<PAGE> 1
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SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
FOR THE QUARTERLY PERIOD ENDED JUNE 30, 2000
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
FOR THE TRANSITION PERIOD FROM ____________ TO ______________
COMMISSION FILE NUMBER 0-9207
HARKEN ENERGY CORPORATION
(Exact name of registrant as specified in its charter)
DELAWARE 95-2841597
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
16285 PARK TEN PLACE, SUITE 600 77084
HOUSTON, TEXAS (Zip Code)
(Address of principal executive offices)
Registrant's telephone number, including area code (281) 717-1300
INDICATE BY CHECK MARK WHETHER THE REGISTRANT (1) HAS FILED ALL REPORTS
REQUIRED TO BE FILED BY SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF
1934 DURING THE PRECEDING 12 MONTHS (OR FOR SUCH SHORTER PERIOD THAT THE
REGISTRANT WAS REQUIRED TO FILE SUCH REPORTS), AND (2) HAS BEEN SUBJECT TO SUCH
FILING REQUIREMENTS FOR THE PAST 90 DAYS. YES [X] NO [ ]
The number of shares of Common Stock, par value $0.01 per share,
outstanding as of August 1, 2000 was 170,916,142.
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<PAGE> 2
HARKEN ENERGY CORPORATION
INDEX TO QUARTERLY REPORT
JUNE 30, 2000
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
PART I. FINANCIAL INFORMATION
Item 1. Condensed Financial Statements
Consolidated Condensed Balance Sheets.............................................. 4
Consolidated Condensed Statements of Operations.................................... 5
Consolidated Condensed Statements of Stockholders' Equity.......................... 6
Consolidated Condensed Statements of Cash Flows.................................... 7
Notes to Consolidated Condensed Financial Statements............................... 8
Item 2. Management's Discussion and Analysis of Financial Condition
and Results of Operations..................................................... 25
Item 3. Quantitative and Qualitative Disclosures About Market Risk......................... 34
PART II. OTHER INFORMATION
Notes Concerning Other Information................................................. 34
SIGNATURES ................................................................................... 38
</TABLE>
2
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PART I- FINANCIAL INFORMATION
3
<PAGE> 4
ITEM 1. CONDENSED FINANCIAL STATEMENTS
HARKEN ENERGY CORPORATION AND SUBSIDIARIES
CONSOLIDATED CONDENSED BALANCE SHEETS
(Unaudited)
<TABLE>
<CAPTION>
DECEMBER 31, JUNE 30,
1999 2000
------------- -------------
(RESTATED)
<S> <C> <C>
ASSETS
Current Assets:
Cash and temporary investments $ 25,612,000 $ 14,147,000
Accounts and notes receivable, net 5,312,000 7,078,000
Related party notes receivable 466,000 426,000
Prepaid expenses and other current assets 788,000 567,000
------------- -------------
Total Current Assets 32,178,000 22,218,000
Property and Equipment, net 256,133,000 263,480,000
Other Assets, net 10,474,000 9,592,000
------------- -------------
$ 298,785,000 $ 295,290,000
============= =============
LIABILITIES AND STOCKHOLDERS' EQUITY
Current Liabilities:
Trade payables $ 2,981,000 $ 1,155,000
Accrued liabilities and other 7,692,000 6,618,000
Revenues and royalties payable 529,000 1,088,000
------------- -------------
Total Current Liabilities 11,202,000 8,861,000
Convertible Notes Payable 95,869,000 84,311,000
Bank Credit Facilities 10,500,000 10,500,000
Development Finance Obligation 1,302,000 --
Other Long-Term Obligations 5,078,000 5,075,000
Commitments and Contingencies (Note 15)
Stockholders' Equity:
Common stock, $0.01 par value; 225,000,000 shares authorized;
155,707,548 and 170,047,347 shares issued, respectively 1,557,000 1,701,000
Additional paid-in capital 349,236,000 361,250,000
Retained deficit and other comprehensive income (171,443,000) (171,892,000)
Treasury stock, at cost, 2,153,000 shares held (4,516,000) (4,516,000)
------------- -------------
Total Stockholders' Equity 174,834,000 186,543,000
------------- -------------
$ 298,785,000 $ 295,290,000
============= =============
</TABLE>
The accompanying Notes to Consolidated Condensed Financial Statements
are an integral part of these Statements.
4
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HARKEN ENERGY CORPORATION AND SUBSIDIARIES
CONSOLIDATED CONDENSED STATEMENTS OF OPERATIONS
(Unaudited)
<TABLE>
<CAPTION>
THREE MONTHS ENDED SIX MONTHS ENDED
JUNE 30, JUNE 30,
------------------------------- -------------------------------
1999 2000 1999 2000
-------------- -------------- -------------- --------------
(RESTATED) (RESTATED)
<S> <C> <C> <C> <C>
Revenues:
Oil and gas operations $ 4,110,000 $ 10,790,000 $ 7,190,000 $ 20,674,000
Interest and other income 990,000 287,000 2,246,000 675,000
-------------- -------------- -------------- --------------
5,100,000 11,077,000 9,436,000 21,349,000
-------------- -------------- -------------- --------------
Costs and Expenses:
Oil and gas operating expenses 1,744,000 3,695,000 3,202,000 6,968,000
General and administrative expenses, net 2,578,000 2,977,000 4,367,000 5,711,000
Depreciation and amortization 1,502,000 3,221,000 2,887,000 6,142,000
Interest expense and other, net 1,514,000 1,301,000 2,873,000 2,744,000
Charge for European Note conversion -- -- -- 2,068,000
-------------- -------------- -------------- --------------
7,338,000 11,194,000 13,329,000 23,633,000
-------------- -------------- -------------- --------------
Income (loss) before income taxes $ (2,238,000) $ (117,000) $ (3,893,000) $ (2,284,000)
Income tax expense -- 15,000 -- 30,000
-------------- -------------- -------------- --------------
Income (loss) before extraordinary items $ (2,238,000) $ (132,000) $ (3,893,000) $ (2,314,000)
Extraordinary item-charge for reduction of
unamortized issuance costs (589,000) -- (589,000) (7,000)
Extraordinary item-gain on repurchase of
European Notes -- 1,872,000 -- 1,872,000
-------------- -------------- -------------- --------------
Net income (loss) $ (2,827,000) $ 1,740,000 $ (4,482,000) $ (449,000)
============== ============== ============== ==============
Accretion related to preferred stock -- -- (8,427,000) --
-------------- -------------- -------------- --------------
Net income (loss) attributed to common stock $ (2,827,000) $ 1,740,000 $ (12,909,000) $ (449,000)
============== ============== ============== ==============
Income (loss) per common share:
Basic income (loss) before extraordinary item $ (0.01) $ (0.00) $ (0.09) $ (0.01)
Extraordinary item-charge for reduction of
unamortized issuance costs (0.00) -- (0.00) (0.00)
Extraordinary item-gain on repurchase of
European Notes -- 0.01 -- 0.01
-------------- -------------- -------------- --------------
Basic income (loss) per common share $ (0.01) $ 0.01 $ (0.09) $ (0.00)
============== ============== ============== ==============
Weighted average shares outstanding 139,817,277 166,345,743 137,297,387 161,771,010
============== ============== ============== ==============
Diluted income (loss) before extraordinary item $ (0.01) $ (0.00) $ (0.09) $ (0.01)
Extraordinary item-charge for reduction of
unamortized issuance costs (0.00) -- (0.00) (0.00)
Extraordinary item-gain on repurchase of
European Notes -- 0.01 -- 0.01
-------------- -------------- -------------- --------------
Diluted income (loss) per common share $ (0.01) $ 0.01 $ (0.09) $ (0.00)
============== ============== ============== ==============
Weighted average shares outstanding 139,817,277 166,386,738 137,297,387 161,771,010
============== ============== ============== ==============
</TABLE>
The accompanying Notes to Consolidated Condensed Financial Statements
are an integral part of these Statements.
5
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HARKEN ENERGY CORPORATION AND SUBSIDIARIES
CONSOLIDATED CONDENSED STATEMENTS OF STOCKHOLDERS' EQUITY
(Unaudited)
<TABLE>
<CAPTION>
ADDITIONAL
PREFERRED COMMON PAID-IN TREASURY
STOCK STOCK CAPITAL STOCK
-------------- -------------- -------------- --------------
<S> <C> <C> <C> <C>
Balance, December 31, 1998 $ 15,000 $ 1,348,000 $ 327,498,000 $ (2,552,000)
Issuance of common stock, net -- 101,000 20,566,000 --
Conversions of Development Finance
Obligation -- 108,000 21,999,000 --
Accretion of preferred stock -- -- 8,427,000 --
Treasury shares purchased -- -- -- (1,964,000)
Redemption of preferred stock (15,000) -- (25,269,000) --
Settlement of property purchase
acquisition -- -- (3,985,000) --
Comprehensive income (loss):
Net loss (restated) -- -- -- --
Total comprehensive loss (restated)
-------------- -------------- -------------- --------------
Balance, December 31, 1999 (restated) -- 1,557,000 349,236,000 (4,516,000)
Issuance of common stock, net -- 75,000 9,889,000 --
Repurchase of Benz Convertible Notes -- -- 639,000 --
Conversions of Development Finance
Obligation -- 69,000 1,486,000 --
Comprehensive income (loss):
Net loss -- -- --
Total comprehensive loss
-------------- -------------- -------------- --------------
Balance, June 30, 2000 $ -- $ 1,701,000 $ 361,250,000 $ (4,516,000)
============== ============== ============== ==============
<CAPTION>
ACCUMULATED
OTHER
RETAINED COMPREHENSIVE
DEFICIT INCOME (LOSS) TOTAL
-------------- -------------- --------------
<S> <C> <C> <C>
Balance, December 31, 1998 $ (150,305,000) $ 134,000 $ 176,138,000
Issuance of common stock, net -- -- 20,667,000
Conversions of Development Finance
Obligation -- -- 22,107,000
Accretion of preferred stock (8,427,000) -- --
Treasury shares purchased -- -- (1,964,000)
Redemption of preferred stock -- -- (25,284,000)
Settlement of property purchase
acquisition -- -- (3,985,000)
Comprehensive income (loss):
Net loss (restated) (12,845,000) --
Total comprehensive loss (restated) (12,845,000)
-------------- -------------- --------------
Balance, December 31, 1999 (restated) (171,577,000) 134,000 174,834,000
Issuance of common stock, net -- -- 9,964,000
Repurchase of Benz Convertible Notes -- -- 639,000
Conversions of Development Finance
Obligation -- -- 1,555,000
Comprehensive income (loss):
Net loss (449,000) --
Total comprehensive loss (449,000)
-------------- -------------- --------------
Balance, June 30, 2000 $ (172,026,000) $ 134,000 $ 186,543,000
============== ============== ==============
</TABLE>
The accompanying Notes to Consolidated Condensed Financial Statements
are an integral part of these Statements.
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HARKEN ENERGY CORPORATION AND SUBSIDIARIES
CONSOLIDATED CONDENSED STATEMENTS OF CASH FLOWS
(Unaudited)
<TABLE>
<CAPTION>
SIX MONTHS ENDED JUNE 30,
-----------------------------------
1999 2000
-------------- --------------
(RESTATED)
<S> <C> <C>
Cash flows from operating activities:
Net income (loss) $ (4,482,000) $ (449,000)
Adjustment to reconcile net loss to net cash
provided by operating activities:
Depreciation and amortization 2,887,000 6,142,000
Amortization of issuance costs 437,000 545,000
Charge for European Note conversion -- 2,068,000
Extraordinary items 589,000 (1,865,000)
Other expense -- 89,000
Change in assets and liabilities:
Increase in accounts receivable and other assets (2,500,000) (1,505,000)
Increase (decrease) in trade payables and other (12,107,000) (1,844,000)
-------------- --------------
Net cash provided by (used in) operating activities (15,176,000) 3,181,000
-------------- --------------
Cash flows from investing activities:
Proceeds from sales of assets -- 1,552,000
Capital expenditures (22,131,000) (15,957,000)
-------------- --------------
Net cash used in investing activities (22,131,000) (14,405,000)
-------------- --------------
Cash flows from financing activities:
Repayments of long-term debt -- (3,072,000)
Proceeds from issuances of common stock,
net of issuance costs 47,000 2,831,000
Redemption of preferred stock (25,284,000) --
Purchase of treasury stock (960,000) --
-------------- --------------
Net cash provided by (used in) financing activities (26,197,000) (241,000)
-------------- --------------
Net increase (decrease) in cash and temporary investments (63,504,000) (11,465,000)
Cash and temporary investments at beginning of period 141,545,000 25,612,000
-------------- --------------
Cash and temporary investments at end of period $ 78,041,000 $ 14,147,000
============== ==============
Supplemental disclosures of cash flow information:
Cash paid during the period for:
Interest $ 2,125,000 $ 2,587,000
Taxes $ -- $ --
</TABLE>
The accompanying Notes to Consolidated Condensed Financial Statements
are an integral part of these Statements.
7
<PAGE> 8
HARKEN ENERGY CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS
JUNE 30, 1999 AND 2000
(Unaudited)
(1) MANAGEMENT'S REPRESENTATIONS
In the opinion of Harken Energy Corporation ("Harken"), the
accompanying unaudited consolidated condensed financial statements contain all
adjustments necessary to present fairly its financial position as of December
31, 1999 and June 30, 2000 and the results of its operations and changes in its
cash flows for all periods presented as of June 30, 1999 and 2000. These
adjustments represent normal recurring items.
The accompanying unaudited condensed financial statements have been
prepared pursuant to the rules and regulations of the Securities and Exchange
Commission ("SEC"). Certain information and note disclosures normally included
in annual financial statements prepared in accordance with generally accepted
accounting principles have been condensed or omitted pursuant to these rules and
regulations, although Harken believes that the disclosures made are adequate to
make the information presented not misleading. It is suggested that these
condensed financial statements be read in conjunction with the financial
statements and the notes thereto included in Harken's Form 10-K/A for the year
ended December 31, 1999.
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, 2000
are not necessarily indicative of the results to be expected for the full year.
(2) MERGERS AND ACQUISITIONS
Merger with XPLOR -- On August 19, 1999, Harken executed a merger
agreement with XPLOR Energy, Inc. ("XPLOR") whereby XPLOR became a wholly-owned
subsidiary of Harken. XPLOR explores for, develops and produces oil and gas
reserves domestically. The assets of XPLOR consist primarily of oil and gas
property interests located along the Texas and Louisiana Gulf Coasts. Under the
terms of the merger agreement, 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 also received 2,336,066 warrants for the purchase of Harken
common stock at $2.50 per share. Additionally, Harken assumed $14,200,000 of
bank debt secured by the oil and gas properties of XPLOR. See Note 6 -- Bank
Credit Facility Obligations for further discussion of the XPLOR bank debt. No
further consideration was issuable under this transaction to any other class of
stock of XPLOR and all outstanding shares of XPLOR stock were cancelled under
the merger agreement. The merger with XPLOR has been accounted for under the
purchase method of accounting.
Acquisition of Benz Prospects -- On December 30, 1999, pursuant to a
Purchase and Sale Agreement and other related agreements, Harken, along with
Harken Gulf Exploration Company, a newly formed
8
<PAGE> 9
wholly-owned subsidiary, purchased oil and gas leases covering nine exploration
prospect areas (the "Benz Prospects") covering approximately 51,000 net acres
plus certain other assets from Benz Energy, Incorporated ("Benz"). The prospects
include interests in acreage in the Cotton Valley Reef, Wilcox and Frio Trends
in Texas and the Salt Dome and Salt Ridge Basins of Mississippi. In exchange for
the prospects, Harken issued 5% subordinated notes (the "Benz Convertible
Notes") with a face value of $12 million, which are convertible into Harken
common stock at a conversion price of $6.50 per share and mature on May 26,
2003. See Note 8 - Convertible Notes Payable for further discussion of the Benz
Convertible Notes. A former officer of Benz retained a 20% reversionary
interest, subject to the Benz Prospects achieving payout as defined in the
Purchase and Sale Agreement. Such reversionary interest shall increase to 40% in
the event that Benz merges into or is otherwise acquired by Harken. In addition,
in connection with the acquisition of the Benz Prospects, Harken entered into a
consulting agreement with the former officer of Benz whereby Harken would pay a
monthly consulting fee of $100,000 through December 31, 2000 in exchange for
consulting services related to the Benz Prospects. See Note 12 -- Related Party
Transactions for a discussion of the relationship between Harken and Benz.
(3) MARKETABLE SECURITIES
Included within cash and temporary investments at December 31, 1999 and
June 30, 2000 are certain investments in marketable debt securities having
maturities of sixty days or less. The cost of such marketable debt securities
totaled $18,459,000 and $7,278,000 as of December 31, 1999 and June 30, 2000,
respectively, with cost approximating fair value. Harken management determines
the appropriate classification of such debt and equity securities at the time of
purchase and reevaluates such designation as of each balance sheet date. Such
debt and equity securities are classified as held-to-maturity as Harken has the
positive intent and ability to hold the securities to maturity. Held-to-maturity
securities are stated at amortized cost, adjusted for amortization of premiums
and accretion of discounts to maturity. Such amortization is included in
interest and other income. Harken holds no securities which are classified as
available-for-sale or trading. Harken includes in cash and temporary investments
other cash and cash equivalent amounts in addition to the above marketable debt
securities.
In addition, at June 30, 2000, Harken held an investment in 10,000
shares of Benz preferred stock, but has reflected no carrying value for those
shares.
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(4) PROPERTY AND EQUIPMENT
A summary of property and equipment follows:
<TABLE>
<CAPTION>
December 31, June 30,
1999 2000
-------------- --------------
(restated)
<S> <C> <C>
Unevaluated oil and gas properties:
Unevaluated Colombian properties $ 44,767,000 $ 34,768,000
Unevaluated Costa Rican properties 2,037,000 6,324,000
Unevaluated domestic properties 17,111,000 16,934,000
Evaluated oil and gas properties:
Evaluated Colombian properties 121,351,000 135,883,000
Evaluated domestic properties 131,159,000 135,535,000
Facilities, gas plants and other property 21,320,000 21,786,000
Less accumulated depreciation and amortization (81,612,000) (87,750,000)
-------------- --------------
$ 256,133,000 $ 263,480,000
============== ==============
</TABLE>
(5) MIDDLE AMERICAN OPERATIONS
Colombian Operations -- Harken's Colombian operations are conducted
through its wholly owned subsidiary Harken de Colombia, Ltd. Harken holds five
exclusive Colombian Association Contracts with Empresa Colombiana de Petroleos
("Ecopetrol"). Information about these contracts is set forth below:
<TABLE>
<CAPTION>
ACREAGE AS OF
NAME AWARD YEAR LOCATION JUNE 30, 2000
----------------- --------------- ------------------------------------- -----------------
<S> <C> <C> <C>
Alcaravan 1992 Llanos Basin, Eastern Colombia 102,000
Bocachico 1994 Middle Madalena Valley, Central 192,000
Colombia
Cambulos 1995 Middle Madalena Valley, Central 41,000
Colombia
Bolivar 1996 Middle Madalena Valley, Central 250,000
Colombia
Los Olmos 1998 Lower Magdalena Valley, Northern 374,000
Colombia.
</TABLE>
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Each contract requires that Harken complete prescribed activities within a
timetable specified in the contract. Harken has either completed all of the
required work, or received permission from Ecopetrol to delay or substitute
different work, for those of its contracts which contain proved reserves. Harken
is negotiating the work requirements and the timing of these requirements for
several of its other contracts.
Under the terms of the Association Contracts, if, during the first six
years of each contract, Harken discovers one or more fields capable of producing
oil or gas in quantities that are economically exploitable and Ecopetrol elects
to participate in the development of the field, or Harken chooses to proceed
with the development on a sole-risk basis, the term of that contract will be
extended for a period of 22 years from the date of such discovery. Upon the
election by Ecopetrol to participate in a field and upon commencement of
production from that field, Ecopetrol will begin to reimburse Harken for 50% of
Harken's successful well costs expended up to the point of Ecopetrol's
participation plus, in the case of the Cambulos, Bolivar, and Los Olmos
Contracts, 50% of all seismic and dry well costs incurred prior to the point of
Ecopetrol's participation. For fields in which Ecopetrol participates,
production will be allocated as follows: Ecopetrol, on behalf of the Colombian
government, will receive a 20% royalty interest in all production, and all
production (after royalty payments) will be allocated 50% to Ecopetrol and 50%
to Harken until cumulative production from all fields (or the particular
productive field under certain of the Association Contracts) in the Association
Contract acreage reaches 60 million barrels of oil. As cumulative production
increases in excess of 60 million barrels of oil, Ecopetrol's share of
production will increase progressively (to a maximum of 75% under certain of the
Association Contracts) with a corresponding decrease in Harken's share of
production. After a declaration of Ecopetrol's participation, Harken and
Ecopetrol will be responsible for all future development costs and operating
expenses in direct proportion to their interest in production. For any fields in
which Ecopetrol declines to participate, Harken would be entitled to receive
Ecopetrol's share of production after royalty until Harken has recovered 200% of
its costs, after which time Ecopetrol would receive its share of production.
Harken has proved reserves attributable to two of its five contracts,
the Alcaravan and Bolivar Contracts. In the Alcaravan Contract, Harken has
proved reserves in the Palo Blanco field, and in the Bolivar Contract, Harken
has proved reserves in the Buturama field. Harken has submitted application to
Ecopetrol for their participation in both of these fields. It has been Harken's
experience that Ecopetrol asks for additional information with regard to the
applications, and that the process of receiving an election from Ecopetrol may
take as much as two years.
Reimbursement by Ecopetrol to Harken may either be in cash, or through
allowing its share of production to apply to Harken's cost recovery. During the
last part of 1999, Harken began receiving Ecopetrol's working interest share of
monthly Bolivar Contract area production as nonrefundable reimbursement for a
portion of Ecopetrol's share of historical Bolivar Contract area costs. Harken
similarly began receiving Ecopetrol's working interest share of monthly
Alcaravan area production in May 2000. Harken has reflected such nonrefundable
reimbursement production as revenues during 1999 and 2000.
In order to continue producing from its wells while Ecopetrol is making
its determinations as to participation, Harken must receive testing permits,
which generally cover 90 day periods, issued by Colombia's Ministry of Mining
and Energy. Ecopetrol has advised Harken that the Ministry of Mining and Energy
has never denied a permit to conduct a test requested by Ecopetrol. Harken
believes that these permits will continue to be granted.
Harken has completed all of the work requirements of the first five
years of the Alcaravan Contract. During September 1999, Ecopetrol granted a
six-month extension until March 31, 2000 to Harken for drilling
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<PAGE> 12
the exploratory well required in the sixth year of the Alcaravan Contract. In
February 2000, Harken was granted by Ecopetrol a further extension until January
31, 2001 to drill this sixth year exploratory well of the Alcaravan Contract.
Harken currently plans to begin drilling this development well on the Alcaravan
Contract area acreage in December 2000. Effective December 29, 1999, Ecopetrol
accepted Harken's relinquishment of 52% of the Alcaravan Contract Area as
required under the Alcaravan Contract. Harken has retained the acreage covering
those structure areas associated with the Palo Blanco and Anteojos discoveries.
Accordingly, the acreage relinquishment had no effect on Harken's Colombian
proved reserves.
Harken has fulfilled all of the work requirements for the first four
years of the Bocachico Contract. The work requirements for the fifth year
required Harken to drill one exploratory well by May 6, 1999, and the sixth year
work obligation required an additional exploratory well to be drilled by March
6, 2000. Harken has not drilled the fifth year or sixth year exploratory wells,
and Harken does not currently have any plans to drill a well on the Bocachico
Contract area acreage during 2000. During May 2000, Ecopetrol granted an
extension until December 7, 2000 to Harken for the drilling of the exploratory
well required in the fifth year of the Bocachico Contract and waived the sixth
year well obligation. Harken continues to negotiate with Ecopetrol regarding the
remaining future well obligation including discussing the transfer of the fifth
year well obligation to another Association Contract. Such negotiations include
a proposal to relinquish all but approximately 53,000 acres of Bocachico
Contract area acreage, although Harken's proposal to Ecopetrol includes
retaining the structure area associated with the Rio Negro Prospect. Harken has
no proved reserves associated with the Bocachico Contract. Such proposed acreage
relinquishments represent 72% of the original Bocachico Contract area acreage.
The Cambulos Contract originally required that the Cambulos Contract
acreage be reduced to 173,000 acres at the end of the second contract year, but
in May 1998, Ecopetrol agreed to defer relinquishment of the acreage in exchange
for Harken drilling two exploratory wells within the third contract year. During
May 1999, Harken received approval from Ecopetrol to allow for the additional
well depth drilled during the Islero #1 well to substitute for the obligation to
drill a second exploratory well within the third contract year. During September
1999, Ecopetrol conditionally granted a six month extension from November 1999
until May 16, 2000 to Harken for the drilling of the exploratory well required
in the fourth year of the Cambulos Contract. In May 2000, Harken relinquished
all but approximately 41,000 of its Cambulos acreage and has negotiated with
Ecopetrol for the drilling of an exploratory well on the Delta prospect on the
Cambulos Contract area during 2000. This acreage relinquishment represents 86%
of the original Cambulos Contract area acreage. Such relinquishment did not
affect Harken's proved reserves and Harken has no proved reserves associated
with the Cambulos Contract area.
Harken has completed all of the work requirements of the first four
years of the Bolivar Contract, and has committed to the fifth year work
requirements which require Harken to drill an additional well prior to July
2001.
During the first two years of the Los Olmos Contract, and before May
24, 2000, Harken was required to reprocess at least 500 kilometers of existing
seismic data and acquire at least 120 kilometers of new seismic data and 2,000
kilometers of aeromagnetic data, and prepare an engineering study of the
contract areas. Harken is currently in negotiations with Ecopetrol which could
result in delaying the above work requirements or modifying certain of the
seismic obligations required under the Los Olmos Contract.
12
<PAGE> 13
Colombia Mid-Year Reserve Report -- The following table sets forth the
estimated net proved reserves of Harken in Colombia as of December 31, 1999 and
June 30, 2000, as reflected in reports prepared by Gaffney, Cline and
Associates, Harken's independent reserve engineers. The reserve values reflected
in the following reserve disclosures are based on prices as of December 31, 1999
($26.02/barrel) and June 30, 2000 ($32.50/barrel). In August 2000, following
discussions with the Securities and Exchange Commission's ("SEC") engineering
staff, and in resolution of these discussions, Gaffney, Cline and Associates
agreed to revise Harken's oil and gas reserves in Colombia to remove the
reserves associated with the Norean/Crisol gas field and the Trigos oil field,
both on Harken's Bolivar Contract area, from the proved category. In addition,
these reserves are not classified as proved in the June 30, 2000 reserve report.
The June 30, 2000 reserve information also reflects reductions in the proved
reserves from the La Luna formation as a result of recent production information
from Harken's Olivo #1 well on the Bolivar Contract area.
<TABLE>
<CAPTION>
Colombian Reserves
------------------------------------------------------
Volumes
---------------------------------- Pre-tax
Oil Gas Net Present
(Barrels) (Mcf) Value
-------------- -------------- --------------
<S> <C> <C> <C>
DECEMBER 31, 1999
Previously reported 27,139,000 44,400,000 $ 266,800,000
Less Norean/Crisol gas reserves -- (44,400,000) (4,900,000)
Less Trigos oil reserves (3,819,000) -- (30,200,000)
-------------- -------------- --------------
As restated 23,320,000 -- $ 231,700,000
============== ============== ==============
JUNE 30, 2000 18,167,000 -- $ 224,640,000
============== ============== ==============
</TABLE>
Costa Rica Operations -- In August 1999, the Exploration and Production
concession contract with the Republic of Costa Rica ("Costa Rica Contract") was
signed by MKJ Xploration, Inc. ("MKJ"), which was originally awarded the
concession under Costa Rica's bidding process that was finalized in October
1997. In the fourth quarter of 1998, Harken announced an agreement to
participate in this anticipated Costa Rica Contract. The Costa Rica Contract
covers approximately 1.4 million acres in the North and South Limon Back Arc
Basin onshore and offshore Costa Rica Central America. The formal Costa Rica
Contract was signed by the President of Costa Rica and became effective October
1999. The Costa Rica Contract area is comprised of Blocks 2, 3, 4 and 12 from
Costa Rica's initial bidding round in October of 1997. Two of the Blocks are
located onshore and two are located offshore within Costa Rica's Caribbean
territorial waters.
Harken's participation in Costa Rica is structured whereby a
wholly-owned Harken subsidiary owns 80% of the stock of a Nevada limited
liability corporation, Harken Costa Rica Holdings LLC ("HCRH"). An affiliate of
MKJ owns the remaining 20% of the stock of this subsidiary. Under the terms of
the agreement between Harken and MKJ, Harken paid $4.2 million to MKJ to
purchase its share of the Costa Rica Contract rights from MKJ after an agreement
and approval of the assignment was signed and ratified with the Republic of
Costa Rica. In June 2000, the assignment of the Costa Rica Contract rights to
HCRH was approved by the Costa Rican government. Additionally, up to $8 million
may be committed by Harken over the next two years to fund the initial minimum
work program obligations under the proposed Costa Rica Contract and Harken is
seeking additional joint venture partner participation for these work program
obligations. In connection with Harken's participation in the Costa Rica
Contract rights, Harken issued to MKJ certain non-registered, non-transferable
stock purchase warrants to purchase 200,000 shares of Harken common stock which
are currently exercisable by the holders thereof at any time after November 12,
1998 and on or before November 12, 2001 at an exercise price of $3.50 per share.
13
<PAGE> 14
(6) BANK CREDIT FACILITY OBLIGATIONS
A summary of long-term bank obligations follows:
<TABLE>
<CAPTION>
December 31, June 30,
1999 2000
------------ ------------
<S> <C> <C>
Subsidiary notes payable to bank (A) $ 10,500,000 $ 10,500,000
Subsidiary project finance facility (B) -- --
------------ ------------
10,500,000 10,500,000
Less: Current portion -- --
------------ ------------
$ 10,500,000 $ 10,500,000
============ ============
</TABLE>
(A) XPLOR, a wholly-owned subsidiary of Harken, has a three-year loan
facility with Christiania og Kreditkasse ("Christiania") which is
solely secured by the oil and gas properties and subsidiaries of
XPLOR. The Christiania facility matures on September 30, 2002 and
provides borrowings limited by a borrowing base (as defined by
the Christiania facility) which was $10,500,000 at June 30, 2000.
The Christiania facility provides for interest based on the
Short-term Interbank Offered Rates ("LIBOR") plus a margin of
1.125% to 1.875%, payable at the underlying LIBOR maturities or
lender's prime rate plus 0.25% (8.5126% at June 30, 2000) and
provides for a commitment fee of 0.375% on the unused amount. At
June 30, 2000, Harken was in compliance with all financial
covenants related to the facility. The borrowing base is subject
to a review by Christiania on a semi-annual basis and may be
adjusted subject to the provisions of the Christiania facility.
On August 11, 2000, certain Harken subsidiaries including XPLOR,
entered into a new three year loan facility with Bank One Texas,
N.A. ("Bank One") which is secured by certain of Harken's
domestic oil and gas properties and a guaranty from Harken. The
Bank One facility provides borrowings limited by a borrowing base
(as defined by the Bank One facility) which was $22,000,000 at
closing. The Bank One facility provides for interest based on the
LIBOR plus a margin of 2.350 %, payable at the underlying LIBOR
maturities or lender's prime rate, and provides for a commitment
fee of 0.375 % on the unused amount. Harken plans to immediately
draw $10,500,000 under the Bank One facility to payoff the
balance from the Christiania facility.
(B) Effective September 1, 1999, Harken de Colombia, Ltd. entered
into a project finance loan agreement with the International
Finance Corporation ("IFC") to be utilized in the development of
the Bolivar Association Contract block in Colombia ("the
Project"). As of August 14, 2000, no borrowings have been drawn
down by Harken de Colombia, Ltd. under the facility.
The project finance facility consists of an A Loan of
$20,000,000, a syndicated B loan of $25,000,000 and a C Loan of
$10,000,000. The A and B Loans will bear interest at LIBOR plus a
margin of 3.50% and will be repayable in equal semi-annual
installments beginning one year after initial disbursement of
funds and continuing for five years. The syndicated B Loan has
been jointly arranged by Dresdner Kleinwort Benson, and fully
underwritten by Dresdner Bank Lateinamerika AG. The C Loan will
bear interest at LIBOR with a quasi-equity income participation
and is repayable in full at the end of the sixth year of
maturity.
14
<PAGE> 15
The C Loan will be convertible into Harken common stock under
certain conditions at a conversion price of $3.00 per share. All
loans are extendable for up to two years from the initial term if
certain Project performance conditions are achieved. All loans
will be secured by the Project. Funding under the facility is
subject to certain conditions, including Harken maintaining
certain capital commitments to Harken de Colombia, Ltd. to be
dedicated to the Project. Harken has incurred approximately
$1,174,000 of issuance costs associated with the project finance
facility and such costs are being amortized over the term of the
facility.
Harken has begun negotiations with IFC regarding certain aspects
of the Project in light of current Bolivar production information
and considering the inclusion of Harken's Palo Blanco development
on the Alcaravan Association Contract as part of the Project.
Currently, and as of June 30, 2000, Harken de Colombia, Ltd. and
Harken do not meet certain of the provisions and financial
covenants required in order to draw down funds under the project
finance facility. As of August 14, 2000, no official
modifications to the project finance facility have been made with
IFC.
(7) DEVELOPMENT FINANCE AND OPERATING AGREEMENTS
EnCap Development Finance Agreement -- In October 1997, Harken entered
into a Development Finance Agreement (the "EnCap Development Finance Agreement")
with EnCap Energy Capital Fund III, L.P., EnCap Energy Capital Fund III-B, L.P.,
BOCP Energy Partners, L.P. and Energy Capital Investment Company PLC
(collectively the "EnCap Investors"), pursuant to which the EnCap Investors
provided $25 million (the "Payment Amount"), less a 2% investment banking fee,
to Harken to finance the planned drilling of the initial wells on three
unexplored oil and gas prospects in the Middle Magdalena Basin of Colombia. In
exchange, the EnCap Investors received the right to receive future payments from
Harken equal to 5% of the net profits that Harken de Colombia, Ltd. may have
derived from the sale of oil and gas produced from each of the three prospects
if the planned drilling on the prospect was successful (the "EnCap
Participation").
Pursuant to the EnCap Development Finance Agreement, the EnCap
Investors had the right, for a period of two years beginning in October 1998, to
convert all or part of the EnCap Participation into shares of Harken common
stock. The number of shares of Harken common stock to be issued upon conversion
of the EnCap Participation was equal to the quotient of (i) the Payment Amount
(less any distributions made in respect of the EnCap Participation) plus an
amount equal to 15% interest per annum on the net Payment Amount compounded
monthly (the "Invested Amount"), divided by (ii) the market price of Harken
common stock at the time of conversion. During the same two year period, Harken
also had the right to convert the EnCap Participation into shares of Harken
common stock with the number of shares of Harken common stock to be issued to be
equal to the quotient of (i) the Payment Amount (less any distribution made in
respect of the EnCap Participation) plus an amount equal to 25% interest per
annum on the net Payment Amount compounded monthly, divided by (ii) the market
price of Harken common stock at the time of conversion. Harken could also elect
to pay cash upon any conversion of the EnCap Participation in lieu of issuing
Harken common stock. The EnCap Development Finance Agreement also provided for
additional shares of Harken common stock ("Deficiency Shares") to be issued by
Harken in the event of a conversion to the extent that the EnCap Investors do
not, under certain circumstances, realize the Invested Amount from the sale of
shares of Harken common stock issued at the conversion. See Note 12 -- Related
Party Transactions for a discussion of the relationship between Harken and the
EnCap Investors.
15
<PAGE> 16
In April 1999, Harken received notice from EnCap Investments L.C. that
the EnCap Investors elected to exercise their option to convert a 40% portion of
the EnCap Participation into shares of Harken common stock. Pursuant to the
EnCap Development Finance Agreement, the EnCap Investors received 6,481,512
shares of Harken common stock.
On October 28, 1999, Harken and the EnCap Investors entered into a
repurchase agreement whereby Harken paid cash of $20 million to EnCap
Investments L.C. on behalf of the EnCap Investors as full settlement of the
remaining Development Finance Obligations to the EnCap Investors. Such
repurchase and settlement included the extinguishment of Harken's contingent
obligation to issue Deficiency Shares of Harken common stock to the extent that
the EnCap Investors did not realize the Invested Amount from the sale of shares
issued to the EnCap Investors in April 1999.
European Development Finance Agreement -- In December 1997, Harken
entered into a Development Finance Agreement and other related agreements (the
"European Development Finance Agreement") whereby Sidro S.A., Lambertine
Holdings, Ltd. and Rauscher Pierce and Clark (collectively the "European
Investors") purchased all of the outstanding common stock of Harken Capital
Corporation, ("HCC", a newly-formed U.S. corporation) for $7 million. Pursuant
to the European Development Finance Agreement, HCC then provided the $7 million
to Harken in January 1998 to finance a portion of the cost of the three-well
exploratory program discussed above pursuant to terms identical to the EnCap
Development Finance Agreement. In exchange, HCC received the right to receive
future payments from Harken equal to 1.4% of the net profits that Harken de
Colombia, Ltd. may have derived from the sale of oil and gas produced from each
of the three prospects if the planned drilling on the prospect was successful.
In March 1998, Harken received directly an additional $3 million
pursuant to a Development Finance Agreement with Faisal Finance ("Faisal"),
which contains terms substantially identical to the EnCap Development Finance
Agreement, including conversion provisions which began in March 1999. In
exchange, Faisal received the right to receive future payments from Harken equal
to 0.6% of the net profits that Harken de Colombia, Ltd. may have derived from
the sale of oil and gas produced from each of the three prospects discussed
above pursuant to the EnCap Development Finance Agreement if the planned
drilling on the prospect was successful.
Pursuant to the European Development Finance Agreement, the European
Investors, Faisal and Harken each had the right to convert the interest into
shares of common stock of Harken pursuant to conversion rights terms identical
to those terms related to the EnCap Development Finance Agreement, for a period
of two years beginning in December 1998. Pursuant to the European Development
Finance Agreements, the European Investors, including Faisal, are entitled to
Deficiency Shares of Harken common stock in the event of a conversion to the
extent that the Investors do not, under certain circumstances, realize the
Invested Amount from the sale of Harken common stock issued at conversion.
In December 1998, one of the European Investors exercised their right
to convert all their interest into shares of Harken common stock. Harken elected
to pay cash of approximately $2.3 million in lieu of issuing Harken common
stock. In April and May 1999, respectively, Harken received notice from the
remaining European Investors that they had elected to exercise their option to
convert all of their interest into shares of Harken common stock. Pursuant to
the European Development Finance Agreement, the European Investors received
1,908,637 and 1,121,738 shares, respectively, of Harken common stock. In
November 1999, Harken and these European Investors entered into an agreement to
extend the calculation of the Invested Amount from the date of conversion to
September 30, 1999 and also extended the period in which these European
Investors could sell their shares of Harken common stock received at conversion.
In March 2000,
16
<PAGE> 17
Harken issued to these European Investors 2,398,400 and 1,739,730 shares,
respectively, of Deficiency Shares of Harken common stock pursuant to the
European Development Finance Agreement as modified.
Also, in April 1999, Harken received notice from Faisal that it had
elected to exercise its option to convert a two-thirds portion of its Interest
into shares of Harken common stock. Pursuant to the Development Finance
Agreement with Faisal, Faisal received 1,316,829 shares of Harken common stock.
In February 2000, Harken entered into an agreement with Faisal whereby Harken
issued 1,457,390 shares of Harken common stock to Faisal as full settlement for
any additional shares payable to Faisal related to its April 1999 conversion of
its Interest. In March 2000, Harken received notice from Faisal that it had
elected to exercise its option to convert the remaining portion of its Interest
into shares of Harken common stock. Pursuant to the Development Finance
Agreement with Faisal, Faisal was issued 1,282,741 shares of Harken common
stock. Harken continues to be committed to provide potential additional
Deficiency Shares of Harken common stock to Faisal related to the sale of these
shares issued.
Accounting for Development Finance Agreements - At December 31, 1999,
Harken accounted for the remaining Development Finance Agreement Invested
Amount, including the accrued 15% per annum increase, as a long-term obligation,
as such Invested Amount is payable to Faisal should Faisal elect to convert
their Institutional Participation into shares of Harken common stock. The 15%
per annum increase in the Invested Amount, plus the amortization of the issuance
costs associated with the Development Finance Agreements, is reflected as
Interest Expense and Other, net of amounts capitalized, in the accompanying
consolidated statements of operations. Harken records as Interest Expense and
Other the fair value of the obligation to issue Deficiency Shares related to
conversions of Development Finance Agreements at the time they are converted. In
addition, Harken reflected Interest Expense and Other during the fourth quarter
of 1999 and first quarter of 2000 for the additional value related to the
November 1999 agreement with the European Investors and the February 2000
agreement with Faisal, respectively. As Institutional Participation is converted
into shares of Harken common stock, a pro-rata portion of the unamortized
issuance costs associated with the Development Finance Agreements has been
charged to income as an extraordinary item.
(8) CONVERTIBLE NOTES PAYABLE
A summary of convertible notes payable is as follows:
<TABLE>
<CAPTION>
December 31, June 30,
1999 2000
------------ ------------
<S> <C> <C>
5% European Notes $ 85,000,000 $ 74,320,000
Benz Convertible Notes 10,869,000 9,991,000
------------ ------------
95,869,000 84,311,000
Less: Current portion -- --
------------ ------------
$ 95,869,000 $ 84,311,000
============ ============
</TABLE>
5% European Notes -- On May 26, 1998, Harken issued to qualified
purchasers a total of $85 million in 5% Senior Convertible Notes (the "5%
European Notes") which mature on May 26, 2003. Interest incurred on these notes
is payable semi-annually in May and November of each year to maturity or until
the 5% European Notes are converted. Such 5% European Notes are convertible into
shares of Harken common stock at an initial conversion price of $6.50 per share,
subject to adjustment in certain circumstances ("the
17
<PAGE> 18
5% European Note Conversion Price"). Other than the February 2000 transaction
discussed below, none of the bondholders have exercised their conversion option
as of August 14, 2000.
In February 2000, Harken entered into an agreement with a holder of the
European Notes in which the holder exchanged Notes in the face amount of
$6,000,000, plus accrued interest, for 3,000,000 shares of Harken common stock.
Although the 3,000,000 shares of Harken common stock issued had a total fair
value of approximately 50% of the face value of the Notes exchanged, accounting
for the transaction required Harken to reflect a charge to earnings of
$2,068,000 related to the fair value of the shares of Harken common stock issued
in excess of the number of shares which would have been issued pursuant to the
$6.50 per share conversion price of the European Notes.
In April 2000, Harken repurchased European Notes in the face amount of
$1,980,000 from a holder in exchange for cash of approximately $1,089,000 plus
transaction expenses. In June 2000, Harken repurchased European Notes in the
face amount of $2,700,000 from certain holders in exchange for cash of
approximately $1,489,000 plus transaction expenses. Harken has reflected an
extraordinary item gain from the cash purchase of outstanding European Notes in
the accompanying consolidated condensed statements of operations.
Benz Convertible Notes -- On December 30, 1999 (the "Closing Date"),
Harken issued the Benz Convertible Notes in exchange for certain prospects
acquired from Benz. (See Note 2 - Mergers and Acquisitions for further
discussion of the acquisition of the Benz Prospects) The Benz Convertible Notes
originally were to mature May 26, 2003 and bear interest at 5% per annum,
payable semi-annually in May and November of each year to maturity or until the
Benz Convertible Notes are converted. Such Benz Convertible Notes are
convertible into shares of Harken common stock at a conversion price of $6.50
per share, subject to adjustment in certain circumstances (the "Benz Notes
Conversion Price).
For a period of nine months following the Closing Date (the "Restricted
Put Period"), Benz may require Harken to redeem the Benz Convertible Notes into
Harken's option of either cash or Harken common stock, provided that such
consideration is used to retire obligations of Benz at a discount, which is
acceptable to Harken at Harken's sole discretion, to the face amount of such
obligations. In addition, for a period of nine months, beginning no later than
the end of the Restricted Put Period, the Benz Convertible Notes may be redeemed
at Benz's option for an amount equal to 50% of the then outstanding principal
amount, plus accrued interest, of the related Benz Convertible Notes, payable at
Harken's option either in cash or Harken common stock.
In March 2000, Harken and Benz entered into an agreement whereby Harken
prepaid the approximately $243,000 interest payment due May 26, 2000 on the Benz
Convertible Notes and repurchased Benz Convertible Notes having a face amount of
$1,125,000 for $375,000 cash. In addition, the May 26, 2003 maturity date for
certain of the Benz Convertible Notes was extended to November 26, 2003. No gain
was recorded on this transaction due to the related party relationship between
Harken and Benz.
Harken has reflected the Benz Convertible Notes on its consolidated
balance sheet at the fair value of the Notes on the Closing date. The difference
between the fair value and the face amount of the Benz Convertible Notes
outstanding will be accreted into interest expense over the term of the notes.
18
<PAGE> 19
(9) STOCKHOLDERS' EQUITY
Common Stock -- Harken currently has authorized 225,000,000 shares of
$.01 par common stock. At December 31, 1999 and June 30, 2000, Harken had issued
155,707,548 shares and 170,047,347 shares, respectively.
Treasury Stock -- At December 31, 1999 and June 30, 2000, Harken held
2,153,000 shares of Harken common stock purchased in the open market at a cost
of $4,516,000.
Issuance of Convertible Notes Payable -- In May 1998, Harken issued to
qualified purchasers a total of $85 million in 5% European Notes which mature on
May 26, 2003. In February 2000, Harken entered into an agreement with a holder
of the European Notes where the holder exchanged Notes in the face amount of
$6,000,000, plus accrued interest, for 3,000,000 shares of Harken common stock
On December 30, 1999 (the "Closing Date"), Harken issued the Benz
Convertible Notes in exchange for certain prospects acquired from Benz. (See
Note 2 - Mergers and Acquisitions for further discussion of the acquisition of
the Benz Prospects) The Benz Convertible Notes originally were to mature May 26,
2003 and bear interest at 5% per annum, payable semi-annually in May and
November of each year to maturity or until the Benz Convertible Notes are
converted. In March 2000, Harken and Benz entered into an agreement whereby
Harken prepaid the approximately $243,000 interest payment due May 26, 2000 on
the Benz Convertible Notes and repurchased Benz Convertible Notes having a face
amount of $1,125,000 for $375,000 cash. In addition, the May 26, 2003 maturity
date for certain of the Benz Convertible Notes was extended to November 26,
2003. No gain was recorded on this transaction due to the related party
relationship between Harken and Benz.
Private Placements of Harken Common Stock - In March 2000, Harken
issued 1,666,667 shares of Harken common stock to two institutional investors in
exchange for $1,500,000 cash and 5,000 shares of Benz Series II preferred stock
having a face value of $500,000. In May 2000, Harken issued 2,461,538 shares of
Harken common stock to institutional investors in exchange for $1,500,000 cash
and 5,000 shares of Benz Series II preferred stock having a face value of $
500,000. In July and August 2000, Harken issued 8,608,762 shares of Harken
common stock to institutional investors in exchange for $4,971,000 cash and
12,450 shares of Benz Series II preferred stock having a face value of
$1,245,000 and Benz Notes with a face value of $412,000. No value has been
assigned to the Benz securities held by Harken.
Development Finance Agreements -- Harken entered into Development
Finance Agreements relating to certain of its Colombian operations. Pursuant to
these Development Finance Agreements, the investors have exercised their options
to convert their beneficial interest in a specific operating area into shares of
Harken common stock. In addition, certain of these investors were issued shares
of Harken common stock at the time of entering into a Development Finance
Agreement with Harken. In October 1999, Harken repurchased for cash a
significant majority of the remaining Development Finance Agreements. For a
complete discussion of each of the various Development Finance Agreements, and
further discussions of certain conversions of beneficial interests exercised in
April and May 1999, and March 2000, as well as a discussion of the October 1999
repurchase, see Note 7 - Development Finance and Operating Agreements.
(10) PER SHARE DATA
Basic earnings per common share was computed by dividing net loss by
the weighted average number of shares of Harken common stock outstanding during
the period. The impact of unconverted
19
<PAGE> 20
Convertible Notes or Development Finance Agreements was not included as their
effect would have been antidilutive. Had the remaining Development Finance
Agreement which converted in March 2000, the February and March 2000 issuance of
Deficiency Shares pursuant to Development Finance Agreements and the private
placements of Harken common stock in March, June and July 2000 been consummated
effective January 1, 2000, Harken's net loss attributed to common stock would
have been $(0.00) for the first six months of 2000.
(11) INCOME TAXES
At June 30, 2000, Harken had available for federal income tax reporting
purposes, net operating loss (NOL) carryforward for regular tax purposes of
approximately $101,000,000 which expires in 2000 through 2019, alternative
minimum tax NOL carryforward of approximately $88,000,000 which expires in 2000
through 2019, statutory depletion carryforward of approximately $2,000,000 which
does not have an expiration date, and a net capital loss carryforward of
approximately $6,000,000 which expires in 2000. Approximately $5,000,000 of the
net operating loss carryforward has been acquired with the purchase of
subsidiaries and must be used to offset future income from profitable operations
within those subsidiaries.
There were no deferred tax liabilities as of June 30, 2000. Total
deferred tax assets, primarily related to the net operating loss carryforward,
were approximately $37,833,000 at June 30, 2000. The total deferred tax asset is
offset by a valuation allowance of approximately $37,833,000 at June 30, 2000.
(12) RELATED PARTY TRANSACTIONS
Prior to his resignation in July 2000, Harken had on its Board of
Directors a director who is also a managing director of EnCap Investments L.C.
("EnCap"). EnCap has historically provided financial consulting and investment
banking services to Harken. In connection with the June 1997 placement of the
5 1/2% European Notes, EnCap received as a financial consulting fee, $466,667 in
cash, and a warrant to purchase 50,000 shares of Harken common stock at any time
after December 11, 1997 and on or before December 11, 1999 at an exercise price
of $5.00 per share. As described in Note 7 -- Development Finance and Operating
Agreements, in October 1997, Harken entered into a Development Finance Agreement
with the EnCap Investors. EnCap serves as the general partner of three of the
EnCap Investors and the Harken director serves as a director of the fourth EnCap
Investor. In connection with the EnCap Development Finance Agreement, EnCap
received an investment banking fee of $500,000. In October 1999, Harken
purchased all the Development Finance Agreement interests and rights held by the
EnCap Investors for $20,000,000 cash. In May 1998, Harken acquired the Bargo
Properties from St. Martinville Partners, Ltd. and Bargo Energy Company, which
are affiliates of EnCap. In addition, in December 1999, Harken acquired the Benz
Prospects from Benz, which is an affiliate of EnCap. Harken believes that the
above transactions were made at terms at least as favorable to Harken as those
that could have been secured with an unrelated party.
During March, June and July 2000, Harken issued shares of Harken common
stock to investors in Benz in exchange for cash and shares of Benz Series II
preferred stock. See Note 9--Stockholders Equity for further discussion.
20
<PAGE> 21
During 1997, 1998, and 1999, Harken made secured short-term loans to
certain members of Harken's Board of Directors and Management. Such notes
receivable are reflected in Harken's consolidated balance sheet at December 31,
1999 and June 30, 2000 as Related Party Notes Receivable.
(13) HEDGING ACTIVITIES
During 1999, Harken entered into certain commodity derivative
instruments, which are effective in mitigating commodity price risk associated
with a portion of its monthly crude oil and natural gas production and cash
flow. With the August 19, 1999 merger with XPLOR, Harken held natural gas price
swaps entered into by XPLOR. At June 30, 2000, such natural gas price swaps
result in XPLOR receiving fixed prices of approximately $2.20 per MMBTU covering
a total of 1,350,000 MMBTUs over the life of the swaps, through December 2001.
Harken allocated a portion of the XPLOR purchase price to the fair value of
these swap contracts as of the date of the merger. At June 30, 2000, the
remaining deferred obligation relating to these natural gas swap contracts was
approximately $442,000, and had a market value of approximately $2,374,000, is
reflected in accrued liabilities and will be recognized in revenue over the life
of the contracts as the hedged natural gas is sold. At June 30, 2000, Harken
also held a put option for crude oil with a fixed price of $15 per barrel
covering 74,000 barrels over the life of the option, through October 31, 2000.
At June 30, 2000, the remaining unamortized premium of approximately $30,000
relating to the crude oil put option is included in other current assets and
will be recognized in revenue over the life of the option as the hedged crude
oil is sold.
Settlements of oil and gas commodity derivatives are based on the
difference between fixed swap or option prices and the New York Mercantile
Exchange closing prices for each month during the life of the contracts. Harken
monitors its crude oil and gas production prices compared to New York Mercantile
Exchange prices to assure its commodity derivatives are effective hedges in
mitigating its commodity price risk.
(14) SEGMENT INFORMATION
Harken divides its operations into two operating segments which are
managed and evaluated by Harken as separate operations. Harken's North American
operating segment currently relates to Harken's exploration, development,
production and acquisition efforts in the United States whereby production cash
flows are discovered or acquired, and operated primarily through traditional
ownership of mineral interests in the various states in which it operates.
Harken's North American production is sold to established purchasers and
generally transported through an existing and well-developed pipeline
infrastructure. Harken's Middle American operating segment currently relates to
Harken's exploration, development, production and acquisition efforts in
Colombia and Costa Rica. Middle American segment production cash flows are
discovered through extensive drilling operations conducted under Association
Contract arrangements with the state-owned oil and gas companies/ministries in
the respective countries. Harken's Middle American operations are heavily
capital intensive in the exploration and development phases due to remote well
locations and the general need for the construction of Harken's own flowline
connections and production facilities. During the periods presented below, none
of Harken's Middle American segment operating revenues related to Costa Rica.
Harken's accounting policies for each of its operating segments are the
same as those for its consolidated financial statements. There are no
intersegment sales or transfers. Revenues and expenses
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<PAGE> 22
not directly identifiable with either segment, such as certain general and
administrative expenses, are allocated by Harken based on various internal and
external criteria including an assessment of the relative benefit to each
segment.
Harken's financial information for each of its operating segments is as
follows for the periods ended June 30, 1999 and June 30, 2000:
<TABLE>
<CAPTION>
Three Months Ended June 30, 1999 Six Months Ended June 30, 1999
--------------------------------------------- ---------------------------------------------
North South North South
America America Total America America Total
------------- ------------- ------------- ------------- ------------- -------------
<S> <C> <C> <C> <C> <C> <C>
Operating revenues $ 2,899,000 $ 1,211,000 $ 4,110,000 $ 5,301,000 $ 1,889,000 $ 7,190,000
Interest and other income 489,000 501,000 990,000 1,100,000 1,146,000 2,246,000
Depreciation and amortization
(restated) 1,131,000 371,000 1,502,000 2,294,000 593,000 2,887,000
Interest expense and other, net 513,000 1,001,000 1,514,000 729,000 2,144,000 2,873,000
Income tax expense -- -- -- -- -- --
Segment loss before
extraordinary loss (restated) (929,000) (1,309,000) (2,238,000) (1,372,000) (2,521,000) (3,893,000)
Segment loss (restated) (929,000) (1,898,000) (2,827,000) (1,372,000) (3,110,000) (4,482,000)
Capital expenditures 165,000 5,901,000 6,066,000 699,000 19,842,000 20,541,000
Total assets at end of period
(restated) 74,301,000 204,649,000 278,950,000 74,301,000 204,649,000 278,950,000
</TABLE>
<TABLE>
<CAPTION>
Three Months Ended June 30, 2000 Six Months Ended June 30, 2000
-------------------------------------------- --------------------------------------------
North South North South
America America Total America America Total
------------- ------------- ------------- ------------- ------------- -------------
<S> <C> <C> <C> <C> <C> <C>
Operating revenues $ 8,450,000 $ 2,340,000 $ 10,790,000 $ 15,605,000 $ 5,069,000 $ 20,674,000
Interest and other income 150,000 137,000 287,000 300,000 375,000 675,000
Depreciation and amortization 2,046,000 1,175,000 3,221,000 4,037,000 2,105,000 6,142,000
Interest expense and other, net 924,000 377,000 1,301,000 1,739,000 1,005,000 2,744,000
Income tax expense 15,000 -- 15,000 30,000 -- 30,000
Segment income (loss) before
extraordinary items 831,000 (963,000) (132,000) 186,000 (2,500,000) (2,314,000)
Segment income (loss) 1,767,000 (27,000) 1,740,000 1,122,000 (1,571,000) (449,000)
Capital expenditures 2,125,000 5,822,000 7,947,000 4,632,000 9,078,000 13,710,000
Total assets at end of period 96,037,000 199,253,000 295,290,000 96,037,000 199,253,000 295,290,000
</TABLE>
(15) COMMITMENTS AND CONTINGENCIES
Operational Contingencies -- The exploration, development and
production of oil and gas are subject to various Navajo, federal and state laws
and regulations designed to protect the environment. Compliance with these
regulations is part of Harken's day-to-day operating procedures. Infrequently,
accidental discharge of such materials as oil, natural gas or drilling fluids
can occur and such accidents can require material expenditures to correct.
Harken maintains levels of insurance customary in the industry to limit its
financial exposure. Management is unaware of any material capital expenditures
required for environmental control during the next fiscal year.
In September 1997, Harken Exploration Company, a wholly-owned
subsidiary of Harken, was served with a lawsuit filed in U.S. District Court for
the Northern District of Texas, Amarillo Division, styled D. E. Rice and Karen
Rice, as Trustees for the Rice Family Living Trust ("Rice") vs. Harken
Exploration Company. In the lawsuit, Rice alleges damages resulting from Harken
Exploration Company's alleged spills on Rice's property and has claimed that the
Oil Pollution Act ("OPA") should be applied in this circumstance. Harken
believes that this position as well as the lawsuit in total is wholly without
merit. In
22
<PAGE> 23
October 1999, the trial court granted Harken's Motion for Summary Judgment that
the OPA did not apply and dismissed the Rice claim under it. Rice has appealed
the trial court's summary judgement to the U.S. Fifth Circuit Court of Appeals.
The appeal is not expected to be heard before the third quarter of 2000. In
Harken management's opinion, the results of the lawsuit and appeal will not have
a material adverse effect on Harken's financial position.
Search Acquisition Corp. ("Search Acquisition"), a wholly-owned
subsidiary of Harken, is a defendant in a lawsuit filed by Petrochemical
Corporation of America and Lorken Investments Corporation (together,
"Petrochemical"). This lawsuit arises out of Petrochemical's attempt to enforce
a judgement entered in 1993 against a group of twenty limited partnerships known
as the "Odyssey limited partnerships." Petrochemical claims that Search
Exploration, Inc. is liable for payment of the judgement as the
successor-in-interest to eight Odyssey limited partnerships. Search Acquisition
was the surviving corporation in the 1995 merger with Search
Exploration, Inc. On February 28, 1996, the court granted Search Acquisition's
motion for summary judgment. On July 3, 1998, the Fifth District Court of
Appeals for the State of Texas reversed the trial court's summary judgment and
remanded the case to the trial court. It is estimated that this trial will take
place in the second quarter of 2001. Although the ultimate outcome of this
litigation is uncertain, Harken believes that any liability to Harken as a
result of this litigation will not have a material adverse effect on Harken's
financial condition.
420 Energy Investment, Inc. and ERI Investments, Inc. (collectively
"420 Energy") filed a lawsuit against XPLOR Energy, Inc., ("XPLOR") a
wholly-owned subsidiary of Harken, on December 21, 1999 in the New Castle County
Court of Chancery of the State of Delaware. 420 Energy alleges that they are
entitled to appraisal and payment of the fair value of their common stock in
XPLOR as of the date XPLOR merged with Harken. Although the outcome of this
litigation is uncertain, Harken believes that any liability to Harken as a
result of this litigation will not have a material adverse effect on Harken's
financial condition.
On March 8, 2000, Harken was named as a third party defendant in an
action styled State of Texas vs. Amber Refining, Inc., Paradigm Properties
Management, Inc., Amber Terminal, Inc., Texas 150 Business Park, Inc., Edward A.
Shaw, ESCM & Associates, Restructure Petroleum Marketing, Inc., and EZ Serve
Corporation, Inc.; Case No. 97-05966 pending in the 261st District Court for
Travis County, Texas. This is an action brought by the State of Texas against
the owners of a refinery and refined products terminal facility located in Fort
Worth, Texas. Harken believes that it has no liability in this matter.
On August 3, 2000, Harken was served with a lawsuit initiated by Melvyn
I. Weiss styled Melvyn I. Weiss vs. Harken Energy Corporation, C.A. No. 18182NC,
pending in the Court of Chancery of the State of Delaware in and for New Castle
County. In this lawsuit, the plaintiff, Melvyn I. Weiss, a stockholder of
Harken, seeks to inspect Harken's corporate records as they relate to actions
taken with respect to the EnCap Development Finance Agreement. Management
believes that any liability to Harken as a result of this litigation will not
have a material adverse effect on Harken's financial condition; no assurances
can be made, however, that the litigation will not have a material adverse
effect.
During the second quarter of 2000, HCRH was notified of a
constitutional challenge raised against the Costa Rica government's awarding of
the concession contract to MKJ which was subsequently assigned to HCRH. The
challenge was raised by several local environmental groups in Costa Rica
alleging that the Costa Rica government had violated their rights of the
citizens of Costa Rica under the Costa Rica constitution. Specifically, the
plaintiffs allege that the governmental agency that awarded the concession did
not give sufficient prior notice to the community and ask that the concession be
declared null and void. HCRH is not a party to this litigation. Management
believes that the plaintiffs' claims are groundless; no
23
<PAGE> 24
assurances can be made, however, as to the outcome of the litigation or that the
litigation will not have a material adverse effect on Harken's business.
Harken and its subsidiaries currently are involved in various other
lawsuits and other contingencies, which in management's opinion, will not have a
material adverse effect on Harken's financial position.
Harken has accrued approximately $6,115,000 at June 30, 2000 relating
to certain other operational or regulatory liabilities related to Harken's
domestic operations. Harken and its subsidiaries currently are involved in
various lawsuits and other contingencies, which in management's opinion, will
not result in significant loss exposure to Harken.
24
<PAGE> 25
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
(UNAUDITED)
Certain statements included in the accompanying condensed financial
statements and in the following discussion and analysis of financial condition
and results of operations, including statements of Harken management's current
expectations, intentions, plans and beliefs, and statements containing the words
"believes", "anticipates", "estimates", "expects", or "may" are forward-looking
statements, as defined in Section 21D of the Securities Exchange Act of 1934.
Such forward-looking statements involve known and unknown risk, uncertainties
and other factors which may cause the actual results, performance, timing or
achievements of Harken to be materially different from any results, performance,
timing or achievements expressed or implied by such forward-looking statements.
Such factors include, among others, the risks described in Harken's Annual
Report on Form 10-K/A for the fiscal year ended December 31, 1999 filed with the
Securities and Exchange Commission.
OVERVIEW
Harken reported a net loss for the six months ended June 30, 2000 of
$449,000 primarily due to a first quarter 2000 charge to earnings related to the
conversion of certain European Notes compared to a net loss of $4,482,000 for
the prior year period. The lower net loss for the six months ended June 30, 2000
is attributed to increased domestic and Colombian production and increased
prices. Harken worldwide oil and gas revenues have increased 187% during the
first six months of 2000 compared to the prior year period due to increased
prices; increased domestic production primarily as a result of the August 1999
merger with XPLOR Energy, Inc.; and the increased Colombian production from
Harken's Bolivar and Alcaravan Association Contract areas. Gross profit before
depreciation and amortization, general and administrative and interest expenses
totaled approximately $13.7 million during the six months ended June 30, 2000
compared to approximately $4.0 million for the prior year period.
<TABLE>
<CAPTION>
Three Months Ended Six Months Ended
June 30, June 30,
------------------------ ------------------------
1999 2000 1999 2000
---------- ---------- ---------- ----------
(unaudited) (unaudited)
<S> <C> <C> <C> <C>
Domestic Exploration and
Production Operations
Oil sales revenues $1,733,000 $4,077,000 $3,083,000 $8,045,000
Oil volumes in barrels 110,000 144,000 231,000 287,000
Oil price per barrel $ 15.75 $ 28.31 $ 13.35 $ 28.03
Gas sales revenues $1,033,000 $4,115,000 $2,012,000 $7,106,000
Gas volumes in mcf 550,000 970,000 1,120,000 2,094,000
Gas price per mcf $ 1.88 $ 4.24 $ 1.80 $ 3.39
Gas plant revenues $ 133,000 $ 258,000 $ 206,000 $ 454,000
</TABLE>
25
<PAGE> 26
<TABLE>
<CAPTION>
Three Months Ended Six Months Ended
June 30, June 30,
------------------------ ------------------------
1999 2000 1999 2000
---------- ---------- ---------- ----------
(unaudited) (unaudited)
<S> <C> <C> <C> <C>
Colombian Exploration and
Production Operations
Oil sales revenues $1,211,000 $2,340,000 $1,889,000 $5,069,000
Oil volumes in barrels 104,000 108,000 181,000 232,000
Oil price per barrel $ 11.64 $ 21.67 $ 10.44 $ 21.85
OTHER REVENUES
Interest income $ 980,000 $ 283,000 $2,228,000 $ 665,000
Other income $ 10,000 $ 4,000 $ 18,000 $ 10,000
</TABLE>
RESULTS OF OPERATIONS
The following is management's discussion and analysis of certain
significant factors which have affected Harken's earnings and balance sheet
during the periods included in the accompanying consolidated financial
statements.
For the quarter ended June 30, 2000 compared with the corresponding prior
period.
DOMESTIC OPERATIONS
Domestic gross oil and gas revenues during the second quarter of 2000
and 1999 relate primarily to the operations in the onshore and offshore areas of
the Texas and Louisiana Gulf Coast, the Western and Panhandle regions of Texas,
the Four Corners area primarily on the Navajo Indian Reservation, the Magnolia
region of Arkansas and the Carlsbad region of New Mexico.
Gross domestic oil revenues increased 135% to $4,077,000 during the
second quarter of 2000 compared to $1,733,000 during the second quarter of 1999
primarily due to the increase in average oil prices, which averaged $12.56 more
per barrel during the second quarter of 2000 compared to the prior year period.
Oil prices have continued to remain higher during the third quarter of 2000
compared to prices received during the same period of the prior year. Oil
production volumes also increased 31% during the second quarter of 2000 compared
to the prior year period primarily due to the merger with XPLOR in August 1999.
Gross domestic gas revenues increased 298% to $4,115,000 for the three
months ended June 30, 2000 compared to $1,033,000 for the prior year period due
primarily to the increase in gas production as a result of the merger with XPLOR
in August 1999. In addition, the increased gas revenues were also due to the
increase in average gas prices received during the second quarter of 2000, as
Harken received an overall average price of $4.24 per mcf of gas production
during the second quarter of 2000 compared to $1.88 per mcf received during the
second quarter of 1999. Gas prices have continued to remain
26
<PAGE> 27
higher during the third quarter of 2000 compared to prices received during the
same period of the prior year.
Domestic oil and gas operating expenses consist of lease operating
expenses and gas plant expenses, along with a number of production and reserve
based taxes. Domestic oil and gas operating expenses increased 121% to
$3,126,000 during the second quarter of 2000 compared to $ 1,416,000 during the
prior year primarily due to the increase in operating expenses from the above
mentioned merger with XPLOR. Oil and gas operating expenses decreased as a
percentage of related oil and gas revenues due primarily to the increase in oil
and gas prices during the second quarter of 2000 compared to the prior year
period. Harken is reviewing its existing domestic operations to identify
specific properties for which operating expenses can be reduced.
Harken expects that oil and gas production volumes from its existing
domestic operations will remain flat or increase slightly in 2000 as compared to
1999 due to the inclusion of XPLOR operations during the full year and as normal
production declines experienced in its operating areas are expected to be
minimized by Harken's continuing workover efforts and exploration and
development drilling during 2000. Harken expects that 2000 domestic oil revenues
will further increase from 1999 levels if crude oil prices remain at late 1999
and early 2000 levels. Harken's oil and gas revenues are highly dependent upon
product prices, which Harken is unable to predict.
COLOMBIAN OPERATIONS
Middle American oil revenues have increased 93% from $1,211,000 during
the second quarter of 1999 to $2,340,000 during the second quarter of 2000.
During the second quarter of 2000, Harken's Colombian production operations
consisted of production testing conducted on Harken's Bolivar and Alcaravan
Association contract areas. In April 1999, Harken commenced pipeline
transportation on its Palo Blanco flowline on the Alcaravan Association Contract
area.
During the second quarter of 2000, Harken's Estero #1 well sales of
production were limited to approximately 1,000 gross barrels of oil per day due
to pipeline constraints and pumping capacity. Harken's Catalina #1 and Olivo #1
wells on the Bolivar Contract area have averaged a combined 768 gross barrels of
oil per day during the second quarter of 2000. Harken's production volumes
during the remainder of 2000 will primarily remain dependent on existing well
production, pipeline transportation capacity and pumping efficiency.
Due to increased production, Middle American operating expenses have
also increased from $328,000 during the second quarter of 1999 to $569,000 for
the second quarter of 2000.
INTEREST AND OTHER INCOME
Interest and other income decreased during the second quarter of 2000
compared to the prior year period due to Harken's usage of cash during 1999 for
capital expenditures, and the October 1999 purchase of certain development
finance interests for $20 million. Harken generated approximately $ 980,000 of
interest income during the second quarter of 1999, compared to approximately
$283,000 of interest income during the second quarter of 2000. Harken's cash
balances, which include investments in short-term marketable debt securities,
are expected to continue to decrease in 2000 as such funds are used to support
Harken's capital expenditure plans. Harken intends to continue to pursue
financing arrangements from various sources during 2000 and the decrease in
existing cash balances and related interest income could be mitigated or offset
if such efforts are successful.
27
<PAGE> 28
OTHER COSTS AND EXPENSES
General and administrative expenses increased to $2,977,000 during the
second quarter of 2000 compared to $2,578,000 in the second quarter of 1999
primarily due to administrative expenses associated with Harken's growing
Colombian production operations. In addition, Harken added minimal
administrative expenses as a result of the increased operations relating to the
August 1999 merger with XPLOR. Harken also continues to reduce general and
administrative expenses by reducing staff.
Depreciation and amortization expense increased to $3,221,000 during
the second quarter of 2000 compared to $1,502,000 in the prior year period
consistent with the increased equivalent barrel production levels during the
quarter and due to a downward revision in Harken's Colombia proved reserves as
of June 30, 2000. Depreciation and amortization on oil and gas properties is
calculated on a unit of production basis in accordance with the full cost method
of accounting for oil and gas properties. In addition, Harken's depreciation on
other property has increased as a result of Harken's expanding operations.
Interest expense and other decreased to $1,301,000 during the second
quarter of 2000 from $1,514,000 during the prior year period primarily due to
the conversion and purchase of the Development Finance Agreements during 1999
and early 2000. Such decreases in interest expense were partially offset by the
interest expense added from XPLOR and the Benz Convertible Notes, as well as the
decrease in the amounts of interest capitalized to Harken's Colombian
exploration activity, as such activity during the second quarter of 2000 has
decreased compared to the prior year period.
During the second quarter of 2000, Harken repurchased a total of
approximately $4.7 million face amount of European Convertible Notes for
approximately $2.6 million cash plus transaction expenses. In connection with
such repurchases, Harken has recorded $1,872,000 of extraordinary item gains
during the quarter, which is net of a charge for related unamortized issuance
costs.
For the six months ended June 30, 2000 compared with the corresponding prior
period.
DOMESTIC OPERATIONS
Gross domestic oil revenues increased 161% to $8,045,000 during the
first six months of 2000 compared to $3,083,000 during the first six months of
1999 primarily due to the increase in average oil prices, which averaged $14.68
more per barrel during the first half of 2000 compared to the prior year period.
Oil prices have continued to remain higher during the third quarter of 2000
compared to prices received during the same period of the prior year. Oil
production volumes also increased 24% during the first six months of 2000
compared to the prior year period primarily due to the merger with XPLOR in
August 1999.
Gross domestic gas revenues increased 253% to $7,106,000 for the six
months ended June 30, 2000 compared to $2,012,000 for the prior year period due
primarily to the increase in gas production as a result of the merger with XPLOR
in August 1999. In addition, the increased gas revenues were also due to the
increase in average gas prices received during the second quarter of 2000, as
Harken received an overall average price of $3.39 per mcf of gas production
during the first six months of 2000 compared to $1.80 per mcf received during
the first six months of 1999. Gas prices have continued to
28
<PAGE> 29
remain higher during the third quarter of 2000 compared to prices received
during the same period of the prior year.
Domestic oil and gas operating expenses increased 118% to $5,872,000
during the first six months of 2000 compared to $ 2,689,000 during the prior
year primarily due to the increase in operating expenses from the above
mentioned merger with XPLOR. Oil and gas operating expenses decreased as a
percentage of related oil and gas revenues due primarily to the increase in oil
and gas prices during the first half of 2000 compared to the prior year period.
Harken is reviewing its existing domestic operations to identify specific
properties for which operating expenses can be reduced.
COLOMBIAN OPERATIONS
Middle American oil revenues increased 168% from $1,889,000 during the
first six months of 1999 to $5,069,000 during the first six months of 2000
primarily due to the increase in oil prices, which averaged $21.85 per barrel
during the first six months of 2000 compared to $10.44 during the first half of
1999. During the first six months of 2000, Harken's Colombian production
operations consisted of production testing conducted on Harken's Bolivar and
Alcaravan Association contract areas. In April 1999, Harken commenced pipeline
transportation on its Palo Blanco flowline on the Alcaravan Association Contract
area.
Due to increased production, Middle American operating expenses have
also increased from $513,000 during the first six months of 1999 to $1,096,000
for the first six months of 2000.
INTEREST AND OTHER INCOME
Interest and other income decreased during the first half of 2000
compared to the prior year period due to Harken's usage of cash during 1999 for
capital expenditures, and the October 1999 purchase of certain development
finance interests for $20 million. Harken generated approximately $ 2,228,000 of
interest income during the first six months of 1999, compared to approximately
$665,000 of interest income during the first six months of 2000. Harken's cash
balances, which include investments in short-term marketable debt securities,
are expected to continue to decrease in 2000 as such funds are used to support
Harken's capital expenditure plans. Harken intends to continue to pursue
financing arrangements from various sources during 2000 and the decrease in
existing cash balances and related interest income could be mitigated or offset
if such efforts are successful.
OTHER COSTS AND EXPENSES
General and administrative expenses increased to $5,711,000 during the
first six months of 2000 compared to $4,367,000 during the first six months of
1999 primarily due to administrative expenses associated with Harken's growing
Colombian production operations. In addition, Harken added minimal
administrative expenses as a result of the increased operations relating to the
August 1999 merger with XPLOR. Harken also continues to reduce general and
administrative expenses by reducing staff.
Depreciation and amortization expense increased to $6,142,000 during
the first six months of 2000 compared to $2,887,000 during the prior year period
consistent with the increased equivalent barrel production levels during the
quarter and due to a downward revision in Harken's Colombia proved reserves as
of June 30, 2000. Depreciation and amortization on oil and gas properties is
calculated on a unit of production basis in accordance with the full cost method
of accounting for oil and gas properties. In addition, Harken's depreciation on
other property has increased as a result of Harken's expanding operations.
29
<PAGE> 30
Interest expense and other decreased to $2,744,000 during the first six
months of 2000 compared to $2,873,000 during the prior year period primarily due
to the conversion and purchase of the Development Finance Agreements during 1999
and early 2000. Such decreases in interest expense were partially offset by the
interest expense added from XPLOR and the Benz Convertible Notes, as well as the
decrease in the amounts of interest capitalized to Harken's Colombian
exploration activity, as such activity during the first six months of 2000 has
decreased compared to the prior year period.
Related to the February 2000 transaction whereby Harken exchanged
European Notes in the face amount of $6,000,000 plus accrued interest, for
3,000,000 shares of Harken common stock, Harken reflected a charge to earnings
of $2,068,000 related to the fair value of the shares of Harken common stock
issued in excess of the number of shares which would have been issued pursuant
to the $6.50 per share conversion price of the European Notes.
During the second quarter of 2000, Harken repurchased a total of
approximately $4.7 million face amount of European Convertible Notes for
approximately $2.6 million cash plus transaction expenses. In connection with
such repurchases, Harken has recorded $1,872,000 of extraordinary item gains
during the quarter, which is net of a charge for related unamortized issuance
costs.
LIQUIDITY AND CAPITAL RESOURCES
CAPITAL SOURCES
Harken's working capital at June 30, 2000 was approximately $13.4
million, versus approximately $21.0 million at December 31, 1999. The decrease
in cash and working capital during the first six months of 2000 resulted
primarily from approximately $16.0 million of capital expenditures. Harken's
operations generated approximately $3.2 million of cash flow during the first
six months of 2000. Harken's cash resources at June 30, 2000 totaled
approximately $14.1 million. Harken's remaining cash resources are available for
its ongoing exploration, development and acquisition efforts both
internationally and in North America.
Harken's cash flows from operations have been enhanced by the current
production tests at its Alcaravan and Bolivar Contract areas. In addition,
beginning in December 1999 and May 2000, Harken is receiving Ecopetrol's working
interest share of monthly Bolivar and Alcaravan Contract area production,
respectively, as reimbursement for a portion of Ecopetrol's share of historical
Contract area costs.
In March 1999, Harken de Colombia, Ltd. filed an application with
Ecopetrol for Ecopetrol's participation in the development of the Catalina
field. In June 1999, Harken de Colombia, Ltd. filed an application with
Ecopetrol for Ecopetrol's participation in the development of the Palo Blanco
field. As of August 14, 2000, both applications are in process of being reviewed
by Ecopetrol. Ecopetrol may elect to participate in the development of the
fields or require Harken de Colombia, Ltd. to proceed on a sole-risk basis for
its development plans. If Harken de Colombia, Ltd. proceeds on a sole-risk
basis, it will be entitled to receive Ecopetrol's share of production after
royalty, until Harken de Colombia, Ltd. has recovered 200% of its development
costs, after which time Ecopetrol would receive its share of production.
30
<PAGE> 31
Effective August 11, 2000, certain Harken subsidiaries entered into a
three year loan facility with Bank One Texas, N.A. ("Bank One"), which is
secured by Harken's domestic oil and gas properties and a guaranty from Harken.
The Bank One facility provides borrowings subject to a borrowing base (as
defined by the Bank One facility) which was $22,000,000 at closing. Harken plans
to immediately draw $10,500,000 under the Bank One facility to pay off the
outstanding balance from the previous XPLOR loan facility, and plans to borrow
additional amounts available under the Bank One facility as needed, particularly
for acquisition or capital expenditure needs.
During the third quarter of 1999, Harken announced the non-recourse
project finance loan agreement facility with the International Finance
Corporation ("IFC"), the private sector subsidiary of the World Bank Group.
Loans under this facility were to be available for the development of the
Bolivar Association Contract in Colombia. Currently, and as of June 30, 2000,
Harken de Colombia, Ltd. and Harken do not meet certain of the provisions and
financial covenants required in order to draw down funds under the project
finance facility. As of August 14, 2000, no official modifications to the
project finance facility have been made with IFC. The current plans for the
development of the Bolivar Contract area call for further testing of the Laurel
#1 well, with the installation of a new rod pump assembly to further test the
Rosa Blanca formation in this well. If the test does not prove successful due to
the damage in the Rosa Blanca formation, Harken plans to move up hole and test
the La Luna formation, which was present in this well based on log analysis.
Through August 14, 2000, Harken has closed private placements during
2000 totaling 13,070,300 shares of Harken common stock to institutional
investors in exchange for $8.0 million cash plus certain Benz securities. Harken
has assigned no value to the Benz securities.
Harken continues to review its domestic oil and gas properties for
non-strategic assets which can be negotiated for possible sale.
CAPITAL COMMITMENTS
Harken's primary need for capital is to fund its planned exploration
and development efforts domestically as well as in Colombia and Costa Rica.
Harken anticipates worldwide capital expenditures will total approximately $32
million during 2000, and plans to seek joint venture partner participation to
fund a portion of the cost for all of its significant exploration projects,
particularly its Costa Rican operations. Harken believes that it will have
sufficient cash resources to fund all of its planned capital expenditures during
2000. In addition, Harken intends to continue to pursue North American and
international acquisition opportunities and plans to fund such acquisitions, if
any are consummated, through a combination of cash on hand, issuances of debt or
equity securities.
Harken anticipates that full development of its Middle American
reserves will take several years and will also require extensive production
facilities, transportation flowlines and development activity which will require
significant additional capital expenditures. The ultimate amount of such
expenditures cannot be presently predicted.
Harken is currently constructing a Bolivar Contract area flowline which
will be completed over the next few months. Harken will continue to truck 100%
of daily Catalina field production while the flowline is being installed. Harken
had earlier planned to construct the flowline during late 1999 or early 2000,
but decided to delay the actual construction of the flowline following the
initial results of the Laurel #1 well.
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<PAGE> 32
Terms of each of the Association Contracts entered into between Harken
de Colombia, Ltd. and Ecopetrol commit Harken to perform certain activities in
Colombia in accordance with a prescribed timetable. Failure by Harken to perform
these activities as required could result in Harken losing its rights under the
particular Association Contract, which could potentially have a material adverse
effect on Harken's business. Certain of the required activities are currently
being discussed and negotiated with Ecopetrol, which could impact the timing and
amount of capital expenditures to be required during 2000 and 2001.
Related to Harken's Costa Rica operations, under the terms of the
agreement between Harken and MKJ Xploration, Inc. ("MKJ"), Harken paid $4.2
million to MKJ during the second quarter of 2000 to purchase its share of the
Costa Rica Contract rights from MKJ after an agreement and approval of the
assignment was granted by the Republic of Costa Rica. Additionally, up to $8
million may be committed by Harken over the next two years to fund the initial
minimum work program obligations under the proposed Costa Rica Contract. Harken
is currently seeking joint venture partner participation to share in the work
program expenditures required by the Costa Rica Contract.
Harken's North American operating strategy includes efforts to acquire
additional oil and gas reserves through exploration and development drilling
activities in North America, particularly on selected properties acquired
through the August 1999 merger with XPLOR Energy, Inc., the additional prospects
acquired in December 1999, and through acquisitions. Harken also plans to
continue selected development of proved undeveloped reserves on its North
American properties in addition to a continual workover program on producing
properties. The targeted results of these workover efforts are to maintain North
American production levels during 2000.
On May 26, 1998, Harken issued a total of $85 million in 5% Senior
Convertible Notes (the "European Notes") which mature on May 26, 2003. Such
European Notes are convertible into shares of Harken common stock at a
conversion price of $6.50 per share, subject to adjustment in certain
circumstances. Interest payments related to the 5% European Notes will be funded
from cash flow from operations or existing cash balances. For a detailed
discussion of the 5% European Notes see "Notes to Consolidated Condensed
Financial Statements, Note 8 -- Convertible Notes Payable."
In February 2000, Harken entered into an agreement with a holder of
$6,000,000 of the European Notes where the holder exchanged all his Notes, plus
accrued interest, for 3,000,000 shares of Harken common stock plus a cash
payment of $50,000.
In April and June 2000, Harken repurchased European Notes with a total
face amount of $3,789,000 from holders in exchange for cash of approximately
$2,578,000 plus transaction expenses. Harken continues to consider additional
transactions with the European Note holders whereby Harken may retire additional
Notes in exchange for shares of Harken common stock, cash or other
consideration.
On December 30, 1999, Harken issued the Benz Convertible Notes in
exchange for certain prospects acquired from Benz. See "Notes to Consolidated
Condensed Financial Statements, Note 2 - Mergers and Acquisitions" for further
discussion of the acquisition of the Benz Prospects. The Benz Convertible Notes
mature May 26, 2003 and bear interest at 5% per annum, payable semi-annually in
May and November of each year to maturity or until the Benz Convertible Notes
are converted. Such Benz Convertible Notes are convertible into shares of Harken
common stock at a conversion price of $6.50 per share, subject to adjustment in
certain circumstances (the "Benz Notes Conversion Price"). For a detailed
discussion of the
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<PAGE> 33
Benz Convertible Notes see "Notes to Consolidated Condensed Financial
Statements, Note 8 -- Convertible Notes Payable".
In March 2000, Harken and Benz entered into an agreement whereby Harken
prepaid the approximately $243,000 interest payment due May 26, 2000 on the Benz
Convertible Notes and repurchased Benz Convertible Notes having a face amount of
$1,125,000 for $375,000 cash. In addition, the May 26, 2003 maturity date for
certain of the Benz Convertible Notes was extended to November 26, 2003. No
accounting gain was recorded on this transaction due to the related party
relationship between Harken and Benz.
Harken has reflected the Benz Convertible Notes on its consolidated
balance sheet at the fair value of the Notes on the Closing Date. The difference
between the fair value and the face amount of the Benz Convertible Notes
outstanding will be accreted into interest expense over the term of the notes.
Operational Contingencies -- The exploration, development and
production of oil and gas are subject to various Colombian, Costa Rican, Navajo,
federal, state and local laws and regulations designed to protect the
environment. Compliance with these regulations is part of Harken's day-to-day
operating procedures. Accidental discharge of such materials as oil, natural gas
or drilling fluids can occur and such accidents can require material
expenditures to correct. Harken maintains levels of insurance customary in the
industry to limit its financial exposure. Management is unaware of any material
capital expenditures required for environmental control during the next fiscal
year.
Harken has accrued approximately $6.1 million at June 30, 2000 relating
to operational or regulatory liabilities related to Harken's North American
operations. Harken and its subsidiaries currently are involved in various
lawsuits and other contingencies, which in management's opinion, will not result
in significant loss exposure to Harken. See part II. Item 1. Legal Proceedings.
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<PAGE> 34
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
The information contained in item 3 updates, and should be read in
conjunction with, information set forth in Part II, Item 7a in Harken's Annual
Report on Form 10-K for the year ended December 31, 1999, in addition to the
interim condensed consolidated financial statements and accompanying notes
presented in Item 1 of this Form 10-Q.
PART II - OTHER INFORMATION
Item 1. Legal Proceedings
In September 1997, Harken Exploration Company, a wholly-owned
subsidiary of Harken, was served with a lawsuit filed in U.S. District Court for
the Northern District of Texas, Amarillo Division, styled D. E. Rice and Karen
Rice, as Trustees for the Rice Family Living Trust ("Rice") vs. Harken
Exploration Company. In the lawsuit, Rice alleges damages resulting from Harken
Exploration Company's alleged spills on Rice's property and has claimed that the
Oil Pollution Act ("OPA") should be applied in this circumstance. Harken
believes that this position as well as the lawsuit in total is wholly without
merit. In October 1999, the trial court granted Harken's Motion for Summary
Judgment that the OPA did not apply and dismissed the Rice claim under it. Rice
has appealed the trial court's summary judgement to the U.S. Fifth Circuit Court
of Appeals. The appeal is not expected to be heard before the third quarter of
2000. In Harken management's opinion, the results of the lawsuit and appeal will
not have a material adverse effect on Harken's financial position.
Search Acquisition Corp. ("Search Acquisition"), a wholly-owned
subsidiary of Harken, is a defendant in a lawsuit filed by Petrochemical
Corporation of America and Lorken Investments Corporation (together,
"Petrochemical"). This lawsuit arises out of Petrochemical's attempt to enforce
a judgement entered in 1993 against a group of twenty limited partnerships known
as the "Odyssey limited partnerships." Petrochemical claims that Search
Exploration, Inc. is liable for payment of the judgement as the
successor-in-interest to eight Odyssey limited partnerships. Search Acquisition
was the surviving corporation in the 1995 merger with Search Exploration, Inc.
On February 28, 1996, the court granted Search Acquisition's motion for summary
judgment. On July 3, 1998, the Fifth District Court of Appeals for the State of
Texas reversed the trial court's summary judgment and remanded the case to the
trial court. It is estimated that this trial will take place in the second
quarter of 2001. Although the ultimate outcome of this litigation is uncertain,
Harken believes that any liability to Harken as a result of this litigation will
not have a material adverse effect on Harken's financial condition.
420 Energy Investment, Inc. and ERI Investments, Inc. (collectively
"420 Energy") filed a lawsuit against XPLOR Energy, Inc., ("XPLOR") a
wholly-owned subsidiary of Harken, on December 21, 1999 in the New Castle County
Court of Chancery of the State of Delaware. 420 Energy alleges that they are
entitled to appraisal and payment of the fair value of their common stock in
XPLOR as of the date XPLOR merged with Harken. Although the outcome of this
litigation is uncertain, Harken believes that any liability to Harken as a
result of this litigation will not have a material adverse effect on Harken's
financial condition.
On March 8, 2000, Harken was named as a third party defendant in an
action styled State of Texas vs. Amber Refining, Inc., Paradigm Properties
Management, Inc., Amber Terminal, Inc., Texas 150 Business Park, Inc., Edward A.
Shaw, ESCM & Associates, Restructure Petroleum Marketing, Inc., and EZ Serve
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<PAGE> 35
Corporation, Inc.; Case No. 97-05966 pending in the 261st District Court for
Travis County, Texas. This is an action brought by the State of Texas against
the owners of a refinery and refined products terminal facility located in Fort
Worth, Texas. Harken believes that it has no liability in this matter.
During the second quarter of 2000, Harken Costa Rica Holdings, LLC was
notified of a constitutional challenge raised against the Costa Rican
government's awarding of the concession contract to MKJ Xploration, Inc. which
was subsequently assigned to Harken Costa Rica Holdings, LLC. The challenge was
raised by several local environmental groups in Costa Rica alleging that the
Costa Rican government had violated the rights of the citizens of Costa Rica
under the Costa Rica constitution. Specifically, the plaintiffs allege that the
governmental agency that awarded the concession didn't give sufficient prior
notice to the community and ask that the concession be declared null and void.
Harken Costa Rica Holdings, LLC is not a party to the litigation. Management
believes that the plaintiffs' claims are groundless; no assurances can be made,
however, as to the outcome of the litigation or that the litigation will not
have a material adverse effect on the Company's business.
On August 3, 2000, Harken was served with a lawsuit initiated by Melvyn
I. Weiss styled Melvyn I. Weiss vs. Harken Energy Corporation, C.A. No. 18182NC,
pending in the Court of Chancery of the State of Delaware in and for New Castle
County. In this lawsuit, the plaintiff, Melvyn I. Weiss, a stockholder of
Harken, seeks to inspect Harken's corporate records as they relate to actions
taken with respect to the EnCap Development Finance Agreement. Management
believes that any liability to Harken as a result of this litigation will not
have a material adverse affect on Harken's financial condition; no assurances
can be made, however, that the litigation will not have a material adverse
effect.
Harken and its subsidiaries currently are involved in various other
lawsuits and other contingencies, which in management's opinion, will not have a
material adverse effect on Harken's financial position.
Item 4. Submission of Matters to a Vote of Security Holders
The Company's annual meeting was held on June 13, 3000, at which three
Class A directors were elected. The nominees for director were Messrs. Mikel D.
Faulkner, Bruce N. Huff and Gary R. Petersen. Mr. Faulkner received 132,566,757
votes for and 5,523,629 votes against or withheld. Mr. Huff received 132,566,757
votes for and 5,523,629 votes against or withheld. Mr. Petersen received
132,566,757 votes for and 5,523,629 votes against or withheld.
Item 6. Exhibits and Reports on Form 8-K.
9a) EXHIBIT INDEX
Exhibit
3.1 Certificate of Incorporation of Harken Energy
Corporation as amended (filed as Exhibit 3.1 to
Harken's Annual Report on Form 10-K for fiscal year
ended December 31, 1989, File No. 0-9207, and
incorporated by reference herein).
3.2 Amendment to the Certificate of Incorporation of
Harken Energy Corporation (filed as Exhibit 28.8 to
the Registration Statement on Form S-1 of Tejas Power
Corporation, file No. 33-37141, and incorporated by
reference herein.)
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<PAGE> 36
3.3 Amendment to the Certificate of Incorporation of
Harken Energy Corporation (filed as Exhibit 3 to
Harken's Quarterly Report on Form 10-Q for fiscal
quarter ended March 31, 1991, File No. 0-9207, and
incorporated by reference herein.)
3.4 Amendments to the Certificate of Incorporation of
Harken Energy Corporation (filed as Exhibit 3 to
Harken's Quarterly Report on Form 10-Q for fiscal
quarter ended June 30,1991, File No. 0-9207, and
incorporated by reference herein.)
3.5 Amendments to the Certificate of Incorporation of
Harken Energy Corporation (filed as Exhibit 3.5 to
Harken's Annual Report on Form 10-K for the fiscal
year ended December 31, 1996, File No. 0-9207, and
incorporated herein by reference).
3.6 Amendment to the Certificate of Incorporation of
Harken Energy Corporation (filed as Exhibit 3.6 to
Harken's Annual Report on Form 10-K for the fiscal
year ended December 31, 1997, File No. 0-9207 and
incorporated by reference herein).
3.7 Amendment to the Certificate of Incorporation of
Harken Energy Corporation (filed as Exhibit 3.6 to
Harken's Quarterly Report on Form 10-K for the fiscal
quarter ended June 30, 1999, File No. 0-9207, and
incorporated by reference herein).
3.8 Bylaws of Harken Energy Corporation, as amended
(filed as Exhibit 3.2 to Harken's Annual Report on
Form 10-K for fiscal year ended December 31, 1989,
File No. 0-9207, and incorporated by reference
herein).
4.1 Form of certificate representing shares of Harken
common stock, par value $.01 per share (filed as
Exhibit 1 to Harken's Registration Statement on Form
8-A, File No. 0-9027, and incorporated by reference
herein.)
4.2 Certificate of Designations, Powers, Preferences and
Rights of Series A Cumulative Convertible Preferred
Stock, $1.00 par value, of Harken Energy Corporation
(filed as Exhibit 4.1 to Harken's Annual Report on
Form 10-K for the fiscal year ended December 31,
1989, File No. 0-9207, and incorporated by reference
herein).
4.3 Certificate of Designations, Powers, Preferences and
Rights of Series B Cumulative Convertible Preferred
Stock, $1.00 par value, of Harken Energy Corporation
(filed as Exhibit 4.2 to Harken's Annual Report on
Form 10-K for the fiscal year ended December 31,
1989, File No. 0-9207, and incorporated by reference
herein.).
4.4 Certificate of the Designations, Powers, Preferences
and Rights of Series C Cumulative Convertible
Preferred Stock, $1.00 par value of Harken Energy
Corporation (filed as Exhibit 4.3 to Harken's Annual
Report on Form 10-K for fiscal year ended December
31, 1989, File No. 0-9207, and incorporated by
reference herein).
4.5 Certificate of the Designations of Series D Preferred
Stock, $1.00 par value of Harken Energy Corporation
(filed as Exhibit 4.3 to Harken's Quarterly Report on
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Form 10-Q for the fiscal quarter ended September
30, 1995, File No. 0-9207, and incorporated by
reference herein).
4.6 Rights Agreement, dated as of April 6, 1999, by and
between Harken Energy Corporation And ChaseMellon
Shareholder Services L.L.C., as Rights Agent (filed
as Exhibit 4 to Harken's Current Report on Form 8-K
dated April 7, 1999, File No. 0-9207, and
incorporated by reference herein).
4.7 Certificate of Designations of Series E Junior
Participating Preferred Stock (filed as Exhibit B to
Exhibit 4 to Harken's Current Report on Form 8-K
dated April 7, 1999, file No. 0-9207, and
incorporated by reference herein).
4.8 Certificate of Designations, Preferences and Rights
of Series F Convertible Preferred Stock (filed as
Exhibit 4.8 to Harken's Quarterly Report on Form 10-Q
for the period ended March 31, 1999, File No. 0-9207,
and incorporated by reference herein).
*23 Consent of Gaffney, Cline & Associates, Inc.
*27 Financial Data Schedules.
(b) REPORTS ON FORM 8-K
None filed.
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HARKEN ENERGY CORPORATION
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
Harken Energy Corporation
------------------------------------
(Registrant)
Date: August 14, 2000 By: /s/ Anna M. Williams
-------------------- ---------------------
Senior Vice President
and Chief Financial Officer
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INDEX TO EXHIBITS
<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION
------- -----------
<S> <C>
23 Consent of Gaffney, Cline & Associates, Inc.
27 Financial Data Schedule
</TABLE>
