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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
FOR THE FISCAL YEAR ENDED DECEMBER 31, 1996
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE
SECURITIES EXCHANGE ACT OF 1934
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:
TITLE OF EACH CLASS NAME OF EACH EXCHANGE
------------------- ON WHICH REGISTERED
---------------------
NONE NONE
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 24, 1997, the registrant had 15,170,836 shares of common stock
outstanding. The aggregate market value on March 24, 1997 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 $73,588,000
(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. [ x ]
Document incorporated by reference: None.
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HARCOR ENERGY, INC.
PART I
ITEM 1. DESCRIPTION OF BUSINESS
GENERAL
HarCor Energy, Inc. 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. Since 1987 when the present
management group acquired control, the Company has grown through selective
acquisitions and development drilling, with estimated proved reserves increasing
from 1.35 MMBOE as of January 1, 1990, to 30.8 MMBOE as of January 1, 1997, at
an average replacement cost of $2.91 per BOE.
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 Energy, Inc. and its wholly-owned subsidiaries, Warrior, Inc. and
HTAC Investments, Inc. (until March 1996), are collectively described herein as
the "Company" or "HarCor", unless the context otherwise requires. Warrior, Inc.
and HTAC Investments, Inc. were merged into HarCor Energy, Inc. in March 1996.
The Company's operations have been focused in the San Joaquin Basin of
California, South Texas, the Permian Basin of New Mexico and West Texas and the
Gulf Coast of Louisiana. Based on the estimates of independent petroleum
engineers, the Company had total proved reserves of 30.8 MMBOE consisting of
14.9 MMBbls of crude oil and natural gas liquids and 95.5 Bcf of natural gas as
of January 1, 1997. The Company's present value of estimated future net cash
flows before income taxes from its total proved reserves (the "Pre-tax SEC 10
Value") was $260.7 million at January 1, 1997. Approximately 88% of the Pre-tax
SEC 10 Value was attributable to net proved reserves located in the Lost Hills
Field in the San Joaquin Basin (the "Bakersfield Properties").
The Company conducts its exploration, development and production activities
through strategic alliances with industry partners that are experienced and
knowledgeable in (i) specific exploration technology such as 3-D seismic
interpretation expertise and (ii) particular geologic basins of activity. In
each instance the strategic partner involved owns a significant interest in the
jointly owned properties. The industry partner is generally designated as the
operator of the jointly owned properties, thereby allowing the Company to avoid
the cost of maintaining the personnel and other resources necessary to be an
operator. The Company believes that through (i) its ownership of significant
working
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interests in its properties, (ii) the contractual rights to approve drilling
budgets or propose wells and (iii) its experienced team of oil and gas
professionals, the Company is able to control or significantly influence the
operators' decisions affecting the magnitude and timing of exploration,
development and production activities on its properties.
Through geographic concentration and tight control over oil and gas
operating and general and administrative expenses, the Company has maintained a
relatively low cost structure that has been declined on a per-unit basis over
the last five years. For the year ended December 31, 1996, the Company had an
average production cost of $3.45 per barrel of oil equivalent ("BOE") and
general and administrative expenses of $1.84 per BOE.
BUSINESS STRATEGY
The Company's business objective is to increase its hydrocarbon reserves as
economically as possible by:
. Continuing to develop its San Joaquin Basin, South Texas and Permian
Basin properties through additional drilling and secondary recovery
activities;
. Using the cash flow from its existing properties and available credit
capacity to engage in exploration activities through agreements with
experienced and technologically knowledgeable industry partners,
initially focusing on onshore Texas and Louisiana;
. Acquiring onshore oil and gas properties with significant development
potential; and
. Continuing to maintain relative low production costs through geographic
concentration and tight control over lease operating and general and
administrative expenses.
In March 1997, the Company announced that it had engaged a group of investment
bankers to pursue a possible sale of the Company in order to maximize
shareholder returns. The Company is continuing to conduct its business without
regard to the potential outcome of this process.
DEVELOPMENT ACTIVITIES
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. The properties produce
a light (approximately 40 Degrees gravity), low sulfur crude oil that has a
higher
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value product yield than most other crude oils produced in California and
consequently sells at a premium in that market. During the fourth quarter of
1996, this light oil averaged $22.87 per barrel. The associated natural gas
produced with the crude oil has a high Btu content (approximately 1,240 Btu)
which yields approximately 1.88 gallons of natural gas liquids ("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 101 wells on the
Bakersfield Properties and expects to drill an additional 176 wells over the
next five years. As a result of drilling completed through December 1996, the
Company's average daily production from these properties increased to 848 Bbls
of oil and 7,396 Mcf of gas per day (based on the quarter ended December 31,
1996). The Company's net proved reserves from the Bakersfield Properties have
increased to 27.2 MMBOE at January 1, 1997, with a Pre-tax SEC 10 Value of $230
million.
Gas Plant. As part of the acquisition of the Bakersfield Properties, the
Company purchased a modern, refrigeration liquid extraction facility with a
rated inlet capacity of 23 MMcf of gas per day and a rated liquid fractionation
capacity of 100,000 gallons of NGLs per day. The gas plant's average daily
production was 556 barrels of NGLs per day based on the quarter ended December
31, 1996, as compared to 493 barrels per day at the time of its acquisition. The
plant currently processes all of the gas produced from the Company's Bakersfield
Properties as well as gas produced by third parties. The plant can deliver dry,
residue gas into multiple pipeline systems allowing the Company to enter into
contract and marketing arrangements that are not tied to the sometimes
unfavorable and volatile California spot market.
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% working interest 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 until
April 1997.
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South Texas. In October 1992, the Company acquired an interest in nine gas
fields located in South Texas for a total purchase price of approximately $5.4
million. Subsequent development activities have resulted in average daily
production on the South Texas properties of 46 Bbls of crude oil and 3,800 Mcf
of natural gas based on the quarter ended December 31, 1996, and net proved
reserves as estimated by Ryder Scott of 1.5 MMBOE at January 1, 1997.
Approximately 39% of the Company's reserves in the South Texas properties are
attributable to its interests in the Hostetter Field. The Company owns
interests in 17 gross (four net) wells and owns approximately 2,525 gross (956
net) acres in the Hostetter Field. These wells are operated by Texaco
Exploration and Production Company ("Texaco") and Cabot Oil and Gas Corporation
("Cabot"). The Company currently believes that there are opportunities for
additional development and recompletion work and exploratory opportunities in
this field. (See EXPLORATION ACTIVITIES which follows.)
Permian Basin (West Texas/New Mexico). Since 1989, the Company, in
conjunction with Penroc Oil Corporation, has jointly identified and acquired
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
average daily production of 250 Bbls of crude oil and 350 Mcf of natural gas
based on production in the quarter ended December 31, 1996. The Company sold a
portion of its Permian Basin properties effective December 31, 1996. Ryder
Scott's estimate of the Company's net proved reserves in the Permian Basin
(exclusive of reserves related to the sale properties) as of January 1, 1997
was 2.0 MMBOE.
EXPLORATION ACTIVITIES
Consistent with its core objective of increasing its reserves as
economically as possible, the Company has commenced a program of identifying and
developing exploratory prospects in areas where the Company or its partners have
expertise. The Company manages its exploration and economic risks by (i)
generating prospects with the assistance of strategic industry partners that are
experienced in 3-D seismic and computer assisted exploration ("CAEX")
technology, (ii) identifying and pursuing prospects with multiple potential
productive zones and (iii) funding its exploration activities from internally
generated cash flow and credit capacity. In addition, the Company intends to
further manage the drilling risks associated with the exploration projects in
South Texas and South Louisiana by drilling multipay prospects that combine
shallower lower risk zones that have previously proven production in the area
with deeper potential target zones. In further pursuit of this strategy, the
Company entered into an agreement in 1996 with South Coast Exploration Company
and its affiliated company Interactive Exploration Solutions, Inc.
(collectively, "South Coast Exploration"), companies which have extensive
experience utilizing 3-D seismic and CAEX techniques, to jointly pursue
exploration
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projects on developed and undeveloped properties in South Texas, the Permian
Basin of West Texas and South Louisiana.
The Company and South Coast Exploration have jointly formed an experienced
geologic team to work exclusively to pursue these joint projects.
The following table sets forth certain information as of December 31, 1996,
relating to the exploration prospects that the Company currently plans to
pursue:
Gross Acreage Confirmed
Owned or Prospective Prospect
Under Square Miles of Gross
Prospect Area Option (1) 3-D Seismic Data Wells
------------- ---------- ---------------- ---------
South Texas (Upper Wilcox Trend) 23,000 104 23
West Texas (Permian Basin) 88,000 234 12
South Louisiana (Terrebonne Parish) 8,500 35 21
------- --- --
Total 119,500 373 56
======= === ==
(1) Includes acreage in which the Company currently has leases, options to
acquire leases, contingent lease rights or fee interests.
The following sets forth a brief summary of each exploration project that
the Company has in progress. This discussion only includes prospects on which
the Company has acquired substantial leasehold interests, options to acquire
leasehold interests or other contingent lease rights and has performed or is in
the process of arranging related 3-D seismic surveys.
South Texas (Upper Wilcox Trend). The Company has entered into an
agreement with Cabot to participate in an 104 square mile 3-D seismic survey in
southeast McMullen and northwest Duval Counties, Texas. The expanded and over-
pressured Upper Wilcox Trend in the survey area has significant potential for
the application of 3-D seismic technology due to complex faulting in the area
and stacking of multiple pay zones in both the shallow normal-pressured zones
such as the Cole Sand at 1,600 feet and the over-pressured zones such as the
House Sand at approximately 12,000 feet. The 3-D seismic survey in the Upper
Wilcox Trend was completed in July 1996. The survey is designed to evaluate
prospects already identified and generate new drilling prospects with both
development and exploration potential in the area of the Hostetter field and the
nearby Bonne Terre Field. The survey will evaluate approximately 40 geologic
formations at depths ranging between 8,500 feet and 13,000 feet for the
expanded over-pressured Upper Wilcox formation and as shallow as 1,500 feet for
other intervals The Company has joined with Cabot to acquire, or to acquire
options for, leasehold interests in 23,000 gross acres inside the 3-D survey
area as of December 31, 1996. Production to date in the survey area, including
production from the Hostetter Field and the Bonne Terre Field, is estimated to
be approximately 450 Bcf of natural gas equivalent. On May 29, 1996, the
Company assigned to South Coast Exploration and one of its affiliates 40% of its
rights in its agreement with Cabot in exchange for the
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interest it received in the South Louisiana project described below. The Company
retains a 22.7% working interest in the project.
South Louisiana (Terrebonne Parish). South Coast Exploration and its
affiliate have acquired an interest in a 46 square mile 3-D seismic survey to be
conducted in south Terrebonne Parish, Louisiana. To date, the Lapeyrouse Field,
which is located in the survey area, has produced approximately 350 Bcf of
natural gas equivalents. Based upon 2-D seismic surveys and reports from
independent engineers, South Coast Exploration's joint venture preliminarily has
identified potential exploration sites in the area to drill an estimated four
test wells in the next 18 months. Two of these potential exploration sites have
been identified in the Bourg Sands between 14,500 feet and 15,500 feet and the
remaining two potential exploration sites have been identified in traps
associated with faulting in a series of Upper Middle Miocene Sands between
15,000 feet and 17,000 feet. South Coast Exploration and its affiliate have
each assigned the Company a 12.5% working interest in this project.
West Texas (Permian Basin). In May 1996, the Company entered into an
agreement to participate in a 234 square mile 3-D seismic survey in Reeves
County, Texas, with Penwell Energy, Inc. ("Penwell") which, along with its
investment partner MCN Energy, has extensive recent experience in the Permian
Basin. Penwell initially derived its rights to about half of the area in the
Penwell survey (74,880 fee mineral acres held by Texaco) from an agreement dated
September 1995 among Texaco, Penwell and Meridian Oil Inc. Production in the
field within or adjoining gross acreage in which Penwell presently owns or has
contingent lease rights is estimated to be 455 Bcf of natural gas equivalents,
most of which has been produced from the Silurian/Devonian Fusselman formation
at depths between 10,000 feet and 17,000 feet, where the Company intends to
focus.
SELECTIVE OPPORTUNISTIC ACQUISITIONS
The Company also intends to pursue selective strategic acquisitions of
attractively priced, underexploited onshore oil and gas properties in the United
States. As a result of its joint venture agreement with South Coast
Exploration, the Company will also pursue property acquisitions where it can
utilize 3-D seismic and CAEX technology to identify additional potential
reserves. Management intends to continue to be active in developing acquisition
opportunities rather than pursuing opportunities in the auction market.
Management believes that this strategy has resulted in lower acquisition prices
for its oil and gas properties.
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FINANCING ACTIVITIES
The Company has typically financed its acquisitions through the use of
secured bank borrowings or long-term notes 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 transferable 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. 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.
During third quarter 1996, the Company completed a public offering of
6,700,000 shares of common stock at $4.50 per share (the "Equity Offering").
The Company sold 5,359,059 new primary shares in the Equity Offering, and
certain of the Company's existing stockholders sold 1,340,941 shares. The
Company realized total net proceeds of approximately $21.9 million from the
Equity Offering after underwriters' discount and offering expenses.
The Company immediately used $10 million of the proceeds from the Equity
Offering to repay the total outstanding under its Credit Agreement at that date.
Pursuant to the terms of its Note Offering completed in July 1995, the Company
used an aggregate of $12.4 million of the proceeds from the Equity Offering to
redeem a portion of its Senior Secured Notes. The remaining net proceeds to the
Company, along with availability under the Credit Agreement, were used to
initiate its 3-D seismic, CAEX and exploration activities.
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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 56% of the Company's 1996 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 approximately 51% of its oil
production in 1996. Additionally, price fluctuations in the gas market also
have a significant impact on the Company's business as approximately 44% of the
Company's natural gas production in 1996 was sold at spot market prices. The
Company currently anticipates that approximately 2.9 Bcf of the Company's
natural gas production for 1997 (based on contracted volumes at December 31,
1996) will be sold under fixed-price or NYMEX-indexed contracts with the balance
sold at spot market prices. (See Note 5. of "Notes to Consolidated Financial
Statements" included in Item 8. herein.)
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
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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:
<TABLE>
<CAPTION>
Customer 1996 1995 1994
-------- ----- ----- -----
<S> <C> <C> <C>
Cabot Oil and Gas Marketing........ - - 21%
Kern Oil and Refining.............. - 10% 17%
Mock Resources, Inc................ 20% 24% -
Valero Gas Marketing, L.P.......... - 10% -
Enron Capital and Trade Resources.. 18% - -
Shell Oil Company.................. 27% - -
</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 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.
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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, 636-B and
636-C ("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 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 all Order No. 636 pipeline restructuring proceedings.
The United States Court of Appeals for the District of Columbia Circuit ("D.C.
Circuit") has generally affirmed Order No. 636 and remanded certain issues for
further explanation or clarification. The issues remanded for further action do
not appear to materially affect the Company. A number of parties have appealed
the D.C. Circuit's ruling to the United States Supreme Court and proceedings on
the remanded issues are currently ongoing before FERC following its issuance of
Order No. 636-C in February 1997. Numerous petitions
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for review of the individual pipeline restructuring orders are currently pending
in that court. Although it is difficult to predict when all appeals of pipeline
restructuring orders will be completed or their impact on the Company, the
Company does not believe that it will be affected by the restructuring rule and
orders any differently than other natural gas producers and marketers with which
it competes.
The FERC 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. The Company believes its operations, to the extent they may be subject
to current gas pipeline safety requirements, comply in all material respects
with such requirements. The Company cannot predict what effect, if any, the
adoption of additional pipeline safety legislation might have on its operations,
but the industry could be required to incur additional capital expenditures and
increased costs depending upon future legislative and regulatory changes.
The FERC has announced several important transportation-related policy
statements and proposed rule changes, including the manner in which interstate
pipeline shippers may release interstate pipeline capacity under Order No. 636
for resale in the secondary market and, more recently, the price that shippers
can charge for their released capacity. In addition, in 1995, the FERC issued a
policy statement on how interstate natural gas pipelines can recover the costs
of new pipeline facilities. In January 1996, the FERC issued a policy statement
and a request for comments concerning alternatives to its traditional cost-of-
service ratemaking methodology. A number of pipelines have obtained FERC
authorization to charge negotiated rates as one such alternative. While any
resulting FERC action on these matters would affect the Company only indirectly,
the FERC's current rules and policies may have the effect of enhancing
competition in natural gas markets by, among other things, encouraging non-
producer natural gas marketers to engage in certain purchase and sale
transactions. The Company cannot predict what action the FERC will take on
these matters, nor
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can it accurately predict whether the FERC's actions will achieve the goal of
increasing competition in markets in which the Company's natural gas is sold.
However, the Company does not believe that it will be affected by any action
taken materially differently than other natural gas producers and marketers with
which it competes.
Sales of crude oil, condensate and gas liquids by the Company are not
regulated and are made at market prices. The price the Company receives from
the sale of these products is affected by the cost of transporting the products
to market. Effective as of January 1, 1995, the FERC implemented regulations
establishing an indexing system for transaction rates for oil pipelines, which
would generally index such rates to inflation, subject to certain conditions and
limitations. These regulations could increase the cost of transporting crude
oil, liquids and condensates by pipeline. The Company is not able to predict
with certainty what effect, if any, these regulations will have on it, but other
factors being equal, the regulations may tend to increase transportation costs
or reduce wellhead prices for such conditions.
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 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
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<PAGE>
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. For example, the federal Comprehensive Environmental
Response, Compensation and Liability Act of 1980, as amended, also known as the
"Superfund" law, imposes strict liability on an owner and operator of a facility
or site where a release of hazardous substances into the environment has
occurred and on companies that disposed or arranged for the disposal of the
hazardous substances released at the facility or site. Although many of the
wastes handled by the Company are not subject to classification as hazardous
substances under current law, any change in law that would cause such wastes to
be reclassified as hazardous would make such wastes subject to more stringent
and costly handling, disposal and clean-up requirements. Other laws, rules and
regulations may restrict the rate of oil and natural gas production below the
rate that would otherwise exist, require the acquisition of a permit before
drilling commences, or prohibit drilling activities in environmentally sensitive
areas. 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 and costs of the Company. In 1996,
the American Institute of Certified Public Accountants issued its Statement of
Position 96-1 ("SOP 96-1"), which provides guidance on accounting for
environmental remediation liabilities. SOP 96-1 interprets existing Financial
Accounting Standards Board standards applicable to public companies. The
Company intends to apply SOP 96-1 starting in 1997. The Company believes
adoption of SOP 96-1 will not have a material effect on its results of
operations or financial position.
While 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 other independent energy
companies in the oil and gas industry likely would be similarly affected. 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
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<PAGE>
on the Company.
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, 1996, the Company had 14 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.
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<PAGE>
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 (the Bakersfield Properties), 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 portion of the Permian Basin.
These properties, in aggregate, accounted for 96% of the Company's oil and gas
revenues in 1996. 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 drilling on any exploratory prospects in
1996. The Company has acquired interests in certain exploratory acreage in
South Texas, Louisiana and West Texas, but has not yet commenced in the
exploratory drilling thereof.
Workover and development activity in 1996 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 two successful development wells in South Texas. A total of 30
successful development wells were drilled on the Bakersfield Properties during
1996. It is anticipated that 38 additional wells will be drilled in 1997, with a
total of 176 new wells planned to exploit the proven undeveloped reserves on the
properties over the next several years. It is also anticipated that a waterflood
project, which was initiated in 1996 on the Ellis lease, will be expanded in
1997. The Company's total future cost to develop the proven reserves on the
properties is currently estimated at $59.3 million at December 31, 1996.
It is also anticipated that workover and development activity will continue
on the South Texas and Permian Basin properties during 1997, as the Company
plans to continue to exploit the potential for additional reserves on the
Company's properties in these areas. Anticipated 1997 development activities
include continued secondary recovery development of certain properties in Lea
County, New Mexico, and the continued development of the Company's South Texas
Properties.
The following table summarizes the Company's producing and shut-in wells,
producing acreage and undeveloped acreage as of December 31, 1996:
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<PAGE>
Gross Net Producing Undeveloped
Wells (1) Wells (2) Acreage Acreage
--------- ------------- -------------- --------------
Oil Gas Oil Gas Gross Net Gross Net
--- --- ----- ----- ------- ----- ------- -------
304 78 154.6 18.46 27,356 6,345 117,177 14,435
- - --------------
(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:
1996 1995 1994
---------- ---------- ----------
Gross Net Gross Net Gross Net
----- --- ----- --- ----- ---
Exploratory-
Oil . . . . . . - - - - - -
Gas . . . . . . - - - - - -
Dry . . . . . . - - - - - -
Development-
Oil . . . . . . 30 22.50 44 33.00 27 10.50
Gas . . . . . . 2 .45 1 .28 2 .60
Dry . . . . . . - - - - - -
Total-
Producing . . . 32 22.95 45 33.28 29 11.10
Dry . . . . . . - - - - - -
-- ----- -- ----- -- ----
32 22.95 45 33.28 29 11.10
== ===== == ===== == =====
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 (rounded to the
nearest thousand), 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 (dollar amounts in thousands except per unit data):
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<PAGE>
<TABLE>
<CAPTION>
1996 1995 1994
----------- ---------- ----------
<S> <C> <C> <C>
Production:
Crude oil and condensate (Bbls) 523,000 463,000 312,000
Plant NGLs (Bbls) 232,000 207,000 94,000
Natural gas (Mcf) 5,795,000 5,137,000 3,326,000
Revenues:
Crude oil and condensate $ 9,777 $ 7,625 $ 4,925
Gas plant operating and marketing revenue/(1)/ 6,635 6,362 1,990
Natural gas 11,939 8,405 6,045
----------- ---------- ----------
Total oil and gas operating revenues $ 28,351 $ 22,392 $ 12,960
----------- ---------- ----------
Costs:
Production expenses $ 5,134 $ 5,263 $ 3,610
Gas plant operating and marketing expenses 4,017 3,704 832
----------- ---------- ----------
Total oil and gas operating costs $ 9,151 $ 8,967 $ 4,442
----------- ---------- ----------
Weighted average selling price:/(2)/
Crude oil and condensate (per Bbl) $ 18.71 $ 16.49 $ 15.79
Plant NGLs (per Bbl) $ 19.39 $ 16.06 13.95
Natural gas (per Mcf) $ 2.06 1.64 $ 1.82
Production costs per BOE/(3)/ $ 3.45 $ 3.99 $ 4.13
</TABLE>
/(1)/ Revenues relating to the gas plant include sale of plant NGLs, resale of
purchased third party gas, processing fees and other.
/(2)/ All average price data reflect the effects of the Company's fixed-price
sales and hedging contracts.
/(3)/ Production costs per BOE relate to oil and gas exclusive of NGLs, and
include production and ad valorem taxes where applicable.
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 12 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.
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.
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<PAGE>
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
Not applicable.
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<PAGE>
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>
1996 1995
---- ----
Quarter Ended High Low High Low
------------- ----- ----- ----- ---
<S> <C> <C> <C> <C>
March 31 . . . . . $5.38 $2.31 $4.38 $2.88
June 30. . . . . . $5.13 $4.06 $4.38 $2.75
September 30 . . . $6.25 $4.17 $3.50 $2.50
December 31. . . . $6.11 $4.38 $3.38 $1.88
</TABLE>
On March 24, 1997, the closing bid price for the common stock as
reported by NASDAQ was $6.19 per share. The Company had approximately 1,680
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 cash dividends on its common stock.
Additionally, pursuant to the terms of the Company's preferred stock, the
Company is restricted from the payment of cash dividends on its 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.
RECENT SALES BY THE COMPANY OF UNREGISTERED SECURITIES
On January 31, 1996, 5,000 shares of common stock were issued to Vinod
Dar and 5,000 shares of common stock were issued to Kevin O'Keefe in exchange
for an option held by such persons (as successors to Jefferson Gas Systems,
Inc.) to purchase 150,000 shares of common stock.
On February 5, 1996, a warrant to purchase 99,750 shares of common
stock at an exercise price of $3.85 per share was issued to Erland & Co. in
exchange for financial consulting services.
In May 1996, 25,000 shares of common stock were issued to First Union
National Bank of North Carolina ("First Union") in
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<PAGE>
exchange for the cancellation of a warrant to purchase 100,000 shares of common
stock at an exercise price of $4.75 per share held by First Union.
In May 1996, 30,000 shares of common stock were issued to
Internationale Nederlanden (U.S.) Capital Corporation ("INCC") in exchange for
the cancellation of a warrant to purchase 76,000 shares of common stock at an
exercise price of $5.50 per share and a warrant to purchase 50,000 shares of
common stock at an exercise price of $4.75 per share held by INCC.
On October 1, 1996, 857,142 shares of common stock were issued to
Bakersfield Energy Partners, L.P. ("BEP") upon the conversion by BEP of 30,000
shares of Series E Preferred Stock held by BEP.
On October 30, 1996, 71,248 shares of common stock were issued to E.V.
Fund II, Ltd. upon conversion of such Fund of 5,000 shares of Series A Preferred
Stock.
On October 31, 1996, 12,000 shares of common stock were issued to
David Hamilton upon cancellation of a warrant to purchase 30,000 shares of
common stock at an exercise price of $4.00 per share held by Mr. Hamilton.
All of the above transactions were conducted as private offerings and
therefore qualify for the exemption provided by Section 4(2) under the
Securities Act of 1933. In addition, the above transactions involving the
conversion of shares of Series E Preferred Stock and Series A Preferred Stock
qualify for the exemption provided by Section 3(a)(9) of the Securities Act of
1933.
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<PAGE>
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)
1996 1995 1994/(2)/ 1993 1992/(1)/
------- ------ ---------- ------ ----------
<S> <C> <C> <C> <C> <C>
Revenues . . . . . .... $31,622 $22,595 $13,213 $ 6,725 $ 6,666
Net loss . . . . . .... $(1,798) $(4,618) $ (939) $(1,041) $(1,414)
Net loss applicable
to common
stockholders . . . .... $(2,259) $(7,765) $(1,890) $(1,287) $(1,446)
Net loss per
common share........... $ (.20) $ (.98) $ (.29) $ (.23) (.41)
Weighted average
number of common
shares outstanding .... 11,150 7,904 6,447 5,492 3,512
1996 1995 1994 1993 1992
--------- ------- -------- ------- -------
Working capital........ $ (61) $ 1,325 $(7,943) $ 1,551 $ 381
Total assets . . . .... $94,627 $94,231 $68,573 $17,937 $12,580
Long-term debt . . .... $54,100 $68,709 $31,889 $ 8,067 $ 4,712
Stockholders'
equity. . . . . . .... $29,793 $10,214 $15,353 $ 7,536 $ 4,645
</TABLE>
/(1)/Operating data for 1992 includes the results of operations of the
Company's investment in Consolidated HCO Energy Ltd. ("HCO"). The Company's
interest in HCO was reduced in late 1992 resulting in a deconsolidation of HCO's
accounts at December 31, 1992. The Company disposed of its remaining interest
in HCO in January 1993.
/(2)/Includes six months results of operations from the Bakersfield Properties
which were acquired on June 30, 1994.
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<PAGE>
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.)
RESULTS OF OPERATIONS FOR THREE YEARS ENDED DECEMBER 31, 1996
COMPARISON OF 1996 TO 1995 -
REVENUES - The Company's total revenues increased $9,027,000 (40%) from
$22,595,000 in 1995 to $31,622,000 in 1996.
Oil and gas revenues increased $5,686,000 (35%) from $16,030,000 in 1995 to
$21,716,000 in 1996. Oil revenues increased $2,152,000 (28%) from $7,625,000 in
1995 to $9,777,000 in 1996 due to higher levels of oil production and higher
average unit prices. Oil production increased 60,000 barrels (13%) from 463,000
barrels in 1995 to 523,000 barrels in 1996. The increased production was a
result of the continued drilling and development of the Bakersfield Properties
during 1996. Oil production from the Company's Permian and other properties
decreased slightly (4%) in the aggregate during 1996 as a result of normal
production declines. The average unit price received for oil was $20.12 per
barrel in 1996 as compared to $16.49 per barrel in 1995. Inclusive of hedging
charges, the Company's average price realized for oil was $18.71 in 1996.
Gas revenues increased $3,534,000 (42%) from $8,405,000 in 1995 to
$11,939,000 in 1996 also due to higher levels of production and higher average
unit prices. Gas production increased 658,000 Mcf (13%) from 5,137,000 Mcf in
1995 to 5,795,000 Mcf in 1996 primarily due to the continued drilling and
development of the Bakersfield Properties. Gas production from the Company's
South Texas and other properties remained flat in the aggregate during 1996 as
compared to 1995. Average unit prices realized for gas were $2.06 per Mcf in
1996 as compared to $1.64 per Mcf in 1995.
During 1996, revenues of $6,635,000 were realized from the Company's
natural gas processing plant and gas marketing activities. Gas plant revenues
consisted of $4,508,000 from the sale of processed NGLs (232,000 barrels at an
average composite sale price of $19.39 per barrel), $1,990,000 from the resale
of natural gas purchased from third parties, and $137,000 in processing fees.
During 1995, the Company realized revenues of $6,362,000 from gas plant and gas
marketing activities, which consisted of $3,321,000 from the sale of NGLs
(207,000 barrels at an average composite sale price of $16.06 per barrel),
$2,320,000 in the resale of natural gas purchased from third parties, and an
aggregate of $721,000 from gas processing and other gas marketing-related
activities.
In 1996 the Company realized other income of $3,147,000, which was
primarily the net gain of $2,948,000 from the sale and disposition of certain of
its Permian Basin and other minor oil and
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<PAGE>
gas assets. Other income was $39,000 in 1995. Interest income was $124,000 and
$164,000 for 1996 and 1995, respectively.
COSTS AND EXPENSES - Total costs and expenses increased $5,960,000 (24%)
from $25,325,000 in 1995 to $31,285,000 in the current period.
Oil and gas production costs decreased slightly in the aggregate ($129,000
or 2%) from $5,263,000 in 1995 to $5,134,000 in 1996 although total oil and gas
production increased during the same period. This was primarily due to the
continuing development of the Bakersfield Properties and resulting operating
efficiencies in that area. The Company's total aggregate production cost per
BOE declined from $3.99 per BOE in 1995 to $3.45 per BOE in 1996.
The Company incurred costs of $4,017,000 during 1996 resulting from its
natural gas processing plant and gas marketing activities. Gas plant costs
consisted of $2,072,000 from the purchase of natural gas for processing and
resale and $1,945,000 of fixed and variable direct operating expenses. During
1995, the Company incurred costs of $3,704,000 in gas plant and gas marketing
activities which consisted of $1,998,000 from the purchase of natural gas for
processing and resale and $1,706,000 of direct plant operating expenses.
Engineering and geological costs were $368,000 and $311,000 during 1996 and
1995, respectively.
Total depletion, depreciation and amortization expense ("DD&A") increased
$2,200,000 (37%) from $5,973,000 in 1995 to $8,173,000 in 1996. This was the
result of a significant increase in lease equipment and drilling costs incurred
in the continued development of the Bakersfield Properties, and increasing
production volume. The DD&A rate per BOE for oil and gas reserves on a Company-
wide basis was $5.23 in 1996 as compared to $3.60 per BOE in 1995, excluding the
effects of SFAS 121.
General and administrative expenses were $3,160,000 and $2,744,000 for 1996
and 1995, respectively, representing an increase of $416,000 (15%) in the
current year. The increase was a result of the Company's continued growth and
expansion.
Interest expense increased $3,220,000, from $6,846,000 in 1995 to
$10,066,000 in 1996. This was due primarily to the refinancing of the Company's
bank debt and Series D Redeemable Preferred Stock with $65,000,000 in 14-7/8%
Senior Secured Notes (the "Notes") in July 1995. Most of the principal balance
resulting from this higher-cost debt refinancing was outstanding for all of 1996
(exclusive of a portion of the Notes redeemed during the third quarter) as
compared to five months during 1995. Also affecting interest expense in the
current period was an increase in amortization of deferred financing costs
resulting from this refinancing.
EXTRAORDINARY ITEM AND ACCRETION - The Company incurred an extraordinary
charge of $2,135,000 in 1996 resulting from the early redemption of a portion of
the Notes. The charge consisted of a $1,127,000 (10%) premium pursuant to the
terms of the redemption, $295,000 in acceleration of accretion relating to the
redeemed
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<PAGE>
portion of the Notes, and the write-off of $713,000 in deferred financing
charges and miscellaneous expenses. In 1995 the Company incurred an
extraordinary charge of $1,888,000 in connection with the refinancing of its
long-term debt which resulted in the write-off of deferred financing costs
related to its bank debt and Series D Preferred Stock which were repaid at the
time. The Company also incurred non-cash accretion charges of $2,147,000 on its
Series D Preferred Stock during 1995.
PREFERRED STOCK DIVIDENDS - Dividends on preferred stock were $461,000 in
1996, as compared to $1,000,000 in 1995. Dividends in 1996 consisted of cash,
while 1995 dividends were comprised of $464,000 in cash, $476,000 in shares of
Series D Preferred Stock and $60,000 in shares of common stock of the Company.
The Series D Preferred Stock was retired during 1995 which accounted for the
comparatively lower dividends in 1996.
NET LOSS - The Company had net operating income in 1996 of $337,000 before
extraordinary loss on early retirement of debt and dividends. Net loss
attributable to common stockholders after extraordinary loss and preferred
dividends was $2,259,000 ($.20 per share). For 1995, the Company had a net
operating loss of $2,730,000 and net loss attributable to common stockholders of
$7,765,000 ($0.98 per share) after loss on early extinguishment of debt,
preferred dividends and accretion.
COMPARISON OF 1995 TO 1994 -
ACQUISITION OF BAKERSFIELD PROPERTIES - Included in results of operations
for 1995 are a full year's results of operations from the Bakersfield
Properties, as compared to six months' results of operations during 1994. The
Bakersfield Properties were acquired on June 30, 1994.
REVENUES - The Company's total revenues increased $9,382,000 (71%) from
$13,213,000 in 1994 to $22,595,000 in 1995.
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%) 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.
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
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<PAGE>
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, revenues of $6,362,000 were realized from the Company's 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 1995. This compares to interest and other income of $16,000
and $237,000, respectively, in 1994. The increase in 1995's interest income was
due to significantly larger cash balances resulting from the Note Offering in
July 1995. Other income in 1994 was primarily a gain on sale of miscellaneous
oil and gas properties.
COSTS AND EXPENSES - The Company's total costs and expenses increased
$11,295,000 (81%) from $14,030,000 in 1994 to $25,325,000 in 1995.
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 1995. 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. Engineering and geological costs were $311,000
and $329,000 for 1995 and 1994, respectively.
The Company adopted in 1995 SFAS 121 which resulted in a non-cash
impairment charge of $876,000 which was included in DD&A expense. 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 acquisition of the Bakersfield
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<PAGE>
Properties. 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 1995. Further
affecting the increase in overall DD&A expense in 1995 was $314,000 in
depreciation expense relating to the natural gas processing plant acquired with
the Bakersfield Properties as compared to $145,000 in 1994 (six months).
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.
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 1995 was
increased amortization of deferred financing costs resulting from these
financings.
Other expenses of $483,000 in 1995 were a result of 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 a limited partnership.
EXTRAORDINARY ITEM - In connection with the refinancing of its long-term
debt, the Company incurred in 1995 an extraordinary charge of $1,888,000
resulting from the early extinguishment of debt. This was primarily the write-
off of 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 in the refinancing of its South Texas
Properties.
ACCRETION - During 1995, 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 in July 1995.
PREFERRED DIVIDENDS - Dividends on preferred stock were $1,000,000 for 1995
as compared to $795,000 in 1994. Increased dividends in 1995 were a result of
the Series D and Series E Preferred Stocks being outstanding for a longer
portion of the year 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
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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 operating loss 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 operating loss 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.
LIQUIDITY AND CAPITAL RESOURCES
SUMMARY - The Company's sources of working capital have primarily been cash
flows from operations and a combination of debt and equity financings as needs
for capital have arisen. In 1996, the Company generated net cash from operations
of $6,083,000 as compared to $5,016,000 in 1995. The Company realized net
proceeds of $4,711,000 from financing activities during the current year as
compared to net proceeds from financing activities of $15,541,000 in 1995. The
Company utilized a total of $21,405,000 in investing activities in the current
year, which consisted mainly of developmental drilling activities, as compared
to $9,251,000 in 1995.
WORKING CAPITAL - The Company had a working capital deficit of $61,000
with a current ratio of 1:1 at December 31, 1996 as compared to net working
capital of $1,325,000 and a current ratio of 1.1:1 at December 31, 1995.
Included in current liabilities at December 31, 1996, was $3.7 million in
accrued interest relating to the Company's 14-7/8% Senior Secured Notes which
was subsequently paid in January 1997.
OPERATING ACTIVITIES -
CASH FLOWS - Discretionary cash flow is a measure of performance which is
useful for evaluating exploration and production companies. It is derived by
adjusting net income or loss to eliminate the non-cash effects of exploration
expenses, depletion, depreciation, amortization and non-recurring charges, if
applicable. The effects of non-cash working capital changes are not taken into
account. This measure reflects an amount that is available for capital
expenditures, debt service and dividend payments.
During the current year, the Company generated discretionary cash flow of
$7,213,000 (before changes in other working capital of $1,130,000). This
compares to $4,746,000 (before changes in other working capital of $269,000) in
1995. The improvement in the current year, in spite of significantly increased
debt service, was primarily due to (i) increased oil and gas production
resulting from the continued drilling and development of the Bakersfield
Properties and (ii) increased prices realized for oil and gas
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sales. The Company's 1996 drilling activity included 28 new wells on the Ellis
lease and 2 wells on the Tisdale lease, and the Company had a total of 160
producing wells in this area at December 31, 1996, as compared to 132 producing
wells at December 31, 1995. As a consequence of these drilling activities, the
Company's production from the Bakersfield Properties (including NGLs) averaged
1,648 barrels of oil per day ("BPD") and 10,349 thousand cubic feet per day
("Mcfd") for 1996, showing increases of 18% and 17%, respectively, over the
prior year's average rates of 1,400 BPD and 8,813 Mcfd. These increases in
yearly production rates were in spite of the impact of normal production rate
declines on older wells and the conversion of eight producing wells to water
injection wells for the Ellis waterflood project.
With respect to pricing, the Company-wide average prices realized for oil
and gas sales were $18.71 per barrel for oil, $19.39 per barrel for NGLs and
$2.12 per Mcf for natural gas. This compares to $16.49, $16.06 and $1.64,
respectively, for 1995. Average prices as stated include the effects of the
Company's fixed price sales and hedging contracts.
The Company is currently drilling additional wells on the Bakersfield
Properties with plans to drill 30 additional wells on the Ellis lease, 6 new
Truman lease wells and 2 Tisdale lease wells in 1997. (See DEVELOPMENTAL
DRILLING ACTIVITIES which follows.) Production in the first half of 1997 may
continue to be negatively impacted by production losses resulting from the
conversion of additional producing wells to injector wells on the Ellis lease
waterflood project. However, the Company expects increases in operating cash
flows in the second half of 1997 as a result of its continued drilling on the
Ellis and Truman leases and anticipated response from the waterflood project
that was initiated during the latter part of 1996.
The Company will also be impacted by the loss of production from the sale
of certain of its Permian Basin properties effective December 31, 1996. These
properties produced an estimated average of 173 BOE per day in the aggregate
during fourth quarter 1996.
RESULTS OF HEDGING ACTIVITIES - In order to help mitigate the potential
effects of declines in oil and gas prices, the Company often enters into fixed-
price sales and hedging contracts covering significant portions of the Company's
current and estimated future production. The Company believes that its hedging
strategy has helped manage its growth by providing more predictable cash flows
with which to finance its acquisitions and development drilling activities. The
Company's hedging activities during the three years ended December 31, 1996 have
not had a material effect on the Company's liquidity or results of operations.
(See Note 5. of "Notes to Consolidated Financial Statements" included herein.)
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
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and related services, as well as an increase in revenues. Inflation has had a
minimal effect on the Company.
FINANCING ACTIVITIES -
SUMMARY - The Company realized net proceeds of $4.7 million from financing
activities during 1996. Sources of financing proceeds consisted of $21.9
million of net proceeds from a public sale of common stock and $6.4 million in
long-term bank debt. Uses of financing proceeds consisted of $12.4 million for
the redemption of a portion of the Company's 14-7/8% Senior Secured Notes, $10
million for the repayment of long-term bank debt, $461,000 for the payment of
preferred dividends, and $928,000 in the repayment of other debt and
miscellaneous activities. See descriptions of the Company's EQUITY OFFERING,
CREDIT AGREEMENT and 14-7/8% SENIOR SECURED NOTES which follow.
EQUITY OFFERING - During the third quarter of 1996, the Company completed a
public offering of 6,700,000 shares of Common Stock at $4.50 per share. The
Company sold 5,359,059 new primary shares in the offering, and certain of the
Company's existing stockholders sold 1,340,941 shares. The Company realized net
proceeds of approximately $21.9 million from the Equity Offering after
underwriters' discount and offering expenses.
The Company immediately used $10 million of the proceeds from the Equity
Offering to repay the total outstanding under its Credit Agreement. Pursuant to
the terms of its Note Offering completed in July 1995, the Company used an
aggregate of $12.4 million to redeem a portion of its 14-7/8% Senior Secured
Notes. The remaining net proceeds to the Company, along with availability under
the Credit Agreement, were used to initiate its 3-D seismic, CAEX and
exploration activities.
CREDIT AGREEMENT - Availability under the Company's Credit Agreement is
limited to a "borrowing base" amount which is determined semi-annually by ING
Capital, at its sole discretion, and may be established at an amount up to $15
million. The borrowing base was $15 million at December 31, 1996, and there was
$2 million outstanding under the Credit Agreement at that date. Availability
under the Credit Agreement will terminate on June 30, 1997 (unless renewed by
ING Capital), at which time amounts outstanding will convert to a term loan on
September 30, 1997, with a set amortization schedule of a percentage of the
outstanding principal balance continuing through December 31, 2000. Amounts
advanced under this facility bear interest at an adjusted Eurodollar rate plus
2.50% or Prime Rate (as determined by ING Capital) plus .5% at the Company's
option.
The Credit Agreement contains restrictive covenants which impose
limitations on the Company and its subsidiaries with respect to, among other
things, certain financial ratios or limitations, incurrence of indebtedness, the
sale of the Company's oil and gas properties and other assets, hedging
transactions, payment of dividends, mergers or consolidations and investments
outside the ordinary course of business. The Credit Agreement also contains
customary default provisions. The Company believes that it was in
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compliance with all of the covenant provisions under the Credit Agreement at
December 31, 1996. (See Footnote 3. of "Notes to Consolidated Financial
Statements" included in Part IV, Item 14. herein for further description of the
Credit Agreement.)
14-7/8% SENIOR SECURED NOTES - The Company's 14-7/8% Senior Secured Notes
(the "Notes") bear interest at the rate of 14-7/8% per annum and is payable
semi-annually on January 15 and July 15 of each year. The Notes are redeemable,
in whole or in part, at the option of the Company at any time on or after July
15, 1999, at the following redemption prices (expressed as percentages of the
principal amount) if redeemed during the 12-month period commencing on July 15
of the year set forth below plus, in each case, accrued interest thereon to the
date of redemption:
Year Percentage
----- ----------
1999 . . . . . . . . . . 110%
2000 . . . . . . . . . . 107%
2001 and thereafter. . . 100%
In the event that the Company has excess cash flow (as defined) in excess
of $2 million in any fiscal year, beginning with the fiscal year ending December
31, 1996, the Company will be required to make an offer to purchase Notes from
all holders thereof in an amount equal to 50% of all such excess cash flow for
such fiscal year (not just the amount in excess of $2 million) at a purchase
price equal to 101% of the principal amount thereof, plus accrued and unpaid
interest thereon.
All of the obligations of the Company under the Notes and related indenture
are secured by a second priority lien on substantially all of the assets of the
Company, which are also collateralized under its Credit Agreement.
Pursuant to the terms of the Notes, and as a result of the Company's Equity
Offering in July 1996, the Company redeemed $11.3 million of the Notes during
the third quarter of 1996, for an aggregate redemption price of $12.4 million.
There were $53.7 million of Notes (face value) outstanding at December 31, 1996.
The Company anticipates that it will save approximately $1.7 million in future
annualized interest costs as a result of the partial redemption of Notes. (See
Note 4. of "Notes to Consolidated Financial Statements" included in Part IV,
Item 14. herein for further description of the Notes.)
CAPITAL EXPENDITURES AND INVESTING ACTIVITIES
DEVELOPMENTAL DRILLING ACTIVITIES - The Company incurred a total of
approximately $14.5 million in drilling, development and related expenditures
during 1996, the majority of which were related to the continued development of
the Bakersfield Properties. Based on current engineering estimates, the Company
anticipates that as of December 31, 1996, total additional drilling necessary to
completely develop the proven reserves of Bakersfield Properties over future
years will result in approximately 176 new wells at an estimated capital cost of
$59 million (based on current drilling costs). Approximately $14 million is
planned to be spent during the
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remainder of 1997, and $45 million thereafter. These future development costs
for the Bakersfield Properties also include additional costs for full
development of a waterflood project in the Diatomite Formation on the Ellis
Lease. During July, 1996 water injection was initiated in the waterflood pilot
project area with completion of the installation of the entire project
anticipated by January 1, 1999. These estimates may vary as the Company further
evaluates the results of drilling activities and results of future operations.
The Company is also involved in a small waterflood project on its Permian
Basin properties and has approximately $2.1 million in capital expenditures
planned in this area during the next two years.
EXPLORATION ACTIVITIES - The Company incurred approximately $2.5 million
on exploratory-related expenditures during 1996. The Company has entered into
an agreement with a 3-D seismic interpretation company to jointly explore the
Hostetter Field in South Texas; the Terrebonne Parish area of South Louisiana;
and an area in Reeves County, Texas. The Company has working interests of
22.7%, 7.5% and 12.5% in these projects, respectively. The projects' area of
mutual interest covers approximately 217,000 acres and entails shooting 3-D
seismic data over approximately 339 square miles. The Company and its 3-D
seismic partner have also jointly formed a geologic team to assist them in the
evaluation of these 3-D projects. Initial evaluation of these projects has
identified 56 prospects for future drilling.
The Company expects to commence drilling two wells in the Hostetter Field
in early second quarter 1997 and commence one well each in Reeves County and
Terrebonne Parish by late second quarter. The Company currently expects to
commit approximately $5 million to $8 million to drilling on these 3-D
exploratory prospects during 1997. The amount of any future capital commitments
will depend upon the success of initial drilling activities.
FINANCIAL COMMITMENTS - The Company expects that its available cash and
expected cash flows from operating activities will be sufficient to meet its
financial obligations and fund its planned developmental drilling on the
Bakersfield Properties for the foreseeable future, provided, that (i) there are
no significant decreases in oil and gas prices, (ii) there are no significant
declines in oil and gas production from existing properties other than declines
in production currently anticipated based on engineering estimates of the
decline curves associated with such properties, (iii) drilling costs for
development wells with respect to the Bakersfield Properties do not increase
significantly from the drilling costs recently experienced by the operator in
such areas with respect to similar wells and (iv) the operator continues its
development program with respect to the Bakersfield Properties on the schedule
currently contemplated.
The Company also expects that its improved liquidity as a result of the
July 1996 Equity Offering, availability under its Credit Agreement and improved
cash flow as a result of interest savings due to the redemption of a portion of
the Notes will enable
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<PAGE>
it to fund its 3-D seismic and exploration activities for the next eighteen
months. Further exploration and resulting development drilling of these projects
will depend largely on the measure of success of these initial activities.
In the event operating cash flows and available liquidity are not
sufficient to fund debt and development and exploration costs, or results from
developmental drilling and exploration are not as successful as anticipated,
then the Company will either (i) curtail its developmental drilling and/or
exploration activities or (ii) seek alternative financing to assist in these
activities.
STRATEGIC ALTERNATIVES
In March 1997 the Company announced that it had engaged a group of
investment bankers to pursue a possible sale of the Company in order to maximize
shareholder returns. There can be no assurances that this process will, in
fact, result in the sale of the Company. In the event the Company is sold,
there can be no assurances as to the amount or form of consideration that the
Company's shareholders would receive in such a transaction. The Company intends
to continue conducting its business as described in the above CAPITAL
EXPENDITURES AND INVESTMENT ACTIVITIES section, without regard to any potential
outcome of a proposed sale.
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<PAGE>
UNCERTAINTIES INVOLVING FORWARD-LOOKING DISCLOSURE
Certain of the statements set forth above under "LIQUIDITY AND CAPITAL
RESOURCES - CAPITAL EXPENDITURES AND INVESTMENT ACTIVITIES" AND "STRATEGIC
ALTERNATIVES", such as the statements regarding estimated production amounts,
available cash and expected cash flows from operating activities for 1997 and
1998, estimated development costs and number of anticipated wells to be drilled
in 1997 and thereafter, the planned 3-D seismic program and the potential sale
of the Company are forward-looking and are based upon the Company's current
belief as to the outcome and timing of such future events. There are numerous
uncertainties inherent in estimating quantities of proved oil and gas reserves
and in projecting future rates of production and timing of development
expenditures, including many factors beyond the control of the Company. Reserve
engineering is a subjective process of estimating underground accumulations of
oil and gas that cannot be measured in an exact way, and the accuracy of any
reserve estimate is a function of the quality of available data and of
engineering and geological interpretation and judgment.
As a result, estimates made by different engineers often vary from one
another. In addition, results of drilling, testing and production subsequent to
the date of an estimate may justify revisions of such estimate and such
revisions, if significant, would change the schedule of any further production
and development drilling. Accordingly, reserve estimates are generally
different from the quantities of oil and gas that are ultimately recovered.
Furthermore, the estimated production amounts and numbers of wells to be drilled
in 1997 and beyond are based upon product prices and costs as of December 31,
1996 (except for gas sold under contract, in which case the contract prices were
used), which will probably be different from the actual prices recognized and
costs incurred in 1997 and beyond. Additional factors which could materially
affect the Company's oil and gas production and development drilling program in
the future are general economic conditions; the impact of the activities of OPEC
and other competitors; the impact of possible geopolitical occurrences world-
wide; the results of financing efforts, risks under contract and swap
agreements; changes in laws and regulations; capacity, deliverability and supply
constraints or difficulties, unforeseen engineering and mechanical or
technological difficulties in drilling or working over wells; and other risks
described under "Risk Factors" in the Company's Prospectus dated July 25, 1996,
filed with the Securities and Exchange Commission, relating to the July 1996
Equity Offering. Because of the foregoing matters, the Company's actual results
for 1997 and beyond and strategic alternatives could differ materially from
those expressed in the above-described forward-looking statements.
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ITEM 8. CONSOLIDATED FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
The information required by this Item begins at Page F-1, following Page 53
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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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................. 44 Chairman of the Board of Directors and 1987
Chief Executive Officer
Francis H. Roth.................... 59 President, Chief Operating Officer and 1989
Director
Gary S. Peck....................... 44 Vice President - Finance & N/A
Administration, Chief Financial
Officer and Corporate Secretary
Albert J. McMullin................. 40 Vice President - Land, Contracts and N/A
Acquisitions
Robert J. Cresci................... 53 Director 1994
Vinod K. Dar*...................... 46 Director 1992
David E. K. Frischkorn, Jr.*....... 45 Director 1992
Ambrose K. Monell.................. 42 Director 1987
Herbert L. Oakes, Jr............... 50 Director 1992
</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 5% of the outstanding Common Stock of the Company.
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., a Calgary, Alberta based
independent public listed oil company which Mr. Harrington also helped organize
in 1987. 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
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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
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 1982 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 and 1991. 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 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., Film Roman, Inc., Educational
Medical, Inc. and several private companies.
Mr. Dar is currently a Managing Director of Hagler Bailly Consulting and a
Director of Hagler Bailly, Inc., the parent company of Hagler Bailly Consulting,
an international management consulting firm he helped found in 1980. Mr. Dar
was President and Chairman of Jefferson Gas Systems, Inc. (a natural gas and
electric power co-investment concern) from 1991 to 1995, and the Managing
Director of Dar & Company (a consulting firm to energy companies and financial
institutions) from 1990 to 1995. He was also the Chairman of Sunrise Energy
Services, Inc. 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. See
"Transactions with Related Parties".
Mr. Frischkorn, Jr. has been Managing Director in the Energy Corporate
Finance Department of Jefferies & Company, Inc. since August 1996. Prior to
this he was a Senior Vice President and Managing Director in the Energy
Corporate Finance Department of Rauscher Pierce Refsnes, Inc., an investment
banking firm from 1992 to 1996. 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. Preceding to that he served as Vice
President, Energy Group of Kidder, Peabody & Company and Senior Vice President,
Corporate Finance of Rotan Mosle, Inc. in Houston, Texas. 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
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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 The New World Power Corporation and a number of private corporations
in the U.S. and the U.K.
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, 1996 to December 31, 1996 all filing
requirements applicable to its officers, directors and greater than 10%
stockholders were complied with on a timely basis.
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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 three 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................... 1996 $231,800 $80,908 $-0- 75,000 $3,989
Chairman of the Board.............. 1995 190,000 70,417 -0- 50,000 3,699
and Chief Executive................ 1994 190,000 62,500 -0- 148,750 3,699
Officer
Francis H. Roth...................... 1996 152,500 40,104 -0- 27,000 5,475
President and Chief................ 1995 125,000 70,208 -0- 18,000 5,113
Operating Officer.................. 1994 125,000 32,500 -0- 75,625 5,113
Gary S. Peck......................... 1996 122,000 31,333 -0- 24,000 2,490
Vice President-Finance &........... 1995 100,000 39,167 -0- 16,000 2,305
Administration, Chief.............. 1994 100,000 17,500 -0- 42,500 2,305
Financial Officer and
Corporate Secretary
Albert J. McMullin................... 1996 85,400 14,808 -0- 15,000 1,908
Vice President-Land,............... 1995 73,770 8,026 -0- 10,000 -0-
Contracts & Acquisitions........... 1994 67,000 5,025 -0- 33,500 -0-
</TABLE>
- - -----------------------------------
(1) Does not include perquisites and other personal benefits because the value
of these items did not exceed the lesser of $50,000 or 10% of reported
salary and bonus of any of the Named Executive Officers.
(2) No stock appreciation rights ("SARs") were granted to any of the Named
Executive Officers during any of the years presented.
(3) Such amounts were premiums paid by the Company for annual disability
insurance for each such officer.
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<PAGE>
STOCK OPTION GRANTS DURING 1996
The following table provides details regarding stock options granted to the
Named Executive Officers in 1996. The Company does not have any outstanding
SARs.
OPTION GRANTS IN 1996
<TABLE>
<CAPTION>
Number of % of Total
Securities Options
Underlying Granted to
Options Granted Employees Exercise or Base
Name (#)(1) in 1996 Price ($/Sh)(2) Expiration Date
- - -------------------- ---------------- ---------- ---------------- ------------------
<S> <C> <C> <C> <C>
Mark G. Harrington.. 75,000 37.9% $5.16 September 25, 2001
Francis H. Roth..... 27,000 13.6% $4.69 September 25, 2001
Gary S. Peck........ 24,000 12.1% $4.69 September 25, 2001
Albert J. McMullin.. 15,000 7.6% $4.69 September 25, 2001
</TABLE>
- - ----------------------------------
(1) Fifty percent of the options become exercisable on September 25, 1997 (the
first anniversary of the date of grant), and the remaining fifty percent
become exercisable on September 25, 1998. 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, Peck and McMullin in 1996 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 was deemed to own more than 10% of the Common Stock, the
exercise price per share of all options granted to him in 1996 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>
1996 OPTION EXERCISES AND OUTSTANDING STOCK OPTION VALUES
AS OF DECEMBER 31, 1996
The following table shows the number of shares acquired by the Named
Executive Officers upon their exercise of stock options during 1996, 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, 1996 and their respective values at such date.
AGGREGATED OPTION EXERCISES IN 1996 AND
AGGREGATED OPTIONS AND OPTION VALUES AT DECEMBER 31, 1996
<TABLE>
<CAPTION>
Number of Securities Underlying Value of Unexercised
Unexercised Options at In-the-Money Options at
Shares December 31, 1996(#) December 31, 1996($)(1)
Acquired on Value ----------------------------------- --------------------------------------
Name Exercise(#) Realized($) Exercisable Unexercisable Exercisable Unexercisable
- - -------------------- ----------- ----------- ------------- -------------------- ----------------------- -------------
<S> <C> <C> <C> <C> <C> <C>
Mark G. Harrington... 30,000 $ 80,250 262,000 100,000 $289,662 $49,688
Francis H. Roth...... 30,000 80,250 111,500 36,000 154,314 25,313
Gary S. Peck......... 55,000 147,125 69,500 32,000 96,688 22,500
Albert J. McMullin... -0- N/A 35,000 20,000 51,876 14,063
</TABLE>
- - ---------------
(1) On December 31, 1996, the closing bid price of the Common Stock as quoted
by NASDAQ was $4.875 per share. Value is calculated on the basis of the
differences between the option prices and $4.875, multiplied by the number
of shares of Common Stock granted at the respective option prices. The
option price for shares acquired by Messrs. Harrington, Roth and Peck
during 1996 was $2.20 per share. The option prices for exercisable and
unexercisable options granted to Messrs. Harrington, Roth, Peck and
McMullin covering 287,000, 147,500, 101,500 and 55,000 shares,
respectively, range from a low of $2.625 per share to a high of $4.6875 per
share. The option price for the remaining unexercisable options is higher
than $4.6875 and therefore no value is ascribed to such options in the
above table.
-40-
<PAGE>
RESTRICTED SHARE VALUES AS OF DECEMBER 31, 1996
The following table shows the number of restricted shares of Common Stock
held by the Named Executive Officers and their values at December 31, 1996:
RESTRICTED STOCK SHARES AND
RESTRICTED STOCK VALUES AT DECEMBER 31, 1996
<TABLE>
<CAPTION>
Restricted Restricted
Shares Share Value
Name (#) ($)
------------------ ----------- ------------
<S> <C> <C>
Mark G. Harrington.. 23,750 $115,781
Francis H. Roth..... 15,625 76,172
Gary S. Peck........ 12,500 60,938
Albert J. McMullin.. 8,500 41,438
</TABLE>
- - ---------------------
(1) The Restricted Shares were originally prohibited from being 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. The Restricted Stock Agreement was
subsequently amended to designate January 15, 1997, as the lapse date, at
which time the Restricted Shares became unrestricted.
(2) The value of Restricted Shares at December 31, 1996 is calculated by
multiplying the number of Restricted Shares by the December 31, 1996
closing bid price of the Common Stock as quoted by NASDAQ, which was $4.875
per share.
COMPENSATION OF DIRECTORS
During 1996, 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 second anniversary of his election to the Board of Directors (July
6, 1996), Mr. Cresci was automatically granted an option to purchase 5,000
shares of Common Stock at an exercise price equal to $5.91 per share,
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<PAGE>
110% of the fair market value of the Common Stock on such date. Upon completion
of their fourth full year of service after the effective date of the Directors'
Option Plan (October 14, 1996), 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 $6.46 per share, 110% of the fair market value of the
Common Stock on such date. Upon the fourth anniversary of his initial election
to the Board of Directors (November 17, 1996), Mr. Oakes was automatically
granted an option to purchase 5,000 shares of Common Stock at an exercise price
equal to $5.78 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, 1997 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
As of Percent
Beneficial Owner(1) March 25, 1997(2) of Class
------------------- ----------------- --------
<S> <C> <C>
Harrington and Company International
Incorporated(3)..................... 690,768 4.6
Robert J. Cresci(4).................... 32,500 *
Vinod K. Dar(4)........................ 47,500 *
David E.K. Frischkorn, Jr.(4).......... 42,500 *
Mark G. Harrington(4)(5)............... 1,006,518 6.5
Albert J. McMullin (4)................. 43,500 *
Ambrose K. Monell(4)................... 46,421 *
Herbert L. Oakes, Jr.(4)............... 47,500 *
Gary S. Peck(4)........................ 154,500 1.0
Francis H. Roth(4)..................... 199,625 1.3
Robert A. Shore(4)(6).................. 889,643 5.5
FMR Corp.(7)........................... 905,000 5.8
Bakersfield Energy Resources, Inc.(8).. 857,143 5.6
Trust Company of the West(9)........... 1,730,710 11.2
Wellington Management Company(10)...... 785,100 5.2
Paulson Partners (11).................. 1,259,700 8.3
All Directors and Officers as a group
(10 persons)(5)(6)(12).............. 2,510,207 15.0
</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
-42-
<PAGE>
EV Fund I, Ltd., and (ii) 309,868 shares 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, 22,500, 32,500, 32,500, 262,000, 35,000, 32,500, 32,500, 69,500,
111,500 and 22,500 shares for Messrs. Cresci, Dar, Frischkorn, Harrington,
McMullin, Monell, Oakes, Peck, Roth and Shore, respectively, purchasable
within 60 days upon the exercise of stock options.
(5) Mr. Harrington is the Chief Executive Officer and Chairman of the Board of
Directors of the Company. The number of shares indicated includes 682,173
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.
(6) Includes 857,143 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 8.). 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. Mr. Shore was a director of
the Company from July 6, 1994, until his resignation on March 14, 1997.
(7) The principal business address for FMR Corp. is 82 Devonshire Street,
Boston, Massachusetts 02109. Includes 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
905,000 shares owned by the Funds.
(8) The principal business address for Bakersfield Energy Resources, Inc. is
2131 Mars Court, Bakersfield, California 93308. Includes 857,143 shares of
Common Stock held by Bakersfield Gas, L.P., 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.
(9) The business address of Trust Company of the West ("TCW") is 865 South
Figueroa, Suite 1800, Los Angeles, CA 90017. Includes 256,351 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.
(10) 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.
(11) The principal business address for Paulson Partners LP is 277 Park
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<PAGE>
Avenue, 26th Floor, New York, NY 10172.
(12) Includes 653,000 shares purchasable within 60 days upon the exercise of
stock options.
Holders of the Company's Series B and C 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 and C 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.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
In October 1996, Bakersfield Gas, L.P., the holder of the Series E Junior
Convertible Preferred Stock (the "Series E Preferred Stock"), exercised its
right pursuant to the terms thereof to convert its entire 30,000 shares of
Series E Preferred Stock into 857,143 shares of common stock of the Company.
Additionally, 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, who is the Chief Executive Officer of Bakersfield Energy
Resources, Inc., the general partner of Bakersfield Gas, L.P., was a director of
the Company from July 6, 1994, until his resignation on March 14, 1997
In November 1996, EV Fund II, Ltd., the holder of the Series A 8%
Cumulative Convertible Preferred Stock (the "Series A Preferred Stock"),
exercised its right pursuant to the terms thereof to convert its entire 5,000
shares of Series A Preferred Stock into 71,459 shares of common stock of the
Company. The general partner of EV Fund II, Ltd. is Harrington and Company
International Incorporated, of which Mr. Mark G. Harrington, the Company's Chief
Executive Officer and Chairman of the Board, is the majority stockholder, the
President and a director.
Vinod K. Dar, a director of the Company, 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. In November 1994, Sunrise Marketing
Company (a subsidiary of Sunrise Energy) filed a voluntary petition for
protection under Chapter 11, Title 11 of the United States Bankruptcy Code. As
of December 31, 1995, Sunrise Marketing Company owed the Company approximately
$92,000 for gas delivered by the Company during the term of a contract acquired
with the Company's acquisition of the Bakersfield Properties. The Company
subsequently wrote off this $92,000 to bad debt expense as a result of ensuing
bankruptcy proceedings.
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
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<PAGE>
of the Company's directors, is a managing director of Pecks Management Partners
Ltd., the investment advisor to the Series D Holders.
-45-
<PAGE>
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>
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>
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:
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 Warrant to Erland & Co. dated February 28, 1997. (16)
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
("INCC") dated November 20, 1989, as amended in December, 1990 and
on March 18, 1994. (7)
4.10 Amended and Restated Warrant to First Union National Bank of North
Carolina dated May 1, 1996. (16)
4.11 Registration Rights Agreement between the Registrant and First
Union National Bank of North Carolina dated as of June 30, 1994.
(12)
4.12 Amendment No. 1, dated February 12, 1996, to Registration Rights
Agreement between the Registrant and First Union National Bank of
North Carolina dated
48
<PAGE>
as of June 30, 1994. (16)
4.13 Specimen of Common Stock Certificate. (9)
4.14 Stock Purchase Agreement dated as of June 27, 1994 among HarCor
Energy, Inc. and the Purchasers named on Schedule I thereto. (12)
4.15 Form of Warrant to Rauscher, Pierce, Refsnes, Inc. (13)
4.16 Warrant Agreement among HarCor Energy, Inc. and Texas Commerce Bank
National Association as warrant agent dated July 24, 1995. (14)
4.17 Agreement dated December 28, 1995, between the Company and INCC as
to exchange of Common Stock for Warrants and Registration Rights.
(16)
4.18 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)
4.19 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)
4.20 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)
4.21 First Supplemental Indenture dated as of October 11, 1995 to
Indenture filed as Exhibit 4.21. (14).
4.22 Amendment No. 3 dated July 8, 1996 to Warrant Certificate dated
November 23, 1992 between HarCor Energy, Inc. and Trust Company of
the West. (16)
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)
49
<PAGE>
10.5 Deed of Trust, Mortgage, Line of Credit Mortgage, Assignment,
Security Agreement Fixture Filing and 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)
10.15 Agreement of Exchange dated May 10, 1996 between HarCor Energy,
Inc. and South Coast Exploration Company. (15)
10.16 Unanimous Consent of Stock Option and Compensation Committee dated
January 15, 1997, granting restricted stock awards to Mark G.
Harrington, Francis H. Roth, Gary S. Peck and Albert J. McMullin.
(16)
10.17 Unanimous Consent of Board of Directors granting restricted stock
awards to non-employee directors and employee severance awards to
employees of the Company. (16)
23.2 Consent of Ryder Scott Company Petroleum Engineers. (16)
23.3 Consent of Huddleston & Co., Inc. (16)
23.4 Consent of Arthur Andersen LLP. (16)
- - -------------------
* 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.
50
<PAGE>
(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.
(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 as Exhibit 10.15 to HarCor Energy, Inc.'s Form S-1 Registration
Statement No. 333-04987 and incorporated herein by reference.
(16) Filed herewith.
(b) No Reports on Form 8-K were filed by the Company during the last quarter of
1996.
51
<PAGE>
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 27, 1997 By: /s/ Gary S. Peck
-----------------------------------------
Gary S. Peck
Vice President - Finance & Administration,
Chief Financial Officer and Corporate
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.
Date: March 27, 1997 /s/ Mark G. Harrington
---------------------------------------
Mark G. Harrington
Chairman of the Board, Chief Executive
Officer and Director
(Principal Executive Officer)
Date: March 27, 1997 /s/ Gary S. Peck
---------------------------------------
Gary S. Peck
Vice President - Finance & Administration,
Chief Financial Officer and Corporate
Secretary (Principal Accounting and
Financial Officer)
Date: March 27, 1997 /s/ Francis H. Roth
---------------------------------------
Francis H. Roth
President, Chief Operating Officer and
Director
Date: March 27, 1997 /s/ Robert J. Cresci
---------------------------------------
Robert J. Cresci
Director
Date: March 27, 1997 /s/ Vinod K. Dar
---------------------------------------
Vinod K. Dar
Director
Date: March 27, 1997 /s/ David E.K. Frischkorn, Jr.
---------------------------------------
David E.K. Frischkorn, Jr.
Director
52
<PAGE>
Date: March 27, 1997 /s/ Ambrose K. Monell
---------------------------------------
Ambrose K. Monell
Director
Date: March 27, 1997 /s/ Herbert L. Oakes, Jr.
---------------------------------------
Herbert L. Oakes, Jr.
Director
53
<PAGE>
HARCOR ENERGY, INC.
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
INDEX
<TABLE>
<CAPTION>
CONSOLIDATED FINANCIAL STATEMENTS: Page
----
<S> <C>
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>
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, 1996 and 1995,
and the related consolidated statements of operations, stockholders' equity and
cash flows for each of the three years in the period ended December 31, 1996.
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, 1996 and 1995, and the results of their
operations and their cash flows for each of the three years in the period ended
December 31, 1996, 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 28, 1997
F-2
<PAGE>
<TABLE>
<CAPTION>
HARCOR ENERGY, INC.
CONSOLIDATED BALANCE SHEETS
DECEMBER 31, 1996 AND 1995
---------------------------------------------------------
ASSETS
1996 1995
------------- -------------
<S> <C> <C>
CURRENT ASSETS:
Cash and cash investments............ $ 1,593,330 $ 12,204,460
Accounts receivable.................. 8,894,240 3,829,548
Prepaids and other................... 185,618 282,833
-------------- --------------
Total current assets................. 10,673,188 16,316,841
-------------- --------------
PROPERTY AND EQUIPMENT, at cost,
successful efforts method:
Unproved oil and gas properties...... 4,079,779 5,039,553
Proved oil and gas properties:
Leasehold costs.................... 56,934,690 54,793,930
Plant, lease and well equipment.... 19,194,951 16,858,402
Intangible development costs....... 28,918,323 18,547,293
Furniture and equipment.............. 373,772 256,211
-------------- --------------
109,501,515 95,495,389
Less - Accumulated depletion,
depreciation and amortization...... (28,876,525) (22,647,657)
-------------- --------------
Net property, plant and equipment.... 80,624,990 72,847,732
-------------- --------------
OTHER ASSETS........................... 3,328,364 5,066,904
-------------- --------------
$ 94,626,542 $ 94,231,477
============== ==============
</TABLE>
The accompanying notes are an integral part
of these consolidated financial statements.
F-3
<PAGE>
<TABLE>
<CAPTION>
HARCOR ENERGY, INC.
CONSOLIDATED BALANCE SHEETS
DECEMBER 31, 1996 AND 1995
-----------------------------------------------------------
LIABILITIES AND STOCKHOLDERS' EQUITY
1996 1995
------------- -------------
<S> <C> <C>
CURRENT LIABILITIES:
Short-term portion of long-term bank
debt................................ $ 300,000 $ -
Other short-term debt................. 85,500 378,695
Accounts payable and accrued
liabilities......................... 10,348,318 14,612,813
-------------- --------------
Total current liabilities............. 10,733,818 14,991,508
-------------- --------------
LONG-TERM BANK DEBT..................... 1,700,000 5,600,000
-------------- --------------
14-7/8% SENIOR SECURED NOTES............ 52,400,131 63,108,608
-------------- --------------
OTHER LIABILITIES....................... - 316,469
-------------- --------------
COMMITMENTS AND CONTINGENCIES (NOTE 5)
STOCKHOLDERS' EQUITY:
Preferred stock, $.01 par value -
1,500,000 shares authorized;
30,000 and 65,000 shares issued and
outstanding at December 31, 1996
and 1995, respectively.............. 300 650
Common stock, $.10 par value -
25,000,000 shares authorized;
15,110,836 and 8,631,207 shares
issued and outstanding at December
31, 1996 and 1995, respectively
and 1995, respectively.............. 1,511,084 863,121
Additional paid-in capital............ 49,891,612 29,163,670
Accumulated deficit................... (21,610,403) (19,812,549)
-------------- --------------
Total stockholders' equity............ 29,792,593 10,214,892
-------------- --------------
$ 94,626,542 $ 94,231,477
============== ==============
</TABLE>
The accompanying notes are an integral part
of these consolidated financial statements.
F-4
<PAGE>
<TABLE>
<CAPTION>
HARCOR ENERGY, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
FOR THE YEARS ENDED DECEMBER 31, 1996, 1995 AND 1994
----------------------------------------------------
1996 1995 1994
------------ ------------ ------------
<S> <C> <C> <C>
REVENUES:
Oil and gas revenues.................. $ 21,716,014 $ 16,030,043 $ 10,981,651
Gas plant operating and marketing
revenues............................ 6,635,147 6,361,665 1,978,317
Interest income....................... 124,040 164,193 16,269
Other................................. 3,146,973 39,368 236,814
------------- ------------- -------------
31,622,174 22,595,269 13,213,051
------------- ------------- -------------
COSTS AND EXPENSES:
Production costs...................... 5,133,892 5,262,887 3,609,831
Gas plant operating and marketing
costs............................... 4,016,850 3,704,397 1,707,551
Exploration costs..................... 367,893 311,115 329,215
Depletion, depreciation and
amortization........................ 8,172,578 5,973,117 3,897,133
General and administrative expenses... 3,159,605 2,744,239 2,014,232
Interest expense...................... 10,066,602 6,846,471 2,268,558
Other................................. 367,844 482,608 203,000
------------- ------------- -------------
31,285,264 25,324,834 14,029,520
------------- ------------- -------------
Income (loss) before provision for
income taxes and extraordinary
item................................. 336,910 (2,729,565) (816,469)
Provision for income taxes.............. - - -
------------- ------------- -------------
Net operating income (loss) before
extraordinary item.................... 336,910 (2,729,565) (816,469)
EXTRAORDINARY ITEM - Loss on early
extinguishment of debt................ (2,134,764) (1,888,433) (122,193)
------------- ------------- -------------
Net loss.............................. (1,797,854) (4,617,998) (938,662)
Dividends on preferred stock............ (460,842) (1,000,161) (795,065)
Accretion on redeemable preferred
stock................................. - (2,146,812) (156,152)
------------- ------------- -------------
NET LOSS APPLICABLE TO COMMON
STOCKHOLDERS.......................... $ (2,258,696) $ (7,764,971) $ (1,889,879)
============= ============= =============
NET LOSS PER COMMON SHARE BEFORE
EXTRAORDINARY ITEM.................... $ (0.01) $ (0.74) $ (0.27)
============= ============= =============
NET LOSS PER COMMON SHARE AFTER
EXTRAORDINARY ITEM.................... $ (0.20) $ (0.98) $ (0.29)
============= ============= =============
</TABLE>
The accompanying notes are an integral part
of these consolidated financial statements.
F-5
<PAGE>
HARCOR ENERGY, INC.
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
FOR THE YEARS ENDED DECEMBER 31, 1996, 1995 AND 1994
<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, 1993.............. 37,500 $ 375 5,736,884 $ 573,689 $21,217,720 $(14,255,889)
Issuance 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.............. $ 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 of 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)
Issuance of common stock pursuant to
warrant exchanges...................... -- -- 77,000 7,700 (7,700) --
Issuance of common stock pursuant to
public equity offering................. -- -- 5,359,059 535,906 21,337,781 --
Issuance of common stock pursuant to
option exercises....................... -- -- 115,000 11,500 241,500 --
Cancellation of warrants................ -- -- -- -- (290,290) --
Conversion of Preferred Stock........... (35,000) (350) 928,570 92,857 (92,507) --
Preferred stock dividends............... -- -- -- -- (460,842) --
Net loss................................ -- -- -- -- -- (1,797,854)
------- ----- ---------- ---------- ----------- ------------
BALANCE, DECEMBER 31, 1996.............. 30,000 $ 300 15,110,836 $1,511,084 $49,891,612 $(21,610,403)
======= ===== ========== ========== =========== ============
</TABLE>
The accompanying notes are an integral part
of these consolidated financial statements.
F-6
<PAGE>
HARCOR ENERGY, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE YEARS ENDED DECEMBER 31, 1996, 1995 AND 1994
<TABLE>
<CAPTION>
1996 1995 1994
-------- -------- --------
<S> <C> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net Loss.............................................. $ (1,797,854) $ (4,617,998) $ (938,662)
Adjustments to reconcile net loss to net cash
provided by operating activities:
Depletion, depreciation and amortization and
impairment......................................... 8,172,578 5,973,117 3,897,133
Amortization of deferred charges.................... 919,996 708,932 254,372
Exploration costs..................................... 367,893 311,115 329,215
(Gain) loss on disposition of assets.................. (2,951,920) 131,702 (230,993)
Loss on early extinguishment of debt.................. 2,134,764 1,888,433 122,193
Other................................................. 367,844 350,908 203,000
------------ ------------ -----------
7,213,301 4,746,209 3,636,258
Changes in current assets and liabilities:
Increase in receivables............................... (497,833) (212,319) (2,520,726)
(Increase) decrease in other current assets........... 97,215 24,408 (147,002)
Increase (decrease) in accounts payable and accrued
liabilities.......................................... (729,679) 457,233 1,772,930
------------ ------------ -----------
Net cash provided by operating activities............. 6,083,004 5,015,531 2,741,460
------------ ------------ -----------
CASH FLOWS FROM INVESTING ACTIVITIES:
Exploration costs..................................... (367,893) (311,115) (329,215)
Proceeds from sale of assets.......................... -- 13,650 455,754
Additions to property and equipment................... (21,037,567) (8,953,427) (45,607,532)
------------ ------------ -----------
Net cash used in investing activities................. (21,405,460) (9,250,892) (45,480,993)
------------ ------------ -----------
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from long-term bank debt..................... 6,400,000 5,600,000 34,436,875
Repayment of bank debt................................ (10,000,000) (39,400,000) (3,577,873)
Proceeds from issuance of (redemption of)
Redeemable Preferred Stock........................... -- (10,931,200) 10,000,000
Proceeds from issuance of (redemption of)
14-7/8% Senior Secured Notes......................... (12,426,400) 64,647,700 --
Proceeds from issuance of common stock................ 22,126,687 -- 3,053,101
Dividends on preferred stock.......................... (460,842) (464,161) (356,413)
Increase in other assets.............................. (318,455) (3,856,119) (1,772,621)
Other................................................. (609,664) (55,597) (305,850)
------------ ------------ -----------
Net cash provided by financing activities............. 4,711,326 15,540,623 41,477,219
------------ ------------ -----------
Net increase (decrease) in cash....................... (10,611,130) 11,305,262 (1,262,314)
Cash at beginning of period........................... 12,204,460 899,198 2,161,512
------------ ------------ -----------
Cash at end of period................................. $ 1,593,330 $ 12,204,460 $ 899,198
============ ============ ===========
</TABLE>
The accompanying notes are an integral part
of these consolidated financial statements.
F-7
<PAGE>
HARCOR ENERGY, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE YEARS ENDED DECEMBER 31, 1996, 1995 AND 1994
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION (ALL DOLLAR AMOUNTS HAVE BEEN
ROUNDED TO THE NEAREST THOUSAND)-
The Company made cash interest payments of $10,219,000, $2,329,000 and
$2,030,000 in 1996, 1995 and 1994, respectively.
SUPPLEMENTAL INFORMATION REGARDING NON-CASH INVESTING AND FINANCING ACTIVITIES -
YEAR ENDED DECEMBER 31, 1996
The Company had a receivable of $4,674,000 related to the sale of certain
oil and gas assets, which was collected in January 1997 and is not reflected in
the 1996 statement of cash flows.
The Company incurred charges relating to the early extinguishment of debt,
of which $982,000 were non-cash and not reflected in financing activities.
The Company incurred a non-cash charge of $368,000 in connection with the
write-off of a long-term investment and related receivable which is not
reflected in investing activities.
The Company had accrued capital costs aggregating $4,725,000 at December
31, 1996, which are not reflected in investing activities.
The Company entered into agreements resulting in the issuance of 77,000
shares of its common stock in exchange for the cancellation of options and
warrants to purchase an aggregate of 656,250 of its common shares. These
transactions are not reflected in financing activities in this statement of cash
flows and did not result in a gain or loss.
SUPPLEMENTAL INFORMATION REGARDING NON-CASH INVESTING AND FINANCING ACTIVITIES -
YEAR ENDED DECEMBER 31, 1995
The Company had accrued capital expenditure costs of $8,188,000 at December
31, 1995 which are not reflected in investing activities.
Pursuant to the terms of a bridge loan outstanding during 1995, 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 an aggregate of $661,000 in short-term debt and other
liabilities in connection with the financing of an insurance policy and certain
equipment which is not reflected in financing activities.
F-8
<PAGE>
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.
Dividend payments included "in-kind" dividends consisting of $476,000 in
newly-issued Series D Preferred Stock, and $60,000 of newly-issued unregistered
shares of the Company's common stock, which are not reflected in financing
activities.
The Company recorded non-cash accretion charges of $2,147,000 on its Series
D Preferred Stock which are not reflected in financing activities.
SUPPLEMENTAL INFORMATION REGARDING NON-CASH INVESTING AND FINANCING ACTIVITIES -
YEAR ENDED DECEMBER 31, 1994
The Company wrote off $203,000 of its cost basis in the dissolution of a
limited partnership, and expensed $122,000 reflecting a write-off of deferred
financing costs resulting from the early extinguishment of debt. These non-cash
charges are not reflected in investing and financing activities.
The Company had accrued acquisition and developmental drilling costs
aggregating $1,823,000 and accrued prepaid and deferred financing costs
aggregating $342,000 at December 31, 1994, which 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.
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 is not
reflected in financing activities.
Dividend payments included "in-kind" dividends consisting of $455,000 in
newly-issued Series D Preferred Stock, and $60,000 of
F-9
<PAGE>
newly-issued unregistered shares of the Company's common stock, which are not
reflected in financing activities.
The accompanying notes are an integral part
of these consolidated financial statements.
F-10
<PAGE>
HARCOR ENERGY, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1996
(1) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
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.
PRINCIPLES OF CONSOLIDATION -
The accompanying consolidated financial statements 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")
through March 1996 (see below); 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 have been within HarCor Energy, Inc. Separate financial
statements of Warrior and HTACI, HarCor's only direct or indirect subsidiaries,
have not been included herein because they were wholly-owned and not material.
In March 1996, Warrior and HTACI were merged into HarCor, and all of their
assets became the property, and all of their liabilities and guarantees became
the obligations, of HarCor.
All significant intercompany accounts and transactions have been eliminated
in consolidation.
ACCOUNTS RECEIVABLE -
Accounts receivable at December 31, 1996 and 1995 were comprised of the
following (amounts in thousands):
<TABLE>
<CAPTION>
1996 1995
------ ------
<S> <C> <C>
Oil and gas sales receivable....... $3,464 $3,089
Receivable for sale of property ... 4,674 -
Other receivables.................. 756 741
------ ------
$8,894 $3,830
====== ======
</TABLE>
F-11
<PAGE>
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.
GAS BALANCING
Natural gas revenues are recorded on the entitlement method based on the
Company's percentage ownership of current production. Each working interest
owner in a well generally has the right to a specific percentage of production,
although actual production sold may differ from an owner's ownership percentage.
Under entitlement accounting, a receivable is recorded when underproduction
occurs and a payable when overproduction occurs.
CAPITALIZED INTEREST COSTS -
Certain interest costs relating to the Company's 14-7/8% Senior Secured
Notes have been capitalized as part of the historical costs of unproved oil and
gas properties. These capitalized interest costs were $565,000 and $452,000 for
1996 and 1995, respectively.
ACCOUNTS PAYABLE AND ACCRUED LIABILITIES -
Accounts payable and accrued liabilities at December 31, 1996 and 1995 were
comprised of the following (amounts in thousands):
<TABLE>
<CAPTION>
1996 1995
------ ------
<S> <C> <C>
Accrued development costs........... $ 4,725 $ 8,188
Accrued interest payable............ 3,710 4,217
Trade accounts payable.............. 1,698 1,889
Other accrued liabilities........... 215 319
------- -------
$10,348 $14,613
======= =======
</TABLE>
STOCK COMPENSATION PLANS
F-12
<PAGE>
The Company accounts for its Stock Compensation Plans by applying
provisions of Accounting Principles Board ("APB") Opinion No. 25, "Accounting
for Stock Issued to Employees"; accordingly, no compensation expense has been
recognized for awards granted under these plans. See Note 8.
The Company has elected not to apply SFAS No. 123, "Accounting for Stock
Based Compensation", which would result in additional compensation expense in
the statement of income for 1996. Disclosure as to what net income or loss and
earnings per share would have been had this method been followed is included in
Note 8.
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 in all periods. The weighted average number of outstanding common
shares utilized in the calculation was 11,150,000 in 1996, 7,904,000 shares in
1995, and 6,447,000 shares in 1994.
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.
IMPAIRMENT OF LONG-LIVED ASSETS -
In September 30, 1995, the Company adopted the provisions of Statement of
Financial Accounting Standards ("SFAS") No. 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 were
evaluated at December 31, 1996 and 1995 and compared to the carrying values of
such assets at those dates. The resulting impairment loss of $876,000 was
included in depletion, depreciation, amortization and impairment in 1995. There
was no impairment charge new in 1996.
CHANGES IN ACCOUNTING PRINCIPLES -
In October 1996, the American Institute of Certified Public Accountants
issued Statement of Position No. 96-1, "Environmental
F-13
<PAGE>
Remediation Liabilities", which establishes new accounting and reporting
standards for the recognition and disclosure of environmental remediation
liabilities. The provisions of the statement are effective for fiscal years
beginning after December 15, 1996. The impact of this new standard is not
expected to have a significant effect on the Companys financial position or
results of operations.
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 12., "Oil and Gas Producing
Activities".)
PRIOR YEAR RECLASSIFICATIONS -
Certain prior year amounts have been reclassified to conform with the
current year presentation.
(2) 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 and light, 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 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 until April 1997.
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 $100.00 per share and a seven-year callable warrant to purchase
1,000,000 shares of common stock 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 8.)
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):
F-14
<PAGE>
Total revenues........................ $19,304
=======
Net loss attributable to common
stockholders......................... $(1,587)
=======
Net loss per common share............. $ (0.22)
=======
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.
(3) LONG-TERM DEBT
In July 1995, the Company repaid all amounts outstanding under its existing
credit agreement with Internationale Nederlanden (U.S.) Capital Corporation
("ING Capital") with proceeds resulting from a long-term refinancing of its debt
(see Note 4.) and entered into a new credit agreement with ING Capital (the
"Credit Agreement").
Availability under the Credit Agreement is limited to a "borrowing base"
amount which is determined semi-annually by ING Capital, at its sole discretion,
and may be established at an amount up to $15 million. The borrowing base was
$15 million at December 31, 1996. Availability under the Credit Agreement will
terminate on June 30, 1997 (unless renewed by ING Capital), and amounts
outstanding will convert to a term loan on September 30, 1997, with a set
amortization schedule of a percentage of the outstanding principal balance
continuing through December 31, 2000. Amounts advanced under this facility bear
interest at an adjusted Eurodollar rate plus 2.50% or Prime Rate (as determined
by ING Capital) plus 0.5% at the Company's option. There was $2 million
outstanding under the Credit Agreement at December 31, 1996. The effective
interest rate on the balance outstanding was 7.93% at that date.
The 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 equal to at least 100% of current
liabilities, (ii) the maintenance of a minimum tangible net worth, (iii) the
incurrence of indebtedness, (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 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
F-15
<PAGE>
exceptions.
(4) SENIOR SECURED NOTE OFFERING
SALE OF UNITS -
On July 24, 1995, the Company consummated the sale (the "Note Offering") of
65,000 units consisting of $65 million aggregate principal amount of its 14-7/8%
Senior Notes due July 15, 2002 (the "Notes") and five-year warrants to purchase
1,430,000 shares of common stock at $3.85 per share. Each unit consisted of a
$1,000 principal amount Note and 22 warrants to purchase an equal number of
shares of common stock. The warrants became immediately detachable upon the
closing of the Note Offering.
The 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 repay $34.3 million
outstanding under its Credit Agreement with ING Capital, repay $5 million
outstanding under a bridge loan with ING Capital, redeem the $10.9 million
outstanding shares of Series D Preferred Stock, and acquire additional interests
in the Bakersfield Properties for $2.3 million. The Company used the remaining
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 and are payable
semi-annually on January 15 and July 15 of each year. The Notes are redeemable,
in whole or in part, at the option of the Company at any time on or after July
15, 1999, at the following redemption prices (expressed as percentages of the
principal amount) if redeemed during the twelve-month period commencing on July
15 of the year set forth below plus, in each case, accrued interest thereon to
the date of redemption:
Year Percentage
---- ----------
1999........................ 110%
2000........................ 107%
2001 and thereafter......... 100%
The Notes were issued pursuant to an indenture, dated July 24, 1995,
between the Company and Texas Commerce Bank National Association, as Trustee
(the "Indenture"). All of the obligations of the Company under the Notes and
the Indenture are secured by a second priority lien on substantially all of the
assets of the Company securing its bank debt.
F-16
<PAGE>
Pursuant to the terms of the Notes, and as a result of the Company's public
offering of common stock in July 1996 (see Note 4), the Company redeemed an
aggregate of $11.3 million of the Notes in August and October 1996 at a price
equal to 110% of their face value for an aggregate redemption price of $12.4
million. There were a total of $53.7 million Notes outstanding (face value) at
December 31, 1996. The difference between the face value of the Notes and the
balance sheet amount recorded herein is the result of an initial allocation to
paid-in capital of the value ascribed to the warrants at the close of the Note
Offering. This amount is being amortized through interest expense over the life
of the Notes.
EXCESS CASH FLOW OFFER -
In the event that the Company has excess cash flow (as defined) in excess
of $2 million in any fiscal year, beginning with the fiscal year ending December
31, 1996, the Company will be required to make an offer to purchase Notes from
all Holders in an amount equal to 50% of all such excess cash flow for such
fiscal year (not just the amount in excess of $2 million) at a purchase price
equal to 101% of the principal amount thereof, plus accrued and unpaid interest
thereon ("Excess Cash Flow Offer"). The 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. No such offer was required for the year
ended December 31, 1996.
(5) COMMITMENTS AND CONTINGENCIES
RISK MANAGEMENT AND HEDGING ACTIVITIES -
The Company utilizes financial instruments as a hedging strategy to protect
against the effects of volatility in crude oil and natural gas commodity prices.
Upon consummation of an acquisition, the Company will usually enter into
commodity derivative contracts (hedges) such as futures, swaps or collars or
forward contracts which cover a substantial portion of the existing production
of the acquired property. Over time, as production increases, the Company will
continue to utilize hedging techniques to ensure that a substantial portion of
its production remains effectively hedged. Gains or losses under the hedging
agreements are recognized in oil and gas production revenues in periods in which
the hedged production occurs with such agreements settling on a monthly basis.
As of December 31, 1996, the Company was a party to various gas contracts
covering volumes of approximately 2.9 Bcf and 0.3 Bcf for 1997 and 1998,
respectively, at fixed prices ranging from $1.68/MMBtu to $2.07/MMBtu or
indexed prices; and oil hedges covering notional volumes of approximately 288
MBOE and 29 MBOE for 1997 and 1998, respectively, at fixed prices ranging from
$17.25/Bbl to $18.51/Bbl or NYMEX-indexed prices.
F-17
<PAGE>
FAIR VALUE OF FINANCIAL INSTRUMENTS
The following table summarizes the estimated fair value of financial
instruments and related transactions for non-trading activities at December 31,
1996 (amounts are in thousands):
<TABLE>
<CAPTION>
Estimated
Carrying Fair
Amount Value(1)
-------- ---------
<S> <C> <C>
Long-Term Debt(2)(4)................ $ 2,000 $ 2,000
14-7/8% Senior Secured Notes(3)(4).. $52,400 $52,400
NYMEX-related Crude Oil Price
Swaps.............................. $ - $ (290)
</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 3., "Long-Term Debt."
(3) See Note 4., "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.
LEASE OBLIGATIONS -
Future net minimum rental payments for office and office equipment lease
commitments as of December 31, 1996 aggregated approximately $133,000, $133,000,
and $90,000 for 1997, 1998 and 1999, respectively.
Rental expense in the aggregate under noncancellable long-term operating
leases was approximately $163,000, $165,000 and $159,000 for 1996, 1995 and
1994, respectively.
EMPLOYEE SEVERANCE OBLIGATION -
Concurrent with the Company's engagement of investment bankers to pursue
its potential sale, the Company's Board of Directors approved in March 1997 a
severance arrangement for all of the Company's employees. The purpose of this
severance arrangement is to maximize shareholder value in any potential sale
process and retain personnel necessary to effect an orderly transition in the
event of sale. The severance arrangement would be effected only in the event the
Company is sold or a change of control occurs. The total financial impact of
this severance
F-18
<PAGE>
arrangement, if effected, would result in a decrement of approximately $0.10 per
share to any potential sales proceeds on a fully-diluted basis. (See Note 13.)
(6) 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 34% 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, 1996 due to
taxable losses in all three years.
At December 31, 1996, the Company had accumulated net operating loss
("NOL") carryforwards for United States federal income tax purposes of
approximately $25,324,000. 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 (or could become) subject to limitations on the
amounts that may be used to reduce taxable income in any given year based on
changes in the stock ownership of the Company. Accordingly, the total net
operating loss carryforwards available to reduce federal income taxes in the
future are approximately $20,624,000. Such net operating loss carryforwards
expire as follows for the years ending December 31 (amounts in thousands):
1998 . . . . . . . . . . $ 550
2001 . . . . . . . . . . 205
2002 . . . . . . . . . . 90
2003 . . . . . . . . . . 1,555
2004 . . . . . . . . . . 755
2006 . . . . . . . . . . 1,045
2007 . . . . . . . . . . 1,150
2008 . . . . . . . . . . 1,449
2009 . . . . . . . . . . 3,316
2010 . . . . . . . . . . 5,727
2011 . . . . . . . . . . 4,782
-------
$20,624
=======
Under the provisions of SFAS 109, "Accounting for Income Taxes," 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, 1996 and 1995 are as follows (amounts in thousands):
F-19
<PAGE>
December 31,
----------------
1996 1995
------ ------
Deferred tax assets:
Net operating loss carryforwards.. $ 7,012 $ 5,805
Other............................. - 115
------- -------
Total deferred tax assets....... 7,012 5,920
Less valuation allowances....... (4,447) (4,145)
------- -------
Net deferred tax assets......... $ 2,565 $ 1,775
------- -------
Deferred tax liabilities:
Oil and gas properties............ $(2,414) $(1,681)
Other............................. (151) (94)
------- -------
Total deferred tax liabilities.. (2,565) (1,775)
------- -------
Net deferred taxes.............. $ - $ -
======= =======
(7) STOCKHOLDERS' EQUITY
EQUITY OFFERING -
On July 31, 1996, the Company completed a public offering of 6,400,000
shares of Common Stock at $4.50 per share (the "Equity Offering"). The Company
sold 5,059,059 new primary shares in the Equity Offering, and certain of the
Company's existing stockholders sold 1,340,941 shares. On August 28, 1996, the
underwriters of the Equity Offering exercised an over-allotment option to sell
an additional 300,000 shares of common stock. The Company realized total net
proceeds of approximately $21.9 million from the Equity Offering after
underwriters' discount and offering expenses.
The Company immediately used $10 million of the proceeds from the Equity
Offering to repay the total outstanding under its Credit Agreement at that date.
Pursuant to the terms of its Note Offering completed in July 1995, the Company
used an aggregate of $12.4 million of the proceeds from the Equity Offering to
redeem a portion of its Senior Secured Notes (see Note 4). The remaining net
proceeds to the Company, along with availability under the Credit Agreement,
were used to initiate its 3-D seismic, CAEX and exploration activities.
The following table presents the unaudited pro forma condensed consolidated
statement of operations for the year ended December 31, 1996, which is derived
from the historical financial statements of the Company as set forth herein,
adjusted to reflect the following transactions as if they had occurred at
January 1, 1996: (i) the sale by the Company of 5,359,059 primary shares of
common stock at a price of $4.50 per share, less underwriters' discount, (ii)
the redemption of $11.3 million of the Company's 14-7/8% Senior Secured Notes
and (iii) the repayment of outstanding bank debt (amounts in thousands):
F-20
<PAGE>
Total revenues................. $31,622
Net loss attributable to
common shareholders........... $ (711)
Net loss per common share...... $ (0.06)
OTHER COMMON STOCK ISSUANCES -
During 1996, the Company issued 115,000 common shares at a price of $2.20
per share pursuant to the exercise of stock options.
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.
During 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 16,770 and 16,671 common shares pursuant to the payment
of Series E Preferred Stock dividends during 1995 and 1994, respectively.
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.
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.
WARRANT EXCHANGES -
During 1996, the Company completed exchange agreements whereby certain
holders of options and warrants to purchase the Company's common stock exchanged
an aggregate 656,250 options and warrants at exercise prices ranging from $4.00
to $5.50 per share for an aggregate of 77,000 unregistered shares of common
stock of the Company.
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 3,424,666 warrants to purchase shares of common
stock at $3.67 per share for 1,100,000 shares of unregistered 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
F-21
<PAGE>
event of a sale of the Company or its assets and certain registration rights to
the Series D Holders.
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.
PREFERRED STOCK -
The Series A 8% Convertible Preferred Stock, of which 5,000 shares had been
outstanding, was converted into 71,428 common shares of the Company in November
1996 on an exchange basis equivalent to $3.50.
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.
The Company redeemed the total 109,312 shares of Series D Preferred Stock
outstanding in July 1995 with proceeds resulting from a long-term refinancing of
its debt. (See "Warrant Exchanges".)
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 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. Pursuant to the terms thereof, BER elected in October 1996 to
convert all of its 30,000 shares of the Series E Preferred Stock into 857,143
shares of common stock of the Company.
F-22
<PAGE>
PREFERRED STOCK DIVIDENDS -
The Company has paid dividends on its preferred stocks for the three years
ended December 31, 1996 as follows (amounts in thousands):
Preferred Stock 1996 1995 1994
- - --------------- ------ ------ ------
8% Convertible Series A, B, C.. $ 258 $ 265 $ 280
9% Redeemable Series D......... - 540 455
4%-9%* Convertible Series E.... 203 195 60
----- ------ -----
$ 461 $1,000 $ 795
===== ====== =====
* The coupon rate on the Series E increased from 4% per annum to 9% per annum
effective July 1, 1995.
Dividends on the 9% Series D Preferred Stock for 1994 and the first half of
1995 were paid "in-kind" in additional shares of Series D Preferred Stock.
Dividends on the Series E Preferred Stock for 1994 and the first half of 1995
were paid in shares of common stock of the Company. All other dividends were
paid in cash for periods presented.
(8) 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 the 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.
Option transactions for the three years ended December 31, 1996 are
summarized as follows:
F-23
<PAGE>
<TABLE>
<CAPTION>
Number of Options
-----------------------------------------------
Available
Exercise for Future
Outstanding Price Grant
----------- --------- ----------
<S> <C> <C> <C>
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
Canceled................................ (150,000) $4.88 -
Exercised............................... (115,000) $2.20 -
Granted................................. 228,000 $4.56-$6.46 (228,000)
--------- ---------
Balance at December 31, 1996.............. 1,011,500 $2.61-$6.46 563,500
========= =========
</TABLE>
At December 31, 1996, options to purchase 708,500 common shares were
exercisable under these plans and agreements, with prices ranging from $2.61 to
$4.68 per share and an aggregate exercise price of $2,537,000.
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, 1996 are summarized as follows:
Number of
Warrants Exercise
Outstanding Price
----------- --------
Balance at December 31, 1993.... 640,293 $3.20-$5.00
Issued........................ 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
Issued........................ 3,051,765 $3.85-$4.75
----------
Balance at December 31, 1995.... 2,733,340 $3.20-$5.50
Canceled...................... (576,000) $3.85-$5.50
Exercised..................... (30,000) $4.00
Issued........................ 132,451 $3.57-$4.00
----------
Balance at December 31, 1996.... 2,259,791 $3.20-$4.75
==========
At December 31, 1996, all outstanding warrants were exercisable with an
aggregate exercise price of $8,669,000.
The fair value of each option grant is estimated using the Black-Scholes
option-pricing model with the following weighted-average assumptions used for
grants in 1996 and 1995, respectively: (1) dividend yield of 0% and 0%, (2)
expected volatility of 71% and
F-24
<PAGE>
57%, (3) risk-free interest rate of 6.3% and 6.1%, and (4) expected life of 5.7
years and 6.0 years.
The following table summarizes certain information for the shares
outstanding at December 31, 1996 (shares in thousands):
<TABLE>
<CAPTION>
Shares Outstanding Shares Exercisable
---------------------------- ------------------
Weighted Weighted Weighted
Range of Average Average Average
Grant Remaining Grant Grant
Prices Shares Life Price Shares Price
- - -------- ------ --------- --------- ------ ---------
<S> <C> <C> <C> <C> <C>
$2.61-$2.89 125,000 5.2 $2.73 62,500 $2.73
$3.16-$3.72 25,000 10.0 $3.38 12,500 $3.38
$4.56-$4.69 121,000 5.0 $4.67 0 0
$5.15-$6.47 107,000 6.4 $5.44 0 0
------- ----- ------ -----
$2.61-$6.47 378,000 $4.16 75,000 $2.78
======= ===== ====== =====
</TABLE>
The Company's pro forma net income and earnings per share of common stock
for 1996 and 1995, had compensation costs been recorded in accordance with SFAS
No. 123, are presented below (in thousands except per share data):
<TABLE>
<CAPTION>
1996 1995
------- --------
<S> <C> <C> <C> <C>
As As
Reported Pro Forma Reported Pro Forma
Net Loss Before
Extraordinary Item $(124) $(242) $(5,876) $(5,876)
Net Loss Per Common
Share Before
Extraordinary Item $(0.01) $(0.02) $ (0.74) $(0.74)
</TABLE>
The effects of applying SFAS No. 123 in this pro forma disclosure are not
indicative of future amounts. SFAS No. 123 does not apply to awards prior to
1995, and additional awards in future years are anticipated.
The Black-Scholes model used by the Company to calculate option values, as
well as other currently accepted option valuation models, was developed to
estimate the fair value of freely tradable, fully transferable options without
vesting and/or trading restrictions, which significantly differ from the
Company's stock option awards. These models also require highly subjective
assumptions, including future stock price volatility and expected time until
exercise, which greatly affect the calculated values. Accordingly, management
does not believe that this model provides a reliable single measure of the fair
value of the Company's stock option awards.
(9) 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, 1996, 1995 and
1994 (amounts in thousands):
F-25
<PAGE>
<TABLE>
<CAPTION>
1996 1995 1994
------ ------ ------
<S> <C> <C> <C>
Oil and gas revenues............ $21,716 $16,030 $10,982
Gas plant and related revenues.. 6,635 6,362 1,978
------- ------- -------
28,351 22,392 12,960
------- ------- -------
Production costs................ 5,134 5,263 3,610
Gas plant operating costs....... 4,017 3,704 1,708
Exploration expenses............ 368 311 329
Depreciation - gas plant........ 392 316 159
Depletion, depreciation and
impairment.................... 7,781 5,619 3,694
------- ------- -------
17,692 15,213 9,500
------- ------- -------
Income before income taxes...... 10,659 7,179 3,460
Income tax expense.............. 3,731 2,513 1,211
------- ------- -------
Net income...................... $ 6,928 $ 4,666 $ 2,249
======= ======= =======
</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 for oil and
gas properties per physical unit of production measured in barrel of oil
equivalents (with six Mcf of gas equaling one barrel of oil equivalent) was
$5.23, $4.26 and $4.26 for the years ended December 31, 1996, 1995 and 1994,
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.
(10) 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, 1996 and 1995 were as
follows (amounts are in thousands):
1996 1995
------ ------
Unproved properties............. $ 4,080 $ 5,040
Proved properties............... 105,048 90,200
-------- --------
Total capitalized costs......... 109,128 95,240
Less - accumulated depletion,
depreciation and amortization.. (28,706) (22,501)
-------- --------
$ 80,422 $ 72,739
======== ========
The following table sets forth the costs incurred, both capitalized and
expensed, in the Company's oil and gas property
F-26
<PAGE>
acquisition, exploration and development activities for the years presented
(amounts in thousands):
<TABLE>
<CAPTION>
1996 1995 1994
------- ------- -------
<S> <C> <C> <C>
Property acquisition costs -
Proved....................... $ 2,592 $ 256 $39,094
Unproved..................... 629 453 7,013
Exploration costs............. 368 311 329
Development costs............. 14,500 17,457 4,998
------- ------- -------
$18,089 $18,477 $51,434
======= ======= =======
</TABLE>
(11) MAJOR CUSTOMERS AND CREDIT RISK
Substantially all the Company's accounts receivable at December 31, 1996
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 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 1996.
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 1996 1995 1994
-------- ---- ---- ----
<S> <C> <C> <C>
Cabot Oil and Gas Marketing Corp..... - - 21%
Kern Oil and Refining................ - 10% 17%
Mock Resources, Inc.................. 20% 24% -
Valero Gas Marketing, L.P............ - 10% -
Enron Capital and Trade Resources.... 18% - -
Shell Oil Company.................... 27% - -
</TABLE>
The Company considers its relationship with its current major customers to
be satisfactory.
F-27
<PAGE>
(12) 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, 1996, 1995 and 1994. The reserve
estimates for certain of the Company's minor royalty interests were 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 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 resulted in an extension of the proved undeveloped
reserve area and was reflected in extension and discoveries. The improved
production performance of the properties also resulted in an upward revision of
the proved reserves. Improved performance on certain Permian Basin properties
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
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 was
reflected in extension and discoveries. The favorable gas production rates on
the properties also resulted in an upward revision of the proved gas reserves.
In
F-28
<PAGE>
1995, the acquisition of interests in additional wells in the San Joaquin
properties and the acquisition of additional properties in the Permian Basin
accounted for the reserve volumes purchased in 1995.
During 1996 the extensions and discoveries primarily reflect the extension
of the proved undeveloped area on the Truman and Tisdale leases with two
successful wells drilled on the Tisdale lease in 1996. The sales in place
volumes are a result of the sale of certain minor interest properties in the
Permian Basin. The upward revisions of oil and gas reserves reflect performance
of the San Joaquin properties and a revision of undeveloped oil reserves in the
Permian Basin.
F-29
<PAGE>
<TABLE>
<CAPTION>
Oil NGLs Gas
-------- --------- ---------
Proved Reserves (Bbls) (Bbls) (Mcf)
- - --------------- -------- --------- ---------
<S> <C> <C> <C>
December 31, 1993.................. 1,724,368 - 17,168,956
Revisions of previous estimates.. 1,697,742 - 5,538,878
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
Extensions, discoveries and
other additions................ 1,851,381 174,991 12,291,500
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
Revisions of previous estimates.. 273,958 (256,945) 3,538,467
Extensions, discoveries and
other additions................ 639,010 - 10,462,000
Sales in place................... (336,516) - (315,520)
Production....................... (522,527) (232,222) (5,795,347)
---------- --------- ----------
December 31, 1996.................. 12,411,649 2,489,440 95,525,800
========== ========= ==========
Proved developed reserves -
December 31, 1994.................. 2,555,988 1,014,293 27,651,000
========== ========= ==========
December 31, 1995.................. 2,801,504 939,088 32,474,000
========== ========= ==========
December 31, 1996.................. 2,691,456 924,628 34,589,000
========== ========= ==========
</TABLE>
F-30
<PAGE>
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>
1996 1995 1994
------ ------ ------
<S> <C> <C> <C>
Future cash inflow......................... $ 754,020 $ 478,302 $ 375,585
Future production, development and
abandonment costs........................ (276,963) (238,517) (215,163)
--------- --------- ---------
Future cash flows before income taxes...... 477,057 239,785 160,422
Future income taxes........................ (137,674) (47,082) (27,228)
--------- --------- ---------
Future net cash flows...................... 339,383 192,703 133,194
10% discount factor........................ (154,200) (81,798) (52,381)
--------- --------- ---------
Standardized measure of discounted
future net cash flow..................... $ 185,183 $ 110,905 $ 80,813
========= ========= =========
Changes in standardized measure
of discounted future net cash flows:
Sales of oil, gas and natural gas
liquids, net of production costs..... $ (21,912) $ (10,857) $ (7,643)
Extensions, discoveries and other
additions............................ 21,140 13,667 6,381
Revisions of estimates of reserves
proved in prior years:
Quantity estimated................... 7,216 7,685 16,144
Net changes in price and production
costs.............................. 103,762 22,261 (6,446)
Accretion of discount.................. 12,450 8,668 2,098
Purchases of reserves in place......... - 3,252 57,001
Sales of reserves in place............. (2,463) - (342)
Development costs incurred............. 15,085 (16,691) (977)
Changes in future development costs.... (7,896) 17,167 790
Net change in income taxes............. (61,915) (7,725) (2,696)
Changes in production rates (timing)
and other............................ 8,811 (7,335) (1,305)
--------- --------- ---------
Net change............................. $ 74,278 $ 30,092 $ 63,005
========= ========= =========
</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 forecasts, crude oil and natural
gas prices and the fact that the bases for such volume estimates vary
significantly, management
F-31
<PAGE>
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 1994 revisions of the purchase of reserves in place reflected the
acquisition of the property interests in the San Joaquin Basin, California. The
extension and discoveries were a result of the extension of the proved
undeveloped area of the San Joaquin leases. The upward revisions were primarily
a result of improved performance on the Bakersfield Properties which offset the
under performance of certain South Texas Properties. The sales of oil and gas
were significantly increased reflecting the production from the Bakersfield
Properties purchased June 30, 1994.
The 1995 upward revision in extensions and discoveries reflected the
increased proved undeveloped area on the Ellis Lease in the Bakersfield
Properties which resulted from the development drilling activity and the
drilling of a step-out well. Revisions of previous estimates of proved reserves
were largely a result of favorable gas production on the Bakersfield Properties.
The net changes in prices and production costs were 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 1996 extensions and discoveries reflect the increased proved
undeveloped area on the Truman and Tisdale leases in the San Joaquin properties.
The upward revision of prior year estimates of reserve quantities were a result
of performance of the San Joaquin properties and the additions of undeveloped
reserves in the Permian Basin. The changes due to sale of reserves in place
reflect the sale of minor value properties in the Permian Basin in December
1996. The net changes in prices and production costs are primarily a result of
higher oil and gas prices at December 31, 1996.
(13) SUBSEQUENT EVENT
In March 1997 the Company announced that it had engaged a group of
investment bankers to pursue the potential sale of the Company. There can be no
assurances that this process will result in the sale of the Company. In the
event the Company is sold, there can be no assurances as to the amount or form
of consideration that the Company's shareholders would receive in such a
transaction. The Company intends to continue conducting its business without
regard to any potential outcome
F-32
<PAGE>
of the proposed sale.
F-33
<PAGE>
EXHIBIT 4.4
WARRANT CERTIFICATE
THIS WARRANT HAS NOT BEEN, NOR WILL IT BE, REGISTERED UNDER THE SECURITIES ACT
OF 1933, AS AMENDED (THE "ACT"), NOR HAS IT BEEN APPROVED BY THE UNITED STATES
SECURITIES AND EXCHANGE COMMISSION OR THE SECURITIES REGULATORY AUTHORITY OF ANY
STATE. THIS WARRANT HAS BEEN ACQUIRED FOR INVESTMENT AND NOT WITH A VIEW TO
DISTRIBUTION OR RESALE AND MAY NOT BE OFFERED FOR SALE, SOLD, MORTGAGED,
PLEDGED, HYPOTHECATED OR OTHERWISE TRANSFERRED EXCEPT PURSUANT TO AN EFFECTIVE
REGISTRATION STATEMENT FOR SUCH WARRANT UNDER THE ACT AND APPLICABLE STATE
SECURITIES LAWS OR AN OPINION OF COUNSEL REASONABLY SATISFACTORY TO THE COMPANY
THAT REGISTRATION IS NOT REQUIRED UNDER THE ACT AND APPLICABLE STATE SECURITIES
LAWS.
WARRANT
to Purchase up to an Aggregate of 99,750
Shares of Common Stock of
HARCOR ENERGY, INC.
at $3.85 per share
VOID AFTER 3:00 p.m. (prevailing New York time)
ON July 24, 2000
This is to certify that, for value received, Erland & Co. ("Holder") is
entitled to purchase, subject to the provisions of this Warrant, from HarCor
Energy, Inc., a Delaware corporation (the "Corporation"), at any time on or
after the date hereof until 3:00 p.m. New York time on July 24, 2000, an
aggregate of up to ninety-nine thousand seven hundred fifty (99,750) fully paid
and nonassessable shares of common stock, par value $.10 per share (the "Common
Stock"), of the Corporation at a price of $3.85 per share, as adjusted from time
to time pursuant to the terms hereof (the "Exercise Price").
1
<PAGE>
1. EXERCISE OF WARRANT. Subject to the provisions hereof, this Warrant
may be exercised in whole or in part (in multiples of at 10,000 shares), at any
time or from time to time on or after the date hereof until 3:00 p.m. New York
time on July 24, 2000. This Warrant shall be exercised only by presentation and
surrender hereof to the Corporation at the principal office of the Corporation,
accompanied by (i) a written notice of exercise and (ii) payment to the
Corporation, for the account of the Corporation, of the Exercise Price for the
number of shares of Common Stock specified in such notice. The Exercise Price
for the number of shares of Common Stock specified in the notice shall be
payable in immediately available funds.
As soon as practicable after such presentation and surrender, the
Corporation shall issue and deliver to the Holder the shares of Common Stock to
which the Holder is entitled hereunder. Unless at the time of such exercise
there is in existence an effective registration statement under the Securities
Act of 1933, as amended, concerning the shares of common stock issuable upon
exercise of this Warrant, the certificates representing the shares purchased
pursuant to the exercise of this Warrant shall be legended substantially as
follows:
"THE SECURITIES REPRESENTED BY THIS CERTIFICATE HAVE NOT BEEN
REGISTERED UNDER THE SECURITIES ACT OF 1933, AS AMENDED (THE "ACT") OR
UNDER ANY STATE SECURITIES LAWS, AND ARE "RESTRICTED SECURITIES" AS
THAT TERM IS DEFINED IN RULE 144 UNDER THE ACT. THE SECURITIES MAY
NOT BE OFFERED FOR SALE, SOLD OR OTHERWISE TRANSFERRED WITHOUT AN
EFFECTIVE REGISTRATION STATEMENT FOR SUCH SECURITIES UNDER THE ACT AND
APPLICABLE STATE SECURITIES LAWS, OR AN OPINION OF COUNSEL
SATISFACTORY TO THE CORPORATION THAT REGISTRATION IS NOT REQUIRED
UNDER SUCH ACT AND APPLICABLE STATE SECURITIES LAWS."
This Warrant may be exercised in part, provided that the shares of the
Corporation's common stock to be purchased upon any such partial exercise must
be for at least 10,000 shares or for any multiple thereof. If this Warrant
should be exercised in part, then the Corporation shall, upon surrender of this
Warrant for cancellation, execute and deliver a new Warrant evidencing the
rights of the Holder to purchase the balance of the shares of Common Stock
purchasable hereunder. Upon receipt by the Corporation of this Warrant, in
proper form for exercise, the Holder shall be deemed to be the holder of record
of the shares of Common Stock issuable upon such exercise, notwithstanding that
the stock transfer books of the Corporation shall then be closed or that
certificates representing such shares of Common Stock shall not then be actually
delivered to the Holder. The Corporation shall pay any and all expenses,
transfer taxes and other charges payable in connection with the preparation,
issuance and delivery of stock certificates pursuant to this Paragraph 1 in the
name of the Holder. The Corporation shall not, however, be required to pay any
tax which may be payable in respect of any transfer involved in the issuance and
delivery of shares of Common Stock in a name other than that in which this
Warrant is registered, and no such issuance or delivery
2
<PAGE>
shall be made unless and until the person requesting such issuance has paid to
the Corporation the amount of any such tax, or has established, to the
satisfaction of the Corporation, that such tax has been paid.
No fractional shares of Common Stock shall be issued in connection with the
exercise of this Warrant
2. RESERVATION OF SHARES; PRESERVATION OF RIGHTS OF HOLDER. The
Corporation hereby agrees that at all times it will maintain and reserve, free
from preemptive rights, such number of authorized but unissued shares of Common
Stock so that this Warrant may be exercised without additional authorization of
Common Stock after giving effect to all other options, warrants, convertible
securities and other rights to acquire shares of Common Stock. The Corporation
further agrees that it will not, by charter amendment or through reorganization,
consolidation, merger, dissolution or sale of assets, or by any other voluntary
act, avoid or seek to avoid the observance or performance of any of the
covenants, stipulations or conditions to be observed or performed hereunder by
the Corporation.
3. EXCHANGE OR LOSS OF WARRANT. This Warrant is exchangeable, upon
presentation and surrender hereof at the principal office of the Corporation,
only in connection with a partial exercise hereof. The Corporation shall be
under no obligation to issue replacement warrants for the aggregate number of
shares covered hereby except as described herein. The term "Warrant" as used
herein includes any Warrant or Warrants for which this Warrant may be exchanged.
Upon receipt by the Corporation of evidence reasonably satisfactory to it of the
loss, theft, destruction or mutilation of this Warrant, and (in case of loss,
theft or destruction) of indemnification satisfactory to the Corporation, and
upon surrender and cancellation of this Warrant, if mutilated, the Corporation
will execute and deliver a new Warrant of like tenor and date.
4. RESTRICTED TRANSFERABILITY. This Warrant may not be transferred
other than pursuant to a valid exemption from (based upon an opinion of counsel
satisfactory to the Corporation), or registration statement under, the Act and
applicable state securities laws.
5. ADJUSTMENT. The number of shares of Common Stock purchasable upon the
exercise of this Warrant and the Exercise Price shall be subject to adjustment
from time to time as provided in this paragraph 5.
A. (1) If, during the term of this Warrant, the Corporation shall pay or
make a dividend or other distribution on any class of capital stock of the
Corporation in Common Stock, other than any such dividend in connection
with any preferred stock of the Corporation which has or may be issued,
then the number of shares of Common Stock purchasable upon exercise of this
Warrant shall be increased by multiplying such number of shares by a
fraction, of which the denominator shall be the number of shares of Common
Stock outstanding at the close of
3
<PAGE>
business on the day immediately preceding the date of such distribution and the
numerator shall be the sum of such number of shares and the total number of
shares constituting such dividend or other distribution; such increase in the
number of shares of Common Stock purchasable shall become effective immediately
after the opening of business on the date following such distribution.
(2) If, during the term of this Warrant, the outstanding shares of Common
Stock shall be subdivided into a greater number of shares of Common Stock, then
the number of shares of Common Stock purchasable upon exercise of this Warrant
at the opening of business on the day following the day upon which such
subdivision becomes effective shall be proportionately increased and,
conversely, if outstanding shares of Common Stock shall each be combined into a
smaller number of shares of Common Stock, then the number of shares of Common
Stock purchasable upon exercise of this Warrant at the opening of business on
the day following the day upon which such combination becomes effective shall be
proportionately decreased, such increase or decrease, as the case may be, to
become effective immediately after the opening of business on the day following
the day upon which such subdivision or combination becomes effective.
(3) The reclassification of Common Stock into securities (other than Common
Stock) and/or cash and/or other combination shall be deemed to involve a
subdivision or combination, as the case may be, of the number of shares of
Common Stock outstanding immediately prior to such reclassification into the
number or amount of securities and/or cash and/or other consideration
outstanding immediately thereafter and the effective date of such
reclassification shall be deemed to be "the day upon which such subdivision
becomes effective" or the "the day upon which such combination becomes
effective", as the case may be, within the meaning of clause (2) above.
(4) The Corporation may in its sole discretion make such increases in the
number of shares of Common Stock purchasable upon exercise of this Warrant in
addition to those required by this subparagraph (A), as shall be determined by
its Board of Directors to be advisable in order to avoid taxation of any
dividend of stock or stock rights or any event treated as such for federal
increase tax purposes to the recipients.
B. Whenever the number of shares of Common Stock purchasable upon exercise
of this Warrant is adjusted as herein provided, the Exercise Price shall be
adjusted by a fraction, of which the numerator is equal to the number of shares
of Common Stock purchasable prior to the adjustment and the denominator is equal
to the number of shares of Common Stock purchasable after the adjustment.
For the purpose of this Paragraph 5, the term "Common Stock" shall include any
shares of the Corporation of any class or series which has no preference or
priority in the payment of dividends or
4
<PAGE>
in the distribution of assets upon any voluntary or involuntary liquidation,
dissolution or winding up of the Corporation and which is not subject to
redemption to the Corporation.
6. NOTICE. Whenever the number of shares of Common Stock for which this
Warrant is exercisable is adjusted as provided in paragraph 5 hereof, the
Corporation shall promptly compute such adjustment and mail to the Holder a
certificate, signed by the chief financial officer of the Corporation, setting
forth the number of shares of Common Stock for which this Warrant is exercisable
and the exercise price as a result of such adjustment, a brief statement of the
facts requiring such adjustment, the computation thereof and when such
adjustment will become effective.
7. RIGHTS OF THE HOLDER. The Holder shall not, by virtue hereof, be
entitled to any rights of a shareholder in the Corporation.
8. TERMINATION. This Warrant and the rights conferred hereby shall
terminate at the aforementioned time on July 24, 2000.
9. GOVERNING LAW. This Warrant shall be governed by, and interpreted in
accordance with, the laws of the State of Delaware without regard to conflict of
laws principles.
DATED: February 28, 1996
HARCOR ENERGY, INC.
ATTEST:
By: /s/ GARY S. PECK By: /s/ MARK G. HARRINGTON
------------------------------ -----------------------------------
Gary S. Peck, Secretary Mark G. Harrington
Chairman and Chief Executive Officer
5
<PAGE>
Exhibit 4.10
THIS WARRANT HAS NOT BEEN, NOR WILL IT BE, REGISTERED UNDER THE SECURITIES ACT
OF 1933, AS AMENDED (THE "ACT"), NOR HAS IT BEEN APPROVED BY THE UNITED STATES
SECURITIES AND EXCHANGE COMMISSION OR THE SECURITIES REGULATORY AUTHORITY OF ANY
STATE. THIS WARRANT HAS BEEN ACQUIRED FOR INVESTMENT AND NOT WITH A VIEW TO
DISTRIBUTION OR RESALE AND MAY NOT BE OFFERED FOR SALE, SOLD, MORTGAGED,
PLEDGED, HYPOTHECATED OR OTHERWISE TRANSFERRED EXCEPT PURSUANT TO AN EFFECTIVE
REGISTRATION STATEMENT FOR SUCH WARRANT UNDER THE ACT AND APPLICABLE STATE
SECURITIES LAWS OR AN OPINION OF COUNSEL REASONABLY SATISFACTORY TO THE COMPANY
THAT REGISTRATION IS NOT REQUIRED UNDER THE ACT AND APPLICABLE STATE SECURITIES
LAWS.
NO. 1 (FUNBNC) Restated
WARRANT
to Purchase up to an Aggregate of 100,000
Shares of Common Stock of
HarCor Energy, Inc.
(100,000 shares at $4.75 per share)
VOID AFTER 3:00 p.m. (prevailing New York time)
ON December 31, 1999
This is to certify that, for value received, First Union National Bank of
North Carolina (together with its permitted assigns, "Holder") is entitled to
purchase, subject to the provisions of this Warrant, from HarCor Energy, Inc.
(the "Corporation"), at any time on or after the date hereof for a period ending
December 31, 1999, an aggregate of up to one hundred thousand (100,000) fully
paid and nonassessable shares of common stock, par value $.10 per share (the
"Common Stock"), of the Corporation at a price of $4.75 per share, as adjusted
from time to time pursuant to the terms hereof (the "Exercise Price").
This Warrant is restated and reissued upon the surrender of the initial
Warrant No. 1 (FUNBNC) dated June 30, 1994, for the purchase of 200,000 shares
of the Corporation's Common Stock at $4.75 per share issued to First Union
National Bank of North Carolina and upon the exercise
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<PAGE>
in part thereof pursuant to that certain Warrant Exercise Agreement dated
February 12, 1996 between the Holder, First Union Corporation and the
Corporation wherein Amendment No. 1 to the said Warrant authorized the cashless
partial exercise of the Warrant by the Holder's surrender for cancellation of
its rights to purchase 100,000 shares of Common Stock in exchange for 25,000
shares of Common Stock. Pursuant thereto this restated Warrant evidences such
partial exercise of the Warrant and the reduction of the Holder's right to
purchase 200,000 shares of Common Stock to the right to purchase 100,000 shares
of Common Stock, the balance of the shares purchasable hereunder.
1. EXERCISE OF WARRANT. Subject to the provisions hereof, this Warrant
may be exercised in whole or in part (in multiples of at 1,000 shares), at any
time or from time to time on after the date hereof for a period ending December
31, 1999. This Warrant shall be exercised by presentation and surrender hereof
to the Corporation at the principal office of the Corporation, for the account
of the Corporation, accompanied by (i) a written notice of exercise and (ii)
payment to the Corporation, for the account of the Corporation, of the Exercise
Price for the number of shares of Common Stock specified in such notice. The
Exercise Price for the number of shares of Common Stock specified in the notice
shall be payable in immediately available funds.
As soon as practicable after such presentation and surrender, but in no
event later than five (5) business days following such date, the Corporation
shall issue and deliver to the Holder the shares of Common Stock, to which the
Holder is entitled hereunder. Unless at the time of such exercise there is in
existence an effective registration statement under the Securities Act of 1933,
as amended, concerning the shares of common stock issuable upon exercise of this
Warrant, the certificates representing the shares purchased pursuant to the
exercise of this Warrant shall be legended substantially as follows:
"The securities represented by this Certificate have not been
registered under the Securities Act of 1933, as amended ( the "Act")
or under any state securities laws, and are " restricted securities"
as that term is defined in Rule 144 under the Act. The securities may
not be offered for sale, sold or otherwise transferred without an
effective registration statement for such securities under the Act
and applicable state securities laws, or an opinion of counsel
satisfactory to the Corporation that registration is not required
under such Act and applicable state securities laws."
This Warrant may be exercised in part, provided that the shares of the
Corporation's common stock to be purchased upon any such partial exercise must
be for at least 1,000 shares for any multiple thereof. If this Warrant should
be exercised in part, then the Corporation shall, upon surrender of this Warrant
for cancellation, execute and deliver a new Warrant evidencing the rights of the
Holder to purchase the balance of the shares of Common Stock purchasable
hereunder. Upon receipt by the Corporation of this Warrant, in proper form for
exercise, the Holder shall be deemed to be the holder of record of the shares of
Common Stock issuable upon such exercise, notwithstanding that the stock
transfer books of the Corporation shall then be closed or that certificates
representing such shares of
2
<PAGE>
Common Stock shall not then be actually delivered to the Holder. The
Corporation shall pay any and all expenses, transfer taxes and other charges
payable in connection with the preparation, issuance and delivery of stock
certificates pursuant to this Paragraph 1 in the name of the Holder. The
Corporation shall not, however, be required to pay any tax which may be payable
in respect of any transfer involved in the issuance and delivery of shares of
Common Stock in a name other than that in which this Warrant is registered, and
no such issuance or delivery shall be made unless and until the person
requesting such issuance has paid to the Corporation the amount of any such tax,
or has established, to the satisfaction of the Corporation, that such tax has
been paid.
No fractional shares of Common Stock shall be issued in connection with the
exercise of this Warrant, but the Corporation shall pay a cash adjustment in
respect of any fraction of a share which would otherwise be issuable in an
amount equal to such fraction multiplied by the highest market price per share
of Common Stock on the day of exercise, as determined by the highest sale price,
regular way, or, if there shall have been no sale on such day, the average of
the highest reported bid and lowest reported asked price, in each case as
officially reported on the principal securities exchange on which the Common
Stock is listed or admitted to trading, or if not listed or admitted to trading
on any securities exchange, the average of the highest reported bid and lowest
reported asked price as furnished by the National Quotation Bureau Incorporated;
provided, however, that if the Common Stock is not traded in such manner that
the quotations referred to herein are available, the market price shall be
deemed to be the fair market value of such Common Stock as determined by the
Board of Directors of the Corporation in good faith.
2. RESERVATION OF SHARES; PRESERVATION OF RIGHTS OF HOLDER. (a) The
Corporation hereby agrees that at all time it will maintain and reserve, free
from preemptive rights, such number of authorized but unissued shares of Common
Stock so that this Warrant may be exercised without additional authorization of
Common Stock after giving effect to all other options, warrants, convertible
securities and other rights to acquire shares of Common Stock. The Corporation
further agrees that it will not, by charter amendment or through reorganization,
consolidation, merger, dissolution or sale of assets, or by any other voluntary
act, avoid or seek to avoid the observance or performance of any of the
covenants, stipulations or conditions to be observed or performed hereunder by
the Corporation.
(b) All shares of Common Stock delivered upon the exercise of the Warrant
shall be validly issued, fully paid and nonassessable;
(c) The Corporation shall list the Common Stock issuable upon the exercise
of the Warrant on any securities exchange upon which any securities of the
Corporation are then listed, if the listing of such securities is then permitted
under the rules of such exchange.
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<PAGE>
3. EXCHANGE OR LOSS OF WARRANT. This Warrant is exchangeable, upon
presentation and surrender hereof at the principal office of the Corporation,
only in connection with a partial exercise hereof. The Corporation shall be
under no obligation to issue replacement warrants for the aggregate number of
shares covered hereby except as described herein. The term "Warrant" as used
herein includes any Warrant or Warrants for which this Warrant may be exchanged.
Upon receipt by the Corporation of evidence reasonably satisfactory to it of the
loss, theft, destruction or mutilation of this Warrant, and (in case of loss,
theft or destruction) of reasonably satisfactory indemnification, and upon
surrender and cancellation of this Warrant, if mutilated, the Corporation will
execute and deliver a new Warrant of like tenor and date.
4. RESTRICTED TRANSFERABILITY. This Warrant may not be transferred other
than pursuant to a valid exemption from (based upon an opinion of counsel
satisfactory to the Corporation), or registration statement under, the Act and
applicable state securities laws.
5. ADJUSTMENT. The number of shares of Common Stock purchasable upon the
exercise of this Warrant and the Exercise Price shall be subject to adjustment
from time to time as provided in this paragraph 5.
A. (1) If, during the term of this Warrant, the Corporation shall pay
or make make a dividend or other distribution on any class of
capital stock of the Corporation in Common Stock, other than any
such dividend in connection with any preferred stock of the
Corporation which has or may be issued, then the number of shares
of Common Stock purchasable upon exercise of this Warrant shall be
increased by multiplying such number of shares by a fraction, of
which the denominator shall be the number of shares of Common Stock
outstanding at the close of business on the day immediately
preceding the date of such distribution and the numerator shall be
the sum of such number of shares and the total number of shares
constituting such dividend or other distribution, such increase to
become effective immediately after the opening of business on the
date following such distribution.
(2) If, during the term of this Warrant, the outstanding shares of
Common Stock shall be subdivided into a greater number of shares of Common
Stock, then the number of shares of Common Stock purchasable upon exercise of
this Warrant at the opening of business on the day following the day upon which
such subdivision becomes effective shall be proportionately increased and,
conversely, if outstanding shares of Common Stock shall each be combined into a
smaller number of shares of Common Stock, then the number of shares of Common
Stock purchasable upon exercise of this Warrant at the opening of business on
the day following the day upon which such combination becomes effective shall be
proportionately decreased, such increase or decrease, as the case may be, to
become effective immediately after the opening of business on the day following
the day upon which such subdivision or combination becomes effective.
4
<PAGE>
(3) The reclassification of Common Stock into securities (other than Common
Stock) and/or cash and/or other combination shall be deemed to involve a
subdivision or combination, as the case may be, of the number of shares of
Common Stock outstanding immediately prior to such reclassification into the
number or amount of securities and/or cash and/or other consideration
outstanding immediately thereafter and the effective date of such
reclassification shall be deemed to be "the day upon which such subdivision
becomes effective" or the "the day upon which such combination becomes
effective", as the case may be, within the meaning of clause (2) above.
(4) The Corporation may in its sole discretion make such increases in the
number of shares of Common Stock purchasable upon exercise of this Warrant in
addition to those required by this subparagraph (A), as shall be determined by
its Board of Directors to be advisable in order to avoid taxation so far a
practicable if any dividend of stock or stock rights or any event treated as
such for federal increase tax purposes to the recipients.
B. Whenever the number of shares of Common Stock purchasable upon exercise
of this Warrant is adjusted as herein provided, the Exercise Price shall be
adjusted by a fraction, of which the numerator is equal to the number of shares
of Common Stock purchasable prior to the adjustment and the denominator is equal
to the number of shares of Common Stock purchasable after the adjustment.
C. If any consolidation or merger of the Corporation with another entity
or the sale of all or substantially all if its assets to another entity, shall
be effected in such a way that holders of Common Stock shall be entitled to
receive stock, securities or assets with respect to or in exchange for Common
Stock, then, as a condition of such consolidation, merger or sale, lawful and
adequate provisions shall be made whereby the Holder shall thereafter have the
right to purchase and receive upon the basis and upon the terms and conditions
specified in this Warrant and in lieu of the shares of the Common Stock of the
Corporation immediately theretofore purchasable and receivable upon the exercise
of the rights set forth herein, such shares of stock, securities or assets as
may be issued or payable with respect to or in exchange for a number of
outstanding shares of such Common Stock equal to the number of shares of such
stock immediately theretofore purchasable and receivable upon the exercise of
the rights set forth herein had such consolidation, merger or sale not taken
place, and in any such case, appropriate provisions shall be made with respect
to the rights and interests of the Holder to the end that the provisions hereof
(including without limitation provisions for adjustments of the exercise price
and of the number of shares purchasable and receivable upon the exercise of the
Warrant) shall thereafter be applicable, as nearly as may be, in relation to any
shares of stock, securities or assets thereafter deliverable upon the exercise
hereof. If a purchase, tender or exchange offer is made to and accepted by the
holders of more than 50% of the outstanding shares of Common Stock of the
Corporation, the Corporation shall not effect any consolidation, merger or sale
with the person having made such offer or with any affiliate of such person,
unless prior to the consummation
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<PAGE>
of such consolidation, merger or sale the Holder shall have been given a
reasonable opportunity to the elect to receive upon the exercise of the Warrant
either the stock, securities or assets then issuable with respect to the Common
Stock of the Corporation or the stock, securities or assets, or the equivalent
issued to previous holders of the Common Stock in accordance with such offer.
D. In the event of (i) any taking by the Corporation of a record of the
holders of any class of securities for the purpose of determining the holders
thereof who are entitled to receive any dividend or other distribution, or any
right to subscribe for, purchase or otherwise acquire any shares of stock of any
class or any other securities or assets, or to receive any other right, (ii) any
reorganization of the Corporation, or any reclassification or recapitalization
of the capital stock of the Corporation, or any transfer of all or substantially
all of the assets of the Corporation to, or consolidation or merger of the
Corporation with any other person or (iii) any voluntary or involuntary
dissolution or liquidation of the Corporation then and in each such event the
Corporation will mail or cause to be mailed to the Holder a notice specifying
the date on which any such record is to be taken for the purpose of such
dividend, distribution or right, the amount and character of such dividend,
distribution or right, the date on which any such reorganization,
reclassification, recapitalization, transfer, consolidation, merger,
dissolution, liquidation or winding-up is to take place, and the time, if any,
as of which the holders of record of Common Stock shall be entitled to exchange
their shares of Common Stock for securities or other property deliverable upon
such reorganization, reclassification, recapitalization, transfer,
consolidation, merger, dissolution, liquidation or winding- up. Such notice
shall be mailed at least 20 days prior to the proposed record at therein
specified.
For the purpose of this Paragraph 5, the term "Common Stock" shall include
any shares of the Corporation of any class or series which has no preference or
priority in the payment of dividends or in the distribution of assets upon any
voluntary or involuntary liquidation, dissolution or winding up of the
Corporation and which is not subject to redemption to the Corporation.
6A. OPTIONAL REDEMPTIONS OF THE WARRANTS.
(a) Subject to the rights of holders of Warrants to exercise such Warrants
pursuant to provisions of the Warrants, the Warrants shall be subject to
redemption at the Corporation's option, in whole or in part (in multiples of
Warrants representing 100 shares of Common Stock), at any time on or after the
third anniversary the Closing Date if, for at least 30 days within a period of
40 connective trading days ending no more than 10 days prior to the date of
notice of redemption, the closing sale price of the Corporation's Common Stock
as reported on NASDAQ, the American Stock Exchange, or the New York Stock
Exchange, as appropriate, has been equal to or in excess of 200% of the Exercise
Price (as defined in the Warrant) in effect on the date such notice of
redemption is given.
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(b) The redemption price for the Warrants shall be payable immediately upon
redemption, by certified bank or cashier's checks, and shall be $1.00
multiplied by the number of shares of Common Stock issuable upon exercise
of the Warrants so redeemed.
6B. NOTICE OF REDEMPTIONS. The Corporation shall give each holder of
Warrants written notice of each redemption pursuant to Paragraph 6A not less
than 60 days prior to the redemption date, specifying such redemption date, the
number of Warrants to be redeemed on such date, that such redemption is to be
made pursuant to Paragraph 6A. Each such notice shall be accompanied by an
Officer's Certificate stating that all of the applicable conditions set forth in
Paragraph 6A have been fulfilled. Notice of redemption having been given as
aforesaid, the redemption amount due in respect of the Warrants specified in
such notice and as calculated in Paragraph 6A(b), shall become due and payable
on such redemption date unless the holder of such Warrants shall have prior
exercised such Warrants pursuant to the terms thereof, unless the filing by the
Corporation of a registration statement under the Securities Act relating to the
Common Stock obtainable upon exercise of the Warrants shall have been requested
by a holder thereof (either before or after receipt of such notice) pursuant to
a registration rights agreement between the Corporation and such holder, in
which case the redemption shall be effected 60 days after the declaration of
effectiveness of such registration statement by the Commission or unless the
holder of such Warrant is restricted (otherwise than pursuant to the Act or
applicable state securities laws) under such other agreement to which the
Corporation is a party from sale or distribution of the Common Stock, in which
case the redemption shall be effected 60 days after the lapse or termination of
the restriction. Should the Warrants not be redeemed on such redemption date
due to the Corporation's failure to perform its obligations under this Paragraph
6B, any subsequent redemption may be effected only after compliance with the
provisions of this Paragraph 6 from and after such redemption date.
7. NOTICE. Whenever the number of shares of Common Stock for which this
Warrant is exercisable is adjusted as provided in paragraph 5 hereof, the
Corporation shall promptly compute such adjustment and mail to the Holder a
certificate, signed by the chief financial officer of the Corporation, setting
forth the number of shares of Common Stock for which this Warrant is exercisable
and the exercise price as a result of such adjustment, a brief statement of the
facts requiring such adjustment, the computation thereof and when such
adjustment will become effective.
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<PAGE>
8. RIGHTS OF THE HOLDER. The Holder shall not, by virtue hereof, be
entitled to any rights of a shareholder in the Corporation.
9. TERMINATION. This Warrant and the rights conferred hereby shall
terminate at the aforementioned time on December 31, 1999.
10. GOVERNING LAW. This Warrant shall be governed by, and interpreted in
accordance with, the laws of the State of Delaware without regard to conflict of
laws principles.
11. REMEDIES. The Corporation stipulates that the remedies at law of the
Holder in the even of any default or threatened default by the Corporation in
the performance of or compliance with any of the terms of this Warrant are not
and will not be adequate and that such terms may be specifically enforced by a
decree for the specific performance of any agreement contained herein or by an
injunction against a violation of any of the terms hereof or thereof or
otherwise.
DATED: May 1, 1996.
ATTEST: HARCOR ENERGY, INC.
By: /s/ Gary S. Peck By: /s/ Mark G. Harrington
------------------------- -----------------------------
Gary S. Peck, Secretary Mark G. Harrington
President and Chief Executive Officer
8
<PAGE>
EXHIBIT 4.12
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>
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>
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/ Paul N. Riddle
------------------------
Paul N. Riddle, Vice President
3
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Exhibit 4.17
ING CAPITAL Internationale Nederlanden (U.S.) Capital Corporation
______________________________________________________________________________
December 28, 1995
HarCor Energy Inc.
Five Post Oak Park, suite 2220
Houston, Texas 77027
Attention: Mark G. Harrington
Chairman and Chief Executive Officer
Gentlemen:
This letter sets forth the terms and conditions of the agreement between
Internationale Nederlanden (U.S) Capital Corporation ("INCC") and HarCor Energy
Inc. ("HarCor") relating to the payment of certain fees and reimbursable costs
owed by HarCor to INCC in connection with the Amended and Restated Credit
Agreement entered into as of July 19, 1995 between INCC and HarCor (the "Credit
Agreement").
By your execution of this letter agreement, it is agreed that payment of
the fees and reimbursable costs owed by HarCor to INCC in connection with the
Credit Agreement will be satisfied as follows:
(1) HarCor will:
(i) pay to INCC, by wire transfer in immediately available funds, the
amount of $137,654.71 ($37,654.71 of which is for reimbursement of the fees
and expenses of counsel to INCC previously billed to HarCor in connection
with the Credit Agreement, and at the request of INCC will be directly
wired to INCC's Counsel); and
(ii) deliver to INCC, 30,000 unregistered shares of HarCor Common
Stock (the "Shares") which such Shares shall:
(A) have been duly and validly issued by HarCor, fully paid and
nonassessable and free from all taxes, liens and charges; and
(B) be entitled to "piggy-back registration rights" if the
Company proposes to file a Registration Statement for its own account of
its common equity securities (other than (i) a Registration Statement on
Form S-4 or S-8, or (ii) a Registration Statement filed in connection with
an exchange offer or offering of securities solely to the Company's
existing security holders). The Company would give INCC at least 30 days
prior written notice of any filing and at the request of INCC would include
the Shares in such registration, at the expense of the Company ("piggy-back
registration rights"), subject to any limitations and priorities
customarily set forth in similar registration rights granted by the
Company.
<PAGE>
(2) INCC will thereafter deliver to HarCor for cancellation: (i) that
certain Warrant to purchase 76,000 shares of the common stock of HarCor at
an exercise price of $5.50 with an expiration date of March 18, 1997; and
(ii) that certain Warrant to purchase 50,000 shares of HarCor Common Stock
with an exercise price of $4.75 and an expiration date of December 31,
1999.
HarCor also acknowledges and agrees that the provisions in the Credit
Agreement requiring HarCor to reimburse INCC for all costs and expenses
relating to such Credit Agreement (including reasonable fees and expenses
of counsel in addition to those referred to in paragraph (1) and to
indemnify INCC and its directors, officers, and employees for liabilities
in connection therewith, shall be applicable to this letter agreement and
the transactions contemplated hereby and shall survive the termination of
this letter agreement.
This agreement shall terminate and INCC's obligations hereunder shall be of
no further force and effect if HarCor shall not have performed its
obligations under this letter agreement on or before December 31, 1995.
No waiver of any provision of the Credit Agreement or any other Loan
Document executed in connection therewith shall be deemed to have occurred
by execution of this letter agreement nor shall this letter be deemed to
amend, alter, modify or impair the Credit Agreement or such other Loan
Documents. The terms and provisions of the Credit Agreement and all other
Loan Documents executed in connection therewith are and shall remain in
full force and effect and the same are hereby ratified and confirmed by the
Borrower in all respects.
This letter shall be governed by New York law. This letter shall not be
delivered to any other party.
Please evidence your agreement to and acceptance of the foregoing by
signing and returning to us the enclosed copy of this letter.
Yours truly,
Internationale Nederlanden (U.S)
Capital Corporation
By: /s/ Trond O. Rokhold
--------------------------------
Trond O. Rokholt
Vice President
AGREED TO AND ACCEPTED
as of December 28, 1995
HarCor Energy, Inc.
<PAGE>
By: /s/ Mark G. Harrington
------------------------------------
Mark G. Harrington
Chairman and Chief Executive Officer
<PAGE>
EXHIBIT 4.22
AMENDMENT NO. 3 TO WARRANT CERTIFICATE
This AMENDMENT NO. 3 TO WARRANT CERTIFICATE (this "AMENDMENT") dated as of
July 8, 1996 is entered into by and between HARCOR ENERGY, INC., A Delaware
corporation ('HarCor") and TRUST COMPANY OF THE WEST, in its capacities as
Investment Manager pursuant to an Investment Management Agreement with General
Mills, Inc. and Custodian pursuant to a Custody Agreement dated February 6, 1989
with General Mills, Inc. and State Street Bank and Trust Company, as Trustee (in
such capacities, "TCW").
WHEREAS, HarCor issued a Warrant Certificate to TCW dated June 13, 1990,
which was amended as of April 6, 1991 and November 23, 1992 (as amended, the
"Warrant Certificate")
WHEREAS, the parties hereto wish to amend the Warrant Certificate in
certain respects, upon the terms and conditions specified herein;
NOW, THEREFORE, the parties hereto hereby agree as follows:
Section 1. Definitions. Unless otherwise defined herein, capitalized
terms defined in the Warrant Certificates are used herein as defined therein.
Section 2. Amendment. The Warrant Certificate is hereby amended to extend
the Expiration Date set forth therein by an additional period of one hundred
eighty (180) days.
Section 3. Shelf Registration. HarCor agrees to cause its registration
statement (SEC file no. 32-84496) to remain at all times effective (or cause a
successor registration statement to be filed and become effective) through the
earlier of (a) March 31, 1998 or (b) the date all of the shares registered
thereunder on behalf of TCW have been sold. If such registration statement ( or
sucessor registration statement) shall at any time cease to be effective or its
effectiveness shall be suspended, the date set forth in clause (a) of the
previous sentence shall be extended by the number of days such registration
statement was not effective or its effectiveness was suspended.
Section 4. Conditions Precedent. This Amendment shall become effective
immediately after the last to occur of the events set forth below:
(a) TCW shall have executed a "lock-up" agreement addressed to Rauscher
Pierce Refsnes, Inc. and certain other underwriters for a period not exceeding
one hundred eighty (180) days in connection with HarCor's proposed public
offering or securities. Such "lock up" agreement shall not become effective
unless and until this Amendment becomes effective.
b) The Board of Directors of HarCor shall have authorized the
execution, delivery and performance by HarCor of this Amendment.
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<PAGE>
Section 5. Miscellaneous
(a) Except as expressly amended hereby, nothing in this Amendment
shall be construed as an amendment or waiver of any provision of the Warrant
Certificate and, except as so amended or waived, the Warrant Certificate shall
remain unchanged and in full force and effect. Each reference in the Warrant
Certificate to "this Agreement", "herein", "hereof" and words of similar import
shall be deemed a reference to the Warrant Certificate as amended hereby.
(b) This Amendment may be executed in any number of counterparts, all
of which taken together shall constitute one and the same amendatory instrument
and any of the parties hereto may execute this Amendment by signing any such
counterpart.
( c ) This Amendment shall be binding upon and inure to the benefit of
the parties hereto and their respective successors and permitted assigns.
IN WITNESS WHEREOF, the parties hereto have caused this Amendment to
be duly executed as of the day and year first above written.
HarCor Energy, Inc.
By: /s/ FRANCIS ROTH
---------------------------
Name: Francis Roth,
Title: President
Trust Company of the West, in its
capacities as Investment Manager
pursuant to an Investment Management
Agreement with General Mills, Inc. and
Custodian pursuant to a Custody Agreement
dated February 6, 1989 with General Mill, Inc.
and State Steet Bank and Trust Company,
as trustee
By: /s/ ARTHUR R. CARLSON
----------------------------
Name: Arthur R. Carlson
Title: Managing Director
2
<PAGE>
Exhibit 10.16
UNANIMOUS CONSENT
OF THE STOCK OPTION AND COMPENSATION COMMITTEE
OF THE BOARD OF DIRECTORS OF
HARCOR ENERGY, INC.
IN LIEU OF A SPECIAL MEETING
The undersigned, being all of the members of the Stock Option and Compensation
Committee (the "Committee") of the Board of Directors of HarCor Energy, Inc., a
Delaware corporation (the "Corporation"), acting pursuant to Section 141(f) of
the General Corporation Law of the State of Delaware, do hereby consent to,
adopt and approve the following:
WHEREAS, and pursuant to that Unanimous Consent dated June 30, 1994 (copy
attached), this Committee has granted to certain officers of the Corporation
shares of Common Stock of the Corporation as follows:
Name Amount of Shares
---- ----------------
Mark G. Harrington 23,750
Francis H. Roth 15,625
Gary S. Peck 12,500
Albert J. McMullin 8,500
and
WHEREAS, said issued shares of Common Stock are subject to the restrictions
set forth in that Unanimous Consent and related restricted stock agreements; and
WHEREAS, said shares of Common Stock were initially restricted from being
transferred until April 28, 1997 (the "Transfer Date", and as also stated on
stock certificates' legend bearing this restriction); and
<PAGE>
WHEREAS, the purpose of the initial restriction period (three years) was to
encourage the continued service of the Company's Key Officers; and
WHEREAS, the initial restriction period has, for most intents and purposes,
transpired; and
WHEREAS, the Key Officers have demonstrated their continued commitment to the
service of the Company; and
WHEREAS, the Committee has discussed at length the acceleration of the
Transfer Date.
NOW, THEREFORE, IT IS HEREBY RESOLVED that the Committee hereby deems the
Transfer Date to be January 15, 1997 in lieu of April 28, 1997 as originally
deemed;
AND BE IT FURTHER RESOLVED, that the proper officers of the Corporation are
hereby authorized and directed to deliver said share certificates free of
restrictive legend, to those officers heretofore granted unto.
IN WITNESS WHEREOF, the undersigned have executed this Consent effective as of
the 15__ of January, 1997.
/s/ Vinod K. Dar
--------------------------------------
Vinod K. Dar
/s/ Herbert Oakes
--------------------------------------
Herbert Oakes
<PAGE>
EXHIBIT 10.17
UNANIMOUS CONSENT
OF THE BOARD OF DIRECTORS
OF
HARCOR ENERGY, INC.
The undersigned, being all of the directors of HarCor Energy, Inc., a
Delaware corporation ( the "Corporation"), and acting pursuant to the provisions
of Section 141 (f) of the General Corporation Law of the State of Delaware, do
hereby consent to, approve and adopt the following resolution:
WHEREAS, the Board of Directors (the "Board") recognizes that even the
possibility of a change of control and the uncertainty and questions which it
may raise may result in the departure or distraction of employees to the
detriment of the Corporation and its shareholders during a critical time;
WHEREAS, the Board considers it in the best interest of the Corporation and
its shareholders that employees be encouraged to remain with the Corporation in
the event of any actual or threatened change of control of the Corporation;
WHEREAS, the Board recognizes the services of the non-employee directors on
the Board to date and, in furtherance of their continued services on the Board,
the Board considers it in the best interest of the Corporation and its
shareholders that the non-employee directors receive grants of restricted shares
of Common Stock with rights and terms as set forth below;
WHEREAS, the Corporation's Board has determined that appropriate steps
should be taken now to reinforce and encourage employees of the Corporation;
WHEREAS, a "Change of Control" shall occur if (i) the Corporation shall not
be the surviving entity in any merger or consolidation (or survives only as a
subsidiary of an entity other than a previously wholly-owned subsidiary of the
Corporation), (ii) the Corporation sells, leases or exchanges or agrees to sell,
lease or exchange all or substantially all of its assets to any other person or
entity (other than a wholly-owned subsidiary of the Corporation), (iii) the
Corporation is to be dissolved and liquidated, (iv) and person or entity,
including a "group" as contemplated by Section 13(d)(3) of the 1934 Act,
acquires or gains ownership or control (including, without limitation, power to
vote) of more than 50% of the outstanding shares of capital stock of the
Corporation, or (v) as a result of or in connection with any cash tender or
exchange offer, merger or other business combination, sales of assets or a
contested election for the board of directors, or any combination of the
foregoing transactions (a "Transaction"), the persons who were directors of the
Corporation before such Transaction shall cease to constitute a majority of the
Board:
WHEREAS, the "Effective Date" shall mean the first date on which a Change
of Control had occurred; and
<PAGE>
WHEREAS, the "1996 Cash Compensation" shall be equal to employee's total
cash paid in 1996, including bonuses (if any)
EMPLOYEE SEVERANCE MATTERS
RESOLVED, that if the employment of any employee of the Corporation that is
employed by the Corporation prior to the Effective Date shall be terminated for
any reason, including a voluntary termination by employee, on or after the
Effective Date, the Corporation shall pay to each employee of the Corporation a
lump sum payment (made within 10 days after the Effective Date) equal to 1 1/2
times such employee's 1996 cash Compensation.
NON-EMPLOEE DIRECTOR RESTRICTED STOCK AWARDS
RESOLVED, that the Board hereby approves the grant of 10,000 restricted
shares of Common Stock to each of the non-employee directors effective as of the
date hereof.
RESOLVED, that the foregoing shares of restricted Common Stock will vest in
equal installments over three (3) years; provided, however, that in the event of
a Change of Control all such shares of restricted Common Stock will vest
immediately prior to the Effective Date.
OTHER
RESOLVED, that the officers of the Corporation are authorized and empowered
to direct the preparation of, and execute on behalf of the Corporation, such
agreements and instruments as are necessary to carry out the forgoing
resolutions and to take such actions as may be required to carry out the
purposes and intents of the foregoing resolutions; all such actions to be
performed in such manner as the officer performing the same shall approve, the
performance thereof by officer to be conclusive evidence of the approval thereof
by such officer and the Board.
IN WITNESS WHEREOF, the undersigned have executed this Consent effective as
of the 17th of March, 1997.
/s/ ROBERT J. CRESCI /s/ VINOD K. DAR
- - ------------------------------- ------------------------------
Robert J. Cresci Vinod K. Dar
/s/ DAVID E.K. FRISCHKORN, JR. /s/ MARK G. HARRINGTON
- - ------------------------------- ------------------------------
David E.K. Frischkorn, Jr. Mark G. Harrington
<PAGE>
/s/ AMBROSE K. MONDELL /s/ HERBERT L. OAKES, JR.
- - ------------------------------- ------------------------------
Ambrose K. Monell Herbert L. Oakes, Jr.
/s/ FRANCIS H. ROTH
- - -------------------------------
Francis H. Roth
<PAGE>
EXHIBIT 23.2
[LETTERHEAD OF RYDER SCOTT COMPANY APPEARS HERE]
CONSENT OF INDEPENDENT PETROLEUM CONSULTANTS
As independent petroleum consultants, Ryder Scott Company hereby consents
(i) to the reference to our Firm as experts and to the summarization of our
report entitled "Estimated Future Reserves and Income Attributable to Certain
Leasehold and Royalty Interests in HarCor Energy, Inc. As of January 1, 1997",
as detailed in the Form 10-K for the year ended December 31, 1996 for HarCor
Energy, Inc. filed with the Securities and Exchange Commission in March 1997 and
(ii) the incorporation by reference of such Form 10-K in the Registration
Statement of HarCor Energy, Inc. on Form S-8 (No. 33-69312) and Form S-3 (No.
33-84496).
/s/ Ryder Scott Company Petroleum Engineers
-------------------------------------------
RYDER SCOTT COMPANY
PETROLEUM ENGINEERS
Houston, Texas
March 27, 1997
<PAGE>
EXHIBIT 23.3
HUDDLESTON & CO. INC.
PETROLEUM AND GEOLOGICAL ENGINEERS
1111 FANNIN-SUITE 1700
HOUSTON, TEXAS 77002
---------------
(713) 658-0248
CONSENT OF INDEPENDENT PETROLEUM ENGINEER
As independent petroleum consultants, Huddleston & Co., Inc., hereby consents
(i) to the reference to our Firm as experts and the summarization of our reports
entitled "HarCor Energy, Inc., Estimated Future Reserves and Revenues for
Certain Properties as of January 1, 1997," as detailed in the Form 10-K for the
year ended December 31, 1996, for HarCor Energy, Inc., filed with the Securities
and Exchange Commission in March 1997 and (ii) to the incorporation by reference
of such Form 10-K in the Registration Statements of HarCor Energy, Inc., on Form
S-8 (No. 33-69312) and Form S-3 (No. 33-84496).
HUDDLESTON & CO., INC.
By: /s/ Peter D. Huddleston
--------------------------------
Peter D. Huddleston, P.E.
President
Houston, Texas
March 27, 1997
<PAGE>
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 Form S-3
Registration Statement File No. 33-84496, Form S-8 Registration Statement File
No. 33-69312, Form S-8 Registration Statement File No. 333-02167, and Form S-8
Registration Statement File No. 333-02179.
ARTHUR ANDERSEN LLP
Houston, Texas
March 28, 1997
<TABLE> <S> <C>
<PAGE>
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<PERIOD-TYPE> 12-MOS
<FISCAL-YEAR-END> DEC-31-1996
<PERIOD-START> JAN-01-1996
<PERIOD-END> DEC-31-1996
<CASH> 1,593,330
<SECURITIES> 0
<RECEIVABLES> 8,864,240
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0
300
<COMMON> 1,511,084
<OTHER-SE> 28,281,209
<TOTAL-LIABILITY-AND-EQUITY> 94,626,542
<SALES> 28,351,161
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<CGS> 9,150,742<F2>
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<INCOME-PRETAX> 336,910
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<EXTRAORDINARY> (2,134,764)
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<NET-INCOME> (2,258,696)
<EPS-PRIMARY> (0.20)
<EPS-DILUTED> (0.20)
<FN>
<F1>14 7/8% SENIOR SECURED NOTES DUE 2002.
<F2>OIL & GAS PRODUCTION COSTS & GAS PLANT COSTS
<F3>EXPLORATION, DD&A, G&A AND OTHER
</FN>
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