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SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
Form 10-Q
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15 (d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended 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 0-9207
HARKEN ENERGY CORPORATION
(Exact name of registrant as specified in its charter)
Delaware 95-2841597
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
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 [_]
The number of shares of Common Stock, par value $0.01 per share,
outstanding as of August 1, 2002 was 23,731,407.
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 17
PART II. OTHER INFORMATION 31
Item 1. Legal Proceedings 31
Item 2. Changes in Securities and Use of Proceeds 31
Item 6. Exhibits and Reports on Form 8-K 32
SIGNATURES 37
2
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.
3
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.
4
HARKEN ENERGY CORPORATION AND SUBSIDIARIES
CONSOLIDATED CONDENSED STATEMENT OF STOCKHOLDERS' EQUITY
(Unaudited)
Accumulated
G1 G2 Additional Other
Preferred Preferred Common Paid-In Treasury Accumulated Comprehensive
Stock Stock Stock Capital Stock Deficit Income (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 subisidiary -- -- -- (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 costs -- 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 flow 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.
6
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. 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)
======= =======
7
(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.
(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
============= =============
(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
8
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, including certain
affiliates of Harken and Global, for approximately $1,435,000 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 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 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 and Global fully impairing its 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.
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
9
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 certain 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.
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
10
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.
(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% 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 value of the
note to be redeemed, plus accrued and unpaid interest thereon, 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% 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% 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% Notes had been converted at
this price, the noteholders would have received an aggregate of approximately
151.8 million shares of common stock and, collectively, would control over 86%
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% Notes to be redeemed.
In connection with the issuance of Harken common stock in redemption of 5%
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 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 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
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 value of the note to be redeemed, plus accrued and
unpaid interest thereon, 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
11
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 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, 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
12
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 interest thereon, 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 an agreement to forgive the
repayment of a short-term loan in the amount of $64,000 to a member of
management and reflected the forgiveness as a charge to earnings during the
first quarter of 2002.
(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
13
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.
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
14
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, is a defendant in a
lawsuit filed by Petrochemical Corporation of America and Lorken Investments
Corporation (together, "Petrochemical"). This lawsuit arises out of
Petrochemical's attempt to enforce a judgment of joint and several liability
entered in 1993 against a group of twenty limited partnerships known as the
"Odyssey limited partnerships." Petrochemical claims that Search Exploration,
Inc. is liable for payment of the judgment as the successor-in-interest to eight
Odyssey limited partnerships. Search Acquisition was the surviving corporation
in 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 late 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 promptly
appealed this judgment. 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 to the appointment of the interim
trustee. These actions resulted in a stay of Search Acquisition's appeal 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 appeal 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 signed on August 1, 2002, Petrochemical may also elect
to receive the stock of six non-operating subsidiaries
15
of Harken that are not material to Harken's operations. The mediation agreement
is subject to approval by the Bankruptcy Courts in Dallas and Houston.
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 certain
third parties. Although the outcome of this litigation is uncertain, Harken
believes that any liability to Harken as a result of this litigation will not
have a material adverse effect on Harken's financial condition. In February
2002, 420 Energy filed a new lawsuit against XPLOR, Harken and other defendants
in state court in Dallas, Texas. Harken intends to pursue and enforce, through
whatever steps are necessary, the indemnification from the third parties
discussed above with regard to this suit. 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. A significant majority of this accrued amount relates to future
abandonment costs 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.
16
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:
o 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
o 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.
17
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 instances or
threats of violence, preventing or interrupting Global from producing,
transporting or delivering future production volumes.
18
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, 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.
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:
19
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 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
20
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
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
21
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.
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.
23
22
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
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.
23
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.
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.
24
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, the cash resources generated subsequent to June 30, 2002 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 $1.7 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 to 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 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 value of the note to be redeemed,
plus accrued and unpaid interest thereon, 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
25
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 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 interest thereon, 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.
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 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
26
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 value of the
note to be redeemed, plus accrued and unpaid interest thereon, 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% 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% 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% Notes had been converted at
this price, the noteholders would have received an aggregate of approximately
151.8 million shares of common stock and, collectively, would control over 86%
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% Notes to be redeemed.
In connection with the issuance of Harken common stock in redemption of 5%
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 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.
Other Capital 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.
27
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 has accrued approximately $7.4 million
at June 30, 2002 relating to operational or regulatory liabilities related to
Harken's domestic operations. Harken and its subsidiaries currently are involved
in various lawsuits and other contingencies, which in management's opinion, will
not result in a material adverse effect upon Harken's financial condition or
operations taken as a whole. See Item 2, Part 1 for description of a certain
litigation.
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.
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.
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
28
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 certain 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.
Global's operating cash flows continue to be provided by ongoing production
from its Alcaravan and Bolivar Contract areas in Colombia. Global anticipates
that cash flows from its Colombian assets will be adequate to fund the capital
needs, as well as the operating, administrative and management costs of its
Middle American operations.
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. Such transactions may be impacted,
however, by the market value of Harken common stock and/or Global ordinary
shares. If the price of Harken common stock and/or Global ordinary shares
remains low or decreases, Harken's ability to utilize such stock either directly
or indirectly through convertible instruments for raising capital could be
negatively affected.
Adequacy of Capital Sources
Management believes funds on hand and available sources of financing will
enable Harken to meet its liquidity needs for the remainder of 2002. The
continuation of Harken's business plan 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
29
above. Accordingly, there can be no assurance that such capital restructuring
plans will be successful.
30
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, is a defendant in a
lawsuit filed by Petrochemical Corporation of America and Lorken Investments
Corporation (together, "Petrochemical"). This lawsuit arises out of
Petrochemical's attempt to enforce a judgment of joint and several liability
entered in 1993 against a group of twenty limited partnerships known as the
"Odyssey limited partnerships." Petrochemical claims that Search Exploration,
Inc. is liable for payment of the judgment as the successor-in-interest to eight
Odyssey limited partnerships. Search Acquisition was the surviving corporation
in 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 late 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 promptly
appealed this judgment. 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 to the appointment of the interim
trustee. These actions resulted in a stay of Search Acquisition's appeal 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 appeal 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 signed on August 1, 2002, Petrochemical may also elect
to receive the stock of six non-operating subsidiaries of Harken that are not
material to Harken's operations. The mediation agreement is subject to approval
by the Bankruptcy Courts in Dallas and Houston.
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.
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
31
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 receipients 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.
9a) EXHIBIT INDEX Exhibit
3.1 Certificate of Incorporation of Harken Energy Corporation as
amended (filed as Exhibit 3.1 to Harken's Annual Report on
Form 10-K for fiscal year ended December 31, 1989, File No.
0-9207, and incorporated by reference herein).
3.2 Amendment to the Certificate of Incorporation of Harken
Energy Corporation (filed as Exhibit 28.8 to the
Registration Statement on Form S-1 of Tejas Power
Corporation, file No. 33-37141, and incorporated by
reference herein.)
3.3 Amendment to the Certificate of Incorporation of Harken
Energy Corporation (filed as Exhibit 3 to Harken's Quarterly
Report on Form 10-Q for fiscal quarter ended March 31, 1991,
File No. 0-9207, and incorporated by reference herein.)
3.4 Amendments to the Certificate of Incorporation of Harken
Energy Corporation (filed as Exhibit 3 to Harken's Quarterly
Report on Form 10-Q for fiscal quarter ended June 30,1991,
File No. 0-9207, and incorporated by reference herein.)
32
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, 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 Exhibit 4 to
Harken's Current Report on Form 8-K dated April 7, 1998,
File No. 0-9207, and incorporated by reference herein).
33
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, and incorporated by reference
herein).
10.5 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).
10.6 Association Contract (Bolivar) by and between Harken de
Colombia, Ltd. and Empresa Colombia de Petroleos (filed as
Exhibit 10.4 to Harken's Quarterly Report on Form 10-Q for
the quarterly period ended June 30, 1996, and incorporated
herein by reference).
10.7 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).
10.8 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
34
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).
10.9 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).
10.10 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).
10.11 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).
10.12 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).
10.14 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).
10.15 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).
10.16 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).
10.17 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.)
*10.18 Loan Agreement dated July 15, 2002 between Harken Energy
Corporation and Lyford Investments Enterprises Ltd.
*10.19 Harken Energy Corporation 7% Senior Convertible Notes Due
2007 in the principal sum of $2,025,000 dated June 18, 2002.
35
*10.20 Harken Energy Corporation 7% Senior Convertible Notes Due
2007 in the principal sum of $2,025,000 dated June 19, 2002.
*10.21 Harken Energy Corporation 5% 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.
* Filed herewith
(b) REPORTS ON FORM 8-K
None filed.
36
HARKEN ENERGY CORPORATION
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
Harken Energy Corporation
-----------------------------------------
(Registrant)
Date: August 14, 2002 By: /s/Anna M. Williams
---------------------- --------------------------------------
Executive Vice President-Finance and
Chief Financial Officer
37