<PAGE> 1
================================================================================
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, 1997
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:
NAME OF EACH EXCHANGE
TITLE OF EACH CLASS 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 [ ]
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]
At March 26, 1998, the registrant had 16,268,387 shares of common stock
outstanding. The aggregate market value on March 26, 1998 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 $26,278,000
(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).
Document incorporated by reference: None.
================================================================================
<PAGE> 2
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.
On January 23, 1998, the Company reported reaching an agreement in
principle with Seneca Resources Corporation ("Seneca") for the sale of the
Company to Seneca (see STRATEGIC ALTERNATIVES UPDATE which follows).
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 25.6 MMBOE as of January 1, 1998.
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 25.6 MMBOE consisting of
11.5 MMBbls of crude oil and natural gas liquids and 84.4 Bcf of natural gas as
of January 1, 1998. 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 $95.4 million at January 1, 1998. Approximately 86% 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 sold all of its non-California proved reserves, as well as its
leasehold interests, working interests and associated rights, under its
exploration agreements in its 3-D and 2-D exploration activities in South Texas,
the West Texas-Permian Basin, and the Lapeyrouse area of Louisiana in February
1998 (see SALE OF NON-CALIFORNIA ASSETS).
- 1 -
<PAGE> 3
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 July, 1995, the Company consummated the sale of 65,000 units consisting
of $65 million aggregate principal amount of its 14-7/8% Senior Secured Notes
("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 Senior 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 used
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 and fund further development drilling. Concurrent
with the repayment of its outstanding bank debt, the Company entered into a new
credit agreement with ING Capital (the "Credit Agreement"), providing for a
total credit facility of $15 million.
In 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 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 Notes. The remaining net proceeds to the Company, along
with availability under the Credit Agreement, were used to fund its exploration
activities which were subsequently sold in February 1998. There are currently
$53.7 million of Senior Notes outstanding.
- 2 -
<PAGE> 4
SALE OF NON-CALIFORNIA ASSETS
In February 1998, pursuant to its announced sales process (see STRATEGIC
ALTERNATIVES UPDATE which follows) the Company closed the sale of all of its oil
and gas assets located outside of California (the "Non-California Assets") to an
undisclosed buyer effective January 1, 1998, for $12.8 million in cash, subject
to certain post- closing adjustments. The Company anticipates recording an
estimated gain of approximately $2.1 million upon closing of the sale subject to
final post-closing adjustments. No capital gains taxes are anticipated to be
incurred due to the Company's current net operating loss carry-forwards.
The Non-California Assets consisted of (i) all of the Company's proved
developed producing, proved undeveloped, probable and possible reserves
primarily located in New Mexico, Texas, Alabama and Louisiana; (ii) all of the
Company's leasehold interests, working interests in wells currently drilling,
seismic data and the associated resale rights, and participation rights in those
exploration agreements in its 3-D and 2-D exploration activities in the
Hostetter area of South Texas, Reeves County in the West Texas-Permian Basin,
the Lapeyrouse area of Louisiana, Polaris Joint Venture and the Gulf Coast Frio
AVO Program; and (iii) certain miscellaneous royalty and net-profits interests
in various states previously referred to by the Company as the Fund I Royalty
Interests. See Note 10 of "Notes to Consolidated Financial Statements" included
in Item 8. herein.
STRATEGIC ALTERNATIVES UPDATE
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. Following the circulation of certain confidential
information to an initial group of potential suitors, indications of interest
were received which suggested that the Company would probably receive more value
for the Company's Non-California Assets if they were offered to a separate group
of buyers because of the non-operated nature of these properties, and the
relatively high level of future capital expenditures and reserve potential
associated with the Company's various 3-D projects.
The Company subsequently bifurcated the sales process during the second
quarter and solicited interest from potential buyers for its California and
Non-California assets as separate packages. As a result of this effort the
Company effected the sale of its Non-California Assets for $12.8 million
(subject to certain purchase price adjustments) in February 1998 (see SALE OF
NON-CALIFORNIA ASSETS above).
On January 23, 1998, the Company reported reaching an agreement in
principle with Seneca for the sale of the Company to Seneca Corporation for a
total cash price of $32,536,000, or $2.00 per share of the Company's common
stock. The sale is subject to the preparation and
- 3 -
<PAGE> 5
execution of definitive agreements, satisfactory completion of the audit of the
Company's financial statements for the year ended December 31, 1997, receipt of
all required approvals, including approval of the Company's shareholders,
satisfactory completion of the previously announced sale of the Company's
Non-California Assets, and completion by Seneca of a satisfactory due diligence
review of the Company's assets, liabilities and business.
CONTINUING DEVELOPMENT ACTIVITIES - SAN JOAQUIN BASIN (CALIFORNIA)
In July 1996 a secondary recovery waterflood project was initiated in the
Diatomite zone on the Ellis lease. To date a total of 24 producing wells have
been converted to water injection. Conversion of producing wells, normal
production declines and the anticipated delay in significant waterflood response
as the reservoir is reaching fill-up are reflected in lower producing rates. As
a result of the waterflood conversion activity and certain delays in other
projected development activities, the Company's daily production from these
properties averaged 641 Bbls of oil and 6,751 Mcf of gas per day in fourth
quarter 1997 as compared to 848 Bbls and 7,386 Mcf in fourth quarter 1996.
The Company has recently (i) documented an initial repressurization of that
area of the Ellis lease currently under waterflood; and (ii) seen an initial
increase in oil production from wells in the response area. Additionally, based
on results of a deep shale well drilled on the Truman lease in January, 1997
which has continued to perform better than its offsetting wells, the Company
commenced a four well drilling program in October 1997 on the Truman lease. The
Company's oil production from the Bakersfield Properties increased to
approximately 860 barrels per day in February, 1998, as a result of four
additional development wells drilled on the Ellis lease in the fourth quarter of
1997 and January 1998. (See DEVELOPMENTAL DRILLING ACTIVITIES in LIQUIDITY AND
CAPITAL RESOURCES included in Item 7. herein.)
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
- 4 -
<PAGE> 6
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 as most of the Company's oil production is sold at prices
based upon posted field prices which vary monthly. 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 1997
was sold at spot market prices. The Company currently anticipates that
approximately 2.9 Bcf of the Company's natural gas production for 1998 (based on
contracted volumes at December 31, 1997) will be sold under fixed-price or
NYMEX-indexed contracts with the balance sold at spot market prices with the
balance anticipated being sold at spot prices.
The Company's business is typically seasonal in nature. The demand for the
Company's oil and gas production generally increases during the winter months.
Gas prices in particular have been sensitive to weather patterns in recent
years. Weather conditions at certain times of the year can also affect the
operations of the Company's oil and gas properties and its ability to produce
hydrocarbons in commercially marketable quantities.
COMPETITION
The acquisition, exploration and development of oil and gas properties is a
highly competitive business. Many companies and individuals are engaged in the
business of acquiring interests in and developing onshore oil and gas properties
in the United States. The industry is not dominated by any single competitor or
a small number of competitors. Many entities with which the Company competes
have significantly greater financial resources, staff and experience. The
Company competes with major and independent oil and gas companies for the
acquisition of desirable oil and gas properties, as well as for the equipment
and labor required to operate and develop such properties. Many of these
competitors have financial and other resources substantially in excess of those
available to the Company. Such competitive disadvantages could adversely affect
the Company's ability to acquire desirable prospects or develop existing
prospects.
- 5 -
<PAGE> 7
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 1997 1996 1995
---------------------------------- ---- ---- ----
<S> <C> <C> <C>
Kern Oil and Refining ....................... -- -- 10%
Mock Resources, Inc. ........................ 17% 20% 24%
Valero Gas Marketing, L.P. .................. -- -- 10%
Enron Capital and Trade Resources ........... 22% 18% --
Shell Oil Company ........................... -- 27% --
Koch Oil Co. ................................ 23% -- --
</TABLE>
The Company considers its relationships with these customers to be
satisfactory. The Company believes that the loss of any present customers 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.
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
- 6 -
<PAGE> 8
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 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.
- 7 -
<PAGE> 9
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 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.
- 8 -
<PAGE> 10
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.
Historically, the natural gas industry 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 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
- 9 -
<PAGE> 11
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's adoption of SOP 96-1 in 1997 did 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 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, 1997, 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.
- 10 -
<PAGE> 12
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 97% of the Company's oil and gas
revenues in 1997. Substantially all of the interests in the oil and gas
properties of the Company are subject to liens securing the Company's Credit
Agreement with ING Capital and are subject to a second priority lien under the
Company's Senior Notes and an indenture agreement. The Company sold its
producing properties outside of California in February 1998. (See SALE OF
NON-CALIFORNIA ASSETS in Item 1.)
Workover and development activity in 1997 included significant development
work on the San Joaquin Basin properties and the drilling of two successful
development wells in South Texas. A total of ten successful development wells
were drilled on the Bakersfield Properties during 1997. It is anticipated that
45 additional wells may be drilled in 1998, with a total of 183 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 continue to be expanded in 1998. The
Company's total future cost to develop the proven reserves on the properties is
currently estimated at $76.8 million at December 31, 1997.
EXPLORATION ACTIVITIES - During 1997 the Company commenced drilling
operations in the McMullen County, Texas, and Reeves County, Texas 3-D project
areas.
In the McMullen County project area, the Company drilled two wells. The
Texaco Fee #64-1 (22.725% working interest) is still under evaluation, while the
Stella Penn #8 (17.5935% working interest) is flowing approximately 4 MMcfd and
120 BCPD. At year end the Company had two wells drilling in this project area.
In the Reeves County project area, the Company drilled the TXL H-13 #1
which was completed as a shallow gas producer. In addition, the Company
successfully re-entered and completed the Kirk #1 (7.5% working interest) which
had an initial flow rate of 1 MMcfd. The Company had two wells drilling in this
project area at year end.
In the Gulf Coast 2-D AVO program, the Company participated in two wells
both of which were dry holes.
The Company sold its leasehold and working interests and associated rights
under its exploration agreements as part of the
- 11 -
<PAGE> 13
sale of its Non-California Assets (see SALE OF NON-CALIFORNIA ASSETS in Item
1.).
The following table summarizes the Company's producing and shut-in wells,
producing acreage and undeveloped acreage as of December 31, 1997:
<TABLE>
<CAPTION>
Gross Net Producing Undeveloped
Wells (1) Wells (2) Acreage Acreage
- --------------- --------------- ------------------- -------------------
Oil Gas Oil Gas Gross Net Gross Net
- ----- ----- ----- ----- ------- ------- ------- -------
<S> <C> <C> <C> <C> <C> <C> <C>
317 79 164.4 19.58 23,596 6,305 135,468 16,933
</TABLE>
(1) The number of gross wells and acreage shown equals the total number of
wells or acres in which a working interest is owned.
(2) The number of net wells or acres shown equals the sum of the
fractional working interests owned in gross wells or acres, expressed
as whole numbers or fractions thereof.
DRILLING ACTIVITIES
The following table shows the gross and net number of exploratory and
development wells drilled in the years indicated and the Company's interests
therein:
<TABLE>
<CAPTION>
1997 1996 1995
----------------- ----------------- -----------------
Gross Net Gross Net Gross Net
------- ------- ------- ------- ------- -------
<S> <C> <C> <C> <C> <C> <C>
Exploratory-
Oil .............. -- -- -- -- -- --
Gas .............. -- -- -- -- -- --
Dry .............. 2 .86 -- -- -- --
Development-
Oil .............. 13 9.75 30 22.50 44 33.00
Gas .............. 4 .55 2 .45 1 .28
Dry .............. -- -- -- -- -- --
Total-
Producing ........ 17 10.30 32 22.95 45 33.28
Dry .............. 2 .86 -- -- -- --
------- ------- ------- ------- ------- -------
19 11.16 32 22.95 45 33.28
======= ======= ======= ======= ======= =======
</TABLE>
PRODUCTION, REVENUES AND LIFTING COSTS
Summary information of the Company's net oil and gas production, 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 is shown in Note 8 of "Notes to Consolidated Financial Statements"
contained in Item 8. herein.
- 12 -
<PAGE> 14
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.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
(a) The Company's Annual Meeting of Stockholders (the "Annual Meeting")
was held on December 16, 1997.
(b) At the Annual Meeting, Vinod K. Dar and David E.K. Frischkorn, Jr.
were elected as Class III directors of the Company for a three year term. Mark
G. Harrington, Herbert L. Oakes, Jr. and Francis H. Roth are Class I directors
whose terms expire at the 1998 Annual Meeting of Stockholders. Robert J. Crespi
and Ambrose K. Monell are Class II directors, whose terms expire at the 1999
Annual Meeting of Stockholders.
(c) The number of shares voted for and against the two directors who were
elected at the Annual Meeting were as follows:
<TABLE>
<CAPTION>
VOTES AGAINST
CANDIDATE VOTES FOR OR ABSTAIN
--------- --------- -------------
<S> <C> <C>
Vinod K. Dar 14,506,380 68,306
David E.K. Frischkorn, Jr. 14,506,355 68,331
</TABLE>
- 13 -
<PAGE> 15
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>
1997 1996
---------------- ----------------
Quarter Ended High Low High Low
------------- ------ ----- ------ -----
<S> <C> <C> <C> <C>
March 31 ................... $ 6.88 $4.25 $ 5.38 $2.31
June 30 .................... $ 6.56 $5.63 $ 5.13 $4.06
September 30 ............... $ 6.13 $4.56 $ 6.25 $4.17
December 31 ................ $ 5.25 $1.38 $ 6.11 $4.38
</TABLE>
On March 26, 1998, the closing bid price for the common stock as reported
by NASDAQ was $1.66 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 Notes and its Credit Agreement, 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. There is
currently no preferred stock outstanding.
RECENT SALES BY THE COMPANY OF UNREGISTERED SECURITIES
In April 1997, 512,800 shares of common stock were issued upon conversion
of 20,000 shares of the Company's Series B 8% Convertible Preferred Stock and
256,400 shares of common stock were issued upon conversion of 10,000 shares of
the Company's Series C 8% Convertible Preferred Stock. In each case, no
consideration was received by the Company other than the surrender of the
certificates representing Convertible Preferred Stock being converted, and no
commission or other remuneration was paid or given directly or indirectly in
connection with such conversions. Therefore, the issuances of such shares of
common stock upon such conversions are exempt from the registration provisions
of the Securities Act of 1933 pursuant to the exemption provided by Section
3(a)(9) thereof.
- 14 -
<PAGE> 16
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)
1997 1996 1995 1994 1993
-------- -------- -------- -------- --------
<S> <C> <C> <C> <C> <C>
Revenues ........................ $ 21,946 $ 31,622 $ 22,595 $ 13,213 $ 6,725
Net loss ........................ $ (4,733) $ (1,798) $ (4,618) $ (939) $ (1,041)
Net loss applicable
to common stockholders .......... $ (4,793) $ (2,259) $ (7,765) $ (1,890) $ (1,287)
Net loss percommon share ........ $ (.30) $ (.20) $ (.98) $ (.29) (.23)
Weighted average number
of common shares outstanding .... 15,915 11,150 7,904 6,447 5,492
<CAPTION>
1997 1996 1995 1994 1993
-------- -------- -------- -------- --------
<S> <C> <C> <C> <C> <C>
Working capital ................. $ (4,585) $ (61) $ 1,325 $ (7,943) $ 1,551
Total assets .................... $ 93,528 $ 94,627 $ 94,231 $ 68,573 $ 17,937
Long-term debt .................. $ 57,143 $ 54,100 $ 68,709 $ 31,889 $ 8,067
Stockholders' equity ............ $ 26,377 $ 29,793 $ 10,214 $ 15,353 $ 7,536
</TABLE>
- 15 -
<PAGE> 17
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, 1997
COMPARISON OF 1997 TO 1996 -
REVENUES - The Company's total revenues decreased $9,676,000 (31%) from
$31,622,000 during 1996 to $21,946,000 in the current year. Approximately $2.9
million of the comparative decrease is attributable to a gain on sale of oil and
gas properties the Company realized in December.
Oil and gas revenues decreased $5,435,000 (25%) from $21,716,000 in 1996 to
$16,281,000 in the current year due to decreased production levels. Oil and gas
production volumes were comparably lower in the current year as a result of the
following factors: (i) the sale of certain of the Company's Permian Basin
properties in December 1996; (ii) normal production rate declines on the initial
Bakersfield development wells; (iii) 1996 included the effect of higher initial
production rates from the drilling of 17 development wells on the Bakersfield
Properties during second and third quarters of 1996; (iv) the conversion of 23
producing wells to water injection wells beginning in the latter part of 1996
and continuing through 1997 as part of the Ellis waterflood project on the
Bakersfield Properties; and (v) continuing development drilling on the Ellis
lease was delayed pending repressurization of the Ellis waterflood. Development
drilling on the Truman and Tisdale shale leases was also delayed until fourth
quarter 1997 pending a potential resolution of the Company's announced sale
process.
Oil revenues decreased $3,687,000 (38%) from $9,777,000 in 1996 to
$6,090,000 in the current year due to lower production volumes. Oil production
decreased 185,000 barrels (35%) from 523,000 barrels in 1996 to 338,000 barrels
in the current year. A decrease of 111,000 barrels was attributable to the
Bakersfield Properties due to the factors described above while oil production
from the Company's other properties decreased 74,000 barrels in the aggregate
due principally to the sale of the Company's Permian Basin properties in
December 1996. The average unit price received for oil was $18.00 per barrel
during the current year as compared to $18.71 per barrel for the same period in
1996. Hedging activities had no material effect on oil revenues in the current
year.
Gas revenues decreased $1,749,000 (15%) from $11,939,000 in 1996 to
$10,190,000 in 1997 also due to decreased production volumes. Gas production
decreased 1,319,000 Mcf (23%) from 5,795,000 Mcf in 1996 to 4,476,000 Mcf in the
current year. This was primarily the result of decreased production from the
Company's Bakersfield Properties as described previously. Gas
- 16 -
<PAGE> 18
production from the Company's other properties declined 257,000 Mcf in the
aggregate during 1997. Average prices received for gas increased to $2.28 per
Mcf for the year 1997 as compared to $2.06 per Mcf in 1996.
During 1997, the Company realized revenues of $5,487,000 from its natural
gas processing plant and gas marketing activities. Gas plant revenues consisted
of $3,554,000 from the sale of natural gas liquids (184,000 barrels at an
average composite price of $19.42 per barrel), $1,771,000 from the resale of
natural gas purchased from third parties, and $162,000 in gas processing fees.
During 1996, the Company realized revenues of $6,635,000 from its gas plant and
marketing activities consisting of $4,508,000 from the sale of natural gas
liquids (232,000 barrels at an average composite price of $19.39 per barrel),
$1,990,000 from the resale of natural gas purchased from third parties, and
$137,000 in gas processing fees. The decrease in revenues from sale of NGLs in
the current year was due to reduced gas inlet production volumes from the
Company's Bakersfield Properties as previously discussed.
The Company realized total interest and other income of approximately
$179,000 in 1997 as compared to $3,271,000 during the same period in 1996. In
1996, other income included a gain of $2,948,000 on the sale of the Company's
Permian Basin oil and gas assets which was effected in December of that year.
COSTS AND EXPENSES - Total costs and expenses decreased $4,605,000 (15%)
from $31,285,000 in 1996 to $26,680,000 in 1997.
Oil and gas production costs for 1997 were $5,022,000 as compared to
$5,134,000 in 1996, representing a decrease of $112,000 (2%) in the current
year. The Company's total aggregate production cost per barrel of oil equivalent
("BOE") was $4.63 per BOE in 1997 as compared to $3.45 per BOE in 1996.
During 1997, the Company incurred costs of $3,745,000 from gas plant and
gas marketing activities, which consisted of $2,320,000 from the purchase of
natural gas for processing and resale and $1,425,000 of direct operating
expenses. During 1996, the Company incurred costs of $4,017,000 resulting from
its gas plant and marketing activities which consisted of $2,072,000 from the
purchase of natural gas for processing and resale and $1,945,000 of direct
operating expenses.
The Company incurred engineering and geological expenses of $272,000 and
$368,000 for the years ended December 31, 1997 and 1996, respectively,
representing a decrease of $96,000 (26%) for the current year.
Depletion, depreciation and amortization ("DD&A") expense decreased $2,927,000
(36%) from $8,173,000 in 1996 to $5,246,000 in 1997 due to decreased levels of
oil and gas production in the current year as discussed in REVENUES. The DD&A
rate per BOE for
- 17 -
<PAGE> 19
oil and gas reserves was $4.84 for 1997 as compared to $5.23 per BOE in 1996.
General and administrative expenses were $2,869,000 and $3,160,000 for the
years ended December 31, 1997 and 1996, respectively, representing a decrease of
$291,000 (9%) in the current year.
Interest expense decreased $1,272,000 (13%) from $10,066,000 in 1996 to
$8,794,000 in 1997. This was due to the retirement of $11.3 million of the
Company's 14-7/8% Senior Notes in the third quarter of 1996. The Company
realized the benefit of reduced interest resulting from the debt retirement for
the entire year of 1997 as compared to approximately two quarters during 1996.
The Company paid $60,000 in preferred dividends in 1997 as compared to $461,000
during 1996. The decrease in dividends is due to the conversion of the Company's
remaining preferred stock into common stock during 1997.
NET LOSS - The Company's net loss attributable to common stockholders for
the year ended December 31, 1997 was $4,793,000 ($.30 per common share). For the
year ended December 31, 1996, the Company had net operating income of $337,000,
and a net loss attributable to common stockholders, after extraordinary charge
and preferred dividends, of $2,259,000 ($.20 per common share). The
extraordinary charge in 1996 was due to early retirement of debt as a result of
the redemption of a portion of the Company's 14-7/8% Senior Notes.
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
- 18 -
<PAGE> 20
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 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 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.
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
- 19 -
<PAGE> 21
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 Senior
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 Senior 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 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.
LIQUIDITY AND CAPITAL RESOURCES
SUMMARY - The Company's sources of working capital have primarily been
cash flow from operations and a combination of debt and equity financings as
needs for capital have arisen. In 1997, the Company generated net cash from
operations of $2,583,000 as compared to $6,083,000 in 1996. The Company realized
net proceeds of $4,508,000 from financing activities during the current year as
compared to $4,711,000 in 1996. The Company utilized a total of $7,540,000 in
investing activities in the current year (which was net of proceeds from asset
dispositions of $4,674,000) as compared
- 20 -
<PAGE> 22
to $21,405,000 in 1996. Investing activities in both periods consisted mainly of
developmental drilling activities.
WORKING CAPITAL - The Company had a working capital deficit of $4,585,000
with a current ratio of 0.54:1 at December 31, 1997 as compared to net working
capital of $61,000 and a current ratio of 1:1 at December 31, 1996. Included in
current liabilities at December 31, 1996, was $3.7 million in accrued interest
relating to the Company's 14-7/8% Senior Notes. The accrued interest was
subsequently paid in January 1997 with proceeds from an increase in long-term
debt.
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
$1,745,000 (before changes in other working capital of $838,000). This compares
to $7,213,000 (before changes in other working capital of $1,130,000) in 1996.
The decrease in the current period's discretionary cash flow as compared to 1996
was due to decreased oil and gas production volumes which was a result of the
following factors: (i) the sale of certain of the Company's Permian Basin
properties in December 1996; (ii) normal production rate declines; (iii) 1996
included the effects of higher initial production rates resulting from
developmental drilling activities; (iv) the conversion of producing wells to
water injection wells as part of the Ellis waterflood project during the current
year; and (v) certain other delays of the projected development drilling program
on the Bakersfield Properties. These factors resulted in a 27% decrease in BOE
production levels in 1997 as compared with 1996. (See RESULTS OF OPERATIONS -
REVENUES.)
With respect to pricing, the Company-wide average prices realized for oil
and gas sales were $18.00 per barrel for oil, $19.42 per barrel for NGLs and
$2.28 per Mcf for natural gas. This compares to $18.71, $19.39 and $2.06,
respectively, for 1996. Average prices as stated include the effects of the
Company's fixed price sales and hedging contracts.
The effect of the current period's decline in production volumes was
partially mitigated by (i) lower operating costs and expenses; (ii) interest
expense savings as a result of the retirement of a portion of the Company's
14-7/8% Senior Notes; and (iii) reduced dividend payments resulting from the
conversion
- 21 -
<PAGE> 23
of the Company's remaining preferred stock into common stock. (See RESULTS OF
OPERATIONS - COSTS AND EXPENSES.)
Production from the Bakersfield Properties during January and February of
1998 has increased over the fourth quarter rates as a result of development
drilling on the Truman lease. The Ellis lease will continue to be negatively
impacted by normal production declines and production losses resulting from the
conversion of additional producing wells to water injector wells in the further
development of waterflood project. Plans for 1998 provide for the conversion of
an additional 12 producing wells to injection for a total of 35 injectors by
year-end 1998.
The Company anticipates that the proposed additional shale development
drilling on the Truman and Tisdale leases will positively affect 1998 production
rates. Also, effects of water injection on the Ellis waterflood initiated in
1996 and continuing through 1997 have been observed, and an increase in
production response has resulted in portions of the waterflood area beginning in
the fourth quarter of 1997. (See DEVELOPMENTAL DRILLING ACTIVITIES which
follows.)
The Company will also be negatively impacted in future periods on a
period-to-period comparative basis by the loss of production from the sale of
its Non-California Assets in February 1998. These properties produced an
estimated average of 730 BOE per day in the aggregate during fourth quarter
1997. See SALE OF NON-CALIFORNIA ASSETS above.
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, 1997 have not had a material effect on the Company's liquidity or
results of operations. (See Note 4 of "Notes to Consolidated Financial
Statements" included herein.)
EFFECTS OF INFLATION AND CHANGES IN PRICE - The Company's results of
operations and cash flows are affected by changing oil and gas prices. If the
price of oil and gas increases, there could be a corresponding increase in the
cost to the Company for drilling and related services, as well as an increase in
revenues. Inflation has had a minimal effect on the Company.
- 22 -
<PAGE> 24
FINANCING ACTIVITIES
SUMMARY - The Company realized net proceeds of $4.5 million from its
financing activities during 1997 which consisted of (i) $1.4 million in cash
proceeds from the issuance of common stock pursuant to a warrant exercise; (ii)
net borrowings of $3.3 million on the Company's revolving Credit Agreement with
Internationale Nederlanden (U.S.) Capital Corporation ("ING Capital"); and (iii)
a net of $200,000 for the payment of preferred stock dividends and miscellaneous
activities. Effective April 1997 all of the Company's preferred stock had been
either redeemed or converted to common stock and no further dividend payments
are required in future periods.
CREDIT AGREEMENT - The Company entered into the current Credit Agreement
with ING Capital in July 1995. 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, 1997, and was
subsequently reduced to $4.3 million in February 1998 (see last paragraph of
this note). Availability under the Credit Agreement, as amended in August 1997,
will terminate on June 30, 1998, and amounts outstanding will convert to a term
loan on July 31, 1998, with a set amortization schedule of a percentage of the
outstanding principal balance continuing through December 31, 2001. 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 $5.3 million outstanding under the Credit Agreement at
December 31, 1997, with an effective interest rate of 8.25% at that date.
The Credit Agreement contains restrictive covenants which impose
limitations on the Company and its subsidiaries with respect to, among other
things, certain financial ratios or limitations, incurrence of indebtedness, the
sale of the Company's oil and gas properties and other assets, hedging
transactions, payment of dividends, mergers or consolidations and investments
outside the ordinary course of business. The Credit Agreement also contains
customary default provisions. The Company believes that it was in compliance
with all of the covenant provisions under the Credit Agreement at December 31,
1997.
Pursuant to the terms of its 14-7/8% Senior Notes, the Company repaid $10.7
million of the $10.8 million outstanding under the Credit Agreement effective
with the sale of its Non-California oil and gas assets in February 1998 (see
Notes 3 and 10 of "Notes to Consolidated Financial Statements" included herein).
ING Capital concurrently reduced the amount of the borrowing base by this amount
pursuant to its rights under the Senior Notes and an intercreditor agreement.
SENIOR NOTES - The Company's $53.7 million (face value) of Senior Notes
bear interest at the rate of 14-7/8% per annum and
- 23 -
<PAGE> 25
are payable semi-annually on January 15 and July 15 of each year. The Senior
Notes are redeemable, in whole or in part, at the option of the Company at any
time on or after July 15, 1999, at the following redemption prices (expressed as
percentages of the principal amount) if redeemed during the twelve-month period
commencing on July 15 of the year set forth below plus, in each case, accrued
interest thereon to the date of redemption:
<TABLE>
<CAPTION>
Year Percentage
---- ----------
<S> <C>
1999.......................... 110%
2000.......................... 107%
2001 and thereafter........... 100%
</TABLE>
The Senior 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 Senior Notes
and the Indenture are secured by a second priority lien on substantially all of
the assets of the Company securing its bank debt.
The difference between the face value of the Senior 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 Senior 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 Senior 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, 1997.
CAPITAL EXPENDITURES AND INVESTING ACTIVITIES
SUMMARY - The Company expended a total of $12.2 million cash in investing
activities in 1997 which consisted of $4.7 million for drilling costs accrued at
December 31, 1996 and $7.5 million relating to current period developmental
drilling and 3-D activities. The Company also realized cash proceeds of $4.7
million in 1997 relating to the sale of certain of its Permian Basin oil and gas
properties which had been effected in December 1996. This compares to $21.4
million cash expenditures for 1996
- 24 -
<PAGE> 26
which consisted of $8.2 million for drilling costs accrued at December 31, 1995
and $13.2 relating to developmental drilling and 3-D activities for 1996. Total
accrual-basis capital expenditures were $10.3 million and $18.1 million for 1997
and 1996, respectively.
DEVELOPMENTAL DRILLING ACTIVITIES - The Company had originally planned to
spend approximately $14 million during 1997 on the development of its
Bakersfield Properties. However, a portion of those expenditures for drilling
new wells will be delayed until 1998 pending progress of repressuring of the
Diatomite zone on the Ellis lease by water injection. During July, 1996 water
injection was initiated in four wells in the waterflood pilot project area with
four additional producing wells converted to injection in December 1996.
Expansion of the waterflood project has continued in 1997 with the number of
injection wells being increased to a total of 23 active injection wells by
year-end 1997. Completion of the installation of the entire waterflood project
is anticipated by early 1999.
The effect of water injection has been observed in a total of 33 wells to
date. During 1997 the Company drilled three Diatomite wells on the Ellis lease
to evaluate the repressuring progress. Based on favorable pressure data
observed, one of the three new wells was completed in the Diatomite zone as a
producer. In addition to the three new Diatomite wells drilled on the Ellis
lease in the third quarter of 1997, 12 wells previously drilled which were
completed in only the deeper shale zone are also available for completion in the
Diatomite zone pending repressuring of the waterflood area. The timing of
completion of these wells and the drilling of additional wells is contingent on
the pressure information indicating that the reservoir has been sufficiently
repressured, although it is anticipated that at least a portion of these wells
will be completed in the Diatomite in 1998.
Active development of the shale zones on the Truman and Tisdale leases
previously had been delayed as a primary focus was the exploitation of the Ellis
lease through development drilling and installation of the Diatomite zone
waterflood project. A deep shale well drilled on the Truman lease in January
1997 has shown favorable performance with average rates of 50 barrels of oil per
day and 250 Mcfd during 1997. In the fourth quarter the Company commenced the
drilling of a four-well shale development program on the Truman lease which was
completed in the first quarter of 1998. Drilling activity resulted in the Truman
lease production increasing from 223 barrels of oil per day in the fourth
quarter to 550 barrels per day in February, 1998, although one of the four new
wells only began producing late in February. Similarly, gas production increased
from 3,483 Mcfd to 4,611 Mcfd (all rates net to the Company's interest).
Additional shale development is also projected for 1998. These estimates may
vary as the Company further evaluates the results of drilling activities, water
injection, and results of future operations.
- 25 -
<PAGE> 27
There can be no assurances that the Company will be successful in the
continued development of the Bakersfield Properties nor that it will experience
increased production response from the Ellis waterflood project.
EXPLORATION ACTIVITIES - During 1997 the Company commenced drilling
operations in the McMullen County, Texas, and Reeves County, Texas 3-D project
areas.
In the McMullen County project area, the Company drilled two wells. The
Texaco Fee #64-1 (22.725% working interest) is still under evaluation, while the
Stella Penn #8 (17.5935% working interest) is flowing approximately 4 MMcfd and
120 BCPD. At year end the Company had two wells drilling in this project area.
In the Reeves County project area, the Company drilled the TXL H-13 #1
which was completed as a shallow gas producer. In addition, the Company
successfully re-entered and completed the Kirk #1 (7.5% working interest) which
had an initial flow rate of 1 MMcfd. The Company had two wells drilling in this
project area at year end.
In the Gulf Coast 2-D AVO program, the Company participated in two wells
both of which were dry holes.
The Company sold all of its leasehold and working interests and associated
rights under its exploration agreements as part of the sale of its
Non-California Assets in February 1998. (See SALE OF NON-CALIFORNIA ASSETS which
follows.)
SALE OF NON-CALIFORNIA ASSETS
In February 1998, the Company closed pursuant to its announced sales
process (see STRATEGIC ALTERNATIVES UPDATE which follows) the sale of all of its
oil and gas assets located outside of California (the "Non-California Assets")
to an undisclosed buyer effective December 31, 1997, for $12.8 million in cash.
The transaction is subject to post closing adjustments, the most significant of
which includes the purchaser's obligation to acquire a producing well in south
Texas excluded from the purchase until workover operations now underway are
completed. The well's value in the transaction was originally $714,000; however,
the price to be paid by the purchaser will be equal to the present value of the
reserves assigned to the well by HarCor's independent petroleum engineers,
discounted at 10%, following completion of the workover. It is anticipated that
the well will be restored to production in early April, but there is no
assurance that its price as so determined will equal $714,000. The Company
anticipates recording an estimated gain of approximately $2.1 million upon
closing of the sale subject to final post-closing adjustments. No capital gains
taxes are anticipated to be incurred due to the Company's current net operating
loss carry-forwards.
- 26 -
<PAGE> 28
The Non-California Assets consisted of (i) all of the Company's proved
developed producing, proved undeveloped, probable and possible reserves in New
Mexico, Texas, Alabama and Louisiana; (ii) all of the Company's leasehold
interests, working interests in wells currently drilling, seismic data and the
associated resale rights, and participation rights in those exploration
agreements in its 3-D and 2-D exploration activities in the Hostetter area of
South Texas, Reeves County in the West Texas-Permian Basin, the Lapeyrouse area
of Louisiana, Polaris Joint Venture and the Gulf Coast Frio AVO Program; and
(iii) certain miscellaneous royalty and net-profits interests in various states
previously referred to by the Company as the Fund I Royalty Interests. Average
daily production relating to these properties during the fourth quarter of 1997
was 213 BOPD and 3,100 Mcfd as reported. (See Note 10 of "Notes to Consolidated
Financial Statements" included in Item 8. herein.)
STRATEGIC ALTERNATIVES UPDATE
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. Following the circulation of certain confidential
information to an initial group of potential suitors, indications of interest
were received which suggested that the Company would probably receive more value
for the Company's Non-California Assets if they were offered to a separate group
of buyers because of the non-operated nature of these properties, and the
relatively high level of future capital expenditures and reserve potential
associated with the Company's various 3-D projects.
The Company subsequently bifurcated the sales process during the second
quarter and solicited interest from potential buyers for its California and
Non-California Assets as separate packages. As a result of this effort, the
Company effected the sale of its Non-California Assets for approximately $12.8
million in February 1998 (see SALE OF NON-CALIFORNIA ASSETS in Item 1).
On January 23, 1998, the Company reported reaching an agreement in
principle with Seneca for the sale of the Company to Seneca for a total cash
price of $32,536,000, or $2.00 per share of the Company's common stock. The sale
is subject to the preparation and execution of definitive agreements,
satisfactory completion of the audit of the Company's financial statements for
the year ended December 31, 1997, receipt of all required approvals, including
approval of the Company's shareholders, satisfactory completion of the
previously announced sale of the Company's Non-California Assets and completion
by Seneca of a satisfactory due diligence review of the Company's assets,
liabilities and business.
- 27 -
<PAGE> 29
FINANCIAL COMMITMENTS
In the event that the proposed sale of the Company to Seneca is not
effected, the Company plans to (i) restructure its overhead and significantly
reduce G & A expenses according to its reduced scope of operations as a result
of the sale of its Non-California Assets; (ii) attempt to refinance its Senior
Notes with either lower-cost debt or additional equity; (iii) continue with the
development of its Bakersfield Properties as outlined in Development Drilling
Activities to the extent that cash flows and financial resources and liquidity
permit; and (iv) continue to market the sale of the Company or the California
Properties as an asset sale.
In the event operating cash flow and available liquidity are not sufficient
to continue funding development costs, or results from developmental drilling
are not as successful as anticipated, the Company will either (i) curtail its
developmental drilling and/or exploration activities or (ii) seek alternative
financing to assist in these activities.
There can be no assurances that the Company will be successful in closing
its announced sale transaction. In the event this transaction is not closed,
there can be no assurances that the Company will be successful in its efforts to
refinance its Senior Notes, attract additional equity financing, nor
successfully effect the sale of the Company or the sale of its California oil
and gas properties at an acceptable price.
UNCERTAINTIES INVOLVING FORWARD-LOOKING DISCLOSURE
Certain of the statements set forth above under "LIQUIDITY AND CAPITAL
RESOURCES - CAPITAL EXPENDITURES AND INVESTING ACTIVITIES" AND "STRATEGIC
ALTERNATIVES", such as the statements regarding estimated production amounts,
available cash and expected cash flows from operating activities for 1997 and
1998, estimated development costs and number of anticipated wells to be drilled
in 1997 and thereafter, the planned 3-D seismic program and the potential sale
of the Company are forward-looking and are based upon the Company's current
belief as to the outcome and timing of such future events. There are numerous
uncertainties inherent in estimating quantities of proved oil and gas reserves
and in projecting future rates of production and timing of 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
- 28 -
<PAGE> 30
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 1998 and
beyond and strategic alternatives could differ materially from those expressed
in the above-described forward-looking statements.
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
None.
ITEM 8. CONSOLIDATED FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
The information required by this Item begins at Page F-1, following Page 52
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.
- 29 -
<PAGE> 31
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
GENERAL
The names and ages of the Company's executive officers and 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............45 Chairman of the Board of Directors 1987
and Chief Executive Officer
Francis H. Roth...............60 President, Chief Operating Officer 1989
and Director
Gary S. Peck..................45 Vice President - Finance & N/A
Administration, Chief Financial
Officer and Corporate Secretary
Albert J. McMullin............41 Vice President - Land, Contracts and N/A
Acquisitions
Robert J. Cresci..............53 Director 1994
Vinod K. Dar..................47 Director 1992
David E. K. Frischkorn, Jr....46 Director 1992
Ambrose K. Monell*............42 Director 1987
Herbert L. Oakes, Jr..........51 Director 1992
</TABLE>
- ----------
* Resigned effective January 16, 1998
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.
- 30 -
<PAGE> 32
Mr. Roth has been President and Chief Operating Officer of the Company
since March 1989. Prior to that time, he served as Vice President - Production
of the Company since July 1988. He has been employed in various engineering
positions with both Amoco and Chevron in several geographic locations. Prior to
joining the Company, he had been employed for 16 years by MCO Resources, Inc.,
an oil and gas company, in various positions, including General Manager of
Operations and Engineering. He also served as Vice President of Drilling and
Production and Engineering for MCOR Oil and Gas Corporation, a subsidiary of MCO
Resources, Inc. Mr. Roth holds a Bachelor of Science degree in petroleum
engineering from the University of Kansas, a Master of Science degree in
petroleum engineering from the University of Oklahoma and a Master of Business
Administration degree from the University of California.
Mr. Peck joined the Company as Vice President - Finance and Chief Financial
Officer in October 1989 and became Secretary in November 1989. Prior to joining
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
- 31 -
<PAGE> 33
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. From 1992 to
1996, 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 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 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 resigned as a director of the Company effective January 16,
1998, to pursue other interests.
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
- 32 -
<PAGE> 34
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.
- 33 -
<PAGE> 35
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 ................ 1997 $231,800 $99,978 $ -0- -0- $ 4,315
Chairman of the Board 1996 231,800 80,908 -0- 75,000 3,989
and Chief Executive 1995 190,000 70,417 -0- 50,000 3,699
Officer
Francis H. Roth ................... 1997 152,500 47,867 -0- -0- 5,859
President and Chief 1996 152,500 40,104 -0- 27,000 5,475
Operating Officer 1995 125,000 70,208 -0- 18,000 5,113
Gary S. Peck ...................... 1997 122,000 38,292 -0- -0- 2,700
Vice President-Finance & 1996 122,000 31,333 -0- 24,000 2,490
Administration, Chief 1995 100,000 39,167 -0- 16,000 2,305
Financial Officer and
Corporate Secretary
Albert J. McMullin ................ 1997 85,400 17,745 -0- -0- 2,020
Vice President-Land, 1996 85,400 14,808 -0- 15,000 1,908
Contracts & Acquisitions 1995 73,770 8,026 -0- 10,000 -0-
</TABLE>
- ----------
(1) Does not include perquisites and other personal benefits because the value
of these items did not exceed the lesser of $50,000 or 10% of reported
salary and bonus of any of the Named Executive Officers.
(2) No stock appreciation rights ("SARs") were granted to any of the Named
Executive Officers during any of the years presented.
(3) Such amounts were premiums paid by the Company for annual disability
insurance for each such officer.
STOCK OPTION GRANTS DURING 1997
There were no stock options granted to the Named Executive Officers in
1997. The Company does not have any outstanding SARs.
- 34 -
<PAGE> 36
1997 OPTION EXERCISES AND OUTSTANDING STOCK OPTION VALUES
AS OF DECEMBER 31, 1997
The following table shows the number of shares acquired by the Named
Executive Officers upon their exercise of stock options during 1997, the value
realized by such Named Executive Officers upon such exercises, the number of
shares of common stock covered by both exercisable and non-exercisable stock
options as of December 31, 1997 and their respective values at such date.
AGGREGATED OPTION EXERCISES IN 1996 AND
AGGREGATED OPTIONS AND OPTION VALUES AT DECEMBER 31, 1997
<TABLE>
<CAPTION>
Number of Securities Underlying Value of Unexercised
Unexercised Options at In-the-Money Options at
Shares December 31, 1997(#) December 31, 1997($)(1)
Acquired on Value ------------------------------- -----------------------------
Name Exercise(#) Realized($) Exercisable Unexercisable Exercisable Unexercisable
- --------------------------- ----------- ----------- ----------- ------------- ----------- -------------
<S> <C> <C> <C> <C> <C> <C>
Mark G. Harrington ........ -0- N/A 252,500 37,500 $ -0- $ -0-
Francis H. Roth ........... -0- N/A 116,500 13,500 -0- -0-
Gary S. Peck .............. -0- N/A 75,500 12,000 -0- -0-
Albert J. McMullin......-0- N/A 47,500 7,500 -0- -0-
</TABLE>
- ----------
(1) On December 31, 1997, the closing bid price of the common stock as quoted
by NASDAQ was $1.65625 per share. Value is calculated on the basis of the
differences between the option prices and $1.65625, multiplied by the
number of shares of common stock granted at the respective option prices.
The option prices for exercisable and unexercisable options granted to
Messrs. Harrington, Roth, Peck and McMullin covering 290,000, 130,000,
87,500 and 55,000 shares, respectively, range from a low of $2.625 per
share to a high of $5.16 per share. Consequently there was no value
ascribed to any of the options in the above table.
- 35 -
<PAGE> 37
RESTRICTED SHARE VALUES AS OF DECEMBER 31, 1997
The following table shows the number of restricted shares of common stock
held by the Named Executive Officers and their values at December 31, 1997:
RESTRICTED STOCK SHARES AND
RESTRICTED STOCK VALUES AT DECEMBER 31, 1997
<TABLE>
<CAPTION>
Restricted Restricted
Shares Share Value
Name (#) ($)
-------------------------------------- ---------- -----------
<S> <C> <C>
Mark G. Harrington ................... 23,750 $ 39,336
Francis H. Roth ...................... 15,625 25,879
Gary S. Peck ......................... 12,500 20,703
Albert J. McMullin ................... 8,500 14,078
</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, 1997 is calculated by
multiplying the number of Restricted Shares by the December 31, 1997
closing bid price of the common stock as quoted by NASDAQ, which was
$1.65625 per share.
COMPENSATION OF DIRECTORS
During 1997, 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 latter 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
- 36 -
<PAGE> 38
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 third anniversary of his election to the Board of Directors (July
7, 1997), Mr. Cresci was automatically granted an option to purchase 5,000
shares of common stock at an exercise price equal to $6.32 per share, 110% of
the fair market value of the common stock on such date. Upon completion of their
fifth full year of service after the effective date of the Directors' Option
Plan (October 14, 1997), Messrs. Dar and Frischkorn were each automatically
granted an option to purchase 5,000 shares of common stock at an exercise price
equal to $5.43 per share, 110% of the fair market value of the common stock on
such date. Upon the fifth anniversary of his initial election to the Board of
Directors (November 17, 1997), Mr. Oakes was automatically granted an option to
purchase 5,000 shares of common stock at an exercise price equal to $4.54 per
share, 110% of the fair market value of the common stock on such date.
CHANGE-IN-CONTROL ARRANGEMENTS
Effective April 9, 1997, pursuant to the authority granted by the Board of
Directors to retain the Company's personnel necessary to maximize shareholder
value in any potential sale process and effect an orderly transition, the
Company entered into Severance Agreements (the "Agreements") with all employees,
including the following Executive Officers: Mark G. Harrington, Francis H. Roth,
Gary S. Peck and Albert J. McMullin. These Agreements were restated on October
17, 1997 to extend the term of the agreements through December 31, 1998. The
Agreements only become effective if the Company is sold or a change of control
occurs. The Agreements provide that the said Executive Officers agree to remain
employed by the Company and to devote the their best efforts to the business
affairs of the Company until (a) December 31, 1998, or until (b) the effective
date of a "Change of Control" (as defined therein), whichever first occurs. If
an Executive Officer leaves the Company's employment prior to the Effective
Date, the Company is relieved of any severance obligation for such Officer. The
Agreements further provide that the Executive Officers will not disclose or use
any confidential information of the Company.
Under the Agreements each of the Executive Officers is entitled to receive
a lump sum severance payment equal to 1.5 times Total Cash Compensation (as
defined) paid to such Executive Officer for the tax year 1996, if the employment
of such Executive Officer either with the Company or any successors resulting
from a Change of Control is terminated for any reason, including a voluntary
termination by the Executive Officer, on or after the effective date of a
"Change of Control". The Executive Officers are also entitled to current
benefits under the
- 37 -
<PAGE> 39
Company's existing health and life insurance policies for six months after the
effective date, or until such policies contractually expire due to the
dissolution of the Company, whichever occurs first.
The Agreements do not guarantee continued employment by the Company but
permit the Company to terminate the Executive Officers' employment at any time
for cause. Each Executive Officer has agreed, effective upon the payment of
these severance benefits, to release the Company or any successors arising from
a Change of Control from all employment or termination related claims, including
any claim for salary, bonuses, severance pay and benefits.
COMPENSATION COMMITTEE INTERLOCKS AND INSIDER PARTICIPATION
The Compensation Committee of the Board of Directors consists of Vinod K.
Dar and Herbert Oakes Jr.
STOCK OPTION AND COMPENSATION COMMITTEE REPORT ON EXECUTIVE COMPENSATION
The Stock Option and Compensation Committee's (the "Compensation
Committee") principal duties are to review and approve the compensation of the
officers of the Company. In addition, the Compensation Committee administers the
Company's 1994 Stock Option Plan and has the sole authority to make grants to
officers pursuant to such plan. Members of the Compensation Committee are not
eligible to participate in the 1994 Stock Option Plan.
EXECUTIVE COMPENSATION. The Compensation Committee believes that
compensation of executive officers should not only be adequate to attract,
motivate and retain competent executive personnel, but should also serve to
align the interests of executive officers with those of stockholders. To achieve
these ends the Company has adopted both short-term and long-term incentive
compensation plans that are dependent upon the Company's performance. The
Compensation Committee does not currently intend to award levels of compensation
that would result in a limitation on the deductibility of a portion of such
compensation for federal income tax purposes pursuant to Section 162(m) of the
Internal Revenue Code of 1986, as amended (the "Code"); however, the
Compensation Committee may authorize compensation that results in such
limitations in the future if it determines that such compensation is in the best
interest of the Company.
BASE SALARY. While the Compensation Committee believes it is crucial to
provide salaries within a competitive market range in order to attract and
retain personnel who are highly talented, the Compensation Committee has
established a philosophy of generally providing conservative base salaries
coupled with
- 38 -
<PAGE> 40
incentive compensation opportunities that strongly emphasize
pay-for-performance. The specific competitive markets considered depend on the
nature and level of the positions in question and the labor markets from which
qualified individuals would be recruited. For 1996, the Compensation Committee
increased base salaries, which had not been increased since 1992, by 12% to
reflect Consumer Price Index increases for the years 1993, 1994 and 1995. Also
an additional increase of 10% was granted, after consultation with an
independent human resources consulting firm and a review of peer group
information, to be based, in part, on the successful closing of the Company's
equity offering, resulting in a total increase of 22% over 1995 levels. The
Compensation Committee intends to review the executive group's salaries on a
biannual basis and adjust them if they deviate substantially from the average
for other comparable companies or from salary levels implied by other market
data. There was no Compensation Committee review of executive compensation
during 1997.
INCENTIVE BONUS COMPENSATION. The Compensation Committee is responsible for
determining the participants, performance criteria to be used, award levels and
allocation of incentives. Any allocated incentives are awarded to executive
officers based upon performance factors that are reviewed annually to reflect
the Company's goals for that year. It is the overall objective of the Company
that the Incentive Plan not reward employees until the Company's stockholders
have been appropriately rewarded for investing in the Company. The Compensation
Committee is not required to grant awards for all amounts available under the
Incentive Plan. There were no awards granted for the 1997 performance year.
1994 STOCK OPTION PLAN. The Company's 1994 Stock Option Plan authorizes the
Compensation Committee to award stock options to purchase up to 800,000 shares
of Common Stock to the officers and employees of the Company. The Compensation
Committee determined, after consultation with an independent human resources
consulting firm, that this number was comparable to the number of shares
available for grant under stock option plans of similar companies. The
Compensation Committee generally grants non-statutory options at an exercise
price equal to the fair market value of the Company's Common Stock on the date
of grant. Options have five-year terms, with exercise restrictions that lapse
over a two-year period.
Stock option grants are designed to align the long-term interests of the
Company's executive officers with those of its stockholders by linking
compensation to Company goals, as well as by enabling officers to develop and
maintain a significant, long-term equity ownership position in the Company.
There were no awards of stock options to the named executive officers in
1997 pursuant to the 1994 Stock Option Plan.
401(k) PLAN. Under the Company's 401(k) profit sharing
- 39 -
<PAGE> 41
plan, eligible employees, including executive officers, are permitted to defer
receipt of up to 15% of their compensation (subject to certain limitations
imposed under the Code). The amounts held under the plan are to be invested
among various investment funds maintained under the plan in accordance with the
directions of each participant. The plan is administered by an outside benefits
specialist.
Salary deferral contributions by participants are 100% vested. Participants
or their beneficiaries are entitled to payment of vested benefits upon
termination of employment. In addition, hardship distributions to participants
from the plan are available under certain conditions. The amount of benefits
ultimately payable to a participant under the plan depends on the level of the
participant's elective deferrals under the plan and the performance of the
investment funds maintained under the plan in which contributions are invested.
The Company currently does not have any provisions for matching employee's
deferral contributions in the Plan.
CHIEF EXECUTIVE OFFICER COMPENSATION. As described above, the Company's
executive compensation philosophy, including the compensation of the Company's
Chief Executive Officer, Mark G. Harrington, is a competitive, but conservative,
base salary and incentive compensation based upon the Company's performance. In
setting both the cash-based and the equity-based elements of Mr. Harrington's
compensation, the Compensation Committee made an overall assessment of Mr.
Harrington's leadership in achieving the Company's long-term strategic and
business goals.
BASE SALARY. Mr. Harrington's base salary for 1997 was $231,800. Mr.
Harrington's base salary reflects a consideration of both competitive forces and
the Company's performance. The Company does not assign specific weights to these
categories. It is based upon the criteria set forth above under "Executive
Compensation - Base Salary."
INCENTIVE COMPENSATION. No incentive bonus compensation was awarded Mr.
Harrington for the 1997 performance year.
STOCK OPTION PLAN. Mr. Harrington was not granted any options pursuant to
the 1994 Stock Option Plan in 1997.
Compensation Committee
Vinod K. Dar
Herbert Oakes, Jr.
PERFORMANCE GRAPH
The following Performance Graph compares the Company's cumulative total
stockholder return on its Common Stock for a five-year period (December 31, 1992
to December 31, 1997) with the cumulative total return of the NASDAQ Composite
(US) and a
- 40 -
<PAGE> 42
peer group described more fully below (the "Peer Group"). Dividend reinvestment
has been assumed and, with respect to Companies in the Peer Group, the returns
of each such Company have been weighted to reflect relative Stock Market
Capitalization as of the beginning of the measurement period.
[GRAPH]
The Peer Group consists of Abraxas Petroleum Corp., Arch Petroleum, Inc.,
Callon Petroleum Co., Howell Corporation, Lomak Petroleum, Inc., McFarland
Energy, Inc. and PANACO Inc.
- 41 -
<PAGE> 43
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
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, 1998 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, 1998(2) of Class
------------------- ----------------- --------
<S> <C> <C>
Robert J. Cresci (3).............................. 37,500 *
Vinod K. Dar (3).................................. 32,500 *
David E.K. Frischkorn, Jr.(3)..................... 27,500 *
Mark G. Harrington(3)(4).......................... 406,812 2.5
Albert J. McMullin (3)............................ 56,000 *
Herbert L. Oakes, Jr.(3).......................... 32,500 *
Gary S. Peck(3)................................... 160,500 *
Francis H. Roth(3)................................ 204,625 1.2
FMR Corp.(5)...................................... 1,244,000 7.4
Trust Company of the West(6)...................... 1,730,710 10.6
Paulson Partners (7).............................. 1,516,800 9.3
Timothy R. Barakett(8)............................ 1,046,600 6.4
Turnberry Capital Management, L.L.C.(9)........... 1,359,200 8.4
All Directors and Officers as a group
(8 persons)(4)(10)............................. 957,937 5.7
</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) Includes, 27,500, 17,500, 17,500, 252,500, 47,500, 17,500, 75,500, and
116,500 shares for Messrs. Cresci, Dar, Frischkorn, Harrington, McMullin,
Oakes, Peck, and Roth, respectively, purchasable within 60 days upon the
exercise of stock options.
(4) Mr. Harrington is the Chief Executive Officer and Chairman of the Board of
Directors of the Company. The number of shares indicated includes 10,126
shares held by Harrington and Company E V Fund I, Ltd., a limited
partnership, of which Harrington and Company International Incorporated is
the general or managing partner. Mr. Harrington is the majority
stockholder, the President and a director of Harrington and Company
International Incorporated. As a result, voting and investment power over
such shares may be deemed to be shared between Mr. Harrington and
- 42 -
<PAGE> 44
Harrington and Company International Incorporated. Mr. Harrington disclaims
beneficial ownership of such shares.
(5) 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 share the power to dispose of the
1,244,000 shares owned and assumed to be owned by the Funds.
(6) The business address of Trust Company of the West ("TCW") is 865 South
Figueroa, Suite 1800, Los Angeles, CA 90017. Includes 1,474,359 shares
beneficially owned by a General Mills pension fund, over which TCW controls
voting and investment power as Investment Manager and Custodian. TCW
disclaims beneficial ownership of the 1,474,359 shares.
(7) The principal business address for Paulson Partners LP is 277 Park Avenue,
26th Floor, New York, NY 10172.
(8) The principal business address for Timothy R. Barakett is c/o Atticus
Holdings, L.L.C. is 590 Madison Avenue, 32nd Floor, New York, NY 10022.
Timothy R. Barakett is deemed, through sole voting and sole dispositive
powers, to beneficially own 1,046,600 shares held in the aggregate by
certain managed funds and accounts.
(9) The principal business address for Turnberry Capital Management, L.L.C.
("Turnberry") is Two Greenwich Office Park, Greenwich, CT 06831. Turnberry
is managing general partner for certain investment partnerships which hold
the shares and has sole power to vote all securities owned by them.
(10) Includes 572,000 shares purchasable within 60 days upon the exercise of
stock options.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
In December 1997, the Company made an unsecured demand loan to Gary S.
Peck, Vice President - Finance and Administration of the Company, in the
amount of $90,000 for the purpose of covering a margin call on certain shares
of Company Common Stock owned by Mr. Peck and held in a margin account
with a brokerage firm. The loan bears interest at 10% per annum, and all
interest is payable at maturity. Mr. Peck currently intends to pay all
remaining indebtedness on the loan either from the severance payment he
receives upon a Change in Control of the Company (see Item 11. Executive
Compensation - Change-in-Control Arrangements) or from the proceeds of the sale
of his shares of Company Common Stock upon a sale of the Company.
- 43 -
<PAGE> 45
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.
- 44 -
<PAGE> 46
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.
- 45 -
<PAGE> 47
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 as of
June 30, 1994. (16)
- 46 -
<PAGE> 48
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)
- 47 -
<PAGE> 49
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)
10.18 Agreement in Principle dated January 23, 1998, between
the Company and Seneca Resources Corporation. (17)
10.19 Form of Severance Agreement between the Company and each
employee of the Company. (18)
- ----------
* 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.
- 48 -
<PAGE> 50
10.20 Purchase and Sale Agreement between the Company and
Penroc Oil Corporation, dated December 3, 1997. (18)
10.21 Letter Agreement dated January 15, 1998, amending the
Purchase and Sale Agreement between the Company and
Penroc Oil Corporation dated December 3, 1997. (18)
23.1 Consent of Ryder Scott Company Petroleum Engineers. (18)
23.2 Consent of Arthur Andersen LLP. (18)
(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 as an exhibit to Registrant's Form 10-K for the year ended
December 31, 1996 and incorporated herein by reference.
- 49 -
<PAGE> 51
(17) Filed as an exhibit to Registrant's Form 8-K dated January 23,
1998 and incorporated herein by reference.
(18) Filed herewith.
(b) Reports on Form 8-K: On December 18, 1997 the Company filed a report on
Form 8-K under Item 2. Disposition of Assets announcing an agreement
for the sale of all of the Company's oil and gas assets located outside
of California for $13.2 million.
Included in the report was the following pro forma financial
information:
(i) Unaudited Pro Forma Condensed Consolidated Balance Sheet of the
Company at September 30, 1997 assuming that the disposition of
assets described herein had occurred at that date; and
(ii) Unaudited Pro Forma Statements of Operations for the nine-months
ended September 30, 1997 and the year ended December 31, 1996
assuming that the disposition of assets described herein had
occurred at the beginning of such periods.
- 50 -
<PAGE> 52
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 30, 1998 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 30, 1998 /s/ Mark G. Harrington
-----------------------------------------
Mark G. Harrington
Chairman of the Board, Chief Executive
Officer and Director
(Principal Executive Officer)
Date: March 30, 1998 /s/ Gary S. Peck
-----------------------------------------
Gary S. Peck
Vice President - Finance &
Administration, Chief Financial Officer
and Corporate Secretary (Principal
Accounting and Financial Officer)
Date: March 30, 1998 /s/ Francis H. Roth
-----------------------------------------
Francis H. Roth
President, Chief Operating Officer and
Director
Date: March 30, 1998 /s/ Robert J. Cresci
-----------------------------------------
Robert J. Cresci
Director
Date: March 30, 1998 /s/ Vinod K. Dar
-----------------------------------------
Vinod K. Dar
Director
Date: March 30, 1998 /s/ David E.K. Frischkorn, Jr.
-----------------------------------------
David E.K. Frischkorn, Jr.
Director
Date: March 30, 1998 /s/ Herbert L. Oakes, Jr.
-----------------------------------------
Herbert L. Oakes, Jr.
Director
- 51 -
<PAGE> 53
INDEX TO EXHIBITS
<TABLE>
<CAPTION>
Exhibits Description
-------- -----------
<S> <C>
3.1 Registrant's Certificate of Incorporation, as amended
through July 13, 1995. (1)
3.2 Certificate of Ownership and Merger dated March 6, 1996,
merging HTAC Investments, Inc. into the Registrant. (15)
3.3 Certificate of Ownership and Merger dated March 6, 1996,
merging Warrior, Inc. into the Registrant. (15)
3.4 Registrant's Bylaws, as amended. (1)
4.1 Certificate of Designation, Powers, Preferences and
Rights of the Series A Preferred Stock of the
Registrant. (2)
4.2 Certificate of Designation, Powers, Preferences and
Rights of the Series B Convertible Preferred Stock of
the Registrant. (2)
4.3 Certificate of Designation, Powers, Preferences and
Rights of the Series C Convertible Preferred Stock of
the Registrant. (2)
4.4 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 as of
June 30, 1994. (16)
</TABLE>
<PAGE> 54
<TABLE>
<S> <C>
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)
</TABLE>
<PAGE> 55
<TABLE>
<S> <C>
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)
10.18 Agreement in Principle dated January 23, 1998, between
the Company and Seneca Resources Corporation. (17)
10.19 Form of Severance Agreement between the Company and each
employee of the Company. (18)
</TABLE>
- ----------
* Management contract or compensatory plan or arrangement required
to be filed as an exhibit to this Form 10-K pursuant to Item
14.(c) of this Report.
<PAGE> 56
<TABLE>
<S> <C>
23.1 Consent of Ryder Scott Company Petroleum Engineers. (18)
23.2 Consent of Huddleston & Co., Inc. (18)
23.3 Consent of Arthur Andersen LLP. (18)
</TABLE>
(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 as an exhibit to Registrant's Form 10-K for the year ended
December 31, 1996 and incorporated herein by reference.
(17) Filed as an exhibit to Registrant's Form 8-K dated January 23,
1998 and incorporated herein by reference.
(18) Filed herewith.
<PAGE> 57
HARCOR ENERGY, INC.
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
INDEX
CONSOLIDATED FINANCIAL STATEMENTS: Page
----
Report of Independent Public Accountants ........................ F-2
Consolidated Balance Sheets ..................................... F-3
Consolidated Statements of Operations ........................... F-5
Consolidated Statements of
Stockholders' Equity .......................................... F-6
Consolidated Statements of Cash Flows ........................... F-7
Notes to Consolidated Financial Statements ...................... F-10
F-1
<PAGE> 58
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, 1997 and 1996,
and the related consolidated statements of operations, stockholders' equity and
cash flows for each of the three years in the period ended December 31, 1997.
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, 1997 and 1996, and the results of their
operations and their cash flows for each of the three years in the period ended
December 31, 1997, in conformity with generally accepted accounting principles.
As discussed in Notes 1, 10 and 11, the Company sold its Non-California Assets
in February 1998 and entered into an agreement in principle on January 23, 1998
to sell the Company to Seneca Resources Corporation, pending completion of
definitive agreements, shareholder approvals, satisfactory due diligence review
and certain other matters.
ARTHUR ANDERSEN LLP
Houston, Texas
March 25, 1998
F-2
<PAGE> 59
HARCOR ENERGY, INC.
CONSOLIDATED BALANCE SHEETS
DECEMBER 31, 1997 AND 1996
- --------------------------------------------------------------------------------
ASSETS
<TABLE>
<CAPTION>
1997 1996
-------------- --------------
<S> <C> <C>
CURRENT ASSETS:
Cash and cash investments ............ $ 1,143,875 $ 1,593,330
Accounts receivable .................. 4,110,456 8,894,240
Prepaids and other ................... 169,256 185,618
-------------- --------------
Total current assets ................. 5,423,587 10,673,188
-------------- --------------
PROPERTY AND EQUIPMENT, at cost,
successful efforts method:
Unproven oil and gas properties ...... 4,403,430 4,079,779
Proved oil and gas properties:
Leasehold costs .................... 57,875,358 56,934,690
Plant, lease and well equipment .... 22,262,042 19,194,951
Intangible development costs ....... 34,658,816 28,918,323
Furniture and equipment .............. 396,551 373,772
-------------- --------------
119,596,197 109,501,515
Less - accumulated depletion,
depreciation and amortization ...... (34,121,156) (28,876,525)
-------------- --------------
Net property, plant and equipment .... 85,475,041 80,624,990
-------------- --------------
OTHER ASSETS ........................... 2,629,372 3,328,364
-------------- --------------
$ 93,528,000 $ 94,626,542
============== ==============
</TABLE>
The accompanying notes are an integral part
of these consolidated financial statements.
F-3
<PAGE> 60
HARCOR ENERGY, INC.
CONSOLIDATED BALANCE SHEETS
DECEMBER 31, 1997 AND 1996
LIABILITIES AND STOCKHOLDERS' EQUITY
<TABLE>
<CAPTION>
1997 1996
------------ ------------
<S> <C> <C>
CURRENT LIABILITIES:
Short-term portion of
long-term bank debt ...................... $ 795,000 $ 300,000
Other short-term debt ...................... 121,600 85,500
Accounts payable and
accrued liabilities ...................... 9,091,800 10,348,318
------------ ------------
Total current liabilities .................. 10,008,400 10,733,818
------------ ------------
LONG-TERM BANK DEBT .......................... 4,505,000 1,700,000
------------ ------------
14-7/8% SENIOR SECURED NOTES ................. 52,637,599 52,400,131
------------ ------------
COMMITMENTS AND CONTINGENCIES (Note 4)
STOCKHOLDERS' EQUITY:
Preferred stock, $.01 par value -
1,500,000 shares authorized; zero and
30,000 shares issued and outstanding
at December 31, 1997 and 1996 ............ -- 300
Common stock, $.10 par value -
25,000,000 shares authorized;
16,268,387 and 15,110,836 shares
issued and outstanding at December
31, 1997 and 1996, respectively .......... 1,626,839 1,511,084
Additional paid-in capital ................. 51,093,839 49,891,612
Accumulated deficit ........................ (26,343,677) (21,610,403)
------------ ------------
Total stockholders' equity ................. 26,377,001 29,792,593
------------ ------------
$ 93,528,000 $ 94,626,542
============ ============
</TABLE>
The accompanying notes are an integral part
of these consolidated financial statements.
F-4
<PAGE> 61
HARCOR ENERGY, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
FOR THE YEARS ENDED DECEMBER 31, 1997, 1996 AND 1995
<TABLE>
<CAPTION>
1997 1996 1995
------------ ------------- -------------
<S> <C> <C> <C>
REVENUES:
Oil and gas revenues .......................... $16,280,570 $ 21,716,014 $16,030,043
Gas plant operating
and marketing revenues ...................... 5,487,273 6,635,147 6,361,665
Interest income ............................... 43,424 124,040 164,193
Other ......................................... 135,135 3,146,973 39,368
----------- ------------ ------------
21,946,402 31,622,174 22,595,269
----------- ------------ ------------
COSTS AND EXPENSES:
Production costs .............................. 5,022,210 5,133,892 5,262,887
Gas plant operating
and marketing costs ......................... 3,745,486 4,016,850 3,704,397
Exploration costs ............................. 271,722 367,893 311,115
Depletion, depreciation and
amortization ................................ 5,246,413 8,172,578 5,973,117
General and administrative expenses ........... 2,869,025 3,159,605 2,744,239
Interest expense .............................. 8,794,185 10,066,602 6,846,471
Other ......................................... 730,635 367,844 482,608
----------- ------------ ------------
26,679,676 31,285,264 25,324,834
----------- ------------ ------------
Income (loss) before provision for income
taxes and extraordinary item ................ (4,733,274) 336,910 (2,729,565)
Provision for income taxes .................... -- -- --
----------- ------------ ------------
Net operating income (loss) before
extraordinary item .......................... (4,733,274) 336,910 (2,729,565)
EXTRAORDINARY ITEM - Loss on early
extinguishment of debt ...................... -- (2,134,764) (1,888,433)
----------- ------------ ------------
Net loss .................................... (4,733,274) (1,797,854) (4,617,998)
Dividends on preferred stock .................. (60,000) (460,842) (1,000,161)
Accretion on redeemable
preferred stock ............................. -- -- (2,146,812)
----------- ------------ ------------
NET LOSS APPLICABLE TO COMMON
STOCKHOLDERS ................................ $(4,793,274) $ (2,258,696) $ (7,764,971)
=========== ============ ============
NET LOSS PER COMMON SHARE BEFORE
EXTRAORDINARY ITEM .......................... $ (0.30) $ (0.01) $ (0.74)
=========== ============ ============
NET LOSS PER COMMON SHARE AFTER
EXTRAORDINARY ITEM .......................... $ (0.30) $ (0.20) $ (0.98)
=========== ============ ============
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
F-5
<PAGE> 62
HARCOR ENERGY, INC.
CONSOLIDATED STATEMENT OF STOCKHOLDERS' EQUITY
FOR THE YEARS ENDED DECEMBER 31, 1997, 1996 AND 1995
- --------------------------------------------------------------------------------
<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, 1994 67,500 $ 675 7,192,837 $ 719,284 $ 29,827,989 $ (15,194,551)
Conversion of Convertible Preferred Stock (2,500) (25) 64,100 6,410 (6,385) --
Issuance of common stock pursuant to
bank financing agreement .................. -- -- 75,000 7,500 226,125 --
Issuance of common stock
pursuant to warrant exchange .............. -- -- 1,282,500 128,250 (128,250) --
Issuance of common stock and warrants
pursuant to preferred stock dividends ..... -- -- 16,770 1,677 153,164 --
Issuance of warrants pursuant to 14 - 7/8%
Senior Secured Notes ...................... -- -- -- -- 2,238,000 --
Preferred stock dividends ................... -- -- -- -- (1,000,161) --
Accretion on Series D Preferred Stock ....... -- -- -- -- (2,146,812) --
Net Loss .................................... -- -- -- -- -- (4,617,998)
------ ----- ---------- ---------- ------------ -------------
BALANCE, DECEMBER 31, 1995 65,000 $ 650 8,631,207 $ 863,121 $ 29,163,670 $ (19,812,549)
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)
Issuance of common stock
pursuant to warrant exercises ............. -- -- 388,351 38,835 1,354,965 --
Conversion of Preferred Stock ............... (30,000) (300) 769,200 76,920 (92,738) --
Preferred stock dividends ................... -- -- -- -- (60,000) --
Net Loss .................................... -- -- -- -- -- (4,733,274)
------ ----- ---------- ---------- ------------ -------------
BALANCE, DECEMBER 31, 1997 -- $ -- 16,268,387 $1,626,839 $ 51,093,839 $ (26,343,677)
====== ===== ========== ========== ============ =============
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
F-6
<PAGE> 63
HARCOR ENERGY, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE YEARS ENDED DECEMBER 31, 1997, 1996 AND 1995
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
1997 1996 1995
--------------- --------------- --------------
<S> <C> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net Loss ................................... $ (4,733,274) $ (1,797,854) $ (4,617,998)
Adjustments to reconcile net loss to net
cash provided by operating activities:
Depletion, depreciation and
amortization and impairment ............ 5,246,413 8,172,578 5,973,117
Amortization of deferred charges ......... 959,806 919,996 708,932
Exploration costs .......................... 271,722 367,893 311,115
(Gain) loss on disposition of assets ....... -- (2,951,920) 131,702
Loss on early extinguishment of debt ....... -- 2,134,764 1,888,433
Other ...................................... -- 367,844 350,908
--------------- --------------- --------------
1,744,667 7,213,301 4,746,209
Changes in current assets and liabilities:
(Increase) decrease in receivables ......... 109,784 (497,833) (212,319)
Decrease in other current assets ........... 137,962 97,215 24,408
Increase (decrease) in accounts payable and
accrued liabilities ...................... 590,482 (729,679) 457,233
--------------- --------------- --------------
Net cash provided by operating activities... 2,582,895 6,083,004 5,015,531
--------------- --------------- --------------
CASH FLOWS FROM INVESTING ACTIVITIES:
Exploration costs .......................... (271,722) (367,893) (311,115)
Proceeds from sale of assets ............... 4,674,000 -- 13,650
Additions to property and equipment ........ (11,942,464) (21,037,567) (8,953,427)
--------------- --------------- --------------
Net cash used in investing activities ...... (7,540,186) (21,405,460) (9,250,892)
--------------- --------------- --------------
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from long-term bank debt .......... 9,000,000 6,400,000 5,600,000
Repayment of bank debt ..................... (5,700,000) (10,000,000) (39,400,000)
Redemption of Redeemable Preferred Stock ... -- -- (10,931,200)
Proceeds from issuance of (redemption of)
14-7/8% Senior Secured Notes ............. -- (12,426,400) 64,647,700
Proceeds from issuance of common stock ..... 1,376,682 22,126,687 --
Dividends on preferred stock ............... (60,000) (460,842) (464,161)
(Increase) Decrease in other asssets ....... (23,346) (318,455) (3,856,119)
Other ...................................... (85,500) (609,664) (55,597)
--------------- --------------- --------------
Net cash provided by financing activities .. 4,507,836 4,711,326 15,540,623
--------------- --------------- --------------
Net increase (decrease) in cash ............ (449,455) (10,611,130) 11,305,262
Cash at beginning of period ................ 1,593,330 12,204,460 899,198
--------------- --------------- --------------
Cash at end of period ...................... $ 1,143,875 $ 1,593,330 $ 12,204,460
=============== =============== ==============
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
F-7
<PAGE> 64
HARCOR ENERGY, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE YEARS ENDED DECEMBER 31, 1997, 1996 AND 1995
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION (ALL DOLLAR AMOUNTS HAVE BEEN
ROUNDED TO THE NEAREST THOUSAND) -
The Company made cash interest payments of $8,273,000, $10,219,000 and
$2,329,000 in 1997, 1996 and 1995, respectively.
SUPPLEMENTAL INFORMATION REGARDING NON-CASH INVESTING AND FINANCING ACTIVITIES -
YEAR ENDED DECEMBER 31, 1997
Included in investing activities in the current period are payments of
$4,725,000 relating to drilling costs which were accrued but unpaid at December
31, 1996. At December 31, 1997, the Company had accrued capital costs of
$2,878,000 which are not reflected in investing activities.
The Company incurred a non-cash charge of $115,000 in connection with the
write-off of an investment and related prepaid expense which is not reflected in
investing activities.
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.
Included in investing activities are payments of $8,188,000 relating to
drilling costs which were accrued but unpaid at December 31, 1995. 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
F-8
<PAGE> 65
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.
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.
The accompanying notes are an integral part
of these consolidated financial statements.
F-9
<PAGE> 66
HARCOR ENERGY, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1997
(1) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
BUSINESS AND ORGANIZATION -
HarCor Energy, Inc. ("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.
The Company has reached an agreement in principle with Seneca Resources
Corporation ("Seneca") for the sale of the Company to Seneca. The accompanying
financial statements have been prepared on a historical-cost basis and do not
reflect any allocation of purchase price that will be recorded by Seneca in
connection with this pending transaction (see Note 11).
PRINCIPLES OF CONSOLIDATION -
The accompanying consolidated financial statements include the accounts and
results of operations of 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).
All significant intercompany accounts and transactions have been eliminated
in consolidation.
ACCOUNTS RECEIVABLE -
Accounts receivable at December 31, 1997 and 1996 comprised the following
(amounts in thousands):
<TABLE>
<CAPTION>
1997 1996
------ ------
<S> <C> <C>
Oil and gas sales receivable ....................... $3,470 $3,464
Other receivables .................................. 535 756
Advances due from officers ......................... 105 --
Receivable for sale of property .................... -- 4,674
------ ------
$4,110 $8,894
====== ======
</TABLE>
JOINT INTEREST RECEIVABLE -
Not included in accounts receivable as of December 31, 1997 is $1,141,000
that the Company claims it is owed pursuant to its rights under a Joint
Operating Agreement ("JOA") with the operator
F-10
<PAGE> 67
of its California oil and gas properties. Of this amount, $421,000 is a result
of amounts determined to be owed the Company pursuant to a third-party JOA audit
for 1994 and 1995. The balance of $720,000 for 1996 and 1997 has been determined
by the Company based on its own internal analysis of joint interest billings and
actual direct expenses as furnished by the operator. The Company intends to
substantiate this amount with a subsequent JOA audit. The entire $1,141,000 has
been billed to the operator in February 1998, and the Company intends to pursue
and collect the full amount owed pursuant to its rights and remedies under the
JOA.
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.
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, 1997, 1996 and 1995 and compared to the carrying
values of such assets at those dates. The resulting impairment loss in 1995 of
$876,000 was included in depletion, depreciation, amortization and impairment.
There were no impairment charges necessary in 1997 and 1996.
F-11
<PAGE> 68
Net property, plant and equipment at December 31, 1997, comprised the
following (amounts in thousands):
<TABLE>
<S> <C>
California Oil and Gas Properties ............................ $73,891
Non-California Oil and Gas Properties ........................ 11,428
Other Assets ................................................. 156
-------
$85,475
=======
</TABLE>
The Non-California Assets were sold subsequent to December 31, 1997 (see
Note 10).
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 Notes have
been capitalized as part of the historical costs of unproved oil and gas
properties. These capitalized interest costs were $375,000, $565,000, and
$452,000 for 1997, 1996 and 1995, respectively.
ACCOUNTS PAYABLE AND ACCRUED LIABILITIES -
Accounts payable and accrued liabilities at December 31, 1997 and 1996
comprised the following (amounts in thousands):
<TABLE>
<CAPTION>
1997 1996
-------- --------
<S> <C> <C>
Accrued development costs ...................... $ 2,878 $ 4,725
Accrued interest payable ....................... 3,663 3,710
Trade accounts payable ......................... 2,450 1,698
Other accrued liabilities ...................... 101 215
-------- --------
$ 9,092 $ 10,348
======== ========
</TABLE>
OTHER EXPENSES -
Other expenses incurred in 1997 consist of $616,000 related to the
Company's ongoing sale process and $115,000 resulting from the write-off of an
investment in a potential acquisition.
STOCK COMPENSATION PLANS -
The Company accounts for its Stock Compensation Plans by applying
provisions of Accounting Principles Board ("APB") Opinion No. 25, "Accounting
for Stock Issued to Employees"; accordingly, no
F-12
<PAGE> 69
compensation expense has been recognized for awards granted under these plans.
See Note 7.
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. Disclosure as to what net income or loss and earnings
per share would have been had this method been followed is included in Note 7.
NET LOSS PER COMMON SHARE -
Net loss per common share represents basic earnings per share ("EPS") as
defined in Statement of Financial Accounting Standards No. 128, "Earnings per
Share" ("SFAS No. 128"). Under SFAS No. 128, Basic EPS is calculated by dividing
the net loss, after consideration of preferred stock dividends paid or accrued,
by the weighted average number of common shares outstanding during each period
presented. Diluted EPS, as defined in SFAS No. 128, is not presented separately
as the effect of any potential common shares on reported losses would be
antidilutive. Potential common shares for the Company include outstanding stock
options, warrants and convertible preferred stock. The weighted average number
of shares outstanding utilized in the calculation of both Basic and Diluted EPS
was 15,915,000 in 1997, 11,150,000 shares in 1996, and 7,904,000 shares in 1995.
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.
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 9, "Oil and Gas Producing Activities".)
(2) LONG-TERM BANK DEBT
The Company entered into its current credit facility (the "Credit
Agreement") with Internationale Nederlanden (U.S.) Capital Corporation ("ING
Capital") in July 1995. Availability under the Credit Agreement is limited to a
"borrowing base" amount which is determined semi-annually by ING Capital, at its
sole discretion,
F-13
<PAGE> 70
and may be established at an amount up to $15 million. The borrowing base was
$15 million at December 31, 1997, and was subsequently reduced to $4.3 million
in February 1998 (see last paragraph of this note). Availability under the
Credit Agreement, as amended in August 1997, will terminate on June 30, 1998,
and amounts outstanding will convert to a term loan on July 31, 1998, with a set
amortization schedule of a percentage of the outstanding principal balance
continuing through December 31, 2001. 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 $5.3 million
outstanding under the Credit Agreement at December 31, 1997, with an effective
interest rate of 8.25% at that date.
The Credit Agreement contains certain customary and usual covenants and
restrictions which impose limitations on the Company with respect to, among
other things, dividends, financial condition and ratios, use of borrowings and
additional debt incurrence. All indebtedness of the Company under the Credit
Agreement is secured by a first lien upon substantially all of the Company's oil
and gas properties as well as by a pledge of all of the accounts receivable,
inventory, general intangibles, machinery and equipment and other assets of the
Company. All assets not subject to a lien in favor of the lender are subject to
a negative pledge, with certain exceptions.
Pursuant to the terms of its 14-7/8% Senior Secured Notes, the Company
repaid $10.7 million of the $10.8 million of long-term bank debt then
outstanding under the Credit Agreement effective with the sale of its
Non-California oil and gas assets in February 1998 (see Notes 3 and 10.) ING
Capital concurrently reduced the amount of the borrowing base by this amount
pursuant to its rights under the 14-7/8% Senior Secured Notes and an
intercreditor agreement.
(3) 14-7/8% SENIOR SECURED NOTES
NOTE OFFERING -
In July 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 Secured Notes due July 15, 2002 (the "Senior 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 net proceeds to the Company from the
Note Offering of approximately $61 million were used to (i) repay $34.3 million
outstanding under its Credit Agreement with ING Capital, (ii) repay $5 million
outstanding under a bridge loan with ING Capital, (iii) redeem the $10.9 million
outstanding shares of Series D Preferred Stock, (iv) acquire additional
interests in its Bakersfield Properties for $2.3 million and (v) finance a
portion of the development of the Bakersfield Properties during the remainder of
1995.
F-14
<PAGE> 71
Pursuant to the terms of the Notes, and as a result of the Company's public
offering of common stock in July 1996 (see Note 6), the Company redeemed an
aggregate of $11.3 million of the Senior 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 Senior Notes outstanding
(face value) at December 31, 1997. The difference between the face value of the
Senior 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.
THE SENIOR NOTES -
The Senior 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 Senior Notes
are redeemable, in whole or in part, at the option of the Company at any time on
or after July 15, 1999, at the following redemption prices (expressed as
percentages of the principal amount) if redeemed during the twelve-month period
commencing on July 15 of the year set forth below plus, in each case, accrued
interest thereon to the date of redemption:
<TABLE>
<CAPTION>
Year Percentage
---- ----------
<S> <C>
1999.............................................. 110%
2000.............................................. 107%
2001 and thereafter............................... 100%
</TABLE>
The Senior 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 Senior Notes
and the Indenture are secured by a second priority lien on substantially all of
the assets of the Company securing its bank debt.
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 Senior 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 Senior 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
F-15
<PAGE> 72
operations less capital expenditures and payments on scheduled indebtedness. No
such offer was required for the year ended December 31, 1997.
(4) COMMITMENTS AND CONTINGENCIES
RISK MANAGEMENT AND HEDGING ACTIVITIES -
The Company utilizes financial instruments as a hedging strategy to protect
against the effects of volatility in crude oil and natural gas commodity prices.
Upon consummation of an acquisition, the Company will usually enter into
commodity derivative contracts (hedges) such as futures, swaps or collars or
forward contracts which cover a substantial portion of the existing production
of the acquired property. Over time, as production increases, the Company will
continue to utilize hedging techniques to ensure that a substantial portion of
its production remains effectively hedged. Gains or losses under the hedging
agreements are recognized in oil and gas production revenues in periods in which
the hedged production occurs with such agreements settling on a monthly basis.
As of December 31, 1997, the Company was a party to an oil contract
covering notional volumes of approximately 88,000 barrels of oil for 1998 at a
fixed price of $17.25/Bbl.
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,
1997 (amounts are in thousands):
<TABLE>
<CAPTION>
Estimated
Carrying Fair
Amount Value
-------- ---------
<S> <C> <C>
Long-Term Debt(1)(3) .......................... $ 5,300 $ 5,300
14-7/8% Senior Secured
Notes(2)(3) ................................. $ 52,600 $ 53,700
NYMEX-related Crude Oil Price Swaps ........... $ -- $ (84)
</TABLE>
(1) See Note 2, "Long-Term Debt."
(2) See Note 3, "14-7/8 Senior Secured Notes."
(3) The fair value of long-term debt and the Senior Notes are based on the
estimated value the Company would have to pay to retire the debt or
the Senior Notes. Management estimates such fair values approximate
the face values of each debt item (not considering any applicable
repayment premium on the Senior Notes - see Note 3) because (a) the
long-term debt is floating-rate debt and (b) the interest
F-16
<PAGE> 73
rate on the Senior Notes approximates the rate the Company could
obtain on similar financing at December 31, 1997.
LEASE OBLIGATIONS -
Future net minimum rental payments for office and office equipment lease
commitments as of December 31, 1997 aggregated approximately $133,000 and
$90,000 for 1998 and 1999, respectively.
Rental expense in the aggregate under noncancellable long-term operating
leases was approximately $138,000, $163,000 and $165,000 for 1997, 1996 and
1995, 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. Management has the ability to
stagger payments subject to Board of Directors approval, but as of December 31,
1997 has not elected to do so. The total financial impact of this severance
arrangement, if effected, would result in a decrement of approximately $2.3
million ($0.14 per share) to any potential sales proceeds. (See Note 10.)
(5) 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 and the
effective tax rate for all 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, 1997 due to
taxable losses in all three years.
At December 31, 1997, the Company had accumulated net operating loss
("NOL") carryforwards for United States federal income tax purposes of
approximately $35,941,000. 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
F-17
<PAGE> 74
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 $31,241,000. Such net operating loss carryforwards expire as
follows for the years ending December 31 (amounts in thousands):
<TABLE>
<S> <C>
1998 .............................................. $ 550
2001 .............................................. 205
2002 .............................................. 90
2003 .............................................. 1,555
2004 .............................................. 755
2006 .............................................. 1,045
2007 .............................................. 1,150
2008 .............................................. 1,449
2009 .............................................. 3,316
2010 .............................................. 5,727
2011 .............................................. 5,072
2012 .............................................. 10,327
-------
$31,241
=======
</TABLE>
Under the provisions of SFAS 109, "Accounting for Income Taxes", the income
tax effects of temporary differences between financial and income tax reporting
bases and carryforwards that give rise to deferred income tax assets and
liabilities at December 31, 1997 and 1996 are as follows (amounts in thousands):
<TABLE>
<CAPTION>
December 31,
----------------------
1997 1996
-------- --------
<S> <C> <C>
Deferred tax assets:
Net operating loss carryforwards ............ $ 10,622 $ 7,012
Other ....................................... 59 --
-------- --------
Total deferred tax assets ................. 10,681 7,012
Less valuation allowances ................. (5,865) (4,447)
-------- --------
Net deferred tax assets ................... $ 4,816 $ 2,565
-------- --------
Deferred tax liabilities:
Oil and gas properties ...................... $ (4,808) $ (2,414)
Other ....................................... (8) (151)
-------- --------
Total deferred tax liabilities ............ (4,816) (2,565)
-------- --------
Net deferred taxes ........................ $ -- $ --
======== ========
</TABLE>
(6) STOCKHOLDERS' EQUITY
COMMON STOCK EQUITY OFFERING -
On July 31, 1996, the Company completed a public offering of
F-18
<PAGE> 75
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 amount 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 Notes (see Note 3). 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 Senior Notes and (iii) the
repayment of outstanding bank debt (amounts in thousands):
<TABLE>
<S> <C>
Total revenues .............................................. $ 31,622
========
Net loss attributable to
common shareholders ....................................... $ (711)
========
Net loss per common share ................................... $ (0.06)
========
</TABLE>
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 common shares pursuant to the payment of Series E
Preferred Stock dividends during 1995.
F-19
<PAGE> 76
CONVERSION OF PREFERRED STOCK -
In April 1997 (i) the remaining 20,000 shares of the Company's Series B 8%
Convertible Preferred Stock were converted into 512,800 shares of the Company's
common stock on an exchange basis equivalent to 25.64 shares of common to each
share of preferred and (ii) all of the 10,000 shares of the Company's Series C
8% Convertible Preferred Stock were converted into 256,400 shares of the
Company's common stock on an exchange basis equivalent to the Series B 8%
Convertible Preferred Stock.
The Company's 5,000 shares of Series A 8% Convertible Preferred Stock was
converted into 71,428 common shares of the Company in November 1996 on an
exchange basis equivalent to $3.50.
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".)
In October 1996 all of the Company's 30,000 shares of Series E Preferred
Stock were converted into 857,143 shares of common stock of the Company.
PREFERRED STOCK DIVIDENDS -
The Company has paid dividends on its preferred stocks for the three years
ended December 31, 1997 as follows (amounts in thousands):
<TABLE>
<CAPTION>
Preferred Stock 1997 1996 1995
- --------------- ------ ------ ------
<S> <C> <C> <C>
8% Convertible Series A, B, C ................. $ 60 $ 258 $ 265
9% Redeemable Series D ........................ -- -- 540
4%-9%* Convertible Series E ................... -- 203 195
------ ------ ------
$ 60 $ 461 $1,000
====== ====== ======
</TABLE>
* 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 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 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.
WARRANT EXERCISES -
In May 1997 a warrant to purchase 256,351 shares of the Company's common
stock at $3.57 per share was exercised. Additionally, in July and August 1997
warrants to purchase an aggregate of 132,000 shares of the Company's common
stock at
F-20
<PAGE> 77
$3.85 per share were exercised. Total net cash proceeds to the Company were
approximately $1.4 million as a result of these warrant exercises.
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 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.
These shares were subsequently sold in conjunction with the Company's equity
offering in July 1996 (see COMMON STOCK EQUITY OFFERING).
In May 1995, a warrant to purchase 1,000,000 shares of the Company's common
stock at $5.00 per share was exchanged 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.
(7) 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.
F-21
<PAGE> 78
Option transactions for the three years ended December 31, 1997 are
summarized as follows:
<TABLE>
<CAPTION>
Number of Options
-------------------------------------------
Available
Exercise for Future
Outstanding Price Grant
----------- ------------- ----------
<S> <C> <C> <C>
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 --
Expired ...................... (115,000) $2.20 --
Granted ...................... 228,000 $4.56 - $6.47 (228,000)
----------- ----------
Balance at December 31, 1996 ... 1,011,500 $2.61 - $6.47 563,500
Expired ...................... (198,500) $3.12 - $3.85 --
Canceled ..................... (30,000) $3.37 - $5.91 --
----------- ----------
Balance at December 31, 1997 ... 783,000 $2.61 - $6.47 563,500
=========== ==========
</TABLE>
At December 31, 1997, 671,500 options to purchase common shares were
exercisable under these plans and agreements, with prices ranging from $2.61 to
$6.47 per share and an aggregate exercise price of $2.5 million.
The weighted average fair values per share of options granted during 1996
and 1995 were $3.16 and $1.57, respectively. No options were granted during
1997. 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 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 Company granted no
additional stock options in 1997.
The following table summarizes certain information for the shares
outstanding at December 31, 1997:
<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 2.7 $ 2.73 125,000 $ 2.73
$3.16-$3.85 304,000 1.6 $ 3.52 304,000 $ 3.52
$4.25-$4.69 252,000 2.2 $ 4.53 191,500 $ 4.49
$5.15-$6.47 102,000 3.7 $ 5.42 51,000 $ 5.42
-------- -------- -------- --------
$2.61-$6.47 783,000 $ 3.97 671,500 $ 3.79
======== ======== ======== ========
</TABLE>
The Company's pro forma net income and earnings per share of common stock
for 1997, 1996 and 1995, had compensation costs been recorded in accordance with
SFAS No. 123, are presented below (in thousands except per share data):
F-22
<PAGE> 79
<TABLE>
<CAPTION>
1997 1996 1995
------------------- ------------------- -------------------
Pro Pro Pro
Reported Forma Reported Forma Reported Forma
-------- ------- -------- ------- -------- -------
<S> <C> <C> <C> <C> <C> <C>
Net Loss before
Extraordinary Item $ (4,793) $(5,061) $ (124) $ (242) $ (5,876) $(5,876)
Net Loss per
Common Share before
Extraordinary Item $ (0.30) $ (0.32) $ (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 not 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 tradeable, 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.
The following table summarizes certain information for shares exercisable
at December 31.
<TABLE>
<CAPTION>
1997 1996 1995
------------- ------------- -------------
<S> <C> <C> <C>
Shares Exercisable ............. 671,500 708,500 744,000
Range of Grant Prices .......... $2.61 - $6.47 $2.61 - $4.68 $2.20 - $4.68
Weighted Average Grant Price ... $3.79 $3.58 $3.71
</TABLE>
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, 1997 are summarized as follows:
F-23
<PAGE> 80
<TABLE>
<CAPTION>
Number of
Warrants Exercise
Outstanding Price
----------- -------------
<S> <C> <C>
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
Exercised ................................. (388,351) $3.57 - $3.85
-----------
Balance at December 31, 1997 ................ 1,871,440 $3.20 - $4.75
===========
</TABLE>
At December 31, 1997, all outstanding warrants were exercisable with an
aggregate exercise price of $7.2 million.
(8) MAJOR CUSTOMERS AND CREDIT RISK
A substantial portion of the Company's accounts receivable at December 31,
1997 was a result of 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 1997.
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 1997 1996 1995
--------------------------------------------- ---- ---- ----
<S> <C> <C> <C>
Kern Oil and Refining ....................... -- -- 10%
Mock Resources, Inc. ........................ 17% 20% 24%
Valero Gas Marketing, L.P. .................. -- -- 10%
Enron Capital and Trade Resources ........... 22% 18% --
Shell Oil Company ........................... -- 27% --
Koch Oil Co. ................................ 23% -- --
</TABLE>
The Company considers its relationship with its current major customers to
be satisfactory.
F-24
<PAGE> 81
(9) OIL AND GAS PRODUCING ACTIVITIES (UNAUDITED)
RESULTS OF OPERATIONS FOR OIL AND GAS PRODUCING ACTIVITIES -
The following table shows, for the current year-ended, 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):
<TABLE>
<CAPTION>
1997 1996 1995
---------- ---------- ----------
<S> <C> <C> <C>
Production:
Crude oil and condensate (Bbls) ....... 338,000 523,000 463,000
Plant NGLs (Bbls) ..................... 183,000 232,000 207,000
Natural Gas (Mcf) ..................... 4,476,000 5,795,000 5,137,000
Revenues:
Crude oil and condensate .............. $ 6,090 $ 9,777 $ 7,625
Natural gas ........................... 10,190 11,939 8,405
Gas plant and related revenues(1) ..... 5,487 6,635 6,362
---------- ---------- ----------
21,767 28,351 22,392
---------- ---------- ----------
Operating Costs:
Production costs ...................... 5,022 5,134 5,263
Gas plant operating costs ............. 3,745 4,017 3,704
Exploration expenses .................. 272 368 311
Depreciation gas plant ................ 440 392 316
Depletion, depreciation and
impairment .......................... 4,735 7,781 5,619
---------- ---------- ----------
14,214 17,692 15,213
---------- ---------- ----------
Income before income taxes .............. 7,553 10,659 7,179
Income tax expense (2) .................. 2,644 3,731 2,513
---------- ---------- ----------
Net income .............................. $ 4,909 $ 6,928 $ 4,666
---------- ---------- ----------
Weighted average selling price: (3)
Crude oil and condensate (per Bbl) ... $ 18.00 $ 18.71 $ 16.49
Plant NGLs (per Bbl) .................. $ 19.42 $ 19.39 $ 16.06
Natural gas (per Mcf) ................. $ 2.28 $ 2.06 $ 1.64
Production costs per BOE(4) ............. $ 4.63 $ 3.45 $ 3.99
</TABLE>
(1) Revenues relating to the gas plant include sale of plant NGLs, resale of
purchased third party gas, processing fees and other.
(2) Income Tax Expense does not consider the effects of NOL carryforwards (see
Note 5).
(3) All average price data reflect the effects of the Company's fixed-price
sales and hedging contracts.
F-25
<PAGE> 82
(4) Production costs per BOE relate to oil and gas exclusive of NGLs, and
include production and ad valorem taxes where applicable.
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
$4.84, $5.23 and $4.26 for the years ended December 31, 1997, 1996 and 1995,
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.
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, 1997 and 1996 were as follows
(amounts are in thousands):
<TABLE>
<CAPTION>
1997 1996
-------- --------
<S> <C> <C>
Unproved properties ........................... $ 4,403 $ 4,080
Proved properties ............................. 114,797 105,048
-------- --------
Total capitalized costs ....................... 119,200 109,128
Less - accumulated depletion,
depreciation, amortization and impairment ... (33,879) (28,706)
-------- --------
$ 85,321 $ 80,422
======== ========
</TABLE>
The following table sets forth the costs incurred, both capitalized and
expensed, in the Company's oil and gas property acquisition, exploration and
development activities for the years presented (amounts in thousands):
F-26
<PAGE> 83
<TABLE>
<CAPTION>
1997 1996 1995
-------- -------- --------
<S> <C> <C> <C>
Property acquisition costs -
Proved ................................ $ 940 $ 2,592 $ 256
Unproved .............................. 325 629 453
Exploration costs ....................... 272 368 311
Development costs ....................... 8,808 14,500 17,457
-------- -------- --------
$ 10,345 $ 18,089 $ 18,477
======== ======== ========
</TABLE>
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, 1997, 1996 and 1995. All U.S. reserve
estimates for the Company, excluding minor royalty interests which accounted for
less than 1% of total reserves, were prepared by Ryder Scott Company, an
independent petroleum engineering firm.
F-27
<PAGE> 84
<TABLE>
<CAPTION>
Oil NGLs Gas
Proved Reserves (Bbls) (Bbls) (Mcf)
- --------------- ---------- ---------- ----------
<S> <C> <C> <C>
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) 3,538,120
Extensions, discoveries and
other additions .................. 639,010 -- 10,462,000
Sales in place ..................... (336,516) -- (315,520)
Production ......................... (522,527) (232,222) (5,795,000)
---------- ---------- ----------
December 31, 1996 .................... 12,411,649 2,489,440 95,525,800
Revisions of previous estimates .... (2,787,824) (61,987) (7,269,155)
Extensions, discoveries and
other additions .................. 5,445 -- 607,000
Purchases in place ................. 2,985 -- 6,007
Production ......................... (338,400) (184,077) (4,475,752)
---------- ---------- ----------
December 31, 1997 (1) ................ 9,293,855 2,243,376 84,393,900
========== ========== ==========
Proved developed reserves -
December 31, 1995.................. 2,801,504 939,088 32,474,000
========== ========== ==========
December 31, 1996.................. 2,691,456 924,628 34,589,000
========== ========== ==========
December 31, 1997 (1).............. 2,374,529 659,713 28,569,900
========== ========== ==========
</TABLE>
(1) The proved reserve volumes at December 31, 1997, include 1,610,000 barrels
of oil and 9,703,000 Mcf of gas, and proved developed reserve volumes include
224,000 barrels of oil and 5,500,000 Mcf of gas, related to oil and gas
properties disposed of in the sale of the Company's Non-California Assets in
February 1998. See Note 10.
F-28
<PAGE> 85
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):
Standardized Measures of Discounted Future Net Cash Flows
<TABLE>
<CAPTION>
1997 1996 1995
---------- ---------- ----------
<S> <C> <C> <C>
Future cash inflow ............................... $ 424,839 $ 754,020 $ 478,302
Future production, development and
abandonment costs .............................. (250,519) (276,963) (238,517)
---------- ---------- ----------
Future cash flows before income taxes (1) ........ 174,320 477,057 239,785
Future income taxes .............................. (31,209) (137,674) (47,082)
---------- ---------- ----------
Future net cash flows ............................ 143,111 339,383 192,703
10% discount factor .............................. (64,238) (154,200) (81,798)
---------- ---------- ----------
Standardized measure of discounted
future net cash flow ........................... $ 78,873 $ 185,183 $ 110,905
========== ========== ==========
Changes in standardized measure
of discounted future net cash flows:
Sales of oil, gas and natural gas
liquids, net of production costs ........... $ (14,518) $ (21,912) $ (10,857)
Extensions, discoveries and other
additions .................................. 1,312 21,140 13,667
Revisions of estimates of reserves
proved in prior years:
Quantity estimated ......................... (22,369) 7,216 7,685
Net changes in price and production
costs .................................... (126,550) 103,762 22,261
Accretion of discount ........................ 26,069 12,450 8,668
Purchases of reserves in place ............... 3 -- 3,252
Sales of reserves in place ................... -- (2,463) --
Development costs incurred ................... 5,822 15,085 (16,691)
Changes in future development costs .......... (19,391) (7,896) 17,167
Net change in income taxes ................... 59,021 (61,915) (7,725)
Changes in production rates (timing)
and other .................................. (15,709) 8,811 (7,335)
---------- ---------- ----------
Net change ................................... $ (106,310) $ 74,278 $ 30,092
========== ========== ==========
</TABLE>
(1) The discounted future net cash flows on a pre-tax basis related to the oil
and gas properties disposed of in the sale in 1998 of the Company's
Non-California Assets was $13.8 million at December 31, 1997 (see Note 10).
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
F-29
<PAGE> 86
future income tax expense is calculated by applying year-end statutory tax rates
to estimated future pre-tax 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 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
flows to the Company. Management's investment and operating decisions are based
upon reserve estimates that include proved as well as probable reserves and
different price and cost assumptions from those used herein.
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 the 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.
During 1997, the extensions and discoveries are primarily a result of
additional drilling activity in the Hostetter Field in South Texas. The downward
revisions of oil and gas reserves reflect revisions of developed and undeveloped
reserves for the San Joaquin properties.
(10) SUBSEQUENT EVENT - SALE OF OIL AND GAS PROPERTIES (UNAUDITED)
On February 12, 1998, the Company closed the previously announced sale of
all of its oil and gas assets located outside of California (the "Non-California
Assets") to an undisclosed buyer effective January 1, 1998, for $12.8 million in
cash. The
F-30
<PAGE> 87
transaction is subject to post closing adjustments, the most significant of
which includes the purchaser's obligation to acquire a producing well in south
Texas excluded from the purchase until workover operations now underway are
completed. The well's value in the transaction was originally $714,000; however,
the price to be paid by the purchaser will be equal to the value of the present
value of the reserves assigned to the well by HarCor's independent petroleum
engineers, discounted at 10%, following completion of the workover. It is
anticipated that the well will be restored to production in early April, but
there is no assurance that its price as so determined will equal $714,000. The
Company anticipates recording an estimated gain of approximately $2.1 million
upon closing of the sale subject to final post-closing adjustments. No capital
gains taxes are anticipated to be incurred due to the Company's current net
operating loss carry-forwards.
The Non-California Assets consisted of (i) all of the Company's proved
developed producing, proved undeveloped, probable and possible reserves in New
Mexico, Texas, Alabama and Louisiana; (ii) all of the Company's leasehold
interests, working interests in wells currently drilling, seismic data and the
associated resale rights, and participation rights in those exploration
agreements in its 3-D and 2-D exploration activities in the Hostetter area of
South Texas, Reeves County in the West Texas-Permian Basin, the Lapeyrouse area
of Louisiana, Polaris Joint Venture and the Gulf Coast Frio AVO Program; and
(iii) certain miscellaneous royalty and net-profits interests in various states
previously referred to by the Company as the Fund I Royalty Interests.
Based on a January 1, 1998 engineering reserve study, the total proved oil
and gas reserves being sold pursuant to this transaction consist of 1,610,000
barrels of oil and 9,703 MMcf of gas with a current 10% present value of
$13,826,000. This value is based on flat projected pricing (at December 31,
1997) of $14.24 per barrel and $2.27 per Mcf, which reflects adjustments for
quality and location. Included in these values are proved undeveloped oil and
gas reserves consisting of 1,386,000 barrels of oil and 4,203 MMcf of gas with a
10% present value of $7,271,000. Average daily production relating to these
properties during the fourth quarter of 1997 was 213 BPD and 3,099 Mcfd as
reported.
PRO FORMA CONDENSED FINANCIAL INFORMATION (UNAUDITED)
Set forth in the following pages is certain unaudited pro forma condensed
financial information with respect to the disposition of the Company's
Non-California Assets including an unaudited pro forma balance sheet as of
December 31, 1997 and unaudited pro forma statement of operations for the year
ended December 31, 1997. The balance sheet data have been prepared on the basis
that the disposition of the Company's Non-California Assets and the concurrent
reduction of its Credit Agreement and Senior Notes had occurred on December 31,
1997. The statement of
F-31
<PAGE> 88
operations for the year ended December 31, 1997 has been prepared on the basis
that the disposition of the Company's Non-California Assets and reduction of its
Credit Agreement and Senior Notes had occurred on January 1, 1997. The unaudited
pro forma financial statements should be read in conjunction with the notes
thereto and the consolidated financial statements of HarCor Energy, Inc. The pro
forma results of operations are not necessarily indicative of future operations
of HarCor Energy, Inc. All dollar amounts are in thousands except per share
data).
F-32
<PAGE> 89
UNAUDITED PRO FORMA CONDENSED CONSOLIDATED BALANCE SHEETS
at December 31, 1997
<TABLE>
<CAPTION>
Pro Forma
------------------------------
Historical Adjustments (g) Audited
---------- ----------- -------
ASSETS
<S> <C> <C> <C> <C>
Current assets ..................................... $ 5,424 $ 714 (a,b) 6,138
-------- ---------- -------
Property & Equipment, net .......................... 85,475 (11,428) (a) 74,047
-------- ---------- -------
Other assets ....................................... 2,629 (367) (f) 2,262
-------- ---------- -------
Total Assets $ 93,528 $ (11,081) $82,447
======== ========== =======
LIABILITIES & STOCKHOLDERS' EQUITY
Current liabilities ................................ $ 10,008 $ (695) (b) 9,313
-------- ---------- -------
LONG TERM BANK DEBT ................................ 4,505 (4,505) (b) --
-------- ---------- -------
14 - 7/8% SENIOR SECURED NOTES ..................... 52,638 (7,589) (b) 45,049
-------- ---------- -------
Total Stockholders' Equity ......................... 26,377 1,708 (a,f) 28,085
-------- ---------- -------
$ 93,528 $ (11,081) $82,447
======== ========== =======
</TABLE>
UNAUDITED PRO FORMA CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
For the Year Ended December 31, 1997
<TABLE>
<S> <C> <C> <C> <C>
TOTAL REVENUES: 21,946 (4,905) (c) 17,041
-------- ---------- -------
COSTS AND EXPENSES:
Production, Plant Expense
and Exploration ................................ 9,039 (1,951) (c) 7,088
DD&A ............................................. 5,246 (1,464) (c) 3,782
General & Administrative ......................... 2,869 (956) (d) 1,913
Interest ......................................... 8,794 (1,558) (e) 7,236
Other ............................................ 731 -- 731
-------- ---------- -------
Total Expenses ................................... 26,679 (5,929) 20,750
-------- ---------- -------
NET OPERATING LOSS ................................. (4,733) 1,024 (3,709)
-------- ---------- -------
NET LOSS TO COMMON STOCKHOLDERS .................... $ (4,793) $ 1,024 $(3,769)
======== ========== =======
NET LOSS TO COMMON
STOCKHOLDERS PER SHARE ........................... $ (0.30) $ (0.23)
======== =======
WEIGHTED AVERAGE
SHARES OUTSTANDING ............................... 15,915 15,915
======== =======
</TABLE>
F-33
<PAGE> 90
HARCOR ENERGY, INC.
NOTES TO UNAUDITED PRO FORMA CONDENSED FINANCIAL STATEMENTS
December 31, 1997
1. Basis of Presentation
The accompanying unaudited pro forma condensed financial statements have
been prepared to reflect adjustments to the Company's historical financial
statements for:
(i) The sale of the Non-California Assets for cash and a receivable;
(ii) The use of the sales proceeds to repay bank debt and repurchase a portion
of the Senior Notes as required pursuant to the terms of an indenture
agreement;
(iii) The reduction of historical revenues and expenses directly related to the
Non-California Assets as previously reported for the periods presented;
(iv) The estimated reduction of other direct expenses resulting from the sale
of the Non-California Assets.
The unaudited pro forma balance sheet data are presented as if the sale of
the Non-California Assets and debt repayment occurred on December 31, 1997. The
unaudited pro forma statements of operations are presented as if the sale of
Non-California Assets occurred on January 1, 1997.
The accompanying unaudited pro forma financial information has been
prepared based on the historical results of operations of the Non-California
Assets as previously reported in the Company's audited and unaudited financial
statements; along with pro forma adjustments, estimates and assumptions deemed
by the Company to be appropriate. This unaudited pro forma financial information
does not purport to be indicative of the financial position or results of
operations which would actually have occurred if the disposition of
Non-California Assets had occurred as presented in such statements or which may
be obtained in the future.
2. Pro Forma Adjustments
The accompanying unaudited pro forma condensed financial statements
include the following adjustments:
(a) To record the sale of the Non-California Assets for $12,789,000 cash and a
$714,000 receivable with an estimated gain of $2,075,000 at December 31, 1997;
(b) To record the repayment of $5,200,000 of bank debt and the repurchase of
$7,589,000 of Senior Notes pursuant to the terms of an indenture agreement;
F-34
<PAGE> 91
(c) To reduce historical oil and gas sales revenues, production, exploration
and depletion, depreciation and amortization expenses directly related to the
Non-California Assets as previously reported;
(d) To record the estimated reduction of G & A expenses resulting from the
sale of the Non-California Assets;
(e) To reduce historical interest expense related to repayment of bank debt
and the repurchase of a portion of the Senior Notes;
(f) To write-off a portion of deferred financing costs related to the Senior
Notes repurchased;
(g) The Company does not anticipate any capital gains taxes resulting from the
sale of the Non-California Assets due to its net operating loss carry forwards.
(11) SUBSEQUENT EVENT - SALE OF THE COMPANY (UNAUDITED)
On January 23, 1998, the Company reported reaching an agreement in
principle with Seneca for the sale of the Company to Seneca for a total cash
price of $32,536,000, or $2.00 per share of the Company's common stock. The sale
is subject to the preparation and execution of definitive agreements,
satisfactory completion of the audit of the Company's financial statements for
the year ended December 31, 1997, receipt of all required approvals, including
approval of the Company's shareholders, satisfactory completion of the
previously announced sale of the Company's Non-California Assets, and completion
by Seneca of a satisfactory due diligence review of the Company's assets,
liabilities and business.
F-35
<PAGE> 92
EXHIBITS INDEX
<TABLE>
<CAPTION>
Exhibits Description
-------- -----------
<S> <C>
3.1 Registrant's Certificate of Incorporation, as amended
through July 13, 1995. (1)
3.2 Certificate of Ownership and Merger dated March 6, 1996,
merging HTAC Investments, Inc. into the Registrant. (15)
3.3 Certificate of Ownership and Merger dated March 6, 1996,
merging Warrior, Inc. into the Registrant. (15)
3.4 Registrant's Bylaws, as amended. (1)
4.1 Certificate of Designation, Powers, Preferences and
Rights of the Series A Preferred Stock of the
Registrant. (2)
4.2 Certificate of Designation, Powers, Preferences and
Rights of the Series B Convertible Preferred Stock of
the Registrant. (2)
4.3 Certificate of Designation, Powers, Preferences and
Rights of the Series C Convertible Preferred Stock of
the Registrant. (2)
4.4 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 as of
June 30, 1994. (16)
</TABLE>
<PAGE> 93
<TABLE>
<S> <C>
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)
</TABLE>
<PAGE> 94
<TABLE>
<S> <C>
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)
10.18 Agreement in Principle dated January 23, 1998, between
the Company and Seneca Resources Corporation. (17)
10.19 Form of Severance Agreement between the Company and each
employee of the Company. (18)
</TABLE>
- ----------
* Management contract or compensatory plan or arrangement required
to be filed as an exhibit to this Form 10-K pursuant to Item
14.(c) of this Report.
<PAGE> 95
<TABLE>
<S> <C>
23.1 Consent of Ryder Scott Company Petroleum Engineers. (18)
23.2 Consent of Huddleston & Co., Inc. (18)
23.3 Consent of Arthur Andersen LLP. (18)
</TABLE>
(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 as an exhibit to Registrant's Form 10-K for the year ended
December 31, 1996 and incorporated herein by reference.
(17) Filed as an exhibit to Registrant's Form 8-K dated January 23,
1998 and incorporated herein by reference.
(18) Filed herewith.
<PAGE> 1
EXHIBIT 10.20
PURCHASE AND SALE AGREEMENT
BETWEEN
HARCOR ENERGY, INC.
AS SELLER
AND
PENROC OIL CORPORATION
AS BUYER
<PAGE> 2
PURCHASE AND SALE AGREEMENT
TABLE OF CONTENTS
<TABLE>
<CAPTION>
PAGE
----
<S> <C> <C>
ARTICLE 1. PURCHASE AND SALE . . . . . . . . . . . . . . . . . . . . . . . 1
1.1 The Property . . . . . . . . . . . . . . . . . . . . . . . . . 1
1.2 Exclusions . . . . . . . . . . . . . . . . . . . . . . . . . . 2
1.3 Ownership of Production from the Property . . . . . . . . . . 2
ARTICLE 2. PURCHASE PRICE . . . . . . . . . . . . . . . . . . . . . . . . 3
2.1 Purchase Price . . . . . . . . . . . . . . . . . . . . . . . . 3
2.2 Allocated Values . . . . . . . . . . . . . . . . . . . . . . . 3
ARTICLE 3. REPRESENTATIONS AND WARRANTIES . . . . . . . . . . . . . . . . 3
3.1 Reciprocal Representations and Warranties . . . . . . . . . . 3
3.2 Buyer's Representations and Warranties . . . . . . . . . . . . 4
3.3 Seller's Representations and Warranties . . . . . . . . . . . 5
3.4 Notice . . . . . . . . . . . . . . . . . . . . . . . . . . . . 5
3.5 Representations and Warranties Exclusive . . . . . . . . . . . 5
3.6 Survival of Representations and Warranties . . . . . . . . . . 5
ARTICLE 4. WARRANTY DISCLAIMER. . . . . . . . . . . . . . . . . . . . . . 5
4.1 Title; Encumbrances . . . . . . . . . . . . . . . . . . . . . 5
4.2 Other Property Warranties . . . . . . . . . . . . . . . . . . 5
4.3 Information About the Property . . . . . . . . . . . . . . . . 6
ARTICLE 5. PHYSICAL INSPECTION; ENVIRONMENTAL ASSESSMENT; CASUALTY LOSS. . 6
5.1 Access to Records . . . . . . . . . . . . . . . . . . . . . . 6
5.2 Inspection . . . . . . . . . . . . . . . . . . . . . . . . . . 6
5.3 Environmental Assessment and Indemnification . . . . . . . . . 7
5.4 Casualty Losses . . . . . . . . . . . . . . . . . . . . . . . 8
ARTICLE 6. PREFERENTIAL RIGHTS/CONSENTS; TITLE DEFECTS . . . . . . . . . . 9
6.1 Preferential Purchase Rights and Consents to Assign . . . . . 9
6.2 Title Defects . . . . . . . . . . . . . . . . . . . . . . . . 10
6.3 Right Not to Close . . . . . . . . . . . . . . . . . . . . . . 12
ARTICLE 7. CLOSING; FINAL SETTLEMENT . . . . . . . . . . . . . . . . . . . 13
7.1 Closing Date . . . . . . . . . . . . . . . . . . . . . . . . . 13
7.2 Conditions to Closing . . . . . . . . . . . . . . . . . . . . 13
7.3 Closing . . . . . . . . . . . . . . . . . . . . . . . . . . . 13
7.4. Post-Closing Obligations . . . . . . . . . . . . . . . . . . . 16
</TABLE>
-i-
<PAGE> 3
<TABLE>
<S> <C>
ARTICLE 8. ASSUMPTION OF OBLIGATIONS . . . . . . . . . . . . . . . . . . . 17
8.1 Ownership and Operations . . . . . . . . . . . . . . . . . . . 17
8.2 Plugging and Abandonment Obligations . . . . . . . . . . . . . 18
ARTICLE 9. INDEMNITIES . . . . . . . . . . . . . . . . . . . . . . . . . . 18
9.1 Definition of Claims . . . . . . . . . . . . . . . . . . . . . 18
9.2 APPLICATION OF INDEMNITIES . . . . . . . . . . . . . . . . . . 18
9.3 Buyer's Indemnity . . . . . . . . . . . . . . . . . . . . . . 19
9.4 Seller's Indemnity . . . . . . . . . . . . . . . . . . . . . . 19
ARTICLE 10. TAXES AND EXPENSES. . . . . . . . . . . . . . . . . . . . . . . 19
10.1 Recording Expenses . . . . . . . . . . . . . . . . . . . . . . 19
10.2 Ad Valorem, Real Property and Personal Property Taxes . . . . 19
10.3 Severance Taxes . . . . . . . . . . . . . . . . . . . . . . . 19
10.4 Sales Taxes . . . . . . . . . . . . . . . . . . . . . . . . . 20
ARTICLE 11. INTERIM OPERATION OF THE PROPERTY . . . . . . . . . . . . . . . 20
11.1 Interim Operations . . . . . . . . . . . . . . . . . . . . . . 20
11.2 Buyer's Approval . . . . . . . . . . . . . . . . . . . . . . . 20
ARTICLE 12. MISCELLANEOUS . . . . . . . . . . . . . . . . . . . . . . . . 20
12.1 Production Imbalances . . . . . . . . . . . . . . . . . . . . 20
12.2 Press Releases . . . . . . . . . . . . . . . . . . . . . . . . 21
12.3 Notices . . . . . . . . . . . . . . . . . . . . . . . . . . . 21
12.4 Entirety of Agreement; Amendment . . . . . . . . . . . . . . . 21
12.5 Successors and Assigns . . . . . . . . . . . . . . . . . . . . 21
12.6 Governing Law . . . . . . . . . . . . . . . . . . . . . . . . 21
12.7 Exhibits . . . . . . . . . . . . . . . . . . . . . . . . . . . 22
12.8 Litigation Costs . . . . . . . . . . . . . . . . . . . . . . . 22
12.9 General . . . . . . . . . . . . . . . . . . . . . . . . . . . 22
12.10 Texas Deceptive Trade Practices Act Waiver . . . . . . . . . . 22
</TABLE>
EXHIBITS
A Leases and Certain Related Contracts
B Warranted Property, Allocation of Value
C Non Foreign Affidavit
D Assignment and Bill of Sale
E Release Liens
F Certain Consents and Preferential Purchase Rights
G Disclosure
SCHEDULES
1.2.2
-ii-
<PAGE> 4
PURCHASE AND SALE AGREEMENT
This Purchase and Sale Agreement (the "Agreement"), dated December 3,
1997, but effective as hereinafter set forth at 7:00 a.m., local time, on
January 1, 1998 (the "Effective Date"), is between HarCor Energy, Inc., a
Delaware corporation ("Seller"), and Penroc Oil Corporation, a Texas
corporation ("Buyer").
RECITALS:
Seller owns certain oil and gas properties located in Texas, New Mexico,
Alabama, California, Oklahoma, North Dakota, Wyoming, Michigan and Louisiana,
and related contractual rights and desires to sell these properties and
transfer these contractual rights.
Buyer desires to purchase these properties from Seller and acquire these
contractual rights.
Accordingly, in consideration of the mutual promises contained in this
Agreement, Buyer and Seller agree as follows:
ARTICLE 1. PURCHASE AND SALE
1.1 The Property. Subject to the terms of this Agreement (including,
without limitation, the exclusions provided in Section 1.2), Seller agrees to
sell and assign to Buyer and Buyer agrees to purchase and acquire from Seller
all of Seller's right and title to, and interest in, the following
(collectively, subject to the exclusions provided in Section 1.2, the
"Property"):
1.1.1 The oil, gas and mineral leases and other interests in oil
and gas described in Exhibit A attached hereto (the "Leases") and all rights
and privileges appurtenant to the Leases;
1.1.2 All rights in any unit in which the Leases are included,
to the extent that these rights arise from and are associated with the Leases,
including without limitation all rights derived from any unitization, pooling,
operating, communitization or other agreement or from any declaration or order
of any governmental authority;
1.1.3 All oil, gas and condensate wells (whether producing, not
producing or abandoned), and water source, water injection and other injection
or disposal wells located on the Leases or lands unitized or pooled with the
Leases;
1.1.4 All equipment, facilities and other personal property on
the Leases used in developing or operating the Leases or producing, treating,
storing, compressing, processing or transporting hydrocarbons on or from the
Leases;
1.1.5 All easements, rights-of-way, licenses, permits,
servitudes and similar interests applicable to or used in operating the Leases
or the personal property described above, including without limitation those
described in Exhibit A, in each case to the extent they are
<PAGE> 5
assignable or transferable and subject to any consents to assignment or
transfer to which they may be subject;
1.1.6 All contracts and contractual rights and interests
relating to the Leases and the other property described or referred to in this
Section 1.1, including (without limitation) unit agreements, farmout
agreements, farm in agreements, operating agreements, participation agreements,
exploration agreements, and hydrocarbon sales, purchase, gathering,
transportation, treating, marketing, exchange, processing and fractionating
agreements (collectively, the "Related Contracts"), including without
limitation those Related Contracts described in Exhibit A, in each case to the
extent they are assignable or transferable and subject to any consents to
assignment or transfer to which they may be subject;
1.1.7 All seismic data and interpretive geological maps owned by
and in the possession of Seller to the extent, but only to the extent, such
maps and data cover the lands covered by the Leases or the Related Contracts or
lands pooled with lands covered by the Leases, to the extent the same is
assignable or transferable and subject to any confidentiality agreements, use
restrictions and consents to assignment or transfer to which the same may be
subject; and
1.1.8 Without limiting and in addition to the foregoing, all of
Seller's rights, titles and interests in and to the Leases, the lands described
in the Leases and the lands described or referred to in Exhibit A, and in and
to oil and gas leases, working interests, overriding royalty interests, mineral
interests, royalty interests and all other interests and property of every kind
and character, insofar as the same cover or relate to such lands without
limitation as to depth, and the physical property thereon or used or obtained
for use in connection therewith, even though such rights, titles and interests
be incorrectly or insufficiently described or referred to in, or a description
thereof be omitted from, Exhibit A.
1.2 Exclusions. The Property sold and assigned under this Agreement
does not include:
1.2.1 Trade credits, accounts and notes receivable, and
adjustments or refunds (including without limitation transportation tariff
refunds, take-or-pay claims, and audit adjustments) attributable to the
Property with respect to any period before the Effective Date or with respect
to any production prior to the Effective Date; and
1.2.2 All claims, causes of action, rights under contracts or
applicable law, and other rights (a) relating to or arising out of the
ownership or operation of the Leases and other property described in Section
1.1 prior to the Effective Date, or (b) relating to any liabilities and
obligations retained by Seller or for which Seller is obligated to indemnify
Buyer hereunder arising out of the ownership or operation of the Leases and
other property described in Section 1.1 between the Effective Date and the
Closing, such claims and causes of action described in this Section 1.2.2 to
include (without limitation) those claims and causes of action listed in
Schedule 1.2.2.
1.3 Ownership of Production from the Property. If the Closing
occurs, (I) Seller owns all merchantable oil, gas, condensate and distillate
("Hydrocarbons") produced from the Property before the Effective Date, and (ii)
Buyer owns all Hydrocarbons produced from the Property on and after the
Effective Date.
-2-
<PAGE> 6
ARTICLE 2. PURCHASE PRICE
2.1 Purchase Price. Buyer shall pay Seller $13.2 Million for the
Property (the "Purchase Price"), subject to any adjustments to the Purchase
Price made at Closing. Buyer shall, upon execution of this Agreement, pay the
Escrow Agent (as defined in Section 7.3.4) by wire transfer or certified funds
of cash $500,000 (the "Earnest Money Deposit"). In the event the Closing
occurs, the Earnest Money Deposit shall be applied upon the Purchase Price as
set forth in Section 7.3.2(I). Anything in this Agreement to the contrary
notwithstanding, in the event the Closing does not occur, the Escrow Agent
shall pay to Seller and Seller shall be entitled to receive and retain the
Earnest Money Deposit (together with any interest earned thereon) only in the
event that: (I) the conditions contained in this Agreement to which the duties
and obligations of Buyer are subject as set forth in Section 7.2 shall have
been fulfilled, (ii) Seller shall not have materially breached this Agreement,
and (iii) Buyer materially breaches this Agreement by failing or refusing to
close the sale as provided herein on the Closing Date or Buyer terminates this
Agreement. In the event such sale is not closed and the Escrow Agent pays the
Earnest Money Deposit to Seller as provided in this Section 2.1, the Earnest
Money Deposit shall constitute liquidated damages in lieu of all other damages
(and as Seller's sole remedy in such event). The parties hereby acknowledge
that the extent of damages to Seller occasioned by such failure or refusal by
Buyer would be impossible or extremely impractical to ascertain and that the
amount of the Earnest Money Deposit is a fair and reasonable estimate of such
damages under the circumstances. In the event the Earnest Money Deposit is
neither applied upon the Purchase Price pursuant to Section 7.3.2(I) nor paid
to and retained by Seller pursuant to the foregoing provisions of this Section
2.1, the Escrow Agent shall return the Earnest Money Deposit to Buyer on or
before the date on or before which Buyer is entitled to receive it pursuant to
the other provisions of this Agreement. If the sale contemplated hereby is not
consummated at Closing because of a breach of Seller's obligations hereunder,
this Agreement shall not terminate and Buyer shall have the right of specific
performance of the obligations of Seller hereunder by giving written notice of
such election to Seller within thirty (30) days after the scheduled Closing.
If Buyer fails to notify Seller of its election to exercise specific
performance within such thirty (30) day period, this Agreement shall terminate
and neither party shall have any further obligation to the other hereunder,
other than liabilities hereunder arising prior to such termination and those
obligations that by their terms survive termination. In the event Buyer elects
to seek specific performance as provided for above and it is subsequently
determined by the court in which such proceeding is filed that specific
performance cannot be granted to Buyer because such remedy is unavailable to
Buyer, then, in such event, Buyer shall be entitled to all other remedies
available in law or in equity.
2.2 Allocated Values. The Purchase Price has been allocated by Buyer
and Seller among certain wells and other properties that are included as part
of the Property. The wells and other properties described or referred to in
Exhibit B are herein collectively referred to as the "Warranted Property." The
portion of the Purchase Price allocated to each Warranted Property (the
"Allocated Value") is set forth in Exhibit B.
ARTICLE 3. REPRESENTATIONS AND WARRANTIES
3.1 Reciprocal Representations and Warranties. Seller and Buyer each
represent and warrant to the other that:
-3-
<PAGE> 7
3.1.1 Corporate Authority. It is a corporation duly organized,
validly existing and in good standing under the laws of its state of
incorporation, is duly qualified to carry on its business in the States of
Texas, New Mexico, Alabama, California, Oklahoma, North Dakota, Wyoming,
Michigan and Louisiana (or the failure to be so qualified in any of such states
would not have a material adverse effect on Seller or the Property), and has
all the requisite corporate power and authority to enter into and perform this
Agreement.
3.1.2 Requisite Approvals. It has taken all necessary actions
pursuant to its Certificate of Incorporation, By-laws and other governing
documents to fully authorize it to consummate the transaction contemplated by
this Agreement.
3.1.3 Validity of Obligation. This Agreement and all documents
it is to execute and deliver on or before the Closing Date have been or will be
duly executed by its appropriate officials and constitute or will constitute
valid and legally binding obligations, enforceable against it in accordance
with the terms of this Agreement and such documents, except as such
enforceability may be limited by applicable bankruptcy, insolvency, and other
statutes and laws affecting the rights of creditors, and except in respect of
equitable remedies.
3.1.4 Impediments to Consummation of Agreement. Its executing,
delivering and performing this Agreement does not conflict with or violate any
agreement or instrument to which it is a party, or any law, rule, regulation,
ordinance, judgment, decree or order to which it is subject, subject to
compliance by Seller with any preferential purchase right or consent
requirements applicable to the Property.
3.1.5 Bankruptcy. There are no bankruptcy, reorganization or
receivership proceedings pending, being contemplated by, or to its actual
knowledge, threatened against it.
3.1.6 Broker's Fees. It has not incurred any obligation for
brokers, finders or similar fees for which the other party would be liable.
3.2 Buyer's Representations and Warranties. Buyer represents and
warrants to Seller that:
3.2.1 Independent Evaluation. Buyer is an experienced and
knowledgeable investor in the oil and gas business. Buyer has been advised by
and has relied solely on its own expertise and legal, tax, reservoir
engineering and other professional counsel concerning this transaction, the
Property and the value thereof, as determined by Buyer's examination of
Seller's records and inspection of the Property, and the representations,
warranties and covenants made by the Seller in this Agreement.
3.2.2 Eligibility. Buyer is eligible under all applicable laws
and regulations to own the Property, including without limitation the Leases.
3.2.3 Securities Laws. Buyer is acquiring the Property for its
own account for the purpose of investment and not for any distribution or re-
sale in violation of any applicable state or federal securities law.
-4-
<PAGE> 8
3.3 Seller's Representations and Warranties. Seller represents and
warrants to Buyer that:
3.3.1 Lawsuits and Claims. Except as set forth on Exhibit G,
there is no judgment, order, decree or award, or suit, action or
administrative, arbitration or other proceeding or governmental investigation
of any kind in existence or pending or, to Seller's knowledge, threatened in
writing against Seller which has a material adverse effect on the Property or
the value thereof, and Seller has not received or been advised in writing of
any unsatisfied request for information, notice, administrative inquiry or
claim (including but not limited to those from the U.S. Environmental
Protection Agency or a state or local environmental agency) with respect to the
Property.
3.3.2 Tax Partnerships. The Property is not subject to any tax
partnerships.
3.4 Notice. Seller and Buyer shall each give the other prompt
written notice upon becoming aware of any matter materially affecting any of
its representations or warranties or those of the other party under this
Article 3 or rendering any such warranty or representation untrue.
3.5 Representations and Warranties Exclusive. All representations
and warranties contained in this Agreement are exclusive, and are given in lieu
of all other representations and warranties, express or implied.
3.6 Survival of Representations and Warranties. The representations,
warranties, and indemnities made or provided for in this Agreement shall
survive the Closing and shall not be deemed to have merged with the separate
representations, warranties and covenants made in the Assignment and Bill of
Sale, except that the representations and/or warranties of Buyer and Seller
under this Agreement shall survive for a period of one year after the Closing
Date, except that Seller's warranties contained in Section 3.3 shall expire at
Closing; Buyer's sole remedy with respect to Seller's warranties contained in
Section 3.3 shall be to terminate the Agreement pursuant to Section 7.1 prior
to the Closing. Seller's liability for breach of warranties and
representations made by Seller pursuant to this Agreement shall in any event
not exceed the Purchase Price as adjusted hereunder.
ARTICLE 4. WARRANTY DISCLAIMER.
4.1 Title; Encumbrances. IF THE CLOSING OCCURS, SELLER SHALL CONVEY
THE PROPERTY TO BUYER WITHOUT WARRANTY OF TITLE, EXPRESS OR IMPLIED, AS
PROVIDED IN THE ASSIGNMENT AND BILL OF SALE TO BE DELIVERED PURSUANT TO SECTION
7.3.1.
4.2 Other Property Warranties. SELLER SELLS AND TRANSFERS THE
PROPERTY TO BUYER WITHOUT ANY EXPRESS, STATUTORY OR IMPLIED WARRANTY OR
REPRESENTATION OF ANY KIND, INCLUDING WARRANTIES RELATING TO (I) THE CONDITION
OR MERCHANTABILITY OF THE PROPERTY, (II) THE FITNESS OF THE PROPERTY FOR A
PARTICULAR PURPOSE, OR (III) TITLE TO THE PROPERTY. SUBJECT TO THE PROVISIONS
OF SECTION 5.3, BUYER HAS INSPECTED, OR BEFORE CLOSING WILL HAVE INSPECTED OR
BEEN GIVEN THE OPPORTUNITY TO INSPECT, THE PROPERTY AND IS SATISFIED AS TO THE
-5-
<PAGE> 9
PHYSICAL AND ENVIRONMENTAL CONDITION (BOTH SURFACE AND SUBSURFACE) OF THE
PROPERTY AND ACCEPTS THE PROPERTY "AS IS", "WHERE IS", AND "WITH ALL FAULTS."
4.3 Information About the Property. EXCEPT FOR THE REPRESENTATIONS
AND WARRANTIES PROVIDED IN ARTICLE 3, SELLER MAKES NO WARRANTY OR
REPRESENTATION, EXPRESS, STATUTORY OR IMPLIED, AS TO (I) THE ACCURACY,
COMPLETENESS, OR MATERIALITY OF ANY DATA, INFORMATION OR RECORDS FURNISHED TO
BUYER IN CONNECTION WITH THE PROPERTY; (II) THE QUALITY AND QUANTITY OF
HYDROCARBON RESERVES (IF ANY) ATTRIBUTABLE TO THE PROPERTY; (III) THE ABILITY
OF THE PROPERTY TO PRODUCE HYDROCARBONS, INCLUDING WITHOUT LIMITATION
PRODUCTION RATES, DECLINE RATES AND RECOMPLETION OPPORTUNITIES; (IV) GAS
BALANCING INFORMATION, ALLOWABLES OR OTHER REGULATORY MATTERS, (V) THE PRESENT
OR FUTURE VALUE OF THE ANTICIPATED INCOME, COSTS OR PROFITS, IF ANY, TO BE
DERIVED FROM THE PROPERTY, OR (VI) THE ENVIRONMENTAL CONDITION OF THE PROPERTY.
ANY AND ALL DATA, INFORMATION OR OTHER RECORDS FURNISHED BY SELLER ARE PROVIDED
TO BUYER AS A CONVENIENCE AND BUYER'S RELIANCE ON OR USE OF THE SAME IS AT
BUYER'S SOLE RISK.
ARTICLE 5. PHYSICAL INSPECTION; ENVIRONMENTAL ASSESSMENT; CASUALTY LOSS
5.1 Access to Records. Except to the extent Seller is restricted
from disclosing such information by existing agreements with third parties,
Seller shall give Buyer, and Buyer's authorized representatives, at mutually
agreeable times before Closing, access to all contract, land, lease,
accounting, well, production and engineering records and pipeline and gathering
system files and all environmental permits and filings and supporting
documentation for such filings in connection with compliance with environmental
requirements, to the extent such data, records, files and documents are in
Seller's possession and relate to the Property (all of the foregoing, subject
to the exclusions stated above, being herein collectively called "Property
Records"). Buyer may photocopy the Property Records at its sole expense.
Buyer shall keep (and cause its representatives to keep) confidential all
information made available to Buyer in accordance with the provisions of the
confidentiality agreement previously executed by Buyer, unless and until
Closing occurs. The confidentiality agreement previously executed by Buyer
will continue in force unless and until Closing occurs, at which time it will
terminate as to the Property, it being further understood and agreed that Buyer
shall be bound by the confidentiality obligations of the Related Contracts
assumed by Buyer pursuant to Article 8 of this Agreement.
5.2 Inspection. Before the Closing, Seller will cooperate with Buyer
in attempting to secure from third party operators access to any portion of the
Property operated by them for Buyer and its representatives, at their sole risk
and expense, to conduct reasonable inspections of the Property. BUYER SHALL
REPAIR ANY DAMAGE TO THE PROPERTY RESULTING FROM ITS INSPECTION AND SHALL
INDEMNIFY, DEFEND AND HOLD SELLER AND EACH SUCH THIRD PARTY OPERATOR HARMLESS
FROM AND AGAINST ANY AND
-6-
<PAGE> 10
ALL LOSSES, DAMAGES, OBLIGATIONS, CLAIMS, LIABILITIES, EXPENSES (INCLUDING
COURT COSTS AND ATTORNEY'S FEES), OR CAUSES OF ACTION ARISING FROM BUYER
INSPECTING AND OBSERVING THE PROPERTY, INCLUDING, WITHOUT LIMITATION, CLAIMS
FOR PERSONAL INJURIES OR DEATH OF EMPLOYEES OF THE BUYER, ITS CONTRACTORS,
AGENTS, CONSULTANTS AND REPRESENTATIVES, AND PROPERTY DAMAGES, REGARDLESS OF
WHETHER SUCH CLAIMS ARE CAUSED BY THE SOLE OR CONCURRENT NEGLIGENCE OF SELLER
OR ANY SUCH THIRD PARTY OPERATOR OR THE CONDITION OF THE PROPERTY.
5.3 Environmental Assessment and Indemnification.
5.3.1 "Adverse Environmental Conditions" means contaminations or
conditions that would require in the aggregate $100,000 or more of out of
pocket costs and expenses to remedy and that are not otherwise permanently
authorized by permit or law, resulting from the existence or any discharge,
release, disposal, production, storage, treatment, or any other activities on,
in or from the Property, or the migration or transportation from other lands to
the Property, prior to the Closing Date, of any wastes, pollutants,
contaminants, hazardous materials or other materials or substances that are
subject to regulation under any laws, rules or regulations relating to the
protection of health or the environment ("Environmental Laws"), including, but
not limited to, the Clean Air Act, the Comprehensive Environmental Response,
Compensation and Liability Act of 1980, the Federal Water Pollution Control
Act, the Safe Drinking Water Act, the Toxic Substance Control Act, the
Hazardous and Solid Waste Amendments Act of 1984, the Superfund Amendments and
Reauthorization Act of 1986, the Hazardous Materials Transportation Act, the
Clean Water Act, the National Environmental Policy Act, the Endangered Species
Act, the Fish and Wildlife Coordination Act, the National Historic Preservation
Act and the Oil Pollution Act of 1990, as well as any state and local
regulation or law governing the same, similar or related matters.
5.3.2 Buyer shall advise Seller promptly of any Adverse
Environmental Conditions discovered after the date hereof as a result of its
investigation of the Property and the estimated costs for remediating such
conditions. Buyer shall provide such information regarding such Adverse
Environmental Conditions as Seller may reasonably request. If Seller receives
timely notice from Buyer not later than two (2) business days prior to the
Closing Date of any Adverse Environmental Conditions, (a) Seller shall have the
right
(i) to agree to remedy such Adverse Environmental Conditions to
Buyer's reasonable satisfaction, all at Seller's sole cost and
expense, not later than thirty (30) days after the Closing Date,
in which case the amount to be paid to the Seller at the Closing
shall be reduced by an amount equal to the agreed cost of
remedying such Adverse Environmental Conditions (the "Remediation
Amount") and the Buyer shall pay to the Escrow Agent at the
Closing an amount equal to the Remediation Amount in accordance
with the provisions of Section 7.3.4, or
-7-
<PAGE> 11
(ii) if the parties have agreed upon an adjustment to the Purchase
Price in respect of such Adverse Environmental Conditions, to
reduce the Purchase Price by the amount of such adjustment, in
which event Seller shall have no obligation or liability in
respect of such Adverse Environmental Conditions,
and (b) if the reasonable cost of remedying all of the Adverse Environmental
Conditions exceeds $750,000, either party shall have the right to terminate
this Agreement. Each party shall notify the other of any election under the
preceding sentence no later than two business days prior to Closing. If Seller
elects to terminate this Agreement pursuant to the foregoing provision, the
Escrow Agent shall pay to Buyer the Earnest Money Deposit (together with any
interest earned thereon) within three (3) business days of receipt of such
cancellation notice by the party to whom it was addressed. If Buyer elects to
terminate this Agreement pursuant to the foregoing provision, the Escrow Agent
shall pay to Seller and Seller shall be entitled to receive and retain the
Earnest Money Deposit (together with any interest earned thereon). Seller
shall have no liability or obligation to Buyer under this Section 5.3.2 for any
Adverse Environmental Condition for which Seller did not receive timely written
notice of such condition not later than two (2) business days prior to the
Closing Date. Buyer shall grant Seller and its representatives such access to
the Property as may be reasonably necessary provided such access does not
interfere with Buyer's operations.
5.3.3 Except for any costs or expenses incurred by Seller in
discharging any remediation obligations under Section 5.3.2, if the Closing
occurs Buyer shall indemnify, defend and hold Seller harmless from and against
any and all claims, demands, causes of action, liabilities and obligations, and
all costs and expenses (including, without limitation, reasonable attorneys'
fees) associated therewith, arising out of or relating to any discharge,
release, disposal, production, storage, treatment or any activities on, in or
from the Property, or the migration or transportation from any other lands to
the Property, whether before or after the Effective Date, of materials or
substances that are presently, or become in the future, subject to regulation
under Environmental Laws, whether such Environmental Laws are presently
existing or are hereafter enacted, INCLUDING, WITHOUT LIMITATION, ANY CLAIMS,
DEMANDS, CAUSES OF ACTION, LIABILITIES, OR OBLIGATIONS ARISING IN WHOLE OR IN
PART FROM THE SOLE OR CONCURRENT NEGLIGENCE OR GROSS NEGLIGENCE OF SELLER.
5.4 Casualty Losses. If there is any loss resulting from destruction
of Property by fire or other casualty (a "Casualty Loss") before the Closing
Date, Seller shall notify Buyer promptly after Seller learns of such event.
Seller shall have the right, but not the obligation to cure the Casualty Loss
by repairing such damage or, in the case of personal property or fixtures,
replacing them with equivalent items, no later than the date of Closing, all to
Buyer's reasonable satisfaction. If any uncured Casualty Loss exists at
Closing, the Purchase Price shall be reduced by the aggregate reduction in the
value of the Property as a result of such Casualty Loss, as determined by the
mutual agreement of the parties. If the parties are unable to agree on the
reduction in the value of the Property as a result of such Casualty Loss, such
reduction in value shall be determined by arbitration pursuant to Section
6.2.4, the Property will be conveyed to Buyer at Closing without a reduction in
the Purchase Price because of the Casualty Loss, and within ten business days
after the parties receive the determination of the arbitrators Seller shall pay
to Buyer, by wire transfer of immediately available funds, the amount of the
reduction in value of the Property as a result of the Casualty Loss,
-8-
<PAGE> 12
together with interest at ___% per anum (the "Interest Rate") from (and
including) the Closing Date to (but excluding) the date such payment is made.
ARTICLE 6. PREFERENTIAL RIGHTS/CONSENTS; TITLE DEFECTS
6.1 Preferential Purchase Rights and Consents to Assign.
6.1.1 If any of the Property is subject to preferential purchase
rights, rights of first refusal, or similar rights (collectively "Preferential
Rights"), or consents to assign, lessor's approvals or similar rights
(collectively, "Consents"), Seller shall on the date of this Agreement (I)
notify the holders of the Preferential Rights and Consents that it intends to
sell the Property to Buyer, (ii) in the case of a Preferential Right, notify
the holder of such right that the price for the portion of the Property covered
by the Preferential Right is the Allocated Value of such interest, subject to
adjustment in the same manner that the Purchase Price is subject to adjustment
hereunder, (iii) provide them with any other information about the sale of the
Property to which they are entitled, and (iv) in the case of Consents, ask the
holders of the Consents to consent to the assignment of the affected Property
to Buyer. Seller shall promptly notify Buyer whether Preferential Rights are
exercised, waived or deemed waived because of the expiration of the period
within which the Preferential Right may be exercised, or if any Consents are
given or denied. Seller will not be liable to Buyer if any Preferential Rights
are exercised, or any Consents are denied, but the Purchase Price shall be
subject to adjustment to the extent provided below.
6.1.2 If, before Closing, (I) any Preferential Right is validly
exercised or (ii) any Consent (other than consent on a Related Contract that
would not materially and adversely affect the operation of the affected
Property) is denied, Seller and Buyer shall exclude the affected Property at
Closing and deduct the Allocated Value of the affected Property from the
Purchase Price.
6.1.3 If Seller is unable before Closing to obtain a Consent
(other than Consents on the Related Contracts that would not materially and
adversely affect the operation of the affected Property) or is unable to obtain
the waiver of a Preferential Right for which the period within which such
Preferential Right may be exercised has not expired (other than a Preferential
Right referred to in Section 6.1.2), then, unless mutually agreed, Buyer shall
exclude the affected Property at Closing and deduct the Allocated Value of the
affected Property from the Purchase Price. Upon receipt of such Consent, the
waiver of such Preferential Right following Closing, or the expiration of the
period within which the Preferential Right may be exercised (if such right is
not exercised during such period), such Property will be purchased by and
conveyed to Buyer for an amount equal to the Allocated Value of such Property,
appropriately adjusted in a manner consistent with this Agreement, at a
subsequent closing to be held within ten days following receipt by Seller and
forwarding to Buyer of such Consent or waiver, or the expiration of the period
within which the Preferential Right may be exercised, as the case may be;
provided, however, that in the case of a Consent, if such Consent is not
obtained and provided to Seller and Buyer within 120 days following the
Closing, then the Property so affected shall be eliminated from this Agreement
and shall be excluded from the assets covered hereby (unless Buyer agrees to
proceed with the Closing on such Property and Buyer further agrees to indemnify
Seller against claims arising from such sale and assignment on terms acceptable
to Seller, in which event Buyer shall be deemed to have waived any objections
with respect to failing to obtain such Consent).
-9-
<PAGE> 13
6.2 Title Defects.
6.2.1 For the purposes of this Agreement, the following terms
shall have the meanings given them below:
"Defensible Title" shall mean:
(a) with respect to a well listed on Exhibit B, such title
(whether of record or beneficially held pursuant to the provisions of a
participation or exploration agreement listed in Exhibit A) as will
entitle Buyer to receive a percentage of the Hydrocarbons produced and
saved from such well (subject to any depth restrictions noted in Exhibit
A), after deducting all applicable Production Burdens, that is not less
than the "Net Revenue Interest" shown for such well on Exhibit B
throughout the productive life of such well, and will obligate Buyer to
bear and pay a portion of the costs and expenses of operating the well
that is no greater than the "Working Interest" shown for such well on
Exhibit B throughout the productive life of such well and is free and
clear of Material Title Deficiencies (as hereinafter defined); and
(b) with respect to a Related Contract listed on Exhibit B,
such title as will entitle Buyer to the interest in such Related
Contract shown on Exhibit B and is free and clear of Material Title
Deficiencies.
"Material Title Deficiency" means a material deficiency in one or
more of the following respects: (I) Seller's title is subject to an
outstanding mortgage, deed of trust, lien, encumbrance, contractual
burden (other than Production Burdens that do not have the effect of
reducing Seller's net revenue interest below that reflected on Exhibit
B), adverse claim or defect which substantially and adversely affects
the value or operation of the Property in question; (ii) Seller's rights
and interests are subject to being reduced by virtue of the exercise by
a third party of a reversionary, back-in or other similar right not
reflected in Exhibit B; or (iii) Seller is in default under some
material provision of a lease, farmout or other agreement or a right of
way, easement, permit or license affecting the Property in question.
"Net Revenue Interest" means in respect of any lease, well or
unit, the interest (expressed as a percentage) in and to oil and gas
produced from or allocated to such lease, well or unit after deducting
all applicable Production Burdens.
"Production Burdens" means all royalty interests, overriding
royalty interests, production payments, net profits interests or other
similar interests that constitute a burden on, are measured by or are
payable out of the production of Hydrocarbons or the proceeds realized
from the sale or other disposition thereof.
"Title Defect" is any matter that causes the title to a Warranted
Property to fail to qualify as Defensible Title. Neither the
environmental condition of a Warranted Property nor any failure to
obtain Consents to the transfer of Related Contracts will be considered
a Title Defect.
-10-
<PAGE> 14
"Title Defect Amount" is the amount by which a Title Defect
reduces the fair market value of a Warranted Property below its
Allocated Value.
"Working Interest" means, in respect of any lease, well or unit,
the interest (expressed as a percentage) in such lease, well or unit
before giving effect to any applicable Production Burdens, and the
percentage of all costs and expenses required to be borne that are
associated with the exploration, development and operation of such
lease, well or unit.
6.2.2 Buyer may review title to the Warranted Property before
Closing and notify Seller in writing of any Title Defect it discovers as soon
as reasonably practicable after its discovery, but in no event less than two
(2) business days before the Closing Date. Buyer will be deemed to have
conclusively waived any Title Defect for which Buyer has failed to notify
Seller in writing at least two (2) business days prior to the Closing Date.
6.2.3 If Buyer properly notifies Seller of any alleged Title
Defect, Buyer and Seller shall meet and use their best efforts to agree on the
validity of the alleged Title Defect and the corresponding Title Defect Amount
based on the Allocated Value of such Property, and the following provisions
shall apply:
(i) The affected Property will be conveyed to Buyer at
Closing.
(ii) If Buyer and Seller agree that there is a Title Defect and
agree to a Title Defect Amount and Seller elects not to attempt to cure
such Title Defect, the Title Defect Amount will be deducted from the
Purchase Price at Closing and Seller shall have no liability to Buyer
with respect to such Title Defect.
(iii) Seller shall have the right to agree to cure such Title
Defect to Buyer's reasonable satisfaction, all at Seller's sole cost and
expense, not later than thirty (30) days after the Closing Date, in
which case the amount to be paid to the Seller at the Closing shall be
reduced by an amount equal to the Title Defect Amount and the Buyer
shall pay to the Escrow Agent at the Closing an amount equal to the
Title Defect Amount in accordance with the provisions of Section 7.3.4.
If the Seller fails to cure such Title Defect within such thirty day
period, the Escrow Agent shall pay the Title Defect Amount to the Buyer
and the Seller shall have no further liability to the Buyer with respect
to such Title Defect. If the Seller cures such Title Defect within such
thirty day period, the Escrow Agent shall pay the Title Defect Amount to
the Seller.
(iv) If Buyer and Seller are unable to agree on whether a Title
Defect exists or if Buyer and Seller agree that a Title Defect exists
but are unable to agree on the Title Defect Amount, then (A) the amount
to be paid to the Seller at the Closing shall be reduced by an amount
equal to the Title Defect Amount, (B) the Buyer shall pay to the Escrow
Agent at the Closing an amount equal to such Title Defect Amount in
accordance with the provisions of Section 7.3.4, and (C) the parties
shall submit the determination of whether the Title Defect exists or the
Title
-11-
<PAGE> 15
Defect Amount (as the case may be) to arbitration in accordance with the
provisions of Section 6.2.4. In such event, the provisions of Section
6.2.4 shall apply and if the arbitrators determine that a Title Defect
or the Title Defect Amount does exist, within ten (10) business days
after the parties receive the determination of the arbitrators the Buyer
shall be entitled to the payment by the Escrow Agent, in accordance with
the provisions of Section 7.3.4, of the Title Defect Amount determined
by the arbitrators, unless the Seller elects to attempt to cure the
Title Defect pursuant to clause (iii) above in which event the
provisions of clause (iii) shall apply.
6.2.4 Any arbitration conducted pursuant to this Agreement shall
be conducted in Houston, Texas, in accordance with the Commercial Arbitration
Rules of the American Arbitration Association; provided, however, that the
parties hereby agree to modify those rules by adoption of the following
provisions of this Section, which the arbitrators shall be bound to apply. On
or before the fifth day after the Closing Date, Seller must name its choice of
an arbitrator and Buyer must name its choice of an arbitrator. Within seven
days thereafter, the two arbitrators so chosen shall name a third arbitrator.
If any of the three arbitrators has not been named within the appointed time,
then any party may apply to the American Arbitration Association for
appointment of the arbitrator(s) necessary to complete the panel within ten
days. Seller shall pay the compensation and expenses of the arbitrator named
by or for it, Buyer shall pay the compensation and expenses of the arbitrator
named by or for it, and Seller and Buyer shall each pay one-half of the
compensation and expenses of the third arbitrator. Within five days following
the date that a three-person panel is established, the three arbitrators shall
meet and proceed with due dispatch to hear the parties with respect to such
matters. The decision of the arbitration panel, or a majority thereof, shall
be rendered in writing no later than 15 days after the arbitrators have met and
heard the parties. Such decision shall be final and binding on the parties.
6.2.5 The parties acknowledge that those certain liens, bank
loans and encumbrances shown on Exhibit E ("Release Liens") are in existence
with respect to the Property on the Effective Date. The obligations of Seller
under this Agreement are subject to Seller's obtaining the consent to the
transaction contemplated by this Agreement from the holders of the Release
Liens and to obtaining releases of such Release Liens as to the Property.
Seller shall use reasonable efforts to obtain such consent and legally
sufficient and recordable releases of such Release Liens at or before the
Closing in form and substance satisfactory to Buyer; and such Release Liens, if
so released, shall not be considered Title Defects for purposes of this
Agreement. The provisions of the preceding sentence shall not be deemed an
assumption of such liens or encumbrances by Buyer or a waiver of any claim or
defense of Buyer with respect thereto.
6.3 Right Not to Close. If, before the Closing Date,
(i) the net downward adjustments to the Purchase Price as the result
of application of Sections 6.1 and 6.2 (exclusive, for purposes
of this Section 6.3, of any adjustments as a result of the
failure to obtain any consents or waivers of preferential
purchase rights listed on Exhibit F) exceeds $750,000, or
(ii) the reasonable cost of remedying all of the Adverse Environmental
Conditions asserted by the Buyer pursuant to Section 5.3 exceeds
$750,000,
-12-
<PAGE> 16
then either Seller or Buyer may, by notice to the other, elect to terminate
this Agreement and not to proceed with Closing. If Seller is the party
electing to terminate this Agreement, Seller shall return the Earnest Money
Deposit paid by Buyer pursuant to Section 2.1 within three (3) business days of
receipt of such cancellation notice by the party to whom it was addressed. If
Buyer is the party electing to terminate this Agreement, the Escrow Agent shall
pay to Seller and Seller shall be entitled to receive and retain the Earnest
Money Deposit (together with any interest earned thereon) paid by Buyer
pursuant to Section 2.1 free of any claim by Buyer.
ARTICLE 7. CLOSING; FINAL SETTLEMENT
7.1 Closing Date. Unless Buyer and Seller otherwise agree, the
closing of this purchase and sale (the "Closing") will occur on January 15,
1998 (the actual date on which Closing occurs being the "Closing Date"), at
10:00 a.m. local time in Seller's offices in Houston, Texas, except that Seller
may postpone the Closing Date until Seller has obtained the consent and
releases described in Section 6.2.5. Seller shall notify Buyer in writing of
such postponement, if any, not later than January 10, 1998. Provided such
party is not in material default of its obligations under this Agreement,
either party may terminate this Agreement by giving written notice to the other
if the Closing has not occurred on or before the later of (i) July 1, 1998 and
(ii) (if Seller has postponed the Closing Date as above provided) the date
Seller has obtained the consent and releases described in Section 6.2.5. In
the event of an election by either party to terminate this Agreement pursuant
to the foregoing provision, the Escrow Agent shall return to Buyer the Earnest
Money Deposit paid by Buyer pursuant to Section 2.1 within three (3) business
days of receipt of such cancellation notice by the party to whom it was
addressed.
7.2 Conditions to Closing. Each of Buyer and Seller shall not be
obligated to close the transaction that is the subject of this Agreement if:
7.2.1 Any matter represented or warranted by the other party in
this Agreement is not true in any material respect as of the Closing Date, or
there has been a material breach by the other party of its obligations under
this Agreement and such breach is not cured by the Closing Date; or
7.2.2 Any suit or other proceeding (other than a suit or
proceeding initiated by such party hereto) is pending or threatened before any
court or governmental agency seeking to restrain, prohibit, or declare illegal,
or seeking substantial damages in connection with, the transaction that is the
subject of this Agreement; or
7.2.3 Seller fails to obtain, by the Closing Date, the consent
to the transaction contemplated by this Agreement from the holders of the
Release Liens or the releases of such Release Liens as to the Property as
described in Section 6.2.5.
7.3 Closing. Seller and Buyer have the following obligations at
Closing:
7.3.1 Seller's Obligations. At Closing, Seller shall deliver to
Buyer:
-13-
<PAGE> 17
(i) A duly executed Non Foreign Affidavit in the
form of Exhibit C;
(ii) An executed and acknowledged Assignment and
Bill of Sale (in sufficient counterparts for recording) in
the form of Exhibit D (the "Assignment and Bill of Sale");
(iii) Any other appropriate instruments necessary
to effect or support the transaction contemplated in this
Agreement, including, without limitation, any lease
assignment forms or other forms or filings required by
federal or state agencies to transfer ownership or
operation of the Property;
(iv) Letters in lieu of transfer orders, executed
by Seller and Buyer, in form and substance satisfactory to
Buyer, directing all purchasers of production to make
payment of proceeds attributable to production from the
Property after the Effective Date to Buyer; and
(v) Letters to third party pipeline operators,
executed by Seller in form and substance reasonably
satisfactory to Buyer, notifying such operators that Buyer
shall operate all pipeline meters included in the Property
which are currently being operated by Seller.
7.3.2 Buyer's Obligations. At Closing, Buyer shall:
(i) Pay Seller the Purchase Price, as adjusted
under 7.3.3 and any other provisions of this Agreement
(less the amount of the Earnest Money Deposit plus
interest thereon from the date of its payment to the
Escrow Agent until the Closing Date), by wire transfer of
immediately available funds into an account designated by
Seller according to Seller's instructions; and Buyer shall
cause the Escrow Agent to deliver to Seller at the Closing
the amount of the Earnest Money Deposit plus interest
thereon;
(iii) Execute any ratification and joinder
instruments required to transfer Seller's rights,
obligations and interests in the Related Contracts and
other Property;
(iv) Execute any applications necessary to
transfer regulatory permits to which the Property is
subject, and which Seller has agreed to transfer under
this Agreement; and
(v) Execute, acknowledge and deliver to Seller
the Assignment and Bill of Sale.
7.3.3 Purchase Price Adjustment.
7.3.3.1 The Purchase Price shall be adjusted upward
by the following:
-14-
<PAGE> 18
(i) The amount of (1) all overhead charges and
administrative expenses paid by Seller to third parties under the terms
of applicable joint operating agreements, (2) all actual direct
operating expenses paid by Seller, and (3) all actual direct capital
expenditures paid by Seller; but only to the extent that the expenses
and expenditures described in clauses (1), (2) and (3) above arise from,
or are otherwise properly allocable to, the ownership or operation of
the Property after the Effective Date, and do not result from or relate
to remediation of Adverse Environmental Conditions or curing of Title
Defects; and
(ii) An amount equal to all upward adjustments to the
Purchase Price provided in Sections 6.1, 6.2 and 12.1.
7.3.3.2 The Purchase Price shall be adjusted
downward by the following:
(i) The gross proceeds, net of production taxes paid
with respect thereto, actually received by Seller, whether before or
after Closing, that are attributable to the ownership or operation of
the Property from and after the Effective Date (excluding any proceeds
from the sale of the Hydrocarbons in storage on the Effective Date).
The amount of gross proceeds received by Seller shall be determined on
the basis of applicable sales and marketing agreements and not on the
basis of swap or other hedging agreements, which swap or hedging
agreements shall be solely for the account of Seller); and
(ii) An amount equal to all downward adjustments to the
Purchase Price provided in Sections 5.3, 5.4, 6.1, 6.2 and 12.1.
7.3.3.3 At least five (5) days prior to the Closing
Date, Seller shall estimate the amount of the Purchase Price adjustment under
Sections 7.3.3.1 and 7.3.3.2 in good faith and in a bona fide manner and
deliver to Buyer a certificate of the Chief Financial Officer of Seller setting
forth in reasonable detail the calculation thereof. The Purchase Price shall
be adjusted as set forth in such certificate, and the resulting amount shall be
the initially adjusted Purchase Price.
7.3.3.4 As soon as reasonably practicable, and in
any event within 120 days following the Closing Date, Seller shall deliver to
Buyer a statement of the actual Purchase Price adjustment under Sections
7.3.3.1 and 7.3.3.2 (specifying whether the Purchase Price is to be increased
or decreased by such amount), which shall be certified by the Chief Financial
Officer of Seller (the "Purchase Price Adjustment Certificate"), and all
supporting documentation. Within 30 days after delivery of the Purchase Price
Adjustment Certificate, Buyer shall notify Seller whether Buyer agrees or
disagrees with the determination of the Purchase Price adjustment set forth in
the Purchase Price Adjustment Certificate. If Buyer disagrees with such
determination, representatives of Buyer and Seller shall meet and endeavor to
resolve their differences regarding the determination of the Purchase Price
adjustment as soon as reasonably possible. If the representatives of Buyer and
Seller are unable to agree upon such determination of the Purchase Price
adjustment within 20 business days, the independent accounting firm of
______________ shall audit the Purchase Price Adjustment Certificate and
determine the Purchase Price adjustment as soon as reasonably possible. The
decision of such independent accounting firm shall be binding on Seller and
Buyer, and the fees
-15-
<PAGE> 19
and expenses of such independent accounting firm shall be borne one-half by
Seller and one-half by Buyer. If the Purchase Price adjustment as finally
determined pursuant to this Section 7.3.3.4 is a smaller upward adjustment or a
larger downward adjustment than that estimated pursuant to Section 7.3.3.3,
Seller shall pay to Buyer the amount of such excess, plus interest thereon at
the Interest Rate from (and including) the Closing Date to (but excluding) the
date of payment. If the Purchase Price Adjustment Amount as finally determined
pursuant to this Section 7.3.3.4 is a larger upward adjustment or a smaller
downward adjustment than that estimated pursuant to Section 7.3.3.3, Buyer
shall pay to Seller the amount of such deficiency, plus interest thereon at the
Interest Rate from (and including) the Closing Date to (but excluding) the date
of payment. Any payment contemplated by this Section 7.3.3.4 shall be made by
wire transfer in federal or other immediately available funds on or before the
fifth business day following the final determination of the amount thereof.
7.3.4 Escrow Agent. At the Closing, Buyer shall pay to Texas
Commerce Bank N.A., Houston, Texas or another bank mutually acceptable to Buyer
and Seller (the "Escrow Agent") the amounts required to be paid to the Escrow
Agent in accordance with the provisions of Sections 5.3.2 and 6.2.3. Such
payment shall be made by wire transfer in federal or other immediately
available funds. If Seller cures or remedies any Title Defect or Adverse
Environmental Conditions in a timely manner as required by such Sections, then
Seller shall be entitled to payment of the applicable Title Defect Amount or
Remediation Amount out of the funds held by the Escrow Agent. If Seller fails
to cure or remedy the Title Defect or Adverse Environmental Conditions in a
timely manner, then (I) Buyer shall be entitled to payment of the applicable
Title Defect Amount or Remediation Amount out of the funds held by the Escrow
Agent and (ii) Seller shall have no further obligation or liability to Buyer
with respect to or arising out of the uncured or unremediated Title Defect or
Adverse Environmental Conditions. The parties shall direct the Escrow Agent to
make payments in accordance with the provisions of this Section 7.3.4 and
Sections 2.1, 5.3.2, 6.3, 7.1 and 7.3.2, and they shall enter into and execute
an escrow agreement with the Escrow Agent in a mutually acceptable form
consistent with the provisions of this Agreement.
7.3.5 Document Preparation. Unless Seller and Buyer otherwise
agree, Seller will prepare any Closing documents to be executed and delivered
under Sections 7.3.1 and 7.3.2 at Closing and will furnish copies of the same
to Buyer at least two days before the Closing, except as provided elsewhere in
this Agreement for an earlier date.
7.4. Post-Closing Obligations. Seller and Buyer have the following
post-closing obligations:
7.4.1 Property Records. Within five (5) days after Closing,
Seller shall deliver to Buyer the originals (if in Seller's possession) of the
Property Records at a location designated by Buyer. Seller shall have the
right to retain copies of any or all such Property Records. Buyer shall
preserve and maintain all Property Records for at least seven (7) years after
the Closing Date. Buyer shall notify Seller before destroying any Property
Records. Seller reserves the right to access and copy (at its own expense) all
Property Records for seven (7) years after the Closing Date, and Buyer agrees
to provide access to the Property Records to Seller during normal business
hours.
-16-
<PAGE> 20
7.4.2 Recording and Filing. Buyer, within thirty (30) days
after Closing, shall (I) file for record the Assignment and Bill of Sale and
all other instruments that must be recorded to effectuate the transfer of the
Property; and (ii) file for approval with the applicable government agencies
all state and federal transfer and assignment documents for the Property.
Buyer shall provide Seller a recorded copy of the Assignment and Bill of Sale
and other recorded instruments, and approved copies of the state and federal
transfer and assignment documents as soon as they are available. If Buyer
fails, within thirty (30) days after Closing, to file for record the Assignment
and Bill of Sale and all other instruments that must be recorded to effectuate
the transfer of the Property, and file for approval with the applicable
government agencies all state and federal transfer and assignment documents for
the Property, Seller, in addition to any other rights available to it, shall
have the right to specific performance of Buyer's obligations under this
Section.
7.4.3 Audit Rights. For a period of two (2) years following the
Closing Date, any party hereto may at its expense audit the other party's
accounting for any item adjusted between them at Closing or in any pre-Closing
or post-Closing statement, billing, invoice or accounting made on the Property.
7.4.4 Further Assurances. Buyer and Seller agree to execute and
deliver from time to time such further instruments and do such other acts as
may be reasonably necessary to effectuate the purposes of this Agreement.
ARTICLE 8. ASSUMPTION OF OBLIGATIONS
8.1 Ownership and Operations. If the Closing occurs, and in addition
to the liabilities and obligations for which Buyer indemnifies Seller or which
Buyer assumes in this Agreement, Buyer shall assume and perform the following
rights, duties, obligations and liabilities of ownership and operation of the
Property on and after the Effective Date: (I) all of Seller's express and
implied obligations and covenants under the terms of the Leases and the Related
Contracts described in Exhibit A; and all other orders and contracts to which
the Property is subject and of which Buyer has actual or constructive notice;
(ii) responsibility for all royalties, overriding royalties, production
payments, net profits obligations, rentals and shut-in payments and other
burdens or encumbrances to which the Property is subject and of which Buyer has
actual or constructive notice; (iii) responsibility for compliance with all
applicable laws, ordinances, rules and regulations pertaining to the Property,
and the procurement and maintenance of all permits required by public
authorities in connection with the Property; (iv) responsibility for all
liabilities of Seller for net proceeds from production attributable to the
Property as currently held in suspense because of lack of identity or address
of owners, title questions, change of ownership, or similar questions, to the
extent such net proceeds are transferred and delivered to Buyer at the Closing;
and (v) all other obligations assumed by Buyer under this Agreement; provided,
however, that, except to the extent provided in Sections 5.2 and 5.3, Buyer
does not assume any liabilities and obligations to third parties for loss or
damage to property or injury to or death of persons arising from the operation
of the Property during the period from the Effective Date to the Closing.
Seller remains responsible for all costs, expenses and liabilities incurred by
Seller in connection with the ownership or operation of the Property before the
Effective Date and for all liabilities and obligations to third parties for
loss or damage to property or injury to or death of persons arising from the
operation of the Property during the period from the Effective Date to the
Closing (except, in each case, for those costs, expenses,
-17-
<PAGE> 21
liabilities and obligations for which Buyer indemnifies Seller or which Buyer
assumes under the provisions of this Agreement).
8.2 Plugging and Abandonment Obligations. From and after the Closing
Date, Buyer assumes full responsibility and liability for the following
obligations related to the Property (the "Plugging and Abandonment
Obligations"): (I) plugging, replugging and abandoning all wells on the
Property (except wells previously permanently plugged and abandoned by Seller);
(ii) removing and disposing of all structures and equipment comprising part of
the Property,(iii) the necessary and proper capping and burying of all
associated flow lines comprising part of the Property; (iv) restoring the
leasehold premises of the Property; both surface and subsurface, to the
condition they were in before commencement of oil and gas operations, as may be
required by applicable laws, regulation or contract; and (v) any necessary
disposal of Property contaminated by naturally occurring radioactive material
("NORM"). Buyer's obligations under this Section 8.2 include without
limitation obligations arising from contractual requirements and demands made
by authorized regulatory bodies or parties claiming a vested interest in the
Property. With respect to any non-operating interests in the Property being
transferred to Buyer under this Agreement, Buyer shall assume full
responsibility and liability, from and after the Closing Date, for that portion
of the Plugging and Abandonment Obligations for which non-operators are
responsible.
ARTICLE 9. INDEMNITIES
9.1 Definition of Claims. As used in this Agreement, the term
"Claims" means any and all losses, liabilities, damages, obligations, expenses,
fines, penalties, costs, claims, causes of action and judgments for (I)
breaches of contract; (ii) loss or damage to property, injury to or death of
persons, and other tortious injury; and (iii) violations of applicable laws,
rules, regulations, orders or any other legal right or duty actionable at law
or equity. The term "Claims" also includes attorneys fees and court costs
resulting from the defense of any claim or cause of action within the scope of
the indemnities in this Agreement.
9.2 APPLICATION OF INDEMNITIES. UNLESS THIS AGREEMENT EXPRESSLY
PROVIDES TO THE CONTRARY, THE INDEMNITIES SET FORTH IN THIS AGREEMENT APPLY
REGARDLESS OF WHETHER: (I) AN INDEMNIFIED CLAIM ARISES OUT OF OR RESULTS FROM
THE INDEMNIFIED PARTY'S (OR ITS EMPLOYEES', AGENTS', CONTRACTORS', SUCCESSORS'
OR ASSIGNS') SOLE OR CONCURRENT NEGLIGENCE, (II) THE INDEMNIFIED PARTY (OR ITS
EMPLOYEES, AGENTS, CONTRACTORS, SUCCESSORS OR ASSIGNS) IS DEEMED TO BE STRICTLY
LIABLE, IN WHOLE OR PART, FOR AN INDEMNIFIED CLAIM; OR (III) ANY PART OF AN
INDEMNIFIED CLAIM IS THE RESULT OF THE IMPOSITION OF PUNITIVE DAMAGES. ALL
INDEMNITIES SET FORTH IN THIS AGREEMENT EXTEND TO THE OFFICERS, DIRECTORS,
EMPLOYEES AND AFFILIATES OF THE PARTY INDEMNIFIED, AND COVER THE ACTS AND
OMISSIONS OF THE OFFICERS, DIRECTORS, EMPLOYEES, CONTRACTORS, SUCCESSORS AND
ASSIGNS OF THE INDEMNIFYING PARTY.
-18-
<PAGE> 22
9.3 Buyer's Indemnity. Except as provided below in this Section 9.3,
Buyer shall indemnify, defend and hold Seller harmless from and against any and
all Claims caused by, resulting from or incidental to (a) the ownership or
operation of the Property on and after the Effective Date, or (b) the
obligations assumed by Buyer under the other provisions of this Agreement. The
foregoing indemnity shall not apply to third party Claims for loss or damage to
property or injury to or death of persons arising out of the operation of the
Property during the period from the Effective Date to the Closing. Moreover,
the foregoing indemnity shall not apply to any Claims covered by the provisions
of Section 5.3.
9.4 Seller's Indemnity. Except as provided below in this Section
9.4, Seller shall indemnify, defend and hold Buyer harmless from and against
(a) any and all Claims caused by, resulting from or incidental to Seller's
ownership or operation of the Property before the Effective Date, except those
arising out of, resulting from or incidental to the obligations assumed by
Buyer under the other provisions of this Agreement, and (b) any and all third
party Claims for loss or damage to property or injury to or death of persons
arising out of the operation of the Property during the period from the
Effective Date to the Closing. The foregoing indemnity shall not apply to any
Claims covered by the provisions of Sections 5.2 or 5.3.
ARTICLE 10. TAXES AND EXPENSES.
10.1 Recording Expenses. Buyer shall pay all costs of recording and
filing the Assignment and Bill of Sale for the Property, all state and federal
transfer and assignment documents, and all other instruments.
10.2 Ad Valorem, Real Property and Personal Property Taxes. All Ad
Valorem Taxes, Real Property Taxes, Personal Property Taxes, and similar
obligations ("Property Taxes") on the Property are Seller's obligation for
periods before the Effective Date and Buyer's obligation for periods after the
Effective Date. If Property Taxes for the current tax year have not been
assessed and paid as of the Closing Date, the Buyer shall file all required
reports and returns incident to the Property Taxes and pay the Property Taxes
for the current tax year and subsequent periods. The Seller will reimburse the
Buyer promptly for the Seller's proportionate share of these taxes, prorated as
of the Effective Date, upon receipt of evidence of the Buyer's payment of the
taxes. If Property Taxes for the current tax year have been assessed and paid
as of the Closing Date, the Buyer will reimburse the Seller for its
proportionate share of these taxes, prorated as of the Effective Date. Seller
shall furnish to Buyer upon request any information in Seller's possession
regarding the Property to assist Buyer in its preparation and filing of all
required reports and returns incident to the Property Taxes for the current tax
year.
10.3 Severance Taxes. Seller shall bear and pay all severance or
other taxes measured by Hydrocarbon production from the Property, or the
receipt of proceeds therefrom, to the extent attributable to production from
the Property before the Effective Date. Seller shall withhold and pay (or
cause the first purchaser to withhold and pay) on behalf of Buyer all such
taxes on production from the Property between the Effective Date and the
Closing Date. Subject to the obligations of Seller under the preceding
sentence, Buyer shall bear and pay all such taxes on production from the
Property on and after the Effective Date. If either party pays taxes owed by
the other, upon receipt
-19-
<PAGE> 23
of evidence of payment, the nonpaying party will reimburse the paying party
promptly for its proportionate share of such taxes.
10.4 Sales Taxes. The Purchase Price is exclusive of any applicable
sales tax. In the event any sales tax is due in connection with the
transactions contemplated by this Agreement, Buyer shall be responsible for the
same and indemnify Seller against the same.
ARTICLE 11. INTERIM OPERATION OF THE PROPERTY
11.1 Interim Operations. Seller shall use such efforts as are
reasonably available to a nonoperator during the period between the date this
Agreement is executed and the Closing Date (the "Interim Period") (I) to cause
the Property to be maintained and operated in a good and workmanlike manner,
(ii) to maintain or cause to be maintained insurance now in force with respect
to the Property, and (iii) to pay or cause to be paid all costs and expenses
incurred in connection therewith; provided, however, that Seller shall not
propose the commencement of operations for the drilling of any new well or the
redrilling of any existing well on the Property after the date of this
Agreement without the prior written consent of Buyer. Seller shall carry on
the business of Seller with respect to the Property in substantially the same
manner as Seller has heretofore and shall not introduce any substantially new
method of management, operation or accounting with respect to the Property.
11.2 Buyer's Approval. Without prior written consent of Buyer (which
shall not be unreasonably withheld), Seller shall not enter into any new
agreements or commitments with respect to the Property which extend beyond the
Closing, shall not abandon any well located on the Property nor release or
abandon all or any portion of any of the Leases, shall not modify or terminate
any of the material agreements relating to the Property and shall not encumber,
sell or otherwise dispose of any of the Property other than (I) production sold
in the ordinary course of business or otherwise under a Related Contract, or
(ii) personal property that is replaced by equivalent property or consumed in
the normal operation of the Property. Seller agrees to consult with Buyer
before making any expenditures on any well in excess of $25,000 and not
exceeding $50,000, and Seller shall not make any expenditures on any well
exceeding $50,000 without Buyer's prior written consent, which shall not be
unreasonably withheld.
ARTICLE 12. MISCELLANEOUS
12.1 Production Imbalances. If there are any production imbalances
relating to the Property, Seller transfers all imbalances as of the Effective
Date to Buyer. Buyer and Seller hereby agree that if Seller is in fact
underproduced as of the Effective Date with respect to any of the Property, the
Purchase Price will be increased by any amounts due Seller from third parties
(assuming permanent cessation of production as of the Effective Date) as the
result of Seller being an underproduced party with regard to gas produced from
the Property prior to the Effective Date. Buyer and Seller hereby agree that
if Seller is in fact overproduced as of the Effective Date with respect to any
of the Property, the Purchase Price will be decreased by any amounts due third
parties from Seller (assuming permanent cessation of production as of the
Effective Date) as the result of Seller being an overproduced party with regard
to gas produced from the Property prior to the Effective Date.
-20-
<PAGE> 24
12.2 Press Releases. The parties agree that prior to making any
public announcement or statement with respect to the transactions contemplated
by this Agreement, the party desiring to make such public announcement or
statement shall consult with the other parties hereto and exercise their best
good faith efforts to (I) agree upon the text of a joint public announcement or
statement to be made by both of such parties or (ii) obtain approval of the
other party hereto to the text of a public announcement or statement to be made
solely by Seller or Buyer, as the case may be; provided, however, if Seller or
Buyer is required by law to make such public announcement or statement, then
the same may be made without the approval of the other party. The opinion of
counsel of either party shall be conclusive evidence of such requirement by
law.
12.3 Notices. All notices under this Agreement must be in writing.
Any notice under this Agreement may be given by personal delivery, facsimile
transmission, U.S. mail (postage prepaid), or commercial delivery service, and
will be deemed duly given when received by the party charged with such notice
and addressed as follows:
<TABLE>
<S> <C>
Seller: HarCor Energy, Inc. Buyer: Penroc Oil Corporation
- ------ ------
4400 Post Oak Parkway, Suite 2220 P. O. Box 5970
Houston, Texas 77027 Hobbs, New Mexico 88241
Attention: President 5014 Carlsbad Hwy.
Hobbs, New Mexico 88246
FAX: (713) 961-9773 FAX: (505) 393-7051
</TABLE>
Any party, by written notice to the other, may change the address or the
individual to which or to whom notices are to be sent under this Agreement.
12.4 Entirety of Agreement; Amendment. This Agreement constitutes the
entire understanding between the parties with respect to the subject matter
hereof, superseding all negotiations, prior discussions, representations, and
prior agreements and understandings relating to such subject matter. This
Agreement may be amended, modified, and supplemented only in a writing duly
executed by Buyer and Seller.
12.5 Successors and Assigns. This Agreement binds and inures to the
benefit of the parties hereto and their respective permitted successors and
assigns, and nothing contained in this Agreement, express or implied, is
intended to confer upon any other person or entity any benefits, rights, or
remedies. Neither party may assign any of its rights or obligations under this
Agreement prior to the Closing without the prior written consent of the other
party, which consent may be given or withheld in such party's sole discretion.
No permitted assignment by a party of its rights or obligations under this
Agreement shall release such party from its obligations hereunder.
12.6 Governing Law. THIS AGREEMENT IS GOVERNED BY AND MUST BE
CONSTRUED IN ACCORDANCE WITH THE LAWS OF THE STATE OF TEXAS, EXCLUDING ANY
CONFLICTS-OF-LAW RULE OR PRINCIPLE THAT MIGHT APPLY THE LAW OF ANOTHER
JURISDICTION.
-21-
<PAGE> 25
12.7 Exhibits. The Exhibits attached to this Agreement are
incorporated into and made a part of this Agreement. In the event of a
conflict between the provisions of the Exhibits or the executed Assignment and
Bill of Sale and the foregoing provisions of this Agreement, the provisions of
the Exhibits and the executed Assignment and Bill of Sale take precedence over
the foregoing provisions of this Agreement. In the event of a conflict between
the provisions of the pro forma Assignment and Bill of Sale attached to this
Agreement as Exhibit __ and the executed Assignment and Bill of Sale, the
provisions of the executed Assignment and Bill of Sale take precedence.
12.8 Litigation Costs. If any party hereto should hereafter institute
litigation against any other party hereto alleging that such other party has
breached this Agreement or any agreement or other instrument attached hereto or
delivered pursuant hereto, the nonprevailing party or parties (whether
plaintiff or defendant) in such action shall reimburse the prevailing party or
parties for the prevailing party's or parties' reasonable attorneys' fees,
witness fees, court costs and all other costs in connection with such
litigation.
12.9 General. References in this Agreement to Articles, Sections,
subsections, Exhibits and Schedules shall be deemed to refer to articles,
Sections and subsections of and Exhibits and Schedules to this Agreement except
as provided otherwise in this Agreement. As used in this Agreement, "person"
means any natural person or corporation, partnership, limited liability
company, trust, estate, governmental unit or other entity.
12.10 Texas Deceptive Trade Practices Act Waiver. Buyer represents and
warrants to Seller that Buyer: (a) is acquiring the Property for commercial or
business use, (b) has assets of $25,000,000 or more or is owned or controlled
by a corporation or entity with assets of $25,000,000 or more, and (c) has
knowledge and experience in financial and business matters that enable it to
evaluate the merits and risks of the transactions contemplated by this
agreement and is not in a significantly disparate bargaining position with
respect to Seller. MOREOVER, BUYER HEREBY UNCONDITIONALLY AND IRREVOCABLY
WAIVES ANY AND ALL RIGHTS OR REMEDIES THAT IT MAY HAVE UNDER THE DECEPTIVE
TRADE PRACTICES -- CONSUMER PROTECTION ACT OF THE STATE OF TEXAS, BUSINESS AND
COMMERCE CODE SECTION 17.41 THROUGH SECTION 17.63 (OTHER THAN SECTION 17.555).
The authorized representatives of Seller and Buyer sign below indicating
their agreement to the terms of this Agreement on the date first above written.
<TABLE>
<S> <C>
Seller: Buyer:
HarCor Energy, Inc. Penroc Oil Corporation
By: /s/ MARK G. HARRINGTON By: /s/ MOHAMMED YAMIN MERCHANT
---------------------- ----------------------------
Title: CEO and Chairman Title: President
</TABLE>
-22-
<PAGE> 1
EXHIBIT 10.21
January 15, 1998
HarCor Energy, Inc.
Attention: Mr. Mark Harrington, CEO
5 Post Oak Park Blvd., Suite 2220
Houston, Texas 77027
Dear Mr. Harrington:
This Agreement dated effective January 8, 1998, is between HarCor Energy, Inc.
("Seller") and Penroc Oil Corporation ("Buyer") and evidences the agreement of
the parties with respect to various issues which were not fully resolved in
that certain Purchase and Sale Agreement dated December 3, 1997, but effective
as of January 1, 1998, at 7:00 A.M., local time (the "Purchase and Sale
Agreement"). All defined terms in the Purchase and Sale Agreement shall have
the same meaning herein.
For valuable consideration received, Seller and Buyer agree as follows:
1. Subsequent to the execution of the Purchase and Sale Agreement, Buyer
learned that an unforeseen downhole mechanical failure occurred in the
Beaurline No. 9 well, Beaurline/McAllen Ranch Area, South Texas, which
failure, if not fully corrected, would significantly and materially
reduce the value of the property. Seller and Buyer agree as follows
with respect to Seller's interest in the Beaurline #9 well and its
pooled or allocated producing unit (the "Well"): (a) The Purchase
Price shall be reduced by an amount equal to the PV10 value given to
this Well by the Ryder Scott Reserve Report previously furnished to
Buyer by Seller, being an amount equal to $714,911.00, and the Well
shall be excluded from the Property to be conveyed by Buyer at
Closing. (b) Seller will participate in necessary remedial operations
proposed by the Operator in an attempt to restore the Well to its
previous producing condition or in the drilling of a replacement well
to the financial extent as may be determined in Seller's sole
discretion. Seller will advise Buyer of all proposals and remedial
operations to restore the Well. (c) If the Well is restored by
sidetrack or redrill or associated operations, Seller will obtain at
its cost a new evaluation of the Well from Ryder Scott (the "New
Reserve Evaluation"), and Seller will promptly provide same to Buyer.
(d) Buyer will purchase the Well pursuant to the same terms and
provisions as the Purchase and Sale Agreement for a price qual to the
PV10 value given to the Well in the New Reserve Evaluation. Unless
otherwise agreed between Seller and Buyer, the Closing for Buyer's
purchase of the Well will take place at 10:00 A.M., local time, in
Seller's offices on the tenth (10th) business day after Buyer's
receipt of the new Reserve Evaluation, at which time Seller will
deliver to Buyer an executed assignment of the Well, in the same form
as the Assignment and Bill of Sale attached to the Purchase and Sale
Agreement, and Buyer will concurrently deliver the purchase price to
Seller in immediately available funds.
<PAGE> 2
2. Seller agrees to assist Buyer in obtaining any necessary consents for
Buyer to use any and all seismic data in Seller's possession or to
which Seller has access, including but not limited to all such three
dimensional and two dimensional seismic data covering any portion of
the Property, including, but not limited to, the Hostetter Area in
McMullen, Duval and Live Oak Counties, Texas, and the Lapeyrouse
(Starboard) Area in Terrebonne Parish, Louisiana, in the event Buyer
acquires the corresponding Property pursuant to the Purchase and Sale
Agreement, subject to the provisions of Section 1.1.7 of the Purchase
and Sale Agreement.
3. Seller and Buyer agree that Seller's rights in the 2D/3D Geophysical
computer workstation, associated peripheral devices and furniture,
including without limitation, plotter, digitizer and all related
software and software licenses shall constitute a part of the
Property, and Buyer agrees to pay $10,000.00 for such equipment, in
addition to the Purchase Price, without warranty and subject to the
disclaimers and other restrictions on transfer in the Purchase and
Sale Agreement.
4. Seller hereby authorizes Buyer to plug and abandon, on behalf of
Seller, the May B #1, the *WEI 32 #1, and the WEI 32 #3 located on
expired leases not a part of the Property in the Eumont Prospect, Lea
County, New Mexico. Buyer will bill Seller for such services and
Seller agrees to pay Buyer the billed costs within ten (10) business
days after receipt of Buyer's invoice.
5. The Warranted Property described in Exhibit "B" to the Purchase and
Sale Agreement, Schedule 1, Item 16. "California-Chowchilla" may be
transferred and assigned by Seller to the Non-Operator owning a fifty
percent (50%) interest therein prior to the Closing between Seller and
Buyer, and in such case shall be excluded from the Property, or if the
Non-Operator does not agree to accept the above interests prior to the
Closing, the Warranted Property described above will remain a part of
the Property and shall be transferred to Buyer at Closing, and Seller
will maintain its operator's bond concerning such property for a
period of ninety (90) days following Closing.
The authorized representatives of Seller and Buyer sign below indicating their
agreement to the terms of the Agreement on the date first above written.
Seller: Buyer:
HarCor Energy, Inc. Penroc Oil Corporation
By: /s/ MARK HARRINGTON By: /s/ M.Y. MERCHANT
------------------------------ -----------------------------
Mark Harrington M. Y. Merchant
Chief Executive Officer President
Chairman of the Board
* Also included in the plugging and abandonment are the Freedman State wells #1
and 2.
-2-
<PAGE> 3
CLOSING STATEMENT
This Closing Statement (the"Statement"), dated February 6, 1998, but
effective as of January 1,1998, at 7:00 a.m., local time, is between HarCor
Energy, Inc., a Delaware corporation ("Seller"), and Penroc Oil Corporation, a
Texas corporation ("Buyer"), in conjunction with that certain Purchase and Sale
Agreement (the "Agreement"), dated December 3, 1997, by and between Seller and
Buyer, and sets forth the subsequent understanding and agreement of Seller and
Buyer with respect to the subject matter of the Agreement. Capitalized terms
used herein without definition are used herein as defined in the Agreement.
Accordingly, in consideration of the mutual promises contained in this
Statement, Buyer and Seller agree as follows:
1. Attached hereto as Exhibit I and made a part hereof is a true and
correct copy of that certain Letter Agreement dated effective January
15, 1998, by and between HarCor Energy, Inc., and Penroc Oil
Corporation with respect various issues that were not fully resolved
in the Agreement, which terms and provisions thereof are incorporated
herein by reference thereto.
2. Pursuant to Section 7.3.3.3 of the Agreement Seller delivered to Buyer
a Certificate of the Chief Financial Officer of Seller setting forth
in reasonable detail the calculation of the estimate of the amount of
the Purchase Price adjustment; a true and correct copy of the
Certificate, as amended and corrected, is attached hereto as Exhibit
II and incorporated herein by reference.
3. In conjunction with the Certificate of the Chief Financial Officer,
the estimate of the adjusted purchase price and Section 7.3 of the
Agreement regarding Closing obligations, a Closing Settlement
Statement, including a recapitulation of the calculation of the
initially adjusted Purchase Price, is attached hereto as Exhibit III
and incorporated herein by reference.
4. By facsimile letter dated February 4, 1998, Seller notified Buyer of
the bank wiring instructions for the payment of the Purchase Price, as
initially adjusted, by Buyer as set forth in Section 7.3.2 of the
Agreement. A true and correct copy of which letter is attached
hereto as Exhibit IV and incorporated herein by reference. The
initial adjusted Purchase Price was calculated on the basis that
Closing would occur on February 6, 1998, but since Closing is
occurring February 12,1998, additional interest has accrued on the
Earnest Deposit held in escrow that would change the wiring
instructions, and in the interest of simplicity, the parties have
agreed not to change the wiring instructions, and that the difference
in accrued interest would be paid at Closing by Seller to Buyer. At
Closing Seller shall deliver its check in the amount of $404.44 to
Buyer, being the amount of the accrued interest since February 6,
1998.
5. By facsimile letter dated February 12,1998, received February 12, 1998
by Buyer, Seller notified Buyer that under Section 7.1 of the
Agreement that Seller postponed the Closing and that the Closing will
occur on February 12, 1998, at 11:30 a.m. A true and correct copy of
which letter is attached hereto as Exhibit V and incorporated herein
by reference.
<PAGE> 4
6. Seller and Buyer acknowledge that the Agreement was executed and
accepted by both parties by facsimile signature pages, that the
parties agree to execute original signature pages simultaneous with
the execution of this Statement, and that such original signature
pages shall be attached to the Agreement and with the same validity as
if same had been originally executed as of the time of execution of
the Agreement. A true and correct copy of the facsimile signature of
the Agreement is attached hereto as Exhibit VI and incorporated herein
by reference.
7. Seller and Buyer hereby acknowledge the Agreement, as executed, did
not include all Exhibits referenced throughout the terms and
provisions thereof, and certain of the Exhibits, as originally
attached, contained scrivener's errors or were incomplete with respect
to the descriptions, or certain of the Property was eliminated from
this transaction between Seller and Buyer due to the exercise of
preferential rights of purchase under certain Related Contracts. The
following described Exhibits, in the form attached hereto as
designated below, shall be the Exhibits to the Agreement as if such
Exhibits had originally been attached to the Agreement:
a. Exhibit A, Leases and Certain Related Contracts, including
Schedule I. Leases, Schedule II. Contracts, Schedule III.
Preferential Rights, and Schedule IV. Consents, all of which
is attached hereto as Exhibit VII and incorporated herein and
in the Agreement by reference.
b. Exhibit B, Warranted Property, including Schedule I. Inventory
of Wells and Schedule II. Value Allocation, all of which is
attached hereto as Exhibit VIII and incorporated herein and in
the Agreement by reference.
c. Exhibit C, Non Foreign Affidavit, styled "Non Foreign
Certificate", is attached hereto as Exhibit IX and
incorporated herein and in the Agreement by reference.
d. Exhibit D, Assignment and Bill of Sale, is attached hereto as
Exhibit X and incorporated herein and in the Agreement by
reference.
e. Exhibit E, Release Liens, is attached hereto as Exhibit XI and
incorporated herein and in the Agreement by reference.
f. Exhibit F, Certain Consents and Preferential Purchase Rights,
is attached hereto as Exhibit XII and incorporated herein and
in the Agreement by reference.
g. Exhibit G, Disclosure, is attached hereto as Exhibit XIII and
incorporated by reference.
8. Seller and Buyer acknowledge that Section 12.1 of the Agreement
provides that Seller transfers all production imbalances as of the
Effective Date to Buyer, that production imbalances, whether
underproduced or overproduced, are to be valued on the basis of
assuming permanent cessation of production as of the Effective Date,
that as of the Closing
-2-
<PAGE> 5
Date final gas balancing volume statements through December 31,1997,
have not been provided to Seller by all of the respective operators,
and that the applicable gas balancing agreements provide for a cash
balancing based on the actual price received for the gas in the
specific months in which the out of balance conditions occurred.
Seller and Buyer agree that settling the volumes, pricing and cash
balancing at the time of Closing is in the best interest of the
parties. Therefore Seller and Buyer agree that the provisions of
Section 12.1 of the Agreement are satisfied and that all imbalances
have been transferred at Closing based on the estimates of 50,564
MMBtu of underproduced gas at an average price of $1.68 for a total
cash value of $84,799.00, which cash value has been incorporated in
the initially adjusted Purchase Price as set forth in the Closing
Settlement Statement attached hereto as Exhibit III and as reflected
in the Certificate of the Chief Financial Officer of Seller attached
hereto as Exhibit II.
9. Section 7.3.1(v) of the Agreement provides that Seller shall deliver
to Buyer letters to third party pipeline operators notifying such
operators that Buyer shall operate all pipeline meters included in the
Property which are currently being operated by Seller. Seller has
delivered no such letters and represents to Buyer that Seller does not
operate any such pipeline meters as would require delivery of such
letters.
10. Seller and Buyer entered into that certain Escrow Agreement dated
December 31, 1997, by and between Penroc Oil Corporation, and HarCor
Energy, Inc., collectively as the "Other Parties", and Texas Commerce
Bank National Association, the "Bank", as Escrow Agent for the deposit
of the Earnest Money Deposit. The parties hereto acknowledge that no
additional amounts are required to be paid to the Escrow Agent in
accordance with the provisions of Sections 5.3.2 and 6.2.3 of the
Agreement. Seller and Buyer have executed the written instructions
dated February 6, 1998 directing the Escrow Agent to disburse the
Earnest Money Deposit and accrued interest to Seller. A true and
correct copy of which written instructions are attached hereto as
Exhibit XIV and incorporated by reference.
11. Should either Seller or Buyer desire to make a public announcement
regarding the conclusion of this transaction, such party shall comply
with Section 12.2 of the Agreement, and a true and correct copy of
such announcement will be attached to this Statement as Exhibit XV and
be incorporated herein.
12. Buyer acknowledges that Buyer has had an opportunity to inspect the
Property as provided in the Agreement, and Buyer makes no claim of
Adverse Environmental Conditions pursuant to Section 5.3 of the
Agreement, otherwise than agreed to by Seller and Buyer herein below.
a. Seller grants to Buyer written authorization to plug and
abandon the Freedman #1 and #2 Wells located on expired leases
not a part of the Property in the Eumont Prospect in Lea
County, New Mexico, including without limitation surface
restoration, in accordance with the rules and regulations of
the governmental authority having jurisdiction and related
agreements , and Seller agrees to be liable for all expenses
and liabilities incurred in connection therewith. Buyer shall
invoice Seller for such costs and expenses incurred in
relation thereto, and Seller agrees to
-3-
<PAGE> 6
pay the amount of the invoice to Buyer within ten(10) business
days after receipt of the Buyer's invoice.
b. Seller confirms Buyer's notification to Seller in November
1997 regarding the Federal D #3 Well located in the Eumont
Prospect. Seller authorizes Buyer to apply for the proper
state permits and commence the operations to conform the well
to be in compliance with the state regulations at Buyer's
sole cost and expense. Buyer and Seller agree that the costs
of such operations shall be $20,000.00. The Purchase Price
has been reduced by $20,000.00 as Seller's full payment to
Buyer, and Buyer releases Seller from any further cost by
reason of such matter.
c. Seller authorizes Buyer to complete the operations for the
environmental remediation of the surface conditions relating
to the tank battery sites on the Harris well, the State AD
well and the New Mexico 'E' State well, which operations have
not been completed due to adverse weather conditions and the
delays incident thereto. Seller and Buyer agree that the
remaining operations will cost $12,000.00, which cost and
expense will be borne by Seller and Buyer on an equal basis
according to a preexisting agreement. The Purchase Price has
been reduced by $6,000.00 as Seller's full payment and
satisfaction under this and the preexisting agreement to Buyer
to conduct such operations, and Buyer releases Seller from any
further cost by reason of such matter.
13. Seller hereby transfers and assigns to Buyer as of the Effective Date
all claims, causes of action, rights under contracts or applicable
law, and other rights that Seller may have against Cabot Oil & Gas
Corporation, its agents, representatives, successors and assigns,
relating to the fields in South Texas that are a part of the Property
relating to or arising out of the ownership or operation of the Leases
and other property described in Section 1.1 of the Agreement, and
Buyer shall indemnify, defend and hold Seller harmless from and
against any and all Claims caused by, resulting from or incidental to
the prosecution or otherwise of the rights assigned to Buyer in this
paragraph. Seller does not hereby transfer and assign to Buyer any
other claims, causes of action, rights under contracts or applicable
law, and other rights, excluded from the Property and reserved by
Seller pursuant to Section 1.2.2 of the Agreement (the "Excluded
Claims"). Notwithstanding anything in the Agreement to the contrary,
Seller shall indemnify, defend and hold Buyer harmless from and
against any and all Claims affecting the Property, or Buyer's
ownership or operations of the Property, after the Effective Date, and
resulting from or incidental to the Excluded Claims or Seller's
prosecution or assertion of the Excluded Claims.
14. Buyer has notified Seller in the attached list marked as Exhibit XVI
hereto of several Consents (to the assignment to Buyer of Leases)that
have not been obtained as of the date hereof. The most material of
these Consents are required from The Louisiana Land & Exploration
Company in the Lapeyrouse Area, Terrebonne Parish, Louisiana. Buyer
reserves all of its rights under Section 6.1.3 of the Agreement to
seek an adjustment of the Purchase Price at the time of the
post-Closing adjustment provided for in Section 7.3.3.4 of the
Agreement for the denial of such Consents, and if the Consents are
denied, the Purchase Price will be reduced by $20,000 at the time of
the post-Closing adjustment.
-4-
<PAGE> 7
15. Section 8.1 of the Agreement provides that Buyer shall assume
responsibility for all liabilities of Seller for net proceeds from
production attributable to the Property as currently held in suspense
to the extent such net proceeds are transferred to and delivered to
Buyer at the Closing. Seller acknowledges and agrees with Buyer that
Seller retains all liability of Seller under Section 8.1 of the
Agreement as no such net proceeds from production held in suspense
were transferred and delivered to Buyer.
16. Seller agrees to pay Invoice #8140-01 from Penwell Energy, Inc., dated
January 8, 1998 for costs related to the TXL "1" #1 well in the ERG
Prospect, Reeves County, Texas, in the amount of $56,340.00 pursuant
to Section 8.1 of the Agreement as a cost incurred in connection with
the operation of the Property before the Effective Date. Seller
represents to Buyer that the amounts of the invoice are not included
in the adjustments of the Purchase Price as reflected in the
Certificate of the Chief Financial Officer attached hereto as Exhibit
II.
17. In confirmation of Seller's representations in Section 3.1.1
(Corporate Authority) of the Agreement Seller has submitted to Buyer
the Certificate of Secretary of HarCor Energy, Inc., dated January 28,
1998. A true and correct copy of such Certificate is attached hereto
as Exhibit XVII and incorporated herein by reference.
18. In confirmation of Buyer's representations in Section 3.1.1(Corporate
Authority) of the Agreement Buyer has submitted to Seller the
Unanimous Consent of Board of Directors of Penroc Oil Corporation
dated February 3, 1998. A true and correct copy of such Consent is
attached hereto as Exhibit XVIII and incorporated herein by reference.
19. Section 10.2 of the Agreement provides that Seller will pay all
Property Taxes assessed for all tax periods through the Effective
Date, and such Property Taxes remain the obligation of Seller.
Attached hereto as Exhibit XIX and incorporated herein by reference is
the Certificate dated February 5, 1998, of the Chief Financial Officer
that there are outstanding unpaid Property Taxes in the amount of
$0.00. Seller shall furnish Buyer with evidence that all Property
Taxes for periods before the Effective Date have been paid at the time
of the post-Closing adjustment provided in Section 7.3.3.4 of the
Agreement.
20. Section 7.4 of the Agreement provides that within five (5) days after
Closing, Seller shall deliver to Buyer the originals of the Property
Records (as defined in Section 5.1) at a location designated by Buyer.
Buyer hereby designates Ted Rhodes as its representative to direct
preparation and delivery of the Property Records, the location of such
delivery, and to accept custody of the Property Records on behalf of
Buyer. The Property Records will be delivered at a time mutually
agreeable to the parties within five (5) days of Closing. Included
within the definition of Property Records is information contained in
the bound volumes containing the documents regarding the financing
agreements relating to the Release Liens. Buyer is willing to accept
a duplicated copy of such volumes and agrees to allow Seller to retain
the original for its records, and Seller agrees to deliver such
duplicated copy within five (5) days of Closing.
-5-
<PAGE> 8
21. The parties agree to resolution of the title issue set forth in
Paragraph No. 2 of the Statement of Title Defects letter dated
February 3, 1998, as set forth herein. Seller will deliver to Buyer a
fully executed, recordable instrument in which Saba Energy of Texas
Incorporated quitclaims all of its rights, titles and interests to
Buyer in and to that portion of the Property identified as Jennings
Lake Field, Matagorda County, Texas, and White Kitchen Field, LaSalle
County, Texas, in the Agreement, insofar and only insofar as the 6%
interest more fully described in Statement of Title Defects, effective
as of January 1, 1995, on or before the date of the post-Closing
adjustment, or the Allocated Value thereof, being 6% of $350,000.00 or
$21,000.00, shall be deducted from the Purchase Price and will be
accounted for in the final Purchase Price adjustment provided for in
Section 7.3.3.4 of the Agreement.
22. All alleged Title Defects and objections to the condition of the
Property given to Seller by Buyer in previous notices have been
satisfied or waived by Buyer, except as set out in this Closing
Statement.
The authorized representatives of Seller and Buyer sign below
indicating their agreement to the terms of this Statement on the date first
above written.
Seller: Buyer:
HarCor Energy, Inc. Penroc Oil Corporation
By: By:
------------------------ -------------------------------
Name: Mark G. Harrington Name: M. Y. Merchant
---------------------- -----------------------------
Title: Chairman and CEO Title: President
--------------------- ----------------------------
-6-
<PAGE> 1
EXHIBIT 23.1
[RYDER SCOTT COMPANY LETTERHEAD]
CONSENT OF INDEPENDENT PETROLEUM ENGINEERS
As independent petroleum consultants, Ryder Scott Company hereby consents
(i) 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, 1998", as detailed in the Form 10-K for the year
ended December 31, 1997 for HarCor Energy, Inc. filed with the Securities and
Exchange Commission on March 30, 1998 and (ii) to the reference to our firm as
experts and the incorporation by reference of such Form 10-K in the previously
filed Registration Statement of HarCor Energy, Inc. on 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, Form S-8 Registration
Statement File No. 333-02179 and Form S-3 Registration Statement No. 333-26241.
/s/ RYDER SCOTT COMPANY
PETROLEUM ENGINEERS
RYDER SCOTT COMPANY
PETROLEUM ENGINEERS
Houston, Texas
March 30, 1998
<PAGE> 1
EXHIBIT 23.2
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, Form S-8
Registration Statement File No. 333-02179 and Form S-3 Registration Statement
No. 333-26241.
ARTHUR ANDERSEN LLP
Houston, Texas
March 27, 1998
<TABLE> <S> <C>
<ARTICLE> 5
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> DEC-31-1997
<PERIOD-START> JAN-01-1997
<PERIOD-END> DEC-31-1997
<CASH> 1,143,875
<SECURITIES> 0
<RECEIVABLES> 4,110,456
<ALLOWANCES> 0
<INVENTORY> 0
<CURRENT-ASSETS> 5,423,587
<PP&E> 119,596,197
<DEPRECIATION> (34,121,156)
<TOTAL-ASSETS> 93,528,000
<CURRENT-LIABILITIES> 10,008,400
<BONDS> 52,637,599<F1>
0
0
<COMMON> 1,626,839
<OTHER-SE> 24,750,162
<TOTAL-LIABILITY-AND-EQUITY> 93,528,000
<SALES> 21,767,843
<TOTAL-REVENUES> 21,946,402
<CGS> 8,767,696<F2>
<TOTAL-COSTS> 8,767,696
<OTHER-EXPENSES> 9,117,795<F3>
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 8,794,185
<INCOME-PRETAX> (4,733,274)
<INCOME-TAX> 0
<INCOME-CONTINUING> (4,733,274)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (4,793,274)
<EPS-PRIMARY> (0.30)
<EPS-DILUTED> (0.30)
<FN>
<F1>14 7/8% SENIOR SECURED NOTES DUE 2002
<F2>OIL & GAS PRODUCTION COSTS & GAS PLANT COSTS
<F3>EXPLORATION, DD&A, G&A & OTHER
</FN>
</TABLE>
