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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, 1996
[ ] 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 July 31, 1996 was 92,145,796 net of 400,896 Treasury Shares.
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HARKEN ENERGY CORPORATION
INDEX TO QUARTERLY REPORT
JUNE 30, 1996
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 . . . . . . . . . . . . . . . . . . 22
PART II. OTHER INFORMATION . . . . . . . . . . . . . . . . . . . . . . . . . 32
SIGNATURES . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 35
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PART I - FINANCIAL INFORMATION
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ITEM 1. CONDENSED FINANCIAL STATEMENTS
HARKEN ENERGY CORPORATION AND SUBSIDIARIES
CONSOLIDATED CONDENSED BALANCE SHEETS
(unaudited)
DECEMBER 31, JUNE 30,
1995 1996
---------------- ----------------
ASSETS
------
Current Assets:
Cash and temporary investments . . . . . . . . . . . . . . . $ 4,456,000 $ 14,888,000
Cash available in European segregated account . . . . . . . 4,705,000 871,000
Accounts receivable, net . . . . . . . . . . . . . . . . . . 1,061,000 1,237,000
Prepaid expenses and other current assets . . . . . . . . . 309,000 211,000
---------------- ----------------
Total Current Assets . . . . . . . . . . . . . . . . . 10,531,000 17,207,000
Property and Equipment, net . . . . . . . . . . . . . . . . . . 52,142,000 51,057,000
Restricted Cash in European Segregated Account . . . . . . . 6,173,000 --
Notes Receivable from Related Parties, including interest . . . 232,000 232,000
Other Assets, net . . . . . . . . . . . . . . . . . . . . . . . 1,716,000 432,000
---------------- ----------------
$ 70,794,000 $ 68,928,000
================ ================
LIABILITIES AND STOCKHOLDERS' EQUITY
------------------------------------
Current Liabilities:
Trade payables . . . . . . . . . . . . . . . . . . . . . . $ 356,000 $ 490,000
Accrued liabilities and other . . . . . . . . . . . . . . . 2,722,000 2,203,000
Notes payable and current portion of long-term obligations . 868,000 --
Revenues and royalties payable . . . . . . . . . . . . . . . 972,000 1,104,000
---------------- ----------------
Total Current Liabilities . . . . . . . . . . . . . . 4,918,000 3,797,000
Long-Term Obligations . . . . . . . . . . . . . . . . . . . . . 13,176,000 10,429,000
European Convertible Notes Payable . . . . . . . . . . . . . . 12,550,000 700,000
Commitments and Contingencies (Note 10)
Stockholders' Equity:
Common stock, $0.01 par value; authorized
100,000,000 and 125,000,000 shares, respectively;
issued 75,913,832 and 85,078,958 shares, respectively . . 759,000 851,000
Additional paid-in capital . . . . . . . . . . . . . . . . . 136,435,000 146,816,000
Retained deficit . . . . . . . . . . . . . . . . . . . . . . (92,047,000) (92,275,000)
Treasury stock, 1,440,896 and 400,896 shares held,
respectively . . . . . . . . . . . . . . . . . . . . . . . (4,997,000) (1,390,000)
---------------- ----------------
Total Stockholders' Equity . . . . . . . . . . . . . . 40,150,000 54,002,000
---------------- ----------------
$ 70,794,000 $ 68,928,000
================ ================
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 SIX MONTHS ENDED
JUNE 30, JUNE 30,
------------------------------ -------------------------------
1995 1996 1995 1996
------------- ------------- ------------- -------------
Revenues:
Oil and gas operations . . . . . . . . . . $ 1,540,000 $ 2,388,000 $ 2,713,000 $ 4,385,000
Interest and other income . . . . . . . . 242,000 202,000 668,000 546,000
------------- ------------- ------------- -------------
1,782,000 2,590,000 3,381,000 4,931,000
Costs and Expenses:
Oil and gas operating expenses . . . . . . 458,000 840,000 880,000 1,600,000
General and administrative expenses, net . 737,000 980,000 1,511,000 1,797,000
Depreciation and amortization . . . . . . 534,000 629,000 1,065,000 1,256,000
Interest expense and other . . . . . . . . 211,000 73,000 222,000 506,000
------------- ------------- ------------- -------------
1,940,000 2,522,000 3,678,000 5,159,000
Income (loss) before income taxes . . . (158,000) 68,000 (297,000) (228,000)
Income tax expense . . . . . . . . . . . . . -- -- -- --
------------- ------------- ------------- -------------
Net income (loss) . . . . . . . . . . . $ (158,000) $ 68,000 $ (297,000) $ (228,000)
============= ============= ============= =============
Income (loss) per common share:
Net income (loss) . . . . . . . . . . . $ (0.00) $ 0.00 $ (0.00) $ (0.00)
============= ============= ============= =============
Weighted average shares outstanding . . . . . 62,939,852 82,048,561 61,741,352 77,836,034
============= ============= ============= =============
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, 1994 . . . . . $ 664,000 $ 132,572,000 $ (90,520,000)(A) $ (20,757,000)
Issuances of common stock, net . 79,000 1,740,000 -- 15,760,000
Conversions of European notes payable 16,000 2,123,000 -- --
Equity adjustment from foreign currency
translation . . . . . . . . . . -- -- (2,000) --
Adjustment for unrealized gains (losses)
on available-for-sale securities -- -- 100,000 --
Net loss . . . . . . . . . . . . . -- -- (1,625,000) --
------------- --------------- --------------- ---------------
Balance, December 31, 1995 . . . . . 759,000 136,435,000 (92,047,000) (4,997,000)
Issuances of common stock, net . . 5,000 (1,549,000) -- 3,607,000
Conversions of warrants and options 7,000 1,236,000 -- --
Conversions of European notes payable 80,000 10,694,000 -- --
Net loss . . . . . . . . . . . . . -- -- (228,000) --
------------- --------------- --------------- ---------------
Balance, June 30, 1996 . . . . . . . $ 851,000 $ 146,816,000 $ (92,275,000) $ (1,390,000)
============= =============== =============== ===============
(A) Includes, as a component of Retained Deficit, net unrealized gains (losses)
on available-for-sale securities of ($100,000) as of December 31, 1994.
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)
SIX MONTHS ENDED
JUNE 30,
--------------------------------------
1995 1996
----------------- -----------------
Cash flows from operating activities:
Net loss . . . . . . . . . . . . . . . . . . . . . . $ (297,000) $ (228,000)
Adjustments to reconcile net loss to net cash
provided by (used in)
operating activities:
Depreciation and amortization . . . . . . . . . 1,065,000 1,256,000
Forgiveness of related party note receivable . . 232,000 --
Provision for doubtful accounts . . . . . . . . (180,000) --
(Gain) loss on sales of assets and other . . . . (406,000) 19,000
Accretion of discount on note payable . . . . . -- 234,000
Amortization of European note issuance costs . . 73,000 178,000
Change in assets and liabilities:
Decrease (increase) in accounts receivable . . . (8,000) (81,000)
Increase (decrease) in trade payables and other (1,107,000) (420,000)
----------------- -----------------
Net cash provided by (used in) operating
activities . . . . . . . . . . . . . . . . . (628,000) 958,000
----------------- -----------------
Cash flows from investing activities:
Cash from acquired subsidiary . . . . . . . . . . . . 190,000 --
Proceeds from sales of assets . . . . . . . . . . . . 2,779,000 177,000
Investor project advances . . . . . . . . . . . . . . -- 2,250,000
Capital expenditures, net . . . . . . . . . . . . . (2,983,000) (3,945,000)
----------------- -----------------
Net cash used in investing activities . . . . . (14,000) (1,518,000)
----------------- -----------------
Cash flows from financing activities:
Transfers from segregated account cash . . . . . . . -- 10,000,000
Proceeds from issuances of common stock, net of
issuance costs . . . . . . . . . . . . . . . . . . 1,404,000 2,492,000
Investment in segregated account cash, net . . . . . (106,000) (242,000)
Repayment of notes payable and long-term obligations -- (1,258,000)
----------------- -----------------
Net cash provided by financing activities . . . 1,298,000 10,992,000
----------------- -----------------
Net increase (decrease) in cash and temporary investments 656,000 10,432,000
Cash and temporary investments at beginning of period . . 2,828,000 4,456,000
----------------- -----------------
Cash and temporary investments at end of period . . . . . $ 3,484,000 $ 14,888,000
================= =================
Supplemental disclosures of cash flow information:
Cash paid during the period for:
Interest . . . . . . . . . . . . . . . . . . . . . $ 22,000 $ 203,000
Income taxes . . . . . . . . . . . . . . . . . . . -- --
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
JUNE 30, 1995 AND 1996
(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, 1995 and June 30, 1996 and the results of its operations and changes in its
cash flows for all periods presented as of June 30, 1995 and 1996. These
adjustments represent normal recurring items. Certain prior year amounts have
been reclassified to conform with the 1996 presentations.
The accompanying unaudited condensed financial statements have been
prepared pursuant to the rules and regulations of the Securities and Exchange
Commission ("SEC"). Certain information and note disclosures normally included
in annual financial statements prepared in accordance with generally accepted
accounting principles have been condensed or omitted pursuant to these rules
and regulations, although Harken believes that the disclosures made are
adequate to make the information presented not misleading. 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/A for
the year ended December 31, 1995.
The results of operations for the six month period ended June 30, 1996
are not necessarily indicative of the results to be expected for the full year.
(2) ACQUISITIONS
Acquisition of Texas Properties -- In October 1995, a wholly-owned
subsidiary of Harken acquired certain non- operated interests in producing
properties located in the western region of Texas ("Yellowhouse Properties").
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 and the seller made
payments totaling approximately $417,000 on these notes payable at closing and
the remaining balance was 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.
On December 21, 1995, pursuant to the terms of a Purchase and Sale
Agreement (the "Panhandle Purchase and Sale Agreement"), Harken Exploration
Company ("Harken Exploration"), a wholly-owned subsidiary of Harken, acquired
certain interests in producing properties located in the panhandle region of
Texas ("Panhandle Properties"). As consideration for the purchase of these
interests, Harken issued, along with other consideration, 2.5 million shares of
restricted Harken common stock (the "Purchase Shares"), $2.5 million in cash
and a note payable by Harken Exploration to the seller for an initial face
amount of $13 million. Harken had the option over the next two years to repay
all or part of this $13 million note with restricted common stock at conversion
rates tied to future trading prices of Harken common stock. The $13 million
note was to mature and become payable in two stages, with each maturity amount
subject to certain adjustments. On July 11, 1996, Harken Exploration entered
into an exchange agreement with the holder of the $13 million note, whereby it
was exchanged for, among other consideration, the issuance of 5,150,000
restricted shares of Harken common stock, including 185,000 shares
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held in escrow. See Note 5 -- Notes Payable and Long-Term Obligations for
further discussion. The acquisition of the Panhandle Properties has been
accounted for under the purchase method of accounting. Due to the note payable
adjustments to be calculated, some of which were based on the future trading
prices of Harken common stock, the allocation of the purchase price to the
assets and liabilities related to the acquisition of the Panhandle Properties
at December 31, 1995 was preliminary, with further adjustments to be reflected
upon the final accounting for the $13 million note payable. With the July 11,
1996 exchange agreement resulting in the issuance of 5,150,000 restricted
shares of Harken common stock with a market value of approximately $10,429,000
in full payment of the outstanding balance on the note, Harken has adjusted the
purchase price of the Panhandle Properties as of June 30, 1996 to give effect
to the finalization of the consideration issued in the purchase.
Acquisition of CHAP Venture Interests - In May 1995, Harken acquired
an additional joint venture interest in the CHAP 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
seller's interest raised Harken's total interest in CHAP from approximately 70%
to approximately 82%. As consideration for this acquisition, Harken paid cash
of $300,000 and issued 534,000 shares of restricted Harken common stock to the
seller, 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.
During the second quarter of 1996, Harken acquired additional
interests in CHAP, raising Harken's total interest in CHAP to approximately
94%. The purchase consideration paid by Harken to the sellers consisted of
$338,000 cash plus the issuance of approximately 509,000 shares of restricted
Harken common stock. Harken also assumed certain liabilities of the sellers
relating to the property interests. All of 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
entered into 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.
Pursuant to the 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 by June 30, 1996 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 due
to the above mentioned contingently issuable shares of Harken common stock.
Acquisition of EnerVest Properties - On July 10, 1996 Harken, along
with Harken Exploration, purchased working interests in certain producing oil
and gas properties located in the Magnolia area of Arkansas and in the Carlsbad
area of New Mexico (the "EnerVest Properties") from EnerVest Acquisition
II-Limited Partnership ("EnerVest"). The purchase price of $15,200,000, plus
the assumption of certain operational liabilities relating
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to these properties, is subject to adjustments for property defects identified
including title defects, environmental defects and product production balancing
defects. This purchase price was paid in the form of $5,000,000 cash paid at
closing, 1,550,000 shares of Harken common stock which were issued following
closing, and 1,159,091 shares of Harken common stock to be issued at a
designated time following the registration and sale by the seller of the
initial shares issued following closing. Harken also issued to EnerVest
warrants to purchase, over a period of three years from closing, 300,000 shares
of Harken common stock at an exercise price of $2.75 per share. The agreement
includes adjustment provisions pursuant to which Harken may be obligated to
issue additional shares of Harken common stock if the seller does not realize
at least $10,200,000 from its sales of such shares. The seller will maintain a
lien on these properties until such time as it has received or recognized
$7,000,000 in proceeds from the sales of these shares of Harken common stock.
At May 31, 1996, the EnerVest Properties consisted of proved reserves
of approximately 1,928,000 barrels of oil and approximately 4,490,000 mcf of
gas, with a discounted value of future net revenues of approximately
$15,936,000.
(3) MARKETABLE EQUITY SECURITIES
At December 31, 1994 and during the first three months of 1995, Harken
carried an investment in the common stock of E-Z Serve Corporation, a former
subsidiary ("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 was not a readily marketable security. Harken classified its
investment in E-Z Serve common stock as available for sale. The following is a
summary of Harken's activity from marketable equity securities. Harken sold
its investment in the common stock of E-Z Serve during the third quarter of
1995.
SIX MONTHS ENDED
JUNE 30,
--------------------------------
AVAILABLE-FOR-SALE 1995 1996
------------------ --------------- --------------
Gross Realized Gains $ 14,000 $ --
Gross Realized Losses -- --
(4) PROPERTY AND EQUIPMENT
A summary of property and equipment follows:
DECEMBER 31, JUNE 30,
1995 1996
--------------- ----------------
Oil and gas properties --
Unevaluated international properties not being amortized . . $ 4,866,000 $ 5,002,000
Unevaluated domestic properties not being amortized . . . . . 11,117,000 10,578,000
Evaluated domestic properties being amortized . . . . . . . . 39,526,000 39,823,000
Gas plants and other property . . . . . . . . . . . . . . . . . 6,746,000 7,033,000
Less accumulated depreciation
and amortization . . . . . . . . . . . . . . . . . . . . . . (10,113,000) (11,379,000)
-------------- ---------------
$ 52,142,000 $ 51,057,000
============== ===============
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(5) NOTES PAYABLE AND LONG-TERM OBLIGATIONS
DECEMBER 31, JUNE 30,
1995 1996
------------- --------------
Note payable to seller of producing properties (A) $ 12,786,000 $ 10,429,000
Notes payable to investors (B) 132,000 --
Note payable to Tejas Power Corporation (C) 394,000 --
Notes payable to former stockholder of subsidiary (D) 400,000 --
Notes payable to former investors in Search managed
limited partnerships (E) 332,000 --
------------- --------------
Total 14,044,000 10,429,000
Less amount classified as current liability (868,000) --
------------- --------------
Total long-term obligations $ 13,176,000 $ 10,429,000
============= ==============
(A) As discussed in Note 2 -- Acquisitions, in December 1995 Harken
Exploration issued to the seller of the Panhandle Properties a note payable in
the initial face amount of $13 million (the "Panhandle Note"). The Panhandle
Note bore interest at 5% per annum as to $8,000,000 in principal amount only,
was secured by Harken Exploration's interest in the acquired properties and was
not guaranteed by Harken. The Panhandle Note was to mature and become payable
in two stages. On October 18, 1996, $8,000,000 in principal amount of the
Panhandle Note, subject to adjustment as described below, was to mature, and
become payable ("Maturity I"). The remaining $5,000,000 in principal amount of
the Panhandle Note was non-interest bearing and, subject to adjustment, was to
mature and become payable ("Maturity II") on July 15, 1997; provided, however,
that if the amount due at Maturity I was paid in shares of Harken common stock
("Maturity I Shares") as described below, such principal amount was to mature
and become payable on the earlier of (i) the expiration of 270 days following
the date upon which the SEC declared effective a registration statement
covering the resale of the shares issued at Maturity I or (ii) November 15,
1997. The initial recorded amount of the Panhandle Note was equal to the
discounted fair value of the payments to be made at each maturity date, using a
market rate of interest of 6.66%. As Harken's intention was always to pay the
Panhandle Note with shares of Harken common stock, the entire Panhandle Note
balance has been included in long-term obligations.
Pursuant to the Panhandle Purchase and Sale Agreement, Harken
Exploration could elect to pay the amounts due at either or both of Maturity I
and Maturity II in shares of Harken common stock, with the number of shares to
be issued at Maturity I to be determined by dividing the amount due at Maturity
I by the average of the closing prices of Harken common stock on the American
Stock Exchange during the period beginning on January 22, 1996 and ending ten
(10) trading days prior to Maturity I (the "Maturity I Average Trading Price")
and the number of shares to be issued at Maturity II to be determined by
dividing the amount due at Maturity II by the average of the closing prices of
Harken common stock on the American Stock Exchange during the period beginning
upon the date which the above mentioned registration statement is declared
effective and ending ten (10) trading days prior to Maturity II.
On July 11, 1996, Harken Exploration entered into an exchange
agreement with the seller of the Panhandle Properties, pursuant to which Harken
issued 5,150,000 restricted shares of Harken common stock, including 185,000
shares held in escrow, in satisfaction of all obligations owed by Harken
Exploration to the seller under the terms of the Panhandle Note. As of July
11, 1996, such restricted shares of Harken common stock had an approximate
market value of $10,429,000. Under this exchange agreement, Harken Exploration
agreed to pay the
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seller the amount, if any, by which the proceeds from the sale of these shares
of Harken common stock sold by the seller are less than $8,500,000. In
connection with this exchange agreement, (a) Harken granted the seller the
right to request Harken to effect up to two registrations of these shares of
Harken common stock issued under the Securities Act of 1933 and (b) Harken
granted to the seller a lien over the properties purchased from the seller to
secure, among other things, the obligations of Harken Exploration under the
exchange agreement. The 185,000 shares of Harken common stock held in escrow
are held pending resolution of certain title defects relating to the properties
purchased from the seller and will be released from escrow to the seller unless
the decrease in value of these properties resulting from these defects exceeds
$480,000. Harken has adjusted the value of the Panhandle Note as of June 30,
1996 to equal the approximate market value of the shares issued to satisfy the
obligation.
(B) As discussed in Note 2 -- Acquisitions, a wholly-owned subsidiary
of Harken assumed $750,000 of short-term notes payable in connection with the
acquisition of the Yellowhouse Properties in October 1995. Harken and the
seller made payments totaling approximately $417,000 on these notes payable at
closing and the remaining balance was paid in monthly installments through
March 1996. Such notes bore interest at the rate of 7% per annum.
(C) As part of Harken's December 1995 exchange of its shares of Tejas
Preferred Stock for the shares of Harken Series C Preferred stock held by
Tejas, Harken issued a note payable for $394,000 which was payable in quarterly
installments through September 30, 1997, but was repaid early by Harken in
March 1996. The note bore interest at a rate of 10% per annum.
(D) Under the terms of a March 1994 agreement, a Harken subsidiary
purchased from its former stockholder its 3% working interest in the wells
drilled by the subsidiary as well as all rights held by the former stockholder
to participate in future wells drilled by the subsidiary 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 was
paid to the subsidiary's former stockholder on January 3, 1996.
(E) As part of the Merger Agreement with Search in May 1995, Harken,
through Search, assumed approximately $442,000 of notes payable to former
partners in certain limited partnerships managed by a subsidiary of Search.
Such notes bore interest at 10% per annum and were payable in semiannual
installments beginning June 30, 1995 through June 30, 1998. Harken repaid
these notes in April 1996. See further discussion of the Search Merger at Note
2 - Acquisitions.
(6) 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 "8%
European Notes") which were to mature in May 1998. Interest on these notes was
payable semi- annually in May and November of each year to maturity or until
the 8% European Notes were converted. Such 8% European Notes were convertible
at any time by the holders into shares of Harken common stock at a conversion
price of $1.50 per share ("the 8% European Note Conversion Price"). Such 8%
European Notes were 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 8% European Note Conversion Price (or $2.10
per share of Harken common stock). In connection with the sale and issuance of
the 8% European Notes, Harken paid approximately $1,750,000 from the 8%
European Note proceeds for commissions and issuance costs. In addition, at
closing of the sale of the 8% European Notes, Harken issued to the placement
agents certain non-transferable stock purchase warrants to purchase one million
shares of Harken common stock which are currently exercisable by the holders
thereof at any time on or before May 11, 1999 at an exercise price equal to the
8% European Note Conversion Price described above. Also, Harken paid a fee in
the form of 92,308 shares of Harken common stock to another financial advisor
in connection with the 8% European Notes.
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As of June 30, 1996, Harken had received notification that holders
of 8% European Notes totaling $14,300,000 had exercised their conversion option
and had been issued 9,533,311 shares of Harken common stock. Subsequent to
June 30, 1996, additional notifications of exercise of conversion options have
been received from all remaining holders of 8% European Notes totaling
$700,000, which has resulted in the additional issuance of 466,664 shares of
Harken common stock.
On July 30, 1996, Harken issued to qualified purchasers a total of $40
million in 6 1/2% Senior Convertible Notes (the "6 1/2% European Notes") which
mature on July 30, 2000. Interest on these notes is payable semi-annually in
January and July of each year to maturity or until the 6 1/2% European Notes
are converted. Such 6 1/2% European Notes are convertible at any time
following September 9, 1996 by the holders into shares of Harken common stock
at a conversion price of $2.50 per share ("the 6 1/2% European Note Conversion
Price"). The 6 1/2% European 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 commencing on or after November 28, 1996, the closing
price of Harken common stock each trading day during such period shall have
equaled or exceeded 135% of the 6 1/2% European Note Conversion Price (or
$3.375 per share of Harken common stock). In connection with the sale and
issuance of the 6 1/2% European Notes, Harken paid approximately $3,142,000
from the 6 1/2% European Note proceeds for commissions and issuance costs.
Upon closing, all proceeds from the sale of the 6 1/2% European Notes
were paid to a Trustee under the terms of a Trust Indenture and are held in a
separate interest bearing Trust account (the "Segregated Account") to be
maintained for Harken's benefit, until the Trustee is presented with evidence
of sufficient asset value, as defined, held by Harken to permit an advance of a
portion of the proceeds. Harken must maintain an Asset Value Coverage Ratio
equal to or greater than 1:1 which is calculated as the ratio of the sum of
100% of the aggregate amount of Harken's's cash on deposit in the Segregated
Account plus 60% of the aggregate amount of Harken's marketable securities plus
50% of the SEC value of Harken's domestic unencumbered total proved reserves of
which at least 75% thereof must be proved developed producing reserves to the
aggregate outstanding principal amount of the 6 1/2% European Notes. Upon a
conversion, any proceeds attributable to the 6 1/2% European Notes converted
which remain in the Segregated Account may be released and paid to Harken
without regard to the asset value then existing.
The 6 1/2% European Notes were sold strictly to non-U.S. purchasers
and are convertible in $50,000 increments. Similar to the 8% European Notes,
the 6 1/2% European Notes and the Harken common stock issuable upon conversion
of the 6 1/2% European 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.
Commissions and issuance costs associated with the 8% European Notes
and the 6 1/2% European Notes have been deferred and are included in Other
Assets and are amortized to interest expense over the period until conversion
or maturity of the European Notes. As European Notes are converted to Harken
common stock, a pro-rata portion of these deferred costs are charged to
additional paid-in capital.
To the extent that proceeds invested in the Segregated Account at the
balance sheet date are available under the above discussed Asset Value Coverage
Ratio limitations, such cash is included as a current asset in Cash Available
in European Segregated Account in the accompanying consolidated balance sheets.
Segregated Account cash that is not available as of the balance sheet date, due
to the Asset Value Coverage Ratio limitations, is reflected as Restricted Cash
in European Segregated Account in the accompanying consolidated balance sheets,
and is a non-current asset. The initial cash proceeds from the issuance of the
European Notes are not included in the Statement of Cash Flows because the
proceeds are not considered to be cash equivalents. Transfers of proceeds from
the Segregated Account are included in cash flows from financing activities in
the Statements of Cash Flows.
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(7) STOCKHOLDERS' EQUITY
Common Stock - Harken currently has authorized 125,000,000 shares of
$.01 par common stock. At December 31, 1995 and June 30, 1996, Harken had
issued 75,913,832 and 85,078,958 shares, respectively, and held 1,440,896 and
400,896 shares, respectively, as treasury stock at a cost of $4,997,000 and
$1,390,000, respectively. Subsequent to June 30, 1996 and as of July 31, 1996,
Harken has issued an additional 7,467,734 shares of Harken common stock as
discussed below.
Acquisition of CHAP Interests -- 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. In April
1996, Harken acquired an additional interest of approximately 12% in CHAP
primarily in exchange for, among other consideration, 509,000 restricted shares
of Harken common stock. See Note 2 -- Acquisitions for further discussion.
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. In connection with the Merger, Harken issued warrants
entitling the holders to purchase 732,771 shares of Harken common stock at an
exercise price of $1.82 per share. As of June 30, 1996, 597,127 shares of
Harken common stock had been issued upon exercise of such warrants. Up to
approximately 8.1 million additional 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 Payable -- 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 8% European Notes certain
non- registered non-transferrable stock purchase warrants to purchase one
million shares of Harken common stock which are currently exercisable by the
holders thereof at any time on or before May 11, 1999 at an exercise price of
$1.50 per share. In addition, the 8% European Notes were convertible into a
maximum of approximately 10,000,000 shares of Harken common stock. As of June
30, 1996, Harken had received notification that holders of 8% European Notes
totaling $14,300,000 had exercised their conversion option and had been issued
9,533,311 shares of Harken common stock. See Note 6 - European Convertible
Notes Payable for further discussion. Subsequent to June 30,1996, additional
notifications of exercise of conversion options have been received from all
remaining holders of 8% European Notes totaling $700,000 which has resulted in
the additional issuance of 466,664 shares of Harken common stock. Also, Harken
paid a fee of 92,308 shares of Harken common stock to a financial advisor in
connection with the 8% European Notes and the market value of such shares as of
the date issued was included as deferred issuance costs in Other Assets in the
accompanying consolidated balance sheets.
In July 1996, Harken issued to qualified purchasers a total of $40
million in 6 1/2% European Notes which mature on July 30, 2000. The 6 1/2%
European Notes are convertible under certain terms into approximately
16,000,000 shares of Harken common stock. In connection with the issuance of
the 6 1/2% European Notes, Harken issued to the placement agents for the 6 1/2%
European Notes certain non-registered non-transferrable stock purchase warrants
to purchase 1,280,000 shares of Harken common stock which are currently
exercisable by the holders thereof at any time on or before July 31, 1999 at an
exercise price of $2.50 per share.
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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 newly-issued 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 newly-issued 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 a
certain institutional and/or accredited purchaser. In March 1996, Harken
received $1,289,000 related to the sale of 1,040,000 shares of Harken common
stock previously held as treasury stock. In connection with certain of these
placements, Harken issued to certain financial advisors an aggregate total of
410,000 warrants to purchase shares of Harken common stock at an average
exercise price of $1.71 per share.
Acquisition of Texas Properties -- In October 1995, a wholly-owned
subsidiary of Harken paid as consideration three million shares of restricted
Harken common stock previously held as treasury stock in exchange for certain
non- operated interests in producing properties located in the western region
of Texas ("Yellowhouse Properties"). As part of the purchase of these
interests, Harken also issued one million 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.
In December 1995, Harken Exploration acquired certain interests in
producing properties located in the panhandle region of Texas ("Panhandle
Properties") in exchange for, among other consideration, 2.5 million shares of
Harken common stock and a $13 million note payable which was payable, at
Harken's option, in shares of Harken common stock. In July 1996, Harken
Exploration entered into an exchange agreement with the seller of the Panhandle
Properties, pursuant to which Harken issued 5,150,000 restricted shares of
Harken common stock, including 185,000 shares held in escrow, in satisfaction
of all obligations owed by the subsidiary to the seller under the terms of the
Panhandle Note. See Notes 2 and 5 -- Acquisitions and Notes Payable and
Long-Term Obligations for further discussion.
Acquisition of EnerVest Properties - On July 10, 1996, Harken
Exploration entered into an asset purchase and sale agreement (the "EnerVest
Agreement') with EnerVest. Pursuant to the EnerVest Agreement, Harken
Exploration acquired all of EnerVest's working interests in certain producing
oil and gas leases located in Arkansas and New Mexico and property and
equipment related thereto (the "EnerVest Properties"), for a purchase price
valued at approximately $15,200,000 and the assumption of certain operational
liabilities relating to these properties. See Note 2 -- Acquisitions for
further discussion. The preliminary purchase price consisted of 1,550,000
shares of Harken common stock (the "Tranche A Shares") issued after closing,
$5,000,000 in cash payable at closing, and an additional number of shares of
Harken common stock to be issued in the future as described below. Harken also
issued to EnerVest warrants to purchase, for a period of three (3) years from
closing, 300,000 shares of Harken common stock at an exercise price of $2.75
per share.
Pursuant to the EnerVest Agreement, upon the expiration of 180 days
from the date the registration statement is declared effective by the SEC
relating to the resale of the Tranche A Shares, Harken is required to issue an
additional 1,159,091 shares of Harken common stock (the "Tranche B Shares") to
EnerVest; provided, however, that if the sum of (i) the actual gross proceeds
realized by EnerVest from the sale of the Tranche A Shares and (ii) the then
market value of Tranche A Shares still held by EnerVest (together, the "Tranche
A Realized Proceeds") is less that $4,262,500, Harken is required to issue such
additional number of shares of Harken common stock (the "Deficiency Shares"),
in addition to the Tranche B Shares, having a market value at the time of
issuance equal to the difference between $4,262,500 and the Tranche A Realized
Proceeds. In addition, at the time Harken is to issue the Tranche B Shares, it
will calculate the aggregate value of all adjustments that are either
identified
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and agreed to under the EnerVest Agreement or identified but still contingent
under the EnerVest Agreement. These adjustments will include matters such as
title defects, identification of unplugged uneconomic wells, environmental
matters and gas imbalances. The aggregate value of all such adjustments that
have been identified and agreed to will be offset against the Tranche B Shares
prior to issuance. The aggregate value, up to $500,000, of all such
adjustments that have been identified but are still contingent will be
evidenced by a portion of the Tranche B Shares which Harken will hold back from
issuance until such contingent matters are resolved. EnerVest will also put
$1,000,000 cash into an escrow account which may be offset or drawn against by
Harken to satisfy other defects identified by Harken under the EnerVest
Agreement. Upon the expiration of 180 days from the sale of the Tranche B
Shares and the Deficiency Shares, Harken may be required to issue an additional
number of shares of Harken common stock (the "Tranche C Shares') if the sum of
(i) the actual proceeds realized by EnerVest from the sale of all of the shares
of Harken common stock sold by EnerVest up to such time and (ii) the then
market value of any shares of Harken common stock still held by EnerVest
(together the "Total Realized Proceeds") is less than $10,200,000 as adjusted
for the defects and adjustments raised by Harken. In such event, Harken shall
be required to issue the number of Tranche C Shares having a market value at
the time of issuance equal to the difference between $10,200,000 and the Total
Realized Proceeds.
(8) PER SHARE DATA
Per share data has been computed based on the weighted average number
of common shares outstanding during each period. Common stock equivalents,
contingently issuable shares and other potentially dilutive securities are not
included in the computation of earnings per share if the effect of inclusion
would be antidilutive. For purposes of calculating earnings per share, the
unconverted European Convertible Notes discussed above are considered not to be
common stock equivalents.
(9) INCOME TAXES
At June 30, 1996, Harken had available for federal income tax
reporting purposes, net operating loss (NOL) carryforward for regular tax
purposes of approximately $65,000,000 which expires in 1997 through 2010,
alternative minimum tax NOL carryforward of approximately $57,000,000 which
expires in 1997 through 2010, investment tax credit carryforward of
approximately $860,000 which expires in 1996 through 2002, statutory depletion
carryforward of approximately $1,200,000 which does not have an expiration
date, and a net capital loss carryforward of approximately $6,100,000 which
expires in 2007 through 2008. Approximately $16,000,000 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, relating primarily to property and
equipment, as of June 30, 1996, computed under the provisions of the Statement
of Financial Accounting Standard No. 109, "Accounting for Income Taxes", were
approximately $7,528,000. Total deferred tax assets, primarily related to the
net operating loss carryforward, were approximately $22,364,000 at June 30,
1996. The total net deferred tax asset is offset by a valuation allowance of
approximately $14,836,000 at June 30, 1996.
(10) COMMITMENTS AND CONTINGENCIES
Colombian Operations-Alcaravan Contract -- During the third quarter
of 1992, Harken de Colombia, Ltd., a wholly-owned subsidiary of Harken, was
awarded the exclusive right to explore for, develop and produce oil and gas
throughout the Alcaravan area of Colombia. This Alcaravan area currently
covers approximately 210,000 acres. The Alcaravan area 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
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Contract (the "Alcaravan Contract") which requires Harken to conduct a seismic
and exploratory drilling program in the Alcaravan area during the initial six
(6) years of the Alcaravan Contract. At the end of each of the first six years
of the Alcaravan Contract, Harken has the option to withdraw from the Alcaravan
Contract or to commit to the next year's work requirements. If during the
initial six years of the Alcaravan Contract, Harken discovers a field capable
of producing oil or gas in quantities that are economically exploitable and
Ecopetrol agrees that such field is economically exploitable (a "commercial
discovery"), the term of the Alcaravan Contract covering such field will be
extended for a period of 22 years from the date of such commercial discovery.
Harken has completed all work requirements for the first, second and third
years of the Alcaravan Contract.
Upon a discovery of a field capable of commercial production,
Ecopetrol will reimburse Harken for 50% of its successful well costs expended
up to the point of declaration of a commercial discovery. Production from a
field following a commercial discovery will be allocated as follows: Ecopetrol,
on behalf of the Colombian government, will receive a 20% royalty interest in
all production. All production (after royalty payments) will be allocated 50%
to Ecopetrol and 50% to Harken until cumulative production in such field
reaches 60 million barrels of oil, after which Ecopetrol's share of production
will progressively increase and Harken's share will progressively decrease
until cumulative production from the field reaches 150 million barrels of oil,
and thereafter all production will be allocated 70% to Ecopetrol and 30% to
Harken. If more than one field capable of commercial production is discovered
on the Alcaravan acreage, the production sharing percentages applicable to the
field with the greatest cumulative production will be applied to all fields
within the Alcaravan acreage. After declaration of a commercial discovery,
Harken and Ecopetrol will be responsible for all future operating expenses in
direct proportion to their interest in production.
In September 1994, Huffco Group, Inc. ("Huffco") of Houston, Texas
joined Harken in the drilling of Harken's first exploratory well under the
Alcaravan Contract. Under the terms of a joint operating agreement, 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. Harken initially determined in April 1995 that the
Alcaravan #1 well failed to produce commercial quantities of oil. Harken
intends to re-enter the well, preferably with a joint venture partner, to
finalize the evaluation of the Alcaravan #1 well's ability to produce
commercial quantities of oil. As a result, the costs incurred on the Alcaravan
#1 well continue to be capitalized at June 30, 1996, as unevaluated oil and gas
properties, pending final determination of the results of the well. In
addition, Huffco elected to not participate in the further exploration and
development of the Alcaravan acreage and reassigned all interest and rights
therein to Harken.
On June 28, 1996, Harken along with Harken de Colombia, Ltd. entered
into development finance agreements ("the Palo Blanco Development Finance
Agreements") with BSR Investments, Inc. and Greyledge LLC, respectively ("the
Palo Blanco Investors"), which cover the Palo Blanco prospect under the
Alcaravan Contract area. Under the terms of the Palo Blanco Development
Finance Agreements, the Palo Blanco Investors will provide an aggregate of
$2,500,000 to Harken de Colombia, Ltd. to finance the drilling of the first
well on the Palo Blanco prospect in exchange for an aggregate beneficial
interest in 40% of the net profits which may be realized by Harken de Colombia,
Ltd. from this prospect, subject to reduction upon exercise of an election to
exchange this interest or any part thereof for shares of Harken common stock.
The Palo Blanco Investors will receive as part of the consideration for this
transaction an aggregate of 90,000 shares of restricted Harken common stock.
Under the Palo Blanco Development Finance Agreements, both the Palo
Blanco Investors and Harken have options to elect to exchange the Palo Blanco
Investors' respective beneficial interests in the Palo Blanco prospect for
restricted shares of Harken common stock. The Palo Blanco Investors may elect
to exchange from time to time up to all of their interests for an aggregate of
up to 1,109,976 restricted shares of Harken common stock, or any lesser part on
a prorated basis. Harken may exercise its option to exchange on the same terms
but only as to 75%
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of such interests on a similar prorated basis. Harken may thereafter elect to
exchange the remaining 25% of such unexchanged interests, if any, for
additional shares of restricted Harken common stock based upon 50% of the
independently engineered valuation of the first well drilled on this Palo
Blanco prospect. Following the issuance of such Harken common stock
thereunder, the Palo Blanco Investors will have certain registration rights
with regard thereto. Subsequent to June 30, 1996, Harken received from the
Palo Blanco Investors the initial scheduled advances pursuant to the Palo
Blanco Development Finance Agreements totaling $625,000. The Palo Blanco
Investors elected to exercise their option to exchange these initial interests
resulting in the issuance of 299,994 restricted shares of Harken common stock.
Bocachico Contract -- In January 1994, Harken de Colombia, Ltd. signed
its second Association Contract (the "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 initial six year term of the Bocachico Contract, if Harken
makes a commercial discovery on one or more prospect areas in the contract
area, the contract covering such prospect area(s) will be further extended for
a period of 22 years from the date of any commercial discovery of oil and/or
gas. The production sharing arrangements under the Bocachico Contract are
substantially similar to those under the Alcaravan Contract.
During the first year of the Bocachico Contract, Harken conducted
seismic activities on the land covered by this contract including the
reprocessing of approximately 250 kilometers of existing seismic data and the
acquisition of approximately 35 kilometers of new seismic data. During each of
the second 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.
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. 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
Bocachico Contract into its second year. Harken spudded its first well to be
drilled on this Bocachico Contract area, named the Torcaz #2 well, on July 18,
1996. This well is projected to be drilled to a depth of 8,500 feet and should
take approximately 22 to 25 days to reach this depth. Harken hopes to have
test results available from this well by the end of August 1996.
Under the original terms of the Bocachico Contract, Harken was
required to complete the first well on the Bocachico acreage by June 5, 1996.
Harken has obtained an extension whereby the first well on the Bocachico
acreage must now be completed by September 4, 1996. In addition, Harken has
committed to drilling a second well thereby extending the Bocachico Contract
into its third year, and has filed applications for environmental permits on
two additional well locations within the Bocachico Contract area.
In October 1995, Harken entered into a Development Finance Agreement
(the "Rio Negro Development Finance Agreement") with Arbco Associates L.P.,
Offense Group Associates L.P., Kayne Anderson Nontraditional Investments L.P.
and Opportunity Associates L.P. (collectively, the "Rio Negro Investors"),
pursuant to which the Rio Negro Investors agreed to provide up to $3,500,000 to
Harken to finance the drilling of two wells, including the Torcaz #2 well, 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
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that prospect is successful. Pursuant to the Rio Negro Development Finance
Agreement, Harken has agreed to drill two wells on the Rio Negro prospect. As
of June 30, 1996, Harken had requested and received $2,000,000 pursuant to the
Rio Negro Development Finance Agreement, and has reflected such amount as a
reduction to its investment in Colombian oil and gas properties in the
accompanying consolidated balance sheet.
Pursuant to the Rio Negro Development Finance Agreement, the Rio Negro
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 Series D
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 Rio Negro Investors have
not previously elected to convert all of such Participation. If Harken
exercises its right to convert the Participation into Preferred Stock, the Rio
Negro Investors at that time can elect to receive cash or Preferred Stock equal
to the amount of the balance of the remaining Participation plus an additional
amount computed at a rate of 25% per annum. In addition, the Rio Negro
Investors may then 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 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 Rio Negro Investors
to elect one director to Harken's Board of Directors.
Playero Contract -- In December 1994, Harken de Colombia, Ltd. signed
its third Association Contract (the "Playero Contract") with Ecopetrol,
covering the Playero Contract area. Under the Playero Contract, Harken
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 acquired
approximately 12 kilometers of new seismic data in the Playero Contract area.
During each of the second through the sixth contract years, Harken had the
option to continue the contract by committing to the drilling of at least one
well during each contract year. Harken has completed the evaluation of the new
seismic data and has determined that the identified prospect lies exclusively
within the contiguous Alcaravan Contract area and not within the Playero
Contract area. Accordingly, in May 1996, Harken elected not to commit to drill
a well in the Playero Contract area, thereby allowing the Playero Contract to
expire under its own terms. Harken reflected a valuation adjustment during the
first quarter of 1996, representing Harken's total incremental investment in
the Playero Contract. The valuation adjustment, which totals $19,000, is
included in interest and other expense in the accompanying consolidated
statement of operations.
Cambulos Contract -- In September 1995, Harken de Colombia, Ltd.
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 kilometers of existing seismic data and the
acquisition of at least 90 kilometers 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.
If during the initial six years of the Cambulos Contract, Harken
discovers a field capable of commercial production of oil or gas, the term of
the Cambulos Contract will be extended for a period of 22 years from the date
of such commercial discovery. Upon a commercial discovery, Ecopetrol will
reimburse Harken for 50% of its successful well costs, seismic costs and dry
hole costs expended prior to the point of declaration of a commercial
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discovery. Production from a commercial discovery will be allocated as
follows: Ecopetrol, on behalf of the Colombian government, will receive a 20%
royalty interest in all production and all production (after royalty payments)
will be allocated 50% to Ecopetrol and 50% to Harken until cumulative
production from all fields in the Cambulos acreage reaches 60 million barrels
of oil, after which Ecopetrol's share of production will increase progressively
to 75% and Harken's share will decrease progressively to 25% determined by a
formula based on Harken's recovery of its total expenditures under the Cambulos
Contract. After a declaration of a commercial discovery, Harken and Ecopetrol
will be responsible for all future operating expenses in direct proportion to
their interest in production.
Bolivar Contract -- In May 1996, Harken de Colombia, Ltd. signed an
additional Association Contract with Ecopetrol, covering the Bolivar Contract
area. Under the Bolivar Contract, Harken has acquired the exclusive rights to
conduct exploration activities in the Bolivar Contract area, which covers
approximately 250,000 acres in the Northern Middle Magdalena Valley of Central
Colombia.
During the first two years of this Bolivar Contract, Harken's work
program will consist of preparing an engineering study of the Buturama and
Totumal fields located on and adjacent to this acreage, the reprocessing of 250
kilometers of seismic data and the acquisition of 100 kilometers of new seismic
data on this contract area. 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. The production
sharing arrangements under the Bolivar Contract are substantially similar to
those under the Cambulos Contract.
Two earlier oil fields, located in the Buturama Area and the Lebrija
Area, were discovered and drilled by a major operator beginning in the early
1950's. These earlier wells were produced for a number of years and then
subsequently abandoned. Harken has obtained and reviewed well data and
information including well logs, and production rates from these earlier wells.
Harken intends to apply modern drilling and completion techniques, including
the use of horizontal drilling similar to that used in the Austin Chalk
formation in Texas, in these areas.
The production sharing arrangements under the Bolivar Contract are
substantially similar to those under the Cambulos Contract.
Bahrain Operations -- In January 1990, Harken, through its
wholly-owned subsidiary, Harken Bahrain Oil Company ("HBOC"), entered into a
production sharing agreement with the Bahrain National Oil Company ("BANOCO")
which gave it the exclusive right to explore for, develop and produce oil and
gas throughout most of Bahrain's Arabian Gulf offshore territories. In 1992
and 1993, HBOC drilled two exploratory wells, neither of which discovered
commercial quantities of oil or gas. In January 1996, the term of the
production sharing agreement expired of its own accord. Harken had negotiated
with BANOCO to extend the term of the production sharing agreement and expand
the acreage covered thereby, however, Harken was unable to identify a joint
venture partner to share in the exploration of the production sharing agreement
acreage.
Other -- The exploration, development and production of oil and gas
are subject to various Navajo, federal, state and local 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.
The Aneth Gas Plant facility, of which Harken Southwest Corporation
("HSW"), a wholly-owned subsidiary, is a co-owner, was in operation for many
years prior to HSW's becoming an owner. The operations at the Aneth Gas Plant
previously used open, unlined drip pits for storage of various waste products.
The plant
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owners have replaced all of the open ground pits currently being used with
steel tanks. The plant owners are currently in the process of closing the open
ground pits.
Texaco, the plant's operator, received a letter from the EPA dated
July 21, 1991 and a subsequent letter dated June 8, 1992, in which the EPA
requested certain information in order to determine if there had been at the
Aneth Gas Plant the release of hazardous substances to the environment. Texaco
has advised HSW that certain information was supplied to the EPA pursuant to
this request. Subsequently, core samples in and around certain pit areas were
jointly taken by the EPA and Texaco. The EPA approved a plan dated April 12,
1996 proposed by Texaco for the remediation and closure of these pits.
An agreement has been reached between the present plant owners
and the previous owner concerning responsibility for and sharing of costs of
pit closures in and around the Aneth Gas Plant. Harken has accrued a
contingency reserve of $219,000 for its best estimate of its share of the
remediation cost.
Harken has accrued approximately $1,128,000 at June 30, 1996 relating
to other operational or regulatory contingent liabilities related to Harken's
domestic operations. Harken and its subsidiaries currently are involved in
various lawsuits and other contingencies, including a certain lawsuit and the
guarantee of certain lease obligations of a former subsidiary, 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. On February 28,
1996, the court granted Search Acquisition's motion for summary judgement. The
plaintiff has appealed the decision of the trial court. Although the ultimate
outcome of this litigation is uncertain, Harken believes that any liability to
Harken as a result of this litigation will not have a material adverse effect
on Harken's financial condition.
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ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
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HARKEN ENERGY CORPORATION AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
(UNAUDITED)
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.
THREE MONTHS ENDED SIX MONTHS ENDED
JUNE 30, JUNE 30,
------------------------------ ---------------------------
DOMESTIC EXPLORATION AND 1995 1996 1995 1996
- ------------------------- ------------- ------------- ------------ ------------
PRODUCTION OPERATIONS (UNAUDITED) (UNAUDITED)
- ---------------------
REVENUES
--------
Oil sales revenues $ 1,054,000 $ 1,496,000 $ 1,846,000 $ 2,830,000
Oil volumes in barrels 56,000 72,000 100,000 144,000
Oil price per barrel $ 18.82 $ 20.78 $ 18.46 $ 19.65
Gas sales revenues $ 310,000 $ 674,000 $ 506,000 $ 1,146,000
Gas volumes in mcf 225,000 274,000 371,000 490,000
Gas price per mcf $ 1.38 $ 2.46 $ 1.36 $ 2.34
Gas plant revenues $ 176,000 $ 218,000 $ 361,000 $ 409,000
OTHER REVENUES
--------------
Interest income $ 168,000 $ 202,000 $ 203,000 $ 385,000
Other income $ 74,000 $ -- $ 465,000 $ 161,000
FOR THE SIX MONTHS ENDED JUNE 30, 1996 COMPARED WITH THE CORRESPONDING PRIOR
PERIOD.
OVERVIEW
Harken reported a net loss for the six months ended June 30, 1996 of
$228,000 compared to a net loss of $297,000 for the prior year period. Total
revenues increased from approximately $3.4 million during the first six months
of 1995 to approximately $4.9 million for the first six months of 1996,
primarily due to four acquisitions consummated during 1995 that increased
Harken's domestic producing properties and oil and gas reserves. Gross profit
before depreciation and amortization, general and administrative and interest
expenses totaled approximately $2.8 million during the six months ended June
30, 1996 compared to approximately $1.8 million for the prior year period.
Gross profit as a percentage of oil and gas sales revenues decreased slightly
during the six months ended June 30, 1996 compared to the prior year period
primarily due to the normal production declines of the Four Corners properties
and higher operating cost levels associated with the Yellowhouse Properties.
Internationally, Harken announced in April 1996 that it had received
final approval from the Environmental Ministry in Colombia to initiate drilling
operations on the initial well to be drilled on the Bocachico Contract area the
Torcaz #2 well. Harken spudded the Torcaz #2 well on July 18, 1996. This well
is projected to be drilled to a depth of 8,500 feet and should take
approximately 22 to 25 days to reach this depth. Harken hopes to have test
results available from this well by the end of August 1996.
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DOMESTIC OPERATIONS
Gross oil and gas revenues during the first six months of 1995 and 1996
were generated by Harken's domestic exploration and production operations.
During the first six months of 1995 these domestic operations consisted
primarily of the operations of Harken Southwest Corporation ("HSW"), which
includes production of oil and gas reserves in the Aneth Field and Blanding
Sub-Basin portions of the Paradox Basin in the Four Corners area of Utah,
Arizona and New Mexico, primarily on the Navajo Indian Reservation. Such
operations are primarily conducted through HSW's interests in the CHAP Venture
("CHAP"). Harken also includes in oil and gas revenues certain gas plant
revenues, primarily from CHAP's plant owner interest in the Aneth Gas Plant
which serves many of the Utah properties.
During the first six months of 1996, Harken's domestic operations also
include the onshore South Texas production operations of Search Exploration,
Inc. ("Search"), which was merged into a wholly-owned subsidiary of Harken in
May 1995. In addition, 1996 activity includes the October 1995 acquisition of
the Yellowhouse Properties in the western region of Texas as well as the
December 1995 acquisition of the Panhandle Properties located in the panhandle
region of Texas.
Gross oil revenues increased significantly during the first six months
of 1996 compared to 1995 primarily due to the additional production volumes
added as a result of the above mentioned acquisitions and higher oil prices.
In particular, the addition of the Yellowhouse Properties contributed
approximately $979,000 to the first six months of 1996 oil revenues, while the
Panhandle Properties contributed approximately $107,000 to the first six months
of 1996 oil revenues. In addition, the higher price received per barrel of oil
produced reflects the increasingly strong demand for crude oil, particularly in
the Four Corners region.
Gross gas revenues also increased significantly for the six months ended
June 30, 1996 compared to the prior year period, again due to the acquisitions
consummated during 1995. The Panhandle Properties contributed approximately
$536,000 to first half 1996 gas revenues, despite many of the properties
experiencing numerous temporary operational curtailments during the first
quarter. These operational problems have been resolved during the second
quarter which has resulted in the resumption of normal gas production and
increased gas revenues from the Panhandle Properties. The gas produced from
the Panhandle Properties, with its associated products, can be currently sold
at approximately a 60% premium to posted gas prices in the region as a result
of the high BTU content of such gas. Harken received an average of $3.70 per
mcf for Panhandle Property gas during the first six months of 1996. Harken
also recorded approximately $176,000 of gas revenues from the acquisition of
Search. In addition, Harken received an average of $1.60 per mcf from Harken's
Four Corners gas production during the first half of 1996 compared to $1.36 per
mcf received during the first half of 1995.
Oil and gas operating expenses consist of lease operating expenses and
gas plant expenses, along with a number of production and reserve based taxes,
including Utah and Texas severance taxes, Utah and Texas property taxes, Utah
conservation taxes and Navajo severance and possessory interest taxes. The
increase in oil and gas operating expenses is as a result of the above
mentioned acquisitions, specifically resulting in approximately $386,000 from
the Yellowhouse Properties, approximately $212,000 from the Panhandle
Properties, and approximately $61,000 from the Search operations.
On July 10, 1996, Harken, along with a wholly-owned subsidiary,
purchased working interests in certain producing properties located in Arkansas
and New Mexico (the "EnerVest Properties") for a purchase price of $15,200,000
and the assumption of certain operational liabilities related to these
properties. The acquisition of the EnerVest Properties, while not impacting
the results of operations for the six months ended June 30, 1996, will increase
oil and gas sales revenues and gross profit before depreciation and
amortization, general and administrative expenses and interest expense for the
remainder of 1996 and beyond.
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INTEREST AND OTHER INCOME
Interest and other income decreased during the first six months of 1996
compared to the prior period as during the first six months of 1995, Harken
included a gain of approximately $189,000 on the March 1995 sale of Harken's
investment in E-Z Serve Corporation Series C Preferred. During the first six
months of 1996, Harken recognized approximately $259,000 of interest income
earned by Harken on proceeds received from the May 1995 issuance of $15 million
of European 8% Senior Convertible Notes Payable (the "8% European Notes")
compared to $102,000 of such interest income during the first six months of
1995. Such proceeds, net of 8% European Notes issuance costs and amounts
released and transferred, are maintained and invested in a separate interest
bearing bank account (the "Segregated Account").
In July 1996, Harken issued a total of $40 million in 6 1/2% European
Notes which mature on July 30, 2000. As a result, in future periods Harken
initially expects to reflect interest income from the net proceeds which will
similarly be invested in a Segregated Account.
OTHER COSTS AND EXPENSES
General and administrative expenses increased from $1,511,000 for the
first six months of 1995 to $1,797,000 for the first six months of 1996,
primarily as a result of increased personnel and office costs associated with
the acquisitions consummated during 1995.
Depreciation and amortization expense increased during the first six
months of 1996 compared to the prior year period consistent with the increased
production levels from the acquired oil and gas property interests during 1995.
Depreciation and amortization on oil and gas properties is calculated on a unit
of production basis in accordance with the full cost method of accounting for
oil and gas properties.
Interest expense and other increased significantly during the first six
months of 1996 compared to the prior year period. In December 1995, Harken
issued the Panhandle Note for an initial face amount of $13 million in
connection with the acquisition of the Panhandle Properties, and the accretion
of interest on such note resulted in $234,000 of interest expense during the
first six months of 1996. In addition, the May 1995 issuance of the 8%
European Notes generated interest expense during 1996 of approximately $38,000
net of amounts of interest capitalized, and approximately $178,000 of
amortization of issuance costs associated with the 8% European Notes.
On July 11, 1996, Harken's wholly-owned subsidiary entered into an
exchange agreement with the holder of the $13 million Panhandle Note whereby it
was exchanged for, among other consideration, 5,150,000 restricted shares of
Harken common stock, including 185,000 shares held in escrow. The exchange has
eliminated the further accretion of interest expense related to the Panhandle
Note.
Also in July 1996, Harken issued a total of $40 million in 6 1/2%
European Notes which mature on July 30, 2000. The 6 1/2% European Notes are
convertible under certain terms into shares of Harken common stock. As a
result, Harken expects to reflect interest expense associated with the 6 1/2%
European Notes, net of amounts capitalized, and the amortization of issuance
costs associated with the 6 1/2% European Notes over the term or until such 6
1/2% European Notes are redeemed or are converted to Harken common stock.
FOR THE QUARTER ENDED JUNE 30, 1996 COMPARED WITH THE CORRESPONDING PRIOR
PERIOD.
Harken reported net income of $68,000 for the three months ended June
30, 1996 compared to a net loss of $158,000 for the second quarter of 1995.
Total revenues increased from approximately $1.8 million during the second
quarter of 1995 to approximately $2.6 million for the second quarter of 1996,
primarily due to the acquisitions consummated during 1995. Gross profit before
depreciation and amortization, general and
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administrative and interest expenses totaled approximately $1.5 million during
the second quarter of 1996 compared to approximately $1.1 million during the
prior year period.
DOMESTIC OPERATIONS
Gross oil revenues increased significantly during the second quarter of
1996 compared to 1995 primarily due to the additional production volumes added
as a result of the above mentioned acquisitions and higher oil prices. In
particular, the addition of the Yellowhouse Properties contributed
approximately $504,000 to second quarter 1996 oil revenues, while the Panhandle
Properties contributed approximately $69,000 to second quarter 1996 oil
revenues. Overall, oil prices were particularly strong during the second
quarter of 1996, averaging $20.78 per barrel compared to $18.82 during the
second quarter of 1995.
Gross gas revenues also increased significantly for the three months
ended June 30, 1996 compared to the prior year period, again due to the
acquisitions consummated during 1995. The Panhandle Properties contributed
approximately $339,000 to second quarter 1996 gas revenues, reflecting a
significant improvement over first quarter 1996 revenues from the Panhandle
Properties, which was negatively impacted by operational curtailments. Harken
also recorded approximately $126,000 of gas revenues from the acquisition of
Search, compared to only a minimal amount of Search revenue during the second
quarter of 1995.
Oil and gas operating expenses consist of lease operating expenses and
gas plant expenses, along with a number of production and reserve based taxes,
including Utah and Texas severance taxes, Utah and Texas property taxes, Utah
conservation taxes and Navajo severance and possessory interest taxes. The
increase in second quarter 1996 oil and gas operating expenses compared to the
prior year is as a result of the above mentioned acquisitions, specifically
resulting in approximately $171,000 from the Yellowhouse Properties,
approximately $141,000 from the Panhandle Properties, and approximately $40,000
from the Search operations.
INTEREST AND OTHER INCOME
Interest and other income decreased slightly during the second quarter
of 1996 compared to the prior period despite the inclusion for the full quarter
during 1996 of interest income earned by Harken on proceeds received from the
May 1995 issuance of $15 million of European 8% Senior Convertible Notes
Payable (the "8% European Notes").
OTHER COSTS AND EXPENSES
General and administrative expenses increased from $737,000 for the
second quarter of 1995 to $980,000 for the second quarter of 1996, primarily as
a result of increased personnel and office costs associated with the
acquisitions consummated during 1995.
Depreciation and amortization expense increased during the second
quarter of 1996 compared to the prior year period consistent with the increased
production levels from the acquired oil and gas property interests during 1995.
Depreciation and amortization on oil and gas properties is calculated on a unit
of production basis in accordance with the full cost method of accounting for
oil and gas properties.
Interest expense and other decreased during the second quarter of 1996
compared to the prior year period due to the significant number of conversions
by holders of 8% European Notes into shares of Harken common stock, which
resulted in interest expense during 1996 of approximately $15,000 net of
amounts of interest capitalized, and approximately $56,000 of amortization of
issuance costs associated with the 8% European Notes. Interest expense and
other during the second quarter of 1995 included net interest expense of
approximately $125,000 and approximately $73,000 of amortization of issuance
costs associated with the 8% European Notes.
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LIQUIDITY AND CAPITAL RESOURCES
During the year ended December 31, 1995, Harken took significant steps
to strengthen its operating cash flow and available capital resources in order
to implement its overall operating strategy. Such efforts included the issuance
of $15 million of 8% European Notes, the generation of approximately $4.4
million from private placements of Harken common stock, four separate
acquisitions of domestic oil and gas reserves and the signing of a Rio Negro
Development Finance Agreement with certain investors to provide up to $3.5
million for Colombian exploration efforts.
During the first six months of 1996, Harken's working capital increased
approximately $7.8 million, primarily due to the availability of the remaining
approximately $6.2 million of cash proceeds from the issuance of the 8%
European Notes, which were restricted as of December 31, 1995. In addition,
Harken generated approximately $2.5 million of net proceeds during the first
six months of 1996 from the conversion of certain options and warrants and from
a March 1996 private placement of Harken common stock. In July 1996, Harken
again significantly improved its available capital resources primarily through
the issuance of $40 million of 6 1/2% European Notes, which generated net
available proceeds, subject to limitations discussed below, of approximately
$36.9 million. Such 6 1/2% European Notes mature in July 2000 and are
convertible after September 9, 1996 by the holders into shares of Harken common
stock at a conversion price of $2.50 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 of Harken common stock for
each day during such period shall have equaled or exceeded 135% of the
conversion price (or $3.375 per share of Harken common stock). All proceeds
from the sale of the 6 1/2% European Notes were paid to a Trustee and are held
in a Segregated Account to be maintained for Harken's benefit.
Also during July 1996, Harken strengthened it operating cash flow with
the acquisition of certain producing oil and gas properties located in the
Magnolia area of Arkansas and in the Carlsbad area of New Mexico (the "EnerVest
Properties"). The purchase price of $15,200,000 plus the assumption of certain
operational liabilities related to these properties, was paid in the form of
$5,000,000 cash paid at closing, 1,550,000 shares of Harken common stock issued
following closing, and 1,159,091 shares of Harken common stock issued at a
designated time following the registration and sale by the seller of the
initial shares issued at closing. Harken also issued to the seller warrants to
purchase, for a period of three years from closing, 300,000 shares of Harken
common stock at an exercise price of $2.75 per share. The agreement includes
adjustment provisions pursuant to which Harken may be obligated to issue
additional shares of Harken common stock if the seller does not realize at
least $10,200,000 from its sale of such shares.
The $5,000,000 cash consideration paid in connection with the July 1996
acquisition of the EnerVest Properties was funded with proceeds attributable to
the 8% European Notes, issued in May 1995. Such 8% European Notes were
convertible at any time by the holders into shares of Harken common stock at a
conversion 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 of Harken common stock 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). Upon a conversion, any proceeds
attributable to the 8% European Notes converted which remained in the
Segregated Account were available to be released and paid to Harken without
regard to the Asset Value Coverage Ratio test (as defined below). As of June
30, 1996, holders of 8% European Notes totaling $14,300,000 had exercised their
conversion option and had been issued 9,533,311 shares of Harken common stock.
Subsequent to June 30, 1996 and as of July 31, 1996, additional notifications
of exercise of conversion options have been received from the remaining holders
of 8% European Notes totaling $700,000, which has resulted in the additional
issuance of 466,664 shares of Harken common stock.
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For the 8% European Notes, Harken was required to maintain an Asset
Value Coverage Ratio equal to or greater than 1:1. As of June 30, 1996, Harken
was in compliance with the Asset Value Coverage Ratio test. The Asset Value
Coverage Ratio for the 8% European Notes was calculated as a ratio of the sum
of 100% of the aggregate amount of Harken's cash on deposit in the Segregated
Account plus 60% of the aggregate amount of Harken's marketable securities plus
40% of the present value of Harken's unencumbered proved developed producing
reserves located in the U.S. to the aggregate outstanding principal amount of
the 8% European Notes.
For the 6 1/2% European Notes, the Asset Value Coverage Ratio must also
be equal to or greater than 1:1, and is calculated as the ratio of the sum of
100% of the aggregate amount of Harken's cash on deposit in the Segregated
Account plus 60% of the aggregate amount of Harken's marketable securities plus
50% of the SEC value of Harken's domestic unencumbered total proved reserves of
which at least 75% thereof must be proved developed producing reserves to the
aggregate outstanding principal amount of the 6 1/2% European Notes. As of
July 31, 1996, the amount of net proceeds from the 6 1/2% European Notes that
was available based on the Asset Value Coverage Ratio described above was
approximately $5,467,000.
In order for a specific amount of proceeds to be released from the
Segregated Account, Harken must demonstrate that the Asset Value Coverage Ratio
test would continue to be met after such release of funds and that no Event of
Default with respect to the 6 1/2% European Notes has occurred and is
continuing at the date of such release. Such request must be accompanied by an
independent reserve engineering report or other independent third party
valuation of Harken's unencumbered proved developed producing assets.
The anticipated timing at which funds will be released from the
Segregated Account is dependent upon the timing and magnitude of conversions
into Harken common stock by the individual noteholders, the market price of the
Harken common stock, the amount of Harken's assets which qualify for inclusion
in the Asset Value Coverage Ratio test, and the decision and ability by Harken
to convert the 6 1/2% European Notes into Harken common stock. Once an amount
of proceeds are available to be released from the Segregated Account, Harken
may submit its request for the transfer of such proceeds at its discretion and
according to its capital resource requirements. Upon maturity date of the 6
1/2% European Notes, the Segregated Account cash proceeds then remaining could
be used to retire any remaining unconverted 6 1/2% European Notes.
To the extent that proceeds invested in the Segregated Account at the
balance sheet date are available under the above Asset Value Coverage Ratio
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 6 1/2% European Notes is payable semi-annually in
January and July of each year to maturity or until the 6 1/2% European Notes
are converted. Interest payments will be funded from cash flow from
operations, existing cash balances or from available proceeds.
Also in July 1996, Harken entered into an exchange agreement with the
seller of the Panhandle Properties, pursuant to which Harken issued 5,150,000
restricted shares of Harken common stock, including 185,000 shares to be held
in escrow, in connection with the satisfaction of all obligations owed by
Harken Exploration to the seller under the terms of the Panhandle Note. Harken
has reflected the Panhandle Note at the $10,429,000 approximate market value of
the 5,150,000 restricted shares of Harken common stock issued. Under this
exchange agreement, Harken Exploration agreed to pay the seller the amount, if
any, by which the proceeds from the sale of these shares of Harken common stock
sold by the seller are less than $8,500,000. The $13 million Panhandle Note
bore interest at 5% per annum as to $8,000,000 in principal amount only, was
secured by Harken Exploration's interest in the Panhandle Properties and was
not guaranteed by Harken. Pursuant to the Panhandle Purchase and Sale
Agreement, Harken Exploration could elect to pay the amounts due pursuant to
the Panhandle Note in shares of Harken
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common stock, with the number of shares to be issued based on the average of
the closing prices of the Harken common stock on the American Stock Exchange
during certain periods.
As Harken's intention was to pay the Panhandle Note with shares of
Harken common stock, the entire Panhandle Note balance has been classified as
long-term obligations on Harken's Consolidated Balance Sheet. The recorded
amount of the Panhandle Note on Harken's Consolidated Balance Sheet at December
31, 1995 was equal to the discounted fair value of the payments to be made at
each maturity date, using a market rate of interest.
In addition to Harken's efforts to acquire domestic oil and gas
reserves, Harken continues to be very active in exploration efforts
internationally, particularly in Colombia. As of June 30, 1996, Harken's net
investment in its Colombian operations has totaled approximately $5 million,
the realizability of which is dependent upon the success of Harken's
exploration efforts. In addition, terms of each of the Association Contracts
entered into between Harken de Colombia, Ltd. and Ecopetrol commit Harken to
perform certain activities in accordance with a prescribed timetable. Failure
by Harken to perform these activities as required could result in Harken losing
its rights under the particular Association Contract, which could potentially
have a material adverse effect on Harken's business. For a detailed discussion
of each of the Association Contracts entered into between Harken de Colombia,
Ltd. and Ecopetrol, see "Notes to Consolidated Condensed Financial Statements,
Note 10 -- Commitments and Contingencies".
Harken anticipates that full development of Colombian reserves in the
Alcaravan contract area of the Llanos Basin and the Bocachico, Cambulos and
Bolivar contract areas of the Middle Magdalena Basin may take several years and
may require extensive production facilities which could require significant
additional capital expenditures. The ultimate amount of such expenditures
cannot be presently predicted. Harken anticipates that amounts required to
fund international activities, including those in Colombia, will be funded from
existing cash balances, asset sales, stock issuances, production payments,
operating cash flows and from industry partners; however, there can be no
assurances that Harken will have adequate funds available to it to fund its
international activities or that industry partners can be obtained to fund such
international activities.
In October 1995, Harken entered into a Development Finance Agreement
(the "Rio Negro Development Finance Agreement") with Arbco Associates L.P.,
Offense Group Associates L.P., Kayne Anderson Nontraditional Investments L.P.
and Opportunity Associates L.P. (collectively, the "Rio Negro Investors"),
pursuant to which the Rio Negro Investors agreed to provide up to $3.5 million
to Harken to finance the drilling of two wells, including the Torcaz #2, 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, through its wholly-owned subsidiary 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 Rio Negro Development Finance Agreement, Harken has agreed to
drill two wells on the Rio Negro prospect. As of June 30, 1996, Harken had
requested and received $2,000,000 pursuant to the Rio Negro Development Finance
Agreement.
Pursuant to the Rio Negro Development Finance Agreement, the Rio Negro
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 Rio Negro
Investors have not previously elected to convert all of such Participation. If
Harken exercises its right to convert the Participation into Preferred Stock,
the Rio Negro Investors at that time can elect to receive cash or Preferred
Stock equal to the amount of the balance of the remaining Participation plus an
additional amount computed at a rate of 25% per annum. In addition, the Rio
Negro Investors may then 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
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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 Rio Negro Investors to elect one director to
Harken's Board of Directors.
Harken has completed all work requirements for the first, second and
third years of the Alcaravan Contract. On June 28, 1996, Harken along with
Harken de Colombia, Ltd. entered into development finance agreements ("the Palo
Blanco Development Finance Agreements") with BSR Investments, Inc. and
Greyledge LLC, respectively ("the Palo Blanco Investors"), which cover the Palo
Blanco prospect under the Alcaravan Contract area. Under the terms of the Palo
Blanco Development Finance Agreements, the Palo Blanco Investors will provide
an aggregate of $2,500,000 to Harken de Colombia, Ltd. to finance the drilling
of the first well on the Palo Blanco prospect in exchange for an aggregate
beneficial interest in 40% of the net profits which may be realized by Harken
de Colombia, Ltd. from this prospect, subject to reduction upon exercise of an
election to exchange this interest or any part thereof for shares of Harken
common stock. The Palo Blanco Investors will receive as part of the
consideration for this transaction an aggregate of 90,000 shares of restricted
Harken common stock.
Under the Palo Blanco Development Finance Agreements, both the Palo
Blanco Investors and Harken have options to elect to exchange the Palo Blanco
Investors' respective beneficial interests in the Palo Blanco prospect for
restricted shares of Harken common stock. The Palo Blanco Investors may elect
to exchange from time to time all of their interests for an aggregate of
1,109,976 restricted shares of Harken common stock, or any lesser part on a
prorated basis. Harken may exercise its option to exchange on the same terms
but only as to 75% of such interests on a similar prorated basis. Harken may
thereafter elect to exchange the remaining 25% of such unexchanged interests,
if any, for additional shares of restricted Harken common stock based upon 50%
of the independently engineered valuation of the first well drilled on this
Palo Blanco prospect. Following the issuance of such Harken common stock
thereunder, the Palo Blanco Investors will have certain registration rights
with regard thereto. Subsequent to June 30, 1996, Harken received from the
Palo Blanco Investors the initial scheduled advances pursuant to the Palo
Blanco Development Finance Agreements totalling $625,000. The Palo Blanco
Investors elected to exercise their option to exchange this initial interest
resulting in the issuance of 299,994 restricted shares of Harken common stock.
All of the steps taken by Harken during the past year, including the
above mentioned Development Finance Agreements, provide Harken with additional
capital resources, both internally and externally, to be used toward
accomplishing Harken's exploration and development objectives during 1996 and
beyond. Such capital expenditures will be incurred only to the extent that
cash flows from operations or capital resources are available. Capital
expenditures related to Harken's Colombian operations are expected to total a
minimum of $3.2 million during 1996, with a majority of such costs related to
the Rio Negro prospect on the Bocachico Contract area. Harken has selected the
site of its first well, the Torcaz #2 well, and in April 1996 received the
drilling permit from the Environmental Ministry in Colombia to initiate
drilling operations. Harken spudded its first well to be drilled on this
Bocachico Contract area, named the Torcaz #2 well, on July 18, 1996. This well
is projected to be drilled to a depth of 8,500 feet and should take
approximately 22 to 25 days to reach this depth. Harken hopes to have test
results available from this well by the end of August 1996. In addition,
Harken plans to expend at least $1 million in 1996 on domestic drilling
activities. Harken anticipates that such amounts will be funded from existing
cash balances (including available European Segregated Account cash), operating
cash flows and funds provided by the Development Finance Agreements.
During the six months ended June 30, 1996, Harken's cash and temporary
investments increased approximately $10.4 million consisting primarily of
transfers from the European Segregated Account of $10 million following the
conversions of 8% European Notes to Harken common stock, Harken common stock
private placement offering proceeds of approximately $1.3 million, and the
initial advances pursuant to the Rio Negro Development Finance Agreement of $2
million. Such activity was sufficient to fund capital expenditures of
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approximately $3.9 million and repayments of notes payable and long-term
obligations of approximately $1.3 million. Cash flow provided by operations
during the first six months of 1996 totaled $958,000.
Harken believes that cash flow from operations will be sufficient to
meet its operating cash requirements in 1996. Harken includes in cash and
temporary investments certain balances which are restricted to use for specific
project expenditures, collateral or for distribution to outside interest owners
and are not available for general working capital purposes.
The exploration, development and production of oil and gas are subject
to various Navajo, federal, state and local laws and regulations designed to
protect the environment. Compliance with these regulations is part of Harken's
day-to-day operating procedures. Infrequently, accidental discharge of such
materials as oil, natural gas or drilling fluids can occur and such accidents
can require material expenditures to correct. Harken maintains levels of
insurance customary in the industry to limit its financial exposure. Management
is unaware of any material capital expenditures required for environmental
control during the next fiscal year.
Harken has accrued approximately $1,128,000 at June 30, 1996 relating to
operational or regulatory contingent liabilities related to Harken's domestic
operations. Harken and its subsidiaries currently are involved in various
lawsuits and other contingencies, including a certain lawsuit and the guarantee
of certain lease obligations of a former subsidiary, which in management's
opinion, will not result in significant loss exposure to Harken.
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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 eight Odyssey limited partnerships.
Search Acquisition was the surviving corporation in the merger with
Search. On February 28, 1996, the court granted Search
Acquisition's motion for summary judgement. Petrochemical has
appealed the decision of the trial court.
Harken has been named as a defendant in a lawsuit styled Douglas C
Kramlich vs. E-Z Serve Corp., Harken Energy Corp., Diamond
Shamrock, Inc., Autotronic Systems, Inc., and Does 1-100 filed in
the Superior Court of California, County of San Diego. The
plaintiff has alleged that property owned by him has become
contaminated with hazardous substances and further claims that the
contamination was caused by a gasoline leak at a service station
operated on the property by one or more of the defendants. As a
result, plaintiff claims that he is entitled to damages. The
property was the site of a gasoline service station operated by E-Z
Serve Corp., a former subsidiary of Harken, but was never owned or
operated by Harken. Harken believes that it has numerous
meritorious defenses to this lawsuit and intends to defend this
lawsuit vigorously.
Although the outcome of the litigation matters described above are
uncertain, Harken does not believe that any liability to Harken as
a result of such matters will have a material adverse effect on
Harken's financial condition.
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.
Results of Annual Meeting of Stockholders.
On June 11, 1996, Harken held its Annual Meeting of Stockholders.
The stockholders of Harken voted on three separate proposals, the
results of which are described below:
1. Approval of an amendment to Harken's Certificate of
Incorporation increasing the authorized number of shares of
Common Stock from 100,000,000 to 125,000,000.
For Against Abstain
------------- ----------- ---------
61,232,052 1,793,442 199,044
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2. Approval of an amendment to Harken Energy Corporation 1993
Stock Option and Restricted Stock Plan to increase the number
of shares of Common Stock authorized for issuance under the
plan from 3,000,000 to 4,000,000.
For Against Abstain
------------ ----------- ---------
59,153,032 3,838,355 233,151
3. Election of Directors.
For Withheld
------------- ----------
Donald W. Raymond 62,367,376 857,162
Richard H. Schroeder 62,462,446 762,092
Gary B. Wood, Ph.D. 62,419,851 804,687
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.)
4.2 Certificate of Designations, Powers, Preferences and
Rights of Series A Cumulative Convertible Preferred
Stock, $1.00 par value, of Harken Energy Corporation
(filed as Exhibit 4.1 to Harken's Annual Report on Form
10-K for the fiscal year ended December 31, 1989, File
No. 0-9207, and incorporated by reference herein).
4.3 Certificate of Designations, Powers, Preferences and
Rights of Series B Cumulative Convertible Preferred
Stock, $1.00 par value, of Harken Energy Corporation
(filed as Exhibit 4.2 to Harken's Annual Report on Form
10-K for the fiscal year ended December 31, 1989, File
No. 0-9207, and incorporated by reference herein).
4.4 Certificate of the Designations, Powers, Preferences and
Rights of Series C Cumulative Convertible Preferred
Stock, $1.00 par value of Harken Energy Corporation
(filed as Exhibit 4.3 to Harken's Annual Report on Form
10-K for fiscal year ended December 31, 1989, File No.
0-9207, and incorporated by reference herein).
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4.5 Certificate of the Designations of Series D Preferred
Stock, $1.00 par value of Harken Energy Corporation
(filed as Exhibit 4.3 to Harken's Quarterly Report on
Form 10-Q for the fiscal quarter ended September 30,
1995, File No. 0-9207, and incorporated by reference
herein).
*10.1 Trust Indenture dated July 30, 1996, by and between
Harken and Marine Midland Bank plc.
*10.2 Placing Agreement dated July 19, 1996, by and between
Harken and the various signatories thereto.
*10.3 Global Temporary Note dated July 30, 1996 issued by
Harken in the principal amount of $40,000,000.
*10.4 Association Contract (Bolivar) by and between Harken de
Colombia, Ltd., and Empresa Colombia de Petroleos.
*10.5 Exchange Agreement dated July 11, 1996, by and among
Harken, Harken Exploration Company and Momentum Operating
Co., Inc.
*27 Financial Data Schedules.
(b) REPORTS ON FORM 8-K.
The registrant filed a Current Report on Form 8-K dated July 10,
1996 (Item 2) to report the acquisition of the EnerVest
Properties.
The registrant filed a Current Report on Form 8-K dated July 31,
1996 (Item (5) to report the issuance of the 6 1/2% European
Notes.
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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 8, 1996 By: /s/ Bruce N. Huff
- ------------------------------ ----------------------------------------
Bruce N. Huff, Senior Vice President and
Chief Financial Officer
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EXHIBIT INDEX
Exhibit Description
------- -----------
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 Designations, Powers, Preferences and Rights of
Series A Cumulative Convertible Preferred Stock, $1.00 par value,
of Harken Energy Corporation (filed as Exhibit 4.1 to Harken's
Annual Report on Form 10-K for the fiscal year ended December 31,
1989, File No. 0-9207, and incorporated by reference herein).
4.3 Certificate of Designations, Powers, Preferences and Rights of
Series B Cumulative Convertible Preferred Stock, $1.00 par value,
of Harken Energy Corporation (filed as Exhibit 4.2 to Harken's
Annual Report on Form 10-K for the fiscal year ended December 31,
1989, File No. 0-9207, and incorporated by reference herein).
4.4 Certificate of the Designations, Powers, Preferences and Rights of
Series C Cumulative Convertible Preferred Stock, $1.00 par value of
Harken Energy Corporation (filed as Exhibit 4.3 to Harken's Annual
Report on Form 10-K for fiscal year ended December 31, 1989, File
No. 0-9207, and incorporated by reference herein).
4.5 Certificate of the Designations of Series D Preferred Stock, $1.00
par value of Harken Energy Corporation (filed as Exhibit 4.3 to
Harken's Quarterly Report on Form 10-Q for the fiscal quarter ended
September 30, 1995, File No. 0-9207, and incorporated by reference
herein).
*10.1 Trust Indenture dated July 30, 1996, by and between Harken and
Marine Midland Bank plc.
*10.2 Placing Agreement dated July 19, 1996, by and between Harken and
the various signatories thereto.
*10.3 Global Temporary Note dated July 30, 1996 issued by Harken in the
principal amount of $40,000,000.
*10.4 Association Contract (Bolivar) by and between Harken de Colombia,
Ltd., and Empresa Colombia de Petroleos.
*10.5 Exchange Agreement dated July 11, 1996, by and among Harken, Harken
Exploration Company and Momentum Operating Co., Inc.
*27 Financial Data Schedules.