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SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the fiscal year ended December 31, 2002
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from __________ to __________
Commission file number 1-10262
HARKEN ENERGY CORPORATION
(Exact name of registrant as specified in its charter)
DELAWARE 95-2841597
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
580 WESTLAKE PARK BLVD., SUITE 600
HOUSTON, TEXAS 77079
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code (281) 504-4000
Securities registered pursuant to Section 12(b) of the Act:
Title of each class: Name of each exchange on which registered:
COMMON STOCK, PAR VALUE $0.01 AMERICAN STOCK EXCHANGE
PER SHARE
Securities registered pursuant to Section 12(g) of the Act: None
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 if disclosure of delinquent filers pursuant to
Item 405 of Regulation S-K is not contained herein, and will not be contained,
to the best of registrant's knowledge, in definitive proxy or information
statements incorporated by reference in Part III of this Form 10-K or any
amendment to this Form 10-K. [X]
Indicate by check mark whether the registrant is an accelerated filer
(as defined in Exchange Act Rule 12b-2). Yes No [X].
The aggregate market value of the voting Common Stock, par value $0.01
per share, held by non affiliates of the Registrant as of June 28, 2002 was
approximately $7,800,000. For purposes of the determination of the above stated
amount only, all directors, executive officers and 5% or more shareholders of
the Registrant are presumed to be affiliates.
The number of shares of Common Stock, par value $0.01 per share,
outstanding as of March 26, 2003 was 98,673,064.
DOCUMENTS INCORPORATED BY REFERENCE: Certain sections of the
Registrant's definitive proxy statement, which involves, among other things, the
election of directors and is to be filed under the Securities Exchange Act of
1934 within 120 days of the end of the Registrant's fiscal year ended December
31, 2002, are incorporated by reference into Part III hereof. Except for those
portions specifically incorporated by references herein, such document shall not
be deemed to be filed with the Commission as part of this Form 10-K.
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TABLE OF CONTENTS
PAGE
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PART I.
ITEM 1. Business.......................................................................... 3
ITEM 2. Properties........................................................................ 31
ITEM 3. Legal Proceedings................................................................. 31
ITEM 4. Submission of Matters to a Vote of Security Holders............................... 33
PART II.
ITEM 5. Market for Registrant's Common Equity and Related Stockholder Matters............. 34
ITEM 6. Selected Financial Data........................................................... 37
ITEM 7. Management's Discussion and Analysis of Financial Condition and
Results of Operations............................................................. 38
ITEM 7A. Quantitative and Qualitative Disclosures about Market Risk........................ 62
ITEM 8. Financial Statements and Supplementary Data....................................... 64
ITEM 9. Changes in and Disagreements with Accountants on Accounting and
Financial Disclosure.............................................................. 116
PART III.
ITEM 10. Directors and Executive Officers of the Registrant ...............................
ITEM 11. Executive Compensation............................................................ 117
ITEM 12. Security Ownership of Certain Beneficial Owners and Management.................... 117
ITEM 13. Certain Relationships and Related Transactions.................................... 117
ITEM 14. Controls and Procedures........................................................... 117
PART IV.
ITEM 15. Exhibits, Financial Statement Schedules and Reports on Form 8-K................... 119
2
PART I
ITEM 1. BUSINESS
OVERVIEW
Harken Energy Corporation (together with its wholly-owned or controlled
subsidiaries, "Harken") is engaged in oil and gas exploration, development and
production operations both domestically and internationally through its various
subsidiaries. Harken's domestic operations include oil and gas exploration,
development and production operations 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 during the year ended
December 31, 2002 included four exclusive Association Contracts with the
state-owned oil company in the Republic of Colombia and Technical Evaluation
Agreements covering acreage in Peru and Panama.
Harken was incorporated in 1973 in the state of California and
reincorporated in 1979 in the state of Delaware. Harken's principal offices are
located at 580 WestLake Park Blvd., Suite 600, Houston, Texas 77079, and its
telephone number is (281) 504-4000.
Harken divides its operations into two operating segments which are
managed and evaluated as separate operations. Harken's North American operating
segment currently consists of Harken's exploration, development, production and
acquisition efforts in the United States. Harken's Middle American operating
segment currently consists of Harken's exploration, development, production and
acquisition efforts in Colombia, Peru and Panama as well as potential future
operations elsewhere in Central America and South America. All of the Middle
American operating revenues during 2002 have been generated from Colombian
operations. See "Note 14- Other Information" in the Notes to Consolidated
Financial Statements contained in Part II, Item 8 of this Annual Report on Form
10-K for certain financial information about Harken's two operating segments and
certain financial information about the geographical areas of Harken's
operations.
During 2001, Harken's Board of Directors approved a plan to restructure
Harken's operations for the purpose of focusing Harken's resources more directly
on its U.S. acquisition, exploration and development operations, particularly in
the Gulf Coast region of Texas and Louisiana. Pursuant to this restructuring
plan, the Board determined it to be in the stockholders' interest to implement
such a plan to move Harken's interests in its Middle American operations, assets
and obligations under a separate subsidiary which could seek financing and other
capital plans on its own. During 2001, Harken transferred all of its
international operations, assets and obligations into a new subsidiary, Global
Energy Development Ltd. ("Global Ltd."), a Delaware corporation.
In March 2002, Global Ltd. transferred all of its interests in its
international assets and operations to, and obligations relating to such assets
and operations were assumed by, a new subsidiary, Global Energy Development PLC
("Global," a United Kingdom company), in exchange for 92.77% of Global's common
stock. Upon the completion of this exchange transaction, Global then completed
the listing of its common stock for trading on the AIM Exchange in London, and
sold 7.23% (2,021,902 shares) of such stock in a private placement to investors,
of which less than 1% (166,198 shares) of Global was purchased by certain
officers, directors and employees of Harken and Global and a family member at
the offering price. Global is seeking additional financing and acquisition
activities using its shares of its listed common stock. In December 2002, Harken
exchanged 2,000,000 shares of its Global common stock for 1,232,742 redeemable
ordinary shares of New Opportunities Investment Trust PLC ("NOIT"), an
investment trust organized under the laws of the United Kingdom. This exchange
further reduced Harken's ownership of Global to approximately 85.62%,
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and resulted in NOIT owning approximately 7% of Global's common stock. In
connection with the issuance to Lyford of certain promissory notes, Lyford
received warrants to purchase 7,000,000 shares held by Harken of Global at a
price of 50 pence per share. These warrants expire in 2005. Global's executive
offices are located at 580 WestLake Park Blvd., Suite 750, Houston, Texas 77079.
Global's business strategy is to identify, develop and promote energy projects
throughout Latin America to industry and financial partners and to aggregate
assets in Latin America through strategic acquisitions and alliances.
For additional information concerning material acquisitions, see Note 2
- - Mergers, Acquisitions and Dispositions contained in the accompanying Notes to
Consolidated Financial Statements, contained in Part II, Item 8.
In February 2003, Harken distributed to holders of its common stock,
Series G1 preferred stock and Series G2 preferred stock, at no charge,
nontransferable subscription rights to purchase shares of its common stock. Such
holders received one subscription right for each share of common stock they
owned (or in the case of the Series G1 preferred stock and Series G2 preferred
stock, one subscription right for each share of common stock issuable upon
conversion) at the close of business on January 30, 2003. Harken distributed
32,154,867 subscription rights exercisable for up to 72,885,437 shares of common
stock. All unexercised subscription rights expired at 12:00 midnight, New York
City time, on March 13, 2003. Each subscription right entitled the holder to
purchase 2.2667 shares of Harken common stock at a subscription price of $0.311
per right (or $0.1372 per share).
In connection with the rights offering, subscription rights were
properly exercised for 13,169,779 shares of common stock for an aggregate
purchase price of $1,807,000. Pursuant to a standby purchase agreement relating
to the rights offering, on March 21, 2003, Lyford purchased 59,716,227 shares of
common stock from Harken for an aggregate purchase price of approximately
$8,193,000. Lyford paid $3,184,943 in cash to Harken from its available working
capital. The remainder of the purchase price was offset against two promissory
notes issued by Harken in favor of Lyford on July 15, 2002 and August 29, 2002
(the "10% Term Loan"). As a result, upon the closing of the standby commitment,
Harken's indebtedness to Lyford under those notes, totaling $5,000,000 in
principal amount plus accrued interest, was cancelled. After giving effect to
the consummation of Harken's rights offering and Lyford's standby commitment,
Lyford became the holder of approximately 62% of Harken's outstanding common
stock. Therefore, these transactions resulted in a change of control of Harken.
Lyford has the voting power to control the election of Harken's board of
directors and the approval or other matters presented for consideration by the
stockholders, which could include mergers, acquisitions, amendments to Harken's
charter and various corporate governance actions.
During 2002, and continuing into the first quarter of 2003, Harken has
taken steps to repurchase, restructure and redeem portions of its 5% Senior
Convertible Notes, which mature on May 26, 2003 ("5% European Notes"), and its
5% Convertible Notes, which mature on November 26, 2003 ("Benz Convertible
Notes"). The combined principal balance outstanding for the 5% European Notes
and the Benz Convertible Notes has been reduced from approximately $51.8 million
at December 31, 2001 to approximately $19.8 million as of March 27, 2003.
Additionally, Harken presently intends to repay its obligations under its
promissory note issued to Waverley Investments Limited ("Waverley") in principal
amount of $1,705,000 due September 1, 2003 (the "Waverley Note") in cash prior
to or upon maturity of the Waverley Note.
Harken continues to prioritize the reduction and restructuring of its
convertible notes outstanding in order to minimize the potential dilutive effect
that the redemption of such notes would have on the ownership percentage of
Harken's common stockholders. For example, during the first quarter of 2003,
Harken has reduced the outstanding principal balance of the 5% European Notes by
an aggregate of approximately $14.92 million. Currently, Harken does not have
sufficient funds to pay the 5% Notes and the Waverley Note in cash upon
maturity, or to otherwise redeem or repurchase the 5% Notes and Waverley Note.
Although Harken's management continues to actively pursue negotiated
transactions to restructure the
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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 such an event, Harken plans to satisfy its
obligations under the 5% Notes by redeeming them in exchange for Harken common
stock. To the extent the Waverley Note remains outstanding at maturity Harken
similarly plans to redeem it for Harken common stock. Although there can be no
assurances, Harken believes that it will repurchase and restructure a sufficient
amount of the 5% European Notes to enable Harken to redeem the remaining
principal balance of the 5% European Notes upon maturity for Harken common stock
without requiring stockholder approval of additional authorized shares. However,
depending on Harken's success in repurchasing or restructuring the 5% European
Notes and the price of its common stock, Harken may not have a sufficient number
of authorized but unissued shares of Harken common stock to redeem the remaining
5% Notes for common stock. Harken has, therefore, included a proposal to
increase its authorized common stock in the preliminary proxy statement for its
annual stockholders meeting scheduled to be held on or about May 16, 2003.
Harken plans to propose an increase in the number of authorized shares
sufficient to redeem the 5% European Notes. Additionally, Harken plans to
include in this increase a number of authorized shares that, based on the
current market price of Harken common stock, at a minimum, should be sufficient
to redeem the Benz Convertible Notes. Lyford, who controls 62% of Harken's
common stock, has indicated to Harken that it will vote all of its shares of
common stock in favor of approval of the proposal to increase the authorized
shares of common stock. While there can be no assurances, Harken believes that
it will be able to hold the stockholders meeting before May 26, 2003, the
maturity date of the 5% European Notes. If the stockholders meeting cannot be
held prior to the maturity date of the 5% European Notes and Harken is unable to
otherwise restructure or repurchase the 5% European Notes, then Harken would
experience a material adverse impact on its financial position and results of
operations.
As described above, if Harken is not able to repurchase or restructure
the entire principal balance of the Benz Convertible Notes and the Waverley
Note, then Harken plans to satisfy its obligations under the Benz Convertible
Notes and the Waverley Note by redeeming them in exchange for Harken common
stock. Assuming stockholder approval is obtained for the proposed increase in
the number of authorized shares of Harken common stock, then, at the present
market price of Harken common stock, Harken believes that the increase should
provide a sufficient number of shares to allow Harken to redeem the Benz
Convertible Notes and the Waverley Note for common stock. However, if the market
price of Harken common stock declines significantly, then depending on the
amount of the Benz Convertible Notes and the Waverley Note outstanding, Harken
may be required to seek stockholder approval of an additional increase in shares
before Harken could redeem the Benz Convertible Notes and the Waverley Note in
full. There can be no assurances that Harken will obtain such stockholder
approval prior to the respective maturity dates of the Benz Convertible Notes
and the Waverley Note. Harken currently does not have sufficient funds to pay
the Benz Convertible Note in cash upon maturity. If Harken's efforts to convert
a substantial amount of the Benz Convertible Notes and the Waverley Note into
common stock is unsuccessful and Harken is unable to otherwise restructure or
repurchase those notes, Harken would experience a material adverse impact on its
financial position and results of operations.
The redemption of the 5% Notes and the Waverley Note for Harken common
stock would likely 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 the 5% Notes had been redeemed at
an estimated redemption price of $0.20, for every $1,000,000 of 5% Notes
redeemed at this price, Harken would have been required to issue to the
noteholders approximately 5.75 million shares of common stock. Additionally, at
this redemption price, Harken would have been required to issue to Waverley
approximately 8.53 million shares of common stock to redeem the outstanding
principal balance of the Waverley Note. If all of the 5% Notes and the Waverley
Note had been redeemed at this price, the noteholders would have received
5
an aggregate of approximately 122 million shares of common stock and,
collectively, would control over 55% of Harken's common stock. The number of
shares that might be issued in this regard will vary significantly depending
upon the average market price of Harken's common stock over the 30 days
preceding the redemption notice, and the amount of 5% Notes and the Waverley
Note to be redeemed.
For further information concerning this proposed capital restructuring,
see "Liquidity and Capital Resources" contained in Part II, Item 7, Management's
Discussion and Analysis of Financial Conditions and Results of Operations.
DOMESTIC EXPLORATION AND PRODUCTION OPERATIONS
During the three years ended December 31, 2002, Harken has drilled or
participated in the drilling of 46 oil and gas wells domestically, completing 35
of the wells drilled. Harken's domestic drilling activity increased following
the August 1999 acquisition of XPLOR Energy, Inc. ("XPLOR," a wholly-owned
subsidiary) and the December 1999 acquisition of prospects from Benz Energy,
whereby Harken acquired a variety of domestic prospect acreage within its Texas
and Louisiana Gulf Coast area of emphasis. Drilling activity was also spurred by
increased oil and gas prices, which resulted in significant domestic operating
cash flows from Harken's producing property base. Harken also capitalized on the
higher product prices by selling certain non-strategic producing properties,
most of which were outside of Harken's Gulf Coast operating focus. Such
producing property and mineral interest sales during the three years ended
December 31, 2002, generated cash proceeds of approximately $21 million, which
was used in part to support Harken's exploration and development activities.
During 2002, Harken's domestic operations shifted from primarily an
exploration and development focus to an acquisition growth strategy, with a
reduced emphasis on exploration. This shift allows Harken to conserve its
capital resources to repurchase convertible debt obligations pursuant to a
proposed capital restructuring. For further information concerning this proposed
capital restructuring, see "Liquidity and Capital Resources" contained in Part
II, Item 7, Management's Discussion and Analysis of Financial Conditions and
Results of Operations. In April 2002, a wholly-owned subsidiary of Harken
acquired certain property interests (the "Republic Properties") from Republic
Resources, Inc., in exchange for 2,645,500 shares of Harken common stock. The
Republic Properties consist of interests in 16 oil and gas wells in nine fields
and interests in additional prospect acreage located in southern Louisiana and
the Texas Gulf Coast region. Harken is seeking additional acquisition
opportunities to expand its domestic operations. Although capital expenditure
plans for 2003 are decreased compared to historical levels, Harken is continuing
to seek joint venture and farmout opportunities to explore and develop its
domestic prospect portfolio and pursue domestic oil and gas reserve growth
through acquisitions. However, Harken's ability to make future acquisition
transactions may be affected by many reasons, including the market value of
Harken common stock and the successful completion of its proposed capital
restructuring. See "Cautionary Statements" contained in Part I - Item 1,
Business.
As of December 31, 2002, Harken operates or owns a non-operating working
interest in 263 oil wells and 91 gas wells in the United States. Harken's
domestic operations are located in the onshore and offshore Gulf Coast regions
of South Texas and Louisiana, portions of West Texas and the Texas Panhandle
region. There were no domestic customers during 2000, 2001 or 2002 which
individually represented 10% or more of Harken's consolidated revenues.
Gulf Coast Operations -- On August 19, 1999, Harken acquired XPLOR
whereby XPLOR became a wholly-owned subsidiary of Harken. At December 31, 2002,
through XPLOR and other wholly-owned subsidiaries, Harken owns operating and
non-operating working interests in one oil well and 30 gas wells
6
located in various counties in South Texas, concentrated in the Raymondville
area of Willacy County and the Esperanza field in Wharton County. In Louisiana,
through XPLOR, Harken owns operated and non-operated interests in 31 oil wells
and 19 gas wells concentrated primarily in the Main Pass area offshore
Plaquemines Parish, the Lake Raccourci area of LaFourche Parish and the
Abbeville and Leleux fields in Vermillion Parish. On April 4, 2002, Harken
acquired the Republic Properties, which consist of 16 oil and gas wells located
primarily in Jackson County, Texas, the Bayou Sorrel field located in Iberville
and Lafayette, Lafayette Parishes, Louisiana. At December 31, 2002,
approximately 58% of Harken's domestic proved reserves are located in the Gulf
Coast region of Louisiana and Texas.
During 2001 and 2002, Harken has drilled or participated in the drilling
of several Gulf Coast area exploratory and development wells. Wells drilled in
2001 include the State Lease 14589 #3 and the State Lease 1480 #3, both in the
Lake Raccourci area. The State Lease 14589 #3, which was completed in September
2001, had initial gross production of 2.4 million cubic feet equivalent per day
and is currently producing 1.2 million gross cubic feet equivalent per day. The
State Lease 1480 #3 well was completed in October 2001 and recorded initial
production in excess of 3.6 million cubic feet equivalent per day and is
currently producing 1.6 million gross cubic feet equivalent per day. Harken
holds a 39.59% and 44% working interest, respectively, in these two wells.
During 2001 and 2002, Harken drilled 23 wells in the Raymondville area of South
Texas, successfully completing 22 of the wells drilled. Harken holds an
approximate 27% working interest in the Raymondville area wells.
West Texas Operations -- Harken operates or owns non-operated interests
in 157 oil wells and 40 gas wells in Hutchinson and Gray Counties and 61 oil
wells in Hockley County, all located in the Panhandle area of Texas. During
2002, Harken performed recompletion procedures on selected Panhandle producing
wells in order to begin production from certain behind pipe zones. Harken
believes such procedures may be applied to additional producing well bores
within its Panhandle areas. At December 31, 2002, approximately 42% of Harken's
domestic proved reserve volumes are located in West Texas.
Prospect Acreage -- In addition to the producing property interests
discussed above, Harken, through certain wholly-owned subsidiaries, owns
interests in a variety of domestic prospect acreage. Through XPLOR, Harken owns
acreage interests in the Lake Raccourci and Lapeyrouse fields of LaFourche and
Terrebonne Parishes, respectively, in Louisiana. As part of the December 1999
prospect purchase from Benz Energy, Inc., Harken Gulf Exploration owns prospect
acreage interests in the Old Ocean field in Matagorda and Brazoria Counties of
Texas, the Rayburn field in Liberty County, Texas and certain salt dome
prospects in various counties in Mississippi. Harken successfully drilled
exploratory wells in the Lake Raccourci, Lapeyrouse and Old Ocean fields during
2000 and 2001.
MIDDLE AMERICAN EXPLORATION AND DEVELOPMENT OPERATIONS - COLOMBIA
At December 31, 2002, Global held, through Harken de Colombia, Ltd., a
wholly-owned subsidiary of Global, four exclusive Association Contracts with
Empresa Colombiana de Petroleos ("Ecopetrol"), the state-owned Colombian oil
company. Global has proved reserves attributable to three of its four
Association Contracts, the Alcaravan, Bolivar and Bocachico Contracts. In the
Alcaravan Contract, Global has proved reserves in the Palo Blanco and Anteojos
fields. In the Bolivar Contract, Global has proved reserves in the Buturama
field. In the Bocachico Contract, Global has proved reserves in the Rio Negro
field. Ecopetrol, which purchases all of Global's crude oil production,
individually accounted for 26% and 30% of Harken's consolidated revenues in 2001
and 2002, respectively.
Global has responded to recent increased security concerns in Colombia
by implementing a number of operating changes including the 2001 decision to
replace its field operating employees with outsourced
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personnel. Global's operating plans in Colombia are continuing, subject to the
ongoing monitoring of security developments. For further discussion of Global's
security concerns in Colombia, see "Cautionary Statements" contained in Part I,
Item 1.
Alcaravan Contract -- The Alcaravan Association Contract (the "Alcaravan
Contract") gives Global the exclusive right to explore for, develop and produce
oil and gas throughout approximately 24,000 acres in the Alcaravan area of
Colombia, which is located in Colombia's Llanos Basin approximately 140 miles
east of Santafe de Bogota. Global has completed the maximum six year seismic and
exploratory drilling program of the Alcaravan Contract (the "Exploration
Period").
In October 2001, Global received notification from Ecopetrol that Global
could proceed with the sole risk development of the Palo Blanco field of the
Alcaravan Association Contract. As such, the term of the Alcaravan Contract
related to the productive areas has been extended for a period of 22 years from
the date of such election by Ecopetrol, subject to the entire term of the
Alcaravan Contract being limited to no more than 28 years. Due to Ecopetrol's
election not to participate, Global elected to proceed with the development of
the Palo Blanco field on a sole risk basis, whereby Global is entitled to
receive Ecopetrol's 50% share of production after deduction for Ecopetrol's 20%
royalty interest, until Global has recovered 200% of its successful well costs
expended, after which time Ecopetrol could elect to begin to receive its 50%
working interest share of production. Accordingly, Global reflects its 80%
interest in gross production and cash flows in its financial statements and
reserve information. Global has retained the acreage covering those structure
areas associated with the Palo Blanco and Anteojos discoveries.
Alcaravan Contract Operations -- Global has drilled five wells on the
Alcaravan acreage, two of which are currently producing, the Estero #1 and
Estero #2 wells. In February 1997, Global drilled the Estero #1 well and in
January 2001, Global drilled the Estero #2 well, both located on the Palo Blanco
field. Daily combined production from the Estero #1 and Estero #2 wells from the
Palo Blanco field have averaged a total of approximately 760 gross barrels per
day during the first quarter of 2003. During the fourth quarter of 2002, Global
successfully conducted a workover of the Estero #2 to reduce water production
from that well. Global's workover operations resulted in reduced water cuts for
the Estero #2 well. No additional workover operations are anticipated for Estero
#1 or Estero #2 during 2003. At December 31, 2002, Global reflects proved
reserves of approximately 2.5 million net barrels related to its interest in the
Palo Blanco field. During 2002, Global produced a total of approximately 468,000
gross barrels of oil from its Palo Blanco field, and since inception and through
December 31, 2002, Global has produced a cumulative total of approximately
1,514,000 gross barrels of oil from its Palo Blanco field. The next development
well to be drilled in the Palo Blanco field is scheduled for early 2004 for an
estimated cost of completion of less than $2.5 million. Such costs are expected
to be funded out of a cash on hand and cash from operations. If sufficient funds
are not available, Global intends to seek additional financing and there can be
no assurance that Global will be able to obtain financing on acceptable terms.
These planned international capital expenditures are discretionary and, as a
result, will be curtailed if sufficient funds are not available. Such
expenditure curtailments, however, could result in Harken losing certain
prospect acreage or reducing its interest in future development projects.
In April 1999, Global commenced pipeline transportation of production
from the Alcaravan Contract Area through its constructed flowline connecting the
Palo Blanco field to an existing crude oil pipeline system adjacent to the
field. During early portions of the Estero #1 production tests, sustained
production during 2000 and the first quarter of 2001 was limited to
approximately 1,000 gross barrels of oil per day due to pipeline constraints and
pumping capacity. Beginning in April 2001, such pipeline constraints were
partially alleviated. In addition, during the second quarter of 2001, Global
purchased the 45 kilometer Guarimena to Santiago crude oil pipeline and
negotiated a new transportation agreement with the owner/operator of the
pipeline that transports crude oil from Santiago north to market points. As a
result of the above steps, though Global's Palo
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Blanco production levels are currently less than transport capacity, Global is
now allowed to transport up to 3,000 gross barrels of oil per day combined from
Estero #1, Estero #2 and the Canacabare #1 wells. This 3,000 gross barrel
limitation will also apply to the Cajaro #1, which is described below. Harken
believes that the transport capacity is sufficient for production from all four
wells.
At December 31, 2002, Global also reflects proved reserves of
approximately 400,000 net barrels related to its interest in the Anteojos
prospect within the Alcaravan Contract area. The Canacabare #1 well, which was
drilled during 1998 to a total depth of 8,410 feet, had not produced
consistently due to the rainy season and resulting operating conditions in the
Llanos Basin area in Colombia. During the last half of 2002, and first quarter
of 2003, Global installed a flowline connection, at a cost of approximately
$500,000, to Global's existing Palo Blanco pipeline facility and expects that it
will begin daily production from the Canacabare #1 well beginning in late March
or early April 2003. Global's net revenue interest in any production that may be
discovered on the Anteojos prospect will depend on whether or not Ecopetrol
elects to participate. Upon the election by Ecopetrol to participate in a field
and upon commencement of production from the field, Global will begin to be
reimbursed by Ecopetrol out of Ecopetrol's share of production, net of
royalties, for 50% of all direct exploratory well costs incurred prior to the
point of Ecopetrol's participation. Reimbursement by Ecopetrol to Global may be
either in cash or through allowing its share of production to apply to Global's
cost recovery. Production from a field in which Ecopetrol elects to participate
will be allocated as follows: Ecopetrol, on behalf of the Colombian government,
will receive a royalty interest of 20% of all production, and all production
(after royalty payments) will be allocated 50% to Ecopetrol and 50% to Global.
Ecopetrol and Global will be responsible for all future development costs and
operating expenses in direct proportion to their interest in production. If
Ecopetrol does not elect to participate, Global has the choice to proceed with
the development of the prospect area on a sole-risk basis. If Global does
proceed on a sole-risk basis, it will be entitled to receive Ecopetrol's 50%
share of production after deduction for Ecopetrol's 20% royalty interest, until
Global has recovered 200% of its successful well costs expended, after which
time Ecopetrol could elect to receive its 50% working interest share of
production.
Bocachico Contract -- Under the Bocachico Association Contract (the
"Bocachico Contract"), Global acquired the exclusive rights to conduct
exploration and production activities and drilling on this area, which covers
approximately 54,700 acres in the Middle Magdalena Valley of Central Colombia.
Global has fulfilled all of the work requirements for the first four years of
the Bocachico Contract and agreed with Ecopetrol to amend the Bocachico Contract
whereby the remaining work requirements for the fifth and sixth year were
transferred to Global's Cajaro Association Contract, which is discussed below.
With the execution of this amendment, Global has completed the Exploration
Period related to the Bocachico Contract. The production sharing and term
arrangements under the Bocachico Contract are substantially similar to those
under the Alcaravan Contract. The Bocachico Contract provides that two years
following the end of the Exploration Period and for any field in which Ecopetrol
elects to participate, the Bocachico Contract area will be further reduced to
25% of the original area. Two years thereafter, the Bocachico Contract area will
be reduced to the area of the field that is in production or development, plus a
reserve zone of five kilometers in width around the productive boundary of such
field. The producing field plus the zone surrounding such field will become the
area of exploitation. Global has and will continue to designate any acreage to
be released subject to acceptance by Ecopetrol.
Bocachico Contract Operations -- From 1996 to 1998, Global drilled and
completed three wells on the Bocachico Contract area, all in the Rio Negro
prospect. Global initiated sales of production from both the Torcaz #2 and
Torcaz #3 wells to a local purchaser at the wellsites and for most of 1998 these
wells produced in excess of 100 gross barrels of oil per day. From 1999 and
until the last six months of 2002, Global could not sustain production
consistently from the Torcaz wells. However, during the last six months of 2002,
Global performed workover procedures on the Torcaz #3 well and averaged
approximately 100 gross barrels of
9
production per day from the Torcaz field. At December 31, 2002, Global reflected
proved reserves of approximately 300,000 net barrels related to its interest in
the Rio Negro field. There are no capital expenditures scheduled for the Rio
Negro field in 2003 or 2004.
In December 1999, Global submitted an application to Ecopetrol for their
participation in the Rio Negro field. Global submitted an updated application to
Ecopetrol in October 2002, which it plans to review with Ecopetrol in April
2003. Global's net revenue interest in production from the Bocachico Contract
will depend upon whether or not Ecopetrol elects to participate. If Ecopetrol
does not elect to participate, Global would then have the choice to proceed with
the development of the prospect area on a sole-risk basis. If Global does
proceed on a sole-risk basis, it will be entitled to receive Ecopetrol's 50%
share of production, after deduction for Ecopetrol's 20% royalty interest, until
Global has recovered 200% of its successful well costs expended, after which
time Ecopetrol could elect to receive its 50% working interest share of
production. Should Ecopetrol elect to participate in the development of the
Bocachico Contract, Global would receive 40% of the gross revenues from
production from the Bocachico Contract area and to the extent that a field
produces in excess of 60 million barrels, Global's net revenue interest would
decrease. Should Ecopetrol elect to participate or Global elect to proceed on a
sole risk basis, the term of the Bocachico Contract related to the productive
areas will be extended for a period of 22 years from the date of such election,
subject to the entire term of the Bocachico contract being limited to no more
than 28 years.
Bolivar Contract -- Under the Bolivar Association Contract (the "Bolivar
Contract"), Global acquired the exclusive rights to conduct exploration and
production activities in the Bolivar Contract area, which covers approximately
124,000 acres in the Northern Middle Magdalena Valley of Central Colombia.
In February 2001, Global received notification from Ecopetrol that it
had elected not to participate in the development of the Buturama field of the
Bolivar Association Contract. Due to Ecopetrol's election not to participate,
Global has elected to proceed with the development of the field on a sole risk
basis, whereby Global is entitled to receive Ecopetrol's 50% share of
production, after deduction of Ecopetrol's 20% royalty interest, until Global
has recovered 200% of its successful well costs expended, after which time
Ecopetrol could elect to begin to receive its 50% working interest share of
production. Accordingly, Global reflects its 80% interest in gross production
and cash flows in its financial statements and reserve information. In addition,
the term of the Bolivar Contract related to the productive areas has been
extended for a period of 22 years from the date of such election by Ecopetrol,
subject to the entire term of the Bolivar Contract being limited to no more than
28 years.
Global has completed all of the work obligations for the first five
years of the Bolivar Contract. Global and Ecopetrol entered into an agreement in
June 2002 whereby Global relinquished all but approximately 124,000 of the
Bolivar Contract area acreage in exchange for the release from the sixth year
Bolivar Contract work obligations. The release of such acreage did not affect
Global's proved reserves on the Bolivar Contract area. With the execution of
this amendment, Global has completed the Exploration Period related to the
Bolivar Contract. The production sharing and term arrangements under the Bolivar
Contract are substantially similar to the Alcaravan and Bocachico Contracts.
Bolivar Contract Operations -- Global has drilled four wells on the
Bolivar Contract area. In November 1997, Global spudded its first well on the
Bolivar Contract acreage, the Catalina #1, which was found to be productive. In
March 1998, Global spudded the Olivo #1, which was drilled from the same surface
location as the Catalina #1, and was also found to be productive. Two additional
wells, the Laurel #1, drilled in 1999, and the Olivo #2, drilled in early 2001,
were unproductive.
10
At December 31, 2002, Global reflects proved reserves (primarily proved
undeveloped) of approximately 2.4 million net barrels related to its interest in
the Buturama field. Global plans to drill two development wells in the Buturama
field, scheduled for 2003, for a total cost of completion of approximately $4.7
million. Such costs are expected to be funded out of cash on hand and cash from
operations. If sufficient funds are not available, Global intends to seek
additional financing, however, there can be no assurance that Global will be
able to obtain financing on acceptable terms. During 2002, the Catalina # 1 and
Olivo #1 produced a total of 90,000 gross barrels of oil and, since inception,
Global has produced cumulative production of approximately 1,104,000 gross
barrels of oil from these wells. During the last part of 2001 and first quarter
of 2002, the Catalina #1 and Olivo #1 wells experienced mechanical problems,
with workovers and recompletions completed in 2002 at a total approximate cost
of $800,000, which was funded out of a combination of cash on hand and cash from
operations. During the fourth quarter of 2002, Global modified the lift systems
on both the Catalina #1 and Olivo #1 wells at a combined cost of $447,000.
Global's work on the lift systems resulted in increased production volumes for
the Bolivar Contract area all of which is currently derived from the Olivo #1
well, since the Catalina #1 well is temporarily shut-in. Global intends on
conducting additional work on the lift system for the Catalina #1 well during
the second quarter of 2003 at an estimated cost of $75,000. Global expects to
continue to transport 100% of current and projected Bolivar area production
through its current trucking operations. For further discussion of Global's
security concerns in Colombia, see "Cautionary Statements" section below.
Cajaro Contract -- In December 2001, Global signed an Association
Contract (the "Cajaro Contact") with Ecopetrol, covering the Cajaro Contract
area. Under the Cajaro Contract, which became effective in February 2002, Global
acquired the exclusive rights to conduct exploration and production activities
in the Cajaro Contract area, which covers approximately 83,000 acres in
Colombia's Llanos Basin adjacent to Global's Alcaravan Contract area. The
signing of the Cajaro Contract was pursuant to Global's exercise of contract
option rights contained as part of the El Retorno Technical Evaluation
Agreement, which Global had previously signed in May 2001, and following the
completion of certain seismic reprocessing procedures.
Under the terms of the Cajaro Contract, if during the three year minimum
Exploration Period, Global discovers one or more fields capable of producing oil
or gas in quantities that are economically exploitable and Ecopetrol elects to
participate in the development of the field or Global chooses to proceed with
the development on a sole risk basis, the term of the Cajaro Contract will be
extended for a period of 22 years from the date of such discovery. Global's net
revenue interest in any production that may be discovered on the Cajaro Contract
will depend on whether or not Ecopetrol elects to participate. Upon the election
by Ecopetrol to participate in a field and upon commencement of production from
the field, Global will begin to be reimbursed by Ecopetrol out of Ecopetrol's
share of production, net of royalties, for 50% of all seismic costs and direct
exploratory well costs (including costs related to dry holes) incurred prior to
the point of Ecopetrol's participation. Reimbursement by Ecopetrol to Global may
either be in cash, or through allowing its share of production to apply to
Global's cost recovery. Production from a field in which Ecopetrol elects to
participate will be allocated as follows: Ecopetrol, on behalf of the Colombian
government, will receive a royalty interest ranging from 5% to 25% (based on
levels of average monthly production) of all production, and all production
(after royalty payments) will be allocated 50% to Ecopetrol and 50% to Global.
Ecopetrol and Global will be responsible for all future development costs and
operating expenses in direct proportion to their interest in production.
Similar to Global's other Association Contracts with Ecopetrol, for any
Cajaro Contract field in which Ecopetrol elects not to participate, Global could
elect to proceed with the development of the field on a sole risk basis, whereby
Global would be entitled to receive Ecopetrol's 50% share of production, after
deduction of Ecopetrol's royalty interest, until Global has recovered 200% of
its successful well costs expended, after which time Ecopetrol could elect to
begin to receive its 50% working interest share of production. The acreage
11
relinquishment arrangements under the Cajaro Contract are substantially similar
to those under Global's Bocachico Association Contract with Ecopetrol.
Cajaro Contract Operations -- In February 2003, Global commenced
drilling operations on the initial well required to be drilled in the Cajaro
Association Contract, the Cajaro #1 well. As of March 27, 2003, the Cajaro #1
well has reached a depth of approximately 9,300 feet and recorded oil shows in
the Ubaque and Mirador Formations. Global has disassembled the equipment
contracted for the drilling operation and expects a completion rig to arrive by
March 31, 2003. There can be no assurances, but if successful, production from
the Cajaro #1 well would be transported through Global's existing Palo Blanco
pipeline facilities, subject to the 3,000 gross barrel limitation relating to
the Palo Blanco field. Costs to drill the Cajaro #1 well are estimated at
approximately $2.5 million and will be incurred in 2003. These costs are
expected to be funded out of cash on hand and cash from operations. If
sufficient funds are not available, Global intends to seek additional financing
and there can be no assurance that Global will be able to obtain financing on
acceptable terms.
MIDDLE AMERICAN OPERATIONS - PERU
In April 2001, Global, through a wholly-owned subsidiary, signed a
Technical Evaluation Agreement ("Peru TEA") with PeruPetro, the national oil
company of Peru. The Peru TEA covers an area of approximately 6.8 million gross
acres in northeastern Peru. Under the terms of the Peru TEA, Global has the
option to convert the Peru TEA to a seven year exploration contract, with a
twenty-two year production period. Terms of the Peru TEA allow Global to conduct
a study of the area that will include the reprocessing of seismic data and
evaluation of previous well data. Global is currently negotiating with PeruPetro
an extension to the Peru TEA, which is currently scheduled to expire in April
2003.
MIDDLE AMERICAN OPERATIONS - PANAMA
In September 2001, Global, through a wholly-owned subsidiary, signed a
Technical Evaluation Agreement ("Panama TEA") with the Ministry of Commerce and
Industry for the Republic of Panama. The Panama TEA covers an area of
approximately 2.7 million gross acres divided into three blocks in and offshore
Panama. Under the terms of the Panama TEA, which extends for a period of 24
months, Global is to perform certain work program procedures and studies to be
submitted to the Panamanian government with an option to negotiate and enter
into one or more Contracts for the Exploration and Exploitation of Hydrocarbons
with the Ministry of Commerce and Industry.
MIDDLE AMERICAN EXPLORATION AND DEVELOPMENT OPERATIONS - COSTA RICA
Under the terms of an Exploration and Production Concession contract
with the Republic of Costa Rica (the "Costa Rica Contract"), Global, through an
investment in Harken Costa Rica Holdings ("HCRH," a Nevada limited liability
company), owns an interest in approximately 1.4 million acres in the North and
South Limon Back Arc Basin onshore and offshore Costa Rica. Global's
participation in Costa Rica is structured whereby a wholly-owned subsidiary owns
a 40% share of the stock of HCRH, with an affiliate of MKJ Xploration, Inc.
("MKJ") owning the remaining stock of HCRH. MKJ is the operator of HCRH and the
Costa Rica Contract.
Costa Rica Operations -- In November 1999, HCRH commenced its offshore
seismic acquisition program in Costa Rica to collect approximately 100 square
kilometers of 3-D seismic information. The seismic data confirmed the viability
of the Moin prospect in both the Tertiary and Cretaceous target horizons. In
July 2000, HCRH filed its environmental impact study requesting an environmental
permit related to the planned
12
drilling operation with the Costa Rican environmental agency SETENA. In March
2002, SETENA denied its approval of the requested environmental permit. 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. Due to the
Costa Rica Constitutional Court decision discussed above, even though it did not
directly involve HCRH, as well as the pending legislation described above,
Harken and Global believe that HCRH's appeal to SETENA for reconsideration of
its denial of the requested permit, or any similar recourse, will be
unsuccessful. Further, 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. See "Cautionary Statements" below.
OTHER MIDDLE AMERICAN OPERATIONS
Global is committed to broadening its exploration efforts
internationally, in addition to its existing operations in Colombia, Peru and
Panama. Global's operational experience in those areas may enable Global to
expand its exploration efforts elsewhere in Latin America. Global's business
strategy is to focus on improvement of its cash flow by increasing its daily
production volumes as well as to identify, develop and promote energy projects
from throughout Latin America to industry and financial partners and to
aggregate assets in Latin America through strategic acquisitions and alliances.
CAUTIONARY STATEMENTS
Certain statements contained in this Annual 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.
Such forward-looking statements involve known and unknown risk,
uncertainties and other factors which may cause the actual results, performance,
timing or achievements of Harken to be materially different from any results,
performance, timing or achievements expressed or implied by such forward-looking
statements. Additional cautionary statements include, among others, the
following:
RISKS ASSOCIATED WITH HARKEN'S FINANCIAL CONDITION:
If Harken does not continue to meet the listing requirements of the American
Stock Exchange, its common stock could be delisted.
The American Stock Exchange requires companies to fulfill certain
requirements in order for their shares to continue to be listed. The securities
of a company may be considered for delisting if the company fails to meet
certain financial thresholds, including if the company has stockholders' equity
of less than $6
13
million and has sustained losses from continuing operations and/or net losses in
its five most recent fiscal years. As of December 31, 2002, Harken's
stockholders' equity was $5.1 million and, as discussed below, Harken has
sustained losses in each of Harken's last five fiscal years. As of March 25,
2003, Harken's stockholders' equity has increased to an amount over $6.0
million. There can be no assurance that Harken's stockholders' equity will
remain above $6.0 or that Harken will not report additional losses in the
future. If these aspects of Harken's financial condition do not improve,
Harken's common stock may be considered for 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 will be in default under Harken's 5% European
Notes and, as a result of cross-default provisions, Harken's other debt
obligations. Any default under Harken's debt agreements will result in
substantially all of Harken's debt obligations becoming due in full. Harken does
not have sufficient funds to pay Harken's debt obligations in cash and there is
no assurance Harken 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.
HARKEN HAS A HISTORY OF LOSSES AND MAY SUFFER LOSSES IN THE FUTURE.
Harken has reported losses in each of the last five fiscal years,
including a net loss of approximately $9.8 million for the year ended December
31, 2002. Harken has reported cumulative net losses of approximately $272
million over the last five fiscal years. Harken's ability to generate net income
is strongly affected by, among other factors, Harken's ability to successfully
drill Harken's undeveloped reserves as well as the market price of crude oil and
natural gas. During the fourth quarter of 2000, Harken recorded a writedown of
Harken's oil and gas properties of approximately $156 million primarily due to a
significant reduction in Harken's proved undeveloped reserves in Colombia
following the drilling of a non-productive well. If Harken is unsuccessful in
drilling productive wells or the market price of crude oil and natural gas
declines, Harken may report additional losses in the future. Consequently,
future losses may adversely affect Harken's business, prospects, financial
condition, results of operations and cash flows.
If Harken cannot obtain stockholder approval for the issuance of shares of
common stock to redeem certain of its existing convertible notes and Harken is
unable to pay cash at maturity, Harken could be subject to potential delisting
of its common stock from the American Stock Exchange.
The issuance of a number of shares that is greater than 20% of Harken's
currently outstanding shares of common stock requires stockholder approval as a
condition to listing such additional shares on the American Stock Exchange.
Currently, Harken does not have sufficient funds to pay its existing convertible
notes in cash upon maturity, or to otherwise redeem or repurchase these notes.
Harken has obtained stockholder approval for the issuance of shares of common
stock to redeem up to $20 million principal amount of the 5% European Notes due
May 26, 2003 at Harken's annual stockholders meeting held on January 29, 2003 to
comply with the rules of the American Stock Exchange. As of March 27, 2003,
approximately $14.1 million principal amount of 5% European Notes was
outstanding.
Harken also has the right to redeem for shares of common stock
approximately $5.7 million principal amount of the Benz Convertible Notes that
mature in November 2003 and $1.7 million principal amount of the Waverley Note
that matures in September 2003. Although the exact number of shares which may be
issued in connection with redemptions of the Benz Convertible Notes and the
Waverley Note will depend upon the number of shares of common stock outstanding
at that time, the amount of notes to be redeemed for common stock and the
average market price of Harken's common stock at the time of the redemptions.
The redemption for common stock of the notes may result in the issuance of a
number of shares that is greater than 20% of Harken's currently outstanding
14
shares of common stock. Consequently, the rules of the American Stock Exchange
may require additional stockholder approval as a condition to listing such
additional shares on that exchange.
If Harken does not obtain required stockholder approvals, its common
stock could be subject to potential delisting from the American Stock Exchange.
See also "-- If Harken does not continue to meet the listing requirements of the
American Stock Exchange, its common stock could be delisted."
Harken may have an insufficient number of authorized shares of common stock to
redeem convertible notes due in 2003, which would cause it to restructure the
notes or to pay cash at maturity -- neither of which Harken may be able to
accomplish.
Harken currently has 225 million shares of common stock authorized for
issuance. As of March 27, 2003, approximately 99 million shares were outstanding
and 51 million shares were reserved for issuance. There is approximately 76
million shares of common stock available for issuance. See "--Risks associated
with market conditions -- Harken may issue additional shares of common stock
that may dilute the value of its common stock and adversely affect the market
price of Harken's common stock."
The redemption of the 5% European Notes, the Benz Convertible Notes and
the Waverley Note may result in an issuance of shares that is in excess of the
amount of shares currently authorized for issuance. Harken has included a
proposal to increase its authorized common stock in the preliminary proxy
statement for Harken's annual stockholders meeting scheduled to be held on or
about May 16, 2003 prior to May 26, 2003, the maturity date of the 5% European
Notes. While Harken believes that it will be able to hold the stockholders
meeting before the maturity of the 5% European Notes, there can be no
assurances. Absent receiving stockholder approval at a meeting, Harken would be
required to otherwise restructure the then-outstanding notes prior to maturity
or pay cash at maturity. There can be no assurance that, in such an event,
Harken will be successful in restructuring its obligations under the outstanding
notes prior to maturity. Harken currently does not have sufficient funds to pay
such notes in cash upon maturity and it is unlikely that it will have such funds
prior to maturity. If Harken is unsuccessful in redeeming the then-outstanding
5% European Notes prior to maturity for common stock, Harken would experience a
material adverse impact on its financial position and results of operations.
Assuming a redemption price of $0.20 per share for Harken's common
stock, the table below reflects the number of shares of common stock required to
be issued in order to redeem Harken's existing convertible notes due in 2003 as
of March 27, 2003:
Amount Shares of Common Stock to
Indebtedness Outstanding be Issued in Redemption Maturity Date
- ---------------------- ------------- ------------------------- -----------------
5% European Notes $ 14,110,000 81,132,500 May 26, 2003
Waverley Note $ 1,705,000 8,525,000 September 1, 2003
Benz Convertible Notes $ 5,668,708 32,595,071 November 26, 2003
Harken's financial condition may suffer if estimates of its oil and gas reserve
information are adjusted, and fluctuations in oil and gas prices and other
factors affect Harken's oil and gas reserves.
Harken's oil and gas reserve information is based upon criteria mandated
by the Securities and Exchange Commission (the "SEC"), and reflects only
estimates of the accumulation of oil and gas and the economic recoverability of
those volumes. Harken's future production, revenues and expenditures with
respect to such oil and gas reserves will likely be different from estimates,
and any material differences may negatively affect Harken's business, financial
condition and results of operations.
15
Petroleum engineering is a subjective process of estimating underground
accumulations of oil and gas that cannot be measured in an exact manner.
Estimates of economically recoverable oil and gas reserves and of future net
cash flows necessarily depend upon a number of variable factors and assumptions.
Because all reserve estimates are to some degree subjective, each of the
following items may prove to differ materially from that assumed in estimating
reserves:
. the quantities of oil and gas that are ultimately recovered,
. the production and operating costs incurred,
. the amount and timing of future development expenditures, and
. future oil and gas sales prices.
Furthermore, different reserve engineers may make different estimates of
reserves and cash flow based on the same available data.
The estimated discounted future net cash flows described in this Annual
Report for the year ended December 31, 2002, should not be considered as the
current market value of the estimated oil and gas reserves attributable to
Harken's properties from proved reserves. Such estimates are based on prices and
costs as of the date of the estimate, in accordance with SEC requirements, while
future prices and costs may be materially higher or lower. The SEC requires that
Harken report its oil and natural gas reserves using the price as of the last
day of the year. Using lower values in forecasting reserves will result in a
shorter life being given to producing oil and natural gas properties because
such properties, as their production levels are estimated to decline, will reach
an uneconomic limit, with lower prices, at an earlier date. There can be no
assurance that a decrease in oil and gas prices or other differences in Harken's
estimates of its reserve will not adversely affect Harken's financial condition
and results of operations.
Harken may require future waivers and amendments to its bank credit facility
covenant requirements.
Harken's bank credit facility with Guaranty Bank, FSB requires certain
of its subsidiaries (the "Borrowers"), to maintain certain financial covenant
ratios and requirements, as calculated on a quarterly basis. The Guaranty Bank
facility requires the Borrowers, among other things, to maintain a maximum
liability to equity ratio (as defined in the agreement) of not more than 1.0 to
1.0, a current ratio (as defined in the agreement) of not less than 1.0 to 1.0,
and a debt service coverage ratio (as defined in the agreement) of not less than
1.25 to 1.0. In addition, the agreement requires that general and administrative
expenses of the Borrowers must not exceed 30% of the Borrowers' net revenue for
the quarter ended December 31, 2002 and 25% for each quarter thereafter. The
Guaranty Bank facility matures on December 6, 2005.
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 Guaranty Bank facility requirements, the bank
credit facility would be in default and callable by Guaranty Bank. In addition,
due to cross-default provisions in Harken's 5% European Notes, 7% Senior
Convertible Notes due 2006 and 2007 (collectively, the "7% European Notes"),
Benz Convertible Notes and Waverley Note, substantially all of Harken's debt
obligations would become due in full if any debt is in default. Expectations of
future operating results and 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
16
waivers or amendments of the Guaranty Bank facility are not received and
Harken's debt is placed in default, Harken will experience a material adverse
impact on its financial position and results of operations.
The Guaranty Bank facility prohibits cash dividends, loans, advances and
similar payments to be made to Harken by the Borrowers. Therefore, the Borrowers
will not be able to provide Harken with funds to be used for the repayment of
the 5% Notes, the Waverley Note or other debt obligations or for other uses,
unless the Borrowers obtain Guaranty's consent.
If estimated discounted future net cash flows decrease, Harken may be required
to take additional writedowns.
Harken periodically reviews the carrying value of its oil and gas
properties under applicable full-cost accounting rules. These rules require a
writedown of the carrying value of oil and gas properties if the carrying value
exceeds the applicable estimated discounted future net cash flows from proved
oil and gas reserves. Given the volatility of oil and gas prices, it is
reasonably possible that the estimated discounted future net cash flows could
change in the near term. If oil and gas prices decline in the future, even if
only for a short period of time, it is possible that additional writedowns of
oil and gas properties could occur. Whether Harken will be required to take such
a charge will depend on the prices for oil and gas at the end of any quarter and
the effect of reserve additions or revisions, property sales and capital
expenditures during such quarter.
Harken will be controlled by Lyford as long as Lyford owns a majority of the
voting power of Harken's common stock, and Harken's other stockholders will be
unable to affect the outcome of stockholder voting during this time.
As a result of Harken's rights offering and the standby purchase
agreement, Lyford beneficially owns approximately 62% of the combined voting
power of Harken's outstanding common stock and is able to determine the outcome
of all corporate actions requiring stockholder approval. Because Lyford has the
ability to control Harken, Lyford has the power to act without taking the best
interests of Harken into consideration. For example, Lyford will control
decisions with respect to:
. the direction and policies of Harken, including the election and
removal of directors,
. mergers or other business combinations involving Harken,
. the acquisition or disposition of assets by Harken,
. future issuances of Harken's common stock or other securities,
. the incurrence of debt by Harken,
. the payment of dividends, if any, on Harken's common stock, and
. amendments to Harken's certificate of incorporation and bylaws.
Such concentration of ownership may also have the effect of delaying,
deferring or preventing a future change of control of Harken.
RISKS ASSOCIATED WITH MARKET CONDITIONS:
Harken's stock price is volatile and the value of any investment in Harken's
common stock may fluctuate.
Harken's stock price has been and is highly volatile, and Harken
believes this volatility is due to, among other things:
17
. the results of Harken's drilling,
. current expectations of Harken's future financial performance,
. commodity prices of oil and natural gas,
. the progress and ultimate success of Harken's capital plan,
including Harken's actions with respect to its 5% European
Notes, Benz Convertible Notes and Waverley Note, and
. the volatility of the market in general.
For example, the common stock price has fluctuated from a high of $15
per share to a low of $0.16 per share over the last three years ending December
31, 2002. This volatility may affect the market value of Harken's common stock
in the future. See Part II, Item 5: Market for Registrant's Common Equity and
Related Stockholder Matters.
Future sales of Harken's common stock pursuant to outstanding registration
statements may affect the market price of Harken's common stock.
There are currently several registration statements with respect to
Harken's common stock that are effective, pursuant to which certain of Harken's
stockholders may sell up to an aggregate of 54.3 million shares of common stock.
Any such sale of stock may also decrease the market price of Harken's common
stock.
Harken may issue additional shares of common stock that may dilute the value of
its common stock and adversely affect the market price of its common stock.
Harken may issue additional shares of common stock in the following
scenarios:
. approximately 1.5 million shares of common stock may be required
to be issued pursuant to Harken's stock options,
. approximately 6.2 million shares of common stock may be issued
pursuant to other securities exercisable or exchangeable, or
convertible into, shares of common stock,
. approximately 8.525 million shares of common stock may be issued
in connection with the redemption of the Waverley Note maturing
on September 1, 2003 (assuming a redemption price of $0.20 per
share),
. approximately 32.6 million shares of common stock may be issued
in connection with the redemption of the Benz Convertible Notes
maturing on November 26, 2003 (assuming a redemption price of
$0.20 per share),
. approximately 81 million shares of common stock may be issued in
connection with the redemption of the 5% European Notes maturing
on May 26, 2003 (assuming a redemption price of $0.20 per
share),
. approximately 39.8 million shares of common stock may be issued
in connection with the conversion of the 7% European Notes
maturing in 2006 and 2007 (using the adjusted conversion rate of
$0.36 per share or the initial conversion rate of $0.50, as
appropriate), and
18
. a significant number of additional shares of common stock may be
issued for financing or other purposes.
A large issuance of shares of common stock in any or all of the above
scenarios will decrease the ownership percentage of current outstanding
stockholders and will likely result in a decrease in the market price of
Harken's common stock. Any large issuance will also likely result in a change in
control of Harken.
In addition, Harken may elect to issue a significant number of
additional shares of common stock for financing or other purposes, which could
result in a decrease in the market price of Harken's common stock.
If Harken redeems its existing convertible notes with shares of common stock,
stockholders will suffer a significant dilution of their ownership percentage
and a decrease in the market value of Harken's common stock and the redemptions
may result in a change in control of Harken.
Any redemptions of Harken's existing convertible notes involving a large
issuance of shares could result in a substantial dilution of stockholders'
ownership percentage of Harken's common stock and may result in a decrease in
the market value of Harken's common stock. The number of new shares to be issued
could also likely result in a change in control of Harken and, depending on the
ownership of the notes, a small group of stockholders could control the election
of the board of directors and the approval of other matters presented for
consideration by the stockholders, which could include mergers, acquisitions,
amendments to Harken's charter and various corporate governance actions.
Stockholders may also incur immediate and likely substantial net asset dilution.
Specifically, the redemption of the 5% European Notes, the Benz
Convertible Notes and the Waverley Note by converting them into common stock
could likely result in substantial dilution of the existing Harken common stock.
In addition, the number of new shares to be issued may result in a change of
control of Harken. For example, if 5% European Notes or Benz Convertible Notes
had been redeemed with a redemption price of $0.20, for every $1,000,000 of 5%
European Notes or Benz Convertible Notes redeemed at this price, Harken would be
required to issue to the noteholders approximately 5.75 million shares of common
stock. Additionally, at this redemption price, Harken would be required to issue
to Waverley approximately 8.525 million shares of common stock to redeem the
outstanding principal balance of the Waverley Note. If all of the outstanding
notes had been redeemed at this price, the noteholders would have received an
aggregate of approximately 122 million shares of common stock and, collectively,
would control over 55% of Harken's common stock.
Harken has issued shares of preferred stock with greater rights than its common
stock and may issue additional shares of preferred stock in the future.
Harken is permitted under Harken's charter to issue up to 10 million
shares of preferred stock. Harken can issue shares of its preferred stock in one
or more series and can set the terms of the preferred stock without seeking any
further approval from its common stockholders. Any preferred stock that Harken
issues may rank ahead of Harken's common stock in terms of dividend priority or
liquidation premiums and may have greater voting rights than Harken's common
stock. At March 27, 2003, Harken had outstanding 385,638 shares of Series G1
preferred stock and 93,150 shares of Series G2 preferred stock. These shares of
preferred stock have rights senior to Harken's common stock with respect to
dividends and liquidation. In addition, such preferred stock may be converted
into shares of common stock, which could dilute the value of common stock to
current stockholders and could adversely affect the market price of Harken's
common stock. Each share of Series G1 preferred stock and Series G2 preferred
stock may be converted into shares of common stock at conversion
19
prices of $12.50 and $3.00 per share of common stock, respectively, for each
$100.00 liquidation value of a share of such preferred stock plus the amount of
any accrued and unpaid dividends.
Harken's domestic operating strategic plan includes the acquisition of
additional reserves through business combinations.
Harken's domestic operations have shifted from primarily an exploration
and development focus to an acquisition growth strategy, with a reduced emphasis
on exploration. Harken is seeking additional acquisition opportunities to expand
its domestic operations and increase its oil and gas reserves in North America.
Harken may not be able to consummate future acquisitions on favorable terms.
Additionally, any such future transactions may not achieve favorable financial
results.
Future business combinations may also involve the issuance of shares of
Harken's common stock, which could have a dilutive effect on stockholders'
percentage ownership. Harken may not have a sufficient number of authorized
shares to issue in any such business combinations and Harken may need to obtain
stockholder approval to authorize additional shares for issuance. Further, the
use of shares in business combinations will reduce the number of shares
available for the redemption of existing convertible notes.
In addition, acquisitions may require substantial financial expenditures
that will need to be financed through cash flow from operations or future debt
and equity offerings by Harken and Harken may not be able to acquire companies
or oil and gas properties using its equity as currency. In the case of cash
acquisitions, Harken may not be able to generate sufficient cash flow from
operations or obtain debt or equity financing sufficient to fund future
acquisitions of reserves.
RISKS ASSOCIATED WITH HARKEN'S OPERATIONS:
Oil and gas price fluctuations in the market may adversely affect the results of
Harken's operations.
The results of Harken's operations are highly dependent upon the prices
received for Harken's oil and natural gas production. Substantially all of
Harken's sales of oil and natural gas are made in the spot market, or pursuant
to contracts based on spot market prices, and not pursuant to long-term,
fixed-price contracts. Accordingly, the prices received for Harken's oil and
natural gas production are dependent upon numerous factors beyond Harken's
control. These factors include the level of consumer product demand,
governmental regulations and taxes, the price and availability of alternative
fuels, the level of foreign imports of oil and natural gas and the overall
economic environment. Significant declines in prices for oil and natural gas
could have a material adverse effect on Harken's financial condition, results of
operations and quantities of reserves recoverable on an economic basis. Any
significant decline in prices of oil or gas could have a material adverse effect
on Harken's financial condition and results of operations. Recently, the price
of oil and natural gas has been volatile. For example, during 2001, the price
for a barrel (bbl) of oil ranged from a high of $29.25 to a low of $14.25 and
the price for a thousand cubic feet (Mcf) of gas ranged from a high of $10.53 to
a low of $1.74. During 2002, the price for a bbl of oil ranged from a high of
$29.50 to a low of $14.75 and the price for a Mcf of gas ranged from a high of
$5.32 to a low of $1.98.
Harken's operations require significant expenditures of capital that may not be
recovered.
Harken requires significant expenditures of capital in order to locate
and acquire producing properties and to drill exploratory wells. In conducting
exploration and development activities from a particular well, the presence of
unanticipated pressure or irregularities in formations, miscalculations or
accidents may cause Harken's exploration, development and production activities
to be unsuccessful, potentially resulting in
20
abandoning the well. This could result in a total loss of Harken's investment.
In addition, the cost and timing of drilling, completing and operating wells is
difficult to predict.
The oil and gas Harken produces may not be readily marketable at the time of
production.
Crude oil, natural gas, condensate and other oil and gas products are
generally sold to other oil and gas companies, government agencies and other
industries. The availability of ready markets for oil and gas that Harken might
discover and the prices obtained for such oil and gas depend on many factors
beyond Harken's control, including:
. the extent of local production and imports of oil and gas,
. the proximity and capacity of pipelines and other transportation
facilities,
. fluctuating demand for oil and gas,
. the marketing of competitive fuels, and
. the effects of governmental regulation of oil and gas production
and sales.
Natural gas associated with oil production is often not marketable due to demand
or transportation limitations and is often flared at the producing well site.
Pipeline facilities do not exist in certain areas of exploration and, therefore,
any actual sales of discovered oil and gas might be delayed for extended periods
until such facilities are constructed.
Harken may encounter operating hazards that may result in substantial losses.
Harken is subject to operating hazards normally associated with the
exploration and production of oil and gas, including blowouts, explosions, oil
spills, cratering, pollution, earthquakes, labor disruptions and fires. The
occurrence of any such operating hazards could result in substantial losses to
Harken due to injury or loss of life and damage to or destruction of oil and gas
wells, formations, production facilities or other properties. Harken maintains
insurance coverage limiting financial loss resulting from certain of these
operating hazards. Harken does not maintain full insurance coverage for all
matters that may adversely affect its operations, including war, terrorism,
nuclear reactions, government fines, treatment of waste, blowout expenses and
business interruptions. Losses and liabilities arising from uninsured or
underinsured events could reduce Harken's revenues or increase Harken's costs.
There can be no assurance that any insurance will be adequate to cover losses or
liabilities associated with operational hazards. Harken cannot predict the
continued availability of insurance, or its availability at premium levels that
justify its purchase.
Drilling oil and gas wells particularly in certain regions of the United States
and foreign countries could be hindered by hurricanes, earthquakes and other
weather-related operating risks.
Harken's operations in the Louisiana wetlands, the onshore regions of
Texas and in Colombia, Peru and Panama are subject to risks from hurricanes and
other natural disasters. Damage caused by hurricanes, earthquakes or other
operating hazards could result in substantial losses to Harken. Harken is not
covered by insurance for any business interruption resulting from such events
and, upon the occurrence of a natural disaster, this lack of coverage could have
a material adverse effect on its financial position and results of operations.
21
Harken faces strong competition from larger oil and gas companies, which could
result in adverse effects on Harken's business.
The exploration and production business is highly competitive. Many of
Harken's competitors have substantially larger financial resources, staffs and
facilities. Harken's competitors in the United States include numerous major oil
and gas exploration and production companies and in Colombia, Peru and Panama
include such major oil and gas companies as BP Amoco, Exxon/Mobil, Texaco/Shell,
Conoco/Phillips and Arco. These major oil and gas companies are often better
positioned to obtain the rights to exploratory acreage for which Harken
competes.
Harken's operations are subject to various litigation that could have an adverse
effect on its business.
Presently, various Harken subsidiaries are defendants in various
litigation matters. The nature of Harken's and its subsidiaries' operations also
expose Harken to further possible litigation claims in the future. For example,
Harken is currently a party to the following pending proceedings:
. In September 1997, D. E. Rice and Karen Rice, as Trustees for
the Rice Family Living Trust (collectively referred to as Rice)
filed a lawsuit against Harken Exploration Company, a
wholly-owned subsidiary of Harken, in Texas state court. Rice
claims damages in an amount of approximately $40 million from
Harken Exploration Company's alleged spills on Rice's property.
. In December 1999, 420 Energy Investment, Inc. and ERI
Investments, Inc. (collectively referred to as 420 Energy) filed
a lawsuit against XPLOR Energy, Inc., a wholly-owned subsidiary
of Harken (referred to as XPLOR), in Delaware state court. 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.
. In August 2001, a new lawsuit was filed by New West Resources,
Inc. (referred to as New West), a former XPLOR stockholder,
against XPLOR, Harken and other defendants in Texas state court.
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.
. In December 2002, Black Point Limited (referred to as Black
Point) filed a lawsuit against Global Energy Development LTD, a
subsidiary of Harken, in Illinois federal court. Black Point
alleges that Global Energy Development LTD, aided and abetted by
officers of Harken, fraudulently induced Black Point to spend
time and money locating prospective business partners in the
People's Republic of China. Black Point seeks breach of contract
damages of $1.5 million from Global Energy Development LTD, that
amount being Black Point's projected success fee on an
unconsummated $20 million investment by a Chinese partner.
There is risk that any matter in litigation could be adversely decided
against Harken or its subsidiaries, regardless of their belief, opinion and
position, which could have a material adverse effect on Harken's financial
condition and results of operations. Litigation is highly costly and the costs
associated with defending litigation could also have a material adverse effect
on Harken's financial condition. For further detail concerning Harken's pending
litigation, please see Part I, Item 3, Legal Proceedings.
Compliance with, or breach of, environmental laws can be costly and could limit
Harken's operations.
Harken's operations are subject to numerous and frequently changing laws
and regulations governing
22
the discharge of materials into the environment or otherwise relating to
environmental protection. Harken owns or leasees, and has in the past owned or
leased, properties that have been used for the exploration and production of oil
and gas and these properties and the wastes disposed on these properties may be
subject to the Comprehensive Environmental Response, Compensation and Liability
Act, the Oil Pollution Act of 1990, the Resource Conservation and Recovery Act,
the Federal Water Pollution Control Act and analogous state laws. Under such
laws, Harken could be required to remove or remediate previously released wastes
or property contamination.
Laws and regulations protecting the environment have generally become
more stringent and, may in some cases, impose "strict liability" for
environmental damage. Strict liability means that Harken may be held liable for
damage without regard to whether Harken was negligent or otherwise at fault.
Environmental laws and regulations may expose Harken to liability for the
conduct of or conditions caused by others or for acts that were in compliance
with all applicable laws at the time they were performed. Failure to comply with
these laws and regulations may result in the imposition of administrative, civil
and criminal penalties.
While Harken believes that its operations are in substantial compliance
with existing requirements of governmental bodies, Harken's ability to conduct
continued operations is subject to satisfying applicable regulatory and
permitting controls. Harken's current permits and authorizations and ability to
get future permits and authorizations, particularly in foreign countries, may be
susceptible, on a going forward basis, to increased scrutiny, greater complexity
resulting in increased costs, or delays in receiving appropriate authorizations.
In particular, Harken has experienced and may continue to experience delays in
obtaining permits and authorization in Colombia necessary for Harken's
operations. In addition, recent judicial and political developments in Costa
Rica have significantly and adversely affected Harken's ability to acquire
necessary environmental permits and severely limit the opportunity for future
oil and gas exploration in Costa Rica. As a result of these developments, Harken
fully impaired its investment through Harken's subsidiary, Global, in its
onshore and offshore properties in Costa Rica, as reflected on Harken's
consolidated balance sheet, for the year ended December 31, 2001.
Harken is required to obtain an environmental permit or approval from
the governments in Colombia, Costa Rica, Peru and Panama prior to conducting
seismic operations, drilling a well or constructing a pipeline in such foreign
locations. Harken's operations in foreign countries have been delayed in the
past and could be delayed in the future through the process of obtaining an
environmental permit. Compliance with these laws and regulations may increase
Harken's costs of operations, as well as further restrict Harken's foreign
operations.
Costa Rica has implemented policies and laws with a high level of
attention to the protection of its ecological areas and environment. As a
result, the operations of Global's subsidiary, Harken Costa Rica Holdings, in
Costa Rica are subject to much greater control, scrutiny and restrictions than
are usually encountered in international exploration operations. Due to such
additional regulations and requirements in Costa Rica, as well as recent rulings
by Costa Rica government agencies, Harken Costa Rica Holdings will likely not be
able to continue operations in Costa Rica for the foreseeable future.
Harken's foreign operations involve substantial costs and are subject to certain
risks because the oil and gas industries in such countries are less developed.
The oil and gas industries in Colombia, Costa Rica, Peru and Panama are
not as developed as the oil and gas industry in the United States. As a result,
Harken's drilling and development operations in many instances take longer to
complete and often cost more than similar operations in the United States. The
availability of technical expertise, specific equipment and supplies is more
limited in Colombia, Costa Rica,
23
Peru and Panama than in the United States. Harken expects that such factors will
continue to subject Harken's international operations to economic and operating
risks not experienced in Harken's domestic operations.
Harken follows the full cost method of accounting for exploration and
development of oil and gas reserves in which all of its acquisition, exploration
and development costs are capitalized. Costs related to the acquisition, holding
and initial exploration of oil and gas associated with Harken's contracts in
countries with no proved reserves are initially capitalized, including internal
costs directly identified with acquisition, exploration and development
activities. If Harken abandons all exploration efforts in a country where no
proved reserves are assigned, all acquisition and exploration costs associated
with the country are expensed. From time to time, Harken makes assessments as to
whether its investment within a country is impaired and whether exploration
activities within a country will be abandoned based on its analysis of drilling
results, seismic data and other information it believes to be relevant. Due to
the unpredictable nature of exploration drilling activities, the amount and
timing of impairment expenses are difficult to predict.
If Harken fails to comply with the terms of certain contracts related to its
foreign operations, it could lose its rights under each of those contracts.
The terms of each of the Colombia Association Contracts, the Costa Rica
Contract, the Peruvian Technical Evaluation Agreement and the Panamanian
Technical Evaluation Agreement require that Harken perform certain activities,
such as seismic interpretations and the drilling of required wells, in
accordance with those contracts and agreements. Harken's failure to timely
perform those activities as required could result in the loss of its rights
under a particular contract, which would likely result in a significant loss to
Harken. As of March 27, 2003, Harken was in compliance with the requirements of
each of the Colombia Association Contracts, the Peruvian Technical Evaluation
Agreement and the Panamanian Technical Evaluation Agreement. For further detail
concerning these contracts and agreements, please see Part I, Item 1, Business.
Harken requires significant additional financing for its foreign operations,
which financing may not be available.
Harken anticipates that full development of its existing and future oil
and gas discoveries and prospects in Colombia, Peru and Panama may take several
years and require significant additional capital expenditures. If Harken is
unable to timely obtain adequate funds to finance these investments, Harken's
ability to develop oil and gas reserves in these countries may be severely
limited or substantially delayed. Such limitations or delay would likely result
in substantial losses for Harken and Global.
Harken anticipates that amounts required to fund Global's foreign
activities will be funded from existing cash balances, asset sales, stock
issuances, production payments, operating cash flows and from joint venture
partners. Harken estimates a cost of $2.5 million in 2003 for the completion of
a well in Colombia required to be drilled by Global pursuant to the Cajaro
Association Contract with Empresa Colombia de Petroleos. The exact usage of
other future funding sources is unknown at this time and there can be no
assurance that Global will have adequate funds available to finance its foreign
operations.
Harken's foreign operations are subject to political, economic and other
uncertainties.
Global currently conducts significant operations in Colombia, Peru and
Panama and may also conduct operations in other foreign countries in the future.
At December 31, 2002, approximately 38% of Harken's proved reserves and 31% of
Harken's consolidated revenues were related to Global's Colombian operations.
Exploration and production operations in foreign countries are subject to
political, economic and other uncertainties, including:
24
. the risk of war, revolution, border disputes, expropriation,
renegotiation or modification of existing contracts, import,
export and transportation regulations and tariffs resulting in
loss of revenue, property and equipment,
. taxation policies, including royalty and tax increases and
retroactive tax claims,
. exchange controls, currency fluctuations and other uncertainties
arising out of foreign government sovereignty over international
operations,
. laws and policies of the United States affecting foreign trade,
taxation and investment, and
. the possibility of being subjected to the jurisdiction of
foreign courts in connection with legal disputes and the
possible inability to subject foreign persons to the
jurisdiction of courts in the United States.
Central and South America and certain other regions of the world have a
history of political and economic instability. This instability could result in
new governments or the adoption of new policies, laws or regulations that might
assume a substantially more hostile attitude toward foreign investment. In an
extreme case, such a change could result in termination of contract rights and
expropriation of foreign-owned assets. Any such activity could result in a
significant loss to Harken and Global.
Guerrilla activity in Colombia could disrupt or delay Global's operations, and
Harken is concerned about safeguarding Global's operations and personnel in
Colombia.
Colombia's 37-year armed conflict between the government and leftist
guerrilla groups has escalated in recent years. The current government's quest
for peace was unsuccessful. The breakdown of peace negotiations has resulted in
increased military action by the Colombian government directed against the rebel
groups operating in Colombia. Unless the parties determine to return to peace
negotiations, the military confrontation with the rebel groups is expected to
continue. Also, the increased activity of right-wing paramilitary groups, formed
in opposition to the left-wing FARC and ELN groups, has contributed to the
escalation in violence. The increase in violence has affected business interests
in Colombia. Targeting such enterprises as symbols of foreign exploitation,
particularly in the North of the country, the rebel groups have attempted to
hamper production of hydrocarbons. The cumulative effect of escalation in the
armed conflict and the resulting unstable political and security situation has
led to increased risks and costs and the downgrading of Colombia's country risk
rating. Global's oil and gas operations are in areas outside guerrilla control
and with the exception of its increased security requirements, Harken's
operations continue mostly unaffected, although from time to time, guerilla
activity in Colombia has delayed Harken's projects there. This guerilla activity
has increased over the last few years, causing delays in the development of
Harken's fields in Colombia. Guerilla activity, such as road blockades, has also
from time to time slowed Harken's deployment of workers in the field and
affected Harken's operations. In addition, guerillas could attempt to disrupt
the flow of Harken's production through pipelines. In addition to these security
issues, Harken has also become the subject of media focus in Colombia that may
further compromise Harken's security position in the country.
There can be no assurance that attempts to reduce or prevent guerilla
activity will be successful or that guerilla activity will not disrupt Global's
operations in the future. There can also be no assurance that Global can
maintain the safety of its operations and personnel in Colombia or that this
violence will not affect its operations in the future. Continued or heightened
security concerns in Colombia could also result in a significant loss to Harken
and Global.
25
The United States government may impose economic or trade sanctions on Colombia
that could result in a significant loss to Harken and Global.
Colombia is among several nations whose progress in stemming the
production and transit of illegal drugs is subject to annual certification by
the President of the United States. Although Colombia was so certified in 2002,
there can be no assurance that, in the future, Colombia will receive
certification or a national interest waiver. The failure to receive
certification or a national interest waiver may result in any of the following:
. all bilateral aid, except anti-narcotics and humanitarian aid,
would be suspended,
. the Export-Import Bank of the United States and the Overseas
Private Investment Corporation would not approve financing for
new projects in Colombia,
. United States representatives at multilateral lending
institutions would be required to vote against all loan requests
from Colombia, although such votes would not constitute vetoes,
and
. the President of the United States and Congress would retain the
right to apply future trade sanctions.
Each of these consequences could result in adverse economic consequences in
Colombia and could further heighten the political and economic risks associated
with Harken's operations there. Any changes in the holders of significant
government offices could have adverse consequences on Harken's relationship with
the Colombian national oil company and the Colombian government's ability to
control guerrilla activities and could exacerbate the factors relating to
Harken's foreign operations discussed above.
Any sanctions imposed on Colombia by the United States government could
threaten Harken's ability to obtain necessary financing to develop the Colombian
properties or cause Colombia to retaliate against Harken, including by
nationalizing Harken's Colombian assets. Accordingly, the imposition of the
foregoing economic and trade sanctions on Colombia would likely result in a
substantial loss to Harken and Global and a decrease in the price of Harken's
common stock. Harken can give no assurance that the United States will not
impose sanctions on Colombia in the future or predict the effect in Colombia
that these sanctions might cause.
Harken may suffer losses from exchange rate fluctuations.
Harken accounts for its Colombian, Costa Rican, Peruvian and Panamanian
operations using the U.S. dollar as the functional currency. The costs
associated with Harken's exploration efforts in Colombia, Costa Rica, Peru and
Panama have typically been denominated in U.S. dollars. Harken expects that a
substantial portion of its future Colombian revenues may be denominated in
Colombian pesos. To the extent that the amount of Harken's revenues denominated
in Colombian pesos is greater than the amount of costs denominated in Colombian
pesos, Harken could suffer a loss if the value of the Colombian peso were to
drop relative to the value of the U.S. dollar. Any substantial currency
fluctuations could have a material adverse effect on Harken's results of
operations. In recent years the value of the Colombian peso relative to the U.S.
dollar has declined. For example, the average exchange rate for the Colombian
peso into U.S. dollars for December 2002 was 0.000355, as compared to an average
of 0.000434 for December 2001 and 0.000456 for December 2000.
PROPERTIES AND LOCATIONS
Production and Revenues -- See also "Note 15- Oil and Gas Disclosures"
in the Notes to Consolidated
26
Financial Statements contained in Part II, Item 8 of this Annual Report on Form
10-K for certain information about Harken's proved oil and gas reserves. A
summary of Harken's and Global's ownership in its most significant producing
properties is as follows:
AVERAGE AVERAGE REVENUE
WORKING INTEREST INTEREST
---------------- ---------------
Lake Raccourci - Domestic 40% 28%
Lapeyrouse - Domestic 28% 19%
Raymondville - Domestic 27% 19%
West Texas - Domestic 95% 76%
Main Pass Block 35 - Domestic 90% 72%
Bayou Sorrel - Domestic 15% 11%
Jackson County, Texas - Domestic 9% 7%
Alcaravan Contract - Colombia 100% 80%
Bolivar Contract - Colombia 100% 80%
The following table shows, for the periods indicated, operating
information attributable to Harken's oil and gas interests:
NORTH AMERICAN
YEAR ENDED DECEMBER 31,
-----------------------------------------------------------------------------
1998 1999 2000 2001 2002
------------- ------------- ------------- ------------- -------------
Production:
Natural Gas (Mcf) 2,063,000 2,847,000 4,012,000 3,844,000 3,225,000
Oil (Bbls) 433,000 510,000 529,000 273,000 267,000
Revenues:
Natural Gas $ 4,373,000 $ 6,879,000 $ 16,178,000 $ 16,643,000 $ 10,753,000
Oil 5,508,000 9,188,000 15,422,000 6,708,000 6,617,000
------------- ------------- ------------- ------------- -------------
Total $ 9,881,000 $ 16,067,000 $ 31,600,000 $ 23,351,000 $ 17,370,000
============= ============= ============= ============= =============
Unit Prices:
Natural Gas (per Mcf) $ 2.12 $ 2.42 $ 4.03 $ 4.33 $ 3.33
Oil (per Bbl) $ 12.72 $ 18.02 $ 29.15 $ 24.57 $ 24.78
Production costs per
equivalent barrel $ 7.36 $ 7.84 $ 10.10 $ 10.14 $ 9.06
Amortization per
equivalent barrel $ 6.03 $ 5.41 $ 6.43 $ 9.10 $ 8.64
27
COLOMBIA
YEAR ENDED DECEMBER 31,
-----------------------------------------------------------------------------
1998 1999 2000 2001 2002
------------- ------------- ------------- ------------- -------------
Production:
Oil (Bbls) 61,000 248,000 460,000 500,000 465,000
Natural Gas (Mcf) - - - - -
Revenues:
Oil $ 538,000 $ 3,026,000 $ 10,649,000 $ 8,291,000 $ 7,619,000
Natural Gas $ - $ - $ - $ - $ -
------------- ------------- ------------- ------------- -------------
Total $ 538,000 $ 3,026,000 $ 10,649,000 $ 8,291,000 $ 7,619,000
============= ============= ============= ============= =============
Unit Prices:
Oil (per Bbl) $ 8.82 $ 12.20 $ 23.15 $ 16.58 $ 16.38
Natural Gas (per Mcf) $ - $ - $ - $ - $ -
Production and
transportation costs
per equivalent barrel $ 4.39 $ 4.90 $ 4.96 $ 5.87 $ 4.38
Amortization per
equivalent barrel $ 1.04 $ 3.52 $ 9.45 $ 8.66 $ 8.23
Acreage and Wells -- At December 31, 2002, Harken and Global owned
interests in the following oil and gas wells and acreage. Substantially all of
Harken's domestic oil and gas properties are encumbered under the credit
facility with Guaranty Bank, FSB.
NORTH AMERICAN
Gross Wells Net Wells Developed Acreage Undeveloped Acreage
-------------------- --------------------- ---------------------- -----------------------
STATE Oil Gas Oil Gas Gross Net Gross Net
--------- -------- --------- --------- ---------- --------- ---------- ----------
Mississippi - - - - - - 14,126 7,432
Texas 229 71 212.89 43.53 39,078 23,724 52,533 6,123
Louisiana 34 20 23.81 4.38 7,434 2,994 16,534 10,206
Wyoming - - - - - - 21,650 6,640
--------- -------- --------- --------- ---------- --------- ---------- ----------
Total 263 91 236.70 47.91 46,512 26,718 104,843 30,401
========= ======== ========= ========= ========== ========= ========== ==========
28
COLOMBIA
Gross Wells Net Wells Developed Acreage Undeveloped Acreage
-------------------- --------------------- ---------------------- -----------------------
CONTRACT AREA Oil Gas Oil Gas Gross Net Gross Net
--------- -------- --------- --------- ---------- --------- ---------- ----------
Alcaravan 3 - 2.40 - 2,253 2,253 22,011 11,006
Bocachico 2 - 1.60 - 7,835 3,918 46,865 23,432
Bolivar 2 - 1.60 - 1,953 1,953 122,047 61,024
Cajaro - - - - - - 82,752 41,376
--------- -------- --------- --------- ---------- --------- ---------- ----------
Total 7 - 5.60 - 12,041 8,124 273,675 136,838
========= ======== ========= ========= ========== ========= ========== ==========
COSTA RICA
Gross Wells Net Wells Developed Acreage Undeveloped Acreage
-------------------- --------------------- ---------------------- -----------------------
Oil Gas Oil Gas Gross Net Gross Net
--------- -------- --------- --------- ---------- --------- ---------- ----------
Costa Rica - - - - - - 1,400,000 560,000
Drilling Activity -- A well is considered "drilled" when it is
completed. A productive well is completed when permanent equipment is installed
for the production of oil or gas. A dry hole is completed when it has been
plugged as required and its abandonment is reported to the appropriate
government agency. International activity relates to Global's Colombian
operations. Colombian net wells drilled information does not consider any
potential future participation by Ecopetrol. The following tables summarize
certain information concerning Harken's and Global's drilling activity:
NORTH AMERICAN
NUMBER OF GROSS WELLS DRILLED
---------------------------------------------------------------------------
Exploratory Developmental Total
----------------------- ----------------------- -----------------------
Productive Drilled Productive Drilled Productive Drilled
---------- ---------- ---------- ---------- ---------- ----------
2000 3 6 13 13 16 19
2001 6 13 6 6 12 19
2002 7 8 - - 7 8
---------- ---------- ---------- ---------- ---------- ----------
Total 16 27 19 19 35 46
========== ========== ========== ========== ========== ==========
29
NUMBER OF NET WELLS DRILLED
---------------------------------------------------------------------------
Exploratory Developmental Total
----------------------- ----------------------- -----------------------
Productive Drilled Productive Drilled Productive Drilled
---------- ---------- ---------- ---------- ---------- ----------
2000 0.68 1.59 2.49 2.49 3.17 4.08
2001 1.38 2.49 3.25 3.25 4.63 5.74
2002 1.35 1.36 - - 1.35 1.36
---------- ---------- ---------- ---------- ---------- ----------
Total 3.41 5.44 5.74 5.74 9.15 11.18
========== ========== ========== ========== ========== ==========
COLOMBIA
NUMBER OF GROSS WELLS DRILLED
---------------------------------------------------------------------------
Exploratory Developmental Total
----------------------- ----------------------- -----------------------
Productive Drilled Productive Drilled Productive Drilled
---------- ---------- ---------- ---------- ---------- ----------
2000 -- -- -- -- -- --
2001 1 3 -- -- 1 3
2002 -- -- -- -- -- --
---------- ---------- ---------- ---------- ---------- ----------
Total 1 3 -- -- 1 3
========== ========== ========== ========== ========== ==========
NUMBER OF NET WELLS DRILLED
---------------------------------------------------------------------------
Exploratory Developmental Total
----------------------- ----------------------- -----------------------
Productive Drilled Productive Drilled Productive Drilled
---------- ---------- ---------- ---------- ---------- ----------
2000 -- -- -- -- -- --
2001 1.00 3.00 -- -- 1.00 3.00
2002 -- -- -- -- -- --
---------- ---------- ---------- ---------- ---------- ----------
Total 1.00 3.00 -- -- 1.00 3.00
========== ========== ========== ========== ========== ==========
EMPLOYEES
As of December 31, 2002, Harken had 42 employees, including 14 employees
of Global and its subsidiaries. Harken has experienced no work stoppages or
strikes as a result of labor disputes and considers relations with its employees
to be satisfactory. Harken maintains group life, medical, dental, surgical and
hospital insurance plans for its employees.
30
ITEM 2. PROPERTIES
See "Item 1. Business" for discussion of oil and gas properties and
locations.
Harken and Global have offices in Houston and Southlake, Texas and
Bogota, Colombia. Harken leases approximately 26,800 square feet of office space
in Houston, Texas, which lease runs through October 2006, approximately 2,200
square feet in Southlake, Texas, which runs through May 2004, and approximately
2,840 square feet of office space in Bogota, Colombia, which lease runs through
November 2003. The average annual cost of Harken's Houston leases are
approximately $655,000. See "Liquidity and Capital Resources - Capital
Commitments - Consolidated Contractual Obligations" contained in Part II, Item
7, Management's Discussion and Analysis of Financial Condition and Results of
Operations.
ITEM 3. LEGAL PROCEEDINGS
In September 1997, Harken Exploration Company, a wholly-owned subsidiary
of Harken, was served with a lawsuit filed in U.S. District Court for the
Northern District of Texas, Amarillo Division, styled D. E. Rice and Karen Rice,
as Trustees for the Rice Family Living Trust ("Rice") vs. Harken Exploration
Company. In the lawsuit, Rice alleges damages resulting from Harken Exploration
Company's alleged spills on Rice's property and claimed that the Oil Pollution
Act ("OPA") should be applied in this circumstance. Rice alleges that
remediation of all of the alleged pollution on its land would cost approximately
$40,000,000. In October 1999, the trial court granted Harken's Motion for
Summary Judgment that the OPA did not apply and dismissed the Rice claim under
it. Rice appealed the trial court's summary judgment to the U.S. Fifth Circuit
Court of Appeals. In April 2001, the Fifth Circuit Court of Appeals issued its
opinion affirming the trial court's summary judgment in Harken's favor. Based on
this affirmation of the summary judgment, in Harken management's opinion, the
results of any further appeal will not have a material adverse effect on
Harken's financial position. On August 15, 2002, Harken was served with a new
suit filed by Rice in state court in Hutchinson County, Texas. In this new state
case, Rice continues to seek approximately $40,000,000 in remediation costs and
damages. Harken filed a motion for partial summary judgment seeking a ruling
that remediation costs are not the proper measure of damages and that Rice's
property damages, if any, should be measured by the alleged diminution in value
of its land. The Court held a hearing on Harken's motion on October 30, 2002,
but on December 30, 2002, this motion was denied by the court. Harken's
management continues to believe that the correct measure of damages is the
alleged diminution in value of Rice's land. Therefore, in Harken management's
opinion, the results of such additional claim will not have a material adverse
effect on Harken's financial position.
Search Acquisition Corp. ("Search Acquisition"), also known as Harken
Texas Acquisition Corp., a wholly-owned subsidiary of Harken, was a defendant in
a lawsuit filed by Petrochemical Corporation of America and Lorken Investments
Corporation (together, "Petrochemical"). This lawsuit arose out of
Petrochemical's attempt to enforce a judgment of joint and several liability
entered in 1993 against a group of twenty limited partnerships known as the
"Odyssey limited partnerships." Petrochemical claimed that Search Exploration,
Inc. is liable for payment of the judgment as the successor-in-interest to eight
Odyssey limited partnerships. Search Acquisition was the surviving corporation
in Harken's 1995 acquisition of Search Exploration, Inc. On February 28, 1996,
the court granted Search Acquisition's motion for summary judgment in this case.
On July 3, 1998, the Fifth District Court of Appeals for the State of Texas
reversed the trial court's summary judgment and remanded the case to the trial
court. In December 2001, a jury trial was held in this matter. The jury returned
a verdict finding for Petrochemical in the amount of $1.1 million of actual
damages and $3 million in punitive damages. In April 2002, the court entered
judgment on the verdict rendered by the jury. Search Acquisition then filed a
motion for a new trial. In June 2002, Petrochemical filed with the U.S.
Bankruptcy Court in Dallas, Texas an involuntary petition in bankruptcy against
Search
31
Acquisition, under Chapter 7 of the Bankruptcy Code, and moved for the
appointment of an interim trustee. Search Acquisition agreed to the entry of an
order for relief under Chapter 7, as well as the appointment of the interim
trustee. These actions resulted in a stay of Search Acquisition's motion of the
Court's judgment on the jury verdict totaling $4.1 million. Thereafter,
McCulloch Energy, Inc. ("McCulloch"), a wholly-owned subsidiary of Search
Acquisition, filed a voluntary petition in bankruptcy under Chapter 7 of the
Bankruptcy Code in the U.S. Bankruptcy Court in Houston, Texas. The stay of
Search Acquisition's motion and the related bankruptcy filings led to
negotiations in bankruptcy and mediation relating to the Petrochemical suit and
judgment. As a result of these events, on August 1, 2002, pursuant to a mediated
settlement, Petrochemical and the bankruptcy trustees agreed to release their
claims against Harken in exchange for a payment of $2 million to be distributed
to Petrochemical, and a payment of approximately $189,000 to pay administrative
expenses and other creditors of the bankruptcy estates. Pursuant to the
mediation agreement, Petrochemical elected to receive 100% of the stock of
McCulloch in September 2002. McCulloch does not have any contractual
arrangements that are material to Harken's operations and has a book and fair
value each less than $10,000. The mediation agreement was approved by the
Bankruptcy Courts in Dallas and Houston in September 2002. Payment of the
mediation settlement was also made in September 2002.
420 Energy Investment, Inc. and ERI Investments, Inc. (collectively "420
Energy") filed a lawsuit against XPLOR Energy, Inc., a wholly-owned subsidiary
of Harken ("XPLOR"), on December 21, 1999 in the New Castle County Court of
Chancery of the State of Delaware. 420 Energy alleges that they are entitled to
appraisal and payment of the fair value of their common stock in XPLOR as of the
date XPLOR merged with Harken. Harken has relied on an indemnity provision in
the XPLOR merger agreement to tender the costs of defense in this matter to
former stockholders of XPLOR. Although the outcome of this litigation is
uncertain, because the former stockholders of XPLOR have accepted
indemnification of this claim, Harken believes that any liability to Harken as a
result of this litigation will not have a material adverse effect on Harken's
financial condition.
In August 2001, a new lawsuit was filed by New West Resources, Inc.
("New West"), a former XPLOR stockholder, against XPLOR, Harken and other
defendants in state court in Dallas, Texas. Harken received service of process
in February 2002. Effective January 17, 2003, the case was transferred by
agreement of the parties to Harris County district court, where all future
proceedings will occur. New West claims that it lost its $6 million investment
in XPLOR as a result of misrepresentations by XPLOR and breach of fiduciary
duties by certain XPLOR directors. Harken believes this new suit is an adjunct
of the prior appraisal rights claim by 420 Energy. The former stockholders of
XPLOR have rejected Harken's request for indemnification of this claim under the
XPLOR merger agreement. However, Harken intends to continue to pursue and
enforce, through whatever steps are necessary, any indemnification from the
third parties. Harken has tendered the defense of this claim to National Union
Fire Insurance Company, pursuant to insurance policy coverage held by XPLOR.
National Union has accepted defense of this claim subject to a reservation of
rights. Based on the facts that (i) the allegations of New West's current
petition focus primarily on defendants other than Harken, (ii) New West has
provided no evidence supporting its claims in response to Harken's discovery
requests and (iii) New West has not served process upon other defendants
described in New West's petition as being the primary wrongdoers, Harken does
not believe the claims asserted against Harken are meritorious. Therefore, in
Harken management's opinion, the ultimate outcome of this litigation will not
have a material adverse effect on Harken's financial condition.
In December 2002, a new lawsuit was filed by Black Point Limited
("Black Point") in the United District Court for the Northern district of
Illinois, alleging that Global Ltd., aided and abetted by officers of Harken,
fraudulently induced Black Point to spend time and money locating prospective
business partners for Global Ltd. in the People's Republic of China. Black Point
contends that it located willing and suitable partners, only to have them
unreasonably rejected by Global Ltd. Black Point seeks breach of contract
damages of $1.5 million from Global Ltd., that amount being Black Point's
projected success fee on an
32
unconsummated $20 million investment by a Chinese partner. Alternatively, Black
Point seeks damages of approximately $290,000 for retainer fees foregone by
Black Point, plus out of pocket expenses, from Global Ltd. under theories of
fraudulent inducement, quantum merit, and detrimental reliance. Black Point also
seeks approximately $290,000 in damages from Harken, alleging that Harken aided
and abetted Global Ltd.'s fraudulent inducement. Harken and Global Ltd. do not
believe Black Point's allegations have merit since Global Ltd. fully complied
with the terms of the agreement in good faith. On March 6, 2003, the Court held
a hearing on a Motion to Dismiss filed by Harken and Global Ltd. At the
conclusion of that hearing, the Court ruled in favor of Harken and Global Ltd.
by dismissing Black Point's complaint in its entirety. It is anticipated that
the Court will enter its official order dismissing Black Point's complaint
during the second quarter of 2003. Although Black Point may seek reconsideration
of the Court's order, or attempt to restate its claims in a new pleading, based
on the outcome of the March 6, 2003 hearing and the underlying facts of this
case, Harken believes that the ultimate outcome of this litigation will not have
a material adverse effect on Harken's financial condition.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
Harken held its annual meeting of stockholders on January 29, 2003. At
the meeting, Harken's stockholders voted on the following three proposals and
cast their votes as follows:
Proposal 1: To approve a $10 million rights offering and the issuance of such
number of shares of common stock as may be necessary to accomplish the rights
offering:
FOR AGAINST ABSTENTIONS BROKER NON-VOTES
11,518,037 1,768,667 206,757 8,405,844
Proposal 2: To approve the redemption of up to $20 million principal amount of
Harken's 5% European Notes and the issuance of such number of shares of Harken's
common stock as may be necessary to accomplish the redemption:
FOR AGAINST ABSTENTIONS BROKER NON-VOTES
9,873,398 3,397,847 222,576 8,405,844
Proposal 3: To elect the following nominees as the Class C Directors of Harken
to hold office in accordance with Harken's Certificate of Incorporation until
the 2005 annual meeting of stockholders and until their respective successors
are duly elected and qualified:
NOMINEE FOR WITHHELD BROKER NON-VOTES
Stephen C. Voss 18,667,304 3,232,001 -
Marvin M. Chronister 20,289,865 1,609,440 -
James H. Frizell 20,295,070 1,604,235 -
The following directors' terms of office continued after the annual meeting:
Mikel D. Faulkner, Bruce N. Huff, Larry G. Akers, Michael M. Ameen, Jr., Dr. J.
William Petty and H. A. Smith.
33
PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS
PRICE RANGE OF COMMON STOCK
Since March 18, 1991, Harken common stock has been listed on the American
Stock Exchange and traded under the symbol HEC. At December 31, 2002, there were
approximately 2,850 holders of record of Harken common stock. See Part I, Item
1, "Cautionary Statements--If Harken does not continue to meet the listing
requirements of the American Stock Exchange, its common stock could be
delisted." for further discussion.
The following table sets forth, for the periods indicated, the reported
high and low closing sales prices of Harken common stock on the American Stock
Exchange Composite Tape.
Prices
-------------------------------------------
High Low
---------------- -----------------
2001 -- First Quarter 6.97 3.05
Second Quarter 3.59 2.27
Third Quarter 2.39 1.50
Fourth Quarter 1.75 0.86
2002 -- First Quarter 1.24 0.86
Second Quarter 0.90 0.33
Third Quarter 0.52 0.22
Fourth Quarter 0.30 0.16
DIVIDENDS
Harken has not paid any cash dividends on common stock since its
organization and does not contemplate that any cash dividends will be paid on
shares of common stock in the foreseeable future. Dividends may not be paid to
holders of common stock prior to all dividend obligations related to Harken
Series G1 Preferred Stock and Series G2 Preferred Stock being satisfied.
During 2002, Harken's Board of Directors declared that a dividend of all
accrued and unpaid dividends as of December 31, 2002 be payable to holders of
Harken Series G1 Preferred Stock and Series G2 Preferred Stock, such dividend to
be paid with shares of Harken common stock. As of the record date for the
dividends, December 26, 2002, there were 402,688 shares of Series G1 Preferred
outstanding and 93,150 shares of Series G2 Preferred Stock outstanding. In
January 2003, a total of 586,755 shares of Harken common stock were paid to
holders of Series G1 Preferred Stock and a total of 360,010 shares of Harken
common stock were paid to holders of Series G2 Preferred Stock. For further
discussion of the terms of the Harken Series G1 Preferred Stock and Series G2
Preferred Stock outstanding, see Part II, Item 8, Notes to Consolidated
Financial Statements, "Note 9 - Stockholders' Equity."
34
EQUITY COMPENSATION PLAN INFORMATION
The following table sets forth, as of December 31, 2002, certain
information related to Harken's compensation plans under which shares of its
common stock are authorized for issuance:
Number of securities
remaining available for
future issuance under
equity compensation plans
Number of securities to be Weighted-average exercise (excluding securities
issued upon exercise of price of outstanding reflected in column (a))
Plan category outstanding options options
- -------------------------------------------------------------------------------------------------------------
(a) (b) (c)
- -------------------------------------------------------------------------------------------------------------
Equity compensation
plans approved by
security holders 1,444,485 $ 20.45 408,015
See Part II, Item 8, Notes to Consolidated Financial Statements, Note 10 - Stock
Option Plan for further discussion. Harken has no compensation plans under which
its equity securities are authorized for issuance that have not been approved by
its stockholders.
RECENT SALES OF UNREGISTERED SECURITIES
The following is a description of the unregistered securities Harken has
issued during the period covered by this Annual Report and during the subsequent
period through the date of this Annual Report:
1. On January 28, 2003, Harken issued $1,420,000 in principal amount of 7%
European Notes due 2007 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 $1,420,000 principal amount of
Harken's 5% European Notes. For a description of the conversion features
of the 7% European Notes, see Note 8--Convertible Notes Payable to the
accompanying Notes to Consolidated Financial Statements contained in
Part II, Item 8.
2. On February 13, 2003, Harken issued $1.6 million in principal amount of
7% European Notes due 2006 to certain holders of Harken's securities
(the "Investors"), who represented to Harken that they were accredited
investors as defined in Rule 501 of Regulation D, in exchange for $2
million principal amount of Harken's 5% European Notes. Harken also
entered into an option agreement with the Investors, dated February 13,
2003, that provides for a call option in favor of Harken and a put
option in favor of the Investors. For a description of the terms of
conversion of the 7% European Notes and the call and put options, see
Note 8--Convertible Notes Payable to the accompanying Notes to
Consolidated Financial Statements contained in Part II, Item 8.
3. On March 18, 2003, Harken issued $3,410,000 in principal amount of 7%
European Notes due 2007 and a promissory note in principal amount of
$1,705,000 due September 1, 2003 to an affiliate of a holder of Harken's
securities, who represented to Harken that it was an accredited investor
as defined in Rule 501 of Regulation D, in exchange for 17,050 shares of
Series G-1 preferred stock owned and $3,410,000 in cash. For a
description of the conversion features of the 7% European Notes, see
Note
35
8--Convertible Notes Payable to the accompanying Notes to Consolidated
Financial Statements contained in Part II, Item 8.
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.
36
ITEM 6. SELECTED FINANCIAL DATA
The following table sets forth historical financial data derived from Harken's
audited Consolidated Financial Statements and should be read in conjunction with
Management's Discussion and Analysis of Financial Condition and Results of
Operations and our Consolidated Financial Statements and accompanying Notes to
Consolidated Financial Statements.
1998 1999 2000 2001 2002
------------- ------------- ------------- ------------- -------------
OPERATING DATA:
Revenues $ 19,770,000 $ 23,456,000 $ 44,395,000 $ 32,423,000 $ 25,711,000
Loss before extraordinary items $ (55,787,000) $ (12,295,000) $(160,671,000) $ (43,998,000) $ (13,335,000)
Net loss $ (55,787,000) $ (12,845,000) $(152,933,000) $ (41,023,000) $ (9,807,000)
Basic and diluted loss per common share (1):
Loss before extraordinary items $ (4.42) $ (1.44) $ (9.55) $ (2.61) $ (0.80)
Net loss $ (4.42) $ (1.48) $ (9.09) $ (2.45) $ (0.64)
BALANCE SHEET DATA:
Current assets $ 144,163,000 $ 32,178,000 $ 29,144,000 $ 14,245,000 $ 11,021,000
Current liabilities 20,426,000 11,202,000 13,877,000 10,867,000 44,544,000
---------------------------------------------------------------------------------
Working capital $ 123,737,000 $ 20,976,000 $ 15,267,000 $ 3,378,000 $ (33,523,000)
=================================================================================
Total assets $ 320,116,000 $ 298,785,000 $ 145,347,000 $ 95,806,000 $ 85,580,000
Long-term obligations:
Convertible notes payable $ 85,000,000 $ 95,869,000 $ 69,940,000 $ 51,388,000 $ 11,106,000
Development finance obligation 38,552,000 1,302,000 - - -
Bank credit facilities - 10,500,000 9,937,000 7,937,000 3,810,000
Investor term loan - - - - 5,000,000
Other long-term obligations - 5,078,000 4,917,000 9,400,000 12,677,000
---------------------------------------------------------------------------------
Total $ 123,552,000 $ 112,749,000 $ 84,794,000 $ 68,725,000 $ 32,593,000
=================================================================================
Stockholders' equity $ 176,138,000 $ 174,834,000 $ 46,676,000 $ 16,214,000 $ 5,131,000
Series F preferred stock outstanding (3) 15,000 - - - -
Series G1 preferred stock outstanding (4) - - 158,155 446,417 402,688
Series G2 preferred stock outstanding (4) - - - 95,300 93,150
Weighted average common shares outstanding (1) 13,025,273 14,413,517 16,863,610 18,063,584 21,742,163
Proved reserves at end of year (2)(5):
Bbls of oil 31,522,000 29,678,000 6,794,000 7,626,000 8,779,000
Mcf of gas 108,451,000 52,818,000 54,836,000 39,393,000 34,508,000
Future net cash inflows $ 226,974,000 $ 451,118,000 $ 421,634,000 $ 104,166,000 $ 236,756,000
Present value (discounted at 10% per year) $ 144,851,000 $ 280,427,000 $ 264,697,000 $ 63,297,000 $ 160,237,000
(1) Loss per share amounts and weighted average common shares outstanding
calculations reflect the impact of a one-for-ten reverse stock split which
was effective November 7, 2000.
(2) These estimated reserve quantities, future net revenues and present value
figures are related to proved reserves located in the United States and
Colombia. No consideration has been given to probable or possible reserves.
Oil and gas year end prices were held constant except where future price
increases were fixed and determinable under existing contracts and
government regulations. Due primarily to the significant decline in Harken's
estimated present value of future net cash flows as a result of low oil and
gas prices during 1998, Harken recorded a non-cash valuation allowance on
its domestic oil and gas properties of approximately $50.5 million during
the year ended December 31, 1998. Due primarily to a significant reduction
in Harken's proved undeveloped oil reserves on its Bolivar Association
Contract in Colombia, Harken recorded a non-cash valuation allowance of
approximately $156.4 million during the year ended December 31, 2000. Due to
reduced oil and gas prices as of December 31, 2001, Harken recorded a
consolidated non-cash valuation allowance of approximately $18.7 million
during the year ended December 31, 2001.
(3) In April 1998, Harken issued to an investor 15,000 shares of Series F
Convertible Preferred Stock (the "Series F preferred") in exchange for
$15,000,000. In January 1999, Harken repurchased the Series F preferred for
cash in lieu of issuing to the investor the required shares of Harken common
stock pursuant to the conversion terms of the Series F preferred.
(4) See "Notes to Consolidated Financial Statements, Note 8 - Stockholders'
Equity" contained in Part II, Item 8, for a discussion of Harken Series G1
and Series G2 Preferred Stock.
(5) Includes amounts associated with a 14.38% minority interest of a
consolidated subsidiary.
37
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS.
OVERVIEW
Harken is engaged in oil and gas exploration, development and production
operations both domestically and internationally through its various
subsidiaries. Harken's domestic operations currently include oil and gas
exploration, development and production in the onshore and offshore Gulf Coast
regions of South Texas and Louisiana, and in portions of West Texas and the
Texas Panhandle region. Harken's international operations currently include
Global's activities in Colombia, Panama and Peru. Although Global owns an
interest in approximately 1.4 million acres in Costa Rica, Harken and Global
believe that political and judicial developments have severely limited the
opportunity for future oil and gas development in that country.
Harken's domestic operating segment has experienced successful drilling
activity over the past three fiscal years. However, Harken has reduced its
drilling activity in order to conserve capital resources to repurchase
convertible debt obligations pursuant to a capital restructuring plan, as
described below under "Liquidity and Capital Resources." 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 by many factors, including the market value of Harken common stock. See
"Cautionary Statements" contained in Part I - Item 1, Business. In April 2002,
Harken, through a wholly-owned subsidiary, acquired certain producing property
interests (the "Republic Properties") in exchange for Harken common stock. In
addition, the Purchase and Sale Agreement for the Republic Properties provides
for contingent additional consideration of cash or additional shares of Harken
common stock, or any combination of the two as Harken may decide, to be paid
within 45 days after December 31, 2003, based on a defined calculation to
measure the appreciation, if any, of the reserve value of the Republic
Properties.
Harken's Middle American operations are conducted through its ownership
of Global, a public limited company registered in England and Wales under the
Companies Act (1985) of the United Kingdom with its ordinary shares admitted for
trading on the AIM Exchange in London. All of the Middle American operating
revenues during 2002 have been generated from Global's Colombian operations and
have declined from the comparable period last year due to lower commodity prices
and lower production volumes.
As a part of Harken's business strategy, Harken has taken steps to
reduce personnel, reduce salaries, increase efficiencies in its production
operations, and reduce its debt obligations. Additionally, Global has
substantially reduced operating expenses and capital expenditures in the Middle
American segment during 2002. The effect of these efforts have been partially
mitigated by increased legal and professional costs associated with Harken's
capital restructuring plan.
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. Harken reflected a full cost valuation allowance totaling $18.7
million as of December
38
31, 2001, based on NYMEX prices of $19.84/barrel and $2.57/mmbtu. As of December
31, 2002, Global reflected a non-cash full-cost valuation allowances totaling
approximately $521,000 for unevaluated costs incurred for specific areas which
Global no longer intends to pursue under its Technical Evaluation Agreements in
Peru and Panama. Global has no proved reserves in Peru and Panama. For a
complete discussion of Harken's proved oil and gas reserves, see Note 15 - Oil
and Gas Disclosures in the Notes to Consolidated Financial Statements contained
in Part II, Item 8.
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 additional impairments could occur if costs are incurred in excess of any
increases in the cost ceiling, revisions to proved oil and gas reserves occur or
if properties are sold for proceeds less than the discounted present value of
the related proved oil and gas reserves.
Colombia operations -- During the year ended December 31, 2002,
approximately 30% of Harken's consolidated 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. Any such adverse developments in Global's
Colombian operations could result in, among other things, additional full cost
valuation allowances and impairments related to Global's assets.
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.
Classification of long term debt - On December 6, 2002, certain of
Harken's domestic subsidiaries (the "Borrowers") and Harken, entered into a new
three-year credit facility with Guaranty Bank FSB ("Guaranty") which is secured
by substantially all of Harken's domestic oil and gas properties and a guarantee
from Harken. The Guaranty credit facility replaced the credit facility with Bank
One, N.A. previously held by Harken and certain of its domestic subsidiaries.
Harken's bank credit facility with Guaranty requires the Borrowers to maintain
certain financial covenant ratios and requirements, as calculated on a quarterly
basis. Harken and the Borrowers were in compliance with these financial covenant
ratios and requirements as of December 31, 2002. If the Borrowers are not in
compliance with the bank financial covenant ratios or requirements in the future
and are unable to obtain a waiver or amendment to the facility requirements, the
credit facility would be in default and callable by Guaranty. In addition, due
to cross-default provisions in Harken's 5% Senior Convertible Notes due 2003
(the "5% European Notes"), 7% Senior Convertible Notes (the "7% European Notes")
and the 5% Convertible Notes Due 2003 (the "Benz Convertible Notes"),
39
substantially all of Harken's debt obligations would become due in full if any
debt is in default. The classification of Harken's long-term debt obligations at
December 31, 2002 reflects Harken's expectations that future operating results
will result in the Borrowers being in compliance with the bank financial
covenant ratios and requirements in future quarters. However, expectations of
future operating results and continued compliance with financial covenants
cannot be assured and the actions of Harken's lenders are not controllable by
Harken. If Harken's projections of future operating results are not achieved and
Harken's debt is placed in default, Harken would experience a material adverse
impact on its financial position and results of operations. See Part I, Item 1,
"Cautionary Statements - Harken may require future waivers and amendments to its
bank credit facility covenant requirements," for further discussion.
40
RESULTS OF OPERATIONS
The following table presents certain data for Harken's continuing
operations for the years ended December 31, 2000, 2001 and 2002. A discussion
follows of certain significant factors that have affected Harken's operating
results during such periods. This discussion should be read in conjunction with
Harken's Consolidated Financial Statements and related footnotes contained in
Part II, Item 8.
OPERATING REVENUES Year Ended December 31,
----------------------------------------------------------
North American Exploration and Production
Operations 2000 2001 2002
----------------- --------------- ----------------
Gas sales revenues $ 16,178,000 $ 16,643,000 $ 10,753,000
Gas volumes in Mcf 4,012,000 3,844,000 3,225,000
Gas price per Mcf $ 4.03 $ 4.33 $ 3.33
Oil sales revenues $ 15,422,000 $ 6,708,000 $ 6,617,000
Oil volumes in barrels 529,000 273,000 267,000
Oil price per barrel $ 29.15 $ 24.57 $ 24.78
Gas plant revenues $ 928,000 $ - $ -
Middle American Exploration and Production
Operations/(1)/
Oil sales revenues $ 10,649,000 $ 8,291,000 $ 7,619,000
Oil volumes in barrels 460,000 500,000 465,000
Oil price per barrel $ 23.15 $ 16.58 $ 16.38
OTHER REVENUES
Interest Income $ 1,188,000 $ 673,000 $ 113,000
Other Income $ 30,000 $ 108,000 $ 609,000
Extraordinary item gains, net $ 7,738,000 $ 2,975,000 $ 3,528,000
/(1)/ All of the Middle American operating revenues during 2002 have
been generated from Global's Colombian operations.
41
For the year ended December 31, 2002 compared with the prior year
NORTH AMERICAN OPERATIONS
Domestic gross oil and gas revenues during 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 on April 4, 2002
and consist of interests in 16 producing oil and gas wells in nine 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 $13.4 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 $2.5 million in cash. During the third quarter of 2002, a
wholly-owned subsidiary of Harken sold oil and gas mineral interests for
approximately $75,000 in cash.
Domestic gas revenues decreased 35% to $10,753,000 during 2002 compared
to $16,643,000 for the prior year due primarily to the decrease in average gas
prices received during the current year, as Harken received an overall average
price of $3.33 per Mcf of gas during 2002 compared to $4.33 per Mcf received
during 2001. In addition, gas revenues also declined as a result of reduced
production volumes during 2002, which was partially attributed to sales of
domestic producing properties during 2001 and 2002. The decline in these gas
revenues was partially offset by approximately $433,000 of gas revenues
attributable to the Republic Properties acquired in April 2002.
Domestic oil revenues decreased 1% to $6,617,000 during 2002 from
$6,708,000 during 2001. Oil prices averaged $24.78 per barrel during 2002
compared to $24.57 per barrel during the prior year. Despite the sales of
producing properties discussed above, Harken's domestic oil production volumes
remained flat during 2002 compared to the prior year period, as Harken's Gulf
Coast oil production was reduced by temporary operational curtailments during
the first quarter of 2001 at Harken's Main Pass area, offshore Louisiana.
Domestic oil and gas operating expenses decreased 21% to $7,292,000
during 2002 compared to $9,266,000 during the prior year 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 gas prices during 2002 compared to the prior year. Oil and gas
operating expenses decreased per unit of production primarily as a result of
increased operating efficiencies at Harken's Main Pass field.
Harken's oil and gas production volumes could continue to decrease if
Harken sells additional producing properties without replacing these production
volumes. During the first quarter of 2003, Harken's oil and gas revenues have
been strengthened by commodity prices, which have averaged higher than those
received during 2002. Harken's oil and gas revenues are highly dependent upon
product prices, which Harken is unable to predict.
42
MIDDLE AMERICAN OPERATIONS
Middle American gross revenues during 2002 relate to Global's oil
operations in Colombia. During 2001 and 2002, Global's Colombian operating
revenues consisted primarily of production from its Bolivar and Alcaravan
Association Contract areas. Global's Colombian oil revenues decreased 8% to
$7,619,000 during 2002 from $8,291,000 during 2001, due to reduced oil prices
and volumes. Oil prices averaged $16.38 per barrel during 2002 compared to
$16.58 per barrel during 2001. Global's oil volumes declined in 2002 as compared
to the prior year due to normal production decline of wells.
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 alleviate such
limitations. As a result of these steps, though Global's Palo Blanco production
levels are currently less than transport capacity, Global is now allowed to
transport up to an aggregate of 3,000 gross barrels of oil per day from the
Estero #1, Estero #2 and the Canacabare #1 wells. Any production from the Cajaro
#1 well that is in process of being drilled would also be transported through
Global's existing Palo Blanco pipeline facilities, subject to this 3,000 gross
barrel limitation. Estero #2 was completed during the first quarter of 2001 and
partially 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 completed workover procedures.
Middle American operating expenses have decreased 31% to $2,039,000 for
2002 from $2,938,000 during 2001, primarily as a result of Global's efforts to
reduce field contract labor and equipment rentals. Certain pipeline tariff
reimbursements also reduced operating expenses related to Global's producing
fields in Colombia.
During the first quarter of 2003, Global's oil revenues have been
strengthened by increased crude oil prices, which have averaged higher than
those received during 2002. Global's oil revenues are dependent on product
prices, which Global is unable to predict.
INTEREST AND OTHER INCOME
Interest and other income decreased 8% during 2002 from the prior year.
Interest income decreased primarily to Harken's usage of cash during 2001 for
capital expenditures, which decreased Harken's interest-bearing cash balances.
Harken generated approximately $673,000 of interest income during 2001 compared
to approximately $113,000 of interest income during 2002. Offsetting this
decrease was an increase in other income to $609,000 for 2002 from $108,000
during 2001 due primarily to the recognition during the third quarter of 2002 of
a refund of Colombian pipeline tariffs charged to Global in prior years.
OTHER COSTS AND EXPENSES
General and administrative expenses decreased 5% during 2002 compared
to 2001, due primarily to the personnel and salary reductions in 2002. Harken
reduced the number of its employees by 35% in 2002. The decrease in general and
administrative expenses was partially mitigated by increased legal and
professional costs in 2002 associated with Harken's capital restructuring plan,
as well as the reimbursement in 2001 of approximately $740,000 of litigation
expenses pursuant to Harken's insurance coverage related to certain litigation.
43
Depreciation and amortization expense decreased 25% during 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.
During the fourth quarter of 2002, Harken recorded non-cash full-cost
valuation allowances totaling $521,000 related to Global's Peru and Panama
unevaluated property costs incurred for specific areas which Global no longer
intends to pursue under its Technical Evaluation Agreements in Peru and Panama.
Global has no proved reserves associated with the Peru or Panama Technical
Evaluation Agreements.
During the fourth quarter of 2002, Global reflected an impairment of
approximately $400,000 on certain Colombia oilfield equipment consisting of
casing and tubing inventory. Based on the current low industry demand for such
equipment in light of heightened Colombia security concerns, the carrying value
of such inventory was in excess of estimated future cash flows from the sale or
use of such equipment.
Interest and other expense increased 23% during 2002 from the prior
year. The increase is partially due to the expensing of approximately $382,000
related to the non-refundable portion of the September 2002 standby commitment
fee shares issued to Lyford in connection with the rights offering. The increase
is also attributed, in part, to a charge of $295,000 related to Colombian war
taxes recorded during the third quarter of 2002 by Global. Finally, interest and
other expense increased compared to the prior year because during the fourth
quarter of 2002, Harken expensed an unrealized holding loss of $499,000 on its
investment in shares of NOIT since Harken believes the decline in market value
of those shares is not temporary. See Notes to Consolidated Financial
Statements, Note 3 - Investments contained in Part II, Item 8, for a discussion
of this investment.
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 Financial Statements, Note 16--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 that were settled during the second quarter of 2002
for amounts less than the amounts previously accrued.
EXTRAORDINARY ITEMS
During 2001 and 2002, Harken repurchased or exchanged certain of its 5%
European Notes for cash and/or other securities of Harken. During 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. Also, in August
2002, Harken repurchased $4,071,000 principal amount of Benz Convertible Notes
for $1,231,000 in cash and recorded an extraordinary item gain of approximately
$2.8 million related to that transaction. An extraordinary item gain of
$2,975,000 was recorded for 2001 related to Harken's acquisitions of $18,830,000
principal amount of 5% European Notes.
NET LOSS
44
Harken reported a net loss for the year ended December 31, 2002 of
approximately $9.8 million compared to a net loss of approximately $41.0 million
for the prior year. The decline in the amount of Harken's reported net loss in
2002 is due primarily to full cost valuation allowances and provision for asset
impairments taken in 2001. Harken reflected a full cost valuation allowance and
asset impairments totaling $18.7 million and $14.1 million, respectively, during
2001, compared to full cost valuation allowances and asset impairments totaling
approximately $521,000 and $400,000, respectively, in 2002. Included in asset
impairments during 2001 were impairments of approximately $8.8 million related
to Global's investment in the Costa Rica project.
For the year ended December 31, 2001 compared with the prior year
NORTH AMERICAN OPERATIONS
Domestic gross oil and gas revenues during 2001 relate primarily to
Harken's continuing operations in the onshore and offshore areas of the Texas
and Louisiana Gulf Coast and the Western and Panhandle regions of Texas.
Domestic gas revenues increased 3% to $16.6 million during 2001 from
$16.2 million for the prior year due primarily to the increase in average gas
prices received during the current year, as Harken received an overall average
price of $4.33 per Mcf of gas during 2001 compared to $4.03 per Mcf received
during 2000. Gas prices were particularly strong during the first half of 2001,
but weakened during the fourth quarter of 2001. Gas production volumes during
2001 decreased slightly compared to the prior year, despite Harken's sales of
certain producing properties, due primarily to new production from Harken's
drilling activity during 2001, particularly from the Old Ocean field in the
Texas Gulf Coast region and the Lake Raccourci and Lapeyrouse fields in southern
Louisiana.
Domestic oil revenues decreased 57% to $6.7 million during 2001 from
$15.4 million during 2000 primarily due to the December 2000 sale of Harken
Southwest Corporation, which owned and operated Harken's Four Corners area
production and due to the second quarter 2001 sale of Harken's New Mexico
operations. In addition, 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. Overall, domestic oil production volumes
decreased 48% during 2001 compared to the prior year.
Gas plant revenues during 2000 were derived through Harken Southwest
Corporation, which was sold in December 2000.
Domestic oil and gas operating expenses consist of lease operating
expenses and production and reserve based taxes. Domestic oil and gas operating
expenses decreased 23% to $9.3 million during 2001 from $12.1 million during the
prior year primarily due to the above mentioned sales of producing properties.
Oil and gas operating expenses decreased slightly per unit of production due to
the replacement of sold producing fields with completed gas production.
MIDDLE AMERICAN OPERATIONS
Harken's Middle American operations are conducted through Global.
Global's Colombian oil revenues decreased 22% from $10.6 million during 2000 to
$8.3 million during 2001 due to a decrease in the
45
average price received per barrel, which decreased from $23.15 during 2000 to
$16.58 during 2001. During 2000 and 2001, Global's Colombian production
operations related primarily to Global's Bolivar and Alcaravan Association
Contract areas.
During 2000 and 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 and is allowed to transport up to approximately 3,000
gross barrels of oil per day from both Estero #1 and Estero #2 wells. Estero #2
was completed during the first quarter of 2001, and produced throughout the
remainder of 2001, mitigating production declines related primarily to Global's
Bolivar Contract area production.
Middle American operating expenses increased 26% to $2.9 million for
2001 from $2.3 million during 2000, primarily due to increases in transportation
and security costs. During the third quarter of 2001, Global took steps to
reduce operating expenses related to its producing fields in Colombia, which
resulted in operating expense reductions beginning in the fourth quarter of
2001.
INTEREST AND OTHER INCOME
Interest and other income decreased 12% during 2001 from the prior year
due to Harken's usage of cash for capital expenditures during 2000 and 2001, as
well as lower yield rates on invested funds. Harken generated approximately $1.2
million of interest income during 2000, compared to approximately $673,000 of
interest income during 2001.
OTHER COSTS AND EXPENSES
General and administrative expenses decreased 18% during 2001 from 2000
primarily due to personnel reductions and efforts to improve administrative
efficiency. Harken reduced the number of its employees by 34% during 2001.
Depreciation and amortization expense increased during 2001 from the
prior year primarily due to downward revisions during 2000 in Colombia proved
reserves. 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.
During the fourth quarter of 2001, due to reduced oil and gas prices at
December 31, 2001, Harken recorded non-cash valuation allowances of
approximately $14.4 million related to its domestic oil and gas properties and
$4.3 million related to its Colombian oil properties. The valuation was based on
the present value, discounted at ten percent, of Harken proved oil and gas
reserves based on year end prices.
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 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. In March 2002, the Costa Rica environmental agency SETENA denied its
approval of the requested
46
environmental permit related to Global's Costa Rica Contract. HCRH filed an
appeal related to this ruling by SETENA. Due to 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, Harken and
Global believe that HCRH's appeal to SETENA for reconsideration of its denial of
the requested permit, or any similar recourse, will be unsuccessful. Further,
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.
These significant adverse developments resulted in Global fully impairing its
approximately $8.8 million investment in the Costa Rica project in the
Consolidated Balance Sheet as of December 31, 2001.
During the fourth quarter of 2001, Global also reflected an impairment
of approximately $3.2 million related to certain transportation facility costs
related to Global's Bolivar Contract area in Colombia, as the carrying value of
such facilities was in excess of estimates of future cash flows. Such estimated
future cash flows were based on current production levels, future production
expectations based on December 31, 2001 reserve estimates, projected locations
of future wells to be drilled and the lack of a ready market to purchase such
facilities. Global continues to utilize transportation facilities related to its
Alcaravan Contract area. Global also reflected an impairment of approximately
$1.6 million related to certain deferred transaction costs incurred, primarily
for certain merger transaction efforts which were a part of the restructuring of
Global's international assets. Such merger transaction efforts were terminated
during the fourth quarter of 2001 and the corresponding transaction costs were
charged to earnings. In addition, Global reflected an impairment of $620,000 on
certain Colombia oilfield equipment, as based on the current low industry demand
for such equipment in light of heightened Colombia security concerns, the
carrying value of such inventory was in excess of estimated future cash flows
from sale or use of such equipment.
Interest and other expense decreased during 2001 from the prior year
primarily due to the repurchase and exchange of certain 5% European Notes during
2000 and 2001. Such decrease in net interest expense was despite the decrease in
the amounts of interest capitalized to Global's Colombian unevaluated property
costs. In addition, during the first quarter of 2001, Harken expensed the
remaining unamortized issuance costs related to the International Finance
Corporation project loan finance facility, which was terminated in May 2001.
47
LIQUIDITY AND CAPITAL RESOURCES
Harken's negative working capital at December 31, 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
December 31, 2002 primarily because of the classification as current liabilities
as of December 31, 2002 of a total principal amount of approximately $34.7
million of the 5% European Notes and Benz Convertible Notes (collectively, the
"5% Notes"). As of December 31, 2002, $29 million principal amount of Harken's
outstanding 5% European Notes that are due in May 2003 and approximately $5.7
million principal amount of the Benz Convertible Notes due in November 2003 were
classified as current liabilities. These obligations were long-term liabilities
and did not reduce working capital at December 31, 2001. Approximately
$2,176,000 of Guaranty credit facility has also been reflected as a current
liability at December 31, 2002 due to the monthly borrowing base reductions of
$200,000 which began January 1, 2003 and the current outstanding letters of
credit which have reduced the available borrowing base. As of March 27, 2003,
the remaining principal balance of the 5% European Notes and the Benz
Convertible Notes was approximately $14.1 million and $5.7 million,
respectively.
Harken's operations used approximately $2.1 million of cash flow during
2002, primarily due to the timing of certain working capital payments and
collections during the period. Harken's cash resources at December 31, 2002
totaled approximately $6.4 million. Global anticipates international capital
expenditures will total approximately $8.0 million during 2003. Harken also
anticipates domestic capital expenditures will total approximately $4.0 million
during 2003. A majority of Harken's planned domestic and Global's planned
international capital expenditures are discretionary and, as a result, will be
curtailed if sufficient funds are not available. Such expenditure curtailments,
however, could result in Harken losing certain prospect acreage or reducing its
interest in future development projects.
During the twelve months ended December 31, 2002, approximately $1.4
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 $1.4 million and consisted of $2.3 million raised through the
issuance of Harken's 7% European Notes (which are described below and in Note
8--Convertible Notes Payable to the accompanying Notes to Consolidated Financial
Statements contained in Part II, Item 8), $915,000 in net cash proceeds from the
issuance of Global's common stock, and approximately $4.9 million raised through
the issuance of a 10% Term Loan (which is described in Note 7--Investor Term
Loan in the accompanying Notes to Consolidated Financial Statements contained in
Part II, Item 8), offset by approximately $6.4 million in repayment of long-term
debt. Net cash used in investing activities during 2002 totaled approximately
$2.1 million and was primarily comprised of approximately $2.8 million received
upon the sale of producing domestic oil and gas properties and certain Colombian
oil field tanks, offset by approximately $4.9 million in capital expenditures.
CONVERTIBLE NOTE COMMITMENTS IN 2003 AND CAPITAL RESTRUCTURING
5% European Notes -- On May 26, 1998, Harken issued to qualified
purchasers a total of $85 million of its 5% European Notes, which mature on May
26, 2003. Since issuance and as of March 27, 2003, Harken has repurchased or
exchanged an aggregate of approximately $70.9 million principal amount of the 5%
European Notes, of which approximately $26.9 million in principal amount of the
5% European Notes was repurchased in 2002 and 2003 for cash and/or in exchange
for 7% European Notes. As of March 27, 2003, the
48
remaining principal balance of 5% European Notes was approximately $14.1
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 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 (the "Redemption Price"). Such Redemption Price
is calculated at the time Harken issues its notice of redemption, which is to be
given no less than 30 days, and no more than 60 days, prior to the date of
redemption.
Benz Convertible Notes -- On December 30, 1999, Harken issued
$12,000,000 principal amount of its Benz Convertible Notes in exchange for
certain prospects acquired from Benz Energy, Incorporated ("Benz"). The Benz
Convertible Notes originally were to mature on May 26, 2003. In March 2000, the
maturity date of certain of the Benz Convertible Notes was extended to November
26, 2003. Since issuance and as of March 27, 2003, Harken has repurchased or
redeemed an aggregate of approximately $6.3 million principal amount of the Benz
Convertible Notes for cash and/or Harken common stock, of which approximately
$5.2 million was repurchased in 2002. As of March 27, 2003, the outstanding
principal balance of Benz Convertible Notes was approximately $5.7 million and
has a maturity date of November 26, 2003.
The Benz Convertible Notes bear interest at 5% per annum, payable
semi-annually in May and November of each year until maturity or until the Benz
Convertible Notes are redeemed, converted or repurchased by Harken prior to
their maturity. Beginning November 26, 2002, Harken may redeem up to 50% of the
Benz Convertible Notes then outstanding in exchange for shares of Harken common
stock. At maturity on November 26, 2003, Harken may similarly redeem all
remaining outstanding Benz Convertible Notes for shares of Harken common stock.
If Harken elects to redeem the Benz Convertible Notes for shares of its common
stock, each note will be redeemed for a number of shares of Harken common stock
equal to 115% of the principal amount of the note to be redeemed, plus accrued
and unpaid interest thereon to the date of redemption, divided by the average
market price of the stock over the 30 calendar days immediately preceding the
date of the notice of redemption.
Waverley Note -- On March 18, 2003, Harken issued to Waverley
Investments Limited ("Waverley") a promissory note in the principal amount of
$1,705,000 (the "Waverley Note"), which matures on September 1, 2003. The
Waverley Note will only bear interest during the period of any default. The
Waverley Note may be redeemed for cash at Harken's option, at par, in whole or
in part, upon not less than 30 days notice to the holders. The Waverley Note may
be redeemed for shares on September 1, 2003. If Harken elects to redeem the
Waverley Note for shares of its common stock, the note will be redeemed for a
number of shares of Harken common stock equal to 100% of the principal amount of
the note to be redeemed, plus default interest, if any, divided by the average
market price of the common stock over all stock exchange business days during
August
49
2003.
Capital Restructuring - In 2003, Harken's most significant capital
commitment is satisfying its remaining obligations under the 5% European Notes,
the Waverley Note and the Benz Convertible Notes, which mature in May 2003,
September 2003 and November 2003, respectively. Harken's management has been
actively working to repurchase and/or restructure the indebtedness represented
by the 5% Notes in advance of their scheduled maturity dates in 2003. Since
issuance and as of March 27, 2003, Harken has repurchased, restructured or
redeemed an aggregate of approximately $70.9 million and $6.3 million principal
of the 5% European Notes and the Benz Convertible Notes, respectively.
Currently, Harken does not have sufficient funds to pay the 5% Notes and
the Waverley Notes in cash upon maturity, or to otherwise redeem or repurchase
the 5% Notes and the Waverley Notes. Harken's management plans to continue to
actively pursue negotiated transactions to repurchase and restructure the 5%
Notes. These efforts are expected to primarily include exchanging the 5% Notes
for debt or equity securities (such as the 7% European Notes) and raising funds
through the issuance of debt or equity securities. Additionally, Harken intends
to repay the Waverley Note in cash prior to or upon maturity of the Waverley
Note. It is unlikely, however, that the entire principal balance of the 5% Notes
will be restructured or repurchased for cash and/or other securities or property
prior to maturity. Consequently, Harken presently intends to satisfy its
remaining obligations under the 5% Notes by redeeming them in exchange for
Harken common stock. To the extent the Waverley Note remains outstanding at
maturity Harken similarly plans to redeem it for Harken common stock. Although
there can be no assurances, Harken believes that it will repurchase and
restructure a sufficient amount of the 5% European Notes to enable Harken to
redeem the remaining principal balance of the 5% European Notes upon maturity
for Harken common stock without requiring stockholder approval of additional
authorized shares. However, depending on Harken's success in repurchasing or
restructuring the 5% European Notes and the price of its common stock, Harken
may not have a sufficient number of authorized but unissued shares of Harken
common stock to redeem the remaining 5% Notes for common stock. Harken has,
therefore, included a proposal to increase its authorized common stock in the
preliminary proxy statement for its annual stockholders meeting scheduled to be
held on or about May 16, 2003. Harken plans to propose an increase in the number
of authorized shares sufficient to redeem the 5% European Notes. Additionally,
Harken plans to include in this increase a number of authorized shares that
based on the current market price of Harken common stock, at a minimum, should
be sufficient to redeem the Benz Convertible Notes. Lyford, who controls 62% of
Harken's common stock, has indicated to Harken that it will vote all of its
shares of common stock in favor of approval of the proposal to increase the
authorized shares of common stock. While there can be no assurances, Harken
believes that it will be able to hold the stockholders meeting before May 26,
2003, the maturity date of the 5% European Notes. At the present market price of
Harken common stock, Harken believes that this increase in the authorized shares
should provide a sufficient number of shares to allow Harken to also redeem the
Waverley Note for common stock. However, if the market price of Harken common
stock declines significantly, then depending on the amount of the Benz
Convertible Notes and the Waverley Note outstanding, Harken may be required to
seek stockholder approval of an additional increase in authorized shares before
Harken could redeem the remaining Benz Convertible Notes and the Waverley Note.
See "Adequacy of Capital Sources" below for further discussion
concerning Harken's efforts to satisfy the 5% Notes and the Waverley Note prior
to their respective maturity dates.
OTHER CAPITAL COMMITMENTS
50
North American 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 North American capital expenditure plans have
been reduced compared to historical levels. Harken anticipates North American
capital expenditures will total approximately $4.0 million during 2003. However,
Harken's planned North American capital expenditures for 2003 are discretionary
and, as a result, will be curtailed if sufficient funds are not available. Such
expenditure curtailments, however, could result in Harken losing certain
prospect acreage or reducing its interest in future development projects.
Middle American Commitments -- Global anticipates international capital
expenditures will total approximately $8.0 million during 2003. Approximately
$3.0 million of these capital expenditures result from commitments under the
terms of certain of the Association Contracts entered into between Global's
subsidiary Harken de Colombia, Ltd. and Ecopetrol, as well as scheduled capital
expenditure commitments related to its TEA Agreements in Peru and Panama. These
contracts require Global to perform certain activities in Colombia in accordance
with a prescribed timetable. Failure by Global to perform these activities as
required could result in Global losing its rights under the particular contract,
which could have a material adverse effect on Harken's business. As of March 27,
2003, Global was in compliance with the requirements of each of the Association
Contracts and TEA Agreements. In light of the political and judicial
developments in Costa Rica discussed above, Global is projecting no capital
expenditure plans during 2003 with regard to the Costa Rica Contract. Global's
planned international capital expenditures for 2003 also include approximately
$5.0 million of discretionary expenditures. These discretionary expenditures
will be curtailed if sufficient funds are not available. Such expenditure
curtailments, however, could result in Global losing certain prospect acreage or
reducing its interest in future development projects.
7% European Notes -- As of March 27, 2003, Harken has issued a total of
approximately $17.9 million in principal of its 7% European Notes, of which
approximately $1.6 million mature on June 30, 2006 and approximately $16.3
mature on March 31, 2007. Harken issued the 7% European Notes in the following
transactions:
. On June 18, 2002, Harken issued to certain holders of Harken's
securities $2,025,000 principal amount of its 7% European Notes
due 2007 in exchange for approximately $1,025,000 in cash and
10,000 shares of Harken's Series G1 preferred stock owned by
such holders.
. On June 19, 2002, Harken issued to certain holders of Harken's
securities an additional $2,025,000 principal amount of the 7%
European Notes due 2007 in exchange for approximately $1,725,000
in cash and 3,000 shares of Harken's Series G1 preferred stock
owned by such holders.
. During 2002, Harken issued an aggregate of $7,432,000 principal
amount of the 7% European Notes due 2007 in connection with the
exchange transactions involving certain of the 5% European Notes
described above.
. On January 28, 2003, Harken issued a total of $1,420,000
principal amount of 7% European Notes due 2007 in exchange for
$1,420,000 principal amount of 5% European Notes.
51
. On February 13, 2003, Harken issued $1,600,000 in principal
amount of 7% European Notes due 2006 to certain investors in
exchange for $2,000,000 in principal amount of the 5% European
Notes.
. On March 18, 2003, Harken issued $3,410,000 in principal amount
of the 7% European Notes due 2007 and the Waverley Note to
Waverley in exchange for 17,050 shares of Harken's Series G-1
convertible preferred stock owned by an affiliate of Waverley,
and $3,410,000 in cash.
The 7% European Notes due 2007 mature on March 31, 2007 and rank equal
to the 5% European Notes. Interest incurred on the 7% European Notes due 2007 is
payable semi-annually in March and September of each year to maturity or until
these 7% European Notes are redeemed, converted or purchased by Harken prior to
their maturity. Upon the registration of the underlying Harken common stock
issuable upon conversion, the 7% European Notes due 2007 are convertible into
shares of Harken common stock at an initial conversion price of $0.50 per share,
subject to adjustment in certain circumstances (the "2007 7% European Note
Conversion Price"). Following the February 2003 announcement of the terms of the
rights offering, the 2007 7% European Note Conversion Price was adjusted to
$0.36 per share, effective January 31, 2003, for all 7% European Notes due 2007
outstanding on that date. The 7% European Notes due 2007 are also convertible by
Harken into shares of Harken common stock if, for any period of 30 consecutive
days commencing upon registration of the underlying conversion shares, the
average of the closing prices of Harken common stock for each trading day during
such 30-day period shall have equaled or exceeded 125% of the 2007 7% European
Note Conversion Price (or $0.45 per share of Harken common stock effective
January 31, 2003).
The 7% European Notes due 2007 may be redeemed at Harken's option, at
any time and from time to time, in whole or in part, for cash equal to the
outstanding principal and accrued interest to the date of redemption, upon not
less than 30 days notice to the noteholders. In addition, beginning March 31,
2006, Harken may redeem up to 50% of the then outstanding 7% European Notes due
2007 for shares of Harken common stock, and at maturity, on March 31, 2007,
Harken may similarly redeem all remaining outstanding 7% European Notes due 2007
for shares of Harken common stock, in each case upon not less than 30 days
notice to the noteholders. If Harken elects to redeem the 7% European Notes due
2007 for shares of its common stock, each note will be redeemed for a number of
shares of Harken common stock equal to 110% of the principal value of the notes
to be redeemed, plus accrued and unpaid interest thereon to the date of
redemption, divided by the average market price of the stock over the 120
business days immediately preceding the date of the notice of redemption.
The 7% European Notes due 2006 mature on June 30, 2006 and also rank
equal to the 5% European Notes. Interest incurred on the 7% European Notes due
2006 is payable semi-annually in June and December of each year to maturity or
until the 7% European Notes due 2006 are redeemed, converted or purchased by
Harken prior to their maturity. Upon the registration of the underlying Harken
common stock issuable upon conversion, the 7% European Notes are convertible
into shares of Harken common stock at an initial conversion price of $0.40 per
share, subject to adjustment in certain circumstances. The initial conversion
price will be reset on February 2, 2004 to equal 115% of the average market
price of Harken common stock for the 20 business days immediately preceding
such date. The 7% European Notes due 2006 may be redeemed at Harken's option, at
any time and from time to time, in whole or in part, for cash equal to the
outstanding principal and accrued interest to the date of redemption, upon not
less than 30 days notice to the noteholders.
52
Guaranty Bank Facility -- On December 6, 2002, certain of Harken's
domestic subsidiaries (the "Borrowers") and Harken entered into a three-year
loan facility with Guaranty Bank FSB ("Guaranty"), which is secured by
substantially all of Harken's domestic oil and gas properties and a guarantee
from Harken. In connection with entering into the Guaranty credit facility, the
credit facility with Bank One, N.A. was terminated. The initial proceeds
advanced under the Guaranty credit facility were used to repay in full the
outstanding principal and interest owed under the credit facility with Bank One,
N.A. previously held by Harken and certain of its domestic subsidiaries. The
Guaranty facility provides borrowings limited by a borrowing base (as defined by
the Guaranty facility) which was $7,100,000 as of December 31, 2002. Such
borrowing base, which is net of outstanding letters of credit totaling
$1,090,000, is re-determined by Guaranty on May 1 and November 1 of each year in
accordance with the facility agreement. If, based on any redetermination, the
borrowing base is reduced by Guaranty, then the Borrowers would be required to
repay the amount by which the outstanding balance of the facility exceeds the
borrowing base or provide additional collateral satisfactory to Guaranty within
30 days following notice by Guaranty of such determination. The borrowing base
is being reduced by $200,000 per month and will be redetermined by Guaranty on
May 1, 2003, in accordance with the facility agreement. Due to these scheduled
borrowing base reductions and the current outstanding letters of credit, Harken
has reflected approximately $2,176,000 of the facility amount as a current
liability at December 31, 2002. At December 31, 2002 and March 27, 2003, Harken
has $5,986,000 and $5,610,000, respectively, outstanding pursuant to the
facility. Guaranty's commitments under the facility terminate on December 6,
2006.
Harken's bank credit facility with Guaranty prohibits cash dividends,
loans, advances and similar payments to be made to Harken by the Borrowers.
Therefore, the Borrowers will not be able to provide Harken with funds to be
used for the repayment of Harken's debt or for other uses, unless the Borrowers
obtain Guaranty's consent. The Guaranty facility also requires the Borrowers to
maintain certain financial covenant ratios and requirements, as calculated on a
quarterly basis. Harken and the Borrowers were in compliance with all
requirements under the Guaranty facility as of December 31, 2002. If the
Borrowers are not in compliance with their bank financial covenant ratios or
requirements in the future and are unable to obtain a waiver or amendment to the
facility requirements, the credit facility would be in default and callable by
Guaranty. In addition, due to cross-default provisions in Harken's 5% European
Notes, 7% European Notes, Benz Convertible Note and the Waverley Note,
substantially all of Harken's debt obligations would become due in full if any
debt is in default. Expectations of continued compliance with financial
covenants cannot be assured and our lenders' actions are not controllable by
Harken. If Harken's projections of future operating results are not achieved and
its debt is placed in default, Harken would experience a material adverse impact
on its financial position and results of operations.
Operational Contingencies - Harken's operations are subject to stringent
and complex environmental laws and regulations governing the discharge of
materials into the environment or otherwise relating to environmental
protection. These laws and regulations are subject to changes that may result in
more restrictive or costly operations. Failure to comply with applicable
environmental laws and regulations may result in the imposition of
administrative, civil and criminal penalties or injunctive relief. Global's
international oil and gas exploration and production operations, including well
drilling and seismic activities, require specific governmental environmental
licenses and permits, the acquisition of which in the past have been subject to
extensive delays. Global may continue to experience similar delays in the
future. Failure to obtain these licenses and permits in a timely manner may
prevent or delay Harken's and Global's operational plans.
Harken has accrued approximately $5,102,000 at December 31, 2002
relating to certain operational or
53
regulatory contingencies related to Harken and its subsidiaries' operations.
Approximately $4,663,000 of this accrued amount relates to total future
abandonment costs of $7,550,000 for certain of Harken's producing properties,
which will be incurred at the end of the properties' productive life.
Approximately $439,000 of the total operational, regulatory or litigation
contingencies are expected to be paid during 2003 and are included in current
liabilities. The timing of the remaining payments of the operational and
regulatory liabilities cannot be reasonably estimated at this time since they
primarily relate to plugging costs that will not be incurred until the end of
the productive life of the property in question. 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 I, Item 3 for a
description of certain litigation.
Consolidated Contractual Obligations - The following table presents a
summary of Harken's contractual obligations and commercial commitments as of
March 27, 2003. Harken has no off-balance sheet obligations other than in the
table set forth below.
PAYMENTS DUE BY PERIOD
------------------------------------------------------------------------------------------
CONTRACTUAL OBLIGATIONS 2003 2004 2005 2006-2007 THEREAFTER TOTAL
------------ -------------- ----------- ------------ ------------ ------------
Bank Credit Facility/(1)/ $ 1,800,000 $ 2,400,000 $ 1,410,000 $ -- $ -- $ 5,610,000
Operating Leases/(2)/ 717,000 681,000 681,000 568,000 -- 2,647,000
Middle American
Commitments/(3)/ 3,000,000 -- -- -- -- 3,000,000
North American
Commitments/(4)/ -- -- -- -- -- --
Convertible Notes
Payable/(5)/ 19,779,000 -- -- 17,912,000 -- 37,691,000
Waverley Note 1,705,000 -- -- -- -- 1,705,000
------------------------------------------------------------------------------------------
Total Contractual Cash
Obligations $ 27,001,000 $ 3,081,000 $ 2,091,000 $ 18,480,000 $ -- $ 50,653,000
==========================================================================================
(1) Subsequent to December 31, 2002, and as of March 27, 2003, Harken and
the Borrowers have reduced the outstanding balance of the bank credit
facility by approximately $376,000. Amounts shown do not reflect impact
of semi-annual borrowing base redeterminations.
(2) Amount net of sublease arrangements in effect at December 31, 2002.
(3) Represents the estimated cost of completion of a well in Colombia
required to be drilled by Global under the Cajaro Contract and the
remaining geological and geophysical work requirements under Global's
Peru TEA and Panama TEA. The amount of Global's planned international
capital expenditures for 2003 set forth in the above table does not
include approximately $5.0 million of discretionary expenditures. These
discretionary expenditures will be curtailed if sufficient funds are not
available. Such expenditure curtailments, however, could result in
Global losing certain prospect
54
acreage or reducing its interest in future development projects.
(4) Harken plans North American capital expenditures of $4.0 million for
2003. However, these capital expenditures are discretionary and, as a
result, will be curtailed if sufficient funds are not available. Such
expenditure curtailments, however, could result in Harken losing certain
prospect acreage or reducing its interest in future development
projects.
(5) Represents the outstanding obligations owing under the 5% European
Notes, the Benz Convertible Notes and the 7% European Notes as of March
27, 2003. These obligations are payable or redeemable for cash or with
shares of Harken common stock (See Part II, Item 8, Notes to
Consolidated Financial Statements, Note 8 - Convertible Notes Payable
for further discussion).
In addition to the above commitments, during 2003 and afterward,
government authorities under Harken's Louisiana state leases and operators under
Harken's other North American operations may also request Harken to participate
in the cost of drilling additional exploratory and development wells. Harken may
fund these future domestic expenditures at its discretion. Further, the cost of
drilling or participating in the drilling of any such exploratory and
development wells cannot be quantified at this time since the cost will depend
on many factors outside of Harken's control, such as the timing of the request,
the depth of the wells and the location of the property. Harken's discretionary
capital expenditures for 2003 will be curtailed if Harken does not have
sufficient funds available. If Harken does not have sufficient funds or
otherwise chooses not to participate, it may experience a delay of future cash
flows from proved undeveloped oil and gas reserves. Such expenditure
curtailments could also result in Harken losing certain prospect acreage or
reducing its interest in future development projects.
CAPITAL SOURCES - RIGHTS OFFERING
Rights Offering -- In February 2003, Harken distributed to holders of
its common stock, Series G1 preferred stock and Series G2 preferred stock, at no
charge, nontransferable subscription rights to purchase shares of its common
stock. These shares of common stock include preferred stock purchase rights
attached to such common stock under the Stockholder Rights Plan (See Note 9 -
Stockholders' Equity in the accompanying Notes to the Consolidated Financial
Statement for further discussion of the Stockholder Rights Plan). Such holders
received one subscription right for each share of common stock they owned (or in
the case of the Series G1 preferred stock and Series G2 preferred stock, one
subscription right for each share of common stock issuable upon conversion) at
the close of business on January 30, 2003. Harken distributed 32,154,867
subscription rights exercisable for up to 72,885,437 shares of common stock.
All unexercised subscription rights expired at 12:00 midnight, New York
City time, on March 13, 2003. Each subscription right entitled the holder to
purchase 2.2667 shares of Harken common stock at a subscription price of $0.311
per right (or $0.1372 per share). In connection with the rights offering,
subscription rights were exercised for 13,169,779 shares of common stock for an
aggregate purchase price of approximately $1,807,000. Pursuant to a standby
purchase agreement, on March 20, 2003, Lyford purchased the remaining
unsubscribed shares of common stock offered in the rights offering at the
subscription price. As compensation to Lyford for its standby commitment, Harken
paid Lyford a Standby Commitment Fee of $600,000 by issuing 1,714,286 shares of
common stock to Lyford with each such share being attributed a value of $0.35.
Harken has also paid Lyford $50,000 in cash for its legal fees in connection
with the rights offering.
As a result of a standby commitment, Lyford purchased 59,716,227 shares
of common stock from
55
Harken for an aggregate purchase price of approximately $8,193,000. Lyford paid
$3,184,943, net of the $5,000,000 outstanding under the Lyford 10% Term Loan,
plus accrued interest, in cash to Harken at the closing of the standby
commitment. As a result, no amounts remain outstanding under the 10% Term Loan.
After giving effect to the consummation of Harken's rights offering and Lyford's
standby commitment, Lyford has become the holder of approximately 62% of
Harken's outstanding common stock. Therefore, these transactions resulted in a
change of control of Harken. Lyford has the voting power to control the election
of Harken's board of directors and the approval of other matters presented for
consideration by the stockholders, which could include mergers, acquisitions,
amendments to Harken's charter and various corporate governance actions.
However, due to the planned redemption for shares of common stock of certain
convertible notes of Harken in May 2003, Lyford's ownership percentage may
decrease below 50%.
Harken used the remaining proceeds of the rights offering and the
standby commitment to pay a portion of the exercise prices under call options
with the Investors and HBK. Under these call options the Investors and HBK sold
an aggregate of $11.5 million principal amount of 5% European Notes at an
aggregate cash option price of approximately $6.9 million, plus accrued and
unpaid interest through the date of payment.
Lyford has advised Harken that it does not currently intend to resell
any shares of common stock, including any shares acquired in the rights
offering, but rather intends to retain such shares for investment purposes.
Lyford has advised Harken, however, that any determination to retain its
interest in Harken will be subject to the continuing evaluation by the
individual members of Lyford of pertinent factors related to its investment in
Harken. Depending upon the continuing assessment of these factors from time to
time, Lyford may change its present intentions and may determine to acquire
additional shares of common stock (by means of open market or privately
negotiated purchases or otherwise) or to dispose of some or all of the shares of
common stock or warrants held by Lyford and its partners. Lyford has also
advised Harken that it intends to seek active participation on Harken's board of
directors and be a proactive and urgent voice in helping plan its future to
create value for its stockholders. However, Lyford has indicated that it does
not have any current definitive plan, arrangement or understanding to seek to
cause Harken to enter into any extraordinary corporate transaction such as a
merger, reorganization or liquidation, to sell or transfer any assets, to change
its capitalization, dividend policy, business, corporate structure, charter,
bylaws or similar instruments, or to cause the Harken common stock to be
delisted or become eligible for termination of registration pursuant to Section
12(g)(4) of the Securities Exchange Act of 1934, as amended. Alan G. Quasha, a
Lyford representative, was elected as the new Chairman of Harken's board of
directors to be effective March 31, 2003. Mr. Quasha will fill the vacancy
created by the resignation effective March 31, 2003 of Stephen C. Voss as a
director and he will serve the unexpired term of Mr. Voss. Mr. Quasha replace
Mikel D. Faulkner as Chairman, with Mr. Faulkner continuing as a director of
Harken.
CAPITAL SOURCES - OTHER OFFERINGS
Global's ordinary shares are admitted for trading on the AIM Exchange in
London. This may enable Global to seek additional financing and effect
acquisition activities using shares of Global stock or enable Harken to sell a
portion of its Global common stock for cash. Global's ability to effectively use
its common stock will be dependent upon the market value and liquidity of its
shares on the AIM Exchange. Global is also pursuing raising additional capital
through potential sales of pipe inventory. Additional capital raised by Global
would be used exclusively for Global's capital needs, as cash dividends to
Harken may be limited by tax
56
restrictions. In December 2002, Harken exchanged 2,000,000 of its shares of
Global common stock for 1,232,742 of the redeemable ordinary shares of NOIT.
This exchange further reduced Harken's ownership of Global to approximately
85.62%.
In addition to the above sources, Harken has raised and may continue to
raise capital through the issuance of debt, equity and convertible debt
instruments, or through the exchange of existing instruments through
transactions that could provide Harken with additional capital.
OTHER CAPITAL SOURCES
During 2001, sales of certain domestic producing property interests
generated cash proceeds of approximately $13.4 million. During 2002, Harken sold
certain additional domestic producing property and mineral interests for
approximately $2,574,000. Global sold some oil storage tanks in the fourth
quarter of 2002 for approximately $259,000.
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 nine 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. During the first quarter of 2003,
Harken's oil and gas revenues have been strengthened by commodity prices which
have averaged higher than those received during 2002. Harken's domestic
operating cash flows are particularly dependent on the commodity prices, which
Harken is unable to predict.
Global's operating cash flows continue to be provided by ongoing
production from its Alcaravan, Bolivar and Bocachico Contract areas in Colombia.
ADEQUACY OF CAPITAL SOURCES
Currently, Harken does not have sufficient funds to pay the 5% Notes and
the Waverley Note in cash upon maturity, or to otherwise redeem or repurchase
the 5% Notes and the Waverley Note. As described below Harken's management plans
to continue to actively pursue negotiated transactions to repurchase and
restructure the 5% Notes. These efforts are expected to primarily include
exchanging the 5% Notes for debt or equity securities (such as the 7% European
Notes) and raising funds through the issuance of debt or equity securities.
Additionally, Harken intends to repay the Waverley Note in cash prior to or upon
maturity of the Waverley Note. It is unlikely, however, that the entire
principal balance of the 5% Notes will be restructured or repurchased for cash
and/or other securities or property prior to maturity. Consequently, Harken
presently intends to satisfy its remaining obligations under the 5% Notes by
redeeming them in exchange for Harken common stock. To the extent the Waverley
Note remains outstanding at maturity Harken similarly plans to redeem it for
Harken common stock. Although there can be no assurances, Harken believes that
it will repurchase and restructure a sufficient amount of the 5% European Notes
to enable Harken to redeem the remaining principal balance of the 5% European
Notes upon
57
maturity for Harken common stock without requiring stockholder approval of
additional authorized shares. However, depending on Harken's success in
repurchasing or restructuring the 5% European Notes and the price of its common
stock, Harken may not have a sufficient number of authorized but unissued shares
of Harken common stock to redeem the remaining 5% Notes for common stock. Harken
has, therefore, included a proposal to increase its authorized common stock in
the preliminary proxy statement for its annual stockholders meeting scheduled to
be held on or about May 16, 2003.
5% European Notes -- As of March 27, 2003, the remaining principal
balance of 5% European Notes was approximately $14.1 million. Harken intends to
repay the 5% European Notes by restructuring or repurchasing a portion of the
notes for cash and/or other securities or property prior to maturity and
redeeming the remaining balance for Harken common stock at maturity. Harken's
management has actively pursued, and plans to continue to actively pursue,
negotiated transactions to restructure or repurchase the 5% European Notes to
reduce the amount of the 5% European Notes that must be redeemed for Harken
common stock. During 2002 and through March 27, 2003, Harken repurchased or
exchanged an aggregate of approximately $26.9 million principal amount of the 5%
European Notes. These repurchases of the 5% European Notes included the
following:
. During 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. Harken reflected
an extraordinary item gain of $767,000 from the cash purchase of
outstanding 5% European Notes in the accompanying consolidated
statements of operations related to this transaction.
. During 2002, Harken exchanged an aggregate of $2,850,000
principal amount of the 5% European Notes for $1,152,000
principal amount of the 7% European Notes due 2007 and
$1,223,000 in cash paid including transaction costs by Harken.
Harken recognized an extraordinary item gain of $123,000 related
to these transactions.
. During 2002, Harken exchanged an aggregate $6,980,000 principal
amount of the 5% European Notes for $6,280,000 principal amount
of the 7% European Notes due 2007 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.
. On January 28, 2003, Harken issued a total of $1,420,000
principal amount of 7% European Notes due 2007 for $1,420,000
principal amount of 5% European Notes.
. On February 13, 2003, Harken issued $1.6 million in principal
amount of 7% European Notes due 2006 to certain investors (the
"Investors") in exchange for $2 million in principal amount of
5% European Notes.
. On February 13, 2003, Harken entered into an option agreement
with the Investors that, among other things, provides for a call
option in favor of Harken and a put option in favor of the
Investors. On March 26, 2003, Harken exercised the call option
and purchased $6.57
58
million principal amount of 5% European Notes at an option price
of $3.94 million, plus accrued and unpaid interest through the
date of payment. As a result of Harken's exercise of the call
option, the put option terminated.
. On March 18, 2003, Harken entered into an option agreement with
HBK Master Fund L.P. ("HBK") that, among other things, provided
for a call option in favor of Harken and a put option in favor
of HBK. On March 27, 2003, Harken exercised the call option and
purchased $4.93 million principal amount of 5% European Notes at
an option price of approximately $2.96 million. As a result of
Harken's exercise of the call option, the put option terminated.
Harken plans to continue to pursue additional negotiated transactions to
restructure or repurchase the 5% European Notes in order to reduce the number of
shares it must use to redeem the 5% European Notes at maturity. These efforts
primarily include exchanging the 5% European Notes for debt or equity securities
(such as the 7% European Notes) and raising funds through the issuance of debt
or equity securities. It is unlikely that all of the 5% European Notes will be
restructured or repurchased for cash and/or other securities or property prior
to maturity. Consequently, Harken presently intends to satisfy its remaining
obligations under the 5% European Notes by redeeming them in exchange for Harken
common stock.
Harken believes that it will reduce the 5% European Notes to enable
Harken to repurchase their remaining balance for Harken common stock without
requiring stockholder approval of additional authorized shares. However, there
can be no assurances that Harken will be able to enter into arrangements to
repurchase or restructure the 5% European Notes on acceptable terms.
Additionally, the exact number of shares to be issued in connection with
redemptions of the 5% European Notes is uncertain at this time since it will
depend upon the amount of 5% European Notes to be redeemed for common stock and
the average market price of Harken's common stock at the time of the
redemptions. If the price of Harken common stock declines and Harken is not able
to significantly reduce the balance of the 5% European Notes, Harken may not
have a sufficient number of authorized but unissued shares of Harken common
stock to convert the remaining 5% European Notes into common stock.
Consequently, Harken has included a proposal to increase its authorized common
stock in the preliminary proxy statement for its annual stockholders meeting
scheduled to be held on or about May 16, 2003, which will require the
affirmative vote of a majority of the outstanding voting stock for approval.
Lyford, who controls 62% of Harken's common stock, has indicated to Harken that
it will vote all of its shares of common stock in favor of approval of the
proposal to increase the authorized shares of common stock. While there can be
no assurances, Harken believes that it will be able to hold the stockholders
meeting before May 26, 2003, the maturity date of the 5% European Notes. Harken
currently does not have sufficient funds to pay the 5% European Notes in cash
upon maturity. If the stockholder meeting cannot be held prior to the maturity
date of the 5% European Notes and Harken is unable to otherwise restructure or
repurchase the 5% European Notes, then Harken would experience a material
adverse impact on its financial position and results of operations.
Benz Convertible Notes and Waverley Note -- As of March 27, 2003, the
outstanding principal balance of the Benz Convertible Notes and the Waverley
Note was approximately $5.7 million and $1.7 million, respectively. Harken has,
and plans to continue to pursue negotiated transactions to restructure or
repurchase the Benz Convertible Notes that mature in November 2003. During 2002,
Harken repurchased or exchanged an aggregate of approximately $5.2 million
principal amount of the Benz Convertible Notes. Harken has not repurchased any
of the Benz Convertible Notes during the first quarter of 2003. Repurchases of
the Benz
59
Convertible Notes in 2002 included the following:
. 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. Harken recorded no extraordinary
item gain related to this transaction.
. In August 2002, Harken repurchased approximately $4,071,000 of
Benz Convertible Notes from a holder for $1,231,000 in cash.
Harken recorded an extraordinary item gain of approximately $2.8
million related to this transaction.
Additionally, Harken intends to repay the Waverley Note in cash prior to
or upon maturity of the Waverley Note. To the extent any of the Benz Convertible
Notes and the Waverley Note remain outstanding at maturity, however, Harken
plans to redeem them for Harken common stock.
The exact number of shares to be issued in connection with the
redemption of the Benz Convertible Notes and the Waverley Note will depend upon
the amount of the notes to be redeemed for common stock and the average market
price of Harken common stock at the time of the redemptions. Depending on the
price of Harken common stock and the success of Harken's efforts to reduce the
principal amount of the Benz Convertible Notes and the Waverley Note, the
redemption of the Benz Convertible Notes and the Waverley Note may result in an
issuance of shares that is in excess of the amount of shares currently
authorized for issuance. Consequently, as described above, Harken has included a
proposal to increase its authorized common stock in the preliminary proxy
statement for its annual stockholders meeting scheduled to be held on or about
May 16, 2003. As part of the proxy statement, Harken plans to propose an
increase in the number of authorized shares that based on the current market
price of Harken common stock, at a minimum, should be sufficient to redeem the
Benz Convertible Notes. As described above, Lyford, who controls 62% of Harken's
common stock, has indicated to Harken that it will vote all of its shares of
common stock in favor of approval of the proposal to increase the authorized
shares of common stock.
At the present market price of Harken common stock, Harken believes that
this proposed increase in the authorized shares should provide a sufficient
number of shares to allow Harken to redeem the Benz Convertible Notes and the
Waverley Note for common stock. However, if the market price of Harken common
stock declines significantly, then depending on the amount of the Benz
Convertible Notes and the Waverley Note outstanding, Harken may be required to
seek stockholder approval of an additional increase in authorized shares before
Harken could redeem the remaining Benz Convertible Notes and the Waverley Note.
There can be no assurances that Harken will obtain such stockholder approval
prior to the respective maturity dates of the Benz Convertible Notes and the
Waverley Note. In such an event, Harken would have to otherwise restructure the
then-outstanding Benz Convertible Notes and the Waverley Note or pay cash at
maturity. Harken can make no assurances that, in such an event, it would be
successful in restructuring its obligations under the then-outstanding notes.
Harken currently does not have sufficient funds to pay such notes in cash upon
maturity. If Harken's efforts to convert a substantial amount of the Benz
Convertible Notes and the Waverley Note into common stock is unsuccessful or
Harken is unable to otherwise restructure or repurchase those notes, Harken
would experience a material adverse impact on its financial position and results
of operations.
Restrictions under Guaranty Facility - Currently, Harken does not have
sufficient funds to pay the 5% Notes and the Waverley Note in cash upon
maturity, or to otherwise redeem or repurchase the 5% Notes an the Waverley
Note. Harken's bank credit facility with Guaranty prohibits cash dividends,
loans, advances and similar payments to be made to Harken by the Borrowers.
Therefore, the Borrowers will not be able to provide Harken with funds to be
used for the repayment of the 5% Notes, the Waverley Note or other debt
obligations or for other uses, unless the Borrowers obtain Guaranty's consent.
Dilution Resulting from Redemption of 5% Notes and Waverley Note for
Common Stock. -- The redemption of the 5% Notes and the Waverley Note for Harken
common stock would likely result in
60
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 the 5% Notes had been redeemed on March 27, 2003, with an
estimated redemption price of $0.20, for every $1,000,000 of 5% Notes redeemed
at this price, Harken would have been required to issue to the noteholders
approximately 5.75 million shares of common stock. Additionally, at this
redemption price, Harken would be required to issue to Waverley approximately
8.525 million shares of common stock to redeem the outstanding principal balance
of the Waverley Note. If all of the 5% Notes and the Waverley Note had been
converted at this price, the noteholders would have received an aggregate of
approximately 122 million shares of common stock and, collectively, would
control over 55% of Harken's common stock. The number of shares that might be
issued in this regard will vary significantly depending upon the average market
price of Harken's common stock over the 30 days preceding the redemption notice,
and the amount of 5% Notes and the Waverley Note to be redeemed.
Rights Offering, Standby Commitment and Waverley Note -- Harken consummated
the rights offering and the standby commitment with Lyford on March 20, 2003.
The gross proceeds to Harken from the sale of its common stock in the rights
offering and Lyford's standby commitment were approximately $10.0 million. In
purchasing shares pursuant to its standby commitment, Lyford offset the purchase
amount to satisfy the approximately $5.0 million of principal and interest owing
under the 10% Term Loan. Additionally, on March 18, 2003, Harken issued
$3,410,000 in principal amount of the 7% European Notes due 2007 and $1,705,000
in principal amount of the Waverley Note in exchange for 17,050 shares of
Harken's Series G-1 convertible preferred stock owned by Perry Limited, an
affiliate of Waverley, and $3,410,000 in cash. Harken used approximately $6.9
million of net proceeds from the rights offering, Lyford's standby commitment
and Waverley Note transaction to pay the exercise prices under call options with
the Investors and HBK. Under these call options the Investors and HBK sold an
aggregate of $11.5 million principal amount of 5% European Notes at an aggregate
cash option price of approximately $6.9 million plus accrued and unpaid interest
through the date of payment. Harken intends to use the remaining $1.5 million of
the net proceeds to reduce a portion of the 5% Notes, the Waverley Note and the
Guaranty credit facility or as additional working capital for Harken's business.
Capital Expenditures -- Considering its existing cash resources and the
potential additional capital sources described above, assuming Harken is
successful in restructuring the 5% Notes and redeeming the 5% Notes and the
Waverley Note for Harken common stock, Harken believes that it will have
sufficient cash resources to fund all of its remaining capital expenditures
during 2003. Harken's future exploration, development and acquisition efforts
are expected to be funded through a combination of cash on hand, cash flows from
operations, issuances or exchanges of debt or equity securities, and cash
provided by newly established financing arrangements. Harken and Global may fund
their future domestic expenditures and certain international expenditures at
their discretion. Therefore, if Harken does not have sufficient funds available
it will curtail its discretionary capital expenditures for 2003. Such
expenditure curtailments could result in Harken losing certain prospect acreage
or reducing its interest in future development projects.
Cross Defaults -- If Harken fails to meet certain financial thresholds or
other requirements pursuant to the rules of the American Stock Exchange, its
common stock could 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. Additionally, if the Borrowers are not in
compliance with their bank financial covenant ratios or requirements under the
Guaranty facility in the future and are unable to obtain a waiver or amendment
to the facility requirements, the credit facility would be in default and
callable by Guaranty. Due to cross-default
61
provisions in Harken's 5% European Notes, 7% European Notes, Benz Convertible
Note, Waverley Note and the Guaranty facility, any default under Harken's debt
agreements would result in substantially all of Harken's debt obligations
becoming due in full. Harken does not have sufficient funds to pay its debt
obligations in cash and there is no assurance it will obtain such funds if such
debt became due, which would result in a material adverse effect on Harken's
financial position and results of operations.
Other -- Even if Harken is successful in redeeming or repurchasing the 5%
Notes, 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. Consequently, Harken expects to fund these operational and
capital commitments in 2003 and afterward through a combination of cash on hand,
cash flows from operations, issuances or exchanges of debt or equity securities,
or through cash provided by either existing or newly established financing
arrangements.
Harken intends to continue to seek to raise equity or debt financing
through the issuance of debt, equity and convertible debt instruments, or
through the exchange of existing instruments through transactions that provide
Harken with additional capital to fund the capital commitments described above,
including repurchases of the 5% Notes. Such transactions may be affected,
however, by the market value of Harken common stock. If the price of Harken
common stock remains low or declines, Harken's ability to utilize its stock
either directly or indirectly through convertible instruments for raising
capital could be negatively affected. Any delisting of Harken's common stock
would also adversely affect Harken's ability to raise capital in the future by
issuing common stock or securities convertible into common stock. Further,
raising additional funds by issuing common stock or other types of equity
securities would further dilute Harken's existing stockholders, which dilution
could be substantial if the price of Harken common stock remains low or
decreases. No assurance can be given that Harken will be able to obtain
additional financing on favorable terms, if at all, to meet its operational and
capital commitments described above.
The rules of the American Stock Exchange require additional stockholder
approval for the listing of additional shares if the issuance of shares is
greater than 20% of Harken's currently outstanding shares of common stock. As of
March 27, 2003, $5.7 million principal amount of the Benz Convertible Notes and
$1.7 million of the Waverley Note were outstanding. The redemption of the
outstanding Benz Convertible Notes and the Waverley Note could require
stockholder approval under American Stock Exchange rules. Although the exact
number of shares to be issued in connection with redemptions of the Benz
Convertible Notes and the Waverley Note will depend upon the number of shares of
common stock outstanding at that time, the amount of notes to be redeemed for
common stock and the average market price of Harken's common stock at the time
of the redemptions. The redemption for common stock the notes may result in the
issuance of a number of shares that is greater than 20% of Harken's currently
outstanding shares of common stock. Consequently, any issuances in violation of
the rules of the American Stock Exchange, could subject Harken's common stock to
potential delisting from the American Stock Exchange.
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
Harken is exposed to market risk from movements in commodity prices,
interest rates and foreign currency exchange rates. As part of an overall risk
management strategy, Harken uses of derivative financial instruments to manage
and reduce risks associated with these factors.
62
Commodity Price Risk -- Harken is a producer of hydrocarbon commodities,
including crude oil, condensate and natural gas. Harken uses oil and gas
derivative financial instruments, limited to swaps, collars and options with
maturities of 24 months or less, to mitigate its exposure to fluctuations in oil
and gas commodity prices on future crude oil and natural gas production. Harken
has evaluated the potential effect that near term changes in commodity prices
would have had on the fair value of its commodity price risk sensitive financial
instruments at year end 2002. Assuming a 20% increase in natural gas prices from
actual prices at December 31, 2002, the potential increase in the liability of
Harken's natural gas collar contract at December 31, 2002 would have been
approximately $582,000. At December 31, 2001 and 2002, Harken had no financial
instrument risk exposure related to increases or decreases in crude oil prices.
The average percentage of Harken's natural gas production hedged during 2002 was
approximately 44%.
Interest Rate Risk - Consistent with the prior year, Harken invests cash in
interest-bearing temporary investments of high quality issuers. Due to the short
time the investments are outstanding and their general liquidity, these
instruments are classified as cash equivalents in the consolidated balance sheet
and do not represent a significant interest rate risk to Harken. Consistent with
the prior year, Harken considers its interest rate risk exposure related to
long-term debt obligations to not be material, as at December 31, 2002 all but
approximately $5,986,000 of Harken's financing obligations carry a fixed
interest rate per annum. Harken has no open interest rate swaps agreements.
Foreign Currency Exchange Rate Risk - Consistent with the prior year,
Global conducts international business in Colombia and is subject to foreign
currency exchange rate risk on cash flows related to sales, expenses, and
capital expenditures. However, because predominately all material transactions
in Global's existing foreign operations are denominated in U.S. dollars, the
U.S. dollar is the functional currency for all operations. Consistent with the
prior year, exposure from transactions in currencies other than U.S. dollars is
not considered material.
63
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
The following financial statements appear on pages 66 through 117 in
this Annual Report.
PAGE
----
Report of Independent Auditors.................................. 65
Consolidated Balance Sheets -- December 31, 2001 and 2002....... 67
Consolidated Statements of Operations --
Years ended December 31, 2000, 2001 and 2002.................. 68
Consolidated Statements of Stockholders' Equity --
Years ended December 31, 2000, 2001 and 2002.................. 69
Consolidated Statements of Cash Flows --
Years ended December 31, 2000, 2001 and 2002.................. 70
Notes to Consolidated Financial Statements...................... 71
64
REPORT OF INDEPENDENT AUDITORS
To the Stockholders and Board of Directors of Harken Energy Corporation:
We have audited the accompanying consolidated balance sheets of Harken
Energy Corporation as of December 31, 2001 and 2002, and the related
consolidated statements of operations, stockholders' equity and cash flows for
each of the two years in the period then ended. These financial statements are
the responsibility of the Company's management. Our responsibility is to express
an opinion on these financial statements based on our audits. The financial
statements of Harken Energy Corporation for the year ended December 31, 2000,
were audited by other auditors who have ceased operations and whose report dated
March 27, 2001 expressed an unqualified opinion on those statements before the
revisions discussed below.
We conducted our audits in accordance with auditing standards generally
accepted in the United States. Those standards require that we plan and perform
the audit to obtain reasonable assurance about whether the financial statements
are free of material misstatement. An audit includes examining, on a test basis,
evidence supporting the amounts and disclosures in the financial statements. An
audit also includes assessing the accounting principles used and significant
estimates made by management, as well as evaluating the overall financial
statement presentation. We believe that our audits provide a reasonable basis
for our opinion.
In our opinion, the financial statements referred to above present fairly,
in all material respects, the consolidated financial position of Harken Energy
Corporation at December 31, 2001 and 2002, and the consolidated results of its
operations and its cash flows for each of the two years in the period then ended
in conformity with accounting principles generally accepted in the United
States.
As discussed above, the financial statements of Harken Energy Corporation
for the year ended December 31, 2000 were audited by other auditors who have
ceased operations. The following paragraphs of these financial statements have
been revised: paragraph 13 of Note 1, paragraph 3 of Note 2, paragraph 15 of
Note 9 and paragraph 2 of Note 12. We audited the disclosures described in these
paragraphs that were applied to revise the 2000 financial statements. Our
procedures included agreeing the revised disclosures to the Company's underlying
records obtained from management, and testing the mathematical accuracy as
applicable. In our opinion, such revised disclosures are appropriate. However,
we were not engaged to audit, review, or apply any procedures to the 2000
financial statements of the Company other than with respect to such revised
disclosures and, accordingly, we do not express an opinion or any other form of
assurance on the 2000 financial statements taken as a whole.
/s/ ERNST & YOUNG LLP
Houston, Texas
March 26, 2003
65
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS/(1)/
To the Stockholders and Board of Directors of Harken Energy Corporation:
We have audited the accompanying consolidated balance sheet of Harken
Energy Corporation (a Delaware corporation) and subsidiaries as of December 31,
2000, and the related consolidated statements of operations, stockholders'
equity and cash flows for each of the two years in the period ended December 31,
2000. These financial statements are the responsibility of the Company's
management. Our responsibility is to express an opinion on these financial
statements based on our audits.
We conducted our audits in accordance with auditing standards generally
accepted in the United States. Those standards require that we plan and perform
the audit to obtain reasonable assurance about whether the financial statements
are free of material misstatement. An audit includes examining, on a test basis,
evidence supporting the amounts and disclosures in the financial statements. An
audit also includes assessing the accounting principles used and significant
estimates made by management, as well as evaluating the overall financial
statement presentation. We believe that our audits provide a reasonable basis
for our opinion.
In our opinion, the financial statements referred to above present
fairly, in all material respects, the financial position of Harken Energy
Corporation and subsidiaries as of December 31, 2000, and the results of their
operations and their cash flows for each of the two years in the period ended
December 31, 2000, in conformity with accounting principles generally accepted
in the United States.
ARTHUR ANDERSEN LLP
Houston, Texas
March 27, 2001
(1) Harken Energy Corporation has not been able to obtain, after reasonable
efforts, the reissued report of Arthur Andersen LLP related to the 2000
financial statements. Therefore, a copy of their previously issued
report is included. See Item 9 and Exhibit 23.2 for further
information.
66
HARKEN ENERGY CORPORATION
CONSOLIDATED BALANCE SHEETS
ASSETS
DECEMBER 31,
----------------------------------------
2001 2002
------------------- --------------------
Current Assets:
Cash and temporary investments $ 8,523,000 $ 6,377,000
Restricted cash 944,000 -
Accounts receivable, net of allowance for uncollectible accounts 3,248,000 3,237,000
of $483,000 and $376,000 for 2001 and 2002, respectively.
Related party notes receivable 169,000 105,000
Prepaid expenses and other current assets 1,361,000 1,302,000
------------------- --------------------
Total Current Assets 14,245,000 11,021,000
Property and Equipment:
Oil and gas properties, using the full cost method of accounting:
Evaluated 337,440,000 340,565,000
Unevaluated 3,472,000 3,483,000
Facilities and other property 25,000,000 25,394,000
Less accumulated depreciation and amortization (287,577,000) (298,985,000)
------------------- --------------------
Total Property and Equipment, net 78,335,000 70,457,000
Investment in Equity Securities - 1,091,000
Other Assets, net 3,226,000 3,011,000
------------------- --------------------
$ 95,806,000 $ 85,580,000
=================== ====================
LIABILITIES AND STOCKHOLDERS' EQUITY
Current Liabilities:
Trade payables $ 2,664,000 $ 2,356,000
Accrued liabilities and other 6,197,000 4,095,000
Revenues and royalties payable 2,006,000 1,342,000
Bank credit facilities - 2,176,000
Convertible notes payable - 34,575,000
------------------- --------------------
Total Current Liabilities 10,867,000 44,544,000
Convertible notes payable 51,388,000 11,106,000
Bank credit facilities 7,937,000 3,810,000
Investor term loan - 5,000,000
Accrued preferred stock dividends 3,942,000 7,369,000
Other long-term obligations 5,458,000 5,308,000
Commitments and contingencies (Note 15)
Minority interest in consolidated subsidiary - 3,312,000
Stockholders' Equity:
Series G1 Preferred Stock, $1.00 par value; $100 liquidation value; 700,000 shares
authorized, respectively; 446,417 and 402,688 shares outstanding, respectively 446,000 403,000
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 385,710,000 388,703,000
Accumulated deficit (369,087,000) (383,004,000)
Accumulated other comprehensive income *deficit** 296,000 134,000
Treasury stock, at cost, 542,900 and 605,700 shares held, respectively (1,433,000) (1,452,000)
------------------- --------------------
Total Stockholders' Equity 16,214,000 5,131,000
------------------- --------------------
$ 95,806,000 $ 85,580,000
=================== ====================
The accompanying Notes to Consolidated Financial Statements are
an integral part of these Statements.
- ----------
* LESS THAN
** GREATER THAN
67
HARKEN ENERGY CORPORATION
CONSOLIDATED STATEMENTS OF OPERATIONS
Year Ended December 31,
------------------------------------------------------------
2000 2001 2002
----------------- ------------------- -----------------
Revenues:
Oil and gas operations $ 43,177,000 $ 31,642,000 $ 24,989,000
Interest and other income 1,218,000 781,000 722,000
----------------- ------------------- -----------------
44,395,000 32,423,000 25,711,000
----------------- ------------------- -----------------
Costs and Expenses:
Oil and gas operating expenses 14,379,000 12,204,000 9,331,000
General and administrative expenses, net 13,223,000 10,830,000 10,298,000
Depreciation and amortization 13,649,000 15,254,000 11,510,000
Full cost valuation allowance 156,411,000 18,669,000 521,000
Provision for asset impairments - 14,102,000 400,000
Litigation and contingent liability settlements, net - - 1,288,000
Interest expense and other, net 5,297,000 4,663,000 5,723,000
Charge for European Note conversion 2,068,000 - -
----------------- ------------------- -----------------
205,027,000 75,722,000 39,071,000
----------------- ------------------- -----------------
Loss before income taxes $ (160,632,000) $ (43,299,000) $ (13,360,000)
Income tax expense 39,000 699,000 237,000
----------------- ------------------- -----------------
Loss before extraordinary items and minority interest$ (160,671,000) $ (43,998,000) $ (13,597,000)
Minority interest in loss of subsidiary - - 262,000
--------------- ---------------- ---------------
Loss before extraordinary item $ (160,671,000) $ (43,998,000) $ (13,335,000)
Extraordinary item-gains on repurchases of
European Notes 7,745,000 2,975,000 3,655,000
Extraordinary item-charge for reduction of
unamortized issuance costs (7,000) - (127,000)
----------------- ------------------- -----------------
Net loss $ (152,933,000) $ (41,023,000) $ (9,807,000)
================= =================== =================
Accretion/dividends related to preferred stock (376,000) (3,178,000) (4,110,000)
----------------- ------------------- -----------------
Net loss attributed to common stock $ (153,309,000) $ (44,201,000) $ (13,917,000)
================= =================== =================
Basic and diluted loss per common share:
Loss per common share before extraordinary items $ (9.55) $ (2.61) $ (0.80)
Extraordinary item-gain on repurchase of
European Notes 0.46 0.16 0.17
Extraordinary item-charge for reduction of
unamortized issuance costs (0.00) - (0.01)
----------------- ------------------- -----------------
Loss per common share $ (9.09) $ (2.45) $ (0.64)
================= =================== =================
Weighted average shares outstanding 16,863,610 18,063,584 21,742,163
================= =================== =================
The accompanying Notes to Consolidated Financial Statements are
an integral part of these Statements.
68
HARKEN ENERGY CORPORATION
CONSOLIDATED STATEMENT OF STOCKHOLDER'S EQUITY
Additional
G1 Preferred G2 Preferred Common Paid-In
Stock Stock Stock Capital
---------------------------------------------------------------------
Balance, December 31, 1999 - - 156,000 350,637,000
Issuance of common stock, net - - 13,000 7,768,000
Exchange of European Notes - - 3,000 7,870,000
Issuance of preferred stock, net 158,000 - - 7,609,000
Preferred stock dividends - - - -
Repurchase of Benz Convertible Notes - - - 639,000
Treasury shares purchased - - - -
Cancellations of treasury shares - - (2,000) (4,514,000)
Conversions of Development Finance Obligation - - 7,000 1,537,000
Net loss - - - -
---------------------------------------------------------------------
Balance, December 31, 2000 158,000 - 177,000 371,546,000
Issuance of common stock, net - - 6,000 95,000
Issuance of preferred stock, net 336,000 96,000 - 14,024,000
Preferred stock dividends - - - -
Purchase of treasury stock - - - -
Conversions of preferred stock (48,000) (1,000) 4,000 45,000
Comprehensive income:
Cumulative effect of change in accounting principle - - - -
Net change in derivative fair value - - - -
Reclasification of derivative fair value into earnings - - - -
Net loss - - - -
---------------------------------------------------------------------
Balance, December 31, 2001 $ 446,000 $ 95,000 $ 187,000 $ 385,710,000
Issuance of common stock - - 27,000 2,623,000
Redemption of convertible note - - 20,000 1,091,000
Repurchase of preferred stock - related party (6,000) - - 45,000
Repurchase of preferred stock (13,000) - - (53,000)
Conversions of preferred stock (24,000) (2,000) 3,000 463,000
Repurchase of treasury stock - - - -
Rights offering costs - - 17,000 555,000
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, December 31, 2002 $ 403,000 $ 93,000 $ 254,000 $ 388,703,000
=====================================================================
Accumulated
Other
Treasury Accumulated Comprehensive
Stock Deficit Income Total
--------------------------------------------------------------------
Balance, December 31, 1999 (4,516,000) (171,577,000) 134,000 174,834,000
Issuance of common stock, net - - - 7,781,000
Exchange of European Notes - - - 7,873,000
Issuance of preferred stock, net - - - 7,767,000
Preferred stock dividends - (376,000) - (376,000)
Repurchase of Benz Convertible Notes - - - 639,000
Treasury shares purchased (453,000) - - (453,000)
Cancellations of treasury shares 4,516,000 - - -
Conversions of Development Finance Obligation - - - 1,544,000
Net loss - (152,933,000) - (152,933,000)
--------------------------------------------------------------------
Balance, December 31, 2000 (453,000) (324,886,000) 134,000 46,676,000
Issuance of common stock, net - - - 101,000
Issuance of preferred stock, net - - - 14,456,000
Preferred stock dividends - (3,178,000) - (3,178,000)
Purchase of treasury stock (980,000) - - (980,000)
Conversions of preferred stock - - - -
Comprehensive income:
Cumulative effect of change in accounting principle - - (3,025,000)
Net change in derivative fair value - - 1,553,000
Reclasification of derivative fair value into earnings - - 1,634,000
Net loss - (41,023,000) - (40,861,000)
--------------------------------------------------------------------
Balance, December 31, 2001 $ (1,433,000) $ (369,087,000) $ 296,000 $ 16,214,000
Issuance of common stock - - - 2,650,000
Redemption of convertible note - - - 1,111,000
Repurchase of preferred stock - related party - - - 39,000
Repurchase of preferred stock - - - (66,000)
Conversions of preferred stock - - - 440,000
Repurchase of treasury stock (19,000) - - (19,000)
Rights offering costs - - - 572,000
Preferred stock dividends - (4,110,000) - (4,110,000)
Issuance of stock of subsidiary - - - (1,731,000)
Comprehensive income:
Net change in derivative fair value - - (72,000)
Reclassification of derivative fair value
into earnings - - (90,000)
Net loss - (9,807,000) -
Total comprehensive income (loss) (9,969,000)
--------------------------------------------------------------------
Balance, December 31, 2002 $ (1,452,000) $ (383,004,000) $ 134,000 $ 5,131,000
====================================================================
The accompanying Notes to Consolidated Financial Statements are
an integral part of these Statements.
69
HARKEN ENERGY CORPORATION
CONSOLIDATED STATEMENTS OF CASH FLOWS
Year Ended December 31,
-------------------------------------------------------
2000 2001 2002
---------------- ----------------- ---------------
Cash flows from operating activities:
Net loss $ (152,933,000) $ (41,023,000) $ (9,807,000)
Adjustments to reconcile net loss to net cash
provided by (used in) operating activities:
Depreciation and amortization 13,649,000 15,254,000 11,510,000
Full cost valuation allowance 156,411,000 18,669,000 521,000
Provision for asset impairments - 14,102,000 400,000
Standby purchase agreement costs - - 300,000
Loss on investment - - 499,000
Charge for European Note conversion 2,068,000 - -
Amortization of issuance and finance costs 1,785,000 1,084,000 862,000
Extraordinary items (7,738,000) (2,975,000) (3,528,000)
Minority interest - - (262,000)
Litigation and contingent liability settlements, net - - 1,288,000
Change in assets and liabilities, net of companies acquired:
(Increase) decrease in accounts receivable (2,307,000) 3,181,000 (522,000)
Increase (decrease) in trade payables and other 1,774,000 (597,000) (2,680,000)
---------------- ----------------- ---------------
Net cash provided by (used in) operating activities 12,709,000 7,695,000 (1,419,000)
---------------- ----------------- ---------------
Cash flows from investing activities:
Proceeds from sales of assets 7,045,000 13,390,000 2,835,000
Capital expenditures, net (28,073,000) (28,677,000) (4,951,000)
Deconsolidation of subsidiary - (668,000) -
---------------- ----------------- ---------------
Net cash used in investing activities (21,028,000) (15,955,000) (2,116,000)
---------------- ----------------- ---------------
Cash flows from financing activities:
Proceeds from issuances of 10% Term Loan, net of issuance costs - - 4,889,000
Proceeds from issuances of common stock, net 7,710,000 - 921,000
Repayments of notes payable and long-term obligations (12,003,000) (2,140,000) (6,363,000)
Proceeds from issuance of preferred stock, net 7,767,000 - -
Proceeds from collection of note receivable - 140,000 -
Proceeds from issuances of European Notes, net of issuance costs - - 2,327,000
Rights Offering costs - - (366,000)
Treasury shares purchased (453,000) (980,000) (19,000)
Payments for financing costs (551,000) - -
---------------- ----------------- ---------------
Net cash provided by (used in) financing activities 2,470,000 (2,980,000) 1,389,000
---------------- ----------------- ---------------
Net decrease in cash and temporary investments (5,849,000) (11,240,000) (2,146,000)
Cash and temporary investments at beginning of year 25,612,000 19,763,000 8,523,000
---------------- ----------------- ---------------
Cash and temporary investments at end of year $ 19,763,000 $ 8,523,000 6,377,000
================ ================= ===============
The accompanying Notes to Consolidated Financial Statements are an
integral part of these Statements.
70
HARKEN ENERGY CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(1) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Principles of Consolidation and Presentation -- The Consolidated
Financial Statements include the accounts of Harken Energy Corporation (a
Delaware corporation) and all of its wholly-owned and majority-owned
subsidiaries ("Harken") after elimination of significant intercompany balances
and transactions. Data is as of December 31 of each year or for the year then
ended and dollar amounts in tables are in thousands unless otherwise indicated.
The Consolidated Financial Statements retroactively reflect the effect
of the one-for-ten reverse stock split which was effective November 7, 2000.
Accordingly, all disclosures involving the number of shares of Harken common
stock outstanding, issued or to be issued, such as with a transaction involving
Harken common stock, and all per share amounts, retroactively reflect the impact
of the reverse stock split.
The preparation of financial statements in conformity with accounting
principles generally accepted in the United States 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 those estimates.
Certain prior year amounts have been reclassified to conform with the 2002
presentation.
Statement of Cash Flows -- For purposes of the Consolidated Statements
of Cash Flows, Harken considers all highly liquid investments purchased with an
original maturity of three months or less to be cash equivalents. Harken paid
cash for interest in the amounts of $5,046,000, $3,720,000 and $2,888,000 during
2000, 2001 and 2002, respectively. All significant non-cash investing and
financing activities are discussed in Notes 2, 8 and 9 - Mergers, Acquisitions
and Dispositions, Convertible Notes Payable and Stockholders' Equity.
Concentrations of Credit Risk -- Although Harken's cash and temporary
investments, commodity derivative instruments and accounts receivable are
exposed to potential credit loss, Harken does not believe such risk to be
significant. Cash and temporary investments includes investments in high-grade,
short-term securities, placed with highly rated financial institutions. Most of
Harken's accounts receivable are from a broad and diverse group of industry
partners, many of which are major oil and gas companies and, as a whole, do not
in total represent a significant credit risk.
Property and Equipment -- Harken follows the full cost accounting method
to account for the costs incurred in the acquisition, exploration, development
and production of oil and gas reserves. Gas plants and other property are
depreciated on the straight-line method over their estimated useful lives
ranging from four to twenty years. Production facilities are depreciated on a
units-of-production method.
In accordance with the full cost accounting method for oil and gas
properties, Harken reflected valuation allowances during each of the three years
ended December 31, 2002 related to the amount of net
71
capitalized costs of evaluated oil and gas properties in excess of the present
value of Harken's oil and gas reserves. See Note 4 - Oil and Gas Properties for
further discussion.
Other Assets -- Harken includes in other assets certain deferred
commissions and issuance costs associated with the 5% Senior Convertible Notes
due 2003 and the 7% Senior Convertible Notes due 2007, bank credit facility and
the rights offering, as well as the cost of oilfield material and equipment
inventory. At December 31, 2001, other assets included deferred issuance costs
of $771,000, net of $1,612,000 of accumulated amortization, $1,271,000 of
oilfield material and equipment inventory and $767,000 of deferred transaction
costs primarily related to Global's restructuring. At December 31, 2002, other
assets included deferred issuance costs of $2,110,000, net of $1,550,000 of
accumulated amortization and $716,000 of oilfield material and equipment
inventory.
Middle American Operations -- Harken's Middle American operations are
all conducted through its ownership in Global Energy Development PLC ("Global")
(a public limited company registered in England and Wales under the Companies
Act (1985) of the United Kingdom) and include oil and gas exploration and
development efforts in Colombia, Peru and Panama pursuant to certain Association
Contracts and Technical Evaluation Agreements. See further discussion at Note 5
- - Middle American Operations. Global accounts for its Middle America activities
using the United States dollar as the functional currency as significant
exploration expenditures have typically been denominated in U.S. dollars. See
further discussion at Notes 4 and 15 -- Oil and Gas Properties and Oil and Gas
Disclosures.
Capitalization of Interest -- Harken capitalizes interest on certain oil
and gas exploration and development costs which are classified as unevaluated
costs, or which have not yet begun production, and has capitalized interest on
certain costs associated with facilities under construction. During 2000, Harken
recorded interest expense of $5,353,000, net of $2,536,000 of interest which was
capitalized to Harken's oil and gas properties. During 2001, Harken recorded
interest expense of $4,435,000, net of $963,000 of interest which was
capitalized to Harken's oil and gas properties. During 2002, Harken recorded
interest expense of $4,191,000, net of $114,000 of interest which was
capitalized to Harken's oil and gas properties.
General and Administrative Expenses -- Harken reflects general and
administrative expenses net of operator overhead charges and other amounts
billed to joint interest owners. General and administrative expenses are net of
$362,000, $372,000 and $238,000 for such amounts during 2000, 2001 and 2002,
respectively.
Provision for Asset Impairments -- Assets that are used in Harken's
operations, or are not held for resale, are carried at cost, less any
accumulated depreciation. Harken reviews its long-lived assets, other than its
investment in oil and gas properties, whenever events or changes in
circumstances indicate that the carrying amount of an asset may not be
recoverable. When evidence indicates that operations will not produce sufficient
cash flows to cover the carrying amount of the related asset, and when the
carrying amount of the related asset cannot be realized through sale, a
permanent impairment is recorded and the asset value is written down to fair
value.
During the fourth quarter of 1999, Harken identified certain oilfield
equipment assets consisting primarily of casing and tubing materials to be used
in the drilling of oil and gas wells in Colombia that would not be utilized
during 2000 due to a decrease in the planned number of Colombian wells to be
drilled as compared to previous drilling plans and made the decision to begin
selling such oil field equipment in 2000.
72
During 2000, Harken reflected a net gain of approximately $351,000 related to
the sales of a substantial portion of this oilfield equipment.
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. In March
2002, the Costa Rica environmental agency SETENA denied its approval of the
requested environmental permit related to Harken's Costa Rica Contract. HCRH has
filed an appeal related to this ruling by SETENA. Due to the Costa Rica
Constitutional Court decision, discussed above, even though it did not directly
involve HCRH, as well as the pending legislation described above, Harken and
Global believe that HCRH's appeal to SETENA for reconsideration of its denial of
the requested permit, or any similar recourse, will be unsuccessful. Further,
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.
These significant adverse developments have resulted in Harken and Global fully
impairing its investment in the Costa Rica project in its Consolidated Balance
Sheet as of December 31, 2001.
During 2001, Global also reflected an impairment of approximately $3.2
million related to certain transportation facility costs related to Global's
Bolivar Contract area in Colombia, as the carrying value of such facilities was
in excess of estimates of future cash flows. Such estimated future cash flows
were based on current production levels, future production expectations based on
December 31, 2001 reserve estimates, projected locations of future wells to be
drilled and the lack of a ready market to purchase such facilities. Harken
continues to utilize transportation facilities related to its Alcaravan Contract
area. Harken also reflected an impairment of approximately $1.6 million related
to certain deferred transaction costs incurred by Global, primarily for certain
merger transaction efforts related to the restructuring of Harken's
international assets. Such merger transaction efforts were terminated during
2001 and the corresponding transaction costs were charged to earnings.
During 2001 and 2002, Global reflected an impairment of $620,000 and
$400,000, respectively, based on continuing declines in the market on certain
Colombia oilfield equipment consisting primarily of casing and tubing materials
held by Global. Based on the current low industry demand for such equipment in
light of heightened Colombia security concerns, the carrying value of such
inventory was in excess of estimated future cash flows from sale or use of such
equipment as estimated using third party quotations.
73
A summary of Harken's Provision for Asset Impairments for the years ended
December 31, 2000, 2001 and 2002 are as follows:
Year Ended December 31,
-------------------------------------------------------
(in thousands)
-------------------------------------------------------
2000 2001 2002
---------------- ------------------ -----------------
Colombia Oilfield Equipment $ - $ 620 $ 400
Costa Rica Investment - 8,761 -
Colombia Transportation Facilities - 3,161 -
Transaction Costs - 1,560 -
---------------- ------------------ -----------------
$ - $ 14,102 $ 400
================ ================== =================
Revenue Recognition - Harken uses the sales method of accounting for
natural gas revenues. Under this method, revenues are recognized based on actual
volumes of gas sold to purchasers. The volumes of gas sold may differ from the
volumes to which Harken is entitled based on its interests in the properties.
These differences create imbalances that are recognized as a liability only when
the estimated remaining reserves will not be sufficient to enable the
underproduced owner to recoup its entitled share through production. There are
no significant gas balancing arrangements or obligations related to Harken's
operations.
Commodity Derivative Financial Instruments -- Harken has entered into
certain commodity derivative instruments to mitigate commodity price risk
associated with a portion of its natural gas production and cash flows.
Effective January 1, 2001, Harken adopted Statement of Financial Accounting
Standard No. 133, "Accounting for Derivative Instruments and Hedging Activities"
and recognizes all derivatives as assets or liabilities at fair value. For
derivatives designated as hedges of forecasted cash flows, Harken records the
effective portion of the gain or loss on the derivative as a component of Other
Comprehensive Income and reclassifies those amounts to earnings in the period
the hedged cash flow affects earnings. Harken records in earnings any gain or
loss on the derivative instrument in excess of the cumulative change in the
present value of future cash flows of the hedged item. For option and collar
derivative contracts, Harken excludes the time value component from the
assessment of hedge effectiveness. For derivative instruments not designated as
hedging instruments, Harken records the gain or loss in current earnings. For
further discussion, see Note 13 -- Hedging Activities.
Recently Issued Accounting Pronouncements -- 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,
including 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 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 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
74
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 Harken's consolidated balance sheet.
In April 2002, the FASB issued Statement No. 145, "Rescission of FASB
Statements No. 4, 44 and 64, Amendment of FASB Statement No. 13 and Technical
Corrections." The rescission of Statement No. 4 will require that gains and
losses on extinguishments of debt no longer be presented as extraordinary items
in the Statement of Operations, commencing in 2003. All prior periods will be
restated in 2003 to reflect this change in presentation.
(2) MERGERS, ACQUISITIONS AND DISPOSITIONS
Acquisition of Benz Prospects -- On December 30, 1999, pursuant to a
Purchase and Sale Agreement and other related agreements, Harken, along with
Harken Gulf Exploration Company, a wholly-owned subsidiary, purchased oil and
gas leases covering nine exploration prospect areas (the "Benz Prospects")
covering approximately 51,000 net acres plus certain other assets from Benz
Energy, Incorporated ("Benz"). The prospects included interests in acreage in
the Cotton Valley Reef, Wilcox and Frio Trends in Texas and the Salt Dome and
Salt Ridge Basins of Mississippi. In exchange for the prospects, Harken issued
5% convertible notes due 2003 (the "Benz Convertible Notes") with a face value
of $12 million, which are convertible into Harken common stock at a conversion
price of $29.41, as adjusted, per share and originally were to mature on May 26,
2003. See Note 8 - Convertible Notes Payable for further discussion of the Benz
Convertible Notes.
Benz retained a 20% reversionary interest, subject to the Benz Prospects
achieving payout as defined in the Purchase and Sale Agreement. Also, pursuant
to the agreements, a former officer of Benz may annually earn additional
purchase price consideration based on 20% of the project reserve value (using
Securities and Exchange Commission proved reserve guidelines after applying an
agreed upon discount to non-producing and undeveloped reserves) as of December
31, 2000, 2001 and 2002 less total project costs, as defined, related to the
Benz Prospects.
Pursuant to the agreement, in April 2001 Harken issued 263,301 shares of
Harken common stock relating to this additional purchase price consideration
based on the reserve value of the Benz Prospects as of December 31, 2000 and
adjusted the purchase price by approximately $810,000, based on the market value
of the shares issued. No such consideration was required based on the reserve
value of the Benz Prospects as of December 31, 2001 and 2002. In addition, in
connection with the acquisition of the Benz Prospects, Harken entered into a
consulting agreement with a former officer of Benz whereby Harken paid a monthly
consulting fee of $100,000 through December 31, 2000 in exchange for consulting
services related to the Benz Prospects. Such defined consulting services
included the development of the Benz Prospects, promoting Benz Prospect
interests to third parties, recommending drilling and other exploration efforts
concerning the Benz Prospects, and other matters reasonably requested by Harken.
At December 30, 1999, the date of the purchase, Harken assigned a purchase price
to the Benz Prospects, net of the reversionary interest retained by Benz, of
approximately $10,969,000, which was equal to the fair value of the Benz
Convertible Notes and was calculated using the borrowing rate of Harken's bank
credit facility on the date of the acquisition.
75
Sale of Harken Southwest Corporation -- On December 21, 2000, a
wholly-owned subsidiary of Harken sold its interest in Harken Southwest
Corporation ("HSW") to Rim Southwest Holding Corporation (the "Buyer") for
approximately $3,000,000 in cash, subject to certain adjustments. HSW owned and
operated interests in a total of 23 oil wells and six gas wells in the Paradox
Basin in the Four Corners area of Arizona, Utah and New Mexico and owned a
non-operated interest in the Aneth Gas Plant, a gas processing plant located in
the Paradox Basin. HSW's operations were primarily concentrated on the 16
million acre Navajo Indian Reservation through two operating agreements with the
Navajo Tribe of Indians.
Sales of Certain Producing Property Interests -- During the fourth
quarter of 2000, Harken, through certain wholly-owned subsidiaries, sold its
interest in 30 selected oil and gas properties located in New Mexico, Texas and
Louisiana for a total of approximately $2,362,000. 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 $13,390,000 cash which was used in part to support Harken's
exploration and development activities. In 2002, wholly-owned subsidiaries of
Harken sold interests in oil and gas producing properties located in Texas for
approximately $2,499,000 and also sold oil and gas mineral interests for
approximately $75,000.
Acquisition of Republic Properties - On January 30, 2002, a wholly-owned
subsidiary of Harken signed an agreement to acquire certain property interests
(the "Republic Properties") from Republic Resources, Inc. ("Republic"). This
acquisition was closed on April 4, 2002 following approval by Republic
stockholders and debenture holders. The Republic Properties consist of interests
in 16 oil and gas wells in nine fields plus interests in additional prospect
acreage located in southern Louisiana and the Texas Gulf Coast region. The
Republic Properties were acquired by Harken in exchange for 2,645,500 shares of
Harken common stock, which was a value of $2,645,500 on the closing date, plus
79,365 shares issued as a transaction fee in this acquisition. In addition, the
Purchase and Sale Agreement provides for contingent additional consideration of
cash or additional shares of Harken common stock, or any combination of the two
as Harken may decide, to 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.
Pro Forma Information -- The following unaudited pro forma combined
condensed statement of operations for the year ended December 31, 2000 gives
effect to the acquisition of the Republic Properties, and the sale of Harken
Southwest Corporation and the sale of certain producing property interests
consummated during 2000 and 2001 as if each had been consummated at January 1,
2000. The following unaudited pro forma combined condensed statement of
operations for the year ended December 31, 2001 gives effect to the acquisition
of the Republic Properties and the sale of certain producing property interests
consummated during 2001 as if each had been consummated at January 1, 2001. The
following unaudited pro forma combined condensed statement of operations for the
year ended December 31, 2002 gives effect to the acquisition of the Republic
Properties as if it had been consummated at January 1, 2002. See information
above for a detailed discussion of each transaction. None of the above
transactions generated any gain or loss.
The unaudited pro forma data is presented for illustrative purposes only
and is not necessarily indicative of the operating results that would have
occurred had the transactions been consummated at the dates indicated, nor are
they indicative of future operating results. The unaudited pro forma data does
not reflect the effect of the interest income earned from proceeds from asset
sales.
76
PRO FORMA COMBINED CONDENSED STATEMENT OF OPERATIONS
FOR THE YEAR ENDED DECEMBER 31, 2000
(UNAUDITED)
(IN THOUSANDS)
HARKEN PRO FORMA
ACTUAL ADJUSTMENTS PRO FORMA
------------ ------------ ------------
Oil and gas revenue $ 43,177 $ (4,512)(1) $ 33,236
(8,829)(2)
3,400 (3)
Other revenues 1,218 - 1,218
------------ ------------ ------------
Total Revenues 44,395 (9,941) 34,454
------------ ------------ ------------
Oil and gas operating expenses 14,379 (1,787)(1) 10,915
(2,288)(2)
611 (3)
General and administrative expenses, net 13,223 (235)(1) 12,988
Depreciation and amortization 13,649 (820)(1) 11,344
(2,241)(2)
756 (3)
Valuation allowance 156,411 - 156,411
Interest expense and other, net 5,297 - 5,297
Charge for European Notes conversion 2,068 - 2,068
------------ ------------ ------------
Total Expenses 205,027 (6,004) 199,023
------------ ------------ ------------
Income tax expense 39 - 39
------------ ------------ ------------
Loss before extraordinary item $ (160,671) $ (3,937) $ (164,608)
Extraordinary item, net 7,738 - 7,738
------------ ------------ ------------
Net loss $ (152,933) $ (3,937) $ (156,870)
Preferred stock dividends (376) - (376)
------------ ------------ ------------
Net loss atributed to common stock $ (153,309) $ (3,937) $ (157,246)
============ ============ ============
Basic and diluted loss per common share $ (9.09) $ (8.06)
------------ ------------
Weighted average common shares outstanding 16,863,610 19,509,110
============ ============
Pro Forma Adjustments - Pro Forma Combined Condensed Statement of Operations -
Year Ended December 31, 2000
(1) Pro forma entry to adjust oil and gas revenues, operating expenses, general
and administrative expenses and depreciation and amortization to reflect
the sale of Harken Southwest Corporation.
(2) Pro forma entry to adjust oil and gas revenues, operating expenses and
depreciation and amortization to reflect the sale of certain producing
property interests.
(3) Pro forma entry to adjust oil and gas revenues, operating expenses and
depreciation and amortization to reflect the purchase of the Republic
Properties.
77
PRO FORMA COMBINED CONDENSED STATEMENT OF OPERATIONS
FOR THE YEAR ENDED DECEMBER 31, 2001
(unaudited)
(in thousands)
HARKEN PRO FORMA
ACTUAL ADJUSTMENTS PRO FORMA
--------------- ---------------- ---------------
Oil and gas revenue $ 31,642 $ (3,678)(1) $ 30,315
2,351 (2)
Other revenues 781 - 781
--------------- ---------------- ---------------
Total Revenues 32,423 (1,327) 31,096
--------------- ---------------- ---------------
Oil and gas operating expenses 12,204 (927)(1) 11,700
423 (2)
General and administrative expenses, net 10,830 - 10,830
Depreciation and amortization 15,254 (1,159)(1) 14,897
802 (2)
Full cost valuation allowance 18,669 - 18,669
Provision for asset impairments 14,102 - 14,102
Interest expense and other, net 4,663 - 4,663
--------------- ---------------- ---------------
Total Expenses 75,722 (861) 74,861
--------------- ---------------- ---------------
Income tax expense 699 - 699
--------------- ---------------- ---------------
Loss before extraordinary item $ (43,998) $ (466) (44,464)
Extraordinary item 2,975 - 2,975
--------------- ---------------- ---------------
Net loss $ (41,023) $ (466) (41,489)
Preferred stock dividends (3,178) - (3,178)
--------------- ---------------- ---------------
Net loss attributed to common stock $ (44,201) $ (466) (44,667)
=============== ================ ===============
Basic and diluted loss per common share $ (2.45) $ (2.16)
=============== ===============
Weighted average common shares outstanding 18,063,584 20,709,084
=============== ===============
Pro Forma Adjustments - Pro Forma Combined Condensed Statement of Operations -
Year Ended December 31, 2001
(1) Pro forma entry to adjust oil and gas revenues, operating expenses and
depreciation and amortization to reflect sale of certain producing
properties.
(2) Pro forma entry to adjust oil and gas revenues, operating expenses and
depreciation and amortization to reflect the purchase of the Republic
Properties.
78
PRO FORMA COMBINED CONDENSED STATEMENT OF OPERATIONS
FOR THE YEAR ENDED DECEMBER 31, 2002
(unaudited)
(in thousands)
HARKEN PRO FORMA
ACTUAL ADJUSTMENTS PRO FORMA
--------------- ---------------- ---------------
Oil and gas revenue $ 24,989 $ 308 (1) $ 25,297
Otherprevenuesby (used in) operating activities: 722 - 722
--------------- ---------------- ---------------
Total Revenues 25,711 308 26,019
--------------- ---------------- ---------------
Oil and gas operating expenses 9,331 83 (1) 9,414
General and administrative expenses, net 10,298 - 10,298
Depreciation and amortization 11,510 169 (1) 11,679
Litigation and contingent liablility settlements, net 1,288 - 1,288
Full cost valuation allowance 521 - 521
Provision for asset impairments 400 - 400
Interest expense and other, net 5,723 - 5,723
--------------- ---------------- ---------------
Total Expenses 39,071 252 39,323
--------------- ---------------- ---------------
Income tax expense 237 - 237
--------------- ---------------- ---------------
Loss before extraordinary item and minority interest (13,597) 56 (13,541)
Minority intrest in loss of subsidiary 262 - 262
--------------- ---------------- ---------------
Loss before extraordinary item $ (13,335) $ 56 (13,279)
Extraordinary item 3,528 - 3,528
--------------- ---------------- ---------------
Net loss $ (9,807) $ 56 (9,751)
Preferred stock dividends (4,110) - (4,110)
--------------- ---------------- ---------------
Net loss atributed to common stock $ (13,917) $ 56 (13,861)
=============== ================ ===============
Basic and diluted loss per common share $ (0.64) (0.62)
=============== ===============
Weighted average common shares outstanding 21,742,163 22,414,047
=============== ===============
Pro Forma Adjustments - Pro Forma Combined Condensed Statement of Operations -
Year Ended December 31, 2002
(1) Pro forma entry to adjust oil and gas revenues, operating expenses and
depreciation and amortization to reflect the purchase of the Republic
Properties.
79
(3) INVESTMENTS
Included within cash and temporary investments at December 31, 2001 and
2002 are certain investments in money market accounts. The cost of such
investments totaled $4,637,000 and $3,250,000 as of December 31, 2001 and 2002,
respectively, with cost equal to fair value.
On December 16, 2002, Harken exchanged 2,000,000 of its shares of Global
common stock for 1,232,742 of the redeemable ordinary common shares of New
Opportunities Investment Trust PLC ("NOIT"), an investment trust organized under
the laws of the United Kingdom (a public limited company admitted for trading on
the Alternative Investment Market of the London Stock Exchange). This
transaction reduced Harken's ownership in Global from 92.77% to 85.62%. Harken
has accounted for the 2,000,000 ordinary shares of NOIT as an investment in
available for sale securities in accordance with FAS No. #115 "Accounting for
Certain Investment in Debt and Equity Transactions" and has reflected the fair
value of the investment as a long term asset included as Investment in Equity
Securities at December 31, 2002. As of December 31, 2002, the fair value of the
investment, based on the market price of the NOIT common stock, had declined by
$499,000, and this decline was determined to be other than temporary. At
December 31, 2002, the fair market value of the investment in NOIT was
approximately $1,091,000, and the holding loss of $499,000 was included in
Interest Expense and Other in December 2002.
In addition, at December 31, 2001 and 2002, Harken held an investment in
66,903 shares of Benz Series II preferred stock and Benz Convertible Notes with
a face value of $3,967,000, but has reflected no carrying value for these
securities. See Note 9 - Stockholders' Equity, for a discussion of how Harken
acquired these Benz securities.
(4) OIL AND GAS PROPERTIES
Harken follows the full cost accounting method to account for the costs
incurred in the acquisition, exploration, development and production of oil and
gas reserves. Under this method, all costs, including internal costs, directly
related to acquisition, exploration and development activities are capitalizable
as oil and gas property costs. Harken capitalized $3,196,000, $1,850,000 and
$370,000 of internal costs directly related to these activities in 2000, 2001
and 2002, respectively. Such costs include certain office and personnel costs of
Harken's international and domestic exploration field offices and do not include
any corporate overhead. Harken also accrues costs of dismantlement, restoration
and abandonment to the extent that such costs, in the aggregate, are anticipated
to exceed the aggregate salvage value of equipment and facilities removed from
producing wells and other facilities. See Note 15 -- Oil and Gas Disclosures for
further discussion.
The capitalized costs of oil and gas properties, excluding unevaluated
properties, are amortized on a country-by-country basis using a
unit-of-production method (equivalent physical units of six Mcf of gas to each
barrel of oil) based on estimated proved recoverable oil and gas reserves. Such
amortization of U.S. domestic oil and gas properties was $6.43, $9.10 and $8.64
per equivalent barrel of oil produced during 2000, 2001 and 2002, respectively.
Amortization of certain Colombia oil and gas properties was $9.45, $8.66
and $8.23 per equivalent barrel of oil produced during 2000, 2001 and 2002,
respectively. The evaluated costs, net of accumulated depreciation and
amortization, at December 31, 2001 and 2002 include $12,623,000 and $11,273,000,
80
respectively, related to Colombia. See Note 5 - Middle American Operations for a
discussion of Colombian operations.
Amortization of unevaluated property costs begins when the properties
become proved or their values become impaired. Harken assesses realizability of
unevaluated properties on at least an annual basis or when there has been an
indication that an impairment in value may have occurred, such as for a
relinquishment of Global's Colombian Association Contract acreage. Impairment of
unevaluated prospects is assessed based on management's intention with regard to
future exploration and development of individually significant properties and
the ability of Harken to obtain funds to finance such exploration and
development.
Under full cost accounting rules for each cost center, capitalized costs
of evaluated oil and gas properties, less accumulated amortization and related
deferred income taxes, shall not exceed an amount (the "cost ceiling") equal to
the sum of (a) the present value of future net cash flows from estimated
production of proved oil and gas reserves, based on current economic and
operating conditions, discounted at 10%, plus (b) the cost of properties not
being amortized, plus (c) the lower of cost or estimated fair value of any
unproved properties included in the costs being amortized, less (d) any income
tax effects related to differences between the book and tax basis of the
properties involved. If capitalized costs exceed this limit, the excess is
charged to earnings.
During the fourth quarter of 2002, Harken recorded non-cash full-cost
valuation allowances totaling $521,000 related to a portion of Global's Peru and
Panama unevaluated property costs. Global has no proved reserves associated with
the Peru or Panama Technical Evaluation Agreements.
During the fourth quarter of 2001, Harken recorded non-cash valuation
allowances of $14,353,000 related to its domestic oil and gas properties and
$4,316,000 related to its Colombian oil properties. The valuation allowances
were based upon the present value, discounted at ten percent, of Harken's future
net cash flows associated with proved oil and gas reserves, which declined due
to reduced oil and gas prices at December 31, 2001. Prices at December 31, 2001
were based on NYMEX prices of $19.84/barrel and $2.57/mmbtu.
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 further in
the future, even if only for a short period of time, it is possible that
additional impairments of oil and gas properties could occur. In addition, it is
reasonably possible that additional impairments could occur if costs are
incurred in excess of any increases in the present value of future net cash
flows from proved oil and gas reserves, or if properties are sold for proceeds
less than the discounted present value of the related proved oil and gas
reserves.
(5) MIDDLE AMERICAN OPERATIONS
Harken's Middle American operations are conducted through its ownership
in Global. Global's ordinary shares are listed for trading on the AIM Exchange
in London. Effective March 25, 2002, Harken's ownership in Global decreased from
100% to 92.77% when Global sold 7.23% of its shares to 22 investors. The
placement to these investors consisted of 2,021,902 shares at a cost of
approximately $0.70 per share, of which less than 1% was purchased, at the
offering price, by certain officers, directors and employees of Harken and
Global and a family member, in exchange for approximately $1,436,000 in cash.
Global is seeking
81
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 $1,984,000
related to the corresponding minority interest and offsetting proceeds of
approximately $1,436,000 received from transaction costs of $1,181,000, of which
$520,000 were incurred in 2002 and the remaining in 2001. During December 2002,
Harken exchanged 2,000,000 common shares of Global for 1,232,742 common shares
of NOIT which further reduced Harken's ownership of Global to approximately
85.62%. In connection with the issuance to Lyford of certain promissory notes,
Lyford received warrants to purchase 7,000,000 shares held by Harken of Global
at a price of 50 pence per share. These warrants expire in 2005.
Colombian Operations - Global's Colombian operations are conducted
through Harken de Colombia, Ltd., a wholly-owned subsidiary of Global, which
held four exclusive Colombian Association Contracts with Empresa Colombiana de
Petroleos ("Ecopetrol") as of December 31, 2002. These Association Contracts
include the Alcaravan Contract, awarded in 1992, the Bocachico Contract, awarded
in 1994, the Bolivar Contract, awarded in 1996, and the Cajaro Contract, awarded
in December 2001 and effective February 2002. As of December 31, 2002, the
Alcaravan Contract covers an area of approximately 24,000 acres in the Llanos
Basin of Eastern Colombia. The Bocachico Contract covers approximately 54,700
acres in the Middle Magdalena Valley of Central Colombia and the Bolivar
Contract covers an area of approximately 124,000 acres in the Northern Middle
Magdalena Valley of Central Colombia. The Cajaro Contract covers approximately
83,000 acres in the Llanos Basin of Eastern Colombia, adjacent to the Alcaravan
Contract area.
Terms of each of the Association Contracts commit Global to perform
certain activities in accordance with a prescribed timetable. As of December 31,
2002, Global was in compliance with the requirements of each of the Association
Contracts, as amended and/or waived. Global has fulfilled all of the work
requirements for the first four years of the Bocachico Contract and agreed with
Ecopetrol to amend the Bocachico Contract whereby the remaining work
requirements for the fifth and sixth year were transferred to Global's Cajaro
Association Contract.
Under the terms of the Association Contracts, if, during the first six
years of each contract, Global discovers one or more fields capable of producing
oil or gas in quantities that are economically exploitable and Ecopetrol elects
to participate in the development of the field, or Global chooses to proceed
with the development on a sole-risk basis, the term of that contract will be
extended for a period of 22 years from the date of such election by Ecopetrol,
subject to the entire term of the Association Contract being limited to no more
than 28 years. Upon an election by Ecopetrol to participate in the development
of a field and upon commencement of production from that field, Ecopetrol would
begin to reimburse Global for 50% of Global's successful well costs expended up
to the point of Ecopetrol's participation plus, in the case of the Bolivar and
Cajaro Contracts, 50% of all seismic and dry well costs incurred prior to the
point of Ecopetrol's participation. Ecopetrol, on behalf of the Colombian
government, receives a 20% royalty interest (5% to 25% royalty interest on the
Cajaro Contract depending on production levels) from all production. For fields
in which Ecopetrol participates, all production (after royalty payments) will be
allocated 50% to Ecopetrol and 50% to Global until cumulative production from
all fields (or the particular productive field under certain of the Association
Contracts) in the Association Contract acreage reaches 60 million barrels of
oil. For certain Association Contracts, as cumulative production increases in
excess of 60 million barrels of oil, Ecopetrol's share of production will
increase progressively (to a maximum of 75% under certain of the Association
Contracts) with a corresponding decrease in Global's share of production. After
a declaration of Ecopetrol's participation,
82
Global and Ecopetrol will be responsible for all future development costs and
operating expenses in direct proportion to their interest in production. For any
fields in which Ecopetrol declines to participate, Global is entitled to receive
Ecopetrol's 50% share of production, after deduction of Ecopetrol's royalty
interest, until Global has recovered 200% of its costs, after which time
Ecopetrol could elect to begin to receive 50% working interest share of
production.
Global has proved reserves attributable to three of its contracts, the
Alcaravan, Bolivar and Bocachico Contracts. In the Alcaravan Contract, Global
has proved reserves in the Palo Blanco and Anteojos field, and in the Bolivar
Contract, Global has proved reserves in the Buturama field. In the Bocachico
Contract, Global has proved reserves in the Rio Negro field. Global submitted an
application to Ecopetrol for their participation in all of these fields. In
2001, Global was notified by Ecopetrol that Global could proceed with the
development and production of the Buturama and Palo Blanco fields on a sole risk
basis. In December 1999, Global submitted an application to Ecopetrol for their
participation in the Rio Negro field. Global submitted an updated application to
Ecopetrol in October 2002, which it plans to review with Ecopetrol in late April
2003.
Costa Rica Operations -- In August 1999, the Exploration and Production
concession contract with the Republic of Costa Rica ("Costa Rica Contract") was
signed by MKJ Xploration, Inc. ("MKJ"), which was originally awarded the
concession under Costa Rica's bidding process that was finalized in October
1997. In the fourth quarter of 1998, Harken entered into an agreement with MKJ
to participate in this anticipated Costa Rica Contract. Global's participation
in Costa Rica is structured whereby a wholly-owned subsidiary owns a share of
the stock of HCRH, with an affiliate of MKJ owning the remaining stock of HCRH.
Through June 30, 2001, Global owned 80% of the stock of HCRH. Under the terms of
the agreement between Harken and MKJ, Harken paid approximately $3.7 million of
the $4.2 million to be paid to MKJ to purchase its share of the Costa Rica
Contract rights from MKJ after an agreement and approval of the assignment was
signed and ratified with the Republic of Costa Rica. The remaining $500,000 of
this purchase price is to be paid upon the mobilization of the rig related to
the initial well to be drilled on the Costa Rica Contract acreage. In June 2000,
the assignment of the Costa Rica Contract rights to HCRH was approved by the
Costa Rican government. Additionally, $4 million was funded by Global related to
the Contract. In July 2001, Global elected not to pay an additional $4 million
of funds to be transferred to HCRH, which, in accordance with the contract
between Global and MKJ, resulted in Global's ownership in HCRH being reduced
from 80% to the current 40% (with MKJ's ownership being increased to 60%) and
MKJ consequently assumed operations of HCRH and the Costa Rica Contract. As a
result of Global's reduced ownership in HCRH, beginning in July 2001, Harken
reflected its investment in HCRH following the equity method of accounting
whereby Global's historical cost of its investment was presented as Investment
in Equity Investee in its Consolidated Balance Sheets. This presentation
represented a change in the accounting for Global's investment in HCRH, which
was previously consolidated. Due to the insignificant impact of this change in
accounting, no pro forma disclosure is required.
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 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. In March 2002, the Costa Rica environmental agency SETENA denied its
approval of the requested environmental permit related to Harken's Costa Rica
Contract. HCRH filed an appeal related to this ruling by SETENA. Due to the
Costa Rica Constitutional Court decision discussed above, even though it did not
directly involve HCRH, as well as the pending legislation described above,
Harken and Global believe that HCRH's
83
appeal to SETENA for reconsideration of its denial of the requested permit, or
any similar recourse, will be unsuccessful. Further, 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. These significant adverse
developments resulted in Harken and Global fully impairing their investment in
the Costa Rica project in its Consolidated Balance Sheet as of December 31,
2001.
Panama Operations -- In September 2001, Global, through a wholly-owned
subsidiary, signed a Technical Evaluation Agreement ("Panama TEA") with the
Ministry of Commerce and Industry for the Republic of Panama. The Panama TEA
covers an area of approximately 2.7 million gross acres divided into three
blocks in and offshore Panama. Under the terms of this Panama TEA, which extends
for a period of 24 months, Global is to perform certain work program procedures
and studies to be submitted to the Panamanian government with an option to
negotiate and enter into one or more Contracts for the Exploration and
Exploitation of Hydrocarbons with the Ministry of Commerce and Industry.
Peru Operations -- In April 2001, Global, through a wholly-owned
subsidiary, signed a Technical Evaluation Agreement ("Peru TEA") with PeruPetro,
the national oil company of Peru. The Peru TEA covers an area of approximately
6.8 million gross acres in northeastern Peru. Under the terms of the Peru TEA,
Global has the option to convert the Peru TEA to a seven year exploration
contract, with a twenty-two year production period. Terms of the Peru TEA allow
Global to conduct a study of the area that will include the reprocessing of
seismic data and evaluation of previous well data. Global is currently
negotiating with PeruPetro an extension to the Peru TEA, which is currently
scheduled to expire in April 2003
(6) BANK CREDIT FACILITY OBLIGATIONS
A summary of long-term bank obligations follows:
December 31, December 31,
2001 2002
--------------- ---------------
Subsidiary notes payable to bank $ 7,937,000 $ 5,986,000
Less: Current portion - 2,176,000
--------------- ---------------
$ 7,937,000 $ 3,810,000
=============== ===============
On August 11, 2000, certain Harken subsidiaries, (the "Borrowers"),
entered into a three year loan facility with Bank One Texas, N.A. ("Bank One")
which was secured by substantially all of Harken's domestic oil and gas
properties and a guarantee from Harken. The Bank One facility provided
borrowings limited by a borrowing base (as defined by the Bank One facility),
which was $12,400,000 as of December 31, 2001. The Bank One facility provided
for interest based on LIBOR plus a margin of 2.350% (4.36625% as of December 31,
2001), payable at the underlying LIBOR maturities or lender's prime rate, and
provided for a commitment fee of 0.375% on the unused amount. At December 31,
2001 Harken had $7,937,000 outstanding pursuant to the facility.
On December 6, 2002, certain Harken subsidiaries, (the "Borrowers") and
Harken, entered into a new three year loan facility with Guaranty Bank, FSB
("Guaranty"), which is secured by substantially all of Harken's domestic oil and
gas properties and a guarantee from Harken. The Guaranty facility provides for
interest based on LIBOR plus a margin of 2.75% (4.16% as of December 31, 2002),
payable at the underlying
84
LIBOR maturities or lender's prime rate, and provides for a commitment fee of
0.50% on the unused amount. The Guaranty facility provides borrowings limited by
a borrowing base (as defined by the Guaranty facility) which was $7,100,000 as
of December 31, 2002. Such borrowing base, which is net of outstanding letters
of credit totaling $1,090,000, is re-determined by Guaranty on May 1 and
November 1 of each year in accordance with the facility agreement. The borrowing
base is being reduced by $200,000 per month and will be redetermined by Guaranty
on May 1, 2003, in accordance with the facility agreement. Due to these
scheduled borrowing base reductions and the current outstanding letters of
credit, Harken has reflected approximately $2,176,000 of the facility amount as
a current liability at December 31, 2002. At December 31, 2002 and March 27,
2003, Harken has $5,986,000 and $5,610,000, respectively, outstanding pursuant
to the facility.
Harken's bank credit facility with Guaranty prohibits cash dividends,
loans, advances and similar payments to be made to Harken by the Borrowers.
Therefore, the Borrowers will not be able to provide Harken with Funds to be
used for the repayment of Harken's debt or for other uses, unless the Borrowers
obtain Guaranty's consent. The Guaranty facility requires the Borrowers to
maintain certain financial covenant ratios and requirements as calculated on a
quarterly basis. Such financial covenant ratios and requirements for the
Borrowers include a current ratio, as defined, of not less than 1.0 to 1.0, a
maximum liabilities to equity ratio, as defined, of not more than 1.0 to 1.0 and
a debt service coverage ratio, as defined, of not less than 1.25 to 1.0. In
addition, the agreement requires that general and administrative expenses of the
Borrowers must not exceed 30% of the Borrowers' net revenue for the quarter
ended December 31, 2002, and 25% for each quarter thereafter. At December 31,
2002, the Borrowers were in compliance with these covenants.
(7) INVESTOR TERM LOAN
In July 2002, Harken issued a 10% Term Loan Payable (the "10% Term
Loan") in the principal amount of $3,000,000 to Lyford Investments Enterprises
Ltd. ("Lyford"), a private investor, in exchange for cash in the principal
amount of the 10% Term Loan. The principal of Lyford is Phyllis Quasha, whose
son, Alan G. Quasha, is 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. Additionally, pursuant to Harken's standby purchase agreement
with Lyford, Lyford may offset the purchase amount to satisfy the principal and
interest owing under the 10% Term Loan. (See Note 9 - Stockholders' Equity, for
discussion of Rights Offering and Lyford's Standby Purchase Agreement.) 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
held by Harken 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 AIM
Exchange in London.
Lyford offset a portion of the purchase price of its standby commitment
(see Note 9 - Stockholders' Equity, for a discussion of the Standby Commitment)
relating to Harken's rights offering to repay in full the outstanding balance
plus accrued interest related to the 10% Term Loan. Harken's indebtedness to
Lyford under the 10% Term Loan was thereby cancelled on March 20, 2003.
85
As additional consideration for the 10% Term Loan, as amended, Harken
issued to Lyford warrants to purchase up to a total of 7.0 million shares of
Global ordinary shares owned by Harken, at a price of 50 pence per share. These
warrants constitute approximately 29% of Harken's holdings of Global shares. At
March 27, 2003, the market price of Global ordinary shares on the Alternative
Investment Market of the London Stock Exchange was 52 pence per share. The
warrants will expire on October 13, 2005, 90 days after the originally scheduled
maturity date of the 10% Term Loan. 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 SFAS No. 133 and accordingly has reflected the
fair value of the warrants as a liability in the consolidated 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. The issuance of the warrants is considered to be a
debt issuance cost and is amortized over the life of the 10% Term Loan. As the
10% Term Loan was paid in full on March 20, 2003, these debt issuance costs will
be fully amortized in the first quarter of 2003.
(8) CONVERTIBLE NOTES PAYABLE
A summary of convertible notes payable is as follows:
December 31, December 31,
2001 2002
-------------------- ------------------
5% European Notes $ 40,980,000 $ 29,030,000
7% European Notes - 11,106,000
Benz Convertible Notes 10,408,000 5,545,000
-------------------- ------------------
51,388,000 45,681,000
Less: Current portion - 34,575,000
-------------------- ------------------
$ 51,388,000 $ 11,106,000
==================== ==================
See "Item 2. Management's Discussion and Analysis of Financial Condition and
Results of Operations - Liquidity and Capital Resources."
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 at their maturity. 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 Price"). Such
Redemption Price is calculated at the time Harken issues its notice of
redemption, which is to be given no less than 30 days, and no more than 60 days,
prior to the date of redemption.
86
The redemption of 5% Notes by converting them into common stock could
result in substantial dilution of the existing Harken common stock. In addition,
the number of new shares to be issued could result in a change of control of
Harken. For example, if notes had been redeemed on March 27, 2003, with an
estimated Redemption Price of $0.20, for every $1,000,000 of 5% 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% Notes had
been converted at this price on March 27, 2003, the noteholders would have
received an aggregate of approximately 113.7 million shares of common stock and,
collectively, could control over 53% of Harken's common stock. The number of
shares that might be issued in this regard will vary significantly depending
upon the average market price of Harken's common stock over the 30 days
preceding the redemption notice, and the amount of 5% Notes to be redeemed.
At its annual stockholder meeting held January 29, 2003, Harken received
stockholder approval in connection with the potential issuance of Harken common
stock to redeem up to $20 million of the 5% European Notes, in accordance with
guidelines of the American Stock Exchange that apply to transactions involving
the potential issuance below market value of at least 20% of a company's
outstanding shares. Depending on the remaining principal amount of notes to be
redeemed at maturity for common stock and the average market price of Harken's
common stock at the time of redemption, the redemption of the remaining
principal balance of the Benz Convertible Notes could likewise require
stockholder approval. 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% Notes and 7% European Note agreements and the promissory note
dated March 18, 2003 in the principal amount of $1,705,000 issued to Waverley
Investments Limited, substantially all 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. Such 5% European Notes were originally convertible
into shares of Harken common stock at a conversion price of $65.00 per share,
subject to adjustment in certain circumstances. In January 2003, such conversion
price was adjusted to $62.58 per share, and following the February 2003
announcement of the terms of the rights offering, the conversion price was
adjusted to $45.22 per share, effective January 31, 2003. Since issuance, Harken
has repurchased or exchanged to date an aggregate of $70,890,000 principal
amount of the 5% European Notes. As of March 27, 2003, the outstanding principal
balance of the 5% European Notes was $14,110,000. The 5% European Notes are
listed on the Luxembourg Stock Exchange and had an aggregate market value of
approximately $17,400,000 as of December 31, 2002.
87
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 (the "Redemption Price"). Such Redemption Price is
calculated at the time Harken issues its notice of redemption, which is to be
given no less than 30 days, and no more than 60 days, prior to the date of
redemption.
During 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 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% Senior Convertible Notes (the "7%
European Notes") due 2007, and $1,223,000 in cash paid to Harken and recognized
an extraordinary item gain of $123,000 related to these transactions. Also,
during 2002, Harken exchanged an aggregate $6,980,000 principal amount of the 5%
European Notes for $6,280,000 principal amount of Harken's 7% European Notes due
2007 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.
On January 28, 2003, Harken exchanged a total of $1,420,000 principal
amount of 5% European Notes for $1,420,000 principal amount of 7% European Notes
due 2007. On February 13, 2003, Harken issued $1,600,000 in principal amount of
7% European Notes due 2006, to certain investors (the "Investors") in exchange
for $2,000,000 in principal amount of the 5% European Notes. Harken also entered
into an Option Agreement with the Investors, dated February 13, 2003, that
provides for a call option in favor of Harken and a put option in favor of the
Investors. Additionally, on March 18, 2003, Harken entered into an option
agreement with HBK Master Fund L.P. ("HBK") that provides for a call option in
favor of Harken and a put option in favor of HBK. On March 26 and 27, 2003,
Harken exercised, respectively, both of these call options. Pursuant to this
exercise, the Investors and HBK sold an aggregate of $11.5 million principal
amount of 5% European Notes at an aggregate cash option prices of approximately
$6.9 million plus accrued and unpaid interest through the date of payment. As a
result of Harken's exercise of these call options, the respective put options
with the Investors and HBK terminated.
7% European Notes -- On June 18, 2002, Harken issued to certain holders
of Harken's securities $2,025,000 principal amount of its 7% Senior Convertible
Notes (the "7% European Notes") due 2007 in exchange for approximately
$1,025,000 in cash and 10,000 shares of Harken's Series G1 Preferred Stock
88
owned by such holders. On June 19, 2002, Harken issued to certain holders of
Harken's securities an additional $2,025,000 principal amount of the 7% European
Notes in exchange for approximately $1,725,000 in cash and 3,000 shares of
Harken's Series G1 Preferred Stock owned by such holders. Also, in 2002, Harken
issued an additional total of $7,432,000 principal amount of the 7% European
Notes due 2007 in connection with the exchange transactions involving certain of
the 5% European Notes described in the preceding paragraphs. Additionally, on
March 18, 2003, Harken issued $3,410,000 in principal amount of the 7% European
Notes due 2007 and a promissory note in principal amount of $1,705,000 (the
"Waverley Note") due September 1, 2003 to Waverley Investments Limited
("Waverley") in exchange for 17,050 shares of Harken's Series G-1 convertible
preferred stock owned by an affiliate of Waverley, and $3,410,000 in cash. The
Waverley Note will only bear interest during the period of any default. The
Waverley Note may be redeemed for cash at Harken's option, at par, in whole or
in part, upon not less than 30 days notice to the holders. The Waverley Note may
be redeemed for shares on September 1, 2003. If Harken elects to redeem the
Waverley Note for shares of its common stock, the note will be redeemed for a
number of shares of Harken common stock equal to 100% of the principal amount of
the note to be redeemed, plus default interest, if any, divided by the average
market price of the common stock over all stock exchange business days during
August 2003. As of March 27, 2003, Harken has issued a total of approximately
$17.9 million in principal of the 7% European Notes, of which approximately $1.6
million mature on June 30, 2006 and approximately $16.3 mature on March 31,
2007.
7% European Notes due 2007 -- The 7% European Notes due 2007 mature on
March 31, 2007 and rank equal to the 5% European Notes. Interest incurred on the
7% European Notes due 2007 is payable semi-annually in March and September of
each year to maturity or until these 7% European Notes are redeemed, converted
or purchased by Harken prior to their maturity. Upon the registration of the
underlying Harken common stock issuable upon conversion, the 7% European Notes
due 2007 are convertible into shares of Harken common stock at an initial
conversion price of $0.50 per share, subject to adjustment in certain
circumstances (the "2007 7% European Note Conversion Price"). Following the
February 2003 announcement of the terms of the rights offering, the 2007 7%
European Note Conversion Price was adjusted to $0.36 per share, effective
January 31, 2003, for all 7% European Notes due 2007 then outstanding. The 7%
European Notes due 2007 are also convertible by Harken into shares of Harken
common stock if, for any period of 30 consecutive days commencing upon
registration of the underlying conversion shares, the average of the closing
prices of Harken common stock for each trading day during such 30-day period
shall have equaled or exceeded 125% of the 2007 7% European Note Conversion
Price (or $0.45 per share of Harken common stock effective January 31, 2003).
The 7% European Notes due 2007 may be redeemed at Harken's option, at
any time and from time to time, in whole or in part, for cash equal to the
outstanding principal and accrued interest to the date of redemption, upon not
less than 30 days notice to the noteholders. In addition, beginning March 31,
2006, Harken may redeem up to 50% of the outstanding 7% European Notes due 2007
for shares of Harken common stock, and at maturity, on March 31, 2007, Harken
may similarly redeem all remaining outstanding 7% European Notes due 2007 for
shares of Harken common stock, in each case upon not less than 30 days notice to
the noteholders. If Harken elects to redeem the 7% European Notes due 2007 for
shares of its common stock, each note will be redeemed for a number of shares of
Harken common stock equal to 110% of the principal value of the notes to be
redeemed, plus accrued and unpaid interest thereon to the date of redemption,
divided by the average market price of the stock over the 120 business days
immediately preceding the date of the notice of redemption.
89
7% European Notes due 2006 -- The 7% European Notes due 2006 mature on
June 30, 2006 and also rank equal to the 5% European Notes. Interest incurred on
the 7% European Notes due 2006 is payable semi-annually in June and December of
each year to maturity or until the 7% European Notes due 2006 are redeemed,
converted or purchased by Harken prior to their maturity. Upon the registration
of the underlying Harken common stock issuable upon conversion, the 7% European
Notes are convertible into shares of Harken common stock at an initial
conversion price of $0.40 per share, subject to adjustment in certain
circumstances. The initial conversion price will be reset on February 2, 2004 to
equal 115% of the averge market price of Harken common stock for the 20 business
days immediately preceding such date. The 7% European Notes due 2006 may be
redeemed at Harken's option, at any time and from time to time, in whole or in
part, for cash equal to the outstanding principal and accrued interest to the
date of redemption, upon not less than 30 days notice to the noteholders.
Benz Convertible Notes -- On December 30, 1999, Harken issued
$12,000,000 principal amount of the Benz Convertible Notes in exchange for
certain prospects acquired from Benz Energy, Incorporated. The Benz Convertible
Notes originally were to mature on May 26, 2003. In March 2000, the maturity
date of certain of the Benz Convertible Notes was extended to November 26, 2003.
The Benz Convertible Notes were originally convertible into shares of Harken
common stock at a conversion price of $65.00 per share, subject to adjustment in
certain circumstances. Following the February 2003 announcement of the terms of
the rights offering, the conversion price for the Benz Convertible Notes was
adjusted to $29.41 per share, effective January 31, 2003. In July 2002, pursuant
to the terms of the Benz Convertible Notes, Harken elected to redeem Benz
Convertible Notes with a principal amount of approximately $1,135,000 for
2,000,000 shares of Harken common stock. In August 2002, Harken repurchased
approximately $4,071,000 principal amount of Benz Convertible Notes from a
holder for $1,231,000 in cash 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 March 27, 2003, the
outstanding principal balance of Benz Convertible Notes was approximately
$5,669,000 with a maturity date of November 26, 2003.
The Benz Convertible Notes bear interest at 5% per annum, payable
semi-annually in May and November of each year until maturity or until the Benz
Convertible Notes are redeemed, converted or purchased by Harken prior to their
maturity. Beginning November 26, 2002, Harken may redeem up to 50% of the Benz
Convertible Notes then outstanding in exchange for shares of Harken common
stock. At maturity, on November 26, 2003, Harken may similarly redeem all
remaining outstanding Benz Convertible Notes for shares of Harken common stock.
If Harken elects to redeem the Benz Convertible Notes for shares of its common
stock beginning November 26, 2002, each note will be redeemed for a number of
shares of Harken common stock equal to 115% of the principal amount of the note
to be redeemed, plus accrued and unpaid interest thereon to the date of
redemption, divided by the average market price of the stock over the 30
calendar days immediately preceding the date of the notice of redemption (the
"Redemption Price"). Such Redemption Price is calculated at the time Harken
issues its notice of redemption, which is to be given no less than 30 days, and
no more than 60 days, prior to the date of redemption.
Harken has experienced recurring net losses attributed to common stock
of approximately $9.8 million, $44.2 million and $153.3 million during the years
ended December 31, 2002, 2001 and 2000, respectively. Additionally, at December
31, 2002, Harken has a net working capital deficit of approximately $33 million.
Harken's working capital is primarily negative at December 31, 2002 because
approximately $34.7 million of the 5% European Notes and Benz Convertible Notes
(collectively, the "5% Notes") are due in 2003. On
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March 18, 2003, Harken also issued the Waverley Note, which matures on September
1, 2003. Harken's management has been actively working to repurchase and/or
restructure the indebtedness represented by the 5% Notes in advance of their
scheduled maturity dates in 2003. Since December 31, 2002 and as of March 27,
2003, Harken has repurchased, restructured or redeemed an aggregate of
approximately $14.9 million principal amount of the 5% Notes. As a result, as of
March 27, 2003, the remaining aggregate principal amount of the 5% Notes and the
Waverley Note was approximately $21.5 million.
Currently, Harken does not have sufficient funds to pay the 5% Notes and
the Waverley Note in cash upon maturity. However, Harken plans to continue to
actively pursue negotiated transactions whereby Harken would repay its
obligations under the 5% Notes by cash or redeeming or restructuring them in
exchange for Harken securities. Harken also intends to repay the Waverley Note
in cash prior to or upon maturity of the Waverley Note. To the extent the 5%
Notes and the Waverley Note remains outstanding upon maturity, Harken would plan
to satisfy its remaining obligations under the 5% Notes and the Waverley Note by
redeeming them in exchange for Harken common stock.
Although there can be no assurances, Harken believes that it will
repurchase and restructure a sufficient amount of the 5% European Notes to
enable Harken to redeem the remaining principal balance of the 5% European Notes
upon maturity for Harken common stock without requiring additional authorized
shares. However, depending on Harken's success in repurchasing or restructuring
the 5% European Notes and the price of its common stock, Harken may not have a
sufficient number of authorized but unissued shares of Harken common stock to
redeem the remaining 5% European Notes for common stock. Harken has, therefore,
included a proposal to increase its authorized common stock in the preliminary
proxy statement for its annual stockholders meeting scheduled to be held on or
about May 16, 2003. Harken plans to propose an increase in the number of
authorized shares sufficient to redeem the 5% European Notes. Additionally,
Harken plans to include in this increase a number of authorized shares that,
based on the current market price of Harken common stock, at a minimum, should
be sufficient to redeem the Benz Convertible Notes. Lyford, who owns 62% of
Harken's common stock (see Note 9--Stockholders' Equity), has indicated to
Harken that it will vote all of its shares of common stock in favor of approval
of the proposal to increase the authorized shares of common stock. Therefore,
Harken believes that it will have a sufficient number of authorized shares of
common stock to allow Harken to redeem the 5% European Notes and the Benz
Convertible Notes. In addition, Harken and certain of its domestic subsidiaries
obtained new financing with the Guaranty credit facility in December 2002 and
are in compliance with all debt covenants at December 31, 2002. Harken also
expects cash flows from operations to be positive for 2003 after considering
required and discretionary capital expenditures and other commitments, including
the repayment of the Waverley Note. While there can be no assurance that all of
these events will occur exactly as planned, the combination of these factors
remove substantial doubt about the Harken's ability to continue as a going
concern.
At December 31, 2002, the approximate carrying amount and estimated fair
value of Harken's non-traded fixed-rate short-term and long-term debt is as
follows:
Carrying
Amount Fair Value
-------------- --------------
7% European Notes due 2007 $ 11,106,000 $ 12,808,000
Benz Convertible Notes 5,545,000 5,715,000
-------------- --------------
$ 16,651,000 $ 18,523,000
============== ==============
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The fair value of Harken's non-traded fixed-rate short-term and
long-term debt is based on the discounted cash flows of principal and interest
using Harken's current incremental borrowing rate.
(9) STOCKHOLDERS' EQUITY
Reverse Stock Split -- On November 7, 2000, Harken effected a
one-for-ten reverse stock split that has been retroactively reflected in the
consolidated financial statements.
Common Stock -- Harken currently has authorized 225,000,000 shares of
$.01 par common stock. At December 31, 2001 and 2002, Harken had issued
18,713,038 shares and 25,447,804 shares, respectively.
Treasury Stock -- At December 31, 2001 and 2002, Harken had 542,900 and
605,700 shares respectively, of treasury stock. During 2000, Harken cancelled
all of the 215,300 shares of treasury stock it held as of December 31, 1999. In
addition, during 2000, Harken purchased 89,750 shares of Harken common stock at
a cost of approximately $453,000. During 2001, Harken purchased 453,150 shares
of Harken common stock at a cost of approximately $980,000. During 2002, Harken
purchased 62,800 shares of Harken common stock at a cost of approximately
$19,000.
Series G1 Preferred Stock -- In 2000, Harken's Board of Directors
approved the authorization and issuance of up to 700,000 shares of a new series
of convertible preferred stock. The Series G1 Convertible Preferred Stock (the
"Series G1 Preferred"), which was issued in October 2000, has a liquidation
value of $100 per share, is non-voting, and is convertible at the holder's
option into Harken common stock at a conversion price of $12.50 per share,
subject to adjustment in certain circumstances (the "Series G1 Preferred
Conversion Price"). The Series G1 Preferred is also convertible by Harken into
shares of Harken common stock if for any period of twenty consecutive trading
days, the average of the closing prices of Harken common stock during such
period shall have equaled or exceeded the Target Price. Such Target Price shall
initially be defined as the Series G1 Preferred Conversion Price multiplied by
110% (or $13.75 per share of Harken common stock) and shall be reduced by an
additional $1.10 per share on each anniversary of the closing date, but not less
than a minimum Target Price of $8.10 per share of Harken common stock.
The Series G1 Preferred holders shall be entitled to receive dividends
at an annual rate equal to $8 per share when, as and if declared by Harken's
Board of Directors. All dividends on the Series G1 Preferred are cumulative and
payable semi-annually in arrears, payable on June 30 and December 30. At
Harken's option, dividends may also be payable in Harken common stock valued at
$12.50 per share. The Series G1 Preferred dividend and liquidation rights shall
rank junior to all claims of creditors, including holders of outstanding debt
securities, but senior to Harken common stockholders and to any subsequent
series of Harken preferred stock, unless otherwise provided, except for the
Series G2 Preferred, which shall rank equal to the Series G1 Preferred. As of
December 31, 2002, Harken had accrued approximately $6,289,000 of dividends in
arrears related to the Series G1 Preferred stock, approximately $15.62 per share
of such preferred stock outstanding. During 2002, Harken's Board of Directors
declared that a dividend be paid on all accrued and unpaid dividends as of
December 31, 2002 payable to holders of Harken Series G1 Preferred and Series G2
Preferred, such dividend to be paid with shares of Harken common stock. As of
the record date for the dividends,
92
December 26, 2002, there were 402,688 shares of Series G1 Preferred outstanding.
In January 2003, a total of 586,755 shares of Harken common stock were paid to
holders of Series G1 Preferred.
Harken also may redeem the Series G1 Preferred in whole or in part for
cash at any time at $100 per share plus any accrued and unpaid dividends. In
addition, on or after June 1, 2004, Harken may further elect, in any six-month
period, to redeem up to 50% of the outstanding Series G1 Preferred with shares
of Harken common stock valued at an average market price, and using a redemption
value of the Series G1 Preferred that includes a 5% to 10% premium based on the
market capitalization of Harken at the time of redemption.
During 2000, Harken received consideration consisting of approximately
$7,767,000 cash, 43,523 shares of Benz Series II preferred stock having a face
value of $4,352,300 and Benz Convertible Notes with a face value of $3,555,000
in exchange for 158,155 shares of Series G1 Preferred which were issued in
October 2000. No value has been assigned to the Benz securities held by Harken.
An additional 11,160 shares of Series G1 Preferred were issued during 2000 as
part of the transaction costs associated with the issuance.
As discussed in Note 8 - Convertible Notes Payable, during May 2001,
Harken issued 325,150 additional newly-issued shares of Series G1 Preferred
stock in exchange for 5% European Notes in the face amount of $9,000,000.
During 2001, holders of 48,048 shares of Series G1 Preferred stock
elected to exercise their conversion option, and such holders were issued
415,053 shares of Harken common stock. In 2002, holders of 24,279 shares of
Series G1 Preferred stock elected to exercise its conversion option, and such
holders were issued 219,862 shares of Harken common stock.
During June 2002, Harken received 13,000 shares of Series G-1 Preferred
stock along with cash in exchange for 7% European Notes due 2007. Subsequent to
December 31, 2002, Harken received 17,050 shares of Series G-1 Preferred stock
along with cash in exchange for 7% European Notes and the Waverley Note. See
Note 8 - Convertible Notes Payable for further discussion of these transactions.
Series G2 Preferred Stock -- As discussed in Note 8 - Convertible Notes
Payable, in July 2001, Harken issued 95,800 shares of a new series of
convertible preferred stock, the Series G2 Preferred, in exchange for 5%
European Notes in the face amount of $9,580,000. Harken's Board of Directors
approved the authorization and issuance of up to 100,000 shares of Series G2
Preferred, which has a liquidation value of $100 per share, is non-voting, and
is convertible at the holder's option into Harken common stock at a conversion
price of $3.00 per share, subject to adjustment in certain circumstances (the
"Series G2 Preferred Conversion Price"). The Series G2 Preferred is also
convertible by Harken into shares of Harken common stock if for any period of
twenty consecutive calendar days, the average of the closing prices of Harken
common stock during such period shall have equaled or exceeded $3.75 per share.
The Series G2 Preferred holders shall be entitled to receive dividends
at an annual rate equal to $8 per share when, as and if declared by the Harken
Board of Directors. All dividends on the Series G2 Preferred are cumulative and
payable semi-annually in arrears, payable on June 30 and December 30. At
Harken's option, dividends may also be payable in Harken common stock at $3.00
per share of Harken common stock. The Series G2 Preferred dividend and
liquidation rights shall rank junior to all claims of creditors, including
holders of outstanding debt securities, but senior to Harken common stockholders
and to any subsequent series of Harken preferred stock, unless otherwise
provided. The Series G2 Preferred shall rank equal to the Series
93
G1 Preferred. At December 31, 2002, Harken had accrued approximately $1,080,000
of dividends in arrears related to the Series G2 Preferred stock, approximately
$11.59 per share of such preferred stock outstanding. During 2002, Harken's
Board of Directors declared that a dividend by paid of all accrued and unpaid
dividends payable as of December 31, 2002 to holders of Harken Series G1
Preferred and Series G2 Preferred, such dividend to be paid with shares of
Harken common stock. As of the record date for the dividends, December 26, 2002,
there were 93,150 shares of Series G2 Preferred outstanding. In January 2003, a
total of 360,010 shares of Harken common stock were paid to holders of Series G2
Preferred.
Harken may also redeem the Series G2 Preferred in whole or in part for
cash at any time at $100 per share plus any accrued and unpaid dividends. In
addition, on or after June 1, 2004, Harken may further elect, in any six month
period, to redeem up to 50% of the outstanding Series G2 Preferred with shares
of Harken common stock valued at an average market price, and using a redemption
value of the Series G2 Preferred that includes a 5% to 10% premium based on the
market capitalization of Harken at the time of redemption.
During 2001, a holder of 500 shares of G2 Preferred stock elected to
exercise its conversion option, and such holder was issued 16,822 shares of
Harken common stock. In 2002, holders of 2,150 shares of G2 Preferred stock
elected to exercise their conversion option, and such holders were issued 75,598
shares of Harken common stock.
94
A walk forward of the number of common, preferred and shares held in treasury
are as follows:
Number of Shares
--------------------------------------------------------
Description Preferred G1 Preferred G2 Common Treasury
- ----------------------------------------------------------------------------------------------------
Balance at December 31, 1999, (as restated) - - 15,571,000 (215,000)
Issuances of common stock - - 1,357,000 -
Issuances of preferred stock 169,000 - - -
Exchange of European Notes - - 300,000 -
Conversion of development finance agreement - - 688,000 -
Treasury shares purchased - - - (90,000)
Cancellation of treasury shares and other (217,000) 215,000
--------------------------------------------------------
Balance at December 31, 2000 169,000 - 17,699,000 (90,000)
Issuances of common stock - - 521,000 -
Issuances of preferred stock 325,000 95,800 - -
Treasury shares purchased - - - (453,000)
Conversions of G1 Preferred (48,000) - 415,000 -
Conversions of G2 Preferred - (500) 17,000 -
Purchase of property interest - - 61,000 -
--------------------------------------------------------
Balance as of December 31, 2001 446,000 95,300 18,713,000 (543,000)
Issuances of common stock - - 6,439,000 -
Repurchases of preferred stock (19,000) - - -
Treasury shares purchased - - - (63,000)
Conversions of G1 Preferred (24,000) - 220,000 -
Conversions of G2 Preferred - (2,000) 76,000 -
--------------------------------------------------------
Balance as of December 31, 2002 403,000 93,300 25,448,000 (606,000)
========================================================
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Accumulated Other Comprehensive Income -- At December 31, 2002, the
balance remaining in Other Comprehensive Income is the accumulated foreign
currency translation adjustment of approximately $134,000 relating to prior
periods. Since 1998, Harken has accounted for its international operations using
the U.S. dollar as the functional currency, and as such, foreign currency gains
and losses are reflected in the Statement of Operations.
Rights Offering -- In February 2003, Harken distributed to holders of
its common stock, Series G1 preferred stock, and Series G2 preferred stock, at
no charge, nontransferable subscription rights to purchase shares of its common
stock. These shares of common stock include preferred stock purchase rights
attached to such common stock under the Stockholder Rights Plan (see further
discussion below). Such holders received one subscription right for each share
of common stock they own (or in the case of the Series G1 preferred stock and
Series G2 preferred stock, one subscription right for each share of common stock
issuable upon conversion) at the close of business on January 30, 2003. Harken
distributed 32,154,867 subscription rights exercisable for up to 72,885,437
shares of common stock.
Each subscription right entitled the holders to purchase 2.2667 shares
of common stock at a subscription price of $0.311 per right (or $0.1372 per
share). The subscription rights expired at 12:00 midnight, New York City time,
on March 13, 2003. In connection with the rights offering, subscription rights
were properly exercised for 13,169,779 shares of common stock for an aggregate
purchase price of approximately $1,807,000.
Standby Purchase Agreement -- On September 6, 2002, Harken entered into
a standby purchase agreement with Lyford that defined Harken's rights and
obligations, and the rights and obligations of Lyford, (the "Standby
Commitment"). This agreement was amended on November 22, 2002. The standby
purchase agreement obligated Harken to sell, and required Lyford to subscribe
for and purchase from Harken, a number of shares of common stock equal to the
Shortfall divided by the subscription price per share. The "Shortfall" is the
amount by which $10,000,000 offering amount exceeds the aggregate subscription
price to be paid by the stockholders who subscribe for and purchase shares in
the offering.
As compensation to Lyford for its Standby Commitment, Harken paid Lyford
a Standby Commitment Fee of $600,000 by issuing 1,714,286 shares of common stock
to Lyford (the "Standby Commitment Fee Shares"), with each such share being
attributed a value of $0.35. Harken has also paid Lyford $50,000 in cash for its
legal fees in connection with the rights offering.
Pursuant to the standby purchase agreement, on March 20, 2003, Lyford
purchased 59,716,227 shares of common stock from Harken for an aggregate
purchase price of approximately $8,193,000. Lyford paid $3,184,942.71 in cash to
Harken from its available working capital. After giving effect to the
consummation of Harken's rights offering and the standby purchase agreement,
Lyford has become the holder of approximately 62% of Harken's outstanding common
stock. Therefore, these transactions resulted in a change of control of Harken.
Lyford has the voting power to control the election of Harken's board of
directors and the approval or other matters presented for consideration by the
stockholders, which could include mergers, acquisitions, amendments to Harken's
charter and various corporate governance actions.
Issuance of Convertible Notes Payable -- In May 1998, Harken issued to
qualified purchasers a total of $85 million of 5% European Notes which mature on
May 26, 2003. Such 5% European Notes were convertible into shares of Harken
common stock at an initial conversion price of $65.00 per share, subject to
96
adjustment in certain circumstances. In January 2003, the conversion price of
the 5% European Notes was adjusted to $62.63 and then again adjusted to $45.22
in accordance with the terms of the 5% European Note Indenture Agreement. For
further discussion of the 5% European Notes, see Note 8 - Convertible Notes
Payable.
In February 2000, Harken entered into an agreement with a holder of
certain of the 5% European Notes where the holder exchanged Notes in the face
amount of $6,000,000, plus accrued interest, for 300,000 shares of Harken common
stock. During 2000, Harken repurchased 5% European Notes in the face amount of
$19,190,000 from certain holders in exchange for cash of approximately
$10,680,000 plus transaction expenses.
In May 2001 and July 2001, Harken exchanged 5% European Notes in the
face amount of $18,580,000 for shares of Series G1 Preferred and Series G2
Preferred. See further discussion below. During 2002, and the first quarter of
2003, Harken has repurchased for cash, or exchanged for 7% European Notes, a
total of $26,870,000 face amount of 5% European Notes, resulting in a balance
outstanding at March 27, 2003, of $14,110,000.
On December 30, 1999, Harken issued the Benz Convertible Notes in
exchange for certain prospects acquired from Benz. See Note 2 - Mergers,
Acquisitions and Dispositions for further discussion of the acquisition of the
Benz Prospects. Such Benz Convertible Notes are convertible into shares of
Harken common stock at the Benz Notes Conversion Price, subject to adjustment in
certain circumstances. In July 2002, 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. Additionally, in August 2002, Harken repurchased
approximately $4,071,000 of the Benz Convertible Notes from a holder for
$1,231,000 in cash. For further discussion of the Benz Convertible Notes, see
Note 8 - Convertible Notes Payable.
Acquisition of Republic Properties -- On January 30, 2002, a
wholly-owned subsidiary of Harken signed an agreement to acquire certain
property interests from Republic. This acquisition was closed on April 4, 2002
following, approval by Republic's shareholders and debenture holders. 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. See Note 2 - Mergers, Acquisitions and Dispositions for further
discussion.
Private Placements of Harken Common Stock -- In March 2000, Harken
issued 200,000 shares of Harken common stock to two institutional investors in
exchange for $1,500,000 cash and 5,000 shares of Benz Series II preferred stock
having a face value of $500,000. In May 2000, Harken issued 246,154 shares of
Harken common stock to institutional investors in exchange for $1,500,000 cash
and 5,000 shares of Benz Series II preferred stock having a face value of
$500,000. During the third quarter of 2000, Harken issued 910,476 shares of
Harken common stock to institutional investors in exchange for $4,971,000 cash
and 13,380 shares of Benz Series II preferred stock having a face value of
$1,338,000 and Benz Notes with a face value of $412,000. No value has been
assigned to the Benz securities held by Harken.
Development Finance Agreements -- During 2000 and 2001, Harken issued to
the Development Finance Agreement investors a total of 687,826 and 318,907,
respectively, of Harken common stock pursuant to, and in full satisfaction of,
the Development Finance Agreements.
97
Stockholder Rights Plan -- In April 1998, Harken adopted a rights
agreement (the "Rights Agreement") whereby a dividend of one preferred share
purchase right (a "Right") was paid for each outstanding share of Harken common
stock. The Rights will be exercisable only if a person acquires beneficial
ownership of 15% or more of Harken common stock (an "Acquiring Person"), or
commences a tender offer which would result in beneficial ownership of 15% or
more of such stock. When they become exercisable, each Right entitles the
registered holder to purchase from Harken one one-thousandth of one share of
Series E Junior Participating Preferred Stock ("Series E Preferred Stock"), at a
price of $35.00 per one one-thousandth of a share of Series E Preferred Stock,
subject to adjustment under certain circumstances. During 2002, Harken's Board
of Directors amended the Rights Agreement to exclude from the definition of an
Acquiring Person certain parties who have received or would receive beneficial
ownership pursuant to certain transactions, including the rights offering and
the possible redemption of Harken's 5% European Notes.
Upon the occurrence of certain events specified in the Rights Agreement,
each holder of a Right (other than an Acquiring Person) will have the right to
purchase, at the Right's then current exercise price, shares of Harken common
stock having a value of twice the Right's exercise price. In addition, if, after
a person becomes an Acquiring Person, Harken is involved in a merger or other
business combination transaction with another person in which Harken is not the
surviving corporation, or under certain other circumstances, each Right will
entitle its holder to purchase, at the Right's then current exercise price,
shares of common stock of the other person having a value of twice the Right's
exercise price.
Unless redeemed by Harken earlier, the Rights will expire on April 6,
2008. Harken will generally be entitled to redeem the Rights in whole, but not
in part, at $.01 per Right, subject to adjustment. No Rights were exercisable
under the Rights Agreement at December 31, 2002. The terms of the Rights
generally may be amended by Harken without the approval of the holders of the
Rights prior to the public announcement by Harken or an Acquiring Person that a
person has become an Acquiring Person.
In addition, as of December 31, 2002, Harken has an agreement with a
member of management whereby such employee would receive compensation amounts in
the event of a change, as defined in the agreement, in the ownership of Harken.
Per Share Data -- Basic loss per common share was computed by dividing
net loss attributed to common stock by the weighted average number of shares of
Harken common stock outstanding during the year and retroactively reflects the
effect of the one-for-ten reverse stock split that was effective November 7,
2000. The impact of unconverted Convertible Notes was not included in any of the
years presented as their effect would have been antidilutive. The impact of the
unconverted Series G1 Preferred and the unconverted G2 Preferred were not
included for any of the years presented as their effect would have been
antidilutive.
Outstanding Warrants -- At December 31, 2002, Harken has no outstanding
warrants available to be exercised.
(10) STOCK OPTION PLAN
Harken has elected to follow Accounting Principles Board Opinion No. 25,
"Accounting for Stock Issued to Employees" ("APB 25") and related
Interpretations in accounting for its employee stock options because, as
discussed below, the alternative fair value accounting provided for under
Statement of Financial Accounting Standards No. 123, "Accounting for Stock-Based
Compensation" ("SFAS 123") requires use of
98
option valuation models that were not developed for use in valuing employee
stock options. Under APB 25, because the exercise price of Harken's employee
stock options equals or exceeds the market price of the underlying stock on the
date of grant, no compensation expense is recognized.
Harken's 1993 Stock Option and Restricted Plan has authorized the grant
of options to Harken employees and directors for up to 400,000 shares of Harken
common stock. Harken's 1996 Stock Option and Restricted Stock Plan has
authorized the grant of 1,852,500 shares of Harken common stock. All options
granted have 10-year terms and vest and become fully exercisable at the end of 4
years of continued employment.
Pro forma information regarding net loss and loss per share is required
by SFAS 123 and has been determined as if Harken had accounted for its employee
stock options under the fair value method of that Statement. The fair value for
these options was estimated at the date of grant using a Black-Scholes option
pricing model with the following weighted-average assumptions for 2000, 2001 and
2002, respectively: risk-free interest rates of 5%; dividend yields of 0%;
volatility factors of the expected market price of Harken common stock of .929,
1.38 and 1.37; and a weighted-average expected life of the options of 6 years.
The Black-Scholes option valuation model was developed for use in
estimating the fair value of traded options which have no vesting restrictions
and are fully transferable. In addition, option valuation models require the
input of highly subjective assumptions including the expected stock price
volatility. Because Harken's employee stock options have characteristics
significantly different from those of traded options, and because changes in the
subjective input assumptions can materially affect the fair value estimate, in
management's opinion, the existing models do not necessarily provide a reliable
single measure of the fair value of its employee stock options.
For purposes of pro forma disclosures, the estimated fair value of the
options is amortized to expense over the options' vesting period. Harken's pro
forma information follows (in thousands except for earnings per share
information):
Year Ended December 31,
---------------------------------------------------------
2000 2001 2002
----------------- ---------------- ---------------
Pro forma net loss attributed to common stock $ (156,968) $ (46,778) $ (15,144)
Pro forma basic and diluted loss per share $ (9.31) $ (2.59) $ (0.70)
The weighted average fair value of the options issued in 2000, 2001 and
2002 was $2.32, $2.40 and $0.43 per share, respectively.
A summary of Harken's stock option activity, and related information for the
years ended December 31, 2000, 2001 and 2002 follows (not in thousands):
99
Year Ended December 31,
-----------------------------------------------------------------------------------------
2000 2001 2002
------------------------------ --------------------------- ----------------------------
Weighted Weighted- Weighted-
-Average Average Average
Options Exercise Price Options Exercise Price Options Exercise Price
------------ ---------------- ----------- -------------- ----------- ---------------
Outstanding-beginning of year 1,404,748 $ 30.65 1,618,326 $ 21.17 1,553,252 $ 20.81
Granted 509,500 $ 3.41 15,000 $ 7.07 5,000 $ 0.51
Exercised - $ - - $ - - $ -
Forfeited (295,922) $ 35.59 (80,074) $ 25.53 (113,767) $ 24.50
------------ ---------------- ----------- -------------- ----------- ---------------
Outstanding-end of year 1,618,326 $ 21.17 1,553,252 $ 20.81 1,444,485 $ 20.45
Exercisable-end of year 721,864 $ 30.97 980,246 $ 27.95 1,121,098 $ 24.83
Exercise prices for options outstanding as of December 31, 2000 ranged
from $3.3125 to $64.375. Exercise prices for options outstanding as of December
31, 2001 ranged from $1.2200 to $64.375. Exercise prices for options outstanding
as of December 31, 2002 ranged from $0.51 to $63.75.
(11) INCOME TAXES
The total provision for income taxes consists of the following:
Year Ended December 31,
2000 2001 2002
--------- --------- ---------
(in thousands)
---------------------------------
Current Taxes:
Federal - AMT 39 79 (63)
State - - -
Foreign - Colombia - 620 300
Deferred - - -
---------------------------------
Total 39 699 237
=================================
100
The following is a reconciliation of the reported amount of income tax expense
for the years ended December 31, 2000, 2001, 2002 to the amount of income tax
expense that would result from applying domestic federal statutory tax rates to
pretax income:
YEAR ENDED DECEMBER 31,
2000 2001 2002
------------ ------------- ------------
(IN THOUSANDS)
-------------------------------------------
Statutory Tax (Benefit) (54,615) (14,722) (4,261)
Increase in Valuation Allowance 54,615 14,722 3,334
Effect of Foreign Operations - 620 300
Interest Expense Disallowed
for Tax 921
Other 39 79 5
-------------------------------------------
Total Tax Expense 39 699 237
===========================================
At December 31, 2002, Harken had available for U.S. federal income tax
reporting purposes, a net operating loss (NOL) carryforward for regular tax
purposes of approximately $93,600,000 which expires in varying amounts during
the tax years 2003 through 2022, an alternative minimum tax NOL carryforward of
approximately $77,000,000 which expires in varying amounts during the tax years
2003 through 2022, and a statutory depletion carryforward of approximately
$2,400,000 which can be carried forward indefinitely to offset future taxable
income of Harken subject to certain limitations imposed by the Internal Revenue
Code. In recent years, Harken has undertaken numerous transactions that have
impacted its capital structure and shareholder base. Accordingly, Harken may
have undergone one or more ownership changes within the meaning of Internal
Revenue Code Section 382 that would significantly restrict Harken's ability to
utilize its NOLs. In addition, certain of these NOLs were acquired in prior
years in conjunction with the purchase of certain subsidiaries of Harken. In
accordance with the applicable federal income tax laws, these acquired NOLs can
generally only be used to offset future taxable income from profitable
operations within those subsidiaries. At December 31, 2002, Harken had available
for Colombian income tax reporting purposes a NOL carryforward of approximately
$91,000,000 that expires in varying amounts during the Colombian tax years 2005
through 2007.
Total deferred tax liabilities, relating primarily to U.S. oil and gas
properties as of December 31, 2001, were approximately $2,675,000. Total
deferred tax assets, primarily related to the NOLs and Colombian oil properties,
were approximately $80,779,000 at December 31, 2001. The total net deferred tax
asset is offset by a valuation allowance of approximately $78,104,000 at
December 31, 2001, resulting in no impact to results of operations.
Total deferred tax liabilities, relating primarily to U.S. oil and gas
properties as of December 31, 2002, were approximately $3,337,000. Total
deferred tax assets, primarily related to the NOLs and Colombian oil and gas
properties, were approximately $88,728,000. The total net deferred tax asset is
offset by a valuation allowance of approximately $90,263,000 at December 31,
2002, resulting in no impact to results of operations.
101
(12) 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
Balance Sheet at December 31, 2001 and December 31, 2002 as Related Party Notes
Receivable.
In January 2001, pursuant to an agreement executed in December 2000,
Harken forgave the repayment of a short-term loan in the principal amount of
$250,000, plus accrued interest of $45,000, to a former director and former
member of management related to the surrender of his Harken stock options and
reflected the forgiveness as a charge to earnings in 2000. Such loan was a
recourse loan secured by his options.
In November 2001, Global elected to its Board of Directors a director
who is also a director of RP&C International Inc. ("RP&C"). RP&C has
historically provided financial and transaction consulting services to Harken,
including with regard to Harken's Convertible European Notes, and Series G1
Preferred and Series G2 Preferred stock. In addition, RP&C has served as a
financial advisor in connection with Harken's restructuring of its international
assets, obligations and operations through its Global subsidiary. Also, RP&C
currently serves as Global's nominated advisor for the AIM Exchange in London.
In connection with these services provided, RP&C has earned consulting and
transaction fees and may continue to earn such fees in the future. During 2002,
Harken repurchased approximately 6,000 shares of Series G1 Preferred stock held
by RP&C in consideration for certain financial and transaction consulting
services.
In May 2002, Harken entered into a severance agreement and agreed 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.
(13) HEDGING ACTIVITIES
Harken holds certain commodity derivative instruments to mitigate
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 highly dependent upon 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 oil and gas sales from the risk of
significant declines in commodity prices.
During 2000 and 2001, Harken, through a wholly-owned subsidiary, held
natural gas price swaps resulting in the subsidiary receiving fixed prices of
approximately $2.20 per MMBTU covering a total of 75,000 MMBTUs per month over
the life of the swaps, which terminated December 31, 2001. Upon the January 1,
2001 adoption of Statement of Financial Accounting Standards ("SFAS") No. 133,
Harken reflected an increase in its accrued liabilities of approximately
$3,025,000 in order to fully record the fair value of these natural gas swaps.
Because the derivatives had previously been designated in a hedging relationship
that addressed the variable cash flow exposure of forecasted transactions, the
offsetting impact was a charge to Other Comprehensive Income within Harken's
stockholders' equity.
102
In January 2001, Harken purchased a put option for crude oil with a
strike price of $25 per barrel, covering 6,000 barrels per month through June
30, 2001.
In November 2001, Harken entered into a zero-cost collar consisting of a
fixed price floor option of $2.50 per MMBTU and a fixed price cap option of
$3.8225 per MMBTU, covering 115,000 MMBTUs per month over the period of the
contract, beginning January 1, 2002 through December 31, 2002. The above
derivatives were designated as hedges of the exposure to variability of cash
flows related to forecasted sales of specified production from certain of
Harken's domestic property operations.
In March 2002, Harken modified the remaining term of its zero-cost
collar, adjusting it to a fixed price floor option of $2.75 per MMBTU and a
fixed price cap option of $3.47 per MMBTU and increasing the monthly hedged
volume to 135,000 MMBTUs. Harken did not designate the modified derivative as a
hedge under SFAS 133. Also in March 2002, Harken also entered into a new
zero-cost collar 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 and designated the
collar as a hedge of the exposure to variability of cash flows related to
forecasted sales of specific production from certain of Harken's domestic
property operations. During December 2002, Harken replaced the collar described
above with a natural gas collar contract consisting of a fixed price floor
option of $3.00 per MMBTU and a fixed price cap option of $4.95 per MMBTU,
covering 70,000 MMBTUs per month over the period of the contract through June
30, 2004. Harken did not designate the modified derivative as a hedge under SFAS
No. 133 and has been marked to market at December 31, 2002.
Risk management policies established by Harken management limit Harken's
derivative instrument activities to those derivative instruments which are
effective in mitigating certain operating risks, including commodity price risk.
In addition to other restrictions, the extent and terms of any derivative
instruments are required to be reviewed and approved by executive management of
Harken.
(14) OTHER INFORMATION
Quarterly Data -- (Unaudited) -- The following tables summarize selected
quarterly financial data for 2001 and 2002 expressed in thousands, except per
share amounts:
QUARTER ENDED
------------------------------------------------------ TOTAL
MARCH 31 JUNE 30 SEPTEMBER 30 DECEMBER 31 YEAR
------------ --------- ------------ ------------ ---------
2001
Revenues $ 9,192 $ 10,982 $ 6,432 $ 5,817 $ 32,423
Gross profit 5,661 7,465 3,329 2,983 19,438
Net (loss) before
extraordinary items (1,518) (1,072) (2,930) (38,478) (43,998)
Net income (loss) (1,412) 75 (1,208) (38,478) (41,023)
Basic and diluted loss
per common share $ (0.10) $ (0.03) $ (0.13) $ (2.18) $ (2.44)
2002
Revenues $ 5,492 $ 7,712 $ 6,464 $ 6,043 $ 25,711
Gross profit 3,106 5,123 4,231 3,198 15,658
Net (loss) before
Extraordinary items (3,556) (2,690) (2,576) (4,513) (13,335)
Net income (loss) (3,556) (2,350) 739 (4,640) (9,807)
Basic and diluted loss
per common share $ (0.24) $ (0.16) $ (0.01) $ (0.23) $ (0.64)
103
Significant Customers -- In 2000, 2001 and 2002, Ecopetrol, which
purchases Global's Colombia oil production, represented 24%, 26% and 30%,
respectively, of Harken's consolidated revenues. Harken has secured and
maintains letters of credit with certain significant domestic commercial
purchasers. In addition, management does not feel that the loss of a significant
domestic purchaser would significantly impact the operations of Harken due to
the availability of other potential purchasers for its oil and gas production.
Operating Segment Information -- Harken divides its operations into two
operating segments which are managed and evaluated by Harken and Global as
separate operations. Harken's North American operating segment currently relates
to Harken's exploration, development, production and acquisition efforts in the
United States whereby production cash flows are discovered or acquired, and
operates primarily through traditional ownership of mineral interests in the
various states in which it operates. Harken's North American production is sold
to established purchasers and generally transported through an existing and
well-developed pipeline infrastructure. Harken's Middle American operating
segment currently relates to Global's exploration, development, production and
acquisition efforts in Colombia, Peru and Panama. Middle American segment
production cash flows have been discovered through extensive drilling operations
conducted under Association Contracts with the state-owned oil and gas
companies/ministries in the respective countries. Global's Middle American
production is currently sold to Ecopetrol. In addition, Global seeks to
identify, develop and promote energy projects from throughout Latin America to
industry and financial partners and to aggregate assets in Latin America through
strategic acquisitions and alliances. During the three-year period ended
December 31, 2002, none of Global's Middle American segment revenues related to
Costa Rica, Peru or Panama.
Harken's accounting policies for each of its operating segments are the
same as those described in Note 1 - Summary of Significant Accounting Policies.
There are no intersegment sales or transfers.
104
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.
See Note 15 - Oil and Gas Disclosures for geographic information
regarding Harken's long-lived assets. Harken's financial information for each of
its operating segments is as follows for each of the three years in the period
ended December 31, 2002:
NORTH MIDDLE
AMERICA AMERICA TOTAL
------------ ----------- ------------
For the year ended
December 31, 2000:
Operating revenues $ 32,528 $ 10,649 $ 43,177
Oil and gas operating expenses 12,096 2,283 14,379
Interest and other income 617 601 1,218
Depreciation and amortization 8,200 5,449 13,649
Full cost valuation allowance - 156,411 156,411
Interest expense and other, net 3,304 1,993 5,297
Income tax expense 39 - 39
Segment income (loss) before
extraordinary item 863 (161,534) (160,671)
Capital expenditures 14,015 12,950 26,965
Total assets at end of year 97,683 47,664 145,347
For the year ended
December 31, 2001:
Operating revenues $ 23,351 $ 8,291 $ 31,642
Oil and gas operating expenses 9,266 2,938 12,204
Interest and other income 548 233 781
Depreciation and amortization 8,871 6,383 15,254
Full cost valuation allowance 14,353 4,316 18,669
Provision for asset impairments - 14,102 14,102
Interest expense and other, net 2,761 1,902 4,663
Income tax expense 79 620 699
Segment (loss) before
extraordinary item (16,902) (27,096) (43,998)
Capital expenditures 11,892 10,721 22,613
Total assets at end of year 65,732 30,074 95,806
For the year ended
December 31, 2002:
Operating revenues $ 17,370 $ 7,619 $ 24,989
Oil and gas operating expenses 7,292 2,039 9,331
Interest and other income 263 459 722
Depreciation and amortization 7,498 4,012 11,510
Full cost valuation allowance - 521 521
Provision for asset impairments - 400 400
Interest expense and other, net 5,379 344 5,723
Income tax expense (63) 300 237
Segment (loss) before
extraordinary item (9,826) (3,509) (13,335)
Capital expenditures 3,688 2,324 5,937
Total assets at end of year 59,783 25,797 85,580
105
(15) OIL AND GAS DISCLOSURES
Costs Incurred in Property Acquisition, Exploration and Development
Activities:
YEAR ENDED DECEMBER 31,
-------------------------------------
2000 2001 2002
----------- ----------- ---------
DOMESTIC COSTS INCURRED:
Acquisition of properties
Evaluated $ - $ - $ 2,646
Unevaluated 161 - -
Exploration 10,837 2,200 566
Development 3,017 9,692 476
----------- ----------- ---------
Total domestic costs incurred $ 14,015 $ 11,892 $ 3,688
=========== =========== =========
MIDDLE AMERICAN COSTS INCURRED:
Acquisition of properties
Evaluated $ - $ 100 $ -
Unevaluated - 869 -
Exploration 12,950 9,752 622
Development - - 1,702
----------- ----------- ---------
Total Middle American costs incurred $ 12,950 $ 10,721 $ 2,324
=========== =========== =========
106
Middle American costs incurred during 2000 include $5,122,000 of Costa
Rica costs, respectively. Middle American costs during 2001 include $891,000,
$635,000 and $166,000 of costs related to Costa Rica, Peru and Panama,
respectively. Middle American costs during 2002 include $353,000 and $233,000 of
costs related to Peru and Panama, respectively.
Capitalized Costs Relating to Oil and Gas Producing Activities:
December 31,
-------------------------------------
2000 2001 2002
----------- ---------- ----------
Capitalized costs:
Unevaluated Colombia properties $ 588 $ 68 $ -
Unevaluated Peru properties - 635 562
Unevaluated Panama properties - 166 304
Unevaluated Costa Rica properties 7,159 - -
Unevaluated domestic properties 9,919 2,603 2,617
Evaluated Colombia properties 173,358 182,945 184,491
Evaluated domestic properties 148,487 154,495 156,072
Colombian production facilities 12,797 14,892 15,409
Domestic production facilities 491 501 508
----------- ---------- ----------
Total capitalized costs 352,739 356,305 359,963
Less accumulated depreciation
and amortization (243,955) (280,357) (291,159)
----------- ---------- ----------
Net capitalized costs $ 108,784 $ 75,948 $ 68,804
=========== ========== ==========
107
Oil and Gas Reserve Data -- (Unaudited) -- The following information is
presented with regard to Harken's proved oil and gas reserves. The reserve
values and cash flow amounts reflected in the following reserve disclosures are
based on prices as of year end. Global reflected proved reserves in Colombia
related to its Alcaravan, Bolivar and Bocachico Association Contracts. As Global
identifies proved reserves associated with other Association Contracts, or
identifies proved reserves from additional prospects within its Alcaravan,
Bolivar and Cajaro Association Contracts, such reserves will be added in the
year of their discovery. Global has reflected no proved reserves related to its
Costa Rica, Peru or Panama operations.
During 1999, Global applied to Ecopetrol for a declaration of commercial
discovery related to the Palo Blanco field on the Alcaravan Association Contract
and the Buturama field on the Bolivar Association Contract. In February and
October 2001, Global was notified by Ecopetrol that Global could proceed with
the development and production of the Buturama and Palo Blanco fields,
respectively, on a sole-risk basis. As such, Global is entitled to receive
Ecopetrol's share of production after royalty, until Global has recovered 200%
of its costs, after which time Ecopetrol could elect to begin to receive its 50%
working interest share of production. In light of Ecopetrol's election not to
participate in these fields, Global has reflected its 80% share of future net
cash flows from the Buturama field in its proved reserves as of December 31,
2002. In February 2003, Global commenced drilling operations on the initial well
required to be drilled in the Cajaro Association Contract, the Cajaro #1 well.
As of March 27, 2003, the Cajaro #1 well has reached a depth of approximately
9,300 feet and recorded oil shows in the Ubaque and Mirador Formations. Global
has disassembled the equipment contracted for the drilling operation and expects
a completion rig to arrive by March 31, 2003. There can be no assurances, but if
successful, production from the Cajaro #1 well would be transported through
Global's existing Palo Blanco pipeline facilities, subject to the 3,000 gross
barrel limitation relating to the Palo Blanco field. All Colombian proved
reserves are net of Ecopetrol's 20% royalty pursuant to each related Association
Contract. Global's Colombian reserves in the Bolivar, Alcaravan and Bocachico
Contract
108
Blocks have been prepared by Ryder Scott Company. For further discussion of
Global's Colombian operations, see Note 5 - Middle American Operations.
Harken's domestic reserves reflect reductions for certain producing
properties which were sold for cash during 2000, 2001 and 2002. See Note 2 -
Mergers, Acquisitions and Dispositions for further discussion. Harken's domestic
reserves at December 31, 2002 have been prepared by Netherland, Sewell &
Associates, Inc.
Proved oil and gas reserves are defined as the estimated quantities of
crude oil, natural gas, and natural gas liquids which geological and engineering
data demonstrate with reasonable certainty to be recoverable in future years
from known reservoirs under existing economic and operating conditions.
Reservoirs are considered proved if economic productibility is supported by
either actual production or conclusive formation tests. The area of a reservoir
considered proved includes that portion delineated by drilling and defined by
gas-oil and/or oil-water contacts, if any, and the immediately adjoining
portions not yet drilled, but which can be reasonably judged as economically
productive on the basis of available geological and engineering data. Reserves
which can be produced economically through application of improved recovery
techniques are included in the "proved" classification when successful testing
by a pilot project, or the operation of an installed program in the reservoir,
provides support for the engineering analysis on which the project or program
was based.
The reliability of reserve information is considerably affected by
several factors. Reserve information is imprecise due to the inherent
uncertainties in, and the limited nature of, the data base upon which the
estimating of reserve information is predicated. Moreover, the methods and data
used in estimating reserve information are often necessarily indirect or
analogical in character rather than direct or deductive. Furthermore, estimating
reserve information, by applying generally accepted petroleum engineering and
evaluation principles, involves numerous judgments based upon the engineer's
educational background, professional training and professional experience. The
extent and significance of the judgments to be made are, in themselves,
sufficient to render reserve information inherently imprecise.
"Standardized measure" relates to the estimated discounted future net
cash flows and major components of that calculation relating to proved reserves
at the end of the year in the aggregate and by geographic area, based on year
end prices, costs, and statutory tax rates and using a 10% annual discount rate.
109
(UNAUDITED)
-------------------------------------------------------------------------
UNITED STATES COLOMBIA TOTAL WORLDWIDE
-------------------- ---------------------- -------------------------
OIL GAS OIL GAS OIL GAS
(BARRELS) (MCF) (BARRELS) (MCF) (BARRELS) (MCF)
--------- --------- ---------- ------- --------- -----------
(in thousands)
PROVED RESERVES:
As of December 31, 1999 6,358 52,818 23,320 - 29,678 52,818
Extensions and discoveries 79 7,035 - - 79 7,035
Revisions (677) 370 (20,833) - (21,510) 370
Production (529) (4,012) (460) - (989) (4,012)
Sales of reserves in place (464) (1,375) - - (464) (1,375)
--------- --------- ---------- ------- --------- -----------
As of December 31, 2000 4,767 54,836 2,027 - 6,794 54,836
Extensions and discoveries 463 4,650 4,171 - 4,634 4,650
Revisions (1,041) (5,830) (686) - (1,727) (5,830)
Production (273) (3,851) (500) - (773) (3,851)
Sales of reserves in place (1,302) (10,412) - - (1,302) (10,412)
--------- --------- ---------- ------- --------- -----------
As of December 31, 2001 2,614 39,393 5,012 - 7,626 39,393
Purchases of reserves in place 125 902 - - 125 902
Extensions and discoveries 2 551 - - 2 551
Revisions 837 (173) 946 - 1,783 (173)
Production (267) (3,225) (465) - (732) (3,225)
Sales of reserves in place (25) (2,940) - - (25) (2,940)
--------- --------- ---------- ------- --------- -----------
As of December 31, 2002 3,286 34,508 5,493(1) - 8,779(1) 34,508
========= ========= ========== ======= ========= ===========
PROVED DEVELOPED RESERVES AT:
December 31, 2000 3,006 30,430 540 - 3,546 30,430
December 31, 2001 1,583 23,673 872 - 2,455 23,673
December 31, 2002 1,945 18,630 1,091(2) - 3,036(2) 18,630
(1) Includes approximately 790,000 barrels of total proved reserves
attributable to a 14.38% minority interest of a consolidated subsidiary.
(2) Includes approximately 157,000 barrels of total proved developed
reserves attributable to a 14.38% minority interest of a consolidated
subsidiary.
110
Standardized Measure of Discounted Future Net Cash Flows Relating to Proved Oil
and Gas Reserves:
(UNAUDITED)
--------------------------------------------------
TOTAL
UNITED STATES COLOMBIA WORLDWIDE
-------------- -------------- --------------
(IN THOUSANDS)
December 31, 2001:
Future cash inflows $ 170,105 $ 56,963 $ 227,068
Production costs (54,458) (12,868) (67,326)
Development costs (30,095) (20,567) (50,662)
-------------- -------------- --------------
85,552 23,528 109,080
Future net inflows before income tax
Future income taxes (568) (4,346) (4,914)
-------------- -------------- --------------
Future net cash flows 84,984 19,182 104,166
10% discount factor (34,310) (6,559) (40,869)
-------------- -------------- --------------
Standardized measure of discounted future
net cash flows $ 50,674 $ 12,623 $ 63,297
============== ============== ==============
December 31, 2002:
Future cash inflows $ 277,373 $ 120,687 $ 398,060
Production costs (78,009) (21,224) (99,233)
Development costs (32,976) (18,882) (51,858)
-------------- -------------- --------------
Future net inflows before income tax 166,388 80,581 246,969
Future income taxes (6,177) (4,036) (10,213)
-------------- -------------- --------------
160,211 76,545 236,756
Future net cash flows
10% discount factor (58,039) (18,480) (76,519)
-------------- -------------- --------------
Standardized measure of discounted future
net cash flows $ 102,172 $ 58,065(1) $ 160,237(1)
============== ============== ==============
(1) Includes approximately $8,349,000 of discounted future net cash flows
attributable to a 14.38% minority interest of a consolidated subsidiary.
(2) Changes In Standardized Measure of Discounted Future Net Cash Flows
Relating to Proved Oil and Gas Reserves (in thousands).
111
(UNAUDITED)
--------------------------------------
2000 2001 2002
---------- ---------- ----------
WORLDWIDE
Standardized measure -- beginning of year $ 280,427 $ 264,697 $ 63,297
Increase (decrease)
Sales, net of production costs (28,130) (19,665) (15,786)
Net change in prices, net of production costs 177,332 (211,359) 92,247
Development costs incurred 251 5,358 636
Change in future development costs 9,886 (10,829) 1,121
Change in future income taxes (20,958) 64,304 473
Revisions of quantity estimates (198,243) (18,752) 22,247
Accretion of discount 28,042 26,470 6,328
Changes in production rates, timing and other (28,397) (8,222) (11,490)
Extensions and discoveries, net of future costs 48,029 19,748 1,340
Sales of reserves-in-place (3,542) (48,453) (4,400)
Purchases of reserves-in-place - - 4,224
---------- ---------- ----------
Standardized measure -- end of year $ 264,697 $ 63,297 $ 160,237(1)
========== ========== ==========
(1) Includes approximately $8,349,000 of discounted future net cash flows
attributable to a 14.38% minority interest of a consolidated subsidiary.
(16) COMMITMENTS AND CONTINGENCIES
Operating Leases -- Harken leases its corporate and certain other office
space and certain field operating offices. Total office and operating lease
payments during 2000, 2001 and 2002 were $1,270,000, $750,000 and $736,000
respectively, net of applicable sublease arrangements. Future minimum rental
payments required under all leases that have initial or remaining noncancellable
lease terms in excess of one year as of December 31, 2002, net of sublease
reimbursements of $684,000 in 2003, respectively, are as follows:
Year Amount
----------- -----------
2003 717,000
2004 681,000
2005 681,000
2006 568,000
Thereafter -
-----------
Total minimum payments required $ 2,647,000
===========
112
Operational Contingencies -- The exploration, development and production
of oil and gas are subject to various, federal and state laws and regulations
designed to protect the environment. Compliance with these regulations is part
of Harken's day-to-day operating procedures. Infrequently, accidental discharge
of such materials as oil, natural gas or drilling fluids can occur and such
accidents can require material expenditures to correct. Harken maintains levels
of insurance customary in the industry to limit its financial exposure.
Management is unaware of any material capital expenditures required for
environmental control during the next fiscal year.
In September 1997, Harken Exploration Company, a wholly-owned subsidiary
of Harken, was served with a lawsuit filed in U.S. District Court for the
Northern District of Texas, Amarillo Division, styled D. E. Rice and Karen Rice,
as Trustees for the Rice Family Living Trust ("Rice") vs. Harken Exploration
Company. In the lawsuit, Rice alleges damages resulting from Harken Exploration
Company's alleged spills on Rice's property and claimed that the Oil Pollution
Act ("OPA") should be applied in this circumstance. Rice alleges that
remediation of all of the alleged pollution on its land would cost approximately
$40,000,000. In October 1999, the trial court granted Harken's Motion for
Summary Judgment that the OPA did not apply and dismissed the Rice claim under
it. Rice appealed the trial court's summary judgment to the U.S. Fifth Circuit
Court of Appeals. In April 2001, the Fifth Circuit Court of Appeals issued its
opinion affirming the trial court's summary judgment in Harken's favor. Based on
this affirmation of the summary judgment, in Harken management's opinion, the
results of any further appeal will not have a material adverse effect on
Harken's financial position. On August 15, 2002, Harken was served with a new
suit filed by Rice in state court in Hutchinson County, Texas. In this new state
case, Rice continues to seek approximately $40,000,000 in remediation costs and
damages. Harken filed a motion for partial summary judgment seeking a ruling
that remediation costs are not the proper measure of damages and that Rice's
property damages, if any, should be measured by the alleged diminution in value
of its land. The Court held a hearing on Harken's motion on October 30, 2002,
but on December 30, 2002, this motion was denied by the Court. Harken's
management continues to believe that the correct measure of damages is the
alleged diminution in value of Rice's land. Therefore, in Harken management's
opinion, the results of such additional claim will not have a material adverse
effect on Harken's financial position.
Search Acquisition Corp. ("Search Acquisition"), also known as Harken
Texas Acquisition Corp., a wholly-owned subsidiary of Harken, was a defendant in
a lawsuit filed by Petrochemical Corporation of America and Lorken Investments
Corporation (together, "Petrochemical"). This lawsuit arose out of
Petrochemical's attempt to enforce a judgment of joint and several liability
entered in 1993 against a group of twenty limited partnerships known as the
"Odyssey limited partnerships." Petrochemical claimed that Search Exploration,
Inc. is liable for payment of the judgment as the successor-in-interest to eight
Odyssey limited partnerships. Search Acquisition was the surviving corporation
in Harken's 1995 acquisition of Search Exploration, Inc. On February 28, 1996,
the court granted Search Acquisition's motion for summary judgment in this case.
On July 3, 1998, the Fifth District Court of Appeals for the State of Texas
reversed the trial court's summary judgment and remanded the case to the trial
court. In December 2001, a jury trial was held in this matter. The jury returned
a verdict finding for Petrochemical in the amount of $1.1 million of actual
damages and $3 million in punitive damages. In April 2002, the court entered
judgment on the verdict rendered by the jury. Search Acquisition then filed a
motion for a new trial. In June 2002, Petrochemical filed with the U.S.
Bankruptcy Court in Dallas, Texas an involuntary petition in bankruptcy against
Search Acquisition, under Chapter 7 of the Bankruptcy Code, and moved for the
appointment of an interim trustee. Search Acquisition agreed to the entry of an
order for relief under Chapter 7, as well as the appointment of the interim
trustee. These actions resulted in a stay of Search Acquisition's motion of the
Court's judgment on the
113
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. Pursuant to the mediation agreement,
Petrochemical elected to receive 100% of the stock of McCulloch in September
2002. McCulloch does not have any contractual arrangements that are material to
Harken's operations and has a book and fair value each less than $10,000. The
mediation agreement was approved by the Bankruptcy Courts in Dallas and Houston
in September 2002. Payment of the mediation settlement was also made in
September 2002.
420 Energy Investment, Inc. and ERI Investments, Inc. (collectively "420
Energy") filed a lawsuit against XPLOR Energy, Inc., a wholly-owned subsidiary
of Harken ("XPLOR"), on December 21, 1999 in the New Castle County Court of
Chancery of the State of Delaware. 420 Energy alleges that they are entitled to
appraisal and payment of the fair value of their common stock in XPLOR as of the
date XPLOR merged with Harken. Harken has relied on an indemnity provision in
the XPLOR merger agreement to tender the costs of defense in this matter to
former stockholders of XPLOR. Although the outcome of this litigation is
uncertain, because the former stockholders of XPLOR have accepted
indemnification of this claim, Harken believes that any liability to Harken as a
result of this litigation will not have a material adverse effect on Harken's
financial condition.
In August 2001, a new lawsuit was filed by New West Resources, Inc.
("New West"), a former XPLOR stockholder, against XPLOR, Harken and other
defendants in state court in Dallas, Texas. Harken received service of process
in February 2002. Effective January 17, 2003, the case was transferred by
agreement of the parties to Harris County district court, where all future
proceedings will occur. New West claims that it lost its $6 million investment
in XPLOR as a result of misrepresentations by XPLOR and breach of fiduciary
duties by certain XPLOR directors. Harken believes this new suit is an adjunct
of the prior appraisal rights claim by 420 Energy. The former stockholders of
XPLOR have rejected Harken's request for indemnification of this claim under the
XPLOR merger agreement. However, Harken intends to continue to pursue and
enforce, through whatever steps are necessary, any indemnification from the
third parties. Harken has tendered the defense of this claim to National Union
Fire Insurance Company, pursuant to insurance policy coverage held by XPLOR.
National Union has accepted defense of this claim subject to a reservation of
rights. Based on the facts that (i) the allegations of New West's current
petition focus primarily on defendants other than Harken, (ii) New West has
provided no evidence supporting its claims in response to Harken's discovery
requests and (iii) New West has not served process upon other defendants
described in New West's petition as being the primary wrongdoers, Harken does
not believe the claims asserted against Harken are meritorious. Therefore, in
Harken management's opinion, the ultimate outcome of this litigation will not
have a material adverse effect on Harken's financial condition.
In December 2002, a new lawsuit was filed by Black Point Limited ("Black
Point") in the United District Court for the Northern district of Illinois,
alleging that Global Ltd., aided and abetted by officers of Harken, fraudulently
induced Black Point to spend time and money locating prospective business
partners for Global Ltd. in the People's Republic of China. Black Point contends
that it located willing and suitable partners, only to have them unreasonably
rejected by Global Ltd. Black Point seeks breach of contract
114
damages of $1.5 million from Global Ltd., that amount being Black Point's
projected success fee on an unconsummated $20 million investment by a Chinese
partner. Alternatively, Black Point seeks damages of approximately $290,000 for
retainer fees foregone by Black Point, plus out of pocket expenses, from Global
Ltd. under theories of fraudulent inducement, quantum merit, and detrimental
reliance. Black Point also seeks approximately $290,000 in damages from Harken,
alleging that Harken aided and abetted Global Ltd.'s fraudulent inducement.
Harken and Global Ltd. do not believe Black Point's allegations have merit since
Global Ltd. fully complied with the terms of the agreement in good faith. On
March 6, 2003, the Court held a hearing on a Motion to Dismiss filed by Harken
and Global Ltd. At the conclusion of that hearing, the Court ruled in favor of
Harken and Global Ltd. by dismissing Black Point's complaint in its entirety. It
is anticipated that the Court will enter its official order dismissing Black
Point's complaint during the second quarter of 2003. Although Black Point may
seek reconsideration of the Court's order, or attempt to restate its claims in a
new pleading, based on the outcome of the March 6, 2003 hearing and the
underlying facts of this case Harken believes that the ultimate outcome of this
litigation will not have a material adverse effect on Harken's financial
condition
Harken has accrued approximately $5,102,000 at December 31, 2002
relating to certain operational or regulatory contingencies related to Harken
and its subsidiaries operations. Approximately $4,663,000 of this accrued amount
relates to total future abandonment costs of $7,550,000 of certain of Harken's
producing properties, which will be incurred at the end of the properties'
productive life. Approximately $439,000 of the total operational, regulatory or
litigation contingencies are expected to be paid during 2003 and are included in
current liabilities. The timing of the remaining payments of the operational and
regulatory liability cannot be reasonably estimated at this time since they
primarily relate to plugging costs that will not be incurred until the end of
the productive life of the property in question. 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.
Harken and its subsidiaries currently are involved in other various
lawsuits and contingencies, which in management's opinion, will not result in
significant loss exposure to Harken.
As of December 31, 2002, maturities of Harken's long-term and short-term
debt in 2003 through 2007 are $36,875,000, $2,400,000, $6,410,000, $0 and
$11,482,000, respectively. See Note 6 - Bank Credit Facility Obligations, Note 7
- - Investor Term Loan and Note 8 - Convertible Notes Payable for further
discussion.
115
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
On August 28, 2001, Harken dismissed Arthur Andersen LLP ("Arthur
Andersen") as Harken's independent accountants. Harken engaged Ernst and Young
LLP ("Ernst & Young") as its new independent accountants. The decision to change
Harken's independent accountants was made by Harken's Audit Committee of the
Board of Directors.
Arthur Andersen's reports on Harken's consolidated financial statements
for the year ended December 31, 2000 did not contain an adverse opinion or
disclaimer of opinion, nor were such reports qualified or modified as to
uncertainty, audit scope, or accounting principles.
During the two years ended December 31, 2000 and the subsequent interim
period preceding the decision to change independent accountants, there were no
disagreements with Arthur Andersen on any matters of accounting principles or
practices, financial statement disclosure, or auditing scope or procedure, which
disagreement(s), if not resolved to the satisfaction of Arthur Andersen, would
have caused the former accountant to make a reference to the subject matter of
the disagreement(s) in connection with its reports covering such periods.
During the two years ended December 31, 2000 and the subsequent interim
period preceding the decision to change independent accountants, there were no
"reportable events" (hereinafter defined) requiring disclosure pursuant to Item
304 (a) (1) (v) of Regulation S-K. As used herein, the term "reportable events"
means any of the items listed in paragraphs (a) (1) (v) (A) - (D) of Item 304 of
Regulation S-K.
Effective September 5, 2001, Harken engaged Ernst & Young as its
independent accountants. During the two years ended December 31, 2000 and the
subsequent interim period preceding the decision to change independent
accountants, neither Harken nor anyone on its behalf consulted Ernst & Young
regarding either the application of accounting principles to a specified
transaction, either completed or proposed, or the type of audit opinion that
might be rendered on Harken's consolidated financial statements, nor has Ernst &
Young provided to Harken a written report or oral advice regarding such
principles or audit opinion.
Harken requested and obtained a letter from Arthur Andersen addressed to
the Securities and Exchange Commission stating that it agrees with the above
statements.
Harken has been unable to obtain Arthur Andersen's written consent to
its incorporation by reference into its registration statements of Arthur
Andersen's audit report with respect to Harken's financial statements as of
December 31, 2000 and 1999, and for the years then ended. Under these
circumstances, Rule 437a under the Securities Act of 1933 permits Harken to file
this Form 10-K without a written consent from Arthur Andersen. As a result,
however, Arthur Andersen will not have any liability under Section 11(a) of the
Securities Act for any untrue statements of a material fact contained in the
financial statements audited by Arthur Andersen or any omissions of a material
fact required to be stated therein. Accordingly, you would be unable to assert a
claim against Arthur Andersen under Section 11(a) of the Securities Act for any
purchases of securities under Harken's registration statements made on or after
the date of this Form 10-K. To the extent provided in Section 11(b)(3)(C) of the
Securities Act, however, other persons who are liable under Section 11(a) of the
Securities Act, including Harken's officers and directors, may still rely on
Arthur Andersen's
116
original audit reports as being made by an expert for purposes of establishing a
due diligence defense under Section 11(b) of the Securities Act.
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
Information regarding Harken's directors and executive officers is set
forth under "Proposal Two: Election of Directors," "Executive Officers of
Harken" and "Section 16(a) Beneficial - Ownership Reporting Compliance" in the
Proxy Statement, which information is incorporated herein by reference.
ITEM 11. EXECUTIVE COMPENSATION
Information regarding Harken's compensation of its named executive
officers is set forth under "Compensation of Executive Officers" in the Proxy
Statement, which information is incorporated herein by reference. Information
regarding Harken's compensation of its directors is set forth under
"Compensation of Directors" in the Proxy Statement, which information is
incorporated herein by reference.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
Information regarding security ownership of certain beneficial owners
and management is set forth under "Ownership of Common Stock" in the Proxy
Statement, which information is incorporated herein by reference.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
Information regarding certain relationships and related transactions is
set forth under "Certain Relationships and Related Transactions" in the Proxy
Statement, which information is incorporated herein by reference.
ITEM 14. CONTROLS AND PROCEDURES
EVALUATION OF DISCLOSURE CONTROLS AND PROCEDURES
Based on their evaluation as of a date within 90 days of the filing date
of this Annual Report, Harken's principal executive officer and principal
financial officer have concluded that Harken's disclosure controls and
procedures (as defined in Rules 13a-14(c) and 15d-14(c) under the Securities
Exchange Act of 1934, as amended) are effective to ensure that information
required to be disclosed by Harken in reports that it files or submits under the
Exchange Act is recorded, processed, summarized and reported within the time
periods specified in Securities and Exchange Commission rules and forms.
CHANGES IN INTERNAL CONTROLS
117
There were no significant changes in Harken's internal controls or in
other factors that could significantly affect these controls subsequent to the
date of their evaluation, including any corrective actions with regard to
significant deficiencies and material weaknesses.
LIMITATION ON THE EFFECTIVENESS OF CONTROLS
Harken's disclosure controls and procedures and internal controls
provide reasonable, but not absolute, assurance that all deficiencies in design
or operation of these control systems, or all instances of errors or fraud, will
be prevented or detected. These control systems are designed to provide
reasonable assurance of achieving the goals or these systems in light of our
resources and nature of our business operations. These control systems remain
subject to risks of human error and the risk that controls can be circumvented
for wrongful purposes by one or more individuals in management or non-management
positions.
118
PART IV
ITEM 15. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K
(a) The following documents are filed as a part of this Annual Report:
(1) Financial Statements included in Part II of this Annual Report:
PAGE
----
Harken Energy Corporation and Subsidiaries
-- Report of Independent Auditors......................................................... 65
-- Selected Financial Data for the five years ended December 31, 2002..................... 37
-- Consolidated Balance Sheets -- December 31, 2001 and 2002.............................. 67
-- Consolidated Statements of Operations for the three years ended
December 31, 2002 .................................................................. 68
-- Consolidated Statements of Stockholders' Equity for the three years ended
December 31, 2002................................................................... 69
-- Consolidated Statements of Cash Flows for the three years ended
December 31, 2002................................................................... 70
-- Notes to Consolidated Financial Statements............................................. 71
(2) The information required by Schedule I is either provided in the
related financial statements or in a note thereto, or is not
applicable to Harken. The information required by all other
Schedules is not applicable to Harken.
(3) Exhibits
3.1 Certificate of Incorporation of Harken Energy Corporation (filed
as Exhibit 3.1 to Harken's Current Report on Form 8-K dated
February 13, 2003, File No. 1-10262, and incorporated by
reference herein).
3.2 Certificate of Amendment to Certificate of Incorporation of
Harken Energy Corporation (filed as Exhibit 3.2 to Harken's
Current Report on Form 8-K dated February 13, 2003, File No.
1-10262, and incorporated by reference herein).
3.3 Certificate of Amendment to Certificate of Incorporation of
Harken Energy Corporation (filed as Exhibit 3.3 to Harken's
Current Report on Form 8-K dated February 13, 2003, File No.
1-10262, and incorporated by reference herein).
3.4 Certificate of Amendment to Certificate of Incorporation of
Harken Energy Corporation (filed as Exhibit 3.4 to Harken's
Current Report on Form 8-K dated February 13, 2003, File No.
1-10262, and incorporated by reference herein).
3.5 Certificate of Amendment to Certificate of Incorporation of
Harken Energy Corporation (filed as Exhibit 3.5 to Harken's
Current Report on Form 8-K dated February 13, 2003, File No.
1-
119
10262, and incorporated by reference herein).
3.6 Certificate of Amendment to Certificate of Incorporation of
Harken Energy Corporation (filed as Exhibit 3.6 to Harken's
Current Report on Form 8-K dated February 13, 2003, File No.
1-10262, and incorporated by reference herein).
*3.7 Amended and Restated Bylaws of Harken Energy Corporation.
4.1 Form of certificate representing shares of Harken common stock,
par value $.01 per share (filed as Exhibit 1 to Harken's
Registration Statement on Form 8-A, File No. 1-10262, filed with
the SEC on June 1, 1989 and incorporated by reference herein).
4.2 Rights Agreement, dated as of April 6, 1998, by and between
Harken Energy Corporation and ChaseMellon Shareholder Services
L.L.C., as Rights Agent (filed as Exhibit 4 to Harken's Current
Report on Form 8-K dated April 7, 1998, file No. 1-10262, and
incorporated by reference herein).
4.3 Amendment to Rights Agreement by and between Harken Energy
Corporation and American Stock Transfer and Trust Company
(successor to Mellon Investor Services LLC, (formerly known as
ChaseMellon Shareholder Services L.L.C.), as Rights Agent, dated
June 18, 2002 (filed as Exhibit 4.11 to Harken's Quarterly
Report on Form 10-Q for the period ended September 30, 2002,
File No. 1-10262, and incorporated by reference herein).
4.4 Amendment to Rights Agreement by and between Harken Energy
Corporation and American Stock Transfer and Trust Company
(successor to Mellon Investor Services LLC, (formerly known as
ChaseMellon Shareholder Services L.L.C.), as Rights Agent, dated
August 27, 2002 (filed as Exhibit 4.12 to Harken's Quarterly
Report on Form 10-Q for the period ended September 30, 2002,
File No. 1-10262, and incorporated by reference herein).
4.5 Certificate of Designations of Series E Junior Participating
Preferred Stock (filed as Exhibit A to Exhibit 4 to Harken's
Current Report on Form 8-K dated April 7, 1998, file No.
1-10262, and incorporated by reference herein).
*4.6 Certificate of Increase of Series E Junior Participating
Preferred Stock of Harken Energy Corporation.
4.7 Certificate of Designations of Series G1 Convertible Preferred
Stock (filed as Exhibit 3.7 to Harken's Current Report on Form
8-K dated February 13, 2003, File No. 1-10262, and incorporated
by reference herein).
4.8 Certificate of Increase of Series G1 Convertible Preferred Stock
of Harken Energy Corporation (filed as Exhibit 3.8 to Harken's
Current Report on Form 8-K dated February 13, 2003, File No.
1-10262, and incorporated by reference herein).
4.9 Certificate of Designations of Series G2 Convertible Preferred
Stock (filed as Exhibit 4.10 to Harken's Annual Report on Form
10-K, as amended, for the fiscal year ended December 31,
120
2001, File No. 1-10262, and incorporated by reference herein).
/\10.1 Seventh Amendment and Restatement of Harken's Amended Stock
Option Plan (filed as Exhibit 10.1 to Harken's Annual Report on
Form 10-K for the fiscal year ended December 31, 1991, File No.
1-10262, and incorporated by reference herein).
/\10.2 Amended and Restated Non-Qualified Incentive Stock Option Plan
of Harken adopted by Harken's stockholders on February 18, 1991
(filed as Exhibit 10.2 to Harken's Annual Report on Form 10-K
for the fiscal year ended December 31, 1991, File No. 1-10262,
and incorporated by reference herein).
/\10.3 Form of Advancement Agreement dated September 13, 1990, between
Harken and each director of Harken (filed as Exhibit 10.38 to
Harken's Annual Report on Form 10-K for the fiscal year ended
December 31, 1989, File No. 1-10262, and incorporated by
reference herein).
/\10.4 Harken Energy Corporation's 1993 Stock Option and Restricted
Stock Plan (filed as Exhibit 4.3 to Harken's Registration
Statement on Form S-8, filed with the SEC on September 23, 1993,
and incorporated by reference herein).
/\10.5 First Amendment to Harken Energy Corporation's 1993 Stock Option
and Restricted Stock Plan (filed as an Exhibit 4.4 to Harken's
Registration Statement on S-8, filed with the SEC on July 22,
1996 and incorporated by reference herein).
/\10.6 Harken Energy Corporation's Directors Stock Option Plan (filed
as Exhibit 4.3 to Harken's Registration Statement on Form S-8,
and incorporated herein by reference).
10.7 Association Contract (Bolivar) by and between Harken de
Colombia, Ltd. and Empresa Colombia de Petroleos (filed as
Exhibit 10.4 to Harken's Quarterly Report on Form 10-Q for the
quarterly period ended June 30, 1996, and incorporated herein by
reference).
/\10.8 Harken Energy Corporation 1996 Incentive and Nonstatutory Stock
Option Plan (filed as Exhibit 10.1 to Harken's Quarterly Report
on Form 10-Q for the quarterly period ended September 30, 1996,
and incorporated herein by reference).
/\10.9 Amendment No. 1 to Harken Energy Corporation 1996 Incentive and
Nonstatutory Stock Option Plan (filed as Exhibit 4.5 to Harken's
Registration Statement on Form S-8, filed with the SEC on August
19, 1997 and incorporated by reference herein).
/\10.10 Amendment No. 2 to Harken Energy Corporation 1996 Incentive and
Nonstatutory Stock Option Plan (filed as Exhibit 4.6 to Harken's
Registration Statement on Form S-8, filed with the SEC on August
19, 1997 and incorporated by reference herein).
10.11 Association Contract (Alcaravan) dated as of December 13, 1992,
but effective as of February 13, 1993, by and between Empresa
Colombia de Petroleos (filed as Exhibit 10.1 to Harken's Annual
Report on Form 10-K for the fiscal year ended December 31, 1992,
File No. 1-10262, and incorporated herein by reference).
121
10.12 Association Contract (Bocachico) dated as of January 1994, but
effective as of April 1994, by and between Harken de Colombia,
Ltd. and Empresa Colombia de Petroleos (filed as Exhibit 10.1 to
Harken's Quarterly Report on Form 10-Q for the quarterly period
ended March 31, 1994, File No. 1-10262, and incorporated herein
by reference
10.13 Trust Indenture dated May 26, 1998, by and between Harken and
Marine Midland Bank plc (filed as Exhibit 10.1 to Harken's
Quarterly Report on Form 10-Q for the quarterly period ended
June 30, 1998, File No. 1-10262, and incorporated herein by
reference).
10.14 Harken Energy Corporation 5% Convertible Notes Due 2003 in the
principal sum of $6,803,679.26, dated December 30, 1999 (filed
as Exhibit 10.21 to Harken's Quarterly Report on Form 10-Q for
the period ended June 30, 2002, File No. 1-10262, and
incorporated by reference herein).
10.15 Credit Agreement, dated December 6, 2002, by and between Harken
Exploration Company, XPLOR Energy, Inc., Harken Energy West
Texas, Inc., South Coast Exploration Co., XPLOR Energy SPV-1,
Inc., Harken Gulf Exploration Company and Guaranty Bank, FSB
(filed as Exhibit 10.1 to Harken's Current Report on Form 8-K
dated December 6, 2002, File No. 1-10262, and incorporated by
reference herein).
10.16 Guaranty Agreement, dated December 6, 2002, by and between
Harken Energy Corporation and Guaranty Bank, FSB (filed as
Exhibit 10.2 to Harken's Current Report on Form 8-K dated
December 6, 2002, File No. 1-10262, and incorporated by
reference herein).
10.17 Association Contract (Cajaro) dated as of December 2001, but
effective as of February 2002, by and between Harken de
Colombia, Ltd. and Empresa Colombia de Petroleos (filed as
Exhibit 10.14 to Harken's Annual Report on Form 10-K, as
amended, for the fiscal year ended December 31, 2001, File No.
1-10262, and incorporated by reference herein).
10.18 Purchase and Sale Agreement dated January 31, 2002 between
Republic Resources, Inc. and Harken Energy Corporation (filed as
Exhibit 10.15 to Harken's Annual Report on Form 10-K, as
amended, for the fiscal year ended December 31, 2001, File No.
1-10262, and incorporated by reference herein).
10.19 Standby Purchase Agreement between Harken Energy Corporation and
Lyford Investments Enterprises Ltd. dated September 6, 2002
(filed as Exhibit 99.9 to Harken's Registration Statement on
Form S-3, filed with SEC on September 13, 2002, File No.
333-99579, and incorporated by reference herein).
10.20 Amendment No. 1 to Standby Purchase Agreement of September 6,
2002 between Harken Energy Corporation and Lyford Investments
Enterprises Ltd., dated November 22, 2002 (filed as Exhibit
99.10 to Harken's Amendment No. 1 to Registration Statement on
Form S-3, filed with the SEC on December 24, 2002, File No.
333-99579, and incorporated by reference herein).
122
10.21 Loan Agreement dated July 15, 2002 between Harken Energy
Corporation and Lyford Investments Enterprises Ltd. (filed as
Exhibit 10.18 to Harken's Quarterly Report on Form 10-Q for the
period ended June 30, 2002, File No. 1-10262, and incorporated
by reference herein).
10.22 First Amendment to Loan Agreement between Harken Energy
Corporation and Lyford Investments Enterprises Ltd., dated
August 29, 2002 (filed as Exhibit 10.2 to Harken's Quarterly
Report on Form 10-Q for the period ended September 30, 2002,
File No. 1-10262, and incorporated by reference herein).
10.23 Harken Energy Corporation 7% Senior Convertible Notes Due 2007
in the principal sum of $2,025,000, dated June 18, 2002 (filed
as Exhibit 10.19 to Harken's Quarterly Report on Form 10-Q for
the period ended June 30, 2002, File No. 1-10262, and
incorporated by reference herein).
10.24 Harken Energy Corporation 7% Senior Convertible Notes Due 2007
in the principal sum of $2,025,000, dated June 19, 2002 (filed
as Exhibit 10.20 to Harken's Quarterly Report on Form 10-Q for
the period ended June 30, 2002, File No. 1-10262, and
incorporated by reference herein).
10.25 Harken Energy Corporation 7% Senior Convertible Notes Due 2007,
Series A, in the principal sum of $2,210,000, dated August 13,
2002 (filed as Exhibit 10.3 to Harken's Quarterly Report on Form
10-Q for the period ended September 30, 2002, File No. 1-10262,
and incorporated by reference herein).
10.26 Harken Energy Corporation 7% Senior Convertible Notes Due 2007,
Series B, in the principal sum of $1,152,000, dated August 30,
2002 (filed as Exhibit 10.4 to Harken's Quarterly Report on Form
10-Q for the period ended September 30, 2002, File No. 1-10262,
and incorporated by reference herein).
10.27 Harken Energy Corporation 7% Senior Convertible Notes Due 2007,
Series C, in the principal sum of $2,000,000, dated October 9,
2002 (filed as Exhibit 10.5 to Harken's Quarterly Report on Form
10-Q for the period ended September 30, 2002, File No. 1-10262,
and incorporated by reference herein).
10.28 Harken Energy Corporation 7% Senior Convertible Notes Due 2007,
Series D, in the principal sum of $2,070,000, dated October 30,
2002 (filed as Exhibit 10.6 to Harken's Quarterly Report on Form
10-Q for the period ended September 30, 2002, File No. 1-10262,
and incorporated by reference herein).
10.29 Option Agreement between Harken Energy Corporation, The
Liverpool Limited Partnership and Elliot International LP, dated
February 13, 2003 (filed as Exhibit 10.1 to Harken's Current
Report on Form 8-K dated February 13, 2003, File No. 1-10262,
and incorporated by reference herein).
10.30 7% Senior Convertible Note due 2006, Series A by Harken Energy
Corporation payable to The Liverpool Limited Partnership in the
principal amount of $720,000.00, dated February 13, 2003
123
(filed as Exhibit 10.2 to Harken's Current Report on Form 8-K
dated February 13, 2003, File No. 1-10262, and incorporated by
reference herein).
10.31 7% Senior Convertible Note due 2006, Series A by Harken Energy
Corporation payable to Elliot International LP in the principal
amount of $880,000.00, dated February 13, 2003 (filed as Exhibit
10.3 to Harken's Current Report on Form 8-K dated February 13,
2003, File No. 1-10262, and incorporated by reference herein).
10.32 7% Senior Convertible Note due 2007, Series E by Harken Energy
Corporation payable to the Bank of New York Depository in the
principal amount of $1,420,000.00, dated January 28, 2003 (filed
as Exhibit 10.4 to Harken's Current Report on Form 8-K dated
February 13, 2003, File No. 1-10262, and incorporated by
reference herein).
10.33 7% Senior Convertible Note due 2007, Series G by Harken Energy
Corporation payable to Waverley Investments Limited in the
principal amount of $3,410,000, dated March 18, 2003 (filed as
Exhibit 10.1 to Harken's Current Report on Form 8-K dated March
18, 2003, File No. 1-10262, and incorporated by reference
herein).
10.34 Promissory note by Harken Energy Corporation payable to Waverley
Investments Limited in the principal amount of $1,705,000, dated
March 18, 2003 (filed as Exhibit 10.2 to Harken's Current Report
on Form 8-K dated March 18, 2003, File No. 1-10262, and
incorporated by reference herein).
*10.35 Option Agreement between Harken Energy Corporation and HBK
Master Fund L.P. dated March 18, 2003.
/\10.36 Executive Service Agreement by and between Harken Energy
Corporation and A. Wayne Hennecke (filed as Exhibit 10.7 to
Harken's Quarterly Report on Form 10-Q for the period ended
September 30, 2002, File No. 1-10262, and incorporated by
reference herein).
/\10.37 Severance Agreement dated June, 2002 by and between Harken
Energy Corporation and Anna M. Williams (filed as Exhibit 10.8
to Harken's Quarterly Report on Form 10-Q for the period ended
September 30, 2002, File No. 1-10262, and incorporated by
reference herein).
/\10.38 Severance Agreement dated June, 2002 by and between Harken
Energy Corporation and Bruce N. Huff (filed as Exhibit 10.9 to
Harken's Quarterly Report on Form 10-Q for the period ended
September 30, 2002, File No. 1-10262, and incorporated by
reference herein).
/\10.39 Severance Agreement dated June, 2002 by and between Harken
Energy Corporation and Jim Denny (filed as Exhibit 10.10 to
Harken's Quarterly Report on Form 10-Q for the period ended
September 30, 2002, File No. 1-10262, and incorporated by
reference herein).
/\10.40 Severance Agreement dated June, 2002 by and between Harken
Energy Corporation and Rich Cottle (filed as Exhibit 10.11 to
Harken's Quarterly Report on Form 10-Q for the period ended
September 30, 2002, File No. 1-10262, and incorporated by
reference herein).
124
/\10.41 Severance Agreement dated June, 2002 by and between Harken
Energy Corporation and Jorge Delgado, Jr. (filed as Exhibit
10.12 to Harken's Quarterly Report on Form 10-Q for the period
ended September 30, 2002, File No. 1-10262, and incorporated by
reference herein).
/\10.42 Agreement regarding Compensation In the Event of a Change In
Control dated February 1, 2000, effective as of December 30,
1999 by and between Harken Energy Corporation and Mikel D.
Faulkner (filed as Exhibit 10.13 to Harken's Quarterly Report
on Form 10-Q for the period ended September 30, 2002, File No.
1-10262, and incorporated by reference herein).
/\10.43 Amended and Restated Agreement regarding Compensation In the
Event of a Change In Control dated April 2, 2001, effective as
of December 30, 1999 by and between Harken Energy Corporation
and Mikel D. Faulkner (filed as Exhibit 10.14 to Harken's
Quarterly Report on Form 10-Q for the period ended September
30, 2002, File No. 1-10262, and incorporated by reference
herein).
/\10.44 Waiver of Change in Control Payment, dated December 10, 2002,
by and between Mikel D. Faulkner and Harken Energy Corporation
(filed as Exhibit 10.1 to Harken's Current Report on Form 8-K
dated December 10, 2002, File No. 1-10262, and incorporated by
reference herein).
*/\10.45 Waiver of Change in Control Payment, dated February 10, 2003,
by and between Mikel D. Faulkner and Harken Energy Corporation.
*/\10.46 Waiver of Change in Control Payment, dated March 5, 2003, by
and between Mikel D. Faulkner and Harken Energy Corporation.
16.1 Letter from Arthur Andersen LLP pursuant to Item 304(a)(3) of
Regulation S-K (field as Exhibit 16.1 in Harken's current
report on Form 8-K, filed on September 5, 2001, File No.
1-10262, and incorporated by reference herein).
*21 Subsidiaries of Harken (filed as Exhibit 21 to Harken's Annual
Report on Form 10-K for the fiscal year ended December 31, 2001,
File No. 1-10262, and incorporated by reference herein).
*23.1 Consents of Ernst & Young LLP and Independent Reserve Engineers.
*23.2 Information Concerning Consent of Arthur Andersen LLP.
*24 Power of Attorney.
*99.1 Certificate of the Chief Executive Officer of Harken Energy
Corporation.
*99.2 Certificate of the Chief Financial Officer of Harken Energy
Corporation.
* Filed herewith
/\ Indicates a management contract or compensatory plan or arrangement.
(b) Reports on Form 8-K
125
On December 10, 2002, Harken filed a Form 8-K with respect to a credit agreement
with Guaranty Bank, FSB.
On December 20, 2002, Harken filed a Form 8-K with respect to: an exchange of
shares of a subsidiary for shares of New Opportunities Investment Trust PLC;
certain litigation matters; and a waiver of a change of control payment.
On February 14, 2003, Harken filed a Form 8-K with respect to the issuance of
$1.6 million in principal amount of 7% European Notes due 2006 to certain
investors in exchange for $2 million in principal amount of 5% European Notes,
and a related option agreement with such investors.
On March 20, 2003, Harken filed a Form 8-K with respect to the issuance of
$3,410,000 in principal amount of 7% European Notes due 2007 and a promissory
note in principal amount of $1,705,000 due September 1, 2003 to an affiliate of
a holder of Harken's securities in exchange for 17,050 shares of Series G-1
preferred stock owned and $3,410,000 in cash.
On March 20, 2003, Harken filed a Form 8-K with respect to the closing of a
standby purchase agreement whereby Lyford Investments Enterprises Ltd.
("Lyford") was issued 59,716,227 shares of Harken common stock, resulting in
Lyford becoming a holder of approximately 62% of Harken's outstanding common
stock.
126
SIGNATURES
Pursuant to the requirements of the Section 13 or 15(d) 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, on March
27, 2003.
HARKEN ENERGY CORPORATION
/s/ Mikel D. Faulkner
-------------------------------------
Mikel D. Faulkner, Chairman of the Board of Directors and Chief
Executive Officer
/s/ Anna M. Williams
-------------------------------------
Anna M. Williams, Executive Vice President-Finance and Chief Financial
Officer
127
CERTIFICATION OF CHIEF EXECUTIVE OFFICER
PURSUANT TO 18 U.S.C. SECTION 135D,
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 annual report on Form 10-K of Harken Energy
Corporation;
2. Based on my knowledge, this annual report does not contain any untrue
statement of a material fact or omit to state a material fact necessary
to make the statements made, in light of the circumstances under which
such statements were made, not misleading with respect to the period
covered by this annual report;
3. Based on my knowledge, the financial statements, and other financial
information included in this annul 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 annual report.
4. The Registrant's other certifying officers and I are responsible for
establishing and maintaining disclosure controls and procedures (as
defined in Exchange Act Rules 13a-14 and 15d-14) for the Registrant and
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 annual
report on Form 10-K is being prepared;
(b) evaluated the effectiveness of the Registrant's disclosure controls
and procedures as of a date within 90 days prior to the filing date
of this annual report on Form 10-K (the "Evaluation Date"); and
(c) presented in this annual report on Form 10-K our conclusions about
the effectiveness of the disclosure controls and procedures based on
our evaluation as of the Evaluation Date;
5. The Registrant's other certifying officers and I have disclosed, based
on our most recent evaluation, to the Registrant's auditors and the
audit committee of Registrant's board of directors (or persons
fulfilling the equivalent function):
(a) all significant deficiencies in the design or operation of internal
controls which could adversely affect the Registrant's ability to
record, process, summarize and report financial data and have
identified for the Registrant's auditors any material weaknesses in
internal controls; and
(b) any fraud, whether or not material, that involves management or
other employees who have a significant role in the Registrant's
internal controls; and
6. The Registrant's other certifying officers and I have indicated in this
annual report on Form 10-K whether there were significant changes in
internal controls or in other factors that could significantly affect
internal controls subsequent to the date of our most recent evaluation,
including any corrective actions with regard to significant deficiencies
and material weaknesses.
Date: March 27, 2003 By: /s/ Mikel D. Faulkner
-------------------------
Mikel D. Faulkner
Chief Executive Officer
128
CERTIFICATION OF FINANCIAL OFICER
PURSUANT TO 18 U.S.C. SECTION 135D,
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 annual report on Form 10-K of Harken Energy
Corporation;
2. Based on my knowledge, this annual report does not contain any untrue
statement of a material fact or omit to state a material fact necessary
to make the statements made, in light of the circumstances under which
such statements were made, not misleading with respect to the period
covered by this annual report;
3. Based on my knowledge, the financial statements, and other financial
information included in this annul 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 annual report.
4. The Registrant's other certifying officers and I are responsible for
establishing and maintaining disclosure controls and procedures (as
defined in Exchange Act Rules 13a-14 and 15d-14) for the Registrant and
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 annual
report on Form 10-K is being prepared;
(b) evaluated the effectiveness of the Registrant's disclosure controls
and procedures as of a date within 90 days prior to the filing date
of this annual report on Form 10-K (the "Evaluation Date"); and
(c) presented in this annual report on Form 10-K our conclusions about
the effectiveness of the disclosure controls and procedures based on
our evaluation as of the Evaluation Date;
5. The Registrant's other certifying officers and I have disclosed, based
on our most recent evaluation, to the Registrant's auditors and the
audit committee of Registrant's board of directors (or persons
fulfilling the equivalent function):
(a) all significant deficiencies in the design or operation of internal
controls which could adversely affect the Registrant's ability to
record, process, summarize and report financial data and have
identified for the Registrant's auditors any material weaknesses in
internal controls; and
(b) any fraud, whether or not material, that involves management or
other employees who have a significant role in the Registrant's
internal controls; and
6. The Registrant's other certifying officers and I have indicated in this
annual report on Form 10-K whether there were significant changes in
internal controls or in other factors that could significantly affect
internal controls subsequent to the date of our most recent evaluation,
including any corrective actions with regard to significant deficiencies
and material weaknesses.
Date: March 27, 2003 By: /s/ Anna M. Williams
-------------------------
Anna M. Williams
Executive Vice President -Finance and
Chief Financial Officer
129