- --------------------------------------------------------------------------------
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended September 30, 2001
[_] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from ______ to _______
Commission file number 0-9207
HARKEN ENERGY CORPORATION
(Exact name of registrant as specified in its charter)
DELAWARE 95-2841597
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
580 WESTLAKE PARK BOULEVARD,
SUITE 600 77079
HOUSTON, TEXAS (Zip Code)
(Address of principal executive offices)
Registrant's telephone number, including area code (281) 504-4000
INDICATE BY CHECK MARK WHETHER THE REGISTRANT (1) HAS FILED ALL REPORTS
REQUIRED TO BE FILED BY SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF
1934 DURING THE PRECEDING 12 MONTHS (OR FOR SUCH SHORTER PERIOD THAT THE
REGISTRANT WAS REQUIRED TO FILE SUCH REPORTS), AND (2) HAS BEEN SUBJECT TO SUCH
FILING REQUIREMENTS FOR THE PAST 90 DAYS. YES x NO
----- ------
The number of shares of Common Stock, par value $0.01 per share, outstanding
as of November 1, 2001 was 18,117,995.
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HARKEN ENERGY CORPORATION
INDEX TO QUARTERLY REPORT
SEPTEMBER 30, 2001
PAGE
----
PART I. FINANCIAL INFORMATION
Item 1. Condensed Financial Statements
Consolidated Condensed Balance Sheets....................... 4
Consolidated Condensed Statements of Operations............. 5
Consolidated Condensed Statement of Stockholders' Equity.... 6
Consolidated Condensed Statements of Cash Flows............. 7
Notes to Consolidated Condensed Financial Statements........ 8
Item 2. Management's Discussion and Analysis of Financial Condition
and Results of Operations................................. 16
PART II. OTHER INFORMATION............................................. 25
SIGNATURES............................................................. 29
2
PART I - FINANCIAL INFORMATION
3
ITEM 1. CONDENSED FINANCIAL STATEMENTS
HARKEN ENERGY CORPORATION AND SUBSIDIARIES
CONSOLIDATED CONDENSED BALANCE SHEETS
(Unaudited)
DECEMBER 31, SEPTEMBER 30,
2000 2001
------------- -------------
ASSETS
------
Current Assets:
Cash and temporary investments $ 20,673,000 $ 13,321,000
Accounts receivable, net 7,160,000 6,614,000
Related party notes receivable 169,000 169,000
Prepaid expenses and other current assets 1,142,000 1,828,000
------------- -------------
Total Current Assets 29,144,000 21,932,000
Property and Equipment, net 110,961,000 100,660,000
Investment in Equity Investee - 8,757,000
Other Assets, net 5,242,000 4,623,000
------------- -------------
$ 145,347,000 $ 135,972,000
============= =============
LIABILITIES AND STOCKHOLDERS' EQUITY
------------------------------------
Current Liabilities:
Trade payables $ 3,106,000 $ 1,971,000
Accrued liabilities and other 8,819,000 8,393,000
Revenues and royalties payable 1,952,000 1,210,000
Current portion of long-term debt - 2,000,000
------------- -------------
Total Current Liabilities 13,877,000 13,574,000
Convertible Notes Payable 69,940,000 51,318,000
Long-Term Bank Credit Facilities 9,937,000 7,937,000
Other Long-Term Obligations 4,917,000 7,459,000
Commitments and Contingencies (Note 10)
Stockholders' Equity:
Series G1 Preferred Stock, $1.00 par value; $100 liquidation
value; 240,000 and 700,000 shares authorized, respectively;
158,155 and 446,417 shares issued, respectively 158,000 446,000
Series G2 Preferred Stock, $1.00 par value; $100 liquidation
value; 400,000 shares authorized and 95,800 shares issued
at September 30, 2001. - 96,000
Common stock, $0.01 par value; 225,000,000 shares authorized;
17,699,110 and 18,635,395 shares issued, respectively 177,000 186,000
Additional paid-in capital 371,546,000 385,615,000
Accumulated deficit (324,886,000) (329,515,000)
Accumulated other comprehensive income 134,000 134,000
Treasury stock, at cost, 89,750 and 446,900 shares held, respectively (453,000) (1,278,000)
------------- -------------
Total Stockholders' Equity 46,676,000 55,684,000
------------- -------------
$ 145,347,000 $ 135,972,000
============= =============
The accompanying Notes to Consolidated Condensed Financial Statements
are an integral part of these Statements.
4
HARKEN ENERGY CORPORATION AND SUBSIDIARIES
CONSOLIDATED CONDENSED STATEMENTS OF OPERATIONS
(Unaudited)
THREE MONTHS ENDED NINE MONTHS ENDED
SEPTEMBER 30, SEPTEMBER 30,
----------------------------------- -----------------------------------
2000 2001 2000 2001
-------------- -------------- -------------- --------------
Revenues:
Oil and gas operations $ 11,398,000 $ 6,296,000 $ 32,072,000 $ 26,003,000
Interest and other income 194,000 136,000 869,000 603,000
-------------- -------------- -------------- --------------
11,592,000 6,432,000 32,941,000 26,606,000
-------------- -------------- -------------- --------------
Costs and Expenses:
Oil and gas operating expenses 3,688,000 2,967,000 10,656,000 9,548,000
General and administrative expenses, net 3,009,000 2,037,000 8,720,000 7,409,000
Depreciation and amortization 3,124,000 3,425,000 9,266,000 11,508,000
Interest expense and other, net 1,242,000 899,000 3,986,000 3,597,000
Charge for European Note conversion - - 2,068,000 -
-------------- -------------- -------------- --------------
11,063,000 9,328,000 34,696,000 32,062,000
-------------- -------------- -------------- --------------
Income (loss) before income taxes $ 529,000 $ (2,896,000) $ (1,755,000) $ (5,456,000)
Income tax expense 15,000 34,000 45,000 64,000
-------------- -------------- -------------- --------------
Income (loss) before extraordinary items $ 514,000 $ (2,930,000) $ (1,800,000) $ (5,520,000)
Extraordinary item-charge for reduction of
unamortized issuance costs - - (7,000) -
Extraordinary item-gain on repurchase/exchange of
European Notes 3,523,000 1,722,000 5,395,000 2,975,000
-------------- -------------- -------------- --------------
Net income (loss) $ 4,037,000 $ (1,208,000) $ 3,588,000 $ (2,545,000)
============== ============== ============== ==============
Preferred stock dividends (65,000) (1,135,000) (65,000) (2,084,000)
-------------- -------------- -------------- --------------
Net income (loss) attributed to common
stock $ 3,972,000 $ (2,343,000) $ 3,523,000 $ (4,629,000)
============== ============== ============== ==============
Basic and diluted income (loss) per common share:
Income (loss) before extraordinary items $ 0.02 $ (0.22) $ (0.11) $ (0.42)
Extraordinary item-charge for reduction of
unamortized issuance costs - - (0.00) -
Extraordinary item-gain on repurchase/exchange of
European Notes 0.20 0.09 0.32 0.16
-------------- -------------- -------------- --------------
Income (loss) per common share $ 0.22 $ (0.13) $ 0.21 $ (0.26)
============== ============== ============== ==============
Weighted average shares outstanding 17,671,003 18,118,344 16,820,086 18,034,555
============== ============== ============== ==============
The accompanying Notes to Consolidated Condensed Financial Statements are
an integral part of these Statements.
5
HARKEN ENERGY CORPORATION AND SUBSIDIARIES
CONSOLIDATED CONDENSED STATEMENT OF STOCKHOLDERS' EQUITY
(Unaudited)
ACCUMULATED
G1 G2 ADDITIONAL OTHER
PREFERRED PREFERRED COMMON PAID-IN TREASURY ACCUMULATED COMPREHENSIVE
STOCK STOCK STOCK CAPITAL STOCK DEFICIT INCOME (LOSS) TOTAL
--------- --------- -------- ------------ ----------- ------------- -------------- ------------
Balance, December 31, 2000 $ 158,000 $ - $177,000 $371,546,000 $ (453,000) $(324,886,000) $ 134,000 $ 46,676,000
Issuance of common
stock, net - - 5,000 (5,000) - - - -
Issuance of preferred
stock, net 336,000 96,000 - 14,030,000 - - - 14,462,000
Preferred stock
dividends - - - - - (2,084,000) - (2,084,000)
Purchase of treasury
stock - - - - (825,000) - - (825,000)
Conversion of preferred
stock (48,000) - 4,000 44,000 - - - -
Comprehensive income:
Cumulative effect of
change in accounting
principle - - - - - - (3,025,000)
Net change in derivative
fair value - - - - - - 1,391,000
Reclassification of
derivative fair
value into earnings - - - - - - 1,634,000
Net loss - - - - - (2,545,000) -
Total comprehensive
income (loss) (2,545,000)
--------- --------- -------- ------------ ----------- ------------- -------------- ------------
Balance, September 30, 2001 $ 446,000 $ 96,000 $186,000 $385,615,000 $(1,278,000) $(329,515,000) $ 134,000 $ 55,684,000
========= ========= ======== ============ =========== ============= ============== ============
The accompanying Notes to Consolidated Condensed Financial Statements are
an integral part of these Statements.
6
HARKEN ENERGY CORPORATION AND SUBSIDIARIES
CONSOLIDATED CONDENSED STATEMENTS OF CASH FLOWS
(Unaudited)
NINE MONTHS ENDED
SEPTEMBER 30,
-------------------------------
2000 2001
------------ ------------
Cash flows from operating activities:
Net income (loss) $ 3,588,000 $ (2,545,000)
Adjustments to reconcile net loss to net cash
provided by operating activities:
Depreciation and amortization 9,266,000 11,508,000
Amortization of issuance costs 1,084,000 966,000
Extraordinary items (5,388,000) (2,975,000)
Charge for European Note conversion 2,068,000 -
Other (9,000) 441,000
Change in assets and liabilities:
(Increase) decrease in accounts receivable (1,792,000) 46,000
Increase (decrease) in trade payables and other 7,330,000 (1,436,000)
------------ ------------
Net cash provided by operating activities 16,147,000 6,005,000
------------ ------------
Cash flows from investing activities:
Proceeds from sales of assets 2,627,000 13,336,000
Deconsolidation of subsidiary - (668,000)
Capital expenditures, net (24,749,000) (25,133,000)
------------ ------------
Net cash used in investing activities (22,122,000) (12,465,000)
------------ ------------
Cash flows from financing activities:
Repayments of long-term debt (8,093,000) (207,000)
Proceeds from issuances of common stock,
net of issuance costs 7,772,000 -
Proceeds from issuance of preferred stock,
net of issuance costs 7,528,000 -
Treasury shares purchased - (825,000)
Collection of note receivable - 140,000
------------ ------------
Net cash provided by (used in) financing activities 7,207,000 (892,000)
------------ ------------
Net increase (decrease) in cash and temporary investments 1,232,000 (7,352,000)
Cash and temporary investments at beginning of period 25,612,000 20,673,000
------------ ------------
Cash and temporary investments at end of period $ 26,844,000 $ 13,321,000
============ ============
Supplemental disclosures of cash flow information:
Cash paid during the period for:
Interest $ 2,903,000 $ 2,280,000
Income taxes - -
The accompanying Notes to Consolidated Condensed Financial Statements
are an integral part of these Statements.
7
HARKEN ENERGY CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS
SEPTEMBER 30, 2000 AND 2001
(Unaudited)
(1) BASIS OF PRESENTATION
The accompanying unaudited consolidated condensed financial statements of
Harken Energy Corporation ("Harken") have been prepared pursuant to the rules
and regulations of the Securities and Exchange Commission ("SEC"). Certain
information and note disclosures normally included in annual financial
statements prepared in accordance with generally accepted accounting principles
have been condensed or omitted pursuant to these rules and regulations, although
Harken believes that the disclosures made are adequate to make the information
presented not misleading. In the opinion of Harken, these financial statements
contain all adjustments necessary to present fairly its financial position as of
December 31, 2000 and September 30, 2001 and the results of its operations and
changes in its cash flows for all periods presented as of September 30, 2000 and
2001. All such adjustments represent normal recurring items. These condensed
financial statements should be read in conjunction with the financial statements
and the notes thereto included in Harken's Annual Report on Form 10-K for the
year ended December 31, 2000. Certain prior year amounts have been reclassified
to conform with the 2001 presentation.
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the financial
statements and the reported amounts of revenues and expenses during the reported
period. Actual results could differ from these estimates.
The results of operations for the nine month period ended September 30,
2001 are not necessarily indicative of the results to be expected for the full
year.
(2) ACQUISITIONS AND DISPOSITIONS
Acquisition of Benz Prospects -- On December 30, 1999, pursuant to a
Purchase and Sale Agreement and other related agreements, Harken, along with
Harken Gulf Exploration Company, a wholly-owned subsidiary, purchased oil and
gas leases covering nine exploration prospect areas (the "Benz Prospects")
covering approximately 51,000 net acres plus certain other assets from Benz
Energy, Incorporated ("Benz"). In exchange for the prospects, Harken issued 5%
subordinated notes (the "Benz Convertible Notes") with a face value of $12
million, which are convertible into Harken common stock at a conversion price of
$65.00 per share and originally were to mature on May 26, 2003.
Benz retained a 20% reversionary interest, subject to the Benz Prospects
achieving payout as defined in the Purchase and Sale Agreement. Also, pursuant
to the agreements, a former officer of Benz shall earn additional purchase price
consideration based on 20% of the project reserve value, as defined, as of
December 31, 2000, 2001 and 2002 less total project costs, as defined, related
to the Benz Prospects. Such purchase price consideration percentage shall
increase to 40% in the event Benz merges into or is otherwise acquired by
Harken. Pursuant to the agreement, in April 2001 Harken issued 263,301 shares of
Harken
8
common stock relating to this additional purchase price consideration based on
the reserve value of the Benz Prospects as of December 31, 2000.
Sales of Certain Producing Property Interests -- During the first nine
months of 2001, Harken sold certain interests in producing oil and gas
properties located in Texas, Arkansas, New Mexico, and Louisiana for
approximately $12,974,000 cash.
(3) PROPERTY AND EQUIPMENT
A summary of property and equipment follows:
December 31, September 30,
2000 2001
------------- -------------
Unevaluated oil and gas properties:
Unevaluated Colombian properties $ 588,000 $ 161,000
Unevaluated Costa Rican properties 7,159,000 -
Unevaluated Peru properties - 575,000
Unevaluated domestic properties 9,919,000 6,818,000
Evaluated oil and gas properties:
Evaluated Colombian properties 173,358,000 182,423,000
Evaluated domestic properties 148,487,000 148,277,000
Facilities, gas plants and other property 22,048,000 24,496,000
Less accumulated depreciation and
amortization (250,598,000) (262,090,000)
------------- -------------
$ 110,961,000 $ 100,660,000
============= =============
Under full cost accounting rules, for each cost center, capitalized costs
of evaluated oil and gas properties, 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 cash flows from estimated
production of proved oil and gas reserves, based on current economic and
operating conditions, 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. If capitalized costs exceed this limit, the excess is
charged to earnings.
Based on prices as of September 30, 2001, the net evaluated capitalized
costs related to Harken's domestic oil and gas properties exceeded the domestic
cost ceiling. Subsequent to September 30, 2001 and as of November 8, 2001,
natural gas prices have increased while oil prices have declined. Based on
prices as of November 8, 2001, along with updated information related to oil and
gas reserve quantities added subsequent to September 30, 2001, Harken's domestic
cost ceiling exceeded its net evaluated capitalized costs, and no amount has
been charged to expense.
9
(4) MIDDLE AMERICAN OPERATIONS
Colombia Operations -- Harken's Colombian operations are conducted through
Harken de Colombia, Ltd. ("HDC"), a wholly-owned subsidiary of Harken. During
the second quarter of 2001, and following the evaluation of the results of
recent 3-D seismic, Harken declined the extension of the Los Olmos Contract into
a third contract year, and relinquished the Los Olmos Contract acreage back to
Ecopetrol. In May 2001, HDC signed a Technical Evaluation Agreement ("El Retorno
TEA") covering the El Retorno acreage block, which covers approximately 86,000
acres adjacent to the Alcaravan Contract area. The El Retorno TEA requires HDC
to carry out a seismic reprocessing program over the subsequent six month period
and grants HDC an option to execute an Association Contract over the area.
Harken is currently negotiating with Ecopetrol for an extension of the term of
the El Retorno TEA.
Terms of each of the Association Contracts commit Harken to perform certain
activities in accordance with a prescribed timetable. During July 2001, Harken
received from Ecopetrol an extension to December 8, 2001 to drill the fifth year
obligation well related to the Bocachico Contract. Harken intends to spud this
well within this time requirement. Also during July 2001, Harken received from
Ecopetrol an extension to October 31, 2001 for Harken to determine whether to
extend the Bolivar Contract into its sixth contract year. Harken is currently
negotiating with Ecopetrol for the further extension of this determination date
on the Bolivar Contract. As of November 9, 2001, Harken was in compliance with
the requirements of each of the Association Contracts, as amended, and the El
Retorno TEA.
In October 2001, Harken received notification from Ecopetrol that Harken
could proceed with the sole-risk development of the Palo Blanco Field of the
Alcaravan Association Contract. As such, Harken is entitled to receive
Ecopetrol's share of production after royalty, until Harken has recovered 200%
of its costs, after which time Ecopetrol could elect to begin to receive its
share of production.
Costa Rica Operations -- Harken, through Harken Costa Rica Holdings LLC
("HCRH", a Nevada limited liability corporation subsidiary) owns an interest in
an Exploration and Production concession contract with the Republic of Costa
Rica ("Costa Rica Contract"). At June 30, 2001, Harken owned 80% of the stock of
HCRH, with an affiliate of MKJ Xploration, Inc. ("MKJ") owning the remaining 20%
of the stock of HCRH. In July 2001, Harken elected not to pay the $4 million of
additional funds to be transferred to HCRH, which, in accordance with the
contract between Harken and MKJ, resulted in Harken's ownership in HCRH being
reduced to 40% (with MKJ's ownership being increased to 60%) and resulted in MKJ
assuming the operations of the Costa Rica Contract. As a result of Harken's
reduced ownership in HCRH, Harken reflects its investment in HCRH following the
equity method of accounting whereby Harken's historical cost of its investment
as of September 30, 2001 is presented as Investment in Equity Investee in the
accompanying condensed consolidated balance sheet. This presentation represents
a change in the accounting for Harken's investment in HCRH, which was previously
consolidated. Due to the insignificant impact of this change in accounting, no
pro forma disclosure is required. HCRH is committed to the drilling of the
initial well to be drilled, pending the receipt of the necessary environmental
drilling permit. MKJ is seeking additional joint venture partner participation
for the work program obligations required by the Costa Rica Contract to fund the
initial well to be drilled. As of November 9, 2001, the environmental drilling
permit for the initial well under the Costa Rica Contract has not been approved
or denied by the Costa Rica government authorities.
Peru Operations -- In April 2001, Harken, through a wholly-owned
subsidiary, signed a Technical Evaluation Agreement ("Peru TEA") with PeruPetro,
the national oil company of Peru. The Peru TEA covers
10
an area of approximately 6.8 million gross acres in northeastern Peru. Under the
terms of the Peru TEA, Harken has the option to convert the Peru TEA to a seven
year exploration contract, with a twenty-two year production period. Terms of
the Peru TEA allow Harken to conduct a study of the area that will include the
reprocessing of seismic data and evaluation of previous well data.
Panama Operations - In September 2001, Harken, through a wholly-owned
subsidiary, signed a Technical Evaluation Agreement ("Panama TEA") with the
Ministry of Commerce and Industry for the Republic of Panama. The Panama TEA
covers an area of approximately 2.7 million gross acres divided into three
blocks in and offshore Panama. Under the terms of this Panama TEA, which extends
for a period of 24 months, Harken is to perform certain work program procedures
and studies to be submitted to the Panamanian government with an option to
negotiate and enter into one or more Contracts for the Exploration and
Exploitation of Hydrocarbons with the Ministry of Commerce and Industry.
(5) BANK CREDIT FACILITY OBLIGATIONS
A summary of long-term bank obligations follows:
December 31, September 30,
2000 2001
------------ -------------
Subsidiary notes payable to bank (A) $ 9,937,000 $ 9,937,000
Subsidiary project finance facility (B) - -
------------ -------------
9,937,000 9,937,000
Less: Current portion - (2,000,000)
------------ -------------
$ 9,937,000 $ 7,937,000
============ =============
(A) Certain Harken subsidiaries (the "Borrowers") entered into a three year
loan facility with Bank One, N.A. ("Bank One") which is secured by
certain of Harken's domestic oil and gas properties and a guarantee from
Harken. The Bank One facility provides borrowings limited by a borrowing
base (as defined by the Bank One facility) which was $15,490,000 as of
September 30, 2001, and $14,290,000 as of November 9, 2001, pending
Bank One's redetermination which is currently in progress. Such borrowing
base is currently being reduced by $600,000 per month and is to be
redetermined by Bank One on May 1 and November 1 of each year in
accordance with the facility agreement. The Bank One facility provides
for interest based on LIBOR plus a margin of 2.350% (5.014% as of
September 30, 2001), payable at the underlying LIBOR maturities or
lender's prime rate, and provides for a commitment fee of 0.375 % on the
unused amount. At September 30, 2001, Harken has $9,937,000 outstanding
pursuant to the facility.
The Bank One facility requires the Borrowers, as well as Harken, to
maintain certain financial covenant ratios and requirements. Such
financial covenant ratios and requirements for the Borrowers include a
current ratio, as defined, of not less than 1.0 to 1.0, a total
liabilities to net capital investment ratio, as defined, of not more than
1.15 to 1.0 and a debt service coverage ratio, as defined, of not less
than 1.5 to 1.0. Required financial covenants for Harken include a ratio
of total liabilities to net worth, as defined, of not more than 0.6 to
1.0, and a debt service coverage ratio, as defined, of not less than 1.25
to 1.0. For the quarter
11
ended September 30, 2001, Harken and the Borrowers were each not in
compliance with their respective debt service coverage ratio requirement.
Harken and the Borrowers have received a waiver from Bank One related to
these two financial covenant requirements, and accordingly, the remaining
unpaid facility balance remains classified as a long-term obligation in
the accompanying consolidated condensed balance sheet.
(B) Effective September 1, 1999, Harken de Colombia, Ltd. entered into a
project finance loan agreement with the International Finance Corporation
("IFC") to be utilized in the development of the Bolivar Association
Contract block in Colombia ("the Project"). No borrowings were drawn down
by Harken de Colombia, Ltd. under the facility.
During the second quarter of 2001, Harken de Colombia, Ltd and IFC agreed
to terminate the project finance loan agreement.
(6) CONVERTIBLE NOTES PAYABLE
A summary of convertible notes payable is as follows:
December 31, September 30,
2000 2001
------------ -------------
5% European Notes $ 59,810,000 $ 40,980,000
Benz Convertible Notes 10,130,000 10,338,000
------------ -------------
69,940,000 51,318,000
Less: Current portion - -
------------ -------------
$ 69,940,000 $ 51,318,000
============ =============
5% European Notes -- On May 26, 1998, Harken issued to qualified purchasers
a total of $85 million in 5% Senior Convertible Notes (the "5% European Notes")
which mature on May 26, 2003. Interest incurred on these notes is payable semi-
annually in May and November of each year to maturity or until the 5% European
Notes are converted.
During the second quarter of 2001, Harken issued 325,150 newly-issued
shares of Series G1 Preferred stock in exchange for 5% European Notes in the
face amount of $9,000,000. Harken has reflected an extraordinary item gain of
$1,147,000 in the accompanying Consolidated Condensed Statements of Operations
for the difference between the face amount of the 5% European Notes exchanged
and the fair value of the Series G1 Preferred shares issued, less transaction
expenses.
During July 2001, Harken issued 95,800 shares of a new series of
convertible preferred stock (the "Series G2 Preferred") in exchange for 5%
European Notes in the face amount of $9,580,000. Harken has reflected an
extraordinary item gain of $1,722,000 in the accompanying Consolidated Condensed
Statements of Operations during the third quarter of 2001 for the difference
between the face amount of the 5% European Notes exchanged and the fair value of
the Series G2 Preferred shares issued, less transaction expenses.
12
(7) STOCKHOLDERS' EQUITY
Treasury Stock -- During the third quarter of 2001, Harken purchased
357,150 shares of Harken common stock at a cost of approximately $825,000.
Series G2 Preferred Stock -- As discussed in Note 6 - Convertible Notes
Payable, in July 2001, Harken issued 95,800 shares of a new series of
convertible preferred stock, the Series G2 Preferred, in exchange for 5%
European Notes in the face amount of $9,580,000. Harken's Board of Directors
approved the authorization and issuance of up to 400,000 shares of Series G2
Preferred, which has a liquidation value of $100 per share, and is convertible
at the holder's option into Harken common stock at a conversion price of $3.00
per share, subject to adjustment in certain circumstances (the "Series G2
Preferred Conversion Price"). The Series G2 Preferred is also convertible by
Harken into shares of Harken common stock if for any period of twenty
consecutive calendar days, the average of the closing prices of Harken common
stock during such period shall have equaled or exceeded $3.75 per share.
The Series G2 Preferred holders shall be entitled to receive dividends at
an annual rate equal to $8 per share when, as and if declared by the Harken
Board of Directors. All dividends on the Series G2 Preferred are cumulative and
payable semi-annually in arrears, payable on June 30 and December 30. At
Harken's option, dividends may also be payable in Harken common stock at $3.00
per share of Harken common stock. Harken may also redeem the Series G2 Preferred
in whole or in part for cash at any time at $100 per share plus any accrued and
unpaid dividends. In addition, on or after June 1, 2004, Harken may further
elect, in any six month period, to redeem up to 50% of the outstanding Series G2
Preferred with shares of Harken common stock valued at an average market price,
and using a redemption value of the Series G2 Preferred that includes a 5% to
10% premium based on the market capitalization of Harken at the time of
redemption.
(8) HEDGING ACTIVITIES
Harken holds certain commodity derivative instruments which are effective
in mitigating commodity price risk associated with a portion of its future
monthly natural gas production and related cash flows. Harken's oil and gas
operating revenues and cash flows are highly dependent upon commodity product
prices, which are volatile and cannot be accurately predicted. Harken's
objective for holding these commodity derivatives is to protect the operating
revenues and cash flows related to a portion of its future oil and gas sales
from the risk of significant declines in commodity prices.
As of September 30, 2001, Harken, through a wholly-owned subsidiary, held
natural gas price swaps resulting in the subsidiary receiving fixed prices of
approximately $2.20 per MMBTU covering a total of 225,000 MMBTUs over the
remaining life of the swaps, which terminate in December 2001. Upon the
January 1, 2001 adoption of Statement of Financial Accounting Standards ("SFAS")
No. 133, Harken reflected an increase in its accrued liabilities of
approximately $3,025,000 in order to fully record the fair value of these
natural gas swaps. As such derivatives qualify as cash flow hedges under SFAS
No. 133, the offsetting impact upon adoption was a charge to Other Comprehensive
Income within Harken's stockholders' equity. Such natural gas swaps are
reflected in accrued liabilities at September 30, 2001 with a remaining fair
value of approximately $26,000.
13
The above derivative has been designated as a cash flow hedge of the
exposure to variability of cash flows related to future sales of specified
production from certain of Harken's domestic property operations. Gains and
losses from commodity derivative instruments are reclassified into earnings when
the associated hedged production occurs. Harken holds no derivative instruments
which are designated as either fair value hedges or foreign currency hedges.
Settlements of commodity derivatives are based on the difference between fixed
swap prices and the New York Mercantile Exchange closing prices for each month
during the life of the contracts. Harken monitors its natural gas production
prices compared to New York Mercantile Exchange prices to assure its commodity
derivatives are effective hedges in mitigating its commodity price risk.
Risk management policies established by Harken management limit Harken's
derivative instrument activities to those derivative instruments which are
effective in mitigating certain operating risks, including commodity price risk.
In addition to other restrictions, the extent and terms of any derivative
instruments are required to be reviewed and approved by executive management of
Harken. With the August 19, 1999 merger with XPLOR Energy, Inc. ("XPLOR"),
Harken assumed the above mentioned natural gas swap contract currently held by
XPLOR.
(9) SEGMENT INFORMATION
Harken's accounting policies for each of its operating segments are the
same as those for its consolidated financial statements. There are no
intersegment sales or transfers. Revenues and expenses not directly
identifiable with either segment, such as certain general and administrative
expenses, are allocated by Harken based on various internal and external
criteria including an assessment of the relative benefit to each segment. During
the periods presented below, none of Harken's Middle American segment operating
revenues related to Costa Rica, Peru or Panama.
Harken's financial information for each of its operating segments is as
follows for the periods ended September 30, 2000 and 2001:
THREE MONTHS ENDED SEPTEMBER 30, 2000 NINE MONTHS ENDED SEPTEMBER 30, 2000
------------------------------------------------- -------------------------------------------------
NORTH MIDDLE NORTH MIDDLE
AMERICA AMERICA TOTAL AMERICA AMERICA TOTAL
-------------- ------------- -------------- ------------- -------------- --------------
Operating revenues $ 8,424,000 $ 2,974,000 $ 11,398,000 $ 24,029,000 $ 8,043,000 $ 32,072,000
Interest and other income 142,000 52,000 194,000 442,000 427,000 869,000
Depreciation and
amortization 1,794,000 1,330,000 3,124,000 5,831,000 3,435,000 9,266,000
Interest expense and
other, net 844,000 398,000 1,242,000 2,583,000 1,403,000 3,986,000
Income tax expense 15,000 - 15,000 45,000 - 45,000
Segment income (loss)
before extraordinary items 1,099,000 (585,000) 514,000 1,285,000 (3,085,000) (1,800,000)
Segment income (loss) 2,861,000 1,176,000 4,037,000 3,983,000 (395,000) 3,588,000
Capital expenditures 4,698,000 1,703,000 6,401,000 9,330,000 10,781,000 20,111,000
Total assets at end of
period 109,153,000 201,840,000 310,993,000 109,153,000 201,840,000 310,993,000
14
THREE MONTHS ENDED SEPTEMBER 30, 2001 NINE MONTHS ENDED SEPTEMBER 30, 2001
------------------------------------------------- -------------------------------------------------
NORTH MIDDLE NORTH MIDDLE
AMERICA AMERICA TOTAL AMERICA AMERICA TOTAL
-------------- ------------- -------------- ------------- -------------- --------------
Operating revenues $ 4,212,000 $ 2,084,000 $ 6,296,000 $ 19,359,000 $ 6,644,000 $ 26,003,000
Interest and other income 67,000 69,000 136,000 271,000 332,000 603,000
Depreciation and
amortization 1,984,000 1,441,000 3,425,000 6,384,000 5,124,000 11,508,000
Interest expense and
other, net 579,000 320,000 899,000 2,128,000 1,469,000 3,597,000
Income tax expense 34,000 - 34,000 64,000 - 64,000
Segment income (loss)
before extraordinary items (1,264,000) (1,666,000) (2,930,000) 885,000 (6,405,000) (5,520,000)
Segment income (loss) (402,000) (806,000) (1,208,000) 2,373,000 (4,918,000) (2,545,000)
Capital expenditures 4,298,000 847,000 5,145,000 10,211,000 10,105,000 20,316,000
Total assets at end of
period 94,960,000 41,012,000 135,972,000 94,960,000 41,012,000 135,972,000
(10) COMMITMENTS AND CONTINGENCIES
Search Acquisition Corp. ("Search Acquisition"), a wholly-owned subsidiary
of Harken, is a defendant in a lawsuit filed by Petrochemical Corporation of
America and Lorken Investments Corporation (together, "Petrochemical"). This
lawsuit arises out of Petrochemical's attempt to enforce a judgment of joint and
several liability entered in 1993 against a group of twenty limited partnerships
known as the "Odyssey limited partnerships." Petrochemical claims that Search
Exploration, Inc. is liable for payment of the judgment as the successor-in-
interest to eight Odyssey limited partnerships. Search Acquisition was the
surviving corporation in the 1995 merger with Search Exploration, Inc. On
February 28, 1996, the court granted Search Acquisition's motion for summary
judgment. On July 3, 1998, the Fifth District Court of Appeals for the State of
Texas reversed the trial court's summary judgment and remanded the case to the
trial court. It is estimated that this trial will take place in the fourth
quarter of 2001. Although the ultimate outcome of this litigation is uncertain,
Harken believes that any liability to Harken as a result of this litigation will
not have a material adverse effect on Harken's financial condition.
420 Energy Investment, Inc. and ERI Investments, Inc. (collectively "420
Energy") filed a lawsuit against XPLOR Energy, Inc., ("XPLOR") a wholly-owned
subsidiary of Harken, on December 21, 1999 in the New Castle County Court of
Chancery of the State of Delaware. 420 Energy alleges that they are entitled to
appraisal and payment of the fair value of their common stock in XPLOR as of the
date XPLOR merged with Harken. Harken has relied on an indemnity provision in
the XPLOR merger agreement to tender the costs of defense in this matter to a
third party. Although the outcome of this litigation is uncertain, Harken
believes that any liability to Harken as a result of this litigation will not
have a material adverse effect on Harken's financial condition.
Harken has accrued approximately $6,007,000 at September 30, 2001 relating
to certain other operational or regulatory liabilities related to Harken's
domestic operations. Harken and its subsidiaries currently are involved in
various lawsuits and other contingencies, which in management's opinion, will
not result in significant loss exposure to Harken.
15
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
(UNAUDITED)
Certain statements included in the accompanying condensed financial
statements and in the following discussion and analysis of financial condition
and results of operations, including statements of Harken management's current
expectations, intentions, plans and beliefs, and statements containing the words
"believes", "anticipates", "estimates", "expects", or "may" are forward-looking
statements, as defined in Section 21D of the Securities Exchange Act of 1934.
Such forward-looking statements involve known and unknown risk, uncertainties
and other factors which may cause the actual results, performance, timing or
achievements of Harken to be materially different from any results, performance,
timing or achievements expressed or implied by such forward-looking statements.
Such factors include, among others, the risks described in Harken's Annual
Report on Form 10-K for the fiscal year ended December 31, 2000 filed with the
Securities and Exchange Commission.
OVERVIEW
Harken reported a net loss for the nine months ended September 30, 2001 of
$2,545,000, compared to a net income of $3,588,000 for the prior year period due
primarily to decreased worldwide oil and gas revenues during the first nine
months of 2001 compared to the prior year period primarily due to certain
domestic property sales. Gross profit before depreciation and amortization,
general and administrative and interest expenses totaled approximately $16.5
million during the nine months ended September 30, 2001 compared to
approximately $21.4 million for the prior year period.
During June 2001, Harken's Board of Directors approved a new plan to
restructure Harken's operations for the purpose of focusing Harken's resources
more directly on its domestic U.S. assets and operations particularly in the
Gulf Coast region of Texas and Louisiana. Pursuant to this restructuring plan,
the Board determined it to be in the shareholders' interest to implement such a
plan to move Harken's Middle American operations and obligations under a
separate subsidiary which will have the ability and capability to seek financing
and other capital plans on its own. During subsequent meetings held in September
and October 2001, the Board approved and authorized additional steps necessary
towards finalizing the first key stage of a restructuring by December 31, 2001.
During the nine months ended September 30, 2001, Harken's domestic
operating segment reflected segment gross profit of approximately $12.4 million
compared to approximately $15.2 million during the prior year period. Harken's
domestic operating results for the nine months ended September 30, 2001 do not
yet reflect the impact from recent successful domestic drilling activity in
southern Louisiana. Production from these wells, drilled in Harken's Lapeyrouse
and Lake Raccourci areas, have begun to contribute to Harken's operating cash
flows, partially mitigating the production and revenue reductions following the
sales of producing properties. Harken's domestic operating strategy includes
plans for additional exploration and development drilling, primarily in the Gulf
Coast region of Texas and Louisiana, to test prospects which may hold up to 170
billion cubic feet equivalent of risked net reserve potential. Certain of these
prospects may be drilled through joint venture arrangements, which Harken is
currently pursuing. Harken is also actively pursuing certain domestic
acquisition opportunities.
16
Three Months Ended Nine Months Ended
September 30, September 30,
----------------------------- ----------------------------------
2000 2001 2000 2001
----------------------------- ----------------------------------
OPERATING REVENUES (unaudited) (unaudited)
- -----------------------------------
Domestic Exploration and Production
Operations
- -----------------------------------
Gas sales revenues $ 4,014,000 $ 2,563,000 $ 11,120,000 $ 13,863,000
Gas volumes in mcf 934,000 830,000 3,028,000 2,931,000
Gas price per mcf $ 4.30 $ 3.09 $ 3.67 $ 4.73
Oil sales revenues $ 4,174,000 $ 1,649,000 $ 12,219,000 $ 5,496,000
Oil volumes in barrels 137,000 65,000 424,000 209,000
Oil price per barrel $ 30.47 $ 25.37 $ 28.82 $ 26.30
Gas plant revenues $ 236,000 $ - $ 690,000 $ -
Colombian Exploration and Production
Operations
- ------------------------------------
Oil sales revenues $ 2,974,000 $ 2,084,000 $ 8,043,000 $ 6,644,000
Oil volumes in barrels 123,000 119,000 355,000 356,000
Oil price per barrel $ 24.18 $ 17.51 $ 22.66 $ 18.66
OTHER REVENUES
- --------------
Interest income $ 185,000 $ 136,000 $ 850,000 $ 555,000
Other income $ 9,000 $ - $ 19,000 $ 48,000
RESULTS OF OPERATIONS
The following is management's discussion and analysis of certain
significant factors which have affected Harken's earnings and balance sheet
during the periods included in the accompanying consolidated financial
statements.
For the quarter ended September 30, 2001 compared with the corresponding prior
period.
NORTH AMERICAN OPERATIONS
Domestic gross oil and gas revenues during the third quarter of 2001 relate
primarily to the operations in the onshore and offshore areas of the Texas and
Louisiana Gulf Coast, and the Western and Panhandle regions of Texas. Earlier
during the year, Harken sold its operations in the Magnolia region of Arkansas,
the Carlsbad region of New Mexico and certain properties in southern Louisiana.
Domestic gas revenues decreased 36% to $2,563,000 for the three months
ended September 30, 2001 compared to $4,014,000 for the prior year period due
primarily to the decrease in average gas prices received during the third
quarter of 2001, as Harken received an overall average price of $3.09 per mcf of
gas during the third quarter of 2001 compared to $4.30 per mcf received during
the third quarter of 2000. In addition, Harken's domestic gas production volumes
decreased 11% compared to the prior year period due to the production decreases
resulting from the sales of certain producing properties discussed above. Third
quarter 2001 production volumes do not reflect the full impact of recent
successful drilling activity in southern Louisiana, which has resulted in the
recent completions of three producing gas wells, the first of which began
production in September 2001.
17
Domestic oil revenues decreased 60% to $1,649,000 during the third quarter
of 2001 compared to $4,174,000 during the third quarter of 2000 due primarily to
the December 2000 sale of Harken Southwest Corporation, which operated Harken's
Four Corners area production, and due to the sale during the second quarter 2001
of Harken's New Mexico operations. Overall, domestic oil production volumes
decreased 53% during the third quarter of 2001 compared to the prior year
period. In addition, average oil prices received during the third quarter of
2001 were decreased compared to the prior year period.
Gas plant revenues during the third quarter of 2000 were derived through
Harken Southwest Corporation, which was sold in December 2000.
Domestic oil and gas operating expenses consist of lease operating expenses
and production and reserve based taxes. Domestic oil and gas operating expenses
decreased 24% to $2,257,000 during the third quarter of 2001 compared to
$2,955,000 during the prior year primarily due to the above mentioned sales of
producing properties. Oil and gas operating expenses increased as a percentage
of related oil and gas revenues due primarily to the decrease in oil and gas
prices during the third quarter of 2001 compared to the prior year period.
Harken continues to seek to sell a specific domestic field operation with high
operating costs per barrel. Such efforts are intended to further reduce Harken's
overall operating expenses per unit of production beginning in 2002.
Harken expects that oil and gas production volumes generated as a result of
the recent drilling activity discussed above will continue to offset the normal
production declines experienced in its operating areas and help to mitigate the
production decreases as a result of recent sales of non-strategic producing
properties. However, through November 9, 2001, fourth quarter oil and gas prices
have remained lower than prices received in the prior year period. Harken's oil
and gas revenues are highly dependent upon product prices, which Harken is
unable to predict.
MIDDLE AMERICAN OPERATIONS
Harken's Colombian oil revenues have decreased 30% from $2,974,000 during
the third quarter of 2000 to $2,084,000 during the third quarter of 2001, due to
a decrease in the average price received per barrel, which decreased to $17.51
during the third quarter 2001 compared to $24.18 during the prior year period.
During the third quarter of 2000 and 2001, Harken's Colombian production
operations related to its Bolivar and Alcaravan Association Contract areas.
During the third quarter of 2000, sales of production from Harken's Estero
#1 well on the Alcaravan Contract area were temporarily limited to approximately
1,000 gross barrels of oil per day due to pipeline constraints and pumping
capacity. Beginning in April 2001, such pipeline constraints were partially
alleviated. In addition, during the second quarter of 2001, Harken purchased the
45 kilometer Guarimena to Santiago crude oil pipeline and negotiated a new
transportation agreement with the owner/operator of the pipeline that transports
crude oil from Santiago north to market and export points. As a result of the
above steps, Harken is now allowed to produce and transport up to approximately
3,000 gross barrels of oil per day combined from both Estero #1 and from the
recently drilled Estero #2 well, and during the third quarter 2001, averaged
approximately 2,000 gross barrels of oil production per day. In addition, in
October 2001, Harken was notified by Ecopetrol that Harken could proceed with
the development and production of the Palo Blanco Field on a sole-risk basis,
which will result in Harken receiving Ecopetrol's share of production from both
the Estero #1 and Estero #2 wells beginning in October 2001. Harken had been
previously receiving Ecopetrol's share of Estero #1 production pursuant to a
previous agreement with Ecopetrol. The
18
above increases from Harken's Estero field operations were offset by decreased
production from Harken's Catalina #1 and Olivo #1 wells on the Bolivar Contract,
as both wells have experienced downtime for evaluation procedures. Harken's
production volumes during the remainder of 2001 will primarily remain dependent
on existing well production, pumping efficiency, and security conditions.
Middle American operating expenses have decreased slightly from $733,000
during the third quarter of 2000 to $710,000 for the third quarter of 2001.
During the third quarter of 2001, Harken has taken steps to reduce operating
expenses related to its producing fields in Colombia, which are expected to
result in additional operating expense reductions beginning in the fourth
quarter of 2001.
INTEREST AND OTHER INCOME
Interest and other income decreased during the third quarter of 2001
compared to the prior year period as Harken's usage of cash for capital
expenditures during the past twelve months was only partially offset by cash
generated from operations and from sales of domestic properties. Harken
generated approximately $185,000 of interest income during the third quarter of
2000, compared to approximately $136,000 of interest income during the third
quarter of 2001. Additional decreases in Harken's cash balances could be
mitigated or offset by additional capital sources.
OTHER COSTS AND EXPENSES
General and administrative expenses decreased by 32% during the third
quarter of 2001 compared to the third quarter of 2000 partly due to Harken's
continuing efforts to reduce staff and further improve administrative
efficiency. In addition, during the third quarter of 2001, Harken was notified
that certain litigation expenses totaling approximately $740,000 incurred in
prior periods in the case D.E. Rice and Karen Rice, as Trustees for the Rice
Family Living Trust vs. Harken Exploration Company would be covered under
Harken's insurance coverage and would be collected during the fourth quarter
2001. Accordingly, Harken has reflected these proceeds as a reduction of general
and administrative expenses during the third quarter of 2001.
Depreciation and amortization expense increased during the third quarter of
2001 compared to the prior year period primarily due to downward revisions
during the fourth quarter of 2000 in Harken's Colombia proved reserves.
Depreciation and amortization on oil and gas properties is calculated on a unit
of production basis in accordance with the full cost method of accounting for
oil and gas properties.
Interest expense and other decreased during the third quarter of 2001
compared to the prior year period primarily due to the repurchase and exchange
of certain 5% European Notes during 2000 and during the first nine months of
2001. Such decrease in net interest expense was despite the decrease in the
amounts of interest capitalized to Harken's Colombian unevaluated property
costs.
19
For the nine months ended September 30, 2001 compared with the corresponding
prior period.
NORTH AMERICAN OPERATIONS
Domestic gross oil and gas revenues during the first nine months of 2001
relate primarily to the operations in the onshore and offshore areas of the
Texas and Louisiana Gulf Coast, the Western and Panhandle regions of Texas, the
Magnolia region of Arkansas and the Carlsbad region of New Mexico.
Domestic gas revenues increased 25% to $13,863,000 for the nine months
ended September 30, 2001 compared to $11,120,000 for the prior year period due
primarily to the increase in average gas prices received during the first nine
months of 2001, as Harken received an overall average price of $4.73 per mcf of
gas during the first nine months of 2001 compared to $3.67 per mcf received
during the first nine months of 2000. Gas production volumes during the first
nine months of 2001 decreased only slightly compared to the prior year period,
despite the sales of certain producing properties, due to new production from
Harken's drilling activity during the past twelve months, particularly from the
Old Ocean Field in the Texas Gulf Coast region. Additional new production is
also expected due to the recent drilling successes in southern Louisiana.
Domestic oil revenues decreased 55% to $5,496,000 during the first nine
months of 2001 compared to $12,219,000 during the first nine months of 2000
primarily due to the December 2000 sale of Harken Southwest Corporation, which
owned and operated Harken's Four Corners area production and due to the second
quarter 2001 sale of Harken's New Mexico operations. In addition, Harken's Gulf
Coast oil production was reduced by temporary operational curtailments during
the first quarter of 2001 at Harken's Main Pass area offshore Louisiana.
Overall, domestic oil production volumes decreased 51% during the first nine
months of 2001 compared to the prior year period.
Gas plant revenues during the first nine months of 2000 were derived
through Harken Southwest Corporation, which was sold in December 2000.
Domestic oil and gas operating expenses consist of lease operating expenses
and production and reserve based taxes. Domestic oil and gas operating expenses
decreased 21% to $6,976,000 during the first nine months of 2001 compared to
$8,827,000 during the prior year primarily due to the above mentioned sales of
producing properties. Oil and gas operating expenses decreased slightly as a
percentage of related oil and gas revenues due primarily to the increase in gas
prices during the first nine months of 2001 compared to the prior year period.
Harken continues to seek to sell a specific domestic field operation with high
operating costs per barrel. Such efforts are intended to further reduce Harken's
overall operating expenses per unit of production beginning in 2002.
Harken expects that oil and gas production volumes generated as a result of
the recent drilling activity discussed above will continue to offset the normal
production declines experienced in its operating areas and help to mitigate the
production decreases as a result of recent sales of non-strategic producing
properties. Through November 9, 2001, however, fourth quarter 2001 oil and gas
prices have remained lower than prices received in the prior year period.
Harken's oil and gas revenues are highly dependent upon product prices, which
Harken is unable to predict.
20
MIDDLE AMERICAN OPERATIONS
Harken's Colombian oil revenues have decreased 17% from $8,043,000 during
the first nine months of 2000 to $6,644,000 during the first nine months of 2001
due to a decrease in the average price received per barrel, which decreased from
$22.66 during the first nine months half of 2000 to $18.66 during 2001. During
2000 and 2001, Harken's Colombian production operations related to its Bolivar
and Alcaravan Association Contract areas.
During 2000 and the first quarter of 2001, sales of production from
Harken's Estero #1 well on the Alcaravan Contract area were limited to
approximately 1,000 gross barrels of oil per day due to pipeline constraints and
pumping capacity. During the second quarter of 2001, Harken took the steps
discussed above to resolve such limitations and Harken is now allowed to produce
and transport up to approximately 3,000 gross barrels of oil per day from both
Estero #1 and from the recently drilled Estero #2 well. Harken's production
volumes during the remainder of 2001 will primarily remain dependent on existing
well production, pumping efficiency, and security conditions.
Middle American operating expenses have increased from $1,829,000 during
the first nine months of 2000 to $2,572,000 for the first nine months of 2001,
primarily due to transportation and security costs. During the third quarter of
2001, Harken has taken steps to reduce operating expenses related to its
producing fields in Colombia, which are expected to result in operating expense
reductions beginning in the fourth quarter of 2001.
INTEREST AND OTHER INCOME
Interest and other income decreased during the first nine months of 2001
compared to the prior year period due to Harken's usage of cash for capital
expenditures during 2000 and first quarter 2001. Harken generated approximately
$850,000 of interest income during the first nine months of 2000, compared to
approximately $555,000 of interest income during the first nine months of 2001.
Additional decreases in Harken's cash balances could be mitigated or offset by
additional capital sources.
OTHER COSTS AND EXPENSES
General and administrative expenses decreased 15% during the first nine
months of 2001 compared to the first nine months of 2000 primarily due to staff
reductions and overall administrative efficiencies, as well as the legal expense
reimbursement mentioned above.
Depreciation and amortization expense increased during the first nine
months of 2001 compared to the prior year period primarily due to downward
revisions during 2000 in Harken's Colombia proved reserves. Depreciation and
amortization on oil and gas properties is calculated on a unit of production
basis in accordance with the full cost method of accounting for oil and gas
properties.
Interest expense and other decreased during the first nine months of 2001
compared to the prior year period primarily due to the repurchase and exchange
of certain 5% European Notes during 2000 and during the first nine months of
2001. Such decrease in net interest expense was despite the decrease in the
amounts of interest capitalized to Harken's Colombian unevaluated property
costs. In addition, during the first quarter
21
of 2001, Harken expensed the remaining unamortized issuance costs related to the
IFC project loan finance facility, which was terminated in May 2001.
LIQUIDITY AND CAPITAL RESOURCES
Harken's working capital at September 30, 2001 was approximately $8.4
million, compared to approximately $15.3 million at December 31, 2000. The
decrease in working capital during the first nine months of 2001 resulted
primarily from approximately $25.1 million of capital expenditures, which were
funded partially by sales of domestic oil and gas properties totaling
approximately $13.3 million. Assisted by strong oil and natural gas prices,
Harken's operations generated approximately $6.0 million of cash flow during the
first nine months of 2001. Harken's cash resources at September 30, 2001 totaled
approximately $13.3 million. Considering its existing cash resources and
potential additional capital sources, Harken believes that it will have
sufficient cash resources to fund all of its planned capital expenditures during
2001 and 2002. Harken's ongoing exploration, development and acquisition efforts
are expected to be funded through a combination of cash on hand, cash flows from
operations, issuances of debt or equity securities, or through cash provided by
either existing or newly established financing arrangements.
In June 2001, Harken's Board of Directors approved a plan to restructure
Harken's operations ("the Restructuring Plan"). This plan would focus on
concentrating Harken's future activities on domestic exploration and
development, while seeking a new venue for Harken's international assets that
could provide continued benefit to Harken from upside growth. Under the
Restructuring Plan, Harken has determined that its international assets can best
be valued and developed if placed in a venue and market outside of traditional
U.S. markets. Harken's restructuring plan will permit Harken to focus its
resources more directly on its domestic U.S. assets and operations particularly
in the Gulf Coast region of Texas and Louisiana. Pursuant to this restructuring
plan, the Board determined it to be in the shareholders' interest to implement
such a plan to move Harken's Middle American operations and obligations under a
separate subsidiary which will have the ability and capability to seek financing
and other capital plans on its own. During subsequent meetings held in September
and October 2001, the Board approved and authorized additional steps necessary
towards finalizing the first key stage of a restructuring by December 31, 2001.
CAPITAL SOURCES
During the first nine months of 2001, sales of domestic producing property
interests generated cash proceeds of approximately $12.9 million. Harken is
currently not considering additional sales of producing properties that would
generate significant cash proceeds.
Harken's operating cash flows from its domestic oil and gas properties are
being strengthened by recent successful drilling activity in southern Louisiana,
which have begun to partially offset the reductions following the sales of
producing properties consummated in late 2000 and during the first seven months
of 2001. The first of these new producing wells, the Thomas Cenac #1 on Harken's
Lapeyrouse area, began production in September 2001. Harken's domestic operating
cash flows are particularly dependent on the price of natural gas, which Harken
is unable to predict.
Certain Harken subsidiaries entered into a three year loan facility with
Bank One, N.A. ("Bank One"), which is secured by certain of Harken's domestic
oil and gas properties and a guarantee from Harken. The Bank One facility
provides borrowings subject to a borrowing base (as defined by the Bank One
facility)
22
which was $15,490,000 as of September 30, 2001. As of November 9, 2001, pending
Bank One's borrowing base redetermination which is currently in progress, the
borrowing base was $14,290,000, which provides availability for additional
borrowing of up to approximately $4.4 million to be used for domestic
exploration, development or acquisition activities. The Bank One facility
requires the Borrowers, as well as Harken, to maintain certain financial
covenant ratios and requirements. For the quarter ended September 30, 2001,
Harken and the Borrowers were each not in compliance with their respective debt
service coverage ratio requirement, and received a waiver from Bank One related
to these two financial covenant requirements.
Harken's consolidated operating cash flows continue to be supplemented by
ongoing production from its Alcaravan and Bolivar Contract areas in Colombia.
Following the recent notification from Ecopetrol permitting Harken to proceed
with the sole-risk development of the Palo Blanco field of the Alcaravan
Association Contract, Harken will receive Ecopetrol's share of production after
royalty from both the Estero #1 and Estero #2 wells beginning in October 2001.
Harken had been previously receiving Ecopetrol's share of Estero #1 production
pursuant to a previous agreement with Ecopetrol. Harken anticipates that cash
flows from its Colombian assets will be adequate to fund the capital needs, as
well as the operating, administrative and management costs of its Middle
American operations.
CAPITAL COMMITMENTS
Harken's domestic operating strategy continues to include efforts to
increase its oil and gas reserves through exploration and development drilling
activities in North America. Harken's prospect inventory includes acreage which
may hold up to 170 billion cubic feet equivalent of risked net reserve
potential. Certain of these prospects may be drilled through joint venture
arrangements, which Harken is currently pursuing. In addition, Harken is
actively pursuing certain North American acquisition opportunities. Harken has
focused its operating strategy to acquire, explore, and produce primarily
natural gas prospects located in the Gulf Coast region of Texas and Louisiana.
Harken's primary need for capital is to fund these planned domestic exploration
and development efforts. Harken anticipates worldwide capital expenditures will
total approximately $30 million during 2001. Harken also plans to seek partner
participation to fund a portion of the cost for its significant exploration and
development drilling program planned in 2002. A portion of Harken's planned
capital expenditures are discretionary and, as a result, will be curtailed if
sufficient funds are not available.
During the second quarter of 2001, Harken issued 325,150 shares of Series
G1 Preferred stock in exchange for 5% European Notes in the face amount of $9.0
million. In addition, in July 2001, Harken issued 95,800 shares of Series G2
Preferred stock in exchange for 5% European Notes in the face amount of
approximately $9.6 million. Including these most recent exchanges, Harken has
retired 5% European Notes totaling approximately $44 million since February
2000. Harken continues to consider additional transactions with the 5% European
Note holders whereby Harken may retire additional Notes in exchange for shares
of Harken common stock, cash, convertible securities or other consideration.
Operational Contingencies -- Harken has accrued approximately $6.0 million
at September 30, 2001 relating to operational or regulatory liabilities related
to Harken's North American operations. Harken and its subsidiaries currently are
involved in various lawsuits and other contingencies, which in management's
opinion, will not result in significant loss exposure to Harken.
Harken's operations are subject to stringent and complex environmental laws
and regulations governing the discharge of materials into the environment or
otherwise relating to environmental protection.
23
These laws and regulations are subject to changes that may result in more
restrictive or costly operations. Failure to comply with applicable
environmental laws and regulations may result in the imposition of
administrative, civil and criminal penalties or injunctive relief. Harken's
international oil and gas exploration and production operations, including well
drilling, pipeline construction, and seismic activities, require specific
federal and local environmental licenses and permits, the acquisition of which
in the past have been subject to extensive delays. Harken may continue to
experience similar delays in the future. Failure to obtain these licenses and
permits in a timely manner may prevent Harken from obtaining alternative
financing.
International Commitments--Terms of each of the Association Contracts
entered into between Harken de Colombia, Ltd. and Ecopetrol commit Harken to
perform certain activities in Colombia in accordance with a prescribed
timetable. Failure by Harken to perform these activities as required could
result in Harken losing its rights under the particular Association Contract,
which could potentially have a material adverse effect on Harken's business.
During July 2001, Harken received from Ecopetrol an extension to December 8,
2001 to drill the fifth year obligation well related to the Bocachico Contract.
Harken intends to spud this well within this time requirement. Also during July
2001, Harken received from Ecopetrol an extension to October 31,2001 for Harken
to determine whether to extend the Bolivar Contract into its sixth contract
year. Harken is currently negotiating with Ecopetrol for the further extension
of this determination date on the Bolivar Contract as well as the extension of
the term of the El Retorno TEA. As of November 9, 2001, Harken was in compliance
with the requirements of each of the Association Contracts, as amended.
Related to Harken's Costa Rica operations, Harken is to pay a remaining
amount of $500,000 to MKJ Xploration, Inc. ("MKJ") upon the mobilization of the
rig related to the initial well to be drilled offshore Costa Rica, the Moin #2,
which Harken expects will be drilled during 2002 pending the receipt of the
necessary environmental drilling permit and subject to drilling rig
availability. MKJ is currently seeking additional joint venture partner
participation for the work program expenditures required by the Costa Rica
Contract prior to drilling the Moin #2 well. Terms of the Costa Rica Contract
and the agreement with MKJ commit Harken Costa Rica Holdings ("HCRH") to perform
certain activities in Costa Rica in accordance with a prescribed timetable.
Failure by HCRH to perform these activities as required could result in HCRH
losing its rights under the Costa Rica Contract, which could have a material
adverse effect on Harken's business. As of November 9, 2001, the environmental
drilling permit for the initial well under the Costa Rica Contract has not been
approved or denied by the Costa Rica government authorities
There are no significant expenditures required or planned related to
Harken's recently executed Technical Evaluation Agreements in Peru and Panama.
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PART II - OTHER INFORMATION
Item 3. Quantitative and Qualitative Disclosures About Market Risk
The information contained in Item 3 updates, and should be read in
conjunction with, information set forth in Part II, Item 7A in Harken's Annual
Report on Form 10-K for the year ended December 31, 2000, in addition to the
interim condensed consolidated financial statements and accompanying notes
presented in Item 1 of this Form 10-Q.
Item 4. Exhibits and Reports on Form 8-K.
9a) EXHIBIT INDEX
Exhibit
--------
3.1 Certificate of Incorporation of Harken Energy Corporation as
amended (filed as Exhibit 3.1 to Harken's Annual Report on
Form 10-K for fiscal year ended December 31, 1989, File
No. 0-9207, and incorporated by reference herein).
3.2 Amendment to the Certificate of Incorporation of Harken
Energy Corporation (filed as Exhibit 28.8 to the Registration
Statement on Form S-1 of Tejas Power Corporation, file
No. 33-37141, and incorporated by reference herein.)
3.3 Amendment to the Certificate of Incorporation of Harken
Energy Corporation (filed as Exhibit 3 to Harken's Quarterly
Report on Form 10-Q for fiscal quarter ended March 31, 1991,
File No. 0-9207, and incorporated by reference herein.)
3.4 Amendments to the Certificate of Incorporation of Harken
Energy Corporation (filed as Exhibit 3 to Harken's Quarterly
Report on Form 10-Q for fiscal quarter ended June 30,1991,
File No. 0-9207, and incorporated by reference herein.)
3.5 Amendments to the Certificate of Incorporation of Harken
Energy Corporation (filed as Exhibit 3.5 to Harken's Annual
Report on Form 10-K for the fiscal year ended December 31,
1996, File No. 0-9207, and incorporated herein by reference).
3.6 Amendment to the Certificate of Incorporation of Harken
Energy Corporation (filed as Exhibit 3.6 to Harken's Annual
Report on Form 10-K for the fiscal year ended December 31,
1997, File No. 0-9207 and incorporated by reference herein).
3.7 Amendment to the Certificate of Incorporation of Harken
Energy Corporation (filed as Exhibit 3.6 to Harken's
Quarterly Report on Form 10-Q for the fiscal quarter ended
June 30, 1998, File No. 0-9207, and incorporated by reference
herein).
3.8 Bylaws of Harken Energy Corporation, as amended (filed as
Exhibit 3.2 to Harken's Annual Report on Form 10-K for fiscal
year ended December 31, 1989, File No. 0-9207, and
incorporated by reference herein).
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4.1 Form of certificate representing shares of Harken common
stock, par value $.01 per share (filed as Exhibit 1 to
Harken's Registration Statement on Form 8-A, File No. 0-9027,
and incorporated by reference herein.)
4.2 Certificate of Designations, Powers, Preferences and Rights
of Series A Cumulative Convertible Preferred Stock, $1.00 par
value, of Harken Energy Corporation (filed as Exhibit 4.1 to
Harken's Annual Report on Form 10-K for the fiscal year ended
December 31,1989, File No. 0-9207, and incorporated by
reference herein).
4.3 Certificate of Designations, Powers, Preferences and Rights
of Series B Cumulative Convertible Preferred Stock, $1.00 par
value, of Harken Energy Corporation (filed as Exhibit 4.2 to
Harken's Annual Report on Form 10-K for the fiscal year ended
December 31, 1989, File No. 0-9207, and incorporated by
reference herein.).
4.4 Certificate of the Designations, Powers, Preferences and
Rights of Series C Cumulative Convertible Preferred Stock,
$1.00 par value of Harken Energy Corporation (filed as
Exhibit 4.3 to Harken's Annual Report on Form 10-K for fiscal
year ended December 31,1989, File No. 0-9207, and
incorporated by reference herein).
4.5 Certificate of the Designations of Series D Preferred Stock,
$1.00 par value of Harken Energy Corporation (filed as
Exhibit 4.3 to Harken's Quarterly Report on Form 10-Q for the
fiscal quarter ended September 30,1995, File No. 0-9207, and
incorporated by reference herein).
4.6 Rights Agreement, dated as of April 6, 1999, by and between
Harken Energy Corporation And ChaseMellon Shareholder
Services L.LC., as Rights Agent (filed as Exhibit 4 to
Harken's Current Report on Form 8-K dated April 7, 1998, File
No. 0-9207, and incorporated by reference herein).
4.7 Certificate of Designations of Series E Junior Participating
Preferred Stock (filed as Exhibit B to Exhibit 4 to Harken's
Current Report on Form 8-K dated April 7, 1998, file
No. 0-9207, and incorporated by reference herein).
4.8 Certificate of Designations, Preferences and Rights of Series
F Convertible Preferred Stock (filed as Exhibit 4.8 to
Harken's Quarterly Report on Form 10-Q for the period ended
June 30, 1998, File No. 0-9207, and incorporated by reference
herein).
4.9 Certificate of Designations of Series G1 Convertible
Preferred Stock (filed as Exhibit 4.9 to Harken's Annual
Report on Form 10-K for fiscal year ended December 31, 2000,
File No. 09207, and incorporated by reference herein).
10.1 Seventh Amendment and Restatement of Harken's Amended Stock
Option Plan (filed as Exhibit 10.1 to Harken's Annual Report
on Form 10-K for the fiscal year ended December 31, 1991,
File No. 0-9207, and incorporated by reference herein).
26
10.2 Amended and Restated Non-Qualified Incentive Stock Option
Plan of Harken adopted by Harken's stockholders on February
18, 1991 (filed as Exhibit 10.2 to Harken's Annual Report on
Form 10-K for the fiscal year ended December 31, 1991, File
No. 0-9207, and incorporated by reference herein).
10.3 Form of Advancement Agreement dated September 13, 1990,
between Harken and each director of Harken (filed as Exhibit
10.38 to Harken's Annual Report on Form 10-K for the fiscal
year ended December 31, 1989, File No. 0-9207, and
incorporated by reference herein).
10.4 Harken Energy Corporation's 1993 Stock Option and Restricted
Stock Plan (filed as Exhibit 4.3 to Harken's Registration
Statement on Form S-8, and incorporated by reference herein).
10.5 Harken Energy Corporation's Directors Stock Option Plan
(filed as Exhibit 4.3 to Harken's Registration Statement on
Form S-8, and incorporated herein by reference).
10.6 Association Contract (Bolivar) by and between Harken de
Colombia, Ltd. and Empresa Colombia de Petroleos (filed as
Exhibit 10.4 to Harken's Quarterly Report on Form 10-Q for
the quarterly period ended June 30, 1996, and incorporated
herein by reference).
10.7 Harken Energy Corporation 1996 Incentive and Nonstatutory
Stock Option Plan (filed as Exhibit 10.1 to Harken's
Quarterly Report on Form 10-Q for the quarterly period ended
September 30, 1996, and incorporated herein by reference).
10.8 Association Contract (Alcaravan) dated as of December 13,
1992, but effective as of February 13, 1993, by and between
Empresa Colombia de Petroleos (filed as Exhibit 10.1 to
Harken's Annual Report on Form 10-K for the fiscal year ended
December 31, 1992, File No. 0-9207, and incorporated herein
by reference).
10.9 Association Contract (Bocachico) dated as of January 1994,
but effective as of April 1994, by and between Empresa
Colombia de Petroleos (filed as Exhibit 10.1 to Harken's
Quarterly Report on Form 10-Q for the quarterly period ended
March 31, 1994, File No. 0-9207, and incorporated herein by
reference).
10.10 Trust Indenture dated June 11, 1997, by and between Harken
and Marine Midland Bank plc (filed as Exhibit 10.1 to
Harken's Quarterly Report on Form 10-Q for the quarterly
period ended June 30, 1997, File No. 0-9207, and incorporated
herein by reference).
10.11 Placing Agreement Dated June 3, 1997, by and among Harken and
the other signatories thereto (filed as Exhibit 10.2 to
Harken's Quarterly Report on Form 10-Q for the quarterly
period ended June 30, 1997, File No. 0-9207, and incorporated
herein by reference).
27
10.12 Credit Agreement between Harken Exploration Company, XPLOR
Energy, Inc. Harken Energy West Texas, Inc. , Harken
Southwest Corporation, South Coast Exploration Co., Xplor
Energy SPV-1, Inc., McCulloch Energy, Inc. and Bank One,
Texas, N.A. dated August 11, 2000 and as amended December 21,
2000 and December 31, 2000 (filed as Exhibit 10.12 to
Harken's Annual Report on Form 10-K for fiscal year ended
December 31, 2000, File No. 09207, and incorporated by
reference herein).
10.13 Third Amendment to Credit Agreement between Harken
Exploration Company, XPLOR Energy, Inc., Harken Energy West
Texas, Inc., South Coast Exploration Co., XPLOR Energy SPV-1,
Inc., McCulloch Energy, Inc., Harken Gulf Exploration
Company, and Bank One, N.A. dated May 11,2001 (filed as
Exhibit 10.13 to Harken's Quarterly Report on Form 10-Q for
the quarter ended June 30, 2001, File No. 0-9207, and
incorporated herein by reference).
(b) REPORTS ON FORM 8-K
On September 5, 2001, Harken filed a Form 8-K to disclose a
change in Harken's independent accountants.
* Filed herewith
28
HARKEN ENERGY CORPORATION
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
Harken Energy Corporation
-------------------------------
(Registrant)
Date: November 9, 2001 By: /s/ Anna M. Williams
---------------------------
Executive Vice President-Finance and
Chief Financial Officer
29