ITEM 1. BUSINESS
OVERVIEW
Harken Energy Corporation and its subsidiaries ("Harken") is engaged in oil and gas exploration, development and production operations both domestically and internationally through its various wholly-owned subsidiaries and joint venture investments. Harken's domestic operations include the oil and gas exploration and production operations in the Aneth Field and Blanding Sub-Basin portions of the Paradox Basin in Utah, Arizona and New Mexico, and in the Western Paradox Basin in Utah. Harken's international operations include three exclusive Colombian Association Contracts between Harken's wholly-owned subsidiary, Harken de Colombia, Ltd., and Empresa Colombiana de Petroleos ("Ecopetrol") as well as a production sharing agreement between Harken's wholly-owned subsidiary, Harken Bahrain Oil Company, and the Bahrain National Oil Company ("BANOCO"). Harken's international operations currently consist solely of oil and gas exploration and development. Harken considers that the opportunities to profitably deploy Harken's expertise and assets internationally are generally greater than those available domestically.
Harken was incorporated in 1973 in the state of California and reincorporated in 1979 in the state of Delaware. Harken's principal offices are located at 5605 N. MacArthur Blvd., Suite 400, Irving, Texas 75038 and its telephone number is (214) 753-6900.
INTERNATIONAL EXPLORATION OPERATIONS
Alcaravan Contract -- During the third quarter of 1992, Harken, through a subsidiary, Harken de Colombia, Ltd., was awarded the exclusive right to explore for, develop and produce oil and gas throughout approximately 350,000 acres within the Alcaravan area ("Alcaravan") of Colombia. Alcaravan is located in Colombia's Llanos Basin and is located approximately 140 miles east of Santafe de Bogota. Harken and Ecopetrol have entered into an Association Contract ("Alcaravan Contract") which requires Harken to conduct a seismic and exploratory drilling program in the Alcaravan area ("work program") over the initial six years. At the end of each of the six years in the work program, Harken has the option to withdraw from the Alcaravan Contract or to commit to the next year's work requirements. If Harken makes a commercial discovery of oil and/or gas which is approved by Ecopetrol, the standard terms of the Alcaravan Contract will apply. Such terms provide for Ecopetrol to reimburse Harken for 50% of its successful well costs expended up to the point of commercial discovery and to receive a 20% royalty interest and for both Ecopetrol and Harken to each have a 50% working interest. The term of the Alcaravan Contract will extend twenty-two years from the date of any commercial discovery of oil and/or gas. Harken reprocessed in excess of 200 kilometers of seismic data on the Alcaravan area and completed the acquisition of 52 kilometers of new seismic data over prospective areas in mid-February 1994. Harken also plans to acquire approximately 26 kilometers of additional seismic data on the Alcaravan Contract area in February 1995.
In September 1994, Harken announced that Huffco Group, Inc. ("Huffco") of Houston, Texas joined Harken in the drilling of its first exploratory well under the Alcaravan Contract. Under the terms of this joint venture agreement, which was approved by Ecopetrol, Harken serves as operator and retains
a 50% interest in the well. The well, the Alcaravan #1, was spudded in early February 1995 and will be drilled to a projected depth of 10,500 feet to test for commercial quantities of oil in the oil prone zones prevalent in the Llanos Basin; the Carbonera, Mirador, Guadalupe and the basal Cretaceous formations.
Bocachico Contract -- In January 1994, Harken announced that Harken de Colombia, Ltd. had signed its second Association Contract ("Bocachico Contract") with Ecopetrol, covering the Bocachico contract area. Under the Bocachico Contract, Harken has acquired the exclusive rights to conduct exploration activities and drilling on this area, which covers approximately 192,000 acres in the Middle Magdelena Valley of Central Colombia.
During the first year of the Bocachico Contract, Harken is conducting seismic activities on the land covered by this contract including reprocessing of at least 250 kilometers of existing seismic data and the acquisition of at least 35 kilometers of new seismic data. During each of the 2nd through the 6th contract years Harken may elect to continue the contract by committing to the drilling of at least one well during each contract year. During this initial six year term, called the Exploration Period under the Bocachico Contract, if Harken has discovered the existence of commercial production in the Bocachico Contract area, the Bocachico Contract will be further extended for a period of 22 years from the date of any commercial discovery of oil and/or gas. If Harken makes a commercial discovery of oil and/or gas which is approved by Ecopetrol, the standard terms of the Bocachico Contract will apply. Such terms provide for Ecopetrol to reimburse Harken for 50% of its successful well costs expended up to the point of commercial discovery and to receive a 20% royalty interest and for both Ecopetrol and Harken to each have a 50% working interest.
In addition to reprocessing and acquiring seismic data during the first contract year of the Bocachico Contract, Harken has evaluated seismic data and has completed an engineering feasibility study to evaluate the potential for recovering existing oil reserves in the Rio Negro area, which is located in the northern portion of the Bocachico Contract area. Three wells were drilled, produced and subsequently abandoned by another contractor approximately 30 years ago in this area. These wells have provided information and data including production rates, well logs and pressure tests. This well data has been utilized by Harken in such studies to evaluate the feasibility of applying modern production and recovery techniques in this area. Harken will also acquire a minimum of 35 kilometers of seismic data on the Bocachico Contract area in early 1995.
On January 19, 1995, after completing the engineering feasibility study, Harken notified Ecopetrol of Harken's commitment to drill a well under the Bocachico Contract, and thereby extended the contract into its second year. Harken currently anticipates that a well site will be selected and drilling will commence by mid-1995.
Playero Contract -- In December 1994, Harken announced that Harken de Colombia, Ltd. had signed its third Association Contract ("Playero Contract") with Ecopetrol, covering the Playero contract area. Under the Playero Contract, Harken has acquired the exclusive rights to conduct exploration activities and drilling on this area, which covers approximately 10,000 acres in the Llanos Basin of Colombia, contiguous to Harken's Alcaravan Contract area.
During the first year of the Playero Contract, Harken will acquire at least 12 kilometers of new seismic data in the Playero Contract area. During each of the 2nd through the 6th contract years, Harken may elect to continue the contract by committing to the drilling of at least one well during each contract
year. During this initial six year term, called the Exploration Period under the Playero Contract, if Harken has discovered the existence of commercial production in the Playero Contract area, the Playero Contract will be further extended for a period of 22 years from the date of termination of the Exploration Period with a total term not to exceed 28 years. If Harken makes a commercial discovery of oil and/or gas which is approved by Ecopetrol, the standard terms of the Playero Contract will apply. The Playero Contract was granted by Ecopetrol under a new form of Association Contract which has modified various standard terms from the previous form of Association Contract which was used on the Alcaravan and Bocachico Contract. Such terms provide for Ecopetrol to reimburse Harken for 50% of its successful well costs expended up to the point of a commercial discovery and to receive a 20% royalty interest. Although both Ecopetrol and Harken each would have a 50% working interest, production net of royalty would be allocated 50% to each party until accumulated production from the Playero Contract area reaches a cumulative total of 60 million barrels of oil. After that cumulative production level is achieved, production net of royalty is allocated at rates to Harken from 50% to 25% based upon the relative profitability of the project with Ecopetrol receiving the remaining complementary 50% to 75% of such additional production.
Bahrain Operations -- In January 1990, Harken, through its wholly-owned subsidiary, Harken Bahrain Oil Company ("HBOC"), entered into a production sharing agreement with BANOCO which gave it the exclusive right to explore for, develop and produce oil and gas throughout most of Bahrain's Arabian Gulf offshore territories. Subject to the discovery and development of oil and/or gas, the contract has a term of thirty-five years. Under the original terms of the agreement, as amended, Harken was to drill an exploratory well to test the Permian Khuff formation within 2 1/2 years and drill a total of four wells by 1995 to earn all of its acreage rights.
In July 1990, Harken entered into a joint venture arrangement with a joint venture partner, Bass Enterprises Production Company ("BEPCO"), in which BEPCO committed to provide the funding for the first well and at least two subsequent wells. On April 8, 1993, HBOC and BEPCO entered into an agreement whereby BEPCO was released and discharged from any future drilling obligations related to HBOC's production sharing agreement, and the joint venture agreement between HBOC and BEPCO was terminated. As part of this agreement, BEPCO paid to HBOC approximately $2,000,000 plus other considerations, which represented the negotiated amount for BEPCO's remaining obligation for future costs to be incurred in Bahrain.
The initial exploratory well under the production sharing agreement was drilled on the Jarim Reef, which began drilling November 1991. In March 1992, after drilling was completed, HBOC announced that the Jarim No. 2 well was not productive of either oil or gas and was abandoned. On December 28, 1992, Harken commenced the drilling of its second exploratory well, the Muharraq No. 1, in Bahrain. In February 1993, Harken announced that the Muharraq No. 1 well had no shows of oil or gas and was plugged and abandoned. Further, under the terms of the production sharing agreement, HBOC allowed its exploration and drilling rights on approximately 10% of the acreage covered by the production sharing agreement to expire, effective February 13, 1993. HBOC allowed an additional portion of the acreage covered by the production sharing agreement to expire effective August 29, 1993.
In May 1994, Harken announced a new seismic reprocessing program covering 500 kilometers of seismic lines in the vicinity of the Jarim Reef. At present Harken holds approximately 500,000 acres under its production sharing agreement. Unless commercial production is found or an extension to the production sharing agreement is obtained, this acreage expires in July 1995. In January 1995, Harken completed its reprocessing of approximately 500 kilometers of seismic data and has reviewed the results of that work
with BANOCO. Unless Harken obtains a joint venture partner, Harken will not proceed to either acquire additional seismic data or drill another well. If a joint venturer is located, it will be necessary to obtain an extension of one year or more from July 1995 to complete work necessary with a joint venturer.
DOMESTIC EXPLORATION AND PRODUCTION OPERATIONS
Prior to 1993, Harken's exploration and production operations were primarily in Oklahoma and Texas, and during 1991 and 1992 these operations were conducted through Harken's interest in Harken Anadarko Partners, L.P., ("HAP"), a limited partnership managed by a wholly-owned subsidiary of Harken. As general partner of HAP, Harken's wholly-owned subsidiary received a monthly management fee from the partnership. An affiliate of a major stockholder of Harken served as sole limited partner.
Chuska Resources Corporation -- Effective February 15, 1993, Harken consummated a merger pursuant to which Chuska Resources Corporation ("Chuska") became a wholly-owned subsidiary of Harken. Harken acquired all of the 11,055,918 shares of Chuska common stock outstanding in exchange for 14,210,357 shares of newly-issued Harken common stock. The Board of Directors of both Harken and Chuska approved the Merger as described in the Merger Agreement, and the necessary approvals by the stockholders of both Harken and Chuska were obtained at special meetings of stockholders which were held by each company on February 15, 1993.
Chuska is engaged, primarily through its subsidiary, Harken Southwest Corporation ("HSW"), in the business of exploring for and producing oil and gas in the Aneth Field and Blanding Sub-Basin portions of the Paradox Basin in Utah, Arizona and New Mexico, and in the Western Paradox Basin in Utah. HSW operations in the Paradox Basin are primarily concentrated on the 16 million acre Navajo Indian Reservation (the "Reservation"), which comprises portions of Arizona, New Mexico and Utah. In addition to its oil and gas exploration activities, HSW also has an interest in a gas processing plant in or near the Paradox Basin, the Aneth Gas Plant, on the Utah portion of the Reservation.
HSW currently has two operating agreements (the "Tribal Agreements") with the Navajo Tribe of Indians (the "Tribe" or the "Navajo Nation") allowing oil and gas exploration and development on an aggregate 53,430 acres of Navajo tribal lands on the Reservation (the "Tribal Lands"). HSW has the right to explore for, produce, and sell oil, natural gas, and other specified gases until July 20, 2012, under the Tribal Agreement effective July 20, 1987 (the "1987 Tribal Agreement") and until August 26, 2003, under the Tribal Agreement effective August 26, 1983 (the "1983 Tribal Agreement"). Any acreage under the 1987 Tribal Agreement which is not held by production as of July 1995, will expire. All non-productive acreage under the 1983 Tribal Agreement has previously expired.
The Navajo Nation receives 30% of gross revenues from the sale of production of oil and gas under the 1983 Tribal Agreement and 20% under the 1987 Tribal Agreement (this 20% is subject to an increase to 23% with respect to each barrel of oil sold for more than $22 after July 1994). Under both Tribal Agreements, the Tribe is entitled to receive an escalated 50% of all gross proceeds recovered over $35 per barrel of oil. Under the 1983 Tribal Agreement, the Tribe receives 50% of all gross proceeds over $4 per MCF of gas. Under the 1987 Tribal Agreement, the Tribe receives 40% of all gross proceeds over $8 per MCF of gas.
In addition to the Tribe's share of gross proceeds, designation consideration and delay rentals, HSW pays severance tax and possessory interest tax ("PIT") to the Tribe. The severance tax is payable
monthly and is 4% of HSW's gross proceeds from sales of oil and gas, after deducting the Tribe's share of gross proceeds. The PIT is assessed once a year and is calculated as a specified percentage of a defined discounted present value of projected future cash flows (net of the Tribe's share of gross proceeds) from existing proven reserves as of January 1 of the year for which the PIT is assessed, although the Tribe actually retains title to those reserves. The PIT is payable in two installments. HSW is also required to pay the Tribe land damage costs relating to HSW's seismic and drilling activities.
CHAP Venture -- In order to develop the Tribal Lands, HSW sold an undivided 50% interest in gross proceeds under the Tribal Agreements to Amadeus Petroleum, Inc., Bligh Petroleum, Inc., Crusader, Inc., C.A.B. Resources, Inc. (an affiliate of Crusader, Inc.), Australian Hydrocarbons, Inc., Jindavik Petroleum, Inc., and Paroo Petroleum (USA), Inc. (collectively the "Australian Group") effective August 1, 1988, and formed the CHAP Venture ("CHAP"). CHAP is not a legal entity, although it is a tax partnership. Effective March 1, 1990, HSW sold 20% of its CHAP interest to Global Natural Resources Corporation of Nevada ("Global"), which interest was repurchased by HSW effective January 1, 1993, resulting in HSW again holding a 50% total interest in CHAP.
In October 1994, Harken acquired the CHAP Joint Venture interests of Crusader, Inc., C.A.B. Resources, Inc. and Australian Hydrocarbons, Inc., raising Harken and its subsidiaries' total interest in CHAP to approximately 70%. As consideration for this acquisition, Harken issued an aggregate total of 960,000 shares of restricted Harken common stock to the sellers, assumed certain liabilities of the sellers relating to the properties, and the sellers in turn retained responsibility for certain contingent operational and environmental liabilities related to the properties as well as retaining certain distributions made by CHAP prior to the actual date of closing.
Each CHAP co-venturer pays its respective participating interest share of costs and expenses and receives its participating interest share of revenues. HSW is the operator for CHAP and communicates with and makes proposals to an Operating Committee composed of HSW representatives and a representative of each of the non-operators. As operator, HSW is reimbursed by CHAP for indirect costs incurred on behalf of CHAP or in the pursuit of CHAP activities.
Greater Blanding -- During 1991, a venture between Sunfield Energy Company ("Sunfield", a wholly-owned subsidiary of Chuska), Amadeus Petroleum, Inc., Bligh Petroleum, Inc., and Jindavik Petroleum, Inc., was formed to explore and develop properties in a portion of the Blanding Sub-Basin designated internally as the "Greater Blanding" project. The venture has no separate legal status or existence except as a tax partnership. Sunfield is the operator of the venture, and all costs and expenses of the venture are borne and paid by, and all property, revenues and other benefits are to be allocated to and owned by, each venturer in the ratio of its respective participating working interest; however, the three non-Sunfield parties agreed to carry $600,000 of qualifying capital expenditures allocable to Sunfield in connection with the Greater Blanding project and/or the Central Blanding project (see "Central Blanding" below). Sunfield owns a 60% interest in the Greater Blanding project.
In connection with the operation of the Greater Blanding venture, Sunfield is reimbursed for any direct or indirect costs incurred on behalf of the venture. The area termed Greater Blanding includes an area of mutual interest (AMI) north of the Navajo Reservation area being explored by HSW pursuant to the Tribal Agreements.
Central Blanding -- During 1991, a venture between Sunfield, Global, Amadeus Petroleum, Inc., Bligh Petroleum, Inc., and Jindavik Petroleum, Inc. was formed. During 1992, a 10% interest in the venture was assigned from Global to Holly Petroleum. The venture has no separate legal status or existence except as a tax partnership. Sunfield is the operator of the venture, and all costs and expenses of the venture are borne and paid by, and all property, revenues and other benefits are to be allocated to and owned by each venturer in the ratio of its respective participating working interest. The Global interest was repurchased by Sunfield effective January 1, 1993, resulting in Sunfield holding a 70% total interest in the Central Blanding venture.
In connection with the operation of the Central Blanding venture, Sunfield is reimbursed for any direct or indirect costs incurred on behalf of the venture. The area termed Central Blanding includes an area of mutual interest (AMI) north of the area of the Navajo Reservation being explored by HSW pursuant to the Tribal Agreements. There is no overlap between the Greater Blanding AMI and the Central Blanding AMI.
Western Paradox -- During 1991, Sunfield began the acquisition of acreage for an oil and gas exploration project in a portion of central Utah northwest of the Greater Blanding and Central Blanding projects. During 1994, Sunfield entered into a seismic sharing agreement with an industry partner to begin geophysical and exploration efforts in the Western Paradox area.
DISCONTINUED WELL SERVICING AND CONTRACT DRILLING OPERATIONS
Prior to May 1994, Supreme Well Service Company ("Supreme", a wholly owned subsidiary) provided services to oil and gas exploration and production companies for the maintenance and workover of existing oil and gas wells and the completion of newly drilled wells. In May 1994, Harken announced that it had discontinued its well servicing operations. Harken has sold the equipment assets of Supreme in order to utilize the proceeds toward developing Harken's exploration and production operations both domestically and internationally.
In April 1991, Harken made the decision to suspend domestic contract drilling operations due to decreased demand and increased competition, particularly in the Austin Chalk trend in South Texas. In January 1994, Harken made the decision to liquidate its remaining drilling rigs and related assets and apply the proceeds primarily to its international exploration efforts, specifically in Colombia and Bahrain. As a result of this decision, Harken recognized an additional non-cash charge of approximately $3,100,000 during the fourth quarter of 1993.
INDUSTRY RISKS
Price Volatility. The revenues generated by Harken are highly dependent upon the prices of crude oil and natural gas. The currently unsettled energy market makes it difficult to estimate future prices of crude oil and natural gas. Fluctuations in energy prices are caused by a number of factors, including regional, domestic and international demand, energy legislation, federal or state taxes (if any) on sales of crude oil and natural gas, production guidelines established by the Organization of Petroleum Exporting Countries ("OPEC"), and the relative abundance of supplies of alternative fuel such as coal. Additionally, changing international economic and political conditions may have a substantial impact upon crude oil and natural gas prices. Many of these factors which can affect energy prices are beyond the control of Harken.
Business Risks. Harken must continually acquire or explore for and develop new oil and gas reserves to replace those being depleted by production. Without successful drilling or acquisition ventures, Harken's oil and gas assets, properties and the revenues derived therefrom will decline over time. To the extent Harken engages in drilling activities, such activities carry the risk that no commercially viable oil or gas production will be obtained. The cost of drilling, completing and operating wells is often uncertain. Moreover, drilling may be curtailed, delayed or canceled as a result of many factors, including shortage of available working capital, title problems, weather conditions, environmental concerns, shortages of or delays in delivery of equipment, as well as the financial instability of well operators, major working interest owners and drilling and well servicing companies. The availability of a ready market for Harken's oil and gas depends on numerous factors beyond its control, including the demand for and supply of oil and gas, the proximity of Harken's natural gas reserves to pipelines, the capacity of such pipelines, fluctuations in seasonal demand, the effects of inclement weather, and government regulation. New gas wells may be shut-in for lack of a market until a gas pipeline or gathering system with available capacity is extended into the area.
In February 1994, the Navajo Nation issued a moratorium on future oil and gas development agreements and exploration on lands situated within the Aneth Chapter on the Navajo Reservation, which is an area that includes some of HSW's undeveloped acreage. It is unknown what effect, if any, this resolution will have on HSW's operations. Any acreage under the 1987 Tribal Agreement which is not held by production as of July 31, 1995, will expire unless extended by Harken and the Navajo Nation.
Operating Hazards and Uninsured Risks. The operations of Harken are subject to the inherent risks normally associated with exploration for and production of oil and gas, including blowouts, cratering, pollution and fires, each of which could result in damage to or destruction of oil and gas wells or production facilities or damage to persons and property. As is common in the oil and gas industry, Harken is not fully insured against all of these risks, either because insurance is not available or because Harken has elected to self-insure due to high premium costs. The occurrence of a significant event that is not fully insured against could have a material adverse effect on Harken's financial condition.
International Operations. Harken conducts international operations presently and anticipates that it will conduct significant international operations in the future. Foreign properties, operations or investments may be adversely affected by local political and economic developments, exchange controls, currency fluctuations, royalty and tax increases, retroactive tax claims, renegotiation of contracts with governmental entities, expropriation, import and export regulations and other foreign laws or policies governing operations of foreign-based companies, as well as by laws and policies of the United States affecting foreign trade, taxation and investment. In addition, as certain of Harken's operations are governed by foreign laws, in the event of a dispute, Harken may be subject to the exclusive jurisdiction of foreign courts or may not be successful in subjecting foreign persons to the jurisdiction of courts in the United States. Harken may also be hindered or prevented from enforcing its rights with respect to a governmental instrumentality because of the doctrine of sovereign immunity. Exploration and production activities in areas outside the United States are also subject to the risks inherent in foreign operations, including loss of revenue, property and equipment as a result of hazards such as expropriation, nationalization, war, insurrection and other political risks.
Environmental Regulation. The activities of Harken are subject to various Navajo, federal, state, and local laws and regulations covering the discharge of material into the environment or otherwise relating to protection of the environment. In particular, Harken's oil and gas exploration, development, production;
its activities in connection with storage and transportation of liquid hydrocarbons; and its use of facilities for treating, processing, recovering, or otherwise handling hydrocarbons and wastes therefrom are subject to stringent environmental regulation by governmental authorities in the United States and in foreign jurisdictions. Such regulations have increased the costs of planning, designing, drilling, installing, operating and abandoning Harken's oil and gas wells and other facilities.
The Aneth Gas Plant facility, of which HSW is a co-owner, was in operation for many years prior to HSW's becoming an owner. The operations at the Aneth Gas Plant previously used open, unlined drip pits for storage of various waste products. The plant owners have replaced all of the open ground pits currently being used with steel tanks. The plant owners are currently in the process of closing the open ground pits.
Texaco, the plant's operator, received a letter from the EPA dated July 2, 1991 and a subsequent letter dated June 8, 1992, in which the EPA requested certain information in order to determine if there had been at the Aneth Gas Plant the release of hazardous substances to the environment. Texaco has advised HSW that certain information was supplied to the EPA pursuant to this request. Subsequently, core samples in and around certain pit areas were taken by the EPA and Texaco jointly. The EPA has responded to the initial sampling of the drip pits and Texaco is now planning the next phase of required evaluation.
Texaco has indicated to HSW that it believes that some of these pits may require reclamation or remediation. In the event such action should or must be taken, the plant owners, including HSW, will seek contractual indemnification from the previous owner of the Aneth Gas Plant for the costs incurred in the reclamation and remediation process. At this time, however, it is impossible for HSW to determine or estimate the costs of the cleanup at the Aneth Gas Plant or if the prior owner will indemnify the present owners, including HSW, for such costs.
Harken has expended significant resources, both financial and managerial, to comply with environmental regulations and permitting requirements and anticipates that it will continue to do so in the future. Although Harken believes that its respective operations and facilities are in general compliance with applicable environmental laws and regulations, risks of substantial costs and liabilities are inherent in oil and gas operations, and there can be no assurance that significant costs and liabilities will not be incurred in the future. Moreover, it is possible that other developments, such as increasingly strict environmental laws, regulations and enforcement policies thereunder, and claims for damages to property, employees, other persons and the environment resulting from Harken's operations, could result in substantial costs and liabilities in the future.
Imprecise Nature of Reserve Estimates. Reserve estimates are imprecise and may be expected to change as additional information becomes available. Furthermore, estimates of crude oil and natural gas reserves, of necessity, are projections based on engineering data, and there are uncertainties inherent in the interpretation of such data as well as the projection of future rates of production and the timing of development expenditures. Reserve engineering is a subjective process of estimating underground accumulations of oil and gas that cannot be measured in an exact way, and the accuracy of any reserve estimate is a function of the quality of available data and of engineering and geological interpretation and judgment. Accordingly, there can be no assurance that the information regarding reserves set forth herein will ultimately be produced.
Competitive Factors in Oil and Gas Industry. The oil and gas industry is highly competitive in all its phases. Competition is particularly intense with respect to the acquisition of desirable producing properties and the sale of crude oil and natural gas production. Harken's competitors in oil and gas exploration, development and production include major oil companies and numerous independent oil and gas companies, and individual producers and operators. Many of Harken's competitors possess and employ financial and personnel resources substantially greater than those which are available to Harken and may, therefore, be able to pay greater amounts for desirable leases and to define, evaluate, bid for and purchase a greater number of producing prospects than the financial or personnel resources of Harken will permit.
Regulatory Items. The production of oil and gas is subject to extensive Navajo, federal and state laws, rules, orders and regulations governing a wide variety of matters, including the drilling and spacing of wells, allowable rates of production, prevention of waste and pollution and protection of the environment. In addition to the direct costs borne in complying with such regulations, operations and revenues may be impacted to the extent that certain regulations limit oil and gas production to below economic levels. Although the particular regulations applicable in each state in which operations are conducted vary, such regulations are generally designed to ensure that oil and gas operations are carried out in a safe and efficient manner and to ensure that similarly-situated operators are provided with reasonable opportunities to produce their respective fair shares of available crude oil and natural gas reserves. However, since these regulations generally apply to all oil and gas producers, management of Harken believes that these regulations should not put Harken at a material disadvantage to other oil and gas producers.
Certain sales, transportation, and resales of natural gas by Harken are subject to Navajo, federal and state laws and regulations, including, but not limited to, the Natural Gas Act (NGA), the NGPA and regulations promulgated by the FERC under the NGA, the NGPA and other statutes. The provisions of the NGA and NGPA, as well as the regulations thereunder, are complex, and can affect all who produce, resell, transport, purchase or consume natural gas.
Although recent FERC transportation regulations do not directly apply to Harken because they are not engaged in rendering jurisdictional transportation services, these regulations do affect the operations of Harken by virtue of the need to deliver its gas production to markets served by interstate or intrastate pipelines. In most instances, interstate pipelines represent the only available method of accomplishing such transportation.
PROPERTIES AND LOCATIONS
Production and Revenues. The following table shows for the periods indicated operating information attributable to Harken's oil and gas interests. The 1990 information represents ten months activity because Harken's producing oil and gas properties were transferred to HAP effective November 1, 1990. The 1993 information reflects the February 15, 1993 merger with Chuska.
Acreage and Wells. At December 31, 1994, Harken owned interests in the following oil and gas wells and acreage, primarily through HSW:
Drilling Activity. The following table summarizes certain information concerning Harken's activity drilled by HAP during 1992 and by HSW and Sunfield during 1993 and 1994.
A well is considered "drilled" when it is completed. A productive well is completed when permanent equipment is installed for the production of oil or gas. A dry hole is completed when it has been plugged as required and its abandonment is reported to the appropriate government agency.
As of December 31, 1994, one well was in process of drilling and was being completed in early 1995.
EMPLOYEES
As of December 31, 1994, Harken had 40 employees. Harken has experienced no work stoppages or strikes as a result of labor disputes and considers relations with its employees to be satisfactory. Harken maintains group life, medical, dental, surgical and hospital insurance plans for its employees.
ITEM 2.
ITEM 2. PROPERTIES
See "Item 1. Business" for discussion of properties and locations.
ITEM 3.
ITEM 3. LEGAL PROCEEDINGS
Harken is currently involved in various lawsuits. In Management's opinion, the determination against Harken of any of these suits would not have a material effect on Harken.
ITEM 4.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
None.
PART II
ITEM 5.
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS
PRICE RANGE OF COMMON STOCK
Since March 18, 1991, Harken's common stock ("Common Stock") has been listed on the American Stock Exchange and traded under the symbol HEC. From August 30, 1989 through March 15, 1991, Harken's Common Stock was listed on the New York Stock Exchange and traded under the symbol HEC. On February 18, 1991, the stockholders of Harken approved an amendment to Harken's Certificate of Incorporation to reduce the par value of Harken's Common Stock from $1.00 to $0.01 per share. At December 31, 1994, there were approximately 3,545 holders of record of Common Stock.
The following table sets forth, for the periods indicated, the reported high and low sales prices of the Common Stock on the American Stock Exchange Composite Tape after such date.
DIVIDENDS
Harken has not paid any cash dividends on the Common Stock since its organization and it is not contemplated that any cash dividends will be paid on shares of Common Stock in the foreseeable future.
Harken's shares of Series C Cumulative Convertible Preferred Stock, par value $1.00 per share ("Series C Preferred") were to accrue a cumulative dividend of 12% per year and have a mandatory redemption feature of $10 per share, plus any accrued but unpaid dividends, beginning on June 30, 1993, and continuing annually until June 30, 1998. As of December 31, 1993 and 1994, only the 186,760 shares of Series C Preferred held by Tejas Power Corporation ("Tejas") are currently outstanding. During 1991, in connection with the issuance of 1,000 shares of Tejas preferred stock to Harken, Tejas agreed to waive certain of the provisions under the terms of the Harken Series C Preferred, including the payment of the 12% annual dividend.
ITEM 6.
ITEM 6. SELECTED FINANCIAL INFORMATION AND OTHER DATA
- --------------- (1) These estimated reserve quantities, future net revenues and present value figures are related solely to proved reserves. No consideration has been given to probable or possible reserves. Oil and gas prices were held constant except where future price increases were fixed and determinable under existing contracts and government regulations. Operating costs were held constant. Harken's share of an equity method investee's proved oil and gas reserves are not reflected in these amounts. Effective November 1, 1990, Harken transferred its oil and gas properties to a newly-formed limited partnership. In addition, effective February 15, 1993, Harken consummated a merger whereby Chuska Resources Corporation ("Chuska") became a wholly-owned subsidiary of Harken. The 1993 and 1994 amounts reflect primarily the proved reserve quantities and future net revenues of Chuska. (See "Notes to Consolidated Financial Statements, Notes 3 and 14 -- Acquisitions and Oil and Gas Disclosures" contained in Part II, Item 8.)
(2) See "Notes to Consolidated Financial Statements, Note 9 -- Redeemable Preferred Stock" contained in Part II, Item 8, for a discussion of Harken Series C Preferred Stock.
(3) Revenues and Total Assets amounts in 1990 reflect the last year prior to the formation of Harken Anadarko Partners, L.P. whereby Harken transferred its domestic oil and gas property interests
to the limited partnership effective November 1, 1990. As a result, Harken did not reflect direct oil and gas operating revenues, expenses or depreciation and amortization from these properties in its statements of operations after 1990.
(4) Financial information for these periods has been restated to present the operations of Harken's well servicing and contract drilling operations as discontinued operations. See "Notes to Consolidated Financial Statements, Note 2--Discontinued Operations" contained in Part II, Item 8, for a discussion of its discontinued contract drilling and well service segment.
(5) Pursuant to a plan of reorganization, Harken completed a rights offering and related exchange transactions on April 30, 1991. These transactions resulted in a discontinuance of Harken's refined products marketing and natural gas gathering and marketing operations. Discontinued operations for 1990 and 1991 includes losses of $32,884,000 and $2,997,000, respectively, from Harken's discontinued refined products marketing and natural gas gathering and marketing operations.
ITEM 7.
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
RESULTS OF OPERATIONS
The following table presents certain data for Harken's continuing operations for the years ended December 31, 1992, 1993 and 1994. A discussion follows of certain significant factors which have affected Harken's operating results during such periods. This discussion should be read in conjunction with Harken's Consolidated Financial Statements and related footnotes contained in Part II, Item 8.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
The following financial statements appear on pages 26 through 52 in this report.
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
To the Stockholders and Board of Directors of Harken Energy Corporation:
We have audited the accompanying consolidated balance sheets of Harken Energy Corporation (a Delaware corporation) and subsidiaries as of December 31, 1993 and 1994, and the related consolidated statements of operations, stockholders' equity and cash flows for each of the three years in the period ended December 31, 1994. These financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on these financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing standards. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly, in all material respects, the financial position of Harken Energy Corporation and subsidiaries as of December 31, 1993 and 1994, and the results of their operations and their cash flows for each of the three years in the period ended December 31, 1994, in conformity with generally accepted accounting principles.
ARTHUR ANDERSEN LLP
Dallas, Texas, February 10, 1995
HARKEN ENERGY CORPORATION AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
The accompanying Notes to Consolidated Financial Statements are an integral part of these Statements
HARKEN ENERGY CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
The accompanying Notes to Consolidated Financial Statements are an integral part of these Statements.
HARKEN ENERGY CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
- ---------------
(A) Includes, as an offset to Additional Paid-In Capital, notes receivable of $5,325,000 and $4,182,000 as of December 31, 1991 and 1992 respectively, from certain officers, directors and affiliates for stock purchases. See Note 12 -- Related Party Transactions "Other Transactions" for discussion.
(B) Includes, as a component of Retained Deficit, net unrealized losses on available-for-sale securities of $100,000 as of December 31, 1994. See Note 4 -- Marketable Equity Securities for further discussion.
The accompanying Notes to Consolidated Financial Statements are an integral part of these Statements.
HARKEN ENERGY CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
The accompanying Notes to Consolidated Financial Statements are an integral part of these Statements.
HARKEN ENERGY CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS DECEMBER 31, 1992, 1993 AND 1994
(1) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Principles of Consolidation and Presentation -- The Consolidated Financial Statements include the accounts of Harken Energy Corporation (a Delaware corporation) and all of its wholly-owned subsidiaries ("Harken") after elimination of significant intercompany balances and transactions. Interests in managed oil and gas joint ventures are proportionately consolidated. Data is as of December 31 of each year or for the year then ended and dollar amounts in tables are in thousands unless otherwise indicated. Certain prior year amounts have been reclassified to conform with the 1994 presentation.
Cash and Temporary Investments -- For purposes of the Consolidated Statements of Cash Flows, Harken considers all highly liquid investments purchased with a maturity of three months or less to be cash equivalents. Harken paid cash for interest in the amounts of $77,000, $97,000 and $85,000 during 1992, 1993 and 1994, respectively. All significant noncash investing and financing activities are discussed in Notes 3 and 10 -- Acquisitions and Stockholders' Equity.
Harken includes in cash and temporary investments certain balances which are restricted to use for specific project expenditures, collateral or for distribution to outside interest owners and are not available for general working capital purposes. Such restricted cash amounts totalled approximately $1,391,000 and $1,063,000 at December 31, 1993 and 1994, respectively.
Accounts Receivable -- Harken maintains a reserve for potential losses in collection of its accounts receivable. The allowance for doubtful accounts was $1,403,000 and $1,162,000 as of December 31, 1993 and 1994, respectively.
Assets Held for Resale -- Harken reflects assets that it intends to sell during the next twelve months as a current asset in the accompanying consolidated balance sheets at the lower of cost or net realizable value. At December 31, 1993, Harken identified certain contract drilling rigs and related equipment for resale and reflected them as Assets of Discontinued Operations Held for Resale in the accompanying consolidated financial statements. At December 31, 1994, Harken has reflected its investment in E-Z Serve Series C Preferred and related accrued dividends as Investment in Former Subsidiary Held for Resale. See Note 5 -- Investments in Former Subsidiaries for further discussion.
Accrued Liabilities and Other -- Accrued liabilities and other at December 31, 1993, consists of certain liabilities of $2,931,000 related to Chuska and other accrued liabilities of $1,909,000. The December 31, 1994 balance consists of certain liabilities of $1,260,000 related to Chuska and other accrued liabilities of $1,204,000.
Deferred Revenue -- During 1993, Harken received approximately $2,000,000 from a joint venture partner upon termination of a joint operating agreement. Such amount, net of Harken's carrying value in its Bahrain investment, has been recorded as deferred revenue in the accompanying consolidated balance sheet. See Note 15 -- Commitments and Contingencies-Bahrain Operations for further discussion. This deferred amount has been fully offset by ongoing Bahrain investment expenditures at December 31, 1994.
HARKEN ENERGY CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
Management Fee Income -- During 1992 and 1993, Harken received management fees of approximately $1,110,000 and $300,000, respectively, related to monthly fees earned as manager of a partnership (see Note 7 -- Investment in Limited Partnership).
General and Administrative Expenses -- Harken reflects general and administrative expenses net of operator overhead charges and other amounts billed to joint interest owners. General and administrative expenses are net of $4,280,000, $4,252,000 and $1,264,000 for such amounts during 1992, 1993 and 1994, respectively.
Provision for Asset Impairments -- Assets which are used in Harken's operations, or are not held for resale, are carried at cost, less any accumulated depreciation. When evidence indicates that operations will not produce sufficient revenues to cover all costs, including depreciation, and when the carrying amount of the related asset cannot be realized through sale, a permanent impairment is recorded and the asset value is written down to recoverable value. Harken reflected a provision for asset impairments from continuing operations in the amounts of $52,000, $726,000 and $6,361,000 during 1992, 1993 and 1994, respectively. See Note 5 and 12 -- Investments in Former Subsidiaries and Related Party Transactions for further discussion.
(2) DISCONTINUED OPERATIONS
In May 1994, Harken announced that it had discontinued its well servicing operations which it had conducted through Supreme Well Service Company ("Supreme"), a wholly-owned subsidiary. Harken has sold the equipment assets of Supreme and has utilized the proceeds toward developing Harken's exploration and production operations, both domestically and internationally. As a result of this decision, Harken has reflected the revenues and expenses of Harken's well servicing and contract drilling segment as discontinued operations in the accompanying financial statements. Such discontinued operations include revenues of $2,048,000, $2,074,000 and $1,053,000 for the years ended December 31, 1992, 1993 and 1994, respectively. The December 31, 1994 revenue amount includes $272,000 of gain on the sale of Harken's contract drilling assets which occurred during the first quarter of 1994.
(3) ACQUISITIONS
Effective February 15, 1993, Harken consummated a merger pursuant to which Chuska Resources Corporation ("Chuska") became a wholly-owned subsidiary of Harken. Harken acquired all of the 11,055,918 shares of Chuska common stock outstanding in exchange for 14,210,357 shares of newly-issued Harken common stock. Chuska is engaged, primarily through its subsidiary, Harken Southwest Corporation ("HSW"), in the business of exploring for and producing oil and gas in the Aneth Field and Blanding Sub-Basin portions of the Paradox Basin in Utah, Arizona and New Mexico, and in the Western Paradox Basin in Utah. HSW operations in the Paradox Basin area are primarily concentrated on the 16 million acre Navajo Indian Reservation ("the Reservation"), which comprises portions of Arizona, New Mexico and Utah. HSW conducts activities on the Reservation as a contractually appointed operator and agent of the Navajo Nation pursuant to two Federally approved operating agreements. In addition to its oil and gas exploration activities,
HARKEN ENERGY CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
HSW also has an interest in a gas processing plant in or near the Paradox Basin, the Aneth Gas Plant, on the Utah portion of the Reservation. The acquisition of Chuska has been accounted for under the purchase method of accounting.
HSW is the general partner and operator of four limited partnerships and is a venturer in the CHAP Joint Venture ("CHAP"), all of which were formed for the exploration and production of oil and gas. Chuska or its wholly- owned subsidiaries are venturers in three additional projects for the exploration and production of oil and gas. These projects are named Greater Blanding, Central Blanding and Western Paradox. Harken accounts for its investments in the partnerships and CHAP using the proportionate consolidation method.
In October 1994, Harken acquired additional joint venture interests in CHAP which resulted in Harken increasing its ownership in the Reservation reserves, exploration acreage, development drilling locations and the Aneth Gas Plant. The acquisition of the sellers' interest raised Harken's total interest in CHAP from 50% to approximately 70% and increased Harken's share of daily production by approximately 40% over its previous interest. As consideration for this acquisition, Harken issued an aggregate total of 960,000 shares of restricted Harken common stock to the sellers, assumed certain liabilities of the sellers relating to the properties, and the sellers in turn retained responsibility for certain contingent operational and environmental liabilities related to the properties as well as retaining certain distributions made by CHAP prior to the actual date of closing. The acquisition of the additional interest in CHAP has been accounted for under the purchase method of accounting.
In November 1994, Harken announced the signing of a Merger Agreement with Search Exploration Company ("Search"). Search is primarily engaged in the domestic exploration for, and development and production of oil and gas reserves. Pursuant to the Merger Agreement, upon the consummation of the Merger, (a) each outstanding share of Search common stock will be converted into the right to receive that number of shares of Harken common stock determined by dividing $0.8099 by the average of the closing sales price of a share of Harken common stock on the American Stock Exchange over the 30 days immediately preceding the date that is five trading days prior to the consummation of the merger, subject to certain restrictions ("the Average Trading Price"); (b) each outstanding share of Search Series 1993 Redeemable Preferred Stock will be converted into the right to receive that number of shares of Harken common stock determined by dividing $1.00 by the Average Trading Price and (c) certain promissory notes to be issued by Search will, by their terms, be converted into the right to receive that number of shares of Harken common stock determined by dividing the principal amount of each note by the Average Trading Price. In addition, the holders of Search common stock, certain notes and overriding royalty interests in certain properties of Search will receive a non-transferable right to receive additional shares in the future, if any, of Harken common stock or, under certain circumstances, cash, based upon the increase that may subsequently be realized in the value of a group of undeveloped leases and properties of Search. Under the terms of the Merger Agreement, certain contingencies must be satisfied by Search prior to closing, unless waived by Harken. Upon closing, the merger with Search would be accounted for under the purchase method of accounting.
HARKEN ENERGY CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
As of December 31, 1994, Search had proved reserves of approximately 19,000 barrels of oil and 1,298,000 mcf of gas with a net present value of approximately $1,513,000 and had gross revenue interests in 42 productive wells, none of which were operated by Search.
Pro Forma Information -- The following unaudited pro forma combined condensed financial statements give effect to the above mentioned transactions. The pro forma combined condensed balance sheet gives effect to the Search merger as if it had been consummated as of December 31, 1994. The pro forma combined condensed statement of operations for the years ended December 31, 1993 and 1994, gives effect to both the Search merger and the acquisition of an additional interest in CHAP as if both had been consummated at the beginning of each period.
The pro forma data is presented for illustrative purposes only and are not necessarily indicative of the financial position or operating results that would have occurred had the transactions been consummated at the dates indicated, nor are they indicative of future financial position or operating results.
PRO FORMA COMBINED CONDENSED BALANCE SHEET DECEMBER 31, 1994 (UNAUDITED)
HARKEN ENERGY CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
PRO FORMA ADJUSTMENTS-PRO FORMA COMBINED CONDENSED BALANCE SHEET-
(1) Pro forma entry to record the acquisition of Search at December 31, 1994, in exchange for Harken common stock. Purchase price was calculated using the market value, discounted by 10%, of Harken common stock over the most recent 30 days to determine the number of shares of Harken common stock to be issued, according the Merger Agreement. Such purchase price results in a total investment in Search of approximately $3,360,000, which includes approximately $215,000 of estimated transaction costs.
(2) Pro forma entry to record the required roll-up acquisition by Search of the non-owned interests in its managed limited partnerships in exchange for notes payable bearing interest at 10% per annum.
PRO FORMA COMBINED CONDENSED STATEMENT OF OPERATIONS FOR THE YEAR ENDED DECEMBER 31, 1993 (UNAUDITED)
HARKEN ENERGY CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
PRO FORMA COMBINED CONDENSED STATEMENT OF OPERATIONS FOR THE YEAR ENDED DECEMBER 31, 1994 (UNAUDITED)
PRO FORMA ADJUSTMENTS-PRO FORMA COMBINED CONDENSED STATEMENTS OF OPERATIONS-
(3) Pro forma entry to adjust actual depreciation and depletion expense and valuation provision on oil and gas properties for the acquired interest in CHAP to the depreciation and depletion calculated on a consolidated basis.
(4) Pro forma entry to adjust actual depreciation and depletion expense and valuation provision on oil and gas properties for Search to the depreciation and depletion calculated on a consolidated basis.
(5) Pro forma entry to reflect the additional revenues and expenses of Search's required roll-up of its managed limited partnerships, along with related interest expense on the notes payable to be issued.
(6) Pro forma entry to eliminate income tax benefit of Search.
HARKEN ENERGY CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
(4) MARKETABLE EQUITY SECURITIES
In May 1993 the Financial Accounting Standards Board issued Statement of Financial Accounting Standards No. 115, "Accounting For Certain Investments in Debt and Equity Securities", ("SFAS 115") effective for fiscal years beginning after December 15, 1993. Under the new rules, all marketable equity securities are classified as available-for-sale or trading and are carried at fair value. Unrealized holding gains and losses on securities classified as available-for- sale are carried as a component of stockholders' equity. Realized gains and losses and declines in value judged to be other than temporary on available-for-sale securities are included in other income. Unrealized holding gains and losses on securities classified as trading are also reported in earnings. The cost of securities sold is based on the average cost method.
Harken carries an investment in the common stock of E-Z Serve, including shares of E-Z Serve common stock resulting from the conversion of 5,000 shares of E-Z Serve Series C Preferred in June 1994. Harken's remaining investment in E-Z Serve Series C Preferred is not accounted for pursuant to SFAS 115, as it is not a readily marketable security. See Note 5 -- Investments in Former Subsidiaries for further discussion of E-Z Serve Series C Preferred. Beginning in 1994 pursuant to SFAS 115, Harken classifies its investment in E-Z Serve common stock as available for sale. The following is a summary of Harken's marketable equity securities, which are included in Prepaid Expenses and Other Current Assets in the accompanying balance sheet:
An unrealized holding loss on available-for-sale securities of $100,000 was recognized at December 31, 1994, and is included as a component of stockholders' equity. Such amount has been included in Retained Deficit in the accompanying consolidated financial statements.
HARKEN ENERGY CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
(5) INVESTMENTS IN FORMER SUBSIDIARIES
Pursuant to a Rights Offering effective April 30, 1991, Harken owned approximately 7.25% and 6.59%, respectively, of the outstanding common shares of E-Z Serve Corporation ("E-Z Serve") and Tejas Power Corporation ("Tejas"), both of which it accounted for as marketable equity securities using the lower of cost or market value. During late 1991 and throughout 1992, Harken sold all of its common stock interest in Tejas and in December 1992 and during 1993 and 1994, Harken sold its initial common stock interest in E-Z Serve. The resulting realized gains from these sales as of December 31, 1992 totalled $2,451,000 and were deferred until 1993 when all remaining material contingencies and guarantees by Harken relating to its discontinued operations of E-Z Serve and Tejas were eliminated. The total net gain recognized during 1993 was $164,000.
E-Z Serve Preferred Stock -- Harken holds 74,754 shares of E-Z Serve $6.00 Convertible Preferred Stock, Series C ("E-Z Serve Series C Preferred") at December 31, 1994, which it acquired at a cost of $100 per share. Such shares include the 12,830 additional shares of E-Z Serve Series C Preferred received in April 1993 as part of a restructuring by E-Z Serve. See below for further discussion. The E-Z Serve Series C Preferred is to pay a cumulative dividend of $6.00 per share per annum, payable semi-annually beginning October 1, 1991 as declared by the E-Z Serve Board of Directors, and payable in legally available cash or in additional shares of E-Z Serve Series C Preferred. Each share of E-Z Serve Series C Preferred is convertible at the option of either E-Z Serve or Harken into 52.63 common shares of E-Z Serve, such rate to be adjusted under certain conditions. The E-Z Serve Series C Preferred is subordinated to all E-Z Serve bank credit facilities. Harken recorded dividend income of $397,000, $466,000 and $424,000 during 1992, 1993 and 1994, respectively, related to the E-Z Serve Series C Preferred and has included such dividends in Other Income in the accompanying financial statements.
During 1994, Harken converted a portion of its shares of E-Z Serve Series C Preferred into E-Z Serve common shares and has sold certain of its E-Z Serve common shares. See Note 4 -- Marketable Equity Securities for further discussion. During the fourth quarter of 1994, Harken also began reviewing the potential for a sale to other parties of some or all of its remaining investment in E-Z Serve Series C Preferred and related accrued dividends. Based on the terms and consideration of these potential transactions, the current market price of E-Z Serve common shares, the conversion terms and limited marketability of the E-Z Serve Series C Preferred and the current overall capital structure of E-Z Serve, Harken has deemed that a decline in value that is other than temporary has occurred with respect to its investment in E-Z Serve Series C Preferred. Accordingly, Harken has reclassified its investment in E-Z Serve Series C Preferred and its related accrued dividends receivable from E-Z Serve to current assets at December 31, 1994, at a total estimated realizable value of $2,898,000. Such amount is reflected as Investment in Former Subsidiary Held for Resale in the accompanying consolidated balance sheet. In connection with this determination, Harken has included the decline in value of $5,831,000 in Provision for Asset Impairments in the accompanying consolidated financial statements.
Tejas Preferred Stock -- On September 6, 1991, and effective May 3, 1991, Harken purchased 1,000 shares of Tejas Power Corporation Series B Preferred Stock, $.01 par value per share ("Tejas Preferred
HARKEN ENERGY CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
Stock"), at a purchase price of $1,200,000. The purchase price was equal to certain expenses incurred by Harken on behalf of Tejas in connection with the Rights Offering and represents the redemption value of the Tejas Preferred Stock. Harken accepted these shares of Tejas Preferred Stock as full and complete payment for the above expenses as a result of Tejas agreeing to waive certain of the provisions under the terms of the Harken Series C Preferred held by Tejas and pledging all 186,760 shares of the Harken Series C Preferred to Harken.
E-Z Serve Restructuring -- Harken held a 12% secured subordinated debenture from E-Z Serve for $3,136,000, which included $1,336,000 which was issued in exchange for 531,824 shares of Harken common stock and was reflected as a reduction to stockholders' equity in Harken's balance sheet. In April 1993, Harken agreed to enter into an exchange which E-Z Serve had proposed in connection with an overall E-Z Serve restructuring. Under this restructuring, which was consummated on April 21, 1993, E-Z Serve entered into various agreements with its existing bank, a new bank, its major stockholders as well as certain agreements with Harken. Under the exchange which was made between E-Z Serve and Harken, Harken has tendered and released to E-Z Serve the 12% secured subordinated debenture of $3,136,000 plus accrued interest receivable from E-Z Serve. Harken also waived certain antidilution provisions of the E-Z Serve Series C Preferred held by Harken and made a capital contribution to E-Z Serve for $366,000 in cash. In exchange for the above matters, Harken received from E-Z Serve a full and complete release of Harken's guarantee previously given to E-Z Serve's bank for up to $5,000,000 of a portion of E-Z Serve's bank debt. In addition, Harken received 12,830 additional shares of E-Z Serve's Series C Preferred Stock (see discussion above).
As discussed above, Harken had previously deferred $2,451,000 of realized gain which had been generated during 1991 and 1992 from the sale of certain of its common stock interests in certain former subsidiaries, including E-Z Serve. During the second quarter of 1993, and upon release of Harken's guarantee of E-Z Serve's bank debt, such deferred gain was utilized to reduce the carrying value of investments in former subsidiaries and reflect the release of the 12% secured subordinated debenture in the Harken consolidated balance sheet.
(6) PROPERTY AND EQUIPMENT
Property and equipment are carried at cost. Gas plant and other property is depreciated on the straight-line method over their estimated useful lives ranging from three to fifteen years. Harken follows the full cost accounting method to account for the costs incurred in the acquisition, exploration, development and production of oil and gas reserves. Under this method, all costs, including internal costs, directly related to acquisition, exploration and development activities are capitalizable as oil and gas property costs. Harken capitalized $602,000, $1,840,000 and $1,066,000 of internal costs, net of reimbursements from joint venture partners, directly related to these activities in 1992, 1993 and 1994 respectively. Such costs include office and personnel costs of Harken's international and domestic exploration field offices and does not include any corporate overhead. Harken also accrues costs of dismantlement, restoration and abandonment to the extent that such costs, in the aggregate, are anticipated to exceed the aggregate salvage value of equipment and facilities removed from producing wells and other facilities.
HARKEN ENERGY CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
The capitalized costs of oil and gas properties, excluding unevaluated properties, are amortized using a company-wide unit of production method (equivalent physical units of 6 mcf of gas to each barrel of oil) based on estimated proved recoverable oil and gas reserves. Such amortization was $5.58 and $6.31 per equivalent barrel of oil produced during 1993 and 1994, respectively.
The unevaluated property costs at December 31, 1993 and 1994 includes $796,000 and $1,512,000, respectively, related to Colombia (see Note 15 -- Commitments and Contingencies for a discussion of Colombian operations) and $7,208,000 and $5,934,000, respectively, related to domestic prospects. Amortization of unevaluated property costs will begin when the properties become proved or their values become impaired. Harken assesses realizability of unevaluated properties on at least an annual basis or when there has been an indication that an impairment in value may have occurred. Fair value of unevaluated prospects is determined based on management's intention with regard to future exploration and development of individually significant properties and the ability of Harken to obtain funds to finance such exploration and development. Under full cost accounting rules, for each cost center, capitalized costs, less accumulated amortization and related deferred income taxes, shall not exceed an amount ("the cost ceiling") equal to the sum of (a) the present value of future net revenues from estimated production of proved oil and gas reserves discounted at 10%, plus (b) the cost of properties not being amortized, plus (c) the lower of cost or estimated fair value of any unproved properties included in the costs being amortized, less (d) any income tax effects related to differences between the book and tax basis of the properties involved.
(7) INVESTMENT IN LIMITED PARTNERSHIP
On December 17, 1992, Harken entered into a Purchase and Sale Agreement (the "Agreement") pursuant to which Harken sold its 12% general partner's interest in a limited partnership to an affiliate of a major stockholder which served as limited partner. The closing of the Agreement was completed on December 30, 1992. The transaction resulted in Harken recognizing a gain on sale of partnership investment of $1,449,000 in 1992.
Pursuant to the Agreement, Harken was paid consideration in cash of $2,650,000 for the sale of this partnership interest and certain contract rights associated therewith, subject to certain reductions. As additional consideration for the transaction, an affiliate of the major stockholder agreed to indemnify Harken from any liability under the guarantee given by Harken to a bank with regard to the limited partnership's credit agreement with the bank. Subsequent to December 31, 1992, the affiliate of the major stockholder caused the bank to release Harken and its affiliates from any liability under this guarantee and loan.
Under the terms of the Agreement, Harken continued to manage the oil and gas property interests of the limited partnership and to operate certain partnership properties. Harken was paid $50,000 per month to manage the partnership interest in such properties in addition to the fees it received for serving as operator of the properties pursuant to applicable joint operating agreements. During the second quarter of 1993, the partnership sold its interests in all oil and gas properties operated by Harken and Harken ceased to manage the partnership.
HARKEN ENERGY CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
(8) NOTES PAYABLE
At December 31, 1993, Harken had included $1,000,000 in accrued liabilities related to a consulting payment due to a former Chuska stockholder. Under the terms of a prior agreement made by Chuska with the former Chuska stockholder, among other obligations previously satisfied, Chuska was to pay $1,000,000 to the former Chuska stockholder when aggregate net revenues (as defined in the agreement) reached $60,000,000. In October 1992, a lawsuit was filed against Chuska by the former Chuska stockholder. The lawsuit was generally based upon allegations that Chuska had reached the defined aggregate net revenue amount and that the $1,000,000 consulting payment was due and payable. In March 1994, this lawsuit was settled whereby Chuska and a subsidiary entered into an agreement to pay $500,000 to the former Chuska stockholder as the first of two installments relating to the consulting payment. Chuska executed a non-interest bearing note payable, guaranteed by Harken, for the remaining $500,000 consulting payment which was paid to the former Chuska stockholder on January 5, 1995. This obligation is included in Notes Payable in the accompanying December 31, 1994 consolidated balance sheet.
Further, under the terms of this March 1994 agreement, Chuska purchased from the former Chuska stockholder his 3% working interest in the wells drilled by Chuska as well as all rights he held to participate in future wells drilled by Chuska on the Navajo Reservation, effective January 1, 1994. As consideration for such purchase, Chuska issued a 10% note payable in the amount of $400,000 which is due and payable to the former Chuska stockholder on or before January 3, 1996. This note is included in Notes Payable in the accompanying December 31, 1994 consolidated balance sheet. The balance is included as a current liability as Chuska is obligated under this agreement to pay 75% of the monthly net cash flow (as defined) from the acquired interest to an escrow account which will serve as collateral for the above notes payable until the notes are fully paid.
(9) REDEEMABLE PREFERRED STOCK
During 1988, Harken completed the private placement of 3,000,000 shares of newly-issued Series C 12% $1 par value cumulative convertible redeemable preferred stock ("Series C Preferred") for $30,000,000. Each share of preferred stock was convertible into 1.667 shares of common stock at the option of the holder and was mandatorily redeemable at $10 per share over a five year period beginning in 1993. Dividends may be paid in the form of cash or common stock at the option of the holder. Harken has the option to convert the preferred stock to shares of common stock if the market price for Harken's common stock has exceeded 125% of the $6.00 conversion price of the preferred stock for twenty consecutive days. The conversion price of $6.00 per share is adjustable under certain conditions.
The 186,760 shares of Series C Preferred held by Tejas represent the only Series C Preferred shares outstanding as of December 31, 1993 and 1994. During 1991, in connection with the issuance of 1,000 shares of Tejas preferred stock to Harken, Tejas agreed to waive certain of the provisions under the terms of the Harken Series C Preferred, including the payment of the 12% annual dividend.
HARKEN ENERGY CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
The holder of 200,000 shares of Series C Preferred who did not elect to exchange its shares of Series C Preferred continued to hold its shares, until such shares were also exchanged under the original terms of the Series C Preferred in January 1992 for 333,400 shares of Harken common stock.
During the third quarter of 1992, the 513,240 shares of Harken Series C Preferred held by E-Z Serve were exchanged for 2,200,000 newly issued shares of Harken common stock. In addition, E-Z Serve agreed to adjust the conversion ratio of its E-Z Serve Series C Preferred (see Note 5 -- Investments in Former Subsidiaries, "E-Z Serve Preferred Stock" for further discussion). As part of the above exchange transaction, Harken issued its approval of an E-Z Serve acquisition as required under the terms of a subordinated debenture by E-Z Serve to Harken.
(10) STOCKHOLDERS' EQUITY
Common Stock -- Harken currently has authorized 100,000,000 shares of $.01 par common stock. At December 31, 1993 and 1994, Harken had issued 65,466,508 shares and 66,426,508 shares, respectively. Harken held 5,983,655 shares as treasury stock at a cost of $20,757,000 both December 31, 1993 and 1994.
Acquisition of Chuska Resources Corporation -- Effective February 15, 1993, Harken consummated a merger pursuant to which Chuska Resources Corporation ("Chuska") became a wholly-owned subsidiary of Harken. In exchange for all of the outstanding common stock of Chuska, Harken issued 14,210,357 shares of Harken common stock. In connection with the merger, Harken filed a registration statement, which became effective January 15, 1993, with the Securities and Exchange Commission for the shares of Harken common stock issued. See further discussion of the merger at Note 3 -- Acquisitions.
Acquisition of CHAP Interest -- In October 1994, Harken acquired an additional interest of approximately 20% in CHAP in exchange for, among other consideration, 960,000 shares of restricted Harken common stock.
Per Share Data -- Per share data has been computed based on the weighted average number of common shares outstanding during each period. Per share data reflects net loss adjusted for accrued dividends on the Series C Preferred stock.
Stock Options -- In conjunction with various stock option plans and grants, Harken has the following options outstanding at December 31, 1994 (not in thousands):
HARKEN ENERGY CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
At December 31, 1994, Harken had remaining options authorized and available to be granted of 1,475,000.
Registration of Outstanding Shares -- Pursuant to the request of certain former CHAP partners, and in accordance with the terms of the above mentioned purchase by Harken of an additional interest in CHAP Harken filed a registration statement with the Securities and Exchange Commission covering 960,000 restricted shares of its currently outstanding common stock.
(11) INCOME TAXES
At December 31, 1994, Harken had available for federal income tax reporting purposes, net operating loss (NOL) carryforward for regular tax purposes of approximately $58,000,000 which expires in 1997 through 2010, alternative minimum tax NOL carryforward of approximately $47,000,000 which expires in 1997 through 2010, investment tax credit carryforward of approximately $863,000 which expires in 1995 through 2002, contribution carryforward of approximately $57,000 which expires in 2000 through 2009, statutory depletion carryforward of approximately $1,150,000 which does not have an expiration date, jobs tax credit carryforward of approximately $118,000 which expires in 1994 through 1995 and a net capital loss carryforward of approximately $542,000 which expires in 2007. Approximately $14,000,000 of the net operating loss carryforward has been acquired with the purchase of subsidiaries and must be used to offset future income from profitable operations within those subsidiaries.
During the first quarter of 1993, Harken adopted Statement of Financial Accounting Standard No. 109, "Accounting for Income Taxes" ("SFAS No. 109"). This standard requires, among other things, recognition of future tax benefits and liabilities, measured by enacted tax rates, attributable to deductible temporary differences between financial statement and income tax bases of assets and liabilities and to tax net operating loss carryforwards. Deferred tax benefits are required to be recognized to the extent that realization of such benefits is more likely than not.
HARKEN ENERGY CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
Upon adoption of SFAS No. 109, on January 1, 1993, Harken calculated total deferred tax liabilities of approximately $2,020,000 resulting from financial statement basis for property and equipment in excess of related tax basis. In addition, Harken calculated total deferred tax assets of approximately $18,989,000 consisting of approximately $18,142,000 related to Harken's net operating loss carryforward and approximately $847,000 primarily related to tax basis for investments in former subsidiaries in excess of related financial statement basis. Harken established a valuation allowance for the entire net deferred tax asset of $16,969,000. As a result, the adoption of SFAS No. 109 by Harken on January 1, 1993 had no effect on Harken's results from operations or earnings (loss) per common share for the year ended December 31, 1993.
At December 31, 1993, primarily as a result of the February 15, 1993 merger with Chuska whereby Chuska became a wholly-owned subsidiary of Harken, total deferred tax liabilities increased to approximately $4,065,000. Such increase was due to the financial statement basis for Chuska property and equipment being in excess of the related historical tax basis. In addition, total deferred tax assets increased to approximately $22,872,000, primarily from an increase in the NOL carryforward during the year. The resulting increase in net deferred tax assets was offset by a corresponding increase in the valuation allowance, resulting in no impact to Harken's results of operations.
At December 31, 1994, total deferred tax liabilities increased to approximately $5,100,000 while total deferred tax assets decreased to approximately $20,640,000. The resulting decrease in net deferred tax assets was offset by a corresponding decrease in the valuation allowance to approximately $15,540,000 at December 31, 1994, resulting in no impact to Harken's results of operations.
The Tax Reform Act of 1986 made substantial changes with regard to NOL carryforwards. After an "ownership change," the taxable income of a loss corporation is limited annually to a prescribed rate times the value of the loss corporation's stock immediately before the ownership change. In general, an ownership change occurs if ownership of more than 50% in value of the stock of the loss corporation changes during the three-year period preceding the test date. Under federal tax law, the amount and availability of loss carryforwards are subject to a variety of interpretations and restrictive tests, under which, the utilization of such loss carryforwards could be limited or effectively lost upon certain changes in ownership. Application of these and other tests requires certain factual determinations and legal interpretations as to which there is little guidance. An ownership change occurred in 1989 resulting in Harken's utilization of NOL carryforwards for all periods prior to the date of change being limited annually to approximately $11,000,000 to $12,000,000.
(12) RELATED PARTY TRANSACTIONS
Relationship with E-Z Serve -- At December 31, 1993, E-Z Serve owed Harken $870,000 primarily for preferred stock dividends. Such balance is included in Accounts Receivable from Related Parties in the accompanying consolidated balance sheet. At December 31, 1994, the accrued preferred stock dividends have been reclassified as Investment in Former Subsidiary Held for Resale. See Note 5 -- Investments in Former Subsidiaries for further discussion.
HARKEN ENERGY CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
Other Transactions -- The Board of Directors approved the granting of loans from Harken to certain employees and directors under the Non-Qualified Plan and the Directors Option Agreement for the purpose of allowing such individuals to exercise their stock options immediately. The Board of Directors determined in making such grants that as a result of the restricted nature of the stock and the lack of any rights on the part of the optionee to cause such shares to be registered, an option price per share equal to 60% of the closing market price on the date of grant was the reasonable price for such shares of common stock which were immediately purchased. Each loan is evidenced by a promissory note which is due eight years from making and bears interest at 5% per annum. The shares of stock purchased pursuant to such notes were held by Harken as collateral until the respective notes were fully paid. During 1988, 1989, 1990 and 1991, certain officers and directors elected to purchase common stock under these terms. Harken had notes receivable of $3,989,000 and $2,846,000 as of December 31, 1991 and 1992, respectively, which are included in Stockholders' Equity.
During the first and second quarter of 1993, Harken foreclosed on certain of these non-recourse notes receivable from certain former employees, officers and directors resulting in the addition of 381,925 shares of treasury stock, which had served as the sole collateral for these notes. In addition, during the third quarter of 1993, certain employees, officers and directors surrendered to Harken a total of 704,000 shares of common stock for the cancellation of certain of these non-recourse promissory notes given by such parties to Harken upon the purchase of such shares. In connection with such surrender, Harken issued new stock options to such parties which options had been determined to be equal in value to the shares surrendered. This resulted in the addition of 704,000 shares of treasury stock which had served as collateral for these notes. As a result of the above transactions, during the year ended December 31, 1993, Harken expensed a total of $551,000 of accrued interest related to these non-recourse notes receivable, and such expense has been included in Provision for Asset Impairments in the accompanying Statements of Operations.
In September 1989, Harken's Board of Directors approved a loan to an officer in the amount of $520,000. The note bears interest at the Broker Loan Rate (5% at December 31, 1993 and 1994, respectively) plus 1/2% and is due October 2, 1999. The note is secured by vested options to purchase 266,790 shares of Harken's common stock at $1.00 per share. During 1994, an agreement was reached with the officer whereby the note, together with accrued interest, is scheduled to be forgiven equally over three installments dated April 1994, July 1995 and December 1996 with each installment of such forgiveness contingent upon the officer's continued employment through the date of each such installment. Such note is included in Notes Receivable from Related Parties in the accompanying financial statements.
See Notes 2, 5, 7 and 10 -- Discontinued Operations, Investments in Former Subsidiaries, Investment in Limited Partnership and Stockholders' Equity for other related party transactions.
(13) OTHER INFORMATION
Quarterly Data -- (Unaudited) -- The following tables summarize selected quarterly financial data for 1993 and 1994 expressed in thousands, except per share amounts. Such financial information has been
HARKEN ENERGY CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
restated to present the operations of Harken's well servicing and contract drilling operations as discontinued operations. See Note 2 -- Discontinued Operations for further discussion.
Significant Customers -- In 1992, management fees and prospect fees from the limited partnership represented 25% of consolidated revenues from continuing operations. There were two oil purchasers which represented 18% and 28% of consolidated revenues from continuing operations in 1993 and which represented 38% and 16% of consolidated revenues from continuing operations in 1994. Management does not feel that the loss of these purchasers would significantly impact the operations of Harken due to the availability of other potential purchasers for its oil production.
(14) OIL AND GAS DISCLOSURES
Costs Incurred in Property Acquisition, Exploration and Development Activities:
HARKEN ENERGY CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
Total costs incurred during 1993 includes approximately $796,000 related to Harken's Colombian operations. Total costs incurred during 1994 includes approximately $716,000 related to Harken's Colombian operations and approximately $114,000 related to Harken's Bahrain operations.
Capitalized Costs Relating to Oil and Gas Producing Activities:
Oil and Gas Reserve Data -- (Unaudited) -- The following information is presented with regard to Harken's proved oil and gas reserves, all of which are located in the United States. The reserve values reflected in the following reserve disclosures are based on prices received as of year end. Effective February 15, 1993, Harken consummated a merger whereby Chuska became a wholly-owned subsidiary of Harken. (See Note 3 -- Acquisitions for a discussion of Chuska).
HARKEN ENERGY CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
Standardized Measure of Discounted Future Net Cash Flows Relating to Proved Oil and Gas Reserves:
HARKEN ENERGY CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
Changes In Standardized Measure of Discounted Future Net Cash Flows Relating to Proved Oil and Gas Reserves:
(15) COMMITMENTS AND CONTINGENCIES
Colombian Operations-Alcaravan Contract -- During the third quarter of 1992, Harken, through a subsidiary, Harken de Colombia, Ltd., was awarded the exclusive right to explore for, develop and produce oil and gas throughout approximately 350,000 acres within the Alcaravan area ("Alcaravan") of Colombia. Alcaravan is located in Colombia's Llanos Basin and is located approximately 140 miles east of Santafe de Bogota. Harken and Ecopetrol have entered into an Association Contract ("Alcaravan Contract") which requires Harken to conduct a seismic and exploratory drilling program in the Alcaravan area ("work program") over the initial six years. At the end of each of the six years in the work program, Harken has the option to withdraw from the Alcaravan Contract or to commit to the next year's work requirements. If Harken makes a commercial discovery of oil and/or gas which is approved by Ecopetrol, the standard terms of the Alcaravan Contract will apply. Such terms provide for Ecopetrol to reimburse Harken for 50% of its successful well costs expended up to the point of commercial discovery and to receive a 20% royalty interest and for both Ecopetrol and Harken to each have a 50% working interest. The term of the Alcaravan Contract will extend twenty-two years from the date of any commercial discovery of oil and/or gas. Harken reprocessed in excess of 200 kilometers of seismic data on the Alcaravan area and completed the acquisition of 52 kilometers of new seismic data over prospective areas in mid-February 1994. Harken also plans to acquire approximately 26 kilometers of additional seismic data on the Alcaravan Contract area in February 1995.
In September 1994, Harken announced that Huffco Group, Inc. ("Huffco") of Houston, Texas joined Harken in the drilling of its first exploratory well under the Alcaravan Contract. Under the terms of this joint
HARKEN ENERGY CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
venture agreement, which was approved by Ecopetrol, Harken serves as operator and retains a 50% interest in the well. The well, the Alcaravan #1, was spudded in early February 1995 and will be drilled to a projected depth of 10,500 feet to test for commercial quantities of oil in the oil prone zones prevalent in the Llanos Basin; the Carbonera, Mirador, Guadalupe and the basal Cretaceous formations.
Bocachico Contract -- In January 1994, Harken announced that Harken de Colombia, Ltd. had signed its second Association Contract ("Bocachico Contract") with Ecopetrol, covering the Bocachico contract area. Under the Bocachico Contract, Harken has acquired the exclusive rights to conduct exploration activities and drilling on this area, which covers approximately 192,000 acres in the Middle Magdelena Valley of Central Colombia.
During the first year of the Bocachico Contract, Harken is conducting seismic activities on the land covered by this contract including reprocessing of at least 250 kilometers of existing seismic data and the acquisition of at least 35 kilometers of new seismic data. During each of the 2nd through the 6th contract years Harken may elect to continue the contract by committing to the drilling of at least one well during each contract year. During this initial six year term, called the Exploration Period under the Bocachico Contract, if Harken has discovered the existence of commercial production in the Bocachico Contract area, the Bocachico Contract will be further extended for a period of 22 years from the date of any commercial discovery of oil and/or gas. If Harken makes a commercial discovery of oil and/or gas which is approved by Ecopetrol, the standard terms of the Bocachico Contract will apply. Such terms provide for Ecopetrol to reimburse Harken for 50% of its successful well costs expended up to the point of commercial discovery and to receive a 20% royalty interest and for both Ecopetrol and Harken to each have a 50% working interest.
In addition to reprocessing and acquiring seismic data during the first contract year of the Bocachico Contract, Harken has evaluated seismic data and has completed an engineering feasibility study to evaluate the potential for recovering existing oil reserves in the Rio Negro area, which is located in the northern portion of the Bocachico Contract area. Three wells were drilled, produced and subsequently abandoned by another contractor approximately 30 years ago in this area. These wells have provided information and data including production rates, well logs and pressure tests. This well data has been utilized by Harken in such studies to evaluate the feasibility of applying modern production and recovery techniques in this area. Harken will also acquire a minimum of 35 kilometers of seismic data on the Bocachico Contract area in early 1995.
On January 19, 1995, after completing the engineering feasibility study, Harken notified Ecopetrol of Harken's commitment to drill a well under the Bocachico Contract, and thereby extended the contract into its second year. Harken currently anticipates that a well site will be selected and drilling will commence by mid-1995.
Playero Contract -- In December 1994, Harken announced that Harken de Colombia, Ltd. had signed its third Association Contract ("Playero Contract") with Ecopetrol, covering the Playero contract area. Under the Playero Contract, Harken has acquired the exclusive rights to conduct exploration activities and drilling on this area, which covers approximately 10,000 acres in the Llanos Basin of Colombia, contiguous to Harken's Alcaravan Contract area.
HARKEN ENERGY CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
During the first year of the Playero Contract, Harken will acquire at least 12 kilometers of new seismic data in the Playero Contract area. During each of the 2nd through the 6th contract years, Harken may elect to continue the contract by committing to the drilling of at least one well during each contract year. During this initial six year term, called the Exploration Period under the Playero Contract, if Harken has discovered the existence of commercial production in the Playero Contract area, the Playero Contract will be further extended for a period of 22 years from the date of termination of the Exploration Period with a total term not to exceed 28 years. If Harken makes a commercial discovery of oil and/or gas which is approved by Ecopetrol, the standard terms of the Playero Contract will apply. The Playero Contract was granted by Ecopetrol under a new form of Association Contract which has modified various standard terms from the previous form of Association Contract which was used on the Alcaravan and Bocachico Contracts. Such terms provide for Ecopetrol to reimburse Harken for 50% of its successful well costs expended up to the point of a commercial discovery and to receive a 20% royalty interest. Although both Ecopetrol and Harken each would have a 50% working interest, production net of royalty would be allocated 50% to each party until accumulated production from the Playero Contract area reaches a cumulative total of 60 million barrels of oil. After that cumulative production level is achieved, production net of royalty is allocated at rates to Harken from 50% to 25% based upon the relative profitability of the project with Ecopetrol receiving the remaining complementary 50% to 75% of such additional production.
Bahrain Operations -- In January 1990, Harken, through its wholly-owned subsidiary, Harken Bahrain Oil Company ("HBOC"), entered into a production sharing agreement with the Bahrain National Oil Company ("BANOCO"), which gave it the exclusive right to explore for, develop and produce oil and gas throughout most of Bahrain's Arabian Gulf offshore territories. Subject to the discovery and development of oil and/or gas, the contract has a term of thirty-five years. Under the original terms of the agreement, as amended, Harken was to drill an exploratory well to test the Permian Khuff formation within 2 1/2 years and drill a total of four wells by 1995 to earn all of its acreage rights.
In July 1990, Harken entered into a joint venture arrangement with a joint venture partner, Bass Enterprises Production Company ("BEPCO"), in which BEPCO committed to provide the funding for the first well and at least two subsequent wells. On April 8, 1993, HBOC and BEPCO entered into an agreement whereby BEPCO was released and discharged from any future drilling obligations related to HBOC's production sharing agreement, and the joint venture agreement between HBOC and BEPCO was terminated. As part of this agreement, BEPCO paid to HBOC approximately $2,000,000 plus other consideration, which represented the negotiated amount for BEPCO's remaining obligation for future costs to be incurred in Bahrain. This settlement amount was recorded as deferred revenue by Harken and is reduced by ongoing investment expenditures related to Bahrain.
The initial exploratory well under the production sharing agreement was drilled on the Jarim Reef, which began drilling November 1991. In March 1992, after drilling was completed, HBOC announced that the Jarim No. 2 well was not productive of either oil or gas and was abandoned. On December 28, 1992, Harken commenced the drilling of its second exploratory well, the Muharraq No. 1, in Bahrain. In February 1993, Harken announced that the Muharraq No. 1 well had no shows of oil or gas and was plugged and abandoned. Further, under the terms of the production sharing agreement, HBOC allowed its exploration and drilling rights on approximately 10% of the acreage covered by the production sharing agreement to
HARKEN ENERGY CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
expire, effective February 13, 1993. HBOC allowed an additional portion of the acreage covered by the production sharing agreement to expire effective August 29, 1993.
In May 1994, Harken announced a new seismic reprocessing program covering 500 kilometers of seismic lines in the vicinity of the Jarim Reef. At present Harken holds approximately 500,000 acres under its production sharing agreement. Unless commercial production is found or an extension to the production sharing agreement is obtained, this acreage expires in July 1995. In January 1995, Harken completed its reprocessing of approximately 500 kilometers of seismic data and has reviewed the results of that work with BANOCO. Unless Harken obtains a joint venture partner, Harken will not proceed to either acquire additional seismic data or drill another well. If a joint venturer is located, it will be necessary to obtain an extension of one year or more from July 1995 to complete work necessary with a joint venturer.
Other -- Harken leases its corporate and certain other office space and certain field operating offices. Total office and operating lease expense during 1992, 1993 and 1994 was $680,000, $707,000 and $510,000, respectively. Future minimum rental payments required under all leases that have initial or remaining noncancellable lease terms in excess of one year as of December 31, 1994, net of sublease arrangements, are as follows:
The exploration, development and production of oil and gas are subject to various Navajo, federal and state laws and regulations designed to protect the environment. Compliance with these regulations is part of Harken's day-to- day operating procedures. Infrequently, accidental discharge of such materials as oil, natural gas or drilling fluids can occur and such accidents can require material expenditures to correct. Harken maintains levels of insurance customary in the industry to limit its financial exposure. Management is unaware of any material capital expenditures required for environmental control during the next fiscal year.
Harken has accrued approximately $1,260,000 at December 31, 1994 relating to other operational or regulatory liabilities related primarily to Chuska's operations. Harken and its subsidiaries currently are involved in various lawsuits and other contingencies, including the guarantee of certain lease obligations, which in management's opinion, will not result in significant loss exposure to Harken.
ITEM 9.
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE
None
PART III
ITEM 10.
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
Reference is made to the material under the captions "Directors of Harken" and "Executive Officers of Harken" in the Registrant's definitive Proxy Statement to be filed on or before April 30, 1995 pursuant to Regulation 14A in connection with its Annual Meeting of Stockholders to be held in June 1995, which is incorporated herein by reference.
ITEM 11.
ITEM 11. EXECUTIVE COMPENSATION
Reference is made to the material under the captions "Executive Officers of Harken (Executive Compensation)" in the Registrant's definitive Proxy Statement to be filed on or before April 30, 1995 pursuant to Regulation 14A in connection with its Annual Meeting of Stockholders to be held in June 1995, which is incorporated herein by reference.
ITEM 12.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS
Reference is made to the material under the captions "Principal Holders of Securities" in the Registrant's definitive Proxy Statement to be filed on or before April 30, 1995 pursuant to Regulation 14A in connection with its Annual Meeting of Stockholders to be held in June 1995, which is incorporated herein by reference.
ITEM 13.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
Reference is made to the material under the captions "Certain Transactions" in the Registrant's definitive Proxy Statement to be filed on or before April 30, 1995 pursuant to Regulation 14A in connection with its Annual Meeting of Stockholders to be held in June 1995, which is incorporated herein by reference.
PART IV
ITEM 14.
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K
A. Exhibits
10-21 -- None 22 -- Subsidiaries of Harken 23-24 -- None 25 -- Powers of Attorney 26 -- None 27 -- EDGAR Financial Data Schedules 28-29 -- None
B. Financial Statements and Schedules
(1) Included in PART II of this report:
(2) The information required by Schedules IV and VIII is provided in the related financial statements or in a note, thereto.
(3) The information required by Schedules III, VII, X, and XI through XXVIII is not applicable to the Company.
C. Reports on Form 8-K
On November 4, 1994, a report on Form 8-K was filed regarding the acquisition of additional interest in CHAP Venture.
SIGNATURES
Pursuant to the requirements of Section 13 or 15 (d) of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized in the capacities indicated.
Bruce N. Huff, by signing his name hereto, does hereby sign this Form 10-K, Annual Report for the fiscal year ended December 31, 1994, on behalf of Harken Energy Corporation and each of the above-named officers and directors of such Company, pursuant to powers of attorney, executed on behalf of the Company and each such officer and director.
*By: /s/ BRUCE N. HUFF ---------------------- Bruce N. Huff, Attorney-in-fact