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SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K
/X/ ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(D)
OF THE SECURITIES EXCHANGE ACT OF 1934
FOR THE FISCAL YEAR ENDED DECEMBER 31, 1993
/ / TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(D)
OF THE SECURITIES EXCHANGE ACT OF 1934.
FOR THE TRANSITION PERIOD FROM ________ TO ________
COMMISSION FILE NUMBER 0-9207
HARKEN ENERGY CORPORATION
(Exact name of registrant as specified in its charter)
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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)
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Registrant's telephone number, including area code (817) 695-4900
Securities registered pursuant to Section 12(b) of the Act:
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Title of each class: Name of each exchange on which registered:
COMMON STOCK, PAR VALUE $0.01 PER SHARE AMERICAN STOCK EXCHANGE
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Securities registered pursuant to Section 12(g) of the Act: NONE
INDICATE BY CHECK MARK WHETHER THE REGISTRANT (1) HAS FILED ALL REPORTS
REQUIRED TO BE FILED BY SECTION 13 OR 15(D) OF THE SECURITIES EXCHANGE ACT OF
1934 DURING THE PRECEDING 12 MONTHS (OR FOR SUCH SHORTER PERIOD THAT THE
REGISTRANT WAS REQUIRED TO FILE SUCH REPORTS), AND (2) HAS BEEN SUBJECT TO SUCH
FILING REQUIREMENTS FOR THE PAST 90 DAYS. YES X No
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INDICATE BY CHECK MARK IF DISCLOSURE OF DELINQUENT FILERS PURSUANT TO ITEM
405 OF REGULATION S-K IS NOT CONTAINED HEREIN, AND WILL NOT BE CONTAINED, TO THE
BEST OF REGISTRANT'S KNOWLEDGE, IN DEFINITIVE PROXY INFORMATION STATEMENTS
INCORPORATED BY REFERENCE IN PART III OF THIS FORM 10-K OR ANY AMENDMENT TO THIS
FORM 10-K. /X/
The aggregate market value of the voting Common Stock, par value $0.01 per
share, held by nonaffiliates of the Registrant as of February 28, 1994 was
approximately $44,637,000. For purposes of the determination of the above stated
amount only, all directors, executive officers and 5% or more shareholders of
the Registrant are presumed to be affiliates.
The number of shares of Common Stock, par value $0.01 per share,
outstanding as of February 28, 1994 was 59,482,853.
DOCUMENTS INCORPORATED BY REFERENCE: PROXY STATEMENT TO BE FILED ON OR
BEFORE APRIL 30, 1994 IS INCORPORATED BY REFERENCE INTO PART III.
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TABLE OF CONTENTS
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PART I.
ITEM 1. Business............................................................... 3
ITEM 2. Properties............................................................. 10
ITEM 3. Legal Proceedings...................................................... 10
ITEM 4. Submission of Matters to a Vote of Security Holders.................... 11
PART II.
ITEM 5. Market for Registrant's Common Equity and Related Stockholder
Matters................................................................ 11
ITEM 6. Selected Financial Information and Other Data.......................... 12
ITEM 7. Management's Discussion and Analysis of Financial Condition and
Results of Operations.................................................. 13
ITEM 8. Financial Statements and Supplementary Data............................ 20
ITEM 9. Changes in and Disagreements with Accountants on Accounting and
Financial Disclosure................................................... 48
PART III.
ITEM 10. Directors and Executive Officers of the Registrant..................... 48
ITEM 11. Executive Compensation................................................. 48
ITEM 12. Security Ownership of Certain Beneficial Owners........................ 48
ITEM 13. Certain Relationships and Related Transactions......................... 48
PART IV.
ITEM 14. Exhibits, Financial Statement Schedules and Reports on Form 8-K........ 48
SIGNATURES............................................................................ 50
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PART I
ITEM 1. BUSINESS
OVERVIEW
Harken Energy Corporation and its subsidiaries ("Harken") is engaged in oil
and gas exploration, development and production operations both domestically and
internationally through its various wholly-owned subsidiaries and joint venture
investments. Harken's domestic operations include the well servicing operations
of Supreme Well Service Company ("Supreme") and the oil and gas exploration and
production operations of Chuska Resources Corporation ("Chuska"), which was
acquired February 15, 1993. Harken's international operations include two
exclusive Colombian Association Contracts between Harken's wholly-owned
subsidiary, Harken de Colombia, Ltd., and Empresa Colombiana de Petroleos
("Ecopetrol") as well as a production sharing agreement between Harken's
wholly-owned subsidiary, Harken Bahrain Oil Company, and the Bahrain National
Oil Company. Harken's international operations currently consist solely of
exploration activities, however, management is continuing to pursue
international opportunities in all areas of Harken's operations, including
oilfield services and oil and gas exploration and development. Harken considers
that the opportunities to profitably deploy Harken's expertise and assets
internationally are generally greater than those available domestically.
Harken was incorporated in 1973 in the state of California and
reincorporated in 1979 in the state of Delaware. Harken's principal offices are
located at 2505 N. Highway 360, Suite 800, Grand Prairie, Texas 75050 and its
telephone number is (817) 695-4900.
INTERNATIONAL EXPLORATION OPERATIONS
Alcaravan Contract -- During the third quarter of 1992, Harken, through a
subsidiary, Harken de Colombia, Ltd., was awarded the exclusive right to explore
for, develop and produce oil and gas throughout approximately 350,000 acres
within the Alcaravan area ("Alcaravan") of Colombia. Alcaravan is located in
Colombia's Llanos Basin and is located approximately 140 miles east of Santafe
de Bogota. Harken and Ecopetrol have entered into an Association Contract
("Alcaravan Contract") which requires Harken to conduct a seismic and
exploratory drilling program in the Alcaravan area ("work program") over the
initial six (6) years. At the end of each of the six years in the work program,
Harken has the option to withdraw from the Alcaravan Contract or to commit to
the next year's work requirements. If Harken makes a commercial discovery of oil
and/or gas which is approved by Ecopetrol, the standard terms of the Alcaravan
Contract will apply. Such terms provide for Ecopetrol to reimburse Harken for
50% of its successful well costs expended up to the point of commercial
discovery and to receive a 20% royalty interest and for both Ecopetrol and
Harken to each have a 50% working interest. The term of the Alcaravan Contract
will extend twenty-two (22) years from the date of any commercial discovery of
oil and/or gas. Harken reprocessed in excess of 200 kilometers of seismic on the
Alcaravan area and completed the acquisition of 52 kilometers of new seismic
over prospective areas in mid-February 1994. Harken is currently carrying on
discussions with potential joint venture partners regarding potential drilling
on the Alcaravan area.
Bocachico Contract -- In January 1994, Harken announced that Harken de
Colombia, Ltd. had signed its second Association Contract ("Bocachico Contract")
with Ecopetrol, covering the Bocachico contract area. Under the Bocachico
Contract, Harken has acquired the exclusive rights to conduct exploration
activities and drilling on this area, which covers approximately 192,000 acres
in the Middle Magdelena Valley of Central Colombia.
During the first year of the Bocachico Contract, Harken will conduct
seismic activities on the land covered by this contract including reprocessing
of at least 250 kilometers of existing seismic data and the acquisition of at
least 35 kilometers of new seismic data. During each of the 2nd through the 6th
contract years Harken may elect to continue the contract by committing to the
drilling of at least one well during each contract year. During this initial six
year term, called the Exploration Period under the Bocachico Contract, if Harken
has discovered the existence of commercial production in the Bocachico Contract
area, the Bocachico Contract will be further extended for a period of 22 years
from the date of any commercial discovery of oil
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and/or gas. If Harken makes a commercial discovery of oil and/or gas which is
approved by Ecopetrol, the standard terms of the Bocachico Contract will apply.
Such terms provide for Ecopetrol to reimburse Harken for 50% of its successful
well costs expended up to the point of commercial discovery and to receive a 20%
royalty interest and for both Ecopetrol and Harken to each have a 50% working
interest.
In addition to reprocessing and acquiring seismic data during the first
contract year of the Bocachico Contract, Harken intends to also conduct
engineering studies to evaluate the potential for recovering existing oil
reserves in the Rio Negro area, which is located in the northern portion of the
Bocachico Contract area. Three wells were drilled, produced and subsequently
abandoned by another contractor approximately 30 years ago in this area, which
have provided information and data including production rates, well logs and
pressure tests. This well data will be utilized by Harken in such studies to
evaluate the feasibility of applying modern production and recovery techniques
in this area. Harken has not made any determination at this point as to the
recoverability of reserves which may be indicated in this area.
Bahrain Operations -- In January 1990, Harken, through its wholly-owned
subsidiary, Harken Bahrain Oil Company ("HBOC"), entered into a production
sharing agreement with the Bahrain National Oil Company ("BANOCO") which gave it
the exclusive right to explore for, develop and produce oil and gas throughout
most of Bahrain's Arabian Gulf offshore territories. Subject to the discovery
and development of oil and/or gas, the contract has a term of thirty-five years.
The agreement, as amended, called for HBOC to drill an exploratory well to test
the Permian Khuff formation (estimated depth 14,275 feet) within 2 1/2 years of
the signing of the contract. Under the original terms of the agreement, as
amended, in order for HBOC to earn all of its acreage rights, four exploratory
wells were required to be drilled by 1995.
In July 1990, Bass Enterprises Production Company ("BEPCO") entered into a
joint venture agreement with HBOC and agreed to participate with HBOC in the
exploration and development contemplated under HBOC's production sharing
agreement, subject to certain conditions. Under the terms of this agreement,
BEPCO committed to fund, at a minimum, the first three exploratory wells. After
drilling the initial three wells, BEPCO held the option to either withdraw from
the project and forfeit all rights under the agreement or fund additional
drilling activities. If BEPCO had elected to fund certain additional drilling
activities, BEPCO would have thereby earned a fifty percent interest in HBOC's
rights, title and interests under the production sharing agreement, and after
recovering its previous drilling and related costs, would have been entitled to
share equally with HBOC in any profits.
HBOC has identified several surface and subsurface structures within the
contract area. One significant prospect within the area is called the Jarim Reef
and is located on trend between Bahrain's onshore Awali field and Saudi Arabia's
nearby offshore Abu Safah field. The first well required under HBOC's production
sharing agreement was the Jarim No. 2 located to test the seismic structure
mapped on Jarim Reef. Jarim No. 2 was thought to be prospective in both the
Jurassic Arab formation for oil and the Permian Khuff formation for gas. In
March 1992, after drilling was completed, HBOC announced that the Jarim No. 2
well was not productive of either oil or gas and was abandoned. On December 28,
1992, Harken commenced the drilling of its second exploratory well, the Muharraq
No. 1, in Bahrain. Harken announced on February 10, 1993, that the well had
reached a depth of 8,778 feet and that no shows of oil and gas were noted in the
well cuttings of the Jurassic Arab or the Jurassic Fadhili formation. As a
result, the well was plugged and abandoned at the foregoing depth. Further,
under the terms of the production sharing agreement, HBOC allowed its
exploration and drilling rights on approximately 10% of the acreage covered by
the production sharing agreement to expire, effective February 13, 1993. Later,
during the third quarter of 1993, HBOC allowed an additional portion of the
acreage covered by the production sharing agreement to expire effective August
29, 1993. HBOC's remaining obligation under the production sharing agreement is
limited to reprocessing 500 kilometers of seismic prior to July 30, 1995.
On April 8, 1993, HBOC and BEPCO entered into an agreement whereby BEPCO
was released and discharged from any future drilling obligations related to
HBOC's production sharing agreement, and the joint venture agreement between
HBOC and BEPCO was terminated. As part of this agreement, BEPCO paid to HBOC
approximately $2,000,000 plus all remaining costs and obligations related to the
Muharraq No. 1 well along with certain other costs and contingencies. HBOC's
production sharing agreement with BANOCO was
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not impacted as a result of the termination of this joint venture agreement.
HBOC is continuing to pursue discussions with various other parties in joining
HBOC to pursue continuing operations on the remaining acreage which HBOC
continues to hold.
DOMESTIC EXPLORATION AND PRODUCTION OPERATIONS
Prior to 1993, Harken's exploration and production operations were
primarily in Oklahoma and Texas, and during 1991 and 1992 these operations were
conducted through Harken's interest in Harken Anadarko Partners, L.P., ("HAP"),
a limited partnership managed by a wholly-owned subsidiary of Harken. As general
partner of HAP, Harken's wholly-owned subsidiary received a monthly management
fee from the partnership. An affiliate of a major stockholder of Harken served
as sole limited partner.
On December 17, 1992, Harken entered into a Purchase and Sale Agreement
(the "HAP Agreement") pursuant to which Harken sold its 12% general partner's
interest in HAP to an affiliate of both the limited partner and the major
stockholder. The closing of the HAP Agreement was completed on December 30,
1992. Pursuant to the HAP Agreement, Harken was paid consideration in cash of
$2,650,000 for the sale of this partnership interest and certain contract rights
associated therewith. Under the terms of the Agreement, Harken continued to
manage the oil and gas property interests of HAP and operate certain partnership
properties. Harken was paid $50,000 per month to manage the HAP interest in such
properties in addition to the fees it received for serving as operator of the
properties pursuant to applicable joint operating agreements. During the second
quarter of 1993, HAP sold its interests in all oil and gas properties operated
by Harken and Harken ceased to manage the partnership.
Chuska -- Effective February 15, 1993, Harken consummated a merger pursuant
to which Chuska became a wholly-owned subsidiary of Harken. Harken acquired all
of the 11,055,918 shares of Chuska common stock outstanding in exchange for
14,210,357 shares of newly-issued Harken common stock. The Board of Directors of
both Harken and Chuska approved the Merger as described in the Merger Agreement,
and the necessary approvals by the stockholders of both Harken and Chuska were
obtained at special meetings of stockholders which were held by each company on
February 15, 1993. In addition, each of the Boards of Directors of Chuska and
Harken received a fairness opinion from a financial advisor that the Exchange
Ratio was fair to the holders of Chuska common stock and the holders of Harken
common stock from a financial point of view. The Boards of Directors of Harken
and Chuska received such opinion on January 13, 1993. The registration statement
(including the prospectus/joint proxy statement for the special meeting of
stockholders of each company) covering the shares of Harken common stock to be
issued pursuant to the Merger Agreement was declared effective by the SEC on
January 15, 1993.
In connection with the merger, Harken agreed to pay the financial advisor,
Howard, Weil, Labouisse, Friedrichs Incorporated ("Howard Weil"), a total of
50,000 shares of restricted Harken common stock for its services in connection
with rendering a fairness opinion to the Harken Board of Directors relating to
the merger, such shares to be issued upon the consummation of the merger
transaction. Chuska paid Howard Weil a cash fee in connection with rendering the
fairness opinion to its Board of Directors.
Chuska is engaged, through its subsidiaries, in the business of exploring
for and producing oil and gas in the Aneth Field and Blanding Sub-Basin portions
of the Paradox Basin in Utah, Arizona and New Mexico, and in the Western Paradox
Basin in Utah. Chuska's operations in the Paradox Basin are primarily
concentrated on the 16 million acre Navajo Indian Reservation (the
"Reservation"), which comprises portions of Arizona, New Mexico and Utah. In
addition to its oil and gas exploration activities, Chuska also has an interest
in a gas processing plant in or near the Paradox Basin, the Aneth Gas Plant, on
the Utah portion of the Reservation.
Chuska currently has two operating agreements (the "Tribal Agreements")
with the Navajo Tribe of Indians (the "Tribe" or the "Navajo Nation") allowing
oil and gas exploration and development on an aggregate 53,430 acres of Navajo
tribal lands on the Reservation (the "Tribal Lands"). Chuska has the right to
explore for, produce, and sell oil, natural gas, and other specified gases until
July 20, 2012, under the Tribal Agreement effective July 20, 1987 (the "1987
Tribal Agreement") and until August 26, 2003, under the Tribal Agreement
effective August 26, 1983 (the "1983 Tribal Agreement"). Any acreage under the
1987
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Tribal Agreement which is not held by production as of July 1995, will expire.
All non-productive acreage under the 1983 Tribal Agreement has previously
expired.
The Navajo Nation receives 30% of gross revenues from the sale of
production of oil and gas under the 1983 Tribal Agreement and 20% under the 1987
Tribal Agreement (this 20% is subject to an increase to 23% with respect to each
barrel of oil sold for more than $22 after July 1994). Under both Tribal
Agreements, the Tribe is entitled to receive an escalated 50% of all gross
proceeds recovered over $35 per barrel of oil. Under the 1983 Tribal Agreement,
the Tribe receives 50% of all gross proceeds over $4 per MCF of gas. Under the
1987 Tribal Agreement, the Tribe receives 40% of all gross proceeds over $8 per
MCF of gas.
In addition to the Tribe's share of gross proceeds, designation
consideration and delay rentals, Chuska pays severance tax and possessory
interest tax ("PIT") to the Tribe. The severance tax is payable monthly and is
4% of Chuska's gross proceeds from sales of oil and gas, after deducting the
Tribe's share of gross proceeds. The PIT is assessed once a year and is
calculated as a specified percentage of a defined discounted present value of
projected future cash flows (net of the Tribe's share of gross proceeds) from
existing proven reserves as of January 1 of the year for which the PIT is
assessed, although the Tribe actually retains title to those reserves. The PIT
is payable in two installments. Chuska is also required to pay the Tribe land
damage costs relating to Chuska's seismic and drilling activities.
CHAP Venture -- In order to develop the Tribal Lands, Chuska sold an
undivided 50% interest in gross proceeds under the Tribal Agreements to Amadeus
Petroleum, Inc., Bligh Petroleum, Inc., Crusader, Inc., C.A.B. Resources, Inc.
(an affiliate of Crusader, Inc.), Australian Hydrocarbons, Inc., Jindavik
Petroleum, Inc., and Paroo Petroleum (USA), Inc. (collectively the "Australian
Group") effective August 1, 1988, and formed the CHAP Venture. CHAP is not a
legal entity, although it is a tax partnership. Effective March 1, 1990, Chuska
sold 20% of its CHAP interest to Global Natural Resources Corporation of Nevada
("Global"), which interest was repurchased by Chuska effective January 1, 1993,
resulting in Chuska again holding a 50% total interest in CHAP.
Each CHAP co-venturer pays its respective participating interest share of
costs and expenses and receives its participating interest share of revenues.
Chuska is the operator for CHAP and communicates with and makes proposals to an
Operating Committee composed of Chuska representatives and a representative of
each of the non-operators. As operator, Chuska is reimbursed by CHAP for
indirect costs incurred on behalf of CHAP or in the pursuit of CHAP activities.
Greater Blanding -- During 1991, a venture between Sunfield Energy Company
("Sunfield", a wholly-owned subsidiary of Chuska), Amadeus Petroleum, Inc.,
Bligh Petroleum, Inc., and Jindavik Petroleum, Inc., was formed to explore and
develop properties in a portion of the Blanding Sub-Basin designated internally
as the "Greater Blanding" project. The venture has no separate legal status or
existence except as a tax partnership. Sunfield is the operator of the venture,
and all costs and expenses of the venture are borne and paid by, and all
property, revenues and other benefits are to be allocated to and owned by, each
venturer in the ratio of its respective participating working interest; however,
the three non-Sunfield parties agreed to carry $600,000 of qualifying capital
expenditures allocable to Sunfield in connection with the Greater Blanding
project and/or the Central Blanding project (see "Central Blanding" below).
Sunfield owns a 60% interest in the Greater Blanding project.
In connection with the operation of the Greater Blanding venture, Sunfield
is reimbursed for direct and indirect costs incurred on behalf of the venture.
The area termed Greater Blanding includes an area of mutual interest (AMI) north
of the Navajo Reservation area being explored by Chuska pursuant to the Tribal
Agreements.
Central Blanding -- During 1991, a venture between Sunfield, Global,
Amadeus Petroleum, Inc., Bligh Petroleum, Inc., and Jindavik Petroleum, Inc. was
formed. During 1992, a 10% interest in the venture was assigned from Global to
Holly Petroleum. The venture has no separate legal status or existence except as
a tax partnership. Sunfield is the operator of the venture, and all costs and
expenses of the venture are borne and paid by, and all property, revenues and
other benefits are to be allocated to and owned by each venturer in the ratio of
its respective participating working interest. The Global interest was
repurchased by Sunfield effective January 1, 1993, resulting in Sunfield holding
a 70% total interest in the Central Blanding venture.
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In connection with the operation of the Central Blanding venture, Sunfield
is reimbursed for direct and indirect costs incurred on behalf of the venture.
The area termed Central Blanding includes an area of mutual interest (AMI) north
of the area of the Navajo Reservation being explored by Chuska pursuant to the
Tribal Agreements. There is no overlap between the Greater Blanding AMI and the
Central Blanding AMI.
Western Paradox -- During 1991, Sunfield began the acquisition of acreage
for an oil and gas exploration project in a portion of central Utah northwest of
the Greater Blanding and Central Blanding projects. Subsequent to December 31,
1993, Sunfield has entered into a seismic sharing agreement with an industry
partner to begin geophysical and exploration efforts in the Western Paradox
area.
WELL SERVICING OPERATIONS
Harken formed Harken International, Ltd. ("HIL") as a wholly owned
subsidiary whose major domestic assets are 100% of the outstanding stock of
Burns Drilling Company, Inc. ("Burns"), a contract drilling subsidiary, and
Supreme, a well servicing subsidiary.
Supreme provides services to oil and gas exploration and production
companies for the maintenance and workover of existing oil and gas wells and the
completion of newly drilled wells. Supreme generally provides the well servicing
rig, the crew to operate it and other auxiliary equipment as needed. Supreme was
operating 12 workover and swab rigs in Texas at December 31, 1993. The well
servicing operations are affected by the same seasonal operational trends as the
contract drilling business as well as by weather conditions.
CONTRACT DRILLING OPERATIONS
In April 1991, Harken made the decision to suspend domestic contract
drilling operations due to decreased demand and increased competition,
particularly in the Austin Chalk trend in South Texas. In December 1991, HIL
made the decision to attempt to sell certain of its drilling rigs and related
domestic assets which are not suitable for the pursuit of international drilling
opportunities. As a result of its decision to sell certain of its drilling rigs
and related domestic assets, Harken recognized a non-cash charge of $7.1 million
to fourth quarter 1991 operations to decrease the carrying value of those
assets. All remaining contract drilling rigs were idle at December 31, 1992 and
1993.
In January 1994, Harken made the decision to liquidate its remaining
drilling rigs and related assets and apply the proceeds primarily to its
international exploration efforts, specifically in Colombia and Bahrain. As a
result of this decision, Harken recognized an additional non-cash charge of
approximately $3,100,000 during the fourth quarter of 1993.
INDUSTRY RISKS
Price Volatility. The revenues generated by Harken are highly dependent
upon the prices of oil and gas. The currently unsettled energy market makes it
difficult to estimate future prices of oil and natural gas. Fluctuations in
energy prices are caused by a number of factors, including regional, domestic
and international demand, energy legislation, federal or state taxes (if any) on
sales of crude oil and natural gas, production guidelines established by the
Organization of Petroleum Exporting Countries ("OPEC"), and the relative
abundance of supplies of alternative fuel such as coal. Additionally, changing
international economic and political conditions may have a substantial impact
upon crude oil and natural gas prices. Many of these factors which can affect
energy prices are beyond the control of Harken.
Business Risks. Harken must continually acquire or explore for and develop
new oil and gas reserves to replace those being depleted by production. Without
successful drilling or acquisition ventures, Harken's oil and gas assets,
properties and the revenues derived therefrom will decline over time. To the
extent Harken engages in drilling activities, such activities carry the risk
that no commercially viable oil or gas production will be obtained. The cost of
drilling, completing and operating wells is often uncertain. Moreover, drilling
may be curtailed, delayed or canceled as a result of many factors, including
shortage of available working capital, title problems, weather conditions,
environmental concerns, shortages of or delays in delivery of equipment, as well
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as the financial instability of well operators, major working interest owners
and drilling and well servicing companies. The availability of a ready market
for Harken's oil and gas depends on numerous factors beyond their respective
control, including the demand for and supply of oil and gas, the proximity of
Harken's natural gas reserves to pipelines, the capacity of such pipelines,
fluctuation in seasonal demand, the effects of inclement weather, and government
regulation. New gas wells may be shut-in for lack of a market until a gas
pipeline or gathering system with available capacity is extended into the area.
In February 1994, the Navajo Nation issued a moratorium on future oil and
gas development agreements and exploration on lands situated within the Aneth
Chapter on the Navajo Reservation, which is an area that includes much of
Chuska's undeveloped acreage. It is unknown what effect, if any, this resolution
will have on Chuska's operations.
Operating Hazards and Uninsured Risks. The operations of Harken are subject
to the inherent risks normally associated with exploration for and production of
oil and gas, including blowouts, cratering, pollution and fires, each of which
could result in damage to or destruction of oil and gas wells or production
facilities or damage to persons and property. As is common in the oil and gas
industry, Harken is not fully insured against all of these risks, either because
insurance is not available or because Harken has elected to self-insure due to
high premium costs. The occurrence of a significant event that is not fully
insured against could have a material adverse effect on Harken's financial
condition.
Environmental Regulation. The activities of Harken are subject to various
Navajo, federal, state, and local laws and regulations covering the discharge of
material into the environment or otherwise relating to protection of the
environment. In particular, Harken's oil and gas exploration, development,
production, its activities in connection with storage and transportation of
liquid hydrocarbons and its use of facilities for treating, processing,
recovering, or otherwise handling hydrocarbons and wastes therefrom are subject
to stringent environmental regulation by governmental authorities. Such
regulations have increased the costs of planning, designing, drilling,
installing, operating and abandoning Harken's oil and gas wells and other
facilities.
The Aneth Gas Plant facility, of which Chuska is a co-owner, was in
operation for many years prior to Chuska's becoming an owner. The operations at
the Aneth Gas Plant previously used open, unlined drip pits for storage of
various waste products. The plant owners have replaced all of the open ground
pits currently being used with steel tanks. The plant owners are currently in
the process of closing the open ground pits.
Texaco, the plant's operator, received a letter from the EPA dated July 2,
1991 and a subsequent letter dated June 8, 1992, in which the EPA requested
certain information in order to determine if there had been at the Aneth Gas
Plant the release of hazardous substances to the environment. Texaco has advised
Chuska that certain information was supplied to the EPA pursuant to this
request. Subsequently, core samples in and around certain pit areas were taken
by the EPA and Texaco jointly. The EPA has responded to the initial sampling of
the drip pits and Texaco is now planning the next phase of required evaluation.
Texaco has indicated to Chuska that it believes that some of these pits may
require reclamation or remediation. In the event such action should or must be
taken, the plant owners, including Chuska, will seek contractual indemnification
from the previous owner of the Aneth Gas Plant for the costs incurred in the
reclamation and remediation process. At this time, however, it is impossible for
Chuska to determine or estimate the costs of the cleanup at the Aneth Gas Plant
or if the prior owner will indemnify the present owners, including Chuska, for
such costs.
Harken has expended significant resources, both financial and managerial,
to comply with environmental regulations and permitting requirements and
anticipates that it will continue to do so in the future. Although Harken
believes that its respective operations and facilities are in general compliance
with applicable environmental laws and regulations, risks of substantial costs
and liabilities are inherent in oil and gas operations, and there can be no
assurance that significant costs and liabilities will not be incurred in the
future. Moreover, it is possible that other developments, such as increasingly
strict environmental laws, regulations and enforcement policies thereunder, and
claims for damages to property, employees, other persons and the environment
resulting from Harken's operations, could result in substantial costs and
liabilities in the future.
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Imprecise Nature of Reserve Estimates. Reserve estimates are imprecise and
may be expected to change as additional information becomes available.
Furthermore, estimates of oil and gas reserves, of necessity, are projections
based on engineering data, and there are uncertainties inherent in the
interpretation of such data as well as the projection of future rates of
production and the timing of development expenditures. Reserve engineering is a
subjective process of estimating underground accumulations of oil and gas that
cannot be measured in an exact way, and the accuracy of any reserve estimate is
a function of the quality of available data and of engineering and geological
interpretation and judgment.
Competitive Factors in Oil and Gas Industry. The oil and gas industry is
highly competitive in all its phases. Competition is particularly intense
respecting the acquisition of desirable producing properties and the sale of oil
and natural gas production. Harken's competitors in oil and gas exploration,
development and production, as well as well servicing, include major oil
companies and numerous independent oil and gas companies, and individual
producers and operators. Many of Harken's competitors possess and employ
financial and personnel resources substantially greater than those which are
available to Harken and may, therefore, be able to pay greater amounts for
desirable leases and to define, evaluate, bid for and purchase a greater number
of producing prospects than the financial or personnel resources of Harken will
permit.
Production and Revenues. The following table shows for the periods
indicated operating information attributable to Harken's oil and gas interests.
The 1990 information represents ten months activity because Harken's producing
oil and gas properties were transferred to HAP effective November 1, 1990. The
1993 information reflects the February 15, 1993 merger with Chuska.
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
------------------------------------------------------------
1989 1990 1991 1992 1993
--------- ---------- -------- -------- ---------
<S> <C> <C> <C> <C> <C>
Production:
Oil (Bbls)............... 250,000 199,000 -- -- 185,000
Natural Gas (Mcf)........ 2,092,000 1,605,000 -- -- 429,000
Revenues:
Oil...................... $4,519,000 $4,325,000 $ -- $ -- $2,989,000
Natural Gas.............. 3,407,000 2,599,000 -- -- 792,000
--------- ---------- -------- -------- ---------
Total............ $7,926,000 $6,924,000 $ -- $ -- $3,781,000
--------- ---------- -------- -------- ---------
--------- ---------- -------- -------- ---------
Unit Prices:
Oil (per Bbl)............ $ 18.08 $ 21.73 $ -- $ -- $ 16.16
Natural Gas (per Mcf).... $ 1.63 $ 1.62 $ -- $ -- $ 1.85
Production costs per
equivalent barrel..... $ 4.72 $ 6.65 $ -- $ -- $ 4.98
Amortization per
equivalent barrel..... $ 5.22 $ 8.40 $ -- $ -- $ 5.58
</TABLE>
Acreage and Wells. At December 31, 1993, Harken owned interests in the
following oil and gas wells and acreage, primarily through Chuska:
<TABLE>
<CAPTION>
DEVELOPED UNDEVELOPED
GROSS WELLS NET WELLS ACREAGE ACREAGE
----------- ------------- --------------- ------------------
STATE OIL GAS OIL GAS GROSS NET GROSS NET
------------------------ --- --- ----- ---- ------ ----- ------- -------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Arizona................. 0 5 0.00 2.60 4,475 2,238 970 485
New Mexico.............. 14 0 7.00 0.00 670 335 8,750 4,375
Oklahoma................ 10 11 0.14 0.09 -- -- -- --
Texas................... 6 0 0.01 0.00 -- -- -- --
Utah.................... 40 0 18.00 0.00 21,928 6,671 174,680 139,460
--- --- ----- ---- ------ ----- ------- -------
Total......... 70 16 25.15 2.69 27,073 9,244 184,400 144,320
--- --- ----- ---- ------ ----- ------- -------
--- --- ----- ---- ------ ----- ------- -------
</TABLE>
9
<PAGE> 10
Drilling Activity. The following table summarizes certain information
concerning Harken's activity drilled by HAP during 1991 and 1992 and by Chuska
during 1993.
<TABLE>
<CAPTION>
NUMBER OF WELLS DRILLED
-----------------------------------------------------------------------
EXPLORATORY DEVELOPMENTAL TOTAL
--------------------- --------------------- ---------------------
PRODUCTIVE DRILLED PRODUCTIVE DRILLED PRODUCTIVE DRILLED
---------- ------- ---------- ------- ---------- -------
<S> <C> <C> <C> <C> <C> <C>
1991........................... 0 6 29 39 29 45
1992........................... 0 0 2 2 2 2
1993........................... 1 3 1 1 2 4
- - -- -- -- --
Total................ 1 9 32 42 33 51
- - -- -- -- --
- - -- -- -- --
</TABLE>
A well is considered "drilled" when it is completed. A productive well is
completed when permanent equipment is installed for the production of oil or
gas. A dry hole is completed when it has been plugged as required and its
abandonment is reported to the appropriate government agency.
As of December 31, 1993, no wells were in process of drilling.
Regulatory Items. The production of oil and gas is subject to extensive
Navajo, federal and state laws, rules, orders and regulations governing a wide
variety of matters, including the drilling and spacing of wells, allowable rates
of production, prevention of waste and pollution and protection of the
environment. In addition to the direct costs borne in complying with such
regulations, operations and revenues may be impacted to the extent that certain
regulations limit oil and gas production to below economic levels. Although the
particular regulations applicable in each state in which operations are
conducted vary, such regulations are generally designed to ensure that oil and
gas operations are carried out in a safe and efficient manner and to ensure that
similarly-situated operators are provided with reasonable opportunities to
produce their respective fair shares of available oil and gas reserves. However,
since these regulations generally apply to all oil and gas producers, management
of Harken believes that these regulations should not put Harken at a material
disadvantage to other oil and gas producers.
Certain sales, transportation, and resales of natural gas by Harken are
subject to Navajo, federal and state laws and regulations, including, but not
limited to, the Natural Gas Act (NGA), the NGPA and regulations promulgated by
the FERC under the NGA, the NGPA and other statutes. The provisions of the NGA
and NGPA, as well as the regulations thereunder, are complex, and can affect all
who produce, resell, transport, purchase or consume natural gas.
Although recent FERC transportation regulations do not directly apply to
Harken because they are not engaged in rendering jurisdictional transportation
services, these regulations do affect the operations of Harken by virtue of the
need to deliver its gas production to markets served by interstate or intrastate
pipelines. In most instances, interstate pipelines represent the only available
method of accomplishing such transportation.
EMPLOYEES
As of December 31, 1993, Harken had 101 employees, including 52 employees
in its well servicing operations. Harken has experienced no work stoppages or
strikes as a result of labor disputes and considers relations with its employees
to be satisfactory. Harken maintains group life, medical, dental, surgical and
hospital insurance plans for its employees.
ITEM 2. PROPERTIES
See "Item 1. Business" for discussion of properties and locations.
ITEM 3. LEGAL PROCEEDINGS
Harken is currently involved in various lawsuits. In Management's opinion,
the determination against Harken of any of these suits would not have a material
effect on Harken.
10
<PAGE> 11
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
None.
PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS
PRICE RANGE OF COMMON STOCK
Since March 18, 1991, Harken's common stock ("Common Stock") has been
listed on the American Stock Exchange and traded under the symbol HEC. From
August 30, 1989 through March 15, 1991, Harken's Common Stock was listed on the
New York Stock Exchange and traded under the symbol HEC. On February 18, 1991,
the stockholders of Harken approved an amendment to Harken's Certificate of
Incorporation to reduce the par value of Harken's Common Stock from $1.00 to
$0.01 per share. At February 15, 1994, there were approximately 3,531 holders of
record of Common Stock.
The following table sets forth, for the periods indicated, the reported
high and low sales prices of the Common Stock on the American Stock Exchange
Composite Tape after such date.
<TABLE>
<CAPTION>
PRICES
-----------------
HIGH LOW
---- ----
<S> <C> <C>
1992 -- First Quarter............................................ $6 1/4 $2 1/8
Second Quarter........................................... 2 7/8 2 1/4
Third Quarter............................................ 3 1 13/16
Fourth Quarter........................................... 3 1/4 2
1993 -- First Quarter............................................ 3 1/4 1 3/16
Second Quarter........................................... 1 11/16 15/16
Third Quarter............................................ 1 1/4 13/16
Fourth Quarter........................................... 1 13/16 1
</TABLE>
DIVIDENDS
Harken has not paid any cash dividends on the Common Stock since its
organization and it is not contemplated that any cash dividends will be paid on
shares of Common Stock in the foreseeable future.
Harken's shares of Series C Cumulative Convertible Preferred Stock, par
value $1.00 per share ("Series C Preferred") were to accrue a cumulative
dividend of 12% per year and have a mandatory redemption feature of $10 per
share, plus any accrued but unpaid dividends, beginning on June 30, 1993, and
continuing annually until June 30, 1998. As of December 31, 1992 and 1993, only
the 186,760 shares of Series C Preferred held by Tejas Power Corporation
("Tejas") are currently outstanding. During 1991, in connection with the
issuance of 1,000 shares of Tejas preferred stock to Harken, Tejas agreed to
waive certain of the provisions under the terms of the Harken Series C
Preferred, including the payment of the 12% annual dividend.
11
<PAGE> 12
ITEM 6. SELECTED FINANCIAL INFORMATION AND OTHER DATA
<TABLE>
<CAPTION>
1989(1) 1990 1991(5) 1992(5) 1993
----------- ----------- ----------- ---------- ----------
<S> <C> <C> <C> <C> <C>
Revenues....................................... $17,684,000 $21,759,000 $ 6,774,000 $6,430,000 $8,675,000
Income (loss) from continuing operations....... $(1,117,000) $(8,304,000) $(12,606,000) $ 333,000 $(5,494,000)
Income (loss) from discontinued operations..... $(11,449,000) $(32,884,000) $(2,997,000) $ -- $ --
Extraordinary item............................. $ -- $ -- $ -- $ 172,000 $ --
Net income (loss).............................. $(12,566,000) $(41,188,000) $(15,603,000) $ 505,000 $(5,494,000)
Net income (loss) per common share:
Income (loss) from continuing operations..... $ (0.14) $ (0.37) $ (0.31) $ 0.00 $ (0.09)
Discontinued operations...................... (0.35) (1.01) (0.07) -- --
Extraordinary item........................... -- -- -- 0.00 --
----------- ----------- ----------- ---------- ----------
Net income (loss)............................ $ (0.49) $ (1.38) $ (0.38) $ 0.00 $ (0.09)
----------- ----------- ----------- ---------- ----------
----------- ----------- ----------- ---------- ----------
Current assets................................. $108,745,000 $94,038,000 $15,560,000 $13,911,000 $6,698,000
Current liabilities............................ $103,129,000 $101,094,000 $15,122,000 $10,201,000 $6,533,000
----------- ----------- ----------- ---------- ----------
Working capital (deficit)...................... $ 5,616,000 $(7,056,000) $ 438,000 $3,710,000 $ 165,000
----------- ----------- ----------- ---------- ----------
----------- ----------- ----------- ---------- ----------
Working capital (deficit) from continuing
operations................................... $ (895,000) $ 328,000 $ 438,000 $3,710,000 $ 165,000
Total assets................................... $292,040,000 $260,607,000 $37,664,000 $34,872,000 $37,731,000
Long-term obligations:
Long-term debt and other liabilities......... $ 427,000 $ 302,000 $ 1,276,000 $ -- $ --
Notes payable to related parties(4).......... $23,938,000 $ 4,761,000 $ 253,000 $ -- $ --
Redeemable preferred stock(3)................ $30,000,000 $30,000,000 $ 9,000,000 $1,868,000 $1,868,000
----------- ----------- ----------- ---------- ----------
Total.................................. $54,365,000 $35,063,000 $10,529,000 $1,868,000 $1,868,000
----------- ----------- ----------- ---------- ----------
----------- ----------- ----------- ---------- ----------
Stockholders' Equity........................... $31,442,000 $ 3,000,000 $11,499,000 $20,316,000 $28,963,000
Redeemable preferred stock outstanding......... 3,000,000 3,000,000 900,000 186,760 186,760
Common stock of subsidiary held by minority
interest outstanding......................... 621,000 -- -- -- --
Weighted average common stock outstanding...... 33,191,448 32,533,137 42,519,373 45,752,936 58,392,901
Proved reserves at end of year(2):
Bbls of oil.................................. 1,880,000 -- -- -- 1,035,000
Mcf of gas................................... 29,297,000 -- -- -- 4,970,000
Future net revenues.......................... $62,782,000 $ -- $ -- $ -- $13,707,000
Present value (discounted at 10% per year)... $42,043,000 $ -- $ -- $ -- $8,230,000
</TABLE>
- ---------------
(1) Financial information for this year has been restated to reflect the effects
of the rights offering of Harken in 1991, as the result of which E-Z Serve
Corporation and Tejas Power Corporation, former Harken gasoline retailing
and natural gas gathering and marketing subsidiaries, respectively, became
stand-alone public companies. See "Notes to Consolidated Financial
Statements, Note 2 -- Discontinued Operations" contained in Part II, Item
8.
(2) These estimated reserve quantities, future net revenues and present value
figures are related solely to proved reserves. No consideration has been
given to probable or possible reserves. Oil and gas prices were held
constant except where future price increases were fixed and determinable
under existing contracts and government regulations. Operating costs were
held constant. Harken's share of an equity method investee's proved oil and
gas reserves are not reflected in these amounts. Effective November 1,
1990, Harken transferred its oil and gas properties to a newly-formed
limited partnership. In addition, effective February 15, 1993, Harken
consummated a merger whereby Chuska Resources Corporation ("Chuska") became
a wholly-owned subsidiary of Harken. Only the 1993 amounts reflect the
proved reserve quantities and future net revenues of Chuska. (See "Notes to
Consolidated Financial Statements, Notes 3 and 12 -- Acquisitions and Oil
and Gas Disclosures" contained in Part II, Item 8.)
(3) See "Notes to Consolidated Financial Statements, Note 7 -- Redeemable
Preferred Stock" contained in Part II, Item 8, for a discussion of Harken
Series C Preferred Stock.
(4) Notes payable to related parties at December 31, 1989, included
approximately $13,027,000 of principal and interest payable to affiliates
of major stockholders pursuant to the repurchase of 6,908,176 shares of
Harken common stock owned by a former stockholder. Effective January 1,
1990, these affiliates agreed to exchange their notes, including accrued
interest, for Harken common stock. In addition, notes payable
12
<PAGE> 13
to related parties at December 31, 1989 included $10,911,000 of advanced
funds from E-Z Serve Corporation, which was repaid by Harken in 1990.
(5) Revenues and Total Assets amounts in 1991 and 1992 reflect the formation of
Harken Anadarko Partners, L.P. whereby Harken transferred its domestic oil
and gas property interests to the limited partnership effective November 1,
1990. As a result, Harken did not reflect direct oil and gas operating
revenues, expenses or depreciation and amortization from these properties
in its statements of operations for these years.
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
RESULTS OF OPERATIONS
The following table presents certain data for major operating segments of
Harken for the years ended December 31, 1991, 1992 and 1993. A discussion
follows of certain significant factors which have affected Harken's operating
results during such periods. This discussion should be read in conjunction with
Harken's Consolidated Financial Statements and related footnotes contained in
Part II, Item 8.
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
---------------------------
1991 1992 1993
----- ----- -----
<S> <C> <C> <C>
EXPLORATION AND PRODUCTION SEGMENT(1)
Management fee income ($000).................................... 1,266 1,110 300
Revenues ($000):
Oil sales.................................................... -- -- 2,989
Gas sales and gas plant revenues............................. -- -- 1,981
Gain on sale of partnership interest ($000)..................... -- 1,449 --
WELL SERVICING AND CONTRACT DRILLING SEGMENT
Well servicing revenues ($000).................................. 2,266 2,027 2,074
Well servicing gross profit ($000).............................. 965 1,080 1,138
Contract drilling revenues ($000)............................... 1,317 -- --
Contract drilling gross profit ($000)........................... 256 -- --
CORPORATE AND OTHER REVENUES
Interest income ($000).......................................... 1,120 822 225
Other income ($000)............................................. 805 1,022 1,106
</TABLE>
- ---------------
(1) Effective February 15, 1993, Harken consummated a merger whereby Chuska
Resources Corporation ("Chuska") became a wholly-owned subsidiary of
Harken.
OVERVIEW
Harken reported a net loss for the year ended December 31, 1993, of
$5,494,000. Effective February 15, 1993, Harken consummated a merger pursuant to
which Chuska Resources Corporation ("Chuska") became a wholly-owned subsidiary
of Harken. As a result of the merger with Chuska, Harken began reflecting oil
and gas sales revenues and related operating expenses and depreciation and
amortization in 1993. Harken's exploration and production segment generated
gross revenues of $5,505,000 and gross profit before depreciation and
amortization and general and administrative expenses totalled $3,680,000 during
1993, primarily generated from the Chuska acquisition. Harken's well servicing
operations, through Supreme Well Service ("Supreme"), generated gross revenues
of $2,074,000 and gross profit before depreciation and amortization and general
and administrative expenses totalled $1,138,000. Contributing to the net loss
for 1993 was the decision to liquidate Harken's remaining contract drilling rigs
and related assets whereby Harken recognized a non-cash charge of approximately
$3,100,000 during the fourth quarter of 1993 in order to reduce the carrying
value of these remaining rigs to liquidation value. These drilling rigs had not
previously been written down in 1991, as Harken pursued deploying these rigs
internationally. The proceeds from the sale of these drilling rigs
13
<PAGE> 14
will be used primarily by Harken for its international exploration efforts. Such
international exploration efforts continued in 1993, particularly in Bahrain and
Colombia. Harken completed its first year work commitment in Colombia for the
Alcaravan Association Contract and also entered into a second Association
Contract in January 1994 for the Bocachico area of Colombia in the Middle
Magdelena Basin. In addition to the above write down of drilling rigs and
related assets, Harken also expensed a total of $551,000 of accrued interest
related to certain non-recourse notes receivable from certain current and former
employees, officers and directors.
Harken reported net income for the year ended December 31, 1992, of
$505,000. In December 1992, Harken entered into a Purchase and Sale Agreement
pursuant to which Harken sold its 12% general partner's interest in its managed
limited partnership, Harken Anadarko Partners, L.P. ("HAP"), for cash of
$2,650,000. The transaction resulted in Harken recognizing a gain on the sale of
$1,449,000 during December 1992. As a result of this gain, segment operating
profit for Harken's exploration and production operations was $2,872,000 during
1992. Harken's international operations continued to be very active during 1992.
Despite announcing in February 1993 that the second well to be drilled in
Bahrain, the Muharraq No. 1, had been plugged and abandoned, Harken's other
international efforts during 1992 resulted in significant opportunities. During
the third quarter of 1992, Harken entered into an Association Contract to
conduct a seismic and exploratory drilling program in the Alcaravan area of
Colombia. All of Harken's revenues during 1992 continued to be domestic,
including Harken's well servicing operations, which through Supreme generated
revenues of $2,027,000 during 1992.
Harken incurred a net loss from continuing operations for the year ended
December 31, 1991, of approximately $12.6 million. In April 1991, Harken
suspended its contract drilling operations due to decreased demand and increased
competition, resulting in greatly reduced contract drilling revenues and related
operating expenses. Contributing to the operating loss was the decision in late
1991 to write down Harken's carrying value in certain drilling rigs and related
domestic assets by $7.1 million. These assets were deemed not to be part of
Harken's operating plans for the future due to Harken's decision to focus on the
international oilfield services industry. Such asset write down is included in
Provision for Impairment of Contract Drilling Rigs and Related Equipment in
Harken's financial statements. In addition, oil and gas sales revenues and
related operating expenses were eliminated in 1991 due to the November 1, 1990,
transfer of producing oil and gas properties to a newly-formed limited
partnership, Harken Anadarko Partners, L.P. ("HAP"). In addition to the non-cash
write down discussed above, Harken also incurred a non-cash loss for its equity
in the loss of partnership of $3.0 million resulting from Harken's 12% interest
in HAP.
EXPLORATION AND PRODUCTION OPERATIONS
With the February 15, 1993 merger with Chuska, Harken reported and received
a direct interest in its oil and gas exploration and production operations
during 1993. In the prior two years, Harken conducted its exploration and
production activities through its 12% general partner's interest in HAP, and
accounted for its interest in HAP's operations using the equity method, whereby
Harken recorded its interest in HAP's oil and gas operating revenues, expenses
and depreciation and amortization through its Equity in Income (Loss) of
Partnership account. Gross oil and gas sales revenues during 1993 reflect the
operations of Chuska, which consists primarily of the production of oil and gas
reserves in the Aneth Field and Blanding Sub-Basin portions of the Paradox Basin
in Utah, Arizona and New Mexico, primarily on the Navajo Indian Reservation.
Such operations are conducted through Chuska's interests in the CHAP Venture,
Greater Blanding venture and Central Blanding venture. Gross oil revenues
reflect the overall weak demand experienced by the industry, resulting in low
oil pricing, particularly during the fourth quarter of 1993. Revenues from gas
sales totalled $792,000 and were enhanced by production from a new 1993
successful gas well drilled in the Black Rock Field in Arizona. Harken drilled
four wells during 1993 and is largely dependent on future drilling success to
offset the production declines typically experienced in the region. Harken
recognized $1,189,000 in gas plant revenues, primarily from Chuska's plant owner
interest in the Aneth Plant which serves many of the Utah properties.
Oil and gas operating expenses consist of lease operating expenses and gas
plant expenses, along with a number of production and reserve-based taxes,
including Utah severance, conservation, and property taxes and Navajo severance
and possessory interest taxes.
14
<PAGE> 15
In December 1992, Harken, through a subsidiary, entered into a Purchase and
Sale Agreement ("the Agreement") pursuant to which Harken sold its 12% general
partner's interest in HAP to an affiliate of a major stockholder who served as
sole limited partner. The closing of the Agreement was completed on December 30,
1992. Pursuant to the Agreement, Harken was paid consideration in cash of
$2,650,000 for the sale of this partnership interest and certain contract rights
associated therewith. The transaction resulted in Harken recognizing a gain of
$1,449,000 during December 1992.
Under the terms of the Agreement, Harken continued to manage the oil and
gas property interests of HAP and operate certain partnership properties. Harken
was paid a management fee of $50,000 per month to manage the HAP interest in
such properties in addition to the fees it received for serving as operator of
the properties pursuant to applicable joint operating agreements. During the
second quarter of 1993, HAP sold its interests in all oil and gas properties
operated by Harken and Harken ceased to manage the partnership. As a result of
the above transactions, Harken earned only $300,000 in management fees during
1993 compared to $1,110,000 during 1992. During 1991, Harken received management
fees totalling $1,266,000, primarily consisting of $100,000 per month it
received from HAP.
Prior to the sale, Harken recorded a $107,000 equity in loss of partnership
during 1992 relating to its 12% equity method interest in HAP's net loss at the
time of the sale. During 1991, however, Harken recorded a $3.0 million equity in
loss of partnership, as HAP incurred a $24.1 million loss during 1991 primarily
caused by a $21.1 million full cost ceiling write down principally resulting
from lower crude oil prices at December 31, 1991.
During 1993, Harken received $903,000 of operator overhead fees and
operator cost reimbursements, with the decrease from 1992 caused by the above
mentioned sale by HAP of all remaining oil and gas properties operated by
Harken. Operator overhead fees and other cost reimbursements during 1992 were
$1,901,000 compared to $2,539,000 during 1991 due to the sale by HAP during 1992
of certain properties operated by Harken. Harken accounts for operator fees and
reimbursements as a reduction to general and administrative expenses in its
statements of operations.
In addition to the above operations, Harken earned certain fees from
leasing company owned compressors to certain properties it operated, as well as
receiving prospect fees from the sale of Harken prospects to HAP, as provided
for in the HAP partnership agreement. Such prospect and compressor fee income
totalled $83,000 during 1993, compared to $284,000 in 1992 and $352,000 in 1991.
The decrease each year was due to the reduction in HAP's operations.
WELL SERVICING OPERATIONS
Harken's well servicing revenues totalled $2,074,000 in 1993 compared to
$2,027,000 in 1992 and $2,266,000 in 1991. Supreme generated its revenue from
the operations of 7 well service rigs and 2 swab rigs during most of 1993,
although 3 additional well service rigs were purchased during the fourth
quarter. Similarly, well servicing operating expenses, which consist principally
of contract labor and supplies, have totalled $936,000 in 1993, $947,000 in 1992
and $1,301,000 in 1991. Harken continues to monitor operating costs closely,
working to reduce costs by focusing exclusively in the South Texas region and
closing its Oklahoma office in early 1992.
CONTRACT DRILLING OPERATIONS
Harken reported contract drilling revenues of $1,317,000 during 1991 prior
to the decision to suspend those operations in April 1991 as discussed earlier.
Harken continues to pursue opportunities for oilfield services internationally,
where the opportunities to profitably deploy Harken's expertise and assets are
generally greater than those available domestically. Consistent with this change
in emphasis, in December 1991, Harken made the decision to attempt to sell
certain of its drilling rigs and related domestic assets which were not suitable
for the pursuit of international drilling opportunities. As a result of this
decision, Harken recognized a non-cash charge of $7.1 million to fourth quarter
1991 operations to write down the carrying value of these assets to an estimated
recoverable value. In January 1994, Harken made the decision to liquidate its
remaining drilling rigs and related assets and apply the proceeds primarily to
its international
15
<PAGE> 16
exploration efforts, specifically in Colombia and Bahrain. As a result of this
decision, Harken recognized an additional non-cash charge of $3.1 million during
the fourth quarter of 1993. Harken has included these charges as Provision for
Impairment of Contract Drilling Rigs and Related Equipment during 1991 and 1993
in Harken's Statements of Operations.
INTEREST AND OTHER INCOME
Interest income decreased in 1993 from 1992, and in 1992 from 1991, due to
generally lower investment and cash balances, and due to the lower investment
yields available during each of these years. Other income remained level
compared to 1992 despite the decrease in compressor rental and prospect fees
discussed above, due to an increase in E-Z Serve Preferred dividends and a
realized gain on the sale of E-Z Serve common stock during 1993. Other income
increased in 1992 from 1991 primarily due to the inclusion of approximately
$100,000 per quarter in accrued E-Z Serve Preferred dividends. Harken first
purchased E-Z Serve Preferred shares during the second quarter of 1991.
OTHER COSTS AND EXPENSES
General and administrative expenses increased by approximately $1.1 million
during 1993 as compared to 1992 primarily as a result of the increased
administrative costs added as a result of the merger with Chuska. General and
administrative expenses for 1993 includes costs related to certain offices of
Chuska that have since been closed in an effort to reduce costs and improve
efficiency. Harken has also taken efforts throughout 1993 to reduce total
personnel with the objective of eliminating duplicative administrative and
operational functions. In addition, as discussed above, Harken's operator
overhead fees and other operator cost reimbursements which are netted against
general and administrative expenses decreased by approximately $1.0 million due
to the reduction in properties operated by Harken.
General and administrative expenses decreased by approximately $1.6 million
during 1992 as compared to 1991 due to Harken's continuing cost reduction
measures which were taken in an effort to reduce administrative expenses to a
level consistent with its reduced revenue base. In addition, certain additional
administrative costs and professional fees were incurred during 1991 in
connection with a Rights Offering. See discussion below of the Rights Offering.
Depreciation and amortization increased by approximately $1.8 million due
to the merger with Chuska, primarily due to the approximately $1.4 million in
depreciation, depletion and amortization calculated on Chuska's oil and gas
properties. Such calculation is made on a unit of production basis in accordance
with the full cost method of accounting for oil and gas properties.
Provision for asset impairments during 1993 includes a total of $551,000 of
accrued interest which was expensed related to certain non-recourse notes
receivable from certain current and former employees, officers and directors.
Provision for asset impairments totalled $726,000 during 1993 compared to
$252,000 in 1992 and $478,000 in 1991.
Interest expense increased during 1993 compared to 1992 due to the addition
of short term borrowings which were acquired as part of the merger with Chuska.
Such borrowings were paid in 1993. Interest expense decreased in 1992 compared
to 1991 due primarily to the existence of related party debt during the first
part of 1991 pursuant to the Rights Offering. At the effective date of the
closing of the Rights Offering, Harken paid all but $237,000 of the principal
and interest on this related party debt. New long-term notes payable to related
parties were issued for this remaining $237,000 liability. These new long-term
notes payable to the related parties were repaid by Harken during December 1992.
DISCONTINUED OPERATIONS
Pursuant to a plan of reorganization approved by the Board of Directors, as
of April 30, 1991, Harken completed a Rights Offering and related exchange
transactions whereby its percentage ownership in the common stock of E-Z Serve
Corporation ("E-Z Serve") and Tejas Power Corporation ("Tejas") decreased
16
<PAGE> 17
to 7.25% and 6.59%, respectively. The Rights Offering resulted in a
discontinuance of Harken's refined products marketing and natural gas gathering,
storage, and marketing operations. Harken estimated the net operating profit
(loss) for E-Z Serve and Tejas for the period from December 31, 1990 through the
anticipated closing date of the Rights Offering to be approximately $(3,325,000)
and $600,000, respectively and included such estimated net loss of $2,725,000 in
Net Income (Loss) from Discontinued Operations at December 31, 1990. Additional
losses of $1,524,000 and $1,473,000 have been reflected during the first quarter
and April of 1991, respectively, to reflect the difference between the year end
estimate and Harken's interest in actual results for these discontinued
subsidiaries.
LIQUIDITY AND CAPITAL RESOURCES
During the year ended December 31, 1993, Harken's working capital decreased
approximately $3.5 million, primarily due to the accrual of certain liabilities
totalling approximately $2.9 million associated with Chuska's operations and due
to capital expenditures during 1993. Cash and temporary investments decreased by
$7.0 million despite the $2.6 million of cash balances that were acquired from
the merger with Chuska. Such cash usage was caused by cash used by operating
activities of $3.9 million, $4.1 million of net capital expenditures and $1.6
million of repayments of debt. The cash used by operating activities was
primarily caused by the payment of approximately $2.1 million of operator
suspended revenues primarily related to amounts which were appropriately
released upon the sale of operated properties by Harken's managed limited
partnership, HAP. Since the acquisition of Chuska, Harken has closed three of
Chuska's offices and taken steps to appropriately reduce personnel as part of
the effort to reduce administrative expenditures and absorb Chuska's operations
into Harken.
During 1992, total proceeds from sales of assets of approximately $4.7
million plus $211,000 from net common stock proceeds funded approximately $5.3
million of cash utilized by operating activities, approximately $1.3 million of
capital expenditures and $517,000 of total debt payments, resulting in a net
decrease in cash of approximately $2.2 million during the year.
During 1991, cash flows from operations of approximately $2.6 million were
generated, proceeds from sales of assets were approximately $1.2 million, cash
generated from issuance of common shares upon exercise of options was $453,000,
and $1.5 million was generated from short term borrowings which were repaid with
a portion of Harken's interest in a limited partnership. Such proceeds were used
to fund approximately $5.7 million in Rights Offering expenses and working
capital advances on behalf of Harken's discontinued operations and $953,000 in
capital expenditures, and $171,000 of debt payments. Total 1991 activity
resulted in approximately $1 million decrease in cash during the year.
The February 1993 merger with Chuska has further enhanced Harken's asset
base during 1993, and Chuska's operations have historically funded its capital
expenditure needs. Harken continues to maintain no significant long term debt.
In addition, since the Chuska merger, Harken is continuing to take steps to
eliminate operational overlap to result in increased efficiency and a reduction
in combined general and administrative costs. The merger transaction was
consummated through the issuance of 14,210,357 newly issued shares of Harken
common stock in exchange for all of the outstanding Chuska common stock.
Harken has taken steps to appropriately reduce overhead costs and capital
expenditures will be incurred only to the extent that cash flow from operations
or additional financing sources are available. Harken believes that cash flow
from operations will be sufficient to meet its operating cash requirements in
1994. Amounts required to fund international activities, including Colombia and
Bahrain, as well as domestic drilling costs and other capital expenditures will
be funded from existing cash balances, sale of assets, operating cash flows and
industry partners. Harken includes in cash and temporary investments certain
balances which are restricted to use for specific project expenditures,
collateral or for distribution to outside interest owners and are not available
for general working capital purposes. Such restricted cash amounts totalled
$6,197,000 and $1,391,000 at December 31, 1992 and 1993, respectively.
Colombian Operations -- During the third quarter of 1992, Harken, through a
subsidiary, Harken de Colombia, Ltd., was awarded the exclusive right to explore
for, develop and produce oil and gas throughout
17
<PAGE> 18
approximately 350,000 acres within the Alcaravan area ("Alcaravan") of Colombia.
Alcaravan is located in Colombia's Llanos Basin and is located approximately 140
miles east of Santafe De Bogota. Harken and Empresa Colombiana de Petroleos
("Ecopetrol") have entered into an Association Contract ("Alcaravan Contract")
which requires Harken to conduct a seismic and exploratory drilling program in
the Alcaravan area ("work program") over the initial six (6) years. At the end
of each of the six years in the work program, Harken has the option to withdraw
from the Alcaravan Contract or to commit to the next year's work requirements.
If Harken makes a commercial discovery of oil and/or gas which is approved by
Ecopetrol, the standard terms of the Alcaravan Contract will apply. Such terms
provide for Ecopetrol to reimburse Harken for 50% of its successful well costs
expended up to the point of commercial discovery and to receive a 20% royalty
interest and for both Ecopetrol and Harken to each have a 50% working interest.
The term of the Alcaravan Contract will extend twenty-two (22) years from the
date of any commercial discovery of oil and/or gas. Harken reprocessed in excess
of 200 kilometers of seismic on the Alcaravan area and completed the acquisition
of 52 kilometers of new seismic data over prospective areas in mid-February
1994. Harken is currently carrying on discussions with potential joint venture
partners regarding potential drilling on the Alcaravan area.
In January 1994, Harken announced that Harken de Colombia, Ltd. had signed
its second Association Contract ("Bocachico Contract") with Ecopetrol, covering
the Bocachico contract area. Under the Bocachico Contract, Harken has acquired
the exclusive rights to conduct exploration activities and drilling on this
area, which covers approximately 192,000 acres in the middle Magdelena Valley of
Central Colombia.
During the first year of the Bocachico Contract, Harken will conduct
seismic activities on the land covered by this contract including reprocessing
of at least 250 kilometers of existing seismic data and the acquisition of at
least 35 kilometers of new seismic data. During each of the 2nd through the 6th
contract years Harken may elect to continue the contract by committing to the
drilling of at least one well during each contract year. During this initial six
year term, called the Exploration Period under the Bocachico Contract, if Harken
has discovered the existence of commercial production in the Bocachico Contract
area, the Bocachico Contract will be further extended for a period of 22 years
from the date of any commercial discovery of oil and/or gas. If Harken makes a
commercial discovery of oil and/or gas which is approved by Ecopetrol, the
standard terms of the Bocachico Contract will apply. Such terms provide for
Ecopetrol to reimburse Harken for 50% of its successful well costs expended up
to the point of commercial discovery and to receive a 20% royalty interest and
for both Ecopetrol and Harken to each have a 50% working interest.
In addition to reprocessing and acquiring seismic data during the first
contract year of the Bocachico Contract, Harken intends to also conduct
engineering studies to evaluate the potential for recovering existing oil
reserves in the Rio Negro area, which is located in the northern portion of the
Bocachico Contract area. Three wells were drilled, produced and subsequently
abandoned by another contractor approximately 30 years ago in this area, which
have provided information and data including production rates, well logs and
pressure tests. This well data will be utilized by Harken in such studies to
evaluate the feasibility of applying modern production and recovery techniques
in this area. Harken has not made any determination at this point as to the
recoverability of reserves which may be indicated in this area.
Bahrain Operations -- In January 1990, Harken, through its wholly-owned
subsidiary, Harken Bahrain Oil Company ("HBOC"), entered into a production
sharing agreement with the Bahrain National Oil Company which gave it the
exclusive right to explore for, develop and produce oil and gas throughout most
of Bahrain's Arabian Gulf offshore territories. Subject to the discovery and
development of oil and/or gas, the contract has a term of thirty-five years.
Under the original terms of the agreement, as amended, Harken was to drill an
exploratory well to test the Permian Khuff formation within 2 1/2 years and
drill a total of four wells by 1995 to earn all of its acreage rights under the
agreement. In July 1990, Harken entered into a joint venture arrangement with a
joint venture partner, Bass Enterprises Production Company ("BEPCO"), in which
BEPCO committed to provide the funding for the first well and at least two
subsequent wells.
The initial exploratory well under the contract was drilled on the Jarim
Reef, which began drilling November 1991. The well was drilled to an approximate
depth of 14,275 feet and tested the Jurassic Arab formation at approximately
7,300 feet and the Permian Khuff formation at approximately 13,300 feet. In
18
<PAGE> 19
March 1992, after drilling was completed, HBOC announced that the Jarim No. 2
well was not productive of either oil or gas and was abandoned.
On December 28, 1992, Harken commenced the drilling of its second
exploratory well, the Muharraq No. 1, in Bahrain. In February 1993, Harken
announced that the Muharraq No. 1 well had been drilled to a total depth of
8,778 feet and that no shows of oil and gas were noted in the well cuttings of
either the Jurassic Arab or the Jurassic Fadhili formations. As a result, the
well was plugged and abandoned at the foregoing depth. Further, under the terms
of the production sharing agreement, HBOC allowed its exploration and drilling
rights on approximately 10% of the acreage covered by the production sharing
agreement to expire, effective February 13, 1993. Later, during the third
quarter of 1993, HBOC allowed an additional portion of the acreage covered by
the production sharing agreement to expire effective August 29, 1993. HBOC's
remaining obligation under the production sharing agreement is limited to
reprocessing 500 kilometers of seismic prior to July 30, 1995.
On April 8, 1993, HBOC and BEPCO entered into an agreement whereby BEPCO
was released and discharged from any future drilling obligations related to
HBOC's production sharing agreement, and the joint venture agreement between
HBOC and BEPCO was terminated. As part of this agreement, BEPCO paid to HBOC
approximately $2,000,000 plus all remaining costs and obligations related to the
Muharraq No. 1 well along with certain other costs and contingencies. Such
amount, net of Harken's carrying value in its Bahrain investment, has been
recorded as deferred revenue in the accompanying balance sheet. Harken is
continuing to pursue discussions with various other parties in joining HBOC to
pursue continuing operations on the remaining acreage which HBOC continues to
hold.
Other -- The exploration, development and production of oil and gas are
subject to various Navajo, federal and state laws and regulations designed to
protect the environment. Compliance with these regulations is part of Harken's
day-to-day operating procedures. Infrequently, accidental discharge of such
materials as oil, natural gas or drilling fluids can occur and such accidents
can require material expenditures to correct. Harken maintains levels of
insurance customary in the industry to limit its financial exposure. Management
is unaware of any material capital expenditures required for environmental
control during the next fiscal year.
At December 31, 1993, Harken has accrued $1,000,000 related to a consulting
payment due to a former Chuska stockholder. Under the terms of a prior agreement
made by Chuska with the former Chuska stockholder, among other obligations
previously satisfied, Chuska is to pay $1,000,000 to the former Chuska
stockholder when aggregate net revenues (as defined in the agreement) reach
$60,000,000. In October 1992, a lawsuit was filed against Chuska by the former
Chuska stockholder. The lawsuit was generally based upon allegations that Chuska
had reached the defined aggregate net revenue amount and that the $1,000,000
consulting payment was due and payable. In March 1994, this lawsuit was settled
whereby Chuska and a subsidiary entered into an agreement to pay $500,000 to the
former Chuska stockholder as the first of two installments relating to the
consulting payment. Chuska executed a non-interest bearing note payable for the
remaining $500,000 consulting payment which is payable to the former Chuska
stockholder on or before January 5, 1995. Further, under the terms of this March
1994 agreement, Chuska purchased from the former Chuska stockholder his 3%
working interest in the wells drilled by Chuska as well as all rights he held to
participate in future wells drilled by Chuska on the Navajo Reservation,
effective January 1, 1994. As consideration for such purchase, Chuska issued a
10% note payable in the amount of $400,000 which is due and payable to the
former Chuska stockholder on or before January 3, 1996. Chuska is obligated
under this agreement to pay 75% of the net cash flow (as defined) from the
acquired interest to an escrow account which will serve as collateral for the
above notes payable until the notes are fully paid.
Harken has also accrued approximately $1,900,000 relating to other
operational or regulatory liabilities related to Chuska's operations. Harken and
its subsidiaries currently are involved in various lawsuits and other
contingencies, including the guarantee of certain lease obligations, which, in
management's opinion, will not result in significant loss exposure to Harken.
19
<PAGE> 20
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
The following financial statements appear on pages 21 through 47 in this
report.
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
Report of Independent Public Accountants.............................................. 21
Consolidated Balance Sheets -- December 31, 1992 and 1993............................. 22
Consolidated Statements of Operations -- Years ended December 31, 1991, 1992 and
1993................................................................................ 23
Consolidated Statements of Stockholders' Equity -- Years ended December 31, 1991, 1992
and 1993............................................................................ 24
Consolidated Statements of Cash Flows -- Years ended December 31, 1991, 1992 and
1993................................................................................ 25
Notes to Consolidated Financial Statements............................................ 26
Supplemental Schedule I............................................................... 42
Supplemental Schedule II.............................................................. 43
Supplemental Schedule V............................................................... 45
Supplemental Schedule VI.............................................................. 46
Supplemental Schedule IX.............................................................. 47
</TABLE>
20
<PAGE> 21
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
To the Stockholders and Board of Directors of Harken Energy Corporation:
We have audited the accompanying consolidated balance sheets of Harken
Energy Corporation (a Delaware corporation) and subsidiaries as of December 31,
1992 and 1993, and the related consolidated statements of operations,
stockholders' equity and cash flows for each of the three years in the period
ended December 31, 1993. These financial statements and the schedules referred
to below are the responsibility of the Company's management. Our responsibility
is to express an opinion on these financial statements and schedules based on
our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly,
in all material respects, the financial position of Harken Energy Corporation
and subsidiaries as of December 31, 1992 and 1993, and the results of their
operations and their cash flows for each of the three years in the period ended
December 31, 1993, in conformity with generally accepted accounting principles.
As explained in Note 9 to the financial statements, effective January 1,
1993, the Company changed its method of accounting for income taxes.
Our audits were made for the purpose of forming an opinion on the basic
financial statements taken as a whole. The schedules listed in the index of
financial statements are presented for purposes of complying with the Securities
and Exchange Commission's rules and are not part of the basic financial
statements. These schedules have been subjected to the auditing procedures
applied in the audits of the basic financial statements and, in our opinion,
fairly state in all material respects the financial data required to be set
forth therein in relation to the basic financial statements taken as a whole.
ARTHUR ANDERSEN & CO.
Dallas, Texas,
March 15, 1994
21
<PAGE> 22
HARKEN ENERGY CORPORATION AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
ASSETS
<TABLE>
<CAPTION>
DECEMBER 31, DECEMBER 31,
1992 1993
------------ ------------
<S> <C> <C>
Current Assets:
Cash and temporary investments............................... $10,348,000 $ 3,299,000
Accounts and notes receivable, net........................... 1,744,000 1,022,000
Accounts receivable from related parties..................... 1,446,000 1,081,000
Assets held for resale....................................... -- 796,000
Prepaid expenses and other current assets.................... 373,000 500,000
------------ ------------
Total Current Assets.................................... 13,911,000 6,698,000
Property and Equipment, net.................................... 8,320,000 19,807,000
Investments in Former Subsidiaries............................. 9,757,000 9,218,000
Notes Receivable from Related Parties, including interest...... 1,214,000 701,000
Other Assets, net.............................................. 1,670,000 1,307,000
------------ ------------
$34,872,000 $ 37,731,000
------------ ------------
------------ ------------
LIABILITIES AND STOCKHOLDERS' EQUITY
Current Liabilities:
Trade payables............................................... $ 769,000 $ 339,000
Accrued liabilities and other................................ 4,056,000 4,840,000
Revenues and royalties payable............................... 5,274,000 1,354,000
Accounts payable to related parties.......................... 102,000 --
------------ ------------
Total Current Liabilities............................... 10,201,000 6,533,000
Commitments and Contingencies (Note 13)
Deferred Revenue, net of current portion....................... 2,487,000 367,000
Redeemable Preferred Stock..................................... 1,868,000 1,868,000
Stockholders' Equity:
Common stock, $0.01 par value; authorized 100,000,000 shares;
issued 51,206,151 and 65,466,508 shares, respectively..... 512,000 654,000
Additional paid-in capital................................... 114,207,000 131,052,000
Retained deficit............................................. (76,492,000) (81,986,000)
Treasury stock............................................... (17,911,000) (20,757,000)
------------ ------------
Total Stockholders' Equity.............................. 20,316,000 28,963,000
------------ ------------
$34,872,000 $ 37,731,000
------------ ------------
------------ ------------
</TABLE>
The accompanying Notes to Consolidated Financial Statements
are an integral part of these Consolidated Balance Sheets.
22
<PAGE> 23
HARKEN ENERGY CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
---------------------------------------
1991 1992 1993
----------- ---------- ----------
<S> <C> <C> <C>
Revenues:
Oil and gas operations............................. $ -- $ -- $4,970,000
Well servicing operations.......................... 2,266,000 2,027,000 2,074,000
Contract drilling operations....................... 1,317,000 -- --
Management fee income.............................. 1,266,000 1,110,000 300,000
Interest income.................................... 1,120,000 822,000 225,000
Gain on sale of partnership investment............. -- 1,449,000 --
Other income....................................... 805,000 1,022,000 1,106,000
----------- ---------- ----------
6,774,000 6,430,000 8,675,000
----------- ---------- ----------
Costs and Expenses:
Cost of sales and operating expenses:
Oil and gas operations.......................... -- -- 1,825,000
Well servicing operations....................... 1,301,000 947,000 936,000
Contract drilling operations.................... 1,061,000 -- --
General and administrative expenses, net........... 4,712,000 3,151,000 4,219,000
Equity in (income) loss of partnership............. 2,992,000 107,000 --
Depreciation and amortization...................... 1,484,000 1,408,000 3,254,000
Provision for impairment of contract drilling rigs
and related equipment........................... 7,122,000 -- 3,112,000
Provision for asset impairments.................... 478,000 252,000 726,000
Interest expense................................... 230,000 60,000 97,000
----------- ---------- ----------
19,380,000 5,925,000 14,169,000
----------- ---------- ----------
Income (loss) from continuing operations
before income taxes........................ (12,606,000) 505,000 (5,494,000)
Income tax expense................................... -- 172,000 --
----------- ---------- ----------
Income (loss) from continuing operations...... (12,606,000) 333,000 (5,494,000)
Discontinued Operations (Note 2):
Income (loss) from operations of discontinued
subsidiaries (including income taxes of $0 in
1991)........................................... (2,997,000) -- --
----------- ---------- ----------
Net income (loss) before extraordinary item... (15,603,000) 333,000 (5,494,000)
----------- ---------- ----------
Extraordinary item-reduction in income taxes
resulting from utilization of net operating loss
carryforwards...................................... -- 172,000 --
----------- ---------- ----------
Net income (loss)............................. (15,603,000) 505,000 (5,494,000)
----------- ---------- ----------
Loss attributable to common stock:
Net income (loss).................................. $(15,603,000) $ 505,000 $(5,494,000)
Less preferred stock dividends..................... (702,000) (360,000) --
----------- ---------- ----------
Earnings (loss) attributable to common
stock...................................... $(16,305,000) $ 145,000 $(5,494,000)
----------- ---------- ----------
----------- ---------- ----------
Income (loss) per common share:
Income (loss) from continuing operations........... $ (0.31) $ 0.00 $ (0.09)
Discontinued operations............................ (0.07) -- --
Extraordinary item................................. -- 0.00 --
----------- ---------- ----------
Net income (loss).................................. $ (0.38) $ 0.00 $ (0.09)
----------- ---------- ----------
----------- ---------- ----------
Weighted average shares outstanding.................. 42,519,373 45,752,936 58,392,901
----------- ---------- ----------
----------- ---------- ----------
</TABLE>
The accompanying Notes to Consolidated Financial Statements
are an integral part of these Statements.
23
<PAGE> 24
HARKEN ENERGY CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
<TABLE>
<CAPTION>
ADDITIONAL
COMMON PAID-IN RETAINED TREASURY
STOCK CAPITAL DEFICIT STOCK
----------- ----------- ----------- -----------
<S> <C> <C> <C> <C>
Balance, December 31, 1990............. $41,192,000 $41,065,000 $(61,394,000) $(17,863,000)
Change in par value of common
stock............................. (40,780,000) 40,780,000 -- --
Stock grant issuances................ 3,000 16,000 -- (19,000)
Conversion of warrants and options... 3,000 534,000 -- --
Conversion of preferred stock and
dividends......................... 69,000 24,291,000 -- --
Issuances of treasury stock, net..... -- (1,336,000) -- 1,218,000
Payment of notes receivable, net of
retirements....................... -- 366,000 -- (341,000)
Dividends on preferred stock......... -- (702,000) -- --
Net loss............................. -- -- (15,603,000) --
----------- ----------- ----------- -----------
Balance, December 31, 1991............. 487,000 105,014,000(A) (76,997,000) (17,005,000)
Conversion of warrants and options... -- 13,000 -- --
Payment of notes receivable, net of
retirements....................... -- 1,131,000 -- (906,000)
Conversion of preferred stock and
dividends......................... 25,000 8,409,000 -- --
Dividends on preferred stock......... -- (360,000) -- --
Net income........................... -- -- 505,000 --
----------- ----------- ----------- -----------
Balance, December 31, 1992............. 512,000 114,207,000(A) (76,492,000) (17,911,000)
Issuance of common stock, net........ 142,000 12,663,000 -- --
Payment of notes receivable, net of
retirements....................... -- 2,846,000 -- (2,846,000)
Exchange of subordinated debenture... -- 1,336,000 -- --
Net loss............................. -- -- (5,494,000) --
----------- ----------- ----------- -----------
Balance, December 31, 1993............. $ 654,000 $131,052,000(A) $(81,986,000) $(20,757,000)
----------- ----------- ----------- -----------
----------- ----------- ----------- -----------
</TABLE>
- ---------------
(A) Includes, as an offset to Additional Paid-In Capital, notes receivable of
$5,325,000, $4,182,000 and $0 as of December 31, 1991, 1992, and 1993
respectively, from certain officers, directors and affiliates for stock
purchases. See Note 10 -- Related Party Transactions "Other Transactions"
for discussion.
The accompanying Notes to Consolidated Financial Statements
are an integral part of these Statements.
24
<PAGE> 25
HARKEN ENERGY CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
------------------------------------------
1991 1992 1993
------------ ----------- -----------
<S> <C> <C> <C>
Cash flows from operating activities:
Income (loss) from continuing operations................................. $(12,606,000) $ 333,000 $(5,494,000)
Adjustments to reconcile net income (loss) to net cash provided by
(used in) operating activities:
Utilization of net operating loss carryforward....................... -- 172,000 --
Depreciation and amortization........................................ 1,484,000 1,408,000 3,254,000
Interest expense (income) on notes payable to/receivable from related
parties............................................................ (293,000) (813,000) (466,000)
Provision for impairment of contract drilling rigs and related
equipment.......................................................... 7,122,000 -- 3,112,000
Provision for asset impairments...................................... 478,000 252,000 726,000
Provision for doubtful accounts...................................... 115,000 154,000 --
(Gain) loss on sales of assets and other............................. 12,000 (1,485,000) (201,000)
Equity in (income) loss of partnership............................... 2,992,000 107,000 --
------------ ----------- -----------
(696,000) 128,000 931,000
------------ ----------- -----------
Income (loss) from discontinued operations............................... (2,997,000) -- --
Adjustments to reconcile income (loss) to net cash provided by
operating activities:
Depreciation and amortization........................................ 4,075,000 -- --
Interest on notes payable to related parties......................... 949,000 -- --
Loss on sales of assets and other.................................... 182,000 -- --
------------ ----------- -----------
2,209,000 -- --
Change in assets and liabilities, net of effect of companies acquired:
(Increase) decrease in accounts receivable........................... 2,410,000 (403,000) 2,282,000
(Increase) decrease in accounts receivable from/payable to related
parties............................................................ 1,537,000 (2,438,000) (338,000)
Increase (decrease) in trade payables and other...................... (421,000) (2,539,000) (6,761,000)
Net (increase) decrease in net current assets of discontinued
operations......................................................... (2,419,000) -- --
------------ ----------- -----------
Net cash provided by (used in) operating activities................ 2,620,000 (5,252,000) (3,886,000)
------------ ----------- -----------
Cash flows from investing activities:
Proceeds from sale of assets............................................. 1,156,000 4,680,000 350,000
Cash from acquired subsidiary............................................ -- -- 2,616,000
Capital expenditures..................................................... (953,000) (1,341,000) (4,499,000)
Net cash used in investing activities of discontinued operations......... (7,552,000) -- --
------------ ----------- -----------
Net cash provided by (used in) investing activities................ (7,349,000) 3,339,000 (1,533,000)
------------ ----------- -----------
Cash flows from financing activities:
Issuance of preferred and common stock, net of retirements............... 453,000 211,000 --
Issuance of long-term debt and short-term borrowings..................... 1,480,000 -- --
Payment of note payable to related party................................. -- (253,000) --
Debt repayments.......................................................... (171,000) (264,000) (1,630,000)
Net cash flows from financing activities of discontinued operations...... 1,872,000 -- --
------------ ----------- -----------
Net cash provided by (used in) financing activities................ 3,634,000 (306,000) (1,630,000)
------------ ----------- -----------
Net increase (decrease) in cash and temporary investments.................. (1,095,000) (2,219,000) (7,049,000)
Cash and temporary investments at beginning of year........................ 13,662,000 12,567,000 10,348,000
------------ ----------- -----------
Cash and temporary investments at end of year.............................. $ 12,567,000 $10,348,000 $ 3,299,000
------------ ----------- -----------
------------ ----------- -----------
</TABLE>
The accompanying Notes to Consolidated Financial Statements
are an integral part of these Statements.
25
<PAGE> 26
HARKEN ENERGY CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1991, 1992 AND 1993
(1) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Principles of Consolidation and Presentation -- The Consolidated Financial
Statements include the accounts of Harken Energy Corporation and all of its
wholly-owned subsidiaries ("Harken") after elimination of significant
intercompany balances and transactions. Interests in managed oil and gas joint
ventures are proportionately consolidated. Data is as of December 31 of each
year or for the year then ended and dollar amounts in tables are in thousands
unless otherwise indicated. Certain prior year amounts have been reclassified to
conform with the 1993 presentation.
Accounts Receivable -- Harken maintains a reserve for potential losses in
collection of its receivables. The allowance for doubtful accounts was
$1,252,000 and $1,403,000 as of December 31, 1992 and 1993, respectively.
Assets Held for Resale -- Harken reflects assets that it intends to sell
during the next twelve months as a current asset in its balance sheets at the
lower of cost or net realizable value. At December 31, 1993, Harken has
identified certain contract drilling rigs and related equipment for resale and
reflected them as Assets Held for Resale in the accompanying financial
statements.
Management Fee Income -- During 1991, 1992 and 1993, Harken received
management fees of approximately $1,266,000, $1,110,000 and $300,000,
respectively, related to monthly fees earned as manager of a partnership (see
Note 6 -- Investment in Limited Partnership).
Accrued Liabilities and Other -- Accrued liabilities and other at December
31, 1992 consists of Bahrain joint venture prepayments of $2,220,000 and other
accrued liabilities of $1,836,000. The December 31, 1993 balance consists of
certain liabilities of $2,931,000 related to Chuska and other accrued
liabilities of $1,909,000.
Deferred Revenue -- During 1992, Harken deferred the realized gain
generated upon the sale of certain of its common stock interests in two former
subsidiaries. Such gains were deferred until 1993 when all remaining material
contingencies and guarantees by Harken relating to these former subsidiaries
were eliminated. See Note 4 -- Investments in Former Subsidiaries for further
discussion.
During 1993, Harken received approximately $2,000,000 from a joint venture
partner upon termination of a joint operating agreement. Such amount, net of
Harken's carrying value in its Bahrain investment, has been recorded as deferred
revenue in the accompanying balance sheet. See Note 13 -- Commitments and
Contingencies-Bahrain Operations for further discussion.
Well Servicing and Contract Drilling -- Harken accounts for revenues
generated from its well servicing and contract drilling operations using the
percentage of completion method whereby revenues from contracts in progress at
year end are accrued based on the portion of the total anticipated depth to be
drilled that is completed at year end. Harken's contract drilling operations
were suspended in April 1991, due to decreased domestic demand and increased
competition, as discussed in Note 11 -- Segment Information and Other.
Cash and Temporary Investments -- For purposes of the Consolidated
Statements of Cash Flows, Harken considers all highly liquid investments
purchased with a maturity of three months or less to be cash equivalents. Harken
paid cash for interest in the amounts of $49,000, $77,000 and $97,000 during
1991, 1992 and 1993, respectively. All significant noncash investing and
financing activities are discussed in Notes 3 and 8 -- Acquisitions and
Stockholders' Equity.
Harken includes in cash and temporary investments certain balances which
are restricted to use for specific project expenditures, collateral or for
distribution to outside interest owners and are not available for general
working capital purposes. Such restricted cash amounts totalled $6,197,000 and
$1,391,000 at December 31, 1992 and 1993, respectively.
26
<PAGE> 27
HARKEN ENERGY CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
General and Administrative Expenses -- Harken reflects general and
administrative expenses net of amounts capitalized, operator overhead charges
and other amounts billed to joint interest owners. General and administrative
expenses are net of $4,893,000, $4,280,000 and $4,252,000 for such amounts
during 1991, 1992 and 1993, respectively.
Equity Method Investees -- Harken accounts for its 12% general partner
interest in an oil and gas limited partnership using the equity method of
accounting. Harken recorded $2,992,000 and $107,000 of equity in (income) loss
of its investment in the oil and gas partnership during 1991 and 1992,
respectively, and included such amounts in Equity in (Income) Loss of
Partnership in the accompanying financial statements. Such partnership
investment was sold in December 1992. See Note 6 -- Investment in Limited
Partnership for further discussion.
(2) DISCONTINUED OPERATIONS
Two former wholly-owned subsidiaries of Harken, E-Z Serve Corporation ("E-Z
Serve"), and Tejas Power Corporation ("Tejas"), filed a registration statement
with the Securities and Exchange Commission ("SEC") relating to a distribution
("Rights Offering") of rights to acquire shares of the common stock, $0.01 par
value, of E-Z Serve and Tejas. Effective April 30, 1991, and pursuant to the
Rights Offering and certain other transactions relating thereto, Harken owned
approximately 7.25% and 6.59%, respectively, of the outstanding shares of E-Z
Serve common stock and Tejas common stock. Balances relating to certain Rights
Offering expenses and working capital advances paid by Harken on behalf of E-Z
Serve and Tejas were converted to preferred stock and subordinated debenture
investments in these former subsidiaries. See Note 4 -- Investments in Former
Subsidiaries.
These transactions resulted in the discontinuance of Harken's refined
products marketing and natural gas gathering and marketing operations. Harken
estimated the net operating profit (loss) for E-Z Serve and Tejas for the
quarter ended March 31, 1991 to be approximately $(3,325,000) and $600,000,
respectively, and included such estimated net loss of $2,725,000 in Net Income
(Loss) from Discontinued Operations at December 31, 1990. Additional losses of
$1,524,000 and $1,473,000 have been reflected during the first quarter and April
of 1991, respectively, to reflect the difference between the year-end estimate
and Harken's reported interest in actual results for these discontinued
subsidiaries.
(3) ACQUISITIONS
Effective February 15, 1993, Harken consummated a merger pursuant to which
Chuska Resources Corporation ("Chuska") became a wholly-owned subsidiary of
Harken. Harken acquired all of the 11,055,918 shares of Chuska common stock
outstanding in exchange for 14,210,357 shares of newly-issued Harken common
stock. Chuska is engaged, 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 or near the Paradox Basin, the
Aneth Gas Plant, on the Utah portion of the Reservation. The acquisition of
Chuska has been accounted for under the purchase method of accounting.
Chuska is the general partner of four limited partnerships and is a
venturer in the CHAP Joint Venture, 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
27
<PAGE> 28
HARKEN ENERGY CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
Blanding and Western Paradox. Chuska accounts for its investments in the
partnerships and CHAP using the proportionate consolidation method.
Pro Forma Information -- Unaudited pro forma information for the year ended
December 31, 1992 and 1993, has been prepared to reflect the results of
operations as if the February 15, 1993 acquisition of Chuska by Harken had been
accomplished at January 1, 1992 and 1993. The results are not necessarily
indicative of the results which would have occurred had these transactions been
consummated at the beginning of each year or of future results of operations of
Harken. Pro forma adjustments have been applied to reflect Chuska's acquisition
of an acquired joint venture interest as of January 1, 1992 and to recalculate
depreciation, depletion and amortization for the combined entities. Pro forma
revenues for the years ended December 31, 1992 and 1993 would have been
$17,739,000 and $9,305,000, respectively, with a net income (loss) of $3,679,000
and $(5,414,000), respectively, or $0.06 and $(0.09) per common share,
respectively.
(4) INVESTMENTS IN FORMER SUBSIDIARIES
Pursuant to the Rights Offering as discussed in Note 2 -- Discontinued
Operations, effective April 30, 1991, Harken owned approximately 7.25% and
6.59%, respectively, of the outstanding shares of E-Z Serve common stock and
Tejas common stock, both of which it accounts for as marketable equity
securities using the lower of cost or market value. During late 1991 and
throughout 1992, Harken sold its common stock interest in Tejas and in December
1992 and during 1993, Harken sold a portion of its common stock interest in E-Z
Serve. The resulting realized gains from these sales as of December 31, 1992
totalled $2,451,000 and were deferred until 1993 when all remaining material
contingencies and guarantees by Harken relating to its discontinued operations
of E-Z Serve and Tejas were eliminated. At December 31, 1992, the aggregate cost
and market value of Harken's investment in common shares of E-Z Serve was
$22,000 and $283,000, respectively and gross unrealized gains totalled $261,000.
At December 31, 1993, the aggregate cost and market value of Harken's investment
in common shares of E-Z Serve was $138,000 and $250,000 respectively and gross
unrealized gains totalled $112,000.
E-Z Serve Restructuring -- Harken held a 12% secured subordinated debenture
from E-Z Serve for $3,136,000, which included $1,336,000 which was issued in
exchange for 531,824 shares of Harken common stock and was reflected as a
reduction to stockholders' equity in Harken's balance sheet. In April 1993,
Harken agreed to enter into an exchange which E-Z Serve had proposed in
connection with an overall E-Z Serve restructuring. Under this restructuring,
which was consummated on April 21, 1993, E-Z Serve entered into various
agreements with its existing bank, a new bank, its major stockholders as well as
certain agreements with Harken. Under the exchange which was made between E-Z
Serve and Harken, Harken has tendered and released to E-Z Serve the 12% secured
subordinated debenture of $3,136,000 plus accrued interest receivable from E-Z
Serve. Harken also waived certain antidilution provisions of the E-Z Serve
Series C Preferred held by Harken and made a capital contribution to E-Z Serve
for $366,000 in cash. In exchange for the above matters, Harken received from
E-Z Serve a full and complete release of Harken's guarantee previously given to
E-Z Serve's bank for up to $5,000,000 of a portion of E-Z Serve's bank debt. In
addition, Harken received 12,830 additional shares of E-Z Serve's Series C
Preferred Stock (see discussion below) and received an agreement from E-Z Serve
which would allow Harken to assist E-Z Serve in identifying purchasers for the
shares of Harken common stock which are held by E-Z Serve and under which E-Z
Serve would pay to Harken a fee to be negotiated upon the sale of any such
shares to such identified parties. All of these shares of Harken common stock
were subsequently sold by E-Z Serve under an effective registration and did not
require Harken's assistance nor did Harken earn any fee in connection therewith.
As discussed above, Harken had previously deferred $2,451,000 of realized
gain which had been generated during 1991 and 1992 from the sale of certain of
its common stock interests in certain former subsidiaries, including E-Z Serve.
During the second quarter of 1993, and upon release of Harken's guarantee
28
<PAGE> 29
HARKEN ENERGY CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
of E-Z Serve's bank debt, such deferred gain was utilized to reduce the value of
investments in former subsidiaries and reflect the release of the 12% secured
subordinated debenture in the Harken balance sheet.
E-Z Serve Preferred Stock -- Harken holds 79,754 shares of 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. See above for further discussion. The E-Z Serve
Series C Preferred is to pay a cumulative dividend of $6.00 per share per annum,
payable semi-annually beginning October 1, 1991 as declared by the E-Z Serve
Board of Directors, and payable in legally available cash or in additional
shares of E-Z Serve Series C Preferred. Each share of E-Z Serve Series C
Preferred is convertible at the option of either E-Z Serve or Harken into 52.63
common shares of E-Z Serve, such rate to be adjusted under certain conditions.
The E-Z Serve Series C Preferred is subordinated to all E-Z Serve bank credit
facilities. Harken recorded dividend income of $200,000, $397,000 and $466,000
during 1991, 1992 and 1993, respectively, related to the E-Z Serve Series C
Preferred and has included such dividends in Other Income in the accompanying
financial statements.
Tejas Preferred Stock -- On September 6, 1991, and effective May 3, 1991,
Harken purchased 1,000 shares of Tejas Power Corporation Series B Preferred
Stock, $.01 par value per share ("Tejas Preferred Stock"), at a purchase price
of $1,200,000. The purchase price amount was equal to certain expenses incurred
by Harken on behalf of Tejas in connection with the Rights Offering. Harken
accepted these shares of Tejas Preferred Stock as full and complete payment for
the above expenses as a result of Tejas agreeing to waive certain of the
provisions under the terms of the Harken Series C Preferred held by Tejas and
pledging all 186,760 shares of the Harken Series C Preferred to Harken.
(5) PROPERTY AND EQUIPMENT
Property and equipment are carried at cost. Oil and gas properties and
oilfield service equipment are depreciated principally using the
unit-of-production method and the gas plant and other property is depreciated on
the straight-line method over their estimated useful lives ranging from three to
fifteen years. A summary of property and equipment follows:
<TABLE>
<CAPTION>
1992 1993
------- -------
<S> <C> <C>
Oil and gas properties --
Evaluated...................................................... $ 123 $ 9,664
Unevaluated.................................................... 975 8,004
Oilfield service equipment....................................... 7,568 1,375
Gas plants and other property.................................... 5,063 6,994
Less accumulated depreciation and amortization................... (5,409) (6,230)
------- -------
$ 8,320 $19,807
------- -------
------- -------
</TABLE>
(6) INVESTMENT IN LIMITED PARTNERSHIP
On December 17, 1992, Harken entered into a Purchase and Sale Agreement
(the "Agreement") pursuant to which Harken sold its 12% general partner's
interest in a limited partnership to an affiliate of a major stockholder which
served as limited partner. The closing of the Agreement was completed on
December 30, 1992. The transaction resulted in Harken recognizing a gain of
$1,449,000 during December 1992.
Pursuant to the Agreement, Harken was paid consideration in cash of
$2,650,000 for the sale of this partnership interest and certain contract rights
associated therewith, subject to certain reductions. As additional consideration
for the transaction, the affiliate of the major stockholder agreed to indemnify
Harken
29
<PAGE> 30
HARKEN ENERGY CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
from any liability under the guarantee given by Harken to a bank with regard to
the limited partnership's credit agreement with the bank. Subsequent to December
31, 1992, the affiliate of the major stockholder caused the bank to release
Harken and its affiliates from any liability under this guarantee and loan.
Under the terms of the Agreement, Harken continued to manage the oil and
gas property interests of the limited partnership and operate certain
partnership properties. Harken was paid $50,000 per month to manage the
partnership interest in such properties in addition to the fees it received for
serving as operator of the properties pursuant to applicable joint operating
agreements. During the second quarter of 1993, the partnership sold its
interests in all oil and gas properties operated by Harken and Harken ceased to
manage the partnership.
Under full cost accounting rules, net capitalized costs of oil and gas
properties are limited to the sum of the present worth of future net revenues
from proved oil and gas discounted at 10%. Included in Harken's Equity in
(Earnings) Loss of Partnership for 1991 of $2,992,000 is Harken's interest in a
$21,095,000 full cost valuation adjustment by the partnership principally
resulting from lower crude oil prices at December 31, 1991 compared to the prior
year. Presented below is summarized financial information of the oil and gas
limited partnership for the year ended December 31, 1991:
<TABLE>
<CAPTION>
1991
--------
<S> <C>
Oil and gas sales revenues................................................ $ 14,596
Oil and gas operating expenses............................................ 6,213
General and administrative expenses, net.................................. 956
Depreciation and amortization............................................. 8,309
Full cost valuation adjustment............................................ 21,095
Interest expense, net..................................................... 2,113
--------
Net loss........................................................ $(24,090)
--------
--------
</TABLE>
(7) REDEEMABLE PREFERRED STOCK
During 1988, Harken completed the private placement of 3,000,000 shares of
newly-issued Series C 12% $1 par value cumulative convertible redeemable
preferred stock ("Series C Preferred") for $30,000,000. Each share of preferred
stock was convertible into 1.667 shares of common stock at the option of the
holder and was mandatorily redeemable at $10 per share over a five year period
beginning in 1993. Dividends may be paid in the form of cash or common stock at
the option of the holder. Harken has the option to convert the preferred stock
to shares of common stock if the market price for Harken's common stock has
exceeded 125% of the $6.00 conversion price of the preferred stock for twenty
consecutive days. The conversion price of $6.00 per share is adjustable under
certain conditions.
In 1990, Harken extended to the holders of Series C Preferred stock
exchange offers by Harken, E-Z Serve and Tejas, pursuant to which each
outstanding share of Series C Preferred would be exchanged for 2.48 shares of
Harken common stock, .31 shares of E-Z Serve common stock and .31 shares of
Tejas common stock. During the first quarter of 1991 the holders of 2,800,000
shares of Series C Preferred accepted these exchange offers which had been made
separately by each of Harken, E-Z Serve and Tejas, pursuant to which 2,100,000
shares of Series C Preferred were exchanged to Harken for 6,944,000 shares of
Harken common stock, 513,240 shares of Series C Preferred were exchanged to E-Z
Serve for 868,000 shares of E-Z Serve common stock and 186,760 shares of Series
C Preferred were exchanged to Tejas for 868,000 shares of Tejas common stock.
These 186,760 shares of Series C Preferred held by Tejas represent the only
Series C Preferred shares outstanding as of December 31, 1992 and 1993. During
1991, in connection with the issuance of 1,000 shares of Tejas preferred stock
to Harken, Tejas agreed to waive certain of the provisions under the terms of
the Harken Series C Preferred, including the payment of the 12% annual dividend.
30
<PAGE> 31
HARKEN ENERGY CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
The holder of 200,000 shares of Series C Preferred who did not elect to
exchange its shares of Series C Preferred continued to hold its shares, until
such shares were also exchanged under the original terms of the Series C
Preferred in January 1992 for 333,400 shares of Harken common stock.
During the third quarter of 1992, the 513,240 shares of Harken Series C
Preferred held by E-Z Serve were exchanged for 2,200,000 newly issued shares of
Harken common stock. In addition, E-Z Serve agreed to adjust the conversion
ratio of its E-Z Serve Series C Preferred (see Note 4 -- Investments in Former
Subsidiaries, "E-Z Serve Preferred Stock" for further discussion). As part of
the above exchange transaction, Harken issued its approval of an E-Z Serve
acquisition as required under the terms of a subordinated debenture by E-Z Serve
to Harken.
(8) STOCKHOLDERS' EQUITY
Common Stock -- Harken currently has authorized 100,000,000 shares of $.01
par common stock. At December 31, 1992 and 1993, Harken had issued 51,206,151
shares and 65,466,508 shares, respectively. At December 31, 1992 and 1993,
Harken held 4,897,730 and 5,983,655 shares as treasury stock at a cost of
$17,911,000 and $20,757,000, respectively. In February 1991, the stockholders of
Harken approved an amendment to Harken's Certificate of Incorporation to reduce
the par value of Harken's common stock from $1.00 to $0.01 per share.
Contribution to E-Z Serve -- Harken contributed 3,448,276 newly-issued
shares of common stock valued at $10,000,000 to E-Z Serve's capital pursuant to
E-Z Serve's refinanced bank debt facility in November 1990. The bank debt
facility required such shares contributed to E-Z Serve to be sufficient to equal
$10,000,000 in value when compared to the average closing price for the Harken
common stock at the time of the Rights Offering. On May 8, 1991, Harken issued
531,824 additional shares to satisfy this requirement. Such shares, valued at
$1,336,000, were issued in exchange for a portion of a 12% secured subordinated
debenture from E-Z Serve. See Note 4 -- Investments in Former Subsidiaries "E-Z
Serve Restructuring" for further discussion.
Registration of Outstanding Shares -- Pursuant to the request of E-Z Serve
and certain other Harken stockholders under registration rights agreements,
Harken filed a registration statement with the SEC which became effective
January 24, 1992, covering 14,171,451 shares of its currently outstanding common
stock. No additional shares were issued by Harken through this offering, and the
offering generated no proceeds to Harken.
Later in 1992, Harken again filed a registration statement with the SEC
pursuant to the request of E-Z Serve covering the 2,200,000 shares of Harken
common stock held by E-Z Serve that were exchanged for 513,240 shares of Harken
Series C Preferred (see Note 7 -- Redeemable Preferred Stock). The registration
statement included an additional 916,300 shares of Harken common stock held by
certain other Harken stockholders under registration rights agreements. The
registration statement became effective January 28, 1993 and the offering
generated no proceeds to Harken.
Acquisition of Chuska Resources Corporation -- Effective February 15, 1993,
Harken consummated a merger pursuant to which Chuska Resources Corporation
("Chuska") became a wholly-owned subsidiary of Harken. In exchange for all of
the outstanding common stock of Chuska, Harken issued 14,210,357 shares of
Harken common stock. In connection with the merger, Harken filed a registration
statement, which became effective January 15, 1993, with the Securities and
Exchange Commission for the shares of Harken common stock issued. See further
discussion of the merger at Note 3 -- Acquisitions.
Per Share Data -- Per share data has been computed based on the weighted
average number of common shares outstanding during each period. Per share data
reflects net loss adjusted for accrued dividends on the Series C Preferred
stock.
31
<PAGE> 32
HARKEN ENERGY CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
Stock Options -- In conjunction with various stock option plans and grants,
Harken has the following options outstanding at December 31, 1993 (not in
thousands):
<TABLE>
<CAPTION>
YEAR OF NUMBER OF EXPIRATION
GRANT SHARES EXERCISABLE OPTION PRICE DATE
- ------- --------- ----------- ------------------ ----------
<S> <C> <C> <C> <C>
1984................................ 42,056 42,056 $1.000 1994
1985................................ 697,219 697,219 $1.000 1995
1986................................ 10,000 10,000 $4.1875 1996
1987................................ 31,667 31,667 $3.75 to $4.120 1994-1995
1988................................ 112,250 112,250 $4.18 to $5.625 1994-1998
1990................................ 142,848 142,848 $4.00 to $5.000 1994-2000
1991................................ 10,000 6,667 $6.500 2001
1993................................ 333,650 284,692 $1.1875 to $1.625 1995-2003
</TABLE>
(9) INCOME TAXES
At December 31, 1993, Harken had available for federal income tax reporting
purposes, net operating loss (NOL) carryforward for regular tax purposes of
approximately $59,000,000 which expires in 1997 through 2009, alternative
minimum tax NOL carryforward of approximately $50,000,000 which expires in 1997
through 2009, investment tax credit carryforward of approximately $863,000 which
expires in 1994 through 2002, contribution carryforward of approximately $31,000
which expires in 2000 through 2007, statutory depletion carryforward of
approximately $529,000 which does not have an expiration date, jobs tax credit
carryforward of approximately $132,000 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 year ended December 31, 1993.
At December 31, 1993, primarily as a result of the February 15, 1993 merger
with Chuska whereby Chuska became a wholly-owned subsidiary of Harken, total
deferred tax liabilities increased to approximately $4,065,000. Such increase
was due to the financial statement basis for Chuska property and equipment being
in excess of the related historical tax basis. In addition, total deferred tax
assets increased to approximately $22,872,000, primarily from an increase in the
NOL carryforward during the year. The resulting increase in net deferred tax
assets was offset by a corresponding increase in the valuation allowance,
resulting in no impact to Harken's results of operations.
32
<PAGE> 33
HARKEN ENERGY CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
The Tax Reform Act of 1986 made substantial changes with regard to NOL
carryforwards. After an "ownership change," the taxable income of a loss
corporation is limited annually to a prescribed rate times the value of the loss
corporation's stock immediately before the ownership change. In general, an
ownership change occurs if ownership of more than 50% in value of the stock of
the loss corporation changes during the three-year period preceding the test
date. Under federal tax law, the amount and availability of loss carryforwards
are subject to a variety of interpretations and restrictive tests, under which,
the utilization of such loss carryforwards could be limited or effectively lost
upon certain changes in ownership. Application of these and other tests requires
certain factual determinations and legal interpretations as to which there is
little guidance. An ownership change occurred in 1989 resulting in Harken's
utilization of NOL carryforwards for all periods prior to the date of change
being limited annually to approximately $11,000,000 to $12,000,000.
(10) RELATED PARTY TRANSACTIONS
Relationship with E-Z Serve and Tejas -- At December 31, 1992, E-Z Serve
owed Harken $1,024,000 primarily for preferred stock dividends and interest on
the subordinated debenture. At December 31, 1993, E-Z Serve owed Harken
$870,000, primarily for preferred stock dividends. Such balances are included in
Accounts Receivable from Related Parties in the accompanying consolidated
balance sheets.
See Note 8 -- Stockholders' Equity for other related party transactions
with E-Z Serve.
Other Transactions -- The Board of Directors approved the granting of loans
from Harken to certain employees and directors under the Non-Qualified Plan and
the Directors Option Agreement for the purpose of allowing such individuals to
exercise their stock options immediately. The Board of Directors determined in
making such grants that as a result of the restricted nature of the stock and
the lack of any rights on the part of the optionee to cause such shares to be
registered, an option price per share equal to 60% of the closing market price
on the date of grant was the reasonable price for such shares of common stock
which were immediately purchased. Each loan is evidenced by a promissory note
which is due eight years from making and bears interest at 5% per annum. The
shares of stock purchased pursuant to such notes are held by Harken as
collateral until the respective notes are fully paid. During 1988, 1989, 1990
and 1991, certain officers and directors elected to purchase common stock under
these terms. Harken had notes receivable of $3,989,000 and $2,846,000 as of
December 31, 1991 and 1992, respectively, which are included in Stockholders'
Equity.
During the first and second quarter of 1993, Harken foreclosed on certain
of these non-recourse notes receivable from certain former employees, officers
and directors resulting in the addition of 381,925 shares of treasury stock,
which had served as the sole collateral for these notes. In addition, during the
third quarter of 1993, certain current employees, officers and directors
surrendered to Harken a total of 704,000 shares of common stock for the
cancellation of certain of these non-recourse promissory notes given by such
parties to Harken upon the purchase of such shares. In connection with such
surrender, Harken issued new stock options to such parties which options had
been determined to be equal value to the shares surrendered. This resulted in
the addition of 704,000 shares of treasury stock which had served as collateral
for these notes. As a result of the above transactions, during the year ended
December 31, 1993, Harken expensed a total of $551,000 of accrued interest
related to these non-recourse notes receivable, and such expense has been
included in Provision for Asset Impairments in the accompanying Statements of
Operations.
In September 1989, Harken's Board of Directors approved a loan to an
officer in the amount of $520,000. The note bears interest at the Broker Loan
Rate (5% at December 31, 1992 and 1993, respectively) plus 1/2% and is due
October 2, 1999. The note is secured by vested options to purchase 266,790
shares of Harken's common stock at $1.00 per share. 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. Such note is included in Notes Receivable from Related
Parties in the accompanying financial statements.
33
<PAGE> 34
HARKEN ENERGY CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
See Notes 2, 4, 6 and 8 -- Discontinued Operations, Investments in Former
Subsidiaries, Investment in Limited Partnership and Stockholders' Equity for
other related party transactions.
(11) SEGMENT INFORMATION AND OTHER
Segment Information -- Operating profit for each segment includes total
revenue less operating expenses, excluding general corporate expenses, interest
expense and income taxes.
The following table presents information relating to Harken's continuing
business segments included in its Consolidated Statements of Operations for the
years ended December 31, 1991, 1992, and 1993:
<TABLE>
<CAPTION>
1991 1992 1993
-------- ------- -------
<S> <C> <C> <C>
Segment Revenues:
Exploration and production......................... $ 1,769 $ 2,821 $ 5,505
Well servicing and contract drilling............... 3,583 2,048 2,074
Corporate and other................................ 1,422 1,561 1,096
-------- ------- -------
Total...................................... $ 6,774 $ 6,430 $ 8,675
-------- ------- -------
-------- ------- -------
Segment Operating Profit (Loss):
Exploration and production......................... $ (1,234) $ 2,872 $ 2,215
Well servicing and contract drilling............... (8,193) (497) (3,697)
-------- ------- -------
Total...................................... (9,427) 2,375 (1,482)
Corporate and other general and administrative
expense, net of corporate revenue............... (2,949) (1,810) (3,915)
Interest expense................................... (230) (60) (97)
-------- ------- -------
Income (loss) from continuing operations before
income taxes.................................. $(12,606) $ 505 $(5,494)
-------- ------- -------
-------- ------- -------
</TABLE>
The identifiable assets of Harken, by segment, at December 31, 1992 and
1993 are as follows:
<TABLE>
<CAPTION>
1992 1993
------- -------
<S> <C> <C>
Exploration and production....................................... $ 7,778 $21,280
Well servicing and contract drilling............................. 6,597 5,150
------- -------
Total.................................................. 14,375 26,430
Corporate and other.............................................. 20,497 11,301
------- -------
Total.................................................. $34,872 $37,731
------- -------
------- -------
</TABLE>
34
<PAGE> 35
HARKEN ENERGY CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
Depreciation and amortization expense and capital expenditure information
for each segment is as follows:
<TABLE>
<CAPTION>
1991 1992 1993
------ ------ ------
<S> <C> <C> <C>
Depreciation and Amortization Expense:
Exploration and production............................. $ -- $ -- $1,433
Well servicing and contract drilling................... 649 454 683
------ ------ ------
Total.......................................... 649 454 2,116
Corporate and other.................................... 835 954 1,138
------ ------ ------
Total.......................................... $1,484 $1,408 $3,254
------ ------ ------
------ ------ ------
</TABLE>
<TABLE>
<CAPTION>
1992 1993
------ ------
<S> <C> <C>
Capital Expenditures:
Exploration and production....................................... $ 763 $2,170
Well servicing and contract drilling............................. 71 920
------ ------
Total.................................................... 834 3,090
Corporate and other.............................................. 507 1,409
------ ------
Total.................................................... $1,341 $4,499
------ ------
------ ------
</TABLE>
Well servicing and contract drilling operations revenues and operating
expenses decreased in 1991 due to the decision in April 1991 to suspend the
domestic contract drilling operations due to decreased demand and increased
competition, particularly in the Austin Chalk trend in South Texas. All contract
drilling rigs were idle at December 31, 1992 and 1993. Harken continues to
pursue opportunities for oilfield services internationally, where the
opportunities to profitably deploy Harken's expertise and assets are generally
greater than those available domestically. Consistent with this change in
emphasis, in December 1991, Harken made the decision to attempt to sell certain
of its drilling rigs and related domestic assets which were not suitable for the
pursuit of international drilling opportunities. As a result of this decision,
Harken recognized a non-cash charge of $7,122,000 to fourth quarter 1991
operations to write down the carrying value of these assets to an estimated
recoverable value. In addition, in January 1994, Harken made the decision to
liquidate its remaining drilling rigs and related assets and apply the proceeds
primarily to its international exploration efforts, specifically in Colombia and
Bahrain. As a result of this decision, Harken recognized an additional non-cash
charge of approximately $3,100,000 during the fourth quarter of 1993. Harken has
included these charges as Provision for Impairment of Contract Drilling Rigs and
Related Equipment during 1991 and 1993 in the accompanying statement of
operations. At December 31, 1993, Harken classified its remaining drilling rigs
as Assets Held for Resale in the accompanying balance sheets. Harken continues
to operate its well service fleet through Supreme Well Service ("Supreme")
primarily in Texas.
35
<PAGE> 36
HARKEN ENERGY CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
Quarterly Data -- (Unaudited) -- The following tables summarize selected
quarterly financial data for 1992 and 1993 expressed in thousands, except per
share amounts.
<TABLE>
<CAPTION>
QUARTER ENDED
------------------------------------------------- TOTAL
MARCH 31 JUNE 30 SEPTEMBER 30 DECEMBER 31 YEAR
-------- ------- ------------ ----------- -------
<S> <C> <C> <C> <C> <C>
1992
Revenues................................. $1,209 $ 1,385 $1,320 $ 2,516 $ 6,430
Gross profit............................. 223 321 290 246 1,080
Earnings (loss) from continuing
operations............................ (72) (30) (199) 634 333
Extraordinary item -- utilization of net
operating loss carryforward........... -- -- -- 172 172
Net income (loss)........................ (72) (30) (199) 806 505
Per common share
Income (loss) from continuing
operations.......................... $(0.01) $ (0.00) $(0.00) $ 0.01 $ 0.00
Extraordinary item.................... -- -- -- 0.00 0.00
Net income (loss)..................... (0.01) (0.00) (0.00) 0.01 0.00
1993
Revenues................................. $1,943 $ 2,628 $2,122 $ 1,982 $ 8,675
Gross profit............................. 986 1,475 1,137 685 4,283
Loss from continuing operations.......... (184) (312) (632) (4,366) (5,494)
>Net loss................................ (184) (312) (632) (4,366) (5,494)
Per common share
Loss from continuing operations....... $(0.00) $ (0.01) $(0.01) $ (0.07) $ (0.09)
Net loss................................. (0.00) (0.01) (0.01) (0.07) (0.09)
</TABLE>
Significant Customers -- In 1991, management fees and prospect fees earned
from a limited partnership represented 21% of consolidated revenues. In 1992,
management fees and prospect fees from the limited partnership represented 17%
of consolidated revenues. In 1993, there were two oil purchasers which
represented 14% and 21% of consolidated revenues.
(12) OIL AND GAS DISCLOSURES
Harken follows the full cost accounting method to account for the costs
incurred in the acquisition, exploration, development and production of oil and
gas reserves. Under this method, all costs, including indirect costs, related to
acquisition, exploration and development activities are capitalizable as oil and
gas property costs. Harken capitalized $189,000, $602,000 and $1,840,000 of
indirect costs, net of reimbursements from joint venture partners, directly
related to these activities in 1991, 1992 and 1993, respectively. The
capitalized costs of oil and gas properties, excluding unevaluated properties,
are amortized using a company-wide unit of production method (equivalent
physical units of 6 Mcf of gas to each barrel of oil) based on estimated proved
recoverable oil and gas reserves. Such amortization was $5.58 per equivalent
barrel of oil produced during 1993. The unevaluated property costs at December
31, 1993 includes $796,000 related to Colombia (see Note 13 -- Commitments and
Contingencies for a discussion of Colombian operations) and $7,208,000 related
to domestic prospects. Amortization of unevaluated property costs will begin
when the properties become proved or their values become impaired. Under full
cost accounting rules, net capitalized costs of the oil and gas properties less
the related deferred federal income taxes are limited to the sum of the present
worth, after tax, of future net revenues discounted at 10% from proved oil and
gas reserves.
36
<PAGE> 37
HARKEN ENERGY CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
Costs Incurred in Property Acquisition, Exploration and Development
Activities:
<TABLE>
<CAPTION>
1991 1992 1993
---- ---- -------
<S> <C> <C> <C>
Costs incurred --
Acquisition of properties
Evaluated............................................. $ -- $123 $ 8,293
Unevaluated........................................... 450 640 7,029
Exploration.............................................. -- -- 729
Development.............................................. -- -- 519
---- ---- -------
Total costs incurred............................. $450 $763 $16,570
---- ---- -------
---- ---- -------
</TABLE>
Capitalized Costs Relating to Oil and Gas Producing Activities:
<TABLE>
<CAPTION>
1991 1992 1993
---- ------ -------
<S> <C> <C> <C>
Capitalized costs --
Unevaluated properties not being amortized.............. $335 $ 975 $ 8,004
Evaluated properties being amortized.................... -- 123 9,664
---- ------ -------
Total capitalized costs................................... 335 1,098 17,668
Less accumulated depreciation and amortization............ -- -- (1,433)
---- ------ -------
Net capitalized costs................................... $335 $1,098 $16,235
---- ------ -------
---- ------ -------
</TABLE>
Oil and Gas Reserve Data -- (Unaudited) -- The following information is
presented with regard to Harken's proved oil and gas reserves, all of which are
located in the United States. The reserve values reflected in the following
reserve disclosures are based on prices received as of year end. Effective
February 15, 1993, Harken consummated a merger whereby Chuska became a
wholly-owned subsidiary of Harken. (See Note 3 -- Acquisitions for a discussion
of Chuska).
Crude Oil and Condensate (Barrels):
<TABLE>
<CAPTION>
(UNAUDITED)
-------------------------
1991 1992 1993
----- ----- -----
(IN THOUSANDS)
<S> <C> <C> <C>
Proved reserves -- beginning of year........................ 0 0 0
Extensions and discoveries................................ -- -- 1
Production................................................ -- -- (185)
Purchases of reserves-in-place............................ -- -- 1,219
----- ----- -----
Proved reserves -- end of year.............................. 0 0 1,035
----- ----- -----
----- ----- -----
Proved developed reserves --
Beginning of year......................................... 0 0 0
----- ----- -----
----- ----- -----
End of year............................................... 0 0 624
----- ----- -----
----- ----- -----
Harken's share of an investee's proved oil reserves, equity
method.................................................... 336 0 0
----- ----- -----
----- ----- -----
</TABLE>
37
<PAGE> 38
HARKEN ENERGY CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
Natural Gas (Mcf):
<TABLE>
<CAPTION>
(UNAUDITED)
-------------------------
1991 1992 1993
----- ----- -----
(IN THOUSANDS)
<S> <C> <C> <C>
Proved reserves -- beginning of year........................ 0 0 0
Extensions and discoveries................................ -- -- 683
Production................................................ -- -- (429)
Purchases of reserves-in-place............................ -- -- 4,716
----- ----- -----
Proved reserves -- end of year.............................. 0 0 4,970
----- ----- -----
----- ----- -----
Proved developed reserves --
Beginning of year......................................... 0 0 0
----- ----- -----
----- ----- -----
End of year............................................... 0 0 1,624
----- ----- -----
----- ----- -----
Harken's share of an investee's proved gas reserves, equity
method.................................................... 6,877 0 0
----- ----- -----
----- ----- -----
</TABLE>
Standardized Measure of Discounted Future Net Cash Flows Relating to Proved
Oil and Gas Reserves:
<TABLE>
<CAPTION>
(UNAUDITED)
-------------------
1992 1993
----- -------
(IN THOUSANDS)
<S> <C> <C>
Future cash inflows.............................................. $ -- $25,328
Production costs............................................... -- (8,674)
Development costs.............................................. -- (2,947)
----- -------
Future net inflows before income tax............................. -- 13,707
Future income taxes.............................................. -- --
----- -------
Future net cash flows............................................ -- 13,707
10% discount factor.............................................. -- (5,477)
----- -------
Standardized measure of discounted future net cash flows......... $ -- $ 8,230
----- -------
----- -------
</TABLE>
Changes In Standardized Measure of Discounted Future Net Cash Flows
Relating to Proved Oil and Gas Reserves:
<TABLE>
<CAPTION>
(UNAUDITED)
---------------------------
1991 1992 1993
------ ------ -------
(IN THOUSANDS)
<S> <C> <C> <C>
Standardized measure -- beginning of year................. $ 0 $ 0 $ 0
Increase (decrease)
Sales, net of production costs.......................... -- -- (2,726)
Extensions and discoveries, net of future costs......... -- -- 875
Purchases of reserves-in-place.......................... -- -- 10,081
------ ------ -------
Standardized measure -- end of year....................... $ 0 $ 0 $ 8,230
------ ------ -------
------ ------ -------
Harken's share of an investee's standardized measure of
discounted future net cash flows, equity method......... $6,278 $ 0 $ 0
------ ------ -------
------ ------ -------
</TABLE>
38
<PAGE> 39
HARKEN ENERGY CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
(13) 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. At the end of each of the six years in
the work program, Harken has the option to withdraw from the Alcaravan Contract
or to commit to the next year's work requirements. If Harken makes a commercial
discovery of oil and/or gas which is approved by Ecopetrol, the standard terms
of the Alcaravan Contract will apply. Such terms provide for Ecopetrol to
reimburse Harken for 50% of its successful well costs expended up to the point
of commercial discovery and to receive a 20% royalty interest and for both
Ecopetrol and Harken to each have a 50% working interest. The term of the
Alcaravan Contract will extend twenty-two (22) years from the date of any
commercial discovery of oil and/or gas. Harken reprocessed in excess of 200
kilometers of seismic on the Alcaravan area and completed the acquisition of 52
kilometers of new seismic data over prospective areas in mid-February 1994.
Harken is currently carrying on discussions with potential joint venture
partners regarding potential drilling on the Alcaravan area.
In January 1994, Harken announced that Harken de Colombia, Ltd. had signed
its second Association Contract ("Bocachico Contract") with Ecopetrol, covering
the Bocachico contract area. Under the Bocachico Contract, Harken has acquired
the exclusive rights to conduct exploration activities and drilling on this
area, which covers approximately 192,000 acres in the Middle Magdelena Valley of
Central Colombia.
During the first year of the Bocachico Contract, Harken will conduct
seismic activities on the land covered by this contract including reprocessing
of at least 250 kilometers of existing seismic data and the acquisition of at
least 35 kilometers of new seismic data. During each of the 2nd through the 6th
contract years Harken may elect to continue the contract by committing to the
drilling of at least one well during each contract year. During this initial six
year term, called the Exploration Period under the Bocachico Contract, if Harken
has discovered the existence of commercial production in the Bocachico Contract
area, the Bocachico Contract will be further extended for a period of 22 years
from the date of any commercial discovery of oil and/or gas. If Harken makes a
commercial discovery of oil and/or gas which is approved by Ecopetrol, the
standard terms of the Bocachico Contract will apply. Such terms provide for
Ecopetrol to reimburse Harken for 50% of its successful well costs expended up
to the point of commercial discovery and to receive a 20% royalty interest and
for both Ecopetrol and Harken to each have a 50% working interest.
In addition to reprocessing and acquiring seismic data during the first
contract year of the Bocachico Contract, Harken intends to also conduct
engineering studies to evaluate the potential for recovering existing oil
reserves in the Rio Negro area, which is located in the northern portion of the
Bocachico Contract area. Three wells were drilled, produced and subsequently
abandoned by another contractor approximately 30 years ago in this area, which
have provided information and data including production rates, well logs and
pressure tests. This well data will be utilized by Harken in such studies to
evaluate the feasibility of applying modern production and recovery techniques
in this area. Harken has not made any determination at this point as to the
recoverability of reserves which may be indicated in this area.
Bahrain Operations -- In January 1990, Harken, through its wholly-owned
subsidiary, Harken Bahrain Oil Company ("HBOC"), entered into a production
sharing agreement with the Bahrain National Oil Company which gave it the
exclusive right to explore for, develop and produce oil and gas throughout most
of Bahrain's Arabian Gulf offshore territories. Subject to the discovery and
development of oil and/or gas, the contract has a term of thirty-five years.
Under the original terms of the agreement, as amended, Harken was to drill an
exploratory well to test the Permian Khuff formation within 2 1/2 years and
drill a total of four wells by
39
<PAGE> 40
HARKEN ENERGY CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
1995 to earn all of its acreage rights under the agreement. In July 1990, Harken
entered into a joint venture arrangement with a joint venture partner, Bass
Enterprises Production Company ("BEPCO"), in which BEPCO committed to provide
the funding for the first well and at least two subsequent wells.
The initial exploratory well under the contract was drilled on the Jarim
Reef, which began drilling November 1991. The well was drilled to an approximate
depth of 14,275 feet and tested the Jurassic Arab formation at approximately
7,300 feet and the Permian Khuff formation at approximately 13,300 feet. In
March 1992, after drilling was completed, HBOC announced that the Jarim No. 2
well was not productive of either oil or gas and was abandoned.
On December 28, 1992, Harken commenced the drilling of its second
exploratory well, the Muharraq No. 1, in Bahrain. In February 1993, Harken
announced that the Muharraq No. 1 well had been drilled to a total depth of
8,778 feet and that no shows of oil and gas were noted in the well cuttings of
either the Jurassic Arab or the Jurassic Fadhili formations. As a result, the
well was plugged and abandoned at the foregoing depth. Further, under the terms
of the production sharing agreement, HBOC allowed its exploration and drilling
rights on approximately 10% of the acreage covered by the production sharing
agreement to expire, effective February 13, 1993. Later, during the third
quarter of 1993, HBOC allowed an additional portion of the acreage covered by
the production sharing agreement to expire effective August 29, 1993. HBOC's
remaining obligation under the production sharing agreement is limited to
reprocessing 500 kilometers of seismic prior to July 30, 1995.
On April 8, 1993, HBOC and BEPCO entered into an agreement whereby BEPCO
was released and discharged from any future drilling obligations related to
HBOC's production sharing agreement, and the joint venture agreement between
HBOC and BEPCO was terminated. As part of this agreement, BEPCO paid to HBOC
approximately $2,000,000 plus all remaining costs and obligations related to the
Muharraq No. 1 well along with certain other costs and contingencies. Such
amount, net of Harken's carrying value in its Bahrain investment, has been
recorded as deferred revenue in the accompanying balance sheet. Harken is
continuing to pursue discussions with various other parties in joining HBOC to
pursue continuing operations on the remaining acreage which HBOC continues to
hold.
Other -- Harken leases its corporate and certain other office space and
certain field operating offices. Total office and operating lease expense during
1993 was $707,000. Future minimum rental payments required under all leases that
have initial or remaining noncancellable lease terms in excess of one year as of
December 31, 1993, net of sublease arrangements, are as follows:
<TABLE>
<CAPTION>
YEAR AMOUNT
---- ------
<S> <C>
1994........................................................ $510
1995........................................................ 217
1996........................................................ 119
1997........................................................ 64
1998........................................................ 6
Thereafter.................................................. 8
------
Total minimum payments required........................ $924
------
------
</TABLE>
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.
40
<PAGE> 41
HARKEN ENERGY CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
At December 31, 1993, Harken has accrued $1,000,000 related to a consulting
payment due to a former Chuska stockholder. Under the terms of a prior agreement
made by Chuska with the former Chuska stockholder, among other obligations
previously satisfied, Chuska is to pay $1,000,000 to the former Chuska
stockholder when aggregate net revenues (as defined in the agreement) reach
$60,000,000. In October 1992, a lawsuit was filed against Chuska by the former
Chuska stockholder. The lawsuit was generally based upon allegations that Chuska
had reached the defined aggregate net revenue amount and that the $1,000,000
consulting payment was due and payable. In March 1994, this lawsuit was settled
whereby Chuska and a subsidiary entered into an agreement to pay $500,000 to the
former Chuska stockholder as the first of two installments relating to the
consulting payment. Chuska executed a non-interest bearing note payable for the
remaining $500,000 consulting payment which is payable to the former Chuska
stockholder on or before January 5, 1995. Further, under the terms of this March
1994 agreement, Chuska purchased from the former Chuska stockholder his 3%
working interest in the wells drilled by Chuska as well as all rights he held to
participate in future wells drilled by Chuska on the Navajo Reservation,
effective January 1, 1994. As consideration for such purchase, Chuska issued a
10% note payable in the amount of $400,000 which is due and payable to the
former Chuska stockholder on or before January 3, 1996. Chuska is obligated
under this agreement to pay 75% of the net cash flow (as defined) from the
acquired interest to an escrow account which will serve as collateral for the
above notes payable until the notes are fully paid.
Harken has also accrued approximately $1,900,000 relating to other
operational or regulatory liabilities related to Chuska's operations. Harken and
its subsidiaries currently are involved in various lawsuits and other
contingencies, including the guarantee of certain lease obligations, which in
management's opinion, will not result in significant loss exposure to Harken.
41
<PAGE> 42
SCHEDULE I
HARKEN ENERGY CORPORATION AND SUBSIDIARIES
MARKETABLE SECURITIES -- OTHER INVESTMENTS
<TABLE>
<CAPTION>
NUMBER OF AMOUNT
SHARES --PRINCIPAL MARKET CARRIED IN THE
NAME OF ISSUER AMOUNT OF NOTES COST VALUE BALANCE SHEET
- ---------------------------------------- --------------- ----------- ----------- ---------------
<S> <C> <C> <C> <C>
Year ended December 31, 1991
E-Z Serve Corporation
Common Stock....................... 580,875 $ 61,000 $ 944,000 $ 61,000
Tejas Power Corporation
Common Stock....................... 553,375 $ 181,000 $ 3,182,000 $ 181,000
Non-Marketable Securities and
Notes Held.........................
E-Z Serve Corporation Series A
Preferred Stock............... 63,962 $ 6,420,000 N/A $ 6,420,000
Tejas Power Corporation Series B
Preferred Stock............... 1,000 $ 1,219,000 N/A $ 1,219,000
E-Z Serve Corporation
Subordinated Debenture(A)..... -- $ 1,800,000 N/A $ 1,800,000
---------------
$ 9,681,000
---------------
---------------
Year ended December 31, 1992
E-Z Serve Corporation
Common Stock....................... 205,875 $ 22,000 $ 283,000 $ 22,000
Non-Marketable Securities and
Notes Held.........................
E-Z Serve Corporation Series C
Preferred Stock............... 66,924 $ 6,716,000 N/A $ 6,716,000
Tejas Power Corporation Series B
Preferred Stock............... 1,000 $ 1,219,000 N/A $ 1,219,000
E-Z Serve Corporation
Subordinated Debenture(A)..... -- $ 1,800,000 N/A $ 1,800,000
---------------
$ 9,757,000
---------------
---------------
Year ended December 31, 1993
E-Z Serve Corporation
Common Stock....................... 100,200 $ 138,000 $ 250,000 $ 138,000
Non-Marketable Securities and
Notes Held.........................
E-Z Serve Corporation Series C
Preferred Stock............... 79,754 $ 7,999,000 N/A $ 7,999,000
Tejas Power Corporation Series B
Preferred Stock............... 1,000 $ 1,219,000 N/A $ 1,219,000
---------------
$ 9,356,000
---------------
---------------
</TABLE>
- ---------------
(A) Amount shown is net of $1,336,000 related to purchase of Harken common stock
and reflected as a component of Additional Paid-in Capital within
Stockholders' Equity.
42
<PAGE> 43
SCHEDULE II
HARKEN ENERGY CORPORATION AND SUBSIDIARIES
AMOUNTS RECEIVABLE FROM RELATED PARTIES AND EMPLOYEES
<TABLE>
<CAPTION>
BALANCE AT BALANCE AT END OF PERIOD
BEGINNING AMOUNTS AMOUNTS --------------------------
OF PERIOD ADDITIONS COLLECTED FORGIVEN CURRENT NONCURRENT
---------- --------- --------- -------- --------- ----------
<S> <C> <C> <C> <C> <C> <C>
Year ended December 31, 1991:
Employees
Chal Barnwell.................. $ 225,852 $ -- $ 225,852 (E) $ -- $ -- $ --
Ted Beechler................... $ 126,875 $ -- $ -- $20,000 (C) $ -- $ 106,875 (D)
Larry Bickle................... $ -- $ 225,000 $ -- $ -- $ -- $ 225,000 (D)
Larry Cummings................. $ 271,050 $ -- $ -- $ -- $ -- $ 271,050 (D)
Mikel Faulkner................. $1,117,937 $ -- $ -- $ -- $ -- $1,117,937 (B)(D)
Jayne Ford..................... $ 265,050 $ -- $ -- $ -- $ -- $ 265,050 (D)
Chris Jones.................... $ -- $ 225,000 $ -- $ -- $ -- $ 225,000 (D)
Ed More........................ $ 173,086 $ -- $ -- $ -- $ -- $ 173,086 (D)
John Strom..................... $ -- $ 225,000 $ -- $ -- $ -- $ 225,000 (D)
Monte Swetnam.................. $ 129,600 $ -- $ -- $ -- $ -- $ 129,600 (D)
Dale Valvo..................... $ 233,458 $ -- $ 25,125 $73,333 (A) $ -- $ 135,000 (D)
Directors
George Bush.................... $ 180,375 $ -- $ -- $ -- $ -- $ 180,375 (D)
Alan Quasha.................... $ 597,937 $ -- $ -- $ -- $ -- $ 597,937 (D)
Related Parties
E-Z Serve Corporation.......... $2,767,069 $7,205,758 $6,396,200 (H) $ -- $ 440,420 (G) $3,136,207 (J)
Tejas Power.................... $ 759,834 $1,075,631 $1,757,741 (I) $ -- $ 77,724 (F) $ --
Year ended December 31, 1992:
Employees
Ted Beechler................... $ 106,875 $ -- $ -- $ 6,000 $ -- $ 100,875 (D)
Larry Bickle................... $ 225,000 $ -- $ 225,000 $ -- $ -- $ --
Larry Cummings................. $ 271,050 $ -- $ -- $ -- $ -- $ 271,050 (D)
Mikel Faulkner................. $1,117,937 $ -- $ -- $ -- $ -- $1,117,937 (B)(D)
Jayne Ford..................... $ 265,050 $ -- $ -- $ -- $ -- $ 265,050 (D)
Chris Jones.................... $ 225,000 $ -- $ 225,000 (K) $ -- $ -- $ --
Ed More........................ $ 173,086 $ -- $ 173,086 (K) $ -- $ -- $ --
John Strom..................... $ 225,000 $ -- $ 225,000 (K) $ -- $ -- $ --
Monte Swetnam.................. $ 129,600 $ -- $ -- $ -- $ -- $ 129,600 (D)
Dale Valvo..................... $ 135,000 $ -- $ -- $ -- $ -- $ 135,000 (D)
Directors
George Bush.................... $ 180,375 $ -- $ -- $ -- $ -- $ 180,375 (D)
Alan Quasha.................... $ 597,937 $ -- $ -- $ -- $ -- $ 597,937 (D)
Related Parties
E-Z Serve Corporation.......... $3,576,627 $ 879,580 $ 296,000 (M) $ -- $1,024,000 (L) $3,136,207 (J)
Harken Anadarko Partners, L.P.. $ -- $ 404,000 (N) $ -- $ -- $ 404,000 $ --
Year ended December 31, 1993:
Employees
Ted Beechler................... $ 100,875 $ -- $ 100,875 (Q) $ -- $ -- $ --
Larry Cummings................. $ 271,050 $ -- $ 271,050 (O) $ -- $ -- $ --
Mikel Faulkner................. $1,111,937 $ -- $ 591,937 (O) $ -- $ -- $ 520,000 (B)
Jayne Ford..................... $ 265,050 $ -- $ 265,050 (Q) $ -- $ -- $ --
Monte Swetnam.................. $ 129,600 $ -- $ 129,600 (Q) $ -- $ -- $ --
Dale Valvo..................... $ 135,000 $ -- $ 135,000 (Q) $ -- $ -- $ --
Directors
George Bush.................... $ 180,375 $ -- $ 180,375 (O) $ -- $ -- $ --
Alan Quasha.................... $ 597,937 $ -- $ 597,937 (O) $ -- $ -- $ --
Related Parties
E-Z Serve Corporation.......... $4,160,207 $ -- $3,290,207 (P) $ -- $ 870,000 $ --
Harken Anadarko Partners....... $ 404,000 $ -- $ 241,000 (N) $ -- $ 163,000 $ --
</TABLE>
43
<PAGE> 44
- ---------------
Notes:
(A) A non-interest bearing demand note receivable of $110,000 was issued for
personal obligations involved in his employment. The note is to be
amortized over three years; accordingly, $73,333 and $36,666 was reflected
as non-current in 1988 and 1989, respectively. The balance of $73,333 was
forgiven in 1991.
(B) Includes a non-recourse note in the amount of $520,000 bearing interest at
the Broker Loan Rate plus 1/2% which is due October 2, 1999. The note is
secured by vested options to purchase 266,790 shares of Harken's common
stock at $1.00 per share under the Harken's Incentive Non-Qualified Stock
Options Plan. 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.
(C) Represents certain non-interest bearing demand notes which were forgiven.
(D) These loans, other than amounts discussed in Notes B and C, were incurred
pursuant to purchases of Harken common stock and were evidenced by
promissory notes bearing interest at 5% per annum which mature eight (8)
years from making. The notes were secured by the shares issued to makers of
the notes.
(E) Upon termination of employment, this employee elected not to pay the note
(see Note D) issued to purchase common stock and returned 101,119 shares of
common stock.
(F) Represents amounts owed for miscellaneous expenses paid by Harken. See
"Notes to Consolidated Financial Statements, Note 10 -- Related Party
Transactions -- Relationship with E-Z Serve and Tejas" for discussion.
(G) Represents accrued preferred stock dividends of $200,000, accrued interest
on subordinated debenture of $224,776, and other accruals of $15,644. See
"Notes to Consolidated Financial Statements, Note 4 -- Investments in
Former Subsidiaries" for discussion.
(H) Harken received 63,962 shares of E-Z Serve $6.00 Convertible Preferred
Stock, Series A, at a price of $100 per share in payment for certain debt
and expenses owed by E-Z Serve to Harken. See "Notes to Consolidated
Financial Statements, Note 4 -- Investments in Former Subsidiaries" for
discussion.
(I) Harken received 1,000 shares of Tejas Series B Preferred Stock, totalling
$1,200,000, in payment for certain expenses incurred by Harken on behalf of
Tejas in connection with the recent Rights Offering. Tejas also paid
$557,741 in cash. See "Notes to Consolidated Financial Statements, Note
4 -- Investments in Former Subsidiaries" for discussion.
(J) Represents a 12% secured subordinated debenture from E-Z Serve dated May
28, 1991, payable on June 30, 1994, with interest payable quarterly (see
Note G). $1,336,000 of this amount is recorded as a reduction of
stockholders' equity. See "Notes to Consolidated Financial Statements, Note
4 -- Investments in Former Subsidiaries" for discussion.
(K) Upon maturity of these notes, these employees elected not to pay note (see
Note D) issued to purchase common stock and returned 205,118 shares of
common stock.
(L) Represents accrued preferred stock dividends of $301,000, accrued interest
on subordinated debenture of $598,000, other accruals of $13,000 and
registration statement costs to be reimbursed of $112,000. See "Notes to
Consolidated Financial Statements, Note 4 -- Investments in Former
Subsidiaries" for discussion.
(M) Harken exchanged 63,962 shares of E-Z Serve $6.00 Convertible Preferred
Stock, Series A plus accrued dividends for 66,924 shares of E-Z Serve $6.00
Convertible Preferred Stock, Series C. See "Notes to Consolidated Financial
Statements, Note 4 -- Investments in Former Subsidiaries" for discussion.
(N) Represents net activity throughout the year between Harken and its managed
limited partnership.
(O) These employees surrendered 684,000 shares of common stock. See "Notes to
Consolidated Financial Statements, Note 10 -- Related Party Transactions"
for discussion.
(P) As part of a restructuring by E-Z Serve, Harken tendered and released to
E-Z Serve a 12% secured subordinated debenture along with other
consideration in exchange for 12,830 additional shares of E-Z Serve's
Series C Preferred Stock along with other benefits. See "Notes to
Consolidated Financial Statements, Note 4 -- Investments in Former
Subsidiaries -- E-Z Serve Restructuring" for discussion.
(Q) Upon maturity of these notes, these employees elected not to pay note (see
Note D) issued to purchase common stock and returned 220,800 shares of
common stock.
44
<PAGE> 45
SCHEDULE V
HARKEN ENERGY CORPORATION AND SUBSIDIARIES
PROPERTY AND EQUIPMENT
(IN THOUSANDS)
<TABLE>
<CAPTION>
BALANCE AT BALANCE
BEGINNING OTHER AT END OF
OF PERIOD ADDITIONS RETIREMENTS CHANGES PERIOD
---------- --------- ----------- ------- ---------
<S> <C> <C> <C> <C> <C>
Year ended December 31, 1991:
Oil and gas properties............. $ 670 $ 450 $ (307) $ (478) $ 335
Oilfield service equipment......... 14,208 136 (260) (6,272)(A) 7,812
Other property..................... 4,960 145 (278) (71)(A) 4,756
---------- --------- ----------- ------- ---------
$ 19,838 $ 731 $ (845) $(6,821) $12,903
---------- --------- ----------- ------- ---------
---------- --------- ----------- ------- ---------
Year ended December 31, 1992:
Oil and gas properties............. $ 335 $ 763 $ -- $ -- $ 1,098
Oilfield service equipment......... 7,812 71 (315) -- 7,568
Other property..................... 4,756 356 (49) -- 5,063
---------- --------- ----------- ------- ---------
$ 12,903 $ 1,190 $ (364) $ -- $13,729
---------- --------- ----------- ------- ---------
---------- --------- ----------- ------- ---------
Year ended December 31, 1993:
Oil and gas properties............. $ 1,098 $16,570 $ -- $ -- $17,668
Oilfield service equipment......... 7,568 700 (1,720) (5,173)(B) 1,375
Gas plants and other property...... 5,063 2,030 (99) -- 6,994
---------- --------- ----------- ------- ---------
$ 13,729 $19,300 $(1,819) $(5,173) $26,037
---------- --------- ----------- ------- ---------
---------- --------- ----------- ------- ---------
</TABLE>
- ---------------
(A) The decrease is primarily due to the impairment write down of certain assets
to estimated resale recoverable value. See "Notes to Consolidated Financial
Statements, Note 11 -- Segment Information and Other" for discussion.
(B) The decrease is due to the December 1993 write down of certain assets to
liquidation value and the transfer of these assets to Assets Held for
Resale in Harken's balance sheet. See "Notes to Consolidated Financial
Statements, Note 11 -- Segment Information and Other" for discussion.
45
<PAGE> 46
SCHEDULE VI
HARKEN ENERGY CORPORATION AND SUBSIDIARIES
ACCUMULATED DEPRECIATION AND AMORTIZATION
(IN THOUSANDS)
<TABLE>
<CAPTION>
BALANCE AT BALANCE
BEGINNING OTHER AT END OF
OF PERIOD ADDITIONS RETIREMENTS CHANGES PERIOD
---------- --------- ----------- ------- ---------
<S> <C> <C> <C> <C> <C>
Year ended December 31, 1991:
Oil and gas properties................ $ -- $ -- $ -- $ -- $ --
Oilfield service equipment............ 1,275 472 (36) (3) 1,708
Other property........................ 1,484 972 (93) (30) 2,333
---------- --------- ----------- ------- ---------
$2,759 $ 1,444 $ (129) $ (33) $ 4,041
---------- --------- ----------- ------- ---------
---------- --------- ----------- ------- ---------
Year ended December 31, 1992:
Oil and gas properties................ $ -- $ -- $ -- $ -- $ --
Oilfield service equipment............ 1,708 454 -- -- 2,162
Other property........................ 2,333 932 (18) -- 3,247
---------- --------- ----------- ------- ---------
$4,041 $ 1,386 $ (18) $ -- $ 5,409
---------- --------- ----------- ------- ---------
---------- --------- ----------- ------- ---------
Year ended December 31, 1993:
Oil and gas properties................ $ -- $ 1,433 $ -- $ -- $ 1,433
Oilfield service equipment............ 2,162 667 (1,169) (1,264)(A) 396
Gas plants and other property......... 3,247 1,154 -- -- 4,401
---------- --------- ----------- ------- ---------
$5,409 $ 3,254 $(1,169) $(1,264) $ 6,230
---------- --------- ----------- ------- ---------
---------- --------- ----------- ------- ---------
</TABLE>
- ---------------
(A) The decrease is due to the December 1993 transfer of certain assets to
Assets Held for Resale in Harken's balance sheet. See "Notes to Consolidated
Financial Statements, Note 11 -- Segment Information and Other" for
discussion.
46
<PAGE> 47
SCHEDULE IX
HARKEN ENERGY CORPORATION AND SUBSIDIARIES
SHORT TERM BORROWINGS
<TABLE>
<CAPTION>
WEIGHTED
MAXIMUM AVERAGE AVERAGE
WEIGHTED AMOUNT AMOUNT INTEREST
BALANCE AT AVERAGE OUTSTANDING OUTSTANDING RATE
CATEGORY OF END OF INTEREST DURING THE DURING THE DURING THE
SHORT TERM BORROWINGS PERIOD RATE PERIOD PERIOD PERIOD
--------------------- ---------- -------- ----------- ----------- ----------
<S> <C> <C> <C> <C> <C> <C>
Year Ended December 31, 1991....... Note payable to $ -0- 12%(B) $1,480,000 $1,480,000 12%(B)
stockholder(A)
Year Ended December 31, 1993....... Note payable to $ -0- 6% $1,600,000 $1,092,000 6%
former joint
venture partner(C)
Note payable to a $ -0- 7.5% $ 245,000 $ 245,000 7.5%
bank(D)
</TABLE>
- ---------------
(A) On May 24, 1991, Harken borrowed $1,480,000 from a major stockholder. At the
August 31, 1991 maturity date, the parties elected to extinguish the note
by transferring to the stockholder one fourth of Harken's 16% interest in a
limited partnership. See "Notes to Consolidated Financial Statements, Note
6 -- Investment in Limited Partnership" for discussion.
(B) The note bore interest at a fixed 12% rate during the entire period it was
outstanding.
(C) On March 16, 1993, Chuska issued a $1,600,000 non-recourse note payable to a
former joint venture partner in exchange for its interest in certain oil
and gas joint ventures. The note was payable in monthly installments from
oil and gas net revenues relating to the acquired interest. The final
payment of all remaining principal was made on September 1, 1993.
(D) Chuska had a note payable to a bank which bore interest at the bank's prime
rate plus 1.5%. Harken paid the remaining balance prior to March 31, 1993.
47
<PAGE> 48
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING
AND FINANCIAL DISCLOSURE
None
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
Reference is made to the material under the captions "Directors of Harken"
and "Executive Officers of Harken" in the Registrant's definitive Proxy
Statement to be filed on or before April 30, 1994 pursuant to Regulation 14A in
connection with its Annual Meeting of Stockholders to be held on June 3, 1994,
which is incorporated herein by reference.
ITEM 11. EXECUTIVE COMPENSATION
Reference is made to the material under the captions "Executive Officers of
Harken (Executive Compensation)" in the Registrant's definitive Proxy Statement
to be filed on or before April 30, 1994 pursuant to Regulation 14A in connection
with its Annual Meeting of Stockholders to be held on June 3, 1994, which is
incorporated herein by reference.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS
Reference is made to the material under the captions "Principal Holders of
Securities" in the Registrant's definitive Proxy Statement to be filed on or
before April 30, 1994 pursuant to Regulation 14A in connection with its Annual
Meeting of Stockholders to be held on June 3, 1994, which is incorporated herein
by reference.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
Reference is made to the material under the captions "Certain Transactions"
in the Registrant's definitive Proxy Statement to be filed on or before April
30, 1994 pursuant to Regulation 14A in connection with its Annual Meeting of
Stockholders to be held on June 3, 1994, which is incorporated herein by
reference.
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K
A. Exhibits
<TABLE>
<S> <C>
10-21 -- None
22 -- Subsidiaries of Harken
23-24 -- None
25 -- Powers of Attorney
26-29 -- None
</TABLE>
48
<PAGE> 49
B. Financial Statements and Schedules
(1) Included in PART II of this report:
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
Harken Energy Corporation and Subsidiaries
-- Report of Independent Public Accountants................................... 21
-- Selected Financial Information and Other Data for the five years ended
December 31, 1993........................................................ 12
-- Consolidated Balance Sheets -- December 31, 1992 and 1993.................. 22
-- Consolidated Statements of Operations for the three years ended
December 31, 1993........................................................ 23
-- Consolidated Statements of Stockholders' Equity for the three years ended
December 31, 1993........................................................ 24
-- Consolidated Statements of Cash Flows for the three years ended
December 31, 1993........................................................ 25
-- Notes to Consolidated Financial Statements................................. 26
-- Schedules:
I -- Marketable Securities -- Other Investments for the three years ended
December 31, 1993..................................................... 42
II -- Amounts Receivable from Related Parties and Employees for the three
years ended December 31, 1993......................................... 43
V -- Property and Equipment for the three years ended December 31, 1993.... 45
VI -- Accumulated Depreciation and Amortization for the three years ended
December 31, 1993..................................................... 46
IX -- Short-Term Borrowings -- For the three years ended December 31,
1993.................................................................. 47
</TABLE>
(2) The information required by Schedules IV and VIII is provided in the
related financial statements or in a note, thereto.
(3) The information required by Schedules III, VII, X, and XI through
XXVIII is not applicable to the Company.
C. Reports on Form 8-K
On January 14, 1993, a report on Form 8-K was filed regarding the sale of
Harken's general partner interest in its managed limited partnership.
On February 9, 1993, a report on Form 8-K was filed regarding the results
of the Muharraq No. 1 exploratory well in Bahrain.
On March 1, 1993, a report on Form 8-K was filed regarding the merger with
Chuska Resources Corporation.
On November 19, 1993, a report on Form 8-K was filed regarding the
resignation of George W. Bush as a director of Harken.
49
<PAGE> 50
SIGNATURES
Pursuant to the requirements of Section 13 or 15 (d) of the Securities
Exchange Act of 1934, the Registrant has duly caused this report to be signed on
its behalf by the undersigned, thereunto duly authorized in the capacities
indicated.
Dated: March 28, 1994
/s/ BRUCE N. HUFF
HARKEN ENERGY CORPORATION
By: *
Mikel D. Faulkner, Chairman of the
Board
of Directors, Principal Executive
Officer
*
Richard H. Schroeder, Director,
President
and Chief Operating Officer
*
Bruce N. Huff, Senior Vice President
Chief Financial Officer and
Principal
Accounting Officer
*
Alan G. Quasha, Director
*
Talat M. Othman, Director
*
Michael R. Eisenson, Director
*
Michael M. Ameen, Jr., Director
*
Donald W. Raymond, Director
Harvey V. Risien, Jr., Director
*
E. C. Kettenbrink, Jr., Director
Bruce N. Huff, by signing his name hereto, does hereby sign this Form 10-K,
Annual Report for the fiscal year ended December 31, 1993, on behalf of Harken
Energy Corporation and each of the above-named officers and directors of such
Company, pursuant to powers of attorney, executed on behalf of the Company and
each such officer and director.
*By: /s/ BRUCE N. HUFF
Bruce N. Huff,
Attorney-in-fact
50
<PAGE> 1
EXHIBIT 22
HARKEN ENERGY CORPORATION
WHOLLY OWNED SUBSIDIARIES
<TABLE>
<CAPTION>
CORPORATIONS: NOTES:
- --------------------------------------------------------------------------- ----------------
<S> <C>
AEX, Inc. *
Fisher-Webb, Inc. **
Harken Exploration Company *****
Harken Acquisition Company *
D-FW Resources Management, Inc. *
Kendrick & Mulligan Oil & Gas, Inc. *
KMI Acquisition Corporation *
Kennedy & Mitchell, Inc. ***
KMI Capital Corporation *
Harken International, Ltd. *****
Burns Drilling Company, Inc. ****
Supreme Well Service Company *****
Harken Bahrain Oil Company ****
Harken de Colombia, Ltd. ****
Harken de Mexico, Ltd. ****
Harken de Venezuela, Ltd. ****
Harken de Bolivia, Ltd. ****
Chuska Resources Corporation *****
Sunfield Energy Company *******
Chuska Gulf Resources, Inc. *******
Double "R", Inc. *******
Harken Southwest Corporation ******
</TABLE>
- ---------------
Notes:
* Wholly Owned Subsidiary of Harken Exploration Company
** Wholly Owned Subsidiary of Burns Drilling Company, Inc. (Merged)
*** Wholly Owned Subsidiary of KMI Acquisition Company
**** Wholly Owned Subsidiary of Harken International, Ltd.
***** Wholly Owned Subsidiary of Harken Energy Corporation
****** Wholly Owned Subsidiary of Double "R", Inc.
******* Wholly Owned Subsidiary of Chuska Resources Corporation
<PAGE> 1
HARKEN ENERGY CORPORATION
10(K) POWER OF ATTORNEY
KNOW ALL MEN BY THESE PRESENTS, that the undersigned, an Officer and/or
Director of HARKEN ENERGY CORPORATION, a Delaware corporation (the
"Corporation"), hereby constitutes and appoints Mikel D. Faulkner, Bruce N. Huff
and Larry E. Cummings and each of them (with full power to each of them to act
alone), his true and lawful attorney-in-fact and agent with full power of
substitution for him and on his behalf in his name, place and stead in any and
all capacities (whether on behalf of the corporation or as an Officer or
Director or both thereof or by attesting the seal of the Corporation or
otherwise), to sign, execute and file an Annual Report on Form 10-K for the
fiscal year ended December 31, 1993, under the Securities Exchange Act of 1934,
as amended with all exhibits and any and all documents required to be filed with
respect thereto with the Securities and Exchange Commission or any state or
other regulatory authority, and granting unto said attorneys-in-fact and agents
and each of them full power and authority to do and perform each and every act
and thing requisite and necessary to be done in and about the premises in order
to effectuate the same as fully to all intents and purposes as he himself might
or could do if personally present, hereby ratifying and confirming all that said
attorneys-in-fact and agents or any of them or their substitute or substitutes,
may lawfully do or cause to be done.
IN WITNESS WHEREOF, the undersigned have executed this Power of Attorney
effective as of March 11, 1994.
<TABLE>
<CAPTION>
NAME CAPACITIES
- -------------------------------------------- ---------------------------------------------
<S> <C>
* Principal Executive Officer,
Mikel D. Faulkner Chairman of the Board of Directors
* President
Richard H. Schroeder
* Principal Financial Officer and
Bruce N. Huff Principal Accounting Officer
* Director
Edwin C. Kettenbrink, Jr.
* Director
Michael R. Eisenson
* Director
Talat M. Othman
* Director
Alan G. Quasha
* Director
Donald W. Raymond
* Director
Michael M. Ameen, Jr.
Director
Harvey V. Risien, Jr.
</TABLE>
