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SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q/A
(AMENDMENT NO. 1)
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
FOR THE QUARTERLY PERIOD ENDED MARCH 31, 2000
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
FOR THE TRANSITION PERIOD FROM _____ TO _____
COMMISSION FILE NUMBER 0-9207
HARKEN ENERGY CORPORATION
(Exact name of registrant as specified in its charter)
DELAWARE 95-2841597
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
16285 PARK TEN PLACE, SUITE 600 77084
HOUSTON, TEXAS (Zip Code)
(Address of principal executive offices)
Registrant's telephone number, including area code (281) 717-1300
INDICATE BY CHECK MARK WHETHER THE REGISTRANT (1) HAS FILED ALL REPORTS
REQUIRED TO BE FILED BY SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF
1934 DURING THE PRECEDING 12 MONTHS (OR FOR SUCH SHORTER PERIOD THAT THE
REGISTRANT WAS REQUIRED TO FILE SUCH REPORTS), AND (2) HAS BEEN SUBJECT TO SUCH
FILING REQUIREMENTS FOR THE PAST 90 DAYS. YES X NO
--- ---
The number of shares of Common Stock, par value $0.01 per share,
outstanding as of May 1, 2000 was 163,216,509.
- --------------------------------------------------------------------------------
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EXPLANATORY NOTE
This Form 10-Q/A for the first quarter ended March 31, 2000 is being
filed, together with Form 10-K/A for the year ended December 31, 1999, in order
for Harken Energy Corporation to report its consolidated financial statements
which have been restated to reflect a change in Harken's proved reserves in
Colombia to resolve issues raised by the SEC in a recent comment letter. The
items amended are Item 1 and 2 of Part I, and Item 6 of Part II. Other items are
not amended and are not included in this filing. Item 2 of Part I has been
revised only to reflect the impact of the above mentioned change in Colombian
proved reserves, and does not include an updated discussion for events occurring
after May 10, 2000.
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HARKEN ENERGY CORPORATION
INDEX TO QUARTERLY REPORT
MARCH 31, 2000
PAGE
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PART I. FINANCIAL INFORMATION
Item 1. Condensed Financial Statements
Consolidated Condensed Balance Sheets.............................................. 5
Consolidated Condensed Statements of Operations.................................... 6
Consolidated Condensed Statements of Stockholders' Equity.......................... 7
Consolidated Condensed Statements of Cash Flows.................................... 8
Notes to Consolidated Condensed Financial Statements............................... 9
Item 2. Management's Discussion and Analysis of Financial Condition
and Results of Operations..................................................... 29
PART II. OTHER INFORMATION ............................................................................ 37
SIGNATURES ................................................................................... 39
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PART I - FINANCIAL INFORMATION
4
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HARKEN ENERGY CORPORATION AND SUBSIDIARIES
CONSOLIDATED CONDENSED BALANCE SHEETS
DECEMBER 31, MARCH 31,
------------------------------
1999 2000
------------- -------------
(Restated) (Restated)
ASSETS
Current Assets:
Cash and temporary investments $ 25,612,000 $ 21,015,000
Accounts and notes receivable, net 5,312,000 6,060,000
Related party notes receivable 466,000 466,000
Prepaid expenses and other current assets 788,000 742,000
------------- -------------
Total Current Assets 32,178,000 28,283,000
Property and Equipment, net 256,133,000 259,084,000
Other Assets, net 10,474,000 9,909,000
------------- -------------
$ 298,785,000 $ 297,276,000
============= =============
LIABILITIES AND STOCKHOLDERS' EQUITY
Current Liabilities:
Trade payables $ 2,981,000 $ 2,002,000
Accrued liabilities and other 7,692,000 7,916,000
Revenues and royalties payable 529,000 714,000
------------- -------------
Total Current Liabilities 11,202,000 10,632,000
Convertible Notes Payable 95,869,000 88,922,000
Bank Credit Facilities 10,500,000 10,500,000
Development Finance Obligation 1,302,000 --
Other Long-Term Obligations 5,078,000 5,161,000
Commitments and Contingencies (Note 15)
Stockholders' Equity:
Common stock, $0.01 par value; 225,000,000 shares authorized;
155,707,548 and 165,585,810 shares issued, respectively 1,557,000 1,656,000
Additional paid-in capital 349,236,000 358,553,000
Retained deficit and other comprehensive income (171,443,000) (173,632,000)
Treasury stock, at cost, 2,153,000 shares held (4,516,000) (4,516,000)
------------- -------------
Total Stockholders' Equity 174,834,000 182,061,000
------------- -------------
$ 298,785,000 $ 297,276,000
============= =============
The accompanying Notes to Consolidated Condensed Financial
Statements are an integral part of these Statements.
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HARKEN ENERGY CORPORATION AND SUBSIDIARIES
CONSOLIDATED CONDENSED STATEMENTS OF OPERATIONS
(Unaudited)
THREE MONTHS ENDED
MARCH 31,
------------------------------
1999 2000
------------- -------------
(Restated) (Restated)
Revenues:
Oil and gas operations $ 3,080,000 $ 9,884,000
Interest and other income 1,256,000 388,000
------------- -------------
4,336,000 10,272,000
------------- -------------
Costs and Expenses:
Oil and gas operating expenses 1,458,000 3,273,000
General and administrative expenses, net 1,789,000 2,734,000
Depreciation and amortization 1,385,000 2,921,000
Interest expense and other, net 1,359,000 1,443,000
Charge for European Note conversion -- 2,068,000
------------- -------------
5,991,000 12,439,000
------------- -------------
Loss before income taxes $ (1,655,000) $ (2,167,000)
Income tax expense -- 15,000
------------- -------------
Loss before extraordinary item $ (1,655,000) $ (2,182,000)
Extraordinary item-charge for reduction of
unamortized issuance costs -- (7,000)
------------- -------------
Net loss $ (1,655,000) $ (2,189,000)
============= =============
Accretion related to preferred stock (8,427,000) --
------------- -------------
Net loss attributed to common stock $ (10,082,000) $ (2,189,000)
============= =============
Basic loss per common share:
Loss before extraordinary item $ (0.08) $ (0.01)
Extraordinary item -- 0.00
------------- -------------
Basic loss per common share $ (0.08) $ (0.01)
============= =============
Weighted average shares outstanding 134,073,116 157,187,214
============= =============
Diluted loss before extraordinary item:
Loss before extraordinary item $ (0.08) $ (0.01)
Extraordinary item -- (0.00)
------------- -------------
Diluted loss per common share $ (0.08) $ (0.01)
============= =============
Weighted average shares outstanding 134,073,116 157,187,214
============= =============
The accompanying Notes to Consolidated Condensed Financial Statements are
an integral part of these Statements.
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HARKEN ENERGY CORPORATION AND SUBSIDIARIES
CONSOLIDATED CONDENSED STATEMENTS OF STOCKHOLDERS' EQUITY
(Unaudited)
ADDITIONAL
PREFERRED COMMON PAID-IN TREASURY RETAINED
STOCK STOCK CAPITAL STOCK DEFICIT
------------- ------------- ------------- ------------- -------------
Balance, December 31, 1998 $ 15,000 $ 1,348,000 $ 327,498,000 $ (2,552,000) $(150,305,000)
Issuance of common stock, net -- 101,000 20,566,000 -- --
Redemption of preferred stock (15,000) -- (25,269,000) -- --
Accretion of preferred stock -- -- 8,427,000 -- (8,427,000)
Conversions of Development Finance
Obligation -- 108,000 21,999,000 -- --
Treasury shares purchased -- -- -- (1,964,000) --
Settlement of property purchase
acquisition -- -- (3,985,000) -- --
Comprehensive income:
Net loss (restated) -- -- -- -- (12,845,000)
Total comprehensive
income (loss) (restated)
------------- ------------- ------------- ------------- -------------
Balance, December 31, 1999 (restated) -- 1,557,000 349,236,000 (4,516,000) (171,577,000)
Issuance of common stock, net -- 30,000 6,730,000 -- --
Repurchase of Benz Convertible Notes -- -- 639,000 -- --
Conversions of Development Finance
Obligation -- 69,000 1,948,000 -- --
Comprehensive income:
Net loss (restated) -- -- -- -- (2,189,000)
Total comprehensive income
(loss) (restated)
------------- ------------- ------------- ------------- -------------
Balance, March 31, 2000 (restated) $ -- $ 1,656,000 $ 358,553,000 $ (4,516,000) $(173,766,000)
============= ============= ============= ============= =============
ACCUMULATED
OTHER
COMPREHENSIVE
INCOME (LOSS) TOTAL
------------- -------------
Balance, December 31, 1998 $ 134,000 $ 176,138,000
Issuance of common stock, net -- 20,667,000
Redemption of preferred stock -- (25,284,000)
Accretion of preferred stock -- --
Conversions of Development Finance
Obligation -- 22,107,000
Treasury shares purchased -- (1,964,000)
Settlement of property purchase
acquisition -- (3,985,000)
Comprehensive income:
Net loss (restated) --
Total comprehensive
income (loss) (restated) (12,845,000)
------------- -------------
Balance, December 31, 1999 (restated) 134,000 174,834,000
Issuance of common stock, net -- 6,760,000
Repurchase of Benz Convertible Notes -- 639,000
Conversions of Development Finance
Obligation -- 2,017,000
Comprehensive income:
Net loss (restated) --
Total comprehensive income
(loss) (restated) (2,189,000)
------------- -------------
Balance, March 31, 2000 (restated) $ 134,000 $ 182,061,000
============= =============
The accompanying Notes to Consolidated Condensed Financial Statements are
an integral part of these Statements.
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HARKEN ENERGY CORPORATION AND SUBSIDIARIES
CONSOLIDATED CONDENSED STATEMENTS OF CASH FLOWS
(Unaudited)
THREE MONTHS ENDED MARCH 31,
------------------------------
1999 2000
------------- -------------
(Restated) (Restated)
Cash flows from operating activities:
Net loss $ (1,655,000) $ (2,189,000)
Adjustment to reconcile net loss to net cash
provided by operating activities:
Depreciation and amortization 1,385,000 2,921,000
Amortization of issuance costs 227,000 281,000
Extraordinary item -- 7,000
Charge for European Note conversion -- 2,068,000
Change in assets and liabilities:
Increase in accounts receivable (917,000) (748,000)
Decrease in trade payables and other (9,866,000) (49,000)
------------- -------------
Net cash provided by (used in) operating activities (10,826,000) 2,291,000
------------- -------------
Cash flows from investing activities:
Capital expenditures, net (14,028,000) (6,463,000)
------------- -------------
Net cash used in investing activities (14,028,000) (6,463,000)
------------- -------------
Cash flows from financing activities:
Repayments of long term debt -- (425,000)
Redemption of preferred stock (25,284,000) --
Proceeds form issuances of common stock,
net of issuance costs 47,000 --
------------- -------------
Net cash provided by (used in) financing activities (25,237,000) (425,000)
------------- -------------
Net decrease in cash and temporary investments (50,091,000) (4,597,000)
Cash and temporary investments at beginning of period 141,545,000 25,612,000
------------- -------------
Cash and temporary investments at end of period $ 91,454,000 $ 21,015,000
============= =============
Supplemental disclosures of cash flow information:
Cash paid during the period for:
Interest $ -- $ 446,000
Income taxes -- --
The accompanying Notes to Consolidated Condensed Financial Statements
are an integral part of these Statements.
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HARKEN ENERGY CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS
MARCH 31, 1999 AND 2000
(Unaudited)
(1) MANAGEMENT'S REPRESENTATIONS
In the opinion of Harken Energy Corporation ("Harken"), the
accompanying unaudited consolidated condensed financial statements contain all
adjustments necessary to present fairly its financial position as of December
31, 1999 and March 31, 2000 and the results of its operations and changes in its
cash flows for all periods presented as of March 31, 1999 and 2000. These
adjustments represent normal recurring items.
The accompanying unaudited condensed financial statements have been
prepared pursuant to the rules and regulations of the Securities and Exchange
Commission ("SEC"). Certain information and note disclosures normally included
in annual financial statements prepared in accordance with generally accepted
accounting principles have been condensed or omitted pursuant to these rules and
regulations, although Harken believes that the disclosures made are adequate to
make the information presented not misleading. It is suggested that these
condensed financial statements be read in conjunction with the financial
statements and the notes thereto included in Harken's Form 10-K/A for the year
ended December 31, 1999.
The consolidated condensed financial statements as of December 31, 1999
and March 31, 2000 have been restated to reflect a change in Harken's proved
reserves in Colombia. See note 17 - Restatement of Financial Statements for
further discussion.
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the financial
statements and the reported amounts of revenues and expenses during the reported
period. Actual results could differ from these estimates.
The results of operations for the three month period ended March 31,
2000 are not necessarily indicative of the results to be expected for the full
year.
(2) MERGERS AND ACQUISITIONS
Merger with XPLOR -- On August 19, 1999, Harken executed a merger
agreement with XPLOR Energy, Inc. ("XPLOR") whereby XPLOR became a wholly-owned
subsidiary of Harken. XPLOR explores for, develops and produces oil and gas
reserves domestically. The assets of XPLOR consist primarily of oil and gas
property interests located along the Texas and Louisiana Gulf Coasts. Under the
terms of the merger agreement, the holders of the outstanding shares of the
preferred stock of XPLOR converted their stock into 7,500,000 shares of Harken
common stock, and also received 2,336,066 warrants for the purchase of Harken
common stock at $2.50 per share. Additionally, Harken assumed $14,200,000 of
bank debt secured by the oil and gas properties of XPLOR. See Note 6 -- Bank
Credit Facility Obligations for further discussion of the XPLOR bank debt. No
further consideration was issuable under this transaction to any other class of
stock of XLPOR and all outstanding shares of XPLOR stock were cancelled under
the merger agreement. The merger with XPLOR has been accounted for under the
purchase method of accounting.
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Acquisition of Benz Prospects -- On December 30, 1999, pursuant to a
Purchase and Sale Agreement and other related agreements, Harken, along with
Harken Gulf Exploration Company, a newly formed wholly-owned subsidiary,
purchased oil and gas leases covering nine exploration prospect areas (the "Benz
Prospects") covering approximately 51,000 net acres plus certain other assets
from Benz Energy, Incorporated ("Benz"). The prospects include interests in
acreage in the Cotton Valley Reef, Wilcox and Frio Trends in Texas and the Salt
Dome and Salt Ridge Basins of Mississippi. In exchange for the prospects, Harken
issued 5% subordinated notes (the "Benz Convertible Notes") with a face value of
$12 million, which are convertible into Harken common stock at a conversion
price of $6.50 per share and mature on May 26, 2003. See Note 8 - Convertible
Notes Payable for further discussion of the Benz Convertible Notes. A former
officer of Benz retained a 20% reversionary interest, subject to the Benz
Prospects achieving payout as defined in the Purchase and Sale Agreement. Such
reversionary interest shall increase to 40% in the event that Benz merges into
or is otherwise acquired by Harken. In addition, in connection with the
acquisition of the Benz Prospects, Harken entered into a consulting agreement
with the former officer of Benz whereby Harken would pay a monthly consulting
fee of $100,000 through December 31, 2000 in exchange for consulting services
related to the Benz Prospects. See Note 12 -- Related Party Transactions for a
discussion of the relationship between Harken and Benz.
(3) MARKETABLE SECURITIES
Included within cash and temporary investments at December 31, 1999 and
March 31, 2000 are certain investments in marketable debt securities having
maturities of sixty days or less. In addition, at March 31, 2000, Harken held an
investment in Benz preferred stock. Harken management determines the appropriate
classification of such debt and equity securities at the time of purchase and
reevaluates such designation as of each balance sheet date. Such debt and equity
securities are classified as held-to-maturity as Harken has the positive intent
and ability to hold the securities to maturity. Held-to-maturity securities are
stated at amortized cost, adjusted for amortization of premiums and accretion of
discounts to maturity. Such amortization is included in interest and other
income. Harken holds no securities which are classified as available-for-sale or
trading.
The following is a summary of held-to-maturity securities:
December 31, March 31,
1999 2000
------------ ------------
Included in cash and temporary investments:
Cost $ 18,459,000 $ 15,341,000
Estimated fair value $ 18,530,000 $ 15,409,000
Harken includes in cash and temporary investments other cash and cash
equivalent amounts in addition to the above marketable debt securities.
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(4) PROPERTY AND EQUIPMENT
A summary of property and equipment follows:
December 31, March 31,
1999 2000
------------- -------------
(restated) (restated)
Unevaluated oil and gas properties:
Unevaluated Colombian properties $ 44,767,000 $ 46,525,000
Unevaluated Costa Rican properties 2,037,000 2,399,000
Unevaluated domestic properties 17,111,000 18,828,000
Evaluated oil and gas properties:
Evaluated Colombian properties 121,351,000 122,453,000
Evaluated domestic properties 131,159,000 131,847,000
Facilities, gas plants and other property 21,320,000 21,563,000
Less accumulated depreciation and amortization (81,612,000) (84,531,000)
------------- -------------
$ 256,133,000 $ 259,084,000
============= =============
(5) MIDDLE AMERICAN OPERATIONS
Colombian Operations -- Harken's Colombian operations are conducted
through Harken de Colombia, Ltd., a wholly-owned subsidiary of Harken, which
held five exclusive Colombian Association Contracts with Empresa Colombiana de
Petroleos ("Ecopetrol") as of March 31, 2000. These Association Contracts
include the Alcaravan Contract, awarded in 1992, the Bocachico Contract, awarded
in 1994, the Cambulos Contract, awarded in 1995, the Bolivar Contract, awarded
in 1996 and the Los Olmos Contract, awarded in 1998. As of March 31, 2000, the
Alcaravan Contract covers an area of approximately 24,000 acres in the Llanos
Basin of Eastern Colombia. The Bocachico and Cambulos Contracts cover a combined
area of approximately 492,000 acres in the Middle Magdalena Valley of Central
Colombia and the Bolivar Contract covers an area of approximately 250,000 acres
in the Northern Middle Magdalena Valley of Central Colombia. The Los Olmos
Contract covers approximately 374,000 acres in the Lower Magdalena Valley of
Northern Colombia.
Terms of each of the Association Contracts commit Harken to perform
certain activities in accordance with a prescribed timetable. As of May 10,
2000, Harken was in compliance with the requirements of each of the Association
Contracts, as amended and/or waived. Harken has completed all of the work
requirements of the first five years of the Alcaravan Contract. During September
1999, Ecopetrol granted a six-month extension until March 31, 2000 to Harken for
drilling the exploratory well required in the sixth year of the Alcaravan
Contract. Harken does not currently have any plans to drill an additional well
on the Alcaravan Contract area acreage until December 2000. Effective December
29, 1999, Ecopetrol accepted Harken's relinquishment of 52% of the Alcaravan
Contract Area as required under the Alcaravan
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Contract. In February 2000, Harken was granted by Ecopetrol a further extension
until January 31, 2001 to drill this sixth year exploratory well of the
Alcaravan Contract. In exchange, Harken relinquished all Alcaravan Contract area
acreage to Ecopetrol except for the approximately 24,000 acres covering those
structure areas associated with the Palo Blanco and Anteojos discoveries.
Accordingly, the acreage relinquishments had no effect on Harken Colombia proved
reserves. As a result of the above relinquishments, Harken has relinquished a
total of 89% of the original Alcaravan Contract area acreage.
Harken has fulfilled all of the work requirements for the first four
years of the Bocachico Contract. The work requirements for the fifth year
required Harken to drill one exploratory well by May 6, 1999, and the sixth year
work obligation required an additional exploratory well to be drilled by March
6, 2000. Harken did not drill the fifth year or sixth year exploratory wells,
and Harken does not currently have any plans to drill a well on the Bocachico
Contract area acreage during 2000. Harken is currently negotiating with
Ecopetrol for a modification of the fifth and sixth year work obligations, and
management believes that it will be successful in negotiating such
modifications. Such negotiations include a proposal to relinquish all but
approximately 53,000 acres of Bocachico Contract area acreage, although Harken's
proposal to Ecopetrol includes retaining the structure area associated with the
Rio Negro Prospect. Such proposed relinquishment would not affect Harken's
proved reserves. Such proposed acreage relinquisments represent 72% of the
original Bocachico Contract area acreage. Ecopetrol has advised Harken that
during these negotiations, Ecopetrol will consider the contract to be in full
compliance.
The Cambulos Contract originally required that the Cambulos Contract
acreage be reduced to 173,000 acres at the end of the second contract year, but
in May 1998, Ecopetrol agreed to defer relinquishment of the acreage in exchange
for Harken drilling two exploratory wells within the third contract year. During
May 1999, Harken received approval from Ecopetrol to allow for the additional
well depth drilled during the Islero #1 well to substitute for the obligation to
drill a second exploratory well within the third contract year. During September
1999, Ecopetrol conditionally granted a six month extension from November 1999
until May 16, 2000 to Harken for the drilling of the exploratory well required
in the fourth year of the Cambulos Contract. Harken does not currently have any
plans to drill an additional well on the Cambulos Contract area acreage during
2000 and Harken is currently in negotiations with Ecopetrol regarding this well
requirement for the fourth contract year. Harken's proposal includes the
relinquishing of all but approximately 41,000 acres or less of its Cambulos
acreage and transferring the obligation to acreage on another Association
Contract in order to meet the conditions required by Ecopetrol in granting
Harken an extension. Such proposed acreage relinquishment represents 86% of the
original Cambulos Contract area acreage. Such relinquishment would not affect
Harken's proved reserves.
During the first two years of the Los Olmos Contract, and before May
24, 2000, Harken is required to reprocess at least 500 kilometers of existing
seismic data and acquire at least 120 kilometers of new seismic data and 2,000
kilometers of aeromagnetic data, and prepare an engineering study of the
contract areas. Harken is currently in negotiations with Ecopetrol which could
result in delaying the above work requirements or transferring certain of the
seismic obligations to another Association Contract.
Under the terms of the Association Contracts, if, during the first six
years of each contract, Harken discovers one or more fields capable of producing
oil or gas in quantities that are economically exploitable and Ecopetrol elects
to participate in the development of the field, or Harken chooses to proceed
with the development on a sole-risk basis, the term of that contract will be
extended for a period of 22 years from the date of such discovery. Upon
discovery of a field capable of commercial production, the election by
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Ecopetrol to participate in the commercial field and upon commencement of
production from that commercial field, Ecopetrol will begin to reimburse Harken
for 50% of Harken's successful well costs expended up to the point of
declaration of a commercial discovery plus, in the case of the Cambulos,
Bolivar, and Los Olmos Contracts, 50% of all seismic and dry well costs incurred
prior to the point of declaration of a commercial discovery. Production from a
commercial discovery will be allocated as follows: Ecopetrol, on behalf of the
Colombian government, will receive a 20% royalty interest in all production, and
all production (after royalty payments) will be allocated 50% to Ecopetrol and
50% to Harken until cumulative production from all fields (or the particular
productive field under certain of the Association Contracts) in the Association
Contract acreage reaches 60 million barrels of oil. As cumulative production
increases in excess of 60 million barrels of oil, Ecopetrol's share of
production will increase progressively (to a maximum of 75% under certain of the
Association Contracts) with a corresponding decrease in Harken's share of
production. After a declaration of a commercial discovery, Harken and Ecopetrol
will be responsible for all future development costs and operating expenses in
direct proportion to their interest in production. For any fields that are not
declared by Ecopetrol to be a commercial discovery, Harken would retain the
rights to all production after royalty.
Reimbursement by Ecopetrol to Harken may either be directly, or through
allowing its share of production to apply to Harken's cost recovery. During the
last part of 1999, Harken began receiving Ecopetrol's working interest share of
monthly Bolivar Contract area production as reimbursement for a portion of
Ecopetrol's share of historical Bolivar Contract area costs. Harken has
reflected such reimbursement production as revenues during 1999 and 2000.
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 had announced an agreement to
participate in this anticipated Costa Rica Contract. The Contract covers
approximately 1.4 million acres in the North and South Limon Back Arc Basin
onshore and offshore Costa Rica Central America. The formal Costa Rica Contract
was signed by the President of Costa Rica and became effective October 1999. The
Costa Rica Contract area is comprised of Blocks 2, 3, 4 and 12 from Costa Rica's
initial bidding round in October of 1997. Two of the Blocks are located onshore
and two are located offshore within Costa Rica's Caribbean territorial waters.
Harken's participation in Costa Rica is structured whereby a
wholly-owned Harken subsidiary owns 80% of the stock of a Nevada limited
liability corporation, Harken Costa Rica Holdings LLC ("HCRH"). An affiliate of
MKJ owns the remaining 20% of the stock of this subsidiary. Under the terms of
the agreement between Harken and MKJ, Harken will pay $4.2 million to MKJ to
purchase its share of the Costa Rica Contract rights from MKJ after an agreement
and approval of the assignment is signed and ratified with the Republic of Costa
Rica. Application for assignment of the contract has been presented to the Costa
Rican government for final approval. Harken anticipates that assigning of these
contractual rights will be finalized during the second quarter of 2000.
Additionally, up to $8 million may be committed by Harken over the next two
years to fund the initial minimum work program obligations under the proposed
Costa Rica Contract. In connection with Harken's participation in the Costa Rica
Contract rights, Harken issued to MKJ certain non-registered, non-transferable
stock purchase warrants to purchase 200,000 shares of Harken common stock which
are currently exercisable by the holders thereof at any time after November 12,
1998 and on or before November 12, 2001 at an exercise price of $3.50 per share.
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(6) BANK CREDIT FACILITY OBLIGATIONS
A summary of long-term bank obligations follows:
December 31, March 31,
1999 2000
-------------- -------------
Subsidiary notes payable to bank (A) $ 10,500,000 $ 10,500,000
Subsidiary project finance facility (B) -- --
-------------- -------------
10,500,000 10,500,000
Less: Current portion -- --
-------------- -------------
$ 10,500,000 $ 10,500,000
============== =============
(A) XPLOR, a wholly-owned subsidiary of Harken, has a three-year loan
facility with Christiania og Kreditkasse ("Christiania") which is
solely secured by the oil and gas properties and subsidiaries of XPLOR.
The Christiania facility matures on September 30, 2002 and provides up
to $50,000,000 in borrowings limited by a borrowing base (as defined by
the Christiania facility) which was $10,500,000 at March 31, 2000. The
outstanding balance under the Christiania facility was $14,200,000 at
the August 19, 1999 merger of XPLOR with Harken, and was paid down by
Harken to $10,500,000 subsequent to the merger. The Christiania
facility provides for interest based on the Short-term Interbank
Offered Rates ("LIBOR") plus a margin of 1.125% to 1.875%, payable at
the underlying LIBOR maturities or lender's prime rate plus 0.25%
(7.85% at March 31, 2000) and provides for a commitment fee of 0.375%
on the unused amount. At March 31, 2000, Harken was in compliance with
all financial covenants related to the facility. The borrowing base is
subject to a review by Christiania on a semi-annual basis and may be
adjusted subject to the provisions of the Christiania facility.
(B) Effective September 1, 1999, Harken de Colombia, Ltd. entered into a
project finance loan agreement with the International Finance
Corporation ("IFC") to be utilized in the development of the Bolivar
Association Contract block in Colombia ("the Project"). As of May 10,
2000, no borrowings have been drawn down by Harken de Colombia, Ltd.
under the facility.
The project finance facility consists of an A Loan of $20,000,000, a
syndicated B loan of $25,000,000 and a C Loan of $10,000,000. The A and
B Loans will bear interest at LIBOR plus a margin of 3.50% and will be
repayable in equal semi-annual installments beginning one year after
initial disbursement of funds and continuing for five years. The
syndicated B Loan has been jointly arranged by Dresdner Kleinwort
Benson, and fully underwritten by Dresdner Bank Lateinamerika AG. The C
Loan will bear interest at LIBOR with a quasi-equity income
participation and is repayable in full at the end of the sixth year of
maturity. The C Loan will be convertible into Harken common stock under
certain conditions at a conversion price of $3.00 per share. All loans
are extendable for up to two years from the initial term if certain
Project performance conditions are achieved. All loans will be secured
by the Project. Funding under the facility is subject to certain
conditions, including Harken maintaining certain capital commitments to
Harken de Colombia, Ltd. to be dedicated to the
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Project. Harken has incurred approximately $1,174,000 of issuance
costs associated with the project finance facility and such costs are
being amortized over the term of the facility.
Currently, and as of March 31, 2000, Harken de Colombia, Ltd. and
Harken do not meet certain of the financial covenants required in order
to draw down funds under the project finance facility. Additionally,
Harken is reviewing certain aspects of the Project in light of current
Bolivar production information and Harken's drilling and development
plans for 2000. As of May 10, 2000, no modifications to the project
finance facility have been made with IFC.
(7) DEVELOPMENT FINANCE AND OPERATING AGREEMENTS
Rochester Agreement -- Harken de Colombia, Ltd. entered into an
operating agreement (the "Rochester Agreement") with Rochester Energy
Corporation ("Rochester", a Canadian corporation) pursuant to which Rochester
paid 33 1/3% of the aggregate costs of the Estero #1 well and related production
facilities on the Palo Blanco prospect, 25% of the aggregate costs related to
the Estero #3 well, and 25% of the aggregate costs of the initial well drilled
on the Anteojos prospect, the Canacabare #1, all of which are located within the
Alcaravan and Miradores Contract areas. In exchange, Rochester acquired a
beneficial interest equal to 25% of the interest held by Harken de Colombia,
Ltd. in the Palo Blanco and Anteojos prospect operations. The Estero #1 well was
drilled in the first half of 1997, and Estero #3 was spudded in December 1997.
In May 1999, Harken signed a definitive purchase and sale agreement
pursuant to which Harken purchased all of the interests held by Rochester in the
Alcaravan and Miradores Association Contract areas. Under the terms of the
purchase and sale agreement entered into between Harken and Rochester, Harken
forgave all amounts owed by Rochester to Harken and issued 2,600,000 shares of
Harken common stock. The purchase and sale agreement with Rochester was closed
in July 1999.
EnCap Development Finance Agreement -- In October 1997, Harken entered
into a Development Finance Agreement (the "EnCap Development Finance Agreement")
with EnCap Energy Capital Fund III, L.P., EnCap Energy Capital Fund III-B, L.P.,
BOCP Energy Partners, L.P. and Energy Capital Investment Company PLC
(collectively the "EnCap Investors"), pursuant to which the EnCap Investors
provided $25 million (the "Payment Amount"), less a 2% investment banking fee,
to Harken to finance the planned drilling of the initial wells on three
unexplored oil and gas prospects in the Middle Magdalena Basin of Colombia. As
part of the transaction, Harken issued 150,000 shares of Harken common stock to
the EnCap Investors. The three well exploratory program contemplated the
drilling of one prospect on Harken's Bocachico Contract area and the
drilling of two prospects on Harken's Cambulos Contract area. In exchange, the
EnCap Investors received the right to receive future payments from Harken equal
to 5% of the net profits that Harken de Colombia, Ltd. may have derived from the
sale of oil and gas produced from each of the three prospects if the planned
drilling on the prospect was successful (the "EnCap Participation").
Pursuant to the EnCap Development Finance Agreement, the EnCap
Investors had the right, for a period of two years beginning in October 1998, to
convert all or part of the EnCap Participation into shares of Harken common
stock. The number of shares of Harken common stock to be issued upon conversion
of the EnCap Participation was equal to the quotient of (i) the Payment Amount
(less any distributions made in
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respect of the EnCap Participation) plus an amount equal to 15% interest per
annum on the net Payment Amount compounded monthly (the "Invested Amount"),
divided by (ii) the market price of Harken common stock at the time of
conversion. During the same two year period, Harken also had the right to
convert the EnCap Participation into shares of Harken common stock with the
number of shares of Harken common stock to be issued to be equal to the quotient
of (i) the Payment Amount (less any distribution made in respect of the EnCap
Participation) plus an amount equal to 25% interest per annum on the net Payment
Amount compounded monthly, divided by (ii) the market price of Harken common
stock at the time of conversion. Harken could also elect to pay cash upon any
conversion of the EnCap Participation in lieu of issuing Harken common stock.
The EnCap Development Finance Agreement also provided for additional shares of
Harken common stock ("Deficiency Shares") to be issued by Harken in the event of
a conversion to the extent that the EnCap Investors do not, under certain
circumstances, realize the Invested Amount from the sale of shares of Harken
common stock issued at the conversion. See Note 12 -- Related Party Transactions
for a discussion of the relationship between Harken and the EnCap Investors.
In April 1999, Harken received notice from EnCap Investments L.C. that
the EnCap Investors elected to exercise their option to convert a 40% portion of
the EnCap Participation into shares of Harken common stock. Pursuant to the
EnCap Development Finance Agreement, the EnCap Investors received 6,481,512
shares of Harken common stock.
On October 28, 1999, Harken and the EnCap Investors entered into a
repurchase agreement whereby Harken paid cash of $20 million to EnCap
Investments L.C. on behalf of the EnCap Investors as full settlement of the
remaining Development Finance Obligations to the EnCap Investors. Such
repurchase and settlement included the extinguishment of Harken's contingent
obligation to issue Deficiency Shares of Harken common stock to the extent that
the EnCap Investors did not realize the Invested Amount from the sale of shares
issued to the EnCap Investors in April 1999.
European Development Finance Agreement -- In December 1997, Harken
entered into a Development Finance Agreement and other related agreements (the
"European Development Finance Agreement") whereby Sidro S.A., Lambertine
Holdings, Ltd. and Rauscher Pierce and Clark (collectively the "European
Investors") purchased all of the outstanding common stock of Harken Capital
Corporation, ("HCC", a newly-formed U.S. corporation) for $7 million. Pursuant
to the European Development Finance Agreement, HCC then provided the $7 million
to Harken in January 1998 to finance a portion of the cost of the three-well
exploratory program discussed above pursuant to terms identical to the EnCap
Development Finance Agreement. In exchange, HCC received the right to receive
future payments from Harken equal to 1.4% of the net profits that Harken de
Colombia, Ltd. may have derived from the sale of oil and gas produced from each
of the three prospects if the planned drilling on the prospect was successful.
As part of the transaction, Harken issued 42,000 shares of Harken common stock
to the European Investors and paid a cash fee of $175,000 to one of the European
Investors.
In March 1998, Harken received directly an additional $3 million
pursuant to a Development Finance Agreement with Faisal Finance ("Faisal"),
which contains terms substantially identical to the EnCap Development Finance
Agreement, including conversion provisions which began in March 1999. In
exchange, Faisal received the right to receive future payments from Harken equal
to 0.6% of the net profits that Harken de Colombia, Ltd. may have derived from
the sale of oil and gas produced from each of the three prospects discussed
above pursuant to the EnCap Development Finance Agreement if the planned
drilling on
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the prospect was successful. As part of this transaction, Harken issued 18,000
shares of Harken common stock to Faisal and paid a cash fee of $75,000 to a
financial advisor.
Pursuant to the European Development Finance Agreement, the European
Investors, Faisal and Harken each had the right to convert the interest into
shares of common stock of Harken pursuant to conversion rights terms identical
to those terms related to the EnCap Development Finance Agreement, for a period
of two years beginning in December 1998. Pursuant to the European Development
Finance Agreements, the European Investors, including Faisal, are entitled to
Deficiency Shares of Harken common stock in the event of a conversion to the
extent that the Investors do not, under certain circumstances, realize the
Invested Amount from the sale of Harken common stock issued at conversion.
In December 1998, one of the European Investors exercised their right to
convert all their Institutional Participation into shares of Harken common
stock. Harken elected to pay cash of approximately $2.3 million in lieu of
issuing Harken common stock. In April and May 1999, respectively, Harken
received notice from the remaining European Investors that they had elected to
exercise their option to convert all of their Institutional Participation into
shares of Harken common stock. Pursuant to the European Development Finance
Agreement, the European Investors received 1,908,637 and 1,121,738 shares,
respectively, of Harken common stock. In November 1999, Harken and these
European Investors entered into an agreement to extend the calculation of the
Invested Amount from the date of conversion to September 30, 1999 and also
extended the period in which these European Investors could sell their shares of
Harken common stock received at conversion. In March 2000, Harken issued to
these European Investors 2,398,400 and 1,739,730 shares, respectively, of
Deficiency Shares of Harken common stock pursuant to the European Development
Finance Agreement as modified.
Also, in April 1999, Harken received notice from Faisal that it had
elected to exercise its option to convert a two-thirds portion of its
Institutional Participation into shares of Harken common stock. Pursuant to the
Development Finance Agreement with Faisal, Faisal received 1,316,829 shares of
Harken common stock. In February 2000, Harken entered into an agreement with
Faisal whereby Harken issued 1,457,390 shares of Harken common stock to Faisal
as full settlement for any additional shares payable to Faisal related to its
April 1999 conversion of its Institutional Participation. In March 2000, Harken
received notice from Faisal that it had elected to exercise its option to
convert the remaining portion of its Institutional Participation into shares of
Harken common stock. Pursuant to the Development Finance Agreement with Faisal,
Faisal was issued 1,282,741 shares of Harken common stock. Harken continues to
be committed to provide potential additional Deficiency Shares of Harken common
stock to Faisal related to the sale of these shares issued.
Accounting for Development Finance Agreements - At December 31, 1999,
Harken accounts for the remaining Development Finance Agreement Invested Amount,
including the accrued 15% per annum increase, as a long-term obligation, as such
Invested Amount is payable to Faisal should Faisal elect to convert their
Institutional Participation into shares of Harken common stock. The 15% per
annum increase in the Invested Amount, plus the amortization of the issuance
costs associated with the Development Finance Agreements, is reflected as
Interest Expense and Other, net of amounts capitalized, in the accompanying
consolidated statements of operations. Harken records as Interest Expense and
Other the fair value of the obligation to issue Deficiency Shares related to
conversions of Development Finance Agreements at the time they are converted. In
addition, Harken reflected Interest Expense and Other during the fourth quarter
of 1999 and first quarter of 2000 for the additional value related to the
November 1999 agreement with the
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European Investors and the February 2000 agreement with Faisal, respectively. As
Institutional Participation is converted into shares of Harken common stock, a
pro-rata portion of the unamortized issuance costs associated with the
Development Finance Agreements has been charged to income as an extraordinary
item.
(8) CONVERTIBLE NOTES PAYABLE
5% European Notes -- On May 26, 1998, Harken issued to qualified
purchasers a total of $85 million in 5% Senior Convertible Notes (the "5%
European Notes") which mature on May 26, 2003. 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 $6.50 per share, subject to adjustment in certain circumstances ("the
5% European Note Conversion Price"). The Trust Indenture provided for a 3%
premium on the number of shares of Harken common stock issuable on conversion to
holders of the 5% European Notes who converted prior to November 25, 1998. Other
than the February 2000 transaction discussed below, none of the bondholders have
exercised their conversion option as of May 10, 2000. The 5% European Notes are
also convertible by Harken into shares of Harken common stock after May 26,
1999, 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 125% of
the 5% European Note Conversion Price (or $8.125 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. The 5% European Notes are listed on the Luxembourg
Stock Exchange.
In February 2000, Harken entered into an agreement with a holder of the
European Notes in which the holder exchanged Notes in the face amount of
$6,000,000, plus accrued interest, for 3,000,000 shares of Harken common stock.
Although the 3,000,000 shares of Harken common stock issued had a total fair
value of approximately 50% of the face value of the Notes exchanged, accounting
for the transaction required Harken to reflect a charge to earnings of
$2,068,000 related to the fair value of the shares of Harken common stock issued
in excess of the number of shares which would have been issued pursuant to the
$6.50 per share conversion price of the European Notes. In April 2000, Harken
repurchased European Notes in the face amount of $1,980,000 from a holder in
exchange for cash of approximately $1,089,000 plus transaction expenses.
Commissions and issuance costs associated with the European Notes are
deferred and are included in Other Assets and are amortized to interest expense
over the period until conversion or maturity of the European Notes. As European
Notes are converted to Harken common stock, a pro-rata portion of these deferred
costs are charged to Additional Paid-In Capital.
Benz Convertible Notes -- On December 30, 1999 (the "Closing Date"),
Harken issued the Benz Convertible Notes in exchange for certain prospects
acquired from Benz. (See Note 2 -- Mergers and Acquisitions for further
discussion of the acquisition of the Benz Prospects) The Benz Convertible Notes
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originally were to mature May 26, 2003 and bear interest at 5% per annum,
payable semi-annually in May and November of each year to maturity or until the
Benz Convertible Notes are converted. Such Benz Convertible Notes are
convertible into shares of Harken common stock at a conversion price of $6.50
per share, subject to adjustment in certain circumstances (the "Benz Notes
Conversion Price"). 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 $8.125 per share of Harken common stock). The Benz
Convertible 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 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 nine months following the Closing Date (the "Restricted
Put Period"), Benz may require Harken to redeem the Benz Convertible Notes into
Harken's option of either cash or Harken common stock, provided that such
consideration is used to retire obligations of Benz at a discount, which is
acceptable to Harken at Harken's sole discretion, to the face amount of such
obligations. In addition, for a period of nine months, beginning no later than
the end of the Restricted Put Period, the Benz Convertible Notes may be redeemed
at Benz's option for an amount equal to 50% of the then outstanding principal
amount, plus accrued interest, of the related Benz Convertible Notes, payable at
Harken's option either in cash or Harken common stock.
In March 2000, Harken and Benz entered into an agreement whereby Harken
prepaid the approximately $243,000 interest payment due May 26, 2000 on the Benz
Convertible Notes and repurchased Benz Convertible Notes having a face amount of
$1,125,000 for $375,000 cash. In addition, the May 26, 2003 maturity date for
certain of the Benz Convertible Notes was extended to November 26, 2003. No gain
was recorded on this transaction due to the related party relationship between
Harken and Benz.
Harken has reflected the Benz Convertible Notes on its consolidated
balance sheet at the fair value of the Notes on the Closing date. The difference
between the fair value and the face amount of the Benz Convertible Notes
outstanding will be accreted into interest expense over the term of the notes.
(9) STOCKHOLDERS' EQUITY
Common Stock -- Harken currently has authorized 225,000,000 shares of
$.01 par common stock. At December 31, 1999 and March 31, 2000, Harken had
issued 155,707,548 shares and 165,585,810 shares, respectively.
Treasury Stock -- At December 31, 1999 and March 31, 2000, Harken held
2,153,000 shares of Harken common stock purchased in the open market at a cost
of $4,516,000.
Issuance of Convertible Notes Payable -- In May 1998, Harken issued to
qualified purchasers a total of $85 million in 5% European Notes which mature on
May 26, 2003. Such 5% European Notes are convertible into shares of Harken
common stock at an initial conversion price of $6.50 per share, subject to
adjustment in certain circumstances ("the 5% European Note Conversion Price").
Other than the February
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2000 transaction discussed below, none of the bond holders have exercised their
conversion option as of May 10, 2000. The 5% European Notes are also convertible
by Harken into shares of Harken common stock after May 26, 1999, 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 125% of the 5% European
Note Conversion Price (or $8.125 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. In connection with the issuance of the 5% European Notes, Harken
issued to the placement agents for the 5% European Notes warrants to purchase
200,000 shares of Harken common stock at any time after May 26, 1998 and on or
before May 26, 2000 at an exercise price of $6.50 per share. The 5% European
Notes are listed on the Luxembourg Stock Exchange.
In February 2000, Harken entered into an agreement with a holder of the
European Notes where the holder exchanged Notes in the face amount of
$6,000,000, plus accrued interest, for 3,000,000 shares of Harken common stock.
On December 30, 1999 (the "Closing Date"), Harken issued the Benz
Convertible Notes in exchange for certain prospects acquired from Benz. (See
Note 2 -- Mergers and Acquisitions for further discussion of the acquisition of
the Benz Prospects) The Benz Convertible Notes originally were to mature May 26,
2003 and bear interest at 5% per annum, payable semi-annually in May and
November of each year to maturity or until the Benz Convertible Notes are
converted. Such Benz Convertible Notes are convertible into shares of Harken
common stock at a conversion price of $6.50 per share, subject to adjustment in
certain circumstances (the "Benz Notes Conversion Price"). 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 $8.125 per
share of Harken common stock). The Benz Convertible 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 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.
In March 2000, Harken and Benz entered into an agreement whereby Harken
prepaid the approximately $243,000 interest payment due May 26, 2000 on the Benz
Convertible Notes and repurchased Benz Convertible Notes having a face amount of
$1,125,000 for $375,000 cash. In addition, the May 26, 2003 maturity date for
certain of the Benz Convertible Notes was extended to November 26, 2003. No gain
was recorded on this transaction due to the related party relationship between
Harken and Benz.
Private Placement of Harken Common Stock - In March 2000, Harken issued
1,666,667 shares of Harken common stock to two institutional investors in
exchange for $1,500,000 cash and 5,000 shares of Benz Series II preferred stock
having a face value of $500,000.
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Development Finance Agreements -- Harken entered into Development
Finance Agreements relating to certain of its Colombian operations. Pursuant to
these Development Finance Agreements, the investors have exercised their options
to convert their beneficial interest in a specific operating area into shares of
Harken common stock. In addition, certain of these investors were issued shares
of Harken common stock at the time of entering into a development finance
agreement with Harken. In October 1999, Harken repurchased for cash a
significant majority of the remaining development finance agreements. For a
complete discussion of each of the various development finance agreements, and
further discussions of certain conversions of beneficial interests exercised in
April and May 1999, and March 2000, as well as a discussion of the October 1999
repurchase, see Note 7 -- Development Finance and Operating Agreements.
Series F Preferred Stock -- On April 9, 1999, 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 1999 as accretion related
to preferred stock. Such accretion amount is reflected in Harken's calculation
of net loss attributable to common stock. The Series F Preferred did not pay
dividends.
On January 5, 1999, Harken reached an agreement with RGC to extend the
fixed conversion price dates and mandatory conversion date by one year on
Harken's $15 million Series F Preferred. Under the terms of the new agreement
with RGC, Harken would have issued shares of a new Series G Convertible
Preferred Stock (the "Series G Preferred") in exchange for the outstanding
Series F Preferred. In January 1999, RGC elected to present its Series F
Preferred for conversion and Harken elected to pay cash of approximately $25.3
million to RGC in lieu of issuing 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. Harken has reflected the additional
accretion amount of approximately $8,427,000 in the calculation of net loss
attributed to common stock during the first quarter of 1999 reflecting the
portion of the redemption value generated in January 1999.
Stockholder Rights Plan -- In April 1999, Harken adopted a rights
agreement (the "Rights Agreement") whereby a dividend of one preferred share
purchase right (a "Right") was paid for each outstanding share of Harken common
stock. The Rights will be exercisable only if a person acquires beneficial
ownership of 15 percent or more of Harken common stock (an "Acquiring Person"),
or commences a tender offer which would result in beneficial ownership of 15
percent or more of such stock. When they become exercisable, each Right entitles
the registered holder to purchase from Harken one one-thousandth of one share of
Series E Junior Participating Preferred Stock ("Series E Preferred Stock"), at a
price of $35.00 per one one-thousandth of a share of Series E Preferred Stock,
subject to adjustment under certain circumstances.
Upon the occurrence of certain events specified in the Rights
Agreement, each holder of a Right (other than an Acquiring Person) will have the
right to purchase, at the Right's then current exercise price, shares of Harken
common stock having a value of twice the Right's exercise price. In addition,
if, after a
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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 March 31, 2000.
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.
(10) PER SHARE DATA
Basic earnings per common share was computed by dividing net loss by
the weighted average number of shares of Harken common stock outstanding during
the period. The impact of unconverted Convertible Notes or Development Finance
Agreements was not included as their effect would have been antidilutive. Had
the remaining Development Finance Agreement which converted in March 2000, the
February and March 2000 issuance of Deficiency Shares pursuant to Development
Finance Agreements and the private placement of Harken common stock in March
2000 been consummated effective January 1, 2000, Harken's net loss attributed to
common stock would have been $(0.01) for the first quarter of 2000.
(11) INCOME TAXES
At March 31, 2000, Harken had available for federal income tax
reporting purposes, net operating loss (NOL) carryforward for regular tax
purposes of approximately $101,000,000 which expires in 2000 through 2019,
alternative minimum tax NOL carryforward of approximately $88,000,000 which
expires in 2000 through 2019, statutory depletion carryforward of approximately
$2,000,000 which does not have an expiration date, and a net capital loss
carryforward of approximately $6,000,000 which expires in 2000. Approximately
$5,000,000 of the net operating loss carryforward has been acquired with the
purchase of subsidiaries and must be used to offset future income from
profitable operations within those subsidiaries.
There were no deferred tax liabilities as of March 31, 2000. Total
deferred tax assets, primarily related to the net operating loss carryforward,
were approximately $39,532,000 at March 31, 2000. The total net deferred tax
asset is offset by a valuation allowance of approximately $39,532,000 at March
31, 2000.
(12) RELATED PARTY TRANSACTIONS
Harken has on its Board of Directors a director who is also a managing
director of EnCap Investments L.C. ("EnCap"). EnCap has historically provided
financial consulting and investment banking services to Harken. In connection
with the June 1997 placement of the 5 1/2% European Notes, EnCap
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received as a financial consulting fee, $466,667 in cash, and a warrant to
purchase 50,000 shares of Harken common stock at any time after December 11,
1997 and on or before December 11, 1999 at an exercise price of $5.00 per share.
As described in Note 7 -- Development Finance and Operating Agreements, in
October 1997, Harken entered into a Development Finance Agreement with the EnCap
Investors. EnCap serves as the general partner of three of the EnCap Investors
and the Harken director serves as a director of the fourth EnCap Investor. In
connection with the EnCap Development Finance Agreement, EnCap received an
investment banking fee of $500,000. In October 1999, Harken purchased all the
Development Finance Agreement interests and rights held by the EnCap Investors
for $20,000,000 cash. In May 1998, Harken acquired the Bargo Properties from St.
Martinville Partners, Ltd. and Bargo Energy Company, which are affiliates of
EnCap. In addition, in December 1999, Harken acquired the Benz Prospects from
Benz, which is an affiliate of EnCap. Harken believes that the above
transactions were made at terms at least as favorable to Harken as those that
could have been secured with an unrelated party.
In March 2000, Harken issued 1,666,667 shares of Harken common stock to
two institutional investors in exchange for $1,500,000 cash and 5,000 shares of
Benz Series II preferred stock.
During 1997, 1998, and 1999, Harken made secured short-term loans to
certain members of Harken's Board of Directors and Management. Such notes
receivable are reflected in Harken's consolidated balance sheet at December 31,
1999 and March 31, 2000 as Related Party Notes Receivable.
(13) HEDGING ACTIVITIES
During 1999, Harken entered into certain commodity derivative
instruments, which are effective in mitigating commodity price risk associated
with a portion of its monthly crude oil and natural gas production and cash
flow. With the August 19, 1999 merger with XPLOR, Harken held natural gas price
swaps entered into by XPLOR. At March 31, 2000, such natural gas price swaps
result in XPLOR receiving fixed prices of approximately $2.20 per MMBTU covering
a total of 1,575,000 MMBTUs over the life of the swaps, through December 2001.
Harken allocated a portion of the XPLOR purchase price to the fair value of
these swap contracts as of the date of the merger. At March 31, 2000, the
remaining deferred obligation relating to these natural gas swap contracts of
approximately $517,000, and having a market value of approximately $995,000, is
reflected in accrued liabilities and will be recognized in revenue over the life
of the contracts as the hedged natural gas is sold. At March 31, 2000, Harken
also held a put option for crude oil with a fixed price of $15 per barrel
covering 129,500 barrels over the life of the option, through October 31, 2000.
At March 31, 2000, the remaining unamortized premium of approximately $52,000
relating to the crude oil put option is included in other current assets and
will be recognized in revenue over the life of the option as the hedged crude
oil is sold.
Settlements of oil and gas commodity derivatives are based on the
difference between fixed swap or option prices and the New York Mercantile
Exchange closing prices for each month during the life of the contracts. Harken
monitors its crude oil and gas production prices compared to New York Mercantile
Exchange prices to assure its commodity derivatives are effective hedges in
mitigating its commodity price risk.
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(14) SEGMENT INFORMATION
Harken divides its operations into two operating segments which are
managed and evaluated by Harken as separate operations. Harken's North American
operating segment currently relates to Harken's exploration, development,
production and acquisition efforts in the United States whereby production cash
flows are discovered or acquired, and operated primarily through traditional
ownership of mineral interests in the various states in which it operates.
Harken's North American production is sold to established purchasers and
generally transported through an existing and well-developed pipeline
infrastructure. Harken's Middle American operating segment currently relates to
Harken's exploration, development, production and acquisition efforts in
Colombia and Costa Rica. Middle American segment production cash flows are
discovered through extensive drilling operations conducted under Association
Contract arrangements with the state-owned oil and gas companies/ministries in
the respective countries. Harken's Middle American operations are heavily
capital intensive in the exploration and development phases due to remote well
locations and the general need for the construction of Harken's own flowline
connections and production facilities. During the periods presented below, none
of Harken's Middle American segment operating revenues related to Costa Rica.
Harken's accounting policies for each of its operating segments are the
same as those for its consolidated financial statements. There are no
intersegment sales or transfers. Revenues and expenses 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.
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Harken's financial information for each of its operating segments is as
follows for the periods ended March 31, 1999 and March 31, 2000:
NORTH MIDDLE
AMERICA AMERICA TOTAL
------------- ------------- -------------
FOR THE THREE MONTHS ENDED
MARCH 31, 1999:
Operating revenues $ 2,402,000 $ 678,000 $ 3,080,000
Interest and other income 611,000 645,000 1,256,000
Depreciation and amortization (restated) 1,163,000 222,000 1,385,000
Interest expense and other, net 216,000 1,143,000 1,359,000
Income tax expense -- -- --
Segment loss (restated) (443,000) (1,212,000) (1,655,000)
Capital expenditures 534,000 13,941,000 14,475,000
Total assets at end of period (restated) 82,013,000 202,650,000 284,663,000
FOR THE THREE MONTHS ENDED
MARCH 31, 2000:
Operating revenues $ 7,155,000 $ 2,729,000 $ 9,884,000
Interest and other income 150,000 238,000 388,000
Depreciation and amortization (restated) 1,991,000 930,000 2,921,000
Interest expense and other, net 815,000 628,000 1,443,000
Income tax expense 15,000 -- 15,000
Segment loss before extraordinary (645,000) (1,537,000) (2,182,000)
Items (restated)
Segment loss (restated) (645,000) (1,544,000) (2,189,000)
Capital expenditures 2,507,000 3,256,000 5,763,000
Total assets at end of period (restated) 100,601,000 196,675,000 297,276,000
(15) COMMITMENTS AND CONTINGENCIES
Operational Contingencies -- The exploration, development and
production of oil and gas are subject to various Navajo, federal and state laws
and regulations designed to protect the environment. Compliance with these
regulations is part of Harken's day-to-day operating procedures. Infrequently,
accidental discharge of such materials as oil, natural gas or drilling fluids
can occur and such accidents can require material expenditures to correct.
Harken maintains levels of insurance customary in the industry to limit its
financial exposure. Management is unaware of any material capital expenditures
required for environmental control during the next fiscal year.
In September 1997, Harken Exploration Company, a wholly-owned
subsidiary of Harken, was served with a lawsuit filed in U.S. District Court for
the Northern District of Texas, Amarillo Division, styled D. E. Rice and Karen
Rice, as Trustees for the Rice Family Living Trust ("Rice") vs. Harken
Exploration
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Company. In the lawsuit, Rice alleges damages resulting from Harken Exploration
Company's alleged spills on Rice's property and has claimed that the Oil
Pollution Act ("OPA") should be applied in this circumstance. Harken believes
that this position as well as the lawsuit in total is wholly without merit. In
October 1999, the trial court granted Harken's Motion for Summary Judgment that
the OPA did not apply and dismissed the Rice claim under it. Rice has appealed
the trial court's summary judgement to the U.S. Fifth Circuit Court of Appeals.
The appeal is not expected to be heard before the fourth quarter of 2001. In
Harken management's opinion, the results of the lawsuit and appeal will not have
a material adverse effect on Harken's financial position.
Search Acquisition Corp. ("Search Acquisition"), a wholly-owned
subsidiary of Harken, is a defendant in a lawsuit filed by Petrochemical
Corporation of America and Lorken Investments Corporation (together,
"Petrochemical"). This lawsuit arises out of Petrochemical's attempt to enforce
a judgement entered in 1993 against a group of twenty limited partnerships known
as the "Odyssey limited partnerships." Petrochemical claims that Search
Exploration, Inc. is liable for payment of the judgement as the
successor-in-interest to eight Odyssey limited partnerships. Search Acquisition
was the surviving corporation in the 1995 merger with Search Exploration, Inc.
On February 28, 1996, the court granted Search Acquisition's motion for summary
judgment. On July 3, 1998, the Fifth District Court of Appeals for the State of
Texas reversed the trial court's summary judgment and remanded the case to the
trial court. It is estimated that this trial will take place in the fourth
quarter of 2000. Although the ultimate outcome of this litigation is uncertain,
Harken believes that any liability to Harken as a result of this litigation will
not have a material adverse effect on Harken's financial condition.
420 Energy Investment, Inc. and ERI Investments, Inc. (collectively
"420 Energy") filed a lawsuit against XPLOR Energy, Inc., ("XPLOR") a
wholly-owned subsidiary of Harken, on December 21, 1999 in the New Castle County
Court of Chancery of the State of Delaware. 420 Energy alleges that they are
entitled to appraisal and payment of the fair value of their common stock in
XPLOR as of the date XPLOR merged with Harken. Although the outcome of this
litigation is uncertain, Harken believes that any liability to Harken as a
result of this litigation will not have a material adverse effect on Harken's
financial condition.
On March 8, 2000, Harken was named as a third party defendant in an
action styled State of Texas vs. Amber Refining, Inc., Paradigm Properties
Management, Inc., Amber Terminal, Inc., Texas 150 Business Park, Inc., Edward A.
Shaw, ESCM & Associates, Restructure Petroleum Marketing, Inc., and EZ Serve
Corporation, Inc.; Case No. 97-05966 pending in the 261st District Court for
Travis County, Texas. This is an action brought by the State of Texas against
the owners of a refinery and refined products terminal facility located in Fort
Worth, Texas. Harken believes that it has no liability in this matter.
Harken and its subsidiaries currently are involved in various other
lawsuits and other contingencies, which in management's opinion, will not have a
material adverse effect on Harken's financial position.
Harken has accrued approximately $ 6,100,000 at March 31, 2000 relating
to certain other operational or regulatory liabilities related to Harken's
domestic operations. Harken and its subsidiaries currently are involved in
various lawsuits and other contingencies, which in management's opinion, will
not result in significant loss exposure to Harken.
Year 2000 Update -- Over the past two years, Harken has prepared for
the potential impact of the Year 2000 on the processing of date-sensitive
information by Harken's computer systems. The Year 2000
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issue involves circumstances where a computerized system may not properly
recognize or process date-sensitive information on or after January 1, 2000. The
Year 2000 problem is the result of computer programs being written using two
digits, rather than four, to define the applicable year. The problem is not
limited to computer systems. Year 2000 issues potentially could have affected
every non-information technology system that has an embedded microchip, such as
elevators.
Harken began a formal process in 1998 to identify those internal
computerized systems that were not Year 2000 compliant, prioritize those
business-critical computerized systems that needed remediation or replacement,
test compliance once the appropriate corrective measures had been implemented,
and develop any contingency plans where considered necessary. In addition,
Harken conducted a survey to verify the Year 2000 readiness status of key
purchasers, vendors and customers that potentially could have had an impact on
Harken's material business operations.
As of May 10, 2000, Harken has experienced no interruption in any of
its computerized systems or any other non-information technology system related
to the Year 2000 issue. In additional, Harken has noted no material impact to
any of its key purchasers, vendors or customers as a result of the Year 2000
issue. Harken continues to be alert for any potential Year 2000-related problems
and maintains appropriate contingency plans to address any remaining potential
disruption related to the Year 2000 issue.
(17) RESTATEMENT OF FINANCIAL STATEMENTS
In August 2000, following discussions with the Securities and Exchange
Commission's engineering staff, Gaffney, Cline and Associates agreed to revise
its oil and gas reserves in Colombia to remove the reserves associated with the
Norean/Crisol gas field and Trigos oil field, both on Harken's Bolivar
Association Contract area, from the proved category. The effect of the change in
Colombian proved reserves was to reclassify certain Colombian oil and gas
property costs and to increase Colombian depreciation and amortization for the
periods presented. The 1999 reduction in proved oil and gas reserves had no
effect on Harken's historical revenues, net working capital or cash flow for any
of the periods presented. Harken had no long-term debt compliance covenants that
were affected by the restatement.
The following table summarizes certain selected financial data as of
March 31, 2000 and 1999 and for the three months then ended as originally
reported and as restated to reflect the impact of the change in Colombian
reserves.
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March 31,
----------------------------------------------------------------
1999 2000
------------------------------ ------------------------------
Previously Previously
Reported Restated Reported Restated
------------- ------------- ------------- -------------
Revenues:
Oil and gas revenues $ 3,080,000 $ 3,080,000 $ 9,884,000 $ 9,884,000
Interest and
other income 1,256,000 1,256,000 388,000 388,000
------------- ------------- ------------- -------------
4,336,000 4,336,000 10,272,000 10,272,000
Costs and Expenses:
Oil and gas
operating 1,458,000 1,458,000 3,273,000 3,273,000
General and
administrative 1,789,000 1,789,000 2,734,000 2,734,000
Depreciation and
amortization 1,378,000 1,385,000 2,756,000 2,921,000
Interest expense
and other, net 1,359,000 1,359,000 1,443,000 1,443,000
Charge for
European Note conversion -- -- 2,068,000 2,068,000
------------- ------------- ------------- -------------
5,984,000 5,991,000 12,274,000 12,439,000
Income tax expense -- -- (15,000) (15,000)
Extraordinary item -- -- (7,000) (7,000)
------------- ------------- ------------- -------------
Net loss $ (1,648,000) $ (1,655,000) $ (2,024,000) $ (2,189,000)
Net loss attributed to
common stock (10,075,000) (10,082,000) (2,024,000) (2,189,000)
Basic and diluted
net loss per share (0.08) (0.08) (0.01) (0.01)
Total assets 284,670,000 284,663,000 297,576,000 297,276,000
Stockholders' equity 149,253,000 149,246,000 182,361,000 182,061,000
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ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
(UNAUDITED)
Certain statements included in the accompanying condensed financial
statements and in the following discussion and analysis of financial condition
and results of operations, including statements of Harken management's current
expectations, intentions, plans and beliefs, and statements containing the words
"believes", "anticipates", "estimates", "expects", or "may" are forward-looking
statements, as defined in Section 21D of the Securities Exchange Act of 1934.
Such forward-looking statements involve known and unknown risk, uncertainties
and other factors which may cause the actual results, performance, timing or
achievements of Harken to be materially different from any results, performance,
timing or achievements expressed or implied by such forward-looking statements.
Such factors include, among others, the risks described in Harken's Annual
Report on Form 10-K for the fiscal year ended December 31, 1999 filed with the
Securities and Exchange Commission.
OVERVIEW
Harken reported a net loss for the three months ended March 31, 2000 of
$2,189,000 compared to a net loss of $1,655,000 for the prior year period
despite increased domestic and Colombian production and increased prices,
primarily due to a charge to earnings related to the conversion of certain
European Notes. Harken worldwide oil and gas revenues have increased 221% during
the first quarter of 2000 compared to the prior year period due to increased
prices, particularly for crude oil; increased domestic production primarily as a
result of the August 1999 merger with XPLOR Energy, Inc.; and the increased
Colombian production from Harken's Bolivar and Alcaravan Association Contract
areas. Gross profit before depreciation and amortization, general and
administrative and interest expenses totaled approximately $6.6 million during
the three months ended March 31, 2000 compared to approximately $1.6 million for
the prior year period.
Three Months Ended
March 31,
-------------------------
1999 2000
----------- -----------
(unaudited)
REVENUES
Domestic Exploration and Production Operations
Oil sales revenues $ 1,350,000 $ 3,968,000
Oil volumes in barrels 121,000 143,000
Oil price per barrel $ 11.16 $ 27.75
Gas sales revenues $ 979,000 $ 2,991,000
Gas volumes in mcf 570,000 1,124,000
Gas price per mcf $ 1.72 $ 2.66
Gas plant revenues $ 73,000 $ 196,000
Colombian Exploration and Production Operations
Oil sales revenues $ 678,000 $ 2,729,000
Oil volumes in barrels 77,000 124,000
Oil price per barrel $ 8.81 $ 22.01
OTHER REVENUES
Interest income $ 1,248,000 $ 382,000
Other income $ 8,000 $ 6,000
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RESULTS OF OPERATIONS
The following is management's discussion and analysis of certain
significant factors which have affected Harken's earnings and balance sheet
during the periods included in the accompanying consolidated financial
statements.
For the quarter ended March 31, 2000 compared with the corresponding prior
period.
DOMESTIC OPERATIONS
Domestic gross oil and gas revenues during the first quarter of 2000
and 1999 relate primarily to the operations in the onshore and offshore areas of
the Texas and Louisiana Gulf Coast, the Western and Panhandle regions of Texas,
the Four Corners area primarily on the Navajo Indian Reservation, the Magnolia
region of Arkansas and the Carlsbad region of New Mexico.
Gross domestic oil revenues increased 194% to $3,968,000 during the
first quarter of 2000 compared to $1,350,000 during the first quarter of 1999
primarily due to the increase in oil prices, which averaged $16.59 more per
barrel during the first quarter of 2000 compared to the prior year period. Oil
prices have continued to remain higher during the second quarter of 2000
compared to prices received during the same period of the prior year. Oil
production volumes also increased 18% during the first quarter of 2000 compared
to the prior year period primarily due to the merger with XPLOR in August 1999.
Gross domestic gas revenues increased 206% to $2,991,000 for the three
months ended March 31, 2000 compared to $979,000 for the prior year period due
primarily to the increase in gas production as a result of the merger with XPLOR
in August 1999. In addition, the increased gas revenues were also due to the
increase in average gas prices received during the first quarter of 2000, as
Harken received an overall average price of $2.66 per mcf of gas production
during the first quarter of 2000 compared to $1.72 per mcf received during the
first quarter of 1999.
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 116% to
$2,746,000 during the first quarter of 2000 compared to $1,273,000 during the
prior year primarily due to the increase in operating expenses from the above
mentioned merger with XPLOR. Oil and gas operating expenses decreased as a
percentage of related oil and gas revenues due primarily to the increase in oil
and gas prices during the first quarter of 2000 compared to the prior year
period. Harken is reviewing its existing domestic operations to identify
specific properties for which operating expenses can be reduced.
Harken expects that oil and gas production volumes from its existing
domestic operations will remain flat or increase slightly in 2000 as compared to
1999 due to the inclusion of XPLOR operations
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during the full year and as normal production declines experienced in its
operating areas are expected to be minimized by Harken's continuing workover
efforts and exploration and development drilling during 2000. Harken expects
that 2000 domestic oil revenues will further increase from 1999 levels if crude
oil prices remain at late 1999 and early 2000 levels. Harken's oil and gas
revenues are highly dependent upon product prices, which Harken is unable to
predict.
COLOMBIAN OPERATIONS
Middle American oil revenues have increased 303% from $678,000 during
the first quarter of 1999 to $2,729,000 during the first quarter of 2000. During
the first quarter of 2000, Harken's Colombian production operations consisted of
production testing conducted on Harken's Bolivar and Alcaravan Association
contract areas. All of Harken's Colombian production during the first quarter of
1999 was transported by trucking operations, however, in April 1999, Harken
commenced pipeline transportation on its Palo Blanco flowline on the Alcaravan
Association contract area.
During portions of the first quarter of 2000, Harken's Estero #1 well
on the Alcaravan Contract area has produced at rates in excess of 3,000 gross
barrels of oil per day, although sales of production have been temporarily
limited to approximately 1,000 gross barrels of oil per day due to pipeline
constraints and pumping capacity. Harken's Catalina #1 and Olivo #1 wells on the
Bolivar Contract area have averaged a combined 1,250 gross barrels of oil per
day during the first quarter of 2000. Harken's production volumes during the
remainder of 2000 will primarily remain dependent on existing well production,
pipeline transportation capacity and pumping efficiency.
Due to increased production, Middle American operating expenses have
also increased from $185,000 during the first quarter of 1999 to $527,000 for
the first quarter of 2000.
INTEREST AND OTHER INCOME
Interest and other income decreased during the first quarter of 2000
compared to the prior year period due to Harken's usage of cash during 1999 for
capital expenditures, and the October 1999 purchase of certain development
finance interests for $20 million. Harken generated approximately $1.25 million
of interest income during the first quarter of 1999, compared to approximately
$382,000 of interest income during the first quarter of 2000. Harken's cash
balances, which include investments in short-term marketable debt securities,
are expected to decrease in 2000 as such funds are used to support Harken's
capital expenditure plans. Harken intends to continue to pursue financing
arrangements from various sources during 2000 and the decrease in existing cash
balances and related interest income could be mitigated or offset if such
efforts are successful.
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OTHER COSTS AND EXPENSES
General and administrative expenses increased during the first quarter
of 2000 compared to the first quarter of 1999 primarily due to administrative
expenses associated with Harken's growing Colombian production operations. In
addition, Harken added minimal administrative expenses as a result of the
increased operations relating to the August 1999 merger with XPLOR. Harken also
continues to reduce general and administrative expenses by reducing staff.
Depreciation and amortization expense increased during the first
quarter of 2000 compared to the prior year period consistent with the increased
equivalent barrel production levels during the quarter. Depreciation and
amortization on oil and gas properties is calculated on a unit of production
basis in accordance with the full cost method of accounting for oil and gas
properties. In addition, Harken's depreciation on other property has increased
as a result of Harken's expanding operations.
Interest expense and other remained level during the first quarter of
2000 compared to the prior year period despite the conversion and purchase of
the Development Finance Agreements during 1999 and early 2000. Such decreases in
interest expense were offset by the interest expense added from XPLOR and the
Benz Convertible Notes, interest expense recorded from the February 2000
agreement with Faisal as well as the decrease in the amounts of interest
capitalized to Harken's Colombian exploration activity, as such activity during
the first quarter of 2000 has decreased compared to the prior year period.
Related to the February 2000 transaction whereby Harken exchanged
European Notes in the face amount of $6,000,000 plus accrued interest, for
3,000,000 shares of Harken common stock, Harken reflected a charge to earnings
of $2,068,000 related to the fair value of the shares of Harken common stock
issued in excess of the number of shares which would have been issued pursuant
to the $6.50 per share conversion price of the European Notes.
LIQUIDITY AND CAPITAL RESOURCES
Harken's working capital at March 31, 2000 was approximately $17.7
million, versus approximately $21.0 million at December 31, 1999. The decrease
in cash and working capital during the first quarter of 2000 resulted primarily
from approximately $6.4 million of capital expenditures. Harken's operations
generated approximately $2.3 million of cash flow during the first quarter of
2000. Harken's cash resources at March 31, 2000 totaled approximately $21.0
million. Harken's remaining cash resources are available for its ongoing
exploration, development and acquisition efforts both internationally and in
North America.
Harken's primary need for capital is to fund its planned exploration
and development efforts domestically as well as in Colombia and Costa Rica.
Harken anticipates worldwide capital expenditures will total approximately $38
million during 2000, and plans to seek joint venture partner participation to
fund a portion of the cost for all of its significant exploration projects.
Harken believes that it will have sufficient cash resources to fund all of its
planned capital expenditures during 2000. In addition, Harken intends to
continue to pursue North American and international acquisition opportunities
and plans to fund such acquisitions, if any are consummated, through a
combination of cash on hand, issuances of debt or equity securities.
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Harken anticipates that full development of its Middle American
reserves will take several years and will also require extensive production
facilities, transportation flowlines and development activity which will require
significant additional capital expenditures. The ultimate amount of such
expenditures cannot be presently predicted.
During the third quarter of 1999, Harken announced the non-recourse
project finance loan agreement facility with the International Finance
Corporation ("IFC"), the private sector subsidiary of the World Bank Group.
Loans under this facility were to be available for the development of the
Bolivar Association Contract in Colombia. Currently, and as of March 31, 2000,
Harken de Colombia, Ltd. and Harken do not meet certain of the financial
covenants required in order to draw down funds under the project finance
facility. Additionally, Harken is reviewing certain aspects of the Bolivar
development project in light of current Bolivar production information and
Harken's drilling and development plans for 2000. As of May 10, 2000, no
modifications to the project finance facility have been made with IFC. The
current plans for the development of the Bolivar Contract area call for further
testing of the Laurel #1 well, with the installation of a new rod pump assembly
to further test the Rosa Blanca formation in this well. If the test does not
prove successful, Harken plans to move up hole and test the La Luna formation,
which was present in this well based on log analysis. While the analysis will
provide helpful information, a full understanding of the complex field geology
may only be obtained as Harken drills the additional planned wells.
Harken is currently constructing a Bolivar Contract area flowline which
will be completed over the next few months. Harken will continue to truck 100%
of daily field production while the flowline is being installed. Harken had
earlier planned to construct the flowline during late 1999 or early 2000, but
decided to delay the actual construction of the flowline following the initial
results of the Laurel #1 well. In March 1999, Harken de Colombia, Ltd. filed a
request with Ecopetrol to declare the Catalina field to be commercial. In June
1999, Harken de Colombia, Ltd. filed a request with Ecopetrol to declare the
Palo Blanco field to be commercial. As of May 10, 2000, both commerciality
applications are in process of being reviewed by Ecopetrol. Ecopetrol may
approve the commerciality requests or require Harken de Colombia, Ltd. to
proceed on a sole-risk basis for its development plans. If Harken de Colombia,
Ltd. proceeds on a sole-risk basis, it will be entitled to receive Ecopetrol's
share of production after royalty, until Harken de Colombia, Ltd. has recovered
200% of its development costs, after which time Ecopetrol would receive its
share of production.
Harken's cash flows from operations have been enhanced by the current
production tests at its Alcaravan and Bolivar Contract areas. In addition,
beginning in December 1999, Harken is receiving Ecopetrol's working interest
share of monthly Bolivar Contract area production as reimbursement for a portion
of Ecopetrol's share of historical Bolivar Contract area costs.
Terms of each of the Association Contracts entered into between Harken
de Colombia, Ltd. and Ecopetrol commit Harken to perform certain activities in
Colombia in accordance with a prescribed timetable. Failure by Harken to perform
these activities as required could result in Harken losing its rights under the
particular Association Contract, which could potentially have a material adverse
effect on Harken's business. Certain of the required activities are currently
being discussed and negotiated with Ecopetrol, which could impact the timing and
amount of capital expenditures to be required during 2000.
Related to Harken's Costa Rica operations, under the terms of the
agreement between Harken and MKJ Xploration, Inc. ("MKJ"), Harken will pay $4.2
million to MKJ to purchase its share of the Costa Rica
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Contract rights from MKJ after an agreement and approval of the assignment is
signed and ratified with the Republic of Costa Rica. Application for assignment
of the contract has been presented to the Costa Rican government for final
approval. Additionally, up to $8 million may be committed by Harken over the
next two years to fund the initial minimum work program obligations under the
proposed Costa Rica Contract.
Harken's North American operating strategy includes efforts to acquire
additional oil and gas reserves through exploration and development drilling
activities in North America, particularly on selected properties acquired
through the August 1999 merger with XPLOR Energy, Inc., the additional prospects
acquired in December 1999, and through acquisitions. Harken also plans to
continue selected development of proved undeveloped reserves on its North
American properties in addition to a continual workover program on producing
properties. The targeted results of these workover efforts are to maintain North
American production levels during 2000. Harken continues to review its domestic
oil and gas properties for non-strategic assets which can be negotiated for
possible sale.
European Convertible Notes Payable -- On May 26, 1998, Harken issued a
total of $85 million in 5% Senior Convertible Notes (the "European Notes") which
mature on May 26, 2003. 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 commission 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 European Notes are convertible into shares
of Harken common stock at a conversion price of $6.50 per share, subject to
adjustment in certain circumstances. Harken also has the right to require
conversion of the 5% European Notes into shares of Harken common stock at any
time on or after May 26, 1999, 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 $8.125 per share. Interest payments related to the 5%
European Notes will be funded from cash flow from operations or existing cash
balances. For a detailed discussion of the 5% European Notes see "Notes to
Consolidated Condensed Financial Statements, Note 8 -- Convertible Notes
Payable."
In February 2000, Harken entered into an agreement with a holder of
$6,000,000 of the European Notes where the holder exchanged all his Notes, plus
accrued interest, for 3,000,000 shares of Harken common stock plus a cash
payment of $50,000. Although the 3,000,000 shares of Harken common stock issued
had a total fair value of approximately 50% of the face value of the Notes
exchanged, accounting for the transaction required Harken to reflect a charge to
earnings of approximately $2,100,000 related to the fair value of the shares of
Harken common stock issued in excess of the number of shares which would have
been issued pursuant to the $6.50 per share conversion price of the European
Notes. In April 2000, Harken repurchased European Notes in the face amount of
$1,980,000 from a holder in exchange for cash of approximately $1,089,000 plus
transaction expenses. Harken is considering additional transactions with the
European Note holders whereby Harken may retire additional Notes in exchange for
shares of Harken common stock, cash or other consideration.
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 "Notes to Consolidated Condensed Financial Statements,
Note 2 - Mergers and Acquisitions" for further discussion of the acquisition of
the Benz Prospects. The Benz Convertible Notes mature May 26, 2003 and bear
interest at 5% per annum, payable semi-annually in May and November of each year
to maturity or until the Benz Convertible Notes are converted. Such Benz
Convertible Notes are convertible into shares of Harken
34
35
common stock at a conversion price of $6.50 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 $8.125 per
share of Harken common stock). The Benz Convertible 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 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 nine months following the Closing Date (the "Restricted
Put Period"), Benz may require Harken to redeem the Benz Convertible Notes into
Harken's option of either cash or shares of Harken common stock, provided that
such consideration is used to retire secured obligations of Benz at a discount,
which is acceptable to Harken at Harken's sole discretion, to the face amount of
such obligations. In addition, for a period of nine months, beginning no later
than the end of the Restricted Put Period, the Benz Convertible Notes may be
redeemed at Benz's option for an amount equal to 50% of the then outstanding
principal amount, plus accrued interest, payable at Harken's option either in
cash or shares of Harken common stock.
In March 2000, Harken and Benz entered into an agreement whereby Harken
prepaid the approximately $243,000 interest payment due May 26, 2000 on the Benz
Convertible Notes and repurchased Benz Convertible Notes having a face amount of
$1,125,000 for $375,000 cash. In addition, the May 26, 2003 maturity date for
certain of the Benz Convertible Notes was extended to November 26, 2003. No
accounting gain was recorded on this transaction due to the related party
relationship between Harken and Benz.
Harken has reflected the Benz Convertible Notes on its consolidated
balance sheet at the fair value of the Notes on the Closing Date. The difference
between the fair value and the face amount of the Benz Convertible Notes
outstanding will be accreted into interest expense over the term of the notes.
Development Finance Agreements -- Following the October 1999 purchase
of the EnCap Development Finance Agreement, only the $1 million principal amount
from Faisal Finance ("Faisal"), along with related accrued interest, remained
outstanding as a Development Finance Obligation as of December 31, 1999. For a
detailed discussion of the terms of the Development Finance Agreement, see
"Notes to Consolidated Condensed Financial Statements, Note 7 -Development
Finance and Operating Agreements."
In April and May 1999, certain Institutional Investors, including
Faisal, exercised their individual rights to convert either a portion or all of
their Institutional Participation into shares of Harken common stock. In
February 2000, Harken issued additional shares of Harken common stock to Faisal
as full settlement for the additional shares issuable to Faisal related to their
April 1999 conversion under the terms of the Development Finance Agreement. In
March 2000, Harken issued to other Institutional Investors the remaining shares
of Harken common stock issuable to the extent the Institutional Investors did
not realize the Invested Amount from the sale of Harken common stock previously
issued at conversion. In addition, in March 2000, Faisal exercised its rights to
convert the remaining portion of its Institutional Participation into shares of
Harken common stock. Harken continues to be committed to provide additional
shares of Harken
35
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common stock to Faisal to the extent that Faisal does not, under certain
circumstances, realize the Invested Amount from the sale of shares of Harken
common stock issued at their March 2000 conversion.
Operational Contingencies -- The exploration, development and
production of oil and gas are subject to various Colombian, Costa Rican, Navajo,
federal, state and local laws and regulations designed to protect the
environment. Compliance with these regulations is part of Harken's day-to-day
operating procedures. Accidental discharge of such materials as oil, natural gas
or drilling fluids can occur and such accidents can require material
expenditures to correct. Harken maintains levels of insurance customary in the
industry to limit its financial exposure. Management is unaware of any material
capital expenditures required for environmental control during the next fiscal
year.
Harken has accrued approximately $6.1 million at December 31, 1999
relating to operational or regulatory liabilities related to Harken's North
American operations. Harken and its subsidiaries currently are involved in
various lawsuits and other contingencies, which in management's opinion, will
not result in significant loss exposure to Harken.
Year 2000 Update -- Over the past two years, Harken has prepared for
the potential impact of the Year 2000 on the processing of date-sensitive
information by Harken's computer systems. The Year 2000 issue involves
circumstances where a computerized system may not properly recognize or process
date-sensitive information on or after January 1, 2000. The Year 2000 problem is
the result of computer programs being written using two digits, rather than
four, to define the applicable year. The problem is not limited to computer
systems. Year 2000 issues potentially could have affected every non-information
technology system that has an embedded microchip, such as elevators.
Harken began a formal process in 1998 to identify those internal
computerized systems that were not Year 2000 compliant, prioritize those
business-critical computerized systems that needed remediation or replacement,
test compliance once the appropriate corrective measures had been implemented,
and develop any contingency plans where considered necessary. In addition,
Harken conducted a survey to verify the Year 2000 readiness status of key
purchasers, vendors and customers that potentially could have had an impact on
Harken's material business operations.
As of May 10, 2000, Harken has experienced no interruption in any of
its computerized systems or any other non-information technology system related
to the Year 2000 issue. In addition, Harken has noted no material impact to any
of its key purchasers, vendors or customers as a result of the Year 2000 issue.
Harken continues to be alert for any potential Year 2000-related problems and
maintains appropriate contingency plans to address any remaining potential
disruption related to the Year 2000 issue.
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37
PART II - OTHER INFORMATION
Item 6. Exhibits and Reports on Form 8-K.
9a) EXHIBIT INDEX
Exhibit
3.1 Certificate of Incorporation of Harken Energy
Corporation as amended (filed as Exhibit 3.1 to
Harken's Annual Report on Form 10-K for fiscal year
ended December 31, 1989, File No. 0-9207, and
incorporated by reference herein).
3.2 Amendment to the Certificate of Incorporation of
Harken Energy Corporation (filed as Exhibit 28.8 to
the Registration Statement on Form S-1 of Tejas Power
Corporation, file No. 33-37141, and incorporated by
reference herein.)
3.3 Amendment to the Certificate of Incorporation of
Harken Energy Corporation (filed as Exhibit 3 to
Harken's Quarterly Report on Form 10-Q for fiscal
quarter ended March 31, 1991, File No. 0-9207, and
incorporated by reference herein.)
3.4 Amendments to the Certificate of Incorporation of
Harken Energy Corporation (filed as Exhibit 3 to
Harken's Quarterly Report on Form 10-Q for fiscal
quarter ended June 30,1991, File No. 0-9207, and
incorporated by reference herein.)
3.5 Amendments to the Certificate of Incorporation of
Harken Energy Corporation (filed as Exhibit 3.5 to
Harken's Annual Report on Form 10-K for the fiscal
year ended December 31, 1996, File No. 0-9207, and
incorporated herein by reference).
3.6 Amendment to the Certificate of Incorporation of
Harken Energy Corporation (filed as Exhibit 3.6 to
Harken's Annual Report on Form 10-K for the fiscal
year ended December 31, 1997, File No. O-9207 and
incorporated by reference herein).
3.7 Amendment to the Certificate of Incorporation of
Harken Energy Corporation (filed as Exhibit 3.6 to
Harken's Quarterly Report on Form 10-K for the fiscal
quarter ended June 30, 1999, File No. 0-9207, and
incorporated by reference herein).
3.8 Bylaws of Harken Energy Corporation, as amended
(filed as Exhibit 3.2 to Harken's Annual Report on
Form 10-K for fiscal year ended December 31, 1989,
File No. O-9207, and incorporated by reference
herein).
4.1 Form of certificate representing shares of Harken
common stock, par value $.01 per share (filed as
Exhibit 1 to Harken's Registration Statement on Form
8-A, File No.
0-9027, and incorporated by reference herein.)
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38
4.2 Certificate of Designations, Powers, Preferences and
Rights of Series A Cumulative Convertible Preferred
Stock, $1.00 par value, of Harken Energy Corporation
(filed as Exhibit 4.1 to Harken's Annual Report on
Form 10-K for the fiscal year ended December 31,1989,
File No. 0-9207, and incorporated by reference
herein).
4.3 Certificate of Designations, Powers, Preferences and
Rights of Series B Cumulative Convertible Preferred
Stock, $1.00 par value, of Harken Energy Corporation
(filed as Exhibit 4.2 to Harken's Annual Report on
Form 10-K for the fiscal year ended December 31,
1989, File No. 0-9207, and incorporated by reference
herein.).
4.4 Certificate of the Designations, Powers, Preferences
and Rights of Series C Cumulative Convertible
Preferred Stock, $1.00 par value of Harken Energy
Corporation (filed as Exhibit 4.3 to Harken's Annual
Report on Form 10-K for fiscal year ended December
31,1989, File No. 0-9207, and incorporated by
reference herein).
4.5 Certificate of the Designations of Series D Preferred
Stock, $1.00 par value of Harken Energy Corporation
(filed as Exhibit 4.3 to Harken's Quarterly Report on
Form 10-Q for the fiscal quarter ended September
30,1995, File No. 0-9207, and incorporated by
reference herein).
4.6 Rights Agreement, dated as of April 6, 1999, by and
between Harken Energy Corporation And ChaseMellon
Shareholder Services L.LC., as Rights Agent (filed as
Exhibit 4 to Harken's Current Report on Form 8-K
dated April 7, 1999, File No. 0-9207, and
incorporated by reference herein).
4.7 Certificate of Designations of Series E Junior
Participating Preferred Stock (filed as Exhibit B to
Exhibit 4 to Harken's Current Report on Form 8-K
dated April 7, 1999, file No. 0-9207, and
incorporated by reference herein).
4.8 Certificate of Designations, Preferences and Rights
of Series F Convertible Preferred Stock (filed as
Exhibit 4.8 to Harken's Quarterly Report on Form 10-Q
for the period ended March 31, 1999, File No. 0-9207,
and incorporated by reference herein).
*27 Financial Data Schedules.
(b) REPORTS ON FORM 8-K
None filed.
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HARKEN ENERGY CORPORATION
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
Harken Energy Corporation
------------------------------------
(Registrant)
Date: August 14, 2000 By: /s/ Anna M. Williams
----------------------- ------------------------------------
Anna M. Williams, Senior Vice President
and Chief Financial Officer
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INDEX TO EXHIBITS
EXHIBIT
NUMBER DESCRIPTION
------- -----------
3.1 Certificate of Incorporation of Harken Energy
Corporation as amended (filed as Exhibit 3.1 to
Harken's Annual Report on Form 10-K for fiscal year
ended December 31, 1989, File No. 0-9207, and
incorporated by reference herein).
3.2 Amendment to the Certificate of Incorporation of
Harken Energy Corporation (filed as Exhibit 28.8 to
the Registration Statement on Form S-1 of Tejas Power
Corporation, file No. 33-37141, and incorporated by
reference herein.)
3.3 Amendment to the Certificate of Incorporation of
Harken Energy Corporation (filed as Exhibit 3 to
Harken's Quarterly Report on Form 10-Q for fiscal
quarter ended March 31, 1991, File No. 0-9207, and
incorporated by reference herein.)
3.4 Amendments to the Certificate of Incorporation of
Harken Energy Corporation (filed as Exhibit 3 to
Harken's Quarterly Report on Form 10-Q for fiscal
quarter ended June 30,1991, File No. 0-9207, and
incorporated by reference herein.)
3.5 Amendments to the Certificate of Incorporation of
Harken Energy Corporation (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. O-9207 and
incorporated by reference herein).
3.7 Amendment to the Certificate of Incorporation of
Harken Energy Corporation (filed as Exhibit 3.6 to
Harken's Quarterly Report on Form 10-K for the fiscal
quarter ended June 30, 1999, File No. 0-9207, and
incorporated by reference herein).
3.8 Bylaws of Harken Energy Corporation, as amended
(filed as Exhibit 3.2 to Harken's Annual Report on
Form 10-K for fiscal year ended December 31, 1989,
File No. O-9207, and incorporated by reference
herein).
4.1 Form of certificate representing shares of Harken
common stock, par value $.01 per share (filed as
Exhibit 1 to Harken's Registration Statement on Form
8-A, File No.
0-9027, and incorporated by reference herein.)
4.2 Certificate of Designations, Powers, Preferences and
Rights of Series A Cumulative Convertible Preferred
Stock, $1.00 par value, of Harken Energy Corporation
(filed as
41
Exhibit 4.1 to Harken's Annual Report on Form 10-K
for the fiscal year ended December 31,1989, File No.
0-9207, and incorporated by reference herein).
4.3 Certificate of Designations, Powers, Preferences and
Rights of Series B Cumulative Convertible Preferred
Stock, $1.00 par value, of Harken Energy Corporation
(filed as Exhibit 4.2 to Harken's Annual Report on
Form 10-K for the fiscal year ended December 31,
1989, File No. 0-9207, and incorporated by reference
herein.).
4.4 Certificate of the Designations, Powers, Preferences
and Rights of Series C Cumulative Convertible
Preferred Stock, $1.00 par value of Harken Energy
Corporation (filed as Exhibit 4.3 to Harken's Annual
Report on Form 10-K for fiscal year ended December
31,1989, File No. 0-9207, and incorporated by
reference herein).
4.5 Certificate of the Designations of Series D Preferred
Stock, $1.00 par value of Harken Energy Corporation
(filed as Exhibit 4.3 to Harken's Quarterly Report on
Form 10-Q for the fiscal quarter ended September
30,1995, File No. 0-9207, and incorporated by
reference herein).
4.6 Rights Agreement, dated as of April 6, 1999, by and
between Harken Energy Corporation And ChaseMellon
Shareholder Services L.LC., as Rights Agent (filed as
Exhibit 4 to Harken's Current Report on Form 8-K
dated April 7, 1999, File No. 0-9207, and
incorporated by reference herein).
4.7 Certificate of Designations of Series E Junior
Participating Preferred Stock (filed as Exhibit B to
Exhibit 4 to Harken's Current Report on Form 8-K
dated April 7, 1999, file No. 0-9207, and
incorporated by reference herein).
4.8 Certificate of Designations, Preferences and Rights
of Series F Convertible Preferred Stock (filed as
Exhibit 4.8 to Harken's Quarterly Report on Form 10-Q
for the period ended March 31, 1999, File No. 0-9207,
and incorporated by reference herein).
*27 Financial Data Schedules.