--------------------------------------------------------------------------------
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
Form 10-Q/A
(Amendment No. 1)
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15 (d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended June 30, 2002
[_] 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 ____ No [X]
The number of shares of Common Stock, par value $0.01 per share,
outstanding as of August 1, 2002 was 23,731,407.
--------------------------------------------------------------------------------
EXPLANATORY NOTE
Harken Energy Corporation filed its original Quarterly Report on Form 10-Q
for the quarter ended June 30, 2002 with the Securities and Exchange Commission
("SEC") on August 14, 2002. This Amendment No. 1 to the Quarterly Report on Form
10-Q/A is being filed solely for the purpose of responding to comments of the
SEC. In order to preserve the nature and character of the disclosures as of
August 14, 2002, except as specifically discussed in this Amendment No. 1 to the
Quarterly Report on Form 10-Q/A, no attempt has been made in this amendment to
modify or update such disclosures for events which occurred subsequent to the
original filing on August 14, 2002. Accordingly, this Amendment No. 1 to the
Quarterly Report on Form 10-Q/A should be read in conjunction with the Company's
subsequent filings with the SEC.
2
HARKEN ENERGY CORPORATION
INDEX TO QUARTERLY REPORT
June 30, 2002
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 ......................................... 20
PART II. OTHER INFORMATION .............................................................. 35
Item 1. Legal Proceedings ......................................................... 35
Item 2. Changes in Securities and Use of Proceeds ................................. 35
Item 6. Exhibits and Reports on Form 8-K .......................................... 36
SIGNATURES .............................................................................. 41
3
ITEM 1. CONDENSED FINANCIAL STATEMENTS
HARKEN ENERGY CORPORATION AND SUBSIDIARIES
CONSOLIDATED CONDENSED BALANCE SHEETS
(Unaudited)
December 31, June 30,
2001 2002
-------------- --------------
Assets
------
Current Assets:
Cash and temporary investments $ 8,523,000 $ 7,723,000
Restricted cash 944,000 -
Accounts receivable, net 3,248,000 4,505,000
Related party notes receivable 169,000 105,000
Prepaid expenses and other current assets 1,361,000 576,000
-------------- --------------
Total Current Assets 14,245,000 12,909,000
Property and Equipment, net 78,335,000 73,878,000
Other Assets, net 3,226,000 2,747,000
-------------- --------------
$ 95,806,000 $ 89,534,000
============== ==============
Liabilities and Stockholders' Equity
------------------------------------
Current Liabilities:
Trade payables $ 2,664,000 $ 784,000
Accrued liabilities and other 6,197,000 5,824,000
Revenues and royalties payable 2,006,000 1,422,000
Bank credit facilities - 6,737,000
Convertible notes payable - 41,211,000
-------------- --------------
Total Current Liabilities 10,867,000 55,978,000
Convertible Notes Payable 51,388,000 12,318,000
Bank Credit Facilities 7,937,000 -
Accrued Preferred Stock Dividends 3,942,000 5,629,000
Other Long-Term Obligations 5,458,000 4,856,000
Commitments and Contingencies (Note 11)
Minority Interest in Consolidated Subsidiary - 1,948,000
Stockholders' Equity
Series G1 Preferred Stock, $1.00 par value; $100 liquidation value; 700,000
shares authorized; 446,417 and 424,597 shares outstanding, respectively 446,000 424,000
Series G2 Preferred Stock, $1.00 par value; $100 liquidation value; 400,000
shares authorized; 95,300 and 94,300 shares outstanding, respectively 95,000 94,000
Common stock, $0.01 par value; 225,000,000 shares authorized;
18,713,038 and 21,541,595 shares issued, respectively 187,000 215,000
Additional paid-in capital 385,710,000 386,880,000
Accumulated deficit (369,087,000) (377,108,000)
Accumulated other comprehensive income 296,000 (267,000)
Treasury stock, at cost, 542,900 shares held (1,433,000) (1,433,000)
-------------- --------------
Total Stockholders' Equity 16,214,000 8,805,000
-------------- --------------
$ 95,806,000 $ 89,534,000
============== ==============
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 Six Months Ended
June 30, June 30,
---------------------------------------------------------------
2001 2002 2001 2002
---------------------------------------------------------------
Revenues:
Oil and gas operations $ 10,792,000 $ 7,516,000 $ 19,707,000 $ 12,942,000
Interest and other income 190,000 196,000 467,000 262,000
---------------------------------------------------------------
10,982,000 7,712,000 20,174,000 13,204,000
---------------------------------------------------------------
Costs and Expenses:
Oil and gas operating expenses 3,327,000 2,393,000 6,581,000 4,713,000
General and administrative expenses, net 2,892,000 2,453,000 5,372,000 4,862,000
Depreciation and amortization 4,834,000 3,365,000 8,083,000 6,631,000
Litigation and contingent liability settlements, net - 1,168,000 - 1,168,000
Interest expense and other, net 986,000 953,000 2,698,000 1,925,000
---------------------------------------------------------------
12,039,000 10,332,000 22,734,000 19,299,000
---------------------------------------------------------------
Loss before income taxes (1,057,000) (2,620,000) (2,560,000) (6,095,000)
Income tax expense 15,000 90,000 30,000 180,000
---------------------------------------------------------------
Loss before extraordinary items and minority interest (1,072,000) (2,710,000) (2,590,000) (6,275,000)
Minority interest in loss of subsidiary - 20,000 - 29,000
---------------------------------------------------------------
Loss before extraordinary item $ (1,072,000) $ (2,690,000) $ (2,590,000) $ (6,246,000)
Extraordinary item-gain on repurchase/exchange of
European Notes 1,147,000 340,000 1,253,000 340,000
---------------------------------------------------------------
Net income (loss) $ 75,000 $ (2,350,000) $ (1,337,000) $ (5,906,000)
===============================================================
Preferred stock dividends (633,000) (1,070,000) (949,000) (2,115,000)
---------------------------------------------------------------
Net loss attributed to common stock $ (558,000) $ (3,420,000) $ (2,286,000) $ (8,021,000)
===============================================================
Basic and diluted income (loss) per common share:
Loss before extraordinary items $ (0.09) $ (0.18) $ (0.20) $ (0.42)
Extraordinary item-gain on repurchase/exchange of
European Notes 0.06 0.02 0.07 0.02
---------------------------------------------------------------
Loss per common share $ (0.03) $ (0.16) $ (0.13) $ (0.40)
===============================================================
Weighted average shares outstanding 18,124,805 20,968,751 17,991,060 19,608,768
===============================================================
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)
Accumulated
Other
Additional Comprehensive
G1 Preferred G2 Preferred Common Paid-In Treasury Accumulated Income
Stock Stock Stock Capital Stock Deficit (Loss) Total
-------------------------------------------------------------------------------------------------------
Balance December 31, 2001 $446,000 $ 95,000 $ 187,000 $ 385,710,000 $(1,433,000) $ (369,087,000) $ 296,000 $ 16,214,000
Issuance of common stock - - 27,000 2,689,000 - - - 2,716,000
Exchange of preferred stock (13,000) - - (49,000) - - - (62,000)
Conversions of preferred
stock (8,000) (1,000) 1,000 257,000 - - - 249,000
Repurchase of preferred
stock (1,000) - - (8,000) - - - (9,000)
Preferred stock dividends - - - - - (2,115,000) - (2,115,000)
Issuance of stock of
subsidiary - - - (1,719,000) - - - (1,719,000)
Comprehensive income:
Net change in derivative
fair value - - - - - - (473,000)
Reclassification of
derivative fair value
into earnings - - - - - - (90,000)
Net loss - - - - - (5,906,000) -
Total comprehensive
income (loss) (6,469,000)
-------------------------------------------------------------------------------------------------------
Balance June 30, 2002 $424,000 $ 94,000 $ 215,000 $ 386,880,000 $(1,433,000) $ (377,108,000) $(267,000) $ 8,805,000
=======================================================================================================
The accompanying Notes to Consolidated Condensed Financial Statements are
an integral part of these Statements.
5
HARKEN ENERGY CORPORATION AND SUBSIDIARIES
CONSOLIDATED CONDENSED STATEMENTS OF CASH FLOWS
(Unaudited)
Six Months Ended
June 30,
--------------------------------
2001 2002
-------------- --------------
Cash flows from operating activities:
Net loss $ (1,337,000) $ (5,906,000)
Adjustment to reconcile net loss to net cash
provided (used) by operating activities:
Depreciation and amortization 8,083,000 6,631,000
Amortization of issuance costs 837,000 238,000
Minority interest - (29,000)
Litigation and contingent liability settlements, net - 1,168,000
Extraordinary items (1,253,000) (340,000)
Other 294,000 121,000
Change in assets and liabilities:
(Increase) decrease in accounts receivable (840,000) (1,791,000)
Increase (decrease) in trade payables and other (1,396,000) (2,031,000)
-------------- --------------
Net cash provided by (used in) operating activities 4,388,000) (1,939,000)
-------------- --------------
Cash flows from investing activities:
Proceeds from sales of assets 9,620,000 2,606,000
Capital expenditures, net (18,384,000) (2,903,000)
-------------- --------------
Net cash used in investing activities (8,764,000) (297,000)
-------------- --------------
Cash flows from financing activities:
Repayments of long-term debt (207,000) (1,894,000)
Proceeds from issuances of common stock, net of issuances co - 921,000
Collection of note receivable 140,000 -
Proceeds from issuances of European Notes, net - 2,418,000
Purchase of preferred stock - (9,000)
-------------- --------------
Net cash (used in) provided by financing activities (67,000) 1,436,000
-------------- --------------
Net decrease in cash and temporary investments (4,443,000) (800,000)
Cash and temporary investments at beginning of period 20,673,000 8,523,000
-------------- --------------
Cash and temporary investments at end of period $ 16,230,000 $ 7,723,000
============== ==============
Supplemental disclosures of cash flows information:
Cash paid during the period for
Interest $ 2,046,000 $ 1,410,000
Income taxes - 333,000
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
June 30, 2001 and 2002
(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, 2001 and June 30, 2002 and the results of its operations and
changes in its cash flows for all periods presented as of June 30, 2001 and
2002. 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, 2001. Certain prior year amounts have been reclassified
to conform with the 2002 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. Management has begun a
series of transactions to repurchase, refinance and redeem certain convertible
notes, which mature in 2003. See Note 7 - Convertible Notes Payable, for further
discussion. If this process is not successful, there could be a material adverse
effect to Harken.
The results of operations for the six month period ended June 30, 2002 are
not necessarily indicative of the results to be expected for the full year.
Comprehensive Loss - Comprehensive loss includes changes in stockholders'
equity during the periods that do not result from transactions with
stockholders. Harken's total comprehensive loss is as follows:
Six Months Ended
June 30,
-----------------------
2001 2002
---------- ----------
(in thousands)
Net loss $ (1,337) $ (5,906)
Change in fair value of derivative 1,153 (473)
Reclassification of derivative fair value
into earnings 1,525 (90)
Cumulative effect of change in
accounting principle (3,025) -
-------- ---------
Total comprehensive loss $ (1,684) $ (6,469)
======== =========
8
(2) ACQUISITIONS AND DISPOSITIONS
Sales of Certain Producing Interests -During 2001, certain wholly-owned
subsidiaries of Harken sold certain interests in oil and gas producing
properties located in Texas, Arkansas, New Mexico and Louisiana for
approximately $13,090,000 in cash, which was used in part to support Harken's
exploration and development activities. During the first quarter of 2002, a
wholly-owned subsidiary of Harken sold interests in oil and gas producing
properties located in Texas for approximately $910,000. During the second
quarter of 2002, a wholly-owned subsidiary of Harken sold additional interests
in oil and gas producing properties for approximately $1,614,000.
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 9 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, plus 79,365 shares issued as a transaction fee in this
acquisition. In addition, the Purchase and Sale Agreement also 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. Since Harken acquired only the proved 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, June 30,
2001 2002
------------- -------------
Unevaluated oil and gas properties:
Unevaluated Colombian properties $ 68,000 $ 104,000
Unevaluated Peru properties 635,000 784,000
Unevaluated Panama properties 166,000 274,000
Unevaluated domestic properties 2,603,000 2,303,000
Evaluated oil and gas properties:
Evaluated Colombian properties 182,945,000 183,432,000
Evaluated domestic properties 154,495,000 156,087,000
Facilities and other property 25,000,000 25,084,000
Less accumulated depreciation and
amortization (287,577,000) (294,190,000)
------------- -------------
$ 78,335,000 $ 73,878,000
============= =============
9
(4) MIDDLE AMERICAN OPERATIONS
Harken's Middle American operations are conducted through its ownership in
Global Energy Development PLC ("Global," a public limited company registered in
England and Wales under the Companies Act (1985) of the United Kingdom).
Global's ordinary shares are admitted for trading on the Alternative Investment
Market of the London Stock Exchange. 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 of 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 $1,425,000
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 it, for
cash or otherwise. The issuance of shares by Global has been accounted for by
Harken within stockholders' equity, by reducing additional paid-in capital by
$1,977,000 related to the corresponding minority interest and offsetting
proceeds of approximately $1,425,000 received from transaction costs of
$1,177,000, of which $516,000 were incurred in 2002.
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 June 30, 2002. 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 August
14, 2002, Global was in compliance with the requirements of each of the
Association Contracts.
Costa Rica Operations - Global's Costa Rican operations have been conducted
through Harken Costa Rica Holdings LLC ("HCRH", a Nevada limited liability
company) that is owned 40% by a wholly-owned subsidiary of Global and 60% by an
affiliate of MKJ Xploration, Inc. ("MKJ"). MKJ is the operator of this Costa
Rica project.
In March 2002, the Costa Rica environmental agency SETENA denied its
approval of the requested environmental permit related to HCRH's Costa Rica
contract. HCRH has filed an appeal related to this ruling by SETENA. In January
2002, the Costa Rica Constitutional Court rendered a published opinion in a suit
that had been filed against another oil and gas operator and the Costa Rican
Ministry of Environment and Energy ("MINAE") by certain environmental groups. In
its opinion in this case, the Constitutional Court of Costa Rica found, among
other issues, that SETENA did not have the current authority to grant
environmental permits. In addition, proposed legislation pending in the Costa
Rica legislature seeks to abolish the Costa Rica government's rights to grant
hydrocarbon exploration contracts. These significant adverse developments
resulted in Harken fully impairing its approximately $8.8 million investment in
the Costa Rica project in its Consolidated Balance Sheet as of December 31,
2001. Consistent with the Costa Rica Constitutional Court decision discussed
above, even though it did not directly involve HCRH or the Moin #2 well, as well
as the pending legislation described above, HCRH's initial appeal to SETENA for
reconsideration of its denial of the requested permit was rejected. Denial of
HCRH's appeal and recent political developments in Costa Rica, in the opinion of
Harken and Global, severely limit the opportunity for future oil and gas
exploration in Costa Rica. Following denial of its appeal, HCRH initiated
discussions with the Costa Rica government to address HCRH's rights under the
concession contract.
10
Peru Operations - In April 2001, a wholly-owned subsidiary of Global signed
a Technical Evaluation Agreement ("Peru TEA") with PeruPetro, the national oil
company of Peru. The Peru TEA covers approximately 6.8 million gross acres in
northeastern Peru. Under the terms of the Peru TEA, Global has the option to
convert the Peru TEA to a seven year exploration contract, with a twenty-two
year production period. Terms of the Peru TEA allow Global to conduct a study of
the area that will include the reprocessing of seismic data and evaluation of
previous well data.
Panama Operations - In September 2001, a wholly-owned subsidiary of Global
signed a Technical Evaluation Agreement ("Panama TEA") with the Ministry of
Commerce and Industry for the Republic of Panama. The Panama TEA covers
approximately 2.7 million gross acres divided into three blocks in and offshore
Panama. Under the terms of the Panama TEA, which extends through September 2003,
Global is to perform certain work program procedures and studies to be submitted
to the Panamanian government, and has 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.
(5) BANK CREDIT FACILITY OBLIGATION
Certain Harken subsidiaries (the "Borrowers") entered into a three year
loan facility with Bank One, N.A. ("Bank One") that is secured by substantially
all of Harken's domestic oil and gas properties and guaranteed by Harken. The
Bank One facility provides borrowings limited by a borrowing base (as defined by
the Bank One facility) that was approximately $6,737,000 as of June 30, 2002 and
as of August 14, 2002. The borrowing base will be reduced by $225,000 per month
beginning September 1, 2002 until the borrowing base is redetermined by Bank One
on November 1 and May 1 in accordance with the facility agreement. The Bank One
facility provides for interest based on LIBOR plus a margin of 2.350% (4.22% as
of June 30, 2002), payable at the underlying LIBOR maturities or lender's prime
rate, and provides for a commitment fee of 0.375 % on any unused amount. At
December 31, 2001 and June 30, 2002, Harken had $7,937,000 and $6,737,000,
respectively, outstanding pursuant to the facility.
11
The Bank One facility requires the Borrowers, as well as Harken, to
maintain certain financial covenant ratios and requirements as calculated on a
quarterly basis. The financial covenant ratios and requirements for the
Borrowers include a current ratio, as defined, of not less than 1.0 to 1.0 and a
total liabilities to net capital investment ratio, as defined, of not more than
1.15 to 1.0. Effective beginning in the second quarter of 2002, the Borrowers
also are required to maintain a debt service coverage ratio, as defined, of not
less than 1.15 to 1.00. Required financial covenants for Harken include a ratio
of total liabilities to net worth, as defined, of not more than 0.6 to 1.0, and
a current ratio, as defined, of not less than 1.15 to 1.0.
Harken and the Borrowers are in compliance with all requirements under the
Bank One facility, as amended or waived, as of June 30, 2002. Harken received a
waiver of the current ratio covenant for the quarter ended June 30, 2002. Due to
the uncertainty of Bank One's November 1, 2002 borrowing base redetermination
and whether additional waivers of Harken's current ratio requirement can be
obtained from Bank One, the balance of the Bank One facility has been reflected
as a current liability as of June 30, 2002.
(6) 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 a private investor in exchange for cash
in the principal amount of the loan. The 10% Term Loan earns interest at 10% per
annum with interest payable quarterly through maturity, beginning in December
2002. The 10% Term Loan is unsecured and matures July 15, 2005. The 10% Term
Loan may be prepaid at any time without penalty and is subject to a mandatory
prepayment (i) in whole or in part from up to 60% of the proceeds derived from
the sale by Harken of its common stock for cash, and (ii) in whole if certain
changes occur in the composition of Harken's board of directors or if an event
of default occurs under the 10% Term Loan, as defined. As additional
consideration for the 10% Term Loan, Harken agreed to issue to the investor
warrants to purchase up to 4.2 million shares of Global ordinary shares owned by
Harken, at a price of 50 pence per share. These warrants constitute 16.2% of
Harken's holdings of Global shares. At August 14, 2002, the market price of
Global ordinary shares on the Alternative Investment Market of the London Stock
Exchange was 52 pence per share. The warrants will expire on October 13, 2005,
90 days after the scheduled maturity date of the 10% Term Loan, however, if the
maturity of the 10% Term Loan occurs as the result of an event of default, then
the warrants will expire on October 13, 2008. The 10% Term Loan also provides
that in the event of a default that is not subsequently cured by Harken, the
investor may elect to release the amounts due under the 10% Term Loan in
exchange for purchasing an amount of shares of Global common stock determined by
dividing such amounts due by a price which is the lesser of 25 pence or 70% of
the closing bid price of Global shares on the Alternative Investment Market of
the London Stock Exchange.
12
(7) CONVERTIBLE NOTES PAYABLE
A summary of convertible notes payable is as follows:
December 31, June 30,
2001 2002
------------ -----------
5% European Notes $ 40,980,000 $39,980,000
7% European Notes - 3,003,000
Benz Convertible Notes 10,408,000 10,546,000
------------ -----------
51,388,000 53,529,000
Less: Current portion - 41,211,000
------------ -----------
$ 51,388,000 $12,318,000
============ ===========
See "Item 2. Management's Discussion and Analysis of Financial Condition
and Results of Operations - Liquidity and Capital Resources - Convertible Note
Commitments and Proposed Capital Restructuring."
Although Harken management is actively pursuing negotiated transactions to
restructure the 5% European Notes and the Benz Convertible Notes (collectively
referred to as the "5% Notes"), no assurance can be given that Harken will be
able to redeem them for cash pursuant to their terms or repurchase them for cash
and/or other securities or property. In this event, Harken presently intends to
satisfy its obligations under the 5% Notes by redeeming them in exchange for
Harken common stock. Under the terms of the 5% Notes, if Harken elected to
redeem the 5% Notes for shares of its common stock, each note would be converted
into 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 of 5% European Notes by converting them into common stock
could result in substantial dilution of the existing Harken common stock. In
addition, the number of new shares to be issued could result in a change of
control of Harken. For example, if notes had been converted on August 14, with
an estimated conversion price of $0.30, for every $1,000,000 of 5% European
Notes converted at this price, Harken would have been required to issue to the
noteholders approximately 3.8 million shares of common stock. If all of the 5%
European Notes had been converted at this price, the noteholders would have
received an aggregate of approximately 130.1 million shares of common stock and,
collectively, would control over 85% of Harken's common stock. The number of
shares that might be issued in this regard will vary significantly depending
upon the average market price of Harken's common stock over the 30 days
preceding the redemption notice, and the amount of 5% European Notes to be
redeemed.
In connection with the issuance of Harken common stock in redemption of 5%
European Notes, Harken intends to request stockholder approval 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. If shareholder approval was required under the
American Stock Exchange Guidelines and was not obtained, Harken could apply for
an exemption from the shareholder approval requirement or be subject to
delisting of its common stock if it issued the shares without shareholder
approval. The potential delisting of Harken common stock could adversely affect
Harken's ability to raise capital in the future by issuing common stock or
securities convertible into common stock.
13
In addition, if Harken's stock price were to decline significantly,
Harken's ability to convert a substantial amount of the 5% Notes into common
stock could be limited by the number of authorized but unissued shares of Harken
common stock. If there were an insufficient number of shares of common stock to
redeem all of the then-outstanding 5% Notes, Harken would have to obtain
shareholder approval to increase its authorized common stock before it could
redeem all such 5% Notes into common stock. Absent such shareholder approval,
Harken would have to otherwise restructure the then-outstanding 5% Notes, or pay
such 5% Notes at maturity. There can be no assurance that, in such an event,
Harken would be successful in restructuring its obligations under the
then-outstanding 5% Notes, or would have available sufficient funds to pay such
5% Notes, in cash, upon maturity.
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. Since April 1, 2002 and as of August 14, 2002, Harken
has repurchased approximately $6 million in principal amount of the 5% European
Notes for cash and/or in exchange for its 7% Senior Convertible Notes (the "7%
European Notes"), the terms of which are described below. Since issuance, Harken
has repurchased or exchanged to date an aggregate of approximately $51,050,000
principal amount of the 5% European Notes. As of August 14, 2002, the
outstanding principal balance of 5% European Notes was approximately
$33,950,000.
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 then outstanding in exchange for shares of Harken
common stock. At maturity, on May 26, 2003, Harken may similarly redeem all
remaining outstanding 5% European Notes for shares of Harken common stock. If
Harken elects to redeem the 5% European Notes for shares of its common stock,
each note will be redeemed for a number of shares of Harken common stock equal
to 115% of the principal amount of the 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.
During the three months ended June 30, 2002, Harken repurchased $1,000,000
in principal amount of the 5% European Notes from certain holders thereof in
exchange for approximately $650,000 in cash, plus transaction costs. Harken has
reflected an extraordinary item gain from the cash purchase of outstanding 5%
European Notes in the accompanying consolidated condensed statements of
operations.
In July 2002, Harken repurchased an additional $1,120,000 principal amount
of the 5% European Notes from certain holders thereof in exchange for
approximately $696,000 in cash. Also in July 2002, Harken repurchased $700,000
in principal amount of the 5% European Notes from a holder in exchange for cash
of approximately $444,000 plus an agreement to exchange an additional $2,210,000
principal amount of the 5% European Notes for $2,210,000 principal amount of
Harken's 7% European Notes. Such notes were exchanged in August 2002. Other
holders of $2,000,000 principal amount of the 5% European Notes agreed to
exchange their notes in August 2002 for $800,000 principal amount of the 7%
European Notes and $800,000 in cash paid by Harken.
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 Due 2007 (the "7% European Notes") in exchange for approximately
$1,025,000 in cash and 10,000 shares of Harken's Series G1 Preferred Stock
14
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. In August 2002, Harken
issued or agreed to issue an additional $3,010,000 principal amount of the 7%
European Notes in connection with the exchange transactions involving certain of
the 5% European Notes described in the preceding paragraph.
The 7% European Notes mature on March 31, 2007 and rank equal to the 5%
European Notes. Interest incurred on the 7% European Notes is payable
semi-annually in March and September of each year to maturity or until the 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 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 "7% European Note Conversion Price").
The 7% European Notes are also convertible by Harken into shares of Harken
common stock if, for any period of thirty consecutive days commencing on or
after June 19, 2002, the average of the closing prices of Harken common stock
for each trading day during such thirty-day period shall have equaled or
exceeded 125% of the 7% European Note Conversion Price (or $0.625 per share of
Harken common stock).
The 7% European Notes 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 for shares of Harken
common stock, and at maturity, on March 31, 2007, Harken may similarly redeem
all remaining outstanding 7% European Notes 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 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.
Benz Convertible Notes --- On December 30, 1999, Harken issued $12,000,000
principal amount of 5% Convertible Notes Due 2003 (the "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. 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 August 14, 2002, the outstanding principal
balance of Benz Convertible Notes was approximately $5,669,000 and has a
November 26, 2003 maturity date.
The Benz Convertible Notes bear interest at 5% per annum, payable
semi-annually in May and November of each year until maturity or until the Benz
Convertible Notes are redeemed, converted or purchased by Harken prior to their
maturity. The notes may be redeemed for cash, or shares of Harken common stock,
at Harken's option, at par, in whole or in part, at any time after May 26, 2002,
upon not less than 30 days notice to the holders. In addition, beginning
November 26, 2002, Harken may redeem up to 50% of the Benz Convertible Notes
then outstanding in exchange for shares of Harken common stock. At maturity, on
November 26, 2003, Harken may similarly redeem all remaining outstanding Benz
Convertible Notes for shares of Harken common stock. If Harken elects to redeem
the Benz Convertible Notes for shares of its common stock beginning November 26,
2002, each note will be redeemed for a number of shares of Harken common stock
equal to 115% of the principal value of the note to be redeemed, plus accrued
and unpaid
15
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.
No Benz Convertible Notes were repurchased or redeemed by Harken during the
three months ended June 30, 2002. In July 2002, pursuant to the terms of the
Benz Convertible Notes, Harken elected to redeem Benz Convertible Notes with a
face amount of approximately $1,135,000 for 2,000,000 shares of Harken common
stock. In August 2002, Harken entered into an agreement with a holder of
approximately $4,071,000 of Benz Convertible Notes to exchange those notes for
$1,231,000 in cash.
(8) 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, 2001 and June 30, 2002 as related party
notes receivable. In May 2002, Harken entered into a severance agreement and
forgave 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, when such forgiveness was agreed to and discussed
with the former management member.
(9) 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 June 30, 2002, Harken holds natural gas zero cost collar contracts
consisting of a fixed price floor option of $2.75 per MMBTU and a fixed price
cap option of $3.47 per MMBTU, covering 135,000 MMBTUs per month over the period
of the contract through December 31, 2002. In addition, Harken also holds zero
cost collar contracts consisting of a fixed price floor option of $2.75 per
MMBTU and a fixed price cap option of $5.12 per MMBTU, covering 60,000 MMBTUs
per month over a period from January 1, 2003 through December 31, 2003. Such
natural gas collar contracts are reflected in accrued liabilities at June 30,
2002 with a market value of approximately $261,000.
Each of the above derivatives have been designated as cash flow hedges of
the exposure from the variability of cash flows from future specified production
from certain of Harken's domestic property operations. Gains and losses from
commodity derivative instruments are reclassified into earnings when the
associated hedged production occurs. Harken holds no derivative instruments
which are designated as either fair value hedges or foreign currency hedges.
Settlements of oil and gas commodity derivatives are based on the difference
between fixed swap or option prices and the New York Mercantile Exchange closing
prices for each month during the life of the contracts. Harken monitors its
natural gas production prices compared to New York Mercantile Exchange prices to
assure its commodity derivatives are effective hedges in mitigating its
commodity price risk.
16
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.
(10) 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.
Harken's financial information for each of its operating segments is as
follows for the periods ended June 30, 2001 and 2002:
Three Months Ended June 30, 2001 Six Months Ended June 30, 2001
----------------------------------------------- ----------------------------------------------
North Middle North Middle
America America Total America America Total
-------------- ------------ ------------- ------------- ------------ -------------
Operating revenues $ 8,139,000 $ 2,653,000 $ 10,792,000 $ 15,147,000 $ 4,560,000 $ 19,707,000
Interest and other income 85,000 105,000 190,000 204,000 263,000 467,000
Depreciation and amortization 2,581,000 2,253,000 4,834,000 4,400,000 3,683,000 8,083,000
Interest expense and other, net 673,000 313,000 986,000 1,549,000 1,149,000 2,698,000
Income tax expense 15,000 - 15,000 30,000 - 30,000
Segment income (loss) before
extraordinary items 1,383,000 (2,455,000) (1,072,000) 2,149,000 (4,739,000) (2,590,000)
Segment income (loss) 1,956,000 (1,881,000) 75,000 2,775,000 (4,112,000) (1,337,000)
Capital expenditures 3,176,000 1,046,000 4,222,000 5,913,000 9,258,000 15,171,000
Total assets at end of period 92,266,000 47,280,000 139,546,000 92,266,000 47,280,000 139,546,000
Three Months Ended June 30, 2002 Six Months Ended June 30, 2002
----------------------------------------------- ----------------------------------------------
North Middle North Middle
America America Total America America Total
-------------- ------------ ------------- ------------- ------------ -------------
Operating revenues $ 5,173,000 $ 2,343,000 $ 7,516,000 $ 8,961,000 $ 3,981,000 $ 12,942,000
Interest and other income 158,000 38,000 196,000 179,000 83,000 262,000
Depreciation and amortization 2,160,000 1,205,000 3,365,000 4,283,000 2,348,000 6,631,000
Interest expense and other, net 1,274,000 (321,000) 953,000 1,938,000 (13,000) 1,925,000
Income tax expense 15,000 75,000 90,000 30,000 150,000 180,000
Segment income (loss) before
extraordinary items (2,669,000) * (21,000) (2,690,000) (5,051,000) * (1,195,000) (6,246,000)
Segment income (loss) (2,329,000) (21,000) (2,350,000) (4,711,000) (1,195,000) (5,906,000)
Capital expenditures 3,189,000 588,000 3,777,000 3,296,000 780,000 4,076,000
Total assets at end of period 61,572,000 27,962,000 89,534,000 61,572,000 27,962,000 89,534,000
* Includes Litigation and Contingent Liability Settlements, net
(11) COMMITMENTS AND CONTINGENCIES
Search Acquisition Corp. ("Search Acquisition"), also known as Harken Texas
Acquisition Corp., a wholly-owned subsidiary of Harken, was a defendant in a
lawsuit filed by Petrochemical Corporation of
17
America and Lorken Investments Corporation (together, "Petrochemical"). This
lawsuit arose out of Petrochemical's attempt to enforce a judgment of joint and
several liability entered in 1993 against a group of twenty limited partnerships
known as the "Odyssey limited partnerships." Petrochemical claimed that Search
Exploration, Inc. is liable for payment of the judgment as the
successor-in-interest to eight Odyssey limited partnerships. Search Acquisition
was the surviving corporation in Harken's 1995 acquisition of Search
Exploration, Inc. On February 28, 1996, the court granted Search Acquisition's
motion for summary judgment in this case. On July 3, 1998, the Fifth District
Court of Appeals for the State of Texas reversed the trial court's summary
judgment and remanded the case to the trial court. In December 2001, a jury
trial was held in this matter. The jury returned a verdict finding for
Petrochemical in the amount of $1.1 million of actual damages and $3 million in
punitive damages. In April 2002, the court entered judgment on the verdict
rendered by the jury. Search Acquisition then filed a motion for a new trial. In
June 2002, Petrochemical filed with the U.S. Bankruptcy Court in Dallas, Texas
an involuntary petition in bankruptcy against Search Acquisition, under Chapter
7 of the Bankruptcy Code, and moved for the appointment of an interim trustee.
Search Acquisition agreed to the entry of an order for relief under Chapter 7,
as well as the appointment of the interim trustee. These actions resulted in a
stay of Search Acquisition's motion of the Court's judgment on the jury verdict
totaling $4.1 million. Thereafter, McCulloch Energy, Inc. ("McCulloch"), a
wholly-owned subsidiary of Search Acquisition, filed a voluntary petition in
bankruptcy under Chapter 7 of the Bankruptcy Code in the U.S. Bankruptcy Court
in Houston, Texas. The stay of Search Acquisition's motion and the related
bankruptcy filings led to negotiations in bankruptcy and mediation relating to
the Petrochemical suit and judgment. As a result of these events, on August 1,
2002, pursuant to a mediated settlement, Petrochemical and the bankruptcy
trustees agreed to release their claims against Harken in exchange for a payment
of $2 million to be distributed to Petrochemical, and a payment of approximately
$189,000 to pay administrative expenses and other creditors of the bankruptcy
estates. This amount has been fully accrued as of June 30, 2002 and is included
in accrued liabilities in the accompanying Consolidated Condensed Balance Sheet
at June 30, 2002. Pursuant to the mediation agreement, Petrochemical elected to
receive 100% of the stock of McCulloch in September 2002. McCulloch does not
have any contractual arrangements that are material to Harken's operations and
has a book and fair value each less than $10,000. The mediation agreement was
approved by the Bankruptcy Courts in Dallas and Houston in September 2002.
Payment of the mediation settlement was also made in September 2002.
420 Energy Investment, Inc. and ERI Investments, Inc. (collectively "420
Energy") filed a lawsuit against XPLOR Energy, Inc., a wholly-owned subsidiary
of Harken, on December 21, 1999 in the New Castle County Court of Chancery of
the State of Delaware. 420 Energy alleges that they are entitled to appraisal
and payment of the fair value of their common stock in XPLOR as of the date
XPLOR merged with Harken. Harken has relied on an indemnity provision in the
XPLOR merger agreement to tender the costs of defense in this matter to former
stockholders of XPLOR. Although the outcome of this litigation is uncertain,
because the former stockholders of XPLOR have accepted indemnification of this
claim, Harken believes that any liability to Harken as a result of this
litigation will not have a material adverse effect on Harken's financial
condition.
In August 2001, a new lawsuit was filed by New West Resources, Inc. ("New
West"), a former XPLOR stockholder, against XPLOR, Harken and other defendants
in state court in Dallas, Texas. Harken received service of process in February
2002. New West claims that it lost its $6 million investment in XPLOR as a
result of misrepresentations by XPLOR and breach of fiduciary duties by certain
XPLOR directors. Harken believes this new suit is an adjunct of the prior
appraisal rights claim by 420 Energy. The former stockholders of XPLOR have
rejected Harken's request for indemnification of this claim under the XPLOR
merger agreement. However, Harken intends to continue to pursue and enforce,
through whatever steps are necessary, any indemnification from the third
parties. Harken has tendered the defense of this claim
18
to National Union Fire Insurance Company, pursuant to insurance policy coverage
held by XPLOR. National Union has accepted defense of this claim subject to a
reservation of rights. Based on the facts that (i) the allegations of New West's
current petition focus primarily on defendants other than Harken, (ii) New West
has provided no evidence supporting its claims in response to Harken's discovery
requests, and (iii) the case is set for trial in January 2003 but New West has
not served process upon certain of the defendants described in New West's
petition as being the primary wrongdoers, Harken does not believe the claims
asserted against Harken are meritorious. Therefore, in Harken management's
opinion, the ultimate outcome of this litigation will not have a material
adverse effect on Harken's financial condition.
Harken has accrued approximately $5,275,000 at June 30, 2002 relating
to certain other operational or regulatory liabilities related to Harken's
domestic operations. Approximately $4,500,000 of this accrued amount relates to
total future abandonment costs of $7,550,000 of certain producing properties
owned by XPLOR, which will be incurred at the end of the properties' productive
life. Harken and its subsidiaries currently are involved in other various
lawsuits and contingencies, any of which in management's opinion, will not
result in significant loss exposure to Harken.
19
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 shareholders. 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, 2001 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, Costa Rica, Panama and Peru.
Harken's domestic operating segment has completed a period of significant
successful drilling activity over the past two years. Harken has recently
temporarily reduced its exploratory drilling activity, however, in order to
conserve capital resources to repurchase convertible debt obligations pursuant
to a proposed capital restructuring, as described below under "Liquidity and
Capital Resources." Harken does, however, intend to continue to pursue domestic
oil and gas reserve growth through acquisitions. Harken's ability to make future
acquisition transactions may be affected, however, by the market value of Harken
common stock. If the price of Harken common stock remains low or decreases,
Harken's ability to utilize its stock in acquisition transactions could be
negatively affected. Harken also continues to include development operations as
part of its capital expenditure plans. In April 2002, Harken, along with a
wholly-owned subsidiary, acquired certain producing property interests (the
"Republic Properties") in exchange for Harken common stock.
20
Harken's Middle American operations are conducted through its ownership of
92.77% of Global Energy Development PLC ("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 Alternative
Investment Market of the London Stock Exchange. All of the Middle American
operating revenues during the first half of 2002 have been generated from
Global's Colombian operations and have declined from the comparable period last
year, due to lower commodity prices and slightly reduced production volumes.
Global has substantially reduced operating expenses and capital expenditures in
the Middle American segment during 2002.
As a part of Harken's business strategy, Harken has taken steps to maximize
its cash flow by decreasing its administrative costs through reductions in
personnel, reductions in salaries, increasing efficiencies in its production
operations, and reducing its long-term debt obligations. Harken's continued
steps in these areas should continue to increase operating efficiency and cash
flow during 2002.
Harken reported a net loss for the six months ended June 30, 2002 of
$5,906,000 compared to a net loss of $1,337,000 for the prior year period due
primarily to lower commodity prices compared to the prior year. Harken's
worldwide oil and gas revenues have decreased 34% during the first six months of
2002 compared to the prior year period, due to lower commodity prices and
decreased domestic production volumes resulting from sales of producing
properties during 2001 and 2002. Gross operating profit before depreciation and
amortization, general and administrative and interest expenses totaled
approximately $8.2 million during the six months ended June 30, 2002 compared to
approximately $13.1 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 additional
impairments of oil and gas properties could occur. In addition, it is reasonably
possible that additional impairments could occur if costs are incurred in excess
of any increases in the cost ceiling, revisions to proved oil and gas reserves
occur, or if properties are sold for proceeds less than the discounted present
value of the related proved oil and gas reserves.
Colombian operations -- During the six months ended June 30, 2002,
approximately 30% of Harken's consolidated operating revenues were generated
from Global's 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
21
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, many of which are
major oil and gas companies, and as a whole, do not represent a significant
credit risk. In addition, Harken charges certain industry partners, who
participate in Harken-operated wells, with their share of drilling costs and
operating expenses. In determining a reserve for potential losses in collection
of its accounts receivable, Harken considers, among other factors, the current
financial condition of its industry partners in light of current industry
conditions. In the event of a significant decline in oil and gas prices, many of
our industry partners may not be able to meet their ongoing financial
obligations to Harken or be able to meet the terms of existing contract
provisions.
Classification of long-term debt -- Harken's bank credit facility with Bank
One, N.A. ("Bank One") requires Harken, as well as certain of its subsidiaries
("Borrowers") to maintain certain financial covenant ratios and requirements, as
calculated on a quarterly basis. Harken received a waiver of the current ratio
covenant for the quarter ended June 30, 2002. If Harken or the Borrowers are not
in compliance with their bank financial covenant ratios or requirements in the
future and are unable to obtain a waiver or amendment to the facility
requirements, the credit facility would be in default and callable by Bank One.
In addition, due to cross-default provisions in Harken's 5% and 7% European Note
agreements and the Benz Convertible Note agreement, a majority 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 our lenders'
actions are not controllable by Harken. If Harken's projections of future
operating results are not achieved and future waivers or amendments of Harken's
current ratio covenant under the Bank One credit facility are not received and
its debt is placed in default, Harken could experience a material adverse impact
on its financial position and results of operations.
Accounting for derivatives - Harken holds commodity derivative financial
instruments designed to mitigate commodity price risk associated with a portion
of its future monthly natural gas production and related cash flows. These
commodity derivatives qualify for hedge accounting as discussed in Note 9 -
Hedging Activities in the notes to the accompanying Consolidated Condensed
Financial Statements contained in Part 1, Item 1. Harken does not participate in
speculative derivatives trading. Hedge accounting requires that commodity
derivative instruments be designated as hedges and that fluctuations in their
market value are effective in mitigating the hedged commodity price risk, and
that such effectiveness be documented and monitored. While Harken intends to
continue to meet the conditions to qualify for hedge accounting, to the extent
hedges are not highly effective, or if the forecasted hedged production does not
occur, the changes in the fair value of the commodity derivative instruments are
reflected in earnings. During the six months ended June 30, 2002, the average
percentage of Harken's natural gas production hedged was approximately 30%.
22
RESULTS OF OPERATIONS
The following table presents information regarding Harken's revenues
and oil and gas production volumes during the periods included in the
accompanying consolidated condensed financial statements:
Three Months Ended Six Months Ended
June 30, June 30,
------------------------------ -------------------------------
2001 2002 2001 2002
------------------------------ -------------------------------
Operating Revenues (unaudited) (unaudited)
------------------
Domestic Exploration and Production
-----------------------------------
Operations
----------
Gas sales revenues $ 5,748,000 $ 3,244,000 $ 11,300,000 $ 5,711,000
Gas volumes in mcf 1,132,000 925,000 2,101,000 1,900,000
Gas price per mcf $ 5.08 $ 3.51 $ 5.38 $ 3.00
Oil sales revenues $ 2,391,000 $ 1,929,000 $ 3,847,000 $ 3,250,000
Oil volumes in barrels 90,000 77,000 144,000 142,000
Oil price per barrel $ 26.57 $ 25.05 $ 26.72 $ 22.89
Colombian Exploration and
-------------------------
Production Operations
---------------------
Oil sales revenues $ 2,653,000 $ 2,343,000 $ 4,560,000 $ 3,981,000
Oil volumes in barrels 143,000 136,000 $ 237,000 267,000
Oil price per barrel $ 18.55 $ 17.23 $ 19.24 $ 14.91
Other Revenues
--------------
Interest income $ 174,000 $ 31,000 $ 419,000 $ 64,000
Other income $ 16,000 $ 164,000 $ 48,000 $ 198,000
For the quarter ended June 30, 2002 compared with the corresponding prior
period.
North American Operations
Domestic gross oil and gas revenues during the second quarter of 2002
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. Beginning
April 2002, Harken's domestic operations include the Republic Properties, which
were acquired effective April 4, 2002 and consist of interests in 16 oil and gas
wells in 9 fields plus interests in additional prospect acreage located in
southern Louisiana and the Texas Gulf Coast region. During 2001, certain
wholly-owned subsidiaries of Harken sold certain interests in oil and gas
producing properties located in Texas, Arkansas, Louisiana and New Mexico for
approximately $13.1 million in cash. During the first quarter of 2002, another
wholly-owned subsidiary of Harken sold interests in oil and gas producing
properties located in Texas for approximately $910,000. During the second
quarter of 2002, a wholly-owned subsidiary of Harken sold additional interests
in oil and gas producing properties for approximately $1,614,000.
Domestic gas revenues decreased 44% to $3,244,000 for the three months
ended June 30, 2002 compared to $5,748,000 for the prior year period principally
due to the decrease in average gas prices received during the second quarter of
2002, as Harken received an overall average price of $3.51 per mcf of gas during
the second quarter of 2002 compared to $5.08 per mcf received during the second
quarter of 2001. Gas revenues also declined due to reduced production volumes
during the second quarter of 2002, despite the
23
acquisition of the Republic Properties, as a result of sales of domestic
producing properties during 2001 and 2002.
Domestic oil revenues decreased 19% to $1,929,000 during the second
quarter of 2002 compared to $2,391,000 during the second quarter of 2001 due to
reduced oil prices and decreased production volume. Harken's oil price per
barrel averaged $25.05 during the current year quarter compared to $26.57 during
the comparable period last year. Harken's domestic oil production volumes also
decreased during the quarter compared to the prior year period, due to sales of
domestic producing properties during 2001 and 2002.
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 16% to $1,870,000 during the second quarter of
2002 compared to $2,228,000 during the prior year period primarily due to the
above-mentioned sales of properties. Oil and gas operating expenses increased,
however, as a percentage of related oil and gas revenues due primarily to the
decrease in oil and gas prices during the second quarter of 2002 compared to the
prior year period. Oil and gas operating expenses decreased per unit of
production due to the replacement of sold producing fields with newly completed
gas production.
Harken expects that oil and gas production volumes generated as a
result of drilling activities in late 2001 and continuing workover activities
together with the acquisition of the Republic Properties discussed above will
continue to help to mitigate the production decreases resulting from the sales
of producing properties discussed above. Harken's oil and gas production volumes
increased beginning in April 2002 from the Republic Properties, but could
decrease if Harken sells additional producing properties. Harken continues to
pursue opportunities to acquire additional producing properties, which would
also further increase domestic production. Harken's oil and gas revenues are
highly dependent upon product prices, which Harken is unable to predict.
Middle American Operations
Middle American gross revenues during the second quarter of 2002 relate
to Global's oil operations in Colombia. During the second quarter of 2001 and
2002, Global's Colombian operating revenues consisted of production from its
Bolivar and Alcaravan Association Contract areas. Global's Colombian oil
revenues decreased 12% from $2,653,000 during the second quarter of 2001 to
$2,343,000 during the second quarter of 2002, partially due to reduced oil
prices, which averaged $17.23 per barrel during the current year quarter
compared to $18.55 per barrel during the prior year quarter. In addition,
production volumes decreased compared to the prior year quarter. Global's
production volumes during the remainder of 2002 will continue to remain
dependent on existing well production and pumping efficiency.
Middle American operating expenses decreased 52% from $1,099,000 during
the second quarter of 2001 to $523,000 for the second quarter of 2002, as Global
has successfully reduced field contract labor, equipment rental and pipeline
tariff costs in order to reduce operating expenses related to its producing
fields in Colombia.
Interest and Other Income
Interest and other income increased 4% during the second quarter of
2002 compared to the prior year period due to a gain recognized from the
ineffective portion of Harken's natural gas 2002 zero cost collar contract,
which offset an 82% decrease in interest income over the same periods. Harken
generated
24
approximately $174,000 of interest income during the second quarter of 2001,
compared to approximately $32,000 of interest income during the second quarter
of 2002, due primarily to decreased cash balances.
Other Costs and Expenses
General and administrative expenses decreased 15% during the second
quarter of 2002 compared to the second quarter of 2001, despite certain one time
employee severance costs, as Harken has taken steps to reduce personnel costs
through personnel reductions, salary reductions and other methods to achieve
other administrative cost reductions.
Depreciation and amortization expense decreased 30% during the second
quarter of 2002 compared to the prior year period primarily due to decreased
production volumes during the quarter as a result of Harken's sales of certain
producing properties. 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 decreased 3% during the second quarter of
2002 compared to the prior year period primarily due to the decrease in the
amount of outstanding 5% European Notes compared to the prior year. See
"Liquidity and Capital Resources," below.
Harken also recorded a $1.2 million expense during the second quarter
of 2002 relating to the settlement of certain liabilities and contingencies
resolved during the second quarter of 2002. As discussed further in the Notes to
the Consolidated Condensed Financial Statements, Note 11--Commitments and
Contingencies, Harken accrued and charged to expense approximately $2.2 million
related to its mediation agreement signed on August 1, 2002 to resolve the
Petrochemical litigation. Such amount was reduced by approximately $1 million
related to other accrued liabilities which were settled during the second
quarter of 2002 for amounts less than the amounts previously accrued.
Extraordinary Item
During 2001 and 2002, Harken repurchased or exchanged certain of its 5%
European Notes for cash and/or other securities of Harken. During the second
quarter of 2002, Harken recorded an extraordinary gain of $340,000 relating to
the acquisition of $1,000,000 principal amount of 5% European Notes. An
extraordinary gain of $1,147,000 was recorded for the comparable period of 2001
relating to Harken's exchange of $9,000,000 principal amount of 5% European
Notes.
For the six months ended June 30, 2002 compared with the corresponding prior
period.
North American Operations
Domestic gas revenues decreased 50% to $5,711,000 for the six months
ended June 30, 2002 compared to $11,300,000 for the prior year period due to the
decrease in average gas prices received during the first half of 2002, as Harken
received an overall average price of $3.00 per mcf of gas during the first six
months of 2002 compared to $5.38 per mcf received during the first half of 2001.
In addition, gas revenues also declined due to reduced production volumes during
the first six months of 2002, despite the acquisition of the Republic
Properties, due to sales of domestic producing properties during 2001 and 2002.
25
Domestic oil revenues decreased 16% to $3,250,000 during the first six
months of 2002 compared to $3,847,000 during the first six months of 2001
primarily due to reduced oil prices, which averaged $22.89 per barrel during the
current year period compared to $26.72 per barrel during the prior year. Despite
the sales of producing properties discussed above, Harken's domestic oil
production volumes remained flat during the first six months of 2002 compared to
the prior year period, as Harken's Gulf Coast oil production was reduced by
temporary operational curtailments during the first quarter of 2001 at Harken's
Main Pass area offshore Louisiana.
Domestic oil and gas operating expenses decreased 20% to $3,755,000
during the first six months of 2002 compared to $4,719,000 during the prior year
period primarily due to the above-mentioned sales of properties. Oil and gas
operating expenses increased, however, as a percentage of related oil and gas
revenues due primarily to the decrease in oil and gas prices during the first
six months of 2002 compared to the prior year period. Oil and gas operating
expenses decreased per unit of production due to the replacement of sold
producing fields with newly completed gas production.
Harken expects that oil and gas production volumes generated as a
result of drilling activities in late 2001 and early 2002 and continuing
workover activities together with the acquisition of the Republic Properties
discussed above will continue to help to mitigate the production decreases as a
result of the sales of producing properties discussed above. Harken's oil and
gas production volumes increased beginning in April 2002 from the Republic
Properties, but could decrease if Harken sells additional producing properties.
Harken's oil and gas revenues are highly dependent upon product prices, which
Harken is unable to predict.
Middle American Operations
Middle American gross revenues during the first six months of 2002
relate to Global's oil operations in Colombia.Global's Colombian oil revenues
decreased 13% from $4,560,000 during the first six months of 2001 to $3,981,000
during the first six months of 2002, primarily due to reduced oil prices, which
averaged $14.91 per barrel during the first six months this year compared to
$19.24 per barrel during the first six months of 2001. During the first six
months of 2001 and 2002, Global's Colombian operating revenues consisted of
production from its Bolivar and Alcaravan Association Contract areas.
Global's Colombia production volumes increased during the first six
months of 2002, compared to the prior year period, as during the first quarter
of 2001, sales of production from Global's Estero #1 well on the Alcaravan
Contract area were limited to approximately 1,000 gross barrels of oil per day
due to pipeline constraints and pumping capacity. During the second quarter of
2001, Global took steps to resolve such limitations. Estero #2 was completed
during the first quarter of 2001, and has mitigated the production declines
related to Global's Bolivar Contract area production, as Bolivar Contract
production was temporarily shut-in during the first quarter of 2002, pending
recently completed workover procedures. Harken's production volumes during the
remainder of 2002 will continue to remain dependent on existing well production
and pumping efficiency.
Middle American operating expenses have decreased 49% from $1,862,000
during the first six months of 2001 to $958,000 for the first six months of
2002, as Global has successfully reduced field contract labor equipment rental
and pipeline tariff costs in order to reduce operating expenses related to its
producing fields in Colombia.
Interest and Other Income
26
Interest and other income decreased 44% during the first six months of
2002 compared to the prior year period due to Harken's usage of cash during 2001
for capital expenditures, which decreased its interest-bearing cash balances.
Harken generated approximately $419,000 of interest income during the first six
months of 2001, compared to approximately $64,000 of interest income during the
first six months of 2002.
Other income during the first six months of 2002 primarily relates to
the gain recognized from the ineffective portion of Harken's natural gas 2002
zero cost collar contract.
Other Costs and Expenses
General and administrative expenses decreased 9% during the first six
months of 2002 compared to the first six months of 2001, despite certain one
time employee severance costs during the period related to staff reductions.
Harken took steps to reduce personnel costs through personnel reductions, salary
reductions and other methods during the second quarter of 2002, and continues to
seek additional administrative cost reductions.
Depreciation and amortization expense decreased 18% during the first
six months of 2002 compared to the prior year period primarily due to decreased
production volumes during the period as a result of Harken's sales of certain
producing properties. 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 decreased 29% during the first six months of
2002 compared to the prior year period primarily due to the decrease in the
amount of outstanding 5% European Notes from early 2001. See "Liquidity and
Capital Resources," below. In addition, during the first quarter of 2001, Harken
expensed the remaining unamortized issuance costs related to the IFC project
loan finance facility, which was terminated in May 2001.
Harken also recorded a $1.2 million expense during the second quarter
of 2002 relating to the settlement of certain liabilities and contingencies
resolved during the second quarter of 2002. As discussed further in the Notes to
the Consolidated Condensed Financial Statements, Note 11--Commitments and
Contingencies, Harken accrued and charged to expense approximately $2.2 million
related to its mediation agreement signed on August 1, 2002 to resolve the
Petrochemical litigation. Such amount was reduced by approximately $1 million
related to other accrued liabilities which were settled during the second
quarter of 2002 for amounts less than the amounts previously accrued.
Extraordinary Item
During 2001 and 2002, Harken repurchased or exchanged certain of its 5%
European Notes for cash and/or other securities of Harken. During the first six
months of 2002, Harken recorded an extraordinary gain of $340,000 relating to
the acquisition of $1,000,000 principal amount of 5% European Notes. An
extraordinary gain of $1,253,000 was recorded for the comparable period of 2001
relating to Harken's acquisitions of $9,250,000 principal amount of 5% European
Notes.
27
LIQUIDITY AND CAPITAL RESOURCES
Harken's negative working capital at June 30, 2002 was approximately
$43.1 million, compared to positive working capital of approximately $3.4
million at December 31, 2001. Working capital is the difference between current
assets and current liabilities. Harken's working capital was negative at June
30, 2002 because approximately $41.2 million of Harken's outstanding convertible
notes are due in May 2003 and therefore are classified as current liabilities at
June 30, 2002. These obligations were long-term liabilities and did not reduce
working capital at December 31, 2001. Harken received a waiver of the current
ratio covenant for the quarter ended June 30, 2002 under the Bank One credit
facility. Due to the uncertainty of Bank One's November 1, 2002 borrowing base
redetermination and whether additional waivers of Harken's current ratio
requirement can be obtained from Bank One, the balance of the Bank One facility
has been reflected as a current liability as of June 30, 2002.
Harken's operations used approximately $1.9 million of cash flow during
the first six months of 2002, primarily due to the timing of certain working
capital payments and collections during the six-month period. Harken's cash
resources at June 30, 2002 totaled approximately $7.7 million. Considering its
existing cash resources, and the potential additional capital sources listed
below, Harken believes that it will have sufficient cash resources to fund all
of its planned capital expenditures during 2002. 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 either existing or newly
established financing arrangements.
During the six months ended June 30, 2002, the approximately $1.9
million of net cash used in Harken's operations was funded from existing cash
resources, sales of producing properties, and the issuance of convertible notes.
Net cash from financing activities during this period totaled approximately $1.4
million and consisted of $2.4 million raised through the issuance of Harken's 7%
European Notes, which are described below and in Note 7 to the accompanying
Consolidated Condensed Financial Statements contained in Part 1, Item 1, and
$900,000 in net cash proceeds from the issuance of subsidiary common stock,
offset by $1.9 million in repayment of long-term debt. Net cash used in
investing activities for the first half of 2002 totaled $297,000 and was
comprised of $2.6 million received upon the sale of producing domestic oil and
gas properties, offset by $2.9 million in capital expenditures.
Convertible Note Commitments and Proposed Capital Restructuring
5% European Notes -- On May 26, 1998, Harken issued to qualified
purchasers a total of $85 million of its 5% Senior Convertible Notes due 2003
(the "5% European Notes"), which mature on May 26, 2003. Since April 1, 2002 and
as of August 14, 2002, Harken has repurchased approximately $6 million in
principal amount of the 5% European Notes for cash and/or in exchange for its 7%
Senior Convertible Notes (the "7% European Notes"), the terms of which are
described in Note 7 of the Notes to the Consolidated Condensed Financial
Statements contained in Part 1, Item 1. Since issuance and as of August 14,
2002, Harken has repurchased or exchanged to date an aggregate of approximately
$51,050,000 million principal amount of the 5% European Notes. As of August 14,
2002, the remaining principal balance of 5% European Notes was approximately
$33,950,000. 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
28
November 26, 2002, Harken may redeem up to 50% of the 5% European Notes then
outstanding in exchange for shares of Harken common stock. At maturity, on May
26, 2003, Harken may similarly redeem all remaining outstanding 5% European
Notes for shares of Harken common stock. If Harken elects to redeem the 5%
European Notes for shares of its common stock, each note will be redeemed for a
number of shares of Harken common stock equal to 115% of the principal amount of
the notes to be redeemed, plus accrued and unpaid interest thereon to the date
of redemption, divided by the average market price of the stock over the 30
calendar days immediately preceding the date of the notice of redemption.
Benz Convertible Notes -- On December 30, 1999, Harken issued
$12,000,000 principal amount of 5% Convertible Notes Due 2003 (the "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. As of August 14, 2002,
Harken has repurchased or redeemed approximately $6.3 million principal amount
of the Benz Convertible Notes for cash and/or Harken common stock. As of August
14, 2002, the outstanding principal balance of Benz Convertible Notes was
approximately $5,669,000 and had a maturity date of November 26, 2003.
The Benz Convertible Notes bear interest at 5% per annum, payable
semi-annually in May and November of each year until maturity or until the Benz
Convertible Notes are redeemed, converted or purchased by Harken prior to their
maturity. The Benz Convertible Notes may be redeemed for cash, or shares of
Harken common stock, at Harken's option, at par, in whole or in part, at any
time after May 26, 2002, upon not less than 30 days notice to the holders. In
addition, beginning November 26, 2002, Harken may redeem up to 50% of the Benz
Convertible Notes then outstanding in exchange for shares of Harken common
stock. At maturity on November 26, 2003, Harken may similarly redeem all
remaining outstanding Benz Convertible Notes for shares of Harken common stock.
If Harken elects to redeem the Benz Convertible Notes for shares of its common
stock, beginning November 26, 2002, each note will be redeemed for a number of
shares of Harken common stock equal to 115% of the principal amount of the note
to be redeemed, plus accrued and unpaid interest thereon to the date of
redemption, divided by the average market price of the stock over the 30
calendar days immediately preceding the date of the notice of redemption.
Capital Restructuring - Harken management has been actively working to
restructure the indebtedness represented by the 5% European Notes and Benz
Convertible Notes (collectively, the "5% Notes") in advance of their scheduled
maturity next year. As of August 14, 2002, Harken has repurchased or redeemed
approximately $57.3 million principal amount of such notes.
During the three months ended June 30, 2002, Harken repurchased
$1,000,000 in principal amount of the 5% European Notes from certain holders
thereof in exchange for approximately $650,000 in cash, plus transaction costs.
In July 2002, Harken repurchased an additional $1,120,000 principal amount of
the 5% European Notes from certain holders thereof in exchange for approximately
$696,000 in cash. Also in July 2002, Harken repurchased $700,000 in principal
amount of the 5% European Notes from a holder in exchange for cash of
approximately $444,000 plus an agreement to exchange an additional $2,210,000
principal amount of the 5% European Notes for $2,210,000 principal amount of
Harken's 7% European Notes. Such notes were exchanged in August 2002. Other
holders of $2,000,000 principal amount of the 5% European Notes agreed to
exchange their notes in August 2002 for $800,000 principal amount of the 7%
European Notes and $800,000 in cash paid by Harken.
29
No Benz Convertible Notes were repurchased or redeemed by Harken during the
three months ended June 30, 2002. 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 entered into an agreement with a holder of
approximately $4,071,000 of Benz Convertible Notes to repurchase those notes for
$1,231,000 in cash.
As of August 14, 2002, after giving effect to the above transactions, the
aggregate principal indebtedness outstanding under the 5% Notes was
approximately $39.6 million. In order to satisfy its remaining obligations under
the 5% Notes, Harken must: (i) raise additional capital to redeem the 5% Notes
for cash, (ii) repurchase the 5% Notes from the holders thereof for cash and/or
securities (such as the 7% European Notes or Harken common stock) or other
property, (iii) redeem the 5% Notes by issuing Harken common stock on or before
maturity, or (iv) redeem, repurchase or convert the 5% Notes using any
combination of the foregoing methods.
Although Harken management is actively pursuing negotiated transactions to
restructure the 5% Notes, no assurance can be given that Harken will be able to
redeem them for cash pursuant to their terms or repurchase them for cash and/or
other securities or property. In this event, Harken presently intends to satisfy
its obligations under the 5% Notes by redeeming them in exchange for Harken
common stock. Under the terms of the 5% Notes, if Harken elected to redeem the
5% Notes for shares of its common stock, each note would be converted into a
number of shares of Harken common stock equal to 115% of the face 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 of 5% European Notes by converting them into common stock
could result in substantial dilution of the existing Harken common stock. In
addition, the number of new shares to be issued could result in a change of
control of Harken. For example, if notes had been converted on August 14, with
an estimated conversion price of $0.30, for every $1,000,000 of 5% European
Notes converted at this price, Harken would have been required to issue to the
noteholders approximately 3.8 million shares of common stock. If all of the 5%
European Notes had been converted at this price, the noteholders would have
received an aggregate of approximately 130.1 million shares of common stock and,
collectively, would control over 85% of Harken's common stock. The number of
shares that might be issued in this regard will vary significantly depending
upon the average market price of Harken's common stock over the 30 days
preceding the redemption notice, and the amount of 5% European Notes to be
redeemed.
In connection with the issuance of Harken common stock in redemption of 5%
European Notes, Harken intends to request stockholder approval 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. If shareholder approval was required under the
American Stock Exchange Guidelines and was not obtained, Harken could apply for
an exemption from the shareholder approval requirement or be subject to
delisting of its common stock if it issued the shares without shareholder
approval. The potential delisting of Harken common stock could adversely affect
Harken's ability to raise capital in the future by issuing common stock or
securities convertible into common stock.
In addition, if Harken's stock price were to decline significantly,
Harken's ability to convert a substantial amount of the 5% Notes into common
stock could be limited by the number of authorized but unissued shares of Harken
common stock. If there were an insufficient number of shares of common stock to
redeem all of the then-outstanding 5% Notes, Harken would have to obtain
shareholder approval to increase its
30
authorized common stock before it could redeem all such 5% Notes into common
stock. Absent such shareholder approval, Harken would have to otherwise
restructure the then-outstanding 5% Notes, or pay such 5% Notes at maturity.
There can be no assurance that, in such an event, Harken would be successful in
restructuring its obligations under the then-outstanding 5% Notes, or would have
available sufficient funds to pay such 5% Notes, in cash, upon maturity. If
Harken's ability to convert a substantial amount of the 5% Notes into common
stock is unsuccessful, Harken could experience a material adverse impact on its
financial position and results of operations.
Other Capital Commitments
Domestic Commitments -- In light of recent reduced oil and gas prices, and
as a result of Harken's ongoing capital restructuring discussed above, Harken's
domestic operating strategy now includes efforts to increase its oil and gas
reserves in North America through acquisitions and development, with a decreased
emphasis on exploration drilling activities. Accordingly, Harken's domestic
capital expenditure plans have been reduced compared to the prior two-year
period. Harken is, however, actively pursuing various North American acquisition
and development opportunities. Harken anticipates domestic capital expenditures
will total approximately $1.5 million during 2002. A majority of Harken's
planned domestic capital expenditures are discretionary and, as a result, will
be curtailed if sufficient funds are not available. Such expenditure
curtailments, however, could result in Harken losing certain prospect acreage or
reducing its interest in future development projects.
7% European Notes -- On June 18, 2002, Harken issued to certain holders of
Harken's securities $2,025,000 principal amount of its 7% European Notes 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. In
August 2002, Harken issued or agreed to issue an additional $3,010,000 principal
amount of the 7% European Notes in connection with the exchange transactions
involving certain of the 5% European Notes described above. For a description of
the 7% European Notes, see Note 7 to the accompanying consolidated condensed
financial statements contained in Part 1, Item 1.
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 has accrued approximately $5,275,000 at June 30, 2002 relating to
operational or regulatory contingencies related to Harken's domestic operations.
Approximately $4,500,000 of this accrued amount relates to total future
abandonment costs of $7,550,000 of certain of Harken's producing properties,
which will be incurred at the end of the properties' productive life. 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.
See Item 2, Part 1 for description of a
31
certain litigation.
International Commitments--Terms of certain of the Association Contracts
entered into between Global's subsidiary Harken de Colombia, Ltd. and Ecopetrol
commit Global to perform certain activities in Colombia in accordance with a
prescribed timetable. In addition, Global has certain scheduled capital
expenditure commitments related to its TEA Agreements in Peru and Panama.
Failure by Global to perform these activities as required could result in Global
losing its rights under the particular contract, which could potentially have a
material adverse effect on Harken's business. As of August 14, 2002, Global was
in compliance with the requirements of each of the Association and TEA
Contracts, as amended. In light of political and regulatory developments in
Costa Rica, Global is projecting no capital expenditure plans during 2002 with
regard to the Costa Rica Contract.
Consolidated Contractual Obligations - The following table presents a
summary of Harken's contractual obligations and commercial commitments as of
June 30, 2002. Harken has no off-balance sheet obligations other than in the
table set forth below.
Payments Due by Period
---------------------------------------------------------------------------------------------
Contractual Obligations 2002 2003 2004 2005 2006-2007 Thereafter Total
----------------------------------- ---- ---- ---- ---- --------- ---------- -----
Bank Credit Facility/(1)/ $ 450,000 $ 7,450,000 $ -- $ -- $ -- $ -- $ 7,900,000
Operating Leases/(2)/ 744,000 720,000 688,000 689,000 574,000 -- 3,415,000
International Commitments/(3)/ -- 2,500,000 -- -- -- -- 2,500,000
Domestic Commitments -- -- -- -- -- -- --
Convertible Notes Payable/(4)/ -- 50,855,000 -- -- 4,050,000 -- 54,905,000
----------- ----------- ----------- ----------- ----------- -------- -----------
Total Contractual Cash
Obligations $ 1,194,000 $61,525,000 $ 688,000 $ 689,000 $ 4,624,000 $ -- $68,720,000
=========== =========== =========== =========== =========== ======== ===========
(1) Does not reflect impact of plans to modify or extend existing facility
through refinancing.
(2) Amount net of sublease arrangements in effect at June 30, 2002.
(3) Represents the estimated cost of completion of a well in Colombia required
to be drilled by Harken under Harken's Cajaro Association Contract with
Ecopetrol.
(4) Represents the outstanding principal obligations owing under the 5%
European Notes, the Benz Convertible Notes and the 7% European Notes as of
June 30, 2002. These obligations are payable or redeemable for cash or with
shares of Harken common stock (See Part I, Item 1, Notes to Consolidated
Condensed Financial Statements, "Note 6 - Convertible Notes Payable" for
further discussion).
In addition to the above commitments, Harken anticipates that its
discretionary domestic and international capital expenditures will total
approximately $1.5 million each during 2002. After 2002, government authorities
under Harken's Louisiana state leases and operators under Harken's other
domestic operations may also request Harken to participate in the cost of
drilling additional exploratory and development wells. Harken may fund these
future domestic expenditures at its discretion. Further, the cost of drilling or
participating in the drilling of any such exploratory and development wells
cannot be quantified at this time since the cost will depend on many factors
outside of Harken's control, such as the timing of the request, the depth of the
wells and the location of the property. Harken's discretionary capital
expenditures for 2002 and afterward will be curtailed if Harken does not have
sufficient funds available. If Harken does not have sufficient funds or
otherwise chooses not to participate, it may experience a delay of future cash
flows from proved undeveloped oil and gas reserves. Such expenditure
curtailments could also result in Harken losing certain prospect acreage or
reducing its interest in future development projects.
32
Capital Sources
During 2001, sales of certain domestic producing property interests
generated cash proceeds of approximately $13.1 million. During the first six
months of 2002, Harken sold certain additional domestic producing property
interests for approximately $2,524,000.
Harken's operating cash flows from its domestic oil and gas properties were
strengthened by successful drilling activity in late 2001 in southern Louisiana,
which have partially offset the reductions following the recent sales of
producing properties. Wells completed in 2001, including the Thomas Cenac #1,
the State Lease 1480 #2, the State Lease 14589 #3 and the State Lease 1480 #3,
all began production in the last four months of 2001. In 2002, Harken has
participated in the drilling of three exploratory wells and three development
wells with a total of four of these wells being commercially successful. In
April 2002, Harken acquired the Republic Properties which consist of interests
in 16 oil and gas wells in 9 fields plus interests in additional prospect
acreage located in southern Louisiana and the Texas Gulf Coast region. The
acquisition of the Republic Properties began supplementing Harken's domestic
operating cash flows beginning in the second quarter of 2002. Harken's domestic
operating cash flows are particularly dependent on the price of natural gas,
which Harken is unable to predict.
Certain Harken subsidiaries entered into a three-year loan facility with
Bank One, N.A. ("Bank One"), which is secured by substantially all of those
subsidiaries' domestic oil and gas properties and a guarantee from Harken. The
Bank One facility provides borrowings subject to a borrowing base (as defined by
the Bank One facility), which was $6,737,000 as of June 30, 2002 and as of
August 14, 2002. Such borrowing base will be reduced by $225,000 per month
beginning September 1, 2002 until the borrowing base is redetermined by Bank One
on November 1 and May 1 in accordance with the facility agreement. The Bank One
facility requires the Borrowers, as well as Harken, to maintain certain
financial covenant ratios and requirements. Bank One's commitments under the
facility terminate in August 2003.
Global's operating cash flows continue to be provided by ongoing production
from its Alcaravan and Bolivar Contract areas in Colombia.
Global's ordinary shares are admitted for trading on the Alternative
Investment Market of the London Stock Exchange. This may enable Harken, through
its ownership in Global, to seek additional financing and effect acquisition
activities using shares of Global stock. 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 and net operating losses. Additional capital
raised by Global would be used exclusively for Global's capital needs, as cash
dividends to Harken would be limited by tax restrictions.
In addition to the above sources, Harken has and may continue to raise
capital through the issuance of debt, equity and convertible debt instruments,
or through the exchange of existing instruments through transactions that
provide Harken with additional capital.
Adequacy of Capital Sources
Considering its existing cash resources, the cash resources generated
subsequent to June 30, 2002 and the potential additional capital sources listed
above, Harken believes that it will have sufficient cash resources
33
to fund all of its planned capital expenditures during 2002. 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 either existing or
newly established financing arrangements.
In 2003, Harken's most significant capital commitment is satisfying its
remaining obligations under the 5% European Notes, the Bank One credit facility
and the Benz Convertible Notes, which mature in May 2003, August 2003 and
November 2003, respectively. The continuation of Harken's business plan in 2003
is dependent upon a number of factors, including Harken's efforts to restructure
its capital structure through the repurchase, redemption and restructuring of
its 5% Notes. As discussed above, such restructuring efforts are dependent upon
the ability of Harken to raise funds through the issuance of debt or equity
securities, or if necessary though the sale of producing properties. Management
is presently investigating potential financing transactions that it believes can
provide additional cash for these purposes. Additional cash may be available
from production operations, though Harken has had reduced operating cash flows
during 2002 due to lower commodity prices compared to the prior year. The use of
a significant number of shares of Harken common stock toward the redemption of
5% Notes is also dependent on various factors, including the future market price
of Harken common stock, the approval by Harken shareholders to issue the
required number of shares necessary, and the limitation of authorized common
shares available for such redemptions, as discussed above. Accordingly, there
can be no assurance that such capital restructuring plans will be successful.
Even if Harken is successful in its efforts to redeem or repurchase the 5%
Notes, Harken will still require additional financing in 2003 to fund its
operations. Further, Harken may not be able to generate sufficient cash from
operations to fund its ongoing exploration and development efforts and fulfill
its other capital commitments after 2003. Consequently, Harken expects to fund
these operational and capital commitments in 2003 and afterward through a
combination of cash on hand, cash flows from operations, issuances or exchanges
of debt or equity securities, or through cash provided by either existing or
newly established financing arrangements.
Harken intends to continue to seek to raise equity or debt financing
through the issuance of debt, equity and convertible debt instruments, or
through the exchange of existing instruments through transactions that provide
Harken with additional capital to fund the capital commitments described above.
Such transactions may be affected, however, by the market value of Harken common
stock. If the price of Harken common stock remains low or decreases, Harken's
ability to utilize its stock either directly or indirectly through convertible
instruments for raising capital could be negatively affected. Further, raising
additional funds by issuing common stock or other types of equity securities
would further dilute Harken's existing stockholders, which dilution could be
substantial if the price of Harken common stock remains low or decreases. No
assurance can be given that Harken will be able to obtain additional financing
on favorable terms, if at all, to meet its operational and capital commitments
described above.
34
PART II - OTHER INFORMATION
Item 1. Legal Proceedings.
Search Acquisition Corp. ("Search Acquisition"), also known as Harken Texas
Acquisition Corp., a wholly-owned subsidiary of Harken, was a defendant in a
lawsuit filed by Petrochemical Corporation of America and Lorken Investments
Corporation (together, "Petrochemical"). This lawsuit arose out of
Petrochemical's attempt to enforce a judgment of joint and several liability
entered in 1993 against a group of twenty limited partnerships known as the
"Odyssey limited partnerships." Petrochemical claimed that Search Exploration,
Inc. is liable for payment of the judgment as the successor-in-interest to eight
Odyssey limited partnerships. Search Acquisition was the surviving corporation
in Harken's 1995 acquisition of Search Exploration, Inc. On February 28, 1996,
the court granted Search Acquisition's motion for summary judgment in this case.
On July 3, 1998, the Fifth District Court of Appeals for the State of Texas
reversed the trial court's summary judgment and remanded the case to the trial
court. In December 2001, a jury trial was held in this matter. The jury returned
a verdict finding for Petrochemical in the amount of $1.1 million of actual
damages and $3 million in punitive damages. In April 2002, the court entered
judgment on the verdict rendered by the jury. Search Acquisition then filed a
motion for a new trial. In June 2002, Petrochemical filed with the U.S.
Bankruptcy Court in Dallas, Texas an involuntary petition in bankruptcy against
Search Acquisition, under Chapter 7 of the Bankruptcy Code, and moved for the
appointment of an interim trustee. Search Acquisition agreed to the entry of an
order for relief under Chapter 7, as well as the appointment of the interim
trustee. These actions resulted in a stay of Search Acquisition's motion of the
Court's judgment on the jury verdict totaling $4.1 million. Thereafter,
McCulloch Energy, Inc. ("McCulloch"), a wholly-owned subsidiary of Search
Acquisition, filed a voluntary petition in bankruptcy under Chapter 7 of the
Bankruptcy Code in the U.S. Bankruptcy Court in Houston, Texas. The stay of
Search Acquisition's motion and the related bankruptcy filings led to
negotiations in bankruptcy and mediation relating to the Petrochemical suit and
judgment. As a result of these events, on August 1, 2002, pursuant to a mediated
settlement, Petrochemical and the bankruptcy trustees agreed to release their
claims against Harken in exchange for a payment of $2 million to be distributed
to Petrochemical, and a payment of approximately $189,000 to pay administrative
expenses and other creditors of the bankruptcy estates. This amount has been
fully accrued as of June 30, 2002 and is included in accrued liabilities in the
accompanying Consolidated Condensed Balance Sheet at June 30, 2002. Pursuant to
the mediation agreement, Petrochemical elected to receive 100% of the stock of
McCulloch in September 2002. McCulloch does not have any contractual
arrangements that are material to Harken's operations and has a book and fair
value each less than $10,000. The mediation agreement was approved by the
Bankruptcy Courts in Dallas and Houston in September 2002. Payment of the
mediation settlement was also made in September 2002.
Item 2. Changes in Securities and Use of Proceeds
The following is a description of the unregistered securities Harken has issued
during the period covered by this report and during the subsequent period
through the date of this report:
1. On June 18, 2002, Harken issued to certain holders of Harken's securities,
who represented to Harken that they were accredited investors as defined in Rule
501 of Regulation D, $2,025,000 in principal amount of its 7% Senior Convertible
Notes Due 2007 (the "7% European Notes") in exchange for $1,025,000 in cash and
10,000 shares of Harken's Series G1 Preferred Stock. The 7% European Notes are
convertible as described in Sections 6 and 7 of the Note, which Note is Exhibit
10.19 to this Report, and which Sections of the Note are incorporated herein by
reference.
35
2. On June 19, 2002, Harken issued an additional $2,025,000 in principal amount
of its 7% European Notes to certain holders of Harken's securities, who
represented to Harken that they were accredited investors as defined in Rule 501
of Regulation D, in exchange for 3,000 shares of Harken's Series G1 Preferred
Stock and approximately $1,725,000 in cash. The 7% European Notes are
convertible as described in Sections 6 and 7 of the Note, which Note is Exhibit
10.20 to this Report, and which Sections of the Note are incorporated herein by
reference.
3. On July 15, 2002, Harken issued a 10% Term Loan Payable to a certain holder
of Harken's securities, who represented to Harken that he was an accredited
investor as defined in Rule 501 of Regulation D, in exchange for $3,000,000 in
cash.
4. On August 13, 2002, Harken issued an additional $2,210,000 in principal
amount of its 7% European Notes to certain holders of Harken's securities, who
represented to Harken that they were accredited investors as defined in Rule 501
of Regulation D, in exchange for $2,210,000 principal amount of Harken's 5%
Senior Convertible Notes Due 2003. The 7% European Notes are convertible as
described in Sections 6 and 7 of the Note.
5. On April 4, 2002, Harken issued a total of 2,724,865 shares of unregistered
Harken common stock in connection with the acquisition of the Republic
Properties. Such shares were registered in June 2002 through the filing of an
S-3 registration statement with the Securities and Exchange Commission.
All of the securities issued in the transactions described above were issued
without registration under the Securities Act of 1933 in reliance upon the
exemption provided in Section 4(2) of such Act. The recipients of securities in
each such transaction acquired the securities for investment only and not with a
view to or for sale in connection with any distribution thereof and appropriate
legends were affixed to the instruments issued in such transactions. Harken
believes the recipients were all accredited investors within the meaning of Rule
501 of Regulation D, or had such knowledge and experience in financial and
business matters as to be able to evaluate the merits and risks of an investment
in Harken's securities. All recipients were existing holders of Harken
securities, and none of the transactions described above involved general
solicitation or general advertising.
Item 6. Exhibits and Reports on Form 8-K.
6a) EXHIBIT INDEX
Exhibit
3.1 Certificate of Incorporation of Harken Energy
Corporation as amended (filed as Exhibit 3.1 to
Harken's Annual Report on Form 10-K for fiscal year
ended December 31, 1989, File No. 0-9207, and
incorporated by reference herein).
3.2 Amendment to the Certificate of Incorporation of
Harken Energy Corporation (filed as Exhibit 28.8 to
the Registration Statement on Form S-1 of Tejas Power
Corporation, file No. 33-37141, filed with the SEC on
October 3, 1990 and incorporated by reference
herein.)
3.3 Amendment to the Certificate of Incorporation of
Harken Energy Corporation (filed as Exhibit 3 to
Harken's Quarterly Report on Form 10-Q for fiscal
quarter ended March 31, 1991, File No. 0-9207, and
incorporated by reference herein.)
36
3.4 Amendments to the Certificate of Incorporation of Harken Energy
Corporation (filed as Exhibit 3 to Harken's Quarterly Report on
Form 10-Q for fiscal quarter ended June 30,1991, File No. 0-9207,
and incorporated by reference herein.)
3.5 Amendments to the Certificate of Incorporation of Harken Energy
Corporation (filed as Exhibit 3.5 to Harken's Annual Report on
Form 10-K for the fiscal year ended December 31, 1996, File No.
0-9207, and incorporated herein by reference).
3.6 Amendment to the Certificate of Incorporation of Harken Energy
Corporation (filed as Exhibit 3.6 to Harken's Annual Report on
Form 10-K for the fiscal year ended December 31, 1997, File No.
0-9207 and incorporated by reference herein).
3.7 Amendment to the Certificate of Incorporation of Harken Energy
Corporation (filed as Exhibit 3.6 to Harken's Quarterly Report on
Form 10-Q for the fiscal quarter ended June 30, 1998, File No.
0-9207, and incorporated by reference herein).
3.8 Bylaws of Harken Energy Corporation, as amended (filed as Exhibit
3.2 to Harken's Annual Report on Form 10-K for fiscal year ended
December 31, 1989, File No. 0-9207, and incorporated by reference
herein).
4.1 Form of certificate representing shares of Harken common stock,
par value $.01 per share (filed as Exhibit 1 to Harken's
Registration Statement on Form 8-A, File No. 0-9027, filed with
the SEC on June 1, 1989 and incorporated by reference herein.)
4.2 Certificate of Designations, Powers, Preferences and Rights of
Series A Cumulative Convertible Preferred Stock, $1.00 par value,
of Harken Energy Corporation (filed as Exhibit 4.1 to Harken's
Annual Report on Form 10-K for the fiscal year ended December
31,1989, File No. 0-9207, and incorporated by reference herein).
4.3 Certificate of Designations, Powers, Preferences and Rights of
Series B Cumulative Convertible Preferred Stock, $1.00 par value,
of Harken Energy Corporation (filed as Exhibit 4.2 to Harken's
Annual Report on Form 10-K for the fiscal year ended December 31,
1989, File No. 0-9207, and incorporated by reference herein.).
4.4 Certificate of the Designations, Powers, Preferences and Rights of
Series C Cumulative Convertible Preferred Stock, $1.00 par value
of Harken Energy Corporation (filed as Exhibit 4.3 to Harken's
Annual Report on Form 10-K for fiscal year ended December 31,1989,
File No. 0-9207, and incorporated by reference herein).
4.5 Certificate of the Designations of Series D Preferred Stock, $1.00
par value of Harken Energy Corporation (filed as Exhibit 4.3 to
Harken's Quarterly Report on Form 10-Q for the fiscal quarter
ended September 30,1995, File No. 0-9207, and incorporated by
reference herein).
4.6 Rights Agreement, dated as of April 6, 1999, by and between Harken
Energy Corporation and ChaseMellon Shareholder Services L.LC., as
Rights Agent (filed as
37
Exhibit 4 to Harken's Current Report on Form 8-K dated April 7,
1998, File No. 0-9207, and incorporated by reference herein).
4.7 Certificate of Designations of Series E Junior Participating
Preferred Stock (filed as Exhibit B to Exhibit 4 to Harken's
Current Report on Form 8-K dated April 7, 1998, File No. 0-9207,
and incorporated by reference herein).
4.8 Certificate of Designations, Preferences and Rights of Series F
Convertible Preferred Stock (filed as Exhibit 4.8 to Harken's
Quarterly Report on Form 10-Q for the period ended June 30, 1998,
File No. 0-9207, and incorporated by reference herein).
4.9 Certificate of Designations of Series G1 Convertible Preferred
Stock (filed as Exhibit 4.9 to Harken's Annual Report on Form 10-K
for fiscal year ended December 31, 2000, File No. 0-9207, and
incorporated by reference herein).
4.10 Certificate of Designations of Series G2 Convertible Preferred
Stock (filed as Exhibit 4.10 to Harken's Annual Report on Form
10-K for fiscal year ended December 31, 2001, File No. 0-9207, 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. 0-9207, and
incorporated by reference herein).
10.2 Amended and Restated Non-Qualified Incentive Stock Option Plan of
Harken adopted by Harken's stockholders on February 18, 1991
(filed as Exhibit 10.2 to Harken's Annual Report on Form 10-K for
the fiscal year ended December 31, 1991, File No. 0-9207, and
incorporated by reference herein).
10.3 Form of Advancement Agreement dated September 13, 1990, between
Harken and each director of Harken (filed as Exhibit 10.38 to
Harken's Annual Report on Form 10-K for the fiscal year ended
December 31, 1989, File No. 0-9207, and incorporated by reference
herein).
10.4 Harken Energy Corporation's 1993 Stock Option and Restricted Stock
Plan (filed as Exhibit 4.3 to Harken's Registration Statement on
Form S-8, filed with the SEC on September 23, 1993, and
incorporated by reference herein).
10.5 First Amendment to Harken Energy Corporation's 1993 Stock Option
and Restricted Stock Plan (filed as an Exhibit 4.4 to Harken's
Registration Statement on Form 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).
38
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 Association Contract (Alcaravan) dated as of December 13, 1992,
but effective as of February 13, 1993, by and between Empresa
Colombia de Petroleos (filed as Exhibit 10.1 to Harken's Annual
Report on Form 10-K for the fiscal year ended December 31, 1992,
File No. 0-9207, and incorporated herein by reference).
10.10 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.
10.11 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).
10.12 Association Contract (Bocachico) dated as of January 1994, but
effective as of April 1994, by and between Empresa Colombia de
Petroleos (filed as Exhibit 10.1 to Harken's Quarterly Report on
Form 10-Q for the quarterly period ended March 31, 1994, File No.
0-9207, and incorporated herein by reference).
10.13 Trust Indenture dated May 26, 1998, by and between Harken and
Marine Midland Bank plc (filed as Exhibit 10.1 to Harken's
Quarterly Report on Form 10-Q for the quarterly period ended June
30, 1998, File No. 0-9207, and incorporated herein by reference).
10.14 Credit Agreement between Harken Exploration Company, XPLOR Energy,
Inc. Harken Energy West Texas, Inc., Harken Southwest Corporation,
South Coast Exploration Co., Xplor Energy SPV-1, Inc., McCulloch
Energy, Inc. and Bank One, Texas, N.A. dated August 11, 2000 and
as amended December 21, 2000 and December 31, 2000 (filed as
Exhibit 10.12 to Harken's Annual Report on Form 10-K for fiscal
year ended December 31, 2000, File No. 09207, and incorporated by
reference herein).
10.15 Third Amendment to Credit Agreement between Harken Exploration
Company, XPLOR Energy, Inc., Harken Energy West Texas, Inc., South
Coast Exploration Co., XPLOR Energy SPV-1, Inc., McCulloch Energy,
Inc., Harken Gulf Exploration Company, and Bank One, N.A. dated
May 11, 2001 (Filed as Exhibit 10.13 to Harken's Quarterly Report
on Form 10-Q for the quarter ended June 30, 2001, File No. 0-9207,
and incorporated herein by reference).
10.16 Association Contract (Cajaro) dated as of December 2001, but
effective as of February 2002, by and between Harken de Colombia,
Ltd. and Empresa Colombia de Petroleos. (Filed as Exhibit 10.14 to
Harken's Annual Report on Form 10-K for fiscal year ended December
31, 2001, File No. 0-9207, and incorporated herein by reference).
39
10.17 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 for fiscal
year ended December 31, 2001, File No. 0-9207, and incorporated by
reference herein).
10.18 Letter from Arthur Andersen LLP pursuant to Item 304(a)(3) of
Regulation S-K (Filed as Exhibit 16.1 in Harken's current report
on Form 8-K, filed on September 5, 2001, File No. 0-9207, and
incorporated by reference herein).
10.19 Waiver and Fourth Amendment to Credit Agreement between Harken
Exploration Company, XPLOR Energy, Inc., Harken Energy West Texas,
Inc., XPLOR Energy SPV-1, Inc., Harken Gulf Exploration Company,
and Bank One, N.A. dated March 21, 2002. (Filed as Exhibit 10.17
to Harken's Quarterly Report on Form 10-Q for the quarter ended
March 31, 2002, File No. 0-9207, and incorporated herein by
reference).
*10.20 Loan Agreement dated July 15, 2002 between Harken Energy
Corporation and Lyford Investments Enterprises Ltd.
*10.21 Harken Energy Corporation 7% Senior Convertible Notes Due 2007 in
the principal sum of $2,025,000 dated June 18, 2002.
*10.22 Harken Energy Corporation 7% Senior Convertible Notes Due 2007 in
the principal sum of $2,025,000 dated June 19, 2002.
*10.23 Harken Energy Corporation5% Convertible Notes Due 2003 between
Harken and Benz Energy, Inc. and Texstar Petroleum, Inc. in the
principal amounts of $6,803,679.26 and $4,071,320.74 dated
December 30, 1999.
**99.1 Certificate of the Chairman of the Board and Chief Executive
Officer of Harken Energy Corporation.
**99.2 Certificate of the Chief Financial Officer of Harken Energy
Corporation.
* Previously filed
** Filed herewith
(b) REPORTS ON FORM 8-K
None filed.
40
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: December 20, 2002 By: /s/ Anna M. Williams
--------------------- ------------------------------------
Executive Vice President-Finance and
Chief Financial Officer
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.
Date: December 20, 2002 By: /s/ Mikel D. Faulkner
---------------------------
Mikel D. Faulkner
Chief Executive Officer
41
CERTIFICATION OF CHIEF FINANCIAL OFFICER
PURSUANT TO 18 U.S.C. SECTION 1350
AS ADOPTED PURSUANT TO SECTION 302
OF THE SARBANES-OXLEY ACT OF 2002
I, Anna M. Williams, Chief Financial Officer of Harken Energy Corporation,
certify that:
1. I have reviewed this 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.
Date: December 20, 2002 By: /s/ Anna M. Williams
---------------------------------
Anna M. Williams
Executive Vice President -Finance
and Chief Financial Officer
42