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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-K
(MARK ONE)
/X/ ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934 [FEE REQUIRED]
FOR THE FISCAL YEAR ENDED DECEMBER 31, 1995
OR
/ / TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934 [NO FEE REQUIRED]
FOR THE TRANSITION PERIOD FROM ____________ TO ___________
COMMISSION FILE NO. 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
SECURITIES REGISTERED PURSUANT TO SECTION 12(b) OF THE ACT:
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<S> <C>
NAME OF EACH EXCHANGE
TITLE OF EACH CLASS ON WHICH REGISTERED
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NONE NONE
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SECURITIES REGISTERED PURSUANT TO SECTION 12(g) OF THE ACT:
COMMON STOCK, $0.10 PAR VALUE
(TITLE OF CLASS)
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 / /
At March 26, 1996, the registrant had 8,661,207 shares of common stock
outstanding. The aggregate market value on March 26, 1996 of the registrant's
common stock held by non-affiliates of the registrant (including beneficial
owners holding less than 10% of the registrant's common stock) was $24,000,000
(based upon the last reported sales price of the registrant's common stock as
quoted on such date by the National Association of Securities Dealers, Inc.
Automated Quotation System).
Indicate by check mark if disclosure of delinquent filers pursuant to
Item 405 of Regulation S-K is not contained herein, and will not be contained,
to the best of registrant's knowledge, in definitive proxy or information
statements incorporated by reference in Part III of this Form 10-K or any
amendment to this Form 10-K. / /
Document incorporated by reference: None.
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HARCOR ENERGY, INC.
PART I
ITEM 1. DESCRIPTION OF BUSINESS
GENERAL
HarCor Energy, Inc. ("HarCor" or the "Company") is an independent oil
and gas company engaged in the acquisition, exploitation and exploration of
onshore oil and gas properties located in the United States. Formerly named
Pangea Petroleum Company, the Company was organized as a California corporation
in 1976, but did not conduct significant operations until after May 1980. In
1987, a group led by Mark G. Harrington, the current Chairman of the Board and
Chief Executive Officer, acquired control of the Company, the jurisdiction of
incorporation was changed from California to Delaware and the Company changed
its name from Pangea Petroleum Company to HarCor Energy, Inc. Under
Harrington's leadership, the Company's proved reserves have grown from
approximately 0.5 MMBOE at January 1, 1987 to 29.9 MMBOE at January 1, 1996.
The Company's corporate headquarters are located at Five Post Oak
Park, 4400 Post Oak Parkway, Suite 2220, Houston, Texas 77027, telephone (713)
961-1804. HarCor and its wholly-owned subsidiaries, Warrior, Inc. and HTAC
Investments, Inc., are collectively described herein as the "Company", unless
the context otherwise requires.
The Company's principal reserves and producing properties are located
in the San Joaquin Basin of California, South Texas, the Permian Basin of West
Texas and New Mexico, and the Louisiana and Alabama onshore Gulf Coast. Based
on the estimates of independent petroleum engineers, as of January 1, 1996, the
Company had total proved reserves of 29.9 MMBOE consisting of 15.3 MMBbls of
crude oil and natural gas liquids and 87.6 Bcf of natural gas. The Company's
present value of estimated future net cash flows before income taxes from its
total proved reserves, or the Pre-tax SEC 10 Value at January 1, 1996, was
$124.5 million, approximately 84% of which was attributable to net proved
reserves located in the Lost Hills Field in the San Joaquin Basin (the
"Bakersfield Properties"). The above net cash flows include the Company's
ownership of a 75% interest in a 23 MMcf per day gas processing and
fractionation plant in the San Joaquin Basin, which processes the natural gas
produced in the San Joaquin Basin by the Company and certain third parties.
BUSINESS STRATEGY
The Company's primary business objective is to acquire and develop, in
cooperation with experienced regional industry operators, oil and gas
properties with significant development
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potential while using hedging strategies to minimize the negative effects of
oil and gas price volatility on profitability. The Company intends to continue
fulfilling its business objective through the use of the following operating
strategies:
Strategic Alliances with Local Operators. The Company's principal
strategy is to align itself financially and operationally with strategic
partners that have extensive, regionally-focused exploitation and technological
expertise. While the strategic partner serves as operator, HarCor seeks to
maintain supervisory influence or control by retaining decision-making
authority over the nature of capital projects and the magnitude and timing of
capital investments. In addition, these alliances are typically structured so
that the strategic partners have a significant portion of their capital at risk
and are motivated by financial risks and incentives similar to those of the
Company. Management believes that these alliances provide the Company with
several important benefits. First, the Company leverages off the demonstrated
core competencies in specific basins of each of the strategic partners to
develop optimal strategies for managing and exploiting acquired reserves.
Second, the Company is able to maintain low overhead expenses because its
corporate level business activity can be conducted with a small group of senior
management and operating personnel. Finally, alliances with strategic partners
enable the Company to identify and capitalize quickly on acquisition
opportunities in established oil and gas producing regions throughout the
United States.
Managed Development. Approximately 20.7 MMBOE, or 69.4%, of the
Company's total proved reserves are classified as proved undeveloped at January
1, 1996. Management believes that the risk inherent in developing its reserves
is substantially reduced due to the location of the largest portion of the
Company's undeveloped reserves within the known producing region of the Lost
Hills Field in the San Joaquin Basin. To exploit these proved undeveloped
reserves, the Company and the operator of the properties have drilled 71 wells
since June 1994 which has resulted in an increase in reserves of 13.3 MMBOE at
an average cost of $1.66 per barrel. The Company has identified 178 new wells
which are intended to be drilled during the next five years to fully develop
the proved reserves on the properties, of which 48 are expected to be drilled
in 1996. In addition, the Company has targeted 60 locations for future
development of probable and possible reserves located on the San Joaquin
properties.
Manage Exposure to Oil and Gas Price Volatility. Management utilizes
various hedging strategies to protect against the effects of volatility in
crude oil and natural gas commodity prices. Typically, upon consummation of an
acquisition, management will enter into hedging contracts which cover at least
half of the then existing production of the acquired property. Management
believes that this hedging strategy is advantageous because it allows the
Company to generate a predictable cash flow stream from the hedged portion of
its production and therefore provide a reliable source of funds to finance
future development and acquisition activities.
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In the fourth quarter of 1995, the Company executed a basis swap contract for
1996 and 1997 which prices 6 MMBtu per day of its California production at a
price of $0.3675 off NYMEX. As a consequence, the Company has further
diversified its end-user markets and helped to manage the risk of the potential
for depressed natural gas prices on the West Coast. As of December 31, 1995,
the Company had fixed future sales prices and index-based swaps covering
approximately 45% and 25% of projected proved developed crude oil production
from its currently producing properties for 1996 and 1997, respectively, and
prices for approximately 64% and 77% of projected proved developed natural gas
production for 1996 and 1997, respectively.
Selective Acquisitions. The Company intends to pursue selective
acquisitions of attractively priced, underexploited oil and gas properties
primarily within the onshore oil and gas producing regions of the United
States. The Company will consider acquisitions both with existing strategic
partners as well as those involving newly established alliances with
experienced regional operators. As a consequence of its working relationship
with a 3-D seismic company, the Company will also be pursuing property
acquisitions where it can utilize CAEX technology to identify additional
potential reserves. In addition, management intends to continue to be
proactive in developing acquisition opportunities rather than pursuing
opportunities in the auction market. Management believes that this proactive
strategy has historically resulted in lower acquisition prices paid for its oil
and gas properties.
The Company, in utilizing the foregoing strategies, has replaced its
annual production through reserve growth by an average rate of 670% per year
since 1990 at an average aggregate replacement cost of $2.61 per BOE for the
period 1990 through 1995.
TECHNOLOGICAL ENHANCEMENTS
Technological Enhancement of Core Properties. The Company pursues the
development of its core properties utilizing known technologies in waterflood,
3-D Seismic Computer Assisted Reservoir Modelling ("CARM"), horizontal
drilling, and 3-D Seismic Computer Assisted Exploration ("CAEX").
Waterflood Technology. Utilizing primary production techniques, it is
estimated by independent petroleum engineers, as of January 1, 1996, that the
Ellis Lease should produce proven reserves net to the Company of approximately
4.3 MMBbls of crude oil from the Diatomite Zone, which the Company estimates
represents an average recovery rate of 7.7% of total crude oil originally in
place. In addition to primary development, management intends to increase
recovery rates by implementing a secondary recovery waterflood project in the
Diatomite Zone on the Ellis Lease, which is similar to waterflood projects
currently utilized by other oil and gas companies operating in the Lost Hills
Field. It is estimated that the Company's Ellis Lease will yield an additional
3.7 MMBbls of crude oil of proved undeveloped secondary recovery
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reserves utilizing the waterflood recovery method, resulting in an increase in
recovery of estimated crude oil initially in place on the Ellis Lease of an
additional 5.9%. In addition, several major oil companies operating in the San
Joaquin Basin are currently employing, on both a pilot and fully implemented
project basis, other additional enhanced recovery techniques, such as thermal
stimulation, in order to further increase recovery rates and profitability.
Management will continue to evaluate the implementation of various other
enhanced recovery applications once the operating and economic benefits have
been clearly established.
The Company has two additional waterflood projects under way in the
Permian Basin. Further development is planned on both these projects during
1996. In addition, the Company will commence a feasibility study for
waterflooding the Reef Ridge and Antelope Shale formations on its San Joaquin
Basin properties.
CARM Technology. During 1995, the Company and its San Joaquin Basin
Operations Partner completed a 3-D reservoir model of the Diatomite Zone on the
Ellis Lease. The results of this model will be used to assist the Company with
additional computer simulation modelling of hot water, steam and CO2 recovery
techniques. The model will also be used to examine various means of further
optimizing its planned Ellis Lease waterflood, including the potential use of
horizontal drilling on the property.
Horizontal Drilling Technology. The Company undertook the evaluation
of using horizontal drilling technology on its San Joaquin Basin properties in
the fourth quarter of 1995. As a result of these studies, at least two
horizontal wells are planned to be drilled in the second quarter of 1996. The
first of these wells will be 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 replace certain 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 these wells are successful, potential 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.
CAEX Technology. 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. Processing of data from this shoot 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, in February 1996, the
Company entered into an agreement with a 3-D seismic company to jointly explore
the Hostetter Field. This partner in turn will provide the Company with a
similar opportunity in one of its current exploration projects. The Company
and 3- D seismic partner have also jointly formed a geologic team to assist
them in the evaluation of the Hostetter 3-D program. Management anticipates
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its relationship with 3-D seismic partner will lead to other 3-D CAEX
opportunities for the Company during 1996.
PRIMARY OPERATING AREAS
San Joaquin Basin (California). In June 1994, the Company acquired
75% of Bakersfield Energy Resources, Inc. and its affiliates' ("Bakersfield
Energy") interests in the Lost Hills oil and gas field and a 23 MMcf per day
gas processing plant in the San Joaquin Basin of California, for a total
purchase price of approximately $46 million. The properties produce a light
(approximately 40o gravity), low sulfur crude oil that has a higher value
product yield than most other crude oils produced in California and
consequently sells at a premium in that market. In March 1996, this light oil
sold for over $20.00 per barrel. The associated natural gas produced with the
crude oil has a high Btu content (approximately 1,240 Btu) which yields in
excess of 2 gallons of NGLs per Mcf of natural gas when processed in the
Company's gas plant.
At the time of acquisition, the Bakersfield Properties had 47 net
productive wells with average daily production of approximately 546 Bbls of oil
and 7,195 Mcf of gas per day. Estimated net proved reserves attributable to
the interests acquired by the Company in the Bakersfield Properties was 6.6
MMBbls of crude oil and 46.8 Bcf of natural gas, or a total of 14.5 MMBOE and a
Pre-tax SEC 10 Value of $49.7 million. Since the acquisition, the Company, in
conjunction with the operator of the properties, has drilled 71 wells on the
Bakersfield Properties and expects to drill an additional 178 wells over the
next five years. As a result of drilling completed through December 1995, the
Company's average daily production from these properties increased to 1,174
Bbls of oil and 11,700 Mcf of gas per day based on the quarter ended December
31, 1995. The Company's net proved reserves from the Bakersfield Properties
have increased to 25.7 MMBOE at January 1, 1996, with a Pre-tax SEC 10 Value of
$105.2 million.
The gas processing plant acquired as part of the Bakersfield
Properties is a modern, refrigeration liquid extraction facility with inlet
capacity of 23 MMcf of gas per day and liquid fractionation capacity of 100,000
gallons of NGLs per day. Currently, the plant processes most of the gas
produced from the Bakersfield Properties as well as gas produced by third
parties.
The Bakersfield Properties are currently being operated by Bakersfield
Energy, a company which originally acquired an interest in these properties in
1990 and has retained a 25% ownership. In addition, the Company entered into a
joint acquisition agreement with Bakersfield Energy which gives each party the
right to participate equally in any acquisition of oil and gas interests
located within the state of California by the other party.
South Texas. The Company has worked with Washington Energy
Exploration, Inc., which was acquired by Cabot Oil and Gas Corporation, to
acquire interests in oil and gas properties located
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in South Texas ("South Texas Properties") for a total acquisition cost net to
the Company of $5.4 million. Current average daily production in South Texas
is 44 Bbls of crude oil and 4,187 Mcf of natural gas based on production in the
quarter ended December 31, 1995, and estimated net proved reserves was 1.7
MMBOE at January 1, 1996.
Permian Basin (West Texas/New Mexico). Since 1989, the Company has
worked with Penroc Oil and Gas Corporation to jointly identify and acquire
interests in oil and gas properties located in the Permian Basin with total
acquisition costs net to the Company of $3.4 million. Subsequent remedial
work, development drilling activity and secondary recovery procedures have
resulted in current average daily production of 318 Bbls of crude oil and 458
Mcf of natural gas based on production in the quarter ended December 31, 1995,
and estimated net proved reserves at January 1, 1996 was 2.2 MMBOE.
FINANCING ACTIVITIES
The Company has typically financed its acquisitions through the use of
secured bank borrowings and periodic common and preferred equity placements.
Internationale Nederlanden (U.S.) Capital Corporation ("ING Capital") has been
the Company's principal banker since November 1989 with an initial credit
facility of $2.9 million. The Company's credit facility with ING Capital has
subsequently been increased at certain times in connection with the Company's
various acquisitions of oil and gas properties. In June 1994, ING Capital (in
conjunction with another bank) provided the Company with a $34.4 million credit
facility and a $5 million bridge loan to help finance the acquisition of the
Bakersfield Properties.
On July 24, 1995, the Company consummated the sale of 65,000 units
consisting of $65 million aggregate principal amount of its 14-7/8% Senior
Notes due in the year 2002 (the "Note Offering"). Each unit consisted of a
$1,000 principal amount note and a warrant to purchase 22 shares of common
stock. The notes and warrants became separately transferrable immediately
after July 24, 1995.
The net proceeds to the Company from the Note Offering was
approximately $61 million after deducting discounts and offering expenses. The
Company immediately used a portion of the net proceeds to (i) repay $34.3
million outstanding under the credit agreement with ING Capital and repay the
$5 million bridge loan with ING Capital; (ii) redeem the total $10.9 million in
outstanding shares of Series D Preferred Stock which were issued in connection
with the acquisition of the Bakersfield Properties and (iii) acquire interests
in additional producing wells in the Bakersfield Properties for $2.3 million.
The Company used the balance of the proceeds from the Note Offering to finance
a portion of the development of the Bakersfield Properties over the remainder
of 1995.
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Concurrent with the repayment of its outstanding bank debt, the
Company entered into a new credit agreement with ING Capital, providing for a
total credit facility of $15 million, $10 million of which was initially
available. There was $5.6 million outstanding under this facility at December
31, 1995.
SALES, MARKETS AND MARKET CONDITIONS
With the exception of the gas produced from the Bakersfield
Properties, all of the Company's production is generally sold at the wellhead
or from on-site storage facilities to oil and gas purchasing companies in the
areas where it is produced. Crude oil and condensate are typically sold at
prices which are based upon posted field prices. The natural gas produced from
the Bakersfield Properties is processed at the gas processing plant in which
the Company has a 75% interest. The NGLs which are extracted in such process
are sold in the spot market. Including the natural gas remaining after
extraction of the NGLs, approximately 76% of the Company's 1995 natural gas
production was subject to fixed-price contracts. The remainder of the
Company's natural gas was sold at spot market prices. The term "spot market"
as used herein refers to contracts with a term of six months or less or
contracts which call for a redetermination of sales prices every six months or
earlier.
For much of the past decade, the markets for oil and natural gas have
been volatile. The Company anticipates that such markets will continue to be
volatile over the next year. As an independent oil and gas company, the
Company's revenue, profitability and future rate of growth are substantially
dependent upon prevailing prices for oil and gas, which are in turn dependent
upon numerous factors beyond the Company's control, such as economic, political
and regulatory developments and competition from other sources of energy. A
substantial or extended decline in oil and gas prices could have a material
adverse effect on the Company's financial position, results of operations,
quantities of oil and gas reserves that may be economically produced and access
to capital.
Price fluctuations in the oil market have a significant impact on the
Company's business because all of the Company's oil production is sold at
prices based upon posted field prices which vary monthly. In order to minimize
the price volatility to which the Company is subject, the Company entered into
hedging contracts with third parties covering significant portions of its oil
production in 1995. Additionally, price fluctuations in the gas market also
have a significant impact on the Company's business because approximately 24%
of the Company's natural gas production in 1995 was sold at spot market prices,
and the Company currently anticipates that approximately 36% of the Company's
estimated natural gas production for 1996 will be sold at spot market prices
based on contracted volumes at December 31, 1995. The remainder of the
Company's gas production is subject to certain fixed-price contracts. For
further information concerning the Company's fixed-price sales and hedging
contracts, see Note 9 of Notes to Consolidated Financial Statements included in
Item 8 herein.
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The Company's business is typically seasonal in nature. The demand
for the Company's oil and gas production generally increases during the winter
months. Gas prices in particular have been sensitive to weather patterns in
recent years. Weather conditions at certain times of the year can also affect
the operations of the Company's oil and gas properties and its ability to
produce hydrocarbons in commercially marketable quantities.
COMPETITION
The acquisition, exploration and development of oil and gas properties
is a highly competitive business. Many companies and individuals are engaged
in the business of acquiring interests in and developing onshore oil and gas
properties in the United States. The industry is not dominated by any single
competitor or a small number of competitors. Many entities with which the
Company competes have significantly greater financial resources, staff and
experience. The Company competes with major and independent oil and gas
companies for the acquisition of desirable oil and gas properties, as well as
for the equipment and labor required to operate and develop such properties.
Many of these competitors have financial and other resources substantially in
excess of those available to the Company. Such competitive disadvantages could
adversely affect the Company's ability to acquire desirable prospects or
develop existing prospects.
CUSTOMERS
The following customers accounted for more than 10% of the Company's
oil and gas revenues in at least one of the years indicated:
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Customer 1995 1994 1993
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Cabot Oil and Gas Marketing . . . . . . . . . . . . - 21% -
Kern Oil and Refining . . . . . . . . . . . . . . . 10% 17% -
Mock Resources, Inc. . . . . . . . . . . . . . . . 24% - -
Valero Gas Marketing, L.P. . . . . . . . . . . . . 10% - -
Washington Energy Marketing,
Inc. . . . . . . . . . . . . . . . . . . . . . . - - 36%
</TABLE>
The Company considers its relationships with these purchasers to be
satisfactory. The Company believes that the loss of any present purchaser
would not have a material adverse effect on the Company's consolidated
business.
REGULATION
GENERAL - The Company's business is affected by governmental laws and
regulations, including price control, energy, environmental, conservation, tax
and other laws and regulations relating to the petroleum industry. For
example, state and federal agencies have issued rules and regulations that
require permits for the drilling of wells, regulate the spacing of wells,
prevent the waste of natural gas and crude oil reserves through proration, and
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regulate environmental and safety matters. Changes in any of these laws and
regulations could have a material adverse effect on the Company's business. In
view of the many uncertainties with respect to current laws and regulations,
including their applicability to the Company, the Company cannot predict the
overall effect of such laws and regulations on future operations.
The Company believes that its operations comply in all material
respects with all applicable laws and regulations and that the existence of
such laws and regulations have no more restrictive effect on the Company's
method of operations than on other similar companies in the industry.
The following discussion contains summaries of certain laws and
regulations and is qualified in its entirety by reference thereto.
NATURAL GAS SALES PRICE CONTROLS - Various aspects of the Company's
oil and natural gas operations are regulated by administrative agencies under
statutory provisions of the states where such operations are conducted and by
certain agencies of the federal government for operations on federal leases.
The Federal Energy Regulatory Commission (the "FERC") regulates the
transportation and sale for resale of natural gas in interstate commerce
pursuant to the Natural Gas Act of 1938 (the "NGA") and the Natural Gas Policy
Act of 1978 (the "NGPA"). In the past, the federal government has regulated
the prices at which oil and gas could be sold. Currently, sales by producers
of natural gas, and all sales of crude oil, condensate and natural gas liquids
can be made at uncontrolled market prices, but Congress could reenact price
controls at any time. Deregulation of wellhead sales in the natural gas
industry began with the enactment of the NGPA in 1978. In 1989, Congress
enacted the Natural Gas Wellhead Decontrol Act which removed all NGA and NGPA
price and nonprice controls affecting wellhead sales of natural gas effective
January 1, 1993.
Commencing in April 1992, the FERC issued Order Nos. 636, 636-A, and
636-B ("Order No. 636"), which require interstate pipelines to provide
transportation separate, or "unbundled", from the pipelines' sales of gas.
Also, Order No. 636 requires pipelines to provide open-access transportation on
a basis that is equal for all gas shippers. Although Order No. 636 does not
directly regulate the Company's activities, the FERC has stated that it intends
for Order No. 636 to foster increased competition within all phases of the
natural gas industry. It is unclear what impact, if any, increased competition
within the natural gas industry under Order No. 636 will have on the Company's
activities. Although Order No. 636, assuming it is upheld in its entirety,
could provide the Company with additional market access and more fairly-applied
transportation service rates, Order No. 636 could also subject the Company to
more restrictive pipeline imbalance tolerances and greater penalties for
violation of those tolerances. The FERC has issued final orders of virtually
all Order No. 636 pipeline restructuring proceedings. Appeals of Order No.
636, as well as orders in the individual pipeline restructuring proceedings,
are
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currently pending and the Company cannot predict the ultimate outcome of court
review. This review may result in the reversal, in whole or in part, of Order
No. 636.
In 1994, the FERC announced its intention to reexamine certain of its
transportation-related policies, including the appropriate manner for setting
rates for new interstate pipeline construction and the manner in which
interstate pipelines release transportation capacity under Order No. 636.
While any resulting FERC action would affect the Company only indirectly, these
inquiries are intended to further enhance competition in natural gas markets.
The FERC has also recently clarified that it does not have
jurisdiction over natural gas gathering facilities and services and that such
facilities and services are properly regulated by state authorities. As a
result, natural gas gathering may receive greater regulatory scrutiny by state
agencies. The Company's gathering operations could be adversely affected
should they be subject in the future to state regulation of rates and services,
although the Company does not believe that it would be affected by such
regulation any differently than other similar natural gas producers or
gatherers. In addition, the FERC has approved several transfers by interstate
pipelines of gathering facilities to unregulated gathering companies, including
pipeline affiliates. This could allow such companies to compete more
effectively with independent gatherers, such as the Company.
The Company's natural gas gathering operations are generally subject
to safety and operational regulations relating to the design, installation,
testing, construction, operation, replacement and management of facilities.
Pipeline safety issues have recently become the subject of increasing focus in
various political and administrative arenas at both the state and federal
levels. For example, federal legislation addressing pipeline safety issues has
recently been introduced before Congress. Among other things, the legislation
includes a requirement that states adopt "one-call" notification systems. The
Company cannot predict what effect, if any, the adoption of such legislation
might have on the Company's operations.
Additional proposals and proceedings that might affect the oil and gas
industry are pending before Congress, the FERC and the courts. The Company
cannot predict when or whether any such proposals may become effective. In the
past, the natural gas industry historically has been very heavily regulated.
There is no assurance that the current regulatory approach pursued by the FERC
will continue indefinitely into the future. Notwithstanding the foregoing, it
is not anticipated that compliance with existing federal, state and local laws,
rules and regulations will have a material or significantly adverse effect upon
the capital expenditures, earnings or competitive position of the Company.
TAXATION - The operations of the Company, as is the case in
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the petroleum industry generally, are significantly affected by federal tax
laws, including the Tax Reform Act of 1986. Certain transactions which were
entered into in connection with the Company's 1987 recapitalization have, under
the Tax Reform Act of 1986, significantly limited the Company's ability to
utilize its net operating losses arising prior to the recapitalization. In
addition, certain 1992 equity transactions resulted in additional restrictions
on the utilization of net operating losses arising since 1987. For further
information on the limitations of the Company's net operating loss
carryforwards, see Notes to Consolidated Financial Statements included in Item
8 herein.
In addition to the foregoing, federal as well as state tax laws have
many provisions applicable to corporations in general, which could affect the
potential tax liability of the Company.
OPERATING HAZARDS AND ENVIRONMENTAL MATTERS - The oil and gas business
involves a variety of operating risks, including the risk of fire, explosions,
blow-outs, pipe failure, casing collapse, abnormally pressured formations and
environmental hazards such as oil spills, gas leaks, ruptures and discharges of
toxic gases, the occurrence of any of which could result in substantial losses
to the Company due to injury or loss of life, severe damage to or destruction
of property, natural resources and equipment, pollution or other environmental
damage, clean-up responsibilities, regulatory investigation and penalties and
suspension of operations. Such hazards may hinder or delay drilling,
development and on-line production operations.
Extensive federal, state and local laws govern oil and natural gas
operations regulating the discharge of materials into the environment or
otherwise relating to the protection of the environment. Numerous governmental
departments issue rules and regulations to implement and enforce such laws
which are often difficult and costly to comply with and which carry substantial
penalties for failure to comply. Some laws, rules and regulations relating to
protection of the environment may, in certain circumstances, impose "strict
liability" for environmental contamination, rendering a person liable for
environmental damages and cleanup costs without regard to negligence or fault
on the part of such person. Other laws, rules and regulations may restrict the
rate of oil and natural gas production below the rate that would otherwise
exist. The regulatory burden on the oil and natural gas industry increases its
cost of doing business and consequently affects its profitability. These laws,
rules and regulations affect the operations of the Company. Compliance with
environmental requirements generally could have a material adverse effect upon
the capital expenditures, earnings or competitive position of the Company. The
Company believes that it is in substantial compliance with current applicable
environmental laws and regulations and that continued compliance with existing
requirements will not have a material adverse impact on the Company.
-11-
<PAGE> 13
Although the Company maintains insurance against some, but not all, of
the risks described above, including insuring the costs of clean-up operations,
public liability and physical damage, there is no assurance that such insurance
will be adequate to cover all such costs or that such insurance will continue
to be available in the future or that such insurance will be available at
premium levels that justify its purchase. The occurrence of a significant
event not fully insured or indemnified against could have a material adverse
effect on the Company's financial condition and operations.
EMPLOYEES
At December 31, 1995, the Company had 11 full-time employees. The
Company believes its relationship with its employees is satisfactory. The
Company also employs technical consultants from time to time. The Company is
not materially dependent on any of such consultants.
ITEM 2. PROPERTIES
PRODUCING ACREAGE AND WELLS
The principal assets of the Company consist of interests in proved
developed and undeveloped oil and gas leases in the United States. The
Company's most significant oil and gas properties are located in the San
Joaquin Basin of California, various fields in South Texas, the Morganza Field
in Louisiana, the Foshee and West Foshee Fields in Alabama, and in various
fields in the Southeast New Mexico and West Texas portions of the Permian
Basin. These properties, in aggregate, accounted for approximately 96% of the
Company's oil and gas revenues in 1995. Substantially all of the interests in
the oil and gas properties of the Company are subject to liens securing the
Company's credit facility with ING Capital and subject to a second priority
lien under the Company's Senior Secured Notes and an indenture agreement.
The Company did not participate in any exploratory prospects in 1995.
The Company acquired an interest in certain exploratory acreage concurrent with
the acquisition of interests in South Texas, but is not committed to
participate in the exploratory drilling thereof. Workover and development
activity in 1995 included significant development work on the San Joaquin Basin
properties, remedial work on the Company's interests in the Foshee Field in
Alabama and in the Permian Basin and the drilling of one successful development
well in South Texas.
A total of 44 successful development wells were drilled on the San
Joaquin properties during 1995. The favorable results of the development
drilling activity during 1995 and the successful completion of a step-out well
on the Ellis Lease resulted in a significant expansion of the proven area on
the Ellis Lease and the addition of 61 new proven undeveloped locations. It is
anticipated that 50 additional wells will be drilled after 1995, with a total
of 178 new wells planned to exploit the proven undeveloped reserves
-12-
<PAGE> 14
on the properties over the next several years. It is also anticipated that a
waterflood project will be initiated in 1998. The Company's total future cost
to develop the proven reserves on the properties is currently estimated at
$56.6 million.
It is also anticipated that workover and development activity will
continue on the South Texas and Permian Basin properties during 1996, as the
Company plans to continue to exploit the potential for additional reserves on
the Company's properties in these areas. Anticipated 1996 development
activities include continued secondary recovery development of certain
properties in Lea County, New Mexico and West Texas and the continued
development of the Company's South Texas Properties.
The following table summarizes the Company's producing and shut-in
wells and producing acreage as of December 31, 1995:
<TABLE>
<CAPTION>
Gross Net Producing Undeveloped
Wells (1) Wells (2) Acreage Acreage
--------- ------------- -------------- --------------
Oil Gas Oil Gas Gross Net Gross Net
--- --- ----- ----- ------- ----- ------- -----
<S> <C> <C> <C> <C> <C> <C> <C>
347 77 164.6 18.45 30,852 7,626 17,344 6,356
</TABLE>
______________
(1) The number of gross wells and acreage shown equals the total
number of wells or acres in which a working interest is owned.
(2) The number of net wells or acres shown equals the sum of the
fractional working interests owned in gross wells or acres,
expressed as whole numbers or fractions thereof.
DRILLING ACTIVITIES
The following table shows the gross and net number of exploratory and
development wells drilled in the years indicated and the Company's interests
therein:
<TABLE>
<CAPTION>
1995 1994 1993
---------- ---------- ----------
Gross Net Gross Net Gross Net
----- --- ----- --- ----- ---
<S> <C> <C> <C> <C> <C> <C>
Exploratory-
Oil . . . . . . - - - - - -
Gas . . . . . . - - - - - -
Dry . . . . . . - - - - - -
Development-
Oil . . . . . . 44 33.00 27 10.50 10 0.74
Gas . . . . . . 1 .28 2 .60 4 1.37
Dry . . . . . . - - - - - -
Total-
Producing . . . 45 33.28 29 11.10 14 2.11
Dry . . . . . . - - - - - -
-- ----- -- ----- -- ----
45 33.28 29 11.10 14 2.11
== ===== == ===== == ====
</TABLE>
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<PAGE> 15
PRODUCTION, REVENUES AND LIFTING COSTS
The following table shows, for the years indicated, the net
production, measured in barrels of oil and thousands of cubic feet of gas,
attributable to the Company's oil and gas interests, the revenues derived by
the Company from the sale of such production, the weighted average selling
price per unit and the weighted average cost to the Company per unit produced.
All average price data consider the effects of the Company's fixed-price sales
and hedging contracts (dollar amounts in thousands except per unit data):
<TABLE>
<CAPTION>
1995 1994 1993
------ ------ ------
<S> <C> <C> <C>
Production:
Crude oil and condensate (Bbls) . . . . . . . . . . . . . . . . 463,000 312,000 179,000
Plant NGLs (Bbls) . . . . . . . . . . . . . . . . . . . . . . . 207,000 94,000 3,000
Natural gas (Mcf) . . . . . . . . . . . . . . . . . . . . . . . 5,137,000 3,326,000 1,985,000
Revenues:
Crude oil and condensate . . . . . . . . . . . . . . . . . . . $ 7,625 $ 4,925 $2,951
Gas plant and related revenue . . . . . . . . . . . . . . . . . 6,362 1,990 38
Natural gas . . . . . . . . . . . . . . . . . . . . . . . . . . 8,405 6,045 3,518
------ ------ -----
Total oil and gas operating revenues . . . . . . . . . . . . $22,392 $12,960 $6,507
------ ------ -----
Costs:
Production expenses . . . . . . . . . . . . . . . . . . . . . . $ 5,263 $ 3,610 $2,249
Gas plant expenses . . . . . . . . . . . . . . . . . . . . . . 3,704 832 -
------ ------ -----
Total oil and gas operating costs . . . . . . . . . . . . . . . $ 8,967 $ 4,442 $2,249
------ ------ -----
Weighted average selling price:
Crude oil and condensate (per Bbl) . . . . . . . . . . . . . . $16.49 $15.79 $16.46
Plant NGLs (per Bbl) . . . . . . . . . . . . . . . . . . . . . $16.06 $13.95 -
Natural gas (per Mcf) . . . . . . . . . . . . . . . . . . . . . $ 1.64 $ 1.82 $ 1.77
Production costs per BOE . . . . . . . . . . . . . . . . . . . . $ 3.99 $ 4.13 $ 4.41
</TABLE>
Revenues relating to the gas plant as presented include sale of plant
NGLs, resale of purchased third party gas, processing fees and other. Weighted
average selling price for plant NGLs is calculated based on revenue derived
from the sale of NGLs only.
RESERVES
The Company's net proved reserves, net proved developed reserves and
the standardized measure of discounted future net cash flows from such proved
reserve quantities are shown in Note 17 of Notes to Consolidated Financial
Statements contained in Item 8 herein. The majority of the Company's oil and
gas interests is held through mineral leases which are kept open by current
production and will continue to remain open so long as there is production of
oil and gas in commercial quantities from such interests.
OFFICE FACILITIES
The Company's corporate headquarters are located at Five Post Oak
Park, Suite 2220, Houston, Texas in rented office space.
-14-
<PAGE> 16
ITEM 3. LEGAL PROCEEDINGS
To the best of the Company's knowledge, no material lawsuits are
pending or have been threatened against it. Due to the nature of its business,
however, the Company may be, from time to time, a party to certain legal or
administrative proceedings arising in the ordinary course of its business.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
Not applicable.
-15-
<PAGE> 17
PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS
The Company's common stock trades on The Nasdaq Stock Market
("NASDAQ") under the symbol "HARC". Quotations of the sales volume and the
closing sales prices of the common stock are listed daily in NASDAQ's national
market listings. The following table sets forth the range of high and low bid
prices of the common stock as quoted by NASDAQ's monthly statistical report for
the periods indicated. Such prices represent interdealer quotations without
retail markups, markdowns or commissions and do not necessarily represent
actual transactions:
<TABLE>
<CAPTION>
1995 1994
------------- -------------
Quarter Ended High Low High Low
------------- ----- ----- ----- -----
<S> <C> <C> <C> <C>
March 31 . . . . . $4.38 $2.88 $4.00 $3.00
June 30. . . . . . $4.38 $2.75 $4.00 $3.25
September 30 . . . $3.50 $2.50 $4.00 $3.00
December 31. . . . $3.38 $1.88 $4.00 $2.75
</TABLE>
On March 26, 1996, the closing bid price for the common stock as
reported by NASDAQ was $4.75 per share. The Company had approximately 1,860
stockholders of record at that date.
The Company has never paid dividends on its common stock. Pursuant to
the terms of the Company's Senior Secured Notes and its credit facility, it is
currently restricted from the payment of dividends on its common stock (except
dividends paid in shares of common stock). Additionally, pursuant to the terms
of the Company's preferred stock, the Company is restricted from the payment of
dividends on its common stock (except dividends paid in shares of common stock)
unless the Company is current in its payment of dividends on such preferred
stock.
None of the Company's warrants or preferred stock is or will be traded
in any public trading market.
-16-
<PAGE> 18
ITEM 6. SELECTED FINANCIAL DATA
The following selected financial data of the Company should be read in
conjunction with the Consolidated Financial Statements and Notes thereto
contained in Item 8 of this report:
<TABLE>
<CAPTION>
Year Ended December 31,
----------------------------------------------------------------------------------------
(Amounts in thousands except per share data)
1992 1991
------------------------- -------------------------
1995 1994 1993 U.S. Canada Total U.S. Canada Total
------ ------ ------ ------ ------ ------ ------ ------ ------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Revenues . . . . . . $22,595 $13,213 $ 6,725 $ 3,312 $3,354 $ 6,666 $ 3,424 $2,610 $ 6,034
Net loss . . . . . . $(4,618) $ (939) $(1,041) $(1,338) $ (76) $(1,414) $(1,097) $ (364) $(1,461)
Net loss applicable
to common
stockholders . . . . $(7,765) $(1,890) $(1,287) $(1,370) $ (76) $(1,446) $(1,137) $ (364) $(1,501)
Net loss per
common share . . . . $ (.98) $ (.29) $ (.23) n/a n/a $ (.41) n/a n/a $ (.50)
Weighted average
number of common
shares outstanding . 7,904 6,447 5,492 n/a n/a 3,512 n/a n/a 2,973
</TABLE>
<TABLE>
<CAPTION>
1991
-------------------------
1995 1994 1993 1992 U.S. Canada Total
------ ------ ------ ------ ----- ------ ------
<S> <C> <C> <C> <C> <C> <C> <C>
Working capital. . . $ 1,325 $(7,943) $ 1,551 $ 381 $ 37 $ (165) $ (128)
Total assets . . . . $94,231 $68,573 $17,937 $12,580 $ 6,771 $8,815 $15,586
Long-term debt . . . $68,709 $31,889 $ 8,067 $ 4,712 $ 4,195 $5,633 $ 9,828
Minority interest. . $ - $ - $ - $ - $ 858 $ 932 $ 1,790
Stockholders'
equity. . . . . . . $10,214 $15,353 $ 7,536 $ 4,645 $ 1,798 - $ 1,798
</TABLE>
All amounts pertaining to Canadian operations for 1991 and 1992 relate
to the Company's investment in Consolidated HCO Energy Ltd. ("HCO"). As a
result of a series of equity transactions by HCO in late 1992, the Company's
interest in HCO was reduced to 21% resulting in a deconsolidation of HCO's
accounts at December 31, 1992. The Company disposed of its remaining interest
in HCO in January 1993.
-17-
<PAGE> 19
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
All dollar amounts referenced in this Item 7 have been rounded to the
nearest thousand.
OVERVIEW
The Company has grown through the acquisitions of oil and gas
properties. Therefore, the Company's results of operations and financial
position are significantly affected by such acquisitions and related
financings.
In June 1990, the Company increased its ownership of HCO, a Canadian
oil and gas company, to over 50% and from June 1990 through December 1992, the
accounts of HCO were consolidated with those of the Company. In December 1992,
the Company's interest in HCO was decreased to 21% and HCO was deconsolidated.
In January 1993, the shares of HCO common stock held by the Company were sold.
The Company's results of operations for 1993 do not reflect any of the results
of operations of HCO.
In October 1992, the Company formed South Texas Limited Partnership
("STLP") with Washington Energy and an unrelated third party for the purpose of
acquiring the South Texas Properties. At such time, the Company owned a 25.25%
interest in STLP. The acquisition of the South Texas Properties was financed
by STLP through a production note. In May 1993, the Company purchased an
additional 12.625% interest in STLP with the proceeds of the sale of 10,000
shares of its Series C Convertible Preferred Stock and the assumption of an
additional 12.625% of the production note relating to the South Texas
Properties. Effective March 1, 1994, the STLP partners agreed to dissolve STLP
and distribute all of the assets and liabilities of STLP to the partners in
proportion to their respective interests.
In March 1993, the Company exchanged 30,000 shares of its Series B
Convertible Preferred Stock for certain gross overriding royalty and net profit
interests in certain oil and gas properties located in Oklahoma, Texas,
Louisiana and New Mexico (the "Royalty Interests").
In June 1994, the Company acquired 75% of Bakersfield Energy's
interests in the Lost Hills and North Antelope Hills oil and gas fields and a
23 MMcf per day gas processing plant in the San Joaquin Basin of California.
In July 1995, the Company consummated the sale of 65,000 units
consisting of $65 million aggregate principal amount of its 14-7/8% Senior
Notes due in the year 2002 and warrants to purchase 1,430,000 shares of common
stock. Each unit consisted 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 to repay an aggregate of $39.3
million outstanding under its credit agreement and bridge loan with ING
-18-
<PAGE> 20
Capital; redeem $10.9 million in outstanding shares of Series D Preferred Stock
which were issued in connection with the acquisition of the Bakersfield
Properties; acquire interests in additional producing wells in the Bakersfield
Properties for $2.3 million; and finance a portion of the development of the
Bakersfield Properties over the remainder of 1995. This refinancing of the
Company's debt and capital structure resulted in an extraordinary loss on early
extinguishment of debt of $1.9 million and accretion on Redeemable Preferred
Stock of $2.1 million in the current year.
In order to protect against the effects of declines in oil and gas
prices, the Company generally enters into either fixed-price sales or hedging
contracts covering significant portions of the Company's estimated future
production. The Company believes that its hedging strategy has allowed it to
grow more rapidly by providing more predictable cash flows with which to
finance its acquisitions and development drilling activities.
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, and recognize a loss if such recoverable amounts
are less. The adoption of SFAS 121 resulted in an impairment loss of $876,000
which was included in depletion, depreciation, amortization and impairment in
1995. The Company uses the successful efforts method of accounting for its oil
and gas properties. See Note 1 of Notes to Consolidated Financial Statements
included in Item 8 herein for summary of significant accounting policies.
RESULTS OF OPERATIONS - COMPARISON OF 1995 TO 1994
ACQUISITION OF BAKERSFIELD PROPERTIES - Included in results of
operations for the current year are twelve months of operations from the
Bakersfield Properties, as compared to six months of operations in the
comparable period of 1994. The Bakersfield Properties were acquired on June
30, 1994. (See Note 4 of Notes to Consolidated Financial Statements included
in Item 8 herein.)
REVENUES - The Company's total revenues increased $9,382,000 (71%)
from $13,213,000 in 1994 to $22,595,000 in 1995.
The Company's total oil and gas revenues increased $5,048,000 (46%)
from $10,982,000 in 1994 to $16,030,000 in 1995. Oil revenues increased
$2,688,000 (54%) due primarily to an increase in oil production volumes of
151,000 barrels (48%), from 312,000 barrels in 1994 to 463,000 barrels in 1995.
The increased production was a result of the acquisition of the Bakersfield
Properties, which produced 304,200 barrels of oil in 1995 as compared to
131,400 barrels in 1994 (six months). Oil production from the Company's other
properties decreased 30,000 barrels (16%)
-19-
<PAGE> 21
in the aggregate due to normal production declines. The average price received
for oil was $16.49 per barrel during 1995 compared to $15.79 per barrel in
1994.
The Company's gas revenues increased $2,360,000 (39%) in 1995 in spite
of lower gas prices due to increased production. Gas production increased
1,811,000 Mcf (54%) from 3,326,000 Mcf in 1994 to 5,137,000 Mcf in 1995. The
Bakersfield Properties contributed 3,217,000 Mcf of production in 1995 as
compared to 1,315,000 Mcf in 1994 (six months). Gas production from the
Company's other properties decreased 90,000 Mcf (5%) in the aggregate during
1995 due to normal production declines. The average price received for gas was
$1.64 per Mcf in 1995 as compared to $1.82 per Mcf in 1994.
During 1995, the Company realized revenues of $6,362,000 from its
share of the operations of the natural gas processing plant acquired with the
Bakersfield Properties. These revenues consisted of $2,320,000 in the resale
of natural gas purchased from third parties, $3,321,000 in the sale of
processed natural gas liquids, $111,000 in gas processing fees and $610,000
from the monetization of certain index-based gas contracts. In 1994, the
Company realized gas plant revenues of $1,978,000 (six months), which consisted
of $718,000 in the resale of purchased natural gas, $1,199,000 from the sale of
processed natural gas liquids and $61,000 in gas processing fees.
The Company realized interest and other income of $164,000 and
$39,000, respectively, in the current year. This compares to interest and
other income of $16,000 and $237,000, respectively, in 1994. The increase in
the current year's interest income is due to significantly larger cash balances
resulting from the recent Note Offering in July 1995. Other income in 1994 was
primarily a gain on sale of miscellaneous oil and gas properties.
COSTS AND EXPENSES - Total costs and expenses increased $11,295,000
(81%) from $14,030,000 in 1994 to $25,325,000 in 1995.
The Company's production costs increased $1,653,000 (46%) from
$3,610,000 in 1994 to $5,263,000 in 1995. This was primarily due to the
acquisition of the Bakersfield Properties, which accounted for $3,050,000 of
production costs incurred in 1995 as compared to $1,373,000 in 1994 (six
months). Production costs on the Company's other properties decreased $33,000
in the aggregate during the current year. Average production costs decreased
to $3.99 per BOE in 1995 as compared to $4.13 per BOE in 1994.
During 1995, the Company incurred costs of $3,704,000 resulting from
its share of the operations of the natural gas processing plant acquired with
the Bakersfield Properties. These costs included $1,998,000 for the purchase
of natural gas for processing and resale and $1,706,000 of direct operating
expenses. During 1994, the Company incurred gas plant costs of $1,708,000 (six
months) consisting of $876,000 of natural gas purchased for resale and $832,000
of direct operating expenses.
-20-
<PAGE> 22
The Company incurred incidental abandonment costs of $4,000 in the
current year as compared to $75,000 during 1994. Engineering and geological
expenses increased $53,000 (21%) from $254,000 in 1994 to $307,000 in 1995 due
to an increase in the number of oil and gas properties owned by the Company and
activities related to their evaluation and management.
The Company adopted in the current year SFAS 121 which resulted in a
non-cash impairment charge of $876,000 which is included in depletion,
depreciation, amortization and impairment expense ("DD&A"). Excluding the
impairment charge, the Company's DD&A increased $1,200,000 (31%) from
$3,897,000 in 1994 to $5,097,000 in 1995. This was a result of the substantial
increase in acquisition and development costs related to the Bakersfield
Property acquisition. The DD&A rate, excluding the effects of SFAS 121, was
$3.60 per BOE in 1995 as compared to $4.26 during 1994 as a result of an
increase in oil and gas reserves attributable to the Bakersfield Properties
during the current year. Further affecting the increase in overall DD&A
expense was $314,000 in depreciation expense in the current period relating to
the natural gas processing plant acquired with the Bakersfield Properties as
compared to $145,000 in 1994 (six months).
The Company's general and administrative expenses increased $730,000
(36%) from $2,014,000 in 1994 to $2,744,000 in 1995. Increases in G&A were a
result of the Company's increased development and financing activities and
general expansion.
The Company's interest expense increased $4,578,000 from $2,268,000 in
1994 to $6,846,000 in 1995. This was due to the increased bank debt resulting
from the original financing of the Bakersfield Properties in June 1994 and
subsequent refinancing of that bank debt and Redeemable Preferred Stock with
$65,000,000 in 14-7/8% Senior Secured Notes in July 1995. Also increasing
interest expense in the current period was increased amortization of deferred
financing costs resulting from these financings.
Other expense of $483,000 in the current year resulted from the
write-down of a long-term investment of $261,000, bad debt expense of $90,000
and a $132,000 loss on the disposition of miscellaneous oil and gas properties.
In 1994, the Company recorded a charge of $203,000 from a write-off of a
portion of its interests in the South Texas Properties, a portion of which was
conveyed to a third party pursuant to the terms of the dissolution of STLP.
EXTRAORDINARY ITEM - In connection with the refinancing of its
long-term debt, the Company incurred in the current year a non-cash
extraordinary charge of $1,888,000 resulting from the early extinguishment of
debt. This was primarily the write-off of all deferred financing costs
associated with the Company's bank debt and Redeemable Preferred Stock which
were repaid in July 1995. During 1994, the Company incurred an extraordinary
non-operating charge of $122,000 resulting from the early extinguishment of
debt
-21-
<PAGE> 23
in the refinancing of the South Texas Properties in connection with the
dissolution of STLP.
ACCRETION - During the current year, the Company incurred a non-cash
accretion charge of $2,147,000 on its Series D Preferred Stock. This accretion
charge was primarily the result of the early redemption of the Series D
Preferred Stock in connection with the refinancing of the Company's long-term
debt.
PREFERRED DIVIDENDS - Dividends on preferred stock were $1,000,000 for
1995 as compared to $795,000 in 1994. Increased dividends in the current year
were a result of the Series D and Series E Preferred Stocks being outstanding
for a longer portion of the year during 1995 as compared to 1994 and an
increase in the Series E coupon rate from 4% to 9% effective July 1995.
Dividends in 1995 consisted of $464,000 in cash, $476,000 in shares of Series D
Preferred Stock and $60,000 in common stock of the Company. Dividends for 1994
consisted of $280,000 in cash, $455,000 in shares of Series D Preferred Stock
and $60,000 in common stock of the Company.
NET LOSS - The Company's net loss from continuing operations for 1995
was $2,730,000 ($0.35 per share), while net loss attributable to common
stockholders after extraordinary item, preferred dividends and accretion was
$7,765,000 ($0.98 per share). In 1994, the Company had a net loss from
continuing operations of $816,000 ($0.10 per share) and net loss to common
shareholders of $1,890,000 ($0.29 per share) after extraordinary item,
preferred dividends and accretion.
RESULTS OF OPERATIONS - COMPARISON OF 1994 TO 1993
ACQUISITION - Included in results of operations for 1994 are six
months of operations from the Bakersfield Properties, which were acquired on
June 30, 1994.
REVENUES - The Company's total revenues increased $6,488,000 (96%)
from $6,725,000 in 1993 to $13,213,000 in 1994.
The Company's oil and gas revenues increased $4,475,000 (69%) from
$6,507,000 in 1993 to $10,982,000 in 1994. Oil revenues increased $1,975,000
(67%) from $2,950,000 in 1993 to $4,925,000 in 1994 due to higher oil
production. The Company's oil production increased approximately 133,000
barrels (74%) from 179,000 barrels in 1993 to 312,000 barrels in 1994. The
increased production was primarily a result of the acquisition of the
Bakersfield Properties, which contributed 131,400 barrels during the last six
months of 1994. The Company's Permian Basin Properties experienced an increase
of 5,400 barrels in 1994 due to the Company's acquisition of additional oil and
gas interests in that area in late 1994. Additionally, oil production from the
South Texas Properties increased by 2,100 barrels due to the additional 12.625%
interest in those properties acquired by the Company in May 1993 and the
drilling of four development wells in late 1993 and early 1994. Oil production
from the Company's Gulf Coast and other
-22-
<PAGE> 24
properties declined approximately 6,200 barrels in the aggregate due to normal
production declines. The average price received for oil was $15.79 per barrel
during 1994 compared to $16.46 per barrel in 1993.
The Company's gas revenues increased $2,527,000 (72%) from $3,518,000
in 1993 to $6,045,000 in 1994 also due to increased production. Gas production
increased 1,341,000 Mcf (68%) from 1,985,000 Mcf in 1993 to 3,326,000 Mcf in
1994. The acquisition of the Bakersfield Properties contributed 1,315,000 Mcf
of the increase while production from the South Texas Properties increased
174,000 Mcf due to the additional 12.625% interest acquired by the Company and
the drilling of four development wells. Gas production from the Royalty
Interests decreased 76,000 Mcf in 1994 as compared to 1993 as a result of
mechanical problems with a gas purchaser's compression facilities which serve a
significant gas lease. These facility problems were corrected in the fourth
quarter of 1994. Gas production from the Company's other properties decreased
72,000 Mcf in the aggregate in 1994 due to normal production declines. Average
prices received for gas were $1.82 per Mcf in 1994 as compared to $1.77 per Mcf
in 1993. Excluding natural gas liquids attributable to the Bakersfield gas
plant, the Company also realized $12,000 in natural gas liquids sales in 1994
as compared to $39,000 in 1993.
During 1994, the Company realized revenues of $1,978,000 from its
share of the operations of the natural gas processing plant acquired as part of
the Bakersfield Properties. These revenues consisted of $718,000 in the resale
of natural gas purchased from third parties, $1,199,000 in the sale of
processed natural gas liquids, including the sale of natural gas liquids
extracted from the natural gas purchased from third parties and $61,000 in gas
processing fees.
The Company realized other income of $237,000 in 1994 resulting
primarily from a gain on the sale of securities. During 1993, the Company had
other income of $197,000 resulting primarily from the sale of its interests in
several minor oil and gas properties.
COSTS AND EXPENSES - Total costs and expenses increased $6,264,000
(81%) from $7,766,000 in 1993 to $14,030,000 in 1994.
The Company's production costs increased $1,361,000 (61%) from
$2,249,000 in 1993 to $3,610,000 in 1994. This was primarily due to the
acquisition of the Bakersfield Properties, which accounted for $1,373,000 in
production costs during the last six months of 1994. Production costs on the
South Texas Properties increased $143,000 in the current year due to
developmental drilling activities while production costs from the Company's
other oil and gas properties decreased $155,000 in the aggregate as a result of
lower workover costs.
During 1994, the Company incurred operating costs of $1,708,000
associated with the natural gas processing plant
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<PAGE> 25
acquired as part of the Bakersfield Properties. These costs included $876,000
from the purchase of natural gas for processing and resale and $832,000 of
directing operating expenses.
The Company incurred incidental abandonment costs on older
non-productive leases of $75,000 in 1994 as compared to $41,000 in 1993.
Engineering and geological expenses increased $66,000 (35%) from $188,000 in
1993 to $254,000 in 1994 due to the Company's increased activities.
The Company's depletion, depreciation and amortization expense
increased $1,256,000 (48%) from $2,641,000 in 1993 to $3,897,000 in 1994 as a
result of increases in depreciable oil and gas assets due to acquisitions and
development costs. The DD&A rate per BOE for oil and gas reserves decreased
from $5.13 per BOE in 1993 to $4.26 per BOE in 1994 due to lower acquisition
costs per BOE for oil and gas reserves acquired during 1994 and positive
reserve revisions during 1994. Further affecting the increase in overall DD&A
expense was depreciation expense relating to the natural gas processing plant
acquired as part of the Bakersfield Properties in 1994.
The Company's general and administrative expenses decreased slightly
from $2,105,000 in 1993 to $2,014,000 in 1994 (4%). The Company experienced
$142,000 in nonrecurring costs resulting from its relocation from California to
Texas during 1993.
The Company's interest expense increased $1,727,000 from $542,000 in
1993 to $2,269,000 in 1994 primarily as a result of the bank debt used to
finance the acquisition of the Bakersfield Properties in June 1994. The
Company's bank debt increased from $8,541,000 at December 31, 1993 to
$39,400,000 at December 31, 1994, resulting in a significantly higher average
debt balance during the current year.
The Company recorded a charge of $203,000 in 1994 from a write-off of
a portion of its interests in the South Texas Properties, which portion was
conveyed to a third party pursuant to the terms of the dissolution of STLP.
Also in connection with the dissolution of STLP, the Company incurred an
extraordinary non-operating charge of $122,000 in 1994 resulting from the early
extinguishment of debt in the refinancing of the South Texas Properties.
Total dividends on preferred stock were $795,000 in 1994, as compared
to $246,000 in 1993. The increase in dividends was a result of the issuance of
additional preferred stock as part of the financing for the acquisition of the
Bakersfield Properties. Dividends in 1994 consisted of $280,000 in cash,
$455,000 in Series D Preferred Stock and detachable warrants and $60,000 in
common stock of the Company. All 1993 dividends were paid in cash. The
Company also incurred a non-cash charge of $156,000 attributable to accretion
on its Series D Redeemable Preferred Stock in 1994.
-24-
<PAGE> 26
NET LOSS - The Company's net loss before the extraordinary item in
1994 was $816,000, and $939,000 after the extraordinary item. Net loss
attributable to common stockholders was $1,890,000 ($.29 per share) after
preferred dividends, accretion on preferred stock and the extraordinary item.
In 1993, the Company had a net loss of $1,041,000 and a loss of $1,287,000
($.23 per share) attributable to common shareholders after preferred dividends.
LIQUIDITY AND CAPITAL RESOURCES
SUMMARY - The Company's sources of working capital have primarily been
cash flows from operations and debt and equity financings. During the year
ended December 31, 1995, the Company had cash flows from operations of
$5,016,000 as compared to $2,741,000 during 1994. The Company realized net
proceeds of $15,541,000 from financing activities during 1995 which were
primarily the result of the Company refinancing its debt and capital structure
through the Note Offering. In 1994, the Company realized $41,477,000 from
financing activities, primarily from the issuance of debt and sale of preferred
and common stock. The Company utilized a net of $9,251,000 for investing
activities in the current year as compared to $45,481,000 during 1994.
WORKING CAPITAL - The Company had net working capital of $1,325,000
with a current ratio of 1.1:1 at December 31, 1995 as compared to a net working
capital deficiency of $7,943,000 and a current ratio of 0.4:1 at December 31,
1994. At December 31, 1994, current liabilities included a $5 million bridge
loan and $2,511,000 of current maturities under the Company's credit agreement.
All borrowings outstanding under the bridge loan and the credit agreement were
refinanced on a long-term basis in July 1995 with proceeds from the Note
Offering.
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 loss to eliminate the non-cash
effects of exploration expenses, including dry hole and abandonment costs,
depletion, depreciation, amortization and impairment and (gain) loss on sale of
assets. The effects of non-cash working capital changes are not taken into
account. This measure reflects an amount that is available for capital
expenditures, debt service and repayment and dividend payments.
During the current year, the Company generated discretionary cash flow
of $4,746,000 (before non-cash changes in working capital of $269,000). This
compares to $3,636,000 (before non-cash changes in working capital of $895,000)
during 1994. The improvement in the current year, in spite of significantly
increased debt service, was primarily a result of increased oil and gas
revenues resulting from a full year's results of operations from the
Bakersfield Properties and the further development of the properties which
resumed in late July 1995. The Company had drilled 42 wells from July through
December 1995, 36 of which were producing with 6 awaiting completion at that
date. As a consequence of these
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<PAGE> 27
drilling activities and the acquisition of certain additional interests in the
properties, HarCor's share of sales production from the Bakersfield Properties
was 1,148 BPD and 11,600 Mcfd during the fourth quarter of 1995, showing
increases of 40% and 44%, respectively, over fourth quarter 1994.
In addition, the Company realized a net profit margin of $2,657,000 on
its gas plant operations in 1995 as compared to $271,000 in 1994. This was
again a result of a full year of operations during 1995 and, additionally,
increased lease production volumes processed through the plant resulting in
increased NGL sales.
The Company expects further improvement in operating cash flows in
future periods as a result of this drilling and development program. As of
January 1996, all of the wells drilled on the Bakersfield Properties were
completed and producing, and the Company expects increased average rates of
production for both oil and gas in the first quarter of 1996 as compared to
fourth quarter 1995.
FINANCING ACTIVITIES - On July 24, 1995, the Company consummated the
sale of 65,000 units consisting of $65 million aggregate principal amount of
its 14-7/8% Senior Notes due in the year 2002 and warrants to purchase
1,430,000 shares of common stock. Each unit consisted of a $1,000 principal
amount note and 22 warrants to purchase an equal number of shares of common
stock. The notes and warrants became separately transferrable immediately
after July 24, 1995.
The net proceeds to the Company from the offering of units was
approximately $61 million after deducting discounts and offering expenses. The
Company immediately used a portion of the net proceeds to (i) repay $34.3
million outstanding under its credit agreement with ING Capital and repay $5
million outstanding under a bridge loan with ING Capital; (ii) redeem the total
$10.9 million in outstanding shares of Series D Preferred Stock and (iii)
acquire interests in additional producing wells in the Bakersfield Properties
for $2.3 million. The Company used the balance of the proceeds from the Note
Offering to finance a portion of the development of the Bakersfield Properties
over the remainder of 1995. Concurrent with the repayment of its outstanding
bank debt, the Company entered into a new credit agreement with ING Capital.
(See New Credit Agreement, which follows.)
The notes bear interest at the rate of 14-7/8% per annum. Interest
accrues from the date of issue and will be payable semi-annually on January 15
and July 15 of each year, commencing on January 15, 1996. The notes are
redeemable, in whole or in part, at the option of the Company at any time on or
after July 15, 1999, at the following redemption prices (expressed as
percentages of the principal amount) if redeemed during the 12-month period
commencing on July 15 of the year set forth below plus, in each case, accrued
interest thereon to the date of redemption:
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<PAGE> 28
<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. (See Note 7 of Notes to Consolidated Financial
Statements contained in Item 1 herein for a complete description of the notes.)
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 and its subsidiaries, which are also collateralization
under a secured credit agreement (see below).
Concurrent with the closing of the Note Offering in July 1995, the
Company repaid all borrowings under its then existing credit agreement and
entered into a new credit agreement with ING Capital (the "New Credit
Agreement").
The New Credit Agreement provides that the Company initially may
borrow up to $10 million on a revolving credit basis. Availability under the
New Credit Agreement is limited to a "borrowing base" amount. The borrowing
base will be determined semi-annually by ING Capital, at its sole discretion,
and may be established at an amount up to $15 million. The initial borrowing
base was set at and is currently $10 million and ING Capital will have no
obligation to increase the borrowing base above this amount. Availability
under the New Credit Agreement, as amended in March 1996, will terminate on
June 30, 1997, at which time amounts outstanding under the New Credit Agreement
will convert to a term loan on September 30, 1997, with a set amortization
schedule of a percentage of the outstanding principal balance continuing
through December 31, 2000. There was $5.6 million outstanding under the New
Credit Agreement at December 31, 1995. The effective interest rate on the
balance outstanding was approximately 9% at that date. Amounts advanced under
the New Credit Agreement will bear interest at an adjusted Eurodollar rate plus
2.50%.
The New Credit Agreement contains restrictive covenants which impose
limitations on the Company and its subsidiaries with respect to, among other
things, 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 New Credit Agreement also
contains customary default provisions.
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<PAGE> 29
All indebtedness of the Company under the New 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.
Additionally, the Company paid $464,000 in cash dividends on preferred
stock during the current year, which is reflected in financing activities.
RESULTS OF HEDGING ACTIVITIES - The Company's hedging activities
during the three years ended December 31, 1995 have not had any material effect
on the Company's liquidity or results of operations. (See Note 9 of Notes to
Consolidated Financial Statements included herein.)
CAPITAL EXPENDITURES AND FUTURE OUTLOOK - Subsequent to the
refinancing of its debt, the Company spent $2.3 million on the acquisition of
interests in additional producing wells on the Bakersfield Properties, and
spent approximately $15 million on developmental and drilling activities on
these properties through December 31, 1995. The Company also spent an
aggregate of $848,000 on the development of its Permian and South Texas
Properties during 1995. (See "Operating Activities" for current production
rates.)
The Company intends to spend an additional estimated $56.6 million for
capital expenditures to develop the proved reserves of the Bakersfield
Properties, of which $16 million is planned to be spent during 1996, $12
million in 1997 and $28.6 million thereafter. An additional $3 million will be
spent over the next several years for the development of the Company's other
properties. The Company plans to fund 1996 and future capital expenditures
from operating cash flows and borrowings under the New Credit Agreement.
The Company currently anticipates that total additional drilling
necessary to develop the Bakersfield Properties after 1995 will result in
approximately 178 new wells. The projected total development costs for the
existing proved reserves assigned to the Bakersfield Properties after 1995 are
estimated at approximately $42 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
will be 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 replace certain 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
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<PAGE> 30
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 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 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. 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, in February 1996, the
Company entered into an agreement with a 3-D seismic company to jointly explore
the Hostetter Field. This partner in turn will provide the Company with a
similar opportunity in one of its current exploration projects. The Company
and its 3-D seismic partner have also jointly formed a geologic team to assist
them in the evaluation of the Hostetter 3-D program. Management anticipates
its relationship with 3-D seismic partner will lead to other 3-D CAEX
opportunities for the Company during 1996.
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
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<PAGE> 31
exploration activities for the foreseeable future, provided, that (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 area with
respect to similar wells and (iv) the operator continues its development
program with respect to the Bakersfield Properties on the schedule currently
contemplated.
In the event incremental cash flows from the Bakersfield Properties
are not sufficient to fund both increased debt and 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
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<PAGE> 32
the actual prices recognized and costs incurred in 1996 and 1997. Additional
factors which could materially affect the Company's oil and gas production and
development drilling program in the future are general economic conditions; the
impact of the activities of OPEC and other competitors; the impact of possible
geopolitical occurrences world-wide; the results of financing efforts, risks
under contract and swap agreements; changes in laws and regulations; capacity,
deliverability and supply constraints or difficulties, unforeseen engineering
and mechanical or technological difficulties in drilling or working over wells;
and other risks described 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.
EFFECTS OF INFLATION AND CHANGES IN PRICE
The Company's results of operations and cash flows are affected by
changing oil and gas prices. If the price of oil and gas increases, there
could be a corresponding increase in the cost to the Company for drilling and
related services, as well as an increase in revenues. Inflation has had a
minimal effect on the Company.
ITEM 8. CONSOLIDATED FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
The information required by this Item begins at Page F-1, following
Page 50 hereof.
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURES
There have been no disagreements with the Company's independent public
accountants with respect to accounting or financial statement disclosure
matters.
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<PAGE> 33
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
GENERAL
The names and ages of the Company's executive officers and directors,
including the two nominees for election to the Board of Directors, the
principal occupation or employment of each of them during the past five years
and at present, the name and principal business of the corporation or other
organization, if any, in which such occupation or employment is or was carried
on, directorships of other public companies or investment companies held by
them, and the period during which the directors have served in that capacity
with the Company are set forth below.
<TABLE>
<CAPTION>
Present Position Director
Name Age With the Company Since
---- --- ---------------- -----
<S> <C> <C> <C>
Mark G. Harrington . . . . . . . . . . 43 Chairman of the Board of Directors and 1987
Chief Executive Officer
Francis H. Roth . . . . . . . . . . . . 58 President, Chief Operating Officer and 1989
Director
Gary S. Peck . . . . . . . . . . . . . 43 Vice President - Finance, Chief N/A
Financial Officer and Secretary
Albert J. McMullin . . . . . . . . . . 39 Vice President - Land, Contracts and N/A
Acquisitions
Robert J. Cresci* . . . . . . . . . . . 52 Director 1994
Vinod K. Dar . . . . . . . . . . . . . 45 Director 1992
David E. K. Frischkorn, Jr. . . . . . . 45 Director 1992
Ambrose K. Monell* . . . . . . . . . . 41 Director 1987
Herbert L. Oakes, Jr. . . . . . . . . . 49 Director 1992
Robert A. Shore . . . . . . . . . . . . 49 Director 1994
</TABLE>
___________________________________
* Nominee for election at Annual Meeting
Mr. Harrington has been Chairman of the Board of Directors and Chief
Executive Officer of the Company since May 1987. He also is President of
Harrington and Company International Incorporated ("Harrington and Company"),
an investment company which he founded in 1986. Harrington and Company is the
general or managing partner of several limited partnerships which in the
aggregate own approximately 20% of the outstanding Common Stock. In 1977, he
joined Carl H. Pforzheimer and Co., an investment banking firm, where he became
a partner in 1980 and remained as a partner until December 1985. During his
eight years with Carl H. Pforzheimer and Co., he worked in the firm's research
and corporate finance departments. In 1984, Mr. Harrington helped organize
Chipco Energy Corporation, the holding company for the firm's oil and gas
assets. He is a director of HCO Energy Ltd. and Jefferson Gas Systems, Inc.
Mr. Harrington holds a Bachelor of Business Administration degree and a Master
of Business Administration degree, both in finance, from the University of
Texas.
Mr. Roth has been President and Chief Operating Officer of the Company
since March 1989. Prior to that time, he served as Vice President - Production
of the Company since July 1988. He has been employed in various engineering
positions with both Amoco and Chevron in several geographic locations. Prior
to joining the Company, he had been employed for 16 years by MCO Resources,
Inc., an oil and gas company, in various positions, including General Manager
of Operations and Engineering. He also served as Vice President of Drilling
and Production and Engineering for MCOR Oil and Gas Corporation, a subsidiary
of MCO Resources, Inc. Mr. Roth holds a Bachelor of Science degree in
petroleum engineering from the University of Kansas, a Master of Science degree
in petroleum engineering from the University of Oklahoma and a Master of
Business Administration degree from the University of California.
Mr. Peck joined the Company as Vice President - Finance and Chief
Financial Officer in October 1989 and became Secretary in November 1989. Prior
to joining
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<PAGE> 34
the Company, Mr. Peck acted as a financial consultant to the Company. Mr. Peck
was Director of Finance for Herbert L. Farkas Company (a multi-location
furniture and business equipment concern) from 1987 to 1989 and was Vice
President - Finance and Chief Financial Officer of RAWA, Inc. (a franchising
and car rental company) from 1985 to 1987. Prior to that, Mr. Peck had
approximately seven years' experience in oil and gas accounting management with
Minoco Southern Corporation and MCO Resources,Inc. He graduated from
California State University at Long Beach in 1977 with a Bachelor of Science
degree in accounting and finance.
Mr. McMullin joined the Company as Vice President - Land, Contracts and
Acquisitions in August 1992. Prior to joining the Company, Mr. McMullin was a
gas supply manager for Mitchel Marketing Company since 1991 and for Delhi Gas
Pipeline Corporation during 1990. Mr. McMullin also worked as an Accounts
Manager for United Gas Pipeline from 1987 to 1989. From 1980 to 1985, Mr.
McMullin worked for Atlantic Richfield Company as a landman. He holds a
Bachelor of Arts degree in petroleum land management from the University of
Texas and earned a Masters in Business Administration from the University of
St. Thomas.
Mr. Cresci has been as a Managing Director of Pecks Management Partners
Ltd., an investment management firm, since September 1990. Mr. Cresci
currently serves on the boards of Bridgeport Machines, Inc., Serv-Tech, Inc.,
EIS International, Inc., Sepracor, Inc., Vestro Natural Foods, Inc., Olympic
Financial, Ltd., GeoWaste, Inc., Hitox, Inc., Natures Elements, Inc, Garnet
Resources Corporation, Meris Laboratories, Inc. and several private companies.
Mr. Dar has been Chairman of Jefferson Gas Systems, Inc. (a natural gas
and electric power co-investment concern) since May 1991, and the Managing
Director of Dar & Company (a consulting firm to energy companies and financial
institutions) since August 1990. Currently he is Senior Advisor, RCG/Hagler,
Bailly & Company, an international management consulting firm he helped found
in 1980. He was also Chairman of Sunrise Energy Services between 1992 and
1994. Since 1980 Mr. Dar has held a variety of executive positions in the
natural gas industry and with management consulting firms. He has been the
Senior Vice President of American Exploration Company, an oil and gas firm, and
Executive Vice President and Director of Hadson Corporation, a diversified
public company. He was the founder and Chief Executive Officer of four major
Hadson subsidiaries, Hadson Gas Systems, Hadson New Mexico, Hadson Liquid Fuels
and Hadson Electric. He has a Bachelor of Science degree in engineering and a
Master's degree in management and finance from MIT, where he also received his
doctoral training in economics.
Mr. Frischkorn has been Senior Vice President and Managing Director of
the Energy Corporate Finance Department of Rauscher Pierce Refsnes, Inc., an
investment banking firm, since January 1993. From 1988 to 1992, he was
President of Frischkorn & Co., a Houston, Texas-based merchant banking firm
specializing in oil and gas corporate finance services. Prior to that he served
as Vice President, Energy Group of Kidder, Peabody & Co. in Houston, Texas and
Senior Vice President, Corporate Finance of Rotan Mosle, Inc. in Houston. He
holds a Bachelor of Arts degree in economics and german from Tufts University
and a Masters of Business Administration from Columbia.
Mr. Monell has been Vice President and a director of Harrington and
Company since 1986. He has been active in the oil and gas industry since 1976.
He graduated from the University of Virginia in 1976 with a Bachelor of Science
degree in foreign affairs.
Mr. Oakes is Managing Director and a principal of Oakes, Fitzwilliams &
Co. Limited, a member of the London Stock Exchange, and which he founded in
1987. In 1973, he joined Dillon, Read & Co. Inc., an investment banking firm,
in London. In 1982, he formed H. L. Oakes & Co. Limited specializing in
arranging venture and development capital for U.S. and U.K. corporations. He
is a director of Shared Technologies, Inc., The New World Power Corporation and
a number of private corporations in the U.S. and the U.K.
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<PAGE> 35
Mr. Shore was founder and has been Chief Executive Officer of
Bakersfield Energy Resources, Inc. since 1990. He is responsible for
evaluating and negotiating acquisitions, and planning the development of oil
and gas properties for Bakersfield Energy Resources, Inc. For 20 years prior
to founding Bakersfield Energy Resources, Inc., Mr. Shore held various
engineering, supervisory and management positions with Mission Resources,
Texaco Inc. and Getty Oil Company in California. Mr. Shore holds a Bachelor of
Science degree in petroleum engineering from Stanford University. He is a
member of the Kiwanis Club of East Bakersfield, the American Petroleum
Institute, the Society of Petroleum Engineers and the California Independent
Petroleum Association. Mr. Shore also serves as a Director of the Stanford
University Petroleum Investment Fund.
SECTION 16 REPORTING
Section 16(a) of the Securities Exchange Act of 1934, as amended,
requires the Company's officers and directors, and persons who own more than
10% of a registered class of the Company's equity securities, to file reports
of ownership and changes in ownership to the Securities and Exchange Commission
(the "Commission"). Officers, directors and greater than 10% stockholders are
required by the Commission regulations to furnish the Company with copies of
all Section 16(a) reports they file. Based solely on its review of copies of
such reports received by it and written representations from certain reporting
persons that no Forms 5 were required for those persons, the Company believes
that, during the period from January 1, 1995 to December 31, 1995 all filing
requirements applicable to its officers, directors and greater than 10%
stockholders were complied with except that Robert A. Shore, a director, failed
to file on a timely basis on Form 4 a report required by Section 16(a) during
the said period. One report relating to two transactions was not reported on a
timely basis, but these transactions were subsequently reported on Form 5 at
the end of the Company's fiscal year.
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<PAGE> 36
ITEM 11. EXECUTIVE COMPENSATION
EXECUTIVE COMPENSATION
The following table sets forth certain information regarding
compensation earned during the last three years by the Company's Chief
Executive Officer and each of the Company's two other most highly compensated
executive officers (collectively, the "Named Executive Officers") based on
salary and bonus earned in those years:
SUMMARY COMPENSATION TABLE
<TABLE>
<CAPTION>
Long-Term
Annual Compensation Awards
------------------------------ ----------
Securities
and
Other Annual Securities All Other
Name and Compen- Underlying Compen-
Principal Position Year Salary Bonus sation(1) Options(2) sation(3)
------------------ ---- ------ ----- --------- ---------- ---------
<S> <C> <C> <C> <C> <C> <C>
Mark G. Harrington . . . . . . . . . . 1995 $190,000 $70,417 $ -0- $ 50,000 $3,699
Chairman of the Board 1994 190,000 62,500 -0- 148,750 3,699
and Chief Executive 1993 190,000 7,917 -0- 40,000 3,455
Officer
Francis H. Roth . . . . . . . . . . . . 1995 125,000 70,208 -0- 18,000 5,113
President and Chief 1994 125,000 32,500 -0- 75,625 5,113
Operating Officer 1993 125,000 5,208 -0- 25,000 4,779
Gary S. Peck . . . . . . . . . . . . . 1995 100,000 39,167 -0- 16,000 2,306
Vice President-Finance, 1994 100,000 17,500 -0- 42,500 2,306
Chief Financial Officer 1993 100,000 4,167 -0- 17,500 2,156
and Secretary
</TABLE>
___________________________________
(1) Does not include perquisites and other personal benefits because the
value of these items did not exceed the lesser of $50,000 or 10% of
reported salary and bonus of any of the Named Executive Officers.
(2) No stock appreciation rights ("SARs") were granted to any of the Named
Executive Officers during any of the years presented.
(3) Such amounts were premiums paid by the Company for annual disability
insurance for each such officer.
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<PAGE> 37
STOCK OPTION GRANTS DURING 1995
The following table provides details regarding stock options granted to
the Named Executive Officers in 1995. The Company does not have any
outstanding SARs.
OPTION GRANTS IN 1995
<TABLE>
<CAPTION>
Number of % of Total
Securities Options
Underlying Granted to
Options Granted Employees Exercise or Base
Name (#)(1) in 1995 Price ($/Sh)(2) Expiration Date
- ------------------------- ---------------- ---------- ---------------- -------------------------
<S> <C> <C> <C> <C>
Mark G. Harrington . . . . . . 50,000 41.7% $2.89 September 26, 2000
Francis H. Roth . . . . . . . . 18,000 15.0% $2.63 September 26, 2000
Gary S. Peck . . . . . . . . . 16,000 13.3% $2.63 September 26, 2000
</TABLE>
___________________________________
(1) Fifty percent of the options become exercisable on September 26, 1996
(the first anniversary of the date of grant), and the remaining fifty
percent become exercisable on September 26, 1997. If the Company
recapitalizes or otherwise changes its capital structure, thereafter
upon any exercise of an option the optionee will be entitled to
purchase, in lieu of the number and class of shares of Common Stock
then covered by such option, the number and class of shares of stock
and securities to which the optionee would have been entitled pursuant
to the terms of the recapitalization if, immediately prior to such
recapitalization, the optionee had been the holder of record of the
number of shares of Common Stock then covered by such option. If there
is a Corporate Change, as defined in the 1994 Stock Option Plan, then
the Stock Option and Compensation Committee, acting in its sole
discretion, has the following alternatives, which may vary among
individual optionees: (1) accelerate the time at which options then
outstanding may be exercised, (2) require the surrender to the Company
by selected optionees of some or all of the outstanding options held by
such optionees, in which event the Committee will thereupon cancel such
options and pay to each optionee a certain amount of cash or (3) make
such adjustments to the options then outstanding as the Committee deems
appropriate to reflect such Corporate Change. Any adjustment provided
for pursuant to this paragraph will be subject to any required
stockholder action.
(2) The exercise price per share with respect to the stock options granted
to Messrs. Roth and Peck in 1995 is equal to the closing bid price of
the Common Stock on the date of grant thereof, as quoted by the
National Association of Securities Dealers, Inc. Automated Quotation
System ("NASDAQ"). Pursuant to the terms of the 1994 Stock Option
Plan, because Mr. Harrington is deemed to own more than 10% of the
Common Stock, the exercise price per share of all options granted to
him in 1995 was 110% of the closing bid price of the Common Stock on
the date of grant thereof, as quoted by NASDAQ.
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<PAGE> 38
1995 OPTION EXERCISES AND OUTSTANDING STOCK OPTION VALUES AS OF
DECEMBER 31, 1995
The following table shows the number of shares acquired by the Named
Executive Officers upon their exercise of stock options during 1995, the value
realized by such Named Executive Officers upon such exercises, the number of
shares of Common Stock covered by both exercisable and non-exercisable stock
options as of December 31, 1995 and their values at such date.
AGGREGATED OPTION EXERCISES IN 1995
AND OPTION VALUES AT DECEMBER 31, 1995
<TABLE>
<CAPTION>
Number of Securities Underlying Value of Unexercised
Unexercised Options at In the-Money Options at
Shares December 31, 1995(#) December 31, 1995($)(1)
Acquired on Value ------------------------------- ---------------------------
Name Exercise(#) Realized($) Exercisable Unexercisable Exercisable Unexercisable
- ------------------------- ----------- ----------- ----------- ------------- ----------- -------------
<S> <C> <C> <C> <C> <C> <C>
Mark G. Harrington . . . . . . -0- N/A 204,500 112,500 12,750 -0-
Francis H. Roth . . . . . . . . -0- N/A 102,500 48,000 12,750 -0-
Gary S. Peck . . . . . . . . . -0- N/A 101,500 31,000 23,375 -0-
</TABLE>
___________________________________
(1) On December 31, 1995, the closing bid price of the Common Stock as
quoted by NASDAQ was $2.625 per share. Value is calculated on the
basis of the difference between the option price and $2.625, multiplied
by the number of shares of Common Stock granted at that option price.
The option price for exercisable options granted to Mr. Harrington,
Mr. Roth and Mr. Peck covering 30,000, 30,000 and 55,000 shares,
respectively, is $2.20 per share. The option prices for the remaining
exercisable options and all of the unexercisable options are equal to
or higher than $2.625 and therefore no value is ascribed to such
options in the above table.
-37-
<PAGE> 39
RESTRICTED SHARE VALUES AS OF DECEMBER 31, 1995
The following table shows the number of restricted shares of Common
Stock held by the Named Executive Officers and their values at December 31,
1995:
RESTRICTED STOCK SHARES AND
RESTRICTED STOCK VALUES AT DECEMBER 31, 1995
<TABLE>
<CAPTION>
Restricted Restricted
Shares Share Value
Name (#) ($)
------------------ --------- -----------
<S> <C> <C>
Mark G. Harrington . . . . . . . . 23,750 62,344
Francis H. Roth . . . . . . . . . 15,625 41,016
Gary S. Peck . . . . . . . . . . . 12,500 32,813
</TABLE>
___________________________________
(1) The Restricted Shares may not be sold, tendered, assigned, transferred,
pledged or otherwise encumbered prior to the earliest of April 28, 1997
(lapse date), the date of a grantee's death or disability, or the date
of a "Change of Control" of the Company, as defined in the Restricted
Stock Agreement. In the event that a grantee terminates employment
with the Company prior to the lapse date, the Restricted Shares shall
revert back to the Company; provided, however, in the event a grantee
is involuntarily terminated for any reason other than cause, the
Compensation Committee of the Board of Directors of the Company
administering this Agreement may, at its sole discretion, determine to
release a prorated number of Restricted Shares, based on the number of
months of active employment service during the restriction period, as a
percentage of the total months of the restriction period.
(2) The value of Restricted Shares at December 31, 1995 is calculated by
multiplying the number of Restricted Shares by the December 31, 1995
closing bid price of the Common Stock as quoted by NASDAQ, which was
$2.625 per share.
COMPENSATION OF DIRECTORS
During 1995, nonemployee members of the Board of Directors received
annual compensation of $10,000 plus $1,000 for each meeting of the Board of
Directors attended in person ($250 per telephonic meeting) and reimbursement
for their reasonable expenses incurred in connection with their duties and
functions as directors. Directors of the Company who are also employees do not
receive any compensation for their services as directors.
On October 14, 1992, the Board of Directors adopted the Company's 1992
Nonemployee Directors' Stock Option Plan (the "Directors' Option Plan"). Under
the Directors' Option Plan, upon the later of the effective date of the
Directors' Option Plan or the date of their initial election or appointment to
the Board of Directors, directors who are not employees of the Company were
granted options to purchase 20,000 shares of Common Stock at an exercise price
equal to the fair market value of the Common Stock on the date of grant.
Thereafter, and so long as the Directors' Option Plan is in effect, upon the
completion of each full year of service on the Board of Directors, each
nonemployee director continuing to serve as a director will automatically be
granted an additional option to purchase 5,000 shares of Common Stock at an
exercise price equal to 110% of the fair market value of the Common Stock on
the date of grant. All options granted under the Directors' Option Plan vest
in equal parts over two years.
Upon the first anniversary of their election to the Board of Directors
(July 6, 1995), Messrs. Cresci and Shore were each automatically granted
options
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<PAGE> 40
to purchase 5,000 shares of Common Stock at an exercise price equal to 3.7125
per share, 110% of the fair market value of the Common Stock on such date.
Upon completion of their third full year of service after the effective date of
the Directors' Option Plan (October 14, 1995), Messrs. Dar, Frischkorn and
Monell were each automatically granted an option to purchase 5,000 shares of
Common Stock at an exercise price equal to $3.1625 per share, 110% of the fair
market value of the Common Stock on such date. Upon the third anniversary of
his initial election to the Board of Directors (November 17, 1995), Mr. Oakes
was automatically granted an option to purchase 5,000 shares of Common Stock at
an exercise price equal to $2.6125 per share, 110% of the fair market value of
the Common Stock on such date.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The following table sets forth information as to the number and
percentage of shares of Common Stock owned beneficially as of March 25, 1996 by
(i) each person known to the Company to be the beneficial owner of more than 5%
of the Common Stock, (ii) each director and each nominee for election as a
director, (iii) each Named Executive Officer and (iv) all directors and
officers of the Company as a group. Unless otherwise indicated in the
footnotes following the table, each named beneficial owner had sole voting and
investment power over the shares of Common Stock shown as beneficially owned by
them.
<TABLE>
<CAPTION>
Shares Owned
Beneficially Percent
As of of
Beneficial Owner(1) March 25, 1996(2) Class
------------------- ----------------- -------
<S> <C> <C>
Harrington and Company International
Incorporated(3) . . . . . . . . . . . . . . . . . . . . . . . . . . 729,968 8.4
Robert J. Cresci(4)(5) . . . . . . . . . . . . . . . . . . . . . . . . 1,110,000 12.8
Vinod K. Dar(4) . . . . . . . . . . . . . . . . . . . . . . . . . . . . 32,500 *
David E.K. Frischkorn, Jr.(4)(6) . . . . . . . . . . . . . . . . . . . 52,500 *
Mark G. Harrington(4)(7) . . . . . . . . . . . . . . . . . . . . . . . 958,218 10.7
Ambrose K. Monell(4) . . . . . . . . . . . . . . . . . . . . . . . . . 46,421 *
Herbert L. Oakes, Jr.(4) . . . . . . . . . . . . . . . . . . . . . . . 32,500 *
Gary S. Peck(4) . . . . . . . . . . . . . . . . . . . . . . . . . . . . 131,500 1.5
Francis H. Roth(4) . . . . . . . . . . . . . . . . . . . . . . . . . . 160,625 1.8
Robert A. Shore(4)(8) . . . . . . . . . . . . . . . . . . . . . . . . . 1,108,084 11.7
FMR Corp.(9) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 550,000 6.0
Bakersfield Energy Resources, Inc.(10) . . . . . . . . . . . . . . . . 1,098,084 11.6
Granite Capital L.P.(11) . . . . . . . . . . . . . . . . . . . . . . . 612,092 6.9
Pecks Management Partners Ltd.(12) . . . . . . . . . . . . . . . . . . 1,100,000 12.7
Trust Company of the West(13) . . . . . . . . . . . . . . . . . . . . . 1,728,009 19.4
Wellington Management Company(14) . . . . . . . . . . . . . . . . . . . 468,700 5.4
All Directors and Officers as a group
(10 persons)(5)(6)(7)(8)(15) . . . . . . . . . . . . . . . . . . . . 3,663,348 36.0
</TABLE>
___________________________________
* Less than 1%
(1) Information with respect to beneficial ownership is based on
information publicly available or furnished to the Company by each
person included in this table.
(2) Includes, in each case, shares deemed beneficially owned by such
persons or entities pursuant to Rule 13d-3 promulgated under the
Securities Exchange Act of 1934, as amended, because such persons or
entities have the right to acquire such shares within 60 days upon the
exercise of stock options or similar rights or because such persons or
entities have or share investment or voting power with respect to such
shares.
(3) The business address of Harrington and Company International
Incorporated is 4400 Post Oak Parkway, Suite 2220, Houston, Texas
77027. Such amount includes (i) 372,305 shares held by Harrington and
Company EV Fund I, Ltd., and (ii) 309,868 shares held by Harrington and
Company EV Fund II, Ltd.
-39-
<PAGE> 41
(71,429 shares of which are issuable within 60 days upon conversion of
Series A Preferred Stock held by Harrington and Company EV Fund II,
Ltd.), of which limited partnerships Harrington and Company
International Incorporated is the general or managing partner. The
shares held by each such limited partnership are also deemed to be
beneficially owned by such limited partnership. Harrington and Company
International Incorporated disclaims beneficial ownership of such
shares.
(4) Includes, 10,000, 27,500, 27,500, 204,500, 27,500, 27,500, 101,500,
102,500 and 10,000 shares for Messrs. Cresci, Dar, Frischkorn,
Harrington, Monell, Oakes, Peck, Roth and Shore, respectively,
purchasable within 60 days upon the exercise of stock options.
(5) Includes 1,100,000 shares and votes deemed to be beneficially owned by
Pecks Management Partners Ltd., of which Mr. Cresci is a managing
director (See Footnote 12). As a result, Mr. Cresci may be deemed to
share voting and investment power with respect to such shares. Mr.
Cresci disclaims beneficial ownership of such shares.
(6) Includes 25,000 shares issuable within 60 days upon the exercise of
options held by Rauscher Pierce Refsnes, Inc., of which Mr. Frischkorn
is a Senior Vice President and Managing Director. As a result, Mr.
Frischkorn may be deemed to share voting and investment power with
respect to such shares. Mr. Frischkorn disclaims beneficial ownership
of such shares.
(7) Mr. Harrington is the Chief Executive Officer and Chairman of the Board
of Directors of the Company. The number of shares indicated includes
729,968 shares deemed to be beneficially owned by Harrington and
Company International Incorporated (see Footnote 3 above) of which Mr.
Harrington is the majority stockholder, the President and a director.
As a result, voting and investment power over such shares may be deemed
to be shared between Mr. Harrington and Harrington and Company
International Incorporated. Mr. Harrington disclaims beneficial
ownership of such shares.
(8) Includes 1,098,084 shares deemed to be beneficially owned by
Bakersfield Energy Resources, Inc., of which Mr. Shore is the Chief
Executive Officer and a director (see Footnote 10). As a result, Mr.
Shore may be deemed to share voting and investment power with respect
to such shares. Mr. Shore disclaims beneficial ownership of such
shares.
(9) The principal business address for FMR Corp. is 82 Devonshire Street,
Boston, Massachusetts 02109. Consists of 550,000 shares issuable upon
exercise of a warrant granted to Fidelity Management & Research Company
("Fidelity"), a wholly-owned subsidiary of FMR Corp., as a result of
Fidelity's acting as investment advisor to various investment companies
registered under the Investment Company Act of 1940. FMR Corp.
disclaims sole power to vote or direct the voting of the shares owned
directly by the Fidelity Funds, which power resides with the Funds'
Boards of Trustees. Fidelity carries out the voting of the shares
under written guidelines established by the Funds' Boards of Trustees.
FMR Corp., through its control of Fidelity, and the Funds each has sole
power to dispose of the 550,000 shares owned by the Funds.
(10) The principal business address for Bakersfield Energy Resources, Inc.
is 2131 Mars Court, Bakersfield, California 93308. Includes 857,143
shares of Common Stock issuable to Bakersfield Gas, L.P. upon its
conversion of 30,000 shares of Series E Preferred Stock, of which
limited partnerships Bakersfield Energy Resources, Inc. is the general
or managing partner. The shares held by each such limited partnership
are also deemed to be beneficially owned by such limited partnership.
(11) The principal business address for Granite Capital L.P. is 375 Park
Avenue, 18th Floor, New York, New York 10152. Includes 256,400 shares
of Common Stock issuable within 60 days upon conversion of 10,000
shares of the Series C Preferred Stock. Also includes 45,000 shares
beneficially owned
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<PAGE> 42
by an affiliate of Granite Capital L.P. and 3,000 shares beneficially
owned by certain managed accounts for which Granite Capital is the
investment manager and shares voting and investment power. Granite
Capital L.P. disclaims beneficial ownership of such 3,000 shares.
(12) The principal business address for Pecks Management Partners Ltd. is
One Rockefeller Plaza, New York, New York 10020. As investment manager
for such clients, Pecks Management Partners Ltd. may be deemed to share
voting and investment power with respect to such shares.
(13) The business address of Trust Company of the West ("TCW") is 865 South
Figueroa, Suite 1800, Los Angeles, CA 90017. Includes 253,650 shares
purchasable within 60 days upon the exercise of a warrant held by TCW.
Includes 1,474,359 shares beneficially owned by a General Mills pension
fund, which shares TCW controls voting and investment power as
Investment Manager and Custodian. TCW disclaims beneficial ownership
of the 1,474,359 shares.
(14) The principal business address for Wellington Management Company is 75
State Street, Boston, Massachusetts 02109. Such shares are also deemed
beneficially owned by Wellington Trust Co., N.A., a subsidiary of
Wellington Management Company.
(15) Includes 1,514,572 shares purchasable within 60 days upon the exercise
of stock options and warrants and the conversion of Convertible
Preferred Stock held or deemed to be owned by all officers and
directors.
Holders of the Company's Series B, C and E Preferred Stock have certain
voting rights, including the right to vote together with the holders of the
Common Stock on all matters voted upon by the holders of the Common Stock. In
all such matters, holders of the Series B, C and E Preferred Stock have the
number of votes per share of such Preferred Stock equal to the whole number of
shares of Common Stock into which each share of such Preferred Stock is
convertible. The outstanding shares of Series B Preferred Stock are held by
(i) Citibank, N.A., as Trustee for the United Technologies Corporation Master
Retirement Trust, United Technologies Building, Hartford, Connecticut 06101
(25%), (ii) Bankers Trust Company, as Trustee of the Hughes Aircraft Company
Retirement Plan, 7200 Hughes Terrace, Los Angeles, California 90045-0066 (25%),
and (iii) Bankers Trust Company, as Trustee of the GTE Service Corporation Plan
for Employees' Pensions, One Stamford Place, Stamford, Connecticut 06904 (50%).
All of the outstanding shares of the Series C Preferred Stock are held by
Granite Capital Partners, L.P., 666 Fifth Avenue, 33rd Floor, New York, New
York 10103. All outstanding shares of the Series E Preferred Stock are held by
Bakersfield Gas, L.P., 2131 Mars Court, Bakersfield, California 93308.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
The Company completed an agreement with Bakersfield Gas, L.P. in June
1995 for the exchange of a warrant to purchase 1,000,000 shares of Common Stock
for 182,500 shares of Common Stock of the Company. This warrant had an
exercise price of $5.00 per share and would have expired on June 30, 2001.
Robert A. Shore, one of the Company's directors, is the Chief Executive Officer
of Bakersfield Energy Resources, Inc., the general partner of Bakersfield Gas,
L.P.
The Company completed an agreement with the holders of the Company's
Series D Preferred Stock (the "Series D Holders") in July 1995 for the
redemption of the Series D Preferred Stock at its stated redemption price and
the exchange of warrants to purchase 3,424,666 shares of Common Stock for
1,100,000 shares of Common Stock of the Company. These warrants had an
exercise price of $3.67 per share and would have expired two years following
the date of redemption of the Series D Preferred Stock. Robert J. Cresci, one
of the Company's directors, is a managing director of Pecks Management Partners
Ltd., the investment advisor to the Series D Holders.
-41-
<PAGE> 43
Vinod K. Dar, one of the Company's directors, was the Chairman of the
Board of Directors and Chief Executive Officer of Sunrise Energy Services, Inc.
("Sunrise Energy") from October 1992 to October 1994. As part of the Company's
acquisition of the Bakersfield Properties, the Company was assigned an interest
in a previously existing gas marketing contract with Sunrise Energy Marketing
Company ("Sunrise Marketing"), a subsidiary of Sunrise Energy, whereby Sunrise
Marketing agreed to pay $1.97 per one million British thermal units ("MMBtu")
for the delivery of 2,250 MMBtu of gas per day from the Bakersfield Properties
during June, July and August of 1994. On November 15, 1994, Sunrise Marketing
filed a voluntary petition for protection under Chapter 11, Title 11 of the
United States Bankruptcy Code. As of December 31, 1995, Sunrise Marketing owed
the Company approximately $92,000 for gas delivered by the Company during the
term of such contract. The $92,000 amount owed to the Company by Sunrise
Marketing is an unsecured claim and, as such, the Company is unable to
determine whether such amount will be paid and if such amount is paid in full
or in part, when such amount will be paid.
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<PAGE> 44
CERTAIN DEFINITIONS
The terms defined in this section are used throughout this Report.
Bbl. One stock tank barrel, or 42 U.S. gallons liquid volume, used
herein in reference to crude oil or other liquid hydrocarbons.
Bcf. Billion cubic feet.
BOE. Barrels of oil equivalent, determined using the ratio of six Mcf
of natural gas (including natural gas liquids) to one Bbl of crude oil or
condensate.
BPD. Barrels of oil per day.
Btu. British thermal unit, which is the heat required to raise the
temperature of a one-pound mass of water from 58.5 to 59.5 degrees fahrenheit.
Development location. A location on which a development well can be
drilled.
Development well. A well drilled within the proved area of an oil or
gas reservoir to the depth of a stratigraphic horizon known to be productive in
an attempt to recover proved undeveloped reserves.
Dry hole. A well found to be incapable of producing either oil or gas
in sufficient quantities to justify completion as an oil or gas well.
Estimated future net revenues. Revenues from production of oil and
gas, net of all production-related taxes, lease operating expenses and capital
costs.
Exploratory well. A well drilled to find and produce oil or gas in an
unproved area, to find a new reservoir in a field previously found to be
productive of oil or gas in another reservoir, or to extend a known reservoir.
Gross acre. An acre in which a working interest is owned.
Gross well. A well in which a working interest is owned.
MBbl. One thousand barrels of crude oil or other liquid hydrocarbons.
MBOE. One thousand barrels of oil equivalent.
MBtu. One thousand Btus.
Mcf. One thousand cubic feet.
Mcfd. One thousand cubic feet per day.
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<PAGE> 45
MMBbl. One million barrels of crude oil or other liquid hydrocarbons.
MMBOE. One million barrels of oil equivalent.
MMBtu. One million Btus.
MMcf. One million cubic feet.
Net acres or net wells. The sum of the fractional working interests
owned by the Company in gross acres or gross wells.
NGLs. Natural gas liquids such as ethane, propane, iso-butane, normal
butane and natural gasoline that have been extracted from natural gas.
Overriding royalty interest. An interest in an oil and gas property
entitling the owner to a share of oil and gas production free of costs of
production.
Pre-tax SEC 10 Value. Estimated future net revenues discounted by a
factor of 10% per annum, before income taxes and with no price or cost
escalation or de-escalation, in accordance with guidelines promulgated by the
Securities and Exchange Commission.
Productive well. A well that is producing oil or gas or that is
capable of production.
Proved developed reserves. Proved reserves that can be expected to be
recovered through existing wells with existing equipment and operating methods.
Proved reserves. The estimated quantities of crude oil, natural gas
and NGLs which geological and engineering data demonstrate with reasonable
certainty to be recoverable in future years from known reservoirs under
existing economic and operating conditions.
Proved undeveloped location. A site on which a development well can be
drilled consistent with local spacing rules for the purpose of recovering
proved reserves.
Proved undeveloped reserves. Proved reserves that are expected to be
recovered from new wells on undrilled acreage, or from existing wells where a
relatively major expenditure is required for recompletion.
Recompletion. The completion for production of an existing wellbore in
another formation from that in which the well has previously been completed.
Undeveloped acreage. Lease acreage on which wells have not been
drilled or completed to a point that would permit the production of commercial
quantities of oil and gas regardless of whether such acreage contains proved
reserves.
Working interest. The operating interest which gives the owner the
right to drill, produce and conduct operating activities on the property and to
share in production.
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<PAGE> 46
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENTS, SCHEDULES, AND REPORTS ON FORM 8-K
(a) 1. See the Index to Consolidated Financial Statements contained in
Item 8 herein.
2. No Schedules to the Consolidated Financial Statements are required
to be filed.
3. Exhibits:
<TABLE>
<S> <C>
3.1 Registrant's Certificate of Incorporation, as amended through July 13, 1995. (1)
3.2 Certificate of Ownership and Merger dated March 6, 1996, merging HTAC Investments, Inc. into the
Registrant. (15)
3.3 Certificate of Ownership and Merger dated March 6, 1996, merging Warrior, Inc. into the Registrant. (15)
3.4 Registrant's Bylaws, as amended. (1)
4.1 Certificate of Designation, Powers, Preferences and Rights of the Series A Preferred Stock of the
Registrant. (2)
4.2 Certificate of Designation, Powers, Preferences and Rights of the Series B Convertible Preferred Stock
of the Registrant. (2)
4.3 Certificate of Designation, Powers, Preferences and Rights of the Series C Convertible Preferred Stock
of the Registrant. (2)
4.4 Certificate of Designation, Powers, Preferences and Rights of the Series E Junior Convertible Preferred
Stock of the Registrant. (2)
4.5 Warrant to Trust Company of the West dated November 23, 1992. (4)
4.6 Amendment No. 1 dated July 30, 1994 to Warrant Certificate dated November 23, 1992 between HarCor
Energy, Inc. and Trust Company of the West. (12)
4.7 Amendment No. 2 dated November 1, 1994 to Warrant Certificate dated November 23, 1992 between HarCor
Energy, Inc. and Trust Company of the West. (11)
4.8 Amended and Restated Registration Rights Agreement dated as of July 30, 1994 between the Registrant and
Trust Company of the West. (12)
4.9 Warrant to Internationale Nederlanden (U.S.) Capital Corporation dated November 20, 1989, as amended in
December, 1990 and on March 18, 1994. (7)
4.10 Warrant to First Union National Bank of North Carolina dated June 30, 1994. (12)
4.11 Amendment No. 1, dated February 12, 1996, to Warrant to First Union National Bank of North
Carolina dated as of June 30, 1994. (15)
</TABLE>
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<PAGE> 47
<TABLE>
<S> <C>
4.12 Registration Rights Agreement between the Registrant and First Union National Bank of North
Carolina dated as of June 30, 1994. (12)
4.13 Amendment No. 1, dated February 12, 1996, to Registration Rights Agreement between the Registrant
and First Union National Bank of North Carolina dated as of June 30, 1994. (15)
4.14 Specimen of Common Stock Certificate. (9)
4.15 Stock Purchase Agreement dated as of June 27, 1994 among HarCor Energy, Inc. and the Purchasers
named on Schedule I thereto. (12)
4.16 Form of Warrant to Rauscher, Pierce, Refsnes, Inc. (13)
4.17 Warrant Agreement among HarCor Energy, Inc. and Texas Commerce Bank National Association as
warrant agent dated July 24, 1995. (14)
4.18 Preferred Stock Warrant Agreement between HarCor Energy, Inc. and BT Securities Corporation dated
July 24, 1995. (14)
4.19 Registration Rights Agreement among HarCor Energy, Inc., Warrior, Inc., HTAC Investments, Inc.,
BT Securities Corporation and Internationale Nederlanden (U.S.) Securities Corporation dated
July 24, 1995. (14)
4.20 Securityholders' and Registration Rights Agreement among HarCor Energy, Inc., Warrior, Inc., HTAC
Investments, Inc. and Texas Commerce Bank National Association, as trustee, dated July 24, 1995.
(14)
4.21 Indenture among HarCor Energy, Inc., Warrior, Inc., HTAC Investments, Inc. and Texas Commerce
Bank National Association, as trustee, dated July 24, 1995, including forms of Series A Note and
Exchange Note as Exhibits A-1 and A-2 thereto, respectively. (14)
4.22 First Supplemental Indenture dated as of October 11, 1995 to Indenture filed as Exhibit 4.21.
(14).
10.1 Amended and Restated Credit Agreement between HarCor Energy, Inc. and Internationale Nederlanden
(U.S.) Capital Corporation, as Agent, and the Lenders identified therein dated as of July 15,
1995. (14)
10.3 Deed of Trust, Mortgage, Line of Credit Mortgage, Assignment, Security Agreement and Financing
Statement from HarCor Energy, Inc. to Trond D. Rokholt, Trustee and Internationale Nederlanden
(U.S.) Capital Corporation, Lender dated March 18, 1994. (7)
10.4 First Amendment to Deed of Trust, Mortgage, Line of Credit Mortgage, Assignment, Security
Agreement and Financing Statement dated June 30, 1994 by HarCor Energy, Inc. for the benefit of
International Nederlanden (U.S.) Capital Corporation, in its capacity as Agent for itself and
First Union National Bank of North Carolina. (12)
10.5 Deed of Trust, Mortgage, Line of Credit Mortgage, Assignment, Security Agreement Fixture Filing
and
</TABLE>
-46-
<PAGE> 48
<TABLE>
<S> <C> <C>
Financing Statement from HarCor Energy, Inc. to Trond D. Rokholt, Trustee and Internationale
Nederlanden (U.S.) Capital Corporation, Lender dated June 30, 1994. (10)
10.6 Agreement of Dissolution and Termination dated March 18, 1994 between Washington Energy
Exploration, Inc. and HarCor Energy, Inc. (7)
10.7 Purchase Agreement dated December 4, 1987 by and between HarCor Energy Inc. and Harrington and
Company EV Fund I, Limited. (5)
* 10.8 HarCor Energy, Inc. 1992 Stock Option Plan. (9)
* 10.9 Form of Incentive Stock Option Agreement and Nonstatutory Stock Option Agreement for options
issued under the HarCor Energy, Inc. 1992 Stock Option Plan. (6)
* 10.10 HarCor Energy, Inc. 1992 Nonemployee Directors' Stock Option Plan and form of Option Agreement,
as amended. (8)
* 10.11 HarCor Energy, Inc. 1994 Stock Option Plan and related forms of Incentive Stock Option Agreement
and Nonstatutory Stock Option Agreement. (8)
10.12 Purchase and Sale or Exchange Agreement dated April 18, 1994 between HarCor Energy Inc. and
Bakersfield Energy Resources, Inc., Bakersfield Energy Partners, L.P. and Bakersfield Gas, L.P.
(9)
10.13 Amendment to Purchase and Sale or Exchange Agreement dated June 8, 1994 by and between HarCor
Energy, Inc. and Bakersfield Energy Resources, Inc., Bakersfield Energy Partners, L.P. and
Bakersfield Gas, L.P. (9)
* 10.14 Form of Restricted Stock Agreements between HarCor Energy, Inc. and its officers. (11)
23.2 Consent of Ryder Scott Company Petroleum Engineers. (15)
23.3 Consent of Huddleston & Co., Inc. (15)
23.4 Consent of Arthur Andersen LLP. (15)
_________________________________________________________________________________________________________________________
</TABLE>
* Management contract or compensatory plan or arrangement required to
be filed as an exhibit to this Form 10-K pursuant to Item 14(c) of
this report.
(1) Filed as an Exhibit to the Registrant's Registration Statement on
Form S-4 (Reg. No. 33-62007) and incorporated herein by reference.
(2) Included in Exhibit 3.1.
(3) Filed as an exhibit to Registrant's Amendment No. 1 to its Form
10-Q for the period ended September 30, 1992 dated as of December
5, 1992 and filed with the Commission on December 7, 1992 (No.
0-9300) and incorporated herein by reference.
(4) Filed as an exhibit to Registrant's Form 8-K dated as of November
23, 1992 and filed with the Commission on December 7, 1992 (No.
0-9300) and incorporated herein by reference.
-47-
<PAGE> 49
(5) Filed as an exhibit to Registrant's Form 10-K for the year ended
December 31, 1987 (No. 0-9300) and incorporated herein by
reference.
(6) Filed as an exhibit to the Registrant's definitive proxy statement
for its 1992 Annual Meeting of Stockholders (No. 0-9300) and
incorporated herein by reference.
(7) Filed as an exhibit to Registrant's Form 10-K for the year ended
December 31, 1993 (No. 0-9300) and incorporated herein by
reference.
(8) As filed as an exhibit to Registrant's definitive proxy statement
for its 1994 Annual Meeting of Stockholders (No. 0-9300) and
incorporated herein by reference.
(9) Filed as an exhibit to Registrant's Registration Statement on Form
S-1 (No. 33-80942) and incorporated herein by reference.
(10) Filed as an exhibit to Registrant's Form 10-Q for the quarterly
period ended June 30, 1994 (No. 0-9300) and incorporated herein
by reference.
(11) Filed as an exhibit to Registrant's Form 10-Q for the quarterly
period ended September 30, 1994 (No. 0-9300) and incorporated
herein by reference.
(12) Filed as an exhibit to Registrant's Registration Statement on
Form S-1 filed on June 30, 1994 (No. 33-8446) and incorporated
herein by reference.
(13) Filed as an exhibit to Amendment No. 1 to Registrant's
Registration Statement on Form S-1 filed on December 20, 1994
(No. 33-8446) and incorporated herein by reference.
(14) Filed as an exhibit to HarCor Energy, Inc.'s Form 8-K dated as
of July 20, 1995 and incorporated herein by reference.
(15) Filed herewith.
(b) No Reports on Form 8-K were filed by the Company during the last
quarter of 1995.
-48-
<PAGE> 50
SIGNATURES
Pursuant to the requirements of Section 13 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: March 26, 1996 By: /s/ Gary S. Peck
-------------------------------------
Gary S. Peck
Vice President - Finance,
Chief Financial Officer and Secretary
Pursuant to the requirements of the Securities Exchange Act of 1934,
this report has been signed below by the following persons on behalf of the
registrant and in the capacities and on the dates indicated.
<TABLE>
<S> <C> <C>
Date: March 26, 1996 /s/ Mark G. Harrington
---------------------------------------------------------
Mark G. Harrington
Chairman of the Board,
Chief Executive Officer
and Director
(Principal Executive Officer)
Date: March 26, 1996 /s/ Gary S. Peck
---------------------------------------------------------
Gary S. Peck
Vice President - Finance,
Chief Financial Officer and Secretary
(Principal Accounting and Financial
Officer)
Date: March 26, 1996 /s/ Francis H. Roth
---------------------------------------------------------
Francis H. Roth
President, Chief Operating Officer
and Director
Date: March 26, 1996 /s/ Robert J. Cresci
---------------------------------------------------------
Robert J. Cresci
Director
Date: March 26, 1996 /s/ Vinod K. Dar
---------------------------------------------------------
Vinod K. Dar
Director
Date: March 26, 1996 /s/ David E.K. Frischkorn, Jr.
---------------------------------------------------------
David E.K. Frischkorn, Jr.
Director
</TABLE>
-49-
<PAGE> 51
<TABLE>
<S> <C> <C>
Date: March 26, 1996 /s/ Ambrose K. Monell
---------------------------------------------------------
Ambrose K. Monell
Director
Date: March 26, 1996 /s/ Herbert L. Oakes, Jr.
---------------------------------------------------------
Herbert L. Oakes, Jr.
Director
Date: March 26, 1996 /s/ Robert A. Shore
---------------------------------------------------------
Robert A. Shore
Director
</TABLE>
-50-
<PAGE> 52
HARCOR ENERGY, INC.
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
INDEX
<TABLE>
<S> <C>
CONSOLIDATED FINANCIAL STATEMENTS: Page
----
Report of Independent Public Accountants . . . . . . . . . . . . . . . . . . . . . . . . . F-2
Consolidated Balance Sheets . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . F-3
Consolidated Statements of Operations . . . . . . . . . . . . . . . . . . . . . . . . . . F-5
Consolidated Statements of
Stockholders' Equity . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . F-6
Consolidated Statements of Cash Flows . . . . . . . . . . . . . . . . . . . . . . . . . . F-7
Notes to Consolidated Financial Statements . . . . . . . . . . . . . . . . . . . . . . . . F-11
</TABLE>
F-1
<PAGE> 53
Report of Independent Public Accountants
To the Stockholders and Board of Directors of HarCor Energy, Inc.:
We have audited the accompanying consolidated balance sheets of HarCor
Energy, Inc. (a Delaware corporation) and subsidiaries as of December 31, 1995
and 1994, and the related consolidated statements of operations, stockholders'
equity and cash flows for each of the three years in the period ended December
31, 1995. These consolidated financial statements are the responsibility of
the Company's management. Our responsibility is to express an opinion on these
consolidated financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to
obtain reasonable assurance about whether the financial statements are free of
material misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements. An audit
also includes assessing the accounting principles used and significant
estimates made by management, as well as evaluating the overall financial
statement presentation. We believe that our audits provide a reasonable basis
for our opinion.
In our opinion, the consolidated financial statements referred to above
present fairly, in all material respects, the financial position of HarCor
Energy, Inc. and subsidiaries as of December 31, 1995 and 1994, and the results
of their operations and their cash flows for each of the three years in the
period ended December 31, 1995, in conformity with generally accepted
accounting principles.
As discussed in Note 1 to the consolidated financial statements, effective
September 30, 1995, the Company adopted the Provisions of Statement of
Financial Accounting Standards No. 121, "Accounting for the Impairment of
Long-Lived Assets and for Long-Lived Assets to be Disposed Of."
ARTHUR ANDERSEN LLP
Houston, Texas
March 22, 1996
F-2
<PAGE> 54
HARCOR ENERGY, INC.
CONSOLIDATED BALANCE SHEETS
DECEMBER 31, 1995 AND 1994
ASSETS
<TABLE>
<CAPTION>
1995 1994
---------- ----------
<S> <C> <C>
CURRENT ASSETS:
Cash and cash investments . . . . . . . . . . . . . . . . . . $12,204,460 $ 899,198
Accounts receivable . . . . . . . . . . . . . . . . . . . . . 3,829,548 3,707,433
Prepaids and other . . . . . . . . . . . . . . . . . . . . . 282,833 307,241
---------- ----------
Total current assets . . . . . . . . . . . . . . . . . . . . 16,316,841 4,913,872
---------- ----------
PROPERTY, PLANT AND EQUIPMENT,
at cost, successful efforts method:
Unproved oil and gas properties . . . . . . . . . . . . . . . 5,039,553 7,414,113
Proved oil and gas properties:
Leasehold costs . . . . . . . . . . . . . . . . . . . . . . 54,793,930 52,158,281
Lease and well equipment . . . . . . . . . . . . . . . . . 16,858,402 12,900,913
Intangible development costs . . . . . . . . . . . . . . . 18,547,293 4,745,579
Furniture and equipment . . . . . . . . . . . . . . . . . . . 256,211 231,354
---------- ----------
95,495,389 77,450,240
Less - accumulated depletion,
depreciation, amortization
and impairment . . . . . . . . . . . . . . . . . . . . . . (22,647,657) (16,674,540)
---------- ----------
Net property, plant and equipment . . . . . . . . . . . . . 72,847,732 60,775,700
---------- ----------
OTHER ASSETS . . . . . . . . . . . . . . . . . . . . . . . . . 5,066,904 2,883,277
---------- ----------
$94,231,477 $68,572,849
========== ==========
</TABLE>
The accompanying notes are an integral part
of these consolidated financial statements.
F-3
<PAGE> 55
HARCOR ENERGY, INC.
CONSOLIDATED BALANCE SHEETS
DECEMBER 31, 1995 AND 1994
LIABILITIES AND STOCKHOLDERS' EQUITY
<TABLE>
<CAPTION>
1995 1994
---------- ----------
<S> <C> <C>
CURRENT LIABILITIES:
Short-term debt . . . . . . . . . . . . . . . . . . . . . . . $ 378,695 $ -
Current portion of long-term debt . . . . . . . . . . . . . . - 2,511,200
Subordinated Bridge Loan . . . . . . . . . . . . . . . . . . - 5,000,000
Accounts payable and accrued
liabilities . . . . . . . . . . . . . . . . . . . . . . . . 14,612,813 5,345,967
---------- ----------
Total current liabilities . . . . . . . . . . . . . . . . . . 14,991,508 12,857,167
---------- ----------
LONG-TERM DEBT, net of current
portion . . . . . . . . . . . . . . . . . . . . . . . . . . . 5,600,000 31,888,800
---------- ----------
OTHER LIABILITIES . . . . . . . . . . . . . . . . . . . . . . . 316,469 71,055
---------- ----------
14-7/8% SENIOR SECURED NOTES . . . . . . . . . . . . . . . . . 63,108,608 -
---------- ----------
COMMITMENTS AND CONTINGENCIES
(Note 9)
REDEEMABLE SERIES D PREFERRED STOCK . . . . . . . . . . . . . . - 8,402,430
---------- ----------
STOCKHOLDERS' EQUITY:
Preferred stock, $.01 par value -
1,500,000 shares authorized;
65,000 and 67,500 shares
outstanding at December 31,
1995 and 1994, respectively . . . . . . . . . . . . . . . . 650 675
Common stock, $.10 par value -
25,000,000 shares authorized;
8,631,207 and 7,192,837 shares
outstanding at December 31,
1995 and 1994, respectively . . . . . . . . . . . . . . . . 863,121 719,284
Additional paid-in capital . . . . . . . . . . . . . . . . . 29,163,670 29,827,989
Accumulated deficit . . . . . . . . . . . . . . . . . . . . . (19,812,549) (15,194,551)
---------- ----------
Total stockholders' equity . . . . . . . . . . . . . . . . . 10,214,892 15,353,397
---------- ----------
$94,231,477 $68,572,849
========== ==========
</TABLE>
The accompanying notes are an integral part
of these consolidated financial statements.
F-4
<PAGE> 56
HARCOR ENERGY, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
FOR THE YEARS ENDED DECEMBER 31, 1995, 1994 AND 1993
<TABLE>
<CAPTION>
1995 1994 1993
---------- ---------- ----------
<S> <C> <C> <C>
REVENUES:
Oil and gas revenues . . . . . . . . . . . . . . . $16,030,043 $10,981,651 $ 6,507,468
Gas plant operating and marketing
revenues . . . . . . . . . . . . . . . . . . . . 6,361,665 1,978,317 -
Interest income . . . . . . . . . . . . . . . . . . 164,193 16,269 20,593
Other . . . . . . . . . . . . . . . . . . . . . . 39,368 236,814 197,022
---------- ---------- ----------
22,595,269 13,213,051 6,725,083
---------- ---------- ----------
COSTS AND EXPENSES:
Production costs . . . . . . . . . . . . . . . . . 5,262,887 3,609,831 2,248,877
Gas plant operating and marketing
costs . . . . . . . . . . . . . . . . . . . . . 3,704,397 1,707,551 -
Dry hole and abandonment costs . . . . . . . . . . 4,013 74,797 41,165
Engineering and geological costs . . . . . . . . . 307,102 254,418 187,862
Depletion, depreciation,
amortization and impairment . . . . . . . . . . . 5,973,117 3,897,133 2,641,079
General and administrative
expenses . . . . . . . . . . . . . . . . . . . . 2,744,239 2,014,232 2,104,857
Interest expense . . . . . . . . . . . . . . . . . 6,846,471 2,268,558 542,098
Other . . . . . . . . . . . . . . . . . . . . . . 482,608 203,000 -
---------- ---------- ----------
25,324,834 14,029,520 7,765,938
---------- ---------- ----------
Loss before provision for income
taxes and extraordinary item . . . . . . . . . . (2,729,565) (816,469) (1,040,855)
Provision for income taxes . . . . . . . . . . . . . - - -
------------- ---------- ----------
Loss before extraordinary item . . . . . . . . . . (2,729,565) (816,469) (1,040,855)
EXTRAORDINARY ITEM:
Loss on early extinguishment of
debt . . . . . . . . . . . . . . . . . . . . . . (1,888,433) (122,193) -
---------- ---------- ----------
Net loss . . . . . . . . . . . . . . . . . . . . . . (4,617,998) (938,662) (1,040,855)
Dividends on preferred stock . . . . . . . . . . . . (1,000,161) (795,065) (246,468)
Accretion on Redeemable Preferred
Stock . . . . . . . . . . . . . . . . . . . . . (2,146,812) (156,152) -
---------- ---------- ----------
NET LOSS APPLICABLE TO COMMON
STOCKHOLDERS . . . . . . . . . . . . . . . . . . . $(7,764,971) $(1,889,879) $(1,287,323)
========== ========== ==========
NET LOSS PER COMMON SHARE BEFORE
EXTRAORDINARY ITEM . . . . . . . . . . . . . . . . $(.74) $(.27) $(.23)
EXTRAORDINARY ITEM . . . . . . . . . . . . . . . . . . (.24) (.02) -
---- ---- ----
NET LOSS PER COMMON SHARE AFTER
EXTRAORDINARY ITEM . . . . . . . . . . . . . . . . $(.98) $(.29) $(.23)
==== ==== ====
</TABLE>
The accompanying notes are an integral part
of these consolidated financial statements.
F-5
<PAGE> 57
HARCOR ENERGY, INC.
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
FOR THE YEARS ENDED DECEMBER 31, 1995, 1994 AND 1993
<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, 1992 . . . . . . . . 8,000 $ 80 5,399,877 $539,988 $17,320,228 $(13,215,034)
Issuance of 8% Series B Convertible
Preferred Stock . . . . . . . . . . . . . 30,000 300 - - 2,999,700 -
Issuance of 8% Series C Convertible
Preferred Stock . . . . . . . . . . . . . 10,000 100 - - 930,926 -
Conversion of Convertible Preferred Stock . (10,500) (105) 235,157 23,516 (23,411) -
Issuance of common stock pursuant to
exercise of stock options . . . . . . . . - - 101,850 10,185 236,745 -
Preferred stock dividends . . . . . . . . . - - - - (246,468) -
Net loss . . . . . . . . . . . . . . . . . - - - - - (1,040,855)
------ --- --------- ------- ---------- -----------
BALANCE, DECEMBER 31, 1993 . . . . . . . . 37,500 375 5,736,884 573,689 21,217,720 (14,255,889)
Issuances in connection with Bakersfield
Property acquisition:
4% Series E Convertible Preferred Stock 30,000 300 - - 2,982,443 -
Common stock . . . . . . . . . . . . . . - - 1,363,907 136,391 2,965,148 -
Warrants . . . . . . . . . . . . . . . . - - - - 3,200,842 -
Issuances of common stock pursuant to
Restricted Stock grant and exercise
of stock options . . . . . . . . . . . . - - 75,375 7,537 266,776 -
Issuances of common stock and warrants
pursuant to preferred stock dividends . . - - 16,671 1,667 146,277 -
Preferred stock dividends . . . . . . . . . - - - - (795,065) -
Accretion on 9% Redeemable Series D
Preferred Stock . . . . . . . . . . . . . - - - - (156,152) -
Net loss . . . . . . . . . . . . . . . . . - - - - - (938,662)
------ --- -------- ------- ---------- -----------
BALANCE, DECEMBER 31, 1994 . . . . . . . . . 67,500 675 7,192,837 719,284 29,827,989 (15,194,551)
Conversion of Convertible Preferred
Stock . . . . . . . . . . . . . . . . . . (2,500) (25) 64,100 6,410 (6,385) -
Issuance of common stock . . . . . . . . . - - 75,000 7,500 226,125 -
Issuance of common stock pursuant to
warrant exchange . . . . . . . . . . . . - - 1,282,500 128,250 (128,250) -
Issuance of common stock and warrants
pursuant to preferred stock dividends . . - - 16,770 1,677 153,164 -
Issuance of warrants pursuant to 14-7/8%
Senior Secured Notes . . . . . . . . . . - - - - 2,238,000 -
Preferred stock dividends . . . . . . . . . - - - - (1,000,161) -
Accretion on Series D Preferred Stock . . . - - - - (2,146,812) -
Net loss . . . . . . . . . . . . . . . . . - - - - - (4,617,998)
------ --- --------- ------- ---------- -----------
BALANCE, DECEMBER 31, 1995 . . . . . . . . 65,000 $650 8,631,207 $863,121 $29,163,670 $(19,812,549)
====== === ========= ======= ========== ===========
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
F-6
<PAGE> 58
HARCOR ENERGY, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE YEARS ENDED DECEMBER 31, 1995, 1994 AND 1993
<TABLE>
<CAPTION>
1995 1994 1993
------------ ------------ ------------
<S> <C> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net Loss . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $(4,617,998) $ (938,662) $(1,040,855)
Adjustments to reconcile net loss to net cash
provided by operating activities:
Depletion, depreciation, amortization
and impairment . . . . . . . . . . . . . . . . . . . . . . . 5,973,117 3,897,133 2,641,079
Amortization of deferred financing costs . . . . . . . . . . . 708,932 254,372 67,177
Dry hole and abandonment costs . . . . . . . . . . . . . . . . 4,013 74,797 41,165
Engineering and geological costs . . . . . . . . . . . . . . . 307,102 254,418 187,862
(Gain) loss on sale of assets . . . . . . . . . . . . . . . . . 131,702 (230,993) (166,021)
Loss on early extinguishment of debt . . . . . . . . . . . . . 1,888,433 122,193 -
Other . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 350,908 203,000 -
---------- ---------- ----------
4,746,209 3,636,258 1,730,407
Changes in current assets and liabilities:
Decrease (increase) in receivables . . . . . . . . . . . . . . . (212,319) (2,520,726) 11,987
Decrease (increase) in other current assets . . . . . . . . . . . 24,408 (147,002) 68,786
Increase in accounts payable and accrued
liabilities . . . . . . . . . . . . . . . . . . . . . . . . . . 457,233 1,772,930 560,074
---------- ---------- ----------
Net cash provided by operating activities . . . . . . . . . . . . . 5,015,531 2,741,460 2,371,254
---------- ---------- ----------
CASH FLOWS FROM INVESTING ACTIVITIES:
Engineering and geological costs . . . . . . . . . . . . . . . . . (307,102) (254,418) (187,862)
Proceeds from sale of assets . . . . . . . . . . . . . . . . . . . 13,650 455,754 363,332
Additions to oil and gas properties . . . . . . . . . . . . . . . . (8,953,427) (45,607,532) (4,283,066)
Dry hole and abandonment costs . . . . . . . . . . . . . . . . . . (4,013) (74,797) (41,165)
Sale of Canadian securities . . . . . . . . . . . . . . . . . . . . - - 1,287,356
Other . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . - - 58,683
---------- ---------- ----------
Net cash used in investing activities . . . . . . . . . . . . . . . (9,250,892) (45,480,993) (2,802,722)
---------- ---------- ----------
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from issuance of debt . . . . . . . . . . . . . . . . . . 5,600,000 34,436,875 2,603,528
Repayment of debt . . . . . . . . . . . . . . . . . . . . . . . . (39,400,000) (3,577,873) (1,949,189)
Proceeds from issuance of preferred stock . . . . . . . . . . . . . - - 931,026
Proceeds from issuance of Redeemable
Preferred Stock . . . . . . . . . . . . . . . . . . . . . . . . . - 10,000,000 -
Proceeds from 14-7/8% Senior Secured Notes . . . . . . . . . . . . 64,647,700 - -
Proceeds from issuance of common stock . . . . . . . . . . . . . . - 3,053,101 246,930
Redemption of Redeemable Preferred Stock . . . . . . . . . . . . . (10,931,200) - -
Dividends on preferred stock . . . . . . . . . . . . . . . . . . . (464,161) (356,413) (170,055)
Increase in other assets . . . . . . . . . . . . . . . . . . . . . (3,856,119) (1,772,621) (47,655)
Other . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . (55,597) (305,850) 49,888
---------- ---------- ----------
Net cash provided by financing activities . . . . . . . . . . . . . 15,540,623 41,477,219 1,664,473
---------- ---------- ----------
Net increase (decrease) in cash . . . . . . . . . . . . . . . . . . 11,305,262 (1,262,314) 1,233,005
Cash and cash investments at beginning of
period . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 899,198 2,161,512 928,507
---------- ---------- ----------
Cash and cash investments at end of period . . . . . . . . . . . . . $12,204,460 $ 899,198 $ 2,161,512
========== ========== ==========
</TABLE>
The accompanying notes are an integral part
of these consolidated financial statements.
F-7
<PAGE> 59
HARCOR ENERGY, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE YEARS ENDED DECEMBER 31, 1995, 1994 AND 1993
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION (ALL DOLLAR AMOUNTS HAVE BEEN
ROUNDED TO THE NEAREST THOUSAND) -
The Company made cash interest payments of $2,329,000, $2,030,000 and
$453,000 in 1995, 1994 and 1993, respectively.
SUPPLEMENTAL INFORMATION REGARDING NON-CASH INVESTING AND FINANCING ACTIVITIES
- - YEAR ENDED DECEMBER 31, 1995
The Company had accrued capital expenditure costs of $8,266,000 at
December 31, 1995 which are not reflected in investing activities.
Pursuant to the terms of its bridge loan facility, the Company issued
to its secured lender 75,000 shares of its common stock to which a value of
$253,000 was ascribed. These additions to deferred financing costs and equity
are not reflected in financing activities.
The Company incurred $379,000 in short-term debt and $282,000 in other
liabilities in connection with the financing of an annual insurance policy and
the financing of equipment which is not reflected in financing activities.
In connection with the refinancing of its long-term debt, the Company
incurred a non-cash charge of $1,888,000 in writing off all of the deferred
financing costs associated with the extinguished debt. Also in connection with
this refinancing, the Company issued warrants to which a value of $580,000 was
ascribed. These charges to deferred financing costs and equity are not
reflected in financing activities.
Included in the payment of dividends on its Series D Preferred Stock
were "in-kind" dividends consisting of $476,000 in newly-issued Series D
Preferred Stock. Included in the payment of dividends on the Convertible
Series E Preferred Stock was $60,000 of newly-issued unregistered shares of the
Company's common stock. These dividend payments as described are not reflected
in financing activities.
The Company incurred aggregate non-cash accretion charges of
$2,147,000 on its Series D Preferred Stock which are not reflected in financing
activities.
F-8
<PAGE> 60
SUPPLEMENTAL INFORMATION REGARDING NON-CASH INVESTING AND FINANCING ACTIVITIES
- - YEAR ENDED DECEMBER 31, 1994
In connection with the dissolution of the South Texas Limited
Partnership and related property conveyance, the Company wrote off $203,000 of
its cost basis of the partnership, and expensed $122,000 reflecting a write-off
of deferred financing costs resulting from the early extinguishment of debt.
These non-cash charges for the dissolution and debt extinguishment are not
reflected in investing and financing activities.
At December 31, 1994, the Company had accrued acquisition and
developmental drilling costs aggregating $1,823,000 and accrued prepaid and
deferred financing costs aggregating $342,000. The additions to property,
plant and equipment and financing costs resulting from these and the above
described transactions are not reflected in investing and financing activities.
In connection with the Company's acquisition of certain oil and gas
assets, the Company issued to the sellers, as a portion of the consideration,
30,000 shares of its Series E Preferred Stock with a face value of $3,000,000,
25,000 shares of unregistered common stock with a value of $81,000 and a
warrant to purchase 1,000,000 shares of the Company's common stock at $5.00 per
share to which the Company ascribed a value of $850,000. The acquisition value
of the assets acquired and corresponding additions to equity resulting from
these transactions are not reflected in investing and financing activities.
In connection with the amendment of the Company's credit agreement,
the Company issued warrants to purchase 250,000 shares of the Company's common
stock to which the Company ascribed a value of $230,000. The deferred
financing cost and addition to equity resulting from this transaction are not
reflected in financing activities.
During 1994, the Company issued an aggregate of 60,375 restricted
shares of common stock to officers which was valued as deferred compensation of
$242,000 and was not reflected in financing activities.
During 1994, the Company paid "in-kind" dividends on its Series D
Redeemable Preferred Stock consisting of $455,000 in newly-issued Series D
Preferred Stock and detachable warrants to purchase shares of common stock
which were valued at $88,000. The Company also paid dividends on its
Convertible Series E Preferred Stock consisting of $60,000 in newly-issued
unregistered shares of the Company's common stock. These dividend payments and
issuance of common stock and warrants are not reflected in financing
activities.
F-9
<PAGE> 61
SUPPLEMENTAL INFORMATION REGARDING NON-CASH INVESTING AND FINANCING ACTIVITIES
- - YEAR ENDED DECEMBER 31, 1993
In March 1993, the Company acquired oil and gas royalty and net profit
interests in exchange for 30,000 shares of the Company's 8% Series B
Convertible Preferred Stock at $100.00 per share for an aggregate of
$3,000,000. The acquisition value of the assets acquired and corresponding
addition to equity are not reflected in investing or financing activities.
In connection with the Company's May 1993 acquisition of assets for
$1,095,000, the Company assumed $787,000 of an outstanding production note
payable. The additions to properties and production note are not reflected in
investing and financing activities.
The Company declared dividends totaling $76,000 in the fourth quarter
on its Series A, B and C Convertible Preferred Stock, which were accrued and
unpaid and not reflected in financing activities at December 31, 1993.
The accompanying notes are an integral part
of these consolidated financial statements.
F-10
<PAGE> 62
HARCOR ENERGY, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1995
(1) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
PRINCIPLES OF CONSOLIDATION -
The accompanying consolidated financial statements for the year ended
December 31, 1993 include the accounts and results of operations of HarCor
Energy, Inc. ("HarCor") and its wholly-owned subsidiaries, Warrior, Inc.
("Warrior") and HTAC Investments, Inc. ("HTACI"); HarCor's general partner
share of the assets, liabilities, revenues and costs and expenses of South
Texas Limited Partnership ("STLP"); and HarCor's share of assets, revenues and
costs and expenses of oil and gas interests acquired from the TCW Commingled
Debt and Royalty Fund I ("Royalty Interests") for the period of March 1993
through December 1993.
The accompanying consolidated financial statements for the years ended
December 31, 1994 and 1995 include the accounts and results of HarCor, Warrior
and HTACI; HarCor's share of the assets, liabilities, revenues and costs and
expenses of STLP or, after STLP's dissolution in March 1994, HarCor's direct
working interests in the STLP properties ("South Texas Properties"); HarCor's
share of the Royalty Interests; and HarCor's interest in certain oil and gas
assets located in Kern County, California acquired on June 30, 1994 (the
"Bakersfield Properties"); (collectively, the "Company" or "HarCor" unless the
context specifies otherwise).
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.
Subsequent to December 31, 1995, 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.
BUSINESS AND ORGANIZATION -
HarCor, a Delaware corporation, was incorporated in 1976 and is
engaged in the business of acquiring interests in and developing onshore oil
and gas properties in the United States.
CASH FLOWS -
For purposes of reporting cash flows, cash and cash investments
include cash on hand and temporary short-term cash investments, with original
maturities of three months or less.
F-11
<PAGE> 63
PROPERTY, PLANT AND EQUIPMENT-
The Company utilizes the successful efforts method of accounting for
its oil and gas properties. Under this method, exploratory costs, except costs
of drilling exploratory wells, are charged to expense when incurred;
exploratory well costs (including leasehold costs) are initially capitalized,
but are charged to expense if the well is determined to be unsuccessful. Upon
discovery of reserves on an oil and gas property in commercially producible
quantities, all costs of developing that property, including costs of drilling
unsuccessful development wells, are capitalized. Capitalized leasehold
acquisition costs are depleted on a unit-of-production method, based on proved
oil and gas reserves. Exploration, development and equipment costs are
depreciated or amortized on a unit-of-production method, based on proved
developed oil and gas reserves. The carrying amount of all unproved properties
is evaluated periodically and reduced if such properties have been impaired.
The gas plant is stated at cost and is depreciated utilizing the
straight-line method over 14 years.
Furniture and equipment are stated at cost and are depreciated
utilizing the straight-line method over three to five years.
ACCOUNTS PAYABLE AND ACCRUED LIABILITIES-
Accounts payable and accrued liabilities at December 31, 1995 and 1994
comprised the following (amounts in thousands):
<TABLE>
<CAPTION>
1995 1994
--------- ---------
<S> <C> <C>
Accrued development costs . . . . $ 8,188 $1,823
Accrued interest payable. . . . . 4,217 814
Trade accounts payable. . . . . . 1,889 2,434
Other accrued liabilities . . . . 319 275
------ -----
$14,613 $5,346
====== =====
</TABLE>
CAPITALIZED INTEREST COSTS-
Certain interest costs of approximately $452,000 have been capitalized
as part of the historical costs of unproved oil and gas properties effective
with the refinancing and subsequent active development thereof in July 1995 and
through December 31, 1995.
NET LOSS PER COMMON SHARE-
Net loss per common share was calculated by dividing the net loss,
after consideration of preferred stock dividends paid or accrued and related
accretion, 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
F-12
<PAGE> 64
in all periods. The weighted average number of outstanding common shares
utilized in the calculation was 7,904,000 shares in 1995, 6,447,000 shares in
1994 and 5,492,000 shares in 1993.
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.
Accordingly, the estimated fair values of its oil and gas properties
at December 31, 1995 were evaluated and compared to the carrying values of such
assets at that date. The resulting impairment loss of $876,000 was included in
depletion, depreciation, amortization and impairment in 1995.
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 (see Note 16, "Oil and Gas Producing
Activities").
PRIOR YEAR RECLASSIFICATIONS-
Certain prior year amounts have been reclassified to conform with the
current year presentation.
(2) SOUTH TEXAS LIMITED PARTNERSHIP
In October 1992, the Company formed STLP, a Texas limited partnership,
with two industry partners. The Company became a general partner of STLP with
an initial 25.25% interest in the partnership. In May 1993, the Company
purchased an additional 12.625% of STLP for $1,095,000 in cash and assumed an
incremental 12.625% of STLP's production note with a bank ($787,000 at the
acquisition date).
In March 1994, the Company and the remaining partner of STLP agreed to
dissolve and terminate the partnership. Pursuant to the
F-13
<PAGE> 65
terms of a dissolution agreement, 37.875% of the assets and liabilities of STLP
(reflecting its proportionate interest in STLP) were distributed to the
Company. The principal asset distributed to the Company was its 37.875% direct
working interest in the South Texas Properties. Concurrent with STLP's
dissolution, the Company repaid its respective share of all amounts owed
pursuant to STLP's production note outstanding ($3.1 million). The dissolution
of STLP resulted in a write-off of $122,000 by the Company of deferred
financing costs in connection with the early extinguishment of debt and the
write-off of $203,000 in oil and gas properties resulting from a conveyance of
6% of the South Texas Properties pursuant to the dissolution agreement.
(3) ROYALTY EXCHANGE AND ISSUANCE OF PREFERRED STOCK
In March 1993, the Company entered into a transaction in which six
institutional participants in the TCW Commingled Debt and Royalty Fund I ("the
Fund") exchanged their proportionate share of the gross royalty and net profit
interests in certain oil and gas properties (the "Royalty Interests") for an
aggregate of 30,000 shares of the Company's 8% Series B Convertible Preferred
Stock priced at $100 per share. Trust Company of the West ("TCW") is the
manager and trustee of the Fund. As of December 31, 1995, TCW, acting on
behalf of certain pension funds, was a holder of approximately 17% of the
outstanding common stock of the Company.
The Royalty Interests acquired by the Company consisted of gross
overriding royalty interests and net profit interests, which were estimated to
have total proved net reserves of 124,000 barrels of oil and 2.64 Bcf of
natural gas with an ascribed acquisition cost of $3,073,000.
(4) ACQUISITION OF BAKERSFIELD PROPERTIES
On June 30, 1994, the Company acquired a 75% interest in substantially
all of the oil and gas properties, a 23 MMcf per day natural gas processing
plant and gathering lines owned by Bakersfield Energy Resources, Inc. and its
affiliates ("BER"). The oil and gas reserves acquired were principally natural
gas (1,240 Btu) and light (35-40 degrees gravity), low sulfur, crude oil
located in Kern County, California. BER has retained its remaining 25%
working interest in these assets and continues to operate all of the
properties and facilities acquired by the Company. Additionally, the Company
and BER entered into a three-year joint acquisition agreement which gives each
the right to participate in acquisitions of oil and gas interests located
within the state of California by the other.
The purchase price for such interests was approximately $46 million,
consisting of $42 million in cash plus 25,000 shares of the Company's common
stock, 30,000 shares of the Company's Series E Junior Convertible Preferred
Stock at $100 per share and a seven-year callable warrant to purchase 1,000,000
shares of common stock
F-14
<PAGE> 66
at an exercise price of $5.00 per share to which the Company had ascribed a
value of $850,000. This warrant was subsequently canceled in May 1995 pursuant
to a warrant exchange agreement. (See Note 11.)
To finance the acquisition, the Company amended its credit facility
with a group of lenders led by Internationale Nederlanden (U.S.) Capital
Corporation ("ING Capital") to increase the total commitment under such
facility to $34.4 million. The Company financed the cash portion of the
purchase price with (i) $25 million of incremental borrowings under a credit
agreement; (ii) $5 million of borrowings under a bridge loan facility with ING
Capital; (iii) $10 million gross proceeds from the private placement of 100,000
shares of the Company's Series D Preferred Stock and (iv) a portion of the $3.5
million of gross proceeds from the private placement of 1,071,538 shares of
common stock. The assets acquired in this transaction were accounted for by
the purchase method of accounting.
The following table presents the unaudited pro forma condensed
consolidated statement of operations for the year ended December 31, 1994,
assuming the acquisition of the Bakersfield Properties and the related
financings had occurred at January 1, 1994 (amounts are in thousands except per
share data):
<TABLE>
<S> <C>
Total revenues . . . . . . . . . . . $19,304
=======
Net loss attributable
to common stockholders . . . . . . $(1,587)
=======
Net loss per common share . . . . . $ (0.22)
=======
</TABLE>
Pro forma net loss for the year ended December 31, 1994 includes losses
of approximately $600,000 attributable to gas plant operating losses incurred
during its start-up phase prior to acquisition by the Company.
(5) SUBORDINATED BRIDGE LOAN
In connection with the acquisition of the Bakersfield Properties in
June 1994, the Company entered into a $5 million bridge loan facility (the
"Bridge Loan") with ING Capital. Outstanding advances under the Bridge Loan
bore interest at a floating rate of, at the Company's option, prime plus 2% or
LIBOR plus 4% per annum until September 30, 1994 and escalating by (i) .75% per
annum from October 1, 1994 through January 31, 1995 and (ii) 1.5% per annum at
all times after January 31, 1995.
In July 1995, the Company refinanced the Bridge Loan with proceeds from
a long-term refinancing of its debt. (See Note 6.)
F-15
<PAGE> 67
(6) LONG-TERM DEBT
Effective upon the closing of the acquisition of the Bakersfield
Properties in June 1994, the Company amended its facility with ING Capital (the
"Amended Credit Agreement") to provide for a total commitment of $34.4 million.
Outstanding advances under the Amended Credit Agreement bore interest at a
floating rate of, at the Company's option, prime plus 1% or LIBOR plus 3% per
annum.
The Amended Credit Agreement contained certain covenants and
restrictions with respect to dividends, redemption of preferred stock, general
and administrative expenses, working capital, fixed charge coverage ratios and
hedging activities. The Amended Credit Agreement also made provisions for the
mandatory early repayment of portions of the loan amount outstanding under
certain specified events. The Company issued to the lending institutions
involved with the Amended Credit Agreement and the preceding credit facility
warrants to purchase an aggregate of 326,000 shares of its common stock at
prices ranging from $4.75 to $5.50 per share, of which 226,000 warrants were
canceled pursuant to certain warrant exchange agreements subsequent to December
31, 1995. (See Note 11.)
In July 1995, the Company repaid $34.3 million of the amount
outstanding under the Amended Credit Agreement with proceeds resulting from a
long-term refinancing of its debt and entered into a new credit agreement with
ING Capital (the "New Credit Agreement"). A write-off of deferred financing
costs of approximately $1.9 million was charged to expense as an extraordinary
item resulting from this early extinguishment of debt and concurrent early
redemption of the Series D Preferred Stock. (See Notes 7 and 8.)
The New Credit Agreement provides that the Company initially may borrow
up to $10 million on a revolving credit basis. Availability under the New
Credit Agreement is limited to a "borrowing base" amount. The borrowing base
will be determined semi-annually by ING Capital, at its sole discretion, and
may be established at an amount up to $15 million. The initial borrowing base
was set at and is currently $10 million and ING Capital will have no obligation
to increase the borrowing base above this amount. Availability under the New
Credit Agreement, as amended in March 1996, will terminate on June 30, 1997, at
which time amounts outstanding under the New Credit Agreement will convert to a
term loan on September 30, 1997, with a set amortization schedule of a
percentage of the outstanding principal balance continuing through December 31,
2000. There was $5.6 million outstanding under the New Credit Agreement at
December 31, 1995. The effective interest rate on the balance outstanding was
approximately 9% at that date. Amounts advanced under the New Credit Agreement
will bear interest at an adjusted Eurodollar rate plus 2.50%.
The New Credit Agreement contains restrictive covenants which impose
limitations on the Company and its subsidiaries with respect to, among other
things: (i) the maintenance of current assets
F-16
<PAGE> 68
equal to at least 100% of current liabilities, (ii) the maintenance of a
minimum tangible net worth, (iii) the incurrence of indebtedness (with
exceptions for the notes and the New Credit Agreement and certain other limited
exceptions), (iv) dividends and similar payments (except dividends on Series A,
B and C Preferred Stock of up to $530,000), (v) the creation of additional
liens on, or the sale of, the Company's oil and gas properties and other
assets, (vi) the Company's ability to enter into hedging transactions, (vii)
mergers or consolidations, (viii) investments outside the ordinary course of
business and (ix) transactions with affiliates.
All indebtedness of the Company under the New Credit Agreement is
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.
(7) SENIOR SECURED NOTE OFFERING
SALE OF UNITS -
On July 24, 1995, the Company consummated the sale (the "Note
Offering") of 65,000 units (the "Units") consisting of $65 million aggregate
principal amount of its 14-7/8% Senior Notes due July 15, 2002 (the "Notes")
and warrants to purchase 1,430,000 shares of common stock. Each Unit consists
of a $1,000 principal amount Note and 22 warrants to purchase an equal number
of shares of common stock. The Notes and warrants became separately
transferrable immediately after July 24, 1995.
USE OF PROCEEDS -
The net proceeds to the Company from the offering of Units was
approximately $61 million after deducting discounts and offering expenses. The
Company immediately used a portion of the net proceeds to (i) repay $34.3
million outstanding under its Amended Credit Agreement with ING Capital and
repay $5 million outstanding under the Bridge Loan with ING Capital, (ii)
redeem $10.9 million in outstanding shares of Series D Preferred Stock and
(iii) acquire interests in certain oil and gas wells associated with the
Bakersfield Properties (the "Carried Interests Wells") for $2.3 million. The
Company used the balance of the proceeds from the Note Offering to finance a
portion of the development of the Bakersfield Properties during the remainder
of 1995.
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
F-17
<PAGE> 69
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 are issued pursuant to an indenture, dated July 24, 1995,
between the Company and Texas Commerce Bank National Association, as Trustee
(the "Indenture"). All of the obligations of the Company under the Notes and
the Indenture are secured by a second priority lien on substantially all of the
assets of the Company and its subsidiaries securing its bank debt. The
subsidiaries of the Company were merged into HarCor subsequent to December 31,
1995 and all of their assets became the property, and all of their liabilities
and guarantees became the obligations, of HarCor.
THE WARRANTS-
Each warrant entitles the holder thereof to purchase one share of
common stock at an exercise price of $3.85 per share. The warrants are
exercisable at any time on or after July 24, 1996 and expire at the close of
business on July 24, 2000. Holders of the warrants have certain demand and
piggy-back rights to cause the Company to register the shares of common stock
issuable thereunder. Such shares of common stock collectively represent
approximately 10% of the common stock of the Company on a fully diluted basis
(after taking into account the conversion or exercise of all existing options,
warrants and other convertible securities).
PLACEMENT OF UNITS-
Subject to the terms of the Purchase Agreement dated July 17, 1995
(the "Purchase Agreement"), the Company sold the Units to BT Securities
Corporation and Internationale Nederlanden (U.S.) Securities Corporation (the
"Initial Purchasers"). As part of the compensation to the Initial Purchasers
in connection with the offering of the Units, the Company issued to the Initial
Purchasers (i) additional warrants to purchase 350,000 shares of common stock
at an initial exercise price of $3.85 per share and (ii) warrants to purchase
150,000 shares of the Company's Series F Preferred Stock at an initial exercise
price of $3.85 per share. Each share of Series F Preferred Stock is
convertible into one share of common stock. The additional warrants issued as
such compensation have substantially the same terms as the warrants described
above. All of the warrants as described herein were ascribed an aggregate
value of approximately $2.2 million and are reflected in either
F-18
<PAGE> 70
other assets or additional paid-in capital to be amortized over the life of the
Notes.
EQUITY PROCEEDS OFFER AND REDEMPTION-
In the event the Company completes an offering for the sale of $5
million or more of its equity securities on or prior to July 15, 1997 ("Equity
Offering"), then following such Equity Offering, the Company must make an offer
to purchase from all the holders of the Notes ("Holders") (on a date not later
than the 90th day after the date of the consummation of such Equity Offering)
at a purchase price equal to 110% of the aggregate principal amount of Notes to
be repurchased, plus accrued and unpaid interest thereon, an aggregate
principal amount of Notes equal to the lesser of (i) the maximum principal
amount of Notes such that 60% of the aggregate principal amount of Notes
originally issued remains outstanding after completion of the offer or (ii) the
maximum principal amount of the Notes which could be purchased with 50% of the
amount of net proceeds received or receivable by the Company from such Equity
Offering.
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 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.
PRO FORMA FINANCIAL STATEMENTS -
The following Unaudited Pro Forma Condensed Consolidated Statements of
Operations are derived from the historical financial statements of the Company
set forth herein and are adjusted to reflect (i) the issuance of the Units and
the application of a portion of the net proceeds to repay all indebtedness
outstanding under the Amended Credit Agreement and the Bridge Loan and to
redeem the Series D Preferred Stock and (ii) the acquisition of the Carried
Interests Wells as if such transactions had occurred on January 1, 1995. This
unaudited pro forma financial information should be read in conjunction with
the notes thereto.
The unaudited pro forma financial information does not purport to be
indicative of the results of operations that would actually have occurred if
the transactions described had occurred as presented in such statements or
which may be obtained in the
F-19
<PAGE> 71
future. In addition, future results may vary significantly from the results
reflected in such statements due to normal crude oil and natural gas production
declines, reductions in prices paid for crude oil and natural gas, future
acquisitions and other factors.
UNAUDITED PRO FORMA CONDENSED CONSOLIDATED STATEMENT OF OPERATIONS
FOR THE YEAR ENDED DECEMBER 31, 1995
<TABLE>
<CAPTION>
Pro Forma
---------- -------------------------------
Adjustments
--------------------------
Carried Note
Historical Interests(A) Offering Adjusted
---------------------------------------------------------
<S> <C> <C> <C> <C>
Total revenues . . . . . . . . . . . . . . . . . . $22,595 $1,281 $ - $23,876
------- ------ ------- -------
Costs and expenses:
Operating and exploration costs . . . . . . . . . 9,278 194 - 9,472
Depletion, depreciation,
amortization and impairment . . . . . . . . . . 5,973 445 - 6,418
General and administrative
expenses . . . . . . . . . . . . . . . . . . . 2,744 - - 2,744
Interest expense . . . . . . . . . . . . . . . . 6,847 - 3,826(B) 10,673
Other . . . . . . . . . . . . . . . . . . . . . 483 - - 483
------- ------ ------- -------
Total costs and expenses . . . . . . . . . . . 25,325 639 3,826 29,790
------- ------ ------- -------
Loss from continuing operations . . . . . . . . . $(2,730) $ 642 $(3,826) $(5,914)
======= ====== ======= =======
Loss applicable to common
shareholders . . . . . . . . . . . . . . . . . $(7,765) $(8,263)
======= =======
Loss from continuing operations
per share applicable to common
shareholders . . . . . . . . . . . . . . . . . . $ (0.98) $ (1.05)(C)
======= =======
Weighted average shares
outstanding . . . . . . . . . . . . . . . . . . . 7,904 7,904 (C)
======= =======
</TABLE>
All amounts in the tables above are in thousands except per share data.
See accompanying notes to pro forma financial statements.
Pro forma adjustments to the Unaudited Pro Forma Condensed
Consolidated Statements of Operations included herein are as follows (dollar
amounts are in thousands):
(A) Revenues and expenses resulting from the acquisition of the
Carried Interests Wells and adjustments to depletion,
depreciation and amortization for the six months ended June 30,
1995 (the Carried Interests were acquired effective July 1,
1995).
(B) Changes in interest expense associated with (i) the inclusion of
$6,030 in interest, discount amortization and amortization of
deferred financing costs associated with the Notes for the
period ended July 24, 1995, the date of the completion of Note
Offering, and (ii) the elimination of $2,204 in interest expense
and deferred financing costs for that period related to the
Amended Credit Agreement and the Bridge Loan.
(C) The pro forma earnings per share data reflect dividends on
remaining preferred stock which increase loss applicable to
common shareholders. The extraordinary write-off of deferred
financing costs and the charge to additional paid-in capital
resulting from the early extinguishment of debt and early
redemption of preferred stock have not been
F-20
<PAGE> 72
reflected in the earnings per share calculation as their effects are
nonrecurring. Outstanding stock options, warrants and Convertible
Preferred shares were not included in the calculation as their effect
was antidilutive.
(8) REDEMPTION OF SERIES D PREFERRED STOCK
In connection with the acquisition of the Bakersfield Properties in
June 1994, the Company had issued 100,000 shares of Series D Preferred Stock
with detachable warrants in a private placement at a price of $100.00 per share
for an aggregate value of $10 million. The Series D Preferred Stockholders
("Series D Holders") received dividends at rates from 9% to 12% per annum,
payable in cash or in shares of the Series D Preferred Stock at the option of
the Company. Pursuant to the Company's election to pay a portion of dividends
in shares and also as a result of accretion, the number of shares outstanding
of the Series D Preferred had increased to 109,312 shares and its face value
had increased to $10.9 million at June 30, 1995.
Upon issuance of the Series D Preferred Stock, the Company issued to
the Series D Holders warrants to purchase 2,305,263 shares of common stock at
an initial exercise price of $4.75 per share. The Company had ascribed a value
to these warrants of $0.92 per warrant, based on certain warrant valuation
models, for an aggregate value of $2.1 million. Pursuant to generally accepted
accounting principles, the Company had allocated the $2.1 million ascribed
value of the warrants to additional paid-in capital and correspondingly reduced
the face amount of the Series D Preferred Stock reflected on its balance sheet
to $7.9 million at the original date of issuance. Pursuant to the issuance of
share dividends and terms of the Series D Preferred Stock, the number of
warrants to purchase common stock issued to the Series D Holders thereof had
increased to 3,424,666 at June 30, 1995, and the exercise price had decreased
to $3.67 per share.
In July 1995, the Company redeemed the total 109,312 shares of Series
D Preferred Stock outstanding with proceeds resulting from a long-term
refinancing of its debt. (See Note 7.) Resultant from this early redemption
was an acceleration of accretion resulting in a non-cash charge of $2.1 million
to paid-in capital in 1995.
Also in conjunction with the early redemption of the Series D
Preferred Stock, the Series D Holders exchanged all of their warrants to
purchase shares of common stock for unregistered common stock of the Company.
(See Note 11.)
(9) 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
F-21
<PAGE> 73
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
appropriately hedged. Gains or losses under the hedging agreements are
recognized in oil and gas production revenues in periods in which the hedged
production occurs and such agreements are settled on a monthly basis.
As of December 31, 1995, the Company was a party to various gas
contracts covering volumes of approximately 4.0 Bcf and 3.4 Bcf for 1996 and
1997, respectively, at prices ranging from $1.68/MMBtu to $2.07/MMBtu; 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
$18.75/Bbl.
The following table summarizes the estimated fair value of financial
instruments and related transactions for non-trading activities at December 31,
1995 (amounts are in thousands):
<TABLE>
<CAPTION>
Estimated
Carrying Fair
Amount Value(1)
------ --------
Asset (Liab.)
<S> <C> <C>
Long-Term Debt(2)(4) . . . . . . . . . . . . . . . . . . . ($ 5,600) ($ 5,600)
14-7/8% Senior Secured
Notes(3)(4) . . . . . . . . . . . . . . . . . . . . . . ($63,109) ($63,109)
Financial Instruments . . . . . . . . . . . . . . . . . . - $710
</TABLE>
____________________
(1) Estimated fair values have been determined by using available
market data and valuation methodologies. Judgment is
necessarily required in interpreting market data and the use of
different market assumptions or estimation methodologies may
affect the estimated fair value amounts.
(2) See Note 6, "Long-Term Debt."
(3) See Note 7, "Senior Secured Note Offering."
(4) The fair value of long-term debt and the Senior Secured Notes
are the value the Company would have to pay to retire the debt
or the Notes, including any premium or discount to the holder
for the differential between the stated interest rate and the
year-end market rate. The fair value of the long-term debt
and the Notes is based upon interest rates available to the
Company at year-end.
F-22
<PAGE> 74
LEASE OBLIGATIONS -
Future net minimum rental payments for office and office equipment
lease commitments as of December 31, 1995 aggregated approximately $180,000 and
$52,000 for 1996 and 1997, respectively.
Rental expense in the aggregate under noncancellable long-term
operating leases was approximately $165,000, $159,000 and $166,000 for 1995,
1994 and 1993, respectively.
(10) INCOME TAXES
The Company files a consolidated United States federal income tax
return for its United States incorporated entities.
The difference between the federal income tax statutory rate of 35%
and the effective tax rate of zero for such years reflected in the accompanying
consolidated statements of operations relates to the uncertainty of utilizing
future benefits from net operating loss carryforwards.
The Company did not pay any United States regular or alternative
minimum federal income taxes during the three- year period ended December 31,
1995 due to taxable losses in all three years.
At December 31, 1995, the Company had accumulated net operating loss
("NOL") carryforwards for United States federal income tax purposes of
approximately $21,287,000. Certain Company security transactions occurring
since 1986 have triggered changes in the stock ownership of the Company
aggregating more than 50% over a three-year period. Accordingly, NOL
carryforwards of approximately $5,455,000 arising prior to 1987 are limited to
approximately $755,000 of future utilization in the aggregate (expiring in the
year 2001), and certain NOLs are subject to limitations on the amounts that may
be used to reduce taxable income in any given year. Accordingly, the total net
operating loss carryforwards available to reduce federal income taxes in the
future are approximately $16,587,000. Such net operating loss carryforwards
expire as follows for the years ending December 31 (amounts in thousands):
<TABLE>
<S> <C>
1998 . . . . . . . . . . $ 550
2001 . . . . . . . . . . 205
2002 . . . . . . . . . . 90
2003 . . . . . . . . . . 1,555
2004 . . . . . . . . . . 755
2006 . . . . . . . . . . 1,045
2007 . . . . . . . . . . 1,150
2008 . . . . . . . . . . 1,449
2009 . . . . . . . . . . 3,316
2010 . . . . . . . . . . 6,472
------
$16,587
======
</TABLE>
F-23
<PAGE> 75
Under the provisions of SFAS 109, the income tax effects of temporary
differences between financial and income tax reporting and carryforwards that
give rise to deferred income tax assets and liabilities at December 31, 1995
and 1994 are as follows (amounts in thousands):
<TABLE>
<CAPTION>
December 31,
---------------------------
1995 1994
---- ----
<S> <C> <C>
Deferred tax assets:
Net operating loss carryforwards . . . . . . . . . . . . $ 5,805 $ 3,540
Accounts payable . . . . . . . . . . . . . . . . . . . . - 1,757
Other . . . . . . . . . . . . . . . . . . . . . . . . . 115 -
------ ------
Total deferred tax assets . . . . . . . . . . . . . . 5,920 5,297
Less valuation allowances . . . . . . . . . . . . . . (4,145) (2,472)
------ ------
Net deferred tax assets . . . . . . . . . . . . . . . $ 1,775 $ 2,825
------ ------
Deferred tax liabilities:
Intangible drilling costs . . . . . . . . . . . . . . . $(1,375) $(1,285)
Depreciation of property and
equipment . . . . . . . . . . . . . . . . . . . . . . (306) (294)
Accounts receivable . . . . . . . . . . . . . . . . . . - (1,152)
Other . . . . . . . . . . . . . . . . . . . . . . . . . (94) (94)
------ ------
Total deferred tax
liabilities . . . . . . . . . . . . . . . . . . . . (1,775) (2,825)
------ ------
Net deferred taxes . . . . . . . . . . . . . . . . . $ - $ -
====== ======
</TABLE>
(11) STOCKHOLDERS' EQUITY
COMMON STOCK -
During 1993, holders of 3,000 shares of Series A Preferred Stock
converted these shares into 42,857 common shares of the Company; and holders of
7,500 shares of Series B Preferred Stock converted these shares into an
aggregate of 192,300 common shares of the Company. Also during 1993 the
Company issued 101,850 common shares at an average price of $2.42 per share
pursuant to the exercise of stock options.
In June 1994, the Board of Directors adopted (and the shareholders
approved) an amendment to the Company's Certificate of Incorporation increasing
the number of authorized shares of the Company's common stock from 15,000,000
shares to 25,000,000 shares.
In June 1994, the Company sold 1,071,538 shares of unregistered
newly-issued common stock in a private placement at $3.25 per share for gross
proceeds of approximately $3,482,000. The Company also issued to an agent
267,369 shares of common stock in connection with the above sale and the
private placement sale of the Company's Series D Preferred Stock and Series E
Preferred Stock. Additionally, the Company issued to BER 25,000 shares of
common stock as part of the consideration for the purchase of the Bakersfield
Properties.
F-24
<PAGE> 76
Pursuant to the terms of the above private placement sale agreement of
common stock, the Company filed on December 20, 1994 a registration statement
with the Securities and Exchange Commission covering the resale of such shares
of common stock by the initial purchasers thereof. Also included in the
registration statement were an additional 1,778,869 shares of common stock,
which included shares issued in a November 1992 private placement sale, shares
issuable upon conversion of the Company's Series B and Series C Preferred Stock
and shares issuable upon exercise of certain warrants. The Company has agreed
to keep a registration statement continuously effective for at most three
years.
During 1994, the Company issued 15,000 common shares at a price of
$2.19 per share pursuant to the exercise of stock options and issued an
aggregate of 60,375 restricted shares of common stock to officers at $4.00 per
share. Also during 1994 the Company issued 16,671 common shares pursuant to
the payment of Series E Preferred Stock dividends.
The Company issued to ING Capital an aggregate of 75,000 shares of its
common stock during 1995 pursuant to the terms of its Bridge Loan.
In April 1995, holders of 2,500 shares of Series B Preferred Stock
converted their shares into 64,100 common shares of the Company.
The Company issued 16,671 and 16,770 common shares pursuant to the
payment of Series E Preferred Stock dividends during 1994 and 1995,
respectively.
WARRANT EXCHANGES -
In May 1995, BER exchanged its warrant to purchase 1,000,000 shares of
the Company's common stock at $5.00 per share for 182,500 unregistered shares
of the Company's common stock. The Company had ascribed a value of $850,000 to
the warrant upon its original issuance and has ascribed the same value to the
common stock issued in this exchange.
In July 1995, in connection with the Senior Secured Note Offering, the
Company and the Series D Holders effected an agreement pursuant to which the
Series D Holders exchanged their warrants to purchase shares of common stock
for unregistered common stock of the Company. The Series D Holders had
warrants to purchase 3,424,666 shares of common stock at an exercise price of
$3.67 per share at the time of the exchange. Pursuant to the agreement, the
Series D Holders exchanged all of their warrants for 1,100,000 unregistered
shares of common stock of the Company. This exchange agreement also contained
certain conditions including certain appreciation rights to the Series D
Holders effective during a two-year period following the exchange in the event
of a sale of the Company or its assets and certain registration rights to the
Series D Holders.
F-25
<PAGE> 77
Subsequent to December 31, 1995, 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.
PREFERRED STOCK -
The Series A 8% Convertible Preferred Stock, of which 5,000 shares are
outstanding, is convertible into common shares of the Company at $3.50 per
share, subject to certain anti-dilution provisions. At the Company's option,
the preferred stock may be redeemed. Upon liquidation of the Company, the
preferred shares have a preference over the common shares equal to the sum of
the aggregate offering price ($50 per share) plus accrued but unpaid dividends
thereon. The cumulative dividend of 8% is payable quarterly.
The Series B Preferred Stock, of which 20,000 shares are outstanding,
is convertible at the option of the respective holders into the Company's
common stock at $3.90 per share and will be automatically converted into common
stock of the Company at $3.90 per share on December 31, 1998. If the Company
merges or consolidates with, or sells all or substantially all of its assets
to, any entity which results in the stockholders of the Company owning less
than 50% of the voting power in the election of directors of such other entity;
or if any person other than Mark Harrington (Chairman of the Board, Chief
Executive Officer and director of the Company) acquires more than 50% of the
Company's outstanding common stock, then the conversion price shall be adjusted
to the then-current market price of the Company's common stock, but only if the
then-current market price is less than the conversion price. The Company may
at its option elect to redeem the Series B Preferred Stock at $150 per share at
any time after December 31, 1994, if the then-current market price of the
Company's common stock exceeds $5.85 per share for 20 of 30 consecutive trading
days. The cumulative dividend of 8% is payable quarterly.
The Series C 8% Convertible Preferred Stock, of which 10,000 shares
are outstanding at $100.00 per share, has substantially the same designations,
preferences and rights as the Series B 8% Convertible Preferred Stock.
Pursuant to the agreement with BER for the purchase of the Bakersfield
Properties, the Company issued 30,000 shares of Series E Junior Convertible
Preferred Stock (the "Series E Preferred
F-26
<PAGE> 78
Stock") to BER. The purchase price of the Series E Preferred Stock was $100.00
per share for an aggregate face value of $3,000,000. The Series E Preferred
Stock is convertible at the option of the holder into common stock at a
conversion price of $3.50 per share, subject to adjustment for certain stock
dividends, subdivisions, reclassifications or combinations with respect to the
common stock and for certain other distributions or events of consolidation,
merger or sale, lease or conveyance of all or substantially all of the assets
of the Company. The Series E Preferred Stock receives a cash dividend,
cumulative from the date of issuance of the Series E Preferred Stock and
payable quarterly in arrears commencing on September 30, 1994, at the rate of
$4.00 per share per annum until June 30, 1995, and thereafter at the rate of
$9.00 per share per annum. The Company has the option of paying dividends on
the Series E Preferred Stock either in cash or in shares of common stock. The
Series E Preferred Stock is redeemable in cash at any time, in whole or in
part, at the option of the Company, at a price of $110.00 per share, plus
accrued and unpaid dividends. The Company must redeem the Series E Preferred
Stock in cash upon completion of its first underwritten public offering of
securities following the issuance of the Series E Preferred Stock in which the
net proceeds received by the Company equal or exceed $20,800,000.
Each share of Series E Preferred Stock entitles the holder thereof to
such number of votes per share as equals the whole number of shares of common
stock into which each share of Series E Preferred Stock is then convertible,
and each share of Series E Preferred Stock is entitled to vote on all matters
as to which holders of common stock are to vote, in the same manner and with
the same effect as such holders of common stock, voting together with the
holders of common stock as one class, except for certain matters in which
holders of the Series E Preferred Stock have class voting rights. At any time
while a minimum of 50% of the shares of Series E Preferred Stock remain
outstanding, the Company shall not take any action to alter or repeal its
Certificate of Incorporation or Bylaws which would adversely affect the rights,
privileges or powers of the Series E Preferred Stock (other than the issuance
of additional series of stock or increases in the authorized amount of existing
series of stock) without the consent or approval of at least a majority of the
voting power of the Series E Preferred Stock. The Company may not pay any
dividend on its common stock unless all accrued dividends on the Series E
Preferred Stock have been paid.
F-27
<PAGE> 79
PREFERRED STOCK DIVIDENDS -
The Company has paid dividends on preferred stocks for the three years
ended December 31, 1995 as follows:
<TABLE>
<CAPTION>
Preferred Stock 1995 1994 1993
--------------- ---- ---- ----
<S> <C> <C> <C>
8% Convertible Series A, B, C. . $ 265,000 $280,000 $246,468
9% Redeemable Series D . . . . . 540,161 455,065 -
4%-9% Convertible Series E . . . 195,000 60,000 -
---------- -------- --------
$1,000,161 $795,065 $246,468
========== ======== ========
</TABLE>
Dividends on 8% Series A, Series B and Series C Preferred Stock were
paid in cash for all years presented.
Dividends on the 9% Series D Preferred Stock for 1994 and the first
two quarters of 1995 were paid, at the option of the Company, in additional
shares of Series D Preferred Stock. Remaining accrued dividends on the Series
D Preferred Stock were paid in cash at its redemption in July 1995.
Dividends on the Series E Preferred Stock for 1994 and the first two
quarters of 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 remaining two quarters of 1995. The coupon rate on the
Series E increased from 4% per annum to 9% per annum effective July 1, 1995.
(12) STOCK OPTIONS AND WARRANTS
STOCK OPTIONS -
In October 1992, the Board of Directors adopted the Company's 1992
Stock Option Plan and the Company's 1992 Nonemployee Directors' Stock Option
Plan. In May 1994, the Board of Directors adopted the Company's 1994 Stock
Option Plan and amended the 1992 Nonemployee Directors' Stock Option Plan to
increase the aggregate number of shares which may be issued under that plan.
These plans initially had available an aggregate of 1,525,000 shares of common
stock and allow the granting of options to purchase shares to employees,
officers and nonemployee directors of the Company at a price, for any incentive
stock options, not less than the fair market value of the common stock at the
time of grant. In case of options that do not constitute incentive stock
options, the options may not be less than 85% of the fair market value of the
shares at the time the option is granted. The options under these plans vest
over a two-year period and expire in five years.
In addition to the above stock option plans, the Company's Board of
Directors and Option Committee has, from time to time, granted options directly
to its officers and directors outside of the existing plans.
F-28
<PAGE> 80
Option transactions for the three years ended December 31, 1995 are
summarized as follows:
<TABLE>
<CAPTION>
Number of Options
-------------------------------------
Available
Exercise for Future
Outstanding Price Grant
----------- ------------ -----------
<S> <C> <C> <C>
Balance at December 31, 1992. 693,150 $2.19-$3.85 226,500
Expired . . . . . . . . . . (112,800) $3.30 -
Exercised . . . . . . . . . (101,850) $2.19-$2.80 -
Granted . . . . . . . . . . 167,000 $3.88-$4.68 (167,000)
--------- ---------
Balance at December 31, 1993. 645,500 $2.19-$4.68 59,500
Exercised . . . . . . . . . (15,000) $2.19 -
New plans or shares . . . . - - 1,100,000
Granted . . . . . . . . . . 330,000 $3.38-$4.33 (280,000)
--------- ---------
Balance at December 31, 1994. 960,500 $2.20-$4.68 879,500
Expired . . . . . . . . . . (62,000) $3.13-$4.68 62,000
Granted . . . . . . . . . . 150,000 $2.61-$3.71 (150,000)
--------- ---------
Balance at December 31, 1995. 1,048,500 $2.20-$4.68 791,500
========= =========
</TABLE>
At December 31, 1995, options to purchase 1,048,500 common shares were
outstanding under these plans and agreements (744,000 exercisable with prices
ranging from $2.20 to $4.68 per share). At December 31, 1995, the aggregate
exercise price of these exercisable options was $2,758,000. Subsequent to
December 31, 1995, an option to purchase 150,000 shares of common stock at
$4.875 per share was canceled pursuant to an exchange offer. (See Note 11.)
WARRANTS -
The Company has issued warrants in connection with certain of its
financings. Issuances of these warrants are described in other footnotes
herein pertaining to those transactions. All warrant transactions for the
three years ended December 31, 1995 are summarized as follows:
<TABLE>
<CAPTION>
Number of
Warrants Exercise
Outstanding Price
----------- ------------
<S> <C> <C>
Balance at December 31, 1992. . . 640,293 $3.20-$5.00
1993 Activity . . . . . . . . . - -
---------
Balance at December 31, 1993. . . 640,293 $3.20-$5.00
Granted . . . . . . . . . . . . 3,757,294 $4.65-$5.50
---------
Balance at December 31, 1994. . . 4,397,587 $3.20-$5.50
Expired . . . . . . . . . . . . (291,346) $5.00
Canceled. . . . . . . . . . . . (4,424,666) $4.75-$5.00
Granted . . . . . . . . . . . . 3,051,765 $3.85-$4.75
---------
Balance at December 31, 1995 2,733,340 $3.20-$5.50
=========
</TABLE>
At December 31, 1995, warrants to purchase 2,733,340 common shares
were outstanding and exercisable under all current warrant
F-29
<PAGE> 81
agreements. At December 31, 1995, the aggregate exercise price of these
warrants was $11,045,000. Subsequent to December 31, 1995, warrants to
purchase an aggregate of 576,000 common shares at prices ranging from $3.85 to
$5.50 per share were canceled pursuant to certain exchange agreements. (See
Note 11.)
In October 1995, the Financial Accounting Standards Board issued SFAS
No. 123, "Accounting for Stock-Based Compensation." SFAS No. 123 encourages
companies to account for stock-based compensation awards based on the fair
value of the awards at the date they are granted. The resulting compensation
cost would be shown as an expense in the statement of income. Companies can
choose not to apply the new accounting method and continue to apply current
accounting requirements; however, disclosure will be required as to what net
income and earnings per share would have been had the new accounting method
been followed. SFAS No. 123 is effective for calendar year 1996, and the
Company intends not to apply SFAS No. 123 in its statement of operations in
future periods.
(13) RESULTS OF OPERATIONS FOR OIL AND GAS PRODUCING ACTIVITIES
The following table sets forth the Company's results of operations for
oil and gas producing activities for the years ended December 31, 1995, 1994
and 1993 (amounts in thousands):
<TABLE>
<CAPTION>
1995 1994 1993
------- ------ ------
<S> <C> <C> <C>
Oil and gas revenues . . . . . . . . . . . . . . . . . . . . . . . . . . $16,030 $10,982 $6,507
Gas plant and related revenues . . . . . . . . . . . . . . . . . . . . . 6,362 1,978 -
------ ------ -----
22,392 12,960 6,507
------ ------ -----
Production costs . . . . . . . . . . . . . . . . . . . . . . . . . . . . 5,263 3,610 2,249
Gas plant operating costs . . . . . . . . . . . . . . . . . . . . . . . . 3,704 1,708 -
Exploration expenses . . . . . . . . . . . . . . . . . . . . . . . . . . 311 329 229
Depreciation - gas plant . . . . . . . . . . . . . . . . . . . . . . . . 316 159 -
Depletion, depreciation and
impairment . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 5,619 3,694 2,619
------ ------ -----
15,213 9,500 5,097
------ ------ -----
Income before income taxes . . . . . . . . . . . . . . . . . . . . . . . 7,179 3,460 1,410
Income tax expense . . . . . . . . . . . . . . . . . . . . . . . . . . . 2,513 1,211 479
------ ------ -----
Net income . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 4,666 $ 2,249 $ 931
====== ====== =====
</TABLE>
The results of operations from oil and gas producing activities were
determined in accordance with Statement of Financial Accounting Standards No.
69, "Disclosures About Oil and Gas Producing Activities" ("SFAS 69") and,
therefore, do not include corporate overhead, interest and other general income
and expense items.
The Company's depletion, depreciation and impairment expense
F-30
<PAGE> 82
for oil and gas properties per physical unit of production measured in barrel
of oil equivalents (with six Mcf of gas equalling one barrel of oil) was $4.26,
$4.26 and $5.13 for the years ended December 31, 1995, 1994 and 1993,
respectively. The Company's depletion and depreciation expense for 1995
included an impairment write-down of $876,000 relating to the implementation of
the provisions of SFAS 121. Excluding such impairment write-down, the
Company's depletion and depreciation expense was $3.60 per barrel of oil
equivalent for 1995.
(14) CAPITALIZED COSTS RELATING TO OIL AND GAS PRODUCING ACTIVITIES
The aggregate amounts of capitalized costs relating to the Company's
oil and gas producing activities and the related accumulated depletion,
depreciation, amortization and impairment at December 31, 1995 and 1994 were as
follows (amounts are in thousands):
<TABLE>
<CAPTION>
1995 1994
------- -------
<S> <C> <C>
Unproved properties. . . . . . . . $ 5,040 $ 7,414
Proved properties. . . . . . . . . 90,200 69,805
------- -------
Total capitalized costs. . . . . . 95,240 77,219
Less - accumulated depletion,
depreciation and amortization. . (22,501) (16,565)
------- -------
$ 72,739 $ 60,654
======= =======
</TABLE>
The following table sets forth the costs incurred, both capitalized
and expensed, in the Company's oil and gas property acquisition, exploration
and development activities for the years presented (amounts in thousands):
<TABLE>
<CAPTION>
1995 1994 1993
------ ------ ------
<S> <C> <C> <C>
Property acquisition costs -
Proved. . . . . . . . . . . . $ 407 $39,094 $5,148
Unproved. . . . . . . . . . . - 7,013 22
Exploration costs . . . . . . . 311 329 229
Development costs . . . . . . . 17,760 4,998 3,047
------ ------ -----
$18,478 $51,434 $8,446
====== ====== =====
</TABLE>
(15) MAJOR CUSTOMERS AND CREDIT RISK
Substantially all the Company's accounts receivable at December 31,
1995 result from oil and gas sales and joint interest billings to other
companies in the oil and gas industry. This concentration of customers and
joint interest owners may impact the Company's overall credit risk, either
positively or negatively, in
F-31
<PAGE> 83
that these entities may be similarly affected by industry-wide changes in
economic or other conditions. Such receivables are generally not
collateralized. Historically, credit losses incurred by the Company on
receivables generally have not been material. No known material credit losses
were experienced during 1995.
The Company grants short-term credit to its customers, primarily major
oil and gas companies, and generally receives payment within 30 to 60 days
after the month of production.
The following table summarizes the customers that accounted for more
than 10% of the Company's oil and gas revenues in at least one of the years
indicated:
<TABLE>
<CAPTION>
Customer 1995 1994 1993
-------------------------------- ---- ---- ----
<S> <C> <C> <C>
Cabot Oil and Gas Marketing Corp. . . - 21% -
Kern Oil and Refining . . . . . . . . 10% 17% -
Mock Resources, Inc. . . . . . . . . 24% - -
Valero Gas Marketing, L.P. . . . . . 10% - -
Washington Energy Marketing, Inc. . . - - 36%
</TABLE>
The Company considers its relationship with its current major
customers to be satisfactory.
(16) OIL AND GAS PRODUCING ACTIVITIES (UNAUDITED)
RESERVES -
The process of estimating proved developed and proved undeveloped oil
and gas reserves is very complex, requiring significant subjective decisions in
the evaluation of available geologic, engineering and economic data for each
reservoir. The data for a given reservoir may change over time as a result of,
among other things, additional development activity, production history and
viability of production under varying economic conditions. Consequently,
material revisions to existing reserve estimates may occur in the future.
Although every reasonable effort is made to ensure that reserve estimates are
based on the most accurate and complete information possible, the significance
of the subjective decisions required and variances in available data for
various reservoirs make these estimates generally less precise than other
estimates presented in connection with financial statement disclosures.
The Company's oil and gas reserves, shown below, all of which are
located in the continental United States, consist of proved developed and
undeveloped reserves which, based on subjective judgments, are estimated to be
recoverable in the future under existing economic and operating conditions.
The following table sets forth the changes in the Company's total
proved reserves for the years ended December 31, 1995, 1994 and 1993. The
reserve estimates for the Royalty Interests were
F-32
<PAGE> 84
prepared by Huddleston Engineering. All other U.S. reserve estimates for the
Company were prepared by Ryder Scott Company. Both firms are independent
petroleum engineering firms.
During 1993, additional proved undeveloped reserves were assigned to
STLP as a result of development activities on these properties. Proved
undeveloped reserves were also added in 1993 for a new waterflood project in
Lea County, New Mexico. A portion of the proved undeveloped reserves from new
waterflood projects was moved to the proved developed reserve category in 1993
as a result of a production response in one of the two projects during 1993.
Reserves in certain instances were revised downward as a result of lower oil
prices adversely affecting economic limits and also the reduced performance on
some projects.
During 1994, the acquisition of interests in the San Joaquin Basin
properties account for the reserve volumes purchased in 1994. Additional
development drilling work performed on the San Joaquin properties during the
last six months of 1994 has resulted in an extension of the proved undeveloped
reserve area and is reflected in the extension and discoveries. The improved
production performance of the properties has also resulted in an upward
revision of the proved reserves. Improved performance on certain Permian Basin
properties has also resulted in an increase in reserves. The less than
expected performance of the South Texas gas properties and reduced gas prices
at December 31, 1994 has resulted in downward revisions of the South Texas
reserves. Although gas prices were generally lower at December 31, 1994, as
compared to December 31, 1993, an increase in oil prices during the same period
provided an offset in revenue which prevented significant changes in economic
limits for various properties.
During 1995, the continued development drilling program on the San
Joaquin properties and the successful drilling of a step-out well on the Ellis
Lease resulted in a further extension of the proved undeveloped area which is
reflected in the extension and discoveries. The favorable gas production rates
on the properties also resulted in an upward revision of the proved gas
reserves. In 1995, the acquisition of interests in additional wells in the San
Joaquin properties and the acquisition of additional properties in the Permian
Basin account for the reserve volumes purchased in 1995.
F-33
<PAGE> 85
<TABLE>
<CAPTION>
Oil NGLs Gas
--------- ---- ---------
(Bbls) (Bbls) (Mcf)
--------- ---------- ---------
<S> <C> <C> <C>
Proved reserves
December 31, 1992 . . . . . . . . . . . . . . . . . . . 1,331,085 - 6,591,417
Revisions of previous estimates . . . . . . . . . . . (512,883) - (272,711)
Improved recovery . . . . . . . . . . . . . . . . . . 695,198 - 688,000
Extensions, discoveries and
other additions . . . . . . . . . . . . . . . . . . 58,604 - 7,645,825
Sales in place . . . . . . . . . . . . . . . . . . . (562) - (249,202)
Purchases in place . . . . . . . . . . . . . . . . . 334,685 - 4,750,447
Production . . . . . . . . . . . . . . . . . . . . . (181,759) - (1,984,820)
---------- --------- ----------
December 31, 1993 . . . . . . . . . . . . . . . . . . . 1,724,368 - 17,168,956
Revisions of previous estimates . . . . . . . . . . . 1,697,742 - 5,538,878
Improved recovery . . . . . . . . . . . . . . . . . . - - -
Extensions, discoveries and
other additions . . . . . . . . . . . . . . . . . . 950,013 - 5,356,714
Sales in place . . . . . . . . . . . . . . . . . . . (2,411) - (280,907)
Purchases in place . . . . . . . . . . . . . . . 6,523,611 2,994,273 45,344,000
Production . . . . . . . . . . . . . . . . . . . . . (311,831) (85,940) (3,325,641)
---------- --------- ----------
December 31, 1994 . . . . . . . . . . . . . . . . . . . 10,581,492 2,908,333 69,802,000
Revisions of previous estimates . . . . . . . . . . . (17,124) 102,106 10,118,498
Improved recovery . . . . . . . . . . . . . . . . . . - - -
Extensions, discoveries and
other additions . . . . . . . . . . . . . . . . . . 1,851,381 174,991 12,291,500
Sales in place . . . . . . . . . . . . . . . . . . . - - -
Purchases in place . . . . . . . . . . . . . . . . 404,508 - 561,281
Production . . . . . . . . . . . . . . . . . . . . . (462,533) (206,823) (5,137,079)
---------- --------- ----------
December 31, 1995 . . . . . . . . . . . . . . . . . . . 12,357,724 2,978,607 87,636,200
========== ========= ==========
Proved developed reserves -
December 31, 1993 . . . . . . . . . . . . . . . . . . . 869,328 - 11,361,784
========== ========= ==========
December 31, 1994 . . . . . . . . . . . . . . . . . . . 2,555,988 1,014,293 27,651,000
========== ========= ==========
December 31, 1995 . . . . . . . . . . . . . . . . . . . 2,801,504 939,088 32,474,000
========== ========= ==========
</TABLE>
F-34
<PAGE> 86
STANDARDIZED MEASURES OF DISCOUNTED FUTURE NET CASH FLOWS -
The Company's standardized measure of discounted future net cash
flows, and changes therein, related to proved oil and gas reserves are as
follows (amounts in thousands):
<TABLE>
<CAPTION>
1995 1994 1993
------ ------ ------
<S> <C> <C> <C>
Future cash inflow . . . . . . . . . . . . . . . . . . . . . . . $478,302 $375,585 $57,052
Future production, development and
abandonment costs . . . . . . . . . . . . . . . . . . . . . . . (238,517) (215,163) (22,662)
------- ------- ------
Future cash flows before income taxes . . . . . . . . . . . . . . 239,785 160,422 34,390
Future income taxes . . . . . . . . . . . . . . . . . . . . . . (47,082) (27,228) (4,747)
------- ------- ------
Future net cash flows . . . . . . . . . . . . . . . . . . . . . . 192,703 133,194 29,643
10% discount factor . . . . . . . . . . . . . . . . . . . . . . . (81,798) (52,381) (11,835)
------- ------- ------
Standardized measure of discounted
future net cash flow . . . . . . . . . . . . . . . . . . . . . $110,905 $ 80,813 $17,808
======= ======= ======
Changes in standardized measure
of discounted future net cash flows:
Sales of oil, gas and natural gas
liquids, net of production costs . . . . . . . . . . . . . $(10,857) $ (7,643) $(4,194)
Extensions, discoveries and other
additions . . . . . . . . . . . . . . . . . . . . . . . . . 13,667 6,381 9,015
Revisions of estimates of reserves
proved in prior years:
Quantity estimated . . . . . . . . . . . . . . . . . . . . 7,685 16,144 (3,070)
Net changes in price and production
costs . . . . . . . . . . . . . . . . . . . . . . . . . . 22,261 (6,446) (2,931)
Accretion of discount . . . . . . . . . . . . . . . . . . . . 8,668 2,098 1,693
Purchases of reserves in place . . . . . . . . . . . . . . . 3,252 57,001 6,406
Sales of reserves in place . . . . . . . . . . . . . . . . . - (342) (238)
Development costs incurred . . . . . . . . . . . . . . . . . (16,691) (977) 2,854
Changes in future development costs . . . . . . . . . . . . . 17,167 790 (1,913)
Net change in income taxes . . . . . . . . . . . . . . . . . (7,725) (2,696) (2,442)
Changes in production rates (timing)
and other . . . . . . . . . . . . . . . . . . . . . . . . . (7,335) (1,305) (1,162)
------- ------- ------
Net change . . . . . . . . . . . . . . . . . . . . . . . . . $ 30,092 $ 63,005 $ 4,018
======= ======= ======
</TABLE>
Estimated future cash inflows are computed by applying year-end prices
of oil and gas to year-end quantities of proved reserves. Future price changes
are considered only to the extent provided by contractual arrangements.
Estimated future development and production costs are determined by estimating
the expenditures to be incurred in developing and producing the proved oil and
gas reserves at the end of the year, based on year-end costs and assuming
continuation of existing economic conditions. Estimated future income tax
expense is calculated by applying year-end statutory tax rates to estimated
future pretax net cash flows related to proved oil and gas reserves, less the
tax basis (including net operating loss carryforwards projected to be usable)
of the properties involved.
These estimates were determined in accordance with SFAS 69. Because
of unpredictable variances in expenses and capital
F-35
<PAGE> 87
forecasts, crude oil and natural gas prices and the fact that the bases for
such volume estimates vary significantly, management believes the usefulness of
this data is limited. These estimates of future net cash flows do not
necessarily represent management's assessment of estimated fair market value,
future profitability or future cash flow to the Company. Management's
investment and operating decisions are based upon reserve estimates that
include proved as well as probable reserves and upon different price and cost
assumptions from those used herein.
The 1993 revisions of previous estimates of oil and gas reserves
reflect the significant decrease in oil prices from 1992 to 1993 and downward
adjustments due to performance on certain properties. The purchases in place
of oil and gas reserves reflect the acquisition of a larger interest in STLP
and the acquisition of interests in additional properties in Lea County, New
Mexico. Sales in place reflect the sale of two minor properties in STLP.
Extensions and discoveries are primarily a result of drilling activity on the
STLP properties during 1993. Improved recovery was primarily the result of
projected recovery from an additional secondary recovery project in Lea County,
New Mexico. The increased production rates in 1993 reflect a full year of
production from interests acquired in 1992 and production from additional
property interests acquired during 1993.
The 1994 revisions of the purchase of reserves in place reflect the
acquisition of the property interests in the San Joaquin Basin, California.
The extension and discoveries are a result of the extension of the proved
undeveloped area of the San Joaquin Leases. The upward revisions are primarily
a result of improved performance on the San Joaquin properties which offset the
under performance of certain South Texas Properties. The sales of oil and gas
are significantly increased reflecting the production from the San Joaquin
properties purchased June 30, 1994.
The 1995 upward revision in extensions and discoveries reflects the
increased proved undeveloped area on the Ellis Lease in the San Joaquin
properties which resulted from the development drilling activity and the
drilling of a step-out well. Revisions of previous estimates of proved
reserves are largely a result of favorable gas production on the San Joaquin
properties. The net changes in prices and production costs are primarily a
reflection of higher crude oil prices at December 31, 1995, as compared to
prior year. Reserve purchases include the acquisition of interests in
additional San Joaquin wells and the acquisition of additional properties in
the Permian Basin.
The future cash flows presented in the "Standardized Measures of
Discounted Future Net Cash Flows" are based on contract prices for oil and gas
for contracted volumes over the contract period, as applicable, and year-end
1995 oil and gas prices for oil and gas volumes not covered under oil and gas
contracts. (See Note 9.)
F-36
<PAGE> 88
EXHIBIT INDEX
<TABLE>
<S> <C>
3.1 Registrant's Certificate of Incorporation, as amended through July 13, 1995. (1)
3.2 Certificate of Ownership and Merger dated March 6, 1996, merging HTAC Investments, Inc. into the
Registrant. (15)
3.3 Certificate of Ownership and Merger dated March 6, 1996, merging Warrior, Inc. into the Registrant. (15)
3.4 Registrant's Bylaws, as amended. (1)
4.1 Certificate of Designation, Powers, Preferences and Rights of the Series A Preferred Stock of the
Registrant. (2)
4.2 Certificate of Designation, Powers, Preferences and Rights of the Series B Convertible Preferred Stock
of the Registrant. (2)
4.3 Certificate of Designation, Powers, Preferences and Rights of the Series C Convertible Preferred Stock
of the Registrant. (2)
4.4 Certificate of Designation, Powers, Preferences and Rights of the Series E Junior Convertible Preferred
Stock of the Registrant. (2)
4.5 Warrant to Trust Company of the West dated November 23, 1992. (4)
4.6 Amendment No. 1 dated July 30, 1994 to Warrant Certificate dated November 23, 1992 between HarCor
Energy, Inc. and Trust Company of the West. (12)
4.7 Amendment No. 2 dated November 1, 1994 to Warrant Certificate dated November 23, 1992 between HarCor
Energy, Inc. and Trust Company of the West. (11)
4.8 Amended and Restated Registration Rights Agreement dated as of July 30, 1994 between the Registrant and
Trust Company of the West. (12)
4.9 Warrant to Internationale Nederlanden (U.S.) Capital Corporation dated November 20, 1989, as amended in
December, 1990 and on March 18, 1994. (7)
4.10 Warrant to First Union National Bank of North Carolina dated June 30, 1994. (12)
4.11 Amendment No. 1, dated February 12, 1996, to Warrant to First Union National Bank of North
Carolina dated as of June 30, 1994. (15)
</TABLE>
<PAGE> 89
<TABLE>
<S> <C>
4.12 Registration Rights Agreement between the Registrant and First Union National Bank of North
Carolina dated as of June 30, 1994. (12)
4.13 Amendment No. 1, dated February 12, 1996, to Registration Rights Agreement between the Registrant
and First Union National Bank of North Carolina dated as of June 30, 1994. (15)
4.14 Specimen of Common Stock Certificate. (9)
4.15 Stock Purchase Agreement dated as of June 27, 1994 among HarCor Energy, Inc. and the Purchasers
named on Schedule I thereto. (12)
4.16 Form of Warrant to Rauscher, Pierce, Refsnes, Inc. (13)
4.17 Warrant Agreement among HarCor Energy, Inc. and Texas Commerce Bank National Association as
warrant agent dated July 24, 1995. (14)
4.18 Preferred Stock Warrant Agreement between HarCor Energy, Inc. and BT Securities Corporation dated
July 24, 1995. (14)
4.19 Registration Rights Agreement among HarCor Energy, Inc., Warrior, Inc., HTAC Investments, Inc.,
BT Securities Corporation and Internationale Nederlanden (U.S.) Securities Corporation dated
July 24, 1995. (14)
4.20 Securityholders' and Registration Rights Agreement among HarCor Energy, Inc., Warrior, Inc., HTAC
Investments, Inc. and Texas Commerce Bank National Association, as trustee, dated July 24, 1995.
(14)
4.21 Indenture among HarCor Energy, Inc., Warrior, Inc., HTAC Investments, Inc. and Texas Commerce
Bank National Association, as trustee, dated July 24, 1995, including forms of Series A Note and
Exchange Note as Exhibits A-1 and A-2 thereto, respectively. (14)
4.22 First Supplemental Indenture dated as of October 11, 1995 to Indenture filed as Exhibit 4.21.
(14).
10.1 Amended and Restated Credit Agreement between HarCor Energy, Inc. and Internationale Nederlanden
(U.S.) Capital Corporation, as Agent, and the Lenders identified therein dated as of July 15,
1995. (14)
10.3 Deed of Trust, Mortgage, Line of Credit Mortgage, Assignment, Security Agreement and Financing
Statement from HarCor Energy, Inc. to Trond D. Rokholt, Trustee and Internationale Nederlanden
(U.S.) Capital Corporation, Lender dated March 18, 1994. (7)
10.4 First Amendment to Deed of Trust, Mortgage, Line of Credit Mortgage, Assignment, Security
Agreement and Financing Statement dated June 30, 1994 by HarCor Energy, Inc. for the benefit of
International Nederlanden (U.S.) Capital Corporation, in its capacity as Agent for itself and
First Union National Bank of North Carolina. (12)
10.5 Deed of Trust, Mortgage, Line of Credit Mortgage, Assignment, Security Agreement Fixture Filing
and
</TABLE>
<PAGE> 90
<TABLE>
<S> <C> <C>
Financing Statement from HarCor Energy, Inc. to Trond D. Rokholt, Trustee and Internationale
Nederlanden (U.S.) Capital Corporation, Lender dated June 30, 1994. (10)
10.6 Agreement of Dissolution and Termination dated March 18, 1994 between Washington Energy
Exploration, Inc. and HarCor Energy, Inc. (7)
10.7 Purchase Agreement dated December 4, 1987 by and between HarCor Energy Inc. and Harrington and
Company EV Fund I, Limited. (5)
* 10.8 HarCor Energy, Inc. 1992 Stock Option Plan. (9)
* 10.9 Form of Incentive Stock Option Agreement and Nonstatutory Stock Option Agreement for options
issued under the HarCor Energy, Inc. 1992 Stock Option Plan. (6)
* 10.10 HarCor Energy, Inc. 1992 Nonemployee Directors' Stock Option Plan and form of Option Agreement,
as amended. (8)
* 10.11 HarCor Energy, Inc. 1994 Stock Option Plan and related forms of Incentive Stock Option Agreement
and Nonstatutory Stock Option Agreement. (8)
10.12 Purchase and Sale or Exchange Agreement dated April 18, 1994 between HarCor Energy Inc. and
Bakersfield Energy Resources, Inc., Bakersfield Energy Partners, L.P. and Bakersfield Gas, L.P.
(9)
10.13 Amendment to Purchase and Sale or Exchange Agreement dated June 8, 1994 by and between HarCor
Energy, Inc. and Bakersfield Energy Resources, Inc., Bakersfield Energy Partners, L.P. and
Bakersfield Gas, L.P. (9)
* 10.14 Form of Restricted Stock Agreements between HarCor Energy, Inc. and its officers. (11)
23.2 Consent of Ryder Scott Company Petroleum Engineers. (15)
23.3 Consent of Huddleston & Co., Inc. (15)
23.4 Consent of Arthur Andersen LLP. (15)
27 Financial Data Schedule (15)
____________________________________________________________________________________________________________________________________
</TABLE>
* Management contract or compensatory plan or arrangement required to
be filed as an exhibit to this Form 10-K pursuant to Item 14(c) of
this report.
(1) Filed as an Exhibit to the Registrant's Registration Statement on
Form S-4 (Reg. No. 33-62007) and incorporated herein by reference.
(2) Included in Exhibit 3.1.
(3) Filed as an exhibit to Registrant's Amendment No. 1 to its Form
10-Q for the period ended September 30, 1992 dated as of December
5, 1992 and filed with the Commission on December 7, 1992 (No.
0-9300) and incorporated herein by reference.
(4) Filed as an exhibit to Registrant's Form 8-K dated as of November
23, 1992 and filed with the Commission on December 7, 1992 (No.
0-9300) and incorporated herein by reference.
<PAGE> 91
(5) Filed as an exhibit to Registrant's Form 10-K for the year ended
December 31, 1987 (No. 0-9300) and incorporated herein by
reference.
(6) Filed as an exhibit to the Registrant's definitive proxy statement
for its 1992 Annual Meeting of Stockholders (No. 0-9300) and
incorporated herein by reference.
(7) Filed as an exhibit to Registrant's Form 10-K for the year ended
December 31, 1993 (No. 0-9300) and incorporated herein by
reference.
(8) As filed as an exhibit to Registrant's definitive proxy statement
for its 1994 Annual Meeting of Stockholders (No. 0-9300) and
incorporated herein by reference.
(9) Filed as an exhibit to Registrant's Registration Statement on Form
S-1 (No. 33-80942) and incorporated herein by reference.
(10) Filed as an exhibit to Registrant's Form 10-Q for the quarterly
period ended June 30, 1994 (No. 0-9300) and incorporated herein
by reference.
(11) Filed as an exhibit to Registrant's Form 10-Q for the quarterly
period ended September 30, 1994 (No. 0-9300) and incorporated
herein by reference.
(12) Filed as an exhibit to Registrant's Registration Statement on
Form S-1 filed on June 30, 1994 (No. 33-8446) and incorporated
herein by reference.
(13) Filed as an exhibit to Amendment No. 1 to Registrant's
Registration Statement on Form S-1 filed on December 20, 1994
(No. 33-8446) and incorporated herein by reference.
(14) Filed as an exhibit to HarCor Energy, Inc.'s Form 8-K dated as
of July 20, 1995 and incorporated herein by reference.
(15) Filed herewith.
<PAGE> 1
EXHIBIT 3.2
STATE OF DELAWARE
OFFICE OF THE SECRETARY OF STATE
-------------------
I, EDWARD J. FREEL, SECRETARY OF STATE OF THE STATE OF DELAWARE, DO
HEREBY CERTIFY THE ATTACHED IS A TRUE AND CORRECT COPY OF THE CERTIFICATE OF
OWNERSHIP, WHICH MERGES:
"HTAC INVESTMENTS, INC.", A CALIFORNIA CORPORATION,
WITH AND INTO "HARCOR ENERGY, INC. UNDER THE NAME OF "HARCOR ENERGY,
INC.", A CORPORATION ORGANIZED AND EXISTING UNDER THE LAWS OF THE STATE OF
DELAWARE, AS RECEIVED AND FILED IN THIS OFFICE THE SIXTH DAY OF MARCH, A.D.
1996, AT 12 O'CLOCK P.M.
A CERTIFIED COPY OF THIS CERTIFICATE HAS BEEN FORWARDED TO THE NEW
CASTLE COUNTY RECORDER OF DEEDS FOR RECORDING.
/s/ EDWARD J. FREEL
Edward J. Freel, Secretary of State
2126867 8100M AUTHENTICATION: 7855077
960065602 DATE: 03-06-96
<PAGE> 2
CERTIFICATE OF OWNERSHIP AND MERGER
MERGING
HTAC INVESTMENTS, INC.
INTO
HARCOR ENERGY, INC.
HarCor Energy, Inc., a corporation organized and existing under the
laws of the State of Delaware, does hereby certify:
FIRST: That this corporation was incorporated on the 25th day of May,
1987, pursuant to the General Corporation Law of the State of Delaware.
SECOND: That this corporation owns all of the outstanding shares of
the stock of HTAC Investments, Inc., a corporation incorporated on the 25th day
of April, 1990, pursuant to the General Corporation Law of the State of
California.
THIRD: That this corporation, by the following resolutions of its
Board of Directors, duly adopted by the unanimous written consent of its
members, on the 5th day of March, 1996, determined to and did merge into itself
said HTAC Investments, Inc.:
RESOLVED, that HarCor Energy, Inc. merge, and it hereby does merge
into itself HTAC Investments, Inc., a California corporation, and assumes all
its liabilities and obligations; and
FURTHER RESOLVED, that the merger shall be effective upon the date of
filing a Certificate of Ownership and Merger with respect to such merger with
the Secretary of State of Delaware.
FURTHER RESOLVED, that the Chairman of the Board, the President or any
Vice President of this corporation be and he hereby is directed to make and
execute a Certificate of Ownership and Merger setting forth a copy of the
resolutions to merge said HTAC Investments, Inc. and assume its liabilities and
obligations, and the date of adoption thereof, and to cause the same to be
filed with the Secretary of State and to do all acts and things whatsoever,
whether within or without the State of Delaware, which may be in anywise
necessary or proper to effect said merger.
<PAGE> 3
IN WITNESS WHEREOF, said HarCor Energy, Inc. has caused this
Certificate to be signed by Gary S. Peck, its Vice President-Finance, this 6th
day of March, 1996.
HARCOR ENERGY, INC.
By: /s/ GARY S. PECK
Gary S. Peck
Vice President-Finance
-3-
<PAGE> 1
EXHIBIT 3.3
STATE OF DELAWARE
OFFICE OF THE SECRETARY OF STATE
-----------------
I, EDWARD J. FREEL, SECRETARY OF STATE OF THE STATE OF DELAWARE, DO
HEREBY CERTIFY THE ATTACHED IS A TRUE AND CORRECT COPY OF THE CERTIFICATE OF
OWNERSHIP, WHICH MERGES:
"WARRIOR, INC.", A TEXAS CORPORATION,
WITH AND INTO "HARCOR ENERGY, INC. UNDER THE NAME OF "HARCOR ENERGY,
INC.", A CORPORATION ORGANIZED AND EXISTING UNDER THE LAWS OF THE STATE OF
DELAWARE, AS RECEIVED AND FILED IN THIS OFFICE THE SIXTH DAY OF MARCH, A.D.
1996, AT 12 O'CLOCK P.M.
A CERTIFIED COPY OF THIS CERTIFICATE HAS BEEN FORWARDED TO THE NEW
CASTLE COUNTY RECORDER OF DEEDS FOR RECORDING.
/s/ EDWARD J. FREEL
Edward J. Freel, Secretary of State
2126867 8100M AUTHENTICATION: 7855112077
9600656092 DATE: 03-06-96
<PAGE> 2
CERTIFICATE OF OWNERSHIP AND MERGER
MERGING
WARRIOR, INC.
INTO
HARCOR ENERGY, INC.
HarCor Energy, Inc., a corporation organized and existing under the
laws of the State of Delaware, does hereby certify:
FIRST: That this corporation was incorporated on the 25th day of May,
1987, pursuant to the General Corporation Law of the State of Delaware.
SECOND: That this corporation owns all of the outstanding shares of
the stock of Warrior, Inc., a corporation incorporated on the 5th day of
October, 1976, pursuant to the Texas Business Corporation Act.
THIRD: That this corporation, by the following resolutions of its
Board of Directors, duly adopted by the unanimous written consent of its
members, on the 5th day of March, 1996, determined to and did merge into itself
said Warrior, Inc.:
RESOLVED, that HarCor Energy, Inc. merge, and it hereby does merge
into itself Warrior, Inc., a Texas corporation, and assumes all its liabilities
and obligations; and
FURTHER RESOLVED, that the merger shall be effective upon the date of
filing a Certificate of Ownership and Merger with respect to such merger with
the Secretary of State of Delaware.
FURTHER RESOLVED, that the Chairman of the Board, the President or any
Vice President of this corporation be and he hereby is directed to make and
execute a Certificate of Ownership and Merger setting forth a copy of the
resolutions to merge said Warrior, Inc. and assume its liabilities and
obligations, and the date of adoption thereof, and to cause the same to be
filed with the Secretary of State of Delaware and to do all acts and things
whatsoever, whether within or without the State of Delaware (including the
preparation and filing of Articles of Merger with the Secretary of State of
Texas), which may be in anywise necessary or proper to effect said merger.
<PAGE> 3
IN WITNESS WHEREOF, said HarCor Energy, Inc. has caused this
Certificate to be signed by Gary S. Peck, its Vice President-Finance, this 6th
day of March, 1996.
HARCOR ENERGY, INC.
By: /s/ GARY S. PECK
Gary S. Peck
Vice President-Finance
-3-
<PAGE> 1
EXHIBIT 4.11
AMENDMENT NO. 1
TO
WARRANT NO. 1 (FUNBNC)
to Purchase up to an Aggregate of 200,000
Shares of Common Stock of
HarCor Energy, Inc.
This Amendment is made this 12th day of February 1996 by HarCor
Energy, Inc., a Delaware corporation (hereafter, "HarCor").
WITNESSETH:
WHEREAS, on June 24, 1994, HarCor entered into a financing transaction
with First Union National Bank of North Carolina ("FUNBNC") to borrow certain
funds; and, in connection with that borrowing, FUNBNC acquired a certain
warrant dated June 30, 1994 from HarCor entitling FUNBNC to purchase, subject
to its provisions, up to 200,000 shares of the Common Stock, par value $.10 of
HarCor at a price of $4.75 per share, and terminating on December 31, 1999
(hereinafter the "Warrant") and
WHEREAS, the said Warrant was issued by HarCor to FUNBNC who presently
holds the same, and
WHEREAS, the parties desire to amend the said Registration Rights
Agreement to provide that the Shares issued under the cashless option provision
of the said First
1
<PAGE> 2
Union Warrant will only have "piggy back" registration rights, and
WHEREAS, HarCor and FUNBNC desire to amend the said Warrant for the
purposes expressed herein;
NOW, THEREFORE, in consideration of the premises and the mutual
covenants and agreements between HarCor and FUNBNC and for other good and
valuable consideration, the receipt and sufficiency of which are hereby
acknowledged, HarCor, with the agreement and consent of FUNBNC, hereby issues
this first Amendment to the said Warrant.
1. Unless the context of this Amendment otherwise requires or
unless otherwise expressly defined herein, the terms defined
in the Warrant shall have the same meanings whenever used in
this Amendment.
2. The following Paragraph 6C is hereby added to the said Warrant
as follows:
"6C. Cashless Option Right
(a) FUNBNC is hereby granted the option to
exercise the right to purchase 25,000 shares of Common
Stock without payment of the Exercise Price by
surrendering for cancellation its right hereunder to
purchase 100,000 shares of Common Stock.
(b) FUNBNC shall exercise this option by giving
the Corporation written notice of its intention to
exercise this cashless exercise right on or before March
8, 1996.
(c) Upon receipt of such notice, FUNBNC's
entitlement to purchase 200,000 shares of Common Stock
hereunder will be reduced to 100,000 shares of Common
Stock, but all other rights hereunder shall remain in
effect but adjusted to reflect this reduction.
(d) Within 20 days after the receipt of such
notice, the Company shall issue 25,000 shares of Common
Stock under and in accordance with the provisions of
this agreement in exchange for the
2
<PAGE> 3
cancellation of FUNBNC's right to purchaser 100,000
Shares of Common Stock hereunder, and FUNBNC shall not
be required to pay the Exercise Price for such 25,000
shares. The said 25,000 shares shall be deemed to be
fully paid and non-assessable."
3. No other terms and conditions of the Warrant are changed by this
Amendment, and, except as set out herein, this Amendment shall not
operate as a waiver of any provision of the Warrant or as a waiver
of any remedy of the Holder of the Warrant.
4. This Amendment shall become effective as of the date first written
above upon execution and shall be governed by the laws of the
State of Delaware without regard to conflict of law principles.
Executed this 12th day of February 1996.
Attest: HARCOR ENERGY, INC.
by /s/ GARY S. PECK by /s/ FRANCIS H. ROTH
-------------------------- --------------------------
Gary S. Peck, Secretary Francis H. Roth, President
Approved:
FIRST UNION NATIONAL BANK OF NORTH CAROLINA
by /s/
------------------------
its
------------------------
3
<PAGE> 1
EXHIBIT 4.13
AMENDMENT NO. 1
TO
REGISTRATION RIGHTS AGREEMENT
This Amendment is made this 12th day of February 1996 by HARCOR
ENERGY, INC., a Delaware corporation (the "Company") and FIRST UNION NATIONAL
BANK OF NORTH CAROLINA ("First Union").
WITNESSETH:
WHEREAS, on June 24, 1994, HarCor entered into a financing transaction
with First Union to borrow certain funds; and, in connection with that
borrowing, First Union acquired a certain warrant dated June 30, 1994 from
HarCor entitling First Union to purchase, subject to its provisions, up to
200,000 shares of the Common Stock, par value $.10 of HarCor at a price of
$4.75 per share, expiring on December 31, 1999 (hereinafter the "Warrant
Certificate") and
WHEREAS, the parties entered into a Registration Rights Agreement
dated June, 30, 1994 (the "Registration Rights Agreement) that grants certain
registration
1
<PAGE> 2
rights to First Union for the "Registrable Shares" as that term is defined
therein, issued pursuant to the said Warrant Certificate, and
WHEREAS, the parties desire to amend the said Registration Rights
Agreement to provide that the Shares issued under the cashless option provision
of the said Warrant Certificate will have "piggy back" registration rights
only, and
WHEREAS, the parties desire to amend the said Registration Rights
Agreement for the purposes expressed herein;
NOW, THEREFORE, in consideration of the premises and the mutual
covenants and agreements between the said parties and for other good and
valuable consideration, the receipt and sufficiency of which are hereby
acknowledged, the said parties agree to amend the Registration Rights Agreement
as follows:
1. The first paragraph of Section 2 (a) of the Registration
Rights Agreement shall be amended by adding the following
sentence at the end of such paragraph:
"notwithstanding anything contained herein to the
contrary, no Registrable Shares issued upon the
exercise of the cashless option in Section 6C of the
Warrant Certificate, as amended, shall be eligible
for the demand registrations provided in this Section
2(a). The Holder shall only have the rights set out
in Section 2(b) to "piggy back" registrations for
such Registrable Shares."
2. Unless the context of this Amendment otherwise requires or
unless otherwise expressly defined herein, the terms defined
in the Warrant Certificate shall have the same meanings
whenever used in this Amendment.
3. No other terms and conditions of the Registration Rights
Agreement are changed by this Amendment, and, except as set
out herein, this
2
<PAGE> 3
Amendment shall not operate as a waiver of any provision of or
remedy under the Registration Rights Agreement.
4. This Amendment shall become effective as of the date first
written above upon execution and shall be governed by the laws
of the State of Delaware without regard to conflict of law
principles.
Executed this 12th day of February 1996.
Attest: HARCOR ENERGY, INC.
by /s/ GARY S. PECK by /s/ FRANCIS H. ROTH
----------------------- ---------------------------
Gary S. Peck, Secretary Francis H. Roth, President
FIRST UNION NATIONAL BANK OF NORTH CAROLINA
by /s/
-----------------------------
its
-----------------------------
3
<PAGE> 1
EXHIBIT 23.2
CONSENT OF INDEPENDENT PETROLEUM CONSULTANTS
As independent petroleum consultants, Ryder Scott Company hereby consents
to (i) the reference to our Firm as experts, (ii) the summarization of our
report entitled "Estimated Future Reserves and Income Attributable to Certain
Leasehold and Royalty Interests of HarCor Energy, Inc. As of January 1, 1996",
as detailed in Form 10-K for the year ended December 31, 1995 for HarCor
Energy, Inc. filed with the Securities and Exchange Commission in March, 1996
and (iii) the incorporation by reference of such Form 10-K in the Registration
Statement on Form S-8 relating to the HarCor Energy, Inc. 1992 Non-Employee
Directors' Stock Option Plan filed with the Securities and Exchange Commission
on or about April 1, 1996 and any amendment thereto that incorporates by
reference such Form 10-K.
/s/ RYDER SCOTT COMPANY
PETROLEUM ENGINEERS
RYDER SCOTT COMPANY
PETROLEUM ENGINEERS
Houston, Texas
March__, 1996
<PAGE> 1
EXHIBIT 23.3
[HUDDLESTON & CO., INC. LETTERHEAD]
CONSENT OF INDEPENDENT PETROLEUM ENGINEER
As independent petroleum consultants, Huddleston & Co., Inc., hereby consents
to (i) the reference to our Firm as experts, (ii) the summarization of our
report entitled "HarCor Energy, Inc., Estimated Future Reserves and Revenues
for Certain Properties as of January 1, 1996, "as detailed in Form 10-K for the
year ended December 31, 1995, for HarCor Energy, Inc., filed with the
Securities and Exchange Commission in March, 1996, and (iii) the incorporation
by reference of such Form 10-K in the Registration Statement on Form S-8
relating to the HarCor Energy, Inc. 1992 Non-Employee Directors' Stock Option
Plan filed with the Securities and Exchange Commission on or about April 1,
1996, and any amendment thereto that incorporates by reference such Form 10-K.
HUDDLESTON & CO., INC.
By: /s/ Peter D. Huddleston, P.E.
------------------------------
Peter D. Huddleston, P.E.
President
Houston, Texas
March 27, 1996
<PAGE> 1
EXHIBIT 23.4
Consent of Independent Public Accountants
-----------------------------------------
As independent public accountants, we hereby consent to the incorporation of
our report included in this Form 10-K, into the Company's previously filed S-8
Registration Statement File No. 33-69312 and S-3 Registration Statement File
NO. 33-84496.
ARTHUR ANDERSEN LLP
Houston, Texas
March 27, 1996
<TABLE> <S> <C>
<ARTICLE> 5
<CIK> 0000315272
<NAME> HARCOR ENERGY, INC.
<MULTIPLIER> 1
<CURRENCY> U.S. DOLLARS
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> DEC-31-1995
<PERIOD-START> JAN-01-1995
<PERIOD-END> DEC-31-1995
<EXCHANGE-RATE> 1
<CASH> 12,204,460
<SECURITIES> 0
<RECEIVABLES> 3,829,548
<ALLOWANCES> 0
<INVENTORY> 0
<CURRENT-ASSETS> 16,316,841
<PP&E> 95,495,389
<DEPRECIATION> 22,647,657
<TOTAL-ASSETS> 94,231,477
<CURRENT-LIABILITIES> 14,991,508
<BONDS> 68,708,608<F1>
<COMMON> 863,121
0
650
<OTHER-SE> 9,351,121
<TOTAL-LIABILITY-AND-EQUITY> 94,231,477
<SALES> 22,391,708
<TOTAL-REVENUES> 22,595,269
<CGS> 8,967,284<F2>
<TOTAL-COSTS> 0
<OTHER-EXPENSES> 9,511,079<F3>
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 8,993,283<F4>
<INCOME-PRETAX> (2,729,565)
<INCOME-TAX> 0
<INCOME-CONTINUING> 0
<DISCONTINUED> 0
<EXTRAORDINARY> (1,888,433)
<CHANGES> 0
<NET-INCOME> (7,764,971)
<EPS-PRIMARY> (.98)
<EPS-DILUTED> (.98)
<FN>
<F1>LONG-TERM SECURED BANK DEBT = 5,600,000 SENIOR NOTES = 63,108,608
<F2>INCLUDES OIL & GAS PRODUCTION & GAS PLANT COSTS
<F3>INCLUDES EXPLORATION DD&A, G&A EXPENSES & OTHER
<F4>INCLUDES INTEREST EXPENSE & ACCRETION ON PREFERRED STOCK
</FN>
</TABLE>
