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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, 1998
[ ] 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
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The number of shares of Common Stock, par value $0.01 per share,
outstanding as of April 30, 1998 was 122,823,347.
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HARKEN ENERGY CORPORATION
INDEX TO QUARTERLY REPORT
MARCH 31, 1998
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.......................................................... 20
PART II. OTHER INFORMATION
Notes Concerning Other Information................................................. 27
SIGNATURES........................................................................................ 30
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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, MARCH 31,
1997 1998
----------------- ---------------
ASSETS
Current Assets:
Cash and temporary investments $ 85,740,000 $ 80,280,000
Cash in segregated accounts 37,771,000 38,293,000
Accounts receivable, net 2,175,000 1,692,000
Related party notes receivable 295,000 355,000
Prepaid expenses and other current assets 411,000 444,000
------------- -------------
Total Current Assets 126,392,000 121,064,000
Property and Equipment, net 106,798,000 119,941,000
Other Assets, net 5,323,000 6,959,000
------------- -------------
$ 238,513,000 $ 247,964,000
============= =============
LIABILITIES AND STOCKHOLDERS' EQUITY
Current Liabilities:
Trade payables $ 6,268,000 $ 5,076,000
Accrued liabilities and other 8,668,000 6,890,000
Revenues and royalties payable 816,000 835,000
------------- -------------
Total Current Liabilities 15,752,000 12,801,000
European Convertible Notes Payable 39,880,000 39,270,000
Deferred Revenue 25,000,000 35,000,000
Commitments and Contingencies (Note 12)
Stockholders' Equity:
Common stock, $0.01 par value; 175,000,000 shares authorized;
121,811,534 and 122,799,347 shares issued, respectively 1,218,000 1,228,000
Additional paid-in capital 248,770,000 251,646,000
Retained deficit and other comprehensive income (92,107,000) (91,981,000)
------------- -------------
Total Stockholders' Equity 157,881,000 160,893,000
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$ 238,513,000 $ 247,964,000
============= =============
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
March 31,
--------------------------------
1997 1998
-------------- --------------
Revenues:
Oil and gas operations $ 3,680,000 $ 2,700,000
Interest and other income 571,000 1,662,000
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4,251,000 4,362,000
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Costs and Expenses:
Oil and gas operating expenses 1,239,000 1,382,000
General and administrative expenses, net 1,334,000 1,758,000
Depreciation and amortization 1,091,000 1,130,000
Interest expense and other, net 519,000 8,000
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4,183,000 4,278,000
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Income before income taxes 68,000 84,000
Income tax expense -- --
------------ ------------
Net income $ 68,000 $ 84,000
============ ============
Income per common share:
Basic income per common share $ 0.00 $ 0.00
============ ============
Weighted average shares outstanding 97,053,054 122,441,279
============ ============
Diluted income per common share $ 0.00 $ 0.00
============ ============
Weighted average shares outstanding 100,033,496 133,093,340
============ ============
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)
ACCUMULATED
ADDITIONAL OTHER
COMMON PAID-IN TREASURY RETAINED COMPREHENSIVE
STOCK CAPITAL STOCK DEFICIT INCOME TOTAL
----------- ------------- ------------- ------------- -------------- -------------
Balance, December 31, 1996 $ 939,000 $ 171,191,000 $ (1,390,000) $ (92,386,000) $ (15,000) $ 78,339,000
Issuance of common stock, net 77,000 20,208,000 -- -- -- 20,285,000
Conversions of European notes
payable 202,000 57,371,000 1,390,000 -- -- 58,963,000
Comprehensive income:
Equity adjustment from
foreign currency translation -- -- -- -- 105,000
Net income -- -- -- 189,000 --
Total comprehensive
income 294,000
------------ ------------- ------------- ------------- ----------- -------------
Balance, December 31, 1997 1,218,000 248,770,000 -- (92,197,000) 90,000 157,881,000
Issuance of common stock, net 9,000 2,305,000 -- -- -- 2,314,000
Conversions of European notes
payable 1,000 571,000 -- -- -- 572,000
Comprehensive income:
Equity adjustment from
foreign currency translation -- -- -- -- 42,000
Net income -- -- -- 84,000 --
Total comprehensive
income 126,000
------------ ------------- ------------- ------------- ----------- -------------
Balance, March 31, 1998 $ 1,228,000 $ 251,646,000 $ -- $ (92,113,000) $ 132,000 $ 160,893,000
============ ============= ============= ============= =========== =============
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)
THREE MONTHS ENDED
MARCH 31,
---------------------------------
1997 1998
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Cash flows from operating activities:
Net income $ 68,000 $ 84,000
Adjustment to reconcile net income to net cash provided by
operating activities:
Depreciation and amortization 1,091,000 1,130,000
Amortization of European note issuance costs 166,000 --
Provision for doubtful accounts -- 15,000
Change in assets and liabilities:
Decrease in accounts receivable 42,000 408,000
Decrease in trade payables and other (478,000) (915,000)
------------ ------------
Net cash provided by operating activities 889,000 722,000
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Cash flows from investing activities:
Investor advances, net 2,623,000 9,798,000
Capital expenditures, net (5,394,000) (16,865,000)
------------ ------------
Net cash used in investing activities (2,771,000) (7,067,000)
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Cash flows from financing activities:
Transfer from segregated account cash 15,295,000 --
Proceeds from issuances of common stock, net of issuance costs 2,051,000 1,945,000
Investment in segregated account cash, net 758,000 (1,060,000)
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Net cash provided by financing activities 18,104,000 885,000
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Net increase in cash and temporary investments 16,222,000 (5,460,000)
Cash and temporary investments at beginning of period 9,855,000 85,740,000
------------ ------------
Cash and temporary investments at end of period $ 26,077,000 $ 80,280,000
============ ============
Supplemental disclosures of cash flow information:
Cash paid during the quarter for:
Interest $ -- $ --
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
MARCH 31, 1997 AND 1998
(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, 1997 and March 31, 1998 and the results of its operations and changes in its
cash flows for all periods presented as of March 31, 1997 and 1998. 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, 1997.
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 three month period ended March 31,
1998 are not necessarily indicative of the results to be expected for the full
year.
(2) ACQUISITION
On August 29, 1997, Harken, along with Harken Exploration Company, a
wholly-owned subsidiary, purchased working interests in oil and gas properties
located in the panhandle region of Texas (the "Cal-T Properties"). The purchase
price of approximately $3,416,000 consisted primarily of 565,000 shares of
Harken common stock.
(3) MARKETABLE SECURITIES
Included within cash and temporary investments and cash in segregated
accounts at December 31, 1997 and March 31, 1998 are certain investments in
marketable debt securities having maturities of sixty days or less. Harken
management determines the appropriate classification of such debt securities at
the time of purchase and reevaluates such designation as of each balance sheet
date. Such debt securities are classified as held-to-maturity as Harken has the
positive intent and ability to hold the securities to maturity. Held-to-maturity
securities are stated at amortized cost, adjusted for amortization of premiums
and accretion
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of discounts to maturity. Such amortization is included in interest and other
income. Harken holds no securities which are classified as available-for-sale or
trading.
The following is a summary of held-to-maturity securities:
December 31, March 31,
1997 1998
--------------- ----------------
Included in cash and temporary investments:
Cost $ 50,906,000 $ 50,973,000
Estimated fair value $ 50,973,000 $ 58,396,000
Included in segregated accounts:
Cost $ 37,184,000 $ 38,154,000
Estimated fair value $ 37,242,000 $ 38,270,000
Harken includes in cash and temporary investments and cash in
segregated accounts other cash and cash equivalent amounts in addition to the
above marketable debt securities.
(4) PROPERTY AND EQUIPMENT
A summary of property and equipment follows:
December 31, March 31,
1997 1998
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Unevaluated oil and gas properties--
Unevaluated international properties $ 21,413,000 $ 19,765,000
Unevaluated domestic properties 5,780,000 5,745,000
Evaluated oil and gas properties--
Evaluated international properties 22,754,000 37,794,000
Evaluated domestic properties 67,431,000 68,304,000
Gas plant and other property 8,325,000 8,387,000
Less accumulated depreciation and amortization (18,905,000) (20,054,000)
------------------ ------------------
$ 106,798,000 $ 119,941,000
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(5) COLOMBIAN OPERATIONS
Harken's Colombian operations are conducted through Harken de Colombia,
Ltd., a wholly-owned subsidiary of Harken, which held six exclusive Colombian
Association Contracts with Empresa Colombiana de Petroleos ("Ecopetrol") as of
March 31, 1998. These Association Contracts include the Alcaravan Contract,
awarded in 1992, the Bocachico Contract, awarded in 1994, the Cambulos Contract,
awarded in 1995, the Bolivar Contract, awarded in 1996, the Miradores Contract,
awarded in December 1997, and the Los Olmos Contract, awarded in March 1998. The
Alcaravan and Miradores Contracts currently cover a combined area of
approximately 242,000 acres in the Llanos Basin of Eastern Colombia. The
Bocachico and Cambulos Contracts cover a combined area of approximately 492,000
acres in the Middle Magdalena Valley of Central Colombia and the Bolivar
Contract covers an area of approximately 250,000 acres in the Northern Middle
Magdalena Valley of Central Colombia. The Los Olmos Contract covers
approximately 374,000 acres in the Lower Magdalena Valley of Northern Colombia.
Terms of each of the Association Contracts commit Harken to perform certain
activities in accordance with a prescribed timetable. As of March 31, 1998,
Harken was in compliance with the requirements of each of the Association
Contracts, as amended.
Under the terms of the Association Contracts, if, during the first six years of
each contract, Harken discovers one or more fields 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 that
contract will be extended for a period of 22 years from the date of such
commercial discovery. Upon 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 plus, in the
case of the Cambulos, Bolivar, Miradores and Los Olmos Contracts, 50% of all
seismic and dry well costs incurred prior to the point of declaration of a
commercial discovery. Production from a commercial discovery will be allocated
as follows: Ecopetrol, on behalf of the Colombian government, will receive a 20%
royalty interest in all production, and all production (after royalty payments)
will be allocated 50% to Ecopetrol and 50% to Harken until cumulative production
from all fields in the Association Contract acreage reaches 60 million barrels
of oil. As cumulative production increases in excess of 60 million barrels of
oil, Ecopetrol's share of production will increase progressively (to a maximum
of 75% under certain of the Association Contracts) with a corresponding decrease
in Harken's share of production. 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. For any
fields that are not declared by Ecopetrol to be a commercial discovery, Harken
would retain the rights to all production after royalty.
Harken has entered into certain development finance and operating
agreements with outside parties whereby such parties have received a beneficial
interest in certain of Harken's Colombian operations. For further discussion see
Note 6 -- Development Finance and Operating Agreements.
(6) DEVELOPMENT FINANCE AND OPERATING AGREEMENTS
Rio Negro Development Finance Agreement -- 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 provided $3,500,000 to Harken to finance drilling on the Rio Negro
prospect in the Bocachico Contract area in exchange for the right
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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 "Rio Negro Participation").
In March 1997, Harken and the Rio Negro Investors entered into a
Conversion Agreement whereby Harken purchased 75% of the Rio Negro Participation
in exchange for 900,000 restricted shares of Harken common stock. From the
remaining 25% of the Rio Negro 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.
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 provided an aggregate of $2,500,000 to finance the drilling of a well
on the Palo Blanco prospect in the Alcaravan Association Contract area. 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.
Rochester Agreement -- 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 33-1/3% of the aggregate costs of the Estero #1 well and related
production facilities on the Palo Blanco prospect, 25% of the aggregate costs
related to the Estero #3 well, and 25% of the aggregate costs of the initial
well drilled on the Anteojos prospect, the Canacabare #1, all of which are
located within the Alcaravan Contract area, along with 25% of the aggregate
costs related to the Miradores Association Contract. In exchange, Rochester
acquired a beneficial interest equal to 25% of the interest held by Harken de
Colombia, Ltd. in the Palo Blanco and Anteojos prospect operations.
Parkcrest Financing Agreement -- Harken de Colombia, Ltd. has entered
into a financing agreement (the "Parkcrest Financing Agreement") with Parkcrest
Explorations, Ltd. ("Parkcrest", a Canadian corporation) pursuant to which
Parkcrest has paid 33-1/3% of the aggregate costs of the Estero #1 well and
related production facilities on the Palo Blanco prospect, 33-1/3% of the
aggregate costs of the initial well to be drilled on the Anteojos prospect, the
Canacabare #1, and 25% of the aggregate costs related to the Estero #3 well, all
of which are located within the Alcaravan Contract area. In addition, Parkcrest
will pay 33-1/3% of the aggregate costs of the initial well to be drilled under
the Miradores Association Contract. Parkcrest is also responsible for their
contracted percentage share of costs related to seismic on the Alcaravan and
Miradores Contract areas. In exchange, Parkcrest, upon its full performance,
will acquire a beneficial interest equal to 25% of the interest held by Harken
de Colombia, Ltd. in these prospects.
In April 1998, Harken and Parkcrest entered into a Loan and Security
Agreement (the "Parkcrest Loan Agreement") whereby Harken will provide up to
$2,600,000 to Parkcrest to be used as needed by Parkcrest to finance its share
of costs under the Parkcrest Financing Agreement. Under the terms of the
Parkcrest Loan Agreement, any outstanding loans bear interest at 6% per annum in
addition to a monthly management fee payable to Harken of $37,500 per month. Any
outstanding balance pursuant to the Parkcrest Loan Agreement is due and payable
by Parkcrest on November 30, 1998 and is secured by 50% of Parkcrest's
beneficial interest in the Palo Blanco prospect. In April 1998, Parkcrest
borrowed approximately $1,483,000 pursuant to the Parkcrest Loan Agreement.
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EnCap Development Finance Agreement -- In October 1997, Harken entered
into a Development Finance Agreement (the "EnCap Development Finance Agreement")
with EnCap Energy Capital Fund III, L.P., EnCap Energy Capital Fund III-B, L.P.,
BOCP Energy Partners, L.P. and Energy Capital Investment Company PLC
(collectively the "EnCap Investors"), pursuant to which the EnCap Investors
provided $25 million (the "Payment Amount"), less a 2% investment banking fee,
to Harken to finance the planned drilling of the initial wells on three
unexplored oil and gas prospects in the Middle Magdalena Basin of Colombia. As
part of the transaction, Harken issued 150,000 shares of Harken common stock to
the EnCap Investors. The three well exploratory program contemplates the
drilling of one prospect on Harken's Bocachico Contract area and the drilling of
two prospects on Harken's Cambulos Contract area. In exchange, the EnCap
Investors received the right to receive future payments from Harken equal to 5%
of the net profits that Harken de Colombia, Ltd. may derive from the sale of oil
and gas produced from each of the three prospects if the planned drilling on the
prospect is successful (the "EnCap Participation"). Pursuant to the EnCap
Development Finance Agreement, Harken is obligated to drill each of the three
wells prior to October 2000.
Pursuant to the EnCap Development Finance Agreement, the EnCap
Investors have the right, for a period of two years beginning in October 1998,
to convert all or part of the EnCap Participation into shares of Harken common
stock. The number of shares of Harken common stock to be issued upon conversion
of the EnCap Participation will be equal to the quotient of (i) the Payment
Amount (less any distributions made in respect of the EnCap Participation) plus
an amount equal to 15% interest per annum on the net Payment Amount compounded
monthly (the "Invested Amount"), divided by (ii) the market price of Harken
common stock at the time of conversion. During the same two year period, Harken
also has the right to convert the EnCap Participation into shares of Harken
common stock with the number of shares of Harken common stock to be issued to be
equal to the quotient of (i) the Payment Amount (less any distribution made in
respect of the EnCap Participation) plus an amount equal to 25% interest per
annum on the net Payment Amount compounded monthly, divided by (ii) the market
price of Harken common stock at the time of conversion. Harken can also elect to
pay cash upon any conversion of the EnCap Participation in lieu of issuing
Harken common stock. The EnCap Development Finance Agreement also provides for
additional shares of Harken common stock to be issued by Harken in the event of
a conversion to the extent that the EnCap Investors do not, under certain
circumstances, realize the Invested Amount from the sale of shares of Harken
common stock issued at the conversion. See Note 11 -- Related Party Transactions
for a discussion of the relationship between Harken and the EnCap Investors.
European Development Finance Agreements -- In December 1997, Harken
entered into a Development Finance Agreement and other related agreements (the
"European Development Finance Agreement") whereby Sidro S.A., Lambertine
Holdings, Ltd. and Rauscher Pierce and Clark (collectively the "European
Investors") purchased all of the outstanding common stock of Harken Capital
Corporation, ("HCC", a newly-formed U.S. corporation) for $7 million. Pursuant
to the European Development Finance Agreement, HCC then provided the $7 million
to Harken in January 1998 to finance a portion of the cost of the three-well
exploratory program discussed above pursuant to the EnCap Development Finance
Agreement. In exchange, HCC received the right to receive future payments from
Harken equal to 1.4% of the net profits that Harken de Colombia, Ltd. may derive
from the sale of oil and gas produced from each of the three prospects if the
planned drilling on the prospect is successful. Beginning in December 1998, the
European Investors have the right to convert their shares of HCC into shares of
Harken common stock with terms substantially identical to the EnCap Development
Finance Agreement. As part of the transaction, Harken issued 42,000 shares of
Harken common stock to the European Investors and paid a cash fee of $175,000 to
one of the European Investors.
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In March 1998, Harken received directly an additional $3 million
pursuant to a Development Finance Agreement with Faisal Finance ("Faisal"),
which contains terms substantially identical to the EnCap Development Finance
Agreement, including conversion provisions which begin in March 1999. In
exchange, Faisal received the right to receive future payments from Harken equal
to 0.6% of the net profits that Harken de Colombia, Ltd. may derive from the
sale of oil and gas produced from each of the three prospects discussed above
pursuant to the EnCap Development Finance Agreement if the planned drilling on
the prospect is successful. As part of this transaction, Harken issued 18,000
shares of Harken common stock and paid a cash fee of $75,000 to a financial
advisor.
(7) EUROPEAN CONVERTIBLE NOTES PAYABLE
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 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).
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. 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. 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. 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"). The Trust Indenture
provided for a five percent premium on the number of shares of Harken common
stock issuable on conversion that was paid 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). In October 1997, Harken met the market price criteria
necessary to call for mandatory conversion of the 5 1/2% European Notes any time
on or after June 11, 1998, and provided
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notice to the holders as required under the Trust Indenture. In May 1998, Harken
formally called the 5 1/2% European Notes which remain outstanding for
conversion on June 12, 1998. As of December 31, 1997, holders of 5 1/2% European
Notes totaling $30,120,000 have exercised their conversion option and such
holders were issued 6,325,200 shares of Harken common stock. Subsequent to
December 31, 1997, and as of April 30, 1998, additional holders of 5 1/2%
European Notes totaling $610,000 have exercised their conversion option and such
holders were issued an additional 122,000 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
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 total proved Colombian 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. Harken was in compliance with the Asset
Value Coverage Ratio at March 31, 1998.
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 5 1/2% European Notes is
reflected as a current asset at December 31, 1997 and March 31, 1998 as all such
cash is available according to the Trust Indenture. 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.
(8) STOCKHOLDERS' EQUITY
Common Stock -- Harken currently has authorized 175,000,000 shares of
$.01 par common stock. At December 31, 1997 and March 31, 1998, Harken had
issued 121,811,534 and 122,799,347 shares, respectively.
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Issuance of European Convertible Notes Payable -- 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. 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. (see Note 7 -- European Convertible Notes Payable for further
discussion). 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. On July 31,
1997, Harken converted the remaining 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 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. As of March 31, 1998, all but approximately 60,000 of such warrants had
been 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 December 31, 1997, holders of 5 1/2%
European Notes totaling $30,120,000 have exercised their conversion option and
such holders were issued 6,325,200 shares of Harken common stock. Subsequent to
December 31, 1997 and as of April 30, 1998, holders of 5 1/2% European Notes
totaling an additional $610,000 have exercised their conversion option and such
holders were issued 122,000 shares of Harken common stock.
Acquisition of Cal-T Properties -- In August 1997, Harken acquired
working interests in the Cal-T Properties in exchange for 565,000 shares of
Harken common stock. See Note 2-- Acquisition for further discussion.
Acquisition of EnerVest Properties -- In March 1997, Harken and
EnerVest Acquisition - II Limited Partnership ("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 at the July 10, 1996
acquisition closing date, Harken issued 1,400,000 shares of Harken common stock
as final consideration for the purchase of the EnerVest Properties.
Palo Blanco Development Finance Agreements -- In June 1996, Harken,
along with Harken de Colombia, Ltd. entered into separate Development Finance
Agreements with two investors. 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. See Note 6 -- Development Finance and Operating Agreements.
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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 6 -- Development Finance and Operating
Agreements for further discussion.
EnCap Development Finance Agreement -- In October 1997, Harken and the
EnCap Investors entered into a Development Finance Agreement under which the
EnCap Investors funded approximately $25 million to finance the drilling of
three wells in the Middle Magdalena Basin of Colombia. Pursuant to the EnCap
Development Finance Agreement, both Harken and the EnCap Investors have the
right under certain circumstances to convert all or part of the EnCap
Participation into shares of Harken common stock. Harken also issued 150,000
shares of Harken common stock to the EnCap Investors. See Note 6 -- Development
Finance and Operating Agreements for further discussion of the EnCap Development
Finance Agreement and Note 11 -- Related Party Transactions for further
discussion of the EnCap Investors.
European Development Finance Agreements -- In December 1997, Harken,
HCC and the European Investors entered into a Development Finance Agreement
under which HCC funded $7 million in January 1998 to finance the drilling of
three wells in the Middle Magdalena Basin of Colombia. Pursuant to the European
Development Finance Agreement, both Harken and HCC have the right under certain
circumstances to convert some or all of the shares of HCC common stock into
shares of Harken common stock. In addition, Harken issued 42,000 shares of
Harken common stock to the European Investors. In March 1998, Harken entered
into an additional Development Finance Agreement with Faisal, which also
contained terms whereby both Harken and Faisal have the right under certain
circumstances to convert part of the Participation into shares of Harken common
stock. In addition, Harken issued 18,000 shares of Harken common stock to a
financial advisor in connection with the Development Finance Agreement with
Faisal. See Note 6 -- Development Finance and Operating Agreements for further
discussion.
Series F Preferred Stock -- On April 9, 1998, Harken entered into a
Securities Purchase Agreement with RGC International Investors, LDC ("RGC"),
pursuant to which Harken issued to RGC 15,000 shares of its Series F Convertible
Preferred Stock (the "Series F Preferred") in exchange for $15,000,000. The
Series F Preferred is convertible into shares of Harken common stock at a
conversion price based upon the market price of Harken common stock at the time
of conversion. The number of shares of Harken common stock issuable upon
conversion of the Series F Preferred will also include a premium amount equal to
an increase calculated on the face value of the Series F Preferred at 5% per
annum. The Series F Preferred does not pay dividends.
During the first six months following the issuance of the Series F
Preferred, RGC can elect to convert the shares of the Series F Preferred into
Harken common stock on any day that the closing sales price of the Harken common
stock on the American Stock Exchange is equal to or greater than 115% of the
"Market Price." The Market Price is equal to the lower of (a) the average of the
closing bid prices of Harken common stock for any five consecutive trading days
during the 22 trading days ending one trading day prior to the conversion date,
or (b) the low closing bid price of Harken common stock over the five trading
days ending one trading day prior to the conversion date.
During the first nine months following the issuance of the Series F
Preferred, the conversion price will be equal to 103% of the Market Price on the
conversion date. On January 9, 1999, the conversion price will be fixed at 90%
of the average of the closing bid prices of Harken common stock for the previous
22 trading days. Beginning February 9, 1999, the conversion price will be fixed
at 90% of the average of the closing bid
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prices of Harken common stock for the previous 22 trading days if it would
result in a lower conversion price than that calculated on January 9, 1999. Any
shares of Series F Preferred outstanding on April 9, 1999, will automatically be
converted into shares of Harken common stock at the then applicable conversion
price.
Harken has the option to redeem for cash any shares of Series F
Preferred presented for conversion if (a) prior to January 9, 1999, the closing
price of Harken common stock on the conversion date is less than $4.80, or (b)
on or after January 9, 1999, the then applicable conversion price is less than
$4.80, for an amount equal to the number of shares of Harken common stock that
would otherwise be issuable upon conversion multiplied by the closing price of
Harken common stock on the conversion date.
At each election to convert shares of Series F Preferred into Harken
common stock, RGC will have the option to purchase from Harken for cash
additional shares of Harken common stock equal to the number of shares issued on
such conversion (less any shares issued in respect of the premium amount) at a
purchase price equal to the then applicable conversion price.
Stockholder Rights Plan -- In April 1998, Harken adopted a rights
agreement (the "Rights Agreement") whereby a dividend of one preferred share
purchase right (a "Right") was paid for each outstanding share of Harken common
stock. The Rights will be exercisable only if a person acquires beneficial
ownership of 15 percent or more of Harken common stock (an "Acquiring Person"),
or commences a tender offer which would result in beneficial ownership of 15
percent or more of such stock. When they become exercisable, each Right entitles
the registered holder to purchase from Harken one one-thousandth of one share of
Series E Junior Participating Preferred Stock ("Series E Preferred Stock"), at a
price of $35.00 per one one-thousandth of a share of Series E Preferred Stock,
subject to adjustment under certain circumstances.
Upon the occurrence of certain events specified in the Rights
Agreement, each holder of a Right (other than an Acquiring Person) will have the
right to purchase, at the Right's then current exercise price, shares of Harken
common stock having a value of twice the Right's exercise price. In addition,
if, after a person becomes an Acquiring Person, Harken is involved in a merger
or other business combination transactions with another person in which Harken
is not the surviving corporation, or under certain other circumstances, each
Right will entitle its holder to purchase, at the Right's then current exercise
price, shares of common stock of the other person having a value of twice the
Right's exercise price.
Unless redeemed by Harken earlier, the Rights will expire on April 6,
2008. Harken will generally be entitled to redeem the Rights in whole, but not
in part, at $.01 per Right, subject to adjustment. No Rights were exercisable
under the Rights Agreement at March 31, 1998.
The terms of the Rights generally may be amended by Harken without the
approval of the holders of the Rights prior to the public announcement by Harken
or an Acquiring Person that a person has become an Acquiring Person.
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(9) PER SHARE DATA
Basic earnings per common share was computed by dividing net income or
loss by the weighted average number of shares of Harken common stock outstanding
during the year. Diluted earnings per common share for 1997 and 1998 was
determined by including the effect of outstanding options and warrants using the
treasury stock method to the extent that the average share price exceeds the
exercise price. The impact of unconverted European Convertible Notes was not
included for the three months ended March 31, 1997 as their effect would have
been antidilutive. Harken has adopted Statement of Financial Accounting
Standards No. 128, "Earnings per Share", effective December 15, 1997, and as a
result has restated 1997 weighted average shares outstanding calculations,
although there was no impact on prior year income per share amounts. A
reconciliation of the calculations of diluted earnings per common share is as
follows:
Three Months Ended March 31, 1997
-----------------------------------------
Weighted Average
Income Shares Per Share
------------ ------------- ---------
Basic earnings per common share $ 68,000 97,053,054 $0.00
Treasury stock method effect of:
Outstanding employee stock options -- 1,385,894 --
Outstanding warrants -- 1,594,548 --
----------- ----------- -----
Diluted earnings per common share $ 68,000 100,033,496 $0.00
=========== =========== =====
Three Months Ended March 31, 1998
------------------------------------------
Weighted Average
Income Shares Per Share
------------ ------------- ----------
Basic earnings per common share $ 84,000 122,441,279 $0.00
Treasury stock method effect of:
Outstanding employee stock options -- 2,352,875 --
Outstanding warrants -- 400,853 --
Effect of conversion of outstanding
5 1/2% European Notes -- 7,898,333 --
----------- ----------- -----
Diluted earnings per common share $ 84,000 133,093,340 $0.00
=========== =========== =====
Beginning in April 1998, Harken's calculation of diluted earnings per
share will be affected by the issuance of the Series F Preferred Stock which are
convertible into shares of Harken common stock. See Note 8 -- Stockholders'
Equity for further discussion of the Series F Preferred Stock.
(10) INCOME TAXES
At March 31, 1998, Harken had available for federal income tax
reporting purposes, net operating loss (NOL) carryforward for regular tax
purposes of approximately $60,000,000 which expires in 1998 through 2012,
alternative minimum tax NOL carryforward of approximately $51,000,000 which
expires in 1998 through 2011, investment tax credit carryforward of
approximately $842,000 which expires in 1998 through 2002, statutory depletion
carryforward of approximately $2,400,000 which does not have an expiration date,
and a net capital loss carryforward of approximately $12,400,000 which expires
in 2007 through 2011.
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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 March 31, 1998 were approximately $680,000. Total deferred tax
assets, primarily related to the net operating loss carryforward, were
approximately $20,538,000 at March 31, 1998. The total net deferred tax asset is
offset by the valuation allowance of approximately $19,858,000 at March 31,
1998.
(11) RELATED PARTY TRANSACTIONS
In June 1997, Harken added to its Board of Directors a new director who
is also a managing director of EnCap Investments L.C. ("EnCap"). EnCap has
historically provided financial consulting and investment banking services to
Harken. In connection with the June 1997 placement of the 5 1/2% European Notes,
EnCap received as a financial consulting fee, $466,667 in cash, and a warrant to
purchase 50,000 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 described in Note 6 -- Development Finance and Operating Agreements, in
October 1997, Harken entered into a Development Finance Agreement with the EnCap
Investors. EnCap serves as the general partner of three of the EnCap Investors
and the new Harken director serves as a director of the fourth EnCap Investor.
In connection with the EnCap Development Finance Agreement, EnCap received an
investment banking fee of $500,000.
During 1997 and 1998, Harken made short-term loans totaling $355,000 to
certain members of Harken's Board of Directors and Management. Such notes
receivable are reflected in Harken's consolidated balance sheet at December 31,
1997 and March 31, 1998 as Related Party Notes Receivable.
(12) COMMITMENTS AND CONTINGENCIES
Harken has accrued approximately $1,681,000 at March 31, 1998 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 the guarantee of certain lease
obligations of a former subsidiary, which in management's opinion, will not
result in significant loss exposure to Harken.
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, and statements containing the words
"believes", "anticipates", "estimates", "expects", or "may" are forward-looking
statements, as defined in Section 21D of the Securities Exchange Act of 1934.
Such forward-looking statements involve known and unknown risk, uncertainties
and other factors which may cause the actual results, performance, timing or
achievements of Harken to be materially different for any results, performance,
timing or achievements expressed or implied by such forward-looking statements.
Such factors include, among others, the risks described in Harken's filings with
the Securities and Exchange Commission.
OVERVIEW
Harken reported net income for the three months ended March 31, 1998 of
$84,000 compared to a net income of $68,000 for the prior year period. Total
revenues increased from approximately $4.25 million during the first quarter of
1997 to approximately $4.36 million for the first quarter of 1998, primarily due
to increased interest income as a result of net proceeds received from the
issuance of the 5 1/2% European Notes and from the EnCap Development Finance
Agreement. Gross profit before depreciation and amortization, general and
administrative and interest expenses totaled approximately $1.3 million during
the three months ended March 31, 1998 compared to approximately $2.4 million for
the prior year period.
Internationally, during March 1998, Harken signed an additional
Association Contract in Colombia with Ecopetrol, bringing the total number of
Association Contracts to six and increasing the total number of acres currently
operated in Colombia by Harken to approximately 1,358,000. Harken has continued
its Colombian exploration efforts during the first part of 1998 with the
drilling of the Estero #3 and Canacabare #1 wells on the Alcaravan Contract
area, and the completion of the Catalina #1 well and the spudding and completion
of the Olivo #1 well on the Bolivar Contract area.
Harken plans to continue its Colombian exploration program during 1998,
expecting to spud ten additional exploratory wells as well as certain pipeline
and facility installation efforts.
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RESULTS OF OPERATIONS
The following is management's discussion and analysis of certain
significant factors which have affected Harken's earnings and balance sheet
during the periods included in the accompanying consolidated financial
statements.
Three Months Ended March 31,
-----------------------------
DOMESTIC EXPLORATION AND PRODUCTION OPERATIONS 1997 1998
- ---------------------------------------------- ------------- ------------
(Unaudited)
REVENUES
Oil sales revenues $2,160,000 $1,379,000
Oil volumes in barrels 100,000 95,000
Oil price per barrel $ 21.60 $ 14.52
Gas sales revenues $1,307,000 $1,189,000
Gas volumes in mcf 394,000 502,000
Gas price per mcf $ 3.32 $ 2.37
Gas plant revenues $ 213,000 $ 132,000
OTHER REVENUES
Interest Income $ 560,000 $1,656,000
Other Income $ 11,000 $ 6,000
For the quarter ended March 31, 1998 compared with the corresponding prior
period.
DOMESTIC OPERATIONS
Gross oil and gas revenues during the first quarter of 1998 and 1997
were generated by Harken's domestic exploration and production operations. 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.
Gross oil revenues decreased 36% to $1,379,000 during the first quarter
of 1998 compared to $2,160,000 during the first quarter of 1997 primarily due to
the sharp decline in oil prices, which averaged $7.08 less per barrel during the
first quarter of 1998 compared to the prior year period. Prices have continued
to remain lower than prices received during 1997 during the first half of the
second quarter of 1998.
Gross gas revenues decreased 9% to $1,189,000 for the three months
ended March 31, 1998 compared to $1,307,000 for the prior year period, despite
the increased production resulting from the acquisition of the Cal-T Properties
in August 1997. The decrease in gas revenues was caused by the decrease in
average gas prices received during the first quarter of 1998, as Harken received
an overall average price of $3.32 per mcf of gas production during the first
quarter of 1997 compared to only $2.37 per mcf received during the first quarter
of 1998. Harken also reflected decreased gas production from certain of its
Texas Panhandle properties
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during the first quarter of 1998 as many of the properties experienced numerous
temporary operational curtailments.
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
acquisition of the Cal-T Properties.
COLOMBIAN OPERATIONS
Harken reflected no oil and gas revenues or operating expenses from its
Colombian operations during the first quarter of 1998. Harken expects, however,
that production from its Estero #1, Torcaz #2, Torcaz #3 and Catalina #1 wells
will commence during 1998 as trucking operations from these well sites are
initiated. In addition, 1998 production operations could further increase if the
current and planned drilling activities in Colombia are successful.
In April 1998, Harken initiated trucking operations from its Torcaz #2
and Torcaz #3 wells on the Bocachico Contract area. In the Alcaravan Contract
area, Harken's operations have been affected by the rainy season in the Llanos
Basin, which has affected the completion and testing of the recently drilled
Estero #3 and Canacabare #1 wells, as well as the construction of the Phase I
Pipeline connecting the Estero wells to the closest existing pipeline. Harken
anticipates that results of the Estero #3 will be available in mid-May 1998.
Harken is currently attempting to mobilize light equipment in order to test the
Canacabare #1 well, and hopes to have results available in May 1998, if weather
conditions do not impede these efforts. Harken now expects to initiate a 90-day
production test of the Estero #1 and, if successful, the Estero #3 well, in June
1998. Construction of the Phase I Pipeline, pending weather conditions and
receipt of required approvals, is scheduled to begin in July 1998. The Olivo #1
well, drilled on the Bolivar Contract area, was completed and tested at a
production rate of 10,800 barrels of oil per day with no water from the Middle
Cretaceous naturally fractured Salada (Lower La Luna) Formation. Harken believes
the production rate was limited by the size of pump and production equipment
used. An independent reservoir engineering firm estimates the Olivo #1 and the
previously completed Catalina #1 are each capable of producing at rates in
excess of 20,000 barrels of oil per day with larger production equipment. Harken
anticipates initiating a 90-day production test from the Catalina #1 in July
1998. In the Cambulos Contract area, Harken anticipates drilling its first well
on the Cambulos acreage, on the Emerald Mountain prospect, in June 1998. For a
detailed discussion of all of Harken's operations in Colombia, see Harken's
Annual Report on Form 10-K for the year ended December 31, 1997.
INTEREST AND OTHER INCOME
Interest and other income increased significantly during the first
quarter of 1998 compared to the prior year period due to interest earned by
Harken on its invested funds, including the net proceeds from the June 1997
issuance of $70 million of 5 1/2% European Notes, which are initially maintained
and invested in separate interest bearing bank accounts (the "Segregated
Accounts"), and from proceeds from the EnCap Development Finance Agreement and
the European Development Finance Agreements. Harken generated approximately $1.7
million of interest income during the first quarter of 1998, compared to
approximately $560,000 of interest income during the prior year period. Harken's
cash balances, which include investments in short-term marketable debt
securities, are expected to decrease in 1998 as such funds are used to support
Harken's capital expenditure plans. Harken intends to continue to pursue other
financing arrangements during 1998 and the decrease in existing cash balances
and related interest income could be mitigated or offset if such efforts are
successful.
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OTHER COSTS AND EXPENSES
General and administrative expenses increased 32% from $1,334,000 for
the first quarter of 1997 to $1,758,000 for the first quarter of 1998, related
to Harken's increased executive, corporate and administrative personnel costs
associated with Harken's expanding overall operations.
Depreciation and amortization expense increased during the first
quarter of 1998 compared to the prior year period consistent with the increased
equivalent barrel production levels during the quarter. 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. In addition, Harken's depreciation on other property has increased
as a result of Harken's expanding operations.
Interest expense and other decreased significantly during the first
quarter of 1998 compared to the prior year period despite the June 1997 issuance
of the 5 1/2% European Notes due to the increase in the amounts of interest
capitalized to Harken's Colombian exploration activity.
LIQUIDITY AND CAPITAL RESOURCES
Harken's working capital at March 31, 1998 was approximately $108.3
million, versus approximately $110.6 million at December 31, 1997. Cash and
temporary investments, including segregated account cash, at March 31, 1998
totaled $118.6 million, a decrease of $4.9 million from December 31, 1997. The
decrease in cash and working capital resulted primarily from approximately $16.9
million of capital expenditures during the first quarter, primarily related to
Harken's Colombia operations. The effect of such capital expenditures was
partially offset by the receipt of approximately $9.8 million pursuant to
Development Finance Agreements. In addition, Harken's operations provided
approximately $722,000 of cash flow during the first quarter of 1998.
Harken's primary need for capital is to fund the planned exploration
and development efforts in Colombia. In 1997, Harken's capital expenditures
totaled approximately $37 million, including $30 million related to exploration
and development in Colombia. Harken anticipates that its 1998 Colombian capital
expenditures will total approximately $113 million, including exploration costs
of approximately $85 million. Harken believes that it will have sufficient cash
resources to fund all of its planned capital expenditures for 1998. In addition,
Harken intends to pursue domestic acquisition opportunities during 1998. Harken
intends to fund such acquisitions, if any are consummated, through a combination
of cash on hand, issuances of debt or equity securities.
Harken anticipates that full development of its Colombian reserves will
take several years and will also require extensive production facilities,
transportation pipelines and development activity which would require
significant additional capital expenditures. The ultimate amount of such
expenditures cannot be presently predicted. As a result of its recent successes
in Colombia from its exploratory drilling program, Harken's current business
plan includes estimated total capital expenditures in Colombia for the years
1998 through 2001 that approximate $1 billion. Harken estimates that
approximately 75 to 80% of external funds applicable to these capital
expenditures will be provided from non-recourse project finance and other
similar forms of debt which can be identified to specific development projects.
Harken anticipates it would put this type of debt facility in place after
establishing ongoing production rates from its recently announced discoveries.
The remaining 20 to 25% of the total anticipated expenditures in Colombia apply
to continued exploration efforts including seismic acquisition and exploratory
drilling. In the past, Harken has addressed its exploration capital needs in
Colombia through European convertible note offerings. Although Harken will
continue to seek some
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of its exploration capital from Europe, Harken anticipates that a portion of its
1998 and 1999 exploration capital needs will also be satisfied by placements in
the United States. There can be no assurances, however, that Harken will have
adequate funds available to it to fund all of its Colombian activities.
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.
Harken's domestic operating strategy includes efforts to acquire
additional oil and gas reserves through drilling activities in North America and
through acquisitions. Harken plans to continue development of proved undeveloped
reserves on its North American properties in addition to a continual workover
program on producing properties. Harken expects such drilling and workover costs
to total approximately $4 million in 1998. The targeted results of these efforts
are to maintain North American production levels during 1998.
On June 11, 1997, Harken issued 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 a conversion price of $5.00 per share, subject
to adjustment in certain circumstances. Harken also has the right to require
conversion of the 5 1/2% European Notes into shares of Harken common stock at
any time on or after June 11, 1998. In May 1998, Harken formally called the 5
1/2% European Notes which remain outstanding for conversion on June 12, 1998.
Between June 11, 1997 and December 31, 1997, $30,120,000 in principal amount of
the 5 1/2% European Notes converted into Harken common stock.
All proceeds from the sale of the 5 1/2% European Notes were initially
paid to a Trustee pursuant to a Trust Indenture and held in Segregated Accounts
to be maintained for Harken's benefit. Until all of the 5 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) 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 total proved
Colombian reserves to (ii) the aggregate outstanding principal amount of the 5
1/2% European Notes. As of March 31, 1998, Harken was in compliance with the
Asset Value Coverage Ratio test. In order for any of the proceeds to be released
from the Segregated Accounts, Harken must demonstrate that the Asset Value
Coverage Ratio (as defined in the Trust Indenture) 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 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
reserves. At March 31, 1998, all proceeds held in the Segregated Accounts were
available to be released. For a detailed discussion of the 5 1/2% European Notes
see "Notes to Consolidated Financial Statements, Note 7 -- European Convertible
Notes Payable."
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 payments will be funded from cash flow from operations, existing cash
balances or from available proceeds in the Segregated Accounts.
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In October 1997, December 1997, and March 1998, Harken entered into
separate Development Finance Agreements with institutional investors
(collectively the "Institutional Investors"), pursuant to which the
Institutional Investors provided approximately $34.5 million (the "Payment
Amount") of net proceeds to Harken to finance the drilling of the initial wells
on three unexplored oil and gas prospects in the Middle Magdalena Basin of
Colombia. Approximately $24.5 million of net proceeds was received in October
1997 and approximately $10 million of net proceeds was received during the first
quarter of 1998. In exchange, the Institutional Investors received the right to
receive future payments from Harken equal to 7% of the net profits that Harken
de Colombia, Ltd. may derive from the sale of oil and gas produced from each of
the three prospects if the planned drilling on the prospect is successful (the
"Institutional Participation"). Pursuant to the Development Finance Agreements,
Harken is obligated to drill each of the three wells prior to October 2000.
Pursuant to the Development Finance Agreements, the Institutional
Investors have the right, for a period of two years beginning in October 1998,
to convert all or part of the Institutional Participation into shares of Harken
common stock. The number of shares of Harken common stock to be issued upon
conversion of the Institutional Participation will be equal to the quotient of
(i) the Payment Amount (less any distributions made in respect of the
Institutional Participation) plus an amount equal to 15% interest per annum on
the net Payment Amount compounded monthly (the "Invested Amount"), divided by
(ii) the market price of the Harken common stock at the time of conversion.
During the same two year period, Harken also has the right to convert the
Institutional Participation into shares of Harken common stock with the number
of shares of Harken common stock to be issued to be equal to the quotient of (i)
the Payment Amount (less any distribution made in respect of the Institutional
Participation) plus an amount equal to 25% interest per annum on the net Payment
Amount compounded monthly, divided by (ii) the market price of Harken common
stock at the time of conversion. Harken can also elect to pay cash upon any
conversion of the Institutional Participation in lieu of issuing Harken common
stock. The Development Finance Agreements also provide for additional shares of
Harken common stock to be issued by Harken in the event of a conversion to the
extent that the Institutional Investors do not, under certain circumstances,
realize the Invested Amount from the sale of shares of Harken common stock
issued at the conversion.
At the present time, it is not known whether the Institutional
Investors or Harken will exercise their rights to convert the Institutional
Interest into Harken common stock, nor can Harken determine the number of shares
of Harken common stock which would be required to be issued in the event that
Harken or the Institutional Investors elect to convert the Institutional
Participation into shares of Harken common stock.
On April 9, 1998, Harken entered into a Securities Purchase Agreement
with RGC International Investors, LDC ("RGC"), pursuant to which Harken issued
to RGC 15,000 shares of its Series F Convertible Preferred Stock (the "Series F
Preferred") in exchange for $15,000,000. The Series F Preferred is convertible
into shares of Harken common stock at a conversion price based upon the market
price of Harken common stock at the time of conversion. The number of shares of
Harken common stock issuable upon conversion of the Series F Preferred will also
include a premium amount equal to an increase calculated on the face value of
the Series F Preferred at 5% per annum. The Series F Preferred does not pay
dividends.
Harken has the option to redeem for cash any shares of Series F
Preferred presented for conversion if (a) prior to January 9, 1999, the closing
price of Harken common stock on the conversion date is less than $4.80, or (b)
on or after January 9, 1999, the then applicable conversion price is less than
$4.80, for an amount equal to the number of shares of Harken common stock that
would otherwise be issuable upon conversion multiplied by the closing price of
Harken common stock on the conversion date.
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26
At each election to convert shares of Series F Preferred into Harken
common stock, RGC will have the option to purchase from Harken for cash
additional shares of Harken common stock equal to the number of shares issued on
such conversion (less any shares issued in respect of the premium amount) at a
purchase price equal to the then applicable conversion price.
The exploration, development and production of oil and gas are subject
to various Colombian, 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. 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 $1.7 million at March 31, 1998
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, 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.
In September 1997, Harken Exploration Company, a wholly owned
subsidiary of Harken, was served with a lawsuit filed in Amarillo,
Texas in Federal District Court for the Northern District of Texas
styled D. E. Rice and Karen Rice, as Trustees for the Rice Family
Living Trust vs. Harken Exploration Company. The Rice Family Living
Trust ("Rice") is a surface land owner in Hutchinson County, Texas.
Rice has alleged that oil and saltwater spills from Harken Exploration
Company's equipment and wells have polluted and otherwise damaged its
property. Rice is seeking payment of costs to prevent, minimize and
mitigate the alleged oil pollution, costs to restore and repair the
land and vegetation, costs to decontaminate the ground and surface
water, interest, attorneys' fees, and punitive damages. Furthermore,
Rice has requested that Harken Exploration Company be enjoined from
producing any oil or gas from its lands. Rice has alleged that
remediation of all of the pollution on its land will cost approximately
$40,000,000. Harken believes that this lawsuit is wholly without merit.
Harken has filed a Motion to Dismiss for Failure to State a Claim and
has asserted numerous other defenses, all of which Harken believes are
meritorious. Harken intends to defend itself vigorously.
Harken and its subsidiaries currently are involved in various other
lawsuits and other contingencies, which in management's opinion, will
not have a material adverse effect on Harken's financial position.
Item 2. Changes in Securities.
In April 1998, Harken adopted a Stockholder Rights Plan. For further
discussion, see Harken's Current Report on Form 8-K dated April 6,
1998.
Item 3. Default Upon Senior Securities.
Not applicable.
Item 4. Submission of Matters to a Vote of Securities Holders.
Not applicable.
Item 5. Other Information
Not applicable.
Item 6. Exhibits and Reports on Form 8-K.
(a) EXHIBIT INDEX
Exhibit
3.1 Certificate of Incorporation of Harken Energy
Corporation as amended (filed as Exhibit 3.1 to
Harken's Annual Report on Form 10-K for fiscal year
ended December 31,1989, File No. 0-9207, and
incorporated by reference herein).
3.2 Amendment to the Certificate of Incorporation of
Harken Energy Corporation (filed as Exhibit 28.8 to
the Registration Statement on Form S-1 of Tejas Power
Corporation, file No. 33-37141, and incorporated by
reference herein.)
3.3 Amendment to the Certificate of Incorporation of
Harken Energy Corporation (filed as Exhibit 3 to
Harken's Quarterly Report on Form 10-Q for fiscal
quarter ended March 31, 1991, File No. 0-9207, and
incorporated by reference herein.)
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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).
4.6 Rights Agreement, dated as of April 6, 1998, by and
between Harken Energy Corporation And ChaseMellon
Shareholder Services L.L.C., as Rights Agent (filed
as Exhibit 4 to Harken's Current Report on Form 8-K
dated April 7, 1998, file No. 0-9207, and
incorporated by reference herein).
4.7 Certificate of Designations of Series E Junior
Participating Preferred Stock (filed as Exhibit B to
Exhibit 4 to Harken's Current Report on Form 8-K
dated April 7, 1998, file No. 0- 9207, and
incorporated by reference herein).
*4.8 Certificate of Designations, Preferences and Rights
of Series F Convertible Preferred Stock.
*10.1 Securities Purchase Agreement dated as of April 9,
1998, by and between Harken Energy Corporation and
RGC International Investors, LDC.
*27 Financial Data Schedules.
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(b) REPORTS ON FORM 8-K.
Current Report on Form 8-K dated April 6, 1998, reporting
Harken's adoption of a Stockholder Rights Plan.
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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 7, 1998 By: /s/ WAYNE HENNECKE
--------------------------- --------------------------------------
Wayne Hennecke, Vice President of
Finance and Chief Financial Officer
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EXHIBIT INDEX
Exhibit
-------
3.1 Certificate of Incorporation of Harken Energy
Corporation as amended (filed as Exhibit 3.1 to
Harken's Annual Report on Form 10-K for fiscal year
ended December 31,1989, File No.
0-9207, and incorporated by reference herein).
3.2 Amendment to the Certificate of Incorporation of
Harken Energy Corporation (filed as Exhibit 28.8 to
the Registration Statement on Form S-1 of Tejas Power
Corporation, file No. 33-37141, and incorporated by
reference herein.)
3.3 Amendment to the Certificate of Incorporation of
Harken Energy Corporation (filed as Exhibit 3 to
Harken's Quarterly Report on Form 10-Q for fiscal
quarter ended March 31, 1991, File No. 0-9207, and
incorporated by reference herein.)
3.4 Amendments to the Certificate of Incorporation of
Harken Energy Corporation (filed as Exhibit 3 to
Harken's Quarterly Report on Form 10-Q for fiscal
quarter ended June 30, 1991, File No. 0-9207, and
incorporated by reference herein.)
3.5 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).
4.6 Rights Agreement, dated as of April 6, 1998, by and
between Harken Energy Corporation And ChaseMellon
Shareholder Services L.L.C., as Rights Agent (filed
as Exhibit 4 to Harken's Current Report on Form 8-K
dated April 7, 1998, file No. 0-9207, and
incorporated by reference herein).
4.7 Certificate of Designations of Series E Junior
Participating Preferred Stock (filed as Exhibit B to
Exhibit 4 to Harken's Current Report on Form 8-K
dated April 7, 1998, file No. 0- 9207, and
incorporated by reference herein).
*4.8 Certificate of Designations, Preferences and Rights
of Series F Convertible Preferred Stock.
*10.1 Securities Purchase Agreement dated as of April 9,
1998, by and between Harken Energy Corporation and
RGC International Investors, LDC.
*27 Financial Data Schedules.