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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 MARCH 31, 1997
| | TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
FOR THE TRANSITION PERIOD FROM TO
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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 April 30, 1997 was 104,698,246.
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HARKEN ENERGY CORPORATION
INDEX TO QUARTERLY REPORT
MARCH 31, 1997
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...................................... 19
PART II. OTHER INFORMATION
Notes Concerning Other Information............................. 25
SIGNATURES ............................................................... 27
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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, MARCH 31,
1996 1997
------------- -------------
ASSETS
Current Assets:
Cash and temporary investments ......................... $ 9,855,000 $ 26,077,000
Cash in European segregated accounts ................... 37,662,000 21,531,000
Accounts receivable, net ............................... 2,058,000 2,016,000
Prepaid expenses and other current assets .............. 263,000 415,000
------------- -------------
Total Current Assets ............................. 49,838,000 50,039,000
Property and Equipment, net ............................... 70,035,000 77,238,000
Other Assets, net ......................................... 3,127,000 1,992,000
------------- -------------
$ 123,000,000 $ 129,269,000
============= =============
LIABILITIES AND STOCKHOLDERS' EQUITY
Current Liabilities:
Trade payables ........................................ $ 1,272,000 $ 1,726,000
Accrued liabilities and other .......................... 3,889,000 3,294,000
Revenues and royalties payable ......................... 900,000 821,000
------------- -------------
Total Current Liabilities ........................ 6,061,000 5,841,000
European Convertible Notes Payable ........................ 38,600,000 24,550,000
Commitments and Contingencies (Note 9)
Stockholders' Equity:
Common stock, $0.01 par value; 150,000,000 shares
authorized; 93,862,266 and 103,158,246 shares issued,
respectively ......................................... 939,000 1,032,000
Additional paid-in capital ............................. 171,191,000 190,176,000
Retained deficit ....................................... (92,401,000) (92,330,000)
Treasury stock, 400,896 shares held at December 31, 1996 (1,390,000) --
------------- -------------
Total Stockholders' Equity ....................... 78,339,000 98,878,000
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$ 123,000,000 $ 129,269,000
============= =============
The accompanying Notes to Consolidated Condensed Financial Statements
are an integral part of these Statements.
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HARKEN ENERGY CORPORATION AND SUBSIDIARIES
CONSOLIDATED CONDENSED STATEMENTS OF OPERATIONS
(unaudited)
THREE MONTHS ENDED
MARCH 31,
----------------------------
1996 1997
------------ ------------
Revenues:
Oil and gas operations ................. $ 1,997,000 $ 3,680,000
Interest and other income .............. 344,000 571,000
------------ ------------
2,341,000 4,251,000
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Costs and Expenses:
Oil and gas operating expenses ......... 760,000 1,239,000
General and administrative expenses, net 817,000 1,334,000
Depreciation and amortization .......... 627,000 1,091,000
Interest expense and other ............. 433,000 519,000
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2,637,000 4,183,000
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Income (loss) before income taxes .... (296,000) 68,000
Income tax expense ........................ -- --
------------ ------------
Net income (loss) .................... $ (296,000) $ 68,000
============ ============
Income (loss) per common share:
Net income (loss) .................... $ (0.00) $ 0.00
============ ============
Weighted average shares outstanding ....... 75,151,824 100,033,496
============ ============
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, 1995 ............. $ 759,000 $136,435,000 $(92,047,000) $ (4,997,000)
Issuance of common stock, net ......... 90,000 22,090,000 -- 3,607,000
Conversions of European notes payable . 90,000 12,666,000 -- --
Equity adjustment from foreign currency
translation ........................ -- -- (13,000) --
Net loss .............................. -- -- (341,000) --
------------ ------------ ------------ ------------
Balance, December 31, 1996 ............. 939,000 171,191,000 (92,401,000) (1,390,000)
Issuance of common stock, net ......... 40,000 7,376,000 -- --
Conversions of European notes payable . 53,000 11,609,000 -- 1,390,000
Equity adjustment from foreign
currency translation .................. -- -- 3,000 --
Net income ............................ -- -- 68,000 --
------------ ------------ ------------ ------------
Balance, March 31, 1997 ................ $ 1,032,000 $190,176,000 $(92,330,000) $ --
============ ============ ============ ============
The accompanying Notes to Consolidated Condensed Financial Statements are
an integral part of these Statements.
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HARKEN ENERGY CORPORATION AND SUBSIDIARIES
CONSOLIDATED CONDENSED STATEMENTS OF CASH FLOWS
(unaudited)
THREE MONTHS ENDED
MARCH 31,
----------------------------
1996 1997
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Cash flows from operating activities:
Net income (loss) .......................................................... $ (296,000) $ 68,000
Adjustments to reconcile net income (loss) to net cash
provided by operating activities:
Depreciation and amortization ......................................... 627,000 1,091,000
Loss on sales of assets and other ..................................... 19,000 --
Accretion of note payable ............................................. 234,000 --
Amortization of European note issuance costs .......................... 122,000 166,000
Change in assets and liabilities:
Decrease in accounts receivable ....................................... 124,000 42,000
Decrease in trade payables and other .................................. (369,000) (478,000)
------------ ------------
Net cash provided by operating activities ........................... 461,000 889,000
------------ ------------
Cash flows from investing activities:
Proceeds from sales of assets .............................................. 167,000 --
Investor advances .......................................................... 1,000,000 2,623,000
Capital expenditures, net .................................................. (1,935,000) (5,394,000)
------------ ------------
Net cash used in investing activities ............................... (768,000) (2,771,000)
------------ ------------
Cash flows from financing activities:
Transfer from segregated account cash ...................................... 800,000 15,295,000
Proceeds from issuances of common stock, net of issuance costs ............. 1,289,000 2,051,000
Repayment of notes payable and long-term obligations ....................... (926,000) --
Investment in segregated account cash, net ................................. (125,000) 758,000
------------ ------------
Net cash provided by financing activities ........................... 1,038,000 18,104,000
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Net increase in cash and temporary investments ................................ 731,000 16,222,000
Cash and temporary investments at beginning of period ......................... 4,456,000 9,855,000
------------ ------------
Cash and temporary investments at end of period ............................... $ 5,187,000 $ 26,077,000
============ ============
Supplemental disclosures of cash flow information:
Cash paid during the quarter for:
Interest ................................................................. $ 26,000 $ --
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
MARCH 31, 1996 AND 1997
(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, 1996 and March 31, 1997 and the results of its operations and changes in
its cash flows for all periods presented as of March 31, 1996 and 1997. These
adjustments represent normal recurring items.
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 for the year
ended December 31, 1996.
The results of operations for the three month period ended March 31,
1997 are not necessarily indicative of the results to be expected for the full
year.
(2) ACQUISITIONS
Acquisition of EnerVest Properties - On July 10, 1996 Harken, along
with Harken Exploration, a wholly- owned subsidiary, purchased working
interests in certain producing oil and gas properties located in the Magnolia
region of Arkansas and in the Carlsbad region of New Mexico (the "EnerVest
Properties") from EnerVest Acquisition-II Limited Partnership ("EnerVest"). The
purchase price of approximately $15,200,000, plus the assumption of certain
operational liabilities relating to these properties, 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 1,400,000 shares of Harken common stock
which were issued in March 1997. 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
initially included adjustment provisions pursuant to which Harken was to be
obligated to issue additional shares of Harken common stock if the seller did
not realize at least $10,200,000 from the sale of all shares of Harken common
stock issued to the seller. In addition, the seller was to maintain a lien on
these properties until such time as it had received or recognized approximately
$7,000,000 in proceeds from the sales of all shares of Harken common stock it
received. This initial contingent issuance of shares of Harken common stock and
the lien on the properties were eliminated with the March 1997 issuance of the
1,400,000 shares of Harken common stock.
Acquisition of Additional Four Corners Property Interests - During the
second quarter of 1996, Harken acquired additional interests in its oil and gas
operations in the Four Corners area of Arizona, Utah and New Mexico (the "Four
Corners Properties") which resulted in Harken increasing its ownership in the
Navajo Reservation reserves, exploration acreage, development drilling
locations
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and the Aneth Gas Plant. The acquisition of the sellers' interest
raised Harken's total interest in the Four Corners Properties from
approximately 82% to approximately 94% of Harken's total operated interest. The
consideration 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 seller relating to the property interests.
(3) PROPERTY AND EQUIPMENT
A summary of property and equipment follows:
DECEMBER 31, MARCH 31,
1996 1997
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Oil and gas properties--
Unevaluated international properties not being amortized $ 3,656,000 $ 5,032,000
Unevaluated domestic properties not being amortized .... 6,610,000 6,643,000
Evaluated international properties not being amortized . 5,802,000 11,663,000
Evaluated domestic properties being amortized .......... 60,188,000 61,013,000
Gas plant and other property ........................... 7,500,000 7,713,000
Less accumulated depreciation and amortization ......... (13,721,000) (14,826,000)
------------ ------------
$ 70,035,000 $ 77,238,000
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(4) 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. 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 currently requires Harken to conduct
a seismic and exploratory drilling program on approximately 210,000 acres in
the Alcaravan area during the initial six 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 one or more fields 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 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 three years of the Alcaravan Contract.
Upon a discovery of a field capable of commercial production, and upon
commencement of production from that commercial field, Ecopetrol will reimburse
Harken for 50% of Harken's successful well costs expended up to the point of
declaration of a commercial discovery. Production from the 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 and
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 commercially declared field is discovered on the Alcaravan area, the
production sharing percentages applicable to the field with the greatest
cumulative production will be
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applied to all fields within the Alcaravan area. After declaration of a
commercial discovery, Harken and Ecopetrol will be responsible for all future
development costs and operating expenses in direct proportion to their interest
in production.
In February 1995, Harken drilled the first well on the Alcaravan
acreage, the Alcaravan #1. The well was initially determined not to be
economically productive, however, Harken intends to re-enter the well during
the next contract year to finalize the evaluation of this well. The drilling of
this well satisfied the contractual obligations of the second year of the
Alcaravan Contract.
During 1996, Harken renegotiated certain terms of the Alcaravan
Contract with Ecopetrol and amended the original contract to provide for an
extension of time to fulfill the work requirements corresponding to the third
contractual year of the Alcaravan Association Contract. The amended third year
contractual work obligations required Harken to drill one exploratory well and
return approximately 40% of the original acreage contracted. Harken spudded the
Estero #1 exploratory well located on the Palo Blanco prospect within the
Alcaravan area in early February 1997, and drilled to a depth of 8,608 feet to
test the Carbonera, Mirador, Guadalupe, Gacheta and Ubaque formations, thus
satisfying the third year requirements of the Alcaravan Association Contract.
Initial production testing of the Ubaque formation of the Estero #1 well,
produced with an electric submersible pump, indicated a rate of 4,116 barrels
of oil per day. This production rate was limited by the capacity of the
submersible pump and surface storage facilities at the location. Harken is
currently awaiting approval by Ecopetrol to initiate trucking operations to
produce and sell crude oil throughout the rainy season in the Llanos Basin of
Colombia. Harken is also completing studies to determine appropriate pipeline
connections to efficiently produce this field.
During September 1996, Harken de Colombia, Ltd. entered into an
operating agreement (the "Rochester Agreement") with Rochester Minerals, Inc.
("Rochester", a Canadian corporation) pursuant to which Rochester agreed to pay
331/3% of the aggregate costs of the initial well to be drilled on the Palo
Blanco prospect, the Estero #1 well, in conjunction with a non-refundable
project contribution of $500,000. In exchange, Rochester, upon its full
performance, will acquire a beneficial interest equal to 25% of the interest
held by Harken de Colombia, Ltd. in the Alcaravan contract, except as it
relates to the area around the Alcaravan #1. In April 1997, Rochester committed
to pay 25% of the aggregate costs related to the second well to be drilled on
the Palo Blanco prospect, the Estero #2, and the initial well to be drilled on
the Anteojos prospect. In exchange, Rochester will acquire a beneficial
interest equal to 25% of the interest for each of these wells held by Harken de
Colombia, Ltd. Both of these wells are scheduled to be spud in early 1998.
In January 1997, Harken de Colombia, Ltd. entered into a financing
agreement ("the Parkcrest Financing Agreement") with Parkcrest Explorations,
Ltd. ("Parkcrest", a Canadian corporation) which covers the Palo Blanco
prospect, and includes options on additional prospects, all located within the
Alcaravan Contract area. Under the terms of the Parkcrest Financing Agreement,
Parkcrest paid a project fee of $250,000 to Harken and prepaid 331/3% of the
estimated drilling and completion costs of the initial well to be drilled on
the Palo Blanco prospect in exchange for a beneficial interest equal to 25% of
the interest held by Harken de Colombia, Ltd. in the Palo Blanco prospect.
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
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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 lands 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 exploratory well during each
contract year.
On January 19, 1995, Harken committed 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 completed and initially tested at the
rate of 635 barrels per day. Harken has encountered numerous mechanical
problems with the down-hole submersible electric pump compounded by apparent
reservoir formation damage which may have occurred in the completion process.
Harken will be carrying out recompletion efforts on this well as well as
further remedial work after the drilling of the Torcaz #3 well.
On February 27, 1996, Harken committed to the drilling of a second well
thereby extending the Bocachico Contract into its third year and in May 1997
received an extension of the third year of the Bocachico Contract to July 5,
1997 to complete this second well. Harken announced in late April 1997 that
drilling operations had begun on the Torcaz #3 well, which is expected to reach
a depth of approximately 8,000 feet and will take approximately 30 days to
drill and an additional 30 days to test and evaluate. The well is expected to
test two oil-prone zones prevalent in the Middle Magdalena Basin: the Mugrosa
and Esmeralda formations. Harken has further currently identified eight
additional potential well locations and has filed applications for
environmental permits on two additional well locations within the Bocachico
Contract area.
In October 1995, Harken entered into a Development Finance Agreement (the
"Rio Negro Development Finance Agreement") with Arbco Associates L.P., Offense
Group Associates L.P., Kayne Anderson Nontraditional Investments L.P. and
Opportunity Associates L.P. (collectively, the "Rio Negro Investors"), pursuant
to which the Rio Negro Investors agreed to provide up to $3,500,000 to Harken
to finance drilling 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"). Pursuant to
the Rio Negro Development Finance Agreement, Harken is obligated to drill two
wells on the Rio Negro prospect. The drilling of the Torcaz #3 well will
fulfill this commitment by Harken.
Pursuant to the Rio Negro Development Finance Agreement, the Rio Negro
Investors have the right at any time prior to January 11, 1998 (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 during a 10 day period following 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
in lieu of Preferred Stock equal to the amount of the balance of the remaining
unexchanged Participation plus an additional amount computed at a 25% annual
rate of return. 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 will 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
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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.
In March 1997, Harken and the Rio Negro Investors entered into a
Conversion Agreement whereby Harken purchased 75% of the Participation relating
to the Rio Negro Development Finance Agreement in exchange for 900,000
restricted shares of Harken common stock to be issued within 30 days following
closing. With respect to the remaining 25% interest held by the Rio Negro
Investors, the Rio Negro Development Finance Agreement was not modified by the
Conversion Agreement.
Playero Contract -- In December 1994, Harken de Colombia, Ltd. signed
its third Association Contract (the "Playero Contract") with Ecopetrol,
covering the Playero Contract area located in the Llanos Basin of Colombia. 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 recognized an impairment in the carrying value of this investment of
$19,000 during the first quarter of 1996 which represented Harken's total
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 an additional Association Contract (the "Cambulos 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 is
required to conduct geologic studies on the lands covered by this contract,
including reprocessing of at least 400 kilometers of existing seismic data and
the acquisition of at least 90 kilometers of new seismic data. As of March 31,
1997, Harken has completed a preliminary environmental study for the Cambulos
Contract area and is currently conducting the obligatory work program required
during the first two years of the Cambulos Association contract. 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 exploratory 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 and at the initiation
of production from the commercial field, Harken will be reimbursed by Ecopetrol
for 50% of all seismic costs and dry well costs incurred prior to the point at
which a declaration of a commercial discovery is made in addition to being
reimbursed for 50% of its successful direct exploratory well costs expended up
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
development costs and operating expenses in direct proportion to their interest
in production.
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Subject to rig availability and receipt of all necessary permits,
Harken plans to drill its first exploratory well on the Cambulos Contract area
in the fall of 1997.
Bolivar Contract -- In May 1996, Harken de Colombia, Ltd. signed an
additional Association Contract (the "Bolivar 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 the 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 350
kilometers of existing 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 exploratory well during each contract year. The
production sharing arrangements under the Bolivar Contract are substantially
similar to those under the Cambulos Contract.
Subject to rig availability and receipt of all necessary permits,
Harken intends to drill its first exploratory well on the Bolivar Contract area
in the summer of 1997.
(5) 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. Between September 30, 1995 and July 30, 1996, all holders of
these 8% European Notes exercised their conversion options and Harken issued an
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. 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. Interest incurred 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 February 1997, Harken gave notice
as required under the Trust Indenture that it had met the market price criteria
necessary to call for mandatory conversion of the 6 1/2% European Notes,
therefore, at any time after July 30, 1997, Harken is able to convert the 6
1/2% European Notes into shares of Harken common stock. Harken intends to
mandatorily convert all unconverted 6 1/2% European Notes into shares of Harken
common stock on July 31, 1997.
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Upon closing, all proceeds from the sale of the 6 1/2% European Notes
were initially paid to a Trustee under the terms of a Trust Indenture and held
in separate interest bearing Trust accounts (the "Segregated Accounts") to be
maintained for Harken's benefit, until the Trustee is presented with evidence
of sufficient asset value, as defined in the Trust Indenture, held by Harken to
permit an advance of a portion of the proceeds. Until all of the 6 1/2%
European Notes are converted, Harken must maintain an Asset Value Coverage
Ratio equal to or greater than 1:1 which is calculated as the ratio of (i) the
sum of (x) 100% of the aggregate amount of Harken's cash on deposit in the
Segregated Accounts plus (y) 60% of the aggregate amount of Harken's marketable
securities plus (z) 50% of the net present value of Harken's domestic
unencumbered total proved reserves of which at least 75% thereof must be proved
developed producing reserves to (ii) the aggregate outstanding principal amount
of the 6 1/2% European Notes. Upon a conversion, any proceeds attributable to
the 6 1/2% European Notes converted which remain in the Segregated Accounts 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 last half of 1996, holders of 6 1/2% European Notes
totaling $1,400,000 exercised their conversion option and such holders were
issued 560,000 shares of Harken common stock. During the first quarter of 1997,
holders of 6 1/2% European Notes totaling $14,050,000 exercised their
conversion option and such holders were issued 5,620,000 shares of Harken
common stock. Subsequent to March 31, 1997, and as of April 30, 1997, holders
of 6 1/2% European Notes totaling an additional $3,600,000 exercised their
conversion option, which has resulted in the additional issuance of 1,440,000
shares of Harken common stock.
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.
All Segregated Account cash is reflected as a current asset at
December 31, 1996, and March 31, 1997 as Harken has the intent and ability to
convert all outstanding 6 1/2% European Notes to Harken common stock prior to
December 31, 1997. During March 1997, Harken transferred approximately $15.3
million of 6 1/2% European Note proceeds from the Segregated Accounts to
Harken's operating cash account due to the conversions of the 6 1/2% European
Notes. 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
Accounts are included in cash flows from financing activities in the
accompanying consolidated statements of cash flows.
(6) STOCKHOLDERS' EQUITY
Common Stock -- Harken currently has authorized 150,000,000 shares of
$.01 par common stock. At December 31, 1996 and March 31, 1997, Harken had
issued 93,862,266 and 103,158,246 shares, respectively. Harken held 400,896
shares as treasury stock at a cost of $1,390,000 at December 31, 1996.
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Acquisition of Additional Four Corners Property Interests -- In April
1996, Harken acquired an additional interest in the Four Corners Properties in
exchange for, among other consideration, 509,000 restricted shares of Harken
common stock. See Note 2 -- Acquisitions for further discussion.
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 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.
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 last half of 1996, holders
of 6 1/2% European Notes totaling $1,400,000 exercised their conversion option
and such holders were issued 560,000 shares of Harken common stock. During the
first quarter of 1997, holders of 6 1/2% European Notes totaling $14,050,000
exercised their conversion option and such holders were issued 5,620,000 shares
of Harken common stock, a portion of which had been held as treasury shares.
Subsequent to March 31, 1997, and as of April 30, 1997, additional holders of 6
1/2% European Notes totaling $3,600,000 exercised their conversion option,
which has resulted in the additional issuance of 1,440,000 shares of Harken
common stock. In February 1997, Harken gave notice as required under the Trust
Indenture that it had met the market price criteria necessary to call for
mandatory conversion of the 6 1/2% European Notes (see Note 5 -- European
Convertible Notes Payable for further discussion), therefore, at any time after
July 30, 1997, Harken is able to convert the 6 1/2% European Notes into shares
of Harken common stock. Harken intends to mandatorily convert all unconverted 6
1/2% European Notes into shares of Harken common stock on July 31, 1997.
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 -- 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 warrants to purchase an
aggregate total of 410,000 shares of Harken common stock at an average exercise
price of $1.71 per share.
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 price consisted of 1,550,000 in shares of Harken
common stock 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 subject to certain contingencies. Harken also issued to EnerVest
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.
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In March 1997, Harken and EnerVest entered into a Resolution and
Settlement Agreement whereby in addition to the 1,550,000 shares of Harken
common stock previously issued to EnerVest as discussed above, Harken issued
1,400,000 shares of Harken common stock as final consideration for the purchase
of the EnerVest Properties. As a result of the Resolution and Settlement
Agreement, there are no remaining shares of Harken common stock to be issued
and all adjustments or property defects issues were resolved.
Palo Blanco Development Finance Agreements - In June 1996, Harken,
along with Harken de Colombia, Ltd. entered into separate Development Finance
Agreements with two investors. Under the terms of the agreements, the two
investors agreed to provide an aggregate of $2,500,000 to finance the drilling
of a well on the Palo Blanco prospect in the Alcaravan Association Contract
area. See Note 4 - Colombian Operations for further discussion of the Alcaravan
Association Contract. In return for the $2,500,000, the investors were
initially granted a beneficial interest in 40% of the net profits from the Palo
Blanco prospect which might have been received by Harken de Colombia, Ltd. In
1996, the investors exercised their rights under the agreement to convert
one-half of their beneficial interest into 599,988 shares of restricted Harken
common stock. During the first quarter of 1997, the investors exercised their
right to convert the remaining portion of their beneficial interest into an
additional 599,988 shares of restricted Harken common stock.
Rio Negro Development Finance Agreement - In March 1997, Harken and
the Rio Negro Investors entered into a Conversion Agreement whereby Harken
purchased 75% of the Participation relating to the Rio Negro Development
Finance Agreement for 900,000 restricted shares of Harken common stock. These
shares were issued in April 1997. See Note 4 - Colombian Operations for further
discussion of the Rio Negro Development Finance Agreement and the Bocachico
Association Contract.
(7) PER SHARE DATA
Per share data is 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.
In March 1997, the Financial Accounting Standards Board issued
Statement of Financial Accounting Standard No. 128, "Earnings per Share" ("SFAS
128") which will be adopted in December 1997. Under SFAS 128, weighted average
shares outstanding under basic and diluted earnings per share calculations
would have been 97,053,054 and 100,033,496, respectively, for the three months
ended March 31, 1997.
(8) INCOME TAXES
At March 31, 1997, Harken had available for federal income tax
reporting purposes, net operating loss (NOL) carryforward for regular tax
purposes of approximately $67,000,000 which expires in 1997 through 2011,
alternative minimum tax NOL carryforward of approximately $57,000,000 which
expires in 1997 through 2011, investment tax credit carryforward of
approximately $857,000 which expires in 1997 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 March 31, 1997, computed under the provisions of the Statement
of Financial Accounting Standard No. 109, "Accounting for Income Taxes", were
approximately $3,230,000. Total deferred tax assets, primarily related to the
net operating loss carryforward, were approximately $22,624,000 at March 31,
1997. The total net deferred tax asset is offset by the valuation allowance of
approximately $19,394,000 at March 31, 1997.
(9) COMMITMENTS AND CONTINGENCIES
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 present plant owners, including HSW, have replaced all of the open ground
pits currently being used with steel tanks. The plant owners are currently in
the process of closing the open ground pits.
Texaco, the plant's operator, received a letter from the EPA dated
July 21, 1991 and a subsequent letter dated June 8, 1992, in which the EPA
requested certain information in order to determine if there had been at the
Aneth Gas Plant the release of hazardous substances to the environment. Texaco
has advised HSW that certain information was supplied to the EPA pursuant to
this request. Subsequently, core samples in and around certain pit areas were
taken by the EPA and Texaco jointly and a Phase II environmental investigation
was undertaken. A closure plan is currently being negotiated with the EPA.
The prior owner of the Aneth Gas Plant facility, El Paso Natural Gas,
has agreed to accept financial responsibility for a portion of the remediation
work. Texaco and the other current plant owners, including HSW, have entered
into a formal agreement with the prior owner to allocate costs between
remediation work that is mandated by the EPA and other remediation work that is
determined to be carried out by the parties. The prior owner will bear
approximately 86% of the costs of mandated remediation as well as certain other
related expenses. The prior owner will not be responsible for other remediation
work that does not fall within the mandated category. At this time, however, it
is impossible for HSW to accurately estimate the costs of the cleanup at the
Aneth Gas Plant facility or the amount of such total costs the indemnification
from the prior owner will cover for the mandated remediation work. Harken has
accrued a contingency reserve of $219,000 at March 31, 1997 for management's
best estimate of its share of remediation expenditures.
Harken has accrued approximately $1,173,000 at March 31, 1997 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 judgment.
Petrochemical has appealed the decision of the trial court to the Texas Fifth
District Court of Appeals. 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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The exploration, development and production of oil and gas are subject
to various Navajo, federal and state laws and regulations designed to protect
the environment. Compliance with these regulations is part of Harken's
day-to-day operating procedures. Infrequently, accidental discharge of such
materials as oil, natural gas or drilling fluids can occur and such accidents
can require material expenditures to correct. Harken maintains levels of
insurance customary in the industry to limit its financial exposure. Management
is unaware of any material capital expenditures required for environmental
control during the next fiscal year.
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ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
(UNAUDITED)
Certain statements included in the accompanying condensed financial
statements and 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, and 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.
OVERVIEW
Harken reported net income for the three months ended March 31, 1997
of $68,000 compared to a net loss of $296,000 for the prior year period. Total
revenues increased from approximately $2.3 million during the first quarter of
1996 to approximately $4.3 million for the first quarter of 1997, primarily due
to an acquisition consummated in July 1996 that increased Harken's producing
properties and oil and gas reserves. Gross profit before depreciation and
amortization, general and administrative and interest expenses totaled
approximately $2.4 million during the three months ended March 31, 1997
compared to approximately $1.2 million for the prior year period.
Internationally, Harken announced in March 1997 that the initial
production testing of the Ubaque formation of the Estero #1 well within the
Palo Blanco prospect of the Alcaravan Contract area which was drilled during
the first quarter of 1997, produced with an electric submersible pump,
indicated a rate of 4,116 barrels of oil per day. This production rate was
limited by the capacity of the submersible pump and surface storage facilities
at the location. In addition, Harken announced in late April 1997 that drilling
operations had begun on the Torcaz #3 well on the Rio Negro prospect of the
Bocachico Contract area. The Torcaz #3 well is expected to reach a depth of
approximately 8,000 feet and will take approximately 30 days to drill and an
additional 30 days to test and evaluate. The well should test two oil-prone
zones prevalent in the Middle Magdalena Basin: the Mugrosa and Esmeralda
formations.
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.
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THREE MONTHS ENDED
MARCH 31,
-----------------------
EXPLORATION AND PRODUCTION 1996 1997
---------- ----------
OPERATIONS (UNAUDITED)
REVENUES
Oil sales revenues $1,334,000 $2,160,000
Oil volumes in barrels 72,000 100,000
Oil price per barrel $ 18.53 $ 21.60
Gas sales revenues $ 472,000 $1,307,000
Gas volumes in mcf 216,000 394,000
Gas price per mcf $ 2.19 $ 3.32
Gas plant revenues $ 191,000 $ 213,000
OTHER REVENUES
Interest income $ 183,000 $ 560,000
Other income $ 161,000 $ 11,000
For the quarter ended March 31, 1997 compared with the corresponding prior
period.
DOMESTIC OPERATIONS
Gross oil and gas revenues during the first quarter of 1996 and 1997
were generated by Harken's domestic exploration and production operations.
During the first quarter of 1997 these domestic operations consisted primarily
of the operations in the Four Corners area of Utah, Arizona and New Mexico,
primarily on the Navajo Indian Reservation (the "Four Corners Properties"),
onshore South Texas, and in the Western and Panhandle regions of Texas, as well
as Harken's operations in the Magnolia region of Arkansas and the Carlsbad
region of New Mexico, which were acquired as part of the EnerVest Property
purchase in July 1996.
Gross oil revenues increased 62% to $2,160,000 during the first
quarter of 1997 compared to $1,334,000 during the first quarter of 1996
primarily due to the additional production volumes added as a result of the
acquisition of the EnerVest Properties which contributed approximately $806,000
to first quarter 1997 oil revenues. In addition, Harken benefited from the
overall higher prices received per barrel of oil, receiving an average of
$21.60 per barrel compared to $18.53 from the prior year period.
Gross gas revenues increased 177% to $1,307,000 for the three months
ended March 31, 1997 compared to $472,000 for the prior year period, again due
primarily to the acquisition of the EnerVest Properties consummated in July
1996. The EnerVest Properties contributed approximately $345,000 to first
quarter 1997 gas revenues. In addition, Harken received an overall average
price of $3.32 per mcf of gas production during the first quarter of 1997
compared to $2.19 per mcf received during the first quarter of 1996. Harken
also reflected increased gas production volumes from its Panhandle Properties
during the first quarter of 1997 as many of the properties experienced numerous
temporary operational curtailments during the first quarter of 1996. Gas
produced from the Panhandle Properties, with its associated products,
represented 29% of first quarter 1997 gas production and is sold at
approximately a 60% premium to posted gas prices in the region as a result of
the high BTU content of such gas.
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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 severance taxes, property taxes, Utah conservation taxes and Navajo
severance and possessory interest taxes. The increase in oil and gas operating
expenses compared to the prior year is primarily a result of the above
mentioned acquisitions of the EnerVest Properties, which added approximately
$250,000 to first quarter 1997 oil and gas operating expenses. First quarter
1997 oil and gas operating expenses decreased, however, as a percentage of oil
and gas revenues as compared to the prior year period.
INTEREST AND OTHER INCOME
Interest and other income increased during the first quarter of 1997
compared to the prior period due to the inclusion during 1997 of approximately
$413,000 of interest income earned by Harken on proceeds received from the July
1996 issuance of $40 million of 6 1/2% European Notes. Such proceeds, net of
European Notes issuance costs and amounts released and transferred, are
maintained and invested in separate interest bearing bank accounts (the
"Segregated Accounts").
OTHER COSTS AND EXPENSES
General and administrative expenses increased from $817,000 for the
first quarter of 1996 to $1,334,000 for the first quarter of 1997, primarily as
a result of increased personnel and office costs associated with the increased
overall operations as well as increased corporate costs. However, first quarter
1997 general and administrative expenses decreased as a percentage of total
revenues as compared to the prior year.
Depreciation and amortization expense increased during the first
quarter of 1997 compared to the prior year period consistent with the increased
production levels from the acquired oil and gas property interests during 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 during the first quarter of 1997
compared to the prior year period due to the July 1996 issuance of the 6 1/2%
European Notes, which generated interest expense of approximately $352,000 net
of amounts of interest capitalized, and approximately $166,000 of amortization
of issuance costs associated with the 6 1/2% European Notes. Such amounts were
greater than the corresponding costs associated with the 8% European Notes and
the $234,000 accretion of interest expense on a note payable which was included
in interest expense during the first quarter of 1996.
LIQUIDITY AND CAPITAL RESOURCES
Harken's working capital increased to $43.8 million at December 31,
1996 from $5.6 at December 31, 1995, primarily due to the availability of
unrestricted funds held in the Segregated Accounts relating to the $40,000,000
6 1/2% European Notes issued in July 1996 which are convertible into Harken
common stock ("Common Stock") at Harken's option beginning July 31, 1997.
During the quarter ended March 31, 1997, Harken's working capital increased to
$44.2 million, despite continued investment in Harken's Colombian operations.
In addition, holders of 6 1/2% European Notes totaling approximately $14
million exercised their conversion options during the first quarter, resulting
in $24,550,000 of 6 1/2% European Notes remaining outstanding at March 31,
1997.
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During the first quarter ended March 31, 1997, Harken's cash and
temporary investments increased approximately $16.2 million consisting
primarily of transfers from the Segregated Accounts of approximately $15.3
million following the conversions of a portion of the 6 1/2% European Notes to
Common Stock, proceeds from the exercise of outstanding options and warrants of
approximately $2.1 million, and advances received pursuant to the Palo Blanco
Development Finance Agreement, Parkcrest Agreement and Rochester Agreement of
$2.6 million. Such activity was sufficient to fund capital expenditures of
approximately $5.4 million. Cash flow provided by operations during the first
quarter of 1997 totaled $889,000.
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. All proceeds from the sale of the 6 1/2%
European Notes were initially paid at closing to a Trustee pursuant to a Trust
Indenture and held in Segregated Accounts to be maintained for Harken's
benefit. Such 6 1/2% European Notes mature in July 2000 and are convertible at
any time by the holders into shares of Common Stock at a conversion price of
$2.50 per share, and are convertible by Harken into shares of Common Stock
after one year following issuance, if for any period of thirty consecutive days
the closing price of Common Stock for each day during such period shall have
equaled or exceeded 135% of the conversion price (or $3.375 per share of Common
Stock). In February 1997, Harken gave notice as required under the Trust
Indenture that it had met the market price criteria necessary to call for
mandatory conversion of the 6 1/2% European Notes, therefore, at anytime after
July 30, 1997, Harken has the right to convert the 6 1/2% European Notes into
shares of Common Stock. Harken intends to mandatorily convert all unconverted 6
1/2% European Notes into shares of Common Stock on July 31, 1997. As of April
30, 1997, approximately $19 million of the 6 1/2% European Notes had
voluntarily converted into Common Stock. In March 1997, Harken transferred
approximately $15.3 million of 6 1/2% European Note proceeds from the
Segregated Accounts to Harken's operating cash account as a result of these
conversions.
Until all of the 6 1/2% European Notes are converted, the Trust
Indenture under which the 6 1/2% European Notes were issued requires Harken to
maintain an Asset Value Coverage Ratio, as defined in the Trust Indenture. For
a detailed discussion of the 6 1/2% European Notes see "Notes to Consolidated
Financial Statements, Note 5 -- European Convertible Notes Payable." As of
March 31, 1997, Harken was in compliance with the Asset Value Coverage Ratio
test and the amount of net proceeds remaining in the Segregated Accounts that
was available based on the Asset Value Coverage Ratio mentioned above was
approximately $17.9 million.
In order for an additional specific amount of proceeds to be released
from the Segregated Accounts, 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 additional funds will be released from
the Segregated Accounts prior to August 1997 is dependent upon the timing and
magnitude of conversions into Common Stock by the individual noteholders and
the amount of Harken's assets which qualify for inclusion in the Asset
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Value Coverage Ratio test. After July 30, 1997, the anticipated timing of the
release of the Segregated Account funds is based solely on the decision by
Harken to convert the 6 1/2% European Notes into Common Stock. Once an amount
of proceeds are available to be released from the Segregated Accounts, Harken
may submit its request for the transfer of such proceeds at its discretion and
according to its capital resource requirements.
To the extent that proceeds invested in the Segregated Accounts at the
balance sheet date are available under the above Asset Value Coverage Ratio
limitations, or will become available, upon the conversion of the 6 1/2%
European Notes by Harken, such cash is included as a current asset as it is, or
will be, 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 Accounts.
Harken's operating strategy includes efforts to find additional
opportunities to acquire domestic oil and gas reserves through domestic
drilling activities and through merger and acquisitions, in exchange for cash,
debt or issuance of Common Stock. In addition to Harken's efforts to develop
and acquire domestic oil and gas reserves, Harken continues to be very active
in exploration efforts internationally, particularly in Colombia. As of March
31, 1997, Harken's net investment in its Colombian operations has totaled
approximately $16.7 million. 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 Financial Statements, Note 4--
Colombian Operations."
Harken's Colombian exploration program includes drilling to evaluate
fourteen currently identified prospects over approximately 150,000 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.
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. Capital expenditures related to
Harken's Colombian operations are expected to total a minimum of approximately
$30 million before potential partner contributions during 1997, including a
minimum of approximately $16 million related to total operations commitments
required under Harken's Association Contracts. Harken anticipates that it will
have sufficient cash available to fund all of its planned activities in
Colombia for 1997.
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 will take several years
and may also require extensive production facilities which would require
significant additional capital 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
23
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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 all of its Colombian activities or that industry
partners can be obtained to fund a portion of such Colombian activities.
Harken is continually negotiating with potential industry and
financial partners with the objective of farming out a portion of its interests
in various Colombian prospects. Under the terms of its existing development and
finance agreements, Harken has received commitments from certain industry and
financial partners to participate in a percentage of Harken's operations in
certain prospects located on the Alcaravan and Bocachico Contract areas. As of
April 30, 1997, and pursuant to all of its development and finance agreements,
Harken has received a total of approximately $10.6 million of project payments
and drilling and completion cost advances used or to be used by Harken in
drilling its initial three wells in Colombia. In addition, $5.1 million of such
advances were made by venture partners who subsequently elected to convert
their interests in the Alcaravan Contract area operation into shares of Common
Stock. For a detailed discussion of each of Harken's development and financing
arrangements with industry and financial partners, see "Notes to Consolidated
Financial Statements, Note 4 - Colombian Operations."
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. Harken expects such costs
to total approximately $7 million in 1997. The targeted results of these
efforts are to increase domestic production and cash flows during 1997. Harken
expects that its increased domestic efforts will be completed with minimal
planned increases of approximately 10% in general and administrative expenses
for 1997 compared to the level of such expenses reflected during the year ended
December 31, 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 $1,173,000 at March 31, 1997 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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25
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 judgment 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
judgment 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 judgment. Petrochemical has the right to
appeal 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.
Item 2. Changes in Securities.
Not applicable.
Item 3. Default Upon Senior Securities.
Not applicable.
Item 4. Submission of Matters to a Vote of Securities Holders. Not
applicable.
Item 5. Other Information
Not applicable.
Item 6. Exhibits and Reports on Form 8-K.
(a) EXHIBIT INDEX
Exhibit
3.1 Certificate of Incorporation of Harken Energy
Corporation as amended (filed as Exhibit 3.1 to
Harken's Annual Report on Form 10-K for fiscal year
ended December 31,1989, File No. 0-9207, and
incorporated by reference herein).
3.2 Amendment to the Certificate of Incorporation of
Harken Energy Corporation (filed as Exhibit 28.8 to
the Registration Statement on Form S-1 of Tejas Power
Corporation, file No. 33-37141, and incorporated by
reference herein.)
3.3 Amendment to the Certificate of Incorporation of
Harken Energy Corporation
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26
(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 Amendments to the Certificate of Incorporation of
Harken Energy Corporation.
3.6 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).
*27 Financial Data Schedules.
(b) REPORTS ON FORM 8-K.
None.
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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: May 12, 1997
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
------- -----------
3.1 Certificate of Incorporation of Harken Energy
Corporation as amended (filed as Exhibit 3.1 to
Harken's Annual Report on Form 10-K for fiscal year
ended December 31,1989, File No. 0-9207, and
incorporated by reference herein).
3.2 Amendment to the Certificate of Incorporation of
Harken Energy Corporation (filed as Exhibit 28.8 to
the Registration Statement on Form S-1 of Tejas Power
Corporation, file No. 33-37141, and incorporated by
reference herein.)
3.3 Amendment to the Certificate of Incorporation of
Harken Energy Corporation (filed as Exhibit 3 to
Harken's Quarterly Report on Form 10-Q for fiscal
quarter ended March 31, 1991, File No. 0-9207, and
incorporated by reference herein.)
3.4 Amendments to the Certificate of Incorporation of
Harken Energy Corporation (filed as Exhibit 3 to
Harken's Quarterly Report on Form 10-Q for fiscal
quarter ended June 30, 1991, File No. 0-9207, and
incorporated by reference herein.)
3.5 Amendments to the Certificate of Incorporation of
Harken Energy Corporation.
3.6 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).
*27 Financial Data Schedules.