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SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15 (D)
OF THE SECURITIES EXCHANGE ACT OF 1934
FOR THE QUARTERLY PERIOD ENDED SEPTEMBER 30, 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 (972) 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 October 31, 1996 was 93,461,370 net of 400,896 Treasury
Shares.
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HARKEN ENERGY CORPORATION
INDEX TO QUARTERLY REPORT
SEPTEMBER 30, 1996
PAGE
----
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 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 21
PART II. OTHER INFORMATION . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 32
SIGNATURES . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 34
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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, SEPTEMBER 30,
1995 1996
---------------- ----------------
ASSETS
------
Current Assets:
Cash and temporary investments . . . . . . . . . . . . . . . $ 4,456,000 $ 9,413,000
Cash available in European segregated account . . . . . . . 4,705,000 7,201,000
Accounts receivable, net . . . . . . . . . . . . . . . . . . 1,061,000 2,262,000
Prepaid expenses and other current assets . . . . . . . . . 309,000 202,000
---------------- ----------------
Total Current Assets . . . . . . . . . . . . . . . . . 10,531,000 19,078,000
Property and Equipment, net . . . . . . . . . . . . . . . . . . 52,142,000 68,768,000
Restricted Cash in European Segregated Account . . . . . . . 6,173,000 29,991,000
Notes Receivable from Related Parties, including interest . . . 232,000 232,000
Other Assets, net . . . . . . . . . . . . . . . . . . . . . . . 1,716,000 3,457,000
---------------- ----------------
$ 70,794,000 $ 121,526,000
================ ================
LIABILITIES AND STOCKHOLDERS' EQUITY
------------------------------------
Current Liabilities:
Trade payables . . . . . . . . . . . . . . . . . . . . . . $ 356,000 $ 966,000
Accrued liabilities and other . . . . . . . . . . . . . . . 2,722,000 3,366,000
Notes payable and current portion of long-term obligations . 868,000 --
Revenues and royalties payable . . . . . . . . . . . . . . . 972,000 1,057,000
---------------- ----------------
Total Current Liabilities . . . . . . . . . . . . . . 4,918,000 5,389,000
Long-Term Obligations . . . . . . . . . . . . . . . . . . . . . 13,176,000 --
European Convertible Notes Payable . . . . . . . . . . . . . . 12,550,000 38,600,000
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 93,363,378 shares, respectively . . 759,000 934,000
Additional paid-in capital . . . . . . . . . . . . . . . . . 136,435,000 170,223,000
Retained deficit . . . . . . . . . . . . . . . . . . . . . . (92,047,000) (92,230,000)
Treasury stock, 1,440,896 and 400,896 shares held,
respectively . . . . . . . . . . . . . . . . . . . . . . . (4,997,000) (1,390,000)
---------------- ----------------
Total Stockholders' Equity . . . . . . . . . . . . . . 40,150,000 77,537,000
---------------- ----------------
$ 70,794,000 $ 121,526,000
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The accompanying Notes to Consolidated Condensed Financial Statements
are an integral part of these Statements.
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HARKEN ENERGY CORPORATION AND SUBSIDIARIES
CONSOLIDATED CONDENSED STATEMENTS OF OPERATIONS
(unaudited)
THREE MONTHS ENDED NINE MONTHS ENDED
SEPTEMBER 30, SEPTEMBER 30,
------------------------------ ------------------------------
1995 1996 1995 1996
------------- ------------- ------------- -------------
Revenues:
Oil and gas operations . . . . . . . . . . $ 1,476,000 $ 3,679,000 $ 4,189,000 $ 8,064,000
Interest and other income . . . . . . . . 324,000 436,000 992,000 982,000
------------- ------------- ------------- -------------
1,800,000 4,115,000 5,181,000 9,046,000
Costs and Expenses:
Oil and gas operating expenses . . . . . . 463,000 1,342,000 1,343,000 2,942,000
General and administrative expenses, net . 774,000 1,103,000 2,285,000 2,900,000
Depreciation and amortization . . . . . . 543,000 1,141,000 1,608,000 2,397,000
Interest expense and other . . . . . . . . 302,000 484,000 524,000 990,000
------------- ------------- ------------- -------------
2,082,000 4,070,000 5,760,000 9,229,000
Income (loss) before income taxes . . . (282,000) 45,000 (579,000) (183,000)
Income tax expense . . . . . . . . . . . . . -- -- -- --
------------- ------------- ------------- -------------
Net income (loss) . . . . . . . . . . . $ (282,000) $ 45,000 $ (579,000) $ (183,000)
============= ============= ============= =============
Income (loss) per common share:
Net income (loss) . . . . . . . . . . . $ (0.01) $ 0.00 $ (0.01) $ (0.00)
============= ============= ============= =============
Weighted average shares outstanding . . . . . 65,674,626 92,270,516 63,052,443 83,378,170
============= ============= ============= =============
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 . . . . . 76,000 19,456,000 -- 3,607,000
Conversions of warrants and options . . . 10,000 1,665,000 -- --
Conversions of European notes payable . . 89,000 12,667,000 -- --
Net loss . . . . . . . . . . . . . . . . -- -- (183,000) --
----------- --------------- --------------- ---------------
Balance, September 30, 1996 . . . . . . . . $ 934,000 $ 170,223,000 $ (92,230,000) $ (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)
NINE MONTHS ENDED
SEPTEMBER 30,
-----------------------------
1995 1996
------------ ------------
Cash flows from operating activities:
Net loss . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ (579,000) $ (183,000)
Adjustments to reconcile net loss to net cash provided by (used in)
operating activities:
Depreciation and amortization . . . . . . . . . . . . . . . . . . . . 1,608,000 2,397,000
Forgiveness of related party note receivable . . . . . . . . . . . . 232,000 --
Provision for doubtful accounts . . . . . . . . . . . . . . . . . . . (180,000) --
(Gain) loss on sales of assets and other . . . . . . . . . . . . . . (628,000) 19,000
Accretion of discount on note payable . . . . . . . . . . . . . . . . -- 234,000
Amortization of European note issuance costs . . . . . . . . . . . . 202,000 310,000
Change in assets and liabilities:
Decrease (increase) in accounts receivable . . . . . . . . . . . . . 3,000 (739,000)
Increase (decrease) in trade payables and other . . . . . . . . . . . (1,145,000) 304,000
------------ ------------
Net cash provided by (used in) operating activities . . . . . . . . (487,000) 2,342,000
------------ ------------
Cash flows from investing activities:
Cash from acquired subsidiary . . . . . . . . . . . . . . . . . . . . . . 190,000 --
Proceeds from sales of assets . . . . . . . . . . . . . . . . . . . . . . 3,304,000 177,000
Investor project advances . . . . . . . . . . . . . . . . . . . . . . . . -- 3,125,000
Capital expenditures, net . . . . . . . . . . . . . . . . . . . . . . . (4,505,000) (12,660,000)
------------ ------------
Net cash used in investing activities . . . . . . . . . . . . . . . (1,011,000) (9,358,000)
------------ ------------
Cash flows from financing activities:
Transfers from segregated account cash . . . . . . . . . . . . . . . . . -- 10,878,000
Proceeds from issuances of common stock, net of issuance costs . . . . . 2,801,000 2,964,000
Investment in segregated account cash, net . . . . . . . . . . . . . . . (294,000) (611,000)
Repayment of notes payable and long-term obligations . . . . . . . . . . -- (1,258,000)
------------ ------------
Net cash provided by financing activities . . . . . . . . . . . . . 2,507,000 11,973,000
------------ ------------
Net increase (decrease) in cash and temporary investments . . . . . . . . . . 1,009,000 4,957,000
Cash and temporary investments at beginning of period . . . . . . . . . . . . 2,828,000 4,456,000
------------ ------------
Cash and temporary investments at end of period . . . . . . . . . . . . . . . $ 3,837,000 $ 9,413,000
============ ============
Supplemental disclosures of cash flow information:
Cash paid during the period for:
Interest . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ -- $ 206,000
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
SEPTEMBER 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
September 30, 1996 and the results of its operations and changes in its cash
flows for all periods presented as of September 30, 1995 and 1996. These
adjustments represent normal recurring items. Certain prior year amounts have
been reclassified to conform with the 1996 presentation.
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 nine month period ended September 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.
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 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
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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 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 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. This acquisition 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 May 1995, Search Exploration, Inc.
("Search"), a company engaged primarily in the domestic exploration for, and
development and production of oil and gas, was acquired by Harken pursuant to
an Amended and Restated Agreement and Plan of Merger. Search was merged with
and into Search Acquisition Corp., a wholly-owned subsidiary of Harken. Upon
consummation of the merger, Harken issued approximately 2.2 million shares of
Harken common stock to holders of Search common stock, preferred stock and
promissory notes. In addition, the holders of Search common stock, certain
notes and overriding royalty interests in certain properties of Search received
the contingent right to receive additional shares of Harken common stock based
upon the increase in value of certain properties of Search as of June 30, 1996.
No contingent shares were ultimately required to be issued. The merger was
accounted for under the purchase method of accounting due to the above
mentioned contingently issued 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 to these properties, is
subject to adjustments for property defects identified including title defects,
environmental defects, nonproductive unplugged wells 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
restricted 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 the sale of all shares issued
to the seller. 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.
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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.
NINE MONTHS ENDED
SEPTEMBER 30,
-------------------------------
AVAILABLE-FOR-SALE 1995 1996
------------------ ------------- --------------
Gross Realized Gains $ 81,000 $ --
Gross Realized Losses -- --
(4) PROPERTY AND EQUIPMENT
A summary of property and equipment follows:
DECEMBER 31, SEPTEMBER 30,
1995 1996
--------------- ----------------
Oil and gas properties --
Unevaluated international properties not being amortized . . $ 4,866,000 $ 7,615,000
Unevaluated domestic properties not being amortized . . . . . 11,117,000 10,600,000
Evaluated domestic properties being amortized . . . . . . . . 39,526,000 55,645,000
Gas plants and other property . . . . . . . . . . . . . . . . . 6,746,000 7,429,000
Less accumulated depreciation
and amortization . . . . . . . . . . . . . . . . . . . . . . (10,113,000) (12,521,000)
-------------- ---------------
$ 52,142,000 $ 68,768,000
============== ===============
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(5) NOTES PAYABLE AND LONG-TERM OBLIGATIONS
DECEMBER 31, SEPTEMBER 30,
1995 1996
------------------ ----------------
Note payable to seller of producing properties (A) $ 12,786,000 $ --
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 --
Less amount classified as current liability (868,000) --
------------- --------------
Total long-term obligations $ 13,176,000 $ --
============= ==============
(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. Pursuant to the Panhandle Purchase and Sale Agreement, Harken
Exploration could elect to pay the amounts due at either or both of two
prescribed maturity dates for the notes with shares of Harken common stock.
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 was included in long-term obligations at December 31, 1995.
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, and having an approximate market value of $10,429,000,
in satisfaction of all obligations owed by Harken Exploration to the seller
under the terms of the Panhandle Note. 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. 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.
(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.
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(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"). 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. During the last half of 1995 and up to July 30, 1996, Harken
received notifications that all holders of these 8% European Notes had
exercised their conversion options and Harken issued on aggregate total of
9,999,975 shares of Harken common stock pursuant to these conversions.
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 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 for 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 cash on deposit in the Segregated
Account plus (i) 60% of the aggregate amount of Harken's marketable securities
plus (ii) 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 (iii) the aggregate outstanding principal amount of the 6 1/2%
European Notes. Upon a conversion, any proceeds attributable to the 6 1/2%
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European Notes converted which remain in the Segregated Account may be
withdrawn by Harken without regard to the asset value then existing.
The 6 1/2% European Notes were sold strictly to non-U.S. purchasers in
the form of bearer instruments in $50,000 increments. 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.
During the third quarter of 1996, Harken received notification that
holders of 6 1/2% European Notes totaling $1,400,000 had exercised their
conversion option and such holders were issued 560,000 shares of Harken common
stock pursuant to such conversions.
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.
(7) STOCKHOLDERS' EQUITY
Common Stock - Harken currently has authorized 125,000,000 shares of
$.01 par common stock. At December 31, 1995 and September 30, 1996, Harken had
issued 75,913,832 and 93,363,378 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.
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 September 30, 1996, 616,877 shares of
Harken common stock had been issued upon exercise of such warrants.
Issuance of European Convertible Notes Payable -- At December 31,
1995, $2,450,000 of the 8% European Notes had been converted into 1,633,327
shares of Harken common stock. In 1996, all of the remaining
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outstanding 8% European Notes were converted into 8,366,648 additional shares
of Harken common stock. In connection with the issuance of the 8% European
Notes, 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. See Note 6 - European Convertible Notes Payable for further
discussion. 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. During the third quarter of 1996,
Harken received notification that holders of 6 1/2% European Notes totaling
$1,400,000 had exercised their conversion option and such holders were issued
560,000 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.
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 the
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 acquired 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
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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 restricted 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 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 September 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 2011,
alternative minimum tax NOL carryforward of approximately $56,000,000 which
expires in 1997 through 2011, investment tax credit carryforward of
approximately $860,000 which expires in 1996 through 2002, statutory depletion
carryforward of approximately $1,800,000 which does not have an expiration
date, and a net capital loss carryforward of approximately $12,400,000 which
expires in 2007 through 2011. 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.
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Total deferred tax liabilities, relating primarily to property and
equipment, as of September 30, 1996, computed under the provisions of the
Statement of Financial Accounting Standard No. 109, "Accounting for Income
Taxes", were approximately $3,264,0000. Total deferred tax assets, primarily
related to the net operating loss carryforward, were approximately $22,867,000
at September 30, 1996. The total net deferred tax asset is offset by a
valuation allowance of approximately $19,603,000 at September 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 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 February 1995, Harken drilled its first exploratory well under the
Alcaravan Contract, the Alcaravan #1. 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 September 30, 1996, as unevaluated oil
and gas properties, pending final determination of the results of the well.
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 of up to 40% of the net profits which may
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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% 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. During July 1996 and October 1996, Harken received from
the Palo Blanco Investors the first and second scheduled advances pursuant to
the Palo Blanco Development Finance Agreements each 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 during the third quarter of 1996 and 299,994 restricted
shares of Harken common stock subsequent to September 30, 1996, leaving the
Palo Blanco Investors with an aggregate beneficial interest of up to 20% of the
net profits which may be realized by Harken de Colombia, Ltd. from the Palo
Blanco prospect. The Estero #1 well is expected to be drilled in January 1997
to a depth of 10,500 feet to test the Carbonera, Mirador, Guadalupe, Gacheta
and Ubaque formations.
During September 1996, Harken entered into an operating agreement (the
"Rochester Agreement") with Rochester Minerals, Inc. ("Rochester") pursuant to
which Rochester agreed to provide $1 million to Harken de Colombia, Ltd. for
the exploration and development of the Palo Blanco prospect area. In exchange,
Rochester will acquire a beneficial interest equal to 25% of the 100% interest
of Harken de Colombia, Ltd. in the lands within the Alcaravan prospect except
for the western portion of the block which includes the Alcaravan #1 well,
which was excluded from the Rochester Agreement. During September 1996, Harken
received from Rochester $500,000 due pursuant to the Rochester Agreement and
subsequent to September 30, 1996, Harken received an additional $500,000 due
pursuant to the Rochester Agreement.
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. 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.
On January 19, 1995, after completing an 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 on this Bocachico Contract area,
named the Torcaz #2 well, on July 18, 1996. This well was drilled to an
approximate depth of 8,500 feet and has been evaluated with a series of
electric logs and initial production testing. Harken believes
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that the Torcaz #2 well is currently producing primarily from the Upper Mugrosa
formation and that drilling mud and other solids remain in the lower
potentially productive formations. Additional work will be undertaken in an
attempt to remove any blocking debris throughout the entire section shown to be
oil bearing on well log data. Harken has committed to drilling a second well
thereby extending the Bocachico Contract into its third year, has identified
eight potential well locations and has filed applications for environmental
permits on two 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 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 September 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. Subsequent to September 30, 1996,
Harken had also requested and received the remaining $1,500,000 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 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. 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
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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
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.
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 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.
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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 signed 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 $1,874,000 at September 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 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)
Certain statements included in the following discussion and analysis
of financial condition and results of operation, including statements of Harken
management's current expectations, intentions, plans and beliefs, are forward-
looking statements, as defined in Section 21D of the Securities Exchange Act of
1934, that are dependent on certain events, risks and uncertainties that may be
outside of Harken's control. These forward-looking statements include
statements of management's plans and objectives for Harken's future operations
and statements of future economic performance, information regarding Colombian
drilling schedules, expected or planned production capabilities, Harken's
capital budget and future capital expenditures and the sufficiency and
availability of capital resources needed to fund such future capital
expenditures. Actual results and developments could differ materially from
those expressed in or implied by such statements due to a number of factors,
including general economic conditions; the timing of environmental and other
necessary administrative permits; the impact of the activities of OPEC and
other competitors; the impact of possible geopolitical occurrences world-wide;
the results of financing efforts; changes in laws and regulations; capacity,
deliverability and supply constraints or difficulties; unforeseen engineering
and mechanical or technological difficulties in drilling or working over wells;
and other risks described in Harken's filings with the Securities and Exchange
Commission.
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 NINE MONTHS ENDED
SEPTEMBER 30, SEPTEMBER 30,
----------------------------- ---------------------------
DOMESTIC EXPLORATION AND 1995 1996 1995 1996
------------- ------------- ------------ ------------
PRODUCTION OPERATIONS (UNAUDITED) (UNAUDITED)
REVENUES
Oil sales revenues $ 842,000 $ 2,444,000 $ 2,688,000 $ 5,274,000
Oil volumes in barrels 43,000 118,000 143,000 262,000
Oil price per barrel $ 19.58 $ 20.71 $ 18.80 $ 20.13
Gas sales revenues $ 403,000 $ 1,092,000 $ 909,000 $ 2,238,000
Gas volumes in mcf 263,000 459,000 634,000 949,000
Gas price per mcf $ 1.53 $ 2.38 $ 1.43 $ 2.36
Gas plant revenues $ 231,000 $ 143,000 $ 592,000 $ 552,000
OTHER REVENUES
Interest income $ 234,000 $ 432,000 $ 437,000 $ 817,000
Other income $ 90,000 $ 4,000 $ 555,000 $ 165,000
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OVERVIEW
Harken reported a net loss for the nine months ended September 30, 1996
of $183,000 compared to a net loss of $579,000 for the prior year period.
Total revenues increased from approximately $5.2 million during the first nine
months of 1995 to approximately $9.0 million for the first nine months of 1996,
primarily due to four acquisitions consummated during 1995 and 1996 that
increased Harken's domestic producing properties and oil and gas reserves.
Gross profit from oil and gas operations before depreciation and amortization,
general and administrative and interest expenses totaled approximately $5.1
million during the nine months ended September 30, 1996 compared to
approximately $2.8 million for the prior year period. Gross profit from oil
and gas operations as a percentage of oil and gas sales revenues decreased
slightly during the nine months ended September 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 and
Panhandle 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 was drilled to an approximate depth of 8,500 feet and has been evaluated
with a series of electric logs and initial production testing. Harken believes
that the Torcaz #2 well is currently producing primarily from the Upper Mugrosa
formation and that drilling mud and other solids remain in the lower
potentially productive formations. Additional work is being undertaken in an
attempt to remove any blocking debris throughout the entire section shown to be
oil bearing on well log data. As of September 30, 1996, Harken has recognized
no revenues from its Colombian operations.
Domestically, Harken expects that future production operations from its
properties will continue in 1997 at levels consistent with the third quarter of
1996 for both oil and gas, with declines in production expected to be offset by
increases generated from workover and development activities at all of Harken's
domestic operations locations. General and administrative expenses should
increase during the fourth quarter of 1996 from increases in overall
activities. General and administrative expenses during 1997 are expected to
increase slightly from the amounts recorded during the first nine months of
1996, due to the overall growth in Harken's domestic operations, and in order
to administer Harken's anticipated Colombian production operations.
Depreciation and amortization should continue to relate primarily to Harken's
domestic oil and gas operations, which approximates $5.40 per equivalent barrel
of production.
Internationally, Harken anticipates that 1997 results of operations will
include revenues and expenses from Colombian production operations. With the
successful completion of the Torcaz #2, Harken is now performing additional
procedures designed to increase production rates on this well and also is
continuing its plans to develop the Torcaz field with the spudding of the
Torcaz #3 well planned near the end of 1996.
FOR THE NINE MONTHS ENDED SEPTEMBER 30, 1996 COMPARED WITH THE CORRESPONDING
PRIOR PERIOD.
DOMESTIC OPERATIONS
Gross oil and gas revenues during the first nine months of 1995 and 1996
were generated by Harken's domestic exploration and production operations.
During the first nine months of 1995 these domestic operations consisted
primarily of the operations of Harken Southwest Corporation ("HSW"). 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.
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During the first nine 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 has been impacted by the October 1995
acquisition of the Yellowhouse Properties in the western region of Texas, the
December 1995 acquisition of the Panhandle Properties located in the panhandle
region of Texas, and the July 1996 acquisition of the EnerVest Properties
located in Arkansas and New Mexico.
Gross oil revenues increased significantly during the first nine 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 $1,503,000 to the first nine months of 1996 oil revenues, while
the Panhandle Properties contributed approximately $158,000 to the first nine
months of 1996 oil revenues. The July 1996 acquisition of the EnerVest
Properties increased 1996 oil revenues by approximately $867,000. 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 nine months
ended September 30, 1996 compared to the prior year period, again due to the
acquisitions consummated during 1995 and 1996. The Panhandle Properties
contributed approximately $920,000 to the first nine months of 1996 gas
revenues, despite many of the properties experiencing numerous temporary
operational curtailments during the first quarter. 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 $3.88 per mcf
for Panhandle Property gas during the first nine months of 1996. Harken also
recorded approximately $428,000 of gas revenues from the acquisition of Search
and approximately $229,000 of gas revenues from the EnerVest Properties.
Gas plant revenues were impacted negatively during the third quarter of
1996 due to plant shutdowns experienced due to operational problems at the
Aneth Gas Plant. The plant has now resumed normal operations.
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 state severance taxes, state property taxes, Utah conservation taxes
and Navajo severance and possessory interest taxes. The increase in oil and
gas operating expenses during the nine months ended September 30, 1996 compared
to the prior period is as a result of the above mentioned acquisitions,
specifically resulting in approximately $581,000 from the Yellowhouse
Properties, approximately $434,000 from the Panhandle Properties, approximately
$300,000 from the EnerVest Properties, and approximately $119,000 from the
Search operations.
INTEREST AND OTHER INCOME
Other income decreased during the first nine months of 1996 compared to
the prior period as during the first nine 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. Interest income has increased
sharply during the first nine months of 1996, as Harken recognized
approximately $600,000 of interest income earned on proceeds received from the
issuance in May 1995 of $15 million of European 8% Senior Convertible Notes
Payable (the "8% European Notes") and $40 million of European 6 1/2% Senior
Convertible Notes Payable (the "6 1/2% European Notes") issued in July 1996
compared to $294,000 of such interest income during the first nine months of
1995. Such proceeds, net of issuance costs and amounts released and
transferred, are maintained and invested in a separate interest bearing bank
account (the "Segregated Account").
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OTHER COSTS AND EXPENSES
General and administrative expenses increased from $2,285,000 for the
first nine months of 1995 to $2,900,000 for the first nine months of 1996,
primarily as a result of increased personnel and office costs associated with
the acquisitions consummated during 1995 and 1996. General and administrative
expenses decreased as a percentage of total revenues due to Harken's efforts to
maximize efficiency and absorb much of its domestic growth with its existing
personnel and office cost structure.
Depreciation and amortization expense increased during the first nine
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
and 1996. 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 nine
months of 1996 compared to the prior year period. The May 1995 issuance of the
8% European Notes generated interest expense during the nine months ended
September 30, 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. The July 1996 issuance of the 6 1/2%
European Notes generated interest expense during the nine months ended
September 30, 1996 of $352,000, net of amounts of interest capitalized, and
approximately $132,000 of amortization of issuance costs associated with the 6
1/2% European Notes. In addition, 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 nine months of
1996 prior to the exchange of such note on July 11, 1996.
FOR THE QUARTER ENDED SEPTEMBER 30, 1996 COMPARED WITH THE CORRESPONDING PRIOR
PERIOD.
Harken reported net income of $45,000 for the three months ended
September 30, 1996 compared to a net loss of $282,000 for the third quarter of
1995. Total revenues increased from approximately $1.8 million during the
third quarter of 1995 to approximately $4.1 million for the third quarter of
1996, primarily due to the acquisitions consummated during 1995 and 1996.
Gross profit from oil and gas operations before depreciation and amortization,
general and administrative and interest expenses totaled approximately $2.3
million during the third quarter of 1996 compared to approximately $1.0 million
during the prior year period.
DOMESTIC OPERATIONS
Gross oil revenues increased significantly during the third 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 $524,000 to third quarter 1996 oil revenues, and the EnerVest
Properties contributed approximately $867,000 of third quarter oil revenues,
while the Panhandle Properties contributed approximately $51,000 to third
quarter 1996 oil revenues. Overall, oil prices were particularly strong during
the third quarter of 1996, averaging $20.71 per barrel compared to $19.58
during the third quarter of 1995.
Gross gas revenues also increased significantly for the three months
ended September 30, 1996 compared to the prior year period, due to the
acquisitions consummated during 1995 and 1996. The Panhandle Properties and
EnerVest Properties contributed approximately $384,000 and $229,000,
respectively, to third quarter 1996 gas revenues. Harken also recorded
approximately $252,000 of gas revenues from the acquisition of Search, due
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to newly completed gas wells, compared to only a minimal amount of revenues
from Search properties during the third quarter of 1995.
Gas plant revenues were impacted negatively during the third quarter of
1996 due to plant shutdowns experienced due to operational problems at the
Aneth Gas Plant. The plant has now resumed normal operations.
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 state severance taxes, state property taxes, Utah conservation taxes
and Navajo severance and possessory interest taxes. The increase in third
quarter 1996 oil and gas operating expenses compared to the prior year is a
result of the above mentioned acquisitions, specifically resulting in
approximately $195,000 from the Yellowhouse Properties, approximately $222,000
from the Panhandle Properties, approximately $300,000 from the EnerVest
Properties, and approximately $58,000 from the Search operations.
INTEREST AND OTHER INCOME
Interest income increased significantly during the third quarter of 1996
compared to the prior period due to the inclusion of interest income earned by
Harken on proceeds received from the July 1996 issuance of $40 million of the 6
1/2% European Notes compared to the interest earned on the $15 million proceeds
from the 8% European Notes.
OTHER COSTS AND EXPENSES
General and administrative expenses increased from $774,000 for the
third quarter of 1995 to $1,103,000 for the third quarter of 1996, primarily as
a result of increased personnel and office costs associated with the
acquisitions consummated during 1995 and 1996. General and administrative
expenses decreased as a percentage of total revenues due to Harken's efforts to
maximize efficiency and absorb much of its domestic growth with its existing
personnel and office cost structure.
Depreciation and amortization expense increased during the third 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 increased during the third quarter of 1996
compared to the prior year period due to the 6 1/2% European Notes which were
issued in July 1996 and which resulted in interest expense during the third
quarter of 1996 of approximately $352,000 net of amounts of interest
capitalized, and approximately $132,000 of amortization of issuance costs
associated with the 6 1/2% European Notes. Interest expense and other during
the third quarter of 1995 included net interest expense of approximately
$150,000 and approximately $129,000 of amortization of issuance costs
associated with the 8% European Notes.
LIQUIDITY AND CAPITAL RESOURCES
During the first nine months of 1996, Harken's working capital increased
approximately $8.1 million, primarily due to the availability of approximately
$7.2 million of unrestricted funds held in the Segregated Account relating to
the 6 1/2% European Notes issued in July 1996. In addition, proceeds of
approximately $6.2 million from the 8% European Notes which were restricted as
of December 31, 1995 became available and were transferred
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from the Segregated Account during the first nine months of 1996, although $5
million of these proceeds were used in the EnerVest Property acquisition as of
July 1996. Harken also generated approximately $3.0 million of net proceeds
during the first nine months of 1996 from the conversion of certain options and
warrants and from a March 1996 private placement of Harken common stock.
Partially offsetting these increases in working capital during the first nine
months of 1996 were capital expenditures relating to Harken's domestic and
international capital projects.
During the nine months ended September 30, 1996, Harken's cash and
temporary investments increased approximately $5.0 million consisting primarily
of transfers from the European Segregated Account of $10.9 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
and Rochester Agreement of $2.5 million. Such activity was sufficient to fund
capital expenditures of approximately $12.7 million and repayments of notes
payable and long-term obligations of approximately $1.3 million. Cash flow
provided by operations during the first nine months of 1996 totaled
approximately $2.3 million.
Harken believes that cash flow from operations will be sufficient to
meet its operating cash requirements in 1997. 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.
In July 1996, Harken 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 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 at closing to a Trustee pursuant to a Trust
Indenture and are held in a Segregated Account to be maintained for Harken's
benefit.
The Trust Indenture under which the 6 1/2% European Notes were issued
requires Harken to maintain an Asset Value Coverage Ratio 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 September 30,
1996, Harken was in compliance with the Asset Value Coverage Ratio test and 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 $7,201,000.
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
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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 in the Segregated
Account.
Also during July 1996, Harken strengthened its 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 restricted 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 the sale of all shares issued to the seller. 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.
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. 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 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.
Harken's operating strategy includes efforts to find additional
opportunities to acquire domestic oil and gas reserves through merger and
acquisitions, in exchange for cash, debt or issuance of Harken common stock.
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 September 30, 1996, Harken's net investment in
its Colombian operations has totaled approximately $7.6 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".
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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. Any costs incurred to drill these
two wells in excess of the amounts funded by the Rio Negro Investors will be
borne by Harken. As of September 30, 1996, Harken had requested and received
$2,000,000 pursuant to the Rio Negro Development Finance Agreement. Subsequent
to September 30, 1996, Harken had also requested and received the remaining
$1,500,000 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 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.
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 of up to 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
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regard thereto. During July 1996 and October 1996, Harken received from the
Palo Blanco Investors the first and second scheduled advances pursuant to the
Palo Blanco Development Finance Agreements each 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 during the third quarter of 1996 and 299,994 restricted shares of
Harken common stock subsequent to September 30, 1996, leaving the Palo Blanco
Investors with an aggregate beneficial interest of up to 20% of the net profits
which may be realized by Harken de Colombia, Ltd. from the Palo Blanco
prospect.
During September 1996, Harken entered into an operating agreement (the
"Rochester Agreement") with Rochester Minerals, Inc. ("Rochester") pursuant to
which Rochester agreed to provide $1 million to Harken de Colombia, Ltd. for
the exploration and development of the Palo Blanco prospect area. In exchange,
Rochester will acquire a beneficial interest equal to 25% of the 100% interest
of Harken de Colombia, Ltd. in the lands within the Alcaravan prospect except
for the western portion of this block which includes the Alcaravan #1 well,
which was excluded from the Rochester Agreement. During September 1996, Harken
received from Rochester $500,000 due pursuant to the Rochester Agreement and
subsequent to September 30, 1996, Harken received an additional $500,000 due
pursuant to the Rochester Agreement.
During the third quarter of 1996, Harken's Board of Directors approved a
three year $60 million exploration program for the Middle Magdalena and Llanos
Basins of Colombia. The program includes drilling to evaluate twelve currently
identified prospects over approximately 75,000 acres. In addition to the
drilling program, Harken plans to conduct additional new geologic and
engineering studies directed at specific prospect "leads" beginning in 1997 on
an additional 125,000 acres in compliance with the various Association Contract
work programs. Plans to evaluate the remaining 800,000 acres currently held by
Harken in Colombia will be finalized over the next twenty-four months.
The above mentioned exploration program timetable anticipates Harken
drilling, on average, one Colombian prospect per quarter beginning in 1997.
The timetable does not include new prospects that may subsequently be
identified through seismic and geologic studies nor the development wells which
would be required if an exploratory well is successful. Some of the drilling
program activities will test potential formations created by the thrust fault
tectonics which are present in the Middle Magdalena Basin of Colombia.
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. Capital
expenditures related to Harken's Colombian operations are expected to total a
minimum of approximately $15 million during 1997, including a minimum of
approximately $6 million related to total activity required under Harken's
Association Contracts. Such capital expenditures in excess of amounts required
will be incurred only to the extent that cash flows from operations or capital
resources are available. Drilling and completion operations for the Torcaz #2
were successfully completed during late August 1996. This well was drilled to
a projected depth of approximately 8,500 feet and has been evaluated with a
series of electric logs and initial production testing. Harken has already
identified eight additional well locations on the Torcaz prospect and has filed
applications for environmental permits on two well locations within the
Bocachico Contract area. The next well to be drilled in this prospect area, the
Torcaz #3, is expected to be spudded near the end of 1996.
Harken is currently negotiating with several potential industry and
financial partners with the objective of farming out a portion of its interests
in various prospects.
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 also require extensive production facilities which would require
significant additional capital
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expenditures. The ultimate amount of such expenditures cannot be presently
predicted. Harken anticipates that amounts required to fund its Colombian
activities, including the above mentioned exploration programs and additional
development expenditures, will be funded from existing cash balances, asset
sales, the proceeds from the 6 1/2% European Notes, future 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 Colombian activities or that industry partners can be obtained to
fund such Colombian activities.
Domestically, Harken plans to continue development of proved undeveloped
reserves on properties with minimal development risk in addition to a continual
workover program on producing properties. The targeted results of these
efforts are, at a minimum, to replace production declines to maintain cash flow
at a reasonably steady rate in 1997. Such efforts will be completed with
minimal planned increases in general and administrative expenses for 1997
compared to the level of such expenses reflected during the quarter ended
September 30, 1996.
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 $1,874,000 at September 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.
Although the outcome of the litigation matter described above is
uncertain, Harken does not believe that any liability to Harken as
a result of such matter will have a material adverse effect on
Harken's financial condition.
Harken previously reported that it had 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. In September 1996, the plaintiff dismissed
Harken from the lawsuit. The dismissal was without prejudice to
refiling.
Item 2. Changes in Securities.
Not applicable.
Item 3. Default Upon Senior Securities.
Not applicable.
Item 4. Submission of Matters to a Vote of Securities Holders.
Not applicable.
Item 5. Other Information
Not applicable.
Item 6. Exhibits and Reports on Form 8-K.
(a) EXHIBIT INDEX
Exhibit
3.1 Certificate of Incorporation of Harken Energy Corporation
as amended (filed as Exhibit 3.1 to Harken's Annual
Report on Form 10-K for fiscal year ended December 31,
1989, File No. 0-9207, and incorporated by reference
herein).
3.2 Amendment to the Certificate of Incorporation of Harken
Energy Corporation (filed as Exhibit 28.8 to the
Registration Statement on Form S-1 of Tejas Power
Corporation, file No. 33-37141, and incorporated by
reference herein.)
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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 Harken Energy Corporation 1996 Incentive and Nonstatutory
Stock Option Plan.
*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.
______________________
*Filed herewith
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HARKEN ENERGY CORPORATION
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
Harken Energy Corporation
------------------------------------------
(Registrant)
Date: November 11, 1996 By: /s/ Bruce N. Huff
----------------------- -------------------------------------------
Bruce N. Huff, Senior Vice President and
Chief Financial Officer
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INDEX TO EXHIBITS
EXHIBIT
NUMBER DESCRIPTION
- ------- -----------
10.1 - Harken Energy Corporation 1996 Incentive and Nonstatutory
Option Plan.
27 - Financial Data Schedule