<PAGE> 1
As filed with the Securities and Exchange Commission on April 12, 1995
Registration No. 33-58265
================================================================================
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
---------------
Amendment No. 1
to
FORM S-4
REGISTRATION STATEMENT
UNDER
THE SECURITIES ACT OF 1933
---------------
HARKEN ENERGY CORPORATION
(Exact name of registrant as specified in its charter)
<TABLE>
<S> <C> <C>
DELAWARE 1381 95-2841597
(State or Other Jurisdiction (Primary Standard Industrial (I.R.S. Employer
of Incorporation or Organization) Classification Code Number) Identification Number)
</TABLE>
------------------------
5605 NORTH MACARTHUR BLVD., SUITE 400
IRVING, TEXAS 75038
(214) 753-6900
(Address, including zip code, and telephone number, including area code, of
registrant's principal executive offices)
------------------------
LARRY E. CUMMINGS
VICE PRESIDENT, SECRETARY AND GENERAL COUNSEL
HARKEN ENERGY CORPORATION
5605 NORTH MACARTHUR BLVD., SUITE 400
IRVING, TEXAS 75038
(214) 753-6900
(Name, address, including zip code, and telephone number, including area code,
of agent for service)
------------------------
With copies to:
<TABLE>
<S> <C>
JOHN D. CURTIS, ESQ. SAMUEL E. WING, ESQ.
BAKER & MCKENZIE JONES & KELLER
2001 ROSS AVENUE, SUITE 4500 1750 BROADWAY, SUITE 1600
DALLAS, TEXAS 75201 DENVER, COLORADO 80214
(214) 978-3000 (303) 573-1600
</TABLE>
------------------------
Approximate date of commencement of proposed sale to the public: As soon
as practicable after the effective date of this Registration Statement and at
consummation of the Merger (the "Merger") contemplated by the Amended and
Restated Agreement and Plan of Merger dated March 27, 1995, attached as
Appendix A to the Proxy Statement/Prospectus forming a part of this
Registration Statement.
If the securities being registered on this form are to be offered on a
delayed or continuous basis pursuant to Rule 415 under the Securities Act of
1933, check the following box. [x]
------------------------
THE REGISTRANT HEREBY AMENDS THIS REGISTRATION STATEMENT ON SUCH DATE OR
DATES AS MAY BE NECESSARY TO DELAY ITS EFFECTIVE DATE UNTIL THE REGISTRANT
SHALL FILE A FURTHER AMENDMENT WHICH SPECIFICALLY STATES THAT THIS REGISTRATION
STATEMENT SHALL THEREAFTER BECOME EFFECTIVE IN ACCORDANCE WITH SECTION 8(A) OF
THE SECURITIES ACT OF 1933, AS AMENDED, OR UNTIL THE REGISTRATION STATEMENT
SHALL BECOME EFFECTIVE ON SUCH DATE AS THE SECURITIES AND EXCHANGE COMMISSION,
ACTING PURSUANT TO SAID SECTION 8(A), MAY DETERMINE.
================================================================================
<PAGE> 2
CROSS REFERENCE SHEET
(Pursuant to Item 501(b) of Regulation S-K Showing the Location in the
Statement of the Information Required by Part I of Form S-4)
<TABLE>
<CAPTION>
Form S-4 Location in
Item Statement
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<S> <C> <C>
A. INFORMATION ABOUT THE TRANSACTION
1. Forepart of Registration Statement and Outside Front
Cover Page of Prospectus . . . . . . . . . . . . . . . Forepart of the Registration Statement; Outside
Front Cover Page of the Statement
2. Inside Front and Outside Back Cover Pages of Prospectus
Inside Front Cover Page of the Statement;
Available Information; Incorporation of Certain
Documents by Reference; Table of Contents
3. Risk Factors, Ratio of Earnings to Fixed Charges and
Other Information . . . . . . . . . . . . . . . . . . Summary; Outside Front Cover Page of the
Statement; Risk Factors; Not Applicable
4. Terms of the Transaction . . . . . . . . . . . . . . . Summary; he Merger; Comparison of Stockholder
Rights; The Merger Agreement; The Warrant
Exchange Offer
5. Pro Forma Financial Information . . . . . . . . . . . Pro Forma Combined Oil and Gas Reserve Data;
Index to Financial Statements; Appendix G
6. Material Contacts with the Company Being Acquired . .
The Merger; The Merger Agreement; The Warrant
Exchange Offer
7. Additional Information Required for Reoffering by
Persons and Parties Deemed to be Underwriters . . . . Not Applicable
8. Interests of Named Experts and Counsel . . . . . . . . Not Applicable
9. Disclosure of Commission Position on Indemnification
for Securities Act
Liabilities . . . . . . . . . . . . . . . . . . . . . Not Applicable
B. INFORMATION ABOUT THE REGISTRANT
10. Information with Respect to S-3 Registrants . . . . . Not Applicable
11. Incorporation of Certain Information by
Reference . . . . . . . . . . . . . . . . . . . . . . Incorporation of Certain Documents by Reference
</TABLE>
- i -
<PAGE> 3
<TABLE>
<S> <C> <C>
12. Information with Respect to S-2 or S-3
Registrants . . . . . . . . . . . . . . . . . . . . . Available Information; Incorporation of Certain
Documents by Reference; Business of Harken;
Appendix G
13. Incorporation of Certain Information by
Reference . . . . . . . . . . . . . . . . . . . . . . Not Applicable
14. Information with Respect to Registrants Other Than S-3
or S-2 Registrants . . . . . . . . . . . . . . . . . . Not Applicable
C. INFORMATION ABOUT THE COMPANY BEING ACQUIRED
15. Information with Respect to S-3 Companies . . . . . . Not Applicable
16. Information with Respect to S-2 or S-3
Companies . . . . . . . . . . . . . . . . . . . . . . Available Information; Incorporation of Certain
Documents by Reference; Business of Search;
Appendix H
17. Information with Respect to Companies Other Than S-3 or
S-2 Companies . . . . . . . . . . . . . . . . . . . . Not Applicable
D. VOTING AND MANAGEMENT INFORMATION
18. Information if Proxies, Consents or Authorizations are
to be Solicited . . . . . . . . . . . . . . . . . . . Front Cover Page of the Statement; Summary; The
Special Meeting; The Merger; The Sections
"Ownership of Common Stock"; "Directors'
Meetings and Committees"; "Compensation of
Directors"; "Certain Matters Involving
Directors and Executive Officers"; "Executive
Officers of Harken"; "Compensation of Executive
Officers"; "Certain Transactions" and
"Compensation Committee Interlocks and Insider
Participation" in Harken's Proxy Statement for
the Annual Meeting of Stockholders held on June
3, 1994 which is attached as Appendix H
19. Information if Proxies, Consents or Authorizations are
not to be Solicited in an Exchange Offer . . . . . . . Not Applicable
</TABLE>
- ii -
<PAGE> 4
----------------
SEARCH
EXPLORATION, INC
5430 LBJ Freeway, Suite 1500
Dallas, Texas 75240
(214) 991-4100
April 17, 1995
Dear Search Warrantholders:
Enclosed is a proxy statement/exchange offer/prospectus (the
"Statement") which is a part of a Registration Statement on Form S-4 filed with
the United States Securities and Exchange Commission for the proposed merger of
Search Exploration, Inc. ("Search") with and into a wholly-owned subsidiary of
Harken Energy Corporation ("Harken"). The merger requires approval of the
holders of Search's common stock and preferred stock. Although the merger does
not require your approval, it will affect your outstanding options or warrants
to purchase shares of the common stock of Search ("Search Warrants").
You may tender your Search Warrants in exchange for non-transferable
warrants to purchase shares of common stock of Harken ("Harken Warrants")
pursuant to and in accordance with the instructions set forth in the Letter of
Transmittal enclosed herewith, and in the discussion under the section "The
Warrant Exchange Offer" in the Statement. However, you should review the
entire Statement before making a decision as to whether to exchange your Search
Warrants for Harken Warrants. A Warrant Exchange Schedule is also included in
the Statement as Appendix D, which also should be reviewed carefully.
Should you need any further information, please do not hesitate to
contact the Warrant Exchange Agent as set forth in the Letter of Transmittal.
Very truly yours,
SEARCH EXPLORATION, INC.
Joseph F. Langston, Jr.
President
IF YOU ARE ALSO A SEARCH STOCKHOLDER AND EVEN IF YOU PLAN ON ATTENDING THE
SPECIAL MEETING IN PERSON, WE REQUEST THAT YOU ALSO RETURN THE ENCLOSED PROXY
CARD IN ADDITION TO RETURNING THE COMPLETED LETTER OF TRANSMITTAL. PLEASE DO
NOT SEND ANY STOCK CERTIFICATES WITH THE PROXY CARD OR THE LETTER OF
TRANSMITTAL.
<PAGE> 5
----------------
SEARCH
EXPLORATION, INC
5430 LBJ Freeway, Suite 1500
Dallas, Texas 75240
(214) 991-4100
NOTICE OF SPECIAL MEETING OF STOCKHOLDERS
TO BE HELD MAY 22, 1995
Notice is hereby given that a Special Meeting of Stockholders (the
"Special Meeting") of Search Exploration, Inc. ("Search") will be held at 5430
LBJ Freeway, Suite 1500, Dallas, Texas on May 22, 1995 at 9:00 a.m., local
time, for the following purposes:
1. To adopt and approve the Amended and Restated Agreement and
Plan of Merger (as amended, the "Merger Agreement") dated as
of March 27, 1995 by and among Search, Harken Energy
Corporation ("Harken") and Search Acquisition Corp., a
wholly-owned subsidiary of Harken ("Merger Sub"), pursuant to
which Search will merge with and into Merger Sub which shall
be the surviving corporation (the "Merger"). Pursuant to the
provisions of the Merger Agreement, upon the consummation of
the Merger, (a) each outstanding share of common stock, par
value $.05 per share ("Search Common Stock"), of Search will
be converted into the right to receive that number of shares
of common stock, par value $.01 per share ("Harken Common
Stock"), of Harken determined by dividing $.8099 by the
average of the closing sales prices of a share of Harken
Common Stock on the American Stock Exchange over the 30 days
immediately preceding the date that is five trading days prior
to the date of the Special Meeting, provided, however, that in
no event shall such average price be greater than $2.366 or
lower than $1.274 (the "Average Trading Price"), (b) each
outstanding share of Series 1993 Redeemable Preferred Stock,
par value $.001 per share ("Search Preferred Stock"), of
Search will be converted into the right to receive that number
of shares of Harken Common Stock determined by dividing $1.00
by the Average Trading Price, and (c) certain promissory notes
to be issued by Search (the "Notes") will, by their terms, be
converted into the right to receive that number of shares of
Harken Common Stock determined by dividing the principal
amount of each note by the Average Trading Price. In
addition, the holders of Search Common Stock, certain Notes
and overriding royalty interests in certain properties of
Search will receive a non-transferable right to receive
additional shares in the future, if any, of Harken Common
Stock (the "Contingent Shares") or, under certain
circumstances, cash, based upon the increase that may
subsequently be realized in the value of a group of
undeveloped leases and properties of Search. A copy of the
Merger Agreement is attached as Appendix A to the accompanying
Statement.
2. To consider and transact such other business as may properly
come before the Special Meeting and/or any adjournments or
postponements thereof.
The Board of Directors of Search has fixed the close of business on
April 5, 1995 as the record date for determination of stockholders entitled
to notice of and to vote at the Special Meeting and any adjournments thereof. A
complete list of the stockholders entitled to vote at the Special Meeting will
be available for examination at the Special Meeting and at the offices of Search
during normal business hours for a period of ten days prior to the meeting. The
Merger Agreement requires the adoption and approval by the holders of a majority
of the outstanding Search Common Stock and the holders of all outstanding Search
Preferred Stock, voting separately as a class, of the Merger Agreement and the
Merger.
THE BOARD OF DIRECTORS OF SEARCH BELIEVES THAT THE MERGER IS IN THE
BEST INTERESTS OF SEARCH AND ITS STOCKHOLDERS AND UNANIMOUSLY RECOMMENDS THAT
YOU VOTE FOR APPROVAL OF THE MERGER AGREEMENT AND THE MERGER.
<PAGE> 6
The holders of Search Common Stock and Search Preferred Stock will
have appraisal rights, and subject to certain conditions, receive payment for
their shares. These rights are described in greater detail in the accompanying
Statement under the caption "The Special Meeting--Appraisal Rights," and are
set forth in Section 262 of the Delaware General Corporation Law. A copy of
Section 262 is attached as Appendix C to the accompanying Statement.
Harken has offered to the holders of outstanding options or warrants
("Search Warrants") to purchase shares of Search Common Stock, upon the terms
and subject to the conditions set forth in the attached Statement, the
opportunity to tender their Search Warrants in exchange for non-transferable
warrants ("Harken Warrants") to purchase Harken Common Stock (the "Exchange
Offer"). The holders of Harken Warrants and the holders of Search Warrants not
exchanged in the Exchange Offer will also have the right to receive, under
certain conditions, Contingent Shares. The consummation of the Exchange Offer
is conditioned, among other things, on the consummation of the Merger.
Your vote is important. Even if you plan to attend the Special
Meeting in person, we request that you sign and return the enclosed proxy card
and thus ensure that your shares of Search Common Stock and Search Preferred
Stock will be represented at the Special Meeting if you are unable to attend.
If you do attend the Special Meeting and wish to vote in person, you may
withdraw your proxy and vote in person. Please do not send any stock
certificates with your proxy card.
By Order of the Board of Directors
Joseph F. Langston, Jr.
President
Gary B. Wood, Ph.D.
Secretary
Dallas, Texas
April 17, 1995
<PAGE> 7
---------------- HARKEN
SEARCH ENERGY
EXPLORATION, INC CORPORATION
PROXY STATEMENT FOR A SPECIAL MEETING OF EXCHANGE OFFER AND
STOCKHOLDERS PROSPECTUS
To Be Held On May 22, 1995
This proxy statement/exchange offer/prospectus (this "Statement") is
being furnished in connection with:
(a) The solicitation of proxies from the holders of record as of the close
of business on April 5, 1995, of the shares of common stock, par
value $.05 per share ("Search Common Stock"), and 1993 Series
Redeemable Preferred Stock, $.001 par value ("Search Preferred
Stock"), of Search Exploration, Inc., a Delaware corporation
("Search"), for use by the Board of Directors of Search at a Special
Meeting of Stockholders (the "Special Meeting") to be held at 9:00
a.m., local time, on May 22, 1995 at 5430 LBJ Freeway, Suite
1500, Dallas, Texas, and at any adjournments or postponements thereof.
See "The Special Meeting."
(b) An offer by Harken Energy Corporation, a Delaware corporation
("Harken"), upon the terms and subject to the conditions set forth in
this Statement and the accompanying Letter of Transmittal, to exchange
outstanding options or warrants to purchase shares of Search Common
Stock ("Search Warrants") for non-transferable warrants ("Harken
Warrants") to purchase that number of shares of common stock, par
value $.01 per share ("Harken Common Stock"), of Harken as set forth
on the Warrant Exchange Schedule attached hereto as Appendix D (the
"Exchange Offer"). The Harken Warrants issued in the Exchange Offer
will entitle the holder to purchase shares of Harken Common Stock at a
price of $1.82 per share, subject to adjustment under certain
conditions, from the date of issuance until their expiration at 3:00
p.m., Dallas, Texas time on June 30, 1996. See "The Warrant Exchange
Offer" and "Description of Harken Securities--Warrants."
(c) The issuance in connection with the terms of the Merger Agreement and
the Exchange Offer of (i) up to 11,000,000 shares of Harken Common
Stock, including (A) shares issued in exchange for all outstanding
shares of Search Common Stock, (B) shares issued in exchange for all
outstanding shares of Search Preferred Stock, (C) shares issued in
cancellation and exchange of the Notes (as defined herein), (D) shares
which may be issued pursuant to the exercise of Harken Warrants or
Unexchanged Search Warrants (as defined herein), and (E) an
indeterminate number of shares which may be issued in the future as
Contingent Shares (as defined herein); and (ii) Harken Warrants
exercisable for 750,000 shares out of the 11,000,000 shares of Harken
Common Stock.
At the Special Meeting, the holders of Search Common Stock and Search
Preferred Stock (the "Stockholders") will be asked to consider and vote on a
proposal to adopt and approve the Amended and Restated Agreement and Plan
(continued)
FOR A DISCUSSION OF CERTAIN FACTORS THAT SHOULD BE CONSIDERED IN CONNECTION
WITH THE MERGER AND THE EXCHANGE OFFER, SEE "RISK FACTORS."
------------------------
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND
EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION NOR HAS THE SECURITIES
AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION PASSED UPON THE
ACCURACY OR ADEQUACY OF THIS STATEMENT. ANY REPRESENTATION TO THE CONTRARY IS
A CRIMINAL OFFENSE.
------------------------
THE DATE OF THIS STATEMENT IS APRIL 17, 1995.
<PAGE> 8
(cover page continued)
of Merger dated as of March 27, 1995 (as amended, the "Merger Agreement") by
and among Search, Harken and Search Acquisition Corp., a Delaware corporation
wholly-owned by Harken ("Merger Sub"), pursuant to which Search will merge
with and into Merger Sub which shall be the surviving corporation (the
"Merger"). Pursuant to the provisions of the Merger Agreement, upon the
consummation of the Merger, (a) each outstanding share of Search Common Stock
will be converted into the right to receive that number of shares of Harken
Common Stock determined by dividing $.8099 by the average of the closing sales
prices of a share of Harken Common Stock on the American Stock Exchange over
the 30 days immediately preceding the date that is five trading days prior to
the date of the Special Meeting, provided, however, that in no event shall such
average price be greater than $2.366 or lower than $1.274 (the "Average Trading
Price"), (b) each outstanding share of Search Preferred Stock will be converted
into the right to receive that number of shares of Harken Common Stock
determined by dividing $1.00 by the Average Trading Price, and (c) certain
promissory notes to be issued by Search (the "Notes") will, by their terms, be
converted into the right to receive that number of shares of Harken Common
Stock determined by dividing the principal amount of each Note by the Average
Trading Price. Within five days of the Special Meeting, the Stockholders can
call D.F. King & Co., Inc., the proxy solicitor for Search, at (800) 669-5550
for the Average Trading Price to be used in the calculation of the exchange
ratios. A copy of the Merger Agreement is attached to this Statement as
Appendix A.
In addition, the holders of record at the Effective Time (as defined
herein) of Search Common Stock (excluding those exercising appraisal rights),
certain Notes and Search Warrants (whether tendered in the Exchange Offer or
not), and the holders of overriding royalty interests ("Royalty Holders") in
certain properties held by Search will receive a non-transferable right to
receive additional shares in the future, if any, of Harken Common Stock (the
"Contingent Shares") or, under certain circumstances, cash, based upon the
increase that may subsequently be realized in the value of a group of
undeveloped leases and properties of Search as described in Appendix F attached
hereto ("Undeveloped Properties"). HOWEVER, DUE TO THE CONTINGENT NATURE OF
THE DISTRIBUTION OF ADDITIONAL SHARES, STOCKHOLDERS SHOULD BASE THEIR VOTING
DECISION CONCERNING THE MERGER ON THE NUMBER OF SHARES OF HARKEN COMMON STOCK
TO BE RECEIVED AT THE EFFECTIVE TIME. See "The Merger Agreement--Terms of the
Merger."
Unless waived, the consummation of the Merger is conditioned, among
other things, upon receiving the affirmative vote of the holders of a majority
of the outstanding Search Common Stock and the holders of all outstanding
Search Preferred Stock, voting separately as a class. See "The Merger
Agreement--Conditions."
Harken will accept for exchange at the Effective Time any and all
Search Warrants that are validly tendered and not withdrawn prior to 5:00 p.m.,
Dallas, Texas time, on May 19, 1995 unless the Exchange Offer is extended
(the "Expiration Date"). Tenders of Search Warrants may be withdrawn at any
time prior to the Expiration Date. The Exchange Offer is not conditioned upon
any minimum number of Search Warrants being tendered for exchange. However,
the Exchange Offer is subject to certain conditions, including the consummation
of the Merger. Search Warrants not exchanged in the Exchange Offer
("Unexchanged Search Warrants") will remain outstanding and shall be
exercisable for Harken Common Stock according to their terms. See "The Warrant
Exchange Offer."
This Statement together with the accompanying proxy card and Letter of
Transmittal are first being mailed to the Stockholders, the holders of Search
Warrants and Notes, and the Royalty Holders on or about April 18, 1995.
------------------------
THE EXCHANGE OFFER EXPIRES AT 5:00 P.M., DALLAS, TEXAS TIME, ON
MAY 19, 1995, UNLESS EXTENDED BY HARKEN. SEARCH WARRANTS TENDERED PURSUANT TO
THE EXCHANGE OFFER MAY BE WITHDRAWN BY THE TENDERING WARRANT HOLDER AT ANY
TIME BEFORE ACCEPTANCE BY HARKEN.
------------------------
<PAGE> 9
AVAILABLE INFORMATION
Harken and Search are subject to the informational requirements of the
Securities Exchange Act of 1934, as amended (the "Exchange Act"), and in
accordance therewith each of Harken and Search files reports, proxy statements
and other information with the Securities and Exchange Commission (the
"Commission"). The reports, proxy statements and other information filed by
Harken and Search with the Commission can be inspected and copied at the public
reference facilities maintained by the Commission at Room 1024, 450 Fifth
Street, N.W., Washington, D.C. 20549, and at the Commission's Regional Offices
at Seven World Trade Center, New York, New York 10048 and Northwest Atrium
Center, 500 West Madison Street, Suite 1400, Chicago, Illinois 60661. Copies
of such material also can be obtained at prescribed rates from the Public
Reference Section of the Commission at 450 Fifth Street, N.W., Washington, D.C.
20549. Harken Common Stock is listed and traded on the American Stock Exchange
(the "AMEX") and certain of Harken's reports, proxy statements and other
information can be inspected at the offices of the AMEX, 86 Trinity Place, New
York, New York 10006.
Harken has filed with the Commission a Registration Statement on Form
S-4 (together with any amendments or supplements thereto, the "Registration
Statement") under the Securities Act of 1933, as amended (the "Securities
Act"), with respect to the shares of Harken Common Stock and the Harken
Warrants to be issued in connection with the Merger and the Exchange Offer.
This Statement does not contain all of the information set forth in the
Registration Statement and the exhibits thereto, certain parts of which are
omitted in accordance with the rules and regulations of the Commission. Such
additional information may be obtained from the Commission's principal office
in Washington, D.C. Statements contained in this Statement or in any document
incorporated in this Statement by reference as to the contents of any contract
or other document referred to herein or therein are not necessarily complete,
and in each instance reference is made to the copy of such contract or other
documents filed as an exhibit to the Registration Statement or such other
document, each such statement being qualified in all respects by such
reference.
All information contained in this Statement relating to Search has
been supplied by Search, and all information relating to Harken has been
supplied by Harken.
INCORPORATION OF CERTAIN DOCUMENTS BY REFERENCE
THIS STATEMENT INCORPORATES DOCUMENTS BY REFERENCE WHICH ARE NOT
PRESENTED HEREIN OR DELIVERED HEREWITH. SUCH DOCUMENTS (OTHER THAN EXHIBITS TO
SUCH DOCUMENTS UNLESS SUCH EXHIBITS ARE SPECIFICALLY INCORPORATED HEREIN BY
REFERENCE) ARE AVAILABLE TO ANY PERSON TO WHOM THIS STATEMENT IS DELIVERED, ON
WRITTEN OR ORAL REQUEST, WITHOUT CHARGE, DIRECTED WITH RESPECT TO HARKEN
DOCUMENTS, TO HARKEN ENERGY CORPORATION, 5605 N. MACARTHUR BLVD., SUITE 400,
IRVING, TEXAS 75038, ATTENTION: LARRY E. CUMMINGS, SECRETARY (TELEPHONE NUMBER
(214) 753-6900) AND WITH RESPECT TO SEARCH DOCUMENTS, TO SEARCH EXPLORATION,
INC., 5430 LBJ FREEWAY, SUITE 1500, DALLAS, TEXAS 75240, ATTENTION: JOSEPH F.
LANGSTON, PRESIDENT (TELEPHONE NUMBER (214) 991-4100). IN ORDER TO ENSURE
TIMELY DELIVERY OF THE DOCUMENTS, ANY REQUEST SHOULD BE MADE BY MAY 15, 1995.
The following documents filed with the Commission by Harken (File No.
0-9207) pursuant to the Exchange Act are incorporated by reference in this
Statement: (a) Annual Report on Form 10-K for the fiscal year ended December
31, 1994 (the "Harken Annual Report"), and (b) the portions of the Proxy
Statement for the Annual Meeting of Stockholders held June 3, 1994 (the "Harken
Proxy Statement") that have been incorporated by reference in the Harken Annual
Report.
The Annual Report on Form 10-K for the fiscal year ended December 31,
1994, and Annual Report on Form 10-K/A Amendment No. 1 for the fiscal year
ended December 31, 1994 (as amended, the "Search Annual Report") filed with the
Commission by Search (File No. 0-18837) pursuant to the Exchange Act is
incorporated by reference in this Statement.
2
<PAGE> 10
Attached to this Statement as Appendix G are copies of the Harken
Annual Report and Harken Proxy Statement. Attached to this Statement as
Appendix H is a copy of the Search Annual Report.
------------------------
NO PERSONS HAVE BEEN AUTHORIZED TO GIVE ANY INFORMATION OR TO MAKE ANY
REPRESENTATION OTHER THAN THAT CONTAINED IN THIS STATEMENT IN CONNECTION WITH
THE SOLICITATION OF PROXIES, THE SOLICITATION OF TENDERS OF SEARCH WARRANTS OR
THE OFFERING OF SECURITIES MADE HEREBY AND, IF GIVEN OR MADE, SUCH INFORMATION
OR REPRESENTATION MUST NOT BE RELIED UPON AS HAVING BEEN AUTHORIZED BY SEARCH,
HARKEN OR ANY OTHER PERSON. THIS STATEMENT DOES NOT CONSTITUTE AN OFFER TO SELL
OR EXCHANGE, OR A SOLICITATION OF AN OFFER TO BUY, ANY SECURITIES, OR THE
SOLICITATION OF A PROXY, IN ANY JURISDICTION, TO OR FROM ANY PERSON TO WHOM IT
IS NOT LAWFUL TO MAKE ANY SUCH OFFER OR SOLICITATION IN SUCH JURISDICTION.
NEITHER THE DELIVERY OF THIS STATEMENT NOR ANY DISTRIBUTION OF SECURITIES MADE
HEREUNDER SHALL UNDER ANY CIRCUMSTANCES CREATE AN IMPLICATION THAT THERE HAS
BEEN NO CHANGE IN THE AFFAIRS OF SEARCH OR HARKEN SINCE THE DATE HEREOF OR THAT
THE INFORMATION HEREIN IS CORRECT AS OF ANY TIME SUBSEQUENT TO ITS DATE.
3
<PAGE> 11
TABLE OF CONTENTS
<TABLE>
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Page
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AVAILABLE INFORMATION . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2
INCORPORATION OF CERTAIN DOCUMENTS BY REFERENCE . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2
SUMMARY . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 6
The Companies . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 6
The Special Meeting . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 6
The Merger . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 7
The Warrant Exchange Offer . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 9
Resale Restrictions . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 11
Comparison of Stockholder Rights . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 11
Selected Historical Financial Data . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 11
Selected Unaudited Pro Forma Combined Condensed Financial Data . . . . . . . . . . . . . . . . . . . . . . . . . 14
Comparative Market Data . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 15
RISK FACTORS . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 16
Uncertainty of the Exchange Ratios . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 16
Contingent Nature of Additional Issuance . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 16
Restrictions on Transfer of Harken Warrants . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 16
Limitations of Fairness Opinion . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 16
Losses from Continuing Operations of Harken . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 17
Effect of Sales of Harken Common Stock and Other Events on Market Price . . . . . . . . . . . . . . . . . . . . 17
Volatility of Harken Common Stock Trading Price . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 17
Contingent Liabilities of Harken . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 17
Preferred Stock Authorized for Issuance . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 18
Factors Related to International Operations . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 18
Losses from Continuing Operations of Search . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 18
Inability of Search to Access Capital Markets . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 18
Declining Oil and Gas Production of Search . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 19
Industry Risks . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 19
THE SPECIAL MEETING . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 20
Matters to be Considered at the Special Meeting . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 20
Voting at the Special Meeting; Record Date . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 20
Voting of Proxies . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 21
Revocability of Proxies . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 21
Solicitation of Proxies . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 22
Appraisal Rights . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 22
THE MERGER . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 23
Background of the Merger . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 23
Reasons for the Merger . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 26
Benefits to Search of the Merger . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 27
Recommendation of Search Board . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 27
Opinion of Financial Advisor . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 27
Conflicts of Interest . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 31
Accounting Treatment . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 34
Stock Exchange Listing . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 34
THE MERGER AGREEMENT . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 34
The Merger . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 34
Terms of the Merger . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 34
Exchange Procedures for Search Securities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 40
The Warrant Exchange Offer . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 41
Representations and Warranties . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 41
Conduct of Business Prior to the Merger . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 41
No Solicitation of Acquisition Transaction . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 41
Indemnification . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 42
Conditions . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 42
Termination . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 43
Termination Fee . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 43
Expenses . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 44
Amendment and Waiver . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 44
THE WARRANT EXCHANGE OFFER . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 44
Purpose of the Exchange Offer . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 44
Terms of the Exchange Offer . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 45
Expiration Date; Extensions; Amendments . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 45
Procedures for Tendering . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 46
Withdrawal of Tenders . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 47
Termination . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 47
Warrant Exchange Agent . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 47
Acceptance of Search Warrants and Delivery of Harken Warrants . . . . . . . . . . . . . . . . . . . . . . . . . 48
Solicitation of Tenders; Fees and Expenses . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 48
Other . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 48
CERTAIN FEDERAL INCOME TAX CONSEQUENCES . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 49
RESALE RESTRICTIONS . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 50
UNAUDITED PRO FORMA COMBINED OIL AND GAS RESERVE DATA . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 51
BUSINESS OF SEARCH . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 52
General . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 52
Recent Developments . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 53
BUSINESS OF HARKEN . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 53
General . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 53
Operations, Liquidity and Capital Resources of Harken After the Merger . . . . . . . . . . . . . . . . . . . . . 53
BUSINESS OF MERGER SUB . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 54
DESCRIPTION OF HARKEN SECURITIES . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 54
Common Stock . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 54
Warrants . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 55
Preferred Stock . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 55
Delaware Law Relating to "Business Combinations" . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 56
COMPARISON OF STOCKHOLDER RIGHTS . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 57
Authorized Capital . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 57
Directors . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 57
Limitation of Liabilities of Directors . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 58
Voting Rights . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 58
Stockholder Action by Written Consent; Call of Special Meeting . . . . . . . . . . . . . . . . . . . . . . . . . 58
Indemnification of Directors and Officers . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 59
Amendment of Bylaws . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 59
LEGAL MATTERS . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 60
EXPERTS . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 60
STOCKHOLDER PROPOSALS . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 60
INDEX TO FINANCIAL STATEMENTS . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . F-1
APPENDIX A - Merger Agreement
APPENDIX B - Opinion of Principal Financial
Securities, Inc.
APPENDIX C - Section 262 of the Delaware General
Corporation Law regarding
Appraisal Rights
APPENDIX D - Warrant Exchange Schedule
APPENDIX E - Form of Harken Warrant
APPENDIX F - Description of Undeveloped
Properties
APPENDIX G - Harken Annual Report and Proxy Statement
APPENDIX H - Search Annual Report
</TABLE>
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SUMMARY
The following is a summary of certain information contained elsewhere in
this Statement, including the Appendices hereto which are a part of this
Statement. Reference is made to, and this summary is qualified in its entirety
by, the more detailed information contained elsewhere in this Statement. The
holders of Search securities are urged to read this Statement in its entirety.
THE COMPANIES
Harken is principally engaged in oil and gas exploration, development and
production operations both domestically and internationally. The principal
executive offices of Harken are located at 6505 N. MacArthur Boulevard, Suite
400, Irving, Texas 75038, and the telephone number at such offices is (214)
753-6900. See "Business of Harken" and Appendix G.
Merger Sub is a corporation recently organized by Harken for the purpose of
effecting the Merger. It has no material assets and has not engaged in any
activities except in connection with the Merger. Merger Sub's principal
executive offices are located at 6505 N. MacArthur Boulevard, Suite 400,
Irving, Texas 75038, and the telephone number at such offices is (214)
753-6900.
Search is principally engaged in the business of participating in oil and
gas prospect generation ventures and in related exploration activities. The
principal executive offices of Search are located at 5430 LBJ Freeway, Suite
1500, Dallas, Texas 75240, and the telephone number at such offices is (214)
991-4100. See "Business of Search" and Appendix H.
THE SPECIAL MEETING
Time, Date and Place. The Special Meeting will be held at 9:00 a.m. local
time, on May 22, 1995 at 5430 LBJ Freeway, Suite 1500, Dallas, Texas.
Purpose of the Special Meeting. The purpose of the Special Meeting is to
consider and vote upon a proposal to adopt and approve the Merger Agreement and
the Merger and to transact such other business as may properly come before the
Special Meeting.
Record Date; Shares Entitled to Vote; Quorum. Holders of record of Search
Common Stock and Search Preferred Stock at the close of business on April 5,
1995 are entitled to notice of and to vote at the Special Meeting. At such
date, there were 3,690,632 shares of Search Common Stock and 575,000 shares of
Search Preferred Stock issued and outstanding, each of which will be entitled
to one vote on each matter to be acted upon or which may properly come before
the Special Meeting, voting separately as a class. The presence, in person or
by proxy, of the holders of a majority of the outstanding shares of the Search
Common Stock and Search Preferred Stock entitled to vote at the Special Meeting
is necessary to constitute a quorum for the transaction of business at the
Special Meeting. Shares of Search Common Stock and Search Preferred Stock
represented by properly executed proxies received at or prior to the Special
Meeting and which have not been revoked will be voted in accordance with the
instructions indicated therein. If no instructions are indicated on a
properly executed proxy, such proxies will be voted FOR approval and adoption
of the Merger Agreement. See "The Special Meeting."
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Vote Required. Delaware law requires the adoption and approval of the
Merger Agreement by the affirmative vote of the holders of a majority of the
total number of shares of Search Common Stock and Search Preferred Stock
outstanding and entitled to vote thereon. However, the consummation of the
Merger is conditioned upon the adoption and approval of the Merger Agreement by
the holders of a majority of the outstanding Search Common Stock and the
holders of all outstanding Search Preferred Stock, voting separately as a
class. As of December 31, 1994, directors, executive officers and their
affiliates were beneficial owners of approximately 28.98% of the outstanding
shares of Search Common Stock (including 771,488 shares which may be acquired
upon exercise of options and/or warrants which are exercisable within 60 days
of December 31, 1994) and all outstanding shares of Search Preferred Stock.
THE MERGER
Initial Issuance of Harken Common Stock. Upon consummation of the Merger,
Search will be merged with and into Merger Sub which shall be the surviving
corporation. Pursuant to the Merger Agreement, upon the consummation of the
Merger, (a) each outstanding share of Search Common Stock will be converted
into the right to receive that number of shares of Harken Common Stock
determined by dividing $.8099 by the Average Trading Price (the "Exchange
Ratio"), (b) each outstanding share of Search Preferred Stock will be converted
into the right to receive that number of shares of Harken Common Stock
determined by dividing $1.00 by the Average Trading Price, and (c) the Notes to
be issued by Search will, by their terms, be converted into the right to
receive that number of shares of Harken Common Stock determined by dividing the
principal amount of each Note by the Average Trading Price. For a description
of the Notes, see "The Merger--Conflicts of Interest." Within five days of the
Special Meeting, the Stockholders can call D.F. King & Co., Inc., the proxy
solicitor for Search, at (800) 669-5550 for the Average Trading Price to be
used in the calculation of the exchange ratios.
Issuance of Contingent Shares. In addition, the holders of record at the
Effective Time of Search Common Stock (excluding those exercising appraisal
rights), certain Notes and Search Warrants (whether tendered in the Exchange
Offer or not) and the holders of overriding royalty interests in certain
properties held by Search shall receive a right to receive in the future
Contingent Shares or, under certain circumstances, cash, based upon the
increase that may subsequently be realized in the value of the Undeveloped
Properties. This right to receive additional shares or, under certain
circumstances cash, is non-transferable and will be separate from the shares of
Harken Common Stock received upon the consummation of the Merger or the
exercise of Harken Warrants or Unexchanged Search Warrants. The right to the
Contingent Shares, however, will not be represented by any form of certificate.
For a more detailed description of the Contingent Shares, see "The Merger
Agreement--Terms of the Merger--Issuance of Contingent Shares."
Fractional shares of Harken Common Stock will not be issued in connection
with the Merger. The total number of shares of Harken Common Stock that a
Stockholder, a holder of a Note (the "Noteholder") or a holder of a right to
receive Contingent Shares in the future is entitled to receive will be rounded
up to the nearest whole share of Harken Common Stock. See "The Merger
Agreement."
Recommendation of the Search Board. The Board of Directors of Search (the
"Search Board") has unanimously approved the Merger Agreement and recommends a
vote FOR approval and adoption of the Merger Agreement and the Merger by the
Stockholders. The Search Board believes that the terms of the Merger are fair
to and in the best interest of Search and its Stockholders.
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For a discussion of the factors considered by the Search Board in reaching
its decision, see "The Merger--Reasons for the Merger; Recommendation of the
Search Board."
Opinion of Financial Advisor. Principal Financial Securities, Inc.
("Principal") delivered to the Search Board its oral and written opinion on
November 7, 1994 to the effect that the consideration to be received by the
holders of Search Common Stock pursuant to the Merger, taken as a whole, is
fair to such stockholders from a financial point of view. In rendering its
opinion, Principal has relied upon and assumed, without independent
verification, the accuracy, completeness and fairness of all of the financial
and other information provided to Principal from both Search and Harken.
Principal has also relied, without independent investigation, upon the
estimates of the management of Search of the future prospects achievable as a
result of the Merger. With respect to the financial forecasts supplied by
Search to Principal, Principal has assumed that all such forecasts have been
reasonably derived on a basis reflecting the best currently available estimates
and judgment of the management as to the future operating and financial
performance of the companies and Principal has relied upon the assumptions
therein for oil and natural gas prices. A copy of the full text of the written
opinion of Principal, which sets forth the assumptions made, procedures
followed, matters considered and limits of its review, is attached to this
Statement as Appendix B, and should be read in its entirety. See "The
Merger--Opinion of Financial Advisor."
Conflicts of Interest. In considering the recommendation of the Search
Board with respect to the Merger, Stockholders should be aware that certain
officers and directors of Search have certain interests with respect to the
Merger that are in addition to, and possibly in conflict with, the interests of
Stockholders generally. See "The Merger--Conflicts of Interest."
Conditions to the Merger. The obligations of Harken and Search to
consummate the Merger are subject to the satisfaction of certain conditions,
including, among others, (a) obtaining approval of the Merger by the holders of
a majority of the outstanding Search Common Stock and the holders of all Search
Preferred Stock, (b) the absence of any material adverse change in the
conditions, business, operations, properties, assets, or liabilities of the
other party, and (c) the absence of any order or injunction prohibiting or
restricting the consummation of the Merger. In addition, the obligations of
Harken to consummate the Merger are subject to the satisfaction of certain
conditions, including, among others, (a) the execution of the Partial
Settlement and Conversion Agreements and the issuance of the Notes by Search,
(b) the execution of Royalty Assignment Agreements reconveying to Search the
overriding royalty interest, (c) that no more than five percent (5%) of the
holders of the outstanding Search Common Stock and Search Preferred Stock shall
have exercised their appraisal rights, and (d) the liquidation by Search of the
Search Partnerships (as defined herein). The conditions to each party's
obligation to consummate the Merger may be waived in writing signed by the
party granting the waiver. See "The Merger Agreement--Conditions"
Effective Time of the Merger. The Merger will become effective upon the
filing of a Certificate of Merger with the Secretary of State of the State of
Delaware (the "Effective Time"), which Certificate will be filed as promptly as
practicable after Stockholder approval has been obtained and all other
conditions of the Merger have been satisfied or waived. Subject to the
satisfaction (or waiver) of the other conditions to the obligations of Harken
and Search to consummate the Merger, it is presently expected that the Merger
will be consummated on the date of the Special Meeting, or as soon thereafter
as such conditions are satisfied.
Exchange of Search Securities in the Merger. Upon consummation of the
Merger, each holder of a note or certificate ("Certificates") representing
Search Common Stock, Search Preferred Stock or the Notes
7
<PAGE> 15
("Search Securities") outstanding immediately prior to the Merger will, upon
the surrender thereof (duly endorsed, if required) to Continental Stock
Transfer and Trust Company (the "Exchange Agent"), be entitled to receive a
certificate or certificates representing the number of whole shares of Harken
Common Stock into which such Search Securities will have been automatically
converted as a result of the Merger. After the consummation of the Merger, the
Exchange Agent will mail a letter of transmittal with instructions to all
holders of record of Search Securities as of the Effective Time for use in
surrendering their Certificates in exchange for certificates representing
shares of Harken Common Stock. CERTIFICATES OF SEARCH SECURITIES SHOULD NOT BE
SURRENDERED UNTIL THE LETTER OF TRANSMITTAL AND INSTRUCTIONS ARE RECEIVED. See
"The Merger Agreement--Exchange Procedures for Search Securities."
Appraisal Rights. Holders of Search Common Stock and Search Preferred
Stock are entitled to dissenters' appraisal rights in connection with the
Merger and, subject to certain conditions, to receive payment of the "fair
value" of their shares, as provided in Section 262 of the Delaware General
Corporation Law. See "The Merger--Appraisal Rights" and Appendix C.
Accounting Treatment. Harken believes that the Merger will be treated as a
purchase by Harken of Search in accordance with generally accepted accounting
principles, and has been so advised by its independent public accountants. See
"The Merger--Accounting Treatment."
Termination of the Merger Agreement. The Merger Agreement may be
terminated and the Merger abandoned at any time prior to the Effective Time,
before or after the approval by the Stockholders, at the option of either
Harken or Search if the Merger has not been consummated by May 30, 1995, and
prior to such time upon the occurrence of certain events. See "The Merger
Agreement--Termination."
Termination Fee. If Harken or Search terminates the Merger Agreement
because the Search Board has (a) approved or recommended a competing
acquisition transaction, then Search shall pay to Harken a cash fee equal to
all of Harken's out-of-pocket expenses plus $800,000, or (b) withdrawn,
modified or amended in any manner adverse to Harken its approval of or
recommendation in favor of the Merger, then Search shall pay to Harken a cash
fee equal to all of Harken's out-of-pocket expenses plus $150,000. See "The
Merger Agreement--Termination Fee."
THE WARRANT EXCHANGE OFFER
The Exchange. Harken is obligated pursuant to the terms of the Merger
Agreement to offer to exchange the outstanding Search Warrants for Harken
Warrants. As of December 31, 1994, Search had outstanding Search Warrants
exercisable for up to an aggregate of 989,000 shares of Search Common Stock.
Harken Warrants will be issued in exchange for Search Warrants validly tendered
and accepted pursuant to the Exchange Offer. Each Search Warrant tendered in
the Exchange Offer shall be exchanged for a non-transferable Harken Warrant
exercisable for that number of shares of Harken Common Stock as set forth on
the Warrant Exchange Schedule attached hereto as Appendix D. If all of the
Search Warrants are exchanged in the Exchange Offer, the Harken Warrants will
be exercisable for an aggregate of 750,000 shares of Harken Common Stock. The
Harken Warrants issued in the Exchange Offer will entitle the holder to
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<PAGE> 16
purchase Harken Common Stock at a price of $1.82 per share, subject to
adjustment under certain conditions, from the date of issuance until their
expiration at 3:00 p.m., Dallas, Texas time on June 30, 1996. See "Description
of Harken Securities--Warrants" and "The Warrant Exchange Offer."
Unexchanged Search Warrants shall remain outstanding and shall be
exercisable for Harken Common Stock according to their terms. Generally, the
Search Warrants provide that, upon the consummation of the Merger, the number
of shares that each Search Warrant is exercisable for and the exercise price
per share of the Search Warrant will be adjusted based on the Exchange Ratio,
which will range from .3423 to .6357. For example, if prior to the
consummation of the Merger a Search Warrant is exercisable for 1,000 shares of
Search Common Stock at an exercise price of $2.00 per share and assuming that
the Exchange Ratio is .3423, upon the consummation of the Merger, the
Unexchanged Search Warrant will be exercisable for 343 shares of Harken Common
Stock at an exercise price of $5.84 per share. Assuming that the Exchange
Ratio is .6357, upon the consummation of the Merger, the Unexchanged Search
Warrant will be exercisable for 636 shares of Harken Common Stock at an
exercise price of $3.14 per share.
Upon exercise of a Harken Warrant or an Unexchanged Search Warrant, the
holder of such warrant shall receive the number of shares of Harken Common
Stock exercised by such holder. In addition, the holder of record at the
Effective Time of a Search Warrant (whether tendered in the Exchange Offer or
not) will be eligible to receive Contingent Shares or, under certain
circumstances, cash, if any, upon the exercise of such Unexchanged Search
Warrant or Harken Warrant. The transferee of an Unexchanged Search Warrant
subsequent to the Effective Time will not be eligible to receive Contingent
Shares, if any. See "The Merger Agreement--Terms of the Merger."
Expiration Date. 5:00 p.m., Dallas, Texas time on May 19, 1995, unless
the Exchange Offer is extended, in which case the term "Expiration Date" means
the latest date and time to which the Exchange Offer is extended. See "The
Warrant Exchange Offer--Expiration Date; Extensions; Amendments."
Restrictions on Transfer. While certain of the Search Warrants may be
transferable under certain circumstances, the Harken Warrants will not be
transferable other than by laws of descent and distribution. However, the
shares of Harken Common Stock issuable upon the exercise of the Harken Warrants
or the Unexchanged Search Warrants will be freely transferable, except that
shares of Harken Common Stock received by persons who are deemed to be
"affiliates" (as such term is defined under the Securities Act) of Search at
the time of the Special Meeting may be resold by them only in permitted
circumstances. See "Resale Restrictions."
Termination of the Exchange Offer. Harken may terminate the Exchange Offer
if the Merger Agreement has been terminated. See "The Warrant Exchange
Offer--Termination."
Procedures for Tendering. Each holder of a Search Warrant wishing to
accept the Exchange Offer must complete, sign and date the Letter of
Transmittal separate from the proxy, or a facsimile thereof, in accordance with
the instructions contained herein and therein, and mail or otherwise deliver
such Letter of Transmittal, or such facsimile, together with the original
Search Warrants to be exchanged and any other required documentation to Harken,
as Warrant Exchange Agent, at the address set forth herein. See "The Warrant
Exchange Offer--Procedures for Tendering."
Withdrawal Rights. Tenders of Search Warrants may be withdrawn at any time
prior to 5:00 p.m., Dallas, Texas time, on the Expiration Date, by furnishing a
written or facsimile transmission notice of
9
<PAGE> 17
withdrawal to the Warrant Exchange Agent containing the information set forth
in "The Warrant Exchange Offer--Withdrawal of Tenders."
Acceptance of Search Warrants and Delivery of Harken Warrants. Subject to
certain conditions (as summarized above in "--Termination of the Exchange
Offer" and described more fully in "The Warrant Exchange Offer--Termination"),
Harken will accept for exchange any and all Search Warrants that are properly
tendered in the Exchange Offer prior to the Expiration Date at the Effective
Time. The acceptance of any Search Warrants is conditioned on the consummation
of the Merger. The Harken Warrants issued pursuant to the Exchange Offer will
be delivered promptly following the Effective Time. See "The Warrant Exchange
Offer--Acceptance of Search Warrants and Delivery of Harken Warrants."
Warrant Exchange Agent. Harken is serving as exchange agent (the "Warrant
Exchange Agent") in connection with only the Exchange Offer. The mailing
address of the Warrant Exchange Agent is Harken Energy Corporation, Attn:
Larry E. Cummings, 5605 N. MacArthur Boulevard, Suite 400, Irving, Texas 75038
or P.O. Drawer 612007, Dallas, Texas 75261. For assistance and requests for
additional copies of this Statement or the Letter of Transmittal, the telephone
number for the Warrant Exchange Agent is (214) 753-9600 and the facsimile
number for the Warrant Exchange Agent is (214) 753-6963.
CERTAIN FEDERAL INCOME TAX CONSEQUENCES
Hein + Associates LLP, certified public accountants of Search, has given
its opinion that (a) no gain or loss would be recognized by the Search
Stockholders on the conversion pursuant to the Merger of Search Common Stock
and Search Preferred Stock into Harken Common Stock and the receipt of
Contingent Shares, if any, (b) no gain or loss would be recognized by the
holders of Unexchanged Search Warrants pursuant to the Merger, and (c) the
holders of Search Warrants that exchange their warrants in the Exchange Offer
would recognize gain or loss on the exchange. The Noteholders and the Royalty
Holders are affiliates of Search and are seeking their own independent tax
advice. See "Certain Federal Income Tax Consequences."
RESALE RESTRICTIONS
All shares of Harken Common Stock issued in connection with the Merger and
upon the exercise of Harken Warrants and Unexchanged Search Warrants, will be
freely transferable, except that shares of Harken Common Stock received by
persons who at the time of the Special Meeting are deemed to be "affiliates"
(as such term is defined under the Securities Act) of Search may be resold by
them only in certain permitted circumstances. The Harken Warrants and the
right to receive Contingent Shares or, under certain circumstances, cash are
not transferable. See "Resale Restrictions."
COMPARISON OF STOCKHOLDER RIGHTS
See "Comparison of Stockholder Rights" for a summary of the material
differences between the rights of the Stockholders and the holders of Harken
Common Stock.
SELECTED HISTORICAL FINANCIAL DATA
Set forth below are selected historical financial data of Harken and Search
which are based upon the respective historical financial statements of Harken
and Search, including the notes thereto, set forth in Appendices G and H and
incorporated by reference herein, and should be read in conjunction therewith.
See "Incorporation of Certain Documents by Reference" and Appendices G and H.
10
<PAGE> 18
HARKEN ENERGY CORPORATION
SELECTED HISTORICAL FINANCIAL DATA
($ in thousands, except per share data)
<TABLE>
<CAPTION>
For the Years Ended December 31,
--------------------------------------------------------------------------------
1990(2)(3)(4) 1991(3)(4) 1992(3) 1993(3) 1994
------------- ------------ ----------- ----------- -----------
<S> <C> <C> <C> <C> <C>
Revenues . . . . . . . . . . . . . . . . . $ 10,749 $ 3,191 $ 4,382 $ 6,601 $ 4,895
Income (loss) from continuing
operations(5)(6) . . . . . . . . . . . . . $ (5,212) $ (4,413) $ 661 $ (1,797) $ (8,211)
Income (loss) from discontinued
operations(4) . . . . . . . . . . . . . . $ (35,976) $ (11,190) $ (328) $ (3,697) $ (223)
Extraordinary item . . . . . . . . . . . . -- -- 172 -- --
Net income (loss) . . . . . . . . . . . . . $ (41,188) $ (15,603) $ 505 $ (5,494) $ (8,434)
Net income (loss) per common share:
Income (loss) from continuing operations . $ (0.27) $ (0.12) $ 0.01 $ (0.03) $ (0.14)
Discontinued operations . . . . . . . . . (1.11) (0.26) (0.01) (0.06) (0.00)
Extraordinary item . . . . . . . . . . . . -- -- 0.00 -- --
----------- ----------- ----------- ----------- -----------
Net income (loss) . . . . . . . . . . . . $ (1.38) $ (0.38) $ 0.00 $ (0.09) $ (0.14)
=========== =========== =========== =========== ===========
Current assets . . . . . . . . . . . . . . $ 94,038 $ 15,560 $ 13,911 $ 7,677 $ 6,840
Current liabilities . . . . . . . . . . . . $ 101,094 $ 15,122 $ 10,201 $ 6,533 $ 5,133
----------- ----------- ----------- ----------- -----------
Working capital (deficit) . . . . . . . . . $ (7,056) $ 438 $ 3,710 $ 1,144 $ 1,707
=========== =========== =========== =========== ===========
Working capital (deficit) from continuing
operations . . . . . . . . . . . . . . . . $ 328 $ 438 $ 3,710 $ 1,144 $ 1,707
Total assets . . . . . . . . . . . . . . . $ 260,607 $ 37,664 $ 34,872 $ 37,731 $ 28,960
Long-term obligations:
Long-term debt and other liabilities . . . $ 302 $ 1,276 $ -- $ -- $ --
Notes payable to related parties . . . . . $ 4,761 $ 253 $ -- $ -- $ --
Redeemable preferred stock . . . . . . . . $ 30,000 $ 9,000 $ 1,868 $ 1,868 $ 1,868
----------- ---------- ----------- ----------- -----------
Total . . . . . . . . . . . . . . . . . . $ 35,063 $ 10,529 $ 1,868 $ 1,868 $ 1,868
=========== ========== =========== =========== ===========
Stockholders' Equity . . . . . . . . . . . $ 3,000 $ 11,499 $ 20,316 $ 28,963 $ 21,959
Redeemable preferred stock outstanding . . 3,000,000 900,000 186,760 186,760 186,760
Weighted average common stock
outstanding . . . . . . . . . . . . . . . 32,533,137 42,519,373 45,752,936 58,392,901 59,722,853
Proved reserves at end of year(1):
Bbls of oil . . . . . . . . . . . . . . . -- -- -- 1,035,000 1,521,000
Mcf of gas . . . . . . . . . . . . . . . . -- -- -- 4,970,000 7,148,000
Future net revenues . . . . . . . . . . . $ -- $ -- $ -- $ 13,707 $ 20,178
Present value (discounted at 10% per year) $ -- $ -- $ -- $ 8,230 $ 11,712
</TABLE>
- ---------------
(1) These estimated reserve quantities, future net revenues and present
value figures are related solely to proved reserves. No consideration
has been given to probable or possible reserves. Oil and gas prices
were held constant except where future price increases were fixed and
determinable under existing contracts and government regulations.
Operating costs were held constant. Harken's share of an equity method
investee's proved oil and gas reserves are not reflected in these
amounts. Effective November 1, 1990, Harken transferred its oil and
gas properties to a newly-formed limited partnership. In addition,
effective February 15, 1993, Harken consummated a merger whereby
Chuska Resources Corporation ("Chuska") became a wholly-owned
subsidiary of Harken. The 1993 and 1994 amounts reflect primarily the
proved reserve quantities and future net revenues of Chuska. (See
"Notes to Consolidated Financial Statements," set forth in Appendix
G.)
(2) Revenues and Total Assets amounts in 1990 reflect the last year prior
to the formation of Harken Anadarko Partners, L.P. whereby Harken
transferred its domestic oil and gas property interests to the limited
partnership effective November 1, 1990. As a result, Harken did not
reflect direct oil and gas operating revenues, expenses or
depreciation and amortization from these properties in its statements
of operations after 1990.
(3) Financial information for these periods has been restated to present
the operations of Harken's well servicing and contract drilling
operations as discontinued operations.
(4) Pursuant to a plan of reorganization, Harken completed a rights
offering and related exchange transactions on April 30, 1991. These
transactions resulted in a discontinuance of Harken's refined products
marketing and natural gas gathering and marketing operations.
Discounted operations for 1990 and 1991 include losses of $32,884,000
and $2,997,000, respectively, from Harken's discontinued refined
products marketing and natural gas gathering and marketing operations.
(5) Contributing to the 1990 loss from continuing operations were: (a)
lower gross profits from oil and gas operations due to production
declines, increased workover expenses and the inclusion of ten months
versus twelve months activity as a result of the transfer of oil and
gas properties effective November 1, 1990; (b) higher general and
administrative expenses in connection with the costs associated with
consolidating certain offices and administrative functions, and
expenses related to efforts to raise equity during the year; and (c)
interest expense in connection with the rights offering.
(6) Contributing to the 1991 loss from continuing operations were equity
in the loss of a partnership of $3.0 million resulting from Harken's
12% interest in Harken Anadarko Partners, LP.
11
<PAGE> 19
SEARCH EXPLORATION , INC.
SELECTED HISTORICAL FINANCIAL DATA
($ in thousands, except per share data)
<TABLE>
<CAPTION>
Fiscal Year Ended
September 30, Year Ended December 31,
------------------------- ------------------------------------------
1990(2) 1991(3)(4) 1992(3) 1993 1994
---------- ---------- ---------- ---------- ---------
<S> <C> <C> <C> <C> <C>
Revenues . . . . . . . . . . . . . . . . . . . . $ 2,317 $ 4,021 $ 339 $ 1,101 $ 716
Income (loss) before cumulative effect of change
in accounting method . . . . . . . . . . . . $ 250 $ 1,729 $ (284) $ (905) $ (3,200)
Cumulative effect of change
in accounting method . . . . . . . . . . . . -- -- -- (69) --
Net income (loss) . . . . . . . . . . . . . . . . $ 250 $ 1,729 $ (284) $ (836) $ (3,200)
Net income (loss) per common share:
Income (loss) before cumulative effect of change
in accounting method . . . . . . . . . . . . $ 0.06 $ 0.36 $ (0.08) $ (0.25) $ (0.88)
Cumulative effect of change in accounting method -- -- -- 0.02 --
---------- ---------- ---------- ---------- ----------
Net income (loss) . . . . . . . . . . . . . . . $ 0.06 $ 0.36 $ (0.08) $ (0.23) $ (0.88)
========== ========== ========== ========== ==========
Working capital (deficit) . . . . . . . . . . . . $ (189) $ 4,664 $ 967 $ (297) $ 315
========== ========== ========== ========== ==========
Total assets . . . . . . . . . . . . . . . . . . $ 8,174 $ 7,287 $ 5,905 $ 7,266 $ 2,573
Long-term obligations:
Long-term debt and other liabilities . . . . . . $ 367 $ -- $ -- $ -- $ --
Redeemable preferred stock . . . . . . . . . . . $ -- $ -- $ -- $ 575 $ 575
---------- ---------- ---------- ---------- ----------
Total . . . . . . . . . . . . . . . . . . . . . $ 367 $ -- $ -- $ 575 $ 575
========== ========== ========== ========== ==========
Stockholders' Equity . . . . . . . . . . . . . . $ 6,592 $ 6,673 $ 8,552 $ 5,069 $ 1,824
Redeemable preferred stock outstanding . . . . . -- -- -- 575,000 575,000
Weighted average common stock outstanding . . . . 4,351,223 4,793,165 3,742,402 3,690,632 3,690,632
Proved reserves at end of year(1):
Bbls of oil . . . . . . . . . . . . . . . . . . 387,000 5,000 132,000 159,000 19,000
Mcf of gas . . . . . . . . . . . . . . . . . . . 9,119,000 494,000 3,216,000 2,068,000 1,298,000
Future net revenues . . . . . . . . . . . . . . $ 15,224 $ 545 $ 5,228 $ 4,922 $ 2,414
Present value (discounted at 10% per year) . . . $ 7,492 $ 373 $ 3,338 $ 3,126 $ 1,513
</TABLE>
- -------------------
(1) These estimated reserve quantities, future net revenues and present
value figures are related solely to proved reserves. No consideration
has been given to probable or possible reserves. Oil and gas prices
were held constant except where future price increases were fixed and
determinable under existing contracts and government regulations.
Operation costs were held constant.
(2) Plano Petroleum Corporation only for October and November 1989 and
combined with Search and the 33 acquired partnerships for December 1,
1989 through September 30, 1990.
(3) Search changed its fiscal year effective December 31, 1991.
Consequently, the three months ended December 31, 1991 are not shown
due to the fact that it is not comparative with the other annual
amounts.
(4) In 1991, Search sold substantially all of its oil and gas properties
pursuant to a lawsuit settlement.
12
<PAGE> 20
SELECTED UNAUDITED PRO FORMA COMBINED CONDENSED FINANCIAL DATA
The following selected unaudited pro forma combined financial data are
presented for illustrative purposes only and are not necessarily indicative of
the financial position or results of operation that would actually have been
reported had the Merger been in effect during the periods presented or that may
be reported in the future. The selected unaudited pro forma combined condensed
financial data should be read in conjunction with the unaudited pro forma
combined condensed financial statements, including the notes thereto, appearing
elsewhere in this Statement. See "Index to Financial Statements."
HARKEN ENERGY CORPORATION AND SEARCH EXPLORATION, INC.
SELECTED UNAUDITED PRO FORMA COMBINED CONDENSED FINANCIAL DATA
($ in thousands, except per share data)
<TABLE>
<CAPTION>
For the Year
Ended
December 31, 1994
-----------------
<S> <C>
Revenues . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 6,774
Income (loss) from continuing operations . . . . . . . . . . . . . . . . . . . . . . $ (8,271)
Net income (loss) from continuing operations per common share:
Income (loss) from continuing operations . . . . . . . . . . . . . . . . . . $ (0.13)
Current assets . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 7,329
Current liabilities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 5,655
Working capital . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 1,674
Total assets . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 33,151
Long-term obligations:
Long-term debt and other liabilities . . . . . . . . . . . . . . . . . . . . $ 309
Redeemable preferred stock . . . . . . . . . . . . . . . . . . . . . . . . . $ 1,868
Total . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 2,177
Stockholders' Equity . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 25,319
Weighted average common stock outstanding . . . . . . . . . . . . . . . . . . . . . . 62,439,236
</TABLE>
<TABLE>
<CAPTION>
SEARCH
HARKEN SEARCH PRO FORMA EQUIVALENT
HISTORICAL HISTORICAL COMBINED PRO FORMA
---------- ---------- -------- ---------
<S> <C> <C> <C> <C>
COMPARATIVE PER SHARE DATA(1):
Earnings per common share outstanding from
continuing operations Year ended December
31, 1994 . . . . . . . . . . . . . . . . $ (0.14) $ (0.88) $ (0.13) $ (0.05)
Book value per common share outstanding as
of December 31, 1994 . . . . . . . . . . . $ 0.36 $ .49 $ 0.40 $ 0.16
</TABLE>
______________
(1) In accordance with the terms of the Merger Agreement, the exchange
ratios will be calculated using the Average Trading Price of Harken
Common Stock which is limited to a range from $2.366 to $1.274. This
range will result in a minimum of 1,679,047 shares and a maximum of
3,118,227 shares, respectively, of Harken Common Stock being issued.
As presented in the Unaudited Pro Forma Combined Condensed Financial
Statements in Appendix G, the calculated Average Trading Price results
in the issuance of 1,996,383 shares of Harken Common Stock with a
total purchase price valuation, net of a 10% discount, of $3,360,000.
Pro Forma Net Income (Loss) Per Share would not be materially affected
by varying the number of shares to be issued over the possible range
described above.
13
<PAGE> 21
COMPARATIVE MARKET DATA
The Harken Common Stock is listed on the AMEX and traded under the
symbol "HEC." The Search Common Stock is currently quoted on the National
Association of Securities Dealers OTC Bulletin Board ("Nasdaq") and traded
under the symbol "SXEI." The table below sets forth, for the periods
indicated, the high and low sales prices per share reported on the AMEX
Composite Tape for the Harken Common Stock and the Nasdaq high and low bid
prices for the Search Common Stock, as appropriate. The information with
respect to the Nasdaq quotations was obtained from the National Association of
Securities Dealers, Inc. and reflects interdealer prices, without retail
markup, markdown or commissions and may not represent actual transactions.
During the periods presented below, neither Harken nor Search has paid any cash
dividends.
<TABLE>
<CAPTION>
Harken Search
Common Stock Common Stock
----------------------------- ----------------------------
Calendar Year High Low High Low
------------- ------------- ------------- ------------ ------------
<S> <C> <C> <C> <C>
1993:
-----
First Quarter $3 1/4 $1 3/16 $2 1/4 $1 5/8
Second Quarter 1 11/16 15/16 2 3/8 1 5/8
Third Quarter 1 1/4 13/16 2 1/4 1 1/4
Fourth Quarter 1 13/16 1 2 3/8 1
1994:
-----
First Quarter $1 1/2 $1 1/16 $1 1/2 $ 3/4
Second Quarter 1 7/16 15/16 1 3/4
Third Quarter 2 3/4 1 15/16 11/16
Fourth Quarter 2 1/4 1 5/8 15/16 11/16
1995:
-----
First Quarter $2 1/4 $1 1/2 $ 3/4 $ 1/2
</TABLE>
The last reported sale prices per share of Harken Common Stock and closing bid
price per share of Search Common Stock on November 8, 1994, the last trading
day preceding public announcement of the proposed Merger, were $2 and $ 13/16,
respectively. On April 10, 1995, the closing sale price per share of Harken
Common Stock and Search Common Stock was $2 1/2 and $ 21/32, respectively.
Pursuant to the terms of the Merger Agreement, the value of the Search Common
Stock in the Merger is $.8099 for each share of Search Common Stock and the
value of the Search Preferred Stock is $1.00 for each share of Search Preferred
Stock regardless of the market value at that time of Search Common Stock or
Harken Common Stock; provided, however, that the value of Harken Common Stock
received in the Merger may be higher if the Average Trading Price of Harken
Common Stock is greater than $2.366 or lower if the Average Trading Price is
lower than $1.274. See "The Merger Agreement--Terms of the Merger." Assuming
that the consummation of the Merger occurred on April 10, 1995, the Average
Trading Price of Harken Common Stock was $1.77.
14
<PAGE> 22
RISK FACTORS
The following risk factors should be considered by holders of Search
Securities in evaluating whether to approve the Merger Agreement and thereby
become holders of Harken Common Stock, and by holders of Search Warrants in
evaluating whether to tender their warrants in exchange for Harken Warrants
pursuant to the Exchange Offer. These factors should be considered in
conjunction with the other information included and incorporated by reference
in this Statement.
UNCERTAINTY OF THE EXCHANGE RATIOS
The exchange ratios for the conversion of Search Common Stock and
Search Preferred Stock into Harken Common Stock will vary substantially
depending on the fluctuations in the market price of Harken Common Stock. The
exchange ratios for the conversion of the Search Common Stock and Search
Preferred Stock into Harken Common Stock will vary from .3423 to .6357 and from
.4227 to .7849, respectively. The exchange ratios will be determined based on
events and circumstances occurring after the date of this Statement and could
be determined after the delivery of a proxy by a Search Stockholder for the
Special Meeting. Within five days of the Special Meeting, the Stockholders can
call D.F. King & Co., Inc., the proxy solicitor for Search, at (800) 669-5550
for the Average Trading Price to be used in the calculation of the exchange
ratios. A Stockholder may revoke his proxy by following the procedures set
forth under "The Special Meeting--Revocability of Proxies." See "The Merger
Agreement--Terms of the Merger."
CONTINGENT NATURE OF ADDITIONAL ISSUANCE
Harken's obligation to issue Contingent Shares is conditional in
nature, and Harken may never make any additional payments beyond those shares
of Harken Common Stock issued as of the Effective Time or upon the exercise of
the Harken Warrants or the Unexchanged Search Warrants. The determination and
calculation of the number of Contingent Shares to be issued, if any, will be
determined solely by Harken in its exercise of good faith based upon the
procedures set forth under "The Merger Agreement--Terms of the Merger--Issuance
of Contingent Shares."
RESTRICTIONS ON TRANSFER OF HARKEN WARRANTS
While certain of the Search Warrants are transferable under certain
circumstances, Harken Warrants will not be transferable other than by laws of
descent and distribution. See "The Warrant Exchange Offer" and "Restrictions
on Transfer."
LIMITATIONS OF FAIRNESS OPINION
The fairness opinion of Principal Financial Securities, Inc.
("Principal") dated November 7, 1994 was based on financial projections,
valuation of assets and other information prepared by Search and its
management. The foregoing projections, valuations and other information were
not confirmed by an independent third party, and an independent third party
could have arrived at different projections or valuations, which could have
affected Principal's opinion as to the fairness of the consideration to be
received by the holders of Search Common Stock. See "The Merger--Opinion of
Financial Advisor."
The fairness opinion dated as of November 7, 1994 will not be updated,
therefore, based on the future price of Harken Common Stock or the future
events or circumstances affecting Harken or Search, the consideration to be
received by the holders of Search Common Stock may or may not be fair from a
financial point of view.
In addition, Principal has expressed no opinion as to the allocation
of any portion of the aggregate consideration to be received from Harken
pursuant to the Merger Agreement among the holders of Search Common Stock,
Search Preferred Stock, the holders of the Notes, Royalty Holders and the
holders of Search Warrants or to the fairness to them thereof. See "The
Merger--Conflicts of Interest."
15
<PAGE> 23
LOSSES FROM CONTINUING OPERATIONS OF HARKEN
Harken reported losses from continuing operations for the fiscal years
ended December 31, 1990, 1991, 1993 and 1994, in the amounts of $5,212,000,
$4,413,000, $1,797,000 and $8,211,000, respectively. While the reasons for
most of these annual losses are considered to be non-recurring, there can be no
assurances that Harken will not continue to report losses. See "Index to
Financial Statements."
EFFECT OF SALES OF HARKEN COMMON STOCK AND OTHER EVENTS ON MARKET PRICE
As of December 31, 1994, there were 60,442,853 shares of Harken Common
Stock outstanding. As a result of the exercise of certain contractual demand
registration rights by nonaffiliated third parties, Harken filed with the
Commission on December 13, 1994, a Registration Statement on Form S-3 (the
"Form S-3") registering for resale an aggregate of 960,000 shares of Harken
Common Stock. Harken has no knowledge of the proposed plan of distribution of
such shares other than as described in the Form S-3. At the Effective Time,
shares of Harken Common Stock will be issued to holders of Search Securities
and will be immediately freely tradeable. In addition, shares of Harken Common
Stock will be issuable upon the exercise of Harken Warrants and Unexchanged
Search Warrants. There can be no assurance that the sale of the shares of
Harken Common Stock by the selling shareholders under the Form S-3 or the
shares of Harken Common Stock to be issued at the Effective Time or upon
exercise of Harken Warrants and Unexchanged Search Warrants will not have a
material adverse effect on the then prevailing market price of the Harken
Common Stock.
VOLATILITY OF HARKEN COMMON STOCK TRADING PRICE
The daily closing prices of the Harken Common Stock on the AMEX has
over the twelve months ended December 31, 1994, ranged from a high of $2 3/4
per share on September 14, 1994, to a low of $15/16 per share on June 30, 1994.
The closing price of a share of Harken Common Stock on the AMEX on April 10,
1995 was $ 2 1/2. See "Summary--Comparative Market Data." Management of Harken
believes that the price fluctuations and trading activity in the Harken Common
Stock during the past twelve months could be attributable to a number of
factors, including Harken's international exploration activities. In the event
that Harken's drilling activities in offshore territories are unsuccessful,
there can be no assurance that such results will not have a substantial adverse
effect on the then prevailing market price of Harken Common Stock.
CONTINGENT LIABILITIES OF HARKEN
Harken has certain contingent liabilities that could have a material
adverse effect on its financial condition if Harken were required to satisfy
these liabilities, including the following:
Harken Southwest Corporation ("HSW"), a wholly owned subsidiary of
Harken owns an interest in the Aneth Gas Plant facility. The Aneth Gas Plant
facility was in operation for many years prior to HSW becoming an owner. The
operations at the Aneth Gas Plant previously used open, unlined drip pits for
storage of various waste products. The current 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 Environmental
Protection Agency (the "EPA") dated July 21, 1991 and a subsequent letter dated
June 8, 1992, in which the EPA requested certain information in order to
determine if there had been at the Aneth Gas Plant the release of hazardous
substances to the environment. Texaco has advised HSW that certain information
was supplied to the EPA pursuant to this request. Subsequently, core samples
in and around certain pit areas were taken by the EPA and Texaco jointly. The
EPA responded to the initial sampling of the drip pits and Texaco, as plant
operator, is now pursuing Phase II of a remediation plan covering the facility.
The prior owner of the Aneth Gas Plant facility has agreed to accept
financial responsibility for at least some portion of this remediation work.
Texaco and the other current plant owners are presently negotiating a formal
agreement with the prior owner to allocate and provide for how such costs will
be shared by such parties. At this time, however, it is impossible for HSW to
determine or estimate the costs of the cleanup at
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the Aneth Gas Plant facility or if the prior owner will indemnify the present
owners, including HSW, for all or substantially all of such costs.
Harken has accrued in its financial statements an estimate for certain
contingent liabilities on outstanding claims related to its operations,
including the environmental issue discussed above.
PREFERRED STOCK AUTHORIZED FOR ISSUANCE
Harken has available for issuance ten million shares of preferred
stock, par value $1.00 per share. The Board of Directors of Harken is
authorized to provide for the issuance of such preferred stock in one or more
series and to set the designations, preferences, powers and relative
participating, optional or other rights and restrictions thereof. Presently,
Harken has three series of preferred stock authorized, of which only one has
any shares currently outstanding. Such shares have certain preferences over
shares of Harken Common Stock with respect to the payment of dividends and upon
liquidation, dissolution, winding-up and in certain instances, voting. The
Board of Directors of Harken also may authorize other series of preferred stock
in the future that have similar as well as other preferences over shares of
Harken Common Stock. See "Description of Harken Securities--Preferred Stock."
FACTORS RELATED TO INTERNATIONAL OPERATIONS
Harken conducts international operations presently and anticipates
that it will conduct significant international operations in the future.
Foreign properties, operations or investments may be adversely affected by
local political and economic developments, exchange controls, currency
fluctuations, royalty and tax increases, retroactive tax claims, renegotiation
of contracts with governmental entities, expropriation, import and export
regulations and other foreign laws or policies governing operations of
foreign-based companies, as well as by laws and policies of the United States
affecting foreign trade, taxation and investment. In addition, as certain of
Harken's operations are governed by foreign laws, in the event of a dispute,
Harken may be subject to the exclusive jurisdiction of foreign courts or may
not be successful in subjecting foreign persons to the jurisdiction of courts
in the United States. Harken may also be hindered or prevented from enforcing
its rights with respect to a governmental instrumentality because of the
doctrine of sovereign immunity. Exploration and production activities in areas
outside the United States are also subject to the risks inherent in foreign
operations, including loss of revenue, property and equipment as a result of
hazards such as expropriation, nationalization, war, insurrection and other
political risks. Harken believes that amounts required to fund international
activities, including activities in Colombia and Bahrain, as well as domestic
drilling costs and other capital expenditures, will be funded from existing
cash balances, asset sales, stock issuances, operating cash flows and
potentially from industry partners, however, there can be no assurance that
industry partners will be obtained to fund such international activities. See
Appendix G.
LOSSES FROM CONTINUING OPERATIONS OF SEARCH
Search reported net losses for the fiscal years ended December 31,
1992, 1993 and 1994, in the amounts of $284,091, $835,854 and $3,200,059,
respectively. If the Merger is not consummated, there can be no assurances
that Search will continue as a going concern. See "Index to Financial
Statements."
INABILITY OF SEARCH TO ACCESS CAPITAL MARKETS
If the Merger is not consummated, Search would be required to seek
additional financing to continue future operations. There can be no assurances
that such financing will be available or, if available, the terms of such
financing.
DECLINING OIL AND GAS PRODUCTION OF SEARCH
Search's oil production decreased from approximately 27,556 barrels
during the year ended December 31, 1993 to approximately 9,923 barrels during
the year ended December 31, 1994. Gas production decreased from 342,275 Mcf
during the year ended December 31, 1993, to 237,808 Mcf during the year ended
December 31, 1994. The decline in production for this period reflects
declining reservoir pressure as a result
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of production from the wells and sale of properties. Declines in production
for oil and gas wells cannot be accurately projected, however, in order to
offset declining production, Search, as with other companies in the oil and gas
industry, must add more reserves to increase production and therefore increase
revenues. There can be no assurance, however, that such additional reserves
will be obtained by Search in the future due to its past inability to raise
capital and the uncertainty of drilling risks. See Appendix H.
INDUSTRY RISKS
Price Volatility. The revenues generated by Harken, and certain of
its affiliates, as well as by Search 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 or Search.
Business Risks. Harken and Search 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 and
Search'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 cancelled as
a result of many factors, including shortages of available working capital,
title problems, weather conditions, environmental concerns, shortages of or
delays in delivery of equipment, as well as the financial instability of well
operators, major working interest owners and drilling and well servicing
companies. The availability of a ready market for Harken's and Search'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 and
Search's natural gas reserves to pipelines, the capacity of such pipelines,
fluctuations in seasonal demand, the effects of inclement weather, and
government regulation. New gas wells may be shut-in for lack of a market until
a gas pipeline or gathering system with available capacity is extended into the
area.
Operating Hazards and Uninsured Risks. The operations of Harken and
Search 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, neither Harken or Search is fully insured against
all of these risks, either because insurance is not available or because Harken
or Search 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 or Search's financial condition.
Environmental Regulation. The activities of Harken and Search are
subject to various federal, state, local and foreign laws and regulations
covering the discharge of material into the environment or otherwise relating
to protection of the environment. In particular, Harken's and Search'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 in the United States and in foreign jurisdictions. Such
regulations have increased the costs of planning, designing, drilling,
installing, operating and abandoning Harken's and Search's oil and gas wells
and other facilities.
Harken and Search have each expended significant resources, both
financial and managerial, to comply with environmental regulations and
permitting requirements and each anticipates that it will continue to do so in
the future. Although Harken and Search believe that their 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
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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 or
Search's operations, could result in substantial costs and liabilities in the
future.
Imprecise Nature of Reserve Estimates. Reserve estimates are
imprecise and may be expected to change as additional information becomes
available. Furthermore, estimates of 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. Accordingly, there can be no assurance
that the information regarding reserves set forth herein, or in any document
incorporated by reference into the Registration Statement of which this
Statement is a part, will ultimately be produced.
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 and Search's competitors in
oil and gas exploration, development and production, include major oil
companies and numerous independent oil and gas companies, and individual
producers and operators. Many of Harken's and Search's competitors possess and
employ financial and personnel resources substantially greater than those which
are available to Harken or Search, 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 or Search will permit.
THE SPECIAL MEETING
MATTERS TO BE CONSIDERED AT THE SPECIAL MEETING
At the Special Meeting, Stockholders will be asked to consider and
vote upon a proposal to adopt and approve the Merger Agreement and the Merger
and other transactions contemplated thereby. The Stockholders will also
consider and vote upon such other business as may properly come before the
Special Meeting.
THE SEARCH BOARD HAS UNANIMOUSLY APPROVED THE MERGER AGREEMENT HAVING
CONCLUDED THAT THE MERGER IS ADVISABLE AND IN THE BEST INTERESTS OF SEARCH AND
THE STOCKHOLDERS AND RECOMMENDS A VOTE FOR THE ADOPTION AND APPROVAL OF THE
MERGER AGREEMENT AND THE MERGER.
VOTING AT THE SPECIAL MEETING; RECORD DATE
The Search Board has fixed April 5, 1995 as the record date for the
determination of the Stockholders entitled to notice of and to vote at the
Special Meeting (the "Record Date"). Accordingly, only holders of record of
Search Common Stock and Search Preferred Stock on the Record Date will be
entitled to notice of, and to vote at, the Special Meeting. As of the Record
Date, there were 3,690,632 shares of Search Common Stock outstanding and
entitled to vote, which were held by approximately 1,061 holders of record. As
of the Record Date, there were 575,000 shares of Search Preferred Stock
outstanding and entitled to vote, which were held by four holders of record.
The Proxy Tabulator with respect to Search Common Stock and Search Preferred
Stock is Continental Stock Transfer and Trust Company. Each holder of record
of shares of Search Common Stock and Search Preferred Stock on the Record Date
is entitled to cast one vote per share, exercisable in person or by properly
executed proxy, on each matter properly submitted for the vote of the
Stockholders at the Special Meeting voting separately as a class. The
presence, in person or by properly executed proxy, of the holders of a majority
of the outstanding shares of Search Common Stock and Search Preferred Stock
entitled to vote at the Special Meeting is necessary to constitute a quorum at
the Special Meeting.
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If a quorum is not obtained, or if fewer shares are voted in favor of
approval of the Merger Agreement than the number required for approval, the
Special Meeting may be adjourned for the purpose of obtaining additional
proxies or votes or for any other purpose, and, at any subsequent reconvening
of the Special Meeting, all proxies will be voted in the same manner as such
proxies would have been voted at the original convening of the meeting (except
for any proxies which have theretofore effectively been revoked or withdrawn),
notwithstanding that they may have been effectively voted on the same or any
other matter at a previous meeting.
Under Delaware General Corporation Law (the "Delaware Law"), the
adoption and approval of the Merger Agreement will require the affirmative vote
of the holders of a majority of the total number of outstanding Search Common
Stock and Search Preferred Stock. However, the consummation of the Merger is
conditioned upon the adoption and approval of the Merger Agreement by the
holders of a majority of the outstanding Search Common Stock and the holders of
all outstanding Search Preferred Stock, voting separately as a class. See "The
Merger Agreement--Conditions."
As of December 31, 1994, directors and executive officers of Search
and their respective affiliates may be deemed to be beneficial owners of an
aggregate of 1,330,319 shares of Search Common Stock representing approximately
28.98% of the outstanding shares of Search Common Stock (including 771,488
shares which may be acquired upon exercise of options and/or warrants which are
exercisable within 60 days of December 31, 1994) and all outstanding shares of
Search Preferred Stock.
VOTING OF PROXIES
All shares of Search Common Stock and Search Preferred Stock
represented at the Special Meeting by properly executed proxies received prior
to or at the Special Meeting and not subsequently revoked will be voted at the
Special Meeting in accordance with the instructions indicated on such proxies.
A properly executed proxy marked "ABSTAIN" will be counted for purposes of
determining whether there is a quorum for the Special Meeting but will not be
voted. An abstention (or broker non-vote) has the same effect as a vote
against the proposal to approve the Merger Agreement. If no instructions are
indicated, such proxies will be voted FOR adoption and approval of the Merger
Agreement.
If any other matters are properly presented at the Special Meeting for
consideration, the person named in the enclosed proxy card and acting
thereunder will have discretion to vote such matters in accordance with their
best judgment, unless the proxy card indicates otherwise. As of the date of
this Statement, the Search Board does not know of any other matters that are to
come before the Special Meeting.
REVOCABILITY OF PROXIES
Any proxy given pursuant to this solicitation may be revoked by the
person giving it at any time before it is voted by (a) giving written notice of
such revocation to the Proxy Tabulator (as set forth below) bearing a later
date than the proxy, (b) duly executing a later dated proxy relating to the
same shares of Search Common Stock or Search Preferred Stock and delivering it
to the Proxy Tabulator before the taking of the vote at the Special Meeting or
(c) attending the Special Meeting and voting in person (although attendance at
the Special Meeting will not in and of itself constitute the revocation of a
proxy).
PROXY TABULATOR
Continental Stock Transfer and Trust Company
Two Broadway, 19th floor
New York, New York 10004
Telephone Number: (800) 509-5586
Facsimile Number: (212) 509-5152
Stockholders of record may revoke a proxy via facsimile at the number set forth
above. Any beneficial owner whose shares are registered in the name of a
broker, dealer, commercial bank, trust company or other nominee and who wishes
to revoke should contact such registered holder promptly and instruct such
registered
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holder to revoke on his behalf. There is no guarantee that there will be
sufficient time prior to the Special Meeting for the registered holder to
deliver a revocation upon instruction by the beneficial owner.
SOLICITATION OF PROXIES
Harken and Search will share equally all expenses of preparing and
mailing this Statement. In addition to solicitation by use of the mails,
proxies may be solicited by directors, officers and employees of Search in
person or by telephone, telegram or other means of communication. Such
directors, officers and employees will not be additionally compensated, but may
be reimbursed for out-of-pocket expenses incurred in connection with such
solicitation. Arrangements will also be made with custodians, nominees and
fiduciaries for forwarding of proxy solicitation materials to beneficial owners
of shares held of record by such custodians, nominees and fiduciaries, and
Harken and Search will reimburse such custodians, nominees and fiduciaries for
reasonable expenses incurred in connection therewith. Harken and Search will
share equally such fees and expenses. D.F. King & Co., Inc. has been retained
by Search to assist in soliciting proxies and to provide materials to banks,
brokerage firms, nominees, fiduciaries and other custodians. For such
services, D.F. King & Co., Inc. will receive a fee of approximately $5,000 plus
expenses and additional fees for providing additional services as requested by
Search. Search estimates that the costs for the solicitation of proxies
including the fee to be paid to D.F. King & Co., Inc. will be approximately
$15,000.
APPRAISAL RIGHTS
The holders of shares of Search Common Stock and Search Preferred
Stock who do not vote in favor of Merger have appraisal rights with respect to
their shares in connection with the proposed Merger, as provided in Section 262
of the Delaware General Corporation Law. However, it is a condition to the
obligations of the parties to consummate the Merger that all holders of Search
Preferred Stock vote in favor of the Merger. Holders of Search Common Stock
and Search Preferred Stock who follow the procedures set forth in Section 262
are entitled to receive cash payments equal to the fair value of their shares.
Unless all of the procedures set forth in Section 262 are followed by a
Stockholder who wishes to exercise appraisal rights, such Stockholder will be
bound by the terms of the Merger. To be entitled to a cash payment upon
exercise of appraisal rights, a Stockholder must file a written demand for
appraisal of his or her shares with Search prior to the vote on the Merger by
the holders of such shares.
Within ten days after the Effective Time, Merger Sub, as the surviving
corporation (the "Surviving Corporation"), will notify each holder of Search
Common Stock or Search Preferred Stock who has validly perfected a right to
appraisal of his or her shares that the Merger has become effective. The
holder of Search Common Stock or Search Preferred Stock may withdraw his or her
demand for appraisal within 60 days after the Effective Time or at any time
thereafter with the consent of the Surviving Corporation. If a holder of
Search Common Stock or Search Preferred Stock does not choose to withdraw his
or her demand for appraisal, either Surviving Corporation or the holder may
file within 120 days after the Effective Time a petition in the Delaware Court
of Chancery demanding a determination of the value of such shares.
The court will then determine whether each dissenting stockholder in
question has fully complied with the provisions of Section 262 and, for all
dissenting stockholders who have fully complied and not lost or withdrawn
statutory appraisal rights, the court will determine the fair value of the
shares, taking into account any and all factors the court finds relevant,
computed by any method that the court, in its discretion, sees fit to use,
regardless of whether used by the Surviving Corporation or a dissenting
stockholder, together with a fair rate of interest, if any, to be paid. The
fair value of the shares as determined by the court is binding on all
stockholders and may be less than, equal to, or greater than the consideration
to be issued to non-dissenting stockholders for their shares if the Merger is
completed. The costs and expenses of the court proceeding will be assessed by
the court as it deems equitable.
THE FOREGOING SUMMARY DOES NOT PURPORT TO BE A COMPLETE STATEMENT OF
DISSENTERS' RIGHTS OF APPRAISAL, AND SUCH SUMMARY IS QUALIFIED IN ITS ENTIRETY
BY REFERENCE TO SECTION 262 OF THE DELAWARE GENERAL CORPORATION LAW, WHICH IS
REPRODUCED IN FULL AS APPENDIX C TO THIS STATEMENT. SEARCH AND HARKEN
RECOMMEND THAT HOLDERS OF SEARCH COMMON STOCK OR SEARCH PREFERRED STOCK WHO
WISH TO PURSUE RIGHTS OF APPRAISAL CONSULT WITH THEIR OWN LEGAL ADVISOR WITH
RESPECT TO THE RELEVANT STATUTORY
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PROVISIONS AND THE PROCEDURES TO BE FOLLOWED. THE RIGHT TO APPRAISAL WILL BE
LOST IF THE PROCEDURAL REQUIREMENTS OF SECTION 262 ARE NOT FULLY AND PRECISELY
SATISFIED. FOR A DISCUSSION OF THE TAX CONSEQUENCES TO THE HOLDERS OF SEARCH
COMMON STOCK OR SEARCH PREFERRED STOCK WHO WISH TO PURSUE RIGHTS OF APPRAISAL,
SEE "CERTAIN FEDERAL INCOME TAX CONSIDERATIONS."
THE MERGER
The Merger Agreement provides for a business combination between
Harken and Search in which Search would be merged with and into Merger Sub, a
wholly-owned subsidiary of Harken, in a transaction intended to qualify as a
tax-free reorganization for federal income tax purposes. Merger Sub will be
the surviving corporation in the Merger. The discussion in this Statement of
the Merger and the description of the Merger's principal terms are subject to
and qualified in their entirety by reference to the Merger Agreement, a copy of
which is attached to this Statement as Appendix A and which is incorporated
herein by reference.
BACKGROUND OF THE MERGER
In the latter part of 1993, the Search Board determined that it was
inappropriate to remain at its present size. Search's lack of critical mass
had precluded it from securing financing through numerous avenues which had
been pursued, including equity placements, offerings of equity, as well as debt
financing and debt offerings. The Search Board had determined that for Search
to remain at its present size a large portion of its revenues would ultimately
be required to fund Search's overhead and continued operations, which would not
be in the best interest of Search's Stockholders. Consequently, the Search
Board determined that Search either needed to identify and complete one or more
acquisitions of other small oil and gas exploration companies to achieve this
critical mass or to merge Search with a larger oil and gas exploration company.
Therefore, on November 3, 1993, the Search Board formally authorized Joseph F.
Langston, the President of Search, to investigate and pursue the feasibility
and possibility of either merging Search with either a publicly held oil and
gas exploration company or identifying a series of acquisitions which Search
could complete resulting in a larger critical mass.
In December 1993, Search's President contacted several investment
banking firms to assist in finding an acceptable merger or acquisition
candidate. Four firms, including Concorde Financial Corporation ("Concorde"),
of which Dr. Gary B. Wood, a member of the Search Board, is the President, and
EnCap Investments L.C. ("EnCap"), entered into a non-exclusive relationship for
an incentive fee of two percent of the aggregate consideration of the
transaction payable in cash upon completion. During the first ten months of
1994, Search had reviewed thirty-four companies, property acquisitions or
corporate financings. Many companies were not interested in pursuing a
consolidation with Search because of competing projects for their time and
resources or a determination by them that Search was not an appropriate match.
However, Search received nine proposals (verbal or written), with a variety of
considerations (cash, common stock, preferred stock, and other incentives) and
structures (merger, reverse merger, etc.).
In March 1994 Search was introduced by EnCap to Mikel D. Faulkner,
Chairman of the Board of Harken, who indicated an interest in opening
discussions with Search concerning the possibility of a merger between the two
companies. Following such contact, the President of Search initiated
preliminary discussions with Harken to determine the seriousness of Harken's
interest in pursuing a potential transaction.
During the first quarter of 1994, the management of Search met with
the representatives of two private companies with asset values less than
Search. These companies proposed reverse merger transactions, whereby Search
would acquire the private company in exchange for newly issued common stock of
Search. These companies valued Search at approximately $4,000,000, but did not
increase significantly the market capitalization of the combined company.
Because of the issuance of the new shares, Search's existing stockholders
would have less than 50% participation in the future value of the unproved
properties.
The Search Board met on March 18, 1994 to review the prospects which
had been identified for merger or acquisition since November 1993. The
prospects reviewed by the Search Board were Harken and
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the two private companies. Following its review and discussion, the Search
Board determined that an insufficient number of viable prospects had been
identified for acquisition and authorized the President to continue his pursuit
of such opportunities but with a focus primarily on identifying a merger with a
larger public company in order to achieve greater liquidity.
In May 1994, having had numerous discussions and having exchanged
publicly available information, the President and Dr. Gary B. Wood, met with
the Chairman of the Board of Harken to formally initiate discussions of the
possibility of a merger between Search and Harken. In addition to discussions
with Harken, Search's management had discussions with other large public
companies, six of which presented proposals to Search.
During late May, representatives of Search and Harken had numerous
discussions and representatives of Harken made a preliminary proposal to Search
regarding the terms of the proposed merger.
On June 1, 1994 the Search Board met to evaluate the various merger
opportunities and proposals. The primary concerns of the Search Board
expressed at this meeting were: (a) liquidity, (b) the value of the
consideration, (c) future participation in the unproved properties, and (d)
representation on the board of directors of the combined company. The Board
further determined that to achieve the desired liquidity it only wanted to
consider a transaction where the combined company would have a market
capitalization of greater than $50 million. The Search Board discussed the
proposals from two private companies previously considered and four new
proposals from public companies. The Board was also updated regarding the
status of negotiations and discussions with Harken and reviewed the information
which had been provided by Harken to Search including both public information
and information provided pursuant to confidentiality agreements. Given its
review of the status of these discussions, the Search Board dismissed the two
private companies as viable candidates because the combined company would not
have been able to achieve the desired market capitalization. The Search Board
determined that Harken's proposal was the most attractive proposal at this time
because Harken was the only company that had a market capitalization of greater
than $50 million that also provided the Search Stockholders with participation
in the unproved properties. However, the Board also wanted additional
information on the other public companies that had made or would make a
proposal.
After the June Board meeting, Search's representatives had numerous
meetings with representatives of Harken in regard to terms of the proposed
merger including terms under which the Search Stockholders would have the
potential for realizing further value in the event Search's unproved prospects
and properties were substantially successful. Throughout the month of June
1994, meetings and due diligence continued regarding Harken's international
operations and formulating a written non-binding term sheet setting out the
proposed terms of such a merger transaction. On July 14, 1994, both companies
executed a non-binding confidential term sheet and determined to undertake
preparation and negotiation of a formal merger agreement between the companies.
Through the month of July and into October numerous meetings were held
between the management and the Board of Directors of Search and Harken as well
as joint meetings and separate meetings between attorneys representing both
companies in negotiating and drafting a formal merger agreement. During these
same months both companies continued to review the other's properties,
operations, assets and liabilities. In addition, Search followed up with the
companies which had expressed an interest in Search.
On October 8, 1994, the Search Board met to (a) discuss the status of
the drafting of the merger agreement with Harken; (b) review the additional
information from the six public companies that made proposals, and (c) discuss
a previously dismissed private company which had subsequently gained a
financing proposal from an investment banking firm. The proposals from the
other companies were to acquire all of Search's stock for shares of their
common stock for assumed values ranging from $1,754,000 to $4,004,000. One of
these proposals included participation in the unproved properties of up to 50%.
One company was 88% owned by management and in the gas gathering and
transportation business. It allowed the Search stockholders up to a 60% to 80%
participation in the unproved properties. However, it assigned a current value
of Search at only $1,754,000. This proposal was declined because Search would
not only receive a lower current valuation, but also would not have enhanced
liquidity because of the closely held nature of the company's stock. The
second company withdrew its proposal to Search as a result of another
acquisition it was also
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pursuing. At this meeting, the Search Board determined to pursue the Harken
proposal and the private company proposal because they were the only proposals
that met the Board's criteria for a merger candidate.
Dr. Gary Wood, in his capacity as President of Concorde, and Mr.
Langston, President of Search, met with the management and the Board of
Directors of both Harken and the private company, and with the private
company's investment banking firm. After finalizing these discussions, the
Search Board met on October 18, 1994, and after carefully evaluating each
proposal, the results of Search's due diligence and pro forma information, made
a determination to attempt to finalize the Harken merger agreement in
substantially the present form, subject to the concurrence of a fairness
opinion rendered by a reputable investment banking firm.
On October 19, 1994, Search engaged Principal Financial Securities,
Inc. ("Principal") to act as an independent investment banker for the purpose
of rendering a written opinion to the Search Board as to whether the
consideration to be received by the holders of Search Common Stock as a result
of the Merger is fair to such stockholders from a financial point of view. The
Search Board further considered the terms of the merger agreement and carried
on further discussions with Harken and its financial advisors until its meeting
held on November 7, 1994 at which meeting Principal formally delivered its
fairness opinion to the Search Board that the consideration to be received by
the holders of Search Common Stock pursuant to the Merger, taken as a whole, is
fair to such stockholders from a financial point of view. The Search Board met
again on November 8, 1994, at which time, following consideration, it formally
approved the Merger Agreement and authorized the President of Search to execute
and deliver the Merger Agreement on behalf of Search and adopted such further
resolutions that were necessary to recommend the terms of the Merger Agreement
to the Stockholders and to carry forward the proposed transaction.
In March 1995, the Boards of Directors of Search and Harken agreed to
amend the Merger Agreement to (a) change the termination date of the agreement
from March 31, 1995 to April 30, 1995; (b) clarify the agreed to terms of the
distribution of the Contingent Shares; and (c) change the date on which the
exchange ratios are calculated from the closing date of the Merger to the date
of the Special Meeting, in order to allow the stockholders of Search to
determine the exchange ratios prior to the Special Meeting.
REASONS FOR THE MERGER
The Search Board has determined that the Merger Agreement and the
transactions contemplated thereby are fair to and in the best interest of the
Stockholders. On November 8, 1994, the Search Board unanimously approved the
Merger Agreement and the transactions contemplated thereby and recommends a
vote FOR approval and adoption of the Merger Agreement by the Stockholders.
In reaching its determination that the Merger Agreement and the
transactions contemplated thereby are fair to and in the best interest of the
Stockholders, the Search Board considered, among other significant factors and
considerations, the following:
(i) The inability of Search to achieve a critical mass in size on
its own, which in the opinion of the Search Board was
necessary in order to attract and secure financing
opportunities for the further growth and expansion of Search,
including the inability of Search to obtain debt or equity
financing to pursue property or business acquisitions, if
available, on terms that would be favorable to the
Stockholders.
(ii) The inability of Search to identify viable acquisition
candidates with which it could achieve a critical mass in
size, which the Search Board has determined to be a company
with a market capitalization of greater than $50 million.
(iii) The ability to provide through the Merger an opportunity for
exposure to the Stockholders to the international prospects
and opportunities being pursued by Harken as opposed to
relying solely on domestic based opportunities.
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(iv) The opportunity for the holders of Search Common Stock to
participate in the potential increase in value from the
development of Search's Undeveloped Properties subsequent to
the consummation of the Merger through the receipt of
Contingent Shares. See "Merger Agreement--Terms of the
Merger--Issuance of Contingent Shares."
(v) The relative liquidity of Harken Common Stock compared to the
liquidity of Search Common Stock.
(vi) The opportunities for operating efficiencies that should
result from the Merger, particularly through the integration
of office facilities and support functions of the two
companies. See "Business of Harken--Operations, Liquidity and
Capital Resources of Harken After the Merger."
(vii) Recent and prior market prices of Search Common Stock and
Harken Common Stock.
(viii) The structure of the Merger and terms of the Merger Agreement,
which were the result of arm's-length negotiations between
Search and Harken.
(ix) The opinion of Principal described below.
(x) The expectation that the Merger will afford the Stockholders
the opportunity to receive shares of Harken Common Stock in a
transaction that is nontaxable for federal income tax
purposes.
In determining whether the Merger is fair to and in the best interest
of the Stockholders, the Search Board considered the factors above as a whole
and did not assign specific or relative weights to such factors.
In addition, the Search Board considered Harken's historical operating
losses which it has suffered in recent years. The Search Board believes that
such losses are not atypical for an aggressive oil and gas exploration company.
The Search Board is also aware of certain acquisitions made by Harken which
were partially distributed to stockholders and that other extraordinary
transactions and impairments exacerbated the losses shown in Harken's financial
statements. The Search Board believes that the management of Harken is highly
competent and has a demonstrated ability to secure financing at a difficult
time in the oil and gas industry and to effect acquisitions intended to enhance
its asset base. The Search Board believed that Harken's larger market
capitalization would provide greater liquidity for Search stockholders and
Harken's historical ability to raise investment capital would provide for
future growth.
BENEFITS TO SEARCH OF THE MERGER
The Search Board believes that the benefits to the Search Stockholders
from the Merger include, among others, the following:
(i) Greater security in the stability of a larger company which
provides enhanced flexibility and increased opportunities.
(ii) Potential increase in liquidity because of Harken's larger
market capitalization relative to Search.
(iii) Greater diversification because of international exploration
activity.
(iv) Participation, through the potential receipt of Contingent
Shares, in the increase in the value of the Undeveloped
Properties, if any, from the use of Harken's financial
resources to develop such properties.
RECOMMENDATION OF SEARCH BOARD
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After considerable review and consideration concerning Search's future
prospects as an independent company, in light of the terms and benefits which
may be realized through the Merger and the terms of the Merger Agreement, the
Search Board concluded unanimously that the Merger would be in the best
interest of the Stockholders.
THE BOARD OF DIRECTORS OF SEARCH UNANIMOUSLY RECOMMENDS THAT THE
STOCKHOLDERS OF SEARCH VOTE FOR THE APPROVAL AND ADOPTION OF THE MERGER
AGREEMENT AND THE MERGER.
OPINION OF FINANCIAL ADVISOR
Principal was engaged by Search to render an opinion as to whether or
not the consideration to be received by the holders of Search Common Stock
pursuant to the Merger, taken as a whole, is fair to such stockholders from a
financial point of view. Principal is a recognized investment banking firm
owned by an insurance company, The Principal Financial Group of Des Moines,
Iowa, which was originally founded in 1879. As a part of Principal's
investment banking business, Principal has extensive experience in the oil and
gas industry and regularly issues fairness opinions. Principal is continually
engaged in the valuation of companies and their securities in connection with
business reorganizations, private placements, negotiated underwritings, mergers
and acquisitions, and valuations for estate, corporate and other purposes.
Search initially contacted Principal and Rausher Pierce Refsnes, Inc.
with the intent of engaging one of them on behalf of Search to render a
fairness opinion. Neither firm expressed any view on the transaction, whether
formal or informal. After discussions with the representatives of such firms,
the Search Board determined to engage Principal based upon the cost of its
services and its experience in the valuation of oil and gas operations.
Principal had not previously rendered any investment banking services to
Search. However, in the ordinary course of business, Principal and its
affiliates at any time may hold long or short positions, and may trade or
otherwise effect transactions as principal or for the accounts of customers, in
debt or equity securities or options on securities of Search and/or Harken.
On November 7, 1994, Principal delivered its oral and written opinion
to the Search Board that the consideration to be received by the holders of
Search Common Stock as a result of the Merger, taken as a whole, is fair to
such stockholders from a financial point of view. No limitations were placed
on Principal by the Search Board or management of Search with respect to the
investigation made or the procedures followed by Principal in preparing its
fairness opinion. The Search Board has determined not to request Principal to
update its fairness opinion prior to the Special Meeting or the consummation of
the Merger.
The full text of Principal's fairness opinion dated November 7, 1994,
which sets forth the assumptions made, general procedures followed, matters
considered and limits on the review undertaken, is attached as Appendix B to
this Statement. Principal's opinion is directed only to the fairness, from a
financial point of view, to the holders of Search Common Stock of the
consideration to be received by such holders in the Merger and does not
constitute a recommendation to any Stockholder as to how such Stockholder
should vote on the Merger Agreement. The summary of Principal's opinion set
forth below is qualified in its entirety by reference to the full text of such
opinion attached as Appendix B. Stockholders are urged to read the opinion in
its entirety.
In connection with its opinion, Principal: (a) reviewed a draft of
the proposed Merger Agreement; (b) reviewed certain reserve information
provided by Search and Harken relating to the producing and non-producing
properties of Search and Harken, including certain reserve reports prepared
and/or reviewed by an independent petroleum engineer for Search and an
independent petroleum engineer for Harken; (c) reviewed certain financial
information, including financial forecasts of Search prepared by the management
of Search; (d) reviewed the market price and trading activity of Search and
Harken Common Stock; (e) reviewed the financial terms, to the extent publicly
available, of certain comparable transactions, which are similar in certain
respects to the Merger; (f) discussed with management of Search and Harken the
operations of and business prospects for Search and Harken; and (g) considered
such other financial studies and analyses and performed such other
investigations and took into account such other matters as it deemed necessary,
including an assessment of general economic, market and monetary conditions.
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<PAGE> 34
As is customary, in rendering its opinion, Principal has relied upon
and assumed, without independent verification, the accuracy, completeness and
fairness of all of the financial and other information that was available to
Principal from public sources, or provided to Principal by either Search or
Harken or any of their representatives. Principal has also relied, without
independent investigation, upon the forecasts of the management of Search.
Principal has assumed that all such forecasts have been reasonably derived on
bases reflecting the best currently available estimates and judgments of
Search's management as to the future operating and financial performance of the
companies and Principal has relied upon the assumptions therein for oil and
natural gas prices. In addition, Principal has not made an independent
evaluation or appraisal of the assets of Search or Harken, nor has Principal
been furnished with any such independent evaluations or appraisals (other than
certain previously discussed reserve reports prepared and/or reviewed by
independent petroleum engineers for Search and Harken, on which Principal has
relied without independent verification). Independent verification or
evaluation by Principal could have led to different forecasts, valuations, or
financial information of Search, and could have affected Principal's opinion as
to the fairness of the consideration to be received by the holders of Search
Common Stock. However, the unaudited nine month financial statements used by
Principal have been subsequently audited and no material inconsistencies have
been identified. Principal has assumed that the Merger will be, in all
respects, in compliance with all laws and regulations that are applicable to
Search, Harken and the proposed Merger (and Principal has relied as to all
legal matters relating thereto on counsel to Search).
The forecasts reviewed by Principal were prepared by the management of
Search. Such forecasts were not prepared with a view towards public
disclosure. The forecasts were based on numerous variables and assumptions
which are inherently uncertain, including without limitation factors related to
general economic and competitive conditions. Accordingly, actual results could
vary significantly from those set forth in such forecasts.
As a part of the review process for the evaluation of the Merger,
Principal relied upon statements of Search management as to the future
prospects of Search assuming the Merger was not completed and as if Search
continued as a going-concern. In performing its various analyses, Principal
noted that Search had experienced a significant decline in revenues and cash
flow since fiscal 1991. Principal also noted that general and administrative
expenses totaled approximately 95% of revenues during the six months ended June
30, 1994 compared to 66% of revenues during the six months ended June 30, 1993.
Principal also noted that Search was in the process of reducing its personnel,
office space and other general and administrative items. Accordingly,
Principal performed the following analyses in arriving at its opinion.
Merger and Acquisition Proposal Analysis. Principal has reviewed and
relied upon, without independent verification, a schedule of nine recent merger
proposals received by Search from independent third parties dated October 31,
1994 (inclusive of the Harken proposal). Eight proposals (excluding the Harken
proposal) ranged from $1,754,000 to $4,004,000, none of which were for cash.
Principal noted that the only cash proposal received by Search for a portion of
its properties was a verbal proposal totaling $360,000, which had not been
formalized at the time Principal delivered its opinion. For a discussion of
the terms of the proposals, see "The Merger--Background of the Merger."
Principal compared these proposals to the $4,004,000 offer from Harken which
included the potential for holders of Search Common Stock to receive additional
value based on the future realization of value from Search's unproved
properties. In addition, Principal noted that the offer by Harken offered the
most liquidity compared to the other proposals. For the 52-week period ended
November 4, 1994, Principal determined that the average weekly trading volume
of Harken Common Stock was approximately 356,860 shares.
In rendering its opinion, Principal placed significant weight on this
analysis as it concluded that Search had been thoroughly marketed and the most
attractive offer received was from Harken. In Principal's view, the results of
a thoroughly marketed company often provide a solid indication of the range of
reasonable values to the stockholders.
Net Asset Value Analysis. Principal performed a break-up analysis of
Search. In performing this analysis, Principal assumed all assets and
liabilities of Search (principally working capital, debt, preferred stock and
contractual obligations) were constant other than the oil and gas properties.
The amount of the reserves for the proved producing and proved non-producing
properties was based upon a revised reserve
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<PAGE> 35
analysis as reviewed by Search's independent petroleum engineer. The unproved
property values were based upon a summary provided by Search management.
Principal then examined six scenarios in which various assumptions
were used to determine the value of the proved reserves and the unproved
properties (these being the primary assets of Search). These assumptions
primarily included applying discounts to the proved reserves and unproved
properties. Based on these analyses a range of $960,288 to $2,550,038 was
determined for Search's net asset tangible value, as compared to the purchase
offer by Harken of $4,004,000, which is payable in Harken Common Stock and
excludes any future benefit of the unproved properties.
Liquidation Analysis. Principal performed a liquidation break-up
analysis of Search. The liquidation analysis was similar to the net asset
value analysis, with additional expenses included in the analysis which would
result from customary and typical costs associated with the liquidation of a
business. In performing this analysis, Principal assumed all assets and
liabilities of Search (principally working capital, debt, preferred stock and
contractual obligations) were constant other than oil and gas properties. The
amount of the reserves for the proved producing and proved non-producing
properties was based upon a revised reserve analysis as reviewed by Search's
independent petroleum engineer. The unproved property values were based upon a
summary provided by Search management.
Principal then examined six scenarios in which various assumptions
were used to determine the value of the proved reserves and the unproved
properties (these being the primary assets of Search). These assumptions
primarily included applying discounts to the proved reserves and unproved
properties. Based on these analyses, a range of $586,664 to $2,096,927 was
determined for Search's net asset tangible value, as compared to the purchase
offer by Harken of $4,004,000, which is payable in Harken Common Stock and
excludes any future benefit of the unproved properties.
"Blue Sky" Valuation Analysis. Principal performed an analysis
comparing the amount received from the Harken proposal to each of the
previously discussed Net Asset Value and Liquidation scenarios, each under the
following three cases: (i) no future value from the undeveloped properties;
(ii) the undeveloped properties will provide net proceeds of $8.5 million to
the holders of Search Common Stock (a "best case" scenario as defined by Search
management); (iii) the undeveloped properties will provide net proceeds of $1.4
million to the holders of Search Common Stock (a "base case" scenario as
defined by Search Management). However, under each scenario, the blue sky
valuation analysis indicated that the Harken proposal provides a potential
premium to the holders of Search Common Stock over the underlying net tangible
asset value.
Principal did not place significant reliance upon the future prospects
of the unproved properties in determining the value of the Search assets.
Historically, Search has not successfully developed its unproved prospect
inventory, and therefore, based upon this past performance, the value of future
prospects are questionable.
Comparable Transaction Analysis. Principal compared the Merger with
acquisitions of other companies that were deemed similar in certain respects to
Search and Harken (the "Comparable Merger Companies"). The selected
acquisition transactions involving the Comparable Merger Companies were:
Odessa Exploration's purchase from Costa Resources in June 1994; American
Exploration's purchase of undisclosed oil and gas properties in May, 1994;
Plains Petroleum's purchase from Ensign Oil & Gas in March 1994; an undisclosed
buyer of oil and gas properties from Samedan in August 1993; Hallwood Energy's
purchase from Driscoll Lease in August 1993; Gulfwest Oil's purchase from Sikes
Production in August 1993; Tipperary's purchase from Central Resources in July
1993; Merit Resources' purchase from North Star-Conquest in July 1993; Ambrit
Energy's purchase from Standard Resources in July 1993; Alexander Energy's
purchase from Midwest Energy in July 1993; Oxford et al's purchase from
Petrogulf in June 1993; Harcor's purchase from South Texas L.P. in June 1993;
Hunter Resources' purchase of undisclosed oil and gas properties in May 1993;
Comsat's purchase of undisclosed oil and gas properties in May 1993;
Winn/Headington's purchase from Presidio in April 1993; Harken's purchase of
undisclosed oil and gas properties in March 1993; Brock Exploration's purchase
of undisclosed oil and gas properties in February 1993; Tipperary's purchase
from Universal Resources in January 1993; and Rio Grande Drilling's purchase
from Marathon Oil in January 1993.
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In these transactions, Principal examined the average, high and low
consideration paid on a barrel of oil (b.o.e.) basis for the Comparable Merger
Companies which total $3.84, $6.32 and $2.08, respectively. Principal then
assigned the average price of $3.84 per b.o.e. to Search's reserves under a Net
Asset Value scenario and determined that the net tangible asset value was
$1,824,095, compared to the purchase offer by Harken of $4,004,000 which is
paid in approximately 2,200,000 shares of Harken Common Stock and excludes the
future benefit of the undeveloped properties.
Conclusion. The summary set forth above does not purport to be a
complete description of the main elements of Principal's presentation to
Search's Board on November 7, 1994. It does not purport to be a complete
description of the analyses performed, or the matters considered by Principal
in rendering its opinion. Principal believes that its analyses and the summary
set forth above must be considered as a whole and that selecting portions of
such analyses, without considering all analyses, or of the above summary,
without considering all factors and analyses, would create an incomplete view
of the processes underlying its fairness opinion. The fact that any specific
analysis has been referred to in the summary above is not meant to indicate
that such analysis was given greater weight than any other analysis, unless
specifically mentioned.
Principal has not conducted any analysis concerning the allocation of
any portion of the aggregate consideration to be received from Harken pursuant
to the Merger Agreement by certain parties, including the holders of Search
Preferred Stock, Concorde, EnCap, Joseph F. Langston, Jr., Royalty Holders and
the holders of Search Warrants (collectively, the "Additional Parties") or the
fairness to them thereof. Accordingly, Principal is expressing no opinion
regarding such matters, and is assuming that a portion of such aggregate
consideration has been appropriately and properly negotiated and allocated to
the Additional Parties and that such consideration is fair to them from a
financial point of view.
The preparation of a fairness opinion is not necessarily susceptible
to partial analysis or summary. In rendering its fairness opinion, Principal
applied its judgment to a variety of analyses and assumptions. Principal may
have given various analyses more or less weight than other analyses, and may
have deemed various assumptions more or less probable than other assumptions.
The assumptions made and the judgments applied by Principal in rendering its
opinion are not readily susceptible to description beyond that set forth in
this summary of the fairness opinion itself.
As compensation for rendering a fairness opinion to Search, Search
agreed to pay Principal a total fee of $50,000 at the time the opinion was
rendered and such compensation was not contingent on the consummation of the
Merger. Search has also agreed to reimburse Principal for its reasonable
out-of-pocket expenses, including the fees and expenses of its legal counsel,
and to indemnify Principal and its affiliates against certain liabilities
relating to its engagement.
CONFLICTS OF INTEREST
In considering the recommendation of the Search Board with respect to
the Merger, Stockholders should be aware that certain officers and directors of
Search have certain interests with respect to the Merger that are in addition
to the interests of Stockholders of Search generally. The Search Board was
aware of these interests and considered them, among other matters, in approving
the Merger.
Representation on the Board of Directors of Harken. Upon the
consummation of the Merger, Harken has agreed that it will nominate and elect
Gary B. Wood, Ph.D., the Secretary and a director of Search, to the Board of
Directors of Harken to serve in such position until Harken's Annual
Stockholders Meeting to be held on or about June 1996.
Issuance of Promissory Notes by Search. It is a condition to the
consummation of the Merger by Harken that the following promissory notes be
issued by Search prior to the Effective Time:
Langston Note. On July 1, 1991 Search and Joseph F. Langston,
the President and Chairman of the Search Board, entered into an
Employment Agreement (the "Employment Agreement") for a five year
term. Pursuant to the Employment Agreement, Mr. Langston has a right
to receive in cash $140,000 per year plus other benefits for the
remaining balance of his contract upon any change of
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control of Search. Consequently, upon the consummation of the Merger,
Mr. Langston would have had the right to receive cash from Search of
approximately $155,000 for the remaining term of the Employment
Agreement (assuming the consummation of the Merger immediately after
the Special Meeting). It is a condition to the consummation of the
Merger by Harken that Search enter into a Partial Settlement and
Conversion Agreement with Mr. Langston prior to the Effective Time,
pursuant to which Mr. Langston will receive an unsecured,
non-interest bearing promissory note in the amount of $280,000 (the
"Langston Note") in exchange for the full settlement of all
obligations of Search under the Employment Agreement except for any
obligations to indemnify. At the Effective Time, the Langston Note
will be converted into shares of Harken Common Stock as set forth in
"The Merger Agreement--Terms of the Merger." Mr. Langston will not
be eligible to receive any Contingent Shares with respect to the
conversion of the Langston Note into Harken Common Stock.
Concorde Note. On January 10, 1994 Search and Concorde
Financial Corporation ("Concorde"), an affiliate of Gary B. Wood
Ph.D. (a director of Search), entered into a Letter Agreement (the
"Concorde Agreement") to engage Concorde as its financial advisor on
matter related to a business combination, acquisition or merger. For
services rendered pursuant to the Concorde Agreement, Search was
obligated to pay a cash fee of $3,000 per month for six months (the
"Retainer"), expense reimbursement, and a five-year warrant for 50,000
shares of Search Common Stock, exercisable at $1.50 per share, plus a
fee of two percent (2%) of the aggregate amount of any merger or
acquisition (the "Transaction Fee"). It is a condition to the
consummation of the Merger by Harken that Search enter into a Partial
Settlement and Conversion Agreement with Concorde prior to the
Effective Time, pursuant to which Concorde will receive an unsecured,
non-interest bearing promissory note in the amount of $80,000 (the
"Concorde Note") in exchange for the full settlement of the
Transaction Fee and any unpaid Retainer, except for any obligations to
indemnify. At the Effective Time, the Concorde Note will be converted
into shares of Harken Common Stock and Concorde will be eligible to
receive Contingent Shares, if any, as set forth in "The Merger
Agreement--Terms of the Merger."
EnCap Note. On December 20, 1993 Search entered into a Letter
Agreement (the "EnCap Agreement") to engage EnCap Investments L.C.
("EnCap") as its financial advisor on matters related to a merger or
sale of Search. For services rendered pursuant to the EnCap
Agreement, Search was obligated to pay reasonable expenses and a fee
of two percent (2%) of the value of Search assets upon any merger or
sale of Search. It is a condition to the consummation of the Merger
by Harken that Search enter into a Partial Settlement and Conversion
Agreement with EnCap prior to the Effective Time, pursuant to which
EnCap has received an unsecured, non-interest bearing promissory note
in the amount of $80,000 (the "EnCap Note") in exchange for the full
settlement of all obligations of Search to EnCap, except for any
obligations to indemnify. Upon the consummation of the Merger, the
EnCap Note will be converted into shares of Harken Common Stock and
EnCap will be eligible to receive Contingent Shares, if any, as set
forth in "The Merger Agreement--Terms of the Merger."
Holders of Search Preferred Stock. In September 1993, as a
requirement of a proposed debt financing, Search issued 575,000 shares of
Search Preferred Stock to three directors of Search for cash consideration of
$575,000. The Search Preferred Stock is entitled to (a) receive a
non-compounded, cumulative preference dividend at a rate of nine percent (9%)
per annum, payable quarterly, (b) receive a liquidating preference, and (c)
have a right to vote on all matters submitted to a vote of Search Stockholders.
At the election of the holder, the shares of Search Preferred Stock are
convertible into shares of Search Common Stock on a basis of 1.69 shares of
Search Preferred Stock for one share of Search Common Stock for an aggregate of
340,237 shares of Search Common Stock to be issued on conversion.
As an inducement to purchase shares of Search Preferred Stock, the
holders were also assigned an overriding royalty of two percent (2%) in
Search's share of gross revenues derived from the Placid Venture oil and gas
leases located in Nolan, Coke and Tom Green Counties in Texas.
Upon the approval of the Merger by the Search Stockholders and the
consummation of the Merger, shares of Search Preferred Stock will be converted
into that number of shares of Harken Common Stock determined by multiplying the
aggregate number of shares of Search Preferred Stock by the fraction of $1.00
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(the liquidation value of a share of Search Preferred Stock) over the Average
Trading Price, which would result in approximately 287,500 aggregate shares of
Harken Common Stock assuming an Average Trading Price of $2.00. However, if
shares of Search Preferred Stock had been converted into shares of Search Common
Stock prior to the Merger and those shares are subsequently exchanged for Harken
Common Stock in the Merger, the holders of Search Preferred Stock would receive
in the aggregate approximately 137,779 shares of Harken Common Stock at the
Effective Time assuming an Average Trading Price of $2.00. The exchange ratios
of the Search Preferred Stock and the Search Common Stock were based on
negotiations between Search and Harken. In negotiating such ratios with Harken,
Search considered, among other things, the value attributable to the liquidation
preference of the Search Preferred Stock. Consequently, the 149,721 shares (or
approximately 109%) difference in the number of shares of Harken Common Stock to
be received by the holders of the Search Preferred Stock is attributable to the
right of the holders of the Search Preferred Stock to receive a liquidation
preference.
The holders of the Search Preferred Stock will not be eligible to
receive any Contingent Shares with respect to their interest in the Search
Preferred Stock. However, it is a condition to the consummation of the Merger
by Harken that Search enter into Royalty Assignment Agreements prior to the
Effective Time with each of the holders of Search Preferred Stock pursuant to
which the overriding royalty interest held by such holder will be reconveyed to
Search in exchange for the right to receive a portion of the Contingent Shares,
if any, as described under "The Merger Agreement--Terms of the Merger--Issuance
of Contingent Shares."
The Exchange Offer. Search Warrants are currently exercisable for
989,000 shares of Search Common Stock, have exercise prices ranging from $1.32
to $2.00 per share, and have expiration dates ranging from July 17, 1995 to
July 31, 1996. See Appendix D for a schedule of the Search Warrants and their
exercise prices and expiration dates. As an accommodation to the transactions
contemplated by the Merger Agreement, Dr. Gary Wood, the holder of a Search
Warrant with an expiration date of January 10, 1999, agreed to amend his Search
Warrant to expire on July 31, 1996 if the Merger is consummated and he does not
exchange his warrant in the Exchange Offer. The directors of Search hold
Search Warrants exercisable for an aggregate of 700,000 shares of Search Common
Stock or 70.8% of the total number of shares of Search Common Stock exercisable
pursuant to outstanding Search Warrants. The Search Warrants were issued at
the time of the formation of Search to is original stockholders, and
periodically over the last five years as compensation to the directors. See
"The Warrant Exchange Offer--Purpose of the Exchange Offer." In the past,
compensation to the Search Board has been limited to expense reimbursement, and
a directors fee of $500 per month and $500 per meeting, therefore, Search
issued options to purchase shares of Search Common Stock as additional
consideration to Board members as well as management.
Pursuant to the Exchange Offer, the Search Warrants may be exchanged
for Harken Warrants exercisable for an aggregate of 750,000 shares of Harken
Common Stock with an exercise price of $1.82 from the date of issuance until
their expiration at 3:00 p.m., Dallas, Texas time on June 30, 1996. See
Warrant Exchange Schedule attached hereto to as Appendix D. If all of the
Search Warrants were exchanged in the Exchange Offer, the directors of Search
will hold Harken Warrants exercisable for an aggregate of 623,588 shares of
Harken Common Stock or 83.15% of the total number of shares of Harken Common
Stock exercisable pursuant to all Harken Warrants.
Any Unexchanged Search Warrants shall remain outstanding and shall be
exercisable for shares of Harken Common Stock according to their terms (which
are generally adjusted upon the consummation of the Merger on the same basis as
the conversion of the Search Common Stock at the Effective Time). The number
of shares of Harken Common Stock exercisable pursuant to a Harken Warrant
received in the Exchange Offer as set forth on Appendix D was determined based
upon a calculation using the Black Scholes method of option valuation.
An independent compensation consulting firm engaged by Harken
developed an exchange table for exchanging Search Warrants for Harken Warrants
utilizing the Black Scholes option valuation model. While the exchange was
intended to result in an economically neutral transaction, the terms of a
Harken Warrant issued in the Exchange Offer will be different than the terms of
an Unexchanged Search Warrant, based on the remaining term and exercise price
of the Search Warrant. Consequently, the terms of the Exchange Offer
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<PAGE> 39
may or may not be economically neutral to any particular holder of a Search
Warrant. See "The Warrant Exchange Offer."
The holders of Search Warrants (whether tendered in the Exchange Offer
or not) may be eligible to receive Contingent Shares, if any, issued by
Harken. See "The Merger Agreement--Terms of the Merger."
Indemnification. The Merger Agreement provides for broad
indemnification of the officers and directors of Search and its subsidiaries.
See "The Merger Agreement--Indemnification."
ACCOUNTING TREATMENT
It is intended that the proposed Merger will be accounted for by
Harken as a purchase under generally accepted accounting principles. The
effect of purchase accounting treatment is that the assets and liabilities of
Search will be recorded at their fair values at the Effective Time.
STOCK EXCHANGE LISTING
The shares of Harken Common Stock are listed and traded on the AMEX.
It is a condition to the consummation of the Merger that the shares of Harken
Common Stock to be issued in connection therewith and upon the exercise of the
Harken Warrants and the Unexchanged Search Warrants be approved for listing on
the AMEX.
THE MERGER AGREEMENT
The following is a brief summary of certain provisions of the Merger
Agreement, a copy of which is attached as Appendix A to this Statement and
incorporated herein by reference. This summary is qualified in its entirety by
reference to the full text of the Merger Agreement. All holders of Search
securities are urged to read the Merger Agreement in its entirety.
THE MERGER
Pursuant to the Merger Agreement and subject to the terms and
conditions thereof, at the Effective Time Search will be merged with and into
Merger Sub, a wholly-owned subsidiary of Harken. Merger Sub will be the
surviving corporation in the Merger. The Merger will have the effects
specified under Delaware Law.
Upon the satisfaction or waiver of all conditions to the Merger, and
provided that the Merger Agreement has not been terminated or abandoned, Harken
and Search will cause a Certificate of Merger to be executed, acknowledged and
filed with the Secretary of State of the State of Delaware as provided under
Delaware Law (the "Certificate of Merger"). The time at which the Merger
becomes effective is referred to as the Effective Time.
TERMS OF THE MERGER
Initial Issuance of Harken Common Stock. As a result of the Merger
and without any action on the part of the holders thereof, each of the
following securities of Search will be converted at the Effective Time as
described below:
Search Common Stock. Each outstanding share of Search Common
Stock (other than shares subject to validly exercised appraisal
rights) will be converted into the right to receive that number of
shares of Harken Common Stock determined by dividing $.8099 by the
Average Trading Price (the "Exchange Ratio").
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<PAGE> 40
Search Preferred Stock. Each outstanding share of Search
Preferred Stock (other than shares subject to validly exercised
appraisal rights) will be converted into the right to receive that
number of shares of Harken Common Stock determined by dividing $1.00
by the Average Trading Price.
Search Notes. Each of the Langston Note, Concorde Note and
EnCap Note to be issued by Search will, pursuant to its terms, be
converted into the right to receive that number of shares of Harken
Common Stock determined by dividing the principal amount of such Note
by the Average Trading Price. For a description of the Notes, see
"The Merger--Conflicts of Interest."
Each holder of a certificate or note (a "Certificate" or
"Certificates") representing any shares of Search Common Stock, Search
Preferred Stock or Notes ("Search Securities") will thereafter cease to have
any rights with respect to such shares or notes, except the right to receive,
without interest, shares of Harken Common Stock and the potential right to
receive Contingent Shares or, under certain circumstances, cash, if any, upon
the surrender of such Certificate (as described in "--Exchange Procedures for
Search Securities" below). Each share of Search Common Stock and Search
Preferred Stock held in Search's treasury at the Effective Time will cease to
be outstanding and will be cancelled and retired without payment of any
consideration therefor.
Effects of Changes in Market Price of Harken Common Stock on Exchange
Ratios. To the extent that the market price of Harken Common Stock fluctuates
during the period between the date of this Statement and five days prior to the
date of closing of the Merger, the number of shares of Harken Common Stock
issuable can vary considerably. Within five days of the Special Meeting, the
Stockholders can call D.F. King & Co., Inc., the proxy solicitor for Search, at
(800) 669-5550 for the Average Trading Price to be used in the calculation of
the exchange ratios. Presented below is a table showing minimum and maximum
exchange ratios for each of the holders of Search Common Stock, Search
Preferred Stock and the Notes, the minimum and maximum number of shares of
Harken Common Stock to be issued, and the resultant ratios of various current
Search holders to the total of all post-merger holders of Harken Common Stock.
All information presented is exclusive of any Contingent Shares.
<TABLE>
<CAPTION>
EXCHANGE RATIO INFORMATION MINIMUM MAXIMUM
-------------------------- ------- -------
<S> <C> <C>
Search Common Stock to Harken Common Stock . . . . . . . . . . . . . . 0.3423 0.6357
Search Preferred Stock to Harken Common Stock . . . . . . . . . . . . . 0.4227 0.7849
Search Notes to Harken Common Stock . . . . . . . . . . . . . . . . . . 0.4227 0.7849
Total Shares of Harken Common Stock to be issued . . . . . . . 1,679,047 3,118,227
Percentage of Harken Common Stock held by the holders of: . . . . . . .
Search Common Stock . . . . . . . . . . . . . . . . . . . . . 2.03% 3.69%
Search Preferred Stock . . . . . . . . . . . . . . . . . . . . 0.39% 0.71%
Search Notes . . . . . . . . . . . . . . . . . . . . . . . . . 0.28% 0.50%
---------- --------
Total . . . . . . . . . . . . . . . . . . . . . . . . 2.70% 4.90%
</TABLE>
Search Warrants. Each Unexchanged Search Warrant will remain
outstanding and will be exercisable pursuant to its terms; provided, however,
that if the Unexchanged Search Warrant does not contain express provisions
regarding the exercise price and the type and number of securities such warrant
is exercisable for after the Merger, the Unexchanged Search Warrant will be
exercisable upon the same terms and conditions as the applicable Search Warrant
except that such Unexchanged Search Warrant will be exercisable for that whole
number of shares of Harken Common Stock equal to the product of the number of
shares of Search Common Stock covered by the Unexchanged Search Warrant
immediately prior to the Effective Time multiplied by the Exchange Ratio
rounded up to the nearest whole number of shares of Harken Common Stock, and
the per share exercise price for the shares of Harken Common Stock issuable
upon the exercise of such Unexchanged Search Warrant will be equal to the
quotient determined by dividing the exercise price per share of Search Common
Stock specified for such Unexchanged Search Warrant under the applicable
agreement immediately prior to the Effective Time by the Exchange Ratio
rounding the resulting exercise price down to the nearest whole cent.
Issuance of Contingent Shares. The holders of record at the Effective
Time of Search Common Stock, Concorde Note, EnCap Note and Search Warrants
(whether tendered in the Exchange Offer or not) and the
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<PAGE> 41
Royalty Holders (the "Rights Holders") may receive additional shares of Harken
Common Stock (the "Contingent Shares") to the extent the value of the
Undeveloped Properties as of June 30, 1996 (the "Valuation Date"), subject to
certain adjustments as described below, exceeds $1,733,000 (the "Stipulated
Value"). The Stipulated Value was determined based on negotiations between
Harken and Search and may or may not represent the current value of the
Undeveloped Properties. The obligation of Harken to deliver a number of
Contingent Shares will first be determined in dollar terms, as described below
under "--Valuation of the Undeveloped Properties" and in more detail in the
Merger Agreement, and then converted to a number of shares of Harken Common
Stock. The Contingent Shares will then be allocated among the Rights Holders as
described below under "--Allocation of Contingent Shares." The total number of
shares of Harken Common Stock to be issued as Contingent Shares is subject to
the limitation set forth below under "--Maximum Number of Contingent Shares."
Valuation of the Undeveloped Properties. The value of the
Undeveloped Properties as of the Settlement Date (the "Valuation")
will be determined by an independent reserve report (the "Report")
covering the Undeveloped Properties, providing the then present value
of such properties as of June 30, 1996 (the "Present Value") and
adjusted as set forth below:
(a) The Present Value will be reduced by 20% (the
"Adjusted Present Value").
(b) The Adjusted Present Value will be reduced for
geological risks based upon reserve categories of the
Undeveloped Properties as of the Valuation Date (the
"Further Adjusted Value") as set forth below:
0% reduction for proved developed producing
reserves
20% reduction for proved developed
non-producing reserves
40% reduction for proved undeveloped reserves
(c) The Further Adjusted Value will be adjusted by:
(i) Adding the then market value of any
consideration received by Harken or any of
its affiliates from any prospect sales,
farmouts, or joint venture arrangements with
respect to any of the Undeveloped Properties
or any other consideration received upon the
disposition of an oil and gas interest in the
Undeveloped Properties;
(ii) Adding 80% of the net revenue (calculated
before income taxes and after deduction of
lease operating expenses) from sales of oil
and/or gas produced from the Undeveloped
Properties for the period of time from the
Effective Time to the Valuation Date (the
"Development Period");
(iii) deducting the amount of any direct costs,
direct expenses and direct charges (in each
case not associated with oil or gas
production and which are not otherwise taken
into account in the Report) incurred or
accrued by Harken or its affiliates with
respect to the Undeveloped Properties during
the Development Period, including $180,000
for overhead;
(iv) deducting the amount of the Reserve
Deficiency (as defined below);
(v) deducting the amount of the Stipulated Value;
and
(vi) deducting the amount of the Adverse
Consequences ( as defined below), provided,
however, that no amount shall be deducted
until Harken has suffered Adverse
Consequences equal to or in excess of
$100,000 (at which point the entire amount of
such Adverse Consequences will be deducted
relating back to the first dollar).
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<PAGE> 42
As defined in the Merger Agreement, "Reserve Deficiency" means
the amount that the aggregate value of the oil and gas reserves
attributed to all of the properties of Search and its subsidiaries as
set forth in the reserve report dated as of July 1, 1994, after giving
credit for actual production from such properties for the period of
time from July 1, 1994 to December 31, 1994, is greater than the
aggregate value of the oil and gas reserves attributed to all of such
properties pursuant to a subsequent reserve report to be prepared as
of December 31, 1994. The subsequent reserve report will be prepared
by a reserve engineering firm known in the oil and gas industry and
chosen by Harken in good faith, based upon the same pricing and
substantially the same parameters and criteria as used in the
properties of the reserve report dated as of July 1, 1994.
As defined in the Merger Agreement, "Adverse Consequences"
means (a) the amount of any and all liquidated losses, liabilities or
damages (including reasonable amounts paid in settlement) actually
suffered or incurred by Harken as a result of a breach by Search of
any of its representations, warranties or covenants contained in the
Merger Agreement, (b) the amount of any and all unliquidated losses,
liabilities or damages as reasonably estimated in good faith by Harken
to be suffered or incurred by Harken as a result of a breach by Search
of any of its representations, warranties or covenants contained in
the Merger Agreement, and (c) all reasonable fees and expenses,
including attorneys' fees and court costs, actually incurred by Harken
or reasonably estimated in good faith by Harken to be incurred in
connection with any claim, action, suit, proceeding or demand relating
to a breach by Search of any of its representations, warranties or
covenants; provided, however, that Harken must have used commercially
reasonable efforts to defend against or otherwise challenge the merits
of any claim, action, suit, proceeding or demand of a third party.
Solely for purposes of calculating the amount of the Adverse
Consequences, any representation, warranty or covenant made by Search
in the Merger Agreement will be read and interpreted as if the
qualification stated therein with respect to materiality or material
adverse effect were not contained therein.
Calculation of Contingent Shares. The number of shares of
Harken Common Stock to be distributed is determined by dividing the
amount of the Valuation, as adjusted above, by the average closing
price of Harken Common Stock for the 90 days immediately preceding the
Valuation Date (the "Contingent Share Price").
Allocation of Contingent Shares. The Contingent Shares will
be allocated among the Rights Holders as follows:
(a) Two percent (2%) of the Contingent Shares will be
distributed to Concorde pursuant to the terms of the
Concorde Note. See "The Merger--Conflicts of
Interest."
(b) Two percent (2%) of the Contingent Shares will be
distributed to EnCap pursuant to the terms of the
EnCap Note. See "The Merger--Conflicts of Interest."
(c) That number of Contingent Shares equal to the
quotient of the Value of the Eastern Shelf Properties
(as hereinafter defined) divided by the Contingent
Share Price shall be distributed to the Royalty
Holders which Contingent Shares will be distributed
among the Royalty Holders in proportion to the
interest in the Eastern Shelf Properties (as
described in Appendix F) conveyed by a Royalty Holder
to Search and the interest in the Eastern Shelf
Properties conveyed by all Royalty Holders. As
described in the Merger Agreement, "Value of the
Eastern Shelf Properties" means the amount equal to a
two percent overriding royalty interest in the
Eastern Shelf Properties as determined in the Report.
(d) The remainder of the Contingent Shares will be
distributed to the Record Holders (as defined below),
with each such Record Holder receiving that fraction
of such Contingent Shares as equal to the quotient of
the number of shares of Harken Common Stock into
which such holders' Search Common Stock were
converted at the Effective Time (not including
Contingent Shares) plus the number of shares, if any,
of Harken Common Stock received by the Record Holder
upon the exercise of
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<PAGE> 43
Harken Warrants or Unexchanged Search Warrants
divided by the number of shares of Harken Common
Stock into which all Record Holders' Search Common
Stock were converted at the Effective Time (not
including Contingent Shares) plus the number of
shares of Harken Common Stock received upon the
exercise of all Harken Warrants or Unexchanged Search
Warrants.
As defined in the Merger Agreement, "Record Holder" means a
holder of record of Search Common Stock or the Unexchanged Search
Warrants at the Effective Time or a holder of Search Warrants that
were exchanged for Harken Warrants at the Effective Time. Transferees
of Unexchanged Search Warrants subsequent to the Effective Time will
not be Record Holders and, therefore, will not be eligible to receive
Contingent Shares, if any.
Payment of Contingent Shares. Harken will distribute the
Contingent Shares (except for the number of shares of Harken Common
Stock that exceed the Maximum Share Limit (as defined below), on such
dates as set forth below:
(a) On or about September 30, 1996 (the "Settlement
Date"), Harken will deliver to each of the Rights
Holders, at the addresses of the Rights Holders as
they appear on the stock records of Search at the
Effective Time (or, in the case of Concorde, EnCap or
the Royalty Holders, at such address as may be
specified in writing by Concorde, EnCap and the
Royalty Holders, respectively) or at such other
addresses as Rights Holders shall provide to Harken
by written notice, certificates representing the
number of shares of Harken Common Stock payable to
such Rights Holder and a letter from the chief
financial officer of Harken describing the
calculations made in determining the number of
Contingent Shares.
(b) As soon as practicable after the date all
Unliquidated Losses (as defined below) have become
liquidated losses, liabilities, damages, fees or
expenses actually suffered or incurred by Harken (the
"Final Settlement Date"), Harken will determine the
amount, if any, that the Unliquidated Losses exceed
such liquidated amount actually suffered or incurred
by Harken (the "Excess Amount"). Harken will then
distribute to the Rights Holders (excluding the
Royalty Holders), as described in paragraph (a) above
and under "--Allocation of Contingent Shares," the
number of additional Contingent Shares equal to the
quotient of the Excess Amount divided by the
Contingent Share Price. As used in the Merger
Agreement, "Unliquidated Losses" means the amount of
unliquidated losses, liabilities, damages, fees and
expenses reasonably estimated in good faith by Harken
in determining the amount of the Adverse
Consequences.
The determination and calculation of the number of Contingent
Shares to be issued, if any, to the Rights Holders will be determined
solely by Harken in its exercise of good faith based upon the
procedures described above.
Maximum Number of Contingent Shares. Pursuant to the Merger
Agreement, Harken is not required nor obligated to issue any portion
of the Contingent Shares as provided above which when added to all
other shares of Harken Common Stock issued or reserved for issuance in
connection with the Merger, the Exchange Offer and in all related
transactions, would exceed a maximum amount of eleven million
(11,000,000) shares of Harken Common Stock (the "Maximum Share
Limit"). In the event the shares of Harken Common Stock to be issued
by Harken, exceed the Maximum Share Limit, then in such event Harken
will within 30 days after the Settlement Date or the Final Settlement
Date, as may be applicable, elect at its sole option:
(a) to pay the amount in cash of the number of such
Contingent Shares which exceed the Maximum Share Limit times the
Contingent Share Price to the parties entitled to receive such shares,
provided, however, that the cash received by the holders of Search
Common Stock and Search Preferred Stock shall in no event exceed fifty
percent (50%) of the aggregate consideration received
36
<PAGE> 44
by such holders at the Effective Time and on the Settlement Date (and
the Final Settlement Date, if applicable); or
(b) to obtain the consent and approval from its
stockholders, if required, to issue additional shares of Harken Common
Stock in excess of the Maximum Share Limit.
In the event Harken elects to pursue the alternative to pay
cash, Harken will use commercially reasonable efforts to make such
payments within 45 days after the Settlement Date or the Final
Settlement Date, as may be applicable. In the event Harken elects to
pursue the alternative to pay in additional shares or in the event the
cash alternative is not available because of the above limitations
placed upon the amount thereof, then Harken will use commercially
reasonable efforts to obtain the necessary consent and approval from
its stockholders, if required, so as to issue such additional shares
within six months after the Settlement Date or the Final Settlement
Date, as may be applicable. Pending such additional authorizations or
other actions necessary, Harken will issue that portion of the
Contingent Shares up to the Maximum Share Limit on the Settlement
Date. In the event Harken elects to obtain the approval of its
stockholders to issue additional shares in excess of the Maximum Share
Limit and fails to obtain such approval, Harken will pay cash.
Assignment of Contingent Right. The right to receive the
Contingent Shares extends only to the Rights Holders, may not be
assigned or otherwise transferred by them other than by laws of
descent and distribution, and will not be represented by a form or
certificate. Although Harken Common Stock, when received as
Contingent Shares by the Rights Holders will not be subject to
restrictions upon disposition (other than by affiliates of Search as
described in "Resale Restrictions"), the right to receive future
Contingent Shares is personal to the Rights Holders and
non-transferable. In general, this right is independent of the shares
of Harken Common Stock which will be issued at the Effective Time or
upon the exercise of Harken Warrants or the Unexchanged Search
Warrants.
Interim Reports. Within 90 days after June 30, 1995 and
December 31, 1995, Harken will provide to the Rights Holders interim
reports regarding the status of development and production activities
on the Undeveloped Properties.
Management of the Undeveloped Properties. During the
Development Period, Harken shall, through Merger Sub, as its
wholly-owned subsidiary, own, hold and manage the Undeveloped
Properties. Harken may sell, farmout, develop or otherwise deal in
these Undeveloped Properties during the Development Period in a manner
which, in its judgment, optimizes the full potential of these
properties under the circumstances then existing. During the
Development Period, Harken will cause a maximum of $600,000 (the
"Development Amount") to be expended in the further exploration and/or
development of the Undeveloped Properties. In the event that Harken
determines that an insufficient number of the wells drilled on the
Undeveloped Properties during the Development Period are determined to
be commercial to warrant the prudent expenditure of the full
Development Amount or otherwise which would not justify further
development and expenditures to a reasonable, prudent operator, then
Harken will not be required nor obligated to cause any additional
minimum investments to be made on such Undeveloped Properties even if
the Development Amount has not yet been expended in full. During the
Development Period, Harken will cause all production of oil and gas
from the Undeveloped Properties to be sold to non-affiliates pursuant
to bona fide contracts providing for the highest price reasonably
attainable through good faith negotiations as of the date of each such
contract.
Contingent Nature of Issuance. Harken's obligation to issue
Contingent Shares is conditional in nature, and Harken may never make
any additional payments beyond those shares of Harken Common Stock
issued as of the Effective Time or upon the exercise of the Harken
Warrants or the Unexchanged Search Warrants.
Miscellaneous. In the event of any stock split, stock
dividend, reclassification, merger or consolidation occurring on or
after 90 days immediately preceding the Valuation Date, the number of
shares of Harken Common Stock distributable to the Rights Holders as
Contingent Shares will be
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<PAGE> 45
appropriately adjusted to accord the equitable benefit of such changes
to the Rights Holders. Dividends and other distributions with respect
to Harken Common Stock declared after the Settlement Date and payable
to the holders of record thereof after the Settlement Date will be
payable to the Rights Holders with respect to the shares of Harken
Common Stock to be delivered as Contingent Shares; provided, however,
no such payment will be made unless and until a certificate
representing the Contingent Shares has been delivered to the Rights
Holders. No dividends payable to holders of record of shares of
Harken Common Stock prior to the Settlement Date shall be paid to the
Rights Holders with respect to such Contingent Shares.
EXCHANGE PROCEDURES FOR SEARCH SECURITIES
Promptly after the Effective Time, Continental Stock Transfer and
Trust Company, as exchange agent (the "Exchange Agent"), will mail to each
person who was, at the Effective Time, a holder of record of Search Securities,
a letter of transmittal to be used by such holders in forwarding their
Certificates, and instructions for effecting the surrender of the Certificates
in exchange for certificates representing shares of Harken Common Stock. Upon
surrender to the Exchange Agent of a Certificate for cancellation, together
with such letter of transmittal, the holder of such Certificate will be
entitled to receive a certificate representing that number of whole shares of
Harken Common Stock and unpaid dividends and distributions, if any, which such
holder has the right to receive in respect of the Certificate surrendered, and
the Certificate so surrendered will be cancelled. SEARCH STOCKHOLDERS AND
NOTEHOLDERS SHOULD NOT SEND CERTIFICATES UNTIL THEY RECEIVE A LETTER OF
TRANSMITTAL.
No fractional shares of Harken Common Stock will be issued and any
holder of Search Securities entitled under the Merger Agreement to receive a
fractional share will be entitled to receive a whole share of Harken Common
Stock.
No dividends or distributions on shares of Harken Common Stock will be
paid with respect to any Search Securities represented by a Certificate until
such Certificate is surrendered for exchange as provided in the Merger
Agreement. Subject to the effect of applicable laws, following surrender of
any such Certificate, there shall be paid to the holder of certificates
representing shares of Harken Common Stock issued in exchange therefor, (a) at
the time of such surrender, the amount of any dividends or other distributions
with a record date after the Effective Time theretofore payable with respect to
such shares of Harken Common Stock and not paid, less the amount of any
withholding taxes which may be required thereon, and (b) at the appropriate
payment date, the amount of dividends or other distributions with a record date
after the Effective Time but prior to surrender thereof and a payment date
subsequent to surrender thereof payable with respect to such whole shares of
Harken Common Stock, less the amount of any withholding taxes which may be
required thereon. No interest will be paid or accrued on unpaid dividends and
distributions, if any, upon surrender of Certificates.
At or after the Effective Time, there will be no transfers on the
transfer books of Search Securities which were outstanding immediately prior to
the Effective Time.
Notwithstanding the foregoing, neither Harken nor the Exchange Agent
will be liable to any former holders of Search Securities for any amount
properly delivered to a public official pursuant to applicable abandoned
property, escheat or similar laws.
In the event that any Certificate has been lost, stolen or destroyed,
upon the making of an affidavit of that fact by the person claiming such
Certificate to be lost, stolen or destroyed and posting by such person of a
bond in such reasonable amount as the Exchange Agent may direct as indemnity
against any claim that may be made against Harken with respect to such
Certificate, the Exchange Agent will issue in exchange for such lost, stolen or
destroyed Certificate the shares of Harken Common Stock, and any unpaid
dividends and distributions on shares of Harken Common Stock, as described
below.
THE WARRANT EXCHANGE OFFER
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<PAGE> 46
Pursuant to the terms of the Merger Agreement, Harken is obligated to
offer to exchange the outstanding Search Warrants for Harken Warrants. For a
description of the Exchange Offer, see "The Warrant Exchange Offer."
REPRESENTATIONS AND WARRANTIES
The Merger Agreement contains various representations and warranties
relating to, among other things: (a) the due organization, power and standing
of Search and Harken and similar corporate matters; (b) the authorization,
execution, delivery and enforceability of the Merger Agreement; (c) the capital
structure of Search and Harken; (d) subsidiaries of Search and Harken; (e)
investment interests of Search and Harken; (f) conflicts under charters or
bylaws and violations of any instruments or law and required consents or
approvals; (g) certain documents filed by each of Search and Harken with the
Commission and the accuracy of information contained therein; (h) litigation;
(i) absence of certain changes or material adverse effects; (j) taxes; (k)
retirement and other employee benefit plans of Search; (l) brokers' and
finders' fees with respect to the Merger; (m) receipt of fairness opinion of
Search; (n) compliance with environmental laws and regulations; and (o)
property, oil and gas interests and wells of Search. The representations and
warranties of Harken will expire upon the consummation of the Merger. The
representations and warranties of Search shall survive the consummation of the
Merger until the Settlement Date.
CONDUCT OF BUSINESS PRIOR TO THE MERGER
The Merger Agreement provides that, prior to the Effective Time,
Search will operate its business only in the ordinary course and consistent
with past practice, and generally provides for certain restrictions with
respect to Search on, among other things, the issuance or other disposition,
encumbrance, or repurchase of capital stock of Search, certain sales of assets
of Search, the declaration or payment of dividends, the amendment of the
Certificate of Incorporation or Bylaws of Search, the acquisition of any
business, the incurrence of indebtedness, the making of certain capital
expenditures in excess of specific dollar amounts, the granting of certain
employee benefits or the adoption or amendment of employee benefit plans, or
certain actions relating to the entering into or amendment of certain contracts
or arrangements.
NO SOLICITATION OF ACQUISITION TRANSACTION
Search has agreed that it will not, and will not authorize or permit
any of its officers, directors, employees, agents and other representatives or
those of any of its subsidiaries (collectively, "Search Representatives") to,
directly or indirectly, solicit, initiate or encourage (including by way of
furnishing information) any prospective buyer or the making of any proposal
which constitutes or may reasonably be expected to lead to, an Acquisition
Transaction (as defined below) from any person, or engage in any discussions or
negotiations relating thereto or accept any Acquisition Transaction; provided,
however, that, (a) Search may engage in discussions or negotiations with a
third party who (without any solicitation, initiation, encouragement,
discussion or negotiation, directly of indirectly, by or with Search or any
Search Representatives) seeks to initiate such discussions or negotiations and
may furnish such third party information concerning Search and its business,
properties and assets, (b) the Search Board may take and disclose to the Search
Stockholders a position contemplated by Rule 14(e)-2(a) promulgated under the
Exchange Act and (c) following receipt of an Acquisition Transaction that is
financially superior to the Merger and reasonably capable of being financed (as
determined in each case in good faith by the Search Board after consultation
with Search's financial advisors), the Search Board may withdraw or modify its
recommendation or terminate the Merger Agreement, but in each case referred to
in the foregoing clauses (a) through (c) only to the extent that the Search
Board shall conclude in good faith after consulting with Search's outside
counsel that such action is necessary in order for the Search Board to act in a
manner which is consistent with its fiduciary obligations under applicable law.
Search will promptly notify Harken of any such discussions or negotiations,
requests for such information or the receipt of any Acquisition Transaction,
including the identity of the person or group engaging in such discussions or
negotiations, requesting such information or making such Acquisition
Transaction and the material terms and conditions of any Acquisition
Transaction. See "--Termination Fee."
As used in the Merger Agreement, "Acquisition Transaction" shall mean
any proposal or offer, other than a proposal or offer by Harken or any of its
affiliates, for a tender or exchange offer, a merger,
39
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consolidation or other business combination involving Search or any subsidiary
or division of Search or any proposal to acquire in any manner an equity
interest in, or significant assets of, Search or any of its subsidiaries or
divisions.
INDEMNIFICATION
Harken has agreed to cause Merger Sub, as the surviving corporation,
to keep in effect a provision in its Certificate of Incorporation providing for
the exculpation of liability for, and the indemnification of, each person who
is now or ever has been an officer, director, employee, trustee or agent of
Search and/or any of its subsidiaries (the "Agent Indemnified Parties") to the
fullest extent permitted under applicable law, which provision shall not (a) be
contradicted by, or in conflict with, any other term or provision of such
Certificate of Incorporation, or (b) be amended or repealed except as required
by applicable law or except to make changes permitted by law that would enlarge
an Agent Indemnified Parties' right of indemnification. In addition, Harken
and Merger Sub have agreed to enter into indemnification agreements with each
of the Agent Indemnified Parties, a copy of which has been filed as an exhibit
to the Registration Statement.
CONDITIONS
The respective obligations of Search and Harken to consummate the
Merger are subject to the fulfillment of each of the following conditions,
among others: (a) the Registration Statement shall have become effective under
the Securities Act and no stop order with respect thereto shall be in effect;
(b) the Merger Agreement shall have been approved by the holders of a majority
of the issued and outstanding shares of Search Common Stock and by the holders
of all Search Preferred Stock; (c) no order or injunction is in effect against
the consummation of the Merger; and (d) the shares of Harken Common Stock to be
issued in the Merger and shares issuable as Contingent Shares and upon the
exercise of Harken Warrants and Unexchanged Search Warrants shall have been
approved for listing on the AMEX.
The obligations of each of Search and Harken to consummate the Merger
are also subject to the satisfaction or waiver by the other party prior to the
Effective Time of the following conditions, among others: (a) the other party
shall have performed in all material respects with all obligations required to
be performed by it under the Merger Agreement and the representations and
warranties of the other party and its subsidiaries set forth in the Merger
Agreement shall be true in all material respects as of the Effective Time
except for changes contemplated by the Merger Agreement and those
representations and warranties which address matters only as of a particular
date; (b) the other party shall have obtained all material consents, waivers,
approvals, authorizations required to be obtained, and all filings required to
be made, by the other party for the authorization, execution and delivery of
this Merger Agreement and the consummation by it of the transactions
contemplated therein; (c) there shall not have occurred any fact, event or
condition with respect to the other party and its subsidiaries that would have
or would be reasonably likely to have a material adverse effect on the
business, operations, properties, condition, assets or liabilities of other
party and its subsidiaries taken as a whole (a material adverse effect shall be
deemed to exist with respect to Search if there shall occur any event which has
or is reasonably expected to have an adverse financial statement impact of
$100,000); and (d) there shall not be any actual or threatened action or
proceeding before any court or administrative agency or by any governmental
agency or any other person (i) challenging, or seeking material damages by
reason of consummation of the transactions contemplated by this Agreement, or
(ii) seeking to limit or prohibit the exercise of full rights of ownership or
operation by Harken or its subsidiaries of all or any portion of the business
or assets of Search, in either case having a material adverse effect on Search
or Harken.
The obligation of Harken to consummate the Merger is further
conditioned upon (a) the Affiliate Agreements between Harken and certain
individuals have been executed; (b) each of the Employment Agreement, Concorde
Agreement and the EnCap Agreement has been amended by the execution of the
Partial Settlement and Conversion Agreements; (c) all agreements between Search
and any of Search's officers or directors have been terminated; (d) the holders
of not more than five percent of the outstanding shares of Search Common Stock
and Search Preferred Stock have exercised their appraisal rights; (e) Search
shall have obtained assignments and other evidences of transfer, in such form
as may be acceptable to Harken, covering the reconveyance in full to Search of
certain overriding royalty interests in the Eastern Shelf Properties; and
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<PAGE> 48
(f) the liquidation of the Search Partnerships and the opinion of legal counsel
to Search as to certain matters regarding such liquidation.
The obligation of Search to consummate the Merger is further
conditioned upon (a) the receipt of a written opinion in the form reasonably
satisfactory to Search confirming as of the date of this Statement that the
consideration to be received as a result of the Merger Agreement by the holder
of Search Common Stock is fair, from a financial point of view; (b) the receipt
of a letter entitling Search to rely upon the opinion rendered by Harken's
legal counsel filed as an exhibit to the Registration Statement of which this
Statement is a part pursuant to Item 601(b)(5) of Regulation S-K of the
Securities Act; and (c) the receipt of an opinion by Search's legal counsel, or
by a firm of certified public accountants retained by it, with regard to the
taxability of the transactions hereunder to the Stockholders and the holders of
the Search Warrants.
The conditions to each party's obligation to consummate the Merger may
be waived in writing signed by the party granting the waiver.
TERMINATION
The Merger Agreement may be terminated and the Merger may be abandoned
at any time prior to the Effective Time, before or after the approval by the
Stockholders: (a) by the mutual consent of Search and Harken; (b) by either
Search and Harken if (i) the Merger shall not have been consummated before
May 30, 1995 unless the failure to consummate the Merger by such date was due
to the willful failure to act of the party seeking to terminate the Merger
Agreement, (ii) the adoption of the Merger Agreement and the approval of the
transactions contemplated thereby by the Stockholders shall not have been
obtained at a meeting duly convened therefor, (iii) there shall be any order of
any court, governmental or regulatory authority, which is final and
nonappealable preventing the consummation of the transactions contemplated by
the Merger Agreement, or (iv) the Search Board has approved or recommended an
Acquisition Transaction; (c) by Search if there has been a breach by Harken of
any covenant or agreement contained in the Merger Agreement or if any
representation or warranty of Harken shall be or shall become untrue, in either
case such that the closing conditions of Search would not be satisfied, and
such breach is not waived or cured within ten days after written notice from
Search; or (d) by Harken if (i) there has been a material breach by Search of
any covenant or agreement contained in the Merger Agreement or if any
representation or warranty of Search shall be or shall become untrue, in either
case such that the closing conditions of Harken would not be satisfied, and
such breach is not waived or cured within ten days after written notice from
Harken, or (ii) the Search Board withdraws, or modifies or amends in any manner
adverse to Harken, its recommendation to the Stockholders with respect to the
Merger Agreement or the Merger due to a material adverse effect to Harken.
TERMINATION FEE
Search shall pay Harken a cash fee equal to all of Harken's
out-of-pocket expenses plus $800,000 if the Merger Agreement is terminated by
Search or Harken because the Search Board has approved or recommended an
Acquisition Transaction. In addition, Search shall pay Harken a cash fee equal
to all of Harken's out-of-pocket expenses plus $150,000 if the Merger Agreement
is terminated by Harken because the Search Board has withdrawn, modified or
amended in any manner adverse to Harken its approval of or recommendation in
favor of the Merger due to a material adverse effect to Harken. See "--No
Solicitation of Acquisition Transaction."
EXPENSES
Whether or not the Merger is consummated, all costs and expenses
incurred in connection with the Merger Agreement and the transactions
contemplated thereby shall be paid by the party incurring such expenses;
provided, however, that the expenses incurred in connection with the
preparation, printing and mailing this Statement shall be shared equally by
Harken and Search.
AMENDMENT AND WAIVER
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The parties may modify or amend the Merger Agreement by written
agreement at any time prior to the Effective Time; provided, however, that,
after approval of the Merger by the Stockholders, no amendment may be made
which by law requires further approval by the Stockholders without such
approval. The conditions to each party's obligation to consummate the Merger
may be waived in writing signed by the party granting the waiver.
THE WARRANT EXCHANGE OFFER
PURPOSE OF THE EXCHANGE OFFER
As of December 31, 1994, Search had outstanding Search Warrants
exercisable for up to an aggregate of 989,000 shares of Search Common Stock.
Of such warrants, Search issued Search Warrants exercisable for an aggregate of
500,000 shares of Search Common Stock on July 17, 1989 to approximately 202
original shareholders of Search, in connection with the formation of Search.
Search further issued Search Warrants exercisable for an aggregate of 489,000
shares of Search Common Stock from July 1991 through January 1994 to employees
and directors as an incentive for continued support and performance in
connection with Search. The Search Warrants are currently exercisable, have
exercise prices ranging from $1.32 to $2.00 per share and have expiration dates
ranging from July 17, 1995 to July 31, 1996. See Appendix D for a schedule of
the Search Warrants and their exercise prices and expiration dates. As an
accommodation to the transactions contemplated by the Merger Agreement, Dr.
Gary Wood, the holder of a Search Warrant with an expiration date of January
10, 1999, agreed to amend his Search Warrant to expire on July 31, 1996 if the
Merger is consummated and he does not exchange his warrant in the Exchange
Offer. All Search Warrants, pursuant to their agreements and/or plans of
issuance, contain provisions that in the event of a merger transaction the
number and exercise price of such warrants will be adjusted on the same basis
as the conversion of the Search Common Stock in the merger transaction.
Because the exercise prices of the Search Warrants were substantially
higher than the market price of Search Common Stock, Search determined that it
would be in the best interest of the holders of the Search Warrants to provide
a mechanism for Search holders to reduce the exercise prices of the Search
Warrants while providing no additional value or consideration to such holders.
During negotiation of the Merger Agreement, Harken agreed to exchange the
Search Warrants for warrants issued by Harken and retained the services of an
independent compensation consulting firm to review the terms of each of the
Search Warrants and calculate pursuant to the Black Scholes option valuation
model an exchange value of each Search Warrant. The terms of the exchange were
intended to be economically neutral to both Harken and to the exchanging
holders of Search Warrants.
Because of the fact that no additional value or consideration was
being received by the holders of Search Warrants that exchange their warrants
for Harken Warrants, the Search Board determined that the Exchange Offer was
fair and reasonable to the holders of Search Warrants and to the Stockholders.
PRINCIPAL'S FAIRNESS OPINION DID NOT INCLUDE ANY OPINION AS TO THE FAIRNESS OF
THE EXCHANGE OFFER TO THE STOCKHOLDERS OR THE HOLDERS OF THE SEARCH WARRANTS.
Harken is obligated pursuant to the terms of the Merger Agreement to
offer to exchange the Search Warrants for Harken Warrants, however, it is not a
condition to the consummation of the Merger than any of the holders of Search
Warrants tender their warrants in the Exchange Offer.
TERMS OF THE EXCHANGE OFFER
Upon the terms and subject to the conditions set forth in this
Statement and in the Letter of Transmittal, Harken will accept at the Effective
Time all Search Warrants properly tendered and not withdrawn prior to 5:00
p.m., Dallas, Texas time on the Expiration Date. Each Search Warrant tendered
in the Exchange Offer shall be exchanged for a non-transferable Harken Warrant
exercisable for that number of shares of Harken Common Stock as set forth on
the Warrant Exchange Schedule attached hereto as Appendix D. Harken Warrants
issued in the Exchange Offer will entitle the holder to purchase Harken Common
Stock at a price of $1.82 per share, subject to adjustment under certain
conditions, from the date of
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issuance until their expiration at 3:00 p.m., Dallas, Texas time on June 30,
1996. See "Description of Harken Securities--Harken Warrants."
While certain of the Search Warrants are transferable under certain
circumstances, the Harken Warrants will not be transferable other than by laws
of descent and distribution. However, the shares of Harken Common Stock
issuable upon the exercise of the Harken Warrants or the Unexchanged Search
Warrants will be freely transferable, except that shares of Harken Common Stock
received by persons who are deemed to be "affiliates" (as such term is defined
under the Securities Act) of Search at the time of the Special Meeting may be
resold by them only in permitted circumstances. See "Resale Restrictions."
The Exchange Offer is not conditioned upon any minimum number of
Search Warrants being tendered for exchange, however, the Exchange Offer is
subject to certain conditions, including the consummation of the Merger.
Unexchanged Search Warrants shall remain outstanding and shall be
exercisable for Harken Common Stock according to their terms. Generally, the
Search Warrants provide that, upon the consummation of the Merger, the number
of shares that each Search Warrant is exercisable for and the exercise price
per share of the Search Warrant will be adjusted based on the Exchange Ratio,
which will range from .3423 to .6357. For example, if prior to the
consummation of the Merger a Search Warrant is exercisable for 1,000 shares of
Search Common Stock at an exercise price of $2.00 per share and assuming that
the Exchange Ratio is .3423, upon the consummation of the Merger, the
Unexchanged Search Warrant will be exercisable for 343 shares of Harken Common
Stock at an exercise price of $5.84 per share. Assuming that the Exchange
Ratio is .6357, upon the consummation of the Merger, the Unexchanged Search
Warrant will be exercisable for 636 shares of Harken Common Stock at an
exercise price of $3.14 per share.
Upon exercise of a Harken Warrant or an Unexchanged Search Warrant,
the holder of such warrant shall receive the number of shares of Harken Common
Stock exercised by such holder. In addition, the holder of record at the
Effective Time of a Search Warrant (whether tendered in the Exchange Offer or
not) will be eligible to receive Contingent Shares or, under certain
circumstances, cash, if any, upon the exercise of such Unexchanged Search
Warrant or Harken Warrant. The transferee of an Unexchanged Search Warrant
subsequent to the Effective Time will not be eligible to receive Contingent
Shares, if any. See "The Merger Agreement--Terms of the Merger."
Pursuant to the Merger Agreement, Harken has agreed to use
commercially reasonable efforts to provide, until July 17, 1996, to the holders
of the Harken Warrants or the Unexchanged Search Warrants in connection with
the exercise of such warrants, a prospectus meeting the requirements of the
Securities Act, as it may be amended or supplemented from time to time.
EXPIRATION DATE; EXTENSIONS; AMENDMENTS
The term "Expiration Date" shall mean May 19, 1995, unless Harken, in
its sole discretion, extends the Exchange Offer, in which case the term
"Expiration Date" shall mean the latest date to which the Exchange Offer is
extended.
Harken expressly reserves the right, in its sole discretion (a) to
delay acceptance of any Search Warrants, to extend the Exchange Offer or to
terminate the Exchange Offer and to refuse to accept Search Warrants not
previously accepted, if any of the conditions set forth herein under
"--Termination" shall have occurred and shall not have been waived by Harken
(if permitted to be waived by Harken), by giving oral or written notice of such
delay, extension or termination to the Warrant Exchange Agent, and (b) to amend
the terms of the Exchange Offer in any manner. Any such delay in acceptance,
extension, termination or amendment will be followed as promptly as practicable
by oral or written notice thereof by Harken to the registered holders of the
Search Warrants. If the Exchange Offer is amended in a manner determined by
Harken to constitute a material change, Harken will promptly disclose such
amendment in a manner reasonably calculated to inform the holders of Search
Warrants of such amendment.
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Without limiting the manner in which Harken may choose to make public
announcements of any delay in acceptance, extension, termination or amendment
of the Exchange Offer, Harken shall have no obligation to publish, advise, or
otherwise communicate any such public announcement, other than by making a
timely news release.
PROCEDURES FOR TENDERING
To tender in the Exchange Offer, a holder of Search Warrants must
complete, sign and date the Letter of Transmittal or a facsimile thereof, and
mail or otherwise deliver such Letter of Transmittal or such facsimile,
together with the original Search Warrants and any other required documents, to
the Warrant Exchange Agent, prior to 5:00 p.m. Dallas, Texas time, on the
Expiration Date. A Search Warrant may not be partially tendered. If a Search
Warrant is tendered, all the shares exercisable pursuant to the warrant shall
be deemed to have been tendered. In the event the holder of a Search Warrant
has lost the certificate evidencing such warrant, a detailed written
explanation should be provided to the Warrant Exchange Agent.
The tender by a holder of Search Warrants will constitute an agreement
between such holder and Harken in accordance with the terms and subject to the
conditions set forth herein and in the Letter of Transmittal.
The method of delivery of Search Warrants and the Letter of
Transmittal and all other required documents to the Warrant Exchange Agent is
at the election and risk of the holders of Search Warrants. Instead of
delivery by mail, it is recommended that holders of Search Warrants use an
overnight or hand delivery service. In all cases, sufficient time should be
allowed to assure delivery to the Warrant Exchange Agent prior to the
Expiration Date.
If the Letter of Transmittal is signed by a person other than the
registered holder of Search Warrants listed therein, such Search Warrants must
be endorsed or accompanied by appropriate bond or powers of attorney which
authorize such person to tender the Search Warrant on behalf of the registered
holder, in either case signed as the name of the registered holder or holders
appears on the Search Warrants.
If the Letter of Transmittal or any Search Warrants or bond powers are
signed or endorsed by trustees, executors, administrators, guardians,
attorneys-in-fact, officers of corporations or others acting in a fiduciary or
representative capacity, such persons should so indicate when signing, and
unless waived by Harken, evidence satisfactory to Harken of their authority to
so act must be submitted with this Letter of Transmittal.
All questions as to the validity, form, eligibility (including time of
receipt), acceptance and withdrawal of the tendered Search Warrants will be
determined by Harken in its sole discretion, which determination will be final
and binding. Harken reserves the absolute right to reject any and all Search
Warrants not properly tendered or any Search Warrants acceptance of which
would, in the opinion of counsel for Harken, be unlawful. Harken also reserves
the absolute right to waive any irregularities or conditions of tender as to
particular Search Warrants. Harken's interpretation of the terms and
conditions of the Exchange Offer (including the instructions in the Letter of
Transmittal) will be final and binding on all parties. Unless waived, any
defects or irregularities in connection with tenders of Search Warrants must be
cured within such time as Harken shall determine. Although Harken intends to
notify holders of Search Warrants of defects or irregularities with respect to
tenders of Search Warrants, neither Harken or any other person shall be under
any duty to give notification of defects or irregularities with respect to
tenders of Search Warrants nor shall any of them incur any liability for
failure to give such notification. Tenders of Search Warrants will not be
deemed to have been made until such irregularities have been cured or waived.
Any Search Warrants received by the Warrant Exchange Agent that Harken
determines are not properly tendered or the tender of which is otherwise
rejected by Harken and as to which the defects or irregularities have not been
cured or waived by Harken will be returned by the Warrant Exchange Agent to the
tendering holder of Search Warrants unless otherwise provided in the Letter of
Transmittal, as soon as practicable following the Expiration Date.
WITHDRAWAL OF TENDERS
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Except as otherwise provided herein, tenders of Search Warrants may be
withdrawn at any time prior to 5:00 p.m., Dallas, Texas time, on the Expiration
Date.
To withdraw a tender of Search Warrants in the Exchange Offer, a
written or facsimile transmission notice of withdrawal must be received by the
Warrant Exchange Agent at its address set forth herein prior to 5:00 p.m.,
Dallas, Texas time, on the Expiration Date. Any such notice of withdrawal must
(a) specify the name of the person having deposited the Search Warrants to be
withdrawn (the "Depositor"), (b) identify the Search Warrants to be withdrawn
(including the exercise price and the number of shares of Search Common Stock
such warrant is exercisable for, and (c) be signed by the Depositor in the same
manner as the original signature on the Letter of Transmittal by which such
Search Warrants were tendered. All questions as to the validity, form and
eligibility (including time of receipt) of such withdrawal notices will be
determined by Harken, whose determination shall be final and binding on all
parties. Any Search Warrants so withdrawn will be deemed not to have been
validly tendered for purposes of the Exchange Offer and no Harken Warrants will
be issued with respect thereto unless the Search Warrants so withdrawn are
validly retendered. Any Search Warrants that have been tendered but are not
accepted for exchange will be returned to the holder thereof without cost to
such holder as soon as practicable after withdrawal, rejection of tender or
termination of the Exchange Offer. Properly withdrawn Search Warrants may be
retendered by following one of the procedures described above under
"--Procedures for Tendering" at any time prior to the Expiration Date.
TERMINATION
Notwithstanding any other term of the Exchange Offer, Harken will not
be required to accept for exchange, or issue Harken Warrants for, any Search
Warrants, and may terminate the Exchange Offer if the Merger Agreement has been
terminated. If Harken terminates the Exchange Offer, Harken will return any
Search Warrants that have been tendered to the holders thereof.
WARRANT EXCHANGE AGENT
Harken will act as the Warrant Exchange Agent for the Exchange Offer.
In such capacity, Harken has no fiduciary duties to the holders of the Search
Warrants. Requests for assistance and requests for additional copies of this
Statement or of the Letter of Transmittal should be directed to the Warrant
Exchange Agent addressed as follows:
By mail: Harken Energy Corporation
Attn: Larry E. Cummings
P.O. Drawer 612007
Dallas, Texas 75261
By courier: Harken Energy Corporation
Attn: Larry E. Cummings
5605 N. MacArthur Boulevard
Suite 400
Irving, Texas 75038
By facsimile transmission: (214) 753-6963
Confirm by telephone: (214) 753-6900
Documents sent by facsimile should be followed with the originals
sent by mail or courier.
ACCEPTANCE OF SEARCH WARRANTS AND DELIVERY OF HARKEN WARRANTS
Subject to certain conditions set forth in "--Termination" above,
Harken will accept for exchange any and all Search Warrants that are properly
tendered in the Exchange Offer prior to the Expiration Date at the Effective
Time. The acceptance of any Search Warrants is conditioned on the consummation
of the Merger. The Harken Warrants issued pursuant to the Exchange Offer will
be delivered promptly following the Effective Time.
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SOLICITATION OF TENDERS; FEES AND EXPENSES
The principal solicitation pursuant to the Exchange Offer is being
made by mail. Additional solicitations may be made by officers and regular
employees of Harken and its affiliates in person, by telegraph, telephone or
telecopier.
Harken has not retained any dealer-manager in connection with the
Exchange Offer and will not make any payments to brokers, dealers or other
persons soliciting acceptances of the Exchange Offer. The expenses to be
incurred in connection with the Exchange Offer will be paid by Harken,
provided, however, that the expenses incurred in connection with the
preparation, printing and mailing of this Statement shall be shared equally by
Harken and Search. Harken may also pay brokerage houses and other custodians,
nominees and fiduciaries the reasonable out-of-pocket expenses incurred by them
in forwarding copies of this Statement, Letters of Transmittal and related
documents to the beneficial owners of the Search Warrants and in handling or
forwarding tenders for exchange.
OTHER
Participation in the Exchange Offer is voluntary. Holders of the
Unexchanged Search Warrants will continue to hold such certificates and will be
entitled to all the rights, and subject to the limitations applicable thereto,
under such warrants. Holders of the Search Warrants are urged to consult their
financial and tax advisors in making their own decisions on what actions to
take.
As a result of the making of the Exchange Offer, and upon acceptance
for exchange of all validly tendered Search Warrants pursuant to the terms of
this Exchange Offer, Harken will have fulfilled a covenant contained in the
Merger Agreement.
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CERTAIN FEDERAL INCOME TAX CONSEQUENCES
The following is a summary of the material federal income tax
consequences of the Merger and the Exchange Offer to the Stockholders and the
holders of the Search Warrants. The summary may not apply to a person who
acquired his Search securities pursuant to the exercise of employee stock
options or rights or otherwise as compensation. The summary is provided for
information purposes only and relates only to Search securities held as a
capital asset within the meaning of Section 1221 of the Internal Revenue Code
of 1986, as amended (the "Code"), by persons who are citizens or residents of
the United States. The summary does not discuss the tax consequences to the
Noteholders and the Royalty Holders which are affiliates of Search and are
seeking their own independent tax advice. The summary also does not discuss
tax consequences to categories of holders that are subject to special rules,
such as foreign persons, tax exempt organizations, insurance companies,
financial institutions and dealers in stock and securities. No rulings will be
sought from the Internal Revenue Service with respect to the federal income tax
consequences of the Merger or the Exchange Offer and the position set forth
below is not binding on the Internal Revenue Service. The holders of all
Search securities are urged to consult their own tax advisors as to specific
tax consequences to them of the Merger and/or the Exchange Offer.
Hein + Associates LLP, certified public accountants of Search, has
given its opinion that the Merger will constitute a reorganization within the
meaning of Sections 368(a)(1)(A) and 368 (A)(2)(D) of the Code and Harken,
Merger Sub and Search will each be a "party to a reorganization" within the
meaning of Section 368(b) of the Code, provided that the Merger, as proposed in
the Merger Agreement, qualifies as a statutory merger under the laws of the
State of Delaware. The tax opinion is based upon certain assumptions and is
subject to certain qualifications and limitations set forth therein. The tax
opinion was filed as an exhibit to the Registration Statement and a copy may be
obtained as set forth under "Available Information." In addition, a copy of
the tax opinion will be provided to interested Stockholders upon request to
Joseph F. Langston, Jr. at the address indicated under "Incorporation of
Certain Documents by Reference."
The Merger. The tax consequences of the Merger are as follows:
(a) No gain or loss will be recognized by the
Stockholders of Search upon the exchange of their shares of Search
Common Stock and Search Preferred Stock for shares of Harken Common
Stock.
(b) Pursuant to Section 358 of the Code, the tax basis of
the shares of Harken Common Stock received by a Stockholder of Search
will be the same as the basis of the Search Common Stock and/or Search
Preferred Stock surrendered by that Stockholder in the Merger.
(c) Pursuant to Section 1223 of the Code, the holding
period of the shares of Harken Common Stock received by a Stockholder
of Search will include the period during which such Stockholder held
the Search Common Stock and/or Search Preferred Stock exchanged
therefor, to the extent that the Search Common Stock and/or Search
Preferred Stock was held by them as a capital asset on the date of the
consummation of the Merger.
(d) As of December 31, 1994, Search had a net operating
loss ("NOL") carryforward available. Section 382 of the Code limits
the NOL carryover of a loss company following an ownership change.
After an ownership change, the amount of income that a corporation may
offset each year by NOL's that occurred before the change is generally
limited to an amount determined by multiplying the value of the equity
of the corporation immediately prior to this change by the federal
long-term tax exempt rate in effect on the date of the change. Any
unused limitation may be carried forward and added to the next year's
limitation. To the extent Search also has built-in losses as defined
in Section 382(h) of the Code as of the date of the reorganization,
Section 382 limits the utilization of such losses after the ownership
change. The Merger is an ownership change requiring application of
the above described NOL limitation.
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(e) Following the Merger, Merger Sub will be entitled to
claim percentage depletion with respect to production from those of
its oil and gas properties with respect to which Search was entitled
to claim percentage depletion before the Merger.
(f) The Stockholders of Search must file pursuant to
Section 1.368-3(b) of the Regulations promulgated under the Code with
his or her income tax return for the year in which the Merger is
consummated, a statement which provides details relating to the
property transferred, securities received and liabilities, if any,
assumed in the exchange.
(g) Any cash received from Search by a Stockholder of
Search, prior to the Merger, in payment of appraisal shares will be
taxable to the Stockholder under the dividend or redemption rules of
Section 302 of the Code.
(h) A portion of Harken Common Stock received
subsequently pursuant to Contingent Shares will constitute imputed
interest, or original issue discount income and thus be subject to
inclusion in income upon receipt by the holder of Contingent Shares.
Contingent Shares. To the extent the Contingent Shares are received
in exchange for shares of Search Common Stock or Search Preferred Stock, the
issuance should not generate taxable income to the Stockholders. To the extent
the Contingent Shares are issued in exchange for other interests, the
transaction will generate taxable income measured by the difference between the
market value of the Contingent Shares received and the basis of the property
relinquished. Under certain circumstances, the Rights Holders may receive cash
instead of Contingent Shares. See "The Merger Agreement--Terms of the Merger."
To the extent cash is received by the Rights Holders, the receipt of such cash
will constitute a taxable exchange. The issuance of the Contingent Shares
should not violate the continuity of interest principle of the Merger.
The Exchange Offer. If the holders of the Search Warrants exchange
their warrants for Harken Warrants in the Exchange Offer, then the holders will
recognize gain or loss on the exchange pursuant to Section 1001 of the Code and
Regulation 1.354-1(e) promulgated under the Code. If the Search Warrants are
not exchanged, the Unexchanged Search Warrants will be assumed by Harken and
exercisable pursuant to their terms. See "The Warrant Exchange Offer." No
gain or loss should be recognized by the holders of Unexchanged Search Warrants
as a result of the Merger.
OFFEREES SHOULD CONSULT THEIR PERSONAL TAX ADVISORS AS TO THE PARTICULAR TAX
CONSEQUENCES TO HIM OR HER OF THE MERGER AND THE EXCHANGE OFFER, INCLUDING THE
APPLICABILITY AND EFFECT OF FOREIGN, FEDERAL, STATE, LOCAL AND OTHER TAX LAWS.
RESALE RESTRICTIONS
All shares of Harken Common Stock issued in connection with the Merger
and upon the exercise of Harken Warrants and the Unexchanged Search Warrants
will be freely transferable, except that shares of Harken Common Stock received
by persons who are deemed to be "affiliates" (as such term is defined under the
Securities Act) of Search prior to the Merger may be resold by them only in
transactions permitted by the resale provisions of Rule 145 promulgated under
the Securities Act (or Rule 144 in the case of such persons who become
affiliates of Harken) or as otherwise permitted under the Securities Act.
Persons who may be deemed to be affiliates of Search or Harken generally
include individuals or entities that control, are controlled by, or are under
common control with, such party and may include certain officers and directors
of such party as well as principal stockholders of such party.
It is a condition to the obligation of Harken to consummate the Merger
that each of the affiliates of Search execute a written agreement (the
"Affiliate Agreement") to the effect that such person will not offer to sell,
transfer or otherwise dispose of any of the shares of Harken Common Stock
issued to such person in or pursuant to the Merger or upon the exercise of
Harken Warrants or Unexchanged Search Warrants unless (a) such sale, transfer
or other disposition has been registered under the Securities Act, (b) such
sale, transfer
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or other disposition is made in conformity with Rule 145 under the Securities
Act or (c) in the opinion of counsel, such sale, transfer or other disposition
is exempt from registration under the Securities Act. See "The Merger
Agreement--Conditions."
The Harken Warrants and the right to receive Contingent Shares or,
under certain circumstances, cash, are not transferable other than by laws of
descent and distribution.
UNAUDITED PRO FORMA COMBINED OIL AND GAS RESERVE DATA
The following unaudited pro forma combined oil and gas reserve data
gives effect to the Search merger as if it has been consummated as of January
1, 1994. The information is presented with regard to Harken and Search's
proved oil and gas reserves, all of which are located in the United States.
The reserve values reflected in the following reserve disclosure are based on
prices received as of year end.
Pro Forma 1994:
<TABLE>
<CAPTION>
HARKEN SEARCH COMBINED
---------- -------- ------------
(IN THOUSANDS)
<S> <C> <C> <C>
Crude Oil and Condensate (Barrels):
Proved reserve - December 31, 1993 . . . . . . . . . . 1,035 159 1,194
Extensions and discoveries . . . . . . . . . . 0 18 18
Revisions of previous estimates . . . . . . . 186 2 188
Production . . . . . . . . . . . . . . . . . . (158) (10) (168)
Sales of reserves-in-place . . . . . . . . . . 0 (150) (150)
Purchases of reserves-in-place . . . . . . . . 458 0 458
----------------------------------------------------------
Proved reserves - December 31, 1994 . . . . . . . . . . 1,521 19 1,540
==========================================================
Proved developed reserves -
December 31, 1993 . . . . . . . . . . . . . . 624 159 783
==========================================================
December 31, 1994 . . . . . . . . . . . . . . 915 19 934
==========================================================
Natural Gas (Mcf):
Proved reserves - December 31, 1993 . . . . . . . . . . 4,970 2,068 7,038
Revisionssofnpreviouseestimates. . . . . . . . 476 (739) (263)
Production . . . . . . . . . . . . . . . . . . (426) (238) (664)
Sales of reserves-in-place . . . . . . . . . . 0 (753) (753)
Purchases of reserves-in-place . . . . . . . . 2,128 0 2,128
----------------------------------------------------------
Proved reserves - December 31, 1994 . . . . . . . . . . 7,148 1,298 8,446
==========================================================
Proved developed reserves -
December 31, 1993 . . . . . . . . . . . . . . 1,624 2,068 3,692
==========================================================
December 31, 1994 . . . . . . . . . . . . . . 2,207 1,298 3,505
==========================================================
</TABLE>
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<PAGE> 57
Standardized Measure of Discounted Future Net Cash Flows Relating to
Proved Oil and Gas Reserves As of December 31, 1994:
<TABLE>
<CAPTION>
HARKEN SEARCH COMBINED
---------- -------- ------------
(IN THOUSANDS)
<S> <C> <C> <C>
Future cash inflows . . . . . . . . . . . . . . . . . . $37,612 $3,039 $40,651
Production and development costs . . . . . . . (17,434) (625) (18,059)
----------------------------------------------------------
Future net inflows before income tax . . . . . . . . . 20,170 2,410 22,590
Future income taxes . . . . . . . . . . . . . . . . . . 0 0 0
----------------------------------------------------------
Future net cash flows . . . . . . . . . . . . . . . . . 20,178 2,414 22,592
10% discount factor . . . . . . . . . . . . . . . . . . (8,466) (901) (9,367)
----------------------------------------------------------
Standardized measure of discounted future net cash flow $11,712 $1,513 $13,225
==========================================================
</TABLE>
Changes in Standardized Measure of Discounted Future Net Cash Flows
Relating to Proved Oil and Gas Reserves For the Year Ended December 31, 1994:
<TABLE>
<CAPTION>
HARKEN SEARCH COMBINED
---------- -------- ------------
(IN THOUSANDS)
<S> <C> <C> <C>
Standardized measure - December 31, 1993 . . . . . . . $8,230 $3,126 $11,356
Increase (decrease):
Sales, net of production costs . . . . . . . . (2,398) (221) (2,619)
Net changes in prices, net of production costs 364 (411) (47)
Change in future development costs . . . . . . (208) 0 (208)
Revisions of quantity estimates . . . . . . . 1,450 (353) 1,097
Accretion of discount . . . . . . . . . . . . 823 (313) 510
Changes in production rates, timing and other. (150) 0 (561)
Extensions and discoveries, net of future
costs . . . . . . . . . . . . . . . . . . . 0 1,091 1,091
Net change in income taxes . . . . . . . . . . 0 129 129
Sales of reserves-in-place . . . . . . . . . . 0 (1,535) (1,535)
Purchases of reserves-in-place . . . . . . . . 3,601 0 3,601
----------------------------------------------------------
Standardized measure - December 31, 1994 . . . . . . . $11,712 $1,513 $13,225
==========================================================
</TABLE>
BUSINESS OF SEARCH
GENERAL
Search is engaged in the development of oil and gas prospects in Texas
and Louisiana for the purpose of drilling those prospects in joint ventures
with other independent and major oil companies. Search has carried out a
majority of this activity in development joint ventures with four companies:
Yuma Petroleum, Pecos Petroleum, Tierra Minerals, L.L.C., and Placid Oil
Company. All of Search's activities have been in a wholly-owned subsidiary,
McCulloch Energy, Inc., a Texas corporation ("McCulloch").
Search was formed December 1, 1989 in the State of Delaware from the
consolidation of thirty-three oil and gas partnerships and Plano Petroleum
Corporation, a publicly-held oil and gas company. Search's corporate office is
located at 5430 LBJ Freeway, Suite 1500, Dallas, Texas, 75240 and its telephone
number is (214) 991-4100.
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<PAGE> 58
Information pertaining to the principal holders of voting securities
and the management of Search is contained in Search's Annual Report in Items 10
through 13 which is incorporated herein by reference and a copy of which is
attached hereto as Appendix H.
RECENT DEVELOPMENTS
On December 3, 1994, Search tendered for the partnership interests,
not already owned by Search or its subsidiaries, of three limited partnerships
(the "Search Partnerships") in which its wholly-owned subsidiary, McCulloch,
was the managing general partner: McCulloch Energy Guaranty Distribution 92-A
L.P.; McCulloch Energy Guaranty Distribution 92-B L.P.; and McCulloch
Collateralized Energy Venture 93-A, L.P. Pursuant to the tender offer, Search
offered to exchange partnership interests held by investors/partners for ten
percent (10%) interest bearing notes issued by McCulloch payable over four
years in equal semi-annual installments in arrears commencing June 3, 1995.
All partners of the Search Partnerships, both general and limited, participated
in the tender offer. The notes issued in the tender offer are secured by the
properties of the Search Partnerships, as well as guaranteed by Search. It is
anticipated that the Search Partnerships will be liquidated prior to the
Special Meeting. The tender offer did not affect the revenues of Search in 1994.
BUSINESS OF HARKEN
GENERAL
Harken is engaged in oil and gas exploration, development and
production operations both domestically and internationally through its various
wholly-owned subsidiaries and joint venture investments. Harken's domestic
operations include the oil and gas exploration and production operations in the
Aneth Field and Blanding Sub-Basin portions of the Paradox Basin in Utah,
Arizona and New Mexico and in the Western Paradox Basin in Utah. Harken's
international operations include three exclusive Colombian Association
Contracts between Harken's wholly-owned subsidiary, Harken de Colombia, Ltd.,
and Empresa Colombiana de Petroleos 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. See
Appendix G.
Harken was incorporated in 1973 in the State of California and
reincorporated in 1979 in the State of Delaware. Harken's principal offices
are located at 5605 N. MacArthur Boulevard, Suite 400, Irving, Texas 75038 and
its telephone number is (214) 753-6900.
Information pertaining to the principal holders of voting securities
and the management of Harken is contained in Harken's Proxy Statement which is
incorporated herein by reference and a copy of which is attached hereto as
Appendix G.
OPERATIONS, LIQUIDITY AND CAPITAL RESOURCES OF HARKEN AFTER THE MERGER
The Merger is not expected to have a material impact on the results of
operations, liquidity, or capital resources of Harken. The Merger is expected
to enhance earnings and cash flow to a small degree, although Harken could
benefit from the possible sale of some or all of Search's Undeveloped
Properties. Harken anticipates that the Merger will result in operating
efficiencies because the office facilities and support functions of Search will
be eliminated and those functions absorbed by Harken's existing office and
administrative personnel. However, while the Search Board determined that the
operating efficiencies resulting from the Merger would be material to Search
as a separate entity, the efficiencies will not be material to Harken as a
Combined entity after the Merger. See Appendix G.
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<PAGE> 59
BUSINESS OF MERGER SUB
Merger Sub is a corporation recently organized by Harken for the
purposes of effecting the Merger. It has no material assets and has not
engaged in any activities except in connection with the Merger. Merger Sub's
principal executive offices are located at 6505 N. MacArthur Boulevard, Suite
400, Irving, Texas 75038 and the telephone number at such offices is (214)
753-6900.
DESCRIPTION OF HARKEN SECURITIES
COMMON STOCK
Harken's Certificate of Incorporation, as amended ("Certificate of
Incorporation") authorizes the issuance of 100,000,000 shares of Harken Common
Stock. As of December 31, 1994, there were 60,442,853 shares issued and held
of record by approximately 3,545 stockholders. As of such date, there were
5,983,655 shares of Harken Common Stock held in the treasury.
The shares of Harken Common Stock are equal in all respects. Each
issued and outstanding share of Harken Common Stock entitles the holder thereof
to one vote on all matters submitted to a vote of stockholders. The
Certificate of Incorporation permits cumulative voting of shares for any
election of directors, however, it does not permit preemptive rights to
stockholders to acquire additional shares. The Certificate of Incorporation
makes no provisions with respect to subscription or conversion rights,
redemption privileges, or sinking funds with respect to shares of Harken Common
Stock. The Harken Common Stock presently issued and outstanding is fully paid
and non-assessable. The Harken Common Stock to be issued in the Merger and
upon the exercise of the Harken Warrants or the Unexchanged Search Warrants
will, when issued, be fully paid and non-assessable.
The number of directors constituting the full Board of Directors of
Harken has been established as eight, in accordance with Harken's Bylaws. The
Certificate of Incorporation provides that the number of directors be divided
into Classes A, B and C, with staggering terms of three years each. The Class
A, B and C terms expire in 1997, 1995 and 1996, respectively. The Class A, B
and C directorships consist of three, three, and two positions respectively.
As noted above, the holders of Harken Common Stock are entitled to cumulate
their votes in the election of directors by voting the total number of shares
of Harken Common Stock held by them multiplied by the number of directors to be
elected. Because Harken's Board of Directors is divided into classes, Harken's
stockholders do not have the ability to cumulate their vote with respect to the
entire number of board members at each annual meeting, but only with respect to
the number of nominees for a certain class. Further, the classification of the
Board of Directors could create impediments or otherwise discourage persons
from attempting to gain control of Harken because the director terms do not all
expire at the same time, thereby making it difficult to replace directors at
any one annual meeting. Further, as a result of stockholders having the right
to cumulate their votes in the election of directors, minority stockholders
might be able to elect at least one director in an election for directors for a
particular class, which might impede or otherwise discourage persons in
attempting to gain control of Harken.
Upon any liquidation, dissolution or winding up of the affairs of
Harken, holders of Harken Common Stock are entitled to receive pro rata all of
the assets of Harken available for distribution to stockholders, after payment
of any liquidation preference on any preferred stock outstanding at the time.
Subject to the rights of holders of Harken Preferred Stock, dividends on the
Harken Common Stock may be paid if, as and when declared by the Board of
Directors out of funds legally available therefor. Harken does not anticipate
declaring or paying any cash dividend on the Harken Common Stock in the
foreseeable future.
The Transfer Agent and Registrar for the Harken Common Stock is
Continental Stock Transfer and Trust Company and the address is Two Broadway,
New York, New York 10004. The Harken Common Stock is listed on the AMEX.
WARRANTS
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<PAGE> 60
The non-transferable Harken Warrants will be evidenced and governed by
a Warrant Agreement (the "Warrant Agreement"), a form of which is attached
hereto as Appendix E. The following statements are subject to the detailed
provisions of the Warrant Agreement.
Each Harken Warrant entitles the holder to purchase that number of
shares of Harken Common Stock as set forth on such warrant at a price of $1.82
per share, subject to adjustment, from the date of issuance until 3:00 p.m.,
Dallas, Texas time on June 30, 1996. The Harken Warrants may be exercised upon
surrender of the Warrant Agreement therefor on or prior to the expiration date
at the offices of Harken with the "Form of Subscription" attached to the
Warrant Agreement filled out and executed as indicated, accompanied by payment
of the full exercise price by certified check for the number of whole shares of
Harken Common Stock being exercised. In the case of the exercise of only a
portion of a Harken Warrant prior to the expiration date of the Harken Warrant,
Harken will deliver to the holder a new warrant of like tenor in the name of
the holder evidencing the right to purchase the number of shares as to which
such Harken Warrant has not been exercised.
The Harken Warrants contain provisions that protect the holders
thereof against dilution by adjustment of the exercise price and shares
issuable upon exercise in certain events, such as stock dividends, stock
splits, mergers, sales of all or substantially all of Harken's assets and other
unusual events.
The ownership of a Harken Warrant does not entitle the holder thereof
to any of the rights of holders of shares of Harken Common Stock.
PREFERRED STOCK
Harken's Certificate of Incorporation authorizes the Board of
Directors, without first obtaining the approval of the holders of Harken Common
Stock, to issue up to 10,000,000 shares of preferred stock, par value $1.00 per
share ("Harken Preferred Stock"). The Harken Preferred Stock may be issued in
one or more series, and Harken's Board of Directors is authorized to establish
the terms and conditions of such series including, but not limited to, (i) the
designation and number of shares constituting each series, (ii) the dividend
rate payable, if any, and whether such dividends are cumulative or
non-cumulative, (iii) voting rights, if any, (iv) redemption rights, if any,
(v) conversion or preference rights, if any, and (vi) any other rights and
qualifications, preferences, and limitations or restrictions on the shares of
such series.
Series A Preferred. In March 1985, Harken adopted a resolution
authorizing the issuance of up to 50,000 shares of Series A Cumulative
Convertible Preferred Stock ("Harken Series A Preferred") and thereafter filed
with the Secretary of State of Delaware a Certificate of the Designation,
Preferences, Rights and Limitations with respect thereto. As of September 30,
1992, no shares of Harken Series A Preferred were issued and outstanding nor
were there any outstanding securities of Harken convertible into shares of
Harken Series A Preferred.
Series B Preferred. In July 1987, Harken adopted a resolution
authorizing Harken to issue up to 45,000 shares of Series B Convertible
Preferred Stock ("Harken Series B Preferred") and thereafter filed with the
Secretary of State of Delaware a Certificate of the Designation, Preferences
and Rights with respect thereto. In August 1987, 35,000 shares of Harken
Series B Preferred and one million warrants to purchase either one share of
Harken Common Stock or up to 10,000 shares of Harken Series B Preferred were
privately placed with a major European investment bank. Each share of Harken
Series B Preferred was non-interest bearing and non-voting and, at the election
of the holder, convertible into 100 shares of Harken Common Stock. At December
31, 1987, all outstanding shares of Harken Series B Preferred had been
converted into Harken Common Stock. As of December 31, 1991, no shares of
Harken Series B Preferred were issued and outstanding, and no warrants were
outstanding.
Series C Preferred. In August 1988, Harken adopted a resolution
authorizing Harken to issue up to 3,000,000 shares of Harken Series C Preferred
and filed with the Secretary of State of Delaware a Certificate of Designation,
Preferences and Rights ("Certificate of Designation") with respect thereto. As
of December 31, 1994, 186,760 shares of Harken Series C Preferred were issued
and outstanding. Harken is prohibited from issuing or reissuing any shares of
any Preferred Stock senior to Harken Series C Preferred unless the
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<PAGE> 61
holders of Harken Series C Preferred vote for and approve the issuance or
reissuance, except for issuances of Series B Preferred Stock pursuant to the
exercise of warrants. The shares of Harken Series C Preferred have no voting
privileges, except as provided in the Certificate of Designation. In the event
of any liquidation or the dissolution or winding up of Harken, whether
voluntary or involuntary, the holders of shares of Harken Series C Preferred
are entitled to receive out of assets of Harken available for distribution to
stockholders, before any distribution of assets is made to holders of Harken
Common Stock or any other junior stock, liquidating distributions in the amount
of $10.00 per share, plus accumulated and unpaid dividends. After payment of
the full amount of the liquidating distribution to which they are entitled, the
holders of shares of Harken Series C Preferred will not be entitled to any
further participation in any distribution of assets by Harken.
Except as modified by the Pledge Agreement referred to below, the
holders of Harken Series C Preferred would be entitled to receive cash
dividends when, as and if declared by the Board of Directors out of funds of
Harken legally available therefor, at the annual rate of 12% per share or, at
the option of the holder, dividends in the Harken Common Stock at an annual
rate of 12% per share, with Harken Series C Preferred valued at $10.00 per
share and Harken Common Stock valued at $6.00 per share for such purposes,
excluding adjustments, in each case payable annually on the first day of
January of each year, commencing on January 1, 1989. Dividends are cumulative
for all periods as to which the full dividend shall not have been paid;
however, Harken, at its option, may elect to accrue the stock dividends. If
Harken has funds legally available to pay dividends and the Board of Directors
elects not to declare and pay dividends but elects to accrue such dividends,
the dividends will thereafter accrue interest at the rate of 12% per year.
On the thirtieth day of June of each year beginning on June 30, 1998
(each a "Mandatory Redemption Date"), when all shares of Harken Series C
Preferred are required to have been redeemed, Harken will, to the extent of its
funds legally available, redeem 16.67% of the original principal amount of
Harken Series C Preferred outstanding (except that such percentage of the
original principal amount to be redeemed in 1997 and 1998 shall be 16.66%), in
each case at a price per share equal to $10.00 plus accrued and unpaid
dividends to the date of redemption. If Harken does not have funds legally
available to redeem the number of shares of Harken Series C Preferred required
to be redeemed on any Mandatory Redemption Date, as soon as funds become
legally available thereafter, Harken will be required to redeem, either in full
or in part, such number of shares which were to have been redeemed on the
Mandatory Redemption Date. If such shares of Harken Series C Preferred are not
subsequently redeemed once funds legally become available, Harken will
thereafter pay interest at the rate of 12% per year on such unredeemed
principal amount until such shares are redeemed.
All of the remaining outstanding shares of Harken Series C Preferred
are subject to a Pledge Agreement in favor of Harken under which Pledge
Agreement all dividends accruing to the Series C Preferred are waived, any
required redemption, and related interest, of the Series C Preferred is waived
and all voting rights of the Series C Preferred are held by Harken pursuant to
an irrevocable proxy coupled with an interest.
DELAWARE LAW RELATING TO "BUSINESS COMBINATIONS"
Harken is subject to the "business combination" statute of the
Delaware Law. In general, Section 203 of the Delaware Law prohibits a publicly
held Delaware corporation from engaging in a "business combination" with an
"interested stockholder" for a period of three years after the date of the
transaction in which the person became an "interested stockholder," unless (a)
prior to such date the board of directors of the corporation approved either
the "business combination" or the transaction which resulted in the stockholder
becoming an "interested stockholder," (b) upon consummation of the transaction
which resulted in the stockholder becoming an "interested stockholder," the
"interested stockholder" owned at least 85% of the voting stock of the
corporation outstanding at the time the transaction commenced, excluding for
purposes of determining the number of shares outstanding those shares owned (i)
by persons who are directors and also officers and (ii) employee stock plans in
which employee participants do not have the right to determine confidentially
whether shares held subject to the plan will be tendered in a tender or
exchange offer, or (c) on or subsequent to such date the "business combination"
is approved by the board of directors and authorized at an annual or special
meeting of stockholders by the affirmative vote of at least 66% of the
outstanding voting stock which is not owned by the "interested stockholder." A
"business combination" includes mergers, stock or asset sales and other
transactions resulting in a financial benefit to the "interested stockholders."
An
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"interested stockholder" is a person who, together with affiliates and
associates, owns (or within three years, did own) 15% or more of the
corporation's voting stock.
COMPARISON OF STOCKHOLDER RIGHTS
As a result of the Merger, holders of Search Common Stock and Search
Preferred Stock will become stockholders of Harken and the rights of all such
former Search Stockholders will thereafter be governed by the Certificate of
Incorporation of Harken ("Harken Certificate"), the Bylaws of Harken ("Harken
Bylaws") and will continue to be governed by the Delaware General Corporation
Law ("Delaware Law"). The rights of Search Stockholders under the Certificate
of Incorporation of Search ("Search Certificate") and the Bylaws of Search
("Search Bylaws") differ in certain respects from the rights of Harken
stockholders. The following summary, which does not purport to be a complete
statement of the general differences among the rights of the stockholders of
Harken and Search, sets forth these differences. This summary is qualified in
its entirety by reference to the full text of each of the relevant documents.
For information as to how any such documents may be obtained, see "Available
Information."
AUTHORIZED CAPITAL
Harken. The authorized capital stock of Harken consists of
110,000,000 shares, 100,000,000 of which are shares of Harken Common Stock, par
value $0.01 per share, and 10,000,000 of which are shares of Harken Preferred
Stock, par value $1.00 per share. For a description of the Harken capital
stock, see "Description of Harken Securities."
Search. The authorized capital stock of Search consists of 25,000,000
shares, 20,000,000 of which are shares of Search Common Stock, par value $0.05
per share, and 5,000,000 of which are shares of Search Preferred Stock, $.001
par value per share.
DIRECTORS
Harken. Under the Harken By-Laws, the number of directors
constituting the full Board of Directors has been established as eight. In an
election of directors, each holder of stock entitled to vote is entitled to
cumulate his votes by voting the total number of shares of stock held
multiplied by the number of directors to be elected, as such holder my see fit.
Any holder who intends to cumulate his votes must give written notice of such
intention to the Secretary of Harken on or before the date preceding the
election at which such holder intends to cumulate his votes. All holders of
stock entitled to vote may cumulate their votes if any holder has given such
written notice. The Harken Certificate provides that any director or the
entire Board of Directors may be removed at any time, but only for cause, and
by the affirmative vote of holders of two-thirds of the voting power of all the
shares of stock entitled to vote in an election of directors.
Search. Under the Search Certificate and Search Bylaws, the number of
directors constituting the full Board of Directors shall be an odd number
between one and fifteen, as determined by resolution of the board of directors.
The number of directors constituting the full Board of Directors is currently
five. The Search Certificate provides that the number of directors be divided
into three classes with staggered terms of three years each. Pursuant to
Delaware Law, unless provided otherwise in a corporation's certificate of
incorporation, directors may only be removed for cause if a corporation has a
staggered board. In an election of directors, stockholders may not cumulate
their votes.
LIMITATION OF LIABILITIES OF DIRECTORS
Harken. Harken's Certificate of Incorporation provides that no
contract, act or transaction of Harken with any person or persons, firm, trust,
or association or with any other corporation, shall be affected or invalidated
because any director of Harken is a party to, or is interested in, such
contract, act, or transaction, or is any way connected with such person or
persons, firm, trust, or association, or is a director, officer, or shareholder
of, or otherwise interested in, any such other corporation, nor shall any duty
to pay damages to Harken be imposed upon such director solely by reason of such
fact, regardless of whether the vote, action,
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or presence of any such director may be or have been necessary to obligate
Harken on, or in connection with, such contract, act, or transaction provided
that such interest or connection (other than an interest as a non-controlling
stockholder of such corporation) be known or disclosed to the Board of
Directors of Harken. Harken's Certificate also provides that to the fullest
extent permitted by the Delaware Law, a director of Harken shall not be liable
to Harken or its stockholders for monetary damages for breach of fiduciary duty
as a director and that any repeal of such provision shall be prospective only.
Search. The Search Certificate provides that a director shall not be
personally liable to Search or its stockholders for monetary damages for breach
of fiduciary duty as a director; provide that such provision shall not
eliminate or limit the liability of a director (i) for any breach of his duty
of loyalty to Search, (ii) for acts or omissions not in good faith or which
involve intentional misconduct or a knowing violation of the law, (iii) under
Section 174 of the Delaware Law or (iv) for any transaction from which the
director derives an improper benefit.
VOTING RIGHTS
Harken. Stockholder action may be taken by the holders of the
majority of the shares having voting power; provided, that any proposal to
merger with any other corporation, any proposal to sell or exchange all or
substantially all of the assets of Harken, or any proposal to effect the
dissolution of Harken shall require the approval of the holders of two-thirds
of each outstanding class of capital stock of the corporation entitled to vote
at such meetings of stockholders.
Search. Stockholder action may be taken by the holders of the
majority of the shares having voting power.
STOCKHOLDER ACTION BY WRITTEN CONSENT; CALL OF SPECIAL MEETING
Harken. Under the Harken By-Laws, any action required to be taken at
a meeting of the stockholders of Harken may be taken without a meeting if a
consent in writing setting forth the action so taken shall be signed by all of
the stockholders entitled to vote with respect to the subject matter thereof
and then delivered to the secretary for inclusion in the minute book of Harken.
The Harken By-Laws provide that special meetings of stockholders may be called
by the Chairman of the Board, the President, or Secretary of Harken or at the
request in writing of a majority of the Board of Directors or upon written
request of the holders of at least one-tenth in amount of the entire capital of
stock issued and outstanding and having voting power.
Search. The Search Certificate provides that any action required to
be or which may be taken at a meeting of the stockholders of Search must be
taken at an annual or special meeting of the stockholders, and may not be taken
without a meeting, without prior notice or without a vote. The Search Bylaws
provided that a special meeting of the stockholders may be called by the
President of Search or by the Search Board. The Search Bylaws do not contain
any provision allowing the stockholders of Search to call a special meeting of
the stockholders.
INDEMNIFICATION OF DIRECTORS AND OFFICERS
Harken. The Harken Certificate provides that Harken shall indemnify
directors, officers and employees of Harken against all reasonable expenses and
any liabilities paid or incurred by them in connection with or resulting from
any threatened or actual claim, action, suit or proceeding (whether brought by
or in the right of Harken or otherwise), civil, criminal, administrative or
investigative, in which they may be involved, as a party or otherwise, by
reason of them being or having been a director, officer or employee of Harken
if (i) they have been wholly successful, on the merits or otherwise, with
respect to any such claim, suit or proceeding, or (ii) it is determined by a
"Referee" that they acted in good faith and in a manner reasonably believed to
be in the best interest of Harken, and, with respect to any criminal action or
proceeding, they reasonably believed that their conduct was lawful. The term
"Referee" as used therein means independent legal counsel (who may be regular
counsel of Harken), or other disinterested person or persons, selected to act
as such by the Board of Directors of Harken, whether or not a disinterested
quorum exists. The Harken Certificate provides that Harken may advance
litigation expenses upon receipt of an undertaking made by or
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on behalf of the recipient to repay such amount if it is ultimately determined
that he is not entitled to indemnification. Pursuant to various Advancement
Agreements between Harken and each director thereof, Harken, in accordance with
its Certificate of Incorporation and By-Laws, has agreed to advance certain
reasonable expenses incurred by such director(s) in defending a claim or claims
made against such director(s) for certain covered acts (as such acts are
described in the Advancement Agreement). Harken will have no obligation under
the Advancement Agreement to pay any expenses incurred by a director in
connection with a claim which a majority of disinterested directors determines
to be an excluded claim as described in the Advancement Agreement.
Search. The Search Bylaws require Search to indemnify any director,
officer, employee or agent of the corporation against expenses (including
attorneys' fees), judgements, fines and amounts paid in settlement actually and
reasonably incurred in connection with or resulting from any threatened,
pending or completed action, suit or proceeding, whether civil, criminal,
administrative or investigative by reason of the fact that such person was or
is a director, officer, employee or agent of Search if he acted in good faith
and in a manner he reasonably believed to be in or not opposed to the best
interests of Search, and with respect to any criminal action or proceeding, had
no reasonable cause to believe his conduct was unlawful. Search shall not be
required to indemnify any such person from any such action, suit or proceeding
by or in the right of Search as to which such person shall be adjudged liable
to Search unless the court in which such action is brought shall determine
indemnification of such expenses to be proper. The determination that any
director, officer, employee or agent of Search seeking indemnification shall be
made (i) by the Board of Directors by a majority vote of a quorum consisting of
directors who were not parties to such action, suit or proceeding, or (ii) if
such a quorum is not obtainable or if such quorum directs, by independent legal
counsel in a written opinion, or (iii) by the stockholders of Search. Expenses
incurred by an officer or director in defending a civil or criminal action,
suit or proceeding may be paid by Search in advance of the final disposition of
such action, suit or proceeding upon receipt of an undertaking by or on behalf
of such director or officer to repay such amount if it shall ultimately be
determined that he is not entitled to be indemnified by Search. See "The
Merger Agreement--Indemnification."
AMENDMENT OF BYLAWS
Harken. The Harken Certificate provides that the Harken Bylaws may be
adopted, amended, or repealed by the affirmative vote of a majority of the
total number of directors or by the affirmative vote of the holders of
two-thirds of the voting power of Harken's stock.
Search. The Search Certificate provides that the Search Board may
adopt, amend or repeal the Search Bylaws.
LEGAL MATTERS
The validity of the Harken Common Stock and Harken Warrants offered
hereby will be passed upon by Larry E. Cummings, General Counsel of Harken.
The federal income tax consequences of the Merger and the Exchange Offer to
holders of Search Common Stock, Search Preferred Stock and Search Warrants will
be passed upon by Hein + Associates LLP, Dallas, Texas.
EXPERTS
The consolidated financial statements and financial statement
schedules of Harken included in Harken's Annual Report on Form 10-K for the
year ended December 31, 1994, which are incorporated by reference in the
Registration Statement of which this Statement forms a part, have been audited
by Arthur Andersen LLP., independent public accountants, as indicated in their
report with respect thereto, and are incorporated by reference herein in
reliance upon the authority of said firm as experts in accounting and auditing
in giving said report.
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The consolidated financial statements and financial statement
schedules of Search for the year ended December 31, 1994, included in Search's
Annual Report on Form 10-K for the year ended December 31, 1994, included
herein and incorporated by reference in the Registration Statement of which
this Statement forms a part, have been audited by Hein + Associates LLP,
independent certified public accountants, as indicated in their report with
respect thereto, and are incorporated by reference herein in reliance upon the
authority of said firm as experts in accounting and auditing in giving said
report.
The consolidated balance sheet as of December 31, 1993, and the
related consolidated statements of operations, changes in stockholders' equity,
and cash flows of Search and its subsidiaries for the years ended December 31,
1993 and 1992, included in Search's Annual Report on Form 10-K for the year
ended December 31, 1994, included herein and incorporated by reference in the
Registration Statement of which this Statement forms a part, have been audited
by Deloitte & Touche LLP, independent certified public accountants, as stated
in their report appearing therein, and have been so included in reliance upon
the report of such firm given upon their authority as experts in accounting and
auditing.
It is expected that a representative of Hein + Associates LLP will be
present at the Special Meeting to respond to appropriate questions of
Stockholders.
The estimated net quantities of proved, developed and undeveloped oil
and gas reserves of McCulloch, a wholly-owned subsidiary of Search, which are
included in Search's Annual Report on Form 10-K for the year ended December 31,
1994, were prepared by Search based on the estimates as of December 31, 1994,
of the petroleum engineering firm of Gerald W. DuPont Enterprises, Inc. The
estimates of such reserves prepared by Gerald W. DuPont Enterprises, Inc. are
incorporated by reference in the Registration Statement of which this Statement
forms a part from the Search Annual Report in reliance upon reports of such
petroleum engineering firm on such reserves and upon the authority of such firm
as an expert in petroleum engineering.
STOCKHOLDER PROPOSALS
If the Merger is not consummated, Search anticipates holding an annual
meeting in August, 1995. Stockholder proposals intended to be presented at that
meeting must be received by Search, at the address set forth on the first page
of this Statement, not later than June 1, 1995 in order to be included in
Search's proxy material and form of proxy relating to such meeting. Stockholder
proposals must also be otherwise eligible for inclusion.
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INDEX TO FINANCIAL STATEMENTS
HARKEN ENERGY CORPORATION:
The audited financial statements of Harken for the three-year period
ended December 31, 1994 are set forth in the Harken Annual Report,
which is attached to this Statement as Appendix G.
SEARCH EXPLORATION, INC.:
The audited financial statements of Search for the three-year period
ended December 31, 1994 are set forth in the Search Annual Report,
which is attached to this Statement as Appendix H.
HARKEN ENERGY CORPORATION AND SEARCH EXPLORATION, INC.:
The unaudited pro forma combined condensed financial statements and
the notes thereto are set forth in the Harken Annual Report, which is
attached to this Statement as Appendix G.
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APPENDIX A
______________________________________________________________________________
AMENDED AND RESTATED
AGREEMENT AND PLAN OF MERGER
AMONG
HARKEN ENERGY CORPORATION
SEARCH ACQUISITION CORP.
AND
SEARCH EXPLORATION, INC.
______________________________________________________________________________
<PAGE> 68
AMENDED AND RESTATED AGREEMENT AND PLAN OF MERGER
AMENDED AND RESTATED AGREEMENT AND PLAN OF MERGER, dated as of March
27, 1995 (as amended, the "Agreement") among HARKEN ENERGY CORPORATION, a
Delaware corporation ("Harken"), SEARCH ACQUISITION CORP., a Delaware
corporation and a wholly-owned subsidiary of Harken ("Merger Sub"), and SEARCH
EXPLORATION, INC., a Delaware corporation ("Search").
WHEREAS, upon the terms and subject to the conditions of this
Agreement and in accordance with the General Corporation Law of the State of
Delaware ("Delaware Law"), Merger Sub will merge with and into Search;
WHEREAS, the Board of Directors of Search has (i) determined that the
Merger (as defined in Section 1.01 hereof) is fair to the holders of Search
Shares (as defined in Section 1.06 hereof) and in the best interests of such
stockholders and (ii) approved and adopted this Agreement and the transactions
contemplated hereby and recommended approval and adoption of this Agreement by
the stockholders of Search;
WHEREAS, the Board of Directors of Harken has determined that the
Merger is fair to and in the best interests of its stockholders; and
WHEREAS, Harken, Merger Sub, and Search entered into that certain
Agreement and Plan of Merger dated as of November 8, 1994 (the "Original
Agreement"), and wish to amend and restate the Original Agreement as set forth
herein;
NOW, THEREFORE, in consideration of the foregoing and the mutual
covenants and agreements herein contained, and intending to be legally bound
hereby, Harken, Merger Sub and Search hereby agree as follows:
ARTICLE I
THE MERGER
SECTION 1.01 The Merger. Upon the terms and subject to the conditions
set forth in this Agreement, and in accordance with Delaware Law, at the
Effective Time (as defined in Section 1.02 hereof) Search and Merger Sub shall
consummate a merger (the "Merger") in which Search shall be merged with and
into Merger Sub and the separate corporate existence of Search shall cease and
Merger Sub shall be the surviving corporation. The corporation surviving the
Merger is sometimes hereinafter referred to as the "Surviving Corporation."
SECTION 1.02 The Closing; Effective Time. Subject to the terms and
conditions of this Agreement, the closing of the Merger (the "Closing") shall
take place (a) at the offices of Harken located at 2505 N. Highway 360, Suite
800, Grand Prairie, Texas 75050, at 10:00 a.m., local time, on the first
business day immediately following the day on which the last to be fulfilled or
waived of the conditions set forth in Article VI shall be fulfilled or waived
in accordance herewith or (b) at such other time, date or place as Harken and
Search may agree. The date on which the Closing occurs is hereinafter referred
to as the "Closing Date."
The parties hereto shall cause a Certificate of Merger meeting the
requirements of Delaware Law to be properly executed and filed in accordance
with Delaware Law on the Closing Date. The Merger shall become effective at
the time of filing of the Certificate of Merger with the Secretary of State of
the State of Delaware in accordance with Delaware Law or at such later time
which the parties hereto shall have agreed upon and designated in such filing
as the effective time of the Merger (the "Effective Time").
SECTION 1.03 Effect of the Merger. At the Effective Time, the effect
of the Merger shall be as provided in the applicable provisions of Delaware
Law. Without limiting the generality of the foregoing, and subject thereto, at
the Effective Time, except as otherwise provided herein, all the property,
rights, privileges, powers and franchises of Search and Merger Sub shall vest
in the Surviving Corporation, and all debts, liabilities and duties of Search
and Merger Sub shall become the debts, liabilities and duties of the Surviving
Corporation.
SECTION 1.04 Certificate of Incorporation; By-Laws.
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(a) The Certificate of Incorporation of Merger Sub, as in effect
immediately prior to the Effective Time, shall be the Certificate of
Incorporation of the Surviving Corporation until thereafter amended as provided
by Delaware Law.
(b) The By-Laws of Merger Sub, as in effect immediately prior to
the Effective Time, shall be the By-Laws of the Surviving Corporation until
thereafter amended as provided by Delaware Law, the Certificate of
Incorporation of the Surviving Corporation, and such By-Laws.
SECTION 1.05 Directors and Officers. The directors of Merger Sub
serving immediately prior to the Effective Time shall be the directors of the
Surviving Corporation as of the Effective Time, and the officers of Merger Sub
serving immediately prior to the Effective Time shall be the officers of the
Surviving Corporation as of the Effective Time, in each case until their
respective successors are duly elected or appointed and qualified in accordance
with applicable law.
SECTION 1.06 Conversion of Stock. At the Effective Time:
(a) Each share of Common Stock, $.05 par value, of Search then
issued and outstanding (the "Search Common Stock") (other than Appraisal Shares
(as defined and to the extent provided in Section 1.11(b) hereof)) shall, by
virtue of the Merger and without any action on the part of the holder thereof,
be converted into and represent the right to receive and shall be exchangeable
for, as provided in Section 1.09 hereof, a share (or shares or a fraction
thereof) of the common stock, $.01 par value per share, of Harken (the "Harken
Common Stock") equal to the Exchange Ratio (as defined in Section 10.03
hereof). In addition, the holder of a share of Search Common Stock then issued
and outstanding (other than Appraisal Shares) shall be entitled to receive from
Harken, under certain conditions, shares of Harken Common Stock as provided in
Section 1.10 hereof.
(b) Each share of Preferred Stock, $.001 par value, of Search then
issued and outstanding (the "Search Preferred Stock") (other than Appraisal
Shares (to the extent provided in Section 1.11(b) hereof)) shall, by virtue of
the Merger and without any action on the part of the holder thereof, be
convertible into and represent the right to receive and shall be exchangeable
for, as provided in Section 1.09 hereof, a share (or shares or a fraction
thereof) of Harken Common Stock equal to the Preferred Exchange Ratio (as
defined in Section 10.03 hereof).
(c) Each share of Search Common Stock and/or Search Preferred
Stock (such Search Common Stock and Search Preferred Stock being hereinafter
collectively referred to as the "Search Shares") then held in the treasury of
Search, if any, shall, by virtue of the Merger, be cancelled without payment of
any consideration therefore and without any conversion thereof.
SECTION 1.07 Conversion of Notes. At the Effective Time, each of the
Concorde Note, EnCap Note, and Langston Note (each of which is described in
Section 5.07 hereof and hereinafter collectively referred to as the "Notes")
shall, pursuant to its terms, be converted into and represent the right to
receive and shall be exchangeable for the number of whole shares of Harken
Common Stock determined by dividing the principal amount of each Note by the
Strike Price (as defined in Section 10.03 hereof) as provided in Section 1.09
hereof. In addition, the holders of the Concorde Note and EnCap Note shall be
entitled to receive from Harken, under certain conditions, shares of Harken
Common Stock as provided in Section 1.10 hereof. Exhibit "J," attached hereto,
sets forth a schedule of the holders of such Notes, the amount of such Notes
and the number of shares of Harken Common Stock to be issued hereunder to each
holder of such Notes.
SECTION 1.08 Exchange of Eastern Shelf Overriding Royalty. At the
Effective Time, the Royalty Holders (as defined in Section 5.16 hereof), shall
have the right to receive, under certain conditions, shares of Harken Common
Stock as provided in Section 1.10 hereof pursuant to the terms of the Royalty
Assignment Agreement (as defined in Section 5.16 hereof).
SECTION 1.09 Exchange.
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(a) Pursuant to an agreement to be entered into on or before the
Effective Time among Harken, Search and an exchange agent (the "Exchange
Agent") to be chosen by Harken, the Exchange Agent will distribute the Harken
Common Stock issued pursuant to Sections 1.06 and 1.07 hereof. Except as
otherwise provided in this Agreement, upon surrender to the Exchange Agent of
the Letter of Transmittal (provided by the Exchange Agent to the holders of the
Search Shares and the Notes promptly after the Effective Time for such
purpose), duly completed and validly executed in accordance with the
instructions thereto accompanied by the certificates that, immediately prior to
the Effective Time shall have evidenced Search Shares and the Notes to be
exchanged pursuant to the Merger (the "Search Certificates") and such other
documents as may be requested, Harken shall cause to be distributed to the
person in whose name such Search Certificates shall have been registered
certificates registered in the name of such person representing the number of
whole shares of Harken Common Stock into which any shares previously
represented by the Search Certificates shall have been converted at the
Effective Time, and a letter from Harken to the holders of the Search Common
Stock, the Concorde Note and the EnCap Note, setting forth the right of such
holder's to receive, under certain conditions, additional shares of Harken
Common Stock pursuant to the terms of Section 1.10 hereof (the "Stock
Consideration"). No fractional shares of Harken Common Stock shall be issued
or delivered pursuant to this Section 1.09 and Section 1.08. Should any holder
of the Search Shares or the Notes be entitled to a fractional share interest in
Harken Common Stock pursuant to this Section 1.09 and Section 1.08, Harken
shall deliver to such holder that number of shares of Harken Common Stock to
which such holder is entitled rounded up to the nearest whole number. Until
surrendered as contemplated by the preceding sentence, each certificate that
immediately prior to the Effective Time shall have represented any Search
Shares or the Notes shall be deemed at and after the Effective Time to
represent only the right to receive upon such surrender the certificates
representing Harken Common Stock and, as applicable, the right to receive,
under certain conditions, additional shares of Harken Common Stock. Search
Certificates surrendered for exchange by any person constituting an "affiliate"
of Search for purposes of Rule 145(c) under the Securities Act of 1933, as
amended (the "Securities Act"), shall not be exchanged until Harken has
received a written agreement from such person as provided in Section 5.06
hereof.
(b) No holder of any unsurrendered certificates representing
Search Shares or the Notes shall be entitled to any rights as a stockholder of
Harken until his certificates shall be surrendered and exchanged for Harken
Common Stock as provided herein. No dividends or other distributions declared
after the Effective Time with respect to Harken Common Stock and payable to the
holders of record thereof after the Effective Time shall be paid to the holder
of any unsurrendered Search Certificates with respect to which the shares of
Harken Common Stock may be issued in the Merger until such Search Certificates
shall be surrendered and exchanged as provided herein. Subject to the effect
of applicable laws, following surrender of any Search Certificate, there shall
be paid to the holder of such certificate representing whole shares of Harken
Common Stock issued in exchange therefor, without interest, (i) at the time of
such surrender, the amount of dividends or other distributions with a record
date after the Effective Time theretofore payable with respect to such whole
shares of Harken Common Stock and not paid, less the amount of any withholding
taxes which may be required thereon, and (ii) at the appropriate payment date,
the amount of dividends or other distributions with a record date after the
Effective Time but prior to surrender and a payment date subsequent to
surrender payable with respect to such whole shares of Harken Common Stock,
less the amount of any withholding taxes which may be required thereon.
(c) If the Harken Common Stock is to be issued to a person other
than the person in whose name a Search Certificate is registered, it shall be a
condition to such payment or issuance that the Search Certificate so
surrendered shall be properly endorsed or shall be otherwise in proper form for
transfer and that the person requesting such payment or issuance shall have
paid any transfer and other taxes required by reason of such payment or
issuance in a name other than that of the registered holder of the Search
Certificate surrendered or shall have established to the satisfaction of Harken
or the Exchange Agent that such tax either has been paid or is not payable.
(d) All rights to receive the Stock Consideration into which
Search Shares and the Notes shall have been converted pursuant to this Article
I shall be deemed to have been paid or issued in full satisfaction of all
rights pertaining to such Search Shares and the Notes.
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(e) Neither the Exchange Agent, Harken nor any party hereto shall
be liable to a holder of Search Shares or the Notes for any amount properly
paid to a public official pursuant to any applicable property, escheat or
similar law.
(f) In the event any Search Certificates shall have been lost,
stolen or destroyed, upon the making of an affidavit of that fact by the person
claiming such Search Certificate to be lost, stolen or destroyed, Exchange
Agent will issue in exchange for such lost, stolen or destroyed Search
Certificate the Stock Consideration deliverable in respect thereof as
determined in accordance with this Article I. When authorizing such issue of
the Stock Consideration in exchange therefore the Exchange Agent shall, as a
condition precedent to the issuance thereof, require the owner of such lost,
stolen or destroyed Search Certificate to give Harken a bond in such sum as the
Exchange Agent reasonably determines to be appropriate as indemnity against any
claim that may be made against Harken or the Surviving Corporation with respect
to the Search Certificate alleged to have lost, stolen or destroyed.
(g) No interest shall be paid or accrued on any portion of the
Stock Consideration.
SECTION 1.10 Contingent Shares.
(a) Additional shares of Harken Common Stock (the "Contingent
Shares") shall be distributed by Harken to the parties described in Section
1.10(d) hereof (the "Rights Holders") to the extent the Valuation (as
hereinafter defined) of the group of undeveloped leases and properties
described on Exhibit "D" attached hereto (the "Undeveloped Properties") as of
June 30, 1996 (the "Valuation Date") exceeds the aggregate of the stipulated
values set forth on Exhibit "D" attached hereto (the "Stipulated Value").
(b) Harken will cause a reserve report (the "Report") covering the
Undeveloped Properties to be prepared by DuPont, Gaffney Cline, or such other
independent petroleum engineer. Such Report will be prepared based on an SEC
Case (as defined below) and will calculate a valuation (the "Valuation") of
these Undeveloped Properties as of the Valuation Date in accordance with this
Section 1.10(b) hereof. The Valuation shall be further adjusted based upon the
product of eighty percent (80%) multiplied by the present value of future net
cash flows before income taxes (the product of such amounts is hereinafter
referred to as the "Present Value") of Harken's or its affiliate's interest as
of the Valuation Date in the proved reserves of the Undeveloped Properties, as
established by the Report. The Present Value will be further adjusted (as so
adjusted, the "Adjusted Present Value") for geological risks based upon reserve
categories of the Undeveloped Properties as of the Valuation Date as set out
below:
0% reduction for proved developed producing reserves.
20% reduction for proved developed non-producing reserves.
40% reduction for proved undeveloped reserves.
The Valuation shall equal the Adjusted Present Value: (i) plus 100% of
the market value of any proceeds (including notes or securities) received by
Harken or any of its affiliates from any prospect sales, farmouts, or joint
venture arrangements of or with respect to any of the Undeveloped Properties or
any other consideration received upon the disposition of an oil and gas
interest in the Undeveloped Properties plus 80% of the net revenue (calculated
before income taxes and after deduction of lease operating expenses) from sales
of oil and/or gas produced from such Undeveloped Properties during the
Development Period; (ii) less 100% of any direct costs, direct expenses, and
direct charges (in each case not associated with oil or gas production and
which are not otherwise taken into account in the Report) incurred or accrued
by Harken or its affiliates with respect to the Undeveloped Properties for the
period of time from the Effective Time to the Valuation Date (the "Development
Period"), including an appropriate amount of "overhead," which is hereby
stipulated to be $180,000; (iii) less 100% of the Stipulated Value; (iv) less
100% of the Reserve Deficiency set forth in Section 1.10(i) hereof; and (v)
less 100% of the Adverse Consequences set forth in Section 1.10(j) hereof. The
above calculation shall be made without any duplication of additions or charges
and with respect to clauses (i) and (ii) above shall be made using an accrual
method of accounting.
For purposes of this Section 1.10, "SEC Case" means the present value
of estimated future net revenues, before taxes, of the specified reserves or
property, determined in all material respects in accordance
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with the rules and regulations of the Securities Exchange Commission (the
"SEC") using prices and costs in effect on the Valuation Date.
(c) The number of Contingent Shares to be issued shall equal the
quotient of the Valuation divided by the average closing sales price of Harken
Common Stock for the 90 days immediately preceding the Valuation Date (the
"Contingent Share Price").
(d) The Contingent Shares, and a letter from the chief financial
officer of Harken describing the calculations made in determining the number of
Contingent Shares, shall be distributed on or about September 30, 1996 (the
"Settlement Date") as follows:
(i) Two percent (2%) of the Contingent Shares shall be
distributed to Concorde Financial Corporation ("Concorde").
(ii) Two percent (2%) of the Contingent Shares shall be
distributed to EnCap Investments L.C. ("EnCap").
(iii) That number of Contingent Shares equal to the
quotient of the Value of the Eastern Shelf Properties (as hereinafter defined)
divided by the Contingent Share Price shall be distributed to the Royalty
Holders which Contingent Shares shall be distributed among the Royalty Holders
in proportion to the interest in the Eastern Shelf Properties (as defined in
Section 5.16 hereof) conveyed by a Royalty Holder and the interest in the
Eastern Shelf Properties conveyed by all Royalty Holders. For purposes of this
Section 1.10(d) "Value of the Eastern Shelf Properties" shall mean the amount
equal to a two percent overriding royalty interest in the Eastern Shelf
Properties as determined in the Report.
(iv) The remainder of the Contingent Shares shall be
distributed to the Record Holders, with each such Record Holder receiving that
fraction of such Contingent Shares as equal to the quotient of the number of
shares of Harken Common Stock into which such holders' Search Common Stock were
converted at the Effective Time (not including Contingent Shares) plus the
number of shares, if any, of Harken Common Stock received by the Record Holder
upon the exercise of Harken Warrants (as defined in Section 7.01 hereof) or
Unexchanged Search Warrants divided by the number of shares of Harken Common
Stock into which all Record Holders' Search Common Stock were converted at the
Effective Time (not including Contingent Shares) plus the number of shares of
Harken Common Stock received upon the exercise of all Harken Warrants or
Unexchanged Search Warrants.
For purposes of this Section 1.10, "Record Holder" shall mean a holder
of record of Search Common Stock, or the Unexchanged Search Warrants at the
Effective Time or a holder of Search Warrants that were exchanged for Harken
Warrants at the Effective Time.
(e) As soon as practicable after the date all Unliquidated Losses
(as defined in Section 1.10(j) hereof) have become liquidated losses,
liabilities, damages, fees or expenses actually suffered or incurred by Harken,
Harken shall determine the amount, if any, that the Unliquidated Losses exceed
such liquidated amount actually suffered or incurred by Harken (the "Excess
Amount"). Harken shall then distribute to the Rights Holders (excluding the
Royalty Holders), in accordance with the provisions of Sections 1.10(d) and
1.10(h) hereof, the number of additional Contingent Shares equal to the
quotient of the Excess Amount divided by the Contingent Share Price (the "Final
Settlement Date").
(f) During the Development Period, Harken shall, through Merger
Sub, as its wholly-owned subsidiary, own, hold and manage the Undeveloped
Properties. Harken may sell, farmout, develop or otherwise deal in these
Undeveloped Properties during the Development Period in a manner which, in its
judgment, optimizes the full potential of these properties under the
circumstances then existing. During the Development Period, Harken will cause
a maximum of $600,000 (the "Development Amount") to be expended in the further
exploration and/or development of the Undeveloped Properties as described in
the development plan set forth in Exhibit "D". In the event that an
insufficient number of the wells drilled on the Undeveloped Properties during
the Development Period are determined to be commercial to warrant to Harken the
prudent expenditure of the full Development Amount or otherwise which would
justify further development and
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expenditures to a reasonable, prudent operator, then Harken shall not be
required nor obligated to cause any additional minimum investments to be made
on such Undeveloped Properties even if the Development Amount has not yet been
expended in full.
During the Development Period, Harken shall cause all production of
oil and gas from the Undeveloped Properties to be sold to non-affiliates
pursuant to bona fide contracts providing for the highest price reasonably
attainable through good faith negotiations as of the date of each such
contract.
(g) As soon as practicable, but in any event within 90 days, after
June 30, 1995 and December 31, 1995, Harken will provide to the Rights Holders
a interim report regarding the status of development and production activities
on the Undeveloped Properties.
(h) On the Settlement Date (and on the Final Settlement Date),
Harken shall deliver to each of the Rights Holders, at the addresses of the
Rights Holders as they appear on the stock records of Search at the Effective
Time (or, in the case of Concorde, EnCap or the Royalty Holders, at such
address as may be specified in writing after the date hereof by Concorde, EnCap
and the Royalty Holders, respectively) or at such other addresses as Rights
Holders shall provide to Harken by written notice, certificates representing
the number of shares of Harken Common Stock payable to such Rights Holder
pursuant to this Section 1.10. No fractional shares of Harken Common Stock
shall be issued or delivered pursuant to this Section 1.10. Should any Rights
Holder be entitled to a fractional share interest in Harken Common Stock
pursuant to this Section 1.10, Harken shall deliver to such Rights Holder that
number of shares of Harken Common Stock to which such Rights Holder is entitled
rounded up to the nearest whole number. In the event of any stock split, stock
dividend, reclassification, merger, or consolidation occurring on or after 90
days immediately preceding the Valuation Date, the number of shares of Harken
Common Stock distributable to the Rights Holders in accordance with this
Section 1.10 shall be appropriately adjusted to accord the equitable benefit of
such changes to the Rights Holders. Dividends and other distributions with
respect to Harken Common Stock declared after the Settlement Date and payable
to the holders of record thereof after the Settlement Date shall be payable to
the Rights Holders with respect to the shares of Harken Common Stock to be
delivered pursuant to this Section 1.10; provided, however, no such payment
shall be made unless and until a certificate representing the Contingent Shares
shall have been delivered to the Rights Holders. No dividends payable to
holders of record of shares of Harken Common Stock prior to the Settlement Date
shall be paid to the Rights Holders with respect to such Contingent Shares.
The right of each Right Holder to receive shares of Harken Common Stock
pursuant to this Agreement may not be assigned or transferred in any manner
whatsoever except by operation of law or by will.
(i) The reserve report dated as of July 1, 1994 is attached hereto
as Exhibit "C" covering and evaluating each of the leases, wells and prospects
of Search and its subsidiaries (the "Reserve Report"). If the aggregate value
of the oil and gas reserves attributed to all of such properties pursuant to a
subsequent reserve report to be prepared as of December 31, 1994 (the
"Subsequent Report") is less in value than the aggregate value of all of such
properties as set forth in the Reserve Report after giving credit for actual
production from such properties for the period of time from July 1, 1994 to
December 31, 1994 (the "Reserve Deficiency"), the Valuation shall be adjusted
by such Reserve Deficiency as set forth in Section 1.10(b) hereof. The
Subsequent Report will be prepared by a reserve engineering firm known in the
oil and gas industry and chosen by Harken in good faith, based upon the same
pricing and substantially the same parameters and criteria as used in the
properties of the Reserve Report. The parties hereby agree that either or both
parties current reserve engineers, DuPont and Gaffney Cline, are deemed to be
acceptable for preparation of the Subsequent Report.
(j) In the event Search breaches any of its representations,
warranties and covenants contained in this Agreement, subject to an applicable
survival period pursuant to Section 10.01 hereof, then Harken, as provided in
Section 1.10(b) hereof and this Section 1.10(j), may deduct from the amount of
the Valuation, if any, the entirety of any Adverse Consequences (as defined
below) resulting from, arising out of, relating to, or caused by such breach;
provided, however, that no amount shall be deducted from the Valuation until
Harken has suffered Adverse Consequences by reason of all such breaches equal
to or in excess of $100,000 (at which point the entire amount of such Adverse
Consequences will be deducted relating back to the first dollar). Solely for
purposes of this Section 1.10 and in calculating the amount of the Adverse
Consequences,
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any representation, warranty or covenant made by Search in this Agreement shall
be read and interpreted as if the qualification stated therein with respect to
materiality or Material Adverse Effect were not contained therein.
As used in this Section 1.10, "Adverse Consequences" means (a) the
amount of any and all liquidated losses, liabilities or damages (including
reasonable amounts paid in settlement) actually suffered or incurred by Harken
as a result of a breach by Search of any of its representations, warranties or
covenants contained in this Agreement; (b) the amount of any and all
unliquidated losses, liabilities or damages as reasonably estimated in good
faith by Harken to be suffered or incurred by Harken as a result of a breach by
Search of any of its representations, warranties or covenants contained in this
Agreement; and (c) all reasonable fees and expenses, including attorneys' fees
and court costs, actually incurred by Harken or reasonably estimated in good
faith by Harken to be incurred in connection with any claim, action, suit,
proceeding or demand relating to a breach by Search of any of its
representations, warranties or covenants. As a condition precedent to its
ability to make an adjustment to the Valuation for Adverse Consequences
relating to any loss, liability or damage actually suffered or incurred or
estimated to be suffered or incurred by Harken as contemplated by the preceding
provisions and which arises by virtue of a claim, action, suit, proceeding or
demand of a third party, Harken must have used commercially reasonable efforts
to defend against or otherwise challenge the merits of such claim, action,
suit, proceeding or demand. The amount of unliquidated losses, liabilities,
damages, fees and expenses reasonably estimated in good faith by Harken shall
hereinafter be referred to as "Unliquidated Losses."
(k) The number of Contingent Shares to be issued pursuant to this
Section 1.10 is subject to the Maximum Share Limit as set forth in Article IX
hereof.
(l) The parties hereto agree that Harken's obligation to issue
Contingent Shares is conditional in nature, and Harken may never make any
additional payments beyond those shares of Harken Common Stock issued as of the
Effective Time or upon the exercise of the Harken Warrants or the Unexchanged
Search Warrants.
SECTION 1.11 Appraisal Shares.
(a) Search shall give Harken (i) prompt notice of any threat or
actual assertions of appraisal rights received by Search from any of its
stockholders ("Search Stockholders") who may be attempting to exercise their
right to receive payment of the "fair value" of these Search Shares in
accordance with Delaware Law, as well as any withdrawals of any such
assertions, and any other instruments served pursuant to Delaware Law and
received by Search or any of its affiliates, subsidiaries, officers, directors
or agents and (ii) the opportunity to direct with the consent of Search all
negotiations and proceedings with respect to assertions of appraisal rights
under Delaware Law. Search shall not, except with the prior written consent of
Harken, make any payment with respect to any assertions of appraisal rights or
settle any such assertions.
(b) In the event any Search Stockholder(s) give notice that they
intend to exercise appraisal rights and such number of Search Shares dissenting
does not exceed 5% of the outstanding Search Shares then in such event such
Search Shares that are outstanding immediately prior to the Effective Time and
that are held by stockholders who have not voted in favor of the Merger or
consented thereto in writing and who shall have properly exercised their right
of appraisal and receive payment of the "fair value" of his Search Shares in
accordance with Delaware Law (collectively, the "Appraisal Shares") shall not
be converted into or represent the right to receive the Stock Consideration,
except that any Appraisal Shares held by stockholders who shall have failed to
perfect or shall have effectively withdrawn or lost their rights of appraisal
under Delaware Law shall thereupon be deemed to have been converted into and to
have become exchangeable for, as of the Effective Time, the right to receive
the Stock Consideration, as determined in accordance with Section 1.06 hereof
upon surrender of the certificate or certificates formerly representing such
Search Shares.
SECTION 1.12 Stock Transfer Books. At the Effective Time, the stock
transfer books of Search shall be closed and there shall be no further
registration of transfers of shares of Search Shares and the Search Warrants
thereafter on the records of Search. From and after the Effective Time, the
holders of certificates
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evidencing ownership of Search Shares or the Notes outstanding immediately
prior to the Effective Time shall cease to have any rights with respect to such
shares or the notes except as otherwise provided herein or by law.
SECTION 1.13 Adjustments. If, between the date of this Agreement and
the Effective Time, the outstanding shares of Harken Common Stock shall have
been changed into a different number of shares or a different class by reason
of any recapitalization, reorganization, or any split-up or combination, or a
stock dividend or distribution thereon shall be declared with a record date
within said period, or for any other reason except for those enumerated in
Sections 4.02(b)(iii) and (iv) hereof, the number and class of shares of Harken
Common Stock to be issued and delivered at the Effective Time in exchange for
each outstanding share of the Search Shares shall be proportionately adjusted.
SECTION 1.14 Fractional Shares. No fractional share of Harken Common
Stock shall be issued in the Merger. The total number of shares of Harken
Common Stock that any person shall have a right to receive under this Agreement
will be rounded up to the nearest whole share of Harken Common Stock.
SECTION 1.15 Unexchanged Search Warrants. Search Warrants (as
defined in Section 2.03 hereof) outstanding at the Effective Time and which
have not been tendered pursuant to Article VII (the "Unexchanged Search
Warrants") shall remain outstanding and shall be exercisable pursuant to their
terms following the Effective Time; provided, however, that if the Unexchanged
Search Warrants do not contain express provisions regarding the exercise price
and the type and number of securities such warrant is exercisable for after the
Merger, the Unexchanged Search Warrants shall be treated in the following
manner:
At the Effective Time, such Unexchanged Search Warrants shall be
exercisable upon the same terms and conditions as the applicable
Search Warrant except that each such Unexchanged Search Warrant shall
be exercisable for that whole number of shares of Harken Common Stock
equal to the product of the number of shares of Search Common Stock
covered by the Unexchanged Search Warrant immediately prior to the
Effective Time multiplied by the Exchange Ratio rounded up to the
nearest whole number of shares of Harken Common Stock, and the per
share exercise price for the shares of Harken Common Stock issuable
upon the exercise of such Unexchanged Search Warrant shall be equal to
the quotient determined by dividing the exercise price per share of
Search Common Stock specified for such Unexchanged Search Warrant
under the applicable agreement immediately prior to the Effective Time
by the Exchange Ratio rounding the resulting exercise price down to
the nearest whole cent. In addition, a Record Holder of an
Unexchanged Search Warrant who has exercised such warrant in whole or
in part shall have the right to receive Contingent Shares, if any, as
set forth in Section 1.10 hereof.
ARTICLE II
REPRESENTATIONS AND WARRANTIES OF SEARCH
Search hereby represents and warrants to Harken and Merger Sub as
follows:
SECTION 2.01 Organization and Qualifications; Subsidiaries. Each of
Search and each of its subsidiaries is a corporation duly organized, validly
existing and in good standing under the laws of the jurisdiction of its
incorporation and has the requisite corporate power and authority and is in
possession of all franchises, grants, authorizations, licenses, permits,
easements, consents, certificates, approvals, and orders ("Approvals")
necessary to own, lease and operate its properties and to carry on its business
as it is now being conducted, except where the failure to be so organized,
existing and in good standing or to have such power, authority and Approvals
would not, individually or in the aggregate, have a Material Adverse Effect (as
defined below). Neither Search nor any subsidiary has received any notice of
proceedings relating to the revocation or modification of any such Approvals.
Each of Search and each of its subsidiaries is duly qualified or licensed as a
foreign corporation to do business, and is in good standing, in each
jurisdiction where the character of its properties owned, leased or operated by
it or the nature of its activities makes such qualification or licensing
necessary, except for such failures to be so duly qualified or licensed and in
good standing that would not, either individually or in the aggregate, have a
Material Adverse Effect. When used in connection with Search or any of its
subsidiaries, the term "Material Adverse Effect" means any change
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or effect that is or is reasonably likely to be materially adverse to the
business, operations, properties (including intangible properties), condition
(financial or otherwise), assets or liabilities (including contingent
liabilities) of Search and its subsidiaries taken as a whole or which would
reasonably be expected to have an adverse financial statement impact to Search
and its subsidiaries taken as a whole of $100,000 or more. A true and complete
schedule listing of all of Search's and all of its subsidiaries, together with
the jurisdiction of incorporation of each, the percentage of each subsidiary's
outstanding capital stock owned by Search or another Search subsidiary, the
capitalization and outstanding shares of each, is set forth in the Disclosure
Schedule prepared by Search attached hereto as Exhibit "O"(the "Search
Disclosure Schedule"). Except for such subsidiaries and as set forth in the
Search Distribution Schedule, Search does not directly or indirectly own any
majority equity or similar interest in, or any interest convertible into or
exchangeable or exercisable for, any equity or similar interest in, any
corporation, partnership, joint venture or other business association or
entity, other than partnerships which are entered into in the ordinary course
of business.
SECTION 2.02 Certificate of Incorporation and By-Laws. Search has
heretofore furnished to Harken a complete and correct copy of the Certificate
of Incorporation and the By-Laws, each as amended to date, of Search and each
of its subsidiaries. Such Certificate of Incorporation, By-Laws and the
equivalent organizational documents of each of its subsidiaries are in full
force and effect. Neither Search nor any of its subsidiaries is in violation
of any of the provisions of its Certificate of Incorporation or By-Laws or
equivalent organizational documents.
SECTION 2.03 Capitalization. The authorized capital stock of Search
consists of 20,000,000 shares of Search Common Stock and 5,000,000 shares of
Search Preferred Stock. As of the date hereof, (i) 3,690,632 shares of Search
Common Stock are issued and outstanding, all of which are validly issued, fully
paid and non-assessable and free of preemptive rights with no personal
liability attaching to the ownership thereof; (ii) 575,000 shares of Search
Preferred Stock are issued and outstanding, all of which are validly issued,
fully paid and non-assessable, all dividends due thereunder are fully paid
through the date hereof, and such Search Preferred Stock is free of preemptive
rights with no personal liability attaching to the ownership thereof; (iii) no
shares of the Search Shares are held in the treasury of Search; (iv) other than
an aggregate total of 989,000 shares of Search Common Stock reserved for
issuance upon the exercise of outstanding stock purchase options and warrants
(the "Search Warrants"), Search has no other shares reserved for issuance; and
(v) other than the stock purchase options and warrants pursuant to the exercise
of which the holders thereof can currently acquire shares of Search Common
Stock all of which are disclosed in the Search Disclosure Schedule, and the
issued and outstanding Search Preferred Stock, there are no other options,
warrants, or other rights, agreements, arrangements or commitments of any
character relating to the issued or unissued capital stock of Search or any of
its subsidiaries or obligating Search or any of its subsidiaries to issue or
sell any shares of capital stock of, or any securities convertible into or
evidencing the right to purchase any shares of capital stock of, or other
equity interests in, Search or any of its subsidiaries. All of the Search
Common Stock subject to issuance as aforesaid, upon issuance on the terms and
conditions specified in the instruments pursuant to which they are issuable,
shall be duly authorized, validly issued, fully paid and non-assessable. There
are no obligations, contingent or otherwise, of Search or any of its
subsidiaries to repurchase, redeem or otherwise acquire any Search Shares or
the common stock of any subsidiary to repurchase, redeem or otherwise acquire
any Search Shares or the common stock of any subsidiary or to provide funds to
or make any investment (in the form of a loan, capital contribution or
otherwise) in any such subsidiary or any other entity, including agreements
entered into in the ordinary course of business. Each of the outstanding
shares of capital stock of each of Search's subsidiaries is duly authorized,
validly issued, fully paid and non-assessable, and such shares owned by Search
or another subsidiary are owned free and clear of all security interests,
liens, claims, pledges, agreements, limitations in Search's voting rights,
charges or other encumbrances of any nature whatsoever.
SECTION 2.04 Authority Relative to this Agreement. Search has the
requisite corporate power and authority to execute and deliver this Agreement,
and to carry out its obligations hereunder and to consummate the transactions
contemplated hereby. The execution and delivery of this Agreement by Search
and the consummation by Search of the transactions contemplated hereby have
been duly and validly authorized by all necessary corporate action and no other
corporate proceedings on the part of Search are necessary to authorize this
Agreement or to consummate the transactions so contemplated (other than, with
respect to the Merger, the approval and adoption of this Agreement and the
Merger by the stockholders of Search, in
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accordance with Delaware Law and Search's Certificate of Incorporation and
By-Laws). This Agreement has been duly and validly executed and delivered by
Search and, assuming the due authorization, execution and delivery by Harken
and Merger Sub, constitutes the legal, valid and binding obligation of Search,
enforceable in accordance with its terms.
SECTION 2.05 No Conflict; Required Filings and Consents.
(a) The execution and delivery of this Agreement by Search does
not, and the performance of this Agreement by Search shall not, (i) conflict
with or violate the Certificate of Incorporation or By-Laws or equivalent
organizational documents of Search or any of its subsidiaries, (ii) conflict
with or violate any law, rule, regulation, order, judgment or decree applicable
to Search or any of its subsidiaries, or by which its or any of their
respective properties is bound or affected, except for any such conflicts or
violations that would not, individually or in the aggregate, have a Material
Adverse Effect, or (iii) result in any breach of or constitute a default (or an
event that with notice or lapse of time or both would become a default) under,
or give to others any rights of termination, amendment, acceleration or
cancellation of, or result in the creation of a lien or encumbrance on any of
the properties or assets of Search or any of its subsidiaries pursuant to, any
note, bond, mortgage, indenture, contract, agreement, lease, license, permit,
franchise or other instrument or obligation to which Search or any of its
subsidiaries is a party or by which Search or any of its subsidiaries or its or
any of their respective properties is bound or affected, except for any such
breaches, defaults or other occurrences that would not, individually or in the
aggregate, have a Material Adverse Effect.
(b) The execution and delivery of this Agreement by Search does
not, and the performance of this Agreement by Search shall not, require any
consent, approval, authorization or permit of, or filing with or notification
to, any governmental or regulatory authority, domestic or foreign, except (i)
for applicable requirements, if any, of the Securities Act, the Securities
Exchange Act of 1934, as amended (the "Exchange Act"), state securities laws
("Blue Sky Laws"), the National Association of Securities Dealers Automated
Quotations System, and the rules and regulations thereunder, and the filing and
recordation of appropriate merger or other documents as required by Delaware
Law and (ii) where the failure to obtain such consents, approvals,
authorizations or permits or to make such filings or notifications, would not
prevent or delay consummation of the Merger, or otherwise prevent Search from
performing its obligations under this Agreement, and would not have a Material
Adverse Effect.
SECTION 2.06 Compliance; Permits. Except as disclosed in the Search
Disclosure Schedule, (a) neither Search nor any of its subsidiaries is in
conflict with, or in default or violation of, (i) any law, rule, regulation,
order, judgment or decree applicable to Search or any of its subsidiaries or by
which its or any of their respective properties is bound or affected, or (ii)
any note, bond, mortgage, indenture, contract, agreement, lease, license,
permit, franchise or other instrument or obligation to which Search or any of
its subsidiaries is a party or by which Search or any of its subsidiaries or
its or any of their respective properties is bound or affected, nor has Search
or any of its subsidiaries received and not finally resolved any complaint,
citation or notice of a conflict with or a default or violation of any of the
foregoing nor, are any threatened, except for any such conflicts, defaults or
violations which would not, individually or in the aggregate, have a Material
Adverse Effect.
(b) Search and its subsidiaries hold all permits, licenses,
variances exemptions, orders and approvals from governmental authorities which
are material to the operation of the business of Search and its subsidiaries
taken as a whole (collectively, the "Search Permits"). Search and its
subsidiaries are in compliance with the terms of Search Permits, except where
the failure to so comply would not have a Material Adverse Effect.
SECTION 2.07 Securities and Exchange Commission Filing; Financial
Statements. Search has filed all forms, reports and documents required to be
filed with the SEC since January 1, 1990, and has heretofore delivered or made
available to Harken, in the form filed with the SEC, (i) its Annual Reports on
Form 10-K for the fiscal years ended December 31, 1991, 1992 and 1993,
respectively, (ii) its Quarterly Reports on Form 10-Q for the periods ended
March 31, 1994 and June 30, 1994, (iii) all proxy statements relating to
Search's meetings of stockholders (whether annual or special) held since
January 1, 1991, (iv) all Form 8-K's filed by Search with the SEC since January
1, 1991, (v) all other reports or registration statements filed by Search with
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the SEC since January 1, 1991 and (vi) all amendments and supplements to all
such reports and registration statements filed by Search with the SEC since
January 1, 1991 (collectively, the "Search SEC Reports"). The Search
Disclosure Schedule lists all Search SEC Reports that have been provided to
Harken prior to the date hereof. Except as set forth in the Search Disclosure
Schedule, to the best knowledge and belief of Search, the Search SEC Reports
(i) were prepared in substantial compliance with the requirements of the
Securities Act or the Exchange Act, as the case may be, and with all of the
rules and regulations thereunder, and (ii) did not at the time they were filed
contain any untrue statement of a material fact or omit to state a material
fact required to be stated therein or necessary in order to make the statements
therein, in the light of the circumstances under which they were made, not
misleading. None of Search's subsidiaries is required to file any forms,
reports or other documents with the SEC, or any state securities authority,
except documents that may be filed with regard to the liquidation of the Search
Partnerships (as defined in Section 6.02(m) hereof).
(b) Except as set forth in the Search Disclosure Schedule, each of
the consolidated financial statements (including, in each case, any related
notes thereto) contained in Search SEC Reports and each of the consolidated
financial statements for the periods ended March 31, 1994 and June 30, 1994,
has been prepared in accordance with generally accepted accounting principles
applied on a consistent basis throughout the periods involved (except as may be
indicated in the notes thereto) and each fairly presents the consolidated
financial position of Search and its subsidiaries as of the respective dates
thereof and the consolidated results of its operations and changes in financial
position for the periods indicated, except for the omission of footnotes in the
unaudited interim financial statements and except that the unaudited interim
financial statements were or are subject to normal and recurring year-end
adjustments which were not or are not expected to be material in amount. The
consolidated financial statements provided by Search for periods subsequent to
June 30, 1994, shall comply with the foregoing standards.
SECTION 2.08 Undisclosed Liabilities. Except as and to the extent
set forth on the consolidated balance sheet of Search and its subsidiaries as
of June 30, 1994 (the "Balance Sheet Date"), including the notes thereto (the
"Search Balance Sheet"), neither Search nor any of its subsidiaries has any
liabilities or obligations of any nature (whether accrued, absolute, contingent
or otherwise) that would be required to be reflected on a balance sheet, or in
the notes thereto, prepared in accordance with generally accepted accounting
principles, except (i) for liabilities or obligations incurred in the ordinary
course of business since the Balance Sheet Date, that would not, individually
or in the aggregate, have a Material Adverse Effect, (ii) as otherwise
reflected in the Search SEC Reports filed with the SEC since the Balance Sheet
Date, or (iii) as specified in the Search Disclosure Schedule.
SECTION 2.09 Properties and Assets. Except as set forth in the
Search Disclosure Schedule and except to the extent that the failure of any one
or more of the following representations or warranties would not individually
or in the aggregate have a Material Adverse Effect:
(a) Title to Property. Except as set forth in the Search
Disclosure Schedule:
(i) Search and/or its subsidiaries have Good
Title (as defined in Section 10.03 hereof) to the Oil and Gas Interests (as
defined in Section 10.03 hereof).
(ii) Except for Permitted Encumbrances (as defined
in Section 10.03 hereof), the Oil and Gas Interests reflected in the Reserve
Report entitles Search and/or its subsidiaries to receive not less than the
undivided interests set forth in such engineering report of all oil and gas
produced, saved and sold from a particular property and the portion of the
costs and expenses of operation and development of such property which is borne
or to be borne by Search or its subsidiaries is not greater than the undivided
interests set forth in such engineering report.
(iii) Except for Permitted Encumbrances, Search
and/or its subsidiaries have good and marketable title to such portion of the
assets of Search or its subsidiaries (other than the Oil and Gas Interests) and
other properties included or reflected on the financial statements for Search's
accounting periods prepared as of the Balance Sheet Date (attached hereto as
Exhibit "A", the "Balance Sheet Date Statements"), which assets and properties
are set forth and described on Exhibit "B-2" attached hereto.
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(b) Oil and Gas Interests of Search and its Subsidiaries.
Except as set forth in the Search Disclosure Schedule:
(i) Neither Search nor any of its subsidiaries
has been advised by any operator, lessor or any other party of any material
default under any such oil and gas leases which default has not heretofore been
cured in all material respects.
(ii) To the best knowledge of Search and its
subsidiaries all proper and timely payments (including but not limited to
royalties, delay rentals and shut-in royalties), due under the oil and gas
leases giving rise to the Oil and Gas Interests have been timely made and paid
by the operator(s) of each such lease or well.
(iii) Search and/or its subsidiaries are entitled
to be paid, and are being paid, in all material respects, its percentage of net
revenue interests included in the Oil and Gas Interests without suspense and
without indemnity other than those customarily found in the industry.
(c) Wells. Except as set forth in the Search Disclosure
schedule:
(i) All of the wells included in the Oil and Gas
Interests and which are described on Exhibit "B-1" hereto of Search and/or its
subsidiaries have been drilled and completed within the boundaries of such Oil
and Gas Interests or within the limits otherwise permitted by contract, pooling
or unit agreement, lease instrument and by law.
(ii) All drilling and completion of the wells in
such Oil and Gas Interests and all development and operations on such Oil and
Gas Interests have been conducted in material compliance with all applicable
laws, ordinances, rules, regulations and permits, and judgments, orders and
decrees of any court or governmental body or agency.
(iii) Except as may be reflected in the Reserve
Report, no well included in such Oil and Gas Interests is subject to material
penalties on allowables because of any overproduction (legal or illegal) which
would prevent the full legal and regular allowable (including maximum
permissible tolerance) as prescribed by any court or federal, state or local
governmental body or agency to be assigned to any such well.
(d) Refund. Except as included or reflected on the
Balance Sheet Date Statements as of June 30, 1994 or as set forth in the Search
Disclosure Schedule:
(i) Neither Search nor any of its subsidiaries is
obligated by virtue of a prepayment arrangement under any gas contract
containing a "take or pay" or similar provision, a production payment or any
other arrangement to deliver any material amount of gas or oil attributable to
the Oil and Gas Interests at some future time without then or thereafter
receiving full payment therefor.
(ii) Neither Search nor any of its subsidiaries
has received any funds or payments from purchasers of production of gas under
gas contracts which are subject to a potential material refund.
(e) Operation of Assets. Since the acquisition of Oil
and Gas Interests by Search and/or its subsidiaries, the Oil and Gas Interests
have been administered and maintained by Search directly or through its
subsidiaries in a reasonable manner and in accordance with generally prevailing
standards of the oil and gas industry. Neither Search nor any of its
subsidiaries are named nor act as the operator of any Oil and Gas Interests or
other leases or properties.
(f) Environmental Matters. (i)(A) Search and each of its
subsidiaries is in material compliance with all applicable foreign, federal
(including but not limited to the Clean Water Act, the Oil Pollution Act, the
Resource Conservation and Recovery Act, the Clean Air Act, the Comprehensive
Environmental Response Compensation and Liability Act, the Occupational Safety
and Health Act and the Hazardous Materials Transportation Act), state and local
laws and regulations and common law relating to
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pollution or protection of human health or the environment (including, without
limitation, ambient air, surface water, ground water, land surface or
subsurface strata (collectively, "Environmental Laws")), except for
non-compliance that individually or in the aggregate would not have a Material
Adverse Effect, which compliance includes, but is not limited to, the
possession by Search and its subsidiaries of all material permits and other
governmental authorizations required under applicable Environmental Laws, and
compliance with the terms and conditions thereof and compliance with
notification, reporting and registration provisions under applicable
Environmental Laws; and (B) neither Search nor any of its subsidiaries has
received notice of, or, to the knowledge of Search, is the subject of, any
action, cause of action, claim, investigation, demand or notice by any person
or entity alleging liability under or non-compliance with any Environmental Law
(an "Environmental Claim") that individually or in the aggregate would have a
Material Adverse Effect.
(ii) There are no Environmental Claims which individually or
in the aggregate would have a Material Adverse Effect that are pending or, to
the knowledge of Search, threatened against Search or any of its subsidiaries
or, to the knowledge of Search, against any person or entity whose liability
for any Environmental Claim Search or any of its subsidiaries has or may have
retained or assumed either contractually or by operation of law.
(iii) To the knowledge of Search, there are no circumstances
that could form the basis for an Environmental Claim against Search or any of
its subsidiaries, or against any person or entity whose liability for any
Environmental Claim Search or any of its subsidiaries has or may have retained
or assumed either contractually or by operation of law, which individually or
in the aggregate would have a Material Adverse Effect.
SECTION 2.10 Absence of Certain Changes or Events. Since June 30,
1994, except as disclosed in the Search Disclosure Schedule or in the Search
SEC Reports filed since that date to the date of this Agreement or as otherwise
contemplated by this Agreement, Search and its subsidiaries have conducted
their business only in the ordinary course and in a manner consistent with past
practice and, since such date, there has not been (i) any change in the
financial condition, results of operations or business of Search or any of its
subsidiaries having a Material Adverse Effect, (ii) any damage, destruction or
loss (whether or not covered by insurance) with respect to any assets of Search
or any of its subsidiaries having a Material Adverse Effect, (iii) any change
by Search in its accounting methods, principles or practices, (iv) any
reevaluation by Search, which is material taken as a whole, of any of its
assets, including, without limitation, writing down the value of inventory or
writing off notes or accounts receivable other than in the ordinary course of
business, (v) any entry by Search or any of its subsidiaries into any
commitment or transactions material to Search and its subsidiaries taken as a
whole, (vi) any declaration, setting aside or payment of any dividends or
distributions in respect of shares of Search Common Stock or any redemption,
purchase or other acquisition of any of its securities or any of the securities
of any subsidiary, (vii) any increase in or establishment of any bonus,
insurance, severance, deferred compensation, pension, retirement, profit
sharing, stock option (including, without limitation, the granting of stock
options, stock appreciation rights, performance awards, or restricted stock
awards), stock purchase or other employee benefit plan, or any other increase
in the compensation payable or to become payable to any officers or key
employees of Search or any of its subsidiaries, (viii) any contract, lease,
commitment or loan outstanding where Search or any of its subsidiaries was a
party that involved or related to any officer or director of Search or any of
its subsidiaries, (ix) any increase or addition in the obligations, liabilities
and/or accounts payable of Search, or (x) any reduction, loss or material
decline in the value of its assets including, without limitation, monthly
production of oil and gas from Search's properties, wells and leases.
SECTION 2.11 Absence of Litigation. The Search Disclosure Schedule
contains a list of all claims, actions, proceedings or investigations pending
or, to the best knowledge of Search, threatened against Search or any of its
subsidiaries, before any court, arbitrator or administrative, governmental or
regulatory authority or body, domestic or foreign, that, individually or in the
aggregate, would have a Material Adverse Effect. As of the date hereof,
neither Search nor any of its subsidiaries nor any of their properties is
subject to any order, writ, judgment, injunction, decree, determination or
award having a Material Adverse Effect. Since June 30, 1994, and except as set
forth in the Search Disclosure Schedule, there has been no event, action or
other development in connection with any claim, action, proceeding, or
investigation pending or to the best
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knowledge of Search threatened against Search or any of its subsidiaries or any
properties or rights of Search or any of its subsidiaries, individually or in
the aggregate, having a Material Adverse Effect.
SECTION 2.12 Registration Statement; Statement. The information
supplied by Search for inclusion in the Registration Statement (as defined in
Section 3.10 hereof) shall not at the time the Registration Statement is
declared effective contain any untrue statement of a material fact or omit to
state any material fact required to be stated therein or necessary in order to
make the statements therein, in the light of the circumstances under which they
were made, not misleading. The information supplied by Search for inclusion in
the Statement to be sent to the stockholders of Search in connection with the
meeting of Search's stockholders to consider the approval and adoption of this
Agreement and the Merger (the "Search Stockholders' Meeting") (such Statement
as amended or supplemented is referred to herein as the "Proxy Statement"),
shall not, at the date the Proxy Statement (or any amendment thereof or
supplement thereto) is first mailed to stockholders, at the time of Search
Stockholders' Meeting, and at the Effective Time, contain any untrue statements
of material fact, or omit to state any material fact required to be stated
therein or necessary in order to make the statements made therein, in the light
of the circumstances under which they are made, not misleading; or omit to
state any material fact necessary to correct any statement in any earlier
communication with respect to the solicitation of proxies for Search
Stockholders' Meeting which has become false or misleading. If at any time
prior to the Effective Time any event relating to Search, any of its
subsidiaries, or any of its respective affiliated, officers or directors should
be discovered by Search which should be set forth in an amendment to the
Registration Statement or a supplement to the Proxy Statement, Search shall
promptly inform Harken and Merger Sub. Notwithstanding the foregoing, Search
makes no representation or warranty with respect to any information supplied by
Harken which is contained in any of the foregoing documents. The Proxy
Statement shall comply in all material respects as to form and substance with
the requirements of the Exchange Act and the rules and regulations thereunder.
SECTION 2.13 Investment Bankers. No broker, finder, advisor,
consultant, or investment banker, except for EnCap, Concorde and Principal
Financial Securities, Inc. ("Principal"), are entitled to any consulting,
brokerage, finder's or other fee or commission in connection with the
transactions contemplated by this Agreement based upon arrangements made by or
on behalf of Search. Search has received the oral opinion of Principal on the
date of this Agreement to the effect that the consideration to be received by
the common stockholders of Search as a result of the Agreement is fair, from a
financial point of view, to the common stockholders of Search.
SECTION 2.14 Board Recommendation. The Board of Directors of Search
has, by resolutions duly adopted by the requisite vote of directors present at
a meeting of such Board duly called and held on November 7, 1994, determined
that the Merger, in accordance with the terms of this Agreement, is in the best
interests of Search and its stockholders, approved and adopted this Agreement
and the transactions contemplated hereby and recommended approval and adoption
of this Agreement by the stockholders of Search.
SECTION 2.15 Warrants. At the Effective Time, except for the Search
Warrants (as described in Section 2.03 hereof), there will be no outstanding
options, warrants, or other agreements, arrangements or other derivative
securities under which the holder thereof would have the right to acquire
Search Common Stock, Search Preferred Stock or the capital stock of any of its
subsidiaries.
SECTION 2.16 Disposition of Harken Common Stock. Search has no
knowledge that any Search stockholders nor any of the other parties whom will
acquire shares of Harken Common Stock, as contemplated under this Agreement,
have the present intention of disposing of such Harken Common Stock.
SECTION 2.17 ERISA.
(a) Except as set forth in the Search Disclosure
Schedule, Search currently has none and has never had, in the past, any
employee benefit plan (including, without limitation, any "employee benefit
plan," as defined in Section 3(3) of the Employee Retirement Income Security
Act of 1974, as amended ("ERISA")), nor any bonus, pension, profit sharing,
deferred compensation, incentive compensation, stock ownership, stock purchase,
stock option, phantom stock, retirement, vacation, severance, disability, death
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benefit, hospitalization, insurance or other plan, arrangement or understanding
(whether or not legally binding), maintained or contributed to by Search or any
of its subsidiaries.
(b) Neither Search nor any of its subsidiaries is a party
to any collective bargaining agreement.
(c) Neither Search nor any of its subsidiaries has any
obligation for retiree health, medical or life insurance benefits under any
plan referred to in this Section 2.17(a) other than (a) deferred compensation
benefits accrued as liabilities on the consolidated financial statements of
Search and its subsidiaries, or (b) benefits the full cost of which are borne
by the current or former employee (or his beneficiary).
SECTION 2.18 Taxes. Search and each of its subsidiaries have duly
filed all material U.S. federal, state, local and foreign tax returns required
to be filed by it in any capacity, and Search has duly paid, caused to be paid
or made adequate provision for the payment of all Taxes (as hereinafter
defined) shown to be payable on such returns in respect of the periods covered
by such returns and has made and recorded in the Balance Sheet Date Statements
adequate provision for payment of all Taxes anticipated to be payable in
respect of all calendar periods since the periods covered by such returns.
Except as provided in the Search Disclosure Schedule, no U.S. federal income
tax return ever filed by Search or any of its subsidiaries has ever been
audited by the Internal Revenue Service (the "IRS"). Except as disclosed in
the Search Disclosure Schedule, all deficiencies and assessments asserted as a
result of any examinations or other audits by U.S. federal, state, local or
foreign taxing authorities have been paid, fully settled or adequately provided
for in the financial statements contained in the Search SEC Reports, and no
issue or claim has been asserted for Taxes by any taxing authority for any
prior period, the adverse determination of which would result in a deficiency
which would have a Material Adverse Effect, other than those heretofore paid or
provided for. Except as set forth in the Search Disclosure Schedule, there are
no outstanding agreements or waivers extending the statutory period of
limitation applicable to any U.S. federal, state, local or foreign income tax
return of Search or its subsidiaries. Except as set forth in the Search
Disclosure Schedule, neither Search nor any of its subsidiaries is a party to
any agreement, contract or arrangement that would result, separately or in the
aggregate, in the payment of any "excess parachute payment" within the meaning
of Section 280G of the Internal Revenue Code of 1986, as amended (the "Code"),
and the Merger will not be a factor causing any payments to be made by Search,
Harken or any subsidiaries of either which payments are not deductible (in
whole or in part) pursuant to Section 280G of the Code. For purposes of this
Agreement, "Taxes" shall mean all taxes, fees, levies, duties, charges or other
assessments imposed by any federal, state, county, local or foreign government,
taxing authority, subdivision or agency thereof, including interest, penalties,
additions to tax or additional amounts thereto.
SECTION 2.19 Change in Control. Except as set forth in the Search
Disclosure Schedule, neither Search nor any of its subsidiaries is a party to
any contract, agreement or understanding which contains a "change in control,"
"potential change in control" or similar provision. Except as set forth in the
Search Disclosure Schedule or as set forth in this Agreement, the consummation
of the transactions contemplated by this Agreement will not (either alone or
upon the occurrence of any additional acts or events) result in any payment
(whether of severance pay or otherwise) becoming due from Search or any of its
subsidiaries to any person.
SECTION 2.20 Material Contracts. The Search Disclosure Schedule sets
forth a complete and accurate list of all contracts, agreements and instruments
(including any amendments hereto), other than oil and gas leases, to which
Search or any of its subsidiaries is a party or by which any of them or any of
their properties or assets may be bound which (a) is material to the oil and
gas business conducted by Search and its subsidiaries to which Search or any of
its subsidiaries is a party or by which they or their respective assets are
bound or subject or (b) provide for payments in any one year by or to Search or
any of its subsidiaries in excess of $10,000. Except as set forth in the
Search Disclosure Schedule, each of such contracts, agreements and instruments
is valid and binding and in full force and effect and, to the best knowledge of
Search, there has not occurred any default by any party thereto which remains
unremedied as of the date hereof.
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SECTION 2.21 Insurance. The Search Disclosure Schedule lists all
policies of title, asset, fire, hazard, casualty, liability, life, worker's
compensation and other forms of insurance of any kind owned or held by Search
or any of its subsidiaries. All such policies: (a) are with insurance
companies believed by Search to be financially capable and reputable; (b) are
in full force and effect; (c) are sufficient for compliance by Search or its
subsidiaries in all material respects with all requirements of law and of all
material agreements to which Search or any of its subsidiaries is a party; (d)
are, to Search's knowledge, valid and outstanding policies enforceable against
the insurer; (e) provide insurance coverage against all risks normally insured
against in accordance with generally prevailing practices in the oil and gas
industry; and (f) provide that they will remain in full force and effect
through the respective dates set forth in the Search Disclosure Schedule,
subject to payment of required premiums thereunder.
SECTION 2.22 Banks; Attorneys-in-fact. The Search Disclosure
Schedule sets forth a complete list showing the name of each bank or other
financial institution in which Search or any of its subsidiaries has accounts
(including a list of the names of all persons currently authorized to draw
thereon or to have access thereto). Such list also shows the name of each
person holding a power of attorney and any other power or authority under which
another party may obligate or commit Search, its subsidiaries, or any of their
assets in any manner or form.
SECTION 2.23 Amendment to Stock Options. The Stock Option Agreement
between Search and Dr. Gary Wood dated March 3, 1994 to purchase 25,000 shares
of Search Common Stock has been amended to terminate on June 30, 1996.
SECTION 2.24 Documentation Regarding Partnerships. Search has
delivered to Harken copies of all materials and documents previously sent or
delivered to the partners of any of the Search Partnerships in connection with
either the acquisition by Search or any of its subsidiaries of partnership
interests in the Search Partnerships or the liquidation of the Search
Partnerships.
SECTION 2.25 Ownership of Harken Stock. Search does not own, nor has
it owned during the past five years, any shares of the stock of Harken.
SECTION 2.26 Not Investment Company. Neither Search nor any of its
subsidiaries is a investment company as defined in Sections 368(a)(2)(F)(iii)
and (iv) of the Code.
SECTION 2.27 No Intercorporate Indebtedness. There is no
intercorporate indebtedness existing between Search and Harken that was issued,
acquired or will be settled at a discount.
ARTICLE III
REPRESENTATIONS AND WARRANTIES OF HARKEN AND MERGER SUB
Harken and Merger Sub hereby, jointly and severally, represent and
warrant to Search that:
SECTION 3.01 Organization and Qualifications; Subsidiaries. Each of
Harken and each of its subsidiaries is a corporation duly organized, validly
existing and in good standing under the laws of the jurisdiction of its
incorporation and has the requisite corporate power and authority and is in
possession of all Approvals necessary to own, lease and operate its properties
and to carry on its business as it is now being conducted, except where the
failure to be so organized, existing and in good standing or to have such
power, authority and Approvals would not, individually or in the aggregate,
have a Material Adverse Effect (as defined below). Neither Harken nor any
subsidiary has received any notice of proceedings relating to the revocation or
modification of any such Approvals. Each of Harken and each of its
subsidiaries is duly qualified or licensed as a foreign corporation to do
business, and is in good standing, in each jurisdiction where the character of
its properties owned, leased or operated by it or the nature of its activities
makes such qualification or licensing necessary, except for such failures to be
so duly qualified or licensed and in good standing that would not, either
individually or in the aggregate, have a Material Adverse Effect. When used in
connection with Harken or Merger Sub, the term "Material Adverse Effect" means
any change or effect that is or is reasonably likely to be materially adverse
to the business, operations, properties (including intangible properties),
condition (financial or otherwise), assets or liabilities (including contingent
liabilities)
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of Harken and its subsidiaries taken as a whole. The Disclosure Schedule
prepared by Harken attached hereto as Exhibit "P" (the "Harken Disclosure
Schedule") lists all of Harken's subsidiaries.
SECTION 3.02 Certificate of Incorporation and By-Laws. Harken has
heretofore furnished to Search a complete and correct copy of the Certificate
of Incorporation and the By-Laws, each as amended to date, of Harken and Merger
Sub. Each of Harken's and Merger Sub's Certificate of Incorporation, By-Laws
and the equivalent organizational documents of each of its subsidiaries are in
full force and effect. Neither Harken nor any of its subsidiaries is in
violation of any of the provisions of its respective Certificate of
Incorporation or By-Laws.
SECTION 3.03 Capitalization.
(a) The authorized capital stock of Harken consists of (i)
100,000,000 shares of Harken Common Stock of which, as of the date hereof,
59,482,853 shares were issued and outstanding, 5,983,655 shares are held in
treasury, 6,425,534 shares are reserved for issuance pursuant to (A)
outstanding options under Harken's stock option plans, (B) the conversion terms
of Harken's Series C Convertible Preferred Stock and (C) the terms set forth in
the Harken Disclosure Schedule; and (ii) 10,000,000 shares of preferred stock
of which, as of the date hereof, 186,760 shares of Harken's Series C
Convertible Preferred Stock were issued and outstanding. The authorized
capital stock of Merger Sub consists of 10,000 shares of common stock, par
value $.10 per share, 1,000 shares of which, as of the date hereof, are issued
and outstanding. All of the outstanding shares of Harken's and Merger Sub's
respective capital stock have been duly authorized and validly issued and are
fully paid and non-assessable and are free of preemptive rights with no
personal liability attaching to the ownership thereof. Except as set forth in
this Section 3.03, as of the date hereof, there are no options, warrants or
other rights, agreements, arrangements or commitments of any character relating
to the issued or unissued capital stock of Harken or any of its subsidiaries or
obligating Harken or any of its subsidiaries to issue or sell any shares of
capital stock of, or any securities convertible into or evidencing the right to
purchase any shares of capital stock of, or other equity interests in, Harken
or any of its subsidiaries. There are no obligations, contingent or otherwise,
of Harken or any of its subsidiaries to repurchase, redeem or otherwise acquire
any shares of Harken Common Stock or the capital stock of any subsidiary of
Harken. Each of the outstanding shares of capital stock of each of Harken's
subsidiaries is duly authorized, validly issued, fully paid, and non-
assessable, and such shares owned by Harken or another subsidiary are owned
free and clear of all security interests, liens, claims, pledges, agreements,
limitations in Harken's voting rights, charges, or other encumbrances of any
nature whatsoever.
(b) The shares of Harken Common Stock to be issued as of the
Effective Time, the Contingent Shares, if any, issued on the Settlement Date
and the Final Settlement Date and upon exercise of the Harken Warrants and the
Unexchanged Search Warrants in accordance with their terms, the shares of
Harken Common Stock issued thereunder, will, upon their issuance, be duly
authorized, validly issued, fully paid and non-assessable, and free of any
preemptive rights with no personal liability attached to the ownership thereof.
SECTION 3.04 Authority Relative to this Agreement. Each of Harken
and Merger Sub has the requisite corporate power and authority to execute and
deliver this Agreement and to carry out its obligations hereunder and to
consummate the transactions contemplated hereby. The execution and delivery of
this Agreement by Harken and Merger Sub and the consummation by Harken and
Merger Sub of the transactions contemplated hereby have been duly and validly
authorized by all necessary corporate action on the part of Harken and Merger
Sub and no other corporate proceedings on the part of Harken or Merger Sub are
necessary to authorize this Agreement or to consummate the transactions so
contemplated. This Agreement has been duly and validly executed and delivered
by Harken and Merger Sub and assuming the due authorization, execution and
delivery by Search, constitutes the legal, valid and binding obligation of each
of Harken and Merger Sub, enforceable in accordance with its terms.
SECTION 3.05 No Conflict; Required Filings and Consents.
(a) The execution and delivery of this Agreement by Harken and
Merger Sub do not, and the performance of this Agreement by Harken and Merger
Sub shall not, (i) conflict with or violate the Certificate of Incorporation or
By-Laws of Harken, Merger Sub, or any of Harken's subsidiaries (ii) conflict
with or
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violate any law, rule, regulation, order, judgment or decree applicable to
Harken, any of its subsidiaries, or Merger Sub or by which any of their
respective properties are bound or affected, except for any such conflicts or
violations that would not, individually or in the aggregate, have a Material
Adverse Effect, or (iii) result in any breach of or constitute a default (or an
event which with notice or lapse of time or both would become a default) under,
or give to others any rights of termination, amendment, acceleration or
cancellation of, or result in the creation of a lien or encumbrance on any of
the properties or assets of Harken, or any of its subsidiaries, or Merger Sub
pursuant to, any note, bond, mortgage, indenture, contract, agreement, lease,
license, permit, franchise or other instrument or obligation to which Harken,
or any of its subsidiaries, or Merger Sub is a party or by which Harken, or any
of its subsidiaries, or Merger Sub or any of their respective properties are
bound or affected, except for any such breaches, defaults or other occurrences
that would not, individually or in the aggregate, have a Material Adverse
Effect.
(b) The execution and delivery of this Agreement by Harken and
Merger Sub do not, and the performance of this Agreement by Harken and Merger
Sub shall not, require any consent, approval, authorization or permit of, or
filing with or notification to, any governmental or regulatory authority,
domestic or foreign, except (i) for applicable requirements, if any, of the
Securities Act, the Exchange Act, Blue Sky Laws, the American Stock Exchange
and the rules and regulations thereunder, and the filing and recordation of
appropriate merger or other documents as required by Delaware Law and (ii)
where the failure to obtain such consents, approvals, authorizations or
permits, or to make such filings or notifications, would not prevent or delay
consummation of the Merger, or otherwise prevent Harken or Merger Sub from
performing their respective obligations under this Agreement, and would not
have a Material Adverse Effect.
SECTION 3.06 Compliance; Permits.
(a) Neither Harken nor any of its subsidiaries is in conflict
with, or in default or violation of, (i) any law, rule, regulation, order,
judgment or decree applicable to Harken or any of its subsidiaries or by which
its or any of their respective properties is bound or affected, or (ii) any
note, bond, mortgage, indenture, contract, agreement, lease, license, permit,
franchise or other instrument or obligation to which Harken or any of its
subsidiaries is a party or by which Harken or any of its subsidiaries or any of
its or any of their respective properties is bound or affected, nor, except as
disclosed in the Harken Disclosure Schedule, has Harken or any of its
subsidiaries received and not finally resolved any complaint, citation or
notice of a conflict with or a default or violation of any of the foregoing
nor, to the best of Harken's knowledge, are any threatened, except for any such
conflicts, defaults or violations which would not, individually or in the
aggregate, have a Material Adverse Effect.
(b) Harken and its subsidiaries hold all permits, licenses,
variances, exemptions, orders and approvals from governmental authorities which
are material to the operation of the business of Harken and its subsidiaries
taken as a whole (collectively, the "Harken Permits"). Harken and its
subsidiaries are in compliance with the terms of the Harken Permits, except
where the failure to so comply would not have a Material Adverse Effect.
SECTION 3.07 SEC Filings; Financial Statements.
(a) Harken has filed all forms, reports and documents required to
be filed with the SEC since January 1, 1989, and has heretofore delivered or
made available to Search, in the form filed with the SEC, (i) its Annual
Reports on Form 10-K for the fiscal years ended December 31, 1991, 1992 and
1993, respectively, (ii) its Quarterly Reports on Form 10-Q for the periods
ended March 31, 1994 and June 30, 1994, (iii) all proxy statements relating to
Harken's meetings of stockholders (whether annual or special) held since
January 1, 1991, (iv) all Form 8-K's filed by Harken with the SEC since January
1, 1991, (v) all other reports or registration statements filed by Harken with
the SEC since January 1, 1991 and (vi) all amendments and supplements to all
such reports and registration statements filed by Harken with the SEC since
January 1, 1991 (collectively, the "Harken SEC Reports"). The Harken
Disclosure Schedule lists all Harken SEC Reports which have been provided to
Search prior to the date hereof. To the best knowledge and belief of Harken,
the Harken SEC Reports (i) were prepared in substantial compliance with the
requirements of the Securities Act or the Exchange Act, as the case may be, and
(ii) did not at the time they were filed contain any untrue statement of a
material fact or omit to state a material fact required to be stated therein or
necessary
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in order to make the statements therein, in the light of the circumstances
under which they were made, not misleading. None of Harken's subsidiaries is
required to file any forms, reports or other documents with the SEC or any
state securities authority.
(b) Each of the consolidated financial statements (including, in
each case, any related notes thereto) contained in the Harken SEC Reports has
been prepared in accordance with generally accepted accounting principles
applied on a consistent basis throughout the periods involved (except as may be
indicated in the notes thereto) and each fairly presents the consolidated
financial position of Harken and its subsidiaries as of the respective dates
thereof and the consolidated results of its operations and changes in financial
position for the periods indicated, except for the omission of certain
footnotes in the unaudited interim financial statements and except that the
unaudited interim financial statements were or are subject to normal and
recurring year-end adjustments, which were not or are not expected to be
material in amount.
(c) Except as and to the extent set forth on the consolidated
balance sheet of Harken and its subsidiaries as at the Balance Sheet Date,
including the notes thereto (the "Harken Balance Sheet"), neither Harken nor
any of its subsidiaries has any liabilities or obligations of any nature
(whether accrued, absolute, contingent or otherwise), which would be required
to be reflected on a balance sheet, or in the notes thereto, prepared in
accordance with generally accepted accounting principles, except (i) for
liabilities or obligations incurred in the ordinary course of business since
the Balance Sheet Date that would not, individually or in the aggregate, have a
Material Adverse Effect, (ii) as otherwise reflected in the Harken SEC Reports
filed with the SEC since the Balance Sheet Date, or (iii) as specified in the
Harken Disclosure Schedule.
SECTION 3.08 Absence of Certain Changes or Events. Since June 30,
1994, except as disclosed in the Harken Disclosure Statement or in the Harken
SEC Reports filed since that date to the date of this Agreement, Harken and its
subsidiaries have conducted their businesses only in the ordinary course and in
a manner consistent with past practice and, since such date, there has not been
(i) any change in the financial condition, results of operations or business of
Harken or any of its subsidiaries having a Material Adverse Effect, (ii) any
damage, destruction or loss (whether or not covered by insurance) with respect
to any assets of Harken or any of its subsidiaries having a Material Adverse
Effect, (iii) any change by Harken in its accounting methods, principles or
practices, or (iv) any re-evaluation by Harken, which is material taken as a
whole, of any of its assets, including, without limitation, writing down the
value of inventory or writing off notes or accounts receivable other than in
the ordinary course of business.
SECTION 3.09 Absence of Litigation. The Harken Disclosure Schedule
contains a list of all claims, actions, proceedings or investigations pending
or, to the best knowledge of Harken, threatened against Harken or any of its
subsidiaries, or any properties or rights of Harken or any of its subsidiaries,
before any court, arbitrator or administrative, governmental or regulatory
authority or body, domestic or foreign, which could have a Material Adverse
Effect on Harken or any of its subsidiaries. As of the date hereof, neither
Harken nor any of its subsidiaries nor any of their properties is subject to
any order, writ, judgment, injunction, decree, determination or award having a
Material Adverse Effect. Since June 30, 1994, there has been no event, action
or other development in connection with any claim, action, proceeding or
investigation pending or to the best knowledge of Harken threatened against
Harken, any of its subsidiaries, or any properties or rights of Harken or any
of its subsidiaries, individually or in the aggregate, having a Material
Adverse Effect.
SECTION 3.10 Registration Statement; Statement. The information
supplied by Harken for inclusion in the registration statement of Harken
pursuant to which the shares of Harken Common Stock to be issued as of the
Effective Time, the Contingent Shares, the Harken Warrants, and the shares of
Harken Common Stock issuable pursuant to the exercise of the Harken Warrants
and the Unexchanged Search Warrants will be registered with the SEC (the
"Registration Statement") shall not, at the time the Registration Statement
(including any amendments or supplements thereto) is declared effective by the
SEC, contain any untrue statement of a material fact or omit to state any
material fact required to be stated therein or necessary in order to make the
statements therein, in the light of the circumstances under which they were
made, not misleading. The information supplied by Harken for inclusion in the
Proxy Statement shall not, on the date the Proxy Statement is first mailed to
stockholders, at the time of Search's Stockholders Meeting and at the Effective
Time contain any untrue statements of material fact, or omit to state any
material fact required to be stated therein or necessary in order to make the
statements therein, in light of the circumstances under which they
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were made, not misleading. If at any time prior to the Effective Time any
event relating to Harken, Merger Sub or any of their respective affiliates,
officers or directors should be discovered by Harken or Merger Sub which should
be set forth in an amendment to the Registration Statement or a supplement to
the Proxy Statement, Harken or Merger Sub will promptly inform Search.
Notwithstanding the foregoing, Harken and Merger Sub make no representation or
warranty with respect to any information supplied by Search which is contained
in any of the foregoing documents. The Registration Statement and Proxy
Statement shall comply in all material respects as to form and substance with
the requirements of the Securities Act, the Exchange Act and the rules and
regulations thereunder.
SECTION 3.11 Investment Bankers. No broker, finder, advisor,
consultant, or investment banker is entitled to any consulting, brokerage,
finder's or other fee or commission in connection with the transactions
contemplated by this Agreement based upon arrangements made by or on behalf of
Harken.
SECTION 3.12 Board Approval. The Board of Directors of Harken has,
by resolutions duly adopted by the requisite vote of directors present at a
meeting of such Board duly called and held on September 30, 1994, determined
that the Merger in accordance with the terms of this Agreement, is fair to and
in the best interests of its stockholders.
SECTION 3.13 . Merger Sub will acquire at least ninety percent (90%)
of the fair market value of Search's net assets and at least seventy percent
(70%) of the fair market value of Search's gross assets in Merger. For
purposes of this representation, amounts paid by Search to dissenters, amounts
paid by Search to stockholders who receive cash or other property, amounts used
by Search to pay reorganization expenses, and all redemptions and distributions
(except for regular, normal dividends) made by Search will be included as
assets of Search immediately prior to the Merger.
SECTION 3.14 Control of Merger Sub. Prior to the Merger, Harken will
be in control of Merger Sub within the meaning of Section 368(c) of the Code.
Following the Merger, Merger Sub will not issue additional shares of its stock
that will result in Harken losing control of Merger Sub within the meaning of
Section 368(c) of the Code. No stock of Merger Sub will be issued in the
Merger.
SECTION 3.15 No Plan or Intention to Reacquire Stock. Harken has no
current plan or intention to reacquire any shares of Harken Common Stock issued
at the Effective Time.
SECTION 3.16 No Plan or Intention to Merge, Sell or Otherwise Dispose
of Search. Harken has no current plan or intention after the Merger to
liquidate Merger Sub; to merge Merger Sub with or into another corporation; to
sell or otherwise dispose of the stock of Merger Sub; or to cause Merger Sub to
sell or otherwise dispose of any of its assets or of any of the assets acquired
from Search, except for dispositions made in the ordinary course of business,
dispositions contemplated by this Agreement or transfers described in Section
368(a)(2)(C) of the Code.
SECTION 3.17 No Liabilities. Merger Sub will have no liabilities
prior to the Merger. There is no intercorporate indebtedness existing between
Harken and Search or between Merger Sub and Search that was issued, acquired or
will be settled at a discount.
SECTION 3.18 Historic Business. Following the Merger, Merger Sub
will continue the historic business of Search or use a significant portion of
Search's historic business assets in a business.
SECTION 3.19 Ownership of Search Stock. Harken does not own, nor has
it owned during the past five years, any shares of the stock of Search.
SECTION 3.20 Not Investment Company. Harken and Merger Sub are not
investment companies as defined in Sections 368(a)(2)(F)(iii) and (iv) of the
Code.
SECTION 3.21 No Prior Business. Merger Sub has not conducted any
business prior to the Merger, except such business as may be necessary for
Merger Sub to engage in the Merger.
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ARTICLE IV
CONDUCT OF BUSINESS PENDING THE MERGER
SECTION 4.01 Conduct of Business by Search Pending the Merger.
Except as disclosed in the Search Disclosure Schedule or as contemplated in
this Agreement, Search covenants and agrees that, between the date of this
Agreement and the Effective Time, unless Harken shall otherwise agree, which
agreement shall not be unreasonably withheld, Search shall conduct business and
shall cause the businesses of its subsidiaries, to be conducted only in, and
Search shall not, take any action except in, the ordinary course of business
and in a manner consistent with past practice, and Search shall use
commercially reasonable efforts to preserve substantially intact the business
organization of Search and its subsidiaries, to keep available the services of
the present officers, employees and consultants of Search and its subsidiaries
and to preserve the present relationships of Search and its subsidiaries with
customers, suppliers, partners, investors, operators and other persons with
which Search and its subsidiaries have significant business relations. By way
of amplification and not limitation, except as disclosed in the Search
Disclosure Schedule and as contemplated in this Agreement, neither Search nor
any of its subsidiaries shall, between the date of this Agreement and the
Effective Time, directly or indirectly do, or propose to do, any of the
following without the prior written consent of Harken, which consent shall not
be unreasonably withheld:
(a) amend or otherwise change its Certificate of Incorporation or
By-Laws or equivalent organizational documents;
(b) issue, sell, pledge, dispose of or encumber, or authorize the
issuance, sale, pledge, disposition or encumbrance of, any shares of capital
stock of any class, or any options, warrants, convertible securities or other
rights of any kind to acquire any shares of capital stock, or any other
ownership interest, of Search, any of its subsidiaries, or affiliates (except
for sales of Search Common Stock pursuant to the valid exercise for cash of any
of the existing Search Warrants);
(c) sell, assign, transfer, hypothecate, pledge, mortgage, or in
any other manner transfer or dispose of any of its properties, leases or assets
(other than oil and gas production in the normal course of business);
(d) declare, set aside, make or pay any dividend or other
distribution, payable in cash, stock, property or otherwise, with respect to
any of its capital stock except dividends payable on the preferred stock of
Search for the period ending September 30, 1994 and December 31, 994;
(e) reclassify, combine, split, subdivide or redeem, purchase or
otherwise acquire, directly or indirectly, any of its capital stock;
(f) (i) acquire (by merger, consolidation, or acquisition of stock
or assets) any corporation, partnership or other business organization or
division thereof; (ii) incur any indebtedness for borrowed money or issue any
debt securities or assume, guarantee or endorse or otherwise as an
accommodation become responsible for, the obligations of any person, or make
any loans or advances, except in the ordinary course of business consistent
with past practice; (iii) enter into or agree to amend, modify, extend,
terminate or in any way change any of the terms, conditions or provisions of
any of the Material Contracts; (iv) enter into or amend any other contract,
agreement, commitment, or arrangement other than in the ordinary course of
business; (v) the settlement of claims not exceeding $10,000 for fair value,
and the payment of existing debts to banks, affiliated, vendors, joint
venturers, or stockholders which have been previously disclosed to Harken; or
(vi) except as set forth in the Search Disclosure Schedule, authorize or incur
any capital expenditures which are individually or, in the aggregate, in excess
of $10,000 for Search and any of its subsidiaries taken as a whole;
(g) increase the compensation or fees payable or to become payable
to its directors, officers or employees, or grant any severance or termination
pay, warrants or stock options to, or enter into any employment, severance or
other agreement with any director, officer or other employee of Search or any
of its subsidiaries, or establish, adopt, enter into or amend any collective
bargaining, bonus, profit sharing, thrift, compensation, stock option,
restricted stock, pension, retirement, deferred compensation, employment,
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termination, severance or other plan, agreement, trust, fund, policy or
arrangement for the benefit of any current or former directors, officers or
employees, except for the termination of consulting and other agreements with
former officers and directors of Search and its subsidiaries;
(h) take any action other than in the ordinary course of business
and in a manner consistent with past prudent practice (none of which actions
shall be unreasonable or unusual) with respect to accounting policies or
procedures (including, without limitation, procedures with respect to the
payment of accounts payable and collection of accounts receivable);
(i) make any tax election or settle or compromise any material
federal, state, local or foreign income tax liability; or
(j) pay, discharge or satisfy any claims, liabilities or
obligations (absolute, accrued, asserted or unasserted, contingent or
otherwise), other than as contemplated in the Balance Sheet Date Statements or
the payment, discharge or satisfaction in the ordinary course of business and
consistent with past practice of liabilities reflected or reserved against, in
the financial statements of Search or incurred in the ordinary course of
business and consistent with past practice.
SECTION 4.02 Conduct of Business by Harken and Merger Sub Pending the
Merger. Except as contemplated by this Agreement or as otherwise disclosed in
the Harken Disclosure Schedule, Harken and/or its subsidiaries, as the case may
be, shall not, between the date of this Agreement and the Effective Time,
directly or indirectly do, or propose to do, any of the following without the
prior written consent of Search:
(a) amend or otherwise change its Certificate of Incorporation or
By-Laws;
(b) issue or sell, pledge, dispose of, encumber, or authorize the
issuance or sale of, any shares of capital stock of any class, or any options,
warrants, convertible securities, or any rights of any kind to acquire shares
of capital stock of Harken or any of its subsidiaries, except for (i) the
issuance of Harken Common Stock pursuant to the transactions contemplated
hereunder, (ii) the issuance of the Harken Warrants in the Exchange Offer (as
defined in Section 7.01 hereof), (iii) the issuance of a maximum of 6,425,534
shares of Harken Common Stock currently reserved for issuance under Section
3.03 hereof, (iv) the issuance and sale of capital stock for fair value as
determined by the Board of Directors of Harken, and (v) transactions relating
to indebtedness incurred or to be incurred by Harken or any of its
subsidiaries;
(c) reclassify, combine, split, or subdivide, directly or
indirectly, any of its capital stock; or
(d) Merger Sub shall not conduct any business other than such
business as may be necessary to prepare the Merger Sub to engage in the
transactions contemplated hereunder.
SECTION 4.03 Insurance. Through the Effective Time, Search and
Harken will each maintain in full force and effect either all of their policies
of insurance which were in effect on June 30, 1994 or insurance comparable to
the coverage afforded by such policies.
ARTICLE V
ADDITIONAL AGREEMENTS
SECTION 5.01 Statement; Registration Statement.
(a) As promptly as practicable after the execution of this
Agreement, Search and Harken shall prepare and file with the SEC and any other
appropriate regulatory authority, a registration statement on SEC Form S-4, or
on such other form as shall be appropriate ("Form S-4"), containing a Statement
relating to the approval of the Merger and the transactions contemplated hereby
by the stockholders of Search and the registration under the Securities Act of
the shares of Harken Common Stock to be issued as of the Effective Time, the
Contingent Shares, the Harken Warrants, and the shares of Harken Common Stock
issuable pursuant to the exercise of the Harken Warrants and the Unexchanged
Search Warrants. Harken and Search shall each use all commercially reasonable
efforts to cause the Form S-4 to become effective as soon thereafter as
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practicable. Subject to the applicable fiduciary duties of directors of
Search, as determined by such directors after consultation with independent
counsel, the Proxy Statement shall include the recommendation of the Board of
Directors of Search in favor of the Merger. The Board of Directors of Search
shall submit the Merger on the basis that it be approved by a majority of the
voting power of the holders of the Search Common Stock and the holders of
Search Preferred Stock voting separately as a class.
(b) Harken shall use all commercially reasonable efforts to keep
effective and maintain from Closing until July 17, 1996 the Registration
Statement or such other registration statement under the Securities Act as
Harken may select covering the sale of the shares of Harken Common Stock
issuable upon the exercise of the Harken Warrants and the Unexchanged Search
Warrants, and from time to time during such period shall amend or supplement
the prospectus used in connection therewith to the extent necessary in order to
comply with applicable law.
(c) Harken and Search shall make all necessary filings with
respect to the Merger under the Securities Act and the Exchange Act and the
rules and regulations thereunder, under applicable Blue Sky or similar
securities laws, under applicable foreign securities laws, rules and
regulations and under any rules and regulations of any stock exchange and shall
use all commercially reasonable efforts to obtain required approvals and
clearances with respect thereto. Search shall make all necessary filings with
any exchange upon which the Search Common Stock shall be listed.
SECTION 5.02 Meeting of Stockholders.
(a) Search shall promptly after the date hereof take all action
necessary in accordance with Delaware Law, any exchange upon which the Search
Common Stock may be listed, and its Certificate of Incorporation and By-Laws to
convene the Search Stockholders' Meeting for the purpose of voting on this
Agreement and the Merger; provided, however, that Search will have no
obligation to hold such meeting prior to the effective date of the Registration
Statement. Subject to the applicable fiduciary duties of the Board of
Directors of Search, Search will, through its Board of Directors, recommend to
its stockholders approval of this Agreement and the Merger and shall use
commercially reasonable efforts to solicit from stockholders of Search proxies
in favor of the Merger and shall take any and all other actions necessary or
advisable to secure the vote or consent of stockholders required by Delaware
Law to effect the Merger.
(b) Harken shall promptly after the date hereof take all action
necessary to cause the Harken Common Stock to be issued as of the Effective
Time, the Contingent Shares, and the shares of Harken Common Stock issued
pursuant to the exercise of the Harken Warrants and the Unexchanged Search
Warrants to be approved for listing on the American Stock Exchange prior to the
Effective Time. In addition, Harken shall take all action necessary to cause
the Contingent Shares to be approved for listing on the American Stock Exchange
prior to the Settlement Date.
SECTION 5.03 Access to Information; Confidentiality.
(a) From the date hereof to the Effective Time, each of Search,
Harken and Merger Sub shall, and shall cause their respective subsidiaries,
affiliates, officers, directors, employees, auditors and agents to, afford the
officers, employees and agents of one another complete access at all reasonable
times to one another's officers, employees, agents, properties, offices, plants
and other facilities and to all books and records, including the audit work
papers of their respective certified public accountants, and shall furnish one
another with all financial, operating and other data and information generated
in the ordinary course of business as each, through its officers, employees or
agents, may reasonably request; provided, however, that no party shall be
required to provide access or furnish information which it is prohibited by law
or contract to provide or furnish. Harken and Search further agree to furnish
to Harken, Merger Sub, and to Search, respectively, and to use their
commercially reasonable efforts to cause their respective independent certified
public accountants to furnish, copies of all tax returns, and of all work
papers, audit work papers, and background materials used in the preparation of
such tax returns by Harken, Search, or their respective accountants.
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(b) Each of Harken, Merger Sub and Search shall, and shall cause
their respective affiliates and their respective officers, directors, employees
and agents to, hold in strict confidence all data and information obtained by
them from one another or their respective subsidiaries, affiliates, directors,
officers, employees and agents (unless such information is or becomes readily
ascertainable from public or published information or trade sources or public
disclosure or such information is required to be disclosed by law or in the
Registration Statement or Proxy Statement) and shall ensure that such officers,
directors, employees and agents do not disclose such information to others
without the prior written consent of Search, Harken or Merger Sub, as the case
may be.
(c) In the event of the termination of this Agreement, Search,
Harken and Merger Sub shall, and shall cause their respective affiliates,
officers, directors, employees and agents to, (i) return promptly every
document furnished to them by one another or any of their respective
subsidiaries, affiliates, officers, directors, employees and agents in
connection with the transactions contemplated hereby and any copies thereof,
and shall cause others to whom such documents may have been furnished promptly
to return such documents and any copies thereof any of them may have made,
other than documents filed with the SEC or otherwise publicly available, and
(ii) retain in confidence all documents created by them from any data,
information or document furnished by Search, Harken or Merger Sub, as the case
may be, or any of their respective subsidiaries, affiliates, officers,
directors, employees and agents in connection with the transactions
contemplated hereby and any copies thereof, and shall cause others to whom such
documents may have been furnished promptly to destroy the same and any copies
thereof, other than documents created from data, information or documents filed
with the SEC or otherwise publicly available.
(d) No investigation pursuant to this Section 5.03 shall affect
any representations or warranties of the parties herein or the conditions to
the obligations of the parties hereto.
SECTION 5.04 No Solicitations. From and after the date hereof,
Search will not, and will not authorize or permit any of its officers,
directors, employees, agents and other representatives or those of any of its
subsidiaries (collectively, "Search Representatives") to, directly or
indirectly, solicit, initiate or encourage (including by way of furnishing
information) any prospective buyer or the making of any proposal which
constitutes or may reasonably be expected to lead to, an Acquisition
Transaction (as defined herein) from any person, or engage in any discussions
or negotiations relating thereto or accept any Acquisition Transaction;
provided, however, that, notwithstanding any other provision of this Agreement,
(i) Search may engage in discussions or negotiations with a third party who
(without any solicitation, initiation, encouragement, discussion or
negotiation, directly of indirectly, by or with Search or any Search
Representatives after the date of this Agreement) seeks to initiate such
discussions or negotiations and may furnish such third party information
concerning Search and its business, properties and assets, (ii) Search's Board
of Directors may take and disclose to Search's stockholders a position
contemplated by Rule 14(e)-2(a) promulgated under the Exchange Act and (iii)
following receipt of an Acquisition Transaction that is financially superior to
the Merger and reasonably capable of being financed (as determined in each case
in good faith by Search's Board of Directors after consultation with Search's
financial advisors), the Board of Directors of Search may withdraw, modify or
not make its recommendation referred to in Section 5.02 hereof or terminate
this Agreement in accordance with Section 8.01(d) hereof, but in each case
referred to in the foregoing clauses (i) through (iii) only to the extent that
the Board of Directors of Search shall conclude in good faith after consulting
with Search's outside counsel that such action is necessary in order for the
Board of Directors of Search to act in a manner which is consistent with its
fiduciary obligations under applicable law. Search shall immediately cease and
cause to be terminated any existing solicitation, initiation, encouragement,
activity, discussion or negotiation with any parties conducted heretofore by
Search or any Search Representatives with respect to any Acquisition
Transaction. Search will promptly notify Harken of any such discussions or
negotiations, requests for such information or the receipt of any Acquisition
Transaction, including the identity of the person or group engaging in such
discussions or negotiations, requesting such information or making such
Acquisition Transaction and the material terms and conditions of any
Acquisition Transaction. As used in this Agreement, "Acquisition Transaction"
shall mean any proposal or offer, other than a proposal or offer by Harken or
any of its affiliates, for a tender or exchange offer, a merger, consolidation
or other business combination involving Search or any subsidiary or division of
Search or any proposal to acquire in any manner an equity interest in, or
significant assets of, Search or any of its subsidiaries or divisions.
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SECTION 5.05 Consents; Approvals. Search and Harken shall use all
commercially reasonable efforts to obtain all consents, waivers, approvals,
authorizations or orders (including, without limitation, all United States and
foreign governmental and regulatory rulings and approvals), and Search and
Harken shall make all filings (including, without limitation, all filings with
United States and foreign governmental or regulatory agencies) required in
connection with the authorization, execution and delivery of this Agreement by
Search and Harken and the consummation by them of the transactions contemplated
hereby. Search and Harken shall furnish all information required to be
included in the Proxy Statement and the Registration Statement, and the
American Stock Exchange Listing Application, or for any application or other
filing to be made pursuant to the rules and regulations of any United States or
foreign governmental body in connection with the transactions contemplated by
this Agreement.
SECTION 5.06 Agreements of Affiliates. Search shall deliver to
Harken, prior to the date the Registration Statement becomes effective under
the Securities Act, a letter (the "Affiliate Letter"), in the form attached
hereto as Exhibit "E-1," identifying all persons who are, at the record date
for the Search Stockholders' Meeting, "affiliates" of Search for purposes of
Rule 145 under the Securities Act. Search shall use commercially reasonable
efforts to cause each person who is identified as an "affiliate" in the
Affiliate Letter to deliver to Harken, prior to the Effective Time, a written
agreement (an "Affiliate Agreement") in the form attached hereto as Exhibit
"E-2." Harken shall be entitled to place legends as specified in such
Affiliate Agreements on the certificates evidencing any Harken Common Stock to
be received by such affiliates pursuant to the terms of this Agreement, and to
issue appropriate stop transfer instructions to the transfer agent for the
Harken Common Stock, consistent with the terms of such Affiliate Agreements.
SECTION 5.07 Notes. Prior to the Closing, Search shall enter into
agreements with each of Concorde, EnCap and Joseph F. Langston to amend,
effective as of the Effective Time, the Letter Agreement dated January 10, 1994
between Search and Concorde (the "Concorde Agreement"), the Letter Agreement
dated December 20, 1993 between Search and EnCap (the "EnCap Agreement") and
the Employment Agreement dated July 1, 1991 between Search and Mr. Langston
(the "Employment Agreement"), pursuant to which amendments Search shall issue a
demand, unsecured, non-interest bearing promissory note to (a) evidence the
amount payable to Concorde by Search at the Closing under the Concorde
Agreement in the form attached hereto as Exhibit "H-1" (the "Concorde Note");
(b) evidence the amount payable to EnCap at the Closing by Search under the
EnCap Agreement in the form attached hereto as Exhibit "H-2" (the "EnCap
Note"); and (c) evidence the full settlement of any amounts payable to Joseph
F. Langston under the Employment Agreement, reduced by the amount of any salary
paid to Mr. Langston by Search prior to the Effective Time in the form attached
hereto as Exhibit "H-3" (the "Langston Note"). Each of the Concorde Note,
EnCap Note and the Langston Note shall provide that at the Effective Time it
will be converted automatically into and represent the right to receive shares
of Harken Common Stock, as provided in Section 1.07 hereof.
SECTION 5.08 Indemnification of Directors and Officers. (a) From
and after the Closing, Harken shall cause the Surviving Corporation to, and the
Surviving Corporation shall, keep in effect a provision in its Certificate of
Incorporation, substantially in the form of Exhibit "M," providing for the
exculpation of liability for, and the indemnification of, each person who is
now or ever has been an officer, director, employee, trustee or agent of Search
and/or any of its Subsidiaries (as identified on Schedule 5.08 attached hereto
the "Agent Indemnified Parties") to the fullest extent permitted under
applicable law, which provision shall not (i) be contradicted by, or in
conflict with , any other term or provision of such Certificate of
Incorporation, or (ii) be amended or repealed except as required by applicable
law or except to make changes permitted by law that would enlarge an Agent
Indemnified Parties' right of indemnification, until the lapse of the time
period provided for in Section 11 of the indemnification agreements to be
entered into pursuant to Section 5.08 (c) below.
(b) The rights of each Agent Indemnified Party hereunder shall be
in addition to any other rights such Agent Indemnified Party may have under the
Certificate of Incorporation or Bylaws of the Surviving Corporation as the
surviving entity to the Merger, under Delaware Law or otherwise. The Merger
Sub shall deliver a true and complete copy of its Certificate of Incorporation
and Bylaws to Search prior to the Closing.
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(c) At the Closing, Harken and Surviving Corporation each agree to
enter into indemnification agreements, substantially in the form of Exhibit
"N," with each of the Agent Indemnified Parties.
(d) The provisions of this Section 5.08 shall survive the
consummation of the Merger and are expressly intended to benefit each of the
Agent Indemnified Parties.
SECTION 5.09 Taxability of Transaction. Harken and Search agree to
treat the Merger as a reorganization under Section 368(a)(1) of the Code. In
addition, Harken and Search agree to treat Section 483 of the Code and the
regulations thereunder and not Section 1273 of the Code and the regulations
thereunder as being applicable to compute the amount of interest, if any, that
will be treated as income to the current stockholders of Search and deductible
by Harken upon such stockholders' receipt of Contingent Shares. Harken agrees
to use commercially reasonable efforts to maintain the position upon any audit
or administrative proceeding with the IRS that Section 483 of the Code, rather
than Section 1273 of the Code, is applicable to impute interest income to the
current stockholders upon the issuance to them of the Contingent Shares.
Search agrees that either its legal counsel (or a firm of certified public
accountants retained by it) shall render an opinion with regard to the material
tax consequences of the transactions hereunder to the holders of Search Shares
and the Search Warrants, which opinion shall be filed as an exhibit to the
Registration Statement as required by Item 601(b)(8) of Regulation S-K of the
Securities Act.
SECTION 5.10 Notice of Developments. Search shall give prompt notice
to Harken, and Harken shall give prompt notice to Search, of (a) the
occurrence, or non-occurrence, of any event the occurrence or non-occurrence of
which would be likely to cause any representation or warranty contained in this
Agreement to be untrue or inaccurate and (b) any failure of Search, Harken or
Merger Sub, as the case may be, to comply with or satisfy any covenant,
condition or agreement to be complied with or satisfied by it hereunder;
provided, however, that the delivery of any notice pursuant to this Section
5.10 shall not limit or otherwise affect the remedies available hereunder to
the party receiving such notice.
SECTION 5.11 Further Action. Upon the terms and subject to the
conditions hereof, each of the parties hereto shall (a) promptly make its
respective filings, and thereafter make any other required submissions, and (b)
use commercially reasonable efforts to take, or cause to be taken, all
appropriate action, and to do or cause to be done, all things necessary, proper
or advisable under applicable laws and regulations to consummate and make
effective the transactions contemplated by this Agreement, including, without
limitation, using all commercially reasonable efforts to obtain all licenses,
permits, consents, approvals, authorizations, qualifications and orders of
governmental authorities and parties to contracts with Search and Harken and
their subsidiaries as are necessary for the consummation of the transactions
contemplated by this Agreement and to fulfill the conditions to the Merger. In
case at any time after the Effective Time any further action is necessary or
desirable to carry out the purposes of this Agreement, the proper officers and
directors of each party to this Agreement shall use commercially reasonable
efforts to take all such necessary action.
SECTION 5.12 Public Announcements. Harken and Search shall consult
with each other before issuing any press release or otherwise making any public
statements with respect to the Merger and shall not issue any such press
release or make any such public statement prior to such consultation, except as
may be required by law or any listing agreement with a national securities
exchange.
SECTION 5.13 Director Nominee. After the Effective Time, Harken's
Board of Directors will nominate and elect Dr. Gary Wood as a Director of
Harken to serve in such position through Harken's Annual Stockholders meeting
to be held on or about June 1996.
SECTION 5.14 Fees and Expenses. Whether or not the Merger is
consummated, all costs and expenses incurred in connection with this Agreement
and the transactions contemplated hereby shall be paid by the party incurring
the expenses, except that expenses incurred in connection with the preparation
of the Registration Statement and the printing and mailing of the Proxy
Statement shall be shared equally by Search and Harken.
SECTION 5.15 Major Transactions. Described on Exhibit "K" attached
hereto, are the material terms of certain transactions (the "Major
Transactions") which Search has represented to Harken have been
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negotiated and agreed to between all parties necessary to each of such
transactions and which will be documented and fully and finally closed by
Search prior to the Effective Time. The parties recognize and agree that the
timely closing and completion of each of these Major Transactions prior to the
Effective Time is of material importance in connection with the Merger.
SECTION 5.16 Assignment of Eastern Shelf Overriding Royalty. Prior
to the Closing, Search shall acquire the overriding royalty interests in the
Eastern Shelf Properties (as defined in Exhibit "F" attached hereto) by
entering into the Royalty Assignment Agreement with each of the holders (the
"Royalty Holders") of such royalty interests (the "Eastern Shelf Overriding
Royalty Interests"), a form of which agreement is attached hereto as Exhibit
"L" (the "Royalty Assignment Agreement").
SECTION 5.17 Partnership Documents. Search will deliver to Harken
full and complete copies of any and all documentation and correspondence it or
any of its subsidiaries proposes to send to any of the Partners of any of the
Search Partnerships, prior to such items being sent. Harken shall have the
right to review, comment on and approve all such documents and correspondence,
which approval Harken will not unreasonably withhold.
ARTICLE VI
CONDITIONS OF MERGER
SECTION 6.01 Conditions to Obligation of Each Party to Effect the
Merger. The respective obligations of each party to effect the Merger shall be
subject to the satisfaction at or prior to the Effective Time of the following
conditions:
(a) Effectiveness of the Registration Statement. The Registration
Statement shall have been declared effective. No stop order suspending the
effectiveness of the Registration Statement shall have been issued by the SEC
and no proceedings for that purpose shall, on or prior to the Effective Time,
have been initiated or, to the knowledge of Harken or Search, threatened by the
SEC;
(b) Stockholder Approval. This Agreement and the Merger shall
have been approved and adopted by (i) the requisite vote of the holders of
Search Common Stock (which shall be the minimum required by Delaware Law or the
Certificate of Incorporation and Bylaws of Search) and (ii) the holders of 100%
of the outstanding Search Preferred Stock;
(c) AMEX Listing. The shares of Harken Common Stock issuable at
the Effective Time, the Contingent Shares and the shares of Harken Common Stock
issuable pursuant to the exercise of the Harken Warrants or Unexchanged Search
Warrants shall have been approved for listing on the American Stock Exchange
upon official notice of issuance; and
(d) No Order. No United States or state governmental authority or
other agency or commission or United States or state court of competent
jurisdiction shall have enacted, issued, promulgated, enforced or entered any
statute, rule, regulation, executive order, decree, injunction or other order
(whether temporary, preliminary or permanent) which is in effect restricting,
preventing or prohibiting consummation of the transactions contemplated by this
Agreement.
SECTION 6.02 Additional Conditions to Obligations of Harken and
Merger Sub. The obligations of Harken and Merger Sub to effect the Merger are
also subject to the following conditions:
(a) Representations and Warranties. The representations and
warranties of Search contained in this Agreement shall be true and correct in
all material respects on the date hereof and on and as of the Effective Time,
except for changes contemplated by this Agreement, and except for those
representations and warranties which address matters only as of a particular
date (which shall remain true and correct as of such date), with the same force
and effect as if made on and as of the Effective Time, and Harken and Merger
Sub shall have received a certificate of the President and Chief Financial
Officer of Search to that effect;
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(b) Agreements and Covenants. Search shall have performed or
complied in all material respects with all agreements and covenants required by
this Agreement to be performed or complied with by it on or prior to the
Effective Time, including but not limited to the Major Transactions;
(c) Consents Obtained. All material consents, waivers, approvals,
authorizations or orders required to be obtained, and all filings required to
be made, by Search for the authorization, execution and delivery of this
Agreement and the consummation by it of the transactions contemplated hereby
shall have been obtained and made by Search;
(d) No Challenge. There shall not be any actual or threatened
action, proceeding or investigation before any court or administrative agency
or by any government agency or any other person (i) challenging, or seeking
material damages by reason of consummation of the transactions contemplated by
this Agreement, or (ii) seeking to restrain, prohibit or limit the exercise of
full rights of ownership or operation by Harken or its subsidiaries of all or
any portion of the business or assets of Search, in either case having a
Material Adverse Effect on Search or Harken;
(e) Affiliate Agreements. Harken shall have received from the
chief executive officer of Search the Affiliate Letter and from each person who
is identified in the Affiliate Letter as an "affiliate" of Search, an Affiliate
Agreement;
(f) Amendment of Agreements. The Employment Agreement, Concorde
Agreement and the EnCap Agreement shall have been amended by the mutual written
agreement of the parties thereto, effective as of the Effective Time as
described in Section 5.07 hereof;
(g) Other Agreements. Except as listed on the Search Disclosure
Schedule, all agreements between Search and any of Search's officers or
directors shall have been terminated by the mutual written agreement of the
parties thereto, effective as of the Effective Time;
(h) Material Adverse Effect. No fact, event or condition
(financial or otherwise) shall have occurred with respect to Search and its
subsidiaries taken as a whole having, in the aggregate, a Material Adverse
Effect as defined in Section 2.01 hereof on Search and its subsidiaries;
(i) Dissenting Votes. The holders of not more than five percent
(5%) of the outstanding Search Shares shall have exercised their appraisal
rights, if any, in accordance with Delaware Law;
(j) Reconveyance of Overriding Royalty Interests. Search shall
have obtained and made available for filing, if necessary, such assignments and
other evidences of transfer as are reasonably necessary in such form as may be
acceptable to Harken covering the reconveyance in full to Search of the Eastern
Shelf Overriding Royalty Interests; and
(k) Liquidation of Search Partnerships. The partnerships listed
on Exhibit "I" (the "Search Partnerships") shall have been liquidated pursuant
to the terms of their respective partnership agreements and on the terms and
conditions and with such agreements as are acceptable to Harken. Exhibit "I"
sets forth the disposition of each of the general and limited partnership
interests in each of the Search Partnerships. Harken shall have received from
Stead & Sughroue, L.L.C., an opinion in the form and substance satisfactory to
Harken, that (i) the Search Partnerships have been liquidated and dissolved in
accordance with the terms of each of the partnership agreements and applicable
laws, and (ii) if Search or any of its subsidiaries acquired any of the
partnership interests of any of the Search Partnerships, that the acquisition
of such interests was in accordance with the terms of each of the partnership
agreements and applicable laws.
SECTION 6.03 Additional Conditions to Obligation of Search. The
obligation of Search to effect the Merger is also subject to the following
conditions:
(a) Representations and Warranties. The representations and
warranties of Harken and Merger Sub contained in this Agreement shall be true
and correct in all material respects on the date hereof and on and as of the
Effective Time, except for changes contemplated by this Agreement and except
for those
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representations and warranties which address matters only as of a particular
date (which shall remain true and correct as of such date) with the same force
and effect as if made on and as of the Effective Time, and Search shall have
received a certificate of the President and Chief Financial Officer of Harken
to that effect;
(b) Agreements and Covenants. Harken and Merger Sub shall have
performed or complied in all material respects with all agreements and
covenants required by this Agreement to be performed or complied with by them
on or prior to the Effective Time;
(c) Consents Obtained. All material consents, waivers, approvals,
authorizations or orders required to be obtained, and all filings required to
be made, by Harken and Merger Sub for the authorization, execution and delivery
of this Agreement and the consummation by them of the transactions contemplated
hereby shall have been obtained and made by Harken and Merger Sub;
(d) No Challenge. There shall not be any actual or threatened
action, proceeding or investigation before any court or administrative agency
or by any government agency or any other person (i) challenging, or seeking
material damages by reason of consummation of the transactions contemplated by
this Agreement, or (ii) seeking to restrain, prohibit or limit the exercise of
full rights of ownership or operation by Harken or its subsidiaries of all or
any portion of the business or assets of Search, in either case having a
Material Adverse Effect on Search or Harken;
(e) Opinion of Investment Banker. Principal shall have delivered
a written opinion to the Board of Directors of Search, in form reasonably
satisfactory to Search, confirming, as of the date of the Proxy Statement, its
opinion referred to in Section 2.13 hereof; and
(f) Material Adverse Effect. No fact, event or condition
(financial or otherwise) shall have occurred with respect to Harken and its
subsidiaries taken as a whole having, in the aggregate, a Material Adverse
Effect on Harken and its subsidiaries.
(g) Legal Opinion. Search shall have received a letter, in a form
reasonably satisfactory to Search, entitling Search to rely upon the opinion
rendered by legal counsel of Harken filed as an exhibit to the Registration
Statement pursuant to Item 601(b)(5) of Regulation S-K of the Securities Act.
(h) Tax Opinion. Search shall have received an opinion rendered
by its legal counsel (or by a firm of certified public accountants retained by
it) with regard to the taxability of the transactions hereunder to the holders
of Search Shares and the Search Warrants.
ARTICLE VII
SEARCH WARRANTS
SECTION 7.01 Warrant Exchange Offer. Prior to Closing, Harken will
offer (the "Exchange Offer") to each of the current holders of the Search
Warrants to exchange their Search Warrants for new warrants issued by Harken to
acquire shares of Harken Common Stock, a form of which is attached hereto as
Exhibit "G-2" ("Harken Warrants"), according to the exchange schedule set out
in Exhibit "G-1" attached hereto. Exhibit "G-1" sets forth the name of each
holder of a Search Warrant and the maximum number of shares of Search Common
Stock issuable upon exercise of Search Warrants held by such holder and the
maximum number of shares of Harken Common Stock issuable upon exercise of the
Harken Warrants which will be received upon tender of the Search Warrants
pursuant to the Exchange Offer and identifies each such warrant which was
issued to employees as compensation. The Harken Warrants issued in the
Exchange Offer will be effective as of the Effective Time with a term to expire
on June 30, 1996 and will be initially exercisable at $1.82 per share. The
consummation of the Exchange Offer is conditional upon the consummation of the
Merger.
SECTION 7.02 Unexchanged Search Warrants. Each of the Unexchanged
Search Warrants that is not tendered in the Exchange Offer shall represent the
right to purchase Harken Common Stock as set forth in Section 1.15 hereof.
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SECTION 7.03 Warrant Holders Participation in Contingent Shares. The
holders of Harken Warrants and Unexchanged Search Warrants shall be entitled to
receive, under certain conditions, Contingent Shares as set forth in Section
1.10 hereof.
ARTICLE VIII
TERMINATION, AMENDMENT AND WAIVER
SECTION 8.01 Termination. This Agreement may be terminated and the
Merger contemplated hereby may be abandoned at any time prior to the Effective
Time, notwithstanding approval thereof by the stockholders of Search:
(a) By mutual written consent duly authorized by the Boards of
Directors of Harken and Search; or
(b) By either Harken or Search if the Merger shall not have been
consummated at the earlier of May 30, 1995, or before ninety (90) days
following the declaration of the effectiveness of the Registration Statement by
the SEC, or such later date as may be agreed to in writing by the parties;
provided, however that the right to terminate this Agreement under this Section
8.01(b) shall not be available to any party whose willful failure to fulfill
any material obligation under this Agreement has been the cause of, or resulted
in, the failure of the Effective Time to occur on or before such date; or
(c) By either Harken or Search if a court of competent
jurisdiction or governmental, regulatory or administrative agency or commission
shall have issued an order, decree or ruling or taken any other action, in each
case permanently restraining, enjoining or otherwise prohibiting the
transactions contemplated by this Agreement, and such order, decree, ruling or
other action shall have become final and nonappealable; or
(d) By either Harken or Search if the Board of Directors of Search
shall have approved or recommended any Acquisition Transaction in accordance
with Section 5.04 hereof; or
(e) By Harken if the Board of Directors of Search shall have
withdrawn, modified or amended in any manner adverse to Harken its approval of
or recommendation in favor of the Merger due to a Material Adverse Effect to
Harken; or
(f) By Harken if Search breaches in any material respect any of
its agreements or covenants contained herein, or if any representation or
warranty of Search shall be or shall have become untrue, in either case such
that the conditions set forth in Section 6.02(a) or Section 6.02(b) hereof
would not be satisfied, and such breach is not waived or cured within 10 days
after written notice from Harken; or
(g) By either Harken or Search if Search's stockholders do not
approve the Merger at a meeting of stockholders (or any adjournments thereof)
duly called and held for such purpose; or
(h) By Search if Harken breaches any of its agreements or
covenants contained herein or if any representation or warranty of Harken shall
be or shall have become untrue, in either case such that conditions set forth
in Section 6.03(a) or Section 6.03(b) hereof would not be satisfied, and such
breach is not waived or cured within 10 days after written notice from Search;
or
(i) By Search if the Form S-4 has not been initially filed by
Harken with the SEC within 21 days after the conditions set forth in Section
6.02(k) have been fulfilled.
SECTION 8.02 Effect of Termination.
(a) In the event of the termination of this Agreement pursuant to
Section 8.01 hereof, this Agreement shall forthwith become void and there shall
be no liability on the part of any party hereto or its affiliates, directors,
officers or stockholders, other than the provisions of Section 5.03, this
Section 8.02 and Section 10.01 hereof. Nothing contained in this Section 8.02
shall prejudice the ability of a party from asserting all rights and remedies
that such party may have against any other party by reason of any breach or
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violation of this Agreement occurring prior to such termination, including,
without limitation, the right to pursue any remedy at law or equity and to
recover all attorney's fees incurred in connection therewith.
(b) If Harken or Search terminates this Agreement pursuant to
Sections 8.01(d), Search shall pay Harken a cash fee equal to all of Harken's
out-of-pocket expenses (including the fees and expenses of its legal counsel)
plus $800,000 by wire transfer of immediately available funds to an account
designated by Harken.
(c) If Harken or Search terminates this Agreement pursuant to
Sections 8.01(e), Search shall pay Harken a cash fee equal to all of Harken's
out-of-pocket expenses (including the fees and expenses of its legal counsel)
plus $150,000 by wire transfer of immediately available funds to an account
designated by Harken.
SECTION 8.03 Amendment. This Agreement may be amended by the mutual
action taken by or on behalf of their respective Boards of Directors at any
time prior to the Effective Time; provided, however, that, after approval of
the Merger by the stockholders of Search, no amendment may be made which by law
requires further approval by such stockholders without such further approval.
This Agreement may not be amended except by an instrument in writing signed by
each of the parties hereto.
SECTION 8.04 Extension; Waiver. At any time prior to the Effective
Time, any party hereto may (a) extend the time for the performance of any of
the obligations or other acts of the other parties hereto, (b) waive any
inaccuracies in the representations and warranties of the other parties
contained herein or in any document delivered pursuant hereto and (c) waive
compliance by the other parties with any of the agreements or conditions
contained herein. Any such extension or waiver shall be valid if set forth in
an instrument in writing signed by the party or parties to be bound thereby.
Except as provided in this Agreement, no action taken pursuant to this
Agreement, including, without limitation, any investigation by or on behalf of
any party, shall be deemed to constitute a waiver by the party taking such
action of compliance with any representations, warranties, covenants or
agreements contained in this Agreement. The waiver by any party hereto of a
breach of any provision hereunder shall not operate or be construed as a waiver
of any prior or subsequent breach of the same or any other provision hereunder.
ARTICLE IX
MAXIMUM HARKEN SHARES TO BE ISSUED
SECTION 9.01 Maximum Shares. Notwithstanding any other provisions,
terms or other matters set forth or referenced in this Agreement, Harken shall
not be required nor obligated to issue any portion of the Contingent Shares as
provided in Section 1.10 hereof which when added to all other shares of Harken
Common Stock called for to be issued or reserved for issuance hereunder and in
all related transactions to the Merger, would exceed a maximum amount of eleven
million (11,000,000) shares (the "Maximum Share Limit") of Harken Common Stock.
There shall be included for purposes of determining the number of
Contingent Shares which may be issued within the Maximum Share Limit all shares
issued in exchange for Search Shares, in exchange for the Notes, and all shares
issued or reserved for issuance for the Harken Warrants and the Unexchanged
Search Warrants.
SECTION 9.02 Excess Shares. In the event the calculation of the
Contingent Shares under Section 1.10 hereof when added to the aggregate total
of all other shares of Harken Common Stock to be issued or reserved for
issuance under this Merger and the other transactions which are directly
related to it, exceed the Maximum Share Limit, then in such event Harken shall
within 30 days after the Settlement Date or the Final Settlement Date, as may
be applicable, elect at its sole option:
(a) to pay the amount in cash of the number of such Contingent
Shares which exceed the Maximum Share Limit times the Contingent Share Price to
the parties entitled to receive the same, provided, however, that the cash
received by the holders of Search Shares shall in no event exceed 50% of the
aggregate consideration received by such holders at the Effective Time and on
the Settlement Date (and the Final Settlement Date, if applicable); or
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(b) to obtain the consent and approval from its stockholders to
issue additional shares of Harken Common Stock in excess of the Maximum Share
Limit.
SECTION 9.03 Timing. In the event Harken elects to pursue the
alternative to pay cash as set forth in Section 9.02(a) above, Harken will use
commercially reasonable efforts to make such payments within 45 days after the
Settlement Date or the Final Settlement Date, as may be applicable. In the
event Harken elects to pursue the alternative to pay in additional shares as
set forth in Section 9.02(b) above or in the event the cash alternative is not
available because of the above limitations placed upon the amount thereof then,
Harken will use commercially reasonable efforts to obtain the necessary consent
and approval from its stockholders so as to issue such additional shares within
six months after the Settlement Date or the Final Settlement Date, as may be
applicable. Pending such additional authorizations or other actions necessary,
Harken shall issue that portion of the Contingent Shares up to the Maximum
Share Limit on the Settlement Date. In the event Harken elects to obtain the
approval of its stockholders to issue additional shares in excess of the
Maximum Share Limit and fails to obtain such approval, Harken will pay cash
pursuant to Section 9.02(a) above.
ARTICLE X
GENERAL PROVISIONS
SECTION 10.01 Non-Survival of Representations, Warranties and
Agreements. The representations, warranties and agreements in this Agreement
shall terminate at the Effective Time or upon the termination of this Agreement
pursuant to Section 8.01, as the case may be, provided, however, that (a) the
provisions of Articles I, II, V and X, Sections 3.10, and the agreements
delivered pursuant to this Agreement if not otherwise provided shall survive
the Effective Time until the Settlement Date, provided, however, that Article I
and Sections 3.13 through 3.21 shall survive until the Final Settlement Date
and Section 5.08 shall survive until the lapse of the time period described in
Section 5.08(a) hereof, and (b) the provisions of Section 8.02 and this Article
X shall survive the termination of this Agreement and the representations,
warranties and agreements in this Agreement shall survive any such termination
for the purposes of a party asserting all of its rights and remedies as
contemplated by Section 8.02(a).
SECTION 10.02 Notices. All notices and other communications given or
made pursuant hereto shall be in writing and shall be deemed to have been duly
given or made as of the date delivered or mailed if delivered personally or
mailed by registered or certified mail (postage prepaid, return receipt
requested) to the parties at the following addresses (or at such other address
for a party as shall be specified by like notice):
(a) If to Harken or Merger Sub:
Harken Energy Corporation
2505 North Highway 360, Suite 800
Grand Prairie, Texas 75050
Attention: Larry E. Cummings, General Counsel
With a copy to:
Baker & McKenzie
4500 Trammell Crow Center
2001 Ross Avenue
Dallas, Texas 75201
Attention: John D. Curtis, Esq.
(b) If to Search:
Search Exploration, Inc.
1500 Three Lincoln Centre
5430 LBJ Freeway
Dallas, Texas 75240
Attention: Joseph F. Langston, Jr.
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With copy to:
Johnson & Wortley, P.C.
100 Founders Square
900 Jackson Street
Dallas, Texas 75202
Attention: Michael D. Wortley, Esq.
SECTION 10.03 Certain Definitions. For purposes of this Agreement,
the term:
(a) "affiliate" means a person that directly or indirectly,
through one or more intermediaries, controls, is controlled by, or is under
common control with, the first mentioned person; including, without limitation,
any partnership or joint venture in which the first mentioned person (either
alone, or through or together with any other subsidiary) has, directly or
indirectly, an interest of 5% or more;
(b) "business day" means any day other than a day on which banks
in Dallas, Texas, are required or authorized to be closed;
(c) "control" (including the terms "controlled by and under common
control with") means the possession, directly or indirectly or as trustee or
executor, of the power to direct or cause the direction of the management or
policies of a person, whether through the ownership of stock, as trustee or
executor, by contract or credit arrangement or otherwise;
(d) "Exchange Ratio" means the number (rounded to the nearest
ten-thousandth) obtained by dividing (i) $.8099 by (ii) the Strike Price;
(e) "Good Title" means subject to Permitted Encumbrances good and
defensible title which is (i) evidenced by an instrument or instruments filed
of record in accordance with the conveyance and recording laws of the
applicable jurisdiction and is sufficient against competing claims of bona fide
purchasers for value without notice and (ii) free and clear of all liens,
security interest, claims, infringements and other burdens of encumbrances,
other than such liens, security interests, claims, infringements and other
burdens or encumbrances that a reasonably prudent purchaser of oil and gas
properties would accept in light of the value of the property affected, the
improbability of assertion of the defect or irregularity or the degree of
difficulty or the cost of performing curative work;
(f) "Oil and Gas Interests" means the properties referenced under
Exhibits "B-1" and "D" hereof, which constitute as to Search and its
subsidiaries all interests in and rights in respect of oil, gas, mineral, and
related properties and assets of any kind and nature, direct or indirect,
including working interests, royalties, overriding royalties, production
payments, net profits interests, other nonworking interests and nonoperating
interests, contract rights, debt instruments, and equity interests in joint
ventures, partnerships, corporations and other entities, including but not
limited to common and preferred stock, debentures, bonds and other securities
of every kind and nature and unrelated assets coincidentally acquired in
connection with the acquisition of the foregoing assets; all interests in and
rights in respect of oil, gas and other minerals and hydrocarbons or revenues
therefrom and all contracts in connection therewith and claims and rights
thereto (including but not limited to all oil and gas leases and interests
thereunder, surface interests, fee interests, reversionary interests,
royalties, overriding royalties, reservations and concessions), all easements,
rights of way, licenses, permits, leases and other interests associated with
appurtenant to or necessary for the operation of any of the foregoing, and all
interests in equipment and machinery (including but not limited to well
equipment and machinery), oil and gas transmission or storage facilities
(including but not limited to tanks, tank batteries, pipelines and gathering
systems), camps, water plants, electric plants, gasoline and gas processing
plants, refineries and other tangible personal property and fixtures associated
with, appurtenant to or necessary for the operation of any of the foregoing;
(g) "Preferred Exchange Ratio" means the number (rounded to the
nearest ten-thousandth) obtained by dividing (i) $1.00 by (ii) the Strike
Price;
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(h) "Permitted Encumbrances" means (i) inchoate mechanics',
materialman's warehouseman's and carrier's liens and other similar liens
arising by operation of law or statute in the ordinary course of a party's
business for obligations which are not delinquent and which will be paid or
discharged in the ordinary course of such party's business for obligations
which are not delinquent and which will be paid or discharged in the ordinary
course of such party's business; (ii) liens arising under joint operating
agreements for obligations which are not delinquent and which will be paid or
discharged in the ordinary course of a party's business; (iii) liens for Taxes,
assessments, and similar governmental charges incurred and not delinquent; (iv)
easements, servitudes, rights-of-way and other rights which do not materially
interfere with the use of a property; (v) liens arising pursuant to Section
9.319 of the Texas Business and Commerce Code and all other similar liens
created by operation of law to secure a party's obligations as a purchaser of
oil and gas; (vi) liens constituting pledges or deposits made in the ordinary
course of a party's business to secure obligations under compulsory workmen's
compensation, unemployment insurance, social security, or other similar laws;
(vii) liens retained in any oil and gas lease in favor of the party granting
such lease; (viii) preferential rights to purchase and third-party consents
which would be activated by the Merger contemplated by this Agreement; (ix) all
rights to consent by, required notices to, filings with, or other actions by,
governmental entities in connection with the Closing if such are customarily
obtained subsequent to the Closing; and (x) Oil and Gas Interests of Search and
its subsidiaries, with respect to which Search and its subsidiaries own and
hold only beneficial or equitable title pursuant to a valid and enforceable
written agreement between such party and a non-affiliated third party or
parties and pursuant to which record or legal title is held by such
non-affiliated third party or parties for the benefit of Search or its
subsidiary;
(i) "Person" means an individual, corporation, partnership,
association, trust, unincorporated organization, other entity or group (as
defined in Section 13(d)(3) of the Exchange Act);
(j) "Strike Price" means the average of the closing sales prices
of a share of Harken Common Stock on the American Stock Exchange (as reported
by the Wall Street Journal or, if not reported thereby, by another
authoritative source) over the 30 days immediately preceding the date that is
five trading days prior to the date of the special meeting of the Search
stockholders; provided, however, that in no event shall the Strike Price be an
amount which is (i) greater then $2.366 or (ii) less than $1.274; and
(k) "Subsidiary" or "Subsidiaries" of Search, the Surviving
Corporation, Harken or any other person means the entities listed in Section
3.01 of the Search Disclosure Schedule and the Harken Disclosure Schedule,
respectively, and includes any corporation, partnership, joint venture or other
legal entity of which Search, the Surviving Corporation, Harken or such other
person, as the case may be, (either alone or through or together with any other
subsidiary) owns, directly or indirectly, more than 50% of the stock or other
equity interests the holders of which are generally entitled to vote for the
election of the board of directors or other governing body of such corporation
or other legal entity.
SECTION 10.04 Material Adverse Effect. Notwithstanding anything to
the contrary herein, any change, effect, fact, event or condition which
adversely affects the oil and gas industry generally, such as a decline in the
price of oil or natural gas generally, shall not be considered in determining
whether a Material Adverse Effect has occurred with respect to Search or
Harken.
SECTION 10.05 Headings. The headings contained in this Agreement are
for reference purposes only and shall not affect in any way the meaning or
interpretation of this Agreement.
SECTION 10.06 Severability. If any term or other provision of this
Agreement is invalid, illegal or incapable of being enforced by any rule of
law, or public policy, all other conditions and provisions of this Agreement
shall nevertheless remain in full force and effect so long as the economic or
legal substance of the transactions contemplated hereby is not affected in any
manner adverse to any party. Furthermore, in lieu of such illegal, invalid or
unenforceable provision, there shall be added automatically as a part of this
Agreement a provision as similar in terms to such illegal, invalid or
unenforceable provision as may be possible and be legal, valid and enforceable.
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SECTION 10.07 Construction. This Agreement and any documents or
instruments delivered pursuant hereto shall be construed without regard to the
identity of the person who drafted the various provisions of the same.
SECTION 10.08 Specific Performance. The parties hereto agree that if
any of the provisions of this Agreement were not performed in accordance with
their specific terms or were otherwise breached, irreparable damage would
occur, no adequate remedy at law would exist and damages would be difficult to
determine, and that the parties shall be entitled to specific performance of
the terms hereof, in addition to any other remedy at law or equity. The rights
and remedies provided for in this Agreement are cumulative, and not exclusive
of, any rights or remedies otherwise available.
SECTION 10.09 Entire Agreement. This Agreement (together with the
Exhibits and Schedules) constitutes the entire agreement and supersedes all
prior agreements and undertakings (other than the Confidentiality Agreement
between Harken and Search, which shall survive), both written and oral, among
the parties, or any of them, with respect to the subject matter hereof and,
except as otherwise expressly provided herein, are not intended to confer upon
any other person any rights or remedies hereunder.
SECTION 10.10 Assignment. This Agreement and all the provisions
hereof shall be binding upon and inure to the benefit of the parties hereto and
their respective successors and assigns. Neither this Agreement nor any of the
rights hereunder shall be assigned by any of the parties hereto without the
prior written consent of the other parties, provided that no such assignment
shall release the assigning party from its obligations hereunder.
SECTION 10.11 Parties in Interest. This Agreement shall be binding
upon and inure solely to the benefit of each party hereto, and nothing in this
Agreement, express or implied, is intended to or shall confer upon any other
person any right, benefit or remedy of any nature whatsoever under or by reason
of this Agreement, other than Section 5.08 (which is intended to be for the
benefit of the indemnified parties and may be enforced by such indemnified
parties).
SECTION 10.12 Governing Law. This Agreement shall be governed by,
and construed in accordance with, the laws of the State of Delaware, regardless
of the laws that might otherwise govern under applicable principles of
conflicts of laws thereof.
SECTION 10.13 Counterparts. This Agreement may be executed in one or
more counterparts, and by the different parties hereto in separate
counterparts, each of which when executed shall be deemed to be an original but
all of which taken together shall constitute one and the same agreement.
SECTION 10.14 Plan of Reorganization. This Agreement constitutes a
plan or reorganization within the meaning of Section 368 of the Code and
Treasury Regulation Section 1.368-2(d) among Harken, Search, Merger Sub and the
stockholders of Search.
IN WITNESS WHEREOF, Harken, Merger Sub and Search have caused this
Agreement to be executed as of the date first written above by their respective
officers thereunto duly authorized.
HARKEN ENERGY CORPORATION
By: /s/ RICHARD H. SCHROEDER
--------------------------------
Richard H. Schroeder, President
SEARCH ACQUISITION CORP.
By: /s/ RICHARD H. SCHROEDER
--------------------------------
A-35
<PAGE> 103
Richard H. Schroeder, President
SEARCH EXPLORATION, INC.
By: /s/ JOSEPH F. LANGSTON, JR.
------------------------------------
Joseph F. Langston, Jr.
Chairman of the Board
A-36
<PAGE> 104
APPENDIX B
(LETTERHEAD)
PRINCIPAL
FINANCIAL
GROUP
November 7, 1994
Board of Directors
Search Exploration, Inc.
1500 Three Lincoln Centre
5430 LBJ Freeway
Dallas, Texas 75240
Gentlemen:
You have advised us that, on behalf of Search Exploration,
Inc.("Search"), you have negotiated a merger transaction (the "Merger") with
Harken Energy Corporation ("Harken") and Search Acquisition Corp., a
wholly-owned subsidiary of Harken ("Harken Merger Sub"), to be evidenced by an
Agreement and Plan of Merger to be dated as of November 8, 1994 (the "Merger
Agreement"). Capitalized terms used and not otherwise defined herein shall
have the respective meanings ascribed to such terms in the Merger Agreement.
You have further advised us that, pursuant to the Merger Agreement, at
the Effective Time of the Merger Search will be merged with and into Harken
Merger Sub and, among other things, each share of Search's common stock, $.05
par value per share (the "Search Common Stock"), which is issued and
outstanding at such Effective Time, other than Appraisal Shares, will be
converted into the right to receive (i) a share or a number of shares of Harken
common stock, $.01 par value per share (the "Harken Common Stock"), equal to
the Exchange Ratio calculated pursuant to the Merger Agreement (such shares of
Harken Common Stock to be so issued pursuant to the Merger Agreement are
hereinafter referred to as the "Initial Harken Shares"), and (ii) based upon a
Valuation as of June 30, 1996 of the Undeveloped Properties of Search described
in the Merger Agreement, an additional share or a number of additional shares
of Harken Common Stock equal to the number of Contingent Shares, if any,
attributable to each such share of Search Common Stock as calculated pursuant
to the Merger Agreement, or under certain circumstances cash in lieu thereof
(such additional shares of Harken Common Stock, if any, to be so issued and
such cash, if any, to be so paid pursuant to the Merger Agreement are
hereinafter collectively referred to as the "Contingent Harken Consideration").
The Initial Harken Shares and the Contingent Harken Consideration, if
any, to be issued and/or paid pursuant to the Merger Agreement to the holders
of record of the issued and outstanding shares of Search Common Stock at the
Effective Time of the Merger (the "Search Common Stockholders") are hereinafter
collectively referred to as the "Merger Consideration."
You have asked us whether or not, in our opinion, the proposed Merger
Consideration to be received by the Search Common Stockholders as a result of
the Merger, taken as a whole, is fair to such stockholders from a financial
point of view.
B-1
<PAGE> 105
Board of Directors
Search Exploration, Inc.
November 7, 1994
Page 2
In arriving at our opinion set forth below, we have not participated
in the structuring of the transactions contemplated by the Merger Agreement nor
in any negotiations with respect thereto. You have engaged us solely for the
purpose of rendering the opinion set forth herein.
In rendering such opinion we have, among other things:
(1) Reviewed Search's 1992 Annual Report to Stockholders,
its Form 10-K for the fiscal year ended December 31,
1993, and its Form 10-Q for the quarterly period
ended June 30, 1994;
(2) Reviewed Harken's Form 10-K's for the fiscal years
ended December 31, 1992 and 1993, as well as its Form
10-Q for the quarterly period ended June 30, 1994;
(3) Reviewed certain information, including financial
forecasts, relating to the business, earnings, and
prospects of Search furnished to us by Search;
(4) Reviewed certain information, including financial
forecasts, relating to the business, earnings, and
prospects of Harken furnished to us by Search;
(5) Conducted discussions with members of senior
management of Search concerning its business and
prospects;
(6) Conducted discussions with members of senior
management of Harken concerning its business and
prospects;
(7) Reviewed the historical market prices and trading
activity for the Search Common Stock;
(8) Reviewed the historical market prices and trading
activity for the Harken Common Stock;
(9) Compared the proposed financial terms of the
transactions contemplated by the Merger Agreement
with the financial terms of certain other mergers and
acquisitions which we deemed to be relevant;
(10) Reviewed a draft (draft provided to us by Search on
November 1, 1994) of the proposed Merger Agreement;
(11) Relied upon the oil and gas reserve reports for
Search (McCulloch Energy, Inc.) as of December 31,
1993 and as of July 1, 1994, as prepared by Gerald W.
DuPont, Petroleum Engineer;
(12) Relied upon a revised oil and gas reserve report
dated September 25, 1994, updating the Search oil and
gas reserve reports referenced above, as prepared by
Marshall Watson of Harken;
B-2
<PAGE> 106
Board of Directors
Search Exploration, Inc.
November 7, 1994
Page 3
(13) Relied upon a letter dated November 1, 1994, as
prepared by Gerald W. DuPont, Petroleum Engineer,
confirming the accuracy of the Marshall Watson
revised oil and gas reserve report referenced above;
(14) Relied upon the oil and gas reserve report on proved
reserves for Harken's interest in Harken Southwest
Operated Fields in the Four Corners Area of Arizona
and Utah as of December 31, 1993, as prepared by
Gaffney, Cline & Associates Inc.;
(15) Relied upon Search's recent write down of its oil and
gas reserves;
(16) Relied upon the Search balance sheet dated as of
October 12, 1994 provided to us by Search;
(17) Relied upon the contingent consideration distribution
analysis dated November 4, 1994 supplied to us by
Search pertaining to the estimated percentage
participation in the distribution of Contingent
Shares, if any, by the Search Common Stockholders;
(18) Relied upon the listing dated October 31, 1994
pertaining to proposed business combination
transactions involving Search and certain third
parties furnished to us by Search;
(19) Assumed that there have been no material changes in
the financial condition, results of operations,
business or prospects of either Search or Harken
which have not been publicly disclosed or otherwise
disclosed to us; and
(20) Reviewed such other financial studies and analyses
and performed such other investigations and took into
account such other matters as we deemed necessary,
including our assessment of general economic, market
and monetary conditions.
In preparing our opinion, we have relied upon the accuracy and
completeness of all information supplied or otherwise made available to us by,
or otherwise publicly available with respect to, Search and Harken, and we have
not independently verified such information or undertaken an independent
appraisal of the assets of either Search or Harken. We did not contact any
investment bankers or third parties to solicit indications of interest to
acquire Search.
You have advised us that you have negotiated Merger Agreement
provisions pursuant to which certain additional parties, including the holders
of Search's issued and outstanding preferred stock, Concorde Financial Corp.
and EnCap Investments L.C., financial advisors to Search who have participated
in the structuring of the transactions contemplated by the Merger Agreement,
Joseph F. Langston, Jr., a director and the chief executive officer of Search,
certain Search royalty holders and the holders of issued and outstanding Search
options and warrants (collectively, the "Additional Parties"), are entitled to
receive, in some cases on an initial basis and in some cases on a contingent
basis, shares of Harken Common Stock in connection with the Merger. We also
understand that, as provided in the Merger Agreement, the holders of such
issued and outstanding Search options and warrants will be provided with an
opportunity to exchange such options and warrants for new warrants to be issued
by Harken.
At your request and with your concurrence, we have not conducted any
analysis concerning the allocation of any portion of the aggregate merger
consideration to be received from Harken to the Additional
B-3
<PAGE> 107
Board of Directors
Search Exploration, Inc.
November 7, 1994
Page 4
Parties or the fairness to them thereof. Accordingly, we are expressing no
opinion herein to the Board of Directors of Search regarding such matters, and
are assuming that a portion of such aggregate merger consideration has been
appropriately and properly negotiated and allocated to the Additional Parties
and that such consideration is fair to them from a financial point of view.
On the basis of, and subject to the foregoing, we are of the opinion
that the Merger Consideration to be received by the Search Common Stockholders
pursuant to the Merger, taken as a whole, is fair to such stockholders from a
financial point of view.
Very truly yours,
PRINCIPAL FINANCIAL SECURITIES, INC.
B-4
<PAGE> 108
APPENDIX C
SECTION 262 OF THE DELAWARE GENERAL CORPORATION
LAW REGARDING APPRAISAL RIGHTS
262 APPRAISAL RIGHTS.
(a) Any stockholder of a corporation of this State who holds
shares of stock on the date of the making of a demand pursuant to subsection
(d) of this section with respect to such shares, who continuously holds such
shares through the effective date of the merger or consolidation, who has
otherwise complied with subsection (d) of this section and who has neither
voted in favor of the merger or consolidation nor consented thereto in writing
pursuant to Section 228 of this title shall be entitled to an appraisal by the
Court of Chancery of the fair value of his shares of stock under the
circumstances described in subsections (b) and (c) of this section. As used in
this section, the word "stockholder" means a holder of record of stock in a
stock corporation and also a member of record of a nonstock corporation; the
words "stock" and "share" mean and include what is ordinarily meant by those
words and also membership or membership interest of a member of a nonstock
corporation; and the words "depository receipt" mean a receipt or other
instrument issued by a depository representing an interest in one or more
shares, or fractions thereof, solely of stock of a corporation, which stock is
deposited with the depository..
(b) Appraisal rights shall be available for the shares of any
class or series of stock of a constituent corporation in a merger or
consolidation to be effected pursuant to Section 251, 252, 254, 257, 258, 263
or 264 of this title:
(1) Provided, however, that no appraisal rights under
this section shall be available for the shares of any class or series
of stock, which stock, or depository receipts in respect thereof, at
the record date fixed to determine the stockholders entitled to
receive notice of and to vote at the meeting of stockholders to act
upon the agreement of merger or consolidation, were either (i) listed
on a national securities exchange or designated as a national market
system security on an interdealer quotation system by the National
Association of Securities Dealers, Inc. or (ii) held of record by more
than 2,000 stockholders; and further provided that no appraisal rights
shall be available for any shares of stock of the constituent
corporation surviving a merger if the merger did not require for its
approval the vote of the stockholders of the surviving corporation as
provided in subsection (f) of Section 251 of this title.
(2) Notwithstanding paragraph (1) of this subsection,
appraisal rights under this section shall be available for the shares
of any class or series of stock of a constituent corporation if the
holders thereof are required by the terms of an agreement of merger or
consolidation pursuant to Sections 251, 252, 254, 257, 258, 263 and
264 of this title to accept for such stock anything except:
a. Shares of stock of the corporation surviving
or resulting from such merger or consolidation, or depository
receipt in respect thereof;
b. Shares of stock of any other corporation, or
depository receipts in respect thereof, which shares of stock
or depository receipts at the effective date of the merger or
consolidation will be either listed on a national securities
exchange or designated as a national market system security on
an interdealer quotation system by the National Association of
Securities Dealers, Inc., or held of record by more than 2,000
holders;
c. Cash in lieu of fractional shares or
fractional depository receipts described in the foregoing
subparagraphs a. and b. of this paragraph; or
d. Any combination of the shares of stock,
depository receipts and cash in lieu of fractional shares or
fractional depository receipts described in the foregoing
subparagraphs a., b. and c. of this paragraph.
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<PAGE> 109
(3) In the event all of the stock of a subsidiary
Delaware corporation party to a merger effected under Section 253 of
this title is not owned by the parent corporation immediately prior to
the merger, appraisal rights shall be available for the shares of the
subsidiary Delaware corporation.
(c) Any corporation may provide in its certificate of
incorporation that appraisal rights under this section shall be available for
the shares of any class or series of its stock as a result of an amendment to
its certificate of incorporation, any merger or consolidation in which the
corporation is a constituent corporation or the sale of all or substantially
all of the assets of the corporation. If the certificate of incorporation
contains such a provision, the procedures of this section, including those set
forth in subsection (d) and (e) of this section, shall apply as nearly as is
practicable.
(d) Appraisal rights shall be perfected as follows:
(1) If a proposed merger or consolidation for which
appraisal rights are provided under this section is to be submitted
for approval at a meeting of stockholders, the corporation, not less
than 20 days prior to the meeting, shall notify each of its
stockholders who was such on the record date for such meeting with
respect to shares for which appraisal rights are available pursuant to
subsections (b) or (c) hereof that appraisal rights are available for
any or all of the shares of the constituent corporations, and shall
include in such notice a copy of this section. Each stockholder
electing to demand the appraisal of his shares shall deliver to the
corporation, before the taking of the vote on the merger or
consolidation, a written demand for appraisal of his shares. Such
demand will be sufficient if it reasonably informs the corporation of
the identity of the stockholder and that the stockholder intends
thereby to demand the appraisal of his shares. A proxy or vote
against the merger or consolidation shall not constitute such a
demand. A stockholder electing to take such action must do so by a
separate written demand as herein provided. Within 10 days after the
effective date of such merger or consolidation, the surviving or
resulting corporation shall notify each stockholder of each
constituent corporation who has complied with this subsection and has
not voted in favor of or consented to the merger or consolidation of
the date that the merger or consolidation has become effective; or
(2) If the merger or consolidation was approved pursuant
to Section 228 or 253 of this title, the surviving or resulting
corporation, either before the effective date of the merger or
consolidation or within 10 days thereafter, shall notify each of the
stockholders entitled to appraisal rights of the effective date of the
merger or consolidation and that appraisal rights are available for
any or all of the shares of the constituent corporation, and shall
include in such notice a copy of this section. The notice shall be
sent by certified or registered mail, return receipt requested,
addressed to the stockholder at his address as it appears on the
records of the corporation. Any stockholder entitled to appraisal
rights may, within 20 days after the date of mailing of the notice,
demand in writing from the surviving or resulting corporation the
appraisal of his shares. Such demand will be sufficient if it
reasonably informs the corporation of the identity of the stockholder
and that the stockholder intends thereby to demand the appraisal of
his shares.
(e) Within 120 days after the effective date of the merger or
consolidation, the surviving or resulting corporation or any stockholder who
has complied with subsections (a) and (d) hereof and who is otherwise entitled
to appraisal rights, may file a petition in the Court of Chancery demanding a
determination of the value of the stock of all such stockholders.
Notwithstanding the foregoing, at any time within 60 days after the effective
date of the merger or consolidation, any stockholder shall have the right to
withdraw his demand for appraisal and to accept the terms offered upon the
merger or consolidation. Within 120 days after the effective date of the
merger or consolidation, any stockholder who has complied with the requirements
of subsections (a) and (d) hereof, upon written request, shall be entitled to
receive from the corporation surviving the merger or resulting from the
consolidation a statement setting forth the aggregate number of shares not
voted in favor of the merger or consolidation and with respect to which demands
for appraisal have been received and the aggregate number of holders of such
shares. Such written statement shall be mailed to the stockholder within 10
days after his written request for such a statement is received by the
surviving or resulting corporation or within 10 days after expiration of the
period for delivery of demands for appraisal under subsection (d) hereof,
whichever is later.
C-2
<PAGE> 110
(f) Upon the filing of any such petition by a stockholder, service
of a copy thereof shall be made upon the surviving or resulting corporation,
which shall within 20 days after such service file in the office of the
Register in Chancery in which the petition was filed a duly verified list
containing the names and addresses of all stockholders who have demanded
payment for their shares and with whom agreements as to the value of their
shares have not been reached by the surviving or resulting corporation. If the
petition shall be filed by the surviving or resulting corporation, the petition
shall be accompanied by such a duly verified list. The Register in Chancery,
if so ordered by the Court, shall give notice of the time and place fixed for
the hearing of such petition by registered or certified mail to the surviving
or resulting corporation and to the stockholders shown on the list at the
addresses therein stated. Such notice shall also be given by 1 or more
publications at least one week before the day of the hearing, in a newspaper of
general circulation published in the City of Wilmington, Delaware or such
publication as the Court deems advisable. The forms of the notices by mail and
by publication shall be approved by the Court, and the costs thereof shall be
borne by the surviving or resulting corporation.
(g) At the hearing on such petition, the Court shall determine the
stockholders who have complied with this section and who have become entitled
to appraisal rights. The Court may require the stockholders who have demanded
an appraisal for their shares and who hold stock represented by certificates to
submit their certificates of stock to the Register in Chancery for notation
thereon of the pendency of the appraisal proceedings; and if any stockholder
fails to comply with such direction, the Court may dismiss the proceedings as
to such stockholder.
(h) After determining the stockholders entitled to an appraisal,
the Court shall appraise the shares, determining their fair value exclusive of
any element of value arising from the accomplishment or expectation of the
merger or consolidation, together with a fair rate of interest, if any, to be
paid upon the amount determined to be the fair value. In determining such fair
value, the Court shall take into account all relevant factors. In determining
the fair rate of interest, the Court may consider all relevant factors,
including the rate of interest which the surviving or resulting corporation
would have had to pay to borrow money during the pendency of the proceeding.
Upon application by the surviving or resulting corporation or by any
stockholder entitled to participate in the appraisal proceeding, the Court may,
in its discretion, permit discovery or other pretrial proceedings and may
proceed to trial upon the appraisal prior to the final determination of the
stockholder entitled to an appraisal. Any stockholder whose name appears on
the list filed by the surviving or resulting corporation pursuant to subsection
(f) of this section and who has submitted his certificates of stock to the
Register in Chancery; if such is required, may participate fully in all
proceedings until it is finally determined that he is not entitled to appraisal
rights under this section.
(i) The Court shall direct the payment of the fair value of the
shares, together with interest, if any, by the surviving or resulting
corporation to the stockholders entitled thereto. Interest may be simple or
compound, as the Court may direct. Payment shall be so made to each such
stockholder, in the case of holders of uncertificated stock forthwith, and the
case of holders of shares represented by certificates upon the surrender to the
corporation of the certificates representing such stock. The Court's decree
may be enforced as other decrees in the Court of Chancery may be enforced,
whether such surviving or resulting corporation be a corporation of this State
or of any state.
(j) The costs of the proceeding may be determined by the Court and
taxed upon the parties as the Court deems equitable in the circumstances. Upon
application of a stockholder, the Court may order all or a portion of the
expenses incurred by any stockholder in connection with the appraisal
proceeding, including, without limitation, reasonable attorney's fees and the
fees and expenses of experts, to be charged pro rata against the value of all
the shares entitled to an appraisal.
(k) From and after the effective date of the merger or
consolidation, no stockholder who has demanded his appraisal rights as provided
in subsection (d) of this section shall be entitled to vote such stock for any
purpose or to receive payment of dividends or other distributions on the stock
(except dividends or other distributions payable to stockholders of record at a
date which is prior to the effective date of the merger or consolidation);
provided, however, that if no petition for an appraisal shall be filed within
the time provided in subsection (e) of this section, or if such stockholder
shall deliver to the surviving or resulting corporation a written withdrawal of
his demand for an appraisal and an acceptance of the merger or consolidation,
either
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<PAGE> 111
within 60 days after the effective date of the merger or consolidation as
provided in subsection (e) of this section or thereafter with the written
approval of the corporation, then the right of such stockholder to an appraisal
shall cease. Notwithstanding the foregoing, no appraisal proceeding in the
Court of Chancery shall be dismissed as to any stockholder without the approval
of the Court, and such approval may be conditioned upon such terms as the Court
deems just.
(l) The shares of the surviving or resulting corporation to which
the shares of such objecting stockholders would have been converted had they
assented to the merger or consolidation shall have the status of authorized an
unissued shares of the surviving or resulting corporation.
C-4
<PAGE> 112
APPENDIX D
WARRANT EXCHANGE SCHEDULE
<TABLE>
<CAPTION>
EXCHANGE
SEARCH WARRANTS(1) HARKEN WARRANTS(2) RATIO(3)
------------------------------------ ------------------------------------- ------------
Number Exercise Number Exercise
of Price per Expiration of Price per Expiration
Holder Shares Share Date Shares Share Date
------------------------------- ------ ---------- --------- ------- ---------- ----------
<S> <C> <C> <C> <C> <C> <C> <C>
Original stockholders of Search
(201 holders) . . . . . . . . . 212,512 $2.00 7/17/95 91,643 $1.82 6/30/96 0.4312
Joseph F. Langston . . . . . . . 237,488 $2.00 7/17/95 102,413 $1.82 6/30/96 0.4312
Robert Dobbins' Children . . . . 50,000 $2.00 7/17/95 21,562 $1.82 6/30/96 0.4312
Joseph F. Langston . . . . . . . 150,000 $1.31 7/31/96 173,842 $1.82 6/30/96 1.1589
Joseph F. Langston . . . . . . . 50,000 $1.31 7/31/96 57,947 $1.82 6/30/96 1.1589
James O'Donnell . . . . . . . . . 50,000 $1.31 7/31/96 57,947 $1.82 6/30/96 1.1589
M. Michael Witte . . . . . . . . 50,000 $1.31 7/31/96 57,947 $1.82 6/30/96 1.1589
Dr. Gary Wood . . . . . . . . . . 50,000 $1.31 7/31/96 57,947 $1.82 6/30/96 1.1589
Derry Copland . . . . . . . . . . 9.000 $1.31 7/31/96 10,431 $1.82 6/30/96 1.1589
Randy Reeves . . . . . . . . . . 5,000 $1.31 7/31/96 5,795 $1.82 6/30/96 1.1589
John Eads . . . . . . . . . . . . 25,000 $1.31 7/31/96 28,947 $1.82 6/30/96 1.1589
Robert Dobbins . . . . . . . . . 50,000 $1.75 7/31/96 28,605 $1.82 6/30/96 0.5121
Dr. Gary Wood . . . . . . . . . . 50,000 $1.50 6/30/96 57,947 $1.82 6/30/96 1.1589
Total . . . . . . . . . 989,000 750,000
</TABLE>
________________
(1) The Unexchanged Search Warrants shall remain outstanding and shall be
exercisable for shares of Harken Common Stock according to their terms
(which is generally adjusted upon the consummation of the Merger on
the same basis as the conversion of the Search Common Stock at the
Effective Time). See "The Warrant Exchange Offer" and "The Merger
Agreement--Terms of the Merger."
(2) For a description of the Harken Warrants, see "Description of Harken
Securities--Harken Warrants."
(3) The exchange ratio represents the number of shares of Harken Common
Stock exercisable pursuant to the Harken Warrant for each share of
Search Common Stock exercisable pursuant to a Search Warrant.
D-1
<PAGE> 113
APPENDIX E
FORM OF HARKEN WARRANT
WARRANT NO. 95-____________
Warrant to Purchase
________ Shares
(subject to adjustment)
of Common Stock of
Harken Energy Corporation
Void after 3:00 p.m.
Dallas, Texas
June 30, 1996
HARKEN ENERGY CORPORATION
Stock Purchase Warrant
THIS IS TO CERTIFY THAT, for value received, ____________________________
(the "Holder"), whose address is _____________________________, upon due
exercise of this Warrant, is entitled to purchase from Harken Energy
Corporation, a Delaware corporation (the "Company"), at any time before 3:00
p.m., Dallas, Texas time, on June 30, 1996 (the "Expiration Date"), all or any
part of _____________ shares (the "Shares") of fully paid and non-assessable
common stock, par value $.01 per share (the "Common Stock"), of the Company, at
a purchase price of $1.82 per share (the "Strike Price"), both the Strike Price
and number of shares being subject to possible adjustment as provided below.
1. Exercise of Warrant.
(a) Subject to subsection 1(b) below, the Holder may
exercise this Warrant in whole or in part at any time, but only in such
multiples as are required to permit the issuance by the Company of one or more
full shares of Common Stock of the Company, by surrender of this Warrant with
the Form of Subscription attached hereto duly executed, to the Company at or
prior to 3:00 p.m. Dallas, Texas local time on the Expiration Date, together
with payment of the Strike Price for each of the Shares into which the Warrant
is exercised. Payment for the Shares to be purchased upon exercise of this
Warrant may be made by the delivery of a certified or cashier's check payable
to the Company for the aggregate Strike Price of the Shares to be purchased.
In case of the exercise of this Warrant in part only prior to the Expiration
Date, the Company will deliver to the Holder a new Warrant of like tenor in the
name of the Holder evidencing the right to purchase the number of shares as to
which this Warrant has not been exercised.
(b) The Warrant may not be exercised by the Holder
unless, at the time of exercise, (i) the Company has delivered to the Holder a
current prospectus covering the Shares which complies with the requirements of
the Securities Act of 1933, as amended, and the rules and regulations
thereunder (the "Act"); (ii) the Shares are qualified for sale or exempt from
qualification under applicable state securities laws; and (iii) such exercise
and issuance would otherwise be in compliance with applicable laws in the
opinion of counsel to the Company. Harken agrees to take commercially
reasonable efforts to deliver to the Holder at the time of exercise of the
Warrant a current prospectus meeting the requirements of the Act and to obtain
appropriate approvals or qualifications under applicable state securities laws.
The Warrant may not be, directly or indirectly, transferred to, or exercised
by, any person in any state where such transfer or exercise would violate any
law, including securities law, of such state in the opinion of counsel to the
Company. Legends as required by applicable federal and state laws may be
placed on the certificates representing the Shares. The Holder and the Company
agree to execute such documents and instruments as counsel for the Company
reasonably deems necessary to effect compliance of the issuance of this Warrant
and any Shares issued upon exercise hereof with applicable federal and state
securities laws.
E-1
<PAGE> 114
2. Stock Dividends, Reclassification, Reorganization,
Anti-Dilution Provisions, Etc.
This Warrant is subject to the following further provisions:
(a) In case, prior to the expiration of this Warrant by
exercise or by its terms, the Company issues any shares of its Common Stock as
a stock dividend or divides the number of shares, then, in either of such
cases, the Strike Price per share of the Shares purchasable pursuant to this
Warrant in effect at the time of such action will be proportionately reduced
and the number of Shares at that time purchasable pursuant to this Warrant
shall be proportionately increased; and conversely, in the event the Company
shall combine such shares of its Common Stock into a smaller number of shares,
then, and in such event, the Strike Price per share of the Shares purchasable
pursuant to this Warrant in effect at the time of such action shall be
proportionately increased and the number of Shares at that time purchasable
pursuant to this Warrant shall be proportionately decreased.
(b) In case, prior to the expiration of this Warrant by
exercise or by its terms, the Company is recapitalized by reclassifying its
outstanding Common Stock into stock with a different par value or by changing
its outstanding Common Stock with par value to stock without par value, or the
Company or a successor corporation consolidates or merges with or conveys all
or substantially all of its or of any successor corporation's property and
assets to any other corporation or corporations (any such corporation being
included within the meaning of the term "successor corporation" in the event of
any consolidation or merger of any such corporation with, or the sale of all or
substantially all of the property of any such corporation to, another
corporation or corporations), the Holder of this Warrant may thereafter
purchase, upon the terms and conditions and during the time specified in this
Warrant, in lieu of the Shares theretofore purchasable upon the exercise of
this Warrant, the kind and amount of shares of stock and other securities
receivable upon such recapitalization or consolidation, merger, or conveyance
by a Holder of the number of shares of Common Stock which the holder of this
Warrant might have purchased, immediately prior to such recapitalization or
consolidation, merger, or conveyance.
(c) Upon the occurrence of each event requiring an
adjustment of the Strike Price and/or of the number of Shares purchasable
pursuant to this Warrant in accordance with, and as required by, the terms of
subdivision (a) of this Section 2, the Company shall forthwith employ a firm of
certified public accountants (who may be the regular accountants for the
Company) who shall compute the adjusted Strike Price and the adjusted number of
Shares purchasable at such adjusted Strike Price by reason of such event in
accordance with the provisions of subdivision (a) and shall prepare a
certificate setting forth such adjusted Strike Price and the adjusted number of
Shares and showing in detail the facts upon which such conclusions are based,
including a statement of the consideration received or to be received by the
Company for any additional shares of Common Stock issued or sold or deemed to
have been issued or sold and of the number of shares of Common Stock
outstanding or deemed to be outstanding. The Company shall mail forthwith to
the holder of this Warrant a copy of such certificate, and thereafter said
certificate shall be conclusive and shall be binding upon such holder unless
contested by such holder by written notice to the Company within ten (10) days
after receipt of the certificate of the public accountants by such holder.
(d) In case:
(i) of any classification, reclassification, or
other reorganization of the capital stock of the Company, consolidation, or
merger of the Company with or into another corporation, or conveyance of all or
substantially all of the assets of the Company; or
(ii) of the voluntary or involuntary dissolution,
liquidation or winding up of the Company;
then, and in any such case, the Company shall mail to the holder of this
Warrant a brief statement of the event giving rise to such effect and a
description thereof.
(e) In case the Company at any time while this Warrant
remains unexpired and unexercised, sells all or substantially all of its
property or dissolves, liquidates, or winds up its affairs, the
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<PAGE> 115
holder of this Warrant may thereafter receive upon exercise hereof in lieu of
each share of Common Stock of the kind and amount of any securities or assets
as may be issuable, distributable, or payable upon any such sale, dissolution,
liquidation, or winding up with respect to each share of Common Stock of the
Company.
3. NONTRANSFERABILITY. THIS WARRANT MAY NOT BE SOLD, PLEDGED,
ASSIGNED, HYPOTHECATED, TRANSFERRED, OR DISPOSED OF IN ANY MANNER OTHER THAN BY
WILL OR BY THE LAWS OF DESCENT AND DISTRIBUTION. THIS WARRANT IS EXERCISABLE,
DURING THE LIFETIME OF THE HOLDER, ONLY BY THE HOLDER. ANY ATTEMPTED
ASSIGNMENT, TRANSFER, PLEDGE, HYPOTHECATION, OR OTHER ENCUMBRANCE OF THIS
WARRANT CONTRARY TO THE PROVISIONS HEREOF, ANY EXECUTION, ATTACHMENT, OR
SIMILAR PROCESS UPON THIS WARRANT, WILL BE NULL, VOID, AND OF NO EFFECT.
4. Warrant Holder Not Stockholder. This Warrant does not confer
upon the Holder any right whatsoever as a stockholder of the Company.
5. Loss, Theft, Destruction, or Mutilation. Upon receipt by the
Company of evidence satisfactory to it (in the exercise of its reasonable
discretion) of the ownership of and the loss, theft, destruction, or
mutilation of this Warrant and (in the case of loss, theft, or destruction) of
indemnity satisfactory to it (in the exercise of its reasonable discretion),
and (in the case of mutilation) upon surrender and cancellation thereof, the
Company will execute and deliver, in lieu thereof, a new Warrant of like tenor.
6. Mailing of Notices, etc. All notices and other communications
from the Company to the Holder of this Warrant shall be mailed by first-class
mail, postage prepaid, to the address of the Holder set forth above or such
other address as may be furnished to the Company in writing by the Holder of
this Warrant. All notices from the Holder of this Warrant to the Company shall
be mailed to the Company by first-class mail, postage prepaid at P.O. Drawer
612007, Dallas, Texas 75261.
7. Law Governing. This Warrant shall be construed and enforced
in accordance with and governed by the laws of the State of Delaware.
IN WITNESS WHEREOF, the Company has caused this Warrant to be
executed, sealed, and delivered, in its name by its duly authorized officers.
HARKEN ENERGY CORPORATION
By: ___________________________
Name:___________________________
Title: _________________________
Dated: , 1995
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<PAGE> 116
FORM OF SUBSCRIPTION
(To be signed only upon exercise of Warrant)
TO: Harken Energy Corporation
P.O. Drawer 612007
Dallas, Texas 75261
The undersigned, the Holder of the within Warrant numbered
95-_______, hereby irrevocably elects to exercise the purchase rights
represented by said Warrant for, and to purchase thereunder, __________ shares
of Common Stock of the Company, and herewith makes payment of $__________
therefore, and requests that the certificates for such shares be issued in the
name of and be delivered to___________________________________________, whose
address is _____________________________________________, and if such shares do
not constitute all of the shares purchasable hereunder, that a new Warrant of
like tenor for the balance of the shares purchasable hereunder be delivered to
the undersigned.
Date: _______________________ ___________________________________
(Signature must conform in all
respect to name of holder as
specified on the face of the
Warrant.)
(Print Name)
________________________________
Signature Guaranteed By:
____________________________________
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<PAGE> 117
APPENDIX F
UNDEVELOPED PROPERTIES
(AS OF MARCH 19, 1995)
<TABLE>
<CAPTION>
WORKING
UNPROVED PROPERTY INTEREST
----------------- --------
<S> <C>
NEW TAITON . . . . . . . . . . . . . . . . . . . . . . . . . . 3.75% APO
THROCKMORTON . . . . . . . . . . . . . . . . . . . . . . . . . 50.00%
EASTERN SHELF (FARMOUT) . . . . . . . . . . . . . . . . . . . . 12.50% APO
EASTERN SHELF . . . . . . . . . . . . . . . . . . . . . . . . . 25.00%
PROVIDENT CITY . . . . . . . . . . . . . . . . . . . . . . . . 14.00%
GRACY RANCH . . . . . . . . . . . . . . . . . . . . . . . . . . 2.50%
S.W. SPEAKS . . . . . . . . . . . . . . . . . . . . . . . . . . 50.00%
TATUM SQUARE . . . . . . . . . . . . . . . . . . . . . . . . . 5.00%
BLACK OWL DEEP . . . . . . . . . . . . . . . . . . . . . . . . 50.00%
ESTRALLA PROSPECT . . . . . . . . . . . . . . . . . . . . . . . 43.75%
</TABLE>
_________________
APO - After pay-out
F-1
<PAGE> 118
APPENDIX G
HARKEN ANNUAL REPORT AND PROXY STATEMENT
<PAGE> 119
================================================================================
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K
/X/ ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(D)
OF THE SECURITIES EXCHANGE ACT OF 1934
FOR THE FISCAL YEAR ENDED DECEMBER 31, 1994
/ / TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(D)
OF THE SECURITIES EXCHANGE ACT OF 1934.
FOR THE TRANSITION PERIOD FROM ________ TO ________
COMMISSION FILE NUMBER 0-9207
HARKEN ENERGY CORPORATION
(Exact name of registrant as specified in its charter)
<TABLE>
<S> <C>
DELAWARE 95-2841597
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
5605 N. MACARTHUR BLVD. SUITE 400 75038
IRVING, TEXAS (Zip Code)
(Address of principal executive offices)
</TABLE>
Registrant's telephone number, including area code (214) 753-6900
Securities registered pursuant to Section 12(b) of the Act:
<TABLE>
<S> <C>
Title of each class: Name of each exchange on which registered:
COMMON STOCK, PAR VALUE $0.01 PER SHARE AMERICAN STOCK EXCHANGE
</TABLE>
Securities registered pursuant to Section 12(g) of the Act: NONE
INDICATE BY CHECK MARK WHETHER THE REGISTRANT (1) HAS FILED ALL REPORTS
REQUIRED TO BE FILED BY SECTION 13 OR 15(D) OF THE SECURITIES EXCHANGE ACT OF
1934 DURING THE PRECEDING 12 MONTHS (OR FOR SUCH SHORTER PERIOD THAT THE
REGISTRANT WAS REQUIRED TO FILE SUCH REPORTS), AND (2) HAS BEEN SUBJECT TO SUCH
FILING REQUIREMENTS FOR THE PAST 90 DAYS. YES X NO ___
INDICATE BY CHECK MARK IF DISCLOSURE OF DELINQUENT FILERS PURSUANT TO ITEM
405 OF REGULATION S-K IS NOT CONTAINED HEREIN, AND WILL NOT BE CONTAINED, TO
THE BEST OF REGISTRANT'S KNOWLEDGE, IN DEFINITIVE PROXY INFORMATION STATEMENTS
INCORPORATED BY REFERENCE IN PART III OF THIS FORM 10-K OR ANY AMENDMENT TO
THIS FORM 10-K. /X/
The aggregate market value of the voting Common Stock, par value $0.01 per
share, held by nonaffiliates of the Registrant as of February 1, 1995 was
approximately $65,265,000. For purposes of the determination of the above
stated amount only, all directors, executive officers and 5% or more
shareholders of the Registrant are presumed to be affiliates.
The number of shares of Common Stock, par value $0.01 per share,
outstanding as of February 1, 1995 was 60,442,853.
DOCUMENTS INCORPORATED BY REFERENCE: PROXY STATEMENT TO BE FILED ON OR
BEFORE APRIL 30, 1995 IS INCORPORATED BY REFERENCE INTO PART III.
================================================================================
<PAGE> 120
TABLE OF CONTENTS
<TABLE>
<CAPTION>
PAGE
----
<S> <C> <C>
PART I.
ITEM 1. Business . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 3
ITEM 2. Properties . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 13
ITEM 3. Legal Proceedings . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 13
ITEM 4. Submission of Matters to a Vote of Security Holders . . . . . . . . . . . . 13
PART II.
ITEM 5. Market for Registrant's Common Equity and Related
Stockholder Matters . . . . . . . . . . . . . . . . . . . . . . . . . . . . 13
ITEM 6. Selected Financial Information and Other Data . . . . . . . . . . . . . . . 15
ITEM 7. Management's Discussion and Analysis of Financial Condition and
Results of Operations . . . . . . . . . . . . . . . . . . . . . . . . . . . 16
ITEM 8. Financial Statements and Supplementary Data . . . . . . . . . . . . . . . . 25
ITEM 9. Changes in and Disagreements with Accountants on Accounting and
Financial Disclosure . . . . . . . . . . . . . . . . . . . . . . . . . . . . 53
PART III.
ITEM 10. Directors and Executive Officers of the Registrant . . . . . . . . . . . . . 53
ITEM 11. Executive Compensation . . . . . . . . . . . . . . . . . . . . . . . . . . . 53
ITEM 12. Security Ownership of Certain Beneficial Owners . . . . . . . . . . . . . . 53
ITEM 13. Certain Relationships and Related Transactions . . . . . . . . . . . . . . . 53
PART IV.
ITEM 14. Exhibits, Financial Statement Schedules and Reports on Form 8-K . . . . . . 54
SIGNATURES . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 55
</TABLE>
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PART I
ITEM 1. BUSINESS
OVERVIEW
Harken Energy Corporation and its subsidiaries ("Harken") is engaged
in oil and gas exploration, development and production operations both
domestically and internationally through its various wholly-owned subsidiaries
and joint venture investments. Harken's domestic operations include the oil and
gas exploration and production operations in the Aneth Field and Blanding
Sub-Basin portions of the Paradox Basin in Utah, Arizona and New Mexico, and in
the Western Paradox Basin in Utah. Harken's international operations include
three exclusive Colombian Association Contracts between Harken's wholly-owned
subsidiary, Harken de Colombia, Ltd., and Empresa Colombiana de Petroleos
("Ecopetrol") as well as a production sharing agreement between Harken's
wholly-owned subsidiary, Harken Bahrain Oil Company, and the Bahrain National
Oil Company ("BANOCO"). Harken's international operations currently consist
solely of oil and gas exploration and development. Harken considers that the
opportunities to profitably deploy Harken's expertise and assets
internationally are generally greater than those available domestically.
Harken was incorporated in 1973 in the state of California and
reincorporated in 1979 in the state of Delaware. Harken's principal offices
are located at 5605 N. MacArthur Blvd., Suite 400, Irving, Texas 75038 and its
telephone number is (214) 753-6900.
INTERNATIONAL EXPLORATION OPERATIONS
Alcaravan Contract -- During the third quarter of 1992, Harken,
through a subsidiary, Harken de Colombia, Ltd., was awarded the exclusive right
to explore for, develop and produce oil and gas throughout approximately
350,000 acres within the Alcaravan area ("Alcaravan") of Colombia. Alcaravan is
located in Colombia's Llanos Basin and is located approximately 140 miles east
of Santafe de Bogota. Harken and Ecopetrol have entered into an Association
Contract ("Alcaravan Contract") which requires Harken to conduct a seismic and
exploratory drilling program in the Alcaravan area ("work program") over the
initial six years. At the end of each of the six years in the work program,
Harken has the option to withdraw from the Alcaravan Contract or to commit to
the next year's work requirements. If Harken makes a commercial discovery of
oil and/or gas which is approved by Ecopetrol, the standard terms of the
Alcaravan Contract will apply. Such terms provide for Ecopetrol to reimburse
Harken for 50% of its successful well costs expended up to the point of
commercial discovery and to receive a 20% royalty interest and for both
Ecopetrol and Harken to each have a 50% working interest. The term of the
Alcaravan Contract will extend twenty-two years from the date of any commercial
discovery of oil and/or gas. Harken reprocessed in excess of 200 kilometers of
seismic data on the Alcaravan area and completed the acquisition of 52
kilometers of new seismic data over prospective areas in mid-February 1994.
Harken also plans to acquire approximately 26 kilometers of additional seismic
data on the Alcaravan Contract area in February 1995.
In September 1994, Harken announced that Huffco Group, Inc. ("Huffco")
of Houston, Texas joined Harken in the drilling of its first exploratory well
under the Alcaravan Contract. Under the terms of this joint venture agreement,
which was approved by Ecopetrol, Harken serves as operator and retains
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<PAGE> 122
a 50% interest in the well. The well, the Alcaravan #1, was spudded in early
February 1995 and will be drilled to a projected depth of 10,500 feet to test
for commercial quantities of oil in the oil prone zones prevalent in the Llanos
Basin; the Carbonera, Mirador, Guadalupe and the basal Cretaceous formations.
Bocachico Contract -- In January 1994, Harken announced that Harken de
Colombia, Ltd. had signed its second Association Contract ("Bocachico
Contract") with Ecopetrol, covering the Bocachico contract area. Under the
Bocachico Contract, Harken has acquired the exclusive rights to conduct
exploration activities and drilling on this area, which covers approximately
192,000 acres in the Middle Magdelena Valley of Central Colombia.
During the first year of the Bocachico Contract, Harken is conducting
seismic activities on the land covered by this contract including reprocessing
of at least 250 kilometers of existing seismic data and the acquisition of at
least 35 kilometers of new seismic data. During each of the 2nd through the 6th
contract years Harken may elect to continue the contract by committing to the
drilling of at least one well during each contract year. During this initial
six year term, called the Exploration Period under the Bocachico Contract, if
Harken has discovered the existence of commercial production in the Bocachico
Contract area, the Bocachico Contract will be further extended for a period of
22 years from the date of any commercial discovery of oil and/or gas. If Harken
makes a commercial discovery of oil and/or gas which is approved by Ecopetrol,
the standard terms of the Bocachico Contract will apply. Such terms provide for
Ecopetrol to reimburse Harken for 50% of its successful well costs expended up
to the point of commercial discovery and to receive a 20% royalty interest and
for both Ecopetrol and Harken to each have a 50% working interest.
In addition to reprocessing and acquiring seismic data during the
first contract year of the Bocachico Contract, Harken has evaluated seismic
data and has completed an engineering feasibility study to evaluate the
potential for recovering existing oil reserves in the Rio Negro area, which is
located in the northern portion of the Bocachico Contract area. Three wells
were drilled, produced and subsequently abandoned by another contractor
approximately 30 years ago in this area. These wells have provided information
and data including production rates, well logs and pressure tests. This well
data has been utilized by Harken in such studies to evaluate the feasibility of
applying modern production and recovery techniques in this area. Harken will
also acquire a minimum of 35 kilometers of seismic data on the Bocachico
Contract area in early 1995.
On January 19, 1995, after completing the engineering feasibility
study, Harken notified Ecopetrol of Harken's commitment to drill a well under
the Bocachico Contract, and thereby extended the contract into its second year.
Harken currently anticipates that a well site will be selected and drilling
will commence by mid-1995.
Playero Contract -- In December 1994, Harken announced that Harken de
Colombia, Ltd. had signed its third Association Contract ("Playero Contract")
with Ecopetrol, covering the Playero contract area. Under the Playero
Contract, Harken has acquired the exclusive rights to conduct exploration
activities and drilling on this area, which covers approximately 10,000 acres
in the Llanos Basin of Colombia, contiguous to Harken's Alcaravan Contract
area.
During the first year of the Playero Contract, Harken will acquire at
least 12 kilometers of new seismic data in the Playero Contract area. During
each of the 2nd through the 6th contract years, Harken may elect to continue
the contract by committing to the drilling of at least one well during each
contract
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<PAGE> 123
year. During this initial six year term, called the Exploration Period under
the Playero Contract, if Harken has discovered the existence of commercial
production in the Playero Contract area, the Playero Contract will be further
extended for a period of 22 years from the date of termination of the
Exploration Period with a total term not to exceed 28 years. If Harken makes a
commercial discovery of oil and/or gas which is approved by Ecopetrol, the
standard terms of the Playero Contract will apply. The Playero Contract was
granted by Ecopetrol under a new form of Association Contract which has
modified various standard terms from the previous form of Association Contract
which was used on the Alcaravan and Bocachico Contract. Such terms provide for
Ecopetrol to reimburse Harken for 50% of its successful well costs expended up
to the point of a commercial discovery and to receive a 20% royalty interest.
Although both Ecopetrol and Harken each would have a 50% working interest,
production net of royalty would be allocated 50% to each party until
accumulated production from the Playero Contract area reaches a cumulative
total of 60 million barrels of oil. After that cumulative production level is
achieved, production net of royalty is allocated at rates to Harken from 50%
to 25% based upon the relative profitability of the project with Ecopetrol
receiving the remaining complementary 50% to 75% of such additional production.
Bahrain Operations -- In January 1990, Harken, through its
wholly-owned subsidiary, Harken Bahrain Oil Company ("HBOC"), entered into a
production sharing agreement with BANOCO which gave it the exclusive right to
explore for, develop and produce oil and gas throughout most of Bahrain's
Arabian Gulf offshore territories. Subject to the discovery and development of
oil and/or gas, the contract has a term of thirty-five years. Under the
original terms of the agreement, as amended, Harken was to drill an exploratory
well to test the Permian Khuff formation within 2 1/2 years and drill a total
of four wells by 1995 to earn all of its acreage rights.
In July 1990, Harken entered into a joint venture arrangement with a
joint venture partner, Bass Enterprises Production Company ("BEPCO"), in which
BEPCO committed to provide the funding for the first well and at least two
subsequent wells. On April 8, 1993, HBOC and BEPCO entered into an agreement
whereby BEPCO was released and discharged from any future drilling obligations
related to HBOC's production sharing agreement, and the joint venture agreement
between HBOC and BEPCO was terminated. As part of this agreement, BEPCO paid to
HBOC approximately $2,000,000 plus other considerations, which represented the
negotiated amount for BEPCO's remaining obligation for future costs to be
incurred in Bahrain.
The initial exploratory well under the production sharing agreement
was drilled on the Jarim Reef, which began drilling November 1991. In March
1992, after drilling was completed, HBOC announced that the Jarim No. 2 well
was not productive of either oil or gas and was abandoned. On December 28,
1992, Harken commenced the drilling of its second exploratory well, the
Muharraq No. 1, in Bahrain. In February 1993, Harken announced that the
Muharraq No. 1 well had no shows of oil or gas and was plugged and abandoned.
Further, under the terms of the production sharing agreement, HBOC allowed its
exploration and drilling rights on approximately 10% of the acreage covered by
the production sharing agreement to expire, effective February 13, 1993. HBOC
allowed an additional portion of the acreage covered by the production sharing
agreement to expire effective August 29, 1993.
In May 1994, Harken announced a new seismic reprocessing program
covering 500 kilometers of seismic lines in the vicinity of the Jarim Reef. At
present Harken holds approximately 500,000 acres under its production sharing
agreement. Unless commercial production is found or an extension to the
production sharing agreement is obtained, this acreage expires in July 1995.
In January 1995, Harken completed its reprocessing of approximately 500
kilometers of seismic data and has reviewed the results of that work
5
<PAGE> 124
with BANOCO. Unless Harken obtains a joint venture partner, Harken will not
proceed to either acquire additional seismic data or drill another well. If a
joint venturer is located, it will be necessary to obtain an extension of one
year or more from July 1995 to complete work necessary with a joint venturer.
DOMESTIC EXPLORATION AND PRODUCTION OPERATIONS
Prior to 1993, Harken's exploration and production operations were
primarily in Oklahoma and Texas, and during 1991 and 1992 these operations were
conducted through Harken's interest in Harken Anadarko Partners, L.P., ("HAP"),
a limited partnership managed by a wholly-owned subsidiary of Harken. As
general partner of HAP, Harken's wholly-owned subsidiary received a monthly
management fee from the partnership. An affiliate of a major stockholder of
Harken served as sole limited partner.
Chuska Resources Corporation -- Effective February 15, 1993, Harken
consummated a merger pursuant to which Chuska Resources Corporation ("Chuska")
became a wholly-owned subsidiary of Harken. Harken acquired all of the
11,055,918 shares of Chuska common stock outstanding in exchange for 14,210,357
shares of newly-issued Harken common stock. The Board of Directors of both
Harken and Chuska approved the Merger as described in the Merger Agreement, and
the necessary approvals by the stockholders of both Harken and Chuska were
obtained at special meetings of stockholders which were held by each company on
February 15, 1993.
Chuska is engaged, primarily through its subsidiary, Harken Southwest
Corporation ("HSW"), in the business of exploring for and producing oil and gas
in the Aneth Field and Blanding Sub-Basin portions of the Paradox Basin in
Utah, Arizona and New Mexico, and in the Western Paradox Basin in Utah. HSW
operations in the Paradox Basin are primarily concentrated on the 16 million
acre Navajo Indian Reservation (the "Reservation"), which comprises portions of
Arizona, New Mexico and Utah. In addition to its oil and gas exploration
activities, HSW also has an interest in a gas processing plant in or near the
Paradox Basin, the Aneth Gas Plant, on the Utah portion of the Reservation.
HSW currently has two operating agreements (the "Tribal Agreements")
with the Navajo Tribe of Indians (the "Tribe" or the "Navajo Nation") allowing
oil and gas exploration and development on an aggregate 53,430 acres of Navajo
tribal lands on the Reservation (the "Tribal Lands"). HSW has the right to
explore for, produce, and sell oil, natural gas, and other specified gases
until July 20, 2012, under the Tribal Agreement effective July 20, 1987 (the
"1987 Tribal Agreement") and until August 26, 2003, under the Tribal Agreement
effective August 26, 1983 (the "1983 Tribal Agreement"). Any acreage under the
1987 Tribal Agreement which is not held by production as of July 1995, will
expire. All non-productive acreage under the 1983 Tribal Agreement has
previously expired.
The Navajo Nation receives 30% of gross revenues from the sale of
production of oil and gas under the 1983 Tribal Agreement and 20% under the
1987 Tribal Agreement (this 20% is subject to an increase to 23% with respect
to each barrel of oil sold for more than $22 after July 1994). Under both
Tribal Agreements, the Tribe is entitled to receive an escalated 50% of all
gross proceeds recovered over $35 per barrel of oil. Under the 1983 Tribal
Agreement, the Tribe receives 50% of all gross proceeds over $4 per MCF of gas.
Under the 1987 Tribal Agreement, the Tribe receives 40% of all gross proceeds
over $8 per MCF of gas.
In addition to the Tribe's share of gross proceeds, designation
consideration and delay rentals, HSW pays severance tax and possessory interest
tax ("PIT") to the Tribe. The severance tax is payable
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monthly and is 4% of HSW's gross proceeds from sales of oil and gas, after
deducting the Tribe's share of gross proceeds. The PIT is assessed once a year
and is calculated as a specified percentage of a defined discounted present
value of projected future cash flows (net of the Tribe's share of gross
proceeds) from existing proven reserves as of January 1 of the year for which
the PIT is assessed, although the Tribe actually retains title to those
reserves. The PIT is payable in two installments. HSW is also required to pay
the Tribe land damage costs relating to HSW's seismic and drilling activities.
CHAP Venture -- In order to develop the Tribal Lands, HSW sold an
undivided 50% interest in gross proceeds under the Tribal Agreements to Amadeus
Petroleum, Inc., Bligh Petroleum, Inc., Crusader, Inc., C.A.B. Resources, Inc.
(an affiliate of Crusader, Inc.), Australian Hydrocarbons, Inc., Jindavik
Petroleum, Inc., and Paroo Petroleum (USA), Inc. (collectively the "Australian
Group") effective August 1, 1988, and formed the CHAP Venture ("CHAP"). CHAP is
not a legal entity, although it is a tax partnership. Effective March 1, 1990,
HSW sold 20% of its CHAP interest to Global Natural Resources Corporation of
Nevada ("Global"), which interest was repurchased by HSW effective January 1,
1993, resulting in HSW again holding a 50% total interest in CHAP.
In October 1994, Harken acquired the CHAP Joint Venture interests of
Crusader, Inc., C.A.B. Resources, Inc. and Australian Hydrocarbons, Inc.,
raising Harken and its subsidiaries' total interest in CHAP to approximately
70%. As consideration for this acquisition, Harken issued an aggregate total
of 960,000 shares of restricted Harken common stock to the sellers, assumed
certain liabilities of the sellers relating to the properties, and the sellers
in turn retained responsibility for certain contingent operational and
environmental liabilities related to the properties as well as retaining
certain distributions made by CHAP prior to the actual date of closing.
Each CHAP co-venturer pays its respective participating interest share
of costs and expenses and receives its participating interest share of
revenues. HSW is the operator for CHAP and communicates with and makes
proposals to an Operating Committee composed of HSW representatives and a
representative of each of the non-operators. As operator, HSW is reimbursed by
CHAP for indirect costs incurred on behalf of CHAP or in the pursuit of CHAP
activities.
Greater Blanding -- During 1991, a venture between Sunfield Energy
Company ("Sunfield", a wholly-owned subsidiary of Chuska), Amadeus Petroleum,
Inc., Bligh Petroleum, Inc., and Jindavik Petroleum, Inc., was formed to
explore and develop properties in a portion of the Blanding Sub-Basin
designated internally as the "Greater Blanding" project. The venture has no
separate legal status or existence except as a tax partnership. Sunfield is the
operator of the venture, and all costs and expenses of the venture are borne
and paid by, and all property, revenues and other benefits are to be allocated
to and owned by, each venturer in the ratio of its respective participating
working interest; however, the three non-Sunfield parties agreed to carry
$600,000 of qualifying capital expenditures allocable to Sunfield in connection
with the Greater Blanding project and/or the Central Blanding project (see
"Central Blanding" below). Sunfield owns a 60% interest in the Greater Blanding
project.
In connection with the operation of the Greater Blanding venture,
Sunfield is reimbursed for any direct or indirect costs incurred on behalf of
the venture. The area termed Greater Blanding includes an area of mutual
interest (AMI) north of the Navajo Reservation area being explored by HSW
pursuant to the Tribal Agreements.
7
<PAGE> 126
Central Blanding -- During 1991, a venture between Sunfield, Global,
Amadeus Petroleum, Inc., Bligh Petroleum, Inc., and Jindavik Petroleum, Inc.
was formed. During 1992, a 10% interest in the venture was assigned from Global
to Holly Petroleum. The venture has no separate legal status or existence
except as a tax partnership. Sunfield is the operator of the venture, and all
costs and expenses of the venture are borne and paid by, and all property,
revenues and other benefits are to be allocated to and owned by each venturer
in the ratio of its respective participating working interest. The Global
interest was repurchased by Sunfield effective January 1, 1993, resulting in
Sunfield holding a 70% total interest in the Central Blanding venture.
In connection with the operation of the Central Blanding venture,
Sunfield is reimbursed for any direct or indirect costs incurred on behalf of
the venture. The area termed Central Blanding includes an area of mutual
interest (AMI) north of the area of the Navajo Reservation being explored by
HSW pursuant to the Tribal Agreements. There is no overlap between the Greater
Blanding AMI and the Central Blanding AMI.
Western Paradox -- During 1991, Sunfield began the acquisition of
acreage for an oil and gas exploration project in a portion of central Utah
northwest of the Greater Blanding and Central Blanding projects. During 1994,
Sunfield entered into a seismic sharing agreement with an industry partner to
begin geophysical and exploration efforts in the Western Paradox area.
DISCONTINUED WELL SERVICING AND CONTRACT DRILLING OPERATIONS
Prior to May 1994, Supreme Well Service Company ("Supreme", a wholly
owned subsidiary) provided services to oil and gas exploration and production
companies for the maintenance and workover of existing oil and gas wells and
the completion of newly drilled wells. In May 1994, Harken announced that it
had discontinued its well servicing operations. Harken has sold the equipment
assets of Supreme in order to utilize the proceeds toward developing Harken's
exploration and production operations both domestically and internationally.
In April 1991, Harken made the decision to suspend domestic contract
drilling operations due to decreased demand and increased competition,
particularly in the Austin Chalk trend in South Texas. In January 1994, Harken
made the decision to liquidate its remaining drilling rigs and related assets
and apply the proceeds primarily to its international exploration efforts,
specifically in Colombia and Bahrain. As a result of this decision, Harken
recognized an additional non-cash charge of approximately $3,100,000 during the
fourth quarter of 1993.
INDUSTRY RISKS
Price Volatility. The revenues generated by Harken are highly
dependent upon the prices of crude oil and natural gas. The currently unsettled
energy market makes it difficult to estimate future prices of crude oil and
natural gas. Fluctuations in energy prices are caused by a number of factors,
including regional, domestic and international demand, energy legislation,
federal or state taxes (if any) on sales of crude oil and natural gas,
production guidelines established by the Organization of Petroleum Exporting
Countries ("OPEC"), and the relative abundance of supplies of alternative fuel
such as coal. Additionally, changing international economic and political
conditions may have a substantial impact upon crude oil and natural gas prices.
Many of these factors which can affect energy prices are beyond the control of
Harken.
8
<PAGE> 127
Business Risks. Harken must continually acquire or explore for and
develop new oil and gas reserves to replace those being depleted by production.
Without successful drilling or acquisition ventures, Harken's oil and gas
assets, properties and the revenues derived therefrom will decline over time.
To the extent Harken engages in drilling activities, such activities carry the
risk that no commercially viable oil or gas production will be obtained. The
cost of drilling, completing and operating wells is often uncertain. Moreover,
drilling may be curtailed, delayed or canceled as a result of many factors,
including shortage of available working capital, title problems, weather
conditions, environmental concerns, shortages of or delays in delivery of
equipment, as well as the financial instability of well operators, major
working interest owners and drilling and well servicing companies. The
availability of a ready market for Harken's oil and gas depends on numerous
factors beyond its control, including the demand for and supply of oil and gas,
the proximity of Harken's natural gas reserves to pipelines, the capacity of
such pipelines, fluctuations in seasonal demand, the effects of inclement
weather, and government regulation. New gas wells may be shut-in for lack of a
market until a gas pipeline or gathering system with available capacity is
extended into the area.
In February 1994, the Navajo Nation issued a moratorium on future oil
and gas development agreements and exploration on lands situated within the
Aneth Chapter on the Navajo Reservation, which is an area that includes some of
HSW's undeveloped acreage. It is unknown what effect, if any, this resolution
will have on HSW's operations. Any acreage under the 1987 Tribal Agreement
which is not held by production as of July 31, 1995, will expire unless
extended by Harken and the Navajo Nation.
Operating Hazards and Uninsured Risks. The operations of Harken are
subject to the inherent risks normally associated with exploration for and
production of oil and gas, including blowouts, cratering, pollution and fires,
each of which could result in damage to or destruction of oil and gas wells or
production facilities or damage to persons and property. As is common in the
oil and gas industry, Harken is not fully insured against all of these risks,
either because insurance is not available or because Harken has elected to
self-insure due to high premium costs. The occurrence of a significant event
that is not fully insured against could have a material adverse effect on
Harken's financial condition.
International Operations. Harken conducts international operations
presently and anticipates that it will conduct significant international
operations in the future. Foreign properties, operations or investments may be
adversely affected by local political and economic developments, exchange
controls, currency fluctuations, royalty and tax increases, retroactive tax
claims, renegotiation of contracts with governmental entities, expropriation,
import and export regulations and other foreign laws or policies governing
operations of foreign-based companies, as well as by laws and policies of the
United States affecting foreign trade, taxation and investment. In addition,
as certain of Harken's operations are governed by foreign laws, in the event of
a dispute, Harken may be subject to the exclusive jurisdiction of foreign
courts or may not be successful in subjecting foreign persons to the
jurisdiction of courts in the United States. Harken may also be hindered or
prevented from enforcing its rights with respect to a governmental
instrumentality because of the doctrine of sovereign immunity. Exploration and
production activities in areas outside the United States are also subject to
the risks inherent in foreign operations, including loss of revenue, property
and equipment as a result of hazards such as expropriation, nationalization,
war, insurrection and other political risks.
Environmental Regulation. The activities of Harken are subject to
various Navajo, federal, state, and local laws and regulations covering the
discharge of material into the environment or otherwise relating to protection
of the environment. In particular, Harken's oil and gas exploration,
development, production;
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<PAGE> 128
its activities in connection with storage and transportation of liquid
hydrocarbons; and its use of facilities for treating, processing, recovering,
or otherwise handling hydrocarbons and wastes therefrom are subject to
stringent environmental regulation by governmental authorities in the United
States and in foreign jurisdictions. Such regulations have increased the costs
of planning, designing, drilling, installing, operating and abandoning Harken's
oil and gas wells and other facilities.
The Aneth Gas Plant facility, of which HSW is a co-owner, was in
operation for many years prior to HSW's becoming an owner. The operations at
the Aneth Gas Plant previously used open, unlined drip pits for storage of
various waste products. The plant owners have replaced all of the open ground
pits currently being used with steel tanks. The plant owners are currently in
the process of closing the open ground pits.
Texaco, the plant's operator, received a letter from the EPA dated
July 2, 1991 and a subsequent letter dated June 8, 1992, in which the EPA
requested certain information in order to determine if there had been at the
Aneth Gas Plant the release of hazardous substances to the environment. Texaco
has advised HSW that certain information was supplied to the EPA pursuant to
this request. Subsequently, core samples in and around certain pit areas were
taken by the EPA and Texaco jointly. The EPA has responded to the initial
sampling of the drip pits and Texaco is now planning the next phase of required
evaluation.
Texaco has indicated to HSW that it believes that some of these pits
may require reclamation or remediation. In the event such action should or must
be taken, the plant owners, including HSW, will seek contractual
indemnification from the previous owner of the Aneth Gas Plant for the costs
incurred in the reclamation and remediation process. At this time, however, it
is impossible for HSW to determine or estimate the costs of the cleanup at the
Aneth Gas Plant or if the prior owner will indemnify the present owners,
including HSW, for such costs.
Harken has expended significant resources, both financial and
managerial, to comply with environmental regulations and permitting
requirements and anticipates that it will continue to do so in the future.
Although Harken believes that its respective operations and facilities are in
general compliance with applicable environmental laws and regulations, risks of
substantial costs and liabilities are inherent in oil and gas operations, and
there can be no assurance that significant costs and liabilities will not be
incurred in the future. Moreover, it is possible that other developments, such
as increasingly strict environmental laws, regulations and enforcement policies
thereunder, and claims for damages to property, employees, other persons and
the environment resulting from Harken's operations, could result in substantial
costs and liabilities in the future.
Imprecise Nature of Reserve Estimates. Reserve estimates are imprecise
and may be expected to change as additional information becomes available.
Furthermore, estimates of crude oil and natural gas reserves, of necessity, are
projections based on engineering data, and there are uncertainties inherent in
the interpretation of such data as well as the projection of future rates of
production and the timing of development expenditures. Reserve engineering is a
subjective process of estimating underground accumulations of oil and gas that
cannot be measured in an exact way, and the accuracy of any reserve estimate is
a function of the quality of available data and of engineering and geological
interpretation and judgment. Accordingly, there can be no assurance that the
information regarding reserves set forth herein will ultimately be produced.
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<PAGE> 129
Competitive Factors in Oil and Gas Industry. The oil and gas industry
is highly competitive in all its phases. Competition is particularly intense
with respect to the acquisition of desirable producing properties and the sale
of crude oil and natural gas production. Harken's competitors in oil and gas
exploration, development and production include major oil companies and
numerous independent oil and gas companies, and individual producers and
operators. Many of Harken's competitors possess and employ financial and
personnel resources substantially greater than those which are available to
Harken and may, therefore, be able to pay greater amounts for desirable leases
and to define, evaluate, bid for and purchase a greater number of producing
prospects than the financial or personnel resources of Harken will permit.
Regulatory Items. The production of oil and gas is subject to
extensive Navajo, federal and state laws, rules, orders and regulations
governing a wide variety of matters, including the drilling and spacing of
wells, allowable rates of production, prevention of waste and pollution and
protection of the environment. In addition to the direct costs borne in
complying with such regulations, operations and revenues may be impacted to the
extent that certain regulations limit oil and gas production to below economic
levels. Although the particular regulations applicable in each state in which
operations are conducted vary, such regulations are generally designed to
ensure that oil and gas operations are carried out in a safe and efficient
manner and to ensure that similarly-situated operators are provided with
reasonable opportunities to produce their respective fair shares of available
crude oil and natural gas reserves. However, since these regulations generally
apply to all oil and gas producers, management of Harken believes that these
regulations should not put Harken at a material disadvantage to other oil and
gas producers.
Certain sales, transportation, and resales of natural gas by Harken
are subject to Navajo, federal and state laws and regulations, including, but
not limited to, the Natural Gas Act (NGA), the NGPA and regulations promulgated
by the FERC under the NGA, the NGPA and other statutes. The provisions of the
NGA and NGPA, as well as the regulations thereunder, are complex, and can
affect all who produce, resell, transport, purchase or consume natural gas.
Although recent FERC transportation regulations do not directly apply
to Harken because they are not engaged in rendering jurisdictional
transportation services, these regulations do affect the operations of Harken
by virtue of the need to deliver its gas production to markets served by
interstate or intrastate pipelines. In most instances, interstate pipelines
represent the only available method of accomplishing such transportation.
PROPERTIES AND LOCATIONS
Production and Revenues. The following table shows for the periods
indicated operating information attributable to Harken's oil and gas interests.
The 1990 information represents ten months activity because Harken's producing
oil and gas properties were transferred to HAP effective November 1, 1990. The
1993 information reflects the February 15, 1993 merger with Chuska.
11
<PAGE> 130
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
-----------------------
1990 1991 1992 1993 1994
---- ---- ---- ---- ----
<S> <C> <C> <C> <C> <C>
Production:
Oil (Bbls) . . . . . . . . . . 199,000 -- -- 185,000 158,000
Natural Gas (Mcf) . . . . . . 1,605,000 -- -- 429,000 426,000
Revenues:
Oil . . . . . . . . . . . . . $ 4,325,000 $ -- $ -- $ 2,989,000 $ 2,552,000
Natural Gas . . . . . . . . . 2,599,000 -- -- 792,000 806,000
------------- ----------- --------- ------------- ------------
Total . . . . . . . . . . . $ 6,924,000 $ -- $ -- $ 3,781,000 $ 3,358,000
============= =========== ========= ============= ============
Unit Prices:
Oil (per Bbl) . . . . . . . . $ 21.73 $ -- $ -- $ 16.16 $ 16.15
Natural Gas (per Mcf) . . . . $ 1.62 $ -- $ -- $ 1.85 $ 1.89
Production costs per
equivalent barrel . . . . . . $ 6.65 $ -- $ -- $ 7.12 $ 6.70
Amortization per equivalent
barrel . . . . . . . . . . . $ 8.40 $ -- $ -- $ 5.58 $ 6.31
</TABLE>
Acreage and Wells. At December 31, 1994, Harken owned interests in the
following oil and gas wells and acreage, primarily through HSW:
<TABLE>
<CAPTION>
GROSS WELLS NET WELLS DEVELOPED ACREAGE UNDEVELOPED ACREAGE
----------- --------- ----------------- -------------------
STATE OIL GAS OIL GAS GROSS NET GROSS NET
----- --- --- --- --- ----- --- ----- ---
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Arizona . . . . . . . 0 6 0.00 4.20 4,475 3,133 535 375
New Mexico . . . . . 14 0 9.87 0.00 670 469 8,630 6,041
Oklahoma . . . . . . 10 11 0.14 0.09 -- -- -- --
Texas . . . . . . . . 6 0 0.01 0.00 -- -- -- --
Utah . . . . . . . . 40 0 24.35 0.00 24,668 9,985 100,230 94,834
-- - ----- ---- ------ ----- ------- ------
Total . . . . . . 70 17 34.37 4.29 29,813 13,587 109,395 101,250
== == ===== ==== ====== ====== ======= =======
</TABLE>
Drilling Activity. The following table summarizes certain information
concerning Harken's activity drilled by HAP during 1992 and by HSW and Sunfield
during 1993 and 1994.
<TABLE>
<CAPTION>
NUMBER OF WELLS DRILLED
-----------------------
EXPLORATORY DEVELOPMENTAL TOTAL
----------- ------------- -----
PRODUCTIVE DRILLED PRODUCTIVE DRILLED PRODUCTIVE DRILLED
---------- ------- ---------- ------- ---------- -------
<S> <C> <C> <C> <C> <C> <C>
1992 . . . . . . . . . . . . . 0 0 2 2 2 2
1993 . . . . . . . . . . . . . 1 3 1 1 2 4
1994 . . . . . . . . . . . . . 0 0 0 1 0 1
- - - - - -
Total . . . . . . . . . . . 1 3 3 4 4 7
= = = = = =
</TABLE>
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<PAGE> 131
A well is considered "drilled" when it is completed. A productive well
is completed when permanent equipment is installed for the production of oil or
gas. A dry hole is completed when it has been plugged as required and its
abandonment is reported to the appropriate government agency.
As of December 31, 1994, one well was in process of drilling and was
being completed in early 1995.
EMPLOYEES
As of December 31, 1994, Harken had 40 employees. Harken has
experienced no work stoppages or strikes as a result of labor disputes and
considers relations with its employees to be satisfactory. Harken maintains
group life, medical, dental, surgical and hospital insurance plans for its
employees.
ITEM 2. PROPERTIES
See "Item 1. Business" for discussion of properties and locations.
ITEM 3. LEGAL PROCEEDINGS
Harken is currently involved in various lawsuits. In Management's
opinion, the determination against Harken of any of these suits would not have
a material effect on Harken.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
None.
PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS
PRICE RANGE OF COMMON STOCK
Since March 18, 1991, Harken's common stock ("Common Stock") has been
listed on the American Stock Exchange and traded under the symbol HEC. From
August 30, 1989 through March 15, 1991, Harken's Common Stock was listed on the
New York Stock Exchange and traded under the symbol HEC. On February 18, 1991,
the stockholders of Harken approved an amendment to Harken's Certificate of
Incorporation to reduce the par value of Harken's Common Stock from $1.00 to
$0.01 per share. At December 31, 1994, there were approximately 3,545 holders
of record of Common Stock.
The following table sets forth, for the periods indicated, the
reported high and low sales prices of the Common Stock on the American Stock
Exchange Composite Tape after such date.
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<PAGE> 132
<TABLE>
<CAPTION>
PRICES
------
HIGH LOW
---- ---
<S> <C> <C>
1993 -- First Quarter . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 3 1/4 $ 1 3/16
Second Quarter . . . . . . . . . . . . . . . . . . . . . . . . . . 1 11/16 15/16
Third Quarter . . . . . . . . . . . . . . . . . . . . . . . . . . . 1 1/4 13/16
Fourth Quarter . . . . . . . . . . . . . . . . . . . . . . . . . . 1 13/16 1
1994 -- First Quarter . . . . . . . . . . . . . . . . . . . . . . . . . . . 1 1/2 1 1/16
Second Quarter . . . . . . . . . . . . . . . . . . . . . . . . . . 1 7/16 15/16
Third Quarter . . . . . . . . . . . . . . . . . . . . . . . . . . . 2 3/4 1
Fourth Quarter . . . . . . . . . . . . . . . . . . . . . . . . . . 2 1/4 1 5/8
</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, 1993 and 1994,
only the 186,760 shares of Series C Preferred held by Tejas Power Corporation
("Tejas") are currently outstanding. During 1991, in connection with the
issuance of 1,000 shares of Tejas preferred stock to Harken, Tejas agreed to
waive certain of the provisions under the terms of the Harken Series C
Preferred, including the payment of the 12% annual dividend.
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<PAGE> 133
ITEM 6. SELECTED FINANCIAL INFORMATION AND OTHER DATA
<TABLE>
<CAPTION>
1990(3)(4)(5) 1991(4)(5) 1992(4) 1993(4) 1994
------------- ---------- ------- ------- ----
<S> <C>
Revenues . . . . . . . . . . . . . . . $ 10,749,000 $ 3,191,000 $ 4,382,000 $ 6,601,000 $ 4,895,000
Income (loss) from continuing
operations . . . . . . . . . . . . . . $ (5,212,000) $ (4,413,000) $ 661,000 $(1,797,000) $(8,211,000)
Income (loss) from discontinued
operations(5) . . . . . . . . . . . . $(35,976,000) $(11,190,000) $ (328,000) $(3,697,000) $ (223,000)
Extraordinary item . . . . . . . . . . $ -- $ -- $ 172,000 $ -- $ --
Net income (loss) . . . . . . . . . . . $(41,188,000) $(15,603,000) $ 505,000 $(5,494,000) $(8,434,000)
Net income (loss) per common share:
Income (loss) from continuing
operations . . . . . . . . . . . . . $ (0.27) $ (0.12) 0.01 $ (0.03) $ (0.14)
Discontinued operations(5) . . . . . . (1.11) (0.26) (0.01) (0.06) (0.00)
Extraordinary item . . . . . . . . . . -- -- 0.00 -- --
------------ ------------ ----------- ----------- -----------
Net income (loss) . . . . . . . . . . $ (1.38) $ (0.38) $ 0.00 $ (0.09) $ (0.14)
============ ============ =========== =========== ==========
Current assets . . . . . . . . . . . . $ 94,038,000 $ 15,560,000 $13,911,000 $ 7,677,000 $ 6,840,000
Current liabilities . . . . . . . . . . $101,094,000 $ 15,122,000 $10,201,000 $ 6,533,000 $ 5,133,000
------------ ------------ ----------- ----------- -----------
Working capital (deficit) . . . . . . . $ (7,056,000) $ 438,000 $ 3,710,000 $ 1,144,000 $ 1,707,000
============ ============ =========== =========== ==========
Working capital (deficit) from
continuing operations . . . . . . . . $ 328,000 $ 438,000 $ 3,710,000 $ 1,144,000 $ 1,707,000
Total assets . . . . . . . . . . . . . $260,607,000 $ 37,664,000 $34,872,000 $37,731,000 $28,960,000
Long-term obligations:
Long-term debt and other
liabilities . . . . . . . . . . . . . $ 302,000 $ 1,276,000 $ -- $ -- $ --
Notes payable to related parties . . . $ 4,761,000 $ 253,000 $ -- $ -- $ --
Redeemable preferred stock(2) . . . . $ 30,000,000 $ 9,000,000 $ 1,868,000 $ 1,868,000 $ 1,868,000
------------ ------------ ----------- ----------- -----------
Total . . . . . . . . . . . . . . . $ 35,063,000 $ 10,529,000 $ 1,868,000 $ 1,868,000 $ 1,868,000
============ ============ =========== =========== ===========
Stockholders' equity . . . . . . . . . $ 3,000,000 $ 11,499,000 $20,316,000 $28,963,000 $21,959,000
Redeemable preferred stock outstanding 3,000,000 900,000 186,760 186,760 186,760
Weighted average common stock
outstanding . . . . . . . . . . . . . 32,533,137 42,519,373 45,752,936 58,392,901 59,722,853
Proved reserves at end of year(1):
Bbls of oil . . . . . . . . . . . . . -- -- -- 1,035,000 1,521,000
Mcf of gas . . . . . . . . . . . . . . -- -- -- 4,970,000 7,148,000
Future net revenues . . . . . . . . . $ -- $ -- $ -- $13,707,000 $20,178,000
Present value (discounted at 10%
per year) . . . . . . . . . . . . . . $ -- $ -- $ -- $ 8,230,000 $11,712,000
</TABLE>
- ---------------
(1) These estimated reserve quantities, future net revenues and present
value figures are related solely to proved reserves. No consideration
has been given to probable or possible reserves. Oil and gas prices
were held constant except where future price increases were fixed and
determinable under existing contracts and government regulations.
Operating costs were held constant. Harken's share of an equity method
investee's proved oil and gas reserves are not reflected in these
amounts. Effective November 1, 1990, Harken transferred its oil and
gas properties to a newly-formed limited partnership. In addition,
effective February 15, 1993, Harken consummated a merger whereby
Chuska Resources Corporation ("Chuska") became a wholly-owned
subsidiary of Harken. The 1993 and 1994 amounts reflect primarily the
proved reserve quantities and future net revenues of Chuska. (See
"Notes to Consolidated Financial Statements, Notes 3 and 14 --
Acquisitions and Oil and Gas Disclosures" contained in Part II, Item
8.)
(2) See "Notes to Consolidated Financial Statements, Note 9 -- Redeemable
Preferred Stock" contained in Part II, Item 8, for a discussion of
Harken Series C Preferred Stock.
(3) Revenues and Total Assets amounts in 1990 reflect the last year prior
to the formation of Harken Anadarko Partners, L.P. whereby Harken
transferred its domestic oil and gas property interests
15
<PAGE> 134
to the limited partnership effective November 1, 1990. As a result,
Harken did not reflect direct oil and gas operating revenues, expenses
or depreciation and amortization from these properties in its
statements of operations after 1990.
(4) Financial information for these periods has been restated to present
the operations of Harken's well servicing and contract drilling
operations as discontinued operations. See "Notes to Consolidated
Financial Statements, Note 2--Discontinued Operations" contained in
Part II, Item 8, for a discussion of its discontinued contract
drilling and well service segment.
(5) Pursuant to a plan of reorganization, Harken completed a rights
offering and related exchange transactions on April 30, 1991. These
transactions resulted in a discontinuance of Harken's refined products
marketing and natural gas gathering and marketing operations.
Discontinued operations for 1990 and 1991 includes losses of
$32,884,000 and $2,997,000, respectively, from Harken's discontinued
refined products marketing and natural gas gathering and marketing
operations.
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
RESULTS OF OPERATIONS
The following table presents certain data for Harken's continuing
operations for the years ended December 31, 1992, 1993 and 1994. A discussion
follows of certain significant factors which have affected Harken's operating
results during such periods. This discussion should be read in conjunction with
Harken's Consolidated Financial Statements and related footnotes contained in
Part II, Item 8.
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
-----------------------
1992 1993 1994
---- ---- ----
<S> <C> <C> <C>
EXPLORATION AND PRODUCTION OPERATIONS(1)
- ----------------------------------------
Revenues
Oil sales revenues . . . . . . . . . . . . . . . . . $ -- $ 2,989,000 $ 2,552,000
Oil volumes in barrels . . . . . . . . . . . . . . -- 185,000 158,000
Oil price per barrel . . . . . . . . . . . . . . . $ -- $ 16.16 $ 16.15
Gas sales revenues . . . . . . . . . . . . . . . . . $ -- $ 792,000 $ 806,000
Gas volumes in mcf . . . . . . . . . . . . . . . . -- 429,000 426,000
Gas price per mcf . . . . . . . . . . . . . . . . $ -- $ 1.85 $ 1.89
Gas plant revenues . . . . . . . . . . . . . . . . . . $ -- $ 1,189,000 $ 798,000
Gain on sale of partnership interest . . . . . . . . $ 1,449,000 $ -- $ --
Management fee income . . . . . . . . . . . . . . . . $ 1,110,000 $ 300,000 $ --
OTHER REVENUES
- --------------
Interest income . . . . . . . . . . . . . . . . . . . $ 822,000 $ 225,000 $ 147,000
Other income . . . . . . . . . . . . . . . . . . . . $ 1,001,000 $ 1,106,000 $ 592,000
</TABLE>
- ---------------
(1) Effective February 15, 1993, Harken consummated a merger whereby
Chuska Resources Corporation ("Chuska") became a wholly-owned
subsidiary of Harken.
16
<PAGE> 135
OVERVIEW
Harken reported a net loss from continuing operations for the year
ended December 31, 1994, of $8,211,000 primarily due to a reduction in Harken's
carrying value in its investment in E-Z Serve Series C Preferred and related
accrued dividends by approximately $5.8 million due to a permanent decline in
value as indicated by efforts of Harken management to sell the investment in
early 1995. Despite production declines on existing wells and the lack of new
production from drilling activities, Harken did bolster its oil and gas reserve
and revenue base through the additional acquisition of approximately 20% of the
CHAP Venture during the last half of 1994. Total gross revenues from oil and
gas operations totalled $4,156,000 with a gross profit before depreciation and
amortization and general and administrative expenses of $2,621,000.
International exploration activities continued progressing, particularly in
Colombia, where Harken spudded its first Alcaravan Contract well in early
February 1995, committed to drill a well on its Bocachico Contract area, and
signed its third Association Contract, the Playero Contract. In addition,
Harken completed the reprocessing of approximately 500 kilometers of seismic
data in Bahrain in 1994.
Harken reported a net loss from continuing operations for the year
ended December 31, 1993, of $1,797,000. Effective February 15, 1993, Harken
consummated a merger pursuant to which Chuska Resources Corporation ("Chuska")
became a wholly-owned subsidiary of Harken. As a result of the merger with
Chuska, Harken began reflecting oil and gas sales revenues and related
operating expenses and depreciation and amortization in 1993. Harken's
exploration and production operations generated gross revenues of $5,505,000
and gross profit before depreciation and amortization and general and
administrative expenses totalled $3,680,000 during 1993, primarily generated
from the Chuska acquisition. International exploration efforts continued in
1993, particularly in Bahrain and Colombia. Harken completed its first year
work commitment in Colombia for the Alcaravan Association Contract and also
entered into a second Association Contract in January 1994 for the Bocachico
area of Colombia in the Middle Magdelena Basin. Contributing to the loss from
continuing operations was the expensing of a total of $551,000 of accrued
interest related to certain non-recourse notes receivable from certain current
and former employees, officers and directors.
Harken reported net income from continuing operations for the year
ended December 31, 1992, of $661,000. In December 1992, Harken entered into a
Purchase and Sale Agreement pursuant to which Harken sold its 12% general
partner's interest in its managed limited partnership, Harken Anadarko
Partners, L.P. ("HAP"), for cash of $2,650,000. The transaction resulted in
Harken recognizing a gain on the sale of $1,449,000 during December 1992. As a
result of this gain, operating profit for Harken's exploration and production
operations was $2,872,000 during 1992. Harken's international operations
continued to be very active during 1992. Despite announcing in February 1993
that the second well drilled in Bahrain, the Muharraq No. 1, had been plugged
and abandoned, Harken's other international efforts during 1992 resulted in
significant opportunities. During the third quarter of 1992, Harken entered
into an Association Contract to conduct a seismic and exploratory drilling
program in the Alcaravan area of Colombia.
EXPLORATION AND PRODUCTION OPERATIONS
Gross oil and gas sales revenues during 1993 and 1994 reflect the
operations of HSW, which consists primarily of the production of oil and gas
reserves in the Aneth Field and Blanding Sub-Basin portions of the Paradox
Basin in Utah, Arizona and New Mexico, primarily on the Navajo Indian
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Reservation. Such operations are conducted through HSW's interests in the CHAP
Venture, Greater Blanding venture and Central Blanding venture. Gross oil
revenues reflect the overall weak demand experienced by the industry, resulting
in low oil pricing, particularly during the fourth quarter of 1993 and early
1994. Oil revenues decreased during 1994 as compared to 1993 due to the normal
production decline of existing wells and the lack of new production due to
delays in plans for additional drilling during 1994. Revenues from gas sales
totalled $806,000 during 1994 compared to $792,000 during 1993 and were
enhanced by production from a new successful gas well drilled in mid-1993 in
the Black Rock Field in Arizona. Harken drilled four wells during 1993 and is
largely dependent on future drilling success to offset the production declines
typically experienced in the region. Harken has begun its drilling program of
additional wells beginning in December 1994 on acreage it holds in the Paradox
Basin area, with one productive well being completed in February 1995. Harken
also recognizes gas plant revenues, primarily from HSW's plant owner interest
in the Aneth Plant which serves many of the Utah properties. Gas plant
revenues decreased to $798,000 during 1994 compared to $1,189,000 during 1993
due to an annual redetermination whereby HSW's interest in the Aneth Plant was
reduced based on each owner's throughput volume.
Oil and gas operating expenses consist of lease operating expenses and
gas plant expenses, along with a number of production and reserve-based taxes,
including Utah severance, conservation, and property taxes and Navajo severance
and possessory interest taxes.
In December 1992, Harken, through a subsidiary, entered into a
Purchase and Sale Agreement ("the HAP Sale Agreement") pursuant to which Harken
sold its 12% general partner's interest in HAP to an affiliate of a major
stockholder who served as sole limited partner. The closing of the Agreement
was completed on December 30, 1992. Pursuant to the HAP Sale Agreement, Harken
was paid consideration in cash of $2,650,000 for the sale of this partnership
interest and certain contract rights associated therewith. The transaction
resulted in Harken recognizing a gain of $1,449,000 during December 1992.
Under the terms of the HAP Sale Agreement, Harken continued to manage
the oil and gas property interests of HAP and operate certain partnership
properties. Harken was paid a management fee of $50,000 per month to manage the
HAP interest in such properties in addition to the fees it received for serving
as operator of the properties pursuant to applicable joint operating
agreements. During the second quarter of 1993, HAP sold its interests in all
oil and gas properties operated by Harken and Harken ceased to manage the
partnership. As a result of the above transactions, Harken earned only $300,000
in management fees during 1993 compared to $1,110,000 during 1992.
In addition to the above operations, Harken earned certain fees from
leasing company owned compressors to certain properties it operated, as well as
receiving prospect fees from the sale of Harken prospects to HAP, as provided
for in the HAP partnership agreement.
DISCONTINUED WELL SERVICING AND CONTRACT DRILLING OPERATIONS
Harken's well servicing revenues totalled $1,053,000 in 1994 compared
to $2,074,000 in 1993 and $2,048,000 in 1992. Supreme generated its revenue
from the operations of up to 10 well service rigs and 2 swab rigs. Well
servicing operating expenses, which consist principally of contract labor and
supplies, have totalled $770,000 in 1994, $936,000 in 1993 and $947,000 in
1992. In May 1994, Harken announced that it discontinued its well servicing
operations, and has reflected the activities of its well
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servicing and contract drilling segment as discontinued operations in the
accompanying financial statements.
In January 1994, Harken made the decision to liquidate its remaining
drilling rigs and related assets and apply the proceeds primarily to its
international exploration efforts, specifically in Colombia and Bahrain. As a
result of this decision, Harken recognized a non-cash charge of $3.1 million
during the fourth quarter of 1993.
INTEREST AND OTHER INCOME
Interest and other income decreased in 1994 from 1993, and in 1993
from 1992, primarily due to the release of the E-Z Serve 12% subordinated
debenture in April 1993 and due to lower investment and cash balances, and
generally lower investment yields available during each of these years. In
addition, during 1993 Harken reflected a decrease in compressor rental and
prospect fees discussed above, due to the reduction in HAP's operations.
OTHER COSTS AND EXPENSES
General and administrative expenses remained fairly level during 1994
compared to 1993, as the loss of Harken's operator overhead fees and other
operator cost reimbursements related to the HAP properties were offset by the
effect of general and administrative cost reductions during 1993 and 1994.
General and administrative expenses during 1993 were net of approximately
$903,000 of such operator overhead fees and other operator cost reimbursements,
compared to only $198,000 during 1994, with the decrease caused by the above
mentioned sale by HAP of all remaining oil and gas properties operated by
Harken. Harken accounts for operator fees and reimbursements as a reduction to
general and administrative expenses in its statements of operations.
General and administrative expenses increased by approximately
$972,000 during 1993 as compared to 1992 primarily as a result of the increased
administrative costs added as a result of the merger with Chuska. General and
administrative expenses for 1993 includes costs related to certain offices of
Chuska that have since been closed in an effort to reduce costs and improve
efficiency. Harken has also taken efforts throughout 1993 to reduce total
personnel with the objective of eliminating duplicative administrative and
operational functions. In addition, as discussed above, Harken's operator
overhead fees and other operator cost reimbursements which are netted against
general and administrative expenses decreased by approximately $998,000 due to
the reduction in properties operated by Harken.
Depreciation and amortization decreased during 1994 as compared to
1993 due to the sale or full depreciation of certain non-oil and gas property
assets. Depreciation and amortization increased by approximately $1,617,000
during 1993 as compared to 1992 due to the merger with Chuska, primarily due to
the approximately $1,433,000 in depreciation, depletion and amortization
calculated on HSW's oil and gas properties. Such calculation is made on a unit
of production basis in accordance with the full cost method of accounting for
oil and gas properties.
Provision for asset impairments increased to approximately $6,361,000
during 1994 due primarily to the decision to reduce Harken's investment in E-Z
Serve Series C Preferred and related accrued dividends by $5,831,000 to
realizable value, in light of efforts by Harken management to sell such
investment in early 1995. Provision for asset impairments during 1993 includes
a total of $551,000 of
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accrued interest which was expensed related to certain non-recourse notes
receivable from certain current and former employees, officers and directors.
Provision for asset impairments totalled $726,000 during 1993 compared to
$52,000 in 1992.
LIQUIDITY AND CAPITAL RESOURCES
During the year ended December 31, 1994, Harken's working capital
increased approximately $.6 million, primarily due to the decision by
management to market its E-Z Serve Series C Preferred stock in 1995. Cash and
temporary investments decreased approximately $471,000 although cash of
approximately $2 million was obtained from the sale of certain non-strategic
assets. This reduction was caused by cash used for operating activities of
$510,000 and net capital expenditures of approximately $2 million. The
improvement in cash provided from operations was due to reductions of personnel
and offices during 1994 further centralizing the Chuska operations into Harken.
During the year ended December 31, 1993, Harken's working capital
decreased approximately $2.6 million, primarily due to the accrual of certain
liabilities totalling approximately $2.9 million associated with Chuska's
operations and due to capital expenditures during 1993. Cash and temporary
investments decreased by $7.0 million despite the $2.6 million of cash balances
that were acquired from the merger with Chuska. Such cash usage was caused by
cash used by operating activities of $3.9 million, $4.1 million of net capital
expenditures and $1.6 million of repayments of debt. The cash used by operating
activities was primarily caused by the payment of approximately $2.1 million of
operator suspended revenues primarily related to amounts which were
appropriately released upon the sale of operated properties by Harken's managed
limited partnership, HAP. Since the acquisition of Chuska, Harken has closed
three of Chuska's offices and taken steps to appropriately reduce personnel as
part of the effort to reduce administrative expenditures and absorb Chuska's
operations into Harken.
During 1992, total proceeds from sales of assets of approximately $4.7
million plus $211,000 from net common stock proceeds funded approximately $5.3
million of cash utilized by operating activities, approximately $1.3 million of
capital expenditures and $517,000 of total debt payments, resulting in a net
decrease in cash of approximately $2.2 million during the year.
In October 1994, Harken acquired additional joint venture interests
in CHAP which resulted in Harken increasing its ownership in the Reservation
reserves, exploration acreage, development drilling locations and the Aneth Gas
Plant. The acquisition of the sellers' interest raises Harken's total interest
in CHAP from 50% to approximately 70% and increased Harken's share of daily
production by approximately 40% over its previous interest. As consideration
for this acquisition, Harken issued an aggregate total of 960,000 shares of
restricted Harken common stock to the sellers, assumed certain liabilities of
the sellers relating to the properties, and the sellers in turn retained
responsibility for certain contingent operational and environmental liabilities
related to the properties as well as certain distributions made by CHAP prior
to the actual date of closing.
In November 1994, Harken announced the signing of a Merger Agreement
with Search Exploration Company ("Search"). Search is primarily engaged in the
domestic exploration for, and development and production of oil and gas
reserves. Pursuant to the Merger Agreement, upon the consummation of the
Merger, (a) each outstanding share of Search common stock will be converted
into the right to receive that number of shares of Harken common stock
determined by dividing $0.8099 by the average of the closing
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sales price of a share of Harken common stock on the American Stock Exchange
over the 30 days immediately preceding the date that is five trading days prior
to the consummation of the merger, subject to certain restrictions ("the
Average Trading Price"); (b) each outstanding share of Search Series 1993
Redeemable Preferred Stock will be converted into the right to receive that
number of shares of Harken common stock determined by dividing $1.00 by the
Average Trading Price and (c) certain promissory notes to be issued by Search
will, by their terms, be converted into the right to receive that number of
shares of Harken common stock determined by dividing the principal amount of
each note by the Average Trading Price. In addition, the holders of Search
common stock, certain notes and overriding royalty interests in certain
properties of Search will receive a non-transferable right to receive
additional shares in the future, if any, of Harken common stock or, under
certain circumstances, cash, based upon the increase that may subsequently be
realized in the value of a group of undeveloped leases and properties of
Search. Under the terms of the Merger Agreement, certain contingencies must be
satisfied by Search prior to closing, unless waived by Harken. Upon closing,
the merger with Search would be accounted for under the purchase method of
accounting.
Upon completion of the merger of Search, Harken plans to use cash flow
generated by Search oil and gas properties to fund capital requirements of
certain prospects in which Search has retained a working interest. Most of
such prospects have been farmed-out to other industry partners thereby
requiring such partners to pay for such initial drilling costs under various
contractual arrangements.
Harken has taken steps to appropriately reduce overhead costs and
capital expenditures will be incurred only to the extent that cash flow from
operations or additional financing sources are available. Harken believes that
cash flow from operations will be sufficient to meet its operating cash
requirements in 1995. Harken plans to supplement such cash with proceeds from a
potential sale of its investment in E-Z Serve Series C Preferred in early 1995.
Amounts required to fund international activities, including Colombia and
Bahrain, as well as domestic drilling costs and other capital expenditures will
be funded from existing cash balances, sales of assets, operating cash flows
and industry partners. Harken includes in cash and temporary investments
certain balances which are restricted to use for specific project expenditures,
collateral or for distribution to outside interest owners and are not available
for general working capital purposes. Such restricted cash amounts totalled
approximately $1,391,000 and $1,063,000 at December 31, 1993 and 1994,
respectively.
Colombian Operations-Alcaravan Contract -- During the third quarter of
1992, Harken, through a subsidiary, Harken de Colombia, Ltd., was awarded the
exclusive right to explore for, develop and produce oil and gas throughout
approximately 350,000 acres within the Alcaravan area ("Alcaravan") of
Colombia. Alcaravan is located in Colombia's Llanos Basin and is located
approximately 140 miles east of Santafe De Bogota. Harken and Empresa
Colombiana de Petroleos ("Ecopetrol") have entered into an Association Contract
("Alcaravan Contract") which requires Harken to conduct a seismic and
exploratory drilling program in the Alcaravan area ("work program") over the
initial six years. At the end of each of the six years in the work program,
Harken has the option to withdraw from the Alcaravan Contract or to commit to
the next year's work requirements. If Harken makes a commercial discovery of
oil and/or gas which is approved by Ecopetrol, the standard terms of the
Alcaravan Contract will apply. Such terms provide for Ecopetrol to reimburse
Harken for 50% of its successful well costs expended up to the point of
commercial discovery and to receive a 20% royalty interest and for both
Ecopetrol and Harken to each have a 50% working interest. The term of the
Alcaravan Contract will extend twenty-two years from the date of any commercial
discovery of oil and/or gas. Harken reprocessed in excess of 200 kilometers of
seismic data on the Alcaravan area and completed the acquisition of 52
kilometers of new seismic data over
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prospective areas in mid-February 1994. Harken also plans to acquire
approximately 26 kilometers of additional seismic data on the Alcaravan
Contract area in February 1995.
In September 1994, Harken announced that Huffco Group, Inc. ("Huffco")
of Houston, Texas joined Harken in the drilling of its first exploratory well
under the Alcaravan Contract. Under the terms of this joint venture agreement,
which was approved by Ecopetrol, Harken serves as operator and retains a 50%
interest in the well. The well, the Alcaravan #1, was spudded in early
February 1995 and will be drilled to a projected depth of 10,500 feet to test
for commercial quantities of oil in the oil prone zones prevalent in the Llanos
Basin; the Carbonera, Mirador, Guadalupe and the basal Cretaceous formations.
Bocachico Contract -- In January 1994, Harken announced that Harken de
Colombia, Ltd. had signed its second Association Contract ("Bocachico
Contract") with Ecopetrol, covering the Bocachico contract area. Under the
Bocachico Contract, Harken has acquired the exclusive rights to conduct
exploration activities and drilling on this area, which covers approximately
192,000 acres in the middle Magdelena Valley of Central Colombia.
During the first year of the Bocachico Contract, Harken is conducting
seismic activities on the land covered by this contract including reprocessing
of at least 250 kilometers of existing seismic data and the acquisition of at
least 35 kilometers of new seismic data. During each of the 2nd through the 6th
contract years Harken may elect to continue the contract by committing to the
drilling of at least one well during each contract year. During this initial
six year term, called the Exploration Period under the Bocachico Contract, if
Harken has discovered the existence of commercial production in the Bocachico
Contract area, the Bocachico Contract will be further extended for a period of
22 years from the date of any commercial discovery of oil and/or gas. If Harken
makes a commercial discovery of oil and/or gas which is approved by Ecopetrol,
the standard terms of the Bocachico Contract will apply. Such terms provide for
Ecopetrol to reimburse Harken for 50% of its successful well costs expended up
to the point of commercial discovery and to receive a 20% royalty interest and
for both Ecopetrol and Harken to each have a 50% working interest.
In addition to reprocessing and acquiring seismic data during the
first contract year of the Bocachico Contract, Harken has evaluated seismic
data and has completed an engineering feasibility study to evaluate the
potential for recovering existing oil reserves in the Rio Negro area, which is
located in the northern portion of the Bocachico Contract area. Three wells
were drilled, produced and subsequently abandoned by another contractor
approximately 30 years ago in this area. These wells have provided information
and data including production rates, well logs and pressure tests. This well
data has been utilized by Harken in such studies to evaluate the feasibility of
applying modern production and recovery techniques in this area. Harken will
also acquire a minimum of 35 kilometers of seismic data on the Bocachico
Contract area in early 1995.
On January 19, 1995, after completing the engineering feasibility
study, Harken notified Ecopetrol of Harken's commitment to drill a well
under the Bocachico Contract, and thereby extended the contract into its second
year. Harken currently anticipates that a well site will be selected and
drilling will commence by mid-1995.
Playero Contract -- In December 1994, Harken announced that Harken de
Colombia, Ltd. had signed its third Association Contract ("Playero Contract")
with Ecopetrol, covering the Playero contract area. Under the Playero
Contract, Harken has acquired the exclusive rights to conduct exploration
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activities and drilling on this area, which covers approximately 10,000 acres
in the Llanos Basin of Colombia, contiguous to Harken's Alcaravan Contract
area.
During the first year of the Playero Contract, Harken will acquire at
least 12 kilometers of new seismic data in the Playero Contract area. During
each of the 2nd through the 6th contract years, Harken may elect to continue
the contract by committing to the drilling of at least one well during each
contract year. During this initial six year term, called the Exploration
Period under the Playero Contract, if Harken has discovered the existence of
commercial production in the Playero Contract area, the Playero Contract will
be further extended for a period of 22 years from the date of termination of
the Exploration Period with a total term not to exceed 28 years. If Harken
makes a commercial discovery of oil and/or gas which is approved by Ecopetrol,
the standard terms of the Playero Contract will apply. The Playero Contract
was granted by Ecopetrol under a new form of Association Contract which has
modified various standard terms from the previous form of Association Contract
which was used on the Alcaravan and Bocachico Contracts. Such terms provide
for Ecopetrol to reimburse Harken for 50% of its successful well costs expended
up to the point of a commercial discovery and to receive a 20% royalty
interest. Although both Ecopetrol and Harken each would have a 50% working
interest, production net of royalty would be allocated 50% to each party until
accumulated production from the Playero Contract area reaches a cumulative
total of 60 million barrels of oil. After that cumulative production level is
achieved, production net of royalty is allocated at rates to Harken from 50% to
25% based upon the relative profitability of the project with Ecopetrol
receiving the remaining complementary 50% to 75% of such additional production.
Bahrain Operations -- In January 1990, Harken, through its
wholly-owned subsidiary, Harken Bahrain Oil Company ("HBOC"), entered into a
production sharing agreement with the Bahrain National Oil Company ("BANOCO")
which gave it the exclusive right to explore for, develop and produce oil and
gas throughout most of Bahrain's Arabian Gulf offshore territories. Subject to
the discovery and development of oil and/or gas, the contract has a term of
thirty-five years. Under the original terms of the agreement, as amended,
Harken was to drill an exploratory well to test the Permian Khuff formation
within 2 1/2 years and drill a total of four wells by 1995 to earn all of its
acreage rights.
In July 1990, Harken entered into a joint venture arrangement with a
joint venture partner, Bass Enterprises Production Company ("BEPCO"), in which
BEPCO committed to provide the funding for the first well and at least two
subsequent wells. On April 8, 1993, HBOC and BEPCO entered into an agreement
whereby BEPCO was released and discharged from any future drilling obligations
related to HBOC's production sharing agreement, and the joint venture agreement
between HBOC and BEPCO was terminated. As part of this agreement, BEPCO paid to
HBOC approximately $2,000,000 plus other considerations, which represented the
negotiated amount for BEPCO's remaining obligation for future costs to be
incurred in Bahrain. This settlement amount was recorded as deferred revenue
by Harken and is reduced by ongoing investment expenditures related to Bahrain.
The initial exploratory well under the production sharing agreement
was drilled on the Jarim Reef, which began drilling November 1991. In March
1992, after drilling was completed, HBOC announced that the Jarim No. 2 well
was not productive of either oil or gas and was abandoned. On December 28,
1992, Harken commenced the drilling of its second exploratory well, the
Muharraq No. 1, in Bahrain. In February 1993, Harken announced that the
Muharraq No. 1 well had no shows of oil or gas and was plugged and abandoned.
Further, under the terms of the production sharing agreement, HBOC allowed its
exploration and drilling rights on approximately 10% of the acreage covered by
the production sharing
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agreement to expire, effective February 13, 1993. HBOC allowed an additional
portion of the acreage covered by the production sharing agreement to expire
effective August 29, 1993.
In May 1994, Harken announced a new seismic reprocessing program
covering 500 kilometers of seismic lines in the vicinity of the Jarim Reef. At
present Harken holds approximately 500,000 acres under its production sharing
agreement. Unless commercial production is found, or an extension to the
production sharing agreement is obtained, this acreage expires in July 1995.
In January 1995, Harken completed its reprocessing of approximately 500
kilometers of seismic data and has reviewed the results of that work with
BANOCO. Unless Harken obtains a joint venture partner, Harken will not proceed
to either acquire additional seismic data or drill another well. If a joint
venturer is located, it will be necessary to obtain an extension of one year or
more from July 1995 to complete work necessary with a joint venturer.
Other -- The exploration, development and production of oil and gas
are subject to various Navajo, federal and state laws and regulations designed
to protect the environment. Compliance with these regulations is part of
Harken's day-to-day operating procedures. Infrequently, accidental discharge of
such materials as oil, natural gas or drilling fluids can occur and such
accidents can require material expenditures to correct. Harken maintains levels
of insurance customary in the industry to limit its financial exposure.
Management is unaware of any material capital expenditures required for
environmental control during the next fiscal year.
Harken has accrued approximately $1,260,000 at December 31, 1994
relating to other operational or regulatory liabilities related primarily to
Chuska's operations. Harken and its subsidiaries currently are involved in
various lawsuits and other contingencies, including the guarantee of certain
lease obligations, which in management's opinion, will not result in
significant loss exposure to Harken.
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ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
The following financial statements appear on pages 26 through 52 in
this report.
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
Report of Independent Public Accountants . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 26
Consolidated Balance Sheets --
December 31, 1993 and 1994 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 27
Consolidated Statements of Operations --
Years ended December 31, 1992,
1993 and 1994 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 28
Consolidated Statements of
Stockholders' Equity -- Years ended
December 31, 1992, 1993 and 1994 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 29
Consolidated Statements of Cash
Flows -- Years ended December 31,
1992, 1993 and 1994 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 30
Notes to Consolidated Financial
Statements . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 31
</TABLE>
25
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REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
To the Stockholders and Board of Directors of Harken Energy Corporation:
We have audited the accompanying consolidated balance sheets of Harken
Energy Corporation (a Delaware corporation) and subsidiaries as of December 31,
1993 and 1994, and the related consolidated statements of operations,
stockholders' equity and cash flows for each of the three years in the period
ended December 31, 1994. These financial statements are the responsibility of
the Company's management. Our responsibility is to express an opinion on these
financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of
material misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements. An audit
also includes assessing the accounting principles used and significant
estimates made by management, as well as evaluating the overall financial
statement presentation. We believe that our audits provide a reasonable basis
for our opinion.
In our opinion, the financial statements referred to above present
fairly, in all material respects, the financial position of Harken Energy
Corporation and subsidiaries as of December 31, 1993 and 1994, and the results
of their operations and their cash flows for each of the three years in the
period ended December 31, 1994, in conformity with generally accepted
accounting principles.
ARTHUR ANDERSEN LLP
Dallas, Texas,
February 10, 1995
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HARKEN ENERGY CORPORATION AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
DECEMBER 31,
------------------------------
1993 1994
---- ----
<S> <C> <C>
ASSETS
Current Assets:
Cash and temporary investments . . . . . . . . . . . . . . . . . . . . $ 3,299,000 $ 2,828,000
Accounts receivable, net . . . . . . . . . . . . . . . . . . . . . . . 1,022,000 543,000
Amounts receivable from former subsidiaries . . . . . . . . . . . . . 1,081,000 --
Assets of discontinued operations held for resale . . . . . . . . . . 1,775,000 --
Investment in former subsidiary held for resale . . . . . . . . . . . -- 2,898,000
Prepaid expenses and other current assets . . . . . . . . . . . . . . 500,000 571,000
-------------- -------------
Total Current Assets . . . . . . . . . . . . . . . . . . . . . . . . 7,677,000 6,840,000
Property and Equipment:
Oil and gas properties, using the full cost of method of accounting-
Evaluated . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 9,664,000 13,944,000
Unevaluated . . . . . . . . . . . . . . . . . . . . . . . . . . . . 8,004,000 7,446,000
Gas plants and other property . . . . . . . . . . . . . . . . . . . 6,994,000 6,646,000
Less accumulated depreciation and amortization . . . . . . . . . . . (5,834,000) (7,859,000)
-------------- -------------
Total Property and Equipment, net . . . . . . . . . . . . . . . . . 18,828,000 20,177,000
Investments in Former Subsidiaries . . . . . . . . . . . . . . . . . . 9,218,000 1,219,000
Notes Receivable from Related Parties, including interest . . . . . . . 701,000 474,000
Other Assets, net . . . . . . . . . . . . . . . . . . . . . . . . . . . 1,307,000 250,000
-------------- -------------
$ 37,731,000 $ 28,960,000
============== =============
LIABILITIES AND STOCKHOLDERS' EQUITY
Current Liabilities:
Trade payables . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 339,000 $ 492,000
Accrued liabilities and other . . . . . . . . . . . . . . . . . . . . 4,840,000 2,464,000
Revenues and royalties payable . . . . . . . . . . . . . . . . . . . . 1,354,000 1,277,000
Notes payable . . . . . . . . . . . . . . . . . . . . . . . . . . . . -- 900,000
-------------- -------------
Total Current Liabilities . . . . . . . . . . . . . . . . . . . . . 6,533,000 5,133,000
Commitments and Contingencies (Note 15)
Deferred Revenue, net of current portion . . . . . . . . . . . . . . . 367,000 --
Redeemable Preferred Stock . . . . . . . . . . . . . . . . . . . . . . 1,868,000 1,868,000
Stockholders' Equity:
Common stock, $0.01 par value; authorized 100,000,000 shares;
issued 65,466,508 and 66,426,508 shares, respectively . . . . . . . . 654,000 664,000
Additional paid-in capital . . . . . . . . . . . . . . . . . . . . . . 131,052,000 132,572,000
Retained deficit . . . . . . . . . . . . . . . . . . . . . . . . . . . (81,986,000) (90,520,000)
Treasury stock, 5,983,655 shares held . . . . . . . . . . . . . . . . (20,757,000) (20,757,000)
--------------- --------------
Total Stockholders' Equity . . . . . . . . . . . . . . . . . . . . . 28,963,000 21,959,000
-------------- -------------
$ 37,731,000 $ 28,960,000
============== =============
</TABLE>
The accompanying Notes to Consolidated Financial Statements are
an integral part of these Statements
27
<PAGE> 146
HARKEN ENERGY CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
-----------------------
1992 1993 1994
---- ---- ----
<S> <C> <C> <C>
Revenues:
Oil and gas operations . . . . . . . . . . . . . . . . . . $ -- $ 4,970,000 $ 4,156,000
Management fee income . . . . . . . . . . . . . . . . . . 1,110,000 300,000 --
Gain on sale of partnership investment . . . . . . . . . . 1,449,000 -- --
Interest and other income . . . . . . . . . . . . . . . . 1,823,000 1,331,000 739,000
------------- ------------- ------------
4,382,000 6,601,000 4,895,000
------------- ------------- ------------
Costs and Expenses:
Oil and gas operating expenses . . . . . . . . . . . . . -- 1,825,000 1,535,000
General and administrative expenses, net . . . . . . . . 2,207,000 3,179,000 3,132,000
Depreciation and amortization . . . . . . . . . . . . . . 954,000 2,571,000 1,993,000
Provision for asset impairments . . . . . . . . . . . . . 52,000 726,000 6,361,000
Interest expense and other . . . . . . . . . . . . . . . 167,000 97,000 85,000
------------- ------------- ------------
3,380,000 8,398,000 13,106,000
------------- ------------- ------------
Income (loss) from continuing operations before
income taxes . . . . . . . . . . . . . . . . . . . . . 1,002,000 (1,797,000) (8,211,000)
Income tax expense . . . . . . . . . . . . . . . . . . . . 341,000 -- --
------------- ------------- ------------
Income (loss) from continuing operations . . . . . . . . 661,000 (1,797,000) (8,211,000)
Discontinued Operations (Note 2):
Loss from operations of discontinued well servicing
and contract drilling segment (including income tax
benefit of $169,000 in 1992) . . . . . . . . . . . . . . (328,000) (3,697,000) (223,000)
------------- ------------- ------------
Net income (loss) before extraordinary item . . . . . . 333,000 (5,494,000) (8,434,000)
------------- ------------- ------------
Extraordinary item-reduction in income taxes resulting
from utilization of net operating loss carryforwards . . . 172,000 -- --
------------- ------------- ------------
Net income (loss) . . . . . . . . . . . . . . . . . . . $ 505,000 $ (5,494,000) $ (8,434,000)
============= ============= ============
Loss attributable to common stock:
Net income (loss) . . . . . . . . . . . . . . . . . . . . $ 505,000 $ (5,494,000) $ (8,434,000)
Less preferred stock dividends . . . . . . . . . . . . . . (360,000) -- --
------------- ------------- ------------
Earnings (loss) attributable to common stock . . . . . . $ 145,000 $ (5,494,000) $ (8,434,000)
============= ============= ============
Income (loss) per common share:
Continuing operations . . . . . . . . . . . . . . . . . . $ 0.01 $ (0.03) $ (0.14)
Discontinued operations . . . . . . . . . . . . . . . . . (0.01) (0.06) (0.00)
Extraordinary item . . . . . . . . . . . . . . . . . . . . 0.00 -- --
------------- ------------- ------------
Net income (loss) . . . . . . . . . . . . . . . . . . . . $ 0.00 $ (0.09) $ (0.14)
============= ============= ============
Weighted average shares outstanding . . . . . . . . . . . . 45,752,936 58,392,901 59,722,853
============= ============= ============
</TABLE>
The accompanying Notes to Consolidated Financial Statements are
an integral part of these Statements.
28
<PAGE> 147
HARKEN ENERGY CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
<TABLE>
<CAPTION>
ADDITIONAL RETAINED
COMMON STOCK PAID-IN CAPITAL DEFICIT TREASURY STOCK
------------ --------------- ------- --------------
<S> <C> <C> <C> <C>
Balance, December 31, 1991 . . . . . . . $ 487,000 $ 105,014,000 (A) $ (76,997,000) $ (17,005,000)
Conversion of warrants and options . . . -- 13,000 -- --
Payment of notes receivable, net of
retirements . . . . . . . . . . . . . . -- 1,131,000 -- (906,000)
Conversion of preferred stock and
dividends . . . . . . . . . . . . . . . 25,000 8,409,000 -- --
Dividends on preferred stock . . . . . . -- (360,000) -- --
Net income . . . . . . . . . . . . . . . -- -- 505,000 --
------------ --------------- --------------- ---------------
Balance, December 31, 1992 . . . . . . . 512,000 114,207,000 (A) (76,492,000) (17,911,000)
Issuance of common stock, net . . . . . 142,000 12,663,000 -- --
Payment of notes receivable, net of
retirements . . . . . . . . . . . . . . -- 2,846,000 -- (2,846,000)
Exchange of subordinated debenture . . . -- 1,336,000 -- --
Net loss . . . . . . . . . . . . . . . . -- -- (5,494,000) --
------------ --------------- ----------------- ---------------
Balance, December 31, 1993 . . . . . . . $ 654,000 $ 131,052,000 $ (81,986,000) $ (20,757,000)
Issuance of common stock, net . . . . . 10,000 1,520,000 -- --
Adjustment for unrealized losses
on available-for-sale securities . . . -- -- (100,000) --
Net loss . . . . . . . . . . . . . . . . -- -- (8,434,000) --
------------ --------------- ---------------- ---------------
Balance, December 31, 1994 . . . . . . . $ 664,000 $ 132,572,000 $ (90,520,000)(B) $ (20,757,000)
============ =============== ================ ================
</TABLE>
- ---------------
(A) Includes, as an offset to Additional Paid-In Capital, notes receivable
of $5,325,000 and $4,182,000 as of December 31, 1991 and 1992
respectively, from certain officers, directors and affiliates for
stock purchases. See Note 12 -- Related Party Transactions "Other
Transactions" for discussion.
(B) Includes, as a component of Retained Deficit, net unrealized losses on
available-for-sale securities of $100,000 as of December 31, 1994.
See Note 4 -- Marketable Equity Securities for further discussion.
The accompanying Notes to Consolidated Financial Statements are
an integral part of these Statements.
29
<PAGE> 148
HARKEN ENERGY CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
-----------------------
1992 1993 1994
---- ---- ----
<S> <C> <C> <C>
Cash flows from operating activities:
Income (loss) from continuing operations . . . . . . . . . . . $ 661,000 $ (1,797,000) $ (8,211,000)
Adjustments to reconcile net income (loss) to net cash
provided by (used in) operating activities:
Utilization of net operating loss carryforward . . . . . . . 341,000 -- --
Depreciation and amortization . . . . . . . . . . . . . . . 954,000 2,571,000 1,993,000
Interest expense (income) on notes payable to/receivable
from related parties . . . . . . . . . . . . . . . . . . . (813,000) (466,000) (423,000)
Provision for asset impairments . . . . . . . . . . . . . . 52,000 726,000 6,361,000
Provision for doubtful accounts . . . . . . . . . . . . . . 154,000 -- 256,000
(Gain) loss on sales of assets and other . . . . . . . . . . (1,485,000) (201,000) (176,000)
Equity in (income) loss of partnership . . . . . . . . . . . 107,000 -- --
Income (loss) from discontinued operations . . . . . . . . . . (328,000) (3,697,000) (223,000)
Adjustments to reconcile income (loss) to net cash provided
by operating activities:
Utilization of net operating loss carry forward . . . . . . (169,000) -- --
Depreciation and amortization . . . . . . . . . . . . . . . 454,000 683,000 77,000
Provision for asset impairments . . . . . . . . . . . . . . 200,000 3,112,000 --
(Gain)Loss on sales of assets and other . . . . . . . . . . -- -- (286,000)
Change in assets and liabilities, net of effect of
companies acquired:
(Increase) decrease in accounts receivable . . . . . . . . . (403,000) 2,282,000 577,000
(Increase) decrease in accounts receivable from former
subsidiaries . . . . . . . . . . . . . . . . . . . . . . . (2,438,000) (338,000) 100,000
Increase (decrease) in trade payables and other . . . . . . (2,539,000) (6,761,000) (555,000)
------------- ------------- --------
Net cash provided by (used in) operating activities . . . . (5,252,000) (3,886,000) (510,000)
------------- ------------- --------
Cash flows from investing activities:
Proceeds from sales of assets . . . . . . . . . . . . . . . . 4,680,000 350,000 338,000
Cash from acquired subsidiary . . . . . . . . . . . . . . . . -- 2,616,000 --
Capital expenditures . . . . . . . . . . . . . . . . . . . . . (1,341,000) (4,499,000) (2,344,000)
Proceeds from sale of assets of discontinued operations . . . -- -- 2,045,000
------------- ------------- ------------
Net cash provided by (used in) investing activities . . . . 3,339,000 (1,533,000) 39,000
------------- ------------- ------------
Cash flows from financing activities:
Issuance of preferred and common stock, net of retirements . . 211,000 -- --
Issuance of long-term debt and short-term borrowings . . . . . -- -- --
Payment of note payable to related party . . . . . . . . . . . (253,000) -- --
Debt repayments . . . . . . . . . . . . . . . . . . . . . . . (264,000) (1,630,000) --
------------- ------------- ------------
Net cash used in financing activities . . . . . . . . . . . (306,000) (1,630,000) --
------------- ------------- ------------
Net decrease in cash and temporary investments . . . . . . . . (2,219,000) (7,049,000) (471,000)
Cash and temporary investments at beginning of year . . . . . . 12,567,000 10,348,000 3,299,000
------------- ------------- ------------
Cash and temporary investments at end of year . . . . . . . . . $ 10,348,000 $ 3,299,000 $ 2,828,000
============= ============= ============
</TABLE>
The accompanying Notes to Consolidated Financial Statements are
an integral part of these Statements.
30
<PAGE> 149
HARKEN ENERGY CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1992, 1993 AND 1994
(1) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Principles of Consolidation and Presentation -- The Consolidated
Financial Statements include the accounts of Harken Energy Corporation (a
Delaware corporation) and all of its wholly-owned subsidiaries ("Harken") after
elimination of significant intercompany balances and transactions. Interests in
managed oil and gas joint ventures are proportionately consolidated. Data is as
of December 31 of each year or for the year then ended and dollar amounts in
tables are in thousands unless otherwise indicated. Certain prior year amounts
have been reclassified to conform with the 1994 presentation.
Cash and Temporary Investments -- For purposes of the Consolidated
Statements of Cash Flows, Harken considers all highly liquid investments
purchased with a maturity of three months or less to be cash equivalents.
Harken paid cash for interest in the amounts of $77,000, $97,000 and $85,000
during 1992, 1993 and 1994, respectively. All significant noncash investing and
financing activities are discussed in Notes 3 and 10 -- Acquisitions and
Stockholders' Equity.
Harken includes in cash and temporary investments certain balances
which are restricted to use for specific project expenditures, collateral or
for distribution to outside interest owners and are not available for general
working capital purposes. Such restricted cash amounts totalled approximately
$1,391,000 and $1,063,000 at December 31, 1993 and 1994, respectively.
Accounts Receivable -- Harken maintains a reserve for potential losses
in collection of its accounts receivable. The allowance for doubtful accounts
was $1,403,000 and $1,162,000 as of December 31, 1993 and 1994, respectively.
Assets Held for Resale -- Harken reflects assets that it intends to
sell during the next twelve months as a current asset in the accompanying
consolidated balance sheets at the lower of cost or net realizable value. At
December 31, 1993, Harken identified certain contract drilling rigs and related
equipment for resale and reflected them as Assets of Discontinued Operations
Held for Resale in the accompanying consolidated financial statements. At
December 31, 1994, Harken has reflected its investment in E-Z Serve Series C
Preferred and related accrued dividends as Investment in Former Subsidiary Held
for Resale. See Note 5 -- Investments in Former Subsidiaries for further
discussion.
Accrued Liabilities and Other -- Accrued liabilities and other at
December 31, 1993, consists of certain liabilities of $2,931,000 related to
Chuska and other accrued liabilities of $1,909,000. The December 31, 1994
balance consists of certain liabilities of $1,260,000 related to Chuska and
other accrued liabilities of $1,204,000.
Deferred Revenue -- During 1993, Harken received approximately
$2,000,000 from a joint venture partner upon termination of a joint operating
agreement. Such amount, net of Harken's carrying value in its Bahrain
investment, has been recorded as deferred revenue in the accompanying
consolidated balance sheet. See Note 15 -- Commitments and
Contingencies-Bahrain Operations for further discussion. This deferred amount
has been fully offset by ongoing Bahrain investment expenditures at December
31, 1994.
31
<PAGE> 150
HARKEN ENERGY CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
Management Fee Income -- During 1992 and 1993, Harken received
management fees of approximately $1,110,000 and $300,000, respectively, related
to monthly fees earned as manager of a partnership (see Note 7 -- Investment in
Limited Partnership).
General and Administrative Expenses -- Harken reflects general and
administrative expenses net of operator overhead charges and other amounts
billed to joint interest owners. General and administrative expenses are net of
$4,280,000, $4,252,000 and $1,264,000 for such amounts during 1992, 1993 and
1994, respectively.
Provision for Asset Impairments -- Assets which are used in Harken's
operations, or are not held for resale, are carried at cost, less any
accumulated depreciation. When evidence indicates that operations will not
produce sufficient revenues to cover all costs, including depreciation, and
when the carrying amount of the related asset cannot be realized through sale,
a permanent impairment is recorded and the asset value is written down to
recoverable value. Harken reflected a provision for asset impairments from
continuing operations in the amounts of $52,000, $726,000 and $6,361,000 during
1992, 1993 and 1994, respectively. See Note 5 and 12 -- Investments in Former
Subsidiaries and Related Party Transactions for further discussion.
(2) DISCONTINUED OPERATIONS
In May 1994, Harken announced that it had discontinued its well
servicing operations which it had conducted through Supreme Well Service
Company ("Supreme"), a wholly-owned subsidiary. Harken has sold the equipment
assets of Supreme and has utilized the proceeds toward developing Harken's
exploration and production operations, both domestically and internationally.
As a result of this decision, Harken has reflected the revenues and expenses of
Harken's well servicing and contract drilling segment as discontinued
operations in the accompanying financial statements. Such discontinued
operations include revenues of $2,048,000, $2,074,000 and $1,053,000 for the
years ended December 31, 1992, 1993 and 1994, respectively. The December 31,
1994 revenue amount includes $272,000 of gain on the sale of Harken's contract
drilling assets which occurred during the first quarter of 1994.
(3) ACQUISITIONS
Effective February 15, 1993, Harken consummated a merger pursuant to
which Chuska Resources Corporation ("Chuska") became a wholly-owned subsidiary
of Harken. Harken acquired all of the 11,055,918 shares of Chuska common stock
outstanding in exchange for 14,210,357 shares of newly-issued Harken common
stock. Chuska is engaged, primarily through its subsidiary, Harken Southwest
Corporation ("HSW"), in the business of exploring for and producing oil and gas
in the Aneth Field and Blanding Sub-Basin portions of the Paradox Basin in
Utah, Arizona and New Mexico, and in the Western Paradox Basin in Utah. HSW
operations in the Paradox Basin area are primarily concentrated on the 16
million acre Navajo Indian Reservation ("the Reservation"), which comprises
portions of Arizona, New Mexico and Utah. HSW conducts activities on the
Reservation as a contractually appointed operator and agent of the Navajo
Nation pursuant to two Federally approved operating agreements. In addition to
its oil and gas exploration activities,
32
<PAGE> 151
HARKEN ENERGY CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
HSW also has an interest in a gas processing plant in or near the Paradox
Basin, the Aneth Gas Plant, on the Utah portion of the Reservation. The
acquisition of Chuska has been accounted for under the purchase method of
accounting.
HSW is the general partner and operator of four limited partnerships
and is a venturer in the CHAP Joint Venture ("CHAP"), all of which were formed
for the exploration and production of oil and gas. Chuska or its wholly- owned
subsidiaries are venturers in three additional projects for the exploration and
production of oil and gas. These projects are named Greater Blanding, Central
Blanding and Western Paradox. Harken accounts for its investments in the
partnerships and CHAP using the proportionate consolidation method.
In October 1994, Harken acquired additional joint venture interests
in CHAP which resulted in Harken increasing its ownership in the Reservation
reserves, exploration acreage, development drilling locations and the Aneth Gas
Plant. The acquisition of the sellers' interest raised Harken's total interest
in CHAP from 50% to approximately 70% and increased Harken's share of daily
production by approximately 40% over its previous interest. As consideration
for this acquisition, Harken issued an aggregate total of 960,000 shares of
restricted Harken common stock to the sellers, assumed certain liabilities of
the sellers relating to the properties, and the sellers in turn retained
responsibility for certain contingent operational and environmental liabilities
related to the properties as well as retaining certain distributions made by
CHAP prior to the actual date of closing. The acquisition of the additional
interest in CHAP has been accounted for under the purchase method of
accounting.
In November 1994, Harken announced the signing of a Merger Agreement
with Search Exploration Company ("Search"). Search is primarily engaged in the
domestic exploration for, and development and production of oil and gas
reserves. Pursuant to the Merger Agreement, upon the consummation of the
Merger, (a) each outstanding share of Search common stock will be converted
into the right to receive that number of shares of Harken common stock
determined by dividing $0.8099 by the average of the closing sales price of a
share of Harken common stock on the American Stock Exchange over the 30 days
immediately preceding the date that is five trading days prior to the
consummation of the merger, subject to certain restrictions ("the Average
Trading Price"); (b) each outstanding share of Search Series 1993 Redeemable
Preferred Stock will be converted into the right to receive that number of
shares of Harken common stock determined by dividing $1.00 by the Average
Trading Price and (c) certain promissory notes to be issued by Search will, by
their terms, be converted into the right to receive that number of shares of
Harken common stock determined by dividing the principal amount of each note by
the Average Trading Price. In addition, the holders of Search common stock,
certain notes and overriding royalty interests in certain properties of Search
will receive a non-transferable right to receive additional shares in the
future, if any, of Harken common stock or, under certain circumstances, cash,
based upon the increase that may subsequently be realized in the value of a
group of undeveloped leases and properties of Search. Under the terms of the
Merger Agreement, certain contingencies must be satisfied by Search prior to
closing, unless waived by Harken. Upon closing, the merger with Search would
be accounted for under the purchase method of accounting.
33
<PAGE> 152
HARKEN ENERGY CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
As of December 31, 1994, Search had proved reserves of approximately
19,000 barrels of oil and 1,298,000 mcf of gas with a net present value of
approximately $1,513,000 and had gross revenue interests in 42 productive
wells, none of which were operated by Search.
Pro Forma Information -- The following unaudited pro forma combined
condensed financial statements give effect to the above mentioned transactions.
The pro forma combined condensed balance sheet gives effect to the Search
merger as if it had been consummated as of December 31, 1994. The pro forma
combined condensed statement of operations for the years ended December 31,
1993 and 1994, gives effect to both the Search merger and the acquisition of an
additional interest in CHAP as if both had been consummated at the beginning of
each period.
The pro forma data is presented for illustrative purposes only and are
not necessarily indicative of the financial position or operating results that
would have occurred had the transactions been consummated at the dates
indicated, nor are they indicative of future financial position or operating
results.
PRO FORMA COMBINED CONDENSED BALANCE SHEET
DECEMBER 31, 1994
(UNAUDITED)
<TABLE>
<CAPTION>
HARKEN SEARCH PRO FORMA
ACTUAL ACTUAL ADJUSTMENTS PRO FORMA
------ ------ ----------- ---------
<S> <C> <C> <C> <C>
Current Assets $ 6,840 $ 489 $ $ 7,329
Property and Equipment, net 20,177 2,084 (1) 1,176 23,879
(2) 442
Investments in Former Subsidiaries 1,219 -- 1,219
Notes Receivable from Related Parties,
including interest 474 -- 474
Other Assets, Net 250 -- 250
----------- ------------ ------------- ----------
Total Assets $ 28,960 $ 2,573 $ 1,618 $ 33,151
=========== ============ ============ ==========
Current Liabilities $ 5,133 $ 174 $(1) 215 $ 5,655
(2) 133
Long-Term Debt -- -- (2) 309 309
Redeemable Preferred Stock 1,868 575 (1) (575) 1,868
Stockholders' Equity 21,959 1,824 (1) 1,536 25,319
----------- ------------ ------------ ----------
$ 28,960 $ 2,573 $ 1,618 $ 33,151
=========== ============ ============ =========
</TABLE>
34
<PAGE> 153
HARKEN ENERGY CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
PRO FORMA ADJUSTMENTS-PRO FORMA COMBINED CONDENSED BALANCE SHEET-
(1) Pro forma entry to record the acquisition of Search at December 31, 1994,
in exchange for Harken common stock. Purchase price was calculated using
the market value, discounted by 10%, of Harken common stock over the most
recent 30 days to determine the number of shares of Harken common stock
to be issued, according the Merger Agreement. Such purchase price
results in a total investment in Search of approximately $3,360,000,
which includes approximately $215,000 of estimated transaction costs.
(2) Pro forma entry to record the required roll-up acquisition by Search of
the non-owned interests in its managed limited partnerships in exchange
for notes payable bearing interest at 10% per annum.
PRO FORMA COMBINED CONDENSED STATEMENT OF OPERATIONS
FOR THE YEAR ENDED DECEMBER 31, 1993
(UNAUDITED)
<TABLE>
<CAPTION>
ACQUIRED PRO FORMA PRO FORMA
HARKEN INTEREST IN SEARCH ADJUSTMENT ADJUSTMENTS
ACTUAL CHAP-ACTUAL ACTUAL -CHAP -SEARCH PRO FORMA
-------- ----------- ---------- --------- ----------- ---------
<S> <C> <C> <C> <C> <C> <C>
Oil and gas revenue $ 4,970 $ 2,135 $ 1,057 $ $ (5) 131 $ 8,293
Other revenues 1,631 57 44 1,732
----------- --------- -------- ------- --------- --------
Total Revenues 6,601 2,192 1,101 131 10,025
----------- --------- -------- ------- --------- --------
Oil and gas operating expenses 1,825 676 286 (5) 38 2,825
General and administrative expenses 3,179 199 788 4,166
Depreciation and amortization 2,571 810 670 (3)(511) (4)(246) 3,294
Provision for asset impairments 726 326 462 (3)(326) (4)(462) 726
Interest and other 97 13 135 (5) 41 286
----------- --------- -------- ------- --------- --------
8,398 2,024 2,341 (837) (629) 11,297
----------- --------- -------- ------- --------- --------
Income tax expense (benefit) -- -- (335) (6) 335 --
----------- --------- -------- ------- --------- --------
Income (loss) from continuing
operations $ (1,797) $ 168 $ (905) $ 837 $ 425 $ (1,272)
=========== ========= ======== ======= ========= ========
Net loss per share from continuing
operations attributable to
common stock $ (0.03) $ (0.02)
=========== ========
Weighted Average Shares Outstanding 58,392,901 61,349,284
=========== ==========
</TABLE>
35
<PAGE> 154
HARKEN ENERGY CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
PRO FORMA COMBINED CONDENSED STATEMENT OF OPERATIONS
FOR THE YEAR ENDED DECEMBER 31, 1994
(UNAUDITED)
<TABLE>
<CAPTION>
ACQUIRED PRO FORMA PRO FORMA
HARKEN INTEREST IN SEARCH ADJUSTMENT ADJUSTMENTS
ACTUAL CHAP-ACTUAL ACTUAL -CHAP -SEARCH PRO FORMA
-------- ----------- ---------- --------- ----------- ---------
<S> <C> <C> <C> <C> <C> <C>
Oil and gas revenue $ 4,156 $ 1,035 $ 495 $ $(5) 89 $ 5,775
Other revenues 739 39 221 999
----------- --------- -------- ------- ---------- --------
Total Revenues 4,895 1,074 716 89 6,774
----------- --------- -------- ------- ---------- --------
Oil and gas operating expenses 1,535 337 274 (5) 37 2,183
General and administrative expenses 3,132 96 698 (5) 2 3,928
Depreciation and amortization 1,993 416 499 (3)(324) (4) (128) 2,456
Provision for asset impairments 6,361 -- 2,667 (4) (2,667) 6,361
Interest and other 85 -- 5 (5) 27 117
----------- --------- -------- ------- ---------- --------
13,106 849 4,143 (324) (2,729) 15,045
----------- --------- -------- ------- ---------- --------
Income tax expense (benefit) -- -- (227) (6) 227 --
----------- --------- -------- ------- ---------- --------
Income (loss) from continuing
operations $ (8,211) 225 $ (3,200) $ 324 $ 2,591 $ (8,271)
=========== ========= ======== ======= ========== ========
Net loss per share from continuing
operations attributable to common
stock $ (0.14) $ (0.13)
=========== ========
Weighted Average Shares Outstanding 59,722,853 62,439,236
========== ==========
</TABLE>
PRO FORMA ADJUSTMENTS-PRO FORMA COMBINED CONDENSED STATEMENTS OF OPERATIONS-
(3) Pro forma entry to adjust actual depreciation and depletion expense and
valuation provision on oil and gas properties for the acquired interest in
CHAP to the depreciation and depletion calculated on a consolidated basis.
(4) Pro forma entry to adjust actual depreciation and depletion expense and
valuation provision on oil and gas properties for Search to the
depreciation and depletion calculated on a consolidated basis.
(5) Pro forma entry to reflect the additional revenues and expenses of Search's
required roll-up of its managed limited partnerships, along with related
interest expense on the notes payable to be issued.
(6) Pro forma entry to eliminate income tax benefit of Search.
36
<PAGE> 155
HARKEN ENERGY CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
(4) MARKETABLE EQUITY SECURITIES
In May 1993 the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards No. 115, "Accounting For Certain Investments in
Debt and Equity Securities", ("SFAS 115") effective for fiscal years beginning
after December 15, 1993. Under the new rules, all marketable equity securities
are classified as available-for-sale or trading and are carried at fair value.
Unrealized holding gains and losses on securities classified as available-for-
sale are carried as a component of stockholders' equity. Realized gains and
losses and declines in value judged to be other than temporary on
available-for-sale securities are included in other income. Unrealized holding
gains and losses on securities classified as trading are also reported in
earnings. The cost of securities sold is based on the average cost method.
Harken carries an investment in the common stock of E-Z Serve, including
shares of E-Z Serve common stock resulting from the conversion of 5,000 shares
of E-Z Serve Series C Preferred in June 1994. Harken's remaining investment in
E-Z Serve Series C Preferred is not accounted for pursuant to SFAS 115, as it
is not a readily marketable security. See Note 5 -- Investments in Former
Subsidiaries for further discussion of E-Z Serve Series C Preferred. Beginning
in 1994 pursuant to SFAS 115, Harken classifies its investment in E-Z Serve
common stock as available for sale. The following is a summary of Harken's
marketable equity securities, which are included in Prepaid Expenses and Other
Current Assets in the accompanying balance sheet:
<TABLE>
<CAPTION>
DECEMBER 31,
-----------------------
AVAILABLE-FOR-SALE 1993 1994
------------------ ---------- ----------
<S> <C> <C>
Cost $ 138 $ 210
Gross Unrealized Gains 112 --
Gross Unrealized Losses -- 100
Estimated Fair Value 250 110
<CAPTION>
AVAILABLE-FOR-SALE 1992 1993 1994
------------------ ---- ---- ----
<S> <C> <C> <C>
Gross realized gains $ 2,451 $ 164 $ 88
Gross realized losses -- -- 59
</TABLE>
An unrealized holding loss on available-for-sale securities of
$100,000 was recognized at December 31, 1994, and is included as a component of
stockholders' equity. Such amount has been included in Retained Deficit in the
accompanying consolidated financial statements.
37
<PAGE> 156
HARKEN ENERGY CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
(5) INVESTMENTS IN FORMER SUBSIDIARIES
Pursuant to a Rights Offering effective April 30, 1991, Harken owned
approximately 7.25% and 6.59%, respectively, of the outstanding common shares
of E-Z Serve Corporation ("E-Z Serve") and Tejas Power Corporation ("Tejas"),
both of which it accounted for as marketable equity securities using the lower
of cost or market value. During late 1991 and throughout 1992, Harken sold all
of its common stock interest in Tejas and in December 1992 and during 1993 and
1994, Harken sold its initial common stock interest in E-Z Serve. The resulting
realized gains from these sales as of December 31, 1992 totalled $2,451,000 and
were deferred until 1993 when all remaining material contingencies and
guarantees by Harken relating to its discontinued operations of E-Z Serve and
Tejas were eliminated. The total net gain recognized during 1993 was $164,000.
E-Z Serve Preferred Stock -- Harken holds 74,754 shares of E-Z Serve
$6.00 Convertible Preferred Stock, Series C ("E-Z Serve Series C Preferred") at
December 31, 1994, which it acquired at a cost of $100 per share. Such shares
include the 12,830 additional shares of E-Z Serve Series C Preferred received
in April 1993 as part of a restructuring by E-Z Serve. See below for further
discussion. The E-Z Serve Series C Preferred is to pay a cumulative dividend of
$6.00 per share per annum, payable semi-annually beginning October 1, 1991 as
declared by the E-Z Serve Board of Directors, and payable in legally available
cash or in additional shares of E-Z Serve Series C Preferred. Each share of E-Z
Serve Series C Preferred is convertible at the option of either E-Z Serve or
Harken into 52.63 common shares of E-Z Serve, such rate to be adjusted under
certain conditions. The E-Z Serve Series C Preferred is subordinated to all E-Z
Serve bank credit facilities. Harken recorded dividend income of $397,000,
$466,000 and $424,000 during 1992, 1993 and 1994, respectively, related to the
E-Z Serve Series C Preferred and has included such dividends in Other Income in
the accompanying financial statements.
During 1994, Harken converted a portion of its shares of E-Z Serve
Series C Preferred into E-Z Serve common shares and has sold certain of its E-Z
Serve common shares. See Note 4 -- Marketable Equity Securities for further
discussion. During the fourth quarter of 1994, Harken also began reviewing the
potential for a sale to other parties of some or all of its remaining
investment in E-Z Serve Series C Preferred and related accrued dividends.
Based on the terms and consideration of these potential transactions, the
current market price of E-Z Serve common shares, the conversion terms and
limited marketability of the E-Z Serve Series C Preferred and the current
overall capital structure of E-Z Serve, Harken has deemed that a decline in
value that is other than temporary has occurred with respect to its investment
in E-Z Serve Series C Preferred. Accordingly, Harken has reclassified its
investment in E-Z Serve Series C Preferred and its related accrued dividends
receivable from E-Z Serve to current assets at December 31, 1994, at a total
estimated realizable value of $2,898,000. Such amount is reflected as
Investment in Former Subsidiary Held for Resale in the accompanying
consolidated balance sheet. In connection with this determination, Harken has
included the decline in value of $5,831,000 in Provision for Asset Impairments
in the accompanying consolidated financial statements.
Tejas Preferred Stock -- On September 6, 1991, and effective May 3,
1991, Harken purchased 1,000 shares of Tejas Power Corporation Series B
Preferred Stock, $.01 par value per share ("Tejas Preferred
38
<PAGE> 157
HARKEN ENERGY CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
Stock"), at a purchase price of $1,200,000. The purchase price was equal to
certain expenses incurred by Harken on behalf of Tejas in connection with the
Rights Offering and represents the redemption value of the Tejas Preferred
Stock. Harken accepted these shares of Tejas Preferred Stock as full and
complete payment for the above expenses as a result of Tejas agreeing to waive
certain of the provisions under the terms of the Harken Series C Preferred held
by Tejas and pledging all 186,760 shares of the Harken Series C Preferred to
Harken.
E-Z Serve Restructuring -- Harken held a 12% secured subordinated
debenture from E-Z Serve for $3,136,000, which included $1,336,000 which was
issued in exchange for 531,824 shares of Harken common stock and was reflected
as a reduction to stockholders' equity in Harken's balance sheet. In April
1993, Harken agreed to enter into an exchange which E-Z Serve had proposed in
connection with an overall E-Z Serve restructuring. Under this restructuring,
which was consummated on April 21, 1993, E-Z Serve entered into various
agreements with its existing bank, a new bank, its major stockholders as well
as certain agreements with Harken. Under the exchange which was made between
E-Z Serve and Harken, Harken has tendered and released to E-Z Serve the 12%
secured subordinated debenture of $3,136,000 plus accrued interest receivable
from E-Z Serve. Harken also waived certain antidilution provisions of the E-Z
Serve Series C Preferred held by Harken and made a capital contribution to E-Z
Serve for $366,000 in cash. In exchange for the above matters, Harken received
from E-Z Serve a full and complete release of Harken's guarantee previously
given to E-Z Serve's bank for up to $5,000,000 of a portion of E-Z Serve's bank
debt. In addition, Harken received 12,830 additional shares of E-Z Serve's
Series C Preferred Stock (see discussion above).
As discussed above, Harken had previously deferred $2,451,000 of
realized gain which had been generated during 1991 and 1992 from the sale of
certain of its common stock interests in certain former subsidiaries, including
E-Z Serve. During the second quarter of 1993, and upon release of Harken's
guarantee of E-Z Serve's bank debt, such deferred gain was utilized to reduce
the carrying value of investments in former subsidiaries and reflect the
release of the 12% secured subordinated debenture in the Harken consolidated
balance sheet.
(6) PROPERTY AND EQUIPMENT
Property and equipment are carried at cost. Gas plant and other
property is depreciated on the straight-line method over their estimated useful
lives ranging from three to fifteen years. Harken follows the full cost
accounting method to account for the costs incurred in the acquisition,
exploration, development and production of oil and gas reserves. Under this
method, all costs, including internal costs, directly related to acquisition,
exploration and development activities are capitalizable as oil and gas
property costs. Harken capitalized $602,000, $1,840,000 and $1,066,000 of
internal costs, net of reimbursements from joint venture partners, directly
related to these activities in 1992, 1993 and 1994 respectively. Such costs
include office and personnel costs of Harken's international and domestic
exploration field offices and does not include any corporate overhead. Harken
also accrues costs of dismantlement, restoration and abandonment to the extent
that such costs, in the aggregate, are anticipated to exceed the aggregate
salvage value of equipment and facilities removed from producing wells and
other facilities.
39
<PAGE> 158
HARKEN ENERGY CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
The capitalized costs of oil and gas properties, excluding unevaluated
properties, are amortized using a company-wide unit of production method
(equivalent physical units of 6 mcf of gas to each barrel of oil) based on
estimated proved recoverable oil and gas reserves. Such amortization was $5.58
and $6.31 per equivalent barrel of oil produced during 1993 and 1994,
respectively.
The unevaluated property costs at December 31, 1993 and 1994 includes
$796,000 and $1,512,000, respectively, related to Colombia (see Note 15 --
Commitments and Contingencies for a discussion of Colombian operations) and
$7,208,000 and $5,934,000, respectively, related to domestic prospects.
Amortization of unevaluated property costs will begin when the properties
become proved or their values become impaired. Harken assesses realizability
of unevaluated properties on at least an annual basis or when there has been an
indication that an impairment in value may have occurred. Fair value of
unevaluated prospects is determined based on management's intention with regard
to future exploration and development of individually significant properties
and the ability of Harken to obtain funds to finance such exploration and
development. Under full cost accounting rules, for each cost center,
capitalized costs, less accumulated amortization and related deferred income
taxes, shall not exceed an amount ("the cost ceiling") equal to the sum of (a)
the present value of future net revenues from estimated production of proved
oil and gas reserves discounted at 10%, plus (b) the cost of properties not
being amortized, plus (c) the lower of cost or estimated fair value of any
unproved properties included in the costs being amortized, less (d) any income
tax effects related to differences between the book and tax basis of the
properties involved.
(7) INVESTMENT IN LIMITED PARTNERSHIP
On December 17, 1992, Harken entered into a Purchase and Sale
Agreement (the "Agreement") pursuant to which Harken sold its 12% general
partner's interest in a limited partnership to an affiliate of a major
stockholder which served as limited partner. The closing of the Agreement was
completed on December 30, 1992. The transaction resulted in Harken recognizing
a gain on sale of partnership investment of $1,449,000 in 1992.
Pursuant to the Agreement, Harken was paid consideration in cash of
$2,650,000 for the sale of this partnership interest and certain contract
rights associated therewith, subject to certain reductions. As additional
consideration for the transaction, an affiliate of the major stockholder agreed
to indemnify Harken from any liability under the guarantee given by Harken to a
bank with regard to the limited partnership's credit agreement with the bank.
Subsequent to December 31, 1992, the affiliate of the major stockholder caused
the bank to release Harken and its affiliates from any liability under this
guarantee and loan.
Under the terms of the Agreement, Harken continued to manage the oil
and gas property interests of the limited partnership and to operate certain
partnership properties. Harken was paid $50,000 per month to manage the
partnership interest in such properties in addition to the fees it received for
serving as operator of the properties pursuant to applicable joint operating
agreements. During the second quarter of 1993, the partnership sold its
interests in all oil and gas properties operated by Harken and Harken ceased to
manage the partnership.
40
<PAGE> 159
HARKEN ENERGY CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
(8) NOTES PAYABLE
At December 31, 1993, Harken had included $1,000,000 in accrued
liabilities related to a consulting payment due to a former Chuska stockholder.
Under the terms of a prior agreement made by Chuska with the former Chuska
stockholder, among other obligations previously satisfied, Chuska was to pay
$1,000,000 to the former Chuska stockholder when aggregate net revenues (as
defined in the agreement) reached $60,000,000. In October 1992, a lawsuit was
filed against Chuska by the former Chuska stockholder. The lawsuit was
generally based upon allegations that Chuska had reached the defined aggregate
net revenue amount and that the $1,000,000 consulting payment was due and
payable. In March 1994, this lawsuit was settled whereby Chuska and a
subsidiary entered into an agreement to pay $500,000 to the former Chuska
stockholder as the first of two installments relating to the consulting
payment. Chuska executed a non-interest bearing note payable, guaranteed by
Harken, for the remaining $500,000 consulting payment which was paid to the
former Chuska stockholder on January 5, 1995. This obligation is included in
Notes Payable in the accompanying December 31, 1994 consolidated balance sheet.
Further, under the terms of this March 1994 agreement, Chuska
purchased from the former Chuska stockholder his 3% working interest in the
wells drilled by Chuska as well as all rights he held to participate in future
wells drilled by Chuska on the Navajo Reservation, effective January 1, 1994.
As consideration for such purchase, Chuska issued a 10% note payable in the
amount of $400,000 which is due and payable to the former Chuska stockholder on
or before January 3, 1996. This note is included in Notes Payable in the
accompanying December 31, 1994 consolidated balance sheet. The balance is
included as a current liability as Chuska is obligated under this agreement to
pay 75% of the monthly net cash flow (as defined) from the acquired interest to
an escrow account which will serve as collateral for the above notes payable
until the notes are fully paid.
(9) REDEEMABLE PREFERRED STOCK
During 1988, Harken completed the private placement of 3,000,000
shares of newly-issued Series C 12% $1 par value cumulative convertible
redeemable preferred stock ("Series C Preferred") for $30,000,000. Each share
of preferred stock was convertible into 1.667 shares of common stock at the
option of the holder and was mandatorily redeemable at $10 per share over a
five year period beginning in 1993. Dividends may be paid in the form of cash
or common stock at the option of the holder. Harken has the option to convert
the preferred stock to shares of common stock if the market price for Harken's
common stock has exceeded 125% of the $6.00 conversion price of the preferred
stock for twenty consecutive days. The conversion price of $6.00 per share is
adjustable under certain conditions.
The 186,760 shares of Series C Preferred held by Tejas represent the
only Series C Preferred shares outstanding as of December 31, 1993 and 1994.
During 1991, in connection with the issuance of 1,000 shares of Tejas preferred
stock to Harken, Tejas agreed to waive certain of the provisions under the
terms of the Harken Series C Preferred, including the payment of the 12% annual
dividend.
41
<PAGE> 160
HARKEN ENERGY CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
The holder of 200,000 shares of Series C Preferred who did not elect
to exchange its shares of Series C Preferred continued to hold its shares,
until such shares were also exchanged under the original terms of the Series C
Preferred in January 1992 for 333,400 shares of Harken common stock.
During the third quarter of 1992, the 513,240 shares of Harken Series
C Preferred held by E-Z Serve were exchanged for 2,200,000 newly issued shares
of Harken common stock. In addition, E-Z Serve agreed to adjust the conversion
ratio of its E-Z Serve Series C Preferred (see Note 5 -- Investments in Former
Subsidiaries, "E-Z Serve Preferred Stock" for further discussion). As part of
the above exchange transaction, Harken issued its approval of an E-Z Serve
acquisition as required under the terms of a subordinated debenture by E-Z
Serve to Harken.
(10) STOCKHOLDERS' EQUITY
Common Stock -- Harken currently has authorized 100,000,000 shares of
$.01 par common stock. At December 31, 1993 and 1994, Harken had issued
65,466,508 shares and 66,426,508 shares, respectively. Harken held 5,983,655
shares as treasury stock at a cost of $20,757,000 both December 31, 1993 and
1994.
Acquisition of Chuska Resources Corporation -- Effective February 15,
1993, Harken consummated a merger pursuant to which Chuska Resources
Corporation ("Chuska") became a wholly-owned subsidiary of Harken. In exchange
for all of the outstanding common stock of Chuska, Harken issued 14,210,357
shares of Harken common stock. In connection with the merger, Harken filed a
registration statement, which became effective January 15, 1993, with the
Securities and Exchange Commission for the shares of Harken common stock
issued. See further discussion of the merger at Note 3 -- Acquisitions.
Acquisition of CHAP Interest -- In October 1994, Harken acquired an
additional interest of approximately 20% in CHAP in exchange for, among other
consideration, 960,000 shares of restricted Harken common stock.
Per Share Data -- Per share data has been computed based on the
weighted average number of common shares outstanding during each period. Per
share data reflects net loss adjusted for accrued dividends on the Series C
Preferred stock.
Stock Options -- In conjunction with various stock option plans and
grants, Harken has the following options outstanding at December 31, 1994 (not
in thousands):
42
<PAGE> 161
HARKEN ENERGY CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
<TABLE>
<CAPTION>
YEAR OF NUMBER OF EXPIRATION
GRANT SHARES EXERCISABLE OPTION PRICE DATE
----- ------ ----------- ------------ ----
<S> <C> <C> <C> <C>
1984 . . . . . . . . 37,500 37,500 $1.000 1994
1985 . . . . . . . . 410,000 410,000 $1.000 1995
1986 . . . . . . . . 10,000 10,000 $4.1875 1996
1987 . . . . . . . . 26,667 26,667 $3.75 1995
1988 . . . . . . . . 84,000 84,000 $4.1875 to $5.625 1995-1998
1990 . . . . . . . . 137,477 137,477 $4.00 to $5.000 1995-2000
1991 . . . . . . . . 10,000 10,000 $6.500 1996
1993 . . . . . . . . 333,650 298,442 $1.1875 to $1.875 1996-2003
1994 . . . . . . . . 1,776,775 535,942 $1.00 to $1.875 2000-2004
</TABLE>
At December 31, 1994, Harken had remaining options authorized and
available to be granted of 1,475,000.
Registration of Outstanding Shares -- Pursuant to the request of
certain former CHAP partners, and in accordance with the terms of the above
mentioned purchase by Harken of an additional interest in CHAP Harken filed a
registration statement with the Securities and Exchange Commission covering
960,000 restricted shares of its currently outstanding common stock.
(11) INCOME TAXES
At December 31, 1994, Harken had available for federal income tax
reporting purposes, net operating loss (NOL) carryforward for regular tax
purposes of approximately $58,000,000 which expires in 1997 through 2010,
alternative minimum tax NOL carryforward of approximately $47,000,000 which
expires in 1997 through 2010, investment tax credit carryforward of
approximately $863,000 which expires in 1995 through 2002, contribution
carryforward of approximately $57,000 which expires in 2000 through 2009,
statutory depletion carryforward of approximately $1,150,000 which does not
have an expiration date, jobs tax credit carryforward of approximately $118,000
which expires in 1994 through 1995 and a net capital loss carryforward of
approximately $542,000 which expires in 2007. Approximately $14,000,000 of the
net operating loss carryforward has been acquired with the purchase of
subsidiaries and must be used to offset future income from profitable
operations within those subsidiaries.
During the first quarter of 1993, Harken adopted Statement of
Financial Accounting Standard No. 109, "Accounting for Income Taxes" ("SFAS No.
109"). This standard requires, among other things, recognition of future tax
benefits and liabilities, measured by enacted tax rates, attributable to
deductible temporary differences between financial statement and income tax
bases of assets and liabilities and to tax net operating loss carryforwards.
Deferred tax benefits are required to be recognized to the extent that
realization of such benefits is more likely than not.
43
<PAGE> 162
HARKEN ENERGY CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
Upon adoption of SFAS No. 109, on January 1, 1993, Harken calculated
total deferred tax liabilities of approximately $2,020,000 resulting from
financial statement basis for property and equipment in excess of related tax
basis. In addition, Harken calculated total deferred tax assets of
approximately $18,989,000 consisting of approximately $18,142,000 related to
Harken's net operating loss carryforward and approximately $847,000 primarily
related to tax basis for investments in former subsidiaries in excess of
related financial statement basis. Harken established a valuation allowance for
the entire net deferred tax asset of $16,969,000. As a result, the adoption of
SFAS No. 109 by Harken on January 1, 1993 had no effect on Harken's results
from operations or earnings (loss) per common share for the year ended December
31, 1993.
At December 31, 1993, primarily as a result of the February 15, 1993
merger with Chuska whereby Chuska became a wholly-owned subsidiary of Harken,
total deferred tax liabilities increased to approximately $4,065,000. Such
increase was due to the financial statement basis for Chuska property and
equipment being in excess of the related historical tax basis. In addition,
total deferred tax assets increased to approximately $22,872,000, primarily
from an increase in the NOL carryforward during the year. The resulting
increase in net deferred tax assets was offset by a corresponding increase in
the valuation allowance, resulting in no impact to Harken's results of
operations.
At December 31, 1994, total deferred tax liabilities increased to
approximately $5,100,000 while total deferred tax assets decreased to
approximately $20,640,000. The resulting decrease in net deferred tax assets
was offset by a corresponding decrease in the valuation allowance to
approximately $15,540,000 at December 31, 1994, resulting in no impact to
Harken's results of operations.
The Tax Reform Act of 1986 made substantial changes with regard to NOL
carryforwards. After an "ownership change," the taxable income of a loss
corporation is limited annually to a prescribed rate times the value of the
loss corporation's stock immediately before the ownership change. In general,
an ownership change occurs if ownership of more than 50% in value of the stock
of the loss corporation changes during the three-year period preceding the test
date. Under federal tax law, the amount and availability of loss carryforwards
are subject to a variety of interpretations and restrictive tests, under which,
the utilization of such loss carryforwards could be limited or effectively lost
upon certain changes in ownership. Application of these and other tests
requires certain factual determinations and legal interpretations as to which
there is little guidance. An ownership change occurred in 1989 resulting in
Harken's utilization of NOL carryforwards for all periods prior to the date of
change being limited annually to approximately $11,000,000 to $12,000,000.
(12) RELATED PARTY TRANSACTIONS
Relationship with E-Z Serve -- At December 31, 1993, E-Z Serve owed
Harken $870,000 primarily for preferred stock dividends. Such balance is
included in Accounts Receivable from Related Parties in the accompanying
consolidated balance sheet. At December 31, 1994, the accrued preferred stock
dividends have been reclassified as Investment in Former Subsidiary Held for
Resale. See Note 5 -- Investments in Former Subsidiaries for further
discussion.
44
<PAGE> 163
HARKEN ENERGY CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
Other Transactions -- The Board of Directors approved the granting of
loans from Harken to certain employees and directors under the Non-Qualified
Plan and the Directors Option Agreement for the purpose of allowing such
individuals to exercise their stock options immediately. The Board of Directors
determined in making such grants that as a result of the restricted nature of
the stock and the lack of any rights on the part of the optionee to cause such
shares to be registered, an option price per share equal to 60% of the closing
market price on the date of grant was the reasonable price for such shares of
common stock which were immediately purchased. Each loan is evidenced by a
promissory note which is due eight years from making and bears interest at 5%
per annum. The shares of stock purchased pursuant to such notes were held by
Harken as collateral until the respective notes were fully paid. During 1988,
1989, 1990 and 1991, certain officers and directors elected to purchase common
stock under these terms. Harken had notes receivable of $3,989,000 and
$2,846,000 as of December 31, 1991 and 1992, respectively, which are included
in Stockholders' Equity.
During the first and second quarter of 1993, Harken foreclosed on
certain of these non-recourse notes receivable from certain former employees,
officers and directors resulting in the addition of 381,925 shares of treasury
stock, which had served as the sole collateral for these notes. In addition,
during the third quarter of 1993, certain employees, officers and directors
surrendered to Harken a total of 704,000 shares of common stock for the
cancellation of certain of these non-recourse promissory notes given by such
parties to Harken upon the purchase of such shares. In connection with such
surrender, Harken issued new stock options to such parties which options had
been determined to be equal in value to the shares surrendered. This resulted
in the addition of 704,000 shares of treasury stock which had served as
collateral for these notes. As a result of the above transactions, during the
year ended December 31, 1993, Harken expensed a total of $551,000 of accrued
interest related to these non-recourse notes receivable, and such expense has
been included in Provision for Asset Impairments in the accompanying Statements
of Operations.
In September 1989, Harken's Board of Directors approved a loan to an
officer in the amount of $520,000. The note bears interest at the Broker Loan
Rate (5% at December 31, 1993 and 1994, respectively) plus 1/2% and is due
October 2, 1999. The note is secured by vested options to purchase 266,790
shares of Harken's common stock at $1.00 per share. During 1994, an agreement
was reached with the officer whereby the note, together with accrued interest,
is scheduled to be forgiven equally over three installments dated April 1994,
July 1995 and December 1996 with each installment of such forgiveness
contingent upon the officer's continued employment through the date of each
such installment. Such note is included in Notes Receivable from Related
Parties in the accompanying financial statements.
See Notes 2, 5, 7 and 10 -- Discontinued Operations, Investments in
Former Subsidiaries, Investment in Limited Partnership and Stockholders' Equity
for other related party transactions.
(13) OTHER INFORMATION
Quarterly Data -- (Unaudited) -- The following tables summarize
selected quarterly financial data for 1993 and 1994 expressed in thousands,
except per share amounts. Such financial information has been
45
<PAGE> 164
HARKEN ENERGY CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
restated to present the operations of Harken's well servicing and contract
drilling operations as discontinued operations. See Note 2 -- Discontinued
Operations for further discussion.
<TABLE>
<CAPTION>
QUARTER ENDED
------------- TOTAL
MARCH 31 JUNE 30 SEPTEMBER 30 DECEMBER 31 YEAR
-------- ------- ------------ ----------- ----
<S> <C> <C> <C> <C> <C>
1993
Revenues . . . . . . . . . . . . . . . . . . $ 1,543 $ 2,151 $ 1,478 $ 1,429 $ 6,601
Gross profit . . . . . . . . . . . . . . . . 682 1,257 759 447 3,145
Income(loss) from continuing operations . . 51 (227) (577) (1,044) (1,797)
Net loss . . . . . . . . . . . . . . . . . . (184) (312) (632) (4,366) (5,494)
Per common share
Loss from continuing operations . . . . . $ 0.00 $ (0.00) $ (0.01) $ (0.02) $ (0.03)
Net loss . . . . . . . . . . . . . . . . . (0.00) (0.01) (0.01) (0.07) (0.09)
1994
Revenues . . . . . . . . . . . . . . . . . . $ 1,163 $ 1,147 $ 1,136 $ 1,449 $ 4,895
Gross profit . . . . . . . . . . . . . . . . 648 587 591 795 2,621
Loss from continuing operations . . . . . . . (430) (395) (604) (6,782) (8,211)
Net loss . . . . . . . . . . . . . . . . . . (296) (637) (717) (6,784) (8,434)
Per common share
Loss from continuing operations . . . . . $ (0.01) $ (0.01) $ (0.01) $ (0.11) $ (0.14)
Net loss . . . . . . . . . . . . . . . . . (0.01) (0.01) (0.01) (0.11) (0.14)
</TABLE>
Significant Customers -- In 1992, management fees and prospect fees
from the limited partnership represented 25% of consolidated revenues from
continuing operations. There were two oil purchasers which represented 18% and
28% of consolidated revenues from continuing operations in 1993 and which
represented 38% and 16% of consolidated revenues from continuing operations in
1994. Management does not feel that the loss of these purchasers would
significantly impact the operations of Harken due to the availability of other
potential purchasers for its oil production.
(14) OIL AND GAS DISCLOSURES
Costs Incurred in Property Acquisition, Exploration and Development
Activities:
<TABLE>
<CAPTION>
1992 1993 1994
---- ---- ----
<S> <C> <C> <C>
Costs incurred --
Acquisition of properties
Evaluated . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 123 $ 8,293 $ 1,582
Unevaluated . . . . . . . . . . . . . . . . . . . . . . . . . . . . 640 7,029 --
Exploration . . . . . . . . . . . . . . . . . . . . . . . . . . . . -- 729 712
Development . . . . . . . . . . . . . . . . . . . . . . . . . . . . -- 519 1,428
-------- --------- --------
Total costs incurred . . . . . . . . . . . . . . . . . . . . . . $ 763 $ 16,570 $ 3,722
======== ========= ========
</TABLE>
46
<PAGE> 165
HARKEN ENERGY CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
Total costs incurred during 1993 includes approximately $796,000
related to Harken's Colombian operations. Total costs incurred during 1994
includes approximately $716,000 related to Harken's Colombian operations and
approximately $114,000 related to Harken's Bahrain operations.
Capitalized Costs Relating to Oil and Gas Producing Activities:
<TABLE>
<CAPTION>
1992 1993 1994
---- ---- ----
<S> <C> <C> <C>
Capitalized costs --
Unevaluated properties not being amortized . . . . . . . . . . . . . $ 975 $ 8,004 $ 7,446
Evaluated properties being amortized . . . . . . . . . . . . . . . . 123 9,664 13,944
-------- ---------- ---------
Total capitalized costs . . . . . . . . . . . . . . . . . . . . . . . 1,098 17,668 21,390
Less accumulated depreciation and amortization . . . . . . . . . . . -- (1,433) (2,877)
-------- ----------- ----------
Net capitalized costs . . . . . . . . . . . . . . . . . . . . . . . $ 1,098 $ 16,235 $ 18,513
======== ========== =========
</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).
<TABLE>
<CAPTION>
(UNAUDITED)
-----------
1992 1993 1994
---- ---- ----
Crude Oil and Condensate (Barrels): (IN THOUSANDS)
<S> <C> <C> <C>
Proved reserves -- beginning of year . . . . . . . . . . . . . . . . 0 0 1,035
Extensions and discoveries . . . . . . . . . . . . . . . . . . . . . -- 1 --
Revisions of previous estimates . . . . . . . . . . . . . . . . . . -- -- 186
Production . . . . . . . . . . . . . . . . . . . . . . . . . . . . . -- (185) (158)
Purchases of reserves-in-place . . . . . . . . . . . . . . . . . . . -- 1,219 458
-------- ------- ------
Proved reserves -- end of year . . . . . . . . . . . . . . . . . . . 0 1,035 1,521
======== ======= ======
Proved developed reserves --
Beginning of year . . . . . . . . . . . . . . . . . . . . . . . . . 0 0 624
======== ======= ======
End of year . . . . . . . . . . . . . . . . . . . . . . . . . . . . 0 624 915
======== ======= ======
</TABLE>
47
<PAGE> 166
HARKEN ENERGY CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
<TABLE>
<CAPTION>
(UNAUDITED)
-----------
1992 1993 1994
---- ---- ----
(IN THOUSANDS)
<S> <C> <C> <C>
Natural Gas (Mcf):
Proved reserves -- beginning of year . . . . . . . . . . . . . . . . 0 0 4,970
Extensions and discoveries . . . . . . . . . . . . . . . . . . . . . -- 683 --
Revisions of previous estimates . . . . . . . . . . . . . . . . . . -- -- 476
Production . . . . . . . . . . . . . . . . . . . . . . . . . . . . . -- (429) (426)
Purchases of reserves-in-place . . . . . . . . . . . . . . . . . . . -- 4,716 2,128
-------- ------- ------
Proved reserves -- end of year . . . . . . . . . . . . . . . . . . . 0 4,970 7,148
======== ======= ======
Proved developed reserves --
Beginning of year . . . . . . . . . . . . . . . . . . . . . . . . . 0 0 1,624
======== ======= ======
End of year . . . . . . . . . . . . . . . . . . . . . . . . . . . . 0 1,624 2,207
======== ======= ======
</TABLE>
Standardized Measure of Discounted Future Net Cash Flows Relating to
Proved Oil and Gas Reserves:
<TABLE>
<CAPTION>
(UNAUDITED)
-----------
1993 1994
---- ----
(IN THOUSANDS)
<S> <C> <C>
Future cash inflows . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 25,328 $ 37,612
Production costs . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . (8,674) (13,045)
Development costs . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . (2,947) (4,389)
--------- ---------
Future net inflows before income tax . . . . . . . . . . . . . . . . . . . . . 13,707 20,178
Future income taxes . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . -- --
--------- ---------
Future net cash flows . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 13,707 20,178
10% discount factor . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . (5,477) (8,466)
--------- ---------
Standardized measure of discounted future net cash flows . . . . . . . . . . . $ 8,230 $ 11,712
========= =========
</TABLE>
48
<PAGE> 167
HARKEN ENERGY CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
Changes In Standardized Measure of Discounted Future Net Cash Flows
Relating to Proved Oil and Gas Reserves:
<TABLE>
<CAPTION>
(UNAUDITED)
-----------
1992 1993 1994
---- ---- ----
(IN THOUSANDS)
<S> <C> <C> <C>
Standardized measure -- beginning of year . . . . . . . . . . . . . $ 0 $ 0 $ 8,230
Increase (decrease)
Sales, net of production costs . . . . . . . . . . . . . . . . . . -- (2,726) (2,398)
Net change in prices, net of production costs . . . . . . . . . . -- -- 364
Change in future development costs . . . . . . . . . . . . . . . . -- -- (208)
Revisions of quantity estimates . . . . . . . . . . . . . . . . . -- -- 1,450
Accretion of discount . . . . . . . . . . . . . . . . . . . . . . -- -- 823
Changes in production rates, timing and other . . . . . . . . . . -- -- (150)
Extensions and discoveries, net of future costs . . . . . . . . . -- 875 --
Purchases of reserves-in-place . . . . . . . . . . . . . . . . . . -- 10,081 3,601
-------- ------- --------
Standardized measure -- end of year . . . . . . . . . . . . . . . . $ 0 $ 8,230 $ 11,712
======== ======= ========
</TABLE>
(15) COMMITMENTS AND CONTINGENCIES
Colombian Operations-Alcaravan Contract -- During the third quarter of
1992, Harken, through a subsidiary, Harken de Colombia, Ltd., was awarded the
exclusive right to explore for, develop and produce oil and gas throughout
approximately 350,000 acres within the Alcaravan area ("Alcaravan") of
Colombia. Alcaravan is located in Colombia's Llanos Basin and is located
approximately 140 miles east of Santafe de Bogota. Harken and Ecopetrol have
entered into an Association Contract ("Alcaravan Contract") which requires
Harken to conduct a seismic and exploratory drilling program in the Alcaravan
area ("work program") over the initial six years. At the end of each of the six
years in the work program, Harken has the option to withdraw from the Alcaravan
Contract or to commit to the next year's work requirements. If Harken makes a
commercial discovery of oil and/or gas which is approved by Ecopetrol, the
standard terms of the Alcaravan Contract will apply. Such terms provide for
Ecopetrol to reimburse Harken for 50% of its successful well costs expended up
to the point of commercial discovery and to receive a 20% royalty interest and
for both Ecopetrol and Harken to each have a 50% working interest. The term of
the Alcaravan Contract will extend twenty-two years from the date of any
commercial discovery of oil and/or gas. Harken reprocessed in excess of 200
kilometers of seismic data on the Alcaravan area and completed the acquisition
of 52 kilometers of new seismic data over prospective areas in mid-February
1994. Harken also plans to acquire approximately 26 kilometers of additional
seismic data on the Alcaravan Contract area in February 1995.
In September 1994, Harken announced that Huffco Group, Inc. ("Huffco")
of Houston, Texas joined Harken in the drilling of its first exploratory well
under the Alcaravan Contract. Under the terms of this joint
49
<PAGE> 168
HARKEN ENERGY CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
venture agreement, which was approved by Ecopetrol, Harken serves as operator
and retains a 50% interest in the well. The well, the Alcaravan #1, was
spudded in early February 1995 and will be drilled to a projected depth of
10,500 feet to test for commercial quantities of oil in the oil prone zones
prevalent in the Llanos Basin; the Carbonera, Mirador, Guadalupe and the basal
Cretaceous formations.
Bocachico Contract -- In January 1994, Harken announced that Harken de
Colombia, Ltd. had signed its second Association Contract ("Bocachico
Contract") with Ecopetrol, covering the Bocachico contract area. Under the
Bocachico Contract, Harken has acquired the exclusive rights to conduct
exploration activities and drilling on this area, which covers approximately
192,000 acres in the Middle Magdelena Valley of Central Colombia.
During the first year of the Bocachico Contract, Harken is conducting
seismic activities on the land covered by this contract including reprocessing
of at least 250 kilometers of existing seismic data and the acquisition of at
least 35 kilometers of new seismic data. During each of the 2nd through the 6th
contract years Harken may elect to continue the contract by committing to the
drilling of at least one well during each contract year. During this initial
six year term, called the Exploration Period under the Bocachico Contract, if
Harken has discovered the existence of commercial production in the Bocachico
Contract area, the Bocachico Contract will be further extended for a period of
22 years from the date of any commercial discovery of oil and/or gas. If Harken
makes a commercial discovery of oil and/or gas which is approved by Ecopetrol,
the standard terms of the Bocachico Contract will apply. Such terms provide for
Ecopetrol to reimburse Harken for 50% of its successful well costs expended up
to the point of commercial discovery and to receive a 20% royalty interest and
for both Ecopetrol and Harken to each have a 50% working interest.
In addition to reprocessing and acquiring seismic data during the
first contract year of the Bocachico Contract, Harken has evaluated seismic
data and has completed an engineering feasibility study to evaluate the
potential for recovering existing oil reserves in the Rio Negro area, which is
located in the northern portion of the Bocachico Contract area. Three wells
were drilled, produced and subsequently abandoned by another contractor
approximately 30 years ago in this area. These wells have provided information
and data including production rates, well logs and pressure tests. This well
data has been utilized by Harken in such studies to evaluate the feasibility of
applying modern production and recovery techniques in this area. Harken will
also acquire a minimum of 35 kilometers of seismic data on the Bocachico
Contract area in early 1995.
On January 19, 1995, after completing the engineering feasibility
study, Harken notified Ecopetrol of Harken's commitment to drill a well under
the Bocachico Contract, and thereby extended the contract into its second year.
Harken currently anticipates that a well site will be selected and drilling
will commence by mid-1995.
Playero Contract -- In December 1994, Harken announced that Harken de
Colombia, Ltd. had signed its third Association Contract ("Playero Contract")
with Ecopetrol, covering the Playero contract area. Under the Playero
Contract, Harken has acquired the exclusive rights to conduct exploration
activities and drilling on this area, which covers approximately 10,000 acres
in the Llanos Basin of Colombia, contiguous to Harken's Alcaravan Contract
area.
50
<PAGE> 169
HARKEN ENERGY CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
During the first year of the Playero Contract, Harken will acquire at
least 12 kilometers of new seismic data in the Playero Contract area. During
each of the 2nd through the 6th contract years, Harken may elect to continue
the contract by committing to the drilling of at least one well during each
contract year. During this initial six year term, called the Exploration
Period under the Playero Contract, if Harken has discovered the existence of
commercial production in the Playero Contract area, the Playero Contract will
be further extended for a period of 22 years from the date of termination of
the Exploration Period with a total term not to exceed 28 years. If Harken
makes a commercial discovery of oil and/or gas which is approved by Ecopetrol,
the standard terms of the Playero Contract will apply. The Playero Contract
was granted by Ecopetrol under a new form of Association Contract which has
modified various standard terms from the previous form of Association Contract
which was used on the Alcaravan and Bocachico Contracts. Such terms provide
for Ecopetrol to reimburse Harken for 50% of its successful well costs expended
up to the point of a commercial discovery and to receive a 20% royalty
interest. Although both Ecopetrol and Harken each would have a 50% working
interest, production net of royalty would be allocated 50% to each party until
accumulated production from the Playero Contract area reaches a cumulative
total of 60 million barrels of oil. After that cumulative production level is
achieved, production net of royalty is allocated at rates to Harken from 50% to
25% based upon the relative profitability of the project with Ecopetrol
receiving the remaining complementary 50% to 75% of such additional production.
Bahrain Operations -- In January 1990, Harken, through its
wholly-owned subsidiary, Harken Bahrain Oil Company ("HBOC"), entered into a
production sharing agreement with the Bahrain National Oil Company ("BANOCO"),
which gave it the exclusive right to explore for, develop and produce oil and
gas throughout most of Bahrain's Arabian Gulf offshore territories. Subject to
the discovery and development of oil and/or gas, the contract has a term of
thirty-five years. Under the original terms of the agreement, as amended,
Harken was to drill an exploratory well to test the Permian Khuff formation
within 2 1/2 years and drill a total of four wells by 1995 to earn all of its
acreage rights.
In July 1990, Harken entered into a joint venture arrangement with a
joint venture partner, Bass Enterprises Production Company ("BEPCO"), in which
BEPCO committed to provide the funding for the first well and at least two
subsequent wells. On April 8, 1993, HBOC and BEPCO entered into an agreement
whereby BEPCO was released and discharged from any future drilling obligations
related to HBOC's production sharing agreement, and the joint venture agreement
between HBOC and BEPCO was terminated. As part of this agreement, BEPCO paid to
HBOC approximately $2,000,000 plus other consideration, which represented the
negotiated amount for BEPCO's remaining obligation for future costs to be
incurred in Bahrain. This settlement amount was recorded as deferred revenue
by Harken and is reduced by ongoing investment expenditures related to Bahrain.
The initial exploratory well under the production sharing agreement
was drilled on the Jarim Reef, which began drilling November 1991. In March
1992, after drilling was completed, HBOC announced that the Jarim No. 2 well
was not productive of either oil or gas and was abandoned. On December 28,
1992, Harken commenced the drilling of its second exploratory well, the
Muharraq No. 1, in Bahrain. In February 1993, Harken announced that the
Muharraq No. 1 well had no shows of oil or gas and was plugged and abandoned.
Further, under the terms of the production sharing agreement, HBOC allowed its
exploration and drilling rights on approximately 10% of the acreage covered by
the production sharing agreement to
51
<PAGE> 170
HARKEN ENERGY CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
expire, effective February 13, 1993. HBOC allowed an additional portion of the
acreage covered by the production sharing agreement to expire effective August
29, 1993.
In May 1994, Harken announced a new seismic reprocessing program
covering 500 kilometers of seismic lines in the vicinity of the Jarim Reef. At
present Harken holds approximately 500,000 acres under its production sharing
agreement. Unless commercial production is found or an extension to the
production sharing agreement is obtained, this acreage expires in July 1995.
In January 1995, Harken completed its reprocessing of approximately 500
kilometers of seismic data and has reviewed the results of that work with
BANOCO. Unless Harken obtains a joint venture partner, Harken will not proceed
to either acquire additional seismic data or drill another well. If a joint
venturer is located, it will be necessary to obtain an extension of one year or
more from July 1995 to complete work necessary with a joint venturer.
Other -- Harken leases its corporate and certain other office space
and certain field operating offices. Total office and operating lease expense
during 1992, 1993 and 1994 was $680,000, $707,000 and $510,000, respectively.
Future minimum rental payments required under all leases that have initial or
remaining noncancellable lease terms in excess of one year as of December 31,
1994, net of sublease arrangements, are as follows:
<TABLE>
<CAPTION>
YEAR AMOUNT
---- ------
<S> <C>
1995 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 403,000
1996 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 315,000
1997 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 260,000
1998 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 202,000
1999 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 200,000
Thereafter . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 4,000
------------
Total minimum payments required . . . . . . . . . . . . . . . . . . $ 1,384,000
============
</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.
Harken has accrued approximately $1,260,000 at December 31, 1994
relating to other operational or regulatory liabilities related primarily to
Chuska's operations. Harken and its subsidiaries currently are involved in
various lawsuits and other contingencies, including the guarantee of certain
lease obligations, which in management's opinion, will not result in
significant loss exposure to Harken.
52
<PAGE> 171
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
None
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
Reference is made to the material under the captions "Directors of
Harken" and "Executive Officers of Harken" in the Registrant's definitive Proxy
Statement to be filed on or before April 30, 1995 pursuant to Regulation 14A in
connection with its Annual Meeting of Stockholders to be held in June 1995,
which is incorporated herein by reference.
ITEM 11. EXECUTIVE COMPENSATION
Reference is made to the material under the captions "Executive
Officers of Harken (Executive Compensation)" in the Registrant's definitive
Proxy Statement to be filed on or before April 30, 1995 pursuant to Regulation
14A in connection with its Annual Meeting of Stockholders to be held in June
1995, which is incorporated herein by reference.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS
Reference is made to the material under the captions "Principal
Holders of Securities" in the Registrant's definitive Proxy Statement to be
filed on or before April 30, 1995 pursuant to Regulation 14A in connection with
its Annual Meeting of Stockholders to be held in June 1995, which is
incorporated herein by reference.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
Reference is made to the material under the captions "Certain
Transactions" in the Registrant's definitive Proxy Statement to be filed on or
before April 30, 1995 pursuant to Regulation 14A in connection with its Annual
Meeting of Stockholders to be held in June 1995, which is incorporated herein
by reference.
53
<PAGE> 172
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K
A. Exhibits
10-21 -- None
22 -- Subsidiaries of Harken
23-24 -- None
25 -- Powers of Attorney
26 -- None
27 -- EDGAR Financial Data Schedules
28-29 -- None
B. Financial Statements and Schedules
(1) Included in PART II of this report:
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
Harken Energy Corporation and Subsidiaries
-- Report of Independent Public Accountants . . . . . . . . . . . . . . . . . . . . . . 26
-- Selected Financial Information and Other Data for the five years ended
December 31, 1994 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 15
-- Consolidated Balance Sheets -- December 31, 1993 and 1994 . . . . . . . . . . . . . . 27
-- Consolidated Statements of Operations for the three years ended
December 31, 1994 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 28
-- Consolidated Statements of Stockholders' Equity for the three years ended
December 31, 1994 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 29
-- Consolidated Statements of Cash Flows for the three years ended
December 31, 1994 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 30
-- Notes to Consolidated Financial Statements . . . . . . . . . . . . . . . . . . . . . 31
</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 November 4, 1994, a report on Form 8-K was filed regarding the
acquisition of additional interest in CHAP Venture.
54
<PAGE> 173
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.
<TABLE>
<S> <C>
Dated: February 14, 1995
/s/ BRUCE N. HUFF
-----------------------------------------
HARKEN ENERGY CORPORATION
By: *
------------------------------------
Mikel D. Faulkner, Chairman of the Board
of Directors, Principal Executive Officer
*
-----------------------------------------
Richard H. Schroeder, Director, President
and Chief Operating Officer
*
-----------------------------------------
Bruce N. Huff, Senior Vice President
Chief Financial Officer and Principal
Accounting Officer
*
-----------------------------------------
Talat M. Othman, Director
-----------------------------------------
Michael R. Eisenson, Director
*
-----------------------------------------
Michael M. Ameen, Jr., Director
*
-----------------------------------------
Donald W. Raymond, Director
*
-----------------------------------------
E. C. Kettenbrink, Jr., Director
</TABLE>
Bruce N. Huff, by signing his name hereto, does hereby sign this Form
10-K, Annual Report for the fiscal year ended December 31, 1994, on behalf of
Harken Energy Corporation and each of the above-named officers and directors of
such Company, pursuant to powers of attorney, executed on behalf of the Company
and each such officer and director.
*By: /s/ BRUCE N. HUFF
----------------------
Bruce N. Huff,
Attorney-in-fact
55
<PAGE> 174
INDEX TO EXHIBITS
SEQUENTIALLY
EXHIBIT NUMBERED
NUMBER EXHIBIT PAGE
------- ------- ------------
10-21 -- None
22 -- Subsidiaries of Harken
23-24 -- None
25 -- Powers of Attorney
26 -- None
27 -- EDGAR Financial Data Schedules
28-29 -- None
<PAGE> 175
EXHIBIT 22
HARKEN ENERGY CORPORATION
WHOLLY OWNED SUBSIDIARIES
<TABLE>
<CAPTION>
CORPORATION NOTES:
----------- ------
<S> <C>
AEX, Inc. *
Fisher-Webb, Inc. **
Harken Exploration 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 ******
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 Chuska Resources Corporation
<PAGE> 176
EXHIBIT 25
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, 1994, 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,
- ---------------------------------- Chairman of the Board of Directors
Mikel D. Faulkner
* President
- ----------------------------------
Richard H. Schroeder
* Principal Financial Officer and
- ---------------------------------- Principal Accounting Officer
Bruce N. Huff
* Director
- ----------------------------------
Edwin C. Kettenbrink, Jr.
Director
- ----------------------------------
Michael R. Eisenson
* Director
- ----------------------------------
Talat M. Othman
* Director
- ----------------------------------
Donald W. Raymond
* Director
- ----------------------------------
Michael M. Ameen, Jr.
</TABLE>
<PAGE> 177
[ARTICLE] 5
<TABLE>
<S> <C>
[PERIOD-TYPE] YEAR
[FISCAL-YEAR-END] DEC-31-1994
[PERIOD-START] JAN-01-1994
[PERIOD-END] DEC-31-1994
[CASH] 2,828,000
[SECURITIES] 110,000
[RECEIVABLES] 1,705,000
[ALLOWANCES] 1,162,000
[INVENTORY] 0
[CURRENT-ASSETS] 6,840,000
[PP&E] 28,036,000
[DEPRECIATION] 7,859,000
[TOTAL-ASSETS] 28,960,000
[CURRENT-LIABILITIES] 5,133,000
[BONDS] 0
[COMMON] 664,000
[PREFERRED-MANDATORY] 1,868,000
[PREFERRED] 0
[OTHER-SE] 21,295,000
[TOTAL-LIABILITY-AND-EQUITY] 28,960,000
[SALES] 4,156,000
[TOTAL-REVENUES] 4,895,000
[CGS] 1,535,000
[TOTAL-COSTS] 1,535,000
[OTHER-EXPENSES] 11,230,000
[LOSS-PROVISION] 256,000
[INTEREST-EXPENSE] 85,000
[INCOME-PRETAX] (8,211,000)
[INCOME-TAX] 0
[INCOME-CONTINUING] (8,211,000)
[DISCONTINUED] (223,000)
[EXTRAORDINARY] 0
[CHANGES] 0
[NET-INCOME] (8,434,000)
[EPS-PRIMARY] (0.14)
[EPS-DILUTED] (0.14)
</TABLE>
<PAGE> 178
HARKEN ENERGY CORPORATION
2505 NORTH HIGHWAY 360, SUITE 800
GRAND PRAIRIE, TEXAS 75050
NOTICE OF ANNUAL MEETING OF STOCKHOLDERS
TO BE HELD JUNE 3, 1994
Notice is hereby given that the 1994 Annual Meeting of Stockholders
(the "Meeting") of Harken Energy Corporation, a Delaware corporation
("Harken"), will be held at the West Chase Hilton & Towers, 9999 Westheimer,
Houston, Texas 77042, on June 3, 1994, at 5:00 p.m., local time, for the
following purposes:
(1) to elect three Class "A" Directors of Harken to hold office in
accordance with Harken's Certificate of Incorporation until
the 1997 Annual Meeting of Stockholders and until their
respective successors shall be duly elected and qualified;
(2) to ratify the appointment of independent public accountants
for Harken for fiscal year 1994; and
(3) to transact such other business as may properly be brought
before the meeting or any adjournments or postponements
thereof.
The Board of Directors has fixed the close of business on April 20,
1994 as the date of record for determining the stockholders entitled to
notice of and to vote, either in person or by proxy, at the Meeting and any
adjournments or postponements thereof.
The Annual Report to Stockholders, a Proxy Statement containing
information relative to the matters to be acted upon at the Meeting and a form
of Proxy accompany this Notice.
You are cordially invited to attend the Meeting. However, whether
or not you plan to attend, you are urged to date, sign and promptly return your
proxy so that your shares may be voted in accordance with your wishes and in
order that the presence of a quorum may be assured. YOUR VOTE IS
IMPORTANT. The giving of such proxy does not affect your right to revoke it
later or vote your shares in person if you should attend the meeting.
By Order of the Board of Directors
Larry E. Cummings
Secretary
Grand Prairie, Texas
April 22, 1994
<PAGE> 179
HARKEN ENERGY CORPORATION
2505 NORTH HIGHWAY 360, SUITE 800
GRAND PRAIRIE, TEXAS 75050
PROXY STATEMENT
FOR
ANNUAL MEETING OF STOCKHOLDERS
TO BE HELD JUNE 3, 1994
SOLICITATION AND REVOCATION OF PROXY
The accompanying proxy (the "Proxy") is solicited by and on behalf of
the Board of Directors of Harken Energy Corporation, a Delaware corporation
("Harken"), in connection with the Annual Meeting of Stockholders (the
"Meeting"), which will be held at the West Chase Hilton & Towers, 9999
Westheimer, Houston, Texas 77042, on June 3, 1994, at 5:00 p.m., local time,
and at any adjournments or postponements thereof for the purposes set forth
in the accompanying notice.
Any stockholder giving a Proxy has the power to revoke the Proxy at
any time prior to its exercise by filing with the Secretary of Harken a
written notice of revocation or by duly executing a proxy bearing a later
date. A Proxy may also be revoked by any stockholder present at the Meeting
who expresses a desire to vote his or her shares in person. Subject to such
revocation, shares will be voted in accordance with the instructions on the
Proxy. As to the election of Directors, a stockholder may, by checking the
appropriate box on the Proxy: (i) vote for all Director nominees as a group;
(ii) withhold authority to vote for all Director nominees as a group; or (iii)
vote for all Director nominees as a group except those nominees identified by
the stockholder in the appropriate area on the Proxy. With respect to each
other proposal, a stockholder may, by checking the appropriate box on the
Proxy: (i) vote "FOR" the proposal; (ii) vote "AGAINST" the proposal; or (iii)
"ABSTAIN" from voting on the proposal. In the event no instructions are given,
the persons named in the accompanying Proxy will vote (i) FOR the election of
the Director nominees listed in this Proxy Statement and (ii) FOR the
ratification of the appointment of independent public accountants for Harken's
fiscal year 1994. As to any other business that may properly be brought
before the Meeting, the persons named in the accompanying Proxy will vote in
accordance with their best judgment.
This Proxy Statement and the accompanying Proxy were first mailed to
the stockholders on or about April 22, 1994. The solicitation of Proxies
will be primarily by mail, but may also be by telephone, telegraph or oral
communications by officers, regular employees or agents of Harken. The
cost of preparing, assembling and mailing the Proxy, this Proxy Statement and
the other materials enclosed herewith, and all clerical and other expenses of
proxy solicitation, will be borne by Harken. Harken also will request
brokerage houses and other custodians , nominees and fiduciaries to forward
soliciting materials to the beneficial owners of Harken's common stock, $.01
par value per share ("Common Stock"), held of record by such parties and will
reimburse such parties for their expenses in forwarding such materials.
1
<PAGE> 180
VOTING AT THE MEETING AND VOTING SECURITIES
The Board of Directors has fixed the close of business on April 20,
1994 as the Record Date (herein so called) for determining the holders of
Common Stock who will be entitled to notice of and to vote, either in
person or by proxy, at the Meeting. The Common Stock is currently Harken's
only outstanding class of voting stock. Each holder of Common Stock will be
entitled to cast one vote for each share of Common Stock registered in his or
her name on the books of Harken as of the Record Date. In the election of
Directors, each holder of Common Stock will be entitled to cumulate his or her
votes by voting the total number of shares of Common Stock held by such
stockholder multiplied by the number of Directors to be elected, as such
stockholder may see fit. Any holder of Common Stock who intends to cumulate
his or her votes is required to give written notice of such intention to the
Secretary of Harken on or before the day preceding the election at which such
holder intends to cumulate his or her votes. Notice may be given on the
Proxy. All holders of Common Stock may cumulate their votes if any holder
has given such written notice. One or more stockholders personally present
or represented by proxy and holding more than fifty percent (50%) of the
outstanding shares of Common Stock as of the Record Date will constitute a
quorum.
In accordance with the Certificate of Incorporation and the Bylaws of
Harken, the affirmative vote of a majority of the shares of Common Stock
entitled to vote and represented in person or by proxy at the Meeting will be
required for the election of each of the Director nominees, and for the
ratification of the appointment of independent public accountants for
Harken for fiscal year 1994. Abstentions will have the effect of a vote
against the ratification of the appointment of independent public accountants
for Harken for fiscal year 1994. Broker non-votes will have no effect on the
election of the nominees to the Board of Directors or the ratification of the
appointment of the independent public accountants for Harken for fiscal year
1994. On April 15, 1994, Harken had outstanding 59,482,853 shares of Common
Stock, excluding 5,983,655 treasury shares.
ANNUAL REPORT
The Annual Report to Stockholders for Harken's fiscal year ended
December 31 1993, which includes Harken's 10(k) for December 31, 1993, is
being furnished with this Proxy Statement to stockholders of record on April
20, 1994. The Annual Report does not constitute a part of the Proxy
solicitation materials.
2
<PAGE> 181
OWNERSHIP OF COMMON STOCK
SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS
The following table sets forth information regarding ownership of
the Common Stock as of April 15, 1994 by each person who is known by
Harken to own beneficially more than five percent (5%) of the outstanding
Common Stock. Unless otherwise indicated, such persons have sole voting
and investment power with respect to such shares and all suchs hares are
owned beneficially and of record by the person indicated.
<TABLE>
<CAPTION>
AMOUNT OF
NAME AND ADDRESS OF BENEFICIAL PERCENT
BENEFICIAL OWNER OWNERSHIP OF CLASS
------------------- --------- --------
<S> <C> <C>
Aeneas Venture Corporation 9,085,723 (1) 15.27%
c/o Harvard Management Company, Inc.
600 Atlantic Ave., 26th Floor
Boston, Massachusetts 02210-2203
Abdullah Taha Bakhsh 6,935,364 (2) 11.66%
Bakhashab Building, 4th Floor
P.O. Box 459
Jeddah, Saudi Arabia
Donald W. Raymond 5,460,334 9.18%
1990 North California, Suite 620
Walnut Creek, California 94596
Quadrant Capital Corp. 5,018,806 (3) 8.44%
c/o Quadrant Management Co., Inc.
127 East 73rd Street
New York, New York 10021
Harvey V. Risien, Jr. 4,695,926 7.89%
Fairmount Resources Corporation
700 North St. Mary's Street, Suite 950
San Antonio, Texas 78205
</TABLE>
__________________________
(1) Includes 25,000 shares of Common Stock that may be acquired through
the exercise of options exercisable at $5.625 per share, which
options were transferred to Aeneas from Michael R. Eisenson, a
Director of Harken, effective March 1, 1991. Also includes 468,367
shares of Common Stock owned beneficially by the Harvard Master
Trust, 234,204 shares of Common Stock owned beneficially by the
Harvard Yenching Institute and 321,679 shares of Common Stock owned
beneficially by Phemus Corporation, all of which parties are
affiliates of Aeneas. Aeneas has no investment or voting power over
the shares owned by the Harvard Master Trust and the Harvard Yenching
Institute.
(2) These shares are owned of record by Traco International, NV. ("Traco")
and Atherstone Corporation N.V. ("Atherstone"). According to a
Schedule 13D filed with Harken, Traco is wholly-owned by Mr. Bakhsh,
and Atherstone is indirectly owned by Mr. Bakhsh. The basis for
certain of this information is Amendment 8 to the report on Schedule
13D filed by Abdullah Taha Bakhsh dated August 7, 1992.
(3) Includes 526,686 shares of Common Stock that may be acquired through
the exercise of certain stock options. The basis for certain of this
information is a Form 4 dated October 8, 1993 filed by Quadrant
Capital Corp., Alan G. Quasha and NAR Group Limited.
3
<PAGE> 182
SECURITY OWNERSHIP OF MANAGEMENT
The following table sets forth information regarding the number of
shares of Common Stock beneficially owned by each Director, each Director
nominee, Harken's Chief Executive Officer, each of Harken's four other most
highly compensated executive officers for 1993 and all of Harken's Directors
and executive officers as a group as of April 15, 1994.
<TABLE>
<CAPTION>
AMOUNT SHARES
OF BENEFICIAL SUBJECT TO PERCENT
NAME OWNERSHIP (1) OPTIONS (2) OF CLASS
---- ------------- ----------- --------
<S> <C> <C> <C>
Michael M. Ameen, Jr. 6,000 5,000 (3)
Larry E. Cummings 205,223 185,064 (3)
Michael R. Eisenson 0 (4) 0 0.00%
Mikel D. Faulkner (5) 744,579 641,242 1.20%
Bruce N. Huff 275,000 275,000 (3)
Edwin C. Kettenbrink, Jr. (5) 0 0 0.00%
Talat M. Othman 25,000 (6) 25,000 (3)
Donald W. Raymond 5,460,394 0 8.83%
Harvey V. Risien, Jr. 4,695,926 0 7.60%
Alan G. Quasha (5) 5,018,806 (7) 526,686 8.44%
Richard H. Schroeder 400,000 400,000 (3)
Stephen C. Voss 265,000 265,000 (3)
All Directors and Executive 17,095,928 2,322,992 27.66%
Officers as a Group (13 Persons)
</TABLE>
- -----------------------
(1) Includes shares that may be acquired through the exercise of certain
options.
(2) The shares of Common Stock covered by such options whether or not
such options are currently vested are also included in the column
entitled "Amount of Beneficial Ownership."
(3) Less than one percent (1%).
(4) Aeneas Venture Corporation ("Aeneas") and Phemus Corporation
("Phemus") are wholly-owned subsidiaries of the President and Fellows
of Harvard College and affiliates of Aeneas Group, Inc. ("Aeneas
Group"), which manages the private equity portfolio of the Harvard
endowment fund. Mr. Eisenson is President of Aeneas Group and a Vice
President and director of Aeneas and Phemus. Aeneas beneficially owns
8,061,473 shares (excluding shares beneficially owned by Phemus) and
Phemus beneficially owns 321,679 shares of Common Stock. See
"Ownership of Common Stock - Security Ownership of Certain Beneficial
Owners." As a member of the investment committee of Aeneas Group, Mr.
Eisenson participates in the investment decisions of Aeneas and
Phemus. Mr. Eisenson has neither sole investment nor sole voting
power over the shares of Common Stock owned by Aeneas and Phemus. Mr.
Eisenson disclaims beneficial ownership of the shares owned by Aeneas
and Phemus.
(5) Nominees for Class "A" Directors.
(6) Dearborn Financial, Inc., of which Mr. Othman is the President, is an
affiliate of Traco and Atherstone, significant record stockholders of
Harken. See "Ownership of Common Stock - Security Ownership of
Certain Beneficial Owners."
(7) Includes the shares in which Mr. Quasha shares beneficial ownership
with Quadrant Capital Corp., including 526,686 shares of Common Stock
that may be acquired through the exercise of certain stock options.
4
<PAGE> 183
PROPOSAL ONE: ELECTION OF DIRECTORS
The number of directors constituting the full Board of Directors of
Harken has been established as nine (9) in accordance with Harken's Bylaws.
The Certificate of Incorporation provides that the number of Directors be
divided into Classes A, B and C, with staggered terms of three (3) years each.
Accordingly, Class A Directors will be elected at the Meeting to hold office
until the 1997 Annual Meeting of Stockholders and until their respective
successors are duly elected and qualified. Class A currently consists of three
Directors: Mr. Mikel D. Faulkner, Mr. Alan G. Quasha and Mr. Edwin C.
Kettenbrink, Jr. Messrs. Faulkner, Quasha and Kettenbrink have been nominated
for re-election by the Board of Directors for the Class A positions on the
Board.
Effective as of October 26, 1993 Mr. George W. Bush resigned as a
Class B Director of the Company. In accordance with Harken's Bylaws and
Delaware law, the remaining members of the Board of Directors filled the
vacancy created by Mr. Bush's resignation by electing Mr. Michael M. Ameen, Jr.
as a Class B Director on February 11, 1994. The term of Class B Directors
will expire at the Annual Meeting of Stockholders in 1995. On March 11, 1994
the Board of Directors, also in accordance with Harken's Bylaws and Delaware
law, elected Mr. Richard H. Schroeder as President of Harken and as a Class C
Director. In doing so the Board was expanded from eight (8) members to nine
(9) members. The term of Class C Directors will expire in 1996.
Unless otherwise instructed, the persons named in the Proxy intend to
vote all Proxies FOR the election of the nominees of Harken's Board of
Directors, being Messrs. Faulkner, Quasha and Kettenbrink. If any of the
nominees listed on the Proxy should not continue to be available for election,
the persons named in the Proxy will vote for such other person as the Board of
Directors may recommend. The Board does not presently contemplate that any of
the nominees will not become available for election for any reason. All
nominees have indicated their willingness to serve if re-elected.
The following includes information regarding each Director of Harken,
as of April 15, 1993, and the current nominees for Directors of Harken.
<TABLE>
<CAPTION>
Director
Continuously Term
Name, Age and Business Experience Since Expires
- --------------------------------- ---------------- -------
<S> <C> <C>
MICHAEL M. AMEEN, JR. (Age - 70) - Director of Harken; from 1994 1995
1989 to present Mr. Ameen has served as a part time consultant
to Harken with regard to Middle Eastern exploration projects;
Independent Consultant on Middle East Affairs for the past
five years; Director of Anera (a charitable organization);
Director of Amideast (a charitable organization); Director
of The American Center for Oriental Research (ACOR) and
Director of Seibel - Brule Group, (an insurance company).
MICHAEL R. EISENSON (Age - 38) - Director of Harken; 1987 1995
Director of Cambridge NeuroScience, Inc., a biotechnology
company; Director of ImmunoGen, Inc., a biopharmaceutical
company; and a Director of Somatix Therapy Corporation, a
biopharmaceutical company; President of Aeneas Group, Inc.
a wholly-owned subsidiary of Harvard Management, Inc., from
1986 to present, which manages the private equity portfolio
of the Harvard University endowment fund. Consultant to
Boston Consulting Group, a business consulting company,
from 1981 to 1986.
</TABLE>
5
<PAGE> 184
<TABLE>
<S> <C> <C>
MIKEL D. FAULKNER (Age - 44) - Chairman of the Board of 1982 1994
Harken since February 1991; Director of Harken; CEO
of Harken since 1982, and President of Harken from 1982
until February 1993.
EDWIN. C. KETTENBRINK, JR. (Age - 49) - Director of Harken; 1993 1994
Founder and sole shareholder of Landmark Environmental,
Inc., an environmental consulting firm, since 1989;
Vice President of Harken and certain of its subsidiaries
from 1984 to 1989.
TALAT M. OTHMAN (Age - 57) - Director of Harken; Director 1987 1994
of Hartmarx Corporation; Director of Tejas Power Corp.;
Chairman and CEO of Dearborn Financial, Inc., an investment
company, from 1983 to present.
ALAN G. QUASHA (Age - 44) - Director of Harken; Chairman of 1983 1994
the Board of Directors of Harken from 1983 to February 1991;
Director of E-Z Serve Corporation ("E-Z Serve"); Director of
Tejas; Director of Quadrant Capital Corp.; Chairman of the
Board of Directors of the Horn & Hardart Company; Partner
in the law firm of Quasha Wessely & Schneider (New York, N.Y.)
from 1980 to September 1991; President of Quadrant Management,
Inc., a management consulting company.
DONALD W. RAYMOND (Age - 56) - Director of and consultant to 1993 1996
Harken from February 1993 to present; Chairman, CFO and Treasurer
of Chuska Resources Corporation from 1988 to February 1993;
Chairman of Ute Oil Company and Sireen Oil, Inc. from 1984 to
present.
HARVEY V. RISIEN, JR. (Age - 40) - Director of Harken from 1993 1996
February 1993 to present; President of Fairmount Resources,
Inc., from December 1993 to present; President of Harken
from March 1993 to December 1993; President and Director of
Chuska Resources Corporation from April 1988 until December
1993; President of Ute Oil Company from 1984 to 1988.
RICHARD H. SCHROEDER (Age - 49) - Director and President of 1994 1996
Harken from March 11, 1994 to present; President and owner
of RHS Management, a consulting firm, from November 1990 to
March 1994; President of Rosewood Resources, Inc. from
January 1983 to November 1990.
</TABLE>
THE BOARD OF DIRECTORS RECOMMENDS A VOTE FOR THE RE-ELECTION OF
MESSRS. FAULKNER, QUASHA AND KETTENBRINK TO THE BOARD OF DIRECTORS.
DIRECTORS' MEETINGS AND COMMITTEES
During 1993, the Board of Directors held two meetings, which included
one regularly scheduled meeting and
6
<PAGE> 185
one special meeting. The Board of Directors has standing Audit and
Compensation Committees, but does not have a Nominating Committee. During
1993, the Audit Committee, comprised initially of Messrs. Othman, and Bush and
following Mr. Bush's resignation, Messrs. Othman and Kettenbrink, held two
meetings and reviewed the financial statements of Harken and received reports
and other communications from Harken's independent auditors. The present
members of the Audit Committee are Messrs. Othman and Kettenbrink. During
1993, the Compensation Committee, comprised of Messrs. Quasha and Eisenson,
held one meeting and was responsible for selecting parties eligible for grants
of stock options, for making and setting terms for such grants and for setting
compensation for executive officers of Harken and its subsidiaries. The
only member of the Compensation Committee at the present time is Mr. Eisenson.
During 1993, the Board of directors appointed a Special Compensation Committee
consisting of Messrs. Eisenson and Raymond to consider and recommend to the
Board a proposal for Harken to reacquire or terminate all outstanding Purchase
Grants which had previously been issued under Harken's Non-Qualified Incentive
Stock Option Plan. (See "Certain Transactions - Purchase Grant Acquisition.").
Mr. Quasha did not serve on this Special Compensation Committee due to a
conflict of interest. Directors who were officers, employees or paid
consultants of Harken received no separate compensation for their service as
Directors.
During 1993, each member of the Board of Directors attended or acted
upon at least seventy-five percent (75%) of (i) the meetings of the Board of
Directors (held during the period during which he was a Director), and (ii) the
meetings of the committees on which he served (held during the periods that he
served on such committees).
COMPENSATION OF DIRECTORS
During 1993, each Director who was not also an officer, employee or
paid consultant of Harken received a director's fee for each meeting of the
Board of Directors or one of its committees which he attended in the amount of
$2,000. The aggregate amount paid to the Directors during 1993 pursuant to
such arrangement was $8,000. Directors who were also officers, employees or
paid consultants of Harken received no separate compensation for service as
Directors.
CERTAIN MATTERS INVOLVING DIRECTORS AND EXECUTIVE OFFICERS
Pursuant to the terms of a consulting agreement dated September 29,
1992, Mr. Raymond, a Director of Harken, serves as a full time consultant to
Harken and in such role advises and consults with management on various
matters. The agreement provided that for a period of two years beginning on
February 16, 1993 Mr. Raymond would receive $200,000 per year as compensation
for the consulting services rendered thereunder, be entitled to benefits under
Harken's group health, disability and life insurance for its employees, be
eligible to participate in Harken's 401 (k) Savings Plan and 125 Cafeteria Plan
and be nominated by Harken to its Board of Directors. Harken further provides
an office and certain office support for Mr. Raymond's use in Walnut Creek,
California. At the 1993 Annual Shareholders Meeting Mr. Raymond was elected
as a Class C Director which term expires in 1996. (See "Certain Transactions
- - Certain Matters Involving Officers and Directors").
As of September 29, 1992, Harken entered into an agreement with Mr.
Risien, which provided that for a period of two years beginning on February 16,
1993, Mr. Risien would receive $200,000 per year as compensation, hold a
position as an executive officer of Harken and be nominated by Harken to its
Board of Directors. This agreement was amended as of December 29, 1993 to
provide that for the remaining term of this agreement Mr. Risien would serve as
a consultant to Harken. In such capacity he will receive the same base
compensation as previously provided. In addition, this amendment provided
that Mr. Risien would be eligible to continue to participate in Harken's
employee medical insurance, disability insurance, life insurance, 401(k)
Savings Plan, and 125 Cafeteria Plan. Harken further provides reimbursement
for expenses relating to Mr. Risien's office and office support in San
Antonio, Texas. Mr. Risien was elected as a Class C Director at the 1993
Annual Shareholders Meeting which term expires in 1996. (See "Certain
Transactions - Certain Matters Involving Officers and Directors").
Mr. Kettenbrink provided occasional services to Harken during 1993
through his environmental consulting firm, Landmark Environmental, Inc.
("Landmark"). The total of such fees paid during 1993 to Mr Kettenbrink
and/or Landmark pursuant to such services rendered was $4,900. Harken has no
contract or agreement with Landmark to
7
<PAGE> 186
utilize its services in preference to any other firm rendering similar
services.
Mr. Ameen has served as a part-time consultant to Harken under a
consulting agreement since 1989. Mr. Ameen primarily consults with Harken
concerning Harken's operations in Bahrain and/ or other Middle East projects
and related matters. During 1993 Mr. Ameen was paid a total of $20,000 in
consulting fees pursuant to such arrangement. This agreement may be
terminated by either party by giving notice to the other prior to the annual
renewal date for such agreement being December 31st. Unless so terminated the
agreement will automatically renew for a subsequent one year term under the
prior year terms.
EXECUTIVE OFFICERS OF HARKEN
The officers of Harken are elected annually by the Board of Directors
at the first meeting of the Board of Directors held following each Annual
Meeting of Stockholders, or as soon thereafter as necessary and convenient, in
order to fill vacancies or newly-created offices. Each officer holds office
until the earlier of such time as his or her successor is duly elected and
qualified, his or her death or he or she resigns or is removed from office.
Any officer or agent elected or appointed by the Board of Directors, may be
removed by the Board of Directors whenever, in its judgment, the best interests
of Harken will be served thereby, but such removal will be without prejudice to
the contract rights, if any, of the person so removed.
The executive officers of Harken as of April 15, 1994, their ages and
positions held with Harken and their business experience for the past five
years are listed in alphabetical order below.
<TABLE>
<CAPTION>
Name Age Position Held With Harken
---- --- -------------------------
<S> <C> <C>
Larry E. Cummings 41 Vice President, Secretary and
General Counsel
Mikel D. Faulkner 44 Chairman of the Board of Directors
and Chief Executive Officer
Bruce N. Huff 43 Senior Vice President and Chief
Financial Officer
Richard H. Schroeder 49 President, Chief Operating Officer and Director
Stephen C. Voss 44 Senior Vice President
</TABLE>
Larry E. Cummings - employed by Harken for over five years; Vice
President, Secretary and General Counsel of Harken from 1983 to present;
previously served as Senior Legal Counsel to Harken from 1978 to 1983.
Mikel D. Faulkner - Chairman of the Board of Harken since February
1991; Director of Harken; CEO of Harken since 1982 and President of Harken
between 1982 and 1993.
Bruce N. Huff - employed by Harken in May 1990 as Senior Vice
President and Chief Financial Officer; from 1976 to May 1990 Mr Huff was an
officer of Davis, Kinard & Co., a public accounting firm in Abilene, Texas.
Richard H. Schroeder - employed by Harken as President and Director
since March 11, 1994; from November 1990 to March 1994 Mr. Schroeder was
President and owner of RHS Management, a management consulting firm; from
January 1983 to November 1990 Mr. Schroeder was President of Rosewood
Resources, Inc. a privately owned oil and gas exploration and production
company.
Stephen C. Voss - Senior Vice President from 1990 to present;
President of Harken International, Ltd., Harken Resource Management
Corporation, Burns Drilling Company, Inc. and Supreme Well Service Company from
1990 to
8
<PAGE> 187
present; from 1981 to 1990 Mr. Voss was president of Reliant Drilling Company,
a drilling company.
COMPENSATION OF EXECUTIVE OFFICERS
The following table sets forth certain information regarding the
compensation paid during each of the last three (3) years to Harken's Chief
Executive Officer and its other executive officers in salary and other
compensation during 1993.
SUMMARY COMPENSATION TABLE
<TABLE>
<CAPTION>
Annual Compensation Long Term Compensation
--------------------------------------------- ----------------------
Name and Fiscal Other Annual Securities Underlying All Other
Principal Position Year Salary Bonus Compensation Options/SAR's (#) Compensation
- ------------------ ------ ------ ----- ------------ ----------------- ------------
<S> <C> <C> <C> <C> <C> <C>
Mikel D. Faulkner 1993 $165,688 $65,000(1) --- 91,686 $ 11,264 (3)
Chairman, 1992 $123,420 -- --- --- 8,728
and Chief Executive 1991 $161,137 -- --- --- --
Officer
Bruce N. Huff 1993 $139,145 8 --- --- $ 11,111 (4)
Sr. Vice President 1992 $111,675 $35,000(1) --- --- 33,333 (4)
and Chief Financial 1991 $122,235 $ 1,017 --- --- 33,333 (4)
Officer
Stephen C. Voss 1993 $ 99,961 $25,089(1) --- --- $ 20,942 (5)
Sr. Vice President 1992 $ 94,206 -- --- --- --
1991 $108,200 $ 1,230 --- --- --
Larry E. Cummings 1993 $101,062 $ 89 --- 42,845 --
Vice President 1992 $ 74,223 $25,000(1) --- --- --
Secretary and 1991 $111,999 $ 1,017 --- --- --
General Counsel
Harvey V. Risien, Jr. 1993 $188,750 -- --- --- $ 3,420 (7)
President (6) 1992 -- -- --- --- --
1991 -- -- --- --- --
Monte N. Swetnam 1993 $ 95,807 -- --- --- $ 52,500(10)
(Former) Exec.Vice 1992 $ 98,586 $92,000(9) --- --- --
President (8) 1991 $149,555 $46,000 --- --- --
</TABLE>
(1) This amount shown as Bonus represented a portion of certain salary
reductions which these executive officers had voluntarily agreed to
make as an accommodation to Harken during 1992. Certain executive
officers elected to receive this payment in December 1992 and others
elected to receive it in January 1993.
(2) These stock options were granted during 1993 in connection with a
transaction wherein Harken reacquired restricted shares of common
stock held by these executive officers and issued these options which
transaction was determined by the Special Compensation Committee to be
economically neutral to both Harken and the employee (see "Certain
Transactions-Purchase Grant Acquisition").
(3) This includes $6,497 for use of a company car, and $4,767 for a
portion of his 1992 salary which was deferred until 1993.
(4) These amounts shown are scheduled debt forgiveness of a loan made to
Mr. Huff at his employment related to moving expenses.
9
<PAGE> 188
(5) This amount includes $17,500 of debt forgiveness and $3,442 relating
to use of a company car.
(6) Mr. Risien resigned as President of the Company effective December
29, 1993. (See "Certain Matters Involving Directors and Executive
Officers" for a discussion of an amendment to Mr. Risien's
employment agreement effected in connection with such resignation).
(7) Car allowance.
(8) Mr. Swetnam resigned as Executive Vice President of the Company
effective May 15, 1993.
(9) Includes Mr. Swetnam's bonus for both 1992 and 1993 all paid in 1992.
(10) This amount was paid to Mr. Swetnam as a consulting fee in connection
with his severance from Harken following his resignation.
OPTION/SAR GRANTS IN LAST FISCAL YEAR
<TABLE>
<CAPTION>
Number of % of Total
Securities Options/SAR's
Underlying Granted to
Options/SAR's Employees Exercise Basis Expiration Grant Date
Name Granted In Fiscal Year Price ($/sh) Date Present Value(1)
- ---- ---------------- -------------- -------------- ---------- ----------------
<S> <C> <C> <C> <C> <C>
Mikel D. Faulkner (2) 91,686 25.8647% $1.50 09/01/03 $74,266
Bruce N. Huff -- -- -- -- --
Stephen C. Voss -- -- -- -- --
Larry E. Cummings (2) 42,845 12.0866% $1.50 09/01/03 $34,704
Harvey V. Risien Jr. -- -- -- -- --
Monte N. Swetnam -- -- -- -- --
</TABLE>
- -------------------
(1) The Grant Date Present Value of these options was calculated
based upon the Black-Scholles valuation method which calculated such
present value as $.81 per option. This analysis took into
consideration the grant date market price of the common stock of
$1.063 per share, the 10 year life of such options vesting over four
years and a market interest rate factor of 6.20%.
(2) The Options granted during 1993 to these executive officers were in
connection with Harken's termination of outstanding Purchase Grants
held by these parties in a transaction the Special Compensation
Committee found to be economically neutral (see "Certain Transactions
- Purchase Grant Acquisition").
AGGREGATED OPTION EXERCISES IN LAST FISCAL YEAR
<TABLE>
<CAPTION>
Number of Securities Value of Unexercised
Underlying Unexercised In-The-Money
Number of Options/SAR's at Option/SAR's
Shares/SAR's Fiscal Year End at Fiscal Year End (1)
Acquired on Value ---------------- ----------------------
Name Exercise Realized Exercisable Unexercisable Exercisable Unexercisable
- ---- ------------ -------- ------------ ------------- -------------- -------------
<S> <C> <C> <C> <C> <C> <C>
Mikel D. Faulkner --- --- 316,242 -- $28,070 --
Bruce N. Huff --- --- 50,000 -- -0- --
Stephen C. Voss --- --- 40,000 -- -0- --
Larry E. Cummings --- --- 110,064 -- $ 8,402 --
Harvey V. Risien Jr. --- --- 0 -- -0- --
Monte N. Swetnam --- --- 45,947 -- -0- --
</TABLE>
- --------------------
(1) The closing price for the common stock as reported to the American
Stock Exchange as of December 31, 1993 was $1.125. Value was
calculated on the basis of the difference between the option
exercise price and such closing price multiplied by the number of
shares of common stock underlying the option.
10
<PAGE> 189
CERTAIN TRANSACTIONS
The following table sets forth the largest amount of indebtedness owed
to Harken by each of its Directors and Executive Officers as well as from one
former subsidiary and one Limited Partnership of which a subsidiary of Harken
served as manager during a portion of 1993. The table further shows the
amount of total indebtedness owed to Harken by each of these parties as of
April 15, 1994:
<TABLE>
<CAPTION>
Name and Largest Amount
Relationship with of Indebtedness Total Current
Harken During 1993 Indebtedness
-------- ------------- -------------
<S> <C> <C>
Mikel D. Faulkner $1,117,937(1) $520,000(2)
Executive Officer, Director
Bruce N. Huff $ 11,111(3) $ 0
Executive Officer
Stephen C. Voss $ 20,942 $ 0
Executive Officer
Larry E. Cummings $ 277,050(4) $ 6,000
Executive Officer
Harvey V. Risien, Jr. $ 19,980 $ 0
Former Executive Officer,
Director
Monte N. Swetnam $ 129,600(5) $ 0
Former Executive Officer
Alan G. Quasha $ 597,937(4) $ 0
Director
E-Z Serve Corporation $4,160,207(6) $870,000
Former Subsidiary
Harken Anadarko Partners, L.P. $ 404,000 $163,000(7)
Former managed Limited
Partnership
</TABLE>
-------------------------
(1) This balance includes $597,937 principal amount due to Harken under
certain non-recourse promissory notes which were given to Harken by
Mr. Faulkner in connection with the prior exercise of stock options
and purchase of restricted shares of Common Stock. These notes were
extinguished in full in connection with a transaction wherein Harken
reacquired these restricted shares of Common Stock and issued new
stock options in a transaction the Special Compensation Committee
found to be economically neutral (see "Certain Transactions - Purchase
Grant Acquisition").
(2) Represents a non-recourse note in the amount of $520,00 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 Option Plan. Subsequent to December
31, 1993, an agreement was reached with Mr. Faulkner whereby the
note, together with accrued interest, is scheduled to be forgiven
equally over three installments dated April 1994, July 1995 and
December
11
<PAGE> 190
1996, with each installment of such forgiveness being contingent
upon the officer's continued employment through the date of each such
installment. In addition the expiration date of the options held as
security for such note was extended until March 11, 2001.
(3) Represents the remaining balance of a loan made to Mr. Huff for
moving expenses related to his employment with Harken in 1990. This
remaining balance was forgiven during 1993.
(4) These balances reflect the principal amounts due to Harken from these
parties under certain non-recourse promissory notes which were given
by such parties to Harken in connection with their prior exercise
of stock options and purchase of restricted shares of Common Stock.
These notes were extinguished in full in connection with a transaction
wherein Harken reacquired these restricted shares of Common Stock and
issued new stock options in a transaction the Special Compensation
Committee found to be economically neutral (see "Certain Transactions-
Purchase Grant Acquisition").
(5) This balance represented the principal amount due to Harken from Mr.
Swetnam under certain non-recourse promissory notes which were given
by him to Harken in connection with his prior exercise of stock
options and purchase of restricted shares of common stock. These
notes were terminated and the shares of Common Stock held as security
thereunder transferred to Harken's treasury upon Mr. Swetnam's
resignation.
(6) Prior to April 30, 1991, E-Z Serve was a subsidiary of Harken. Mr.
Quasha is a director of Harken and E-Z Serve. Additionally, Mr.
Quasha also serves as a director of Quadrant Capital Corp., which has
a significant beneficial ownership in each of Harken and E-Z Serve,
and Mr. Eisenson, a Director of Harken, serves as a director and
officer of Aeneas Venture Corporation, which has a significant
beneficial ownership interest in each of Harken and E-Z Serve. As
part of a restructuring by E-Z Serve, Harken tendered and released to
E-Z Serve a 12% secured subordinated debenture in the principal
amount of $3,136,000 issued by E-Z Serve together with accrued
interest thereon of $154,207, 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 "Certain Transactions -
E-Z Serve Restructuring").
(7) Harken Anadarko Partners, L.P. ("HAP") was during 1993 an affiliate
of Aeneas Venture Corporation , a major shareholder of Harken. Mr.
Eisenson, a Director of Harken, is a director and officer of Aeneas
Venture Corporation. (See "Ownership of Common Stock - Security
Ownership of Certain Beneficial Owners"). Until May 1993 a
subsidiary of Harken acted as the manager of HAP. The amounts of
indebtedness shown represents net remaining activity during 1993
between Harken and HAP.
12
<PAGE> 191
Purchase Grant Acquisition. The Board of Directors at its regular
meeting held on April 7, 1993 determined that it would be in Harken's best
interest to effect a plan to reacquire and/or cancel all of the outstanding
Purchase Grant Shares which had previously been issued. Purchase Grant Shares
had previously been issued under Harken's Incentive Non-Qualified Stock Option
Plan (the "Non-Qualified Plan").
In the years 1986, 1988 and 1989, certain of the optionees under the
Non-Qualified Plan were given the election upon being granted options to have
their options made immediately exercisable on condition they immediately
exercised such options and purchased the shares. The Board of Directors
determined in making such grants that, as a result of the restricted nature of
the shares and the lack of any rights on the part of the optionee to cause
such shares to be registered, a fair and reasonable exercise price per share
would be 60% of the closing price for Harken's publicly traded shares on the
date of such grant. These individuals were further given the opportunity to
borrow the funds from Harken to exercise such options and purchase such shares.
In that event, the optionee gave a non-recourse promissory note bearing
interest at 5% per annum to Harken and Harken retained the shares as
collateral. These notes were due eight years from making or upon termination
of such optionee's employment with Harken. In 1986, 1988, and 1989
certain parties, including certain officers and directors, elected to
purchase Common Stock under these terms (which shares are referred to as the
"Purchase Grants"). Upon maturity of such notes given , if not repaid by
the maker, Harken could look only to the shares of Common Stock held as
security for satisfaction of such indebtedness.
The Board of Directors determined that it would be to Harken's
benefit to terminate all outstanding Purchase Grants and the associated related
party debt. A Special Compensation Committee was established by the Board
consisting of Mr. Eisenson and Mr. Raymond, both of whom were disinterested
Board members with regard to such Purchase Grants. This Special Committee
was authorized and directed by the Board to implement a plan and means to
terminate these Purchase Grants on an economically neutral basis such that
neither the individual holding such Purchase Grants nor Harken would realize
an immediate benefit or loss from the transaction implemented.
The Special Committee then engaged an independent consulting firm to
review the Purchase Grants and to independently determine a value for such
Purchase Grants as well as to make recommendations to the Special Committee
with regard thereto.
The consulting firm made its report to the Special Committee on April
28, 1993 and responded with a supplemental report concerning additional
information requested by the Committee on July 1,1993. In its report,
the consulting firm provided a valuation of each separate Purchase Grant
which was outstanding to any officer, employee or director of Harken. The
consulting firm also established a valuation of new stock options that could be
issued to each individual upon surrender of his Purchase Grants, which new
stock options would be approximately equal in present value, as determined by
such consulting firm through a Black-Scholles analysis, to the Purchase Grants
being surrendered.
The Special Committee subsequently approved and adopted the plan which
was presented to each holder of Purchase Grants on August 27, 1993 under
which each holder of Purchase Grants surrendered them all to Harken and the
associated note(s) would be terminated and such surrendering party would be
granted certain new stock options which had been determined by the consulting
firm to have a present value equal to the Purchase Grants being surrendered.
These new stock options were issued under the Non-Qualified Plan,
were immediately vested on issuance, would expire in ten years as provided in
the Non-Qualified Plan and were issued at an exercise price of $1.50 per
share, which constituted a premium over the then current market price for
Harken's common stock.
Subsequently, all individuals then holding Purchase Grants
surrendered all of their Purchase Grant shares to Harken. As a result Harken
reacquired 704,000 common shares into treasury and issued 274,483 new stock
options. (see "Compensation of Executive Officers").
The following table sets out the terms of the Purchase Grants and
related notes which were terminated by each Executive Officer and/or Director
of Harken:
13
<PAGE> 192
<TABLE>
<CAPTION>
Principal Amount
Name and Relationship Purchase Grant Purchase Price of Plus Accrued Interest Maturity Date
with Harken Shares Purchase Grant Shares of Promissory Note(s) of Promissory Note
- ----------- ------ --------------------- --------------------- ------------------
<S> <C> <C> <C> <C>
Mikel D. Faulkner 60,000 $1.20 $ 93,900 December, 1994
Executive Officer, 75,000 $2.5125 $233,188 March, 1996
Director 100,000 $3.375 $405,000 January, 1997
Alan G. Quasha 60,000 $1.20 $ 93,900 December, 1994
Director 75,000 $2.5125 $233,188 March, 1996
100,000 $3.375 $405,000 January, 1997
Larry E. Cummings 35,000 $1.20 $ 54,775 December, 1994
Executive Officer 24,000 $2.5125 $ 74,621 March, 1996
50,000 $3.375 $202,499 January, 1997
</TABLE>
E-Z Serve Restructuring. Harken held a 12% secured subordinated
debenture in the principal amount of $3,136,000, from E-Z Serve Corporation
("E-Z Serve"), a former subsidiary of Harken, which included $1,336,000 which
was issued by E-Z Serve in 1991 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 including affiliates of Quadrant Capital Corp. and Aeneas Venture
Corporation, both major shareholders of Harken (see "Ownership of Common Stock -
Security Ownership of Certain Beneficial Owners"), as well as certain agreements
with Harken. Under the exchange which was made between E-Z Serve and Harken,
Harken 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 Stock
held by Harken and made a capital contribution to E-Z Serve for $336,000 in
cash. In exchange for the above matters, Harken received 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 and
received an agreement from E-Z Serve which would have allowed Harken to assist
E-Z Serve in identifying purchasers for the shares of Harken Common Stock which
were 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 statement and did not require Harken's assistance nor
did Harken earn any fee in connection therewith.
Acquisition of Chuska Resources Corporation. Effective February 15,
1993, Harken consummated a merger between a wholly- owned subsidiary and Chuska
Resources Corporation ("Chuska"), a publicly held corporation, pursuant to which
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 through this
transaction. Mr. Raymond and Mr. Risien, who were each former executive
officers, directors and major shareholders of Chuska, agreed to exchange their
Chuska shares on the same terms as were offered to all other Chuska
shareholders. Mr. Raymond thereby initially acquired 5,998,641 shares of Harken
Common Stock and Mr. Risien thereby initially acquired 5,999,525 shares of
Harken Common Stock. In connection with such transaction Harken also entered
into certain consulting and/or employment agreements with each of Mr.
Raymond and Mr. Risien, respectively. ( See "Certain Transactions - Certain
Matters Involving Directors and Executive Officers").
Sale of HAP. On December 17, 1992, Harken, through its subsidiary
Harken Exploration Company
14
<PAGE> 193
("HEXCO"), entered into a Purchase and Sale Agreement (the "HAP Agreement"),
pursuant to which HEXCO sold its 12% general partner's interest in Harken
Anadarko Partners, L.P. ("HAP") to Aeneas Energy Corporation ("AEC"), an
affiliate of Aeneas Venture Corporation, on December 30, 1992. Aeneas Venture
Corporation is a major shareholder of Harken. (See "Ownership of Common Stock
- - Security Ownership of Certain Beneficial Owners").
Under the terms of the HAP Agreement, Harken continued to manage the
oil and gas property interests of HAP and operate certain of these
partnership properties. Harken was paid by HAP $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 effective May 1, 1993.
Certain Matters Involving Directors and Executive Officers. Mr.
George W. Bush resigned from Harken's Board of Directors effective October 26,
1993 and terminated the Consulting Agreement under which he had served as a
consultant to Harken since April 1987.
Pursuant to the terms of a consulting agreement dated September 29,
1992, Mr. Raymond, a Director of Harken, serves as full time consultant to
Harken and in such role advises and consults with management on various
matters. The agreement provided that for a period of two years beginning on
February 16, 1993 Mr. Raymond would receive $200,000 per year as compensation
for the consulting services rendered thereunder, be entitled to benefits
under Harken's group health, disability and life insurance as provided for its
employees, be eligible to participate in Harken's 401(k) and 125 Cafeteria
Plans and be nominated by Harken to its Board of Directors. Harken further
provides an office and certain office support for Mr. Raymond's use in Walnut
Creek, California. On February 1, 1994, Mr. Raymond agreed as an
accommodation to Harken to reduce the annual amount of this compensation and
extend the term of this contract accordingly.
As of September 29, 1992, Harken entered into an agreement with Mr.
Risien, which provided that for a period of two years beginning on February
16, 1993, Mr Risien would receive $200,000 per year as compensation, hold a
position as an executive officer of Harken and be nominated by Harken to its
Board of Directors. Upon Mr. Risien's resignation as an executive officer in
December 1993 this contract was amended to provide for Mr. Risien to serve as a
consultant instead of an executive officer and to be entitled to continue
under Harken's group health, disability and life insurance as provided for its
employees as well as participate in Harken's 401(k) and 125 Cafeteria Plans.
Harken further provides reimbursement for expenses relating to Mr. Risien's
office and office support in San Antonio, Texas.
General. All of the foregoing transactions were entered into after
arms-length negotiations. Directors of Harken who had a direct or indirect
interest in any such transaction other than as a director of Harken did not
participate in, and were not consulted in connection with, the meetings or
deliberations of the Board of Directors approving such transactions.
15
<PAGE> 194
COMPENSATION COMMITTEE INTERLOCKS
AND INSIDER PARTICIPATION
Messrs. Quasha and Eisenson were during 1993, and have been since the
beginning of fiscal 1992, members of the Compensation Committee of Harken's
Board of Directors. Mr. Quasha was an executive officer of Harken prior to
1991, and was indebted to Harken during 1993 in the amount of $597,937,
which indebtedness was incurred in connection with his exercise of stock
options for Purchase Grants and was evidenced by promissory notes which bear
interest at 5% per annum and are due eight years after their making (See
"Certain Transactions - Indebtedness" and "Certain Transactions - Purchase
Grant Acquisitions"). Additionally, Mr. Quasha currently is, and Mr. Eisenson
was, a director of each of E-Z Serve Corporation ("E-Z Serve") and Tejas Power
Corporation ("Tejas"), former subsidiaries of Harken. Mr. Quasha also serves
as a director of Quadrant Capital Corp., which has a significant beneficial
ownership interest in each of Harken, E-Z Serve and Tejas, and Mr.
Eisenson serves as a director and officer of Aeneas Venture Corporation, which
has a significant beneficial ownership interest in each of Harken, E-Z Serve
and Tejas. Harken has entered into several significant transactions with E-Z
Serve and Aeneas Venture Corporation since the beginning of fiscal 1993. (See
"Certain Transactions - E-Z Serve Restructuring" and "Certain Transactions -
Sale of HAP"). Harken disclaims being an affiliate of either E-Z Serve or
Tejas.
Additionally, during the 1993 fiscal year, the Compensation Committee
was supplemented by the Special Compensation Committee which had been
established by the Board of Directors to consider and effect a termination of
the previously issued Purchase Grants. The Special Compensation Committee
consisted of Messrs. Eisenson and Raymond. Mr. Raymond, formerly an executive
officer, director and major shareholder of Chuska Resources Corporation,
acquired 5,998,641 shares of Harken Common Stock in connection with Harken's
acquisition of Chuska. In addition, in connection with such acquisition, Mr.
Raymond and Harken entered into a consulting agreement which provided that for
a period of two years beginning on February 16, 1993, Mr. Raymond would receive
$200,000 per year as compensation for the consulting services rendered
thereunder, be entitled to benefits under Harken's group health, disability and
life insurance as provided for its employees, be eligible to participate in
Harken's 401(k) and 125 Cafeteria Plans and be nominated by Harken to its Board
of Directors. On February 1, 1994, Mr. Raymond agreed as an accommodation to
Harken to reduce the annual amount of this compensation and extend the term of
this contract accordingly. (See "Certain Transactions").
16
<PAGE> 195
PERFORMANCE OF THE COMMON STOCK
The graph below compares the cumulative total return of Harken's
Common Stock to the S&P 500 Index and the Value Line Petroleum Producing
Companies Index.
(CHART)
COMPARISON OF CUMULATIVE SHAREHOLDER RETURN 1988 - 1993
<TABLE>
<CAPTION>
1988 1989 1990 1991 1922 1993
---- ---- ---- ---- ---- ----
Dollars
<S> <C> <C> <C> <C> <C> <C>
Harken Energy Corp. 100 87 22 89 57 20
S&P 500 100 132 127 166 179 197
Value Line Petroleum Producing Companies 100 140 114 103 108 119
=== === === === === ===
</TABLE>
Data Source: S&P Compustat Services
- -------------------------
(1) In 1990, through a rights offering to its stockholders, Harken
disposed of its gasoline retail and wholesale distribution subsidiary (E-Z
Serve Corporation) and its natural gas gathering, transmission and storage
subsidiary (Tejas Power Corporation).
The closing sale price of Harken's Common Stock as reported by the
American Stock Exchange on April 15, 1994 was $1.875 per share.
COMPLIANCE WITH SECTION 16(A) OF THE SECURITIES EXCHANGE ACT OF 1934
Section 16(a) of the Securities Exchange Act of 1934, as amended (the
"Exchange Act"), requires Harken's Directors and executive officers, and
persons who own more than ten percent of a registered class of Harken's equity
securities, to file with the Securities and Exchange Commission (the "SEC")
initial reports of ownership and reports of changes in ownership of Common
Stock and other equity securities of Harken. Directors, executive officers
and greater than ten-percent stockholders are required by SEC regulations to
furnish Harken with copies of all Section 16(a) forms they file.
Based solely on its review of the copies of such forms and written
representations from certain reporting persons, Harken believes that all
filing requirements applicable to its Directors, executive officers and
persons who own more than 10% of a registered class of Harken's equity
securities have been complied with during 1993.
PROPOSAL TWO: INDEPENDENT PUBLIC ACCOUNTANTS
The independent public accountants for Harken have been Arthur
Andersen & Co. since fiscal year 1979. The
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Audit Committee has recommended to the Board of Directors that Arthur Andersen
& Co. be nominated as independent public accountants for fiscal year 1994, and
the Board of Directors approved the recommendation.
Unless otherwise specified, shares represented by Proxies will be
voted FOR ratification of the appointment of Arthur Andersen & Co. as
independent public accountants for fiscal year 1994. A representative of
Arthur Andersen & Co. is expected to attend the Meeting with the opportunity
to make a statement if such representative desires to do so and to be available
to respond to appropriate questions.
THE BOARD OF DIRECTORS RECOMMENDS A VOTE FOR THIS PROPOSAL.
OTHER BUSINESS
Management knows of no other business that will be presented for
consideration at the Meeting, but should any other matters be brought before
the Meeting, it is intended that the persons named in the accompanying Proxy
will vote such Proxy at their discretion.
STOCKHOLDER PROPOSALS FOR 1994 ANNUAL MEETING
Any stockholder desiring to present a proposal to the stockholders at
the 1995 Annual Meeting of Stockholders, which currently is expected to be
scheduled in June, 1995, must transmit such proposal to Harken so that it is
received by Harken at its principal executive offices to the attention of the
Corporate Secretary on or before December 23, 1994. All such proposals should
be in compliance with applicable Securities and Exchange Commission
regulations.
By Order of the Board of Directors
Larry E. Cummings,
Secretary
Grand Prairie, Texas
April 22, 1994
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COMPENSATION COMMITTEE REPORT ON
EXECUTIVE COMPENSATION
The Compensation Committee is charged with reviewing and making
recommendations to the Board of Directors regarding cash compensation, granting
of stock options and other compensation to be paid to Harken's executive
officers. During the 1993 fiscal year the Compensation Committee was
supplemented by the Special Compensation Committee which had been established
by the Board of Directors to consider and effect a termination of the
previously issued Purchase Grants (See "Certain Transactions - Purchase Grant
Acquisition").
In establishing annual compensation for executive officers, the
Compensation Committee takes into consideration many factors in making a
determination of aggregate compensation. Such factors during 1993
included; 1) the financial results of Harken during the prior year; 2) the
performance of Harken's stock in the public market; 3) prior compensation paid
to such executives over the past five years; 4) compensation of executive
officers employed by companies comparable to Harken; 5) the achievements of
management in completing significant projects during the year; and 6)
management's dedication and commitment to the support of Harken.
The Committee has established a policy of aligning management's
benefits and incentives with those of the stockholders of Harken. In setting
compensation the Committee utilizes its subjective judgment based upon these
factors referenced above and does not apply a formula and/or assign a weight to
each factor considered when establishing compensation levels.
The compensation paid in 1993 to Harken's Chief Executive Officer, Mr.
Faulkner, included annual salary, use of company car, payment for unused
vacation days and options granted in connection with the termination of the
previously issued Purchase Grants, which options the Committee found to be of a
present value equal to the Purchase Grants held by Mr. Faulkner which were
terminated (see "Certain Transactions - Purchase Grant Acquisition" for a
discussion of this transaction). Mr. Faulkner had previously voluntarily
reduced his salary during 1992 as an accommodation to Harken. Effective
January 1, 1993, his salary was increased back to $148,000 which was the level
prior to the voluntary reduction.
The Committee considered in making its decisions on compensation, the
relationship between such compensation and corporate performance in all areas
of its operations. The Committee used its subjective judgment in weighing
these considerations along with the others referenced above.
During this past year, the Committee considered the granting of stock
options to members of Executive Management. After discussion and consultation
with the Board it was determined not to issue new stock options to executive
management as compensation during 1993 with the exception of these options
which were granted by the Special Compensation Committee in connection with
Harken's termination of the outstanding Purchase Grants. (See "Certain
Transactions - Purchase Grant Acquisition").
All discussions by the Compensation Committee relating to the
compensation of Harken's executive officers are customarily reviewed by the
full Board of Directors, except for decisions about awards under certain of
Harken's Stock Option Plans, which must be made solely by the Compensation
Committee to satisfy Exchange Act Rule 16b-3.
By: Michael R. Eisenson
Alan G. Quasha
Donald W. Raymond
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<PAGE> 198
X PLEASE MARK YOUR
VOTES AS IN THIS
EXAMPLE.
THE SHARES REPRESENTED BY THIS PROXY WILL BE VOTED AS DIRECTED. WHERE NO
DIRECTION IS GIVEN, THE SHARES WILL BE VOTED "FOR" MATTERS (1) AND (2).
FOR WITHHELD
1. Election of Three ( ) ( )
Class A Directors
(see reverse side)
FOR AGAINST ABSTAIN
2. Ratification of the appointment of ( ) ( ) ( )
Arthur Andersen & Co. as independent
public accountants for Harken for
fiscal 1994.
3. In the discretion of the proxies on any ( ) ( ) ( )
other matters as may properly come
before the meeting or any adjournment(s)
thereof.
( ) Please mark this box if you
will personally be attend-
ing the meeting.
( ) Change of Address
SIGNATURE(S)______________________________ DATE_________________
SIGNATURE(S)______________________________ DATE_________________
NOTE: Please sign exactly as name appears hereon. Joint owners should each
sign. When signing as attorney, executor, administrator, trustee or
guardian, please give full title as such.
PROXY
HARKEN ENERGY CORPORATION
PROXY SOLICITED BY THE BOARD OF DIRECTORS
FOR ANNUAL MEETING OF STOCKHOLDERS TO BE HELD JUNE 3, 1994
The undersigned hereby (1) acknowledges receipt of the Notice of Annual
Meeting of Stockholders of Harken Energy Corporation ("Harken") to be held June
3, 1994, and (2) constitutes and appoints Bruce N. Huff and Larry E. Cummings,
and each of them, attorneys and proxies of the undersigned, with full power of
substitution to each, for and in the name, place, and stead of the undersigned,
to vote, and to act with respect to, all of the shares of Common Stock of
Harken standing in the name of the undersigned or with respect to which the
undersigned is entitled to vote and act at that meeting and at any meetings to
which that meeting is adjourned, as follows:
(change of address)
Election of Three Class "A" directors of _________________________________
Harken, to hold office in accordance
with Harken's Certificate of Incorporation _________________________________
and Bylaws until the 1997 Annual Meeting
of Stockholders: _________________________________
Mikel D. Faulkner, Alan G. Quasha and _________________________________
Edwin C. Kettenbrink, Jr. (If you have written in the above
space, please mark the
corresponding box on the reverse
side of this card.)
YOU ARE ENCOURAGED TO SPECIFY YOUR CHOICES BY MARKING THE APPROPRIATE BOXES
(SEE REVERSE SIDE), BUT YOU NEED NOT MARK ANY BOXES IF YOU WISH TO VOTE IN
ACCORDANCE WITH THE BOARD OF DIRECTORS' RECOMMENDATIONS. THE PROXY COMMITTEE
CANNOT VOTE YOUR SHARES UNLESS YOU SIGN AND RETURN THIS CARD.
SEE REVERSE
SIDE
<PAGE> 199
APPENDIX H
SEARCH ANNUAL REPORT
<PAGE> 200
SECURITIES AND EXCHANGE COMMISSION
Washington, D. C. 20549
FORM 10-K
Annual Report pursuant to Section 13 or 15(d) of
the Securities Exchange Act of 1934 (Fee Required)
FOR THE FISCAL YEAR ENDED DECEMBER 31, 1994.
Commission File No. 0-18837
SEARCH EXPLORATION, INC.
(Exact name of registrant as specified in its charter)
Delaware 75- 2278362
(State or other jurisdiction of (I.R.S.Employer Identification No.)
incorporation or organization)
1500 THREE LINCOLN CENTRE, 5430 LBJ FREEWAY, DALLAS, TX
75240-2387
Registrant's telephone number, including area code: (214) 991-4100
Securities registered pursuant to Section 12(b) of the Act:
None
Securities registered pursuant to Section 12(g) of the Act:
COMMON STOCK, $0.05 PAR VALUE
(TITLE OF CLASS)
INDICATE BY CHECK MARK WHETHER THE REGISTRANT (1) HAS FILED ALL REPORTS
REQUIRED TO BE FILED BY SECTION 13 OR 15(D) OF THE SECURITIES EXCHANGE ACT OF
1934 DURING THE PRECEDING 12 MONTHS, AND (2) HAS BEEN SUBJECT TO SUCH FILING
REQUIREMENTS FOR THE LAST 90 DAYS.
YES X NO
AS OF DECEMBER 31, 1994, THE REGISTRANT HAD ISSUED AND OUTSTANDING 3,690,632
SHARES OF COMMON STOCK, $0.05 PAR VALUE, ITS ONLY CLASS OF VOTING STOCK. THE
AGGREGATE MARKET VALUE OF THE 2,995,624 SHARES OF COMMON STOCK HELD BY
NON-AFFILIATES OF THE REGISTRANT AS OF FEBRUARY 8,1995, WAS APPROXIMATELY
$1,996,224 (BASED UPON THE MEAN OF THE CLOSING BID AND ASKED PRICES ON NASDAQ
ON THAT DATE, $0.68 PER SHARE).
DOCUMENTS INCORPORATED BY REFERENCE:
NONE
INDICATE BY CHECK MARK IF DISCLOSURE OF DELINQUENT FILERS PURSUANT TO ITEM 405
OF REGULATION S-K IS NOT CONTAINED HEREIN, AND WILL NOT BE CONTAINED, TO THE
BEST OF REGISTRANT'S KNOWLEDGE, IN DEFINITIVE PROXY OR INFORMATION STATEMENTS
INCORPORATED BY REFERENCE IN PART III OF THE FORM 10-K OR ANY AMENDMENT TO THIS
FORM 10-K.
YES NO X
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<PAGE> 201
PART I
ITEM 1. BUSINESS
HISTORY
Search Exploration, Inc., (the "Company" or "Search" herein) is a
Delaware corporation, formed July 17, 1989 when three general and thirty
limited partnerships and Plano Petroleum Corporation, a publicly held
corporation, entered into several merger/exchange agreements subject to
requisite approvals of their respective limited partners and stockholders. In
November, 1989, the votes required by each of the thirty-three partnerships for
approval of the exchange offer were received and Plano's shareholders approved
the merger. The Company commenced operations on December 1, 1989 and its
common stock began trading on the over-the-counter market on February 8,
1990.The Company's business plan was developing oil and gas drilling prospects
for resale to others. However, on November 8,1994, the Company signed a Merger
Agreement with Harken Energy Corporation, subject to Shareholder's approval.
Note the Proxy Statement dated February 3,1995, and the brief description in
Item 1.
ACTIVITIES DURING 1994:
In 1993, the Search Board determined that it was inappropriate for the
Company to remain at its present size. Search's lack of critical mass had
precluded it from securing financing through numerous avenues which had been
pursued, including equity placements and offerings of equity, as well as debt
financing and debt offerings. The Search Board had determined that for Search
to remain at its present size a large portion of its revenues would ultimately
be required to fund Search's overhead and continued operations, which would not
be in the best interest of Search's Stockholders. Consequently, the Search
Board determined that Search either needed to identify and complete one or more
acquisitions of other small oil and gas exploration companies to achieve this
critical mass or to merge Search with a larger oil and gas exploration company.
I. PROPOSED TRANSACTION REQUIRING SHAREHOLDER APPROVAL
On November 8,1994, Search entered into a merger agreement with
Harken Energy Corporation. Harken is an independent oil and gas company based
in Dallas, Texas, which is publicly traded on the American Stock Exchange under
the symbol of "HEC." The merger agreement provides that Search will be merged
into a subsidiary of Harken in exchange for newly issued registered common
shares of Harken determined by dividing $0.8099 by the average closing price of
a share of Harken common stock over the 30 days immediately preceding a date
that is five trading days prior to the Special Shareholders' Meeting. In no
event will the Harken share price used to calculate the exchange ratio be
greater that $2.37( an exchange ratio of 0.3417390) or less than $1.27.(an
exchange ratio of 0.6377165).
In addition, Search shareholders will receive a non-transferrable
right to receive additional shares of Harken common stock and a possible cash
payment based upon a future valuation of oil and gas reserves subsequently
developed from certain Undeveloped Properties now owned by Search. The amount,
if any, of such additional shares of common stock and cash payment will not be
determined and distributed until after June 30,1996. Note the Undeveloped
Properties discussion in Item 2 below.
Upon consummation of the merger, each of Search's 575,000 outstanding
shares of preferred stock and certain corporate obligations of Search will be
exchanged for Harken common stock utilizing the same exchange ratio but using
$1.00 per share as the base to be divided by the average trading price.
As a part of the transaction, Harken will make an exchange offer for
all 989,000 outstanding options and warrants of Search for 750,000 warrants to
be issued by Harken exercisable at $1.82 per share of Harken common stock until
June 30,1996. Any outstanding Search options or warrants which are not
exchanged shall remain
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outstanding and, after the consummation of the merger, shall be exercisable for
Harken common stock on the same terms as set forth in the options and warrants.
Harken will file a registration statement with the Securities and
Exchange Commission covering the shares of common stock to be issued in both
the initial and subsequent transactions as soon as practicable. After the
registration statement is declared effective, the prospectus will also serve as
the proxy statement in connection with Search's Special Stockholder's Meeting
to be held to approve or disapprove the merger. It is currently anticipated
that this meeting will be held during April, 1995.
The transactions contemplated by the Merger Agreement are subject to
numerous conditions including the approval of the merger by all the preferred
stockholders and a majority of the holders of Search's common stock.
Consummation of the merger does not require the vote of Harken's stockholders.
II. ON GOING BUSINESS ACTIVITY
Search continues operations through various joint ventures and
diversified activities. A description and the status of these activities
follows:
(A) PROSPECT GENERATING ACTIVITY
Prospect generating activities provide a basis for expanding the oil
and gas assets of the Company, while minimizing initial drilling risks. Search
generates prospects both in-house through its wholly owned subsidiary,
McCulloch Energy, and through joint ventures with proven professional
individuals or companies. These joint ventures provide diversification and
advanced seismic techniques while maintaining maximum flexibility.
The Company's strategy has been to use available working capital to
participate in controlled risk prospect generation ventures which provide a
cash profit upon the sale of the prospect, plus a carried working interest in
the initial well on each prospect. Currently, the Company has $751,463 in these
undeveloped properties or 29% of total assets.
In 1994, the Company finalized two projects that had been internally
generated. The Provident City Prospect, in LaVaca County, Texas, a deep
Wilcox test, was sold to three large independent oil companies in
November,1994, and the initial well on the prospect is expected to begin
drilling in the second quarter of 1995. The second project is a 50% owned 3-D
Prospect in Throckmorton County, Texas, on which the Company anticipates
drilling the first of six possible drill site locations in the second quarter
of 1995.
The Company has participated in two prospect generating joint
ventures. On December 1, 1989, the Company entered into an oil and gas lease
acquisition and exploration agreement with Yuma Petroleum Company ("Yuma") of
Houston, Texas, a company otherwise unaffiliated with the Company. Yuma has
been active in the Gulf Coast area for approximately ten years and has
developed and sold many Gulf Coast prospects to major and independent oil
companies as well as others. The Yuma Venture employs 8 persons including oil
and gas landmen, geologists, geophysicists and engineers, all of whom have
substantial experience in the Gulf Coast area.
A three year agreement provided that the Company would contribute 50%
of Yuma's overhead and assembly costs, including acreage and seismic costs,
associated with approximately 12 to 15 prospects expected to be generated
during each year of the agreement. For its contribution, the Company receives
50 percent of all cash profits and 25% carried working interest in the
prospects developed and sold by Yuma. These prospects are in the Gulf Coast
area (excluding Louisiana after May 1, 1992) and have an average drilling
investment of approximately $ 90,040 per prospect attributable to the Company's
one-half interest. See Item 2 Properties for information concerning the
results of this program. The Yuma joint venture was terminated as of July 1,
1993, in order to allow the Company to expand its own prospect generating
activity, but it will take until the second quarter of 1995 to liquidate the
existing Yuma prospect inventory in an orderly manner.
In March 1990, the Company signed a joint venture agreement with Pecos
Petroleum Company, of Houston,Texas, which was subsequently terminated as of
December 31,1992. The last remaining prospect was drilled in the second quarter
of 1994, and was plugged and abandoned.
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As of December 31, 1994, the Company had a net remaining investment of
approximately $348,000 in the Yuma joint venture. The Company realized
aggregate net cash revenues of approximately $1,500,000 in 1994 from prospect
sales. The cash profit or losses on these prospects is not reflected in the
Statement of Operations of the Company, but as a reduction or increase in the
cost of the Proved Properties on the Balance Sheet.
During 1995, the Company contemplates a merger with Harken Energy and
consequently will only participate in working out of the existing prospect
inventory (Undeveloped Properties). This activity is subject to many factors
outside the Company's control. These factors include worldwide and domestic
economic conditions, the price of oil and gas, proximity to pipelines, the
supply and price of other energy forms, and the regulation of prices,
production, transportation and marketing by federal and state governmental and
administrative authorities.
UNDEVELOPED PROPERTIES
The following is an operational update through January 16, 1995, on
those prospects in the Company's Undeveloped Property account which is the
subject property relating to the contingent consideration provided for in the
proposed Merger Agreement and discussed above.
NEW TAITON, WHARTON COUNTY, TEXAS
Amerada Hess Petroleum, is the operator and 100% working interest
owner on this 2,200 acre prospect. Two of the first three wells drilled are
currently completed as gas wells. The Dorotik No. 1 is producing into the
pipeline at 2.7 MMCFPD plus 71 BOD from the lower Meek Sand after sand frac
stimulation, and Dorotik No. 2 is producing from the upper Meek Sand at 3
MMCFPD and 93 BOD without stimulation. It appears at least three more wells
will be needed to fully delineate the productive limits of the structure. The
Company has a 3.75 percent back-in working interest after payout on a well by
well basis on the prospect lands.
PROVIDENT CITY PROSPECT, LAVACA COUNTY, TEXAS
Cabot Oil and Gas, Seneca Energy Company and American Exploration
Company are the working interest partners. In addition to drilling a 14,000
foot Wilcox gas exploration well, the partners have subscribed to a 26 square
mile $600,000 3-D shoot covering an extended Prospect Area.
The first well may commence drilling early in the second quarter of
1995. The Company is carried through the drilling of the first well to casing
point for 14 percent. It must pay its share of completion costs and further
development costs if any.
TATUM SQUARE PROSPECT, WHARTON COUNTY, TEXAS
Tatum Square is a 974 acre, 10,000 foot Yegua exploratory prospect
which was sold in January, 1995 to Meridian Resources, Seneca Energy, and
Puchuta, all of Houston. The Company will recover its land and seismic costs
as well as a cash prospect fee and reserve a 5 percent carried interest to
casing point on the first well drilled.
KINGS CREEK PROSPECT, THROCKMORTON COUNTY, TEXAS
The Company has a 50 percent working interest in this 2,500+ acre 3-D
seismic prospect. Five separate carbonate mounds have been seismically
identified, and will be tested by five 4,500 foot wells. The first test may be
a joint well with offset acreage holders to the west.
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HANCOCK RANCH, COLORADO COUNTY, TEXAS
The Company participated in a 30 square mile, 3-D seismic program on
the 13,000 acre Hancock Ranch with objectives in Miocene (3,500'), Frio (to
6,500'), Yegua (to 10,000') and Wilcox sands (to 16,000'). No significant
Yegua nor Wilcox leads have been uncovered but numerous shallow Frio and
Miocene "Bright Spot/AVO" gas prospects have resulted. Three shallow wells have
been successfully drilled and a package of seven shallow Frio/Miocene "Bright
Spot/AVO" wells have recently been sold to various industry partners. These
seven wells should all be drilled during the first quarter of 1995. The Company
will attempt to sell its carried interest of 3.75% in these seven and any
future Shallow Frio wells.
SOUTHWEST SPEAKS PROSPECT, LAVACA COUNTY, TEXAS
This joint Yuma/Company Prospect, currently comprising 1,100 leased
acres, will be offered to industry partners, in February, 1995, to carry out a
3-D seismic program, focusing on the Middle Wilcox, at 13,000 to 15,000 feet.
GRACEY RANCH PROSPECT, COLORADO COUNTY, TEXAS
This 2,256 acre, seismically controlled prospect, is one half sold to
Seitel as well as Cox and Perkins Oil Company, who will spend approximately
$1,106,000 in 3-D shooting (25.3 square miles) to earn a 50 percent working
interest. Several other companies are now seriously considering the remaining
50 percent interest available. The Company would retain a carried working
interest of approximately 2.5%.
EASTERN SHELF PROJECT; NOLAN, COKE, AND TOM GREEN COUNTIES, TEXAS
The Company's largest three dimensional seismic technology (3-D)
exploration is on the Eastern Shelf of West Texas with Placid Oil Company of
Dallas, Texas. This Project consisted of 140 sections which have been shot and
interpreted utilizing 3-D , and the leasing of approximately 57,600 gross
acres. The Company holds a 25% working interest, or 14,850 net acres. Under an
eight well farmout agreement entered into in July, 1994, the Company received
an overriding royalty interest reverting to a half back-in working interest
after payout on an aggregate basis on the farmed-out acreage. The first two
wells of the farmout were two wells previously drilled, of which one had been
plugged and abandoned and the other had marginal daily production. The Company
retained its 25% interest in the remainder of the acreage not included in the
eight 160 acre farmout locations.
To date, three 6,500 foot Pennsylvanian oil wells have been completed
with poor to moderate results, 20 to 60 barrels of oil per day. Two other wells
were abandoned without finding production. Placid is required to drill three
additional prospects under the farmout. During the fourth quarter of 1994,
Placid Oil Company was purchased by Occidental Petroleum Company. Consequently,
the future development of this prospect may be delayed. Therefore, the Company
elected during the third quarter of 1994, to write-off over three quarters of
its remaining investment in the Eastern Shelf Project, or $1,200,000, and it is
possible a sale will result in the Company receiving less than its remaining
basis.
(B) SALE OF PRODUCING PROPERTIES OR JOINT VENTURES
In 1993, the Company through its 50% owned affiliate, Tierra Minerals
Development. L.L.C., purchased 19 operated and 25 non-operated wells located
primarily in Neuces County, Texas. Tierra simultaneously entered into a joint
venture with Stanford Offshore Properties, of Dallas, Texas, whereby Stanford
paid the purchase price plus cost reimbursement and a fee to Tierra, and a
participation in 8.35% of monthly net cash flow until Stanford received 120% of
its capital investment, at which time Tierra's share of cash flow would
increase to a 32.5% working interest. On December 24, 1993, the Company agreed
to sell its 50% interest in Tierra Minerals Development, L.L.C. to Comstock
Resources, Inc., a publicly held Dallas based production acquisition company,
for 132,500 of its common shares which had a bid price of $ 3.0682 per share at
December 31,1993. Accordingly, the securities were recorded at fair market
value as of year end. During the first quarter of 1994, the Company sold the
Comstock common stock for prices ranging from $ 4.75 to $ 5.00, for total
proceeds of $ 610,055, or a
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recognizable profit of $ 203,508.
Since the partnerships formed by the Company during 1992 had a
significant payable to the Company, and were not able to refinance with a bank,
the Company sold an overriding royalty interest in the Scott Field of Lafayette
Parish, Louisiana, for $ 86,700 during the second quarter of 1994. This sale
allowed the McCulloch Guaranty Distribution 1992-A, Ltd. to eliminate its
$42,737 payable to the Company and to make a distribution to the limited
partners. The financial statement impact of this sale was a reduction in the
cost basis of proved properties, and an increase in cash.
(C) RE-ENTRIES AND RE-WORKS OF OLD FIELDS
In 1993, the Company and affiliated limited partnerships participated
in eleven re-entries selected from the Golden Meadow field of Lafourche,
Parish, Louisiana, as having non-produced or bypassed reserves. After
experiencing cost overruns in excess of 200%, three of the highest reserve
potential wells were abandoned. The other eight wells also experienced
significant cost overruns; however, commercial production was established.
Initial production from the eight wells was 500 barrels of oil per day but
quickly declined to approximately 200 barrels per day. Because of high
operating costs in the marsh environment, the project is not economic at
current prices and production levels.
The Company had a 25% working interest in the program apart from its
affiliated limited partnerships, McCulloch Energy Guarantee Distribution 1992-A
and B, L.P., which each had a 12.5% working interest in 6 of the 8 producing
wells. See Subsection (D), Program Offerings to Investors, below. The Company
and partnerships incurred costs exceeding $1 million and received
approximately $ 375,000 in net revenue, well below expectations.
In the second quarter of 1994, the Company disposed its and the
partnership's interest in the Golden Meadow Field in Lafourche Parish,
Louisiana. This disposition was accomplished by forfeiting the interest to the
operator for forgiveness of accounts payable of $156,000.
(D) PROGRAM OFFERINGS TO INVESTORS
In August, 1991, the Company renamed Search Prospect, Inc., its oil
and gas operating subsidiary, McCulloch Energy, Inc. and named a corporate
director, M. Michael Witte, as Chairman. In addition to its other activities
previously discussed, McCulloch acts as managing general partner in various
private and public limited partnerships.
McCulloch's initial program, McCulloch Combination Units Limited
Partnership - 1991, a Texas Limited Partnership ("MCU') closed December 31,
1991, with funding of $650,000, of which McCulloch contributed $500,000. MCU
purchased production in three wells for $190,000, completed five wells and
drilled three dry holes. On July 1, 1993, the Company purchased the three
limited partnership units in the McCulloch Combination Units - 1991 Ltd. not
previously owned. The aggregate purchase price was $149,244 , payable $ 23,944
at closing and the balance in a 8% note, payable in equal installments each
quarter commencing December 31, 1993. The note is now paid in full.
McCulloch's second program, McCulloch Energy Guaranty Distribution
92-A L.P., a Texas Limited Partnership ("MGD 92-A"), was closed August 31, 1992
with funding of $528,000, of which McCulloch contributed $358,000. Partners in
the McCulloch Energy Guaranty Distribution 92-A, L.P. are guaranteed a 15% per
annum distribution for 5 years on the production portion of the partnership's
investment by McCulloch Energy, Inc. The MGD 92-A invested $187,000 in
production purchases, by purchasing an overriding royalty interest in three
wells and a 12.5% working interest in another well. The Company's management
believes the reserve value of this partnership is more than adequate to meet
the aforementioned guaranteed distributions.
MGD 92-A participated in six well completions and two dry holes. In
addition, MGD 92-A participated in six producing recompletions in the Golden
Meadow Prospect. McCulloch has a carried revenue interest of 25%
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in the partnership. The partnership has no ability to assess the limited
partners and borrowing by the partnership is limited to 50% of net asset
appraised value. As of December 31,1994, the MGD 92-A had total payables of
$17,187, and a deficit in working capital of $15,703.
McCulloch's third program, McCulloch Energy Guaranty Distribution 92-B
L.P., a Texas Limited Partnership ("MGD 92-B"), closed December 31, 1992 with
funding of $680,000, of which McCulloch invested $490,000. By mutual consent
of the general and limited partners the Partnership did not purchase reserves.
Therefore, McCulloch is not liable for the five year, 15% per annum guaranteed
distribution as with the MGD 92-A partnership. The partnership has participated
in four well completions, two dry holes and six producing recompletions in the
Golden Meadow Prospect. McCulloch has a carried revenue interest of 25% in the
partnership. The partnership has no ability to assess the limited partners,
and borrowing by the partnership is limited to 50% of net asset appraised
value. As of December 31,1994, the MGD 92-B had total payables of $23,545, and
a deficit in working capital of $17,474.
In December 1993, McCulloch Energy, Inc. formed McCulloch
Collateralized Energy Venture, Ltd. -1993 ("93 Venture").The total amount
raised was $325,000, with McCulloch making no capital contribution as a Venture
Partner. McCulloch co-managed with an industry partner who provided the
initial capital and turnkey services. In addition, McCulloch did agree to
provide certain existing oil and gas producing wells as collateral to the
venture to insure a minimum amount of gross production each quarter commencing
in the fifth quarter of the venture. The partnership did not purchase
production. The drilling was diversified over ten different wells. The results
from the initial drilling was poor. As a result, the collateral commitment to
the partnership as been formally segregated and assigned to the partnership.
The reserves applicable to these wells were therefore deducted from the reserve
estimates of McCulloch, and accounted for in the reserve estimates of the
Collateralized partnership. Note Item 2 discussion of the Engineering of
Reserves . As of December 31,1994, the partnership had total payables of
$31,827, and a deficit in working capital of $12,842.
During the third quarter of 1994, the Company withdrew from the
offering and management of private placement limited partnerships.
Consequently, the Company proposed to purchase the interest in the three
remaining partnerships for a 10% interest bearing note payable over four years
in equal semi-annual installments in arrears. These notes are $101,223.79 for
the MGD 92-A , $84,487.77 for the MGD 92-B, and $256,787.90 for the 93 Venture;
totaling $ 442,499.46. These notes will be secured by the properties
purchased, as well as corporately guaranteed by McCulloch Energy, Inc. The
purchase was calculated by risk adjusting the independently evaluated reserve
estimates, 10% net present value, further reduced 10 % for Proved Producing
Reserves, and 60% for Proved Non-Producing Reserves. This offer was made on
December 3,1994, and has been unanimously accepted by the Investor Partners.
The balloting was concluded January 13,1995, and the effective day of the
transaction is January 1,1995. Therefore, this purchase for notes will not
effect the financial statements as of December 31,1994.
(E) CORPORATE FINANCING
During 1994, the Company talked with a number of banks and other
lending institutions to secure an operating line of credit or some form of
corporate financing. These discussion were unsuccessful. Consequently, the
Company pursued merger discussions with several corporations which resulted in
the Merger Agreement dated November 8,1994, with Harken Energy Corporation as
discussed in Item 1 (I).
MISCELLANEOUS MATTERS
As of December 31, 1994 the Company had one full time employee, one
part time employee, and various consultants as needed.
Neither the Company nor any of its subsidiaries has been a party to
any bankruptcy, receivership, reorganization, readjustment, or similar
proceedings. The Company has no material patents, trademarks, franchises, or
concessions. The Company spends no material efforts or funds on research and
development. The Company's operations are seasonal with respect to demand for
natural gas and crude oil products caused by changes in weather conditions,
worldwide production and industrial demand.
7
<PAGE> 207
The Company maintains public liability insurance, workmen's
compensation insurance and property insurance on its office premises and on
a portion of its lease and well equipment. The Company does not carry business
interruption insurance.
ITEM 2. PROPERTIES
ACREAGE
The following sets forth the acreage owned directly by the Company or
indirectly through participation in various partnerships, as of December 31,
1994.
DEVELOPED(l)
<TABLE>
<CAPTION>
MGD 92-A MGD 92-B MCCULLOCH
Gross(1) Net(2) Gross Net Gross Net
<S> <C> <C> <C> <C> <C> <C>
Texas 565 70.62 320 10.94 6,154 341.48
Louisiana 0 0 0 0 0 0
Oklahoma 0 0 0 0 0 0
--- ----- --- ----- ----- ------
Total 565 70.62 320 10.94 6,154 341.48
=== ===== === ===== ===== ======
</TABLE>
(1) Gross acres include the total number of acres subject to a lease; net
acres represent the number of acres attributable to a participant's
share of the working interests.
(2) Does not include the ownership of Investor Partners of the
partnerships.
UNDEVELOPED (1)
<TABLE>
<CAPTION>
Gross(2) Net
-------- -------
<S> <C> <C>
Yuma Joint Venture 17,447 6,535.75
McCulloch Energy, Inc. 1,010 141.40
Placid Joint Venture 58,190 14,547.50
------ ---------
Total 76,647 21,224.65
====== =========
</TABLE>
(1) Acreage is in Texas
(2) Gross acres include the total number of acres subject to a lease; net
acres represent the number of acres attributable to a participant's
share of the working interest.
8
<PAGE> 208
OIL AND GAS RESERVES
No estimates of reserves were filed by the Company with any agencies
in calendar year 1994 other than the Securities and Exchange Commission. The
Company is not obligated to provide a fixed and determinable quantity of oil or
gas in the future under any long term contracts or agreements.
The following tables summarize certain information regarding the
estimated proved oil and natural gas reserves and estimated future net revenues
of the Company and attributable to the Company's net revenue interest in
affiliated limited partnerships as of December 31, 1994. Such estimated
reserves and future net revenues, as set forth herein and in Note 12 of the
Notes to the Company's Consolidated Financial Statements, are based upon an oil
and gas reserve evaluation report prepared by Gerald DuPont of Houston, Texas,
independent consulting petroleum engineer. All of the Company's reserves are
located in the continental United States. For additional information, see Note
12 to the Consolidated Financial Statements.
PROVED OIL AND GAS RESERVES
DECEMBER 31, 1994
<TABLE>
<CAPTION>
Oil Gas
(Bbls) (Mcf)
-------- ---------
<S> <C> <C>
Proved developed producing reserves 11,072 945,455
Proved developed non-producing reserves 8,247 352,567
------ ---------
Total proved reserves 19,319 1,298,022
====== =========
</TABLE>
The reserve data herein represents only estimates that are based on subjective
determinations. Accordingly, the estimates are expected to change as
additional information becomes available. Further, estimates of oil and gas
reserves, of necessity, are projections based on engineering and economic data.
There are uncertainties inherent in the interpretation of such data, and there
can be no assurance that the proved reserves set forth herein will ultimately
be produced, or that the estimated revenues shown below will be realized within
the periods indicated.
Proved developed producing reserves are those expected to be recovered from
currently producing zones under continuation of present operating methods.
Proved developed non-producing reserves consist of (i) reserves from wells
which have been completed and tested but are not yet producing due to lack of
market or minor completion problems which are expected to be corrected, and
(ii) reserves currently behind the pipe in existing wells and which are
expected to be productive due to both the well log characteristics and
analogous production in the immediate vicinity of the well. Proved undeveloped
reserves are those reserves which may be expected either from existing wells
that will require a major expenditure to develop or from undrilled acreage
adjacent to productive units which are reasonably certain of production when
drilled.
ESTIMATED FUTURE NET REVENUES
AS OF DECEMBER 31, 1994
The following table sets forth an estimate of future net revenues of the
Company, plus the Company's net revenue interest in properties held by
affiliated limited partnerships after deducting production and ad valorem
taxes, future capital costs and operating expenses, but before consideration of
federal income taxes. The future net revenues have been discounted at an
annual rate of 10% to determine their "present value." The net revenues do not
give effect to liabilities of the partnerships which must be paid before the
Company can realize its share of such revenues. The present value is shown to
indicate the effect of time on the value of the net revenue stream and should
not be construed as being the fair market value of the properties. Estimates
have been made in accordance with current Securities and Exchange Commission
guidelines concerning the use of constant oil and gas prices and operating
costs in reserve evaluations.
9
<PAGE> 209
<TABLE>
<CAPTION>
Estimated Future Net Revenue
Year ending December 31,
<S> <C>
1995 $ 418,906
1996 303,120
1997 247,279
1998 227,577
Thereafter 1,120,142
----------
Total $2,317,024
==========
Estimated future net revenues
before income taxes,
discounted at 10% per annum $1,512,783
==========
</TABLE>
The net price received at the well head at December 31, 1994, used in
the above table were $18.00 per barrel of oil and $2.00 per Mcf of gas. Lease
and well operating costs are based on actual costs per monthly operating
expense records.
Estimates of the Company's oil and gas reserves (as measured using the
aggregate future net revenues discounted at an annual rate of 10 percent)
changed from approximately $ 3,333,333 as of January 1, 1994, to $1,482,277
at December 31,1994, as a result of:
1.The production and sale of crude oil and natural gas for the twelve
months of $ 220,718 net of production taxes, lifting costs and expenses related
to the sale of crude oil and natural gas produced and sold;
2.Reserves attributable to the Golden Meadow interest of approximately
$ 794,003 were assigned for debt forgiveness.(Note Golden Meadow discussion
above)
3.Reserves associated with the overriding royalty interest in the
Scott Field of approximately $ 229,488 were sold.
4.Reserves associated with the abandonment of the Estralla Project in
Starr County, Texas, of approximately $ 512,044, were lost on abandonment.
5.Reserves associated with the Striddie Prospect, approximately
$39,276, were lost because of the drop of production and mechanical failures.
6.Reserves associated with several Frio producing wells of
approximately $ 736,960 were reduced based on the engineering report.
The Company solicited the purchase of additional oil and gas reserves
from partners in three of its limited partnerships. Note Item (D) Program
Offerings to Investors above. These purchase reserve estimates were prepared at
the same time, by the same independent engineer, and utilizing the same
standards as those used by the Company. The reserve estimates of the
Partnerships are:
10
<PAGE> 210
MCCULLOCH ENERGY GUARANTY DISTRIBUTION 92-A,LTD.
PROVED OIL AND GAS RESERVES
DECEMBER 31, 1994
<TABLE>
<CAPTION>
Oil Gas
(Bbls) (Mcf)
-------- ---------
<S> <C> <C>
Proved developed producing reserves 2 92,517
Proved developed non-producing reserves 0 2,861
- -------
Total proved reserves 2 95,378
= =======
Estimated future net revenues
before income taxes,
discounted at 10% per annum $100,386
========
</TABLE>
MCCULLOCH ENERGY GUARANTY DISTRIBUTION 92-B,LTD.
PROVED OIL AND GAS RESERVES
DECEMBER 31, 1994
<TABLE>
<CAPTION>
Oil Gas
(Bbls) (Mcf)
-------- ---------
<S> <C> <C>
Proved developed producing reserves 83 60,641
Proved developed non-producing reserves 11 31,248
-- --------
Total proved reserves 94 91,889
== ========
Estimated future net revenues
before income taxes,
discounted at 10% per annum $108,126
========
</TABLE>
11
<PAGE> 211
MCCULLOCH COLLATERALIZED ENERGY VENTURE 93-A,LTD.
PROVED OIL AND GAS RESERVES
DECEMBER 31, 1994
<TABLE>
<CAPTION>
Oil Gas
(Bbls) (Mcf)
------ ---------
<S> <C> <C>
Proved developed producing reserves 83 269,034
Proved developed non-producing reserves 0 130,808
----- --------
Total proved reserves 83 399,842
===== ========
Estimated future net revenues
before income taxes,
discounted at 10% per annum $398,472
========
</TABLE>
The following table shows the production revenues and expenses attributable to
the Company's oil and natural gas interests including those held directly and
indirectly through its limited partnerships. Further information is provided
as to these properties in Note 12 of Notes to the Consolidated Financial
Statements.
PRODUCTION REVENUES AND EXPENSES
OIL AND GAS PRODUCTION DATA
<TABLE>
<CAPTION>
Three-Month
Transition Period
Year Ended Year Ended Year Ended Year Ended Year Ended
December 31 December 31 December 31 December 31 September 30
1994 1993 1992 1991 1991
---- ---- ---- ---- ----
<S> <C> <C> <C> <C> <C>
Production
Oil (Bbls) 9,923 27,556 579 -0- -
Gas(Mcf) 237,808 342,275 75,724 4,235 16,000
Revenues
Oil $143,572 $426,158 $ 10,250 $ -0- $ -0-
Gas(Mcf) 351,118 630,886 140,156 6,702 26,121
Avg Sales Pr. (1)
Oil (Bbls) $ 14.46 $ 15.46 $ 17.70 $ -0- $ -0-
Gas (Mcf) 1.48 1.84 1.85 1.58 1.63
Avg Prod Cost(2)
Per equiv bbl
(3) $ 5.53 $ 3.38 $ 1.26 $ 0.08 $ 3.48
Per $ of sales .55 .27 .11 0.05 .36
</TABLE>
(1) Before deduction of production and ad valorem taxes.
(2) Excludes depletion, depreciation and amortization. Production cost
includes lease operating expenses and production and ad valorem taxes,
if applicable.
(3) Six Mcf of natural gas is considered to be the equivalent of one
barrel of oil, based on BTU content.
The Company's production is located entirely in Texas. The Company's
wells are generally less than 10,000 feet.
12
<PAGE> 212
PRODUCTIVE WELLS
The following table sets forth the total gross and net productive wells in
which the Company owned an interest as of December 31, 1994. The number of
gross wells is the total number of wells in which a working interest is owned.
The number of net wells is the sum of the fractional working interests owned by
the Company in gross wells expressed in whole numbers and decimal fractions
thereof.
<TABLE>
<CAPTION>
OIL MGD 92-A MGD 92-B MCCULLOCH (1)
----------- -------------- ----------------
Gross Net Gross Net Gross Net
<S> <C> <C> <C> <C> <C> <C>
Texas 0 .000 0 .000 5 .515
Louisiana 0 .000 0 .000 0 .000
Oklahoma 0 .000 0 .000 0 .000
- ---- - ---- - ----
Total Oil 0 .000 0 .000 5 .515
- ---- - ---- - ----
</TABLE>
<TABLE>
<CAPTION>
GAS MGD 92-A MGD 92-B MCCULLOCH (1)
------------- -------------- ------------------
Gross Net Gross Net Gross Net
<S> <C> <C> <C> <C> <C> <C>
Texas 9 1.009 5 .589 32 1.568
Louisiana 0 .000 0 .000 0 .000
Oklahoma 0 .000 0 .000 0 .000
- ----- - ---- -- -----
Total Gas 9 1.009 5 .589 32 1.568
- ----- - ---- -- -----
TOTAL ALL WELLS 9 1.009 5 .589 37 2.083
= ===== = ==== == =====
</TABLE>
(1) These interests are owned directly by McCulloch, apart from additional
ownership in various partnerships.
All of the Company's oil and gas interests are working interests or
overriding royalty interests under industry standard on-shore oil and natural
gas leases, rather than mineral ownership or fee title. The defensibility of
the Company's title to such interests in most cases is supported by written
title opinions.
13
<PAGE> 213
DRILLING ACTIVITIES
The following table sets forth the Company's drilling participation directly
and through its various limited partnerships for the twelve months ended
December 31, 1994
<TABLE>
<CAPTION>
EXPLORATORY MGD 92-A(2) MGD 92-B(2) MCCULLOCH(3)
----------- ----------- ------------
<S> <C> <C> <C>
Gross Wells (1) 1 0 15
Net Wells .8475 .000 1.871
Net Productive Wells .8475 .000 .540
Net Dry Holes .000 .000 1.331
</TABLE>
<TABLE>
<CAPTION>
DEVELOPMENTAL MGD 92-A MGD 92-B MCCULLOCH
-------- -------- ---------
<S> <C> <C> <C>
Gross Wells (1) 1 0 3
Net Wells .8475 .000 .215
Net Productive Wells .8475 .000 .175
Net Dry Holes .000 .000 .040
</TABLE>
<TABLE>
<CAPTION>
TOTAL MGD 92-A MGD 92-B MCCULLOCH
-------- -------- ---------
<S> <C> <C> <C>
Gross Wells (1) 2 0 18
Net Wells 1.169 .000 1.830
Net Productive Wells 1.169 .000 .715
Net Dry Holes .000 .000 1.546
</TABLE>
TWELVE MONTHS ENDED DECEMBER 31, 1993
<TABLE>
<CAPTION>
EXPLORATORY MGD 92-A(2) MGD92-B(2) MCCULLOCH(3)
----------- ---------- ------------
<S> <C> <C> <C>
Gross Wells (1) 2 5 13
Net Wells .250 .825 1.740
Net Productive Wells .250 .500 .550
Net Dry Holes .000 .515 1.190
</TABLE>
<TABLE>
<CAPTION>
DEVELOPMENTAL MGD 92-A MGD 92-B MCCULLOCH
-------- -------- ---------
<S> <C> <C> <C>
Gross Wells (1) 8 8 3
Net Wells 1.000 1.000 .315
Net Productive Wells .750 .750 .100
Net Dry Holes .250 .250 .215
</TABLE>
<TABLE>
<CAPTION>
TOTAL MGD 92-A MGD 92-B MCCULLOCH
-------- -------- ---------
<S> <C> <C> <C>
Gross Wells (1) 10 13 16
Net Wells 1.500 1.825 2.055
Net Productive Wells 1.000 1.250 .650
Net Dry Holes .2500 .765 1.405
</TABLE>
14
<PAGE> 214
TWELVE MONTHS ENDED DECEMBER 31, 1992
<TABLE>
<CAPTION>
EXPLORATORY MCU(2) MGD 92-A MGD 92-B MCCULLOCH
------ -------- -------- ---------
<S> <C> <C> <C> <C>
Gross Wells(1) 7 6 3 15
Net Wells .9215 .663 .518 3.990
Net Productive Wells .6465 .663 .000 3.630
Net Dry Holes .2750 .000 .518 .360
</TABLE>
<TABLE>
<CAPTION>
DEVELOPMENTAL MCU MGD 92-A MGD 92-B MCCULLOCH
------ --------- -------- ---------
<S> <C> <C> <C> <C>
Gross Wells(1) 3 9 9 9
Net Wells .2175 1.125 1.125 2.250
Net Productive Wells .0925 1.125 1.125 2.250
Net Dry Holes .1250 .000 .000 .000
</TABLE>
<TABLE>
<CAPTION>
TOTAL MCU MGD 92-A MGD 92-B MCCULLOCH
--- -------- -------- ----------
<S> <C> <C> <C> <C>
Gross Well(1) 10 15 12 24
Net Wells 1.1390 1.788 1.643 6.240
Net Productive Wells .7390 1.788 1.125 5.880
Net Dry Holes .4000 .000 .518 .360
</TABLE>
A gross well is a well in which a working interest is owned. Net wells
represents the sum of the fractional working interests in the gross wells. As
of December 31, 1994, there were no wells in progress.
(1)These entities often participate in the same well, therefore gross well
count may be duplicated.
(2)These entities are affiliated partnerships in which McCulloch owns a
majority interest, Note Item 2: Program Offering to Investors
(3)McCulloch Energy, Inc. is a wholly owned operating subsidiary of Search
Exploration, Inc.
MARKETS AND COMPETITION
The oil and gas industry is highly competitive. Competitors include major oil
companies, other independent oil and gas concerns and individual producers and
operators, many of which have financial resources, staffs and facilities
substantially greater than those of the Company. The market for oil and
natural gas produced by the Company depends on factors beyond its control,
including the extent of domestic production and imports of oil and natural gas,
the proximity and capacity of natural gas pipelines and other transportation
facilities, demand for oil and natural gas, the marketing of competitive fuels,
and the effects of state and federal regulation of oil and natural gas
production and sales. The oil and gas industry as a whole also competes with
other industries in supplying the energy and fuel requirements of industrial,
commercial and individual consumers. In addition, the Company encounters
competition in the acquisition of oil and gas properties.
15
<PAGE> 215
CHANGING OIL AND NATURAL GAS PRICES
The Company's revenues, its ability to repay indebtedness, and the carrying
value of its oil and natural gas properties are affected by changes in oil and
natural gas prices. Moreover, the Company's ability to obtain capital on
attractive terms is substantially dependent upon such prices. Oil and natural
gas prices are subject to substantial seasonal, political and other wide
fluctuations that are beyond the ability of the Company to control or
accurately predict. Spot natural gas prices during 1994 ranged from
approximately $2.62 per MCF to a low of $1.38 per MCF, while oil prices for
Gulf Coast crude oil ranged from approximately $20.30 per barrel to a low of
$14.25 per Bbl during 1994.
REGULATION
Domestic development, production and sale of oil and gas are
extensively regulated at both the federal and state levels. Legislation
affecting the oil and gas industry is under constant review for amendment or
expansion, frequently increasing the regulatory burden. Also, numerous
departments and agencies, both federal and state, have issued rules and
regulations binding on the oil and gas industry and its individual members,
compliance with which is often difficult and costly and some of which carry
substantial penalties for the failure to comply. State statutes and
regulations require permits for drilling operations, drilling bonds and reports
concerning operations, often creating delays in spudding new wells and
constructing gathering lines for connecting completed wells. Louisiana and
other states in which the Company has conducted operations also have statutes
and regulations governing conservation matters, including the unitization or
pooling of oil and gas properties and establishment of maximum rates of
production from oil and gas wells. Many states also have regulatory mechanisms
for restricting production to the market demand for oil and gas. While none of
these statutes and regulations currently limit the rate at which oil and gas is
produced from wells in which the Company owns an interest or limit prices
received for the Company production, various states including Texas are
considering the proration of natural gas production in their states. Even in
the absence of price or production restrictions, the current heavy regulatory
burden on the oil and gas industry increases the Company's cost of doing
business and affects its profitability.
The interstate transportation and sale for resale of natural gas is
regulated by the Federal Energy Regulatory Commission ("FERC") under the
Natural Gas Act of 1938 ("NGA"). The wellhead price of natural gas is also
regulated by FERC under the authority of the Natural Gas Policy Act of 1978
(the "NGPA"). In addition to establishing price controls for the first sales
of gas in interstate commerce, the NGPA also imposed these price controls on
previously unregulated intrastate gas. The provisions of the NGPA are complex
and affect all who produce, consume or transport natural gas. Generally, the
NGPA divided gas into various categories and prescribed maximum lawful prices
for first sales of gas from those categories. The NGPA prices serve only as
maximum lawful prices and, with one exception, collection and payment of those
prices are permitted only if authorized under contract with purchasers of
natural gas.
Under the NGPA, certain categories of natural gas have become price
deregulated. The Natural Gas Wellhead Decontrol Act of 1989 (the "Decontrol
Act") provides for additional phasing out of price regulation under the NGPA
and for the complete elimination of all wellhead gas price regulation on
January 1, 1993. Under the terms of many gas purchase contracts, when a
particular category of gas becomes eligible for deregulated price treatment,
the price may be subject to renegotiation by the buyer and seller on a periodic
basis. However, since the NGPA was enacted, prices for natural gas have
generally declined due to various market related factors such as the surplus of
natural gas and alterative fuels at competitive prices and a resulting decrease
in demand. Consequently, most contracts for purchase of gas at NGPA maximum
prices, and higher deregulated prices, have been renegotiated or purchasers
have refused to purchase production at non-market responsive prices.
Accordingly, substantially all gas production, is sold at prices below NGPA
maximum lawful rates, and the elimination of all remaining price controls in
January 1993 under the Decontrol Act have had no effect on the Company's
operations.
The Company's activities are subject to various federal, state and
local laws and regulations designed to protect the environment. The Company
does not conduct activities offshore. Operations of the Company on
16
<PAGE> 216
onshore oil properties may generally be liable for clean-up costs to the
federal government for up to $50,000,000 for each discharge of oil or hazardous
substances under the Federal Clean Water Act, up to $350,000,000 for each oil
discharge under the Oil Pollution Act of 1990 and for up to $50,000,000 plus
response costs for hazardous substance contamination under the Comprehensive
Environmental Response, Compensation, and Liability Act of 1980 (Superfund).
The Company may also be subject to liability for any violation of the Resource
Conservation and Recovery Act, which regulates treatment, storage and disposal
of hazardous wastes. Liability is unlimited in cases of willful negligence or
misconduct, and there is no limit on liability for environmental clean-up costs
or damages with respect to claims by the state or private persons or entities.
In addition, the Environmental Protection Agency requires producers such as the
Company to prepare and implement spill prevention control and countermeasure
plans relating to the possible discharge of oil into navigable waters and
requires permits to authorize the discharge of pollutants into navigable
waters. State and local permits or approvals may also be needed with respect
to waste-water discharges and air pollutant emissions. Violations of
environment-related lease conditions or environmental permits can result in
substantial civil and criminal penalties as well as potential court injunctions
curtailing operations. Enforcement liabilities can result from prosecution by
public or private entities.
Various federal, state and local governmental agencies are
considering, and some have adopted, other laws and regulations regarding
environmental protection which could adversely affect the Company's operations.
The Company cannot predict what effect, if any, these regulations would have on
the operations of the Company if adopted in Louisiana or Texas.
The Clean Air Act Amendments of 1990 (the "Clean Air Amendments)
mandate the development of regulations for "clean alternative fuels," which
includes natural gas. In areas of the country with certain high air pollution
levels, new motor vehicle standards and the transition of urban buses and fleet
vehicles to clean alternative fuels may provide additional uses for natural
gas. Accordingly, the Clean Air Amendments are not expected to have an adverse
impact on the Company's natural gas sales. Any favorable impact on sales of
natural gas resulting from the comparative economic advantages of gas under the
Clean Air Amendments is anticipated to be long-term and is not expected to have
any immediate effect on the Company's operating results.
OFFICE FACILITIES
The Company sublets offices from one of its directors at Suite 1500,
5430 LBJ Freeway, Dallas, Texas 75240.
ITEM 3. LEGAL PROCEEDINGS.
On March 17,1993, Tricore Energy, Corp., a Texas Corporation, filed a lawsuit
against Tri-Atlas Energy, a Texas Corporation, of which McCulloch Energy was a
shareholder. This lawsuit also named the other companies who are shareholders
of Tri-Atlas, as well as individuals including Joseph F. Langston Jr. and
M. Michael Witte, who are directors of both McCulloch Energy, Inc. and Search
Exploration. This litigation was settled at a cost of $7,500 to McCulloch, all
parties were released, and the case was dismissed in September of 1994.
McCulloch Energy, Inc. has been named as a defendant along with Tri-Atlas
Energy and others, in Federal District Court of Oklahoma, alleging fraud in the
sale of limited partnership interests by Tri-Atlas Energy, Inc. McCulloch had
resigned from any affiliation with Tri-Atlas prior to the investment, and
therefore claims no responsibility. Tri-Atlas is in settlement discussions and
non-binding arbitration with the lone limited partner, while Tri-Atlas is
paying for the legal defense of McCulloch and others.
Search Exploration, Inc. has been named in a suit for collection involving
eight Odyssey Limited Partnerships whose assets were consolidated along with
twenty five other partnerships in the original formation of the Company in
1989. The original suit was filed solely against the Odyssey partnerships in
August,1990, alleging that the partnerships had defrauded the buyer in the sale
of certain producing and non-producing properties in August,1988. In
January,1993, a jury found in favor of the plaintiff. The defendants appealed
the decision of the
17
<PAGE> 217
lower court. In June, 1994, the Appellate Court upheld the decision of the
lower court, less $200,000 in punitive damages. The Odyssey partnerships are
currently appealing to the Texas Supreme Court. However, the Plaintiff is
pursuing collection of the judgment. In this pursuit, they have expanded the
suit to name Search Exploration, Inc., claiming Search benefitted from the
actions of the alleged fraud. Search is not a party to the 1988 Purchase and
Sale Agreement, between Odyssey and Petrochemical; did not receive value from
the transaction, and is in the process of aggressively defending this suit.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS.
There were no matters submitted to the security holders during 1994.
PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS.
The Company's Common Stock commenced trading in the additional over-the-counter
list or the National Association of Securities Dealers Automated Quotation
System (NASDAQ) on February 9, 1990 under the symbol SXEI.
The following is a summary of the trading range based on the closing bid price
for the calendar periods indicated:
<TABLE>
<CAPTION>
1994 Bid 1993 Bid
Price Price
High Low High Low
<S> <C> <C> <C> <C>
Jan 1.50 1.25 $1.75 $1.63
Feb 1.375 1.00 1.75 1.63
Mar 1.375 0.75 2.25 1.68
Apr 1.00 0.75 2.39 1.63
May 1.00 0.75 2.00 1.63
Jun 1.06 0.75 2.00 1.82
Jul 0.94 0.88 1.82 1.63
Aug 0.94 0.69 1.00 0.82
Sep 0.94 0.69 2.25 1.25
Oct 0.875 0.75 2.38 1.63
Nov 0.875 0.75 1.75 1.38
Dec 0.75 0.69 2.00 1.00
</TABLE>
The above quotations reflect inter-dealer prices, without retail mark-up,
mark-down or commissions. Hence, they may not represent actual transactions.
As of December 31, 1994, there were 1,286 holders of record of the Company's
Common Stock. The Company has not paid any dividends on its Common Stock and
does not expect to do so in the foreseeable future.
18
<PAGE> 218
ITEM 6. SELECTED FINANCIAL DATA
The following summary should be read in conjunction with the consolidated
financial statements.
<TABLE>
<CAPTION>
Year Ended Year Ended Year Ended Three Months Fiscal Year Ended
December 31, December 31, December 31, December 31, September 30,
1994 1993 1992 1991 1991 1990
-------- -------- -------- -------- ----- ----
<S> <C> <C> <C> <C> <C> <C>
Total revenues $ 716,292 $1,101,347 $ 339,149 $ 61,450 $4,021,311 $2,316,534
Oil and gas
sales 494,690 1,057,044 150,406 6,702 26,121 2,207,471
Net income
(loss) (3,200,059) (835,854) (284,091) (388,496) 1,729,312 250,288
Net income (loss)
per share of
common stock (0.88) (0.23) (0.08) (.10) .36 .06
</TABLE>
Balance sheet data as of the dates indicated are as follows:
<TABLE>
<CAPTION>
Year Ended Year Ended Year Ended Three Months Fiscal Year Ended
December 31, December 31, December 31, December 31, September 30,
1994 1993 1992 1991 1991 1990
-------- -------- -------- -------- --------- ---------
<S> <C> <C> <C> <C> <C> <C>
Total assets $ 2,572,518 $7,266,199 $ 8,551,837 $6,941,433 $7,287,248 $8,173,771
Net working
capital
(deficit) 314,886 (297,320) 966,899 3,863,677 4,663,944 (188,673)
Redeemable Preferred
Stock 575,000 575,000 -0- -0- -0- -0-
Deferred federal
income taxes -0- 226,770 611,000 -0- -0- -0-
Stockholders'
equity 1,823,815 5,068,780 5,904,634 6,281,551 6,672,519 6,596,707
</TABLE>
(1) The Company changed its fiscal year effective December 31, 1991.
Consequently the three months ended December 31, 1991 are shown as the
transition period, and are not comparative with the other annual amounts.
19
<PAGE> 219
ITEM 7. MANAGEMENTS' DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS.
The following discussion of the Company's financial condition and results of
operations should be read in conjunction with the consolidated financial
statements and notes thereto included in this report.
GENERAL
The Company was created December 1, 1989, from the consolidation of
thirty-three oil and gas partnerships and Plano Petroleum Corporation, a
publicly-held oil and gas company. This discussion refers to the Company as a
consolidated entity. The Company assumed the fiscal year end of September 30 of
its predecessor corporation, Plano Petroleum Corporation. Management changed
the Company's fiscal year to a calendar year as of December 31, 1991, in order
to coincide with the year end periods of its various partnerships and to be
more comparable to other oil companies.
The Company utilizes the full cost method prescribed by SEC financial
reporting rules, to account for its oil and gas exploration activities. Under
the full cost method, all costs associated with the acquisition, exploration,
and development of oil and gas properties are capitalized as part of the full
cost pool, subject to a ceiling calculation.
RESULTS OF OPERATIONS FOR 1994 VS 1993
The net loss was $3,200,059 for the year ended December 31,1994, as compared to
a loss of $835,854 for the year ended December 31, 1993. Of this loss in
1994, $2,667,461 is related to impairments to Proved and Unproved Properties
due to the comparison of current valuations of the properties with their book
values which was partially caused by the property dispositions discussed in
Item 1. The Company recognized a one time gain on the sale of securities in the
first quarter of 1994.
Oil and gas revenues in the amount of $494,690 were lower for the year ended
December 31, 1994 as compared to $1,057,044 for the year ended December
31,1993, primarily due to failure of production in the Golden Meadow project
and several South Texas gas wells as well as the property dispositions
discussed in Item 1. The forfeiture of the Company's interest in Golden Meadow
was the greatest single reason for the impairment described above.
Oil and gas production expenses were lower for the year ended December 31,1994,
as compared to the year ended December 31, 1993 in the amounts of $273,972 and
$285,656 respectively due to dispositions of several operating wells in the
Golden Meadow field.
General and Administrative expenses were reduced from $787,680 for the period
annually in 1993 , to $698,390 for the period ended December 31,1994,
primarily as a result of the reduction in staff during 1994, the absence of
partnership activity, and reduction in use of outside consultants.
Unproved Properties were reduced primarily as a result of the sale of prospect
inventory in the normal course of business and as a result of the write down of
the Eastern Shelf which is further discussed in Item 1.
The Company's exploration results have been disappointing. The independent
engineer, who has prepared the Company's report for several years, engineered
the Company's reserves at December 31,1993, (NPV 10%, unescalated) at
$3,333,333. His report at December 31,1994, was $ 1,482,277 a net reduction
of 55%. This reduction comes as a result of; 1) value of the wells forfeited
for debt reduction to Great Southern (see Golden Meadow discussions), 2)
properties sold, and 3) the contribution of collateral to a limited partnership
(see the limited partnership discussion) or an aggregate of $ 1,021,482 for the
three transactions. Therefore, the Company wrote off during the third quarter
of 1994, the difference in the unamortized costs at September 30,1994, and the
combined present discounted value of reserves at July 1,1994, less production
during the third quarter. The Company's production is new, therefore lacking in
production history. An additional risk, is that over 30% of the Company's
current reserve values are in two wells, with little production history. Note
Item 2 : Reserve Evaluations.
20
<PAGE> 220
The activities discussed above occurred without outside equity investment. The
Company is selling several drillable prospects from its Unproved Properties
inventory for cash and a carried working interest in the initial well drilled
on the prospect acreage, and the Company would then have to pay its prorata
share thereafter. The sale of the unproved prospects inventory coupled with the
present oil and gas income from production would satisfiy the Company's
overhead and capital requirements for 1995. However, not replacing the
Undeveloped Properties would eliminate all future prospect activity, therefore
not allow the Company to carry out its current business plan. Note Item 2
Business Plan. Consequently, if the merger with Harken is not concluded,it
would be difficult, if not impossible, for the Company to continue in business,
and maintain or expand the value of shareholder equity.
TWELVE MONTHS ENDED DECEMBER 31,1994:
"Oil and Gas Revenue" - The 1994 oil and gas gross revenues decreased to
$494,690 or 53% under those of 1993. During 1994, revenues decreased compared
to 1993 because of the number of units of oil and gas produced decreased to
9,923 Bbls. of oil and 237,808 MCF of gas. While the price of oil decreased
from $20.00 to a low of $14.25 per barrel, the price of gas also decreased from
a high of $2.45 to $1.40 per MCF during the period.
"Interest and other income", which is primarily interest income,
decreased significantly in fiscal 1994 primarily due to lower average cash
balances since cash was being utilized in prospect development and drilling and
completion activity.
"Oil and gas production cost" includes lease operating expenses and
taxes. The Company does not operate the wells in which it owns an interest.
Consequently, a portion of these expenses are reimbursement of costs incurred
by the operator on behalf of the Company. The majority of the Company's
reserves are gas, which normally have lower operating costs associated with the
production and sale of it compared to oil.
"Depletion, depreciation and amortization" is a non-cash expense
reflecting the cost of Proved Properties which is amortized using the units of
production method over the life of estimated proved reserves as determined by
an independent petroleum engineer. The reduction of $670,456 to $486,000 is
due to the decline in production. The Company also had impairments of the
value of properties owned by the Company.
"General and Administrative Expense" - The Company currently has only one full
time and one part time employee, and utilizes consulting professionals as
necessary. Management feels this is the minimum staff needed to carry out the
Company's business plan. As a public reporting company, there are fixed
expenses of independent public accountants, legal, printing and mailing which
account for approximately $150,000 per year. The Company eliminated its
expenditures for the marketing of limited partnerships by McCulloch Energy,
Inc. The Company also incurred legal expenses in resolving prior year
litigation as well as incurring added expense in pursuing various acquisition
opportunities.
"Income Tax Expense (Benefit)" - The Company received a refund of
federal income taxes during 1994 of $20,000 because of the losses and
deductions for intangible drilling costs it incurred during 1993.
The Company has 5,000,000 authorized shares of preferred stock. The Company's
certificate of incorporation gives the board of directors the right to fix the
number of shares and establish the various rights and powers of any series of
preferred stock to be issued.
As a condition of a potential debt financing, in September, 1993, 575,000
shares of preferred stock designated as the 1993 Series Redeemable Preferred
Stock("1993 series") were issued to certain directors of the Company for cash
proceeds of $575,000. However, the proposed financing was withdrawn by the
issuer in December of 1993. The 1993 series provides for a non-compounded,
cumulative 9% preference dividend payable on a quarterly basis and the
preferred stock shares are convertible into common shares at $1.69 per share or
340,237 shares of common stock, have a liquidating preference, and must approve
all asset sales or merger of the Company. As additional inducement, the holders
of the preferred stock shares are also entitled to a 2% overriding interest in
the Company's share of revenues derived from the Placid venture oil and gas
leases.
The Company has a major portion of its assets in the Eastern Shelf
Project of West Texas operated by Placid Oil
21
<PAGE> 221
Company of Dallas, Texas. On July 1, 1994, the Company entered into an eight
well farmout agreement with Placid. This agreement provides for the farmout of
the first two wells previously drilled, five identified future locations and
one location to be determined. The Company will retain its 25% interest in the
remainder of the acreage not included in the eight 160 acre farmout locations.
The Company received an overriding royalty interest reverting to a half back-in
working interest after payout on an aggregate basis on the farmed-out acreage.
The first two wells of the farmout were the two wells previously drilled, of
which one had been plugged and abandoned and the other had marginal daily
production.
During the third quarter, Placid drilled two additional wells, one of which is
currently producing 60 barrels of oil and 458 barrels of water per day, and the
other was plugged and abandoned. Based on the poor results on the locations
drilled to date, and the lack of drillable locations, the Company has elected
to write-off over three quarters of its remaining investment in the Eastern
Shelf Project, or $1,200,000. The Company is soliciting the sale of its
interest, and it is possible a sale will result in the Company receiving less
than its remaining basis. If the Company is unsuccessful in selling its
interest, additional write offs may be taken at that time.
The Company and its subsidiaries file a consolidated income tax return.
Effective January 1, 1993 the Company adopted the provisions of Financial
Accounting Standards No. 109, "Accounting for Income Taxes" (SFAS No. 109).
Pursuant to SFAS No. 109, deferred tax assets and liabilities are recognized
for future tax consequences attributable to differences between financial
statement carrying amounts of existing assets and liabilities and their
respective tax bases. Deferred tax assets and liabilities are measured using
enacted tax rates expected to apply to taxable income in the years in which
those temporary differences are expected to be recovered or settled. Under
SFAS No. 109, the effect on deferred tax assets and liabilities of a change in
tax rates is recognized in income in the period that includes the enactment
date.
TWELVE MONTHS ENDED DECEMBER 31,1993:
"Oil and Gas Revenue" - Oil and Gas revenue receipts significantly lag the
investment in drilling activity. Consequently, 1993 revenues increased to
$1,057,044 or 702% over those of 1992. This trend did not continue in 1994
however, because of the lack of exploration success during 1993. During 1993,
revenues increased compared to 1992 because production of oil and gas increased
to 27,556 bbls. of oil and 342,275 MCF of gas. While the price of oil
decreased from $20.00 to a low of $14.25 per barrel, the price of gas
maintained a level of just less than $2.00 per MCF.
"Interest and other income", which is primarily interest income, decreased
significantly in fiscal 1993 primarily due to lower average cash balances since
cash was being utilized in prospect development and drilling and completion
activity.
"Oil and gas production cost" includes lease operating expenses and taxes. The
Company does not operate the wells in which it owns an interest. Consequently,
a portion of these expenses are reimbursement of costs incurred by the operator
on behalf of the Company. The majority of the Company's reserves are gas,
which normally has lower operating costs associated with the production and
sale of it compared to oil. This expense was 26% of oil and gas revenue in
1993 versus 11% for 1992 primarily due to the high operating costs of the
Golden Meadow oil wells.
"Depletion, depreciation and amortization" is a non-cash expense reflecting the
cost of Proved Properties which is amortized using the units of production
method over the estimated proved reserves as determined by an independent
petroleum engineer. This non-cash expense charge provides the Company with an
allowance to replenish its reserves, which are constantly depleted by
production. This expense increased as a percentage of gross oil and gas sales
in 1993 from 1992 because the Company invested approximately $ 1,697,000 in
prospect development and drilling costs in 1993, but the present discounted
value of reserves decreased by $1,075,772 from December 31, 1992. An impairment
allowance of $431,513 was recorded to provide for the decrease in the present
value of the oil and gas reserves compared to the costs incurred in exploration
activities.
"General and Administrative Expense" - The Company currently had three full
time and one part time employee, and utilizes consulting professionals as
necessary. Management felt that was the minimum staff needed to carry out the
company's business plan. As a public reporting company, there are fixed
expenses of independent public
22
<PAGE> 222
accountants, legal, printing and mailing which account for approximately
$150,000 per year. The Company reduced its expenditures for the marketing of
limited partnerships by McCulloch Energy, Inc., to approximating $190,000 for
the year ended December 31, 1993 which were expensed. The Company also
incurred legal expenses in resolving prior year litigation as well as pursuing
various acquisition opportunities. These expenses should be non-recurring,
particularly since limited partnership marketing was discontinued as of
December 31, 1993. Public reporting expenses should remain unchanged and
general administrative expenses may increase as the Company participates in
more drilling activity, assumes operating responsibilities now handled by joint
ventures and purchases production. Consequently, total general and
administrative expenses have remained constant but may increase in 1994 based
on continued expansion.
"Other Costs and Expenses" - The Company had a loss on the sale of its interest
in gas gathering and transmission facilities which were sold in 1993. It also
had a $108,425 loss on its investment in a partnership which traded in oil
futures. This investment was assumed by an officer of the Company when a cash
call was received which the Company could not make.
"Income Tax Expense (Benefit)" - The Company will receive a refund of federal
income taxes of approximately $20,000 and has a $335,000 tax benefit for 1993
because of the losses and deductions for intangible drilling costs it incurred
during 1993. For the year ended December 31, 1993 the tax benefit was
$147,000.
TWELVE MONTHS ENDED DECEMBER 31,1992:
"Oil and Gas Revenue" - During 1992, the Company invested approximately
$2,800,000 (net) in its exploration and development effort. This large capital
expenditure did not result in a major increase in oil and gas income, because
some of the wells were non-productive and a majority of the successful wells
were not yet producing during 1992. Unaudited oil and gas revenue for the
first quarter of 1993 is greater than $120,000, versus $150,406 for the twelve
months ended December 31, 1992. Oil and gas revenue for the three month
transition period was $6,702 and for the twelve months ended September 30, 1991
was $26,121.
"Interest and other income", is primarily interest income resulting from the
cash position of the Company, a majority of which was invested in Government
guaranteed securities.
"Oil and gas production cost" accounts for lease operating expenses and taxes.
The Company does not operate the wells in which it owns an interest.
Consequently, a portion of these expenses are reimbursement of costs incurred
by the operator on behalf of the Company. The majority of the Company's
reserves are gas. Gas normally has less operating cost associated with
production and sale of the product compared to oil.
"Depletion, depreciation and amortization" is a non-cash expense whereby the
cost of Proved Properties is amortized over the production of estimated proved
reserves as determined by an independent petroleum engineer. This non-cash
expense provides the Company with an allowance to replenish its reserves which
are constantly depleted by production.
"General and Administrative Expense" - The Company currently had four full time
and one part time employee, and utilized consulting professionals as necessary.
Management felt that was the minimum expense needed, to carry out the corporate
business plan. As a public reporting company, there are fixed expenses of
independent public accountants, legal, printing, mailing which account for
approximately $150,000 per year. In addition, the Company through its wholly
owned subsidiary, McCulloch Energy, Inc., had a full time sales manager and two
salesmen as well as legal, printing, due diligence, mailing, travel, etc.,
approximating $190,000 for the year ended December 31, 1992. These costs were
expensed, rather than capitalized. The Company also incurred legal expenses in
resolving litigation of prior years as well as pursuing various acquisition
opportunities.
"Interest expense" increased due to the Company borrowing against its six to
twelve month Government guaranteed securities.
"Gain on Sale of Assets" - The Company purchases long term Government
guaranteed marketable securities. These securities are sometimes purchased at a
premium to face value to secure a higher than current market interest rate.
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<PAGE> 223
This premium is allocated against the interest income. In 1992, the Company
sold a Government guaranteed note in excess of its purchase price, and
accordingly recorded a gain on the sale of investment.
"Federal Income Tax" - The Company has a potential $20,000, Federal Income Tax
refund from taxes paid as a result of the profits of prior years. The
exploration and development intangible costs of the Company, all of which are
capitalized for financial statement purposes, are deductible when incurred for
federal income tax purposes.
The weighted average shares outstanding decreased between periods because the
Company repurchased 65,000 shares in the open market during 1992, however the
Company does not contemplate purchasing shares during 1993. The Company also
retired 30,339 shares pursuant to the liquidation and sale of its Energy
Sources Group subsidiary. Also the Company continued to purchase fractional
shares at $1.50 per share, pursuant to the June, 1991, tender offer.
LIQUIDITY AND CAPITAL RESOURCES
Working capital is provided from a variety of sources; oil and gas income, sale
of prospects (Undeveloped Properties), sale of production (Developed
Properties), debt financing and equity investments. During 1994, the Company's
oil and gas revenue decreased to $494,690 a 53% decrease compared to 1993.
The Company also received proceeds of aproximately $1,500,000 for sales of oil
and gas prospects but reinvested $550,000 in new prospects, resulting in a net
decrease (a source of working capital) in Undeveloped Properties of $950,000.
The Company sold its 50% interest in Tierra Minerals L.C. for share of
Comstock Resources. These shares were later sold during the first quarter of
1994 for a price in excess of $4.50 per share. Consequently, a gain in excess
of $200,000 on this sale was recorded in the first quarter of 1994. The
Company invested $209,000 in oil and gas exploration, therefore, despite the
Tierra properties sale, the Proved Properties increased by $376,102 (use of
working capital). The Company incurred no bank debt in 1994, however, Accounts
Payable decreased by $1,221,953 (a use of working capital). Accounts
Receivable decreased by $100,888, (a source of working capital).
The cumulative net result of the aforementioned activity was a $612,206
increase in working capital during 1994. This resulted in the ratio of current
assets to current liabilities being increased from .78 to 2.81.
In the second quarter of 1994, the Company made several necessary decisions to
correct a major liquidity problem. These decisions had an immediate effect on
its current financial condition. The largest decision was to dispose of a major
asset, the Golden Meadow Field in Lafourche Parish, Louisiana, which was
significantly over budget, with current production less than operating expenses
and which required an immediate additional capital investment to restore
economic production. The original plan was to complete 12 wells. Production was
established on only 8 wells. This production was initially good, but quickly
fell to uneconomic levels, considering the royalty burden and the high
operating expenses of operating in the marsh environment. This disposition was
accomplished by tendering the interest owned to the operator for forgiveness of
debt. The result on the financial statements is a reduction in Accounts
Payable of $156,000.
Since a partnership formed by McCulloch Energy during 1992 had a significant
payable to the Company, and was not able to refinance with a bank, McCulloch
sold an overriding royalty interest in the Scott Field of Lafayette Parish,
Louisiana, for $ 86,700 during the second quarter. This sale allowed the
McCulloch Guaranty Distribution 1992-A, Ltd. to eliminate its $42,737 payable
to McCulloch and to make a 5% distribution to the limited partners. The
financial statement impact of this sale was a reduction in the cost basis of
Proved Properties.
The Company is actively marketing its remaining Yuma Petroleum Joint
Venture prospects, which should result in net proceeds of approximately
$596,125. The result of these sales could reduce Undeveloped Properties while
increasing Cash (a source of working capital).
24
<PAGE> 224
ITEM 9. CHANGES AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL
DISCLOSURE.
The Company changed accounting firms during 1994. On December 28,1994, the
Company filled an 8-K replacing the Deliotte & Touche LLP as auditors for the
financial statements for the year-ended December 31,1994, to Hein + Associates
LLP of Dallas, Texas.
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT.
The following sets forth information as of February 8,1995, concerning each
director and executive officer of the Company, ownership, including each such
person's ownership of common stock (the Company's only class of voting
securities), on an individual basis and ownership by all directors and
executive officers of the Company as a group:
<TABLE>
<CAPTION>
AMOUNT AND NAME PERIOD OF
---------------- ---------
OF BENEFICIAL SERVICE AS
--------------------- ----------
NAME OF OFFICER OWNERSHIP (A) PERCENT OF AN OFFICER/
- --------------- --------------------- ---------- -----------
or Director Position(s) Direct Indirect Class Director
- ------------------------ ------------------------- ------ ------------ --------- ------------
<S> <C> <C> <C> <C> <C>
Joseph F.Langston Jr. Chairman of the Board 629,092 -0- 12.53% April 24, 1989
President, Treasurer (b)(c) (i)
and Director
Randal L. Reeves Controller 6,000 -0- .12% February 1, 1992
(c)
A.B. Copland V.P. Exploration 9,000 .17% February 1, 1992
(c)
M. Michael Witte Director, Chairman 50,000 10,000 1.20% June 7, 1991
of McCulloch Energy (c) (d)
Inc.
Dr. Gary B. Wood Secretary, Director 50,000 60,995 2.21% June 7, 1991
(h) (e)
James O'Donnell Director 100,000 297,929 7.93% April 24, 1989
(c) (i)
J. Robert Dobbins Director 50,000 562,929 12.21% June 2, 1993
(g) (i)
Directors and Officers ------- ------- ------
as a group (7 persons) Total 894,099 931,853 36.37% (j)
======= ======= ======
</TABLE>
(a) Each person listed is deemed to have been beneficial ownership as the
result of sole or shared voting and investment power over the shares
shown opposite his name although record ownership may be in members of
his immediate family.
(b) In July, 1991, the Company granted 150,000 Non-Qualified Stock options
to Joseph F. Langston, Jr. The Langston Non-Qualified Stock Options
are exercisable at $1.32 per share (closing bid price at date of
grant), anytime through July 31, 1996. In addition, the total
includes 237,489 warrants to acquire shares
25
<PAGE> 225
of the Company's common stock at $2.00 per share until July 15, 1995,
which Mr. Langston acquired.
(c) In July 1991, the Company's board of directors granted a total of
240,000 Non Qualified Stock Options to the members of the board of
directors, key employees and associates. These options are
exercisable at $1.32 per share (closing bid price at date of grant)
anytime through July 31, 1996.
(d) Shares held in a Trust controlled and beneficially owned by M. Michael
Witte.
(e) Consists of 9,295 shares of common stock and 1,700 stock purchase
warrants owned by Concorde Financial Corporation, an affiliate of Dr.
Wood, and 50,000 owned by a trust for his children and controlled by
his sister.
(f) Includes 25,000 warrants to acquire shares of the Company's common
stock at $2.00 per share until July 15, 1995 and 125,000 shares owned
by O'Donnell and Masur, L.P., a Texas limited partnership managed and
partially owned by Mr. O'Donnell.
(g) In June, 1993, the Company granted Mr. Dobbins 50,000 stock options as
partial consideration for his becoming a member of the board of
directors. These director options are at $1.75 per share and expire
July 15, 1996.
(h) In January, 1994, the Company granted Dr. Gary Wood 50,000 stock
options exercisable at $1.50 and expire January 10, 1999. The options
were granted as partial consideration for Dr. Wood's consulting
agreement dated January 10, 1994, for assistance in pursuing merger
and acquisitions.
(i) In December, 1993, the Company issued 575,000 preferred shares for
$575,000 convertible at $1.69 per share into 340,237 shares of common
stock. The preferred stock was purchased, $75,000 by Langston
Investments, Inc., $250,000 by O'Donnell Masur L.P., and $250,000 by
Dobbins Partners, L.P.; all affiliates of directors.
(j) Based on 3,690,632 shares outstanding, 340,237 shares subject to the
conversion of preferred stock, and 989,000 stock options and warrants,
or 5,019,869 fully diluted shares outstanding.
No family relationship exists between or among any.of the persons named above.
None of the nominees are directors of any other company having a class of
equity securities registered under, or required to file reports pursuant to,
Section 15(d) or Section 12 of the Securities Exchange Act of 1934 or any
company registered as an investment company under the Investment Company Act of
1940, except Dr. Gary Wood who is a director of Concorde Financial Corporation
and the Concorde Value Fund. Mr. O'Donnell who is a director of Bestway
Rentals, Inc. and Mr. Witte who is a director of Kent Financial Services, Inc.
There are no arrangements or understandings between any of the named directors
or officers and any other persons pursuant to which any director or officer was
selected or nominated as director or officer.
26
<PAGE> 226
The following sets forth background information concerning the Company's
officers or directors:
JOSEPH F. LANGSTON, JR., age 42, has since December, 1989, served in the full
time capacity of President and Chairman of the Board of Directors of the
Company. From November, 1987 to December, 1989 he was vice president of Search
Natural Resources, Inc., a small publicly held independent oil company, and
vice president of Trinity Capital Advisors, an investment banking firm. In
1983 Mr. Langston formed Langston Investments where he served as President from
1983 to 1987. Langston Investments engaged in a variety of investment banking
activities for mid-size oil and gas companies. From 1976 to 1983, Langston
served as vice president of finance and director of a newly formed oil and gas
company. In this capacity, Mr. Langston was responsible for the raising of
over $250 million, from financial institutions both domestic and foreign for
exploration and development activity, primarily in Oklahoma. Mr. Langston
received a B.A. degree from the University of Texas at Arlington in 1974 and
is a Certified Public Accountant in the State of Texas.
RANDAL L. REEVES, age 39, part time Controller of the Company obtained BSBA
degree from the University of Arkansas, Fayetteville, Arkansas in
Accounting/General Business in 1978. Mr. Reeves has been employed by the
Company since January 1992. Mr. Reeves has been privately engaged in various
aspects of the oil business since 1981 as well other various business and
financial related endeavors. Mr. Reeves is a Certified Public Accountant in
the State of Texas.
M. MICHAEL WITTE, age 69, organized McCulloch Oil Corporation an oil, gas and
geothermal operations company, with land development operations, where he
served as President and a Director. McCulloch Oil Corporation was
subsequently renamed MCO Resources, Inc. after a change in working control. On
August 1, 1980, he left the McCulloch organization after nearly 30 years
service to start oil and gas consulting firms called Merlin Associates, Inc.
and M. M. Witte & Associates, Inc. which he continues to serve as president.
He is a graduate of Loyola University in Los Angeles and presently serves on
its Board of Regents. Mr. Witte serves on the Board of Directors of Kent
Financial Services, Inc. Mr.. Witte served as an Officer and Director of the
Independent Petroleum Association of America, Independent oil and Gas Producers
Association of California, a Director of the Western Oil and Gas Association
and is listed in Who's Who of America.
GARY BRENT WOOD, PH-D., age 45, has been the Founder and Chief Executive
Officer of Concorde Financial Corporation, a registered investment advisor from
1981 to the present. He is also Founder and Chairman of OmniMed Corporation, a
health care and medical technology investment and management company from 1982
to the present. He was President of the Society of International Business
Fellowship in 1988-1989. He is also Director of Positron Corporation, Alpha
Holdings, Baylor Research Foundation, the American British Cowdray Hospital
Foundation in Mexico City and chairman of The Health Industry Council. He is a
member of the International Association of Financial Planners, Institute of
Certified Financial Planners, National Association of Personal Financial
Advisors and Dallas Estate Planning Council.
JAMES O'DONNELL, age 42, has been a general partner of O'Donnell and Masur,
Dallas, Texas since 1988, a firm involved in venture capital activities. From
1987 to 1988 he was President of Republic Venture Group, Inc., Dallas, Texas
and from 1983 to 1987 he was Chairman and President of Interfirst Venture
Corporation of Dallas, Texas. Mr. O'Donnell received a MBA degree in finance
from the Wharton Graduate Division, University of Pennsylvania in 1978.
J. ROBERT DOBBINs, age 37, was elected to the Board by the then four members of
the Company's Board of Directors on June 2, 1993. From 1981 to 1988, Mr.
Dobbins was employed by the Equity Sales Division of Goldman, Sachs & Co. From
1988 to 1991 he was Vice President of BTC Partners, a captive investment and
corporate finance advisory firm to Mesa Limited Partnership. From 1991 to
present, Mr. Dobbins has been President of Dobbins Capital Corporation which
acts as the general partner to a private investment partnership. Mr. Dobbins
received his B.S. degree (Economics) in 1979 from Rhodes College and his MBA
degree (Finance) from the University of Michigan in 1981.
27
<PAGE> 227
MEETINGS AND COMMITTEES OF THE BOARD
The full Board of Directors held seven meetings during 1994 at which all
members were in attendance in person or by telephone. The Company's audit
committee consist of three directors; O'Donnell, Wood and Langston. The
Company's compensation committee consist of two directors; O'Donnell and Witte.
ITEM 11. EXECUTIVE COMPENSATION.
The following table shows the aggregate direct remuneration paid by the Company
for the periods presented and to all officers and directors as a group for
services in all capacities.
<TABLE>
<CAPTION>
NAME OF INDIVIDUAL
- ------------------
OR NUMBER OF PERSONS CAPACITIES IN TWELVE MONTHS ENDED TWELVE MONTHS ENDED
- -------------------- ------------- ------------------- -------------------
ENDED
- -----
IN GROUP WHICH SERVED DECEMBER 31, 1994 DECEMBER 31, 1993
- -------- ------------ ----------------- -----------------
<S> <C> <C> <C>
Joseph F. Langston Jr. President $ 126,038 $ 138,462
Randal L. Reeves Controller 65,520 63,920
A. B. Copland (3) V.P. Exploration 38,041 48,000
M. Michael Witte (1)(2) Director 11,936 12,281
and Chairman of
McCulloch Energy, Inc.
James O'Donnell (1) Director 8,500 7,000
Dr. Gary Wood (1) Director 8,500 7,000
J. Robert Dobbins (1) Director 8,500 5,000
All Officers and All capacities
Directors as
--------- --------
a group Total $ 267,035 $281,663
========= ========
</TABLE>
(1) Includes outside director's compensation of $500 per month, plus $500
per meeting.
(2) Includes $500 per day for services rendered outside his office on
behalf of the Company, on an as needed basis. Mr. Witte's services
arter rendered through his Professional Corporation, M.M. Witte &
Assoiciates, Inc.
(3) Mr. Copland is not employed by the Company on a full time basis. Half
of his time is devoted to Yuma Petroleum Co., (See Item I). As part
of his employment agreement, Mr. Copland receives an overriding
royalty equal to 1% of the Company's participation in prospects
involving Mr. Copland, but not Yuma.
An Employment Agreement with Mr. Langston requires that he devote such efforts
and attention as are necessary to fulfill his duties consistent with his
position as Chief Executive Officer of the Company as are delegated to him by
the Board of Directors and as set forth in the Company's bylaws. The
Employment Agreement has a five year term which commenced July 1, 1991 and
provides for an annual salary of $132,500 which may be increased from year to
year in the discretion of the Board of Directors. The Board also has
discretion to grant bonuses to Mr. Langston as circumstances warrant. The
Agreement also provides for a $ 1,000,000 life insurance policy on the life of
Mr. Langston to be payable to him or his designees provided, however, that the
face amount may be reduced to the extent necessary because the Board has
limited the payment of premiums to the sum of $5,000 per year. The Agreement
may be terminated for cause or upon Mr. Langston's death.
28
<PAGE> 228
SUMMARY COMPENSATION TABLE
<TABLE>
<CAPTION>
NAME ANNUAL
- ---- ------
AND 12/31 COMPEN-
- --- ----- -------
PRINCIPAL YEAR SATION OPTIONS
- --------- ---- ------ -------
POSITION END SALARY($) BONUS($) ($)
- -------- --- --------- -------- ---
<S> <C> <C> <C> <C> <C>
Joseph F. 1994 126,038 -0- 126,038 -0-
Langston Jr. 1993 140,806 -0- 140,806 -0-
(President) 1991 121,247 150,000 271,247 200,000
1990 96,243 -0- 96,243 -0-
Randal L. 1994 65,520 -0- 65,520 -0-
Reeves 1993 63,920 -0- 63,920 -0-
(Controller) 1992 55,000 3,000 58,000 6,000
A.B. 1994 38,041 -0- 38,041 -0-
Copland(3) 1993 48,000 -0- 48,000 -0-
(V.P.Exploration) 1992 48,000 -0- 48,000 9,000
M. Michael 1994 11,936 -0- 7,500 -0-
Witte (1)(2) 1993 12,281 -0- 12,281 -0-
(Director, Chairman, 1992 23,000 -0- 23,000 -0-
McCulloch Energy, Inc) 1991 6,500 -0- 6,500 50,000
James 1994 8,500 -0- 7,500 -0-
O'Donnell (1) 1993 7,000 -0- 7,000 -0-
(Director) 1992 8,000 -0- 8,000 -0-
1991 9,500 -0- 9,500 50,000
Dr. Gary 1994 8,500 -0- 7,500 -0-
Wood (1)(4) 1993 7,000 -0- 7,000 -0-
(Director) 1992 8,000 -0- 8,000 -0-
1991 4,000 -0- 4,000 50,000
J. Robert 1994 8,500 -0- 7,500 -0-
Dobbins (1) 1993 5,000 -0- 5,000 50,000
(Director) 1992 -0- -0- -0- -0-
1991 -0- -0- -0- -0-
</TABLE>
(1) Includes outside director's compensation of $500 per month,
plus $500 per meeting.
(2) Includes $500 per day for services rendered outside his office
on behalf of the company, on an as needed basis.
(3) Mr. Copland is not employed by the Company on a full time
basis. Half of his time is devoted to Yuma Petroleum Co.,
(See Item I above). As part of his employment agreement, Mr.
Copland receives an overriding royalty equal to 1% of the
Company's participation on prospects involving Mr. Copland,
but not Yuma.
(4) Dr. Gary Wood was issued 50,000 options in January, 1995
subsequent to year end but prior to issuance of this report.
29
<PAGE> 229
AGGREGATE OPTIONS EXERCISED IN LAST FISCAL YEAR
AND FISCAL YEAR-END OPTION VALUES
<TABLE>
<CAPTION>
NUMBER OF VALUE OF
----------- --------
OPTIONS IN-THE-MONEY
------- ------------
SHARES ACQUIRED VALUE AT OPTIONS AT
--------------- ----- -- ------------
NAME ON EXERCISE REALIZED($) DECEMBER 31,1994 DECEMBER 31,1994
- ---- ----------- ----------- ------------------- ------------------
(1)
---
<S> <C> <C> <C> <C>
Joseph F.
Langston -0- -0- 200,000 $ -0-
Randal L.
Reeves -0- -0- 6,000 -0-
A.B.
Copland -0- -0- 9,000 -0-
M. Michael
Witte -0- -0- 50,000 -0-
Dr. Gary B.
Wood -0- -0- 100,000(2) -0-
James
O'Donnell -0- -0- 50,000 -0-
Robert
Dobbins -0- -0- 50,000 -0-
</TABLE>
(1) The closing bid price at December 31, 1994, was $0.75. The option
price is $0.875 per share.
(2) 50,000 stock options were issued to Dr. Gary Wood in January, 1994, at
$1.50 per share, exercisable until January, 1999.
OPTION GRANTS IN LAST FISCAL YEAR
(NONE)
30
<PAGE> 230
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT.
The following table sets forth the number and percentage of the company's
shares of common stock owned beneficially by any person, including any "group"
as that term is defined in Section 13(d)(3) of the Securities Exchange Act of
1934, who own of record or beneficially 5% or more of the Company's common
stock, and the address of such persons as of February 8, 1994.
<TABLE>
<CAPTION>
AMOUNT AND NATURE PERCENT
---------- ------ -------
OF BENEFICIAL OWNERSHIP (A) OF
------------- ------------- --
NAME AND ADDRESS DIRECT INDIRECT CLASS (G)
- ---------------- ------ -------- ----------
<S> <C> <C> <C>
Joseph F. Langston, Jr. 629,092 -0- 12.53%
10210 Hwy 243 (c)(d)
Kaufman, Texas 75142
Dobbins Partners, L.P. 50,000 562,929 12.21%
Suite 260 (e) (b)
2651 N. Harwood
Dallas, TX 75201
O'Donnell-Masur 100,000 297,929 7.93%
5949 Sherry Lane, 11755 (e) (f)
L.B. 159
Dallas, TX 75225
</TABLE>
(a) Each person listed is deemed to have beneficial ownership as the
result of sole or shared voting and investment power over the shares
shown opposite his name although record ownership may be in member
of his immediate family.
(b) Dobbins Partners, L.P. a Texas limited partnership is a Dallas, Texas,
based investment partnership managed by Dobbins Capital
Corporation, of which J. Robert Dobbins is president.
(c) Mr. Langston holds presently exercisable warrants to purchase 237,489
shares of the Company's common stock at $2.00 per share that expire
on July 17, 1995.
(d) Includes 50,000 directors' and 150,000 employee Non-Qualified Stock
Options, exercisable at $1.32 per share (closing bid price at date of
grant) anytime through July 31, 1996.
(e) Includes 50,000 directors options exercisable at $1.32 per share
anytime through July 31, 1996.
(f) Includes 25,000 warrants to acquire shares of the Company's common
stock at $2.00 per share until July 15, 1995 and 125,000 shares owned
by O'Donnell and Masur, L.P., a Texas limited partnership managed
and partially owned by Mr. O'Donnell.
(g) Based on 3,690,632 shares outstanding, 340,237 shares subject to
conversion of the preferred stock, and 989,000 stock options and
warrants; or 5,019,869 fully diluted shares outstanding.
For information concerning ownership and/or control of common stock of the
Company by its officers and directors, see Item 10 of this report.
31
<PAGE> 231
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS.
If a change in control of the Company occurs and within three years,
Mr. Langston voluntarily terminates his employment, or is involuntarily
terminated by the Company, he will be entitled to receive the full salary
benefits for the unexpired term of his Employment Agreement. For purposes of
this provision, a change in control is deemed to have occurred if: (i) any
third person or a group becomes the beneficial owner of shares of the company
or obtains proxies or other rights which entitle them to vote 25 percent or
more of the total number of votes for the election of the Board of Directors of
the Company or with respect to any merger, consolidation or sale or (ii) as a
result of or in connection with any cash tender offer, merger, or other
business combination, sale of assets, contested election or combination of the
foregoing, the persons who are directors of the company immediately prior to
such events cease to constitute a majority of the Board of Directors of the
Company, or (iii) the approval of an agreement providing for either a
transaction or series of transactions by which the Company will cease to be an
independent publicly held company or for a sale , lease or other disposition of
all or substantially all of the assets of the Company.
Since the Company pays only $500 per month, plus $500 per meeting to
its directors and provides no officer/director liability insurance, on July 23,
1991, the board of directors granted 50,000 Non-Qualified Stock Options to each
director. The options are exercisable at $1.32 per share (the average between
the bid and the ask prices at the close of business July 23, 1991). These
options vest immediately and expire on July 31, 1996.
In January, 1994, the Company entered into a six month consulting
agreement with Concorde Financial Corporation, a company controlled by Dr. Gary
Wood, a director of the company. The agreement provides for Dr. Wood and
various associates to assist the Company in the search, evaluation,
negotiations, financing and closing of one or more production (reserve)
acquisitions and (or) corporate mergers. For these services the Company pays
Concorde a fee of $3,000 per month, plus expenses; as well as 50,000 warrants
at $1.50 per share expiring January 10, 1999, and a 2% fee on all business
concluded as a result of Concorde's efforts.
32
<PAGE> 232
PART IV
EXHIBITS
ITEMS 14. CONSOLIDATED FINANCIAL STATEMENT SCHEDULES AND REPORTS ON
FORM 8-K.
(a)(1) and (2) Consolidated Financial Statements and
Supplemental Schedules
See "Index to Consolidated Financial Statements and Supplementary Data' under
Item 8 above.
(a)(3) Exhibits
The following exhibits are filed herewith pursuant to Rule 601
of Regulation S-K or are incorporated by reference to previous filings:
<TABLE>
<CAPTION>
EXHIBIT
- -------
TABLE NO. DOCUMENT REFERENCE
- --------- -------- ---------
<S> <C> <C>
(3) Certificate of Incorporation and by-laws (A)
(4) Instruments defining the rights of security
holders including debentures None
(9) Voting Trust Agreement None
(10) Material Contracts (B)
(11) Statement re: computation of per share earnings (C)
(12) Statement re: computation of ratios None
(13) Annual report to security holders and Form 10-Q
quarterly reports to security holders None
(18) Letter re: Change in accounting principles None
(19) Previously unfiled documents None
(22) Subsidiaries of Registrant (D)
(23) Published report regarding matters submitted
to vote of security holders None
(24) Consent of experts and counsel None
(25) Power of attorney None
(28) Additional exhibits None
(29) Information from reports furnished to state
insurance regulatory authorities None
</TABLE>
(A) Filed with Registration Statement No. 33-30199 under the Securities
Act of 1933 and incorporated herein by this reference.
(B) The following material contracts are made a part hereof by reference
filed herewith.
(C) Not required, since information is ascertainable from the basic
consolidated financial statements.
(D) Filed as Exhibit of 89-22 to Registration Statement No. 33-30199 with
Form 10-K for the Year Ended December 31, 1989, and Incorporated
herein by reference.
33
<PAGE> 233
<TABLE>
<CAPTION>
EXHIBIT COMMISSION
- ------- ----------
REFERENCE DOCUMENT TITLE FILING
- --------- -------------- ------
<S> <C> <C>
89-10.1 Search-ESG-Danbury Agreement 33-30199
89-10.2 Search-ESG-Facilities Use Agreement 33-30199
89-10.3 Search-IPG Securities 33-30199
89-10.4 Search-ESG Plano Audit Expense 33-30199
Agreement
89-10.5 Search-ESG-Plano-Share Voting and 33-30199
Management Agreement
89-10.6 Piano-Odyssey Partnerships Restated 33-30199
Stock Purchase Agreement
89-10.7 Plano-Trinity Capital Advisors
Agreement 33-30199
89-10.8 Search-Walsh,Ulbrich,Danbury
Associates, Inc. Agreement 33-30199
89-10.9 Plano-Carlton and Taylor Consulting 33-30199
Agreement Termination 33-30199
89-10-10 ESG-Walsh Employment Agreement 33-30199
89-10.11 ESG-Ulbrich Employment Agreement
89-10-12 Search-Langston Employment 33-30199
Agreement 33-30199
89-10-13 Joint Venture Agreement-Yuma
89-10.14 Promissory Note of Search re: Yuma 33-30199
joint venture
90-10.01 Joint Venture Agreement-Pecos (E)
90-10.02 Amended Joint Venture Agreements-Yuma (E)
91-10.01 Stock Option Plan and Agreements
with Directors (four Directors)
91-10.02 Employee Non-Qualified Stock Option
Plan and Agreement with (F)
Joseph F. Langston, Jr. (F)
91-10.03 Stock Option Agreement
Employees
91-10.04 Employment Agreement/Joseph F. Langston, Jr. (F)
92.10.01 Tierra Mineral L.L.C. Agreements 0-18837
92.10-02 Note-North Park National Bank 0-18837
92.10-03 Placid Joint Venture Agreement 0-18837
92.10.04 McCulloch Combination Units L.P. 0-18837
92.10.05 McCulloch Energy Guarantee Distribution 1992-A L.P. 0-18837
92-10.06 McCulloch Energy Guarantee Distribution 1992-B L.P. 0-18837
</TABLE>
(E) Filed as Exhibits 90-10.01 and 90.10..02,
respectively, with Form 10-K for the Year Ended
September 30, 1990 and incorporated herein by
reference.
(F) Filed as Exhibits 91.10.01 91.10.02, 91.10.03,
91-10.04, 91.10.05 and 91.10.06, respectively: with
Form 10-K for the Year Ended December 31, 1992 and
incorporated herein as reference.
34
<PAGE> 234
SIGNATURES
Pursuant to Section 13 of the Securities Exchange Act of 1934, Search
Exploration, Inc., (the Registrant) has duly caused this report to be signed on
its behalf by the undersigned thereunto duly authorized.
Dated:
December 31, 1994 SEARCH EXPLORATION, INC.
BY: /s/ JOSEPH F. LANGSTON
-----------------------------
Joseph F. Langston, President
Pursuant to the requirements of the Securities Exchange Act of 1934, this
report has been signed below by the following persons on behalf of the
registrant and in the capacities and on the dates indicated.
<TABLE>
<S> <C>
/s/ JOSEPH F. LANGSTON Date: December 31, 1994
- ------------------------------------- ----------------------------------
Joseph F. Langston, President
Chief Executive Officer, Chief
Financial and Accounting Officer,
and a Director
/s/ GARY WOOD Date: December 31, 1994
- ------------------------------------- ----------------------------------
Dr. Gary Wood, Secretary
a Director
/s/ M. MICHAEL WITTE Date: December 31, 1994
- ------------------------------------- ----------------------------------
M. Michael Witte
a Director
/s/ JAMES O'DONNELL Date: December 31, 1994
- ------------------------------------- ----------------------------------
James O'Donnell
a Director
/s/ J. ROBERT DOBBINS Date: December 31, 1994
- ------------------------------------- ----------------------------------
J. Robert Dobbins
a Director
</TABLE>
35
<PAGE> 235
ITEM 8
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
<TABLE>
<S> <C>
INDEPENDENT AUDITOR'S REPORTS - 1994 F-1
1993 and 1992 F-2
CONSOLIDATED BALANCE SHEETS - As of December 31, 1994 and 1993 F-3
CONSOLIDAT ED STATEMENTS OF OPERATIONS - Years ended December 31, 1994,
1993 and 1992 F-5
CONSOLIDATED STATEMENT OF CHANGES IN STOCKHOLDERS' EQUITY -
For the period from November 1, 1992 through December 31, 1994 F-7
CONSOLIDATED STATEMENTS OF CASH FLOWS - Years ended December 31, 1994,
1993 and 1992 F-8
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS F-9
</TABLE>
<PAGE> 236
INDEPENDENT AUDITOR'S REPORT
The Board of Directors
Search Exploration, Inc.
Dallas, Texas
We have audited the accompanying consolidated balance sheets of Search
Exploration, Inc. and subsidiaries as of December 31, 1994, and the related
consolidated statements of operations, changes in stockholders' equity, and
cash flows for the year then ended. These financial statements are the
responsibility of the Company's management. Our responsibility is to express
an opinion on the financial statements based on our audit.
We conducted our audit 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 audit provides a reasonable basis
for our opinion.
In our opinion, the consolidated financial statements referred to above present
fairly, in all material respects, the financial position of Search Exploration,
Inc. and subsidiaries as of December 31, 1994, and the results of their
operations and cash flows for the year then ended, in conformity with generally
accepted accounting principles.
The accompanying financial statements have been prepared assuming that the
Company will continue as a going concern. As discussed in Note 1 to the
financial statements, the Company has suffered recurring losses from operations
and currently has limited financial resources, which raise substantial doubt
about its ability to continue as a going concern. Management's plans in regard
to these matters are also described in Note 1. The financial statements do not
include any adjustments that might result from the outcome of this uncertainty.
As described in Note 6 to the financial statements, the Company is a defendant
in litigation, the outcome of which is not presently determinable.
As described in Note 10 to the financial statements, the Company entered into
an agreement to merge into another Company.
HEIN + ASSOCIATES LLP
/s/ HEIN + ASSOCIATES LLP
February 10, 1995
Dallas, Texas
F-1
<PAGE> 237
INDEPENDENT AUDITOR'S REPORT
The Board of Directors
Search Exploration, Inc.
Dallas, Texas
We have audited the accompanying consolidated balance sheets of Search
Exploration, Inc. and subsidiaries (the "Company") as of December 31, 1993,
and the related consolidated statements of operations, changes in common
stockholders' equity, and cash flows for the years ended December 31, 1993 and
1992. These financial statements are the responsibility of the Company's
management. Our responsibility is to express an opinion on the financial
statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to
obtain reasonable assurance about whether the financial statements are free of
material misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements. An audit
also includes assessing the accounting principles used and significant
estimates made by management, as well as evaluating the overall financial
statement presentation. We believe that our audits provide a reasonable basis
for our opinion.
In our opinion, such consolidated financial statements present fairly, in all
material respects, the financial position of Search Exploration, Inc. and
subsidiaries as of December 31, 1993, and the results of their operations and
their cash flows for the years ended December 31, 1993 and 1992, in conformity
with generally accepted accounting principles.
As discussed in Note 1 to the consolidated financial statements, effective
January 1, 1993, the Company changed its method of accounting for income taxes
to conform with Statement of Financial Accounting Standards No. 109.
/s/ DELOITTE & TOUCHE LLP
DELOITTE & TOUCHE LLP
April 12, 1994
Dallas, Texas
<PAGE> 238
SEARCH EXPLORATION, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
December 31
--------------------------------------
1994 1993
---- ----
<S> <C> <C>
ASSETS
CURRENT ASSETS:
Cash and cash equivalents $ 42,388 $ 68,732
Marketable securities - 406,547
Receivables:
Trade 423,149 480,727
Partnerships 4,250 47,560
Related party accounts and notes - 75,000
Federal income taxes recoverable 18,802 19,770
------------ ------------
Total Current Assets 488,589 1,098,336
PROPERTY AND EQUIPMENT
Oil and gas properties (full cost method):
Proved properties 5,027,408 4,651,306
Unproved properties 751,464 2,817,480
Office furniture, equipment, and improvements 39,439 39,439
------------ ------------
5,818,311 7,508,225
Less accumulated depletion, depreciation,
amortization and impairment (3,734,382) (1,340,362)
------------ ------------
Net Property and Equipment 2,083,929 6,167,863
------------ ------------
Total Assets $ 2,572,518 $ 7,266,199
============ ============
</TABLE>
-Continued-
F-3
<PAGE> 239
SEARCH EXPLORATION, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS, Continued
<TABLE>
<CAPTION>
December 31
--------------------------------
1994 1993
---- ----
<S> <C> <C>
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES:
Accounts payable $ 173,703 $ 1,295,409
Notes payable - 100,240
------------ ------------
Total Current Liabilities 173,703 1,395,649
DEFERRED FEDERAL INCOME TAXES - 226,770
COMMITMENTS AND CONTINGENCIES (Notes 6 and 10)
REDEEMABLE PREFERRED STOCK
1993 series, $0.001 par value; 5,000,000 shares
authorized; 575,000 shares issued and outstanding 575,000 575,000
STOCKHOLDERS' EQUITY
Common stock, $.05 par value; 50,000,000 shares
authorized; 3,690,632 shares issued and outstanding 184,532 184,532
Additional paid-in capital 4,400,002 4,400,002
Retained earnings (deficit) (subsequent to November 30,
1989 quasi-reorganization in which deficit of $1,037,285
was eliminated) (2,760,719) 484,246
------------ ------------
Total Stockholders' Equity 1,823,815 5,068,780
------------ ------------
Total Liabilities and Stockholders' Equity $ 2,572,518 $ 7,266,199
============ ============
</TABLE>
See accompanying notes to consolidated financial statements
F-4
<PAGE> 240
SEARCH EXPLORATION, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
<TABLE>
<CAPTION>
Year Ended December 31,
--------------------------------------------------
1994 1993 1992
------------ ----------- -----------
<S> <C> <C> <C>
REVENUE:
Oil and gas sales $ 494,690 $ 1,057,044 $ 150,406
Interest and other 18,094 44,303 121,229
Gain on sale of marketable securities 203,508 - 67,514
----------- ----------- ----------
Total Revenue 716,292 1,101,347 339,149
EXPENSES:
Oil and gas production costs 273,972 285,656 16,645
Depletion, depreciation and amortization 498,314 670,457 94,467
Oil and gas property impairment allowance 2,667,471 431,513 -
Loss from sale or impairment of gas
gathering and transmission facilities - 30,000 -
General and administrative expenses 698,390 787,680 622,484
Loss on sale of investment - 108,425 -
Interest expense 4,967 27,470 36,644
----------- ----------- ----------
Total Expenses 4,143,114 2,341,201 770,240
----------- ----------- ----------
LOSS BEFORE INCOME TAXES AND
CUMULATIVE EFFECT OF CHANGE
IN METHOD OF ACCOUNTING FOR
INCOME TAXES (3,426,822) (1,239,854) (431,091)
INCOME TAX (EXPENSE) BENEFIT
Current - 19,770 278,000
Deferred 226,763 315,230 (131,000)
----------- ----------- ----------
Total Income Tax Benefit 226,763 335,000 147,000
----------- ----------- ----------
LOSS BEFORE CUMULATIVE EFFECT
OF CHANGE IN METHOD OF
ACCOUNTING FOR INCOME TAXES (3,200,059) (904,854) (284,091)
CUMULATIVE EFFECT OF CHANGE IN
METHOD OF ACCOUNTING FOR
INCOME TAXES - 69,000 -
----------- ----------- -----------
NET LOSS $(3,200,059) $ (835,854) $ (284,091)
=========== =========== ===========
</TABLE>
-Continued-
F-5
<PAGE> 241
SEARCH EXPLORATION, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS, Continued
<TABLE>
<CAPTION>
Year Ended December 31,
----------------------------------------------------
1994 1993 1992
------------ ------------ ------------
<S> <C> <C> <C>
LOSS PER SHARE:
Net loss before cumulative effect
of change in method of accounting for
income taxes $ (0.88) $ (0.25) $ (0.08)
Cumulative effect of change in method of
accounting for income taxes - 0.02 -
----------- ----------- -----------
Net loss $ (0.88) $ (0.23) $ (0.08)
=========== =========== ===========
WEIGHTED AVERAGE NUMBER OF
COMMON SHARES OUTSTANDING 3,690,632 3,690,632 3,742,402
=========== =========== ===========
</TABLE>
See accompanying notes to consolidated financial statements
F-6
<PAGE> 242
SEARCH EXPLORATION, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF CHANGES IN STOCKHOLDERS' EQUITY
For the period from January 1, 1992 through December 31, 1994
<TABLE>
<CAPTION>
Additional Retained
Common Stock Paid - In Earnings
Shares Amount Capital (Deficit)
---------- --------- ----------- ------------
<S> <C> <C> <C> <C>
Balances, January 1, 1992 3,755,632 $ 187,783 $ 4,489,577 $ 1,604,191
Retirement of Common Stock (65,000) (3,251) (89,575) -
Net loss for the year - - - (284,091)
--------- --------- ---------- ----------
Balances, December 31, 1992 3,690,632 184,532 4,400,002 1,320,100
Net loss for the year - - - (835,854)
--------- --------- ---------- ----------
Balances, December 31, 1993 3,690,632 184,532 4,400,002 484,246
Preferred Stock dividends - - - (44,906)
Net loss for the year - - - (3,200,059)
--------- --------- ---------- ----------
Balances, December 31, 1994 3,690,632 $ 184,532 $ 4,400,002 $(2,760,719)
========= ========= ========== ==========
</TABLE>
See accompanying notes to consolidated financial statements
F-7
<PAGE> 243
SEARCH EXPLORATION, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
Year Ended December 31,
------------------------------------
1994 1993 1992
-------- -------- --------
<S> <C> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net loss $ (3,200,059) $ (835,854) $ (284,091)
Adjustments to reconcile to net cash from
operating activities:
Depletion, depreciation, and amortization 498,314 670,457 94,467
Oil and gas property impairment allowance 2,667,471 431,513
Loss on sale or impairment allowance of gas
gathering and transmission system - 30,000
Loss on sale of investment - 108,425
Changes in assets and liabilities:
Decrease in marketable securities 406,547 1,601,878 953,595
Decrease (increase) in receivables 100,888 (362,396) (89,826)
Decrease (increase) in Federal income
taxes recoverable and other current
assets 968 (19,770) 358,000
Decrease in other assets - 23,555 11,445
(Decrease) increase in accounts payable (965,667) 51,832 1,063,692
Increase (decrease) in deferred income taxes (226,763) (384,230) 131,000
----------- ---------- ----------
Net cash provided (used) by operations (718,301) 1,315,410 2,238,282
CASH FLOWS FROM INVESTING ACTIVITIES:
Additions to property and equipment (759,193) (4,268,370) (5,737,514)
Proceeds from sale of oil and gas properties 1,536,209 2,435,535 2,980,741
Decrease (increase) in related party accounts and notes 75,000 669,249 (744,249)
Proceeds from sale of other assets and other (14,913) 50,000
----------- ---------- ----------
Net cash provided (used) by investing activities 837,103 (1,113,586) (3,501,022)
CASH FLOWS FROM FINANCING ACTIVITIES:
Issuance of redeemable stock - 575,000 -
Payment of dividends (44,906) - -
Retirements of common stock - - (92,826)
Long-term debt and notes payable repayments (100,240) (792,629) -
Proceeds from note payable - - 792,629
----------- ---------- ----------
Net cash provided (used) by financing activities (145,146) (217,629) 699,803
----------- ---------- ----------
NET DECREASE IN CASH AND CASH
EQUIVALENTS (26,344) (15,805) (562,937)
CASH AND CASH EQUIVALENTS,
BEGINNING OF PERIOD 68,732 84,537 647,474
----------- ---------- ----------
CASH AND CASH EQUIVALENTS,
END OF PERIOD $ 42,388 $ 68,732 $ 84,537
=========== ========== ==========
SUPPLEMENTAL CASH FLOW INFORMATION:
Cash paid for interest $ 4,967 $ 27,476 $ 35,340
Cash refunded for income taxes - - 606,040
Oil and gas properties retired in exchange for accounts
payable 156,049 - -
</TABLE>
See accompanying notes to consolidated financial statements
F-8
<PAGE> 244
SEARCH EXPLORATION, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. SUMMARY OF SIGNIFICANT ACCOUNTING AND REPORTING POLICIES
Principles of Consolidation
The accompanying financial statements include the accounts of Search
Exploration, Inc. ("Search" or the "Company"), Search's wholly owned
subsidiary McCulloch Energy, Inc. ("McCulloch") and the proportional
consolidation of the Company's interest in partnerships formed by
McCulloch. Intercompany accounts and transactions are eliminated.
Cash and Cash Equivalents
The Company invests excess cash in short-term securities that are highly
liquid. The short-term investments, which have a maturity of 90 days or
less at date of purchase, are considered cash equivalents by the Company.
Marketable Securities
Marketable securities, which the Company owned at December 31, 1993, were
carried at the lower of cost or market value. The cost of the specific
security sold is used to compute gains or losses.
In February 1992, the Company, through McCulloch, acquired for $50,000 a
50% interest in Tierra Minerals Development, L.C., ("Tierra") which was
formed to pursue producing property acquisitions. The Company sold this
investment in December 1993 for 132,500 shares of common stock in another
public company. The market value of the shares of $406,547 as of December
31, 1993 was credited to the full cost pool. Prior to the sale, the
Company's interest in Tierra was accounted for under the equity method.
The securities were sold in 1994 for a gain of $203,508.
Oil and Gas Properties
Oil and gas properties are recorded at cost using the full cost method of
accounting as prescribed by the Securities and Exchange Commission ("SEC").
Under the full cost method, all costs associated with the acquisition,
exploration and development of oil and gas properties are capitalized as
part of the full cost pool. The full cost pool is limited to the full cost
"ceiling," which is calculated based on the estimated present value of
future net cash flows from proved oil and gas reserves, as adjusted for
expected income taxes and other factors. The Company recorded an oil and
gas property impairment allowance as a result of the full cost ceiling
limitation of $ 2,667,471 in 1994 and $431,513 in 1993. Sales,
dispositions and other oil and gas property retirements are accounted for
as adjustments to the full cost pool with no recognition of gain or loss
unless such disposition would significantly alter the relationship between
capitalized costs and proved oil and gas reserves.
Depletion, depreciation and amortization of proved oil and gas properties
is determined using the units-of- production method based on total proved
reserves as estimated by an independent petroleum engineer. Depletion,
depreciation and amortization of oil and gas properties was $486,000,
$654,860, and $93,967 for the years ended December 31, 1994, 1993 and 1992,
respectively.
F-9
<PAGE> 245
SEARCH EXPLORATION, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Depletion, depreciation and amortization, including the ceiling writedowns,
of oil and gas properties per equivalent unit-of-production (barrel of oil)
was $9.81, $12.85, and $6.83 for the years ended December 31, 1994, 1993
and 1992, respectively.
The Company, through McCulloch, is a participant in joint ventures engaged
in the business of developing oil and gas drilling prospects for resale to
third parties. The Company accounts for its interests in the joint
ventures on an equity basis. Prospect costs are capitalized as incurred
and included in oil and gas properties on the balance sheet. Prospect
costs are excluded from amortizable costs pending evaluation, as described
below. Costs related to impaired prospects are included in amortizable
costs. Gain or loss is not recognized on the sale of these prospects since
the Company uses the full cost method of accounting.
Investments in undeveloped leases, including leases acquired through joint
ventures and directly, are excluded from costs to be amortized pending
determination as to the existence of proved reserves or lease impairment.
Until this determination is made, these properties are subject to periodic
review for impairment, and the amount of any such impairment is included in
costs to be amortized. The amounts excluded from amortization are as
follows: year ended December 31, 1994, $751,464; year ended December 31,
1993, $2,817,480; and year ended December 31, 1992, $2,554,033.
The costs excluded from amortization as of December 31, 1994, by category
of cost and year of origination, are as follows:
<TABLE>
<CAPTION>
Period of Origination
--------------------------------------------------------------------
Year Ended December 31,
--------------------------------------------------------------------
1994 1993 1992 Total
----------- ----------- ---------- ---------
<S> <C> <C> <C> <C>
Acquisition costs $ 142,100 $ 309,850 $ 65,000 $ 516,950
Exploration costs 30,750 103,200 100,564 234,514
--------- --------- --------- ---------
$ 172,850 $ 413,050 $ 165,564 $ 751,464
========= ========= ========= =========
</TABLE>
Management of the Company expects most of these costs to be included in the
amortization base over the next 18 months.
Loss Per Share
Loss per common share has been computed based on the weighted average
number of common shares outstanding during each period presented. In
addition, the loss per common share for the years ended December 31, 1994
and 1993 includes consideration of the redeemable preferred stock
cumulative dividend of $51,750 and $14,523 as of December 31, 1994 and
1993, respectively (See Note 5). Stock options and warrants have not been
considered as common stock equivalents in the calculation of loss per share
because their effect would be antidilutive.
F-10
<PAGE> 246
SEARCH EXPLORATION, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Income Taxes
Effective January 1, 1993, the Company adopted the provisions of Statement
of Financial Accounting Standards No. 109, "Accounting for Income Taxes"
(SFAS No. 109). Pursuant to SFAS No. 109, deferred tax assets and
liabilities are recognized for future tax consequences attributable to
differences between financial statement carrying amounts of existing assets
and liabilities and their respective tax bases. Deferred tax assets and
liabilities are measured using enacted tax rates expected to apply to
taxable income in the years in which these temporary differences are
expected to be recovered or settled. Under SFAS No. 109, the effect on
deferred tax assets and liabilities of a change in tax rates is recognized
in income in the period that includes the enactment date. The cumulative
effect of the change in method of accounting for income taxes from
Accounting Principals Board Opinion No. 11, "Accounting for Income Taxes"
(APB No. 11), which was the income tax accounting method followed through
December 31, 1992, is reflected in the consolidated statement of operations
for the year ended December 31, 1993.
Continuation as a going concern
The Company has suffered recurring losses from operations and currently has
limited financial resources, which raise substantial doubt about its
ability to continue as a going concern. Management of the Company has
pursued merger and acquisition opportunities in an attempt to alleviate
this situation. As described in Note 10, the Company has entered into an
agreement to merge into Harken Energy Corporation. The accompanying
financial statements do not include any adjustments that might result from
the outcome of this uncertainty.
2. INVESTMENT IN PROSPECT GENERATION JOINT VENTURES
The Company is engaged in the business of developing oil and gas drilling
prospects for resale to third parties through joint venture arrangements
with Yuma Petroleum Company ("Yuma") and Pecos Petroleum Company ("Pecos").
The agreement with Yuma required the Company to fund 50% of prospect costs,
including an allocation of overhead. The Company is entitled to 50% of all
cash proceeds from the sale of prospects until its entire investment
(including unsold prospects) is recouped, after which Yuma is entitled to
75% and the Company 25% of net cash proceeds. The Company is also entitled
to any carried working interest retained by the joint venture equal to one-
half of its participation and certain overriding royalty interests as
defined in the agreement. The Company elected to terminate the Yuma joint
venture effective July 1, 1993. As a part of the termination agreement,
the joint venture will continue to market remaining prospects until sold.
As of December 31, 1994, three active prospects remained unsold.
The agreement with Pecos requires the Company to fund 100% of prospect
costs, including an allocation of overhead. The Company is entitiled to
all cash proceeds from the sale of prospects until its investment is fully
recouped, after which Pecos is entitled to 40% and the Company 60% of net
cash proceeds. The Company is also entitled to any carried working
interests or overriding royalty interests retained by the joint venture
equal to 60% of its participation. The Company terminated
F-11
<PAGE> 247
SEARCH EXPLORATION, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
this joint venture effective December 31, 1992, and had one prospect
remaining unsold at December 31, 1993, which was sold in 1994.
3. PARTNERSHIP PROGRAMS
During 1991 and 1992, the Company sold private placement interests in oil
and gas limited partnerships through McCulloch, which acts as managing
general partner. As managing general partner, the Company has general
liability relating to the debts and liabilities of its partnerships.
McCulloch's initial program, McCulloch Combination Units Limited
Partnership - 1991, a Texas Limited Partnership ("MCU"), closed December
31, 1991, with funding of $650,000, of which McCulloch contributed
$500,000. McCulloch has a carried revenue interest of 25% in the
partnership. Consequently, its ownership was 77% and its net revenue
participation was 83% in MCU. As of June 30, 1993, McCulloch purchased the
remaining three partners' interests for an initial cash payment of $23,944
with execution of promissory notes in the amount of $125,300 for a total
purchase price of $149,244. The notes are payable in five equal quarterly
installments plus 8% interest on the outstanding balance. The outstanding
balance of $100,240 at December 31, 1993, was repaid in 1994.
McCulloch's second program, McCulloch Energy Guaranty Distribution 92-A, a
Texas Limited Partnership ("MGD 92-A"), was closed August 31, 1992, with
funding of $528,000, of which McCulloch contributed $358,000. MGD 92-A is
a Texas limited partnership in which McCulloch guaranteed for five years a
15% per annum distribution on the production portion of the partnership's
investment. MGD 92-A invested $187,000 in production, the remaining funds
being invested in drilling. The remaining guarantee at December 31, 1994
to the portion of the partnership not owned by McCulloch was approximately
$29,000. The Company's management believes the reserve value of this
partnership is more than adequate to meet the aforementioned guaranteed
distributions. McCulloch has a carried revenue interest of 25% in the
partnership. Consequently its ownership is 68% and its net revenue
participation is 76%. As of December 31, 1993, MGD 92-A owed the Company
$34,383, which was repaid in 1994.
McCulloch's third program, McCulloch Energy Guaranty Distribution 92-B, a
Texas Limited Partnership ("MGD 92-B"), closed December 31, 1992, with
funding of $680,000, of which McCulloch invested $490,000. MGD 92-B, a
Texas Limited Partnership, purchased no reserves by mutual consent of the
general and limited partners. Therefore, McCulloch is not liable for the
five year, 15% per annum distribution from production purchased by the
partnership. McCulloch has a carried revenue interest of 25% in the
partnership. Consequently, its ownership is 72% and its net revenue
participation is 79%. As of December 31, 1993, MGD 92-B owed the Company a
net of $13,177, which was repaid in 1994.
In December 1993, McCulloch formed McCulloch Collateralized Energy Venture,
Ltd.("Venture"). The total amount raised was $325,000, with McCulloch
making no capital contribution. However, McCulloch agreed to provide
certain existing oil and gas producing wells as collateral to the Venture
to insure a minimum amount of gross production. The Venture did not
purchase production and its initial drilling results were poor. As a
result, the oil and gas wells committed as collateral were assigned to the
Venture in 1994.
F-12
<PAGE> 248
SEARCH EXPLORATION, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
4. COMMON STOCK WARRANTS AND OPTIONS
At December 31, 1994, the following warrants and options were outstanding
to acquire shares of the Company's common stock:
(a) Warrants to acquire 500,000 shares for $2 per share. The warrants may
be exercised at any time through July 15, 1995. Directors, officers
and affiliates own 262,489 of these warrants.
(b) In January 1994, the Company's board of directors granted a warrant to
a director to purchase 50,000 shares at $1.50 anytime through January
1999.
(c) In June 1993, the Company's board of directors elected to grant
options to purchase 50,000 shares to a newly elected director at $1.75
per share that are exercisable anytime through July 31, 1996.
(d) In July 1991, the Company's board of directors elected to grant
options to purchase 150,000 shares to the president of the Company at
$1.32 per share that are exercisable anytime through July 31, 1996.
(e) In July 1991, the Company's board of directors authorized options to
acquire up to 250,000 shares of common stock at $1.32 per share
anytime through July 31, 1996. These options were granted for 50,000
shares to each of the four members of the Company's board of directors
in July 1991 and 1992. In addition, the Company's board of directors
granted an option to purchase a total of 40,000 shares of common stock
to two key employees and an associate at the same price and expiration
date. In September 1993, an amended agreement was executed allowing
one of the board members to assign and transfer options to purchase
25,000 of the shares to a family trust. Options to purchase the
remaining 10,000 shares were unissued as of December 31, 1994.
5. REDEEMABLE PREFERRED STOCK
The Company has 5,000,000 authorized shares of preferred stock. The
Company's certificate of incorporation gives the board of directors the
right to fix the number of shares and establish the various rights and
powers of any series of preferred stock to be issued. In September 1993,
575,000 shares of preferred stock designated as the 1993 Series Redeemable
Preferred Stock ("1993 Series") were issued to directors of the Company for
proceeds of $575,000. The 1993 Series provides for a non-compounded,
cumulative 9% preference dividend payable on a quarterly basis and the
preferred shares are convertible into common shares at $1.69 per share or
340,237 shares of common stock. In addition, the preferred shares are
callable with the consent of the board of directors (exclusive of those
directors holding 1993 Series shares) in the event that at least one-half
of the Company's investment in the Placid Venture oil and gas leases
located in Tom Green, Nolan and Coke Counties, Texas, is sold or disposed
of in some other manner. The holders of the preferred shares are also
entitled to a 2% overriding royalty interest in the Company's share of
those same Placid Venture oil and gas leases.
F-13
<PAGE> 249
SEARCH EXPLORATION, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
6. COMMITMENTS AND CONTINGENCIES
The Company was named as a defendant in a lawsuit, in which the defendant
won a judgment of approximately $800,000 and subsequently expanded the suit
to include the Company in an effort to collect the judgment, as well as
interest, attorney's fees and punitive damages. The Company and its legal
counsel believe it has meritorious defenses, but they are presently unable
to predict the outcome of this litigation.
The Company has been named as a defendant along with Tri-Atlas Energy and
others, in Federal District Court of Oklahoma, alleging fraud in the sale
of limited partnership interests by Tri-Atlas Energy, Inc. The Company had
resigned from any affiliation with Tri-Atlas prior to the investment, and
therefore claims no responsibility. Tri- Atlas is in settlement
discussions and non-binding arbitration with the lone limited partner, and
is paying for the legal defense of the Company and others. Management
believes the Company has no liability in this matter, but is presently
unable to predict the outcome with certainty.
The company has agreements with a director and another party to act as
advisors in the sale or merger of the Company. Each agreement includes the
requirement to pay a fee equal to 2% of the value of such a transaction.
Concurrent with the consummation of the merger with Harken Energy
Corporation (Harken)(See note 10), the Company is to issue an $80,000
promissory note payable to each party.
On July 1, 1991, the Company entered into a five year agreement with the
president of the Company, pursuant to which he has the right to receive
$140,000 per year for the remaining term of his contract upon any change in
control of the Company. Concurrent with the consummation of the merger
with Harken, the Company is to issue a $280,000 note payable to the
president in satisfaction of its obligations under the employment
agreement.
Each of the three notes referred to above is to be exchanged for common
stock of Harken pursuant to the merger agreement.
7. RELATED PARTY TRANSACTIONS
The Company paid approximately $18,000, $24,000, and $39,000 during the
years ended December 31, 1994, 1993 and 1992, respectively, to an entity
controlled by a director of the Company for utilization of office space,
equipment and personnel.
The Company recorded a net loss of $108,425 on oil and gas commodity future
speculation in 1993. In December 1993, the Company was issued a margin
call on its then current positions, which were in a deficit. The Company
was unable to fund a margin cash call and an officer of the Company funded
the call and assumed the Company's loss position in the contracts. As a
result, the Company had no additional liabilities related to this
transaction.
The Company had a $200,000 senior subordinated note receivable at December
31, 1992 due from an entity in which a corporate director of the Company
was also a major creditor and common stockholder. This note was paid in
June 1993, in full with interest at 12%.
F-14
<PAGE> 250
SEARCH EXPLORATION, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
The Company extended a $150,000 revolving line of credit note, bearing
interest at 8%, to Tierra. The Company had a 50% equity ownership in
Tierra as well as a 1% voting proxy until the sale of Tierra in December
1993 for shares of common stock of another publicly traded company (see
Note 1, Marketable Securities). The note outstanding under this line of
credit at December 31, 1993 was $75,000 and was paid in full in February
1994 with interest.
Additional related party transactions are described in Notes 3, 4 and 6.
8. INCOME TAXES
The difference between the income tax benefit reported in the accompanying
financial statements and the expected amount at the statutory rate is as
follows:
<TABLE>
<CAPTION>
Year Ended December 31,
--------------------------------------------------
1994 1993 1992
-------- -------- --------
<S> <C> <C> <C>
Expected income tax benefit
at statutory rate of 34% $1,165,119 $ 421,552 $ 147,000
Increase (decrease) in tax resulting from:
Reduction of net operating loss
carry forwards (83,809) -
Other (2,743) -
Accounting losses for which deferred
Federal income tax benefits could not
be recognized (938,356) - -
----------- ---------- ----------
Actual income tax benefit $ 226,763 $ 335,000 $ 147,000
=========== ========== ==========
</TABLE>
In compliance with APB No.11, deferred tax expense results from timing
differences in the recognition of revenue and expense for tax and financial
statement purposes. The sources of these differences in the periods shown
and the tax effect of each were as follows:
<TABLE>
<CAPTION>
Year Ended
December 31,
1992
--------------
<S> <C>
Joint venture overhead deducted for tax
and capitalized for financial statements $ 40,000
Intangible drilling and dry hole costs 111,000
Depreciation, depletion and amortization (20,000)
------------
Deferred tax expense $ 131,000
============
</TABLE>
In compliance with SFAS No. 109, deferred tax assets and liabilities are
the result of temporary differences between the financial statement
carrying values and tax bases of assets and liabilities. The Company's net
deferred tax liabilities at December 31, 1994 are recorded as $0. The
Company's net deferred tax liabilities at December 31, 1993 are recorded as
a current asset of $19,770 (refundable income taxes) and a long-term
liability of $226,763. Significant components of net deferred tax
liabilities, tax effected at 34% are:
F-15
<PAGE> 251
SEARCH EXPLORATION, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
<TABLE>
<CAPTION>
December 31,
------------------------------
1994 1993
------------ ----------
<S> <C> <C>
Deferred tax liabilities:
Differences between book and tax
basis of oil and gas properties $ 16,000 $ 935,018
Deferred tax assets:
Net operating loss carryforward (875,000) (728,025)
Valuation allowance 859,000 -
----------- ----------
Net deferred tax liabilities $ - $ 206,993
=========== ==========
</TABLE>
As of December 31, 1994, the Company has an estimated tax loss carryforward
of approximately $2,500,000, which is scheduled to expire as follows:
<TABLE>
<CAPTION>
Year of Expiration Amount
------------------ ------
<S> <C>
2008 $ 1,800,000
2009 700,000
------------
$ 2,500,000
============
</TABLE>
9. MAJOR CUSTOMERS
Oil and gas sales for the years ended December 31, 1994, 1993 and 1992
included sales to the following major customers (each of which accounted
for 10% or more of the total oil and gas sales of the Company for those
years):
<TABLE>
<CAPTION>
Year Ended December 31,
-------------------------------------------
Customer 1994 1993 1992
-------- -------- -------- --------
<S> <C> <C> <C>
Gulf States 88% 9% -
Great Southern - 36 -
Pecos 22 -
Eagle - 5 13%
Fina 3 7 57
Smith 4 13 13
Dynamic - 3 12
</TABLE>
10. PROPOSED MERGER
The Company has entered into an agreement to merge into Harken Energy
Corporation (Harken), in which the Company's shareholders will exchange
their shares for shares of Harken. Consummation of the merger will require
shareholder approval. Also, see Note 6.
11. PURCHASE OF PARTNERSHIP INTERESTS
The Company offered to purchase all of the interests in the partnerships
described in Note 3 that it
F-16
<PAGE> 252
SEARCH EXPLORATION, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
did not currently own. In February 1995, the Company's offers were
accepted and the Company will issue promissory notes totalling $442,499 to
the partners in exchange for their partnership interests. The notes will
be for four year terms, bear interest at 10%, be collateralized by the
partnerships' properties and guaranteed by the Company.
12. SUPPLEMENTARY DISCLOSURES ABOUT OIL AND GAS PRODUCING ACTIVITIES
(UNAUDITED)
Capitalized Costs
Net capitalized costs related to the Company's oil and gas producing
activities are summarized as follows:
<TABLE>
<CAPTION>
December 31,
----------------------------------------------
1994 1993 1992
-------- -------- --------
<S> <C> <C> <C>
Capitalized costs:
Proven properties $5,027,408 $4,651,306 $3,115,405
Unproven properties 751,464 2,817,480 2,554,033
---------- ---------- ----------
Total 5,778,872 7,468,786 5,669,438
Less: accumulated depletion, depreciation,
amortization and impairment allowance (3,699,789) (1,318,083) (231,710)
---------- ---------- ----------
Net capitalized costs $2,079,083 $6,150,703 $5,437,728
========== ========== ==========
</TABLE>
Costs Incurred in Oil and Gas Producing Activities
Costs incurred in oil and gas property acquisition, exploration and
development activities are summarized as follows:
<TABLE>
<CAPTION>
Year Ended December 31,
----------------------------------------------------
1994 1993 1992
-------- -------- --------
<S> <C> <C> <C>
Property acquisition costs:
Proved $ - $ 149,244 $ 126,792
Unproved 480,000 2,096,860 2,268,326
Exploration costs 279,193 1,285,172 3,338,082
Development costs - 711,789 -
------------ ---------- ----------
Total $ 759,193 $4,243,065 $5,733,200
============ ========== ==========
</TABLE>
Oil and Gas Reserve Quantities:
The reserve information presented below is based upon reports prepared by
the petroleum engineer, Gerald W. DuPont, as of December 31, 1994, 1993 and
1992. The Company emphasizes that reserve estimates are inherently
imprecise and that estimates of new discoveries are more imprecise than
those of producing oil and gas properties. Accordingly, these estimates
are expected to change as future information becomes available.
F-17
<PAGE> 253
SEARCH EXPLORATION, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Proved oil and gas reserves are the estimated quantities of crude oil,
natural gas and natural gas liquids which geological and engineering data
demonstrate with reasonable certainty to be recoverable in future years
from known reservoirs under existing economic and operating conditions.
Proved developed oil and gas reserves are those expected to be recovered
through existing wells with existing equipment and operating methods.
Proved reserves are estimated as follows:
<TABLE>
<CAPTION>
Oil (bbls) Gas (mcf)
---------- ---------
<S> <C> <C>
Proved reserves, January 1, 1992 5,084 493,993
Extensions, discoveries and other
additions 25,964 2,780,832
Purchase of minerals in place 102,300 91,913
Sales of minerals in place (879) (85,460)
Revisions of previous estimates 288 14,268
Production (579) (79,959)
---------- ----------
Proved reserves, December 31, 1992 132,178 3,215,587
Extensions, discoveries and other
additions 1,825 356,001
Purchase of minerals in place 1,604 202,866
Revisions of previous estimates 51,062 (1,364,360)
Production (27,556) (342,275)
---------- ----------
Proved reserves, December 31, 1993 159,113 2,067,819
Extensions, discoveries and other additions 18,394 959,758
Sales of minerals in place (150,000) (752,600)
Revisions of previous estimates 1,835 (739,147)
Production (9,923) (237,808)
---------- ----------
Proved reserves, December 31, 1994 19,419 1,298,022
========== ==========
</TABLE>
Proved developed reserves of the Company are estimated as follows:
<TABLE>
<CAPTION>
Oil (bbls) Gas (mcf)
---------- ---------
<S> <C> <C>
December 31, 1994 19,419 1,298,022
December 31, 1993 159,113 2,067,819
December 31, 1992 18,226 2,001,525
December 31, 1991 2,542 253,546
</TABLE>
Standardized Measure of Future Net Cash Flows Relating to Proved Reserves:
Statement of Financial Accounting Standards No. 69 prescribes guidelines
for computing a standardized measure of future net cash flows and changes
therein relating to estimated proved reserves. The Company has followed
these guidelines, which are briefly discussed below.
F-18
<PAGE> 254
SEARCH EXPLORATION, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Future cash inflows and future production and development costs are
determined by applying year-end prices and costs to the estimated
quantities of oil and gas to be produced. Estimated future income taxes
are computed using current statutory income tax rates, including
consideration for estimated future statutory depletion and deferred income
taxes. The resulting future net cash flows are reduced to present value
amounts by applying a 10% annual discount factor.
The assumptions used to compute the standardized measure are those
prescribed by the Financial Accounting Standards Board and, as such, do not
necessarily reflect the Company's expectations of actual revenues to be
derived from those reserves or their present worth. The limitations
inherent in the reserve quantity estimation process, as discussed
previously, are equally applicable to the standardized measure
computations, since these estimates are the basis for the valuation
process.
Presented below is the standardized measure of discounted future net cash
flows relating to proved reserves as of:
<TABLE>
<CAPTION>
December 31,
---------------------------------------------
1994 1993 1992
-------- -------- --------
<S> <C> <C> <C>
Future cash inflows $3,039,033 $6,926,261 $8,753,173
Reduced by future:
Production and development costs (624,911) (1,797,635) (2,454,175)
Income taxes - (206,993) (1,070,653)
---------- ---------- ----------
Total future net cash inflows 2,414,122 4,921,633 5,228,345
Less effect of a 10% discount factor (901,339) (1,795,403) (1,890,003)
---------- ---------- ----------
Standardized measure of discounted
future net cash flows $1,512,783 $3,126,230 $3,338,342
========== ========== ==========
</TABLE>
The principal sources of change in the standardized measure of discounted
future net cash flows are as follows:
<TABLE>
<CAPTION>
December 31,
---------------------------------------------
1994 1993 1992
-------- -------- --------
<S> <C> <C> <C>
Balance, beginning of period $3,126,230 $3,338,342 $ 429,580
Sales of oil and gas produced,
net of production cost (220,718) (771,388) (133,761)
Net changes in prices and
production costs (411,550) 1,443,116 (4,816)
Revisions of previous quantity estimates (353,583) (2,152,056) 33,653
Extensions and discoveries 1,091,000 383,925 3,285,834
Purchases of minerals in place - 264,199 951,553
Sales and other transfers of minerals in place (1,535,000) - (64,378)
Development costs incurred during the
period and net change in future estimated
development costs - (577,403) (229,581)
Accretion of discount (312,623) 333,834 42,958
Net change in income taxes 129,027 863,661 (933,607)
Other changes, net - - (39,093)
---------- ---------- ----------
Balance, end of period $1,512,783 $3,126,230 $3,338,342
========== ========== ==========
</TABLE>
F-19
<PAGE> 255
SECURITIES AND EXCHANGE COMMISSION
Washington, D. C. 20549
FORM 10-K/A-AMENDMENT NO. 1
Annual Report pursuant to Section 13 or 15(d) of
the Securities Exchange Act of 1934 (Fee Required)
FOR THE FISCAL YEAR ENDED DECEMBER 31, 1994.
Commission File No. 0-18837
SEARCH EXPLORATION, INC.
(Exact name of registrant as specified in its charter)
Delaware 75- 2278362
(State or other jurisdiction of (I.R.S.Employer Identification No.)
incorporation or organization)
1500 THREE LINCOLN CENTRE, 5430 LBJ FREEWAY, DALLAS, TX
75240-2387
Registrant's telephone number, including area code: (214) 991-4100
Securities registered pursuant to Section 12(b) of the Act:
None
Securities registered pursuant to Section 12(g) of the Act:
COMMON STOCK, $0.05 PAR VALUE
(TITLE OF CLASS)
INDICATE BY CHECK MARK WHETHER THE REGISTRANT (1) HAS FILED ALL REPORTS
REQUIRED TO BE FILED BY SECTION 13 OR 15(D) OF THE SECURITIES EXCHANGE ACT OF
1934 DURING THE PRECEDING 12 MONTHS, AND (2) HAS BEEN SUBJECT TO SUCH FILING
REQUIREMENTS FOR THE LAST 90 DAYS.
YES X NO
AS OF DECEMBER 31, 1994, THE REGISTRANT HAD ISSUED AND OUTSTANDING 3,690,632
SHARES OF COMMON STOCK, $0.05 PAR VALUE, ITS ONLY CLASS OF VOTING STOCK. THE
AGGREGATE MARKET VALUE OF THE 2,995,624 SHARES OF COMMON STOCK HELD BY
NON-AFFILIATES OF THE REGISTRANT AS OF FEBRUARY 8,1995, WAS APPROXIMATELY
$1,996,224 (BASED UPON THE MEAN OF THE CLOSING BID AND ASKED PRICES ON NASDAQ
ON THAT DATE, $0.68 PER SHARE).
DOCUMENTS INCORPORATED BY REFERENCE:
NONE
INDICATE BY CHECK MARK IF DISCLOSURE OF DELINQUENT FILERS PURSUANT TO ITEM 405
OF REGULATION S-K IS NOT CONTAINED HEREIN, AND WILL NOT BE CONTAINED, TO THE
BEST OF REGISTRANT'S KNOWLEDGE, IN DEFINITIVE PROXY OR INFORMATION STATEMENTS
INCORPORATED BY REFERENCE IN PART III OF THE FORM 10-K OR ANY AMENDMENT TO THIS
FORM 10-K.
YES NO X
1
<PAGE> 256
The Registrant hereby amends Item 8 of its December 31, 1994 From 10-K
with respect to reporting of purchases and sales of marketable securities in
the cash flow statement of page F-8.
<PAGE> 257
ITEM 8
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
<TABLE>
<S> <C>
INDEPENDENT AUDITOR'S REPORTS - 1994 F-1
1993 and 1992 F-2
CONSOLIDATED BALANCE SHEETS - As of December 31, 1994 and 1993 F-3
CONSOLIDAT ED STATEMENTS OF OPERATIONS - Years ended December 31, 1994,
1993 and 1992 F-5
CONSOLIDATED STATEMENT OF CHANGES IN STOCKHOLDERS' EQUITY -
For the period from November 1, 1992 through December 31, 1994 F-7
CONSOLIDATED STATEMENTS OF CASH FLOWS - Years ended December 31, 1994,
1993 and 1992 F-8
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS F-9
</TABLE>
<PAGE> 258
INDEPENDENT AUDITOR'S REPORT
The Board of Directors
Search Exploration, Inc.
Dallas, Texas
We have audited the accompanying consolidated balance sheets of Search
Exploration, Inc. and subsidiaries as of December 31, 1994, and the related
consolidated statements of operations, changes in stockholders' equity, and
cash flows for the year then ended. These financial statements are the
responsibility of the Company's management. Our responsibility is to express
an opinion on the financial statements based on our audit.
We conducted our audit 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 audit provides a reasonable basis
for our opinion.
In our opinion, the consolidated financial statements referred to above present
fairly, in all material respects, the financial position of Search Exploration,
Inc. and subsidiaries as of December 31, 1994, and the results of their
operations and cash flows for the year then ended, in conformity with generally
accepted accounting principles.
The accompanying financial statements have been prepared assuming that the
Company will continue as a going concern. As discussed in Note 1 to the
financial statements, the Company has suffered recurring losses from operations
and currently has limited financial resources, which raise substantial doubt
about its ability to continue as a going concern. Management's plans in regard
to these matters are also described in Note 1. The financial statements do not
include any adjustments that might result from the outcome of this uncertainty.
As described in Note 6 to the financial statements, the Company is a defendant
in litigation, the outcome of which is not presently determinable.
As described in Note 10 to the financial statements, the Company entered into
an agreement to merge into another Company.
HEIN + ASSOCIATES LLP
/s/ HEIN + ASSOCIATES LLP
February 10, 1995
Dallas, Texas
F-1
<PAGE> 259
INDEPENDENT AUDITOR'S REPORT
The Board of Directors
Search Exploration, Inc.
Dallas, Texas
We have audited the accompanying consolidated balance sheets of Search
Exploration, Inc. and subsidiaries (the "Company") as of December 31, 1993,
and the related consolidated statements of operations, changes in common
stockholders' equity, and cash flows for the years ended December 31, 1993 and
1992. These financial statements are the responsibility of the Company's
management. Our responsibility is to express an opinion on the financial
statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to
obtain reasonable assurance about whether the financial statements are free of
material misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements. An audit
also includes assessing the accounting principles used and significant
estimates made by management, as well as evaluating the overall financial
statement presentation. We believe that our audits provide a reasonable basis
for our opinion.
In our opinion, such consolidated financial statements present fairly, in all
material respects, the financial position of Search Exploration, Inc. and
subsidiaries as of December 31, 1993, and the results of their operations and
their cash flows for the years ended December 31, 1993 and 1992, in conformity
with generally accepted accounting principles.
As discussed in Note 1 to the consolidated financial statements, effective
January 1, 1993, the Company changed its method of accounting for income taxes
to conform with Statement of Financial Accounting Standards No. 109.
/s/ DELOITTE & TOUCHE LLP
DELOITTE & TOUCHE LLP
April 12, 1994
Dallas, Texas
<PAGE> 260
SEARCH EXPLORATION, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
December 31
--------------------------------------
1994 1993
---- ----
<S> <C> <C>
ASSETS
CURRENT ASSETS:
Cash and cash equivalents $ 42,388 $ 68,732
Marketable securities - 406,547
Receivables:
Trade 423,149 480,727
Partnerships 4,250 47,560
Related party accounts and notes - 75,000
Federal income taxes recoverable 18,802 19,770
------------ ------------
Total Current Assets 488,589 1,098,336
PROPERTY AND EQUIPMENT
Oil and gas properties (full cost method):
Proved properties 5,027,408 4,651,306
Unproved properties 751,464 2,817,480
Office furniture, equipment, and improvements 39,439 39,439
------------ ------------
5,818,311 7,508,225
Less accumulated depletion, depreciation,
amortization and impairment (3,734,382) (1,340,362)
------------ ------------
Net Property and Equipment 2,083,929 6,167,863
------------ ------------
Total Assets $ 2,572,518 $ 7,266,199
============ ============
</TABLE>
-Continued-
F-3
<PAGE> 261
SEARCH EXPLORATION, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS, Continued
<TABLE>
<CAPTION>
December 31
--------------------------------
1994 1993
---- ----
<S> <C> <C>
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES:
Accounts payable $ 173,703 $ 1,295,409
Notes payable - 100,240
------------ ------------
Total Current Liabilities 173,703 1,395,649
DEFERRED FEDERAL INCOME TAXES - 226,770
COMMITMENTS AND CONTINGENCIES (Notes 6 and 10)
REDEEMABLE PREFERRED STOCK
1993 series, $0.001 par value; 5,000,000 shares
authorized; 575,000 shares issued and outstanding 575,000 575,000
STOCKHOLDERS' EQUITY
Common stock, $.05 par value; 50,000,000 shares
authorized; 3,690,632 shares issued and outstanding 184,532 184,532
Additional paid-in capital 4,400,002 4,400,002
Retained earnings (deficit) (subsequent to November 30,
1989 quasi-reorganization in which deficit of $1,037,285
was eliminated) (2,760,719) 484,246
------------ ------------
Total Stockholders' Equity 1,823,815 5,068,780
------------ ------------
Total Liabilities and Stockholders' Equity $ 2,572,518 $ 7,266,199
============ ============
</TABLE>
See accompanying notes to consolidated financial statements
F-4
<PAGE> 262
SEARCH EXPLORATION, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
<TABLE>
<CAPTION>
Year Ended December 31,
--------------------------------------------------
1994 1993 1992
------------ ----------- -----------
<S> <C> <C> <C>
REVENUE:
Oil and gas sales $ 494,690 $ 1,057,044 $ 150,406
Interest and other 18,094 44,303 121,229
Gain on sale of marketable securities 203,508 - 67,514
----------- ----------- ----------
Total Revenue 716,292 1,101,347 339,149
EXPENSES:
Oil and gas production costs 273,972 285,656 16,645
Depletion, depreciation and amortization 498,314 670,457 94,467
Oil and gas property impairment allowance 2,667,471 431,513 -
Loss from sale or impairment of gas
gathering and transmission facilities - 30,000 -
General and administrative expenses 698,390 787,680 622,484
Loss on sale of investment - 108,425 -
Interest expense 4,967 27,470 36,644
----------- ----------- ----------
Total Expenses 4,143,114 2,341,201 770,240
----------- ----------- ----------
LOSS BEFORE INCOME TAXES AND
CUMULATIVE EFFECT OF CHANGE
IN METHOD OF ACCOUNTING FOR
INCOME TAXES (3,426,822) (1,239,854) (431,091)
INCOME TAX (EXPENSE) BENEFIT
Current - 19,770 278,000
Deferred 226,763 315,230 (131,000)
----------- ----------- ----------
Total Income Tax Benefit 226,763 335,000 147,000
----------- ----------- ----------
LOSS BEFORE CUMULATIVE EFFECT
OF CHANGE IN METHOD OF
ACCOUNTING FOR INCOME TAXES (3,200,059) (904,854) (284,091)
CUMULATIVE EFFECT OF CHANGE IN
METHOD OF ACCOUNTING FOR
INCOME TAXES - 69,000 -
----------- ----------- -----------
NET LOSS $(3,200,059) $ (835,854) $ (284,091)
=========== =========== ===========
</TABLE>
-Continued-
F-5
<PAGE> 263
SEARCH EXPLORATION, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS, Continued
<TABLE>
<CAPTION>
Year Ended December 31,
----------------------------------------------------
1994 1993 1992
------------ ------------ ------------
<S> <C> <C> <C>
LOSS PER SHARE:
Net loss before cumulative effect
of change in method of accounting for
income taxes $ (0.88) $ (0.25) $ (0.08)
Cumulative effect of change in method of
accounting for income taxes - 0.02 -
------------ ------------ ------------
Net loss $ (0.88) $ (0.23) $ (0.08)
============ ============ ============
WEIGHTED AVERAGE NUMBER OF
COMMON SHARES OUTSTANDING 3,690,632 3,690,632 3,742,402
============ ============ ============
</TABLE>
See accompanying notes to consolidated financial statements
F-6
<PAGE> 264
SEARCH EXPLORATION, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF CHANGES IN STOCKHOLDERS' EQUITY
For the period from January 1, 1992 through December 31, 1994
<TABLE>
<CAPTION>
Additional Retained
Common Stock Paid - In Earnings
Shares Amount Capital (Deficit)
---------- --------- ----------- ------------
<S> <C> <C> <C> <C>
Balances, January 1, 1992 3,755,632 $ 187,783 $ 4,489,577 $ 1,604,191
Retirement of Common Stock (65,000) (3,251) (89,575) -
Net loss for the year - - - (284,091)
--------- ---------- ----------- -----------
Balances, December 31, 1992 3,690,632 184,532 4,400,002 1,320,100
Net loss for the year - - - (835,854)
--------- ---------- ----------- -----------
Balances, December 31, 1993 3,690,632 184,532 4,400,002 484,246
Preferred Stock dividends - - - (44,906)
Net loss for the year - - - (3,200,059)
--------- ---------- ----------- -----------
Balances, December 31, 1994 3,690,632 $ 184,532 $ 4,400,002 $(2,760,719)
========= ========== =========== ===========
</TABLE>
See accompanying notes to consolidated financial statements
F-7
<PAGE> 265
SEARCH EXPLORATION, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
Year Ended December 31,
-----------------------------------------------
1994 1993 1992
-------- -------- --------
<S> <C> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net loss $ (3,200,059) $ (835,854) $ (284,091)
Adjustments to reconcile to net cash from
operating activities:
Depletion, depreciation, and amortization 498,314 670,457 94,467
Oil and gas property impairment allowance 2,667,471 431,513
Loss on sale or impairment allowance of gas
gathering and transmission system - 30,000
(Gain) loss on sales of investments (203,508) 108,425 (67,514)
Changes in assets and liabilities:
Decrease (increase) in receivables 100,888 (362,396) (89,826)
Decrease (increase) in Federal income
taxes recoverable and other current
assets 968 (19,770) 358,000
Decrease in other assets - 23,555 11,445
(Decrease) increase in accounts payable (965,667) 51,832 1,063,692
Increase (decrease) in deferred income taxes (226,763) (384,230) 131,000
------------ ------------ ------------
Net cash provided (used) by operations (1,328,356) (286,468) 1,217,173
CASH FLOWS FROM INVESTING ACTIVITIES:
Additions to property and equipment (759,193) (4,268,370) (5,737,514)
Proceeds from sale of oil and gas properties 1,536,209 2,435,535 2,980,741
Purchases of marketable securities - (75,000) (3,521,000)
Proceeds from sales of marketable securities 610,055 1,676,878 4,542,109
Decrease (increase) in related party accounts and notes 75,000 669,249 (744,249)
Proceeds from sale of other assets and other (14,913) 50,000
------------ ------------ ------------
Net cash provided (used) by investing activities 1,447,158 488,292 (2,479,913)
CASH FLOWS FROM FINANCING ACTIVITIES:
Issuance of redeemable stock - 575,000 -
Payment of dividends (44,906) - -
Retirements of common stock - - (92,826)
Long-term debt and notes payable repayments (100,240) (792,629) -
Proceeds from note payable - - 792,629
------------ ------------ ------------
Net cash provided (used) by financing activities (145,146) (217,629) 699,803
------------ ------------ ------------
NET DECREASE IN CASH AND CASH
EQUIVALENTS (26,344) (15,805) (562,937)
CASH AND CASH EQUIVALENTS,
BEGINNING OF PERIOD 68,732 84,537 647,474
------------ ------------ ------------
CASH AND CASH EQUIVALENTS,
END OF PERIOD $ 42,388 $ 68,732 $ 84,537
============ ============ ============
SUPPLEMENTAL CASH FLOW INFORMATION:
Cash paid for interest $ 4,967 $ 27,476 $ 35,340
Cash refunded for income taxes - - 606,040
Oil and gas properties retired in exchange for accounts
payable 156,049 - -
</TABLE>
See accompanying notes to consolidated financial statements
F-8
<PAGE> 266
SEARCH EXPLORATION, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. SUMMARY OF SIGNIFICANT ACCOUNTING AND REPORTING POLICIES
Principles of Consolidation
The accompanying financial statements include the accounts of Search
Exploration, Inc. ("Search" or the "Company"), Search's wholly owned
subsidiary McCulloch Energy, Inc. ("McCulloch") and the proportional
consolidation of the Company's interest in partnerships formed by
McCulloch. Intercompany accounts and transactions are eliminated.
Cash and Cash Equivalents
The Company invests excess cash in short-term securities that are highly
liquid. The short-term investments, which have a maturity of 90 days or
less at date of purchase, are considered cash equivalents by the Company.
Marketable Securities
Marketable securities, which the Company owned at December 31, 1993, were
carried at the lower of cost or market value. The cost of the specific
security sold is used to compute gains or losses.
In February 1992, the Company, through McCulloch, acquired for $50,000 a
50% interest in Tierra Minerals Development, L.C., ("Tierra") which was
formed to pursue producing property acquisitions. The Company sold this
investment in December 1993 for 132,500 shares of common stock in another
public company. The market value of the shares of $406,547 as of December
31, 1993 was credited to the full cost pool. Prior to the sale, the
Company's interest in Tierra was accounted for under the equity method.
The securities were sold in 1994 for a gain of $203,508.
Oil and Gas Properties
Oil and gas properties are recorded at cost using the full cost method of
accounting as prescribed by the Securities and Exchange Commission ("SEC").
Under the full cost method, all costs associated with the acquisition,
exploration and development of oil and gas properties are capitalized as
part of the full cost pool. The full cost pool is limited to the full cost
"ceiling," which is calculated based on the estimated present value of
future net cash flows from proved oil and gas reserves, as adjusted for
expected income taxes and other factors. The Company recorded an oil and
gas property impairment allowance as a result of the full cost ceiling
limitation of $ 2,667,471 in 1994 and $431,513 in 1993. Sales,
dispositions and other oil and gas property retirements are accounted for
as adjustments to the full cost pool with no recognition of gain or loss
unless such disposition would significantly alter the relationship between
capitalized costs and proved oil and gas reserves.
Depletion, depreciation and amortization of proved oil and gas properties
is determined using the units-of- production method based on total proved
reserves as estimated by an independent petroleum engineer. Depletion,
depreciation and amortization of oil and gas properties was $486,000,
$654,860, and $93,967 for the years ended December 31, 1994, 1993 and 1992,
respectively.
F-9
<PAGE> 267
SEARCH EXPLORATION, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Depletion, depreciation and amortization, including the ceiling writedowns,
of oil and gas properties per equivalent unit-of-production (barrel of oil)
was $9.81, $12.85, and $6.83 for the years ended December 31, 1994, 1993
and 1992, respectively.
The Company, through McCulloch, is a participant in joint ventures engaged
in the business of developing oil and gas drilling prospects for resale to
third parties. The Company accounts for its interests in the joint
ventures on an equity basis. Prospect costs are capitalized as incurred
and included in oil and gas properties on the balance sheet. Prospect
costs are excluded from amortizable costs pending evaluation, as described
below. Costs related to impaired prospects are included in amortizable
costs. Gain or loss is not recognized on the sale of these prospects since
the Company uses the full cost method of accounting.
Investments in undeveloped leases, including leases acquired through joint
ventures and directly, are excluded from costs to be amortized pending
determination as to the existence of proved reserves or lease impairment.
Until this determination is made, these properties are subject to periodic
review for impairment, and the amount of any such impairment is included in
costs to be amortized. The amounts excluded from amortization are as
follows: year ended December 31, 1994, $751,464; year ended December 31,
1993, $2,817,480; and year ended December 31, 1992, $2,554,033.
The costs excluded from amortization as of December 31, 1994, by category
of cost and year of origination, are as follows:
<TABLE>
<CAPTION>
Period of Origination
--------------------------------------------------------------------
Year Ended December 31,
--------------------------------------------------------------------
1994 1993 1992 Total
----------- ----------- ---------- ---------
<S> <C> <C> <C> <C>
Acquisition costs $ 142,100 $ 309,850 $ 65,000 $ 516,950
Exploration costs 30,750 103,200 100,564 234,514
---------- ---------- ----------- ----------
$ 172,850 $ 413,050 $ 165,564 $ 751,464
========== ========== =========== ==========
</TABLE>
Management of the Company expects most of these costs to be included in the
amortization base over the next 18 months.
Loss Per Share
Loss per common share has been computed based on the weighted average
number of common shares outstanding during each period presented. In
addition, the loss per common share for the years ended December 31, 1994
and 1993 includes consideration of the redeemable preferred stock
cumulative dividend of $51,750 and $14,523 as of December 31, 1994 and
1993, respectively (See Note 5). Stock options and warrants have not been
considered as common stock equivalents in the calculation of loss per share
because their effect would be antidilutive.
F-10
<PAGE> 268
SEARCH EXPLORATION, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Income Taxes
Effective January 1, 1993, the Company adopted the provisions of Statement
of Financial Accounting Standards No. 109, "Accounting for Income Taxes"
(SFAS No. 109). Pursuant to SFAS No. 109, deferred tax assets and
liabilities are recognized for future tax consequences attributable to
differences between financial statement carrying amounts of existing assets
and liabilities and their respective tax bases. Deferred tax assets and
liabilities are measured using enacted tax rates expected to apply to
taxable income in the years in which these temporary differences are
expected to be recovered or settled. Under SFAS No. 109, the effect on
deferred tax assets and liabilities of a change in tax rates is recognized
in income in the period that includes the enactment date. The cumulative
effect of the change in method of accounting for income taxes from
Accounting Principals Board Opinion No. 11, "Accounting for Income Taxes"
(APB No. 11), which was the income tax accounting method followed through
December 31, 1992, is reflected in the consolidated statement of operations
for the year ended December 31, 1993.
Continuation as a going concern
The Company has suffered recurring losses from operations and currently has
limited financial resources, which raise substantial doubt about its
ability to continue as a going concern. Management of the Company has
pursued merger and acquisition opportunities in an attempt to alleviate
this situation. As described in Note 10, the Company has entered into an
agreement to merge into Harken Energy Corporation. The accompanying
financial statements do not include any adjustments that might result from
the outcome of this uncertainty.
2. INVESTMENT IN PROSPECT GENERATION JOINT VENTURES
The Company is engaged in the business of developing oil and gas drilling
prospects for resale to third parties through joint venture arrangements
with Yuma Petroleum Company ("Yuma") and Pecos Petroleum Company ("Pecos").
The agreement with Yuma required the Company to fund 50% of prospect costs,
including an allocation of overhead. The Company is entitled to 50% of all
cash proceeds from the sale of prospects until its entire investment
(including unsold prospects) is recouped, after which Yuma is entitled to
75% and the Company 25% of net cash proceeds. The Company is also entitled
to any carried working interest retained by the joint venture equal to one-
half of its participation and certain overriding royalty interests as
defined in the agreement. The Company elected to terminate the Yuma joint
venture effective July 1, 1993. As a part of the termination agreement,
the joint venture will continue to market remaining prospects until sold.
As of December 31, 1994, three active prospects remained unsold.
The agreement with Pecos requires the Company to fund 100% of prospect
costs, including an allocation of overhead. The Company is entitiled to
all cash proceeds from the sale of prospects until its investment is fully
recouped, after which Pecos is entitled to 40% and the Company 60% of net
cash proceeds. The Company is also entitled to any carried working
interests or overriding royalty interests retained by the joint venture
equal to 60% of its participation. The Company terminated
F-11
<PAGE> 269
SEARCH EXPLORATION, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
this joint venture effective December 31, 1992, and had one prospect
remaining unsold at December 31, 1993, which was sold in 1994.
3. PARTNERSHIP PROGRAMS
During 1991 and 1992, the Company sold private placement interests in oil
and gas limited partnerships through McCulloch, which acts as managing
general partner. As managing general partner, the Company has general
liability relating to the debts and liabilities of its partnerships.
McCulloch's initial program, McCulloch Combination Units Limited
Partnership - 1991, a Texas Limited Partnership ("MCU"), closed December
31, 1991, with funding of $650,000, of which McCulloch contributed
$500,000. McCulloch has a carried revenue interest of 25% in the
partnership. Consequently, its ownership was 77% and its net revenue
participation was 83% in MCU. As of June 30, 1993, McCulloch purchased the
remaining three partners' interests for an initial cash payment of $23,944
with execution of promissory notes in the amount of $125,300 for a total
purchase price of $149,244. The notes are payable in five equal quarterly
installments plus 8% interest on the outstanding balance. The outstanding
balance of $100,240 at December 31, 1993, was repaid in 1994.
McCulloch's second program, McCulloch Energy Guaranty Distribution 92-A, a
Texas Limited Partnership ("MGD 92-A"), was closed August 31, 1992, with
funding of $528,000, of which McCulloch contributed $358,000. MGD 92-A is
a Texas limited partnership in which McCulloch guaranteed for five years a
15% per annum distribution on the production portion of the partnership's
investment. MGD 92-A invested $187,000 in production, the remaining funds
being invested in drilling. The remaining guarantee at December 31, 1994
to the portion of the partnership not owned by McCulloch was approximately
$29,000. The Company's management believes the reserve value of this
partnership is more than adequate to meet the aforementioned guaranteed
distributions. McCulloch has a carried revenue interest of 25% in the
partnership. Consequently its ownership is 68% and its net revenue
participation is 76%. As of December 31, 1993, MGD 92-A owed the Company
$34,383, which was repaid in 1994.
McCulloch's third program, McCulloch Energy Guaranty Distribution 92-B, a
Texas Limited Partnership ("MGD 92-B"), closed December 31, 1992, with
funding of $680,000, of which McCulloch invested $490,000. MGD 92-B, a
Texas Limited Partnership, purchased no reserves by mutual consent of the
general and limited partners. Therefore, McCulloch is not liable for the
five year, 15% per annum distribution from production purchased by the
partnership. McCulloch has a carried revenue interest of 25% in the
partnership. Consequently, its ownership is 72% and its net revenue
participation is 79%. As of December 31, 1993, MGD 92-B owed the Company a
net of $13,177, which was repaid in 1994.
In December 1993, McCulloch formed McCulloch Collateralized Energy Venture,
Ltd.("Venture"). The total amount raised was $325,000, with McCulloch
making no capital contribution. However, McCulloch agreed to provide
certain existing oil and gas producing wells as collateral to the Venture
to insure a minimum amount of gross production. The Venture did not
purchase production and its initial drilling results were poor. As a
result, the oil and gas wells committed as collateral were assigned to the
Venture in 1994.
F-12
<PAGE> 270
SEARCH EXPLORATION, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
4. COMMON STOCK WARRANTS AND OPTIONS
At December 31, 1994, the following warrants and options were outstanding
to acquire shares of the Company's common stock:
(a) Warrants to acquire 500,000 shares for $2 per share. The warrants may
be exercised at any time through July 15, 1995. Directors, officers
and affiliates own 262,489 of these warrants.
(b) In January 1994, the Company's board of directors granted a warrant to
a director to purchase 50,000 shares at $1.50 anytime through January
1999.
(c) In June 1993, the Company's board of directors elected to grant
options to purchase 50,000 shares to a newly elected director at $1.75
per share that are exercisable anytime through July 31, 1996.
(d) In July 1991, the Company's board of directors elected to grant
options to purchase 150,000 shares to the president of the Company at
$1.32 per share that are exercisable anytime through July 31, 1996.
(e) In July 1991, the Company's board of directors authorized options to
acquire up to 250,000 shares of common stock at $1.32 per share
anytime through July 31, 1996. These options were granted for 50,000
shares to each of the four members of the Company's board of directors
in July 1991 and 1992. In addition, the Company's board of directors
granted an option to purchase a total of 40,000 shares of common stock
to two key employees and an associate at the same price and expiration
date. In September 1993, an amended agreement was executed allowing
one of the board members to assign and transfer options to purchase
25,000 of the shares to a family trust. Options to purchase the
remaining 10,000 shares were unissued as of December 31, 1994.
5. REDEEMABLE PREFERRED STOCK
The Company has 5,000,000 authorized shares of preferred stock. The
Company's certificate of incorporation gives the board of directors the
right to fix the number of shares and establish the various rights and
powers of any series of preferred stock to be issued. In September 1993,
575,000 shares of preferred stock designated as the 1993 Series Redeemable
Preferred Stock ("1993 Series") were issued to directors of the Company for
proceeds of $575,000. The 1993 Series provides for a non-compounded,
cumulative 9% preference dividend payable on a quarterly basis and the
preferred shares are convertible into common shares at $1.69 per share or
340,237 shares of common stock. In addition, the preferred shares are
callable with the consent of the board of directors (exclusive of those
directors holding 1993 Series shares) in the event that at least one-half
of the Company's investment in the Placid Venture oil and gas leases
located in Tom Green, Nolan and Coke Counties, Texas, is sold or disposed
of in some other manner. The holders of the preferred shares are also
entitled to a 2% overriding royalty interest in the Company's share of
those same Placid Venture oil and gas leases.
F-13
<PAGE> 271
SEARCH EXPLORATION, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
6. COMMITMENTS AND CONTINGENCIES
The Company was named as a defendant in a lawsuit, in which the defendant
won a judgment of approximately $800,000 and subsequently expanded the suit
to include the Company in an effort to collect the judgment, as well as
interest, attorney's fees and punitive damages. The Company and its legal
counsel believe it has meritorious defenses, but they are presently unable
to predict the outcome of this litigation.
The Company has been named as a defendant along with Tri-Atlas Energy and
others, in Federal District Court of Oklahoma, alleging fraud in the sale
of limited partnership interests by Tri-Atlas Energy, Inc. The Company had
resigned from any affiliation with Tri-Atlas prior to the investment, and
therefore claims no responsibility. Tri- Atlas is in settlement
discussions and non-binding arbitration with the lone limited partner, and
is paying for the legal defense of the Company and others. Management
believes the Company has no liability in this matter, but is presently
unable to predict the outcome with certainty.
The company has agreements with a director and another party to act as
advisors in the sale or merger of the Company. Each agreement includes the
requirement to pay a fee equal to 2% of the value of such a transaction.
Concurrent with the consummation of the merger with Harken Energy
Corporation (Harken)(See note 10), the Company is to issue an $80,000
promissory note payable to each party.
On July 1, 1991, the Company entered into a five year agreement with the
president of the Company, pursuant to which he has the right to receive
$140,000 per year for the remaining term of his contract upon any change in
control of the Company. Concurrent with the consummation of the merger
with Harken, the Company is to issue a $280,000 note payable to the
president in satisfaction of its obligations under the employment
agreement.
Each of the three notes referred to above is to be exchanged for common
stock of Harken pursuant to the merger agreement.
7. RELATED PARTY TRANSACTIONS
The Company paid approximately $18,000, $24,000, and $39,000 during the
years ended December 31, 1994, 1993 and 1992, respectively, to an entity
controlled by a director of the Company for utilization of office space,
equipment and personnel.
The Company recorded a net loss of $108,425 on oil and gas commodity future
speculation in 1993. In December 1993, the Company was issued a margin
call on its then current positions, which were in a deficit. The Company
was unable to fund a margin cash call and an officer of the Company funded
the call and assumed the Company's loss position in the contracts. As a
result, the Company had no additional liabilities related to this
transaction.
The Company had a $200,000 senior subordinated note receivable at December
31, 1992 due from an entity in which a corporate director of the Company
was also a major creditor and common stockholder. This note was paid in
June 1993, in full with interest at 12%.
F-14
<PAGE> 272
SEARCH EXPLORATION, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
The Company extended a $150,000 revolving line of credit note, bearing
interest at 8%, to Tierra. The Company had a 50% equity ownership in
Tierra as well as a 1% voting proxy until the sale of Tierra in December
1993 for shares of common stock of another publicly traded company (see
Note 1, Marketable Securities). The note outstanding under this line of
credit at December 31, 1993 was $75,000 and was paid in full in February
1994 with interest.
Additional related party transactions are described in Notes 3, 4 and 6.
8. INCOME TAXES
The difference between the income tax benefit reported in the accompanying
financial statements and the expected amount at the statutory rate is as
follows:
<TABLE>
<CAPTION>
Year Ended December 31,
--------------------------------------------------
1994 1993 1992
-------- -------- --------
<S> <C> <C> <C>
Expected income tax benefit
at statutory rate of 34% $1,165,119 $ 421,552 $ 147,000
Increase (decrease) in tax resulting from:
Reduction of net operating loss
carry forwards (83,809) -
Other (2,743) -
Accounting losses for which deferred
Federal income tax benefits could not
be recognized (938,356) - -
----------- ---------- ----------
Actual income tax benefit $ 226,763 $ 335,000 $ 147,000
=========== ========== ==========
</TABLE>
In compliance with APB No.11, deferred tax expense results from timing
differences in the recognition of revenue and expense for tax and financial
statement purposes. The sources of these differences in the periods shown
and the tax effect of each were as follows:
<TABLE>
<CAPTION>
Year Ended
December 31,
1992
--------------
<S> <C>
Joint venture overhead deducted for tax
and capitalized for financial statements $ 40,000
Intangible drilling and dry hole costs 111,000
Depreciation, depletion and amortization (20,000)
------------
Deferred tax expense $ 131,000
============
</TABLE>
In compliance with SFAS No. 109, deferred tax assets and liabilities are
the result of temporary differences between the financial statement
carrying values and tax bases of assets and liabilities. The Company's net
deferred tax liabilities at December 31, 1994 are recorded as $0. The
Company's net deferred tax liabilities at December 31, 1993 are recorded as
a current asset of $19,770 (refundable income taxes) and a long-term
liability of $226,763. Significant components of net deferred tax
liabilities, tax effected at 34% are:
F-15
<PAGE> 273
SEARCH EXPLORATION, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
<TABLE>
<CAPTION>
December 31,
------------------------------
1994 1993
------------ ----------
<S> <C> <C>
Deferred tax liabilities:
Differences between book and tax
basis of oil and gas properties $ 16,000 $ 935,018
Deferred tax assets:
Net operating loss carryforward (875,000) (728,025)
Valuation allowance 859,000 -
----------- ----------
Net deferred tax liabilities $ - $ 206,993
=========== ==========
</TABLE>
As of December 31, 1994, the Company has an estimated tax loss carryforward
of approximately $2,500,000, which is scheduled to expire as follows:
<TABLE>
<CAPTION>
Year of Expiration Amount
------------------ ------
<S> <C>
2008 $ 1,800,000
2009 700,000
------------
$ 2,500,000
============
</TABLE>
9. MAJOR CUSTOMERS
Oil and gas sales for the years ended December 31, 1994, 1993 and 1992
included sales to the following major customers (each of which accounted
for 10% or more of the total oil and gas sales of the Company for those
years):
<TABLE>
<CAPTION>
Year Ended December 31,
-------------------------------------------
Customer 1994 1993 1992
-------- -------- -------- --------
<S> <C> <C> <C>
Gulf States 88% 9% -
Great Southern - 36 -
Pecos 22 -
Eagle - 5 13%
Fina 3 7 57
Smith 4 13 13
Dynamic - 3 12
</TABLE>
10. PROPOSED MERGER
The Company has entered into an agreement to merge into Harken Energy
Corporation (Harken), in which the Company's shareholders will exchange
their shares for shares of Harken. Consummation of the merger will require
shareholder approval. Also, see Note 6.
11. PURCHASE OF PARTNERSHIP INTERESTS
The Company offered to purchase all of the interests in the partnerships
described in Note 3 that it
F-16
<PAGE> 274
SEARCH EXPLORATION, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
did not currently own. In February 1995, the Company's offers were
accepted and the Company will issue promissory notes totalling $442,499 to
the partners in exchange for their partnership interests. The notes will
be for four year terms, bear interest at 10%, be collateralized by the
partnerships' properties and guaranteed by the Company.
12. SUPPLEMENTARY DISCLOSURES ABOUT OIL AND GAS PRODUCING ACTIVITIES
(UNAUDITED)
Capitalized Costs
Net capitalized costs related to the Company's oil and gas producing
activities are summarized as follows:
<TABLE>
<CAPTION>
December 31,
----------------------------------------------
1994 1993 1992
-------- -------- --------
<S> <C> <C> <C>
Capitalized costs:
Proven properties $5,027,408 $4,651,306 $3,115,405
Unproven properties 751,464 2,817,480 2,554,033
---------- ---------- ----------
Total 5,778,872 7,468,786 5,669,438
Less: accumulated depletion, depreciation,
amortization and impairment allowance (3,699,789) (1,318,083) (231,710)
---------- ---------- ----------
Net capitalized costs $2,079,083 $6,150,703 $5,437,728
========== ========== ==========
</TABLE>
Costs Incurred in Oil and Gas Producing Activities
Costs incurred in oil and gas property acquisition, exploration and
development activities are summarized as follows:
<TABLE>
<CAPTION>
Year Ended December 31,
----------------------------------------------------
1994 1993 1992
-------- -------- --------
<S> <C> <C> <C>
Property acquisition costs:
Proved $ - $ 149,244 $ 126,792
Unproved 480,000 2,096,860 2,268,326
Exploration costs 279,193 1,285,172 3,338,082
Development costs - 711,789 -
------------ ---------- ----------
Total $ 759,193 $4,243,065 $5,733,200
============ ========== ==========
</TABLE>
Oil and Gas Reserve Quantities:
The reserve information presented below is based upon reports prepared by
the petroleum engineer, Gerald W. DuPont, as of December 31, 1994, 1993 and
1992. The Company emphasizes that reserve estimates are inherently
imprecise and that estimates of new discoveries are more imprecise than
those of producing oil and gas properties. Accordingly, these estimates
are expected to change as future information becomes available.
F-17
<PAGE> 275
SEARCH EXPLORATION, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Proved oil and gas reserves are the estimated quantities of crude oil,
natural gas and natural gas liquids which geological and engineering data
demonstrate with reasonable certainty to be recoverable in future years
from known reservoirs under existing economic and operating conditions.
Proved developed oil and gas reserves are those expected to be recovered
through existing wells with existing equipment and operating methods.
Proved reserves are estimated as follows:
<TABLE>
<CAPTION>
Oil (bbls) Gas (mcf)
---------- ---------
<S> <C> <C>
Proved reserves, January 1, 1992 5,084 493,993
Extensions, discoveries and other
additions 25,964 2,780,832
Purchase of minerals in place 102,300 91,913
Sales of minerals in place (879) (85,460)
Revisions of previous estimates 288 14,268
Production (579) (79,959)
---------- ----------
Proved reserves, December 31, 1992 132,178 3,215,587
Extensions, discoveries and other
additions 1,825 356,001
Purchase of minerals in place 1,604 202,866
Revisions of previous estimates 51,062 (1,364,360)
Production (27,556) (342,275)
---------- ----------
Proved reserves, December 31, 1993 159,113 2,067,819
Extensions, discoveries and other additions 18,394 959,758
Sales of minerals in place (150,000) (752,600)
Revisions of previous estimates 1,835 (739,147)
Production (9,923) (237,808)
---------- ----------
Proved reserves, December 31, 1994 19,419 1,298,022
========== ==========
</TABLE>
Proved developed reserves of the Company are estimated as follows:
<TABLE>
<CAPTION>
Oil (bbls) Gas (mcf)
---------- ---------
<S> <C> <C>
December 31, 1994 19,419 1,298,022
December 31, 1993 159,113 2,067,819
December 31, 1992 18,226 2,001,525
December 31, 1991 2,542 253,546
</TABLE>
Standardized Measure of Future Net Cash Flows Relating to Proved Reserves:
Statement of Financial Accounting Standards No. 69 prescribes guidelines
for computing a standardized measure of future net cash flows and changes
therein relating to estimated proved reserves. The Company has followed
these guidelines, which are briefly discussed below.
F-18
<PAGE> 276
SEARCH EXPLORATION, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Future cash inflows and future production and development costs are
determined by applying year-end prices and costs to the estimated
quantities of oil and gas to be produced. Estimated future income taxes
are computed using current statutory income tax rates, including
consideration for estimated future statutory depletion and deferred income
taxes. The resulting future net cash flows are reduced to present value
amounts by applying a 10% annual discount factor.
The assumptions used to compute the standardized measure are those
prescribed by the Financial Accounting Standards Board and, as such, do not
necessarily reflect the Company's expectations of actual revenues to be
derived from those reserves or their present worth. The limitations
inherent in the reserve quantity estimation process, as discussed
previously, are equally applicable to the standardized measure
computations, since these estimates are the basis for the valuation
process.
Presented below is the standardized measure of discounted future net cash
flows relating to proved reserves as of:
<TABLE>
<CAPTION>
December 31,
---------------------------------------------
1994 1993 1992
-------- -------- --------
<S> <C> <C> <C>
Future cash inflows $3,039,033 $6,926,261 $8,753,173
Reduced by future:
Production and development costs (624,911) (1,797,635) (2,454,175)
Income taxes - (206,993) (1,070,653)
---------- ---------- ----------
Total future net cash inflows 2,414,122 4,921,633 5,228,345
Less effect of a 10% discount factor (901,339) (1,795,403) (1,890,003)
---------- ---------- ----------
Standardized measure of discounted
future net cash flows $1,512,783 $3,126,230 $3,338,342
========== ========== ==========
</TABLE>
The principal sources of change in the standardized measure of discounted
future net cash flows are as follows:
<TABLE>
<CAPTION>
December 31,
---------------------------------------------
1994 1993 1992
-------- -------- --------
<S> <C> <C> <C>
Balance, beginning of period $3,126,230 $3,338,342 $ 429,580
Sales of oil and gas produced,
net of production cost (220,718) (771,388) (133,761)
Net changes in prices and
production costs (411,550) 1,443,116 (4,816)
Revisions of previous quantity estimates (353,583) (2,152,056) 33,653
Extensions and discoveries 1,091,000 383,925 3,285,834
Purchases of minerals in place - 264,199 951,553
Sales and other transfers of minerals in place (1,535,000) - (64,378)
Development costs incurred during the
period and net change in future estimated
development costs - (577,403) (229,581)
Accretion of discount (312,623) 333,834 42,958
Net change in income taxes 129,027 863,661 (933,607)
Other changes, net - - (39,093)
---------- ---------- ----------
Balance, end of period $1,512,783 $3,126,230 $3,338,342
========== ========== ==========
</TABLE>
F-19
<PAGE> 277
SIGNATURES
Pursuant to Section 13 of the Securities Excahnge Act of 1934, Search
Exploration, Inc., (the Registrant) has duly caused this report to be signed on
its behalf by the undersigned thereunto duly authorized.
Dated
April 6, 1995 SEARCH EXPLORATION, INC.
By: /s/ JOSEPH F. LANGSTON
------------------------------
Joseph F. Langston, President
<PAGE> 278
PART II
INFORMATION NOT REQUIRED IN PROSPECTUS
ITEM 20. INDEMNIFICATION OF DIRECTORS AND OFFICERS.
Section 145 of the General Corporation Law of the State of Delaware
provides generally and in pertinent part that a Delaware corporation may
indemnify its directors and officers against expenses, judgments, fines and
settlements actually and reasonably incurred by them in connection with any
civil, criminal, administrative, or investigative suit or action except actions
by or in the right of the corporation if, in connection with the matters in
issues, they acted in good faith and in a manner they reasonably believed to be
in or not opposed to the best interests of the corporation, and in connection
with any criminal suit or proceeding, if in connection with the matters in
issue, they had no reasonable cause to believe their conduct was unlawful.
Section 145 further provides that in connection with the defense or settlement
of any action by or in the right of the corporation, a Delaware corporation may
indemnify its directors and officers against expenses actually and reasonably
incurred by them if, in connection with the matters in issue, they acted in
good faith, in a manner they reasonably believed to be in or not opposed to the
best interests of the corporation, except that no indemnification may be made
with respect to any claim, issue or matter as to which such person has been
adjudged liable for negligence or misconduct unless the Court of Chancery or
the court in which such action or suit to brought approves such
indemnification. Section 145 further permits a Delaware corporation to grant
its directors and officers additional rights of indemnification through bylaw
provisions and otherwise, and to purchase indemnity insurance on behalf of its
directors and officers.
Article Ten of the Registrant's Certificate of Incorporation and Article
VII of the Registrant's bylaws provide, in general, that the Registrant shall
indemnify its directors and officers under certain of the circumstances defined
in Section 145. Pursuant to an Advancement Agreement dated September 13, 1989,
between Harken and each director thereof, Harken in accordance with its
Certificate of Incorporation and By-laws, has agreed to advance certain
reasonable expenses incurred by such director(s) in defending a claim or claims
made against such director(s) for certain covered acts (as such acts are
described in the Advancement Agreement). Harken will have no obligation under
the Advancement Agreement to pay any expenses incurred by a director in
connection with a claim which a majority of disinterested directors determines
to be an excluded claim as described in the Advancement Agreement.
ITEM 21. EXHIBITS AND FINANCIAL STATEMENT SCHEDULES
A. Exhibits
EXHIBIT
NUMBER DESCRIPTION
- ------- -----------
2.1 Amended and Restated Agreement and Plan of Merger among Harken Energy
Corporation ("Harken"), Search Acquisition Corp., and Search
Exploration, Inc. ("Search") dated as of March 27, 1995 (Attached as
Appendix A to the Statement filed as a part of this Registration
Statement)
3.1 Certificate of Incorporation of Harken, as amended (incorporated by
reference as Exhibit 3.1 to Harken's Annual Report on Form 10-K for
fiscal year ended December 31, 1989)
3.2 Amendment to the Certificate of Incorporation of Harken (incorporated
by reference as Exhibit 28.8 to the Registration Statement on Form S-1,
as amended, of E-Z Serve Corporation and Tejas Power Corporation --
Registration No. 33-37141); Amendment dated February 28, 1991, to the
Certificate of Incorporation of Harken (incorporated by reference as
Exhibit 3 to Harken's Quarterly Report on Form 10-Q for the quarter
ended March 31, 1991); Amendment dated July 8, 1991, to Harken's
Certificate of Incorporation (incorporated by reference as Exhibit 3 to
Harken's Quarterly Report on Form 10-Q for the quarter ended June 30,
1991); and Amendment dated June 30, 1992, to Harken's Certificate of
Incorporation (incorporated by reference as Exhibit 3 to Harken's
Quarterly Report on Form 10-Q for the quarter ended June 30, 1992)
II-1
<PAGE> 279
3.3 Bylaws of Harken, as amended (incorporated by reference as Exhibit 3.2
to Harken's Annual Report on Form 10-K for fiscal year ended December
31, 1989)
4.1 Certificate of Designations, Powers, Preferences, and Rights of Series
A Cumulative Convertible Preferred Stock, $1.00 par value, of Harken
(incorporated by reference as Exhibit 4.1 to Harken's Annual Report on
Form 10-K for the fiscal year ended December 31, 1989)
4.2 Certificate of Designations, Powers, Preferences, and Rights of Series
B Cumulative Convertible Preferred Stock, $1.00 par value, of Harken
(incorporated by reference as Exhibit 4.2 to Harken's Annual Report on
Form 10-K for the fiscal year ended December 31, 1989)
4.3 Certificate of the Designations, Powers, Preferences and Rights of
Series C Cumulative Convertible Preferred Stock, $1.00 par value of
Harken (incorporated by reference as Exhibit 4.3 to Harken's Annual
Report on Form 10-K for fiscal year ended December 31, 1989)
+5 Opinion of Larry E. Cummings, General Counsel of Harken, as to the
legality of the securities being registered
+8 Opinion of Hein + Associates LLP, as to certain tax matters
+10.1 Form of Indemnification Agreement to be executed by Harken, Merger Sub
and each of the officers and directors of Search and its subsidiaries
+10.2 Form of Harken Warrant to be issued in the Exchange Offer (attached as
Appendix E to the Statement filed as a part of this Registration
Statement)
+10.3 Form of Assignment of Overriding Royalty Interest Agreement to be
executed by Search, Harken and Dobbins Partners, L.P.
+10.4 Form of Assignment of Overriding Royalty Interest Agreement to be
executed by Search, Harken and O'Donnell & Masur
+10.5 Form of Assignment of Overriding Royalty Interest Agreement to be
executed by Search, Harken and Langston Investment, Inc.
+10.6 Form of Partial Settlement and Conversion Agreement to be executed by
Concorde Financial Corporation, Search and Harken
+10.7 Form of Partial Settlement and Conversion Agreement to be executed by
EnCap Investments, L.C., Search and Harken
+10.8 Form of Partial Settlement and Conversion Agreement to be executed by
Joseph F. Langston, Jr., Search and Harken
10.9 Concession and Lease Purchase Agreement dated October 20, 1994
(incorporated by reference as Exhibit to Harken's Quarterly Report on
Form 10-Q for the quarter ended September 30, 1994)
10.10 Letter Agreement from Huffco Group, Inc. dated September 14, 1994
(incorporated by reference as Exhibit to Harken's Quarterly Report on
Form 10-Q for the quarter ended September 30, 1994)
10.11 Seventh Amendment and Restatement of Harken's Amended Stock Option Plan
(incorporated by reference as Exhibit 10.1 to Harken's Annual Report on
Form 10-K for the fiscal year ended December 31, 1991)
II-2
<PAGE> 280
10.12 Amended and Restated Non-Qualified Incentive Stock Option Plan of
Harken adopted by Harken's stockholders on February 18, 1991
(incorporated by reference as Exhibit 10.2 to Harken's Annual Report on
Form 10-K for the fiscal year ended December 31, 1991)
10.13 Production Sharing Agreement between Bahrain National Oil Company and
Harken Bahrain Oil Company dated January 30, 1990 (filed with the
Commission supplementally under Request for Confidential Treatment)
(incorporated by reference as Exhibit 10.3 to Harken's Annual Report on
Form 10-K for the fiscal year ended December 31, 1989)
10.14 Amendment No. 1 to the Production Sharing Agreement, Blocks I, II, and
III, including a certain Letter Agreement (filed with the Commission
supplementally under Request for Confidential Treatment) (incorporated
by reference as Exhibit 10.7 to Harken's Annual Report on Form 10-K for
the fiscal year ended December 31, 1991)
10.15 Harken Energy Corporation 401(k) Savings Plan (incorporated by
reference as Exhibit 10.1 to Harken's Registration Statement
(Registration No. 33-52874))
10.16 Tax Sharing Agreement among Harken and certain subsidiaries of Harken
(incorporated by reference as Exhibit 10.53 to the Registration
Statement on Form S-1, as amended, of E-Z Serve and Tejas (Registration
No. 33-37141))
10.17 Master Intercompany Agreement among Harken, Harken Marketing Company,
and E-Z Serve (incorporated by reference as Exhibit 10.54 to the
Registration Statement on Form S-1, as amended, of E-Z Serve and Tejas
(Registration No. 33-37141))
10.18 Master Intercompany Agreement between Harken and Tejas (incorporated by
reference as Exhibit 10.55 to the Registration Statement on Form S-1,
as amended, of E-Z Serve and Tejas (Registration No. 33-37141))
10.19 Litigation, Indemnification and Contribution Agreement among Harken,
E-Z Serve, and Harken Marketing Company (incorporated by reference as
Exhibit 10.56 to the Registration Statement on Form S-1, as amended, of
E-Z Serve and Tejas (Registration No. 33-37141))
10.20 Litigation, Indemnification and Contribution Agreement between Harken
and Tejas (incorporated by reference as Exhibit 10.57 to the
Registration Statement on Form S-1, as amended, of E-Z Serve and Tejas
(Registration No. 33-37141))
10.21 Harken Anadarko Partners, L.P. Agreement of Limited Partnership
(incorporated by reference as Exhibit B to Harken's Current Report on
Form 8-K dated November 30, 1990)
10.22 Agreement for Purchase and Sale of Partnership Rights Relating to
Harken Anadarko Partners, L.P. (incorporated by reference as Exhibit
10.14 to Harken's Registration Statement on Form S-4 (Registration No.
33-56964))
10.23 E-Z Serve Subordinated Debenture Agreements (incorporated by reference
as Exhibit 10 to Harken's Quarterly Report on Form 10-Q for the quarter
ended June 30, 1991)
10.24 E-Z Serve Preferred Stock Agreements (incorporated by reference as
Exhibit 10 to Harken's Quarterly Report on Form 10-Q for the quarter
ended June 30, 1991)
10.25 Tejas Power Corporation Preferred Stock Purchase Agreement
(incorporated by reference as Exhibit 10 to Harken's Quarterly Report
on Form 10-Q for the quarter ended September 30, 1991)
10.26 Series C Preferred Stock Exchange Agreement between Harken and E-Z
Serve dated July 31, 1992 (incorporated by reference as Exhibit 10.20
to Harken's Registration Statement on Form S-4 (Registration No.
33-56964))
II-3
<PAGE> 281
10.27 Form of Advancement Agreement dated September 13, 1990, between Harken
and each director of Harken (incorporated by reference as Exhibit 10.38
to Harken's Annual Report on Form 10-K for the fiscal year ended
December 31, 1989)
10.28 Chuska's Operating Agreement with the Navajo Tribe of Indians dated
July 28, 1983, and effective August 26, 1983, with First Addendum
thereto (incorporated by reference to Exhibit 10(a) of Chuska's Form
10--General Form for Registration of Securities ("Form 10"))
10.29 Chuska's Operating Agreement with the Navajo Tribe of Indians dated
February 18, 1987, and effective July 20, 1987 (incorporated by
reference to Exhibit 10(b) of Chuska's Form 10)
10.30 Joint Operations Agreement (CHAP) dated August 1, 1988 (incorporated by
reference to Exhibit 10(e) of Chuska's Form 10)
10.31 Exploration and Carry Agreement between Sunfield Energy Company and
Bligh Petroleum, Inc. and others (incorporated by reference to Exhibit
10(b) of Chuska's Form 10-K)
10.32 Chuska's Exploration Letter Agreement with Bligh Petroleum, Inc.
(incorporated by reference to Exhibit 10(d) of Chuska's Form 10-K)
10.33 Agreement dated and effective October 22, 1992, among Donald W.
Raymond, Harvey V. Risien, Jr., Chuska Energy Company and Western Gas
Resources, Inc. (incorporated by reference as Exhibit 10.41 to Harken's
Registration Statement on Form S-4 (Registration No. 33-56964))
10.34 Indemnification Agreement dated November 3, 1992, among Harken, Harvey
V. Risien, Jr., and Donald W. Raymond (incorporated by reference as
Exhibit 10.42 to Harken's Registration Statement on Form S-4
(Registration No. 33-56964))
10.35 Gas Processing Agreement between Western Processors, Ltd. and Chuska
Energy Company dated June 29, 1989 (incorporated by reference as
Exhibit 10.44 to Harken's Registration Statement on Form S-4
(Registration No. 33-56964))
10.36 Agreement for the Operation and Construction of the San Juan River Plan
and Pipeline dated June 29, 1989 (incorporated by reference as Exhibit
10.45 to Harken's Registration Statement on Form S-4 (Registration No.
33-56964))
13 Annual Report of Search on Form 10-K for the fiscal year ended December
31, 1994, and Annual Report on Form 10-K/A Amendment No-1 for the
fiscal year ended December 31, 1994 (attached as Appendix H to the
Statement filed as a part of this Registration Statement)
22 Subsidiaries of Harken (incorporated by reference as Exhibit 22 to
Harken's Annual Report on Form 10-K for the fiscal year ended December
31, 1994)
23.1 Consent of Larry E. Cummings (included in Exhibit 5)
*23.2 Consent of Principal Financial Securities, Inc.
23.3 Consent of Hein + Associates LLP (included in Exhibit 8)
*23.4 Consent of Hein + Associates LLP
*23.5 Consent of Arthur Andersen LLP
*23.6 Consent of Deloitte & Touche, LLP
II-4
<PAGE> 282
*23.7 Consent of Gerald W. DuPont Enterprises, Inc.
+24 Powers of Attorney
27 EDGAR Financial Schedules (incorporated by reference as Exhibit 27 to
Harken's Annual Report on Form 10-K for the fiscal year ended December
31, 1994)
99.1 Opinion of Principal Financial Securities, Inc. as to the fairness of
the consideration to be received by the stockholders of Search
(attached as Appendix B to the Statement filed as a part of this
Registration Statement)
+99.2 Form of proxy for Search's Stockholders
+99.3 Form of Letter of Transmittal for tendering Search Warrants
__________________
* filed herewith
+ previously filed
B. Financial Statements Schedules.
NONE
C. Reports, Opinions and Appraisals.
NONE
ITEM 22. UNDERTAKINGS.
(a) The undersigned Registrant hereby undertakes that, for purposes of
determining any liability under the Securities Act of 1933, each filing
of the Registrant's annual report pursuant to Section 13(a) or 15(d) of
the Securities Exchange Act of 1934 that is incorporated by reference
in the Registration Statement shall be deemed to be a new registration
statement relating to the securities offered therein, and the offering
of such securities at that time shall be deemed to be the initial bona
fide offering thereof.
(b) (1) The undersigned Registrant hereby undertakes as follows: that
prior to any public reoffering of the securities registered
hereunder through use of a prospectus which is a part of this
Registration Statement, by any person or party who is deemed
to be an underwriter within the meaning of Rule 145(c), the
issuer undertakes that such reoffering prospectus will contain
the information called for by the applicable registration form
with respect to reofferings by persons who may be deemed
underwriters, in addition to the information called for by the
other Items of the applicable form.
(2) The Registrant undertakes that every prospectus (i) that is
filed pursuant to paragraph (b)(1) immediately preceding, or
(ii) that purports to meet the requirements of section
10(a)(3) of the Securities Act of 1933 and is used in
connection with an offering of securities subject to Rule 415,
will be filed as a part of an amendment to the Registration
Statement and will not be used until such amendment is
effective, and that, for purposes of determining any liability
under the Securities Act of 1933, each such post-effective
amendment shall be deemed to be a new registration statement
relating to the securities offered therein, and the offering
of such securities at that time shall be deemed to be the
initial bona fide offering thereof.
(c) Insofar as indemnification for liabilities arising under the Securities
Act of 1933 may be permitted to directors, officers and controlling
persons of the Registrant pursuant to the foregoing provisions, or
otherwise, the Registrant has been advised that in the opinion of the
Securities and Exchange Commission such indemnification is against
public policy as expressed in the Securities Act and is, therefore,
unenforceable. In the event that a claim for indemnification against
such liabilities (other than the payment by the Registrant of expenses
incurred or paid by a director, officer, or controlling person of the
Registrant in the successful defense of any action, suit or proceeding)
is asserted by such director, officer or controlling person in
connection with the securities being
II-5
<PAGE> 283
registered, the Registrant will, unless in the opinion of its counsel
the matter has been settled by controlling precedent, submit to a court
of appropriate jurisdiction the question whether such indemnification
by it is against public policy as expressed in the Securities Act and
will be governed by the final adjudication of such issue.
(d) The undersigned Registrant hereby undertakes to respond to requests for
information that is incorporated by reference into the Prospectus
pursuant to Items 4, 10(b), 11 or 13 of this Form, within one business
day of receipt of such request, and to send the incorporated documents
by first class mail or other equally prompt means. This includes
information contained in documents filed subsequent to the effective
date of the Registration Statement through the date of responding to
the request.
(e) The undersigned Registrant hereby undertakes to supply by means of
post-effective amendment all information concerning a transaction, and
the company being acquired involved therein, that was not the subject
of and included in the Registration Statement when it became effective.
(f) The undersigned Registrant hereby undertakes:
(1) to file, during any period in which offers or sales are being
made, a post-effective amendment to this Registration
Statement:
(i) to include any prospectus required by Section
10(a)(3) of the Securities Act of 1933;
(ii) to reflect in the prospectus any facts or events
arising after the effective date of the Registration Statement
(or the most recent post-effective amendment thereto) which,
individually or in the aggregate, represent a fundamental
change in the information set forth in the Registration
Statement; and
(iii) to include any material information with
respect to the plan of distribution not previously disclosed in
the Registration Statement or any material change to such
information in the Registration Statement.
(2) That, for the purpose of determining any liability under the
Securities Act of 1933, each such post-effective amendment
shall be deemed to be a new registration statement relating to
the securities offered therein, and the offering of such
securities at that time shall be deemed to be the initial bona
fide offering thereof.
(3) To remove from registration by means of post-effective
amendment any of the securities being registered which remain
unsold at the termination of the offering.
II-6
<PAGE> 284
SIGNATURES
Pursuant to the requirements of the Securities Act of 1933, the
Registrant has duly caused this Registration Statement to be signed on its
behalf by the undersigned, thereunto duly authorized, in the City of Irving,
State of Texas, on the 12th day of April, 1995.
HARKEN ENERGY CORPORATION
By: *
----------------------------------
MIKEL D. FAULKNER,
Chairman of the Board and
Chief Executive Officer
Pursuant to the requirements of the Securities Act of 1933, this
Registration Statement has been signed by the following persons in the
capacities and on the dates indicated.
<TABLE>
<CAPTION>
Signature Title Date
--------- ----- ----
<S> <C> <C>
* Chairman of the Board and Chief April 12, 1995
--------------------------------------- Executive Officer (Principal
MIKEL D. FAULKNER Executive Officer)
* President and Director April 12, 1995
---------------------------------------
RICHARD H. SCHROEDER
* Senior Vice President and Chief April 12, 1995
--------------------------------------- Financial Officer (Principal
BRUCE N. HUFF Accounting and Financial Officer)
Director April 12, 1995
---------------------------------------
MICHAEL R. EISENSON
* Director April 12, 1995
---------------------------------------
TALAT M. OTHMAN
* Director April 12, 1995
---------------------------------------
MICHAEL M. AMEEN, JR.
* Director April 12, 1995
---------------------------------------
DONALD W. RAYMOND
* Director April 12, 1995
---------------------------------------
E.C. KETTENBRINK, JR.
</TABLE>
*Larry E. Cummings, by signing his name hereto, does hereby sign this
Registration Statement 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 by each officer and director.
/s/ LARRY E. CUMMINGS
- ---------------------------
Larry E. Cummings
Attorney-in-Fact
II-7
<PAGE> 285
EXHIBIT INDEX
<TABLE>
<CAPTION>
EXHIBIT PAGE
NUMBER DESCRIPTION NUMBER
- ------ ----------- ------
<S> <C> <C>
2.1 Agreement and Plan of Merger among Harken Energy Corporation ("Harken"), Search
Acquisition Corp., and Search Exploration, Inc. ("Search") dated as of November 8,
1994 and as amended on March 27, 1995 (Attached as Appendix A to the Statement filed
as a part of this Registration Statement)
3.1 Certificate of Incorporation of Harken, as amended (incorporated by reference as
Exhibit 3.1 to Harken's Annual Report on Form 10-K for fiscal year ended December 31,
1989)
3.2 Amendment to the Certificate of Incorporation of Harken (incorporated by reference as
Exhibit 28.8 to the Registration Statement on Form S-1, as amended, of E-Z Serve
Corporation and Tejas Power Corporation -- Registration No. 33-37141); Amendment
dated February 28, 1991, to the Certificate of Incorporation of Harken (incorporated
by reference as Exhibit 3 to Harken's Quarterly Report on Form 10-Q for the quarter
ended March 31, 1991); Amendment dated July 8, 1991, to Harken's Certificate of
Incorporation (incorporated by reference as Exhibit 3 to Harken's Quarterly Report on
Form 10-Q for the quarter ended June 30, 1991); and Amendment dated June 30, 1992, to
Harken's Certificate of Incorporation (incorporated by reference as Exhibit 3 to
Harken's Quarterly Report on Form 10-Q for the quarter ended June 30, 1992)
3.3 Bylaws of Harken, as amended (incorporated by reference as Exhibit 3.2 to Harken's
Annual Report on Form 10-K for fiscal year ended December 31, 1989)
4.1 Certificate of Designations, Powers, Preferences, and Rights of Series A Cumulative
Convertible Preferred Stock, $1.00 par value, of Harken (incorporated by reference as
Exhibit 4.1 to Harken's Annual Report on Form 10-K for the fiscal year ended December
31, 1989)
4.2 Certificate of Designations, Powers, Preferences, and Rights of Series B Cumulative
Convertible Preferred Stock, $1.00 par value, of Harken (incorporated by reference as
Exhibit 4.2 to Harken's Annual Report on Form 10-K for the fiscal year ended December
31, 1989)
4.3 Certificate of the Designations, Powers, Preferences and Rights of Series C
Cumulative Convertible Preferred Stock, $1.00 par value of Harken (incorporated by
reference as Exhibit 4.3 to Harken's Annual Report on Form 10-K for fiscal year ended
December 31, 1989)
+5 Opinion of Larry E. Cummings, General Counsel of Harken, as to the legality of the
securities being registered
+8 Opinion of Hein + Associates LLP, as to certain tax matters
+10.1 Form of Indemnification Agreement to be executed by Harken, Merger Sub and each of
the officers and directors of Search and its subsidiaries
+10.2 Form of Harken Warrant to be issued in the Exchange Offer (attached as Appendix E to
the Statement filed as a part of this Registration Statement)
+10.3 Form of Assignment of Overriding Royalty Interest Agreement to be executed by Search,
Harken and Dobbins Partners, L.P.
+10.4 Form of Assignment of Overriding Royalty Interest Agreement to be executed by Search,
Harken and O'Donnell & Masur
+10.5 Form of Assignment of Overriding Royalty Interest Agreement to be executed by Search,
Harken and Langston Investment, Inc.
</TABLE>
<PAGE> 286
<TABLE>
<CAPTION>
EXHIBIT PAGE
NUMBER DESCRIPTION NUMBER
- ------ ----------- ------
<S> <C> <C>
+10.6 Form of Partial Settlement and Conversion Agreement to be executed by Concorde
Financial Corporation, Search and Harken
+10.7 Form of Partial Settlement and Conversion Agreement to be executed by EnCap
Investments, L.C., Search and Harken
+10.8 Form of Partial Settlement and Conversion Agreement to be executed by Joseph F.
Langston, Jr., Search and Harken
10.9 Concession and Lease Purchase Agreement dated October 20, 1994 (incorporated by
reference as Exhibit to Harken's Quarterly Report on Form 10-Q for the quarter ended
September 30, 1994)
10.10 Letter Agreement from Huffco Group, Inc. dated September 14, 1994 (incorporated by
reference as Exhibit to Harken's Quarterly Report on Form 10-Q for the quarter ended
September 30, 1994)
10.11 Seventh Amendment and Restatement of Harken's Amended Stock Option Plan (incorporated
by reference as Exhibit 10.1 to Harken's Annual Report on Form 10-K for the fiscal
year nded December 31, 1991)
10.12 Amended and Restated Non-Qualified Incentive Stock Option Plan of Harken adopted by
Harken's stockholders on February 18, 1991 (incorporated by reference as Exhibit 10.2
to Harken's Annual Report on Form 10-K for the fiscal year ended December 31, 1991)
10.13 Production Sharing Agreement between Bahrain National Oil Company and Harken Bahrain
Oil Company dated January 30, 1990 (filed with the Commission supplementally under
Request for Confidential Treatment) (incorporated by reference as Exhibit 10.3 to
Harken's Annual Report on Form 10-K for the fiscal year ended December 31, 1989)
10.14 Amendment No. 1 to the Production Sharing Agreement, Blocks I, II, and III, including
a certain Letter Agreement (filed with the Commission supplementally under Request
for Confidential Treatment) (incorporated by reference as Exhibit 10.7 to Harken's
Annual Report on Form 10-K for the fiscal year ended December 31, 1991)
10.15 Harken Energy Corporation 401(k) Savings Plan (incorporated by reference as Exhibit
10.1 to Harken's Registration Statement (Registration No. 33-52874))
10.16 Tax Sharing Agreement among Harken and certain subsidiaries of Harken (incorporated
by reference as Exhibit 10.53 to the Registration Statement on Form S-1, as amended,
of E-Z Serve and Tejas (Registration No. 33-37141))
10.17 Master Intercompany Agreement among Harken, Harken Marketing Company, and E-Z Serve
(incorporated by reference as Exhibit 10.54 to the Registration Statement on Form S-1,
as amended, of E-Z Serve and Tejas (Registration No. 33-37141))
10.18 Master Intercompany Agreement between Harken and Tejas (incorporated by reference as
Exhibit 10.55 to the Registration Statement on Form S-1, as amended, of E-Z Serve and
Tejas (Registration No. 33-37141))
10.19 Litigation, Indemnification and Contribution Agreement among Harken, E-Z Serve, and
Harken Marketing Company (incorporated by reference as Exhibit 10.56 to the
Registration Statement on Form S-1, as amended, of E-Z Serve and Tejas (Registration
No. 33-37141))
</TABLE>
<PAGE> 287
<TABLE>
<CAPTION>
EXHIBIT PAGE
NUMBER DESCRIPTION NUMBER
- ------ ----------- ------
<S> <C> <C>
10.20 Litigation, Indemnification and Contribution Agreement between Harken and Tejas
(incorporated by reference as Exhibit 10.57 to the Registration Statement on Form S-1,
as amended, of E-Z Serve and Tejas (Registration No. 33-37141))
10.21 Harken Anadarko Partners, L.P. Agreement of Limited Partnership (incorporated by
reference as Exhibit B to Harken's Current Report on Form 8-K dated November 30,
1990)
10.22 Agreement for Purchase and Sale of Partnership Rights Relating to Harken Anadarko
Partners, L.P. (incorporated by reference as Exhibit 10.14 to Harken's Registration
Statement on Form S-4 (Registration No. 33-56964))
10.23 E-Z Serve Subordinated Debenture Agreements (incorporated by reference as Exhibit 10
to Harken's Quarterly Report on Form 10-Q for the quarter ended June 30, 1991)
10.24 E-Z Serve Preferred Stock Agreements (incorporated by reference as Exhibit 10 to
Harken's Quarterly Report on Form 10-Q for the quarter ended June 30, 1991)
10.25 Tejas Power Corporation Preferred Stock Purchase Agreement (incorporated by reference
as Exhibit 10 to Harken's Quarterly Report on Form 10-Q for the quarter ended
September 30, 1991)
10.26 Series C Preferred Stock Exchange Agreement between Harken and E-Z Serve dated July
31, 1992 (incorporated by reference as Exhibit 10.20 to Harken's Registration
Statement on Form S-4 (Registration No. 33-56964))
10.27 Form of Advancement Agreement dated September 13, 1990, between Harken and each
director of Harken (incorporated by reference as Exhibit 10.38 to Harken's Annual
Report on Form 10-K for the fiscal year ended December 31, 1989)
10.28 Chuska's Operating Agreement with the Navajo Tribe of Indians dated July 28, 1983,
and effective August 26, 1983, with First Addendum thereto (incorporated by reference
to Exhibit 10(a) of Chuska's Form 10--General Form for Registration of Securities
("Form 10"))
10.29 Chuska's Operating Agreement with the Navajo Tribe of Indians dated February 18,
1987, and effective July 20, 1987 (incorporated by reference to Exhibit 10(b) of
Chuska's Form 10)
10.3 Joint Operations Agreement (CHAP) dated August 1, 1988 (incorporated by reference to
Exhibit 10(e) of Chuska's Form 10)
10.31 Exploration and Carry Agreement between Sunfield Energy Company and Bligh Petroleum,
Inc. and others (incorporated by reference to Exhibit 10(b) of Chuska's Form 10-K)
10.32 Chuska's Exploration Letter Agreement with Bligh Petroleum, Inc. (incorporated by
reference to Exhibit 10(d) of Chuska's Form 10-K)
10.33 Agreement dated and effective October 22, 1992, among Donald W. Raymond, Harvey V.
Risien, Jr., Chuska Energy Company and Western Gas Resources, Inc. (incorporated by
reference as Exhibit 10.41 to Harken's Registration Statement on Form S-4
(Registration No. 33-56964))
10.34 Indemnification Agreement dated November 3, 1992, among Harken, Harvey V. Risien,
Jr., and Donald W. Raymond (incorporated by reference as Exhibit 10.42 to Harken's
Registration Statement on Form S-4 (Registration No. 33-56964))
</TABLE>
<PAGE> 288
<TABLE>
<CAPTION>
EXHIBIT PAGE
NUMBER DESCRIPTION NUMBER
- ------ ----------- ------
<S> <C> <C>
10.35 Gas Processing Agreement between Western Processors, Ltd. and Chuska Energy Company
dated June 29, 1989 (incorporated by reference as Exhibit 10.44 to Harken's
Registration Statement on Form S-4 (Registration No. 33-56964))
10.36 Agreement for the Operation and Construction of the San Juan River Plan and Pipeline
dated June 29, 1989 (incorporated by reference as Exhibit 10.45 to Harken's
Registration Statement on Form S-4 (Registration No. 33-56964))
13 Annual Report of Search on Form 10-K for the fiscal year ended December 31, 1994,
and Annual Report on form 10-K/A Amendment No. 1 for the fiscal year ended
December 31, 1994 (attached as Appendix H to the Statement filed as a part of
this Registration Statement)
22 Subsidiaries of Harken (incorporated by reference as Exhibit 22 to Harken's Annual
Report on Form 10-K for the fiscal year ended December 31, 1994)
23.1 Consent of Larry E. Cummings (included in Exhibit 5)
*23.2 Consent of Principal Financial Securities, Inc.
23.3 Consent of Hein + Associates LLP (included in Exhibit 8)
*23.4 Consent of Hein + Associates LLP
*23.5 Consent of Arthur Andersen LLP
*23.6 Consent of Deloitte & Touche, LLP
*23.7 Consent of Gerald W. DuPont Enterprises, Inc.
+24 Powers of Attorney
27 EDGAR Financial Schedules (incorporated by reference as Exhibit 27 to Harken's Annual
Report on Form 10-K for the fiscal year ended December 31, 1994)
99.1 Opinion of Principal Financial Securities, Inc. as to the fairness of the
consideration to be received by the stockholders of Search (attached as Appendix B to
the Statement filed as a part of this Registration Statement)
+99.2 Form of proxy for Search's Stockholders
+99.3 Form of Letter of Transmittal for tendering Search Warrants
</TABLE>
_____________
* filed herewith
+ previously filed
<PAGE> 1
EXHIBIT 23.2
(LOGO)
THE PRINCIPAL
FINANCIAL
GROUP
PRINCIPAL FINANCIAL SECURITIES, INC.
Investment Bankers - Member New York Stock Exchange
CONSENT OF PRINCIPAL FINANCIAL SECURITIES, INC.
Principal Financial Securities, Inc. hereby consents to the use of our
letter to the Search Exploration, Inc. Board of Directors, included as
Appendix B, to the descriptions of and the references to the opinion of our
firm, and to the use of our name and all references to our firm included in or
made a part of this Registration Statement on Form S-4 filed with the
Securities and Exchange Commission under the Securities Act of 1933, as
amended.
/s/ PRINCIPAL FINANCIAL SECURITIES, INC.
PRINCIPAL FINANCIAL SECURITIES, INC.
Dallas, Texas
April 11, 1995
The Fountain Place, 1445 Ross Avenue, Suite 4800, Dallas, Texas
75202-2786, (214) 880-9000 Formerly Eppler,
Guerin & Turner, Inc. Founded 1952.
<PAGE> 1
EXHIBIT 23.4
INDEPENDENT AUDITOR'S CONSENT
We consent to the incorporation by reference in the Form S-4 Registration
Statement and Prospectus of Harken Energy Corporation of our report dated
February 10, 1995, accompanying the consolidated financial statements of Search
Exploration, Inc. incorporated by reference in such Registration Statement, and
to the use of our name and the statements with respect to us, as appearing
under the heading "Experts" in the Prospectus.
HEIN + ASSOCIATES LLP
April 11, 1995
Dallas, Texas
<PAGE> 1
EXHIBIT 23.5
CONSENT OF INDEPENDENT PUBLIC ACCOUNTANTS
As independent public accountants, we hereby consent to the incorporation by
reference in this registration statement on Form S-4 of our report dated
February 10, 1995, included in Harken Energy Corporation's Form 10-K for the
year ended December 31, 1994 and to all references to our firm included in this
registration statement.
/s/ ARTHUR ANDERSEN LLP
ARTHUR ANDERSEN LLP
Dallas, Texas
April 11, 1995
<PAGE> 1
EXHIBIT 23.6
INDEPENDENT AUDITORS' CONSENT
We consent to the incorporation by reference in this Registration Statement of
Harken Energy Company on Form S-4 of our report dated April 12, 1994 appearing
in the Annual Report on Form 10-K of Search Exploration, Inc. for the year
ended December 31, 1994 and to the reference to us under the heading "Experts"
in the Prospectus, which is part of this Registration Statement.
/s/ DELOITTE & TOUCHE, LLP
Dallas, Texas
April 10, 1995
<PAGE> 1
EXHIBIT 23.7
GERALD DUPONT ENTERPRISES, INC.
PETROLEUM ENGINEER
P.O. BOX 1590
SUGAR LAND, TEXAS 77487-1590
(713) 240-2822 FAX (713) 242-2822
CONSENT OF INDEPENDENT PETROLEUM ENGINEERS
Gerald W. DuPont Enterprises, Inc. consents to the incorporation by reference
of our evaluation of the estimated reserves and future net revenues of certain
interests owned by McMulloch Energy, Inc. in the Reserve Report, dated January
1, 1995, included in the Annual Report on Form 10-K of Search Exploration, Inc.
for the year ended December 31, 1994.
/s/ GERALD W. DUPONT
Petroleum Engineer
April 11, 1995
