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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 SEPTEMBER 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
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 10, 1995 was 71,806,270 net of 1,440,896 Treasury
Shares.
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HARKEN ENERGY CORPORATION
INDEX TO QUARTERLY REPORT
SEPTEMBER 30, 1995
PAGE
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PART I. FINANCIAL INFORMATION
Item 1. Condensed Financial Statements
Consolidated Condensed Balance Sheets . . . . . . . . . . . . . . . . . . . . 4
Consolidated Condensed Statements of Operations . . . . . . . . . . . . . . . 5
Consolidated Condensed Statements of Stockholders' Equity . . . . . . . . . . 6
Consolidated Condensed Statements of Cash Flow . . . . . . . . . . . . . . . 7
Notes to Consolidated Condensed 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 . . . . . . . . . . . . . . . . . . . . . 25
SIGNATURES . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 27
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PART I - FINANCIAL INFORMATION
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ITEM I. CONDENSED FINANCIAL STATEMENTS
HARKEN ENERGY CORPORATION AND SUBSIDIARIES
CONSOLIDATED CONDENSED BALANCE SHEETS
(unaudited)
DECEMBER 31, SEPTEMBER 30,
1994 1995
----------------- -----------------
ASSETS
------
Current Assets:
Cash and temporary investments . . . . . . . . . . . . . . . $ 2,828,000 $ 3,837,000
Cash available in European segregated account . . . . . . . -- 3,848,000
Accounts receivable, net . . . . . . . . . . . . . . . . . . 543,000 991,000
Investment in former subsidiary held for resale . . . . . . 2,898,000 --
Prepaid expenses and other current assets . . . . . . . . . 571,000 383,000
---------------- ----------------
Total Current Assets . . . . . . . . . . . . . . . . . 6,840,000 9,059,000
Property and Equipment, net . . . . . . . . . . . . . . . . . . 20,177,000 27,363,000
Restricted Cash in European Segregated Account . . . . . . . -- 9,674,000
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 1,846,000
---------------- ----------------
$ 28,960,000 $ 49,393,000
================ ================
LIABILITIES AND STOCKHOLDERS' EQUITY
------------------------------------
Current Liabilities:
Trade payables . . . . . . . . . . . . . . . . . . . . . . $ 492,000 $ 531,000
Accrued liabilities and other . . . . . . . . . . . . . . . 2,464,000 2,392,000
Notes payable . . . . . . . . . . . . . . . . . . . . . . . 900,000 787,000
Revenues and royalties payable . . . . . . . . . . . . . . . 1,277,000 846,000
---------------- ----------------
Total Current Liabilities . . . . . . . . . . . . . . 5,133,000 4,556,000
Commitments and Contingencies (Note 12)
European Convertible Notes Payable . . . . . . . . . . . . . . -- 13,300,000
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
72,913,833 shares, respectively . . . . . . . . . . . . . 664,000 729,000
Additional paid-in capital . . . . . . . . . . . . . . . . . 132,572,000 140,696,000
Retained deficit . . . . . . . . . . . . . . . . . . . . . . (90,520,000) (90,999,000)
Treasury stock, 5,983,655 shares held . . . . . . . . . . . (20,757,000) (20,757,000)
---------------- ----------------
Total Stockholders' Equity . . . . . . . . . . . . . . 21,959,000 29,669,000
---------------- ----------------
$ 28,960,000 $ 49,393,000
================ ================
The accompanying Notes to Consolidated Condensed Financial Statements
are an integral part of these Statements.
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HARKEN ENERGY CORPORATION AND SUBSIDIARIES
CONSOLIDATED CONDENSED STATEMENTS OF OPERATIONS
(unaudited)
THREE MONTHS ENDED NINE MONTHS ENDED
SEPTEMBER 30, SEPTEMBER 30,
------------------------------ ------------------------------
1994 1995 1994 1995
------------- ------------- ------------- -------------
Revenues:
Oil and gas operations . . . . . . . . . . . . $ 919,000 $ 1,476,000 $ 2,817,000 $ 4,189,000
Interest income . . . . . . . . . . . . . . . 23,000 234,000 67,000 437,000
Other income . . . . . . . . . . . . . . . . . 194,000 90,000 562,000 555,000
------------- ------------- ------------- -------------
1,136,000 1,800,000 3,446,000 5,181,000
Costs and Expenses:
Oil and gas operating expenses . . . . . . . . 328,000 463,000 991,000 1,343,000
General and administrative expenses, net . . . 875,000 774,000 2,372,000 2,285,000
Depreciation and amortization . . . . . . . . 515,000 672,000 1,444,000 1,810,000
Interest expense and other . . . . . . . . . . 22,000 173,000 68,000 322,000
------------- ------------- ------------- -------------
1,740,000 2,082,000 4,875,000 5,760,000
Loss before income taxes . . . . . . . . . . (604,000) (282,000) (1,429,000) (579,000)
Income tax expense . . . . . . . . . . . . . . . -- -- -- --
------------- ------------- ------------- -------------
Loss from continuing operations . . . . . . (604,000) (282,000) (1,429,000) (579,000)
Discontinued Operations:
Income (loss) from operations of discontinued well
service and contract drilling segment . . . (127,000) -- (507,000) --
Gain on sale of contract drilling rigs . . . . 14,000 -- 286,000 --
------------- ------------- ------------- -------------
(113,000) -- (221,000) --
------------- ------------- -------------- -------------
Net loss . . . . . . . . . . . . . . . . . . $ (717,000) $ (282,000) $ (1,650,000) $ (579,000)
============= ============= ============= =============
Income (loss) per common share:
Loss from continuing operations . . . . . . . $ (0.01) $ (0.01) $ (0.03) $ (0.01)
Discontinued operations . . . . . . . . . . . (0.00) -- (0.00) --
------------- ------------- -------------- -------------
Net loss . . . . . . . . . . . . . . . . . . $ (0.01) $ (0.01) $ (0.03) $ (0.01)
============= ============= ============= =============
Weighted average shares outstanding . . . . . . . 59,482,853 65,674,626 59,482,853 63,052,443
============= ============= ============= =============
The accompanying Notes to Consolidated Condensed Financial Statements
are an integral part of these Statements.
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HARKEN ENERGY CORPORATION AND SUBSIDIARIES
CONSOLIDATED CONDENSED 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 . . . . 54,000 6,651,000 -- --
Adjustment for unrealized gains (losses)
on available-for-sale securities . . -- -- 100,000 --
Conversions of European notes payable . 11,000 1,473,000 -- --
Net loss . . . . . . . . . . . . . . . -- -- (579,000) --
------------- --------------- --------------- ---------------
Balance, September 30, 1995 . . . . . . . $ 729,000 $ 140,696,000 $ (90,999,000)(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 $0 as of December 31,
1994 and September 30, 1995, respectively.
The accompanying Notes to Consolidated Condensed Financial Statements
are an integral part of these Statements.
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HARKEN ENERGY CORPORATION AND SUBSIDIARIES
CONSOLIDATED CONDENSED STATEMENTS OF CASH FLOWS
(unaudited)
NINE MONTHS ENDED
SEPTEMBER 30,
-----------------------------
1994 1995
------------ ------------
Cash flows from operating activities:
Net loss from continuing operations . . . . . . . . . . . . . . . . . . . $ (1,429,000) $ (579,000)
Adjustments to reconcile net loss to net cash provided by (used in)
operating activities:
Depreciation and amortization . . . . . . . . . . . . . . . . . . . . 1,444,000 1,810,000
Dividend income on investments in former subsidiaries . . . . . . . . (360,000) --
Forgiveness of related party note receivable . . . . . . . . . . . . . 232,000 232,000
Provision for doubtful accounts . . . . . . . . . . . . . . . . . . . 18,000 (180,000)
(Gain) loss on sales of assets and other . . . . . . . . . . . . . . . (107,000) (628,000)
Interest income on restricted cash . . . . . . . . . . . . . . . . . . -- (294,000)
Income (loss) from discontinued operations . . . . . . . . . . . . . . . (221,000) --
Adjustment to reconcile income (loss) to net cash used in
operating activities:
Depreciation and amortization . . . . . . . . . . . . . . . . . . . 77,000 --
Gain on sales of assets . . . . . . . . . . . . . . . . . . . . . . (286,000) --
Change in assets and liabilities:
Decrease (increase) in accounts receivable . . . . . . . . . . . . . . 833,000 3,000
Increase (decrease) in trade payables and other . . . . . . . . . . . (843,000) (1,145,000)
------------- -------------
Net cash provided by (used in) operating activities . . . . . . . . (642,000) (781,000)
------------- -------------
Cash flows from investing activities:
Cash from acquired subsidiary . . . . . . . . . . . . . . . . . . . . . . -- 190,000
Proceeds from sales of assets . . . . . . . . . . . . . . . . . . . . . . 2,249,000 3,304,000
Capital expenditures . . . . . . . . . . . . . . . . . . . . . . . . . . (1,766,000) (4,505,000)
------------- -------------
Net cash provided by investing activities . . . . . . . . . . . . . 483,000 (1,011,000)
------------- -------------
Cash flows from financing activities:
Proceeds from issuances of common stock . . . . . . . . . . . . . . . . . -- 2,801,000
------------- -------------
Net cash provided by financing activities . . . . . . . . . . . . . -- 2,801,000
------------- -------------
Net increase (decrease) in cash and temporary investments . . . . . . . . . . (159,000) 1,009,000
Cash and temporary investments at beginning of period . . . . . . . . . . . . 3,299,000 2,828,000
------------- -------------
Cash and temporary investments at end of period . . . . . . . . . . . . . . . $ 3,140,000 $ 3,837,000
============= =============
Supplemental disclosures of cash flow information:
Cash paid during the period for:
Interest . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 68,000 $ --
Income taxes . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . -- --
Significant non-cash transactions, excluding effects of mergers:
Cash available in European segregated account . . . . . . . . . . . . . $ -- $ 3,848,000
Restricted cash in European segregated account . . . . . . . . . . . . . -- 9,674,000
Property and equipment . . . . . . . . . . . . . . . . . . . . . . . . . 400,000 --
Current liabilities . . . . . . . . . . . . . . . . . . . . . . . . . . (400,000) --
European convertible notes payable . . . . . . . . . . . . . . . . . . . -- (15,000,000)
Conversions of European notes payable to common stock . . . . . . . . . -- 1,700,000
The accompanying Notes to Consolidated Condensed Financial Statements
are an integral part of these Statements.
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HARKEN ENERGY CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS
SEPTEMBER 30, 1994 AND 1995
(unaudited)
(1) MANAGEMENT'S REPRESENTATIONS
In the opinion of Harken Energy Corporation ("Harken"), the
accompanying unaudited consolidated condensed financial statements contain all
adjustments necessary to present fairly its financial position as of December
31, 1994 and September 30, 1995 and the results of its operations and changes
in its cash flows for all periods presented as of September 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 consolidated 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 consolidated 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 nine month period ended September
30, 1995 are not necessarily indicative of the results to be expected for the
full year.
(2) ACQUISITIONS
Acquisition of CHAP Joint Venture Interests - 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 to the seller consisted of
$300,000 cash plus the issuance of 534,000 shares of restricted Harken common
stock. Harken also assumed certain liabilities of the seller relating to the
properties, and the seller in turn retained responsibility for certain
contingent operational and environmental liabilities related to the interests
purchased. The above acquisitions of the additional interests in CHAP have
been accounted for under the purchase method of accounting.
Merger with Search Exploration, Inc. - In November 1994, Harken
announced the signing of an Agreement and Plan of Merger (the "Merger
Agreement") with Search Exploration, Inc. ("Search"). Search is primarily
engaged in the domestic exploration for, and development and production of oil
and gas reserves. Pursuant to the
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Merger Agreement, Search merged with and into Search Acquisition Corp., a
wholly owned subsidiary of Harken (the "Merger"). 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 was consummated
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.
Acquisition of Texas Panhandle Producing Properties - In October 1995,
a wholly owned subsidiary of Harken acquired certain interests in non-operated
producing properties located in the panhandle region of Texas. As
consideration for the purchase of these interests, Harken issued three million
shares of restricted Harken common stock, one million warrants to purchase
additional shares of restricted Harken common stock at $2 per share, and
assumed $750,000 of short term notes payable. Harken made payments totalling
approximately $417,000 on these notes payable at closing and the remaining
balance is scheduled to be paid in monthly installments through March 1996.
Also, Harken issued an additional 82,759 shares of restricted Harken common
stock to a financial advisor as a fee in connection with the acquisition.
Pursuant to the acquisition, if at the expiration of three years, or earlier
upon certain conditions, the aggregate proceeds received by the sellers upon
the sale of all three million shares of Harken common stock issued is less than
$4 million, the sellers have the right to receive from Harken, at their
election, property having a value of, or a promissory note in the principal
amount equal to, the difference between $4 million and the proceeds received by
the sellers upon the sale of the three million shares of Harken common stock.
Harken estimates that as of June 30, 1995, the acquired interests in
these producing properties represent approximately 1.3 million barrels of oil
and 534,000 mcf of gas. The purchase price of this acquisition will be
allocated entirely to the producing properties.
(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 stock and sold certain of its E-Z
Serve common stock. During the fourth quarter of 1994, Harken also
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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 market price of E-Z Serve common stock, the conversion terms
and limited marketability of the E-Z Serve Series C Preferred and the 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 and received cash proceeds of approximately $2,779,000, an amount
approximately equal to Harken's recorded value.
Harken recorded dividend income of $360,000 during the nine months
ended September 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 nine months ended
September 30, 1995.
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.
(4) MARKETABLE EQUITY SECURITIES
At December 31, 1994, and during the first six months of 1995, Harken
carried an investment in the common stock of E-Z Serve, including shares of E-Z
Serve common stock resulting from the conversion of certain shares of E-Z Serve
Series C Preferred in June 1994 and January 1995. Harken's investment in E-Z
Serve Series C Preferred was not accounted for pursuant to Statement of
Financial Accounting Standards No. 115, "Accounting For Certain Investments in
Debt and Equity Securities" ("SFAS 115"), as it is not a readily marketable
security. Beginning in 1994 pursuant to SFAS 115, Harken classified its
investment in E-Z Serve common stock as available for sale. The following is a
summary of Harken's marketable equity securities at December 31, 1994 and
September 30, 1995, which are included in Prepaid Expenses and Other Current
Assets in the accompanying balance sheet. Harken sold its investment in the
common stock of E-Z Serve during the third quarter of 1995.
DECEMBER 31, SEPTEMBER 30,
AVAILABLE-FOR-SALE 1994 1995
------------------ ----------------- ------------------
Cost $ 210,000 $ --
Gross Unrealized Gains -- --
Gross Unrealized Losses (100,000) --
-------------- ------------
Estimated Fair Value $ 110,000 $ --
============== ============
NINE MONTHS ENDED
SEPTEMBER 30,
------------------------------------------
AVAILABLE-FOR-SALE 1994 1995
------------------ --------------- --------------
Gross Realized Gains $ 101,000 $ 81,000
Gross Realized Losses -- --
An unrealized gain (loss) on available-for-sale securities of
($100,000) was recognized at December 31, 1994 and included as a component of
stockholders' equity.
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(5) PROPERTY AND EQUIPMENT
A summary of property and equipment follows:
DECEMBER 31, SEPTEMBER 30,
1994 1995
---------------- --------------
Oil and gas properties --
Evaluated . . . . . . . . . . . . . . . . . . . . . . . $ 13,944,000 $ 18,077,000
Unevaluated . . . . . . . . . . . . . . . . . . . . . . 7,446,000 12,363,000
Gas plants and other property . . . . . . . . . . . . . . . . 6,646,000 6,392,000
Less accumulated depreciation
and amortization . . . . . . . . . . . . . . . . . . . . (7,859,000) (9,469,000)
-------------- -------------
$ 20,177,000 $ 27,363,000
============== =============
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 September 30,
1995 include $7,906,000 and $4,457,000 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 in the principal amount of
$500,000 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 held by the former stockholder 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.
As part of the acquisition of Search, in May 1995, Harken assumed
approximately $442,000 of notes payable to former partners in certain limited
partnerships managed by a subsidiary of Search. Such notes bear interest at
10% per annum and are payable in semiannual installments beginning June 30,
1995 through June 30, 1998. Such notes are included in Notes Payable in the
accompanying balance sheet. See further discussion of the Search acquisition
at Note 2 - Acquisitions.
(7) EUROPEAN CONVERTIBLE NOTES PAYABLE
During the second quarter of 1995, Harken issued to qualified purchasers
a total of $15 million in 8% Senior Convertible Notes (the "Notes") which
mature in May 1998. Interest on these notes 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 Harken common stock at an
exercise price of $1.50 per share ("the Conversion Price"). Such Notes are
also convertible by Harken into shares of Harken common stock after one year
following issuance, if for any period of thirty consecutive days 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
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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 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. As of September 30,
1995, Harken had received notification that holders of Notes totalling
$1,700,000 had exercised their conversion option and were issued 1,133,328
shares of Harken common stock. Subsequent to September 30, 1995, additional
notifications of exercise of conversion options have been received from holders
of Notes totalling $500,000, which has resulted in the additional issuance of
333,333 shares of Harken common stock.
The Notes were sold strictly to non-U.S. purchasers and are convertible
in $50,000 increments. The Notes and the Harken common stock issuable upon
conversion of the Notes have been or will be issued without registration under
the United States Securities Act of 1933 (the "Securities Act") pursuant to an
exemption contained in Regulation S promulgated under the Securities Act.
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
conversion or maturity of the Notes. In addition, at closing of the Notes,
Harken issued to the placement agents certain 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 equal to the Conversion Price described above, and
expiring in May 1999. Also, Harken paid an additional fee in the form of
92,308 shares of Harken common stock to another 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 balance sheet. 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 balance sheet, 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 $1,039,000 as of September 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.
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(9) STOCKHOLDERS' EQUITY
Common Stock - Harken currently has authorized 100,000,000 shares of
$.01 par common stock. At December 31, 1994 and September 30, 1995, Harken had
issued 66,426,508 and 72,913,833 shares, respectively, and held 5,983,655
shares as treasury stock at a cost of $20,757,000.
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.
Acquisition of Search Exploration, Inc. -- In May 1995, Harken
consummated the Merger with Search. See Note 2- Acquisitions for further
discussion. Pursuant to the terms of the Merger Agreement, a total of
approximately 2.2 million shares of Harken common stock were issued to the
common stockholders of Search, preferred stockholders of Search and certain
note holders of Search. Up to approximately 8.8 million additional shares of
Harken common stock may be issued in connection with the Merger, including (i)
up to 732,771 shares of Harken common stock upon the exercise of certain
warrants issued by Harken, and (ii) up to 8.1 million 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 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. As of the most recent valuation date required under the
terms of the Merger Agreement, no Contingent Shares would be issuable based
upon the value of this 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 Harken common stock to a financial
advisor in connection with the Notes and the market value of such shares as of
the date issued is included as deferred debt issuance costs in Other Assets in
the accompanying Balance Sheet.
Private Placements of Common Stock -- On March 1, 1995, Harken sold
600,000 shares of newly issued Harken common stock to an institutional
purchaser in exchange for net proceeds of $657,000. Harken subsequently
entered into an agreement on April 7, 1995 to sell to this same institutional
purchaser an additional 600,000 shares of Harken common stock in exchange for
net proceeds of $747,000.
In July and August of 1995, Harken received additional net proceeds of
$654,000 and $757,000, respectively, related to the sale of a combined total of
1,300,000 shares of Harken common stock to certain institutional and/or
accredited purchasers. In November 1995, Harken received an additional
$1,633,000 related to the sale of 1,460,000 shares of Harken common stock
previously held as treasury stock to certain institutional and/or accredited
purchasers. In connection with certain of these placements, Harken issued to
certain financial advisors an aggregate total of 206,000 warrants to purchase
shares of Harken common stock at an average exercise price of $1.67 per share.
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Acquisition of Texas Panhandle Producing Properties -- In October 1995,
a wholly owned subsidiary of Harken issued 3,000,000 shares of restricted
Harken common stock previously held as treasury stock in exchange for certain
non- operated producing properties located in the panhandle region of Texas.
As part of the purchase of these interests, Harken also issued 1,000,000
warrants to purchase additional shares of restricted Harken common stock at $2
per share, and also issued 82,759 shares of restricted Harken common stock
previously held as treasury stock to a financial advisor as a fee in connection
with the acquisition.
(10) PER SHARE DATA
Per share data has been computed based on the weighted average number of
shares of common stock outstanding during each period.
(11) INCOME TAXES
At September 30, 1995, Harken had available for federal income tax
reporting purposes, net operating loss (NOL) carryforward for regular tax
purposes of approximately $60,000,000 which expires in 1997 through 2010,
alternative minimum tax NOL carryforward of approximately $53,000,000 which
expires in 1997 through 2010, investment tax credit carryforward of
approximately $860,000 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 $57,000
which expires in 1995 and a net capital loss carryforward of approximately
$6,100,000 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
September 30, 1995, computed under the provisions of the Statement of Financial
Accounting Standard No. 109, "Accounting for Income Taxes", were approximately
$7,616,000 and $20,400,000, respectively. The total net deferred tax asset is
offset by the valuation allowance of approximately $12,784,000 at September 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.
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 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.
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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 conducted
seismic activities on the land covered by this contract including the
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 the initial six year term, called the Exploration Period under
either the Alcaravan or Bocachico Contracts, if Harken has discovered the
existence of commercial production in the contract area, the 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 Alcaravan
or Bocachico Contracts 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 is
also acquiring 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.
In October 1995, Harken entered into a Development Finance Agreement
(the "Development Agreement") with Arbco Associates L.P., Offense Group
Associates L.P., Kayne Anderson Nontraditional Investments L.P. and Opportunity
Associates L.P. (collectively, the "Investors"), pursuant to which the
Investors agreed to provide up to $3,500,000 to Harken to finance the drilling
of two wells on the Rio Negro prospect in the Bocachico Contract area in
exchange for the right to receive future payments from Harken equal to 40% of
the net profits that Harken de Colombia, Ltd. may derive from the sale of oil
and gas produced from the Rio Negro prospect (the "Participation") if the
planned drilling on that prospect is successful. Pursuant to the Development
Agreement, Harken has agreed to drill two wells on the Rio Negro prospect.
Harken has selected its first well site and currently anticipates beginning
site preparation and rig mobilization upon receipt of final environmental and
drilling permits during the fourth quater of 1995.
Pursuant to the Development Agreement, the Investors have the right at
any time prior to October 12, 1997 (the "Commitment Date"), to convert all or
part of the Participation into shares of a newly created series of preferred
stock of Harken (the "Preferred Stock"), and Harken likewise has the right,
exercisable at the Commitment Date, to convert up to 75% of the Participation
into shares of Preferred Stock if the Investors have not previously elected to
convert all of such Participation. If Harken exercises its right to convert
the Participation into Preferred Stock, the Investors at that time can elect to
receive cash instead of Preferred Stock or elect to further convert any
remaining portion of the Participation into additional shares of Preferred
Stock. The shares of Preferred Stock which may be issued would be constituted
as the Series D Preferred and would pay dividends at an annual rate of 15% and
are redeemable by Harken without premium except for accrued unpaid dividends at
any time after the Commitment Date, and must be redeemed by Harken no later
than October 12, 2000. A failure
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by Harken to timely pay dividends due under this preferred stock for three
quarters or to redeem such preferred stock when due would give rise to a right
exercisable on behalf of the Investors to elect one director to Harken's board.
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.
Cambulos Contract - In September 1995, Harken announced that Harken de
Colombia, Ltd. had signed its fourth Association Contract with Ecopetrol,
covering the Cambulos contract area. Under the Cambulos Contract, Harken has
acquired the exclusive rights to conduct exploration activities in the Cambulos
Contract area, which covers approximately 300,000 acres in the Middle Magdalena
Valley of Central Colombia.
During the first two years of the Cambulos Contract, Harken will conduct
geologic studies on the lands covered by this contract, including reprocessing
of at least 400 km of existing seismic data and the acquisition of at least 90
km of new seismic data. During each of the third through the sixth contract
years, Harken may elect to continue the contract by committing to the drilling
of at least one well during each contract year.
During this initial six year term, called the Exploration Period under
both the Playero and Cambulos Contracts, if Harken has discovered the existence
of commercial production in the Playero or Cambulos Contract area, the
contracts 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 or Cambulos Contracts will apply.
The Playero and Cambulos Contracts were 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 or
Cambulos 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 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. Accidental discharge of such materials as oil,
natural gas or drilling
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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 $787,000 at September 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.
Search Acquisition Corp., a wholly-owned subsidiary of Harken, has been
named as a defendant in a lawsuit by certain parties. Harken cannot predict
the outcome of this litigation, but it believes that Search Acquisition Corp.
has numerous meritorious defenses to this lawsuit and is vigorously defending
this lawsuit.
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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 nine month period ended September 30, 1995.
NINE MONTHS ENDED
SEPTEMBER 30,
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EXPLORATION AND PRODUCTION 1994 1995
-------------------------- --------------- --------------
OPERATIONS
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REVENUES
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Oil sales revenues $ 1,734,000 $ 2,688,000
Oil volumes in barrels 109,000 143,000
Oil price per barrel $ 15.91 $ 18.80
Gas sales revenues $ 500,000 $ 909,000
Gas volumes in mcf 279,000 634,000
Gas price per mcf $ 1.79 $ 1.43
Gas plant revenues $ 583,000 $ 592,000
OTHER REVENUES
--------------
Interest income $ 67,000 $ 437,000
Other income $ 562,000 $ 555,000
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 nine months of 1994 compared to a
stronger oil price during the first nine 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 nine months of 1995 compared to 1994, partly due to
the increase in CHAP ownership, and due to the adjustment to certain gas
related liabilities, and in spite of the sharp decrease in gas prices
experienced during the first quarter of 1995, with no subsequent improvement
occurring so far during 1995. Gas plant revenues remained fairly even despite
the increased ownership in CHAP 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 has had minimal
impact on Harken's results of operations for the nine months ended September
30, 1995.
Other income during the first nine months of 1994 consisted primarily of
$360,000 of dividend income related to the E-Z Serve Series C Preferred. Other
income during the first nine months of 1995 consisted primarily of gains of
approximately $309,000 on the sales of Harken's investments in E-Z Serve Series
C Preferred Stock and E-Z Serve common stock. Interest income increased during
the first nine months of 1995 compared to the prior year 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 nine 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 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 have remained fairly constant
despite the growth in operating revenues during the first nine months of 1995
compared to 1994 due to Harken's continuing efforts to minimize administrative
expenses, and due to the fact that such growth has consisted mainly of
acquisitions of additional interests in Harken's CHAP operations. Also, 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.
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LIQUIDITY AND CAPITAL RESOURCES
During the first nine months of 1995, cash and temporary investments
increased by $1,009,000 primarily from $2,779,000 of cash proceeds received
from the sale of Harken's investment in E-Z Serve Series C Preferred and the
receipt of $2,801,000 in net proceeds from the issuance of 2,500,000 shares of
Harken common stock in private placements. Capital expenditures during the
first nine months of 1995 totalled approximately $4,505,000 related to drilling
activities both domestically and in Colombia. Cash used by operations during
the first nine months of 1995 totalled $781,000. 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, including the October 1995 acquired interest in certain Texas
panhandle producing properties, will be sufficient to meet its operating cash
requirements for the remainder of 1995 and throughout 1996.
Capital expenditures related to Harken's Colombian operations are
expected to total a minimum of approximately $3.2 million during 1996, with a
majority of such costs related to the Rio Negro prospect on the Bocachico
Contract area. In October 1995, Harken entered into a Development Finance
Agreement with a certain group of investors to provide up to $3.5 million to
Harken to finance the drilling of two wells on the Rio Negro prospect. See
further discussion below. Generally, amounts required to fund international
activities, including Colombia and Bahrain, as well as domestic drilling costs
and other capital expenditures, including acquisitions, will be funded from
existing cash balances (including available European segregated account cash),
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 Harken common stock at an exercise price of $1.50
per share, and convertible by Harken into shares of 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.
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. As of September
30, 1995, Harken had received notification that holders of notes totalling
$1,700,000 had exercised their conversion option and were to receive 1,133,328
shares of unrestricted Harken common stock. Subsequent to September 30, 1995,
additional notifications of exercise of conversion options have been received
from holders of notes totalling $500,000, which has resulted in the additional
issuance of 333,333 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.
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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.
In October 1995, Harken acquired interests in certain non-operated
producing properties located in the panhandle region of Texas. As consideration
for the purchase of these interests, Harken issued three million shares of
restricted Harken common stock, one million warrants to purchase additional
shares of restricted Harken common stock at $2 per share, and assumed $750,000
of short term notes payable. Harken made payments totalling approximately
$413,000 on these notes payable at closing and the remaining balance is
scheduled to be paid in monthly installments through March 1996. Harken
anticipates additional cash flow as a result of this acquisition, with a
minimal increase in internal general and administrative expenses.
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 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.
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 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 conducted
seismic activities on the land covered by this contract including the
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 the initial six year term, called the Exploration Period under
either the Alcaravan or Bocachico Contracts, if Harken has discovered the
existence of commercial production in the contract area, the contract will
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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 Alcaravan
or Bocachico Contracts 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 is
also acquiring 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.
In October 1995, Harken entered into a Development Finance Agreement
(the "Development Agreement") with Arbco Associates L.P., Offense Group
Associates L.P., Kayne Anderson Nontraditional Investments L.P. and Opportunity
Associates L.P. (collectively, the "Investors"), pursuant to which the
Investors agreed to provide up to $3,500,000 to Harken to finance the drilling
of two wells on the Rio Negro prospect in the Bocachico Contract area in
exchange for the right to receive future payments from Harken equal to 40% of
the net profits that Harken de Colombia, Ltd. may derive from the sale of oil
and gas produced from the Rio Negro prospect (the "Participation") if the
planned drilling on that prospect is successful. Pursuant to the Development
Agreement, Harken has agreed to drill two wells on the Rio Negro prospect.
Harken has selected its first well site and currently anticipates beginning
site preparation and rig mobilization upon receipt of final environmental and
drilling permits during the fourth quarter of 1995.
Pursuant to the Development Agreement, the Investors have the right at
any time prior to October 12, 1997 (the "Commitment Date"), to convert all or
part of the Participation into shares of a newly created series of preferred
stock of Harken (the "Preferred Stock"), and Harken likewise has the right,
exercisable at the Commitment Date, to convert up to 75% of the Participation
into shares of Preferred Stock if the Investors have not previously elected to
convert all of such Participation. If Harken exercises its right to convert
the Participation into Preferred Stock, the Investors at that time can elect to
receive cash instead of Preferred Stock or elect to further convert any
remaining portion of the Participation into additional shares of Preferred
Stock. The shares of Preferred Stock which may be issued would be constituted
as the Series D Preferred and would pay dividends at an annual rate of 15% and
are redeemable by Harken without premium except for accrued unpaid dividends at
any time after the Commitment Date, and must be redeemed by Harken no later
than October 12, 2000. A failure by Harken to timely pay dividends due under
this preferred stock for three quarters or to redeem such preferred stock when
due would give rise to a right exercisable on behalf of the Investors to elect
one director to Harken's board.
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.
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Cambulos Contract - In September 1995, Harken announced that Harken de
Colombia, Ltd. had signed its fourth Association Contract with Ecopetrol,
covering the Cambulos contract area. Under the Cambulos Contract, Harken has
acquired the exclusive rights to conduct exploration activities in the Cambulos
Contract area, which covers approximately 300,000 acres in the Middle Magdalena
Valley of Central Colombia.
During the first two years of the Cambulos Contract, Harken will conduct
geologic studies on the lands covered by this contract, including reprocessing
of at least 400 km of existing seismic data and the acquisition of at least 90
km of new seismic data. During each of the third through the sixth contract
years, Harken may elect to continue the contract by committing to the drilling
of at least one well during each contract year.
During this initial six year term, called the Exploration Period under
both the Playero and Cambulos Contracts, if Harken has discovered the existence
of commercial production in the Playero or Cambulos Contract area, the
contracts 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 or Cambulos Contracts will apply.
The Playero and Cambulos Contracts were 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 or
Cambulos 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 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. 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 $787,000 at September 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.
Search Acquisition Corp., a wholly-owned subsidiary of Harken, has been
named as a defendant in a lawsuit by certain parties. Harken cannot predict
the outcome of this litigation, but it believes that Search Acquisition Corp.
has numerous meritorious defenses to this lawsuit and is vigorously defending
this lawsuit.
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PART II - OTHER INFORMATION
Item 1. Legal Proceedings.
Search Acquisition Corp. ("Search Acquisition"), a wholly-owned
subsidiary of Harken, has been named as a defendant in a lawsuit by
Petrochemical Corporation of America and Lorken Investments
Corporation (together, "Petrochemical"). This lawsuit arises out
of an attempt by Petrochemical to enforce a judgement entered in
1993 against, among other parties, a group of 20 limited
partnerships known as the "Odyssey limited partnerships". In 1989,
Search Exploration, Inc. ("Search") acquired all of the assets of
eight of the 20 Odyssey limited partnerships. Petrochemical claims
that Search is liable for payment of the judgement as the
successor-in-interest to the 8 Odyssey limited partnerships.
Search Acquisition was the surviving corporation in the merger with
Search. Harken cannot predict the outcome of this litigation, but
believes that its subsidiary, Search Acquisition, has numerous
meritorious defenses to this lawsuit and is vigorously defending
this lawsuit.
Item 2. Changes in Securities.
Not applicable.
Item 3. Default Upon Senior Securities.
Not applicable.
Item 4. Submission of Matters to a Vote of Securities Holders.
Not applicable.
Item 5. Other Information
Not applicable.
Item 6. Exhibits and Reports on Form 8-K.
(a) EXHIBIT INDEX
Exhibit
3.1 Certificate of Incorporation of Harken Energy Corporation
as amended (filed as Exhibit 3.1 to Harken's Annual
Report on Form 10-K for fiscal year ended December 31,
1989, File No. 0-9207, and incorporated by reference
herein).
3.2 Amendment to the Certificate of Incorporation of Harken
Energy Corporation (filed as Exhibit 28.8 to the
Registration Statement on Form S-1 of Tejas Power
Corporation, file No. 33-37141, and incorporated by
reference herein.)
3.3 Amendment to the Certificate of Incorporation of Harken
Energy Corporation (filed as Exhibit 3 to Harken's
Quarterly Report on Form 10-Q for fiscal quarter ended
March 31, 1991, File No. 0-9207, and incorporated by
reference herein.)
3.4 Amendments to the Certificate of Incorporation of Harken
Energy Corporation (filed as Exhibit 3 to Harken's
Quarterly Report on Form 10-Q for fiscal quarter ended
June 30, 1991, File No. 0-9207, and incorporated by
reference herein.)
3.5 Bylaws of Harken Energy Corporation, as amended (filed as
Exhibit 3.2 to Harken's Annual Report on Form 10-K for
fiscal year ended December 31, 1989, File No. 0-9207, and
incorporated by reference herein.)
4.1 Form of certificate representing shares of Harken common
stock, par value $.01 per share (filed as Exhibit 1 to
Harken's Registration Statement on Form 8-A, File No.
0-9027, and incorporated by reference herein.)
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4.2 Certificate of the Designations, Powers, Preferences and
Rights of Series C Cumulative Convertible Preferred
Stock, $1.00 par value of Harken Energy Corporation
(filed as Exhibit 4.3 to Harken's Annual Report on Form
10-K for fiscal year ended December 31, 1989, File No.
0-9207, and incorporated by reference herein.)
*4.3 Certificate of the Designations of Series D Preferred
Stock, $1.00 par value of Harken Energy Corporation.
*10.1 Association Contract, dated September 17, 1995 and
effective as November 17, 1995, by and between Harken de
Colombia, Ltd., and Empresa Colombiana de Petroleos.
*10.2 Development Finance Agreement, dated October 12, 1995, by
and among Harken Energy Corporation, Arbco Associates
L.P., Offense Group Associates L.P., Kayne Anderson
Nontraditional Investments L.P., and Opportunity
Associates L.P.
*27 Financial Data Schedules.
(b) REPORTS ON FORM 8-K.
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.
October 11, 1995 - Disclosure of acquisition of Texas
panhandle producing properties.
October 16, 1995 - Disclosure of Development Agreement with
certain Investors to provide up to $3.5 million in financing for
Colombian drilling efforts.
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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: November 14, 1995 By: /s/ Bruce N. Huff
----------------------- ----------------------------------------
Bruce N. Huff, Senior Vice President and
Chief Financial Officer
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EXHIBIT INDEX
EXHIBIT
NUMBER EXHIBIT DESCRIPTION PAGE
- -----------------------------------------------------------------------------------------------
3.1 Certificate of Incorporation of Harken Energy Corporation as
amended (filed as Exhibit 3.1 to Harken's Annual Report on Form
10-K for fiscal year ended December 31, 1989, File No. 0-9207, and
incorporated by reference herein).
3.2 Amendment to the Certificate of Incorporation of Harken Energy
Corporation (filed as Exhibit 28.8 to the Registration Statement on
Form S-1 of Tejas Power Corporation, file No. 33-37141, and
incorporated by reference herein.)
3.3 Amendment to the Certificate of Incorporation of Harken Energy
Corporation (filed as Exhibit 3 to Harken's Quarterly Report on
Form 10-Q for fiscal quarter ended March 31, 1991, File No. 0-9207,
and incorporated by reference herein.)
3.4 Amendments to the Certificate of Incorporation of Harken Energy
Corporation (filed as Exhibit 3 to Harken's Quarterly Report on
Form 10-Q for fiscal quarter ended June 30, 1991, File No. 0-9207,
and incorporated by reference herein.)
3.5 Bylaws of Harken Energy Corporation, as amended (filed as Exhibit
3.2 to Harken's Annual Report on Form 10-K for fiscal year ended
December 31, 1989, File No. 0-9207, and incorporated by reference
herein.)
4.1 Form of certificate representing shares of Harken common stock, par
value $.01 per share (filed as Exhibit 1 to Harken's Registration
Statement on Form 8-A, File No. 0-9027, and incorporated by
reference herein.)
4.2 Certificate of the Designations, Powers, Preferences and Rights of
Series C Cumulative Convertible Preferred Stock, $1.00 par value of
Harken Energy Corporation (filed as Exhibit 4.3 to Harken's Annual
Report on Form 10-K for fiscal year ended December 31, 1989, File
No. 0-9207, and incorporated by reference herein.)
*4.3 Certificate of the Designations of Series D Preferred Stock, $1.00
par value of Harken Energy Corporation.
*10.1 Association Contract, dated September 17, 1995 and effective as
November 17, 1995, by and between Harken de Colombia, Ltd., and
Empresa Colombiana de Petroleos.
*10.2 Development Finance Agreement, dated October 12, 1995, by and among
Harken Energy Corporation, Arbco Associates L.P., Offense Group
Associates L.P., Kayne Anderson Nontraditional Investments L.P.,
and Opportunity Associates L.P.
*27 Financial Data Schedules.