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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, 1999
[ ] 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 April 30, 1999 was 133,560,830.
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EXPLANATORY NOTE
This Form 10-Q/A for the first quarter ended March 31, 1999 is being filed,
together with Form 10-K/A for the year ended December 31, 1998, in order for
Harken Energy Corporation to report its consolidated financial statements which
have been restated to reflect the change in accounting for certain Development
Finance Agreements. 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 above mentioned change in
accounting treatment, and does not include an updated discussion for events
occurring after May 13, 1999.
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HARKEN ENERGY CORPORATION
INDEX TO QUARTERLY REPORT
MARCH 31, 1999
PAGE
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PART I. FINANCIAL INFORMATION
Item 1. Condensed Financial Statements
Consolidated Condensed Balance Sheets.............................................. 4
Consolidated Condensed Statements of Operations.................................... 5
Consolidated Condensed Statements of Stockholders' Equity.......................... 6
Consolidated Condensed Statements of Cash Flows.................................... 7
Notes to Consolidated Condensed Financial Statements............................... 8
Item 2. Management's Discussion and Analysis of Financial Condition
and Results of Operations..................................................... 24
PART II. OTHER INFORMATION............................................................................. 34
SIGNATURES............................................................................................. 36
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PART I - FINANCIAL INFORMATION
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ITEM 1. CONDENSED FINANCIAL STATEMENTS
HARKEN ENERGY CORPORATION AND SUBSIDIARIES
CONSOLIDATED CONDENSED BALANCE SHEETS
(Unaudited)
DECEMBER 31, MARCH 31,
1998 1999
------------- -------------
(Restated) (Restated)
ASSETS
Current Assets:
Cash and temporary investments $ 141,545,000 $ 91,454,000
Accounts and notes receivable, net 1,605,000 2,454,000
Related party notes receivable 398,000 466,000
Prepaid expenses and other current assets 615,000 818,000
------------- -------------
Total Current Assets 144,163,000 95,192,000
Property and Equipment, net 166,218,000 179,171,000
Other Assets, net 9,735,000 10,307,000
------------- -------------
$ 320,116,000 $ 284,670,000
============= =============
LIABILITIES AND STOCKHOLDERS' EQUITY
Current Liabilities:
Trade payables $ 12,496,000 $ 3,746,000
Accrued liabilities and other 7,350,000 6,364,000
Revenues and royalties payable 580,000 517,000
------------- -------------
Total Current Liabilities 20,426,000 10,627,000
European Convertible Notes Payable 85,000,000 85,000,000
Development Finance Obligation 38,552,000 39,790,000
Commitments and Contingencies (Note 13)
Stockholders' Equity:
Series F Preferred Stock, $1.00 par value; 15,000 shares
authorized and issued as of December 31, 1998 15,000
Common stock, $0.01 par value; 225,000,000 shares authorized;
134,758,830 and 134,778,830 shares issued, respectively 1,348,000 1,348,000
Additional paid-in capital 327,498,000 310,703,000
Retained deficit and other comprehensive income (150,171,000) (160,246,000)
Treasury stock, at cost, 700,000 shares held (2,552,000) (2,552,000)
------------- -------------
Total Stockholders' Equity 176,138,000 149,253,000
------------- -------------
$ 320,116,000 $ 284,670,000
============= =============
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,
------------------------------
1998 1999
------------- -------------
(Restated) (Restated)
Revenues:
Oil and gas operations $ 2,700,000 $ 3,080,000
Interest and other income 1,662,000 1,256,000
------------- -------------
4,362,000 4,336,000
------------- -------------
Costs and Expenses:
Oil and gas operating expenses 1,382,000 1,458,000
General and administrative expenses, net 1,758,000 1,789,000
Depreciation and amortization 1,130,000 1,378,000
Interest expense and other, net 641,000 1,359,000
------------- -------------
4,911,000 5,984,000
------------- -------------
Loss before income taxes $ (549,000) $ (1,648,000)
Income tax expense -- --
------------- -------------
Net loss $ (549,000) $ (1,648,000)
============= =============
Accretion related to preferred stock -- (8,427,000)
------------- -------------
Net loss attributed to
common stock $ (549,000) $ (10,075,000)
============= =============
Loss per common share:
Basic loss per common share $ (0.00) $ (0.08)
============= =============
Weighted average shares outstanding 122,441,279 134,073,116
============= =============
Diluted loss per common share $ (0.00) $ (0.08)
============= =============
Weighted average shares outstanding 122,441,279 134,073,116
============= =============
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)
ACCUMULATED
ADDITIONAL OTHER
PREFERRED COMMON PAID-IN TREASURY RETAINED COMPREHENSIVE
STOCK STOCK CAPITAL STOCK DEFICIT INCOME (LOSS) TOTAL
--------- ---------- ------------ ----------- ------------- ------------- ------------
Balance, December 31, 1997 (restated) $ -- $1,218,000 $248,770,000 $ -- $ (92,672,000) $ 92,000 $157,408,000
Issuance of common stock, net -- 51,000 25,110,000 -- -- -- 25,161,000
Issuance of preferred stock 15,000 -- 14,437,000 -- -- -- 14,452,000
Accretion of preferred stock -- -- 1,846,000 -- (1,846,000) -- --
Conversions of European notes
payable -- 79,000 37,335,000 -- -- -- 37,414,000
Treasury shares purchased -- -- -- (2,552,000) -- -- (2,552,000)
Comprehensive income:
Equity adjustment from
foreign currency translation -- -- -- -- -- 42,000
Net loss (restated) -- -- -- -- (55,787,000) --
Total comprehensive
income (loss) (55,745,000)
--------- ---------- ------------ ----------- ------------- ------------- ------------
Balance, December 31, 1998 (restated) 15,000 1,348,000 327,498,000 (2,552,000) (150,305,000) 134,000 176,138,000
Issuance of common stock, net -- -- 47,000 -- -- -- 47,000
Accretion of preferred stock -- -- 8,427,000 -- (8,427,000) -- --
Redemption of preferred stock (15,000) -- (25,269,000) -- -- -- (25,284,000)
Comprehensive income:
Net loss (restated) -- -- -- -- (1,648,000) --
Total comprehensive
income (loss) (1,648,000)
--------- ---------- ------------ ----------- ------------- ------------- ------------
Balance, March 31, 1999 (restated) $ -- $1,348,000 $310,703,000 $(2,552,000) $(160,380,000) $ 134,000 $149,253,000
========= ========== ============ =========== ============= ============= ============
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,
----------------------------
1998 1999
------------- ------------
(Restated) (Restated)
Cash flows from operating activities:
Net loss $ (549,000) $ (1,648,000)
Adjustment to reconcile net income (loss) to net cash
provided by operating activities:
Depreciation and amortization 1,130,000 1,378,000
Amortization of issuance costs 152,000 227,000
Provision for doubtful accounts 15,000 --
Change in assets and liabilities:
(Increase) decrease in accounts receivable 408,000 (917,000)
Decrease in trade payables and other (434,000) (9,866,000)
------------- ------------
Net cash provided by (used in) operating activities 722,000 10,826,000
------------- ------------
Cash flows from investing activities:
Capital expenditures, net (16,865,000) (14,028,000)
------------- ------------
Net cash used in investing activities (16,865,000) (14,028,000)
------------- ------------
Cash flows from financing activities:
Proceeds from issuances of common stock,
net of issuance costs 1,945,000 47,000
Proceeds from development finance agreements, net 9,798,000 --
Redemption of preferred stock -- (25,284,000)
Investment in segregated account cash, net (1,060,000) --
------------- ------------
Net cash provided by (used in) financing activities 10,683,000 (25,237,000)
------------- ------------
Net decrease in cash and temporary investments (5,460,000) (50,091,000)
Cash and temporary investments at beginning of period 85,740,000 141,545,000
------------- ------------
Cash and temporary investments at end of period $ 80,280,000 $ 91,454,000
============= ============
Supplemental disclosures of cash flow information:
Cash paid during the period for:
Interest $ -- $ --
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, 1998 AND 1999
(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, 1998 and March 31, 1999 and the results of its operations and changes in its
cash flows for all periods presented as of March 31, 1998 and 1999. These
adjustments represent normal recurring items.
The accompanying unaudited condensed financial statements have been
prepared pursuant to the rules and regulations of the Securities and Exchange
Commission ("SEC"). Certain information and note disclosures normally included
in annual financial statements prepared in accordance with generally accepted
accounting principles have been condensed or omitted pursuant to these rules and
regulations, although 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, 1998.
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the financial
statements and the reported amounts of revenues and expenses during the reported
period. Actual results could differ from these estimates.
The results of operations for the three month period ended March 31,
1999 are not necessarily indicative of the results to be expected for the full
year.
(2) ACQUISITION
On May 19, 1998, Harken, along with Harken Exploration Company, a
wholly-owned subsidiary, purchased working interests in oil and gas properties
located in southern Louisiana (the "Bargo Properties") from St. Martinville
Partners, Ltd. and Bargo Energy Company. The purchase price consisted of
2,716,483 shares of Harken common stock, having an approximate value of
$16,250,000, which were issuable at closing. Pursuant to the Asset Purchase and
Sale Agreement, additional consideration of up to $4,000,000 may be payable by
Harken to the sellers if the sellers are able to obtain new or renewal leases
for certain of the Bargo Properties. The amount of the additional consideration
is currently being negotiated with the sellers and is payable at Harken's option
in the form of additional shares of Harken common stock or cash. See Note 11 -
Related Party Transactions for a discussion of the relationship between Harken
and the sellers.
(3) MARKETABLE SECURITIES
Included within cash and temporary investments at December 31, 1998 and
March 31, 1999 are certain investments in marketable debt securities having
maturities of sixty days or less. Harken
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management determines the appropriate classification of such debt securities at
the time of purchase and reevaluates such designation as of each balance sheet
date. Such debt securities are classified as held-to-maturity as Harken has the
positive intent and ability to hold the securities to maturity. Held-to-maturity
securities are stated at amortized cost, adjusted for amortization of premiums
and accretion of discounts to maturity. Such amortization is included in
interest and other income. 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,
1998 1999
---------------- ---------------
Included in cash and temporary investments:
Cost $ 124,398,000 $ 75,954,000
Estimated fair value $ 124,914,000 $ 76,137,000
Harken includes in cash and temporary investments other cash and cash
equivalent amounts in addition to the above marketable debt securities.
(4) PROPERTY AND EQUIPMENT
A summary of property and equipment follows:
December 31, March 31,
1998 1999
--------------------- ---------------------
Unevaluated oil and gas properties: (Restated) (Restated)
Unevaluated Colombian properties $ 60,162,000 $ 44,238,000
Unevaluated domestic properties 4,372,000 4,429,000
Evaluated oil and gas properties:
Evaluated Colombian properties 68,772,000 97,430,000
Evaluated domestic properties 92,807,000 93,337,000
Facilities, gas plants and other property 14,864,000 15,878,000
Less accumulated depreciation and amortization (74,759,000) (76,141,000)
--------------------- ---------------------
$ 166,218,000 $ 179,171,000
===================== =====================
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(5) INTERNATIONAL OPERATIONS
Colombian Operations -- Harken's Colombian operations are conducted
through Harken de Colombia, Ltd., a wholly-owned subsidiary of Harken, which
held six exclusive Colombian Association Contracts with Empresa Colombiana de
Petroleos ("Ecopetrol") as of December 31, 1998 and March 31, 1999. 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, the Miradores Contract, awarded in 1997, and
the Los Olmos Contract, awarded in 1998. The Alcaravan and Miradores Contracts
currently cover a combined area of approximately 242,000 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,
1999, Harken was in compliance with the requirements of each of the Association
Contracts, as amended. The Cambulos Association Contract required Harken to have
drilled two wells to a depth sufficient to test productive formations for oil
and/or gas by May 16, 1999. Harken submitted a request and has received a verbal
approval from Ecopetrol to allow for the additional well depth drilled during
the recently drilled Islero #1 well to substitute for the obligation to drill a
second exploratory well within the third contract year.
Under the terms of the Association Contracts, if, during the first six
years of each contract, Harken discovers one or more fields of producing oil or
gas in quantities that are economically exploitable and Ecopetrol agrees that
such field is economically exploitable (a "commercial discovery"), the term of
that contract will be extended for a period of 22 years from the date of such
commercial discovery. Upon discovery or declaration of a field capable of
commercial production, 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, Miradores 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. If Harken proceeds on a sole-risk basis, it will be entitled to
receive Ecopetrol's share of production after royalty, until Harken has
recovered 200% of its costs, after which time Ecopetrol would receive its share
of production.
Harken has entered into certain development finance and operating
agreements with outside parties whereby such parties have received a beneficial
interest in certain of Harken's Colombian operations. For further discussion,
see Note 6 - Development Finance and Operating Agreements.
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Costa Rica Operations -- In the fourth quarter of 1998, Harken announced
that it signed an agreement to participate in approximately 1.4 million acres in
the North and South Limon Back Arc Basin onshore and offshore Costa Rica,
Central America covered by a bid awarded for an Exploration and Production
Contract ("Costa Rica Contract"). 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. The Costa Rica Contract is subject
only to the completion of environmental impact studies and final agreements with
the Republic of Costa Rica, including the assignment to Harken, and is expected
to be signed during the second quarter of 1999.
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 Xploration, Inc. ("MKJ") owns the remaining 20% of the 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 once an
agreement and assignment are signed with the Republic of Costa Rica.
Additionally, Harken is committed to contribute an additional $8 million to fund
the work program obligations and maintain its 80% ownership under the proposed
Costa Rica Contract agreement. 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.
(6) DEVELOPMENT FINANCE AND OPERATING AGREEMENTS
Rio Negro Development Finance Agreement -- In October 1995, Harken
entered into a Development Finance Agreement (the "Rio Negro Development Finance
Agreement") with Arbco Associates L.P., Offense Group Associates L.P., Kayne
Anderson Nontraditional Investments L.P. and Opportunity Associates L.P.
(collectively, the "Rio Negro Investors"), pursuant to which the Rio Negro
Investors provided $3,500,000 to Harken to finance drilling on the Rio Negro
prospect in the Bocachico Contract area in exchange for the right to receive
future payments from Harken equal to 40% of the net profits that Harken de
Colombia, Ltd. may derive from the sale of oil and gas produced from the Rio
Negro prospect (the "Rio Negro Participation").
In March 1997, Harken and the Rio Negro Investors entered into a
Conversion Agreement whereby Harken purchased 75% of the Rio Negro Participation
relating to the Rio Negro Development Finance Agreement in exchange for 900,000
restricted shares of Harken common stock which were issued within 30 days
following closing. From the remaining 25% of the Rio Negro Participation
retained, the Rio Negro Investors have the right to receive 10% of the net
profits that Harken de Colombia, Ltd. may derive from the sale of oil and gas
produced from the Rio Negro prospect.
Rochester Agreement -- Harken de Colombia, Ltd. has entered into an
operating agreement (the "Rochester Agreement") with Rochester Energy
Corporation ("Rochester", a Canadian corporation) pursuant to which Rochester
has 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 Contract area, along with 25% of the aggregate
costs related to the Miradores Association Contract. 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
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#1 well was drilled in the first half of 1997 and Estero #3 was spudded in
December 1997. The Canacabare #1 well began drilling March 1998, and will be
tested in late 1999 due to weather delays.
In May 1999, Harken signed a definitive purchase and sale agreement
pursuant to which Harken will purchase 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
will forgive all amounts owed by Rochester to Harken and will issue 2,600,000
shares of Harken common stock. The closing of this transaction is subject to
various conditions as agreed upon in the agreement, including Rochester
obtaining regulatory and shareholder approvals.
Parkcrest Financing Agreement - In January 1997, Harken de Colombia,
Ltd. entered into a financing agreement ("the Parkcrest Financing Agreement")
with Parkcrest Explorations, Ltd. ("Parkcrest", a Canadian corporation) pursuant
to which Parkcrest paid 33 1/3% of the aggregate costs of the Estero #1 well and
related production facilities on the Palo Blanco prospect, 33 1/3% of the
aggregate costs of the initial well drilled on the Anteojos prospect, the
Canacabare #1, and 25% of the aggregate costs related to the Estero #3 well, all
of which are located within the Alcaravan Contract area. In addition, Parkcrest
was to pay 33 1/3% of the aggregate costs of the initial well to be drilled
under the Miradores Association Contract. Parkcrest was also responsible for
their contracted percentage share of costs related to seismic on the Alcaravan
and Miradores Contract areas. In exchange, Parkcrest, upon its full performance,
was to acquire a beneficial interest equal to 25% of the interest held by Harken
de Colombia, Ltd. in these prospects.
In April 1998, Harken and Parkcrest entered into a Loan and Security
Agreement (the "Parkcrest Loan Agreement") whereby Harken agreed to provide up
to $2,600,000 to Parkcrest to be used as needed by Parkcrest to finance its
share of costs under the Parkcrest Financing Agreement. Under the terms of the
Parkcrest Loan Agreement, any outstanding loans bear interest at 6% per annum in
addition to a monthly management fee payable to Harken of $37,500 per month. Any
outstanding balance pursuant to the Parkcrest Loan Agreement was due and payable
by Parkcrest on November 30, 1998 secured by 50% of Parkcrest's beneficial
interest in the Palo Blanco prospect. In December 1998, Harken purchased all of
the interests held by Parkcrest in the Alcaravan and Miradores Association
Contract areas. Under the terms of the purchase agreement entered into between
Harken and Parkcrest, Harken forgave a loan balance of approximately $2,280,000
outstanding at the date of the purchase and issued 1,350,000 shares of Harken
common stock.
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 contemplates 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 derive from the sale of oil
and gas produced from each of the three prospects if the planned drilling on the
prospect is successful (the "EnCap Participation"). Pursuant to the EnCap
Development Finance Agreement, Harken is obligated to drill each of the three
wells prior to October 2000.
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Pursuant to the EnCap Development Finance Agreement, the EnCap
Investors have 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 will be equal to the quotient of (i) the Payment
Amount (less any distributions made in respect of the EnCap Participation) plus
an amount equal to 15% interest per annum on the net Payment Amount compounded
monthly (the "Invested Amount"), divided by (ii) the market price of Harken
common stock at the time of conversion. During the same two year period, Harken
also has 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 can 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 provides for
additional shares of Harken common stock 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 11 -- 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 have 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 are to receive
6,481,512 shares of Harken common stock.
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 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 derive
from the sale of oil and gas produced from each of the three prospects if the
planned drilling on the prospect is 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 begin 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 derive from the
sale of oil and gas produced from each of the three prospects discussed above
pursuant to the EnCap Development Finance Agreement if the planned drilling on
the prospect is successful. As part of this transaction, Harken issued 18,000
shares of Harken common stock 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 have 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. In December 1998, one of the European
Investors
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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 are to receive 1,908,637
and 1,121,738 shares, respectively, of Harken common stock. 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 is to receive 1,316,829 shares of Harken common stock.
Accounting for Development Finance Agreements - Harken accounts for the
Development Finance Agreements Invested Amount, including the accrued 15% per
annum increase, as a long-term obligation, as such Invested Amounts is payable
to the EnCap Investors, the European Investors and Faisal (the "Institutional
Investors") should the Institutional Investors 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. As Institutional Participation is
converted into shares of Harken common stock, a pro-rata portion of unamortized
issuance costs associated with the Development Finance Agreements will be
charged to income. For a discussion of Harken's change in accounting for
Development Finance Agreements, see Note 14 - Restatement of Financial
Statements.
(7) EUROPEAN CONVERTIBLE NOTES PAYABLE
5 1/2% European Notes -- On June 11, 1997, Harken issued to qualified
purchasers a total of $70 million in 5 1/2% Senior Convertible Notes (the
"5 1/2% European Notes") which were to mature on June 10, 2002. In connection
with the sale and issuance of the 5 1/2% European Notes, Harken paid
approximately $5,174,000 from the 5 1/2% European Notes proceeds for commissions
and issuance costs. Interest incurred on these notes was payable semi-annually
in June and December of each year to maturity or until the 5 1/2% European Notes
were converted. Such 5 1/2% European Notes were convertible into shares of
Harken common stock at an initial conversion price of $5.00 per share, subject
to adjustment in certain circumstances ("the 5 1/2% European Note Conversion
Price"). The Trust Indenture provided for a five percent premium on the number
of shares of Harken common stock issuable on conversion that was paid to holders
converting the 5 1/2% European Notes prior to December 11, 1997. The 5 1/2%
European Notes were also convertible by Harken into shares of Harken common
stock after one year following issuance, if for any period of thirty consecutive
days commencing on or after June 11, 1997, the average of the closing prices of
Harken common stock for each trading day during such thirty-day period equaled
or exceeded 130% of the 5 1/2% European Note Conversion Price (or $6.50 per
share of Harken common stock). In October 1997, Harken met the market price
criteria necessary to call for mandatory conversion of the 5 1/2% European Notes
any time on or after June 11, 1998, and provided notice to the holders as
required under the Trust Indenture. Harken formally called the 5 1/2% European
Notes which remained outstanding on June 12, 1998. As of December 31, 1997,
holders of 5 1/2% European Notes totaling $30,120,000 exercised their conversion
option and such holders were issued 6,325,200 shares of Harken common stock.
During the first six months of 1998 additional holders of 5 1/2% European Notes
totaling $610,000 exercised their conversion option and such holders were issued
an additional 122,000 shares of Harken common stock. On June 12, 1998, Harken
converted the remaining 5 1/2% European Notes into 7,854,000 shares of Harken
common stock.
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Upon closing, all proceeds from the sale of the 5 1/2% European Notes,
net of commissions and issuance costs, were each initially paid to a Trustee
under the terms of a Trust Indenture covering each issue and held in separate
interest bearing Trust accounts (the "Segregated Accounts") to be maintained for
Harken's benefit until the Trustee was presented with evidence of sufficient
asset value, as defined in the Trust Indenture, held by Harken to permit an
advance of a portion of the proceeds. Until all of the 5 1/2% European Notes
were converted, Harken was to maintain an Asset Value Coverage Ratio as defined
in the Trust Indenture. Upon the June 1998 conversion of the 5 1/2% European
Notes which remained outstanding, Harken transferred the approximately $37.6
million in the Segregated Accounts to its main operating account.
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
percent 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. None of the bondholders have exercised their conversion option as of
May 10, 1999. 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.
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.
(8) STOCKHOLDERS' EQUITY
Common Stock -- Harken currently has authorized 225,000,000 shares of
$.01 par common stock. At December 31, 1998 and March 31, 1999, Harken had
issued 134,758,830 shares and 134,778,830 shares, respectively.
Treasury Stock -- At December 31, 1998 and March 31, 1999, Harken held
700,000 shares of Harken common stock purchased in the open market at a cost of
$2,552,000. In April 1999, Harken acquired 518,000 additional shares of Harken
common stock at a cost of $960,000.
Issuance of European Convertible Notes Payable -- In June 1997, Harken
issued to qualified purchasers a total of $70 million in 5 1/2% European Notes
which were to mature on June 11, 2002. As of
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December 31, 1997, holders of 5 1/2% European Notes totaling $30,120,000 had
exercised their conversion option and such holders were issued 6,325,200 shares
of Harken common stock. Subsequent to December 31, 1997 and as of June 11, 1998,
holders of 5 1/2% European Notes totaling an additional $610,000 exercised their
conversion option and such holders were issued 122,000 shares of Harken common
stock. On June 12, 1998, Harken formally called and converted the remaining 5
1/2% European Notes into 7,854,000 shares of Harken common stock. In connection
with the issuance of the 5 1/2% European Notes, Harken issued to the placement
agents for the 5 1/2% European Notes warrants to purchase 1,120,000 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.
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"). The Trust Indenture
provided for a three percent premium on the number of shares of Harken common
stock issuable on conversion to holders of the 5% European Notes who convert
prior to November 25, 1998. None of the bond holders have exercised their
conversion option as of May 10, 1999. 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.
Acquisition of Bargo Properties -- In May 1998, Harken acquired working
interests in the Bargo Properties in exchange for 2,716,483 shares issuable at
closing. Additional consideration of up to $4,000,000 is payable by Harken to
the sellers in the form of additional shares of Harken common stock or cash
under certain circumstances. See Note 2 -- Acquisitions for further discussion.
Development Finance Agreements -- Harken has entered into development
finance agreements relating to certain of its Colombian operations. Pursuant to
these development finance agreements, certain investors have the option, or have
previously 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. 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, see Note 6 - Development Finance and Operating Agreements.
Series F Preferred Stock -- On April 9, 1998, Harken entered into a
Securities Purchase Agreement with RGC International Investors, LDC ("RGC"),
pursuant to which Harken issued to RGC 15,000 shares of its Series F Convertible
Preferred Stock (the "Series F Preferred") in exchange for $15,000,000. The
Series F Preferred was convertible into shares of Harken common stock at a
conversion price based upon the market price of Harken common stock at the time
of conversion. The number of shares of Harken
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common stock issuable upon conversion of the Series F Preferred also included a
premium amount equal to an increase calculated on the face value of the Series F
Preferred at 5% per annum. Harken reflected this 5% per annum increase
throughout 1998 as accretion related to preferred stock. Such accretion amount
is reflected in Harken's calculation of net income (loss) attributable to common
stock. The Series F Preferred did not pay dividends.
During the first six months following the issuance of the Series F
Preferred, RGC could have elected to convert the shares of the Series F
Preferred into Harken common stock on any day that the closing sales price of
the Harken common stock on the American Stock Exchange was equal to or greater
than 115% of the "Market Price." The Market Price is equal to the lower of (a)
the average of the closing bid prices of Harken common stock for any five
consecutive trading days during the 22 trading days ending one trading day prior
to the conversion date, or (b) the low closing bid price of Harken common stock
over the five trading days ending one trading day prior to the conversion date.
During the first nine months following the issuance of the Series F
Preferred, the conversion price was equal to 103% of the Market Price on the
conversion date. On January 9, 1999, the conversion price would be fixed at 90%
of the average of the closing bid prices of Harken common stock for the previous
22 trading days. Beginning February 9, 1999, the conversion price was to be
fixed at 90% of the average of the closing bid prices of Harken common stock for
the previous 22 trading days if it would result in a lower conversion price than
that calculated on January 9, 1999. Any shares of Series F Preferred outstanding
on April 9, 1999, would automatically be converted into shares of Harken common
stock at the then applicable conversion price.
Harken had the option to redeem for cash any shares of Series F
Preferred presented for conversion if (a) prior to January 9, 1999, the closing
price of Harken common stock on the conversion date was less than $4.80, or (b)
on or after January 9, 1999, the then applicable conversion price was less than
$4.80, for an amount equal to the number of shares of Harken common stock that
would otherwise be issuable upon conversion multiplied by the closing price of
Harken common stock on the conversion date.
At each election to convert shares of Series F Preferred into Harken
common stock, RGC would have the option to purchase from Harken for cash
additional shares of Harken common stock equal to the number of shares issued on
such conversion (less any shares issued in respect of the premium amount) at a
purchase price equal to the then applicable conversion price.
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 income
(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 1998, Harken adopted a rights
agreement (the "Rights Agreement") whereby a dividend of one preferred share
purchase right (a "Right") was paid for each outstanding share of Harken common
stock. The Rights will be exercisable only if a person acquires
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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 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, 1999.
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.
(9) PER SHARE DATA
Basic earnings per common share was computed by dividing net income or
loss by the weighted average number of shares of Harken common stock outstanding
during the period. The impact of unconverted European Convertible Notes or
Development Finance Agreements was not included as their effect would have been
antidilutive. Had the certain Development Finance Agreements which converted in
April and May 1999 been converted effective January 1, 1999, Harken's net loss
attributed to common stock would have been $(0.06) for the first quarter of
1999.
(10) INCOME TAXES
At March 31, 1999, Harken had available for federal income tax
reporting purposes, net operating loss (NOL) carryforward for regular tax
purposes of approximately $62,000,000 which expires in 1999 through 2019,
alternative minimum tax NOL carryforward of approximately $49,000,000 which
expires in 1999 through 2019, investment tax credit carryforward of
approximately $809,000 which expires in 1999 through 2002, statutory depletion
carryforward of approximately $2,400,000 which does not have an expiration date,
and a net capital loss carryforward of approximately $6,300,000 which expires in
2000. Approximately $8,000,000 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.
Total deferred tax liabilities, relating primarily to property and
equipment, as of March 31, 1999 were approximately $753,000. Total deferred tax
assets, primarily related to the net operating loss carryforward, were
approximately $20,538,000 at March 31, 1999. The total net deferred tax asset is
offset by a valuation allowance of approximately $19,785,000 at March 31, 1999.
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(11) RELATED PARTY TRANSACTIONS
In June 1997, Harken added to its Board of Directors a new director who
is also a managing director of EnCap Investments L.C. ("EnCap"). EnCap has
historically provided financial consulting and investment banking services to
Harken. In connection with the June 1997 placement of the 5 1/2% European Notes,
EnCap received as a financial consulting fee, $466,667 in cash, and a warrant to
purchase 50,000 shares of Harken common stock at any time after December 11,
1997 and on or before December 11, 1999 at an exercise price of $5.00 per share.
As described in Note 6 - 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. As described in Note 2 - Acquisition, in May
1998, Harken acquired the Bargo Properties from St. Martinville Partners, Ltd.
and Bargo Energy Company, which are affiliates of EnCap. Harken believes that
the above transactions were made at terms at least as favorable to Harken as
those that could have been secured with an unrelated party.
During the past two years, Harken has 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,
1998 and March 31, 1999 as Related Party Notes Receivable.
(12) 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 South American operating segment currently relates to
Harken's exploration, development, production and acquisition efforts in
Colombia and Costa Rica. South 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 South 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 pipeline connections
and production facilities. During the periods presented below, none of Harken's
South American segment operations 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, 1998 and March 31, 1999:
NORTH SOUTH
AMERICA AMERICA TOTAL
------------- ------------- -------------
FOR THE THREE MONTHS ENDED
MARCH 31, 1998:
Operating revenues $ 2,700,000 $ -- $ 2,700,000
Interest and other income 834,000 828,000 1,662,000
Depreciation and amortization 1,105,000 25,000 1,130,000
Interest expense and other, net 8,000 633,000 641,000
(restated)
Income tax expense -- -- --
Segment loss (restated) (183,000) (366,000) (549,000)
Capital expenditures (restated) 993,000 16,602,000 17,595,000
Total assets at end of period 126,770,000 122,039,000 248,809,000
(restated)
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 1,163,000 215,000 1,378,000
Interest expense and other, net 216,000 1,143,000 1,359,000
(restated)
Income tax expense -- -- --
Segment loss (restated) (443,000) (1,205,000) (1,648,000)
Capital expenditures 534,000 13,941,000 14,475,000
(restated)
Total assets at end of period 82,013,000 202,657,000 284,670,000
(restated)
(13) 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 Amarillo, Texas in
Federal District Court for the Northern District of Texas styled D. E. Rice and
Karen Rice, as Trustees for the Rice Family Living Trust vs. Harken Exploration
Company. The Rice Family Living Trust ("Rice") is a surface land owner in
Hutchinson County, Texas. Rice has alleged that oil and saltwater spills from
Harken Exploration Company's equipment and wells have
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polluted and otherwise damaged its property. Rice is seeking payment of costs to
prevent, minimize and mitigate the alleged oil pollution, costs to restore and
repair the land and vegetation, costs to decontaminate the ground and surface
water, interest, attorneys' fees, and punitive damages. Furthermore, Rice has
requested that Harken Exploration Company be enjoined from producing any oil or
gas from its lands. Rice has alleged that remediation of all of the pollution on
its land will cost approximately $40,000,000. Harken believes that this lawsuit
is wholly without merit. Harken has asserted numerous defenses, all of which
Harken believes are meritorious. Harken intends to defend itself vigorously. The
lawsuit is expected to go to trial in 1999. In Harken management's opinion, the
results of the lawsuit will not have a material adverse effect on Harken's
financial position.
Harken has accrued approximately $2,442,000 at March 31, 1999 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 Issues -- Harken is currently working to resolve 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. Any of Harken's programs that have
time-sensitive software may recognize a date using "00" as the Year 1900 rather
than the Year 2000, which could result in miscalculations or system failures.
The problem is not limited to computer systems. Year 2000 issues will also
potentially affect every non-information technology system that has an embedded
microchip, such as elevators.
Harken began a formal process in 1998 to identify those internal
computerized systems that are not Year 2000 compliant, prioritize those
business-critical computerized systems that need remediation or replacement,
test compliance once the appropriate corrective measures have been implemented,
and develop any contingency plans where considered necessary. In addition,
Harken is continuing to conduct a survey of purchasers, vendors and customers
that Harken believes could have an impact on Harken's material business
operations.
Harken's information technology infrastructure consists of desktop
Pentium class Intel based PC systems and servers, and off-the-shelf software
packages. The systems are networked via Microsoft and other telecommunications
equipment. Harken does not use mini or mainframe computer systems and uses only
off-the-shelf software products.
Assessment. Based on Harken's internal review and discussions with
third parties regarding the Year 2000 problem, Harken believes that its exposure
to potential Year 2000 problems exists in two general areas: technological
operations, including non-information technology systems, which are in the sole
control of Harken; and technological operations which are dependent in some way
on one or more third parties. Failure to achieve high levels of Year 2000
compliance in either area could have a material adverse impact on Harken.
Remediation and Implementation. In the area of technological operations
which are under Harken's exclusive control, Harken is currently involved in the
identification and remediation of affected technological functions, including
non-information technology systems. Harken has completed its assessment of Year
2000 readiness of its internal computerized systems. Harken is in the process of
installing upgrades to its off-the-shelf financial and operational software
applications, hardware and
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telecommunications equipment. Harken expects that such remediation procedures
will be completed by the second quarter of 1999. Harken is in the identification
and assessment phase with respect to its non-information technology systems,
which is projected to continue until the third quarter of 1999.
Testing. Harken will begin updating and testing of the newly upgraded
systems for Year 2000 compliance, and expects that all testing will be completed
by the third quarter of 1999. Upon completion, Harken will be able to identify
any internal computer systems that remain non-compliant. At present, it is
anticipated that Harken's action plan for addressing Year 2000 problems will be
successfully completed in all material respects in advance of January 1, 2000.
Third Parties. Harken has assessed the level of Year 2000 issues
associated with its most significant vendors, suppliers, partners and major
customers. All of Harken's oil and gas sales revenues are derived from oil and
gas production from its domestic and Colombian operations. Harken's domestic
operations are dependent upon its various purchasers or pipeline operators who
transport oil or gas for its purchasers. In addition, Harken's Colombian
operations may also become dependent upon the transportation of oil through
outside owned facilities or pipelines. Harken is monitoring progress of its
various domestic purchasers and pipelines, as well as potential Colombian
outside owned facilities on their activities related to the Year 2000. At this
time, Harken expects that field operations will not be interrupted due to
improper recognition of the Year 2000 by computerized systems of its various
purchasers and pipelines.
Harken also relies on other oil and gas service providers, vendors, and
financial institutions in its daily operations. Harken believes it has
identified those third-party relationships that could have a material adverse
effect on Harken's results of operations and financial position should their
computerized systems not be compliant for the Year 2000. Harken continues with
its efforts to survey the identified third parties on their readiness for the
Year 2000 and establish appropriate alternatives, if needed, where noncompliance
may pose a risk to Harken's operations.
Although Harken is making efforts to ensure that the third parties on
which it is heavily reliant are Year 2000 compliant, it cannot predict the
likelihood of such compliance occurring nor the direct or indirect costs to
Harken of non-compliance by those third parties or of securing such services
from compliant third parties. Harken has no control over these third parties'
compliance and cannot give assurances that these third parties' representations
to Harken are accurate. Therefore, there can be no guarantee that Year 2000
problems originating with a third party will not occur and no absolute assurance
that third parties will convert their systems in a timely manner, to the extent
Harken is unable to replace the goods, services or customers with alternate
sources of supply and demand on a timely and economically equivalent basis. Such
failure would likely have a material adverse effect on Harken's business and
results of operations.
Estimated Costs. The total financial effect that Year 2000 issues will
have on Harken cannot be predicted with any certainty at this time. In fact, in
spite of all efforts being made to rectify these problems, the success of
Harken's efforts will not be known with certainty until the year 2000 actually
arrives. Based on its assessment to date, Harken does not believe that the costs
to resolve any Year 2000 issues will be material. To date, Harken has spent less
than $100,000 on Year 2000 matters and it expects that the total cost, primarily
consulting fees and software purchases, will not exceed $200,000.
Contingency Plan. Harken has not completed its implementation and
testing of Year 2000 compliant systems. However, a reasonably likely worst case
scenario is that Harken or certain of its purchasers or other vendors fail to
correct a material Year 2000 problem, which results in an interruption of
Harken's transportation and sale of Harken's crude oil and natural gas
production sales revenues. Certain interruptions could result in a material
adverse effect on Harken's results of operations, cash flows and financial
condition.
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Due to the inherent uncertainties relating to the effect of the Year 2000 on
Harken's operations, it is difficult to predict what impact, if any,
noncompliance with the Year 2000 issue will have on Harken's results of
operations, cash flows and financial condition. Based on the results of the
implementation and testing of Harken's Year 2000 affected systems and ongoing
assessment of the readiness of its vendors, suppliers, partners and major
customers, Harken will develop appropriate contingency plans that address the
most reasonably likely worst case scenarios. Harken expects to have such
contingency plans in place by the end of the third quarter of 1999. A failure to
address Year 2000 issues successfully could have a material adverse effect on
Harken's business, financial condition or results of operations.
(14) RESTATEMENT OF FINANCIAL STATEMENTS
In August 1999, following discussions with the Securities and Exchange
Commission's accounting staff, Harken, along with its independent public
accountants, agreed to change its accounting for certain Development Finance
Agreements to reflect amounts convertible into shares of Harken common stock as
a long-term obligation and to reflect the 15% per annum increase in amounts
convertible as interest expense in Harken's consolidated financial statements.
The restatement of Harken's consolidated financial statements had no effect on
Harken's historical revenues, gross profit, net working capital or cash flow for
any of the periods. Harken had no long-term debt compliance covenants that were
affected by the restatement. See Note 6 - Development Finance and Operating
Agreements for a discussion of Harken's Development Finance Agreements and the
accounting for those agreements. Harken had previously accounted for these
transactions as conveyances of net profits interests and had recorded the sales
proceeds as deferred revenue.
The following table summarizes certain selected financial data as of
December 31, 1998 and March 31, 1999 and for the three months ended March 31,
1998 and March 31, 1999 as originally reported and as restated to reflect the
revised accounting for certain Development Finance Agreements:
December 31, 1998 March 31, 1999
----------------------------------- ------------------------------------
Previously Previously
Reported Restated Reported Restated
---------------- ---------------- ---------------- -----------------
Total assets $ 304,538,000 $ 320,116,000 $ 262,499,000 $ 284,670,000
Stockholders' equity $ 179,942,000 $ 176,138,000 $ 154,023,000 $ 149,253,000
Quarter Ended
----------------------------------------------------------------
March 31, 1998 March 31, 1999
--------------------------- ------------------------------
Previously Previously
Reported Restated Reported Restated
---------- ---------- ----------- ------------
Revenues:
Oil and gas $2,700,000 $2,700,000 $ 3,080,000 $ 3,080,000
Interest and other 1,662,000 1,662,000 1,256,000 1,256,000
---------- ---------- ----------- ------------
4,362,000 4,362,000 4,366,000 4,366,000
Costs and Expenses:
Oil and gas operating 1,382,000 1,382,000 1,458,000 1,458,000
General and administrative 1,758,000 1,758,000 1,789,000 1,789,000
Depreciation and amortization 1,130,000 1,130,000 1,358,000 1,378,000
Interest expense and other, net 8,000 641,000 413,000 1,359,000
---------- ---------- ----------- ------------
4,278,000 4,911,000 5,018,000 5,984,000
Income tax expense -- -- -- --
Net income (loss) $ 84,000 $ (549,000) $ (682,000) $ (1,648,000)
Net income (loss) attributed
to common stock 84,000 (549,000) (9,109,000) (10,075,000)
Basic and diluted net income
(loss) per common share $ 0.00 $ (0.00) $ (0.07) $ (0.08)
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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, 1998 filed with the
Securities and Exchange Commission.
OVERVIEW
Harken reported a net loss for the three months ended March 31, 1999 of
$1,648,000 compared to a net loss of $549,000 for the prior year period. Despite
lower oil and gas prices, total oil and gas operating revenues increased from
approximately $2.70 million during the first quarter of 1998 to approximately
$3.08 million for the first quarter of 1999, primarily due to increased oil and
gas operating revenue from Harken's Colombian operations. Gross profit before
depreciation and amortization, general and administrative and interest expenses
totaled approximately $1.6 million during the three months ended March 31, 1999
compared to approximately $1.3 million for the prior year period.
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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.
Three Months Ended March 31,
--------------------------------
1998 1999
------------- ------------
(unaudited)
REVENUES
Domestic Exploration and Production Operations
Oil sales revenues $ 1,379,000 $ 1,350,000
Oil volumes in barrels 95,000 121,000
Oil price per barrel $ 14.52 $ 11.16
Gas sales revenues $ 1,189,000 $ 979,000
Gas volumes in mcf 502,000 570,000
Gas price per mcf $ 2.37 $ 1.72
Gas plant revenues $ 132,000 $ 73,000
Colombian Exploration and Production Operations
Oil sales revenues $ -- $ 678,000
Oil volumes in barrels -- 77,000
Oil price per barrel $ -- $ 8.81
OTHER REVENUES
Interest income $ 1,656,000 $ 1,248,000
Other income $ 6,000 $ 8,000
For the quarter ended March 31, 1999 compared with the corresponding prior
period.
DOMESTIC OPERATIONS
Domestic gross oil and gas revenues during the first quarter of 1999
and 1998 relate primarily to the operations in the Four Corners area of Utah,
Arizona and New Mexico, the Navajo Indian reservation (the "Four Corners
Properties"), onshore South Texas, and in the Western and Panhandle regions of
Texas, the Magnolia region of Arkansas and the Carlsbad region of New Mexico,
and beginning in May 1998, the southern region of Louisiana.
Gross domestic oil revenues decreased 2% to $1,350,000 during the first
quarter of 1999 compared to $1,379,000 during the first quarter of 1998
primarily due to the sharp decline in oil prices, which averaged $3.36 less per
barrel during the first quarter of 1999 compared to the prior year period. Oil
prices have increased during March 1999 and have continued to remain higher
during the second quarter of 1999
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compared to prices received during the first quarter. Oil production volumes
increased 27% during the first quarter of 1999 compared to the prior year period
primarily due to the acquisition of the Bargo Properties in May 1998.
Gross domestic gas revenues decreased 18% to $979,000 for the three
months ended March 31, 1999 compared to $1,189,000 for the prior year period due
to the decrease in average gas prices received during the first quarter of 1999,
as Harken received an overall average price of $1.72 per mcf of gas production
during the first quarter of 1999 compared to $2.37 per mcf received during the
first quarter of 1998. Domestic gas production increased 14% during the first
quarter of 1999 compared to the prior year period as Harken reflected decreased
gas production from certain of its Texas Panhandle properties during the first
quarter of 1998 as many of the properties experienced numerous temporary
operational curtailments.
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, including severance taxes, property taxes, Utah conservation taxes
and Navajo severance and possessory interest taxes. Domestic oil and gas
operating expenses decreased 8% to $1,273,000 during the first quarter of 1999
compared to $1,382,000 during the prior year as the increase in operating
expenses from the above mentioned acquisition of the Bargo Properties were
offset by efforts to reduce operating expenses.
COLOMBIAN OPERATIONS
During the first quarter of 1999, Harken's Colombian production
operations consisted of production testing conducted primarily on Harken's
Bolivar Association contract area. 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 newly completed Palo
Blanco pipeline on the Alcaravan Association contract area. During April 1999,
production from Harken's Estero #1 well on the Alcaravan Contract area has
averaged 300 gross barrels of oil per day, and Harken's Catalina #1 and Olivo #1
wells on the Bolivar Contract area have averaged a combined 1,855 gross barrels
of oil per day. Harken's Colombian production and revenues are expected to
increase during the remainder of 1999 as Palo Blanco pipeline throughput
increases, and as Bolivar Contract area production increases. Harken reflected
no oil and gas revenues or operating expenses from its Colombian operations
during the first quarter of 1998, as such operation commenced during the second
quarter of 1998.
INTEREST AND OTHER INCOME
Interest and other income decreased during the first quarter of 1999
compared to the prior year period due to a portion of Harken's invested cash
being utilized for Colombian capital expenditures and for the January 1999
redemption of the Series F Preferred for approximately $25.3 million. Harken
generated approximately $1.66 million of interest income during the first
quarter of 1998, compared to approximately $1.25 million of interest income
during the first quarter of 1999. Harken's cash balances, which include
investments in short-term marketable debt securities, are expected to decrease
in 1999 as such funds are used to support Harken's capital expenditure plans,
although Harken intends to continue to pursue financing arrangements for its
Bolivar pipeline facility project during 1999 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 remained level during the first
quarter of 1999 compared to the first quarter of 1998, despite Harken's
expanding overall operations. Harken has taken steps during the last half of
1998 and first half of 1999 to reduce general and administrative expenses by
reducing staff. In addition, in May 1999, Harken consolidated its corporate
office locations, which will result in additional administrative efficiencies
later in 1999.
Depreciation and amortization expense increased during the first
quarter of 1999 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 increased during the first quarter of 1999
compared to the prior year period due to the issuance of the Development Finance
Agreements in late 1997 and early 1998, the issuance of the 5% European Notes in
May 1998, and the decrease in the amounts of interest capitalized to Harken's
Colombian exploration activity, as such activity during the first quarter of
1999 has decreased compared to the prior year period.
LIQUIDITY AND CAPITAL RESOURCES
Harken's working capital at March 31, 1999 was approximately $84.6
million, versus approximately $123.7 million at December 31, 1998. The decrease
in cash and working capital resulted primarily from approximately $14.0 million
of capital expenditures during the quarter and from the January redemption of
the Series F Preferred for approximately $25.3 million. Harken's operations
required approximately $10.8 million of cash flow during the first quarter.
Harken's cash resources at March 31, 1999 totaled approximately $91.5 million
and are available for its ongoing exploration, development and acquisition
efforts both internationally and domestically. In addition, Harken's Board of
Directors has approved the purchase of up to 10 million shares of its
outstanding Harken common stock through December 31, 1999.
Harken's primary need for capital is to fund the planned exploration and
development efforts in Colombia and Costa Rica. Harken's 1998 Colombian capital
expenditures totaled approximately $84 million and Harken anticipates that its
1999 Colombian capital expenditures will be in excess of $50 million, primarily
related to the Bolivar Contract area. Harken believes that it will have
sufficient cash resources to fund all of its planned capital expenditures for
1999, however, Harken plans to obtain additional resources through project debt
financing related to the development of the Bolivar Contract area. In addition,
Harken intends to continue to pursue domestic and international acquisition
opportunities. Harken intends to fund such acquisitions, if any are consummated,
through a combination of cash on hand, issuances of debt or equity securities.
Harken anticipates that full development of its Colombian reserves will
take several years and will also require extensive production facilities,
transportation pipelines and development activity which will require significant
additional capital expenditures. The ultimate amount of such expenditures cannot
be
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presently predicted. There can be no assurances that Harken will have adequate
funds available to it to fund all of its long-term Colombian activities.
The current plans for the development of the Bolivar Contract area call
for a number of wells to be drilled over the next three years. As a part of this
process, Harken is currently in discussions with sources of project finance to
provide debt funding for the development of the area. Such a credit facility
could enable Harken to accelerate its development of the field while still
preserving its working capital position for its exploration efforts. As a part
of this financing plan, and in order to include Ecopetrol in the future planning
process, Harken has decided to reevaluate its drilling schedule in anticipation
of obtaining long-term financing. In March 1999, Harken de Colombia, Ltd. filed
a request with Ecopetrol to declare the Catalina field to be commercial. Within
90 days after the submission of the commerciality application, Ecopetrol is
required to submit their response back to Harken de Colombia, Ltd. Ecopetrol may
approve the commerciality request 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 costs, after which time Ecopetrol would receive its share of production.
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 1999. However, as mentioned
above, Harken has sufficient cash resources to fund all of its required capital
expenditure requirements during 1999.
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 Contract rights from MKJ
once an agreement is signed with the Costa Rican Ministry of Environment and
Energy and the assignment of the contract between MKJ and Harken is approved by
the Costa Rica Ministry of Environment and Energy. Additionally, Harken is
committed to contribute an additional $8 million to fund the work program
obligations and maintain its 80% ownership under the proposed Costa Rica
Contract agreement.
Harken's domestic operating strategy includes efforts to acquire
additional oil and gas reserves through drilling activities in North America and
through acquisitions. Harken 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 efforts
are to maintain North American production levels during 1999 and 2000. Harken
considers that its acquisition efforts may increase in light of the recent
depressed pricing environment.
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.
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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 7 -- European Convertible Notes Payable."
Development Finance Agreements -- In October 1997, December 1997 and
March 1998, Harken entered into separate Development Finance Agreements with
institutional investors (collectively the "Institutional Investors") pursuant to
which the Institutional Investors provided approximately $34.5 million (the
"Payment Amount") of net proceeds to Harken to finance the drilling of the
initial wells on three unexplored oil and gas prospects in the Middle Magdalena
Basin of Colombia. Approximately $24.5 million of net proceeds was received in
October 1997 from a related party and approximately $10 million of net proceeds
was received during the first quarter of 1998. In exchange, the Institutional
Investors obtained the right to receive future payments from Harken equal to 7%
of the net profits that Harken de Colombia, Ltd. may derive from the sale of oil
and gas produced from each of the three prospects if the planned drilling on the
prospect is successful (the "Institutional Participation"). Pursuant to the
Development Finance Agreements, Harken is obligated to drill each of the three
wells prior to October 2000. Harken has satisfied the first well obligation
pursuant to the Development Finance Agreements with the drilling of the Islero
#1 well on the Cambulos Contract area. For a detailed discussion of the terms
and accounting for the Development Finance Agreements, see "Notes to
Consolidated Condensed Financial Statements, Note 6 -- Development Finance and
Operating Agreements." For a discussion of the relationship between Harken and
one of the Institutional Investors, see "Notes to Consolidated Condensed
Financial Statements, Note 11 -- Related Party Transactions."
Pursuant to the Development Finance Agreements, the Institutional
Investors have the right, for a period of two years beginning in October 1998,
to convert all or part of the Institutional Participation into shares of Harken
common stock. The number of shares of Harken common stock to be issued upon
conversion of the Institutional Participation will be equal to the quotient of
(i) the Payment Amount (less any distributions made in respect of the
Institutional 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 the Harken common stock at the time of conversion.
During the same two year period, Harken also has the right to convert the
Institutional 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 Institutional
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 can also elect to pay cash upon any
conversion of the Institutional Participation in lieu of issuing Harken common
stock. The Development Finance Agreements also provide for additional shares of
Harken common stock to be issued by Harken in the event of a conversion to the
extent that the Institutional Investors do not, under certain circumstances,
realize the Invested Amount from the sale of shares of Harken common stock
issued at the conversion.
In December 1998, one of the Institutional 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, certain of the
Institutional Investors exercised their right to convert a certain portion of
their Institutional Participation into shares of
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Harken common stock. See "Notes to Consolidated Condensed Financial Statements,
Note 6 -- Development Finance and Operating Agreements" for further discussion.
At the present time, it is not known whether the remaining
Institutional Investor or Harken will exercise their rights to convert the
remaining Institutional Interest into Harken common stock, nor can Harken
determine the number of shares of Harken common stock which would be required to
be issued in the event that Harken or the remaining Institutional Investor
elects to convert the Institutional Participation into shares of Harken common
stock.
Operational Contingencies -- The exploration, development and
production of oil and gas are subject to various Colombian, 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 $2.4 million at March 31, 1999 relating
to 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 Issues -- Harken is currently working to resolve 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. Any of Harken's programs that have
time-sensitive software may recognize a date using "00" as the Year 1900 rather
than the Year 2000, which could result in miscalculations or system failures.
The problem is not limited to computer systems. Year 2000 issues will also
potentially affect every non-information technology system that has an embedded
microchip, such as elevators.
Harken began a formal process in 1998 to identify those internal
computerized systems that are not Year 2000 compliant, prioritize those
business-critical computerized systems that need remediation or replacement,
test compliance once the appropriate corrective measures have been implemented,
and develop any contingency plans where considered necessary. In addition,
Harken is continuing to conduct a survey of purchasers, vendors and customers
that Harken believes could have an impact on Harken's material business
operations.
Harken's information technology infrastructure consists of desktop
Pentium class Intel based PC systems and servers and off-the-shelf software
packages. The systems are networked via Microsoft and other telecommunications
equipment. Harken does not use mini or mainframe computer systems and uses only
off-the-shelf software products.
Assessment. Based on Harken's internal review and discussions with
third parties regarding the Year 2000 problem, Harken believes that its exposure
to potential Year 2000 problems exists in two general
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areas: technological operations, including non-information technology systems,
which are in the sole control of Harken; and technological operations which are
dependent in some way on one or more third parties. Failure to achieve high
levels of Year 2000 compliance in either area could have a material adverse
impact on Harken.
Remediation and Implementation. In the area of technological operations
which are under Harken's exclusive control, Harken is currently involved in the
identification and remediation of affected technological functions, including
non-information technology systems. Harken has completed its assessment of Year
2000 readiness of its internal computerized systems. Harken is in the process of
installing upgrades to its off-the-shelf financial and operational software
applications, hardware and telecommunications equipment. Harken expects that
such remediation procedures will be completed by the second quarter of 1999.
Harken is in the identification and assessment phase with respect to its
non-information technology systems, which is projected to continue until the
third quarter of 1999.
Testing. Harken will begin updating and testing of the newly upgraded
systems for Year 2000 compliance, and expects that all testing will be completed
by the third quarter of 1999. Upon completion, Harken will be able to identify
any internal computer systems that remain non-compliant. At present, it is
anticipated that Harken's action plan for addressing Year 2000 problems will be
successfully completed in all material respects in advance of January 1, 2000.
Third Parties. Harken has assessed the level of Year 2000 issues
associated with its most significant vendors, suppliers, partners and major
customers. All of Harken's oil and gas sales revenues are derived from oil and
gas production from its domestic and Colombian operations. Harken's domestic
operations are dependent upon its various purchasers or pipeline operators who
transport oil or gas for its purchasers. In addition, Harken's Colombian
operations may also become dependent upon the transportation of oil through
outside owned facilities or pipelines. Harken is monitoring progress of its
various domestic purchasers and pipelines, as well as potential Colombian
outside owned facilities on their activities related to the Year 2000. At this
time, Harken expects that field operations will not be interrupted due to
improper recognition of the Year 2000 by computerized systems of its various
purchasers and pipelines.
Harken also relies on other oil and gas service providers, vendors, and
financial institutions in its daily operations. Harken believes it has
identified those third-party relationships that could have a material adverse
effect on Harken's results of operations and financial position should their
computerized systems not be compliant for the Year 2000. Harken continues with
its efforts to survey the identified third parties on their readiness for the
Year 2000 and establish appropriate alternatives, if needed, where noncompliance
may pose a risk to Harken's operations.
Although Harken is making efforts to ensure that the third parties on
which it is heavily reliant are Year 2000 compliant, it cannot predict the
likelihood of such compliance occurring nor the direct or indirect costs to
Harken of non-compliance by those third parties or of securing such services
from compliant third parties. Harken has no control over these third parties'
compliance and cannot give assurances that these third parties' representations
to Harken are accurate. Therefore, there can be no guarantee that Year 2000
problems originating with a third party will not occur and no absolute assurance
that third parties will convert their systems in a timely manner, to the extent
Harken is unable to replace the goods, services or customers with alternate
sources of supply and demand on a timely and economically equivalent basis. Such
failure
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would likely have a material adverse effect on Harken's business and results of
operations.
Estimated Costs. The total financial effect that Year 2000 issues will
have on Harken cannot be predicted with any certainty at this time. In fact, in
spite of all efforts being made to rectify these problems, the success of
Harken's efforts will not be known with certainty until the year 2000 actually
arrives. Based on its assessment to date, Harken does not believe that the costs
to resolve any Year 2000 issues will be material. To date, Harken has spent less
than $100,000 on Year 2000 matters and it expects that the total cost, primarily
consulting fees and software purchases, will not exceed $200,000.
Contingency Plan. Harken has not completed its implementation and
testing of Year 2000 compliant systems. However, a reasonably likely worst case
scenario is that Harken or certain of its purchasers or other vendors fail to
correct a material Year 2000 problem, which results in an interruption of
Harken's transportation and sale of Harken's crude oil and natural gas
production sales revenues. Certain interruptions could result in a material
adverse effect on Harken's results of operations, cash flows and financial
condition. Due to the inherent uncertainties relating to the effect of the Year
2000 on Harken's operations, it is difficult to predict what impact, if any,
noncompliance with the Year 2000 issue will have on Harken's results of
operations, cash flows and financial condition. Based on the results of the
implementation and testing of Harken's Year 2000 affected systems and ongoing
assessment of the readiness of its vendors, suppliers, partners and major
customers, Harken will develop appropriate contingency plans that address the
most reasonably likely worst case scenarios. Harken expects to have such
contingency plans in place by the end of the third quarter of 1999. A failure to
address Year 2000 issues successfully could have a material adverse effect on
Harken's business, financial condition or results of operations.
33
34
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, 1998, File No. 0-9207, and
incorporated by reference herein).
3.8 Bylaws of Harken Energy Corporation, as amended
(filed as Exhibit 3.2 to Harken's Annual Report on
Form 10-K for fiscal year ended December 31, 1989,
File No. 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
34
35
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, 1998, by and
between Harken Energy Corporation And ChaseMellon
Shareholder Services L.L.C., as Rights Agent (filed
as Exhibit 4 to Harken's Current Report on Form 8-K
dated April 7, 1998, File No. 0-9207, and
incorporated by reference herein).
4.7 Certificate of Designations of Series E Junior
Participating Preferred Stock (filed as Exhibit B to
Exhibit 4 to Harken's Current Report on Form 8-K
dated April 7, 1998, file No. 0-9207, and
incorporated by reference herein).
4.8 Certificate of Designations, Preferences and Rights
of Series F Convertible Preferred Stock (filed as
Exhibit 4.8 to Harken's Quarterly Report on Form 10-Q
for the period ended March 31, 1998, File No. 0-9207,
and incorporated by reference herein).
*27 Financial Data Schedules.
(b) REPORTS ON FORM 8-K
None filed.
35
36
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 12, 1999 By: /s/ Bruce N. Huff
---------------------- --------------------------------------
Bruce N. Huff, President, Chief
Financial Officer and Director
36
37
EXHIBIT INDEX
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, 1998, File No. 0-9207, and incorporated
by reference herein).
3.8 Bylaws of Harken Energy Corporation, as amended (filed
as Exhibit 3.2 to Harken's Annual Report on Form 10-K
for fiscal year ended December 31, 1989, File No.
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
38
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, 1998, 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, 1998, 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, 1998, file No. 0-9207, and incorporated by
reference herein).
4.8 Certificate of Designations, Preferences and Rights of
Series F Convertible Preferred Stock (filed as Exhibit
4.8 to Harken's Quarterly Report on Form 10-Q for the
period ended March 31, 1998, File No. 0-9207, and
incorporated by reference herein).
*27 Financial Data Schedules.