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SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
|X| QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15 (d)
OF THE SECURITIES EXCHANGE ACT OF 1934
FOR THE QUARTERLY PERIOD ENDED JUNE 30, 1997
|_| 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 August 1, 1997 was 115,585,483.
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HARKEN ENERGY CORPORATION
INDEX TO QUARTERLY REPORT
JUNE 30, 1997
PAGE
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PART I. FINANCIAL INFORMATION
Item 1. Condensed Financial Statements
Consolidated Condensed Balance Sheets................................. 4
Consolidated Condensed Statements of Operations....................... 5
Consolidated Condensed Statements of Stockholders' Equity............. 6
Consolidated Condensed Statements of Cash Flow........................ 7
Notes to Consolidated Condensed Financial Statements.................. 8
Item 2. Management's Discussion and Analysis of Financial Condition
and Results of Operations............................................. 18
PART II. OTHER INFORMATION
Notes Concerning Other Information.................................... 25
SIGNATURES ...................................................................... 28
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PART I - FINANCIAL INFORMATION
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ITEM 1. CONSOLIDATED FINANCIAL STATEMENTS
HARKEN ENERGY CORPORATION AND SUBSIDIARIES
CONSOLIDATED CONDENSED BALANCE SHEETS
(unaudited)
DECEMBER 31, JUNE 30,
1996 1997
------------- -------------
ASSETS
Current Assets:
Cash and temporary investments ................................ $ 9,855,000 $ 22,624,000
Cash in European segregated accounts .......................... 37,662,000 86,872,000
Accounts receivable, net ...................................... 2,058,000 1,946,000
Prepaid expenses and other current assets ..................... 263,000 430,000
------------- -------------
Total Current Assets ..................................... 49,838,000 111,872,000
Property and Equipment, net ........................................ 70,035,000 81,052,000
Other Assets, net .................................................. 3,127,000 6,990,000
------------- -------------
$ 123,000,000 $ 199,914,000
============= =============
LIABILITIES AND STOCKHOLDERS' EQUITY
Current Liabilities:
Trade payables ................................................ $ 1,272,000 $ 1,746,000
Accrued liabilities and other ................................. 3,889,000 4,056,000
Revenues and royalties payable ................................ 900,000 736,000
------------- -------------
Total Current Liabilities ................................ 6,061,000 6,538,000
European Convertible Notes Payable ................................. 38,600,000 89,300,000
Commitments and Contingencies (Note 9)
Stockholders' Equity:
Common stock, $0.01 par value; 150,000,000 shares authorized;
93,862,266 and 105,358,246 shares issued, respectively .... 939,000 1,054,000
Additional paid-in capital .................................... 171,191,000 195,292,000
Retained deficit .............................................. (92,401,000) (92,270,000)
Treasury stock, 440,896 shares held at December 31, 1996 ...... (1,390,000) --
------------- -------------
Total Stockholders' Equity ............................... 78,339,000 104,076,000
------------- -------------
$ 123,000,000 $ 199,914,000
============= =============
The accompanying Notes to Consolidated Financial Statements are an integral
part of these Statements.
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HARKEN ENERGY CORPORATION AND SUBSIDIARIES
CONSOLIDATED CONDENSED STATEMENTS OF OPERATIONS
(unaudited)
THREE MONTHS ENDED SIX MONTHS ENDED
JUNE 30, JUNE 30,
--------------------------- ----------------------------
1996 1997 1996 1997
------------ ------------ ------------ ------------
Revenues:
Oil and gas operations ................. $ 2,388,000 $ 3,164,000 $ 4,385,000 $ 6,844,000
Interest and other income .............. 202,000 863,000 546,000 1,434,000
------------ ------------ ------------ ------------
2,590,000 4,027,000 4,931,000 8,278,000
------------ ------------ ------------ ------------
Costs and Expenses:
Oil and gas operating expenses ......... 840,000 1,247,000 1,600,000 2,486,000
General and administrative
expenses, net ...................... 980,000 1,166,000 1,797,000 2,500,000
Depreciation and amortization .......... 629,000 1,239,000 1,256,000 2,330,000
Interest expense and other, net ........ 73,000 329,000 506,000 848,000
------------ ------------ ------------ ------------
2,522,000 3,981,000 5,159,000 8,164,000
------------ ------------ ------------ ------------
Income (loss) before income taxes ... 68,000 46,000 (228,000) 114,000
Income tax expense .......................... -- -- -- --
------------ ------------ ------------ ------------
Net income (loss) ................... $ 68,000 $ 46,000 $ (228,000) $ 114,000
============ ============ ============ ============
Income (loss) per common share:
Net income (loss) ................... $ 0.00 $ 0.00 $ (0.00) $ 0.00
============ ============ ============ ============
Weighted average shares outstanding ......... 82,048,561 107,666,856 77,836,034 103,668,547
============ ============ ============ ============
The accompanying Notes to Consolidated 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
STOCK CAPITAL DEFICIT TREASURY 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 ......... 41,000 7,551,000 -- --
Conversions of European notes payable . 74,000 16,550,000 -- 1,390,000
Equity adjustment from foreign currency
translation ...................... -- -- 17,000 --
Net income ............................ -- -- 114,000 --
------------ ------------ ------------ ------------
Balance, June 30, 1997 .................. $ 1,054,000 $195,292,000 $(92,270,000) $ --
============ ============ ============ ============
The accompanying Notes to Consolidated Financial Statements are an integral
part of these Statements.
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HARKEN ENERGY CORPORATION AND SUBSIDIARIES
CONSOLIDATED CONDENSED STATEMENTS OF CASH FLOWS
(unaudited)
SIX MONTHS ENDED
JUNE 30,
----------------------------
1996 1997
------------ ------------
Cash flows from operating activities:
Net income (loss) .......................................................... $ (228,000) $ 114,000
Adjustment to reconcile net income (loss) to net cash provided by
operating activities:
Depreciation and amortization ......................................... 1,256,000 2,330,000
Loss on sales of assets and other ..................................... 19,000 --
Accretion of note payable ............................................. 234,000 --
Amortization of European note issuance costs .......................... 178,000 246,000
Change in assets and liabilities:
Decrease in accounts receivable ....................................... (81,000) 112,000
Decrease in trade payables and other .................................. (420,000) (223,000)
------------ ------------
Net cash provided by operating activities ........................ 958,000 2,579,000
------------ ------------
Cash flows from investing activities:
Proceeds from sales of assets ......................................... 177,000 6,000
Investor advances ..................................................... 2,250,000 3,779,000
Capital expenditures, net ............................................. (3,945,000) (11,143,000)
------------ ------------
Net cash used in investing activities ............................ (1,518,000) (7,358,000)
------------ ------------
Cash flows from financing activities:
Transfer from segregated account cash ................................. 10,000,000 15,302,000
Proceeds from issuances of common stock, net of issuance costs ........ 2,492,000 2,224,000
Repayments of notes payable and long-term obligations ................. (1,258,000) --
Investment in segregated account cash, net ............................ (242,000) 22,000
------------ ------------
Net cash provided by financing activities ........................ 10,992,000 17,548,000
------------ ------------
Net increase in cash and temporary investments ............................... 10,432,000 12,769,000
Cash and temporary investments at beginning of period ........................ 4,456,000 9,855,000
------------ ------------
Cash and temporary investments at end of period .............................. $ 14,888,000 $ 22,624,000
============ ============
Supplemental disclosures of cash flow information: Cash paid during the period
for:
Interest ................................................................ $ 203,000 $ 2,000
Income taxes ............................................................ -- --
The accompanying Notes to Consolidated Financial Statements are an integral
part of these Statements.
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HARKEN ENERGY CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS
JUNE 30, 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 June 30, 1997 and the results of its operations and changes in its
cash flows for all periods presented as of June 30, 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 preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the financial
statements and the reported amounts of revenues and expenses during the
reported period. Actual results could differ from these estimates.
The results of operations for the six month period ended June 30, 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.
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 and the Aneth Gas Plant. The acquisition of the sellers' interest
raised Harken's total interest in the Four Corners Properties from
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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. On June 30, 1997,
Harken acquired the remaining operating interest in the Four Corners Properties
for approximately $450,000 cash. 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, June 30,
1996 1997
------------ ------------
Unevaluated oil and gas properties--
Unevaluated international properties $ 3,656,000 $ 8,000,000
Unevaluated domestic properties 6,610,000 6,696,000
Evaluated oil and gas properties--
Evaluated international properties 5,802,000 12,402,000
Evaluated domestic properties 60,188,000 62,094,000
Gas plant and other property 7,500,000 7,934,000
Less accumulated depreciation and amortization (13,721,000) (16,074,000)
------------ ------------
$ 70,035,000 $ 81,052,000
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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
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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 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.
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. 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 investigating potential methods to efficiently produce this field,
including possible pipeline connections and trucking arrangements.
Harken de Colombia, Ltd. has entered into an operating agreement (the
"Rochester Agreement") with Rochester Energy Corporation ("Rochester", a
Canadian corporation) pursuant to which Rochester has paid 331/3% of the
aggregate costs of the Estero #1 well, and 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, the Canacabare #1.
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 these
wells. The Estero #2 well and the Canacabare #1 well are scheduled to begin
drilling during the fourth quarter of 1997 or early 1998.
Harken de Colombia, Ltd., has 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 Estero #1 well and committed to pay 25% of the
aggregate costs of the Estero #2 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 these wells.
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 lands covered by this contract. During each of the
second through the sixth contract years, Harken may elect to
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continue the contract by committing to the drilling of at least one exploratory
well during each contract year. Harken has completed all work requirements for
the first three years of the Bocachico Contract.
Harken spudded its first well on this Bocachico Contract area, named
the Torcaz #2 well, in July 1996. This well was completed and initially tested
at the rate of 635 barrels per day. Harken 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 is currently carrying out recompletion efforts on this well.
In late April 1997, Harken began drilling operations on the Torcaz #3
well, located on the Rio Negro prospect in the Bocachico Contract area. This
well initially tested at a rate of 643 barrels per day. In July 1997, Harken
also submitted its notification to Ecopetrol to extend the Bocachico Contract
into its fourth contractual year by committing to drill the third exploratory
well covering the Bocachico Contract area. 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 July 1997, Harken announced plans to acquire approximately
500 kilometers of new seismic data to further evaluate portions of both the
Bocachico and Cambulos Contract areas.
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").
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 which were issued within 30 days
following closing. From the remaining 25% of the Participation retained, the
Rio Negro Investors have the right to receive 10% of the net profits that
Harken de Colombia, Ltd., may derive from the sale of oil and gas produced from
the Rio Negro prospect.
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 June 30,
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.
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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.
In July 1997, Harken announced plans to acquire approximately 500
kilometers of new seismic data to further evaluate portions of both the
Bocachico and Cambulos Contract areas.
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.
Harken plans to horizontally drill a three well exploratory program on
the Bolivar Contract area in which Harken intends to keep 100% of the ownership
interest. Subject to receipt of all necessary permits, Harken intends to drill
its first exploratory well on the Bolivar Contract area in the third quarter of
1997.
(5) EUROPEAN CONVERTIBLE NOTES PAYABLE
8% European Notes -- 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 31, 1996, all holders of
these 8% European Notes exercised
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their conversion options and Harken issued an aggregate total of 9,999,975
shares of Harken common stock pursuant to these conversions.
6 1/2% European Notes -- 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 were to 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 was payable semi-annually in January
and July of each year to maturity or until the 6 1/2% European Notes were
converted. Such 6 1/2% European Notes were 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
were also convertible by Harken into shares of Harken common stock after one
year following issuance, if for any period of thirty consecutive days
commending 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).
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 six months of
1997, holders of 6 1/2% European Notes totaling $19,300,000 exercised their
conversion option and such holders were issued 7,720,000 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 and on June 2, 1997 formally
called the 6 1/2% European Notes for conversion on July 31, 1997. On July 31,
1997, Harken converted the remaining 6 1/2% European Notes into 7,720,000
shares of Harken common stock.
5 1/2% European Notes -- On June 11, 1997, Harken issued to qualified
purchasers a total of $70 million in 5 1/2% Senior Convertible Notes ( the "5
1/2% European Notes") which mature on June 10, 2002. In connection with the
sale and issuance of the 5 1/2% European Notes, Harken paid approximately
$5,174,000 from the 5 1/2% European Notes proceeds for commissions and issuance
costs. Interest incurred on these notes is payable semi-annually in June and
December of each year to maturity or until the 5 1/2% European Notes are
converted. Such 5 1/2% European Notes are convertible into shares of Harken
common stock at an initial conversion price of $5.00 per share, subject to
adjustment in certain circumstances ("the 5 1/2% European Note Conversion
Price"). A five percent premium on the number of shares of Harken common stock
issuable on conversion will be payable to holders converting the 5 1/2%
European Notes prior to December 11, 1997. The 5 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 June 11, 1997, the average of the closing prices of Harken common
stock for each trading day during such thirty day period shall have equaled or
exceeded 130% of the 5 1/2% European Note Conversion Price (or $6.50 per share
of Harken common stock). As of August 1, 1997, holders of 5 1/2% European Notes
totaling $6,730,000 have exercised their conversion option and such holders
were issued 1,413,000 shares of Harken common stock. The 5 1/2% European Notes
are listed on the Luxembourg Stock Exchange.
Upon closing, all proceeds from the sale of each of the European Notes
issuances were each initially paid to a Trustee under the terms of a Trust
Indenture covering each issue 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 5 1/2% European Notes are converted,
Harken
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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) 50% of the net
present value of Harken's domestic unencumbered total proved reserves plus (z)
25% of the net present value of Harken's Colombian total proved reserves to
(ii) the aggregate outstanding principal amount of the 5 1/2% European Notes.
Upon a conversion, any proceeds attributable to the 5 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 5 1/2% European Notes were sold strictly to non-U.S. purchasers in
the form of bearer instruments in $10,000 and $50,000 increments. The 5 1/2%
European Notes and the Harken common stock issuable upon conversion of the 5
1/2% European Notes have been or will be issued without registration under the
United States Securities Act of 1933 (the "Securities Act") pursuant to an
exemption contained in Regulation S promulgated under the Securities Act.
Commissions and issuance costs associated with the European Notes are
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 related to the 6 1/2% European Notes is
reflected as a current asset at December 31, 1996, and June 30, 1997 as Harken
had 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 June 30, 1997, Harken had
issued 93,862,266 and 105,358,246 shares, respectively. Harken held 400,896
shares as treasury stock at a cost of $1,390,000 at December 31, 1996.
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 warrants to purchase one
million shares of Harken common stock at any time on or before May 11, 1999 at
an exercise price of $1.50 per share. As of July 31, 1997 all but approximately
37,000 of these warrants had been exercised for shares of Harken common stock.
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In July 1996, Harken issued to qualified purchasers a total of $40
million in 6 1/2% European Notes which were to mature on July 30, 2000. The 6
1/2% European Notes were 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 six months of 1997, holders of 6 1/2% European Notes totaling an
additional $19,300,000 exercised their conversion option and such holders were
issued 7,720,000 shares of Harken common stock, a portion of which had been
held as treasury shares. 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), and on July 31, 1997, Harken
converted the remaining $19,300,000 balance of the 6 1/2% European Notes into
7,720,000 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 warrants to
purchase 1,280,000 shares of Harken common stock at any time on or before July
31, 1999 at an exercise price of $2.50 per share. In July 1997, approximately
492,000 of these warrants were exercised for shares of Harken common stock.
In June 1997, Harken issued to qualified purchasers a total of $70
million in 5 1/2% European Notes which mature on June 11, 2002. The 5 1/2%
European Notes are convertible under certain terms into a maximum of
approximately 14,700,000 shares of Harken common stock. In connection with the
issuance of the 5 1/2% European Notes, Harken issued to the placement agents
for the 5 1/2% European Notes warrants to purchase 1,120,000 shares of Harken
common stock at any time after December 11, 1997 and on or before December 11,
1999 at an exercise price of $5.00 per share. As of August 1, 1997, holders of
5 1/2% European Notes totaling $6,730,000 have exercised their conversion
option and such holders were issued 1,413,000 shares of Harken common stock.
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. During 1997, these warrants were exercised for shares
of Harken common stock.
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.
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.
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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 not have been materially different for either the three month or six
month period ended June 30, 1997.
(8) INCOME TAXES
At June 30, 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.
Total deferred tax liabilities, relating primarily to property and
equipment, as of June 30, 1997, computed under the provisions of the Statement
of Financial Accounting Standard No. 109, "Accounting for Income Taxes", were
approximately $5,440,000. Total deferred tax assets, primarily related to the
net operating loss carryforward, were approximately $22,624,000 at June 30,
1997. The total net deferred tax asset is offset by the valuation allowance of
approximately $17,184,000 at June 30, 1997.
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(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 $239,000 at June 30, 1997 for management's
best estimate of its share of remediation expenditures.
Harken has accrued approximately $1,269,000 at June 30, 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.
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 six months ended June 30, 1997 of
$114,000 compared to a net loss of $228,000 for the prior year period. Total
revenues increased from approximately $4.9 million during the six months ended
June 30, 1996 to approximately $8.3 million for the same period in 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 $5.8 million during the six months ended June 30, 1997
compared to approximately $3.3 million for the prior year period. Harken
expects that its monthly operating revenues, expenses and gross profit from oil
and gas operations will remain at current levels during the remainder of 1997
and until such time as it commences production from its Colombian operations.
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, in late April 1997, Harken began drilling
operations on the Torcaz #3 well, located on the Rio Negro prospect of the
Bocachico Contract. Harken announced in July 1997 that the drilling and initial
production testing of the Torcaz #3 well had been completed, with the well
being drilled to a depth of 8,225 feet and on initial tests the well produced
at a rate of 643 barrels per day.
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 SIX MONTHS ENDED
JUNE 30, JUNE 30,
--------------------------------------- -----------------------------------------
1996 1997 1996 1997
---------------- ----------------- ----------------- ------------------
EXPLORATION AND (UNAUDITED)
PRODUCTION
OPERATIONS
REVENUES
Oil sales revenues $ 1,496,000 $ 1,975,000 $ 2,830,000 $ 4,135,000
Oil volumes in barrels 72,000 106,000 144,000 206,000
Oil price per barrel $ 20.78 $ 18.63 $ 19.65 $ 20.07
Gas sales revenues $ 674,000 $ 1,037,000 $ 1,146,000 $ 2,344,000
Gas volumes in mcf 274,000 474,000 490,000 868,000
Gas price per mcf $ 2.46 $ 2.19 $ 2.34 $ 2.70
Gas plant revenues $ 218,000 $ 152,000 $ 409,000 $ 365,000
OTHER REVENUES
Interest Income $ 202,000 $ 854,000 $ 385,000 $ 1,414,000
Other Income $ -- $ 9,000 $ 161,000 $ 20,000
For the quarter ended June 30, 1997 compared with the corresponding prior
period.
DOMESTIC OPERATIONS
Gross oil and gas revenues during the second quarter of 1996 and 1997
were generated by Harken's domestic exploration and production operations.
During the second 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 32% to $1,975,000 during the second
quarter of 1997 compared to $1,496,000 during the second quarter of 1996
primarily due to the additional production volumes added as a result of the
acquisition of the EnerVest Properties which contributed approximately $779,000
to second quarter 1997 oil revenues. This increase in oil revenues during the
second quarter of 1997 was partially offset by lower prices received per barrel
of oil during the quarter of $18.63 per barrel compared to $20.78 received
during the second quarter of 1996.
Gross gas revenues increased 54% to $1,037,000 for the three months
ended June 30, 1997 compared to $674,000 for the prior year period, due
primarily to the acquisition of the EnerVest Properties consummated in July
1996. The EnerVest Properties contributed approximately $277,000 to second
quarter
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1997 gas revenues. Harken received a price per mcf of $2.19 during the second
quarter of 1997 compared to $2.46 received per mcf during the prior year
period. Gas produced from the Panhandle Properties, with its associated
products, represented 18% of second 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.
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 during the second quarter of 1997 compared to the prior year period is
primarily a result of the acquisition of the EnerVest Properties, which added
approximately $288,000 to second quarter 1997 oil and gas operating expenses.
INTEREST AND OTHER INCOME
Interest and other income increased during the second quarter of 1997
compared to the prior period due to the inclusion during 1997 of approximately
$492,000 of interest income earned by Harken on proceeds received from the June
1997 issuance of $70 million of 5 1/2% European Notes and 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
initially maintained and invested in separate interest bearing bank accounts
(the "Segregated Accounts").
OTHER COSTS AND EXPENSES
General and administrative expenses increased from $980,000 for the
second quarter of 1996 to $1,166,000 for the second 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,
second quarter 1997 general and administrative expenses decreased as a
percentage of oil and gas revenues as compared to the prior year.
Depreciation and amortization expense increased during the second
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 second quarter of 1997
compared to the prior year period due to the June 1997 issuance of the 5 1/2%
European Notes and the July 1996 issuance of the 6 1/2% European Notes, which
together generated interest expense of approximately $247,000 net of amounts of
interest capitalized, and approximately $81,000 of net amortization of related
issuance costs. Such amounts were greater than the corresponding costs in 1996
associated with the 8% European Notes.
For the six months ended June 30, 1997 compared with the corresponding prior
period.
Gross oil revenues increased 46% to $4,135,000 during the first six
months of 1997 compared to $2,830,000 during the first six months of 1996
primarily due to the additional production volumes added as a result of the
acquisition of the EnerVest Properties which contributed approximately
$1,585,000 to 1997 oil revenues, and which was partially offset by normal
production declines on Harken's existing properties.
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In addition, Harken benefited from the overall higher prices received per
barrel of oil, receiving an average of $20.07 per barrel compared to $19.65
from the prior year period.
Gross gas revenues increased 105% to $2,344,000 for the six months
ended June 30, 1997 compared to $1,146,000 for the prior year period, again due
primarily to the acquisition of the EnerVest Properties consummated in July
1996. The EnerVest Properties contributed approximately $622,000 to 1997 gas
revenues. In addition, Harken received an overall average price per mcf of
$2.70 per mcf of gas production during the first six months of 1997 compared to
$2.34 per mcf received during the first half of 1996. Harken also reflected
increased gas production volumes from its South Texas properties during the
first six months of 1997 due to the successful completion of new gas wells
drilled during late 1996 and early 1997.
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 period is primarily a result of the above
mentioned acquisitions of the EnerVest Properties, which added approximately
$538,000 to the first six months of 1997 oil and gas operating expenses. The
first six months of 1997 oil and gas operating expenses remained flat, 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 six months of
1997 compared to the prior period due to the inclusion during 1997 of
approximately $905,000 of interest income earned by Harken on proceeds received
from the June 1997 issuance of $70 million of 5 1/2% European Notes and 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
initially maintained and invested in separate interest bearing bank accounts
(the "Segregated Accounts").
OTHER COSTS AND EXPENSES
General and administrative expenses increased from $1,797,000 for the
first six months of 1996 to $2,500,000 for the first six months 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,
the first six months of 1997 general and administrative expenses decreased as a
percentage of oil and gas revenues as compared to the prior year.
Depreciation and amortization expense increased during the first six
months 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 half of 1997
compared to the prior year period due to the June 1997 issuance of the 5 1/2%
European Notes and the July 1996 issuance of the 6 1/2% European Notes, which
together generated interest expense of approximately $599,000 net of amounts of
interest capitalized, and approximately $247,000 of net amortization of related
issuance costs. Such amounts were greater than the corresponding costs in 1996
associated with the 8% European Notes.
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LIQUIDITY AND CAPITAL RESOURCES
Harken's working capital increased to approximately $105.3 million at
June 30, 1997 from $43.8 million at December 31, 1996, primarily due to the
June 11, 1997 issuance of 5 1/2% European Notes (see discussion below) which
generated net available proceeds of approximately $65 million which are
classified as a current asset.
During the six months ended June 30, 1997, Harken's cash and temporary
investments increased approximately $12.8 million consisting primarily of
transfers from the 6 1/2% European Notes 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 $2.2 million, and advances received pursuant to the
Palo Blanco Development Finance Agreement, Parkcrest Agreement and Rochester
Agreement of approximately $3.8 million. Such activity was sufficient to fund
capital expenditures of approximately $11.1 million. Cash flow provided by
operations during the first six months of 1997 totaled approximately $2.6
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.
On June 11, 1997, Harken issued to qualified purchasers a total of $70
million in 5 1/2% Senior Convertible Notes (the "5 1/2% European Notes") which
mature on June 10, 2002. In connection with the sale and issuance of the 5 1/2%
European Notes, Harken paid approximately $5,174,000 from the 5 1/2% European
Notes proceeds for commission and issuance costs. Interest incurred on these
notes is payable semi-annually in June and December of each year to maturity or
until the 5 1/2% European Notes are converted. Such 5 1/2% European Notes are
convertible into shares of Harken common stock at an initial conversion price
of $5.00 per share, subject to adjustment in certain circumstances ("the 5 1/2
% European Note Conversion Price"). A five percent premium on the number of
shares of Harken common stock issuable on conversion will be payable to holders
converting the 5 1/2% European Notes prior to December 11, 1997. The 5 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 June 11, 1997, the average of the
closing prices of Harken common stock for each trading day during such thirty
day period shall have equaled or exceeded 130% of the 5 1/2% European Note
Conversion Price (or $6.50 per share of Harken common stock). All proceeds from
the sale of the 5 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.
Until the 5 1/2% European Notes mature or are converted, the Trust
Indenture under which the 5 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 5 1/2% European Notes see "Notes to Consolidated
Financial Statements, Note 5 -- European Convertible Notes Payable." As of June
30, 1997, Harken was in compliance with the Asset Value Coverage Ratio test and
the full amount of net proceeds of the offering (approximately $65 million) was
available.
In order for a 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 5 1/2% European Notes has occurred and is
continuing at the
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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 Accounts 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 Value Coverage Ratio test. 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, 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 5 1/2% European Notes is payable semi-annually in June
and December of each year to maturity or until the 5 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.
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. During the first six months
of 1997, holders of 6 1/2% European Notes totaling $19,300,000 exercised their
conversion option and such holders were issued 7,720,000 shares of Harken
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. On July 31, 1997,
Harken converted the remaining 6 1/2% European Notes into shares of Harken
common stock and transferred the remaining 6 1/2% European Note proceeds of
approximately $21.2 million from the Segregated Accounts to Harken's operating
cash account.
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 June
30, 1997, Harken's net investment in its Colombian operations has totaled
approximately $20.4 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."
Capital expenditures related to Harken's Colombian operations are
expected to total a minimum of approximately $35 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. In June
1997, Harken announced its plans to drill a three well exploratory program in
the Bolivar Contract area. Harken expects the drilling of the three horizontal
wells will require
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approximately $20 million, with Harken retaining 100% ownership in these wells.
This amount is included in Harken's total capital expenditure plans for 1997
and 1998.
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 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 all of its Colombian activities or that
industry partners can be obtained to fund a portion of 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. 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 planned
increases of approximately 20% 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 $1.5 million at June 30, 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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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 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.
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.
On June 9, 1997, Harken held it Annual Meeting of Stockholders. The
stockholders of Harken voted on the election of Directors, the
results of which are described below:
For Against Abstain
--- ------- -------
Mikel D. Faulkner 82,010,205 - 6,600,445
Bruce N. Huff 82,010,205 - 6,600,445
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).
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26
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 (filed as Exhibit 3.5 to
Harken's Annual Report on Form 10-K for fiscal year
ended December 31, 1996, File No. 0-9207, and
incorporated by reference herein.).
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).
*10.1 Trust Indenture dated June 11, 1997, by and between
Harken and Marine Midland Bank plc.
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*10.2 Placing Agreement dated June 3, 1997, by and among
Harken and the various signatories thereto.
*10.3 Global Temporary Note dated June 11, 1997, issued by
Harken in the principal amount of $70,000,000.
*10.4 Drilling Contract dated as of July 22, 1997, between
Harken de Colombia, Ltd., and Parker Drilling Company
International Ltd.
*10.5 Drilling Contract dated as of May 15, 1997, between
Harken de Colombia, Ltd., and Marlin Colombia Drilling
Company, Inc.
*27 Financial Data Schedules.
- --------------------------------
* filed herewith
(b) REPORTS ON FORM 8-K.
On June 11, 1997 Harken filed a Current Report on Form 8-K (Item 5)
to report the issuance of the 5 1/2% European Notes.
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HARKEN ENERGY CORPORATION
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
Harken Energy Corporation
----------------------------------------
(Registrant)
Date: August 11,1997 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 (filed as Exhibit 3.5 to
Harken's Annual Report on Form 10-K for fiscal year
ended December 31, 1996, File No. 0-9207, and
incorporated by reference herein.).
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).
*10.1 Trust Indenture dated June 11, 1997, by and between
Harken and Marine Midland Bank plc.
*10.2 Placing Agreement dated June 3, 1997, by and among
Harken and the various signatories thereto.
*10.3 Global Temporary Note dated June 11, 1997, issued by
Harken in the principal amount of $70,000,000.
*10.4 Drilling Contract dated as of July 22, 1997, between
Harken de Colombia, Ltd., and Parker Drilling Company
International Ltd.
*10.5 Drilling Contract dated as of May 15, 1997, between
Harken de Colombia, Ltd., and Marlin Colombia Drilling
Company, Inc.
*27 Financial Data Schedules.
- --------------------------------
* filed herewith