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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 JUNE 30, 1995
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(D)
OF THE SECURITIES EXCHANGE ACT OF 1934.
FOR THE TRANSITION PERIOD FROM ______ TO ______
COMMISSION FILE NUMBER 0-9207
HARKEN ENERGY CORPORATION
(Exact name of registrant as specified in its charter)
DELAWARE 95-2841597
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
5605 N. MACARTHUR BLVD., SUITE 400 75038
IRVING, TEXAS (Zip Code)
(Address of principal executive offices)
Registrant's telephone number, including area code (214) 753-6900
Securities registered pursuant to Section 12(b) of the Act:
Title of each class: Name of each exchange on which registered:
COMMON STOCK, PAR VALUE $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 July 31, 1995 was 65,036,850 net of 5,983,655 Treasury
Shares.
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HARKEN ENERGY CORPORATION
INDEX TO QUARTERLY REPORT
JUNE 30, 1995
PAGE
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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 . . . . . . . . . . . . . . . . . . . . . . . 18
PART II. OTHER INFORMATION
Notes Concerning Other Information . . . . . . . . . . . . . . . . . . . . . 24
SIGNATURES . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 25
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PART I - FINANCIAL INFORMATION
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HARKEN ENERGY CORPORATION AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(unaudited)
DECEMBER 31, JUNE 30,
1994 1995
----------------- -----------------
ASSETS
------
Current Assets:
Cash and temporary investments . . . . . . . . . . . . . . . $ 2,828,000 $ 3,484,000
Cash available in European segregated account . . . . . . . -- 3,074,000
Accounts receivable, net . . . . . . . . . . . . . . . . . . 543,000 807,000
Investment in former subsidiary held for resale . . . . . . 2,898,000 --
Prepaid expenses and other current assets . . . . . . . . . 571,000 952,000
---------------- ----------------
Total Current Assets . . . . . . . . . . . . . . . . . 6,840,000 8,317,000
Property and Equipment, net . . . . . . . . . . . . . . . . . . 20,177,000 26,508,000
Restricted Cash in European Segregated Account . . . . . . . -- 10,278,000
Investments in Former Subsidiaries . . . . . . . . . . . . . . 1,219,000 1,219,000
Notes Receivable from Related Parties, including interest . . . 474,000 232,000
Other Assets, net . . . . . . . . . . . . . . . . . . . . . . . 250,000 2,151,000
---------------- ----------------
$ 28,960,000 $ 48,705,000
================ ================
LIABILITIES AND STOCKHOLDERS' EQUITY
------------------------------------
Current Liabilities:
Trade payables . . . . . . . . . . . . . . . . . . . . . . $ 492,000 $ 695,000
Accrued liabilities and other . . . . . . . . . . . . . . . 2,464,000 2,191,000
Notes payable . . . . . . . . . . . . . . . . . . . . . . . 900,000 787,000
Revenues and royalties payable . . . . . . . . . . . . . . . 1,277,000 1,031,000
---------------- ----------------
Total Current Liabilities . . . . . . . . . . . . . . 5,133,000 4,704,000
Commitments and Contingencies (Note 12)
European Convertible Notes Payable . . . . . . . . . . . . . . -- 15,000,000
Redeemable Preferred Stock . . . . . . . . . . . . . . . . . . 1,868,000 1,868,000
Stockholders' Equity:
Common stock, $0.01 par value; authorized
100,000,000 shares; issued 66,426,508 and
70,420,505 shares, respectively . . . . . . . . . . . . . 664,000 704,000
Additional paid-in capital . . . . . . . . . . . . . . . . . 132,572,000 137,831,000
Retained deficit . . . . . . . . . . . . . . . . . . . . . . (90,520,000) (90,645,000)
Treasury stock, 5,983,655 shares held . . . . . . . . . . . (20,757,000) (20,757,000)
---------------- -----------------
Total Stockholders' Equity . . . . . . . . . . . . . . 21,959,000 27,133,000
---------------- ----------------
$ 28,960,000 $ 48,705,000
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The accompanying Notes to Consolidated Financial Statements
are an integral part of these Statements.
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HARKEN ENERGY CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
(unaudited)
THREE MONTHS ENDED SIX MONTHS ENDED
JUNE 30, JUNE 30,
------------------------------ ------------------------------
1994 1995 1994 1995
------------- ------------- ------------- -------------
Revenues:
Oil and gas operations . . . . . . . . . $ 889,000 $ 1,540,000 $ 1,898,000 2,713,000
Interest income . . . . . . . . . . . . 21,000 168,000 44,000 203,000
Other income . . . . . . . . . . . . . . 237,000 74,000 368,000 465,000
------------- ------------- ------------- -------------
1,147,000 1,782,000 2,310,000 3,381,000
Costs and Expenses:
Oil and gas operating expenses . . . . . 302,000 458,000 663,000 880,000
General and administrative expenses,
net . . . . . . . . . . . . . . . . . . 808,000 737,000 1,497,000 1,511,000
Depreciation and amortization . . . . . 425,000 607,000 929,000 1,138,000
Interest expense and other . . . . . . . 7,000 138,000 46,000 149,000
------------- ------------- ------------- -------------
1,542,000 1,940,000 3,135,000 3,678,000
Loss before income taxes . . . . . . . (395,000) (158,000) (825,000) (297,000)
Income tax expense . . . . . . . . . . . . . -- -- -- --
------------- ------------- ------------- -------------
Loss from continuing operations . . . (395,000) (158,000) (825,000) (297,000)
Discontinued Operations:
Income (loss) from operations of
discontinued well service and
contract drilling segment . . . . . . . (242,000) -- (380,000) --
Gain on sale of contract
drilling rigs . . . . . . . . . . . . -- -- 272,000 --
------------- ------------- ------------- -------------
(242,000) -- (108,000) --
------------ ------------- -------------- -------------
Net loss . . . . . . . . . . . . . . . $ (637,000) $ (158,000) $ (933,000) $ (297,000)
============== ============== ============== ==============
Income (loss) per common share:
Loss from continuing operations . . . . $ (0.01) $ (0.00) $ (0.02) $ (0.00)
Discontinued operations . . . . . . . . (0.00) -- (0.00) --
------------- ------------- -------------- -------------
Net loss . . . . . . . . . . . . . . . $ (0.01) $ (0.00) $ (0.02) $ (0.00)
============== ============== ============== ==============
Weighted average shares outstanding . . . . . 59,482,853 62,939,852 59,482,853 61,741,352
============= ============= ============= =============
The accompanying Notes to Consolidated Financial Statements
are an integral part of these Statements.
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HARKEN ENERGY CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
(unaudited)
ADDITIONAL
COMMON PAID-IN RETAINED TREASURY
STOCK CAPITAL DEFICIT STOCK
--------------- ----------------- ----------------- ----------------
Balance, December 31, 1993 . . . . . . . . . $ 654,000 $ 131,052,000 $ (81,986,000) $ (20,757,000)
Issuance of common stock, net . . . . . 10,000 1,520,000 -- --
Adjustment for unrealized gains (losses)
on available-for-sale securities . . . -- -- (100,000) --
Net loss . . . . . . . . . . . . . . . . -- -- (8,434,000) --
------------ ------------- -------------- -------------
Balance, December 31, 1994 . . . . . . . . . 664,000 132,572,000 (90,520,000)(A) (20,757,000)
Issuances of common stock, net . . . . . 40,000 5,259,000 -- --
Adjustment for unrealized gains (losses)
on available-for-sale securities . . . -- -- 172,000 --
Net loss . . . . . . . . . . . . . . . . -- -- (297,000) --
------------ ------------- ------------- -------------
Balance, June 30, 1995 . . . . . . . . . . . $ 704,000 $ 137,831,000 $ (90,645,000)(A) $ (20,757,000)
============ ============= ============== =============
(A) Includes, as a component of Retained Deficit, net unrealized gains
(losses) on available-for-sale securities of ($100,000) and $72,000 as of
December 31, 1994 and June 30, 1995, respectively.
The accompanying Notes to Consolidated Financial Statements
are an integral part of these Statements.
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HARKEN ENERGY CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(unaudited)
SIX MONTHS ENDED
JUNE 30,
-------------------------------
1994 1995
-------------- --------------
Cash flows from operating activities:
Net loss from continuing operations . . . . . . . . . . . . . . . . . . . $ (825,000) $ (297,000)
Adjustments to reconcile net loss to net cash provided by (used in)
operating activities:
Depreciation and amortization . . . . . . . . . . . . . . . . . . . . 929,000 1,138,000
Dividend income on investments in former subsidiaries . . . . . . . (240,000) --
Forgiveness of related party note receivable . . . . . . . . . . . . 232,000 232,000
Provision for doubtful accounts . . . . . . . . . . . . . . . . . . . 75,000 (180,000)
(Gain) loss on sales of assets and other . . . . . . . . . . . . . . (44,000) (406,000)
Interest income on restricted cash . . . . . . . . . . . . . . . . . -- (106,000)
Income (loss) from discontinued operations . . . . . . . . . . . . . . (108,000) --
Adjustment to reconcile income (loss) to net cash used in
operating activities:
Depreciation and amortization . . . . . . . . . . . . . . . . . . . 96,000 --
Gain on sales of assets . . . . . . . . . . . . . . . . . . . . . . (272,000) --
Change in assets and liabilities:
Decrease (increase) in accounts receivable . . . . . . . . . . . . . 466,000 (8,000)
Increase (decrease) in trade payables and other . . . . . . . . . . . (1,270,000) (1,107,000)
-------------- --------------
Net cash provided by (used in) operating activities . . . . . . . . (961,000) (734,000)
-------------- --------------
Cash flows from investing activities:
Cash from acquired subsidiary . . . . . . . . . . . . . . . . . . . . . . -- 190,000
Proceeds from sales of assets . . . . . . . . . . . . . . . . . . . . . . 1,471,000 2,779,000
Capital expenditures . . . . . . . . . . . . . . . . . . . . . . . . . . (1,311,000) (2,983,000)
-------------- --------------
Net cash provided by investing activities . . . . . . . . . . . . . 160,000 (14,000)
------------- --------------
Cash flows from financing activities:
Proceeds from issuances of common stock . . . . . . . . . . . . . . . . . -- 1,404,000
------------- -------------
Net cash provided by financing activities . . . . . . . . . . . . . -- 1,404,000
------------- -------------
Net increase (decrease) in cash and temporary investments . . . . . . . . . . (801,000) 656,000
Cash and temporary investments at beginning of period . . . . . . . . . . . . 3,299,000 2,828,000
------------- -------------
Cash and temporary investments at end of period . . . . . . . . . . . . . . . $ 2,498,000 $ 3,484,000
============= =============
Supplemental disclosures of cash flow information:
Cash paid during the period for:
Interest . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 46,000 $ 22,000
Income taxes . . . . . . . . . . . . . . . . . . . . . . . . . . . . . -- --
Significant non-cash transactions:
Increase from acquisition activity
Property and equipment . . . . . . . . . . . . . . . . . . . . . . . $ 400,000 $ --
Current liabilities . . . . . . . . . . . . . . . . . . . . . . . . . (400,000) --
The accompanying Notes to Consolidated Financial Statements
are an integral part of these Statements.
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HARKEN ENERGY CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
JUNE 30, 1994 AND 1995
(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, 1994 and June 30,
1995 and the results of its operations and changes in its cash flows for all
periods presented as of June 30, 1994 and 1995. These adjustments represent
normal recurring items. Certain prior year amounts have been reclassified to
conform with the 1995 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, 1994.
The results of operations for the six month period ended June 30, 1995 are
not necessarily indicative of the results to be expected for the full year.
(2) ACQUISITIONS
In October 1994, Harken acquired additional joint venture interests in the
CHAP Joint Venture ("CHAP") which was formed for the exploration and production
of oil and gas on the Navajo Indian Reservation ("the Reservation"). This
acquisition resulted in Harken increasing its ownership in the Reservation
reserves, exploration acreage, development drilling locations and the Aneth Gas
Plant. The acquisition of the sellers' interest raised Harken's total interest
in CHAP from 50% to approximately 70% and increased Harken's share of daily
production by approximately 40% over its previous interest. As consideration
for this acquisition, Harken issued a total of 960,000 shares of restricted
Harken common stock to the sellers, assumed certain liabilities of the sellers
relating to the properties, and the sellers in turn retained responsibility for
certain contingent operational and environmental liabilities related to the
interests as well as retaining certain distributions made by CHAP prior to the
actual date of closing.
In May 1995, Harken again acquired an additional interest in CHAP, raising
Harken's total interest in CHAP from approximately 70% to approximately 82%.
The purchase consideration paid by Harken consisted of $300,000 cash plus the
issuance of 534,000 shares of restricted Harken common stock to the seller.
Harken also assumed certain liabilities of the seller relating to the
properties, and the seller in turn retained responsibility for certain
contingent operational and environmental liabilities related to the interests
purchased. The above acquisitions of the additional interests in CHAP have
been accounted for under the purchase method of accounting.
In November 1994, Harken announced the signing of a Merger Agreement with
Search Exploration, Inc. ("Search"). Search is primarily engaged in the
domestic exploration for, and development and production of oil
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and gas reserves. Pursuant to the Merger Agreement, upon the consummation of
the Merger, (a) each outstanding share of Search common stock was converted
into the right to receive that number of shares of Harken common stock
determined by dividing $0.8099 by the average of the closing sales price of a
share of Harken common stock on the American Stock Exchange over the 30 days
immediately preceding the date that is five trading days prior to the
consummation of the merger, subject to certain restrictions ("the Average
Trading Price"); (b) each outstanding share of Search Series 1993 Redeemable
Preferred Stock was converted into the right to receive that number of shares
of Harken common stock determined by dividing $1.00 by the Average Trading
Price and (c) certain promissory notes to be issued by Search were, by their
terms, converted into the right to receive that number of shares of Harken
common stock determined by dividing the principal amount of each note by the
Average Trading Price. In addition, the holders of Search common stock,
certain notes and overriding royalty interests in certain properties of Search
received a non-transferable right to receive additional shares in the future,
if any, of Harken common stock or, under certain circumstances, cash, based
upon the increase that may subsequently be realized in the value of a group of
undeveloped leases and properties of Search. The Merger with Search was closed
following a vote held at a Search stockholders meeting on May 22, 1995 and has
been accounted for under the purchase method of accounting.
As of December 31, 1994, Search had proved reserves of approximately 19,000
barrels of oil and 1,298,000 mcf of gas with a net present value of
approximately $1,513,000 and had gross revenue interests in 42 productive
wells, none of which were operated by Search.
(3) INVESTMENTS IN FORMER SUBSIDIARIES
E-Z Serve Preferred Stock -- At December 31, 1994, Harken held 79,754
shares of E-Z Serve $6.00 Convertible Preferred Stock, Series C ("E-Z Serve
Series C Preferred") which it acquired at a cost of $100 per share. The E-Z
Serve Series C Preferred was to pay a cumulative dividend of $6.00 per share
per annum, payable semi-annually 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 was
convertible at the option of either E-Z Serve or Harken into 52.63 common
shares of E-Z Serve, such rate to be adjusted under certain conditions. The
E-Z Serve Series C Preferred was subordinated to all E-Z Serve bank credit
facilities.
During 1994, Harken converted a portion of its shares of E-Z Serve Series C
Preferred into E-Z Serve common shares and sold certain of its E-Z Serve common
shares. During the fourth quarter of 1994, Harken also began reviewing the
potential for a sale to other parties of some or all of its remaining
investment in E-Z Serve Series C Preferred and related accrued dividends.
Based on the terms and consideration of these potential transactions, the
current market price of E-Z Serve common shares, the conversion terms and
limited marketability of the E-Z Serve Series C Preferred and the current
overall capital structure of E-Z Serve, Harken deemed that a decline in value
that was other than temporary had occurred with respect to its investment in
E-Z Serve Series C Preferred. Accordingly, Harken reclassified its investment
in E-Z Serve Series C Preferred and its related accrued dividends receivable
from E-Z Serve to current assets at December 31, 1994, at a total estimated
realizable value of $2,898,000. Such amount is reflected as Investment in
Former Subsidiary Held for Resale in the accompanying consolidated balance
sheet. In connection with this determination, Harken recorded a decline in
value of $5,831,000 at December 31, 1994. In March 1995, Harken sold its
investment in E-Z Serve Series C Preferred and its related accrued dividends
receivable from E-Z Serve. Harken was paid consideration in cash of
approximately $2,779,000, an amount approximately equal to Harken's recorded
value.
Harken recorded dividend income of $240,000 during the six months ended June
30, 1994 related to the E-Z Serve Series C Preferred and has included such
dividends in Other Income in the accompanying financial statements. No
dividend income was recorded during the six months ended June 30, 1995.
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Tejas Preferred Stock -- Harken holds 1,000 shares of Tejas Power
Corporation Series B Preferred Stock, $.01 par value per share ("Tejas
Preferred Stock"), which it acquired at a purchase price of $1,200,000. Harken
accepted these shares of Tejas Preferred Stock as full and complete payment for
certain expenses and 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) MARKETABLE EQUITY SECURITIES
In May 1993 the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards No. 115, "Accounting For Certain Investments in
Debt and Equity Securities", ("SFAS 115") effective for fiscal years beginning
after December 15, 1993. Under the new rules, all marketable equity securities
are classified as available-for-sale or trading and are carried at fair value.
Unrealized holding gains and losses on securities classified as available-for-
sale are carried as a component of stockholders' equity. Realized gains and
losses and declines in value judged to be other than temporary on
available-for-sale securities are included in other income. Unrealized holding
gains and losses on securities classified as trading are also reported in
earnings. The cost of securities sold is based on the average cost method.
Harken carries an investment in the common stock of E-Z Serve, including
shares of E-Z Serve common stock resulting from the conversion of certain
shares of E-Z Serve Series C Preferred in June 1994 and January 1995. Harken's
investment in E-Z Serve Series C Preferred was not accounted for pursuant to
SFAS 115, as it is not a readily marketable security. Beginning in 1994
pursuant to SFAS 115, Harken classifies its investment in E-Z Serve common
stock as available for sale. The following is a summary of Harken's marketable
equity securities, which are included in Prepaid Expenses and Other Current
Assets in the accompanying balance sheet.
DECEMBER 31, JUNE 30,
AVAILABLE-FOR-SALE 1994 1995
------------------ -------------- --------------
Cost $ 210,000 $ 458,000
Gross Unrealized Gains -- 72,000
Gross Unrealized Losses (100,000) --
-------------- -------------
Estimated Fair Value $ 110,000 $ 530,000
============== =============
SIX MONTHS ENDED
JUNE 30,
--------------------------------
AVAILABLE-FOR-SALE 1994 1995
------------------ --------------- --------------
Gross Realized Gains $ 99,000 $ 14,000
Gross Realized Losses -- --
An unrealized holding gain (loss) on available-for-sale securities of
($100,000) and $72,000 was recognized at December 31, 1994 and June 30, 1995,
respectively, and is included as a component of stockholders' equity. Such
amount has been included in Retained Deficit in the accompanying consolidated
financial statements.
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(5) PROPERTY AND EQUIPMENT
A summary of property and equipment follows:
DECEMBER 31, JUNE 30,
1994 1995
---------------- --------------
Oil and gas properties --
Evaluated . . . . . . . . . . . . . . . . . . . . . . . $ 13,944,000 $ 17,781,000
Unevaluated . . . . . . . . . . . . . . . . . . . . . . 7,446,000 11,278,000
Gas plants and other property . . . . . . . . . . . . . . . . 6,646,000 6,387,000
Less accumulated depreciation
and amortization . . . . . . . . . . . . . . . . . . . . (7,859,000) (8,938,000)
-------------- --------------
$ 20,177,000 $ 26,508,000
============== =============
Costs of unevaluated oil and gas properties at December 31, 1994 include
$5,820,000 and $1,626,000 of domestic properties and international properties,
respectively. Costs of unevaluated oil and gas properties at June 30, 1995
include $7,796,000 and $3,482,000 of domestic properties and international
properties, respectively.
(6) NOTES PAYABLE
In March 1994, a lawsuit was settled whereby a Harken subsidiary
executed a non-interest bearing note payable for a $500,000 payment which was
paid to the subsidiary's former stockholder on January 5, 1995. This
obligation is included in Notes Payable in the accompanying December 31, 1994
balance sheet.
Further, under the terms of this March 1994 agreement, the subsidiary
purchased the former stockholder's 3% working interest in the wells drilled by
Harken Southwest Corporation ("HSW"), a wholly-owned subsidiary, as well as all
rights he held to participate in future wells drilled by HSW on the Navajo
Reservation, effective January 1, 1994. As consideration for such purchase,
the subsidiary issued a 10% note payable in the amount of $400,000 which is due
and payable to the subsidiary's former stockholder on or before January 3,
1996. This note is included in Notes Payable in the accompanying balance
sheets. The balance is included as a current liability as HSW 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.
(7) EUROPEAN CONVERTIBLE NOTES PAYABLE
During the second quarter of 1995, Harken issued to qualified purchasers
a total of $15 million in European 8% Senior Convertible Notes (the "Notes")
which mature in May 1998. Interest is payable semi-annually in May and
November of each year to maturity or until the Notes are converted. Such Notes
are convertible by the holders into shares of unrestricted Harken common stock
at an exercise price of $1.50 per share, which is based on the average market
price of Harken common stock ("the Conversion Price"). Such Notes are also
convertible by Harken into shares of unrestricted Harken common stock after one
year following issuance, if for any period of thirty consecutive days the
closing price for each day during such period shall have equaled or exceeded
140% of the Conversion Price (or $2.10 per share of Harken common stock). The
Conversion Price of the Notes was established as the average of the daily low
and closing market prices of Harken common stock for the three Trading Days
prior to April 27, 1995, which was the date of the final offering memorandum
for the Notes, and is subject to adjustment upon the occurrence of certain
events.
The Notes are collateralized by a negative pledge from Harken of certain
defined categories of assets. Upon closing, all proceeds from the sale of the
Notes were paid to a paying and conversion agent and are held in a
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separate interest bearing bank account (the "Segregated Account") to be
maintained in Harken's name, until the paying and conversion agent is presented
with evidence of sufficient collateral held by Harken to permit an advance of a
portion of the proceeds.
Upon conversion, any proceeds attributable to the Notes converted which
remain in the Segregated Account will be released and paid to Harken without
regard to the value of any collateral then existing. In July 1995, Harken
received notification that holders of Notes totalling $400,000 had exercised
their conversion option and will receive 266,664 shares of unrestricted Harken
common stock.
The Notes were sold strictly to non-U.S. purchasers and are convertible
in $50,000 increments. Neither the Notes nor the unrestricted Harken common
stock issuable upon conversion of the Notes have been or will be registered
under the United States Securities Act of 1933 (the Securities Act") and may
not be offered, sold, transferred, pledged or otherwise disposed of in the
United States to, or for the account or benefit of any "U.S. person", (as
defined in Regulation S under the Securities Act) unless the Notes and the
related unrestricted Harken common stock have been registered under the
Securities Act and any applicable state securities laws or exemptions from
registration requirements.
In connection with the sale and issuance of the Notes, Harken paid
approximately $1,750,000 from the Note proceeds for commissions and issuance
costs. Such costs have been deferred and are included in Other Assets in the
accompanying Financial Statements and are being amortized over the period until
maturity of the Notes. In addition, at closing of the Notes, Harken issued to
the placement agents certain non-registered non-transferrable stock purchase
warrants to purchase one million shares of Harken common stock which are
exercisable by the holders thereof at any time following six months after
closing at an exercise price of $1.50 per share which is based on the
Conversion Price described above, and expiring in May 1999. Also, Harken paid
an additional fee of 92,308 shares of restricted Harken common stock to a
financial advisor in connection with the Notes.
To the extent that proceeds invested in the Segregated Account at the
balance sheet date are available under the above discussed collateral-based
limitations, such cash is included as a current asset in Cash Available in
European Segregated Account in the accompanying Financial Statements.
Segregated Account cash that is not available as of the balance sheet date, due
to the collateral based limitations, is reflected as Restricted Cash in
European Segregated Account in the accompanying Financial Statements, as a
non-current asset. The cash proceeds of the Notes are not included in the
Statement of Cash Flows because the proceeds are not considered to be cash
equivalents.
(8) DISCONTINUED OPERATIONS
In May 1994, Harken announced that it had discontinued its well
servicing operations which it had conducted through Supreme Well Service
Company ("Supreme"), a wholly-owned subsidiary. Harken has sold the equipment
assets of Supreme and has utilized the proceeds toward developing Harken's
exploration and production operations, both domestically and internationally.
As a result of this decision, Harken has reflected the revenues and expenses of
Harken's well servicing and contract drilling segment as discontinued
operations in the accompanying financial statements. Such discontinued
operations include revenues of $837,000 as of June 30, 1994. This revenue
amount includes $272,000 of gain on the sale of Harken's contract drilling
assets which occurred during the first quarter of 1994.
(9) STOCKHOLDERS' EQUITY
Common Stock - Harken currently has authorized 100,000,000 shares of
$.01 par common stock. At December 31, 1994 and June 30, 1995, Harken had
issued 66,426,508 and 70,420,505 shares, respectively, and held 5,983,655
shares as treasury stock at a cost of $20,757,000.
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Acquisition of CHAP Interests -- In October 1994, Harken acquired an
additional interest of approximately 20% in CHAP in exchange for, among other
consideration, 960,000 restricted shares of Harken common stock. In May 1995,
Harken acquired an additional interest of approximately 12% in CHAP in exchange
for, among other consideration, 534,000 restricted shares of Harken common
stock.
Private Placements of Common Stock -- On March 1, 1995, Harken sold
600,000 restricted shares of newly issued Harken common stock to an
institutional purchaser in exchange for net proceeds of $657,000. This was a
sale which was issued without registration under the Securities Act pursuant to
an exemption from registration under Regulation D of the Securities Act. These
shares were further issued with certain demand registration and piggy-back
registration rights pursuant to a registration rights agreement between Harken
and the purchaser in connection therewith.
Harken subsequently entered into an agreement on April 7, 1995 to sell
to this same institutional purchaser an additional 600,000 restricted shares of
Harken common stock in exchange for net proceeds of $747,000. These additional
shares were also issued without registration under the Securities Act pursuant
to an exemption under Regulation D of the Securities Act. These additional
shares also are subject to the same demand and piggy-back registration rights
as were the initial shares sold to this purchaser. In May 1995, Harken was
notified that the institutional purchaser had exercised its registration rights
and that the 1,200,000 shares sold were to be registered with the Securities
and Exchange Commission ("SEC").
In July 1995, Harken received additional net proceeds of $654,000
related to the sale of 600,000 restricted shares of Harken common stock to a
second institutional purchaser. These shares were also issued without
registration under the Securities Act pursuant to an exemption under Regulation
D of the Securities Act. These shares were also issued with certain demand
registration and piggy-back registration rights pursuant to a registration
rights agreement between Harken and the purchaser in connection therewith. In
July 1995, Harken was notified that the purchaser had exercised its
registration rights and that the 600,000 shares sold were to be registered with
the SEC.
Registration of Outstanding Shares -- Pursuant to the request of certain
former CHAP partners, and in accordance with the terms of the above mentioned
purchase by Harken of an additional interest in CHAP, Harken filed a
registration statement with the SEC covering 960,000 restricted shares of its
currently outstanding common stock that was approved and made effective in
April 1995. Pursuant to the request of an institutional purchaser, Harken
filed a registration statement with the SEC covering 1,200,000 restricted
shares of its currently outstanding common stock that was approved and made
effective in May 1995. In addition, in accordance with the terms of the above
mentioned placement of 600,000 shares of restricted Harken common stock sold in
July 1995 to an institutional purchaser, Harken has filed a registration
statement in August 1995 with the SEC covering 1,226,308 restricted shares of
its currently outstanding common stock including shares of certain other
shareholders with piggy-back rights.
Acquisition of Search Exploration, Inc. -- In May 1995, Harken
consummated the previously announced Merger with Search Exploration,
Inc. ("Search"). See Note 2-Acquisitions for further discussion. Pursuant to
the terms of the Merger Agreement among Harken, Search and a wholly-owned
subsidiary of Harken, 11,000,000 shares of Harken common stock were authorized
for issuance and registered with the SEC. Upon the consummation of the Search
acquisition on May 22, 1995, a total of approximately 2.2 million shares of
Harken common stock were issued to the common stockholders of Search, preferred
stockholders of Search and certain note holders of Search. Of the remaining
approximately 8.8 million shares of Harken common stock which may be issued in
connection with the Search acquisition, (i) up to 722,486 shares of Common
Stock may be issued upon the exercise of certain warrants issued by Harken, and
(ii) the remaining shares of Harken common stock ("Contingent Shares"), if any,
may be issued on or about September 30, 1996 to the holders of record at the
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effective time of the merger of certain Search securities issued by Search and
overriding royalty interests in certain properties held by Search, based in
part upon the increase that may subsequently be realized in the value of a
group of undeveloped leases and properties of Search.
Issuance of European Convertible Notes -- In connection with the
issuance of $15 million in European 8% Senior Convertible Notes in May 1995,
Harken issued to the placement agents for the Notes certain non-registered non-
transferrable stock purchase warrants to purchase one million shares of Harken
common stock which are exercisable by the holders thereof at any time following
six months after closing at an exercise price of $1.50 per share, and expiring
in May 1999. In addition, the Notes are convertible under certain terms into
up to approximately 10,000,000 shares of Harken common stock. See Note 7 -
European Convertible Notes Payable for further discussion. Also, Harken paid
an additional fee of 92,308 shares of restricted Harken common stock to a
financial advisor in connection with the Notes. The market value of such
shares is included as deferred debt issuance costs in Other Assets in the
accompanying Balance Sheet.
(10) PER SHARE DATA
Per share data has been computed based on the weighted average number of
common shares outstanding during each period.
(11) INCOME TAXES
At June 30, 1995, Harken had available for federal income tax reporting
purposes, net operating loss (NOL) carryforward for regular tax purposes of
approximately $58,000,000 which expires in 1997 through 2010, alternative
minimum tax NOL carryforward of approximately $47,000,000 which expires in 1997
through 2010, investment tax credit carryforward of approximately $863,000
which expires in 1995 through 2002, contribution carryforward of approximately
$57,000 which expires in 2000 through 2009, statutory depletion carryforward of
approximately $1,150,000 which does not have an expiration date, jobs tax
credit carryforward of approximately $118,000 which expires in 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.
Total deferred tax liabilities and total deferred tax assets as of June
30, 1995, computed under the provisions of the Statement of Financial
Accounting Standard No. 109, "Accounting for Income Taxes", were approximately
$7,262,000 and $18,517,000, respectively. The total net deferred tax asset is
offset by the valuation allowance of approximately $11,255,000 at June 30,
1995.
(12) COMMITMENTS AND CONTINGENCIES
Colombian Operations-Alcaravan Contract-During the third quarter of
1992, Harken, through a subsidiary, Harken de Colombia, Ltd., was awarded the
exclusive right to explore for, develop and produce oil and gas throughout
approximately 350,000 acres within the Alcaravan area ("Alcaravan") of
Colombia. Alcaravan is located in Colombia's Llanos Basin and is located
approximately 140 miles east of Santafe De Bogota. Harken and 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. At the end of each of the six years in the work
program, Harken has the option to withdraw from the Alcaravan Contract or to
commit to the next year's work requirements, and Harken has committed to the
second year of the work program under this contract. 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
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each have a 50% working interest. The term of the Alcaravan Contract will
extend twenty-two years from the date of any commercial discovery of oil and/or
gas. Harken reprocessed in excess of 200 kilometers of seismic 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 joined Harken in the drilling of its first exploratory well
under the Alcaravan Contract. Under the terms of this joint venture agreement,
which was approved by Ecopetrol, Harken served as operator and retained a 50%
interest in the well. The well, the Alcaravan #1, was spudded in early
February 1995 and was drilled to a projected depth of 10,550 feet to test for
commercial quantities of oil in the oil prone zones prevalent in the Llanos
Basin; the Carbonera, Mirador, Guadalupe and the basal Cretaceous formations.
In April 1995, Harken announced that the Alcaravan #1 well failed to produce
commercial quantities of oil. In addition, Huffco elected to not participate
in the further exploration and development of the Alcaravan acreage, therefore,
Harken will seek a new partner for the continued development of the Alcaravan
acreage.
Bocachico Contract - In January 1994, Harken announced that Harken de
Colombia, Ltd. had signed its second Association Contract ("Bocachico
Contract") with Ecopetrol, covering the Bocachico contract area. Under the
Bocachico Contract, Harken has acquired the exclusive rights to conduct
exploration activities and drilling on this area, which covers approximately
192,000 acres in the Middle Magdalena Valley of Central Colombia.
During the first year of the Bocachico Contract, Harken is conducting
seismic activities on the land covered by this contract including reprocessing
of at least 250 kilometers of existing seismic data and the acquisition of at
least 35 kilometers of new seismic data. During each of the 2nd through the
6th contract years, Harken may elect to continue the contract by committing to
the drilling of at least one well during each contract year. During this
initial six year term, called the Exploration Period under the Bocachico
Contract, if Harken has discovered the existence of commercial production in
the Bocachico Contract area, the Bocachico Contract will be further extended
for a period of 22 years from the date of any commercial discovery of oil
and/or gas. If Harken makes a commercial discovery of oil and/or gas which is
approved by Ecopetrol, the standard terms of the Bocachico Contract will apply.
Such terms provide for Ecopetrol to reimburse Harken for 50% of its successful
well costs expended up to the point of commercial discovery and to receive a
20% royalty interest and for both Ecopetrol and Harken to each have a 50%
working interest.
In addition to reprocessing and acquiring seismic data during the first
contract year of the Bocachico Contract, Harken has also conducted 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. Three wells were drilled over 30 years ago in this area by
another contractor who produced and subsequently abandoned the wells. Well
information and data, including production rates, well logs and pressure tests,
has been utilized by Harken in its studies to evaluate the feasibility of
applying modern production and recovery techniques in this area. Harken will
also acquire a minimum of 35 kilometers of seismic data on the Bocachico
Contract area in 1995.
On January 19, 1995, after completing the engineering feasibility study,
Harken notified Ecopetrol of Harken's commitment to drill a well under the
Bocachico Contract, and thereby extended the contract into its second year.
Harken has selected a well site and currently anticipates completing this
drilling effort in the fourth quarter of 1995.
Playero Contract - In December 1994, Harken announced that Harken de
Colombia, Ltd. had signed its third Association Contract ("Playero Contract")
with Ecopetrol, covering the Playero contract area. Under the Playero
Contract, Harken has acquired the exclusive rights to conduct exploration
activities and drilling on this
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area, which covers approximately 10,000 acres in the Llanos Basin of Colombia,
contiguous to Harken's Alcaravan Contract area.
During the first year of the Playero Contract, Harken will acquire at
least 12 kilometers of new seismic data in the Playero Contract area. During
each of the 2nd through the 6th contract years, Harken may elect to continue
the contract by committing to the drilling of at least one well during each
contract year. During this initial six year term, called the Exploration
Period under the Playero Contract, if Harken has discovered the existence of
commercial production in the Playero Contract area, the Playero Contract will
be further extended for a period of 22 years from the date of termination of
the Exploration Period with a total term not to exceed 28 years. If Harken
makes a commercial discovery of oil and/or gas which is approved by Ecopetrol,
the standard terms of the Playero Contract will apply. The Playero Contract
was granted by Ecopetrol under a new form of Association Contract which has
modified various standard terms from the previous form of Association Contract
which was used on the Alcaravan and Bocachico Contracts. Such terms provide
for Ecopetrol to reimburse Harken for 50% of its successful well costs expended
up to the point of a commercial discovery and to receive a 20% royalty
interest. Although both Ecopetrol and Harken each would have a 50% working
interest, production net of royalty would be allocated 50% to each party until
accumulated production from the Playero Contract area reaches a cumulative
total of 60 million barrels of oil. After that cumulative production level is
achieved, production net of royalty is allocated at rates to Harken from 50% to
25% based upon the relative profitability of the project with Ecopetrol
receiving the remaining complementary 50% to 75% of such additional production.
Bahrain Operations - At present, Harken holds approximately 500,000
acres under its production sharing agreement with the Bahrain National Oil
Company ("BANOCO"). In January 1995, Harken completed reprocessing of
approximately 500 kilometers of seismic data and has reviewed the results of
that work with BANOCO. In July 1995, Harken announced that BANOCO had granted
an extension to the production sharing agreement for an additional six months,
with an additional six months extension should certain conditions be met.
Unless Harken obtains a joint venture partner, Harken will not proceed to
either acquire additional seismic data or drill another well on the acreage.
Other - The exploration, development and production of oil and gas are
subject to various Navajo, federal and state laws and regulations designed to
protect the environment. Compliance with these regulations is part of Harken's
day-to-day operating procedures. Infrequently, accidental discharge of such
materials as oil, natural gas or drilling fluids can occur and such accidents
can require material expenditures to correct. Harken maintains levels of
insurance customary in the industry to limit its financial exposure. Management
is unaware of any material capital expenditures required for environmental
control during the next fiscal year.
Harken has accrued approximately $860,000 at June 30, 1995 relating to
other operational or regulatory liabilities. Harken and its subsidiaries
currently are involved in various lawsuits and other contingencies, including
the guarantee of certain lease obligations, which in management's opinion, will
not result in significant loss exposure to Harken.
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ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
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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. Consolidated results of operations were consistent with
management's expectations for the six month period ended June 30, 1995.
SIX MONTHS ENDED
JUNE 30,
---------------------------------
EXPLORATION AND PRODUCTION 1994 1995
-------------------------- -------------- ----------------
OPERATIONS
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REVENUES
--------
Oil sales revenues $ 1,115,000 $ 1,846,000
Oil volumes in barrels 75,000 100,000
Oil price per barrel $ 14.87 $ 18.46
Gas sales revenues $ 392,000 $ 506,000
Gas volumes in mcf 185,000 371,000
Gas price per mcf $ 2.12 $ 1.36
Gas plant revenues $ 391,000 $ 361,000
OTHER REVENUES
--------------
Interest income $ 44,000 $ 203,000
Other income $ 368,000 $ 465,000
OVERVIEW
In October 1994, and again in May 1995, Harken acquired additional
joint venture interests in the CHAP Joint Venture ("CHAP") which was formed for
the exploration and production of oil and gas. These acquisitions resulted in
Harken increasing its ownership in the Navajo Indian Reservation reserves,
exploration acreage, development drilling locations and the Aneth Gas Plant.
The acquisition of the sellers' interests raised Harken's total interest in
CHAP from 50% to approximately 82% and increased Harken's share of daily
production by approximately 64% over its previous interest. As consideration
for the October 1994 acquisition, Harken issued a total of 960,000 restricted
shares of Harken common stock to the sellers in exchange for approximately 20%
additional interest in CHAP and, assumed certain liabilities of the sellers
relating to the properties, and the sellers in turn retained responsibility for
certain contingent operational and environmental liabilities related to the
interests as well as retaining certain distributions made by CHAP prior to the
actual date of closing. As consideration for the May 1995 acquisition, Harken
issued 534,000 restricted shares of Harken common stock and paid $300,000 in
cash in exchange for approximately 12% additional interest in CHAP. Harken
also assumed certain liabilities of the seller relating to the properties, and
the seller in turn retained responsibility for certain contingent operational
and environmental liabilities related to the interest purchased. The
acquisitions of the additional interests in CHAP have been accounted for under
the purchase method of accounting.
Oil and gas revenues, primarily from HSW's operations, reflect the low
price for oil experienced during the first six months of 1994 compared to a
stronger oil price during the first six months of 1995, as well as the
increased 1995 production volumes from the above acquired interests. Harken
drilled five wells during the first half of 1995 on acreage it holds in the
Paradox Basin area, in an effort to offset the production declines typically
experienced in the region and increase revenues and cash flow from its oil and
gas operations. Gas revenues
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increased during the first six months of 1995 compared to 1994, partly due to
the increase in CHAP ownership, and due to the adjustment to certain
related liabilities, and in spite of the sharp decrease in gas prices
experienced during the first quarter of 1995, with no improvement occurring in
the second quarter of 1995. Gas plant revenues decreased compared to the prior
period due to a reduction from the prior year in CHAP's ownership in the Aneth
Gas Plant as calculated based on each owner's throughput volume.
In November 1994, Harken announced the signing of a Merger Agreement
with Search Exploration, Inc. ("Search"), and upon consummation of the Merger
on May 22, 1995, approximately 2.2 million shares of Harken common stock were
issued. Search is primarily engaged in the domestic exploration for,
development and production of oil and gas reserves. The Merger with Search was
accounted for under the purchase method of accounting and had minimal impact on
Harken's results of operations for the six months ended June 30, 1995.
Other income increased during the first six months of 1995 compared to
the prior year due to a gain of approximately $225,000 on the sale of Harken's
investment in E-Z Serve Series C Preferred Stock during March 1995. Interest
income increased due to the interest earned on invested Segregated Account cash
pursuant to the May 1995 receipt of proceeds from the European Convertible
Notes.
Oil and gas operating expenses increased during the first six months of
1995 compared to 1994 due to the additional CHAP ownership resulting from the
above described acquisition of CHAP interests in October 1994 and May 1995.
Interest expense and other increased due to the accrual of interest
incurred on the $15,000,000 European Convertible Notes beginning in May 1995.
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 in the accompanying financial
statements.
OTHER COSTS AND EXPENSES
General and administrative expenses decreased from $808,000 for the
second quarter of 1994 to $737,000 for the second quarter of 1995 despite the
loan forgiveness of $232,000 described below. During the second quarter of
1995, Harken adjusted certain valuation allowance accounts by approximately
$230,000, to more accurately reflect these accounts in its balance sheet.
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, and has
included the second installment of this forgiveness totalling $232,000 in
general and administrative expenses during the second quarter of 1995.
LIQUIDITY AND CAPITAL RESOURCES
During the first half of 1995, cash and temporary investments increased
by $656,000 primarily from $2,779,000 of cash proceeds received from the sale
of Harken's investment in E-Z Serve Series C Preferred and
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the receipt of $1,404,000 in net proceeds from the issuance of 1,200,000
shares of Harken common stock in private placements. Capital expenditures
during the first six months of 1995 totalled approximately $2,983,000 related
to drilling activities both domestically and in Colombia. Cash used by
operations during the first six months of 1995 totalled $734,000. Harken has
taken steps to appropriately reduce overhead costs and additional capital
expenditures will be incurred only to the extent that cash flow from operations
or additional funds are available. Harken believes that cash flow from
operations will be sufficient to meet its operating cash requirements for the
remainder of 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 or debt issuances, operating cash flows and potentially from industry
partners. Any acreage on the Navajo Indian Reservation which was not held by
production as of July 31, 1995, has now expired pursuant to the operating
agreements with the Navajo Tribe of Indians. Harken did not record an
impairment associated with this expiration, as no value had been allocated to
this exploratory acreage.
Excluded from the above cash and temporary investments balances and
activity is the net proceeds totalling approximately $13,250,000 generated from
the sale of a total of $15,000,000 in European 8% Senior Convertible Notes (the
"Notes") in May 1995, which mature in May 1998. Such notes are convertible by
the holders into shares of unrestricted Harken common stock at an exercise
price of $1.50 per share, and convertible by Harken into shares of unrestricted
Harken common stock after one year following issuance, if for any period of
thirty consecutive days the closing price for each day during such period shall
have equalled or exceeded 140% of the Conversion Price (or $2.10 per share of
Harken common stock). The Notes are collateralized by a negative pledge from
Harken of certain defined categories of assets. Upon closing, all proceeds
from the sale of the Notes were paid to a paying and conversion agent and are
held in a separate interest bearing bank account (the "Segregated Account") to
be maintained in Harken's name, until the paying and conversion agent is
presented with evidence of sufficient collateral held by Harken to permit an
advance of a portion of the proceeds. Harken plans to use the net proceeds
from these Notes to support Harken's future domestic oil and gas reserve
acquisitions, exploration and development.
Upon a conversion, any proceeds attributable to the Notes converted
which remain in the Segregated Account will be released and paid to Harken
without regard to the value of any collateral then existing. In July 1995,
Harken received notification that holders of Notes totalling $400,000 had
exercised their conversion option and will receive 266,664 shares of
unrestricted Harken common stock.
To the extent that proceeds invested in the Segregated Account at the
balance sheet date are available under the above collateral-based limitations,
such cash is included as a current asset as it is available to Harken to fund
international and domestic activities including acquisitions, drilling costs
and other capital expenditures or other working capital needs.
Interest incurred on the Notes is payable semi-annually in May and
November of each year to maturity or until the Notes are converted. Interest
payments will be funded from cash flow from operations, existing cash balances
or from available proceeds.
Following the May 22, 1995 Merger with Search, Harken plans to use cash
flow generated by Search oil and gas properties to fund capital requirements of
certain prospects in which Search has retained a working interest. Most of
such prospects have been farmed-out to other industry partners thereby
requiring such partners to pay for initial drilling costs under various
contractual arrangements.
Since obtaining the 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 opportunities in oil and gas
exploration and development. Harken considers that the opportunities to
profitably deploy Harken's expertise and assets internationally are generally
greater than those available domestically. Harken continues to
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pursue other international opportunities during 1995, such as the Colombian
opportunities discussed below, through its wholly-owned subsidiary, Harken
International, Ltd.
Colombian Operations-Alcaravan Contract-During the third quarter of
1992, Harken, through a subsidiary, Harken de Colombia, Ltd., was awarded the
exclusive right to explore for, develop and produce oil and gas throughout
approximately 350,000 acres within the Alcaravan area ("Alcaravan") of
Colombia. Alcaravan is located in Colombia's Llanos Basin and is located
approximately 140 miles east of Santafe De Bogota. Harken and Empresa
Colombiana de Petroleos ("Ecopetrol") have entered into an Association Contract
("Alcaravan Contract") which requires Harken to conduct a seismic and
exploratory drilling program in the Alcaravan area ("work program") over the
initial six (6) years. At the end of each of the six years in the work
program, Harken has the option to withdraw from the Alcaravan Contract or to
commit to the next year's work requirements, and Harken has committed to the
second year of the work program under this contract. If Harken makes a
commercial discovery of oil and/or gas which is approved by Ecopetrol, the
standard terms of the Alcaravan Contract will apply. Such terms provide for
Ecopetrol to reimburse Harken for 50% of its successful well costs expended up
to the point of commercial discovery and to receive a 20% royalty interest and
for both Ecopetrol and Harken to each have a 50% working interest. The term of
the Alcaravan Contract will extend twenty-two years from the date of any
commercial discovery of oil and/or gas. Harken reprocessed in excess of 200
kilometers of seismic 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 joined Harken in the drilling of its first exploratory well
under the Alcaravan Contract. Under the terms of this joint venture agreement,
which was approved by Ecopetrol, Harken served as operator and retained a 50%
interest in the well. The well, the Alcaravan #1, was spudded in early
February 1995 and was drilled to a projected depth of 10,550 feet to test for
commercial quantities of oil in the oil prone zones prevalent in the Llanos
Basin; the Carbonera, Mirador, Guadalupe and the basal Cretaceous formations.
In April 1995, Harken announced that the Alcaravan #1 well failed to produce
commercial quantities of oil. In addition, Huffco elected to not participate
in the further exploration and development of the Alcaravan acreage, therefore,
Harken will seek a new partner for the continued development of the Alcaravan
acreage.
Bocachico Contract - In January 1994, Harken announced that Harken de
Colombia, Ltd. had signed its second Association Contract ("Bocachico
Contract") with Ecopetrol, covering the Bocachico contract area. Under the
Bocachico Contract, Harken has acquired the exclusive rights to conduct
exploration activities and drilling on this area, which covers approximately
192,000 acres in the Middle Magdalena Valley of Central Colombia.
During the first year of the Bocachico Contract, Harken is conducting
seismic activities on the land covered by this contract including reprocessing
of at least 250 kilometers of existing seismic data and the acquisition of at
least 35 kilometers of new seismic data. During each of the 2nd through the
6th contract years, Harken may elect to continue the contract by committing to
the drilling of at least one well during each contract year. During this
initial six year term, called the Exploration Period under the Bocachico
Contract, if Harken has discovered the existence of commercial production in
the Bocachico Contract area, the Bocachico Contract will be further extended
for a period of 22 years from the date of any commercial discovery of oil
and/or gas. If Harken makes a commercial discovery of oil and/or gas which is
approved by Ecopetrol, the standard terms of the Bocachico Contract will apply.
Such terms provide for Ecopetrol to reimburse Harken for 50% of its successful
well costs expended up to the point of commercial discovery and to receive a
20% royalty interest and for both Ecopetrol and Harken to each have a 50%
working interest.
In addition to reprocessing and acquiring seismic data during the first
contract year of the Bocachico Contract, Harken has also conducted 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. Three
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wells were drilled over 30 years ago in this area by another contractor who
produced and subsequently abandoned the wells. Well information and data,
including production rates, well logs and pressure tests, has been utilized by
Harken in its studies to evaluate the feasibility of applying modern production
and recovery techniques in this area. Harken will also acquire a minimum of 35
kilometers of seismic data on the Bocachico Contract area in 1995.
On January 19, 1995, after completing the engineering feasibility study,
Harken notified Ecopetrol of Harken's commitment to drill a well under the
Bocachico Contract, and thereby extended the contract into its second year.
Harken has selected a well site and currently anticipates completing this
drilling effort in the fourth quarter of 1995.
Playero Contract - In December 1994, Harken announced that Harken de
Colombia, Ltd. had signed its third Association Contract ("Playero Contract")
with Ecopetrol, covering the Playero contract area. Under the Playero
Contract, Harken has acquired the exclusive rights to conduct exploration
activities and drilling on this area, which covers approximately 10,000 acres
in the Llanos Basin of Colombia, contiguous to Harken's Alcaravan Contract
area.
During the first year of the Playero Contract, Harken will acquire at
least 12 kilometers of new seismic data in the Playero Contract area. During
each of the 2nd through the 6th contract years, Harken may elect to continue
the contract by committing to the drilling of at least one well during each
contract year. During this initial six year term, called the Exploration
Period under the Playero Contract, if Harken has discovered the existence of
commercial production in the Playero Contract area, the Playero Contract will
be further extended for a period of 22 years from the date of termination of
the Exploration Period with a total term not to exceed 28 years. If Harken
makes a commercial discovery of oil and/or gas which is approved by Ecopetrol,
the standard terms of the Playero Contract will apply. The Playero Contract
was granted by Ecopetrol under a new form of Association Contract which has
modified various standard terms from the previous form of Association Contract
which was used on the Alcaravan and Bocachico Contracts. Such terms provide
for Ecopetrol to reimburse Harken for 50% of its successful well costs expended
up to the point of a commercial discovery and to receive a 20% royalty
interest. Although both Ecopetrol and Harken each would have a 50% working
interest, production net of royalty would be allocated 50% to each party until
accumulated production from the Playero Contract area reaches a cumulative
total of 60 million barrels of oil. After that cumulative production level is
achieved, production net of royalty is allocated at rates to Harken from 50% to
25% based upon the relative profitability of the project with Ecopetrol
receiving the remaining complementary 50% to 75% of such additional production.
Bahrain Operations - At present, Harken holds approximately 500,000
acres under its production sharing agreement with the Bahrain National Oil
Company ("BANOCO"). In January 1995, Harken completed reprocessing of
approximately 500 kilometers of seismic data and has reviewed the results of
that work with BANOCO. In July 1995, Harken announced that BANOCO had granted
an extension to the production sharing agreement for an additional six months,
with an additional six months extension should certain conditions be met.
Unless Harken obtains a joint venture partner, Harken will not proceed to
either acquire additional seismic data or drill another well on the acreage.
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.
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Harken has accrued approximately $860,000 at June 30, 1995 relating to
other operational or regulatory liabilities. Harken and its subsidiaries
currently are involved in various lawsuits and other contingencies, including
the guarantee of certain lease obligations, which in management's opinion, will
not result in significant loss exposure to Harken.
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HARKEN ENERGY CORPORATION
NOTES CONCERNING OTHER INFORMATION
JUNE 30, 1994 AND 1995
(1) Items 1, 2, 3, and 5 as required by Part II of Form 10-Q are not
applicable for the quarter ended June 30, 1995.
(2) Item 4, Submission of Matters to a Vote of Security Holders
(a) On June 16, 1995, Harken held its annual meeting of stockholders.
(b) At this meeting, Messrs. Michael M. Ameen, Jr., Michael R.
Eisenson and Talat M. Othman were elected as continuing "Class B"
Directors. In addition, a majority of the stockholders voted to
ratify the appointment of independent public accountants for the
fiscal year 1995.
(3) Item 6, Exhibits and Reports on Form 8-K
(a) Exhibits-EDGAR Financial Data Schedule
(b) Reports on Form 8-K
June 2, 1995 - Disclosure of consummation of Merger with Search
Exploration Inc.
August 3, 1995 - Amendment on Form 8-K/A amending the Form 8-K
dated June 2, 1995, and including updated pro forma information
and financial statements of Search Exploration, Inc. as of
March 31, 1995.
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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: August 14, 1995 By: /s/ Bruce N. Huff
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Bruce N. Huff, Senior Vice President and
Chief Financial Officer
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INDEX TO EXHIBITS
EXHIBIT
NUMBER DESCRIPTION
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27 Financial Data Schedule