<PAGE> 1
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, 1996
/ / TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
FOR THE TRANSITION PERIOD FROM TO
------ ------
COMMISSION FILE NUMBER 0-9207
HARKEN ENERGY CORPORATION
(Exact name of registrant as specified in its charter)
DELAWARE 95-2841597
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
5605 N. MACARTHUR BLVD., SUITE 400 75038
IRVING, TEXAS (Zip Code)
(Address of principal executive offices)
Registrant's telephone number, including area code (972) 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 March 4, 1997 was
approximately $414,000,000. 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 March 4, 1997 was 99,226,246.
DOCUMENTS INCORPORATED BY REFERENCE: DEFINITIVE PROXY MATERIALS FOR THE
1997 ANNUAL MEETING OF STOCKHOLDERS -- PART III, ITEMS 10, 11, 12, AND 13.
<PAGE> 2
TABLE OF CONTENTS
<TABLE>
<CAPTION>
PAGE
----
<S> <C> <C>
PART I.
ITEM 1. Business............................................................... 3
ITEM 2. Properties............................................................. 16
ITEM 3. Legal Proceedings...................................................... 16
ITEM 4. Submission of Matters to a Vote of Security Holders.................... 16
PART II.
ITEM 5. Market for Registrant's Common Equity and Related Stockholder Matters.. 17
ITEM 6. Selected Financial Information and Other Data.......................... 18
ITEM 7. Management's Discussion and Analysis of Financial Condition and
Results of Operations.................................................. 20
ITEM 8. Financial Statements and Supplementary Data............................ 29
ITEM 9. Changes in and Disagreements with Accountants on Accounting and
Financial Disclosure................................................... 63
PART III.
ITEM 10. Directors and Executive Officers of the Registrant..................... 63
ITEM 11. Executive Compensation................................................. 63
ITEM 12. Security Ownership of Certain Beneficial Owners........................ 63
ITEM 13. Certain Relationships and Related Transactions......................... 63
PART IV.
ITEM 14. Exhibits, Financial Statement Schedules and Reports on Form 8-K........ 64
</TABLE>
2
<PAGE> 3
PART I
ITEM 1. BUSINESS
OVERVIEW
Harken Energy Corporation (together with its wholly-owned subsidiaries,
"Harken") is engaged in oil and gas exploration, development and production
operations both domestically and internationally through its various
wholly-owned subsidiaries. Harken's domestic operations include oil and gas
exploration, development and production operations in the Four Corners area of
Utah, Arizona and New Mexico, in the Texas Panhandle region, in the Magnolia
region of Arkansas and the Carlsbad region of New Mexico. Harken's international
operations include four exclusive Colombian Association Contracts with the
state-owned Colombian oil company.
Harken's corporate strategy is to expand its domestic reserve base
through acquisitions and additional exploration and developmental drilling on
its existing oil and gas properties and to reinvest a substantial portion of the
cash flow generated from its domestic assets, along with funds generated from
traditional and other sources of financing, towards developing its higher
potential, and higher risk, international prospects.
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 (972) 753-6900.
INTERNATIONAL EXPLORATION OPERATIONS
Harken's international operations consist primarily of its exploration
operations in Colombia. Harken, through its wholly-owned subsidiary Harken de
Colombia, Ltd., currently holds and maintains four exclusive Association
Contracts with Empresa Colombiana de Petroleos ("Ecopetrol"), the state-owned
Colombian oil company.
Alcaravan Contract -- During the third quarter of 1992, Harken de
Colombia, Ltd. was awarded the exclusive right to explore for, develop and
produce oil and gas throughout the Alcaravan area of Colombia. The Alcaravan
area 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 (the "Alcaravan
Contract") which currently requires Harken to conduct a seismic and exploratory
drilling program on approximately 210,000 acres in the Alcaravan area during the
initial six years of the Alcaravan Contract. At the end of each of the first six
years of the Alcaravan Contract, Harken has the option to withdraw from the
Alcaravan Contract or to commit to the next year's work requirements. If during
the initial six years of the Alcaravan Contract, Harken discovers one or more
fields capable of producing oil or gas in quantities that are economically
exploitable and Ecopetrol agrees that such field is economically exploitable (a
"commercial discovery"), the term of the Alcaravan Contract will be extended for
a period of 22 years from the date of such commercial discovery. Harken has
completed all work requirements for the first and second years of the Alcaravan
Contract.
Upon a discovery of a field capable of commercial production, and upon
commencement of production from that commercial field, Ecopetrol will reimburse
Harken for 50% of Harken's successful well
3
<PAGE> 4
costs expended up to the point of declaration of a commercial discovery.
Production from the field following a commercial discovery will be allocated as
follows: Ecopetrol, on behalf of the Colombian government, will receive a 20%
royalty interest in all production and all production (after royalty payments)
will be allocated 50% to Ecopetrol and 50% to Harken until cumulative production
in such field reaches 60 million barrels of oil, after which Ecopetrol's share
of production will progressively increase and Harken's share will progressively
decrease until cumulative production from the field reaches 150 million barrels
of oil, and thereafter all production will be allocated 70% to Ecopetrol and 30%
to Harken. If more than one commercially declared field is discovered on the
Alcaravan area, the production sharing percentages applicable to the field with
the greatest cumulative production will be applied to all fields within the
Alcaravan area. After declaration of a commercial discovery, Harken and
Ecopetrol will be responsible for all future development costs and operating
expenses in direct proportion to their interest in production.
In February 1995, Harken drilled the first well on the Alcaravan
acreage, the Alcaravan #1. The well was initially determined not to be
economically productive, however, Harken intends to re-enter the well during the
next contract year to finalize the evaluation of this well. The drilling of this
well satisfied the contractual obligations of the second year of the Alcaravan
Contract.
During 1996, Harken renegotiated certain terms of the Alcaravan
Contract with Ecopetrol and amended the original contract to provide for an
extension of time to fulfill the work requirements corresponding to the third
contractual year of the Alcaravan Association Contract. The amended third year
contractual work obligations included Harken drilling only one exploratory well
and returning approximately 40% of the original acreage contracted. Also, the
amendment included a new term until March 13, 1997 to drill the exploratory well
corresponding to the third contractual year of the Alcaravan Contract. Harken
spudded the Estero #1 exploratory well located on the Palo Blanco prospect
within the Alcaravan area in early February 1997. The Estero #1 well is expected
to be drilled to a depth of 9,100 feet to test the Carbonera, Mirador,
Guadalupe, Gacheta and Ubaque formations. Harken anticipates that the Estero #1
well will take approximately 30 days to reach total depth and an additional 20
days of testing before results of the well will be available.
During September 1996, Harken de Colombia, Ltd. entered into an
operating agreement (the "Rochester Agreement") with Rochester Minerals, Inc.
("Rochester", a Canadian corporation) pursuant to which Rochester agreed to pay
33 1/3% of the aggregate costs of the initial well to be drilled on the Palo
Blanco prospect, the Estero #1 well, in conjunction with a non-refundable
project contribution of $500,000. In exchange, Rochester, upon its full
performance, will acquire a beneficial interest equal to 25% of the interest
held by Harken de Colombia, Ltd. in the Alcaravan Contract, except as it relates
to the area around the Alcaravan #1. As of December 31, 1996, Harken had
received from Rochester $1,050,000 due pursuant to the Rochester Agreement,
including the $500,000 project contribution, and subsequent to December 31,
1996, Harken received an additional $80,000 due pursuant to the Rochester
Agreement.
In January 1997, Harken de Colombia, Ltd. entered into a financing
agreement ("the Parkcrest Financing Agreement") with Parkcrest Exploration, Ltd.
("Parkcrest", a Canadian corporation) which covers the Palo Blanco prospect, and
includes options on additional prospects, all located within the Alcaravan
Contract area. Under the terms of the Parkcrest Financing Agreement, Parkcrest
paid a project fee of $250,000 to Harken and prepaid 33 1/3% of the estimated
drilling and completion costs of the initial well to be drilled on the Palo
Blanco prospect in exchange for a beneficial interest equal to 25% of the
interest held by Harken de Colombia, Ltd. in the Palo Blanco prospect. In
January 1997, Harken received from Parkcrest approximately $783,000 representing
the initial $250,000 payment and the prepayment of Parkcrest's share
4
<PAGE> 5
of the estimated drilling costs of the first well to be drilled in the Palo
Blanco prospect, the Estero #1 well. In February 1997, Harken also received from
Parkcrest approximately $301,000 representing the prepayment of Parkcrest's
share of the estimated completion and contingency costs of the Estero #1 well to
be drilled on the Palo Blanco prospect.
Bocachico Contract -- In January 1994, Harken de Colombia, Ltd. signed
its second Association Contract (the "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 Magdalena
Valley of Central Colombia. During the initial six year term of the Bocachico
Contract, if Harken makes a commercial discovery on one or more prospect areas
in the contract area, the contract covering such prospect area(s) will be
further extended for a period of 22 years from the date of any commercial
discovery of oil and/or gas. The production sharing arrangements under the
Bocachico Contract are substantially similar to those under the Alcaravan
Contract.
During the first year of the Bocachico Contract, Harken conducted
seismic activities on the lands covered by this contract. During each of the
second through the sixth contract years, Harken may elect to continue the
contract by committing to the drilling of at least one well during each contract
year.
On January 19, 1995, after completing an engineering feasibility study,
Harken notified Ecopetrol of Harken's commitment to drill a well under the
Bocachico Contract, and thereby extended the Bocachico Contract into its second
year. Harken spudded its first well on this Bocachico Contract area, the Torcaz
#2, on July 18, 1996. This well was completed and initially tested at the rate
of 635 barrels per day. Harken has encountered numerous mechanical problems with
the down-hole submersible electric pump compounded by apparent reservoir
formation damage which may have occurred in the completion process. Harken is
carrying out recompletion efforts on this well as well as further remedial work.
On February 27, 1996, Harken committed to the drilling of a second well
thereby extending the Bocachico Contract into its third year and in February
1997 received an extension of the third year of the Bocachico Contract to May 5,
1997 to complete this second well. Harken expects to spud its second well
related to the Bocachico Contract area, the Torcaz #3, during March 1997. Harken
has further currently identified eight additional potential well locations and
has filed applications for environmental permits on two additional well
locations within the Bocachico Contract area.
In October 1995, Harken entered into a Development Finance Agreement
(the "Rio Negro Development Finance Agreement") with Arbco Associates L.P.,
Offense Group Associates L.P., Kayne Anderson Nontraditional Investments L.P.
and Opportunity Associates L.P. (collectively, the "Rio Negro Investors"),
pursuant to which the Rio Negro Investors agreed to provide up to $3,500,000 to
Harken to finance a portion of the drilling of two wells, including the Torcaz
#2 well, on the Rio Negro prospect in the Bocachico Contract area in exchange
for the right to receive future payments from Harken equal to 40% of the net
profits that Harken de Colombia, Ltd. may derive from the sale of oil and gas
produced from the Rio Negro prospect (the "Participation") if the planned
drilling on that prospect is successful. Pursuant to the Rio Negro Development
Finance Agreement, Harken is obligated to drill two wells on the Rio Negro
prospect. The drilling of the Torcaz #3 well which is anticipated to spud in
March 1997 will fulfill this commitment by Harken. As of December 31, 1996,
Harken had requested and received the entire $3,500,000 pursuant to the Rio
Negro Development Finance Agreement, and has reflected such amount as a
reduction to its investment in Colombian oil and gas properties in the
accompanying consolidated balance sheet.
5
<PAGE> 6
Pursuant to the Rio Negro Development Finance Agreement, the Rio Negro
Investors have the right at any time prior to January 11, 1998 (the "Commitment
Date"), to convert all or part of the Participation into shares of Series D
Preferred Stock of Harken (the "Preferred Stock"), and Harken likewise has the
right, exercisable during a 10 day period following the Commitment Date, to
convert up to 75% of the Participation into shares of Preferred Stock if the Rio
Negro Investors have not previously elected to convert all of such
Participation. If Harken exercises its right to convert the Participation into
Preferred Stock, the Rio Negro Investors at that time can elect to receive cash
in lieu of Preferred Stock equal to the amount of the balance of the remaining
unexchanged Participation plus an additional amount computed at a 25% annual
rate of return. In addition, the Rio Negro Investors may then elect to further
convert any remaining portion of the Participation into additional shares of
Preferred Stock. The shares of Preferred Stock which may be issued will pay
dividends at an annual rate of 15% and are redeemable by Harken without premium
except for accrued unpaid dividends at any time after the Commitment Date, and
must be redeemed by Harken no later than October 12, 2000. A failure by Harken
to timely pay dividends due under this Preferred Stock for three quarters or to
redeem such Preferred Stock when due would give rise to a right exercisable on
behalf of the Rio Negro Investors to elect one director to Harken's Board of
Directors.
Playero Contract -- In December 1994, Harken de Colombia, Ltd. signed
its third Association Contract (the "Playero Contract") with Ecopetrol, covering
the Playero Contract area located in the Llanos Basin of Colombia. In May 1996,
Harken elected not to commit to drill a well in the Playero Contract area,
thereby allowing the Playero Contract to expire under its own terms. Harken
recognized an impairment in the carrying value of this investment of $19,000
during the first quarter of 1996 which represented Harken's total investment in
the Playero Contract.
Cambulos Contract -- In September 1995, Harken de Colombia, Ltd. signed
an additional Association Contract (the "Cambulos Contract") with Ecopetrol,
covering the Cambulos Contract area. Under the Cambulos Contract, Harken has
acquired the exclusive rights to conduct exploration activities in the Cambulos
Contract area, which covers approximately 300,000 acres in the Middle Magdalena
Valley of Central Colombia.
During the first two years of the Cambulos Contract, Harken is required
to conduct geologic studies on the lands covered by this contract, including
reprocessing of at least 400 kilometers of existing seismic data and the
acquisition of at least 90 kilometers of new seismic data. As of December 31,
1996, Harken has completed a preliminary environmental study for the Cambulos
Contract area and is currently conducting the obligatory work program required
during the first two years of the Cambulos Association contract. During each of
the third through the sixth contract years, Harken may elect to continue the
contract by committing to the drilling of at least one well during each contract
year.
If during the initial six years of the Cambulos Contract, Harken
discovers a field capable of commercial production of oil or gas, the term of
the Cambulos Contract will be extended for a period of 22 years from the date of
such commercial discovery. Upon a commercial discovery and at the initiation of
production from the commercial field, Harken will be reimbursed by Ecopetrol for
50% of all seismic costs and dry well costs incurred prior to the point at which
a declaration of a commercial discovery is made in addition to being reimbursed
for 50% of its successful direct exploratory well costs expended up to the point
of declaration of a commercial discovery. Production from a commercial discovery
will be allocated as follows: Ecopetrol, on behalf of the Colombian government,
will receive a 20% royalty interest in all production, and all production (after
royalty payments) will be allocated 50% to Ecopetrol and 50% to Harken until
cumulative production from all fields in the Cambulos acreage reaches 60 million
barrels of
6
<PAGE> 7
oil, after which Ecopetrol's share of production will increase progressively to
75% and Harken's share will decrease progressively to 25% determined by a
formula based on Harken's recovery of its total expenditures under the Cambulos
Contract. After a declaration of a commercial discovery, Harken and Ecopetrol
will be responsible for all future development costs and operating expenses in
direct proportion to their interest in production.
Harken plans to drill its first exploratory well on the Cambulos
Contract area in the early fall of 1997.
Bolivar Contract -- In May 1996, Harken de Colombia, Ltd. signed an
additional Association Contract (the "Bolivar Contract") with Ecopetrol,
covering the Bolivar Contract area. Under the Bolivar Contract, Harken has
acquired the exclusive rights to conduct exploration activities in the Bolivar
Contract area, which covers approximately 250,000 acres in the Northern Middle
Magdalena Valley of Central Colombia.
During the first two years of this Bolivar Contract, Harken's work
program will consist of preparing an engineering study of the Buturama and
Totumal fields located on and adjacent to this acreage, the reprocessing of 350
kilometers of existing seismic data and the acquisition of 100 kilometers of new
seismic data on this contract area. During each of the third through the sixth
contract years, Harken may elect to continue the contract by committing to the
drilling of at least one well during each contract year. The production sharing
arrangements under the Bolivar Contract are substantially similar to those under
the Cambulos Contract.
Harken intends to drill its first exploratory well on the Bolivar
Contract area in the summer of 1997.
DOMESTIC EXPLORATION AND PRODUCTION OPERATIONS
Harken operates or owns a non-operating working interest in 228 oil
wells and 33 gas wells in the U.S. Harken's operations are located in the
Paradox Basin in the Four Corners area of Arizona, Utah and New Mexico, the
Texas Panhandle region, the Carlsbad region of New Mexico and the Magnolia
region of Arkansas.
Four Corners Operations - Harken operates a total of 40 oil wells and 6
gas wells in the Four Corners area of Arizona, Utah, and New Mexico. Harken also
owns an interest in the Aneth Gas Plant, a gas processing plant located in the
Paradox Basin (Harken's interest in the Aneth Gas Plant and the Four Corners
area oil and gas wells are hereinafter referred to as the "Four Corners
Properties"). Harken acquired its initial 50% interest in these properties as a
result of the February 1993 acquisition of Chuska Resources Corporation
("Chuska"). Harken's activities in the Four Corners area are carried out
primarily through Harken Southwest Corporation ("HSW"), a wholly-owned
subsidiary.
HSW's operations in the Paradox Basin are primarily concentrated on the
16 million acre Navajo Indian Reservation (the "Reservation"), which comprises
portions of Arizona, New Mexico and Utah. HSW currently has two operating
agreements with the Navajo Tribe of Indians (the "Navajo Nation") allowing oil
and gas exploration and development on an aggregate of 13,724 acres of Navajo
tribal lands on the Reservation (the "Navajo Nation 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
7
<PAGE> 8
"1987 Tribal Agreement") and until August 26, 2003, under the Tribal Agreement
effective August 26, 1983 (the "1983 Tribal Agreement").
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 (23% with respect to each barrel of oil sold for more than
$22). Under both Tribal Agreements, the Navajo Nation is entitled to receive 50%
of all gross proceeds recovered over $35 per barrel of oil. Under the 1983
Tribal Agreement, the Navajo Nation receives 50% of all gross proceeds over $4
per MCF of gas. Under the 1987 Tribal Agreement, the Navajo Nation receives 40%
of all gross proceeds over $8 per MCF of gas.
In order to develop the Navajo Nation Lands, in 1988, HSW entered into
an operating agreement pursuant to which a group of investors acquired an
undivided 50% interest in the gross proceeds receivable by HSW under the 1983
Tribal Agreement and the 1987 Tribal Agreement. Between 1994 and 1996, HSW
reacquired the interests of all but one of these investors resulting in Harken
now being entitled to receive approximately 94% interest in the operator's
revenues from such properties. Pursuant to the Operations Agreement, HSW is the
operator for itself and the remaining investor.
Texas Operations - Harken operates or owns a non-operated interest in
105 oil wells and 27 gas wells in Texas. Harken operates 70 oil wells and 11 gas
wells in Hutchinson County, owns non-operated interests in 35 oil wells in
Hockley County, and owns non-operated interests in 16 gas wells in various
counties of the Texas Gulf Coast region. Harken acquired its Texas properties as
a result of three acquisitions.
On May 22, 1995, Harken acquired Search Exploration, Inc., a
publicly-held oil and gas exploration and production company ("Search
Exploration"), through a merger between Search Exploration and Search
Acquisition Corp., a wholly-owned subsidiary of Harken ("Search Acquisition").
At the effective time of the merger, each of the outstanding shares of common
stock, preferred stock and certain outstanding promissory notes of Search
Exploration were converted into approximately 2.2 million shares of Common
Stock. Harken also issued warrants exercisable for 732,771 shares of common
stock of Harken ("Common Stock") in exchange for certain outstanding warrants of
Search Exploration.
In October 1995, Harken Energy West Texas, Inc., a wholly-owned
subsidiary of Harken, acquired certain non-operated interests in producing
properties located in Hockley County, Texas (the "Yellowhouse Properties"). As
consideration for the purchase of these interests, Harken issued three million
shares of Common Stock, warrants to purchase an additional one million shares of
Common Stock at $2 per share, and assumed $750,000 of short-term notes payable.
Harken and the seller made payments totaling approximately $417,000 on these
notes payable at closing and the remaining balance was repaid in full by Harken
in monthly installments through March 1996.
On December 21, 1995, pursuant to a Purchase and Sale Agreement (the
"Panhandle Purchase and Sale Agreement"), Harken Exploration Company, a
wholly-owned subsidiary of Harken ("Harken Exploration"), acquired working
interests in certain producing oil and gas leases located on approximately 6,800
acres in Hutchinson County, Texas, a gas gathering system located thereon,
property and equipment related thereto and the surface rights to a 161 acre
tract of land (the "Panhandle Properties"), in exchange for 2,500,000 shares of
Common Stock (the "Purchase Shares"), $2,500,000 in cash and a promissory note
of Harken Exploration (the "Panhandle Note") in the principal amount of
$13,000,000. See Part II, Item 7 "Management's Discussion and Analysis of
Financial Condition and Results of Operations" and "Notes to Consolidated
Financial Statements, Note 6 -- Notes Payable and Long-Term Obligations"
contained in Part
8
<PAGE> 9
II, Item 8 for further description of the terms of the Panhandle Note and a
subsequent exchange of the Panhandle Note for shares of Common Stock.
In addition to existing production, the Panhandle Properties include
substantial proved undeveloped reserves which Harken plans to systematically
develop over the next two to four years. The properties purchased include a
pipeline and gathering system that has capacity and expansion capability to
accommodate the planned development of the properties. Harken believes that the
gas produced from the Panhandle Properties, with its associated products, can be
sold at a premium to posted gas prices in the region as a result of the high BTU
content of such gas. Harken received an average of $4.30 per mcf of gas produced
from the Panhandle Properties in 1996 compared to posted prices of approximately
$2.17 per mcf.
New Mexico Operations - Harken, through Harken Exploration, owns
non-operated interests in 18 oil wells in the Carlsbad region of New Mexico.
These properties were acquired as a part of the EnerVest acquisition described
below.
Arkansas Operations - Harken, through Harken Exploration, operates 34
oil wells and owns nonoperated interests in 31 oil wells in Arkansas. On July
10, 1996 Harken Exploration purchased working interests in certain producing oil
and gas properties located in the Magnolia area of Arkansas and in the Carlsbad
area of New Mexico (the "EnerVest Properties") from EnerVest Acquisition-II
Limited Partnership ("EnerVest"). The purchase price of approximately
$15,200,000, plus the assumption of certain operational liabilities relating to
these properties, is subject to adjustments for property defects identified
including title defects, environmental defects, nonproductive unplugged wells
and product production balancing defects. This purchase price was paid in the
form of $5,000,000 cash paid at closing, 1,550,000 shares of Common Stock which
were issued following closing, and 1,159,091 shares of Common Stock to be issued
at a designated time following the registration and sale by EnerVest of the
initial shares issued following closing. Harken also issued to EnerVest warrants
to purchase, over a period of three years from closing, 300,000 shares of Common
Stock at an exercise price of $2.75 per share. The agreement includes adjustment
provisions pursuant to which Harken may be obligated to issue additional shares
of Common Stock if EnerVest does not realize at least $10,200,000 from the sale
of all shares of Common Stock issued to EnerVest. In addition, EnerVest will
maintain a lien on these properties until such time as it has received or
recognized approximately $7,000,000 in proceeds from the sales of all shares of
Common Stock received from the sale of the EnerVest Properties. As of December
31, 1996, EnerVest had received cumulative proceeds of approximately $3,600,000
from the sale of the initial 1,550,000 shares of Common Stock issued following
closing.
EXECUTIVE OFFICERS OF HARKEN
The officers of Harken are elected annually by the Board of Directors
following each Annual Meeting of Stockholders, or as soon thereafter as
necessary and convenient. 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 elected or appointed by
the Board of Directors may be removed by the Board of Directors whenever, in its
judgement, 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.
9
<PAGE> 10
The executive officers of Harken as of December 31, 1996, their ages
and positions held with Harken and their business experience for the past five
years are listed below.
<TABLE>
<CAPTION>
NAME AGE POSITION HELD WITH HARKEN
- ---- --- -------------------------
<S> <C> <C>
Mikel D. Faulkner 47 Chairman of the Board of Directors and
Chief Executive Officer
Richard H. Schroeder 52 President, Chief Operating Officer and Director
Bruce N. Huff 46 Senior Vice President, Chief Financial Officer
and Director
Stephen C. Voss 46 Senior Vice President
Joseph H. Clark 65 Senior Vice President - Operations
Larry E. Cummings 44 Vice President, Secretary and General Counsel
A. Wayne Hennecke 38 Vice President and Treasurer
Gregory S. Porter 31 Vice President - Legal
</TABLE>
Mikel D. Faulkner has served as Chairman of the Board of Harken since
February 1991 and Chief Executive Officer of Harken since 1982. Mr. Faulkner
previously served as President of Harken between 1982 and 1993.
Richard H. Schroeder has served as President, Chief Operating Officer
and Director of Harken since March 1994. From November 1990 to March 1994, Mr.
Schroeder was President and owner of RHS Management, a management consulting
firm, and from January 1983 to November 1990, Mr. Schroeder was President of
Rosewood Resources, Inc., a privately-owned oil and gas exploration and
production company.
Bruce N. Huff has served as a Director of Harken since August 1996. Mr.
Huff has served as Senior Vice President and Chief Financial Officer since 1990.
Stephen C. Voss has served as Senior Vice President of Harken since
1990. Mr. Voss has also served since 1990 as President of Harken International,
Ltd., a wholly-owned subsidiary of Harken.
Joseph H. Clark has served as Senior Vice President of Operations of
Harken since April 1996. From December 1990 to April 1996, Mr. Clark served as
Vice President of Production for Marsh Operating Company of Dallas, Texas. Mr.
Clark is a registered Professional Engineer.
Larry E. Cummings has served as Vice President, Secretary and General
Counsel of Harken since 1983. Mr. Cummings previously served as Senior Legal
Counsel to Harken from 1978 to 1983.
A. Wayne Hennecke has been employed with Harken since 1988. Mr.
Hennecke has served as Vice President and Treasurer of Harken since June 1995.
Mr. Hennecke previously served as Vice President - Finance for Harken's
subsidiaries.
10
<PAGE> 11
Gregory S. Porter has served as Vice President - Legal of Harken since
September 1995. From April 1994 to September 1995, Mr. Porter was an attorney
with the law firm of Baker & McKenzie and from September 1992 to April 1994, Mr.
Porter was an attorney with the law firm of Johnson & Gibbs.
INDUSTRY RISKS
Price Volatility. The revenues generated by Harken are highly dependent
upon the prices of crude oil and natural gas. Fluctuations in the energy market
make 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 are beyond the control of Harken.
Business Risks. Harken must continually acquire or explore for and
develop new oil and gas reserves to replace those being depleted by production.
Without successful drilling or acquisition ventures, Harken's oil and gas
assets, properties and the revenues derived therefrom will decline over time. To
the extent Harken engages in drilling activities, such activities carry the risk
that no commercially viable oil or gas production will be obtained. The cost of
drilling, completing and operating wells is often uncertain. Moreover, drilling
may be curtailed, delayed or canceled as a result of many factors, including
shortage of available working capital, title problems, weather conditions,
environmental concerns, shortages of or delays in delivery of equipment, as well
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.
International Operations. Harken presently conducts operations in
Colombia and anticipates that it will conduct operations in Colombia and other
foreign countries 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, and property and equipment as a
result of hazards such as expropriation, nationalization, war, insurrection and
other political risks.
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,
11
<PAGE> 12
pollution, environmental liabilities and fires, each of which could result in
damage to or destruction of oil and gas wells or production facilities or damage
to persons and property. As is common in the oil and gas industry, Harken is not
fully insured against all of these risks, either because insurance is not
available or because Harken has elected to self-insure due to high premium
costs. The occurrence of a significant event that is not fully insured against
could have a material adverse effect on Harken's financial condition.
Environmental Regulation. Harken's domestic activities are subject to
various Navajo Nation, federal, state, and local laws and regulations covering
the discharge of material into the environment or otherwise relating to
protection of the environment. In particular, Harken's oil and gas exploration,
development, production, its activities in connection with storage and
transportation of liquid hydrocarbons and its use of facilities for treating,
processing, recovering, or otherwise handling hydrocarbons and wastes therefrom
are subject to stringent environmental regulation by governmental authorities.
In addition to these domestic laws and regulations, Harken's international
operations are subject to the laws, regulations and governmental approvals of
each foreign country in which it conducts activities including, but not limited
to, environmental laws and regulations governing oil and gas operations. Such
domestic and foreign laws and 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 present plant owners, including HSW, 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
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 and a Phase II environmental investigation was undertaken. A
closure plan is currently being negotiated with the EPA.
The prior owner of the Aneth Gas Plant facility, El Paso Natural Gas,
has agreed to accept financial responsibility for a portion of the remediation
work. Texaco and the other current plant owners, including HSW, have entered
into a formal agreement with the prior owner to allocate costs between
remediation work that is mandated by the EPA and other remediation work that is
determined to be carried out by the parties. The prior owner will bear
approximately 86% of the costs of mandated remediation as well as certain other
related expenses. The prior owner will not be responsible for other remediation
work that does not fall within the mandated category. At this time, however, it
is impossible for HSW to accurately estimate the costs of the cleanup at the
Aneth Gas Plant facility or the amount of such total costs the indemnification
from the prior owner will cover for the mandated remediation work. Harken has
accrued a contingency reserve of $219,000 at December 31, 1996 for management's
best estimate of its share of remediation expenditures.
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
12
<PAGE> 13
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.
Competitive Factors in the 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.
Extensive Regulation. 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 increase the costs of 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 (the "NGA"), the Natural Gas Policy Act (the
"NGPA") and regulations promulgated by the Federal Energy Regulatory Commission
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.
13
<PAGE> 14
PROPERTIES AND LOCATIONS
Production and Revenues. The following table shows for the periods
indicated operating information attributable to Harken's oil and gas interests:
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
---------------------------------------------------------------
1992 1993 1994 1995 1996
----------- ----------- ----------- ----------- -----------
<S> <C> <C> <C> <C> <C>
Production:
Oil (Bbls) -- 185,000 158,000 217,000 370,000
Natural Gas (Mcf) -- 429,000 426,000 810,000 1,409,000
Revenues:
Oil $ -- $ 2,989,000 $ 2,552,000 $ 3,985,000 $ 7,863,000
Natural Gas $ -- $ 792,000 $ 806,000 $ 1,188,000 $ 3,611,000
----------- ----------- ----------- ----------- -----------
Total $ -- $ 3,781,000 $ 3,358,000 $ 5,173,000 $11,474,000
=========== =========== =========== =========== ===========
Unit Prices:
Oil (per Bbl) $ -- $ 16.16 $ 16.15 $ 18.36 $ 21.25
Natural Gas (per Mcf) $ -- $ 1.85 $ 1.89 $ 1.47 $ 2.56
Production costs per
equivalent barrel $ -- $ 7.12 $ 6.70 $ 6.06 $ 6.44
Amortization per equivalent
barrel $ -- $ 5.58 $ 6.31 $ 5.68 $ 5.58
</TABLE>
Acreage and Wells. At December 31, 1996, Harken owned interests in the
following oil and gas wells and acreage:
DOMESTIC
<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 1 5 0.94 4.71 4,690 4,417 0 0
Arkansas 65 0 48.00 0 4,280 2,545 0 0
New Mexico 25 0 12.69 0 1,430 718 0 0
Texas 105 27 100.00 12.60 16,384 8,035 2,520 242
Utah 32 1 27.88 0.94 9,916 4,007 11,253 3,942
---------- ----------- ----------- ----------- ----------- ----------- ----------- -----------
Total 228 33 189.51 18.25 36,700 19,722 13,773 4,184
========== =========== =========== =========== =========== =========== =========== ===========
</TABLE>
14
<PAGE> 15
INTERNATIONAL - COLOMBIA
<TABLE>
<CAPTION>
Contract Area Gross Undeveloped Acreage
- -------------------- ---------------------------------
<S> <C>
Alcaravan 210,000
Bocachico 192,000
Bolivar 250,000
Cambulos 300,000
-----------------
Total 952,000
=================
</TABLE>
Drilling Activity. 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.
The following table summarizes certain information concerning Harken's domestic
drilling activity:
DOMESTIC
<TABLE>
<CAPTION>
NUMBER OF GROSS WELLS DRILLED
-------------------------------------------------------------
Exploratory Developmental Total
------------------- ------------------- -------------------
Productive Drilled Productive Drilled Productive Drilled
---------- ------- ---------- ------- ---------- -------
<C> <C> <C> <C> <C> <C> <C>
1994 0 0 0 1 0 1
1995 1 2 2 2 3 4
1996 8 11 7 7 15 18
---------- ------- ---------- ------- ---------- -------
Total 9 13 9 10 18 23
========== ======= ========== ======= ========== =======
</TABLE>
<TABLE>
<CAPTION>
NUMBER OF GROSS WELLS DRILLED
-------------------------------------------------------------
Exploratory Developmental Total
------------------- ------------------- -------------------
Productive Drilled Productive Drilled Productive Drilled
---------- ------- ---------- ------- ---------- -------
<C> <C> <C> <C> <C> <C> <C>
1994 0.00 0.00 0.00 0.70 0.00 0.70
1995 0.59 1.59 1.59 1.59 2.18 3.18
1996 0.19 0.53 1.25 1.25 1.44 1.78
---------- ------- ---------- ------- ---------- -------
Total 0.78 2.12 2.84 3.54 3.62 5.66
========== ======= ========== ======= ========== =======
</TABLE>
INTERNATIONAL
In 1995, Harken drilled one gross and 0.5 net wells on its Alcaravan
acreage in Colombia. The well was initially determined not to be economically
productive, however, Harken intends to re-enter the well during the next
contract year to finalize the evaluation of this well. In 1996, Harken drilled
one gross and 0.6 net wells on its Bocachico acreage which was productive.
15
<PAGE> 16
EMPLOYEES
As of December 31, 1996, Harken had 58 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 oil and gas properties and
locations.
ITEM 3. LEGAL PROCEEDINGS
Search Acquisition Corp. ("Search Acquisition"), a wholly-owned
subsidiary of Harken, has been named as a defendant in a lawsuit by
Petrochemical Corporation of America and Lorken Investments Corporation
(together, "Petrochemical") filed in district court in the State of Texas. This
lawsuit arises out of an attempt by Petrochemical to enforce a judgement entered
in 1993 against, among other parties, a group of twenty limited partnerships
known as the "Odyssey limited partnerships." In 1989, Search Exploration
acquired all of the assets of eight of the twenty Odyssey limited partnerships.
Petrochemical claims that Search Exploration is liable for payment of the
judgement as the successor-in-interest to the eight Odyssey limited
partnerships. Search Acquisition was the surviving corporation in the merger
with Search.
On February 28, 1996, the court granted Search Acquisition's motion for
summary judgement. Petrochemical has appealed the decision of the trial court to
the Texas Fifth District Court of Appeals. Although the ultimate outcome of this
litigation is uncertain, Harken believes that any liability to Harken as a
result of this litigation will not have a material adverse effect on Harken's
financial condition.
Harken and its subsidiaries currently are involved in various lawsuits
and other contingencies, which in management's opinion, will not result in
significant loss exposure to Harken.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
On December 10, 1996, Harken held a special meeting of its
stockholders. At the Special Meeting, the stockholders approved an amendment to
Harken's Certificate of Incorporation increasing the number of authorized shares
of common stock from 125,000,000 to 150,000,000. The total number of votes cast
were as follows: 74,806,519 voting in favor of the proposal, 3,912,152 voting
against the proposal, and 315,518 abstaining.
16
<PAGE> 17
PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED
STOCKHOLDER MATTERS
PRICE RANGE OF COMMON STOCK
Since March 18, 1991, the Common Stock has been listed on the American
Stock Exchange and traded under the symbol HEC. At December 31, 1996, there were
3,628 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.
<TABLE>
<CAPTION>
Prices
------------
High Low
----- -----
<S> <C> <C>
1995 -- First Quarter $2.25 $1.50
Second Quarter 2.50 1.38
Third Quarter 2.00 1.50
Fourth Quarter 2.00 1.50
1996 -- First Quarter 2.00 1.56
Second Quarter 3.13 1.81
Third Quarter 3.13 1.94
Fourth Quarter 3.00 2.25
</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.
17
<PAGE> 18
ITEM 6. SELECTED FINANCIAL INFORMATION AND OTHER DATA
<TABLE>
<CAPTION>
1992(1) 1993(1) 1994 1995 1996
------------- ------------- ------------- ------------- -------------
<S> <C> <C> <C> <C> <C>
Revenues $ 4,382,000 $ 6,601,000 $ 4,895,000 $ 7,471,000 $ 13,921,000
Income (loss) from continuing operations $ 661,000 $ (1,797,000) $ (8,211,000) $ (1,625,000) $ (341,000)
Income (loss) from discontinued operations(1) $ (328,000) $ (3,697,000) $ (223,000) $ -- $ --
Extraordinary item $ 172,000 $ -- $ -- $ -- $ --
Net income (loss) $ 505,000 $ (5,494,000) $ (8,434,000) $ (1,625,000) $ (341,000)
Net income (loss) per common share:
Income (loss) from continuing operations $ 0.01 $ (0.03) $ (0.14) $ (0.02) $ (0.00)
Discontinued operations (1) $ (0.01) $ (0.06) $ (0.00) $ -- $ --
Extraordinary item $ 0.00 $ -- $ -- $ -- $ --
------------- ------------- ------------- ------------- -------------
Net income (loss) $ 0.00 $ (0.09) $ (0.14) $ (0.02) $ (0.00)
============= ============= ============= ============= =============
Current assets $ 13,911,000 $ 7,677,000 $ 6,840,000 $ 10,531,000 $ 49,838,000
Current liabilities $ 10,201,000 $ 6,533,000 $ 5,133,000 $ 4,918,000 $ 6,061,000
------------- ------------- ------------- ------------- -------------
Working capital $ 3,710,000 $ 1,144,000 $ 1,707,000 $ 5,613,000 $ 43,777,000
============= ============= ============= ============= =============
Total assets $ 34,872,000 $ 37,731,000 $ 28,960,000 $ 70,794,000 $ 123,000,000
Long-term obligations:
Long-term obligations and other liabilities $ -- $ -- $ -- $ 25,726,000 $ 38,600,000
Redeemable preferred stock (2) $ 1,868,000 $ 1,868,000 $ 1,868,000 $ -- $ --
------------- ------------- ------------- ------------- -------------
Total $ 1,868,000 $ 1,868,000 $ 1,868,000 $ 25,726,000 $ 38,600,000
============= ============= ============= ============= =============
Stockholders' equity $ 20,316,000 $ 28,963,000 $ 21,959,000 $ 40,150,000 $ 78,339,000
Redeemable preferred stock outstanding (2) 186,760 186,760 186,760 -- --
Weighted average common stock outstanding 45,752,936 58,392,901 59,722,853 65,041,063 85,983,534
Proved reserves at end of year (3):
Bbls of oil -- 1,035,000 1,521,000 3,523,000 7,389,000
Mcf of gas -- 4,970,000 7,148,000 29,203,000 34,160,000
Future net cash inflows $ -- $ 13,707,000 $ 20,178,000 $ 99,193,000 $ 241,905,000
Present value (discounted at 10% per year) $ -- $ 8,230,000 $ 11,712,000 $ 58,776,000 $ 142,243,000
</TABLE>
- ----------
(1) 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 11--Discontinued Operations" contained in
Part II, Item 8, for a discussion of its discontinued contract
drilling and well service segment.
(2) See "Notes to Consolidated Financial Statements, Note 8 -- Redeemable
Preferred Stock" contained in Part II, Item 8, for a discussion of
Harken Series C Preferred Stock.
18
<PAGE> 19
(3) These estimated reserve quantities, future net revenues and present
value figures are related to proved reserves located in the United
States and Colombia. No consideration has been given to probable or
possible reserves. Oil and gas year end prices were held constant
except where future price increases were fixed and determinable under
existing contracts and government regulations. At December 31, 1996,
Harken has included proved oil and gas reserve information related to
its Colombian operations, specifically associated with a portion of its
Bocachico and Bolivar Contract areas. (See "Notes to Consolidated
Financial Statements, Note 16 -- Commitments and Contingencies"
contained in Part II, Item 8.)
19
<PAGE> 20
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS.
Certain statements included in "Item 1. Business" and the following
discussion and analysis of financial condition and results of operation,
including statements of Harken management's current expectations, intentions,
plans and beliefs, are forward-looking statements, as defined in Section 21D of
the Securities Exchange Act of 1934, and are dependent on certain events, risks
and uncertainties that may be outside of Harken's control. These forward-looking
statements include statements of management's plans and objectives for Harken's
future operations and statements of future economic performance, information
regarding Colombian drilling schedules, expected or planned production
capabilities, Harken's capital budget and future capital expenditures and the
sufficiency and availability of capital resources needed to fund such future
capital expenditures. Actual results and developments could differ materially
from those expressed in or implied by such statements due to a number of
factors, including general economic conditions; the timing of environmental and
other necessary administrative permits; the impact of the activities of OPEC and
other competitors; the impact of possible geopolitical occurrences world-wide;
the results of financing efforts; changes in laws and regulations; capacity,
deliverability and supply constraints or difficulties; unforeseen engineering
and mechanical or technological difficulties in drilling or working over wells;
and other risks described in Harken's filings with the Securities and Exchange
Commission.
OVERVIEW
During the three year period ended December 31, 1996, Harken has made
significant progress towards implementing its overall business strategy. During
this period, Harken expanded its base domestic operations, providing a growing
and stable cash flow which has contributed to Harken's increasing investment in
its higher-potential international operations, specifically in Colombia.
Harken's total assets have increased from approximately $29 million at December
31, 1994 to approximately $123 million at December 31, 1996. Harken's proved oil
and gas reserves have increased from a present value of $11.7 million at
December 31, 1994 to $142.2 million at December 31, 1996, including
approximately $12.4 million of proved reserves in Colombia. During 1995, Harken
placed $15 million of 8% European Notes, all of which converted to Common Stock
during 1995 and 1996. In July 1996, Harken placed $40 million of 6 1/2% European
Notes, which Harken will have the option of converting into Common Stock
beginning in July 1997. Accordingly, Harken's working capital has increased to
approximately $43.8 million at December 31, 1996.
Domestically, Harken has completed several acquisitions during the past
three years. These acquisitions have greatly increased Harken's cash flow from
operations and have diversified Harken's base of domestic oil and gas operations
to include properties in Texas, New Mexico and Arkansas in addition to Harken's
Four Corners area operations. Total revenues have increased from $4.9 million to
$7.5 million to $13.9 million during the years ended December 31, 1994, 1995 and
1996, respectively. In addition, Harken's net loss from continuing operations
has decreased from $8.2 million to $1.6 million to $341,000 during the years
ended December 31, 1994, 1995 and 1996, respectively.
Internationally, during 1996, Harken signed an additional Association
Contract in Colombia with Ecopetrol, bringing the total number of Association
Contracts to four and increasing the total number of acres currently operated in
Colombia by Harken to approximately 950,000. Following the drilling of the
Alcaravan #1 well during 1995, Harken drilled the Torcaz #2 well on its
Bocachico Contract area during 1996. The Torcaz #2 well was completed and has
added a total of approximately 1,469,000 equivalent
20
<PAGE> 21
barrels of proved reserves as of December 31, 1996. Additionally, in February
1997, Harken spudded the Estero #1 well within the Palo Blanco prospect of the
Alcaravan Contract area and anticipates that results from this well will be
available in late March 1997. Harken's first development well, the Torcaz #3 is
expected to spud in March 1997. Harken plans to drill its first exploratory well
on the Bolivar Contract area in the summer of 1997 and on the Cambulos Contract
area in the early fall of 1997.
RESULTS OF OPERATIONS
The following table presents certain data for Harken's continuing
operations for the years ended December 31, 1994, 1995 and 1996. 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,
--------------------------------------------
DOMESTIC EXPLORATION AND
PRODUCTION OPERATIONS 1994 1995 1996
---------- ---------- ----------
<S> <C> <C> <C>
REVENUES
Oil sales revenues $2,552,000 $3,985,000 $7,863,000
Oil volumes in barrels 158,000 217,000 370,000
Oil price per barrel $ 16.15 $ 18.36 $ 21.25
Gas sales revenues $ 806,000 $1,188,000 $3,611,000
Gas volumes in mcf 426,000 810,000 1,409,000
Gas price per mcf $ 1.89 $ 1.47 $ 2.56
Gas plant revenues $ 798,000 $ 787,000 $ 867,000
OTHER REVENUES
Interest Income $ 147,000 $ 667,000 $1,401,000
Other Income $ 592,000 $ 844,000 $ 179,000
</TABLE>
FOR THE YEAR ENDED DECEMBER 31, 1996 COMPARED WITH THE PRIOR YEAR
DOMESTIC OPERATIONS
Gross oil and gas revenues during 1996 were generated by Harken's
domestic exploration and production operations, including the Four Corners area
operations primarily on the Navajo Indian Reservation, the onshore areas of
South Texas, the Western and Panhandle regions of Texas and, beginning in July
1996, the Magnolia region of Arkansas and the Carlsbad region of New Mexico.
Oil revenues increased 97% to $7.9 million in 1996 from $4.0 million in
1995. The increase was due primarily to increased production attributable to the
acquisition of the Yellowhouse Properties which were acquired in late 1995 but
which had little impact on 1995 revenues and the acquisition of the EnerVest
21
<PAGE> 22
Properties which was consummated in July 1996. In 1996, Harken recognized
$2,069,000 in oil revenues attributable to the Yellowhouse Properties. Harken
also recorded $1,798,000 in oil revenues attributable to the EnerVest
Properties. Oil revenues were further increased by an increase in average oil
price per barrel of $2.89 in 1996 as compared to 1995.
Gas revenues increased 204% to $3.6 million in 1996 from $1.2 million
in 1995. The increase was due primarily to increased production attributable to
the acquisition of the Panhandle Properties which were acquired in late 1995 but
which had little impact on 1995 gas revenues and the acquisition of the EnerVest
Properties. In 1996, Harken recognized $1,394,000 in gas revenues attributable
to the December 1995 acquisition of the Panhandle Properties and $539,000
attributable to the EnerVest Properties. The increase in gas production was also
the result of additional production from several successful wells drilled in the
Texas Gulf Coast region. The increase in gas revenues in 1996 also reflected
significantly higher natural gas prices in 1996 as compared to 1995. The average
price of gas sold in 1996 increased to $2.56 per mcf from $1.47 in 1995. The
increase in gas prices is due in part to the overall increase in the market
price of natural gas. In addition, the gas produced from the Panhandle
Properties is extremely rich in BTU content and sells for a significant premium
on a BTU adjusted basis to spot market prices.
Gas plant revenues increased from $787,000 in 1995 to $867,000 in 1996
despite an annual redetermination whereby HSW's interest in the Aneth Gas Plant
was slightly reduced based on each owner's throughput volume and despite a
temporary plant shutdown experienced during 1996. Higher prices for plant
liquids, particularly during the fourth quarter of 1996, and the acquisition of
additional interests in the Four Corners Properties contributed to the increase.
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 severance, conservation, and property taxes and Navajo severance and
possessory interest taxes. The increase in oil and gas operating expenses during
1996 compared to 1995 reflects the acquisitions of additional oil and gas
properties, particularly the acquisition of the Panhandle Properties, which
increased oil and gas operating expenses by approximately $746,000 and the
acquisition of the EnerVest Properties, which increased oil and gas operating
expenses by approximately $639,000.
Harken expects that oil and gas production volumes and operating
expenses will increase in 1997 as compared to 1996 due to the inclusion of a
full year of operations of the EnerVest Properties. Harken also plans additional
domestic drilling and development efforts, which if successful, would further
increase production volumes and operating expenses. Harken expects that oil and
gas revenues will also increase based upon these factors if product prices
remain at 1996 levels. Harken's oil and gas revenues, however, are highly
dependent upon product prices, which Harken is unable to predict.
INTEREST AND OTHER INCOME
Interest and other income increased during 1996 compared to 1995 due to
the interest earned by Harken on proceeds received from the July 1996 issuance
of $40 million of European 6 1/2% Senior Convertible Notes Payable (the "6 1/2%
European Notes"). Such proceeds, net of issuance costs on the European Notes,
are maintained and invested in separate interest bearing bank accounts (the
"Segregated Accounts") and earned approximately $803,000 during the last half of
1996.
22
<PAGE> 23
OTHER COSTS AND EXPENSES
General and administrative expenses have increased during 1996 compared
to 1995 due to the increase in Harken's corporate and administrative personnel
costs associated with its expanding domestic operations. General and
administrative expenses decreased significantly, however, as a percentage of oil
and gas revenues from 56.6% in 1995 to 36.7% in 1996 reflecting Harken's ability
to minimize increases in administrative staff and office costs despite its
growth in domestic oil and gas operations. Harken anticipates that general and
administrative expenses will continue to increase as Harken's Colombian
operations continue to grow.
Depreciation and amortization expense increased during 1996 compared to
1995 consistent with the increased production levels from the acquired oil and
gas property interests during 1995 and 1996. Oil and gas depreciation and
amortization decreased slightly on a per equivalent barrel basis to $5.58 during
1996 compared to $5.68 during 1995, although such depreciation rate per
equivalent barrel is expected to increase in 1997, due to increases during 1996
in Harken's evaluated oil and gas properties. Depreciation and amortization on
oil and gas properties is calculated on a unit of production basis in accordance
with the full cost method of accounting for oil and gas properties.
Interest expense and other increased significantly during 1996 compared
to 1995 due to the July 1996 issuance of the 6 1/2% European Notes, which
generated interest expense of approximately $851,000, net of amounts of interest
capitalized, and approximately $326,000 of amortization of issuance costs
associated with the 6 1/2% European Notes. Interest expense from the 6 1/2%
European Notes is expected to decrease during 1997 due to voluntary conversions
of 6 1/2% European Notes to Common Stock and based upon Harken's intention to
convert all remaining 6 1/2% European Notes at July 31, 1997. In December 1995,
Harken issued the Panhandle Note for an initial face amount of $13 million in
connection with the acquisition of the Panhandle Properties, and such note
payable generated interest expense of $234,000 prior to it being exchanged for
Common Stock during 1996.
Provision for asset impairments during 1995 consisted of $457,000
primarily related to Harken's decision to record a valuation adjustment for the
full Bahrain investment amount, as a result of the January 1996 expiration of
the term of the production sharing agreement with the Bahrain state-owned oil
company ("BANOCO"). Such adjustment does not affect Harken's other international
operations.
FOR THE YEAR ENDED DECEMBER 31, 1995 COMPARED WITH THE PRIOR YEAR
DOMESTIC OPERATIONS
Gross oil revenues during 1995 increased compared to 1994 primarily due
to the increased production from the acquisitions of additional interests in the
Four Corners Properties and the fourth quarter 1995 acquisition of the
Yellowhouse Properties. The October 1994 acquisition of an approximately 20%
additional interest in the Four Corners Properties resulted in increased oil
revenues of approximately $842,000 for 1995. Harken drilled four wells during
the first half of 1995 on acreage it holds in the Paradox Basin area, in an
effort to offset the production declines typically experienced in the region. In
addition, oil prices improved an average of $2.21 per barrel from the prior
year.
Gross gas revenues during 1995 also increased compared to 1994, in
spite of the sharp decrease in gas prices experienced throughout 1995 due to the
October 1994 acquisition of additional interests in the
23
<PAGE> 24
Four Corners Properties which contributed additional gas revenues of
approximately $177,000, and due to the recognition of $275,000 of gas revenues
in connection with the write-off of certain liabilities related to suspended gas
revenues associated with property interests operated in prior years. The
December 1995 acquisition of the Panhandle Properties had only a minimal impact
on 1995 gas production and revenues.
Gas plant revenues decreased from $798,000 in 1994 to $787,000 in 1995
due to an annual redetermination whereby HSW's interest in the Aneth Gas Plant
was reduced based on each owner's throughput volume. Gas plant revenues
decreased in 1995 despite an increase in revenues of approximately $143,000 in
1995 resulting from the October 1994 acquisition of additional interest in the
Four Corners Properties.
Oil and gas operating expenses consist of lease operating expenses and
gas plant expenses, along with a number of production and reserve-based taxes,
including Utah severance, conservation, and property taxes and Navajo severance
and possessory interest taxes. The increase in oil and gas operating expenses
during 1995 compared to 1994 reflects the above acquisitions of oil and gas
properties, particularly the additional interest in the Four Corners Properties,
which increased oil and gas operating expenses by approximately $400,000.
INTEREST AND OTHER INCOME
Interest and other income increased during 1995 compared to 1994 due to
the interest earned by Harken on proceeds received from the May 1995 issuance of
$15 million of European 8% Senior Convertible Notes Payable (the "8% European
Notes"). Such proceeds, net of issuance costs on the 8% European Notes, were
maintained and invested in a separate interest bearing bank account (the
"Segregated Account") and earned approximately $475,000 during 1995.
OTHER COSTS AND EXPENSES
General and administrative expenses remained fairly level during 1995
compared to the prior year, as Harken minimized increasing administrative staff
and office costs despite its growth in domestic oil and gas operations. General
and administrative expenses during 1994 were net of approximately $198,000 of
operator overhead fees and other operator cost reimbursements, compared to only
$94,000 of such reimbursements during 1995. Harken accounts for operator fees
and reimbursements as a reduction to general and administrative expenses in its
statements of operations.
Depreciation and amortization expense increased during 1995 compared to
1994 consistent with the increased production levels from the acquired oil and
gas property interests during 1994 and 1995. Depreciation and amortization on
oil and gas properties is calculated on a unit of production basis in accordance
with the full cost method of accounting for oil and gas properties. Oil and gas
depreciation and amortization decreased on a per equivalent barrel basis from
$6.31 in 1994 to $5.68 in 1995.
Interest expense and other increased significantly during 1995 compared
to 1994 due to the May 1995 issuance of the 8% European Notes, which generated
interest expense of approximately $446,000, net of amounts of interest
capitalized, and approximately $337,000 of amortization of issuance costs
associated with the 8% European Notes. In December 1995, Harken issued the
Panhandle Note for an initial face amount of $13 million in connection with the
acquisition of the Panhandle Properties, but such note payable had only a
minimal impact on interest expense during 1995.
24
<PAGE> 25
Provision for asset impairments during 1995 consisted of $457,000
primarily related to Harken's decision to record a valuation adjustment for the
full Bahrain investment amount, as a result of the January 1996 expiration of
the term of the production sharing agreement with BANOCO. Such adjustment does
not affect Harken's other international operations. Provision for asset
impairments during 1994 totaled $6,361,000 due primarily to the decision to
reduce Harken's investment in E-Z Serve Series C Preferred Stock and related
accrued dividends by $5,831,000 to its realizable value, in light of efforts by
Harken management to sell that investment in early 1995.
DISCONTINUED WELL SERVICING AND CONTRACT DRILLING OPERATIONS
Harken's well servicing revenues totaled $1,053,000 in 1994. Harken
generated its well servicing revenue from the operations by Supreme Well Service
Company, a wholly-owned subsidiary. Well servicing operating expenses, which
consist principally of contract labor and supplies, totaled $770,000 in 1994. In
May 1994, Harken announced that it discontinued its well servicing operations,
and has reflected the activities of its well servicing segment as discontinued
operations in the accompanying financial statements.
LIQUIDITY AND CAPITAL RESOURCES
Harken's working capital increased to $43.8 million in 1996 from $5.6
in 1995, primarily due to the availability of unrestricted funds held in the
Segregated Accounts relating to the $40,000,000 6 1/2% European Notes issued in
July 1996 which are convertible into Common Stock at Harken's option beginning
July 31, 1997. In addition, proceeds of approximately $6.2 million from the 8%
European Notes which were restricted as of December 31, 1995 became available
and were transferred from the Segregated Account during 1996, although $5
million of these proceeds were used in the EnerVest Property acquisition in July
1996. Harken also generated approximately $3.0 million of net proceeds during
1996 from the conversion of certain options and warrants and from a March 1996
private placement of Common Stock. Partially offsetting these increases in
working capital during 1996 were capital expenditures relating to Harken's
domestic and international capital projects.
During the year ended December 31, 1996, Harken's cash and temporary
investments increased approximately $5.4 million consisting primarily of
transfers from the European Segregated Account of $10.9 million following the
conversions of 8% European Notes to Common Stock, Common Stock private placement
offering proceeds of approximately $1.3 million, and the aggregate initial
advances pursuant to the Rio Negro Development Finance Agreement, Palo Blanco
Development Finance Agreements and Rochester Agreement of $5.8 million. Such
activity was sufficient to fund capital expenditures of approximately $17.2
million and repayments of notes payable and long-term obligations of
approximately $1.3 million. Cash flow provided by operations during 1996 totaled
approximately $4.9 million.
Harken believes that cash flow from operations will be sufficient to
meet its operating cash requirements in 1997. 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.
In July 1996, Harken significantly improved its available capital
resources primarily through the issuance of $40 million of 6 1/2% European
Notes, which generated net available proceeds, subject to limitations discussed
below, of approximately $36.9 million. All proceeds from the sale of the 6 1/2%
European Notes were paid at closing to a Trustee pursuant to a Trust Indenture
and are held in Segregated
25
<PAGE> 26
Accounts to be maintained for Harken's benefit. Such 6 1/2% European Notes
mature in July 2000 and are convertible at any time by the holders into shares
of Common Stock at a conversion price of $2.50 per share, and are convertible by
Harken into shares of Common Stock after one year following issuance, if for any
period of thirty consecutive days the closing price of Common Stock for each day
during such period shall have equaled or exceeded 135% of the conversion price
(or $3.375 per share of Common Stock). In February 1997, Harken gave notice as
required under the Trust Indenture that it had met the market price criteria
necessary to call for mandatory conversion of the 6 1/2% European Notes,
therefore, at anytime after July 30, 1997, Harken has the right to convert the 6
1/2% European Notes into shares of Common Stock. Harken intends to mandatorily
convert all unconverted 6 1/2% European Notes into shares of Common Stock on
July 31, 1997. As of March 4, 1997, $11.85 million of the 6 1/2% European Notes
had voluntarily converted into Common Stock.
Until the 6 1/2% European Notes are converted, the Trust Indenture
under which the 6 1/2% European Notes were issued requires Harken to maintain an
Asset Value Coverage Ratio, as defined in the Trust Indenture. For a detailed
discussion of the 6 1/2% European Notes see "Notes to Consolidated Financial
Statements, Note 7 -- European Convertible Notes Payable." As of December 31,
1996, Harken was in compliance with the Asset Value Coverage Ratio test and the
amount of net proceeds from the 6 1/2% European Notes that was available based
on the Asset Value Coverage Ratio mentioned above was approximately $20,018,000.
In order for a specific amount of proceeds to be released from the
Segregated Accounts, Harken must demonstrate that the Asset Value Coverage Ratio
test would continue to be met after such release of funds and that no Event of
Default with respect to the 6 1/2% European Notes has occurred and is continuing
at the date of such release. Such request must be accompanied by an independent
reserve engineering report or other independent third party valuation of
Harken's unencumbered proved developed producing assets.
The anticipated timing at which funds will be released from the
Segregated Accounts prior to August 1997 is dependent upon the timing and
magnitude of conversions into Common Stock by the individual noteholders and the
amount of Harken's assets which qualify for inclusion in the Asset Value
Coverage Ratio test. After July 30, 1997, the anticipated timing of the release
of the Segregated Account funds is based solely on the decision by Harken to
convert the 6 1/2% European Notes into Common Stock. Once an amount of proceeds
are available to be released from the Segregated Accounts, Harken may submit its
request for the transfer of such proceeds at its discretion and according to its
capital resource requirements.
To the extent that proceeds invested in the Segregated Accounts at the
balance sheet date are available under the above Asset Value Coverage Ratio
limitations, or will become available, upon the conversion of the 6 1/2%
European Notes by Harken, such cash is included as a current asset as it is, or
will be, available to Harken to fund international and domestic activities
including acquisitions, drilling costs and other capital expenditures or other
working capital needs. Interest incurred on the 6 1/2% European Notes is payable
semi-annually in January and July of each year to maturity or until the 6 1/2%
European Notes are converted. Interest payments will be funded from cash flow
from operations, existing cash balances or from available proceeds in the
Segregated Accounts.
Also during July 1996, Harken strengthened its operating cash flow with
the acquisition of certain producing oil and gas properties located in the
Magnolia region of Arkansas and in the Carlsbad region of New Mexico (the
"EnerVest Properties"). Since the acquisition, the properties have provided
additional monthly net operating cash flow of approximately $250,000.
26
<PAGE> 27
Also in July 1996, Harken entered into an exchange agreement with the
seller of the Panhandle Properties, pursuant to which Harken issued 5,150,000
restricted shares of Common Stock, including 185,000 shares which initially were
held in escrow, in connection with the satisfaction of all obligations owed by
Harken Exploration to the seller under the terms of the $13 million Panhandle
Note.
Harken's operating strategy includes efforts to find additional
opportunities to acquire domestic oil and gas reserves through domestic drilling
activities and through merger and acquisitions, in exchange for cash, debt or
issuance of Common Stock. In addition to Harken's efforts to develop and acquire
domestic oil and gas reserves, Harken continues to be very active in exploration
efforts internationally, particularly in Colombia. As of December 31, 1996,
Harken's net investment in its Colombian operations has totaled approximately
$9.5 million. Terms of each of the Association Contracts entered into between
Harken de Colombia, Ltd. and Ecopetrol commit Harken to perform certain
activities in accordance with a prescribed timetable. Failure by Harken to
perform these activities as required could result in Harken losing its rights
under the particular Association Contract, which could potentially have a
material adverse effect on Harken's business. For a detailed discussion of each
of the Association Contracts entered into between Harken de Colombia, Ltd. and
Ecopetrol, see "Notes to Consolidated Financial Statements, Note 16 --
Commitments and Contingencies".
During the third quarter of 1996, Harken's Board of Directors approved
a three year $60 million exploration program for Harken's properties located in
the Middle Magdalena and Llanos Basins of Colombia. The program includes
drilling to evaluate twelve currently identified prospects over approximately
75,000 acres. In addition to the drilling program, Harken plans to conduct
additional new geologic and engineering studies directed at specific prospect
"leads" beginning in 1997 on an additional 125,000 acres in compliance with the
various Association Contract work programs.
The above mentioned exploration program timetable anticipates Harken
drilling, on average, one Colombian prospect per quarter beginning in 1997. The
timetable does not include new prospects that may subsequently be identified
through seismic and geologic studies nor the development wells which would be
required if an exploratory well is successful. Capital expenditures related to
Harken's Colombian operations are expected to total a minimum of approximately
$30 million before potential partner contributions during 1997, including a
minimum of approximately $16 million related to total operations commitments
required under Harken's Association Contracts. Harken anticipates that it will
have sufficient cash available to fund all of its planned activities in Colombia
for 1997.
Harken anticipates that full development of Colombian reserves in the
Alcaravan contract area of the Llanos Basin and the Bocachico, Cambulos and
Bolivar contract areas of the Middle Magdalena Basin will take several years and
may also require extensive production facilities which would require significant
additional capital expenditures. The ultimate amount of such expenditures cannot
be presently predicted. Harken anticipates that amounts required to fund its
Colombian activities, including the above mentioned exploration programs and
additional development expenditures, will be funded from existing cash balances,
asset sales, the proceeds from the 6 1/2% European Notes, future stock
issuances, production payments, operating cash flows and from industry partners;
however, there can be no assurances that Harken will have adequate funds
available to it to fund all of its Colombian activities or that industry
partners can be obtained to fund a portion of such Colombian activities.
Harken is continually negotiating with potential industry and financial
partners with the objective of farming out a portion of its interests in various
Colombian prospects. Under the terms of its existing
27
<PAGE> 28
development and finance agreements, Harken has received commitments from certain
industry and financial partners to participate in a percentage of Harken's
operations in certain prospects located on the Alcaravan and Bocachico Contract
areas. As of February 21, 1997, and pursuant to all of its development and
finance agreements, Harken has received a total of approximately $9.7 million of
project payments and drilling and completion cost advances used or to be used by
Harken in drilling its initial three wells in Colombia. In addition, $2.5
million of such advances were made by venture partners who subsequently elected
to convert their interests in the Alcaravan Contract area operation into shares
of Common Stock. For a detailed discussion of each of Harken's development and
financing arrangements with industry and financial partners, see "Notes to
Consolidated Financial Statements, Note 16 -- Commitments and Contingencies."
Domestically, Harken plans to continue development of proved
undeveloped reserves on properties with minimal development risk in addition to
a continual workover program on producing properties. Harken expects such costs
to total approximately $7 million in 1997. The targeted results of these efforts
are to increase domestic production and cash flows during 1997. Harken expects
that its increased domestic efforts will be completed with minimal planned
increases of approximately 5% in general and administrative expenses for 1997
compared to the level of such expenses reflected during the year ended December
31, 1996.
The exploration, development and production of oil and gas are subject
to various Navajo, federal, state and local 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 $1,605,000 at December 31, 1996
relating to operational or regulatory contingent liabilities related to Harken's
domestic operations. Harken and its subsidiaries currently are involved in
various lawsuits and other contingencies, including a certain lawsuit and the
guarantee of certain lease obligations of a former subsidiary, which in
management's opinion, will not result in significant loss exposure to Harken.
28
<PAGE> 29
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
The following financial statements appear on pages 30 through 62 in
this report.
PAGE
Report of Independent Public Accountants.................................. 30
Consolidated Balance Sheets -- December 31, 1995 and 1996................ 31
Consolidated Statements of Operations --
Years ended December 31, 1994, 1995 and 1996............................ 32
Consolidated Statements of Stockholders' Equity --
Years ended December 31, 1994, 1995 and 1996............................ 33
Consolidated Statements of Cash Flows --
Years ended December 31, 1994, 1995 and 1996............................ 34
Notes to Consolidated Financial Statements............................... 35
29
<PAGE> 30
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,
1995 and 1996, and the related consolidated statements of operations,
stockholders' equity and cash flows for each of the three years in the period
ended December 31, 1996. 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, 1995 and 1996, and the results
of their operations and their cash flows for each of the three years in the
period ended December 31, 1996, in conformity with generally accepted accounting
principles.
ARTHUR ANDERSEN LLP
Dallas, Texas,
February 21, 1997
30
<PAGE> 31
HARKEN ENERGY CORPORATION AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
ASSETS
DECEMBER 31,
----------------------------------
1995 1996
------------- -------------
<S> <C> <C>
Current Assets:
Cash and temporary investments $ 4,456,000 $ 9,855,000
Cash in European segregated account 4,705,000 37,662,000
Accounts receivable, net 1,061,000 2,058,000
Prepaid expenses and other current assets 309,000 263,000
------------- -------------
Total Current Assets 10,531,000 49,838,000
Property and Equipment:
Oil and gas properties, using the full cost method of accounting-
Evaluated 39,526,000 65,990,000
Unevaluated 15,983,000 10,266,000
Gas plants and other property 6,746,000 7,500,000
Less accumulated depreciation and amortization (10,113,000) (13,721,000)
------------- -------------
Total Property and Equipment, net 52,142,000 70,035,000
Restricted Cash in European Segregated Account 6,173,000 --
Notes Receivable from Related Parties, including interest 232,000 --
Other Assets, net 1,716,000 3,127,000
------------- -------------
$ 70,794,000 $ 123,000,000
============= =============
LIABILITIES AND STOCKHOLDERS' EQUITY
Current Liabilities:
Trade payables $ 356,000 $ 1,272,000
Accrued liabilities and other 2,722,000 3,889,000
Revenues and royalties payable 972,000 900,000
Notes payable and current portion of long-term obligations 868,000 --
------------- -------------
Total Current Liabilities 4,918,000 6,061,000
Long-Term Obligations 13,176,000 --
European Convertible Notes Payable 12,550,000 38,600,000
Commitments and Contingencies (Note 16)
Stockholders' Equity:
Common stock, $0.01 par value; 100,000,000 and 150,000,000 shares
authorized, respectively; 75,913,832 and 93,862,266 shares issued,
respectively 759,000 939,000
Additional paid-in capital 136,435,000 171,191,000
Retained deficit (92,047,000) (92,401,000)
Treasury stock, 1,440,896 and 440,896 shares held, respectively (4,997,000) (1,390,000)
------------- -------------
Total Stockholders' Equity 40,150,000 78,339,000
------------- -------------
$ 70,794,000 $ 123,000,000
============= =============
</TABLE>
The accompanying Notes to Consolidated Financial Statements are
an integral part of these Statements.
31
<PAGE> 32
HARKEN ENERGY CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
------------------------------------------
1994 1995 1996
------------ ------------ ------------
<S> <C> <C> <C>
Revenues:
Oil and gas operations $ 4,156,000 $ 5,960,000 $ 12,341,000
Interest and other income 739,000 1,511,000 1,580,000
------------ ------------ ------------
4,895,000 7,471,000 13,921,000
------------ ------------ ------------
Costs and Expenses:
Oil and gas operating expenses 1,535,000 2,135,000 4,438,000
General and administrative expenses, net 3,132,000 3,376,000 4,537,000
Depreciation and amortization 1,993,000 2,251,000 3,595,000
Provision for asset impairments 6,361,000 457,000 --
Interest expense and other, net 85,000 877,000 1,692,000
------------ ------------ ------------
13,106,000 9,096,000 14,262,000
------------ ------------ ------------
Loss from continuing operations before income taxes (8,211,000) (1,625,000) (341,000)
Income tax expense -- -- --
------------ ------------ ------------
Loss from continuing operations (8,211,000) (1,625,000) (341,000)
Discontinued Operations (Note 11):
Loss from operations of discontinued well
servicing and contract drilling segment (223,000) -- --
------------ ------------ ------------
Net Loss $ (8,434,000) $ (1,625,000) $ (341,000)
============ ============ ============
Loss per common share:
Continuing operations $ (0.14) $ (0.02) $ (0.00)
Discontinued operations (0.00) -- --
------------ ------------ ------------
Net Loss $ (0.14) $ (0.02) $ (0.00)
============ ============ ============
Weighted average shares outstanding 59,722,853 65,041,063 85,983,534
============ ============ ============
</TABLE>
The accompanying Notes to Consolidated Financial Statements are
an integral part of these Statements.
32
<PAGE> 33
HARKEN ENERGY CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
<TABLE>
<CAPTION>
ADDITIONAL
COMMON PAID-IN RETAINED TREASURY
STOCK CAPITAL DEFICIT STOCK TOTAL
------------ ------------ ------------ ------------ ------------
<S> <C> <C> <C> <C> <C>
Balance, December 31, 1993 $ 654,000 $131,052,000 $(81,986,000) $(20,757,000) $ 28,963,000
Issuance of common stock, net 10,000 1,520,000 -- -- 1,530,000
Adjustment for unrealized losses
on available-for-sale securities -- -- (100,000) -- (100,000)
Net loss -- -- (8,434,000) -- (8,434,000)
------------ ------------ ------------ ------------ ------------
Balance, December 31, 1994 664,000 132,572,000 (90,520,000)(A) (20,757,000) 21,959,000
Issuance of common stock, net 79,000 1,740,000 -- 15,760,000 17,579,000
Conversions of European notes
payable 16,000 2,123,000 -- -- 2,139,000
Adjustment for unrealized losses
on available-for-sale securities -- -- 100,000 -- 100,000
Equity adjustment from foreign
currency translation -- -- (2,000) -- (2,000)
Net loss -- -- (1,625,000) -- (1,625,000)
------------ ------------ ------------ ------------ ------------
Balance, December 31, 1995 759,000 136,435,000 (92,047,000) (4,997,000) 40,150,000
Issuance of common stock, net 90,000 22,090,000 -- 3,607,000 25,787,000
Conversions of European notes
payable 90,000 12,666,000 -- -- 12,756,000
Equity adjustment from foreign
currency translation -- -- (13,000) -- (13,000)
Net loss -- -- (341,000) -- (341,000)
------------ ------------ ------------ ------------ ------------
Balance, December 31, 1996 $ 939,000 $171,191,000 $(92,401,000) $ (1,390,000) $ 78,339,000
============ ============ ============ ============ ============
</TABLE>
- ----------
(A) 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 3 -- Marketable Equity Securities for further discussion.
The accompanying Notes to Consolidated Financial Statements are
an integral part of these Statements.
33
<PAGE> 34
HARKEN ENERGY CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
Year Ended December 31,
------------------------------------------
1994 1995 1996
------------ ------------ ------------
<S> <C> <C> <C>
Cash flows from operating activities:
Loss from continuing operations $ (8,211,000) $ (1,625,000) $ (341,000)
Adjustment to reconcile net loss to net cash provided by (used in)
operating activities:
Depreciation and amortization 1,993,000 2,251,000 3,595,000
Dividend income receivable from related parties (423,000) -- --
Forgiveness of related party note receivable 232,000 232,000 232,000
Provision for asset impairments 6,361,000 457,000 --
Provision for doubtful accounts 24,000 (180,000) 25,000
Accretion of note payable -- 27,000 234,000
(Gain) loss on sales of assets and other (176,000) (832,000) 72,000
Amortization of European note issuance costs -- 337,000 504,000
Loss from discontinued operations (223,000) -- --
Adjustments to reconcile loss from discontinued operations to net
cash provided by (used in) operating activities:
Depreciation and amortization 77,000 -- --
(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 577,000 43,000 (592,000)
Decrease in accounts receivable from former subsidiaries 100,000 -- --
Increase (decrease) in trade payables and other (555,000) (339,000) 1,169,000
------------ ------------ ------------
Net cash provided by (used in) operating activities (510,000) 371,000 4,898,000
------------ ------------ ------------
Cash flows from investing activities:
Proceeds from sales of assets 338,000 3,423,000 192,000
Cash from acquired subsidiary -- 190,000 --
Capital expenditures, net (2,344,000) (7,908,000) (17,213,000)
Investor project contributions -- -- 5,800,000
Proceeds from sale of assets of discontinued operations 2,045,000 -- --
------------ ------------ ------------
Net cash provided by (used in) investing activities 39,000 (4,295,000) (11,221,000)
------------ ------------ ------------
Cash flows from financing activities:
Transfer from segregated account cash -- 2,500,000 10,877,000
Proceeds from issuances of common stock, net of issuance costs -- 4,409,000 3,276,000
Repayments of notes payable and long-term obligations -- (1,025,000) (1,258,000)
Investment in segregated account cash, net -- (332,000) (1,173,000)
------------ ------------ ------------
Net cash provided by financing activities -- 5,552,000 11,722,000
------------ ------------ ------------
Net increase (decrease) in cash and temporary investments (471,000) 1,628,000 5,399,000
Cash and temporary investments at beginning of year 3,299,000 2,828,000 4,456,000
------------ ------------ ------------
Cash and temporary investments at end of year $ 2,828,000 $ 4,456,000 $ 9,855,000
============ ============ ============
</TABLE>
The accompanying Notes to Consolidated Financial Statements are
an integral part of these Statements.
34
<PAGE> 35
HARKEN ENERGY CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1994, 1995 AND 1996
(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
oil and gas properties jointly owned and operated pursuant to a Joint Operations
Agreement 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.
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the financial
statements and the reported amounts of revenues and expenses during the reported
period. Actual results could differ from those estimates. Certain prior year
amounts have been reclassified to conform with the 1996 presentation.
Cash and Temporary Investments -- For purposes of the Consolidated
Statements of Cash Flows, Harken considers all highly liquid investments
purchased with an original maturity of three months or less to be cash
equivalents. Harken paid cash for interest in the amounts of $85,000, $246,000
and $464,000 during 1994, 1995 and 1996, respectively. All significant noncash
investing and financing activities are discussed in Notes 2, 6, 7, 8 and 9 --
Acquisitions, Notes Payable and Long-Term Obligations, European Convertible
Notes Payable, Redeemable Preferred Stock 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 totaled approximately
$1,435,000 and $3,355,000 at December 31, 1995 and 1996, respectively. In
addition, Harken excludes from cash and temporary investments certain proceeds
received from the issuance of European Convertible Notes Payable that remain in
the Segregated Accounts. See Note 7 -- European Convertible Notes Payable for
further discussion.
Accounts Receivable -- Harken maintains a reserve for potential losses
in collection of its accounts receivable. The allowance for doubtful accounts
was $375,000 and $405,000 as of December 31, 1995 and 1996, respectively.
Property and Equipment -- 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. Gas plants and other
property are depreciated on the straight-line method over their estimated useful
lives ranging from three to fifteen years.
Other Assets -- Harken includes in other assets certain deferred
commissions and issuance costs associated with the issuance of European
Convertible Notes Payable. See Note 7 -- European Convertible Notes Payable for
further discussion. At December 31, 1995, such deferred costs totaled $1,228,000
net of $337,000 of accumulated amortization. At December 31, 1996, such deferred
costs totaled $2,725,000 net of $323,000 of accumulated amortization.
35
<PAGE> 36
Accrued Liabilities and Other -- Accrued liabilities and other at
December 31, 1995, includes an amount of $1,345,000 related to certain
operational or regulatory contingent liabilities related to Harken's domestic
operations and other accrued expense liabilities of $1,377,000. The December 31,
1996 balance includes an amount of $1,605,000 related to certain operational or
regulatory contingent liabilities associated with Harken's domestic operations
and other accrued expense liabilities of $2,284,000.
Colombian Operations -- Harken's operations include oil and gas
exploration and development efforts in Colombia pursuant to certain Colombian
Association Contracts. See further discussion at Note 16 -- Commitments and
Contingencies. Harken accounts for its activities in Colombia using the
Colombian peso as the functional currency. Any foreign currency translation
adjustment relating to the translation to U.S. dollars of Harken's investment in
Colombian operations is accounted for as an equity adjustment from foreign
currency translation and is included as a component of stockholders' equity in
the accompanying consolidated financial statements. At December 31, 1995 and
1996, Harken reflects its exploration activities in Colombia primarily as a
capitalized cost of oil and gas properties. See further discussion at Notes 5
and 15 -- Oil and Gas Properties and Oil and Gas Disclosures.
Capitalization of Interest -- Harken capitalizes interest on certain
oil and gas exploration and development costs. During 1995, Harken recorded
interest expense of $540,000, net of $204,000 of interest which was capitalized
to Harken's unevaluated oil and gas properties. During 1996, Harken recorded
interest expense of $1,169,000, net of $370,000 of interest which was
capitalized to Harken's unevaluated oil and gas properties. No interest was
capitalized during 1994.
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
$198,000, $94,000 and $61,000 for such amounts during 1994, 1995 and 1996,
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. Harken reviews its long-lived assets, other than its
investment in oil and gas properties, whenever events or changes in
circumstances indicate that the carrying amount of an asset may not be
recoverable. When evidence indicates that operations will not produce sufficient
cash flows to cover the carrying amount of the related asset, 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 fair value. Harken reflected a provision for asset impairments from
continuing operations in the amounts of $6,361,000 and $457,000 during 1994 and
1995, respectively. See Note 4 -- Investments in Former Subsidiaries for further
discussion.
(2) ACQUISITIONS
Acquisition of Additional Four Corners Property Interests -- In
October 1994, Harken acquired additional interests in its oil and gas operations
in the Four Corners area of Arizona, Utah and New Mexico (the "Four Corners
Properties") which resulted in Harken increasing its ownership in the Navajo
Reservation reserves, exploration acreage, development drilling locations and
the Aneth Gas Plant. The acquisition of the sellers' interest raised Harken's
total interest in the Four Corners Properties from 50% to approximately 70% of
Harken's total operated interest and increased Harken's share of daily
production by approximately 40% over its previous interest. As consideration for
this acquisition, Harken issued a 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
36
<PAGE> 37
liabilities related to the interests as well as retaining certain distributions
made prior to the actual date of closing.
In May 1995, Harken acquired an additional interest in the Four Corners
Properties, raising Harken's total interest from approximately 70% of Harken's
total operated interest to approximately 82%. The purchase consideration paid by
Harken to the seller consisted of $300,000 cash plus the issuance of 534,000
shares of restricted Harken common stock. Harken also assumed certain
liabilities of the seller relating to the properties, and the seller in turn
retained responsibility for certain contingent operational and environmental
liabilities related to the interests purchased.
During the second quarter of 1996, Harken again acquired additional
interests in the Four Corners Properties, raising Harken's total interest to
approximately 94% of the total interest operated by Harken. The purchase
consideration paid by Harken to the sellers consisted of $338,000 cash plus the
issuance of approximately 509,000 shares of restricted Harken common stock.
Harken also assumed certain liabilities of the sellers relating to the property
interests. All of the above acquisitions of the additional interests in the Four
Corners Properties have been accounted for under the purchase method of
accounting.
Merger with Search Exploration, Inc. -- In May 1995, Search
Exploration, Inc. ("Search"), a company engaged primarily in the domestic
exploration for, and development and production of oil and gas, was acquired by
Harken pursuant to an Amended and Restated Agreement and Plan of Merger. Search
was merged with and into Search Acquisition Corp., a wholly-owned subsidiary of
Harken. Upon consummation of the merger, Harken issued approximately 2.2 million
shares of Harken common stock to holders of Search common stock, preferred stock
and promissory notes. In addition, the holders of Search common stock, certain
notes and overriding royalty interests in certain properties of Search received
the contingent right to receive additional shares of Harken common stock based
upon the increase in value of certain properties of Search as of June 30, 1996.
No contingent shares were ultimately required to be issued. The merger was
accounted for under the purchase method of accounting due to the above mentioned
contingently issuable shares of Harken common stock.
Acquisition of Texas Properties -- In October 1995, Harken Energy West
Texas, Inc., a wholly-owned subsidiary of Harken, acquired certain non-operated
interests in producing properties located in Hockley County, Texas ("Yellowhouse
Properties"). As consideration for the purchase of these interests, Harken
issued three million shares of restricted Harken common stock, warrants to
purchase one million additional shares of restricted Harken common stock at $2
per share, and assumed $750,000 of short-term notes payable. Harken and the
seller made payments totaling approximately $417,000 on these notes payable at
closing and the remaining balance was repaid in full by Harken during the first
quarter of 1996. Also, Harken issued an additional 82,759 shares of restricted
Harken common stock to a financial advisor as a fee in connection with the
acquisition. The acquisition of the Yellowhouse Properties has been accounted
for under the purchase method of accounting.
On December 21, 1995, pursuant to a Purchase and Sale Agreement (the
"Panhandle Purchase and Sale Agreement"), Harken Exploration Company ("Harken
Exploration"), a wholly-owned subsidiary of Harken, acquired working interests
in certain producing properties located in the panhandle region of Texas
("Panhandle Properties"). As consideration for the purchase of these interests,
Harken issued, along with other consideration, 2.5 million shares of restricted
Harken common stock (the "Purchase Shares"), $2.5 million in cash and a note
payable by Harken Exploration to the seller for an initial face amount of $13
million. Harken had the option over the next two years to repay all or part of
this $13 million note with restricted Harken common stock at conversion rates
tied to future trading prices of Harken common stock. The $13 million note was
to mature and become payable in two stages, with each maturity amount subject
37
<PAGE> 38
to certain adjustments. On July 11, 1996, Harken Exploration entered into an
exchange agreement with the holder of the $13 million note, whereby it was
exchanged for, among other consideration, the issuance of 5,150,000 restricted
shares of Harken common stock. See Note 6 -- Notes Payable and Long-Term
Obligations for further discussion of the $13 million note payable. The
Acquisition - II of the Panhandle Properties has been accounted for under the
purchase method of accounting. Due to the note payable adjustments to be
calculated, some of which were based on the future trading prices of Harken
common stock, the allocation of the purchase price to the assets and liabilities
related to the acquisition of the Panhandle Properties at December 31, 1995 was
preliminary, with further adjustments to be reflected upon the final accounting
for the $13 million note payable. With the July 11, 1996 exchange agreement
resulting in the issuance of 5,150,000 restricted shares of Harken common stock
with a market value of approximately $10,429,000 in full payment of the
outstanding balance on the note, Harken has adjusted the purchase price of the
Panhandle Properties to give effect to the finalization of the consideration
issued in the purchase.
Acquisition of EnerVest Properties - On July 10, 1996 Harken, along
with Harken Exploration, purchased working interests in certain producing oil
and gas properties located in the Magnolia region of Arkansas and in the
Carlsbad region of New Mexico (the "EnerVest Properties") from EnerVest
Acquisition - II Limited Partnership ("EnerVest"). The purchase price of
approximately $15,200,000, plus the assumption of certain operational
liabilities relating to these properties, continues to be subject to adjustments
for property defects identified including title defects, environmental defects,
nonproductive unplugged wells and product production balancing defects. This
purchase price was paid in the form of $5,000,000 cash paid at closing,
1,550,000 shares of Harken common stock which were issued following closing, and
1,159,091 shares of Harken common stock to be issued at a designated time
following the registration and sale by the seller of the initial shares issued
following closing. Harken also issued to EnerVest warrants to purchase, over a
period of three years from closing, 300,000 restricted shares of Harken common
stock at an exercise price of $2.75 per share. The agreement includes adjustment
provisions pursuant to which Harken may be obligated to issue additional shares
of Harken common stock if the seller does not realize at least $10,200,000 from
the sale of all shares of Harken common stock issued to the seller. In addition,
the seller will maintain a lien on these properties until such time as it has
received or recognized approximately $7,000,000 in proceeds from the sales of
all shares of Harken common stock received from the sale of the EnerVest
Properties. As of December 31, 1996, EnerVest had received cumulative proceeds
of approximately $3,600,000 from the sale of the initial 1,550,000 shares of
Harken common stock issued following closing.
Pro Forma Information -- The following unaudited pro forma combined
condensed statement of operations for the year ended December 31, 1995 gives
effect to the Search merger, the two acquisitions of Texas properties, the
acquisition of the EnerVest Properties and the issuance of the European 8%
Senior Convertible Notes Payable (See Note 7 -- European Convertible Notes
Payable for further discussion) as if each had been consummated at January 1,
1995. The following unaudited pro forma combined condensed statement of
operations for the year ended December 31, 1996 gives effect to the acquisition
of the EnerVest Properties and the issuance of the European 6 1/2% Senior
Convertible Notes Payable as if each had been consummated at January 1, 1996.
The unaudited pro forma data is presented for illustrative purposes
only and is not necessarily indicative of the operating results that would have
occurred had the transactions been consummated at the dates indicated, nor are
they indicative of future operating results. The unaudited pro forma data does
not reflect the effect of the various conversions of European Notes, the
capitalization of certain amounts of interest on the European Notes or the
interest income earned from investment of the European Note proceeds.
38
<PAGE> 39
PRO FORMA COMBINED CONDENSED STATEMENT OF OPERATIONS
FOR THE YEAR ENDED DECEMBER 31, 1995
(UNAUDITED)
<TABLE>
<CAPTION>
Period from January 1, 1995 to
Closing Date of Acquisition
------------------------------------
Yellowhouse Panhandle EnerVest
Harken Search Properties Properties Properties Pro Forma
Actual Actual Actual Actual Actual Adjustments
------------ ------- ------------- ----------- ---------- ------------
<S> <C> <C> <C> <C> <C> <C>
Oil and gas revenue $ 5,960 $ 188 $ 1,510 $ 1,251 $ 4,172
Other revenues 1,511 -- -- -- -- (117)(1)
(250)(3)
------------ ------- ------------- ----------- ---------- ------------
Total Revenues 7,471 188 1,510 1,251 4,172 (367)
------------ ------- ------------- ----------- ---------- ------------
Oil and gas operating expenses 2,135 79 665 242 1,410 48(2)
General and administrative expenses, net 3,376 236 123 -- -- 108(2)
124(4)
Depreciation and amortization 2,251 18 -- -- -- 2,486(5)
Provision for asset impairments 457 -- -- -- --
Interest expense and other, net 877 19 -- -- -- 616(6)
------------ ------- ------------- ----------- ---------- ------------
Total Expenses 9,096 352 788 242 1,410 3,382
------------ ------- ------------- ----------- ---------- ------------
Income tax expense (benefit) -- -- -- -- --
------------ ------- ------------- ----------- ---------- ------------
Income (loss) from continuing operation $ (1,625) $ (164) $ 722 $ 1,009 $ 2,762 $ (3,749)
============ ======= ============= =========== ========== ============
Net loss per share from continuing
operations attributable to common stock $ (0.02)
============
Weighted Average Shares Outstanding 65,041,063
============
</TABLE>
<TABLE>
<CAPTION>
Pro Forma
------------
<S> <C>
Oil and gas revenue $ 13,081
Other revenues 1,144
------------
Total Revenues 14,225
------------
Oil and gas operating expenses 4,579
General and administrative expenses, net 3,967
Depreciation and amortization 4,755
Provision for asset impairments 457
Interest expense and other, net 1,512
------------
Total Expenses 15,270
------------
Income tax expense (benefit) --
------------
Income (loss) from continuing operation $ (1,045)
============
Net loss per share from continuing
operations attributable to common stock $ (0.01)
============
Weighted Average Shares Outstanding 79,606,504
============
</TABLE>
PRO FORMA ADJUSTMENTS-PRO FORMA COMBINED CONDENSED STATEMENT OF OPERATIONS -
YEAR ENDED DECEMBER 31, 1995
(1) Pro forma entry to reflect the reduction in interest income earned due
to the $2,500,000 cash consideration paid in connection with the
acquisition of the Panhandle Properties.
(2) Pro forma entry to record additional operating and general and
administrative expenses expected to be incurred by Harken related to
the Panhandle Properties. The additional oil and gas operating expenses
consist of $4,000 per month in pumper and related expenses that have
been incurred in connection with operating the Panhandle Properties.
The additional general and administrative expenses consist of $24,000
for the annual cost of a new field office in the panhandle region and
$84,000 related to newly hired operating and administrative employees
to serve the Panhandle Properties.
(3) Pro forma entry to reflect the reduction in interest income earned due
to the $5,000,000 cash consideration paid in connection with the
acquisition of the EnerVest Properties.
(4) Pro forma entry to record additional general and administrative
expenses expected to be incurred by Harken related to the EnerVest
Properties. The additional general and administrative expenses consist
of $10,000 per month, net of overhead reimbursements, for additional
necessary operating and administrative employees to serve the EnerVest
Properties.
(5) Pro forma entry to adjust actual depreciation and depletion expense on
oil and gas properties for the acquired interests to the depreciation
and depletion expense calculated on a consolidated basis.
(6) Pro forma entry to reflect interest and amortization expense incurred
on the European 8% Senior Convertible Notes Payable.
39
<PAGE> 40
PRO FORMA COMBINED CONDENSED STATEMENT OF OPERATIONS
FOR THE YEAR ENDED DECEMBER 31, 1996
(UNAUDITED)
<TABLE>
<CAPTION>
Period from
January 1, 1996
to Closing Date
of Acquisition
---------------
EnerVest
Harken Properties Pro Forma
Actual Actual Adjustments Pro Forma
------------ ------------ ------------ ------------
<S> <C> <C> <C> <C>
Oil and gas revenue $ 12,341 $ 2,173 $ 14,514
Other revenues 1,580 -- (125)(1) 1,455
------------ ------------ ------------ ------------
Total Revenues 13,921 2,173 (125) 15,969
------------ ------------ ------------ ------------
Oil and gas operating expenses 4,438 710 5,148
General and administrative expenses, net 4,537 -- 60(3) 4,597
Depreciation and amortization 3,595 -- 896(2) 4,491
Interest expense and other, net 1,692 -- 1,967(4) 3,425
(234)(5)
------------ ------------ ------------ ------------
Total Expenses 14,262 710 2,689 17,661
------------ ------------ ------------ ------------
Income tax expense (benefit) -- -- -- --
------------ ------------ ------------ ------------
Income (loss) from continuing operations $ (341) $ 1,463 $ (2,814) $ (1,692)
============ ============ ============ ============
Net loss per share from continuing operations
attributable to common stock $ (0.00) $ (0.02)
============ ============
Weighted Average Shares Outstanding 85,983,534 89,503,671
============ ============
</TABLE>
PRO FORMA ADJUSTMENTS-PRO FORMA COMBINED CONDENSED STATEMENT OF OPERATIONS -
YEAR ENDED DECEMBER 31, 1996
(1) Pro forma entry to reflect the reduction in interest income earned due
to the $5,000,000 cash consideration paid in connection with the
acquisition of the EnerVest Properties.
(2) Pro forma entry to adjust actual depreciation and depletion expense on
oil and gas properties for the acquired interests to the depreciation
and depletion expense calculated on a consolidated basis.
(3) Pro forma entry to record additional general and administrative
expenses expected to be incurred by Harken related to the EnerVest
Properties. The additional general and administrative expenses consist
of $10,000 per month, net of overhead reimbursements, for additional
necessary operating and administrative employees to serve the EnerVest
Properties.
(4) Pro forma entry to reflect interest and amortization expense incurred
on the European 6 1/2% Senior Convertible Notes Payable.
(5) Pro forma entry to reflect the reduction in the accretion of interest
expense related to the July 1996 exchange of the note payable issued by
Harken as part of the acquisition of the Panhandle Properties.
40
<PAGE> 41
(3) MARKETABLE EQUITY SECURITIES
At December 31, 1994 and during the first six months of 1995, Harken
carried an investment in the common stock of E-Z Serve Corporation, a former
subsidiary ("E-Z Serve"), including shares of E-Z Serve common stock resulting
from the conversion of certain shares of E-Z Serve Series C Preferred in June
1994 and January 1995. Harken's investment in E-Z Serve Series C Preferred was
not accounted for pursuant to Statement of Financial Accounting Standards No.
115 "Accounting for Certain Investments in Debt and Equity Securities" ("SFAS
115"), as it was not a readily marketable security. See Note 4 -- Investments in
Former Subsidiaries for further discussion of the E-Z Serve Series C Preferred.
Beginning in 1994 pursuant to SFAS 115, Harken classified its investment in E-Z
Serve common stock as available-for-sale. The following is a summary of Harken's
activity from marketable equity securities. Harken sold its investment in the
common stock of E-Z Serve during the third quarter of 1995.
<TABLE>
<CAPTION>
Year Ended December 31,
-----------------------
Available-For-Sale 1994 1995 1996
- ----------------------- ---- ---- ----
<S> <C> <C> <C>
Gross realized gains $ 88 $309 $ --
Gross realized losses 59 -- --
</TABLE>
(4) INVESTMENTS IN FORMER SUBSIDIARIES
E-Z Serve Preferred Stock -- At December 31, 1994, Harken held 74,754
shares of E-Z Serve $6.00 Convertible Preferred Stock, Series C ("E-Z Serve
Series C Preferred"), which it acquired at a cost of $100 per share. Each share
of E-Z Serve Series C Preferred was 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. Harken recorded dividend income of $423,000 during
1994 related to the E-Z Serve Series C Preferred and has included such dividends
in Interest and Other Income in the accompanying consolidated financial
statements.
During 1994, Harken converted a portion of its shares of E-Z Serve
Series C Preferred into E-Z Serve common stock and sold certain of its E-Z Serve
common stock. See Note 3 -- 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, as well as certain other factors,
Harken deemed that a decline in value that was other than temporary had occurred
with respect to its investment in E-Z Serve Series C Preferred. In connection
with this determination, Harken recorded a decline in value of $5,831,000 in
Provision for Asset Impairments during the fourth quarter of 1994 in the
accompanying consolidated financial statements. In March 1995, Harken sold its
investment in E-Z Serve Series C Preferred and its related accrued dividends
receivable from E-Z Serve and received cash proceeds of approximately
$2,779,000, an amount approximately equal to Harken's recorded value.
Tejas Preferred Stock -- At December 31, 1994, Harken held 1,000 shares
of Tejas Power Corporation ("Tejas") Series B Preferred Stock, $.01 par value
per share ("Tejas Preferred Stock"), which it acquired at a purchase price of
$1,200,000. Harken accepted these shares of Tejas Preferred Stock as full and
complete payment for certain expenses owed by Tejas to Harken. In addition,
Tejas agreed to waive
41
<PAGE> 42
certain of the provisions under the terms of the Harken Series C Preferred and
pledged all 186,760 shares of the Harken Series C Preferred to Harken.
In December 1995, Harken entered into a purchase, sale and exchange
agreement related to its shares of Tejas Preferred Stock, along with a note
payable for approximately $394,000 to Tejas in exchange for the 186,760 shares
of Harken Series C Preferred held by Tejas. See Note 8--Redeemable Preferred
Stock for further discussion.
(5) OIL AND GAS PROPERTIES
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 $1,066,000, $1,182,000 and
$2,167,000 of internal costs, net of reimbursements from joint interest owners,
directly related to these activities in 1994, 1995 and 1996, 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. See Note 15 -- Oil and Gas Disclosures for further discussion.
The capitalized costs of oil and gas properties, excluding unevaluated
properties, are amortized on a country-by-country basis using a 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 of domestic oil and gas properties was $6.31, $5.68 and $5.58 per
equivalent barrel of oil produced during 1994, 1995 and 1996, respectively. The
evaluated costs at December 31, 1996 also includes $5,802,000 related to
Colombia which have not yet begun to be amortized (see Note 16 -- Commitments
and Contingencies for a discussion of Colombian operations).
The unevaluated property costs at December 31, 1995 and 1996 includes
$4,866,000 and $3,656,000, respectively, related to Colombia and $11,117,000 and
$6,610,000, 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.
42
<PAGE> 43
(6) NOTES PAYABLE AND LONG-TERM OBLIGATIONS
<TABLE>
<CAPTION>
December 31
----------------------------
1995 1996
------------ ------------
<S> <C> <C>
Note payable to seller of producing properties (A) $ 12,786 $ --
Notes payable to investors (B) 132 --
Note payable to Tejas Power Corporation (C) 394 --
Notes payable to former stockholder of subsidiary (D) 400 --
Notes payable to former investors in Search managed limited partnerships (E) 332 --
------------ ------------
Total 14,044 --
Less amount classified as current liability (868) --
------------ ------------
Total long-term obligations $ 13,176 $ --
============ ============
</TABLE>
(A) As discussed in Note 2 -- Acquisitions, in December 1995 Harken
Exploration issued to the seller of the Panhandle Properties a note payable in
the initial face amount of $13 million (the "Panhandle Note"). The Panhandle
Note bore interest at 5% per annum as to $8,000,000 in principal amount only,
was secured by Harken Exploration's interest in the acquired properties and was
not guaranteed by Harken. The Panhandle Note was to mature and become payable in
two stages. Pursuant to the Panhandle Purchase and Sale Agreement, Harken
Exploration could elect to pay the amounts due at either or both of two
prescribed maturity dates for the notes with shares of Harken common stock. The
initial recorded amount of the Panhandle Note was equal to the discounted fair
value of the payments to be made at each maturity date, using a market rate of
interest of 6.66%. As Harken's intention was to pay the Panhandle Note with
shares of Harken common stock, the entire Panhandle Note balance was included in
long-term obligations at December 31, 1995.
On July 11, 1996, Harken Exploration entered into an exchange agreement
with the seller of the Panhandle Properties, pursuant to which Harken issued
5,150,000 restricted shares of Harken common stock, including 185,000 shares
originally held in escrow, and having an approximate market value of
$10,429,000, in satisfaction of all obligations owed by Harken Exploration to
the seller under the terms of the Panhandle Note. Under this exchange agreement,
Harken Exploration agreed to pay the seller the amount, if any, by which the
proceeds from the sale of these shares of Harken common stock sold by the seller
are less than $8,500,000. Based on the proceeds received by the seller from the
sale of the shares of Harken common stock issued, no amounts will be required to
be paid to the seller pursuant to this requirement. In connection with this
exchange agreement, (a) Harken granted the seller the right to request Harken to
effect up to two registrations of these shares of Harken common stock issued
under the Securities Act of 1933 and (b) Harken granted to the seller a lien
over the properties purchased from the seller to secure, among other things, the
obligations of Harken Exploration under the exchange agreement. As of December
31, 1996, the seller of the Panhandle Properties has released the lien over such
properties.
43
<PAGE> 44
(B) As discussed in Note 2 -- Acquisitions, a wholly-owned subsidiary
of Harken assumed $750,000 of short-term notes payable in connection with the
acquisition of the Yellowhouse Properties in October 1995. Harken and the seller
made payments totaling approximately $417,000 on these notes payable at closing
and the remaining balance was repaid in full by Harken in monthly installments
through March 1996. Such notes bore interest at the rate of 7% per annum.
(C) As part of Harken's December 1995 exchange of its shares of Tejas
Preferred Stock for the shares of Harken Series C Preferred stock held by Tejas,
Harken issued a note payable for $394,000 which was payable in quarterly
installments through September 30, 1997, but was repaid early by Harken in March
1996. The note bore interest at a rate of 10% per annum.
(D) Under the terms of a March 1994 agreement, a Harken subsidiary
purchased from its former stockholder its 3% working interest in the wells
drilled by the subsidiary as well as all rights held by the former stockholder
to participate in future wells drilled by the subsidiary on the Navajo
Reservation, effective January 1, 1994. As consideration for such purchase, the
subsidiary issued a 10% note payable in the amount of $400,000 which was paid to
the subsidiary's former stockholder on January 3, 1996.
(E) As part of the Merger Agreement with Search in May 1995, Harken,
through Search, assumed approximately $442,000 of notes payable to former
partners in certain limited partnerships managed by a subsidiary of Search. Such
notes bore interest at 10% per annum and were payable in semiannual installments
beginning June 30, 1995 through June 30, 1998. Harken repaid these notes in
April 1996. See further discussion of the Search Merger at Note 2 -
Acquisitions.
(7) EUROPEAN CONVERTIBLE NOTES PAYABLE
During the second quarter of 1995, Harken issued to qualified purchasers
a total of $15 million in 8% Senior Convertible Notes (the "8% European Notes")
which were to mature in May 1998. Interest on these notes was payable
semi-annually in May and November of each year to maturity or until the 8%
European Notes were converted. Such 8% European Notes were convertible at any
time by the holders into shares of Harken common stock at a conversion price of
$1.50 per share ("the 8% European Note Conversion Price"). In connection with
the sale and issuance of the 8% European Notes, Harken paid approximately
$1,750,000 from the 8% European Note proceeds for commissions and issuance
costs. Between September 30, 1995 and July 30, 1996, all holders of these 8%
European Notes exercised their conversion options and Harken issued an aggregate
total of 9,999,975 shares of Harken common stock pursuant to these conversions.
On July 30, 1996, Harken issued to qualified purchasers a total of $40
million in 6 1/2% Senior Convertible Notes (the "6 1/2% European Notes") which
mature on July 30, 2000. In connection with the sale and issuance of the 6 1/2%
European Notes, Harken paid approximately $3,142,000 from the 6 1/2% European
Note proceeds for commissions and issuance costs. Interest on these notes is
payable semi-annually in January and July of each year to maturity or until the
6 1/2% European Notes are converted. Such 6 1/2% European Notes are convertible
at any time by the holders into shares of Harken common stock at a conversion
price of $2.50 per share ("the 6 1/2% European Note Conversion Price"). The 6
1/2% European Notes are also convertible by Harken into shares of Harken common
stock after one year following issuance, if for any period of thirty consecutive
days commencing on or after November 28, 1996, the closing price of Harken
common stock for each trading day during such period shall have equaled or
exceeded 135% of the 6 1/2% European Note Conversion Price (or $3.375 per share
of Harken common stock). In February 1997, Harken gave notice as required under
the Trust Indenture that it had met the market price criteria
44
<PAGE> 45
necessary to call for mandatory conversion of the 6 1/2% European Notes,
therefore, at any time after July 30, 1997, Harken is able to convert the 6 1/2%
European Notes into shares of Harken common stock. Harken intends to mandatorily
convert all unconverted 6 1/2% European Notes into shares of Harken common stock
on July 31, 1997.
Upon closing, all proceeds from the sale of the 6 1/2% European Notes
were paid to a Trustee under the terms of a Trust Indenture and are held in
separate interest bearing Trust accounts (the "Segregated Accounts") to be
maintained for Harken's benefit, until the Trustee is presented with evidence of
sufficient asset value, as defined in the Trust Indenture, held by Harken to
permit an advance of a portion of the proceeds. Until the 6 1/2% European Notes
are converted, Harken must maintain an Asset Value Coverage Ratio equal to or
greater than 1:1 which is calculated as the ratio of (i) the sum of (x) 100% of
the aggregate amount of Harken's cash on deposit in the Segregated Accounts plus
(y) 60% of the aggregate amount of Harken's marketable securities plus (z) 50%
of the net present value of Harken's domestic unencumbered total proved reserves
of which at least 75% thereof must be proved developed producing reserves to
(ii) the aggregate outstanding principal amount of the 6 1/2% European Notes.
Upon a conversion, any proceeds attributable to the 6 1/2% European Notes
converted which remain in the Segregated Accounts may be withdrawn by Harken
without regard to the asset value then existing.
The 6 1/2% European Notes were sold strictly to non-U.S. purchasers in
the form of bearer instruments in $50,000 increments. The 6 1/2% European Notes
and the Harken common stock issuable upon conversion of the 6 1/2% European
Notes have been or will be issued without registration under the United States
Securities Act of 1933 (the "Securities Act") pursuant to an exemption contained
in Regulation S promulgated under the Securities Act.
During the last half of 1996, holders of 6 1/2% European Notes totaling
$1,400,000 exercised their conversion option and such holders were issued
560,000 shares of Harken common stock. Subsequent to December 31, 1996, and as
of February 21, 1997, holders of 6 1/2% European Notes totaling an additional
$3,300,000 exercised their conversion option, which has resulted in the
additional issuance of 1,320,000 shares of Harken common stock.
Commissions and issuance costs associated with the 8% European Notes and
the 6 1/2% European Notes have been deferred and are included in Other Assets
and are amortized to interest expense over the period until conversion or
maturity of the European Notes. As European Notes are converted to Harken common
stock, a pro-rata portion of these deferred costs are charged to Additional
Paid-In Capital.
To the extent that proceeds invested in the Segregated Accounts at
December 31, 1995 are available under the above discussed Asset Value Coverage
Ratio limitations, such cash is included as a current asset in Cash in European
Segregated Account in the accompanying consolidated balance sheets. Segregated
Account cash that is not available as of December 31, 1995, due to the Asset
Value Coverage Ratio limitations, is reflected as Restricted Cash in European
Segregated Account in the accompanying consolidated balance sheets, and is a
non-current asset. All Segregated Account cash is reflected as a current asset
at December 31, 1996, as Harken has the intent and ability to convert all
outstanding 6 1/2% European Notes to Harken common stock prior to December 31,
1997.
The initial cash proceeds from the issuance of the European Notes are
not included in the Statement of Cash Flows because the proceeds are not
considered to be cash equivalents. Transfers of proceeds from
45
<PAGE> 46
the Segregated Accounts are included in cash flows from financing activities in
the accompanying consolidated statements of cash flows.
(8) 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.
At December 31, 1994, 186,760 shares of Series C Preferred outstanding
were held by Tejas and represented the only remaining Series C Preferred shares
outstanding. 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. In December 1995, Harken entered into a purchase, sale and exchange
agreement in which it exchanged the 1,000 shares of Tejas Preferred Stock it
held along with a note payable for $394,000 to Tejas for the 186,760 shares of
Series C Preferred. At December 31, 1995 and 1996, there are no remaining
outstanding shares of Series C Preferred.
(9) STOCKHOLDERS' EQUITY
Common Stock -- Harken currently has authorized 150,000,000 shares of
$.01 par common stock. At December 31, 1995 and 1996, Harken had issued
75,913,832 shares and 93,862,266 shares, respectively. Harken held 1,440,896 and
400,896 shares as treasury stock at a cost of $4,997,000 and $1,390,000 at
December 31, 1995 and 1996, respectively.
Acquisition of Additional Four Corners Property Interests -- In October
1994, Harken acquired an additional interest in the Four Corners Properties in
exchange for, among other consideration, 960,000 restricted shares of Harken
common stock. In May 1995, Harken acquired an additional interest in the Four
Corners Properties primarily in exchange for, among other consideration, 534,000
restricted shares of Harken common stock. In April 1996, Harken acquired an
additional interest in the Four Corners Properties primarily in exchange for,
among other consideration, 509,000 restricted shares of Harken common stock.
See Note 2 -- Acquisitions for further discussion.
Acquisition of Search Exploration, Inc. -- In May 1995, Harken
consummated the Merger with Search. See Note 2 -- Acquisitions for further
discussion. Pursuant to the terms of the Merger Agreement, a total of
approximately 2.2 million shares of Harken common stock were issued to the
common stockholders of Search, preferred stockholders of Search and certain
noteholders of Search. In connection with the Merger, Harken issued warrants
entitling the holders to purchase up to 732,771 shares of Harken common stock at
the exercise price of $1.82 per share. As of the October 30, 1996 expiration
date for these warrants, 713,021 shares of Harken common stock had been issued
upon exercise of such warrants.
Issuance of European Convertible Notes Payable -- At December 31, 1995,
$2,450,000 of the 8% European Notes had been converted into 1,633,327 shares of
Harken common stock. In 1996, all of the remaining outstanding 8% European Notes
were converted into 8,366,648 additional shares of Harken common stock. In
connection with the issuance of the 8% European Notes, Harken issued to the
placement agents for the 8% European Notes certain non-registered
non-transferrable stock purchase warrants to
46
<PAGE> 47
purchase one million shares of Harken common stock which are currently
exercisable by the holders thereof at any time on or before May 11, 1999 at an
exercise price of $1.50 per share. Also, Harken paid a fee of 92,308 shares of
Harken common stock to a financial advisor in connection with the 8% European
Notes and the market value of such shares as of the date issued was included as
deferred issuance costs in Other Assets in the accompanying consolidated balance
sheets.
In July 1996, Harken issued to qualified purchasers a total of $40
million in 6 1/2% European Notes which mature on July 30, 2000. The 6 1/2%
European Notes are convertible under certain terms into approximately 16,000,000
shares of Harken common stock. During the third quarter of 1996, holders of 6
1/2% European Notes totaling $1,400,000 exercised their conversion option and
such holders were issued 560,000 shares of Harken common stock. Subsequent to
December 31, 1996, and as of February 21, 1997, holders of 6 1/2% European Notes
totaling $3,300,000 exercised their conversion option, which has resulted in the
additional issuance of 1,320,000 shares of Harken common stock. In February
1997, Harken gave notice as required under the Trust Indenture that it had met
the market price criteria necessary to call for mandatory conversion of the 6
1/2% European Notes (see Note 7 -- European Convertible Notes Payable for
further discussion), therefore, at any time after July 30, 1997, Harken is able
to convert the 6 1/2% European Notes into shares of Harken common stock. Harken
intends to mandatorily convert all unconverted 6 1/2% European Notes into shares
of Harken common stock on July 31, 1997.
In connection with the issuance of the 6 1/2% European Notes, Harken
issued to the placement agents for the 6 1/2% European Notes certain
non-registered non-transferrable stock purchase warrants to purchase 1,280,000
shares of Harken common stock which are currently exercisable by the holders
thereof at any time on or before July 31, 1999 at an exercise price of $2.50 per
share.
Private Placements of Common Stock -- On March 1, 1995, Harken sold
600,000 shares of newly-issued Harken common stock to an institutional purchaser
in exchange for net proceeds of $657,000. Harken subsequently entered into an
agreement on April 7, 1995 to sell to this same institutional purchaser an
additional 600,000 newly-issued shares of Harken common stock in exchange for
net proceeds of $747,000. In July and August of 1995, Harken received additional
net proceeds of $654,000 and $757,000, respectively, related to the sale of a
combined total of 1,300,000 newly-issued shares of Harken common stock to
certain institutional or accredited purchasers. In November 1995, Harken
received an additional $1,633,000 related to the sale of 1,460,000 shares of
Harken common stock previously held as treasury stock to a certain institutional
or accredited purchaser. In March 1996, Harken received $1,289,000 related to
the sale of 1,040,000 shares of Harken common stock previously held as treasury
stock. In connection with certain of these placements, Harken issued to certain
financial advisors warrants to purchase an aggregate total of 410,000 shares of
Harken common stock at an average exercise price of $1.71 per share.
Acquisition of Texas Properties -- In October 1995, a wholly-owned
subsidiary of Harken paid as consideration three million shares of restricted
Harken common stock previously held as treasury stock in exchange for the
Yellowhouse Properties. As part of the purchase of these interests, Harken also
issued warrants to purchase one million additional shares of restricted Harken
common stock at $2 per share, and also issued 82,759 shares of restricted Harken
common stock previously held as treasury stock to a financial advisor as a fee
in connection with the acquisition.
In December 1995, Harken Exploration acquired certain interests in
producing properties located in the panhandle region of Texas ("Panhandle
Properties") in exchange for, among other consideration, 2.5 million shares of
Harken common stock and a $13 million note payable which was payable, at
Harken's
47
<PAGE> 48
option, in shares of Harken common stock. In July 1996, Harken Exploration
entered into an exchange agreement with the seller of the Panhandle Properties,
pursuant to which Harken issued 5,150,000 restricted shares of Harken common
stock in satisfaction of all obligations owed by the subsidiary to the seller
under the terms of the Panhandle Note. See Notes 2 and 6 -- Acquisitions and
Notes Payable and Long-Term Obligations for further discussion.
Acquisition of EnerVest Properties - On July 10, 1996, Harken
Exploration acquired the EnerVest Properties for a purchase price valued at
approximately $15,200,000 and the assumption of certain operational liabilities
relating to these properties. See Note 2 -- Acquisitions for further discussion.
The preliminary purchase price consisted of 1,550,000 shares of Harken common
stock (the "Tranche A Shares") issued after closing, $5,000,000 in cash payable
at closing, and an additional number of shares of Harken common stock to be
issued in the future as described below. Harken also issued to EnerVest warrants
to purchase, for a period of three years from closing, 300,000 restricted shares
of Harken common stock at an exercise price of $2.75 per share.
Pursuant to the EnerVest Agreement, upon the expiration of 180 days from
the date the registration statement is declared effective by the Securities and
Exchange Commission relating to the resale of the Tranche A Shares, Harken is
required to issue an additional 1,159,091 shares of Harken common stock (the
"Tranche B Shares") to EnerVest; provided, however, that if the sum of (i) the
actual gross proceeds realized by EnerVest from the sale of the Tranche A Shares
and (ii) the then market value of Tranche A Shares still held by EnerVest
(together, the "Tranche A Realized Proceeds") is less that $4,262,500, Harken is
required to issue such additional number of shares of Harken common stock (the
"Deficiency Shares"), in addition to the Tranche B Shares, having a market value
at the time of issuance equal to the difference between $4,262,500 and the
Tranche A Realized Proceeds. EnerVest has reported to Harken that the Tranche A
shares were sold by EnerVest for a total Tranche A Realized Proceeds of
approximately $3,650,000. In addition, at the time Harken is to issue the
Tranche B Shares, it will calculate the aggregate value of all adjustments that
are either identified and agreed to under the EnerVest Agreement or identified
but still contingent under the EnerVest Agreement. These adjustments will
include matters such as title defects, identification of unplugged uneconomic
wells, environmental matters and gas imbalances. The aggregate value of all such
adjustments that have been identified and agreed to will be offset against the
Tranche B Shares prior to issuance. The aggregate value, up to $500,000, of all
such adjustments that have been identified but are still contingent will be
evidenced by a portion of the Tranche B Shares which Harken will hold back from
issuance until such contingent matters are resolved. Harken expects that the
Tranche B Shares will be issued early in the second quarter of 1997. EnerVest
will also put $1,000,000 cash into an escrow account which may be offset or
drawn against by Harken to satisfy other defects identified by Harken under the
EnerVest Agreement.
Upon the expiration of 180 days from the sale of the Tranche B Shares
and the Deficiency Shares, Harken may be required to issue an additional number
of shares of Harken common stock (the "Tranche C Shares") if the sum of (i) the
actual proceeds realized by EnerVest from the sale of all of the shares of
Harken common stock sold by EnerVest up to such time and (ii) the then market
value of any shares of Harken common stock still held by EnerVest (together the
"Total Realized Proceeds") is less than $10,200,000 as adjusted for the defects
and adjustments raised by Harken. In such event, Harken shall be required to
issue the number of Tranche C Shares having a market value at the time of
issuance equal to the difference between $10,200,000 and the Total Realized
Proceeds.
48
<PAGE> 49
Palo Blanco Development Finance Agreements - In June 1996, Harken, along
with Harken de Colombia, Ltd. entered into separate Development Finance
Agreements with two investors. Under the terms of the agreements, the two
investors agreed to provide an aggregate of $2,500,000 to finance the drilling
of a well on the Palo Blanco prospect in the Alcaravan Association Contract
area. See Note 16 -- Commitments and Contingencies for further discussion of the
Alcaravan Association Contract. In return for the $2,500,000, the investors were
initially granted a beneficial interest in 40% of the net profits from the Palo
Blanco prospect which might have been received by Harken de Colombia, Ltd. In
1996, the investors exercised their rights under the agreement to convert
one-half of their beneficial interest into 599,988 shares of restricted Harken
common stock. Subsequent to December 31, 1996, the investors exercised their
right to convert the remaining portion of their beneficial interest into an
additional 599,988 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. Common stock
equivalents, contingently issuable shares and other potentially dilutive
securities are not included in the computation of earnings per share if the
effect of inclusion would be antidilutive. For purposes of calculating earnings
per share, the unconverted European Convertible Notes discussed above are
considered not to be common stock equivalents.
At December 31, 1996, Harken has the following outstanding warrants
available to be exercised (not in thousands):
<TABLE>
<CAPTION>
Year of Issuance Number of Shares Exercisable Price Expiration Date
- ------------------- ---------------- ----------- -------------- ---------------
<S> <C> <C> <C> <C>
1995 2,083,000 2,083,000 $1.50 to $2.00 1997 - 1999
1996 1,784,000 1,784,000 $1.75 to $2.75 1998 - 1999
</TABLE>
(10) STOCK OPTION PLAN
Harken has elected to follow Accounting Principles Board Opinion No. 25,
"Accounting for Stock Issued to Employees" ("APB 25") and related
Interpretations in accounting for its employee stock options because, as
discussed below, the alternative fair value accounting provided for under FASB
Statement No. 123, Accounting for Stock-Based Compensation", ("FAS 123")
requires use of option valuation models that were not developed for use in
valuing employee stock options. Under APB 25, because the exercise price of
Harken's employee stock options equals or exceeds the market price of the
underlying stock on the date of grant, no compensation expense is recognized.
Harken's 1993 Stock Option and Restricted Plan has authorized the grant
of options to Harken employees and directors for up to 4,000,000 shares of
Harken common stock. In addition, Harken's 1996 Stock Option and Restricted
Stock Plan has authorized the grant of an additional 670,000 shares of Harken
common stock. All options granted have 10 year terms and vest and become fully
exercisable at the end of 4 years of continued employment.
Pro forma information regarding net loss and loss per share is required
by FAS 123, and has been determined as if Harken had accounted for its employee
stock options under the fair value method of that Statement. The fair value for
these options was estimated at the date of grant using a Black-Scholes option
pricing model with the following weighted-average assumptions for 1995 and 1996,
respectively: risk-free
49
<PAGE> 50
interest rates of 7% and 6%; dividend yields of 0%; volatility factors of the
expected market price of Harken common stock of .779 and .614; and a
weighted-average expected life to the option of 4 years.
The Black-Scholes option valuation model was developed for use in
estimating the fair value of traded options which have no vesting restrictions
and are fully transferable. In addition, option valuation models require the
input of highly subjective assumptions including the expected stock price
volatility. Because Harken's employee stock options have characteristics
significantly different from those of traded options, and because changes in the
subjective input assumptions can materially affect the fair value estimate, in
management's opinion, the existing models do not necessarily provide a reliable
single measure of the fair value of its employee stock options.
For purposes of pro forma disclosures, the estimated fair value of the
options is amortized to expense over the options' vesting period. Harken's pro
forma information follows (in thousands except for earnings per share
information):
<TABLE>
<CAPTION>
Year Ended December 31,
-----------------------
1995 1996
-------- --------
<S> <C> <C>
Pro forma net loss $ (1,958) $ (929)
Pro forma loss per share $ (0.03) $ (0.01)
</TABLE>
The weighted average fair value of the options issued in 1996 was $1.30
per share underlying such option.
A summary of the Company's stock option activity, and related
information for the year ended December 31, 1996 follows (not in thousands):
<TABLE>
<CAPTION>
Year Ended December 31, 1996
----------------------------
Weighted-Average
Options Exercise Price
--------- ----------------
<S> <C> <C>
Outstanding-beginning of year 3,484,300 $1.76
Granted 1,740,000 $2.92
Exercised --
Forfeited --
Outstanding-end of year 5,224,300 $2.15
Exercisable at end of year 1,739,300 $1.77
</TABLE>
Exercise prices for options outstanding as of December 31, 1996 ranged
from $1.00 to $5.625.
(11) DISCONTINUED OPERATIONS
In May 1994, Harken 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
50
<PAGE> 51
in the accompanying financial statements. Such discontinued operations include
revenues of $1,053,000 for the year ended December 31, 1994. 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.
(12) INCOME TAXES
At December 31, 1996, Harken had available for federal income tax
reporting purposes, net operating loss (NOL) carryforward for regular tax
purposes of approximately $67,000,000 which expires in 1997 through 2011,
alternative minimum tax NOL carryforward of approximately $57,000,000 which
expires in 1997 through 2011, investment tax credit carryforward of
approximately $857,000 which expires in 1997 through 2002, statutory depletion
carryforward of approximately $1,800,000 which does not have an expiration date,
and a net capital loss carryforward of approximately $12,400,000 which expires
in 2007 through 2011. Approximately $16,000,000 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.
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.
At December 31, 1995, total deferred tax liabilities, relating primarily
to property and equipment, increased to approximately $7,528,000 while total
deferred tax assets, primarily related to the net operating loss carryforward,
increased to approximately $22,364,000. The resulting decrease in net deferred
tax assets was offset by a corresponding decrease in the valuation allowance to
approximately $14,836,000 at December 31, 1995, resulting in no impact to
Harken's results of operations.
Total deferred tax liabilities, relating primarily to property and
equipment as of December 31, 1996, were approximately $3,216,000. Total deferred
tax assets, primarily related to the net operating loss carryforward, were
approximately $23,136,000 at December 31, 1996. The total net deferred tax asset
is offset by a valuation allowance of approximately $19,920,000 at December 31,
1996.
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.
(13) RELATED PARTY TRANSACTIONS
In September 1989, Harken's Board of Directors approved a loan to an
officer in the amount of $520,000. The note bore interest at the Broker Loan
Rate plus 1/2% and was due October 2, 1999. The note was 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, was 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
51
<PAGE> 52
such installment. Harken included each installment of this forgiveness totaling
$232,000 per year in general and administrative expense during the years ended
December 31, 1994, 1995 and 1996.
See Notes 4, 6 and 8 -- Investments in Former Subsidiaries, Notes
Payable and Long-Term Obligations and Redeemable Preferred Stock for other
related party transactions.
(14) OTHER INFORMATION
Quarterly Data -- (Unaudited) -- The following tables summarize selected
quarterly financial data for 1995 and 1996 expressed in thousands, except per
share amounts.
<TABLE>
<CAPTION>
Quarter Ended
------------------------------------------------------- Total
March 31 June 30 September 30 December 31 Year
----------- ---------- -------------- -------------- -----------
<S> <C> <C> <C> <C> <C>
1995
Revenues $ 1,599 $ 1,782 $ 1,800 $ 2,290 $ 7,471
Gross profit 751 1,082 1,013 979 3,825
Loss from continuing operations (139) (158) (282) (1,046) (1,625)
Net loss (139) (158) (282) (1,046) (1,625)
Per common share
Loss from continuing operations $ (0.00) $ (0.00) $ (0.01) $ (0.01) $ (0.02)
Net loss (0.00) (0.00) (0.01) (0.01) (0.02)
1996
Revenues $ 2,341 $ 2,590 $ 4,115 $ 4,875 $ 13,921
Gross profit 1,237 1,548 2,337 2,781 7,903
Income (loss) from continuing operations (296) 68 45 (158) (341)
Net income (loss) (296) 68 45 (158) (341)
Per common share
Income (loss) from continuing operations $ (0.00) $ 0.00 $ 0.00 $ (0.00) $ (0.00)
Net income (loss) (0.00) 0.00 0.00 (0.00) (0.00)
</TABLE>
Significant Customers -- There were two oil purchasers which represented
38% and 16% of consolidated revenues from continuing operations in 1994. In
1995, a single oil purchaser represented 47% of consolidated revenues from
continuing operations. In 1996, two oil purchasers and a gas purchaser
represented 27%, 16% and 10%, respectively, of consolidated revenues from
continuing operations. Harken has secured and maintains letters of credit with
two of these significant purchasers. In addition, management does not feel that
the loss of a significant purchaser would significantly impact the operations of
Harken due to the availability of other potential purchasers for its oil and gas
production.
52
<PAGE> 53
(15) OIL AND GAS DISCLOSURES
Costs Incurred in Property Acquisition, Exploration and Development
Activities:
<TABLE>
<CAPTION>
Year Ended December 31,
--------------------------
1994 1995 1996
------- ------- --------
<S> <C> <C> <C>
DOMESTIC COSTS INCURRED:
Acquisition of properties
Evaluated $ 1,464 $22,054 $16,316
Unevaluated -- 6,313 --
Exploration -- 696 162
Development 1,428 1,816 2,418
------- ------- -------
Total domestic costs incurred $ 2,892 $30,879 $18,896
======= ======= =======
INTERNATIONAL COSTS INCURRED:
Acquisition of properties
Evaluated $ -- $ -- $ --
Unevaluated -- -- --
Exploration 830 3,657 9,161
Development -- -- --
------- ------- -------
Total international costs incurred $ 830 $ 3,657 $ 9,161
======= ======= =======
</TABLE>
International costs incurred includes approximately $716,000, $3,354,000
and $9,161,000 during 1994, 1995 and 1996, respectively, related to Harken's
Colombian operations, and approximately $114,000 and $303,000 during 1994 and
1995, respectively, related to Harken's Bahrain operations.
53
<PAGE> 54
Capitalized Costs Relating to Oil and Gas Producing Activities:
<TABLE>
<CAPTION>
December 31,
------------------------------
1994 1995 1996
-------- -------- --------
<S> <C> <C> <C>
CAPITALIZED COSTS:
Unevaluated international properties not being amortized $ 1,626 $ 4,866 $ 3,656
Unevaluated domestic properties not being amortized 5,820 11,117 6,610
Evaluated international properties not being amortized -- -- 5,802
Evaluated domestic properties being amortized 13,944 39,526 60,188
-------- -------- --------
Total capitalized costs 21,390 55,509 76,256
Less accumulated depreciation and amortization (2,877) (4,691) (8,069)
-------- -------- --------
Net capitalized costs $ 18,513 $ 50,818 $ 68,187
======== ======== ========
</TABLE>
Unevaluated international properties at December 31, 1994 includes
approximately $114,000 related to Harken's Bahrain operations. All other
international property costs relate to Harken's Colombian operations, and
represents significantly all of the identifiable assets associated with Harken's
Colombian operations.
Oil and Gas Reserve Data -- (Unaudited) -- The following information is
presented with regard to Harken's proved oil and gas reserves. Such reserve
information excludes HSW's share in the future cash flows from the Aneth Gas
Plant. The largest portion of Harken's proved reserves relate to its domestic
operations. The reserve values reflected in the following reserve disclosures
are based on prices received as of year end. During 1995 and 1996, Harken
consummated certain acquisition transactions resulting in significant additions
to its domestic proved oil and gas reserves. (See Note 2 -- Acquisitions for
further discussion). The drilling of the Torcaz #2 exploratory well in Colombia
has resulted in the addition of approximately 1,469,000 equivalent barrels of
proved reserves as of December 31, 1996 in the Torcaz field within the Bocachico
Contract area. The signing of the Bolivar Association Contract during 1996 also
resulted in the addition of previously established Colombian proved reserves as
of December 31, 1996. The majority of all Colombian reserves represent proved
undeveloped reserves to be developed by Harken in the future. As of December 31,
1996, Harken has included no proved reserves related to its Cambulos or
Alcaravan Association Contracts. As Harken identifies proved reserves associated
with its Cambulos or Alcaravan Association Contracts, or identifies proved
reserves from additional prospects within its Bocachico or Bolivar Association
Contracts, such reserves will be added in the year of their discovery. For
further discussion of Harken's Colombia operations, see Note 16 -- Commitments
and Contingencies.
54
<PAGE> 55
<TABLE>
<CAPTION>
(UNAUDITED)
------------------------------------------------------------------------------------
United States Colombia Total Worldwide
-------------------------- -------------------------- --------------------------
Oil Gas Oil Gas Oil Gas
----------- ----------- ------------ ----------- ------------ -----------
(Barrels) (Mcf) (Barrels) (Mcf) (Barrels) (Mcf)
----------- ----------- ------------ ----------- ------------ -----------
(IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C>
PROVED RESERVES:
AS OF DECEMBER 31, 1993 1,035 4,970 -- -- 1,035 4,970
Extensions and discoveries -- -- -- -- -- --
Revisions 186 476 -- -- 186 476
Production (158) (426) -- -- (158) (426)
Purchases of reserves in place 458 2,128 -- -- 458 2,128
------- ------- ------- ------- ------- -------
AS OF DECEMBER 31, 1994 1,521 7,148 -- -- 1,521 7,148
Extensions and discoveries 70 20 -- -- 70 20
Revisions (43) (3,241) -- -- (43) (3,241)
Production (217) (615) -- -- (217) (615)
Purchases of reserves in place 2,192 25,891 -- -- 2,192 25,891
------- ------- ------- ------- ------- -------
AS OF DECEMBER 31, 1995 3,523 29,203 -- -- 3,523 29,203
Extensions and discoveries 5 2,401 1,426 257 1,431 2,658
Revisions (22) (3,117) -- -- (22) (3,117)
Production (370) (1,409) -- -- (370) (1,409)
Purchases of reserves in place 2,216 4,770 611 2,055 2,827 6,825
------- ------- ------- ------- ------- -------
AS OF DECEMBER 31, 1996 5,352 31,848 2,037 2,312 7,389 34,160
======= ======= ======= ======= ======= =======
PROVED DEVELOPED RESERVES AT:
December 31, 1994 915 2,207 -- -- 915 2,207
December 31, 1995 2,147 8,466 -- -- 2,147 8,466
December 31, 1996 3,757 11,822 252 45 4,009 11,867
</TABLE>
55
<PAGE> 56
Standardized Measure of Discounted Future Net Cash Flows Relating to Proved Oil
and Gas Reserves:
<TABLE>
<CAPTION>
(UNAUDITED)
----------------------------------------
Total
United States Colombia Worldwide
------------- -------------- ---------
(IN THOUSANDS)
<S> <C> <C> <C>
DECEMBER 31, 1995:
Future cash inflows $ 154,717 $ -- $ 154,717
Production costs (44,804) -- (44,804)
Development costs (10,720) -- (10,720)
--------- --------- ---------
Future net inflows before income tax 99,193 -- 99,193
Future income taxes -- -- --
--------- --------- ---------
Future net cash flows 99,193 -- 99,193
10% discount factor (40,417) -- (40,417)
--------- --------- ---------
Standardized measure of discounted future
net cash flows $ 58,776 $ -- $ 58,776
========= ========= =========
DECEMBER 31, 1996:
Future cash inflows $ 309,820 $ 41,859 $ 351,679
Production costs (80,869) (6,770) (87,639)
Development costs (13,398) (8,737) (22,135)
--------- --------- ---------
Future net inflows before income tax 215,553 26,352 241,905
Future income taxes -- (7,741) (7,741)
--------- --------- ---------
Future net cash flows 215,553 18,611 234,164
10% discount factor (85,750) (6,171) (91,921)
--------- --------- ---------
Standardized measure of discounted future
net cash flows $ 129,803 $ 12,440 $ 142,243
========= ========= =========
</TABLE>
56
<PAGE> 57
Changes In Standardized Measure of Discounted Future Net Cash Flows Relating to
Proved Oil and Gas Reserves:
<TABLE>
<CAPTION>
(UNAUDITED)
-------------------------------------
1994 1995 1996
--------- -------------- ---------
<S> <C> <C> <C>
Worldwide (in thousands)
Standardized measure -- beginning of year $ 8,230 $ 11,712 $ 58,776
Increase (decrease)
Sales, net of production costs (2,398) (3,224) (7,577)
Net change in prices, net of production costs 364 1,045 51,070
Development costs incurred -- 391 949
Change in future development costs (208) 1,858 209
Change in future income taxes -- -- (5,465)
Revisions of quantity estimates 1,450 (3,420) (7,791)
Accretion of discount 823 1,171 5,878
Changes in production rates, timing and other (150) (1,361) 1,227
Extensions and discoveries, net of future costs -- 792 12,475
Purchases of reserves-in-place 3,601 49,812 32,492
--------- --------- ---------
Standardized measure -- end of year $ 11,712 $ 58,776 $ 142,243
========= ========= =========
</TABLE>
(16) COMMITMENTS AND CONTINGENCIES
Colombian Operations-Alcaravan Contract -- During the third quarter of
1992, Harken de Colombia, Ltd., a wholly-owned subsidiary of Harken, was awarded
the exclusive right to explore for, develop and produce oil and gas throughout
the Alcaravan area of Colombia. The Alcaravan area 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 (the "Alcaravan Contract") which currently requires Harken
to conduct a seismic and exploratory drilling program on approximately 210,000
acres in the Alcaravan area during the initial six years of the Alcaravan
Contract. At the end of each of the first six years of the Alcaravan Contract,
Harken has the option to withdraw from the Alcaravan Contract or to commit to
the next year's work requirements. If during the initial six years of the
Alcaravan Contract, Harken discovers one or more fields capable of producing oil
or gas in quantities that are economically exploitable and Ecopetrol agrees that
such field is economically exploitable (a "commercial discovery"), the term of
the Alcaravan Contract will be extended for a period of 22 years from the date
of such commercial discovery. Harken has completed all work requirements for the
first and second years of the Alcaravan Contract.
Upon a discovery of a field capable of commercial production, and upon
commencement of production from that commercial field, Ecopetrol will reimburse
Harken for 50% of Harken's successful well costs expended up to the point of
declaration of a commercial discovery. Production from the field following
57
<PAGE> 58
a commercial discovery will be allocated as follows: Ecopetrol, on behalf of the
Colombian government, will receive a 20% royalty interest in all production and
all production (after royalty payments) will be allocated 50% to Ecopetrol and
50% to Harken until cumulative production in such field reaches 60 million
barrels of oil, after which Ecopetrol's share of production will progressively
increase and Harken's share will progressively decrease until cumulative
production from the field reaches 150 million barrels of oil, and thereafter all
production will be allocated 70% to Ecopetrol and 30% to Harken. If more than
one commercially declared field is discovered on the Alcaravan area, the
production sharing percentages applicable to the field with the greatest
cumulative production will be applied to all fields within the Alcaravan area.
After declaration of a commercial discovery, Harken and Ecopetrol will be
responsible for all future development costs and operating expenses in direct
proportion to their interest in production.
In February 1995, Harken drilled the first well on the Alcaravan
acreage, the Alcaravan #1. The well was initially determined not to be
economically productive, however, Harken intends to re-enter the well during the
next contract year to finalize the evaluation of this well. The drilling of this
well satisfied the contractual obligations of the second year of the Alcaravan
Contract.
During 1996, Harken renegotiated certain terms of the Alcaravan Contract
with Ecopetrol and amended the original contract to provide for an extension of
time to fulfill the work requirements corresponding to the third contractual
year of the Alcaravan Association Contract. The amended third year contractual
work obligations included Harken drilling only one exploratory well and
returning approximately 40% of the original acreage contracted. Also, the
amendment included a new term until March 13, 1997 to drill the exploratory well
corresponding to the third contractual year of the Alcaravan Contract. Harken
spudded the Estero #1 exploratory well located on the Palo Blanco prospect
within the Alcaravan area in early February 1997. The Estero #1 well is expected
to be drilled to a depth of 9,100 feet to test the Carbonera, Mirador,
Guadalupe, Gacheta and Ubaque formations. Harken anticipates that the Estero #1
well will take approximately 30 days to reach total depth and an additional 20
days of testing before results of the well will be available.
During September 1996, Harken de Colombia, Ltd. entered into an
operating agreement (the "Rochester Agreement") with Rochester Minerals, Inc.
("Rochester", a Canadian corporation) pursuant to which Rochester agreed to pay
33 1/3% of the aggregate costs of the initial well to be drilled on the Palo
Blanco prospect, the Estero #1 well, in conjunction with a non-refundable
project contribution of $500,000. In exchange, Rochester, upon its full
performance, will acquire a beneficial interest equal to 25% of the interest
held by Harken de Colombia, Ltd. in the Alcaravan contract, except as it
relates to the area around the Alcaravan #1. As of December 31, 1996, Harken had
received from Rochester $1,050,000 due pursuant to the Rochester Agreement,
including the $500,000 project contribution, and subsequent to December 31,
1996, Harken received an additional $80,000 due pursuant to the Rochester
Agreement.
In January 1997, Harken de Colombia, Ltd. entered into a financing
agreement ("the Parkcrest Financing Agreement") with Parkcrest Exploration, Ltd.
("Parkcrest", a Canadian corporation) which covers the Palo Blanco prospect, and
includes options on additional prospects, all located within the Alcaravan
Contract area. Under the terms of the Parkcrest Financing Agreement, Parkcrest
paid a project fee of $250,000 to Harken and prepaid 33 1/3% of the estimated
drilling and completion costs of the initial well to be drilled on the Palo
Blanco prospect in exchange for a beneficial interest equal to 25% of the
interest held by Harken de Colombia, Ltd. in the Palo Blanco prospect. In
January 1997, Harken received from Parkcrest approximately $783,000 representing
the initial $250,000 payment and the prepayment of Parkcrest's share of the
estimated drilling costs of the first well to be drilled in the Palo Blanco
prospect, the Estero #1 well. In February 1997, Harken also received from
Parkcrest approximately $301,000 representing the prepayment
58
<PAGE> 59
of Parkcrest's share of the estimated completion and contingency costs of the
Estero #1 well to be drilled on the Palo Blanco prospect.
Bocachico Contract -- In January 1994, Harken de Colombia, Ltd. signed
its second Association Contract (the "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 Magdalena
Valley of Central Colombia. During the initial six year term of the Bocachico
Contract, if Harken makes a commercial discovery on one or more prospect areas
in the contract area, the contract covering such prospect area(s) will be
further extended for a period of 22 years from the date of any commercial
discovery of oil and/or gas. The production sharing arrangements under the
Bocachico Contract are substantially similar to those under the Alcaravan
Contract.
During the first year of the Bocachico Contract, Harken conducted
seismic activities on the lands covered by this contract. During each of the
second through the sixth contract years, Harken may elect to continue the
contract by committing to the drilling of at least one well during each contract
year.
On January 19, 1995, after completing an engineering feasibility study,
Harken notified Ecopetrol of Harken's commitment to drill a well under the
Bocachico Contract, and thereby extended the Bocachico Contract into its second
year. Harken spudded its first well on this Bocachico Contract area, named the
Torcaz #2 well, on July 18, 1996. This well was completed and initially tested
at the rate of 635 barrels per day. Harken has encountered numerous mechanical
problems with the down-hole submersible electric pump compounded by apparent
reservoir formation damage which may have occurred in the completion process.
Harken is carrying out recompletion efforts on this well as well as further
remedial work.
On February 27, 1996, Harken committed to the drilling of a second well
thereby extending the Bocachico Contract into its third year and in February
1997 received an extension of the third year of the Bocachico Contract to May 5,
1997 to complete this second well. Harken expects to spud its second well
related to the Bocachico Contract area, the Torcaz #3, during March 1997. Harken
has further currently identified eight additional potential well locations and
has filed applications for environmental permits on two additional well
locations within the Bocachico Contract area.
In October 1995, Harken entered into a Development Finance Agreement
(the "Rio Negro Development Finance Agreement") with Arbco Associates L.P.,
Offense Group Associates L.P., Kayne Anderson Nontraditional Investments L.P.
and Opportunity Associates L.P. (collectively, the "Rio Negro Investors"),
pursuant to which the Rio Negro Investors agreed to provide up to $3,500,000 to
Harken to finance a portion of the drilling of two wells, including the Torcaz
#2 well, on the Rio Negro prospect in the Bocachico Contract area in exchange
for the right to receive future payments from Harken equal to 40% of the net
profits that Harken de Colombia, Ltd. may derive from the sale of oil and gas
produced from the Rio Negro prospect (the "Participation") if the planned
drilling on that prospect is successful. Pursuant to the Rio Negro Development
Finance Agreement, Harken is obligated to drill two wells on the Rio Negro
prospect. The drilling of the Torcaz #3 well which is anticipated to spud in
March 1997 will fulfill this commitment by Harken. As of December 31, 1996,
Harken had requested and received the entire $3,500,000 pursuant to the Rio
Negro Development Finance Agreement, and has reflected such amount as a
reduction to its investment in Colombian oil and gas properties in the
accompanying consolidated balance sheet.
Pursuant to the Rio Negro Development Finance Agreement, the Rio Negro
Investors have the right at any time prior to January 11, 1998 (the "Commitment
Date"), to convert all or part of the Participation
59
<PAGE> 60
into shares of Series D Preferred Stock of Harken (the "Preferred Stock"), and
Harken likewise has the right, exercisable during a 10 day period following the
Commitment Date, to convert up to 75% of the Participation into shares of
Preferred Stock if the Rio Negro Investors have not previously elected to
convert all of such Participation. If Harken exercises its right to convert the
Participation into Preferred Stock, the Rio Negro Investors at that time can
elect to receive cash in lieu of Preferred Stock equal to the amount of the
balance of the remaining unexchanged Participation plus an additional amount
computed at a 25% annual rate of return. In addition, the Rio Negro Investors
may then elect to further convert any remaining portion of the Participation
into additional shares of Preferred Stock. The shares of Preferred Stock which
may be issued will pay dividends at an annual rate of 15% and are redeemable by
Harken without premium except for accrued unpaid dividends at any time after the
Commitment Date, and must be redeemed by Harken no later than October 12, 2000.
A failure by Harken to timely pay dividends due under this Preferred Stock for
three quarters or to redeem such Preferred Stock when due would give rise to a
right exercisable on behalf of the Rio Negro Investors to elect one director to
Harken's Board of Directors.
Playero Contract -- In December 1994, Harken de Colombia, Ltd. signed
its third Association Contract (the "Playero Contract") with Ecopetrol, covering
the Playero Contract area located in the Llanos Basin of Colombia. In May 1996,
Harken elected not to commit to drill a well in the Playero Contract area,
thereby allowing the Playero Contract to expire under its own terms. Harken
recognized an impairment in the carrying value of this investment of $19,000
during the first quarter of 1996 which represented Harken's total investment in
the Playero Contract. The valuation adjustment, which totals $19,000, is
included in Interest and Other Expense in the accompanying consolidated
statement of operations.
Cambulos Contract -- In September 1995, Harken de Colombia, Ltd. signed
an additional Association Contract (the "Cambulos Contract") with Ecopetrol,
covering the Cambulos Contract area. Under the Cambulos Contract, Harken has
acquired the exclusive rights to conduct exploration activities in the Cambulos
Contract area, which covers approximately 300,000 acres in the Middle Magdalena
Valley of Central Colombia.
During the first two years of the Cambulos Contract, Harken is required
to conduct geologic studies on the lands covered by this contract, including
reprocessing of at least 400 kilometers of existing seismic data and the
acquisition of at least 90 kilometers of new seismic data. As of December 31,
1996, Harken has completed a preliminary environmental study for the Cambulos
Contract area and is currently conducting the obligatory work program required
during the first two years of the Cambulos Association contract. During each of
the third through the sixth contract years, Harken may elect to continue the
contract by committing to the drilling of at least one well during each contract
year.
If during the initial six years of the Cambulos Contract, Harken
discovers a field capable of commercial production of oil or gas, the term of
the Cambulos Contract will be extended for a period of 22 years from the date of
such commercial discovery. Upon a commercial discovery and at the initiation of
production from the commercial field, Harken will be reimbursed by Ecopetrol for
50% of all seismic costs and dry well costs incurred prior to the point at which
a declaration of a commercial discovery is made in addition to being reimbursed
for 50% of its successful direct exploratory well costs expended up to the point
of declaration of a commercial discovery. Production from a commercial discovery
will be allocated as follows: Ecopetrol, on behalf of the Colombian government,
will receive a 20% royalty interest in all production, and all production (after
royalty payments) will be allocated 50% to Ecopetrol and 50% to Harken until
cumulative production from all fields in the Cambulos acreage reaches 60 million
barrels of oil, after which Ecopetrol's share of production will increase
progressively to 75% and Harken's share will decrease progressively to 25%
determined by a formula based on Harken's recovery of its total expenditures
60
<PAGE> 61
under the Cambulos Contract. After a declaration of a commercial discovery,
Harken and Ecopetrol will be responsible for all future development costs and
operating expenses in direct proportion to their interest in production.
Harken plans to drill its first exploratory well on the Cambulos
Contract area in the early fall of 1997.
Bolivar Contract -- In May 1996, Harken de Colombia, Ltd. signed an
additional Association Contract (the "Bolivar Contract") with Ecopetrol,
covering the Bolivar Contract area. Under the Bolivar Contract, Harken has
acquired the exclusive rights to conduct exploration activities in the Bolivar
Contract area, which covers approximately 250,000 acres in the Northern Middle
Magdalena Valley of Central Colombia.
During the first two years of this Bolivar Contract, Harken's work
program will consist of preparing an engineering study of the Buturama and
Totumal fields located on and adjacent to this acreage, the reprocessing of 350
kilometers of existing seismic data and the acquisition of 100 kilometers of new
seismic data on this contract area. During each of the third through the sixth
contract years, Harken may elect to continue the contract by committing to the
drilling of at least one well during each contract year. The production sharing
arrangements under the Bolivar Contract are substantially similar to those under
the Cambulos Contract.
Harken intends to drill its first exploratory well on the Bolivar
Contract area in the summer of 1997.
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. In 1992 and 1993, HBOC
drilled two exploratory wells, neither of which discovered commercial quantities
of oil or gas. In January 1996, the term of the production sharing agreement
expired of its own accord. Harken had negotiated with BANOCO to extend the term
of the production sharing agreement and expand the acreage covered thereby,
however, Harken was unable to identify a joint venture partner to share in the
exploration of the production sharing agreement acreage.
Other -- Harken leases its corporate and certain other office space and
certain field operating offices. Total office and operating lease expense during
1994, 1995 and 1996 was $510,000, $442,000 and $359,000, 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, 1996, net of
sublease arrangements, are as follows:
<TABLE>
<CAPTION>
Year Amount
- --------------- ---------
<S> <C>
1997 $ 301
1998 271
1999 271
2000 4
2001 --
Thereafter --
---------
Total minimum payments required $ 847
=========
</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
61
<PAGE> 62
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.
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
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 and a Phase II environmental investigation was undertaken. A
closure plan is being negotiated with the EPA.
The prior owner of the Aneth Gas Plant facility, El Paso Natural Gas,
has agreed to accept financial responsibility for a portion of the remediation
work. Texaco and the other current plant owners, including HSW, have entered
into a formal agreement with the prior owner to allocate costs between
remediation work that is mandated by the EPA and other remediation work that is
determined to be carried out by the parties. The prior owner will bear
approximately 86% of the costs of mandated remediation as well as certain other
related expenses. The prior owner will not be responsible for other remediation
work that does not fall within the mandated category. At this time, however, it
is impossible for HSW to accurately estimate the costs of the cleanup at the
Aneth Gas Plant facility or the amount of such total costs the indemnification
from the prior owner will cover for the mandated remediation work. Harken has
accrued a contingency reserve of $219,000 at December 31, 1996 for management's
best estimate of its share of remediation expenditures.
Harken has accrued approximately $1,605,000 at December 31, 1996
relating to other operational or regulatory contingent liabilities related to
Harken's domestic operations. Harken and its subsidiaries currently are involved
in various lawsuits and other contingencies, including the guarantee of certain
lease obligations of a former subsidiary, which in management's opinion, will
not result in significant loss exposure to Harken.
Search Acquisition Corp., a wholly-owned subsidiary of Harken, has been
named as a defendant in a lawsuit by certain parties. On February 28, 1996, the
court granted Search Acquisition's motion for summary judgement. Petrochemical
has appealed the decision of the trial court to the Texas Fifth District Court
of Appeals. Although the ultimate outcome of this litigation is uncertain,
Harken believes that any liability to Harken as a result of this litigation will
not have a material adverse effect on Harken's financial condition.
62
<PAGE> 63
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
See "Item 1. Business" above for a discussion of the Executive
Officers of Harken. Reference is made to the material under the caption
"Election of Directors" in the Registrant's definitive Proxy Statement to be
filed on or before April 30, 1997 pursuant to Regulation 14A in connection with
its Annual Meeting of Stockholders to be held in June 1997, which is
incorporated herein by reference.
ITEM 11. EXECUTIVE COMPENSATION
Reference is made to the material under the caption "Compensation of
Executive Officers" in the Registrant's definitive Proxy Statement to be filed
on or before April 30, 1997 pursuant to Regulation 14A in connection with its
Annual Meeting of Stockholders to be held in June 1997, which is incorporated
herein by reference.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS
Reference is made to the material under the caption "Ownership of Common
Stock" in the Registrant's definitive Proxy Statement to be filed on or before
April 30, 1997 pursuant to Regulation 14A in connection with its Annual Meeting
of Stockholders to be held in June 1997, which is incorporated herein by
reference.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
Reference is made to the material under the caption "Certain
Transactions" in the Registrant's definitive Proxy Statement to be filed on or
before April 30, 1997 pursuant to Regulation 14A in connection with its Annual
Meeting of Stockholders to be held in June 1997, which is incorporated herein by
reference.
63
<PAGE> 64
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K
(a) The following documents are filed as a part of this report:
(1) Financial Statements included in PART II of this report:
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
Harken Energy Corporation and Subsidiaries
-- Report of Independent Public Accountants................................... 30
-- Selected Financial Information and Other Data for the five years ended
December 31, 1996......................................................... 18
-- Consolidated Balance Sheets -- December 31, 1995 and 1996.................. 31
-- Consolidated Statements of Operations for the three years ended
December 31, 1996 ...................................................... 32
-- Consolidated Statements of Stockholders' Equity for the three years ended
December 31, 1996....................................................... 33
-- Consolidated Statements of Cash Flows for the three years ended
December 31, 1996....................................................... 34
-- Notes to Consolidated Financial Statements................................. 35
</TABLE>
(2) The information required by Schedule I is either provided in the
related financial statements or in a note thereto, or is not
applicable to the Company. The information required by all other
Schedules is not applicable to the Company.
(3) Exhibits
3.1 Certificate of Incorporation of Harken Energy Corporation as
amended (filed as Exhibit 3.1 to Harken's Annual Report on Form
10-K for fiscal year ended December 31, 1989, File No.
0-9207, and incorporated by reference herein).
3.2 Amendment to Certificate of Incorporation of Harken Energy
Corporation (filed as Exhibit 28.8 to the Registration Statement
on Form S-1 of Tejas Power Corporation, file No. 33-37141, and
incorporated by reference herein).
3.3 Amendment to the Certificate of Incorporation of Harken Energy
Corporation (filed as Exhibit 3 to Harken's Quarterly Report on
Form 10-Q for fiscal quarter ended March 31, 1991, File No.
0-9207, and incorporated by reference herein).
3.4 Amendments to the Certificate of Incorporation of Harken Energy
Corporation (filed as Exhibit 3 to Harken's Quarterly Report on
Form 10-Q for fiscal quarter ended June 30, 1991, File No.
0-9207, and incorporated by reference herein).
3.5 Amendments to the Certificate of Incorporation of Harken Energy
Corporation.
64
<PAGE> 65
3.6 Bylaws of Harken Energy Corporation, as amended (filed as
Exhibit 3.2 to Harken's Annual Report on Form 10-K for fiscal
year ended December 31, 1989, File No. 0-9207, and incorporated
by reference herein).
4.1 Form of certificate representing shares of Harken common stock,
par value $.01 per share (filed as Exhibit 1 to Harken's
Registration Statement on Form 8-A, File No. 0-9207, and
incorporated by reference herein).
4.2 Certificate of Designations, Powers, Preferences and Rights of
Series A Cumulative Convertible Preferred Stock, $1.00 par
value, of Harken Energy Corporation (filed as Exhibit 4.1 to
Harken's Annual Report on Form 10-K for the fiscal year ended
December 31, 1989, File No. 0-9207, and incorporated herein by
reference).
4.3 Certificate of Designations, Powers, Preferences and Rights of
Series B Cumulative Convertible Preferred Stock, $1.00 par
value, of Harken Energy Corporation (filed as Exhibit 4.2 to
Harken's Annual Report on Form 10-K for the fiscal year ended
December 31, 1989, File No. 0-9207, and incorporated herein by
reference).
4.4 Certificate of the Designations, Powers, Preferences and Rights
of Series C Cumulative Convertible Preferred Stock, $1.00 par
value of Harken Energy Corporation (filed as Exhibit 4.3 to
Harken's Annual Report on Form 10-K for fiscal year ended
December 31, 1989, File No. 0-9207, and incorporated by
reference herein).
4.5 Certificate of the Designations of Series D Preferred Stock,
$1.00 par value of Harken Energy Corporation (filed as Exhibit
4.3 to Harken's Quarterly Report on Form 10-Q for the fiscal
quarter ended September 30, 1995, File No. 0-9207, and
incorporated by reference herein).
10.1 Seventh Amendment and Restatement of Harken's Amended Stock
Option Plan (filed as Exhibit 10.1 to Harken's Annual Report on
Form 10-K for the fiscal year ended December 31, 1991, File No.
0-9207, and incorporated by reference herein).
10.2 Amended and Restated Non-Qualified Incentive Stock Option Plan
of Harken adopted by Harken's stockholders on February 18, 1991
(filed as Exhibit 10.2 to Harken's Annual Report on Form 10-K
for the fiscal year ended December 31, 1991, File No. 0-9207,
and incorporated by reference herein).
10.3 Harken Energy Corporation 401(k) Savings Plan (filed as Exhibit
10.1 to Harken's Registration Statement (Registration No.
33-52874), and incorporated by reference herein).
10.4 Tax Sharing Agreement among Harken and certain subsidiaries of
Harken (filed as Exhibit 10.53 to the Registration Statement on
Form S-1, of E-Z Serve and Tejas (Registration No. 33-37141),
and incorporated by reference herein).
10.5 Master Intercompany Agreement among Harken, Harken Marketing
Company, and E-Z Serve (filed as Exhibit 10.54 to the
Registration Statement on Form S-1, of E-Z Serve and Tejas
(Registration No. 33-37141), and incorporated by reference
herein).
65
<PAGE> 66
10.6 Master Intercompany Agreement between Harken and Tejas (filed as
Exhibit 10.55 to the Registration Statement on Form S-1, of E-Z
Serve and Tejas (Registration No. 33-37141), and incorporated by
reference herein).
10.7 Litigation, Indemnification and Contribution Agreement among
Harken, E-Z Serve, and Harken Marketing Company (filed as
Exhibit 10.56 to the Registration Statement on Form S- 1, of E-Z
Serve and Tejas (Registration No. 33-37141), and incorporated by
reference herein).
10.8 Litigation, Indemnification and Contribution Agreement between
Harken and Tejas (filed as Exhibit 10.57 to the Registration
Statement on Form S-1, of E-Z Serve and Tejas (Registration No.
33-37141), and incorporated by reference herein).
10.9 Form of Advancement Agreement dated September 13, 1990, between
Harken and each director of Harken (filed as Exhibit 10.38 to
Harken's Annual Report on Form 10-K for the fiscal year ended
December 31, 1989, File No. 0-9207, and incorporated by
reference herein).
10.10 Operating Agreement between Chuska Energy Corporation and the
Navajo Tribe of Indians dated February 18, 1987, and effective
July 20, 1987 (filed as Exhibit 10(b) to Chuska Energy
Corporation's Form 10 - General Form for Registration of
Securities (the "Chuska Form 10"), and incorporated by reference
herein).
10.11 Operating Agreement between Chuska Energy Corporation and the
Navajo Tribe of Indians dated July 28, 1983, and effective
August 26, 1983 and First Addendum thereto (filed as Exhibit
10(a) to Chuska's Form 10, and incorporated by reference
herein).
10.12 Agreement dated and effective October 22, 1992, among Donald
W. Raymond, Harvey V. Risien, Jr., Chuska Energy Company and
Western Gas Resources, Inc. (filed as Exhibit 10.41 to
Harken's Registration Statement on Form S-4 (Registration No.
33-56964), and incorporated by reference herein).
10.13 Gas processing Agreement between Western Processing, Ltd. and
Chuska Energy Company dated June 29, 1989 (filed as Exhibit
10.44 to Harken's Registration Statement of Form S-4
(Registration No. 33-56964), and incorporated by reference
herein).
10.14 Association Contract (Cambulos), dated September 17, 1995, and
effective as of November 17, 1995, by and between Harken de
Colombia, Ltd., and Empresa Colombiana de Petroleos (filed as
Exhibit 10.1 to Harken's Quarterly Report on Form 10-Q for the
quarterly period ended September 30, 1995, File No. 0-9207, and
incorporated by reference herein).
10.15 Development Finance Agreement, dated October 12, 1995, by and
among Harken Energy Corporation, Arbco Associates L.P., Offense
Group Associates L.P., Kayne Anderson Nontraditional Investments
L.P. and Opportunity Associates L.P. (filed as Exhibit 10.2 to
Harken's Quarterly Report on Form 10-Q for the quarterly period
ended September 30, 1995, File No. 0-9207, and incorporated by
reference herein).
10.16 Harken Energy Corporation's 1993 Stock Option and Restricted
Stock Plan (filed as Exhibit 4.3 to Harken's Registration
Statement on Form S-8, and incorporated by reference herein).
66
<PAGE> 67
10.17 Harken Energy Corporation's Directors Stock Option Plan (filed
as Exhibit 4.3 to Harken's Registration Statement on Form S-8,
and incorporated herein by reference).
10.18 Trust Indenture dated July 30, 1996, by and between Harken and
Marine Midland Bank plc (filed as Exhibit 10.1 to Harken's
Quarterly Report on Form 10-Q for the quarterly period ended
June 30, 1996, and incorporated herein by reference).
10.19 Placing Agreement dated July 19, 1996, by and between Harken and
the various signatories thereto (filed as Exhibit 10.2 to
Harken's Quarterly Report on Form 10-Q for the quarterly period
ended June 30, 1996, and incorporated herein by reference).
10.20 Global Temporary Note dated July 30, 1996 issued by Harken in
the principal amount of $40,000,000 (filed as Exhibit 10.3 to
Harken's Quarterly Report on Form 10-Q for the quarterly period
ended June 30, 1996, and incorporated herein by reference).
10.21 Association Contract (Bolivar) by and between Harken de
Colombia, Ltd. and Empresa Colombia de Petroleos (filed as
Exhibit 10.4 to Harken's Quarterly Report on Form 10-Q for the
quarterly period ended June 30, 1996, and incorporated herein by
reference).
10.22 Harken Energy Corporation 1996 Incentive and Nonstatutory Stock
Option Plan (filed as Exhibit 10.1 to Harken's Quarterly Report
on Form 10-Q for the quarterly period ended September 30, 1996,
and incorporated herein by reference).
22 Subsidiaries of Harken.
24 Power of Attorney.
27 Financial Data Schedule.
(b) Reports on Form 8-K
The registrant filed a Current Report on Form 8-K dated July 10, 1996
(Item 2) to report the acquisition of the EnerVest Properties.
The registrant filed a Current Report on Form 8-K dated July 31, 1996
(Item 5) to report the issuance of the 6 1/2% European Notes.
67
<PAGE> 68
SIGNATURES
Pursuant to the requirements of the 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 City of Irving,
State of Texas, on March 11, 1997.
HARKEN ENERGY CORPORATION
*
-------------------------------------------------------------------------
Mikel D. Faulkner, Chairman of the Board and Chief Executive Officer
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.
Signature Title Date
- ----------------------- ----------------------------------- --------------
* Chairman of the Board and Chief March 11, 1997
- ----------------------- Executive Officer (Principal
Mikel D. Faulkner Executive Officer)
* President and Chief Operating March 11, 1997
- ----------------------- Officer and Director
Richard H. Schroeder
/s/ Bruce N. Huff Senior Vice President; Chief March 11, 1997
- ----------------------- Financial Officer and Director
Bruce N. Huff (Principal Accounting Officer and
Principal Financial Officer)
* Director March 11, 1997
- -----------------------
Michael M. Ameen, Jr.
68
<PAGE> 69
*
- ---------------------
Michael R. Eisenson Director March 11, 1997
*
- ---------------------
Hobart A. Smith Director March 11, 1997
*
- ---------------------
Donald W. Raymond Director March 11, 1997
*
- ---------------------
Gary B. Wood Director March 11, 1997
*Bruce N. Huff, by signing his name hereto, does hereby sign this Annual Report
on Form 10-K for the year ended December 31, 1996 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
officer and director.
/s/ Bruce N. Huff
- -----------------------
Bruce N. Huff,
Attorney-in-Fact
69
<PAGE> 70
EXHIBIT INDEX
Exhibit -- Description
3.5 Amendments to the Certificate of Incorporation of Harken Energy
Corporation
22 Subsidiaries of Harken
24 Power of Attorney
27 Financial Data Schedule
<PAGE> 1
EXHIBIT 3.5
CERTIFICATE OF AMENDMENT
TO
CERTIFICATE OF INCORPORATION
OF
HARKEN ENERGY CORPORATION
Harken Energy Corporation, a corporation organized and existing under
and by virtue of the General Corporation Law of the State of Delaware (the
"Corporation"), does hereby certify that:
FIRST: The name of the Corporation is Harken Energy Corporation.
SECOND: The first paragraph of Article Four of the Certificate of
Incorporation is hereby amended in its entirety as follows:
"The aggregate number of shares which the Corporation shall
have the authority to issue is one hundred thirty-five million
(135,000,000), of which one hundred twenty-five million
(125,000,000) shall be designated as Common Stock of the par
value of One Cent ($.01) per share and ten million
(10,000,000) shall be designated as Preferred Stock of the par
value of One Dollar ($1.00) per share."
THIRD: The foregoing amendment to Article Four of the
Certificate of Incorporation was duly adopted by the
Corporation in accordance with the provisions of
Section 242 of the General Corporation Law of the
State of Delaware.
IN WITNESS WHEREOF, Harken Energy Corporation has caused this
Certificate of Amendment to be signed by Gregory S. Porter, its Vice President -
Legal this 12th day of June, 1996.
HARKEN ENERGY CORPORATION
/s/ Gregory S. Porter
---------------------------
Gregory S. Porter
Vice President - Legal
<PAGE> 2
CERTIFICATE OF AMENDMENT
TO
CERTIFICATE OF INCORPORATION
OF
HARKEN ENERGY CORPORATION
Harken Energy Corporation, a corporation organized and existing under
and by virtue of the General Corporation Law of the State of Delaware (the
"Corporation"), does hereby certify that:
FIRST: The name of the Corporation is Harken Energy Corporation.
SECOND: The first paragraph of Article Four of the Certificate of
Incorporation is hereby amended in its entirety as follows:
"The aggregate number of shares which the Corporation shall
have the authority to issue is one hundred sixty million
(160,000,000), of which one hundred fifty million
(150,000,000) shall be designated as Common Stock of the par
value of One Cent ($.01) per share and ten million
(10,000,000) shall be designated as Preferred Stock of the par
value of One Dollar ($1.00) per share."
THIRD: The foregoing amendment to Article Four of the
Certificate of Incorporation was duly adopted by the
Corporation in accordance with the provisions of
Section 242 of the General Corporation Law of the
State of Delaware.
IN WITNESS WHEREOF, Harken Energy Corporation has caused this
Certificate of Amendment to be signed by Gregory S. Porter, its Vice President -
Legal this 12th day of December, 1996.
HARKEN ENERGY CORPORATION
/s/ Gregory S. Porter
---------------------------
Gregory S. Porter
Vice President - Legal
<PAGE> 1
EXHIBIT 22
HARKEN ENERGY CORPORATION
SUBSIDIARIES
March 11, 1997
AEX, INC.
BURNS DRILLING COMPANY
CHUSKA RESOURCES CORPORATION
D-FW RESOURCE MANAGEMENT, INC.
FISHER-WEBB, INC.
HARKEN BAHRAIN OIL COMPANY
HARKEN DE BOLIVIA, LTD.
HARKEN DE COLOMBIA, LTD.
HARKEN DE MEXICO, LTD.
HARKEN DE MEXICO, S.A. DE C.V.
HARKEN DE VENEZUELA, LTD.
HARKEN ENERGY WEST TEXAS, INC.
HARKEN EXPLORATION COMPANY
HARKEN INTERNATIONAL, LTD.
HARKEN SOUTHWEST CORPORATION
KMI ACQUISITION CORPORATION
KMI CAPITAL CORPORATION
KENDRICK & MULLIGAN OIL & GAS, INCORPORATED
KENNEDY & MITCHELL, INC.
MCCULLOCH ENERGY, INC.
SEARCH ACQUISITION CORP.
SUNFIELD ENERGY COMPANY
SUPREME WELL SERVICE COMPANY
<PAGE> 1
EXIHIBIT 24
HARKEN ENERGY CORPORATION
FORM 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, Larry E. Cummings and Gregory S. Porter 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, 1996, 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 February 25, 1997.
<TABLE>
<CAPTION>
NAME CAPACITIES
---- ----------
<S> <C>
/s/ Mikel D. Faulkner Chairman of the Board of Directors
- ----------------------------------- and Chief Executive Officer
Mikel D. Faulkner (Principal Executive Officer)
/s/ Richard H. Schroeder Director, President and
- ----------------------------------- Chief Operating Officer
Richard H. Schroeder
/s/ Bruce N. Huff Director, Senior Vice President and
- ----------------------------------- Chief Financial Officer
Bruce N. Huff (Principal Financial Officer and
Principal Accounting Officer)
</TABLE>
<PAGE> 2
<TABLE>
<S> <C>
Harken Energy Corporation
Form 10-K Power of Attorney
February 25, 1997
/s/ Michael R. Eisenson Director
- -----------------------------------
Michael R. Eisenson
/s/ Hobart A. Smith Director
- -----------------------------------
Hobart A. Smith
/s/ Donald W. Raymond Director
- -----------------------------------
Donald W. Raymond
/s/ Michael M. Ameen, Jr. Director
- -----------------------------------
Michael M. Ameen, Jr.
/s/ Gary B. Wood Director
- -----------------------------------
Gary B. Wood
</TABLE>
<TABLE> <S> <C>
<ARTICLE> 5
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> DEC-31-1996
<PERIOD-START> JAN-01-1996
<PERIOD-END> DEC-31-1996
<CASH> 47,517,000
<SECURITIES> 0
<RECEIVABLES> 2,463,000
<ALLOWANCES> (405,000)
<INVENTORY> 0
<CURRENT-ASSETS> 49,838,000
<PP&E> 83,756,000
<DEPRECIATION> (13,721,000)
<TOTAL-ASSETS> 123,000,000
<CURRENT-LIABILITIES> 6,061,000
<BONDS> 38,600,000
0
0
<COMMON> 939,000
<OTHER-SE> 77,400,000
<TOTAL-LIABILITY-AND-EQUITY> 123,000,000
<SALES> 12,341,000
<TOTAL-REVENUES> 13,921,000
<CGS> 4,438,000
<TOTAL-COSTS> 4,438,000
<OTHER-EXPENSES> 8,132,000
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 1,692,000
<INCOME-PRETAX> (341,000)
<INCOME-TAX> 0
<INCOME-CONTINUING> (341,000)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (341,000)
<EPS-PRIMARY> (0.00)
<EPS-DILUTED> 0
</TABLE>
