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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, 1994
/ / 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.)
5605 N. MACARTHUR BLVD. SUITE 400 75038
IRVING, TEXAS (Zip Code)
(Address of principal executive offices)
Registrant's telephone number, including area code (214) 753-6900
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 ___
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 1, 1995 was
approximately $65,265,000. 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 1, 1995 was 60,442,853.
DOCUMENTS INCORPORATED BY REFERENCE: PROXY STATEMENT TO BE FILED ON OR
BEFORE APRIL 30, 1995 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 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 13
ITEM 3. Legal Proceedings . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 13
ITEM 4. Submission of Matters to a Vote of Security Holders . . . . . . . . . . . . 13
PART II.
ITEM 5. Market for Registrant's Common Equity and Related
Stockholder Matters . . . . . . . . . . . . . . . . . . . . . . . . . . . . 13
ITEM 6. Selected Financial Information and Other Data . . . . . . . . . . . . . . . 15
ITEM 7. Management's Discussion and Analysis of Financial Condition and
Results of Operations . . . . . . . . . . . . . . . . . . . . . . . . . . . 16
ITEM 8. Financial Statements and Supplementary Data . . . . . . . . . . . . . . . . 25
ITEM 9. Changes in and Disagreements with Accountants on Accounting and
Financial Disclosure . . . . . . . . . . . . . . . . . . . . . . . . . . . . 53
PART III.
ITEM 10. Directors and Executive Officers of the Registrant . . . . . . . . . . . . . 53
ITEM 11. Executive Compensation . . . . . . . . . . . . . . . . . . . . . . . . . . . 53
ITEM 12. Security Ownership of Certain Beneficial Owners . . . . . . . . . . . . . . 53
ITEM 13. Certain Relationships and Related Transactions . . . . . . . . . . . . . . . 53
PART IV.
ITEM 14. Exhibits, Financial Statement Schedules and Reports on Form 8-K . . . . . . 54
SIGNATURES . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 55
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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 oil and
gas exploration and production operations 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. Harken's international operations include
three 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 ("BANOCO"). Harken's international operations currently consist
solely of 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 5605 N. MacArthur Blvd., Suite 400, Irving, Texas 75038 and its
telephone number is (214) 753-6900.
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 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 years from the date of any commercial
discovery of oil and/or gas. Harken reprocessed in excess of 200 kilometers of
seismic data on the Alcaravan area and completed the acquisition of 52
kilometers of new seismic data over prospective areas in mid-February 1994.
Harken also plans to acquire approximately 26 kilometers of additional seismic
data on the Alcaravan Contract area in February 1995.
In September 1994, Harken announced that Huffco Group, Inc. ("Huffco")
of Houston, Texas joined Harken in the drilling of its first exploratory well
under the Alcaravan Contract. Under the terms of this joint venture agreement,
which was approved by Ecopetrol, Harken serves as operator and retains
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a 50% interest in the well. The well, the Alcaravan #1, was spudded in early
February 1995 and will be drilled to a projected depth of 10,500 feet to test
for commercial quantities of oil in the oil prone zones prevalent in the Llanos
Basin; the Carbonera, Mirador, Guadalupe and the basal Cretaceous formations.
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 is conducting
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 has evaluated seismic
data and has completed an engineering feasibility study 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. These wells have provided information
and data including production rates, well logs and pressure tests. This well
data has been utilized by Harken in such studies to evaluate the feasibility of
applying modern production and recovery techniques in this area. Harken will
also acquire a minimum of 35 kilometers of seismic data on the Bocachico
Contract area in early 1995.
On January 19, 1995, after completing the engineering feasibility
study, Harken notified Ecopetrol of Harken's commitment to drill a well under
the Bocachico Contract, and thereby extended the contract into its second year.
Harken currently anticipates that a well site will be selected and drilling
will commence by mid-1995.
Playero Contract -- In December 1994, Harken announced that Harken de
Colombia, Ltd. had signed its third Association Contract ("Playero Contract")
with Ecopetrol, covering the Playero contract area. Under the Playero
Contract, Harken has acquired the exclusive rights to conduct exploration
activities and drilling on this area, which covers approximately 10,000 acres
in the Llanos Basin of Colombia, contiguous to Harken's Alcaravan Contract
area.
During the first year of the Playero Contract, Harken will acquire at
least 12 kilometers of new seismic data in the Playero Contract area. 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
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year. During this initial six year term, called the Exploration Period under
the Playero Contract, if Harken has discovered the existence of commercial
production in the Playero Contract area, the Playero Contract will be further
extended for a period of 22 years from the date of termination of the
Exploration Period with a total term not to exceed 28 years. If Harken makes a
commercial discovery of oil and/or gas which is approved by Ecopetrol, the
standard terms of the Playero Contract will apply. The Playero Contract was
granted by Ecopetrol under a new form of Association Contract which has
modified various standard terms from the previous form of Association Contract
which was used on the Alcaravan and Bocachico Contract. Such terms provide for
Ecopetrol to reimburse Harken for 50% of its successful well costs expended up
to the point of a commercial discovery and to receive a 20% royalty interest.
Although both Ecopetrol and Harken each would have a 50% working interest,
production net of royalty would be allocated 50% to each party until
accumulated production from the Playero Contract area reaches a cumulative
total of 60 million barrels of oil. After that cumulative production level is
achieved, production net of royalty is allocated at rates to Harken from 50%
to 25% based upon the relative profitability of the project with Ecopetrol
receiving the remaining complementary 50% to 75% of such additional production.
Bahrain Operations -- In January 1990, Harken, through its
wholly-owned subsidiary, Harken Bahrain Oil Company ("HBOC"), entered into a
production sharing agreement with 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. 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.
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. 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 other considerations, which represented the
negotiated amount for BEPCO's remaining obligation for future costs to be
incurred in Bahrain.
The initial exploratory well under the production sharing agreement
was drilled on the Jarim Reef, which began drilling November 1991. 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. In February 1993, Harken announced that the
Muharraq No. 1 well had no shows of oil or gas and was plugged and abandoned.
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. HBOC
allowed an additional portion of the acreage covered by the production sharing
agreement to expire effective August 29, 1993.
In May 1994, Harken announced a new seismic reprocessing program
covering 500 kilometers of seismic lines in the vicinity of the Jarim Reef. At
present Harken holds approximately 500,000 acres under its production sharing
agreement. Unless commercial production is found or an extension to the
production sharing agreement is obtained, this acreage expires in July 1995.
In January 1995, Harken completed its reprocessing of approximately 500
kilometers of seismic data and has reviewed the results of that work
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with BANOCO. Unless Harken obtains a joint venture partner, Harken will not
proceed to either acquire additional seismic data or drill another well. If a
joint venturer is located, it will be necessary to obtain an extension of one
year or more from July 1995 to complete work necessary with a joint venturer.
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.
Chuska Resources Corporation -- Effective February 15, 1993, Harken
consummated a merger pursuant to which Chuska Resources Corporation ("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.
Chuska is engaged, primarily through its subsidiary, Harken Southwest
Corporation ("HSW"), 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. HSW
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, HSW 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.
HSW 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"). HSW 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 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, HSW pays severance tax and possessory interest
tax ("PIT") to the Tribe. The severance tax is payable
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monthly and is 4% of HSW'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. HSW is also required to pay
the Tribe land damage costs relating to HSW's seismic and drilling activities.
CHAP Venture -- In order to develop the Tribal Lands, HSW 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"). CHAP is
not a legal entity, although it is a tax partnership. Effective March 1, 1990,
HSW sold 20% of its CHAP interest to Global Natural Resources Corporation of
Nevada ("Global"), which interest was repurchased by HSW effective January 1,
1993, resulting in HSW again holding a 50% total interest in CHAP.
In October 1994, Harken acquired the CHAP Joint Venture interests of
Crusader, Inc., C.A.B. Resources, Inc. and Australian Hydrocarbons, Inc.,
raising Harken and its subsidiaries' total interest in CHAP to approximately
70%. As consideration for this acquisition, Harken issued an aggregate total
of 960,000 shares of restricted Harken common stock to the sellers, assumed
certain liabilities of the sellers relating to the properties, and the sellers
in turn retained responsibility for certain contingent operational and
environmental liabilities related to the properties as well as retaining
certain distributions made by CHAP prior to the actual date of closing.
Each CHAP co-venturer pays its respective participating interest share
of costs and expenses and receives its participating interest share of
revenues. HSW is the operator for CHAP and communicates with and makes
proposals to an Operating Committee composed of HSW representatives and a
representative of each of the non-operators. As operator, HSW 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 any direct or 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 HSW
pursuant to the Tribal Agreements.
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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.
In connection with the operation of the Central Blanding venture,
Sunfield is reimbursed for any direct or 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
HSW 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. During 1994,
Sunfield entered into a seismic sharing agreement with an industry partner to
begin geophysical and exploration efforts in the Western Paradox area.
DISCONTINUED WELL SERVICING AND CONTRACT DRILLING OPERATIONS
Prior to May 1994, Supreme Well Service Company ("Supreme", a wholly
owned subsidiary) provided 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. In May 1994, Harken announced that it
had discontinued its well servicing operations. Harken has sold the equipment
assets of Supreme in order to utilize the proceeds toward developing Harken's
exploration and production operations both domestically and internationally.
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 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 crude oil and natural gas. The currently unsettled
energy market makes it difficult to estimate future prices of crude 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.
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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 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 its 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, fluctuations 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 some of
HSW's undeveloped acreage. It is unknown what effect, if any, this resolution
will have on HSW's operations. Any acreage under the 1987 Tribal Agreement
which is not held by production as of July 31, 1995, will expire unless
extended by Harken and the Navajo Nation.
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.
International Operations. Harken conducts international operations
presently and anticipates that it will conduct significant international
operations in the future. Foreign properties, operations or investments may be
adversely affected by local political and economic developments, exchange
controls, currency fluctuations, royalty and tax increases, retroactive tax
claims, renegotiation of contracts with governmental entities, expropriation,
import and export regulations and other foreign laws or policies governing
operations of foreign-based companies, as well as by laws and policies of the
United States affecting foreign trade, taxation and investment. In addition,
as certain of Harken's operations are governed by foreign laws, in the event of
a dispute, Harken may be subject to the exclusive jurisdiction of foreign
courts or may not be successful in subjecting foreign persons to the
jurisdiction of courts in the United States. Harken may also be hindered or
prevented from enforcing its rights with respect to a governmental
instrumentality because of the doctrine of sovereign immunity. Exploration and
production activities in areas outside the United States are also subject to
the risks inherent in foreign operations, including loss of revenue, property
and equipment as a result of hazards such as expropriation, nationalization,
war, insurrection and other political risks.
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;
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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 in the United
States and in foreign jurisdictions. 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 HSW is a co-owner, was in
operation for many years prior to HSW'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 HSW 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 HSW 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 HSW, 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 HSW 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 HSW, 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.
Imprecise Nature of Reserve Estimates. Reserve estimates are imprecise
and may be expected to change as additional information becomes available.
Furthermore, estimates of crude oil and natural 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. Accordingly, there can be no assurance that the
information regarding reserves set forth herein will ultimately be produced.
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Competitive Factors in Oil and Gas Industry. The oil and gas industry
is highly competitive in all its phases. Competition is particularly intense
with respect to the acquisition of desirable producing properties and the sale
of crude oil and natural gas production. Harken's competitors in oil and gas
exploration, development and production 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.
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
crude oil and natural 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.
PROPERTIES AND LOCATIONS
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.
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YEAR ENDED DECEMBER 31,
-----------------------
1990 1991 1992 1993 1994
---- ---- ---- ---- ----
Production:
Oil (Bbls) . . . . . . . . . . 199,000 -- -- 185,000 158,000
Natural Gas (Mcf) . . . . . . 1,605,000 -- -- 429,000 426,000
Revenues:
Oil . . . . . . . . . . . . . $ 4,325,000 $ -- $ -- $ 2,989,000 $ 2,552,000
Natural Gas . . . . . . . . . 2,599,000 -- -- 792,000 806,000
------------- ----------- --------- ------------- ------------
Total . . . . . . . . . . . $ 6,924,000 $ -- $ -- $ 3,781,000 $ 3,358,000
============= =========== ========= ============= ============
Unit Prices:
Oil (per Bbl) . . . . . . . . $ 21.73 $ -- $ -- $ 16.16 $ 16.15
Natural Gas (per Mcf) . . . . $ 1.62 $ -- $ -- $ 1.85 $ 1.89
Production costs per
equivalent barrel . . . . . . $ 6.65 $ -- $ -- $ 7.12 $ 6.70
Amortization per equivalent
barrel . . . . . . . . . . . $ 8.40 $ -- $ -- $ 5.58 $ 6.31
Acreage and Wells. At December 31, 1994, Harken owned interests in the
following oil and gas wells and acreage, primarily through HSW:
GROSS WELLS NET WELLS DEVELOPED ACREAGE UNDEVELOPED ACREAGE
----------- --------- ----------------- -------------------
STATE OIL GAS OIL GAS GROSS NET GROSS NET
----- --- --- --- --- ----- --- ----- ---
Arizona . . . . . . . 0 6 0.00 4.20 4,475 3,133 535 375
New Mexico . . . . . 14 0 9.87 0.00 670 469 8,630 6,041
Oklahoma . . . . . . 10 11 0.14 0.09 -- -- -- --
Texas . . . . . . . . 6 0 0.01 0.00 -- -- -- --
Utah . . . . . . . . 40 0 24.35 0.00 24,668 9,985 100,230 94,834
-- - ----- ---- ------ ----- ------- ------
Total . . . . . . 70 17 34.37 4.29 29,813 13,587 109,395 101,250
== == ===== ==== ====== ====== ======= =======
Drilling Activity. The following table summarizes certain information
concerning Harken's activity drilled by HAP during 1992 and by HSW and Sunfield
during 1993 and 1994.
NUMBER OF WELLS DRILLED
-----------------------
EXPLORATORY DEVELOPMENTAL TOTAL
----------- ------------- -----
PRODUCTIVE DRILLED PRODUCTIVE DRILLED PRODUCTIVE DRILLED
---------- ------- ---------- ------- ---------- -------
1992 . . . . . . . . . . . . . 0 0 2 2 2 2
1993 . . . . . . . . . . . . . 1 3 1 1 2 4
1994 . . . . . . . . . . . . . 0 0 0 1 0 1
- - - - - -
Total . . . . . . . . . . . 1 3 3 4 4 7
= = = = = =
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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, 1994, one well was in process of drilling and was
being completed in early 1995.
EMPLOYEES
As of December 31, 1994, Harken had 40 employees. 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.
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 December 31, 1994, there were approximately 3,545 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.
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PRICES
------
HIGH LOW
---- ---
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
1994 -- First Quarter . . . . . . . . . . . . . . . . . . . . . . . . . . . 1 1/2 1 1/16
Second Quarter . . . . . . . . . . . . . . . . . . . . . . . . . . 1 7/16 15/16
Third Quarter . . . . . . . . . . . . . . . . . . . . . . . . . . . 2 3/4 1
Fourth Quarter . . . . . . . . . . . . . . . . . . . . . . . . . . 2 1/4 1 5/8
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, 1993 and 1994,
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
1990(3)(4)(5) 1991(4)(5) 1992(4) 1993(4) 1994
------------- ---------- ------- ------- ----
Revenues . . . . . . . . . . . . . . . $ 10,749,000 $ 3,191,000 $ 4,382,000 $ 6,601,000 $ 4,895,000
Income (loss) from continuing
operations . . . . . . . . . . . . . . $ (5,212,000) $ (4,413,000) $ 661,000 $(1,797,000) $(8,211,000)
Income (loss) from discontinued
operations(5) . . . . . . . . . . . . $(35,976,000) $(11,190,000) $ (328,000) $(3,697,000) $ (223,000)
Extraordinary item . . . . . . . . . . $ -- $ -- $ 172,000 $ -- $ --
Net income (loss) . . . . . . . . . . . $(41,188,000) $(15,603,000) $ 505,000 $(5,494,000) $(8,434,000)
Net income (loss) per common share:
Income (loss) from continuing
operations . . . . . . . . . . . . . $ (0.27) $ (0.12) 0.01 $ (0.03) $ (0.14)
Discontinued operations(5) . . . . . . (1.11) (0.26) (0.01) (0.06) (0.00)
Extraordinary item . . . . . . . . . . -- -- 0.00 -- --
------------ ------------ ----------- ----------- -----------
Net income (loss) . . . . . . . . . . $ (1.38) $ (0.38) $ 0.00 $ (0.09) $ (0.14)
============ ============ =========== =========== ==========
Current assets . . . . . . . . . . . . $ 94,038,000 $ 15,560,000 $13,911,000 $ 7,677,000 $ 6,840,000
Current liabilities . . . . . . . . . . $101,094,000 $ 15,122,000 $10,201,000 $ 6,533,000 $ 5,133,000
------------ ------------ ----------- ----------- -----------
Working capital (deficit) . . . . . . . $ (7,056,000) $ 438,000 $ 3,710,000 $ 1,144,000 $ 1,707,000
============ ============ =========== =========== ==========
Working capital (deficit) from
continuing operations . . . . . . . . $ 328,000 $ 438,000 $ 3,710,000 $ 1,144,000 $ 1,707,000
Total assets . . . . . . . . . . . . . $260,607,000 $ 37,664,000 $34,872,000 $37,731,000 $28,960,000
Long-term obligations:
Long-term debt and other
liabilities . . . . . . . . . . . . . $ 302,000 $ 1,276,000 $ -- $ -- $ --
Notes payable to related parties . . . $ 4,761,000 $ 253,000 $ -- $ -- $ --
Redeemable preferred stock(2) . . . . $ 30,000,000 $ 9,000,000 $ 1,868,000 $ 1,868,000 $ 1,868,000
------------ ------------ ----------- ----------- -----------
Total . . . . . . . . . . . . . . . $ 35,063,000 $ 10,529,000 $ 1,868,000 $ 1,868,000 $ 1,868,000
============ ============ =========== =========== ===========
Stockholders' equity . . . . . . . . . $ 3,000,000 $ 11,499,000 $20,316,000 $28,963,000 $21,959,000
Redeemable preferred stock outstanding 3,000,000 900,000 186,760 186,760 186,760
Weighted average common stock
outstanding . . . . . . . . . . . . . 32,533,137 42,519,373 45,752,936 58,392,901 59,722,853
Proved reserves at end of year(1):
Bbls of oil . . . . . . . . . . . . . -- -- -- 1,035,000 1,521,000
Mcf of gas . . . . . . . . . . . . . . -- -- -- 4,970,000 7,148,000
Future net revenues . . . . . . . . . $ -- $ -- $ -- $13,707,000 $20,178,000
Present value (discounted at 10%
per year) . . . . . . . . . . . . . . $ -- $ -- $ -- $ 8,230,000 $11,712,000
- ---------------
(1) 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. The 1993 and 1994 amounts reflect primarily the
proved reserve quantities and future net revenues of Chuska. (See
"Notes to Consolidated Financial Statements, Notes 3 and 14 --
Acquisitions and Oil and Gas Disclosures" contained in Part II, Item
8.)
(2) See "Notes to Consolidated Financial Statements, Note 9 -- Redeemable
Preferred Stock" contained in Part II, Item 8, for a discussion of
Harken Series C Preferred Stock.
(3) Revenues and Total Assets amounts in 1990 reflect the last year prior
to the formation of Harken Anadarko Partners, L.P. whereby Harken
transferred its domestic oil and gas property interests
15
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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 after 1990.
(4) Financial information for these periods has been restated to present
the operations of Harken's well servicing and contract drilling
operations as discontinued operations. See "Notes to Consolidated
Financial Statements, Note 2--Discontinued Operations" contained in
Part II, Item 8, for a discussion of its discontinued contract
drilling and well service segment.
(5) Pursuant to a plan of reorganization, Harken completed a rights
offering and related exchange transactions on April 30, 1991. These
transactions resulted in a discontinuance of Harken's refined products
marketing and natural gas gathering and marketing operations.
Discontinued operations for 1990 and 1991 includes losses of
$32,884,000 and $2,997,000, respectively, from Harken's discontinued
refined products marketing and natural gas gathering and marketing
operations.
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
RESULTS OF OPERATIONS
The following table presents certain data for Harken's continuing
operations for the years ended December 31, 1992, 1993 and 1994. 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,
-----------------------
1992 1993 1994
---- ---- ----
EXPLORATION AND PRODUCTION OPERATIONS(1)
- ----------------------------------------
Revenues
Oil sales revenues . . . . . . . . . . . . . . . . . $ -- $ 2,989,000 $ 2,552,000
Oil volumes in barrels . . . . . . . . . . . . . . -- 185,000 158,000
Oil price per barrel . . . . . . . . . . . . . . . $ -- $ 16.16 $ 16.15
Gas sales revenues . . . . . . . . . . . . . . . . . $ -- $ 792,000 $ 806,000
Gas volumes in mcf . . . . . . . . . . . . . . . . -- 429,000 426,000
Gas price per mcf . . . . . . . . . . . . . . . . $ -- $ 1.85 $ 1.89
Gas plant revenues . . . . . . . . . . . . . . . . . . $ -- $ 1,189,000 $ 798,000
Gain on sale of partnership interest . . . . . . . . $ 1,449,000 $ -- $ --
Management fee income . . . . . . . . . . . . . . . . $ 1,110,000 $ 300,000 $ --
OTHER REVENUES
- --------------
Interest income . . . . . . . . . . . . . . . . . . . $ 822,000 $ 225,000 $ 147,000
Other income . . . . . . . . . . . . . . . . . . . . $ 1,001,000 $ 1,106,000 $ 592,000
- ---------------
(1) Effective February 15, 1993, Harken consummated a merger whereby
Chuska Resources Corporation ("Chuska") became a wholly-owned
subsidiary of Harken.
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17
OVERVIEW
Harken reported a net loss from continuing operations for the year
ended December 31, 1994, of $8,211,000 primarily due to a reduction in Harken's
carrying value in its investment in E-Z Serve Series C Preferred and related
accrued dividends by approximately $5.8 million due to a permanent decline in
value as indicated by efforts of Harken management to sell the investment in
early 1995. Despite production declines on existing wells and the lack of new
production from drilling activities, Harken did bolster its oil and gas reserve
and revenue base through the additional acquisition of approximately 20% of the
CHAP Venture during the last half of 1994. Total gross revenues from oil and
gas operations totalled $4,156,000 with a gross profit before depreciation and
amortization and general and administrative expenses of $2,621,000.
International exploration activities continued progressing, particularly in
Colombia, where Harken spudded its first Alcaravan Contract well in early
February 1995, committed to drill a well on its Bocachico Contract area, and
signed its third Association Contract, the Playero Contract. In addition,
Harken completed the reprocessing of approximately 500 kilometers of seismic
data in Bahrain in 1994.
Harken reported a net loss from continuing operations for the year
ended December 31, 1993, of $1,797,000. 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 operations 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. 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. Contributing to the loss from
continuing operations was the expensing of 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 from continuing operations for the year
ended December 31, 1992, of $661,000. 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, 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 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.
EXPLORATION AND PRODUCTION OPERATIONS
Gross oil and gas sales revenues during 1993 and 1994 reflect the
operations of HSW, 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
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Reservation. Such operations are conducted through HSW'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 and early
1994. Oil revenues decreased during 1994 as compared to 1993 due to the normal
production decline of existing wells and the lack of new production due to
delays in plans for additional drilling during 1994. Revenues from gas sales
totalled $806,000 during 1994 compared to $792,000 during 1993 and were
enhanced by production from a new successful gas well drilled in mid-1993 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 has begun its drilling program of
additional wells beginning in December 1994 on acreage it holds in the Paradox
Basin area, with one productive well being completed in February 1995. Harken
also recognizes gas plant revenues, primarily from HSW's plant owner interest
in the Aneth Plant which serves many of the Utah properties. Gas plant
revenues decreased to $798,000 during 1994 compared to $1,189,000 during 1993
due to an annual redetermination whereby HSW's interest in the Aneth Plant was
reduced based on each owner's throughput volume.
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.
In December 1992, Harken, through a subsidiary, entered into a
Purchase and Sale Agreement ("the HAP Sale 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 HAP Sale 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 HAP Sale 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.
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.
DISCONTINUED WELL SERVICING AND CONTRACT DRILLING OPERATIONS
Harken's well servicing revenues totalled $1,053,000 in 1994 compared
to $2,074,000 in 1993 and $2,048,000 in 1992. Supreme generated its revenue
from the operations of up to 10 well service rigs and 2 swab rigs. Well
servicing operating expenses, which consist principally of contract labor and
supplies, have totalled $770,000 in 1994, $936,000 in 1993 and $947,000 in
1992. In May 1994, Harken announced that it discontinued its well servicing
operations, and has reflected the activities of its well
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servicing and contract drilling segment as discontinued operations in the
accompanying financial statements.
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 a non-cash charge of $3.1 million
during the fourth quarter of 1993.
INTEREST AND OTHER INCOME
Interest and other income decreased in 1994 from 1993, and in 1993
from 1992, primarily due to the release of the E-Z Serve 12% subordinated
debenture in April 1993 and due to lower investment and cash balances, and
generally lower investment yields available during each of these years. In
addition, during 1993 Harken reflected a decrease in compressor rental and
prospect fees discussed above, due to the reduction in HAP's operations.
OTHER COSTS AND EXPENSES
General and administrative expenses remained fairly level during 1994
compared to 1993, as the loss of Harken's operator overhead fees and other
operator cost reimbursements related to the HAP properties were offset by the
effect of general and administrative cost reductions during 1993 and 1994.
General and administrative expenses during 1993 were net of approximately
$903,000 of such operator overhead fees and other operator cost reimbursements,
compared to only $198,000 during 1994, with the decrease caused by the above
mentioned sale by HAP of all remaining oil and gas properties operated by
Harken. Harken accounts for operator fees and reimbursements as a reduction to
general and administrative expenses in its statements of operations.
General and administrative expenses increased by approximately
$972,000 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 $998,000 due to
the reduction in properties operated by Harken.
Depreciation and amortization decreased during 1994 as compared to
1993 due to the sale or full depreciation of certain non-oil and gas property
assets. Depreciation and amortization increased by approximately $1,617,000
during 1993 as compared to 1992 due to the merger with Chuska, primarily due to
the approximately $1,433,000 in depreciation, depletion and amortization
calculated on HSW'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 increased to approximately $6,361,000
during 1994 due primarily to the decision to reduce Harken's investment in E-Z
Serve Series C Preferred and related accrued dividends by $5,831,000 to
realizable value, in light of efforts by Harken management to sell such
investment in early 1995. Provision for asset impairments during 1993 includes
a total of $551,000 of
19
20
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
$52,000 in 1992.
LIQUIDITY AND CAPITAL RESOURCES
During the year ended December 31, 1994, Harken's working capital
increased approximately $.6 million, primarily due to the decision by
management to market its E-Z Serve Series C Preferred stock in 1995. Cash and
temporary investments decreased approximately $471,000 although cash of
approximately $2 million was obtained from the sale of certain non-strategic
assets. This reduction was caused by cash used for operating activities of
$510,000 and net capital expenditures of approximately $2 million. The
improvement in cash provided from operations was due to reductions of personnel
and offices during 1994 further centralizing the Chuska operations into Harken.
During the year ended December 31, 1993, Harken's working capital
decreased approximately $2.6 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.
In October 1994, Harken acquired additional joint venture interests
in CHAP which resulted in Harken increasing its ownership in the Reservation
reserves, exploration acreage, development drilling locations and the Aneth Gas
Plant. The acquisition of the sellers' interest raises Harken's total interest
in CHAP from 50% to approximately 70% and increased Harken's share of daily
production by approximately 40% over its previous interest. As consideration
for this acquisition, Harken issued an aggregate total of 960,000 shares of
restricted Harken common stock to the sellers, assumed certain liabilities of
the sellers relating to the properties, and the sellers in turn retained
responsibility for certain contingent operational and environmental liabilities
related to the properties as well as certain distributions made by CHAP prior
to the actual date of closing.
In November 1994, Harken announced the signing of a Merger Agreement
with Search Exploration Company ("Search"). Search is primarily engaged in the
domestic exploration for, and development and production of oil and gas
reserves. Pursuant to the Merger Agreement, upon the consummation of the
Merger, (a) each outstanding share of Search common stock will be converted
into the right to receive that number of shares of Harken common stock
determined by dividing $0.8099 by the average of the closing
20
21
sales price of a share of Harken common stock on the American Stock Exchange
over the 30 days immediately preceding the date that is five trading days prior
to the consummation of the merger, subject to certain restrictions ("the
Average Trading Price"); (b) each outstanding share of Search Series 1993
Redeemable Preferred Stock will be converted into the right to receive that
number of shares of Harken common stock determined by dividing $1.00 by the
Average Trading Price and (c) certain promissory notes to be issued by Search
will, by their terms, be converted into the right to receive that number of
shares of Harken common stock determined by dividing the principal amount of
each note by the Average Trading Price. In addition, the holders of Search
common stock, certain notes and overriding royalty interests in certain
properties of Search will receive a non-transferable right to receive
additional shares in the future, if any, of Harken common stock or, under
certain circumstances, cash, based upon the increase that may subsequently be
realized in the value of a group of undeveloped leases and properties of
Search. Under the terms of the Merger Agreement, certain contingencies must be
satisfied by Search prior to closing, unless waived by Harken. Upon closing,
the merger with Search would be accounted for under the purchase method of
accounting.
Upon completion of the merger of Search, Harken plans to use cash flow
generated by Search oil and gas properties to fund capital requirements of
certain prospects in which Search has retained a working interest. Most of
such prospects have been farmed-out to other industry partners thereby
requiring such partners to pay for such initial drilling costs under various
contractual arrangements.
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 1995. Harken plans to supplement such cash with proceeds from a
potential sale of its investment in E-Z Serve Series C Preferred in early 1995.
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, sales 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
approximately $1,391,000 and $1,063,000 at December 31, 1993 and 1994,
respectively.
Colombian 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 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 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 years from the date of any commercial
discovery of oil and/or gas. Harken reprocessed in excess of 200 kilometers of
seismic data on the Alcaravan area and completed the acquisition of 52
kilometers of new seismic data over
21
22
prospective areas in mid-February 1994. Harken also plans to acquire
approximately 26 kilometers of additional seismic data on the Alcaravan
Contract area in February 1995.
In September 1994, Harken announced that Huffco Group, Inc. ("Huffco")
of Houston, Texas joined Harken in the drilling of its first exploratory well
under the Alcaravan Contract. Under the terms of this joint venture agreement,
which was approved by Ecopetrol, Harken serves as operator and retains a 50%
interest in the well. The well, the Alcaravan #1, was spudded in early
February 1995 and will be drilled to a projected depth of 10,500 feet to test
for commercial quantities of oil in the oil prone zones prevalent in the Llanos
Basin; the Carbonera, Mirador, Guadalupe and the basal Cretaceous formations.
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 is conducting
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 has evaluated seismic
data and has completed an engineering feasibility study 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. These wells have provided information
and data including production rates, well logs and pressure tests. This well
data has been utilized by Harken in such studies to evaluate the feasibility of
applying modern production and recovery techniques in this area. Harken will
also acquire a minimum of 35 kilometers of seismic data on the Bocachico
Contract area in early 1995.
On January 19, 1995, after completing the engineering feasibility
study, Harken notified Ecopetrol of Harken's commitment to drill a well
under the Bocachico Contract, and thereby extended the contract into its second
year. Harken currently anticipates that a well site will be selected and
drilling will commence by mid-1995.
Playero Contract -- In December 1994, Harken announced that Harken de
Colombia, Ltd. had signed its third Association Contract ("Playero Contract")
with Ecopetrol, covering the Playero contract area. Under the Playero
Contract, Harken has acquired the exclusive rights to conduct exploration
22
23
activities and drilling on this area, which covers approximately 10,000 acres
in the Llanos Basin of Colombia, contiguous to Harken's Alcaravan Contract
area.
During the first year of the Playero Contract, Harken will acquire at
least 12 kilometers of new seismic data in the Playero Contract area. 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 Playero Contract, if Harken has discovered the existence of
commercial production in the Playero Contract area, the Playero Contract will
be further extended for a period of 22 years from the date of termination of
the Exploration Period with a total term not to exceed 28 years. If Harken
makes a commercial discovery of oil and/or gas which is approved by Ecopetrol,
the standard terms of the Playero Contract will apply. The Playero Contract
was granted by Ecopetrol under a new form of Association Contract which has
modified various standard terms from the previous form of Association Contract
which was used on the Alcaravan and Bocachico Contracts. Such terms provide
for Ecopetrol to reimburse Harken for 50% of its successful well costs expended
up to the point of a commercial discovery and to receive a 20% royalty
interest. Although both Ecopetrol and Harken each would have a 50% working
interest, production net of royalty would be allocated 50% to each party until
accumulated production from the Playero Contract area reaches a cumulative
total of 60 million barrels of oil. After that cumulative production level is
achieved, production net of royalty is allocated at rates to Harken from 50% to
25% based upon the relative profitability of the project with Ecopetrol
receiving the remaining complementary 50% to 75% of such additional production.
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. 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.
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. 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 other considerations, which represented the
negotiated amount for BEPCO's remaining obligation for future costs to be
incurred in Bahrain. This settlement amount was recorded as deferred revenue
by Harken and is reduced by ongoing investment expenditures related to Bahrain.
The initial exploratory well under the production sharing agreement
was drilled on the Jarim Reef, which began drilling November 1991. 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. In February 1993, Harken announced that the
Muharraq No. 1 well had no shows of oil or gas and was plugged and abandoned.
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
23
24
agreement to expire, effective February 13, 1993. HBOC allowed an additional
portion of the acreage covered by the production sharing agreement to expire
effective August 29, 1993.
In May 1994, Harken announced a new seismic reprocessing program
covering 500 kilometers of seismic lines in the vicinity of the Jarim Reef. At
present Harken holds approximately 500,000 acres under its production sharing
agreement. Unless commercial production is found, or an extension to the
production sharing agreement is obtained, this acreage expires in July 1995.
In January 1995, Harken completed its reprocessing of approximately 500
kilometers of seismic data and has reviewed the results of that work with
BANOCO. Unless Harken obtains a joint venture partner, Harken will not proceed
to either acquire additional seismic data or drill another well. If a joint
venturer is located, it will be necessary to obtain an extension of one year or
more from July 1995 to complete work necessary with a joint venturer.
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.
Harken has accrued approximately $1,260,000 at December 31, 1994
relating to other operational or regulatory liabilities related primarily 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.
24
25
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
The following financial statements appear on pages 26 through 52 in
this report.
PAGE
----
Report of Independent Public Accountants . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 26
Consolidated Balance Sheets --
December 31, 1993 and 1994 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 27
Consolidated Statements of Operations --
Years ended December 31, 1992,
1993 and 1994 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 28
Consolidated Statements of
Stockholders' Equity -- Years ended
December 31, 1992, 1993 and 1994 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 29
Consolidated Statements of Cash
Flows -- Years ended December 31,
1992, 1993 and 1994 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 30
Notes to Consolidated Financial
Statements . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 31
25
26
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,
1993 and 1994, and the related consolidated statements of operations,
stockholders' equity and cash flows for each of the three years in the period
ended December 31, 1994. These financial statements are the responsibility of
the Company's management. Our responsibility is to express an opinion on these
financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of
material misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements. An audit
also includes assessing the accounting principles used and significant
estimates made by management, as well as evaluating the overall financial
statement presentation. We believe that our audits provide a reasonable basis
for our opinion.
In our opinion, the financial statements referred to above present
fairly, in all material respects, the financial position of Harken Energy
Corporation and subsidiaries as of December 31, 1993 and 1994, and the results
of their operations and their cash flows for each of the three years in the
period ended December 31, 1994, in conformity with generally accepted
accounting principles.
ARTHUR ANDERSEN LLP
Dallas, Texas,
February 10, 1995
26
27
HARKEN ENERGY CORPORATION AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
DECEMBER 31,
------------------------------
1993 1994
---- ----
ASSETS
Current Assets:
Cash and temporary investments . . . . . . . . . . . . . . . . . . . . $ 3,299,000 $ 2,828,000
Accounts receivable, net . . . . . . . . . . . . . . . . . . . . . . . 1,022,000 543,000
Amounts receivable from former subsidiaries . . . . . . . . . . . . . 1,081,000 --
Assets of discontinued operations held for resale . . . . . . . . . . 1,775,000 --
Investment in former subsidiary held for resale . . . . . . . . . . . -- 2,898,000
Prepaid expenses and other current assets . . . . . . . . . . . . . . 500,000 571,000
-------------- -------------
Total Current Assets . . . . . . . . . . . . . . . . . . . . . . . . 7,677,000 6,840,000
Property and Equipment:
Oil and gas properties, using the full cost of method of accounting-
Evaluated . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 9,664,000 13,944,000
Unevaluated . . . . . . . . . . . . . . . . . . . . . . . . . . . . 8,004,000 7,446,000
Gas plants and other property . . . . . . . . . . . . . . . . . . . 6,994,000 6,646,000
Less accumulated depreciation and amortization . . . . . . . . . . . (5,834,000) (7,859,000)
-------------- -------------
Total Property and Equipment, net . . . . . . . . . . . . . . . . . 18,828,000 20,177,000
Investments in Former Subsidiaries . . . . . . . . . . . . . . . . . . 9,218,000 1,219,000
Notes Receivable from Related Parties, including interest . . . . . . . 701,000 474,000
Other Assets, net . . . . . . . . . . . . . . . . . . . . . . . . . . . 1,307,000 250,000
-------------- -------------
$ 37,731,000 $ 28,960,000
============== =============
LIABILITIES AND STOCKHOLDERS' EQUITY
Current Liabilities:
Trade payables . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 339,000 $ 492,000
Accrued liabilities and other . . . . . . . . . . . . . . . . . . . . 4,840,000 2,464,000
Revenues and royalties payable . . . . . . . . . . . . . . . . . . . . 1,354,000 1,277,000
Notes payable . . . . . . . . . . . . . . . . . . . . . . . . . . . . -- 900,000
-------------- -------------
Total Current Liabilities . . . . . . . . . . . . . . . . . . . . . 6,533,000 5,133,000
Commitments and Contingencies (Note 15)
Deferred Revenue, net of current portion . . . . . . . . . . . . . . . 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 65,466,508 and 66,426,508 shares, respectively . . . . . . . . 654,000 664,000
Additional paid-in capital . . . . . . . . . . . . . . . . . . . . . . 131,052,000 132,572,000
Retained deficit . . . . . . . . . . . . . . . . . . . . . . . . . . . (81,986,000) (90,520,000)
Treasury stock, 5,983,655 shares held . . . . . . . . . . . . . . . . (20,757,000) (20,757,000)
--------------- --------------
Total Stockholders' Equity . . . . . . . . . . . . . . . . . . . . . 28,963,000 21,959,000
-------------- -------------
$ 37,731,000 $ 28,960,000
============== =============
The accompanying Notes to Consolidated Financial Statements are
an integral part of these Statements
27
28
HARKEN ENERGY CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
YEAR ENDED DECEMBER 31,
-----------------------
1992 1993 1994
---- ---- ----
Revenues:
Oil and gas operations . . . . . . . . . . . . . . . . . . $ -- $ 4,970,000 $ 4,156,000
Management fee income . . . . . . . . . . . . . . . . . . 1,110,000 300,000 --
Gain on sale of partnership investment . . . . . . . . . . 1,449,000 -- --
Interest and other income . . . . . . . . . . . . . . . . 1,823,000 1,331,000 739,000
------------- ------------- ------------
4,382,000 6,601,000 4,895,000
------------- ------------- ------------
Costs and Expenses:
Oil and gas operating expenses . . . . . . . . . . . . . -- 1,825,000 1,535,000
General and administrative expenses, net . . . . . . . . 2,207,000 3,179,000 3,132,000
Depreciation and amortization . . . . . . . . . . . . . . 954,000 2,571,000 1,993,000
Provision for asset impairments . . . . . . . . . . . . . 52,000 726,000 6,361,000
Interest expense and other . . . . . . . . . . . . . . . 167,000 97,000 85,000
------------- ------------- ------------
3,380,000 8,398,000 13,106,000
------------- ------------- ------------
Income (loss) from continuing operations before
income taxes . . . . . . . . . . . . . . . . . . . . . 1,002,000 (1,797,000) (8,211,000)
Income tax expense . . . . . . . . . . . . . . . . . . . . 341,000 -- --
------------- ------------- ------------
Income (loss) from continuing operations . . . . . . . . 661,000 (1,797,000) (8,211,000)
Discontinued Operations (Note 2):
Loss from operations of discontinued well servicing
and contract drilling segment (including income tax
benefit of $169,000 in 1992) . . . . . . . . . . . . . . (328,000) (3,697,000) (223,000)
------------- ------------- ------------
Net income (loss) before extraordinary item . . . . . . 333,000 (5,494,000) (8,434,000)
------------- ------------- ------------
Extraordinary item-reduction in income taxes resulting
from utilization of net operating loss carryforwards . . . 172,000 -- --
------------- ------------- ------------
Net income (loss) . . . . . . . . . . . . . . . . . . . $ 505,000 $ (5,494,000) $ (8,434,000)
============= ============= ============
Loss attributable to common stock:
Net income (loss) . . . . . . . . . . . . . . . . . . . . $ 505,000 $ (5,494,000) $ (8,434,000)
Less preferred stock dividends . . . . . . . . . . . . . . (360,000) -- --
------------- ------------- ------------
Earnings (loss) attributable to common stock . . . . . . $ 145,000 $ (5,494,000) $ (8,434,000)
============= ============= ============
Income (loss) per common share:
Continuing operations . . . . . . . . . . . . . . . . . . $ 0.01 $ (0.03) $ (0.14)
Discontinued operations . . . . . . . . . . . . . . . . . (0.01) (0.06) (0.00)
Extraordinary item . . . . . . . . . . . . . . . . . . . . 0.00 -- --
------------- ------------- ------------
Net income (loss) . . . . . . . . . . . . . . . . . . . . $ 0.00 $ (0.09) $ (0.14)
============= ============= ============
Weighted average shares outstanding . . . . . . . . . . . . 45,752,936 58,392,901 59,722,853
============= ============= ============
The accompanying Notes to Consolidated Financial Statements are
an integral part of these Statements.
28
29
HARKEN ENERGY CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
ADDITIONAL RETAINED
COMMON STOCK PAID-IN CAPITAL DEFICIT TREASURY STOCK
------------ --------------- ------- --------------
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 $ (81,986,000) $ (20,757,000)
Issuance of common stock, net . . . . . 10,000 1,520,000 -- --
Adjustment for unrealized losses
on available-for-sale securities . . . -- -- (100,000) --
Net loss . . . . . . . . . . . . . . . . -- -- (8,434,000) --
------------ --------------- ---------------- ---------------
Balance, December 31, 1994 . . . . . . . $ 664,000 $ 132,572,000 $ (90,520,000)(B) $ (20,757,000)
============ =============== ================ ================
- ---------------
(A) Includes, as an offset to Additional Paid-In Capital, notes receivable
of $5,325,000 and $4,182,000 as of December 31, 1991 and 1992
respectively, from certain officers, directors and affiliates for
stock purchases. See Note 12 -- Related Party Transactions "Other
Transactions" for discussion.
(B) Includes, as a component of Retained Deficit, net unrealized losses on
available-for-sale securities of $100,000 as of December 31, 1994.
See Note 4 -- Marketable Equity Securities for further discussion.
The accompanying Notes to Consolidated Financial Statements are
an integral part of these Statements.
29
30
HARKEN ENERGY CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
YEAR ENDED DECEMBER 31,
-----------------------
1992 1993 1994
---- ---- ----
Cash flows from operating activities:
Income (loss) from continuing operations . . . . . . . . . . . $ 661,000 $ (1,797,000) $ (8,211,000)
Adjustments to reconcile net income (loss) to net cash
provided by (used in) operating activities:
Utilization of net operating loss carryforward . . . . . . . 341,000 -- --
Depreciation and amortization . . . . . . . . . . . . . . . 954,000 2,571,000 1,993,000
Interest expense (income) on notes payable to/receivable
from related parties . . . . . . . . . . . . . . . . . . . (813,000) (466,000) (423,000)
Provision for asset impairments . . . . . . . . . . . . . . 52,000 726,000 6,361,000
Provision for doubtful accounts . . . . . . . . . . . . . . 154,000 -- 256,000
(Gain) loss on sales of assets and other . . . . . . . . . . (1,485,000) (201,000) (176,000)
Equity in (income) loss of partnership . . . . . . . . . . . 107,000 -- --
Income (loss) from discontinued operations . . . . . . . . . . (328,000) (3,697,000) (223,000)
Adjustments to reconcile income (loss) to net cash provided
by operating activities:
Utilization of net operating loss carry forward . . . . . . (169,000) -- --
Depreciation and amortization . . . . . . . . . . . . . . . 454,000 683,000 77,000
Provision for asset impairments . . . . . . . . . . . . . . 200,000 3,112,000 --
(Gain)Loss on sales of assets and other . . . . . . . . . . -- -- (286,000)
Change in assets and liabilities, net of effect of
companies acquired:
(Increase) decrease in accounts receivable . . . . . . . . . (403,000) 2,282,000 577,000
(Increase) decrease in accounts receivable from former
subsidiaries . . . . . . . . . . . . . . . . . . . . . . . (2,438,000) (338,000) 100,000
Increase (decrease) in trade payables and other . . . . . . (2,539,000) (6,761,000) (555,000)
------------- ------------- --------
Net cash provided by (used in) operating activities . . . . (5,252,000) (3,886,000) (510,000)
------------- ------------- --------
Cash flows from investing activities:
Proceeds from sales of assets . . . . . . . . . . . . . . . . 4,680,000 350,000 338,000
Cash from acquired subsidiary . . . . . . . . . . . . . . . . -- 2,616,000 --
Capital expenditures . . . . . . . . . . . . . . . . . . . . . (1,341,000) (4,499,000) (2,344,000)
Proceeds from sale of assets of discontinued operations . . . -- -- 2,045,000
------------- ------------- ------------
Net cash provided by (used in) investing activities . . . . 3,339,000 (1,533,000) 39,000
------------- ------------- ------------
Cash flows from financing activities:
Issuance of preferred and common stock, net of retirements . . 211,000 -- --
Issuance of long-term debt and short-term borrowings . . . . . -- -- --
Payment of note payable to related party . . . . . . . . . . . (253,000) -- --
Debt repayments . . . . . . . . . . . . . . . . . . . . . . . (264,000) (1,630,000) --
------------- ------------- ------------
Net cash used in financing activities . . . . . . . . . . . (306,000) (1,630,000) --
------------- ------------- ------------
Net decrease in cash and temporary investments . . . . . . . . (2,219,000) (7,049,000) (471,000)
Cash and temporary investments at beginning of year . . . . . . 12,567,000 10,348,000 3,299,000
------------- ------------- ------------
Cash and temporary investments at end of year . . . . . . . . . $ 10,348,000 $ 3,299,000 $ 2,828,000
============= ============= ============
The accompanying Notes to Consolidated Financial Statements are
an integral part of these Statements.
30
31
HARKEN ENERGY CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1992, 1993 AND 1994
(1) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Principles of Consolidation and Presentation -- The Consolidated
Financial Statements include the accounts of Harken Energy Corporation (a
Delaware corporation) and all of its wholly-owned subsidiaries ("Harken") after
elimination of significant intercompany balances and transactions. Interests in
managed oil and gas joint ventures are proportionately consolidated. Data is as
of December 31 of each year or for the year then ended and dollar amounts in
tables are in thousands unless otherwise indicated. Certain prior year amounts
have been reclassified to conform with the 1994 presentation.
Cash and Temporary Investments -- For purposes of the Consolidated
Statements of Cash Flows, Harken considers all highly liquid investments
purchased with a maturity of three months or less to be cash equivalents.
Harken paid cash for interest in the amounts of $77,000, $97,000 and $85,000
during 1992, 1993 and 1994, respectively. All significant noncash investing and
financing activities are discussed in Notes 3 and 10 -- Acquisitions and
Stockholders' Equity.
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 approximately
$1,391,000 and $1,063,000 at December 31, 1993 and 1994, respectively.
Accounts Receivable -- Harken maintains a reserve for potential losses
in collection of its accounts receivable. The allowance for doubtful accounts
was $1,403,000 and $1,162,000 as of December 31, 1993 and 1994, respectively.
Assets Held for Resale -- Harken reflects assets that it intends to
sell during the next twelve months as a current asset in the accompanying
consolidated balance sheets at the lower of cost or net realizable value. At
December 31, 1993, Harken identified certain contract drilling rigs and related
equipment for resale and reflected them as Assets of Discontinued Operations
Held for Resale in the accompanying consolidated financial statements. At
December 31, 1994, Harken has reflected its investment in E-Z Serve Series C
Preferred and related accrued dividends as Investment in Former Subsidiary Held
for Resale. See Note 5 -- Investments in Former Subsidiaries for further
discussion.
Accrued Liabilities and Other -- Accrued liabilities and other at
December 31, 1993, consists of certain liabilities of $2,931,000 related to
Chuska and other accrued liabilities of $1,909,000. The December 31, 1994
balance consists of certain liabilities of $1,260,000 related to Chuska and
other accrued liabilities of $1,204,000.
Deferred Revenue -- During 1993, Harken received approximately
$2,000,000 from a joint venture partner upon termination of a joint operating
agreement. Such amount, net of Harken's carrying value in its Bahrain
investment, has been recorded as deferred revenue in the accompanying
consolidated balance sheet. See Note 15 -- Commitments and
Contingencies-Bahrain Operations for further discussion. This deferred amount
has been fully offset by ongoing Bahrain investment expenditures at December
31, 1994.
31
32
HARKEN ENERGY CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
Management Fee Income -- During 1992 and 1993, Harken received
management fees of approximately $1,110,000 and $300,000, respectively, related
to monthly fees earned as manager of a partnership (see Note 7 -- Investment in
Limited Partnership).
General and Administrative Expenses -- Harken reflects general and
administrative expenses net of operator overhead charges and other amounts
billed to joint interest owners. General and administrative expenses are net of
$4,280,000, $4,252,000 and $1,264,000 for such amounts during 1992, 1993 and
1994, respectively.
Provision for Asset Impairments -- Assets which are used in Harken's
operations, or are not held for resale, are carried at cost, less any
accumulated depreciation. When evidence indicates that operations will not
produce sufficient revenues to cover all costs, including depreciation, and
when the carrying amount of the related asset cannot be realized through sale,
a permanent impairment is recorded and the asset value is written down to
recoverable value. Harken reflected a provision for asset impairments from
continuing operations in the amounts of $52,000, $726,000 and $6,361,000 during
1992, 1993 and 1994, respectively. See Note 5 and 12 -- Investments in Former
Subsidiaries and Related Party Transactions for further discussion.
(2) DISCONTINUED OPERATIONS
In May 1994, Harken announced that it had discontinued its well
servicing operations which it had conducted through Supreme Well Service
Company ("Supreme"), a wholly-owned subsidiary. Harken has sold the equipment
assets of Supreme and has utilized the proceeds toward developing Harken's
exploration and production operations, both domestically and internationally.
As a result of this decision, Harken has reflected the revenues and expenses of
Harken's well servicing and contract drilling segment as discontinued
operations in the accompanying financial statements. Such discontinued
operations include revenues of $2,048,000, $2,074,000 and $1,053,000 for the
years ended December 31, 1992, 1993 and 1994, respectively. The December 31,
1994 revenue amount includes $272,000 of gain on the sale of Harken's contract
drilling assets which occurred during the first quarter of 1994.
(3) ACQUISITIONS
Effective February 15, 1993, Harken consummated a merger pursuant to
which Chuska Resources Corporation ("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. Chuska is engaged, primarily through its subsidiary, Harken Southwest
Corporation ("HSW"), 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. HSW
operations in the Paradox Basin area are primarily concentrated on the 16
million acre Navajo Indian Reservation ("the Reservation"), which comprises
portions of Arizona, New Mexico and Utah. HSW conducts activities on the
Reservation as a contractually appointed operator and agent of the Navajo
Nation pursuant to two Federally approved operating agreements. In addition to
its oil and gas exploration activities,
32
33
HARKEN ENERGY CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
HSW 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. The
acquisition of Chuska has been accounted for under the purchase method of
accounting.
HSW is the general partner and operator of four limited partnerships
and is a venturer in the CHAP Joint Venture ("CHAP"), all of which were formed
for the exploration and production of oil and gas. Chuska or its wholly- owned
subsidiaries are venturers in three additional projects for the exploration and
production of oil and gas. These projects are named Greater Blanding, Central
Blanding and Western Paradox. Harken accounts for its investments in the
partnerships and CHAP using the proportionate consolidation method.
In October 1994, Harken acquired additional joint venture interests
in CHAP which resulted in Harken increasing its ownership in the Reservation
reserves, exploration acreage, development drilling locations and the Aneth Gas
Plant. The acquisition of the sellers' interest raised Harken's total interest
in CHAP from 50% to approximately 70% and increased Harken's share of daily
production by approximately 40% over its previous interest. As consideration
for this acquisition, Harken issued an aggregate total of 960,000 shares of
restricted Harken common stock to the sellers, assumed certain liabilities of
the sellers relating to the properties, and the sellers in turn retained
responsibility for certain contingent operational and environmental liabilities
related to the properties as well as retaining certain distributions made by
CHAP prior to the actual date of closing. The acquisition of the additional
interest in CHAP has been accounted for under the purchase method of
accounting.
In November 1994, Harken announced the signing of a Merger Agreement
with Search Exploration Company ("Search"). Search is primarily engaged in the
domestic exploration for, and development and production of oil and gas
reserves. Pursuant to the Merger Agreement, upon the consummation of the
Merger, (a) each outstanding share of Search common stock will be converted
into the right to receive that number of shares of Harken common stock
determined by dividing $0.8099 by the average of the closing sales price of a
share of Harken common stock on the American Stock Exchange over the 30 days
immediately preceding the date that is five trading days prior to the
consummation of the merger, subject to certain restrictions ("the Average
Trading Price"); (b) each outstanding share of Search Series 1993 Redeemable
Preferred Stock will be converted into the right to receive that number of
shares of Harken common stock determined by dividing $1.00 by the Average
Trading Price and (c) certain promissory notes to be issued by Search will, by
their terms, be converted into the right to receive that number of shares of
Harken common stock determined by dividing the principal amount of each note by
the Average Trading Price. In addition, the holders of Search common stock,
certain notes and overriding royalty interests in certain properties of Search
will receive a non-transferable right to receive additional shares in the
future, if any, of Harken common stock or, under certain circumstances, cash,
based upon the increase that may subsequently be realized in the value of a
group of undeveloped leases and properties of Search. Under the terms of the
Merger Agreement, certain contingencies must be satisfied by Search prior to
closing, unless waived by Harken. Upon closing, the merger with Search would
be accounted for under the purchase method of accounting.
33
34
HARKEN ENERGY CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
As of December 31, 1994, Search had proved reserves of approximately
19,000 barrels of oil and 1,298,000 mcf of gas with a net present value of
approximately $1,513,000 and had gross revenue interests in 42 productive
wells, none of which were operated by Search.
Pro Forma Information -- The following unaudited pro forma combined
condensed financial statements give effect to the above mentioned transactions.
The pro forma combined condensed balance sheet gives effect to the Search
merger as if it had been consummated as of December 31, 1994. The pro forma
combined condensed statement of operations for the years ended December 31,
1993 and 1994, gives effect to both the Search merger and the acquisition of an
additional interest in CHAP as if both had been consummated at the beginning of
each period.
The pro forma data is presented for illustrative purposes only and are
not necessarily indicative of the financial position or operating results that
would have occurred had the transactions been consummated at the dates
indicated, nor are they indicative of future financial position or operating
results.
PRO FORMA COMBINED CONDENSED BALANCE SHEET
DECEMBER 31, 1994
(UNAUDITED)
HARKEN SEARCH PRO FORMA
ACTUAL ACTUAL ADJUSTMENTS PRO FORMA
------ ------ ----------- ---------
Current Assets $ 6,840 $ 489 $ $ 7,329
Property and Equipment, net 20,177 2,084 (1) 1,176 23,879
(2) 442
Investments in Former Subsidiaries 1,219 -- 1,219
Notes Receivable from Related Parties,
including interest 474 -- 474
Other Assets, Net 250 -- 250
----------- ------------ ------------- ----------
Total Assets $ 28,960 $ 2,573 $ 1,618 $ 33,151
=========== ============ ============ ==========
Current Liabilities $ 5,133 $ 174 $(1) 215 $ 5,655
(2) 133
Long-Term Debt -- -- (2) 309 309
Redeemable Preferred Stock 1,868 575 (1) (575) 1,868
Stockholders' Equity 21,959 1,824 (1) 1,536 25,319
----------- ------------ ------------ ----------
$ 28,960 $ 2,573 $ 1,618 $ 33,151
=========== ============ ============ =========
34
35
HARKEN ENERGY CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
PRO FORMA ADJUSTMENTS-PRO FORMA COMBINED CONDENSED BALANCE SHEET-
(1) Pro forma entry to record the acquisition of Search at December 31, 1994,
in exchange for Harken common stock. Purchase price was calculated using
the market value, discounted by 10%, of Harken common stock over the most
recent 30 days to determine the number of shares of Harken common stock
to be issued, according the Merger Agreement. Such purchase price
results in a total investment in Search of approximately $3,360,000,
which includes approximately $215,000 of estimated transaction costs.
(2) Pro forma entry to record the required roll-up acquisition by Search of
the non-owned interests in its managed limited partnerships in exchange
for notes payable bearing interest at 10% per annum.
PRO FORMA COMBINED CONDENSED STATEMENT OF OPERATIONS
FOR THE YEAR ENDED DECEMBER 31, 1993
(UNAUDITED)
ACQUIRED PRO FORMA PRO FORMA
HARKEN INTEREST IN SEARCH ADJUSTMENT ADJUSTMENTS
ACTUAL CHAP-ACTUAL ACTUAL -CHAP -SEARCH PRO FORMA
-------- ----------- ---------- --------- ----------- ---------
Oil and gas revenue $ 4,970 $ 2,135 $ 1,057 $ $ (5) 131 $ 8,293
Other revenues 1,631 57 44 1,732
----------- --------- -------- ------- --------- --------
Total Revenues 6,601 2,192 1,101 131 10,025
----------- --------- -------- ------- --------- --------
Oil and gas operating expenses 1,825 676 286 (5) 38 2,825
General and administrative expenses 3,179 199 788 4,166
Depreciation and amortization 2,571 810 670 (3)(511) (4)(246) 3,294
Provision for asset impairments 726 326 462 (3)(326) (4)(462) 726
Interest and other 97 13 135 (5) 41 286
----------- --------- -------- ------- --------- --------
8,398 2,024 2,341 (837) (629) 11,297
----------- --------- -------- ------- --------- --------
Income tax expense (benefit) -- -- (335) (6) 335 --
----------- --------- -------- ------- --------- --------
Income (loss) from continuing
operations $ (1,797) $ 168 $ (905) $ 837 $ 425 $ (1,272)
=========== ========= ======== ======= ========= ========
Net loss per share from continuing
operations attributable to
common stock $ (0.03) $ (0.02)
=========== ========
Weighted Average Shares Outstanding 58,392,901 61,349,284
=========== ==========
35
36
HARKEN ENERGY CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
PRO FORMA COMBINED CONDENSED STATEMENT OF OPERATIONS
FOR THE YEAR ENDED DECEMBER 31, 1994
(UNAUDITED)
ACQUIRED PRO FORMA PRO FORMA
HARKEN INTEREST IN SEARCH ADJUSTMENT ADJUSTMENTS
ACTUAL CHAP-ACTUAL ACTUAL -CHAP -SEARCH PRO FORMA
-------- ----------- ---------- --------- ----------- ---------
Oil and gas revenue $ 4,156 $ 1,035 $ 495 $ $(5) 89 $ 5,775
Other revenues 739 39 221 999
----------- --------- -------- ------- ---------- --------
Total Revenues 4,895 1,074 716 89 6,774
----------- --------- -------- ------- ---------- --------
Oil and gas operating expenses 1,535 337 274 (5) 37 2,183
General and administrative expenses 3,132 96 698 (5) 2 3,928
Depreciation and amortization 1,993 416 499 (3)(324) (4) (128) 2,456
Provision for asset impairments 6,361 -- 2,667 (4) (2,667) 6,361
Interest and other 85 -- 5 (5) 27 117
----------- --------- -------- ------- ---------- --------
13,106 849 4,143 (324) (2,729) 15,045
----------- --------- -------- ------- ---------- --------
Income tax expense (benefit) -- -- (227) (6) 227 --
----------- --------- -------- ------- ---------- --------
Income (loss) from continuing
operations $ (8,211) 225 $ (3,200) $ 324 $ 2,591 $ (8,271)
=========== ========= ======== ======= ========== ========
Net loss per share from continuing
operations attributable to common
stock $ (0.14) $ (0.13)
=========== ========
Weighted Average Shares Outstanding 59,722,853 62,439,236
========== ==========
PRO FORMA ADJUSTMENTS-PRO FORMA COMBINED CONDENSED STATEMENTS OF OPERATIONS-
(3) Pro forma entry to adjust actual depreciation and depletion expense and
valuation provision on oil and gas properties for the acquired interest in
CHAP to the depreciation and depletion calculated on a consolidated basis.
(4) Pro forma entry to adjust actual depreciation and depletion expense and
valuation provision on oil and gas properties for Search to the
depreciation and depletion calculated on a consolidated basis.
(5) Pro forma entry to reflect the additional revenues and expenses of Search's
required roll-up of its managed limited partnerships, along with related
interest expense on the notes payable to be issued.
(6) Pro forma entry to eliminate income tax benefit of Search.
36
37
HARKEN ENERGY CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
(4) MARKETABLE EQUITY SECURITIES
In May 1993 the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards No. 115, "Accounting For Certain Investments in
Debt and Equity Securities", ("SFAS 115") effective for fiscal years beginning
after December 15, 1993. Under the new rules, all marketable equity securities
are classified as available-for-sale or trading and are carried at fair value.
Unrealized holding gains and losses on securities classified as available-for-
sale are carried as a component of stockholders' equity. Realized gains and
losses and declines in value judged to be other than temporary on
available-for-sale securities are included in other income. Unrealized holding
gains and losses on securities classified as trading are also reported in
earnings. The cost of securities sold is based on the average cost method.
Harken carries an investment in the common stock of E-Z Serve, including
shares of E-Z Serve common stock resulting from the conversion of 5,000 shares
of E-Z Serve Series C Preferred in June 1994. Harken's remaining investment in
E-Z Serve Series C Preferred is not accounted for pursuant to SFAS 115, as it
is not a readily marketable security. See Note 5 -- Investments in Former
Subsidiaries for further discussion of E-Z Serve Series C Preferred. Beginning
in 1994 pursuant to SFAS 115, Harken classifies its investment in E-Z Serve
common stock as available for sale. The following is a summary of Harken's
marketable equity securities, which are included in Prepaid Expenses and Other
Current Assets in the accompanying balance sheet:
DECEMBER 31,
-----------------------
AVAILABLE-FOR-SALE 1993 1994
------------------ ---------- ----------
Cost $ 138 $ 210
Gross Unrealized Gains 112 --
Gross Unrealized Losses -- 100
Estimated Fair Value 250 110
AVAILABLE-FOR-SALE 1992 1993 1994
------------------ ---- ---- ----
Gross realized gains $ 2,451 $ 164 $ 88
Gross realized losses -- -- 59
An unrealized holding loss on available-for-sale securities of
$100,000 was recognized at December 31, 1994, and is included as a component of
stockholders' equity. Such amount has been included in Retained Deficit in the
accompanying consolidated financial statements.
37
38
HARKEN ENERGY CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
(5) INVESTMENTS IN FORMER SUBSIDIARIES
Pursuant to a Rights Offering effective April 30, 1991, Harken owned
approximately 7.25% and 6.59%, respectively, of the outstanding common shares
of E-Z Serve Corporation ("E-Z Serve") and Tejas Power Corporation ("Tejas"),
both of which it accounted for as marketable equity securities using the lower
of cost or market value. During late 1991 and throughout 1992, Harken sold all
of its common stock interest in Tejas and in December 1992 and during 1993 and
1994, Harken sold its initial common stock interest in E-Z Serve. The resulting
realized gains from these sales as of December 31, 1992 totalled $2,451,000 and
were deferred until 1993 when all remaining material contingencies and
guarantees by Harken relating to its discontinued operations of E-Z Serve and
Tejas were eliminated. The total net gain recognized during 1993 was $164,000.
E-Z Serve Preferred Stock -- Harken holds 74,754 shares of E-Z Serve
$6.00 Convertible Preferred Stock, Series C ("E-Z Serve Series C Preferred") at
December 31, 1994, which it acquired at a cost of $100 per share. Such shares
include the 12,830 additional shares of E-Z Serve Series C Preferred received
in April 1993 as part of a restructuring by E-Z Serve. See below for further
discussion. The E-Z Serve Series C Preferred is to pay a cumulative dividend of
$6.00 per share per annum, payable semi-annually beginning October 1, 1991 as
declared by the E-Z Serve Board of Directors, and payable in legally available
cash or in additional shares of E-Z Serve Series C Preferred. Each share of E-Z
Serve Series C Preferred is convertible at the option of either E-Z Serve or
Harken into 52.63 common shares of E-Z Serve, such rate to be adjusted under
certain conditions. The E-Z Serve Series C Preferred is subordinated to all E-Z
Serve bank credit facilities. Harken recorded dividend income of $397,000,
$466,000 and $424,000 during 1992, 1993 and 1994, respectively, related to the
E-Z Serve Series C Preferred and has included such dividends in Other Income in
the accompanying financial statements.
During 1994, Harken converted a portion of its shares of E-Z Serve
Series C Preferred into E-Z Serve common shares and has sold certain of its E-Z
Serve common shares. See Note 4 -- Marketable Equity Securities for further
discussion. During the fourth quarter of 1994, Harken also began reviewing the
potential for a sale to other parties of some or all of its remaining
investment in E-Z Serve Series C Preferred and related accrued dividends.
Based on the terms and consideration of these potential transactions, the
current market price of E-Z Serve common shares, the conversion terms and
limited marketability of the E-Z Serve Series C Preferred and the current
overall capital structure of E-Z Serve, Harken has deemed that a decline in
value that is other than temporary has occurred with respect to its investment
in E-Z Serve Series C Preferred. Accordingly, Harken has reclassified its
investment in E-Z Serve Series C Preferred and its related accrued dividends
receivable from E-Z Serve to current assets at December 31, 1994, at a total
estimated realizable value of $2,898,000. Such amount is reflected as
Investment in Former Subsidiary Held for Resale in the accompanying
consolidated balance sheet. In connection with this determination, Harken has
included the decline in value of $5,831,000 in Provision for Asset Impairments
in the accompanying consolidated financial statements.
Tejas Preferred Stock -- On September 6, 1991, and effective May 3,
1991, Harken purchased 1,000 shares of Tejas Power Corporation Series B
Preferred Stock, $.01 par value per share ("Tejas Preferred
38
39
HARKEN ENERGY CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
Stock"), at a purchase price of $1,200,000. The purchase price was equal to
certain expenses incurred by Harken on behalf of Tejas in connection with the
Rights Offering and represents the redemption value of the Tejas Preferred
Stock. Harken accepted these shares of Tejas Preferred Stock as full and
complete payment for the above expenses as a result of Tejas agreeing to waive
certain of the provisions under the terms of the Harken Series C Preferred held
by Tejas and pledging all 186,760 shares of the Harken Series C Preferred to
Harken.
E-Z Serve Restructuring -- Harken held a 12% secured subordinated
debenture from E-Z Serve for $3,136,000, which included $1,336,000 which was
issued in exchange for 531,824 shares of Harken common stock and was reflected
as a reduction to stockholders' equity in Harken's balance sheet. In April
1993, Harken agreed to enter into an exchange which E-Z Serve had proposed in
connection with an overall E-Z Serve restructuring. Under this restructuring,
which was consummated on April 21, 1993, E-Z Serve entered into various
agreements with its existing bank, a new bank, its major stockholders as well
as certain agreements with Harken. Under the exchange which was made between
E-Z Serve and Harken, Harken has tendered and released to E-Z Serve the 12%
secured subordinated debenture of $3,136,000 plus accrued interest receivable
from E-Z Serve. Harken also waived certain antidilution provisions of the E-Z
Serve Series C Preferred held by Harken and made a capital contribution to E-Z
Serve for $366,000 in cash. In exchange for the above matters, Harken received
from E-Z Serve a full and complete release of Harken's guarantee previously
given to E-Z Serve's bank for up to $5,000,000 of a portion of E-Z Serve's bank
debt. In addition, Harken received 12,830 additional shares of E-Z Serve's
Series C Preferred Stock (see discussion above).
As discussed above, Harken had previously deferred $2,451,000 of
realized gain which had been generated during 1991 and 1992 from the sale of
certain of its common stock interests in certain former subsidiaries, including
E-Z Serve. During the second quarter of 1993, and upon release of Harken's
guarantee of E-Z Serve's bank debt, such deferred gain was utilized to reduce
the carrying value of investments in former subsidiaries and reflect the
release of the 12% secured subordinated debenture in the Harken consolidated
balance sheet.
(6) PROPERTY AND EQUIPMENT
Property and equipment are carried at cost. Gas plant and other
property is depreciated on the straight-line method over their estimated useful
lives ranging from three to fifteen years. Harken follows the full cost
accounting method to account for the costs incurred in the acquisition,
exploration, development and production of oil and gas reserves. Under this
method, all costs, including internal costs, directly related to acquisition,
exploration and development activities are capitalizable as oil and gas
property costs. Harken capitalized $602,000, $1,840,000 and $1,066,000 of
internal costs, net of reimbursements from joint venture partners, directly
related to these activities in 1992, 1993 and 1994 respectively. Such costs
include office and personnel costs of Harken's international and domestic
exploration field offices and does not include any corporate overhead. Harken
also accrues costs of dismantlement, restoration and abandonment to the extent
that such costs, in the aggregate, are anticipated to exceed the aggregate
salvage value of equipment and facilities removed from producing wells and
other facilities.
39
40
HARKEN ENERGY CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
The capitalized costs of oil and gas properties, excluding unevaluated
properties, are amortized using a company-wide unit of production method
(equivalent physical units of 6 mcf of gas to each barrel of oil) based on
estimated proved recoverable oil and gas reserves. Such amortization was $5.58
and $6.31 per equivalent barrel of oil produced during 1993 and 1994,
respectively.
The unevaluated property costs at December 31, 1993 and 1994 includes
$796,000 and $1,512,000, respectively, related to Colombia (see Note 15 --
Commitments and Contingencies for a discussion of Colombian operations) and
$7,208,000 and $5,934,000, respectively, related to domestic prospects.
Amortization of unevaluated property costs will begin when the properties
become proved or their values become impaired. Harken assesses realizability
of unevaluated properties on at least an annual basis or when there has been an
indication that an impairment in value may have occurred. Fair value of
unevaluated prospects is determined based on management's intention with regard
to future exploration and development of individually significant properties
and the ability of Harken to obtain funds to finance such exploration and
development. Under full cost accounting rules, for each cost center,
capitalized costs, less accumulated amortization and related deferred income
taxes, shall not exceed an amount ("the cost ceiling") equal to the sum of (a)
the present value of future net revenues from estimated production of proved
oil and gas reserves discounted at 10%, plus (b) the cost of properties not
being amortized, plus (c) the lower of cost or estimated fair value of any
unproved properties included in the costs being amortized, less (d) any income
tax effects related to differences between the book and tax basis of the
properties involved.
(7) INVESTMENT IN LIMITED PARTNERSHIP
On December 17, 1992, Harken entered into a Purchase and Sale
Agreement (the "Agreement") pursuant to which Harken sold its 12% general
partner's interest in a limited partnership to an affiliate of a major
stockholder which served as limited partner. The closing of the Agreement was
completed on December 30, 1992. The transaction resulted in Harken recognizing
a gain on sale of partnership investment of $1,449,000 in 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, subject to certain reductions. As additional
consideration for the transaction, an affiliate of the major stockholder agreed
to indemnify Harken from any liability under the guarantee given by Harken to a
bank with regard to the limited partnership's credit agreement with the bank.
Subsequent to December 31, 1992, the affiliate of the major stockholder caused
the bank to release Harken and its affiliates from any liability under this
guarantee and loan.
Under the terms of the Agreement, Harken continued to manage the oil
and gas property interests of the limited partnership and to operate certain
partnership properties. Harken was paid $50,000 per month to manage the
partnership 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, the partnership sold its
interests in all oil and gas properties operated by Harken and Harken ceased to
manage the partnership.
40
41
HARKEN ENERGY CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
(8) NOTES PAYABLE
At December 31, 1993, Harken had included $1,000,000 in accrued
liabilities 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 was to pay
$1,000,000 to the former Chuska stockholder when aggregate net revenues (as
defined in the agreement) reached $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, guaranteed by
Harken, for the remaining $500,000 consulting payment which was paid to the
former Chuska stockholder on January 5, 1995. This obligation is included in
Notes Payable in the accompanying December 31, 1994 consolidated balance sheet.
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. This note is included in Notes Payable in the
accompanying December 31, 1994 consolidated balance sheet. The balance is
included as a current liability as Chuska is obligated under this agreement to
pay 75% of the monthly 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.
(9) REDEEMABLE PREFERRED STOCK
During 1988, Harken completed the private placement of 3,000,000
shares of newly-issued Series C 12% $1 par value cumulative convertible
redeemable preferred stock ("Series C Preferred") for $30,000,000. Each share
of preferred stock was convertible into 1.667 shares of common stock at the
option of the holder and was mandatorily redeemable at $10 per share over a
five year period beginning in 1993. Dividends may be paid in the form of cash
or common stock at the option of the holder. Harken has the option to convert
the preferred stock to shares of common stock if the market price for Harken's
common stock has exceeded 125% of the $6.00 conversion price of the preferred
stock for twenty consecutive days. The conversion price of $6.00 per share is
adjustable under certain conditions.
The 186,760 shares of Series C Preferred held by Tejas represent the
only Series C Preferred shares outstanding as of December 31, 1993 and 1994.
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.
41
42
HARKEN ENERGY CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
The holder of 200,000 shares of Series C Preferred who did not elect
to exchange its shares of Series C Preferred continued to hold its shares,
until such shares were also exchanged under the original terms of the Series C
Preferred in January 1992 for 333,400 shares of Harken common stock.
During the third quarter of 1992, the 513,240 shares of Harken Series
C Preferred held by E-Z Serve were exchanged for 2,200,000 newly issued shares
of Harken common stock. In addition, E-Z Serve agreed to adjust the conversion
ratio of its E-Z Serve Series C Preferred (see Note 5 -- Investments in Former
Subsidiaries, "E-Z Serve Preferred Stock" for further discussion). As part of
the above exchange transaction, Harken issued its approval of an E-Z Serve
acquisition as required under the terms of a subordinated debenture by E-Z
Serve to Harken.
(10) STOCKHOLDERS' EQUITY
Common Stock -- Harken currently has authorized 100,000,000 shares of
$.01 par common stock. At December 31, 1993 and 1994, Harken had issued
65,466,508 shares and 66,426,508 shares, respectively. Harken held 5,983,655
shares as treasury stock at a cost of $20,757,000 both December 31, 1993 and
1994.
Acquisition of Chuska Resources Corporation -- Effective February 15,
1993, Harken consummated a merger pursuant to which Chuska Resources
Corporation ("Chuska") became a wholly-owned subsidiary of Harken. In exchange
for all of the outstanding common stock of Chuska, Harken issued 14,210,357
shares of Harken common stock. In connection with the merger, Harken filed a
registration statement, which became effective January 15, 1993, with the
Securities and Exchange Commission for the shares of Harken common stock
issued. See further discussion of the merger at Note 3 -- Acquisitions.
Acquisition of CHAP Interest -- In October 1994, Harken acquired an
additional interest of approximately 20% in CHAP in exchange for, among other
consideration, 960,000 shares of restricted Harken common stock.
Per Share Data -- Per share data has been computed based on the
weighted average number of common shares outstanding during each period. Per
share data reflects net loss adjusted for accrued dividends on the Series C
Preferred stock.
Stock Options -- In conjunction with various stock option plans and
grants, Harken has the following options outstanding at December 31, 1994 (not
in thousands):
42
43
HARKEN ENERGY CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
YEAR OF NUMBER OF EXPIRATION
GRANT SHARES EXERCISABLE OPTION PRICE DATE
----- ------ ----------- ------------ ----
1984 . . . . . . . . 37,500 37,500 $1.000 1994
1985 . . . . . . . . 410,000 410,000 $1.000 1995
1986 . . . . . . . . 10,000 10,000 $4.1875 1996
1987 . . . . . . . . 26,667 26,667 $3.75 1995
1988 . . . . . . . . 84,000 84,000 $4.1875 to $5.625 1995-1998
1990 . . . . . . . . 137,477 137,477 $4.00 to $5.000 1995-2000
1991 . . . . . . . . 10,000 10,000 $6.500 1996
1993 . . . . . . . . 333,650 298,442 $1.1875 to $1.875 1996-2003
1994 . . . . . . . . 1,776,775 535,942 $1.00 to $1.875 2000-2004
At December 31, 1994, Harken had remaining options authorized and
available to be granted of 1,475,000.
Registration of Outstanding Shares -- Pursuant to the request of
certain former CHAP partners, and in accordance with the terms of the above
mentioned purchase by Harken of an additional interest in CHAP Harken filed a
registration statement with the Securities and Exchange Commission covering
960,000 restricted shares of its currently outstanding common stock.
(11) INCOME TAXES
At December 31, 1994, Harken had available for federal income tax
reporting purposes, net operating loss (NOL) carryforward for regular tax
purposes of approximately $58,000,000 which expires in 1997 through 2010,
alternative minimum tax NOL carryforward of approximately $47,000,000 which
expires in 1997 through 2010, investment tax credit carryforward of
approximately $863,000 which expires in 1995 through 2002, contribution
carryforward of approximately $57,000 which expires in 2000 through 2009,
statutory depletion carryforward of approximately $1,150,000 which does not
have an expiration date, jobs tax credit carryforward of approximately $118,000
which expires in 1994 through 1995 and a net capital loss carryforward of
approximately $542,000 which expires in 2007. Approximately $14,000,000 of the
net operating loss carryforward has been acquired with the purchase of
subsidiaries and must be used to offset future income from profitable
operations within those subsidiaries.
During the first quarter of 1993, Harken adopted Statement of
Financial Accounting Standard No. 109, "Accounting for Income Taxes" ("SFAS No.
109"). This standard requires, among other things, recognition of future tax
benefits and liabilities, measured by enacted tax rates, attributable to
deductible temporary differences between financial statement and income tax
bases of assets and liabilities and to tax net operating loss carryforwards.
Deferred tax benefits are required to be recognized to the extent that
realization of such benefits is more likely than not.
43
44
HARKEN ENERGY CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
Upon adoption of SFAS No. 109, on January 1, 1993, Harken calculated
total deferred tax liabilities of approximately $2,020,000 resulting from
financial statement basis for property and equipment in excess of related tax
basis. In addition, Harken calculated total deferred tax assets of
approximately $18,989,000 consisting of approximately $18,142,000 related to
Harken's net operating loss carryforward and approximately $847,000 primarily
related to tax basis for investments in former subsidiaries in excess of
related financial statement basis. Harken established a valuation allowance for
the entire net deferred tax asset of $16,969,000. As a result, the adoption of
SFAS No. 109 by Harken on January 1, 1993 had no effect on Harken's results
from operations or earnings (loss) per common share for the year ended December
31, 1993.
At December 31, 1993, primarily as a result of the February 15, 1993
merger with Chuska whereby Chuska became a wholly-owned subsidiary of Harken,
total deferred tax liabilities increased to approximately $4,065,000. Such
increase was due to the financial statement basis for Chuska property and
equipment being in excess of the related historical tax basis. In addition,
total deferred tax assets increased to approximately $22,872,000, primarily
from an increase in the NOL carryforward during the year. The resulting
increase in net deferred tax assets was offset by a corresponding increase in
the valuation allowance, resulting in no impact to Harken's results of
operations.
At December 31, 1994, total deferred tax liabilities increased to
approximately $5,100,000 while total deferred tax assets decreased to
approximately $20,640,000. The resulting decrease in net deferred tax assets
was offset by a corresponding decrease in the valuation allowance to
approximately $15,540,000 at December 31, 1994, resulting in no impact to
Harken's results of operations.
The Tax Reform Act of 1986 made substantial changes with regard to NOL
carryforwards. After an "ownership change," the taxable income of a loss
corporation is limited annually to a prescribed rate times the value of the
loss corporation's stock immediately before the ownership change. In general,
an ownership change occurs if ownership of more than 50% in value of the stock
of the loss corporation changes during the three-year period preceding the test
date. Under federal tax law, the amount and availability of loss carryforwards
are subject to a variety of interpretations and restrictive tests, under which,
the utilization of such loss carryforwards could be limited or effectively lost
upon certain changes in ownership. Application of these and other tests
requires certain factual determinations and legal interpretations as to which
there is little guidance. An ownership change occurred in 1989 resulting in
Harken's utilization of NOL carryforwards for all periods prior to the date of
change being limited annually to approximately $11,000,000 to $12,000,000.
(12) RELATED PARTY TRANSACTIONS
Relationship with E-Z Serve -- At December 31, 1993, E-Z Serve owed
Harken $870,000 primarily for preferred stock dividends. Such balance is
included in Accounts Receivable from Related Parties in the accompanying
consolidated balance sheet. At December 31, 1994, the accrued preferred stock
dividends have been reclassified as Investment in Former Subsidiary Held for
Resale. See Note 5 -- Investments in Former Subsidiaries for further
discussion.
44
45
HARKEN ENERGY CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
Other Transactions -- The Board of Directors approved the granting of
loans from Harken to certain employees and directors under the Non-Qualified
Plan and the Directors Option Agreement for the purpose of allowing such
individuals to exercise their stock options immediately. The Board of Directors
determined in making such grants that as a result of the restricted nature of
the stock and the lack of any rights on the part of the optionee to cause such
shares to be registered, an option price per share equal to 60% of the closing
market price on the date of grant was the reasonable price for such shares of
common stock which were immediately purchased. Each loan is evidenced by a
promissory note which is due eight years from making and bears interest at 5%
per annum. The shares of stock purchased pursuant to such notes were held by
Harken as collateral until the respective notes were fully paid. During 1988,
1989, 1990 and 1991, certain officers and directors elected to purchase common
stock under these terms. Harken had notes receivable of $3,989,000 and
$2,846,000 as of December 31, 1991 and 1992, respectively, which are included
in Stockholders' Equity.
During the first and second quarter of 1993, Harken foreclosed on
certain of these non-recourse notes receivable from certain former employees,
officers and directors resulting in the addition of 381,925 shares of treasury
stock, which had served as the sole collateral for these notes. In addition,
during the third quarter of 1993, certain employees, officers and directors
surrendered to Harken a total of 704,000 shares of common stock for the
cancellation of certain of these non-recourse promissory notes given by such
parties to Harken upon the purchase of such shares. In connection with such
surrender, Harken issued new stock options to such parties which options had
been determined to be equal in value to the shares surrendered. This resulted
in the addition of 704,000 shares of treasury stock which had served as
collateral for these notes. As a result of the above transactions, during the
year ended December 31, 1993, Harken expensed a total of $551,000 of accrued
interest related to these non-recourse notes receivable, and such expense has
been included in Provision for Asset Impairments in the accompanying Statements
of Operations.
In September 1989, Harken's Board of Directors approved a loan to an
officer in the amount of $520,000. The note bears interest at the Broker Loan
Rate (5% at December 31, 1993 and 1994, respectively) plus 1/2% and is due
October 2, 1999. The note is secured by vested options to purchase 266,790
shares of Harken's common stock at $1.00 per share. During 1994, an agreement
was reached with the officer whereby the note, together with accrued interest,
is scheduled to be forgiven equally over three installments dated April 1994,
July 1995 and December 1996 with each installment of such forgiveness
contingent upon the officer's continued employment through the date of each
such installment. Such note is included in Notes Receivable from Related
Parties in the accompanying financial statements.
See Notes 2, 5, 7 and 10 -- Discontinued Operations, Investments in
Former Subsidiaries, Investment in Limited Partnership and Stockholders' Equity
for other related party transactions.
(13) OTHER INFORMATION
Quarterly Data -- (Unaudited) -- The following tables summarize
selected quarterly financial data for 1993 and 1994 expressed in thousands,
except per share amounts. Such financial information has been
45
46
HARKEN ENERGY CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
restated to present the operations of Harken's well servicing and contract
drilling operations as discontinued operations. See Note 2 -- Discontinued
Operations for further discussion.
QUARTER ENDED
------------- TOTAL
MARCH 31 JUNE 30 SEPTEMBER 30 DECEMBER 31 YEAR
-------- ------- ------------ ----------- ----
1993
Revenues . . . . . . . . . . . . . . . . . . $ 1,543 $ 2,151 $ 1,478 $ 1,429 $ 6,601
Gross profit . . . . . . . . . . . . . . . . 682 1,257 759 447 3,145
Income(loss) from continuing operations . . 51 (227) (577) (1,044) (1,797)
Net loss . . . . . . . . . . . . . . . . . . (184) (312) (632) (4,366) (5,494)
Per common share
Loss from continuing operations . . . . . $ 0.00 $ (0.00) $ (0.01) $ (0.02) $ (0.03)
Net loss . . . . . . . . . . . . . . . . . (0.00) (0.01) (0.01) (0.07) (0.09)
1994
Revenues . . . . . . . . . . . . . . . . . . $ 1,163 $ 1,147 $ 1,136 $ 1,449 $ 4,895
Gross profit . . . . . . . . . . . . . . . . 648 587 591 795 2,621
Loss from continuing operations . . . . . . . (430) (395) (604) (6,782) (8,211)
Net loss . . . . . . . . . . . . . . . . . . (296) (637) (717) (6,784) (8,434)
Per common share
Loss from continuing operations . . . . . $ (0.01) $ (0.01) $ (0.01) $ (0.11) $ (0.14)
Net loss . . . . . . . . . . . . . . . . . (0.01) (0.01) (0.01) (0.11) (0.14)
Significant Customers -- In 1992, management fees and prospect fees
from the limited partnership represented 25% of consolidated revenues from
continuing operations. There were two oil purchasers which represented 18% and
28% of consolidated revenues from continuing operations in 1993 and which
represented 38% and 16% of consolidated revenues from continuing operations in
1994. Management does not feel that the loss of these purchasers would
significantly impact the operations of Harken due to the availability of other
potential purchasers for its oil production.
(14) OIL AND GAS DISCLOSURES
Costs Incurred in Property Acquisition, Exploration and Development
Activities:
1992 1993 1994
---- ---- ----
Costs incurred --
Acquisition of properties
Evaluated . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 123 $ 8,293 $ 1,582
Unevaluated . . . . . . . . . . . . . . . . . . . . . . . . . . . . 640 7,029 --
Exploration . . . . . . . . . . . . . . . . . . . . . . . . . . . . -- 729 712
Development . . . . . . . . . . . . . . . . . . . . . . . . . . . . -- 519 1,428
-------- --------- --------
Total costs incurred . . . . . . . . . . . . . . . . . . . . . . $ 763 $ 16,570 $ 3,722
======== ========= ========
46
47
HARKEN ENERGY CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
Total costs incurred during 1993 includes approximately $796,000
related to Harken's Colombian operations. Total costs incurred during 1994
includes approximately $716,000 related to Harken's Colombian operations and
approximately $114,000 related to Harken's Bahrain operations.
Capitalized Costs Relating to Oil and Gas Producing Activities:
1992 1993 1994
---- ---- ----
Capitalized costs --
Unevaluated properties not being amortized . . . . . . . . . . . . . $ 975 $ 8,004 $ 7,446
Evaluated properties being amortized . . . . . . . . . . . . . . . . 123 9,664 13,944
-------- ---------- ---------
Total capitalized costs . . . . . . . . . . . . . . . . . . . . . . . 1,098 17,668 21,390
Less accumulated depreciation and amortization . . . . . . . . . . . -- (1,433) (2,877)
-------- ----------- ----------
Net capitalized costs . . . . . . . . . . . . . . . . . . . . . . . $ 1,098 $ 16,235 $ 18,513
======== ========== =========
Oil and Gas Reserve Data -- (Unaudited) -- The following information
is presented with regard to Harken's proved oil and gas reserves, all of which
are located in the United States. The reserve values reflected in the following
reserve disclosures are based on prices received as of year end. Effective
February 15, 1993, Harken consummated a merger whereby Chuska became a
wholly-owned subsidiary of Harken. (See Note 3 -- Acquisitions for a discussion
of Chuska).
(UNAUDITED)
-----------
1992 1993 1994
---- ---- ----
Crude Oil and Condensate (Barrels): (IN THOUSANDS)
Proved reserves -- beginning of year . . . . . . . . . . . . . . . . 0 0 1,035
Extensions and discoveries . . . . . . . . . . . . . . . . . . . . . -- 1 --
Revisions of previous estimates . . . . . . . . . . . . . . . . . . -- -- 186
Production . . . . . . . . . . . . . . . . . . . . . . . . . . . . . -- (185) (158)
Purchases of reserves-in-place . . . . . . . . . . . . . . . . . . . -- 1,219 458
-------- ------- ------
Proved reserves -- end of year . . . . . . . . . . . . . . . . . . . 0 1,035 1,521
======== ======= ======
Proved developed reserves --
Beginning of year . . . . . . . . . . . . . . . . . . . . . . . . . 0 0 624
======== ======= ======
End of year . . . . . . . . . . . . . . . . . . . . . . . . . . . . 0 624 915
======== ======= ======
47
48
HARKEN ENERGY CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
(UNAUDITED)
-----------
1992 1993 1994
---- ---- ----
(IN THOUSANDS)
Natural Gas (Mcf):
Proved reserves -- beginning of year . . . . . . . . . . . . . . . . 0 0 4,970
Extensions and discoveries . . . . . . . . . . . . . . . . . . . . . -- 683 --
Revisions of previous estimates . . . . . . . . . . . . . . . . . . -- -- 476
Production . . . . . . . . . . . . . . . . . . . . . . . . . . . . . -- (429) (426)
Purchases of reserves-in-place . . . . . . . . . . . . . . . . . . . -- 4,716 2,128
-------- ------- ------
Proved reserves -- end of year . . . . . . . . . . . . . . . . . . . 0 4,970 7,148
======== ======= ======
Proved developed reserves --
Beginning of year . . . . . . . . . . . . . . . . . . . . . . . . . 0 0 1,624
======== ======= ======
End of year . . . . . . . . . . . . . . . . . . . . . . . . . . . . 0 1,624 2,207
======== ======= ======
Standardized Measure of Discounted Future Net Cash Flows Relating to
Proved Oil and Gas Reserves:
(UNAUDITED)
-----------
1993 1994
---- ----
(IN THOUSANDS)
Future cash inflows . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 25,328 $ 37,612
Production costs . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . (8,674) (13,045)
Development costs . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . (2,947) (4,389)
--------- ---------
Future net inflows before income tax . . . . . . . . . . . . . . . . . . . . . 13,707 20,178
Future income taxes . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . -- --
--------- ---------
Future net cash flows . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 13,707 20,178
10% discount factor . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . (5,477) (8,466)
--------- ---------
Standardized measure of discounted future net cash flows . . . . . . . . . . . $ 8,230 $ 11,712
========= =========
48
49
HARKEN ENERGY CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
Changes In Standardized Measure of Discounted Future Net Cash Flows
Relating to Proved Oil and Gas Reserves:
(UNAUDITED)
-----------
1992 1993 1994
---- ---- ----
(IN THOUSANDS)
Standardized measure -- beginning of year . . . . . . . . . . . . . $ 0 $ 0 $ 8,230
Increase (decrease)
Sales, net of production costs . . . . . . . . . . . . . . . . . . -- (2,726) (2,398)
Net change in prices, net of production costs . . . . . . . . . . -- -- 364
Change in future development costs . . . . . . . . . . . . . . . . -- -- (208)
Revisions of quantity estimates . . . . . . . . . . . . . . . . . -- -- 1,450
Accretion of discount . . . . . . . . . . . . . . . . . . . . . . -- -- 823
Changes in production rates, timing and other . . . . . . . . . . -- -- (150)
Extensions and discoveries, net of future costs . . . . . . . . . -- 875 --
Purchases of reserves-in-place . . . . . . . . . . . . . . . . . . -- 10,081 3,601
-------- ------- --------
Standardized measure -- end of year . . . . . . . . . . . . . . . . $ 0 $ 8,230 $ 11,712
======== ======= ========
(15) COMMITMENTS AND CONTINGENCIES
Colombian 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 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 years from the date of any
commercial discovery of oil and/or gas. Harken reprocessed in excess of 200
kilometers of seismic data on the Alcaravan area and completed the acquisition
of 52 kilometers of new seismic data over prospective areas in mid-February
1994. Harken also plans to acquire approximately 26 kilometers of additional
seismic data on the Alcaravan Contract area in February 1995.
In September 1994, Harken announced that Huffco Group, Inc. ("Huffco")
of Houston, Texas joined Harken in the drilling of its first exploratory well
under the Alcaravan Contract. Under the terms of this joint
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HARKEN ENERGY CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
venture agreement, which was approved by Ecopetrol, Harken serves as operator
and retains a 50% interest in the well. The well, the Alcaravan #1, was
spudded in early February 1995 and will be drilled to a projected depth of
10,500 feet to test for commercial quantities of oil in the oil prone zones
prevalent in the Llanos Basin; the Carbonera, Mirador, Guadalupe and the basal
Cretaceous formations.
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 is conducting
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 has evaluated seismic
data and has completed an engineering feasibility study 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. These wells have provided information
and data including production rates, well logs and pressure tests. This well
data has been utilized by Harken in such studies to evaluate the feasibility of
applying modern production and recovery techniques in this area. Harken will
also acquire a minimum of 35 kilometers of seismic data on the Bocachico
Contract area in early 1995.
On January 19, 1995, after completing the engineering feasibility
study, Harken notified Ecopetrol of Harken's commitment to drill a well under
the Bocachico Contract, and thereby extended the contract into its second year.
Harken currently anticipates that a well site will be selected and drilling
will commence by mid-1995.
Playero Contract -- In December 1994, Harken announced that Harken de
Colombia, Ltd. had signed its third Association Contract ("Playero Contract")
with Ecopetrol, covering the Playero contract area. Under the Playero
Contract, Harken has acquired the exclusive rights to conduct exploration
activities and drilling on this area, which covers approximately 10,000 acres
in the Llanos Basin of Colombia, contiguous to Harken's Alcaravan Contract
area.
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HARKEN ENERGY CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
During the first year of the Playero Contract, Harken will acquire at
least 12 kilometers of new seismic data in the Playero Contract area. 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 Playero Contract, if Harken has discovered the existence of
commercial production in the Playero Contract area, the Playero Contract will
be further extended for a period of 22 years from the date of termination of
the Exploration Period with a total term not to exceed 28 years. If Harken
makes a commercial discovery of oil and/or gas which is approved by Ecopetrol,
the standard terms of the Playero Contract will apply. The Playero Contract
was granted by Ecopetrol under a new form of Association Contract which has
modified various standard terms from the previous form of Association Contract
which was used on the Alcaravan and Bocachico Contracts. Such terms provide
for Ecopetrol to reimburse Harken for 50% of its successful well costs expended
up to the point of a commercial discovery and to receive a 20% royalty
interest. Although both Ecopetrol and Harken each would have a 50% working
interest, production net of royalty would be allocated 50% to each party until
accumulated production from the Playero Contract area reaches a cumulative
total of 60 million barrels of oil. After that cumulative production level is
achieved, production net of royalty is allocated at rates to Harken from 50% to
25% based upon the relative profitability of the project with Ecopetrol
receiving the remaining complementary 50% to 75% of such additional production.
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. 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.
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. 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 other consideration, which represented the
negotiated amount for BEPCO's remaining obligation for future costs to be
incurred in Bahrain. This settlement amount was recorded as deferred revenue
by Harken and is reduced by ongoing investment expenditures related to Bahrain.
The initial exploratory well under the production sharing agreement
was drilled on the Jarim Reef, which began drilling November 1991. 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. In February 1993, Harken announced that the
Muharraq No. 1 well had no shows of oil or gas and was plugged and abandoned.
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
51
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HARKEN ENERGY CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
expire, effective February 13, 1993. HBOC allowed an additional portion of the
acreage covered by the production sharing agreement to expire effective August
29, 1993.
In May 1994, Harken announced a new seismic reprocessing program
covering 500 kilometers of seismic lines in the vicinity of the Jarim Reef. At
present Harken holds approximately 500,000 acres under its production sharing
agreement. Unless commercial production is found or an extension to the
production sharing agreement is obtained, this acreage expires in July 1995.
In January 1995, Harken completed its reprocessing of approximately 500
kilometers of seismic data and has reviewed the results of that work with
BANOCO. Unless Harken obtains a joint venture partner, Harken will not proceed
to either acquire additional seismic data or drill another well. If a joint
venturer is located, it will be necessary to obtain an extension of one year or
more from July 1995 to complete work necessary with a joint venturer.
Other -- Harken leases its corporate and certain other office space
and certain field operating offices. Total office and operating lease expense
during 1992, 1993 and 1994 was $680,000, $707,000 and $510,000, respectively.
Future minimum rental payments required under all leases that have initial or
remaining noncancellable lease terms in excess of one year as of December 31,
1994, net of sublease arrangements, are as follows:
YEAR AMOUNT
---- ------
1995 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 403,000
1996 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 315,000
1997 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 260,000
1998 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 202,000
1999 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 200,000
Thereafter . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 4,000
------------
Total minimum payments required . . . . . . . . . . . . . . . . . . $ 1,384,000
============
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.
Harken has accrued approximately $1,260,000 at December 31, 1994
relating to other operational or regulatory liabilities related primarily 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.
52
53
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
None
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
Reference is made to the material under the captions "Directors of
Harken" and "Executive Officers of Harken" in the Registrant's definitive Proxy
Statement to be filed on or before April 30, 1995 pursuant to Regulation 14A in
connection with its Annual Meeting of Stockholders to be held in June 1995,
which is incorporated herein by reference.
ITEM 11. EXECUTIVE COMPENSATION
Reference is made to the material under the captions "Executive
Officers of Harken (Executive Compensation)" in the Registrant's definitive
Proxy Statement to be filed on or before April 30, 1995 pursuant to Regulation
14A in connection with its Annual Meeting of Stockholders to be held in June
1995, which is incorporated herein by reference.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS
Reference is made to the material under the captions "Principal
Holders of Securities" in the Registrant's definitive Proxy Statement to be
filed on or before April 30, 1995 pursuant to Regulation 14A in connection with
its Annual Meeting of Stockholders to be held in June 1995, which is
incorporated herein by reference.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
Reference is made to the material under the captions "Certain
Transactions" in the Registrant's definitive Proxy Statement to be filed on or
before April 30, 1995 pursuant to Regulation 14A in connection with its Annual
Meeting of Stockholders to be held in June 1995, which is incorporated herein
by reference.
53
54
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K
A. Exhibits
10-21 -- None
22 -- Subsidiaries of Harken
23-24 -- None
25 -- Powers of Attorney
26 -- None
27 -- EDGAR Financial Data Schedules
28-29 -- None
B. Financial Statements and Schedules
(1) Included in PART II of this report:
PAGE
----
Harken Energy Corporation and Subsidiaries
-- Report of Independent Public Accountants . . . . . . . . . . . . . . . . . . . . . . 26
-- Selected Financial Information and Other Data for the five years ended
December 31, 1994 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 15
-- Consolidated Balance Sheets -- December 31, 1993 and 1994 . . . . . . . . . . . . . . 27
-- Consolidated Statements of Operations for the three years ended
December 31, 1994 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 28
-- Consolidated Statements of Stockholders' Equity for the three years ended
December 31, 1994 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 29
-- Consolidated Statements of Cash Flows for the three years ended
December 31, 1994 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 30
-- Notes to Consolidated Financial Statements . . . . . . . . . . . . . . . . . . . . . 31
(2) The information required by Schedules IV and VIII is provided in the
related financial statements or in a note, thereto.
(3) The information required by Schedules III, VII, X, and XI through
XXVIII is not applicable to the Company.
C. Reports on Form 8-K
On November 4, 1994, a report on Form 8-K was filed regarding the
acquisition of additional interest in CHAP Venture.
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55
SIGNATURES
Pursuant to the requirements of Section 13 or 15 (d) of the Securities
Exchange Act of 1934, the Registrant has duly caused this report to be signed
on its behalf by the undersigned, thereunto duly authorized in the capacities
indicated.
Dated: February 14, 1995
/s/ BRUCE N. HUFF
-----------------------------------------
HARKEN ENERGY CORPORATION
By: *
------------------------------------
Mikel D. Faulkner, Chairman of the Board
of Directors, Principal Executive Officer
*
-----------------------------------------
Richard H. Schroeder, Director, President
and Chief Operating Officer
*
-----------------------------------------
Bruce N. Huff, Senior Vice President
Chief Financial Officer and Principal
Accounting Officer
*
-----------------------------------------
Talat M. Othman, Director
-----------------------------------------
Michael R. Eisenson, Director
*
-----------------------------------------
Michael M. Ameen, Jr., Director
*
-----------------------------------------
Donald W. Raymond, Director
*
-----------------------------------------
E. C. Kettenbrink, Jr., Director
Bruce N. Huff, by signing his name hereto, does hereby sign this Form
10-K, Annual Report for the fiscal year ended December 31, 1994, on behalf of
Harken Energy Corporation and each of the above-named officers and directors of
such Company, pursuant to powers of attorney, executed on behalf of the Company
and each such officer and director.
*By: /s/ BRUCE N. HUFF
----------------------
Bruce N. Huff,
Attorney-in-fact
55