1
================================================================================
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, 1994
( ) TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(D)
OF THE SECURITIES EXCHANGE ACT OF 1934.
FOR THE TRANSITION PERIOD FROM ______ TO ______
COMMISSION FILE NUMBER 0-9207
HARKEN ENERGY CORPORATION
(Exact name of registrant as specified in its charter)
DELAWARE 95-2841597
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
2505 NORTH HIGHWAY 360, SUITE 800 75050
GRAND PRAIRIE, TEXAS (Zip Code)
(Address of principal executive offices)
Registrant's telephone number, including area code (817) 695-4900
Securities registered pursuant to Section 12(b) of the Act:
Title of each class: Name of each exchange
COMMON STOCK, PAR VALUE on which registered:
$0.01 PER SHARE AMERICAN STOCK EXCHANGE
Securities registered pursuant to Section 12(g) of the Act: NONE
INDICATE BY CHECK MARK WHETHER THE REGISTRANT (1) HAS FILED ALL
REPORTS REQUIRED TO BE FILED BY SECTION 13 OR 15(D) OF THE SECURITIES EXCHANGE
ACT OF 1934 DURING THE PRECEDING 12 MONTHS (OR FOR SUCH SHORTER PERIOD THAT THE
REGISTRANT WAS REQUIRED TO FILE SUCH REPORTS), AND (2) HAS BEEN SUBJECT TO SUCH
FILING REQUIREMENTS FOR THE PAST 90 DAYS. YES X NO
--- ---
The number of shares of Common Stock, par value $0.01 per share,
outstanding as of November 1, 1994 was 60,442,853 net of 5,983,655 Treasury
Shares.
================================================================================
2
HARKEN ENERGY CORPORATION
INDEX TO QUARTERLY REPORT
SEPTEMBER 30, 1993 AND 1994
PAGE
----
PART I. FINANCIAL INFORMATION
Item 1. Condensed Financial Statements
Consolidated Balance Sheets . . . . . . . . . . . . . . . . . . . . . . . . . . . 4
Consolidated Statements of Operations . . . . . . . . . . . . . . . . . . . . . . 5
Consolidated Statements of Stockholders' Equity . . . . . . . . . . . . . . . . . 6
Consolidated Statements of Cash Flow . . . . . . . . . . . . . . . . . . . . . . 7
Notes to Consolidated Financial Statements . . . . . . . . . . . . . . . . . . . 8
Item 2. Management's Discussion and Analysis of Financial Condition
and Results of Operations . . . . . . . . . . . . . . . . . . . . . . . . . 14
PART II. OTHER INFORMATION
Notes Concerning Other Information . . . . . . . . . . . . . . . . . . . . 19
SIGNATURES . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 20
2
3
PART I - FINANCIAL INFORMATION
3
4
HARKEN ENERGY CORPORATION AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(unaudited)
DECEMBER 31, SEPTEMBER 30,
1993 1994
---------------- ----------------
ASSETS
------
Current Assets:
Cash and temporary investments . . . . . . . . . . . . . . . $ 3,299,000 $ 3,140,000
Accounts and notes receivable, net . . . . . . . . . . . . . 1,022,000 376,000
Amounts receivable from former subsidiaries . . . . . . . . 1,081,000 984,000
Assets of discontinued operations held for resale . . . . . 796,000 --
Marketable equity securities . . . . . . . . . . . . . . . . 138,000 931,000
Prepaid expenses and other current assets . . . . . . . . . 362,000 315,000
---------------- ----------------
Total Current Assets . . . . . . . . . . . . . . . . . 6,698,000 5,746,000
Property and Equipment, net . . . . . . . . . . . . . . . . . . 19,807,000 18,395,000
Investments in Former Subsidiaries . . . . . . . . . . . . . . 9,218,000 8,459,000
Notes Receivable from Related Parties, including interest . . . 701,000 464,000
Other Assets, net . . . . . . . . . . . . . . . . . . . . . . . 1,307,000 885,000
---------------- ----------------
$ 37,731,000 $ 33,949,000
================ ================
LIABILITIES AND STOCKHOLDERS' EQUITY
------------------------------------
Current Liabilities:
Trade payables . . . . . . . . . . . . . . . . . . . . . . . $ 339,000 $ 274,000
Accrued liabilities and other . . . . . . . . . . . . . . . 4,840,000 2,238,000
Notes payable . . . . . . . . . . . . . . . . . . . . . . . -- 900,000
Revenues and royalties payable . . . . . . . . . . . . . . . 1,354,000 1,279,000
---------------- ----------------
Total Current Liabilities . . . . . . . . . . . . . . 6,533,000 4,691,000
Commitments and Contingencies (Note 10)
Deferred Revenue, net of current portion . . . . . . . . . . . 367,000 77,000
Redeemable Preferred Stock . . . . . . . . . . . . . . . . . . 1,868,000 1,868,000
Stockholders' Equity:
Common stock, $0.01 par value; authorized
100,000,000 shares; issued 65,466,508 shares . . . . . . . 654,000 654,000
Additional paid-in capital . . . . . . . . . . . . . . . . . 131,052,000 131,052,000
Retained deficit . . . . . . . . . . . . . . . . . . . . . . (81,986,000) (83,636,000)
Treasury stock . . . . . . . . . . . . . . . . . . . . . . . (20,757,000) (20,757,000)
--------------- ---------------
Total Stockholders' Equity . . . . . . . . . . . . . . 28,963,000 27,313,000
---------------- ----------------
$ 37,731,000 $ 33,949,000
================ ================
The accompanying Notes to Consolidated Financial Statements
are an integral part of these Consolidated Balance Sheets.
4
5
HARKEN ENERGY CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
(unaudited)
THREE MONTHS ENDED NINE MONTHS ENDED
SEPTEMBER 30, SEPTEMBER 30,
------------------------------- ---------------------------------
1993 1994 1993 1994
-------------- -------------- --------------- ----------------
Revenues:
Oil and gas operations . . . . . . . . . . . $ 1,230,000 $ 919,000 $ 3,961,000 $ 2,817,000
Interest income . . . . . . . . . . . . . . 50,000 23,000 173,000 67,000
Other income . . . . . . . . . . . . . . . . 198,000 194,000 1,038,000 562,000
------------- ------------- ------------- ------------
1,478,000 1,136,000 5,172,000 3,446,000
Costs and Expenses:
Oil and gas operating expenses . . . . . . . 471,000 328,000 1,263,000 991,000
General and administrative expenses, net . . 717,000 875,000 2,249,000 2,372,000
Depreciation and amortization . . . . . . . 866,000 515,000 2,250,000 1,444,000
Interest expense and other . . . . . . . . . 1,000 22,000 163,000 68,000
------------- ------------- ------------- ------------
2,055,000 1,740,000 5,925,000 4,875,000
Loss before income taxes . . . . . . . . . (577,000) (604,000) (753,000) (1,429,000)
Income tax expense . . . . . . . . . . . . . -- -- -- --
------------- ------------- ------------- ------------
Loss from continuing operations . . . . . . (577,000) (604,000) (753,000) (1,429,000)
Discontinued Operations:
Income (loss) from operations of discontinued well
service and contract drilling segment . . (55,000) (127,000) (375,000) (507,000)
Gain on sale of well service and contract
drilling rigs . . . . . . . . . . . . . . -- 14,000 -- 286,000
------------- ------------- ------------- ------------
(55,000) (113,000) (375,000) (221,000)
------------- ------------- ------------- ------------
Net loss . . . . . . . . . . . . . . . . . $ (632,000) $ (717,000) $ (1,128,000) $ (1,650,000)
============= ============= ============= ============
Income (loss) per common share:
Loss from continuing operations . . . . . . $ (0.01) $ (0.01) $ (0.01) $ (0.03)
Discontinued operations . . . . . . . . . . (0.00) (0.00) (0.01) (0.00)
------------- ------------- ------------- ------------
Net loss . . . . . . . . . . . . . . . . . $ (0.01) $ (0.01) $ (0.02) $ (0.03)
============= ============= ============= ============
Weighted average shares outstanding . . . . . 60,092,749 59,482,853 57,450,494 59,482,853
============= ============= ============= ============
The accompanying Notes to Consolidated Financial Statements
are an integral part of these Statements.
5
6
HARKEN ENERGY CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
(unaudited)
ADDITIONAL
COMMON PAID-IN RETAINED TREASURY
STOCK CAPITAL DEFICIT STOCK
-------- ------------ ------------ ------------
Balance, December 31, 1992 . . . . . . . $512,000 $114,207,000(A) $(76,492,000) $(17,911,000)
Issuance of common stock, net . . . . . 142,000 12,663,000 -- --
Payment of notes receivable,
net of retirements . . . . . . . . . . -- 2,846,000 -- (2,846,000)
Exchange of subordinated debenture . . . -- 1,336,000 -- --
Net loss . . . . . . . . . . . . . . . . -- -- (5,494,000) --
-------- ------------ ------------ ------------
Balance, December 31, 1993 . . . . . . . 654,000 131,052,000 (81,986,000) (20,757,000)
Net loss . . . . . . . . . . . . . . . . -- -- (1,650,000) --
-------- ------------ ------------ ------------
Balance, September 30, 1994 . . . . . . . $654,000 $131,052,000 $(83,636,000) $(20,757,000)
======== ============ ============ ============
____________________
(A) Includes as an offset to Additional Paid-In Capital, notes receivable of
$4,182,000 as of December 31, 1992 from certain officers, directors and
affiliates for stock purchases.
The accompanying Notes to Consolidated Financial Statements
are an integral part of these Statements.
6
7
HARKEN ENERGY CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(unaudited)
NINE MONTHS ENDED
SEPTEMBER 30,
----------------------------------
1993 1994
------------- --------------
Cash flows from operating activities:
Net loss from continuing operations . . . . . . . . . . . . . . . . . . . . . $ (753,000) $ (1,429,000)
Adjustments to reconcile net loss from continuing operations to net cash
provided by (used in) operating activities:
Depreciation and amortization . . . . . . . . . . . . . . . . . . . . . . 2,250,000 1,444,000
Interest and dividend income on investments in former subsidiaries . . . (394,000) (360,000)
Forgiveness of related party note receivable . . . . . . . . . . . . . . -- 232,000
Provision for doubtful accounts . . . . . . . . . . . . . . . . . . . . . -- 18,000
(Gain) loss on sales of assets and other . . . . . . . . . . . . . . . . (40,000) (107,000)
Net loss from discontinued operations . . . . . . . . . . . . . . . . . . . . (375,000) (221,000)
Adjustment to reconcile income (loss) from discontinued operations to net
cash used in operating activities:
Depreciation and amortization . . . . . . . . . . . . . . . . . . . . . . 539,000 77,000
Gain on sales of assets . . . . . . . . . . . . . . . . . . . . . . . . . -- (286,000)
Change in assets and liabilities, net of effect of companies acquired:
(Increase) decrease in accounts receivable . . . . . . . . . . . . . . . . 2,250,000 733,000
(Increase) decrease in amounts receivable from former subsidiaries . . . . (232,000) 100,000
Increase (decrease) in trade payables and other . . . . . . . . . . . . . . (6,917,000) (843,000)
------------ ----------
Net cash provided by (used in) operating activities . . . . . . . . . . . (3,672,000) (642,000)
------------ ----------
Cash flows from investing activities:
Proceeds from sale of assets . . . . . . . . . . . . . . . . . . . . . . . . . -- 2,249,000
Cash from acquired subsidiary . . . . . . . . . . . . . . . . . . . . . . . . 2,616,000 --
Capital expenditures . . . . . . . . . . . . . . . . . . . . . . . . . . . . (3,042,000) (1,766,000)
----------- ------------
Net cash provided by (used in) investing activities . . . . . . . . . . . (426,000) 483,000
----------- ------------
Cash flows from financing activities:
Debt repayments . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . (1,630,000) --
----------- ------------
Net cash provided by (used in) financing activities . . . . . . . . . . . (1,630,000) --
----------- ------------
Net increase (decrease) in cash and temporary investments . . . . . . . . . . . (5,728,000) (159,000)
Cash and temporary investments at beginning of period . . . . . . . . . . . . . 10,348,000 3,299,000
---------- ----------
Cash and temporary investments at end of period . . . . . . . . . . . . . . . . $ 4,620,000 $ 3,140,000
============= =============
Supplemental disclosures of cash flow information:
Cash paid during the quarter for:
Interest . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 58,000 $ 68,000
Income taxes . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . -- --
Significant non-cash transactions:
Increase from acquisition activity
Current assets, excluding cash . . . . . . . . . . . . . . . . . . . . . . $ 1,393,000 $ --
Property and equipment . . . . . . . . . . . . . . . . . . . . . . . . . . 14,528,000 400,000
Current liabilities . . . . . . . . . . . . . . . . . . . . . . . . . . . . (5,777,000) (400,000)
Stockholders' equity . . . . . . . . . . . . . . . . . . . . . . . . . . . (12,760,000) --
The accompanying Notes to Consolidated Financial Statements
are an integral part of these Statements.
7
8
HARKEN ENERGY CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
SEPTEMBER 30, 1993 AND 1994
(unaudited)
(1) MANAGEMENT'S REPRESENTATIONS
In the opinion of Harken Energy Corporation ("Harken"), the
accompanying unaudited consolidated financial statements contain all
adjustments necessary to present fairly its financial position as of December
31, 1993 and September 30, 1994 and the results of its operations and changes
in its cash flows for all periods presented as of September 30, 1994. These
adjustments represent normal recurring items. Certain prior year amounts have
been reclassified to conform with the 1994 presentations.
The accompanying unaudited condensed financial statements have been
prepared pursuant to the rules and regulations of the Securities and Exchange
Commission. 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. It is suggested
that these condensed financial statements be read in conjunction with the
financial statements and the notes thereto included in Harken's Form 10-K for
the year ended December 31, 1993.
The results of operations for the nine month period ended September 30,
1994 are not necessarily indicative of the results to be expected for the full
year.
(2) ACQUISITIONS
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. Chuska is engaged, through its
subsidiaries, in the business of exploring for and producing oil and gas in the
Aneth Field and Blanding Sub-Basin portions of the Paradox Basin in Utah,
Arizona and New Mexico, and in the Western Paradox Basin in Utah. Chuska's
operations in the Paradox Basin area are primarily concentrated on the 16
million acre Navajo Indian Reservation ("the Reservation"), which comprises
portions of Arizona, New Mexico and Utah. Chuska conducts activities on the
Reservation as a contractually appointed operator and agent of the Navajo
Nation pursuant to two Federally approved operating agreements. In addition to
its oil and gas exploration activities, Chuska also has an interest in a gas
processing plant in the Paradox Basin, the Aneth Gas Plant, on the Utah portion
of the Reservation. The acquisition of Chuska has been accounted for under the
purchase method of accounting.
Chuska is the general partner of four limited partnerships and is a
venturer in the CHAP Joint Venture ("CHAP"), all of which were formed for the
exploration and production of oil and gas. Chuska is the operator of the
limited partnerships and CHAP. Chuska or its wholly-owned subsidiaries are
venturers in three additional projects for the exploration and production of
oil and gas. These projects are named Greater Blanding, Central Blanding and
Western Paradox. Chuska accounts for its investments in the partnerships and
CHAP using the proportionate consolidation method.
8
9
In October 1994, Harken acquired additional joint venture interests in
CHAP which resulted in Harken increasing its ownership in the Reservation
reserves, exploration acreage, development drilling locations and the Aneth Gas
Plant. The acquisition of the sellers' interest raises Harken's total interest
in CHAP to approximately 70% and increases 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 certain contingent
liabilities related to the properties as well as retaining certain
distributions made under the CHAP Venture.
(3) INVESTMENTS IN FORMER SUBSIDIARIES
E-Z Serve Preferred Stock -- Harken holds 79,754 shares of E-Z Serve
Corporation ("E-Z Serve") $6.00 Convertible Preferred Stock, Series C ("E-Z
Serve Series C Preferred") which it acquired at a cost of $100 per share. Such
shares include the 12,830 additional shares of E-Z Serve Series C Preferred
received in April 1993 as part of a restructuring by E-Z Serve. 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 $345,000 and
$360,000 during the nine months ended September 30, 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.
Beginning with the second quarter of 1994, Harken has reclassified a
portion of the value of the E-Z Serve Series C Preferred shares to current
assets in anticipation of converting such shares to E-Z Serve common shares in
order to liquidate such common shares over the next twelve month period.
Tejas Preferred Stock -- Harken holds 1,000 shares of Tejas Power
Corporation ("Tejas") Series B Preferred Stock, $.01 par value per share, which
it acquired at a cost of $1,200,000. Harken accepted these shares of Tejas
Preferred Stock as full and complete payment from Tejas for certain 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.
(4) PROPERTY AND EQUIPMENT
A summary of property and equipment follows:
DECEMBER 31, SEPTEMBER 30,
1993 1994
-------------- --------------
Oil and gas properties --
Evaluated . . . . . . . . . . . . . . . . . . . . . . . . $ 9,664,000 $10,271,000
Unevaluated . . . . . . . . . . . . . . . . . . . . . . . 8,004,000 8,845,000
Oilfield service equipment . . . . . . . . . . . . . . . . . 1,375,000 --
Gas plants and other property . . . . . . . . . . . . . . . . 6,994,000 6,517,000
Less accumulated depreciation and amortization . . . . . . . (6,230,000) (7,238,000)
----------- -----------
$19,807,000 $18,395,000
=========== ===========
(5) 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
9
10
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 is payable to the former Chuska stockholder
on or before January 5, 1995. This obligation is included at September 30,
1994 in notes payable in the accompanying 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 at September 30, 1994 in notes
payable in the accompanying 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.
(6) 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 plans to utilize 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 $1,521,000 and $1,039,000 as of September 30,
1993 and 1994, respectively. The September 30, 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.
(7) STOCKHOLDERS' EQUITY
Common Stock - Harken currently has authorized 100,000,000 shares of
$.01 par common stock. At December 31, 1993 and September 30, 1994, Harken had
issued 65,466,508 shares and held 5,983,655 shares as treasury stock at a cost
of $20,757,000.
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 2 - Acquisitions.
Acquisition of Additional CHAP Venture Interest - In October 1994,
Harken acquired additional joint venture interests in the CHAP Joint Venture.
See Note 2 - Acquisitions for further discussion. In exchange for these
acquired interests, Harken issued approximately 960,000 shares of restricted
Harken common stock. The 960,000 restricted common shares issued by Harken in
this transaction contain certain demand and piggyback registration rights
exercisable by the sellers.
10
11
(8) PER SHARE DATA
Per share data has been computed based on the weighted average number of
common shares outstanding during each period.
(9) INCOME TAXES
At September 30, 1994, Harken had available for federal income tax
reporting purposes, net operating loss (NOL) carryforward for regular tax
purposes of approximately $55,000,000 which expires in 1997 through 2009,
alternative minimum tax NOL carryforward of approximately $44,000,000 which
expires in 1997 through 2009, investment tax credit carryforward of
approximately $863,000 which expires in 1994 through 2002, contribution
carryforward of approximately $57,000 which expires in 2000 through 2007,
statutory depletion carryforward of approximately $1,150,000 which does not
have an expiration date, jobs tax credit carryforward of approximately $119,000
which expires in 1994 through 1995 and a net capital loss carryforward of
approximately $542,000 which expires in 2007. Approximately $14,000,000 of the
net operating loss carryforward has been acquired with the purchase of
subsidiaries and must be used to offset future income from profitable
operations within those subsidiaries.
During the first quarter of 1993, Harken adopted Statement of Financial
Accounting Standard No. 109, "Accounting for Income Taxes" ("SFAS No. 109").
This standard requires, among other things, recognition of future tax benefits,
measured by enacted tax rates, attributable to deductible temporary differences
between financial statement and income tax bases of assets and liabilities and
to tax net operating loss carryforwards, to the extent that realization of such
benefits is more likely than not.
Upon adoption of SFAS No. 109, on January 1, 1993, Harken calculated
total deferred tax liabilities of approximately $2,020,000 resulting from
financial statement basis for property and equipment in excess of related tax
basis. In addition, Harken calculated total deferred tax assets of
approximately $18,989,000 consisting of approximately $18,142,000 related to
Harken's net operating loss carryforward and approximately $847,000 primarily
related to tax basis for investments in former subsidiaries in excess of
related financial statement basis. Harken established a valuation allowance for
the entire net deferred tax asset of $16,969,000. As a result, the adoption of
SFAS No. 109 by Harken on January 1, 1993 had no effect on Harken's results
from operations or earnings (loss) per common share for the nine months ended
September 30, 1993.
At September 30, 1994, total deferred tax liabilities are approximately
$4,000,000. In addition, total deferred tax assets are approximately
$20,000,000 at September 30, 1994, resulting primarily from an increase in the
NOL carryforward during 1993 and estimated carryforward during 1994. Any
resulting changes 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.
(10) COMMITMENTS AND CONTINGENCIES
Colombian Operations - During the third quarter of 1992, Harken, through
a subsidiary, Harken de Colombia, Ltd., was awarded the exclusive right to
explore for, develop and produce oil and gas throughout approximately 350,000
acres within the Alcaravan area ("Alcaravan") of Colombia. Alcaravan is
located in Colombia's Llanos Basin and is located approximately 140 miles east
of Santafe De Bogota. Harken and Empresa Colombiana de Petroleos ("Ecopetrol")
have entered into an association contract ("Alcaravan Contract") which requires
Harken to conduct a seismic and exploratory drilling program in the Alcaravan
area ("work program") over the initial six (6) years. If Harken makes a
commercial discovery of oil and/or gas which is approved by Ecopetrol, the
standard terms of the Alcaravan Contract will apply. Such terms provide for
Ecopetrol to reimburse Harken for 50% of its successful well costs expended up
to the point of commercial discovery and to receive a 20% royalty interest and
for both Ecopetrol and Harken to each have a 50% working interest. The term of
the Alcaravan Contract will extend twenty-two (22) years from the date of any
commercial discovery of oil and/or gas. Harken reprocessed in excess of 200
kilometers of seismic data on the Alcaravan area and completed the acquisition
11
12
of 52 kilometers of new seismic data over prospective areas in mid-February
1994. In September 1994, Harken announced that Huffco Group, Inc. ("Huffco")
of Houston, Texas will join Harken in the drilling of its first exploratory
well under the Alcaravan Contract. Drilling is scheduled to commence in
December 1994 and Harken will serve as Operator and retain a 50% interest in
the well.
In January 1994, Harken announced that Harken de Colombia, Ltd. had
signed its second association contract ("Bocachico Contract") with Ecopetrol,
covering the Bocachico contract area. Under the Bocachico Contract, Harken has
acquired the exclusive rights to conduct exploration activities and drilling on
this area, which covers approximately 192,000 acres in the Middle Magdelena
Valley of Central Colombia. During the first year of the Bocachico Contract,
Harken will conduct seismic activities on the land covered by this contract
including reprocessing of at least 250 kilometers of existing seismic data and
the acquisition of at least 35 kilometers of new seismic data. In addition,
during the first contract year Harken intends to also conduct engineering
studies to evaluate the potential for recovering existing oil reserves in the
Rio Negro area, which is located in the northern portion of the Bocachico
Contract area. During the 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. Harken is completing
the exploration work program for the first year of the Bocachico Contract, and
significant interest in the contract has been expressed by potential industry
partners following recent industry activity in this basin.
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 under the agreement. In July 1990, Harken entered into a joint
venture arrangement with a joint venture partner, Bass Enterprises Production
Company ("BEPCO"), in which BEPCO committed to provide the funding for the
first well and at least two subsequent wells. 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.
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, to
be completed during the last half of 1994. 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.
12
13
Other - The exploration, development and production of oil and gas
are subject to various Navajo, federal and state laws and regulations designed
to protect the environment. Compliance with these regulations is part of
Harken's day-to-day operating procedures. Infrequently, accidental discharge of
such materials as oil, natural gas or drilling fluids can occur and such
accidents can require material expenditures to correct. Harken maintains levels
of insurance customary in the industry to limit its financial exposure.
Management is unaware of any material capital expenditures required for
environmental control during the next fiscal year.
Harken has accrued certain other operational or regulatory liabilities
related to Chuska's operations. Harken and its subsidiaries currently are
involved in various lawsuits and other contingencies, including the guarantee
of certain lease obligations, which in management's opinion, will not result in
significant loss exposure to Harken.
13
14
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
14
15
RESULTS OF OPERATIONS
The following is management's discussion and analysis of certain
significant factors which have affected Harken's results of operations and
balance sheet during the periods included in the accompanying consolidated
financial statements. Consolidated results of operations were consistent with
management's expectations for the nine month period ended September 30, 1994.
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 11,055,718 shares of Chuska common stock
outstanding in exchange for 14,210,357 shares of newly-issued Harken common
stock. Chuska is engaged, through its subsidiaries, in the business of
exploring for and producing oil and gas in the Aneth Field and Blanding
Sub-Basin portions of the Paradox Basin in Utah. Chuska's operations in the
Paradox Basin area are primarily concentrated on the 16 million acre Navajo
Indian Reservation ("the Reservation"), which comprises portions of Arizona,
New Mexico and Utah. Chuska conducts activities on the Reservation as a
contractually appointed operator and agent of the Navajo Nation pursuant to two
Federally approved operating agreements. In addition to its oil and gas
exploration activities, Chuska also has an interest in a gas processing plant
in the Paradox Basin, the Aneth Gas Plant on the Utah portion of the
Reservation. Chuska is the general partner 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.
In October 1994, Harken acquired additional joint venture interests in
CHAP which resulted in Harken increasing its ownership in the Reservation
reserves, exploration acreage, development drilling locations and the Aneth Gas
Plant. The acquisition of the sellers' interest raises Harken's total interest
in CHAP to approximately 70% and increases Harken's share of daily production
by approximately 40% over its previous interest. In exchange for these
acquired interests, Harken issued approximately 960,000 shares of restricted
common stock which included certain registration rights.
Oil and gas operations revenues as of September 30, 1993, consisted of
oil revenues of $2,449,000 gas revenues of $527,000 and gas plant revenue of
$985,000. Oil and gas operations revenues as of September 30, 1994 consisted
of oil revenues of $1,734,000 gas revenues of $500,000 and gas plant revenues
of $583,000. These oil and gas revenues, primarily from Chuska's operations,
reflect the low price for oil experienced during the first three months of 1994
and the March 1994 reduction in throughput ownership in the Aneth Gas Plant.
In an effort to offset the production declines typically experienced in the
region, Harken plans to drill additional wells beginning in November 1994 on
acreage it holds in the Paradox Basin area, although such timing reflects
delays experienced due to new administrative review procedures performed by the
Navajo Nation. Harken's plans to drill in the Paradox Basin area, plus the
above mentioned increased interest in CHAP, should help to increase revenues
and cash flow from its oil and gas operations.
In May 1994, Harken announced the discontinuance of its well servicing
operations which it had conducted through Supreme Well Service Company
("Supreme"), a wholly-owned subsidiary. As a result of this decision, Harken
has reflected the revenues and expenses of its well service and contract
drilling segment as discontinued operations and has sold its well service
equipment assets. In January 1994, Harken made the decision to liquidate its
remaining contract drilling rigs and related assets and apply the proceeds
primarily to its international exploration efforts, specifically in Colombia
and Bahrain. As a result of this decision, Harken recognized a non-cash charge
of $3.1 million during the fourth quarter of 1993 to write down these assets to
their estimated liquidation value. During the first quarter of 1994, Harken
sold these contract drilling assets for approximately $1.1 million, resulting
in a gain of $272,000. Such gain is also included in discontinued operations.
During the first quarter of 1993, Harken continued to manage the oil and
gas property interests of a limited partnership and operate certain partnership
properties. Harken was paid a management fee of $50,000 per month
15
16
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 these oil and gas properties operated by Harken and
Harken ceased to manage the partnership. As a result of the above, Harken
earned no partnership management fees during the first nine months of 1994
compared to $300,000 during the first nine months of 1993. Other income as of
September 30, 1993 included $108,000 of other fees and revenues related to
these sold properties. There were no such revenues during the nine months
ended in 1994 due to the above mentioned sale of partnership properties.
OTHER COSTS AND EXPENSES
General and administrative expenses increased from $717,000 for the
third quarter of 1993 to $875,000 for the third quarter of 1994, due to the
fact that the third quarter of 1993 included approximately $200,000 in net
reductions to general and administrative costs due to nonrecurring write offs
of certain accrued liabilities and receivables. During 1993, Harken has
consolidated Chuska's administrative activities with Harken's with the
objective of eliminating duplicate administrative and operational functions and
to capitalize on the efficiencies of the combined organization. In addition,
general and administrative expenses for the first nine months of 1993 and 1994
include costs related to certain offices of Chuska that have since been closed
in an effort to further reduce costs and improve efficiency. As discussed
above, Harken's operator overhead fees and other operator cost reimbursements
which are netted against general and administrative expenses decreased due to
the reduction in properties operated by Harken. Such operator overhead fees
and other operator costs reimbursements related to properties which were sold
during the second quarter of 1993 totalled $494,000 for the nine months ended
September 30, 1993.
At December 31, 1993, Harken included in notes receivable from related
parties a loan to an officer in the amount of $520,000, plus accrued interest.
Subsequent to December 31, 1993, an agreement was reached with the officer
whereby the note, together with accrued interest, is scheduled to be forgiven
equally over three installments dated April 1994, July 1995 and December 1996
with each installment of such forgiveness contingent upon the officer's
continued employment through the date of each such installment. Harken has
included the first installment of this forgiveness totalling $232,000 in
general and administrative expenses during the first quarter of 1994.
LIQUIDITY AND CAPITAL RESOURCES
During the nine months ended September 30, 1994, cash and temporary
investments decreased by $159,000 despite the $2,249,000 of cash proceeds
received primarily from the sale of Harken's contract drilling and well service
equipment. Such cash usage was caused by cash used by operating activities of
$642,000 and $1,766,000 of capital expenditures. The cash used by operating
activities was primarily caused by the payment of approximately $500,000
related to the first installment of a consulting payment to a former Chuska
stockholder. Harken's net working capital increased by $890,000 during the
first nine months to $1,055,000 as of September 30, 1994, primarily due to the
decision to convert a portion of the E-Z Serve Preferred Stock to E-Z Serve
common shares and to sell such shares for cash during the next twelve months.
Harken has taken steps to appropriately reduce overhead costs and capital
expenditures will be incurred only to the extent that cash flow from operations
or additional financing sources are available. Harken believes that cash flow
from operations will be sufficient to meet its operating cash requirements in
1995. Amounts required to fund international activities, including Colombia
and Bahrain, as well as domestic drilling costs and other capital expenditures
will be funded from existing cash balances, asset sales, stock issuances,
operating cash flows and potentially from industry partners.
The cash flows and revenues generated from Chuska's oil and gas
properties are expected to increase in 1995. In October 1994, Harken acquired
additional joint venture interests in the CHAP Joint Venture which resulted in
Harken increasing its ownership in the Reservation reserves, exploration
acreage, development drilling locations and the Aneth Gas Plant. The
acquisition of the sellers' interest raises Harken's total interest in the CHAP
16
17
Joint Venture to approximately 70% and increases Harken's share of daily
production by approximately 40% over its previous interest. Workover and
additional drilling activities are currently being conducted and planned in the
Four Corners region. Such plans include the drilling of additional wells
beginning in November 1994 as part of a program to continue the exploration of
new prospects, the further development of existing productive fields and
significant natural gas prospects. Additionally, Harken plans to continue
workover activities on existing wells in an effort to enhance production and
improve field efficiency. Such drilling activities will be funded by existing
working capital and potentially from existing joint venture partners
participating in Chuska's managed joint ventures. In addition, Harken
anticipates generating cash from the sale of E-Z Serve Preferred Stock as
discussed above.
As a result of the decrease in demand for its drilling services
domestically, and upon obtaining a production sharing agreement discussed below
between Harken and the Bahrain National Oil Company in January 1990, Harken
management has increased its focus on pursuing international oil and gas
exploration and development opportunities, and continues to pursue other
international opportunities during 1994, such as the Colombian opportunities
discussed below.
Colombian Operations - During the third quarter of 1992, Harken,
through a subsidiary, Harken de Colombia, Ltd., was awarded the exclusive right
to explore for, develop and produce oil and gas throughout approximately
350,000 acres within the Alcaravan area ("Alcaravan") of Colombia. Alcaravan
is located in Colombia's Llanos Basin and is located approximately 140 miles
east of Santafe De Bogota. Harken and Empresa Colombiana de Petroleos
("Ecopetrol") have entered into an association contract ("Alcaravan Contract")
which requires Harken to conduct a seismic and exploratory drilling program in
the Alcaravan area ("work program") over the initial six (6) years. If Harken
makes a commercial discovery of oil and/or gas which is approved by Ecopetrol,
the standard terms of the Alcaravan Contract will apply. Such terms provide
for Ecopetrol to reimburse Harken for 50% of its successful well costs expended
up to the point of commercial discovery and to receive a 20% royalty interest
and for both Ecopetrol and Harken to each have a 50% working interest. The
term of the Alcaravan Contract will extend twenty-two (22) years from the date
of any commercial discovery of oil and/or gas. Harken reprocessed in excess of
200 kilometers of seismic data on the Alcaravan area and completed the
acquisition of 52 kilometers of new seismic data over prospective areas in
mid-February 1994. In September 1994, Harken announced that Huffco Group, Inc.
("Huffco") of Houston, Texas will join Harken in the drilling of its first
exploratory well under the Alcaravan Contract. Drilling is scheduled to
commence in December 1994 and Harken will serve as Operator and retain a 50%
interest in the well.
In January 1994, Harken announced that Harken de Colombia, Ltd. had
signed its second association contract ("Bocachico Contract") with Ecopetrol,
covering the Bocachico contract area. Under the Bocachico Contract, Harken has
acquired the exclusive rights to conduct exploration activities and drilling on
this area, which covers approximately 192,000 acres in the Middle Magdelena
Valley of Central Colombia. During the first year of the Bocachico Contract,
Harken will conduct seismic activities on the land covered by this contract
including reprocessing of at least 250 kilometers of existing seismic data and
the acquisition of at least 35 kilometers of new seismic data. In addition,
during the first contract year Harken intends to also conduct engineering
studies to evaluate the potential for recovering existing oil reserves in the
Rio Negro area, which is located in the northern portion of the Bocachico
Contract area. During the 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. Harken is completing
the exploration work program for the first year of the Bocachico Contract, and
significant interest in the contract has been expressed by potential industry
partners following recent industry activity in this basin.
17
18
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 under the agreement. In July 1990, Harken entered into a joint
venture arrangement with a joint venture partner, Bass Enterprises Production
Company ("BEPCO"), in which BEPCO committed to provide the funding for the
first well and at least two subsequent wells. 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.
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, to
be completed during the last half of 1994. 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.
Other - The exploration, development and production of oil and gas are
subject to various Navajo, federal and state laws and regulations designed to
protect the environment. Compliance with these regulations is part of Harken's
day-to-day operating procedures. Infrequently, accidental discharge of such
materials as oil, natural gas or drilling fluids can occur and such accidents
can require material expenditures to correct. Harken maintains levels of
insurance customary in the industry to limit its financial exposure. Management
is unaware of any material capital expenditures required for environmental
control during the next fiscal year.
Harken has accrued certain other operational or regulatory liabilities
related to Chuska's operations. Harken and its subsidiaries currently are
involved in various lawsuits and other contingencies, including the guarantee
of certain lease obligations, which in management's opinion, will not result in
significant loss exposure to Harken.
18
19
HARKEN ENERGY CORPORATION
NOTES CONCERNING OTHER INFORMATION
SEPTEMBER 30, 1993 AND 1994
(1) Items 1, 2, 3, 4, and 5 as required by Part II of Form 10-Q are not
applicable for the quarter ended September 30, 1994.
(2) Item 6, Exhibits and Reports on Form 8-K
(a) Exhibits - Concession and Lease Purchase Agreement dated
October 20, 1994
Letter Agreement from Huffco Group, Inc. dated
September 14, 1994
EDGAR Financial Data Schedule
(b) Reports on Form 8-K:
November 4, 1994: Acquisition of Additional Interest
in Four Corners Properties
19
20
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 14, 1994 By: /s/ Bruce N. Huff
Bruce N. Huff,
Senior Vice President and
Chief Financial Officer
20
21
INDEX TO EXHIBITS
EXHIBIT DESCRIPTION PAGE
------- ----------- ----
10.1 Concession and Lease Purchase Agreement dated
October 20, 1994
10.2 Letter Agreement from Huffco Group, Inc. dated
September 14, 1994
27 EDGAR Financial Data Schedule