<PAGE> 1
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FORM 10-Q
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
---------
(Mark One)
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES AND EXCHANGE ACT OF 1934
For the quarterly period ended March 31, 1998.
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the transition period from .......... to ..........
Commission file number 0-9300
HARCOR ENERGY, INC.
(Exact name of registrant as specified in its charter)
DELAWARE 33-0234380
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
4400 POST OAK PARKWAY, SUITE 2220
HOUSTON, TX 77027-3413
(Address of principal executive office) (Zip Code)
Registrant's telephone number, including area code: (713) 961-1804
---------------------------
(Former name, former address and former fiscal year,
if changed since last report)
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. YES [X] NO [ ]
The number of shares of Registrant's Common Stock outstanding at May
14, 1998 was 16,268,387.
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HARCOR ENERGY, INC.
INDEX TO FORM 10-Q
FOR THE QUARTER ENDED MARCH 31, 1998
<TABLE>
<CAPTION>
Part I - Financial Information Page
----
<S> <C>
Item 1. Financial Statements
Consolidated Balance Sheets as of March 31,
1998 (unaudited) and December 31, 1997 1
Consolidated Statements of Operations for the Three
Months Ended March 31, 1998 and 1997 (unaudited) 3
Consolidated Statement of Stockholders' Equity
for the Three Months Ended March 31, 1998 (unaudited) 4
Consolidated Statements of Cash Flows for the
Three Months Ended March 31, 1998 and 1997 (unaudited) 5
Notes to Unaudited Consolidated Financial Statements 8
Item 2. Management's Discussion and Analysis of
Financial Condition and Results of Operations 17
Part II - Other Information
Item 5. Other Information 31
Item 6. Exhibits and Reports on Form 8-K 32
</TABLE>
<PAGE> 3
HARCOR ENERGY, INC.
CONSOLIDATED BALANCE SHEETS
AS OF MARCH 31, 1998 (UNAUDITED) AND DECEMBER 31, 1997
ASSETS
<TABLE>
<CAPTION>
March 31, December 31,
1998 1997
------------- -------------
CURRENT ASSETS:
<S> <C> <C>
Cash and cash investments ............................... $ 2,195,651 $ 1,143,875
Accounts receivable ..................................... 3,340,945 4,110,456
Prepaids and other ...................................... 302,324 169,256
------------- -------------
Total current assets .................................... 5,838,920 5,423,587
------------- -------------
PROPERTY AND EQUIPMENT, at cost, successful efforts method:
Unproved oil and gas properties ......................... 4,498,962 4,403,430
Proved oil and gas properties:
Leasehold costs ....................................... 36,699,630 57,875,358
Plant, lease and well equipment ....................... 17,447,176 22,262,042
Intangible development costs .......................... 31,474,621 34,658,816
Furniture and equipment ................................. 364,219 396,551
------------- -------------
90,484,608 119,506,197
Less - accumulated depletion,
depreciation and amortization ......................... (15,465,962) (34,121,156)
------------- -------------
Net property, plant and equipment ....................... 75,018,646 85,475,041
------------- -------------
OTHER ASSETS .............................................. 2,476,695 2,629,372
------------- -------------
$ 83,334,261 $ 93,528,000
============= =============
</TABLE>
The accompanying notes are an integral part
of these consolidated financial statements.
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HARCOR ENERGY, INC.
CONSOLIDATED BALANCE SHEETS
AS OF MARCH 31, 1998 (UNAUDITED) AND DECEMBER 31, 1997
LIABILITIES AND STOCKHOLDERS' EQUITY
<TABLE>
<CAPTION>
March 31, December 31,
1998 1997
------------ ------------
CURRENT LIABILITIES:
Short-term portion of long-term
<S> <C> <C>
bank debt................................................................... $ 100,000 $ 795,000
Other short-term debt ........................................................ 76,000 121,600
Accounts payable and accrued
liabilities ................................................................ 4,641,797 9,091,800
------------ ------------
Total current liabilities .................................................... 4,817,797 10,008,400
------------ ------------
LONG-TERM BANK DEBT ............................................................ -- 4,505,000
------------ ------------
14-7/8% SENIOR SECURED NOTES ................................................... 52,696,966 52,637,599
------------ ------------
COMMITMENTS AND CONTINGENCIES (Note 4)
STOCKHOLDERS' EQUITY:
Preferred stock, $.01 par value -
1,500,000 shares authorized;
30,000 shares outstanding .................................................. -- --
Common stock, $.10 par value -
25,000,000 shares authorized;
16,268,387 shares outstanding .............................................. 1,626,839 1,626,839
Additional paid-in capital ..................................................... 51,093,839 51,093,839
Accumulated deficit........................................................... (26,901,180) (26,343,677)
------------ ------------
Total stockholders' equity ................................................... 25,819,498 26,377,001
------------ ------------
$ 83,334,261 $ 93,528,000
============ ============
</TABLE>
The accompanying notes are an integral part
of these consolidated financial statements.
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<PAGE> 5
HARCOR ENERGY, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
FOR THE THREE MONTHS ENDED
MARCH 31, 1998 AND 1997
(UNAUDITED)
<TABLE>
<CAPTION>
Three Months Ended
March 31,
----------------------------
1998 1997
----------- -----------
REVENUES:
<S> <C> <C>
Oil and gas revenues ................. $ 2,206,846 $ 5,035,478
Gas plant operating
and marketing revenues ........ 986,487 1,570,616
Interest income ...................... 15,482 10,311
Other ................................ 1,323,921 10,328
----------- -----------
4,532,736 6,626,733
----------- -----------
COSTS AND EXPENSES:
Production costs ..................... 714,380 1,213,895
Gas plant operating
and marketing costs ........... 189,715 897,274
Exploration costs .................... 61,446 149,143
Depletion, depreciation and
amortization ....................... 876,941 1,675,804
General and administrative expenses .. 691,997 670,361
Interest expense ..................... 2,257,398 2,170,542
Other ................................ 298,362 --
----------- -----------
5,090,239 6,777,019
----------- -----------
Loss before provision for income tax . (557,503) (150,286)
Provision for income taxes ............. -- --
----------- -----------
Net operating loss ................... (557,503) (150,286)
Dividends on preferred stock ........... -- (60,000)
----------- -----------
NET LOSS APPLICABLE TO COMMON
STOCKHOLDERS ......................... $ (557,503) $ (210,286)
=========== ===========
NET LOSS PER COMMON SHARE .............. $ (0.03) $ (0.01)
=========== ===========
</TABLE>
The accompanying notes are an integral part
of these consolidated financial statements.
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HARCOR ENERGY, INC.
CONSOLIDATED STATEMENT OF STOCKHOLDERS' EQUITY
FOR THE THREE MONTHS ENDED
MARCH 31, 1998
(UNAUDITED)
<TABLE>
<CAPTION>
Preferred Stock Common Stock Additional
------------------ ---------------------- Paid-in Accumulated
Shares Amount Shares Amount Capital Deficit
------ ------ ------ ------ ------- -------
<S> <C> <C> <C> <C> <C>
Balance, December 31, 1997 -- $ -- 16,628,387 $ 1,626,839 $ 51,093,839 $(26,243,677)
Net loss for three months
ended March 31, 1998 -- -- -- -- -- (557,503)
--- ---- ---------- ------------ ------------ ------------
Balance, March 31, 1998 -- $ -- 16,628,387 $ 1,626,839 $ 51,093,839 $(26,901,180)
=== ==== ========== ============ ============ ============
</TABLE>
The accompanying notes are an integral part
of these consolidated financial statements.
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<PAGE> 7
HARCOR ENERGY, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE THREE MONTHS ENDED
MARCH 31, 1998 AND 1997
(UNAUDITED)
<TABLE>
<CAPTION>
Three Months Ended
March 31,
------------------------------
1998 1997
------------ ------------
CASH FLOWS FROM OPERATING ACTIVITIES:
<S> <C> <C>
Net Loss ............................. $ (557,503) $ (150,286)
Adjustments to reconcile net loss
to net cash provided by operating
activities:
(Gain) loss on sale or disposition
of assets .................. (1,339,852) 1,082
Depletion, depreciation and
amortization ................... 876,941 1,675,804
Amortization of deferred charges . 212,044 211,150
Exploration costs .................... 61,446 149,143
Other ................................ - 6,835
------------ ------------
(746,924) 1,893,728
Changes in working capital, net
of effects of non-cash
transactions ....................... (2,264,560) 3,644,309
------------ ------------
Net cash provided by (used in)
operating activities ............... (3,011,484) 5,538,037
------------ ------------
CASH FLOWS FROM INVESTING ACTIVITIES:
Exploration costs .................... (61,446) (149,143)
Proceeds from sale of assets ......... 13,235,015 -
Additions to property and equipment .. (3,864,709) (4,777,678)
------------ ------------
Net cash provided by (used
in) investing activities ...... 9,308,860 (4,926,821)
------------ ------------
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from bank debt .............. - 300,000
Repayment of bank debt ............... (5,200,000) -
Repayment of other debt .............. (45,600) (51,300)
Dividends on preferred stock ......... - (60,000)
Other ................................ - (152,006)
------------ ------------
Net cash provided by (used in)
financing activities .............. (5,245,600) 36,694
------------ ------------
Net increase in cash ................. 1,051,776 647,910
Cash at beginning of period .......... 1,143,875 1,593,330
------------ ------------
Cash at end of period ................ $ 2,195,651 $ 2,241,240
============ ============
</TABLE>
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<PAGE> 8
HARCOR ENERGY, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE THREE MONTHS ENDED MARCH 31, 1998 AND 1997
(UNAUDITED)
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION (ALL DOLLAR AMOUNTS HAVE BEEN
ROUNDED TO THE NEAREST THOUSAND) -
HarCor Energy, Inc. (the "Company") made cash interest payments of
$4,229,000 and $4,038,000 during the three months ended March 31, 1998 and 1997,
respectively.
SUPPLEMENTAL INFORMATION REGARDING NON-CASH INVESTING AND FINANCING
ACTIVITIES - THREE MONTHS ENDED MARCH 31, 1998
Included in investing activities are payments of $2,878,000 relating to
drilling costs which were accrued but unpaid at December 31, 1997. At March 31,
1998, the Company had accrued capital costs aggregating $1,329,000 which are not
reflected in investing activities.
SUPPLEMENTAL INFORMATION REGARDING NON-CASH INVESTING AND FINANCING
ACTIVITIES - THREE MONTHS ENDED MARCH 31, 1997
Included in investing activities are payments of $4,725,000 relating to
drilling costs which were accrued but unpaid at December 31, 1996. At March 31,
1997, the Company had accrued capital costs aggregating $2,059,000 which are not
reflected in investing activities.
The accompanying notes are an integral part
of these consolidated financial statements.
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<PAGE> 9
HARCOR ENERGY, INC.
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
MARCH 31, 1998
(1) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
BUSINESS AND ORGANIZATION -
HarCor Energy, Inc. (the "Company", or "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.
Effective May 5, 1998, Seneca West Corporation ("Seneca West"), a
wholly-owned subsidiary of Seneca Resources Corporation ("Seneca"), completed a
tender offer of $2.00 per share for all the outstanding shares of HarCor. The
cost of acquiring these shares was approximately $31 million.
The tender offer was commenced pursuant to the terms of an Agreement
and Plan of Merger among HarCor, Seneca and Seneca West which provides for the
merger of Seneca West with and into HarCor following the successful consummation
of the tender offer. Accordingly, all shares of HarCor common stock that were
not purchased pursuant to the tender offer will be converted in the merger into
the right to receive $2.00 per share at a cost of approximately $1.6 million.
Seneca West intends to consummate the merger immediately.
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 and Seneca West in connection with their purchase of
the Company (see Note 6).
PRINCIPLES OF CONSOLIDATION -
The accompanying consolidated financial statements include the accounts
and results of operations of HarCor [Energy, Inc]. The Company sold all of its
non-California oil and gas assets effective January 1, 1998. Accordingly, the
results of operations as
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<PAGE> 10
reported herein include the results of operations for the Company's California
oil and gas assets ("Bakersfield Properties") and non-California oil and gas
assets for the three months ended March 31, 1997; and the results of operations
of the Bakersfield Properties for the three months ended March 31, 1998.
All significant intercompany accounts and transactions have been
eliminated in consolidation.
The consolidated financial statements included herein have been
prepared by the Company, without audit, pursuant to the rules and regulations of
the Securities and Exchange Commission. Certain information and footnote
disclosures normally included in financial statements prepared in accordance
with generally accepted accounting principles have been condensed or omitted
pursuant to such rules and regulations. The Company believes, however, that it
has made adequate disclosures so that the information presented herein is not
misleading.
A summary of the Company's significant accounting policies is included
in the consolidated financial statements and notes thereto, contained in its
Annual Report on Form 10-K for the year ended December 31, 1997 (the "10-K").
The unaudited consolidated financial data presented herein should be read in
conjunction with the 10-K.
In the opinion of the Company, the unaudited consolidated financial
statements contained herein include all adjustments (consisting of normal
recurring accruals and the elimination of intercompany transactions) necessary
to present fairly the Company's consolidated results of operations, cash flows
and changes in stockholders' equity for the three-month periods ended March 31,
1998 and 1997.
The results of operations for an interim period are not necessarily
indicative of the results to be expected for a full year.
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<PAGE> 11
ACCOUNTS RECEIVABLE -
Accounts receivable at March 31, 1998 are comprised of the following
(amounts in thousands):
<TABLE>
<CAPTION>
1998
-------
<S> <C>
Oil and gas sales receivable. . . $ 2,274
Receivable for sale of property . 301
Other receivables . . . . . . . . 766
-------
$ 3,341
=======
</TABLE>
JOINT INTEREST RECEIVABLE -
Not included in accounts receivable as of March 31, 1998 is $1,141,000
that the Company claims it is owed pursuant to its rights under a Joint
Operating Agreement ("JOA") with the operator 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 is currently considering the
substantiation of this amount with a subsequent JOA audit. The entire $1,141,000
has been billed to the operator in February 1998, and the Company is currently
considering pursuing and collecting the full amount owed pursuant to its rights
and remedies under the JOA.
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.
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<PAGE> 12
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 $94,000 and $95,000 for the
three-month periods ended March 31, 1998 and 1997, respectively.
ACCOUNTS PAYABLE AND ACCRUED LIABILITIES -
Accounts payable and accrued liabilities at March 31, 1998 are
comprised of the following (amounts in thousands):
<TABLE>
<CAPTION>
1998
<S> <C>
Accrued development costs . . . . $ 1,329
Accrued interest payable. . . . . 1,666
Trade accounts payable. . . . . . 1,544
Other accrued liabilities . . . . 102
-------
$ 4,641
=======
</TABLE>
STOCK COMPENSATION PLANS -
The Company had historically accounted for its Stock Compensation Plans
by applying provisions of Accounting Principles Board ("APB") Opinion No. 25,
"Accounting for Stock Issued to Employees". Pursuant to and effective with the
Company's sale to Seneca West, all of the Company's stock compensation plans
have been terminated. Accordingly, no compensation expense has been recognized
for any awards granted under these terminated plans.
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
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<PAGE> 13
outstanding utilized in the calculation of both Basic and Diluted EPS
was 16,268,000 and 15,130,000 for the three-month periods ended March 31, 1998
and 1997, respectively.
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.
(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, 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 $100,000 outstanding under the Credit Agreement at
March 31, 1998, with an effective interest rate of 8.21% at that date.
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<PAGE> 14
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 Note 5). 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. The Company's borrowing base is currently $4.3 million.
Pursuant to the terms of the Credit Agreement, ING must grant a waiver
allowing the Company to be sold or merged with or into another Company. ING
Capital granted a waiver to the Company on April 30, 1998 in connection with the
sale of the Company to Seneca West.
(3) 14-7/8% SENIOR SECURED NOTES
THE SENIOR NOTES -
The Company's 14-7/8% Senior Secured Notes, which were issued in July
1995 (the "Notes"), bear interest at the rate of 14-7/8% per annum and are
payable semi-annually on January 15 and July 15 of each year. The Notes are
redeemable, in whole or in part, at the option of the Company at any time on or
after July 15, 1999, at the following redemption prices (expressed as
percentages of the principal amount) if redeemed during the twelve-month period
commencing on July 15 of the year set forth below plus, in each case, accrued
interest thereon to the date of redemption:
<TABLE>
<CAPTION>
Year Percentage
---- ----------
<S> <C>
1999................................................. 110%
2000................................................. 107%
2001 and thereafter.................................. 100%
</TABLE>
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<PAGE> 15
The Notes were issued pursuant to an indenture, dated July 24, 1995,
between the Company and Texas Commerce Bank National Association, as Trustee
(the "Indenture"). All of the obligations of the Company under the Notes and the
Indenture are secured by a second priority lien on substantially all of the
assets of the Company securing its bank debt.
There were a total of $53.7 million Notes outstanding (face value) at
March 31, 1998. The difference between the face value of the Notes and the
balance sheet amount recorded herein is the result of an initial allocation to
paid-in capital of the value ascribed to the warrants at the close of the Note
Offering. This amount is being amortized through interest expense over the life
of the Notes.
In accordance with the terms of a warrant agreement entered into
pursuant to the original issuance of the warrants, upon the effective date of
the Merger with Seneca West, the Warrant will automatically convert into the
right to receive $2.00 cash upon the holders' payment to the Company of $3.85
cash for each "share" being exercised. Because it is not economic for a holder
of the Senior Note Warrants to exercise under these conditions, the Company
notified the holders that it assumed that the holders would not ever exercise
the said Warrants and that the holders would not wish to enter into a
supplemental warrant agreement with the Company that confirms the foregoing.
However the Company offered to prepare such a supplemental warrant agreement, if
requested by May 15, 1998.
EXCESS CASH FLOW OFFER -
In the event that the Company has excess cash flow (as defined) in
excess of $2 million in any fiscal year, beginning with the fiscal year ending
December 31, 1996, the Company will be required to make an offer to purchase
Notes from all Holders in an amount equal to 50% of all such excess cash flow
for such fiscal year (not just the amount in excess of $2 million) at a purchase
price equal to 101% of the principal amount thereof, plus accrued and unpaid
interest thereon ("Excess Cash Flow Offer"). The Company may credit the
principal amount of Notes acquired in the open market and retired prior to the
Excess Cash Flow Offer against such required Excess Cash Flow Offer, provided
that each Note may only be so credited once. Excess cash flow for this purpose
is generally defined as net cash flow provided by operations less capital
expenditures and payments on scheduled indebtedness.
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<PAGE> 16
CHANGE OF CONTROL REDEMPTION OFFER -
The terms of the Notes and the indenture provide that upon the
occurrence of a change of control (as defined), the Company must offer to
repurchase (the "Change of Control Offer") all of the outstanding Notes
(pursuant to the offer described below), at a purchase price equal to 101% of
the principal amount thereof plus accrued interest. Within 30 days following a
Change of Control the Company must notify each Holder with a copy to the
Trustee. Such notice must state the purchase date, which must be no earlier than
30 days nor later than 60 days from the date notice is mailed. The Change of
Control Offer must remain open for at least 20 business days. Because of the
consummation of the Company's sale to Seneca and tender offer, the Company will
be required to make a Change of Control Offer within the time period indicated.
Because the current fair market value of the Notes is currently estimated to be
in excess of 101% of the principal amount, the Company does not expect that a
material number, if any, of the Holders of the Notes will accept the Change of
Control Offer.
(4) COMMITMENTS AND CONTINGENCIES
RISK MANAGEMENT AND HEDGING ACTIVITIES -
The Company has historically utilized 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
has entered 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
or decreases, the Company adjusts its hedging techniques to ensure that a
substantial portion of its current and future anticipated production remains
effectively hedged. Gains or losses under the hedging agreements have been
recognized in oil and gas production revenues in the periods in which the hedged
production occurred.
As of March 31, 1998, the Company was not a party to any material
commodity derivative contracts.
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<PAGE> 17
SALE OF COMPANY - CLOSING OBLIGATIONS -
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 is effective with the sale of the
Company or a change of control (as defined).
Accordingly, and pursuant to the sale of the Company to Seneca West
effective May 5, 1998, and the Agreement and Plan of Merger, the Company and
Seneca West are obligated to pay to the former employees and consultants of
HarCor severance payments aggregating approximately $2.1 million no later than
May 15, 1998.
The Company is also currently obligated to pay as a result of its sale
to Seneca West approximately $1.3 million to certain investment bankers that
represented the Company during the sales process. (See Note 6.)
(5) SALE OF OIL AND GAS PROPERTIES -
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 transaction was subject to post closing adjustments,
the most significant of which included the purchaser's obligation to acquire a
producing well in south Texas excluded from the purchase until workover
operations were completed. The purchaser subsequently purchased this well from
the Company pursuant to the purchase price adjustment terms for $766,000. The
Company recorded a gain of approximately $1.3 million upon closing of the sale
including 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
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<PAGE> 18
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.
(6) SUBSEQUENT EVENT - SALE OF THE COMPANY -
Effective May 5, 1998, Seneca West Corporation, a wholly-owned
subsidiary of Seneca Resources Corporation, completed a tender offer of $2.00
per share for the outstanding shares of HarCor. Preliminary information supplied
by the depository for the offer indicated that approximately 95% of the
outstanding shares of HarCor common stock were tendered in accordance with the
tender offer. Seneca West gave notice to the depository for the offer that
Seneca West accepted for payment all of the shares of HarCor common stock prior
to the expiration of the tender offer. The cost of acquiring these shares is
approximately $31 million.
The tender offer was commenced pursuant to the terms of an Agreement
and Plan of Merger among HarCor, Seneca and Seneca West which provides for the
merger of Seneca West with and into HarCor following the successful consummation
of the tender offer. Accordingly, all shares of HarCor common stock that were
not purchased pursuant to the tender offer will be converted in the merger into
the right to receive $2.00 per share at a cost of approximately $1.6 million.
Seneca West intends to consummate the merger immediately.
Effective May 7, 1998, HarCor's previous directors and officers
resigned, and its employees were terminated. Seneca has immediately begun to
take over the management of the Company's business and operations.
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<PAGE> 19
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
SALE OF COMPANY TO SENECA
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 subject to certain subsequent purchase price
adjustments.
Effective May 5, 1998, Seneca West Corporation ("Seneca West"), a
wholly-owned subsidiary of Seneca Resources Corporation ("Seneca"), completed a
tender offer (an offer of $2.00 per share) for the outstanding shares of HarCor.
Preliminary information supplied by the depository for the offer indicated that
approximately 95% of the outstanding shares of HarCor common stock were tendered
in accordance with the tender offer. Seneca West gave notice to the depository
for the offer that Seneca West accepted for payment all of the shares of HarCor
common stock prior to the expiration of the tender offer. The cost of acquiring
these shares is approximately $31 million.
The tender offer was commenced pursuant to the terms of an Agreement
and Plan of Merger among HarCor, Seneca and Seneca West which provides for the
merger of Seneca West with and into HarCor following the successful consummation
of the tender offer. Accordingly, all shares of HarCor common stock that were
not purchased pursuant to the tender offer will be converted in the merger into
the right to receive $2.00 per share at an approximate
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<PAGE> 20
cost of $1.6 million. Seneca West intends to consummate the merger immediately.
Effective May 7, 1998, HarCor's previous directors and officers
resigned and its employees were terminated. Seneca has immediately begun to take
over the management of the Company's business and operations and is currently
evaluating future plans for the development of the Bakersfield Properties. (See
ITEM 5. - OTHER INFORMATION - BOARD OF THE COMPANY for further information
regarding the Company's new Board of Directors.)
COMPARISON OF RESULTS FOR THE THREE MONTHS
ENDED MARCH 31, 1998 AND 1997
SALE OF NON-CALIFORNIA PROPERTIES - During the first quarter of 1998,
the Company closed the sale of all of its non-California oil and gas assets
effective January 1, 1998 for approximately $13.6 million in cash including
certain adjustments subsequent to closing. This transaction was the result of
the Company's previously announced bifurcation of its ongoing efforts to effect
the sale of the entire Company. (See Note 5 of "Notes to Unaudited Consolidated
Financial Statements".)
Accordingly, the results of operations as reported herein for the
quarter ended March 31, 1997 include the operations of the Company's California
oil and gas assets ("Bakersfield Properties") and non-California oil and gas
assets. The results of operations for the quarter ended March 31, 1998, include
only the operations of the Bakersfield Properties. The Company's corporate
operating expenses, general and administrative expenses and capital structure
were materially unchanged between the two periods on a comparative basis.
REVENUES - The Company's total revenues decreased $2,094,000 (32%) from
$6,627,000 in first quarter 1997 to $4,533,000 in the current period.
Oil and gas revenues decreased $2,828,000 (56%) from $5,035,000 in the
first quarter of 1997 to $2,207,000 in the current period due principally to
significant decreases in production levels and oil prices. Oil and gas
production volumes were lower in the current period as compared to first quarter
1997 as a result of the following factors: (i) the sale of all of the Company's
non-California oil and gas assets effective January
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<PAGE> 21
1, 1998, pursuant to its previously announced sale process; (ii) the conversion
of 17 producing wells to water injection wells through third quarter 1997 as
part of the Ellis waterflood project on the Bakersfield Properties; and (iii)
continuing development drilling on the Bakersfield Properties was delayed
pending repressurization of the Ellis waterflood. The latter two factors
impacted gas production to a greater degree than oil production on the
Bakersfield Properties as development of the principally oil-producing Truman
and Tisdale shale leases during the last two quarters resulted in a net increase
in oil production on the Bakersfield Properties.
Oil revenues decreased $882,000 (46%) from $1,934,000 in first quarter
1997 to $1,052,000 in the current period due to significant decreases in
production volumes and prices. Oil production decreased 20,000 barrels (21%)
from 96,800 barrels in the first quarter of 1997 to 76,800 barrels in the
current period. A decrease of 21,500 barrels was attributable to the sale of all
the Company's non-California properties while oil production on the Bakersfield
Properties had a net increase of 1,500 barrels due to the recent development of
the Truman and Tisdale shale leases. Lower unit prices also negatively impacted
oil revenues in the current quarter. The average unit price received for oil was
$13.69 per barrel during first quarter 1998 as compared to $21.83 per barrel in
first quarter 1997.
Gas revenues decreased $1,947,000 (63%) from $3,101,000 in the first
quarter of 1997 to $1,154,000 in the current period due principally to decreased
volumes. Sales production volumes decreased 716,000 Mcf (58%) from 1,237,000 Mcf
in first quarter 1997 to 521,000 Mcf in first quarter 1998 due to (i) the sale
of all the Company's non-California properties; (ii) a decrease in gas
production volumes from the Company's Bakersfield Properties as discussed
previously; and (iii) gas production volumes of 160,000 Mcf produced on the
Bakersfield Properties were used to resolve a short-in-pipe gas balancing
position that existed at December 31, 1997, rather than being sold into the cash
market. Although the Company was not able to recognize approximately $386,000 in
revenue as a result of this gas production, it realized a like amount in cost
savings to gas plant operations as a result of not having to purchase make-up
gas. Average prices received for gas decreased slightly to $2.22 per Mcf in
first quarter 1998 as compared to $2.51 per Mcf in the first quarter of 1997.
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<PAGE> 22
During the current quarter, the Company realized revenues of $986,000
from its natural gas processing plant and gas marketing activities. Gas plant
revenues consisted of $722,000 from the sale of processed natural gas liquids;
43,200 barrels at an average composite price of $16.69 per barrel), $219,000
from the resale of natural gas purchased from third parties, and $45,000 in gas
processing fees. During the first quarter of 1997, the Company realized revenues
of $1,571,000 from its gas plant and marketing activities consisting of
$1,101,000 from the sale of natural gas liquids (48,000 barrels at an average
composite price of $22.94 per barrel), $437,000 from the resale of natural gas
purchased from third parties, and $33,000 in processing fees. The decrease in
revenues from the sale of NGLs in the current quarter was due to reduced gas
inlet production volumes from the Company's Bakersfield Properties as discussed
previously and lower unit prices.
The Company realized interest and other income of $1,339,000 in the
current quarter which was principally a gain on the sale of its non-California
oil and gas assets. The Company realized total interest and other income $21,000
during the first quarter of 1997.
COSTS AND EXPENSES - Total costs and expenses decreased $1,687,000
(25%) from $6,777,000 in first quarter 1997 to $5,090,000 in the current period.
Oil and gas production costs for the first quarter 1998 were $714,000
as compared to $1,214,000 in first quarter 1997 representing a decrease of
$500,000 (41%) in the current period. The current period decrease was
principally the result of the sale of all the Company's non-California
properties as discussed previously. Production costs related to the Bakersfield
Properties increased slightly ($32,000 or 5%) during the current period due to
the operating additional wells drilled on the Truman and Tisdale shale leases.
During the first quarter of 1998, the Company incurred costs of
$190,000 from gas plant and gas marketing activities, which consisted of
$295,000 from the purchase of natural gas for processing and resale, $281,000 of
direct operating expenses and a reversal of accrued costs of $386,000 related to
the Company's utilization of a portion of its Bakersfield lease gas production
as make-up gas to resolve a short-in-pipe balancing position (see gas revenues
above). During the first quarter of 1997, the
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<PAGE> 23
Company incurred costs of $897,000 in gas plant and marketing activities which
consisted of $596,000 for the purchase of natural gas for resale and $301,000 of
direct operating expenses.
The Company incurred engineering and geological expenses of $61,000 and
$149,000 for the quarters ended March 31, 1998 and 1997, respectively. The
decrease of $88,000 was a result of the Company's reduced oil and gas activities
in the current period.
Depletion, depreciation and amortization ("DD&A") expense decreased
$799,000 (48%) from $1,676,000 in first quarter 1997 to $877,000 in the first
quarter of 1998 due to decreased levels of oil and gas production in the current
period as discussed in REVENUES.
General and administrative expenses were $692,000 and $670,000 for the
quarters ended March 31, 1998 and 1997, respectively. The Company expects
substantially lower general and administrative expenses in future periods as a
result of its sale to Seneca West and their absorption of the Company's
corporate overhead and operations.
Interest expense increased slightly ($87,000 or 4%) from $2,170,000 in first
quarter 1997 to $2,257,000 in first quarter 1998. There were no dividends on
preferred stock in the first quarter of 1998 due to the conversion of the
Company's remaining preferred stock into common stock during 1997. The Company
paid $60,000 in preferred stock dividends in first third quarter 1997.
Other expense of $298,000 for the first quarter of 1998 was related to
the Company's ongoing sales process which was culminated in May 1998.
NET LOSS - For the three months ended March 31, 1998, the Company had a
net loss of $558,000, or $0.03 per share. During the three months ended March
31, 1997, the Company had a net loss attributable to common stockholders of
$210,000 ($.01 per common share).
LIQUIDITY AND CAPITAL RESOURCES
SUMMARY - The Company's sources of working capital have primarily been
cash flow from operations and a combination of debt and equity financings as
needs for capital have arisen. During the three months ended March 31, 1998, the
Company
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<PAGE> 24
used net cash from operations of $3,011,000 as compared to $5,538,000 generated
from operations in 1997. The Company used proceeds of $5,246,000 in financing
activities during the current period as compared to $37,000 provided by
financing activities in 1997. The Company realized net proceeds of $9,309,000
from investing activities in the current period as compared to $4,927,000 used
in investing activities in 1997.
WORKING CAPITAL - The Company had net working capital of $1,021,000
with a current ratio of 1.2:1 at March 31, 1998 as compared to a net working
capital deficit of $4,585,000 and a current ratio of 0.54:1 at December 31,
1997.
OPERATING ACTIVITIES
CASH FLOWS - Discretionary cash flow is a measure of performance which
is useful for evaluating exploration and production companies. It is derived by
adjusting net income or loss to eliminate the non-cash effects of exploration
expenses, depletion, depreciation, amortization and non-recurring charges, if
applicable. The effects of non-cash working capital changes are not taken into
account. This measure reflects an amount that is available for capital
expenditures, debt service and dividend payments.
During the three months ended March 31, 1998, the Company utilized
discretionary cash flows of $747,000 (before a decrease in other working capital
of $2,265,000). This compares to $1,894,000 (before an increase in other working
capital of $3,644,000) in first quarter 1997. The decrease in the current
period's discretionary cash flow as compared to first quarter 1997 was due to
significant decreases in oil and gas production volumes and oil prices. The
decrease in oil and gas production volumes was a result of the following
factors: (i) the sale of all of the Company's non-California oil and gas assets
effective January 1, 1998 pursuant to its previously announced sale process;
(ii) the conversion of 17 producing wells to water injection wells through third
quarter 1997 as part of the Ellis waterflood project on the Bakersfield
Properties; and (iii) continuing development drilling on the Bakersfield
Properties was delayed pending repressurization of the Ellis waterflood. The
latter two factors negatively impacted gas production on the Bakersfield
Properties to a greater extent than oil production as development of the
principally oil-producing Truman and Tisdale
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<PAGE> 25
shale leases during the last two quarters resulted in a net increase in oil
production on the Bakersfield Properties during the current period. (See RESULTS
OF OPERATIONS - REVENUES.)
With respect to pricing, the Company-wide average prices realized for
oil and gas sales were $13.69 per barrel for oil, $16.69 per barrel for NGLs and
$2.22 per Mcf for natural gas. This compares to $21.88, $22.94 and $2.31,
respectively, for first quarter 1997.
The Company will 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 effective January 1998. These properties produced an
estimated average of 730 BOE per day in the aggregate during fourth quarter
1997. (See Note 5 of "Notes to Unaudited Consolidated Financial Statements".)
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. Original plans for 1998 had provided 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 shale development drilling on the
Truman and Tisdale leases will continue to positively impact 1998 production
rates. Also, effects of water injection on the Ellis waterflood initiated in
1996 and continued 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. The above development drilling plans are currently
being evaluated by the management of Seneca and may vary in the future. (See
DEVELOPMENTAL DRILLING ACTIVITIES which follows.)
As a result of the sale of the Company to Seneca, it is anticipated that
corporate operating expenses, particularly general and administrative expenses,
will be significantly reduced in future periods as Seneca absorbs the corporate
overhead and operations of HarCor.
RESULTS OF HEDGING ACTIVITIES - In order to help mitigate the potential
effects of declines in oil and gas prices, the Company has historically entered
into fixed-price sales and hedging contracts covering significant portions of
oil and gas production.
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<PAGE> 26
The Company believes that its hedging strategy has helped manage its growth in
the past by providing more predictable cash flows with which to finance its
acquisitions and development drilling activities. The Company's hedging
activities during the periods reported herein have not had any material effect
on the Company's liquidity or results of operations. (See Note 4 of "Notes to
Unaudited Consolidated Financial Statements" included herein.)
FINANCING ACTIVITIES
SUMMARY - During the current quarter ended, the Company utilized
$5,246,000 in financing activities resulting primarily from the repayment of
long-term bank debt on the Company's revolving Credit Agreement with
Internationale Nederlanden (U.S.) Capital Corporation ("ING Capital"). During
the first quarter of 1997, the Company realized net proceeds of $37,000 from its
financing activities which consisted of net borrowings of $300,000 on the
Company's revolving Credit Agreement and $263,000 used 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.
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 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 $100,000 outstanding under the Credit
Agreement at March 31, 1998, with an effective interest rate of 8.21% 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
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<PAGE> 27
Company's oil and gas properties and other assets, hedging transactions, payment
of dividends, mergers or consolidations and investments outside the ordinary
course of business. The Credit Agreement also contains customary default
provisions. The Company believes that it was in compliance with all of the
covenant provisions under the Credit Agreement at March 31, 1998.
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 5 of "Notes to Unaudited 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.
Pursuant to the terms of the Credit Agreement, ING must grant a waiver
allowing the Company to be sold or merged with or into another Company. ING
Capital granted a waiver to the Company on April 30, 1998 in connection with the
sale of the Company to Seneca West.
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 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.
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<PAGE> 28
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.
CHANGE OF CONTROL REDEMPTION OFFER -
The terms of the Notes and the indenture provide that upon the
occurrence of a change of control (as defined), the Company must offer to
repurchase (the "Change of Control Offer") all of the outstanding Notes
(pursuant to the offer described below), at a purchase price equal to 101% of
the principal amount thereof plus accrued interest. Within 30 days following a
Change of Control the Company must notify each Holder with a copy to the
Trustee. Such notice must state the purchase date, which must be no earlier than
30 days nor later than 60 days from the date notice is mailed. The Change of
Control Offer must remain open for at least 20 business days. Because of the
consummation of the Company's sale to Seneca and tender offer, the Company will
be required to make a Change of Control Offer within the time period indicated.
Because the current fair market value of the Notes is currently estimated to be
in excess of 101% of the principal amount, the Company does not expect that a
material number, if any, of the Holders of the Notes will accept the Change of
Control Offer.
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<PAGE> 29
CAPITAL EXPENDITURES AND INVESTING ACTIVITIES
SUMMARY - The Company realized a net total of $9,309,000 cash in
investing activities in first quarter 1998 which consisted of $13,235,000
proceeds resulting from the sale of its non-California oil and gas properties
and an aggregate of $3,926,000 utilized in development activities in the
Bakersfield Properties and final drilling commitments on the Company's 3-D
projects prior to sale. This compares to $4,778,000 used in investing activities
for first quarter 1997 which consisted of $4,725,000 for drilling costs accrued
at December 31, 1997 and $53,000 relating to developmental drilling and 3-D
activities for first quarter 1997.
DEVELOPMENTAL DRILLING ACTIVITIES - During 1997 the Company delayed a
portion of the planned expenditures for drilling new development wells on the
Bakersfield properties pending progress of repressuring of the Diatomite zone on
the Ellis lease by water injection. Expansion of the waterflood project has
continued in 1998 with the number of injection wells being increased to a total
of 24 active injection wells by the end of the first quarter 1998. Completion of
the installation of the entire waterflood project is currently 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. The management of Seneca is
currently evaluating these results and future drilling plans.
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
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<PAGE> 30
and installation of the Diatomite zone waterflood project. A deep shale well
drilled on the Truman lease in 1997 has shown favorable performance with average
rates of 50 barrels of oil per day and 250 Mcfd during 1997. In fourth quarter
1997 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 171 barrels of
oil per day in fourth quarter 1997 to 408 barrels per day in the first quarter.
Additional shale development is currently projected for 1998. These development
plans may vary in the future as the management of Seneca further evaluates the
results of drilling activities, water injection, and results of current
operations.
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.
FINANCIAL COMMITMENTS
The management of the Company prior to the Company's sale to Seneca had
planned for the continued drilling and development of the Bakersfield Properties
as described in CAPITAL EXPENDITURES AND INVESTING ACTIVITIES.
Seneca is currently in the process of taking over the management of the
Company's business and operations. During this process Seneca will be evaluating
the results of current drilling and development activities and projected costs
and results for future development activities. Until such time that Seneca has
sufficiently evaluated these factors, a definitive capital expenditure forecast
and resulting financial commitments and requirements cannot be specifically
determined.
The Company believes that it has sufficient resources to meet its
current financial obligations and future capital expenditures.
It is anticipated that current operations and future capital
expenditures will be funded from existing cash flows from the Bakersfield
Properties and currently available financial
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<PAGE> 31
resources. These financial resources include the Company's existing cash, its
credit facility with ING Capital, and the financial resources of Seneca
Resources Corporation. The Company also anticipates significant future cost
savings from the consolidation of its operations and corporate overhead into
that of Seneca. The Company may also evaluate its current cost of capital and
consider seeking other financing alternatives.
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 1998 and thereafter, are forward-looking and are based upon the Company's
current belief as to the outcome and timing of such future events. There are
numerous uncertainties inherent in estimating quantities of proved oil and gas
reserves and in projecting future rates of production and timing of development
expenditures, including many factors beyond the control of the Company. Reserve
engineering is a subjective process of estimating underground accumulations of
oil and gas that cannot be measured in an exact way, and the accuracy of any
reserve estimate is a function of the quality of available data and of
engineering and geological interpretation and judgment.
As a result, estimates made by different engineers often vary from one
another. In addition, results of drilling, testing and production subsequent to
the date of an estimate may justify revisions of such estimate and such
revisions, if significant, would change the schedule of any further production
and development drilling. Accordingly, reserve estimates are generally different
from the quantities of oil and gas that are ultimately recovered. Furthermore,
the estimated production amounts and numbers of wells to be drilled in 1998 and
beyond are based upon product prices and costs as of December 31, 1997 (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 1998 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
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<PAGE> 32
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.
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<PAGE> 33
HARCOR ENERGY, INC.
PART II - OTHER INFORMATION
Item 5. - Other Information
New Board of the Company
Pursuant to a merger agreement dated March 31, 1998, (the "Merger
Agreement") between the Company and Seneca West Corp. (the "Purchaser") and its
parent company, Seneca Resources Corp. (the "Parent"), the Company agreed to
recommend a tender offer by the Purchaser to purchase all of the issued and the
outstanding shares of the Company Common Stock at a price of $2.00 per share
(the "Tender Offer"). The Tender Offer commenced on April 6, 1998, and was
consummated on May 4, 1998. As of the expiration of the Tender Offer
approximately 95% of the Company Common Stock was tendered and accepted by
purchasers for payment. The Merger Agreement provided for the merger of
Purchaser with and into the Company following the successful consummation of the
Tender Offer. All shares of the Company Common Stock that are not purchased
pursuant to the Tender Offer (other than shares owned by Purchaser and its
affiliates and shares as to which statutory appraisal rights are exercised) will
be converted in the merger into the right to receive $2.00 per share, net in
cash without interest.
Pursuant to the Merger Agreement, the Company had agreed that promptly
upon the purchase by Purchaser pursuant to the Tender Offer of at least a
majority of the Company's outstanding common stock, Parent will be entitled to
designate all members of the Board of Directors of the Company; and that the
current directors of the Company would resign as directors of the Company to
enable such Parent designees to be so appointed and elected by the Board.
Effective as of May 5, 1997, through action of the Board of the
Company, the total number of directors of the Company was increased from six to
nine directors, adding one Class I position, one Class II position and one Class
III position to the Board of Directors. The Board appointed Phillip C. Ackerman
to fill the Class I position vacancy, James A. Beck to fill the Class II
position vacancy and David F. Smith to fill the Class III position vacancy. The
present Directors, Mr. Robert J.
-31-
<PAGE> 34
Cresci, Mr. Vinod K. Dar, Mr. Herbert L. Oakes, Jr., Mr. David E. K. Frischkorn
Jr., Mr. Mark G. Harrington, and Mr. Francis H. Roth each tendered their
resignation as a Director of the Company and such resignations were accepted by
the Board. Following such action, and effective as of May 5, 1997 the Board
consists of the following Directors who will hold office until the next Annual
Meeting of Stockholders and until their respective successors have been elected
and qualified, or until their earlier resignation or removal:
Class I position: Phillip C. Ackerman
Class II position James A. Beck, and
Class III position: David F. Smith.
Because the Purchaser acquired at least 90% of the outstanding shares
of the Company Common Stock, the merger does not require any further action by
the previous Company board of directors or stockholders of the Company. The
Purchaser intends to consummate the merger immediately. As a result of the
merger, the Company will become a wholly-owned subsidiary of the Purchaser.
Item 6. - Exhibits and Reports on Form 8-K
(a) Exhibits - None
(b) Reports on Form 8-K
On January 24, 1998, a Report on Form 8-K was filed regarding the
Company's January 23, 1998 announcement that the Company had reached an
agreement in principle with Seneca Resources Corporation ("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 common stock. The purpose of this Current Report Form 8-K
was to file as exhibits a copy of the news release dated January 23, 1998 of the
Company announcing such proposed sale and a copy of the related agreement in
principle between the Company and Seneca.
On March 31, 1998, a Current Report on Form 8-K was filed announcing
that the Company had executed a definitive merger agreement with Seneca
Resources Corporation ("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 common stock;
and
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<PAGE> 35
that following completion of the tender offer, a newly formed subsidiary of
Seneca will merge with the Company, pursuant to which the remaining Company
stockholders will also receive $2.00 per share in cash. The purpose of this
Current Report on Form 8-K was to file as exhibits a copy of the joint news
release dated March 31, 1998 of Seneca and the Company announcing the execution
of the definitive agreement and a copy of the definitive agreement between the
Company and Seneca.
-33-
<PAGE> 36
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934,
the Registrant has duly caused this report to be signed on its behalf by the
undersigned, thereunto duly authorized.
HARCOR ENERGY, INC.
Registrant
Date: May 14, 1998 /s/ Gary S. Peck
-----------------
Gary S. Peck
Acting Principal
Accounting Officer
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<PAGE> 37
INDEX TO EXHIBIT
EXHIBIT
NUMBER DESCRIPTION
- ------- -----------
27 Financial Data Schedule
<TABLE> <S> <C>
<ARTICLE> 5
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> DEC-31-1998
<PERIOD-START> JAN-01-1998
<PERIOD-END> MAR-31-1998
<CASH> 2,195,651
<SECURITIES> 0
<RECEIVABLES> 3,340,945
<ALLOWANCES> 0
<INVENTORY> 0
<CURRENT-ASSETS> 5,838,920
<PP&E> 90,484,608
<DEPRECIATION> (15,465,962)
<TOTAL-ASSETS> 83,334,261
<CURRENT-LIABILITIES> 4,817,797
<BONDS> 52,696,966<F1>
0
0
<COMMON> 1,626,839
<OTHER-SE> 24,192,659
<TOTAL-LIABILITY-AND-EQUITY> 83,334,261
<SALES> 3,193,333
<TOTAL-REVENUES> 4,532,736
<CGS> 904,095<F2>
<TOTAL-COSTS> 904,095
<OTHER-EXPENSES> 1,928,746<F3>
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 2,257,398
<INCOME-PRETAX> (557,503)
<INCOME-TAX> 0
<INCOME-CONTINUING> (557,503)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (557,503)
<EPS-PRIMARY> (0.03)
<EPS-DILUTED> (0.03)
<FN>
<F1>14 7/8% Senior Secured Notes Due 2002
<F2>Oil and Gas Production Costs and Gas Plant Costs
<F3>Exploration, DD&A, G&A and other
</FN>
</TABLE>
