================================================================================
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
Form 10-Q
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15 (d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended March 31, 2003
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from ___________ to ___________
Commission file number 1-10262
HARKEN ENERGY CORPORATION
(Exact name of registrant as specified in its charter)
Delaware 95-2841597
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
580 WestLake Park Boulevard, Suite 600 77079
Houston, Texas (Zip Code)
(Address of principal executive offices)
Registrant's telephone number, including area code (281) 504-4000
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. Yes |X| No [ ]
Indicate by check mark whether the registrant is an accelerated filer (as
defined in Rule 12b-2 of the Exchange Act). Yes [X] No [ ]
The number of shares of Common Stock, par value $0.01 per share,
outstanding as of May 1, 2003 was 98,672,766.
================================================================================
HARKEN ENERGY CORPORATION
INDEX TO QUARTERLY REPORT
March 31, 2003
Page
----
PART I. FINANCIAL INFORMATION
Item 1. Condensed Financial Statements
Consolidated Condensed Balance Sheets.......................... 4
Consolidated Condensed Statements of Operations................ 5
Consolidated Condensed Statement 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................................... 22
Item 4. Controls and Procedures........................................ 38
PART II. OTHER INFORMATION.................................................. 39
SIGNATURES.................................................................. 44
2
PART I - FINANCIAL INFORMATION
3
ITEM 1. CONDENSED FINANCIAL STATEMENTS
HARKEN ENERGY CORPORATION AND SUBSIDIARIES
CONSOLIDATED CONDENSED BALANCE SHEETS
(Unaudited)
December 31, March 31,
2002 2003
------------- -------------
Assets
Current Assets:
Cash and temporary investments $ 6,377,000 $ 6,327,000
Accounts receivable, net 3,237,000 4,623,000
Related party notes receivable 105,000 105,000
Prepaid expenses and other current assets 1,302,000 1,320,000
------------- -------------
Total Current Assets 11,021,000 12,375,000
Property and Equipment, net 70,457,000 71,315,000
Investment in Equity Securities 1,091,000 603,000
Other Assets, net 3,011,000 1,926,000
------------- -------------
$ 85,580,000 $ 86,219,000
============= =============
Liabilities and Stockholders' Equity
Current Liabilities:
Trade payables $ 2,356,000 $ 3,177,000
Accrued liabilities and other 4,095,000 4,208,000
Revenues and royalties payable 1,342,000 1,455,000
Bank credit facility 2,176,000 1,200,000
Convertible notes payable 34,575,000 21,371,000
------------- -------------
Total Current Liabilities 44,544,000 31,411,000
Convertible Notes Payable 11,106,000 17,938,000
Bank Credit Facility 3,810,000 4,410,000
Investor Term Loan 5,000,000 --
Accrued Preferred Stock Dividends 7,369,000 947,000
Asset Retirement Obligation 4,664,000 6,962,000
Other Long-Term Obligations 644,000 644,000
Commitments and Contingencies (Note 13)
Minority Interest in Consolidated Subsidiary 3,312,000 3,281,000
Stockholders' Equity:
Series G1 Preferred Stock, $1.00 par value; $100 liquidation value; 700,000
shares authorized; 402,688 and 380,243 shares outstanding, respectively 403,000 380,000
Series G2 Preferred Stock, $1.00 par value; $100 liquidation value; 400,000
shares authorized; 93,150 and 93,150 shares outstanding, respectively 93,000 93,000
Common stock, $0.01 par value; 225,000,000 shares authorized;
25,447,804 and 99,280,575 shares issued, respectively 254,000 993,000
Additional paid-in capital 388,703,000 402,620,000
Accumulated deficit (383,004,000) (382,142,000)
Accumulated other comprehensive income 134,000 134,000
Treasury stock, at cost, 605,700 shares held (1,452,000) (1,452,000)
------------- -------------
Total Stockholders' Equity 5,131,000 20,626,000
------------- -------------
$ 85,580,000 $ 86,219,000
============= =============
The accompanying Notes to Consolidated Condensed Financial Statements are
an integral part of these Statements.
4
HARKEN ENERGY CORPORATION AND SUBSIDIARIES
CONSOLIDATED CONDENSED STATEMENTS OF OPERATIONS
(Unaudited)
Three Months Ended
March 31,
-------------------------
2002 2003
----------- -----------
Revenues:
Oil and gas operations $ 5,426,000 $ 7,378,000
Interest and other income 66,000 32,000
----------- -----------
5,492,000 7,410,000
----------- -----------
Costs and Expenses:
Oil and gas operating expenses 2,320,000 2,027,000
General and administrative expenses, net 2,409,000 2,476,000
Depreciation and amortization 3,266,000 2,040,000
Interest expense and other, net 972,000 2,668,000
----------- -----------
8,967,000 9,211,000
----------- -----------
Gain from repurchases of European Notes -- 4,531,000
----------- -----------
Income/(loss) before income taxes (3,475,000) 2,730,000
Income tax expense 90,000 100,000
----------- -----------
Income/(loss) before cumulative effect of change in
accounting principle and minority interest (3,565,000) 2,630,000
Minority interest in subsidiary 9,000 31,000
----------- -----------
Net income/(loss) before cumulative effect of change in
accounting principle (3,556,000) 2,661,000
Cumulative effect of change in accounting principle -- (813,000)
----------- -----------
Net income/(loss) $(3,556,000) $ 1,848,000
=========== ===========
Preferred stock dividends (1,045,000) (986,000)
----------- -----------
Net income/(loss) attributed to common stock $(4,601,000) $ 862,000
=========== ===========
Basic income/(loss) per common share:
Net income/(loss) per common share before cumulative
effect of change in accounting principle $ (0.25) $ 0.04
Cumulative effect of change in accounting principle -- (0.02)
----------- -----------
Net income/(loss) per common share $ (0.25) $ 0.02
=========== ===========
Weighted average common shares outstanding 18,233,676 36,764,473
=========== ===========
Fully diluted income/(loss) per common share:
Net income/(loss) per common share before cumulative
effect of change in accounting principle $ (0.25) $ 0.02
Cumulative effect of change in accounting principle -- (0.01)
----------- -----------
Net income/(loss) per common share $ (0.25) $ 0.01
=========== ===========
Weighted average common shares outstanding 18,233,676 83,442,281
=========== ===========
The accompanying Notes to Consolidated Condensed Financial Statements
are an integral part of these Statements.
5
HARKEN ENERGY CORPORATION AND SUBSIDIARIES
CONSOLIDATED CONDENSED STATEMENT OF STOCKHOLDERS' EQUITY
(Unaudited)
Additional
G1 Preferred G2 Preferred Common Paid-In
Stock Stock Stock Capital
------------- ------------ -------- ------------
Balance, December 31, 2002 $403,000 $93,000 $254,000 $388,703,000
Issuance of common stock -- -- 729,000 8,344,000
Repurchases of preferred stock (23,000) -- -- (1,675,000)
Issuance of preferred stock dividends -- -- 10,000 7,248,000
Accrual of preferred stock dividends -- -- -- --
Net income -- -- -- --
-------- ------- -------- ------------
Balance, March 31, 2003 $380,000 $93,000 $993,000 $402,620,000
======== ======= ======== ============
Accumulated
Other
Treasury Accumulated Comprehensive
Stock Deficit Income (Loss) Total
----------- ------------- ------------- -----------
Balance, December 31, 2002 $(1,452,000) $(383,004,000) $134,000 $ 5,131,000
Issuance of common stock -- -- -- 9,073,000
Repurchases of preferred stock -- -- -- (1,698,000)
Issuance of preferred stock dividends -- -- -- 7,258,000
Accrual of preferred stock dividends -- (986,000) -- (986,000)
Net income -- 1,848,000 -- 1,848,000
----------- ------------- -------- -----------
Balance, March 31, 2003 $(1,452,000) $(382,142,000) $134,000 $20,626,000
=========== ============= ======== ===========
The accompanying Notes to Consolidated Condensed Financial Statements are
an integral part of these Statements.
6
HARKEN ENERGY CORPORATION AND SUBSIDIARIES
CONSOLIDATED CONDENSED STATEMENTS OF CASH FLOWS
(Unaudited)
Three Months Ended
March 31,
--------------------------
2002 2003
----------- ------------
Cash flows from operating activities:
Net income / loss $(3,556,000) $ 1,848,000
Adjustment to reconcile net income / loss to net cash
provided by operating activities:
Depreciation and amortization 3,266,000 2,040,000
Amortization of issuance costs 117,000 984,000
Gain on repurchases of European Notes -- (4,531,000)
Minority interest (9,000) (31,000)
Cumulative effect of change in accounting principle -- 813,000
Loss on investment -- 488,000
Change in assets and liabilities:
(Increase) decrease in accounts receivable (701,000) (1,410,000)
Increase (decrease) in trade payables and other (1,088,000) 1,068,000
----------- ------------
Net cash provided by (used in) operating activities (1,971,000) 1,269,000
----------- ------------
Cash flows from investing activities:
Proceeds from sales of assets 936,000 660,000
Capital expenditures, net (2,322,000) (2,357,000)
----------- ------------
Net cash used in investing activities (1,386,000) (1,697,000)
----------- ------------
Cash flows from financing activities:
Proceeds from issuances of common stock, net 1,425,000 4,624,000
Transaction costs (257,000) --
Repayments of debt and convertible notes -- (7,272,000)
Proceeds from issuance of European Notes, net of issuance costs -- 3,026,000
----------- ------------
Net cash provided by financing activities 1,168,000 378,000
----------- ------------
Net decrease in cash and temporary investments (2,189,000) (50,000)
Cash and temporary investments at beginning of period 8,523,000 6,377,000
----------- ------------
Cash and temporary investments at end of period $ 6,334,000 $ 6,327,000
=========== ============
Supplemental disclosures of cash flow information:
Cash paid during the period for:
Interest $ 88,000 $ 466,000
Income taxes 72,000 78,000
The accompanying Notes to Consolidated Condensed Financial Statements are
an integral part of these Statements.
7
HARKEN ENERGY CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS
March 31, 2002 and 2003
(Unaudited)
(1) BASIS OF PRESENTATION
The accompanying unaudited consolidated condensed financial statements of
Harken Energy Corporation ("Harken") 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. In the opinion of Harken, these financial statements
contain all adjustments necessary to present fairly its financial position as of
December 31, 2002 and March 31, 2003 and the results of its operations and
changes in its cash flows for all periods presented as of March 31, 2002 and
2003. All such adjustments represent normal recurring items. These condensed
financial statements should be read in conjunction with the financial statements
and the notes thereto included in Harken's Annual Report on Form 10-K for the
year ended December 31, 2002. Certain prior year amounts have been reclassified
to conform with the 2003 presentation.
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, 2003
are not necessarily indicative of the results to be expected for the full year.
(2) ACQUISITIONS AND DISPOSITIONS
Sales of Certain Producing Interests - In 2002, wholly-owned subsidiaries
of Harken sold interests in oil and gas producing properties located in Texas
for approximately $2,499,000 and also sold oil and gas mineral interests for
approximately $75,000. During the first quarter of 2003, Harken sold an
additional interest in an oil and gas producing property located in Louisiana
for approximately $660,000.
Acquisition of Republic Properties - On January 30, 2002, a wholly-owned
subsidiary of Harken signed an agreement to acquire certain property interests
(the "Republic Properties") from Republic Resources, Inc. ("Republic"). This
acquisition was closed on April 4, 2002 following approval by Republic
stockholders and debenture holders. The Republic Properties consist of interests
in 16 oil and gas wells in nine fields plus interests in additional prospect
acreage located in southern Louisiana and the Texas Gulf Coast region. The
Republic Properties were acquired by Harken in exchange for 2,645,500 shares of
Harken common stock, which had a market value of $2,645,500 on the closing date,
plus 79,365 shares issued as a transaction fee in this acquisition. In addition,
the Purchase and Sale Agreement provides for contingent additional consideration
of cash or additional shares of Harken common stock, or any combination of the
two as Harken may decide, to
8
be paid within 45 days after December 31, 2003, based on a defined calculation
to measure the appreciation, if any, of the reserve value of the Republic
Properties. Since Harken acquired only the oil and gas properties from Republic,
the entire purchase price was allocated to the domestic full cost pool.
(3) PROPERTY AND EQUIPMENT
A summary of property and equipment follows:
December 31, March 31,
2002 2003
------------- -------------
Unevaluated oil and gas properties:
Unevaluated Peru properties $ 562,000 $ 612,000
Unevaluated Panama properties 304,000 375,000
Unevaluated domestic properties 2,617,000 2,696,000
Evaluated oil and gas properties:
Evaluated Colombian properties 184,493,000 186,147,000
Evaluated domestic properties 156,072,000 157,098,000
Facilities and other property 25,394,000 25,765,000
Less accumulated depreciation and
amortization (298,985,000) (301,378,000)
------------- -------------
$ 70,457,000 $ 71,315,000
============= =============
(4) ASSET RETIREMENT OBLIGATION
Effective January 1, 2003, Harken changed its method of accounting for
asset retirement obligations in accordance with the recently issued FASB
Statement No. 143, "Accounting for Asset Retirement Obligations" (SFAS 143).
Prior to the effective date of SFAS 143, Harken reflected asset retirement
obligations for acquired assets net of related estimated salvage values to be
realized at the time of retirement. Under the new accounting method, Harken now
recognizes the full amount of asset retirement obligations beginning in the
period in which they are incurred if a reasonable estimate of a fair value can
be made. The associated asset retirement costs are capitalized as part of the
carrying amount of the long-lived asset. Market risk premium was excluded from
the estimate of the asset retirement obligations since reliable estimates were
not obtainable.
The cumulative effect of the change in accounting method on prior years
resulted in a charge to income of $813,000 ((.02) per share), for the period
ended March 31, 2003. The effect of the change on the period ended March 31,
2003 was to decrease income before the cumulative effect of the accounting
change by $144,000. The pro forma effects of the application of SFAS 143 as if
the Statement had been adopted on January 1, 2002 (rather than January 1, 2003)
are presented below:
9
Pro forma amounts assuming the For the three
accounting change is applied months ended
retroactively net-of-tax: March 31, 2002
--------------
Net loss:
As reported $(4,601,000)
Pro forma (4,720,000)
Net loss per common share:
As reported $ (0.25)
Pro forma (0.26)
A summary of Harken's assets with required asset retirement obligations as
of March 31, 2003 is as follows:
Asset Retirement
Asset Category Liability Estimated Life
- ----------------------------------------- ---------------- --------------
Domestic oil and gas producing properties $4,254,000 2-55 years
Domestic facilities and other property 2,158,000 12-29 years
Colombian oil producing properties 550,000 4-23 years
Colombian facilities and other property -- 4-23 years
----------
$6,962,000
==========
Harken reflects no asset retirement obligation for Global's Colombian
facilities as upon the expiration of the related Association Contract, the
ownership of such facilities reverts to Ecopetrol.
The following table describes all changes to Harken's asset retirement
obligation liability during the three month period ended March 31, 2003.
Asset retirement obligation at December 31, 2002 $4,664,000
Liability recognized upon adoption of SFAS 143 2,138,000
Additions during the first quarter of 2003 46,000
Deletions during the first quarter of 2003 (30,000)
Accretion expense 144,000
----------
Asset retirement obligation at March 31, 2003 $6,962,000
==========
Had the provision of SFAS 143 been adopted on January 1, 2002, the asset
retirement obligation would have been $6,262,000.
(5) MIDDLE AMERICAN OPERATIONS
Harken's Middle American operations are all conducted through its ownership
in Global Energy Development PLC ("Global") (a public limited company registered
in England and Wales under the
10
Companies Act (1985) of the United Kingdom). Global's ordinary shares are listed
for trading on the AIM Exchange in London. Effective March 25, 2002, Harken's
ownership in Global decreased from 100% to 92.77% when Global sold 7.23% of its
shares to 22 investors. The placement to these investors consisted of 2,021,902
shares at a cost of approximately $0.70 per share, of which less than 1% was
purchased, at the offering price, by certain officers, directors and employees
of Harken and Global and a family member, in exchange for approximately
$1,436,000 in cash. Global is seeking additional financing and may effect
acquisitions using shares of its newly listed ordinary shares. In addition,
Harken may elect to sell or otherwise dispose of additional shares of Global
owned by Harken, for cash or otherwise. During December 2002, Harken exchanged
2,000,000 common shares of Global for 1,232,742 common shares of New
Opportunities Investment Trust PLC ("NOIT") which further reduced Harken's
ownership of Global to approximately 85.62%. In connection with the issuance to
Lyford Investments Enterprises Ltd. ("Lyford") of the 10% Term Loan, Lyford
received warrants to purchase 7,000,000 shares of Global held by Harken at a
price of 50 pence per share. These warrants expire in 2005.
Colombian Operations - Global's Colombian operations are conducted through
Harken de Colombia, Ltd., a wholly owned subsidiary of Global, which held four
exclusive Colombian Association Contracts with Empresa Colombiana de Petroleos
("Ecopetrol") as of March 31, 2003. Terms of each of the Association Contracts
commit Global to perform certain activities, such as seismic activities and/or
the drilling of a well, in accordance with a prescribed timetable. As of May 14,
2003, Global was in compliance with the requirements of each of the Association
Contracts.
Peru Operations - In April 2001, Global, through a wholly owned subsidiary,
signed a Technical Evaluation Agreement ("Peru TEA") with Perupetro, the
national oil company of Peru. The Peru TEA covers an area of approximately 6.8
million gross acres in northeastern Peru. Under the terms of the Peru TEA,
Global has the option to convert the Peru TEA to a seven year exploration
contract, with a twenty-two year production period. Terms of the Peru TEA allow
Global to conduct a study of the area that will include the reprocessing of
seismic data and evaluation of previous well data. On April 7, 2003, Global
received an extension from Perupetro of the Peru TEA to July 9, 2003.
Panama Operations - In September 2001, Global, through a wholly owned
subsidiary, signed a Technical Evaluation Agreement ("Panama TEA") with the
Ministry of Commerce and Industry for the Republic of Panama. The Panama TEA
covers an area approximately 2.7 million gross acres divided into three blocks
in and offshore Panama. Under the terms of this Panama TEA, which extends for a
period of 24 months, Global is to perform certain work program procedures and
studies to be submitted to the Panamanian government with an option to negotiate
and enter into one or more Contracts for the Exploration and Exploitation of
Hydrocarbons with the Ministry of Commerce and Industry.
11
(6) BANK CREDIT FACILITY OBLIGATION
On December 6, 2002, certain of Harken's domestic subsidiaries (the
"Borrowers") and Harken entered into a three-year loan facility with Guaranty
Bank FSB ("Guaranty"), which is secured by substantially all of Harken's
domestic oil and gas properties and a guarantee from Harken. The initial
proceeds advanced under the Guaranty credit facility were used to repay in full
the outstanding principal and interest owed under the credit facility with Bank
One, N.A. previously held by Harken and certain of its domestic subsidiaries.
The Guaranty credit facility provides borrowings limited by a borrowing base (as
defined by the Guaranty credit facility) which was $7,100,000 and $6,010,000, as
of December 31, 2002 and March 31, 2003 respectively. Such borrowing base, which
is net of outstanding letters of credit, is re-determined by Guaranty on May 1
and November 1 of each year in accordance with the credit facility agreement.
Effective May 1, 2003, the redetermined borrowing base is $7,100,000. If the
borrowing base is reduced by Guaranty to an amount less than the outstanding
balance, then the Borrowers would be required to repay any amount by which the
outstanding balance of the facility exceeds the borrowing base or provide
additional collateral satisfactory to Guaranty within 30 days following notice
by Guaranty of such determination. The borrowing base is being reduced by
$200,000 per month beginning January 1, 2003 and will be redetermined again by
Guaranty on November 1, 2003, in accordance with the credit facility agreement.
Due to these scheduled borrowing base reductions, the current outstanding
letters of credit and the redetermined borrowing base as of May 1, 2003, Harken
has reflected approximately $1,200,000 of the credit facility amount as a
current liability at March 31, 2003. At December 31, 2002 and March 31, 2003,
Harken has $5,986,000 and $5,610,000, respectively, outstanding pursuant to the
credit facility. Guaranty's commitments under the credit facility terminate on
December 6, 2006.
Harken's bank credit facility with Guaranty prohibits cash dividends,
loans, advances and similar payments to be made to Harken by the Borrowers.
Therefore, the Borrowers will not be able to provide Harken with funds to be
used for the repayment of Harken's debt or for other uses, unless the Borrowers
obtain Guaranty's consent. The Guaranty credit facility requires the Borrowers
to maintain certain financial covenant ratios and requirements as calculated on
a quarterly basis. Such financial covenant ratios and requirements for the
Borrowers include a current ratio, as defined, of not less than 1.0 to 1.0, a
maximum liabilities to equity ratio, as defined, of not more than 1.0 to 1.0 and
a debt service coverage ratio, as defined, of not less than 1.25 to 1.0. In
addition, the agreement requires that general and administrative expenses of the
Borrowers must not exceed 25% of the Borrowers' net revenue for each quarter. At
March 31, 2003, the Borrowers were in compliance with these covenants.
(7) INVESTOR TERM LOAN
In July 2002, Harken issued a 10% Term Loan Payable (the "10% Term Loan")
in the principal amount of $3,000,000 to Lyford, in exchange for cash in the
principal amount of the 10% Term Loan. The principal of Lyford is Phyllis
Quasha, whose son, Alan G. Quasha, is now a member of Harken's board of
directors and the Chairman of Harken. Prior to entering into the 10% Term Loan,
Mr. Quasha and his affiliates owned no shares of Harken's common stock. However
an affiliate of Mr. Quasha purchased shares in Harken's subsidiary, Global,
during that subsidiary's March 2002 offering at the offering price. In August
2002, Harken entered into an amendment of the 10% Term Loan and issued an
additional principal amount of $2,000,000 of the 10% Term Loan in exchange for
cash in the additional principal amount of the loan.
Lyford offset a portion of the payment pursuant to its standby commitment
relating to Harken's rights offering to repay in full the outstanding balance
plus accrued interest related to the 10% Term Loan. Harken's indebtedness to
Lyford under the 10% Term Loan was thereby cancelled on March 20, 2003.
12
As additional consideration for the 10% Term Loan, as amended, Harken
issued to Lyford warrants to purchase up to a total of 7.0 million shares of
Global ordinary shares owned by Harken, at a price of 50 pence per share. Harken
has accounted for these warrants as a derivative in accordance with SFAS No. 133
and accordingly has reflected the fair value of the warrants as a liability in
the consolidated condensed balance sheet. Such liability is reflected at the
fair value of the derivative, based on the underlying market price of Global
common stock, and the corresponding gain or loss related to the change in
derivative fair value is reflected in earnings. The issuance of the warrants is
considered to be a debt issuance cost and is amortized over the life of the 10%
Term Loan. As the 10% Term Loan was paid in full on March 20, 2003, the
unamortized debt issuance costs were fully expensed in the first quarter of
2003.
(8) CONVERTIBLE NOTES PAYABLE
A summary of convertible notes payable is as follows:
December 31, March 31,
2002 2003
----------- -----------
5% European Notes $29,030,000 $14,110,000
7% European Notes 11,106,000 17,938,000
Waverley Note -- 1,682,000
Benz Convertible Notes 5,545,000 5,579,000
----------- -----------
45,681,000 39,309,000
Less: Current portion 34,575,000 21,371,000
----------- -----------
$11,106,000 $17,938,000
=========== ===========
5% European Notes -- On May 26, 1998, Harken issued a total of $85 million
of its 5% Senior Convertible Notes due 2003 (the "5% European Notes"), which
mature on May 26, 2003. Such 5% European Notes were originally convertible into
shares of Harken common stock at a conversion price of $65.00 per share, subject
to adjustment in certain circumstances. In January 2003, such conversion price
was adjusted to $62.58 per share, and following the February 2003 announcement
of the terms of the rights offering, the conversion price was adjusted to $45.22
per share, effective January 31, 2003. Since issuance, Harken has repurchased or
exchanged to date an aggregate of $70,890,000 principal amount of the 5%
European Notes. As of May 14, 2003, the outstanding principal balance of the 5%
European Notes was $14,110,000. Interest incurred on the 5% European Notes is
payable semi-annually in May and November of each year to maturity or until the
5% European Notes are redeemed, converted or purchased by Harken prior to their
maturity.
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 redemption price based on an average market price of
Harken common stock. At maturity, on May 26, 2003, Harken may similarly redeem
all remaining 5% European Notes for shares of Harken common stock. If Harken
elects to redeem the 5% European Notes for shares of its common stock, each note
will be redeemed for a number of shares of Harken common stock equal to 115% of
the principal amount of the note to be redeemed, plus accrued and unpaid
interest thereon to the date of
13
redemption, divided by the average market price of the stock over the 30
calendar days immediately preceding the date of the notice of redemption. The 5%
European Notes are listed on the Luxembourg Stock Exchange.
On January 28, 2003, Harken exchanged a total of $1,420,000 principal
amount of 5% European Notes for $1,420,000 principal amount of 7% European Notes
due 2007. On February 13, 2003, Harken issued $1,600,000 in principal amount of
7% European Notes due 2006, to certain investors (the "Investors") in exchange
for $2,000,000 in principal amount of the 5% European Notes. Harken also entered
into an Option Agreement with the Investors, dated February 13, 2003, that
provided for a call option in favor of Harken and a put option in favor of the
Investors. Additionally, on March 18, 2003, Harken entered into an option
agreement with HBK Master Fund L.P. ("HBK") that provided for a call option in
favor of Harken and a put option in favor of HBK. On March 26 and 27, 2003,
Harken exercised, respectively, both of these call options. Pursuant to this
exercise, the Investors and HBK sold an aggregate of $11.5 million principal
amount of 5% European Notes at an aggregate cash option price of approximately
$6.9 million plus accrued and unpaid interest through the date of payment. In
the first quarter of 2003, Harken has reflected a gain of approximately $4.5
million from these cash purchases of outstanding 5% European Notes in the
accompanying Consolidated Condensed Statements of Operations. As a result of
Harken's exercise of these call options, the respective put options with the
Investors and HBK were terminated.
At its annual stockholder meeting held January 29, 2003, Harken received
stockholder approval in connection with the potential issuance of Harken common
stock to redeem up to $20 million of the 5% European Notes, in accordance with
guidelines of the American Stock Exchange that apply to transactions involving
the potential issuance below market value of at least 20% of a company's
outstanding shares. On April 25, 2003, Harken issued a notice of redemption for
the 5% European Notes for shares of Harken's common stock. The date of the
redemption is May 26, 2003. In accordance with the terms of the 5% European
Notes, each 5% European Note outstanding on May 26, 2003 will be redeemed for
the number of shares of common stock equal to 115% of the principal amount of
the notes to be redeemed, plus accrued and unpaid interest thereon to the date
of redemption, divided by approximately $0.35 (the average market price of the
common stock over the 30 calendar days immediately preceding the date of the
notice of the redemption). As of May 14, 2003, there is approximately $14.1
million principal amount of 5% European Notes outstanding, which would result in
an issuance of up to approximately 47.8 million shares of common stock upon
redemption. The amount of the 5% European Notes to be redeemed is likely to
decrease prior to the redemption date as Harken has pursued and is continuing to
actively pursue negotiated transactions to reduce the balance of the notes
through exchanges and repurchases.
7% European Notes -- On June 18, 2002, Harken issued to certain holders of
Harken's securities $2,025,000 principal amount of its 7% Senior Convertible
Notes (the "7% European Notes") due 2007 in exchange for approximately
$1,025,000 in cash and 10,000 shares of Harken's Series G1 Preferred Stock owned
by such holders. On June 19, 2002, Harken issued to certain holders of Harken's
securities an additional $2,025,000 principal amount of the 7% European Notes in
exchange for approximately $1,725,000 in cash and 3,000 shares of Harken's
Series G1 Preferred Stock owned by such holders. Also, during the third and
fourth quarter of 2002, Harken issued an additional total of $7,432,000
principal amount of the 7% European Notes in connection with the exchange
transactions involving certain of the 5% European Notes described in the
preceding paragraphs. On January 28, 2003, Harken exchanged a total of
$1,420,000 principal amount of 5% European Notes for $1,420,000 principal amount
of 7% European Notes due 2007. On February 13, 2003, Harken issued $1,600,000 in
principal amount of 7% European Notes due 2006, to certain investors (the
"Investors") in exchange for $2,000,000 in principal amount of the 5% European
Notes. Additionally, on March 18, 2003, Harken issued $3,410,000 in principal
amount of the 7% European Notes and a promissory note in principal amount of
$1,705,000 (the "Waverley Note", see further discussion below) due September 1,
2003 to Waverley Investments Limited ("Waverley") in exchange for 17,050 shares
of Harken's
14
Series G-1 convertible preferred stock owned by an affiliate of Waverley, and
$3,410,000 in cash. As of May 14, 2003, Harken has issued a total of
approximately $17.9 million in principal of the 7% European Notes, of which
approximately $1.6 million mature on June 30, 2006 and approximately $16.3
mature on March 31, 2007.
7% European Notes due 2007 -- The 7% European Notes due 2007 mature on
March 31, 2007 and rank equal to the 5% European Notes. Interest incurred on the
7% European Notes due 2007 is payable semi-annually in March and September of
each year to maturity or until these 7% European Notes are redeemed, converted
or purchased by Harken prior to their maturity. Upon the registration of the
underlying Harken common stock issuable upon conversion, the 7% European Notes
due 2007 are convertible into shares of Harken common stock at an initial
conversion price of $0.50 per share, subject to adjustment in certain
circumstances (the "2007 7% European Note Conversion Price"). Following the
February 2003 announcement of the terms of the rights offering, the 2007 7%
European Note Conversion Price was adjusted to $0.36 per share, effective
January 31, 2003, for all 7% European Notes due 2007 then outstanding. The 7%
European Notes due 2007 are also convertible by Harken into shares of Harken
common stock if, for any period of 30 consecutive days commencing upon
registration of the underlying conversion shares, the average of the closing
prices of Harken common stock for each trading day during such 30-day period
shall have equaled or exceeded 125% of the 2007 7% European Note Conversion
Price (or $0.45 per share of Harken common stock effective January 31, 2003).
The 7% European Notes due 2007 may be redeemed at Harken's option, at any
time and from time to time, in whole or in part, for cash equal to the
outstanding principal and accrued interest to the date of redemption, upon not
less than 30 days notice to the noteholders. In addition, beginning March 31,
2006, Harken may redeem up to 50% of the outstanding 7% European Notes due 2007
for shares of Harken common stock, and at maturity, on March 31, 2007, Harken
may similarly redeem all remaining outstanding 7% European Notes due 2007 for
shares of Harken common stock, in each case upon not less than 30 days notice to
the noteholders. If Harken elects to redeem the 7% European Notes due 2007 for
shares of its common stock, each note will be redeemed for a number of shares of
Harken common stock equal to 110% of the principal value of the notes to be
redeemed, plus accrued and unpaid interest thereon to the date of redemption,
divided by the average market price of the stock over the 120 business days
immediately preceding the date of the notice of redemption.
7% European Notes due 2006 -- The 7% European Notes due 2006 mature on
June 30, 2006 and also rank equal to the 5% European Notes. Interest incurred on
the 7% European Notes due 2006 is payable semi-annually in June and December of
each year to maturity or until the 7% European Notes due 2006 are redeemed,
converted or purchased by Harken prior to their maturity. Upon the registration
of the underlying Harken common stock issuable upon conversion, the 7% European
Notes are convertible into shares of Harken common stock at an initial
conversion price of $0.40 per share. The initial conversion price will be reset
on February 2, 2004 to equal 115% of the average market price of Harken common
stock for the 20 business days immediately proceeding such date. The 7% European
Notes due 2006 may be redeemed at Harken's option, at any time and from time to
time, in whole or in part, for cash equal to the outstanding principal and
accrued interest to the date of redemption, upon not less than 30 days notice to
the noteholders.
Waverley Note -- The Waverley Note will only bear interest during the
period of any default. The Waverley Note may be redeemed for cash at Harken's
option, at par, in whole or in part, upon not less than 30 days notice to the
holders. The Waverley Note may be redeemed for shares on September 1, 2003. If
Harken elects to redeem the Waverley Note for shares of its common stock, the
note will be redeemed for a number of
15
shares of Harken common stock equal to 100% of the principal amount of the note
to be redeemed, plus default interest, if any, divided by the average market
price of the common stock over all stock exchange business days during August
2003. The difference between the principal amount of the Waverley Note and the
$1,682,000 carrying amount of the Waverley Note at March 31, 2003 is being
accreted to Interest Expense over the term of the note.
Benz Convertible Notes -- On December 30, 1999, Harken issued $12,000,000
principal amount of the Benz Convertible Notes in exchange for certain prospects
acquired from Benz Energy, Incorporated. The Benz Convertible Notes originally
were to mature on May 26, 2003. In March 2000, the maturity date of certain of
the Benz Convertible Notes was extended to November 26, 2003. The Benz
Convertible Notes were originally convertible into shares of Harken common stock
at a conversion price of $65.00 per share, subject to adjustment in certain
circumstances. Following the February 2003 announcement of the terms of the
rights offering, the conversion price for the Benz Convertible Notes was
adjusted to $29.41 per share, effective January 31, 2003. In July 2002, pursuant
to the terms of the Benz Convertible Notes, Harken elected to redeem Benz
Convertible Notes with a principal amount of approximately $1,135,000 for
2,000,000 shares of Harken common stock. In August 2002, Harken repurchased
approximately $4,071,000 principal amount of Benz Convertible Notes from a
holder for $1,231,000 in cash. Harken has repurchased or redeemed to date
approximately $6.3 million principal amount of the Benz Convertible Notes for
cash and/or common stock. As of May 14, 2003, the outstanding principal balance
of Benz Convertible Notes was approximately $5,669,000 with a maturity date of
November 26, 2003.
The Benz Convertible Notes bear interest at 5% per annum, payable
semi-annually in May and November of each year until maturity or until the Benz
Convertible Notes are redeemed, converted or purchased by Harken prior to their
maturity. Beginning November 26, 2002, Harken may redeem up to 50% of the Benz
Convertible Notes then outstanding in exchange for shares of Harken common
stock. At maturity, on November 26, 2003, Harken may similarly redeem all
remaining outstanding Benz Convertible Notes for shares of Harken common stock.
If Harken elects to redeem the Benz Convertible Notes for shares of its common
stock beginning November 26, 2002, each note will be redeemed for a number of
shares of Harken common stock equal to 115% of the principal amount of the note
to be redeemed, plus accrued and unpaid interest thereon to the date of
redemption, divided by the average market price of the stock over the 30
calendar days immediately preceding the date of the notice of redemption (the
"Redemption Price"). Such Redemption Price is calculated at the time Harken
issues its notice of redemption, which is to be given no less than 30 days, and
no more than 60 days, prior to the date of redemption.
No Benz Convertible Notes were repurchased or redeemed by Harken during the
three months ended March 31, 2003.
Currently, Harken does not have sufficient funds to pay the Benz
Convertible Notes and the Waverley Notes in cash upon maturity. Harken's
management plans to continue to actively pursue negotiated transactions to
repurchase and/or restructure the Benz Convertible Notes. These efforts are
expected to primarily include exchanging the Benz Convertible Notes for debt or
equity securities and raising funds through the issuance of debt or equity
securities in order to repurchase the Benz Convertible Notes for cash.
Additionally, Harken intends to repay the Waverley Note in cash prior to or upon
maturity of the Waverley Note. It is not assured, however, that the entire
principal balance of the Benz Convertible Notes will be restructured or
repurchased for cash and/or other securities or property prior to maturity.
Consequently, Harken presently intends to satisfy its remaining obligations
under the Benz Convertible Notes by redeeming them in exchange for Harken common
stock. To the extent the Waverley Note remains outstanding at maturity Harken
similarly plans to redeem it for Harken common stock. Although there can be no
assurances, Harken believes that it will repurchase and restructure a sufficient
amount of the Benz Convertible Notes, if necessary to enable Harken to redeem
the remaining principal balance of the Benz Convertible Notes upon maturity for
Harken common stock without requiring stockholder approval of additional
authorized shares. However, depending on Harken's success in repurchasing or
restructuring the Benz Convertible Notes and the future market price of its
common stock, Harken may not have a sufficient number of authorized but unissued
shares of Harken common stock to redeem the remaining Benz Convertible Notes for
common stock. At the present market price of Harken common stock, Harken has a
sufficient number of authorized shares to allow Harken to redeem the Benz
Convertible Notes and the Waverley Note for common stock. However, if the market
price of Harken common stock declines significantly, then depending on the
amount of the Benz Convertible Notes and the Waverley Note outstanding, Harken
may be required to seek stockholder approval of an additional increase in
authorized shares before Harken could redeem the remaining Benz Convertible
Notes and the Waverley Note.
(9) RIGHTS OFFERING
In February 2003, Harken distributed to holders of its common stock, Series
G1 preferred stock, and Series G2 preferred stock, at no charge, nontransferable
subscription rights to purchase shares of its common stock. Such holders
received one subscription right for each share of common stock they own (or in
the case of the Series G1 preferred stock and Series G2 preferred stock, one
subscription right for each share of common stock issuable upon conversion) at
the close of business on January 30, 2003. Harken distributed 32,154,867
16
subscription rights exercisable for up to 72,885,437 shares of common stock for
a maximum offering amount of $10,000,000.
Each subscription right entitled the holders to purchase 2.2667 shares of
common stock at a subscription price of $0.311 per right (or $0.1372 per share).
The subscription rights expired at 12:00 midnight, New York City time, on March
13, 2003. In connection with the rights offering, subscription rights were
properly exercised for 13,169,779 shares of common stock for an aggregate
purchase price of approximately $1,807,000.
Standby Purchase Agreement -- On September 6, 2002, Harken entered into a
standby purchase agreement with Lyford that defined Harken's rights and
obligations, and the rights and obligations of Lyford, (the "Standby
Commitment"). This agreement was amended on November 22, 2002. The standby
purchase agreement obligated Harken to sell, and required Lyford to subscribe
for and purchase from Harken, a number of shares of common stock equal to the
Shortfall divided by the subscription price per share. The "Shortfall" is the
amount by which the $10,000,000 offering amount exceeds the aggregate
subscription price to be paid by the stockholders who subscribe for and purchase
shares in the offering.
As compensation to Lyford for its Standby Commitment, Harken paid Lyford a
Standby Commitment Fee of $600,000 by issuing 1,714,286 shares of common stock
to Lyford (the "Standby Commitment Fee Shares"), with each such share being
attributed a value of $0.35. Harken has also paid Lyford $50,000 in cash for its
legal fees in connection with the rights offering.
Pursuant to the standby purchase agreement, on March 20, 2003, Lyford
purchased 59,716,227 shares of common stock from Harken for an aggregate
purchase price of approximately $8,193,000. Lyford paid approximately $3,185,000
in cash to Harken from its available working capital. After giving effect to the
consummation of Harken's rights offering and the standby purchase agreement,
Lyford has become the holder of approximately 62% of Harken's outstanding common
stock, and resulted in a change of control of Harken. Lyford has the voting
power to control the election of Harken's board of directors and the approval or
other matters presented for consideration by the stockholders, which could
include mergers, acquisitions, amendments to Harken's charter and various
corporate governance actions.
(10) RELATED PARTY TRANSACTIONS
During 1997, 1998 and 1999, Harken made secured short-term loans to certain
members of Harken's Management, certain of whom also served on the Board of
Directors. Such notes receivable are reflected in Harken's Consolidated
Condensed Balance Sheets at December 31, 2002 and March 31, 2003 as related
party notes receivable. In May 2002, Harken entered into a severance agreement
to forgive the repayment of a short-term loan in the principal amount of $64,000
to a member of management related to his resignation as an officer of Harken due
to health reasons. Harken reflected the forgiveness as a charge to earnings
during the first quarter of 2002.
In November 2001, Global elected to its Board of Directors a director who
is also a director of RP&C International Inc. ("RP&C"). RP&C has historically
provided financial and transaction consulting services to Harken, including with
regard to Harken's Convertible European Notes, and Series G1 Preferred and
Series G2 Preferred stock. In addition, RP&C has served as a financial advisor
in connection with Harken's restructuring of its international assets,
obligations and operations through its Global subsidiary. Also, RP&C currently
17
serves as Global's nominated advisor for the AIM Exchange in London. During 2002
and the three months ended March 31, 2003, Harken repurchased 5,400 shares and
5,395 shares, respectively, of Series G1 Preferred stock held by RP&C in
consideration for certain financial and transaction consulting services. During
the quarter ended March 31, 2003, Harken paid to RP&C approximately $580,000 for
transaction costs associated with these transaction consulting services. In
connection with these services provided, RP&C may continue to earn such fees in
the future.
In April 2003, Lyford purchased $1,980,000 principal amount of Harken's 5%
European Notes in a privately negotiated transaction with the holders of such
notes. Pursuant to Harken's notification of redemption of the 5% European Notes
for shares of Harken common stock, Lyford is entitled to receive 6,714,031
shares of Harken common stock issuable upon redemption of the 5% European Notes
it holds. For further discussion of Harken's 5% European Notes and the
redemption for shares of Harken common stock, see Note 8 -- Convertible Notes
Payable.
(11) HEDGING ACTIVITIES
Harken holds certain commodity derivative instruments which are effective
in mitigating commodity price risk associated with a portion of its future
monthly natural gas production and related cash flows. Harken's oil and gas
operating revenues and cash flows are impacted by changes in commodity product
prices, which are volatile and cannot be accurately predicted. Harken's
objective for holding these commodity derivatives is to protect the operating
revenues and cash flows related to a portion of its future natural gas sales
from the risk of significant declines in commodity prices.
As of March 31, 2003, Harken, holds a natural gas collar contract
consisting of a fixed price floor option of $3.00 per MMBTU and a fixed price
cap option of $4.95 per MMBTU, covering 70,000 MMBTUs per month over the period
of the contract through June 30, 2004. Harken did not designate the above
derivative as a hedge under SFAS No. 133, therefore the derivative has been
marked to market at March 31, 2003 and the changes in the fair value of the
derivative of approximately $356,000 are reflected currently in earnings. Such
natural gas collar contract is reflected in accrued liabilities at March 31,
2003 with a market value of approximately $654,000.
Risk management policies established by Harken management limit Harken's
derivative instrument activities to those derivative instruments which are
effective in mitigating certain operating risks, including commodity price risk.
In addition to other restrictions, the extent and terms of any derivative
instruments are required to be reviewed and approved by executive management of
Harken.
(12) SEGMENT INFORMATION
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. During the periods presented
below, none of Harken's Middle American segment operating revenues related to
Costa Rica, Peru or Panama.
18
Harken's financial information for each of its operating segments is as
follows for the periods ended March 31, 2002 and 2003:
North Middle
America America Total
----------- ----------- -----------
For the three months ended
March 31, 2002:
Operating revenues $ 3,788,000 $ 1,638,000 $ 5,426,000
Interest and other income 21,000 45,000 66,000
Depreciation and amortization 2,123,000 1,143,000 3,266,000
Interest expense and other, net 664,000 308,000 972,000
Income tax expense 15,000 75,000 90,000
Segment loss (2,382,000) (1,174,000) (3,556,000)
Capital expenditures 107,000 192,000 299,000
Total assets at end of period 60,030,000 29,233,000 89,263,000
For the three months ended
March 31, 2003:
Operating revenues $ 5,533,000 $ 1,845,000 $ 7,378,000
Interest and other income 8,000 24,000 32,000
Depreciation and amortization 1,460,000 580,000 2,040,000
Interest expense and other, net 2,639,000 29,000 2,668,000
Gains on repurchases of convertible notes 4,531,000 -- 4,531,000
Income tax expense -- 100,000 100,000
Segment income/(loss) before cumulative
effect of change in accounting principle 2,680,000 (19,000) 2,661,000
Segment income (loss) 2,067,000 (219,000) 1,848,000
Capital expenditures 1,795,000 1,733,000 3,528,000
Total assets at end of period 59,405,000 26,814,000 86,219,000
(13) COMMITMENTS AND CONTINGENCIES
In September 1997, Harken Exploration Company, a wholly-owned subsidiary of
Harken, was served with a lawsuit filed in U.S. District Court for the Northern
District of Texas, Amarillo Division, styled D. E. Rice and Karen Rice, as
Trustees for the Rice Family Living Trust ("Rice") vs. Harken Exploration
Company. In the lawsuit, Rice alleges damages resulting from Harken Exploration
Company's alleged spills on Rice's property and claimed that the Oil Pollution
Act ("OPA") should be applied in this circumstance. Rice alleges that
remediation of all of the alleged pollution on its land would cost approximately
$40,000,000. In October 1999, the trial court granted Harken's Motion for
Summary Judgment that the OPA did not apply and dismissed the Rice claim under
it. Rice appealed the trial court's summary judgment to the U.S. Fifth Circuit
Court of Appeals. In April 2001, the Fifth Circuit Court of Appeals issued its
opinion affirming the trial court's summary judgment in Harken's favor. Based on
this affirmation of the summary judgment, in Harken management's opinion, the
results of any further appeal will not have a material adverse effect on
Harken's financial position. On August 15, 2002, Harken was served with a new
suit filed by Rice in state court in Hutchinson County, Texas. In this new state
case, Rice continues to seek approximately $40,000,000
19
in remediation costs and damages. Harken filed a motion for partial summary
judgment seeking a ruling that remediation costs are not the proper measure of
damages and that Rice's property damages, if any, should be measured by the
alleged diminution in value of its land. The Court held a hearing on Harken's
motion on October 30, 2002, but on December 30, 2002, this motion was denied by
the Court. Harken's management continues to believe that the correct measure of
damages is the alleged diminution in value of Rice's land. Therefore, in Harken
management's opinion, the results of such additional claim will not have a
material adverse effect on Harken's financial position.
420 Energy Investment, Inc. and ERI Investments, Inc. (collectively "420
Energy") filed a lawsuit against XPLOR Energy, Inc., a wholly-owned subsidiary
of Harken ("XPLOR"), on December 21, 1999 in the New Castle County Court of
Chancery of the State of Delaware. 420 Energy alleges that they are entitled to
appraisal and payment of the fair value of their common stock in XPLOR as of the
date XPLOR merged with Harken. Harken has relied on an indemnity provision in
the XPLOR merger agreement to tender the costs of defense in this matter to
former stockholders of XPLOR. Although the outcome of this litigation is
uncertain, because the former stockholders of XPLOR have accepted
indemnification of this claim, Harken believes that any liability to Harken as a
result of this litigation will not have a material adverse effect on Harken's
financial condition.
In August 2001, a new lawsuit was filed by New West Resources, Inc. ("New
West"), a former XPLOR stockholder, against XPLOR, Harken and other defendants
in state court in Dallas, Texas. Harken received service of process in February
2002. Effective January 17, 2003, the case was transferred by agreement of the
parties to Harris County district court, where all future proceedings will
occur. New West claims that it lost its $6 million investment in XPLOR as a
result of misrepresentations by XPLOR and breach of fiduciary duties by certain
XPLOR directors. Harken believes this new suit is an adjunct of the prior
appraisal rights claim by 420 Energy. The former stockholders of XPLOR have
rejected Harken's request for indemnification of this claim under the XPLOR
merger agreement. However, Harken intends to continue to pursue and enforce,
through whatever steps are necessary, any indemnification from the third
parties. Harken has tendered the defense of this claim to National Union Fire
Insurance Company, pursuant to insurance policy coverage held by XPLOR. National
Union has accepted defense of this claim subject to a reservation of rights.
Based on the facts that (i) the allegations of New West's current petition focus
primarily on defendants other than Harken, (ii) New West has provided no
evidence supporting its claims in response to Harken's discovery requests and
(iii) New West has not served process upon other defendants described in New
West's petition as being the primary wrongdoers, Harken does not believe the
claims asserted against Harken are meritorious. Therefore, in Harken
management's opinion, the ultimate outcome of this litigation will not have a
material adverse effect on Harken's financial condition.
In December 2002, a new lawsuit was filed by Black Point Limited ("Black
Point") in the United District Court for the Northern district of Illinois,
alleging that Global Ltd., aided and abetted by officers of Harken, fraudulently
induced Black Point to spend time and money locating prospective business
partners for Global Ltd. in the People's Republic of China. Black Point contends
that it located willing and suitable partners, only to have them unreasonably
rejected by Global Ltd. Black Point seeks breach of contract damages of $1.5
million from Global Ltd., that amount being Black Point's projected success fee
on an unconsummated $20 million investment by a Chinese partner. Alternatively,
Black Point seeks damages of approximately $290,000 for retainer fees foregone
by Black Point, plus out of pocket expenses, from Global Ltd. under theories of
fraudulent inducement, quantum merit, and detrimental reliance. Black Point also
seeks approximately $290,000 in damages from Harken, alleging that Harken aided
and abetted Global Ltd.'s fraudulent inducement. Harken and Global Ltd. do not
believe Black Point's allegations have merit since
20
Global Ltd. fully complied with the terms of the agreement in good faith. On
March 6, 2003, the Court held a hearing on a Motion to Dismiss filed by Harken
and Global Ltd. At the conclusion of that hearing, the Court ruled in favor of
Harken and Global Ltd. by dismissing Black Point's complaint in its entirety. It
is anticipated that the Court will enter its official order dismissing Black
Point's complaint during the second quarter of 2003. On March 31, 2003, Global
Ltd. received notice that Black Point had filed an amended complaint naming
Global Ltd. but not Harken as a defendant. In the amended complaint, Black Point
alleges that Global Ltd. breached a duty to cooperate under the agreement
between the parties and re-alleged damages of $1.5 million based on the
projected lost success fee asserted by Black Point. In April, Global Ltd. filed
a Motion to Dimiss Black Point's amended complaint which is currently under
consideration by the court. Although no ruling from the court has been issued on
Global Ltd.'s Motion to Dismiss the amended complaint, based on the outcome of
the March 6, 2003 hearing and the underlying facts of this case, Harken believes
that the ultimate outcome of this litigation will not have a material adverse
effect on Harken's financial condition.
Harken and its subsidiaries currently are involved in various lawsuits and
other contingencies, which in management's opinion, will not result in a
material adverse effect upon Harken's financial condition or operations taken as
a whole.
21
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
(Unaudited)
The following is a discussion and analysis of Harken's financial condition
and results of operations and should be read in conjunction with the
consolidated condensed financial statements and related notes contained in this
Quarterly Report. Certain statements contained in this discussion, and elsewhere
in this Quarterly Report, including statements of Harken management's current
expectations, intentions, plans and beliefs, are "forward-looking statements,"
as defined in Section 21D of the Securities Exchange Act of 1934 and the Private
Securities Litigation Reform Act of 1995:
.. statements before, after or including the words "may," "will," "could,"
"should," "believe," "expect," "future," "potential," "anticipate,"
"intend," "plan," "estimate," or "continue" or the negative or other
variations of these words; and
.. other statements about matters that are not historical facts.
Harken believes that it is important to communicate its future expectations
to its stockholders. Forward-looking statements reflect the current view of
management with regard to future events and are subject to numerous known and
unknown risks, uncertainties and other factors that 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. These risks, uncertainties and other
factors include, among others, the risks described in Harken's Annual Report on
Form 10-K for the fiscal year ended December 31, 2002 filed with the Securities
and Exchange Commission as well as other risks described in the Quarterly
Report. Although Harken believes that the expectations reflected in the
forward-looking statements are reasonable, it can give no assurance that such
expectations will prove to be correct or that unforeseen developments will not
occur. Harken undertakes no duty to update or revise any forward-looking
statements.
Overview
Harken is engaged in oil and gas exploration, development and production
operations both domestically and internationally through its various
subsidiaries. Harken's domestic operations currently include oil and gas
exploration, development and production in the onshore and offshore Gulf Coast
regions of South Texas and Louisiana, and in portions of West Texas and the
Texas Panhandle region. Harken's international operations currently include
Global's activities in Colombia, Panama and Peru. Although Global owns an
interest in approximately 1.4 million acres in Costa Rica, Harken and Global
believe that political and judicial developments have severely limited the
opportunity for future oil and gas development in that country.
Harken's domestic operating segment has experienced successful drilling
activity over the past three fiscal years. However, Harken reduced its drilling
activity beginning in 2002 in order to conserve capital resources to repurchase
convertible debt obligations pursuant to a capital restructuring plan, as
described below under "Liquidity and Capital Resources." In April 2002, Harken,
through a wholly-owned subsidiary, acquired certain producing property interests
(the "Republic Properties") in exchange for Harken common stock. In addition,
the Purchase and Sale Agreement for the Republic Properties provides for
contingent additional consideration of cash or additional shares of Harken
common stock, or any combination of the two as Harken may decide, to be paid
within 45 days after December 31, 2003, based on a defined calculation to
measure the appreciation, if any, of the reserve value of the Republic
Properties.
Harken's Middle American operations are conducted through its ownership of
Global, a public limited company registered in England and Wales under the
Companies Act (1985) of the United Kingdom with its ordinary shares admitted for
trading on the AIM Exchange in London.
As a part of Harken's business strategy, Harken has taken steps to reduce
personnel, reduce salaries, increase efficiencies in its production operations,
and reduce its debt obligations. The effect of these efforts have been partially
mitigated by increased legal and professional costs associated with Harken's
capital restructuring plan during the first quarter of 2003.
22
Harken reported a net income for the three months ended March 31, 2003 of
$1,848,000 compared to a net loss of $3,556,000 for the prior year period due
primarily due to the gain on repurchases of convertible notes along with higher
commodity prices compared to the prior year. Because of higher product prices
for both natural gas and crude oil, Harken worldwide oil and gas revenues have
increased 36% during the first quarter of 2003 compared to the prior year
period, despite decreased production volumes both domestically and in Colombia.
Gross profit before depreciation and amortization, general and administrative
and interest expenses and other expenses totaled approximately $5.4 million
during the three months ended March 31, 2003 compared to approximately $3.1
million for the prior year period.
Critical Accounting Policies
Full cost accounting method -- Harken accounts for the costs incurred in
the acquisition, exploration, development and production of oil and gas reserves
using the full cost accounting method. Under full cost accounting rules, the net
capitalized costs of evaluated oil and gas properties shall not exceed an amount
(the "cost ceiling") equal to the present value of future net cash flows from
estimated production of proved oil and gas reserves, based on current economic
and operating conditions, including the use of oil and gas prices as of the end
of each quarter.
Given the volatility of oil and gas prices, it is reasonably possible that
the estimate of discounted future net cash flows from proved oil and gas
reserves could change in the near term. If oil and gas prices decline in the
future, even if only for a short period of time, it is possible that impairments
of oil and gas properties could occur. In addition, it is reasonably possible
that impairments could occur if costs are incurred in excess of any increases in
the cost ceiling, revisions to proved oil and gas reserves occur, or if
properties are sold for proceeds less than the discounted present value of the
related proved oil and gas reserves.
Colombia operations -- During the quarter ended March 31, 2003,
approximately 25% of Harken's consolidated revenues were generated from sales to
Ecopetrol, the state-owned Colombian oil company. The country of Colombia is
currently experiencing heightened security issues which could affect Global's
Colombian operations as well as the strength and operations of Ecopetrol. If
Ecopetrol experiences significant adverse conditions in its operations, it may
not be able to meet its ongoing financial obligations to Global for delivered
production or be able to purchase future production under the terms of existing
contract provisions. Global's Colombian operations could also be directly
affected by guerilla activity or other instances or threats of violence,
preventing or interrupting Global from producing, transporting or delivering
future production volumes.
Valuation of accounts receivable -- Harken sells its domestic oil and gas
production to a broad and diverse group of industry partners, and as a whole, do
not represent a significant credit risk. In addition, Harken charges certain
industry partners, who participate in Harken-operated wells, with their share of
drilling costs and operating expenses. In determining a reserve for potential
losses in collection of its accounts receivable, Harken considers, among other
factors, the current financial condition of its industry partners in light of
current industry conditions. In the event of a significant decline in oil and
gas prices, many of our industry partners may not be able to meet their ongoing
financial obligations to Harken or be able to meet the terms of existing
contract provisions.
Classification of long- term debt -- On December 6, 2002, certain of
Harken's domestic subsidiaries (the "Borrowers") and Harken, entered into a
three-year credit facility with Guaranty Bank FSB ("Guaranty")
23
which is secured by substantially all of Harken's domestic oil and gas
properties and a guarantee from Harken. The Guaranty credit facility replaced
the credit facility with Bank One, N.A. previously held by Harken and certain of
its domestic subsidiaries. Harken's bank credit facility with Guaranty requires
the Borrowers to maintain certain financial covenant ratios and requirements, as
calculated on a quarterly basis. Harken and the Borrowers were in compliance
with these financial covenant ratios and requirements as of March 31, 2003. If
the Borrowers are not in compliance with the bank financial covenant ratios or
requirements in the future and are unable to obtain a waiver or amendment to the
facility requirements, the credit facility would be in default and callable by
Guaranty. In addition, due to cross-default provisions in Harken's 5% Senior
Convertible Notes due 2003 (the "5% European Notes"), 7% Senior Convertible
Notes (the "7% European Notes") and the 5% Convertible Notes Due 2003 (the "Benz
Convertible Notes"), substantially all of Harken's debt obligations would become
due in full if any debt is in default. The classification of Harken's long-term
debt obligations at March 31, 2003 reflects Harken's expectations that future
operating results will result in the Borrowers being in compliance with the bank
financial covenant ratios and requirements in future quarters. However,
expectations of future operating results and continued compliance with financial
covenants cannot be assured and the actions of Harken's lenders are not
controllable by Harken. If Harken's projections of future operating results are
not achieved and Harken's debt is placed in default, Harken would experience a
material adverse impact on its financial position and results of operations.
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 condensed financial
statements.
Three Months Ended
March 31,
-----------------------
2002 2003
---------- ----------
(unaudited)
Operating Revenues
Domestic Exploration and Production Operations
Gas sales revenues $2,467,000 $3,429,000
Gas volumes in mcf 975,000 532,000
Gas price per mcf $ 2.53 $ 6.45
Oil sales revenues $1,321,000 $2,104,000
Oil volumes in barrels 65,000 63,000
Oil price per barrel $ 20.32 $ 33.40
Colombian Exploration and Production Operations
Oil sales revenues $1,638,000 $1,845,000
Oil volumes in barrels 131,000 73,000
Oil price per barrel $ 12.50 $ 25.27
Other Revenues
Interest income $ 16,000 $ 14,000
Other income $ 50,000 $ 18,000
For the quarter ended March 31, 2003 compared with the corresponding prior
period.
24
North American Operations
Domestic gross oil and gas revenues during the first quarter of 2003 relate
to the operations in the onshore and offshore areas of the Texas and Louisiana
Gulf Coast and the Western and Panhandle regions of Texas. In February 2002, a
wholly owned subsidiary of Harken sold interests in oil and gas producing
properties located in Texas for approximately $910,000. In March 2003, another
wholly owned subsidiary of Harken sold interests in oil and gas producing
properties located in Louisiana for approximately $660,000.
Domestic gas revenues increased 39% to $3,429,000 for the three months
ended March 31, 2003 compared to $2,467,000 for the prior year period due to the
increase in average gas prices received during the first quarter of 2003, as
Harken received an overall average price of $6.45 per mcf of gas during the
first quarter of 2003 compared to $2.53 per mcf received during the first
quarter of 2002. Such increases in natural gas prices offset a decrease of
approximately 45% in gas production volumes related to sales of gas properties
in 2002.
Domestic oil revenues increased 59% to $2,104,000 during the first quarter
of 2003 compared to $1,321,000 during the first quarter of 2002 primarily due to
increased oil prices, which averaged $33.40 during the current year quarter
compared to $20.32 during the prior period. Domestic oil production volumes
decreased 3% during the first quarter of 2003 compared to the prior year period.
Domestic oil and gas operating expenses consist of lease operating expenses
and a number of production and reserve based taxes. Domestic oil and gas
operating expenses decreased 13% to $1,636,000 during the first quarter of 2003
compared to $1,885,000 during the prior year period primarily due to the above
sale of properties in 2002. Oil and gas operating expenses decreased, however,
as a percentage of related oil and gas revenues due primarily to the increase in
oil and gas prices during the first quarter of 2003 compared to the prior year
period. Oil and gas operating expenses increased per unit of production due to
the production taxes which are based primarily on oil and gas revenues.
Middle American Operations
Global's Colombian oil revenues have increased 13% from $1,638,000 during
the first quarter of 2002 to $1,845,000 during the first quarter of 2003. During
the first quarter of 2002 and 2003, primarily all of Global's Colombian
operating revenues consisted of production from the Bolivar and Alcaravan
Association Contract areas. In the first quarter of 2003, Global's operating
revenues also consisted of production from the Bocachico contract as well. Oil
prices averaged $25.27 per barrel during the first quarter of 2003 compared to
$12.50 per barrel during the first quarter of 2002. Global's oil volumes
declined in the first quarter of 2003 as compared to the prior year period due
to production declines on Global's other producing wells.
25
On March 26, 2003, Global initiated production from the Canacabare #1
located in Global's Alcaravan Association Contract block in the Llanos Basin of
Eastern Colombia. The well was drilled in 1998 and recorded oil shows in the
Carbonera "C-7" sand. Because of poor weather and terrain conditions during the
remainder of 1998 and 1999 the well was not completed until 2000. In March 2003,
Global completed the installation and commissioned a 26 km pipeline connecting
the well to Global's nearby Palo Blanco field. Global initiated production from
the Canacabare #1 on March 24, 2003.
On April 29, 2003, Global announced it had perforated and tested the Upper
Mirador zone from 8,263 to 8,267 feet in its Cajaro #1 well on Global's Cajaro
Association Contract in Colombia. The Upper Mirador zone, which contains what
appears to be 20 feet of producible hydrocarbon thickness, tested at over 700
gross barrels of oil per day. Global placed the Cajaro #1 well on production
effective in May 2003. Through the discovery and successful testing of the Upper
Mirador zone, Global has now established a new productive reservoir in Global's
Palo Blanco field. Global also tested the Upper Massive Ubaque formation of the
Cajaro 1 well, which it found to not be commercially productive.
Middle American operating expenses have decreased 10% from $435,000 during
the first quarter of 2002 to $391,000 for the first quarter of 2003, primarily
as a result of Global's efforts to reduce field contract labor and equipment
rentals.
Interest and Other Income
Interest and other income decreased during the first quarter of 2003
compared to the prior year period due to Harken's usage of cash during 2002.
Harken generated approximately $14,000 of interest income during the first
quarter of 2003, compared to approximately $16,000 of interest income during the
first quarter of 2002. Additional decreases in Harken's cash balances could be
mitigated or offset by additional capital sources.
Other Costs and Expenses
General and administrative expenses increased slightly during the first
quarter of 2003 compared to the first quarter of 2002 despite personnel and
salary reductions in 2002. The increase in general and administrative costs was
due to legal and professional costs in the first quarter of 2003 associated with
Harken's capital restructuring plan. Harken has taken additional steps to
further reduce personnel costs through personnel reductions and to achieve other
administrative cost efficiencies beginning in the second quarter of 2003.
Depreciation and amortization expense decreased during the first quarter of
2003 compared to the prior year period primarily due to decreased production
volumes 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.
Interest expense and other increased during the first quarter of 2003
compared to the prior year period. During the first quarter of 2003, Harken
expensed the remaining unamortized issuance costs of approximately $740,000
related to the issuance of warrants to purchase Global ordinary shares owned by
Harken, which were issued to Lyford in consideration for the Investor Term Loan
which was paid in full in March 2003. Harken also expensed approximately
$356,000 associated with the mark to market of its natural gas contract which is
26
not designated as a hedge under the Statement of Financial Accounting Standard
No. 133, "Accounting for Derivative Instruments and Hedging Activities." In
addition, interest and other expense increased compared to the prior period
because during the first quarter of 2003, Harken expensed an unrealized holding
loss of $488,000 on its investment in shares of New Opportunities Investment
Trust PLC, as Harken believes the decline in market value of those shares is
other than temporary.
LIQUIDITY AND CAPITAL RESOURCES
Harken's negative working capital at March 31, 2003 was approximately $19
million, compared to negative working capital of approximately $33.5 million at
December 31, 2002. Working capital is the difference between current assets and
current liabilities. Harken's working capital was negative at March 31, 2003 and
December 31, 2002 primarily because of the classification as current liabilities
of a total principal amount of approximately $19.7 million and $34.6 million,
respectively, of the 5% European Notes and Benz Convertible Notes (collectively,
the "5% Notes"). As of March 31, 2003, approximately $14.1 million principal
amount of Harken's outstanding 5% European Notes that are due in May 2003,
approximately $5.7 million principal amount of the Benz Convertible Notes due in
November 2003 and approximately $1.7 million principal amount of the Waverley
Note due in September 2003 were classified as current liabilities. Approximately
$1.2 million of the Guaranty credit facility outstanding balance has also been
reflected as a current liability at March 31, 2003 due to the monthly borrowing
base reductions of $200,000 which began January 1, 2003 and the current
outstanding letters of credit which have reduced the available borrowing base,
which was redetermined as of May 1, 2003.
Assisted by strong oil and gas prices during the three months ended March
31, 2003, Harken's operations provided approximately $1.3 million of cash flow
during the period. Harken's cash resources at March 31, 2003 totaled
approximately $6.3 million. Global anticipates that its international capital
expenditures could total up to approximately $8.0 million during 2003. Harken
also anticipates domestic capital expenditures could total up to approximately
$4.0 million during 2003. Harken's future exploration, development and
acquisition efforts are expected to be funded through a combination of cash on
hand, cash flows from operations, issuances or exchanges of debt or equity
securities, and cash provided by newly established financing arrangements. A
majority of Harken's future domestic and Global's planned international capital
expenditures are discretionary and, as a result, will be curtailed if sufficient
funds are not available. Such expenditure curtailments, however, could result in
Harken losing certain prospect acreage or reducing its interest in future
development projects.
Net cash from financing activities during this period totaled approximately
$378,000 and consisted of approximately $3.0 million raised through the issuance
of Harken's 7% European Notes, approximately $4.6 million in net cash proceeds
from the issuance of Harken common stock associated with the rights offering and
standby purchase agreement, offset by approximately $7.3 million in repayments
of debt and 5% European Notes. Net cash used in investing activities during 2003
totaled approximately $1.7 million and was primarily comprised of approximately
$2.4 million in capital expenditures offset by approximately $660,000 received
upon the sale of producing domestic oil and gas properties.
Convertible Note Commitments in 2003 and Capital Restructuring
5% European Notes -- On May 26, 1998, Harken issued to qualified purchasers
a total of $85 million of its 5% European Notes, which mature on May 26, 2003.
Since issuance, and as of May 14, 2003, Harken
27
has repurchased or exchanged an aggregate of approximately $70.9 million
principal amount of the 5% European Notes, of which approximately $26.9 million
in principal amount of the 5% European Notes was repurchased in 2002 and 2003
for cash and/or in exchange for 7% European Notes. Interest incurred on the 5%
European Notes is payable semi-annually in May and November of each year to
maturity or until the 5% European Notes are redeemed, converted or purchased by
Harken prior to their maturity.
At its annual stockholder meeting held January 29, 2003, Harken received
stockholder approval in connection with the potential issuance of Harken common
stock to redeem up to $20 million of the 5% European Notes, in accordance with
guidelines of the American Stock Exchange that apply to transactions involving
the potential issuance below market value of at least 20% of a company's
outstanding shares. On April 25, 2003, Harken issued a notice of redemption for
the remaining outstanding principal amount of 5% European Notes for shares of
Harken's common stock. The date of the redemption is May 26, 2003. Each 5%
European Note outstanding on May 26, 2003 will be redeemed for the number of
shares of common stock equal to 115% of the principal amount of the notes to be
redeemed, plus accrued and unpaid interest thereon to the date of redemption,
divided by approximately $0.35 (the average market price of the common stock
over the 30 calendar days immediately preceding the date of the notice of the
redemption). As of May 14, 2003, there is approximately $14.1 million principal
amount of 5% European Notes outstanding, which would result in an issuance of up
to approximately 47.8 million shares of common stock upon redemption. The amount
of the 5% European Notes to be redeemed is likely to decrease prior to the
redemption date as Harken has pursued and is continuing to actively pursue
negotiated transactions to reduce the balance of the notes through exchanges and
repurchases.
Benz Convertible Notes -- On December 30, 1999, Harken issued $12,000,000
principal amount of its Benz Convertible Notes in exchange for certain prospects
acquired from Benz Energy, Incorporated ("Benz"). The Benz Convertible Notes
originally were to mature on May 26, 2003. In March 2000, the maturity date of
certain of the Benz Convertible Notes was extended to November 26, 2003. Since
issuance and as of May 14, 2003, Harken has repurchased or redeemed an aggregate
of approximately $6.3 million principal amount of the Benz Convertible Notes for
cash and/or Harken common stock, of which approximately $5.2 million was
repurchased in 2002. As of May 14, 2003, the outstanding principal balance of
Benz Convertible Notes was approximately $5.7 million and has a maturity date of
November 26, 2003.
The Benz Convertible Notes bear interest at 5% per annum, payable
semi-annually in May and November of each year until maturity or until the Benz
Convertible Notes are redeemed, converted or repurchased by Harken prior to
their maturity. Beginning November 26, 2002, Harken may redeem up to 50% of the
Benz Convertible Notes then outstanding in exchange for shares of Harken common
stock. At maturity on November 26, 2003, Harken may similarly redeem all
remaining outstanding Benz Convertible Notes for shares of Harken common stock.
If Harken elects to redeem the Benz Convertible Notes for shares of its common
stock, each note will be redeemed for a number of shares of Harken common stock
equal to 115% of the principal amount of the note to be redeemed, plus accrued
and unpaid interest thereon to the date of redemption, divided by the average
market price of the stock over the 30 calendar days immediately preceding the
date of the notice of redemption.
Waverley Note -- On March 18, 2003, Harken issued to Waverley Investments
Limited ("Waverley") a promissory note in the principal amount of $1,705,000
(the "Waverley Note"), which matures on September 1, 2003. The Waverley Note
will only bear interest during any period of default. The Waverley Note may be
redeemed for cash at Harken's option, at par, in whole or in part, upon not less
than 30 days notice to the holders. The Waverley Note may be redeemed for shares
of Harken common stock on September 1, 2003. If
28
Harken elects to redeem the Waverley Note for shares of its common stock, the
note will be redeemed for a number of shares of Harken common stock equal to
100% of the principal amount of the note to be redeemed, plus default interest,
if any, divided by the average market price of the common stock over all stock
exchange business days during August 2003.
Capital Restructuring - In 2003, Harken's most significant capital
commitment is satisfying its remaining obligations under the 5% European Notes,
the Waverley Note and the Benz Convertible Notes, which mature in May 2003,
September 2003 and November 2003, respectively. Harken's management has been
actively working to repurchase and/or restructure the indebtedness represented
by the 5% Notes in advance of their scheduled maturity dates in 2003.
Currently, Harken does not have sufficient funds to pay the Benz
Convertible Notes and the Waverley Notes in cash upon maturity. Harken's
management plans to continue to actively pursue negotiated transactions to
repurchase and/or restructure the Benz Convertible Notes. These efforts are
expected to primarily include exchanging the Benz Convertible Notes for debt or
equity securities and raising funds through the issuance of debt or equity
securities in order to repurchase the Benz Convertible Notes for cash.
Additionally, Harken intends to repay the Waverley Note in cash prior to or upon
maturity of the Waverley Note. It is not assured, however, that the entire
principal balance of the Benz Convertible Notes will be restructured or
repurchased for cash and/or other securities or property prior to maturity.
Consequently, Harken presently intends to satisfy its remaining obligations
under the Benz Convertible Notes by redeeming them in exchange for Harken common
stock. To the extent the Waverley Note remains outstanding at maturity Harken
similarly plans to redeem it for Harken common stock. Although there can be no
assurances, Harken believes that it will repurchase and restructure a sufficient
amount of the Benz Convertible Notes, if necessary to enable Harken to redeem
the remaining principal balance of the Benz Convertible Notes upon maturity for
Harken common stock without requiring stockholder approval of additional
authorized shares. However, depending on Harken's success in repurchasing or
restructuring the Benz Convertible Notes and the future market price of its
common stock, Harken may not have a sufficient number of authorized but unissued
shares of Harken common stock to redeem the remaining Benz Convertible Notes for
common stock. At the present market price of Harken common stock, Harken has a
sufficient number of authorized shares to allow Harken to redeem the Benz
Convertible Notes and the Waverley Note for common stock. However, if the market
price of Harken common stock declines significantly, then depending on the
amount of the Benz Convertible Notes and the Waverley Note outstanding, Harken
may be required to seek stockholder approval of an additional increase in
authorized shares before Harken could redeem the remaining Benz Convertible
Notes and the Waverley Note.
Other Capital Commitments
North American Commitments -- As a result of Harken's ongoing capital
restructuring discussed above, Harken's domestic operating strategy includes
efforts to increase its oil and gas reserves in North America through
acquisitions and development, with a decreased emphasis on exploration drilling
activities. Accordingly, Harken's North American capital expenditure plans have
been reduced compared to historical levels. Harken anticipates North American
capital expenditures could total up to approximately $4.0 million during 2003,
however, Harken's planned North American capital expenditures for 2003 are
discretionary and, as a result, will be curtailed if sufficient funds are not
available. Such expenditure curtailments, however, could result in Harken losing
certain prospect acreage or reducing its interest in future development
projects.
Middle American Commitments -- Global anticipates that its international
capital expenditures will total approximately $8.0 million during 2003.
Approximately $3.0 million of these capital expenditures result
29
from commitments under the terms of certain of the Association Contracts entered
into between Global's subsidiary Harken de Colombia, Ltd. and Ecopetrol, (a
majority of which was satisfied during the first quarter of 2003 with the
drilling of the Cajaro #1 well in Colombia), as well as scheduled capital
expenditure commitments related to its TEA Agreements in Peru and Panama. These
contracts require Global to perform certain activities in Colombia in accordance
with a prescribed timetable. Failure by Global to perform these activities as
required could result in Global losing its rights under the particular contract,
which could have a material adverse effect on Harken's business. As of May 14,
2003, Global was in compliance with the requirements of each of the Association
Contracts and TEA Agreements. In light of the political and judicial
developments in Costa Rica discussed above, Global is projecting no capital
expenditure plans during 2003 with regard to the Costa Rica Contract. Global's
planned international capital expenditures for 2003 also include approximately
$5.0 million of discretionary expenditures. These discretionary expenditures
will be curtailed if sufficient funds are not available. Such expenditure
curtailments, however, could result in Global losing certain prospect acreage or
reducing its interest in future development projects.
7% European Notes -- As of May 14, 2003, Harken has issued a total of
approximately $17.9 million in principal amount of its 7% European Notes, of
which approximately $1.6 million matures on June 30, 2006 and approximately
$16.3 matures on March 31, 2007. Harken issued the 7% European Notes in the
following transactions during the three months ended March 31, 2003:
. On January 28, 2003, Harken issued a total of $1,420,000 principal
amount of 7% European Notes due 2007 in exchange for $1,420,000
principal amount of 5% European Notes.
. On February 13, 2003, Harken issued a total of $1,600,000 principal
amount of 7% European Notes due 2006 to certain investors in exchange
for $2,000,000 principal amount of the 5% European Notes.
. On March 18, 2003, Harken issued $3,410,000 principal amount of 7%
European Notes due 2007 and the Waverley Note to Waverley in exchange
for 17,050 shares of Harken's Series G-1 convertible preferred stock
owned by an affiliate of Waverley, and $3,410,000 in cash.
The 7% European Notes due 2007 mature on March 31, 2007 and rank equal to
the 5% European Notes. Interest incurred on the 7% European Notes due 2007 is
payable semi-annually in March and September of each year to maturity or until
these 7% European Notes are redeemed, converted or purchased by Harken prior to
their maturity. Upon the registration of the underlying Harken common stock
issuable upon conversion, the 7% European Notes due 2007 are convertible into
shares of Harken common stock at an initial conversion price of $0.50 per share,
subject to adjustment in certain circumstances (the "2007 7% European Note
Conversion Price"). Following the February 2003 announcement of the terms of the
rights offering, the 2007 7% European Note Conversion Price was adjusted to
$0.36 per share, effective January 31, 2003, for all 7% European Notes due 2007
outstanding on that date. The 7% European Notes due 2007 are also convertible by
Harken into shares of Harken common stock if, for any period of 30 consecutive
days commencing upon registration of the underlying conversion shares, the
average of the closing prices of Harken common stock for each trading day during
such 30-day period shall have equaled or exceeded 125% of the 2007 7% European
Note Conversion Price (or $0.45 per share of Harken common stock effective
January 31, 2003).
The 7% European Notes due 2007 may be redeemed at Harken's option, at any
time and from time to
30
time, in whole or in part, for cash equal to the outstanding principal and
accrued interest to the date of redemption, upon not less than 30 days notice to
the noteholders. In addition, beginning March 31, 2006, Harken may redeem up to
50% of the then outstanding 7% European Notes due 2007 for shares of Harken
common stock, and at maturity, on March 31, 2007, Harken may similarly redeem
all remaining outstanding 7% European Notes due 2007 for shares of Harken common
stock, in each case upon not less than 30 days notice to the noteholders. If
Harken elects to redeem the 7% European Notes due 2007 for shares of its common
stock, each note will be redeemed for a number of shares of Harken common stock
equal to 110% of the principal amount of the notes to be redeemed, plus accrued
and unpaid interest thereon to the date of redemption, divided by the average
market price of the stock over the 120 business days immediately preceding the
date of the notice of redemption.
The 7% European Notes due 2006 mature on June 30, 2006 and also rank equal
to the 5% European Notes. Interest incurred on the 7% European Notes due 2006 is
payable semi-annually in June and December of each year to maturity or until the
7% European Notes due 2006 are redeemed, converted or purchased by Harken prior
to their maturity. Upon the registration of the underlying Harken common stock
issuable upon conversion, the 7% European Notes are convertible into shares of
Harken common stock at an initial conversion price of $0.40 per share. The
initial conversion price will be reset on February 2, 2004 to equal 115% of the
average market price of Harken common stock for the 20 business days immediately
preceding such date. The 7% European Notes due 2006 may be redeemed at Harken's
option, at any time and from time to time, in whole or in part, for cash equal
to the outstanding principal and accrued interest to the date of redemption,
upon not less than 30 days notice to the noteholders.
Guaranty Bank Facility -- On December 6, 2002, certain of Harken's domestic
subsidiaries (the "Borrowers") and Harken entered into a three-year loan
facility with Guaranty Bank FSB ("Guaranty"), which is secured by substantially
all of Harken's domestic oil and gas properties and a guarantee from Harken. The
initial proceeds advanced under the Guaranty credit facility were used to repay
in full the outstanding principal and interest owed under the credit facility
with Bank One, N.A. previously held by Harken and certain of its domestic
subsidiaries. The Guaranty credit facility provides borrowings limited by a
borrowing base (as defined by the Guaranty credit facility) which was $7,100,000
and $6,010,000, as of December 31, 2002 and March 31, 2003 respectively. Such
borrowing base, which is net of outstanding letters of credit, is redetermined
by Guaranty on May 1 and November 1 of each year in accordance with the credit
facility agreement. Effective May 1, 2003, the redetermined borrowing base is
$7,100,000. If, based on any future redetermination, the borrowing base is
reduced by Guaranty, then the Borrowers would be required to repay any amount by
which the outstanding balance of the credit facility exceeds the borrowing base
or provide additional collateral satisfactory to Guaranty within 30 days
following notice by Guaranty of such determination. The borrowing base is being
reduced by $200,000 per month. Due to these scheduled borrowing base reductions,
the current outstanding letters of credit and the redetermined borrowing base as
of May 1, 2003, Harken has reflected $1,200,000 of the credit facility amount as
a current liability at March 31, 2003. At December 31, 2002 and March 31, 2003,
Harken has $5,986,000 and $5,610,000, respectively, outstanding pursuant to the
credit facility. Guaranty's commitments under the credit facility terminate on
December 6, 2006.
Harken's bank credit facility with Guaranty prohibits cash dividends,
loans, advances and similar payments to be made to Harken by the Borrowers.
Therefore, the Borrowers are not able to provide Harken with funds to be used
for the repayment of Harken's debt or for other uses, unless the Borrowers
obtain Guaranty's consent. The Guaranty credit facility also requires the
Borrowers to maintain certain financial covenant ratios and requirements, as
calculated on a quarterly basis. Harken and the Borrowers were in
31
compliance with all requirements under the Guaranty credit facility as of March
31, 2003. If the Borrowers are not in compliance with their bank financial
covenant ratios or requirements in the future and are unable to obtain a waiver
or amendment to the credit facility requirements, the credit facility would be
in default and callable by Guaranty. In addition, due to cross-default
provisions in Harken's 5% European Notes, 7% European Notes, Benz Convertible
Note and the Waverley Note, substantially all of Harken's debt obligations would
become due in full if any debt is in default. Expectations of continued
compliance with financial covenants cannot be assured and Guaranty's actions are
not controllable by Harken. If Harken's projections of future operating results
are not achieved and its debt is placed in default, Harken would experience a
material adverse impact on its financial position and results of operations.
Operational Contingencies -- Harken's operations are subject to stringent
and complex environmental laws and regulations governing the discharge of
materials into the environment or otherwise relating to environmental
protection. These laws and regulations are subject to changes that may result in
more restrictive or costly operations. Failure to comply with applicable
environmental laws and regulations may result in the imposition of
administrative, civil and criminal penalties or injunctive relief. Global's
international oil and gas exploration and production operations, including well
drilling and seismic activities, require specific governmental environmental
licenses and permits, the acquisition of which in the past have been subject to
extensive delays. Global may continue to experience similar delays in the
future. Failure to obtain these licenses and permits in a timely manner may
prevent or delay Harken's and Global's operational plans.
Harken and its subsidiaries currently are involved in various lawsuits and
other contingencies, which in management's opinion, will not result in a
material adverse effect upon Harken's financial condition or operations taken as
a whole.
32
Consolidated Contractual Obligations - The following table presents a
summary of Harken's contractual obligations and commercial commitments as of May
14, 2003. Harken has no off-balance sheet obligations other than in the table
set forth below.
Payments Due by Period
-----------------------------------------------------------------------------
Contractual Obligations 2003 2004 2005 2006-2007 Thereafter Total
---------- ---------- ---------- ----------- ---------- -----------
Bank Credit Facility/(1)/ $ 600,000 $2,400,000 $2,610,000 $ -- $ -- $ 5,610,000
Operating Leases/(2)/ 698,000 681,000 681,000 568,000 -- 2,628,000
Middle American
Commitments/(3)/ 200,000 -- -- -- -- 200,000
North American
Commitments/(4)/ -- -- -- -- -- --
Convertible Notes
Payable/(5)/ 5,669,000 -- -- 17,912,000 -- 23,581,000
Waverley Note 1,705,000 -- -- -- -- 1,705,000
---------- ---------- ---------- ----------- ---------- -----------
Total Contractual Cash
Obligations $8,872,000 $3,081,000 $3,291,000 $18,480,000 $ -- $33,724,000
========== ========== ========== =========== ========== ===========
(1) Amounts shown do not reflect impact of November 2003 borrowing base
redetermination.
(2) Amount net of sublease arrangements in effect at March 31, 2003.
(3) Represents the remaining geological and geophysical work requirements under
Global's Peru TEA and Panama TEA. The amount of Global's future
international capital expenditures for 2003 set forth in the above table
does not include approximately $5.0 million of discretionary expenditures.
These discretionary expenditures will be curtailed if sufficient funds are
not available. Such expenditure curtailments, however, could result in
Global losing certain prospect acreage or reducing its interest in future
development projects.
(4) Harken plans North American capital expenditures of $4.0 million for 2003.
However, these capital expenditures are discretionary and, as a result,
will be curtailed if sufficient funds are not available. Such expenditure
curtailments, however, could result in Harken losing certain prospect
acreage or reducing its interest in future development projects.
(5) Represents the outstanding obligations owing under the Benz Convertible
Notes and the 7% European Notes as of May 14, 2003. These obligations are
payable or redeemable for cash or with shares of Harken common stock.
In addition to the above commitments, during 2003 and afterward, government
authorities under Harken's Louisiana state leases and operators under Harken's
other North American operations may also request Harken to participate in the
cost of drilling additional exploratory and development wells. Harken may fund
these future domestic expenditures at its discretion. Further, the cost of
drilling or participating in the drilling of any such exploratory and
development wells cannot be quantified at this time since the cost will depend
on many factors outside of Harken's control, such as the timing of the request,
the depth of the wells and the location of the property. Harken's discretionary
capital expenditures for 2003 will be curtailed if Harken does not have
sufficient funds available. If Harken does not have sufficient funds or
otherwise chooses not to participate, it may experience a delay of future cash
flows from proved undeveloped oil and gas reserves. Such expenditure
curtailments could also result in Harken losing certain prospect acreage or
reducing its
33
interest in future development projects.
Capital Sources - Rights Offering
Rights Offering -- In February 2003, Harken distributed to holders of its
common stock, Series G1 preferred stock and Series G2 preferred stock, at no
charge, nontransferable subscription rights to purchase shares of its common
stock. Such holders received one subscription right for each share of common
stock they owned (or in the case of the Series G1 preferred stock and Series G2
preferred stock, one subscription right for each share of common stock issuable
upon conversion) at the close of business on January 30, 2003. Harken
distributed 32,154,867 subscription rights exercisable for up to 72,885,437
shares of common stock.
All unexercised subscription rights expired at 12:00 midnight, New York
City time, on March 13, 2003. Each subscription right entitled the holder to
purchase 2.2667 shares of Harken common stock at a subscription price of $0.311
per right (or $0.1372 per share). In connection with the rights offering,
subscription rights were exercised for 13,169,779 shares of common stock for an
aggregate purchase price of approximately $1,807,000. Pursuant to a standby
purchase agreement, on March 20, 2003, Lyford purchased the remaining
unsubscribed shares of common stock offered in the rights offering at the
subscription price.
As a result of the standby commitment, Lyford purchased 59,716,227 shares
of common stock from Harken for an aggregate purchase price of approximately
$8,193,000. Lyford paid approximately $3,185,000, net of the $5,000,000
outstanding under the Lyford 10% Term Loan, plus accrued interest, in cash to
Harken at the closing of the standby commitment. As a result, no amounts remain
outstanding under the 10% Term Loan. After giving effect to the consummation of
Harken's rights offering and Lyford's standby commitment, Lyford has become the
holder of approximately 62% of Harken's outstanding common stock. Therefore,
these transactions resulted in a change of control of Harken. Lyford has the
voting power to control the election of Harken's board of directors and the
approval of other matters presented for consideration by the stockholders, which
could include mergers, acquisitions, amendments to Harken's charter and various
corporate governance actions. In April 2003, Lyford purchased $1,980,000
principal amount of Harken's 5% European Notes in a privately negotiated
transaction with the holders of such notes. Pursuant to Harken's notification of
redemption of the 5% European Notes for shares of Harken common stock, Lyford is
entitled to receive 6,714,031 shares of Harken common stock issuable upon
redemption of the 5% European Notes it holds.
Harken used the remaining proceeds of the rights offering and the standby
commitment to pay a portion of the exercise prices under call options with the
Investors and HBK. Under these call options, the Investors and HBK sold an
aggregate of $11.5 million principal amount of 5% European Notes at an aggregate
cash option price of approximately $6.9 million, plus accrued and unpaid
interest through the date of payment.
Lyford has advised Harken that it does not currently intend to resell any
shares of common stock, including any shares acquired in the rights offering,
but rather intends to retain such shares for investment purposes. Lyford has
advised Harken, however, that any determination to retain its interest in Harken
will be subject to the continuing evaluation by Lyford of pertinent factors
related to its investment in Harken. Depending upon the continuing assessment of
these factors from time to time, Lyford may change its present intentions and
may determine to acquire additional shares of common stock (by means of open
market or privately negotiated purchases or otherwise) or to dispose of some or
all of the shares of common stock or warrants held by Lyford and its partners.
Alan G. Quasha, a Lyford representative, was elected as the new Chairman of
Harken's board of directors to be effective March 31, 2003. Mr. Quasha filled
the vacancy created by the resignation, effective March 31, 2003 of Stephen C.
Voss as a director and he will serve the
34
unexpired term of Mr. Voss. Mr. Quasha will replace Mikel D. Faulkner as
Chairman, with Mr. Faulkner continuing as a director of Harken.
Capital Sources - Other Offerings
Global's ordinary shares are admitted for trading on the AIM Exchange in
London. This may enable Global to seek additional financing and effect
acquisition activities using shares of Global stock or enable Harken to sell a
portion of its Global common stock for cash. Global's ability to effectively use
its common stock will be dependent upon the market value and liquidity of its
shares on the AIM Exchange. Global is also pursuing raising additional capital
through potential sales of pipe inventory. Additional capital raised by Global
would be used exclusively for Global's capital needs, as cash dividends to
Harken may be limited by tax restrictions. In December 2002, Harken exchanged
2,000,000 of its shares of Global common stock for 1,232,742 of the redeemable
ordinary shares of NOIT. This exchange reduced Harken's ownership of Global to
approximately 85.62%.
Additionally, on March 18, 2003, Harken issued $3,410,000 in principal
amount of the 7% European Notes due 2007 and $1,705,000 in principal amount of
the Waverley Note in exchange for 17,050 shares of Harken's Series G-1
convertible preferred stock owned by Perry Limited, an affiliate of Waverley,
and $3,410,000 in cash.
In addition to the above sources, Harken has raised and may continue to
raise capital through the issuance of debt, equity and convertible debt
instruments, or through the exchange of existing instruments through
transactions that could provide Harken with additional capital.
Other Capital Sources
During 2002, Harken sold certain domestic producing property and mineral
interests for approximately $2,574,000. Global sold some oil storage tanks in
the fourth quarter of 2002 for approximately $259,000. During the first quarter
of 2003, Harken sold certain domestic producing property interest for
approximately $660,000.
During the first quarter of 2003 and through May 14, 2003, Harken's oil and
gas revenues have been strengthened by commodity prices which have averaged
higher than those received during 2002. Harken's domestic operating cash flows
are particularly dependent on the commodity prices, which Harken is unable to
predict.
Global's operating cash flows continue to be provided by ongoing production
from its Alcaravan, Bolivar and Bocachico Contract areas in Colombia.
Adequacy of Capital Sources
Benz Convertible Notes and Waverley Note -- Currently, Harken does not have
sufficient funds to pay the Benz Convertible Notes and the Waverley Note in cash
upon maturity. As described below Harken's management plans to continue to
actively pursue negotiated transactions to repurchase and/or restructure the
Benz Convertible Notes. These efforts are expected to primarily include
exchanging the Benz Convertible Notes for debt or equity securities and raising
funds through the issuance of debt or equity securities to be used to repurchase
the Benz Convertible Notes for cash. Additionally, Harken intends to repay the
Waverley Note in
35
cash prior to or upon maturity of the Waverley Note. It is not assured, however,
that the entire principal balance of the Benz Convertible Notes will be
restructured or repurchased for cash and/or other securities or property prior
to maturity. Consequently, Harken presently intends to satisfy its remaining
obligations under the Benz Convertible Notes by redeeming them in exchange for
Harken common stock. To the extent the Waverley Note remains outstanding at
maturity Harken similarly plans to redeem it for Harken common stock. Although
there can be no assurances, Harken believes that it will repurchase and
restructure a sufficient amount of the Benz Convertible Notes to enable Harken
to redeem the remaining principal balance of the Benz Convertible Notes upon
maturity for Harken common stock without requiring stockholder approval of
additional authorized shares. However, depending on Harken's success in
repurchasing or restructuring the Benz Convertible Notes and the future market
price of its common stock, Harken may not have a sufficient number of authorized
but unissued shares of Harken common stock to redeem the remaining Benz
Convertible Notes for common stock.
As of May 14, 2003, the outstanding principal balance of the Benz
Convertible Notes and the Waverley Note was approximately $5.7 million and $1.7
million, respectively. Harken has, and plans to continue to pursue negotiated
transactions to restructure or repurchase the Benz Convertible Notes that mature
in November 2003. During 2002, Harken repurchased or exchanged an aggregate of
approximately $5.2 million principal amount of the Benz Convertible Notes.
Harken has not repurchased any of the Benz Convertible Notes during the first
quarter of 2003.
Additionally, Harken intends to repay the Waverley Note in cash prior to or
upon maturity of the Waverley Note. To the extent any of the Benz Convertible
Notes and the Waverley Note remain outstanding at maturity, however, Harken
plans to redeem them for Harken common stock.
The exact number of shares to be issued in connection with the redemption
of the Benz Convertible Notes and the Waverley Note will depend upon the amount
of the notes to be redeemed for common stock and the average market price of
Harken common stock at the time of the redemptions. Depending on the price of
Harken common stock and the success of Harken's efforts to reduce the principal
amount of the Benz Convertible Notes and the Waverley Note, the redemption of
the Benz Convertible Notes and the Waverley Note may result in an issuance of
shares that is in excess of the amount of shares currently authorized for
issuance. At the present market price of Harken common stock, Harken has a
sufficient number of authorized shares to allow Harken to redeem the Benz
Convertible Notes and the Waverley Note for common stock. However, if the market
price of Harken common stock declines significantly, then depending on the
amount of the Benz Convertible Notes and the Waverley Note outstanding, Harken
may be required to seek stockholder approval of an additional increase in
authorized shares before Harken could redeem the remaining Benz Convertible
Notes and the Waverley Note. There can be no assurances that Harken will obtain
such stockholder approval prior to the respective maturity dates of the Benz
Convertible Notes and the Waverley Note. In such an event, Harken would have to
otherwise restructure the then-outstanding Benz Convertible Notes and the
Waverley Note or pay cash at maturity. Harken can make no assurances that, in
such an event, it would be successful in restructuring its obligations under the
then-outstanding notes. Harken currently does not have sufficient funds to pay
such notes in cash upon maturity. If Harken's efforts to convert a substantial
amount of the Benz Convertible Notes and the Waverley Note into common stock is
unsuccessful or if Harken is unable to otherwise restructure or repurchase these
notes, Harken would experience a material adverse impact on its financial
position and results of operations.
Restrictions under Guaranty Facility -- Currently, Harken does not have
sufficient funds to pay the 5% Notes and the Waverley Note in cash upon
maturity. Harken's bank credit facility with Guaranty prohibits cash dividends,
loans, advances and similar payments to be made to Harken by the Borrowers.
Therefore, the
36
Borrowers will not be able to provide Harken with funds to be used for the
repayment of the Benz Convertible Notes, the Waverley Note or other debt
obligations or for other uses, unless the Borrowers obtain Guaranty's consent.
Capital Expenditures -- Considering its existing cash resources and the
potential additional capital sources described above, assuming Harken is
successful in restructuring or redeeming the Benz Convertible Notes and the
Waverley Note for Harken common stock, Harken believes that it will have
sufficient cash resources to fund all of its remaining capital expenditures
during 2003. Harken's future exploration, development and acquisition efforts
are expected to be funded through a combination of cash on hand, cash flows from
operations, issuances or exchanges of debt or equity securities, and cash
provided by newly established financing arrangements. Harken may not be able to
generate sufficient cash from operations to fund its ongoing exploration and
development efforts and fulfill its other capital commitments. Harken and Global
may fund their future domestic expenditures and certain international
expenditures at their discretion. Therefore, if Harken or Global do not have
sufficient funds available it will curtail its discretionary capital
expenditures for 2003. Such expenditure curtailments could result in Harken
losing certain prospect acreage or reducing its interest in future development
projects.
Cross Defaults -- If the Borrowers are not in compliance with their bank
financial covenant ratios or requirements under the Guaranty credit facility in
the future and are unable to obtain a waiver or amendment to the facility
requirements, the credit facility would be in default and callable by Guaranty.
Due to cross-default provisions in Harken's 7% European Notes, Benz Convertible
Note, Waverley Note and the Guaranty facility, any default under Harken's debt
agreements would result in substantially all of Harken's debt obligations
becoming due in full. Harken does not have sufficient funds to pay its debt
obligations in cash and there is no assurance it will obtain such funds if such
debt became due, which would result in a material adverse effect on Harken's
financial position and results of operations.
Other -- Harken intends to continue to seek to raise equity or debt
financing through the issuance of debt, equity and convertible debt instruments,
or through the exchange of existing instruments through transactions that
provide Harken with additional capital to fund the capital commitments described
above. Such transactions may be affected, however, by the market value of Harken
common stock. If the price of Harken common stock remains low or declines,
Harken's ability to utilize its stock either directly or indirectly through
convertible instruments for raising capital could be negatively affected. Any
delisting of Harken's common stock would also adversely affect Harken's ability
to raise capital in the future by issuing common stock or securities convertible
into common stock. Further, raising additional funds by issuing common stock or
other types of equity securities would further dilute Harken's existing
stockholders, which dilution could be substantial if the price of Harken common
stock remains low or decreases. No assurance can be given that Harken will be
able to obtain additional financing on favorable terms, if at all, to meet its
operational and capital commitments described above.
37
ITEM 4. CONTROLS AND PROCEDURES
(a) Evaluation of disclosure controls and procedures.
Harken's principal executive officer and its principal financial officer,
based on their evaluation of Harken's disclosure controls and procedures (as
defined in Rules 13a -14 (c) of the Securities Exchange Act of 1934) as of a
date within 90 days prior to the filing of this Quarterly Report on Form 10-Q,
have concluded that Harken's disclosure controls and procedures are adequate and
effective for the purposes set forth in the definition in the rules of the
Securities Exchange Act of 1934.
(b) Changes in internal controls.
There were no significant changes in Harken's internal controls or in other
factors that could significantly affect Harken's internal controls subsequent to
the date of their evaluation.
38
PART II - OTHER INFORMATION
Item 6. Exhibits and Reports on Form 8-K.
6a) EXHIBIT INDEX
Exhibit
3.1 Certificate of Incorporation of Harken Energy Corporation (filed as
Exhibit 3.1 to Harken's Current Report on Form 8-K dated February
13, 2003, File No. 1-10262, and incorporated by reference herein).
3.2 Certificate of Amendment to Certificate of Incorporation of Harken
Energy Corporation (filed as Exhibit 3.2 to Harken's Current Report
on Form 8-K dated February 13, 2003, File No. 1-10262, and
incorporated by reference herein).
3.3 Certificate of Amendment to Certificate of Incorporation of Harken
Energy Corporation (filed as Exhibit 3.3 to Harken's Current Report
on Form 8-K dated February 13, 2003, File No. 1-10262, and
incorporated by reference herein).
3.4 Certificate of Amendment to Certificate of Incorporation of Harken
Energy Corporation (filed as Exhibit 3.4 to Harken's Current Report
on Form 8-K dated February 13, 2003, File No. 1-10262, and
incorporated by reference herein).
3.5 Certificate of Amendment to Certificate of Incorporation of Harken
Energy Corporation (filed as Exhibit 3.5 to Harken's Current Report
on Form 8-K dated February 13, 2003, File No. 1-10262, and
incorporated by reference herein).
3.6 Certificate of Amendment to Certificate of Incorporation of Harken
Energy Corporation (filed as Exhibit 3.6 to Harken's Current Report
on Form 8-K dated February 13, 2003, File No. 1-10262, and
incorporated by reference herein).
3.7 Amended and Restated Bylaws of Harken Energy Corporation (filed as
Exhibit 3.7 to Harken's Annual Report on Form 10-K for fiscal year
ended December 31, 2002, File No. 1-10262, 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. 1-10262, filed with the SEC on June
1, 1989 and incorporated by reference herein).
4.2 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. 1-10262, and incorporated by
reference herein).
4.3 Amendment to Rights Agreement by and between Harken Energy
Corporation and American Stock Transfer and Trust Company
(successor to Mellon Investor Services LLC, (formerly known as
ChaseMellon Shareholder Services L.L.C.), as Rights Agent, dated
June 18, 2002 (filed as Exhibit 4.11 to Harken's Quarterly Report
on Form 10-Q for the period ended September 30, 2002, File No.
1-10262, and incorporated by reference herein).
4.4 Amendment to Rights Agreement by and between Harken Energy
Corporation and American Stock Transfer and Trust Company
(successor to Mellon Investor Services LLC, (formerly known as
ChaseMellon Shareholder Services L.L.C.), as Rights Agent, dated
August 27, 2002
39
(filed as Exhibit 4.12 to Harken's Quarterly Report on Form 10-Q
for the period ended September 30, 2002, File No. 1-10262, and
incorporated by reference herein).
4.5 Amendment to Rights Agreement by and between Harken Energy
Corporation and American Stock Transfer and Trust Company,
successor to Mellon Investor Services LLC (formerly known as
ChaseMellon Shareholder Services L.L.C.), as Rights Agent, dated
August 27, 2002. (Filed as Exhibit 4.1 to Harken's Current Report
on Form 8-K dated April 25, 2003, File No. 1-10262, and
incorporated by reference herein).
4.6 Amendment to Rights Agreement by and between Harken Energy
Corporation and American Stock Transfer and Trust Company,
successor to Mellon Investor Services LLC (formerly known as
ChaseMellon Shareholder Services L.L.C.), as Rights Agent, dated
March 11, 2003. (Filed as Exhibit 4.2 to Harken's Current Report on
Form 8-K dated April 25, 2003, File No. 1-10262, and incorporated
by reference herein).
4.7 Amendment to Rights Agreement by and between Harken Energy
Corporation and American Stock Transfer and Trust Company,
successor to Mellon Investor Services LLC (formerly known as
ChaseMellon Shareholder Services L.L.C.), as Rights Agent, dated
March 25, 2003, (filed as Exhibit 4.3 to Harken's Current Report on
Form 8-K dated April 25, 2003, File No. 1-10262, and incorporated
by reference herein).
4.8 Amendment to Rights Agreement by and between Harken Energy
Corporation and American Stock Transfer and Trust Company,
successor to Mellon Investor Services LLC (formerly known as
ChaseMellon Shareholder Services L.L.C.), as Rights Agent, dated
April 21, 2003, filed as Exhibit 4.4 to Harken's Current Report on
Form 8-K dated April 25, 2003, File No. 1-10262, and incorporated
by reference herein).
4.9 Certificate of Designations of Series E Junior Participating
Preferred Stock (filed as Exhibit A to Exhibit 4 to Harken's
Current Report on Form 8-K dated April 7, 1998, file No. 1-10262,
and incorporated by reference herein).
4.10 Certificate of Increase of Series E Junior Participating Preferred
Stock of Harken Energy Corporation (filed as Exhibit 4.6 to
Harken's Annual Report on Form 10-K for the fiscal year ended
December 31, 2002, File No. 1-10262, and incorporated by reference
herein).
4.11 Certificate of Designations of Series G1 Convertible Preferred
Stock (filed as Exhibit 3.7 to Harken's Current Report on Form 8-K
dated February 13, 2003, File No. 1-10262, and incorporated by
reference herein).
4.12 Certificate of Increase of Series G1 Convertible Preferred Stock of
Harken Energy Corporation (filed as Exhibit 3.8 to Harken's Current
Report on Form 8-K dated February 13, 2003, File No. 1-10262, and
incorporated by reference herein).
4.13 Certificate of Designations of Series G2 Convertible Preferred
Stock (filed as Exhibit 4.10 to Harken's Annual Report on Form
10-K, as amended, for the fiscal year ended December 31, 2001, File
No. 1-10262, and incorporated by reference herein).
10.1 Seventh Amendment and Restatement of Harken's Amended Stock Option
Plan (filed as Exhibit 10.1 to Harken's Annual Report on Form 10-K
for the fiscal year ended December 31, 1991, File No. 1-10262, and
incorporated by reference herein).
40
10.2 Amended and Restated Non-Qualified Incentive Stock Option Plan of
Harken adopted by Harken's stockholders on February 18, 1991 (filed
as Exhibit 10.2 to Harken's Annual Report on Form 10-K for the
fiscal year ended December 31, 1991, File No. 1-10262, and
incorporated by reference herein).
10.3 Form of Advancement Agreement dated September 13, 1990, between
Harken and each director of Harken (filed as Exhibit 10.38 to
Harken's Annual Report on Form 10-K for the fiscal year ended
December 31, 1989, File No. 1-10262, and incorporated by reference
herein).
10.4 Harken Energy Corporation's 1993 Stock Option and Restricted Stock
Plan (filed as Exhibit 4.3 to Harken's Registration Statement on
Form S-8, filed with the SEC on September 23, 1993, and
incorporated by reference herein).
10.5 First Amendment to Harken Energy Corporation's 1993 Stock Option
and Restricted Stock Plan (filed as an Exhibit 4.4 to Harken's
Registration Statement on S-8, filed with the SEC on July 22, 1996
and incorporated by reference herein).
10.6 Harken Energy Corporation's Directors Stock Option Plan (filed as
Exhibit 4.3 to Harken's Registration Statement on Form S-8, and
incorporated herein by reference).
10.7 Association Contract (Bolivar) by and between Harken de Colombia,
Ltd. and Empresa Colombia de Petroleos (filed as Exhibit 10.4 to
Harken's Quarterly Report on Form 10-Q for the quarterly period
ended June 30, 1996, and incorporated herein by reference).
10.8 Harken Energy Corporation 1996 Incentive and Nonstatutory Stock
Option Plan (filed as Exhibit 10.1 to Harken's Quarterly Report on
Form 10-Q for the quarterly period ended September 30, 1996, and
incorporated herein by reference).
10.9 Amendment No. 1 to Harken Energy Corporation 1996 Incentive and
Nonstatutory Stock Option Plan (filed as Exhibit 4.5 to Harken's
Registration Statement on Form S-8, filed with the SEC on August
19, 1997 and incorporated by reference herein).
10.10 Amendment No. 2 to Harken Energy Corporation 1996 Incentive and
Nonstatutory Stock Option Plan (filed as Exhibit 4.6 to Harken's
Registration Statement on Form S-8, filed with the SEC on August
19, 1997 and incorporated by reference herein).
10.11 Association Contract (Alcaravan) dated as of December 13, 1992, but
effective as of February 13, 1993, by and between Empresa Colombia
de Petroleos (filed as Exhibit 10.1 to Harken's Annual Report on
Form 10-K for the fiscal year ended December 31, 1992, File No.
1-10262, and incorporated herein by reference).
10.12 Association Contract (Bocachico) dated as of January 1994, but
effective as of April 1994, by and between Harken de Colombia, Ltd.
and Empresa Colombia de Petroleos (filed as Exhibit 10.1 to
Harken's Quarterly Report on Form 10-Q for the quarterly period
ended March 31, 1994, File No. 1-10262, and incorporated herein by
reference
10.13 Trust Indenture dated May 26, 1998, by and between Harken and
Marine Midland Bank plc (filed as Exhibit 10.1 to Harken's
Quarterly Report on Form 10-Q for the quarterly period ended June
30, 1998, File No. 1-10262, and incorporated herein by reference).
41
10.14 Harken Energy Corporation 5% Convertible Notes Due 2003 in the
principal sum of $6,803,679.26, dated December 30, 1999 (filed as
Exhibit 10.21 to Harken's Quarterly Report on Form 10-Q for the
period ended June 30, 2002, File No. 1-10262, and incorporated by
reference herein).
10.15 Credit Agreement, dated December 6, 2002, by and between Harken
Exploration Company, XPLOR Energy, Inc., Harken Energy West Texas,
Inc., South Coast Exploration Co., XPLOR Energy SPV-1, Inc., Harken
Gulf Exploration Company and Guaranty Bank, FSB (filed as Exhibit
10.1 to Harken's Current Report on Form 8-K dated December 6, 2002,
File No. 1-10262, and incorporated by reference herein).
10.16 Guaranty Agreement, dated December 6, 2002, by and between Harken
Energy Corporation and Guaranty Bank, FSB (filed as Exhibit 10.2 to
Harken's Current Report on Form 8-K dated December 6, 2002, File
No. 1-10262, and incorporated by reference herein).
10.17 Association Contract (Cajaro) dated as of December 2001, but
effective as of February 2002, by and between Harken de Colombia,
Ltd. and Empresa Colombia de Petroleos (filed as Exhibit 10.14 to
Harken's Annual Report on Form 10-K, as amended, for the fiscal
year ended December 31, 2001, File No. 1-10262, and incorporated by
reference herein).
10.18 Purchase and Sale Agreement dated January 31, 2002 between Republic
Resources, Inc. and Harken Energy Corporation (filed as Exhibit
10.15 to Harken's Annual Report on Form 10-K, as amended, for the
fiscal year ended December 31, 2001, File No. 1-10262, and
incorporated by reference herein).
10.19 Standby Purchase Agreement between Harken Energy Corporation and
Lyford Investments Enterprises Ltd. dated September 6, 2002 (filed
as Exhibit 99.9 to Harken's Registration Statement on Form S-3,
filed with SEC on September 13, 2002, File No. 333-99579, and
incorporated by reference herein).
10.20 Amendment No. 1 to Standby Purchase Agreement of September 6, 2002
between Harken Energy Corporation and Lyford Investments
Enterprises Ltd., dated November 22, 2002 (filed as Exhibit 99.10
to Harken's Amendment No. 1 to Registration Statement on Form S-3,
filed with the SEC on December 24, 2002 , File No. 333-99579, and
incorporated by reference herein).
10.21 Loan Agreement dated July 15, 2002 between Harken Energy
Corporation and Lyford Investments Enterprises Ltd. (filed as
Exhibit 10.18 to Harken's Quarterly Report on Form 10-Q for the
period ended June 30, 2002, File No. 1-10262, and incorporated by
reference herein).
10.22 First Amendment to Loan Agreement between Harken Energy Corporation
and Lyford Investments Enterprises Ltd., dated August 29, 2002
(filed as Exhibit 10.2 to Harken's Quarterly Report on Form 10-Q
for the period ended September 30, 2002, File No. 1-10262, and
incorporated by reference herein).
10.23 Harken Energy Corporation 7% Senior Convertible Notes Due 2007 in
the principal sum of $2,025,000, dated June 18, 2002 (filed as
Exhibit 10.19 to Harken's Quarterly Report on Form 10-Q for the
period ended June 30, 2002, File No. 1-10262, and incorporated by
reference herein).
10.24 Harken Energy Corporation 7% Senior Convertible Notes Due 2007 in
the principal sum of
42
$2,025,000, dated June 19, 2002 (filed as Exhibit 10.20 to Harken's
Quarterly Report on Form 10-Q for the period ended June 30, 2002,
File No. 1-10262, and incorporated by reference herein).
10.25 Harken Energy Corporation 7% Senior Convertible Notes Due 2007,
Series A, in the principal sum of $2,210,000, dated August 13, 2002
(filed as Exhibit 10.3 to Harken's Quarterly Report on Form 10-Q
for the period ended September 30, 2002, File No. 1-10262, and
incorporated by reference herein).
10.26 Harken Energy Corporation 7% Senior Convertible Notes Due 2007,
Series B, in the principal sum of $1,152,000, dated August 30, 2002
(filed as Exhibit 10.4 to Harken's Quarterly Report on Form 10-Q
for the period ended September 30, 2002, File No. 1-10262, and
incorporated by reference herein).
10.27 Harken Energy Corporation 7% Senior Convertible Notes Due 2007,
Series C, in the principal sum of $2,000,000, dated October 9, 2002
(filed as Exhibit 10.5 to Harken's Quarterly Report on Form 10-Q
for the period ended September 30, 2002, File No. 1-10262, and
incorporated by reference herein).
10.28 Harken Energy Corporation 7% Senior Convertible Notes Due 2007,
Series D, in the principal sum of $2,070,000, dated October 30,
2002 (filed as Exhibit 10.6 to Harken's Quarterly Report on Form
10-Q for the period ended September 30, 2002, File No. 1-10262, and
incorporated by reference herein).
10.29 Option Agreement between Harken Energy Corporation, The Liverpool
Limited Partnership and Elliot International LP, dated February 13,
2003 (filed as Exhibit 10.1 to Harken's Current Report on Form 8-K
dated February 13, 2003, File No. 1-10262, and incorporated by
reference herein).
10.30 7% Senior Convertible Note due 2006, Series A by Harken Energy
Corporation payable to The Liverpool Limited Partnership in the
principal amount of $720,000.00, dated February 13, 2003 (filed as
Exhibit 10.2 to Harken's Current Report on Form 8-K dated February
13, 2003, File No. 1-10262, and incorporated by reference herein).
10.31 7% Senior Convertible Note due 2006, Series A by Harken Energy
Corporation payable to Elliot International LP in the principal
amount of $880,000.00, dated February 13, 2003 (filed as Exhibit
10.3 to Harken's Current Report on Form 8-K dated February 13,
2003, File No. 1-10262, and incorporated by reference herein).
10.32 7% Senior Convertible Note due 2007, Series E by Harken Energy
Corporation payable to the Bank of New York Depository in the
principal amount of $1,420,000.00, dated January 28, 2003 (filed as
Exhibit 10.4 to Harken's Current Report on Form 8-K dated February
13, 2003, File No. 1-10262, and incorporated by reference herein).
10.33 7% Senior Convertible Note due 2007, Series G by Harken Energy
Corporation payable to Waverley Investments Limited in the
principal amount of $3,410,000, dated March 18, 2003 (filed as
Exhibit 10.1 to Harken's Current Report on Form 8-K dated March 18,
2003, File No. 1-10262, and incorporated by reference herein).
10.34 Promissory note by Harken Energy Corporation payable to Waverley
Investments Limited in the principal amount of $1,705,000, dated
March 18, 2003 (filed as Exhibit 10.2 to
43
Harken's Current Report on Form 8-K dated March 18, 2003, File No.
1-10262, and incorporated by reference herein).
10.35 Option Agreement between Harken Energy Corporation and HBK Master
Fund L.P. dated March 18, 2003 (filed as Exhibit 10-35 to Harken's
Annual Report on Form 10-K for the fiscal year ended December 31,
2002, File No. 1-10262, and incorporated herein by reference).
10.36 Executive Service Agreement by and between Harken Energy
Corporation and A. Wayne Hennecke(filed as Exhibit 10.7 to Harken's
Quarterly Report on Form 10-Q for the period ended September 30,
2002, File No. 1-10262, and incorporated by reference herein).
10.37 Severance Agreement dated June, 2002 by and between Harken Energy
Corporation and Anna M. Williams (filed as Exhibit 10.8 to Harken's
Quarterly Report on Form 10-Q for the period ended September 30,
2002, File No. 1-10262, and incorporated by reference herein).
10.38 Severance Agreement dated June, 2002 by and between Harken Energy
Corporation and Bruce N. Huff (filed as Exhibit 10.9 to Harken's
Quarterly Report on Form 10-Q for the period ended September 30,
2002, File No. 1-10262, and incorporated by reference herein).
10.39 Severance Agreement dated June, 2002 by and between Harken Energy
Corporation and Jim Denny (filed as Exhibit 10.10 to Harken's
Quarterly Report on Form 10-Q for the period ended September 30,
2002, File No. 1-10262, and incorporated by reference herein).
10.40 Severance Agreement dated June, 2002 by and between Harken Energy
Corporation and Rich Cottle (filed as Exhibit 10.11 to Harken's
Quarterly Report on Form 10-Q for the period ended September 30,
2002, File No. 1-10262, and incorporated by reference herein).
10.41 Severance Agreement dated June, 2002 by and between Harken Energy
Corporation and Jorge Delgado, Jr. (filed as Exhibit 10.12 to
Harken's Quarterly Report on Form 10-Q for the period ended
September 30, 2002, File No. 1-10262, and incorporated by reference
herein).
10.42 Agreement regarding Compensation In the Event of a Change In
Control dated February 1, 2000, effective as of December 30, 1999
by and between Harken Energy Corporation and Mikel D. Faulkner
(filed as Exhibit 10.13 to Harken's Quarterly Report on Form 10-Q
for the period ended September 30, 2002, File No. 1-10262, and
incorporated by reference herein).
10.43 Amended and Restated Agreement regarding Compensation In the Event
of a Change In Control dated April 2, 2001, effective as of
December 30, 1999 by and between Harken Energy Corporation and
Mikel D. Faulkner (filed as Exhibit 10.14 to Harken's Quarterly
Report on Form 10-Q for the period ended September 30, 2002, File
No. 1-10262, and incorporated by reference herein).
10.44 Waiver of Change in Control Payment, dated December 10, 2002, by
and between Mikel D. Faulkner and Harken Energy Corporation (filed
as Exhibit 10.1 to Harken's Current Report on Form 8-K dated
December 10, 2002, File No. 1-10262, and incorporated by reference
herein).
10.45 Waiver of Change in Control Payment, dated February 10, 2003, by
and between Mikel D. Faulkner and Harken Energy Corporation (filed
as Exhibit 10.45 to Harken's Annual Report on Form 10-K for the
fiscal year ended December 31, 2002, File No. 1-10262, and
incorporated by reference herein).
44
10.46 Waiver of Change in Control Payment, dated March 5, 2003, by and
between Mikel D. Faulkner and Harken Energy Corporation filed as
Exhibit 10-46 to Harken's Annual Report on Form 10-K for the fiscal
year ended December 31, 2002, File No. 1-10262, and incorporated by
reference herein).
16.1 Letter from Arthur Andersen LLP pursuant to Item 304(a)(3) of
Regulation S-K (field as Exhibit 16.1 in Harken's current report on
Form 8-K, filed on September 5, 2001, File No. 1-10262, and
incorporated by reference herein).
*99.1 Certificate of the Chief Executive Officer of Harken Energy
Corporation.
*99.2 Certificate of the Chief Financial Officer of Harken Energy
Corporation.
* Filed herewith
(b) Reports on Form 8-K
On February 14, 2003, Harken filed a Form 8-K with respect to the issuance of
$1.6 million in principal amount of 7% European Notes due 2006 to certain
investors in exchange for $2 million in principal amount of 5% European Notes,
and a related option agreement with such investors.
On March 20, 2003, Harken filed a Form 8-K with respect to the issuance of
$3,410,000 in principal amount of 7% European Notes due 2007 and a promissory
note in principal amount of $1,705,000 due September 1, 2003 to an affiliate of
a holder of Harken's securities in exchange for 17,050 shares of Series G-1
preferred stock owned and $3,410,000 in cash.
On March 20, 2003, Harken filed a Form 8-K with respect to the closing of a
standby purchase agreement whereby Lyford Investments Enterprises Ltd.
("Lyford") was issued 59,716,227 shares of Harken common stock, resulting in
Lyford becoming a holder of approximately 62% of Harken's outstanding common
stock.
On April 25, 2003, Harken filed a Form 8-K with respect to the notification
dated April 25, 2003 of redemption of the 5% European Notes for shares of Harken
common stock.
45
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: May 14, 2003 By: /s/ Anna M. Williams
------------------------------------
Executive Vice President-Finance and
Chief Financial Officer
46
CERTIFICATION BY CHIEF EXECUTIVE OFFICER
PURSUANT TO 18 U.S.C. SECTION 1350,
AS ADOPTED PURSUANT TO SECTION 302
OF THE SARBANES-OXLEY ACT OF 2002
I, Mikel D. Faulkner, Chief Executive Officer of Harken Energy Corporation,
certify that:
1. I have reviewed this quarterly report on Form 10-Q of Harken Energy
Corporation;
2. Based on my knowledge, this quarterly report does not contain any untrue
statement of a material fact or omit to state a material fact necessary to
make the statements made, in light of the circumstances under which such
statements were made, not misleading with respect to the period covered by
this quarterly report;
3. Based on my knowledge, the financial statements, and other financial
information included in this quarterly report, fairly present in all
material respects the financial condition, results of operations and cash
flows of the Registrant as of, and for, the periods presented in this
quarterly report.
4. The registrant's other certifying officers and I are responsible for
establishing and maintaining disclosure controls and procedures (as defined
in Exchange Act Rules 13a-14 and 15d-14) for the registrant and we have:
a) designed such disclosure controls and procedures to ensure that
material information relating to the registrant, including its consolidated
subsidiaries, is made known to us by others within those entities,
particularly during the period in which this quarterly report is being
prepared;
b) evaluated the effectiveness of the registrant's disclosure controls
and procedures as of a date within 90 days prior to the filing date of this
quarterly report (the "Evaluation Date"); and
c) presented in this quarterly report our conclusions about the
effectiveness of the disclosure controls and procedures based on our
evaluation as of the Evaluation Date;
5. The registrant's other certifying officers and I have disclosed, based on
our most recent evaluation, to the registrant's auditors and the audit
committee of registrant's board of directors (or persons performing the
equivalent function):
a) all significant deficiencies in the design or operation of internal
controls which could adversely affect the registrant's ability to record,
process, summarize and report financial data and have identified for the
registrant's auditors any material weaknesses in internal controls; and
b) any fraud, whether or not material, that involves management or
other employees who have a significant role in the registrant's internal
controls; and
6. The registrant's other certifying officers and I have indicated in this
quarterly report whether or not there were significant changes in internal
controls or in other factors that could significantly affect internal
controls subsequent to the date of our most recent evaluation, including
any corrective actions with regard to significant deficiencies and material
weaknesses.
Date: May 14, 2003 By: /s/ Mikel D. Faulkner
------------------------------------
Mikel D. Faulkner
Chief Executive Officer
CERTIFICATION BY CHIEF FINANCIAL OFFICER
PURSUANT TO 18 U.S.C. SECTION 1350,
AS ADOPTED PURSUANT TO SECTION 302
OF THE SARBANES-OXLEY ACT OF 2002
I, Anna M. Williams, Chief Financial Officer of Harken Energy Corporation,
certify that:
1. I have reviewed this quarterly report on Form 10-Q of Harken Energy
Corporation;
2. Based on my knowledge, this quarterly report does not contain any untrue
statement of a material fact or omit to state a material fact necessary to
make the statements made, in light of the circumstances under which such
statements were made, not misleading with respect to the period covered by
this quarterly report;
3. Based on my knowledge, the financial statements, and other financial
information included in this quarterly report, fairly present in all
material respects the financial condition, results of operations and cash
flows of the Registrant as of, and for, the periods presented in this
quarterly report.
4. The registrant's other certifying officers and I are responsible for
establishing and maintaining disclosure controls and procedures (as defined
in Exchange Act Rules 13a-14 and 15d-14) for the registrant and we have:
a) designed such disclosure controls and procedures to ensure that
material information relating to the registrant, including its consolidated
subsidiaries, is made known to us by others within those entities,
particularly during the period in which this quarterly report is being
prepared;
b) evaluated the effectiveness of the registrant's disclosure controls
and procedures as of a date within 90 days prior to the filing date of this
quarterly report (the "Evaluation Date"); and
c) presented in this quarterly report our conclusions about the
effectiveness of the disclosure controls and procedures based on our
evaluation as of the Evaluation Date;
5. The registrant's other certifying officers and I have disclosed, based on
our most recent evaluation, to the registrant's auditors and the audit
committee of registrant's board of directors (or persons performing the
equivalent function):
a) all significant deficiencies in the design or operation of internal
controls which could adversely affect the registrant's ability to record,
process, summarize and report financial data and have identified for the
registrant's auditors any material weaknesses in internal controls; and
b) any fraud, whether or not material, that involves management or
other employees who have a significant role in the registrant's internal
controls; and
6. The registrant's other certifying officers and I have indicated in this
quarterly report whether or not there were significant changes in internal
controls or in other factors that could significantly affect internal
controls subsequent to the date of our most recent evaluation, including
any corrective actions with regard to significant deficiencies and material
weaknesses.
Date: May 14, 2003 By: /s/ Anna M. Williams
------------------------------------
Anna M. Williams
Executive Vice President -
Finance and Chief Financial
Officer