<PAGE> 1
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SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
FOR THE QUARTERLY PERIOD ENDED SEPTEMBER 30, 1998
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
FOR THE TRANSITION PERIOD FROM TO
COMMISSION FILE NUMBER 0-9207
HARKEN ENERGY CORPORATION
(Exact name of registrant as specified in its charter)
DELAWARE 95-2841597
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
5605 N. MACARTHUR BLVD., SUITE 400 75038
IRVING, TEXAS (Zip Code)
(Address of principal executive offices)
Registrant's telephone number, including area code (972) 753-6900
INDICATE BY CHECK MARK WHETHER THE REGISTRANT (1) HAS FILED ALL REPORTS
REQUIRED TO BE FILED BY SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF
1934 DURING THE PRECEDING 12 MONTHS (OR FOR SUCH SHORTER PERIOD THAT THE
REGISTRANT WAS REQUIRED TO FILE SUCH REPORTS), AND (2) HAS BEEN SUBJECT TO SUCH
FILING REQUIREMENTS FOR THE PAST 90 DAYS. YES [X] NO [ ]
The number of shares of Common Stock, par value $0.01 per share,
outstanding as of November 2, 1998 was 132,708,830.
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HARKEN ENERGY CORPORATION
INDEX TO QUARTERLY REPORT
SEPTEMBER 30, 1998
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
PART I. FINANCIAL INFORMATION
Item 1. Condensed Financial Statements
Consolidated Condensed Balance Sheets........................................... 4
Consolidated Condensed Statements of Operations................................. 5
Consolidated Condensed Statements of Stockholders' Equity....................... 6
Consolidated Condensed Statements of Cash Flow.................................. 7
Notes to Consolidated Condensed Financial Statements............................ 8
Item 2. Management's Discussion and Analysis of Financial Condition
and Results of Operations.................................................... 20
PART II. OTHER INFORMATION
Notes Concerning Other Information.............................................. 30
SIGNATURES ................................................................................ 33
</TABLE>
2
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PART I - FINANCIAL INFORMATION
3
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ITEM 1. CONDENSED FINANCIAL STATEMENTS
HARKEN ENERGY CORPORATION AND SUBSIDIARIES
CONSOLIDATED CONDENSED BALANCE SHEETS
(Unaudited)
<TABLE>
<CAPTION>
DECEMBER 31, SEPTEMBER 30,
1997 1998
------------ -------------
ASSETS
<S> <C> <C>
Current Assets:
Cash and temporary investments $ 85,740,000 $167,483,000
Cash in segregated accounts 37,771,000 --
Accounts and notes receivable, net 2,175,000 2,964,000
Related party notes receivable 295,000 298,000
Prepaid expenses and other current assets 411,000 617,000
------------ ------------
Total Current Assets 126,392,000 171,362,000
Property and Equipment, net 106,798,000 147,805,000
Other Assets, net 5,323,000 11,852,000
------------ ------------
$238,513,000 $331,019,000
============ ============
LIABILITIES AND STOCKHOLDERS' EQUITY
Current Liabilities:
Trade payables $ 6,268,000 $ 5,321,000
Accrued liabilities and other 8,668,000 6,989,000
Revenues and royalties payable 816,000 590,000
------------ ------------
Total Current Liabilities 15,752,000 12,900,000
European Convertible Notes Payable 39,880,000 85,000,000
Deferred Revenue 25,000,000 30,445,000
Stockholders' Equity:
Series F Preferred Stock, $1.00 par value; 15,000 shares
authorized and issued as of September 30, 1998 -- 15,000
Common stock, $0.01 par value; 225,000,000 shares authorized;
121,811,534 and 133,408,830 shares issued, respectively 1,218,000 1,334,000
Additional paid-in capital 248,770,000 323,139,000
Retained deficit and other comprehensive income (92,107,000) (119,262,000)
Treasury stock, at cost, 700,000 shares held as of
September 30, 1998 -- (2,552,000)
------------ ------------
Total Stockholders' Equity 157,881,000 202,674,000
------------ ------------
$238,513,000 $331,019,000
============ ============
</TABLE>
The accompanying Notes to Consolidated Condensed Financial Statements
are an integral part of these Statements.
4
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HARKEN ENERGY CORPORATION AND SUBSIDIARIES
CONSOLIDATED CONDENSED STATEMENTS OF OPERATIONS
(Unaudited)
<TABLE>
<CAPTION>
THREE MONTHS ENDED NINE MONTHS ENDED
SEPTEMBER 30, SEPTEMBER 30,
----------------------------- -----------------------------
1997 1998 1997 1998
------------- ------------- ------------- -------------
<S> <C> <C> <C> <C>
Revenues:
Oil and gas operations $ 3,508,000 $ 3,097,000 $ 10,352,000 $ 8,431,000
Interest and other income 1,492,000 2,657,000 2,926,000 6,581,000
------------- ------------- ------------- -------------
5,000,000 5,754,000 13,278,000 15,012,000
------------- ------------- ------------- -------------
Costs and Expenses:
Oil and gas operating expenses 1,522,000 1,690,000 4,008,000 4,418,000
General and administrative expenses, net 1,571,000 2,018,000 4,071,000 5,542,000
Depreciation and amortization 1,282,000 1,462,000 3,612,000 3,878,000
Valuation allowance -- 27,787,000 -- 27,787,000
Interest expense and other, net 587,000 322,000 1,435,000 538,000
------------- ------------- ------------- -------------
4,962,000 33,279,000 13,126,000 42,163,000
------------- ------------- ------------- -------------
Income (loss) before income taxes 38,000 (27,525,000) 152,000 (27,151,000)
Income tax expense -- -- -- 46,000
------------- ------------- ------------- -------------
Net income (loss) $ 38,000 $ (27,525,000) $ 152,000 $ (27,197,000)
============= ============= ============= =============
Accretion related to preferred stock -- (187,000) -- (356,000)
------------- ------------- ------------- -------------
Net income (loss) attributed to
common stock $ 38,000 $ (27,712,000) $ 152,000 $ (27,553,000)
============= ============= ============= =============
Income (loss) per common share:
Basic income (loss) per common share $ 0.00 $ (0.22) $ 0.00 $ (0.22)
============= ============= ============= =============
Weighted average shares outstanding 114,640,028 133,218,144 105,457,706 126,394,977
============= ============= ============= =============
Diluted income (loss) per common share $ 0.00 $ (0.22) $ 0.00 $ (0.22)
============= ============= ============= =============
Weighted average shares outstanding 117,383,551 133,218,144 108,390,892 126,394,977
============= ============= ============= =============
</TABLE>
The accompanying Notes to Consolidated Condensed Financial Statements are
an integral part of these Statements.
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HARKEN ENERGY CORPORATION AND SUBSIDIARIES
CONSOLIDATED CONDENSED STATEMENTS OF STOCKHOLDERS' EQUITY
(Unaudited)
<TABLE>
<CAPTION>
ACCUMULATED
ADDITIONAL OTHER
PREFERRED COMMON PAID-IN TREASURY RETAINED COMPREHENSIVE
STOCK STOCK CAPITAL STOCK DEFICIT INCOME (LOSS) TOTAL
--------- ------------- ------------- ------------- ------------- ------------- -------------
<S> <C> <C> <C> <C> <C> <C> <C>
Balance, December 31, 1996 $ -- $ 939,000 $ 171,191,000 $ (1,390,000) $ (92,386,000) $ (15,000) $ 78,339,000
Issuance of common stock,
net -- 77,000 20,208,000 -- -- -- 20,285,000
Conversions of European
notes payable -- 202,000 57,371,000 1,390,000 -- -- 58,963,000
Comprehensive income:
Equity adjustment from
foreign currency
translation -- -- -- -- -- 105,000
Net income -- -- -- -- 189,000 --
Total comprehensive
income 294,000
--------- ------------- ------------- ------------- ------------- ------------- -------------
Balance, December 31, 1997 -- 1,218,000 248,770,000 -- (92,197,000) 90,000 157,881,000
Issuance of common stock,
net -- 37,000 22,597,000 -- -- -- 22,634,000
Treasury shares purchased -- -- -- (2,552,000) -- -- (2,552,000)
Issuance of preferred stock 15,000 -- 14,437,000 -- -- -- 14,452,000
Conversions of European
notes payable -- 79,000 37,335,000 -- -- -- 37,414,000
Comprehensive income (loss):
Equity adjustment from
foreign currency
translation -- -- -- -- -- 42,000
Net loss -- -- -- -- (27,197,000) --
Total comprehensive loss (27,155,000)
--------- ------------- ------------- ------------- ------------- ------------- -------------
Balance, September 30, 1998 $ 15,000 $ 1,334,000 $ 323,139,000 $ (2,552,000) $(119,394,000) $ 132,000 $ 202,674,000
========= ============= ============= ============= ============= ============= =============
</TABLE>
The accompanying Notes to Consolidated Condensed Financial Statements are
an integral part of these Statements.
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HARKEN ENERGY CORPORATION AND SUBSIDIARIES
CONSOLIDATED CONDENSED STATEMENTS OF CASH FLOWS
(Unaudited)
<TABLE>
<CAPTION>
NINE MONTHS ENDED
SEPTEMBER 30,
------------------------------
1997 1998
------------ ------------
<S> <C> <C>
Cash flows from operating activities:
Net income (loss) $ 152,000 $(27,197,000)
Adjustments to reconcile net income (loss) to net cash
provided by operating activities:
Depreciation and amortization 3,612,000 3,878,000
Valuation allowance -- 27,787,000
Amortization of European note issuance costs 429,000 77,000
Provision for doubtful accounts -- 15,000
Change in assets and liabilities:
Decrease (increase) in accounts receivable (366,000) (682,000)
Increase (decrease) in trade payables and other 929,000 (2,415,000)
------------ ------------
Net cash provided by operating activities 4,756,000 1,463,000
------------ ------------
Cash flows from investing activities:
Proceeds from sales of assets 7,000 --
Investor advances, net 6,860,000 10,832,000
Capital expenditures, net (18,617,000) (63,140,000)
------------ ------------
Net cash used in investing activites (11,750,000) (52,308,000)
------------ ------------
Cash flows from financing activities:
Transfer from segregated account cash 36,564,000 37,615,000
Proceeds from issuances of common stock,
net of issuance costs 5,291,000 2,075,000
Proceeds from issuance of preferred stock, net -- 14,452,000
Proceeds from issuance of European notes, net -- 81,800,000
Treasury shares purchased -- (2,552,000)
Investment in segregated account cash, net (646,000) (802,000)
------------ ------------
Net cash provided by financing activities 41,209,000 132,588,000
------------ ------------
Net increase in cash and temporary investments 34,215,000 81,743,000
Cash and temporary investments at beginning of period 9,855,000 85,740,000
------------ ------------
Cash and temporary investments at end of period $ 44,070,000 $167,483,000
============ ============
Supplemental disclosures of cash flow information:
Cash paid during the period for:
Interest $ 1,881,000 $ 10,000
Income taxes -- --
</TABLE>
The accompanying Notes to Consolidated Condensed Financial Statements
are an integral part of these Statements.
7
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HARKEN ENERGY CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS
SEPTEMBER 30, 1997 AND 1998
(Unaudited)
(1) MANAGEMENT'S REPRESENTATIONS
In the opinion of Harken Energy Corporation ("Harken"), the accompanying
unaudited consolidated condensed financial statements contain all adjustments
necessary to present fairly its financial position as of December 31, 1997 and
September 30, 1998 and the results of its operations and changes in its cash
flows for all periods presented as of September 30, 1997 and 1998. These
adjustments represent normal recurring items.
The accompanying unaudited condensed financial statements have been
prepared pursuant to the rules and regulations of the Securities and Exchange
Commission ("SEC"). Certain information and note disclosures normally included
in annual financial statements prepared in accordance with generally accepted
accounting principles have been condensed or omitted pursuant to these rules and
regulations, although Harken believes that the disclosures made are adequate to
make the information presented not misleading. It is suggested that these
condensed financial statements be read in conjunction with the financial
statements and the notes thereto included in Harken's Form 10-K for the year
ended December 31, 1997.
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the financial
statements and the reported amounts of revenues and expenses during the reported
period. Actual results could differ from these estimates.
The results of operations for the nine month period ended September 30,
1998 are not necessarily indicative of the results to be expected for the full
year.
(2) ACQUISITIONS
On August 29, 1997, Harken, along with Harken Exploration Company, a
wholly-owned subsidiary, purchased working interests in oil and gas properties
located in the panhandle region of Texas (the "Cal-T Properties"). The purchase
price of approximately $3,416,000 consisted primarily of 565,000 shares of
Harken common stock.
On May 19, 1998, Harken, along with Harken Exploration Company, a
wholly-owned subsidiary, purchased working interests in oil and gas properties
located in southern Louisiana (the "Bargo Properties") from St. Martinville
Partners, Ltd. and Bargo Energy Company (collectively "the Sellers"). The
purchase price consisted of 2,716,483 shares of Harken common stock, having an
approximate value of $16,250,000, which were issuable at closing. Pursuant to
the Asset Purchase and Sale Agreement, additional consideration having a value
of $4,000,000 less certain adjustments, is payable by Harken to the Sellers if
the Sellers are able to obtain new or renewal leases for certain of the Bargo
Properties. Such adjustments may include unresolved title issues on certain
leases and an allowance of up to a maximum of $750,000 for environmental and
regulatory compliance. The amount of the additional consideration is currently
being negotiated with the Sellers and is payable at Harken's option in the form
of additional shares of Harken common stock or cash. See Note 11 - Related Party
Transactions for a discussion of the relationship between Harken and the
Sellers.
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(3) MARKETABLE SECURITIES
Included within cash and temporary investments and cash in segregated
accounts at December 31, 1997 and September 30, 1998 are certain investments in
marketable debt securities having maturities of sixty days or less. Harken
management determines the appropriate classification of such debt securities at
the time of purchase and reevaluates such designation as of each balance sheet
date. Such debt securities are classified as held-to-maturity as Harken has the
positive intent and ability to hold the securities to maturity. Held-to-maturity
securities are stated at amortized cost, adjusted for amortization of premiums
and accretion of discounts to maturity. Such amortization is included in
interest and other income. Harken holds no securities which are classified as
available-for-sale or trading.
The following is a summary of held-to-maturity securities:
<TABLE>
<CAPTION>
December 31, September 30,
1997 1998
------------ -------------
<S> <C> <C>
Included in cash and temporary investments:
Cost $ 50,906,000 $ 143,455,000
Estimated fair value $ 50,973,000 $ 143,890,000
Included in segregated accounts:
Cost $ 37,184,000 $ --
Estimated fair value $ 37,242,000 $ --
</TABLE>
Harken includes in cash and temporary investments and cash in segregated
accounts other cash and cash equivalent amounts in addition to the above
marketable debt securities.
(4) PROPERTY AND EQUIPMENT
A summary of property and equipment follows:
<TABLE>
<CAPTION>
December 31, September 30,
1997 1998
------------ -------------
<S> <C> <C>
Unevaluated oil and gas properties:
Unevaluated Colombian properties $ 21,413,000 $ 31,662,000
Unevaluated domestic properties 5,780,000 11,368,000
Evaluated oil and gas properties:
Evaluated Colombian properties 22,754,000 60,402,000
Evaluated domestic properties 67,431,000 85,152,000
Gas plant and other property 8,325,000 9,803,000
Less accumulated depreciation and amortization,
and valuation allowance (18,905,000) (50,582,000)
------------ ------------
$106,798,000 $147,805,000
============ ============
</TABLE>
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Valuation Allowance on Oil and Gas Properties - The capitalized costs of
proved oil and gas properties are subject to a "ceiling test", which limits such
costs, on a country-by-country basis, to the estimated present value, discounted
at a ten percent interest rate, of future net cash flows from related proved
reserves, based on current economic and operating conditions. If capitalized
costs exceed this limit, the excess is charged to depreciation, depletion and
amortization. Application of these rules during periods of relatively low oil
and gas prices, even if of short-term duration, may result in write-downs.
In the third quarter of 1998, Harken recorded a non-cash valuation
allowance on its U.S. domestic oil and gas properties of approximately $27.8
million due to the significant decline in its estimated present value of future
net cash flows as a result of low oil and gas prices at September 30, 1998 and
downward U.S. domestic reserve revisions during the third quarter of 1998.
(5) COLOMBIAN OPERATIONS
Harken's Colombian operations are conducted through Harken de Colombia,
Ltd., a wholly-owned subsidiary of Harken, which held six exclusive Colombian
Association Contracts with Empresa Colombiana de Petroleos ("Ecopetrol") as of
September 30, 1998. These Association Contracts include the Alcaravan Contract,
awarded in 1992, the Bocachico Contract, awarded in 1994, the Cambulos Contract,
awarded in 1995, the Bolivar Contract, awarded in 1996, the Miradores Contract,
awarded in December 1997, and the Los Olmos Contract, awarded in March 1998. The
Alcaravan and Miradores Contracts currently cover a combined area of
approximately 242,000 acres in the Llanos Basin of Eastern Colombia. The
Bocachico and Cambulos Contracts cover a combined area of approximately 492,000
acres in the Middle Magdalena Valley of Central Colombia and the Bolivar
Contract covers an area of approximately 250,000 acres in the Northern Middle
Magdalena Valley of Central Colombia. The Los Olmos Contract covers
approximately 374,000 acres in the Lower Magdalena Valley of Northern Colombia.
Terms of each of the Association Contracts commit Harken to perform
certain activities in accordance with a prescribed timetable. As of November 1,
1998, Harken was in compliance with the requirements of each of the Association
Contracts, as amended. As of November 1, 1998, the Islero #1 well, on the
Cambulos Association Contract area, had been drilled to a maximum depth of 7,312
feet, penetrating the Lower Seca formation. Harken has elected to continue to
drill this well deeper to attempt a test of the Cimarrona formation, which is
the primary target formation for this well. The Cambulos Association Contract
requires Harken to have drilled two wells to a depth sufficient to test
productive formations for oil and/or gas by November 17, 1998. Due to the
ongoing drilling being conducted on the Islero #1 well, Harken contemplates that
it will request an extension of time for fulfilling the second well obligation
under the Cambulos Association Contract. If Harken is unable to obtain such an
extension, Harken may be required to select and relinquish a portion of the
acreage within the Cambulos Contract area, which event, in the opinion of Harken
management, would not have a material adverse effect on Harken's business.
Under the terms of the Association Contracts, if, during the first six
years of each contract, Harken discovers one or more fields of producing oil or
gas in quantities that are economically exploitable and Ecopetrol agrees that
such field is economically exploitable (a "commercial discovery"), the term of
that contract will be extended for a period of 22 years from the date of such
commercial discovery. Upon discovery of a field capable of commercial
production, and upon commencement of production from that commercial field,
Ecopetrol will begin to reimburse Harken for 50% of Harken's successful well
costs expended up to the point of declaration of a commercial discovery plus, in
the case of the Cambulos, Bolivar, Miradores and Los Olmos Contracts, 50% of all
seismic and dry well costs incurred prior to the point of declaration of a
commercial discovery. Production from a commercial discovery will be allocated
as follows: Ecopetrol, on behalf of the Colombian government, will receive a 20%
royalty interest in all
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production, and all production (after royalty payments) will be allocated 50% to
Ecopetrol and 50% to Harken 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. 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 Harken's share of
production. After a declaration of a commercial discovery, Harken and Ecopetrol
will be responsible for all future development costs and operating expenses in
direct proportion to their interest in production. For any fields that are not
declared by Ecopetrol to be a commercial discovery, Harken would retain the
rights to all production after royalty.
Harken has entered into certain development finance and operating
agreements with outside parties whereby such parties have received a beneficial
interest in certain of Harken's Colombian operations. For further discussion,
see Note 6 - Development Finance and Operating Agreements.
(6) DEVELOPMENT FINANCE AND OPERATING AGREEMENTS
Rio Negro Development Finance Agreement - In October 1995, Harken entered
into a Development Finance Agreement (the "Rio Negro Development Finance
Agreement") with Arbco Associates L.P., Offense Group Associates L.P., Kayne
Anderson Nontraditional Investments L.P. and Opportunity Associates L.P.
(collectively, the "Rio Negro Investors"), pursuant to which the Rio Negro
Investors provided $3,500,000 to Harken to finance drilling on the Rio Negro
prospect in the Bocachico Contract area in exchange for the right to receive
future payments from Harken equal to 40% of the net profits that Harken de
Colombia, Ltd. may derive from the sale of oil and gas produced from the Rio
Negro prospect (the "Rio Negro Participation").
In March 1997, Harken and the Rio Negro Investors entered into a
Conversion Agreement whereby Harken purchased 75% of the Rio Negro Participation
in exchange for 900,000 restricted shares of Harken common stock. From the
remaining 25% of the Rio Negro Participation retained, the Rio Negro Investors
have the right to receive 10% of the net profits that Harken de Colombia, Ltd.
may derive from the sale of oil and gas produced from the Rio Negro prospect.
Palo Blanco Development Finance Agreements - In June 1996, Harken, along
with Harken de Colombia, Ltd., entered into separate Development Finance
Agreements with two investors. Under the terms of the agreements, the two
investors provided an aggregate of $2,500,000 to finance the drilling of a well
on the Palo Blanco prospect in the Alcaravan Association Contract area. In
return for the $2,500,000, the investors were initially granted a beneficial
interest in 40% of the net profits from the Palo Blanco prospect which might
have been received by Harken de Colombia, Ltd. In 1996, the investors exercised
their rights under the agreement to convert one-half of their beneficial
interest into 599,988 shares of restricted Harken common stock. During the first
quarter of 1997, the investors exercised their right to convert the remaining
portion of their beneficial interest into an additional 599,988 shares of
restricted Harken common stock.
Rochester Agreement - Harken de Colombia, Ltd. has entered into an
operating agreement (the "Rochester Agreement") with Rochester Energy
Corporation ("Rochester", a Canadian corporation) pursuant to which Rochester
has paid 33 1/3% of the aggregate costs of the Estero #1 well and related
production facilities on the Palo Blanco prospect, 25% of the aggregate costs
related to the Estero #3 well, and 25% of the aggregate costs of the initial
well drilled on the Anteojos prospect, the Canacabare #1, all of which are
located within the Alcaravan Contract area, along with 25% of the aggregate
costs related to the Miradores Association Contract. In exchange, Rochester
acquired a beneficial interest equal to 25% of the interest held by Harken de
Colombia, Ltd. in the Palo Blanco and Anteojos prospect operations.
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Parkcrest Financing Agreement - Harken de Colombia, Ltd. has entered into
a financing agreement (the "Parkcrest Financing Agreement") with Parkcrest
Explorations, Ltd. ("Parkcrest", a Canadian corporation) pursuant to which
Parkcrest has paid 33 1/3% of the aggregate costs of the Estero #1 well and
related production facilities on the Palo Blanco prospect, 33 1/3% of the
aggregate costs of the initial well to be drilled on the Anteojos prospect, the
Canacabare #1, and 25% of the aggregate costs related to the Estero #3 well, all
of which are located within the Alcaravan Contract area. In addition, Parkcrest
will pay 33 1/3% of the aggregate costs of the initial well to be drilled under
the Miradores Association Contract. Parkcrest is also responsible for their
contracted percentage share of costs related to seismic on the Alcaravan and
Miradores Contract areas. In exchange, Parkcrest, upon its full performance,
will acquire a beneficial interest equal to 25% of the interest held by Harken
de Colombia, Ltd. in these prospects.
In April 1998, Harken and Parkcrest entered into a Loan and Security
Agreement (the "Parkcrest Loan Agreement") whereby Harken agreed to provide up
to $2,600,000 to Parkcrest to be used as needed by Parkcrest to finance its
share of costs under the Parkcrest Financing Agreement. Under the terms of the
Parkcrest Loan Agreement, any outstanding loans bear interest at 6% per annum in
addition to a monthly management fee payable to Harken of $37,500 per month. Any
outstanding balance pursuant to the Parkcrest Loan Agreement is due and payable
by Parkcrest on November 30, 1998 and is secured by 50% of Parkcrest's
beneficial interest in the Palo Blanco prospect. As of September 30, 1998,
Parkcrest had borrowed approximately $2,242,000 pursuant to the Parkcrest Loan
Agreement, and such amount is included in Other Assets in the accompanying
balance sheet.
EnCap Development Finance Agreement - In October 1997, Harken entered
into a Development Finance Agreement (the "EnCap Development Finance Agreement")
with EnCap Energy Capital Fund III, L.P., EnCap Energy Capital Fund III-B, L.P.,
BOCP Energy Partners, L.P. and Energy Capital Investment Company PLC
(collectively the "EnCap Investors"), pursuant to which the EnCap Investors
provided $25 million (the "Payment Amount"), less a 2% investment banking fee,
to Harken to finance the planned drilling of the initial wells on three
unexplored oil and gas prospects in the Middle Magdalena Basin of Colombia. As
part of the transaction, Harken issued 150,000 shares of Harken common stock to
the EnCap Investors. The three well exploratory program contemplates the
drilling of one prospect on Harken's Bocachico Contract area and the drilling of
two prospects on Harken's Cambulos Contract area, including the Islero #1 well
which is currently drilling. In exchange, the EnCap Investors received the right
to receive future payments from Harken equal to 5% of the net profits that
Harken de Colombia, Ltd. may derive from the sale of oil and gas produced from
each of the three prospects if the planned drilling on the prospect is
successful (the "EnCap Participation"). Pursuant to the EnCap Development
Finance Agreement, Harken is obligated to drill each of the three wells prior to
October 2000.
Pursuant to the EnCap Development Finance Agreement, the EnCap Investors
have the right, for a period of two years beginning in October 1998, to convert
all or part of the EnCap Participation into shares of Harken common stock. The
number of shares of Harken common stock to be issued upon conversion of the
EnCap Participation will be equal to the quotient of (i) the Payment Amount
(less any distributions made in respect of the EnCap Participation) plus an
amount equal to 15% interest per annum on the net Payment Amount compounded
monthly (the "Invested Amount"), divided by (ii) the market price of Harken
common stock at the time of conversion. During the same two year period, Harken
also has the right to convert the EnCap Participation into shares of Harken
common stock with the number of shares of Harken common stock to be issued to be
equal to the quotient of (i) the Payment Amount (less any distribution made in
respect of the EnCap Participation) plus an amount equal to 25% interest per
annum on the net Payment Amount compounded monthly, divided by (ii) the market
price of Harken common stock at the time of conversion. Harken can also elect to
pay cash upon any conversion of the EnCap Participation in lieu of issuing
Harken common stock. The EnCap Development Finance Agreement also provides for
additional
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shares of Harken common stock to be issued by Harken in the event of a
conversion to the extent that the EnCap Investors do not, under certain
circumstances, realize the Invested Amount from the sale of shares of Harken
common stock issued at the conversion. See Note 11 - Related Party Transactions
for a discussion of the relationship between Harken and the EnCap Investors.
European Development Finance Agreements - In December 1997, Harken
entered into a Development Finance Agreement and other related agreements (the
"European Development Finance Agreement") whereby Sidro S.A., Lambertine
Holdings, Ltd. and Rauscher Pierce and Clark (collectively the "European
Investors") purchased all of the outstanding common stock of Harken Capital
Corporation, ("HCC", a newly-formed U.S. corporation) for $7 million. Pursuant
to the European Development Finance Agreement, HCC then provided the $7 million
to Harken in January 1998 to finance a portion of the cost of the three-well
exploratory program discussed above pursuant to the EnCap Development Finance
Agreement. In exchange, HCC received the right to receive future payments from
Harken equal to 1.4% of the net profits that Harken de Colombia, Ltd. may derive
from the sale of oil and gas produced from each of the three prospects if the
planned drilling on the prospect is successful. Beginning in December 1998, the
European Investors have the right to convert their shares of HCC into shares of
Harken common stock with terms substantially identical to the EnCap Development
Finance Agreement. As part of the transaction, Harken issued 42,000 shares of
Harken common stock to the European Investors and paid a cash fee of $175,000 to
one of the European Investors.
In March 1998, Harken received directly an additional $3 million pursuant
to a Development Finance Agreement with Faisal Finance ("Faisal"), which
contains terms substantially identical to the EnCap Development Finance
Agreement, including conversion provisions which begin in March 1999. In
exchange, Faisal received the right to receive future payments from Harken equal
to 0.6% of the net profits that Harken de Colombia, Ltd. may derive from the
sale of oil and gas produced from each of the three prospects discussed above
pursuant to the EnCap Development Finance Agreement if the planned drilling on
the prospect is successful. As part of this transaction, Harken issued 18,000
shares of Harken common stock and paid a cash fee of $75,000 to a financial
advisor.
(7) EUROPEAN CONVERTIBLE NOTES PAYABLE
6 1/2% European Notes - On July 30, 1996, Harken issued to qualified
purchasers a total of $40 million in 6 1/2% Senior Convertible Notes (the "6
1/2% European Notes") which were to mature on July 30, 2000. Such 6 1/2%
European Notes were convertible at any time by the holders into shares of Harken
common stock at a conversion price of $2.50 per share ("the 6 1/2% European Note
Conversion Price"). The 6 1/2% European Notes were also convertible by Harken
into shares of Harken common stock after one year following issuance, if for any
period of thirty consecutive days commencing on or after November 28, 1996, the
closing price of Harken common stock for each trading day during such period
shall have equaled or exceeded 135% of the 6 1/2% European Note Conversion Price
(or $3.375 per share of Harken common stock).
During the last half of 1996, holders of 6 1/2% European Notes totaling
$1,400,000 exercised their conversion option and such holders were issued
560,000 shares of Harken common stock. In February 1997, Harken gave notice as
required under the Trust Indenture that it had met the market price criteria
necessary to call for mandatory conversion of the 6 1/2% European Notes and on
June 2, 1997 formally called the 6 1/2% European Notes for conversion on July
31, 1997. During the first six months of 1997, holders of 6 1/2% European Notes
totaling $19,300,000 exercised their conversion option and such holders were
issued 7,720,000 shares of Harken common stock. On July 31, 1997, Harken
converted the remaining 6 1/2% European Notes into 7,720,000 shares of Harken
common stock.
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<PAGE> 14
5 1/2% European Notes - On June 11, 1997, Harken issued to qualified
purchasers a total of $70 million in 5 1/2% Senior Convertible Notes ( the "5
1/2% European Notes") which were to mature on June 10, 2002. Such 5 1/2%
European Notes were convertible into shares of Harken common stock at an initial
conversion price of $5.00 per share, subject to adjustment in certain
circumstances ("the 5 1/2% European Note Conversion Price"). The Trust Indenture
provided for a five percent premium on the number of shares of Harken common
stock issuable on conversion that was paid to holders converting the 5 1/2%
European Notes prior to December 11, 1997. The 5 1/2% European Notes were also
convertible by Harken into shares of Harken common stock after one year
following issuance, if for any period of thirty consecutive days commencing on
or after June 11, 1997, the average of the closing prices of Harken common stock
for each trading day during such thirty day period shall have equaled or
exceeded 130% of the 5 1/2% European Note Conversion Price (or $6.50 per share
of Harken common stock). In October 1997, Harken met the market price criteria
necessary to call for mandatory conversion of the 5 1/2% European Notes any time
on or after June 11, 1998, and provided notice to the holders as required under
the Trust Indenture. In May 1998, Harken formally called the 5 1/2% European
Notes which remained outstanding for conversion on June 12, 1998. As of December
31, 1997, holders of 5 1/2% European Notes totaling $30,120,000 exercised their
conversion option and such holders were issued 6,325,200 shares of Harken common
stock. During the first six months of 1998, additional holders of 5 1/2%
European Notes totaling $610,000 have exercised their conversion option and such
holders were issued an additional 122,000 shares of Harken common stock. On June
12, 1998, Harken converted the remaining 5 1/2% European Notes into 7,854,000
shares of Harken common stock.
Upon closing, all proceeds from the sale of the 6 1/2% European Notes and
5 1/2% European Notes, net of commissions and issuance costs, were each
initially paid to a Trustee under the terms of a Trust Indenture covering each
issue and held in separate interest bearing Trust accounts (the "Segregated
Accounts") to be maintained for Harken's benefit until the Trustee was presented
with evidence of sufficient asset value, as defined in the Trust Indenture, held
by Harken to permit an advance of a portion of the proceeds. Until all of the 5
1/2% European Notes were converted, Harken was to maintain an Asset Value
Coverage Ratio as defined in the Trust Indenture. Upon the June 1998 conversion
of the 5 1/2% European Notes which remained outstanding, Harken transferred the
approximately $37.6 million remaining in the Segregated Accounts to its main
operating account.
All Segregated Account cash related to the 5 1/2% European Notes is
reflected as a current asset at December 31, 1997 as all such cash was available
according to the Trust Indenture. The initial cash proceeds received in 1997
from the issuance of the 5 1/2% European Notes are not included in the Statement
of Cash Flows during that period because the proceeds are not considered to be
cash equivalents due to the Segregated Account requirement of these notes.
Transfers of proceeds from the Segregated Accounts are included in cash flows
from financing activities in the accompanying consolidated statements of cash
flows.
5% European Notes - On May 26, 1998, Harken issued to qualified
purchasers a total of $85 million in 5% Senior Convertible Notes (the "5%
European Notes") which mature on May 26, 2003. In connection with the sale and
issuance of the 5% European Notes, Harken paid approximately $4,256,000 from the
5% European Notes proceeds for commissions and issuance costs. Interest incurred
on these notes is payable semi-annually in May and November of each year to
maturity or until the 5% European Notes are converted. Such 5% European Notes
are convertible into shares of Harken common stock at an initial conversion
price of $6.50 per share, subject to adjustment in certain circumstances ("the
5% European Note Conversion Price"). The Trust Indenture provides for a three
percent premium on the number of shares of Harken common stock issuable on
conversion to holders of the 5% European Notes who convert prior to November 25,
1998. The 5% European Notes are also convertible by Harken into shares of Harken
common stock after May 26, 1999, if for any period of thirty consecutive days
commencing on or after May 26, 1998, the average of the closing prices of Harken
common stock for each trading day during such thirty-day period
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<PAGE> 15
shall have equaled or exceeded 125% of the 5% European Note Conversion Price (or
$8.125 per share of Harken common stock). The 5% European Notes may be redeemed
for cash, at Harken's option, at par, in whole or in part, at any time after May
26, 2002, upon not less than 30 days notice to the holders. In addition,
beginning November 26, 2002, Harken may redeem up to 50% of the 5% European
Notes in exchange for shares of Harken common stock at a defined conversion
price based on an average market price of Harken common stock. Beginning May 26,
2003, Harken may similarly redeem all remaining 5% European Notes. The 5%
European Notes are listed on the Luxembourg Stock Exchange.
Commissions and issuance costs associated with the European Notes are
deferred and are included in Other Assets and are amortized to interest expense
over the period until conversion or maturity of the European Notes. As European
Notes are converted to Harken common stock, a pro-rata portion of these deferred
costs are charged to Additional Paid-In Capital.
(8) STOCKHOLDERS' EQUITY
Common Stock - Harken currently has authorized 225,000,000 shares of $.01
par common stock. At December 31, 1997 and September 30, 1998, Harken had issued
121,811,534 and 133,408,830 shares, respectively.
Treasury Stock - During the third quarter of 1998, Harken purchased
700,000 shares of Harken common stock in the open market at a cost of
approximately $2,552,000. Such shares are held as treasury stock.
Issuance of European Convertible Notes Payable - In July 1996, Harken
issued to qualified purchasers a total of $40 million in 6 1/2% European Notes
which were to mature on July 30, 2000. The 6 1/2% European Notes were
convertible under certain terms into approximately 16,000,000 shares of Harken
common stock. During the last half of 1996, holders of 6 1/2% European Notes
totaling $1,400,000 exercised their conversion option and such holders were
issued 560,000 shares of Harken common stock. In February 1997, Harken gave
notice as required under the Trust Indenture that it had met the market price
criteria necessary to call for mandatory conversion of the 6 1/2% European Notes
and on June 2, 1997, formally called the 6 1/2% European Notes for conversion on
July 31, 1997. (see Note 7 - European Convertible Notes Payable for further
discussion). During the first six months of 1997, holders of 6 1/2% European
Notes totaling an additional $19,300,000 exercised their conversion option and
such holders were issued 7,720,000 shares of Harken common stock. On July 31,
1997, Harken converted the remaining 6 1/2% European Notes into 7,720,000 shares
of Harken common stock. In connection with the issuance of the 6 1/2% European
Notes, Harken issued to the placement agents for the 6 1/2% European Notes
certain non-registered, non-transferable stock purchase warrants to purchase
1,280,000 shares of Harken common stock which are currently exercisable by the
holders thereof at any time on or before July 31, 1999 at an exercise price of
$2.50 per share. As of September 30, 1998, all but approximately 60,000 of such
warrants had been exercised for shares of Harken common stock.
In June 1997, Harken issued to qualified purchasers a total of $70
million in 5 1/2% European Notes which were to mature on June 11, 2002. In
connection with the issuance of the 5 1/2% European Notes, Harken issued to
the placement agents for the 5 1/2% European Notes warrants to purchase
1,120,000 shares of Harken common stock at any time after December 11, 1997 and
on or before December 11, 1999 at an exercise price of $5.00 per share. As of
December 31, 1997, holders of 5 1/2% European Notes totaling $30,120,000
exercised their conversion option and such holders were issued 6,325,200 shares
of Harken common stock. Subsequent to December 31, 1997 and as of June 11, 1998,
holders of 5 1/2% European Notes totaling an additional $610,000 exercised their
conversion option and such holders were issued 122,000
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<PAGE> 16
shares of Harken common stock. On June 12, 1998, Harken converted the remaining
5 1/2% European Notes into 7,854,000 shares of Harken common stock.
In May 1998, Harken issued to qualified purchasers a total of $85 million
in 5% European Notes which mature on May 26, 2003. The 5% European Notes are
convertible under certain terms into a maximum of approximately 13,500,000
shares of Harken common stock. In connection with the issuance of the 5%
European Notes, Harken issued to the placement agents for the 5% European Notes
warrants to purchase 200,000 shares of Harken common stock on or before June 26,
2000 at an exercise price of $6.50 per share. As of November 2, 1998, no holders
of 5% European Notes have exercised their conversion option.
Acquisition of Bargo Properties - In May 1998, Harken acquired working
interests in the Bargo Properties in exchange for 2,716,483 shares issuable at
closing. Additional consideration of up to $4,000,000 is payable by Harken to
the Sellers in the form of additional shares of Harken common stock or cash
under certain circumstances. See Note 2 - Acquisitions for further discussion.
Acquisition of Cal-T Properties - In August 1997, Harken acquired working
interests in the Cal-T Properties in exchange for 565,000 shares of Harken
common stock. See Note 2 - Acquisitions for further discussion.
Acquisition of EnerVest Properties - In March 1997, Harken and EnerVest
Acquisition - II Limited Partnership ("EnerVest") entered into a Resolution and
Settlement Agreement whereby in addition to the 1,550,000 shares of Harken
common stock previously issued to EnerVest at the July 10, 1996 acquisition
closing date, Harken issued 1,400,000 shares of Harken common stock as final
consideration for the purchase of the EnerVest Properties.
Development Finance Agreements - Harken has entered into development
finance agreements relating to certain of its Colombian operations. Pursuant to
these development finance agreements, certain investors have the option, or have
previously exercised their options, to convert their beneficial interest in a
specific operating area into shares of Harken common stock. In addition, certain
of these investors were issued shares of Harken common stock at the time of
entering into a development finance agreement with Harken. For a complete
discussion of each of the various development finance agreements, see Note 6 -
Development Finance and Operating Agreements.
Series F Preferred Stock - On April 9, 1998, Harken entered into a
Securities Purchase Agreement with RGC International Investors, LDC ("RGC"),
pursuant to which Harken issued to RGC 15,000 shares of its Series F Convertible
Preferred Stock (the "Series F Preferred") in exchange for $15,000,000. The
Series F Preferred is convertible into shares of Harken common stock at a
conversion price based upon the market price of Harken common stock at the time
of conversion. The number of shares of Harken common stock issuable upon
conversion of the Series F Preferred will also include a premium amount equal to
an increase calculated on the face value of the Series F Preferred at 5% per
annum. The Series F Preferred does not pay dividends.
During the first six months following the issuance of the Series F
Preferred, RGC could have elected to convert the shares of the Series F
Preferred into Harken common stock on any day that the closing sales price of
the Harken common stock on the American Stock Exchange was equal to or greater
than 115% of the "Market Price." The Market Price is equal to the lower of (a)
the average of the closing bid prices of Harken common stock for any five
consecutive trading days during the 22 trading days ending one trading day prior
to the conversion date, or (b) the low closing bid price of Harken common stock
over the five trading days ending one trading day prior to the conversion date.
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<PAGE> 17
During the first nine months following the issuance of the Series F
Preferred, the conversion price is equal to 103% of the Market Price on the
conversion date. On January 9, 1999, the conversion price will be fixed at 90%
of the average of the closing bid prices of Harken common stock for the previous
22 trading days. Beginning February 9, 1999, the conversion price will be fixed
at 90% of the average of the closing bid prices of Harken common stock for the
previous 22 trading days if it would result in a lower conversion price than
that calculated on January 9, 1999. Any shares of Series F Preferred outstanding
on April 9, 1999, will automatically be converted into shares of Harken common
stock at the then applicable conversion price.
Harken has the option to redeem for cash any shares of Series F Preferred
presented for conversion if (a) prior to January 9, 1999, the closing price of
Harken common stock on the conversion date is less than $4.80, or (b) on or
after January 9, 1999, the then applicable conversion price is less than $4.80,
for an amount equal to the number of shares of Harken common stock that would
otherwise be issuable upon conversion multiplied by the closing price of Harken
common stock on the conversion date.
At each election to convert shares of Series F Preferred into Harken
common stock, RGC will have the option to purchase from Harken for cash
additional shares of Harken common stock equal to the number of shares issued on
such conversion (less any shares issued in respect of the premium amount) at a
purchase price equal to the then applicable conversion price.
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 percent or more of Harken common stock (an "Acquiring Person"),
or commences a tender offer which would result in beneficial ownership of 15
percent 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.
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 September 30, 1998.
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.
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(9) PER SHARE DATA
Basic income (loss) per common share was computed by dividing net income
(loss) attributed to common stock by the weighted average number of shares of
Harken common stock outstanding during the year. Diluted income per common share
was determined by including the effect of outstanding options and warrants using
the treasury stock method to the extent that the average share price exceeds the
exercise price. The impact of certain unconverted European Convertible Notes was
not included for the periods ended September 30, 1997 or 1998 as their effect
would have been antidilutive. The impact of unconverted Series F Preferred Stock
was not included for the periods ended September 30, 1998 as their effect would
have been antidiultive. Harken has adopted Statement of Financial Accounting
Standards No. 128, "Earnings per Share", effective December 15, 1997, and as a
result has restated 1997 weighted average shares outstanding calculations,
although there was no impact on prior year income per share amounts. A
reconciliation of the calculations of diluted earnings per common share is as
follows:
<TABLE>
<CAPTION>
Three Months Ended September 30, 1997 Nine Months Ended September 30, 1997
--------------------------------------------- ---------------------------------------------
Weighted Weighted
Average Average
Income Shares Per Share Income Shares Per Share
----------- ----------- ----------- ----------- ----------- -----------
<S> <C> <C> <C> <C> <C> <C>
Basic income per common share $ 38,000 114,640,028 $ 0.00 $ 152,000 105,457,706 $ 0.00
Treasury stock method effect of:
Outstanding employee stock
options -- 1,721,726 -- -- 1,552,961 --
Outstanding warrants -- 1,021,797 -- -- 1,380,225 --
----------- ----------- ----------- ----------- ----------- -----------
Diluted income per common share $ 38,000 117,383,551 $ 0.00 $ 152,000 108,390,892 $ 0.00
=========== =========== =========== =========== =========== ===========
</TABLE>
(10) INCOME TAXES
At September 30, 1998, Harken had available for federal income tax
reporting purposes, net operating loss (NOL) carryforward for regular tax
purposes of approximately $63,700,000 which expires in 1998 through 2012,
alternative minimum tax NOL carryforward of approximately $51,000,000 which
expires in 1998 through 2011, investment tax credit carryforward of
approximately $809,000 which expires in 1998 through 2002, statutory depletion
carryforward of approximately $2,431,000 which does not have an expiration date,
and a net capital loss carryforward of approximately $12,156,000 which expires
in 2007 through 2011. Approximately $16,000,000 of the net operating loss
carryforward has been acquired with the purchase of subsidiaries and must be
used to offset future income from profitable operations within those
subsidiaries.
Total deferred tax liabilities, relating primarily to property and
equipment, as of September 30, 1998 were approximately $680,000. Total deferred
tax assets, primarily related to the net operating loss carryforward, were
approximately $20,664,000 at September 30, 1998. The total net deferred tax
asset is offset by a valuation allowance of approximately $19,984,000 at
September 30, 1998.
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(11) RELATED PARTY TRANSACTIONS
In June 1997, Harken added to its Board of Directors a new director who
is also a managing director of EnCap Investments L.C. ("EnCap"). EnCap has
historically provided financial consulting and investment banking services to
Harken. In connection with the June 1997 placement of the 5 1/2% European Notes,
EnCap received as a financial consulting fee, $466,667 in cash, and a warrant to
purchase 50,000 shares of Harken common stock at any time after December 11,
1997 and on or before December 11, 1999 at an exercise price of $5.00 per share.
As described in Note 6 - Development Finance and Operating Agreements, in
October 1997, Harken entered into a Development Finance Agreement with the EnCap
Investors. EnCap serves as the general partner of three of the EnCap Investors
and the new Harken director serves as a director of the fourth EnCap Investor.
In connection with the EnCap Development Finance Agreement, EnCap received an
investment banking fee of $500,000. As described in Note 2 - Acquisitions, in
May 1998 Harken acquired the Bargo Properties from St. Martinville Partners,
Ltd. and Bargo Energy Company, which are affiliates of Encap.
During 1997 and 1998, Harken made short-term loans to certain members of
Harken's Board of Directors and Management. Such notes receivable are reflected
in Harken's consolidated balance sheet at December 31, 1997 and September 30,
1998 as Related Party Notes Receivable.
(12) COMMITMENTS AND CONTINGENCIES
Harken has accrued approximately $1,847,000 at September 30, 1998
relating to operational or regulatory contingent liabilities related to Harken's
domestic operations. Harken and its subsidiaries currently are involved in
various lawsuits and other contingencies, including the guarantee of certain
lease obligations of a former subsidiary, which in management's opinion, will
not result in significant loss exposure to Harken.
The exploration, development and production of oil and gas are subject to
various Navajo, 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.
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ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
(UNAUDITED)
Certain statements included in the accompanying condensed financial
statements and in the following discussion and analysis of financial condition
and results of operations, including statements of Harken management's current
expectations, intentions, plans and beliefs, and statements containing the words
"believes", "anticipates", "estimates", "expects", or "may" are forward-looking
statements, as defined in Section 21D of the Securities Exchange Act of 1934.
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.
Such factors include, among others, the risks described in Harken's Annual
Report on Form 10-K for the fiscal year ended December 31, 1997 filed with the
Securities and Exchange Commission.
OVERVIEW
Harken reported a net loss for the nine months ended September 30, 1998
of $27,197,000 compared to a net income of $152,000 for the prior year period,
as Harken recorded a non-cash valuation allowance of its U.S. domestic oil and
gas properties of approximately $27.8 million during the third quarter of 1998.
The valuation allowance was caused by a further decline in the oil price per
barrel received by Harken in addition to a drop in gas prices received on
Harken's production during the third quarter of 1998. Such price declines in
addition to downward reserve revisions during the third quarter of 1998 resulted
in a reduction in the present value of Harken's future net cash flows from U.S.
domestic proved reserves causing a write-down of capitalized costs in excess of
this value. Total revenues increased from approximately $13.28 million during
the nine months ended September 30, 1997 to approximately $15 million for the
same period in 1998, due to increased interest income as a result of net
proceeds received from the issuance of the 5 1/2% European Notes, the 5%
European Notes and from three Development Finance Agreements. Gross profit from
both domestic and Colombia oil and gas operations before depreciation and
amortization, valuation allowance, general and administrative and interest
expenses totaled approximately $4 million during the nine months ended September
30, 1998 compared to approximately $6.3 million for the prior year period.
Internationally, during the second and third quarter of 1998, Harken
reflected its initial revenues from its Colombia operations, consisting of oil
revenues from Harken's Bolivar, Bocachico and Alcaravan Contract Areas. During
March 1998, Harken signed an additional Association Contract in Colombia with
Ecopetrol, bringing the total number of Association Contracts to six and
increasing the total number of acres currently operated in Colombia by Harken to
approximately 1,358,000. Harken has continued its Colombian exploration efforts
during the first three quarters of 1998 with the drilling of the Estero #3 and
Canacabare #1 wells on the Alcaravan Contract area, the Catalina #1 and Olivo #1
wells on the Bolivar Contract area, the Torcaz #5 well on the Bocachico Contract
area, and the drilling of the Islero #1 well on the Cambulos Contract area.
In the Alcaravan Contract area, Harken's operations have been affected by
the rainy season in the Llanos Basin, which has delayed the completion and
testing of the recently drilled Canacabare #1 well until the fourth quarter of
1998. The construction of the Phase I Pipeline connecting the Estero wells to
the closest existing pipeline is nearing completion. Harken also initiated a
long-term production test of the Estero wells in the third quarter of 1998, with
an initial trucking rate of approximately 500 barrels of oil per day, which is
expected to increase to 1,000 barrels of oil per day during the fourth quarter.
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An independent reservoir engineering firm estimates the Olivo #1 and the
Catalina #1 wells in the Bolivar Contract area are each capable of producing at
rates in excess of 20,000 equivalent barrels of oil per day with larger
production equipment. Harken initiated a long-term production test by trucking
from the Catalina #1 and Olivo #1 wells in the third quarter of 1998 and expects
to increase trucked volumes from these wells to 5,000 gross barrels of oil per
day during the fourth quarter. Harken is planning for construction of a Bolivar
pipeline and facility project to be constructed in 1999 which is expected to
allow the initial transport of a maximum of 30,000 to 35,000 gross barrels of
oil and 150 million gross cubic feet of gas per day. Harken is currently in
discussions with a number of project lenders to provide debt financing for the
Catalina area pipeline and facility project. The results of the financing will
effect the timing of the development of the area.
Harken intends to submit its application to Ecopetrol for commerciality
of its Catalina, Olivo, Estero and Torcaz wells later in 1998 or early 1999. In
the Cambulos Contract area, Harken began drilling the Islero #1 well, its first
well on the Cambulos acreage, on the Emerald Mountain feature, in August 1998.
Harken is continuing drilling despite encountering technical difficulties with
this well, and seismic velocity data collected during the drilling indicates
that the target formation may be up to 1,500 feet deeper and that the bed dip
(incline) is much higher than originally expected. Presently, Harken plans to
begin sidetracking the current wellbore at approximately 2,900 feet with
directional drilling updip into the expected location of the target formation.
Harken also encountered multiple highly fractured and faulted zones and has had
to set two additional casing strings to solve various mechanical problems with
these formations. The sidetracking, changed drilling program and added casing
strings have caused Harken to add an additional 30 to 45 days of rig time to its
estimated drilling schedule and have increased expected well costs.
For a detailed discussion of all of Harken's operations in Colombia, see
Harken's Annual Report on Form 10-K for the year ended December 31, 1997.
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RESULTS OF OPERATIONS
The following is management's discussion and analysis of certain
significant factors which have affected Harken's earnings and balance sheet
during the periods included in the accompanying consolidated financial
statements.
<TABLE>
<CAPTION>
Three Months Ended September 30, Nine Months Ended September 30,
-------------------------------- -------------------------------
Revenues 1997 1998 1997 1998
-------------- -------------- ------------- --------------
(Unaudited)
Domestic Exploration and Production Operations
<S> <C> <C> <C> <C>
Oil sales revenues $ 1,976,000 $ 1,475,000 $ 6,111,000 $ 4,200,000
Oil volumes in barrels 106,000 121,000 312,000 323,000
Oil price per barrel $ 18.64 $ 12.19 $ 19.59 $ 13.00
Gas sales revenues $ 1,329,000 $ 1,159,000 $ 3,673,000 $ 3,399,000
Gas volumes in mcf 478,000 582,000 1,346,000 1,553,000
Gas price per mcf $ 2.78 $ 1.99 $ 2.73 $ 2.19
Gas plant revenues $ 203,000 $ 116,000 $ 568,000 $ 351,000
Colombia Exploration and Production Operations
Oil sales revenues $ -- $ 347,000 $ -- $ 481,000
Oil volumes in barrels -- 32,000 -- 46,000
Oil price per barrel $ -- $ 10.84 $ -- $ 10.46
Other Revenues
Interest Income $ 1,490,000 $ 2,537,000 $ 2,904,000 $ 6,337,000
Other Income $ 2,000 $ 120,000 $ 22,000 $ 244,000
</TABLE>
For the quarter ended September 30, 1998 compared with the corresponding prior
period.
DOMESTIC OPERATIONS
Harken's domestic operations consist primarily of the operations in the
Four Corners area of Utah, Arizona and New Mexico, primarily on the Navajo
Indian Reservation, onshore South Texas, the Western and Panhandle regions of
Texas, the Magnolia region of Arkansas and the Carlsbad region of New Mexico,
and beginning in May 1998, the onshore region of southern Louisiana.
Gross oil revenues decreased 25% to $1,475,000 during the third quarter
of 1998 compared to $1,976,000 during the third quarter of 1997 primarily due to
the sharp decline in oil prices, which averaged $6.45 less per barrel during the
third quarter of 1998 compared to the prior year period. With the May 1998
acquisition of the Bargo Properties, Harken now reflects production volumes
slightly higher than volumes produced in 1997. During the first half of the
fourth quarter of 1998, prices have continued to remain lower than prices
received during 1997.
Gross gas revenues decreased 13% to $1,159,000 for the three months ended
September 30, 1998 compared to $1,329,000 for the prior year period despite the
increased production resulting from the acquisition of the Cal-T Properties in
August 1997 and increased South Texas production which offset the normal
declines of Harken's other domestic gas production. The decrease in gas revenues
was caused by the decrease in average gas prices received during the third
quarter of 1998, as Harken received an overall
22
<PAGE> 23
average price of $2.78 per mcf of gas production during the third quarter of
1997 compared to $1.99 per mcf received during the third quarter of 1998.
Oil and gas operating expenses consist of lease operating expenses and
gas plant expenses, along with a number of production and reserve based taxes,
including severance taxes, property taxes, Utah conservation taxes and Navajo
severance and possessory interest taxes. The increase in oil and gas operating
expenses compared to the prior year is primarily a result of the above mentioned
acquisitions of the Cal-T and Bargo Properties.
COLOMBIAN OPERATIONS
During the third quarter of 1998, Harken continued sales of production
from its Torcaz #2 and Torcaz #3 wells on the Bocachico Contract area. In
addition, Harken sold production which was generated during the production tests
of the Catalina #1 and Olivo #1 wells on the Bolivar Contract area. Harken also
initiated trucking operations from its long-term production tests of the Estero
wells on the Alcaravan/Miradores Contract area. All sales volumes were
transported using trucking operations from the wellsite.
Harken's Colombian oil revenues are expected to increase throughout the
remainder of 1998, particularly as production tests continue for the Estero
wells into the fourth quarter.
INTEREST AND OTHER INCOME
Interest and other income increased during the third quarter of 1998
compared to the prior year period due to interest earned by Harken on its
invested funds, including the net proceeds from the June 1997 issuance of $70
million of 5 1/2% European Notes, the May 1998 issuance of $85 million of 5%
European Notes and from proceeds from the EnCap Development Finance Agreement
and the European Development Finance Agreements. Harken generated approximately
$2.5 million of interest income during the third quarter of 1998, compared to
approximately $1.5 million of interest income during the prior year period.
Harken's cash balances, which include investments in short-term marketable debt
securities, are expected to decrease during late 1998 and early 1999 as such
funds are used to support Harken's capital expenditure plans, however, interest
income is expected to continue to be higher than the corresponding period of
1997.
OTHER COSTS AND EXPENSES
General and administrative expenses increased 28% from $1,571,000 for the
third quarter of 1997 to $2,018,000 for the third quarter of 1998, related to
Harken's increased executive, corporate and administrative personnel costs
associated with Harken's expanding overall operations. In addition, Harken has
increased its corporate office space to accommodate the growth in personnel.
Depreciation and amortization expense increased during the third quarter
of 1998 compared to the prior year period due to revisions in Harken's U.S.
reserve estimates partly due to the decline in oil and gas prices. 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. In addition, Harken's depreciation on other property has increased
as a result of Harken's expanding operations. During the third quarter of 1998,
Harken recorded a non-cash valuation allowance on its U.S. domestic oil and gas
properties of approximately $27.8 million. The valuation allowance was based
upon the present value, discounted at ten percent, of Harken's September 30,
1998 U.S. domestic reserves, which declined due to the lower oil and
23
<PAGE> 24
gas prices being received at the end of September 1998 and downward reserve
revisions during the third quarter of 1998. In accordance with the full cost
method of accounting for oil and gas properties, on a country-by-country basis,
net capitalized costs in excess of the present value of the related reserves are
charged to expense.
Interest expense and other decreased during the third quarter of 1998
compared to the prior year period despite the May 1998 issuance of the 5%
European Notes due to the increase in the amounts of interest capitalized to
Harken's Colombian exploration activity.
For the nine months ended September 30, 1998 compared with the corresponding
prior period.
DOMESTIC OPERATIONS
Gross oil revenues decreased 31% to $4,200,000 during the first nine
months of 1998 compared to $6,111,000 during the first nine months of 1997
primarily due to the sharp decline in oil prices, which averaged $6.59 less per
barrel during the first nine months of 1998 compared to the prior year period.
During the first half of the fourth quarter of 1998, prices have continued to
remain lower than prices received during 1997.
Gross gas revenues decreased 7% to $3,399,000 for the nine months ended
September 30, 1998 compared to $3,673,000 for the prior year period despite the
increased production resulting from the acquisition of the Cal-T Properties in
August 1997 and increased South Texas production. The decrease in gas revenues
was primarily caused by the decrease in average gas prices received during the
first nine months of 1998, as Harken received an overall average price of $2.73
per mcf of gas production during the first nine months of 1997 compared to $2.19
per mcf received during the first nine months of 1998. Harken also reflected
decreased gas production from certain of its Texas Panhandle properties during
the first quarter of 1998 as many of the properties experienced numerous
temporary operational curtailments.
Oil and gas operating expenses consist of lease operating expenses and
gas plant expenses, along with a number of production and reserve based taxes,
including severance taxes, property taxes, Utah conservation taxes and Navajo
severance and possessory interest taxes. The increase in oil and gas operating
expenses compared to the prior year is primarily a result of the above mentioned
acquisition of the Cal-T and Bargo Properties.
COLOMBIAN OPERATIONS
During the second quarter of 1998, Harken initiated trucking operations
from its Bocachico Contract operations and also began sales of trucked volumes
produced during the drilling of the Catalina #1 and Olivo #1 wells on the
Bolivar Contract area. Harken initiated trucking of long-term test production
from its Bolivar and Alcaravan Contract operations in the third quarter of 1998.
Harken's Colombian oil revenues are expected to increase throughout the
remainder of 1998, particularly as production tests continue for the Estero
wells into the fourth quarter. Harken reflected no oil and gas revenues or
operating expenses from its Colombian operations prior to the second quarter of
1998.
INTEREST AND OTHER INCOME
Interest and other income increased significantly during the first nine
months of 1998 compared to the prior year period due to interest earned by
Harken on its invested funds, including the net proceeds from
24
<PAGE> 25
the June 1997 issuance of $70 million of 5 1/2% European Notes, and the May 1998
issuance of $85 million of 5% European Notes, and from proceeds from the EnCap
Development Finance Agreement and the European Development Finance Agreements.
Harken generated approximately $6.3 million of interest income during the first
nine months of 1998, compared to approximately $2.9 million of interest income
during the prior year period. Harken's cash balances, which include investments
in short-term marketable debt securities, are expected to decrease during late
1998 and early 1999 as such funds are used to support Harken's capital
expenditure plans, however, interest income is expected to continue to be higher
than the corresponding period of 1997.
OTHER COSTS AND EXPENSES
General and administrative expenses increased 36% from $4,071,000 for the
first nine months of 1997 to $5,542,000 for the first nine months of 1998,
related to Harken's increased executive, corporate and administrative personnel
costs associated with Harken's expanding overall operations. In addition, Harken
has increased its corporate office space to accommodate the growth in personnel.
Depreciation and amortization expense increased during the first nine
months of 1998 compared to the prior year period due to revisions in Harken's
U.S. reserve estimates partly due to the decline in oil and gas prices.
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. In addition, Harken's depreciation on other property has
increased as a result of Harken's expanding operations. During the third quarter
of 1998, Harken recorded a non-cash valuation allowance on its U.S. domestic oil
and gas properties of approximately $27.8 million. The valuation allowance was
based upon the present value, discounted at ten percent, of Harken's September
30, 1998 U.S. domestic reserves, which declined due to the lower oil and gas
prices being received at the end of September 1998 and downward reserve
revisions during the third quarter of 1998. In accordance with the full cost
method of accounting for oil and gas properties, on a country-by-country basis,
net capitalized costs in excess of the present value of the related reserves are
charged to expense.
Interest expense and other decreased significantly during the first nine
months of 1998 compared to the prior year period despite the June 1997 issuance
of the 5 1/2% European Notes and the May 1998 issuance of the 5% European Notes
due to the increase in the amounts of interest capitalized to Harken's Colombian
exploration activity.
25
<PAGE> 26
LIQUIDITY AND CAPITAL RESOURCES
Harken's working capital at September 30, 1998 was approximately
$158.5 million, versus approximately $110.6 million at December 31, 1997. The
increase in cash and working capital resulted primarily from approximately $81.8
million of net proceeds from the 5% European Notes issued in May 1998 and from
the receipt of approximately $9.8 million pursuant to Development Finance
Agreements. In addition, Harken's operations provided approximately $1.5 million
of cash flow during the first nine months of 1998. Such activity was sufficient
to fund capital expenditures of approximately $63 million during the first nine
months of 1998.
Harken's primary need for capital is to fund the planned exploration
and development efforts in Colombia. In 1997, Harken's capital expenditures
totaled approximately $37 million, including $30 million related to exploration
and development in Colombia. Harken anticipates that its 1998 Colombian capital
expenditures will total approximately $90 million. Harken also anticipates that
its 1999 Colombian capital expenditures will total in excess of $80 million.
Harken believes that it will have sufficient cash resources to fund all of its
planned capital expenditures for 1998 and 1999, however, Harken plans to obtain
additional resources through project debt financing related to the development
of the Bolivar Contract area. In addition, Harken intends to continue to pursue
domestic acquisition opportunities. Harken intends to fund such acquisitions, if
any are consummated, through a combination of cash on hand, issuances of debt or
equity securities.
Harken anticipates that full development of its Colombian reserves
will take several years and will also require extensive production facilities,
transportation pipelines and development activity which will require significant
additional capital expenditures. The ultimate amount of such expenditures cannot
be presently predicted. Harken estimates that approximately 75 to 80% of
external funds applicable to these capital expenditures will be provided from
non-recourse project finance and other similar forms of debt which can be
identified to specific development projects. Harken anticipates it would put
this type of debt facility in place after establishing ongoing production rates
from its recently announced discoveries. There can be no assurances, however,
that Harken will have adequate funds available to it to fund all of its
Colombian activities.
The current plans for the development of the Bolivar Contract area
call for a significant number of wells to be drilled over the next three years.
As a part of this process, Harken is currently in discussions with a number of
project lenders to provide debt financing for the development of the area. Such
a credit facility could enable Harken to accelerate its development of the field
while still preserving its working capital position for its exploration efforts.
As a part of this financing plan, and in order to include Ecopetrol in the
future planning process, Harken has decided to reevaluate its drilling schedule
in anticipation of obtaining long-term financing. Also, Harken believes that
lower oil prices have increased the availability of rigs at attractive prices.
As a result, Harken has decided not to renew the long-term contract for one of
its leased rigs in anticipation of more favorable short-term alternatives. While
this might temporarily slow down the drilling pace on the Bolivar Contract area,
it is anticipated that drilling would accelerate once such a credit facility is
active.
Terms of each of the Association Contracts entered into between
Harken de Colombia, Ltd. and Ecopetrol commit Harken to perform certain
activities in accordance with a prescribed timetable. Failure by Harken to
perform these activities as required could result in Harken losing its rights
under the particular Association Contract, which could potentially have a
material adverse effect on Harken's business.
26
<PAGE> 27
Harken's domestic operating strategy includes efforts to acquire
additional oil and gas reserves through drilling activities in North America and
through acquisitions. Harken plans to continue development of proved undeveloped
reserves on its North American properties in addition to a continual workover
program on producing properties. Harken expects such drilling and workover costs
to total approximately $5 million in 1998. The targeted results of these efforts
are to maintain North American production levels during 1998 and 1999.
On May 26, 1998, Harken issued a total of $85 million in 5% Senior
Convertible Notes (the "European Notes") which mature on May 26, 2003. In
connection with the sale and issuance of the 5% European Notes, Harken paid
approximately $4,256,000 from the 5% European Notes proceeds for commission and
issuance costs. Interest incurred on these notes is payable semi-annually in May
and November of each year to maturity or until the 5% European Notes are
converted. Such European Notes are convertible into shares of Harken common
stock at a conversion price of $6.50 per share, subject to adjustment in certain
circumstances. Harken also has the right to require conversion of the 5%
European Notes into shares of Harken common stock at any time on or after May
26, 1999, if for any period of thirty consecutive days commencing on or after
May 26, 1998, the average of the closing prices of Harken common stock for each
trading day during such thirty-day period shall have equaled or exceeded 125% of
the 5% European Note Conversion Price (or $8.125 per share of Harken common
stock).
All proceeds from the sale of previous European Notes issuances were
initially paid to a Trustee pursuant to a Trust Indenture and held in Segregated
Accounts to be maintained for Harken's benefit. In order for any of the proceeds
to be released from the Segregated Accounts, Harken was required to demonstrate
that an Asset Value Coverage Ratio (as defined in the Trust Indenture) test
would continue to be met after such release of funds. During June 1998, all
proceeds held in the Segregated Accounts were released following the conversion
of these European Notes into shares of Harken common stock. There is no
Segregated Account requirement related to the proceeds from the 5% European
Notes. For a detailed discussion of the 5% European Notes see "Notes to
Consolidated Financial Statements, Note 7 -- European Convertible Notes
Payable."
Interest payments related to the 5% European Notes will be funded
from cash flow from operations or existing cash balances.
In October 1997, December 1997, and March 1998, Harken entered into
separate Development Finance Agreements with institutional investors
(collectively the "Institutional Investors"), pursuant to which the
Institutional Investors provided approximately $34.5 million (the "Payment
Amount") of net proceeds to Harken to finance the drilling of the initial wells
on three unexplored oil and gas prospects in the Middle Magdalena Basin of
Colombia. Approximately $24.5 million of net proceeds was received in October
1997 and approximately $10 million of net proceeds was received during the first
quarter of 1998. In exchange, the Institutional Investors obtained the right to
receive future payments from Harken equal to 7% of the net profits that Harken
de Colombia, Ltd. may derive from the sale of oil and gas produced from each of
the three prospects if the planned drilling on the prospect is successful (the
"Institutional Participation"). Pursuant to the Development Finance Agreements,
Harken is obligated to drill each of the three wells prior to October 2000.
Pursuant to the Development Finance Agreements, the Institutional
Investors have the right, for a period of two years beginning in October 1998,
to convert all or part of the Institutional Participation into shares of Harken
common stock. The number of shares of Harken common stock to be issued upon
27
<PAGE> 28
conversion of the Institutional Participation will be equal to the quotient of
(i) the Payment Amount (less any distributions made in respect of the
Institutional Participation) plus an amount equal to 15% interest per annum on
the net Payment Amount compounded monthly (the "Invested Amount"), divided by
(ii) the market price of the Harken common stock at the time of conversion.
During the same two year period, Harken also has the right to convert the
Institutional Participation into shares of Harken common stock with the number
of shares of Harken common stock to be issued to be equal to the quotient of (i)
the Payment Amount (less any distribution made in respect of the Institutional
Participation) plus an amount equal to 25% interest per annum on the net Payment
Amount compounded monthly, divided by (ii) the market price of Harken common
stock at the time of conversion. Harken can also elect to pay cash upon any
conversion of the Institutional Participation in lieu of issuing Harken common
stock. The Development Finance Agreements also provide for additional
shares of Harken common stock to be issued by Harken in the event of a
conversion to the extent that the Institutional Investors do not, under certain
circumstances, realize the Invested Amount from the sale of shares of Harken
common stock issued at the conversion.
At the present time, it is not known whether the Institutional Investors
or Harken will exercise their rights to convert the Institutional Interest into
Harken common stock, nor can Harken determine the number of shares of Harken
common stock which would be required to be issued in the event that Harken or
the Institutional Investors elect to convert the Institutional Participation
into shares of Harken common stock.
On April 9, 1998, Harken entered into a Securities Purchase Agreement
with RGC International Investors, LDC ("RGC"), pursuant to which Harken issued
to RGC 15,000 shares of its Series F Convertible Preferred Stock (the "Series F
Preferred") in exchange for $15,000,000. The Series F Preferred is convertible
into shares of Harken common stock at a conversion price based upon the market
price of Harken common stock at the time of conversion. The number of shares of
Harken common stock issuable upon conversion of the Series F Preferred will also
include a premium amount equal to an increase calculated on the face value of
the Series F Preferred at 5% per annum. The Series F Preferred does not pay
dividends.
Harken has the option to redeem for cash any shares of Series F Preferred
presented for conversion if (a) prior to January 9, 1999, the closing price of
Harken common stock on the conversion date is less than $4.80, or (b) on or
after January 9, 1999, the then applicable conversion price is less than $4.80,
for an amount equal to the number of shares of Harken common stock that would
otherwise be issuable upon conversion multiplied by the closing price of Harken
common stock on the conversion date.
At each election to convert shares of Series F Preferred into Harken
common stock, RGC will have the option to purchase from Harken for cash
additional shares of Harken common stock equal to the number of shares issued on
such conversion (less any shares issued in respect of the premium amount) at a
purchase price equal to the then applicable conversion price. For a detailed
discussion of the Series F Preferred see "Notes to Consolidated Financial
Statements, Note 8 - Stockholders' Equity".
The exploration, development and production of oil and gas are
subject to various Colombian, Navajo, federal, state and local laws and
regulations designed to protect the environment. Compliance with these
regulations is part of Harken's day-to-day operating procedures. 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.
28
<PAGE> 29
Harken has accrued approximately $1.8 million at September 30, 1998
relating to operational or regulatory contingent liabilities related to Harken's
domestic operations. Harken and its subsidiaries currently are involved in
various lawsuits and other contingencies, which in management's opinion, will
not result in significant loss exposure to Harken.
Harken has completed an assessment of its core financial and
operational software systems, all of which are purchased from outside software
vendors, and has found them to have anticipated the issues associated with the
year 2000 date change. Year 2000 issues result from the inability of computer
programs or computerized equipment to accurately calculate, store or use a date
subsequent to December 31, 1999. This could result in a system failure or
miscalculations causing disruptions of operations, including, among other
things, a temporary inability to process transactions, send invoices, or engage
in similar normal business. Assessment of other less critical software systems
and various types of equipment is continuing and should be completed during 1998
or early 1999. Harken believes that the potential impact, if any, of these
systems not being Year 2000 compliant will at most require employees to manually
complete otherwise automated tasks or calculations.
Harken has initiated formal communications with its significant
suppliers, business partners and customers to determine the extent to which
Harken is vulnerable to those third parties' failure to correct their own Year
2000 issues. These third parties have communicated that they have either already
completed the conversion or they will be converted prior to the year 2000.
However, there can be no guarantee that the systems of other companies on which
Harken's systems rely will be timely converted, or that a failure to convert by
another company, or a conversion that is incompatible with Harken's systems
would not have a material adverse effect on Harken.
29
<PAGE> 30
PART II - OTHER INFORMATION
Item 1. Legal Proceedings.
In September 1997, Harken Exploration Company, a wholly-owned
subsidiary of Harken, was served with a lawsuit filed in Amarillo,
Texas in Federal District Court for the Northern District of Texas
styled D. E. Rice and Karen Rice, as Trustees for the Rice Family
Living Trust vs. Harken Exploration Company. The Rice Family Living
Trust ("Rice") is a surface land owner in Hutchinson County, Texas.
Rice has alleged that oil and saltwater spills from Harken
Exploration Company's equipment and wells have polluted and otherwise
damaged its property. Rice is seeking payment of costs to prevent,
minimize and mitigate the alleged oil pollution, costs to restore and
repair the land and vegetation, costs to decontaminate the ground and
surface water, interest, attorneys' fees, and punitive damages.
Furthermore, Rice has requested that Harken Exploration Company be
enjoined from producing any oil or gas from its lands. Rice has
alleged that remediation of all of the pollution on its land will
cost approximately $40,000,000. Harken believes that this lawsuit is
wholly without merit. Harken has asserted numerous defenses, all of
which Harken believes are meritorious. Harken intends to defend
itself vigorously. The lawsuit is expected to go to trial in the
fourth quarter of 1998 or the first quarter of 1999.
Harken and its subsidiaries currently are involved in various other
lawsuits and other contingencies, which in management's opinion, will
not have a material adverse effect on Harken's financial position.
Item 2. Changes in Securities.
Not applicable.
Item 3. Default Upon Senior Securities.
Not applicable.
Item 4. Submission of Matters to a Vote of Securities Holders.
Not applicable.
Item 5. Other Information.
Not applicable.
Item 6. Exhibits and Reports on Form 8-K.
(a) EXHIBIT INDEX
<TABLE>
<CAPTION>
Exhibit
-------
<S> <C>
3.1 Certificate of Incorporation of Harken Energy
Corporation as amended (filed as Exhibit 3.1 to
Harken's Annual Report on Form 10-K for fiscal
year ended December 31,1989, File No. 0-9207, and
incorporated by reference herein).
3.2 Amendment to the Certificate of Incorporation of
Harken Energy Corporation (filed as Exhibit 28.8
to the Registration Statement on Form S-1 of
Tejas Power Corporation, file No. 33-37141, and
incorporated by reference herein.)
</TABLE>
30
<PAGE> 31
<TABLE>
<CAPTION>
<S> <C>
3.3 Amendment to the Certificate of Incorporation of
Harken Energy Corporation (filed as Exhibit 3 to
Harken's Quarterly Report on Form 10-Q for fiscal
quarter ended March 31, 1991, File No. 0-9207,
and incorporated by reference herein.)
3.4 Amendments to the Certificate of Incorporation of
Harken Energy Corporation (filed as Exhibit 3 to
Harken's Quarterly Report on Form 10-Q for fiscal
quarter ended June 30, 1991, File No. 0-9207, and
incorporated by reference herein.)
3.5 Amendment to the Certificate of Incorporation of
Harken Energy Corporation (filed as Exhibit 3.6
to Harken's Annual Report on Form 10-K for the
fiscal year ended December 31, 1997, File No.
0-9207, and incorporated by reference herein).
3.6 Amendment to the Certificate of Incorporation of
Harken Energy Corporation (filed as Exhibit 3.6
to Harken's Quarterly Report on Form 10-Q for the
fiscal quarter ended June 30, 1998, File No.
0-9207, and incorporated by reference herein).
3.7 Bylaws of Harken Energy Corporation, as amended
(filed as Exhibit 3.2 to Harken's Annual Report
on Form 10-K for fiscal year ended December 31,
1989, File No. 0-9207, and incorporated by
reference herein.)
4.1 Form of certificate representing shares of Harken
common stock, par value $.01 per share (filed as
Exhibit 1 to Harken's Registration Statement on
Form 8-A, File No. 0-9027, and incorporated by
reference herein.)
4.2 Certificate of Designations, Powers, Preferences
and Rights of Series A Cumulative Convertible
Preferred Stock, $1.00 par value, of Harken
Energy Corporation (filed as Exhibit 4.1 to
Harken's Annual Report on Form 10-K for the
fiscal year ended December 31, 1989, File No.
0-9207, and incorporated by reference herein).
4.3 Certificate of Designations, Powers, Preferences
and Rights of Series B Cumulative Convertible
Preferred Stock, $1.00 par value, of Harken
Energy Corporation (filed as Exhibit 4.2 to
Harken's Annual Report on Form 10-K for the
fiscal year ended December 31, 1989, File No.
0-9207, and incorporated by reference herein).
4.4 Certificate of the Designations, Powers,
Preferences and Rights of Series C Cumulative
Convertible Preferred Stock, $1.00 par value of
Harken Energy Corporation (filed as Exhibit 4.3
to Harken's Annual Report on Form 10-K for fiscal
year ended December 31, 1989, File No. 0-9207,
and incorporated by reference herein).
4.5 Certificate of the Designations of Series D
Preferred Stock, $1.00 par value of Harken Energy
Corporation (filed as Exhibit 4.3 to Harken's
Quarterly Report on Form 10-Q for the fiscal
quarter ended September 30, 1995, File No.
0-9207, and incorporated by reference herein).
</TABLE>
31
<PAGE> 32
<TABLE>
<CAPTION>
<S> <C>
4.6 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. 0-9207, and incorporated by reference
herein).
4.7 Certificate of Designations of Series E Junior
Participating Preferred Stock (filed as Exhibit B
to Exhibit 4 to Harken's Current Report on Form
8-K dated April 7, 1998, file No. 0-9207, and
incorporated by reference herein).
4.8 Certificate of Designations, Preferences and
Rights of Series F Convertible Preferred Stock
(filed as Exhibit 4.8 to Harken's Quarterly
Report on Form 10-Q for the period ended March
31, 1998, File No.
0-9207, and incorporated by reference herein).
*27 Financial Data Schedules.
</TABLE>
---------------
*Filed herewith
(b) REPORTS ON FORM 8-K.
None.
32
<PAGE> 33
HARKEN ENERGY CORPORATION
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
Harken Energy Corporation
----------------------------------
(Registrant)
Date: November 11, 1998 By: /s/ Wayne Hennecke
-------------------------- ---------------------------------
Wayne Hennecke, Vice President of
Finance and Chief Financial Officer
33
<PAGE> 34
INDEX TO EXHIBITS
<TABLE>
<CAPTION>
Exhibit No. Description
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<S> <C>
3.1 Certificate of Incorporation of Harken Energy Corporation as
amended (filed as Exhibit 3.1 to Harken's Annual Report on
Form 10-K for fiscal year ended December 31,1989, File No.
0-9207, and incorporated by reference herein).
3.2 Amendment to the Certificate of Incorporation of Harken
Energy Corporation (filed as Exhibit 28.8 to the
Registration Statement on Form S-1 of Tejas Power
Corporation, file No. 33-37141, and incorporated by
reference herein.)
3.3 Amendment to the Certificate of Incorporation of Harken
Energy Corporation (filed as Exhibit 3 to Harken's Quarterly
Report on Form 10-Q for fiscal quarter ended March 31, 1991,
File No. 0-9207, and incorporated by reference herein.)
3.4 Amendments to the Certificate of Incorporation of Harken
Energy Corporation (filed as Exhibit 3 to Harken's Quarterly
Report on Form 10-Q for fiscal quarter ended June 30, 1991,
File No. 0-9207, and incorporated by reference herein.)
3.5 Amendment to the Certificate of Incorporation of Harken
Energy Corporation (filed as Exhibit 3.6 to Harken's Annual
Report on Form 10-K for the fiscal year ended December 31,
1997, File No. 0-9207, and incorporated by reference
herein).
3.6 Amendment to the Certificate of Incorporation of Harken
Energy Corporation (filed as Exhibit 3.6 to Harken's
Quarterly Report on Form 10-Q for the fiscal quarter ended
June 30, 1998, File No. 0-9207, and incorporated by
reference herein).
3.7 Bylaws of Harken Energy Corporation, as amended (filed as
Exhibit 3.2 to Harken's Annual Report on Form 10-K for
fiscal year ended December 31, 1989, File No. 0-9207, and
incorporated by reference herein.)
</TABLE>
<PAGE> 35
<TABLE>
<S> <C>
4.1 Form of certificate representing shares of Harken common
stock, par value $.01 per share (filed as Exhibit 1 to
Harken's Registration Statement on Form 8-A, File No.
0-9027, and incorporated by reference herein.)
4.2 Certificate of Designations, Powers, Preferences and Rights
of Series A Cumulative Convertible Preferred Stock, $1.00
par value, of Harken Energy Corporation (filed as Exhibit
4.1 to Harken's Annual Report on Form 10-K for the fiscal
year ended December 31, 1989, File No. 0-9207, and
incorporated by reference herein).
4.3 Certificate of Designations, Powers, Preferences and Rights
of Series B Cumulative Convertible Preferred Stock, $1.00
par value, of Harken Energy Corporation (filed as Exhibit
4.2 to Harken's Annual Report on Form 10-K for the fiscal
year ended December 31, 1989, File No. 0-9207, and
incorporated by reference herein).
4.4 Certificate of the Designations, Powers, Preferences and
Rights of Series C Cumulative Convertible Preferred Stock,
$1.00 par value of Harken Energy Corporation (filed as
Exhibit 4.3 to Harken's Annual Report on Form 10-K for
fiscal year ended December 31, 1989, File No. 0-9207, and
incorporated by reference herein).
4.5 Certificate of the Designations of Series D Preferred Stock,
$1.00 par value of Harken Energy Corporation (filed as
Exhibit 4.3 to Harken's Quarterly Report on Form 10-Q for
the fiscal quarter ended September 30, 1995, File No.
0-9207, and incorporated by reference herein).
4.6 Rights Agreement, dated as of April 6, 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. 0-9207, and incorporated by reference herein).
4.7 Certificate of Designations of Series E Junior Participating
Preferred Stock (filed as Exhibit B to Exhibit 4 to Harken's
Current Report on Form 8-K dated April 7, 1998, file No.
0-9207, and incorporated by reference herein).
4.8 Certificate of Designations, Preferences and Rights of
Series F Convertible Preferred Stock (filed as Exhibit 4.8
to Harken's Quarterly Report on Form 10-Q for the period
ended March 31, 1998, File No. 0-9207, and incorporated by
reference herein).
*27 Financial Data Schedules.
</TABLE>
---------------
*Filed herewith
<TABLE> <S> <C>
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<S> <C>
<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> DEC-31-1998
<PERIOD-START> JAN-01-1998
<PERIOD-END> SEP-30-1998
<CASH> 24,028,000
<SECURITIES> 143,455,000
<RECEIVABLES> 3,301,000
<ALLOWANCES> (337,000)
<INVENTORY> 0
<CURRENT-ASSETS> 171,362,000
<PP&E> 198,387,000
<DEPRECIATION> (50,582,000)
<TOTAL-ASSETS> 331,019,000
<CURRENT-LIABILITIES> 12,900,000
<BONDS> 85,000,000
0
15,000
<COMMON> 1,334,000
<OTHER-SE> 201,325,000
<TOTAL-LIABILITY-AND-EQUITY> 331,019,000
<SALES> 8,431,000
<TOTAL-REVENUES> 15,012,000
<CGS> 4,418,000
<TOTAL-COSTS> 4,418,000
<OTHER-EXPENSES> 37,192,000
<LOSS-PROVISION> 15,000
<INTEREST-EXPENSE> 538,000
<INCOME-PRETAX> (27,151,000)
<INCOME-TAX> 46,000
<INCOME-CONTINUING> (27,197,000)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (27,197,000)
<EPS-PRIMARY> (.22)
<EPS-DILUTED> 0
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