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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 September 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 [ ]
Indicate by check mark whether the registrant is an accelerated filer (as
defined in Rule 12b-2 of the Exchange Act). Yes [ ] No [X]
The number of shares of Common Stock, par value $0.01 per share,
outstanding as of November 1, 2002 was 24,842,104.
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HARKEN ENERGY CORPORATION
INDEX TO QUARTERLY REPORT
September 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 ............................... 21
Item 4. Controls and Procedures ...................................... 38
PART II. OTHER INFORMATION ................................................ 39
Item 1. Legal Proceedings ............................................ 39
Item 2. Changes in Securities and Use of Proceeds .................... 40
Item 6. Exhibits and Reports on Form 8-K ............................. 42
SIGNATURES ................................................................ 46
2
PART I - FINANCIAL INFORMATION
3
ITEM 1. CONDENSED FINANCIAL STATEMENTS
HARKEN ENERGY CORPORATION AND SUBSIDIARIES
CONSOLIDATED CONDENSED BALANCE SHEETS
(Unaudited)
December 31, September 30,
2001 2002
------------- -------------
Assets
Current Assets:
Cash and temporary investments $ 8,523,000 $ 7,669,000
Restricted cash 944,000 --
Accounts receivable, net 3,248,000 4,411,000
Related party notes receivable 169,000 105,000
Prepaid expenses and other current assets 1,361,000 1,109,000
------------- -------------
Total Current Assets 14,245,000 13,294,000
Property and Equipment, net 78,335,000 71,842,000
Other Assets, net 3,226,000 3,351,000
------------- -------------
$ 95,806,000 $ 88,487,000
============= =============
Liabilities and Stockholders' Equity
Current Liabilities:
Trade payables $ 2,664,000 $ 1,493,000
Accrued liabilities and other 6,197,000 4,261,000
Revenues and royalties payable 2,006,000 1,693,000
Bank credit facilities -- 6,287,000
Convertible notes payable -- 33,100,000
------------- -------------
Total Current Liabilities 10,867,000 46,834,000
Convertible Notes Payable 51,388,000 12,525,000
Bank Credit Facilities 7,937,000 --
Investor Term Loan -- 5,000,000
Accrued Preferred Stock Dividends 3,942,000 6,395,000
Other Long-Term Obligations 5,458,000 5,414,000
Commitments and Contingencies (Note 11)
Minority Interest in Consolidated Subsidiary -- 1,915,000
Stockholders' Equity:
Series G1 Preferred Stock, $1.00 par value; $100 liquidation value; 700,000
shares authorized; 446,417 and 404,105 shares outstanding, respectively 446,000 404,000
Series G2 Preferred Stock, $1.00 par value; $100 liquidation value; 400,000
shares authorized; 95,300 and 93,150 shares outstanding, respectively 95,000 93,000
Common stock, $0.01 par value; 225,000,000 shares authorized;
18,713,038 and 25,447,804 shares issued, respectively 187,000 254,000
Additional paid-in capital 385,710,000 388,780,000
Accumulated deficit (369,087,000) (377,371,000)
Accumulated other comprehensive income 296,000 (315,000)
Treasury stock, at cost, 542,900 and 562,400 shares held, respectively (1,433,000) (1,441,000)
------------- -------------
Total Stockholders' Equity 16,214,000 10,404,000
------------- -------------
$ 95,806,000 $ 88,487,000
============= =============
The accompanying Notes to Consolidated Condensed Financial
Statements are an integral part of these Statements.
4
HARKEN ENERGY CORPORATION AND SUBSIDIARIES
CONSOLIDATED CONDENSED STATEMENTS OF OPERATIONS
(Unaudited)
Three Months Ended Nine Months Ended
September 30, September 30,
---------------------------- ----------------------------
2001 2002 2001 2002
------------ ------------ ------------ ------------
Revenues:
Oil and gas operations $ 6,296,000 $ 6,086,000 $ 26,003,000 $ 19,028,000
Interest and other income 136,000 378,000 603,000 640,000
------------ ------------ ------------ ------------
6,432,000 6,464,000 26,606,000 19,668,000
------------ ------------ ------------ ------------
Costs and Expenses:
Oil and gas operating expenses 2,967,000 1,855,000 9,548,000 6,568,000
General and administrative expenses, net 2,037,000 2,702,000 7,409,000 7,564,000
Depreciation and amortization 3,425,000 2,640,000 11,508,000 9,271,000
Litigation and contingent liability settlements, net -- -- -- 1,168,000
Interest expense and other, net 899,000 1,807,000 3,597,000 3,732,000
------------ ------------ ------------ ------------
9,328,000 9,004,000 32,062,000 28,303,000
------------ ------------ ------------ ------------
Loss before income taxes (2,896,000) (2,540,000) (5,456,000) (8,635,000)
Income tax expense (34,000) (75,000) (64,000) (255,000)
------------ ------------ ------------ ------------
Loss before extraordinary items and minority
interest (2,930,000) (2,615,000) (5,520,000) (8,890,000)
Minority interest in loss of subsidiary -- 39,000 -- 68,000
------------ ------------ ------------ ------------
Loss before extraordinary item $ (2,930,000) $ (2,576,000) $ (5,520,000) $ (8,822,000)
Extraordinary item-gains on repurchase/exchange of
Convertible Notes 1,722,000 3,315,000 2,975,000 3,655,000
------------ ------------ ------------ ------------
Net income (loss) $ (1,208,000) $ 739,000 $ (2,545,000) $ (5,167,000)
============ ============ ============ ============
Preferred stock dividends (1,135,000) (1,002,000) (2,084,000) (3,117,000)
------------ ------------ ------------ ------------
Net loss attributed to common stock $ (2,343,000) $ (263,000) $ (4,629,000) $ (8,284,000)
============ ============ ============ ============
Basic and diluted loss per common share:
Loss before extraordinary items $ (0.22) $ (0.16) $ (0.42) $ (0.58)
Extraordinary item-gains on repurchase/exchange of
Convertible Notes 0.09 0.15 0.16 0.18
------------ ------------ ------------ ------------
Loss per common share $ (0.13) $ (0.01) $ (0.26) $ (0.40)
============ ============ ============ ============
Weighted average shares outstanding 18,118,344 22,835,940 18,034,555 20,696,314
============ ============ ============ ============
The accompanying Notes to Consolidated Condensed Financial Statements
are an integral part of these Statements.
5
HARKEN ENERGY CORPORATION AND SUBSIDIARIES
CONSOLIDATED CONDENSED STATEMENT OF STOCKHOLDERS' EQUITY
(Unaudited)
Additional
G1 Preferred G2 Preferred Common Paid-In
Stock Stock Stock Capital
------------ ------------ ------------------------
Balance, December 31, 2001 $ 446,000 $ 95,000 $ 187,000 $385,710,000
Issuance of common stock -- -- 27,000 2,670,000
Redemption of convertible note -- -- 20,000 1,091,000
Exchange of preferred stock (17,000) -- -- (45,000)
Conversions of preferred stock (24,000) (2,000) 3,000 510,000
Repurchase of treasury stock (1,000) -- -- (8,000)
Rights offering costs -- -- 17,000 583,000
Preferred stock dividends -- -- -- --
Issuance of stock of subsidiary -- -- -- (1,731,000)
Comprehensive income:
Net change in derivative fair value -- -- -- --
Reclassification of derivative
fair value into earnings -- -- -- --
Net loss -- -- -- --
Total comprehensive income (loss)
------------ ------------ --------- -------------
Balance, September 30, 2002 $ 404,000 $ 93,000 $ 254,000 $388,780,000
============ ============ ========= =============
Accumulated
Other
Treasury Accumulated Comprehensive
Stock Deficit Income (Loss) Total
-------------------------------------------------------
Balance, December 31, 2001 $(1,433,000) $(369,087,000) $ 296,000 $16,214,000
Issuance of common stock -- -- -- 2,697,000
Redemption of convertible note -- -- -- 1,111,000
Exchange of preferred stock -- -- -- (62,000)
Conversions of preferred stock -- -- -- 487,000
Repurchase of treasury stock (8,000) -- -- (17,000)
Rights offering costs -- -- -- 600,000
Preferred stock dividends -- (3,117,000) -- (3,117,000)
Issuance of stock of subsidiary -- -- -- (1,731,000)
Comprehensive income:
Net change in derivative fair value -- -- (521,000)
Reclassification of derivative
fair value into earnings -- -- (90,000)
Net loss -- (5,167,000) --
Total comprehensive income (loss) (5,778,000)
------------ ------------- ------------- -----------
Balance, September 30, 2002 $(1,441,000) $(377,371,000) $ (315,000) $10,404,000
============ ============= ============= ===========
The accompanying Notes to Consolidated Condensed Financial Statements
are an integral part of these Statements.
6
HARKEN ENERGY CORPORATION AND SUBSIDIARIES
CONSOLIDATED CONDENSED STATEMENTS OF CASH FLOWS
(Unaudited)
Nine Months Ended
September 30,
----------------------------
2001 2002
------------ ------------
Cash flows from operating activities:
Net loss $ (2,545,000) $ (5,167,000)
Adjustment to reconcile net loss to net cash
provided (used) by operating activities:
Depreciation and amortization 11,508,000 9,271,000
Amortization of issuance costs and other 966,000 613,000
Minority interest -- (68,000)
Litigation and contingent liability settlements, net -- 1,168,000
Extraordinary items (2,975,000) (3,655,000)
Standby purchase agreement costs -- 300,000
Other 441,000 127,000
Change in assets and liabilities:
(Increase) decrease in accounts receivable 46,000 (1,697,000)
Decrease in trade payables and other (1,466,000) (2,989,000)
------------ ------------
Net cash provided by (used in) operating activities 5,975,000 (2,097,000)
------------ ------------
Cash flows from investing activities:
Proceeds from sales of assets 13,336,000 2,658,000
Deconsolidation of subsidiary (668,000) --
Capital expenditures, net (25,133,000) (3,646,000)
------------ ------------
Net cash used in investing activities (12,465,000) (988,000)
------------ ------------
Cash flows from financing activities:
Repayments of debt obligations (207,000) (5,937,000)
Proceeds from issuance of long-term debt, net of issuance costs -- 4,895,000
Proceeds from issuances of subsidiary common stock, net of issuance costs -- 915,000
Collection of note receivable 140,000 --
Treasury shares purchased (825,000) (17,000)
Proceeds from issuances of European Notes, net of issuance costs -- 2,375,000
------------ ------------
Net cash (used in) provided by financing activities (892,000) 2,231,000
------------ ------------
Net decrease in cash and temporary investments (7,382,000) (854,000)
Cash and temporary investments at beginning of period 19,763,000 8,523,000
------------ ------------
Cash and temporary investments at end of period $ 12,381,000 $ 7,669,000
============ ============
Supplemental disclosures of cash flow information:
Cash paid during the period for:
Interest $ 2,280,000 $ 1,689,000
Income taxes -- 381,000
The accompanying Notes to Consolidated Condensed Financial Statements
are an integral part of these Statements.
7
HARKEN ENERGY CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS
September 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 normal recurring adjustments necessary to present fairly its
financial position as of December 31, 2001 and September 30, 2002 and the
results of its operations and changes in its cash flows for all periods
presented as of September 30, 2001 and 2002. These condensed financial
statements should be read in conjunction with the financial statements and the
notes thereto included in Harken's Annual Report on Form 10-K for the year ended
December 31, 2001. Certain prior year amounts have been reclassified to conform
with the 2002 presentation.
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the financial
statements and the reported amounts of revenues and expenses during the reported
period. Actual results could differ from these estimates. Management has begun a
series of transactions to repurchase, refinance and redeem certain convertible
notes, which mature in 2003. See Note 7 - Convertible Notes Payable, for further
discussion. If this process is not successful, there could be a material adverse
effect to Harken. In addition, Harken's bank credit facility, which is scheduled
to terminate in August 2003, requires Harken and certain of its subsidiaries to
maintain certain financial covenant ratios and requirements, as calculated on a
quarterly basis. If Harken, or certain of its subsidiaries 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 the bank. In addition, due to
cross-default provisions in Harken's convertible note agreements, a majority of
Harken's debt obligations would become due in full if any debt is in default.
See Note 5--Bank Credit Facility Obligation, for further discussion.
The results of operations for the nine month period ended September 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:
Nine Months Ended
September 30,
------------------------
2001 2002
---------- ----------
(in thousands)
Net loss $(2,545) $(5,167)
Change in fair value of derivative 1,391 (521)
Reclassification of derivative fair value
into earnings 1,634 (90)
Cumulative effect of change in
accounting principle (3,025) -
---------- ----------
Total comprehensive loss $(2,545) $(5,778)
========== ==========
8
(2) ACQUISITIONS AND DISPOSITIONS
Sales of Certain Producing Interests -During 2001, certain wholly-owned
subsidiaries of Harken sold certain interests in oil and gas producing
properties located in Texas, Arkansas, New Mexico and Louisiana for
approximately $13,090,000 in cash, which was used in part to support Harken's
exploration and development activities. During the first six months of 2002,
wholly-owned subsidiaries of Harken sold interests in oil and gas producing
properties located in Texas for approximately $2,524,000. During the third
quarter of 2002, a wholly-owned subsidiary of Harken sold additional oil and gas
mineral interests for approximately $50,000.
Acquisition of Republic Properties - On January 30, 2002, a wholly-owned
subsidiary of Harken signed an agreement to acquire certain property interests
(the "Republic Properties") from Republic Resources, Inc. ("Republic"). This
acquisition was closed on April 4, 2002 following approval by Republic
stockholders and debenture holders. The Republic Properties consist of interests
in 16 oil and gas wells in 9 fields plus interests in additional prospect
acreage located in southern Louisiana and the Texas Gulf Coast region. The
Republic Properties were acquired by Harken in exchange for 2,645,500 shares of
Harken common stock, plus 79,365 shares issued as a transaction fee in this
acquisition. In addition, the Purchase and Sale Agreement also provides for
contingent additional consideration of cash or additional shares of Harken
common stock, or any combination of the two as Harken may decide, to be paid
within 45 days after December 31, 2003, based on a defined calculation to
measure the appreciation, if any, of the reserve value of the Republic
Properties. Since Harken acquired only the oil and gas properties from Republic,
the entire purchase price was allocated to the domestic full cost pool.
(3) PROPERTY AND EQUIPMENT
A summary of property and equipment follows:
December 31, September 30,
2001 2002
-------------------- ------------------
Unevaluated oil and gas properties:
Unevaluated Colombian properties $ 68,000 $ 104,000
Unevaluated Peru properties 635,000 839,000
Unevaluated Panama properties 166,000 340,000
Unevaluated domestic properties 2,603,000 2,515,000
Evaluated oil and gas properties:
Evaluated Colombian properties 182,945,000 183,844,000
Evaluated domestic properties 154,495,000 155,933,000
Facilities and other property 25,000,000 25,096,000
Less accumulated depreciation and
amortization (287,577,000) (296,829,000)
--------------- ----------------
$ 78,335,000 $ 71,842,000
=============== ================
9
(4) MIDDLE AMERICAN OPERATIONS
Harken's Middle American operations are conducted through its ownership in
Global Energy Development PLC ("Global," a public limited company registered in
England and Wales under the Companies Act (1985) of the United Kingdom).
Global's ordinary shares are admitted for trading on the Alternative Investment
Market of the London Stock Exchange. Effective March 25, 2002, Harken's
ownership in Global decreased from 100% to 92.77% when Global sold 7.23% of its
shares to 22 investors. The placement to these investors consisted of 2,021,902
shares at a cost of approximately $0.70 per share, of which less than 1% was
purchased, at the offering price, by certain officers, directors and employees
of Harken and Global and a family member, in exchange for approximately
$1,425,000 in cash. Global is seeking additional financing and may effect
acquisitions using shares of its newly listed ordinary shares. In addition,
Harken may elect to sell or otherwise dispose of additional shares of Global
owned by Harken, 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 $1,985,000 related to the corresponding minority interest and
offsetting proceeds of approximately $1,435,000 received from transaction costs
of $1,181,000, of which $520,000 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 September 30, 2002. Terms of each of the Association
Contracts commit Global to perform certain activities, such as the drilling of
wells, in accordance with a prescribed timetable. As of November 14, 2002,
Global was in compliance with the requirements of each of the Association
Contracts. In the third quarter of 2002, Global recognized $347,000 as interest
and other income and $200,000 as a reduction to operating expense related to
pipeline tariff reimbursements for prior and current year.
Costa Rica Operations - Global's Costa Rican operations have been conducted
through Harken Costa Rica Holdings LLC ("HCRH", a Nevada limited liability
company) that is owned 40% by a wholly-owned subsidiary of Global and 60% by an
affiliate of MKJ Xploration, Inc. ("MKJ"). MKJ is the operator of this Costa
Rica project.
In March 2002, the Costa Rica environmental agency SETENA denied its
approval of the requested environmental permit related to HCRH's Costa Rica
contract. HCRH has filed an appeal related to this ruling by SETENA. In January
2002, the Costa Rica Constitutional Court rendered a published opinion in a suit
that had been filed against another oil and gas operator and the Costa Rican
Ministry of Environment and Energy ("MINAE") by certain environmental groups. In
its opinion in this case, the Constitutional Court of Costa Rica found, among
other issues, that SETENA did not have the current authority to grant
environmental permits. In addition, proposed legislation pending in the Costa
Rica legislature seeks to abolish the Costa Rica government's rights to grant
hydrocarbon exploration contracts. These significant adverse developments
resulted in Harken fully impairing its approximately $8.8 million investment in
the Costa Rica project in its Consolidated Balance Sheet as of December 31,
2001. Consistent with the Costa Rica Constitutional Court decision discussed
above, even though it did not directly involve HCRH or the Moin #2 well, as well
as the pending legislation described above, HCRH's initial appeal to SETENA for
reconsideration of its denial of the requested permit was rejected. Denial of
HCRH's appeal and recent political developments in Costa Rica, in the opinion of
Harken and Global, severely limit the opportunity for future oil and gas
exploration in Costa Rica. Following denial of its appeal, HCRH initiated
discussions with the Costa Rica government to address HCRH's rights under the
concession contract.
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
10
covers approximately 6.8 million gross acres in northeastern Peru and extends
through April 2003. 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. Prior to converting the Peru TEA to an exploratory contract,
Global is seeking to obtain a joint venture partner to participate. Global may
seek to extend the term of the Peru TEA, if necessary, in order to finalize a
possible joint venture arrangement.
Panama Operations - In September 2001, a wholly-owned subsidiary of Global
signed a Technical Evaluation Agreement ("Panama TEA") with the Ministry of
Commerce and Industry for the Republic of Panama. The Panama TEA covers
approximately 2.7 million gross acres divided into three blocks in and offshore
Panama. Under the terms of the Panama TEA, which extends through September 2003,
Global is to perform certain work program procedures and studies to be submitted
to the Panamanian government, and has an option to negotiate and enter into one
or more Contracts for the Exploration and Exploitation of Hydrocarbons with the
Ministry of Commerce and Industry. Prior to converting the Panama TEA to an
exploratory contract, Global is seeking to obtain a joint venture partner to
participate. Global may seek to extend the term of the Panama TEA, if necessary,
in order to finalize a possible joint venture arrangement.
(5) BANK CREDIT FACILITY OBLIGATION
Certain Harken subsidiaries (the "Borrowers") entered into a three year
loan facility with Bank One, N.A. ("Bank One") that is secured by substantially
all of Harken's domestic oil and gas properties and guaranteed by Harken. The
Bank One facility provides borrowings limited by a borrowing base (as defined by
the Bank One facility) that was approximately $6,512,000 as of September 30,
2002 and $5,062,000 as of November 14, 2002. The borrowing base is being reduced
by $225,000 per month until the borrowing base is redetermined by Bank One on
May 1, 2003, in accordance with the facility agreement, as amended. The Bank One
facility provides for interest based on LIBOR plus a margin of 2.350% (4.17% as
of September 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 September 30, 2002, Harken had $7,937,000 and
$6,287,000, respectively, outstanding pursuant to the facility. As of November
14, 2002, Harken has reduced the outstanding balance of the facility to
$5,062,000.
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 received waivers of the current ratio covenant for
the quarter ended September 30, 2002 under the Bank One facility. Also,
effective November 2002, Harken and the Borrowers received an amendment to the
current ratio covenant calculations for future quarters. Harken and the
Borrowers are in compliance with all requirements under the Bank One facility,
as amended or waived, as of September 30, 2002. Due to the Bank One facility
maturity date as of August 2003, the balance of the Bank One facility has been
reflected as a current liability as of September 30, 2002.
11
(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 Lyford Investments Enterprises Ltd.
("Lyford"), a private investor, in exchange for cash in the principal amount of
the Loan. The principal of Lyford, Alan G. Quasha, is a former member of
Harken's board of directors and the former Chairman of Harken. Prior to entering
into the 10% Term Loan, Mr. Quasha and his affiliates owned no shares of
Harken's common stock. However an affiliate of Mr. Quasha purchased shares in
Harken's subsidiary, Global, during that subsidiary's March 2002 offering at the
offering price. In August 2002, Harken entered into an amendment of the 10% Term
Loan and issued an additional principal amount of $2,000,000 of the 10% Term
Loan in exchange for cash in the additional principal amount of the loan. 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
the principal balances mature July 15, 2005 and August 27, 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. 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.
As additional consideration for the 10% Term Loan, as amended, Harken
agreed to issue to Lyford warrants to purchase up to a total of 7.0 million
shares of Global ordinary shares owned by Harken, at a price of 50 pence per
share. These warrants constitute approximately 27% of Harken's holdings of
Global shares. At November 14, 2002, the market price of Global ordinary shares
on the Alternative Investment Market of the London Stock Exchange was 50 pence
per share. The warrants will expire on October 13, 2005, 90 days after the
scheduled maturity date of the 10% Term Loan, however, if the maturity of the
10% Term Loan occurs as the result of an event of default, then the warrants
will expire on October 13, 2008. Harken has accounted for the warrants to
purchase up to 7.0 million shares of Global shares owned by Harken as a
derivative in accordance with Financial Accounting Standard #133, "Accounting
for Derivatives," and accordingly has reflected the fair value of the warrants
as a liability in the accompanying consolidated condensed balance sheet. Such
liability shall be reflected in future periods at the fair value of the
derivative, based on the underlying market price of Global common stock, and the
corresponding gain or loss related to the change in derivative fair value will
be reflected in earnings.
12
(7) CONVERTIBLE NOTES PAYABLE
A summary of convertible notes payable is as follows:
December 31, September 30,
2001 2002
------------- -------------
5% European Notes $ 40,980,000 $ 33,100,000
7% European Notes - 7,014,000
Benz Convertible Notes 10,408,000 5,511,000
51,388,000 45,625,000
------------- -------------
Less: Current portion - 33,100,000
------------- -------------
$ 51,388,000 $ 12,525,000
============= =============
See "Item 2. Management's Discussion and Analysis of Financial Condition
and Results of Operations - Liquidity and Capital Resources - Convertible Note
Commitments and Proposed Capital Restructuring."
Although Harken management is actively pursuing negotiated transactions to
restructure the 5% European Notes and the Benz Convertible Notes (collectively
referred to as the "5% Notes"), no assurance can be given that Harken will be
able to redeem them for cash pursuant to their terms or repurchase them for cash
and/or other securities or property. In this event, Harken presently intends to
satisfy its obligations under the 5% Notes by redeeming them in exchange for
Harken common stock. Under the terms of the 5% Notes, if Harken elected to
redeem the 5% Notes for shares of its common stock, each note would be converted
into a number of shares of Harken common stock equal to 115% of the principal
amount of the note to be redeemed, plus accrued and unpaid interest thereon to
the date of redemption, divided by the average market price of the stock over
the 30 calendar days immediately preceding the date of the notice of redemption.
The redemption of 5% European Notes by converting them into common stock
could result in substantial dilution of the existing Harken common stock. In
addition, the number of new shares to be issued could result in a change of
control of Harken. For example, if notes had been converted on November 14,
2002, with an estimated conversion price of $0.20, for every $1,000,000 of 5%
European Notes converted at this price, Harken would have been required to issue
to the noteholders approximately 5.75 million shares of common stock. If all of
the 5% European Notes had been converted at this price on November 14, 2002, the
noteholders would have received an aggregate of approximately 166.9 million
shares of common stock and, collectively, would control over 87% of Harken's
common stock. The number of shares that might be issued in this regard will vary
significantly depending upon the average market price of Harken's common stock
over the 30 days preceding the redemption notice, and the amount of 5% European
Notes to be redeemed.
In connection with the issuance of Harken common stock to redeem up to $20
million of the 5% European Notes, Harken intends to request stockholder approval
in accordance with guidelines of the American Stock Exchange that apply to
transactions involving the potential issuance below market value of at least 20%
of a company's outstanding shares. If Harken has over $20 million of the 5%
European Notes outstanding, the redemption of the remaining principal balance
could likewise require stockholder approval. There is no assurance that Harken
will obtain such stockholder approvals. If stockholder approvals are required
under the American Stock Exchange guidelines and are not obtained, Harken could
apply for an
13
exemption from the stockholder approvals requirement or be subject to delisting
of its common stock if it issued the shares without stockholder 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. If Harken's common stock is delisted from the
American Stock Exchange for any reason and Harken is deemed not to have used its
"best efforts" to maintain such listing, Harken would be in default under its 5%
European Notes and, as a result of cross-default provisions, its other debt
obligations.
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
stockholder approval to increase its authorized common stock before it could
redeem all such 5% Notes into common stock. Absent such stockholder 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. In addition, due to cross-default provisions
in Harken's 5% and 7% European Note agreements and the Benz Convertible Note
agreements, a majority of Harken's debt obligations would become due in full if
any debt is in default.
5% European Notes -- On May 26, 1998, Harken issued a total of $85 million
of its 5% Senior Convertible Notes due 2003 (the "5% European Notes"), which
mature on May 26, 2003. Since July 1, 2002 and as of November 14, 2002, Harken
has repurchased approximately $11 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 $55,970,000
principal amount of the 5% European Notes. As of November 14, 2002, the
outstanding principal balance of 5% European Notes was approximately
$29,030,000.
Interest incurred on the 5% European Notes is payable semi-annually in May
and November of each year to maturity or until the 5% European Notes are
redeemed, converted or purchased by Harken prior to their maturity. The 5%
European Notes may be redeemed for cash, at Harken's option, at par, in whole or
in part, at any time after May 26, 2002, upon not less than 30 days notice to
the holders. In addition, beginning November 26, 2002, Harken may redeem up to
50% of the 5% European Notes then outstanding in exchange for shares of Harken
common stock. At maturity, on May 26, 2003, Harken may similarly redeem all
remaining outstanding 5% European Notes for shares of Harken common stock. If
Harken elects to redeem the 5% European Notes for shares of its common stock,
each note will be redeemed for a number of shares of Harken common stock equal
to 115% of the principal amount of the note to be redeemed, plus accrued and
unpaid interest thereon to the date of redemption, divided by the average market
price of the stock over the 30 calendar days immediately preceding the date of
the notice of redemption.
During the nine months ended September 30, 2002, Harken repurchased
$2,120,000 in principal amount of the 5% European Notes from certain holders
thereof in exchange for approximately $1,347,000 in cash only, plus transaction
costs. Associated with these repurchases for cash only, Harken has reflected an
extraordinary item gain of $767,000 from the cash purchase of outstanding 5%
European Notes in the accompanying consolidated condensed statements of
operations. In addition, Harken exchanged an aggregate of $2,850,000 principal
amount of the 5% European Notes for $1,152,000 principal amount of Harken's 7%
European Notes and $1,301,000 in cash paid by Harken and recognized an
extraordinary item gain of $123,000 related to these transactions. Also during
the third quarter 2002, Harken exchanged an aggregate $2,910,000 principal
amount of the 5% European Notes for $2,210,000 principal amount of Harken's 7%
European Notes and $455,000 in cash paid by Harken. No extraordinary item gain
or loss was recognized in this transaction pursuant to EITF 96-19, "Debtor's
Accounting for a Modification or Exchange of Debt Instruments." Accordingly, the
initial carrying value of the newly-issued 7% European Notes is equal to the
carrying value of the exchanged 5% European Notes net of the $455,000 cash paid
by Harken. Such initial carrying value of the 7% European Notes will be accreted
to the full cash flow amount due under the 7% European Notes over the term of
such notes. In October 2002, Harken also exchanged a total of $4,070,000
principal amount of 5% European Notes for $4,070,000 principal amount of 7%
European Notes.
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
14
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 an additional total of $3,362,000 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. In
October 2002, Harken issued an additional $4,070,000 principal amount of the 7%
European Notes in exchange for $4,070,000 principal amount of the 5% European
Notes.
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 upon
registration of the underlying conversion shares, 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 26, 2003. In July 2002, pursuant to the terms of the Benz
Convertible Notes, Harken elected to redeem Benz Convertible Notes with a
principal amount of approximately $1,135,000 for 2,000,000 shares of Harken
common stock. In August 2002, Harken repurchased approximately $4,071,000
principal amount of Benz Convertible Notes from a holder for $1,231,000 in cash
and recognized an extraordinary item gain of approximately $2.8 million on this
transaction. 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 November 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
15
common stock, at Harken's option, at par, in whole or in part, at any time after
May 26, 2002, upon not less than 30 days notice to the holders. In addition,
beginning November 26, 2002, Harken may redeem up to 50% of the Benz Convertible
Notes then outstanding in exchange for shares of Harken common stock. At
maturity, on November 26, 2003, Harken may similarly redeem all remaining
outstanding Benz Convertible Notes for shares of Harken common stock. If Harken
elects to redeem the Benz Convertible Notes for shares of its common stock
beginning November 26, 2002, each note will be redeemed for a number of shares
of Harken common stock equal to 115% of the principal amount of the note to be
redeemed, plus accrued and unpaid interest thereon to the date of redemption,
divided by the average market price of the stock over the 30 calendar days
immediately preceding the date of the notice of redemption.
(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 September 30, 2002 as related
party notes receivable. In May 2002, Harken entered into a severance agreement
to forgive the repayment of a short-term loan in the principal amount of $64,000
to a member of management related to his resignation as an officer of Harken due
to health reasons. Harken reflected the forgiveness as a charge to earnings
during the first quarter of 2002.
(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 September 30, 2002, Harken holds natural gas zero cost collar
contracts consisting of a fixed price floor option of $2.75 per MMBTU and a
fixed price cap option of $3.47 per MMBTU, covering 135,000 MMBTUs per month
over the period of the contract through December 31, 2002. In addition, Harken
also holds zero cost collar contracts consisting of a fixed price floor option
of $2.75 per MMBTU and a fixed price cap option of $5.12 per MMBTU, covering
60,000 MMBTUs per month over a period from January 1, 2003 through December 31,
2003. Such natural gas collar contracts are reflected in accrued liabilities at
September 30, 2002 with a market value of approximately $326,000.
Each of the above derivatives have been designated as cash flow hedges of
the exposure from the variability of cash flows from future specified production
from certain of Harken's domestic property operations. Gains and losses from
commodity derivative instruments are reclassified into earnings when the
associated hedged production occurs. Harken holds no derivative instruments
which are designated as either fair value hedges or foreign currency hedges.
Settlements of oil and gas commodity derivatives are based on the difference
between fixed swap or option prices and the New York Mercantile Exchange closing
prices for each month during the life of the contracts. Harken monitors its
natural gas production prices compared to New York Mercantile Exchange prices to
assure its commodity derivatives are effective hedges in mitigating its
commodity price risk.
16
Risk management policies established by Harken management limit Harken's
commodity derivative instrument activities to those commodity 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 September 30, 2001 and 2002:
Three Months Ended September 30, 2001 Nine Months Ended September 30, 2001
-------------------------------------------- --------------------------------------------
North Middle North Middle
America America Total America America Total
----------- ------------- ------------ ----------- ------------ ------------
Operating revenues $ 4,212,000 $ 2,084,000 $ 6,296,000 $19,359,000 $ 6,644,000 $ 26,003,000
Interest and other income 67,000 69,000 136,000 271,000 332,000 603,000
Depreciation and
amortization 1,984,000 1,441,000 3,425,000 6,384,000 5,124,000 11,508,000
Interest expense and
other, net 579,000 320,000 899,000 2,128,000 1,469,000 3,597,000
Income tax expense 34,000 - 34,000 64,000 - 64,000
Segment income (loss)
before extraordinary items (1,264,000) (1,666,000) (2,930,000) 885,000 (6,405,000) (5,520,000)
Segment income (loss) (402,000) (806,000) (1,208,000) 2,373,000 (4,918,000) (2,545,000)
Capital expenditures 4,298,000 847,000 5,145,000 10,211,000 10,105,000 20,316,000
Total assets at end of
period 94,960,000 41,012,000 135,972,000 94,960,000 41,012,000 135,972,000
Three Months Ended September 30, 2002 Nine Months Ended September 30, 2002
-------------------------------------------- --------------------------------------------
North Middle North Middle
America America Total America America Total
----------- ------------- ------------ ----------- ------------ ------------
Operating revenues $ 3,936,000 $ 2,150,000 $ 6,086,000 $12,897,000 $ 6,131,000 $ 19,028,000
Interest and other income 23,000 355,000 378,000 202,000 438,000 640,000
Depreciation and
amortization 1,612,000 1,028,000 2,640,000 5,895,000 3,376,000 9,271,000
Interest expense and
other, net 1,479,000 328,000 1,807,000 3,417,000 315,000 3,732,000
Income tax expense - 75,000 75,000 30,000 225,000 255,000
Segment loss before
extraordinary items (2,093,000) * (483,000) (2,576,000) (7,144,000) * (1,678,000) (8,822,000)
Segment income (loss) 1,222,000 (483,000) 739,000 (3,489,000) (1,678,000) (5,167,000)
Capital expenditures 155,000 652,000 807,000 3,451,000 1,432,000 4,883,000
Total assets at end of
period 60,789,000 27,698,000 88,487,000 60,789,000 27,698,000 88,487,000
* Includes Litigation and Contingent Liability Settlements, net
17
(11) COMMITMENTS AND CONTINGENCIES
Search Acquisition Corp. ("Search Acquisition"), also known as Harken Texas
Acquisition Corp., a wholly-owned subsidiary of Harken, was a defendant in a
lawsuit filed by Petrochemical Corporation of America and Lorken Investments
Corporation (together, "Petrochemical"). This lawsuit arose out of
Petrochemical's attempt to enforce a judgment of joint and several liability
entered in 1993 against a group of twenty limited partnerships known as the
"Odyssey limited partnerships." Petrochemical claimed that Search Exploration,
Inc. was liable for payment of the judgment as the successor-in-interest to
eight Odyssey limited partnerships. Search Acquisition was the surviving
corporation in Harken's 1995 acquisition of Search Exploration, Inc. On February
28, 1996, the court granted Search Acquisition's motion for summary judgment in
this case. On July 3, 1998, the Fifth District Court of Appeals for the State of
Texas reversed the trial court's summary judgment and remanded the case to the
trial court. In December 2001, a jury trial was held in this matter. The jury
returned a verdict finding for Petrochemical in the amount of $1.1 million of
actual damages and $3 million in punitive damages. In April 2002, the court
entered judgment on the verdict rendered by the jury. Search Acquisition then
filed a motion for a new trial. In June 2002, Petrochemical filed with the U.S.
Bankruptcy Court in Dallas, Texas an involuntary petition in bankruptcy against
Search Acquisition, under Chapter 7 of the Bankruptcy Code, and moved for the
appointment of an interim trustee. Search Acquisition agreed to the entry of an
order for relief under Chapter 7, as well as to the appointment of the interim
trustee. These actions resulted in a stay of Search Acquisition's motion of the
Court's judgment on the jury verdict totaling $4.1 million. Thereafter,
McCulloch Energy, Inc. ("McCulloch"), a wholly-owned subsidiary of Search
Acquisition, filed a voluntary petition in bankruptcy under Chapter 7 of the
Bankruptcy Code in the U.S. Bankruptcy Court in Houston, Texas. The stay of
Search Acquisition's motion and the related bankruptcy filings led to
negotiations in bankruptcy and mediation relating to the Petrochemical suit and
judgment. As a result of these events, on August 1, 2002, pursuant to a mediated
settlement, Petrochemical and the bankruptcy trustees agreed to release their
claims against Harken in exchange for a payment of $2 million to be distributed
to Petrochemical, and a payment of approximately $189,000 to pay administrative
expenses and other creditors of the bankruptcy estates. This amount was fully
accrued and charged to expense during the second quarter of 2002. Pursuant to
the mediation agreement, Petrochemical elected to receive 100% of the stock of
McCulloch in September 2002. McCulloch does not have any contractual
arrangements that are material to Harken's operations and has a book and fair
value each less than $10,000. The mediation agreement was approved by the
Bankruptcy Courts in Dallas and Houston in September 2002. Payment of the
mediation settlement was also made in September 2002.
In September 1997, Harken Exploration Company, a wholly-owned subsidiary of
Harken, was served with a lawsuit filed in U.S. District Court for the Northern
District of Texas, Amarillo Division, styled D.E. Rice and Karen Rice as
Trustees for the Rice Family Living Trust ("Rice") vs. Harken Exploration
Company. In the lawsuit, Rice alleged damages resulting from Harken Exploration
Company's alleged spills on Rice's property and claimed that the Oil Pollution
Act ("OPA") should be applied in this circumstance. Rice alleged that
remediation of all of the alleged pollution on its land would cost approximately
$40,000,000. In October 1999, the trial court granted Harken's Motion for
Summary Judgment that the OPA did not apply and dismissed the Rice claim under
it. Rice appealed the trial court's summary judgment to the U.S. Fifth Circuit
Court of Appeals. In April 2001, the Fifth Circuit Court of Appeals issued its
opinion affirming the trial court's summary judgment in Harken's favor. Based on
this affirmation of the summary judgment, in Harken management's opinion, the
results of any further appeal will not have a material adverse effect on
Harken's financial position. On August 15, 2002, Harken was served with a new
suit filed by Rice in state court in Hutchinson County, Texas. In this new state
case, Rice continues to seek approximately $40,000,000 in remediation costs and
damages. Harken recently filed a motion for partial summary judgment seeking a
ruling
18
that remediation costs are not the proper measure of damages and that Rice's
property damages, if any, should be measured by the alleged diminution in value
of its land. The Court held a hearing on Harken's motion on October 30, 2002,
but has not yet issued a ruling. Harken's management believes that the correct
measure of damages, if any, is the alleged diminution in value of Rice's land.
Therefore, in Harken management's opinion, the results of such additional claim
will not have a material adverse effect on Harken's financial position.
420 Energy Investment, Inc. and ERI Investments, Inc. (collectively "420
Energy") filed a lawsuit against XPLOR Energy, Inc., a wholly-owned subsidiary
of Harken, on December 21, 1999 in the New Castle County Court of Chancery of
the State of Delaware. 420 Energy alleges that they are entitled to appraisal
and payment of the fair value of their common stock in XPLOR as of the date
XPLOR merged with Harken. Harken has relied on an indemnity provision in the
XPLOR merger agreement to tender the costs of defense in this matter to former
stockholders of XPLOR. Although the outcome of this litigation is uncertain,
because the former stockholders of XPLOR have accepted indemnification of this
claim, Harken believes that any liability to Harken as a result of this
litigation will not have a material adverse effect on Harken's financial
condition.
In August 2001, a new lawsuit was filed by New West Resources, Inc., a
former XPLOR stockholder, against XPLOR, Harken and other defendants in state
court in Dallas, Texas. Harken received service of process in February 2002. New
West claims that it lost its $6 million investment in XPLOR as a result of
misrepresentations by XPLOR and breach of fiduciary duties by certain XPLOR
directors. Harken believes this new suit is an adjunct of the prior appraisal
rights claim by 420 Energy. The former stockholders of XPLOR have rejected
Harken's request for indemnification of this claim under the XPLOR merger
agreement. However, Harken intends to continue to pursue and enforce, through
whatever steps are necessary, any indemnification from the third parties. Harken
has tendered the defense of this claim to National Union Fire Insurance Company,
("National Union") pursuant to insurance policy coverage held by XPLOR. National
Union has accepted defense of this claim subject to a reservation of rights.
Based on the petition served on Harken, Harken does not believe the claims
asserted against Harken are meritorious. Therefore, in Harken management's
opinion, the ultimate outcome of this litigation will not have a material
adverse effect on Harken's financial condition.
Harken has accrued approximately $5,291,000 at September 30, 2002 relating
to certain other operational or regulatory liabilities or contingencies related
to Harken's domestic operations. Approximately $4,580,000 of this accrued amount
relates to total future abandonment costs of $7,750,000 of certain producing
properties owned by XPLOR, which will be incurred at the end of the properties'
productive life. Harken and its subsidiaries currently are involved in other
various lawsuits and contingencies, any of which in management's opinion, will
not result in significant loss exposure to Harken.
(12) NEW ACCOUNTING STANDARD
In June 2001, the FASB issued Statement No. 143, "Accounting for Asset
Retirement Obligations." Statement No. 143 is required to be adopted by Harken
no later than January 1, 2003, and will require major changes in the accounting
for asset retirement obligations, such as required decommissioning of oil and
gas production platforms, facilities and pipelines. Statement No. 143 requires
entities to record the fair value of a liability for an asset retirement
obligation in the period when it is incurred (typically when the asset is
installed at the production location). When the liability is initially recorded,
the entity capitalizes the cost by increasing the carrying amount of the related
property, plant and equipment. Over time, the liability is
19
accreted for the change in its present value each period, and the initial
capitalized cost is depreciated over the useful life of the related asset. Upon
adoption of Statement No. 143, Harken will possibly need to adjust its recorded
asset retirement obligations to the new requirements using a cumulative-effect
approach. All transition amounts are to be measured using Harken's current
information, assumptions, and credit-adjusted, risk-free interest rates.
While the original discount rates used to establish an asset retirement
obligation will not change in the future, changes in cost estimates or the
timing of expenditures will result in immediate adjustments to the recorded
liability, with an offsetting adjustment to property and equipment. Harken is
currently assessing and quantifying the potential impact of adopting Statement
No. 143. Upon adoption of Statement No. 143, these asset retirement obligations
will be required to be recorded, possibly increasing asset retirement
liabilities on the balance sheet with an offsetting increase to property and
equipment.
20
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
The following is a discussion and analysis of Harken's financial condition
and results of operations and should be read in conjunction with the
consolidated condensed financial statements and related notes contained in this
Quarterly Report. Certain statements contained in this discussion, and elsewhere
in this Quarterly Report, including statements of Harken management's current
expectations, intentions, plans and beliefs, are "forward-looking statements,"
as defined in Section 21D of the Securities Exchange Act of 1934 and the Private
Securities Litigation Reform Act of 1995:
. statements before, after or including the words "may," "will,"
"could," "should," "believe," "expect," "future," "potential,"
"anticipate," "intend," "plan," "estimate," or "continue" or the
negative or other variations of these words; and
. other statements about matters that are not historical facts.
Harken believes that it is important to communicate its future expectations
to its stockholders. Forward-looking statements reflect the current view of
management with regard to future events and are subject to numerous known and
unknown risks, uncertainties and other factors that may cause the actual
results, performance, timing or achievements of Harken to be materially
different from any results, performance, timing or achievements expressed or
implied by such forward-looking statements. These risks, uncertainties and other
factors include, among others, the risks described in Harken's Annual Report on
Form 10-K for the fiscal year ended December 31, 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 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.
21
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 nine months of 2002 have been generated from
Global's Colombian operations and have declined from the comparable period last
year due to lower commodity prices. 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 reduce
personnel, reduce salaries, increase efficiencies in its production operations,
and reduce its long-term debt obligations. The effect of these efforts have been
mitigated by increased legal and professional costs associated with Harken's
capital restructuring plan.
Harken reported a net loss for the nine months ended September 30, 2002 of
$5,167,000 compared to a net loss of $2,545,000 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 27% during the first nine 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 as well as normal production decline. Gross
operating profit before depreciation and amortization, general and
administrative and interest expenses totaled approximately $12.5 million during
the nine months ended September 30, 2002 compared to approximately $16.5 million
for the prior year period.
Critical Accounting Policies
Full cost accounting method -- Harken accounts for the costs incurred in
the acquisition, exploration, development and production of oil and gas reserves
using the full cost accounting method. Under full cost accounting rules, the net
capitalized costs of evaluated oil and gas properties shall not exceed an amount
(the "cost ceiling") equal to the present value of future net cash flows from
estimated production of proved oil and gas reserves, based on current economic
and operating conditions, including the use of oil and gas prices as of the end
of each quarter.
Given the volatility of oil and gas prices, it is reasonably possible that
the estimate of discounted future net cash flows from proved oil and gas
reserves could change in the near term. If oil and gas prices decline in the
future, even if only for a short period of time, it is possible that impairments
of oil and gas properties could occur. In addition, it is reasonably possible
that impairments could occur if costs are incurred in excess of any increases in
the cost ceiling, revisions to proved oil and gas reserves occur, or if
properties are sold for proceeds less than the discounted present value of the
related proved oil and gas reserves.
Colombian operations -- During the nine months ended September 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.
22
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
Harken's 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.
Compliance under debt obligation agreements -- 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. In November 2002, Harken
and the Borrowers received waivers of the current ratio covenants for the
quarter ended September 30, 2002 and an amendment to the current ratio covenant
calculations for future quarters. If Harken or the Borrowers are not in
compliance with their bank financial covenant ratios or requirements in the
future and are unable to obtain a waiver or amendment to the facility
requirements, the credit facility would be in default and callable by Bank One.
In addition, due to cross-default provisions in Harken's 5% and 7% European Note
agreements and the Benz Convertible Note agreement, a majority of Harken's debt
obligations would become due in full if any debt is in default. Expectations of
continued compliance with financial covenants cannot be assured and Harken's
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 covenants under the Bank One credit facility are not received and its
debt is placed in default, Harken would experience a material adverse impact on
its financial position and results of operations.
Accounting for commodity 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 commodity derivatives trading. Hedge accounting requires that
commodity derivative instruments be designated as hedges and that fluctuations
in their market value are effective in mitigating the hedged commodity price
risk, and that such effectiveness be documented and monitored. While Harken
intends to continue to meet the conditions to qualify for hedge accounting, to
the extent hedges are not highly effective, or if the forecasted hedged
production does not occur, the changes in the fair value of the commodity
derivative instruments are reflected in earnings. During the nine months ended
September 30, 2002, the average percentage of Harken's natural gas production
hedged was approximately 47%.
23
RESULTS OF OPERATIONS
The following table presents information regarding Harken's revenues, oil
and gas production volumes and extraordinary item gains during the periods
included in the accompanying consolidated condensed financial statements:
Three Months Ended Nine Months Ended
September 30, September 30,
------------------------------- ---------------------------------
2001 2002 2001 2002
-------------- ---------------- --------------- -----------------
Operating Revenues (unaudited) (unaudited)
- ------------------
Domestic Exploration and Production
Operations
Gas sales revenues $ 2,563,000 $ 2,244,000 $ 13,863,000 $ 7,955,000
Gas volumes in mcf 830,000 651,000 2,931,000 2,551,000
Gas price per mcf $ 3.09 $ 3.45 $ 4.73 $ 3.12
Oil sales revenues $ 1,649,000 $ 1,692,000 $ 5,496,000 $ 4,942,000
Oil volumes in barrels 65,000 62,000 209,000 204,000
Oil price per barrel $ 25.37 $ 27.29 $ 26.30 $ 24.23
Colombian Exploration and Production
Operations
Oil sales revenues $ 2,084,000 $ 2,150,000 $ 6,644,000 $ 6,131,000
Oil volumes in barrels 119,000 114,000 356,000 381,000
Oil price per barrel $ 17.51 $ 18.86 $ 18.66 $ 16.09
Other Revenues
Interest income $ 136,000 $ 31,000 $ 555,000 $ 95,000
Other income $ - $ 347,000 $ 48,000 $ 545,000
Extraordinary item gains $ 1,722,000 $ 3,315,000 $ 2,975,000 $ 3,655,000
For the quarter ended September 30, 2002 compared with the corresponding prior
period.
North American Operations
Domestic gross oil and gas revenues during the third 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 six months of 2002,
another wholly-owned subsidiary of Harken sold interests in oil and gas
producing properties located in Texas for approximately $2,524,000. During the
third quarter of 2002, a wholly-owned subsidiary of Harken sold oil and gas
mineral interests for approximately $50,000.
Domestic gas revenues decreased 12% to $2,244,000 for the three months
ended September 30, 2002 compared to $2,563,000 for the prior year period due to
reduced production volumes during the third quarter of 2002, despite the
acquisition of the Republic Properties, as a result of sales of domestic
producing properties during 2001 and 2002. Partially offsetting the decreased
volumes, was an increase in the overall
24
average price to $3.45 per mcf of gas during the third quarter of 2002 compared
to $3.09 per mcf received during the third quarter of 2001.
Domestic oil revenues increased 3% to $1,692,000 during the third quarter
of 2002 compared to $1,649,000 during the third quarter of 2001 due to increased
oil prices. Harken's oil price per barrel averaged $27.29 during the current
year quarter compared to $25.37 during the comparable period last year.
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 40% to $1,359,000 during the third quarter of 2002
compared to $2,257,000 during the prior year period primarily due to the
above-mentioned sales of properties. Oil and gas operating expenses also
decreased, as a percentage of related oil and gas revenues, due primarily to the
increase in oil and gas prices during the third quarter of 2002 compared to the
prior year period. Oil and gas operating expenses decreased per unit of
production due to increased efficiencies.
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 could help to
partially mitigate the production decreases resulting from the sales of
producing properties discussed above. Harken's oil and gas production volumes
could continue to decrease if Harken sells additional producing properties.
Harken continues to pursue opportunities to acquire additional producing
properties, which would 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 third quarter of 2002 relate to
Global's oil operations in Colombia. During the third quarter of 2001 and 2002,
Global's Colombian operating revenues consisted of production primarily from its
Bolivar and Alcaravan Association Contract areas. Global's Colombian oil
revenues increased 3% from $2,084,000 during the third quarter of 2001 to
$2,150,000 during the third quarter of 2002 due to increased oil prices, which
averaged $18.86 per barrel during the current year quarter compared to $17.51
per barrel during the prior year quarter. Production volumes decreased slightly
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 30% from $710,000 during the
third quarter of 2001 to $496,000 for the third quarter of 2002, as Global has
successfully reduced field contract labor, equipment rental and pipeline tariff
reimbursements which reduced operating expenses related to its producing fields
in Colombia.
Interest and Other Income
Interest and other income increased 178% during the third quarter of 2002
compared to the prior year period due to the recognition of other income during
the third quarter of 2002 related to a refund during the quarter of Colombian
pipeline tariffs charged to Global in prior periods. Such other income was
partially offset by a 77% decrease in interest income over the same periods.
Harken generated approximately $136,000 of interest income during the third
quarter of 2001, compared to approximately $31,000 of interest income during the
third quarter of 2002, due primarily to decreased cash balances.
25
Other Costs and Expenses
General and administrative expenses increased 33% during the third quarter
of 2002 compared to the third quarter of 2001, despite the personnel and salary
reductions taken in prior quarters, primarily due to the reimbursement during
the prior year period of approximately $740,000 of certain litigation expenses
pursuant to Harken's insurance coverage related to such litigation.
Depreciation and amortization expense decreased 23% during the third
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
domestic 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 increased 101% during the third quarter of 2002
compared to the prior year period primarily due to the expensing of
approximately $374,000 related to the non-refundable portion of the September
2002 standby commitment fee shares issued to Lyford Investment Enterprises Ltd.
("Lyford") in connection with a proposed rights offering. See further discussion
below of the proposed right offering. In addition, Harken recorded a charge of
$295,000 related to Colombian war taxes recorded during the current year quarter
by Global.
Extraordinary Item
During the third quarter of 2002, Harken repurchased or exchanged certain
of its 5% European Notes for cash and/or 7% European Notes. During the quarter,
Harken recorded an extraordinary item gain of $550,000 relating to the
acquisition of $6,880,000 principal amount of 5% European Notes. Harken also
repurchased $4,071,000 principal amount of Benz Convertible Notes for cash in
the third quarter of 2002 and recorded an extraordinary item gain of
approximately $2.8 million relating to this transaction.
For the nine months ended September 30, 2002 compared with the corresponding
prior period.
North American Operations
Domestic gas revenues decreased 43% to $7,955,000 for the nine months ended
September 30, 2002 compared to $13,863,000 for the prior year period due to the
decrease in average gas prices received during the first nine months of 2002, as
Harken received an overall average price of $3.12 per mcf of gas during the
first nine months of 2002 compared to $4.73 per mcf received during the first
nine months of 2001. In addition, gas revenues also declined due to reduced
production volumes during the first nine 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 10% to $4,942,000 during the first nine
months of 2002 compared to $5,496,000 during the first nine months of 2001
primarily due to reduced oil prices, which averaged $24.23 per barrel during the
current year period compared to $26.30 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 nine 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.
26
Domestic oil and gas operating expenses decreased 27% to $5,114,000 during
the first nine months of 2002 compared to $6,976,000 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
nine months of 2002 compared to the prior year period. Oil and gas operating
expenses decreased per unit of production due to increased efficiencies.
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 could help to partially mitigate the production decreases as a result of
the sales of producing properties discussed above. Harken's oil and gas
production volumes could continue to 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 nine months of 2002 relate
to Global's oil operations in Colombia. Global's Colombian oil revenues
decreased 8% from $6,644,000 during the first nine months of 2001 to $6,131,000
during the first nine months of 2002, due to reduced oil prices, which averaged
$16.09 per barrel during the first nine months this year compared to $18.66 per
barrel during the first nine months of 2001. During the first nine months of
2001 and 2002, Global's Colombian operating revenues consisted primarily of
production from its Bolivar and Alcaravan Association Contract areas.
Global's Colombia production volumes increased during the first nine 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. 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 have decreased 43% from $2,572,000
during the first nine months of 2001 to $1,454,000 for the first nine months of
2002, as Global has successfully reduced field contract labor, equipment rental
and pipeline tariff reimbursements which reduced operating expenses related to
its producing fields in Colombia.
Interest and Other Income
Interest and other income increased 6% during the first nine months of 2002
compared to the prior year period. Other income increased from $48,000 during
the first nine months of 2001 to $545,000 for the same period in 2002 due
primarily to the recognition of other income during the third quarter of 2002
related to a refund of Colombian pipeline tariffs charged to Global in prior
years as well as from a gain recognized from the ineffective portion of Harken's
natural gas 2002 zero cost collar contract.
Offsetting the increase in other income was a decrease in interest income
due to Harken's usage of cash during 2001 for capital expenditures, which
decreased its interest-bearing cash balances. Harken
27
generated approximately $555,000 of interest income during the first nine months
of 2001, compared to approximately $95,000 of interest income during the first
nine months of 2002.
Other Costs and Expenses
General and administrative expenses increased slightly during the first
nine months of 2002 compared to the first nine months of 2001, despite the
personnel and salary reductions taken in 2002, and due primarily to the
reimbursement during the prior year of approximately $740,000 of certain
litigation expenses pursuant to Harken's insurance coverage related to such
litigation.
Depreciation and amortization expense decreased 19% during the first nine
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
domestic 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 increased during the first nine months of 2002
compared to the prior year period, due to the expensing of approximately
$374,000 related to the non-refundable portion of the September 2002 standby
commitment fee shares issued to Lyford in connection with a proposed rights
offering. In addition, Harken recorded a charge of $295,000 related to Colombian
war taxes recorded during the third quarter of 2002 by Global. 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 partially offset 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 nine
months of 2002, Harken recorded an extraordinary item gain of $890,000 relating
to the acquisition or exchange of $7,880,000 principal amount of 5% European
Notes. An extraordinary item gain of $2,975,000 was recorded for the comparable
period of 2001 relating to Harken's acquisitions of $18,830,000 principal amount
of 5% European Notes. Also during the first nine months of 2002, Harken
repurchased $4,071,000 principal amount of Benz Convertible Notes for cash and
recorded an extraordinary item gain of approximately $2.8 million related to
this transaction.
LIQUIDITY AND CAPITAL RESOURCES
Harken's negative working capital at September 30, 2002 was approximately
$33.5 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
28
September 30, 2002 because approximately $33.1 million of Harken's outstanding
convertible notes are due in May 2003 and therefore are classified as current
liabilities at September 30, 2002. These obligations were long-term liabilities
and did not reduce working capital at December 31, 2001. The balance of the Bank
One facility has also been reflected as a current liability as of September 30,
2002 due to the August 2003 maturity date. Harken and the Borrowers received
waivers of the current ratio covenants for the quarters ended June 30, 2002 and
September 30, 2002 under the Bank One credit facility.
Harken's operations used approximately $2.1 million of cash flow during the
first nine months of 2002, primarily due to the timing of certain working
capital payments and collections during the nine-month period. Harken's cash
resources at September 30, 2002 totaled approximately $7.7 million. Considering
its existing cash resources, and the potential additional capital sources listed
below, Harken believes that it will have sufficient cash resources to fund all
of its planned capital expenditures during 2002. Harken's future exploration,
development and acquisition efforts are expected to be funded through a
combination of cash on hand, cash flows from operations, issuances or exchanges
of debt or equity securities, and cash provided by either existing or newly
established financing arrangements.
During the nine months ended September 30, 2002, the approximately $2.1
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
and term loans. Net cash from financing activities during this period totaled
approximately $2.2 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--Convertible Notes Payable" to the accompanying Notes to Consolidated
Condensed Financial Statements contained in Part 1, Item 1, $915,000 in net cash
proceeds from the issuance of subsidiary common stock, and approximately $4.9
million raised through the issuance of 10% Term Loans which are described in
"Note 6--Investor Term Loan" in the accompanying Notes to Consolidated Condensed
Financial Statements contained in Part 1, Item 1, offset by approximately $5.9
million in repayment of long-term debt. Net cash used in investing activities
for the first nine months of 2002 totaled $1.0 million and was comprised of
approximately $2.7 million received upon the sale of producing domestic oil and
gas properties, offset by approximately $3.6 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 July 1, 2002 and as of
November 14, 2002, Harken has repurchased approximately $11 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"). Since issuance and as of November
14, 2002, Harken has repurchased or exchanged an aggregate of approximately
$55.9 million principal amount of the 5% European Notes. As of November 14,
2002, the remaining principal balance of 5% European Notes was approximately $29
million. 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
29
the 5% European Notes for shares of its common stock, each note will be redeemed
for a number of shares of Harken common stock equal to 115% of the principal
amount of the notes to be redeemed, plus accrued and unpaid interest thereon to
the date of redemption, divided by the average market price of the stock over
the 30 calendar days immediately preceding the date of the notice of redemption.
Benz Convertible Notes -- On December 30, 1999, Harken issued $12,000,000
principal amount of 5% Convertible Notes Due 2003 (the "Benz Convertible Notes")
in exchange for certain prospects acquired from Benz Energy, Incorporated
("Benz"). The Benz Convertible Notes originally were to mature on May 26, 2003.
In March 2000, the maturity date of certain of the Benz Convertible Notes was
extended to November 26, 2003. As of November 14, 2002, Harken has repurchased
or redeemed approximately $6.3 million principal amount of the Benz Convertible
Notes for cash and/or Harken common stock. As of November 14, 2002, the
outstanding principal balance of Benz Convertible Notes was approximately $5.7
million 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 repurchased by Harken prior to
their maturity. The Benz Convertible Notes may be redeemed for cash, or shares
of Harken common stock, at Harken's option, at par, in whole or in part, at any
time after May 26, 2002, upon not less than 30 days notice to the holders. In
addition, beginning November 26, 2002, Harken may redeem up to 50% of the Benz
Convertible Notes then outstanding in exchange for shares of Harken common
stock. At maturity on November 26, 2003, Harken may similarly redeem all
remaining outstanding Benz Convertible Notes for shares of Harken common stock.
If Harken elects to redeem the Benz Convertible Notes for shares of its common
stock, beginning November 26, 2002, each note will be redeemed for a number of
shares of Harken common stock equal to 115% of the principal amount of the note
to be redeemed, plus accrued and unpaid interest thereon to the date of
redemption, divided by the average market price of the stock over the 30
calendar days immediately preceding the date of the notice of redemption.
Capital Restructuring - Harken management has been actively working to
restructure the indebtedness represented by the 5% European Notes and Benz
Convertible Notes (collectively, the "5% Notes") in advance of their scheduled
maturity next year. As of November 14, 2002, Harken has repurchased,
restructured or redeemed approximately $62.3 million principal amount of such
notes.
During the nine months ended September 30, 2002, Harken repurchased
$2,120,000 in principal amount of the 5% European Notes from certain holders in
exchange for approximately $1,347,000 in cash only, plus transaction costs. In
addition, Harken exchanged an aggregate of $2,850,000 principal amount of the 5%
European Notes for $1,152,000 principal amount of Harken's 7% European Notes and
$1,301,000 in cash paid by Harken. Also during the third quarter of 2002, Harken
exchanged an aggregate $2,910,000 principal amount of the 5% European Notes for
$2,210,000 principal amount of Harken's 7% European Notes and $455,000 in cash
paid by Harken. No extraordinary item gain or loss was recognized in this
transaction pursuant to EITF 96-19, "Debtor's Accounting for a Modification or
Exchange of Debt Instruments." Accordingly, the initial carrying value of the
newly-issued 7% European Notes is equal to the carrying value of the exchanged
5% European Notes net of the $455,000 cash paid by Harken. Such initial carrying
value of the 7% European Notes will be accreted to the full cash flow amount due
under the 7% European Notes over the term of such notes. In October 2002,
holders of a total of $4,070,000 principal amount of 5% European Notes agreed to
exchange their notes for $4,070,000 principal amount of 7% European Notes.
In July 2002, pursuant to the terms of the Benz Convertible Notes, Harken
elected to redeem Benz Convertible Notes with a principal amount of
approximately $1,135,000 for 2,000,000 shares of Harken common stock. In August
2002, Harken repurchased approximately $4,071,000 of Benz Convertible Notes from
a holder for $1,231,000 in cash.
As of November 14, 2002, after giving effect to the above transactions, the
aggregate principal indebtedness outstanding under the 5% Notes was
approximately $34.7 million. In order to satisfy its remaining obligations under
the 5% Notes, Harken must: (i) raise additional capital to redeem the 5% Notes
30
for cash, (ii) repurchase the 5% Notes from the holders thereof for cash and/or
securities (such as the 7% European Notes or Harken common stock) or other
property, (iii) redeem the 5% Notes by issuing Harken common stock on or before
maturity, or (iv) redeem, repurchase or convert the 5% Notes using any
combination of the foregoing methods.
Although Harken management is actively pursuing negotiated transactions to
restructure the 5% Notes, no assurance can be given that Harken will be able to
redeem them for cash pursuant to their terms or repurchase them for cash and/or
other securities or property. In this event, Harken presently intends to satisfy
its obligations under the 5% Notes by redeeming them in exchange for Harken
common stock. Under the terms of the 5% Notes, if Harken elected to redeem the
5% Notes for shares of its common stock, each note would be converted into a
number of shares of Harken common stock equal to 115% of the face 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% European Notes by converting them into common stock
could result in substantial dilution of the existing Harken common stock. In
addition, the number of new shares to be issued could result in a change of
control of Harken. For example, if notes had been converted on November 14, with
an estimated conversion price of $0.20, for every $1,000,000 of 5% European
Notes converted at this price, Harken would have been required to issue to the
noteholders approximately 5.75 million shares of common stock. If all of the 5%
European Notes had been converted at this price, the noteholders would have
received an aggregate of approximately 166.9 million shares of common stock and,
collectively, would control over 87% of Harken's common stock. The number of
shares that might be issued in this regard will vary significantly depending
upon the average market price of Harken's common stock over the 30 days
preceding the redemption notice, and the amount of 5% European Notes to be
redeemed.
In connection with the issuance of Harken common stock in redemption of 5%
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 stockholder approval was required under the American
Stock Exchange guidelines and was not obtained, Harken could apply for an
exemption from the stockholder approval requirement or be subject to delisting
of its common stock if it issued the shares without stockholder 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, 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 stockholder approval to increase its authorized common
stock before it could redeem all such 5% Notes into common stock. Absent such
stockholder approval, Harken would have to otherwise restructure the
then-outstanding 5% Notes, or pay such 5% Notes at maturity. There can be no
assurance that, in such an event, Harken would be successful in restructuring
its obligations under the then-outstanding 5% Notes, or would have available
sufficient funds to pay such 5% Notes, in cash, upon maturity. If Harken's
ability to convert a substantial amount of the 5% Notes into common stock is
unsuccessful, Harken would experience a material adverse impact on its financial
position and results of operations.
31
Other Capital Commitments
Domestic Commitments -- 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, however, intends to
pursue various North American acquisition and development opportunities.
Harken's remaining planned domestic capital expenditures for 2002 are
discretionary and, as a result, will be curtailed if sufficient funds are not
available. Such expenditure curtailments, however, could result in Harken losing
certain prospect acreage or reducing its interest in future development
projects.
7% European Notes -- On June 18, 2002, Harken issued to certain holders of
Harken's securities $2,025,000 principal amount of its 7% European Notes in
exchange for approximately $1,025,000 in cash and 10,000 shares of Harken's
Series G1 Preferred Stock owned by such holders. On June 19, 2002, Harken issued
to certain holders of Harken's securities an additional $2,025,000 principal
amount of the 7% European Notes in exchange for approximately $1,725,000 in cash
and 3,000 shares of Harken's Series G1 Preferred Stock owned by such holders. In
addition, Harken issued an aggregate of $3,362,000 principal amount of the 7%
European Notes in connection with the exchange transactions involving certain of
the 5% European Notes described above. In October 2002, Harken issued an
additional $4,070,000 principal amount of the 7% European Notes in exchange for
$4,070,000 principal amount of the 5% European Notes.
10% Term Loan - On July 15, 2002 and August 29, 2002, Harken borrowed an
aggregate principal amount of $5,000,000 from Lyford Investments Enterprises
Ltd. ("Lyford") in exchange for the issuance of promissory notes with an annual
interest rate of 10% (the "10% Term Loan"). The 10% Term Loan provides that the
principal is to be repaid in two installments, consisting of a payment of
$3,000,000 due on July 15, 2005 and a payment of $2,000,000 due on August 29,
2005. Interest on the 10% Term Loan is to be paid quarterly, at the rate of 10%
per annum, beginning December 15, 2002 and is to continue until all principal
and interest is paid in full. The 10% Term Loan is unsecured. Under the terms of
the 10% Term Loan, Harken is generally required to use up to 60% of the net
proceeds of any sale of its common stock for cash to repay the 10% Term Loan
within 30 days of Harken's receipt of the proceeds from such sale. Upon the
consummation of a proposed rights offering with gross proceeds of $10 million,
Harken would be required to repay to Lyford the entire unpaid principal and
accrued interest due under the 10% Term Loan. In purchasing shares pursuant to
its standby purchase agreement, Lyford is entitled to offset an amount to
satisfy the 10% Term Loan without any further action or approval from Harken.
Even if Lyford does not close its purchase of shares under the standby purchase
agreement, Harken is required to use up to 60% of the net proceeds of the rights
offering to repay the 10% Term Loan. See "Note 6 -- Investor Term Loan" in the
accompanying Notes to Consolidated Condensed Financial Statements.
Operational Contingencies -- Harken's operations are subject to stringent
and complex environmental laws and regulations governing the discharge of
materials into the environment or otherwise relating to environmental
protection. These laws and regulations are subject to changes that may result in
more restrictive or costly operations. Failure to comply with applicable
environmental laws and regulations may result in the imposition of
administrative, civil and criminal penalties or injunctive relief. Global's
international oil and gas exploration and production operations, including well
drilling and seismic activities, require specific governmental environmental
licenses and permits, the acquisition of which in the past have been subject to
extensive delays. Global may continue to experience similar delays in the
future. Failure to obtain these licenses and permits in a timely manner may
prevent or delay Harken's and Global's operational plans.
32
Harken has accrued approximately $5,291,000 at September 30, 2002 relating
to operational or regulatory contingencies related to Harken's domestic
operations. Approximately $4,580,000 of this accrued amount relates to total
future abandonment costs of $7,750,000 for certain of Harken's producing
properties, which will be incurred at the end of the properties' productive
life. Harken and its subsidiaries currently are involved in various lawsuits and
other contingencies, which in management's opinion, will not result in a
material adverse effect upon Harken's financial condition or operations taken as
a whole. See Part 2, Item 1 for a description of certain litigation.
International Commitments--Terms of certain of the Association Contracts
entered into between Global's subsidiary Harken de Colombia, Ltd. and Ecopetrol
commit Global to perform certain activities in Colombia in accordance with a
prescribed timetable. In addition, Global has certain scheduled capital
expenditure commitments related to its TEA Agreements in Peru and Panama.
Failure by Global to perform these activities as required could result in Global
losing its rights under the particular contract, which could potentially have a
material adverse effect on Harken's business. As of November 14, 2002, Global
was in compliance with the requirements of each of the Association and TEA
Contracts, as amended. In light of political and regulatory developments in
Costa Rica, Global is projecting no capital expenditure plans during 2002 with
regard to the Costa Rica Contract.
Consolidated Contractual Obligations - The following table presents a
summary of Harken's contractual obligations and commercial commitments as of
September 30, 2002. Harken has no off-balance sheet obligations other than in
the table set forth below.
Payments Due by Period
-----------------------------------------------------------------------------------------
Contractual Obligations 2002 2003 2004 2005 2006-2007 Thereafter Total
- ------------------------- ---- ---- ---- ---- --------- ---------- -----
Bank Credit Facility(1) $1,450,000 $4,837,000 $ -- $ -- $ -- $ -- $ 6,287,000
Operating Leases(2) 171,000 690,000 677,000 677,000 565,000 -- 2,780,000
International Commitments(3) -- 2,500,000 -- -- -- -- 2,500,000
Domestic Commitments -- -- -- -- -- -- --
10% Term Loan -- -- -- 5,000,000 -- -- 5,000,000
Convertible Notes Payable(4) -- 38,769,000 -- -- 7,412,000 -- 46,181,000
--------- ----------- --------- --------- ---------- --------- -----------
Total Contractual Cash
Obligations $1,621,000 $46,796,000 $677,000 $5,677,000 $7,977,000 $ -- $62,748,000
========== =========== ========== ========== ========== ========= ===========
(1) Does not reflect impact of plans to modify or extend existing facility
through refinancing.
(2) Amount net of sublease arrangements in effect at September 30, 2002.
(3) Represents the estimated cost of completion of a well in Colombia required
to be drilled by Harken under Harken's Cajaro Association Contract with
Ecopetrol.
(4) Represents the outstanding principal amount obligations owing under the 5%
European Notes, the Benz Convertible Notes and the 7% European Notes as of
September 30, 2002. These obligations are payable or redeemable for cash or
with shares of Harken common stock (See Part I, Item 1, Notes to
Consolidated Condensed Financial Statements, "Note 7 - Convertible Notes
Payable" for further discussion).
In addition to the above commitments, after 2002, government authorities
under Harken's Louisiana state leases and operators under Harken's other
domestic operations may also request Harken to participate in the cost of
drilling additional exploratory and development wells. Harken may fund these
future domestic expenditures at its discretion. Further, the cost of drilling or
participating in the drilling of any such
33
exploratory and development wells cannot be quantified at this time since the
cost will depend on many factors outside of Harken's control, such as the timing
of the request, the depth of the wells and the location of the property.
Harken's discretionary capital expenditures for 2003 will be curtailed if Harken
does not have sufficient funds available. If Harken does not have sufficient
funds or otherwise chooses not to participate, it may experience a delay of
future cash flows from proved undeveloped oil and gas reserves. Such expenditure
curtailments could also result in Harken losing certain prospect acreage or
reducing its interest in future development projects.
Capital Sources - Proposed Rights Offering
Harken filed a registration statement on September 13, 2002 with the SEC to
register shares of its common stock in connection with a proposed rights
offering whereby Harken would distribute to holders of its common stock, Series
G1 preferred stock and Series G2 preferred stock, at no charge, nontransferable
subscription rights to purchase shares of its common stock. The distribution of
the subscription rights is contingent upon the rights offering being approved by
Harken's stockholders at its annual meeting of stockholders. Although there can
be no assurances that the rights offering will be successful, if the rights
offering is approved and consummated, Harken expects it will result in gross
proceeds of less than $5 million after repaying the 10% Term Loan, and accrued
interest, which are due by their terms in 2005 but must be prepaid upon
completion of the rights offering. See "Other Capital Commitments - 10% Term
Loan" above. This amount of proceeds is not sufficient to repay Harken's
outstanding debt obligations, including its existing convertible notes and its
bank credit facility. The rights offering would also trigger anti-dilution
adjustments to the conversion prices of the 5% European Notes, the Benz
Convertible Notes and 7% European Notes.
The subscription price for a subscription right distributed in the proposed
rights offering would equal 70% of the current market price of Harken's common
stock determined by averaging the closing price of Harken's common stock on the
American Stock Exchange for the five trading days immediately preceding the
commencement of the proposed rights offering, but would be no greater than $0.35
per share and no less than $0.105 per share. Although the exact number of shares
to be issued in connection with the proposed rights offering would depend upon
the market price of Harken's common stock at the time the proposed rights
offering commenced, the minimum number of shares that would be issued is
approximately 28.6 million and the maximum number of shares that would be issued
is approximately 95.2 million. The proposed rights offering would likely result
in substantial dilution of the ownership percentage of the existing holders of
Harken's common stock even if those stockholders exercise their rights in full
because Harken would also provide rights to holders of Series G1 preferred stock
and Series G2 preferred stock. The proposed rights offering may also result in a
decrease in the market value of Harken's common stock. This decrease in market
value may continue after the completion of the proposed rights offering.
If any shares of common stock offered in the proposed rights offering
remain unsubscribed after the rights offering, Lyford has agreed to purchase all
such shares at the subscription price pursuant to a standby purchase agreement.
Even if the minimum number of shares are issued in the proposed rights offering,
the rights offering could result in a change in control of Harken because of
this standby commitment of Lyford. As a result, Lyford may have the voting power
to control the election of Harken's board of directors and the approval of other
matters presented for consideration by Harken's stockholders, which could
include amendments to Harken's charter, mergers, acquisitions and various
corporate governance actions.
As compensation to Lyford for its standby commitment, Harken paid Lyford a
standby commitment fee of $600,000 by issuing 1,714,286 shares of its common
stock to Lyford, with each such share being
34
attributed a value of $0.35. Harken also paid Lyford $50,000 in cash for its
legal fees in connection with the rights offering.
Harken will notify Lyford if the proposed rights offering will not occur,
was not approved by Harken's stockholders or was terminated by Harken. In such
an event, the standby purchase agreement with Lyford will terminate, except for
certain provisions regarding indemnification and Lyford's right to retain
one-half of the standby commitment fee shares. Within 30 days from the
termination date, Lyford will either (i) return the other half of the standby
commitment fee shares to Harken, or (ii) retain all of the standby commitment
fee shares and remit to Harken $300,000. If Lyford does not close its standby
purchase in connection with the proposed rights offering due to Harken not
satisfying certain conditions precedent and Harken has not terminated the
proposed rights offering, Lyford is entitled to retain the entire standby
commitment fee.
Other Capital Sources
During 2001, sales of certain domestic producing property interests
generated cash proceeds of approximately $13.1 million. During the first nine
months of 2002, Harken sold certain additional domestic producing property and
mineral interests for approximately $2,574,000.
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 five development
wells with a total of six of these wells being commercially successful. In April
2002, Harken acquired the Republic Properties which consist of interests in 16
oil and gas wells in 9 fields plus interests in additional prospect acreage
located in southern Louisiana and the Texas Gulf Coast region. The acquisition
of the Republic Properties began supplementing Harken's domestic operating cash
flows beginning in the second quarter of 2002. Harken's domestic operating cash
flows are particularly dependent on the price of natural gas, which Harken is
unable to predict.
Certain Harken subsidiaries (the "Borrowers") entered into a three-year
loan facility with Bank One, N.A. ("Bank One"), which is secured by
substantially all of those subsidiaries' domestic oil and gas properties and a
guarantee from Harken. The Bank One facility provides borrowings subject to a
borrowing base (as defined by the Bank One facility), which was $6,512,000 as of
September 30, 2002 and $5,062,000 as of November 14, 2002. Such borrowing base
will be reduced by $225,000 per month until the next borrowing base is
redetermined by Bank One on May 1, 2003 in accordance with the facility
agreement. Bank One's commitments under the facility terminate in August 2003.
Harken's bank credit facility with Bank One requires Harken, as well as the
Borrowers, to maintain certain financial covenant ratios and requirements, as
calculated on a quarterly basis. Harken and the Borrowers received waivers of
the current ratio covenants for the quarters ended June 30, 2002 and September
30, 2002. Also, effective November 2002, Harken and the Borrowers received an
amendment to the current ratio covenant calculations for future quarters. Harken
and the Borrowers are in compliance with all requirements under the Bank One
facility, as amended or waived, as of September 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
35
Harken's 5% and 7% European Note and Benz Convertible 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 covenants under the Bank One credit facility are not
received and its debt is placed in default, Harken would experience a material
adverse impact on its financial position and results of operations.
Global's operating cash flows continue to be provided by ongoing production
from its Alcaravan and Bolivar Contract areas in Colombia.
Global's ordinary shares are admitted for trading on the Alternative
Investment Market of the London Stock Exchange. This may enable Global to seek
additional financing and effect acquisition activities using shares of Global
stock or enable Harken to sell a portion of its Global common stock for cash.
Global's ability to effectively use its common stock will be dependent upon the
market value and liquidity of its shares on the AIM Exchange. Global is also
pursuing raising additional capital through potential sales of pipe inventory.
Additional capital raised by Global would be used exclusively for Global's
capital needs, as cash dividends to Harken may be limited by tax restrictions.
In 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 could
provide Harken with additional capital.
Adequacy of Capital Sources
Considering its existing cash resources and the potential additional
capital sources listed above, Harken believes that it will have sufficient cash
resources to fund all of its remaining capital expenditures during 2002.
Harken's future exploration, development and acquisition efforts are expected to
be funded through a combination of cash on hand, cash flows from operations,
issuances or exchanges of debt or equity securities, and cash provided by either
existing or newly established financing arrangements.
In 2003, Harken's most significant capital commitment is satisfying its
remaining obligations under the 5% European Notes, the Bank One credit facility
and the Benz Convertible Notes, which mature in May 2003, August 2003 and
November 2003, respectively. Harken is continuing its 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 stockholders to issue the
required number of shares necessary, and the limitation of authorized common
shares available for such redemptions, as discussed above. Accordingly, there
can be no assurance that such capital restructuring plans will be successful.
If Harken does not obtain the required stockholder approvals to redeem the
5% Notes and issues an amount of shares requiring such approval, Harken's common
stock could be subject to potential delisting from the American Stock Exchange.
In addition, if Harken fails to meet certain financial thresholds pursuant
36
to the rules of the American Stock Exchange, its common stock could also be
subject to potential delisting. If Harken's common stock is delisted from the
American Stock Exchange for any reason and Harken is deemed not to have used its
"best efforts" to maintain such listing, Harken would be in default under its 5%
European Notes and, as a result of cross-default provisions, its other debt
obligations. Any default under Harken's debt agreements would result in a
majority of Harken's debt obligations becoming due in full. Harken does not have
sufficient funds to pay its debt obligations in cash and there is no assurance
it will obtain such funds if such debt became due which would result in a
material adverse effect on Harken's financial position and results of
operations. The potential delisting of Harken's common stock could adversely
affect Harken's ability to raise capital in the future by issuing common stock
or securities convertible into common stock.
Although no assurances can be given, Harken believes a replacement credit
facility could be in place prior to August 2003. However, if Harken cannot
negotiate a replacement credit facility with a new financial institution, then
it will not have sufficient cash available to repay the outstanding balance
owing under its existing facility with Bank One. Consequently, Harken would be
required to extend the existing credit facility or repay the outstanding balance
through the issuance of new debt or equity securities. There can be no assurance
that Harken would be successful in negotiating any such extension or obtaining
funds through debt or equity offerings sufficient to repay the Bank One credit
facility.
Even if Harken is successful in redeeming or repurchasing the 5% Notes and
replacing the Bank One facility, Harken could still require additional financing
in 2003 to fund its operations. Harken may not be able to generate sufficient
cash from operations to fund its ongoing exploration and development efforts and
fulfill its other capital commitments after 2003. Consequently, Harken expects
to fund these operational and capital commitments in 2003 and afterward through
a combination of cash on hand, cash flows from operations, issuances or
exchanges of debt or equity securities, or through cash provided by either
existing or newly established financing arrangements.
If the proposed rights offering is approved and consummated, Harken is
required to use up to 60% of the proceeds of the proposed rights offering to
repay the 10% Term Loan. The proposed rights offering would result in gross
proceeds of less than $5 million after Harken repays the 10% Term Loan. This
amount of proceeds will not be sufficient to repay Harken's outstanding debt
obligations, including the 5% Notes, the other existing convertible notes and
the Bank One credit facility.
Harken intends to continue to seek to raise equity or debt financing
through the issuance of debt, equity and convertible debt instruments, or
through the exchange of existing instruments through transactions that provide
Harken with additional capital to fund the capital commitments described above.
Such transactions may be affected, however, by the market value of Harken common
stock. If the price of Harken common stock remains low or decreases, Harken's
ability to utilize its stock either directly or indirectly through convertible
instruments for raising capital could be negatively affected. Further, raising
additional funds by issuing common stock or other types of equity securities
would further dilute Harken's existing stockholders, which dilution could be
substantial if the price of Harken common stock remains low or decreases. No
assurance can be given that Harken will be able to obtain additional financing
on favorable terms, if at all, to meet its operational and capital commitments
described above. If Harken sells any of its common stock for cash, Harken is
generally required to use 60% of the net proceeds of any such sale to repay the
10% Term Loan until the 10% Term Loan is repaid in full.
37
Item 4. Controls and Procedures
(a) Evaluation of disclosure controls and procedures.
Harken's principal executive officer and its principal financial officer,
based on their evaluation of Harken's disclosure controls and procedures (as
defined in Rules 13a-14 (c) of the Securities Exchange Act of 1934) as of a
date within 90 days prior to the filing of this Quarterly Report on Form 10-Q,
have concluded that Harken's disclosure controls and procedures are adequate and
effective for the purposes set forth in the definition in the rules of the
Securities Exchange Act of 1934.
(b) Changes in internal controls.
There were no significant changes in Harken's internal controls or in other
factors that could significantly affect Harken's internal controls subsequent to
the date of their evaluation.
38
PART II - OTHER INFORMATION
Item 1. Legal Proceedings.
Search Acquisition Corp. ("Search Acquisition"), also known as Harken Texas
Acquisition Corp., a wholly-owned subsidiary of Harken, was a defendant in a
lawsuit filed by Petrochemical Corporation of America and Lorken Investments
Corporation (together, "Petrochemical"). This lawsuit arose out of
Petrochemical's attempt to enforce a judgment of joint and several liability
entered in 1993 against a group of twenty limited partnerships known as the
"Odyssey limited partnerships." Petrochemical claimed that Search Exploration,
Inc. was liable for payment of the judgment as the successor-in-interest to
eight Odyssey limited partnerships. Search Acquisition was the surviving
corporation in Harken's 1995 acquisition of Search Exploration, Inc. On February
28, 1996, the court granted Search Acquisition's motion for summary judgment in
this case. On July 3, 1998, the Fifth District Court of Appeals for the State of
Texas reversed the trial court's summary judgment and remanded the case to the
trial court. In December 2001, a jury trial was held in this matter. The jury
returned a verdict finding for Petrochemical in the amount of $1.1 million of
actual damages and $3 million in punitive damages. In April 2002, the court
entered judgment on the verdict rendered by the jury. Search Acquisition then
filed a motion for a new trial. In June 2002, Petrochemical filed with the U.S.
Bankruptcy Court in Dallas, Texas an involuntary petition in bankruptcy against
Search Acquisition, under Chapter 7 of the Bankruptcy Code, and moved for the
appointment of an interim trustee. Search Acquisition agreed to the entry of an
order for relief under Chapter 7, as well as to the appointment of the interim
trustee. These actions resulted in a stay of Search Acquisition's motion of the
Court's judgment on the jury verdict totaling $4.1 million. Thereafter,
McCulloch Energy, Inc. ("McCulloch"), a wholly-owned subsidiary of Search
Acquisition, filed a voluntary petition in bankruptcy under Chapter 7 of the
Bankruptcy Code in the U.S. Bankruptcy Court in Houston, Texas. The stay of
Search Acquisition's motion and the related bankruptcy filings led to
negotiations in bankruptcy and mediation relating to the Petrochemical suit and
judgment. As a result of these events, on August 1, 2002, pursuant to a mediated
settlement, Petrochemical and the bankruptcy trustees agreed to release their
claims against Harken in exchange for a payment of $2 million to be distributed
to Petrochemical, and a payment of approximately $189,000 to pay administrative
expenses and other creditors of the bankruptcy estates. This amount was fully
accrued and charged to expense during the second quarter of 2002. Pursuant to
the mediation agreement, Petrochemical elected to receive 100% of the stock of
McCulloch in September 2002. McCulloch does not have any contractual
arrangements that are material to Harken's operations and has a book and fair
value each less than $10,000. The mediation agreement was approved by the
Bankruptcy Courts in Dallas and Houston in September 2002. Payment of the
mediation settlement was also made in September 2002.
In September 1997, Harken Exploration Company, a wholly-owned subsidiary of
Harken, was served with a lawsuit filed in U.S. District Court for the Northern
District of Texas, Amarillo Division, styled D.E. Rice and Karen Rice as
Trustees for the Rice Family Living Trust ("Rice") vs. Harken Exploration
Company. In the lawsuit, Rice alleged damages resulting from Harken Exploration
Company's alleged spills on Rice's property and claimed that the Oil Pollution
Act ("OPA") should be applied in this circumstance. Rice alleged that
remediation of all of the alleged pollution on its land would cost approximately
$40,000,000. In October 1999, the trial court granted Harken's Motion for
Summary Judgment that the OPA did not apply and dismissed the Rice claim under
it. Rice appealed the trial court's summary judgment to the U.S. Fifth Circuit
Court of Appeals. In April 2001, the Fifth Circuit Court of Appeals issued its
opinion affirming the trial court's summary judgment in Harken's favor. Based on
this affirmation of the summary judgment, in Harken management's opinion, the
results of any further appeal will not have a material adverse effect on
Harken's financial position. On August 15, 2002, Harken was served with a new
suit filed by Rice in state court in
39
Hutchinson County, Texas. In this new state case, Rice continues to seek
approximately $40,000,000 in remediation costs and damages. Harken recently
filed a motion for partial summary judgment seeking a ruling that remediation
costs are not the proper measure of damages and that Rice's property damages, if
any, should be measured by the alleged diminution in value of its land. The
Court held a hearing on Harken's motion on October 30, 2002, but has not yet
issued a ruling. Harken's management believes that the correct measure of
damages, if any, is the alleged diminution in value of Rice's land. Therefore,
in Harken management's opinion, the results of such additional claim will not
have a material adverse effect on Harken's financial position.
420 Energy Investment, Inc. and ERI Investments, Inc. (collectively "420
Energy") filed a lawsuit against XPLOR Energy, Inc., a wholly-owned subsidiary
of Harken, on December 21, 1999 in the New Castle County Court of Chancery of
the State of Delaware. 420 Energy alleges that they are entitled to appraisal
and payment of the fair value of their common stock in XPLOR as of the date
XPLOR merged with Harken. Harken has relied on an indemnity provision in the
XPLOR merger agreement to tender the costs of defense in this matter to former
stockholders of XPLOR. Although the outcome of this litigation is uncertain,
because the former stockholders of XPLOR have accepted indemnification of this
claim, Harken believes that any liability to Harken as a result of this
litigation will not have a material adverse effect on Harken's financial
condition.
In August 2001, a new lawsuit was filed by New West Resources, Inc., a
former XPLOR stockholder, against XPLOR, Harken and other defendants in state
court in Dallas, Texas. Harken received service of process in February 2002. New
West claims that it lost its $6 million investment in XPLOR as a result of
misrepresentations by XPLOR and breach of fiduciary duties by certain XPLOR
directors. Harken believes this new suit is an adjunct of the prior appraisal
rights claim by 420 Energy. The former stockholders of XPLOR have rejected
Harken's request for indemnification of this claim under the XPLOR merger
agreement. However, Harken intends to continue to pursue and enforce, through
whatever steps are necessary, any indemnification from the third parties. Harken
has tendered the defense of this claim to National Union Fire Insurance Company
("National Union"), pursuant to insurance policy coverage held by XPLOR.
National Union has accepted defense of this claim subject to a reservation of
rights. Based on the petition served on Harken, Harken does not believe the
claims asserted against Harken are meritorious. Therefore, in Harken
management's opinion, the ultimate outcome of this litigation will not have a
material adverse effect on Harken's financial condition.
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, 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 in Rule 501
of Regulation D, in exchange for 3,000 shares of Harken's Series G1 Preferred
Stock and
40
approximately $1,725,000 in cash. The 7% European Notes are convertible as
described in Sections 6 and 7 of the Note, 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 August 29, 2002, Harken entered into an amendment of a previous 10% Term
Loan and issued a 10% Term Loan payable in exchange for $2,000,000 cash 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 connection with
the 10% Term Loan, the holder received warrants to purchase 7.0 million shares
of Global at a price of 50 pence per share.
6. On August 30, 2002, Harken issued an additional $1,152,000 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 $1,435,000 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.
7. On October 9, 2002, Harken issued an additional $2,000,000 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 $2,000,000 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.
8. On October 31, 2002, Harken issued an additional $2,070,000 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 $2,070,000 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.
9. On July 22, 2002, Harken issued 2,000,000 shares of Harken common stock
pursuant to a redemption of approximately $1,135,000 principal amount of Benz
Convertible Notes.
10. On September 18, 2002, Harken issued 1,714,286 shares of Harken common stock
to LyFord representing a standby commitment fee pursuant to a Standby Purchase
Agreement dated September 6, 2002.
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.
41
Item 6. Exhibits and Reports on Form 8-K.
9 (a) EXHIBIT INDEX
Exhibit
3.1 Certificate of Incorporation of Harken Energy Corporation as amended
(filed as Exhibit 3.1 to Harken's Annual Report on Form 10-K for
fiscal year ended December 31, 1989, File No. 0-9207, and incorporated
by reference herein).
3.2 Amendment to the Certificate of Incorporation of Harken Energy
Corporation (filed as Exhibit 28.8 to the Registration Statement on
Form S-1 of Tejas Power Corporation, file No. 33-37141, and
incorporated by reference herein.)
3.3 Amendment to the Certificate of Incorporation of Harken Energy
Corporation (filed as Exhibit 3 to Harken's Quarterly Report on Form
10-Q for fiscal quarter ended March 31, 1991, File No. 0-9207, and
incorporated by reference herein.)
3.4 Amendments to the Certificate of Incorporation of Harken Energy
Corporation (filed as Exhibit 3 to Harken's Quarterly Report on Form
10-Q for fiscal quarter ended June 30,1991, File No. 0-9207, and
incorporated by reference herein.)
3.5 Amendments to the Certificate of Incorporation of Harken Energy
Corporation (filed as Exhibit 3.5 to Harken's Annual Report on Form
10-K for the fiscal year ended December 31, 1996, File No. 0-9207, and
incorporated herein by reference).
3.6 Amendment to the Certificate of Incorporation of Harken Energy
Corporation (filed as Exhibit 3.6 to Harken's Annual Report on Form
10-K for the fiscal year ended December 31, 1997, File No. 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).
42
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).
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).
*4.11 Amendment to Rights Agreement by and between Harken Energy Corporation
and American Stock Transfer and Trust Company (successor to Mellon
Investor Services LLC, (formerly known as ChaseMellon Shareholder
Services L.L.C.), as Rights Agent, dated June 18, 2002.
*4.12 Amendment to Rights Agreement by and between Harken Energy Corporation
and American Stock Transfer and Trust Company (successor to Mellon
Investor Services LLC, (formerly known as ChaseMellon Shareholder
Services L.L.C.), as Rights Agent, dated August 27, 2002.
43
10.1 Standby Purchase Agreement between Harken Energy Corporation and
Lyford Investments Enterprises Ltd. dated September 6, 2002. (Filed as
Exhibit 99.9 to the Registration Statement on Form S-3, File No.
333-94579, and incorporated herein by reference).
*10.2 First Amendment to Loan Agreement between Harken Energy Corporation
and Lyford Investments Enterprises Ltd., dated August 29, 2002.
*10.3 Harken Energy Corporation 7% Senior Convertible Notes Due 2007, Series
A, in the principal sum of $2,210,000, dated August 13, 2002.
*10.4 Harken Energy Corporation 7% Senior Convertible Notes Due 2007, Series
B, in the principal sum of $1,152,000, dated August 30, 2002.
*10.5 Harken Energy Corporation 7% Senior Convertible Notes Due 2007, Series
C, in the principal sum of $2,000,000, dated October 9, 2002.
*10.6 Harken Energy Corporation 7% Senior Convertible Notes Due 2007, Series
D, in the principal sum of $2,070,000, dated October 30, 2002.
*10.7 Executive Service Agreement by and between Harken Energy Corporation
and A. Wayne Hennecke.
*10.8 Severance Agreement dated June, 2002 by and between Harken Energy
Corporation and Anna Williams.
*10.9 Severance Agreement dated June, 2002 by and between Harken Energy
Corporation and Bruce N. Huff.
*10.10 Severance Agreement dated June, 2002 by and between Harken Energy
Corporation and Jim Denny.
*10.11 Severance Agreement dated June, 2002 by and between Harken Energy
Corporation and Rich Cottle.
*10.12 Severance Agreement dated June, 2002 by and between Harken Energy
Corporation and Jorge Delgado, Jr.
*10.13 Agreement regarding Compensation In the Event of a Change In Control
dated February 1, 2000, effective as of December 30, 1999 by and
between Harken Energy Corporation and Mikel D. Faulkner.
*10.14 Amended and Restated Agreement regarding Compensation In the Event of
a Change In Control dated April 2, 2001, effective as of December 30,
1999 by and between Harken Energy Corporation and Mikel D. Faulkner.
44
*10.15 Waiver and Fifth 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 October 29, 2002.
* Filed herewith
(b) REPORTS ON FORM 8-K
On August 14, 2002, Harken filed a Form 8-K with respect to executive
certifications required pursuant to Section 906 of the Sarbanes-Oxley Act
of 2002.
45
HARKEN ENERGY CORPORATION
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
Harken Energy Corporation
-------------------------------------
(Registrant)
Date: November 14, 2002 By: /s/Anna M. Williams
--------------------------------- ----------------------------------
Executive Vice President-Finance
and Chief Financial Officer
46
CERTIFICATION BY CHIEF EXECUTIVE OFFICER
PURSUANT TO 18 U.S.C. SECTION 1350,
AS ADOPTED PURSUANT TO SECTION 302
OF THE SARBANES-OXLEY ACT OF 2002
I, Mikel D. Faulkner, Chief Executive Officer of Harken Energy Corporation,
certify that:
1. I have reviewed this quarterly report on Form 10-Q of Harken Energy
Corporation;
2. Based on my knowledge, this quarterly report does not contain any untrue
statement of a material fact or omit to state a material fact necessary to make
the statement made, in light of the circumstances under which such statements
were made, not misleading with respect to the period covered by this quarterly
report;
3. Based on my knowledge, the financial statements, and other financial
information included in this quarterly report, fairly present in all material
respects the financial condition, results of operations and cash flows of the
registrant as of, and for, the periods presented in this quarterly report;
4. The registrant's other certifying officer and I are responsible for
establishing and maintaining disclosure controls and procedures (as defined in
Exchange Act Rules 13a-14 and 15d-14) for the registrant and we have:
a) designed such disclosure controls and procedures to ensure that
material information relating to the registrant, including its
consolidated subsidiaries, is made known to us by others within those
entities, particularly during the period in which this quarterly
report is being prepared;
b) evaluated the effectiveness of the registrant's disclosure controls
and procedures as of a date within 90 days prior to the filling date
of this quarterly report (the "Evaluation Date"); and
c) presented in this quarterly report our conclusions about the
effectiveness of the disclosure controls and procedures based on our
evaluation as of the Evaluation Date;
5. The registrant's other certifying officer and I have disclosed, based on our
most recent evaluation, to the registrant's auditors and the audit committee of
registrant's board of directors (or persons performing the equivalent function):
a) all significant deficiencies in the design or operation of internal
controls which could adversely affect the registrant's ability to
record, process, summarize and report financial data and have
identified for the registrant's auditors any material weaknesses in
internal controls; and
b) any fraud, whether or not material, that involves management or other
employees who have a significant role in the registrant's internal
controls; and
6. The registrant's other certifying officer and I have indicated in this
quarterly report whether or not there were significant changes in internal
47
controls or in other factors that could significantly affect internal controls
subsequent to the date of our most recent evaluation, including any corrective
actions with regard to significant deficiencies and material weaknesses.
Date: November 14, 2002
By: /s/Mikel D. Faulkner
--------------------------------
Mikel D. Faulkner
Chief Executive Officer
48
CERTIFICATION BY CHIEF FINANCIAL OFFICER
PURSUANT TO 18 U.S.C. SECTION 1350,
AS ADOPTED PURSUANT TO SECTION 302
OF THE SARBANES-OXLEY ACT OF 2002
I, Anna M. Williams, Chief Financial Officer of Harken Energy Corporation,
certify that:
1. I have reviewed this quarterly report on Form 10-Q of Harken Energy
Corporation;
2. Based on my knowledge, this quarterly report does not contain any untrue
statement of a material fact or omit to state a material fact necessary to make
the statement made, in light of the circumstances under which such statements
were made, not misleading with respect to the period covered by this quarterly
report;
3. Based on my knowledge, the financial statements, and other financial
information included in this quarterly report, fairly present in all material
respects the financial condition, results of operations and cash flows of the
registrant as of, and for, the periods presented in this quarterly report;
4. The registrant's other certifying officer and I are responsible for
establishing and maintaining disclosure controls and procedures (as defined in
Exchange Act Rules 13a-14 and 15d-14) for the registrant and we have:
a) designed such disclosure controls and procedures to ensure that
material information relating to the registrant, including its
consolidated subsidiaries, is made known to us by others within those
entities, particularly during the period in which this quarterly
report is being prepared;
b) evaluated the effectiveness of the registrant's disclosure controls
and procedures as of a date within 90 days prior to the filling date
of this quarterly report (the "Evaluation Date"); and
c) presented in this quarterly report our conclusions about the
effectiveness of the disclosure controls and procedures based on our
evaluation as of the Evaluation Date;
5. The registrant's other certifying officer and I have disclosed, based on our
most recent evaluation, to the registrant's auditors and the audit committee of
registrant's board of directors (or persons performing the equivalent function):
d) all significant deficiencies in the design or operation of internal
controls which could adversely affect the registrant's ability to
record, process, summarize and report financial data and have
identified for the registrant's auditors any material weaknesses in
internal controls; and
e) any fraud, whether or not material, that involves management or other
employees who have a significant role in the registrant's internal
controls; and
6. The registrant's other certifying officer and I have indicated in this
quarterly report whether or not there were significant changes in internal
controls or in other factors that could significantly affect internal
49
controls subsequent to the date of our most recent evaluation, including any
corrective actions with regard to significant deficiencies and material
weaknesses.
Date: November 14, 2002
By: /s/Anna M. Williams
--------------------------------------
Anna M. Williams
Chief Financial Officer
50
CERTIFICATION PURSUANT TO
18 U.S.C. SECTION 1350,
AS ADOPTED PURSUANT TO
SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002
In connection with the Quarterly Report of Harken Energy Corporation (the
"Company") on Form 10-Q for the period ending September 30, 2002 (the "Report")
as filed with the Securities and Exchange Commission, I, Mikel D. Faulkner,
Chief Executive Officer of the Company, certify, pursuant to 18 U.S.C. S. 1350,
as adopted pursuant to S. 906 of the Sarbanes-Oxley Act of 2002, that:
(1) The Report fully complies with the requirements of section 13 (a) or 15
(d) of the Securities Exchange Act of 1934; and
(2) The information contained in the Report fairly presents, in all
material respects, the financial condition and result of operations of the
Company.
/s/ Mikel D. Faulkner
- ------------------------------
Mikel D. Faulkner
Chief Executive Officer
November 14, 2002
51
CERTIFICATION PURSUANT TO
18 U.S.C. SECTION 1350,
AS ADOPTED PURSUANT TO
SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002
In connection with the Quarterly Report of Harken Energy Corporation (the
"Company") on Form 10-Q for the period ending September 30, 2002 (the "Report")
as filed with the Securities and Exchange Commission, I, Anna M. Williams, Chief
Financial Officer of the Company, certify, pursuant to 18 U.S.C. S. 1350, as
adopted pursuant to S. 906 of the Sarbanes-Oxley Act of 2002, that:
(1) The Report fully complies with the requirements of section 13 (a) or 15
(d) of the Securities Exchange Act of 1934; and
(2) The information contained in the Report fairly presents, in all
material respects, the financial condition and result of operations of the
Company.
/s/ Anna M. Williams
- -------------------------------------
Anna M. Williams
Chief Financial Officer
November 14, 2002
52