<PAGE> 1
================================================================================
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
(X) QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15 (D)
OF THE SECURITIES EXCHANGE ACT OF 1934
FOR THE QUARTERLY PERIOD ENDED SEPTEMBER 30, 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.)
2505 NORTH HIGHWAY 360, SUITE 800 75050
GRAND PRAIRIE, TEXAS (Zip Code)
(Address of principal executive offices)
Registrant's telephone number, including area code (817) 695-4900
Securities registered pursuant to Section 12(b) of the Act:
<TABLE>
<CAPTION>
Title of each class: Name of each exchange
COMMON STOCK, PAR VALUE on which registered:
<S> <C>
$0.01 PER SHARE AMERICAN STOCK EXCHANGE
</TABLE>
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
--- ---
The number of shares of Common Stock, par value $0.01 per share,
outstanding as of November 1, 1994 was 60,442,853 net of 5,983,655 Treasury
Shares.
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<PAGE> 2
HARKEN ENERGY CORPORATION
INDEX TO QUARTERLY REPORT
SEPTEMBER 30, 1993 AND 1994
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
PART I. FINANCIAL INFORMATION
Item 1. Condensed Financial Statements
Consolidated Balance Sheets . . . . . . . . . . . . . . . . . . . . . . . . . . . 4
Consolidated Statements of Operations . . . . . . . . . . . . . . . . . . . . . . 5
Consolidated Statements of Stockholders' Equity . . . . . . . . . . . . . . . . . 6
Consolidated Statements of Cash Flow . . . . . . . . . . . . . . . . . . . . . . 7
Notes to Consolidated Financial Statements . . . . . . . . . . . . . . . . . . . 8
Item 2. Management's Discussion and Analysis of Financial Condition
and Results of Operations . . . . . . . . . . . . . . . . . . . . . . . . . 14
PART II. OTHER INFORMATION
Notes Concerning Other Information . . . . . . . . . . . . . . . . . . . . 19
SIGNATURES . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 20
</TABLE>
2
<PAGE> 3
PART I - FINANCIAL INFORMATION
3
<PAGE> 4
HARKEN ENERGY CORPORATION AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(unaudited)
<TABLE>
<CAPTION>
DECEMBER 31, SEPTEMBER 30,
1993 1994
---------------- ----------------
<S> <C> <C>
ASSETS
------
Current Assets:
Cash and temporary investments . . . . . . . . . . . . . . . $ 3,299,000 $ 3,140,000
Accounts and notes receivable, net . . . . . . . . . . . . . 1,022,000 376,000
Amounts receivable from former subsidiaries . . . . . . . . 1,081,000 984,000
Assets of discontinued operations held for resale . . . . . 796,000 --
Marketable equity securities . . . . . . . . . . . . . . . . 138,000 931,000
Prepaid expenses and other current assets . . . . . . . . . 362,000 315,000
---------------- ----------------
Total Current Assets . . . . . . . . . . . . . . . . . 6,698,000 5,746,000
Property and Equipment, net . . . . . . . . . . . . . . . . . . 19,807,000 18,395,000
Investments in Former Subsidiaries . . . . . . . . . . . . . . 9,218,000 8,459,000
Notes Receivable from Related Parties, including interest . . . 701,000 464,000
Other Assets, net . . . . . . . . . . . . . . . . . . . . . . . 1,307,000 885,000
---------------- ----------------
$ 37,731,000 $ 33,949,000
================ ================
LIABILITIES AND STOCKHOLDERS' EQUITY
------------------------------------
Current Liabilities:
Trade payables . . . . . . . . . . . . . . . . . . . . . . . $ 339,000 $ 274,000
Accrued liabilities and other . . . . . . . . . . . . . . . 4,840,000 2,238,000
Notes payable . . . . . . . . . . . . . . . . . . . . . . . -- 900,000
Revenues and royalties payable . . . . . . . . . . . . . . . 1,354,000 1,279,000
---------------- ----------------
Total Current Liabilities . . . . . . . . . . . . . . 6,533,000 4,691,000
Commitments and Contingencies (Note 10)
Deferred Revenue, net of current portion . . . . . . . . . . . 367,000 77,000
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 shares . . . . . . . 654,000 654,000
Additional paid-in capital . . . . . . . . . . . . . . . . . 131,052,000 131,052,000
Retained deficit . . . . . . . . . . . . . . . . . . . . . . (81,986,000) (83,636,000)
Treasury stock . . . . . . . . . . . . . . . . . . . . . . . (20,757,000) (20,757,000)
--------------- ---------------
Total Stockholders' Equity . . . . . . . . . . . . . . 28,963,000 27,313,000
---------------- ----------------
$ 37,731,000 $ 33,949,000
================ ================
</TABLE>
The accompanying Notes to Consolidated Financial Statements
are an integral part of these Consolidated Balance Sheets.
4
<PAGE> 5
HARKEN ENERGY CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
(unaudited)
<TABLE>
<CAPTION>
THREE MONTHS ENDED NINE MONTHS ENDED
SEPTEMBER 30, SEPTEMBER 30,
------------------------------- ---------------------------------
1993 1994 1993 1994
-------------- -------------- --------------- ----------------
<S> <C> <C> <C> <C>
Revenues:
Oil and gas operations . . . . . . . . . . . $ 1,230,000 $ 919,000 $ 3,961,000 $ 2,817,000
Interest income . . . . . . . . . . . . . . 50,000 23,000 173,000 67,000
Other income . . . . . . . . . . . . . . . . 198,000 194,000 1,038,000 562,000
------------- ------------- ------------- ------------
1,478,000 1,136,000 5,172,000 3,446,000
Costs and Expenses:
Oil and gas operating expenses . . . . . . . 471,000 328,000 1,263,000 991,000
General and administrative expenses, net . . 717,000 875,000 2,249,000 2,372,000
Depreciation and amortization . . . . . . . 866,000 515,000 2,250,000 1,444,000
Interest expense and other . . . . . . . . . 1,000 22,000 163,000 68,000
------------- ------------- ------------- ------------
2,055,000 1,740,000 5,925,000 4,875,000
Loss before income taxes . . . . . . . . . (577,000) (604,000) (753,000) (1,429,000)
Income tax expense . . . . . . . . . . . . . -- -- -- --
------------- ------------- ------------- ------------
Loss from continuing operations . . . . . . (577,000) (604,000) (753,000) (1,429,000)
Discontinued Operations:
Income (loss) from operations of discontinued well
service and contract drilling segment . . (55,000) (127,000) (375,000) (507,000)
Gain on sale of well service and contract
drilling rigs . . . . . . . . . . . . . . -- 14,000 -- 286,000
------------- ------------- ------------- ------------
(55,000) (113,000) (375,000) (221,000)
------------- ------------- ------------- ------------
Net loss . . . . . . . . . . . . . . . . . $ (632,000) $ (717,000) $ (1,128,000) $ (1,650,000)
============= ============= ============= ============
Income (loss) per common share:
Loss from continuing operations . . . . . . $ (0.01) $ (0.01) $ (0.01) $ (0.03)
Discontinued operations . . . . . . . . . . (0.00) (0.00) (0.01) (0.00)
------------- ------------- ------------- ------------
Net loss . . . . . . . . . . . . . . . . . $ (0.01) $ (0.01) $ (0.02) $ (0.03)
============= ============= ============= ============
Weighted average shares outstanding . . . . . 60,092,749 59,482,853 57,450,494 59,482,853
============= ============= ============= ============
</TABLE>
The accompanying Notes to Consolidated Financial Statements
are an integral part of these Statements.
5
<PAGE> 6
HARKEN ENERGY CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
(unaudited)
<TABLE>
<CAPTION>
ADDITIONAL
COMMON PAID-IN RETAINED TREASURY
STOCK CAPITAL DEFICIT STOCK
-------- ------------ ------------ ------------
<S> <C> <C> <C> <C>
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)
Net loss . . . . . . . . . . . . . . . . -- -- (1,650,000) --
-------- ------------ ------------ ------------
Balance, September 30, 1994 . . . . . . . $654,000 $131,052,000 $(83,636,000) $(20,757,000)
======== ============ ============ ============
</TABLE>
____________________
(A) Includes as an offset to Additional Paid-In Capital, notes receivable of
$4,182,000 as of December 31, 1992 from certain officers, directors and
affiliates for stock purchases.
The accompanying Notes to Consolidated Financial Statements
are an integral part of these Statements.
6
<PAGE> 7
HARKEN ENERGY CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(unaudited)
<TABLE>
<CAPTION>
NINE MONTHS ENDED
SEPTEMBER 30,
----------------------------------
1993 1994
------------- --------------
<S> <C> <C>
Cash flows from operating activities:
Net loss from continuing operations . . . . . . . . . . . . . . . . . . . . . $ (753,000) $ (1,429,000)
Adjustments to reconcile net loss from continuing operations to net cash
provided by (used in) operating activities:
Depreciation and amortization . . . . . . . . . . . . . . . . . . . . . . 2,250,000 1,444,000
Interest and dividend income on investments in former subsidiaries . . . (394,000) (360,000)
Forgiveness of related party note receivable . . . . . . . . . . . . . . -- 232,000
Provision for doubtful accounts . . . . . . . . . . . . . . . . . . . . . -- 18,000
(Gain) loss on sales of assets and other . . . . . . . . . . . . . . . . (40,000) (107,000)
Net loss from discontinued operations . . . . . . . . . . . . . . . . . . . . (375,000) (221,000)
Adjustment to reconcile income (loss) from discontinued operations to net
cash used in operating activities:
Depreciation and amortization . . . . . . . . . . . . . . . . . . . . . . 539,000 77,000
Gain on sales of assets . . . . . . . . . . . . . . . . . . . . . . . . . -- (286,000)
Change in assets and liabilities, net of effect of companies acquired:
(Increase) decrease in accounts receivable . . . . . . . . . . . . . . . . 2,250,000 733,000
(Increase) decrease in amounts receivable from former subsidiaries . . . . (232,000) 100,000
Increase (decrease) in trade payables and other . . . . . . . . . . . . . . (6,917,000) (843,000)
------------ ----------
Net cash provided by (used in) operating activities . . . . . . . . . . . (3,672,000) (642,000)
------------ ----------
Cash flows from investing activities:
Proceeds from sale of assets . . . . . . . . . . . . . . . . . . . . . . . . . -- 2,249,000
Cash from acquired subsidiary . . . . . . . . . . . . . . . . . . . . . . . . 2,616,000 --
Capital expenditures . . . . . . . . . . . . . . . . . . . . . . . . . . . . (3,042,000) (1,766,000)
----------- ------------
Net cash provided by (used in) investing activities . . . . . . . . . . . (426,000) 483,000
----------- ------------
Cash flows from financing activities:
Debt repayments . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . (1,630,000) --
----------- ------------
Net cash provided by (used in) financing activities . . . . . . . . . . . (1,630,000) --
----------- ------------
Net increase (decrease) in cash and temporary investments . . . . . . . . . . . (5,728,000) (159,000)
Cash and temporary investments at beginning of period . . . . . . . . . . . . . 10,348,000 3,299,000
---------- ----------
Cash and temporary investments at end of period . . . . . . . . . . . . . . . . $ 4,620,000 $ 3,140,000
============= =============
Supplemental disclosures of cash flow information:
Cash paid during the quarter for:
Interest . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 58,000 $ 68,000
Income taxes . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . -- --
Significant non-cash transactions:
Increase from acquisition activity
Current assets, excluding cash . . . . . . . . . . . . . . . . . . . . . . $ 1,393,000 $ --
Property and equipment . . . . . . . . . . . . . . . . . . . . . . . . . . 14,528,000 400,000
Current liabilities . . . . . . . . . . . . . . . . . . . . . . . . . . . . (5,777,000) (400,000)
Stockholders' equity . . . . . . . . . . . . . . . . . . . . . . . . . . . (12,760,000) --
</TABLE>
The accompanying Notes to Consolidated Financial Statements
are an integral part of these Statements.
7
<PAGE> 8
HARKEN ENERGY CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
SEPTEMBER 30, 1993 AND 1994
(unaudited)
(1) MANAGEMENT'S REPRESENTATIONS
In the opinion of Harken Energy Corporation ("Harken"), the
accompanying unaudited consolidated financial statements contain all
adjustments necessary to present fairly its financial position as of December
31, 1993 and September 30, 1994 and the results of its operations and changes
in its cash flows for all periods presented as of September 30, 1994. These
adjustments represent normal recurring items. Certain prior year amounts have
been reclassified to conform with the 1994 presentations.
The accompanying unaudited condensed financial statements have been
prepared pursuant to the rules and regulations of the Securities and Exchange
Commission. Certain information and note disclosures normally included in
annual financial statements prepared in accordance with generally accepted
accounting principles have been condensed or omitted pursuant to these rules
and regulations, although Harken believes that the disclosures made are
adequate to make the information presented not misleading. It is suggested
that these condensed financial statements be read in conjunction with the
financial statements and the notes thereto included in Harken's Form 10-K for
the year ended December 31, 1993.
The results of operations for the nine month period ended September 30,
1994 are not necessarily indicative of the results to be expected for the full
year.
(2) ACQUISITIONS
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. Chuska is engaged, through its
subsidiaries, in the business of exploring for and producing oil and gas in the
Aneth Field and Blanding Sub-Basin portions of the Paradox Basin in Utah,
Arizona and New Mexico, and in the Western Paradox Basin in Utah. Chuska's
operations in the Paradox Basin area are primarily concentrated on the 16
million acre Navajo Indian Reservation ("the Reservation"), which comprises
portions of Arizona, New Mexico and Utah. Chuska 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, Chuska also has an interest in a gas
processing plant in 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.
Chuska is the general partner 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 is the operator of the
limited partnerships and CHAP. 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. Chuska accounts for its investments in the partnerships and
CHAP using the proportionate consolidation method.
8
<PAGE> 9
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 to approximately 70% and increases 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 certain contingent
liabilities related to the properties as well as retaining certain
distributions made under the CHAP Venture.
(3) INVESTMENTS IN FORMER SUBSIDIARIES
E-Z Serve Preferred Stock -- Harken holds 79,754 shares of E-Z Serve
Corporation ("E-Z Serve") $6.00 Convertible Preferred Stock, Series C ("E-Z
Serve Series C Preferred") 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. 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 $345,000 and
$360,000 during the nine months ended September 30, 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.
Beginning with the second quarter of 1994, Harken has reclassified a
portion of the value of the E-Z Serve Series C Preferred shares to current
assets in anticipation of converting such shares to E-Z Serve common shares in
order to liquidate such common shares over the next twelve month period.
Tejas Preferred Stock -- Harken holds 1,000 shares of Tejas Power
Corporation ("Tejas") Series B Preferred Stock, $.01 par value per share, which
it acquired at a cost of $1,200,000. Harken accepted these shares of Tejas
Preferred Stock as full and complete payment from Tejas for certain 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.
(4) PROPERTY AND EQUIPMENT
A summary of property and equipment follows:
<TABLE>
<CAPTION>
DECEMBER 31, SEPTEMBER 30,
1993 1994
-------------- --------------
<S> <C> <C>
Oil and gas properties --
Evaluated . . . . . . . . . . . . . . . . . . . . . . . . $ 9,664,000 $10,271,000
Unevaluated . . . . . . . . . . . . . . . . . . . . . . . 8,004,000 8,845,000
Oilfield service equipment . . . . . . . . . . . . . . . . . 1,375,000 --
Gas plants and other property . . . . . . . . . . . . . . . . 6,994,000 6,517,000
Less accumulated depreciation and amortization . . . . . . . (6,230,000) (7,238,000)
----------- -----------
$19,807,000 $18,395,000
=========== ===========
</TABLE>
(5) 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
9
<PAGE> 10
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 is payable to the former Chuska stockholder
on or before January 5, 1995. This obligation is included at September 30,
1994 in notes payable in the accompanying 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 at September 30, 1994 in notes
payable in the accompanying 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.
(6) 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 plans to utilize 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 $1,521,000 and $1,039,000 as of September 30,
1993 and 1994, respectively. The September 30, 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.
(7) STOCKHOLDERS' EQUITY
Common Stock - Harken currently has authorized 100,000,000 shares of
$.01 par common stock. At December 31, 1993 and September 30, 1994, Harken had
issued 65,466,508 shares and held 5,983,655 shares as treasury stock at a cost
of $20,757,000.
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 2 - Acquisitions.
Acquisition of Additional CHAP Venture Interest - In October 1994,
Harken acquired additional joint venture interests in the CHAP Joint Venture.
See Note 2 - Acquisitions for further discussion. In exchange for these
acquired interests, Harken issued approximately 960,000 shares of restricted
Harken common stock. The 960,000 restricted common shares issued by Harken in
this transaction contain certain demand and piggyback registration rights
exercisable by the sellers.
10
<PAGE> 11
(8) PER SHARE DATA
Per share data has been computed based on the weighted average number of
common shares outstanding during each period.
(9) INCOME TAXES
At September 30, 1994, Harken had available for federal income tax
reporting purposes, net operating loss (NOL) carryforward for regular tax
purposes of approximately $55,000,000 which expires in 1997 through 2009,
alternative minimum tax NOL carryforward of approximately $44,000,000 which
expires in 1997 through 2009, investment tax credit carryforward of
approximately $863,000 which expires in 1994 through 2002, contribution
carryforward of approximately $57,000 which expires in 2000 through 2007,
statutory depletion carryforward of approximately $1,150,000 which does not
have an expiration date, jobs tax credit carryforward of approximately $119,000
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,
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, to the extent that realization of such
benefits is more likely than not.
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 nine months ended
September 30, 1993.
At September 30, 1994, total deferred tax liabilities are approximately
$4,000,000. In addition, total deferred tax assets are approximately
$20,000,000 at September 30, 1994, resulting primarily from an increase in the
NOL carryforward during 1993 and estimated carryforward during 1994. Any
resulting changes 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.
(10) COMMITMENTS AND CONTINGENCIES
Colombian Operations - During the third quarter of 1992, Harken, through
a subsidiary, Harken de Colombia, Ltd., was awarded the exclusive right to
explore for, develop and produce oil and gas throughout approximately 350,000
acres within the Alcaravan area ("Alcaravan") of Colombia. Alcaravan is
located in Colombia's Llanos Basin and is located approximately 140 miles east
of Santafe De Bogota. Harken and Empresa Colombiana de Petroleos ("Ecopetrol")
have entered into an association contract ("Alcaravan Contract") which requires
Harken to conduct a seismic and exploratory drilling program in the Alcaravan
area ("work program") over the initial six (6) years. If Harken makes a
commercial discovery of oil and/or gas which is approved by Ecopetrol, the
standard terms of the Alcaravan Contract will apply. Such terms provide for
Ecopetrol to reimburse Harken for 50% of its successful well costs expended up
to the point of commercial discovery and to receive a 20% royalty interest and
for both Ecopetrol and Harken to each have a 50% working interest. The term of
the Alcaravan Contract will extend twenty-two (22) years from the date of any
commercial discovery of oil and/or gas. Harken reprocessed in excess of 200
kilometers of seismic data on the Alcaravan area and completed the acquisition
11
<PAGE> 12
of 52 kilometers of new seismic data over prospective areas in mid-February
1994. In September 1994, Harken announced that Huffco Group, Inc. ("Huffco")
of Houston, Texas will join Harken in the drilling of its first exploratory
well under the Alcaravan Contract. Drilling is scheduled to commence in
December 1994 and Harken will serve as Operator and retain a 50% interest in
the well.
In January 1994, Harken announced that Harken de Colombia, Ltd. had
signed its second association contract ("Bocachico Contract") with Ecopetrol,
covering the Bocachico contract area. Under the Bocachico Contract, Harken has
acquired the exclusive rights to conduct exploration activities and drilling on
this area, which covers approximately 192,000 acres in the Middle Magdelena
Valley of Central Colombia. During the first year of the Bocachico Contract,
Harken will conduct seismic activities on the land covered by this contract
including reprocessing of at least 250 kilometers of existing seismic data and
the acquisition of at least 35 kilometers of new seismic data. In addition,
during the first contract year Harken intends to also conduct engineering
studies to evaluate the potential for recovering existing oil reserves in the
Rio Negro area, which is located in the northern portion of the Bocachico
Contract area. During the 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. Harken is completing
the exploration work program for the first year of the Bocachico Contract, and
significant interest in the contract has been expressed by potential industry
partners following recent industry activity in this basin.
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 under the agreement. In July 1990, Harken entered into a joint
venture arrangement with a joint venture partner, Bass Enterprises Production
Company ("BEPCO"), in which BEPCO committed to provide the funding for the
first well and at least two subsequent wells. 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.
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, to
be completed during the last half of 1994. 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.
12
<PAGE> 13
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 certain other operational or regulatory liabilities
related to Chuska's operations. Harken and its subsidiaries currently are
involved in various lawsuits and other contingencies, including the guarantee
of certain lease obligations, which in management's opinion, will not result in
significant loss exposure to Harken.
13
<PAGE> 14
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
14
<PAGE> 15
RESULTS OF OPERATIONS
The following is management's discussion and analysis of certain
significant factors which have affected Harken's results of operations and
balance sheet during the periods included in the accompanying consolidated
financial statements. Consolidated results of operations were consistent with
management's expectations for the nine month period ended September 30, 1994.
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 11,055,718 shares of Chuska common stock
outstanding in exchange for 14,210,357 shares of newly-issued Harken common
stock. Chuska is engaged, through its subsidiaries, in the business of
exploring for and producing oil and gas in the Aneth Field and Blanding
Sub-Basin portions of the Paradox Basin in Utah. Chuska's 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. Chuska 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, Chuska also has an interest in a gas processing plant
in the Paradox Basin, the Aneth Gas Plant on the Utah portion of the
Reservation. Chuska is the general partner 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.
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 to approximately 70% and increases Harken's share of daily production
by approximately 40% over its previous interest. In exchange for these
acquired interests, Harken issued approximately 960,000 shares of restricted
common stock which included certain registration rights.
Oil and gas operations revenues as of September 30, 1993, consisted of
oil revenues of $2,449,000 gas revenues of $527,000 and gas plant revenue of
$985,000. Oil and gas operations revenues as of September 30, 1994 consisted
of oil revenues of $1,734,000 gas revenues of $500,000 and gas plant revenues
of $583,000. These oil and gas revenues, primarily from Chuska's operations,
reflect the low price for oil experienced during the first three months of 1994
and the March 1994 reduction in throughput ownership in the Aneth Gas Plant.
In an effort to offset the production declines typically experienced in the
region, Harken plans to drill additional wells beginning in November 1994 on
acreage it holds in the Paradox Basin area, although such timing reflects
delays experienced due to new administrative review procedures performed by the
Navajo Nation. Harken's plans to drill in the Paradox Basin area, plus the
above mentioned increased interest in CHAP, should help to increase revenues
and cash flow from its oil and gas operations.
In May 1994, Harken announced the discontinuance of its well servicing
operations which it had conducted through Supreme Well Service Company
("Supreme"), a wholly-owned subsidiary. As a result of this decision, Harken
has reflected the revenues and expenses of its well service and contract
drilling segment as discontinued operations and has sold its well service
equipment assets. In January 1994, Harken made the decision to liquidate its
remaining contract 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 to write down these assets to
their estimated liquidation value. During the first quarter of 1994, Harken
sold these contract drilling assets for approximately $1.1 million, resulting
in a gain of $272,000. Such gain is also included in discontinued operations.
During the first quarter of 1993, Harken continued to manage the oil and
gas property interests of a limited partnership and operate certain partnership
properties. Harken was paid a management fee of $50,000 per month
15
<PAGE> 16
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 these oil and gas properties operated by Harken and
Harken ceased to manage the partnership. As a result of the above, Harken
earned no partnership management fees during the first nine months of 1994
compared to $300,000 during the first nine months of 1993. Other income as of
September 30, 1993 included $108,000 of other fees and revenues related to
these sold properties. There were no such revenues during the nine months
ended in 1994 due to the above mentioned sale of partnership properties.
OTHER COSTS AND EXPENSES
General and administrative expenses increased from $717,000 for the
third quarter of 1993 to $875,000 for the third quarter of 1994, due to the
fact that the third quarter of 1993 included approximately $200,000 in net
reductions to general and administrative costs due to nonrecurring write offs
of certain accrued liabilities and receivables. During 1993, Harken has
consolidated Chuska's administrative activities with Harken's with the
objective of eliminating duplicate administrative and operational functions and
to capitalize on the efficiencies of the combined organization. In addition,
general and administrative expenses for the first nine months of 1993 and 1994
include costs related to certain offices of Chuska that have since been closed
in an effort to further reduce costs and improve efficiency. As discussed
above, Harken's operator overhead fees and other operator cost reimbursements
which are netted against general and administrative expenses decreased due to
the reduction in properties operated by Harken. Such operator overhead fees
and other operator costs reimbursements related to properties which were sold
during the second quarter of 1993 totalled $494,000 for the nine months ended
September 30, 1993.
At December 31, 1993, Harken included in notes receivable from related
parties a loan to an officer in the amount of $520,000, plus accrued interest.
Subsequent to December 31, 1993, 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. Harken has
included the first installment of this forgiveness totalling $232,000 in
general and administrative expenses during the first quarter of 1994.
LIQUIDITY AND CAPITAL RESOURCES
During the nine months ended September 30, 1994, cash and temporary
investments decreased by $159,000 despite the $2,249,000 of cash proceeds
received primarily from the sale of Harken's contract drilling and well service
equipment. Such cash usage was caused by cash used by operating activities of
$642,000 and $1,766,000 of capital expenditures. The cash used by operating
activities was primarily caused by the payment of approximately $500,000
related to the first installment of a consulting payment to a former Chuska
stockholder. Harken's net working capital increased by $890,000 during the
first nine months to $1,055,000 as of September 30, 1994, primarily due to the
decision to convert a portion of the E-Z Serve Preferred Stock to E-Z Serve
common shares and to sell such shares for cash during the next twelve months.
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. 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, asset sales, stock issuances,
operating cash flows and potentially from industry partners.
The cash flows and revenues generated from Chuska's oil and gas
properties are expected to increase in 1995. In October 1994, Harken acquired
additional joint venture interests in the CHAP Joint Venture 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 the CHAP
16
<PAGE> 17
Joint Venture to approximately 70% and increases Harken's share of daily
production by approximately 40% over its previous interest. Workover and
additional drilling activities are currently being conducted and planned in the
Four Corners region. Such plans include the drilling of additional wells
beginning in November 1994 as part of a program to continue the exploration of
new prospects, the further development of existing productive fields and
significant natural gas prospects. Additionally, Harken plans to continue
workover activities on existing wells in an effort to enhance production and
improve field efficiency. Such drilling activities will be funded by existing
working capital and potentially from existing joint venture partners
participating in Chuska's managed joint ventures. In addition, Harken
anticipates generating cash from the sale of E-Z Serve Preferred Stock as
discussed above.
As a result of the decrease in demand for its drilling services
domestically, and upon obtaining a production sharing agreement discussed below
between Harken and the Bahrain National Oil Company in January 1990, Harken
management has increased its focus on pursuing international oil and gas
exploration and development opportunities, and continues to pursue other
international opportunities during 1994, such as the Colombian opportunities
discussed below.
Colombian Operations - During the third quarter of 1992, Harken,
through a subsidiary, Harken de Colombia, Ltd., was awarded the exclusive right
to explore for, develop and produce oil and gas throughout approximately
350,000 acres within the Alcaravan area ("Alcaravan") of Colombia. Alcaravan
is located in Colombia's Llanos Basin and is located approximately 140 miles
east of Santafe De Bogota. Harken and Empresa Colombiana de Petroleos
("Ecopetrol") have entered into an association contract ("Alcaravan Contract")
which requires Harken to conduct a seismic and exploratory drilling program in
the Alcaravan area ("work program") over the initial six (6) years. If Harken
makes a commercial discovery of oil and/or gas which is approved by Ecopetrol,
the standard terms of the Alcaravan Contract will apply. Such terms provide
for Ecopetrol to reimburse Harken for 50% of its successful well costs expended
up to the point of commercial discovery and to receive a 20% royalty interest
and for both Ecopetrol and Harken to each have a 50% working interest. The
term of the Alcaravan Contract will extend twenty-two (22) years from the date
of any commercial discovery of oil and/or gas. Harken reprocessed in excess of
200 kilometers of seismic data on the Alcaravan area and completed the
acquisition of 52 kilometers of new seismic data over prospective areas in
mid-February 1994. In September 1994, Harken announced that Huffco Group, Inc.
("Huffco") of Houston, Texas will join Harken in the drilling of its first
exploratory well under the Alcaravan Contract. Drilling is scheduled to
commence in December 1994 and Harken will serve as Operator and retain a 50%
interest in the well.
In January 1994, Harken announced that Harken de Colombia, Ltd. had
signed its second association contract ("Bocachico Contract") with Ecopetrol,
covering the Bocachico contract area. Under the Bocachico Contract, Harken has
acquired the exclusive rights to conduct exploration activities and drilling on
this area, which covers approximately 192,000 acres in the Middle Magdelena
Valley of Central Colombia. During the first year of the Bocachico Contract,
Harken will conduct seismic activities on the land covered by this contract
including reprocessing of at least 250 kilometers of existing seismic data and
the acquisition of at least 35 kilometers of new seismic data. In addition,
during the first contract year Harken intends to also conduct engineering
studies to evaluate the potential for recovering existing oil reserves in the
Rio Negro area, which is located in the northern portion of the Bocachico
Contract area. During the 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. Harken is completing
the exploration work program for the first year of the Bocachico Contract, and
significant interest in the contract has been expressed by potential industry
partners following recent industry activity in this basin.
17
<PAGE> 18
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 under the agreement. In July 1990, Harken entered into a joint
venture arrangement with a joint venture partner, Bass Enterprises Production
Company ("BEPCO"), in which BEPCO committed to provide the funding for the
first well and at least two subsequent wells. 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.
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, to
be completed during the last half of 1994. 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.
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 certain other operational or regulatory liabilities
related to Chuska's operations. Harken and its subsidiaries currently are
involved in various lawsuits and other contingencies, including the guarantee
of certain lease obligations, which in management's opinion, will not result in
significant loss exposure to Harken.
18
<PAGE> 19
HARKEN ENERGY CORPORATION
NOTES CONCERNING OTHER INFORMATION
SEPTEMBER 30, 1993 AND 1994
(1) Items 1, 2, 3, 4, and 5 as required by Part II of Form 10-Q are not
applicable for the quarter ended September 30, 1994.
(2) Item 6, Exhibits and Reports on Form 8-K
(a) Exhibits - Concession and Lease Purchase Agreement dated
October 20, 1994
Letter Agreement from Huffco Group, Inc. dated
September 14, 1994
EDGAR Financial Data Schedule
(b) Reports on Form 8-K:
November 4, 1994: Acquisition of Additional Interest
in Four Corners Properties
19
<PAGE> 20
HARKEN ENERGY CORPORATION
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
Harken Energy Corporation
(Registrant)
Date: November 14, 1994 By: /s/ Bruce N. Huff
Bruce N. Huff,
Senior Vice President and
Chief Financial Officer
20
<PAGE> 21
INDEX TO EXHIBITS
EXHIBIT DESCRIPTION PAGE
------- ----------- ----
10.1 Concession and Lease Purchase Agreement dated
October 20, 1994
10.2 Letter Agreement from Huffco Group, Inc. dated
September 14, 1994
27 EDGAR Financial Data Schedule
<PAGE> 1
CONCESSION AND LEASE PURCHASE AGREEMENT
This CONCESSION AND LEASE PURCHASE AGREEMENT (the "Agreement") is
entered into effective as of 7:00 a.m. C.S.T. on August 1, 1994 (the "Effective
Time") by and among C. A. B. RESOURCES, INC., a Texas corporation ("CAB"),
CRUSADER, INC., a Delaware corporation ("Crusader"), and AUSTRALIAN
HYDROCARBONS, INC., a Delaware corporation ("AHI") (CAB, Crusader and AHI are
herein collectively called "Sellers" and individually a "Seller"), and HARKEN
ENERGY CORPORATION, a Delaware corporation (herein called "Purchaser").
RECITALS
WHEREAS, pursuant to that certain Concession Purchase Agreement (the
"Acquisition Agreement") and that certain Joint Operations Agreement (the
"JOA") each dated effective as of August 1, 1988, by and among Sellers (and
others) and Chuska Energy Company, each Seller acquired a Participating
Interest in the Concession Properties (hereafter defined), including, without
limitation, those Concession Properties described on Exhibit "A" attached
hereto.
WHEREAS, each Seller owns an undivided interest, beneficially, in and
to those certain oil and leases described on Exhibit "B" attached hereto (the
"BIA Leases").
WHEREAS, Sellers desire to sell to Purchaser, and Purchaser desires to
purchase from Sellers, all of Sellers' right, title and interests in and to the
Concession Properties and the BIA Leases.
NOW, THEREFORE, for and in consideration of the premises, of the
covenants herein contained, and other good and valuable consideration, the
receipt and sufficiency of which are hereby acknowledged and confessed, the
parties agree as follows:
1. Definitions. For purposes of this Agreement, unless otherwise
defined herein, capitalized terms set forth in this Agreement shall have the
meaning ascribed to them in the Acquisition Agreement.
2. Purchase and Sale. Subject to the terms and conditions
hereinafter set forth, Purchaser shall purchase from Sellers, and Sellers shall
sell, assign, transfer, grant, convey and deliver to Purchaser, effective as of
the Effective Time, free and clear of all mortgages, liens, pledges, security
interests, charges, claims, restrictions, and encumbrances created by, through
or under Sellers, but not otherwise, the following:
(a) Concession Properties. All of Sellers' right, title
and interest in and to the properties described in Section 2 of the Acquisition
Agreement (all of Sellers' right, title and interest in all of such property is
herein called the "Concession Property"), such property to include, without
limitation, each Seller's right, title and interest, if any, in and to the
following:
<PAGE> 2
(i) Sellers' interest in the Concession Property
described or referred to on Exhibit "A" hereto;
(ii) Sellers' interest in the JOA and all rights
of Sellers created under or by virtue of the JOA; and
(iii) Sellers' interest in all other properties,
assets, rights or interests owned by Sellers under or pursuant to the
Acquisition Agreement and/or the JOA, regardless of whether such properties,
assets or interests are described or referred to on Exhibit "A" attached
hereto.
(b) BIA Leases. All of Sellers' right, title and
interest in and to the BIA Leases, together with any and all producing,
non-producing and shut-in oil and gas wells, salt water disposal wells, water
wells, injection wells, and all other wells attributable to Sellers' right,
title and interest in the BIA Leases, all equipment, rights-of-way, easements,
appurtenances, contract rights, personal property, and hydrocarbons located on
or used in connection with Sellers' right, title and interest in the BIA
Leases.
All of Sellers' right, title and interest in the Concession Properties
and the BIA Lease are herein collectively called the "Properties".
Notwithstanding anything to the contrary, Purchaser agrees to and
shall assume and pay, perform and discharge when due all liabilities and
obligations of Sellers relating to the Properties, other than the liabilities
and costs set forth on Schedule 2 attached hereto.
3. Purchase Price. Subject to Section 4 below, Sellers and
Purchaser agree that the purchase price to be paid by Purchaser for the
Properties (the "Purchase Price") shall be $1,800,000 payable to Sellers in
newly issued shares of Purchaser's common stock (par value $.01 per share) (the
"Purchaser Common Stock") valued at the Index Price (as defined below). The
Purchaser Common Stock shall be issued to each Seller in the following
percentages:
<TABLE>
<CAPTION>
Percentage of
Seller Purchaser Common Stock
------ -----------------------
<S> <C>
CAB 12.68%
Crusader 60.22%
AHI 27.10%
</TABLE>
For the purpose of this Agreement, the term "Index Price" means the average
closing sale price of the Purchaser Common Stock for the five (5) trading days
immediately preceding the Closing Date as reported in the Wall Street Journal,
Southwest Edition. All shares of Purchaser Common Stock issued to Sellers
hereunder shall be rounded to the nearest whole share.
-2-
<PAGE> 3
4. Adjustment to Purchase Price. The Purchase Price shall be
adjusted as follows:
(a) The Purchase Price shall be adjusted upward by the
following:
(1) the value of all merchantable, allowable oil
in storage at the Effective Time which is sold and which is
credited to Sellers' interest in the BIA Leases, such value to
be the actual price received less taxes deducted by the
purchaser;
(2) the amount of all expenditures paid by or on
behalf of Sellers relating to ownership or operation of the
Properties after the Effective Time (exclusive of Sellers'
general and administrative expenses), including, without
limitation, (i) expenses that are paid by Sellers prior to the
Closing Date under the JOA and that are, in accordance with
generally accepted accounting principles, attributable to the
period after the Effective Time, (ii) operational expenditures
paid by Sellers prior to the Closing Date in connection with
the operation of the BIA Leases after the Effective Time and
(iii) prepaid expenses attributable to the Properties that are
paid by Seller and that are, in accordance with generally
accepted accounting principles, attributable to the period
after the Effective Time including, without limitation,
prepaid ad valorem, property, production, severance and
similar taxes (but not including income taxes) based upon or
measured by the ownership of property or the production of
hydrocarbons or the receipt of proceeds therefrom; and
(3) any other amount agreed upon in writing by
Sellers and Purchaser.
(b) The Purchase Price shall be adjusted downward by the
following:
(1) the proceeds received by Sellers prior to the
Closing Date attributable to the Properties and that are, in
accordance with generally accepted accounting principles,
attributable to the period of time from the Effective Time to the
Closing Date and that are not turned over to Purchaser; provided,
however, that the Purchase Price shall not be adjusted downward
on the account of the revenues distributed to Sellers resulting
from the ownership adjustment in the Aneth Gas Plant, such
adjustment being made in August 1994 pursuant to the JOA;
(2) an amount equal to all unpaid ad valorem,
property, production, severance and similar taxes and assessments
(but not including income taxes) based upon or measured by the
ownership of property or the production of hydrocarbons or the
receipt of proceeds therefrom accruing to the Properties prior to
the Effective Time, which amount shall be computed based upon
such taxes assessed against the applicable portion of the
Properties for the current tax year or, if such taxes are
assessed on other than a calendar year basis, for the tax related
year last ended; and
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(3) any other amount agreed upon in writing by
Seller and Buyer.
The adjustment to the Purchase Price shall be paid in cash to the appropriate
party or parties after Closing pursuant to Section 15(c) hereof. There shall
be no adjustment to the Purchaser Common Stock issued to Sellers at Closing on
account of any adjustment to the Purchase Price made according to this Section
4.
5. Registration Rights.
(a) Certain Definitions. As used in this Section 5, the
following terms shall have the following respective meanings:
(i) "Commission" means the Securities and
Exchange Commission, or any other federal agency at the time administering the
Securities Act of 1933, as amended (the "Act").
(ii) "Registration Statement" means the
Registration Statement filed by Purchaser with the Commission for a public
offering and sale of securities of Purchaser pursuant to this Section, but
shall not include a Registration Statement on Form S-8 or Form S-4, or any
other registration statement filed by Purchaser with the Commission covering
only securities proposed to be issued in exchange for securities or assets of
another corporation.
(iii) "Registerable Shares" means the shares of
Purchaser Common Stock acquired by Sellers pursuant to the terms of this
Agreement, and shall include any other shares of common stock of Purchaser
issued in respect of such shares (whether because of stock splits, stock
dividends, reclassifications, recapitalizations, or similar events affecting
Purchaser); provided, however, that shares of common stock of Purchaser which
are Registerable Shares shall cease to be Registerable Shares upon any sale
pursuant to a Registration Statement under this Section 5, or with respect to a
particular Seller, any other disposition of less than all of the shares of
common stock of Purchaser received by such Seller pursuant to a private sale or
other disposition, including all dispositions of the common stock by Sellers
pursuant to Section 4(1) and Rule 144 of the Act, it being the expressed
intentions of the parties hereto that the registration rights contained herein
may only be assigned by a Seller in connection with any private sale or other
transaction agreed to by such Seller subsequent to the date hereof if all of
such Seller's Registerable Shares are sold or otherwise transferred pursuant to
such transaction.
(b) Sale or Transfer of Shares; Legend.
(i) The Registerable Shares and shares issued in
respect of the Registerable Shares shall not be sold or transferred unless
either (A) they first have been registered under the Act, or (B) Purchaser
first shall have been furnished with an opinion of Sewell & Riggs, P. C., or
other legal counsel, reasonably satisfactory to Purchaser, to the effect that
such sale or transfer is exempt from the registration requirements of the Act.
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<PAGE> 5
(ii) All of the Registerable Shares of Purchaser
Common Stock shall bear the legend in the following form:
THE SHARES OF STOCK REPRESENTED BY THIS CERTIFICATE HAVE NOT BEEN
REGISTERED UNDER THE SECURITIES ACT OF 1933, AS AMENDED, OR ANY STATE
SECURITIES ACT AND CANNOT BE SOLD, TRANSFERRED, OR OTHERWISE DISPOSED
OF UNLESS REGISTERED UNDER SUCH ACTS OR EXEMPTIONS FROM REGISTRATION
ARE AVAILABLE. THE TRANSFER OF THE SHARES REPRESENTED BY THIS
CERTIFICATE IS RESTRICTED UNDER THE CONCESSION AND LEASE PURCHASE
AGREEMENT DATED AS OF OCTOBER 20, 1994 BY AND AMONG C.A.B. RESOURCES,
INC., CRUSADER, INC., AUSTRALIAN HYDROCARBONS INC. AND HARKEN ENERGY
CORPORATION. A COPY OF SUCH AGREEMENT MAY BE OBTAINED AT NO COST BY
WRITTEN REQUEST MADE BY THE RECORD HOLDER OF THE CERTIFICATE TO HARKEN
ENERGY CORPORATION.
(c) Demand Registrations.
(i) Requests for Registration. At any time after
the Closing, either of (x) CAB and Crusader and (y) AHI may request
registration under the Securities Act of all or part of their Registerable
Shares. Each request for a Demand Registration shall specify the approximate
number of Registerable Shares requested to be registered and the anticipated
per share price range for such offering. Within ten days after receipt of any
such request, Purchaser will give written notice of such requested registration
to all other holders of Registerable Shares and will include in such
registration, subject to subparagraph (c) (iii), all Registerable Shares with
respect to which Purchaser has received written requests for inclusion therein
within 15 days after the receipt of Purchaser's notice. In the event either of
(x) CAB and Crusader or (y) AHI shall request a Demand Registration pursuant to
this Section 5(c), Purchaser shall provide written notice to the Seller (or
Sellers) who did not request such Demand Registration, whereupon such Seller
(or Sellers) shall have ten (10) days from receipt of such notice to elect in
writing to have its Registrable Shares registered pursuant to such Demand
Registration. The failure to elect in writing within such 10-day period shall
be deemed an election to not have such Seller's (or Sellers') shares registered
pursuant to such Demand Registration. If such Seller (or Sellers) elect to not
have its shares registered pursuant to such Demand Registration, such Seller
(or Sellers) shall have no further rights of a Demand Registration under this
Section 5(c) and provided such registration otherwise counts as a Demand
Registration pursuant to paragraph (c) and (g) of this Section. Any
registration requested pursuant to this subparagraph (c)(i) is referred to
herein as a "Demand Registration."
(ii) Number of Demand Registrations. The holders
of Registerable Shares will be entitled to require one Demand Registration in
which Purchaser will pay all Registration Expenses (as hereinafter defined). A
registration will not count as a Demand Registration unless and until it has
remained effective for 180 days or such shorter period as shall be required to
sell all of the securities registered pursuant thereto (but not before the
expiration of the applicable prospectus delivery period); provided that in any
event Purchaser will pay all
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<PAGE> 6
Registration Expenses in connection with any registration initiated as a Demand
Registration whether or not it has become effective.
(iii) Priority on Registrations. Purchaser will
not include in any Demand Registration any securities which are not
Registerable Shares without the prior written consent of the holders of the
Registerable Shares initially requesting such registration. If a Demand
Registration is an underwritten offering and the managing underwriters advise
Purchaser in writing that in their opinion the number of Registerable Shares
and, if permitted hereunder, other securities requested to be included in such
offering, exceeds the number of Registerable Shares and other securities, if
any, which can be sold in an orderly manner in such offering within a price
range acceptable to the holders of the Registerable Shares initially requesting
registration, Purchaser will include in such registration, prior to the
inclusion of any securities which are not Registerable Shares, the number of
Registerable Shares requested to be included which in the opinion of such
underwriters can be sold in an orderly manner within the price range of such
offering, pro rata among the respective holders thereof on the basis of the
amount of Registerable Securities requested by such holders to be included in
such registration.
(iv) Selection of Underwriters. If any Demand
Registration is in the form of an underwritten offering, Purchaser will select
and retain the investment banker or investment bankers and manager or managers
that will administer the offering; provided, however, that such selection will
be subject to the approval of the holders of the Registerable Shares
participating in such registration, which shall not be unreasonably withheld.
Purchaser shall, (together with all holders proposing to distribute their
securities through such underwriting) enter into an underwriting agreement in
customary form with the managing underwriter selected for such underwriting.
If a holder of Registerable Shares disapproves of the terms of the
underwriting, such Person may elect to withdraw therefrom by written notice to
Purchaser and the managing underwriter. The Registerable Shares so withdrawn
shall also be withdrawn from registration.
(v) Minimum Shares Included. Purchaser shall not
be required to effect any Demand Registration unless the holders of
Registerable Shares agree to include therein Registerable Securities that at
the time of demand constitute at least 50% (or such lesser percentage as the
underwriter shall determine is desirable) of the Registerable Securities.
(d) Piggyback Registrations.
(i) Right to Piggyback. Whenever Purchaser
proposes to register any of its securities under the Securities Act for sale
for cash (other than pursuant to a Demand Registration) and the registration
form to be used may be used for the registration of Registerable Shares,
Purchaser will give prompt written notice to all holders of Registerable Shares
of its intention to effect such a registration and will include in such
registration all Registerable Shares with respect to which Purchaser has
received written requests for inclusion therein within 15 days after the
receipt of Purchaser's notice (a "Piggyback Registration"). If Purchaser gives
notice of such a proposed registration, the total number of Registerable Shares
which shall be included in such registration shall be limited to such number,
if any, as in the reasonable opinion of the
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<PAGE> 7
manager of such offering would not adversely affect the marketability or
offering price of all of the securities proposed to be offered by Purchaser in
such offering; provided, however, if the holders of Registerable Shares having
registration rights upon a Piggyback Registration are not permitted to include
all of such Registerable Shares by reason of such determination by the manager
of the offering, the Registerable Securities to be included in the offering
shall be determined in accordance with subparagraphs (d) (iii) and (iv) below.
Notwithstanding the foregoing, Purchaser may, in its sole discretion and
without the consent of any holder of Registerable Shares, withdraw such
Registration Statement and abandon such proposed public offering.
(ii) Piggyback Expenses. The Registration
Expenses of the holders of Registerable Shares will be paid by Purchaser in all
Piggyback Registrations.
(iii) Priority on Primary Registrations. If a
Piggyback Registration is a primary registration on behalf of Purchaser, and
the managing underwriters advise the company in writing that in their opinion
the number of securities requested to be included in such registration exceeds
the number which can be sold in an orderly manner in such offering within a
price range acceptable to Purchaser, Purchaser will include in such
registration (i) first, the securities Purchaser proposes to sell, (ii) second,
the Registerable Shares requested to be included in such registration, pro rata
among the holders thereof on the basis of the number of shares of such
Registerable Shares requested to be included in such registration by each such
holder, and (iii) third, other securities requested to be included in such
registration.
(iv) Priority on Secondary Registrations. If a
Piggyback Registration is an underwritten secondary registration on behalf of
holders of Purchaser's securities, and the managing underwriters advise
Purchaser in writing that in their opinion the number of securities requested
to be included in such registration exceeds the number which can be sold in an
orderly manner in such offering within a price range acceptable to the holders
initially requesting such registration, Purchaser will use its reasonable
efforts to include in such registration (i) first, the securities the holders
initially requesting such registration propose to sell, and (ii) second, the
Registerable Shares requested to be included in such registration, pro rata
among the holders thereof on the basis of the number of shares of such
Registerable Shares requested to be included in such registration by each such
holder.
(e) Holdback Agreement. Each holder of Registerable
Shares agrees not to effect any public sale or distribution (including sales
pursuant to Rule 144) of any Registerable Shares, within seven days prior to
and during the 60-day period beginning on the date specified in writing by
Company to the holder as being the intended effective date of any underwritten
Demand Registration or any underwritten Piggyback Registration in which
Registerable Shares are included (except as part of such underwritten
registration), unless the underwriters managing the registered public offering
otherwise agree.
(f) Registration Procedures. Whenever the holders of
Registerable Shares have requested that any Registerable Shares be registered
pursuant to this Section, Purchaser will use reasonable efforts to effect the
registration and the sale of such Registerable Shares in
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<PAGE> 8
accordance with the intended method of disposition thereof, and pursuant
thereto Purchaser will as expeditiously as possible:
(i) prepare and file with the Commission a
Registration Statement on the appropriate form with respect to such
Registerable Shares and use all reasonable efforts to cause such Registration
Statement to become effective (provided that before filing a Registration
Statement or prospectus or any amendments or supplements thereto, Purchaser
will furnish to the counsel selected by the holders of the Registerable Shares
covered by such Registration Statement copies of all such documents proposed to
be filed, which documents will be subject to the review of such counsel);
(ii) prepare and file with the Commission such
amendments and supplements to such Registration Statement and the prospectus
used in connection therewith as may be necessary to keep such Registration
Statement effective for a period of not less than 180 consecutive days or such
shorter period which will terminate when Registerable Shares covered by such
Registration Statement have been sold (but not before the expiration of the
applicable prospectus delivery period) and comply with the provisions of the
Securities Act with respect to the disposition of all securities covered by
such Registration Statement during such period in accordance with the intended
methods of disposition by the sellers thereof sat forth in such Registration
Statement;
(iii) furnish to each seller of Registerable Shares
such number of copies of such Registration Statement, each amendment and
supplement thereto, the prospectus included in such Registration Statement
(including each preliminary prospectus) and such other documents as such seller
may reasonably request in order to facilitate the disposition of the
Registerable Shares owned by such seller;
(iv) use its reasonable efforts to register or
qualify such Registerable Shares under such other securities or blue sky laws
of such jurisdictions within the United States as any seller reasonably
requests and do any and all other acts and things which may be reasonably
necessary or advisable to enable such seller to consummate the disposition in
such jurisdictions of the Registerable Shares owned by such seller (provided
that Purchaser will not be required to qualify generally to do business or file
any general consent to service of process in any jurisdiction where it would
not otherwise be required to qualify or file but for this subparagraph);
(v) notify each seller of such Registerable
Shares, at any time when a prospectus relating thereto is required to be
delivered under the Securities Act, of the happening of any event as a result
of which the prospectus included in such Registration Statement contains an
untrue statement of a material fact or omits to state any material fact
required to be stated therein or necessary to make the statements therein not
misleading, and, at the request of any such seller, Purchaser will prepare a
supplement or amendment to such prospectus so that, as thereafter delivered to
the purchasers of such Registerable Shares, such prospectus will not contain an
untrue statement of a material fact or omit to state any material fact required
to be stated therein or necessary to make the statements therein not
misleading;
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<PAGE> 9
(vi) use its reasonable efforts to cause all such
Registerable Shares to be listed on each securities exchange on which similar
securities issued by Purchaser are then listed and, if not so listed, to be
listed on the NASD automated quotation system and, if listed on the National
Association of Securities Dealers Automated Quotation System ("NASDAQ"), use
its reasonable efforts to secure designation of all such Registerable Shares
covered by such Registration Statement as a NASDAQ "national market system
security" within the meaning of Rule 11Aa2-1 of the Securities and Exchange
Commission or, failing that, to secure NASDAQ authorization for such
Registerable Shares and, without limiting the generality of the foregoing, to
arrange for at least one market maker to register as such with respect to such
Registerable Shares with the NASD;
(vii) provide a transfer agent and registrar (which
may be Purchaser) for all such Registerable Shares not later than the effective
date of such Registration Statement;
(viii) enter into such customary agreements
(including underwriting agreements in customary form) and take all such other
actions as the holders of the Registerable Shares being sold or the
underwriters, if any, reasonably request in order to expedite or facilitate the
disposition of such Registerable Shares (including, without limitation,
effecting a stock split or a combination of shares);
(ix) make available for inspection by any seller
of Registerable Shares, any underwriter participating in any disposition
pursuant to such Registration Statement and any attorney, accountant or other
agent retained by any such seller or underwriter, all financial and other
records (reasonably requested), pertinent corporate documents and properties of
Purchaser as shall be reasonably necessary to enable them to exercise their due
diligence responsibility, and cause Purchaser's officers, directors, employees
and independent accountants to supply all information reasonably requested by
any such seller, underwriter, attorney, accountant or agent in connection with
such Registration Statement; provided, however, each seller of Registerable
Shares agrees that information obtained by it as a result of such inspections
which is deemed confidential shall not be used by it as the basis for any
market transaction in securities of the company unless and until such
information is made generally available to the public and each such seller
shall cause any attorney, accountant or agent retained by such seller to keep
confidential any information so deemed;
(x) otherwise use reasonable efforts to comply
with all applicable rules and regulations of the Commission, and make available
to its security holders, as soon as reasonably practicable, an earnings
statement covering the period of at least 12 months beginning with the first
day of Purchaser's first full calendar quarter after the effective date of the
Registration Statement, which earnings statement shall satisfy the provisions
of Section 11(a) of the Securities Act and Rule 158 thereunder;
(xi) permit any holder of Registerable Shares,
which holder, in its reasonable judgment, might be deemed to be an underwriter
or a controlling person of Purchaser, to participate in the preparation of such
registration or comparable statement and to comment thereon;
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<PAGE> 10
(xii) in the event of the issuance of any stop
order suspending the effectiveness of a Registration Statement, or of any order
suspending or preventing the use of any related prospectus or suspending the
qualification of any common stock included in such Registration Statement for
sale in any jurisdiction, Purchaser will use reasonable efforts promptly to
obtain the withdrawal of such order;
(xiii) use reasonable efforts to cause such
Registerable Shares covered by such Registration Statement to be registered
with or approved by such other governmental agencies or authorities as may be
necessary to enable the sellers thereof to consummate the disposition of such
Registerable Shares;
(xiv) use its reasonable efforts to obtain a cold
comfort letter from the Purchaser's independent public accountants in customary
form and covering such matters of the type customarily covered by cold comfort
letters as the holders of the Registerable Shares being sold in such
registration reasonably request; and
(xv) use reasonable efforts thereafter to cause
the Registerable Shares to qualify as "margin stock" within the meaning of
Regulations G, T and U promulgated by the Federal Reserve Board.
(g) Allocation of Registration Expenses. Purchaser shall
be responsible for and pay all Registration Expenses (as defined below).
Sellers shall only be responsible for and pay the following fees and expenses
of registration on a pro rata basis in accordance with the number of their
Registerable Shares included in such registration:
(i) Underwriting discounts and selling
commissions attributable to the sale of Registerable Shares; and
(ii) Fees and expenses of Sellers' independent
legal counsel.
Notwithstanding the foregoing, if a registration is withdrawn at the written
request of the Sellers requesting such registration (other than as a result of
information concerning the business or financial condition of Purchaser which
is made known to Sellers after the date on which such registration was
requested) and if Sellers elect in writing not to have such registration
counted as a registration requested under subparagraph (c) of this Section,
Sellers shall pay all reasonable Registration Expenses of such registration pro
rata in accordance with the number of their Registrable Shares included in such
registration. For purposes of this Section, "Registration Expenses" shall mean
all fees and expenses incident to Purchaser's performance of or compliance with
this Section 5 (other than those specifically payable by Sellers pursuant to
this subparagraph (g)), including, without limitation, all registration and
filing fees, listing fees, fees and expenses of compliance with securities or
blue sky laws, printing and engraving expenses, messenger and delivery
expenses, and fees and disbursements for counsel, all independent certified
public accountants, underwriters and any others retained by Purchaser.
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<PAGE> 11
(h) Certain Delays. Purchaser shall have the right from
time to time and at anytime to defer for a period not to exceed 30 days, the
filing of any Registration Statement requested under Sections 5(c) or 5(d)
above if, in the reasonable judgment of Purchaser's board of directors, such
registration would materially interfere with or materially and adversely affect
any then existing negotiations for financing arrangements of financing plans of
Purchaser, or any arrangement or plan of Purchaser, then pending or being
negotiated in good faith, relating to any acquisition, disposition, merger or
similar transaction.
6. Representations and Warranties of Sellers. Each Seller
represents and warrants (only with respect to itself) to Purchaser the
following:
(a) Seller is a corporation duly organized, validly
existing and in good standing under the laws of its jurisdiction of
incorporation, and has all requisite corporate power and authority to own,
lease and operate its properties and to carry on its business as now being
conducted;
(b) Seller has full power and authority under its
articles of incorporation and by-laws to conduct its business as presently
conducted and to perform its obligations under this Agreement.
(c) This Agreement is a legal and binding obligation of
Seller, enforceable in accordance with its terms, except as limited by
bankruptcy, insolvency reorganization, moratorium and similar laws and
equitable principles relating to or limiting creditors' rights generally.
(d) CAB owns a 3.500% Participating Interest in the
Concession Properties; Crusader owns an 11.625% Participating Interest in the
Concession Properties; and AHI owns a 5.23125% Participating Interest in the
Concession Properties, in each case free and clear of all mortgages, liens,
pledges, security interests, charges, claims, and encumbrances of any nature
whatsoever that have been created by, through or under Seller, but not
otherwise.
(e) Seller owns its beneficial interest in the BIA Leases
free and clear of all mortgages, liens, pledges, security interests, charges,
claims and encumbrances of any nature whatsoever that have been created by,
through, or under Seller, but not otherwise.
(f) To Seller's knowledge, all taxes, assessments and
governmental charges imposed upon the Properties or upon the income, profit and
revenues derived therefrom, to the extent payable by Seller, have been paid by
Seller.
(g) To Seller's knowledge, Seller has not received any
material prepayment respecting any of the Properties and Seller has not entered
into any agreement which contains a "take or pay" clause or similar arrangement
that has obligated Seller to deliver oil, gas or other hydrocarbons at some
future time without then or thereafter receiving full payment thereof. To
Seller's knowledge, Seller is not currently obligated to "make up" any
deliveries of oil or gas to any third parties out of future production from any
of the Properties.
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<PAGE> 12
(h) To Seller's knowledge, no suit, action or other
proceeding is pending before any court or governmental agency as of the date of
this Agreement of which Seller is a party and which might result in substantial
impairment or loss of any Seller's title to any material part of the Properties
or the ability of any Seller to perform its obligations hereunder.
(i) With respect to the "Basic Documents" (defined
below), to Seller's knowledge and in all material respects:
(i) Seller is not in breach or default with
respect to any of its material obligations pursuant to such Basic Documents, or
any regulations incorporated therein or governing same;
(ii) All material payments (including, without
limitation, joint interest or other billings due under JOA or any operating
agreement covering the BIA Leases) due thereunder have been made by Seller;
(iii) Seller or any other party to any Basic
Documents has not given or threatened to give notice of any action to
terminate, cancel, rescind or procure a judicial reformation of any Basic
Documents or any provision thereof; and
(iv) Subject to any requisite consents to
assignment or transfer of the Properties, the execution of this Agreement and
the consummation of the transactions contemplated hereby will not result in a
breach of, constitute default under, or result in a violation of the material
provisions of any Basic Document.
As used herein the term "Basic Documents" shall mean the Acquisition Agreement,
the JOA, the BIA Leases, agreements in respect of or affecting the purchase,
sale, gathering, delivery, compression, transferring, processing, marketing or
any other disposition of oil, gas or condensate produced from or attributable
to the Properties, unitization or pooling agreement and all other material
executory contracts relating to the Properties.
(j) Seller has been furnished with or has had access to
the information it has requested from Purchaser and has had an opportunity to
ask questions and receive answers from management of Purchaser. Seller
acknowledges that it has received and had the opportunity to review copies of
Purchaser's Annual Report on Form 10-K for the fiscal year ended December 31,
1993, Purchaser's Quarterly Reports on Form 10-Q for the quarters ended March
31 and June 30, 1994 and its Proxy Statement dated April 22, 1994 (collectively
referred to herein as the "Purchaser SEC Filings"). Seller is either (i) an
"accredited investor" (as defined in Rule 501(a) of the Act) or (ii) alone, or
together with a "purchaser representative" (as defined in Rule 501(h)
promulgated pursuant to the Act), has knowledge, experience and skill in
business and financial matters and with respect to investments in securities so
as to enable it to understand and evaluate the merits and risks of the
acquisition of the Purchaser Common Stock and to form an investment decision
with respect to such investment. Seller agrees that each certificate
representing shares of Purchaser Common Stock issued pursuant to this Agreement
will contain the restrictive legend set
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<PAGE> 13
forth in Section 5(b)(ii) hereof and acknowledge that stop transfer
instructions will be given to Purchaser's transfer agent for the shares of
Purchaser Common Stock.
7. Representations and Warranties of Purchaser. Purchaser
represents and warrants to Sellers the following:
(a) Purchaser is a corporation duly organized, validly
existing and in good standing under the laws of the State of Delaware.
(b) Purchaser has full power and authority to carry on
its business as presently conducted, to enter into this Agreement, to purchase
the Properties on the terms described in this Agreement, and to perform its
other obligations under this Agreement.
(c) The execution, delivery and performance of this
Agreement and the transactions contemplated hereby have been duly and validly
authorized by all requisite action on the part of Purchaser.
(d) This Agreement is a legal and binding obligation of
Purchaser, enforceable in accordance with its terms, except as limited by
bankruptcy, insolvency, reorganization, moratorium and similar laws and
equitable principles relating to or limited creditors' rights generally.
(e) Purchaser has incurred no liability, contingent or
otherwise, for brokers' or finders' fees relating to the transactions
contemplated by this Agreement for which any Seller shall have any
responsibility whatsoever.
(f) Purchaser is knowledgeable, competent, and
experienced in the oil and gas industry and has independently evaluated and
interpreted all information and data relating to the Properties prior to
entering into this Agreement, understands and is financially able to bear the
risk associated with the Properties, and has independently conducted all the
due diligence investigations and reviews of all technical, geologic,
environmental and legal matters concerning the Properties as it deems necessary
prior to Closing. Purchaser acknowledges that Sellers have made no statements
or representations concerning the present or future value of anticipated
income, costs or profits, if any, to be derived from the Properties, and
Purchaser has relied solely upon its independent inspections, estimates,
computations, evaluations, reports, studies and knowledge of the Properties.
8. Survival of Representations and Warranties. The
representations and warranties of Sellers in Section 6 and the representations
and warranties of Purchaser in Section 7 shall survive the Closing for a period
of one (1) year from the Closing Date (as hereinafter defined).
9. Covenants of Purchaser.
(a) Purchaser agrees to indemnify and hold Sellers
Indemnified Group (as hereinafter defined) and any member thereof, harmless
from, and shall reimburse each Seller and
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<PAGE> 14
its agents, directors, officers, employees and predecessors in interest
(collectively "Sellers' Indemnified Group") with respect to all claims,
demands, causes of action, losses, damages, liabilities, costs and expenses,
including attorneys' fees and court costs including, without limitation, the
environmental liabilities discussed in Section 9(b) below (collectively the
"Claims"), arising out of, and/or incurred, in connection with the ownership,
development and operation of the Properties asserted against or incurred by any
member of Sellers' Indemnified Group for any Claims for acts, events,
omissions, occurrences or conditions arising or incurring before or after the
Effective Time, except for Sellers Indemnified Claims as described in Section
10 hereof, regardless of whether such Claims are founded in whole or in part
upon the negligent acts or omissions of any member of the Sellers' Indemnified
Group.
(b) Without limiting the generality of the foregoing,
Purchaser agrees to indemnify and hold Sellers' Indemnified Group and any
member thereof harmless from, and shall reimburse Sellers' Indemnified Group or
any member thereof with respect to, any and all fines, penalties, costs,
clean-up charges, remediation expenses and assessments (other than Sellers
Indemnified Claims) levied or assessed against Sellers' Indemnified Group or
any member thereof by any person, party or entity, including, but not limited
to, any local, state or federal government entity or authority, together with
any and all Claims of every kind or character, except for Sellers Indemnified
Claims, asserted against or incurred by Sellers' Indemnified Group or any
member thereof at any time for any Claims for acts, events, omissions,
conditions or occurrences, except for Sellers' Indemnified Claims, arising or
incurring before or after the Effective Time by reason of, or arising from, the
Properties or the presence, generation, transportation, treatment, disposal or
release of any hazardous substances or any other environmental contamination
regarding the Properties that arises or occurs before or after the Effective
Time in any manner, including but not limited to the above-referenced presence
of hazardous substance or any other environmental contamination upon the
Properties that arises or occurs after the Effective Time, regardless of
whether such Claims are founded in whole or in part upon the negligent acts or
omissions of Sellers Indemnified Group or any member thereof, but excluding
Sellers Indemnified Claims. For purposes of this Section 9, "hazardous
substances" and "environmental contamination" shall include, without
limitation, oil, gas and other hydrocarbons, radioactive materials, including
NORM, asbestos or asbestos containing materials, polychlorinated biphenyels and
any chemicals, materials, wastes or substances defined as or included in the
definition of "hazardous substances," "hazardous waste," "hazardous materials,"
"toxic substances," "toxic pollutants," "contaminants," or "pollutants" or
words of similar import under any environmental laws or regulations, including,
without limitation, applicable federal, state or local statutes, rules,
regulations, ordinances, codes and policies, now in effect or hereinafter
enacted, and as such may be amended from time to time, relating to the
environment or human health or safety, including, without limitation, the
Comprehensive Environmental Response, Compensation and Liability Act of 1980,
as amended, 42 U.S.C. Section 9601 et seq., the Hazardous Materials
Transportation Act, as amended, 49 U.S.C. Section 1801 et seq., the Resource
Conservation and Recovery Act of 1976, as amended, 42 U.S.C. Section 6901 et
seq., Federal Water Pollution Control Act, as amended, 33 U.S.C. Section 1201
et seq., the Safe Drinking Water Act, 42 U.S.C. Section 3808 et seq., the Toxic
Substances Control Act, as amended, 15 U.S.C. Section 2601 et seq., and the
Clean Air Act, as amended, 42 U.S.C. Section 7401 et seq.
- 14 -
<PAGE> 15
(c) Purchaser hereby agrees, as of the Effective Time, to
assume, perform and comply with all of the provisions and obligations (express
or implied) that are attributable to the Properties or that are attributable to
acts, operations, omissions or conditions arising before or after the Effective
Time (except for Sellers Indemnified Claims), including, but not limited to:
all of the terms and conditions of the JOA, the BIA Leases and all applicable
and valid agreements, contracts and instruments, unit agreements, joint
operating agreements, pooling agreements, communitization agreements and
easements and rights-of-way respecting the BIA Leases; all existing lease
burdens (including, but not limited to, royalties, overriding royalties,
production payments, net profits interest, carried working interest or similar
burdens); and all duties imposed by governmental law, rule or regulation.
(d) All covenants of Purchaser contained in this Section
9 shall survive Closing.
10. Covenants of Sellers. Each Seller severally, but not jointly,
agrees to indemnify and hold Purchaser harmless from, and shall reimburse
Purchaser and its agents, directors, officers, and employees (collectively
"Purchaser's Indemnified Group") with respect to all Claims, including
attorneys' fees and court costs including, relating to, arising out of or in
connection with any of the following (the Claims set forth in subparagraphs (a)
and (b) below for which Sellers shall indemnify Purchasers Indemnified Group
are herein collectively called "Sellers Indemnified Claims"):
(a) All fines, penalties, clean-up charges, remediation
expenses and assessments levied or asserted against Purchasers Indemnified
Group by any local, state or federal government entity or authority by reason
of or arising from the clean-up or remediation of any hazardous substances or
any other environmental contamination that exists on or at the Aneth Gas Plant
as of the Effective Time, but only to the extent that any of the foregoing (i)
is not subject to indemnification by El Paso Natural Gas Company and (ii) is
based on or attributable to the respective Seller's interest in the Aneth Gas
Plant; and
(b) All amounts, including interest, penalties and fines,
levied or asserted against Purchasers Indemnified Group by reason of or arising
from a presently pending investigation or audit by the Minerals Management
Service respecting the alleged underpayment of royalties or other amounts
payable to the Tribe under or pursuant to the Tribal Agreements or the BIA
Leases, but only to the extent that such amounts are based on or attributable
to the respective Seller's interest in the Properties.
All covenants of Sellers contained in this Section 10 shall survive
Closing.
11. Sellers' Conditions to Closing. The obligations of Sellers at
the Closing are subject, at the option of Sellers, to the satisfaction at or
prior to the Closing that all representations and warranties of Purchaser
contained in this Agreement shall be true in all material respects at and as of
the Closing as if such representations and warranties were made at and as of
the Closing, and Purchaser shall have performed and satisfied all material
agreements in
- 15 -
<PAGE> 16
all material respects required by this Agreement to be performed and satisfied
by Purchaser at or prior to the Closing.
12. Purchaser's Conditions. The obligations of Purchaser at the
Closing are subject, at the option of Purchaser, to the satisfaction at or
prior to the Closing that all representations of Sellers contained in this
Agreement shall be true in all material respects at and as of the Closing as if
such representations and warranties were made at and as of the Closing, and
Sellers shall have performed and satisfied all material agreements in all
material respects required by this Agreement to be performed and satisfied by
Sellers at or prior to the Closing.
13. Closing. Unless the parties hereto mutually agree otherwise
and subject to the conditions stated in this Agreement, the consummation of the
transactions contemplated hereby (herein called the "Closing" and the date of
which herein called the "Closing Date") shall be held on or before October 20,
1994. The Closing shall be held at the office of Purchaser or at such other
place as Purchaser and Sellers may agree in writing.
14. Closing Obligations. At the Closing, the following events
shall occur, each being a condition precedent to the others and each being
deemed to have occurred simultaneously with the others.
(a) Each Seller shall execute, acknowledge and deliver an
Assignment and Bill of Sale to Purchaser covering the Concession Properties in
the form (executed in sufficient counterparts to facilitate recording)
substantially set forth in Exhibit "C" hereto.
(b) Purchaser shall instruct and cause its transfer agent
to issue the Purchaser Common Stock to each Seller in the percentages specified
in Section 3 hereof.
15. Obligations after Closing.
(a) Sales Taxes and Recording Fees. Purchaser shall pay
all sales taxes and assessments occasioned by the sale of the Properties, and
Purchaser shall pay all filing and recording fees required in connection with
the filing and recording of any assignments.
(b) Further Assurances. After Closing, Sellers and
Purchaser shall execute, acknowledge and deliver or cause to be executed,
acknowledged and delivered such instruments and take such other action as may
be reasonably necessary or advisable to carry out their obligations under this
Agreement and under any document, certificate or other instrument delivered
pursuant hereto or required by law. If at any time subsequent to the Closing,
either party comes into possession of money or property belonging to the other,
such money or property shall be promptly turned over to the party entitled
thereto. If requested by Purchaser, after Closing each Seller shall execute,
acknowledge and deliver a Declaration of Ownership in the form reasonably
satisfactory to Sellers and Purchaser, to be executed in sufficient counterpart
for filing with (i) the Minerals Division of the Tribe, (ii) the Bureau of
Indians Affairs in Window Rock, Arizona, (iii) San Juan County, New Mexico,
(iv) Apache County, Arizona and (v) San Juan County, Utah.
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<PAGE> 17
(c) Final Accounting. On or before forty-five (45) days
of the Closing Sellers and Purchaser shall deliver to each other, in accordance
with Section 4 or other provisions of this Agreement and generally accepted
accounting principles, an itemized statement setting forth all income received
and expenditures incurred relating to the Properties, the operation thereof and
production and/or revenues therefrom. As soon as practicable, Purchaser and
Sellers shall account to each other in cash (not in Purchaser Common Stock) for
such income and expenditures which were not utilized in calculating the
Purchase Price paid to Sellers at the Closing, as contemplated by Section 4 or
other provisions of this Agreement, taking in account ordinary set-off of same
(the "Final Accounting"). If Buyer and Seller are unable to agree upon the
Final Accounting within sixty (60) days of Closing, then such Final Accounting
shall be resolved through arbitration proceedings in accordance with this
Agreement.
16. Termination. This Agreement and the transaction contemplated
hereby may be terminated in the following instances:
(a) By Sellers if the conditions set forth in Section 10
are not satisfied in a material way or waived as of the Closing Date.
(b) By Purchaser if the conditions set forth in Section
11 are not satisfied in a material way or waived as of the Closing Date.
(c) At any time by the mutual written agreement of
Purchaser and Sellers.
17. Title and Warranty.
(a) Title. Purchaser has had the opportunity to examine
all files, title information and production data that Sellers have in their
possession relating to the Properties. The furnishing of such files, title
information and production data shall create no liability or responsibility on
the part of Sellers and Sellers make no warranty or representation as to the
correctness or completeness of the files, title information and production data
so furnished. Purchaser has conducted, or will conduct prior to Closing, such
examination of title and the other information as it sees fit and has notified
Sellers that this examination revealed no title defects which would cause
Sellers' title to be not merchantable. The purchase and sale of the Properties
shall be made pursuant to a special warranty of title subject to all
reservations, exception, limitations, claims, encumbrances or burdens (i)
contained herein, (ii) which are of record, (iii) of which Purchaser has actual
notice, or (iv) which are not claimed by, through or under Sellers.
(b) Warranty. At the Closing, Sellers shall convey the
Properties subject to a special warranty of title that the Properties are free
and clear from all mortgages, liens, claims or other encumbrances by or on
behalf of any person or entity claiming by, through or under Sellers, but not
otherwise. Purchaser acknowledges that it has relied solely on the basis of
its own investigation of the Properties. NOTWITHSTANDING ANYTHING TO THE
CONTRARY, EXCEPT FOR THE FOREGOING SPECIAL WARRANTY OF TITLE, SELLERS MAKE NO
REPRESENTATIONS OR WARRANTIES WITH RESPECT TO TITLE TO THE PROPERTIES. AT THE
CLOSING, SELLERS SHALL CONVEY THE PROPERTIES "AS
- 17 -
<PAGE> 18
IS, WHERE IS," WITHOUT ANY EXPRESS OR IMPLIED WARRANTIES OF ANY KIND, INCLUDING
WARRANTIES AS TO DESCRIPTION, VALUE, QUALITY, CONDITION, MERCHANTABILITY OR
FITNESS FOR A PARTICULAR PURPOSE.
18. Miscellaneous Provisions.
(a) Successors and Assigns. The terms and conditions of
this Agreement shall inure to the benefit of and be binding upon the respective
successors and assigns of the parties. Notwithstanding the foregoing, neither
Purchaser nor Sellers may assign their rights or obligations hereunder prior to
Closing without the written consent of the other parties.
(b) Counterparts. This Agreement may be executed in two
or more identical counterparts, each of which shall be deemed an original, but
all of which together shall constitute one and the same instrument. All
proceedings to be taken and all documents to be executed and delivered by the
parties at Closing shall be deemed to have been taken and executed
simultaneously with all other proceedings to be taken and documents to be
executed and delivered at Closing and no proceeding shall be deemed taken or
any documents delivered or executed until all have been taken, executed and
delivered at Closing.
(c) Titles and Subtitles. The titles and subtitles used
in this Agreement are used for convenience only and are not to be considered in
construing or interpreting this Agreement.
(d) Finder's Fee. Sellers and Purchasers represent that
they neither are nor will be obligated for any finders fee or commission in
connection with this transaction.
(e) Severability. If one or more provisions of this
Agreement are held to be unenforceable under applicable law, such provision
shall be excluded from this Agreement and the balance of the Agreement shall be
interpreted as if such provision were so excluded and shall be enforceable in
accordance with its terms.
(f) Notices. Any notice, demand or other communication
required to be given or made under this Agreement shall be in writing and be
deemed duly given or made if delivered or sent by telex or facsimile as
follows:
SELLERS: C.A.B. RESOURCES, INC.
c/o Sewell & Riggs
333 Clay Avenue, Suite 800
Houston, Texas 77002
Attention: N. L. Stevens, III
Facsimile: (703) 652-8808
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<PAGE> 19
CRUSADER, INC.
c/o Sewell & Riggs
333 Clay Avenue, Suite 800
Houston, Texas 77002
Attention: N. L. Stevens, III
Facsimile: (703) 652-8808
AUSTRALIAN HYDROCARBONS INC.
c/o Sewell & Riggs
333 Clay Avenue, Suite 800
Houston, Texas 77002
Attention: N. L. Stevens, III
Facsimile: (703) 652-8808
PURCHASER: HARKEN ENERGY CORPORATION
2505 N. Highway 360, Suite 800
Grand Prairie, Texas 75050
Attention: Larry E. Cummings
Facsimile: (817) 652-4463
Any party may change its address for the purpose of this Agreement by
giving notice of such change to the other parties pursuant to the provisions of
this section. Any notice, demand or other communication sent by facsimile
shall be deemed given, in absence of proof to the contrary, upon receipt in a
legible form by the party being served.
(g) Legal Costs. The costs of legal counsel incidental
to the instructions for and the preparation and execution of this Agreement,
all counterparts thereof and all documents executed in connection therewith
shall be borne and paid by the parties who engaged such counsel or on whose
behalf such counsel was engaged.
(h) Governing Law; Jurisdiction and Venue. The terms and
interpretation of this Agreement shall be governed by the laws of the State of
Texas. In no event shall any Texas laws or principles of conflicts of law be
used to permit the laws of another jurisdiction to govern, nor to permit
jurisdiction or venue to be other than those specified herein. The courts of
the State of Texas shall have exclusive jurisdiction over any dispute related
to this Agreement.
(i) Amendments. No modification, variation or amendment
of this Agreement shall have any force or effect unless it is in writing and
signed by all the Parties. Unless the context otherwise so requires, a
reference to this Agreement shall include a reference to this Agreement as
modified, varied or amended from time to time.
(j) Powers of Attorney. If this Agreement is executed
for and on behalf of any of the parties by an attorney-in-fact, each attorney
so executing declares that at the time of execution of this Agreement, no
notice of the revocation of the power of attorney under the
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<PAGE> 20
authority of which he or she executes this Agreement has been received. A copy
of each such power of attorney shall be furnished to each other Party to this
Agreement upon request.
(k) Entire Agreement. This Agreement supersedes all
prior proposals, whether oral or written, and all previous negotiations and
understanding among Purchaser and Sellers with respect to the subject matter
hereof.
(l) Conflicts. In the event that the provisions of this
Agreement conflict with the provisions of the JOA or any other agreement or
instrument executed and delivered to effectuate the transactions contemplated
by this Agreement, the provisions of this Agreement shall prevail over all
others.
(m) Incorporation of Exhibits and Schedules. All
Exhibits and Schedules referred to herein are incorporated herein and made a
part of this Agreement for all purposes.
(n) Publicity. Sellers and Purchaser shall consult with
each other with regard to all press releases and other publicity issued at or
prior to the Closing concerning this Agreement or the transactions contemplated
hereby and, except as may be required by applicable laws or the applicable
rules and regulations of any governmental agency or stock exchange, neither
Purchaser nor Sellers shall issue any such press release or other publicity
without the prior written consent of the other party, which consent may be
withheld for any reason.
(o) Arbitration. If the parties are unable to resolve a
dispute arising under this Agreement, then such dispute shall be settled by
binding arbitration in Houston, Texas, before an independent and impartial
arbitrator. Any party may call for arbitration by written notice to the
others. If within twenty (20) days after receipt of such notice, the parties
are unable to agree upon an arbitrator, then any party may apply to the then
sitting Chief Judge of the United States District Court for the Southern
District of Texas requesting the appointment of an arbitrator. The arbitration
shall be governed by the United States Arbitration Act (9 U.S.C. Section
Section 1-16) and, except as contradicted by the United States Arbitration Act,
shall be conducted in accordance with the rules of the American Arbitration
Association then in effect, including, without limitation, the Code of Ethics
for Arbitrators in Commercial Disputes. The decision of the arbitrator on any
point or points will be final. Judgment may be entered upon any award rendered
by the arbitrator in any court having jurisdiction. Each party shall pay its
own costs of the arbitration, including attorneys' fees, preparation costs and
travel expenses. All other costs of arbitration, including the cost of the
arbitrator, shall be borne equally by the parties.
(p) Attorneys' Fees. If any litigation is commenced
between the parties concerning this Agreement, the party prevailing in such
litigation shall be entitled to the reasonable attorneys' fees and expenses of
counsel and court costs incurred by reason of such litigation.
EXECUTED this the 20th day of October, 1994, but effective for all
purposes as of the Effective Time.
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<PAGE> 21
SELLERS:
C.A.B. RESOURCES, INC., a Texas corporation
By: ____________________________________
N. L. Stevens, III, Attorney-in-Fact
CRUSADER, INC., a Delaware corporation
By: ____________________________________
N. L. Stevens, III, Attorney-in-Fact
AUSTRALIAN HYDROCARBONS INC.,
a Delaware corporation
By: ____________________________________
N. L. Stevens, III, Attorney-in-Fact
PURCHASER:
HARKEN ENERGY CORPORATION,
a Delaware corporation
By: ____________________________________
Larry E. Cummings, Vice President
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<PAGE> 22
SCHEDULE 2
RETAINED LIABILITIES
1. All finds, penalties, clean-up charges, remediation expenses
and assessments based on or attributable to the Sellers' interest in the
Properties levied or asserted by any local, state or federal government entity
or authority by reason of or arising from the clean-up or remediation of any
hazardous substances or any other environmental contamination that exists on or
at the Aneth Gas Plant as of the Effective Time, but only to the extent that
nay of the foregoing is not subject to indemnification by El Paso Natural Gas
Company.
2. All amounts, including interest, penalties and fines, levied
or asserted based on or attributable to the Sellers' Interest in the Properties
by reason of or arising from an investigation or audit by the Minerals
Management Service pending as of September 24, 1994 respecting the alleged
underpayment of royalties or other amounts payable to the Tribe under or
pursuant to the Tribal Agreements or the BIA Leases.
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<PAGE> 23
EXHIBIT "A"
Concession Properties
The Concession Properties shall include each Sellers Participating
Interest in the following (capitalized terms are defined in the Acquisition
Agreement):
(i) all gross proceeds from the sale to purchasers of Petroleum
produced from the Area pursuant to the 1987 Tribal Agreement
after the Effective Time, after deduction for the percentage
of gross proceeds payable to the Tribe pursuant to Section 15
of the 1987 Tribal Agreement;
(ii) all gross proceeds from the sale to purchasers of Petroleum
produced from the Area pursuant to the 1983 Tribal Agreement
and the 1984 Tribal Agreement after the Effective Date after
deduction for the percentage of gross proceeds payable to the
Tribe pursuant to Section 16 of the 1983 Tribal Agreement and
Section 15 of the 1984 Tribal Agreement; provided, however,
with respect to any wells on acreage covered by the
partnership agreements listed on Schedule 2 to the Acquisition
Agreement such gross proceeds shall be reduced to Sellers'
Partnership Share;
(iii) all other rights, titles, interests, benefits and privileges,
if any, whether real, personal or mixed, arising out of and
created by virtue of the Tribal Agreements, that Sellers are
permitted to assign pursuant to the terms and provisions of
the Tribal Agreements, including without limitation: (a) all
right, title and interest of Sellers in and to Petroleum
severed and extracted from or attributable to the Area; (b)
all right, title and interest of Sellers in and to (i)
accounts (including but not limited to accounts resulting from
the sale of Petroleum at the wellhead) and (ii) instruments,
contract rights and general intangibles arising in connection
with the -sale or other disposition of any Petroleum produced
from and after the Effective Date; and (c) all right, title
and interest of Sellers in and to the contracts, agreements,
easements and rights-of-way described on Exhibit "J" to the
Acquisition Agreement and (d) all right, title and interest of
Sellers in and to all other contracts, operating agreements,
farm-out or farm-in agreements, sharing agreements, mineral
purchase agreements, rights-of-way, easements, surface leases,
permits, franchises, licenses, pooling or unitization
agreements, unit designations and pooling orders affecting the
Area, the Operating Equipment or Petroleum produced from the
Area or which are useful or appropriate in drilling for,
producing, treating, handling, storing, transporting or
marketing Petroleum produced from the Area together with all
technical, scientific, geological and seismic data and all
other information of any kind whatsoever heretofore obtained
and accumulated by or on behalf of Sellers or that may be so
obtained and accumulated in the future in connection with
exploration for and production and development of Petroleum
from the Area;
<PAGE> 24
(iv) the Aneth Gas Plant (subject to Section 2(a) of the
Acquisition Agreement) and the Aneth Plant Revenues; and
(v) all of Sellers' right, title and interest in and to the
Operating Equipment.
<PAGE> 25
EXHIBIT "C"
ASSIGNMENT AND BILL OF SALE
(Concession Properties)
NAVAJO NATION )
)
STATE OF ARIZONA )
COUNTY OF APACHE )
)
STATE OF NEW MEXICO )
COUNTY OF SAN JUAN ) KNOW ALL MEN BY THESE PRESENTS:
)
STATE OF UTAH )
COUNTY OF SAN JUAN )
)
UNITED STATES OF AMERICA )
That, ____________________________________, a _____________
corporation whose address is __________________________ ("Assignor"), for and in
consideration of $10.00 and other good and valuable consideration in hand paid
to Assignor by HARKEN ENERGY CORPORATION, a Delaware corporation whose address
is 2505 N. Highway 360, Suite 800, Grand Prairie, Texas 75050 ("Assignee") has
transferred, sold, assigned and conveyed and by these presents does hereby, as
of August 1, 1994, transfer, sell, assign and convey unto Assignee, free and
clear of any and all mortgages, liens, pledges, security interests, charges,
claims, restrictions and encumbrances of any nature whatsoever created by,
through or under Assignor, but not otherwise, the following described
"Property":
All of Assignor's right, title and interest in and to:
1. (a) All gross proceeds from the sale to purchasers of (i)
casinghead gas and (ii) under the 1987 Tribal
Agreement (hereinafter defined), all oil, gas,
hydrocarbons, helium, nitrogen and other gas
resources and (iii) under the 1983 Tribal Agreement
and 1984 Tribal Agreement (hereinafter defined), all
oil, gas, helium, hydrocarbon and other gas resources
("Petroleum"), produced, obtained or secured from the
lands described in Exhibit "A" attached hereto and by
reference made a part hereof, as subsequently reduced
in accordance with the Tribal Agreements (as
hereafter defined), (the "Area") pursuant to the
following described "Tribal Agreements":
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<PAGE> 26
(1) Oil and Gas Operating Agreement dated July
28, 1983 by and between the Navajo Tribe of
Indians, as Owner, Chuska Energy Company
("Chuska"), as Operator (the "1983 Tribal
Agreement");
(2) Oil and Gas Operating Agreement dated
November 26, 1984 by and between the Navajo
Tribe of Indians, as Owner, and Chuska, as
Operator (the "1984 Tribal Agreement"); and
(3) Oil and Gas Operating Agreement dated
February 18, 1987 by and between the Navajo
Tribe of Indians, as Owner, and Assignor, as
Operator (the "1987 Tribal Agreement")
after deductions for the percentage of gross proceeds
payable to the Navajo Tribe of Indians pursuant to
Section 16 of the 1983 Tribal Agreement and Section
15 of the 1984 Tribal Agreement and the 1987 Tribal
Agreement; and
(b) all other rights, titles, interests, benefits and
privileges, if any, whether real, personal or mixed,
arising out of and created by virtue of the Tribal
Agreements, that Assignor is permitted to assign
pursuant to the terms and provisions of the Tribal
Agreements, including without limitation (i) all
right, title and interest of Assignor, if any, in and
to Petroleum severed and extracted from or
attributable to the Area; (ii) all right, title and
interest of Assignor in and to accounts (including
but not limited to accounts resulting from the sale
of Petroleum at the wellhead) instruments, contract
rights and general intangibles arising in connection
with the sale or other disposition of any Petroleum
produced from and after the effective date hereof;
and and (iii) all right, title and interest of
Assignor in and to all other, if any, contracts,
operating agreements, farm-out or farm-in agreements,
sharing agreements, mineral purchase agreements,
rights-of-way, easements, surface leases, permits,
franchises, licenses, pooling or unitization
agreements, unit designations and pooling orders
affecting the Area, the Operating Equipment
(hereinafter defined) or Petroleum produced from the
Area or which are useful or appropriate in drilling
for, producing, treating, handling, storing,
transporting or marketing Petroleum produced from the
Area together with all technical, scientific,
geological and seismic data and all other information
of any kind whatsoever heretofore obtained and
accumulated by or on behalf of Assignor and that may
be so obtained and accumulated in the future in
connection with exploration for and production and
development of Petroleum from the Area.
2. All of Assignor's right, title and interest in and to
operating equipment used in connection with the exploration
for and production of Petroleum under the Tribal Agreements.
The Assignee is acquiring its interest in such operating
equipment
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<PAGE> 27
regardless of whether such operating equipment has become
incorporated into or fixed to realty or structures or
improvements located therein or thereon.
3. The aggregate of all net revenues ("Aneth Plant Revenues")
that Assignor receives as a Plant Owner under the Plant
Ownership and Operating Agreement for the Aneth Gas Plant,
said Plant being more particularly described in Exhibit "B"
attached hereto and by reference made a part hereof, made and
entered into December 31, 1986 by and between Chieftain
International, Inc., Exxon Company U.S.A., Mobil Exploration
and Producing North America, Inc., and Texaco, Inc. (such four
entities hereafter the "Original Plant Owners"), as amended by
(a) a First Amendment to the Plant Ownership and Operating
Agreement for the Operating Agreement for the Aneth Gas Plant,
San Juan County, Utah, made and entered into May 31, 1987 by
and between the Original Plant Owners, and (b) Consent and
Ratification Agreement made and entered into December 21, 1987
by and between the Original Plant Owners and Assignor, and as
may have been subsequently amended. As used in this paragraph
3, the term "net revenues" means all revenues actually
received by Assignor less deductions for any and all
liabilities, losses, claims, causes of action, judgments,
damages, awards, fees, costs, expenses and attorneys fees
payable by the holder of Aneth Plant Revenues including
without limitation all applicable taxes, royalties, service
charges, rentals, capital contributions and costs of producing
the Aneth Plant Revenues.
This Assignment and Bill of Sale has been executed and delivered
pursuant to that certain Concession and Lease Purchase Agreement (the "Purchase
Agreement") dated effective August 1, 1994 by and among C.A.B. Resources, Inc.,
Crusader, Inc., Australian Hydrocarbons Inc. and Assignee and is made and
accepted subject to the Purchase Agreement and the following:
(1) the terms and provisions of the above referenced Concession
and Lease Purchase Agreement and all matters set forth therein
including without limitation that certain Joint Operations
Agreement, dated August 1, 1988, by and among Chuska Energy
Company, as Operator, and Assignor and others, as
Non-operators;
(2) liens for taxes, mechanics, laborers and materialmen arising
by operation of law to secure sums not yet delinquent or due
or being contested in good faith by appropriate action
promptly initiated and diligently conducted;
(3) Assignee shall not acquire by virtue of this Assignment and
Bill of Sale any operating rights under the Tribal Agreements;
provided, however, this paragraph shall not limit the
provisions of the Joint Operations Agreement; and
(4) the terms and provisions of the following "Partnership
Agreements" more particularly described on Schedule 2 of that
certain Concession Purchase Agreement dated August 1, 1988
among Chuska Energy Company, Assignor and others:
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<PAGE> 28
(a) the Agreements of Limited Partnership for Aneth No. 1
Ltd., Aneth No. 2 Ltd., Aneth No. 3 Ltd., Aneth
No. 3A Ltd., Aneth No. 6 Ltd., Aneth No. 7 Ltd.,
Aneth No. 8 Ltd. and Aneth No. 9 Ltd. insofar and
only insofar as such Agreements of Limited
Partnership pertain to the "Contract Areas" therein
described; and
(b) Agreement dated September 11, 1984 by and between
Chuska Energy Company and Trafalgar House Oil & Gas
Inc., insofar and only insofar as the Agreement
covers the properties and wells therein described.
TO HAVE AND TO HOLD the Property described above, together with all
and singular the rights and appurtenances thereto and anywise belonging unto
Assignee, its successors and assigns forever.
Notwithstanding anything herein to the contrary, Assignee hereby
assumes and shall pay, perform and discharge when due all liabilities and
obligations relating to the Property, other than the liabilities and costs set
forth on Schedule 2 attached hereto.
The only warranties made by Assignor in connection with this
Assignment and Bill of Sale are those contained in the Purchase Agreement and
any other warranties, express or implied, are hereby expressly excluded.
NOTWITHSTANDING ANYTHING TO THE CONTRARY, EXCEPT FOR THE SPECIAL WARRANTY OF
TITLE SET FORTH IN THE PURCHASE AGREEMENT, ASSIGNORS MAKE NO REPRESENTATIONS OR
WARRANTIES WITH RESPECT TO TITLE TO THE PROPERTY. ASSIGNORS HEREBY CONVEY THE
PROPERTY "AS IS, WHERE IS," WITHOUT ANY EXPRESS OR IMPLIED WARRANTIES OF ANY
KIND, INCLUDING WARRANTIES AS TO DESCRIPTION, VALUE, QUALITY, CONDITION,
MERCHANTABILITY OR FITNESS FOR A PARTICULAR PURPOSE.
For convenience of recording in the appropriate public records of the
Navajo Nation., Apache County, Arizona, San Juan County, New Mexico, San Juan
County, Utah and the United States of America, this Assignment and Bill of Sale
may be executed by the undersigned in multiple originals it being recognized
that all of such multiple originals, if any, shall comprise only one instrument
of conveyance.
EXECUTED this the 20th day of October, 1994, but effective as of the
1st day of August, 1994 at 7:00 C.S.T.
(NAME OF ASSIGNOR)
By: _________________________________
Name: _______________________________
Title: ______________________________
- 4 -
<PAGE> 29
THE STATE OF TEXAS )
)
COUNTY OF __________________ )
On the ______ day of ______________, 1994, personally appeared before
me, the undersigned authority, ___________________________ , who, being by me
duly sworn, did state and affirm that he is the attorney-in-fact of
____________________________________, a ______________ corporation, and that
the foregoing instrument was signed on behalf of said corporation by authority
of its board of directors and the said _________________________ acknowledged
to me that said corporation executed the same for the purposes and
considerations therein expressed
________________________________
Notary Public in and for
The State of _____________
________________________________________
Printed Name of Notary
My Commission Expires: _____________
- 5 -
<PAGE> 1
HUFFCO GROUP, INC.
1000 Louisiana, Suite 6700
Houston, Texas 77002
Harken de Colombia, Ltd.
2505 North Hwy. 360, Suite 800
Grand Prairie, Texas 75050
Attention: Richard H. Schroeder
Re: Alcaravan Contract Area
Gentlemen:
Huffco Group, Inc. ("Huffco") is pleased to submit a proposal
to acquire a 50% undivided interest in all of the rights of Harken de Colombia,
Ltd. ("Harken") in that certain Association Contract between Harken and Empresa
Colombiana de Petroleos ("Ecopetrol") dated effective February 13, 1993, as
amended by letter dated July 22, 1994 (as so amended, the "Contract") and in
and to the Alcaravan Contract Area in the Department of Casanare, Colombia (the
"Contract Area"). Once accepted by Harken by execution and return of a copy of
this letter, this letter shall constitute a binding agreement between Huffco
and Harken, subject to the conditions in paragraph 10 below. The terms of the
parties' agreement are as follows:
1. In consideration of Huffco's agreements contained
herein, Harken agrees to sell, assign and convey to Huffco, and Huffco agrees
to purchase and accept from Harken, effective as of August 1, 1994 (the
"Effective Date"), an undivided fifty percent (50%) of Harken's rights and
interest in the Contract, the Contract Area, and all related improvements,
equipment, contracts, data, records, licenses and permits (the "Assigned
Interest"). Harken shall execute and deliver to Huffco an instrument of
assignment in substance similar to Exhibit A attached hereto, with such changes
as the parties and their Colombian legal counsel may agree are reasonably
necessary or desirable (the "Assignment"), as promptly as possible after
Ecopetrol has approved the form of the Assignment (but in any case within 5
days thereafter).
2. In consideration of Harken's agreements contained
herein, Huffco agrees to
a. pay Harken U.S. $200,000 in reimbursement of
a portion of the costs previously incurred by Harken to perform the
seismic survey conducted during the first year of the Contract, and
<PAGE> 2
b. pay and bear 100% of the costs incurred by
the parties from and after the Effective Date for joint operations
pursuant to the terms of the Operating Agreement (as defined in
paragraph 6 below) ("Joint Account Costs") until the total Joint
Account Costs paid by Huffco pursuant to this paragraph 2.b equal $1.0
million or until the date of Huffco's notice of withdrawal pursuant to
paragraph 8 below, whichever occurs first. If Huffco does not
withdraw, Joint Account costs beyond the $1.0 million limit shall be
borne 50% by Huffco and 50% by Harken in accordance with the terms of
the Operating Agreement.
3. Huffco shall not be required to commence making
payments under paragraphs 2.a or 2.b until Ecopetrol and the Colombian Ministry
of Mines and Energy have approved the transfer of the Assigned Interest to
Huffco pursuant to the terms of the Contract and have approved the form of the
Assignment, and Huffco has received a duly executed copy of the Assignment from
Harken. Within three business days after satisfaction of these conditions,
Huffco shall make the payment required under paragraph 2.a above in
immediately-available funds, in U.S. dollars, to Harken's designated bank
account. Also following satisfaction of those conditions, Huffco shall
commence payments under paragraph 2.b above by the payment of monthly cash
calls and billings in accordance with the terms of the Operating Agreement.
All amounts billed or cash called shall be accompanied by detailed breakdowns
of costs as shall be called for under the terms of the Operating Agreement, and
copies of actual third party invoices shall be made available at Huffco's
request. The first monthly cash call under the Operating Agreement following
satisfaction of the conditions referenced above shall include Huffco's share of
all Joint Account Costs pursuant to paragraph 2.b since the Effective Date.
4. Harken represents and warrants to Huffco as follows:
a. Harken is a corporation duly organized,
validly existing and in good standing under the laws of the Cayman
Islands. Harken has full corporate power and authority to execute,
deliver and perform this letter, and the execution, delivery and
performance hereof have been duly authorized by all necessary
corporate action on the part of Harken.
b. The Contract is in full force and effect, and
no provision of the Contract has been amended, waived or terminated.
The Spanish language copy of the Contract furnished by Harken to
Huffco (receipt of which is hereby acknowledged by Huffco) is a true
and complete copy of the original, and there are no other agreements
between Harken and Ecopetrol or any agency of the Colombian government
regarding the Contract or the Contract Area.
c. Neither Harken nor, to Harken's knowledge,
Ecopetrol is in default under the Contract.
-2-
<PAGE> 3
d. Harken has to date expended at least $1.2
million for operations in connection with the Contract.
e. Harken has good and defensible title, free of
all encumbrances, to 100% of the "Associate's" interest in the
Contract.
f. There are no suits, actions or proceedings
pending, or to the knowledge of Harken, threatened, against Harken
before any court or governmental authority, which, if adversely
determined, would prevent the consummation of the transactions
contemplated by this letter.
g. No consents, approvals or waivers are
required to consummate the transactions contemplated by this letter
except the consent of Ecopetrol and the Colombian Ministry of Mines
and Energy under the terms of the Contract.
h. Harken has not directly or indirectly
employed any broker, finder or intermediary to whom Huffco shall have
any liability in connection with the transactions contemplated hereby.
i. Neither Harken nor any of its affiliates has
taken or directed any other person to take any action in connection
with the award, terms or continuation of the Contract, or with any
other aspect of operations under the Contract or in the Contract Area,
that would violate or create liability for either party under the
United States Foreign Corrupt Practices Act, 15 USC Sections 78dd-1
and 78dd-2.
5. Huffco represents and warrants to Harken as follows:
a. Huffco is a corporation duly organized,
validly existing and in good standing under the laws of Delaware,
U.S.A. Huffco has full corporate power and authority to execute,
deliver and perform this letter, and the execution, delivery and
performance hereof have been duly authorized by all necessary
corporate action on the part of Huffco.
b. Huffco has not directly or indirectly
employed any broker, finder or intermediary to whom Harken shall have
any liability in connection with the transactions contemplated hereby.
c. Huffco has the financial ability and
substance to carry out and bear the obligations that it will assume
pursuant to the terms of this letter.
6. Operations by Huffco and Harken under the Contract
shall be conducted pursuant to the terms of an operating agreement to be
negotiated and entered into by such parties promptly following the execution of
this letter (the "Operating Agreement"). The parties intend
-3-
<PAGE> 4
that the Operating Agreement be based upon the AIPN Model Form International
Operating Agreement and that it provide, among other things, for the following:
a. Harken will be appointed Operator;
b. In addition to any other grounds for removal,
the Operator may be removed by a vote of the majority of the
Non-Operators (i) if the Operator has committed a material breach of
the Operating Agreement and has failed to cure that breach within 90
days of notice or (ii) if Operator together with its affiliates holds
less than 20% of the Associate interest in the Contract. If any
Non-Operator holding at least 20% of the Associate interest offers to
provide services equivalent to those provided by Operator at a cost at
least twenty percent lower than that proposed by Operator, and the
offer is supported by specific designated reductions in line items in
the approved or proposed work program and budget, Operator will either
match those reductions or resign and vote to elect another party
agreeing to enact such reductions as successor Operator. In the event
any proposed cost savings could reasonably result in a materially
increased risk of loss to life or property, a materially increased
risk to the environment or higher premiums under insurance policies
carried for the Joint Account, Operator may refuse to adopt such
savings and need not resign from its position. If any non-Operator
disagrees with Operator's analysis of the risks associated with such
changes, then it may propose that the dispute be referred to
arbitration.
c. The Operator will bear no liability as a
result of being Operator except liability for the gross negligence or
willful misconduct of its supervisory personnel at the field level and
above. Gross negligence and willful misconduct will be objective
standards not dependent on the good faith or bad faith of the
Operator. In no event will the Operator be liable (beyond its
percentage interest) for environmental, consequential, punitive or
similar indirect damages.
d. Decisions will be made at Operating Committee
meetings by votes of two or more unaffiliated parties having at least
68% of the Associate interest, except that (i) Operator will be
permitted to make certain decisions regarding the conduct of the
minimum work program and mandatory relinquishments necessary to
satisfy the parties' obligations under the Contract in the event of a
deadlock and (ii) unanimous votes will be required for the voluntary
relinquishment of portions of the Contract Area, amendment or
termination of the Contract, and amendment or termination of the
Operating Agreement.
e. When a well has been drilled as proposed, the
Operator will make its recommendation as to subsequent operations.
Any Non-Operator may make an alternate proposal. In the event
multiple proposals are made, preference will be given in the following
priority: (i) additional testing; (ii) completion at the target
depth; (iii) deepening; (iv) sidetracking; (v) plugging back and
attempting completion at a shallower depth; (vi) other operations; and
(vii) plugging and abandonment.
-4-
<PAGE> 5
f. The Operator will be required to solicit
competitive bids for all contracts in excess of U.S. $150,000 and
shall obtain the approval of the Operating Committee for any contracts
awarded to affiliates.
g. The Operator will furnish and obtain
Operating Committee approval for AFEs for all operations (excluding
general and administrative activities) estimated to cost in excess of
U.S. $50,000.
h. The Operator will be entitled to make
emergency cash calls during a month if the Operator is required to pay
amounts exceeding U.S. $50,000 that were not foreseen at the time of
the regular monthly cash call.
i. The Operating Agreement will provide for
minimum levels of insurance coverage.
j. Wells, well bore operations and development
may be conducted as sole risk operations by fewer than all parties if
not approved as joint operations. Seismic and other geophysical data
gathering operations may not be conducted on a sole-risk basis (except
as part of a sole risk well or development and except that any party
may individually conduct a seismic program on the Contract Area at its
sole expense conditioned upon it agreeing to make such data available
to all parties for their use).
k. Parties not participating in exclusive (sole
risk) operations will be required to pay actual costs plus cash
premiums of 1500% to restore their rights in any operations in which
they fail to participate. The cash premiums will be payable by
separate letter agreement performable at a mutually-agreeable location
outside of Colombia. If a party fails to restore its rights in an
exploitation area at the time development is approved, that party will
be deemed to have forfeited all interest in the exploitation area.
l. Reimbursements from Ecopetrol pursuant to
Clause 9 of the Contract will be shared by the parties in proportion
to the reimbursable costs actually borne by or attributed under this
paragraph to each. For this purpose, each party will be considered to
have borne $1.2 million in reimbursable expenses at the time Huffco
satisfies its obligations under paragraph 2.b.
m. The Operator will furnish the representative
of the parties for the Executive Committee under the Contract and will
otherwise be the principal representative of the parties before
Ecopetrol and the Colombian Ministry of Mines and Energy. In such
roles, the Operator and its representative will act only in accordance
with the instructions of the Operating Committee. The Non-Operators
will be entitled to have personnel attend all meetings with Ecopetrol
and the Colombian Ministry of Mines and Energy except to the extent
those authorities determine otherwise.
-5-
<PAGE> 6
n. The Operator will only be entitled to charge
the Joint Account for amounts contained in approved Work Programs and
Budgets (as they may be amended by approved AFEs) or otherwise
authorized under the Operating Agreement and for overruns not to
exceed in the aggregate 12.5% of any individual line item and 5% of
the entire annual budget.
o. Any party will be entitled to withdraw at the
time the Work Program and Budget is approved for the following
calendar year or the time the parties must elect to Ecopetrol to
continue into the next Contract year, whichever comes first, from all
of the Contract Area except existing discoveries in which that party
has participated, and the withdrawing party will be relieved of
liability for subsequent minimum work programs for exploration under
the terms of the Contract.
p. Any obligation to sell or refine oil and/or
gas in the domestic Colombian market will be borne by the parties in
proportion to their shares of the production affected.
q. Any party will be entitled to elect not to
participate in any approved operation that can be conducted on a sole
risk basis.
r. A separate completion election will be made
for each well following receipt of the results of all approved tests.
s. The Operating Agreement will be governed by
the laws of Texas and disputes will be resolved pursuant to
arbitration in accordance with the Commercial Arbitration Rules of the
American Arbitration Association.
t. Each party will be free to assign all or a
part of its interest in the Contract and the Operating Agreement,
provided that the assignee is technically and financially competent
and that neither the assignor nor the assignee will be left with less
than a 10% Associate interest.
u. Each party will have a right of first refusal
to participate for its percentage interest share in any opportunity
obtained by any party to transport and market production from the
Contract Area for a term in excess of 180 days, subject to any
limitations that may be desirable to insure that the parties avoid
association status for U.S. tax purposes.
v. The Operator will be entitled to select the
statutory auditor for operations under the Contract. The
Non-Operators will have independent audit rights.
w. Overhead will be charged as set forth on the
Accounting Procedure attached hereto as Exhibit B. Manday rates
charged for timewriting employees under the
-6-
<PAGE> 7
Accounting Procedure shall be limited to the actual salary and bonus
of those employees and pro-rata employee benefit costs.
The parties agree that the Accounting Procedure attached hereto as Exhibit B
shall be used as the Accounting Procedure under the Operating Agreement.
In the event of a conflict between the provisions of this
letter and the provisions of the Operating Agreement, the provisions of this
letter shall prevail. Until the Operating Agreement has been executed by both
parties, all decisions and elections with respect to the Contract and Contract
Area arising after the date hereof must be approved by both Huffco and Harken.
7. The parties agree in advance that the first well to
be drilled under the Contract shall be a well on the El Mundo Neuvo prospect
(the "El Mundo Well"). The parties shall select the final well location
following evaluation of the reprocessing of seismic line HE-94-9 and the
modeling of seismic line HE-94-7. If line HE-94-9 clearly identifies a
structurally high position with a well-defined fault cut, the El Mundo Well
will be located between shot points 270 and 300 on that line. If line HE-94-7
contains the structural high location, the El Mundo Well will be located
between shot points 250 and 270 on that line. The parties also agree that the
seismic program required under the second year of the Contract shall consist of
25 km of seismic to be shot at a mutually agreeable location in the Contract
Area (the "Seismic Program"). Harken shall submit AFEs for both the El Mundo
well and the Seismic Program to Huffco under the terms of the Operating
Agreement promptly after execution of the Operating Agreement by the parties.
Unless the parties agree otherwise in writing or except in the event of an
emergency, they shall not conduct further operations chargeable to the Joint
Account under the Contract (except the Seismic Program) until the El Mundo Well
has been drilled and logged and copies of the logs have been distributed to the
parties, unless the well shall be abandoned before reaching objective depth by
the agreement of the parties as provided in the Operating Agreement.
8. Huffco may, by written notice to Harken, elect to
withdraw from the Contract and Operating Agreement (and, if applicable, the
Second Contract and the Second Operating Agreement (as defined below)) and
reassign its interests therein to Harken at any time during the 30 day period
following the completion of drilling and logging and receipt of the well logs
for the El Mundo Well or the abandonment of the El Mundo Well before reaching
objective depth by the agreement of the parties, whichever first occurs
("Casing Point"). Taxes, fees and similar costs charged by Ecopetrol and the
government of Colombia in connection with the approval of the reassignment or
for related filings, notarizations and the like shall be borne by Huffco.
Huffco shall have no liability for costs incurred following its withdrawal,
including without limitation costs for any remaining minimum work program under
the Contract (and Second Contract) and any remaining work program and budget
approved under the Operating Agreement (and Second Operating Agreement), other
than costs to plug and abandon the El Mundo Well if it is not completed for
production and any remaining costs of the Seismic Program and (if applicable)
the Second Contract Work Program. In the event of its withdrawal under this
-7-
<PAGE> 8
paragraph 8, Huffco shall not be liable for its share of any Seismic Program
costs in connection with the Contract that exceed $175,000 or such other amount
as the parties may subsequently mutually agree. Once the Seismic Program has
been completed (and, if applicable, the El Mundo Well has been plugged and
abandoned), Harken shall send Huffco a statement showing all Joint Account
Costs paid by Huffco pursuant to paragraph 2.b and this paragraph 8. Within 30
days after receipt of the statement, Huffco shall pay to Harken in immediately
available funds the amount remaining, if any, after subtracting from U.S.
$1,000,000 all such amounts previously paid by Huffco. Neither Huffco nor
Harken shall withdraw from the Contract and Operating Agreement prior to Casing
Point.
9. Huffco shall have a right of first refusal to acquire
an undivided fifty percent (50%) interest in any association contract or
similar agreement that Harken or its affiliates acquire within 180 days from
the date of this letter that includes any acreage that is contiguous to the
Contract Area (the "Second Contract"). Should Harken or any affiliate desire
to acquire such a contract, it shall first send notice to Huffco describing the
contract terms. Huffco shall have ten (10) days from receipt of notice to
elect to join in the Second Contract as an original party (or as an assignee if
so required by Ecopetrol) and to bear 50% of any costs of application and of
any mandatory first year work program required by the Second Contract (the
"Second Contract Work Program"). If the parties both acquire interests in the
Second Contract, they shall enter into an operating agreement with respect to
the Second Contract in substantially the form of the Operating Agreement (the
"Second Operating Agreement").
10. Neither Huffco nor Harken may assign, pledge,
encumber or otherwise transfer all or any part of its rights and obligations in
the Contract and the Operating Agreement prior to Casing Point, except that
Huffco may transfer its entire interest to an affiliate (but will remain liable
following such a transfer). After Casing Point, either party may assign all or
any part of its rights and obligations, subject to the terms of the Contract
and the Operating Agreement.
11. Promptly after the execution of this letter, Harken
shall furnish Huffco with copies of all data in its or its affiliates'
possession, including without limitation geological and geophysical data, that
relates to the Contract Area, except data that it is prohibited from disclosing
by law or third party agreement. To the extent possible, Harken shall
reproduce such data in-house at its cost. If Harken cannot reproduce any data
in-house without undue burden, it shall be deemed to have satisfied its
obligations under this paragraph 11 if it so notifies Huffco and offers to have
such data reproduced by a third party at Huffco's expense. If this letter is
terminated pursuant to paragraph 12, Huffco shall promptly return data received
under this paragraph 11 to Harken.
12. The obligations of the parties under this letter,
except those obligations in paragraphs 13, 15, 16 and 17, shall be subject to
receipt of the approval by Ecopetrol and of the Colombian Ministry of Mines and
Energy of the transfer of the Assigned Interest to Huffco under the terms of
the Contract and of the form of the Assignment. As soon as reasonably possible
-8-
<PAGE> 9
following execution of this letter, Harken shall submit a certificate to
Ecopetrol and the Colombian Ministry of Mines and Energy requesting approval of
the transfer of the Assigned Interest and shall diligently pursue approval
thereafter. Following the receipt of such approval, the parties shall submit
the form of the Assignment for approval and shall diligently pursue approval
thereafter. If Ecopetrol or the Colombian Ministry of Mines and Energy should
fail to approve the transfer of the Assigned Interest and the form of
Assignment within 45 days after the date of this letter, then Huffco may, at
its option, terminate this letter, except paragraphs 13, 15, 16 and 17, at any
time prior to receipt of such approvals by written notice to Harken. In
addition, the obligations of Harken under this letter shall be subject to
Huffco's commencement of payment under paragraphs 2.a and 2.b within 45 days
after the date of this letter. If Huffco has not commenced payment by that
date, then, notwithstanding whether the conditions in paragraph 3 have been
satisfied, Harken may, at its option, terminate this letter, except paragraphs
13, 15, 16 and 17, at any time prior to Huffco's commencement of payment by
written notice to Huffco. Furthermore, the obligations of Huffco under this
letter shall be subject to receipt of the executed Assignment on or before the
date due, failing which Huffco may, at its option, terminate this letter
(except paragraphs 13, 15, 16 and 17) at any time prior to receipt of the
executed Assignment by written notice to Harken.
13. Each party shall pay its own legal fees and other
costs and expenses (including income or profits taxes, if any) incurred by it
in connection with the transactions contemplated by this letter. The parties
shall each bear one-half of any taxes (other than income or profits taxes),
fees or similar costs charged by Ecopetrol or the government of Colombia in
connection with the approval of the Assignment (and any assignment of interest
in the Second Contract to Huffco) or for related filings, notarizations and the
like.
14. The representations and warranties in paragraphs 4
and 5 above shall survive the execution and delivery of the Assignment and the
satisfaction of Huffco's obligations under paragraph 2.
15. This letter shall be construed in accordance with,
and the rights and obligations of the parties governed by, the laws of the
State of Texas, U.S.A. Each party consents to be subject to the jurisdiction
of the courts of Texas for the limited purpose of the enforcement of this
letter.
16. It is not the intention of the parties to create, nor
shall this letter be construed as creating, a mining or other partnership or
other association or otherwise render the parties liable as partners. The
liability of the parties hereto shall be several and not joint or collective.
17. Unless otherwise specifically provided, all notices
under this letter shall be given in writing and in the English language and
shall be delivered in person or sent by courier service, telex or telecopier to
each party at the address given below. Notice shall be deemed given only when
received by the party to whom such notice is directed.
-9-
<PAGE> 10
Huffco Group, Inc.
First Interstate Bank Plaza
1000 Louisiana, Suite 6700
Houston, Texas 77002
Attention: David A. Trice
Telecopy: (713) 651-0119
Harken de Colombia, Ltd.
2505 North Hwy. 360, Suite 800
Grand Prairie, Texas 75050
Attention: Larry E. Cummings
Telecopy: (817) 652-4463
Either party may change its address for notice by delivering notice to the
other in the manner provided for above.
18. This letter (including the Exhibits) constitutes the
entire understanding of the parties with respect to the subject matter hereof
and supersedes any prior agreements, whether written or oral. This letter may
be amended only in a writing signed by both parties.
19. This letter shall be binding upon and inure to the
benefit of the parties and their respective permitted successors and assigns.
20. Each party agrees to execute and deliver such further
documents and take such further actions as the other may reasonably request to
consummate and assure the effectiveness of the transactions contemplated by
this letter.
21. This letter may be executed in any number of
counterparts, and by different parties in separate counterparts, all of which
shall be considered to be one agreement.
-10-
<PAGE> 11
If the foregoing accurately sets forth your understanding,
please execute two originals of this letter in the space provided below, retain
one fully executed original for your files, and return the other to the
undersigned. This proposal will expire unless a signed copy is received by the
undersigned on or before 5:00 p.m. on Wednesday, September 14, 1994.
Very truly yours,
HUFFCO GROUP, INC.
By:_____________________________
AGREED TO AND ACCEPTED
THIS ____ DAY OF __________, 1994
HARKEN DE COLOMBIA, LTD.
By:_______________________________________
-11-
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<ARTICLE> 5
<S> <C>
<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> DEC-31-1994
<PERIOD-START> JAN-01-1994
<PERIOD-END> SEP-30-1994
<CASH> 3,140,000
<SECURITIES> 931,000
<RECEIVABLES> 1,590,000
<ALLOWANCES> 1,214,000
<INVENTORY> 0
<CURRENT-ASSETS> 5,746,000
<PP&E> 25,633,000
<DEPRECIATION> 7,238,000
<TOTAL-ASSETS> 33,949,000
<CURRENT-LIABILITIES> 4,691,000
<BONDS> 0
<COMMON> 654,000
1,868,000
0
<OTHER-SE> 26,659,000
<TOTAL-LIABILITY-AND-EQUITY> 33,949,000
<SALES> 2,817,000
<TOTAL-REVENUES> 3,446,000
<CGS> 991,000
<TOTAL-COSTS> 991,000
<OTHER-EXPENSES> 3,566,000
<LOSS-PROVISION> 250,000
<INTEREST-EXPENSE> 68,000
<INCOME-PRETAX> (1,429,000)
<INCOME-TAX> 0
<INCOME-CONTINUING> (1,429,000)
<DISCONTINUED> (221,000)
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (1,650,000)
<EPS-PRIMARY> (0.03)
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