<PAGE> 1
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, 1994
( ) 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.)
2505 NORTH HIGHWAY 360, SUITE 800 75050
GRAND PRAIRIE, TEXAS (Zip Code)
(Address of principal executive offices)
Registrant's telephone number, including area code (817) 695-4900
Securities registered pursuant to Section 12(b) of the Act:
<TABLE>
<CAPTION>
Title of each class: Name of each exchange on which registered:
<S> <C>
COMMON STOCK, PAR VALUE $0.01 PER SHARE AMERICAN STOCK EXCHANGE
</TABLE>
Securities registered pursuant to Section 12(g) of the Act: NONE
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 shares of Common Stock, par value $0.01 per share,
outstanding as of April 15, 1994 was 59,482,853, net of 5,983,655 Treasury
Shares.
<PAGE> 2
HARKEN ENERGY CORPORATION
INDEX TO QUARTERLY REPORT
MARCH 31, 1993 AND 1994
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
PART I. FINANCIAL INFORMATION
Item 1. Condensed Financial Statements
Consolidated Balance Sheets . . . . . . . . . . . . . . . . . . . . . . . . . 4
Consolidated Statements of Operations . . . . . . . . . . . . . . . . . . . . 5
Consolidated Statements of Stockholders' Equity . . . . . . . . . . . . . . . 6
Consolidated Statements of Cash Flow . . . . . . . . . . . . . . . . . . . . 7
Notes to Consolidated Financial Statements . . . . . . . . . . . . . . . . . 8
Item 2. Management's Discussion and Analysis of Financial Condition
and Results of Operations . . . . . . . . . . . . . . . . . . . . . . . . . . 15
PART II. OTHER INFORMATION
Notes Concerning Other Information . . . . . . . . . . . . . . . . . . . . . 19
SIGNATURES . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 20
</TABLE>
2
<PAGE> 3
PART I - FINANCIAL INFORMATION
3
<PAGE> 4
HARKEN ENERGY CORPORATION AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(unaudited)
<TABLE>
<CAPTION>
DECEMBER 31, MARCH 31,
1993 1994
---------------- ----------------
<S> <C> <C>
ASSETS
------
Current Assets:
Cash and temporary investments . . . . . . . . . . . . . . . $ 3,299,000 $ 2,776,000
Accounts and notes receivable, net . . . . . . . . . . . . . 1,022,000 785,000
Accounts receivable from related parties . . . . . . . . . . 1,081,000 1,202,000
Assets of discontinued operations held for resale . . . . . 796,000 895,000
Prepaid expenses and other current assets . . . . . . . . . 500,000 384,000
---------------- ----------------
Total Current Assets . . . . . . . . . . . . . . . . . 6,698,000 6,042,000
Property and Equipment, net . . . . . . . . . . . . . . . . . . 19,807,000 19,410,000
Investments in Former Subsidiaries . . . . . . . . . . . . . . 9,218,000 9,218,000
Notes Receivable from Related Parties, including interest . . . 701,000 483,000
Other Assets, net . . . . . . . . . . . . . . . . . . . . . . . 1,307,000 1,435,000
---------------- ----------------
$ 37,731,000 $ 36,588,000
================ ================
LIABILITIES AND STOCKHOLDERS' EQUITY
------------------------------------
Current Liabilities:
Trade payables . . . . . . . . . . . . . . . . . . . . . . . $ 339,000 $ 413,000
Accrued liabilities and other . . . . . . . . . . . . . . . 4,840,000 3,186,000
Notes payable . . . . . . . . . . . . . . . . . . . . . . . -- 944,000
Revenues and royalties payable . . . . . . . . . . . . . . . 1,354,000 1,226,000
---------------- ----------------
Total Current Liabilities . . . . . . . . . . . . . . 6,533,000 5,769,000
Commitments and Contingencies (Note 10)
Deferred Revenue, net of current portion . . . . . . . . . . . 367,000 284,000
Redeemable Preferred Stock . . . . . . . . . . . . . . . . . . 1,868,000 1,868,000
Stockholders' Equity:
Common stock, $0.01 par value; authorized
100,000,000 shares; issued 65,466,508 shares . . . . . . . 654,000 654,000
Additional paid-in capital . . . . . . . . . . . . . . . . . 131,052,000 131,052,000
Retained deficit . . . . . . . . . . . . . . . . . . . . . . (81,986,000) (82,282,000)
Treasury stock . . . . . . . . . . . . . . . . . . . . . . . (20,757,000) (20,757,000)
---------------- ----------------
Total Stockholders' Equity . . . . . . . . . . . . . . 28,963,000 28,667,000
---------------- ----------------
$ 37,731,000 $ 36,588,000
================ ================
</TABLE>
The accompanying Notes to Consolidated Financial Statements
are an integral part of these Consolidated Balance Sheets.
4
<PAGE> 5
HARKEN ENERGY CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
(unaudited)
<TABLE>
<CAPTION>
THREE MONTHS ENDED
MARCH 31,
---------------------------------------
1993 1994
--------------- ----------------
<S> <C> <C>
Revenues:
Oil and gas operations . . . . . . . . . . . . . . . . . . . . $ 1,073,000 $ 1,009,000
Management fee income . . . . . . . . . . . . . . . . . . . . 150,000 --
Interest income . . . . . . . . . . . . . . . . . . . . . . . 42,000 23,000
Other income . . . . . . . . . . . . . . . . . . . . . . . . . 278,000 131,000
------------ ------------
1,543,000 1,163,000
------------ ------------
Costs and Expenses:
Oil and gas operating expenses . . . . . . . . . . . . . . . . 391,000 361,000
General and administrative expenses, net . . . . . . . . . . . 487,000 689,000
Depreciation and amortization . . . . . . . . . . . . . . . . 603,000 504,000
Interest expense . . . . . . . . . . . . . . . . . . . . . . . 11,000 39,000
------------ ------------
1,492,000 1,593,000
Income (loss) before income taxes . . . . . . . . . . . . . 51,000 (430,000)
Income tax expense . . . . . . . . . . . . . . . . . . . . . . . -- --
------------ ------------
Income (loss) from continuing operations . . . . . . . . . . 51,000 (430,000)
Discontinued Operations:
Income (loss) from operations of discontinued well service
and contract drilling segment . . . . . . . . . . . . . . . (235,000) (138,000)
Gain on sale of contract drilling rigs . . . . . . . . . . . . -- 272,000
------------ ------------
(235,000) 134,000
------------ ------------
Net loss . . . . . . . . . . . . . . . . . . . . . . . . . . $ (184,000) $ (296,000)
============ ============
Income (loss) per common share:
Income (loss) from continuing operations . . . . . . . . . . . $ 0.00 $ (0.01)
Discontinued operations . . . . . . . . . . . . . . . . . . . (0.00) 0.00
------------ ------------
Net loss . . . . . . . . . . . . . . . . . . . . . . . . . . $ (0.00) $ (0.01)
============ ============
Weighted average shares outstanding . . . . . . . . . . . . . . . 53,491,974 59,482,853
============ ============
</TABLE>
The accompanying Notes to Consolidated Financial Statements
are an integral part of these Statements.
5
<PAGE> 6
HARKEN ENERGY CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
(unaudited)
<TABLE>
<CAPTION>
ADDITIONAL
COMMON PAID-IN RETAINED TREASURY
STOCK CAPITAL DEFICIT STOCK
--------- ---------------- --------------- --------------
<S> <C> <C> <C> <C>
Balance, December 31, 1992 . . . . . . $ 512,000 $ 114,207,000(A) $ (76,492,000) $ (17,911,000)
Issuance of common stock, net . . . 142,000 12,663,000 -- --
Payment of notes receivable,
net of retirements . . . . . . . . -- 2,846,000 -- (2,846,000)
Exchange of subordinated debenture . -- 1,336,000 -- --
Net loss . . . . . . . . . . . . . . -- -- (5,494,000) --
--------- ------------- -------------- -------------
Balance, December 31, 1993 . . . . . . 654,000 131,052,000 (81,986,000) (20,757,000)
Net loss . . . . . . . . . . . . . . -- -- (296,000) --
--------- ------------- --------------- -------------
Balance, March 31, 1994 . . . . . . . . $ 654,000 $ 131,052,000 $ (82,282,000) $ (20,757,000)
========= ============= =============== ==============
</TABLE>
- - -------------------------
(A) Includes as an offset to Additional Paid-In Capital, notes receivable
of $4,182,000 as of December 31, 1992 from certain officers, directors
and affiliates for stock purchases.
The accompanying Notes to Consolidated Financial Statements
are an integral part of these Statements.
6
<PAGE> 7
HARKEN ENERGY CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(unaudited)
<TABLE>
<CAPTION>
THREE MONTHS ENDED
MARCH 31,
---------
1993 1994
---- ----
<S> <C> <C>
Cash flows from operating activities:
Net income (loss) from continuing operations . . . . . . . . . . . . . . . . . . $ 51,000 $ (430,000)
Adjustments to reconcile net income (loss) to net cash provided by (used in)
operating activities:
Depreciation and amortization . . . . . . . . . . . . . . . . . . . . . . . 603,000 504,000
Interest and dividend income on investments in former subsidiaries . . . . . (100,000) (120,000)
Forgiveness of related party note receivable . . . . . . . . . . . . . . . . -- 232,000
Provision for doubtful accounts . . . . . . . . . . . . . . . . . . . . . . 45,000 6,000
(Gain) loss on sales of assets and other . . . . . . . . . . . . . . . . . . (9,000) (9,000)
------------- ------------
590,000 183,000
Income (loss) from discontinued operations . . . . . . . . . . . . . . . . . . (235,000) 134,000
Adjustment to reconcile income (loss) to net cash used in operating activities:
Depreciation and amortization . . . . . . . . . . . . . . . . . . . . . . 196,000 89,000
Gain on sales of assets . . . . . . . . . . . . . . . . . . . . . . . . . -- (272,000)
------------ ------------
(39,000) (49,000)
Change in assets and liabilities, net of effect of companies acquired:
(Increase) decrease in accounts receivable . . . . . . . . . . . . . . . . . 1,354,000 44,000
(Increase) decrease in accounts receivable from/payable to related parties . 352,000 --
Increase (decrease) in trade payables and other . . . . . . . . . . . . . . (3,228,000) (992,000)
------------ ------------
Net cash provided by (used in) operating activities . . . . . . . . . . . (971,000) (814,000)
------------ ------------
Cash flows from investing activities:
Proceeds from sale of assets . . . . . . . . . . . . . . . . . . . . . . . . . . -- 1,067,000
Cash from acquired subsidiary . . . . . . . . . . . . . . . . . . . . . . . . . 2,616,000 --
Capital expenditures . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . (548,000) (776,000)
------------ ------------
Net cash provided by (used in) investing activities . . . . . . . . . . . 2,068,000 291,000
------------ ------------
Cash flows from financing activities:
Debt repayments . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . (401,000) --
------------- ------------
Net cash provided by (used in) financing activities . . . . . . . . . . . (401,000) --
------------ ------------
Net increase (decrease) in cash and temporary investments . . . . . . . . . . . . . 696,000 (523,000)
Cash and temporary investments at beginning of year . . . . . . . . . . . . . . . . 10,348,000 3,299,000
------------ ------------
Cash and temporary investments at end of year . . . . . . . . . . . . . . . . . . . $ 11,044,000 $ 2,776,000
============ ============
Supplemental disclosures of cash flow information:
Cash paid during the quarter for:
Interest . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 10,000 $ 39,000
Income taxes . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . -- --
Significant non-cash transactions:
Increase from acquisition activity
Current assets, excluding cash . . . . . . . . . . . . . . . . . . . . . . . $ 1,393,000 $ --
Property and equipment . . . . . . . . . . . . . . . . . . . . . . . . . . . 14,528,000 400,000
Current liabilities . . . . . . . . . . . . . . . . . . . . . . . . . . . . (5,734,000) (400,000)
Long-term debt . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . (43,000) --
Stockholders' equity . . . . . . . . . . . . . . . . . . . . . . . . . . . . (12,760,000) --
</TABLE>
The accompanying Notes to Consolidated Financial Statements
are an integral part of these Statements.
7
<PAGE> 8
HARKEN ENERGY CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
MARCH 31, 1993 AND 1994
(unaudited)
(1) MANAGEMENT'S REPRESENTATIONS
In the opinion of Harken Energy Corporation ("Harken"), the
accompanying unaudited consolidated financial statements contain all
adjustments necessary to present fairly its financial position as of December
31, 1993 and March 31, 1994 and the results of its operations and changes in
its cash flows for all periods presented as of March 31, 1993 and 1994. These
adjustments represent normal recurring items. Certain prior year amounts have
been reclassified to conform with the 1994 presentations.
The accompanying unaudited condensed financial statements have been
prepared pursuant to the rules and regulations of the Securities and Exchange
Commission. 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, 1993.
The results of operations for the three month period ended March 31,
1994 are not necessarily indicative of the results to be expected for the full
year.
(2) ACQUISITIONS
Effective February 15, 1993, Harken consummated a merger pursuant to
which Chuska Resources Corporation ("Chuska") became a wholly-owned subsidiary
of Harken. Harken acquired all of the 11,055,918 shares of Chuska common stock
outstanding in exchange for 14,210,357 shares of newly-issued Harken common
stock. Chuska is engaged, through its subsidiaries, in the business of
exploring for and producing oil and gas in the Aneth Field and Blanding
Sub-Basin portions of the Paradox Basin in Utah, Arizona and New Mexico, and in
the Western Paradox Basin in Utah. Chuska's operations in the Paradox Basin
area are primarily concentrated on the 16 million acre Navajo Indian
Reservation ("the Reservation"), which comprises portions of Arizona, New
Mexico and Utah. Chuska conducts activities on the Reservation as a
contractually appointed operator and agent of the Navajo Nation pursuant to two
Federally approved operating agreements. In addition to its oil and gas
exploration activities, Chuska also has an interest in a gas processing plant
in or near the Paradox Basin, the Aneth Gas Plant, on the Utah portion of the
Reservation. The acquisition of Chuska has been accounted for under the
purchase method of accounting.
Chuska is the general partner of four limited partnerships and is a
venturer in the CHAP Joint Venture, all of which were formed for the
exploration and production of oil and gas. Chuska is the operator of the
limited partnerships and CHAP. Chuska or its wholly-owned subsidiaries are
venturers in three additional projects for the exploration and production of
oil and gas. These projects are named Greater Blanding, Central Blanding and
Western Paradox. Chuska accounts for its investments in the partnerships and
CHAP using the proportionate consolidation method.
8
<PAGE> 9
(3) INVESTMENTS IN FORMER SUBSIDIARIES
E-Z Serve Preferred Stock -- Harken holds 79,754 shares of E-Z Serve
$6.00 Convertible Preferred Stock, Series C ("E-Z Serve Series C Preferred")
which it acquired at a cost of $100 per share. Such shares include the 12,830
additional shares of E-Z Serve Series C Preferred received in April 1993 as
part of a restructuring by E-Z Serve. The E-Z Serve Series C Preferred is to
pay a cumulative dividend of $6.00 per share per annum, payable semi-annually
beginning October 1, 1991 as declared by the E-Z Serve Board of Directors, and
payable in legally available cash or in additional shares of E-Z Serve Series C
Preferred. Each share of E- Z Serve Series C Preferred is convertible at the
option of either E-Z Serve or Harken into 52.63 common shares of E-Z Serve,
such rate to be adjusted under certain conditions. The E-Z Serve Series C
Preferred is subordinated to all E-Z Serve bank credit facilities. Harken
recorded dividend income of $96,000 and $120,000 during the three months ended
March 31, 1993 and 1994, respectively, related to the E-Z Serve Series C
Preferred and has included such dividends in Other Income in the accompanying
financial statements.
Tejas Preferred Stock -- On September 6, 1991, and effective May 3,
1991, Harken purchased 1,000 shares of Tejas Power Corporation Series B
Preferred Stock, $.01 par value per share ("Tejas Preferred Stock"), at a
purchase price of $1,200,000. The purchase price amount was equal to certain
expenses incurred by Harken on behalf of Tejas in connection with the Rights
Offering. Harken accepted these shares of Tejas Preferred Stock as full and
complete payment for the above expenses as a result of Tejas agreeing to waive
certain of the provisions under the terms of the Harken Series C Preferred held
by Tejas and pledging all 186,760 shares of the Harken Series C Preferred to
Harken.
(4) PROPERTY AND EQUIPMENT
A summary of property and equipment follows:
<TABLE>
<CAPTION>
DECEMBER 31, MARCH 31,
1993 1994
-------------- --------------
<S> <C> <C>
Oil and gas properties --
Evaluated . . . . . . . . . . . . . . . . . . . . . . . . $ 9,664,000 $ 10,148,000
Unevaluated . . . . . . . . . . . . . . . . . . . . . . . 8,004,000 8,576,000
Oilfield service equipment . . . . . . . . . . . . . . . . . 1,375,000 --
Gas plants and other property . . . . . . . . . . . . . . . . 6,994,000 7,027,000
Less accumulated depreciation
and amortization . . . . . . . . . . . . . . . . . . . . (6,230,000) (6,341,000)
-------------- --------------
$ 19,807,000 $ 19,410,000
============== =============
</TABLE>
(5) NOTES PAYABLE
At December 31, 1993, Harken had included $1,000,000 in accrued
liabilities related to a consulting payment due to a former Chuska stockholder.
Under the terms of a prior agreement made by Chuska with the former Chuska
stockholder, among other obligations previously satisfied, Chuska was to pay
$1,000,000 to the former Chuska stockholder when aggregate net revenues (as
defined in the agreement) reached $60,000,000. In October 1992, a lawsuit was
filed against Chuska by the former Chuska stockholder. The lawsuit was
generally based upon allegations that Chuska had reached the defined aggregate
net revenue amount and that the $1,000,000 consulting payment was due and
payable. In March 1994, this lawsuit was settled whereby Chuska and a
subsidiary entered into an agreement to pay $500,000 to the former Chuska
stockholder as the first of two installments relating to the consulting
payment. Chuska executed a non-interest bearing note payable for the remaining
$500,000 consulting payment which is payable to the former Chuska stockholder
on or before January 5, 1995. This obligation is included at March 31, 1994 in
notes payable in the accompanying balance sheet.
9
<PAGE> 10
Further, under the terms of this March 1994 agreement, Chuska
purchased from the former Chuska stockholder his 3% working interest in the
wells drilled by Chuska as well as all rights he held to participate in future
wells drilled by Chuska on the Navajo Reservation, effective January 1, 1994.
As consideration for such purchase, Chuska issued a 10% note payable in the
amount of $400,000 which is due and payable to the former Chuska stockholder on
or before January 3, 1996. This note is included at March 31, 1994 in notes
payable in the accompanying balance sheet. The balance is included as a
current liability as Chuska is obligated under this agreement to pay 75% of the
monthly net cash flow (as defined) from the acquired interest to an escrow
account which will serve as collateral for the above notes payable until the
notes are fully paid.
(6) DISCONTINUED OPERATIONS
In May 1994, Harken announced that it had discontinued its well
servicing operations which it had conducted through Supreme Well Service
Company ("Supreme"), a wholly-owned subsidiary. Harken plans to sell the
equipment assets of Supreme and utilize the proceeds toward developing Harken's
exploration and production operations both domestically and internationally.
As a result of this decision, Harken has reflected the revenues and expenses of
Harken's well servicing and contract drilling segment as discontinued
operations in the accompanying financial statements. Such discontinued
operations include revenues of $400,000 and $837,000 as of March 31, 1993 and
1994, respectively. The March 31, 1994 revenue amount includes $272,000 of
gain on the sale of Harken's contract drilling assets which occurred during the
first quarter of 1994.
(7) STOCKHOLDERS' EQUITY
Common Stock - Harken currently has authorized 100,000,000 shares of
$.01 par common stock. At December 31, 1993 and March 31, 1994, Harken had
issued 65,466,508 shares and held 5,983,655 shares as treasury stock at a cost
of $20,757,000.
Acquisition of Chuska Resources Corporation - Effective February 15,
1993, Harken consummated a merger pursuant to which Chuska Resources
Corporation ("Chuska") became a wholly-owned subsidiary of Harken. In exchange
for all of the outstanding common stock of Chuska, Harken issued 14,210,357
shares of Harken common stock. In connection with the merger, Harken filed a
registration statement, which became effective January 15, 1993, with the
Securities and Exchange Commission for the shares of Harken common stock
issued. See further discussion of the merger at Note 2 - Acquisitions.
(8) PER SHARE DATA
Per share data has been computed based on the weighted average number
of common shares outstanding during each period.
(9) INCOME TAXES
At March 31, 1994, Harken had available for federal income tax
reporting purposes, net operating loss (NOL) carryforward for regular tax
purposes of approximately $59,000,000 which expires in 1997 through 2009,
alternative minimum tax NOL carryforward of approximately $50,000,000 which
expires in 1997 through 2009, investment tax credit carryforward of
approximately $863,000 which expires in 1994 through 2002, contribution
carryforward of approximately $31,000 which expires in 2000 through 2007,
statutory depletion carryforward of approximately $529,000 which does not have
an expiration date, jobs tax credit carryforward of approximately $132,000
which expires in 1994 through 1995 and a net capital loss carryforward of
approximately $542,000 which expires in 2007. Approximately $14,000,000 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.
10
<PAGE> 11
During the first quarter of 1993, Harken adopted Statement of
Financial Accounting Standard No. 109, "Accounting for Income Taxes" ("SFAS No.
109"). This standard requires, among other things, recognition of future tax
benefits, measured by enacted tax rates, attributable to deductible temporary
differences between financial statement and income tax bases of assets and
liabilities and to tax net operating loss carryforwards, to the extent that
realization of such benefits is more likely than not.
Upon adoption of SFAS No. 109, on January 1, 1993, Harken calculated
total deferred tax liabilities of approximately $2,020,000 resulting from
financial statement basis for property and equipment in excess of related tax
basis. In addition, Harken calculated total deferred tax assets of
approximately $18,989,000 consisting of approximately $18,142,000 related to
Harken's net operating loss carryforward and approximately $847,000 primarily
related to tax basis for investments in former subsidiaries in excess of
related financial statement basis. Harken established a valuation allowance
for the entire net deferred tax asset of $16,969,000. As a result, the
adoption of SFAS No. 109 by Harken on January 1, 1993 had no effect on Harken's
results from operations or earnings (loss) per common share for the quarter
ended March 31, 1993.
At March 31, 1994, total deferred tax liabilities are approximately
$4,065,000. In addition, total deferred tax assets are approximately
$22,872,000 at March 31, 1994, resulting primarily from an increase in the NOL
carryforward during 1993. Any resulting changes in net deferred tax assets was
offset by a corresponding increase in the valuation allowance, resulting in no
impact to Harken's results of operations.
(10) COMMITMENTS AND CONTINGENCIES
Colombian Operations - During the third quarter of 1992, Harken,
through a subsidiary, Harken de Colombia, Ltd., was awarded the exclusive right
to explore for, develop and produce oil and gas throughout approximately
350,000 acres within the Alcaravan area ("Alcaravan") of Colombia. Alcaravan
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 ("Alcaravan Contract")
which requires Harken to conduct a seismic and exploratory drilling program in
the Alcaravan area ("work program") over the initial six (6) years. At the end
of each of the six years in the work program, Harken has the option to withdraw
from the Alcaravan Contract or to commit to the next year's work requirements,
and Harken has committed to the second year of the work program under this
contract. If Harken makes a commercial discovery of oil and/or gas which is
approved by Ecopetrol, the standard terms of the Alcaravan Contract will apply.
Such terms provide for Ecopetrol to reimburse Harken for 50% of its successful
well costs expended up to the point of commercial discovery and to receive a
20% royalty interest and for both Ecopetrol and Harken to each have a 50%
working interest. The term of the Alcaravan Contract will extend twenty-two
(22) years from the date of any commercial discovery of oil and/or gas. Harken
reprocessed in excess of 200 kilometers of seismic on the Alcaravan area and
completed the acquisition of 52 kilometers of new seismic data over prospective
areas in mid-February 1994. Harken is currently carrying on discussions with
potential joint venture partners regarding potential drilling on the Alcaravan
area.
In January 1994, Harken announced that Harken de Colombia, Ltd. had
signed its second Association Contract ("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 Magdelena
Valley of Central Colombia.
During the first year of the Bocachico Contract, Harken will conduct
seismic activities on the land covered by this contract including reprocessing
of at least 250 kilometers of existing seismic data and the acquisition of at
least 35 kilometers of new seismic data. During each of the 2nd through the
6th contract years, Harken may elect to continue the contract by committing to
the drilling of at least one well during each contract year. During this
initial six year term, called the Exploration Period under the Bocachico
Contract, if Harken has discovered
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the existence of commercial production in the Bocachico Contract area, the
Bocachico Contract will be further extended for a period of 22 years from the
date of any commercial discovery of oil and/or gas. If Harken makes a
commercial discovery of oil and/or gas which is approved by Ecopetrol, the
standard terms of the Bocachico Contract will apply. Such terms provide for
Ecopetrol to reimburse Harken for 50% of its successful well costs expended up
to the point of commercial discovery and to receive a 20% royalty interest and
for both Ecopetrol and Harken to each have a 50% working interest.
In addition to reprocessing and acquiring seismic data during the
first contract year of the Bocachico Contract, Harken intends to also conduct
engineering studies to evaluate the potential for recovering existing oil
reserves in the Rio Negro area, which is located in the northern portion of the
Bocachico Contract area. Three wells were drilled, produced and subsequently
abandoned by another contractor approximately 30 years ago in this area, which
have provided information and data including production rates, well logs and
pressure tests. This well data will be utilized by Harken in such studies to
evaluate the feasibility of applying modern production and recovery techniques
in this area. Harken has not made any determination at this point as to the
recoverability of reserves which may be indicated in this area.
Bahrain Operations - In January 1990, Harken, through its wholly-owned
subsidiary, Harken Bahrain Oil Company ("HBOC"), entered into a production
sharing agreement with the Bahrain National Oil Company ("BANOCO") which gave
it the exclusive right to explore for, develop and produce oil and gas
throughout most of Bahrain's Arabian Gulf offshore territories. Subject to the
discovery and development of oil and/or gas, the contract has a term of
thirty-five years. Under the original terms of the agreement, as amended,
Harken was to drill an exploratory well to test the Permian Khuff formation
within 2 1/2 years and drill a total of four wells by 1995 to earn all of its
acreage rights under the agreement. In July 1990, Harken entered into a joint
venture arrangement with a joint venture partner, Bass Enterprises Production
Company ("BEPCO"), in which BEPCO committed to provide the funding for the
first well and at least two subsequent wells. On April 8, 1993, HBOC and BEPCO
entered into an agreement whereby BEPCO was released and discharged from any
future drilling obligations related to HBOC's production sharing agreement, and
the joint venture agreement between HBOC and BEPCO was terminated. As part of
this agreement, BEPCO paid to HBOC approximately $2,000,000 plus other
considerations.
The initial exploratory well under the production sharing agreement
was drilled on the Jarim Reef, which began drilling November 1991. The well
was drilled to an approximate depth of 14,275 feet and tested the Jurassic Arab
formation at approximately 7,300 feet and the Permian Khuff formation at
approximately 13,300 feet. In March 1992, after drilling was completed, HBOC
announced that the Jarim No. 2 well was not productive of either oil or gas and
was abandoned. On December 28, 1992, Harken commenced the drilling of its
second exploratory well, the Muharraq No. 1, in Bahrain. In February 1993,
Harken announced that the Muharraq No. 1 well had been drilled to a total depth
of 8,778 feet and that no shows of oil and gas were noted in the well cuttings
of either the Jurassic Arab or the Jurassic Fadhili formations. As a result,
the well was plugged and abandoned at the foregoing depth. Further, under the
terms of the production sharing agreement, HBOC allowed its exploration and
drilling rights on approximately 10% of the acreage covered by the production
sharing agreement to expire, effective February 13, 1993. Later, during the
third quarter of 1993, HBOC allowed an additional portion of the acreage
covered by the production sharing agreement to expire effective August 29,
1993.
In May 1994, Harken announced a new seismic reprocessing program
covering 500 kilometers of seismic lines in the vicinity of the Jarim Reef, to
be completed during the late summer of 1994. At present, Harken holds
approximately 500,000 acres under its production sharing agreement. Unless
commercial production is found, this acreage expires and reverts back to BANOCO
in July 1995. Harken is continuing to pursue discussions with various other
parties in joining HBOC to pursue continuing operations on the remaining
acreage which HBOC continues to hold.
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<PAGE> 13
Other - 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.
Harken has accrued approximately $1,900,000 relating to other
operational or regulatory liabilities related to Chuska's operations. Harken
and its subsidiaries currently are involved in various lawsuits and other
contingencies, including the guarantee of certain lease obligations, which in
management's opinion, will not result in significant loss exposure to Harken.
13
<PAGE> 14
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
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<PAGE> 15
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. Consolidated results of operations were consistent with
management's expectations for the three month period ended March 31, 1994.
Effective February 15, 1993, Harken consummated a merger pursuant to
which Chuska Resources Corporation ("Chuska") became a wholly-owned subsidiary
of Harken. Harken acquired all of the 11,055,718 outstanding Chuska common
stock in exchange for 14,210,357 shares of newly-issued Harken common stock.
Chuska is engaged, through its subsidiaries, in the business of exploring for
and producing oil and gas in the Aneth Field and Blanding Sub-Basin portions of
the Paradox Basin in Utah. Chuska's operations in the Paradox Basin area are
primarily concentrated on the 16 million acre Navajo Indian Reservation ("the
Reservation"), which comprises portions of Arizona, New Mexico and Utah.
Chuska conducts activities on the Reservation as a contractually appointed
operator and agent of the Navajo Nation pursuant to two Federally approved
operating agreements. In addition to its oil and gas exploration activities,
Chuska also has an interest in a gas processing plant near the Paradox Basin,
the Aneth Gas Plant on the Utah portion of the Reservation.
Oil and gas operations revenues as of March 31, 1993 consisted of oil
revenues of $732,000, gas revenues of $154,000 and gas plant revenue of
$187,000. Oil and gas operations revenues as of March 31, 1994 consisted of
oil revenues of $557,000, gas revenues of $231,000 and gas plant revenues of
$221,000. These oil and gas revenues, primarily from Chuska's operations,
reflect the low price for oil experienced during the first quarter of 1994.
Harken plans to drill six to ten wells this year on acreage it holds in the
Paradox Basin area, in an effort to offset the production declines typically
experienced in the region and increase revenues and cash flow from its oil and
gas operations.
In May 1994, Harken announced the discontinuance of its well servicing
operations which it had conducted through Supreme Well Service Company
("Supreme"), a wholly- owned subsidiary. As a result of this decision, Harken
has reflected the revenues and expenses of its well service and contract
drilling segment as discontinued operations. In January 1994, Harken made the
decision to liquidate its remaining drilling rigs and related assets and apply
the proceeds primarily to its international exploration efforts, specifically
in Colombia and Bahrain. As a result of this decision, Harken recognized a
non-cash charge of $3.1 million during the fourth quarter of 1993 to write down
these assets to their estimated liquidation value. During the first quarter of
1994, Harken sold these assets for approximately $1.1 million, resulting in a
gain of $272,000. Such gain is also included in discontinued operations.
During the first quarter of 1993, Harken continued to manage the oil
and gas property interests of a limited partnership and operate certain
partnership properties. Harken was paid a management fee of $50,000 per month
to manage the partnership interest in such properties in addition to the fees
it received for serving as operator of the properties pursuant to applicable
joint operating agreements. During the second quarter of 1993, the partnership
sold its interests in all oil and gas properties operated by Harken and Harken
ceased to manage the partnership. As a result of the above, Harken earned no
partnership management fees during the first quarter of 1994 compared to
$150,000 during the first quarter of 1993. In addition, other income as of
March 31, 1993 included $71,000 of fees from leasing company owned compressors
to certain properties Harken operated. There were no such revenues during the
first quarter of 1994 due to the above sale of partnership properties.
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<PAGE> 16
OTHER COSTS AND EXPENSES
General and administrative expenses increased from $487,000 for the
first quarter of 1993 to $689,000 for the first quarter of 1994, primarily as a
result of the increased personnel and office costs associated with Chuska's
operations. During 1993, Harken has combined Chuska's administrative
activities with the objective of eliminating duplicate administrative and
operational functions. During 1993, management has consolidated those
activities with Harken's to capitalize on the efficiencies of the combined
organization. In addition, general and administrative expenses for the first
quarter of 1993 and 1994 include costs related to certain offices of Chuska
that have since been closed in an effort to further reduce costs and improve
efficiency. In addition, as discussed above, Harken's operator overhead fees
and other operator cost reimbursements which are netted against general and
administrative expenses decreased due to the reduction in properties operated
by Harken. Such operator overhead fees and other operator costs reimbursements
related to properties which were sold during the second quarter of 1993
totalled $329,000 as of March 31, 1993.
At December 31, 1993, Harken included in notes receivable from related
parties a loan to an officer in the amount of $520,000, plus accrued interest.
Subsequent to December 31, 1993, an agreement was reached with the officer
whereby the note, together with accrued interest, is scheduled to be forgiven
equally over three installments dated April 1994, July 1995 and December 1996
with each installment of such forgiveness contingent upon the officer's
continued employment through the date of each such installment. Harken has
included the first installment of this forgiveness totalling $232,000 in
general and administrative expenses during the first quarter of 1994.
LIQUIDITY AND CAPITAL RESOURCES
During the first quarter of 1994, cash and temporary investments
decreased by $523,000 despite the $1,067,000 of cash proceeds received from
the sale of Harken's contract drilling rigs. Such cash usage was caused by
cash used by operating activities of $814,000 and $776,000 of capital
expenditures. The cash used by operating activities was primarily caused by the
payment of approximately $500,000 related to the first installment of a
consulting payment to a former Chuska stockholder. Harken's net working
capital increased by $108,000 during the first quarter to $273,000 as of March
31, 1994. Harken has taken steps to appropriately reduce overhead costs and
capital expenditures will be incurred only to the extent that cash flow from
operations or additional financing sources are available. Harken believes that
cash flow from operations will be sufficient to meet its operating cash
requirements in 1994. Amounts required to fund international activities,
including Colombia and Bahrain, as well as domestic drilling costs and other
capital expenditures will be funded from existing cash balances, asset sales,
stock issuances, operating cash flows and potentially from industry partners.
The cash flows and revenues generated from Chuska's oil and gas
properties are expected to increase in 1994 as workover and additional drilling
activities are currently being conducted and planned in the Aneth Field as well
as in the Blanding Sub-Basin portions of the Paradox Basin. Such plans include
the drilling of six to ten wells during 1994 as part of a program to continue
the exploration of new prospects, the further development of existing
productive fields and significant natural gas prospects. Additionally, Harken
plans to continue a workover program on existing wells in an effort to enhance
production and improve field efficiency. Such drilling activities will be
funded by existing working capital and potentially from existing joint venture
partners participating in Chuska's managed joint ventures. The largest of
these joint ventures, ("the CHAP Joint Venture") was formed between Chuska and
certain co-venturers to explore for and develop Reservation properties. Chuska
currently owns a 50% interest in the CHAP Joint Venture. In addition, Harken
anticipates receiving approximately $1.6 million upon the sale of equipment
assets from its discontinued well service operations. Well service operations
have historically contributed minimally to Harken's operating cash flows.
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As a result of the decrease in demand for its drilling services
domestically, and upon obtaining a production sharing agreement discussed below
between Harken and the Bahrain National Oil Company in January 1990, Harken
management has increased its focus on pursuing international opportunities in
all areas of Harken's operations, including oilfield services and oil and gas
exploration and development. Harken considers that the opportunities to
profitably deploy Harken's expertise and assets internationally are generally
greater than those available domestically. Harken continues to pursue other
international opportunities during 1994, such as the Colombian opportunities
discussed below, through its wholly-owned subsidiary, Harken International,
Ltd.
Colombian Operations - During the third quarter of 1992, Harken,
through a subsidiary, Harken de Colombia, Ltd., was awarded the exclusive right
to explore for, develop and produce oil and gas throughout approximately
350,000 acres within the Alcaravan area ("Alcaravan") of Colombia. Alcaravan
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 ("Alcaravan Contract")
which requires Harken to conduct a seismic and exploratory drilling program in
the Alcaravan area ("work program") over the initial six (6) years. At the end
of each of the six years in the work program, Harken has the option to withdraw
from the Alcaravan Contract or to commit to the next year's work requirements,
and Harken has committed to the second year of the work program under this
contract. If Harken makes a commercial discovery of oil and/or gas which is
approved by Ecopetrol, the standard terms of the Alcaravan Contract will apply.
Such terms provide for Ecopetrol to reimburse Harken for 50% of its successful
well costs expended up to the point of commercial discovery and to receive a
20% royalty interest and for both Ecopetrol and Harken to each have a 50%
working interest. The term of the Alcaravan Contract will extend twenty-two
(22) years from the date of any commercial discovery of oil and/or gas. Harken
reprocessed in excess of 200 kilometers of seismic on the Alcaravan area and
completed the acquisition of 52 kilometers of new seismic data over prospective
areas in mid-February 1994. Harken is currently carrying on discussions with
potential joint venture partners regarding potential drilling on the Alcaravan
area.
In January 1994, Harken announced that Harken de Colombia, Ltd. had
signed its second Association Contract ("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 Magdelena
Valley of Central Colombia.
During the first year of the Bocachico Contract, Harken will conduct
seismic activities on the land covered by this contract including reprocessing
of at least 250 kilometers of existing seismic data and the acquisition of at
least 35 kilometers of new seismic data. During each of the 2nd through the
6th contract years, Harken may elect to continue the contract by committing to
the drilling of at least one well during each contract year. During this
initial six year term, called the Exploration Period under the Bocachico
Contract, if Harken has discovered the existence of commercial production in
the Bocachico Contract area, the Bocachico Contract will be further extended
for a period of 22 years from the date of any commercial discovery of oil
and/or gas. If Harken makes a commercial discovery of oil and/or gas which is
approved by Ecopetrol, the standard terms of the Bocachico Contract will apply.
Such terms provide for Ecopetrol to reimburse Harken for 50% of its successful
well costs expended up to the point of commercial discovery and to receive a
20% royalty interest and for both Ecopetrol and Harken to each have a 50%
working interest.
In addition to reprocessing and acquiring seismic data during the
first contract year of the Bocachico Contract, Harken intends to also conduct
engineering studies to evaluate the potential for recovering existing oil
reserves in the Rio Negro area, which is located in the northern portion of the
Bocachico Contract area. Three wells were drilled, produced and subsequently
abandoned by another contractor approximately 30 years ago in this area, which
have provided information and data including production rates, well logs and
pressure tests. This well data will be utilized by Harken in such studies to
evaluate the feasibility of applying modern production and
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<PAGE> 18
recovery techniques in this area. Harken has not made any determination at
this point as to the recoverability of reserves which may be indicated in this
area.
Bahrain Operations - In January 1990, Harken, through its wholly-owned
subsidiary, Harken Bahrain Oil Company ("HBOC"), entered into a production
sharing agreement with the Bahrain National Oil Company ("BANOCO") which gave
it the exclusive right to explore for, develop and produce oil and gas
throughout most of Bahrain's Arabian Gulf offshore territories. Subject to the
discovery and development of oil and/or gas, the contract has a term of
thirty-five years. Under the original terms of the agreement, as amended,
Harken was to drill an exploratory well to test the Permian Khuff formation
within 2 1/2 years and drill a total of four wells by 1995 to earn all of its
acreage rights under the agreement. In July 1990, Harken entered into a joint
venture arrangement with a joint venture partner, Bass Enterprises Production
Company ("BEPCO"), in which BEPCO committed to provide the funding for the
first well and at least two subsequent wells. On April 8, 1993, HBOC and BEPCO
entered into an agreement whereby BEPCO was released and discharged from any
future drilling obligations related to HBOC's production sharing agreement, and
the joint venture agreement between HBOC and BEPCO was terminated. As part of
this agreement, BEPCO paid to HBOC approximately $2,000,000 plus other
considerations.
The initial exploratory well under the production sharing agreement
was drilled on the Jarim Reef, which began drilling November 1991. The well
was drilled to an approximate depth of 14,275 feet and tested the Jurassic Arab
formation at approximately 7,300 feet and the Permian Khuff formation at
approximately 13,300 feet. In March 1992, after drilling was completed, HBOC
announced that the Jarim No. 2 well was not productive of either oil or gas and
was abandoned. On December 28, 1992, Harken commenced the drilling of its
second exploratory well, the Muharraq No. 1, in Bahrain. In February 1993,
Harken announced that the Muharraq No. 1 well had been drilled to a total depth
of 8,778 feet and that no shows of oil and gas were noted in the well cuttings
of either the Jurassic Arab or the Jurassic Fadhili formations. As a result,
the well was plugged and abandoned at the foregoing depth. Further, under the
terms of the production sharing agreement, HBOC allowed its exploration and
drilling rights on approximately 10% of the acreage covered by the production
sharing agreement to expire, effective February 13, 1993. Later, during the
third quarter of 1993, HBOC allowed an additional portion of the acreage
covered by the production sharing agreement to expire effective August 29,
1993.
In May 1994, Harken announced a new seismic reprocessing program
covering 500 kilometers of seismic lines in the vicinity of the Jarim Reef, to
be completed during the late summer of 1994. At present, Harken holds
approximately 500,000 acres under its production sharing agreement. Unless
commercial production is found, this acreage expires and reverts back to BANOCO
in July 1995. Harken is continuing to pursue discussions with various other
parties in joining HBOC to pursue continuing operations on the remaining
acreage which HBOC continues to hold.
Other - 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.
Harken has accrued approximately $1,900,000 relating to other
operational or regulatory liabilities related to Chuska's operations. Harken
and its subsidiaries currently are involved in various lawsuits and other
contingencies, including the guarantee of certain lease obligations, which in
management's opinion, will not result in significant loss exposure to Harken.
18
<PAGE> 19
HARKEN ENERGY CORPORATION
NOTES CONCERNING OTHER INFORMATION
MARCH 31, 1993 AND 1994
(1) Items 1, 2, 3, 4, 5 and 6 as required by Part II of Form 10-Q are not
applicable for the quarter ended March 31, 1994.
19
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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 13, 1994 By: /s/ BRUCE N. HUFF
Bruce N. Huff, Senior Vice President and
Chief Financial Officer
20
