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SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K/A
(Amendment No. 1)
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the fiscal year ended December 31, 2001
[_] 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 1-10262
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.)
580 WestLake Park Blvd., Suite 600 77079
Houston, Texas (Zip Code)
(Address of principal executive offices)
Registrant's telephone number, including area code (281) 504-4000
Securities registered pursuant to Section 12(b) of the Act:
Name of each exchange
Title of each class: on which registered:
Common Stock, Par Value $0.01 Per Share American Stock Exchange
Securities registered pursuant to Section 12(g) of the Act: None
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. Yes [X] No___
Indicate by check mark if disclosure of delinquent filers pursuant to Item
405 of Regulation S-K is not contained herein, and will not be contained, to the
best of registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to this
Form 10-K. [X]
Indicate by check mark whether the registrant is an accelerated filer (as
defined in Exchange Act Rule 12b-2). Yes___ No [X].
The aggregate market value of the voting Common Stock, par value $0.01 per
share, held by non affiliates of the Registrant as of March 1, 2002 was
approximately $16,647,000. For purposes of the determination of the above stated
amount only, all directors, executive officers and 5% or more shareholders of
the Registrant are presumed to be affiliates.
The number of shares of Common Stock, par value $0.01 per share,
outstanding as of March 1, 2002 was 18,782,559.
DOCUMENTS INCORPORATED BY REFERENCE: NONE.
EXPLANATORY NOTE
Harken Energy Corporation filed its original Annual Report on Form 10-K for
the year ended December 31, 2001 with the Securities and Exchange Commission
("SEC") on March 29, 2002. This Amendment No. 1 to the Annual Report on Form
10-K/A is being filed solely for the purpose of responding to comments of the
SEC. In order to preserve the nature and character of the disclosures as of
March 29, 2002, except as specifically discussed in this Amendment No. 1 to the
Annual Report on Form 10-K/A, no attempt has been made in this amendment to
modify or update such disclosures for events which occurred subsequent to the
original filing on March 29, 2002. Accordingly, this Amendment No. 1 to the
Annual Report on Form 10-K/A should be read in conjunction with the Company's
subsequent filings with the SEC.
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TABLE OF CONTENTS
Page
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PART I.
ITEM 1. Business .................................................... 4
ITEM 2. Properties .................................................. 28
ITEM 3. Legal Proceedings ........................................... 28
ITEM 4. Submission of Matters to a Vote of Security Holders ......... 30
PART II.
ITEM 5. Market for Registrant's Common Equity and Related
Stockholder Matters ......................................... 31
ITEM 6. Selected Financial Data ..................................... 32
ITEM 7. Management's Discussion and Analysis of Financial
Condition and Results of Operations ......................... 33
ITEM 7A. Quantitative and Qualitative Disclosures about Market Risk .. 49
ITEM 8. Financial Statements and Supplementary Data ................. 50
ITEM 9. Changes in and Disagreements with Accountants on
Accounting and Financial Disclosure ......................... 98
PART III.
ITEM 10. Directors and Executive Officers of the Registrant .......... 100
ITEM 11. Executive Compensation ...................................... 103
ITEM 12. Security Ownership of Certain Beneficial Owners
and Management .............................................. 106
ITEM 13. Certain Relationships and Related Transactions .............. 109
ITEM 14. Controls and Procedures ..................................... 109
PART IV.
ITEM 15. Exhibits, Financial Statement Schedules and
Reports on Form 8-K ......................................... 110
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PART I
ITEM 1. BUSINESS
Overview
Harken Energy Corporation (together with its wholly-owned or controlled
subsidiaries, "Harken") is engaged in oil and gas exploration, development and
production operations both domestically and internationally through its various
subsidiaries. Harken's domestic operations include oil and gas exploration,
development and production operations in the onshore and offshore Gulf Coast
regions of South Texas and Louisiana, and in portions of West Texas and the
Texas Panhandle region. Harken's international operations during the year ended
December 31, 2001 included four exclusive Association Contracts with the
state-owned oil company in the Republic of Colombia, Technical Evaluation
Agreements signed during the year covering acreage in Peru and Panama and
Harken's Exploration and Production Contract in the Republic of Costa Rica.
Harken was incorporated in 1973 in the state of California and
reincorporated in 1979 in the state of Delaware. Harken's principal offices are
located at 580 WestLake Park Blvd., Suite 600, Houston, Texas 77079, and its
telephone number is (281) 504-4000.
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 consists of Harken's exploration, development,
production and acquisition efforts in the United States. Harken's Middle
American operating segment currently consists of Harken's exploration,
development, production and acquisition efforts in Colombia, Costa Rica, Peru
and Panama as well as potential future operations elsewhere in Central America
and South America. See "Note 13- Other Information" in the Notes to Consolidated
Financial Statements contained in Part II, Item 8 of this Annual Report on Form
10-K for certain financial information about Harken's two operating segments and
certain financial information about the geographical areas of Harken's
operations.
During 2001, Harken's Board of Directors approved a plan to restructure
Harken's operations for the purpose of focusing Harken's resources more directly
on its U.S. acquisition, exploration and development operations, particularly in
the Gulf Coast region of Texas and Louisiana. Pursuant to this restructuring
plan, the Board determined it to be in the shareholders' interest to implement
such a plan to move Harken's interests in its Middle American operations, assets
and obligations under a separate subsidiary which would have the ability and
capability to seek financing and other capital plans on its own. RP&C
International Inc. and Canaccord Capital (Europe) Limited are acting as
financial advisors in connection with the restructuring plan. During 2001,
Harken transferred all of its international operations, assets and obligations
into a new subsidiary, Global Energy Development Ltd. ("Global"), a Delaware
corporation. Global's executive offices are located at 580 WestLake Park Blvd.,
Suite 750, Houston, Texas 77079. In the past, Harken's international efforts
focused principally on Colombian exploration projects. Global's new business
strategy is to identify, develop and promote energy projects from throughout
Latin America to industry and financial partners and to aggregate assets in
Latin America through strategic acquisitions and alliances.
In March 2002, Global transferred all of its interests in its international
assets and operations to, and obligations relating to such assets and operations
were assumed by, a new subsidiary, Global Energy Development PLC ("Global PLC",
a United Kingdom company), in exchange for 92.77% of Global PLC's
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common stock. Upon the completion of this exchange transaction, Global PLC then
completed the listing of its common stock for trading on the AIM Exchange in
London, and placed 7.23% (2,021,902 shares) of such stock in a placement to
investors, of which less than 1% (166,198 shares) of Global PLC was purchased by
certain officers, directors and employees of Harken and Global and a family
member at the offering price. Global PLC is seeking additional financing and
acquisition activities using its shares of its newly listed common stock. At
March 27, 2002, Harken, through Global, owned 92.77% of Global PLC common stock.
Domestic Exploration and Production Operations
During 2000 and 2001, Harken has drilled or participated in the drilling of
38 oil and gas wells domestically, completing 28 of the wells drilled. Harken's
domestic drilling activity increased following the August 1999 acquisition of
XPLOR Energy, Inc. ("XPLOR", a wholly-owned subsidiary) and the December 1999
acquisition of prospects from Benz Energy, whereby Harken acquired a variety of
domestic prospect acreage within its Texas and Louisiana Gulf Coast area of
emphasis. Drilling activity was also spurred by increased oil and gas prices,
which resulted in significant domestic operating cash flows from Harken's
producing property base. Harken capitalized on the higher product prices by
selling certain non-strategic producing properties, most of which were outside
of Harken's Gulf Coast operating focus. Such producing property sales during
2000 and 2001 generated cash proceeds of approximately $18.3 million, which was
used in part to support Harken's exploration and development activities.
During the second half of 2001, oil and gas prices decreased, and prices
have remained lower during the first quarter of 2002 compared to the prior year
period. Accordingly, Harken's domestic operations have shifted from primarily an
exploration and development focus to an acquisition growth strategy, with a
reduced emphasis on exploration. In April 2002, a wholly-owned subsidiary of
Harken acquired certain property interests (the "Republic Properties") from
Republic Resources, Inc., in exchange for 2,645,500 shares of Harken common
stock. The Republic Properties consist of 15 producing property interests
located in southern Louisiana and the Texas Gulf Coast region. Harken is seeking
additional acquisition opportunities to expand its domestic operations. Although
capital expenditure plans for 2002 are decreased compared to the prior two year
period, Harken is continuing to seek joint venture and farmout opportunities to
explore and develop its domestic prospect portfolio. For further discussion of
Harken's recent acquisitions, see Part II, Item 8, Notes to Consolidated
Financial Statements, "Note 2 -- Mergers, Acquisitions and Dispositions."
As of December 31, 2001, Harken operates or owns a non-operating working
interest in 254 oil wells and 88 gas wells in the United States. Harken's
domestic operations are located in the onshore and offshore Gulf Coast regions
of South Texas and Louisiana, portions of West Texas and the Texas Panhandle
region. There were no domestic customers during 1999, 2000 or 2001 which
individually represented 10% or more of Harken's consolidated revenues.
Gulf Coast Operations -- On August 19, 1999, Harken acquired XPLOR whereby
XPLOR became a wholly-owned subsidiary of Harken. At December 31, 2001, through
XPLOR and other wholly-owned subsidiaries, Harken owns operated and non-operated
interests in one oil well and 30 gas wells located in various counties in South
Texas, concentrated in the Raymondville area of Willacy County, the Hostetter
field in McMullen and Live Oak Counties, and the Esperanza field in Wharton
County. Subsequent to December 31, 2001, Harken sold its interest in the
Hostetter field. In Louisiana, through XPLOR, Harken owns operated and
non-operated interests in 35 oil wells and 18 gas wells concentrated primarily
in the Main Pass area offshore Plaquemines Parish, the Lake Raccourci area of
LaFourche Parish and the Abbeville and Leleux fields
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in Vermillion Parish. At December 31, 2001, approximately 59% of Harken's
domestic proved reserves are located in the Gulf Coast region of Louisiana and
Texas.
During 2000 and 2001, Harken drilled or participated in the drilling of
several Gulf Coast area exploratory and development wells. Significant
successful wells drilled in 2000 include the Thomas Cenac #1 well in Terrebonne
Parish, Louisiana, which tested during the first quarter of 2001 at a rate in
excess of ten million gross cubic feet of gas and 400 gross barrels of
condensate per day, and the State Lease 1480 #2 well in the Lake Raccourci area
in LaFourche Parish, Louisiana, which initially produced 350 gross barrels of
oil and approximately 800,000 gross cubic feet of gas per day. Harken owns
approximately a 27.7% and 40.3% working interest, respectively, in the above
wells. Wells drilled in 2001 include the State Lease 14589 #3 and the State
Lease 1480 #3, both in the Lake Raccourci area. The State Lease 14589 #3, which
was completed in September 2001, had initial gross production of 2.4 million
cubic feet equivalent per day and is currently producing 3.0 million gross cubic
feet equivalent per day. The State Lease 1480 #3 well was completed in October
2001 and recorded initial production in excess of 3.6 million cubic feet
equivalent per day and is currently producing 4.5 million gross cubic feet
equivalent per day. Harken holds a 39.59% and 44% working interest,
respectively, in these two wells.
West Texas Operations -- Harken operates or owns non-operated interests in
157 oil wells and 40 gas wells in Hutchinson and Gray Counties and 61 oil wells
in Hockley County, all located in the Panhandle area of Texas. At December 31,
2001, approximately 41% of Harken's domestic proved reserves are located in west
Texas.
Prospect Acreage -- In addition to the producing property interests
discussed above, Harken, through certain wholly-owned subsidiaries, owns
interests in a variety of domestic prospect acreage. Through XPLOR, Harken owns
acreage interests in the Lake Raccourci and Lapeyrouse fields of LaFourche and
Terrebonne Parishes, respectively, in Louisiana. As part of the December 1999
prospect purchase from Benz Energy, Inc., Harken Gulf Exploration owns prospect
acreage interests in the Old Ocean field in Matagorda and Brazoria Counties of
Texas, the Rayburn field in Liberty County, Texas and certain salt dome
prospects in various counties in Mississippi. Harken successfully drilled
exploratory wells in the Lake Raccourci, Lapeyrouse and Old Ocean fields during
2000 and 2001.
Middle American Exploration and Development Operations - Colombia
At December 31, 2001, Harken, through Harken de Colombia, Ltd., a
wholly-owned subsidiary of Global, held four exclusive Association Contracts
with Empresa Colombiana de Petroleos ("Ecopetrol"), the state-owned Colombian
oil company. Global has proved reserves attributable to two of its four
Association Contracts, the Alcaravan and Bolivar Contracts. In the Alcaravan
Contract, Global has proved reserves in the Palo Blanco field, and in the
Bolivar Contract, Global has proved reserves in the Buturama field. Ecopetrol,
which purchases all of Global's crude oil production, individually accounted for
24% and 26% of Harken's consolidated revenues in 2000 and 2001, respectively.
Harken and Global have responded to recent increased security concerns in
Colombia by implementing a number of operating changes including replacing its
field operating employees with outsource personnel. Global's operating plans in
Colombia are continuing, subject to the ongoing monitoring of security
developments. For further discussion of Global's security concerns in Colombia,
see "Cautionary Statements" section of this Part I, Item 1.
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Alcaravan Contract -- The Alcaravan Association Contract (the "Alcaravan
Contract") gives Global the exclusive right to explore for, develop and produce
oil and gas throughout approximately 24,000 acres in the Alcaravan area of
Colombia, which is located in Colombia's Llanos Basin approximately 140 miles
east of Santafe de Bogota. Global has completed the six year seismic and
exploratory drilling program of the Alcaravan Contract (the "Exploration
Period").
In October 2001, Global received notification from Ecopetrol that Global
could proceed with the sole risk development of the Palo Blanco field of the
Alcaravan Association Contract. As such, the term of the Alcaravan Contract
related to the productive areas has been extended for a period of 22 years from
the date of such election by Ecopetrol, (the "Exploitation Period"), subject to
the entire term of the Alcaravan Contract being limited to no more than 28
years. Due to Ecopetrol's election not to participate, Global elected to proceed
with the development of the Palo Blanco field on a sole risk basis, whereby
Global is entitled to receive Ecopetrol's 50% share of production after
deduction for Ecopetrol's 20% royalty interest, until Global has recovered 200%
of its successful well costs expended, after which time Ecopetrol could elect to
begin to receive its share of production. Accordingly, Global reflects its 80%
interest in gross production and cash flows in its financial statements and
reserve information.
The Alcaravan Contract provides that two years following the end of the
Exploration Period, the Alcaravan Contract area will be further reduced to 25%
of the original area. Global has retained the acreage covering those structure
areas associated with the Palo Blanco and Anteojos discoveries. Two years
thereafter, the Alcaravan Contract area will be reduced to the area of the field
that is in production or development, plus a reserve zone of five kilometers in
width around the productive boundary of such field. The producing field plus the
zone surrounding such field will become the area of exploitation. Global has and
will continue to designate any acreage to be released subject to acceptance by
Ecopetrol.
Alcaravan Contract Operations -- Global has drilled five wells on the
Alcaravan acreage, two of which are currently producing. In February 1997,
Global drilled the Estero #1 well located on the Palo Blanco prospect. The
Estero #1 well was drilled to a depth of 8,608 feet to test the Carbonera,
Mirador, Guadalupe, Gacheta and Ubaque formations and was found to be
productive. In January 2001, Global drilled the Estero #2 well on the Palo
Blanco field to test the Ubaque formation. The Estero #2 well was subsequently
completed and initial production sales began in April 2001. Daily production
from the Estero #1 and Estero #2 wells from the Palo Blanco field have averaged
a total of approximately 1,900 gross barrels per day during the first quarter of
2002.
At December 31, 2001, Global reflects proved reserves of approximately 2.9
million net barrels related to its interest in the Palo Blanco field. During
2001, Global produced a total of approximately 590,000 gross barrels of oil from
its Palo Blanco field, and since inception and through December 31, 2001, Global
has produced a cumulative total of approximately 1,047,000 gross barrels of oil
from its Palo Blanco field. The next development well to be drilled in the Palo
Blanco field is scheduled for late 2003 or early 2004 for an estimated cost of
completion of less than $2.5 million. Such costs are expected to be funded out
of a cash on hand and cash from operations. If sufficient funds are not
available, Harken intends to seek additional financing and there can be no
assurance that Harken will be able to obtain financing on acceptable terms.
In April 1999, Global commenced pipeline transportation of production
from the Alcaravan Contract Area through its constructed flowline connecting the
Palo Blanco field to an existing crude oil pipeline system adjacent to the
field. During early portions of the Estero #1 production tests, Global produced
at rates in excess of 3,000 gross barrels of oil per day from the Estero #1
well, although sustained production during 2000 and the first quarter of 2001
was limited to approximately 1,000 gross barrels of oil per day due to pipeline
7
constraints and pumping capacity. Beginning in April 2001, such pipeline
constraints were partially alleviated. In addition, during the second quarter of
2001, Global purchased the 45 kilometer Guarimena to Santiago crude oil pipeline
and negotiated a new transportation agreement with the owner/operator of the
pipeline that transports crude oil from Santiago north to market points. As a
result of the above steps, though Global's Palo Blanco production levels are
currently less than transport capacity, Global is now allowed to transport up to
3,000 gross barrels of oil per day combined from both Estero #1 and Estero #2
wells.
Bocachico Contract -- Under the Bocachico Association Contract (the
"Bocachico Contract"), Global acquired the exclusive rights to conduct
exploration and production activities and drilling on this area, which covers
approximately 54,700 acres in the Middle Magdalena Valley of Central Colombia.
Global has fulfilled all of the work requirements for the first four years of
the Bocachico Contract. Global is currently negotiating with Ecopetrol to amend
the Bocachico Contract whereby the remaining work requirements for the fifth and
sixth year will be transferred to Global's newly signed Cajaro Association
Contract, which is discussed below. With the execution of the amendment, Global
will complete the Exploration Period related to the Bocachico Contract. The
production sharing, term and acreage relinquishment arrangements under the
Bocachico Contract are substantially similar to those under the Alcaravan
Contract.
Bocachico Contract Operations -- From 1996 to 1998, Global drilled and
completed three wells on the Bocachico Contract area, all in the Rio Negro
prospect. Global initiated sales of production from both the Torcaz #2 and
Torcaz #3 wells to a local purchaser at the wellsites and for most of 1998 these
wells produced in excess of 100 gross barrels of oil per day. Global has not
sustained production consistently from the Torcaz wells subsequent to 1998 and
is currently studying the wells in order to determine the optimum production
method with which to economically produce the heavy crude encountered in such
wells. Global currently reflects no proved reserves associated with this Rio
Negro field in the Bocachico Contract. There are no capital expenditures
scheduled for the Rio Negro field in 2002 and 2003.
In December 1999, Global submitted an application to Ecopetrol for their
participation in the Rio Negro field. Global is to submit an updated application
to Ecopetrol in May 2002. Global's net revenue interest in production from the
Bocachico Contract will depend upon whether or not Ecopetrol elects to
participate. If Ecopetrol does not elect to participate, Global would then have
the choice to proceed with the development of the prospect area on a sole-risk
basis. If Global does proceed on a sole-risk basis, it will be entitled to
receive Ecopetrol's 50% share of production, after deduction for Ecopetrol's 20%
royalty interest, until Global has recovered 200% of its successful well costs
expended, after which time Ecopetrol could elect to receive its share of
production. Should Ecopetrol elect to participate in the development of the
Bocachico Contract, Global would receive 40% of the gross revenues from
production from the Bocachico Contract area and to the extent that a field
produces in excess of 60 million barrels, Global's net revenue interest would
decrease. Should Ecopetrol elect to participate or Global elect to proceed on a
sole risk basis, the term of the Bocachico Contract related to the productive
areas will be extended for a period of 22 years from the date of such election,
subject to the entire term of the Bocachico contract being limited to no more
than 28 years.
Bolivar Contract -- Under the Bolivar Association Contract, (the "Bolivar
Contract"), Global acquired the exclusive rights to conduct exploration and
production activities in the Bolivar Contract area, which covers approximately
250,000 acres in the Northern Middle Magdalena Valley of Central Colombia.
In February 2001, Global received notification from Ecopetrol that it had
elected not to participate in the development of the Buturama field of the
Bolivar Association Contract. Due to Ecopetrol's election not to participate,
Global has elected to proceed with the development of the field on a sole risk
basis, whereby Global is entitled to receive Ecopetrol's 50% share of
production, after deduction of Ecopetrol's 20% royalty
8
interest, until Global has recovered 200% of its successful well costs expended,
after which time Ecopetrol could elect to begin to receive its share of
production. Accordingly, Global reflects its 80% interest in gross production
and cash flows in its financial statements and reserve information. In addition,
the term of the Bolivar Contract related to the productive areas has been
extended for a period of 22 years from the date of such election by Ecopetrol
(the "Exploitation Period"), subject to the entire term of the Bolivar Contract
being limited to no more than 28 years.
Global has completed all of the work obligations for the first five years
of the Bolivar Contract. Global is currently negotiating with Ecopetrol whereby
Global would relinquish 50% of the Bolivar Contract area acreage in exchange for
a release from the sixth year Bolivar Contract work obligations. The release of
such acreage would not affect Global's proved reserves on the Bolivar Contract
area. The production sharing, term and acreage relinquishment arrangements under
the Bolivar Contract are substantially similar to the Alcaravan and Bocachico
Contracts.
Bolivar Contract Operations -- Global has drilled four wells on the Bolivar
Contract area, two of which are currently productive. In November 1997, Global
spudded its first well on the Bolivar Contract acreage, the Catalina #1, which
was drilled as a horizontal well to test the Rosa Blanca formation of the
Buturama field and was found to be productive. In March 1998, Global spudded the
Olivo #1, which was drilled from the same surface location as the Catalina #1
using underbalanced horizontal drilling and was also found to be productive. Two
additional wells, the Laurel #1, drilled in 1999, and the Olivo #2, drilled in
early 2001, were unproductive.
At December 31, 2001, Global reflects proved reserves (primarily proved
undeveloped) of approximately 2.1 million net barrels related to its interest in
the Buturama field. During 2001, the Catalina # 1 and Olivo #1 produced a total
of 69,000 gross barrels of oil and, since inception, Global has produced
cumulative production of approximately 1,014,000 gross barrels of oil from these
wells. During the last part of 2001 and first quarter of 2002, the Catalina #1
and Olivo #1 wells have experienced mechanical problems, with workovers
completed in early 2002 at a total approximate cost of $225,000 which was funded
out of a combination of cash on hand and cash from operations. For further
discussion of Harken's security concerns in Colombia, see "Cautionary
Statements" section below. Given the lower level of production expected from the
producing wells within the Buturama field, Global has retired and seeks to sell
certain of its Buturama field facilities. See Part II, Item 8, Notes to
Consolidated Financial Statements, "Note 1 - Summary of Significant Accounting
Policies - Provision for Asset Impairments" for additional information regarding
these proposed sales. Global expects to continue to transport 100% of current
and projected Bolivar area production through its current trucking operations.
Cajaro Contract -- In December 2001, Global signed an Association Contract
(the "Cajaro Contact") with Ecopetrol, covering the Cajaro Contract area. Under
the Cajaro Contract, which became effective in February 2002, Global acquired
the exclusive rights to conduct exploration and production activities in the
Cajaro Contract area, which covers approximately 83,000 acres in Colombia's
Llanos Basin adjacent to Global's Alcaravan Contract area. The signing of the
Cajaro Contract was pursuant to Global's exercise of contract option rights
contained as part of the El Retorno Technical Evaluation Agreement, which Global
had previously signed in May 2001, following the completion of certain seismic
reprocessing procedures. Global is not required under the Cajaro Contract to
drill any wells in the Cajaro Contract area until February 2003, and Global
currently plans to drill this well during 2003 at an estimated cost of
completion of $2.5 million. Such costs are expected to be funded out of a cash
on hand and cash from operations. If sufficient funds are not available, Harken
intends to seek additional financing and there can be no assurance that Harken
will be able to
9
obtain financing on acceptable terms. See "Management's Discussion and
Analysis -- Liquidity and Capital Resources" for further discussion of Harken's
ability to satisfy its capital obligations during 2003.
Under the terms of the Cajaro Contract, if during the three year minimum
Exploration Period, Global 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 the Cajaro Contract will be
extended for a period of 22 years from the date of such discovery. Global's net
revenue interest in any production that may be discovered on the Cajaro Contract
will depend on whether or not Ecopetrol elects to participate. Upon the election
by Ecopetrol to participate in a field and upon commencement of production from
the field, Global will begin to be reimbursed by Ecopetrol out of Ecopetrol's
share of production, net of royalties, for 50% of all seismic costs and direct
exploratory well costs (including costs related to dry holes) incurred prior to
the point of Ecopetrol's participation. Reimbursement by Ecopetrol to Global may
either be in cash, or through allowing its share of production to apply to
Global's cost recovery. Production from a field in which Ecopetrol elects to
participate will be allocated as follows: Ecopetrol, on behalf of the Colombian
government, will receive a royalty interest ranging from 5% to 25% (based on
levels of average monthly production) of all production, and all production
(after royalty payments) will be allocated 50% to Ecopetrol and 50% to Global.
Ecopetrol and Global will be responsible for all future development costs and
operating expenses in direct proportion to their interest in production.
Similar to Global's other Association Contracts with Ecopetrol, for any
Cajaro Contract field in which Ecopetrol elects not to participate, Global could
elect to proceed with the development of the field on a sole risk basis, whereby
Global would be entitled to receive Ecopetrol's 50% share of production, after
deduction of Ecopetrol's royalty interest, until Global has recovered 200% of
its successful well costs expended, after which time Ecopetrol could elect to
begin to receive its share of production. The acreage relinquishment
arrangements under the Cajaro Contract are substantially similar to those under
Global's other Association Contracts with Ecopetrol.
Middle American Exploration and Development Operations - Costa Rica
Under the terms of an Exploration and Production Concession contract with
the Republic of Costa Rica (the "Costa Rica Contract"), Global, through an
investment in its subsidiary Harken Costa Rica Holdings ("HCRH," a Nevada
limited liability company) owns an interest in approximately 1.4 million acres
in the North and South Limon Back Arc Basin onshore and offshore Costa Rica.
Global's participation in Costa Rica is structured whereby a wholly-owned
subsidiary owns a percentage share of the stock of HCRH, with an affiliate of
MKJ Xploration, Inc. ("MKJ") owning the remaining stock of HCRH. Through June
30, 2001, Global owned 80% of the stock of HCRH. In July 2001, Global elected
not to pay the $4 million of additional funds to be transferred to HCRH, which,
in accordance with the contract between Global and MKJ, resulted in Global's
ownership in HCRH being reduced to 40% (with MKJ's ownership being increased to
60%) and MKJ consequently assumed the operations of HCRH and the Costa Rica
Contract.
Costa Rica Operations -- In November 1999, HCRH commenced its offshore
seismic acquisition program in Costa Rica to collect approximately 100 square
kilometers of 3-D seismic information. The seismic data confirmed the viability
of the Moin prospect in both the Tertiary and Cretaceous target horizons. In
July 2000, HCRH filed its environmental impact study requesting an environmental
permit related to the planned
10
drilling operation with the Costa Rican environmental agency SETENA. In March
2002, SETENA denied its approval of the requested environmental permit. HCRH has
filed an appeal related to this ruling by SETENA.
In January 2002, the Costa Rica Constitutional Court rendered a published
opinion in a suit that had been filed against another oil and gas operator and
the Costa Rican ministry of Environment and Energy ("MINAE") by certain
environmental groups. In its opinion, in this case, the Constitutional Court of
Costa Rica found, among other issues, that SETENA did not have the current
authority to grant environmental permits. In addition, proposed legislation
pending in the Costa Rica legislature seeks to abolish the Costa Rica
government's rights to grant hydrocarbon exploration contracts. Due to the Costa
Rica Constitutional Court decision discussed above, even though it did not
directly involve HCRH or the Moin #2 well, as well as the pending legislation
described above, Harken and Global believe that HCRH's appeal to SETENA for
reconsideration of its denial of the requested permit, or any similar recourse,
will be unsuccessful. Further, recent political developments in Costa Rica, in
the opinion of Harken and Global, severely limit the opportunity for future oil
and gas exploration in Costa Rica. These significant adverse developments have
resulted in Harken fully impairing its approximately $8.8 million investment in
the Costa Rica project in its Consolidated Balance Sheet as of December 31,
2001. See "Cautionary Statements" below.
Middle American Operations - Peru
In April 2001, Global, through a wholly-owned subsidiary, signed a
Technical Evaluation Agreement ("Peru TEA") with PeruPetro, the national oil
company of Peru. The Peru TEA covers an area of approximately 6.8 million gross
acres in northeastern Peru. Under the terms of the Peru TEA, Global has the
option to convert the Peru TEA to a seven year exploration contract, with a
twenty-two year production period. Terms of the Peru TEA allow Global to conduct
a study of the area that will include the reprocessing of seismic data and
evaluation of previous well data.
Middle American Operations - Panama
In September 2001, Global, through a wholly-owned subsidiary, signed a
Technical Evaluation Agreement ("Panama TEA") with the Ministry of Commerce and
Industry for the Republic of Panama. The Panama TEA covers an area of
approximately 2.7 million gross acres divided into three blocks in and offshore
Panama. Under the terms of the Panama TEA, which extends for a period of 24
months, Global is to perform certain work program procedures and studies to be
submitted to the Panamanian government with an option to negotiate and enter
into one or more Contracts for the Exploration and Exploitation of Hydrocarbons
with the Ministry of Commerce and Industry.
Other Middle American Operations
Global is committed to broadening its exploration efforts internationally,
in addition to its existing operations in Colombia, Costa Rica, Peru and Panama.
With most of the major discoveries of oil and gas expected to be in remote,
politically difficult or underexplored areas around the world, Global's
operational experience in those areas may enable Global to expand its
exploration efforts elsewhere in Latin America. Global's business strategy is to
identify, develop and promote energy projects from throughout Latin America to
industry and financial partners and to aggregate assets in Latin America through
strategic acquisitions and alliances.
11
Cautionary Statements
Certain statements contained in this Annual Report, including statements of
Harken management's current expectations, intentions, plans and beliefs, are
"forward-looking statements", as defined in Section 21D of the Securities
Exchange Act of 1934 and the Private Securities Litigation Reform Act of 1995:
. statements before, after or including the words "may," "will," "could,"
"should," "believe," "expect," "future," "potential," "anticipate,"
"intend," "plan," "estimate," or "continue" or the negative or other
variations of these words; and
. other statements about matters that are not historical facts.
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. Additional cautionary statements include, among others, the
following:
Risks associated with our financial condition:
There is no assurance that we will obtain sufficient funds prior to our
outstanding debts' maturity dates. If we cannot obtain necessary stockholder
approval in connection with the issuance of shares of common stock to redeem
certain debt, we could be subject to potential delisting of our common stock
from the American Stock Exchange.
On March 27, 2002, our principal outstanding debt maturing next year
consists of approximately $41.0 million principal amount of our 5% Senior
Convertible Notes due 2003 (the "5% European Notes") and $10.875 million
principal amount of our 5% Convertible Notes due 2003 (the "Benz Convertible
Notes") and approximately $7.9 million principal amount under our bank credit
facility. We do not currently have available sufficient funds to pay such debt
obligations in cash upon maturity and there is no assurance we will obtain such
funds prior to maturity. To the extent we are unable to pay the notes in cash
upon maturity, we will have to (i) repurchase these notes from their holders for
our securities (such as common stock or other convertible debt) and/or other
property, or (ii) redeem these notes by issuing common stock on or before
maturity.
If we elect to redeem any outstanding convertible notes for common stock,
such an issuance could be greater than 20% of our currently outstanding shares
of common stock depending upon the amount of notes to be redeemed and the
average market price of our common stock at the time of the redemption.
Consequently, the rules of the American Stock Exchange, on which we are listed,
require stockholder approval as a condition to listing such additional shares on
that exchange. We cannot assure you that we would receive the required
stockholder approval to redeem the entire amount of our outstanding notes. If we
do not obtain required stockholder approvals and we are unable to pay cash at
maturity, we could be subject to potential delisting of our common stock from
American Stock Exchange. See also "-- Risks relating the our financial
condition -- If we do not continue to meet the listing requirements of the
American Stock Exchange, our common stock could be delisted."
Even if stockholder approval is obtained for the issuance of shares, the
redemption of any notes may result in an issuance of shares that is in excess of
the amount of shares currently authorized for issuance and we
12
would have to obtain additional stockholder approval to increase our authorized
common stock before completing the redemption. Absent such stockholder approval,
we would have to otherwise restructure the notes or pay cash at maturity -
neither of which we may be able to accomplish.
If we do not continue to meet the listing requirements of the American Stock
Exchange, our common stock could be delisted
The American Stock Exchange requires companies to fulfill certain
requirements in order for their shares to continue to be listed. The securities
of a company may be considered for delisting if the company fails to meet
certain financial thresholds, including if the Company has stockholders' equity
of less than $6 million and has sustained losses from continuing operations
and/or net losses in its five most recent fiscal years. As of December 31, 2001,
our stockholders' equity was $16.2 million and, as discussed below, we have
sustained losses in each of the last five fiscal years. There can be no
assurance that our stockholders' equity will not be reduced further or that we
will not report additional losses in the future. If these aspects of our
financial condition do not improve, our common stock (including shares of common
stock issued in the rights offering) may be considered for delisting.
If our common stock is delisted from the American Stock Exchange for any
reason and we are deemed not to have used our "best efforts" to maintain such
listing, we will be in default under our 5% European Notes and, as a result of
cross-default provisions, our other debt obligations. Any default under our debt
agreements will result in a majority of our debt obligations becoming due in
full. We do not currently have available sufficient funds to pay our debt
obligations in cash and there is no assurance we will obtain such funds if such
debt became due.
We have a history of losses and may suffer losses in the future.
We have reported losses in each of the last five fiscal years, including a
net loss of $41,023,000 for the year ended December 31, 2001 that was primarily
caused by the writedown of our oil and gas properties and the impairment of our
investment in Costa Rica. We have reported cumulative net losses of
approximately $263 million over the last five years. Our ability to generate net
income is strongly affected by, among other factors, our ability to successfully
drill our undeveloped reserves as well as the market price of crude oil and
natural gas. During the fourth quarter of 2000, we recorded a writedown of our
oil and gas properties of approximately $156 million primarily due to a
significant reduction in our proved undeveloped reserves in Colombia following
the drilling of a non-productive well. If we are unsuccessful in drilling
productive wells in the future or the market price of crude oil and natural gas
declines, we may report additional losses in the future.
Our financial condition may suffer if estimates of our oil and gas reserve
information are adjusted, and fluctuations in oil and gas prices and other
factors affect our oil and gas reserves.
Our oil and gas reserve information is based upon criteria mandated by the
SEC and reflects only estimates of the accumulation of oil and gas and the
economic recoverability of those volumes. Our future production, revenues and
expenditures with respect to such oil and gas reserves will likely be different
from estimates, and any material differences may negatively affect our business,
financial condition and results of operations.
Petroleum engineering is a subjective process of estimating underground
accumulations of oil and gas that cannot be measured in an exact manner.
Estimates of economically recoverable oil and gas reserves and of
13
future net cash flows necessarily depend upon a number of variable factors and
assumptions.
Because all reserve estimates are to some degree subjective, each of the
following items may prove to differ materially from those assumed in estimating
reserves:
. the quantities of oil and gas that are ultimately recovered,
. the production and operating costs incurred,
. the amount and timing of future development expenditures, and
. future oil and gas sales prices.
Furthermore, different reserve engineers may make different estimates of
reserves and cash flow based on the same available data.
The estimated discounted future net cash flows described in this Annual
Report should not be considered as the current market value of the estimated oil
and gas reserves attributable to our properties from proved reserves. Such
estimates are based on prices and costs as of the date of the estimate, in
accordance with SEC requirements, while future prices and costs may be
materially higher or lower. In addition, such reserves do not reflect the impact
of sales of producing properties consummated during 2002.
For example, prices in effect for oil and natural gas at December 31, 2001
were significantly lower than the average prices a year earlier. The SEC
requires that we report our oil and natural gas reserves using the price as of
the last day of the year, and accordingly, the value of our oil and natural gas
reserves as reported in this Annual Report is significantly lower than the prior
year. Using lower values in forecasting reserves will result in a shorter life
being given to producing oil and natural gas properties because such properties,
as their production levels are estimated to decline, will reach an uneconomic
limit, with lower prices, at an earlier date. There can be no assurance that a
decrease in oil and gas prices or other differences in our estimates of our
reserve will not adversely affect our financial condition and results of
operations.
We may require future waivers and amendments to our bank credit facility
covenant requirements.
Our bank credit facility with Bank One, N.A. ("Bank One") requires Harken,
as well as certain of its subsidiaries (the "Borrowers") to maintain certain
financial covenant ratios and requirements, as calculated on a quarterly basis.
For the quarter ended December 31, 2001, Harken and the Borrowers were each not
in compliance with its respective debt service coverage ratio requirement. In
March 2002, Harken and the 19 Borrowers received a letter from Bank One waiving
the Borrowers debt service coverage ratio requirement for the fourth quarter of
2001 and the first quarter of 2002, and waiving Harken's debt service coverage
ratio requirement for the fourth quarter of 2001, deleting the requirement
beginning in the first quarter of 2002 and adding a current ratio requirement
beginning in the first quarter of 2002. Accordingly, we have reflected all of
the unpaid facility balance classified as a long-term obligation in our
Consolidated Financial Statements. If Harken or the Borrowers are not in
compliance with their bank financial covenant ratios or requirements in the
future and are unable to obtain a waiver or amendment to the bank credit
facility requirements, the bank credit facility would be in default and callable
by Bank One. In addition, due to cross-default provisions in Harken's 5%
European Note agreement, a majority of our debt obligations would become due in
full if any debt is in default. The classification of our long-term debt
obligations at December 31, 2001 reflects our expectations that future operating
results will result in Harken and the Borrowers being in compliance with the
bank
14
financial covenant ratios and requirements in future quarters. However,
expectations of future operating results and continued compliance with financial
covenants cannot be assured and our lenders' actions are not controllable by us.
If our projections of future operating results are not achieved and our debt is
placed in default, we could experience a material adverse impact on our
financial position and results of operations.
If estimated discounted future net cash flows decrease, we may be required to
take additional writedowns.
We periodically review the carrying value of our oil and gas properties
under applicable full-cost accounting rules. These rules require a writedown of
the carrying value of oil and gas properties if the carrying value exceeds the
applicable estimated discounted future net cash flows from proved oil and gas
reserves. Given the volatility of oil and gas prices, it is reasonably possible
that the estimated discounted future net cash flows could change in the near
term. If oil and gas prices decline in the future, even if only for a short
period of time, it is possible that additional writedowns of oil and gas
properties could occur. Whether we will be required to take such a charge will
depend on the prices for oil and gas at the end of any quarter and the effect of
reserve additions or revisions, property sales and capital expenditures during
such quarter.
Because of oil and gas prices as of December 31, 2001, the net evaluated
capitalized costs related to our domestic oil and gas properties exceeded the
domestic cost ceiling which resulted in a non-cash writedown of our domestic oil
and gas properties of approximately $14.4 million. Similarly, as of December 31,
2001, the net evaluated capital costs related to our Colombia oil properties
also exceeded the Colombia cost ceiling, resulting in a non-cash writedown of
our oil properties of approximately $4.3 million.
Risks associated with market conditions:
Our stock price is volatile and the value of any investment in our common stock
may fluctuate.
Our stock price has been and is highly volatile, and we believe this
volatility is due to, among other things:
. the results of our drilling,
. current expectations of our future revenue and earnings growth rates,
. commodity prices of oil and natural gas,
. the progress and ultimate success of our capital plan, including our
actions with respect to our 5% European Notes, and
. the volatility of the market in general.
For example, the common stock price has fluctuated from a high of $15 per
share to a low of $0.86 per share over the last three years. This volatility may
affect the market value of our common stock in the future. See Part II, Item 5:
Market for Registrant's Common Equity and Related Stockholder Matters.
15
Future sales of our common stock pursuant to outstanding registration statements
may affect the market price of our common stock.
There are currently several registration statements with respect to our
common stock that are or will become effective, pursuant to which certain of our
stockholders may sell up to an aggregate of 11.5 million shares of common stock.
Any such sale of stock may also decrease the market price of our common stock.
We may issue additional shares of common stock that may dilute the value of our
common stock and adversely affect the market price of our common stock.
We may issue additional shares of common stock in the following scenarios:
.. approximately 1.5 million shares of common stock may be required to be
issued pursuant to our stock options,
.. approximately 9.5 million shares of common stock may be issued
pursuant to other securities exercisable or exchangeable, or
convertible into, shares of common stock, and
.. a significant number of additional shares of common stock may be
issued for financing or other purposes.
A large issuance of shares of common stock in any or all of the above
scenarios will decrease the ownership percentage of current outstanding
stockholders and will likely result in a decrease in the market price of our
common stock. Any large issuance will also likely result in a change in control
of Harken.
If we redeem our existing convertible notes with shares of common stock, you
will suffer a significant dilution of your ownership percentage and the
redemptions will likely result in a change in control of Harken.
Any redemptions of our existing convertible notes involving a large
issuance of shares will result in a substantial dilution of your ownership
percentage of our common stock. The number of new shares to be issued will also
likely result in a change in control of Harken and, depending on the ownership
of the notes, a small group of stockholders could control the election of the
board of directors and the approval of other matters presented for consideration
by the stockholders, which could include amendments to our charter, mergers,
acquisitions and various corporate governance actions. You will incur immediate
and likely substantial net asset dilution.
We have issued shares of preferred stock with greater rights than our common
stock and may issue additional shares of preferred stock in the future.
We are permitted under our charter to issue up to 10 million shares of
preferred stock. We can issue shares of our preferred stock in one or more
series and can set the terms of the preferred stock without seeking any further
approval from our common stockholders. Any preferred stock that we issue may
rank ahead of our common stock in terms of dividend priority or liquidation
premiums and may have greater voting rights than our common stock. As of March
29, 2002, we have outstanding 494,465 shares of Series G1 preferred stock and
95,800 shares of Series G2 preferred stock. These shares of preferred stock have
rights senior to our common stock with respect to dividends and liquidation. In
addition, such preferred stock may be converted into shares of common stock,
which could dilute the value of common stock to current stockholders and could
16
adversely affect the market price of our common stock. Each share of Series G1
preferred stock and Series G2 preferred stock may be converted into shares of
common stock at the conversion price of $12.50 and $3.00 per share of common
stock, respectively, for each $100.00 liquidation value of a share of such
preferred stock plus the amount of any accrued and unpaid dividends.
Our domestic operating strategic plan includes the acquisition of additional
reserves through business combinations.
Our domestic operations have shifted from primarily an exploration and
development focus to an acquisition growth strategy, with a reduced emphasis on
exploration. We are seeking additional acquisition opportunities to expand our
domestic operations and increase our oil and gas reserves in North America. We
may not be able to consummate future acquisitions on favorable terms.
Additionally, any such future transactions may not achieve favorable financial
results.
Future business combinations may also involve the issuance of shares of our
common stock, which could have a dilutive effect on your percentage ownership as
a stockholder. We may not have a sufficient number of authorized shares to issue
in any such business combinations and we may need to obtain stockholder approval
to authorize additional shares for issuance. Further, the use of shares in
business combinations will reduce the number of shares available for the
redemption of existing convertible notes.
In addition, acquisitions may require substantial financial expenditures
that will need to be financed through cash flow from operations or future debt
and equity offerings by us and we may not be able to acquire companies or oil
and gas properties using our equity as currency. In the case of cash
acquisitions, we may not be able to generate sufficient cash flow from
operations or obtain debt or equity financing sufficient to fund future
acquisitions of reserves.
Risks associated with our operations:
Oil and gas price fluctuations in the market may adversely affect the results of
our operations.
The results of our operations are highly dependent upon the prices received
for our oil and natural gas production. Substantially all of our sales of oil
and natural gas are made in the spot market, or pursuant to contracts based on
spot market prices, and not pursuant to long-term, fixed-price contracts.
Accordingly, the prices received for our oil and natural gas production are
dependent upon numerous factors beyond our control. These factors include the
level of consumer product demand, governmental regulations and taxes, the price
and availability of alternative fuels, the level of foreign imports of oil and
natural gas and the overall economic environment. Significant declines in prices
for oil and natural gas could have a material adverse effect on our financial
condition, results of operations and quantities of reserves recoverable on an
economic basis. Any significant decline in prices of oil or gas could have a
material adverse effect on our financial condition and results of operations.
Recently, the price of oil and natural gas has been volatile. For example,
during 2001, the price for a barrel (bbl) of oil ranged from a high of $29.25 to
a low of $14.25 and the price for a thousand cubic feet (Mcf) of gas ranged from
a high of $10.53 to a low of $1.74.
Our operations require significant expenditures of capital that may not be
recovered.
We require significant expenditures of capital in order to locate and
acquire producing properties and to drill exploratory wells. In conducting
exploration and development activities from a particular well, the presence of
unanticipated pressure or irregularities in formations, miscalculations or
accidents may cause our
17
exploration, development and production activities to be unsuccessful,
potentially resulting in abandoning the well. This could result in a total loss
of our investment. In addition, the cost and timing of drilling, completing and
operating wells is difficult to predict.
The oil and gas we produce may not be readily marketable at the time of
production.
Crude oil, natural gas, condensate and other oil and gas products are
generally sold to other oil and gas companies, government agencies and other
industries. The availability of ready markets for oil and gas that we might
discover and the prices obtained for such oil and gas depend on many factors
beyond our control, including:
. the extent of local production and imports of oil and gas,
. the proximity and capacity of pipelines and other transportation
facilities,
. fluctuating demand for oil and gas,
. the marketing of competitive fuels, and
. the effects of governmental regulation of oil and gas production and
sales.
Natural gas associated with oil production is often not marketable due to demand
or transportation limitations and is often flared at the producing well site.
Pipeline facilities do not exist in certain areas of exploration and, therefore,
any actual sales of discovered oil and gas might be delayed for extended periods
until such facilities are constructed.
We may encounter operating hazards that may result in substantial losses.
We are subject to operating hazards normally associated with the
exploration and production of oil and gas, including blowouts, explosions, oil
spills, cratering, pollution, earthquakes, labor disruptions and fires. The
occurrence of any such operating hazards could result in substantial losses to
our Company due to injury or loss of life and damage to or destruction of oil
and gas wells, formations, production facilities or other properties. We
maintain insurance coverage limiting financial loss resulting from certain of
these operating hazards. We do not maintain full insurance coverage for all
matters that may adversely affect our operations, including war, terrorism,
nuclear reactions, government fines, treatment of waste, blowout expenses and
business interruptions. Losses and liabilities arising from uninsured or
underinsured events could reduce our revenues or increase our costs. There can
be no assurance that any insurance will be adequate to cover losses or
liabilities associated with operational hazards. We cannot predict the continued
availability of insurance, or its availability at premium levels that justify
its purchase.
Drilling oil and gas wells particularly in certain regions of the United States
and foreign countries could be hindered by hurricanes, earthquakes and other
weather-related operating risks.
Our operations in the Louisiana wetlands, the onshore regions of Texas and
in Colombia, Costa Rica, Peru and Panama are subject to risks from hurricanes
and other natural disasters. Damage caused by hurricanes, earthquakes or other
operating hazards could result in substantial losses to our Company. We are not
covered by insurance for any business interruption resulting from such events
and, upon the occurrence of a natural disaster, this lack of coverage could have
a material adverse effect on our financial position and results
18
of operations.
We face strong competition from larger oil and gas companies, which could result
in adverse affects on our business.
The exploration and production business is highly competitive. Many of our
competitors have substantially larger financial resources, staffs and
facilities. Our competitors in the United States include numerous major oil and
gas exploration and production companies and in Colombia, Peru and Panama
include such major oil and gas companies as BP Amoco, Exxon/Mobil, Texaco/Shell,
Conoco/Phillips and Arco. These major oil and gas companies are often better
positioned to obtain the rights to exploratory acreage that we compete for.
Our operations are subject to various litigation that could have an adverse
affect on our business.
Presently, various Harken subsidiaries are defendants in various litigation
matters. The nature of Harken and its subsidiaries' operations also expose us to
further possible litigation claims in the future. There is risk that any matter
in litigation could be adversely decided against Harken or its subsidiaries,
regardless of their belief, opinion and position, which could have a material
adverse effect on Harken's financial condition and results of operations.
Litigation is highly costly and the costs associated with defending litigation
could also have a material adverse effect on Harken's financial condition. See
Part I, Item 3, Legal Proceedings.
Compliance with, or breach of, environmental laws can be costly and could limit
our operations.
Our operations are subject to numerous and frequently changing laws and
regulations governing the discharge of materials into the environment or
otherwise relating to environmental protection. We own or lease, and have in the
past owned or leased, properties that have been used for the exploration and
production of oil and gas and these properties and the wastes disposed on these
properties may be subject to the Comprehensive Environmental Response,
Compensation and Liability Act, the Oil Pollution Act of 1990, the Resource
Conservation and Recovery Act, the Federal Water Pollution Control Act and
analogous state laws. Under such laws, we could be required to remove or
remediate previously released wastes or property contamination.
Laws and regulations protecting the environment have generally become more
stringent and, may in some cases, impose "strict liability" for environmental
damage. Strict liability means that we may be held liable for damage without
regard to whether we were negligent or otherwise at fault. Environmental laws
and regulations may expose us to liability for the conduct of or conditions
caused by others or for acts that were in compliance with all applicable laws at
the time they were performed. Failure to comply with these laws and regulations
may result in the imposition of administrative, civil and criminal penalties.
While we believe that our operations are in substantial compliance with
existing requirements of governmental bodies, our ability to conduct continued
operations is subject to satisfying applicable regulatory and permitting
controls. Our current permits and authorizations and ability to get future
permits and authorizations, particularly in foreign countries, may be
susceptible, on a going forward basis, to increased scrutiny, greater complexity
resulting in increased costs, or delays in receiving appropriate authorizations.
In particular, we have experienced and may continue to experience delays in
obtaining permits and authorization in Colombia necessary for our operations. In
addition, recent judicial and political developments in Costa Rica have
significantly and adversely affected our ability to acquire necessary
environmental permits and severely limit the opportunity for future oil and gas
exploration in Costa Rica. These developments have fully impaired
19
our investment through our subsidiary, Global Energy Development PLC, in certain
onshore and offshore properties on the Caribbean side of Costa Rica, as
reflected on our consolidated balance sheet contained in this Annual Report.
We are required to obtain an environmental permit or approval from the
governments in Colombia, Costa Rica, Peru and Panama prior to conducting seismic
operations, drilling a well or constructing a pipeline in such foreign
locations. Our operations in foreign countries have been delayed in the past and
could be delayed in the future through the process of obtaining an environmental
permit. Compliance with these laws and regulations may increase our costs of
operations, as well as further restrict our foreign operations.
Costa Rica has implemented policies and laws with a high level of attention
to the protection of its ecological areas and environment. As a result, the
operations of our indirect subsidiary, Harken Costa Rica Holdings, in Costa Rica
are subject to much greater control, scrutiny and restrictions than are usually
encountered in international exploration operations. Due to such additional
regulations and requirements in Costa Rica, as well as recent rulings by Costa
Rica government agencies, Harken Costa Rica Holdings will likely not be able to
continue operations in Costa Rica for the foreseeable future.
Our foreign operations involve substantial costs and are subject to certain
risks because the oil and gas industries in such countries are less developed.
The oil and gas industries in Colombia, Costa Rica, Peru and Panama are not
as developed as the oil and gas industry in the United States. As a result, our
drilling and development operations in many instances take longer to complete
and often cost more than similar operations in the United States. The
availability of technical expertise, specific equipment and supplies is more
limited in Colombia, Costa Rica, Peru and Panama than in the United States. We
expect that such factors will continue to subject us to economic and operating
risks not experienced in our domestic operations.
We follow the full cost method of accounting for exploration and
development of oil and gas reserves in which all of our acquisition, exploration
and development costs are capitalized. Costs related to the acquisition, holding
and initial exploration of oil and gas associated with our contracts in
countries with no proved reserves are initially capitalized, including internal
costs directly identified with acquisition, exploration and development
activities. If we abandon all exploration efforts in a country where no proved
reserves are assigned, all acquisition and exploration costs associated with the
country are expensed. From time to time, we make assessments as to whether our
investment within a country is impaired and whether exploration activities
within a country will be abandoned based on our analysis of drilling results,
seismic data and other information we believe to be relevant. Due to the
unpredictable nature of exploration drilling activities, the amount and timing
of impairment expenses are difficult to predict.
If we fail to comply with the terms of certain contracts related to our foreign
operations, we could lose our rights under each of those contracts.
The terms of each of the Colombia Association Contracts, the Costa Rica
Contract, the Peruvian Technical Evaluation Agreement and the Panamanian
Technical Evaluation Agreement require that we perform certain activities, such
as seismic interpretations and the drilling of required wells, in accordance
with those contracts and agreements. Our failure to timely perform those
activities as required could result in the loss of our rights under a particular
contract, which would likely result in a significant loss to our Company. As of
March 27, 2002, we were in compliance with the requirements of each of the
Colombia Association Contracts, the Costa Rica Contract, the Peruvian Technical
Evaluation Agreement and the Panamanian
20
Technical Evaluation Agreement. For further details concerning these contracts
and agreements, please see "Liquidity and Capital Resources" contained in Part
II, Item 7, Management's Discussion and Analysis of Financial Condition and
Results of Operations.
We require significant additional financing for our foreign operations, which
financing may not be available.
We anticipate that full development of our existing and future oil and gas
discoveries and prospects in Colombia, Costa Rica, Peru and Panama may take
several years and require significant additional capital expenditures. If we are
unable to timely obtain adequate funds to finance these investments, our ability
to develop oil and gas reserves in these countries may be severely limited or
substantially delayed. Such limitations or delay would likely result in
substantial losses for our Company.
We anticipate that amounts required to fund our foreign activities will be
funded from our existing cash balances, asset sales, stock issuances, production
payments, operating cash flows and from joint venture partners. As the exact
usage of future funding sources is unknown at this time, we cannot assure you
that we will have adequate funds available to finance our foreign operations.
Our foreign operations are subject to political, economic and other
uncertainties.
We currently conduct significant operations in Colombia and Costa Rica, and
may also conduct operations in Peru, Panama and other foreign countries in the
future. At December 31, 2001, approximately 35% of our proved reserves and 26%
of our consolidated revenues were related to Global Energy Development PLC's
Colombian operations. Exploration and production operations in foreign countries
are subject to political, economic and other uncertainties, including:
. the risk of war, revolution, border disputes, expropriation,
renegotiation or modification of existing contracts, import, export
and transportation regulations and tariffs resulting in loss of
revenue, property and equipment,
. taxation policies, including royalty and tax increases and retroactive
tax claims,
. exchange controls, currency fluctuations and other uncertainties
arising out of foreign government sovereignty over international
operations,
. laws and policies of the United States affecting foreign trade,
taxation and investment, and
. the possibility of being subjected to the jurisdiction of foreign
courts in connection with legal disputes and the possible inability to
subject foreign persons to the jurisdiction of courts in the United
States.
Central and South America and certain other regions of the world have a
history of political and economic instability. This instability could result in
new governments or the adoption of new policies, laws or regulations that might
assume a substantially more hostile attitude toward foreign investment. In an
extreme case, such a change could result in termination of contract rights and
expropriation of foreign-owned assets. Any such activity could result in a
significant loss to our Company.
Guerrilla activity in Colombia could disrupt or delay our operations, and we are
concerned about safeguarding our operations and personnel in Colombia.
21
Colombia's 37-year armed conflict between the government and leftist
guerrilla groups has escalated in recent years. The current government's quest
for peace was unsuccessful. The breakdown of peace negotiations has resulted in
increased military action by the Colombian government directed against the rebel
groups operating in Colombia. Unless the parties determine to return to peace
negotiations, the military confrontation with the rebel groups is expected to
continue. Also, the increased activity of right-wing paramilitary groups, formed
in opposition to the left-wing FARC and ELN groups, has contributed to the
escalation in violence. The increase in violence has affected business interests
in Colombia. Targeting such enterprises as symbols of foreign exploitation,
particularly in the North of the country, the rebel groups have attempted to
hamper production of hydrocarbons. The cumulative effect of escalation in the
armed conflict and the resulting unstable political and security situation has
led to increased risks and costs and the downgrading of Colombia's country risk
rating. Our oil and gas operations are in areas outside guerrilla control and
with the exception of its increased security requirements, our operations
continue mostly unaffected, although from time to time, guerilla activity in
Colombia has delayed our projects there. This guerilla activity has increased
over the last few years, causing delays in the development of our fields in
Colombia. Guerilla activity, such as road blockades, has also from time to time
slowed our deployment of workers in the field and affected our operations. In
addition, guerillas could attempt to disrupt the flow of our production through
pipelines. In addition to these security issues, we have also become the subject
of media focus in Colombia that may further compromise our security position in
the country.
We cannot assure you that attempts to reduce or prevent guerilla activity
will be successful or that guerilla activity will not disrupt our operations in
the future. We also cannot assure you that we can maintain the safety of our
operations and personnel in Colombia or that this violence will not affect our
operations in the future. Continued or heightened security concerns in Colombia
could also result in a significant loss to our Company.
The United States government may impose economic or trade sanctions on Colombia
that could result in a significant loss to our Company.
Colombia is among several nations whose progress in stemming the production
and transit of illegal drugs is subject to annual certification by the President
of the United States. Although Colombia was so certified in 2001, there can be
no assurance that, in the future, Colombia will receive certification or a
national interest waiver. The failure to receive certification or a national
interest waiver may result in any of the following:
. all bilateral aid, except anti-narcotics and humanitarian aid, would be
suspended,
. the Export-Import Bank of the United States and the Overseas Private
Investment Corporation would not approve financing for new projects in
Colombia,
. United States representatives at multilateral lending institutions would
be required to vote against all loan requests from Colombia, although such
votes would not constitute vetoes, and
. the President of the United States and Congress would retain the right to
apply future trade sanctions.
Each of these consequences could result in adverse economic consequences in
Colombia and could further heighten the political and economic risks associated
with our operations there. Any changes in the holders of significant government
offices could have adverse consequences on our relationship with the Colombian
22
national oil company and the Colombian government's ability to control guerrilla
activities and could exacerbate the factors relating to our foreign operations
discussed above.
Any sanctions imposed on Colombia by the United States government could
threaten our ability to obtain necessary financing to develop the Colombian
properties or cause Colombia to retaliate against us, including by nationalizing
our Colombian assets. Accordingly, the imposition of the foregoing economic and
trade sanctions on Colombia would likely result in a substantial loss to our
Company and a decrease in the price of our common stock. We cannot assure you
that the United States will not impose sanctions on Colombia in the future or
predict the effect in Colombia that these sanctions might cause.
We may suffer losses from exchange rate fluctuations.
We account for our Colombian, Costa Rican, Peruvian and Panamanian
operations using the U.S. dollar as the functional currency. The costs
associated with our exploration efforts in Colombia, Costa Rica, Peru and Panama
have typically been denominated in U.S. dollars. We expect that a substantial
portion of our future Colombian revenues may be denominated in Colombian pesos.
To the extent that the amount of our revenues denominated in Colombian pesos is
greater than the amount of costs denominated in Colombian pesos, we could suffer
a loss if the value of the Colombian peso were to drop relative to the value of
the U.S. dollar. Any substantial currency fluctuations could have a material
adverse effect on our results of operations and in recent years the value of the
Colombian peso relative to the U.S. dollar has declined.
Risk relating to Arthur Andersen LLP's lack of consent:
Representatives of Arthur Andersen are not available to consent to the inclusion
of their report on the financial statements of Harken in this prospectus, and
you will not be able to recover against Arthur Andersen under Section 11 of the
Securities Act of 1933, as amended.
Arthur Andersen was our independent accountant for our consolidated
financial statements for the two years ended December 31, 2000. Representatives
for Arthur Andersen are not available to provide the consent required for the
incorporation by reference into our registration statements of their report on
those financial statements, and we have dispensed with the requirement to file
their consent in reliance upon Rule 437a of the Securities Act of 1933, as
amended. As a result, you will not be able to recover against Arthur Andersen
under Section 11 of the Securities Act of 1933, as amended, for any false or
misleading statements of a material fact contained in the financial statements
audited by Arthur Andersen or any omissions to state a material fact required to
be stated therein. Any claims against Arthur Andersen related to any such false
or misleading statements and omissions may be limited.
Properties and Locations
Production and Revenues -- See also "Note 14- Oil and Gas Disclosures" in
the Notes to Consolidated Financial Statements contained in Part II, Item 8 of
this Annual Report on Form 10-K for certain information about Harken's proved
oil and gas reserves. A summary of Harken's ownership in its most significant
producing properties is as follows:
23
-----------------------------------------------------------------------------------------
Average Average Revenue
Domestic Working Interest Interest
-----------------------------------------------------------------------------------------
Lake Raccourci 29% 26%
-----------------------------------------------------------------------------------------
Lapeyrouse 28% 19%
-----------------------------------------------------------------------------------------
Raymondville 27% 19%
-----------------------------------------------------------------------------------------
West Texas 95% 76%
-----------------------------------------------------------------------------------------
Alcaravan Contract - Colombia 100% 80%
-----------------------------------------------------------------------------------------
Bolivar Contract - Colombia 100% 80%
-----------------------------------------------------------------------------------------
-----------------------------------------------------------------------------------------
-----------------------------------------------------------------------------------------
The following table shows, for the periods indicated, operating information
attributable to Harken's oil and gas interests:
Domestic
Year Ended December 31,
---------------------------------------------------------------------------------------
1997 1998 1999 2000 2001
------------------ --------------- ----------------- ---------------- ---------------
Production:
Natural Gas (Mcf) 1,922,000 2,063,000 2,847,000 4,012,000 3,844,000
Oil (Bbls) 416,000 433,000 510,000 529,000 273,000
Revenues:
Natural Gas $ 5,331,000 $ 4,373,000 $ 6,879,000 $ 16,178,000 $ 16,643,000
Oil $ 8,029,000 $ 5,508,000 $ 9,188,000 $ 15,422,000 $ 6,708,000
------------------ --------------- ----------------- ---------------- --------------
Total $ 13,360,000 $ 9,881,000 $ 16,067,000 $ 31,600,000 $ 23,351,000
================== =============== ================= ================ ==============
Unit Prices:
Natural Gas (per Mcf) $ 2.77 $ 2.12 $ 2.42 $ 4.03 $ 4.33
Oil (per Bbl) $ 19.30 $ 12.72 $ 18.02 $ 29.15 $ 24.57
Production costs
per equivalent
barrel $ 7.58 $ 7.36 $ 7.84 $ 10.10 $ 10.14
Amortization
per equivalent
barrel $ 6.60 $ 6.03 $ 5.41 $ 6.43 $ 9.10
24
Colombia
Year Ended December 31,
------------------------------------------------------------------------------------------
1997 1998 1999 2000 2001
-------------- ----------------- --------------- ---------------- -------------------
Production:
Oil (Bbls) -- 61,000 248,000 460,000 500,000
Natural Gas (Mcf) -- -- -- -- --
Revenues:
Oil $ -- $ 538,000 $ 3,026,000 $ 10,649,000 $ 8,291,000
Natural Gas $ -- $ -- $ -- $ -- $ --
-------------- ----------------- ---------------- ----------------- --------------------
Total $ -- $ 538,000 $ 3,026,000 $ 10,649,000 $ 8,291,000
============== ================= ================ ================= ====================
Unit Prices:
Oil (per Bbl) $ -- $ 8.82 $ 12.20 $ 23.15 $ 16.58
Natural Gas (per Mcf) $ -- $ -- $ -- $ -- $ --
Production and
transportation costs
per equivalent barrel $ -- $ 4.39 $ 4.90 $ 4.96 $ 5.87
Amortization per
equivalent barrel $ -- $ 1.04 $ 3.52 $ 9.45 $ 8.66
Acreage and Wells -- At December 31, 2001, Harken owned interests in the
following oil and gas wells and acreage. Substantially all of Harken's domestic
oil and gas properties are encumbered under the credit facility with Bank One
Texas, N.A.
Domestic
Gross Wells Net Wells Developed Acreage Undeveloped Acreage
----------------------- ------------------------ ------------------------ ------------------------
State Oil Gas Oil Gas Gross Net Gross Net
------------ ----------- ----------- ----------- ------------ ---------- ----------- -----------
Mississippi - -- -- -- -- -- 17,156 16,493
Texas 219 70 212.17 43.54 39,081 23,848 20,090 4,986
Louisiana 35 18 27.88 4.30 6,958 2,939 16,301 10,303
Wyoming -- -- -- -- -- -- 21,650 13,281
------------ ----------- ----------- ----------- ------------ ---------- ----------- -----------
Total 254 88 240.05 47.84 46,039 26,787 75,197 45,063
============ =========== =========== =========== ============ ========== =========== ===========
25
Colombia
Gross Wells Net Wells Developed Acreage Undeveloped Acreage
--------------------- --------------------- ----------------------- --------------------------
Contract Area Oil Gas Oil Gas Gross Net Gross Net
---------- --------- ---------- ---------- ----------- ----------- ------------ ------------
Alcaravan 2 -- 1.60 -- 2,253 2,253 98,747 49,374
Bocachico 2 -- 1.60 -- 7,835 3,918 46,865 23,432
Bolivar 2 -- 1.60 -- 1,953 1,953 248,047 124,024
Cajaro - -- -- -- -- -- 82,752 41,376
---------- --------- ---------- ---------- ----------- ----------- ------------ ------------
Total 6 -- 4.80 -- 12,041 8,124 476,411 238,206
========== ========= ========== ========== =========== =========== ============ ============
The Cajaro Contract was signed in December 2001, and effective beginning
February 2002.
Costa Rica
Gross Wells Net Wells Developed Acreage Undeveloped Acreage
--------------------- --------------------- --------------------- --------------------------
Oil Gas Oil Gas Gross Net Gross Net
---------- --------- ---------- ---------- ---------- ---------- ----------- -------------
Costa Rica -- -- -- -- -- -- 1,400,000 560,000
Drilling Activity -- A well is considered "drilled" when it is completed. A
productive well is completed when permanent equipment is installed for the
production of oil or gas. A dry hole is completed when it has been plugged as
required and its abandonment is reported to the appropriate government agency.
International activity relates to Harken's Colombian operations. Colombian net
wells drilled information is reflected net of certain development finance and
operating agreements, and does not consider any potential future participation
by Ecopetrol. The following tables summarize certain information concerning
Harken's drilling activity:
Domestic
Number of Gross Wells Drilled
-------------------------------------------------------------------------------------------
Exploratory Developmental Total
--------------------------- ----------------------------- -----------------------------
Productive Drilled Productive Drilled Productive Drilled
-------------- ---------- --------------- --------- -------------- ---------
1999 4 4 3 3 7 7
2000 3 6 13 13 16 19
2001 6 13 6 6 12 19
-------------- ---------- --------------- --------- -------------- ---------
Total 13 23 22 22 35 45
============== ========== =============== ========= ============== =========
26
Number of Net Wells Drilled
---------------------------------------------------------------------------------------------
Exploratory Developmental Total
---------------------------- ------------------------------- -------------------------------
Productive Drilled Productive Drilled Productive Drilled
------------- -------------- ------------------- ---------- ----------------- -------------
1999 0.94 0.94 0.41 0.41 1.35 1.35
2000 0.68 1.59 2.49 2.49 3.17 4.08
2001 1.38 2.49 3.25 3.25 4.63 5.74
------------- -------------- ------------------- ---------- ----------------- -------------
Total 3.00 5.02 6.15 6.15 9.15 11.17
============= ============== =================== ========== ================= =============
Colombia
Number of Gross Wells Drilled
--------------------------------------------------------------------------------------------
Exploratory Developmental Total
------------------------------- ---------------------------- ------------------------------
Productive Drilled Productive Drilled Productive Drilled
---------------- ------------- ------------- ------------- ------------- ----------------
1999 -- 1 -- -- -- 1
2000 -- -- -- -- -- --
2001 1 3 -- -- 1 3
---------------- ------------- ------------- ------------- ------------- ----------------
Total 1 4 -- -- 1 4
================ ============= ============= ============= ============= ================
Number of Net Wells Drilled
--------------------------------------------------------------------------------------------
Exploratory Developmental Total
------------------------------- ---------------------------- ------------------------------
Productive Drilled Productive Drilled Productive Drilled
---------------- ------------- ------------- ------------- ------------- ----------------
1999 -- 1.00 -- -- -- 1.00
2000 -- -- -- -- -- --
2001 1.00 3.00 -- -- 1.00 3.00
---------------- ------------- ------------- ------------- ------------- ----------------
Total 1.00 4.00 -- -- 1.00 4.00
================ ============= ============= ============= ============= ================
Employees
As of December 31, 2001, Harken had 65 employees, including 21 employees of
Global and its subsidiaries. Harken has experienced no work stoppages or strikes
as a result of labor disputes and considers relations with its employees to be
satisfactory. Harken maintains group life, medical, dental, surgical and
hospital insurance plans for its employees.
27
ITEM 2. PROPERTIES
See "Item 1. Business" for discussion of oil and gas properties and
locations.
Harken and Global have offices in Houston, Texas, Southlake, Texas and
Bogota, Colombia. Harken leases approximately 26,800 square feet of office space
in Houston, Texas, which lease runs through October 2006, approximately 2,200
square feet in Southlake, Texas, which runs through May 2004, and approximately
9,700 square feet of office space in Bogota, Colombia, which lease runs through
April 2002. The average annual cost of Harken's Houston lease is approximately
$659,000. See "Liquidity and Capital Resources -- Capital Commitments --
Consolidated Contractual Obligations" contained in Part II, Item 7, Management's
Discussion and Analysis of Financial Condition and Results of Operations.
ITEM 3. 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 claimed that the Oil Pollution
Act ("OPA") should be applied in this circumstance. Rice alleges that
remediation of all of the alleged pollution on its land would cost approximately
$40,000,000. 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 appealed the trial court's summary judgment to the U.S. Fifth Circuit
Court of Appeals. In April 2001, the Fifth Circuit Court of Appeals issued its
opinion affirming the trial court's summary judgment in Harken's favor. Based on
this affirmation of the summary judgment, in Harken management's opinion, the
results of any further appeal will not have a material adverse effect on
Harken's financial position. On August 15, 2002, Harken was served with a new
suit filed by Rice in state court in Hutchinson County, Texas. In this new state
case, Rice continues to seek approximately $40,000,000 in remediation costs and
damages. Harken recently filed a motion for partial summary judgment seeking a
ruling that remediation costs are not the proper measure of damages and that
Rice's property damages, if any, should be measured by the alleged diminution in
value of its land. The Court held a hearing on Harken's motion on October 30,
2002, but has not yet issued a ruling. Harken's management believes that the
correct measure of damages is the alleged diminution in value of Rice's land.
Therefore, in Harken management's opinion, the results of such additional claim
will not have a material adverse effect on Harken's financial position.
Search Acquisition Corp. ("Search Acquisition"), also known as Harken Texas
Acquisition Corp., a wholly-owned subsidiary of Harken, was a defendant in a
lawsuit filed by Petrochemical Corporation of America and Lorken Investments
Corporation (together, "Petrochemical"). This lawsuit arose out of
Petrochemical's attempt to enforce a judgment of joint and several liability
entered in 1993 against a group of twenty limited partnerships known as the
"Odyssey limited partnerships." Petrochemical claimed that Search Exploration,
Inc. is liable for payment of the judgment as the successor-in-interest to eight
Odyssey limited partnerships. Search Acquisition was the surviving corporation
in Harken's 1995 acquisition of Search Exploration, Inc. On February 28, 1996,
the court granted Search Acquisition's motion for summary judgment in this case.
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. In December 2001, a jury trial was held in this matter. The jury returned
a verdict finding for Petrochemical in the amount of $1.1 million of actual
28
damages and $3 million in punitive damages. In April 2002, the court entered
judgment on the verdict rendered by the jury. Search Acquisition then filed a
motion for a new trial. In June 2002, Petrochemical filed with the U.S.
Bankruptcy Court in Dallas, Texas an involuntary petition in bankruptcy against
Search Acquisition, under Chapter 7 of the Bankruptcy Code, and moved for the
appointment of an interim trustee. Search Acquisition agreed to the entry of an
order for relief under Chapter 7, as well as the appointment of the interim
trustee. These actions resulted in a stay of Search Acquisition's motion of the
Court's judgment on the jury verdict totaling $4.1 million. Thereafter,
McCulloch Energy, Inc. ("McCulloch"), a wholly-owned subsidiary of Search
Acquisition, filed a voluntary petition in bankruptcy under Chapter 7 of the
Bankruptcy Code in the U.S. Bankruptcy Court in Houston, Texas. The stay of
Search Acquisition's motion and the related bankruptcy filings led to
negotiations in bankruptcy and mediation relating to the Petrochemical suit and
judgment. As a result of these events, on August 1, 2002, pursuant to a mediated
settlement, Petrochemical and the bankruptcy trustees agreed to release their
claims against Harken in exchange for a payment of $2 million to be distributed
to Petrochemical, and a payment of approximately $189,000 to pay administrative
expenses and other creditors of the bankruptcy estates. Pursuant to the
mediation agreement, Petrochemical elected to receive 100% of the stock of
McCulloch in September 2002. McCulloch does not have any contractual
arrangements that are material to Harken's operations and has a book and fair
value each less than $10,000. The mediation agreement was approved by the
Bankruptcy Courts in Dallas and Houston in September 2002. Payment of the
mediation settlement was also made in September 2002.
420 Energy Investment, Inc. and ERI Investments, Inc. (collectively "420
Energy") filed a lawsuit against XPLOR Energy, Inc., a wholly-owned subsidiary
of Harken ("XPLOR"), 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. Harken has relied on an indemnity provision in
the XPLOR merger agreement to tender the costs of defense in this matter to
former stockholders of XPLOR. Although the outcome of this litigation is
uncertain, because the former stockholders of XPLOR have accepted
indemnification of this claim, 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.
In August 2001, a new lawsuit was filed by New West Resources, Inc. ("New
West"), a former XPLOR stockholder, against XPLOR, Harken and other defendants
in state court in Dallas, Texas. Harken received service of process in February
2002. New West claims that it lost its $6 million investment in XPLOR as a
result of misrepresentations by XPLOR and breach of fiduciary duties by certain
XPLOR directors. Harken believes this new suit is an adjunct of the prior
appraisal rights claim by 420 Energy. The former stockholders of XPLOR have
rejected Harken's request for indemnification of this claim under the XPLOR
merger agreement. However, Harken intends to continue to pursue and enforce,
through whatever steps are necessary, any indemnification from the third
parties. Harken has tendered the defense of this claim to National Union Fire
Insurance Company, pursuant to insurance policy coverage held by XPLOR. National
Union has accepted defense of this claim subject to a reservation of rights.
Based on the facts that (i) the allegations of New West's current petition focus
primarily on defendants other than Harken, (ii) New West has provided no
evidence supporting its claims in response to Harken's discovery requests and
(iii) the case is set for January 23, 2003, but New West has not served process
upon certain of the defendants described in New West's petition as being the
primary wrongdoers, Harken does not believe the claims asserted against Harken
are meritorious. Therefore, in Harken management's opinion, the ultimate outcome
of this litigation will not have a material adverse effect on Harken's financial
condition.
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.
29
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
None.
30
PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS
Price Range of Common Stock
Since March 18, 1991, Harken common stock has been listed on the American
Stock Exchange and traded under the symbol HEC. At December 31, 2001, there were
approximately 18,928 holders of record of Harken common stock.
The following table sets forth, for the periods indicated, the reported
high and low closing sales prices of Harken common stock on the American Stock
Exchange Composite Tape, as restated for the effect of the one-for-ten reverse
stock split effected on November 7, 2000.
Prices
-----------------------
High Low
------ -----
2000 -- First Quarter $15.00 $6.25
Second Quarter 10.00 5.63
Third Quarter 9.38 6.25
Fourth Quarter 6.88 2.38
2001 -- First Quarter 6.97 3.05
Second Quarter 3.59 2.27
Third Quarter 2.39 1.50
Fourth Quarter 1.75 0.86
Dividends
Harken has not paid any cash dividends on common stock since its
organization and it is not contemplated that any cash dividends will be paid on
shares of common stock in the foreseeable future. Dividends may not be paid to
holders of common stock prior to all dividend obligations related to Harken
Series G1 Preferred and Series G2 Preferred being satisfied.
For further discussion of the terms of the Harken Series G1 Preferred and
Series G2 Preferred issued during the year, see Item 8, Notes to Consolidated
Financial Statements, "Note 8 -- Stockholders' Equity." Such issuances were
pursuant to exemptions from registration under Section 4(2) of the Securities
Act of 1933, as amended.
31
ITEM 6. SELECTED FINANCIAL DATA
The following table sets forth historical financial data derived from our
audited Consolidated Financial Statements and should be read in conjunction with
Management's Discussion and Analysis of Financial Condition and Results of
Operations and our Consolidated Financial Statements and accompanying Notes to
Consolidated Financial Statements.
1997 1998 1999 2000 2001
------------ ------------ ------------ ------------- ------------
Operating Data:
---------------
Revenues $ 18,768,000 $ 19,770,000 $ 23,456,000 $ 44,395,000 $ 32,423,000
Loss before extraordinary items $ (284,000) $(55,787,000) $(12,295,000) $(160,671,000 $(43,998,000)
Net loss $ (284,000) $(55,787,000) $(12,845,000) $(152,933,000 $(41,023,000)
Basic and diluted loss per common
share (1):
Loss before extraordinary items $ (0.03) $ (4.42) $ (1.44) $ (9.55) $ (2.61)
------------ ------------ ------------ ------------- ------------
Net loss $ (0.03) $ (4.42) $ (1.48) $ (9.09) $ (2.45)
============ ============ ============ ============= ============
Balance Sheet Data:
-------------------
Current assets $126,392,000 $144,163,000 $ 32,178,000 $ 29,144,000 $ 14,245,000
Current liabilities $ 15,752,000 $ 20,426,000 $ 11,202,000 $ 13,877,000 $ 10,867,000
------------ ------------ ------------ ------------- ------------
Working capital $110,640,000 $123,737,000 $ 20,976,000 $ 15,267,000 $ 3,378,000
============ ============ ============ ============= ============
Total assets $238,780,000 $320,116,000 $298,785,000 $ 145,347,000 $ 95,806,000
Long-term obligations:
Convertible notes $ 39,880,000 $ 85,000,000 $ 95,869,000 $ 69,940,000 $ 51,388,000
Development finance obligation $ 25,740,000 $ 38,552,000 $ 1,302,000 $ -- $ --
Bank credit facilities $ -- $ -- $ 10,500,000 $ 9,937,000 $ 7,937,000
Other long-term obligations $ -- $ -- $ 5,078,000 $ 4,917,000 $ 9,400,000
------------ ------------ ------------ ------------- ------------
Total $ 65,620,000 $123,552,000 $112,749,000 $ 84,794,000 $ 68,725,000
============ ============ ============ ============= ============
Stockholders' equity $157,408,000 $176,138,000 $174,834,000 $ 46,676,000 $ 16,214,000
Series F preferred stock
outstanding (3) -- 15,000 -- -- --
Series G1 preferred stock
outstanding (4) -- -- -- 158,155 446,417
Series G2 preferred stock
outstanding (4) -- -- -- -- 95,300
Weighted average common shares
outstanding (1) 10,908,770 13,025,273 14,413,517 16,863,610 18,063,584
Proved reserves at end of year (2):
Bbls of oil 13,088,000 31,522,000 29,678,000 6,794,000 7,626,000
Mcf of gas 33,293,000 108,451,000 52,818,000 54,836,000 39,393,000
Future net cash inflows $144,543,000 $226,974,000 $451,118,000 $ 421,634,000 $104,166,000
Present value (discounted at 10%
per year) $ 90,580,000 $144,851,000 $280,427,000 $ 264,697,000 $ 63,297,000
(1) Loss per share amounts and weighted average common shares outstanding
calculations reflect the impact of a one-for-ten reverse stock split which
was effective November 7, 2000.
(2) These estimated reserve quantities, future net revenues and present value
figures are related to proved reserves located in the United States and
Colombia. No consideration has been given to probable or possible reserves.
Oil and gas year end prices were held constant except where future price
increases were fixed and determinable under existing contracts and
government regulations. Due primarily to the significant decline in
Harken's estimated present value of future net cash flows as a result of
low oil and gas prices during 1998, Harken recorded a non-cash valuation
allowance on its domestic oil and gas properties of approximately $50.5
million during the year December 31, 1998. Due primarily to a significant
reduction in Harken's proved undeveloped oil reserves on its Bolivar
Association Contract in Colombia, Harken recorded a non-cash valuation
allowance of approximately $156.4 million during the year ended December
31, 2000. Due to reduced oil and gas prices as of December 31, 2001, Harken
recorded a consolidated non-cash valuation allowance of approximately $18.7
million during the year ended December 31, 2001.
(3) See "Notes to Consolidated Financial Statements, Note 8 -- Stockholders'
Equity" contained in Part II, Item 8, for a discussion of Harken Series F
Preferred Stock.
(4) See "Notes to Consolidated Financial Statements, Note 8 -- Stockholders'
Equity" contained in Part II, Item 8, for a discussion of Harken Series G1
and Series G2 Preferred Stock.
32
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS.
Overview
The year ended December 31, 2001 was a year in which Harken's two operating
segments initiated new business strategies in response to changing industry
conditions. Harken's domestic operating segment has completed a period of
significant successful drilling activity over the past two years, and in light
of reduced prices for oil and natural gas, has reduced its exploration and
development activity at this time in favor of pursuing oil and gas reserve
growth through merger and acquisition activity. In April 2002, Harken, through a
wholly-owned subsidiary, acquired certain producing property interests (the
"Republic Properties") in exchange for 2,645,500 shares of Harken common stock.
Harken's international operating strategy was significantly revised with the
announced restructuring plan whereby Harken's Latin American assets and
operations were transferred to, and the obligations relating to such assets and
operations were assumed by, a subsidiary, Global Energy Development Ltd.
("Global"), which subsequently transferred such assets, obligations and
operations into a newly formed subsidiary whose stock has now been listed on a
United Kingdom exchange, facilitating the ability for Global to seek financing,
growth and other capital plans on its own. Global's new business strategy is to
identify, develop and promote energy projects from throughout Latin America to
industry and financial partners and to aggregate assets in Latin America through
strategic acquisitions and alliances. The changing focus for each of Harken's
two operating segments reflect a response to exposing Harken stockholders to the
growth opportunities of the oil and gas industry overall, as it seeks to meet
energy demand domestically, particularly in the wake of future supply
uncertainties following the September 11, 2001 tragedy.
Harken's consolidated revenues and cash flows were strong during the first
half of 2001 due largely to the high product prices being received. Sales of
certain domestic producing properties during late 2000 and early 2001 took
advantage of higher prices, maximizing the sales proceeds which were used in
part to fund Harken's domestic and Colombian drilling activities. Although a
large portion of the production from sold properties has been offset by
production from newly completed wells, cash flows during the last part of 2001
have decreased due to reduced domestic production and overall product pricing.
As a part of Harken's change in business strategy mentioned above, Harken has
taken steps to maximize its cash flow by decreasing its administrative costs
through reductions in personnel, reductions in salaries, increasing efficiencies
in its production operations, and by reducing its long-term debt obligations.
Harken's continued steps in these areas should continue to increase operating
efficiency and cash flow during 2002.
Harken reflected non-cash writedowns of its domestic and Colombian oil and
gas properties in accordance with the full cost accounting method due to reduced
oil and gas prices as of December 31, 2001. Additionally, recent political and
regulatory developments in Costa Rica have made the further exploration of
Harken's Costa Rica prospect unlikely, resulting in the impairment of its equity
investment in its minority owned Costa Rica operating subsidiary. These non-cash
charges during the year contributed to Harken's consolidated net loss of
approximately $41.0 million during 2001.
Harken also continued to modify its capital structure by retiring an
additional $18.8 million of European Notes outstanding during 2001, resulting in
an aggregate reduction of over $44 million since December 31, 1999. Additional
European Note exchanges are being pursued and are expected by Harken to occur
later in 2002, with a view toward reducing the outstanding 5% European Note
balances prior to their
33
maturity in 2003. Harken anticipates converting the remaining 5% European Notes
to Harken common stock upon their maturity in 2003. Terms of the 5% European
Notes also permit Harken to convert up to 50% of the remaining Notes outstanding
to Harken common stock in November 2002. Debt retirements with cash will also be
pursued through available cash.
Critical Accounting Policies
Full cost accounting method -- Harken accounts for the costs incurred in
the acquisition, exploration, development and production of oil and gas reserves
using the full cost accounting method. Under full cost accounting rules, the net
capitalized costs of evaluated oil and gas properties shall not exceed an amount
(the "cost ceiling") equal to the present value of future net cash flows from
estimated production of proved oil and gas reserves, based on current economic
and operating conditions, including the use of oil and gas prices as of the end
of each quarter. Harken reflected a full cost valuation allowance totaling $18.7
million as of December 31, 2001, based on NYMEX prices of $19.84/barrel and
$2.57/mmbtu. Subsequent increases in oil and gas prices as of March 27, 2002
were not considered in the calculation of the full cost valuation allowance.
Commodity derivative instruments in place as of December 31, 2001 had no impact
on the full cost valuation allowance calculation. For a complete discussion of
Harken's proved oil and gas reserves, see Note 14 - Oil and Gas Disclosures in
the Notes to Consolidated Financial Statements contained in Part II, Item 8.
Given the volatility of oil and gas prices, it is reasonably possible that
the estimate of discounted future net cash flows from proved oil and gas
reserves could change in the near term. If oil and gas prices decline further in
the future, even if only for a short period of time, it is possible that
additional impairments of oil and gas properties could occur. In addition, it is
reasonably possible that additional impairments could occur if costs are
incurred in excess of any increases in the cost ceiling, revisions to proved oil
and gas reserves occur, or if properties are sold for proceeds less than the
discounted present value of the related proved oil and gas reserves.
Colombia operations -- During the year ended December 31, 2001,
approximately 26% of Harken's consolidated revenues were generated from sales to
Ecopetrol, the state-owned Colombian oil company. The country of Colombia is
currently experiencing heightened security issues which could affect Harken's
Colombian operations as well as the strength and operations of Ecopetrol. If
Ecopetrol experiences significant adverse conditions in its operations, it may
not be able to meet its ongoing financial obligations to Harken for delivered
production or be able to purchase future production under the terms of existing
contract provisions. Harken's Colombian operations could also be directly
affected by guerilla activity or other instances or threats of violence,
preventing or interrupting Harken from producing, transporting or delivering
future production volumes.
Valuation of accounts receivable -- Harken sells its domestic oil and gas
production to a broad and diverse group of industry partners, many of which are
major oil and gas companies, and as a whole, do not represent a significant
credit risk. In addition, Harken charges certain industry partners, who
participate in Harken-operated wells, with their share of drilling costs and
operating expenses. In determining a reserve for potential losses in collection
of its accounts receivable, Harken considers, among other factors, the current
financial condition of its industry partners in light of current industry
conditions. In the event of a significant decline in oil and gas prices, many of
our industry partners may not be able to meet their ongoing financial
obligations to Harken or be able to meet the terms of existing contract
provisions.
34
Classification of long-term debt -- Harken's bank credit facility with Bank
One, N.A. ("Bank One") requires Harken, as well as certain of its subsidiaries
(the "Borrowers") to maintain certain financial covenant ratios and
requirements, as calculated on a quarterly basis. For the quarter ended December
31, 2001, Harken and the Borrowers were each not in compliance with its
respective debt service coverage ratio requirement and have received a waiver to
these facility requirements from Bank One. Accordingly, Harken has reflected all
of the unpaid facility balance classified as a long-term obligation in its
Consolidated Financial Statements. If Harken or the Borrowers are not in
compliance with their bank financial covenant ratios or requirements in the
future and are unable to obtain a waiver or amendment to the facility
requirements, the credit facility would be in default and callable by Bank One.
In addition, due to cross-default provisions in Harken's 5% European Note
agreement and Benz Convertible Notes, a majority of Harken's debt obligations
would become due in full if any debt is in default. The classification of
Harken's long-term debt obligations at December 31, 2001 reflects Harken's
expectations that future operating results will result in Harken and the
Borrowers being in compliance with the bank financial covenant ratios and
requirements in future quarters. However, expectations of future operating
results and continued compliance with financial covenants cannot be assured and
our lenders' actions are not controllable by Harken. If Harken's projections of
future operating results are not achieved and its debt is placed in default,
Harken would experience a material adverse impact on its financial position and
results of operations.
Accounting for derivatives -- Harken holds commodity derivative financial
instruments designed to mitigate commodity price risk associated with a portion
of its future monthly natural gas production and related cash flows. These
commodity derivatives qualify for hedge accounting as discussed in Note 12 -
Hedging Activities in the Notes to Consolidated Financial Statements contained
in Part II, Item 8. Harken does not participate in speculative derivatives
trading. Hedge accounting requires that commodity derivative instruments be
designated as hedges and that fluctuations in their market value are effective
in mitigating the hedged commodity price risk, and that such effectiveness be
documented and monitored. While Harken intends to continue to meet the
conditions to qualify for hedge accounting, if hedges are not highly effective,
or if the forecasted hedged production does not occur, the changes in the fair
value of the commodity derivative instruments would be reflected in earnings.
35
RESULTS OF OPERATIONS
The following table presents certain data for Harken's continuing
operations for the years ended December 31, 1999, 2000 and 2001. A discussion
follows of certain significant factors which have affected Harken's operating
results during such periods. This discussion should be read in conjunction with
Harken's Consolidated Financial Statements and related footnotes contained in
Part II, Item 8.
Year Ended December 31,
---------------------------------------
Domestic Exploration and Production
Operations 1999 2000 2001
----------------------------------- ----------- ----------- -----------
Gas sales revenues $ 6,879,000 $16,178,000 $16,643,000
Gas volumes in Mcf 2,847,000 4,012,000 3,844,000
Gas price per Mcf $ 2.42 $ 4.03 4.33
Oil sales revenues $ 9,188,000 $15,422,000 $ 6,708,000
Oil volumes in barrels 510,000 529,000 273,000
Oil price per barrel $ 18.02 $ 29.15 $ 24.57
Gas plant revenues $ 652,000 $ 928,000 --
Middle American Exploration and
Production Operations
-------------------------------
Oil sales revenues $ 3,026,000 $10,649,000 $ 8,291,000
Oil volumes in barrels 248,000 460,000 500,000
Oil price per barrel $ 12.20 $ 23.15 $ 16.58
Other Revenues
--------------
Interest Income $ 3,693,000 $ 1,188,000 $ 673,000
Other Income $ 18,000 $ 30,000 $ 108,000
For the year ended December 31, 2001 compared with the prior year
- -----------------------------------------------------------------
North American Operations
Domestic gross oil and gas revenues during 2001 relate primarily to
Harken's continuing operations in the onshore and offshore areas of the Texas
and Louisiana Gulf Coast and the Western and Panhandle regions of Texas.
36
Domestic gas revenues increased 3% to $16.6 million during 2001 compared to
$16.2 million for the prior year period due primarily to the increase in average
gas prices received during the current year, as Harken received an overall
average price of $4.33 per Mcf of gas during 2001 compared to $4.03 per Mcf
received during 2000. Gas prices were particularly strong during the first half
of 2001, but weakened during the fourth quarter of 2001. Gas production volumes
during 2001 decreased slightly compared to the prior year period, despite the
sales of certain producing properties, due to new production from Harken's
drilling activity during the past twelve months, particularly from the Old Ocean
field in the Texas Gulf Coast region and the Lake Raccourci and Lapeyrouse
fields in southern Louisiana.
Domestic oil revenues decreased 57% to $6.7 million during 2001 compared to
$15.4 million during 2000 primarily due to the December 2000 sale of Harken
Southwest Corporation, which owned and operated Harken's Four Corners area
production and due to the second quarter 2001 sale of Harken's New Mexico
operations. In addition, Harken's Gulf Coast oil production was reduced by
temporary operational curtailments during the first quarter of 2001 at Harken's
Main Pass area offshore Louisiana. Overall, domestic oil production volumes
decreased 48% during the year compared to the prior year.
Gas plant revenues during 2000 were derived through Harken Southwest
Corporation, which was sold in December 2000.
Domestic oil and gas operating expenses consist of lease operating expenses
and production and reserve based taxes. Domestic oil and gas operating expenses
decreased 23% to $9.3 million during 2001 compared to $12.1 million during the
prior year primarily due to the above mentioned sales of producing properties.
Oil and gas operating expenses decreased slightly per unit of production due to
the replacement of sold producing fields with newly completed gas production.
Harken continues to seek to sell a specific domestic field operation, the Main
Pass 35 Field, which is located in the Plaquemines Parish of Louisiana, with
high operating costs per barrel. Such efforts are intended to further reduce
Harken's overall operating expenses per unit of production beginning early 2002.
Harken expects that oil and gas production volumes generated as a result of
the recent drilling activity together with the acquisition of the Republic
Properties discussed above, will continue to help to mitigate the production
decreases as a result of sales of non-strategic producing properties. Through
March 26, 2002, however, average first quarter 2002 gas prices have remained
lower than prices received in the prior year period. Harken's oil and gas
revenues are highly dependent upon product prices, which Harken is unable to
predict.
Middle American Operations
Harken's Middle American operations are conducted through Global. Harken's
Colombian oil revenues have decreased 22% from $10.6 million during 2000 to $8.3
million during 2001 due to a decrease in the average price received per barrel,
which decreased from $23.15 during 2000 to $16.58 during 2001. During 2000 and
2001, Harken's Colombian production operations related primarily to Global's
Bolivar and Alcaravan Association Contract areas.
During 2000 and the first quarter of 2001, sales of production from
Global's Estero #1 well on the Alcaravan Contract area were limited to
approximately 1,000 gross barrels of oil per day due to pipeline
37
constraints and pumping capacity. During the second quarter of 2001, Global took
steps to resolve such limitations and, though it is currently producing
approximately 1,900 gross barrels of oil per day, is now allowed to transport up
to approximately 3,000 gross barrels of oil per day from both Estero #1 and
Estero #2 wells. Estero #2 was completed during the first quarter of 2001, and
produced throughout the remainder of the year, mitigating production declines
related primarily to Global's Bolivar Contract area production. Global's
production volumes during 2002 will continue to be dependent on existing well
production, pumping efficiency, and security conditions.
Middle American operating expenses have increased 26% from $2.3 million
during 2000 to $2.9 million for 2001, primarily due to increases in
transportation and security costs. During the third quarter of 2001, Global took
steps to reduce operating expenses related to its producing fields in Colombia,
which have resulted in operating expense reductions beginning in the fourth
quarter of 2001.
Interest and Other Income
Interest and other income decreased during 2001 compared to the prior year
due to Harken's usage of cash for capital expenditures during 2000 and 2001, and
due to lower yield rates on invested funds. Harken generated approximately $1.2
million of interest income during 2000, compared to approximately $673,000 of
interest income during 2001. Additional decreases in Harken's cash balances
could be mitigated or offset by additional capital sources.
Other Costs and Expenses
General and administrative expenses decreased 18% during 2001 compared to
2000 primarily due to personnel reductions and efforts to improve administrative
efficiency. Harken reduced the number of its employees by 34% during the year.
Depreciation and amortization expense increased during 2001 compared to the
prior year period primarily due to downward revisions during 2000 in Colombia
proved reserves. 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.
During the fourth quarter of 2001, due to reduced oil and gas prices at
December 31, 2001, Harken recorded non-cash valuation allowances of
approximately $14.4 million related to its domestic oil and gas properties and
$4.3 million related to its Colombian oil properties. The valuation is based on
the present value, discounted at ten percent, of Harken proved oil and gas
reserves based on year end prices. Subsequent increases in oil and gas prices as
of March 27, 2002 were not considered in the calculation of the full cost
valuation allowance.
In March 2002, the Costa Rica environmental agency SETENA denied its
approval of the requested environmental permit related to Harken's Costa Rica
Contract. HCRH has filed an appeal related to this ruling by SETENA. In January
2002, the Costa Rica Constitutional Court rendered a published opinion in a suit
that had been filed against another oil and gas operator and MINAE by certain
environmental groups. In its opinion, in this case, the Constitutional Court of
Costa Rica found, among other issues, that SETENA did not
38
have the current authority to grant environmental permits. In addition, proposed
legislation pending in the Costa Rica legislature seeks to abolish the Costa
Rica government's rights to grant hydrocarbon exploration contracts. Due to the
Costa Rica Constitutional Court decision discussed above, even though it did not
directly involve HCRH or the Moin #2 well, as well as the pending legislation
described above, Harken and Global believe that HCRH's appeal to SETENA for
reconsideration of its denial of the requested permit, or any similar recourse,
will be unsuccessful. Further, recent political developments in Costa Rica, in
the opinion of Harken and Global, severely limit the opportunity for future oil
and gas exploration in Costa Rica. These significant adverse developments have
resulted in Harken fully impairing its approximately $8.8 million investment in
the Costa Rica project in its Consolidated Balance Sheet as of December 31,
2001.
During the fourth quarter of 2001, Harken also reflected an impairment of
approximately $3.2 million related to certain transportation facility costs
related to Global's Bolivar Contract area in Colombia, as the carrying value of
such facilities was in excess of estimates of future cash flows. Such estimated
future cash flows were based on current production levels, future production
expectations based on December 31, 2001 reserve estimates, projected locations
of future wells to be drilled and the lack of a ready market to purchase such
facilities. Harken continues to utilize transportation facilities related to its
Alcaravan Contract area. Harken also reflected an impairment of approximately
$1.6 million related to certain deferred transaction costs incurred by Global,
primarily for certain merger transaction efforts which were a part of the
restructuring of Harken's international assets. Such merger transaction efforts
were terminated during the fourth quarter of 2001 and the corresponding
transaction costs were charged to earnings. In addition, Harken reflected an
impairment of $620,000 on certain Colombia oilfield equipment held by Global, as
based on reduced drilling plans by Global, and the current low industry demand
for such equipment in light of heightened Colombia security concerns, the
carrying value of such inventory was in excess of estimated future cash flows
from sale or use of such equipment.
Interest and other expense decreased during 2001 compared to the prior year
period primarily due to the repurchase and exchange of certain 5% European Notes
during 2000 and 2001. Such decrease in net interest expense was despite the
decrease in the amounts of interest capitalized to Harken's Colombian
unevaluated property costs. In addition, during the first quarter of 2001,
Harken expensed the remaining unamortized issuance costs related to the
International Finance Corporation project loan finance facility, which was
terminated in May 2001.
For the year ended December 31, 2000 compared with the prior year
- -----------------------------------------------------------------
North American Operations
Domestic oil and gas revenues during 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. During the fourth quarter of 2000, Harken
sold its Four Corners operations and certain non-operated interests in the Texas
Gulf Coast region.
39
Domestic oil revenues increased 68% to $15.4 million during 2000 compared
to $9.2 million during 1999 primarily due to the increase in average oil prices,
which averaged $11.13 more per barrel during 2000 compared to the prior year.
Domestic gas revenues increased 135% to $16.2 million during 2000 compared
to $6.9 million for the prior year due primarily to the increase in gas
production as a result of the merger with XPLOR in August 1999. Gas production
volumes during 2000 increased 41% compared to the prior year. The increased gas
revenues were also due to the increase in average gas prices received during the
year, as Harken received an overall average price of $4.03 per Mcf of gas
production during 2000 compared to $2.42 per Mcf received during 1999.
Gas plant revenues increased 42% from $652,000 during 1999 to $928,000
during the current year primarily due to increased liquids prices during the
year. Harken's gas plant revenue relates to its Four Corners operation, which
was sold in December 2000.
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 57% to $12.1 million
during 2000 compared to $7.7 million during the prior year primarily due to the
increase in operating expenses from the above mentioned merger with XPLOR. Oil
and gas operating expenses as a percentage of related oil and gas revenues
remained approximately the same between 2000 and 1999.
Middle American Operations
During 1999 and 2000, Middle American production operations consisted of
production testing conducted on Global's Bolivar and Alcaravan Association
Contract areas in Colombia. Colombian oil revenues during the year have
increased 252% from $3.0 million during 1999 to $10.6 million during 2000 due to
increased production volumes and higher oil prices. In addition, beginning
November 1999 and May 2000, pursuant to specific negotiations with Ecopetrol,
Harken began receiving Ecopetrol's working interest share of monthly Bolivar and
Alcaravan Contract area production, respectively. As such, Harken received 80%
of gross production, compared to only 40% during most of 1999.
During 2000, 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. The Catalina #1 and Olivo #1 wells on the Bolivar Contract
area produced an average of a combined 800 gross barrels of oil per day during
2000.
Due primarily to increased production, Middle American operating expenses
have also increased from $1,214,000 during 1999 to $2,283,000 during 2000.
Interest and Other Income
Interest and other income decreased during 2000 compared to the prior year
due to Harken's usage of cash during 1999 and 2000 for capital expenditures, and
the October 1999 purchase of certain development finance interests for $20
million. Harken generated approximately $3,693,000 of interest income during
1999, compared to approximately $1,188,000 of interest income during 2000.
Harken's cash balances, which include investments in short-term marketable debt
securities, increased during the last half of 2000 despite
40
its capital expenditure activity due to the issuance of shares of Harken common
and preferred stock, as well as from domestic property sales.
Other Costs and Expenses
General and administrative expenses increased to $13,223,000 during 2000
compared to $11,043,000 in 1999 primarily due to administrative expenses
associated with Harken's new Costa Rica activities and its 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.
Depreciation and amortization expense increased significantly to
$13,649,000 during 2000 compared to $6,848,000 in the prior year primarily due
to downward revisions in Harken's Colombia proved reserves. 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.
During the fourth quarter of 2000, Harken recorded a non-cash valuation
allowance on its Colombian oil and gas properties of $156,411,000. The valuation
allowance is based upon the present value, discounted at ten percent, of
Harken's Colombian reserves, which declined primarily due to a significant
reduction in Harken's proved undeveloped reserves on its Bolivar Association
Contract following the recently drilled Olivo #2 well in Colombia, which was
drilled during late December 2000 and during the early part of the first quarter
of 2001. To a lesser extent, Harken's proved producing reserve volumes were also
reduced due to production information.
Interest expense and other decreased to $5,297,000 during 2000 from
$7,296,000 during the prior year primarily due to the conversion and purchase of
the Development Finance Agreements during 1999 and early 2000 from EnCap, a
related party (see Note 11 to the Consolidated Financial Statements), for $20
million which represented a discount of approximately $6,300,000 from the
minimum amount then payable (in either cash or shares of Harken common stock)
upon conversion by the investor pursuant to the terms of the Development Finance
Agreement. Harken elected to make such cash payment in order to avoid the
potential dilution of its common stock. Such $20 million repurchase amount was a
mutually negotiated amount between Harken and the investor. As such, Harken
believes that this transaction was made at terms at least as favorable to Harken
as those that could have been secured with an unrelated party. Interest and
other expenses also decreased due to repurchases of certain European Notes
outstanding during 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 2000 was 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 300,000 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 $65.00 per
share conversion price of the European Notes. Harken entered into this
transaction in order to reduce the outstanding balance of the 5% European Notes
and reduce potential impact of redemption of such Notes at their maturity.
41
During 2000, Harken repurchased a total of approximately $19 million face
amount of European Convertible Notes for approximately $10.7 million cash plus
transaction expenses. In connection with such repurchases, Harken has recorded
$7,745,000 of extraordinary item gains during the year, which is net of a charge
for related unamortized issuance costs.
During 1999, accretion related to the Series F Preferred Stock of
$8,427,000 was reflected as a special charge to the common stockholders since
the Series F Stockholder (RGC) elected to present its Series F Preferred for
conversion and Harken elected to pay cash of approximately $25,273,000 to RGC in
lieu of issuing the 9,295,557 shares of Harken common stock required under the
conversion terms of the Series F Preferred. The cash amount paid was equivalent
to the market price of the 9,295,557 shares of Harken common stock on the
conversion dates of January 5, 1999 and January 7, 1999. Harken elected to make
such cash payment in order to avoid potential dilution of its common stock.
Harken reflected an additional amount of approximately $1,302,000 of accretion
during 1998 related to Series F Preferred which represents the portion of the
ultimate redemption value generated in December 1998 and has reflected the
additional accretion amount of approximately $8,427,000 in 1999 which represents
the ultimate redemption value generated in the first quarter of 1999.
42
LIQUIDITY AND CAPITAL RESOURCES
Harken's working capital at December 31, 2001 was approximately $3.4
million, compared to approximately $15.3 million at December 31, 2000. The
decrease in working capital during the year resulted primarily from
approximately $28.7 million of capital expenditures, which were funded partially
by sales of domestic oil and gas properties totaling approximately $13.4
million. Assisted by strong oil and natural gas prices during the first half of
2001 Harken's operations generated approximately $7.7 million of cash flow
during the year. Harken's cash resources at December 31, 2001 totaled
approximately $8.5 million.
In light of recent reduced oil and gas prices, and as a result of Harken's
ongoing capital restructuring discussed above, Harken's domestic operating
strategy now includes efforts to increase its oil and gas reserves in North
America through acquisitions and development, with a decreased emphasis on
exploration drilling activities. Accordingly, Harken's domestic capital
expenditure plans have been reduced compared to the prior two-year period.
Harken is, however, actively pursuing various North American acquisition and
development opportunities. Harken anticipates domestic capital expenditures will
total approximately $1.5 million during 2002. Harken also anticipates
international capital expenditures will total approximately $1.5 million during
2002. A majority of Harken's planned domestic and international capital
expenditures are discretionary and, as a result, will be curtailed if sufficient
funds are not available. Such expenditure curtailments, however, could result in
Harken losing certain prospect acreage or reducing its interest in future
development projects.
During 2001, Harken's Board of Directors approved a plan to restructure
Harken's operations for the purpose of focusing Harken's resources more directly
on domestic acquisition, exploration and development operations, particularly in
the Gulf Coast region of Texas and Louisiana. Pursuant to this restructuring
plan, the Board determined it to be in the shareholders' interest to implement
such a plan to move Harken's interests in its Middle American operations, assets
and obligations under a separate subsidiary with the name Global Energy
Development Ltd. ("Global"), which would have the ability and capability to seek
financing and other capital plans on its own. In March 2002, Global transferred
all of its interests in its international and operations to, and obligations
relating to such assets and operations were assumed by, a United Kingdom
subsidiary, Global Energy Development PLC ("Global PLC") in exchange for 92.77%
of Global PLC's common stock. Upon the completion of this exchange transaction,
Global PLC then completed the listing of its common stock for trading on the AIM
Exchange in London, and placed 7.23% (2,085,282 shares) of such stock in a
placement to investors, of which less than 1% (166,198 shares) of Global PLC
were purchased at the offering price by certain officers, directors and
employees of Harken and Global and a family member. Global PLC is seeking
additional financing and acquisition activities using its shares of its newly
listed common stock. At March 27, 2002, Harken, through Global, owned 92.77% of
Global PLC common stock.
Capital Sources
During 2001, sales of certain domestic producing property interests
generated cash proceeds of approximately $13.1 million. In February 2002, Harken
sold certain additional domestic producing property interests for approximately
$910,000. Harken is currently considering additional sales of producing
properties that could generate additional cash proceeds.
Harken's operating cash flows from its domestic oil and gas properties are
being strengthened by recent successful drilling activity in southern Louisiana,
which have begun to partially offset the reductions following the sales of
producing properties consummated in late 2000 and during the first half of 2001.
43
Recently completed wells, including the Thomas Cenac #1, the State Lease 1480
#2, the State Lease 14589 #3 and the State Lease 1480 #3, all began production
in the last four months of 2001. In January 2002, a wholly-owned subsidiary of
Harken signed an agreement to acquire the Republic Properties from Republic
Resources, Inc., subject to approval by Republic's shareholders and debenture
holders. The Republic Properties consist of 15 producing property interests
located in southern Louisiana and the Texas Gulf Coast region. The Republic
Properties to be acquired by Harken are in exchange for up to 2,645,500 of
Harken common stock. The acquisition of the Republic Properties will supplement
Harken's domestic operating cash flows beginning in the second quarter of 2002.
Harken's domestic operating cash flows are particularly dependent on the price
of natural gas, which Harken is unable to predict.
Certain Harken subsidiaries entered into a three-year loan facility with
Bank One, N.A. ("Bank One"), which is secured by certain of Harken's domestic
oil and gas properties and a guarantee from Harken. The Bank One facility
provides borrowings subject to a borrowing base (as defined by the Bank One
facility), which was $12,400,000 as of December 31, 2001. The Bank One facility
requires the Borrowers, as well as Harken, to maintain certain financial
covenant ratios and requirements. For the quarter ended December 31, 2001,
Harken and the Borrowers were each not in compliance with its respective debt
service coverage ratio requirement. In March 2002, Harken and the Borrowers
received a letter from Bank One waiving the Borrowers debt service coverage
ratio requirement for the fourth quarter of 2001 and the first quarter of 2002,
and waiving Harken's debt service coverage ratio requirement for the fourth
quarter of 2001, deleting the requirement beginning in the first quarter of 2002
and adding a current ratio requirement beginning in the first quarter of 2002.
In exchange, among other requirements, Bank One reduced the current borrowing
base to $7,937,000, the amount of the current balance outstanding under the
facility. Such borrowing base is scheduled to be re-determined by Bank One on
May 1 and November 1 of each year in accordance with the facility agreement.
Bank One's commitments under the facility terminate in August 2003.
Global's operating cash flows continue to be provided by ongoing production
from its Alcaravan and Bolivar Contract areas in Colombia. Following the
notification from Ecopetrol permitting Global to proceed with the sole-risk
development of the Palo Blanco and Buturama fields, Global is now receiving
Ecopetrol's share of production after royalty from its Colombia producing wells.
Global anticipates that cash flows from its Colombian assets will be adequate to
fund the capital needs, as well as the operating, administrative and management
costs of its Middle American operations.
As described above, the March 2002 application to trade on the AIM Exchange
in London enables Harken, through Global, to seek additional financing and
acquisition activities using shares of Global PLC common stock. Global PLC's
ability to effectively use its common stock will be dependent upon the market
value of its shares on the AIM Exchange. Global is also pursuing raising
additional capital through potential sales of assets. Additional capital raised
by Global would be used exclusively for Global's capital needs, as transfers to
Harken would be limited or restricted.
Private Placements of Harken Common Stock -- In March 2000, Harken issued
200,000 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 246,154 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.
During the third quarter of 2000, Harken issued 910,476 shares of Harken common
stock to institutional investors in exchange for $4,971,000 cash and 13,380
shares of Benz Series II preferred stock having a face value of $1,338,000 and
Benz Notes with a face value of
44
$412,000. No value has been assigned to the Benz securities held by Harken.
These private placement investors were also investors in these Benz securities
and desired to exchange their Benz securities as part of the consideration paid
for these shares of Harken common stock. Harken's objective of this private
placement was solely to raise capital, although Harken was willing to accept the
Benz securities as a negotiated part of the transaction.
During 2000, Harken received consideration consisting of approximately
$7,767,000 cash, 43,523 shares of Benz Series II preferred stock having a face
value of $4,352,300 and Benz Notes with a face value of $3,555,000 in exchange
for 158,155 shares of Series G1 Preferred which were issued in October 2000. No
value has been assigned to the Benz securities held by Harken. The Series G1
Preferred investors were also investors in these Benz securities and desired to
exchange their Benz securities as part of the consideration paid for the G1
Preferred. Harken's objective of this G1 Preferred issuance was solely to raise
capital, although Harken was willing to accept the Benz securities as a
negotiated part of the transaction.
In addition to the above sources, Harken has and may continue to raise
capital through the issuance of debt, equity and convertible debt instruments,
or through the exchange of existing instruments through transactions that
provide Harken with additional capital.
Capital Commitments
In light of reduced oil and gas prices, Harken's domestic operating
strategy now includes efforts to increase its oil and gas reserves in North
America through acquisitions, with a decreased emphasis on exploration and
development drilling activities. Accordingly, Harken's domestic capital
expenditure plans have been greatly reduced compared to the prior two year
period. Certain of Harken's domestic prospects may be drilled through joint
venture arrangements, which Harken is currently pursuing in order to reduce its
capital commitment, while maintaining its exposure to the reserve potential.
Harken is actively pursuing various North American acquisition opportunities.
Harken has focused its operating strategy to acquire, explore, and produce oil
and gas properties located in the Gulf Coast region of Texas and Louisiana.
Harken's primary need for capital is to fund these planned domestic exploration
and development efforts. Harken anticipates domestic capital expenditures will
total approximately $1.5 million during 2002. A majority of Harken's planned
domestic capital expenditures are discretionary and, as a result, will be
curtailed if sufficient funds are not available. Such expenditure curtailments,
however, could result in Harken losing certain prospect acreage or reducing its
interest in future exploration and development projects.
5% European Convertible Notes Commitments -- On May 26, 1998, Harken issued
a total of $85 million of the 5% European Notes, which mature on May 26, 2003.
During the second quarter of 2001, Harken issued 325,150 shares of Series G1
Preferred stock in exchange for 5% European Notes in the face amount of $9.0
million. In addition, in July 2001, Harken issued 95,800 shares of Series G2
Preferred stock in exchange for 5% European Notes in the face amount of
approximately $9.6 million. Including these most recent exchanges, since
issuance and as of March 27, 2002, Harken has retired 5% European Notes totaling
approximately $44 million. Harken continues to consider additional transactions
with the 5% European Note holders whereby Harken may retire additional Notes in
exchange for shares of Harken common stock, cash, convertible securities or
other consideration. As of March 27, 2002, the remaining principal balance of 5%
European Notes was $40,980,000. Interest incurred on the 5% European Notes is
payable semi-annually in May and November of each year to maturity or until the
5% European Notes are redeemed, converted or purchased by Harken prior to their
maturity.
45
The 5% European Notes may be redeemed for cash, at Harken's option, at par,
in whole or in part, at any time after May 26, 2002, upon not less than 30 days
notice to the holders. In addition, beginning November 26, 2002, Harken may
redeem up to 50% of the 5% European Notes then outstanding in exchange for
shares of Harken common stock. At maturity, on May 26, 2003, Harken may
similarly redeem all remaining outstanding 5% European Notes for shares of
Harken common stock. If Harken elects to redeem the 5% European Notes for shares
of its common stock, each note will be redeemed for a number of shares of Harken
common stock equal to 115% of the principal amount of the notes to be redeemed,
plus accrued and unpaid interest thereon to the date of redemption, divided by
the average market price of the stock over the 30 calendar days immediately
preceding the date of the notice of redemption.
Benz Convertible Notes Commitments -- On December 30, 1999, Harken issued
$12 million principal amount of the Benz Convertible Notes in exchange for
certain prospects acquired from Benz Energy, Incorporated ("Benz"), which is an
affiliate of EnCap (see Note 11 to the Consolidated Financial Statements). The
Benz Convertible Notes originally were to mature on May 26, 2003 with an
interest rate of 5% per annum and a conversion price of $65.00 per share, which
greatly exceeded the market price for Harken common stock at the acquisition
date. Harken's bank lending rate on the acquisition date was 8.3%. Harken
believed, for these reasons, that this transaction was made at terms at least as
favorable to Harken as those that could have been secured with an unrelated
party.
In March 2000, the maturity date of certain of the Benz Convertible Notes
was extended to November 26, 2003. As of March 27, 2002, Harken has repurchased
or redeemed approximately $1,125,000 million principal amount of the Benz
Convertible Notes for cash and/or Harken common stock. As of March 27, 2002, the
outstanding principal balance of Benz Convertible Notes was approximately
$10,875,000 and had a maturity date of November 26, 2003.
The Benz Convertible Notes bear interest at 5% per annum, payable
semi-annually in May and November of each year until maturity or until the Benz
Convertible Notes are redeemed, converted or purchased by Harken prior to their
maturity. The Benz Convertible Notes may be redeemed for cash, or shares of
Harken common stock, at Harken's option, at par, in whole or in part, at any
time after May 26, 2002, upon not less than 30 days notice to the holders. In
addition, beginning November 26, 2002, Harken may redeem up to 50% of the Benz
Convertible Notes then outstanding in exchange for shares of Harken common
stock. At maturity on November 26, 2003, Harken may similarly redeem all
remaining outstanding Benz Convertible Notes for shares of Harken common stock.
If Harken elects to redeem the Benz Convertible Notes for shares of its common
stock, beginning November 26, 2002, each note will be redeemed for a number of
shares of Harken common stock equal to 115% of the principal amount of the note
to be redeemed, plus accrued and unpaid interest thereon to the date of
redemption, divided by the average market price of the stock over the 30
calendar days immediately preceding the date of the notice of redemption.
Operational Contingencies -- Harken's operations are subject to stringent
and complex environmental laws and regulations governing the discharge of
materials into the environment or otherwise relating to environmental
protection. These laws and regulations are subject to changes that may result in
more restrictive or costly operations. Failure to comply with applicable
environmental laws and regulations may result in the imposition of
administrative, civil and criminal penalties or injunctive relief. Global's
international oil and gas exploration and production operations, including well
drilling and seismic activities, require specific governmental environmental
licenses and permits, the acquisition of which in the past have been subject to
46
extensive delays. Global may continue to experience similar delays in the
future. Failure to obtain these licenses and permits in a timely manner may
prevent or delay Harken's and Global's operational plans.
Harken has accrued approximately $6,779,000 at December 31, 2001 relating
to certain operational or regulatory contingencies related to Harken's domestic
operations. Approximately $4,300,000 of this accrued amount relates to total
future abandonment costs of $7,550,000 of certain of Harken's producing
properties, which will be incurred at the end of the properties' productive
life. Approximately $1,300,000 of the total operational or regulatory
contingencies are expected to be paid during 2002 and are included in current
liabilities. The timing of the remaining payments of these operational and
regulatory liability cannot be reasonably estimated at this time since they
primarily relate to plugging costs that will not be incurred until the end of
the productive life of the property in question. Harken and its subsidiaries
currently are involved in various lawsuits and other contingencies, which in
management's opinion, will not result in a material adverse effect upon Harken's
financial condition or operations taken as a whole.
International Commitments - Terms of certain of the Association Contracts
entered into between Global's subsidiary Harken de Colombia, Ltd. and Ecopetrol
commit Global to perform certain activities in Colombia in accordance with a
prescribed timetable. In addition, Global has certain scheduled capital
expenditure commitments related to its TEA Agreements in Peru and Panama.
Failure by Global to perform these activities as required could result in Global
losing its rights under the particular contract, which could potentially have a
material adverse effect on Harken's business. As of March 27, 2002, Global was
in compliance with the requirements of each of the Association and TEA
Contracts, as amended. In light of the political and regulatory developments in
Costa Rica discussed above, Global is projecting no capital expenditure plans
during 2002 with regard to the Costa Rica Contract.
Consolidated Contractual Obligations - The following table presents a
summary of Harken's contractual obligations and commercial commitments as of
December 31, 2001. Harken has no off-balance sheet obligations other than in the
table set forth below.
Payments Due by Period
------------------------------------------------------------------------------------------
Contractual Obligations 2002 2003 2004 2005 2006-2007 Thereafter Total
- ----------------------- ---- ---- ---- ---- --------- ---------- -----
Bank Credit Facility(1) $ -- $ 7,900,000 $ -- $ -- $ -- $ -- $ 7,900,000
Operating Leases(2) 744,000 720,000 688,000 689,000 574,000 -- 3,415,000
International Commitments(3) -- 2,500,000 -- -- -- -- 2,500,000
Domestic Commitments -- -- -- -- -- -- --
Convertible Notes Payable(4) -- 51,855,000 -- -- -- -- 51,855,000
-------- ----------- -------- -------- -------- -------- -----------
Total Contractual Cash
Obligations $744,000 $62,975,000 $688,000 $689,000 $574,000 $ -- $65,670,000
======== =========== ======== ======== ======== ======== ===========
(1) Does not reflect impact of plans to modify or extend existing facility
through refinancing.
(2) Amount net of sublease arrangements in effect at December 31, 2001.
(3) Represents the estimated cost of completion of a well in Colombia required
to be drilled by Harken under the Cajaro Contract.
(4) Represents the outstanding obligations owing under the 5% European Notes
and the Benz Convertible Notes as of December 31, 2001. These obligations
are payable or redeemable for cash or with shares of Harken common stock
(See Part II, Item 8, Notes to Consolidated Financial Statements, "Note 7 -
Convertible Notes Payable" for further discussion).
47
In addition to the above commitments, Harken anticipates that its
discretionary domestic and international capital expenditures will total
approximately $1.5 million each during 2002. After 2002, government authorities
under Harken's Louisiana state leases and operators under Harken's other
domestic operations may also request Harken to participate in the cost of
drilling additional exploratory and development wells. Harken may fund these
future domestic expenditures at its discretion. Further, the cost of drilling or
participating in the drilling of any such exploratory and development wells
cannot be quantified at this time since the cost will depend on many factors
outside of Harken's control, such as the timing of the request the depth of the
wells and the location of the property. Harken's discretionary capital
expenditures for 2003 will be curtailed if Harken does not have sufficient funds
available. If Harken does not have sufficient funds or otherwise chooses not to
participate, it may experience a delay of future cash flows from proved
undeveloped oil and gas reserves. Such expenditure curtailments could also
result in Harken losing certain prospect acreage or reducing its interest in
future development projects.
Adequacy of Capital Sources
Considering Harken's existing cash resources and the potential additional
capital sources discussed above, Harken believes that it will have sufficient
cash resources to fund all of its planned capital obligations during 2002. In
2003, Harken's most significant capital commitment is satisfying its remaining
obligations under the 5% European Notes, the Bank One credit facility and the
Benz Convertible Notes, which mature in May 2003, August 2003 and November 2003,
respectively. In order to fulfill the obligations under these notes, Harken may:
(i) repurchase these notes from their holders for cash, securities (such as
Harken common stock or other convertible debt) and/or other property, (ii)
redeem these notes by issuing Harken common stock on or before maturity and/or
(iii) raise additional capital to redeem these notes for cash. The redemption of
these notes by issuing common stock could result in substantial dilution of the
existing Harken common stock and could require stockholder approval to complete.
In addition, the number of new shares to be issued could result in a change of
control of Harken. No assurance can be given that Harken will be successful in
any redemption or repurchase of the 5% European Notes and the Benz Convertible
Notes.
In addition, if Harken's stock price were to decline significantly,
Harken's ability to convert a substantial amount of the 5% European Notes and
Benz Convertible Notes into common stock could be limited by the number of
authorized but unissued shares of Harken common stock. If there were an
insufficient number of shares of common stock to redeem all of the
then-outstanding 5% European Notes and Benz Convertible Notes, Harken would have
to obtain stockholder approval to increase its authorized common stock before it
could redeem all such 5% European Notes and Benz Convertible Notes into common
stock. Absent such stockholder approval, Harken would have to otherwise
restructure the then-outstanding 5% European Notes and Benz Convertible Notes,
or pay such 5% European Notes and Benz Convertible Notes at maturity. There can
be no assurance that, in such an event, Harken would be successful in
restructuring its obligations under the then-outstanding 5% European and Notes
Benz Convertible Notes, or would have available sufficient funds to pay such 5%
European Notes and Benz Convertible Notes, in cash, upon maturity. In addition,
due to cross-default provisions in Harken's 5% European Notes and the Benz
Convertible Note agreements, a majority of Harken's debt obligations would
become due in full if any debt is in default.
Even if Harken is successful in its efforts to redeem or repurchase the 5%
European Notes and the Benz Convertible Notes, Harken will still require
additional financing in 2003 to fund its operations. Further, Harken may not be
able to generate sufficient cash from operations to fund its ongoing exploration
and
48
development efforts and fulfill its other capital commitments after 2003.
Consequently, Harken expects to fund these operational and capital commitments
in 2003 and afterward through a combination of cash on hand, cash flows from
operations, issuances or exchanges of debt or equity securities, or through cash
provided by either existing or newly established financing arrangements.
Harken intends to continue to seek to raise equity or debt financing
through the issuance of debt, equity and convertible debt instruments, or
through the exchange of existing instruments through transactions that provide
Harken with additional capital to fund the capital commitments described above.
Such transactions may be affected, however, by the market value of Harken common
stock. If the price of Harken common stock remains low or decreases, Harken's
ability to utilize its stock either directly or indirectly through convertible
instruments for raising capital could be negatively affected. Further, raising
additional funds by issuing common stock or other types of equity securities
would further dilute Harken's existing stockholders, which dilution could be
substantial if the price of Harken common stock remains low or decreases. No
assurance can be given that Harken will be able to obtain additional financing
on favorable terms, if at all, to meet its operational and capital commitments
described above.
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
Market risk generally represents the risk that losses may occur in the
values of financial instruments as a result of movements in commodity prices,
interest rates and foreign currency exchange rates. As part of an overall risk
management strategy, Harken considers the use of derivative financial
instruments to manage and reduce risks associated with these factors.
Commodity Price Risk -- Harken is a producer of hydrocarbon commodities,
including crude oil, condensate and natural gas. Consistent with the prior year,
Harken uses oil and gas derivative financial instruments, limited to swaps,
collars and options with maturities of 24 months or less, to mitigate its
exposure to fluctuations in oil and gas commodity prices on future crude oil and
natural gas production. Consistent with the prior year, Harken enters into no
commodity derivative financial instruments other than those which are designed
to be effective in mitigating commodity price risk of Harken's oil and gas
production, and does not participate in speculative derivative trading. Harken
uses the sensitivity analysis method to disclose its quantitative disclosure of
commodity price risk exposure. Accordingly, Harken has evaluated the potential
effect that near term changes in commodity prices would have had on the fair
value of its commodity price risk sensitive financial instruments at year end
2001. Assuming a 20% increase in natural gas prices from actual prices at
December 31, 2001, the potential decrease in the fair value of Harken's natural
gas collar contract at December 31, 2001 would have been approximately $425,000.
At December 31, 2001 Harken had no financial instrument risk exposure related to
increases or decreases in crude oil prices. The average percentage of Harken's
natural gas production hedged during 1999, 2000 and 2001 was approximately 25%.
Interest Rate Risk -- Consistent with the prior year, Harken invests cash
in interest-bearing temporary investments of high quality issuers. Due to the
short time the investments are outstanding and their general liquidity, these
instruments are classified as cash equivalents in the consolidated balance sheet
and do not represent a significant interest rate risk to Harken. Consistent with
the prior year, Harken considers its interest rate risk exposure related to
long-term debt obligations is also not significant, as at December 31, 2001 all
but approximately $7,937,000 of Harken's financing obligations carry a fixed
interest rate per annum. Harken has no open interest rate swaps agreements.
49
Foreign Currency Exchange Rate Risk - Consistent with the prior year,
Harken conducts international business in Colombia and Costa Rica and is subject
to foreign currency exchange rate risk on cash flows related to sales, expenses,
and capital expenditures. However, because predominately all material
transactions in Harken's existing foreign operations are denominated in U.S.
dollars, the U.S. dollar is the functional currency for all operations.
Consistent with the prior year, exposure from transactions in currencies other
than U.S. dollars is not considered material.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
The following financial statements appear on pages 52 through 98 in this
report.
Page
----
Report of Independent Auditors ........................................... 51
Consolidated Balance Sheets -- December 31, 2000 and 2001 ................ 53
Consolidated Statements of Operations --
Years ended December 31, 1999, 2000 and 2001 ........................... 54
Consolidated Statements of Stockholders' Equity --
Years ended December 31, 1999, 2000 and 2001 ........................... 55
Consolidated Statements of Cash Flows --
Years ended December 31, 1999, 2000 and 2001 ........................... 56
Notes to Consolidated Financial Statements ............................... 57
50
REPORT OF INDEPENDENT AUDITORS
To the Stockholders and Board of Directors of Harken Energy Corporation:
We have audited the accompanying consolidated balance sheet of Harken
Energy Corporation as of December 31, 2001, and the related consolidated
statements of operations, stockholders' equity and cash flows for the year then
ended. These financial statements are the responsibility of the Company's
management. Our responsibility is to express an opinion on these financial
statements based on our audit. The financial statements of Harken Energy
Corporation as of December 31, 2000 and for each of the two years in the period
then ended were audited by other auditors who have ceased operations. Those
auditors expressed an unqualified opinion on those financial statements in their
report dated March 27, 2001.
We conducted our audit in accordance with auditing standards generally
accepted in the United States. Those standards require that we plan and perform
the audit to obtain reasonable assurance about whether the financial statements
are free of material misstatement. An audit includes examining, on a test basis,
evidence supporting the amounts and disclosures in the financial statements. An
audit also includes assessing the accounting principles used and significant
estimates made by management, as well as evaluating the overall financial
statement presentation. We believe that our audit provides a reasonable basis
for our opinion.
In our opinion, the financial statements referred to above present fairly,
in all material respects, the consolidated financial position of Harken Energy
Corporation at December 31, 2001, and the consolidated results of its operations
and its cash flows for the year then ended in conformity with accounting
principles generally accepted in the United States.
As discussed above, the financial statements of Harken Energy Corporation
as of December 31, 2000 and for each of the two years in the period then ended
were audited by other auditors who have ceased operations. The following
paragraphs of these financial statements have been revised: paragraph 13 of Note
1, paragraphs 2 and 5 of Note 2, paragraph 10 of Note 7, paragraph 4 of Note 8
and paragraph 3 of Note 11. We audited the disclosures described in these
paragraphs that were applied to revise the 2000 and 1999 financial statements.
Our procedures included agreeing the revised disclosures to the Company's
underlying records obtained from management, and testing the mathematical
accuracy as applicable. In our opinion, such revised disclosures are
appropriate. However, we were not engaged to audit, review, or apply any
procedures to the 2000 and 1999 financial statements of the Company other than
with respect to such revised disclosures and, accordingly, we do not express an
opinion or any other form of assurance on the 2000 and 1999 financial statements
taken as a whole.
/s/ERNST & YOUNG LLP
Houston, Texas
March 25, 2002,
except for paragraph 13 of Note 1, paragraphs 2 and 5 of Note 2, paragraph 10 of
Note 7, paragraph 4 of Note 8, paragraph 3 of Note 11 and paragraph 4 of Note
15, as to which the date is December 6, 2002
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS/(1)/
To the Stockholders and Board of Directors of Harken Energy Corporation:
We have audited the accompanying consolidated balance sheet of Harken
Energy Corporation (a Delaware corporation) and subsidiaries as of December 31,
2000, and the related consolidated statements of operations, stockholders'
equity and cash flows for each of the two years in the period ended December 31,
2000. These financial statements are the responsibility of the Company's
management. Our responsibility is to express an opinion on these financial
statements based on our audits.
We conducted our audits in accordance with auditing standards generally
accepted in the United States. Those standards require that we plan and perform
the audit to obtain reasonable assurance about whether the financial statements
are free of material misstatement. An audit includes examining, on a test basis,
evidence supporting the amounts and disclosures in the financial statements. An
audit also includes assessing the accounting principles used and significant
estimates made by management, as well as evaluating the overall financial
statement presentation. We believe that our audits provide a reasonable basis
for our opinion.
In our opinion, the financial statements referred to above present fairly,
in all material respects, the financial position of Harken Energy Corporation
and subsidiaries as of December 31, 2000, and the results of their operations
and their cash flows for each of the two years in the period ended December 31,
2000, in conformity with accounting principles generally accepted in the United
States.
ARTHUR ANDERSEN LLP
Houston, Texas
March 27, 2001
(1) Harken Energy Corporation has not been able to obtain, after reasonable
efforts, the reissued report of Arthur Andersen LLP related to the 2000 and
1999 financial statements. Therefore, a copy of their previously issued
report is included. See Item 9 and Exhibit 23.2 for further information.
52
HARKEN ENERGY CORPORATION
CONSOLIDATED BALANCE SHEETS
ASSETS
December 31,
-------------------------------
2000 2001
------------- -------------
Current Assets:
Cash and temporary investments $19,763,000 $ 8,523,000
Restricted cash 910,000 944,000
Accounts receivable, net of allowance for uncollectible accounts 7,160,000 3,248,000
of $468,000 and $483,000 for 2000 and 2001, respectively.
Related party notes receivable 169,000 169,000
Prepaid expenses and other current assets 1,142,000 1,361,000
------------ ------------
Total Current Assets 29,144,000 14,245,000
Property and Equipment:
Oil and gas properties, using the full cost method of accounting:
Evaluated 321,845,000 337,440,000
Unevaluated 17,666,000 3,472,000
Facilities and other property 22,048,000 25,000,000
Less accumulated depreciation and amortization (250,598,000) (287,577,000)
------------- -------------
Total Property and Equipment, net 110,961,000 78,335,000
Other Assets, net 5,242,000 3,226,000
------------- -------------
$ 145,347,000 $ 95,806,000
============= =============
LIABILITIES AND STOCKHOLDERS' EQUITY
Current Liabilities:
Trade payable $ 3,106,000 $ 2,664,000
Accrued liabilities and other 8,819,000 6,197,000
Revenues and royalties payable 1,952,000 2,006,000
------------- -------------
Total Current Liabilities 13,877,000 10,867,000
Convertible Notes Payable 69,940,000 51,388,000
Bank Credit Facilities 9,937,000 7,937,000
Accrued Preferred Stock Dividends 376,000 3,942,000
Other Long-Term Obligations 4,541,000 5,458,000
Commitments and Contingencies (Note 15)
Stockholders' Equity:
Series G1 Preferred Stock, $1.00 par value; $100 liquidation value; 240,000
and 700,000 shares authorized, respectively; 158,155 and 446,417 shares
outstanding, respectively 158,000 446,000
Series G2 Preferred Stock, $1.00 par value; $100 liquidation value, 400,000
shares authorized; 95,300 shares outstanding at December 31, 2001 - 95,000
Common stock, $0.01 par value; 225,000,000 shares authorized;
17,699,110 and 18,713,038 shares issued, respectively 177,000 187,000
Additional paid-in capital 371,546,000 385,710,000
Accumulated deficit (324,886,000) (369,087,000)
Accumulated other comprehensive income 134,000 296,000
Treasury stock, at cost, 89,750 and 542,900 shares held, respectively (453,000) (1,433,000)
------------- -------------
Total Stockholders' Equity 46,676,000 16,214,000
------------- -------------
$ 145,347,000 $ 95,806,000
============= =============
The accompanying Notes to Consolidated Financial Statements are an integral
part of these Statements.
53
HARKEN ENERGY CORPORATION
CONSOLIDATED STATEMENTS OF OPERATIONS
Year Ended December 31,
---------------------------------------------------
1999 2000 2001
------------- -------------- -------------
Revenues:
Oil and gas operations $ 19,745,000 $ 43,177,000 $ 31,642,000
Interest and other income 3,711,000 1,218,000 781,000
------------- -------------- -------------
23,456,000 44,395,000 32,423,000
------------- -------------- -------------
Costs and Expenses:
Oil and gas operating expenses 8,935,000 14,379,000 12,204,000
General and administrative expenses, net 11,043,000 13,223,000 10,830,000
Depreciation and amortization 6,848,000 13,649,000 15,254,000
Full cost valuation allowance - 156,411,000 18,669,000
Provision for asset impairments 1,599,000 - 14,102,000
Interest expense and other, net 7,296,000 5,297,000 4,663,000
Charge for European Note conversion - 2,068,000 -
------------- -------------- -------------
35,721,000 205,027,000 75,722,000
------------- -------------- -------------
Loss before income taxes $ (12,265,000) $ (160,632,000) $ (43,299,000)
Income tax expense 30,000 39,000 699,000
------------- -------------- -------------
Loss before extraordinary items $ (12,295,000) $ (160,671,000) $ (43,998,000)
Extraordinary item-gain on repurchase of
European Notes - 7,745,000 2,975,000
Extraordinary item-charge for reduction of
unamortized issuance costs (550,000) (7,000) -
-------------------------------- -------------
Net loss $ (12,845,000) $ (152,933,000) $ (41,023,000)
============= ============== =============
Accretion/dividends related to preferred stock (8,427,000) (376,000) (3,178,000)
------------- -------------- -------------
Net loss attributed to common stock $ (21,272,000) $ (153,309,000) $ (44,201,000)
============= ============== =============
Basic and diluted loss per common share:
Loss per common share before extraordinary items $ (1.44) $ (9.55) $ (2.61)
Extraordinary item-gain on repurchase of
European Notes - 0.46 0.16
Extraordinary item-charge for reduction of
unamortized issuance costs (0.04) (0.00) -
------------- -------------- -------------
Loss per common share $ (1.48) $ (9.09) $ (2.45)
============= ============== =============
Weighted average shares outstanding 14,413,517 16,863,610 18,063,584
============= ============== =============
The accompanying Notes to Consolidated Financial Statements
are an integral part of these Statements.
54
HARKEN ENERGY CORPORATION
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
Additional
G1 Preferred G2 Preferred Common Paid-in Treasury Accumulated
Stock Stock Stock Capital Stock Deficit
------------------------------------------------------------------------------------
Balance, December 31, 1998 $ 15,000 $ - $ 135,000 $ 328,711,000 $ (2,552,000) $ (150,305,000)
Issuance of common stock, net - - 10,000 20,657,000 - -
Conversions of Development Finance
Obligation - - 11,000 22,096,000 - -
Accretion of preferred stock - - - 8,427,000 - (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) - -
Net loss - - - - - (12,845,000)
------------------------------------------------------------------------------------
Balance, December 31, 1999 - - 156,000 350,637,000 (4,516,000) (171,577,000)
Issuance of common stock net - - 13,000 7,768,000 - -
Exchange of European Notes - - 3,000 7,870,000 - -
Issuance of preferred stock, net 158,000 - - 7,609,000 - -
Preferred stock dividends - - - - - (376,000)
Repurchase of Benz Convertible Notes - - - 639,000 - -
Treasury shares purchased - - - - (453,000) -
Cancellations of treasury shares - - (2,000) (4,514,000) 4,516,000 -
Conversions of Development Finance Obligation - - 7,000 1,537,000 - -
Net loss - - - - - (152,933,000)
------------------------------------------------------------------------------------
Balance, December 31, 2000 158,000 - 177,000 371,546,000 (453,000) (324,886,000)
Issuance of common stock, net - - 6,000 95,000 - -
Issuance of preferred stock, net 336,000 96,000 - 14,024,000 - -
Preferred stock dividends - - - - - (3,178,000)
Purchase of treasury stock - - - - (980,000) -
Conversions of preferred stock (48,000) (1,000) 4,000 45,000 - -
Comprehensive income:
Cumulative effect of change in accounting
principle - - - - - -
Net change in derivative fair value - - - - - -
Reclassification of derivative fair value
into earnings - - - - - -
Net loss - - - - - (41,023,000)
Sub Total
------------------------------------------------------------------------------------
Balance, December 31, 2001 $ 446,000 $ 95,000 $ 187,000 $ 385,710,000 $ (1,433,000) $ (369,087,000)
====================================================================================
Accumulated
Other
Comprehensive
Income Total
-------------------------------
Balance, December 31, 1998 $ 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 - -
Treasury shares purchased - (1,964,000)
Redemption of preferred stock - (25,284,000)
Settlement of property purchase acquisition - (3,985,000)
Net loss - (12,845,000)
-------------------------------
Balance, December 31, 1999 134,000 174,834,000
Issuance of common stock, net - 7,781,000
Exchange of European Notes - 7,873,000
Issuance of preferred stock, net - 7,767,000
Preferred stock dividends - (376,000)
Repurchase of Benz Convertible Notes - 639,000
Treasury shares purchased - (453,000)
Cancellations of treasury shares - -
Conversions of Development Finance Obligation - 1,544,000
Net loss - (152,933,000)
-------------------------------
Balance, December 31, 2000 134,000 46,676,000
Issuance of common stock, net - 101,000
Issuance of preferred stock, net - 14,456,000
Preferred stock dividends - (3,178,000)
Purchase of treasury stock - (980,000)
Conversions of preferred stock - -
Comprehensive income:
Cumulative effect of change in accounting
principle (3,025,000)
Net change in derivative fair value 1,553,000
Reclassification of derivative fair value
into earnings 1,634,000
Net loss - (40,861,000)
Sub Total 162,000
-------------------------------
Balance, December 31, 2001 $ 296,000 $ 16,214,000
===============================
The accompanying Notes to Consolidated Financial Statements are
an integral part of these Statements.
55
HARKEN ENERGY CORPORATION
CONSOLIDATED STATEMENTS OF CASH FLOWS
Year Ended December 31,
----------------------------------------------------
1999 2000 2001
------------- ------------- ------------
Cash flows from operating activities:
Net loss $ (12,845,000) $(152,933,000) $(41,023,000)
Adjustments to reconcile net loss to net cash
provided by (used in) operating activities:
Depreciation and amortization 6,848,000 13,649,000 15,254,000
Full cost valuation allowance - 156,411,000 18,669,000
Provision for asset impairments 1,599,000 - 14,102,000
Charge for European Note conversion - 2,068,000 -
Provision for doubtful accounts - - -
Amortization of issuance and finance costs 765,000 1,785,000 1,084,000
Extraordinary items 550,000 (7,738,000) (2,975,000)
Change in assets and liabilities, net of companies acquired:
(Increase) decrease in accounts receivable (1,780,000) (2,307,000) 3,181,000
Increase (decrease) in trade payables and other (1,090,000) 1,774,000 (597,000)
------------- ------------- ------------
Net cash provided by (used in) operating activities (5,953,000) 12,709,000 7,695,000
------------- ------------- ------------
Cash flows from investing activities:
Proceeds from sales of assets 2,358,000 7,045,000 13,390,000
Capital expenditures, net (60,572,000) (28,073,000) (28,677,000)
Deconsolidation of subsidiary - - (668,000)
Cash received from acquired subsidiary 261,000 - -
Proceeds from collection of notes receivable 98,000 - -
------------- ------------- ------------
Net cash used in investing activities (57,855,000) (21,028,000) (15,955,000)
------------- ------------- ------------
Cash flows from financing activities:
Proceeds from issuances of common stock; net 47,000 7,710,000 -
Repayments of notes payable and long-term obligations (23,750,000) (12,003,000) (2,140,000)
Proceeds from issuance of preferred stock net - 7,767,000 -
Proceeds from collection of note receivable - - 140,000
Redemption of preferred stock (25,284,000) - -
Treasury shares purchased (1,964,000) (453,000) (980,000)
Payments for financing costs (1,174,000) (551,000) -
------------- ------------- ------------
Net cash provided by (used in) financing activities (52,125,000) 2,470,000 (2,980,000)
------------- ------------- ------------
Net decrease in cash and temporary investments (115,933,000) (5,849,000) (11,240,000)
Cash and temporary investments at beginning of year 141,545,000 25,612,000 19,763,000
------------- ------------- ------------
Cash and temporary investments at end of year $ 25,612,000 $ 19,763,000 $ 8,523,000
============= ============= ============
The accompanying Notes to Consolidated Financial Statements
are an integral part of these Statements.
56
HARKEN ENERGY CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(1) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Principles of Consolidation and Presentation -- The Consolidated Financial
Statements include the accounts of Harken Energy Corporation (a Delaware
corporation) and all of its wholly-owned subsidiaries ("Harken") after
elimination of significant intercompany balances and transactions. Data is as of
December 31 of each year or for the year then ended and dollar amounts in tables
are in thousands unless otherwise indicated.
The Consolidated Financial Statements retroactively reflect the effect of
the one-for-ten reverse stock split which was effective November 7, 2000.
Accordingly, all disclosures involving the number of shares of Harken common
stock outstanding, issued or to be issued, such as with a transaction involving
Harken common stock, and all per share amounts, retroactively reflect the impact
of the reverse stock split.
The preparation of financial statements in conformity with accounting
principles generally accepted in the United States 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 those estimates.
Certain prior year amounts have been reclassified to conform with the 2001
presentation.
Statement of Cash Flows -- For purposes of the Consolidated Statements of
Cash Flows, Harken considers all highly liquid investments purchased with an
original maturity of three months or less to be cash equivalents. Harken paid
cash for interest in the amounts of $4,508,000, $5,046,000 and $3,720,000 during
1999, 2000 and 2001, respectively. All significant non-cash investing and
financing activities are discussed in Notes 2, 7 and 8 - Mergers, Acquisitions
and Dispositions, Convertible Notes Payable and Stockholders' Equity.
Concentrations of Credit Risk -- Although Harken's cash and temporary
investments, commodity derivative instruments and accounts receivable are
exposed to potential credit loss, Harken does not believe such risk to be
significant. Cash and temporary investments includes investments in high-grade,
short-term securities, placed with highly rated financial institutions. Most of
Harken's accounts receivable are from a broad and diverse group of industry
partners, many of which are major oil and gas companies and, as a whole, do not
in total represent a significant credit risk.
Property and Equipment -- Harken follows the full cost accounting method to
account for the costs incurred in the acquisition, exploration, development and
production of oil and gas reserves. Gas plants and other property are
depreciated on the straight-line method over their estimated useful lives
ranging from four to twenty years. Production facilities are depreciated on a
units of production method.
In accordance with the full cost accounting method for oil and gas
properties, Harken reflected valuation allowances during each of the two years
ended December 31, 2001 related to the amount of net
57
capitalized costs of evaluated oil and gas properties in excess of the present
value of Harken's oil and gas reserves. See Note 4 - Oil and Gas Properties for
further discussion.
Other Assets -- Harken includes in other assets certain deferred
commissions and issuance costs associated with the European Convertible Notes
Payable and bank credit facility, as well as oilfield material and equipment
inventory. At December 31, 2000, other assets included $2,234,000 of deferred
issuance costs, net of $2,626,000 of accumulated amortization, and $2,104,000 of
oilfield material and equipment inventory. At December 31, 2001, other assets
included deferred issuance costs of $771,000, net of $1,612,000 of accumulated
amortization, $1,271,000 of oilfield material and equipment inventory and
$767,000 of deferred transaction costs primarily related to Harken's
international restructuring.
Middle American Operations -- Harken's Middle American operations include
oil and gas exploration and development efforts in Colombia, Costa Rica, Peru
and Panama pursuant to certain Association and Concession Contracts. Such Middle
American assets, obligations and operations were transferred to a new
subsidiary, Global Energy Development Ltd. ("Global") during 2001 as part of a
Restructuring Plan to allow Global to seek financing and capital plans on its
own. See further discussion at Note 5 - Middle American Operations. Harken
accounts for its Middle America activities using the United States dollar as the
functional currency as significant exploration expenditures have typically been
denominated in U.S. dollars. See further discussion at Notes 4 and 14 -- Oil and
Gas Properties and Oil and Gas Disclosures.
Capitalization of Interest -- Harken capitalizes interest on certain oil
and gas exploration and development costs which are classified as unevaluated
costs, or which have not yet begun production, and has capitalized interest on
certain costs associated with facilities under construction. During 1999, Harken
recorded interest expense of $7,169,000, net of $4,133,000 of interest which was
capitalized to Harken's oil and gas properties. During 2000, Harken recorded
interest expense of $5,353,000, net of $2,536,000 of interest which was
capitalized to Harken's oil and gas properties. During 2001, Harken recorded
interest expense of $4,435,000, net of $963,000 of interest which was
capitalized to Harken's oil and gas properties.
General and Administrative Expenses -- Harken reflects general and
administrative expenses net of operator overhead charges and other amounts
billed to joint interest owners. General and administrative expenses are net of
$108,000, $362,000 and $372,000 for such amounts during 1999, 2000 and 2001,
respectively.
Provision for Asset Impairments -- Assets that are used in Harken's
operations, or are not held for resale, are carried at cost, less any
accumulated depreciation. Harken reviews its long-lived assets, other than its
investment in oil and gas properties, whenever events or changes in
circumstances indicate that the carrying amount of an asset may not be
recoverable. When evidence indicates that operations will not produce sufficient
cash flows to cover the carrying amount of the related asset, and when the
carrying amount of the related asset cannot be realized through sale, a
permanent impairment is recorded and the asset value is written down to fair
value.
During the fourth quarter of 1999, Harken identified certain oilfield
equipment assets consisting primarily of casing and tubing materials to be used
in the drilling of oil and gas wells in Colombia that would not be utilized
during 2000 due to a decrease in the planned number of Colombian wells to be
drilled as compared to previous drilling plans. In addition, in the fourth
quarter of 1999, Harken made the decision to begin selling such oilfield
equipment in the first quarter of 2000 and seek to dispose of such oilfield
58
equipment over the next twelve months. Accordingly, Harken reflected a provision
for asset impairment of $1,599,000 during 1999 to reduce the carrying value of
such oilfield equipment assets to its fair value (calculated as the current
replacement value based on third party fair value estimates for new equipment,
less a discount) of approximately $4,167,000. During 2000, Harken reflected a
net gain of approximately $351,000 related to the sales of a substantial portion
of this oilfield equipment.
In March 2002, the Costa Rica environmental agency SETENA denied its
approval of the requested environmental permit related to Harken's Costa Rica
Contract. HCRH has filed an appeal related to this ruling by SETENA. In January
2002, the Costa Rica Constitutional Court rendered a published opinion in a suit
that had been filed against another oil and gas operator and the Costa Rican
ministry of Environment and Energy ("MINAE") by certain environmental groups. In
its opinion, in this case, the Constitutional Court of Costa Rica found, among
other issues, that SETENA did not have the current authority to grant
environmental permits. In addition, proposed legislation pending in the Costa
Rica legislature seeks to abolish the Costa Rica government's rights to grant
hydrocarbon exploration contracts. Due to the Costa Rica Constitutional Court
decision, discussed above, even though it did not directly involve HCRH or the
Moin #2 well, as well as the pending legislation described above, Harken and
Global believe that HCRH's appeal to SETENA for reconsideration of its denial of
the requested permit, or any similar recourse, will be unsuccessful. Further,
recent political developments in Costa Rica, in the opinion of Harken and
Global, severely limit the opportunity for future oil and gas exploration in
Costa Rica. These significant adverse developments have resulted in Harken and
Global fully impairing its investment in the Costa Rica project in its
Consolidated Balance Sheet as of December 31, 2001.
During the fourth quarter of 2001, Harken also reflected an impairment of
approximately $3.2 million related to certain transportation facility costs
related to Global's Bolivar Contract area in Colombia, as the carrying value of
such facilities was in excess of estimates of future cash flows. Such estimated
future cash flows were based on current production levels, future production
expectations based on December 31, 2001 reserve estimates, projected locations
of future wells to be drilled and the lack of a ready market to purchase such
facilities. Harken continues to utilize transportation facilities related to its
Alcaravan Contract area. Harken also reflected an impairment of approximately
$1.6 million related to certain deferred transaction costs incurred by Global,
primarily for certain merger transaction efforts related to the restructuring of
Harken's international assets. Such merger transaction efforts were terminated
during the fourth quarter of 2001 and the corresponding transaction costs were
charged to earnings. In addition, Harken reflected an impairment of $620,000 on
certain Colombia oilfield equipment held by Global, as based on reduced drilling
plans by Global, and the current low industry demand for such equipment in light
of heightened Colombia security concerns, the carrying value of such inventory
was in excess of estimated future cash flows from sale or use of such equipment.
59
A summary of Harken's Provision for Asset Impairments for the years ended
December 31, 1999, 2000 and 2001 are as follows:
Year Ended December 31,
---------------------------------------------------------------
1999 2000 2001
------------------ ----------------- ----------------
Colombia Oilfield Equipment $ 1,599 $ - $ 620
Costa Rica Investment - - 8,761
Colombia Transportation Facilities - - 3,161
Transaction Costs - - 1,560
----------------- ---------------- ---------------
$ 1,599 $ - $ 14,102
================= ================ ===============
Revenue Recognition - Harken uses the sales method of accounting for
natural gas revenues. Under this method, revenues are recognized based on actual
volumes of gas sold to purchasers. The volumes of gas sold may differ from the
volumes to which Harken is entitled based on its interests in the properties.
These differences create imbalances that are recognized as a liability only when
the estimated remaining reserves will not be sufficient to enable the
underproduced owner to recoup its entitled share through production. There are
no significant gas balancing arrangements or obligations related to Harken's
operations.
Commodity Derivative Financial Instruments -- Harken has entered into
certain commodity derivative instruments which are effective in mitigating
commodity price risk associated with a portion of its crude oil and natural gas
production and cash flows. Accordingly, Harken applies hedge accounting for
those commodity derivative instruments whereby monthly cash settlements of oil
and gas price derivatives or the amortization of oil and gas option premiums
paid are reported as a component of revenue and cash flows from operations.
Settlements of oil and gas price derivatives are based on the difference between
the fixed derivative price and the New York Mercantile Exchange closing prices
for each month during the life of the contracts. Gains or losses attributable to
the termination of a swap or option contract are deferred and recognized in
revenue when the hedged crude oil or natural gas is sold. Effective January 1,
2001, Harken adopted Statement of Financial Accounting Standard No. 133,
"Accounting for Derivative Instruments and Hedging Activities." For further
discussion, see Note 12 -- Hedging Activities.
Recently Issued Accounting Pronouncements -- In June 2001, the Financial
Accounting Standards Board ("FASB") issued Statement No. 141, "Business
Combinations" and Statement No. 142 "Goodwill and Other Intangible Assets,"
which change the accounting for business combinations and for goodwill and
intangible assets by eliminating the use of the pooling of interests method for
all business combinations completed after June 30, 2001, and by eliminating
amortization of goodwill. Statement No. 142 also establishes new criteria,
effective for fiscal years beginning after December 15, 2001, to determine
whether an acquired intangible asset should be recognized separately from
goodwill. Harken will adopt the new rules on accounting for goodwill and other
intangible assets in the first quarter of 2002. It is not anticipated that FASB
Statement No. 141 or 142 will have a significant impact on Harken's results of
operations or financial position.
In June 2001, the FASB issued Statement No. 143 "Accounting for Asset
Retirement Obligations" which will become effective for fiscal years beginning
after June 15, 2002. The new standard requires companies to record a liability
for the fair value of asset retirement obligations in the period in which the
obligation arises. It is not anticipated that FASB Statement No. 143 will have a
significant impact on Harken's results of operations or financial position.
60
In August 2001, the FASB issued Statement No. 144 "Accounting for the
Impairment or Disposal of Long-Lived Assets" which will become effective for
fiscal years beginning after December 15, 2001. The new standard modifies and
extends existing requirements for accounting for asset disposals to include
disposals of a segment of a business accounted for as a discontinued operation.
It is not anticipated that FASB Statement No. 144 will have a significant impact
on Harken's results of operations or financial position.
(2) MERGERS, ACQUISITIONS AND DISPOSITIONS
Merger with XPLOR -- On August 19, 1999 Harken agreed to and 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 consisted primarily of oil
and gas property interests located along the Texas and Louisiana Gulf Coasts
along with a significant amount of additional exploratory acreage. Under the
terms of the merger agreement, the holders of the outstanding shares of the
preferred stock of XPLOR converted their stock into 750,000 shares of Harken
common stock, and also received 233,607 warrants for the purchase of Harken
common stock at $25.00 per share. Additionally, Harken assumed $14,200,000 of
bank debt secured by the oil and gas properties of XPLOR. 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 was accounted for under the purchase method of
accounting.
The merger with XPLOR was announced on August 23, 1999. Harken assigned a
value of approximately $14,531,000 related to the Harken common stock issued in
the merger transaction and approximately $1,565,000 related to the warrants.
Such values were based upon the market value of the common stock and the fair
market value of the warrants (using Black-Scholes method), on the date of the
merger. The decision to apply the merger consideration solely to the XPLOR
preferred holders, and to cancel the other classes of XPLOR stock, was made by
the XPLOR preferred holders due to the fact that the consideration was less than
the liquidation value of the XPLOR preferred.
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 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 included 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
$65.00 per share and originally were to mature on May 26, 2003. See Note 7 -
Convertible Notes Payable for further discussion of the Benz Convertible Notes.
Benz retained a 20% reversionary interest, subject to the Benz Prospects
achieving payout as defined in the Purchase and Sale Agreement. Also, pursuant
to the agreements, a former officer of Benz may annually earn additional
purchase price consideration based on 20% of the project reserve value (using
Securities and Exchange Commission proved reserve guidelines after applying an
agreed upon discount to non-producing and undeveloped reserves) as of December
31, 2000, 2001 and 2002 less total project costs, as defined, related to the
Benz Prospects.
61
Pursuant to the agreement, in April 2001 Harken issued 263,301 shares of
Harken common stock relating to this additional purchase price consideration
based on the reserve value of the Benz Prospects as of December 31, 2000 and
adjusted the purchase price by approximately $810,000, based on the market value
of the shares issued. No such consideration was required based on the reserve
value of the Benz Prospects as of December 31, 2001. In addition, in connection
with the acquisition of the Benz Prospects, Harken entered into a consulting
agreement with a former officer of Benz whereby Harken paid a monthly consulting
fee of $100,000 through December 31, 2000 in exchange for consulting services
related to the Benz Prospects. Such defined consulting services included the
development of the Benz Prospects, promoting Benz prospect interests to third
parties, recommending drilling and other exploration efforts concerning the Benz
Prospects, and other matters reasonably requested by Harken. See Note 11 --
Related Party Transactions for a discussion of the relationship that existed
between Harken and Benz. At December 30, 1999, the date of the purchase, Harken
assigned a purchase price to the Benz prospects, net of the reversionary
interest retained by Benz, of approximately $10,969,000, which was equal to the
fair value of the Benz Convertible Notes, which was calculated using the
borrowing rate of Harken's bank credit facility on the date of the acquisition.
Sale of Harken Southwest Corporation -- On December 21, 2000, a
wholly-owned subsidiary of Harken sold its interest in Harken Southwest
Corporation ("HSW") to Rim Southwest Holding Corporation (the "Buyer") for
approximately $3,000,000 cash, subject to certain adjustments. HSW owned and
operated interests in a total of 23 oil wells and six gas wells in the Paradox
Basin in the Four Corners area of Arizona, Utah and New Mexico and owned a
non-operated interest in the Aneth Gas Plant, a gas processing plant located in
the Paradox Basin. HSW's operations were primarily concentrated on the 16
million acre Navajo Indian Reservation through two operating agreements with the
Navajo Tribe of Indians.
Sales of Certain Producing Property Interests -- During the fourth quarter
of 2000, Harken, through certain wholly-owned subsidiaries, sold its interest in
30 selected oil and gas properties located in New Mexico, Texas and Louisiana
for a total of approximately $2,362,000. During 2001, certain wholly-owned
subsidiaries of Harken sold certain interests in oil and gas producing
properties located in Texas, Arkansas, New Mexico and Louisiana for
approximately $13,090,000 cash. Subsequent to December 31, 2001, in February
2002, Harken sold an additional interest in an oil and gas producing property
located in Texas for approximately $910,000.
Acquisition of Republic Properties -- On January 30, 2002, a wholly-owned
subsidiary of Harken signed an agreement to acquire certain property interests
(the "Republic Properties") from Republic Resources, Inc., ("Republic") subject
to approval by Republic's shareholders and debenture holders. The Republic
Properties consist of 15 producing property interests located in southern
Louisiana and the Texas Gulf Coast region. The Republic Properties to be
acquired by Harken are in exchange for Harken common stock having a value of
$2,645,500 based on the average reported closing price for Harken common stock
for the 20 trading days prior to the Closing Date, subject to a maximum of
2,645,500 shares to be issued. In addition, the Purchase and Sale Agreement also
provides for contingent additional consideration of cash or additional shares of
Harken common stock to be paid within 45 days after December 31, 2003, based on
a defined calculation to measure the appreciation of the reserve value of the
Republic Properties.
Pro Forma Information --The following unaudited pro forma combined
condensed statement of operations for the year ended December 31, 1999 gives
effect to the merger with XPLOR and the issuance of the Benz Convertible Notes
as if each had been consummated at January 1, 1999. The pro forma data related
to the merger with XPLOR reflects the period from January 1, 1999 to the August
19, 1999 merger date and is
62
derived from the unaudited financial statements of XPLOR for the above period.
The merger with XPLOR was considered a "significant" transaction, as defined by
the Securities and Exchange Commission, and accordingly the audited financial
statements for XPLOR were included in Harken's Current Report on Form 8-K/A, as
filed on November 1, 1999. The following unaudited pro forma combined condensed
statement of operations for the year ended December 31, 2000 gives effect to the
sale of Harken Southwest Corporation and the sale of certain producing property
interests consummated during 2000, 2001 and 2002 as if each had been consummated
at January 1, 2000. The following unaudited pro forma combined condensed
statement of operations for the year ended December 31, 2001 gives effect to the
sale of certain producing property interests consummated during 2001 and 2002 as
if each had been consummated at January 1, 2001. See information above for a
detailed discussion of each transaction. None of the above transactions
generated any gain or loss.
The unaudited pro forma data is presented for illustrative purposes only
and is not necessarily indicative of the operating results that would have
occurred had the transactions been consummated at the dates indicated, nor are
they indicative of future operating results. The unaudited pro forma data does
not reflect the effect of the capitalization of certain amounts of interest on
the Benz Convertible Notes or the interest income earned from proceeds from
asset sales.
63
Pro Forma Combined Condensed Statement of Operations
For the Year Ended December 31, 1999
(unaudited)
Period from
January 1, 1999
to Closing Date
of Merger
----------------
Harken XPLOR Pro Forma
Actual Actual Adjustments Pro Forma
----------- ---------------- ----------- -----------
Oil and gas revenue $ 19,745 $ 5,261 $ - $ 25,006
Other revenues 3,711 79 - 3,790
----------- ---------- -------- -----------
Total Revenues 23,456 5,340 - 28,796
----------- ---------- -------- -----------
Oil and gas operating expenses 8,935 2,535 - 11,470
General and administrative expenses, net 11,043 1,543 - 12,586
Depreciation and amortization 6,848 2,735 (596)(1) 8,987
Provision for asset impairments 1,599 - - 1,599
Interest expense and other, net 7,296 708 600 (2) 8,604
----------- ---------- -------- -----------
Total Expenses 35,721 7,521 4 43,246
----------- ---------- -------- -----------
Income tax expense 30 - - 30
----------- ---------- -------- -----------
Loss before extraordinary item $ (12,295) $ (2,181) $ (4) $ (14,480)
Extraordinary item (550) - - (550)
----------- ---------- -------- -----------
Net loss $ (12,845) $ (2,181) $ (4) $ (15,030)
----------- ---------- -------- -----------
Accretion related to preferred stock (8,427) - - (8,427)
----------- ---------- -------- -----------
Net loss atributed to common stock $ (21,272) $ (2,181) $ (4) $ (23,457)
=========== ========== ======== ===========
Basic and diluted loss per common share $ (1.48) $ (1.58)
=========== ===========
Weighted average common shares outstanding 14,413,517 14,886,119
=========== ===========
Pro Forma Adjustments - Pro Forma Combined Condensed Statement of Operations -
Year Ended December 31, 1999
(1) Pro forma entry to adjust actual depreciation and amortization expense on
oil and gas properties for the XPLOR acquired interests to the depreciation
and amortization expense calculated on a consolidated basis. See above
detail discussion of the merger with XPLOR.
(2) Pro forma entry to reflect interest expense incurred on the Benz
Convertible Notes. See above detail discussion of the acquisition of the
Benz Prospects. Also, see Note 7 -- Convertible Notes Payable for a
detailed discussion of the Benz Convertible Notes.
64
Pro Forma Combined Condensed Statement of Operations
For the Year Ended December 31, 2000
(unaudited)
Harken Pro Forma
Actual Adjustments Pro Forma
---------- ----------- -----------
Oil and gas revenue $ 43,177 $ (4,512)(1) $ 29,836
(8,829)(2)
Other revenues 1,218 1,218
----------- -------- -----------
Total Revenues 44,395 (13,341) 31,054
----------- -------- -----------
Oil and gas operating expenses 14,379 (1,787)(1) 10,304
(2,288)(2)
General and administrative expenses, net 13,223 (235)(1) 12,988
Depreciation and amortization 13,649 (820)(1) 10,588
(2,241)(2)
Valuation allowance 156,411 156,411
Interest expense and other, net 5,297 5,297
Charge for European Notes conversion 2,068 2,068
----------- -------- -----------
Total Expenses 205,027 (7,371) 197,656
----------- -------- -----------
Income tax expense 39 39
----------- -------- -----------
Loss before extraordinary item $ (160,671) $ (5,970) $ (166,641)
Extraordinary item, net 7,738 7,738
Net loss $ (152,933) $ (5,970) $ (158,903)
Preferred stock dividends (376) (376)
----------- -------- -----------
Net loss atributed to common stock $ (153,309) $ (5,970) $ (159,279)
=========== ======== ===========
Basic and diluted loss per common share $ (9.09) $ (9.45)
----------- -----------
Weighted average common shares outstanding 16,863,610 16,863,610
=========== ===========
Pro Forma Adjustments - Pro Forma Combined Condensed Statement of Operations -
Year Ended December 31, 2000
(1) Pro forma entry to adjust oil and gas revenues, operating expenses, general
and administrative expenses and depreciation and amortization to reflect
the sale of Harken Southwest Corporation. See above detail description of
the sale of Harken Southwest Corporation.
(2) Pro forma entry to adjust oil and gas revenues, operating expenses and
depreciation and amortization to reflect the sale of certain producing
property interests. See above detail description of the sales of certain
producing property interests.
65
Pro Forma Combined Condensed Statement of Operations
For the Year Ended December 31, 2001
(unaudited)
Harken Pro Forma
Actual Adjustments Pro Forma
----------- ------------ -----------
Oil and gas revenue $ 31,642 $ (3,678)(1) $ 27,964
Other revenues 781 781
----------- -------- -----------
Total Revenues 32,423 (3,678) 28,745
----------- -------- -----------
Oil and gas operating expenses 12,204 (927)(1) 11,277
General and adminstrative expenses, net 10,830 10,830
Depreciation and amortization 15,254 (1,159)(1) 14,095
Full cost valuation allowance 18,669 18,669
Provision for asset impairments 14,102 14,102
Interest expense and other, net 4,663 4,663
----------- -------- -----------
Total Expenses 75,722 (2,086) 73,636
----------- -------- -----------
Income tax expense 699 699
----------- -------- -----------
Loss before extraordinary item $ (43,998) $ (1,592) $ (45,590)
Extraordinary item 2,975 2,975
----------- -------- -----------
Net loss $ (41,023) $ (1,592) $ (42,615)
Preferred stock dividends (3,178) (3,178)
----------- -------- -----------
Net loss atributed to common stock $ (44,201) $ (1,592) $ (45,793)
=========== ======== ===========
Basic and diluted loss per common share $ (2.45) $ (2.54)
----------- -----------
Weighted average common shares outstanding 18,063,584 18,063,584
=========== ===========
Pro Forma Adjustments - Pro Forma Combined Condensed Statement of Operations -
Year Ended December 31, 2001
(1) Pro forma entry to adjust oil and gas revenues, operating expenses and
depreciation and amoritization to reflect sale of certain producing
properties See above detail description of the sale of certain producing
property interests.
66
(3) INVESTMENTS
Included within cash and temporary investments at December 31, 2000 and
2001 are certain investments in marketable debt securities and money market
accounts having maturities of sixty days or less. The cost of such investments
totaled $13,944,000 and $4,637,000 as of December 31, 2000 and 2001,
respectively, with cost approximating fair value. Harken management determines
the appropriate classification of debt securities at the time of purchase and
reevaluates such designation as of each balance sheet date. Such debt securities
are classified as held-to-maturity as Harken has the positive intent and ability
to hold the securities to maturity. Held-to-maturity securities are stated at
amortized cost, adjusted for amortization of premiums and accretion of discounts
to maturity. Such amortization is included in interest and other income. During
2000 and 2001, Harken held no securities which were classified as
available-for-sale or trading.
In addition, at December 31, 2000 and 2001, Harken held an investment in
66,903 shares of Benz Series II preferred stock and Benz Convertible Notes with
a face value of $3,967,000, but has reflected no carrying value for these
securities. See Note 8 -- Stockholders Equity, for a discussion of how Harken
acquired these Benz securities.
(4) OIL AND GAS PROPERTIES
Harken follows the full cost accounting method to account for the costs
incurred in the acquisition, exploration, development and production of oil and
gas reserves. Under this method, all costs, including internal costs, directly
related to acquisition, exploration and development activities are capitalizable
as oil and gas property costs. Harken capitalized $5,411,000, $3,196,000 and
$1,850,000 of internal costs directly related to these activities in 1999, 2000
and 2001, respectively. Such costs include certain office and personnel costs of
Harken's international and domestic exploration field offices and do not include
any corporate overhead. Harken also accrues costs of dismantlement, restoration
and abandonment to the extent that such costs, in the aggregate, are anticipated
to exceed the aggregate salvage value of equipment and facilities removed from
producing wells and other facilities. See Note 14 -- Oil and Gas Disclosures for
further discussion.
The capitalized costs of oil and gas properties, excluding unevaluated
properties, are amortized on a country-by-country basis using a unit of
production method (equivalent physical units of 6 Mcf of gas to each barrel of
oil) based on estimated proved recoverable oil and gas reserves. Such
amortization of U.S. domestic oil and gas properties was $5.41, $6.43 and $9.10
per equivalent barrel of oil produced during 1999, 2000 and 2001, respectively.
Amortization of certain Colombia oil and gas properties was $3.52, $9.45
and $8.66 per equivalent barrel of oil produced during 1999, 2000 and 2001,
respectively. The evaluated costs, net of accumulated depreciation and
amortization, at December 31, 2000 and 2001 include $11,695,000 and $12,623,000,
respectively, related to Colombia (see Note 5 - Middle American Operations for a
discussion of Colombian operations).
Amortization of unevaluated property costs begins when the properties
become proved or their values become impaired. Harken assesses realizability of
unevaluated properties on at least an annual basis or when there has been an
indication that an impairment in value may have occurred, such as for a
relinquishment of Colombian Association Contract acreage. Impairment of
unevaluated prospects is assessed based on
67
management's intention with regard to future exploration and development of
individually significant properties and the ability of Harken to obtain funds to
finance such exploration and development.
Under full cost accounting rules for each cost center, capitalized costs
of evaluated oil and gas properties, less accumulated amortization and related
deferred income taxes, shall not exceed an amount (the "cost ceiling") equal to
the sum of (a) the present value of future net cash flows from estimated
production of proved oil and gas reserves, based on current economic and
operating conditions, discounted at 10%, plus (b) the cost of properties not
being amortized, plus (c) the lower of cost or estimated fair value of any
unproved properties included in the costs being amortized, less (d) any income
tax effects related to differences between the book and tax basis of the
properties involved. If capitalized costs exceed this limit, the excess is
charged to earnings.
During the fourth quarter of 2001, Harken recorded non-cash valuation
allowances of $14,353,000 related to its domestic oil and gas properties and
$4,316,000 related to its Colombian oil properties. The valuation allowances
were based upon the present value, discounted at ten percent, of Harken's proved
oil and gas reserves, which declined due to reduced oil and gas prices at
December 31, 2001. Prices at December 31, 2001 were based on NYMEX prices of
$19.84/barrel and $2.57/mmbtu. Subsequent increases in oil and gas prices as of
March 27, 2002 were not considered in the calculation of the full cost valuation
allowance.
During the fourth quarter of 2000, Harken recorded a non-cash valuation
allowance on its Colombian oil properties of $156,411,000. The valuation
allowance is based upon the present value, discounted at ten percent, of
Harken's Colombian reserves, which declined primarily due to a reduction in
Harken's proved undeveloped reserves on its Bolivar Association Contract
following the unsuccessful Olivo #2 well in Colombia, which was drilled in late
December 2000 and the early part of the first quarter 2001.
Given the volatility of oil and gas prices, it is reasonably possible that
the estimate of discounted future net cash flows from proved oil and gas
reserves could change in the near term. If oil and gas prices decline further in
the future, even if only for a short period of time, it is possible that
additional impairments of oil and gas properties could occur. In addition, it is
reasonably possible that additional impairments could occur if costs are
incurred in excess of any increases in the present value of future net cash
flows from proved oil and gas reserves, or if properties are sold for proceeds
less than the discounted present value of the related proved oil and gas
reserves.
Capital Resources - Harken management believes that cash on hand, together
with anticipated cash flows from operations, will be adequate to satisfy its
capital expenditure plans for 2002. Harken will continue to seek to acquire
additional producing properties, particularly for its domestic operations, in
order to increase its cash flows from operations. A majority of Harken's planned
domestic capital expenditures are discretionary and, as a result, will be
curtailed if sufficient funds are not available. Such expenditure curtailments,
however, could result in Harken losing certain prospect acreage or reducing its
interest in future exploration and development projects.
(5) MIDDLE AMERICAN OPERATIONS
Colombian Operations -- Harken's Colombian operations are conducted
through Harken de Colombia, Ltd., a wholly-owned subsidiary of Global, which
held four exclusive Colombian Association Contracts with
68
Empresa Colombiana de Petroleos ("Ecopetrol") as of December 31, 2001. These
Association Contracts include the Alcaravan Contract, awarded in 1992, the
Bocachico Contract, awarded in 1994, the Bolivar Contract, awarded in 1996, and
the Cajaro Contract, awarded in December 2001 and effective February 2002. As of
December 31, 2001, the Alcaravan Contract covers an area of approximately 24,000
acres in the Llanos Basin of Eastern Colombia. The Bocachico Contract covers
approximately 54,700 acres in the Middle Magdalena Valley of Central Colombia
and the Bolivar Contract covers an area of approximately 250,000 acres in the
Northern Middle Magdalena Valley of Central Colombia. The Cajaro Contract covers
approximately 83,000 acres in the Llanos Basin of Eastern Colombia, adjacent to
the Alcaravan Contract area.
Terms of each of the Association Contracts commit Global to perform certain
activities in accordance with a prescribed timetable. As of December 31, 2001,
Global was in compliance with the requirements of each of the Association
Contracts, as amended and/or waived. As of March 27, 2002, Global is in
negotiations with Ecopetrol whereby Global would relinquish 50% of the Bolivar
contract area acreage in exchange for a release from the sixth year Bolivar
Contract work obligations. The release of such acreage would not affect Harken's
proved reserves on the Bolivar Contract area.
Under the terms of the Association Contracts, if, during the first six
years of each contract, Global 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 Global 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 election by Ecopetrol,
subject to the entire term of the Association Contract being limited to no more
than 28 years. Upon an election by Ecopetrol to participate in the development
of a field and upon commencement of production from that field, Ecopetrol would
begin to reimburse Global for 50% of Global's successful well costs expended up
to the point of Ecopetrol's participation plus, in the case of the Bolivar and
Cajaro Contracts, 50% of all seismic and dry well costs incurred prior to the
point of Ecopetrol's participation. Ecopetrol, on behalf of the Colombian
government, receives a 20% royalty interest (5% to 25% royalty interest on the
Cajaro Contract depending on production levels) from all production. For fields
in which Ecopetrol participates, all production (after royalty payments) will be
allocated 50% to Ecopetrol and 50% to Global 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. For certain Association Contracts, 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 Global's share of production. After
a declaration of Ecopetrol's participation, Global 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, Global is entitled to receive Ecopetrol's 50% share of
production, after deduction of Ecopetrol's royalty interest, until Global has
recovered 200% of its costs, after which time Ecopetrol could elect to begin to
receive its share of production.
Harken, through Global, has proved reserves attributable to two of its
contracts, the Alcaravan and Bolivar Contracts. In the Alcaravan Contract,
Global has proved reserves in the Palo Blanco field, and in the Bolivar
Contract, Global has proved reserves in the Buturama field. Global submitted an
application to Ecopetrol for their participation in both of these fields. In
February and October 2001, respectively, Global was notified by Ecopetrol that
Global could proceed with the development and production of the Buturama and
Palo Blanco fields on a sole risk basis.
69
During the last part of 1999, pursuant to specific negotiations with
Ecopetrol, Global began receiving Ecopetrol's working interest share of monthly
Bolivar Contract area production as nonrefundable reimbursement for a portion of
Ecopetrol's share of certain historical Bolivar Contract area costs. Global
similarly began receiving Ecopetrol's working interest share of monthly
Alcaravan area production in May 2000. Global reflected such nonrefundable
reimbursement production as revenues during the time prior to Ecopetrol's
notification that Global could proceed with the development and production of
these fields on a sole-risk basis.
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 entered into an agreement with MKJ
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 in 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.
Under the terms of the Costa Rica Contract, if during the first six years
of the contract (the "Exploration Period") Harken Costa Rica Holdings LLC
("HCRH," a Nevada limited liability company) discovers one or more fields
capable of producing oil or gas in quantities that are economically exploitable,
the term of the contract will be extended for a period of 20 years. Production
will be allocated whereby the Costa Rican government will receive up to a 15%
royalty interest (sliding scale based on production), and the remaining interest
will be paid to HCRH.
Harken's participation in Costa Rica is structured whereby a wholly-owned
Global subsidiary owns a share of the stock of HCRH, with an affiliate of MKJ
owning the remaining stock of HCRH. Through June 30, 2001, Global owned 80% of
the stock of HCRH. Under the terms of the agreement between Harken and MKJ,
Harken paid approximately $3.7 million of the $4.2 million to be paid 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. The remaining $500,000 of this purchase price is to be paid upon the
mobilization of the rig related to the initial well to be drilled on the Costa
Rica Contract acreage. In June 2000, the assignment of the Costa Rica Contract
rights to HCRH was approved by the Costa Rican government. Additionally, $4
million was funded by Harken related to the Contract. In July 2001, Harken
elected not to pay the $4 million of additional funds to be transferred to HCRH,
which, in accordance with the contract between Harken and MKJ, resulted in
Harken's ownership in HCRH being reduced from 80% to the current 40% (with MKJ's
ownership being increased to 60%) and MKJ consequently assumed operations of
HCRH and the Costa Rica Contract. As a result of Harken's reduced ownership in
HCRH, beginning in July 2001, Harken reflected its investment in HCRH following
the equity method of accounting whereby Harken's historical cost of its
investment was presented as Investment in Equity Investee in its Consolidated
Balance Sheets. This presentation represents a change in the accounting for
Harken's investment in HCRH, which was previously consolidated. Due to the
insignificant impact of this change in accounting, no pro forma disclosure is
required.
In March 2002, the Costa Rica environmental agency SETENA denied its
approval of the requested environmental permit related to Harken's Costa Rica
Contract. HCRH has filed an appeal related to this ruling by SETENA. In January
2002, the Costa Rica Constitutional Court rendered a published opinion in a suit
that
70
had been filed against another oil and gas operator and MINAE by certain
environmental groups. In its opinion, in this case, the Constitutional Court of
Costa Rica found, among other issues, that SETENA did not have the current
authority to grant environmental permits. In addition, proposed legislation
pending in the Costa Rica legislature seeks to abolish the Costa Rica
government's rights to grant hydrocarbon exploration contracts. Due to the Costa
Rica Constitutional Court decision discussed above, even though it did not
directly involve HCRH or the Moin #2 well, as well as the pending legislation
described above, Harken and Global believe that HCRH's appeal to SETENA for
reconsideration of its denial of the requested permit, or any similar recourse,
will be unsuccessful. Further, recent political developments in Costa Rica, in
the opinion of Harken and Global, severely limit the opportunity for future oil
and gas exploration in Costa Rica. These significant adverse developments have
resulted in Harken and Global fully impairing its investment in the Costa Rica
project in its Consolidated Balance Sheet as of December 31, 2001.
Peru Operations -- In April 2001, Harken, through a wholly-owned subsidiary
of Global, signed a Technical Evaluation Agreement ("Peru TEA") with PeruPetro,
the national oil company of Peru. The Peru TEA covers an area of approximately
6.8 million gross acres in northeastern Peru. Under the terms of the Peru TEA,
Global has the option to convert the Peru TEA to a seven year exploration
contract, with a twenty-two year production period. Terms of the Peru TEA allow
Global to conduct a study of the area that will include the reprocessing of
seismic data and evaluation of previous well data.
Panama Operations -- In September 2001, Harken, through a wholly-owned
subsidiary of Global, signed a Technical Evaluation Agreement ("Panama TEA")
with the Ministry of Commerce and Industry for the Republic of Panama. The
Panama TEA covers an area of approximately 2.7 million gross acres divided into
three blocks in and offshore Panama. Under the terms of this Panama TEA, which
extends for a period of 24 months, Global is to perform certain work program
procedures and studies to be submitted to the Panamanian government with an
option to negotiate and enter into one or more Contracts for the Exploration and
Exploitation of Hydrocarbons with the Ministry of Commerce and Industry.
Placement of Global Shares -- During 2001, Harken's Board of Directors
approved a plan to restructure Harken's operations for the purpose of focusing
Harken's resources more directly on its U.S. acquisition, exploration and
development operations particularly in the Gulf Coast region of Texas and
Louisiana. Pursuant to this restructuring plan, the Board determined it to be in
the shareholders' interest to implement such a plan to move Harken's interests
in Middle American operations, assets and obligations under a separate
subsidiary which would have the ability and capability to seek financing and
other capital plans on its own. During 2001, Harken transferred all of its
international operations, assets and obligations into a new subsidiary, Global
Energy Development Ltd. ("Global"), a Delaware corporation. In the past,
Harken's international efforts focused principally on Colombian exploration
projects. Global's new business strategy is to identify, develop and promote
energy projects from throughout Latin America to industry and financial partners
and to aggregate assets in Latin America through strategic acquisitions and
alliances.
In March 2002, Global transferred all of its interests in its international
assets and operations to, and obligations relating to such assets and operations
were assumed by, a new subsidiary, Global Energy Development PLC ("Global PLC,"
a United Kingdom company) in exchange for 92.77% of Global PLC's common stock.
Upon the completion of this exchange transaction, Global PLC then completed the
listing of its common stock for trading on the AIM Exchange in London, and
placed 7.23% of such stock in a placement to investors, of which less than 1%
was purchased at the offering price by certain officers, directors and employees
of Harken and Global and a family member. Global PLC is seeking additional
financing and
71
acquisition activities using its shares of its newly listed common stock. At
March 27, 2002, Harken, through Global, owned 92.77% of Global PLC common stock.
(6) BANK CREDIT FACILITY OBLIGATIONS
A summary of long-term bank obligations follows:
December 31, December 31,
2000 2001
-------------- --------------
Subsidiary notes payable to bank (A) $ 9,937,000 $ 7,937,000
Subsidiary project finance facility (B) - -
-------------- --------------
9,937,000 7,937,000
Less: Current portion - -
-------------- --------------
$ 9,937,000 $ 7,937,000
============== ==============
(A) XPLOR, a wholly-owned subsidiary of Harken, had a three-year loan
facility with Christiania og Kreditkasse ("Christiania") which was
solely secured by the oil and gas properties and subsidiaries of
XPLOR. The Christiania facility provided for interest based on the
short-term London Interbank Offered Rate ("LIBOR") plus a margin of
1.125% to 1.875%, payable at the underlying LIBOR maturities or
lender's prime rate plus 0.25%, and provided for a commitment fee of
0.375% on the unused amount.
On August 11, 2000, certain Harken subsidiaries, including XPLOR (the
"Borrowers"), entered into a new three year loan facility with Bank
One Texas, N.A. ("Bank One") which is secured by substantially all of
Harken's domestic oil and gas properties and a guarantee from Harken.
The Bank One facility provides borrowings limited by a borrowing base
(as defined by the Bank One facility) which was $12,400,000 as of
December 31, 2001. Such borrowing base, which is net of outstanding
letters of credit, is re-determined by Bank One on May 1 and November
1 of each year in accordance with the facility agreement. The Bank One
facility provides for interest based on LIBOR plus a margin of 2.350%
(4.36625% as of December 31, 2001), payable at the underlying LIBOR
maturities or lender's prime rate, and provides for a commitment fee
of 0.375 % on the unused amount. At December 31, 2001 Harken has
$7,937,000 outstanding pursuant to the facility.
The Bank One facility requires the Borrowers, as well as Harken, to
maintain certain financial covenant ratios and requirements as
calculated on a quarterly basis. Such financial covenant ratios and
requirements for the Borrowers include a current ratio, as defined, of
not less than 1.0 to 1.0, a total liabilities to net capital
investment ratio, as defined, of not more than 1.15 to 1.0 and a debt
service coverage ratio, as defined, of not less than 1.5 to 1.0.
Required financial covenants for Harken include a ratio of total
liabilities to net worth, as defined, of not more than 0.6 to 1.0, and
a debt service coverage ratio, as defined, of not less than 1.25 to
1.0. For the quarter ended December 31, 2001, Harken and the Borrowers
were each not in compliance with its respective debt service coverage
ratio requirement.
72
In March 2002, Harken and the Borrowers received a letter from Bank
One waiving the Borrowers debt service coverage ratio requirement for
the fourth quarter of 2001 and the first quarter of 2002 and reducing
the requirement to 1.15 to 1.0 beginning in the second quarter of
2002. Bank One also waived Harken's debt service coverage ratio
requirement for the fourth quarter of 2001, deleted the requirement
beginning in the first quarter of 2002 and added a current ratio
requirement, as defined, for Harken of 1.15 to 1.0, beginning in the
first quarter of 2002. In exchange, Harken entered into certain
commodity derivative instruments hedging an additional portion of the
Borrower's future natural gas production, and the current borrowing
base was reduced to $7,937,000, the amount of the current balance
outstanding under the 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. No borrowings were drawn by
Harken de Colombia, Ltd. under the facility.
During the second quarter of 2001, Harken de Colombia, Ltd. and IFC
agreed to terminate the project finance loan agreement.
(7) CONVERTIBLE NOTES PAYABLE
A summary of convertible notes payable is as follows:
December 31, December 31,
2000 2001
---------------- ----------------
5% European Notes $ 59,810,000 $ 40,980,000
Benz Convertible Notes 10,130,000 10,408,000
---------------- ----------------
69,940,000 51,388,000
Less: Current portion - -
---------------- ----------------
$ 69,940,000 $ 51,388,000
================ ================
5% European Notes -- On May 26, 1998, Harken issued to qualified purchasers
a total of $85 million in 5% European Notes which mature on May 26, 2003. In
connection with the sale and issuance of the 5% European Notes, Harken paid
approximately $4,256,000 from the 5% European Notes proceeds for commissions and
issuance costs. 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 $65.00 per share, subject to adjustment
in certain circumstances (the "5% European Note Conversion Price"). Other than
the February 2000 transaction discussed below, none of the bondholders have
exercised their conversion option as of March 27, 2002. The 5% European Notes
are also convertible by Harken into shares of Harken common stock if for any
period of thirty consecutive days commencing on or after May 26, 1998, the
average of the closing prices of Harken common stock for each trading day during
such thirty-day period shall have equaled or exceeded
73
125% of the 5% European Note Conversion Price (or $81.25 per share of Harken
common stock). The 5% European Notes may be redeemed for cash, at Harken's
option, at par, in whole or in part, at any time after May 26, 2002, upon not
less than 30 days notice to the holders. In addition, beginning November 26,
2002, Harken may redeem up to 50% of the 5% European Notes in exchange for
shares of Harken common stock at a defined conversion price based on an average
market price of Harken common stock. Beginning May 26, 2003, Harken may
similarly redeem all remaining 5% European Notes for shares of Harken common
stock. The remaining 5% European Notes are listed on the Luxembourg Stock
Exchange and had an aggregate market value of approximately $25,000,000 as of
December 31, 2001.
In February 2000, Harken entered into an agreement with a holder of certain
of the 5% European Notes in which the holder exchanged Notes in the face amount
of $6,000,000, plus accrued interest, for 300,000 shares of Harken common stock
plus a cash payment of $50,000. Although the 300,000 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 of $2,068,000 in the accompanying Consolidated Statement of Operations
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 $65.00 per
share conversion price of the 5% European Notes.
During 2000, Harken repurchased 5% European Notes in the face amount of
$19,190,000 from certain holders in exchange for cash of approximately
$10,680,000 plus transaction expenses. During the first quarter of 2001, Harken
repurchased additional 5% European Notes in the face amount of $250,000 from
certain holders in exchange for cash of approximately $140,000 plus transaction
expenses. Harken has reflected an extraordinary item gain from the cash purchase
of outstanding 5% European Notes in the accompanying Consolidated Statements of
Operations.
On May 18, 2001, Harken issued 325,150 newly-issued shares of Series G1
Preferred stock in exchange for 5% European Notes in the face amount of
$9,000,000. Harken has reflected an extraordinary item gain of $1,147,000 in the
accompanying Consolidated Statements of Operations for the difference between
the face amount of the 5% European Notes exchanged and the fair value of the
Series G1 Preferred shares issued, less transaction expenses. Such fair value
was supported by a third-party appraisal of the G1 Preferred stock, based on the
market value of the underlying conversion shares of Harken common stock as of
the date of the exchange.
On July 20, 2001, Harken issued 95,800 shares of a new series of
convertible preferred stock (the "Series G2 Preferred") in exchange for 5%
European Notes in the face amount of $9,580,000. Harken has reflected an
extraordinary item gain of $1,722,000 in the accompanying Consolidated
Statements of Operations for the difference between the face amount of the 5%
European Notes exchanged and the fair value of the Series G2 Preferred shares
issued, less transaction expenses. Such fair value was supported by a
third-party appraisal of the G2 Preferred stock, based on the market value of
the underlying conversion shares of Harken common stock.
Commissions and issuance costs associated with the 5% European Notes are
deferred and are included in Other Assets and are amortized to interest expense
over the period until conversion or maturity of the 5% European Notes. As 5%
European Notes are repurchased for cash, or exchanged for preferred stock, a pro
rata portion of the deferred costs are included in the calculation of the
extraordinary item gain.
74
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, Acquisitions and Dispositions 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. The Benz Convertible Notes are convertible
into shares of Harken common stock at a conversion price of $65.00 per share,
subject to adjustment in certain circumstances (the "Benz Notes Conversion
Price"). The Benz Convertible Notes are also convertible by Harken into shares
of Harken common stock, if for any period of thirty consecutive days the average
of the closing prices of Harken common stock for each trading day during such
thirty-day period shall have equaled or exceeded 125% of the Benz Notes
Conversion Price (or $81.25 per share of Harken common stock). The Benz
Convertible Notes may be redeemed for cash, or shares of Harken common stock, at
Harken's option, at par, in whole or in part, at any time after May 26, 2002,
upon not less than 30 days notice to the holders. In addition, beginning
November 26, 2002 Harken may redeem up to 50% of the Benz Convertible Notes in
exchange for shares of Harken common stock at a conversion price to be
calculated based on an average market price of Harken common stock.
For a period of up to nine months following the Closing Date (the
"Restricted Put Period"), Benz could have required Harken to redeem the Benz
Convertible Notes at Harken's option for either cash or Harken common stock,
provided that such consideration was 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
could have been 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.
This restricted put option would never obligate Harken to pay more than the
carrying value of the debt, and as such, has not been recognized in the
Consolidated Balance Sheet.
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 that
existed between Harken and Benz at the time of this transaction.
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 remaining face amount of the Benz Convertible Notes
outstanding is accreted into interest expense over the term of the notes.
(8) STOCKHOLDERS' EQUITY
Reverse Stock Split -- On November 7, 2000, Harken effected a one-for-ten
reverse stock split that has been retroactively reflected in the consolidated
financial statements.
Common Stock -- Harken currently has authorized 225,000,000 shares of $.01
par common stock. At December 31, 2000 and 2001, Harken had issued 17,699,110
shares and 18,713,038 shares, respectively.
75
Harken currently has reserved approximately 9.5 million shares of common
stock which Harken may be required to issue as a result of outstanding warrants,
stock options, convertible notes and preferred stock which may be become
exercised or converted, particularly in the event of an increase in the market
price of Harken's common stock. See Note 7 - Convertible Notes Payable for
further discussion of the maturity dates of the outstanding notes payable which
are convertible into shares of Harken common stock. Also, see Note 9 - Stock
Option Plan for a discussion of Harken's outstanding and exercisable stock
options.
A roll forward of the number of common, preferred and shares held in
treasury are as follows:
Number of Shares
------------------------------------------
Description Preferred Common Treasury
- ----------------------------------------------------------------------------------------
Balance at December 31, 1998, (as restated) 1,500 13,476,000 (70,000)
Preferred stock (1,500) - -
Accretion of preferred stock - - -
Treasury stock - - (145,000)
Common Stock - 260,000 -
Warrants/Options exercised - 2,000 -
Purchase of XPLOR - 750,000 -
Settlement of Property Purchase Acquisition - - -
Conversion of development finance agreement - 1,083,000 -
----------- ------------- ----------
Balance as of December 31, 1999 - 15,571,000 (215,000)
Number of Shares
------------------------------------------
Description Preferred Common Treasury
- ----------------------------------------------------------------------------------------
Balance at December 31, 1999, (as restated) - 15,571,000 (215,000)
Common Stock - 1,357,000 -
Preferred Stock 158,000 - -
Exchange of Euronote - 300,000 -
Purchase of XPLOR - - -
Conversion of development finance agreement - 688,000 -
Treasury Stock - - 90,000
Cancellation of Treasury Stock and other - (217,000) 215,000
----------- ------------- ----------
Balance as of December 31, 2000 158,000 17,699,000 (90,000)
76
Number of Shares
--------------------------------------------------------
Description Preferred G1 Preferred G2 Common Treasury
----------------------------------------------------------------------------------------------------
Balance at December 31, 2000 158,000 -- 17,699,000 (90,000)
Common Stock -- -- 521,000 --
Preferred Stock 336,000 95,800 -- --
Treasury Stock -- -- -- (453,000)
Conversion of G1 P/S to Common Stock (48,000) -- 415,000 --
Conversion of G2 P/S to Common Stock -- (500) 17,000 --
Kayne Anderson purchase of interest in wells -- -- 61,000 --
------------- ------------ ---------- ----------
Balance as of December 31, 2001 446,000 95,300 18,713,000 (543,000)
Treasury Stock -- At December 31, 2000 and 2001, Harken had 89,750 and
542,900 shares, respectively, of treasury stock. During 1999, Harken purchased
145,300 shares of Harken common stock in the open market at a cost of
approximately $1,964,000. During 2000, Harken cancelled all of the 215,300
shares of treasury stock it held as of December 31, 1999. In addition, during
2000, Harken purchased 89,750 shares of Harken common stock at a cost of
approximately $453,000. During 2001, Harken purchased 453,150 shares of Harken
common stock at a cost of approximately $980,000.
Issuance of Convertible Notes Payable -- In May 1998, Harken issued to
qualified purchasers a total of $85 million of 5% European Notes which mature on
May 26, 2003. Such 5% European Notes are convertible into shares of Harken
common stock at an initial conversion price of $65.00 per share, subject to
adjustment in certain circumstances. For further discussion of the 5% European
Notes, see Note 7 - Convertible Notes Payable.
In February 2000, Harken entered into an agreement with a holder of certain
of the 5% European Notes where the holder exchanged Notes in the face amount of
$6,000,000, plus accrued interest, for 300,000 shares of Harken common stock.
On December 30, 1999, Harken issued the Benz Convertible Notes in exchange
for certain prospects acquired from Benz. See Note 2 - Mergers, Acquisitions and
Dispositions for further discussion of the acquisition of the Benz Prospects.
Such Benz Convertible Notes are convertible into shares of Harken common stock
at the Benz Notes Conversion Price, subject to adjustment in certain
circumstances. For further discussion of the Benz Convertible Notes, see Note 7
- - Convertible Notes Payable.
Merger with XPLOR-- In August 1999, Harken entered into a merger agreement
with XPLOR whereby XPLOR became a wholly-owned subsidiary of Harken. As
consideration for the merger, Harken issued 750,000 shares of Harken common
stock and issued 233,607 warrants for the purchase of shares of Harken common
stock at $25.00 per share, which were exercisable through February 2002. See
Note 2 - Mergers, Acquisitions and Dispositions for further discussion.
Acquisition of Republic Properties - On January 30, 2002, a wholly-owned
subsidiary of Harken signed an agreement to acquire certain property interests
from Republic, subject to approval by Republic's shareholders and debenture
holders, in exchange for Harken common stock having a value of $2,645,500,
77
subject to a maximum of 2,645,000 shares to be issued. See Note 2 - Mergers,
Acquisitions and Dispositions for further discussion.
Development Finance Agreements -- During late 1997 and early 1998, Harken
entered into Development Finance Agreements relating to certain of its Colombian
operations. Pursuant to these Development Finance Agreements, certain investors
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 $20 million a significant majority of the remaining Development Finance
Agreements. During 1999, 2000 and 2001, Harken also issued to the Development
Finance Agreement investors a total of 1,082,872, 687,826 and 318,907,
respectively, of Harken common stock pursuant to, and in full satisfaction of,
the Development Finance Agreements.
Private Placements of Harken Common Stock -- In March 2000, Harken issued
200,000 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 246,154 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.
During the third quarter of 2000, Harken issued 910,476 shares of Harken common
stock to institutional investors in exchange for $4,971,000 cash and 13,380
shares of Benz Series II preferred stock having a face value of $1,338,000 and
Benz Notes with a face value of $412,000. No value has been assigned to the Benz
securities held by Harken.
Series F Preferred Stock -- On April 9, 1998, Harken entered into a
Securities Purchase Agreement with RGC International Investors, LDC ("RGC"),
pursuant to which Harken issued to RGC 15,000 shares of its Series F Convertible
Preferred Stock (the "Series F Preferred") in exchange for $15,000,000. The
Series F Preferred was convertible into shares of Harken common stock at a
conversion price based upon the market price of Harken common stock at the time
of conversion. The number of shares of Harken common stock issuable upon
conversion of the Series F Preferred also included a premium amount equal to an
increase calculated on the face value of the Series F Preferred at 5% per annum.
Harken reflected this 5% per annum increase throughout 1998 as accretion related
to preferred stock in the accompanying Consolidated Statements of Operations.
Such accretion amount is reflected in Harken's calculation of net loss
attributable to common stock. The Series F Preferred did not pay dividends.
In January 1999, RGC elected to present its Series F Preferred for
conversion and Harken elected to pay cash of approximately $25,273,000 to RGC in
lieu of issuing the required shares of Harken common stock. Harken reflected an
additional amount of approximately $1,302,000 of accretion during 1998 related
to Series F Preferred which represents the portion of the ultimate redemption
value generated in December 1998 and has reflected the additional accretion
amount of approximately $8,427,000 in 1999 which represents the ultimate
redemption value generated in the first quarter of 1999.
Series G1 Preferred Stock -- The Harken Board of Directors approved the
authorization and issuance of up to 700,000 shares of a new series of
convertible preferred stock. The Series G1 Convertible Preferred Stock (the
"Series G1 Preferred"), which was issued in October 2000, has a liquidation
value of $100 per share, is non-voting, and is convertible at the holder's
option into Harken common stock at a conversion price of $12.50 per share,
subject to adjustment in certain circumstances (the "Series G1 Preferred
Conversion Price"). The Series G1 Preferred is also convertible by Harken into
shares of Harken common stock if for any
78
period of twenty consecutive trading days, the average of the closing prices of
Harken common stock during such period shall have equaled or exceeded the Target
Price. Such Target Price shall initially be defined as the Series G1 Preferred
Conversion Price multiplied by 110% (or $13.75 per share of Harken common stock)
and shall be reduced by an additional $1.10 per share on each anniversary of the
closing date, but not less than a minimum Target Price of $8.10 per share of
Harken common stock.
The Series G1 Preferred holders shall be entitled to receive dividends at
an annual rate equal to $8 per share when, as and if declared by the Harken
Board of Directors. All dividends on the Series G1 Preferred are cumulative and
payable semi-annually in arrears, payable on June 30 and December 30. At
Harken's option, dividends may also be payable in Harken common stock valued at
$12.50 per share. The Series G1 Preferred dividend and liquidation rights shall
rank junior to all claims of creditors, including holders of outstanding debt
securities, but senior to Harken common stockholders and to any subsequent
series of Harken preferred stock, unless otherwise provided, except for the
Series G2 Preferred, which shall rank equal to the Series G1 Preferred. As of
December 31, 2001, Harken had accrued approximately $3,598,000 of dividends in
arrears related to the Series G1 Preferred stock, approximately $8.06 per share
of such preferred stock outstanding. Harken also may redeem the Series G1
Preferred in whole or in part for cash at any time at $100 per share plus any
accrued and unpaid dividends. In addition, on or after June 1, 2004, Harken may
further elect, in any six-month period, to redeem up to 50% of the outstanding
Series G1 Preferred with shares of Harken common stock valued at an average
market price, and using a redemption value of the Series G1 Preferred that
includes a 5% to 10% premium based on the market capitalization of Harken at the
time of redemption.
During 2000, Harken received consideration consisting of approximately
$7,767,000 cash, 43,523 shares of Benz Series II preferred stock having a face
value of $4,352,300 and Benz Notes with a face value of $3,555,000 in exchange
for 158,155 shares of Series G1 Preferred which were issued in October 2000. No
value has been assigned to the Benz securities held by Harken.
As discussed in Note 7 - Convertible Notes Payable, during May 2001, Harken
issued 325,150 additional newly-issued shares of Series G1 Preferred stock in
exchange for 5% European Notes in the face amount of $9,000,000.
During 2001, holders of 48,048 shares of Series G1 Preferred stock elected
to exercise their conversion option, and such holders were issued 415,053 shares
of Harken common stock. In March 2002, additional holders of 7,770 shares of
Series G1 Preferred stock elected to exercise its conversion option, and such
holders were issued 68,775 shares of Harken common stock.
Series G2 Preferred Stock -- As discussed in Note 6 - Convertible Notes
Payable, in July 2001, Harken issued 95,800 shares of a new series of
convertible preferred stock, the Series G2 Preferred, in exchange for 5%
European Notes in the face amount of $9,580,000. Harken's Board of Directors
approved the authorization and issuance of up to 400,000 shares of Series G2
Preferred, which has a liquidation value of $100 per share, is non-voting, and
is convertible at the holder's option into Harken common stock at a conversion
price of $3.00 per share, subject to adjustment in certain circumstances (the
"Series G2 Preferred Conversion Price"). The Series G2 Preferred is also
convertible by Harken into shares of Harken common stock if for any period of
twenty consecutive calendar days, the average of the closing prices of Harken
common stock during such period shall have equaled or exceeded $3.75 per share.
79
The Series G2 Preferred holders shall be entitled to receive dividends at
an annual rate equal to $8 per share when, as and if declared by the Harken
Board of Directors. All dividends on the Series G2 Preferred are cumulative and
payable semi-annually in arrears, payable on June 30 and December 30. At
Harken's option, dividends may also be payable in Harken common stock at $3.00
per share of Harken common stock. The Series G2 Preferred dividend and
liquidation rights shall rank junior to all claims of creditors, including
holders of outstanding debt securities, but senior to Harken common stockholders
and to any subsequent series of Harken preferred stock, unless otherwise
provided. The Series G2 Preferred shall rank equal to the Series G1 Preferred.
At December 31, 2001, Harken had accrued approximately $344,000 of dividends in
arrears related to the Series G2Preferred stock, approximately $3.61 per share
of such preferred stock outstanding. Harken may also redeem the Series G2
Preferred in whole or in part for cash at any time at $100 per share plus any
accrued and unpaid dividends. In addition, on or after June 1, 2004, Harken may
further elect, in any six month period, to redeem up to 50% of the outstanding
Series G2 Preferred with shares of Harken common stock valued at an average
market price, and using a redemption value of the Series G2 Preferred that
includes a 5% to 10% premium based on the market capitalization of Harken at the
time of redemption.
During 2001, a holder of 500 shares of G2 Preferred stock elected to
exercise its conversion option, and such holder was issued 16,822 shares of
Harken common stock. In February 2002, additional holders of 1,000 shares of G2
Preferred stock elected to exercise their conversion option, and such holders
were issued 34,763 shares of Harken common stock.
Stockholder Rights Plan -- In April 1998, Harken adopted a rights agreement
(the "Rights Agreement") whereby a dividend of one preferred share purchase
right (a "Right") was paid for each outstanding share of Harken common stock.
The Rights will be exercisable only if a person acquires beneficial ownership of
15% or more of Harken common stock (an "Acquiring Person"), or commences a
tender offer which would result in beneficial ownership of 15% or more of such
stock. When they become exercisable, each Right entitles the registered holder
to purchase from Harken one one-thousandth of one share of Series E Junior
Participating Preferred Stock ("Series E Preferred Stock"), at a price of $35.00
per one one-thousandth of a share of Series E Preferred Stock, subject to
adjustment under certain circumstances.
Upon the occurrence of certain events specified in the Rights Agreement,
each holder of a Right (other than an Acquiring Person) will have the right to
purchase, at the Right's then current exercise price, shares of Harken common
stock having a value of twice the Right's exercise price. In addition, if, after
a person becomes an Acquiring Person, Harken is involved in a merger or other
business combination transaction with another person in which Harken is not the
surviving corporation, or under certain other circumstances, each Right will
entitle its holder to purchase, at the Right's then current exercise price,
shares of common stock of the other person having a value of twice the Right's
exercise price.
Unless redeemed by Harken earlier, the Rights will expire on April 6, 2008.
Harken will generally be entitled to redeem the Rights in whole, but not in
part, at $.01 per Right, subject to adjustment. No Rights were exercisable under
the Rights Agreement at December 31, 2001. The terms of the Rights generally may
be amended by Harken without the approval of the holders of the Rights prior to
the public announcement by Harken or an Acquiring Person that a person has
become an Acquiring Person.
In addition, Harken has agreements with certain members of management
whereby such employees would receive compensation amounts in the event of a
change, as defined in the agreements, in the ownership of Harken.
80
Per Share Data -- Basic loss per common share was computed by dividing net
loss attributed to common stock by the weighted average number of shares of
Harken common stock outstanding during the year and retroactively reflects the
effect of the one-for-ten reverse stock split that was effective November 7,
2000. The impact of unconverted Convertible Notes was not included in any of the
years presented as their effect would have been antidilutive. The impact of the
unconverted Development Finance Agreements, the unconverted Series F Preferred,
the unconverted Series G1 Preferred and the unconverted G2 Preferred were not
included for any of the years presented as their effect would have been
antidilutive.
81
Summary of Outstanding Warrants -- At December 31, 2001, Harken has the
following outstanding warrants available to be exercised (not in thousands):
Year of Issuance Number of Shares Exercisable Price Expiration Date
- ------------------ ------------------ ------------- ------- -----------------
1999 233,607 233,607 $25.00 2002
(9) STOCK OPTION PLAN
Harken has elected to follow Accounting Principles Board Opinion No.
25, "Accounting for Stock Issued to Employees" ("APB 25") and related
Interpretations in accounting for its employee stock options because, as
discussed below, the alternative fair value accounting provided for under
Statement of Financial Accounting Standards No. 123, "Accounting for Stock-Based
Compensation" ("SFAS 123") requires use of option valuation models that were not
developed for use in valuing employee stock options. Under APB 25, because the
exercise price of Harken's employee stock options equals or exceeds the market
price of the underlying stock on the date of grant, no compensation expense is
recognized.
Harken's 1993 Stock Option and Restricted Plan has authorized the grant
of options to Harken employees and directors for up to 400,000 shares of Harken
common stock. Harken's 1996 Stock Option and Restricted Stock Plan has
authorized the grant of 1,852,500 shares of Harken common stock. All options
granted have 10-year terms and vest and become fully exercisable at the end of 4
years of continued employment.
Pro forma information regarding net loss and loss per share is required
by SFAS 123 and has been determined as if Harken had accounted for its employee
stock options under the fair value method of that Statement. The fair value for
these options was estimated at the date of grant using a Black-Scholes option
pricing model with the following weighted-average assumptions for 1999, 2000 and
2001, respectively: risk-free interest rates of 5%; dividend yields of 0%;
volatility factors of the expected market price of Harken common stock of .898,
..929, and 1.38; and a weighted-average expected life to the option of 4 years.
The Black-Scholes option valuation model was developed for use in
estimating the fair value of traded options which have no vesting restrictions
and are fully transferable. In addition, option valuation models require the
input of highly subjective assumptions including the expected stock price
volatility. Because Harken's employee stock options have characteristics
significantly different from those of traded options, and because changes in the
subjective input assumptions can materially affect the fair value estimate, in
management's opinion, the existing models do not necessarily provide a reliable
single measure of the fair value of its employee stock options.
82
For purposes of pro forma disclosures, the estimated fair value of the
options is amortized to expense over the options' vesting period. Harken's pro
forma information follows (in thousands except for earnings per share
information):
Year Ended December 31,
-------------------------------------
1999 2000 2001
---------- ---------- ----------
Pro forma net loss attributed to common stock $ (25,596) $ (156,968) $ (46,778)
Pro forma basic and diluted loss per share $ (1.78) $ (9.31) $ (2.59)
The weighted average fair value of the options issued in 1999, 2000 and
2001 was $8.30, $2.32, and $2.40 per share, respectively.
A summary of Harken's stock option activity, and related information
for the years ended December 31, 1999, 2000 and 2001 follows (not in thousands):
Year Ended December 31,
-------------------------------------------------------------------------------------------------
1999 2000 2001
------------------------------ ------------------------------ ------------------------------
Weighted-Average Weighted-Average Weighted-Average
Options Exercise Price Options Exercise Price Options Exercise Price
----------- ---------------- ----------- ---------------- ----------- ----------------
Outstanding-beginning of year 1,117,674 $ 35.80 1,404,748 $ 30.65 1,618,326 $ 21.17
Granted 338,237 $ 13.80 509,500 $ 3.41 15,000 $ 7.07
Exercised - - - - - -
Forfeited (51,163) $ 31.10 (295,922) $ 35.59 (80,074) $ 25.53
----------- ---------------- ----------- --------------- ----------- ----------------
Outstanding-end of year 1,404,748 $ 30.65 1,618,326 $ 21.17 1,553,252 $ 20.81
Exercisable-end of year 670,362 $ 30.30 721,864 $ 30.97 980,246 $ 27.95
Exercise prices for options outstanding as of December 31, 1999 ranged
from $8.125 to $64.375. Exercise prices for options outstanding as of December
31, 2000 ranged from $3.3125 to $64.375. Exercise prices for options outstanding
as of December 31, 2001 ranged from $1.2200 to $64.375.
(10) INCOME TAXES
At December 31, 2001, Harken had available for U.S. federal income tax
reporting purposes, net operating loss (NOL) carryforward for regular tax
purposes of approximately $86,000,000 which expires in 2002 through 2021,
alternative minimum tax NOL carryforward of approximately $71,000,000 which
expires in 2001 through 2020, and statutory depletion carryforward of
approximately $2,400,000 which does not have an expiration date. In recent
years, Harken has undertaken numerous transactions that have impacted its
capital structure and shareholder base. Accordingly, Harken may have undergone
one or more ownership changes within the meaning of Internal Revenue Code
Section 382 that may significantly restrict Harken's ability to
83
utilize those NOLs. In addition, certain of these net operating loss
carryforwards have been acquired with the purchase of subsidiaries and must be
used to offset future income from profitable operations within those
subsidiaries. At December 31, 2001, Harken had available for Colombian income
tax reporting purposes NOL carryforward of approximately $25,000,000 which
expires in 2004 through 2006.
The following is a reconciliation of the reported amount of income tax
expense for the years ended December 31, 1999, 2000 and 2001 to the amount of
income tax expense that would result from applying domestic federal statutory
tax rates to pretax income:
Year Ended December 31,
-------------------------
1999 2000 2001
------ ------ ------
Tax expense using statutory rate $ - $ - $ -
Alternative minimum tax provision - 39 79
State income taxes 30 - -
Colombia presumptive income taxes - - 620
====== ====== ======
Current tax expense $ 30 $ 39 $ 699
====== ====== ======
Total deferred tax liabilities, relating primarily to U.S. oil and gas
properties as of December 31, 2000, were approximately $3,557,000. Total
deferred tax assets, primarily related to the net operating loss carryforwards
and Colombian oil and gas properties, were approximately $81,733,000. The total
net deferred tax asset is offset by a valuation allowance of approximately
$78,176,000 at December 31, 2000, resulting in no impact to results of
operations.
Total deferred tax liabilities, relating primarily to U.S. oil and gas
properties as of December 31, 2001, were approximately $2,675,000. Total
deferred tax assets, primarily related to the net operating loss carryforwards
and Colombian oil properties, were approximately $80,779,000 at December 31,
2001. The total net deferred tax asset is offset by a valuation allowance of
approximately $78,104,000 at December 31, 2001, resulting in no impact to
results of operations.
(11) 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 October 1997, Harken entered into a Development
Finance Agreement with investors affiliated with EnCap (the "EnCap Investors").
EnCap serves as the general partner of three of the EnCap Investors and the
former Harken director serves as a director of the fourth EnCap Investor. In
October 1999, Harken purchased all the interests and rights held by the EnCap
Investors for $20,000,000 cash. 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.
84
During 1997, 1998 and 1999, Harken made secured short-term loans to
certain members of Harken's Management, certain of whom also served on the Board
of Directors. Such notes receivable are reflected in Harken's Consolidated
Balance Sheet at December 31, 2000 and December 31, 2001 as Related Party Notes
Receivable.
In January 2001, pursuant to an agreement executed in December 2000,
Harken forgave the repayment of a short-term loan in the principal amount of
$250,000, plus accrued interest of $45,000, to a former director and former
member of management related to the surrender of his Harken stock options and
reflected the forgiveness as a charge to earnings in 2000. Such loan was a
recourse loan secured by his options.
In November 2001, Global elected to its Board of Directors a director
who is also a director of RP&C International Inc. ("RP&C"). RP&C has
historically provided financial and transaction consulting services to Harken,
including with regard to Harken's Convertible European Notes, and Series G1
Preferred and Series G2 Preferred stock. In addition, RP&C has served as a
financial advisor in connection with Harken's restructuring of its international
assets, obligations and operations through its Global subsidiary. In connection
with these services provided, RP&C has earned consulting and transaction fees
and may continue to earn such fees in the future.
(12) HEDGING ACTIVITIES
Harken holds certain commodity derivative instruments which are
effective in mitigating commodity price risk associated with a portion of its
future monthly natural gas production and related cash flows. Harken's oil and
gas operating revenues and cash flows are highly dependent upon commodity
product prices, which are volatile and cannot be accurately predicted. Harken's
objective for holding these commodity derivatives is to protect the operating
revenues and cash flows related to a portion of its future oil and gas sales
from the risk of significant declines in commodity prices.
During 1999, 2000 and 2001, Harken, through XPLOR, held natural gas
price swaps resulting in the subsidiary receiving fixed prices of approximately
$2.20 per MMBTU covering a total of 75,000 MMBTUs per month over the life of the
swaps, which terminated December 31, 2001. Upon the January 1, 2001 adoption of
Statement of Financial Accounting Standards ("SFAS") No. 133, Harken reflected
an increase in its accrued liabilities of approximately $3,025,000 in order to
fully record the fair value of these natural gas swaps. As such derivatives
qualify as cash flow hedges under SFAS No. 133, the offsetting impact upon
adoption was a charge to Other Comprehensive Income within Harken's
stockholders' equity. Of this initial adoption amount, approximately $1,634,000
was reclassified into earnings during the year ended December 31, 2001, to match
with the corresponding hedged production cash flows.
In January 2001, Harken purchased a put option for crude oil with a
fixed price of $25 per barrel, covering 6,000 barrels per month through June 30,
2001.
In November 2001, Harken entered into a zero-cost collar consisting of
a fixed price floor option of $2.50 per MMBTU and a fixed price cap option of
$3.8225 per MMBTU, covering 115,000 MMBTUs per month over the period of the
contract, beginning January 1, 2002 through December 31, 2002. Harken has
reflected the current fair value of this collar contract, approximately $162,000
at December 31, 2001, in Prepaid Expenses and Other Current Assets in the
accompanying Consolidated Balance Sheet. In March 2002,
85
Harken modified the remaining term of its zero-cost collar, adjusting it to a
fixed price floor option of $2.75 per MMBTU and a fixed price cap option of
$3.47 per MMBTU and increasing the monthly hedged volume to 135,000 MMBTUs. In
addition, Harken also entered into a new zero-cost collar consisting of a fixed
price floor option of $2.75 per MMBTU and a fixed price cap option of $5.12 per
MMBTU, covering 60,000 MMBTUs per month over a period from January 1, 2003
through December 31, 2003.
The above derivatives have each been designated as a cash flow hedge of
the exposure to variability of cash flows related to future sales of specified
production from certain of Harken's domestic property operations. Gains and
losses from commodity derivative instruments, even if terminated, are
reclassified into earnings when the associated hedged production occurs. Harken
holds no derivative instruments which are designated as either fair value hedges
or foreign currency hedges. Settlements of commodity derivatives are based on
the difference between fixed swap or option strike prices and the New York
Mercantile Exchange closing prices for each month during the life of the
contracts. Harken monitors its natural gas production prices compared to New
York Mercantile Exchange prices to assure its commodity derivatives are
effective hedges in mitigating its commodity price risk. Harken reflects in
earnings any increase or decrease in the fair value of its commodity derivative
instruments that is not correlative with a change in the fair value of the
future hedged production cash flows. For option and collar derivative contracts,
Harken excludes the time value component from the assessment of hedge
effectiveness. During the year ended December 31, 2001, Harken reflected a net
loss of $75,000 related to the time value component from commodity derivative
instruments, which is included in Interest and Other Expense in the accompanying
Consolidated Statements of Operations. Harken reflected no gain or loss related
to hedge ineffectiveness during the year ended December 31, 2001. As of December
31, 2001, Harken has a value of $162,000 included in Other Comprehensive Income
related to its commodity hedging activities.
Risk management policies established by Harken management limit
Harken's derivative instrument activities to those derivative instruments which
are effective in mitigating certain operating risks, including commodity price
risk. In addition to other restrictions, the extent and terms of any derivative
instruments are required to be reviewed and approved by executive management of
Harken.
86
(13) OTHER INFORMATION
Quarterly Data -- (Unaudited) -- The following tables summarize
selected quarterly financial data for 2000 and 2001 expressed in thousands,
except per share amounts:
Quarter Ended
----------------------------------------------------------------- Total
March 31 June 30 September 30 December 31 Year
---------------- --------------- ---------------- --------------- -----------------
2000
Revenues $ 10,272 $ 11,077 $ 11,592 $ 11,454 $ 44,395
Gross profit 6,611 7,095 7,710 7,382 28,798
Net income (loss) (2,189) 1,740 4,037 (156,521) (152,933)
Basic and diluted loss
per common share $ (0.14) $ 0.10 $ 0.22 $ (8.87) $ (9.09)
2001
Revenues $ 9,192 $ 10,982 $ 6,432 $ 5,817 $ 32,423
Gross profit 5,661 7,465 3,329 2,983 19,438
Net income (loss) (1,412) 75 (1,208) (38,478) (41,023)
Basic and diluted loss
per common share $ (0.10) $ (0.03) $ (0.13) $ (2.18) $ (2.45)
Significant Customers -- In 1999, 2000 and 2001, Ecopetrol, which
purchases Harken's Colombia oil production, represented 13%, 24% and 26%,
respectively, of Harken's consolidated revenues. Harken has secured and
maintains letters of credit with certain significant domestic commercial
purchasers. In addition, management does not feel that the loss of a significant
domestic purchaser would significantly impact the operations of Harken due to
the availability of other potential purchasers for its oil and gas production.
Operating 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
operates 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 Global's exploration, development, production and
acquisition efforts in Colombia, Costa Rica, Peru and Panama. Middle American
segment production cash flows have been discovered through extensive drilling
operations conducted under Association Contract or Concession arrangements with
the state-owned oil and gas companies/ministries in the respective countries.
Global's Middle American production is currently sold to Ecopetrol. In addition,
Global seeks to identify, develop and promote energy projects from throughout
Latin America to industry and financial partners and to aggregate assets in
Latin America through strategic acquisitions and alliances. During
87
the three-year period ended December 31, 2001, none of Harken's Middle American
segment revenues related to Costa Rica, Peru or Panama.
In March 2002, Global transferred all of its interests in its Middle
American assets and operations to, and obligations relating to such assets and
operations were assumed by, a new subsidiary, Global PLC, in exchange for 92.77%
of Global PLC's common stock. Upon the completion of this exchange transaction,
Global PLC then completed the listing of its common stock for trading on the AIM
Exchange in London, and placed 7.23% of such stock in a placement to investors,
of which less than 1% of Global PLC was purchased by certain officers, directors
and employees of Harken and Global and a family member at the offering price.
Global PLC is seeking additional financing and acquisition activities using its
shares of its newly listed common stock. At March 27, 2002, Harken, through
Global, owned 92.77% of Global PLC common stock.
Harken's accounting policies for each of its operating segments are the
same as those described in Note 1 - Summary of Significant Accounting Policies.
There are no intersegment sales or transfers. Revenues and expenses 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.
88
See Note 14 - Oil and Gas Disclosures for geographic information
regarding Harken's long-lived assets. Harken's financial information for each
of its operating segments is as follows for each of the three years in the
period ended December 31, 2001:
North Middle
America America Total
--------------------- ---------------- -----------------
For the year ended
December 31, 1999:
Operating revenues $ 16,719 $ 3,026 $ 19,745
Interest and other income 1,831 1,880 3,711
Depreciation and amortization 5,591 1,257 6,848
Provision for asset impairments - 1,599 1,599
Interest expense and other, net 2,918 4,378 7,296
Income tax expense 30 - 30
Segment loss before extraordinary item (2,811) (9,484) (12,295)
Capital expenditures 53,448 44,005 97,453
Total assets at end of year 99,534 199,251 298,785
For the year ended
December 31, 2000:
Operating revenues $ 32,528 $ 10,649 $ 43,177
Interest and other income 617 601 1,218
Depreciation and amortization 8,200 5,449 13,649
Full cost valuation allowance - 156,411 156,411
Interest expense and other, net 3,304 1,993 5,297
Income tax expense 39 - 39
Segment income (loss) before
extraordinary item 863 (161,534) (160,671)
Capital expenditures 14,015 12,950 26,965
Total assets at end of year 97,683 47,664 145,347
For the year ended
December 31, 2001:
Operating revenues $ 23,351 $ 8,291 $ 31,642
Interest and other income 548 233 781
Depreciation and amortization 8,871 6,383 15,254
Full cost valuation allowance 14,353 4,316 18,669
Provision for asset impairments - 14,102 14,102
Interest expense and other, net 2,761 1,902 4,663
Income tax expense 79 620 699
Segment income (loss) before
extraordinary item (16,902) (27,096) (43,998)
Capital expenditures 11,892 10,721 22,613
Total assets at end of year 65,732 30,074 95,806
89
(14) OIL AND GAS DISCLOSURES
Costs Incurred in Property Acquisition, Exploration and Development
Activities:
Year Ended December 31,
--------------------------------------
1999 2000 2001
---------- ---------- ----------
Domestic costs incurred:
Acquisition of properties
Evaluated $ 34,720 $ - $ -
Unevaluated 14,481 161 -
Exploration 815 10,837 2,200
Development 3,432 3,017 9,692
---------- ---------- ----------
Total domestic costs incurred $ 53,448 $ 14,015 $ 11,892
========== ========== ==========
Middle American costs incurred:
Acquisition of properties
Evaluated $ 3,761 $ - $ 100
Unevaluated 72 - 869
Exploration 40,172 12,950 9,752
Development - - -
---------- ---------- ----------
Total Middle American costs incurred $ 44,005 $ 12,950 $ 10,721
========== ========== ==========
Middle American costs incurred during 1999 and 2000 include $2,037,000 and
$5,122,000 of Costa Rica costs, respectively. Middle American costs during 2001
include $891,000, $635,000 and $166,000 of costs related to Costa Rica, Peru and
Panama, respectively.
90
Capitalized Costs Relating to Oil and Gas Producing Activities:
December 31,
--------------------------------------
1999 2000 2001
---------- ---------- ----------
Capitalized costs:
Unevaluated Colombia properties $ 44,767 $ 588 $ 68
Unevaluated Peru properties - - 635
Unevaluated Panama properties - - 166
Unevaluated Costa Rica properties 2,037 7,159 -
Unevaluated domestic properties 17,111 9,919 2,603
Evaluated Colombia properties 121,351 173,358 182,945
Evaluated domestic properties 131,159 148,487 154,495
Colombian production facilities 1,219 491 501
Domestic production facilities 10,236 12,737 14,892
---------- ---------- ----------
Total capitalized costs 327,880 352,739 356,305
Less accumulated depreciation and
amortization (75,071) (243,955) (280,357)
---------- ---------- ----------
Net capitalized costs $ 252,809 $ 108,784 $ 75,948
========== ========== ==========
Oil and Gas Reserve Data -- (Unaudited) -- The following information is
presented with regard to Harken's proved oil and gas reserves. The reserve
values and cash flow amounts reflected in the following reserve disclosures are
based on prices as of year end. Harken has reflected proved reserves in Colombia
related to its Alcaravan and Bolivar Association Contracts. As Harken identifies
proved reserves associated with other Association Contracts, or identifies
proved reserves from additional prospects within its Alcaravan and Bolivar
Association Contracts, such reserves will be added in the year of their
discovery. Harken has reflected no proved reserves related to its Costa Rica,
Peru or Panama operations.
During 1999, Harken applied to Ecopetrol for a declaration of commercial
discovery related to the Palo Blanco field on the Alcaravan Association Contract
and the Buturama field on the Bolivar Association Contract. In February and
October 2001, Harken was notified by Ecopetrol that Harken could proceed with
the development and production of the Buturama and Palo Blanco fields,
respectively, on a sole-risk basis. As such, Harken is entitled to receive
Ecopetrol's share of production after royalty, until Harken has recovered 200%
of its costs, after which time Ecopetrol could elect to begin to receive its
share of production. In light of Ecopetrol's election not to participate in
these fields, Harken has reflected its 80% share of future net cash flows from
the Buturama field in its proved reserves as of December 31, 2001. All Colombian
proved reserves are net of Ecopetrol's 20% royalty pursuant to each related
Association Contract. Harken's Colombian reserves in the Bolivar and Alcaravan
Contract Blocks have been reviewed by Ryder Scott Company. For further
discussion of Harken's Colombian operations, see Note 5 - Middle American
Operations.
Harken's domestic reserves reflect reductions for certain producing
properties which were sold for cash during 2000 and 2001. See Note 2 - Mergers,
Acquisitions and Dispositions for further discussion. Harken's domestic reserves
at December 31, 2001 have been prepared by Netherland, Sewell & Associates, Inc.
Proved oil and gas reserves are defined as the estimated quantities of
crude oil, natural gas, and natural
91
gas liquids which geological and engineering data demonstrate with reasonable
certainty to be recoverable in future years from known reservoirs under existing
economic and operating conditions. Reservoirs are considered proved if economic
productibility is supported by either actual production or conclusive formation
tests. The area of a reservoir considered proved includes that portion
delineated by drilling and defined by gas-oil and/or oil-water contacts, if any,
and the immediately adjoining portions not yet drilled, but which can be
reasonably judged as economically productive on the basis of available
geological and engineering data. Reserves which can be produced economically
through application of improved recovery techniques are included in the "proved"
classification when successful testing by a pilot project, or the operation of
an installed program in the reservoir, provides support for the engineering
analysis on which the project or program was based.
The reliability of reserve information is considerably affected by several
factors. Reserve information is imprecise due to the inherent uncertainties in,
and the limited nature of, the data base upon which the estimating of reserve
information is predicated. Moreover, the methods and data used in estimating
reserve information are often necessarily indirect or analogical in character
rather than direct or deductive. Furthermore, estimating reserve information, by
applying generally accepted petroleum engineering and evaluation principles,
involves numerous judgments based upon the engineer's educational background,
professional training and professional experience. The extent and significance
of the judgments to be made are, in themselves, sufficient to render reserve
information inherently imprecise.
92
"Standardized measure" relates to the estimated discounted future net
cash flows and major components of that calculation relating to proved reserves
at the end of the year in the aggregate and by geographic area, based on year
end prices, costs, and statutory tax rates and using a 10% annual discount rate.
(Unaudited)
---------------------------------------------------------------------------------
United States Colombia Total Worldwide
------------------------- ------------------------- -------------------------
Oil Gas Oil Gas Oil Gas
(Barrels) (Mcf) (Barrels) (Mcf) (Barrels) (Mcf)
----------- ----------- ----------- ----------- ----------- -----------
(in thousands)
Proved reserves:
As of December 31, 1998 3,640 28,331 27,882 80,120 31,522 108,451
Extensions and discoveries 1 3,814 - - 1 3,814
Revisions 842 (2,621) (5,456) (80,120) (4,614) (82,741)
Production (510) (2,847) (248) - (758) (2,847)
Sales of reserves in place (119) (2,734) - - (119) (2,734)
Purchases of reserves in place 2,504 28,875 1,142 - 3,646 28,875
----------- ----------- ----------- ----------- ----------- -----------
As of December 31, 1999 6,358 52,818 23,320 - 29,678 52,818
Extensions and discoveries 79 7,035 - - 79 7,035
Revisions (677) 370 (20,833) - (21,510) 370
Production (529) (4,012) (460) - (989) (4,012)
Sales of reserves in place (464) (1,375) - - (464) (1,375)
----------- ----------- ----------- ----------- ----------- -----------
As of December 31, 2000 4,767 54,836 2,027 - 6,794 54,836
Extensions and discoveries 463 4,650 4,171 - 4,634 4,650
Revisions (1,041) (5,830) (686) - (1,727) (5,830)
Production (273) (3,851) (500) - (773) (3,851)
Sales of reserves in place (1,302) (10,412) - - (1,302) (10,412)
----------- ----------- ----------- ----------- ----------- -----------
As of December 31, 2001 2,614 39,393 5,012 - 7,626 39,393
=========== =========== =========== =========== =========== ===========
Proved developed reserves at:
December 31, 1999 3,777 28,289 5,001 - 8,778 28,289
December 31, 2000 3,006 30,430 540 - 3,546 30,430
December 31, 2001 1,583 23,673 872 - 2,455 23,673
93
Standardized Measure of Discounted Future Net Cash Flows Relating to Proved Oil
and Gas Reserves:
(Unaudited)
----------------------------------------------
Total
United States Colombia Worldwide
------------- ---------- -----------
(in thousands)
December 31, 2000:
Future cash inflows $ 705,638 $ 37,932 $ 743,570
Production costs (127,348) (8,440) (135,788)
Development costs (42,871) (14,070) (56,941)
--------- --------- ---------
Future net inflows before income tax 535,419 15,422 550,841
Future income taxes (128,719) (488) (129,207)
--------- --------- ---------
Future net cash flows 406,700 14,934 421,634
10% discount factor (153,698) (3,239) (156,937)
--------- --------- ---------
Standardized measure of discounted future
net cash flows $ 253,002 $ 11,695 $ 264,697
========= ========= =========
December 31, 2001:
Future cash inflows $ 170,105 $ 56,963 $ 227,068
Production costs (54,458) (12,868) (67,326)
Development costs (30,095) (20,567) (50,662)
--------- --------- ---------
Future net inflows before income tax 85,552 23,528 109,080
Future income taxes (568) (4,346) (4,914)
--------- --------- ---------
Future net cash flows 84,984 19,182 104,166
10% discount factor (34,310) (6,559) (40,869)
--------- --------- ---------
Standardized measure of discounted future
net cash flows $ 50,674 $ 12,623 $ 63,297
========= ========= =========
94
Changes In Standardized Measure of Discounted Future Net Cash Flows Relating to
Proved Oil and Gas Reserves (in thousands):
(Unaudited)
---------------------------------------
1999 2000 2001
--------- -------- ---------
Worldwide
Standardized measure -- beginning of year $ 144,851 $ 280,427 $ 264,697
Increase (decrease)
Sales, net of production costs (10,470) (28,130) (19,665)
Net change in prices, net of production costs 330,402 177,332 (211,359)
Development costs incurred 11,098 251 5,358
Change in future development costs (1,633) 9,886 (10,829)
Change in future income taxes (27,288) (20,958) 64,304
Revisions of quantity estimates (216,447) (198,243) (18,752)
Accretion of discount 14,485 28,042 26,470
Changes in production rates, timing and other (20,447) (28,397) (8,222)
Extensions and discoveries, net of future costs 9,835 48,029 19,748
Sales of reserves-in-place (2,789) (3,542) (48,453)
Purchases of reserves-in-place 48,830 - -
--------- --------- ---------
Standardized measure -- end of year $ 280,427 $ 264,697 $ 63,297
========= ========= =========
(15) COMMITMENTS AND CONTINGENCIES
Operating Leases -- Harken leases its corporate and certain other office
space and certain field operating offices. Total office and operating lease
payments during 1999, 2000 and 2001 were $1,437,000, $1,270,000 and $750,000
respectively, net of applicable sublease arrangements. Future minimum rental
payments required under all leases that have initial or remaining noncancellable
lease terms in excess of one year as of December 31, 2001, net of sublease
reimbursements of $554,000 and $92,000 in 2002 and 2003, respectively, are as
follows:
Year Amount
---------------- --------
2002 $ 744
2003 720
2004 688
2005 689
2006 574
Thereafter -
-------
Total minimum payments required $3,415
=======
95
Operational Contingencies -- The exploration, development and
production of oil and gas are subject to various, 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.
Search Acquisition Corp. ("Search Acquisition"), also known as Harken
Texas Acquisition Corp., 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 judgment of joint and several liability
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 judgment as the successor-in-interest to eight
Odyssey limited partnerships. Search Acquisition was the surviving corporation
in the 1995 acquisition of 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. In late 2001,
a jury trial was held in this matter. The jury returned a verdict finding for
Petrochemical in the amount of $1.5 million of actual damages and $3 million in
punitive damages. As of March 27, 2002 the court had not yet decided on Search
Acquisition's various motions to overturn the verdict. Search Acquisition
anticipates that it will appeal if this verdict is not overturned in full.
Should the verdict be overturned in full, Search Acquisition anticipates that
Petrochemical will appeal. In Harken management's opinion at this time, the
ultimate outcome of this matter against Search Acquisition, a wholly-owned
subsidiary that has minimal oil and gas reserves, will not have a material
adverse effect upon Harken's financial condition or operations taken as a whole.
420 Energy Investment, Inc. and ERI Investments, Inc. (collectively
"420 Energy") filed a lawsuit against XPLOR Energy, Inc., a wholly-owned
subsidiary of Harken ("XPLOR"), 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. Harken has relied on an indemnity
provision in the XPLOR merger agreement to tender the costs of defense in this
matter to former stockholders of XPLOR. Although the outcome of this litigation
is uncertain, because the former stockholders of XPLOR have accepted
indemnification of this claim, 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. In August 2001, a new lawsuit was filed by New West
Resources, Inc. ("New West"), a former XPLOR stockholder, against XPLOR, Harken
and other defendants in state court in Dallas, Texas. Harken received service of
process in February 2002. New West claims that it lost its $6 million investment
in XPLOR as a result of misrepresentations by XPLOR and breach of fiduciary
duties by certain XPLOR directors. Harken believes this new suit is an adjunct
of the prior appraisal rights claim by 420 Energy. The former stockholders of
XPLOR have rejected Harken's request for indemnification of this claim under the
XPLOR merger agreement. However, Harken intends to continue to pursue and
enforce, through whatever steps are necessary, any indemnification from the
third parties. Harken has tendered the defense of this claim
96
to National Union Fire Insurance Company, pursuant to insurance policy coverage
held by XPLOR. National Union has accepted defense of this claim subject to a
reservation of rights. Based on the petition served on Harken, Harken does not
believe the claims asserted against Harken are meritorious. Therefore, in Harken
management's opinion, the ultimate outcome of this litigation will not have a
material adverse effect on Harken's financial condition.
Harken has accrued approximately $6,779,000 at December 31, 2001
relating to certain operational or regulatory contingencies related to Harken's
domestic operations. Approximately $4,300,000 of this accrued amount relates to
total future abandonment costs of $7,550,000 of certain of Harken's producing
properties, which will be incurred at the end of the properties' productive
life. Approximately $1,300,000 of the total operational or regulatory
contingencies are expected to be paid during 2002 and are included in current
liabilities.
Harken and its subsidiaries currently are involved in other various
lawsuits and contingencies, which in management's opinion, will not result in
significant loss exposure to Harken.
97
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
On August 28, 2001, Harken dismissed Arthur Andersen LLP ("Arthur
Andersen") as Harken's independent accountants. Harken engaged Ernst and Young
LLP ("Ernst & Young") as its new independent accountants. The decision to change
Harken's independent accountants was made by Harken's Audit Committee of the
Board of Directors.
Arthur Andersen's reports on Harken's consolidated financial statements
for the years ended December 31, 2000 and 1999 did not contain an adverse
opinion or disclaimer of opinion, nor were such reports qualified or modified as
to uncertainty, audit scope, or accounting principles.
During the two years ended December 31, 2000 and the subsequent interim
period preceding the decision to change independent accountants, there were no
disagreements with Arthur Andersen on any matters of accounting principles or
practices, financial statement disclosure, or auditing scope or procedure, which
disagreement(s), if not resolved to the satisfaction of Arthur Andersen, would
have caused the former accountant to make a reference to the subject matter of
the disagreement(s) in connection with its reports covering such periods.
During the two years ended December 31, 2000 and the subsequent interim
period preceding the decision to change independent accountants, there were no
"reportable events" (hereinafter defined) requiring disclosure pursuant to Item
304 (a) (1) (v) of Regulation S-K. As used herein, the term "reportable events"
means any of the items listed in paragraphs (a) (1) (v) (A) - (D) of Item 304 of
Regulation S-K.
Effective September 5, 2001, Harken engaged Ernst & Young as its
independent accountants. During the two years ended December 31, 2000 and the
subsequent interim period preceding the decision to change independent
accountants, neither Harken nor anyone on its behalf consulted Ernst & Young
regarding either the application of accounting principles to a specified
transaction, either completed or proposed, or the type of audit opinion that
might be rendered on Harken's consolidated financial statements, nor has Ernst &
Young provided to Harken a written report or oral advice regarding such
principles or audit opinion.
Harken requested and obtained a letter from Arthur Andersen addressed
to the Securities and Exchange Commission stating that it agrees with the above
statements.
Harken has been unable to obtain Arthur Andersen's written consent to
the Company's incorporation by reference into its registration statements of
Arthur Andersen's audit report with respect to Harken's financial statements as
of December 31, 2001 and 2000, and for the years then ended. Under these
circumstances, Rule 437a under the Securities Act of 1933 permits Harken to file
this Form 10-K without a written consent from Arthur Andersen. As a result,
however, Arthur Andersen will not have any liability under Section 11(a) of the
Securities Act for any untrue statements of a material fact contained in the
financial statements audited by Arthur Andersen or any omissions of a material
fact required to be stated therein. Accordingly, you would be unable to assert a
claim against Arthur Andersen under Section 11(a) of the Securities Act for any
purchases of securities under Harken's registration statements made on or after
the date of this Form 10-K. To the extent provided in Section 11(b)(3)(C) of the
Securities Act, however, other persons who are liable under Section 11(a) of the
Securities Act, including Harken's officers and directors, may still rely on
Arthur Andersen's
98
original audit reports as being made by an expert for purposes of establishing a
due diligence defense under Section 11(b) of the Securities Act.
99
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
The Directors of Harken
The Directors of Harken as of December 31, 2001, their ages and
business experience during the past five years are listed below:
Director
Name, Age and Business Experience Since
--------------------------------- -----
Mikel D. Faulkner (Age - 52) - Chairman of the Board of Harken since February 1982
1991; CEO of Harken since 1982, and President of Harken from 1982 until February
1993. Effective May 2001, Mr. Faulkner also became the Chairman and Chief
Executive Officer of Global.
Bruce N. Huff (Age - 51) - President and Chief Operating Officer of Harken since 1996
March 1998 and Chief Financial Officer from February 1999 to June 2000; Senior
Vice President and Chief Financial Officer of Harken from 1990 to March 1998.
Stephen C. Voss (Age - 52) - Managing Director of Global Energy Development PLC 1997
since November 2001; Vice Chairman of the Board of Harken from May 2000 to
November 2001; from September 1998 to May 15, 2000, he served as Executive Vice
President and Chief Operating Officer of Harken and from 1990 to September 1998,
as Senior Vice President of Harken. Effective May 2001, Mr. Voss also became a
director and President and Chief Operating Officer of Global.
Larry G. Akers (Age - 63) - From 1996 to the present, Mr. Akers has acted as an 2000
independent energy advisor/consultant. From 1978 to 1988, he served as Chairman,
President and CEO of ESCO Energy, Inc. From 1969 to 1978, Mr. Akers served as
exploration and development manager for Laclede Gas.
Michael M. Ameen, Jr. (Age - 77) - From 1989 to 1999, Mr. Ameen served as a part 1994
time consultant to Harken with regard to Middle Eastern exploration projects;
Independent Consultant on Middle East Affairs for the past seven years; Director
of American Near East Refugee Aid (a charitable organization); Past director of
Amideast (a charitable organization); Past director of Middle East Institute;
Past director of International College in Beirut, Lebanon; Past vice president
of government relations and director of Washington office of Aramco; Past
president of Mobil Middle East Development Corporation.
James H. Frizell (Age - 68) - From 1985 to 1987 and from 1989 to the present, 2001
Mr. Frizell has acted as an independent petroleum consultant. From 1987 to 1989,
he served as a Vice President of Pike Petroleum Corporation. From 1983 to 1985,
he served as a Vice President
100
of Valero Producing Company. From 1981 to 1983, he served as Vice
President-Exploration and Senior Vice President at Freeport-McMoran.
Dr. J. William Petty (Age - 59) - Professor of Finance and the W.W. Caruth 2000
Chairholder of Entrepreneurship at Baylor University from 1990 to the present;
Served as dean of the Business School at Abilene Christian University from 1979
to 1990; served as a subject matter expert on a best-practices study by the
American Productivity and Quality Center on the topic of shareholder value based
management; served on a research team for the Australian Department of Industry
to study the feasibility of establishing a public equity market for small and
medium-sized enterprises in Australia.
H. A. Smith (Age - 63) - From June 1991 to the present, Mr. Smith has served as 1997
a consultant to Smith International Inc., an oil field service company;
previously Mr. Smith served as Vice President Customer Relations for Smith
International, Inc.
Executive Officers of Harken
The officers of Harken are elected annually by the Board of Directors
following each Annual Meeting of Stockholders, or as soon thereafter as
necessary and convenient. Each officer holds office until the earlier of such
time as his or her successor is duly elected and qualified, his or her death or
he or she resigns or is removed from office. Any officer elected or appointed by
the Board of Directors may be removed by the Board of Directors whenever, in its
judgment, the best interests of Harken will be served thereby, but such removal
will be without prejudice to the contract rights, if any, of the person so
removed.
The executive officers of Harken as of December 31, 2001, their ages
and positions held with Harken and their business experience for the past five
years are listed below.
Name Age Position Held with Harken
- ---- --- -------------------------
Mikel D. Faulkner 52 Chairman of the Board of Directors and
Chief Executive Officer
Bruce N. Huff 51 President, Chief Operating Officer and
Director
James W. Denny, III 54 Executive Vice President - Operations
Anna M. Williams 31 Executive Vice President - Finance and
Chief Financial Officer
Larry E. Cummings 49 Executive Vice President, Secretary and
General Counsel
Richard O. Cottle 46 Senior Vice President - Production
A. Wayne Hennecke 43 Senior Vice President - Finance
Mikel D. Faulkner has served as Chairman of the Board of Harken since
February 1991 and Chief Executive Officer of Harken since 1982. Mr. Faulkner
previously served as President of Harken between 1982 and 1993.
101
Bruce N. Huff has served as a Director of Harken since August 1996. Mr.
Huff has served as President of Harken since April 1998 and as Chief Operating
Officer since June 2000. Mr. Huff had previously served as Senior Vice President
and Chief Financial Officer since 1990.
James W. Denny, III has served as Executive Vice President - Operations
since October 1999. From 1998 to October 1999, Mr. Denny served as Senior
Engineer/Operations Manager for XPLOR Energy, Inc. From 1995 to 1998, Mr. Denny
served as Vice President, Operations & Exploration for Polaris Exploration
Corporation.
Anna M. Williams has served as Executive Vice President - Finance and
Chief Financial Officer since June 2001. Ms. Williams has served as Senior Vice
President - Finance and Chief Financial Officer since June 2000 and as Vice
President - International Finance since from 1998 to 2000 and as International
Finance Manager from 1996 to 1998. Prior to joining Harken, Ms. Williams worked
with Arthur Andersen, LLP in the audit division.
Larry E. Cummings has served as Executive Vice President, Secretary and
General Counsel of Harken since June 2001. Mr. Cummings previously served as
Vice President, Secretary and General Counsel from 1983 to 2001 and as Senior
Legal Counsel and Vice President of Land for Harken from 1978 to 1983.
Richard O. Cottle has served as Senior Vice President - Production
since October 1999. Since joining Harken in 1994, Mr. Cottle has served as Vice
President of Operations and as Operations Manager for Harken Southwest
Corporation, a wholly-owned subsidiary of Harken.
Wayne Hennecke has been employed with Harken since 1988. Mr. Hennecke
has served as Vice President - Finance of Harken since January 1999. Mr.
Hennecke had previously served as Vice President - Finance and Chief Financial
Officer of Harken since April 1998 and Vice President and Treasurer of Harken
since June 1995.
Compliance with Section 16(a) of the Securities Exchange Act of 1934
Section 16(a) of the Securities Exchange Act of 1934, as amended (the
"Exchange Act"), requires Harken's Directors and Executive Officers, and any
persons who own more than ten percent of a registered class of Harken's equity
securities, to file with the SEC initial reports of ownership and reports of
changes in ownership of common stock and other equity securities of Harken.
Directors, executive officers and greater than ten percent stockholders are
required by SEC regulations to furnish Harken with copies of all Section 16(a)
forms they file. Based solely on its review of the copies of such forms and
written representations from certain reporting persons, Harken believes that all
filing requirements applicable to its Directors and Executive Officers have been
complied with during 2001.
102
ITEM 11. EXECUTIVE COMPENSATION
COMPENSATION OF DIRECTORS
In 2001, each non-employee Director of Harken received an annual
retainer of $20,000 plus $2,000 for attendance at each regular meeting. In
addition, Directors serving on Committees received $4,000 for chairmanship and
$1,000 per Committee meeting attended. Employee Directors do not receive any
additional fees for meetings attended.
COMPENSATION OF EXECUTIVE OFFICERS
The following table sets forth certain information regarding the
compensation paid during fiscal years 2001, 2000, and 1999 to Harken's Chief
Executive Officer and Harken's four most highly compensated executive officers
other than the Chief Executive Officer (the "named executive officers").
SUMMARY COMPENSATION TABLE
- -------------------------------------------------------------------------------------------------------------------------------
Annual Compensation Long Term Compensation
- -------------------------------------------------------------------------------------------------------------------------------
Securities
Name and Principal Fiscal Other Annual All Other Underlying Other
Position Year Salary Bonus Compensation Compensation Options/SARs Compensation
(#)
- -------------------------------------------------------------------------------------------------------------------------------
Mikel D. Faulkner 2001 $301,442 (1) $ 2,414 $5,356 (2) $ 2,983 (3) -- --
---------------------------------------------------------------------------------------------------
Chairman and Chief 2000 $255,000 $25,000 $1,915 (4) $10,858 (5) 200,000 --
---------------------------------------------------------------------------------------------------
Executive Officer 1999 $264,808 (6) $84,904 $2,616 (4) $10,000 (7) 73,000 --
- -------------------------------------------------------------------------------------------------------------------------------
- -------------------------------------------------------------------------------------------------------------------------------
Bruce N. Huff 2001 $229,327 (8) $31,013 $13,351 (9) $ 2,983 (3) -- --
---------------------------------------------------------------------------------------------------
President and Chief 2000 $213,750 (10) $17,700 $39,112 (11) $10,858 (5) 95,000 --
---------------------------------------------------------------------------------------------------
Operating Officer 1999 $206,250 (12) $55,000 $ 7,875 (4) $60,725 (13) 460,000 --
- -------------------------------------------------------------------------------------------------------------------------------
- -------------------------------------------------------------------------------------------------------------------------------
Stephen C. Voss 2001 $223,269(14) $25,000 $22,800 (15) $ 2,983 (3) -- --
---------------------------------------------------------------------------------------------------
Vice Chairman 2000 $205,000 $10,347 $30,936 (16) $10,858 (5) -- --
---------------------------------------------------------------------------------------------------
1999 $195,000 $55,000 $12,000 (4) $10,000 (7) 460,000 --
- -------------------------------------------------------------------------------------------------------------------------------
- -------------------------------------------------------------------------------------------------------------------------------
James Denny 2001 $175,000 $ 521 $16,400 (17) $ 2,970 (18) -- --
---------------------------------------------------------------------------------------------------
Executive Vice President 2000 $151,442 $30,000 $ 3,000 (4) $10,789 (19) 60,000 --
---------------------------------------------------------------------------------------------------
1999 -- -- -- -- -- --
---------------------------------------------------------------------------------------------------
- -------------------------------------------------------------------------------------------------------------------------------
Guillermo Sanchez 2001 $189,909(20) $25,000 -- $ 3,654 (21) -- --
---------------------------------------------------------------------------------------------------
President of Harken 2000 $176,640 -- -- $11,143 (22) -- --
---------------------------------------------------------------------------------------------------
International, Ltd. 1999 $169,399(23) $11,500 -- $10,000 (7) 160,000 --
- -------------------------------------------------------------------------------------------------------------------------------
103
(1) Includes $16,442 for unused vacation time.
(2) Includes $556 relating to use of company car and $4,800 club allowance.
(3) Includes $2,625 of 401(k) matching and $358 in group term life premiums.
(4) Relating to use of company car.
(5) Includes $10,500 of 401(k) matching and $358 in group term life premiums.
(6) Includes $9,808 for unused vacation time.
(7) Relates to 401(k) matching.
(8) Includes $4,327 for unused vacation time.
(9) Includes $8,551 relating to use of company car and $4,800 club allowance.
(10) Includes $3,750 for unused vacation time.
(11) Includes $13,745 relating to use of a company car and debt forgiveness in the amount of $25,367.
(12) Includes $11,250 for unused vacation time.
(13) Includes $10,000 relating to 401(k) matching and $50,725 relating to relocation expenses.
(14) Includes $8,269 for unused vacation time.
(15) Includes $18,000 relating to use of company car and $4,800 club allowance.
(16) Includes $15,716 relating to use of company car and debt forgiveness in the amount of $15,220.
(17) Includes $11,600 relating to use of company car and $4,800 club allowance.
(18) Includes $2,625 of 401(k) matching and $345 in group term life premiums.
(19) Includes $10,500 of 401(k) matching and $289 in group term life premiums.
(20) Includes $7,034 for unused vacation time.
(21) Includes $2,625 of 401(k) matching and $1,029 in group term life premiums.
(22) Includes $10,500 of 401(k) matching and $643 in group term life premiums.
(23) Includes $6,394 for unused vacation time.
OPTION/SAR GRANTS IN LAST FISCAL YEAR
There were no grants of options nor stock appreciation rights made to any
members of the Company's executive officers including the members of this
reporting group during the last fiscal year.
AGGREGATED OPTION/SAR EXERCISES IN LAST FISCAL YEAR
AND FISCAL YEAR END OPTION/SAR VALUES
- -------------------------------------------------------------------------------------------------------------------
Number of Securities Value of Unexercised
Number of Underlying Unexercised In-The-Money
Shares/SAR's Options/SAR's at Option/SAR's at
Acquired on Value Fiscal Year End Fiscal Year End (1)
- -------------------------------------------------------------------------------------------------------------------
Name Exercise Realized Exercisable Unexercisable Exercisable Unexercisable
- -------------------------------------------------------------------------------------------------------------------
Mikel D. Faulkner --- --- 349,375 195,250 $ --- $ ---
- -------------------------------------------------------------------------------------------------------------------
Bruce N. Huff --- --- 164,625 99,375 $ --- $ ---
- -------------------------------------------------------------------------------------------------------------------
Stephen C. Voss --- --- 158,625 84,375 $ --- $ ---
- -------------------------------------------------------------------------------------------------------------------
Jim Denny --- --- 17,500 47,500 $ --- $ ---
- -------------------------------------------------------------------------------------------------------------------
Guillermo Sanchez --- --- 78,000 18,000 $ --- $ ---
- -------------------------------------------------------------------------------------------------------------------
104
(1) The closing price for the Common Stock as reported on the American
Stock Exchange as of December 31, 2001 was $1.23. Value was calculated
on the basis of the difference between the option exercise price and
such closing price multiplied by the number of shares of Common Stock
underlying the option.
REPORT ON
CHIEF EXECUTIVE COMPENSATION
The Board of Directors (the "Board"), sitting in lieu of a Compensation
Committee as of December 31, 2001, develops and oversees Harken's compensation
strategy. The strategy is implemented through policies designed to support the
achievement of Harken's business objectives and the enhancement of stockholder
value. The Board reviews the annual compensation package on an ongoing basis
throughout the year. The Company's compensation policies and programs are
designed to align the annual compensation with the annual and long-term
performance of Harken and to maintain a significant portion of that total
compensation at risk, tied primarily to the creation of stockholder value.
The Board annually reviews and sets the base salary of the Chief Executive
Officer ("CEO"). In establishing annual compensation for the CEO, the Board
takes into consideration many factors in making a determination of aggregate
compensation. Such factors during 2001 included: (i) the financial results of
Harken during the prior year; (ii) the performance of the Common Stock in the
public market; (iii) compensation of chief executive officers employed by
companies comparable to Harken; (iv) the achievements of management in
completing significant projects during the year; (v) Harken's performance during
the past year as compared to its peer companies in this industry; (vi) the
impact that the dramatic fluctuations in the prices of crude oil and natural gas
have had on the Company during this past year; and (vii) management's dedication
and commitment in support of Harken. The Board exercises its judgment based upon
the above criteria and does not apply a specific formula or assign a weight to
each factor considered.
In setting the CEO's compensation for 2001, the Board took note of the fact
that Harken achieved significant success in 2001 toward implementing its overall
business strategy and accomplishing goals that had been set by the Board. Harken
completed certain key objectives which enhanced Harken's domestic oil and gas
reserve base and consolidated its areas of emphasis of operations in the
domestic United States. No cash bonus, other than certain minor compensation
allowance items, was granted to the CEO during 2001. The CEO's base salary was
increased by $30,000 in 2001 compared to his base salary for 2000.
Harken's long-term incentive compensation consists of Harken's Stock Option
Plans. The Board views the granting of stock options and restricted stock awards
as a significant method of aligning management's long-term interests with those
of the stockholders. The Board encourages executives, individually and
collectively, to maintain a long-term ownership position in Harken's Common
Stock. The Board did not grant to the CEO any additional stock options during
2001.
Federal Income Tax Considerations
In 1993, the Internal Revenue Code was amended to place a $1.0 million cap
on the deductibility on compensation paid to individual executives of publicly
held corporations. The Board took this into account, however, upon review of the
available regulations and interpretations, decided that it would not make the
105
deductibility of Harken's compensation for federal income tax purposes a
criterion to be used in establishing compensation of the named executives during
the present review cycle. The Board took into consideration the belief that the
current compensation levels of the CEO, would not be subject to the cap. The
Board continues to recognize that compensation should meet standards of
reasonableness and necessity, which have been part of the Internal Revenue Code
for many years.
By: Mikel D. Faulkner
Bruce N. Huff
Stephen C. Voss
Larry G. Akers
Michael M. Ameen
James H. Frizell
Dr. J. William Petty
H. A. Smith
PERFORMANCE OF THE COMMON STOCK
The table below compares the cumulative total stockholder return on the
Common Stock for the last five fiscal years with the cumulative total return on
the S&P 500 Index and the Dow Jones Secondary Oils Stock Index over the same
period (assuming the investment of $100 in the Common Stock, the S&P 500 Index
and the Dow Jones Secondary Oils Stock Index on December 31, 1996 and
reinvestment of all dividends).
1996 1997 1998 1999 2000 2001
---- ---- ---- ---- ---- ----
Harken Energy Corp. $100 $233 $67 $27 $11 $4
S&P 500 Index 100 105 71 89 126 121
Dow Jones Secondary Oils Stock Index 100 133 171 208 189 166
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
Security Ownership of Certain Beneficial Owners
As of March 27, 2002, the only person known by Harken to beneficially
own five percent 5% or more of Harken common stock was:
Name Shares Percent Ownership
- ---- ------ -----------------
Michael B. Rohlfs, Attorney in Fact 1,210,056 6.56%
for Traco International N.V.
5N762 Burr Road
St. Charles, IL 60175
106
Security Ownership of Directors and Management
The following table sets forth information regarding the number of
shares of Common Stock beneficially owned by each Director, each named executive
officer, and all of Harken's Directors and executive officers as a group as of
March 27, 2002.
Number of Shares
----------------
Name Beneficially Owned Percent of Class
---- ------------------ ----------------
Michael M. Ameen, Jr. 22,100 (1) (2)
Larry G. Akers 3,500 (3) (2)
James Denny 20,500 (4) (2)
Mikel D. Faulkner 419,375 (5) 2.27%
James H. Frizell 18,000 (2)
Bruce N. Huff 167,125 (6) (2)
Dr. J. William Petty 9,750 (7) (2)
Guillermo Sanchez 9,751 (8) (2)
H. A. Smith 27,930 (9) (2)
Stephen C. Voss 159,625 (10) (2)
All Directors and Executive Officers as
a group (16 persons) 925,833 (11) 5.04%
(1) Includes 20,000 shares issuable within 60 days upon exercise of options
issued by Harken.
(2) Less than one percent (1%)
(3) Includes 2,500 shares issuable within 60 days upon exercise of options
issued by Harken.
(4) Includes 17,500 shares issuable within 60 days upon exercise of options
issued by Harken.
(5) Includes 349,375 shares issuable within 60 days upon exercise of
options issued by Harken.
(6) Includes 164,625 shares issuable within 60 days upon exercise of
options issued by Harken.
(7) Includes 1,250 shares issuable within 60 days upon exercise of options
issued by Harken.
(8) Includes 7,800 shares issuable within 60 days upon exercise of options
issued by Harken.
(9) Includes 20,000 shares issuable within 60 days upon exercise of options
issued by Harken.
(10) Includes 158,625 shares issuable within 60 days upon exercise of
options issued by Harken.
(11) Includes 803,685 shares issuable within 60 days upon exercise of
options issued by Harken.
CHANGE-IN-CONTROL ARRANGEMENTS
On April 1, 2002 (but effective as of December 30, 1999), Harken and
Mikel D. Faulkner entered into that certain Amended and Restated Agreement
Regarding Compensation in the Event of Change in Control (the "Change in Control
Agreement"), which was negotiated and approved by the Compensation Committee.
The Change in Control Agreement provides that in the event of a "Change in
Control" of Harken, Harken shall pay to Mr. Faulkner within thirty days' of such
event, in addition to any other payments owing to Mr. Faulkner, a cash payment
equal to thirty (30) times Mr. Faulkner's regular monthly salary which was last
paid prior to the month in which such Change in Control event occurred.
107
A "Change in Control" is defined as including: the sale of all or
substantially all of the assets of Harken; a transaction which results in more
than fifty percent (50%) of the voting stock of Harken being owned by a person
or party other than who owned or held such shares prior to such transaction; a
"person" or "group" (within the meaning of Sections 13(d) or 14(d)(2) of the
Securities Exchange Act of 1934), being or becoming the beneficial owner of more
than fifty percent (50%) of the voting stock of Harken outstanding; the
liquidation or dissolution of Harken; any other event or series of events that
results in a change or right to change a majority of the members of Harken's
Board of Directors; and any event which causes the triggering of or a Change in
Control to occur under Harken's Stockholder Rights Plan. Under Harken's
Stockholder Rights Plan, a triggering event occurs whenever any person (other
than an employee stock option plan) becomes the beneficial owner of 15% or more
of the shares of Common Stock then outstanding.
Mr. Faulkner has waived the application of the "Change in Control"
provisions of the Change in Control Agreement in connection with past capital
restructuring transactions of Harken, and Mr. Faulkner [has waived] the
application of such provisions for the Rights Offering (including the issuance
of any shares to Lyford, as standby purchaser) and the redemption or
restructuring of Harken's convertible notes.
On June 17, 2002, Harken entered into a Severance Agreement with Bruce
N. Huff, which was negotiated and approved by the Compensation Committee. This
Severance Agreement provides that in the event Mr. Huff is involuntarily
terminated by Harken during the term of the Severance Agreement, Harken will pay
Mr. Huff, in addition to any other payments owing to Mr. Huff, an amount equal
to 9 months' salary (which salary shall be deemed to be the greater of Mr.
Huff's salary at the time of termination or his salary as of June 17, 2002). The
term of the Severance Agreement expires on June 17, 2003.
On June 17, 2002, Harken entered into a Severance Agreement with James
W. Denny III, which was negotiated and approved by the Compensation Committee.
This Severance Agreement provides that in the event Mr. Denny is involuntarily
terminated by Harken during the term of the Severance Agreement, Harken will pay
Mr. Denny, in addition to any other payments owing to Mr. Denny, an amount equal
to 9 months' salary (which salary shall be deemed to be the greater of Mr.
Denny's salary at the time of termination or his salary as of June 17, 2002).
The term of the Severance Agreement expires on June 17, 2003.
COMPENSATION COMMITTEE INTERLOCKS AND INSIDER PARTICIPATION
During 2001, the Board of Directors, sitting in lieu of a Compensation
Committee, participated in all deliberations concerning executive compensation
(except that members of the Board of Directors who were also officers did not
participate in deliberations concerning the compensation of the "named executive
officers"). The members of the Board participating in such deliberations were
Mikel D. Faulkner, Chairman of the Board and Chief Executive Officer, Bruce N.
Huff, President and Chief Operating Officer, Stephen C. Voss, Managing Director
of Global, Larry G. Akers, Michael M. Ameen, Jr., James H. Frizell, Dr. J.
William Petty, and H. A. Smith. No executive officer of Harken served as a
member of the board of directors or the compensation committee of any entity
that has one or more executive officers serving on Harken's Board of Directors
or Compensation Committee. As described above under "Certain Relationships and
Related Transactions," on October 21, 1997, Harken loaned Stephen C. Voss, a
director of Harken, $80,000 at an interest rate of 7% per annum. Such loan is
secured by options to purchase Common Stock of Harken granted to Mr. Voss. As of
March 27, 2002, the outstanding principal balance of such loan was $80,000, and
such loan is payable on demand.
108
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
On October 21, 1997, Harken loaned Stephen C. Voss, a director of
Harken, $80,000 at an interest rate of 7% per annum. This loan is a recourse
loan secured by options to purchase Common Stock granted to Mr. Voss. As of
August 14, 2002, the outstanding principal balance of such loan was $80,000, and
such loan is payable on demand.
ITEM 14. CONTROLS AND PROCDEDURES
Not Applicable.
109
PART IV
ITEM 15. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K
(a) The following documents are filed as a part of this report:
(1) Financial Statements included in Part II of this report:
Page
----
Harken Energy Corporation and Subsidiaries
-- Report of Independent Auditors ....................................................... 51
-- Selected Financial Data for the five years ended December 31, 2001 ................... 32
-- Consolidated Balance Sheets -- December 31, 2000 and 2001 ............................ 53
-- Consolidated Statements of Operations for the three years ended
December 31, 2001 ................................................................. 54
-- Consolidated Statements of Stockholders' Equity for the three years ended
December 31, 2001 ................................................................. 55
-- Consolidated Statements of Cash Flows for the three years ended
December 31, 2001 ................................................................. 56
-- Notes to Consolidated Financial Statements ........................................... 57
(2) The information required by Schedule I is either provided in the
related financial statements or in a note thereto, or is not
applicable to the Company. The information required by all other
Schedules is not applicable to the Company.
(3) Exhibits
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 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, filed
with the SEC on October 3, 1990 and incorporated by reference
herein).
3.3 Amendment to the Certificate of Incorporation of Harken Energy
Corporation (filed as Exhibit 3 to Harken's Quarterly Report on
Form 10-Q for fiscal quarter ended March 31, 1991, File No.
0-9207, and incorporated by reference herein).
3.4 Amendments to the Certificate of Incorporation of Harken Energy
Corporation (filed as Exhibit 3 to Harken's Quarterly Report on
Form 10-Q for fiscal quarter ended June 30, 1991, File No. 0-9207,
and incorporated by reference herein).
110
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-Q for the fiscal quarter ended June 30, 1998, 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. 0-9207, filed with
the SEC on June 1, 1989 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 herein by reference).
4.3 Certificate of Designations, Powers, Preferences and Rights of
Series B Cumulative Convertible Preferred Stock, $1.00 par value,
of Harken Energy Corporation (filed as Exhibit 4.2 to Harken's
Annual Report on Form 10-K for the fiscal year ended December 31,
1989, File No. 0-9207, and incorporated by reference herein).
4.4 Certificate of the Designations, Powers, Preferences and Rights of
Series C Cumulative Convertible Preferred Stock, $1.00 par value
of Harken Energy Corporation (filed as Exhibit 4.3 to Harken's
Annual Report on Form 10-K for fiscal year ended December 31,
1989, File No. 0-9207, and incorporated by reference herein).
4.5 Certificate of the Designations of Series D Preferred Stock, $1.00
par value of Harken Energy Corporation (filed as Exhibit 4.3 to
Harken's Quarterly Report on Form 10-Q for the fiscal quarter
ended September 30, 1995, File No. 0-9207, and incorporated by
reference herein).
4.6 Rights Agreement, dated as of April 6, 1998, by and between Harken
Energy Corporation and ChaseMellon Shareholder Services L.L.C., as
Rights Agent (filed as Exhibit 4 to Harken's Current Report on
Form 8-K dated April 7, 1998, file No. 0-9207, and incorporated by
reference herein).
111
4.7 Certificate of Designations of Series E Junior Participating Preferred
Stock (filed as Exhibit B to Exhibit 4 to Harken's Current Report on Form
8-K dated April 7, 1998, file No. 0-9207, and incorporated by reference
herein).
4.8 Certificate of Designations, Preferences and Rights of Series F
Convertible Preferred Stock (filed as Exhibit 4.8 to Harken's Quarterly
Report on Form 10-Q for the period ended June 30, 1998, File No. 0-9207,
and incorporated by reference herein).
4.9 Certificate of Designations of Series G1 Convertible Preferred Stock
(filed as Exhibit 4.9 to Harken's Annual Report on Form 10-K for fiscal
year ended December 31, 2000, File No. 09207, and incorporated by
reference herein).
*4.10 Certificate of Designations of Series G2 Convertible Preferred Stock.
10.1 Seventh Amendment and Restatement of Harken's Amended Stock Option Plan
(filed as Exhibit 10.1 to Harken's Annual Report on Form 10-K for the
fiscal year ended December 31, 1991, File No. 0-9207, and incorporated by
reference herein).
10.2 Amended and Restated Non-Qualified Incentive Stock Option Plan of Harken
adopted by Harken's stockholders on February 18, 1991 (filed as Exhibit
10.2 to Harken's Annual Report on Form 10-K for the fiscal year ended
December 31, 1991, File No. 0-9207, and incorporated by reference herein).
10.3 Form of Advancement Agreement dated September 13, 1990, between Harken and
each director of Harken (filed as Exhibit 10.38 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).
10.4 Harken Energy Corporation's 1993 Stock Option and Restricted Stock Plan
(filed as Exhibit 4.3 to Harken's Registration Statement on Form S-8,
filed with the SEC on September 23, 1993, and incorporated by reference
herein).
10.5 First Amendment to Harken Energy Corporation's 1993 Stock Option and
Restricted Stock Plan (filed as an Exhibit 4.4 to Harken's Registration
Statement on Form 8\S-8, filed with the SEC on July 22, 1996 and
incorporated by reference herein).
10.6 Harken Energy Corporation's Directors Stock Option Plan (filed as Exhibit
4.3 to Harken's Registration Statement on Form S-8, and incorporated
herein by reference).
10.7 Association Contract (Bolivar) by and between Harken de Colombia, Ltd. and
Empresa Colombia de Petroleos (filed as Exhibit 10.4 to Harken's Quarterly
Report on Form 10-Q for the quarterly period ended June 30, 1996, and
incorporated herein by reference).
10.8 Harken Energy Corporation 1996 Incentive and Nonstatutory Stock Option
Plan (filed as Exhibit 10.1 to Harken's Quarterly Report on Form 10-Q for
the quarterly period ended September 30, 1996, and incorporated herein by
reference).
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10.9 Amendment No. 1 to Harken Energy Corporation 1996 Incentive and
Nonstatutory Stock Option Plan (filed as Exhibit 4.5 to Harken's
Registration Statement on Form S-8, filed with the SEC on August 19, 1997
and incorporated by reference herein).
10.10 Amendment No. 2 to Harken Energy Corporation 1996 Incentive and
Nonstatutory Stock Option Plan (filed as Exhibit 4.6 to Harken's
Registration Statement on Form S-8, filed with the SEC on August 19, 1997
and incorporated by reference herein).
10.11 Association Contract (Alcaravan) dated as of December 13, 1992, but
effective as of February 13, 1993, by and between Empresa Colombia de
Petroleos (filed as Exhibit 10.1 to Harken's Annual Report on Form 10-K
for the fiscal year ended December 31, 1992, File No. 0-9207, and
incorporated herein by reference).
10.12 Association Contract (Bocachico) dated as of January 1994, but effective
as of April 1994, by and between Harken de Colombia, Ltd. and Empresa
Colombia de Petroleos (filed as Exhibit 10.1 to Harken's Quarterly Report
on Form 10-Q for the quarterly period ended March 31, 1994, File No.
0-9207, and incorporated herein by reference).
10.13 Trust Indenture dated May 26, 1998, by and between Harken and Marine
Midland Bank plc (filed as Exhibit 10.1 to Harken's Quarterly Report on
Form 10-Q for the quarterly period ended June 30, 1998, File No. 0-9207,
and incorporated herein by reference).
10.14 Credit Agreement between Harken Exploration Company, XPLOR Energy, Inc.
Harken Energy West Texas, Inc. , Harken Southwest Corporation, South Coast
Exploration Co., Xplor Energy SPV-1, Inc., McCulloch Energy, Inc. and Bank
One, Texas, N.A. dated August 11, 2000 and as amended December 21, 2000
and December 31, 2000 (filed as Exhibit 10.20 to Harken's Annual Report on
Form 10-K for fiscal year ended December 31, 2000, File No 0-9207, and
incorporated by reference herein).
10.15 Third Amendment to Credit Agreement between Harken Exploration Company,
XPLOR Energy, Inc., Harken Energy West Texas, Inc., South Coast
Exploration Co., XPLOR Energy SPV-1, Inc., McCulloch Energy, Inc., Harken
Gulf Exploration Company, and Bank One, N.A. dated May 11, 2001 (Filed as
Exhibit 10.13 to Harken's Quarterly Report on Form 10-Q for the quarter
ended June 30, 2001, File No. 0-9207, and incorporated herein by
reference).
*10.16 Association Contract (Cajaro) dated as of December 2001, but effective as
of February 2002, by and between Harken de Colombia, Ltd. and Empresa
Colombia de Petroleos.
*10.17 Purchase and Sale Agreement dated January 31, 2002 between Republic
Resources, Inc. and Harken Energy Corporation.
*10.18 Letter from Arthur Andersen LLP pursuant to Item 304(a)(3) of Regulation
S-K (field as Exhibit 16.1 in Harken's current report on Form 8-K, filed
on September 5, 2001, File No. 0-9207, and incorporated by reference
herein).
*21 Subsidiaries of Harken.
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**23.1 Consent of Ernst & Young LLP.
**23.2 Consent of Independent Reserve Engineers.
**23.3 Consent of Netherland, Sewell and Associates, Inc.
**23.4 Information Concerning Consent of Arthur Andersen LLP.
*24 Power of Attorney.
**99.1 Certificate of the Chairman of the Board and Chief Executive
Officer of Harken Energy Corporation.
**99.2 Certificate of the Chief Financial Officer of Harken Energy
Corporation.
*Previously filed
**Filed herewith
(b) Reports on Form 8-K
NONE.
114
SIGNATURE
Pursuant to the requirements of the Section 13 or 15(d) 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, in the City of
Houston, State of Texas, on December 20, 2002.
HARKEN ENERGY CORPORATION
/s/ Mikel D. Faulkner
----------------------------------------------
Mikel D. Faulkner, Chairman of the Board of
Directors and Chief Executive Officer
/s/ Anna M. Williams
----------------------------------------------
Anna M. Williams, Executive Vice President
-Finance and Chief Financial Officer
115
CERTIFICATION OF CHIEF EXECUTIVE OFFICER
PURSUANT TO 18 U.S.C. SECTION 1350,
AS ADOPTED PURSUANT TO SECTION 302
OF THE SARBANES-OXLEY ACT OF 2002
I, Mikel D. Faulkner, Chief Executive Officer of Harken Energy Corporation,
certify that:
1. I have reviewed this annual report on Form 10-K of Harken Energy
Corporation;
2. Based on my knowledge, this annual report does not contain any untrue
statement of a material fact or omit to state a material fact necessary to
make the statements made, in light of the circumstances under which such
statements were made, not misleading with respect to the period covered by
this annual report;
3. Based on my knowledge, the financial statements, and other financial
information included in this annul report, fairly present in all material
respects the financial condition, results of operations and cash flows of
the Registrant as of, and for, the periods presented in this annual report.
Date: December 20, 2002 By: /s/ Mikel D. Faulkner
-------------------------------------
Mikel D. Faulkner
Chief Executive Officer
CERTIFICATION OF CHIEF FINANCIAL OFFICER
PURSUANT TO 18 U.S.C. SECTION 1350,
AS ADOPTED PURSUANT TO SECTION 302
OF THE SARBANES-OXLEY ACT OF 2002
I, Anna M. Williams, Chief Financial Officer of Harken Energy Corporation,
certify that:
1. I have reviewed this annual report on Form 10-K of Harken Energy
Corporation;
2. Based on my knowledge, this annual report does not contain any untrue
statement of a material fact or omit to state a material fact necessary to
make the statements made, in light of the circumstances under which such
statements were made, not misleading with respect to the period covered by
this annual report;
3. Based on my knowledge, the financial statements, and other financial
information included in this annul report, fairly present in all material
respects the financial condition, results of operations and cash flows of
the Registrant as of, and for, the periods presented in this annual report.
Date: December 20, 2002 By: /s/ Anna M. Williams
-------------------------------------
Anna M. Williams
Executive Vice President -Finance
and Chief Financial Officer
116