a small waterflood project on its
Permian Basin properties and has approximately $2.1 million in capital
expenditures planned in this area during the next two years.
EXPLORATION ACTIVITIES - The Company has entered into an agreement
with a 3-D seismic interpretation 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 area of mutual interest covers
approximately 217,000 acres and entails shooting 3-D seismic data over
approximately 339 square miles. 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. Initial evaluation of these projects has identified 56 prospects
for future drilling.
The Company has commenced the drilling of its first well in the
Hostetter Field in May 1997 and expects to commence drilling a second well in
that field in June. The Company also expects to commence drilling two wells in
Reeves County by June and one well in Terrebonne Parish by third quarter 1997.
The Company currently expects to commit approximately $5 million to $8 million
to drilling on these 3-D exploratory prospects during 1997. The amount of any
future capital commitments will depend upon the success of initial drilling
activities.
FINANCIAL COMMITMENTS - The Company expects that its available cash
and expected cash flow 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.
-22-
<PAGE> 25
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 as a result of interest savings due to the redemption of a portion of
the Notes 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 flow 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,
the Company will either (i) curtail its developmental drilling and/or
exploration activities or (ii) seek alternative financing to assist in these
activities.
STRATEGIC ALTERNATIVES -
In March 1997 the Company announced that it had engaged a group of
investment bankers to pursue a possible sale of the Company in order to
maximize shareholder returns. There can be no assurances that this process
will, in fact, result in the sale of the Company. In the event the Company is
sold, there can be no assurances as to the amount or form of consideration that
the Company's shareholders would receive in such a transaction. The Company
intends to continue conducting its business as described in the above CAPITAL
EXPENDITURES AND INVESTING ACTIVITIES section, without regard to any potential
outcome of a proposed sale.
UNCERTAINTIES INVOLVING FORWARD-LOOKING DISCLOSURE
Certain of the statements set forth above under "LIQUIDITY AND CAPITAL
RESOURCES - CAPITAL EXPENDITURES AND INVESTING ACTIVITIES" AND "STRATEGIC
ALTERNATIVES", such as the statements regarding estimated production amounts,
available cash and expected cash flows from operating activities for 1997 and
1998, estimated development costs and number of anticipated wells to be drilled
in 1997 and thereafter, the planned 3-D seismic program and the potential sale
of the Company 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
-23-
<PAGE> 26
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 1997 and beyond are based upon product prices and costs as of
December 31, 1996 (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 1997 and beyond. 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 1997 and beyond and strategic alternatives
could differ materially from those expressed in the above-described
forward-looking statements.
-24-
<PAGE> 27
HARCOR ENERGY, INC.
PART II - OTHER INFORMATION
Item 6. - Exhibits and Reports on Form 8-K
(a) Exhibits - 27 Financial Data Schedule
(b) Reports on Form 8-K - None
-25-
<PAGE> 28
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, 1997 /s/ Francis H. Roth
--------------------
Francis H. Roth
President and Chief
Operating Officer
Date: May 14, 1997 /s/ Gary S. Peck
-----------------
Gary S. Peck
Vice President - Finance &
Administration, Chief Financial
Officer and Corporate Secretary
-26-
<PAGE> 29
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-31-1997
<PERIOD-START> JAN-01-1997
<PERIOD-END> MAR-31-1997
<CASH> 2,241,240
<SECURITIES> 0
<RECEIVABLES> 3,807,651
<ALLOWANCES> 0
<INVENTORY> 0
<CURRENT-ASSETS> 6,496,508
<PP&E> 111,515,899
<DEPRECIATION> 30,552,329
<TOTAL-ASSETS> 90,970,748
<CURRENT-LIABILITIES> 6,918,943
<BONDS> 52,459,498<F1>
0
300
<COMMON> 1,517,084
<OTHER-SE> 28,349,923
<TOTAL-LIABILITY-AND-EQUITY> 90,970,748
<SALES> 6,606,094
<TOTAL-REVENUES> 6,626,733
<CGS> 2,111,169<F2>
<TOTAL-COSTS> 2,111,169
<OTHER-EXPENSES> 2,495,308<F3>
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 2,170,542
<INCOME-PRETAX> (150,286)
<INCOME-TAX> 0
<INCOME-CONTINUING> (150,286)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (210,286)
<EPS-PRIMARY> (0.01)
<EPS-DILUTED> (0.01)
<FN>
<F1>14 7/8% SENIOR SECURED NOTES DUE 2002.
<F2>OIL & GAS PRODUCTION COSTS AND GAS PLANT COSTS.
<F3>EXPLORATION, DD & A, G & A.
</FN>
</TABLE>
