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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
--------------------
FORM 8-K/A
CURRENT REPORT
Pursuant to Section 13 or 15(d) of the
Securities Exchange Act of 1934
Date of Report (Date of earliest event reported): November 1, 1999
(August 19, 1999)
HARKEN ENERGY CORPORATION
(Exact name of registrant as specified in its charter)
<TABLE>
<S> <C> <C>
DELAWARE 0-9207 95-2841597
(State or other jurisdiction of (Commission File (IRS Employer
incorporation) Number) Identification No.)
</TABLE>
16285 PARK TEN PLACE, SUITE 600 77084
HOUSTON, TEXAS 77084 (ZIP Code)
(Address of principal executive offices)
Registrant's telephone number, including area code: (281) 717-1300
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This Form 8-K/A amends the Form 8-K of Harken Energy Corporation ("Harken")
filed on September 3, 1999 and supplies financial information on Xplor Energy,
Inc. ("Xplor") and pro forma information regarding Harken's acquisition of
Xplor on August 19, 1999.
ITEM 7. FINANCIAL STATEMENTS, PRO FORMA FINANCIAL INFORMATION AND EXHIBITS:
(a) Financial Statements of Businesses Acquired.
The required financial statements of Xplor, attached hereto as
Annex A, are incorporated herein by reference.
(b) Pro Forma Financial Information
The pro forma financial statements of Harken, attached hereto
as Annex B, give effect to the August 19, 1999 acquisition by
Harken of Xplor, the May 19, 1998 acquisition by Harken of
certain oil and gas properties ("the Bargo Properties") and
the May 26, 1998 issuance of 5% European Notes Payable.
(c) Exhibits
2 Agreement and Plan of Merger by and among Harken
Energy Corporation, XEI Acquisition Corp., and Xplor
Energy, Inc. dated August 19, 1999 (previously
filed).
23.1 Consent of KPMG LLP.
99.1 Stock Purchase Warrant Nos. 99A-1 and 99A-2 for the
purchase of a total of 2,336,066 (subject to
adjustment) shares of Harken Energy Corporation
common stock (previously filed).
2
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Annex A
ITEM 7(a) FINANCIAL STATEMENTS OF BUSINESSES ACQUIRED
3
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REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
INDEPENDENT AUDITORS' REPORT
The Board of Directors and Stockholders
XPLOR Energy, Inc.:
We have audited the accompanying consolidated balance sheets of XPLOR Energy,
Inc. and subsidiaries as of December 31, 1998 and 1997, and the related
consolidated statements of operations, stockholders' equity, and cash flows for
each of the years in the three-year period ended December 31, 1998. These
consolidated financial statements are the responsibility of the Company's
management. Our responsibility is to express an opinion on these consolidated
financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of
material misstatement. An audit includes examining on a test basis, evidence
supporting the amounts and disclosures in the financial statements. An audit
also includes assessing the accounting principles used and significant
estimates made by management, as well as evaluating the overall financial
statement presentation. We believe that our audits provide a reasonable basis
for our opinion.
In our opinion, the consolidated financial statements referred to above,
present fairly, in all material respects, the financial position of XPLOR
Energy, Inc. and subsidiaries as of December 31, 1998 and 1997, and the results
of their operations and their cash flows for each of the years in the
three-year period ended December 31, 1998, in conformity with generally
accepted accounting principles.
KPMG LLP
Houston, Texas
April 9, 1999
4
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XPLOR ENERGY, INC.
Consolidated Balance Sheets
December 31, 1998 and 1997
<TABLE>
<CAPTION>
ASSETS 1998 1997
------------ ------------
<S> <C> <C>
Current assets:
Cash and cash equivalents $ 1,967,687 $ 2,390,114
Accounts receivable 6,522,891 3,728,937
Prepaid expenses and other 63,572 107,158
Account receivable, stockholder 620,000 413,540
------------ ------------
Total current assets 9,174,150 6,639,749
Property and equipment, at cost:
Oil and gas properties, full cost method 70,581,749 51,515,307
Pipeline and equipment 1,529,943 1,529,943
Furniture and fixtures and other 1,155,214 1,033,941
------------ ------------
73,266,906 54,079,191
Less accumulated depreciation, depletion and amortization (43,610,114) (5,894,191)
------------ ------------
Net property and equipment 29,656,792 48,185,000
Other assets:
Account receivable, stockholder -- 206,460
Restricted cash - escrow agreements 1,482,143 1,231,909
Goodwill 1,203,610 1,341,166
Deferred charges, net -- 3,077,125
Debt financing costs, net 72,594 237,500
------------ ------------
2,758,347 6,094,160
------------ ------------
$ 41,589,289 $ 60,918,909
============ ============
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Current maturities of long-term debt $ 600,941 $ 22,898,879
Accounts payable 5,543,745 3,722,344
Prepayments received from joint owners -- 419,215
Other payables and accrued liabilities 4,084,549 5,317,378
1997 Series A convertible preferred stock, $10 par value. -0- and
10,000,000 shares authorized; -0- and 2,500,000 shares issued
and outstanding at December 31, 1998 and 1997, respectively -- 24,000,602
------------ ------------
Total current liabilities 10,229,235 56,358,418
Long-term debt, net of current maturities 5,000,000 206,667
1998 redeemable preferred stock, $0.001 par value, $73,412,788 redemption
value at December 31, 1998, 20,000,000 and -0- shares authorized; 8,606,423
and -0- shares issued and outstanding at December 31, 1998 and 1997,
respectively 72,542,747 --
Stockholders' equity (deficit):
Common stock, par $.001 per share. 30,000,000 shares authorized;
4,444,395 and 4,709,413 issued and outstanding at
December 31, 1998 and 1997, respectively 4,444 4,709
Paid-in capital 16,179,977 19,179,712
Accumulated deficit (62,367,114) (14,830,597)
------------ ------------
Total stockholders' equity (deficit) (46,182,693) 4,353,824
------------ ------------
$ 41,589,289 $ 60,918,909
============ ============
</TABLE>
See accompanying notes to consolidated financial statements
5
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XPLOR ENERGY, INC.
Consolidated Statements of Operations
Years ended December 31, 1998, 1997 and 1996
<TABLE>
<CAPTION>
1998 1997 1996
----------- ---------- -----------
<S> <C> <C> <C>
Revenues:
Oil and gas revenues $ 9,588,740 $ 9,109,522 $ 6,043,259
Offshore services -- 1,580,807 1,744,664
------------ ------------ ------------
Total revenues 9,588,740 10,690,329 7,787,923
------------ ------------ ------------
Costs and expenses:
Lease operating expenses 2,574,986 2,153,188 1,613,863
Production and ad valorem taxes 834,447 803,778 555,416
Other operating expense 146,206 69,955 --
Cost of offshore services -- 1,688,775 2,193,925
Depreciation, depletion and amortization 5,066,415 3,304,412 1,714,201
Impairment of oil and gas properties 35,870,838 -- --
General and administrative 2,243,913 3,103,580 1,500,920
Other costs and expenses 841,161 1,568,071 --
------------ ------------ ------------
Total costs and expenses 47,577,966 12,691,759 7,578,325
------------ ------------ ------------
Income (loss) from operations (37,989,226) (2,001,430) 209,598
------------ ------------ ------------
Other (income) expenses:
Interest expense 1,514,081 5,053,843 2,075,591
Interest income (331,229) (52,285) (24,309)
Other expense (16,517) 1,176,256 658,135
------------ ------------ ------------
1,166,335 6,177,814 2,709,417
------------ ------------ ------------
Loss before income tax benefit
(expense) and extraordinary item (39,155,561) (8,179,244) (2,499,819)
Income tax benefit (expense) -- (62,256) 35,957
------------ ------------ ------------
Loss before extraordinary item (39,155,561) (8,241,500) (2,463,862)
Extraordinary item - loss on early extinguishment
of debt, net of income tax benefit of $ -0- 175,627 3,909,307 --
------------ ------------ ------------
Net loss (39,331,188) (12,150,807) (2,463,862)
Preferred stock dividends (5,858,340) -- (67,507)
Accretion of redeemable preferred stock (1,277,535) -- 979,943
1997 Preferred Stock Liquidation - issuance cost amortization (1,069,454) -- --
------------ ------------ ------------
Net loss applicable to common stock $(47,536,517) $(12,150,807) $ (1,551,426)
============ ============ ============
Per basic and diluted share of stock
Net loss per common share before extraordinary item $ (10.30) $ (2.28) $ (0.61)
============ ============ ============
Net loss per common share $ (10.34) $ (3.72) $ (0.61)
============ ============ ============
Weighted average number of shares 4,596,871 3,263,670 2,547,392
============ ============ ============
</TABLE>
See accompanying notes to consolidated financial statements
6
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XPLOR ENERGY, INC.
Consolidated Statements of Stockholders' Equity (Deficit)
<TABLE>
<CAPTION>
COMMON RETAINED EARNINGS/
STOCK PAID-IN (ACCUMULATED
SHARES AMOUNT CAPITAL DEFICIT) TOTAL
------------ ------------ ------------- ------------------ ----------
<S> <C> <C> <C> <C> <C>
Balance at December 31, 1995 2,320,000 2,320 5,659,042 (1,128,364) 4,532,998
Preferred stock dividend -- -- -- (67,507) (67,507)
Stock issued for release of collateral 122,101 122 220,661 -- 220,783
Stock option issued to lender -- -- 1,258,256 -- 1,258,256
Stock issued for redemption of preferred
stock, accrued dividends and
interest 172,469 172 846,651 979,943 1,826,766
Stock issued for acquisition of properties
and assets of Gulfland Resources 137,599 138 499,862 -- 500,000
Net loss -- -- -- (2,463,862) (2,463,862)
------------ ------------ ------------ ------------ ------------
Balance at December 31, 1996 2,752,169 2,752 8,484,472 (2,679,790) 5,807,434
Stock issued pursuant to employment
contracts 171,819 172 1,501,177 -- 1,501,349
Cancellation of stock options -- -- (671,743) -- (671,743)
Stock issued for South Coast acquisition 1,785,425 1,785 9,621,456 -- 9,623,241
Discount stock option grant -- -- 244,350 -- 244,350
Net loss -- -- -- (12,150,807) (12,150,807)
------------ ------------ ------------ ------------ ------------
Balance at December 31, 1997 4,709,413 4,709 19,179,712 (14,830,597) 4,353,824
Redemption of common stock (265,018) (265) (2,999,735) (3,000,000)
Preferred stock dividends -- -- -- (5,858,340) (5,858,340)
1997 Preferred Stock Liquidation - issuance
cost amortization -- -- -- (1,069,454) (1,069,454)
Accretion of redeemable preferred stock -- -- -- (1,277,535) (1,277,535)
Net loss (39,331,188) (39,331,188)
------------ ------------ ------------ ------------ ------------
Balance at December 31, 1998 4,444,395 $ 4,444 $ 16,179,977 $(62,367,114) $(46,182,693)
============ ============ ============ ============ ============
</TABLE>
See accompanying notes to consolidated financial statements
7
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XPLOR ENERGY, INC.
Consolidated Statements of Cash Flows
Years ended December 31, 1998, 1997 and 1996
<TABLE>
<CAPTION>
1998 1997 1996
------------ ------------ -----------
<S> <C> <C> <C>
Cash flows from operating activities:
Net loss $(39,331,188) $(12,150,807) $ (2,463,862)
Adjustments to reconcile net income (loss) to net
cash (used in) provided by operating activities:
Depreciation, depletion and amortization 5,066,415 3,404,038 1,714,201
Ceiling test impairment 35,870,838 -- --
Extraordinary item - debt extinguishment 175,627 3,909,307 --
Allowance for doubtful accounts 291,161 -- --
Compensation exchanged for stock -- 1,568,071 --
Deferred hedge settlement -- (2,785,115) --
Deferred income tax benefit -- -- (35,957)
Common stock issued for collateral release
and interest expense -- -- 376,750
Interest earned on restricted escrow accounts (111,034) -- --
Net realized loss on securities -- 578,452 --
Amortization of debt discount -- 420,000 368,598
Amortization of deferred costs 628,790 1,601,700 --
Other expense 243,351 -- --
Loss on disposal of leaseholds -- -- 9,064
Unrealized (loss) gain on marketable securities -- (462,999) 462,999
Imputed interest 272,895 112,894 21,202
Changes in assets and liabilities:
Accounts receivable (3,085,115) (289,733) (2,635,401)
Prepaid expenses and other 43,586 (70,920) 50,140
Prepayments from joint interest owners (419,215) 130,422 (363,260)
Other payable and accrued liabilities 588,572 382,848 3,110,740
------------ ------------ ------------
Net cash provided by (used in)
operating activities 234,683 (3,651,842) 615,214
------------ ------------ ------------
Cash flows from investing activities:
Capital expenditures and acquisition of properties (25,242,686) (13,522,368) (19,075,204)
Payments on escrow agreements (139,200) (215,800) (206,000)
Deferred costs -- (322,317) --
Proceeds from sales of oil and gas properties 5,254,971 209,951 1,136,363
Proceeds from sales of securities -- 2,508,666 --
------------ ------------ ------------
Net cash used in investing activities (20,126,915) (11,341,868) (18,144,841)
------------ ------------ ------------
</TABLE>
(Continued)
8
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XPLOR ENERGY, INC.
Consolidated Statements of Cash Flows
Years ended December 31, 1998, 1997 and 1996
<TABLE>
<CAPTION>
1998 1997 1996
------------ ------------ -----------
<S> <C> <C> <C>
Cash flows from financing activities:
Proceeds from borrowings $ 12,000,000 $ 46,378,397 $ 25,463,023
Debt issuance costs (89,511) (1,487,299) (769,300)
Payments of long-term debt (29,777,500) (52,425,495) (6,665,424)
Redemption of common stock (3,000,000) -- --
Repurchased 1997 preferred stock (6,795,581) -- --
Preferred stock dividends (1,704,231) -- --
1997 preferred stock issuance costs incurred in 1998 (70,056) -- --
Proceeds from sale of preferred stock, net of issuance 48,906,684 24,000,602 --
------------ ------------ ------------
Net cash provided by financing activities 19,469,805 16,466,205 18,028,299
------------ ------------ ------------
Net increase (decrease) in cash and cash
equivalents (422,427) 1,472,495 498,672
Cash and cash equivalents at beginning of period 2,390,114 917,619 418,947
------------ ------------ ------------
Cash and cash equivalents at end of period $ 1,967,687 $ 2,390,114 $ 917,619
============ ============ ============
Supplemental disclosures of cash flow information:
Cash paid during the year for interest $ -- $ 3,081,638 $ 1,659,503
Noncash investing and financing activities: --
Stock issued for acquired companies -- 9,623,241 --
Liabilities incurred in acquisitions -- 4,730,000 --
Stock issued pursuant to employment contracts -- 1,501,334 --
Cancellation of stock options -- (671,743) --
Deferred costs incurred in acquisition -- 344,220 --
Net liabilities assumed in acquisition -- 288,982 --
Accrued acquisition costs -- (2,100,000) --
Property received in acquisition -- (11,560,887) --
Goodwill recorded in acquisition -- (1,375,555) --
Property received in exchange for debt -- (891,870)
Other deferred costs (419,650) --
Acquisition of oil and gas properties with
common and redeemable preferred stock -- -- --
Dividend of property to stockholder -- -- --
Stock issued for release of collateral -- -- 220,783
Stock option issued for debt account -- -- 1,258,256
Stock issued for redemption of preferred
stock, accrued dividends and interest payable -- -- 1,826,766
Sale of properties in exchange for marketable securities -- -- 3,087,118
Acquisition of properties -- -- 119,232
Exchange of 1997 preferred stock for 1998 preferred
stock 7,710,173 -- --
Preferred stock issued for preferred stock dividends 4,154,019 -- --
Accretion of 1998 redeemable preferred stock 1,277,535 -- --
Amortization of 1997 preferred stock issuance costs 999,398 -- --
============ ============ ============
</TABLE>
See accompanying notes to consolidated financial statements
9
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XPLOR ENERGY, INC.
Notes to Consolidated Financial Statements
December 31, 1998, 1997 and 1996
(1) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES AND PRACTICES
ORGANIZATION
The consolidated financial statements include the accounts of XPLOR
Energy, Inc. (XPLOR) and its wholly-owned subsidiaries (collectively, the
Company). Effective in September 1997, XPLOR succeeded to the operations of
Araxas Energy Corporation (AEC) and its wholly-owned subsidiaries, Araxas
Exploration, Inc. (AEI), Araxas SPV-I (SPV) and Gulfland Industries, Inc.
(GII). The balance sheets at December 31, 1998 and 1997 also includes the
accounts of South Coast Exploration Company (South Coast), SOCO Exploration,
L.P. (SOCO) and Interactive Exploration Solutions, Inc. (INEXS) (collectively,
the South Coast entities), following the acquisition of the South Coast
entities by the Company as of September 30, 1997. Such acquisition was
accounted for as a purchase. See notes 3 and 12 for a description of other
transactions consummated in connection with such transaction. All significant
intercompany balances and transactions have been eliminated in consolidation.
Certain reclassifications have been made in the 1997 and 1996 financial
statements to conform to the presentation used in 1998.
The Company conducts oil and gas exploration, drilling and development
operations along the Texas and Louisiana Gulf Coasts and in Alabama. Prior to
its divestiture in April 1997, GII provided contract operating services to the
Company and third parties in the Gulf of Mexico.
REVENUE RECOGNITION
Owners of oil and gas properties often take more or less production
from a property than entitled to based on their ownership percentages in the
property, which results in a condition known in the industry as a production
imbalance. The Company follows the sales method of accounting for production
imbalances. Under this method, the Company recognizes revenues on production as
it is taken and delivered to its purchasers. The Company's oil and gas
imbalances were not significant at December 31, 1998 and 1997.
CASH AND CASH EQUIVALENTS
The Company considers all highly liquid investments with an original
maturity of less than ninety days to be cash and cash equivalents.
INVESTMENT SECURITIES
The Company classifies its debt and equity securities in one of three
categories: trading, available-for-sale, or held-to-maturity. Trading
securities are bought and held principally for the purpose of selling them in
the near term. Held-to-maturity securities are those securities in which the
Company has the ability and intent to hold until maturity. All other securities
not included in the trading or held-to-maturity categories are classified as
available-for-sale.
Trading and available-for-sale securities are recorded at fair value.
Held-to-maturity securities are recorded at amortized cost, adjusted for the
amortization or accretion of premiums or discounts. Unrealized holding gains
and losses on trading securities are included in earnings. Unrealized holding
gains and losses, net of the related tax effect, on available-for-sale
securities are excluded from earnings and are reported as a separate component
of stockholders' equity until realized. Realized gains and losses from the sale
of available-for-sale securities are determined on a specific identification
basis.
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A decline in the market value of any available-for-sale or
held-to-maturity security below cost that is deemed to be other than temporary
results in a reduction in carrying amount to fair value. The impairment is
charged to earnings and a new cost basis for the security is established.
Premiums and discounts are amortized or accreted over the life of the related
held-to-maturity security as an adjustment to yield using the effective
interest method. Dividend and interest income are recognized when earned.
PROPERTY AND EQUIPMENT
The Company follows the full cost method of accounting for oil and gas
properties, whereby all productive and nonproductive property acquisition,
exploration and development costs are capitalized. Such capitalized costs
include lease acquisition costs, delay rentals, geophysical, geological and
other costs, drilling, completion and other related costs and direct general
and administrative expenses associated with property acquisition, exploration
and development activities. Capitalized general and administrative costs
include internal costs such as salaries and related benefits paid to employees
to the extent that they are directly engaged in such activities, as well as all
other directly identifiable general and administrative costs associated with
such activities, and do not include any costs related to production, general
corporate overhead, or similar activities. Capitalized internal general and
administrative costs were $2,926,000 in 1998, $1,202,000 in 1997, and $857,000
in 1996.
All capitalized costs of oil and gas properties and estimated future
development and dismantlement costs are amortized using the unit-of-production
method based on the ratio of current production to total proved recoverable oil
and natural gas reserves. Investment in unproved properties and major
development projects are not amortized until proved reserves associated with
the projects can be determined or until impairment occurs. Unevaluated costs of
$7,869,000 and $9,672,000 were excluded from amortization at December 31, 1998
and 1997, respectively. Unevaluated properties are assessed quarterly to
determine whether any impairment has occurred. If the results of an assessment
indicate that the properties are impaired, the amount of the impairment is
added to the capitalized cost to be amortized. Abandonments of properties are
accounted for as adjustments to capitalized costs with no loss recognized.
Depreciation, depletion and amortization expense per equivalent
thousand cubic feet of production was, $1.11 in 1998, $0.87 in 1997, and $0.65
in 1996.
In accordance with the full cost method of accounting, the net
capitalized costs of oil and gas properties less related deferred income taxes
for each cost center are limited to the sum of the estimated future net
revenues from the properties at current prices less estimated future
expenditures, discounted at 10%, and unevaluated costs not being amortized,
less income tax effects related to differences between the financial and tax
bases of the properties, computed at each reporting date. In 1998, an
impairment of $35,871,000 was recognized. There were no such write downs in
1997 or 1996.
Depletion expense and limits to capitalized costs are based on
estimates of oil and gas reserves which are inherently imprecise and assume
current prices for future net revenues. Accordingly, it is reasonably possible
that the estimates of reserves quantities and future net revenues could differ
materially in the near term from amounts currently estimated.
Gains and losses on sales of oil and gas properties are not recognized
in income unless the sale involves a significant portion of the reserves.
All other property and equipment are stated at original cost.
Depreciation on other property and equipment is calculated on the straight-line
method over the estimated useful lives of the assets which range from 5 to 15
years.
11
<PAGE> 12
DISMANTLEMENT, RESTORATION AND ENVIRONMENTAL COSTS
The estimated costs, net of salvage value, of dismantling facilities and
site remediation on projects with limited lives or facilities that are required
to be dismantled by contract, regulation or law, and the estimated costs of
restoration and reclamation of land associated with such projects are accrued on
a unit-of-production basis during operations. Such costs are included in
depreciation, depletion and amortization charges in the current period.
The Company is subject to extensive federal, state and local environmental
laws and regulations.These laws, which are constantly changing, regulate the
discharge of materials into the environment and may require the Company to
remove or mitigate the environmental effects of the disposal or release of
petroleum or chemical substances at various sites. Environmental expenditures
are expensed or capitalized depending on their future economic benefit.
Expenditures that relate to an existing condition caused by past operations and
that have no future economic benefits are expensed. Liabilities for expenditures
of a noncapital nature are recorded when environmental assessment and/or
remediation is probable, and the costs can be reasonably estimated. Remediation
costs that are of a fixed or reliably determined amount are discounted generally
at a risk-free interest rate.
IMPAIRMENT OF LONG-LIVED ASSETS AND LONG-LIVED ASSETS TO BE DISPOSED OF
The Company adopted the provisions of Statement of Financial Accounting
Standards (SFAS) No. 121, Accounting for the Impairment of Long-Lived Assets and
for Long-Lived Assets to Be Disposed Of, on January 1, 1996. This statement
requires that long-lived assets, other than oil and gas properties under the
full cost method, and certain identifiable intangibles be reviewed for
impairment whenever events or changes in circumstances indicate that the
carrying amount of an asset may not be recoverable. Recoverability of assets to
be held and used is measured by a comparison of the carrying amount of an asset
to future net cash flows expected to be generated by the asset. If such assets
are considered to be impaired, the impairment to be recognized is measured by
the amount by which the carrying amount of the assets exceeds the fair value of
the assets. Assets to be disposed of are reported at the lower of the carrying
amount or fair value less costs to sell. Adoption of this statement did not have
any impact on the Company's financial position or results of operations.
CAPITALIZED INTEREST
The Company capitalizes interest on expenditures made in connection with
major exploration and development projects that are not subject to current
amortization. Interest is capitalized only for the period that activities are in
progress to bring these projects to their intended use. There was no interest
capitalized in the three years ended December 31, 1998.
RESTRICTED CASH-ESCROW AGREEMENTS
The Company is contractually obligated by the terms of purchase agreements
to contribute funds to escrow accounts amounting to $1,749,000 for the future
dismantlement and abandonment of certain oil and gas properties over the reserve
life of these properties. The restricted cash is recorded as an other asset.
GOODWILL
Goodwill, which represents the excess of purchase price over fair value of
the net investment in a seismic consulting service company acquired, is
amortized on a straight-line basis over the expected periods to be benefited, 10
years. The Company assesses the recoverability of this intangible asset by
determining whether the amortization of the goodwill balance over its remaining
life can be recovered through undiscounted future operating cash flows of the
acquired operation. The amount of goodwill impairment, if any, is measured based
on projected discounted future operating cash flows using a discount rate
reflecting the Company's average cost of funds. The assessment of the
recoverability of goodwill will be impacted if
12
<PAGE> 13
estimated future operating cash flows are not achieved. There was no impairment
of goodwill in the three years ended December 31, 1998.
DEBT FINANCING COSTS
Costs incurred in obtaining debt financing have been capitalized and are
being amortized over the term of the respective loan.
DERIVATIVE FINANCIAL INSTRUMENTS
The Company applies hedge accounting for those derivative financial
instruments that are designated as a hedge. In order to qualify as a hedge,
price movements in the underlying commodity derivative must be highly correlated
with the hedged commodity. Monthly cash settlements of oil and gas price swaps
are reported as a component of revenue and cash flows from operations. The
settlements are based on the difference between the fixed swap price and the New
York Mercantile Exchange closing prices for each month during the life of the
swaps. Gains or losses attributable to the termination of a swap contract are
deferred on the balance sheet and recognized in revenue when the hedged crude
oil and natural gas is sold. In September, 1997, the Company terminated
long-term hedges in connection with the retirement of debt, which required
hedges of a certain amount of the Company's oil and gas production, incurring a
deferred hedge loss of $2,785,115. The remaining unamortized deferred loss of
$2,527,125 was written off as part of the impairment of oil and gas properties
in 1998. There were no terminations during 1996. When a derivative financial
instrument ceases to qualify as a hedge, or is not so designated, the change in
fair value of the derivative financial instrument is recognized in earnings
currently.
INCOME TAXES
Income taxes are accounted for under the asset and liability method.
Deferred tax assets and liabilities are recognized for the future tax
consequences attributable to differences between the financial statement
carrying amounts of existing assets and liabilities and their respective tax
bases and operating loss and tax credit carryforwards. Deferred tax assets and
liabilities are measured using enacted tax rates expected to apply to taxable
income in the years in which those temporary differences are expected to be
recovered or settled. The effect on deferred tax assets and liabilities of a
change in tax rates is recognized in income in the period that includes the
enactment date.
STOCK OPTIONS
The Company accounts for stock-based compensation under the intrinsic value
method. Under this method, the Company records no compensation expense for stock
options granted when the exercise price of options granted is equal to or
greater than the fair market value of the Company's stock on the date of grant.
EARNINGS PER SHARE
Basic net income (loss) per share is computed by dividing net income
(loss), after deduction of the preferred stock dividends, preferred stock
amortization and the add-back of the preferred stock redemption discount, by the
weighted-average number of common stock outstanding (a total of 4,596,871,
3,263,670 and 2,547,392 shares for 1998, 1997 and 1996). Diluted net income
(loss) per share is similar to the computation of basic net income (loss) per
share above, except that the denominator is increased to include the dilutive
effect of outstanding stock options by application of the treasury stock method.
For 1998, 1997 and 1996, the effect of outstanding stock options were excluded
from the calculation of net income (loss) per share as the amounts were
antidilutive.
USE OF ESTIMATES
In preparing the Company's financial statements, management is required to
make estimates and assumptions that affect the reported amounts of assets and
liabilities, the disclosure of contingent assets and
13
<PAGE> 14
liabilities at the date of the financial statements, and the reported amounts of
revenues and expenses during the reporting period. Actual results could differ
from those estimates.
COMPREHENSIVE INCOME
In June 1997, FASB issued SFAS No. 130 regarding reporting comprehensive
income, which establishes standards for reporting and display of comprehensive
income and its components. The components of comprehensive income refer to
revenues, expenses, gains and losses that are excluded from net income under
current accounting standards, including foreign currency translation items,
minimum pension liability adjustments and unrealized gains and losses on certain
investments in debt and equity securities. SFAS No. 130 requires that all items
recognized under accounting standards as components of comprehensive income be
reported in a financial statement displayed in equal prominence with the other
financial statements; the total of other comprehensive income for a period is
required to be transferred to a component of equity that is separately displayed
in a statement of financial condition at the end of an accounting period. SFAS
No. 130 is effective for both interim and annual periods beginning after
December 15, 1997. Reclassification of financial statements for earlier periods
provided for comparative purposes is required. The Company has adopted SFAS No.
130 in 1998, however, the Company has no comprehensive income items for the
three-years ended December 31, 1998.
SEGMENT REPORTING
In June 1997, FASB issued SFAS No. 131 regarding disclosures about segments
of an enterprise and related information. SFAS No. 131 establishes standards for
reporting information about operating segments in annual financial statements
and requires the reporting of selected information about operating segments in
interim financial reports issued to stockholders. It also establishes standards
for related disclosures about products and services, geographic areas and major
customers. SFAS No. 131 is effective for periods beginning after December 15,
1997. The Company adopted SFAS No. 131 in the first quarter of 1998. During the
three years ended December 31, 1998, the Company only had one segment: the
exploration and production of oil and gas reserves.
(2) INVESTMENT IN MARKETABLE SECURITIES
In connection with the sale of certain oil and gas properties in 1996, the
Company received $3,087,118 in marketable equity securities as proceeds from the
sale. At December 31, 1996, the Company recorded an unrealized loss of $462,999
which was included in other expense. These securities were subsequently sold in
1997 for a realized loss of $578,452. The net loss of $115,453 in 1997 is
recorded in other expenses.
(3) ACQUISITION OF SOUTH COAST COMPANIES
On August 19, 1997, an agreement was entered into by XPLOR, a Delaware
corporation formed July 2, 1997 to effect the non-taxable merger of AEC, South
Coast, INEXS, SOCO and certain owners of the stock of AEC, South Coast, INEXS
and SOCO (the Acquisition Agreement), which provided for the acquisition by AEC
and its subsidiaries of South Coast, INEXS and SOCO, with XPLOR as the new
parent company. The Acquisition Agreement was closed on September 24, 1997, with
XPLOR issuing stock to the previous owners of AEC, South Coast, INEXS, and SOCO.
In addition, three notes of $1,000,000 each were created by XPLOR payable to the
principals of INEXS and secured by the stock of INEXS (the INEXS Shareholder
Notes). Goodwill of $1,375,555 was recorded for the excess of the value paid for
INEXS, a seismic consulting service company, over the value of its assets. The
INEXS Shareholder Notes were paid on September 29, 1998 and did not bear
interest. The Acquisition Agreement has been accounted for as a purchase,
effective September 30, 1997, of South Coast, INEXS and SOCO by XPLOR, as
successor to AEC and 67% stockholders of XPLOR. Accordingly, the results of
operations for the South Coast Companies are included in the Company's statement
of operations from that date.
14
<PAGE> 15
<TABLE>
<S> <C>
Dollars in thousands, except per share data
Issuance of 1,785,425 shares of XPLOR common
stock to South Coast valued at an estimated
fair value of $5.39 per share $ 9,623
Issuance of Combination Notes to principals of
South Coast, net of discount of $320 2,680
Negative working capital assumed 289
Estimated transaction costs 344
-------
Total purchase price $12,936
=======
Purchase allocation
Oil and gas properties $11,249
Office equipment and other 312
INEXS goodwill 1,375
-------
Total $12,936
=======
</TABLE>
In conjunction with the Acquisition Agreement, certain former employees
left the Company and related agreements were entered into to effect the
termination of their employment contracts. Pursuant to those agreements, 110,200
shares of the Company's stock were issued at par value to former employees in
exchange for their outstanding stock options. In addition, the Company entered
into an agreement with one of the former employees to purchase the stock of a
Company which was owned by the employee, the principal assets of which were
working interests in properties in which AEC already owns interests, and to
cancel that employee's stock options for consideration of $2,950,000. Of this
amount, $750,000 was paid at closing and a note for $2,200,000 was given by the
Company for the balance (the Employee Note). The Employee Note is unsecured,
bears interest at 5.81%, payable at maturity, and matures at the earlier of
December 31, 1998 or the date of an initial public offering (the IPO) (see note
10) or upon merger or sale of a significant portion of the Company's assets or
capital stock (Other Sale). If no IPO or Other Sale has been closed by December
31, 1998, the principal amount due on the Employee Note will be $1,350,000,
which was paid on December 31, 1998. In addition, certain current employees were
granted 61,619 shares pursuant to their contracts. In conjunction with these
transactions, other compensation of $1,323,722 was recognized for the year ended
December 31, 1997.
15
<PAGE> 16
(4) LONG-TERM DEBT
The Company's long-term debt is as follows:
<TABLE>
<CAPTION>
DECEMBER 31,
-----------------------------------
1998 1997
----------------- -----------------
<S> <C> <C>
$25,000,000 three-year loan facility with Christiania og
Kreditkasse (Christiania) (a), interest based on the
short-term Interbank Offered Rates (LIBOR) plus a margin
of 1.125% to 1.875%, (6.71% at December 31, 1998) payable
at the underlying LIBOR maturities $ 5,000,000 $ --
$25,000,000 three-year loan facility with Credit
Lyonnais, New York Branch (Credit Lyonnais) (b),
Interest based on LIBOR plus a margin of 1.25% to
1.75%, payable at the underlying LIBOR maturities 13,000,000
Note payable due July 31, 1998, to ERI Investments,
Inc. (ERI Note), an affiliate (c) of an owner of the
Company, unsecured, interest at 9% payable at
maturity 5,000,000
Employee Note, payable at the earlier of December 31,
1998 or $2,200,000 payable at the date of the IPO or
upon merger or sale of a significant portion of the
Company's assets or stock, unsecured, bears interest
at 5.81%, payable at maturity 1,350,000
Shareholder notes, payable on September 24, 1998,
discounted at 12%, payable at maturity 2,760,000
Note payable to stockholder due in annual installments
of principal and interest beginning July 1997;
discounted at 10%; due July 1999 600,941 568,046
Note payable due in two installments: $400,000 on
February 1, 1997 and $427,000 on February 1,
1998; interest at prime (8.5%) with interest payable
annually on February 1; note guaranteed by NWR 427,500
----------- -----------
5,600,941 23,105,546
Less current maturities 600,941 22,898,879
----------- -----------
$ 5,000,000 $ 206,667
=========== ===========
</TABLE>
(a) On November 4, 1998, the Company entered into a three-year revolving
credit facility with Christiania (the "Christiania Facility") to finance general
working capital requirements, purchases of oil and gas properties and
acquisitions maturing September 30, 2001. The Christiania Facility is secured by
substantially all of the oil and gas properties of the Company and the stock of
all significant subsidiaries. The Christiania Facility provides up to
$50,000,000 in borrowings limited by a borrowing base (as defined by the
Christiania Facility) which was $25,000,000 at December 31, 1998. At December
31, 1998, borrowings outstanding under the Christiania Facility totaled
$5,000,000. The Christiania Facility provides for interest which ranges from
Libor + 1.125% or the lender's prime to a maximum of Libor +1.875% or lender's
prime rate plus 0.25% (6.71% at December 31, 1998), and provides for a
commitment fee of 0.375% on the unused amount. A $62,500 loan origination fee
was paid at closing. The borrowing base is subject to review by the bank on a
semi-annual basis and may be adjusted subject to the provisions of the
Christiania Facility. The Christiania Facility contains covenants and financial
tests. In particular, the Company must remain a 2.5x
16
<PAGE> 17
Interest Coverage Test, a 2.25x Fixed Charge Coverage Test, a Tangible Net Worth
Test, and a Current Ratio Test. The Company was in compliance with all of the
covenants at December 31, 1998.
(b) On September 24, 1997, the Company entered into a credit agreement
with Credit Lyonnais secured by all of the oil and gas properties of the Company
and the stock of all significant subsidiaries (the Credit Lyonnais Agreement)
and repaid the balance owed under its revolving line of credit with Stratum (the
Stratum Debt). In connection with the repayment of the Stratum Debt,
approximately $742,000 of Stratum unamortized debt financing costs were expensed
as an extraordinary loss. The Company was required by the terms of the Stratum
Debt to maintain certain oil and gas commodity price swaps. Those swaps were
liquidated on September 24, 1997, in connection with the repayment of the
Stratum Debt, resulting in losses of $2,785,115, which were amortized in 1997
over the life of the underlying swap agreements and included in the measurement
of the hedged oil and gas revenues. In 1998, the unrealized hedging losses were
written off as part of the ceiling write-down. See note 11 for a discussion of
the hedges.
The Credit Lyonnais Agreement provided a bridge loan maturing May 24, 1998,
as well as a revolving loan following and contingent upon the partial repayment
of the bridge loan. The bridge loan was for an amount of up to $35,000,000 and
bore interest at the Credit Lyonnais short-term commercial loan rate plus 2.5%
per annum, payable quarterly or, at the option of the Company, at a fixed rate
based on short-term London Interbank Offered Rates (LIBOR) plus a margin of 4.3%
per annum, payable at the underlying LIBOR maturities. On December 31, 1997, the
Company repaid $22,000,000 outstanding under the bridge loan with the proceeds
from the sale of 2,500,000 shares of 1997 Series A Convertible Preferred Stock
(Series A Preferred) (see note 5). Upon such repayment, the bridge loan
automatically converted into the revolving loan, and amounts remaining
outstanding under the bridge loan were automatically converted to borrowings
under the revolving loan.
In connection with the Credit Lyonnais Agreement, the Company paid an
arrangement/structuring fee of $1,000,000 for the bridge loan and fees of 0.643%
for draws under the bridge loan. A portion of the costs associated with the loan
balance outstanding at December 31, 1997, $187,500, remained capitalized at
December 31, 1997, along with certain legal, engineering and consulting
expenses. The remainder of these costs, approximately $816,000, were expensed in
1997. In 1998, the unamortized portion of the capitalized cost of $176,000 were
expensed upon the extinguishment of the Credit Lyonnais Agreement. On November
4, 1998, the Credit Lyonnais Agreement was replaced with the Christiania
Facility discussed above.
(c) On July 7, 1997, in anticipation of the transactions contemplated by
the Acquisition Agreement with the South Coast entities, the Company borrowed
$5,000,000 from ERI Investments, Inc., a company affiliated with one of the
owners of South Coast and SOCO, evidenced by a promissory note (the ERI Note).
The ERI Note was unsecured, matured on July 31, 1998 and bore interest at 9%
payable in two installments on January 31 and July 31, 1998.
Estimated aggregate maturities of long-term debt for the three years
following December 31, 1997 are as follows:
<TABLE>
<CAPTION>
YEAR ENDED
DECEMBER 31, AMOUNT
------------ -----------
<S> <C>
1999 $ 600,941
2000 --
2001 5,000,000
-----------
$ 5,600,000
===========
</TABLE>
17
<PAGE> 18
(5) REDEEMABLE PREFERRED STOCK
On December 31, 1997, the Company issued and sold 2,500,000 shares of 1997
Series A Preferred stock for an aggregate purchase price of $24.9 million. The
1997 Series A Preferred bore a 9% dividend, payable quarterly. The Company
utilized the proceeds from the sale of the Series A Preferred to repay $22
million outstanding under the bridge loan with Credit Lyonnais.
In connection with a new issuance of preferred stock on July 29, 1998, the
holders of the 1997 Series A Preferred sold 852,447 of their shares to a new
holder for $8.9 million, and sold 647,553 of its shares back to the Company for
$6.8 million. The remaining Series A Preferred shares were exchanged for
1,230,280 shares of 1998 Series B Preferred at a value of $10.5 million.
Included in the Series B Preferred value was a liquidation preference of $1.2
million. In exchange of its 1997 Series A preferred and cash of $51.1 million
for an aggregate purchase price of $60.0 million, the new holder received
7,033,998 shares of 1998 Series A Preferred. Both 1998 Series A Preferred and
1998 Series B Preferred (the 1998 Preferred) have a par value of $0.001, and a
stated value of $8.53. The 1998 Preferred bear a 9% dividend payable quarterly,
cumulative 12%. At the option of the Company, dividends on the 1998 Series B
Preferred may be paid in new shares, instead of cash. These paid in kind
dividends are payable on a quarterly basis at a rate of 11.25%, and using the
stated value of $8.53 per share to determine the number of shares to issue.
During 1998, 342,145 shares of Series B Preferred were issued at a value of $2.9
million in lieu of paying cash dividends.
Each share of 1998 Preferred has a warrant attached, which may be converted
in the case of an IPO for one share of common stock at an exercise price of
$8.53 per share, subject to change. The exercise price is based on 1999
discretionary cash flow but will never be less than $3.44 per share nor greater
than $13.81 per share. Effective with the earlier of an IPO, delivery of the
1999 audited financial statements, or May 31, 2001, the number of shares of
common stock to be issued shall be adjusted to be the original value of the
shares at $8.53 per share, divided by the adjusted exercise price. The share
agreements provide for a mandatory redemption of the 1998 Preferred in three
equal increments, due June 30, 2003, 2004 and 2005, unless sooner redeemed or
converted. The 1998 preferred will accrete, over the life of the security, to
the ultimate redemption price, which is calculated as the future value for the
preferred shares assuming a 12% rate of return, compounded quarterly. The
agreements also create certain restrictions regarding the payment of dividends
on common shares, and provide for dilution protection to the Preferred holders.
(6) INCOME TAXES
Income tax expense (benefit) represents state income taxes, federal
alternative minimum taxes, and deferred income taxes for the years ended
December 31, 1997 and 1996. There was no income tax expense for the year ended
December 31, 1998 due to the significant taxable loss and the related increase
in the valuation allowance.
18
<PAGE> 19
Total income taxes were different than the amounts computed by applying the
statutory income tax rate to income (loss) before income taxes. The sources of
these differences are as follows:
<TABLE>
<CAPTION>
1998 1997 1996
------------- ------------ ------------
<S> <C> <C> <C>
Income tax computed at statutory rate $(13,765,916) $ (4,230,993) $ (874,937)
Adjustments resulting from:
State income taxes (net of
Federal income tax effect) (1,179,935) 29,254 (74,995)
Alternative minimum tax -- 17,932 --
Change in valuation allowance 15,437,178 3,045,347 824,653
Deferred compensation adjustment -- 1,064,760 --
Other, net (491,327) 135,956 89,322
------------ ------------ ------------
Total income tax expense (benefit) $ -- $ 62,256 $ (35,957)
============ ============ ============
</TABLE>
The tax effects of temporary differences that give rise to significant
portions of the deferred tax liabilities (assets) at December 31, 1998 and 1997
are as follows:
<TABLE>
<CAPTION>
1998 1997
--------------- --------------
<S> <C> <C>
Oil and gas exploration and development costs $ 5,937,601 $ 2,265,004
--------------- --------------
Gross deferred tax liabilities 5,937,601 2,265,004
--------------- --------------
Depletion, depreciation and amortization (13,186,291) --
Net operating loss carryforward (10,373,329) (5,820,438)
Allowance for doubtful accounts (110,641) --
Litigation accrual (304,000) --
Unrealized loss on swap agreement (960,308) --
Deferred loan costs (310,210) (314,566)
--------------- --------------
Gross deferred tax assets (25,244,779) (6,135,004)
Less valuation allowance 19,307,178 3,870,000
--------------- --------------
Net deferred tax assets (5,937,601) (2,265,004)
--------------- --------------
Net deferred tax liabilities $ -- $ --
=============== ==============
</TABLE>
The Company recorded a valuation allowance for deferred tax assets in 1998
and 1997 of $20,216,392 and $3,870,000, respectively. In assessing the
realizability of deferred tax assets, management considers whether it is more
likely than not that some portion or all of the deferred tax assets will not be
realized. The ultimate realization of deferred tax assets is dependent upon the
generation of future taxable income during the periods in which those temporary
differences become deductible. Management considers the scheduled reversal of
deferred tax liabilities in making this assessment. In order to fully realize
all deferred tax assets, the Company will need to generate future taxable income
of approximately $50,808,000 prior to the expiration of the net operating loss
carryforwards in 2012. The amount of the deferred tax assets considered
realizable, however, could be increased in the near term if estimates of future
taxable income during the carryforward period are increased.
19
<PAGE> 20
(7) CONTINGENCIES
The Company is involved in litigation incidental to the conduct of its
business, none of which management believes is, individually or in the
aggregate, material to the Company's consolidated financial condition, results
of operations or liquidity.
(8) EMPLOYEE BENEFITS
The Company has entered into employment agreements with several key
employees. The agreements provide for bonuses payable to the employees based on
several different factors, including employee performance, and meeting
operational and financial targets. At December 31, 1998, 1997 and 1996, the
Company had accrued approximately $-0-, $615,000 and $34,000, respectively, in
bonuses.
Pursuant to certain employment agreements, the Company also assigns
overriding royalties to several key technical employees on certain exploration
prospects. The amount of the override reserved for employees ranges from 2% to
3% of the Company's interest, and such amounts are deducted from revenue when
earned.
(9) LEASE COMMITMENTS
The Company has entered into various noncancelable operating lease
agreements, primarily for office rent and office equipment. As of December 31,
1998, future minimum payments under these lease agreements are as follows:
<TABLE>
<CAPTION>
YEAR ENDED
DECEMBER 31 AMOUNT
-------------- -------------
<S> <C>
1999 $ 336,639
2000 336,639
2001 314,071
2002 244,485
2003 244,485
Thereafter 590,833
-------------
$ 2,067,152
=============
</TABLE>
Rental expense for 1998, 1997 and 1996 was approximately $321,000,
$286,000, and $220,000, respectively.
(10) STOCK OPTIONS
The Company applies APB Opinion No. 25 and related interpretations in
accounting for stock-based compensation. Had compensation costs been determined
based on the fair value at the grant dates for awards consistent with the method
of SFAS No. 123, the Company's pro forma net loss and loss per share would have
been unchanged for the year ended December 31, 1996 and would have been as
follows for the year ended December 31, 1998 and December 31, 1997:
<TABLE>
<CAPTION>
1998 1997
------------- -------------
<S> <C> <C>
Net loss:
As reported $(47,536,517) $(12,150,807)
Pro forma (47,766,084) (13,061,870)
Basic loss per share:
As reported $ (10.34) $ (3.72)
Pro forma (10.39) (4.00)
</TABLE>
20
<PAGE> 21
The fair value of each option grant is estimated on the date of the
grant using the minimum value method and the following assumptions were used for
the grants issued in 1998 and 1997:
<TABLE>
<CAPTION>
1998 1997
-------- --------
<S> <C> <C>
Risk free rate 5.23% 5.71%
Expected life of options 10 years 10 years
</TABLE>
A summary of the Company's employee stock options at December 31, 1996,
1997, and 1998 and changes during the years ended on those dates, is presented
below:
<TABLE>
<CAPTION>
WEIGHTED-AVERAGE
SHARES EXERCISE PRICE
------ ----------------
<S> <C> <C>
Outstanding, December 31, 1996 248,936 $ 1.71
Canceled 254,504 1.91
Granted 567,854 10.35
Exercised -- --
Forfeited -- --
Outstanding, December 31, 1997 562,286 $ 10.35
Canceled 591,511 10.58
Granted 1,488,880 7.11
Exercised -- --
Forfeited -- --
Outstanding, December 31, 1998 1,459,655 $ 6.95
</TABLE>
<TABLE>
<CAPTION>
*WEIGHTED-AVERAGE OPTIONS
REMAINING OUTSTANDING
*RANGE OF CONTRACTUAL *WEIGHTED-AVERAGE NUMBER WEIGHTED-AVERAGE
EXERCISE PRICES LIFE EXERCISE PRICE OUTSTANDING EXERCISE PRICE
--------------- ---------------- ---------------- ----------- ----------------
<S> <C> <C> <C> <C>
$ 5.78 - 6.99 10 years $ 6.95 1,459,655 $ 6.95
</TABLE>
(11) HEDGING ACTIVITIES AND FINANCIAL INSTRUMENTS
In 1997 and 1996, the Company entered into commodity price swap
agreements as required by the terms of its revolving credit facility with
Stratum. These agreements provided for the Company to receive or make payments
to Stratum on the differential between a fixed price and variable indexed price
on a monthly basis. Gains and losses related to the swap agreements were
recognized as an adjustment to revenues when the transaction occurs.
Pursuant to these swaps, the Company was receiving fixed prices of from
$17.82 to $18.16 per Bbl of oil, covering a total of 1,460,000 Bbls over the
life of the swaps, from May 1996 through December 2001. The Company also entered
into two gas price swaps, receiving fixed prices of $2.04 and $2.0725 per MMBtu,
covering a total of 3,225,000 MMBtus over the life of the swaps, from May 1996
through December 2001. Oil and gas revenues were decreased by $1,164,000 in 1997
as a result of these swaps. The price swaps were terminated in September 1997 at
a liquidation cost of $2,785,000, which was included in deferred charges and was
to be amortized over the life of the underlying swaps as a reduction to oil and
gas sales. For 1997, this
21
<PAGE> 22
amortization amounted to $257,875. In 1998, the deferred charge was written off
as part of the impairment of oil and gas properties.
DETERMINATION OF FAIR VALUES OF FINANCIAL INSTRUMENTS
Fair value for cash, short-term investments, receivables, payables and
long-term debt approximates carrying value. The Company was exposed to an
unrealized loss of $3,744,000 to terminate the oil and gas price swaps held at
December 31, 1996. These swaps were terminated in connection with the debt
refinancing with Credit Lyonnais as discussed above.
(12) SUBSEQUENT EVENTS (UNAUDITED)
Effective November 1, 1998, the Company acquired an oil and gas
property in south Texas for $5.5 million. The acquisition was closed on January
13, 1999, the accounting date, and was funded with borrowings from the
Christiania Facility. The acquisition will add approximately 3.98 bcfe
(unaudited) to the Company's reserves.
In May 1999, XPLOR settled a lawsuit over a disputed interest in an
unevaluated prospect in Duval County, Texas. Pursuant to the terms of the
settlement, XPLOR paid a third party $800,000, plus an overriding royalty
interest of one to 7.3 percent in certain defined sections of the prospect. A
portion of the cash was paid in May 1999 with the signing of the agreement. The
remaining cash is to be paid in three annual increments on or before March 1,
2000, 2001, and 2003. The settlement was accrued as of December 31, 1998 and is
included in Other Payables and accrued liabilities on the balance sheet.
(13) SUPPLEMENTAL OIL AND GAS INFORMATION (UNAUDITED)
Included herein is information with respect to oil and gas acquisition,
exploration, development and production activities, which is based on estimates
of year-end oil and gas reserve quantities and estimates of future development
costs and production schedules. The prices used in the reserve estimates are
prices the Company was receiving at each year end except where fixed and
determinable price escalations or oil and gas hedges are provided by contract.
Reserve quantities and future production at December 31, 1998, 1997 and 1996 are
based upon reserve reports prepared by the independent petroleum engineering
firm of Netherland, Sewell & Associates, Inc.
These estimates are inherently imprecise and subject to substantial
revision. The Company cautions that there are many uncertainties inherent in
estimating proved reserve quantities, and in projecting future production rates
and the timing of future development expenditures, including many factors beyond
the control of the producer. Accordingly, these estimates are subject to change
as additional information becomes available. Reservoir engineering is a
subjective process of estimating underground accumulations of oil and gas that
cannot be measured in an exact way, and the accuracy of any reserve estimate is
a function of the quality of available data and of engineering and geological
interpretation and judgment. Results of drilling, testing and production
subsequent to the date of an estimate may justify revision of the estimate.
Accordingly, reserve estimates are often different from the quantities of oil
and gas that are ultimately recovered.
Estimates of future net cash flows from proved reserves of oil and gas
were made in accordance with SFAS No. 69, Disclosures about Oil and Gas
Producing Activities. The estimates are based on prices the Company was
receiving at the respective date which were $9.89 per barrel of oil and $2.19
per mcf gas. Estimated future cash inflows are reduced by estimated future
development and production costs based on year-end cost levels, assuming
continuation of existing economic conditions, and by estimated future tax
expense. Tax expense is calculated by applying the existing statutory tax rates,
including any known future changes. The results of these disclosures should not
be construed to represent the fair market value of the Company's oil and gas
properties. A market value determination would include many additional factors
including: (i) anticipated future increases and decreases in oil and gas prices
and production and development costs; (ii) an allowance for return on
investment; (iii) the value of additional reserves not considered proved
22
<PAGE> 23
at the present, which may be recovered as a result of further exploration and
development activities; and (iv) other business risks.
In computing the present value of the estimated future net cash flows,
a discount factor of 10% was used pursuant to SEC regulations to reflect the
timing of those net cash flows. Present value, regardless of the discount rate
used, is materially affected by assumptions about timing of future production,
which may prove to be inaccurate. The following reserve value data represent
estimates only, which are subject to uncertainty given the current energy
markets.
CAPITALIZED COSTS AND OIL AND GAS PRODUCING ACTIVITIES
The following table sets forth the aggregate amounts of capitalized
costs relating to the Company's oil and gas producing activities and the
aggregate amount of related accumulated depreciation, depletion and amortization
as of the dates indicated.
<TABLE>
<CAPTION>
DECEMBER 31,
---------------------------------
1998 1997
------------ ------------
<S> <C> <C>
Proved properties $ 62,893,000 $ 41,843,000
Unproved properties 7,689,000 9,672,000
Less accumulated depreciation and
amortization (42,916,000) (5,228,000)
------------ ------------
Net capitalized costs $ 27,666,000 $ 46,287,000
============ ============
</TABLE>
COSTS INCURRED IN OIL AND GAS PRODUCING ACTIVITIES
The following table reflects the costs incurred in oil and gas property
acquisition, exploration and development activities during the periods
indicated.
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
----------------------------------------------------
1998 1997 1996
------------ ------------ ------------
<S> <C> <C> <C>
Property acquisition costs:
Proved properties $ 695,000 $ 4,920,000 $ 9,468,000
Unproved properties 3,803,000 9,506,000 1,102,000
Exploration costs 15,421,000 4,648,000 2,234,000
Development costs 4,403,000 8,512,000 4,329,000
------------ ------------ ------------
$ 24,322,000 $ 27,586,000 $ 17,133,000
============ ============ ============
</TABLE>
RESULTS OF OPERATIONS FOR PRODUCING ACTIVITIES
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
----------------------------------------------
1998 1997 1996
---------- ---------- ----------
<S> <C> <C> <C>
Revenues from oil and gas producing activities $9,589,000 $9,109,000 $6,043,000
Production costs 3,409,000 2,957,000 2,169,000
Depreciation, depletion and amortization 4,875,000 3,015,000 1,569,000
Income tax expense 496,000 1,192,000 784,000
---------- ---------- ----------
Results of operations from producing activities
(excluding corporate overhead and interest costs) $ 809,000 $1,945,000 $1,521,000
========== ========== ==========
</TABLE>
23
<PAGE> 24
The following table sets forth the Company's interest in estimated
total proved oil and gas reserves for years ended December 31, 1996, 1997, and
1998:
<TABLE>
<CAPTION>
OIL (BBLS) GAS (MCF)
------------ ------------
<S> <C> <C>
Balance, December 31, 1996 3,675,200 27,607,900
Revisions of previous estimates (716,400) (3,074,600)
Discoveries and extensions 277,800 1,022,100
Purchases of reserves 257,800 10,833,400
Production (282,400) (1,756,200)
------------ ------------
BALANCE, DECEMBER 31, 1997 3,212,000 34,632,600
Revisions of previous estimates (1,034,000) (8,712,700)
Discoveries and extensions 184,000 6,060,900
Sales of reserves (196,000) (3,869,400)
Production (235,700) (3,034,900)
------------ ------------
BALANCE, DECEMBER 31, 1998 1,930,300 25,076,500
Proved developed reserves, December 31, 1996 2,599,200 12,390,900
Proved developed reserves, December 31, 1997 2,072,800 14,897,500
Proved developed reserves, December 31, 1998 1,047,800 13,537,300
</TABLE>
Proved reserves are estimated quantities of natural gas, crude oil, and
condensate which geological and engineering data demonstrate, with reasonable
certainty, to be recoverable in future years from known reservoirs under
existing economic and operating conditions. Proved developed reserves are proved
reserves that can be expected to be recovered through existing wells and
existing equipment and operating methods.
24
<PAGE> 25
STANDARDIZED MEASURE OF DISCOUNTED FUTURE NET CASH FLOWS
The following table reflects the Standardized Measure of Discounted
Future Net Cash Flows relating to the Company's interest in proved oil and gas
reserves as of December 31, 1998, 1997 and 1996.
<TABLE>
<CAPTION>
DECEMBER 31,
----------------------------------------------
1998 1997 1996
------------ ------------ ------------
<S> <C> <C> <C>
Future cash inflows $ 73,926,000 $145,738,000 $188,233,000
Future production costs 22,510,000 39,198,000 49,480,000
Future development costs 13,512,000 19,984,000 14,853,000
------------ ------------ ------------
Future net cash inflows before income taxes 37,904,000 86,556,000 123,900,000
Future income taxes -- 16,900,000 37,268,000
------------ ------------ ------------
Future net cash flows 37,904,000 69,656,000 86,632,000
10% discount 16,492,000 22,954,000 34,040,000
Standardized measure of discounted future
net cash inflows $ 21,412,000 $ 46,702,000 $ 52,592,000
============ ============ ============
</TABLE>
Principal changes in the Standardized Measure of Discounted Future Net
Cash Flows attributable to the Company's proved oil and gas reserves for the
periods indicated are as follows.
<TABLE>
<CAPTION>
1998 1997 1996
------------ ------------ ------------
<S> <C> <C> <C>
Balances at beginning of year $ 46,702,000 $ 52,592,000 $ 15,075,000
Sales of oil and gas, net of production costs (6,179,000) (5,870,000) (3,874,000)
Net change in sales and transfer prices, net of
Production costs (18,616,000) (24,550,000) (1,735,000)
Discoveries and extensions, net of future
Production and development costs 8,769,000 1,849,000 35,744,000
Changes in estimated future development costs 6,844,000 (2,294,000) (2,310,000)
Development costs incurred that reduced future
Development costs 1,923,000 8,512,000 3,774,000
Revisions of quantity estimates (11,942,000) (8,292,000) (2,671,000)
Accretion of discount 4,953,000 6,726,000 1,748,000
Net change in income taxes (2,830,000) 13,581,000 (13,998,000)
Purchase of reserves in place -- 7,385,000 22,143,000
Sale of reserves in place 4,395,000 -- 1,507,000
Changes in production rates (timing) and other (12,607,000) (2,937,000) (2,811,000)
------------ ------------ ------------
Net increase (decrease) (25,290,000) (5,890,000) 37,517,000
------------ ------------ ------------
Balances at end of year $ 21,412,000 $ 46,702,000 $ 52,592,000
============ ============ ============
</TABLE>
25
<PAGE> 26
XPLOR ENERGY, INC.
Consolidated Balance Sheets
<TABLE>
<CAPTION>
DECEMBER 31, JUNE 30,
ASSETS 1998 1999
------------ ------------
(Unaudited)
<S> <C> <C>
Current assets:
Cash and cash equivalents $ 1,967,687 $ 1,048,985
Accounts receivable 6,522,891 3,690,533
Prepaid expenses and other 63,572 213,020
Account receivable, stockholder 620,000 620,000
------------ ------------
Total current assets 9,174,150 5,572,538
Property and equipment, at cost:
Oil and gas properties, full cost method 70,581,749 79,394,741
Pipeline and equipment 1,529,943 1,529,943
Furniture and fixtures and other 1,155,214 1,171,288
------------ ------------
73,266,906 82,095,972
Less accumulated depreciation, depletion and amortization (43,610,114) (45,763,914)
------------ ------------
Net property and equipment 29,656,792 36,332,058
Other assets:
Restricted cash - escrow agreements 1,482,143 1,055,936
Goodwill 1,203,610 1,134,832
Debt financing costs, net 72,594 134,117
------------ ------------
2,758,347 2,324,885
------------ ------------
$ 41,589,289 $ 44,229,481
============ ============
LIABILITIES AND STOCKHOLDERS' DEFICIT
Current liabilities:
Current maturities of long-term debt $ 600,941 $ 4,367,177
Accounts payable 5,543,745 3,507,849
Prepayments received from joint owners -- 138,619
Other payables and accrued liabilities 4,084,549 1,222,332
------------ ------------
Total current liabilities 10,229,235 9,235,977
Long-term debt, net of current maturities 5,000,000 10,700,000
1998 redeemable preferred stock, $0.001 par value, $73,412,788 redemption
value at December 31, 1998, 20,000,000 and -0- shares authorized; 8,606,423
shares issued and outstanding at December 31, 1998 and June 30, 1999 72,542,747 77,355,386
Stockholders' equity:
Common stock, par $.001 per share. 30,000,000 shares authorized;
4,444,395 issued and outstanding at December 31, 1998 and June 30, 1999 4,444 4,444
Paid-in capital 16,179,977 16,179,977
Accumulated deficit (62,367,114) (69,246,303)
------------ ------------
Total stockholders' deficit (46,182,693) (53,061,882)
------------ ------------
$ 41,589,289 $ 44,229,481
============ ============
</TABLE>
See accompanying notes to consolidated financial statements
26
<PAGE> 27
XPLOR ENERGY, INC.
Consolidated Statements of Operations
(Unaudited)
<TABLE>
<CAPTION>
SIX MONTHS ENDED JUNE 30,
------------------------------
1998 1999
------------ ------------
<S> <C> <C>
Revenues:
Oil and gas revenues $ 5,670,366 $ 3,983,074
------------ ------------
Total revenues 5,670,366 3,983,074
------------ ------------
Costs and expenses:
Lease operating expenses 1,133,554 1,620,433
Production and ad valorem taxes 540,258 379,205
Other operating expense 238,039 239,348
Depreciation, depletion and amortization 2,816,737 2,120,911
Impairment of oil and gas properties 16,610,000 --
General and administrative 1,493,209 1,122,945
Other costs and expenses 228,000 99,702
------------ ------------
Total costs and expenses 23,059,797 5,582,544
------------ ------------
Income (loss) from operations (17,389,431) (1,599,470)
------------ ------------
Other (income) expenses:
Interest expense 1,141,586 543,712
Interest income (110,852) (72,688)
Other (income) expense (45,734) (3,944)
------------ ------------
985,000 467,080
------------ ------------
Loss before income tax benefit
(expense) (18,374,431) (2,066,550)
Income tax benefit (expense) (2,383) --
------------ ------------
Net loss (18,376,814) (2,066,550)
Preferred stock dividends (1,131,250) --
Accretion of redeemable preferred stock -- (4,812,639)
------------ ------------
Net loss applicable to common stock $(19,508,064) $ (6,879,189)
============ ============
Per basic and diluted share of stock
Net loss per common share $ (3.94) $ (1.27)
============ ============
Weighted average number of shares 4,952,689 5,417,498
============ ============
</TABLE>
See accompanying notes to consolidated financial statements
27
<PAGE> 28
XPLOR ENERGY, INC.
Consolidated Statements of Stockholders' Equity (Deficit)
<TABLE>
<CAPTION>
COMMON RETAINED EARNINGS/
STOCK PAID-IN (ACCUMULATED
SHARES AMOUNT CAPITAL DEFICIT) TOTAL
------------ ------------ ------------ ------------------ ------------
<S> <C> <C> <C> <C> <C>
Balance at December 31, 1997 4,709,413 $ 4,709 $ 19,179,712 $(14,830,597) $ 4,353,824
Redemption of common stock (265,018) (265) (2,999,735) (3,000,000)
Preferred stock dividends -- -- -- (5,858,340) (5,858,340)
1997 Preferred Stock Liquidation - issuance
cost amortization -- -- -- (1,069,454) (1,069,454)
Accretion of redeemable preferred stock -- -- -- (1,277,535) (1,277,535)
Net loss -- -- -- (39,331,188) (39,331,188)
------------ ------------ ------------ ------------ ------------
Balance at December 31, 1998 4,444,395 4,444 16,179,977 (62,367,114) (46,182,693)
Accretion of redeemable preferred stock
(Unaudited) -- -- -- (4,812,639) (4,812,639)
Net loss (Unaudited) -- -- -- (2,066,550) (2,066,550)
------------ ------------ ------------ ------------ ------------
Balance at June 30, 1999 (Unaudited) 4,444,395 $ 4,444 $ 16,179,977 $(69,246,303) $(53,061,882)
============ ============ ============ ============ ============
</TABLE>
See accompanying notes to consolidated financial statements
28
<PAGE> 29
XPLOR ENERGY, INC.
Consolidated Statements of Cash Flows
<TABLE>
<CAPTION>
SIX MONTHS ENDED
JUNE 30,
-----------------------------
1998 1999
------------ ------------
<S> <C> <C>
Cash flows from operating activities:
Net loss $(18,376,814) $ (2,066,550)
Adjustments to reconcile net income (loss) to net
cash (used in) provided by operating activities:
Depreciation, depletion and amortization 2,938,059 2,120,911
Ceiling test impairment 16,610,000 --
Allowance for doubtful accounts -- 234,000
Interest earned on restricted escrow accounts (72,563) (26,360)
Amortization of deferred costs 272,436 38,320
Other expense -- (32,631)
Imputed interest 176,097 16,236
Changes in assets and liabilities:
Accounts receivable (465,107) 2,435,243
Prepaid expenses and other (34,623) (107,448)
Prepayments from joint interest owners 1,417,847 138,619
Other payable and accrued liabilities 730,320 (4,600,700)
------------ ------------
Net cash provided by (used in)
operating activities 3,195,652 (1,850,360)
------------ ------------
Cash flows from investing activities:
Capital expenditures and acquisition of properties (10,775,141) (9,296,532)
Proceeds from escrow accounts -- 825,789
Proceeds from sales of oil and gas properties 5,219,311 467,466
Payments on escrow agreements (72,000) (415,222)
Deferred costs (50,000) --
------------ ------------
Net cash used in investing activities (5,677,830) (8,418,499)
------------ ------------
Cash flows from financing activities:
Proceeds from borrowings 7,000,000 10,000,000
Payments of long-term debt (1,427,500) (550,000)
Debt issuance costs (8,416) (99,843)
Preferred stock dividends (1,131,250) --
1997 preferred stock issuance costs incurred in 1998 (70,056) --
------------ ------------
Net cash provided by financing activities 4,362,778 9,350,157
------------ ------------
Net increase (decrease) in cash and cash
equivalents 1,880,600 (918,702)
Cash and cash equivalents at beginning of period 2,390,114 1,967,687
------------ ------------
Cash and cash equivalents at end of period $ 4,270,714 $ 1,048,985
============ ============
Supplemental disclosures of cash flow information:
Cash paid during the year for interest $ 768,736 $ 315,915
Accretion and amortization of preferred stock costs 53,706 4,812,639
</TABLE>
See accompanying notes to consolidated financial statements
29
<PAGE> 30
XPLOR ENERGY, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS
JUNE 30, 1998 AND 1999
(Unaudited)
(1) MANAGEMENT'S REPRESENTATIONS
In the opinion of XPLOR Energy, Inc., the accompanying unaudited
consolidated condensed financial statements contain all adjustments necessary to
present fairly its financial position as of December 31, 1998 and June 30, 1999
and the results of its operations and changes in its cash flows for the periods
ended June 30, 1998 and 1999. 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 XPLOR 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 XPLOR's audited financial
statements for the year ended December 31, 1998.
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the financial
statements and the reported amounts of revenues and expenses during the reported
period. Actual results could differ from these estimates.
The results of operations for the six month period ended June 30, 1999
are not necessarily indicative of the results to be expected for the full year.
(2) BASIS OF PRESENTATION
ORGANIZATION
The unaudited consolidated condensed financial statements include the
accounts of XPLOR Energy, Inc. ("XPLOR") and its wholly-owned subsidiaries
(collectively, "the Company"). Effective in September 1997, XPLOR succeeded to
the operations of Araxas Energy Corporation (AEC) and its wholly-owned
subsidiaries, Araxas Exploration, Inc. ("AEI"), and Araxas SPV-I ("SPV"). The
balance sheets at December 31, 1998 and 1997 also include the accounts of South
Coast Exploration Company ("South Coast"), SOCO Exploration, L.P. (SOCO) and
Interactive Exploration Solutions, Inc. ("INEXS") (collectively, "the South
Coast entities"), following the acquisition of the South Coast entities by the
Company as of September 30, 1997. Such acquisition was accounted for as a
purchase. All significant intercompany balances and transactions have been
eliminated in consolidation.
The Company conducts oil and gas exploration, drilling and development
operations along the Texas and Louisiana Gulf Coasts.
COMPREHENSIVE INCOME
In June 1997, FASB issued SFAS No. 130 regarding reporting
comprehensive income, which establishes standards for reporting and display of
comprehensive income and its components. The components of comprehensive income
refer to revenues, expenses, gains and losses that are excluded from net income
30
<PAGE> 31
under current accounting standards, including foreign currency translation
items, minimum pension liability adjustments and unrealized gains and losses on
certain investments in debt and equity securities. SFAS No. 130 requires that
all items recognized under accounting standards as components of comprehensive
income be reported in a financial statement displayed in equal prominence with
the other financial statements; the total of other comprehensive income for a
period is required to be transferred to a component of equity that is separately
displayed in a statement of financial condition at the end of an accounting
period. SFAS No. 130 is effective for both interim and annual periods beginning
after December 15, 1997. Reclassification of financial statements for earlier
periods provided for comparative purposes is required. The Company adopted SFAS
No. 130 in 1998, however, the Company has no comprehensive income items for the
periods ended June 30, 1998 and 1999.
SEGMENT REPORTING
In June 1997, FASB issued SFAS No. 131 regarding disclosures about
segments of an enterprise and related information. SFAS No. 131 establishes
standards for reporting information about operating segments in annual financial
statements and requires the reporting of selected information about operating
segments in interim financial reports issued to stockholders. It also
establishes standards for related disclosures about products and services,
geographic areas and major customers. SFAS No. 131 is effective for periods
beginning after December 15, 1997. The Company adopted SFAS No. 131 in the first
quarter of 1998. During the periods ended June 30, 1998 and 1999, the Company
only had one segment: the exploration and production of oil and gas reserves.
(3) LONG TERM DEBT
The Company's long-term debt is as follows:
<TABLE>
<CAPTION>
DECEMBER 31, JUNE 30,
--------------------------
1998 1999
--------------------------
<S> <C>
$25,000,000 three-year loan facility with
Christiania og Kreditkasse ("Christiania")
("Note"), interest based on the Short-term
Interbank Offered Rates ("LIBOR") plus a
margin of 1.125% to 1.875%, (6.71% at December
31, 1998) payable at the underlying LIBOR
maturities $ 5,000,000 $14,450,000
Note payable to stockholder due in annual installments
of principal and interest beginning July 1997;
discounted at 10%; due July 1999 600,941 617,177
----------- -----------
5,600,941 15,067,177
Less current maturities 600,941 4,367,177
----------- -----------
$ 5,000,000 $10,700,000
=========== ===========
</TABLE>
On November 4, 1998, the Company entered into a three-year revolving
credit facility with Christiania (the "Christiania Facility") to finance general
working capital requirements, purchases of oil and gas properties and
acquisitions maturing September 30, 2001. The Christiania Facility is secured by
substantially all of the oil and gas properties of the Company and the stock of
all significant subsidiaries. The Christiania Facility provides up to
$50,000,000 in borrowings limited by a borrowing base (as defined by the
Christiania Facility) which was $12,600,000 at June 30, 1999. At June 30, 1999,
borrowings outstanding under the Christiania Facility totaled $14,450,000. The
Christiania Facility provides for interest which ranges from Libor + 1.125% or
the lender's prime to a maximum of Libor +1.875% or lender's prime rate plus
0.25% (7.2% at June 30, 1999), and provides for a commitment fee of 0.375% on
the unused amount. A $62,500 loan origination fee
31
<PAGE> 32
was paid at closing. The borrowing base is subject to review by the bank on a
semi-annual basis and may be adjusted subject to the provisions of the
Christiania Facility. The Christiania Facility contains covenants and financial
tests. In particular, the Company must remain in compliance with a 2.5x Interest
Coverage Test, a 2.25x Fixed Charge Coverage Test, a Tangible Net Worth Test,
and a Current Ratio Test. The Company was in compliance with all of the
covenants at June 30, 1999.
As discussed further at Note 9 -- Subsequent Event - Merger with Harken
Energy Corporation, the Company entered into a merger agreement in August 1999,
whereby the Company became a wholly owned subsidiary of Harken Energy
Corporation. In addition, effective September 30, 1999, the borrowing base of
the Company's Christiania Facility was lowered to $10,700,000. Accordingly,
$3,750,000 of the outstanding balance has been reflected as current portion of
long-term debt, in the accompanying consolidated balance sheet. Following the
merger with Harken Energy Corporation, the Company paid down its outstanding
balance under the Christiania Facility to $10,200,000.
(4) STOCKHOLDERS' EQUITY
Common Stock - At June 30, 1999, XPLOR had authorized 30,000,000 shares
of $.001 par common stock. At December 31, 1998 and June 30, 1999, XPLOR had
4,444,395 shares issued and outstanding.
(5) PER SHARE DATA
Basic earnings per common share was computed by dividing net income or
loss by the weighted average number of shares of XPLOR common stock outstanding
during the period.
(6) INCOME TAXES
Income tax expense (benefit) represents state income taxes, federal
alternative minimum taxes, and deferred income taxes for the periods ended June
30, 1998 and 1999. There was no income tax expense for the periods ended June
30, 1998 and 1999 due to the significant taxable loss and the related increase
in the valuation allowance.
At June 30, 1999, the Company had available for federal United States
income tax reporting purposes, net operating lost (NOL) carryforwards for
regular tax purposes of approximately $10,400,000 which expire in the years 1999
through 2012.
Total deferred tax liabilities, relating primarily to property and
equipment, as of June 30, 1999 were approximately $5,938,000. Total deferred tax
assets, primarily related to the net operating loss carryforward, were
approximately $25,245,000 at June 30, 1999. The total net deferred tax asset is
offset by a valuation allowance of approximately $19,307,000 at June 30, 1999.
(7) REDEEMABLE PREFERRED STOCK
In connection with a new issuance of preferred stock on July 29, 1998,
the holders of the 1997 Series A Preferred sold 852,447 of their shares to a new
holder for $8.9 million, and sold 647,553 of its shares back to the Company for
$6.8 million. The remaining Series A Preferred shares were exchanged for
1,230,280 shares of 1998 Series B Preferred at a value of $10.5 million.
Included in the Series B Preferred value was a liquidation preference of $1.2
million. In exchange for its 1997 Series A preferred and cash of $51.1 million
for an aggregate purchase price of $60.0 million, the new holder received
7,033,998 shares of 1998 Series A Preferred. Both 1998 Series A Preferred and
1998 Series B Preferred ("the 1998 Preferred") have a par value of $0.001, and a
stated value of $8.53. The 1998 Preferred bear a 9% dividend payable quarterly,
cumulative 12%. At the option of the Company, dividends on the 1998 Series B
Preferred may be paid in new shares,
32
<PAGE> 33
instead of cash. These paid in kind dividends are payable on a quarterly basis
at a rate of 11.25%, and using the stated value of $8.53 per share to determine
the number of shares to issue. During 1998, 342,145 shares of Series B Preferred
were issued at a value of $2.9 million in lieu of paying cash dividends.
Each share of 1998 Preferred has a warrant attached, which may be
converted in the case of an IPO for one share of common stock at an exercise
price of $8.53 per share, subject to change. The exercise price is based on 1999
discretionary cash flow but will never be less than $3.44 per share nor greater
than $13.81 per share. Effective with the earlier of an IPO, delivery of the
1999 audited financial statements, or May 31, 2001, the number of shares of
common stock to be issued shall be adjusted to be the original value of the
shares at $8.53 per share, divided by the adjusted exercise price. The share
agreements provide for a mandatory redemption of the 1998 Preferred in three
equal increments, due June 30, 2003, 2004 and 2005, unless sooner redeemed or
converted. The 1998 preferred will accrete, over the life of the security, to
the ultimate redemption price, which is calculated as the future value for the
preferred shares assuming a 12% rate of return, compounded quarterly. The
agreements also create certain restrictions regarding the payment of dividends
on common shares, and provide for dilution protection to the Preferred holders.
(8) COMMITMENTS AND CONTINGENCIES
Contingencies. The Company is involved in litigation incidental to the
conduct of its business, none of which management believes is, individually or
in the aggregate, material to the Company's consolidated financial condition,
results of operations or liquidity.
Year 2000 Issues - Immediately after the merger whereby XPLOR merged
with Harken Energy Corporation ("Harken"), all Year 2000 related issues have
been consolidated into Harken's company wide Year 2000 efforts. This
consolidation was driven by the integration of all aspects of XPLOR's existing
computer infrastructure into the Harken system.
Harken, on behalf of XPLOR and all of its subsidiaries, is currently
working to resolve the potential impact of the Year 2000 on the processing of
date-sensitive information by XPLOR's computer systems. The Year 2000 issue
involves circumstances where a computerized system may not properly recognize or
process date-sensitive information on or after January 1, 2000. The Year 2000
problem is the result of computer programs being written using two digits,
rather than four, to define the applicable year. Any of XPLOR's programs that
have time-sensitive software may recognize a date using "00" as the Year 1900
rather than the Year 2000, which could result in miscalculations or system
failures. The problem is not limited to computer systems. Year 2000 issues will
also potentially affect every non-information technology system that has an
embedded microchip, such as elevators.
XPLOR began a formal process in 1998 to identify those internal
computerized systems that are not Year 2000 compliant, prioritize those
business-critical computerized systems that need remediation or replacement,
test compliance once the appropriate corrective measures have been implemented,
and develop any contingency plans where considered necessary. In addition, XPLOR
is continuing to conduct a survey to verify the Year 2000 readiness status of
key purchasers, vendors and customers that XPLOR believes could have an impact
on XPLOR's material business operations.
XPLOR's information technology infrastructure consists of desktop
Pentium class Intel based PC systems and servers and off-the-shelf software
packages. The systems are networked via Microsoft and other telecommunications
equipment. XPLOR does not use mini or mainframe computer systems and uses only
off-the-shelf software products.
33
<PAGE> 34
Assessment. Based on XPLOR's internal review and discussions with third
parties regarding the Year 2000 problem, XPLOR believes that its exposure to
potential Year 2000 problems exists in two general areas: technological
operations, including non-information technology systems, which are in the sole
control of XPLOR; and technological operations which are dependent in some way
on one or more third parties. Failure to achieve high levels of Year 2000
compliance in either area could have a material adverse impact on XPLOR.
Remediation and Implementation. In the area of technological operations
which are under XPLOR's exclusive control, XPLOR is currently involved in the
identification and remediation of affected technological functions, including
non-information technology systems. XPLOR has substantially completed its
assessment of Year 2000 readiness of its internal computerized systems. XPLOR
has installed upgrades to its off-the-shelf financial and operational software
applications, hardware and telecommunications equipment. XPLOR is in the
identification and assessment phase with respect to its non-information
technology systems, which has continued until the end of the third quarter of
1999.
Testing. XPLOR has completed updating and testing of the newly upgraded
systems for Year 2000 compliance. XPLOR has identified and replaced any internal
computer systems that remain non-compliant. At present, it is anticipated that
XPLOR's action plan for addressing Year 2000 problems will be successfully
completed in all material respects in advance of January 1, 2000.
Third Parties. XPLOR is in the final process of assessing the level of
Year 2000 issues associated with its most significant vendors, suppliers,
partners and major customers. All of XPLOR's oil and gas sales revenues are
derived from oil and gas production from its domestic operations. XPLOR's
operations are dependent upon its various purchasers or pipeline operators who
transport oil or gas for its purchasers. XPLOR is monitoring progress of its
various North American purchasers and pipelines on their activities related to
the Year 2000. At this time, XPLOR expects that field operations will not be
materially interrupted due to improper recognition of the Year 2000 by
computerized systems of its various purchasers and pipelines.
XPLOR also relies on other oil and gas service providers, vendors, and
financial institutions in its daily operations. XPLOR believes it has identified
those third-party relationships that could have a material adverse effect on
XPLOR's results of operations and financial position should their computerized
systems not be compliant for the Year 2000. XPLOR continues with its efforts to
survey the identified third parties on their readiness for the Year 2000 and
establish appropriate alternatives, if needed, where noncompliance may pose a
risk to XPLOR's operations.
Although XPLOR is making significant efforts to ensure that the third
parties on which it is heavily reliant are Year 2000 compliant, it cannot
predict the likelihood of such compliance occurring nor the direct or indirect
costs to XPLOR of non-compliance by those third parties or of securing such
services from compliant third parties. XPLOR has no control over these third
parties' compliance and cannot give assurances that these third parties'
representations to XPLOR are accurate. Therefore, there can be no guarantee that
Year 2000 problems originating with a third party will not occur and no absolute
assurance that third parties will convert their systems in a timely manner, to
the extent XPLOR is unable to replace the goods, services or customers with
alternate sources of supply and demand on a timely and economically equivalent
basis. Such failure could have a material adverse effect on XPLOR's business and
results of operations.
Estimated Costs. The total financial effect that Year 2000 issues will
have on XPLOR cannot be predicted with any certainty at this time. In fact, in
spite of all efforts being made to rectify these problems, the success of
XPLOR's efforts will not be known with certainty until the year 2000 actually
arrives. Based
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<PAGE> 35
on its assessment to date, XPLOR does not believe that the costs to resolve any
Year 2000 issues will be material. To date, XPLOR has spent less than $100,000
on Year 2000 matters and it expects that the total cost, primarily consulting
fees and software purchases, will not exceed $200,000.
Contingency Plan. XPLOR has not completed its implementation and
testing of Year 2000 compliant systems. However, a reasonably likely worst case
scenario is that XPLOR or certain of its purchasers or other vendors fail to
correct a material Year 2000 problem, which results in an interruption of
XPLOR's transportation and sale of XPLOR's crude oil and natural gas production
sales revenues. Certain interruptions could result in a material adverse effect
on XPLOR's results of operations, cash flows and financial condition. Due to the
inherent uncertainties relating to the effect of the Year 2000 on XPLOR's
operations, it is difficult to predict what impact, if any, noncompliance with
the Year 2000 issue will have on XPLOR's results of operations, cash flows and
financial condition. Based on the results of the implementation and testing of
XPLOR's Year 2000 affected systems and ongoing assessment of the readiness of
its vendors, suppliers, partners and major customers, XPLOR has developed
appropriate contingency plans that address the most reasonably likely worst case
scenarios. XPLOR is continuing to review and modify such contingency plans. A
failure to address Year 2000 issues successfully could have a material adverse
effect on XPLOR's business, financial condition or results of operations.
(9) SUBSEQUENT EVENT-MERGER WITH HARKEN ENERGY CORPORATION
On August 19, 1999, the Company executed a merger agreement with Harken
Energy Corporation ("Harken") whereby the Company became a wholly-owned
subsidiary of Harken. Harken, based in Houston, Texas, explores for, develops
and produces oil and gas reserves domestically and internationally. Under the
terms of the merger agreement, which was approved by the Company's shareholders,
the holders of the outstanding shares of the preferred stock of XPLOR converted
their stock into 7,500,000 shares of Harken common stock and additionally,
received 2,336,066 warrants for the purchase of Harken common stock at $2.50 per
share. The common shares of XPLOR stock were not assigned any value, and were
cancelled in conjunction with the merger agreement. Harken is a publicly traded
company and Harken common stock trades on the American Stock Exchange.
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Annex B
ITEM 7(b) PRO FORMA FINANCIAL INFORMATION
The following unaudited pro forma combined condensed financial
statements give effect to the August 19, 1999 merger transaction whereby XPLOR
Energy, Inc. ("XPLOR") became a wholly-owned subsidiary of Harken Energy
Corporation. The merger was accounted for as a purchase transaction. Pursuant
to the merger agreement, Harken issued 7,500,000 shares of Harken common
stock, along with 2,336,066 warrants for the purchase of additional shares of
Harken common stock.
In addition, the 1998 unaudited pro forma combined condensed statement
of operations also reflects the May 1998 acquisition of certain oil and gas
properties ("the Bargo Properties"), as well as the May 26, 1998 issuance of
European 5% Senior Convertible Notes in the amount of $85,000,000.
The pro forma combined condensed balance sheet gives effect to the
acquisition of XPLOR as if it had been consummated June 30,1999. The pro forma
combined condensed statements of operations for the year ended December 31,
1998 and for the six months ended June 30, 1999, give effect to all
transactions as if all had been consummated at the beginning of each period.
The pro forma information is presented for illustrative purposes only
and is not necessarily indicative of the financial position or operating
results that would have occurred had the transactions been consummated at the
dates indicated nor are they indicative of future financial position or
operating results.
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<PAGE> 37
HARKEN ENERGY CORPORATION
PRO FORMA COMBINED CONDENSED STATEMENT OF OPERATIONS
FOR THE YEAR ENDED DECEMBER 31, 1998
(UNAUDITED)
(IN THOUSANDS OF DOLLARS)
<TABLE>
<CAPTION>
BARGO XPLOR
HARKEN PROPERTIES ENERGY, INC. PRO FORMA
HISTORICAL HISTORICAL HISTORICAL ADJUSTMENTS PRO FORMA
------------- ------------- ------------- ------------- -------------
<S> <C> <C> <C> <C> <C>
Oil and gas revenue $ 10,932 $ 1,178 $ 9,589 $ $ 21,699
Other revenues 8,838 -- 348 9,189
------------- ------------- ------------- ------------- -------------
Total Revenues 19,770 1,178 9,937 30,885
------------- ------------- ------------- ------------- -------------
Oil and gas operating expenses 5,988 485 3,557 10,030
General and administrative
expense, net 9,404 -- 2,244 11,648
Depreciation and amortizaiton 5,319 -- 5,066 331 (1) 10,716
Valuation allowance 50,518 -- 35,871 (331) (1) 86,058
Interest expense and other, net 963 -- 2,355 2,069 (2) 5,387
------------- ------------- ------------- ------------- -------------
Total Expenses 72,192 485 49,093 2,069 123,839
------------- ------------- ------------- ------------- -------------
Income tax expense 34 -- -- 34
------------- ------------- ------------- ------------- -------------
Net income (loss) $ (52,456) $ 693 $ (39,156) $ (2,069) $ (92,988)
============= ============= ============= ============= =============
Basic net income (loss) per share
attributable to common stock $ (0.42) $ (0.68)
============= =============
Basic weighted average shares
outstanding $ 130,252,727 $ 137,752,423
============= =============
</TABLE>
PRO FORMA ADJUSTMENTS-PRO FORMA COMBINED CONDENSED STATEMENT OF OPERATIONS-YEAR
ENDED DECEMBER 31, 1998
(1) Pro forma entry to adjust actual depreciation and amortization expense on
oil and gas properties for the acquired interests to the depreciation and
amortization expense calculated on a consolidated basis.
(2) Pro forma entry to reflect interest and amortization expense incurred on
the 5% European Notes Payable.
37
<PAGE> 38
HARKEN ENERGY CORPORATION
PRO FORMA COMBINED CONDENSED BALANCE SHEET
JUNE 30, 1999
(UNAUDITED)
(IN THOUSANDS OF DOLLARS)
<TABLE>
<CAPTION>
PRO FORMA
ADJUSTMENTS
HARKEN XPLOR
HISTORICAL ENERGY, INC.(1) PRO FORMA
--------------- --------------- ---------------
<S> <C> <C> <C>
Current Assets $ 83,159 $ 3,278 $ 86,437
Property and Equipment, net 186,598 33,816 220,414
Other Assets, Net 9,232 1,150 10,382
--------------- --------------- ---------------
$ 278,989 $ 38,244 $ 317,233
=============== =============== ===============
Current Liabilities $ 11,924 $ 8,624 $ 20,548
Notes Payable -- 14,250 14,250
European Convertible
Notes Payable 85,000 85,000
Development Finance Obligation 19,608 19,608
Stockholders' Equity 162,457 15,370 177,827
--------------- --------------- ---------------
$ 278,989 $ 38,244 $ 317,233
=============== =============== ===============
</TABLE>
PRO FORMA ADJUSTMENT-PRO FORMA COMBINED CONDENSED BALANCE SHEET AT JUNE 29, 1995
(1) Pro forma entry to record, as of June 30, 1999, the merger agreement with
XPLOR whereby XPLOR became a wholly-owned subsidiary in exchange for 7,500,000
shares of Harken common stock and 2,336,066 warrants for the purchase of
additional shares of Harken common stock. Harken has valued the shares of Harken
common stock and warrants that were issued at $15,370,000. The purchase price
was allocated to the assets and liabilities acquired on the basis of their fair
values.
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<PAGE> 39
PRO FORMA COMBINED CONDENSED STATEMENT OF OPERATIONS
FOR THE SIX MONTHS ENDED JUNE 30, 1999
(UNAUDITED)
(IN THOUSANDS OF DOLLARS)
<TABLE>
<CAPTION>
XPLOR
HARKEN ENERGY, INC. PRO FORMA
HISTORICAL HISTORICAL ADJUSTMENTS PRO FORMA
------------- ------------- ------------- -------------
<S> <C> <C> <C> <C>
Oil and gas revenue $ 7,190 $ 3,983 $ $ 11,173
Other revenues 2,246 77 2,323
------------- ------------- ------------- -------------
Total Revenues 9,436 4,060 13,496
------------- ------------- ------------- -------------
Oil and gas operating expenses 3,202 2,239 5,441
General and administrative
expense 4,367 1,123 5,490
Depreciation and amortization 2,848 2,121 144(1) 5,113
Interest expense and other, net 2,873 643 3,516
------------- ------------- ------------- -------------
Total Expenses 13,290 6,126 144 19,560
------------- ------------- ------------- -------------
Extraordinary Item 589 -- 589
------------- ------------- ------------- -------------
Net loss $ (4,443) $ (2,066) $ (144) $ (6,653)
============= ============= ============= =============
Basic net (loss) per share
attributable to common stock $ (0.09) $ (0.10)
============= =============
Basic weighted average shares $ 137,297,387 $ 144,797,387
outstanding ============= =============
</TABLE>
PRO FORMA ADJUSTMENT-PRO FORMA COMBINED CONDENSED STATEMENT OF OPERATIONS-SIX
MONTHS ENDED JUNE 30, 1999
(1) Pro forma entry to adjust actual depreciation and amortization expense on
oil and gas properties for the acquired interests to the depreciation and
amortization expense calculated on a consolidated basis.
39
<PAGE> 40
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 hereunto duly authorized.
HARKEN ENERGY CORPORATION
Date: November 1, 1999 BY: /s/ BRUCE N. HUFF
-------------------------------------
Bruce N. Huff,
President and Chief Financial Officer
40
<PAGE> 41
INDEX TO EXHIBITS
<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION
- ------- -----------
<S> <C>
2 Agreement and Plan of Merger by and among Harken Energy
Corporation, XEI Acquisition Corp., and Xplor Energy, Inc. dated
August 19, 1999 (previously filed).
23.1 Consent of KPMG LLP.
99.1 Stock Purchase Warrant Nos. 99A-1 and 99A-2 for the purchase of a
total of 2,336,066 (subject to adjustment) shares of Harken Energy
Corporation common stock (previously filed).
</TABLE>
<PAGE> 1
EXHIBIT 23.1
INDEPENDENT AUDITORS' CONSENT
The Board of Directors
XPLOR Energy, Inc.:
We consent to the inclusion of our report dated April 9, 1999, with respect to
the consolidated balance sheets of XPLOR Energy, Inc. and subsidiaries as of
December 31, 1998 and 1997, and the related consolidated statements of
operations, stockholders' equity, and cash flows for each of the years in the
three-year period ended December 31, 1998, which report appears in the Form 8-K
of Harken Energy Corporation.
KPMG LLP
Houston, Texas
October 29, 1999
