<PAGE> 1
===============================================================================
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, 1999
[ ] 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.)
16285 PARK TEN PLACE, SUITE 600 77084
HOUSTON, TEXAS (Zip Code)
(Address of principal executive offices)
Registrant's telephone number, including area code (281) 717-1300
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 4, 1999 was 153,588,248.
===============================================================================
<PAGE> 2
HARKEN ENERGY CORPORATION
INDEX TO QUARTERLY REPORT
SEPTEMBER 30, 1999
<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 Flows................. 7
Notes to Consolidated Condensed Financial Statements............ 8
Item 2. Management's Discussion and Analysis of Financial Condition
and Results of Operations.................................. 26
PART II. OTHER INFORMATION
Notes Concerning Other Information.............................. 36
SIGNATURES ................................................................ 39
</TABLE>
2
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PART I- FINANCIAL INFORMATION
3
<PAGE> 4
ITEM 1. CONDENSED FINANCIAL STATEMENTS
HARKEN ENERGY CORPORATION AND SUBSIDIARIES
CONSOLIDATED CONDENSED BALANCE SHEETS
(Unaudited)
<TABLE>
<CAPTION>
DECEMBER 31, SEPTEMBER 30,
1998 1999
--------------- ---------------
(Restated)
<S> <C> <C>
ASSETS
Current Assets:
Cash and temporary investments $ 141,545,000 $ 61,621,000
Accounts and notes receivable, net 1,605,000 4,730,000
Related party notes receivable 398,000 466,000
Prepaid expenses and other current assets 615,000 1,149,000
--------------- ---------------
Total Current Assets 144,163,000 67,966,000
Property and Equipment, net 166,218,000 237,605,000
Other Assets, net 9,735,000 9,485,000
--------------- ---------------
$ 320,116,000 $ 315,056,000
=============== ===============
LIABILITIES AND STOCKHOLDERS' EQUITY
Current Liabilities:
Trade payables $ 12,496,000 $ 3,298,000
Accrued liabilities and other 7,350,000 11,978,000
Development finance obligation -- 20,000,000
Revenues and royalties payable 580,000 2,321,000
--------------- ---------------
Total Current Liabilities 20,426,000 37,597,000
European Convertible Notes Payable 85,000,000 85,000,000
Development Finance Obligation 38,552,000 1,255,000
Bank Credit Facility Obligation -- 10,500,000
Commitments and Contingencies (Note 14)
Stockholders' Equity:
Series F Preferred Stock, $1.00 par value; 15,000 shares
authorized and issued as of December 31, 1998 15,000 --
Common stock, $0.01 par value; 225,000,000 shares authorized;
134,758,830 and 155,707,548 shares issued, respectively 1,348,000 1,557,000
Additional paid-in capital 327,498,000 347,345,000
Retained deficit and other comprehensive income (150,171,000) (164,686,000)
Treasury stock, at cost, 700,000 and 1,218,000 shares held, respectively (2,552,000) (3,512,000)
--------------- ---------------
Total Stockholders' Equity 176,138,000 180,704,000
--------------- ---------------
$ 320,116,000 $ 315,056,000
=============== ===============
</TABLE>
The accompanying Notes to Consolidated Condensed Financial Statements
are an integral part of these Statements.
4
<PAGE> 5
HARKEN ENERGY CORPORATION AND SUBSIDIARIES
CONSOLIDATED CONDENSED STATEMENTS OF OPERATIONS
(Unaudited)
<TABLE>
<CAPTION>
THREE MONTHS ENDED NINE MONTHS ENDED
SEPTEMBER 30, SEPTEMBER 30,
---------------------------------- ----------------------------------
1998 1999 1998 1999
--------------- --------------- --------------- ---------------
(Restated) (Restated)
<S> <C> <C> <C> <C>
Revenues:
Oil and gas operations $ 3,097,000 $ 5,701,000 $ 8,431,000 $ 12,891,000
Interest and other income 2,657,000 886,000 6,581,000 3,132,000
--------------- --------------- --------------- ---------------
5,754,000 6,587,000 15,012,000 16,023,000
--------------- --------------- --------------- ---------------
Costs and Expenses:
Oil and gas operating expenses 1,690,000 2,301,000 4,418,000 5,503,000
General and administrative expenses, net 2,018,000 2,390,000 5,542,000 6,757,000
Depreciation and amortization 1,462,000 1,527,000 3,878,000 4,375,000
Valuation allowance 27,787,000 -- 27,787,000 --
Interest expense and other, net 1,241,000 1,990,000 2,946,000 4,863,000
--------------- --------------- --------------- ---------------
34,198,000 8,208,000 44,571,000 21,498,000
--------------- --------------- --------------- ---------------
Loss before income taxes $ (28,444,000) $ (1,621,000) $ (29,559,000) $ (5,475,000)
Income tax expense -- 24,000 46,000 24,000
--------------- --------------- --------------- ---------------
Loss before extraordinary item $ (28,444,000) $ (1,645,000) $ (29,605,000) $ (5,499,000)
Extraordinary item-charge for reduction of
unamortized issuance costs -- -- -- (589,000)
--------------- --------------- --------------- ---------------
Net loss $ (28,444,000) $ (1,645,000) $ (29,605,000) $ (6,088,000)
=============== =============== =============== ===============
Accretion related to preferred stock (187,000) -- (356,000) (8,427,000)
--------------- --------------- --------------- ---------------
Net loss attributed to common stock $ (28,631,000) $ (1,645,000) $ (29,961,000) $ (14,515,000)
=============== =============== =============== ===============
Loss per common share:
Basic loss before extraordinary item $ (0.23) $ (0.01) $ (0.24) $ (0.10)
Extraordinary item -- -- -- (0.00)
--------------- --------------- --------------- ---------------
Basic loss per common share $ (0.23) $ (0.01) $ (0.24) $ (0.10)
=============== =============== =============== ===============
Weighted average shares outstanding 133,218,144 150,297,158 126,394,977 140,972,170
=============== =============== =============== ===============
Diluted loss before extraordinary item $ (0.23) $ (0.01) $ (0.24) $ (0.10)
Extraordinary item -- -- -- (0.00)
--------------- --------------- --------------- ---------------
Diluted loss per common share $ (0.23) $ (0.01) $ (0.24) $ (0.10)
=============== =============== =============== ===============
Weighted average shares outstanding 133,218,144 150,297,158 126,394,977 140,972,170
=============== =============== =============== ===============
</TABLE>
The accompanying Notes to Consolidated Condensed Financial Statements
are an integral part of these Statements.
5
<PAGE> 6
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, 1997
(restated) $ -- $1,218,000 $248,770,000 $ -- $ (92,672,000) $ 92,000 $157,408,000
Issuance of common stock, net -- 51,000 25,110,000 -- -- -- 25,161,000
Issuance of preferred stock 15,000 -- 14,437,000 -- -- -- 14,452,000
Accretion of preferred stock -- -- 1,846,000 -- (1,846,000) -- --
Conversions of European notes
payable -- 79,000 37,335,000 -- -- -- 37,414,000
Treasury shares purchased -- -- -- (2,552,000) -- -- (2,552,000)
Comprehensive income (loss):
Equity adjustment from
foreign currency translation -- -- -- -- -- 42,000
Net loss (restated) -- -- -- -- (55,787,000) --
Total comprehensive
loss (restated) (55,745,000)
--------- ---------- ------------ ----------- ------------- ---------- ------------
Balance, December 31, 1998
(restated) 15,000 1,348,000 327,498,000 (2,552,000) (150,305,000) 134,000 176,138,000
Issuance of common stock, net -- 101,000 19,839,000 -- -- -- 19,940,000
Conversions of Development
Finance Obligation -- 108,000 20,835,000 -- -- -- 20,943,000
Accretion of preferred stock -- -- 8,427,000 -- (8,427,000) -- --
Treasury shares purchased -- -- -- (960,000) -- -- (960,000)
Redemption of preferred stock (15,000) -- (25,269,000) -- -- -- (25,284,000)
Settlement of property purchase
acquisition -- -- (3,985,000) -- -- -- (3,985,000)
Comprehensive income (loss):
Net loss -- -- -- -- (6,088,000) --
Total comprehensive
loss (6,088,000)
--------- ---------- ------------ ----------- ------------- ---------- ------------
Balance, September 30, 1999 $ -- $1,557,000 $347,345,000 $(3,512,000) $(164,820,000) $ 134,000 $180,704,000
========= ========== ============ =========== ============= =========== ============
</TABLE>
The accompanying Notes to Consolidated Condensed Financial Statements
are an integral part of these Statements.
6
<PAGE> 7
HARKEN ENERGY CORPORATION AND SUBSIDIARIES
CONSOLIDATED CONDENSED STATEMENTS OF CASH FLOWS
(Unaudited)
<TABLE>
<CAPTION>
NINE MONTHS ENDED SEPTEMBER 30,
----------------------------------
1998 1999
--------------- ---------------
(Restated)
<S> <C> <C>
Cash flows from operating activities:
Net loss $ (29,605,000) $ (6,088,000)
Adjustment to reconcile net loss to net cash
provided by operating activities:
Valuation allowance 27,787,000 --
Depreciation and amortization 3,878,000 4,375,000
Amortization of issuance costs 562,000 595,000
Provision for doubtful accounts 15,000 --
Extraordinary item -- 589,000
Change in assets and liabilities:
Increase in accounts receivable and other assets (682,000) (604,000)
Increase (decrease) in trade payables and other 1,406,000 (14,256,000)
--------------- ---------------
Net cash provided by (used in) operating activities 3,361,000 (15,389,000)
--------------- ---------------
Cash flows from investing activities:
Investor advances, net 1,034,000 --
Capital expenditures (65,038,000) (37,169,000)
Cash received from acquired subsidiary -- 261,000
Proceeds from sales of assets -- 2,222,000
Proceeds from collection of note receivable -- 98,000
--------------- ---------------
Net cash used in investing activities (64,004,000) (34,588,000)
--------------- ---------------
Cash flows from financing activities:
Proceeds from issuances of common stock,
net of issuance costs 2,075,000 47,000
Proceeds from issuance of European notes, net 81,800,000 --
Proceeds from issuance of preferred stock, net 14,452,000 --
Transfer from segregated account cash 37,615,000 --
Proceeds from development finance obligations 9,798,000 --
Repayments of notes payable and long-term obligations -- (3,750,000)
Redemption of preferred stock -- (25,284,000)
Purchase of treasury stock (2,552,000) (960,000)
Investment in segregated account cash, net (802,000) --
--------------- ---------------
Net cash provided by (used in) financing activities 142,386,000 (29,947,000)
--------------- ---------------
Net increase (decrease) in cash and temporary investments 81,743,000 (79,924,000)
Cash and temporary investments at beginning of period 85,740,000 141,545,000
--------------- ---------------
Cash and temporary investments at end of period $ 167,483,000 $ 61,621,000
=============== ===============
Supplemental disclosures of cash flow information:
Cash paid during the period for:
Interest $ 10,000 $ 99,000
Income taxes - --
</TABLE>
The accompanying Notes to Consolidated Condensed Financial Statements
are an integral part of these Statements.
7
<PAGE> 8
HARKEN ENERGY CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS
SEPTEMBER 30, 1998 AND 1999
(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, 1998 and September 30, 1999 and the results of its operations and changes
in its cash flows for all periods presented as of September 30, 1998 and 1999.
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/A for the year
ended December 31, 1998.
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, 1999 are not necessarily indicative of the results to be expected for the
full year.
(2) MERGERS AND ACQUISITIONS
On August 19, 1999, Harken executed a merger agreement with Xplor
Energy, Inc. ("Xplor") whereby Xplor became a wholly-owned subsidiary of
Harken. Xplor explores for, develops and produces oil and gas reserves
domestically. Under the terms of the merger agreement, the holders of the
outstanding shares of the preferred stock of Xplor converted their stock into
7,500,000 shares of Harken common stock, and also received 2,336,066 warrants
for the purchase of Harken common stock at $2.50 per share. Additionally,
Harken assumed $14,200,000 of bank debt secured by the oil and gas properties
of Xplor. No further consideration was issuable under this transaction to any
other class of stock of Xplor and all outstanding shares of Xplor stock were
cancelled under the merger agreement.
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. 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 of up to $4,000,000 was payable by
Harken to the sellers if the sellers were able to obtain new or renewal leases
for certain of
8
<PAGE> 9
the Bargo Properties. In July 1999, Harken obtained sufficient assignments of
new and/or renewed leases related to the Bargo Properties and paid cash of
approximately $4,000,000 to the sellers. See Note 12 -- Related Party
Transactions for a discussion of the relationship between Harken and the
sellers.
(3) MARKETABLE SECURITIES
Included within cash and temporary investments at December 31, 1998
and September 30, 1999 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 included in
cash and temporary investments:
<TABLE>
<CAPTION>
December 31, September 30,
1998 1999
----------------- ------------------
<S> <C> <C>
Cost $ 124,398,000 $ 57,766,000
Estimated fair value $ 124,914,000 $ 57,962,000
</TABLE>
Harken includes in cash and temporary investments 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,
1998 1999
-------------- -------------
(Restated)
<S> <C> <C>
Unevaluated oil and gas properties:
Colombian properties $ 60,162,000 $ 46,490,000
Costa Rican properties -- 514,000
Domestic properties 4,372,000 8,100,000
Evaluated oil and gas properties:
Colombian properties 68,772,000 117,748,000
Domestic properties 92,807,000 123,088,000
Facilities, gas plants and other property 14,864,000 20,797,000
Less accumulated depreciation and amortization (74,759,000) (79,132,000)
------------- -------------
$ 166,218,000 $ 237,605,000
============= =============
</TABLE>
9
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(5) SOUTH AMERICAN OPERATIONS
Colombian Operations -- Harken's Colombian operations are conducted
through Harken de Colombia, Ltd., a wholly-owned subsidiary of Harken, which
held five exclusive Colombian Association Contracts with Empresa Colombiana de
Petroleos ("Ecopetrol") as of September 30, 1999. 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, and the Los Olmos Contract, awarded in 1998. The Alcaravan
Contract currently covers approximately 210,000 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
10, 1999, Harken was in compliance with the requirements of each of the
Association Contracts, as amended. The Cambulos Association Contract required
Harken to have drilled two wells to a depth sufficient to test productive
formations for oil and/or gas by May 16, 1999. During May 1999, Harken received
approval from Ecopetrol to allow for the additional well depth drilled during
the Islero #1 well to substitute for the obligation to drill a second
exploratory well within the third contract year. During September 1999,
Ecopetrol conditionally granted a six month extension until May 16, 2000 to
Harken for the exploratory well required in the fourth year of the Cambulos
Contract. Harken anticipates relinquishing in the future a portion of its
Cambulos acreage to meet the conditions required by Ecopetrol in granting
Harken an extension.
In exchange for the obligation to drill the fifth year exploratory
well for the Alcaravan Contract, Harken has proposed to relinquish certain
contract acreage. During July 1999, Harken submitted to Ecopetrol a proposal
setting out the specific acreage for this relinquishment. Harken's submitted
relinquishment proposals specifically include plans to retain those structure
areas associated with Palo Blanco and Anteojos discoveries. During September
1999, Ecopetrol granted a six month extension until March 31, 2000 to Harken
for drilling of the exploratory well required in the sixth year of the
Alcaravan Contract.
Harken was required to drill the fifth year exploratory well for the
Bocachico Association Contract by March of 1999. Harken is currently in
negotiations with Ecopetrol regarding the Bocachico work obligations as well as
the future development of the Rio Negro field. Ecopetrol has advised Harken
that during these negotiations, Ecopetrol will consider the contract to be in
full compliance.
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 or declaration 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, 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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<PAGE> 11
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. If Harken
proceeds on a sole-risk basis, it will be entitled to receive Ecopetrol's share
of production after royalty, until Harken has recovered 200% of its development
costs, after which time Ecopetrol would receive its share of production.
Costa Rica Operations -- In the fourth quarter of 1998, Harken
announced that it signed an agreement to participate in approximately 1.4
million acres in the North and South Limon Back Arc Basin onshore and offshore
Costa Rica, Central America covered by a bid awarded for an Exploration and
Production Contract ("Costa Rica Contract"). The formal Costa Rica Contract was
signed by the President of Costa Rica and became effective October 1999. The
Costa Rica Contract area is comprised of Blocks 2, 3, 4 and 12 from Costa
Rica's initial bidding round in October of 1997. Two of the Blocks are located
onshore and two are located offshore within Costa Rica's Caribbean territorial
waters. The Costa Rica Contract is subject only to final agreements with the
Republic of Costa Rica, including the assignment of the Costa Rica Contract to
Harken, which could be signed during the fourth quarter of 1999.
Harken's participation in Costa Rica is structured whereby a
wholly-owned Harken subsidiary owns 80% of the stock of a Nevada limited
liability corporation, Harken Costa Rica Holdings LLC ("HCRH"). An affiliate of
MKJ Xploration, Inc. ("MKJ") owns the remaining 20% of the subsidiary. Under
the terms of the agreement between Harken and MKJ, Harken will pay $4.2 million
to MKJ to purchase its share of the Costa Rica Contract rights from MKJ once an
agreement and assignment are signed with the Republic of Costa Rica.
Additionally, Harken is committed to contribute an additional $8 million to
fund the work program obligations and maintain its 80% ownership under the
proposed Costa Rica Contract agreement. In connection with Harken's
participation in the Costa Rica Contract rights, Harken issued to MKJ certain
non-registered, non-transferable stock purchase warrants to purchase 200,000
shares of Harken common stock which are currently exercisable by the holders
thereof on or before November 12, 2001, at an exercise price of $3.50 per
share.
(6) BANK CREDIT FACILITY OBLIGATIONS
A summary of long-term bank obligations follows:
<TABLE>
<CAPTION>
December 31, September 30,
1998 1999
------------- -------------
<S> <C> <C>
Subsidiary notes payable to bank (A) $ -- $10,500,000
Subsidiary project finance facility (B) -- --
------------ -----------
10,500,000
Less: Current portion -- --
------------ -----------
$ -- $10,500,000
============ ===========
</TABLE>
11
<PAGE> 12
(A) Xplor, a wholly-owned subsidiary of Harken, has a three-year
loan facility with Christiania og Kreditkasse ("Christiania")
which is solely secured by the oil and gas properties and
subsidiaries of Xplor. The Christiania facility matures on
September 30, 2001 and provides up to $50,000,000 in
borrowings limited by a borrowing base (as defined by the
Christiania facility) which was $10,700,000 at September 30,
1999. The outstanding balance under the Christiania facility
was $14,200,000 at the August 19, 1999 merger of Xplor with
Harken, and was paid down by Harken to $10,500,000 subsequent
to the merger. The Christiania facility provides for interest
based on the Short-term Interbank Offered Rates ("LIBOR")
plus a margin of 1.125% to 1.875%, payable at the underlying
LIBOR maturities, or lender's prime rate plus 0.25% (8.5% at
September 30, 1999) and provides for a commitment fee of
0.375% on the unused amount. The borrowing base is subject to
a review by Christiania on a semi-annual basis and may be
adjusted subject to the provisions of the Christiania
facility.
(B) Effective September 1, 1999, Harken de Colombia, Ltd. entered
into a project finance loan agreement with the International
Finance Corporation ("IFC") to be utilized in the development
of the Bolivar Association Contract block in Colombia ("the
Project"). As of November 10, 1999, no borrowings have been
drawn down by Harken de Colombia, Ltd. under the facility.
The project finance facility consists of an A Loan of
$20,000,000, a syndicated B loan of $25,000,000 and a C Loan
of $10,000,000. The A and B Loans will bear interest at LIBOR
plus a margin of 3.50% and will be repayable in equal
semi-annual installments beginning one year after initial
disbursement of funds and continuing for five years. The
syndicated B Loan has been jointly arranged by Dresdner
Kleinwort Benson, and fully underwritten by Dresdner Bank
Lateinamerika AG. The C Loan will bear interest at LIBOR with
a quasi-equity income participation and is repayable in full
at the end of the sixth year of maturity. The C Loan will be
convertible into Harken common stock under certain conditions
at a conversion price of $3.00 per share. All loans are
extendable for up to two years from the initial term if
certain Project performance conditions are achieved. All
loans will be secured by the Project. Funding under the
facility is subject to certain conditions, including Harken
maintaining certain capital commitments to Harken de
Colombia, Ltd. to be dedicated to the Project.
(7) DEVELOPMENT FINANCE AND OPERATING AGREEMENTS
Rochester Agreement -- Harken de Colombia, Ltd. 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. The Estero
#1 well was drilled in the first half of 1997 and Estero #3 was spudded in
December 1997. The Canacabare #1 well began drilling March 1998, and testing of
the well has been delayed until late 1999 due to rainy season conditions.
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In May 1999, Harken signed a definitive purchase and sale agreement
pursuant to which Harken purchased all of the interests held by Rochester in
the Alcaravan and Miradores Association Contract areas. Under the terms of the
purchase and sale agreement entered into between Harken and Rochester, Harken
forgave all amounts owed by Rochester to Harken and issued 2,600,000 shares of
Harken common stock. The purchase and sale agreement with Rochester was closed
in July 1999.
Parkcrest Financing Agreement - In January 1997, Harken de Colombia,
Ltd. entered into a financing agreement ("the Parkcrest Financing Agreement")
with Parkcrest Explorations, Ltd. ("Parkcrest", a Canadian corporation)
pursuant to which Parkcrest 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 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 was to pay 33 1/3% of the aggregate costs of the initial well to be
drilled under the Miradores Association Contract. Parkcrest was 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, was to 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 bore 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 was due and
payable by Parkcrest on November 30, 1998 secured by 50% of Parkcrest's
beneficial interest in the Palo Blanco prospect. In December 1998, Harken
purchased all of the interests held by Parkcrest in the Alcaravan and Miradores
Association Contract areas. Under the terms of the purchase agreement entered
into between Harken and Parkcrest, Harken forgave a loan balance of
approximately $2,280,000 outstanding at the date of the purchase and issued
1,350,000 shares of Harken common stock.
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 relating to the Rio Negro Development Finance Agreement in
exchange for 900,000 restricted shares of Harken common stock which were issued
within 30 days following closing. 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.
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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. 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 have derived from the sale
of oil and gas produced from each of the three prospects if the planned
drilling on the prospect was successful (the "EnCap Participation"). Pursuant
to the EnCap Development Finance Agreement, Harken was obligated to drill each
of the three wells prior to October 2000.
Pursuant to the EnCap Development Finance Agreement, the EnCap
Investors had 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 was 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 had 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 could 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 provided for
additional 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 12 -- Related Party
Transactions for a discussion of the relationship between Harken and the EnCap
Investors.
In April 1999, Harken received notice from EnCap Investments L.C. that
the EnCap Investors elected to exercise their option to convert a 40% portion
of the EnCap Participation into shares of Harken common stock. Pursuant to the
EnCap Development Finance Agreement, the EnCap Investors received 6,481,512
shares of Harken common stock.
On October 28, 1999, Harken and the EnCap Investors entered into a
repurchase agreement whereby Harken paid cash of $20 million to EnCap
Investments L.C. on behalf of the EnCap Investors as full settlement of the
remaining Development Finance Obligations to the EnCap Investors. Such
repurchase and settlement included the extinguishment of Harken's contingent
obligation to issue additional shares of Harken common stock to the extent that
the EnCap Investors did not realize the Invested Amount from the sale of shares
issued to the EnCap Investors in April 1999. As a result of the October
repurchase agreement, Harken has reclassified the Development Finance
Obligation related to the EnCap Development Finance Agreement as a current
liability in the accompanying September 30, 1999 consolidated balance sheet.
The repurchase agreement will result in no significant net gain or loss during
the fourth quarter of 1999.
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European Development Finance Agreement -- 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. 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 began 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 to Faisal and paid a cash fee of
$75,000 to a financial advisor.
Pursuant to the European Development Finance Agreement, the European
Investors, Faisal and Harken each have the right to convert the interest into
shares of common stock of Harken pursuant to conversion rights terms identical
to those terms related to the EnCap Development Finance Agreement, for a period
of two years beginning in December 1998. In December 1998, one of the European
Investors exercised their right to convert all their Institutional
Participation into shares of Harken common stock. Harken elected to pay cash of
approximately $2.3 million in lieu of issuing Harken common stock. In April and
May 1999, respectively, Harken received notice from the remaining European
Investors that they had elected to exercise their option to convert all of
their Institutional Participation into shares of Harken common stock. Pursuant
to the European Development Finance Agreement, the European Investors received
1,908,637 and 1,121,738 shares, respectively, of Harken common stock. Also, in
April 1999, Harken received notice from Faisal that it had elected to exercise
its option to convert a two-thirds portion of its Institutional Participation
into shares of Harken common stock. Pursuant to the Development Finance
Agreement with Faisal, Faisal received 1,316,829 shares of Harken common stock.
(8) EUROPEAN CONVERTIBLE NOTES PAYABLE
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. In connection
with the sale and issuance of the 5 1/2% European Notes, Harken paid
approximately $5,174,000 from the 5 1/2% European Notes proceeds for commissions
and issuance costs. Interest incurred on these notes was payable semi-annually
in June and December of each year to maturity or until the 5 1/2% European Notes
were converted. 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
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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 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. Harken
formally called the 5 1/2% European Notes which remained outstanding 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 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 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 in the Segregated Accounts to its main operating
account.
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
provided for a 3 percent premium on the number of shares of Harken common stock
issuable on conversion to holders of the 5% European Notes who converted prior
to November 25, 1998. None of the bondholders have exercised their conversion
option as of November 12, 1999. 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 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.
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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.
(9) STOCKHOLDERS' EQUITY
Common Stock - Harken currently has authorized 225,000,000 shares of
$.01 par common stock. At December 31, 1998 and September 30, 1999, Harken had
issued 134,778,830 shares and 155,707,548 shares, respectively.
Treasury Stock -- At December 31, 1998 and September 30, 1999, Harken
held 700,000 and 1,218,000 shares, respectively, of Harken common stock
purchased in the open market at a cost of $2,552,000 and $3,512,000,
respectively.
Issuance of European Convertible Notes Payable - In June 1997, Harken
issued to qualified purchasers a total of $70 million in 5 1/2% European Notes.
As of December 31, 1997, holders of 5 1/2% European Notes totaling $30,120,000
had 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 shares
of Harken common stock. On June 12, 1998, Harken formally called and converted
the remaining 5 1/2% European Notes into 7,854,000 shares of Harken common
stock. 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.
In May 1998, Harken issued to qualified purchasers a total of $85
million in 5% European Notes which mature on May 26, 2003. 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"). None of the
bondholders have exercised their conversion option as of November 10, 1999. 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 at any time after May 26, 1998 and on or before May 26,
2000 at an exercise price of $6.50 per share. The 5% European Notes are listed
on the Luxembourg Stock Exchange. For further discussion of the European Notes,
see Note 8 - European Convertible Notes Payable.
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 approximately $4,000,000 was paid by
Harken to the sellers in cash during July 1999. See Note 2 - Mergers and
Acquisitions for further discussion.
Merger with Xplor - In August 1999, Harken entered into a merger
agreement with Xplor whereby Xplor became a wholly-owned subsidiary. As
consideration for the merger, Harken issued 7,500,000 shares of Harken common
stock and issued 2,336,066 warrants for the purchase of shares of Harken common
stock at $2.50 per share. See Note 2 - Mergers and Acquisitions for further
discussion.
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Development Finance Agreements -- Harken 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. In October
1999, Harken repurchased for cash a significant majority of the remaining
development finance agreements. For a complete discussion of each of the
various development finance agreements, and further discussions of certain
conversions of beneficial interests exercised in April and May 1999, as well as
a discussion of the October 1999 repurchase, see Note 7 - 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 was 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 also included a premium
amount equal to an increase calculated on the face value of the Series F
Preferred at 5% per annum. Harken reflected this 5% per annum increase
throughout 1998 as accretion related to preferred stock. Such accretion amount
is reflected in Harken's calculation of net income (loss) attributable to
common stock. The Series F Preferred did 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.
During the first nine months following the issuance of the Series F
Preferred, the conversion price was equal to 103% of the Market Price on the
conversion date. On January 9, 1999, the conversion price would 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 was
to 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, would automatically be converted into shares of
Harken common stock at the then applicable conversion price.
Harken had 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 was less than $4.80, or (b)
on or after January 9, 1999, the then applicable conversion price was 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 would have the option to purchase from Harken for cash
additional shares of Harken common stock equal to the
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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.
On January 5, 1999, Harken reached an agreement with RGC to extend the
fixed conversion price dates and mandatory conversion date by one year on
Harken's $15 million Series F Preferred. Under the terms of the new agreement
with RGC, Harken would have issued shares of a new Series G Convertible
Preferred Stock (the "Series G Preferred") in exchange for the outstanding
Series F Preferred. In January 1999, RGC elected to present its Series F
Preferred for conversion and Harken elected to pay cash of approximately $25.3
million to RGC in lieu of issuing shares of Harken common stock. Harken
reflected an additional amount of approximately $1,302,000 of accretion during
1998 related to Series F Preferred which represents the portion of the ultimate
redemption value generated in December 1998. Harken has reflected the
additional accretion amount of approximately $8,427,000 in the calculation of
net income (loss) attributed to common stock during the first quarter of 1999
reflecting the portion of the redemption value generated in January 1999.
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 $0.01 per Right, subject to adjustment. No Rights were exercisable
under the Rights Agreement at June 30, 1999.
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.
(10) PER SHARE DATA
Basic earnings per common share was computed by dividing net income or
loss by the weighted average number of shares of Harken common stock
outstanding during the period. The impact of unconverted European Convertible
Notes or Development Finance Agreements was not included for the
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three months and nine months ended September 30, 1999 or 1998, as their effect
would have been antidilutive.
(11) INCOME TAXES
At September 30, 1999, Harken had available for federal United States
income tax reporting purposes, net operating loss (NOL) carryforward for
regular tax purposes of approximately $57,000,000 which expires in 1999 through
2018, alternative minimum tax NOL carryforward of approximately $44,000,000
which expires in 1999 through 2018, statutory depletion carryforward of
approximately $2,400,000 which does not have an expiration date, and a net
capital loss carryforward of approximately $6,300,000 which expires in 2000.
Approximately $6,000,000 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, 1999 were approximately $850,000. Total deferred
tax assets, primarily related to the net operating loss carryforward, were
approximately $19,373,000 at September 30, 1999. The total net deferred tax
asset is offset by a valuation allowance of approximately $18,523,000 at
September 30, 1999.
(12) RELATED PARTY TRANSACTIONS
Harken has on its Board of Directors a 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 7 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 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. In October 1999, Harken purchased all the interests and rights
held by the EnCap Investors for $20,000,000 cash. As described in Note 2 -
Mergers and Acquisitions, in May 1998, Harken acquired the Bargo Properties
from St. Martinville Partners, Ltd. and Bargo Energy Company, which are
affiliates of EnCap. Harken believes that the above transactions were made at
terms at least as favorable to Harken as those that could have been secured
with an unrelated party.
During the past two years, Harken has made secured 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,
1998 and September 30, 1999 as Related Party Notes Receivable.
(13) SEGMENT INFORMATION
Harken divides its operations into two operating segments, which are
managed and evaluated by Harken as separate operations. Harken's North American
operating segment currently relates to Harken's exploration, development,
production and acquisition efforts in the United States whereby production cash
flows are discovered or acquired and operated primarily through traditional
ownership of mineral interests in the various states in which it operates.
Harken's North American production is sold to established
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purchasers and generally transported through an existing and well-developed
pipeline infrastructure. Harken's South American operating segment currently
relates to Harken's exploration, development, production and acquisition
efforts in Colombia and Costa Rica. South American segment production cash
flows are discovered through extensive drilling operations conducted under
Association Contract arrangements with the state-owned oil and gas
companies/ministries in the respective countries. Harken's South American
operations are heavily capital intensive in the exploration and development
phases due to remote well locations and the general need for the construction
of Harken's own flowline connections and production facilities. During the
periods ended September 30, 1998 and 1999, none of Harken's South American
segment operations related to Costa Rica.
Harken's accounting policies for each of its operating segments are
the same as those for its consolidated financial statements. There are no
intersegment sales or transfers. Revenues and expenses not directly
identifiable with either segment, such as certain general and administrative
expenses, are allocated by Harken based on various internal and external
criteria including an assessment of the relative benefit to each segment.
Harken's financial information for each of its operating segments is
as follows for the periods ended September 30, 1998 and 1999:
<TABLE>
<CAPTION>
Three Months Ended September 30, 1998 Nine Months Ended September 30, 1998
--------------------------------------------- ---------------------------------------------
North South North South
America America Total America America Total
------------- ------------- ------------- ------------- ------------- -------------
<S> <C> <C> <C> <C> <C> <C>
Operating revenues $ 2,750,000 $ 347,000 $ 3,097,000 $ 7,950,000 $ 481,000 $ 8,431,000
Interest and other income 1,265,000 1,392,000 2,657,000 3,200,000 3,381,000 6,581,000
Depreciation and amortization 1,192,000 270,000 1,462,000 3,551,000 327,000 3,878,000
Valuation allowance 27,787,000 -- 27,787,000 27,787,000 -- 27,787,000
Interest expense and other, net
(restated) 167,000 1,074,000 1,241,000 280,000 2,666,000 2,946,000
Income tax expense -- -- -- 46,000 -- 46,000
Segment profit (loss) (restated) (27,826,000) (618,000) (28,444,000) (28,135,000) (1,470,000) (29,605,000)
Capital expenditures (restated) 1,120,000 6,041,000 7,161,000 23,558,000 47,199,000 70,757,000
Total assets at end of period
(restated) 144,748,000 192,507,000 337,255,000 144,748,000 192,507,000 337,255,000
</TABLE>
<TABLE>
<CAPTION>
Three Months Ended September 30, 1999 Nine Months Ended September 30, 1999
-------------------------------------------- ---------------------------------------------
North South North South
America America Total America America Total
------------- ------------- ------------- ------------- ------------- -------------
<S> <C> <C> <C> <C> <C> <C>
Operating revenues $ 5,183,000 $ 518,000 $ 5,701,000 $ 10,484,000 $ 2,407,000 $ 12,891,000
Interest and other income 439,000 452,000 891,000 1,534,000 1,598,000 3,132,000
Depreciation and amortization 1,289,000 238,000 1,527,000 3,583,000 792,000 4,375,000
Interest expense and other, net 534,000 1,456,000 1,990,000 1,263,000 3,600,000 4,863,000
Income tax expense 24,000 -- 24,000 24,000 -- 24,000
Extraordinary item -- -- -- -- (589,000) (589,000)
Segment profit (loss) 633,000 (2,278,000) (1,645,000) (739,000) (5,349,000) (6,088,000)
Capital expenditures 36,100,000 21,346,000 57,446,000 36,799,000 41,188,000 77,987,000
Total assets at end of period 103,887,000 211,169,000 315,056,000 103,887,000 211,169,000 315,056,000
</TABLE>
21
<PAGE> 22
(14) COMMITMENTS AND CONTINGENCIES
Operational Contingencies - The exploration, development and
production of oil and gas are subject to various Colombian, Costa Rican,
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.
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 ("Rice") vs. Harken
Exploration Company. Harken believes that this lawsuit is wholly without merit.
In October 1999, the trial court granted Harken's motion for Summary Judgement
and dismissed the Rice lawsuit. Harken received Rice's Notice of Appeal to the
U.S. Fifth Circuit Court of Appeals of the trial court's summary judgement
dismissing the Rice lawsuit on October 27, 1999. The appeal is not expected to
be heard before the fourth quarter of 2001. In Harken management's opinion, the
results of the lawsuit and appeal will not have a material adverse effect on
Harken's financial position.
Search Acquisition Corp. ("Search Acquisition"), a wholly owned
subsidiary of Harken, was named as a defendant in a lawsuit by Petrochemical
Corporation of America and Lorken Investments Corporation (together,
"Petrochemical"). This lawsuit arises out of an attempt by Petrochemical to
enforce a judgement entered in 1993 against, among other parties, a group of
twenty limited partnerships known as the "Odyssey limited partnerships." In
1989, Search Exploration, Inc. acquired all of the assets of eight of the
twenty Odyssey limited partnerships. Petrochemical claims that Search
Exploration, Inc. is liable for payment of the judgement as the
successor-in-interest to the eight Odyssey limited partnerships. Search
Acquisition was the surviving corporation in the merger with Search
Exploration, Inc. On February 28, 1996, the court granted Search Acquisition's
motion for summary judgement. On July 3, 1998, the Fifth District Court of
Appeals for the State of Texas reversed the trial court's summary judgment and
remanded the case to the trial court. It is estimated that this trial will take
place in the third quarter of 2000. Although the ultimate outcome of this
litigation is uncertain, Harken believes that any liability to Harken as a
result of this litigation will not have a material adverse effect on Harken's
financial condition.
Harken has accrued approximately $5.0 million at September 30, 1999
relating to certain other operational or regulatory liabilities related to
Harken's North American 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.
Year 2000 Issues - Over the past two years, Harken has prepared for
the potential impact of the Year 2000 on the processing of date-sensitive
information by Harken's computer systems. The Year 2000 issue involves
circumstances where a computerized system may not properly recognize or process
date-sensitive information on or after January 1, 2000. The Year 2000 problem
is the result of computer programs being written using two digits, rather than
four, to define the applicable year. Any of Harken's programs that have
time-sensitive software may recognize a date using "00" as the Year 1900 rather
than the Year 2000, which could result in miscalculations or system failures.
The problem is not limited to computer systems. Year
22
<PAGE> 23
2000 issues will also potentially affect every non-information technology
system that has an embedded microchip, such as elevators.
Harken began a formal process in 1998 to identify those internal
computerized systems that are not Year 2000 compliant, prioritize those
business-critical computerized systems that need remediation or replacement,
test compliance once the appropriate corrective measures have been implemented,
and develop any contingency plans where considered necessary. In addition,
Harken conducted a survey to verify the Year 2000 readiness status of key
purchasers, vendors and customers that potentially could have an impact on
Harken's material business operations.
Harken's information technology infrastructure consists of desktop
Pentium class Intel based PC systems and servers, and off-the-shelf software
packages. The systems are networked via Microsoft and other telecommunications
equipment. Harken does not use mini or mainframe computer systems and uses only
off-the-shelf software products.
Assessment. Based on Harken's internal review and discussions with
third parties regarding the Year 2000 problem, Harken believes that its
exposure to potential Year 2000 problems exists in two general areas:
technological operations, including non-information technology systems which
are in the sole control of Harken; and technological operations which are
dependent in some way on one or more third parties. Failure to achieve high
levels of Year 2000 compliance in either area could have a material adverse
impact on Harken.
Remediation and Implementation. In the area of technological
operations which are under Harken's exclusive control, Harken is currently
involved in the identification and remediation of affected technological
functions, including non-information technology systems. Harken has
substantially completed its assessment of Year 2000 readiness of its internal
computerized systems. Harken has installed upgrades to its off-the-shelf
financial and operational software applications, hardware and
telecommunications equipment. Harken has also substantially completed the
identification and assessment phase with respect to its non-information
technology systems.
Testing. Harken has completed substantially all of the testing process
of newly upgraded systems for Year 2000 compliance. Upon completion, Harken
will be able to identify any internal computer systems that remain
non-compliant. At present, it is anticipated that Harken's action plan for
addressing Year 2000 problems will be successfully completed in all material
respects well in advance of January 1, 2000.
Third Parties. Harken is in the final process of assessing the level
of Year 2000 issues associated with its most significant vendors, suppliers,
partners and major customers. All of Harken's oil and gas sales revenues are
derived from oil and gas production from its North American and South American
operations. Harken's North American operations are dependent upon its various
purchasers or pipeline operators who transport oil or gas for its purchasers.
In addition, Harken's South American operations may also become dependent upon
the transportation of oil through outside owned facilities or pipelines. Harken
is monitoring progress of its various North American purchasers and pipelines,
as well as potential South American outside owned facilities on their
activities related to the Year 2000. At this time, Harken continues to expect
that field operations will not be materially interrupted due to improper
recognition of the Year 2000 by computerized systems of its various purchasers
and pipelines.
23
<PAGE> 24
Harken also relies on other oil and gas service providers, vendors,
and financial institutions in its daily operations. Harken believes it has
identified those third-party relationships that could have a material adverse
effect on Harken's results of operations and financial position should their
computerized systems not be compliant for the Year 2000. Harken continues with
its efforts to survey the identified third parties on their readiness for the
Year 2000 and establish appropriate alternatives, if needed, where
noncompliance may pose a risk to Harken's operations.
Although Harken has made significant efforts to ensure that the third
parties on which it is heavily reliant are Year 2000 compliant, it cannot
predict the likelihood of such compliance occurring nor the direct or indirect
costs to Harken of non-compliance by those third parties or of securing such
services from compliant third parties. Harken has no control over these third
parties' compliance and cannot give assurances that these third parties'
representations to Harken are accurate. Therefore, there can be no guarantee
that Year 2000 problems originating with a third party will not occur and no
absolute assurance that third parties will convert their systems in a timely
manner, to the extent Harken is unable to replace the goods, services or
customers with alternate sources of supply and demand on a timely and
economically equivalent basis. Such failure could have a material adverse
effect on Harken's business and results of operations.
Estimated Costs. The total financial effect that Year 2000 issues
will have on Harken cannot be predicted with any certainty at this time. In
fact, in spite of all efforts being made to rectify these problems, the success
of Harken's efforts will not be known with certainty until the year 2000
actually arrives. Based on its assessment to date, Harken does not believe that
the costs to resolve any Year 2000 issues will be material. To date, Harken has
spent approximately $150,000 on Year 2000 matters and it expects that the total
cost, primarily consulting fees and software purchases, will not exceed
$200,000.
Contingency Plan. Harken has nearly completed its implementation and
testing of Year 2000 compliant systems. However, a reasonably likely worst case
scenario is that Harken or certain of its purchasers or other vendors fail to
correct a material Year 2000 problem, which results in an interruption of
Harken's transportation and sale of Harken's crude oil and natural gas
production sales revenues. Certain interruptions could result in a material
adverse effect on Harken's results of operations, cash flows and financial
condition. Due to the inherent uncertainties relating to the effect of the Year
2000 on Harken's operations, it is difficult to predict what impact, if any,
noncompliance with the Year 2000 issue will have on Harken's results of
operations, cash flows and financial condition. Based on the results of the
implementation and testing of Harken's Year 2000 affected systems and ongoing
assessment of the readiness of its vendors, suppliers, partners and major
customers, Harken has developed appropriate contingency plans that address the
most reasonably likely worst case scenarios. A failure to address Year 2000
issues successfully could have a material adverse effect on Harken's business,
financial condition or results of operations.
24
<PAGE> 25
(15) RESTATEMENT OF FINANCIAL STATEMENTS
In August 1999, following discussions with the Securities and Exchange
Commission's accounting staff, Harken, along with its independent public
accountants, changed its accounting for certain Development Finance Agreements
to reflect amounts convertible into shares of Harken common stock as a
long-term obligation and to reflect the 15% per annum increase in amounts
convertible as interest expense in Harken's consolidated financial statements.
The restatement of Harken's consolidated financial statements had no effect on
Harken's historical revenues, gross profit, net working capital or cash flow
for any of the periods. Harken had no long-term debt compliance covenants that
were affected by the restatement. See Note 7--Development Finance and Operating
Agreements for a discussion of Harken's Development Finance Agreements. Harken
had previously accounted for these transactions as conveyances of net profits
interests and had recorded the sales proceeds as deferred revenue.
The following table summarizes certain selected financial data as of
December 31, 1998 and for the quarter and nine months ended September 30, 1998,
as originally reported and as restated to reflect the revised accounting for
certain Development Finance Agreements:
<TABLE>
<CAPTION>
December 31, 1998
--------------------------------
Previously
Reported Restated
--------------- ---------------
<S> <C> <C>
Total Assets $ 304,538,000 $ 320,116,000
Stockholders' equity $ 179,942,000 $ 176,138,000
</TABLE>
<TABLE>
<CAPTION>
Quarter Ended September 30, 1998 Nine Months Ended September 30, 1998
--------------------------------- ------------------------------------
Previously Previously
Reported Restated Reported Restated
--------------- --------------- --------------- ---------------
<S> <C> <C> <C> <C>
Revenues:
Oil and gas operations $ 3,097,000 $ 3,097,000 $ 8,431,000 $ 8,431,000
Interest and other income 2,657,000 2,657,000 6,581,000 6,581,000
--------------- --------------- --------------- ---------------
5,754,000 5,754,000 15,012,000 15,012,000
Costs and Expenses:
Oil and gas operating 1,690,000 1,690,000 4,418,000 4,418,000
expenses
General and administrative
Expenses, net 2,018,000 2,018,000 5,542,000 5,542,000
Depreciation and 1,462,000 1,462,000 3,878,000 3,878,000
amortization
Valuation allowance 27,787,000 27,787,000 27,787,000 27,787,000
Interest expense and
other, net 322,000 1,241,000 538,000 2,946,000
--------------- --------------- --------------- ---------------
33,279,000 34,198,000 42,163,000 44,571,000
Income tax expense -- -- 46,000 46,000
--------------- --------------- --------------- ---------------
Net income (loss) $ (27,525,000) $ (28,444,000) $ (27,197,000) $ (29,605,000)
=============== =============== =============== ===============
Net income (loss) attributed
to common stock $ (27,712,000) $ (28,631,000) $ (27,553,000) $ (29,961,000)
=============== =============== =============== ===============
Basic and diluted net income
(loss) per common share $ (0.22) $ (0.23) $ (0.22) $ (0.24)
</TABLE>
25
<PAGE> 26
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/A for the fiscal year ended
December 31, 1998 filed with the Securities and Exchange Commission.
OVERVIEW
Harken reported a net loss for the nine months ended September 30,
1999 of $6.1 million compared to a net loss of $29.6 million for the prior year
period. Total oil and gas operating revenues increased from approximately $8.4
million during the first nine months of 1998 to approximately $12.9 million for
the first nine months of 1999, primarily due to increased oil and gas prices
and from increased volumes and operating revenue from Harken's Colombian
operations. Gross profit before depreciation and amortization, general and
administrative and interest expenses totaled approximately $7.4 million during
the nine months ended September 30, 1999 compared to approximately $4.0 million
for the prior year period.
26
<PAGE> 27
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,
--------------------------------- ---------------------------------
1998 1999 1998 1999
--------------- --------------- --------------- ---------------
<S> <C> <C> <C> <C>
North American Exploration and Production Operations
Oil sales revenues $ 1,475,000 $ 2,671,000 $ 4,200,000 $ 5,754,000
Oil volumes in barrels 122,000 132,000 323,000 363,000
Oil price per barrel $ 12.09 $ 20.23 $ 13.00 $ 15.85
Gas sales revenues $ 1,159,000 $ 2,307,000 $ 3,399,000 $ 4,319,000
Gas volumes in mcf 582,000 842,000 1,553,000 1,962,000
Gas price per mcf $ 1.99 $ 2.74 $ 2.19 $ 2.20
Gas plant revenues $ 116,000 $ 205,000 $ 351,000 $ 411,000
South American Exploration and Production Operations
Oil sales revenues $ 347,000 $ 518,000 $ 481,000 $ 2,407,000
Oil volumes in barrels 32,000 36,000 46,000 217,000
Oil price per barrel $ 10.84 $ 14.39 $ 10.46 $ 11.09
Other Revenues
Interest income $ 2,548,000 $ 885,000 $ 6,337,000 $ 3,118,000
Other income $ 109,000 $ 1,000 $ 244,000 $ 14,000
</TABLE>
For the quarter ended September 30, 1999 compared with the corresponding prior
period.
NORTH AMERICAN OPERATIONS
North American gross oil and gas revenues during the third quarter of
1999 and 1998 relate primarily to the operations in the Four Corners area of
Utah, Arizona and New Mexico primarily on the Navajo Indian reservation (the
"Four Corners Properties"), onshore South Texas, the Western and Panhandle
regions of Texas, the Magnolia region of Arkansas, the Carlsbad region of New
Mexico, and the southern region of Louisiana.
Gross North American oil revenues increased 81% to $2,671,000 during
the third quarter of 1999 compared to $1,475,000 during the third quarter of
1998 primarily due to the Xplor merger in August 1999 which accounted for
$706,000 of the revenue increase and 32,000 barrels of the volume increase. Oil
revenues also increased due to higher oil prices, which averaged $8.14 higher
per barrel during the third quarter of 1999 compared to the prior year period.
Gross North American gas revenues increased 99% to $2,307,000 for the
quarter ended September 30, 1999 compared to $1,159,000 for the prior year
period primarily due to the Xplor merger which accounted for approximately
$939,000 of the revenue increase and 332,000 mcf of the volume increase. Gas
revenues were also higher due to a favorable increase in the average price of
gas from $1.99 per mcf for the quarter ended September 30, 1998 to $2.74 per
mcf for the same period in 1999.
27
<PAGE> 28
North American oil and gas operating expenses consist of lease
operating expenses and gas plant expenses, along with a number of production
and reserve based taxes. North American oil and gas operating expenses
increased $428,000 during the third quarter of 1999 compared to the same prior
year period primarily due to the above mentioned merger with Xplor.
SOUTH AMERICAN OPERATIONS
During the third quarter of 1999, Harken's South American production
operations consisted of production testing conducted on Harken's Bolivar and
Alcaravan Association Contract areas in Colombia. All of Harken's South
American production through the first quarter of 1999 was transported by
trucking operations, however, in April 1999, Harken commenced pipeline
transportation on the Alcaravan Association Contract area through its newly
completed Palo Blanco flowline. South American oil revenues increased from
$347,000 for the third quarter of 1998 to $518,000 for the same quarter in
1999. The higher revenues are the result of increased production testing
volumes on the Bolivar Contract area coupled with sales of production in the
Alcaravan Contract area, which did not begin production until September 1998.
Due to the increased production, South American operations expenses have also
risen from $191,000 in the third quarter of 1998 to $382,000 in the same period
of 1999. All of Harken's South American revenues and operating expenses have
come from its Colombian operations.
During the third quarter of 1999, production from Harken's Estero #1
well on the Alcaravan Contract area has averaged 308 gross barrels of oil per
day, and Harken's Catalina #1 and Olivo #1 wells on the Bolivar Contract area
have averaged a combined 678 gross barrels of oil per day. The long-term
production test permits for the Catalina #1 and Olivo #1 wells expired during
the third quarter of 1999 and Harken anticipates receiving permit extensions
during November 1999. During this down time, as originally planned, Harken is
revising the lift method and equipment on these two wells in order to increase
their efficiency and daily production volumes. Harken's South American
production and revenues are expected to increase during the remainder of 1999
as Alcaravan and Bolivar Contract area production increases.
INTEREST AND OTHER INCOME
Interest and other income decreased during the third quarter of 1999
compared to the prior year period due to a portion of Harken's invested cash
being utilized for Colombian capital expenditures and for the January 1999
redemption of the Series F Preferred for approximately $25.3 million. Harken
generated approximately $2.5 million of interest income during the third
quarter of 1998, compared to approximately $885,000 of interest income during
the third quarter of 1999. Harken's cash balances, which include investments in
short-term marketable debt securities, are expected to continue to decrease in
1999 due to the October 1999 purchase of certain development finance interests
for $20 million and as additional funds are used to support Harken's capital
expenditure plans.
OTHER COSTS AND EXPENSES
General and administrative expenses increased $372,000 during the
third quarter of 1999 compared to the third quarter of 1998, primarily because
less expense is being capitalized due to decreased drilling activity in the
third quarter of 1999 compared to the same quarter in 1998. Also contributing
to the increased expense are the costs associated with Harken's May 1999
relocation of its corporate headquarters location to Houston, Texas, which
resulted in employee severance and relocation expenses, in addition to the
physical
28
<PAGE> 29
moving costs to relocate its offices. The relocation allowed Harken to
consolidate its corporate offices with existing Houston office personnel,
thereby gaining additional administrative efficiencies in the future. Harken
also has taken steps during the last half of 1998 and first nine months of 1999
to reduce future general and administrative expenses by reducing staff. Also,
Harken has taken steps to minimize the amount of administrative expenses added
as a result of the increased operations relating the above mentioned Xplor
merger.
Depreciation and amortization expense increased during the third
quarter of 1999 compared to the prior year period consistent with the increased
equivalent barrel production levels during the quarter. 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.
Interest Expense and Other increased during the third quarter of 1999
compared to the prior year period primarily due to less interest being
capitalized as a result of decreased drilling activity.
For the nine months ended September 30, 1999 compared with the corresponding
prior period.
NORTH AMERICAN OPERATIONS
Gross North American oil revenues increased $1,554,000 to $5,754,000
during the first nine months of 1999 compared to $4,200,000 for the same period
in 1998, primarily due to the above mentioned Xplor merger in August 1999. Oil
revenues also increased due to a rise in oil prices from an average of $13.00
per barrel for the first nine months of 1998 to $15.85 for the same period in
1999.
Gross gas revenues increased 27% from $3,399,000 for the first nine
months of 1998 to $4,319,000 for the same period in 1999, primarily due to the
Xplor merger discussed above.
North American oil and gas operating expenses increased $431,000 for
the first nine months of 1999 compared to the same period in 1998 primarily due
to the above mentioned Xplor merger.
SOUTH AMERICAN OPERATIONS
Harken's South American oil sales increased from $481,000 during the
first nine months of 1998 to $2,407,000 for the first nine months of 1999. Most
of the increase came from higher production volumes generated from production
testing on the Bolivar Association Contract area, coupled with increased sales
on the Alcaravan Association Contract area properties due to the ability to
flow oil through the Palo Blanco flowline discussed above. South American
operating expenses have increased $687,000 from $208,000 for the nine months
ended September 30, 1998 to $895,000 for the same period in 1999. Most of the
increase is associated with increased production and sales discussed above, and
from increased security expenses. All of Harken's South American revenues and
operating expenses have come from its Colombian operations.
INTEREST AND OTHER INCOME
Interest and other income decreased $3,449,000 from $6,581,000 during
the first nine months of 1998 to $3,132,000 for the same nine month period in
1999. Harken's cash balances, which include
29
<PAGE> 30
investments in short-term marketable debt securities, are expected to continue
to decrease in 1999 due to the October 1999 purchase of certain development
finance interests for $20 million and as additional funds are used to support
Harken's capital expenditure plans.
OTHER COSTS AND EXPENSES
General and administrative expenses increased $1,215,000 during the
first nine months of 1999 compared to the same period in 1998, primarily due to
Harken's May 1999 relocation of its corporate headquarters location to Houston,
Texas, which resulted in employee severance and relocation expenses in addition
to the physical moving costs to relocate its offices. The relocation allowed
Harken to consolidate its corporate offices with existing Houston office
personnel, thereby gaining additional administrative efficiencies in the
future. Harken also has taken steps during the last half of 1998 and first nine
months of 1999 to reduce general and general and administrative expenses by
reducing staff. Also, Harken has taken steps to minimize the administrative
expenses added as a result of the increased operations relating the above
mentioned Xplor merger.
Depreciation and amortization expense increased during the first nine
months of 1999 compared to the prior year period consistent with the increased
equivalent barrel production levels during the first nine months. 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.
Interest Expense and Other increased during the first nine months of
1999 compared to the prior year period due to the interest on the 5% European
Notes, which were issued in May 1998, and less expense being capitalized as a
result of decreased drilling activity.
An extraordinary charge of $589,000 was recognized in the second
quarter of 1999 for the pro rata share of unamortized Development Finance
Agreement issuance costs associated with the conversions by the EnCap
Investors, the European Investors, and Faisal of their applicable Development
Finance Agreement participation into shares of Harken common stock.
LIQUIDITY AND CAPITAL RESOURCES
Harken's working capital at September 30, 1999 was approximately $30.4
million, versus approximately $123.7 million at December 31, 1998. The decrease
in cash and working capital resulted primarily from approximately $37.2 million
of capital expenditures, which included the drilling costs of the Islero #1 and
Laurel #1 wells during the first nine months of 1999, and from the January
redemption of the Series F Preferred for approximately $25.3 million. In
addition, Harken's operations required approximately $15.4 million of cash flow
during the first nine months of 1999, primarily due to the payment of accounts
payable at December 31, 1998 related to Harken's exploration activities.
Harken's cash resources at September 30, 1999 totaled approximately $61.6
million. In October 1999, Harken utilized $20 million of its cash resources to
purchase all the interests and rights held by the EnCap Investors pursuant to
the EnCap Development Finance Agreement. Harken's remaining cash resources are
available for its ongoing exploration, development and acquisition efforts both
internationally and in North America.
30
<PAGE> 31
In addition, Harken's Board of Directors has approved the purchase of up to 10
million shares of its outstanding Harken common stock through December 31,
1999. Subsequent to September 30, 1999, and as of November 10, 1999, Harken has
purchased 735,000 shares of its outstanding common stock at a total price of
approximately $790,000.
Harken's primary need for capital is to fund its planned exploration
and development efforts domestically as well as in Colombia and Costa Rica.
Harken anticipates worldwide capital expenditures will total approximately $50
million during 2000, and plans to seek joint venture partner participation to
fund a portion of the cost for all of its significant exploration projects. In
addition, during the third quarter of 1999, Harken announced the non-recourse
project finance loan agreement facility with the International Finance
Corporation ("IFC"), the private sector subsidiary of the World Bank Group.
Loans under this facility are available for the development of the Bolivar
Association Contract in Colombia. Harken believes that it will have sufficient
cash resources to fund all of its planned capital expenditures during 2000. In
addition, Harken intends to continue to pursue North American and international
acquisition opportunities and plans 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 South American
reserves will take several years and will also require extensive production
facilities, transportation flowlines and development activity which will
require significant additional capital expenditures. The ultimate amount of
such expenditures cannot be presently predicted.
The current plans for the development of the Bolivar Contract area are
being reviewed in light of the recent disappointing results of the Laurel #1
well. Harken is conducting an extensive technical study to integrate the new
log and core analysis obtained from the prior vertical wells in the area, run
pressure interference tests with surrounding vertical wellbores, collect fluid
samples for comparison with old vertical wells and reevaluate the fracture
model for both the Rosa Blanca and La Luna formations. While the analysis will
provide helpful information, a full understanding of the complex field geology
may only be obtained as Harken drills the additional planned wells. Substantial
progress has been made on bidding for all of the flowline engineering and
associated tubular materials for the final step prior to issuing the
construction contract for the flowlines to connect the Catalina Field to the
main area pipeline.
Though the above mentioned development financing is now in place,
management has decided to delay the actual construction of the flowlines until
additional capacity is needed beyond the current trucking capacity of the
Catalina #1 and Olivo #1 wells. Harken anticipates that the flowline
construction will be initiated and completed during the first quarter of 2000.
In March 1999, Harken de Colombia, Ltd. filed a request with Ecopetrol to
declare the Catalina field to be commercial. As of November 10, 1999, the
commerciality application is in process of being reviewed by Ecopetrol.
Ecopetrol may approve the commerciality request or require Harken de Colombia,
Ltd. to proceed on a sole-risk basis for its development plans. If Harken de
Colombia, Ltd. proceeds on a sole-risk basis, it will be entitled to receive
Ecopetrol's share of production after royalty, until Harken de Colombia, Ltd.
has recovered 200% of its development costs, after which time Ecopetrol would
receive its share of production.
Terms of each of the Association Contracts entered into between Harken
de Colombia, Ltd. and Ecopetrol commit Harken to perform certain activities in
Colombia 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
31
<PAGE> 32
business. Certain of the required activities are currently being discussed and
negotiated with Ecopetrol, which could impact the timing and amount of capital
expenditures to be required during 1999 and 2000.
Related to Harken's Costa Rica operations, under the terms of the
agreement between Harken and MKJ Xploration, Inc. ("MKJ"), Harken will pay $4.2
million to MKJ to purchase its share of the Costa Rica Contract rights from MKJ
once an agreement is signed with the Costa Rican Ministry of Environment and
Energy and the assignment of the contract between MKJ and Harken is approved by
the Costa Rica Ministry of Environment and Energy. Additionally, Harken is
committed to contribute an additional $8 million to fund the work program
obligations and maintain its 80% ownership under the proposed Costa Rica
Contract agreement.
Harken's North American operating strategy includes efforts to acquire
additional oil and gas reserves through drilling activities in North America,
particularly on selected properties acquired through the August 1999 merger
with Xplor Energy, Inc., and through acquisitions. Harken plans to continue
selected development of proved undeveloped reserves on its North American
properties in addition to a continual workover program on producing properties.
The targeted results of these workover efforts are to maintain North American
production levels during 1999 and 2000.
European Convertible Notes Payable -- 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 $8.125 per share. Interest payments related to the 5%
European Notes will be funded from cash flow from operations or existing cash
balances. For a detailed discussion of the 5% European Notes see "Notes to
Consolidated Condensed Financial Statements, Note 8 -- European Convertible
Notes Payable."
Development Finance Agreements - Following the October 1999 purchase
of the EnCap Development Finance Agreement, only the $1 million principal
amount from Faisal Finance ("Faisal"), along with related accrued interest,
will remain outstanding as a Development Finance Obligation. Faisal retains its
right to receive future payments from Harken equal to 0.2% 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 Agreement, Harken is obligated to drill each of the three wells prior
to March 2001. Harken has satisfied the first well obligation pursuant to the
Development Finance Agreement with the drilling of the Islero #1 well on the
Cambulos Contract area. For a detailed discussion of the terms of the
Development Finance Agreement, see "Notes to Consolidated Condensed Financial
Statements, Note 7 -Development Finance and Operating Agreements."
In April and May 1999, certain Institutional Investors, including
Faisal, exercised their right to convert a certain portion of their
Institutional Participation into shares of Harken common stock. Harken
continues to be committed to provide additional shares of Harken common stock
to these Institutional
32
<PAGE> 33
Investors, including Faisal, 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 conversion.
At the present time, it is not known whether Faisal or Harken will
exercise their rights to convert the remaining Institutional Participation 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
Faisal elects to convert the Institutional Participation into shares of Harken
common stock. In addition, Harken cannot determine the number of shares of
Harken common stock which may be issuable to the Institutional Investors,
pursuant to the above mentioned commitment to the Institutional Investors to
realize the Invested Amount from the sale of previously issued shares at
conversion.
Operational Contingencies -- The exploration, development and
production of oil and gas are subject to various Colombian, Costa Rican,
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.
Harken has accrued approximately $5.0 million at September 30, 1999
relating to operational or regulatory liabilities related to Harken's North
American 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.
Year 2000 Issues - Over the past two years, Harken has prepared for
the potential impact of the Year 2000 on the processing of date-sensitive
information by Harken's computer systems. The Year 2000 issue involves
circumstances where a computerized system may not properly recognize or process
date-sensitive information on or after January 1, 2000. The Year 2000 problem
is the result of computer programs being written using two digits, rather than
four, to define the applicable year. Any of Harken's programs that have
time-sensitive software may recognize a date using "00" as the Year 1900 rather
than the Year 2000, which could result in miscalculations or system failures.
The problem is not limited to computer systems. Year 2000 issues will also
potentially affect every non-information technology system that has an embedded
microchip, such as elevators.
Harken began a formal process in 1998 to identify those internal
computerized systems that are not Year 2000 compliant, prioritize those
business-critical computerized systems that need remediation or replacement,
test compliance once the appropriate corrective measures have been implemented,
and develop any contingency plans where considered necessary. In addition,
Harken conducted a survey to verify the Year 2000 readiness status of key
purchasers, vendors and customers that potentially could have an impact on
Harken's material business operations.
Harken's information technology infrastructure consists of desktop
Pentium class Intel based PC systems and servers, and off-the-shelf software
packages. The systems are networked via Microsoft and other telecommunications
equipment. Harken does not use mini or mainframe computer systems and uses only
off-the-shelf software products.
33
<PAGE> 34
Assessment. Based on Harken's internal review and discussions with
third parties regarding the Year 2000 problem, Harken believes that its
exposure to potential Year 2000 problems exists in two general areas:
technological operations, including non-information technology systems which
are in the sole control of Harken; and technological operations which are
dependent in some way on one or more third parties. Failure to achieve high
levels of Year 2000 compliance in either area could have a material adverse
impact on Harken.
Remediation and Implementation. In the area of technological
operations which are under Harken's exclusive control, Harken is currently
involved in the identification and remediation of affected technological
functions, including non-information technology systems. Harken has
substantially completed its assessment of Year 2000 readiness of its internal
computerized systems. Harken has installed upgrades to its off-the-shelf
financial and operational software applications, hardware and
telecommunications equipment. Harken has also substantially completed the
identification and assessment phase with respect to its non-information
technology systems.
Testing. Harken has completed substantially all of the testing process
of newly upgraded systems for Year 2000 compliance. Upon completion, Harken
will be able to identify any internal computer systems that remain
non-compliant. At present, it is anticipated that Harken's action plan for
addressing Year 2000 problems will be successfully completed in all material
respects well in advance of January 1, 2000.
Third Parties. Harken is in the final process of assessing the level
of Year 2000 issues associated with its most significant vendors, suppliers,
partners and major customers. All of Harken's oil and gas sales revenues are
derived from oil and gas production from its North American and South American
operations. Harken's North American operations are dependent upon its various
purchasers or pipeline operators who transport oil or gas for its purchasers.
In addition, Harken's South American operations may also become dependent upon
the transportation of oil through outside owned facilities or pipelines. Harken
is monitoring progress of its various North American purchasers and pipelines,
as well as potential South American outside owned facilities on their
activities related to the Year 2000. At this time, Harken continues to expect
that field operations will not be materially interrupted due to improper
recognition of the Year 2000 by computerized systems of its various purchasers
and pipelines.
Harken also relies on other oil and gas service providers, vendors,
and financial institutions in its daily operations. Harken believes it has
identified those third-party relationships that could have a material adverse
effect on Harken's results of operations and financial position should their
computerized systems not be compliant for the Year 2000. Harken continues with
its efforts to survey the identified third parties on their readiness for the
Year 2000 and establish appropriate alternatives, if needed, where
noncompliance may pose a risk to Harken's operations.
Although Harken has made significant efforts to ensure that the third
parties on which it is heavily reliant are Year 2000 compliant, it cannot
predict the likelihood of such compliance occurring nor the direct or indirect
costs to Harken of non-compliance by those third parties or of securing such
services from compliant third parties. Harken has no control over these third
parties' compliance and cannot give assurances that these third parties'
representations to Harken are accurate. Therefore, there can be no guarantee
that Year 2000 problems originating with a third party will not occur and no
absolute assurance that third parties will convert their systems in a timely
manner, to the extent Harken is unable to replace the goods, services or
customers with alternate sources of supply and demand on a timely and
economically
34
<PAGE> 35
equivalent basis. Such failure could have a material adverse effect on Harken's
business and results of operations.
Estimated Costs. The total financial effect that Year 2000 issues will
have on Harken cannot be predicted with any certainty at this time. In fact, in
spite of all efforts being made to rectify these problems, the success of
Harken's efforts will not be known with certainty until the year 2000 actually
arrives. Based on its assessment to date, Harken does not believe that the
costs to resolve any Year 2000 issues will be material. To date, Harken has
spent approximately $150,000 on Year 2000 matters and it expects that the total
cost, primarily consulting fees and software purchases, will not exceed
$200,000.
Contingency Plan. Harken has nearly completed its implementation and
testing of Year 2000 compliant systems. However, a reasonably likely worst case
scenario is that Harken or certain of its purchasers or other vendors fail to
correct a material Year 2000 problem, which results in an interruption of
Harken's transportation and sale of Harken's crude oil and natural gas
production sales revenues. Certain interruptions could result in a material
adverse effect on Harken's results of operations, cash flows and financial
condition. Due to the inherent uncertainties relating to the effect of the Year
2000 on Harken's operations, it is difficult to predict what impact, if any,
noncompliance with the Year 2000 issue will have on Harken's results of
operations, cash flows and financial condition. Based on the results of the
implementation and testing of Harken's Year 2000 affected systems and ongoing
assessment of the readiness of its vendors, suppliers, partners and major
customers, Harken has developed appropriate contingency plans that address the
most reasonably likely worst case scenarios. A failure to address Year 2000
issues successfully could have a material adverse effect on Harken's business,
financial condition or results of operations.
35
<PAGE> 36
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 ("Rice") vs. Harken Exploration Company. Harken believes
that this lawsuit is wholly without merit. In October 1999, the trial
court granted Harken's motion for Summary Judgement and dismissed the
Rice lawsuit. Harken received Rice's Notice of Appeal to the U.S.
Fifth Circuit Court of Appeals of the trial court's summary judgement
dismissing the Rice lawsuit on October 27, 1999. The appeal is not
expected to be heard before the fourth quarter of 2001. In Harken
management's opinion, the results of the lawsuit and appeal will not
have a material adverse effect on Harken's financial position.
Search Acquisition Corp. ("Search Acquisition"), a wholly owned
subsidiary of Harken, was named as a defendant in a lawsuit by
Petrochemical Corporation of America and Lorken Investments
Corporation (together, "Petrochemical"). This lawsuit arises out of an
attempt by Petrochemical to enforce a judgement entered in 1993
against, among other parties, a group of twenty limited partnerships
known as the "Odyssey limited partnerships." In 1989, Search
Exploration, Inc. acquired all of the assets of eight of the twenty
Odyssey limited partnerships. Petrochemical claims that Search
Exploration, Inc. is liable for payment of the judgement as the
successor-in-interest to the eight Odyssey limited partnerships.
Search Acquisition was the surviving corporation in the merger with
Search Exploration, Inc. On February 28, 1996, the court granted
Search Acquisition's motion for summary judgement. On July 3, 1998,
the Fifth District Court of Appeals for the State of Texas reversed
the trial court's summary judgment and remanded the case to the trial
court. It is estimated that this trial will take place in the third
quarter of 2000. Although the ultimate outcome of this litigation is
uncertain, Harken believes that any liability to Harken as a result of
this litigation will not have a material adverse effect on Harken's
financial condition.
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.
36
<PAGE> 37
Item 6. Exhibits and Reports on Form 8-K.
(a) EXHIBIT INDEX
Exhibit
3.1 Certificate of Incorporation of Harken Energy
Corporation as amended (filed as Exhibit 3.1 to
Harken's Annual Report on Form 10-K for fiscal year
ended December 31,1989, File No. 0-9207, and
incorporated by reference herein).
3.2 Amendment to the Certificate of Incorporation of
Harken Energy Corporation (filed as Exhibit 28.8 to
the Registration Statement on Form S-1 of Tejas
Power Corporation, file No. 33-37141, and
incorporated by reference herein.)
3.3 Amendment to the Certificate of Incorporation of
Harken Energy Corporation (filed as Exhibit 3 to
Harken's Quarterly Report on Form 10-Q for fiscal
quarter ended June 30, 1991, File No. 0-9207, and
incorporated by reference herein.)
3.4 Amendments to the Certificate of Incorporation of
Harken Energy Corporation (filed as Exhibit 3 to
Harken's Quarterly Report on Form 10-Q for fiscal
quarter ended June 30, 1991, File No. 0-9207, and
incorporated by reference herein.)
3.5 Amendments to the Certificate of Incorporation of
Harken Energy Corporation (filed as Exhibit 3.5 to
Harken's Annual Report on Form 10-K for the fiscal
year ended December 31, 1996, File No. 0-9207, and
incorporated herein by reference).
3.6 Amendment to the Certificate of Incorporation of
Harken Energy Corporation (filed as Exhibit 3.6 to
Harken's Annual Report on Form 10-K for the fiscal
year ended December 31, 1997, File No. 0-9207, and
incorporated by reference herein).
3.7 Amendment to the Certificate of Incorporation of
Harken Energy Corporation (filed as Exhibit 3.6 to
Harken's Quarterly Report on Form 10-K for the
fiscal quarter ended June 30, 1998, File No. 0-9207,
and incorporated by reference herein).
3.8 Bylaws of Harken Energy Corporation, as amended
(filed as Exhibit 3.2 to Harken's Annual Report on
Form 10-K for fiscal year ended December 31, 1989,
File No. 0-9207, and incorporated by reference
herein).
4.1 Form of certificate representing shares of Harken
common stock, par value $.01 per share (filed as
Exhibit 1 to Harken's Registration Statement on Form
8-A, File No. 0-9027, and incorporated by reference
herein.)
4.2 Certificate of Designations, Powers, Preferences and
Rights of Series A Cumulative Convertible Preferred
Stock, $1.00 par value, of Harken Energy Corporation
(filed as Exhibit 4.1 to Harken's Annual Report on
Form 10-K for the fiscal year ended December 31,
1989, File No. 0-9207, and incorporated by reference
herein).
37
<PAGE> 38
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 June 30, 1998, File No.
0-9207, and incorporated by reference herein).
*27 Financial Data Schedules.
(b) REPORTS ON FORM 8-K.
On September 3, 1999, Harken filed a Form 8-K to announce the
merger with Xplor Energy, Inc.
On October 15, 1999, Harken filed a Form 8-K to announce an
update with regard to its Bolivar Association Contract block.
On November 1, 1999, Harken filed a Form 8-K/A to report
certain financial information related to the merger with
Xplor Energy, Inc.
On November 8, 1999, Harken filed a Form 8-K to announce a
general update on its operations, including the purchase of
certain development finance agreement interests.
38
<PAGE> 39
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, 1999 By: /s/ Bruce N. Huff
------------------- ---------------------------------------
Bruce N. Huff, President, Chief Financial
Officer and Director
39
<PAGE> 40
INDEX TO EXHIBITS
<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION
- ------- -----------
<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 June 30, 1991,
File No. 0-9207, and incorporated by reference herein.)
3.4 Amendments to the Certificate of Incorporation of Harken
Energy Corporation (filed as Exhibit 3 to Harken's Quarterly
Report on Form 10-Q for fiscal quarter ended June 30, 1991,
File No. 0-9207, and incorporated by reference herein.)
3.5 Amendments to the Certificate of Incorporation of Harken
Energy Corporation (filed as Exhibit 3.5 to Harken's Annual
Report on Form 10-K for the fiscal year ended December 31,
1996, File No. 0-9207, and incorporated herein by reference).
3.6 Amendment to the Certificate of Incorporation of Harken
Energy Corporation (filed as Exhibit 3.6 to Harken's Annual
Report on Form 10-K for the fiscal year ended December 31,
1997, File No. 0-9207, and incorporated by reference herein).
3.7 Amendment to the Certificate of Incorporation of Harken
Energy Corporation (filed as Exhibit 3.6 to Harken's
Quarterly Report on Form 10-K for the fiscal quarter ended
June 30, 1998, File No. 0-9207, and incorporated by reference
herein).
3.8 Bylaws of Harken Energy Corporation, as amended (filed as
Exhibit 3.2 to Harken's Annual Report on Form 10-K for fiscal
year ended December 31, 1989, File No. 0-9207, and
incorporated by reference herein).
4.1 Form of certificate representing shares of Harken common
stock, par value $.01 per share (filed as Exhibit 1 to
Harken's Registration Statement on Form 8-A, File No. 0-9027,
and incorporated by reference herein.)
4.2 Certificate of Designations, Powers, Preferences and Rights
of Series A Cumulative Convertible Preferred Stock, $1.00 par
value, of Harken Energy Corporation (filed as Exhibit 4.1 to
Harken's Annual Report on Form 10-K for the fiscal year ended
December 31, 1989, File No. 0-9207, and incorporated by
reference herein).
</TABLE>
<PAGE> 41
<TABLE>
<S> <C>
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
June 30, 1998, File No. 0-9207, and incorporated by reference
herein).
*27 Financial Data Schedules.
</TABLE>
<TABLE> <S> <C>
<ARTICLE> 5
<S> <C>
<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> DEC-31-1999
<PERIOD-START> JAN-01-1999
<PERIOD-END> SEP-30-1999
<CASH> 3,855,000
<SECURITIES> 57,766,000
<RECEIVABLES> 6,163,000
<ALLOWANCES> (967,000)
<INVENTORY> 0
<CURRENT-ASSETS> 67,966,000
<PP&E> 316,737,000
<DEPRECIATION> (79,132,000)
<TOTAL-ASSETS> 315,056,000
<CURRENT-LIABILITIES> 37,597,000
<BONDS> 96,755,000
0
0
<COMMON> 1,557,000
<OTHER-SE> 179,147,000
<TOTAL-LIABILITY-AND-EQUITY> 315,056,000
<SALES> 12,891,000
<TOTAL-REVENUES> 16,023,000
<CGS> 5,503,000
<TOTAL-COSTS> 5,503,000
<OTHER-EXPENSES> 11,132,000
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 4,863,000
<INCOME-PRETAX> (5,475,000)
<INCOME-TAX> 24,000
<INCOME-CONTINUING> (5,499,000)
<DISCONTINUED> 0
<EXTRAORDINARY> (589,000)
<CHANGES> 0
<NET-INCOME> (6,088,000)
<EPS-BASIC> (0.10)
<EPS-DILUTED> (0.10)
</TABLE>
