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SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K
/X/ ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(D)
OF THE SECURITIES EXCHANGE ACT OF 1934
FOR THE FISCAL YEAR ENDED DECEMBER 31, 1993
/ / TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(D)
OF THE SECURITIES EXCHANGE ACT OF 1934.
FOR THE TRANSITION PERIOD FROM ________ TO ________
COMMISSION FILE NUMBER 0-9207
HARKEN ENERGY CORPORATION
(Exact name of registrant as specified in its charter)
DELAWARE 95-2841597
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
2505 NORTH HIGHWAY 360, SUITE 800 75050
GRAND PRAIRIE, TEXAS (Zip Code)
(Address of principal executive offices)
Registrant's telephone number, including area code (817) 695-4900
Securities registered pursuant to Section 12(b) of the Act:
Title of each class: Name of each exchange on which registered:
COMMON STOCK, PAR VALUE $0.01 PER SHARE AMERICAN STOCK EXCHANGE
Securities registered pursuant to Section 12(g) of the Act: NONE
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
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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 INFORMATION STATEMENTS
INCORPORATED BY REFERENCE IN PART III OF THIS FORM 10-K OR ANY AMENDMENT TO THIS
FORM 10-K. /X/
The aggregate market value of the voting Common Stock, par value $0.01 per
share, held by nonaffiliates of the Registrant as of February 28, 1994 was
approximately $44,637,000. For purposes of the determination of the above stated
amount only, all directors, executive officers and 5% or more shareholders of
the Registrant are presumed to be affiliates.
The number of shares of Common Stock, par value $0.01 per share,
outstanding as of February 28, 1994 was 59,482,853.
DOCUMENTS INCORPORATED BY REFERENCE: PROXY STATEMENT TO BE FILED ON OR
BEFORE APRIL 30, 1994 IS INCORPORATED BY REFERENCE INTO PART III.
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TABLE OF CONTENTS
PAGE
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PART I.
ITEM 1. Business............................................................... 3
ITEM 2. Properties............................................................. 10
ITEM 3. Legal Proceedings...................................................... 10
ITEM 4. Submission of Matters to a Vote of Security Holders.................... 11
PART II.
ITEM 5. Market for Registrant's Common Equity and Related Stockholder
Matters................................................................ 11
ITEM 6. Selected Financial Information and Other Data.......................... 12
ITEM 7. Management's Discussion and Analysis of Financial Condition and
Results of Operations.................................................. 13
ITEM 8. Financial Statements and Supplementary Data............................ 20
ITEM 9. Changes in and Disagreements with Accountants on Accounting and
Financial Disclosure................................................... 48
PART III.
ITEM 10. Directors and Executive Officers of the Registrant..................... 48
ITEM 11. Executive Compensation................................................. 48
ITEM 12. Security Ownership of Certain Beneficial Owners........................ 48
ITEM 13. Certain Relationships and Related Transactions......................... 48
PART IV.
ITEM 14. Exhibits, Financial Statement Schedules and Reports on Form 8-K........ 48
SIGNATURES............................................................................ 50
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PART I
ITEM 1. BUSINESS
OVERVIEW
Harken Energy Corporation and its subsidiaries ("Harken") is engaged in oil
and gas exploration, development and production operations both domestically and
internationally through its various wholly-owned subsidiaries and joint venture
investments. Harken's domestic operations include the well servicing operations
of Supreme Well Service Company ("Supreme") and the oil and gas exploration and
production operations of Chuska Resources Corporation ("Chuska"), which was
acquired February 15, 1993. Harken's international operations include two
exclusive Colombian Association Contracts between Harken's wholly-owned
subsidiary, Harken de Colombia, Ltd., and Empresa Colombiana de Petroleos
("Ecopetrol") as well as a production sharing agreement between Harken's
wholly-owned subsidiary, Harken Bahrain Oil Company, and the Bahrain National
Oil Company. Harken's international operations currently consist solely of
exploration activities, however, management is continuing to pursue
international opportunities in all areas of Harken's operations, including
oilfield services and oil and gas exploration and development. Harken considers
that the opportunities to profitably deploy Harken's expertise and assets
internationally are generally greater than those available domestically.
Harken was incorporated in 1973 in the state of California and
reincorporated in 1979 in the state of Delaware. Harken's principal offices are
located at 2505 N. Highway 360, Suite 800, Grand Prairie, Texas 75050 and its
telephone number is (817) 695-4900.
INTERNATIONAL EXPLORATION OPERATIONS
Alcaravan Contract -- During the third quarter of 1992, Harken, through a
subsidiary, Harken de Colombia, Ltd., was awarded the exclusive right to explore
for, develop and produce oil and gas throughout approximately 350,000 acres
within the Alcaravan area ("Alcaravan") of Colombia. Alcaravan is located in
Colombia's Llanos Basin and is located approximately 140 miles east of Santafe
de Bogota. Harken and Ecopetrol have entered into an Association Contract
("Alcaravan Contract") which requires Harken to conduct a seismic and
exploratory drilling program in the Alcaravan area ("work program") over the
initial six (6) years. At the end of each of the six years in the work program,
Harken has the option to withdraw from the Alcaravan Contract or to commit to
the next year's work requirements. If Harken makes a commercial discovery of oil
and/or gas which is approved by Ecopetrol, the standard terms of the Alcaravan
Contract will apply. Such terms provide for Ecopetrol to reimburse Harken for
50% of its successful well costs expended up to the point of commercial
discovery and to receive a 20% royalty interest and for both Ecopetrol and
Harken to each have a 50% working interest. The term of the Alcaravan Contract
will extend twenty-two (22) years from the date of any commercial discovery of
oil and/or gas. Harken reprocessed in excess of 200 kilometers of seismic on the
Alcaravan area and completed the acquisition of 52 kilometers of new seismic
over prospective areas in mid-February 1994. Harken is currently carrying on
discussions with potential joint venture partners regarding potential drilling
on the Alcaravan area.
Bocachico Contract -- In January 1994, Harken announced that Harken de
Colombia, Ltd. had signed its second Association Contract ("Bocachico Contract")
with Ecopetrol, covering the Bocachico contract area. Under the Bocachico
Contract, Harken has acquired the exclusive rights to conduct exploration
activities and drilling on this area, which covers approximately 192,000 acres
in the Middle Magdelena Valley of Central Colombia.
During the first year of the Bocachico Contract, Harken will conduct
seismic activities on the land covered by this contract including reprocessing
of at least 250 kilometers of existing seismic data and the acquisition of at
least 35 kilometers of new seismic data. During each of the 2nd through the 6th
contract years Harken may elect to continue the contract by committing to the
drilling of at least one well during each contract year. During this initial six
year term, called the Exploration Period under the Bocachico Contract, if Harken
has discovered the existence of commercial production in the Bocachico Contract
area, the Bocachico Contract will be further extended for a period of 22 years
from the date of any commercial discovery of oil
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and/or gas. If Harken makes a commercial discovery of oil and/or gas which is
approved by Ecopetrol, the standard terms of the Bocachico Contract will apply.
Such terms provide for Ecopetrol to reimburse Harken for 50% of its successful
well costs expended up to the point of commercial discovery and to receive a 20%
royalty interest and for both Ecopetrol and Harken to each have a 50% working
interest.
In addition to reprocessing and acquiring seismic data during the first
contract year of the Bocachico Contract, Harken intends to also conduct
engineering studies to evaluate the potential for recovering existing oil
reserves in the Rio Negro area, which is located in the northern portion of the
Bocachico Contract area. Three wells were drilled, produced and subsequently
abandoned by another contractor approximately 30 years ago in this area, which
have provided information and data including production rates, well logs and
pressure tests. This well data will be utilized by Harken in such studies to
evaluate the feasibility of applying modern production and recovery techniques
in this area. Harken has not made any determination at this point as to the
recoverability of reserves which may be indicated in this area.
Bahrain Operations -- In January 1990, Harken, through its wholly-owned
subsidiary, Harken Bahrain Oil Company ("HBOC"), entered into a production
sharing agreement with the Bahrain National Oil Company ("BANOCO") which gave it
the exclusive right to explore for, develop and produce oil and gas throughout
most of Bahrain's Arabian Gulf offshore territories. Subject to the discovery
and development of oil and/or gas, the contract has a term of thirty-five years.
The agreement, as amended, called for HBOC to drill an exploratory well to test
the Permian Khuff formation (estimated depth 14,275 feet) within 2 1/2 years of
the signing of the contract. Under the original terms of the agreement, as
amended, in order for HBOC to earn all of its acreage rights, four exploratory
wells were required to be drilled by 1995.
In July 1990, Bass Enterprises Production Company ("BEPCO") entered into a
joint venture agreement with HBOC and agreed to participate with HBOC in the
exploration and development contemplated under HBOC's production sharing
agreement, subject to certain conditions. Under the terms of this agreement,
BEPCO committed to fund, at a minimum, the first three exploratory wells. After
drilling the initial three wells, BEPCO held the option to either withdraw from
the project and forfeit all rights under the agreement or fund additional
drilling activities. If BEPCO had elected to fund certain additional drilling
activities, BEPCO would have thereby earned a fifty percent interest in HBOC's
rights, title and interests under the production sharing agreement, and after
recovering its previous drilling and related costs, would have been entitled to
share equally with HBOC in any profits.
HBOC has identified several surface and subsurface structures within the
contract area. One significant prospect within the area is called the Jarim Reef
and is located on trend between Bahrain's onshore Awali field and Saudi Arabia's
nearby offshore Abu Safah field. The first well required under HBOC's production
sharing agreement was the Jarim No. 2 located to test the seismic structure
mapped on Jarim Reef. Jarim No. 2 was thought to be prospective in both the
Jurassic Arab formation for oil and the Permian Khuff formation for gas. In
March 1992, after drilling was completed, HBOC announced that the Jarim No. 2
well was not productive of either oil or gas and was abandoned. On December 28,
1992, Harken commenced the drilling of its second exploratory well, the Muharraq
No. 1, in Bahrain. Harken announced on February 10, 1993, that the well had
reached a depth of 8,778 feet and that no shows of oil and gas were noted in the
well cuttings of the Jurassic Arab or the Jurassic Fadhili formation. As a
result, the well was plugged and abandoned at the foregoing depth. Further,
under the terms of the production sharing agreement, HBOC allowed its
exploration and drilling rights on approximately 10% of the acreage covered by
the production sharing agreement to expire, effective February 13, 1993. Later,
during the third quarter of 1993, HBOC allowed an additional portion of the
acreage covered by the production sharing agreement to expire effective August
29, 1993. HBOC's remaining obligation under the production sharing agreement is
limited to reprocessing 500 kilometers of seismic prior to July 30, 1995.
On April 8, 1993, HBOC and BEPCO entered into an agreement whereby BEPCO
was released and discharged from any future drilling obligations related to
HBOC's production sharing agreement, and the joint venture agreement between
HBOC and BEPCO was terminated. As part of this agreement, BEPCO paid to HBOC
approximately $2,000,000 plus all remaining costs and obligations related to the
Muharraq No. 1 well along with certain other costs and contingencies. HBOC's
production sharing agreement with BANOCO was
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not impacted as a result of the termination of this joint venture agreement.
HBOC is continuing to pursue discussions with various other parties in joining
HBOC to pursue continuing operations on the remaining acreage which HBOC
continues to hold.
DOMESTIC EXPLORATION AND PRODUCTION OPERATIONS
Prior to 1993, Harken's exploration and production operations were
primarily in Oklahoma and Texas, and during 1991 and 1992 these operations were
conducted through Harken's interest in Harken Anadarko Partners, L.P., ("HAP"),
a limited partnership managed by a wholly-owned subsidiary of Harken. As general
partner of HAP, Harken's wholly-owned subsidiary received a monthly management
fee from the partnership. An affiliate of a major stockholder of Harken served
as sole limited partner.
On December 17, 1992, Harken entered into a Purchase and Sale Agreement
(the "HAP Agreement") pursuant to which Harken sold its 12% general partner's
interest in HAP to an affiliate of both the limited partner and the major
stockholder. The closing of the HAP Agreement was completed on December 30,
1992. Pursuant to the HAP Agreement, Harken was paid consideration in cash of
$2,650,000 for the sale of this partnership interest and certain contract rights
associated therewith. Under the terms of the Agreement, Harken continued to
manage the oil and gas property interests of HAP and operate certain partnership
properties. Harken was paid $50,000 per month to manage the HAP interest in such
properties in addition to the fees it received for serving as operator of the
properties pursuant to applicable joint operating agreements. During the second
quarter of 1993, HAP sold its interests in all oil and gas properties operated
by Harken and Harken ceased to manage the partnership.
Chuska -- Effective February 15, 1993, Harken consummated a merger pursuant
to which Chuska became a wholly-owned subsidiary of Harken. Harken acquired all
of the 11,055,918 shares of Chuska common stock outstanding in exchange for
14,210,357 shares of newly-issued Harken common stock. The Board of Directors of
both Harken and Chuska approved the Merger as described in the Merger Agreement,
and the necessary approvals by the stockholders of both Harken and Chuska were
obtained at special meetings of stockholders which were held by each company on
February 15, 1993. In addition, each of the Boards of Directors of Chuska and
Harken received a fairness opinion from a financial advisor that the Exchange
Ratio was fair to the holders of Chuska common stock and the holders of Harken
common stock from a financial point of view. The Boards of Directors of Harken
and Chuska received such opinion on January 13, 1993. The registration statement
(including the prospectus/joint proxy statement for the special meeting of
stockholders of each company) covering the shares of Harken common stock to be
issued pursuant to the Merger Agreement was declared effective by the SEC on
January 15, 1993.
In connection with the merger, Harken agreed to pay the financial advisor,
Howard, Weil, Labouisse, Friedrichs Incorporated ("Howard Weil"), a total of
50,000 shares of restricted Harken common stock for its services in connection
with rendering a fairness opinion to the Harken Board of Directors relating to
the merger, such shares to be issued upon the consummation of the merger
transaction. Chuska paid Howard Weil a cash fee in connection with rendering the
fairness opinion to its Board of Directors.
Chuska is engaged, through its subsidiaries, in the business of exploring
for and producing oil and gas in the Aneth Field and Blanding Sub-Basin portions
of the Paradox Basin in Utah, Arizona and New Mexico, and in the Western Paradox
Basin in Utah. Chuska's operations in the Paradox Basin are primarily
concentrated on the 16 million acre Navajo Indian Reservation (the
"Reservation"), which comprises portions of Arizona, New Mexico and Utah. In
addition to its oil and gas exploration activities, Chuska also has an interest
in a gas processing plant in or near the Paradox Basin, the Aneth Gas Plant, on
the Utah portion of the Reservation.
Chuska currently has two operating agreements (the "Tribal Agreements")
with the Navajo Tribe of Indians (the "Tribe" or the "Navajo Nation") allowing
oil and gas exploration and development on an aggregate 53,430 acres of Navajo
tribal lands on the Reservation (the "Tribal Lands"). Chuska has the right to
explore for, produce, and sell oil, natural gas, and other specified gases until
July 20, 2012, under the Tribal Agreement effective July 20, 1987 (the "1987
Tribal Agreement") and until August 26, 2003, under the Tribal Agreement
effective August 26, 1983 (the "1983 Tribal Agreement"). Any acreage under the
1987
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Tribal Agreement which is not held by production as of July 1995, will expire.
All non-productive acreage under the 1983 Tribal Agreement has previously
expired.
The Navajo Nation receives 30% of gross revenues from the sale of
production of oil and gas under the 1983 Tribal Agreement and 20% under the 1987
Tribal Agreement (this 20% is subject to an increase to 23% with respect to each
barrel of oil sold for more than $22 after July 1994). Under both Tribal
Agreements, the Tribe is entitled to receive an escalated 50% of all gross
proceeds recovered over $35 per barrel of oil. Under the 1983 Tribal Agreement,
the Tribe receives 50% of all gross proceeds over $4 per MCF of gas. Under the
1987 Tribal Agreement, the Tribe receives 40% of all gross proceeds over $8 per
MCF of gas.
In addition to the Tribe's share of gross proceeds, designation
consideration and delay rentals, Chuska pays severance tax and possessory
interest tax ("PIT") to the Tribe. The severance tax is payable monthly and is
4% of Chuska's gross proceeds from sales of oil and gas, after deducting the
Tribe's share of gross proceeds. The PIT is assessed once a year and is
calculated as a specified percentage of a defined discounted present value of
projected future cash flows (net of the Tribe's share of gross proceeds) from
existing proven reserves as of January 1 of the year for which the PIT is
assessed, although the Tribe actually retains title to those reserves. The PIT
is payable in two installments. Chuska is also required to pay the Tribe land
damage costs relating to Chuska's seismic and drilling activities.
CHAP Venture -- In order to develop the Tribal Lands, Chuska sold an
undivided 50% interest in gross proceeds under the Tribal Agreements to Amadeus
Petroleum, Inc., Bligh Petroleum, Inc., Crusader, Inc., C.A.B. Resources, Inc.
(an affiliate of Crusader, Inc.), Australian Hydrocarbons, Inc., Jindavik
Petroleum, Inc., and Paroo Petroleum (USA), Inc. (collectively the "Australian
Group") effective August 1, 1988, and formed the CHAP Venture. CHAP is not a
legal entity, although it is a tax partnership. Effective March 1, 1990, Chuska
sold 20% of its CHAP interest to Global Natural Resources Corporation of Nevada
("Global"), which interest was repurchased by Chuska effective January 1, 1993,
resulting in Chuska again holding a 50% total interest in CHAP.
Each CHAP co-venturer pays its respective participating interest share of
costs and expenses and receives its participating interest share of revenues.
Chuska is the operator for CHAP and communicates with and makes proposals to an
Operating Committee composed of Chuska representatives and a representative of
each of the non-operators. As operator, Chuska is reimbursed by CHAP for
indirect costs incurred on behalf of CHAP or in the pursuit of CHAP activities.
Greater Blanding -- During 1991, a venture between Sunfield Energy Company
("Sunfield", a wholly-owned subsidiary of Chuska), Amadeus Petroleum, Inc.,
Bligh Petroleum, Inc., and Jindavik Petroleum, Inc., was formed to explore and
develop properties in a portion of the Blanding Sub-Basin designated internally
as the "Greater Blanding" project. The venture has no separate legal status or
existence except as a tax partnership. Sunfield is the operator of the venture,
and all costs and expenses of the venture are borne and paid by, and all
property, revenues and other benefits are to be allocated to and owned by, each
venturer in the ratio of its respective participating working interest; however,
the three non-Sunfield parties agreed to carry $600,000 of qualifying capital
expenditures allocable to Sunfield in connection with the Greater Blanding
project and/or the Central Blanding project (see "Central Blanding" below).
Sunfield owns a 60% interest in the Greater Blanding project.
In connection with the operation of the Greater Blanding venture, Sunfield
is reimbursed for direct and indirect costs incurred on behalf of the venture.
The area termed Greater Blanding includes an area of mutual interest (AMI) north
of the Navajo Reservation area being explored by Chuska pursuant to the Tribal
Agreements.
Central Blanding -- During 1991, a venture between Sunfield, Global,
Amadeus Petroleum, Inc., Bligh Petroleum, Inc., and Jindavik Petroleum, Inc. was
formed. During 1992, a 10% interest in the venture was assigned from Global to
Holly Petroleum. The venture has no separate legal status or existence except as
a tax partnership. Sunfield is the operator of the venture, and all costs and
expenses of the venture are borne and paid by, and all property, revenues and
other benefits are to be allocated to and owned by each venturer in the ratio of
its respective participating working interest. The Global interest was
repurchased by Sunfield effective January 1, 1993, resulting in Sunfield holding
a 70% total interest in the Central Blanding venture.
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In connection with the operation of the Central Blanding venture, Sunfield
is reimbursed for direct and indirect costs incurred on behalf of the venture.
The area termed Central Blanding includes an area of mutual interest (AMI) north
of the area of the Navajo Reservation being explored by Chuska pursuant to the
Tribal Agreements. There is no overlap between the Greater Blanding AMI and the
Central Blanding AMI.
Western Paradox -- During 1991, Sunfield began the acquisition of acreage
for an oil and gas exploration project in a portion of central Utah northwest of
the Greater Blanding and Central Blanding projects. Subsequent to December 31,
1993, Sunfield has entered into a seismic sharing agreement with an industry
partner to begin geophysical and exploration efforts in the Western Paradox
area.
WELL SERVICING OPERATIONS
Harken formed Harken International, Ltd. ("HIL") as a wholly owned
subsidiary whose major domestic assets are 100% of the outstanding stock of
Burns Drilling Company, Inc. ("Burns"), a contract drilling subsidiary, and
Supreme, a well servicing subsidiary.
Supreme provides services to oil and gas exploration and production
companies for the maintenance and workover of existing oil and gas wells and the
completion of newly drilled wells. Supreme generally provides the well servicing
rig, the crew to operate it and other auxiliary equipment as needed. Supreme was
operating 12 workover and swab rigs in Texas at December 31, 1993. The well
servicing operations are affected by the same seasonal operational trends as the
contract drilling business as well as by weather conditions.
CONTRACT DRILLING OPERATIONS
In April 1991, Harken made the decision to suspend domestic contract
drilling operations due to decreased demand and increased competition,
particularly in the Austin Chalk trend in South Texas. In December 1991, HIL
made the decision to attempt to sell certain of its drilling rigs and related
domestic assets which are not suitable for the pursuit of international drilling
opportunities. As a result of its decision to sell certain of its drilling rigs
and related domestic assets, Harken recognized a non-cash charge of $7.1 million
to fourth quarter 1991 operations to decrease the carrying value of those
assets. All remaining contract drilling rigs were idle at December 31, 1992 and
1993.
In January 1994, Harken made the decision to liquidate its remaining
drilling rigs and related assets and apply the proceeds primarily to its
international exploration efforts, specifically in Colombia and Bahrain. As a
result of this decision, Harken recognized an additional non-cash charge of
approximately $3,100,000 during the fourth quarter of 1993.
INDUSTRY RISKS
Price Volatility. The revenues generated by Harken are highly dependent
upon the prices of oil and gas. The currently unsettled energy market makes it
difficult to estimate future prices of oil and natural gas. Fluctuations in
energy prices are caused by a number of factors, including regional, domestic
and international demand, energy legislation, federal or state taxes (if any) on
sales of crude oil and natural gas, production guidelines established by the
Organization of Petroleum Exporting Countries ("OPEC"), and the relative
abundance of supplies of alternative fuel such as coal. Additionally, changing
international economic and political conditions may have a substantial impact
upon crude oil and natural gas prices. Many of these factors which can affect
energy prices are beyond the control of Harken.
Business Risks. Harken must continually acquire or explore for and develop
new oil and gas reserves to replace those being depleted by production. Without
successful drilling or acquisition ventures, Harken's oil and gas assets,
properties and the revenues derived therefrom will decline over time. To the
extent Harken engages in drilling activities, such activities carry the risk
that no commercially viable oil or gas production will be obtained. The cost of
drilling, completing and operating wells is often uncertain. Moreover, drilling
may be curtailed, delayed or canceled as a result of many factors, including
shortage of available working capital, title problems, weather conditions,
environmental concerns, shortages of or delays in delivery of equipment, as well
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as the financial instability of well operators, major working interest owners
and drilling and well servicing companies. The availability of a ready market
for Harken's oil and gas depends on numerous factors beyond their respective
control, including the demand for and supply of oil and gas, the proximity of
Harken's natural gas reserves to pipelines, the capacity of such pipelines,
fluctuation in seasonal demand, the effects of inclement weather, and government
regulation. New gas wells may be shut-in for lack of a market until a gas
pipeline or gathering system with available capacity is extended into the area.
In February 1994, the Navajo Nation issued a moratorium on future oil and
gas development agreements and exploration on lands situated within the Aneth
Chapter on the Navajo Reservation, which is an area that includes much of
Chuska's undeveloped acreage. It is unknown what effect, if any, this resolution
will have on Chuska's operations.
Operating Hazards and Uninsured Risks. The operations of Harken are subject
to the inherent risks normally associated with exploration for and production of
oil and gas, including blowouts, cratering, pollution and fires, each of which
could result in damage to or destruction of oil and gas wells or production
facilities or damage to persons and property. As is common in the oil and gas
industry, Harken is not fully insured against all of these risks, either because
insurance is not available or because Harken has elected to self-insure due to
high premium costs. The occurrence of a significant event that is not fully
insured against could have a material adverse effect on Harken's financial
condition.
Environmental Regulation. The activities of Harken are subject to various
Navajo, federal, state, and local laws and regulations covering the discharge of
material into the environment or otherwise relating to protection of the
environment. In particular, Harken's oil and gas exploration, development,
production, its activities in connection with storage and transportation of
liquid hydrocarbons and its use of facilities for treating, processing,
recovering, or otherwise handling hydrocarbons and wastes therefrom are subject
to stringent environmental regulation by governmental authorities. Such
regulations have increased the costs of planning, designing, drilling,
installing, operating and abandoning Harken's oil and gas wells and other
facilities.
The Aneth Gas Plant facility, of which Chuska is a co-owner, was in
operation for many years prior to Chuska's becoming an owner. The operations at
the Aneth Gas Plant previously used open, unlined drip pits for storage of
various waste products. The plant owners have replaced all of the open ground
pits currently being used with steel tanks. The plant owners are currently in
the process of closing the open ground pits.
Texaco, the plant's operator, received a letter from the EPA dated July 2,
1991 and a subsequent letter dated June 8, 1992, in which the EPA requested
certain information in order to determine if there had been at the Aneth Gas
Plant the release of hazardous substances to the environment. Texaco has advised
Chuska that certain information was supplied to the EPA pursuant to this
request. Subsequently, core samples in and around certain pit areas were taken
by the EPA and Texaco jointly. The EPA has responded to the initial sampling of
the drip pits and Texaco is now planning the next phase of required evaluation.
Texaco has indicated to Chuska that it believes that some of these pits may
require reclamation or remediation. In the event such action should or must be
taken, the plant owners, including Chuska, will seek contractual indemnification
from the previous owner of the Aneth Gas Plant for the costs incurred in the
reclamation and remediation process. At this time, however, it is impossible for
Chuska to determine or estimate the costs of the cleanup at the Aneth Gas Plant
or if the prior owner will indemnify the present owners, including Chuska, for
such costs.
Harken has expended significant resources, both financial and managerial,
to comply with environmental regulations and permitting requirements and
anticipates that it will continue to do so in the future. Although Harken
believes that its respective operations and facilities are in general compliance
with applicable environmental laws and regulations, risks of substantial costs
and liabilities are inherent in oil and gas operations, and there can be no
assurance that significant costs and liabilities will not be incurred in the
future. Moreover, it is possible that other developments, such as increasingly
strict environmental laws, regulations and enforcement policies thereunder, and
claims for damages to property, employees, other persons and the environment
resulting from Harken's operations, could result in substantial costs and
liabilities in the future.
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Imprecise Nature of Reserve Estimates. Reserve estimates are imprecise and
may be expected to change as additional information becomes available.
Furthermore, estimates of oil and gas reserves, of necessity, are projections
based on engineering data, and there are uncertainties inherent in the
interpretation of such data as well as the projection of future rates of
production and the timing of development expenditures. 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.
Competitive Factors in Oil and Gas Industry. The oil and gas industry is
highly competitive in all its phases. Competition is particularly intense
respecting the acquisition of desirable producing properties and the sale of oil
and natural gas production. Harken's competitors in oil and gas exploration,
development and production, as well as well servicing, include major oil
companies and numerous independent oil and gas companies, and individual
producers and operators. Many of Harken's competitors possess and employ
financial and personnel resources substantially greater than those which are
available to Harken and may, therefore, be able to pay greater amounts for
desirable leases and to define, evaluate, bid for and purchase a greater number
of producing prospects than the financial or personnel resources of Harken will
permit.
Production and Revenues. The following table shows for the periods
indicated operating information attributable to Harken's oil and gas interests.
The 1990 information represents ten months activity because Harken's producing
oil and gas properties were transferred to HAP effective November 1, 1990. The
1993 information reflects the February 15, 1993 merger with Chuska.
YEAR ENDED DECEMBER 31,
------------------------------------------------------------
1989 1990 1991 1992 1993
--------- ---------- -------- -------- ---------
Production:
Oil (Bbls)............... 250,000 199,000 -- -- 185,000
Natural Gas (Mcf)........ 2,092,000 1,605,000 -- -- 429,000
Revenues:
Oil...................... $4,519,000 $4,325,000 $ -- $ -- $2,989,000
Natural Gas.............. 3,407,000 2,599,000 -- -- 792,000
--------- ---------- -------- -------- ---------
Total............ $7,926,000 $6,924,000 $ -- $ -- $3,781,000
--------- ---------- -------- -------- ---------
--------- ---------- -------- -------- ---------
Unit Prices:
Oil (per Bbl)............ $ 18.08 $ 21.73 $ -- $ -- $ 16.16
Natural Gas (per Mcf).... $ 1.63 $ 1.62 $ -- $ -- $ 1.85
Production costs per
equivalent barrel..... $ 4.72 $ 6.65 $ -- $ -- $ 4.98
Amortization per
equivalent barrel..... $ 5.22 $ 8.40 $ -- $ -- $ 5.58
Acreage and Wells. At December 31, 1993, Harken owned interests in the
following oil and gas wells and acreage, primarily through Chuska:
DEVELOPED UNDEVELOPED
GROSS WELLS NET WELLS ACREAGE ACREAGE
----------- ------------- --------------- ------------------
STATE OIL GAS OIL GAS GROSS NET GROSS NET
------------------------ --- --- ----- ---- ------ ----- ------- -------
Arizona................. 0 5 0.00 2.60 4,475 2,238 970 485
New Mexico.............. 14 0 7.00 0.00 670 335 8,750 4,375
Oklahoma................ 10 11 0.14 0.09 -- -- -- --
Texas................... 6 0 0.01 0.00 -- -- -- --
Utah.................... 40 0 18.00 0.00 21,928 6,671 174,680 139,460
--- --- ----- ---- ------ ----- ------- -------
Total......... 70 16 25.15 2.69 27,073 9,244 184,400 144,320
--- --- ----- ---- ------ ----- ------- -------
--- --- ----- ---- ------ ----- ------- -------
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Drilling Activity. The following table summarizes certain information
concerning Harken's activity drilled by HAP during 1991 and 1992 and by Chuska
during 1993.
NUMBER OF WELLS DRILLED
-----------------------------------------------------------------------
EXPLORATORY DEVELOPMENTAL TOTAL
--------------------- --------------------- ---------------------
PRODUCTIVE DRILLED PRODUCTIVE DRILLED PRODUCTIVE DRILLED
---------- ------- ---------- ------- ---------- -------
1991........................... 0 6 29 39 29 45
1992........................... 0 0 2 2 2 2
1993........................... 1 3 1 1 2 4
- - -- -- -- --
Total................ 1 9 32 42 33 51
- - -- -- -- --
- - -- -- -- --
A well is considered "drilled" when it is completed. A productive well is
completed when permanent equipment is installed for the production of oil or
gas. A dry hole is completed when it has been plugged as required and its
abandonment is reported to the appropriate government agency.
As of December 31, 1993, no wells were in process of drilling.
Regulatory Items. The production of oil and gas is subject to extensive
Navajo, federal and state laws, rules, orders and regulations governing a wide
variety of matters, including the drilling and spacing of wells, allowable rates
of production, prevention of waste and pollution and protection of the
environment. In addition to the direct costs borne in complying with such
regulations, operations and revenues may be impacted to the extent that certain
regulations limit oil and gas production to below economic levels. Although the
particular regulations applicable in each state in which operations are
conducted vary, such regulations are generally designed to ensure that oil and
gas operations are carried out in a safe and efficient manner and to ensure that
similarly-situated operators are provided with reasonable opportunities to
produce their respective fair shares of available oil and gas reserves. However,
since these regulations generally apply to all oil and gas producers, management
of Harken believes that these regulations should not put Harken at a material
disadvantage to other oil and gas producers.
Certain sales, transportation, and resales of natural gas by Harken are
subject to Navajo, federal and state laws and regulations, including, but not
limited to, the Natural Gas Act (NGA), the NGPA and regulations promulgated by
the FERC under the NGA, the NGPA and other statutes. The provisions of the NGA
and NGPA, as well as the regulations thereunder, are complex, and can affect all
who produce, resell, transport, purchase or consume natural gas.
Although recent FERC transportation regulations do not directly apply to
Harken because they are not engaged in rendering jurisdictional transportation
services, these regulations do affect the operations of Harken by virtue of the
need to deliver its gas production to markets served by interstate or intrastate
pipelines. In most instances, interstate pipelines represent the only available
method of accomplishing such transportation.
EMPLOYEES
As of December 31, 1993, Harken had 101 employees, including 52 employees
in its well servicing operations. Harken has experienced no work stoppages or
strikes as a result of labor disputes and considers relations with its employees
to be satisfactory. Harken maintains group life, medical, dental, surgical and
hospital insurance plans for its employees.
ITEM 2. PROPERTIES
See "Item 1. Business" for discussion of properties and locations.
ITEM 3. LEGAL PROCEEDINGS
Harken is currently involved in various lawsuits. In Management's opinion,
the determination against Harken of any of these suits would not have a material
effect on Harken.
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ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
None.
PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS
PRICE RANGE OF COMMON STOCK
Since March 18, 1991, Harken's common stock ("Common Stock") has been
listed on the American Stock Exchange and traded under the symbol HEC. From
August 30, 1989 through March 15, 1991, Harken's Common Stock was listed on the
New York Stock Exchange and traded under the symbol HEC. On February 18, 1991,
the stockholders of Harken approved an amendment to Harken's Certificate of
Incorporation to reduce the par value of Harken's Common Stock from $1.00 to
$0.01 per share. At February 15, 1994, there were approximately 3,531 holders of
record of Common Stock.
The following table sets forth, for the periods indicated, the reported
high and low sales prices of the Common Stock on the American Stock Exchange
Composite Tape after such date.
PRICES
-----------------
HIGH LOW
---- ----
1992 -- First Quarter............................................ $6 1/4 $2 1/8
Second Quarter........................................... 2 7/8 2 1/4
Third Quarter............................................ 3 1 13/16
Fourth Quarter........................................... 3 1/4 2
1993 -- First Quarter............................................ 3 1/4 1 3/16
Second Quarter........................................... 1 11/16 15/16
Third Quarter............................................ 1 1/4 13/16
Fourth Quarter........................................... 1 13/16 1
DIVIDENDS
Harken has not paid any cash dividends on the Common Stock since its
organization and it is not contemplated that any cash dividends will be paid on
shares of Common Stock in the foreseeable future.
Harken's shares of Series C Cumulative Convertible Preferred Stock, par
value $1.00 per share ("Series C Preferred") were to accrue a cumulative
dividend of 12% per year and have a mandatory redemption feature of $10 per
share, plus any accrued but unpaid dividends, beginning on June 30, 1993, and
continuing annually until June 30, 1998. As of December 31, 1992 and 1993, only
the 186,760 shares of Series C Preferred held by Tejas Power Corporation
("Tejas") are currently outstanding. During 1991, in connection with the
issuance of 1,000 shares of Tejas preferred stock to Harken, Tejas agreed to
waive certain of the provisions under the terms of the Harken Series C
Preferred, including the payment of the 12% annual dividend.
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ITEM 6. SELECTED FINANCIAL INFORMATION AND OTHER DATA
1989(1) 1990 1991(5) 1992(5) 1993
----------- ----------- ----------- ---------- ----------
Revenues....................................... $17,684,000 $21,759,000 $ 6,774,000 $6,430,000 $8,675,000
Income (loss) from continuing operations....... $(1,117,000) $(8,304,000) $(12,606,000) $ 333,000 $(5,494,000)
Income (loss) from discontinued operations..... $(11,449,000) $(32,884,000) $(2,997,000) $ -- $ --
Extraordinary item............................. $ -- $ -- $ -- $ 172,000 $ --
Net income (loss).............................. $(12,566,000) $(41,188,000) $(15,603,000) $ 505,000 $(5,494,000)
Net income (loss) per common share:
Income (loss) from continuing operations..... $ (0.14) $ (0.37) $ (0.31) $ 0.00 $ (0.09)
Discontinued operations...................... (0.35) (1.01) (0.07) -- --
Extraordinary item........................... -- -- -- 0.00 --
----------- ----------- ----------- ---------- ----------
Net income (loss)............................ $ (0.49) $ (1.38) $ (0.38) $ 0.00 $ (0.09)
----------- ----------- ----------- ---------- ----------
----------- ----------- ----------- ---------- ----------
Current assets................................. $108,745,000 $94,038,000 $15,560,000 $13,911,000 $6,698,000
Current liabilities............................ $103,129,000 $101,094,000 $15,122,000 $10,201,000 $6,533,000
----------- ----------- ----------- ---------- ----------
Working capital (deficit)...................... $ 5,616,000 $(7,056,000) $ 438,000 $3,710,000 $ 165,000
----------- ----------- ----------- ---------- ----------
----------- ----------- ----------- ---------- ----------
Working capital (deficit) from continuing
operations................................... $ (895,000) $ 328,000 $ 438,000 $3,710,000 $ 165,000
Total assets................................... $292,040,000 $260,607,000 $37,664,000 $34,872,000 $37,731,000
Long-term obligations:
Long-term debt and other liabilities......... $ 427,000 $ 302,000 $ 1,276,000 $ -- $ --
Notes payable to related parties(4).......... $23,938,000 $ 4,761,000 $ 253,000 $ -- $ --
Redeemable preferred stock(3)................ $30,000,000 $30,000,000 $ 9,000,000 $1,868,000 $1,868,000
----------- ----------- ----------- ---------- ----------
Total.................................. $54,365,000 $35,063,000 $10,529,000 $1,868,000 $1,868,000
----------- ----------- ----------- ---------- ----------
----------- ----------- ----------- ---------- ----------
Stockholders' Equity........................... $31,442,000 $ 3,000,000 $11,499,000 $20,316,000 $28,963,000
Redeemable preferred stock outstanding......... 3,000,000 3,000,000 900,000 186,760 186,760
Common stock of subsidiary held by minority
interest outstanding......................... 621,000 -- -- -- --
Weighted average common stock outstanding...... 33,191,448 32,533,137 42,519,373 45,752,936 58,392,901
Proved reserves at end of year(2):
Bbls of oil.................................. 1,880,000 -- -- -- 1,035,000
Mcf of gas................................... 29,297,000 -- -- -- 4,970,000
Future net revenues.......................... $62,782,000 $ -- $ -- $ -- $13,707,000
Present value (discounted at 10% per year)... $42,043,000 $ -- $ -- $ -- $8,230,000
- ---------------
(1) Financial information for this year has been restated to reflect the effects
of the rights offering of Harken in 1991, as the result of which E-Z Serve
Corporation and Tejas Power Corporation, former Harken gasoline retailing
and natural gas gathering and marketing subsidiaries, respectively, became
stand-alone public companies. See "Notes to Consolidated Financial
Statements, Note 2 -- Discontinued Operations" contained in Part II, Item
8.
(2) These estimated reserve quantities, future net revenues and present value
figures are related solely to proved reserves. No consideration has been
given to probable or possible reserves. Oil and gas prices were held
constant except where future price increases were fixed and determinable
under existing contracts and government regulations. Operating costs were
held constant. Harken's share of an equity method investee's proved oil and
gas reserves are not reflected in these amounts. Effective November 1,
1990, Harken transferred its oil and gas properties to a newly-formed
limited partnership. In addition, effective February 15, 1993, Harken
consummated a merger whereby Chuska Resources Corporation ("Chuska") became
a wholly-owned subsidiary of Harken. Only the 1993 amounts reflect the
proved reserve quantities and future net revenues of Chuska. (See "Notes to
Consolidated Financial Statements, Notes 3 and 12 -- Acquisitions and Oil
and Gas Disclosures" contained in Part II, Item 8.)
(3) See "Notes to Consolidated Financial Statements, Note 7 -- Redeemable
Preferred Stock" contained in Part II, Item 8, for a discussion of Harken
Series C Preferred Stock.
(4) Notes payable to related parties at December 31, 1989, included
approximately $13,027,000 of principal and interest payable to affiliates
of major stockholders pursuant to the repurchase of 6,908,176 shares of
Harken common stock owned by a former stockholder. Effective January 1,
1990, these affiliates agreed to exchange their notes, including accrued
interest, for Harken common stock. In addition, notes payable
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to related parties at December 31, 1989 included $10,911,000 of advanced
funds from E-Z Serve Corporation, which was repaid by Harken in 1990.
(5) Revenues and Total Assets amounts in 1991 and 1992 reflect the formation of
Harken Anadarko Partners, L.P. whereby Harken transferred its domestic oil
and gas property interests to the limited partnership effective November 1,
1990. As a result, Harken did not reflect direct oil and gas operating
revenues, expenses or depreciation and amortization from these properties
in its statements of operations for these years.
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
RESULTS OF OPERATIONS
The following table presents certain data for major operating segments of
Harken for the years ended December 31, 1991, 1992 and 1993. A discussion
follows of certain significant factors which have affected Harken's operating
results during such periods. This discussion should be read in conjunction with
Harken's Consolidated Financial Statements and related footnotes contained in
Part II, Item 8.
YEAR ENDED DECEMBER 31,
---------------------------
1991 1992 1993
----- ----- -----
EXPLORATION AND PRODUCTION SEGMENT(1)
Management fee income ($000).................................... 1,266 1,110 300
Revenues ($000):
Oil sales.................................................... -- -- 2,989
Gas sales and gas plant revenues............................. -- -- 1,981
Gain on sale of partnership interest ($000)..................... -- 1,449 --
WELL SERVICING AND CONTRACT DRILLING SEGMENT
Well servicing revenues ($000).................................. 2,266 2,027 2,074
Well servicing gross profit ($000).............................. 965 1,080 1,138
Contract drilling revenues ($000)............................... 1,317 -- --
Contract drilling gross profit ($000)........................... 256 -- --
CORPORATE AND OTHER REVENUES
Interest income ($000).......................................... 1,120 822 225
Other income ($000)............................................. 805 1,022 1,106
- ---------------
(1) Effective February 15, 1993, Harken consummated a merger whereby Chuska
Resources Corporation ("Chuska") became a wholly-owned subsidiary of
Harken.
OVERVIEW
Harken reported a net loss for the year ended December 31, 1993, of
$5,494,000. Effective February 15, 1993, Harken consummated a merger pursuant to
which Chuska Resources Corporation ("Chuska") became a wholly-owned subsidiary
of Harken. As a result of the merger with Chuska, Harken began reflecting oil
and gas sales revenues and related operating expenses and depreciation and
amortization in 1993. Harken's exploration and production segment generated
gross revenues of $5,505,000 and gross profit before depreciation and
amortization and general and administrative expenses totalled $3,680,000 during
1993, primarily generated from the Chuska acquisition. Harken's well servicing
operations, through Supreme Well Service ("Supreme"), generated gross revenues
of $2,074,000 and gross profit before depreciation and amortization and general
and administrative expenses totalled $1,138,000. Contributing to the net loss
for 1993 was the decision to liquidate Harken's remaining contract drilling rigs
and related assets whereby Harken recognized a non-cash charge of approximately
$3,100,000 during the fourth quarter of 1993 in order to reduce the carrying
value of these remaining rigs to liquidation value. These drilling rigs had not
previously been written down in 1991, as Harken pursued deploying these rigs
internationally. The proceeds from the sale of these drilling rigs
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will be used primarily by Harken for its international exploration efforts. Such
international exploration efforts continued in 1993, particularly in Bahrain and
Colombia. Harken completed its first year work commitment in Colombia for the
Alcaravan Association Contract and also entered into a second Association
Contract in January 1994 for the Bocachico area of Colombia in the Middle
Magdelena Basin. In addition to the above write down of drilling rigs and
related assets, Harken also expensed a total of $551,000 of accrued interest
related to certain non-recourse notes receivable from certain current and former
employees, officers and directors.
Harken reported net income for the year ended December 31, 1992, of
$505,000. In December 1992, Harken entered into a Purchase and Sale Agreement
pursuant to which Harken sold its 12% general partner's interest in its managed
limited partnership, Harken Anadarko Partners, L.P. ("HAP"), for cash of
$2,650,000. The transaction resulted in Harken recognizing a gain on the sale of
$1,449,000 during December 1992. As a result of this gain, segment operating
profit for Harken's exploration and production operations was $2,872,000 during
1992. Harken's international operations continued to be very active during 1992.
Despite announcing in February 1993 that the second well to be drilled in
Bahrain, the Muharraq No. 1, had been plugged and abandoned, Harken's other
international efforts during 1992 resulted in significant opportunities. During
the third quarter of 1992, Harken entered into an Association Contract to
conduct a seismic and exploratory drilling program in the Alcaravan area of
Colombia. All of Harken's revenues during 1992 continued to be domestic,
including Harken's well servicing operations, which through Supreme generated
revenues of $2,027,000 during 1992.
Harken incurred a net loss from continuing operations for the year ended
December 31, 1991, of approximately $12.6 million. In April 1991, Harken
suspended its contract drilling operations due to decreased demand and increased
competition, resulting in greatly reduced contract drilling revenues and related
operating expenses. Contributing to the operating loss was the decision in late
1991 to write down Harken's carrying value in certain drilling rigs and related
domestic assets by $7.1 million. These assets were deemed not to be part of
Harken's operating plans for the future due to Harken's decision to focus on the
international oilfield services industry. Such asset write down is included in
Provision for Impairment of Contract Drilling Rigs and Related Equipment in
Harken's financial statements. In addition, oil and gas sales revenues and
related operating expenses were eliminated in 1991 due to the November 1, 1990,
transfer of producing oil and gas properties to a newly-formed limited
partnership, Harken Anadarko Partners, L.P. ("HAP"). In addition to the non-cash
write down discussed above, Harken also incurred a non-cash loss for its equity
in the loss of partnership of $3.0 million resulting from Harken's 12% interest
in HAP.
EXPLORATION AND PRODUCTION OPERATIONS
With the February 15, 1993 merger with Chuska, Harken reported and received
a direct interest in its oil and gas exploration and production operations
during 1993. In the prior two years, Harken conducted its exploration and
production activities through its 12% general partner's interest in HAP, and
accounted for its interest in HAP's operations using the equity method, whereby
Harken recorded its interest in HAP's oil and gas operating revenues, expenses
and depreciation and amortization through its Equity in Income (Loss) of
Partnership account. Gross oil and gas sales revenues during 1993 reflect the
operations of Chuska, which consists primarily of the production of oil and gas
reserves in the Aneth Field and Blanding Sub-Basin portions of the Paradox Basin
in Utah, Arizona and New Mexico, primarily on the Navajo Indian Reservation.
Such operations are conducted through Chuska's interests in the CHAP Venture,
Greater Blanding venture and Central Blanding venture. Gross oil revenues
reflect the overall weak demand experienced by the industry, resulting in low
oil pricing, particularly during the fourth quarter of 1993. Revenues from gas
sales totalled $792,000 and were enhanced by production from a new 1993
successful gas well drilled in the Black Rock Field in Arizona. Harken drilled
four wells during 1993 and is largely dependent on future drilling success to
offset the production declines typically experienced in the region. Harken
recognized $1,189,000 in gas plant revenues, primarily from Chuska's plant owner
interest in the Aneth Plant which serves many of the Utah properties.
Oil and gas operating expenses consist of lease operating expenses and gas
plant expenses, along with a number of production and reserve-based taxes,
including Utah severance, conservation, and property taxes and Navajo severance
and possessory interest taxes.
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In December 1992, Harken, through a subsidiary, entered into a Purchase and
Sale Agreement ("the Agreement") pursuant to which Harken sold its 12% general
partner's interest in HAP to an affiliate of a major stockholder who served as
sole limited partner. The closing of the Agreement was completed on December 30,
1992. Pursuant to the Agreement, Harken was paid consideration in cash of
$2,650,000 for the sale of this partnership interest and certain contract rights
associated therewith. The transaction resulted in Harken recognizing a gain of
$1,449,000 during December 1992.
Under the terms of the Agreement, Harken continued to manage the oil and
gas property interests of HAP and operate certain partnership properties. Harken
was paid a management fee of $50,000 per month to manage the HAP interest in
such properties in addition to the fees it received for serving as operator of
the properties pursuant to applicable joint operating agreements. During the
second quarter of 1993, HAP sold its interests in all oil and gas properties
operated by Harken and Harken ceased to manage the partnership. As a result of
the above transactions, Harken earned only $300,000 in management fees during
1993 compared to $1,110,000 during 1992. During 1991, Harken received management
fees totalling $1,266,000, primarily consisting of $100,000 per month it
received from HAP.
Prior to the sale, Harken recorded a $107,000 equity in loss of partnership
during 1992 relating to its 12% equity method interest in HAP's net loss at the
time of the sale. During 1991, however, Harken recorded a $3.0 million equity in
loss of partnership, as HAP incurred a $24.1 million loss during 1991 primarily
caused by a $21.1 million full cost ceiling write down principally resulting
from lower crude oil prices at December 31, 1991.
During 1993, Harken received $903,000 of operator overhead fees and
operator cost reimbursements, with the decrease from 1992 caused by the above
mentioned sale by HAP of all remaining oil and gas properties operated by
Harken. Operator overhead fees and other cost reimbursements during 1992 were
$1,901,000 compared to $2,539,000 during 1991 due to the sale by HAP during 1992
of certain properties operated by Harken. Harken accounts for operator fees and
reimbursements as a reduction to general and administrative expenses in its
statements of operations.
In addition to the above operations, Harken earned certain fees from
leasing company owned compressors to certain properties it operated, as well as
receiving prospect fees from the sale of Harken prospects to HAP, as provided
for in the HAP partnership agreement. Such prospect and compressor fee income
totalled $83,000 during 1993, compared to $284,000 in 1992 and $352,000 in 1991.
The decrease each year was due to the reduction in HAP's operations.
WELL SERVICING OPERATIONS
Harken's well servicing revenues totalled $2,074,000 in 1993 compared to
$2,027,000 in 1992 and $2,266,000 in 1991. Supreme generated its revenue from
the operations of 7 well service rigs and 2 swab rigs during most of 1993,
although 3 additional well service rigs were purchased during the fourth
quarter. Similarly, well servicing operating expenses, which consist principally
of contract labor and supplies, have totalled $936,000 in 1993, $947,000 in 1992
and $1,301,000 in 1991. Harken continues to monitor operating costs closely,
working to reduce costs by focusing exclusively in the South Texas region and
closing its Oklahoma office in early 1992.
CONTRACT DRILLING OPERATIONS
Harken reported contract drilling revenues of $1,317,000 during 1991 prior
to the decision to suspend those operations in April 1991 as discussed earlier.
Harken continues to pursue opportunities for oilfield services internationally,
where the opportunities to profitably deploy Harken's expertise and assets are
generally greater than those available domestically. Consistent with this change
in emphasis, in December 1991, Harken made the decision to attempt to sell
certain of its drilling rigs and related domestic assets which were not suitable
for the pursuit of international drilling opportunities. As a result of this
decision, Harken recognized a non-cash charge of $7.1 million to fourth quarter
1991 operations to write down the carrying value of these assets to an estimated
recoverable value. In January 1994, Harken made the decision to liquidate its
remaining drilling rigs and related assets and apply the proceeds primarily to
its international
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exploration efforts, specifically in Colombia and Bahrain. As a result of this
decision, Harken recognized an additional non-cash charge of $3.1 million during
the fourth quarter of 1993. Harken has included these charges as Provision for
Impairment of Contract Drilling Rigs and Related Equipment during 1991 and 1993
in Harken's Statements of Operations.
INTEREST AND OTHER INCOME
Interest income decreased in 1993 from 1992, and in 1992 from 1991, due to
generally lower investment and cash balances, and due to the lower investment
yields available during each of these years. Other income remained level
compared to 1992 despite the decrease in compressor rental and prospect fees
discussed above, due to an increase in E-Z Serve Preferred dividends and a
realized gain on the sale of E-Z Serve common stock during 1993. Other income
increased in 1992 from 1991 primarily due to the inclusion of approximately
$100,000 per quarter in accrued E-Z Serve Preferred dividends. Harken first
purchased E-Z Serve Preferred shares during the second quarter of 1991.
OTHER COSTS AND EXPENSES
General and administrative expenses increased by approximately $1.1 million
during 1993 as compared to 1992 primarily as a result of the increased
administrative costs added as a result of the merger with Chuska. General and
administrative expenses for 1993 includes costs related to certain offices of
Chuska that have since been closed in an effort to reduce costs and improve
efficiency. Harken has also taken efforts throughout 1993 to reduce total
personnel with the objective of eliminating duplicative administrative and
operational functions. In addition, as discussed above, Harken's operator
overhead fees and other operator cost reimbursements which are netted against
general and administrative expenses decreased by approximately $1.0 million due
to the reduction in properties operated by Harken.
General and administrative expenses decreased by approximately $1.6 million
during 1992 as compared to 1991 due to Harken's continuing cost reduction
measures which were taken in an effort to reduce administrative expenses to a
level consistent with its reduced revenue base. In addition, certain additional
administrative costs and professional fees were incurred during 1991 in
connection with a Rights Offering. See discussion below of the Rights Offering.
Depreciation and amortization increased by approximately $1.8 million due
to the merger with Chuska, primarily due to the approximately $1.4 million in
depreciation, depletion and amortization calculated on Chuska's oil and gas
properties. Such calculation is made on a unit of production basis in accordance
with the full cost method of accounting for oil and gas properties.
Provision for asset impairments during 1993 includes a total of $551,000 of
accrued interest which was expensed related to certain non-recourse notes
receivable from certain current and former employees, officers and directors.
Provision for asset impairments totalled $726,000 during 1993 compared to
$252,000 in 1992 and $478,000 in 1991.
Interest expense increased during 1993 compared to 1992 due to the addition
of short term borrowings which were acquired as part of the merger with Chuska.
Such borrowings were paid in 1993. Interest expense decreased in 1992 compared
to 1991 due primarily to the existence of related party debt during the first
part of 1991 pursuant to the Rights Offering. At the effective date of the
closing of the Rights Offering, Harken paid all but $237,000 of the principal
and interest on this related party debt. New long-term notes payable to related
parties were issued for this remaining $237,000 liability. These new long-term
notes payable to the related parties were repaid by Harken during December 1992.
DISCONTINUED OPERATIONS
Pursuant to a plan of reorganization approved by the Board of Directors, as
of April 30, 1991, Harken completed a Rights Offering and related exchange
transactions whereby its percentage ownership in the common stock of E-Z Serve
Corporation ("E-Z Serve") and Tejas Power Corporation ("Tejas") decreased
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to 7.25% and 6.59%, respectively. The Rights Offering resulted in a
discontinuance of Harken's refined products marketing and natural gas gathering,
storage, and marketing operations. Harken estimated the net operating profit
(loss) for E-Z Serve and Tejas for the period from December 31, 1990 through the
anticipated closing date of the Rights Offering to be approximately $(3,325,000)
and $600,000, respectively and included such estimated net loss of $2,725,000 in
Net Income (Loss) from Discontinued Operations at December 31, 1990. Additional
losses of $1,524,000 and $1,473,000 have been reflected during the first quarter
and April of 1991, respectively, to reflect the difference between the year end
estimate and Harken's interest in actual results for these discontinued
subsidiaries.
LIQUIDITY AND CAPITAL RESOURCES
During the year ended December 31, 1993, Harken's working capital decreased
approximately $3.5 million, primarily due to the accrual of certain liabilities
totalling approximately $2.9 million associated with Chuska's operations and due
to capital expenditures during 1993. Cash and temporary investments decreased by
$7.0 million despite the $2.6 million of cash balances that were acquired from
the merger with Chuska. Such cash usage was caused by cash used by operating
activities of $3.9 million, $4.1 million of net capital expenditures and $1.6
million of repayments of debt. The cash used by operating activities was
primarily caused by the payment of approximately $2.1 million of operator
suspended revenues primarily related to amounts which were appropriately
released upon the sale of operated properties by Harken's managed limited
partnership, HAP. Since the acquisition of Chuska, Harken has closed three of
Chuska's offices and taken steps to appropriately reduce personnel as part of
the effort to reduce administrative expenditures and absorb Chuska's operations
into Harken.
During 1992, total proceeds from sales of assets of approximately $4.7
million plus $211,000 from net common stock proceeds funded approximately $5.3
million of cash utilized by operating activities, approximately $1.3 million of
capital expenditures and $517,000 of total debt payments, resulting in a net
decrease in cash of approximately $2.2 million during the year.
During 1991, cash flows from operations of approximately $2.6 million were
generated, proceeds from sales of assets were approximately $1.2 million, cash
generated from issuance of common shares upon exercise of options was $453,000,
and $1.5 million was generated from short term borrowings which were repaid with
a portion of Harken's interest in a limited partnership. Such proceeds were used
to fund approximately $5.7 million in Rights Offering expenses and working
capital advances on behalf of Harken's discontinued operations and $953,000 in
capital expenditures, and $171,000 of debt payments. Total 1991 activity
resulted in approximately $1 million decrease in cash during the year.
The February 1993 merger with Chuska has further enhanced Harken's asset
base during 1993, and Chuska's operations have historically funded its capital
expenditure needs. Harken continues to maintain no significant long term debt.
In addition, since the Chuska merger, Harken is continuing to take steps to
eliminate operational overlap to result in increased efficiency and a reduction
in combined general and administrative costs. The merger transaction was
consummated through the issuance of 14,210,357 newly issued shares of Harken
common stock in exchange for all of the outstanding Chuska common stock.
Harken has taken steps to appropriately reduce overhead costs and capital
expenditures will be incurred only to the extent that cash flow from operations
or additional financing sources are available. Harken believes that cash flow
from operations will be sufficient to meet its operating cash requirements in
1994. Amounts required to fund international activities, including Colombia and
Bahrain, as well as domestic drilling costs and other capital expenditures will
be funded from existing cash balances, sale of assets, operating cash flows and
industry partners. Harken includes in cash and temporary investments certain
balances which are restricted to use for specific project expenditures,
collateral or for distribution to outside interest owners and are not available
for general working capital purposes. Such restricted cash amounts totalled
$6,197,000 and $1,391,000 at December 31, 1992 and 1993, respectively.
Colombian Operations -- During the third quarter of 1992, Harken, through a
subsidiary, Harken de Colombia, Ltd., was awarded the exclusive right to explore
for, develop and produce oil and gas throughout
17
18
approximately 350,000 acres within the Alcaravan area ("Alcaravan") of Colombia.
Alcaravan is located in Colombia's Llanos Basin and is located approximately 140
miles east of Santafe De Bogota. Harken and Empresa Colombiana de Petroleos
("Ecopetrol") have entered into an Association Contract ("Alcaravan Contract")
which requires Harken to conduct a seismic and exploratory drilling program in
the Alcaravan area ("work program") over the initial six (6) years. At the end
of each of the six years in the work program, Harken has the option to withdraw
from the Alcaravan Contract or to commit to the next year's work requirements.
If Harken makes a commercial discovery of oil and/or gas which is approved by
Ecopetrol, the standard terms of the Alcaravan Contract will apply. Such terms
provide for Ecopetrol to reimburse Harken for 50% of its successful well costs
expended up to the point of commercial discovery and to receive a 20% royalty
interest and for both Ecopetrol and Harken to each have a 50% working interest.
The term of the Alcaravan Contract will extend twenty-two (22) years from the
date of any commercial discovery of oil and/or gas. Harken reprocessed in excess
of 200 kilometers of seismic on the Alcaravan area and completed the acquisition
of 52 kilometers of new seismic data over prospective areas in mid-February
1994. Harken is currently carrying on discussions with potential joint venture
partners regarding potential drilling on the Alcaravan area.
In January 1994, Harken announced that Harken de Colombia, Ltd. had signed
its second Association Contract ("Bocachico Contract") with Ecopetrol, covering
the Bocachico contract area. Under the Bocachico Contract, Harken has acquired
the exclusive rights to conduct exploration activities and drilling on this
area, which covers approximately 192,000 acres in the middle Magdelena Valley of
Central Colombia.
During the first year of the Bocachico Contract, Harken will conduct
seismic activities on the land covered by this contract including reprocessing
of at least 250 kilometers of existing seismic data and the acquisition of at
least 35 kilometers of new seismic data. During each of the 2nd through the 6th
contract years Harken may elect to continue the contract by committing to the
drilling of at least one well during each contract year. During this initial six
year term, called the Exploration Period under the Bocachico Contract, if Harken
has discovered the existence of commercial production in the Bocachico Contract
area, the Bocachico Contract will be further extended for a period of 22 years
from the date of any commercial discovery of oil and/or gas. If Harken makes a
commercial discovery of oil and/or gas which is approved by Ecopetrol, the
standard terms of the Bocachico Contract will apply. Such terms provide for
Ecopetrol to reimburse Harken for 50% of its successful well costs expended up
to the point of commercial discovery and to receive a 20% royalty interest and
for both Ecopetrol and Harken to each have a 50% working interest.
In addition to reprocessing and acquiring seismic data during the first
contract year of the Bocachico Contract, Harken intends to also conduct
engineering studies to evaluate the potential for recovering existing oil
reserves in the Rio Negro area, which is located in the northern portion of the
Bocachico Contract area. Three wells were drilled, produced and subsequently
abandoned by another contractor approximately 30 years ago in this area, which
have provided information and data including production rates, well logs and
pressure tests. This well data will be utilized by Harken in such studies to
evaluate the feasibility of applying modern production and recovery techniques
in this area. Harken has not made any determination at this point as to the
recoverability of reserves which may be indicated in this area.
Bahrain Operations -- In January 1990, Harken, through its wholly-owned
subsidiary, Harken Bahrain Oil Company ("HBOC"), entered into a production
sharing agreement with the Bahrain National Oil Company which gave it the
exclusive right to explore for, develop and produce oil and gas throughout most
of Bahrain's Arabian Gulf offshore territories. Subject to the discovery and
development of oil and/or gas, the contract has a term of thirty-five years.
Under the original terms of the agreement, as amended, Harken was to drill an
exploratory well to test the Permian Khuff formation within 2 1/2 years and
drill a total of four wells by 1995 to earn all of its acreage rights under the
agreement. In July 1990, Harken entered into a joint venture arrangement with a
joint venture partner, Bass Enterprises Production Company ("BEPCO"), in which
BEPCO committed to provide the funding for the first well and at least two
subsequent wells.
The initial exploratory well under the contract was drilled on the Jarim
Reef, which began drilling November 1991. The well was drilled to an approximate
depth of 14,275 feet and tested the Jurassic Arab formation at approximately
7,300 feet and the Permian Khuff formation at approximately 13,300 feet. In
18
19
March 1992, after drilling was completed, HBOC announced that the Jarim No. 2
well was not productive of either oil or gas and was abandoned.
On December 28, 1992, Harken commenced the drilling of its second
exploratory well, the Muharraq No. 1, in Bahrain. In February 1993, Harken
announced that the Muharraq No. 1 well had been drilled to a total depth of
8,778 feet and that no shows of oil and gas were noted in the well cuttings of
either the Jurassic Arab or the Jurassic Fadhili formations. As a result, the
well was plugged and abandoned at the foregoing depth. Further, under the terms
of the production sharing agreement, HBOC allowed its exploration and drilling
rights on approximately 10% of the acreage covered by the production sharing
agreement to expire, effective February 13, 1993. Later, during the third
quarter of 1993, HBOC allowed an additional portion of the acreage covered by
the production sharing agreement to expire effective August 29, 1993. HBOC's
remaining obligation under the production sharing agreement is limited to
reprocessing 500 kilometers of seismic prior to July 30, 1995.
On April 8, 1993, HBOC and BEPCO entered into an agreement whereby BEPCO
was released and discharged from any future drilling obligations related to
HBOC's production sharing agreement, and the joint venture agreement between
HBOC and BEPCO was terminated. As part of this agreement, BEPCO paid to HBOC
approximately $2,000,000 plus all remaining costs and obligations related to the
Muharraq No. 1 well along with certain other costs and contingencies. Such
amount, net of Harken's carrying value in its Bahrain investment, has been
recorded as deferred revenue in the accompanying balance sheet. Harken is
continuing to pursue discussions with various other parties in joining HBOC to
pursue continuing operations on the remaining acreage which HBOC continues to
hold.
Other -- The exploration, development and production of oil and gas are
subject to various Navajo, federal and state laws and regulations designed to
protect the environment. Compliance with these regulations is part of Harken's
day-to-day operating procedures. Infrequently, accidental discharge of such
materials as oil, natural gas or drilling fluids can occur and such accidents
can require material expenditures to correct. Harken maintains levels of
insurance customary in the industry to limit its financial exposure. Management
is unaware of any material capital expenditures required for environmental
control during the next fiscal year.
At December 31, 1993, Harken has accrued $1,000,000 related to a consulting
payment due to a former Chuska stockholder. Under the terms of a prior agreement
made by Chuska with the former Chuska stockholder, among other obligations
previously satisfied, Chuska is to pay $1,000,000 to the former Chuska
stockholder when aggregate net revenues (as defined in the agreement) reach
$60,000,000. In October 1992, a lawsuit was filed against Chuska by the former
Chuska stockholder. The lawsuit was generally based upon allegations that Chuska
had reached the defined aggregate net revenue amount and that the $1,000,000
consulting payment was due and payable. In March 1994, this lawsuit was settled
whereby Chuska and a subsidiary entered into an agreement to pay $500,000 to the
former Chuska stockholder as the first of two installments relating to the
consulting payment. Chuska executed a non-interest bearing note payable for the
remaining $500,000 consulting payment which is payable to the former Chuska
stockholder on or before January 5, 1995. Further, under the terms of this March
1994 agreement, Chuska purchased from the former Chuska stockholder his 3%
working interest in the wells drilled by Chuska as well as all rights he held to
participate in future wells drilled by Chuska on the Navajo Reservation,
effective January 1, 1994. As consideration for such purchase, Chuska issued a
10% note payable in the amount of $400,000 which is due and payable to the
former Chuska stockholder on or before January 3, 1996. Chuska is obligated
under this agreement to pay 75% of the net cash flow (as defined) from the
acquired interest to an escrow account which will serve as collateral for the
above notes payable until the notes are fully paid.
Harken has also accrued approximately $1,900,000 relating to other
operational or regulatory liabilities related to Chuska's operations. Harken and
its subsidiaries currently are involved in various lawsuits and other
contingencies, including the guarantee of certain lease obligations, which, in
management's opinion, will not result in significant loss exposure to Harken.
19
20
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
The following financial statements appear on pages 21 through 47 in this
report.
PAGE
----
Report of Independent Public Accountants.............................................. 21
Consolidated Balance Sheets -- December 31, 1992 and 1993............................. 22
Consolidated Statements of Operations -- Years ended December 31, 1991, 1992 and
1993................................................................................ 23
Consolidated Statements of Stockholders' Equity -- Years ended December 31, 1991, 1992
and 1993............................................................................ 24
Consolidated Statements of Cash Flows -- Years ended December 31, 1991, 1992 and
1993................................................................................ 25
Notes to Consolidated Financial Statements............................................ 26
Supplemental Schedule I............................................................... 42
Supplemental Schedule II.............................................................. 43
Supplemental Schedule V............................................................... 45
Supplemental Schedule VI.............................................................. 46
Supplemental Schedule IX.............................................................. 47
20
21
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
To the Stockholders and Board of Directors of Harken Energy Corporation:
We have audited the accompanying consolidated balance sheets of Harken
Energy Corporation (a Delaware corporation) and subsidiaries as of December 31,
1992 and 1993, and the related consolidated statements of operations,
stockholders' equity and cash flows for each of the three years in the period
ended December 31, 1993. These financial statements and the schedules referred
to below are the responsibility of the Company's management. Our responsibility
is to express an opinion on these financial statements and schedules 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 financial statements referred to above present fairly,
in all material respects, the financial position of Harken Energy Corporation
and subsidiaries as of December 31, 1992 and 1993, and the results of their
operations and their cash flows for each of the three years in the period ended
December 31, 1993, in conformity with generally accepted accounting principles.
As explained in Note 9 to the financial statements, effective January 1,
1993, the Company changed its method of accounting for income taxes.
Our audits were made for the purpose of forming an opinion on the basic
financial statements taken as a whole. The schedules listed in the index of
financial statements are presented for purposes of complying with the Securities
and Exchange Commission's rules and are not part of the basic financial
statements. These schedules have been subjected to the auditing procedures
applied in the audits of the basic financial statements and, in our opinion,
fairly state in all material respects the financial data required to be set
forth therein in relation to the basic financial statements taken as a whole.
ARTHUR ANDERSEN & CO.
Dallas, Texas,
March 15, 1994
21
22
HARKEN ENERGY CORPORATION AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
ASSETS
DECEMBER 31, DECEMBER 31,
1992 1993
------------ ------------
Current Assets:
Cash and temporary investments............................... $10,348,000 $ 3,299,000
Accounts and notes receivable, net........................... 1,744,000 1,022,000
Accounts receivable from related parties..................... 1,446,000 1,081,000
Assets held for resale....................................... -- 796,000
Prepaid expenses and other current assets.................... 373,000 500,000
------------ ------------
Total Current Assets.................................... 13,911,000 6,698,000
Property and Equipment, net.................................... 8,320,000 19,807,000
Investments in Former Subsidiaries............................. 9,757,000 9,218,000
Notes Receivable from Related Parties, including interest...... 1,214,000 701,000
Other Assets, net.............................................. 1,670,000 1,307,000
------------ ------------
$34,872,000 $ 37,731,000
------------ ------------
------------ ------------
LIABILITIES AND STOCKHOLDERS' EQUITY
Current Liabilities:
Trade payables............................................... $ 769,000 $ 339,000
Accrued liabilities and other................................ 4,056,000 4,840,000
Revenues and royalties payable............................... 5,274,000 1,354,000
Accounts payable to related parties.......................... 102,000 --
------------ ------------
Total Current Liabilities............................... 10,201,000 6,533,000
Commitments and Contingencies (Note 13)
Deferred Revenue, net of current portion....................... 2,487,000 367,000
Redeemable Preferred Stock..................................... 1,868,000 1,868,000
Stockholders' Equity:
Common stock, $0.01 par value; authorized 100,000,000 shares;
issued 51,206,151 and 65,466,508 shares, respectively..... 512,000 654,000
Additional paid-in capital................................... 114,207,000 131,052,000
Retained deficit............................................. (76,492,000) (81,986,000)
Treasury stock............................................... (17,911,000) (20,757,000)
------------ ------------
Total Stockholders' Equity.............................. 20,316,000 28,963,000
------------ ------------
$34,872,000 $ 37,731,000
------------ ------------
------------ ------------
The accompanying Notes to Consolidated Financial Statements
are an integral part of these Consolidated Balance Sheets.
22
23
HARKEN ENERGY CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
YEAR ENDED DECEMBER 31,
---------------------------------------
1991 1992 1993
----------- ---------- ----------
Revenues:
Oil and gas operations............................. $ -- $ -- $4,970,000
Well servicing operations.......................... 2,266,000 2,027,000 2,074,000
Contract drilling operations....................... 1,317,000 -- --
Management fee income.............................. 1,266,000 1,110,000 300,000
Interest income.................................... 1,120,000 822,000 225,000
Gain on sale of partnership investment............. -- 1,449,000 --
Other income....................................... 805,000 1,022,000 1,106,000
----------- ---------- ----------
6,774,000 6,430,000 8,675,000
----------- ---------- ----------
Costs and Expenses:
Cost of sales and operating expenses:
Oil and gas operations.......................... -- -- 1,825,000
Well servicing operations....................... 1,301,000 947,000 936,000
Contract drilling operations.................... 1,061,000 -- --
General and administrative expenses, net........... 4,712,000 3,151,000 4,219,000
Equity in (income) loss of partnership............. 2,992,000 107,000 --
Depreciation and amortization...................... 1,484,000 1,408,000 3,254,000
Provision for impairment of contract drilling rigs
and related equipment........................... 7,122,000 -- 3,112,000
Provision for asset impairments.................... 478,000 252,000 726,000
Interest expense................................... 230,000 60,000 97,000
----------- ---------- ----------
19,380,000 5,925,000 14,169,000
----------- ---------- ----------
Income (loss) from continuing operations
before income taxes........................ (12,606,000) 505,000 (5,494,000)
Income tax expense................................... -- 172,000 --
----------- ---------- ----------
Income (loss) from continuing operations...... (12,606,000) 333,000 (5,494,000)
Discontinued Operations (Note 2):
Income (loss) from operations of discontinued
subsidiaries (including income taxes of $0 in
1991)........................................... (2,997,000) -- --
----------- ---------- ----------
Net income (loss) before extraordinary item... (15,603,000) 333,000 (5,494,000)
----------- ---------- ----------
Extraordinary item-reduction in income taxes
resulting from utilization of net operating loss
carryforwards...................................... -- 172,000 --
----------- ---------- ----------
Net income (loss)............................. (15,603,000) 505,000 (5,494,000)
----------- ---------- ----------
Loss attributable to common stock:
Net income (loss).................................. $(15,603,000) $ 505,000 $(5,494,000)
Less preferred stock dividends..................... (702,000) (360,000) --
----------- ---------- ----------
Earnings (loss) attributable to common
stock...................................... $(16,305,000) $ 145,000 $(5,494,000)
----------- ---------- ----------
----------- ---------- ----------
Income (loss) per common share:
Income (loss) from continuing operations........... $ (0.31) $ 0.00 $ (0.09)
Discontinued operations............................ (0.07) -- --
Extraordinary item................................. -- 0.00 --
----------- ---------- ----------
Net income (loss).................................. $ (0.38) $ 0.00 $ (0.09)
----------- ---------- ----------
----------- ---------- ----------
Weighted average shares outstanding.................. 42,519,373 45,752,936 58,392,901
----------- ---------- ----------
----------- ---------- ----------
The accompanying Notes to Consolidated Financial Statements
are an integral part of these Statements.
23
24
HARKEN ENERGY CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
ADDITIONAL
COMMON PAID-IN RETAINED TREASURY
STOCK CAPITAL DEFICIT STOCK
----------- ----------- ----------- -----------
Balance, December 31, 1990............. $41,192,000 $41,065,000 $(61,394,000) $(17,863,000)
Change in par value of common
stock............................. (40,780,000) 40,780,000 -- --
Stock grant issuances................ 3,000 16,000 -- (19,000)
Conversion of warrants and options... 3,000 534,000 -- --
Conversion of preferred stock and
dividends......................... 69,000 24,291,000 -- --
Issuances of treasury stock, net..... -- (1,336,000) -- 1,218,000
Payment of notes receivable, net of
retirements....................... -- 366,000 -- (341,000)
Dividends on preferred stock......... -- (702,000) -- --
Net loss............................. -- -- (15,603,000) --
----------- ----------- ----------- -----------
Balance, December 31, 1991............. 487,000 105,014,000(A) (76,997,000) (17,005,000)
Conversion of warrants and options... -- 13,000 -- --
Payment of notes receivable, net of
retirements....................... -- 1,131,000 -- (906,000)
Conversion of preferred stock and
dividends......................... 25,000 8,409,000 -- --
Dividends on preferred stock......... -- (360,000) -- --
Net income........................... -- -- 505,000 --
----------- ----------- ----------- -----------
Balance, December 31, 1992............. 512,000 114,207,000(A) (76,492,000) (17,911,000)
Issuance of common stock, net........ 142,000 12,663,000 -- --
Payment of notes receivable, net of
retirements....................... -- 2,846,000 -- (2,846,000)
Exchange of subordinated debenture... -- 1,336,000 -- --
Net loss............................. -- -- (5,494,000) --
----------- ----------- ----------- -----------
Balance, December 31, 1993............. $ 654,000 $131,052,000(A) $(81,986,000) $(20,757,000)
----------- ----------- ----------- -----------
----------- ----------- ----------- -----------
- ---------------
(A) Includes, as an offset to Additional Paid-In Capital, notes receivable of
$5,325,000, $4,182,000 and $0 as of December 31, 1991, 1992, and 1993
respectively, from certain officers, directors and affiliates for stock
purchases. See Note 10 -- Related Party Transactions "Other Transactions"
for discussion.
The accompanying Notes to Consolidated Financial Statements
are an integral part of these Statements.
24
25
HARKEN ENERGY CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
YEAR ENDED DECEMBER 31,
------------------------------------------
1991 1992 1993
------------ ----------- -----------
Cash flows from operating activities:
Income (loss) from continuing operations................................. $(12,606,000) $ 333,000 $(5,494,000)
Adjustments to reconcile net income (loss) to net cash provided by
(used in) operating activities:
Utilization of net operating loss carryforward....................... -- 172,000 --
Depreciation and amortization........................................ 1,484,000 1,408,000 3,254,000
Interest expense (income) on notes payable to/receivable from related
parties............................................................ (293,000) (813,000) (466,000)
Provision for impairment of contract drilling rigs and related
equipment.......................................................... 7,122,000 -- 3,112,000
Provision for asset impairments...................................... 478,000 252,000 726,000
Provision for doubtful accounts...................................... 115,000 154,000 --
(Gain) loss on sales of assets and other............................. 12,000 (1,485,000) (201,000)
Equity in (income) loss of partnership............................... 2,992,000 107,000 --
------------ ----------- -----------
(696,000) 128,000 931,000
------------ ----------- -----------
Income (loss) from discontinued operations............................... (2,997,000) -- --
Adjustments to reconcile income (loss) to net cash provided by
operating activities:
Depreciation and amortization........................................ 4,075,000 -- --
Interest on notes payable to related parties......................... 949,000 -- --
Loss on sales of assets and other.................................... 182,000 -- --
------------ ----------- -----------
2,209,000 -- --
Change in assets and liabilities, net of effect of companies acquired:
(Increase) decrease in accounts receivable........................... 2,410,000 (403,000) 2,282,000
(Increase) decrease in accounts receivable from/payable to related
parties............................................................ 1,537,000 (2,438,000) (338,000)
Increase (decrease) in trade payables and other...................... (421,000) (2,539,000) (6,761,000)
Net (increase) decrease in net current assets of discontinued
operations......................................................... (2,419,000) -- --
------------ ----------- -----------
Net cash provided by (used in) operating activities................ 2,620,000 (5,252,000) (3,886,000)
------------ ----------- -----------
Cash flows from investing activities:
Proceeds from sale of assets............................................. 1,156,000 4,680,000 350,000
Cash from acquired subsidiary............................................ -- -- 2,616,000
Capital expenditures..................................................... (953,000) (1,341,000) (4,499,000)
Net cash used in investing activities of discontinued operations......... (7,552,000) -- --
------------ ----------- -----------
Net cash provided by (used in) investing activities................ (7,349,000) 3,339,000 (1,533,000)
------------ ----------- -----------
Cash flows from financing activities:
Issuance of preferred and common stock, net of retirements............... 453,000 211,000 --
Issuance of long-term debt and short-term borrowings..................... 1,480,000 -- --
Payment of note payable to related party................................. -- (253,000) --
Debt repayments.......................................................... (171,000) (264,000) (1,630,000)
Net cash flows from financing activities of discontinued operations...... 1,872,000 -- --
------------ ----------- -----------
Net cash provided by (used in) financing activities................ 3,634,000 (306,000) (1,630,000)
------------ ----------- -----------
Net increase (decrease) in cash and temporary investments.................. (1,095,000) (2,219,000) (7,049,000)
Cash and temporary investments at beginning of year........................ 13,662,000 12,567,000 10,348,000
------------ ----------- -----------
Cash and temporary investments at end of year.............................. $ 12,567,000 $10,348,000 $ 3,299,000
------------ ----------- -----------
------------ ----------- -----------
The accompanying Notes to Consolidated Financial Statements
are an integral part of these Statements.
25
26
HARKEN ENERGY CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1991, 1992 AND 1993
(1) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Principles of Consolidation and Presentation -- The Consolidated Financial
Statements include the accounts of Harken Energy Corporation and all of its
wholly-owned subsidiaries ("Harken") after elimination of significant
intercompany balances and transactions. Interests in managed oil and gas