<PAGE>   1
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                       SECURITIES AND EXCHANGE COMMISSION
                             WASHINGTON, D.C. 20549

                                    FORM 10-K

                              --------------------
(MARK ONE)
[X]      ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
         SECURITIES EXCHANGE ACT OF 1934

                   FOR THE FISCAL YEAR ENDED DECEMBER 31, 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).


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     FINANCING ACTIVITIES

     The Company has typically financed its acquisitions through the use of
secured bank borrowings or long-term notes and periodic common and preferred
equity placements. Internationale Nederlanden (U.S.) Capital Corporation ("ING
Capital") has been the Company's principal banker since November 1989 with an
initial credit facility of $2.9 million. The Company's credit facility with ING
Capital has subsequently been increased at certain times in connection with the
Company's various acquisitions of oil and gas properties.

     In 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.


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     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 -
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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 -
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     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.


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<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.


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<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.