<PAGE> 1
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SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
[x] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
FOR THE QUARTERLY PERIOD ENDED MARCH 31, 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 April 30, 1999 was 133,560,830.
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HARKEN ENERGY CORPORATION
INDEX TO QUARTERLY REPORT
MARCH 31, 1999
<TABLE>
<CAPTION>
PAGE
----
<S> <C> <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.................................. 24
PART II. OTHER INFORMATION
Notes Concerning Other Information............................ 34
SIGNATURES .............................................................. 37
</TABLE>
2
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PART I - FINANCIAL INFORMATION
3
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ITEM 1. CONDENSED FINANCIAL STATEMENTS
HARKEN ENERGY CORPORATION AND SUBSIDIARIES
CONSOLIDATED CONDENSED BALANCE SHEETS
(Unaudited)
<TABLE>
<CAPTION>
DECEMBER 31, MARCH 31,
1998 1999
------------- ------------
<S> <C> <C>
ASSETS
Current Assets:
Cash and temporary investments $ 141,545,000 $ 91,454,000
Accounts and notes receivable, net 1,605,000 2,454,000
Related party notes receivable 398,000 466,000
Prepaid expenses and other current assets 615,000 818,000
------------- -------------
Total Current Assets 144,163,000 95,192,000
Property and Equipment, net 149,900,000 156,104,000
Other Assets, net 10,475,000 11,203,000
------------- -------------
$ 304,538,000 $ 262,499,000
============= =============
LIABILITIES AND STOCKHOLDERS' EQUITY
Current Liabilities:
Trade payables $ 12,496,000 $ 3,746,000
Accrued liabilities and other 7,350,000 6,364,000
Revenues and royalties payable 580,000 517,000
------------- -------------
Total Current Liabilities 20,426,000 10,627,000
European Convertible Notes Payable 85,000,000 85,000,000
Deferred Revenue 19,170,000 12,849,000
Commitments and Contingencies (Note 13)
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 134,778,830 shares issued, respectively 1,348,000 1,348,000
Additional paid in capital 327,498,000 310,703,000
Retained deficit and other comprehensive income (146,367,000) (155,476,000)
Treasury stock, at cost, 700,000 shares held (2,552,000) (2,552,000)
------------- -------------
Total Stockholders' Equity 179,942,000 154,023,000
------------- -------------
$ 304,538,000 $ 262,499,000
============= =============
</TABLE>
The accompanying Notes to Consolidated Condensed Financial Statements
are an integral part of these Statements.
4
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HARKEN ENERGY CORPORATION AND SUBSIDIARIES
CONSOLIDATED CONDENSED STATEMENTS OF OPERATIONS
(Unaudited)
<TABLE>
<CAPTION>
THREE MONTHS ENDED
MARCH 31,
------------------------------
1998 1999
-------------- --------------
<S> <C> <C>
Revenues:
Oil and gas operations $ 2,700,000 $ 3,080,000
Interest and other income 1,662,000 1,256,000
------------ ------------
4,362,000 4,336,000
------------ ------------
Costs and Expenses:
Oil and gas operating expenses 1,382,000 1,458,000
General and administrative expenses, net 1,758,000 1,789,000
Depreciation and amortization 1,130,000 1,358,000
Interest expense and other, net 8,000 413,000
------------ ------------
4,278,000 5,018,000
------------ ------------
Income (loss) before income taxes $ 84,000 $ (682,000)
Income tax expense -- --
------------ ------------
Net income (loss) $ 84,000 $ (682,000)
============ ============
Accretion related to preferred stock -- (8,427,000)
------------ ------------
Net income (loss) attributed to
common stock $ 84,000 $ (9,109,000)
============ ============
Income (loss) per common share:
Basic income (loss) per common share $ 0.00 $ (0.07)
============ ============
Weighted average shares outstanding 122,441,279 134,073,116
============ ============
Diluted income (loss) per common share $ 0.00 $ (0.07)
============ ============
Weighted average shares outstanding 133,093,340 134,073,116
============ ============
</TABLE>
The accompanying Notes to Consolidated Condensed Financial Statements are
an integral part of these Statements.
5
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HARKEN ENERGY CORPORATION AND SUBSIDIARIES
CONSOLIDATED CONDENSED STATEMENTS OF STOCKHOLDERS' EQUITY
(Unaudited)
<TABLE>
<CAPTION>
ACCUMULATED
ADDITIONAL OTHER
PREFERRED COMMON PAID IN TREASURY RETAINED COMPREHENSIVE
STOCK STOCK CAPITAL STOCK DEFICIT INCOME (LOSS)
----------- ------------ -------------- ----------- ------------- ---------------
<S> <C> <C> <C> <C> <C> <C>
Balance, December 31, 1997 $ -- $1,218,000 $ 248,770,000 $ -- $ (92,199,000) $ 92,000
Issuance of common stock, net -- 51,000 25,110,000 -- -- --
Issuance of preferred stock 15,000 -- 14,437,000 -- -- --
Accretion of preferred stock -- -- 1,846,000 -- (1,846,000) --
Conversions of European notes
payable -- 79,000 37,335,000 -- -- --
Treasury shares purchased -- -- -- (2,552,000) -- --
Comprehensive income:
Equity adjustment from
foreign currency translation -- -- -- -- -- 42,000
Net loss -- -- -- -- (52,456,000) --
Total comprehensive
income (loss)
------------- ------------- ------------- ------------ ------------- ----------
Balance, December 31, 1998 15,000 1,348,000 327,498,000 (2,552,000) (146,501,000) 134,000
Issuance of common stock, net -- -- 47,000 -- -- --
Accretion of preferred stock -- -- 8,427,000 -- (8,427,000) --
Redemption of preferred stock (15,000) -- (25,269,000) -- -- --
Comprehensive income:
Net loss -- -- -- -- (682,000) --
Total comprehensive
income (loss)
------------- ------------- ------------- ------------ ------------- ----------
Balance, March 31, 1999 $ -- $1,348,000 $ 310,703,000 $ (2,552,000) $(155,610,000) $ 134,000
============= ============= ============= ============ ============= ==========
<CAPTION>
TOTAL
------------
<S> <C>
Balance, December 31, 1997 $157,881,000
Issuance of common stock, net 25,161,000
Issuance of preferred stock 14,452,000
Accretion of preferred stock --
Conversions of European notes
payable 37,414,000
Treasury shares purchased (2,552,000)
Comprehensive income:
Equity adjustment from
foreign currency translation
Net loss
Total comprehensive
income (loss) (52,414,000)
------------
Balance, December 31, 1998 179,942,000
Issuance of common stock, net 47,000
Accretion of preferred stock --
Redemption of preferred stock (25,284,000)
Comprehensive income:
Net loss
Total comprehensive
income (loss) (682,000)
------------
Balance, March 31, 1999 $154,023,000
============
</TABLE>
The accompanying Notes to Consolidated Condensed Financial Statements are
an integral part of these Statements.
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HARKEN ENERGY CORPORATION AND SUBSIDIARIES
CONSOLIDATED CONDENSED STATEMENTS OF CASH FLOWS
(Unaudited)
<TABLE>
<CAPTION>
THREE MONTHS ENDED
MARCH 31,
-------------------------------
1998 1999
-------------------------------
<S> <C> <C>
Cash flows from operating activities:
Net income (loss) $ 84,000 $ (682,000)
Adjustment to reconcile net income (loss) to net cash
provided by operating activities:
Depreciation and amortization 1,130,000 1,358,000
Amortization of European note issuance costs -- 72,000
Provision for doubtful accounts 15,000 --
Change in assets and liabilities:
(Increase) decrease in accounts receivable 408,000 (917,000)
Decrease in trade payables and other (915,000) (10,657,000)
------------- -------------
Net cash provided by (used in) operating activities 722,000 (10,826,000)
------------- -------------
Cash flows from investing activities:
Investor advances, net 9,798,000 --
Capital expenditures, net (16,865,000) (14,028,000)
------------- -------------
Net cash used in investing activities (7,067,000) (14,028,000)
------------- -------------
Cash flows from financing activities:
Proceeds from issuances of common stock,
net of issuance costs 1,945,000 47,000
Redemption of preferred stock -- (25,284,000)
Investment in segregated account cash, net (1,060,000) --
------------- -------------
Net cash provided by (used in) financing activities 885,000 (25,237,000)
------------- -------------
Net decrease in cash and temporary investments (5,460,000) (50,091,000)
Cash and temporary investments at beginning of period 85,740,000 141,545,000
------------- -------------
Cash and temporary investments at end of period $ 80,280,000 $ 91,454,000
============= =============
Supplemental disclosures of cash flow information:
Cash paid during the period for:
Interest $ -- $ --
Income taxes -- --
</TABLE>
The accompanying Notes to Consolidated Condensed Financial Statements
are an integral part of these Statements.
7
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HARKEN ENERGY CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS
MARCH 31, 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 March 31, 1999 and the results of its operations and changes in
its cash flows for all periods presented as of March 31, 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 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 three month period ended March 31,
1999 are not necessarily indicative of the results to be expected for the full
year.
(2) ACQUISITION
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 having a value of up to $4,000,000 may
be payable by Harken to the sellers if the sellers are able to obtain new or
renewal leases for certain of the Bargo Properties. The amount of the additional
consideration is currently being negotiated with the sellers and is payable at
Harken's option in the form of additional shares of Harken common stock or cash.
See Note 11 - Related Party Transactions for a discussion of the relationship
between Harken and the sellers.
(3) MARKETABLE SECURITIES
Included within cash and temporary investments at December 31, 1998
and March 31, 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
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reevaluates such designation as of each balance sheet date. Such debt
securities are classified as held-to-maturity as Harken has the positive intent
and ability to hold the securities to maturity. Held-to-maturity securities are
stated at amortized cost, adjusted for amortization of premiums and accretion
of discounts to maturity. Such amortization is included in interest and other
income. Harken holds no securities which are classified as available-for-sale
or trading.
The following is a summary of held-to-maturity securities:
<TABLE>
<CAPTION>
December 31, March 31,
1998 1999
-------------- -------------
<S> <C> <C>
Included in cash and temporary investments:
Cost $ 124,398,000 $ 75,954,000
Estimated fair value 124,914,000 76,137,000
</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, March 31,
1998 1999
-------------- -------------
<S> <C> <C>
Unevaluated oil and gas properties:
Unevaluated Colombian properties $ 43,844,000 $ 44,238,000
Unevaluated domestic properties 4,372,000 4,429,000
Evaluated oil and gas properties:
Evaluated Colombian properties 68,772,000 74,343,000
Evaluated domestic properties 92,807,000 93,337,000
Facilities, gas plants and other property 14,864,000 15,878,000
Less accumulated depreciation and amortization (74,759,000) (76,121,000)
------------- -------------
$ 149,900,000 $ 156,104,000
============= =============
</TABLE>
(5) INTERNATIONAL OPERATIONS
Colombian Operations -- Harken's Colombian operations are conducted
through Harken de Colombia, Ltd., a wholly-owned subsidiary of Harken, which
held six exclusive Colombian Association Contracts with Empresa Colombiana de
Petroleos ("Ecopetrol") as of December 31, 1998 and March 31, 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, the Miradores Contract, awarded in 1997,
and the Los Olmos Contract, awarded in 1998. The Alcaravan and Miradores
Contracts currently cover a combined area of approximately 242,000 acres in the
Llanos Basin
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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 May 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. Harken submitted a request and has received a verbal
approval from Ecopetrol to allow for the additional well depth drilled during
the recently drilled Islero #1 well to substitute for the obligation to drill a
second exploratory well within the third contract year.
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, Miradores and Los Olmos Contracts,
50% of all seismic and dry well costs incurred prior to the point of
declaration of a commercial discovery. Production from a commercial discovery
will be allocated as follows: Ecopetrol, on behalf of the Colombian government,
will receive a 20% royalty interest in all 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 costs, after which time Ecopetrol would receive its share
of production.
Harken has entered into certain development finance and operating
agreements with outside parties whereby such parties have received a beneficial
interest in certain of Harken's Colombian operations. For further discussion,
see Note 6 - Development Finance and Operating Agreements.
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 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 the completion of environmental impact studies and
final agreements with the Republic of Costa Rica, including the assignment to
Harken, and is expected to be signed during the second quarter of 1999.
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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 at any time
after November 12, 1998 and on or before November 12, 2001 at an exercise price
of $3.50 per share.
(6) DEVELOPMENT FINANCE AND OPERATING AGREEMENTS
Rio Negro Development Finance Agreement -- In October 1995, Harken
entered into a Development Finance Agreement (the "Rio Negro Development
Finance Agreement") with Arbco Associates L.P., Offense Group Associates L.P.,
Kayne Anderson Nontraditional Investments L.P. and Opportunity Associates L.P.
(collectively, the "Rio Negro Investors"), pursuant to which the Rio Negro
Investors provided $3,500,000 to Harken to finance drilling on the Rio Negro
prospect in the Bocachico Contract area in exchange for the right to receive
future payments from Harken equal to 40% of the net profits that Harken de
Colombia, Ltd. may derive from the sale of oil and gas produced from the Rio
Negro prospect (the "Rio Negro Participation").
In March 1997, Harken and the Rio Negro Investors entered into a
Conversion Agreement whereby Harken purchased 75% of the Rio Negro
Participation 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.
Rochester Agreement -- Harken de Colombia, Ltd. has entered into an
operating agreement (the "Rochester Agreement") with Rochester Energy
Corporation ("Rochester", a Canadian corporation) pursuant to which Rochester
has paid 33 1/3% of the aggregate costs of the Estero #1 well and related
production facilities on the Palo Blanco prospect, 25% of the aggregate costs
related to the Estero #3 well, and 25% of the aggregate costs of the initial
well drilled on the Anteojos prospect, the Canacabare #1, all of which are
located within the Alcaravan Contract area, along with 25% of the aggregate
costs related to the Miradores Association Contract. In exchange, Rochester
acquired a beneficial interest equal to 25% of the interest held by Harken de
Colombia, Ltd. in the Palo Blanco and Anteojos prospect operations. 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 will be
tested in late 1999 due to weather delays.
In May 1999, Harken signed a definitive purchase and sale agreement
pursuant to which Harken will purchase 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
will forgive all amounts owed by Rochester to Harken and will issue 2,600,000
shares of Harken common stock. The closing of this transaction is subject to
various conditions as agreed upon in the agreement, including Rochester
obtaining regulatory and shareholder approvals.
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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 bear interest at 6% per annum
in addition to a monthly management fee payable to Harken of $37,500 per month.
Any outstanding balance pursuant to the Parkcrest Loan Agreement 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.
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 derive from the sale of
oil and gas produced from each of the three prospects if the planned drilling
on the prospect is successful (the "EnCap Participation"). Pursuant to the
EnCap Development Finance Agreement, Harken is obligated to drill each of the
three wells prior to October 2000.
Pursuant to the EnCap Development Finance Agreement, the EnCap
Investors have the right, for a period of two years beginning in October 1998,
to convert all or part of the EnCap Participation into shares of Harken common
stock. The number of shares of Harken common stock to be issued upon conversion
of the EnCap Participation will be equal to the quotient of (i) the Payment
Amount (less any distributions made in respect of the EnCap Participation) plus
an amount equal to 15% interest per annum on the net Payment Amount compounded
monthly (the "Invested Amount"), divided by (ii) the market price of Harken
common stock at the time of conversion. During the same two year period, Harken
also has the right to convert the EnCap Participation into shares of Harken
common stock with the number of shares of Harken common stock to be issued to be
equal to the quotient of (i) the Payment Amount (less any distribution made in
respect of the EnCap Participation) plus an amount equal to 25% interest per
annum on the net Payment Amount compounded monthly, divided by (ii) the market
price of Harken common stock at the time of
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conversion. Harken can also elect to pay cash upon any conversion of the EnCap
Participation in lieu of issuing Harken common stock. The EnCap Development
Finance Agreement also provides for additional shares of Harken common stock to
be issued by Harken in the event of a conversion to the extent that the EnCap
Investors do not, under certain circumstances, realize the Invested Amount from
the sale of shares of Harken common stock issued at the conversion. See Note 11
- -- Related Party Transactions for a discussion of the relationship between
Harken and the EnCap Investors.
In April 1999, Harken received notice from EnCap Investments L.C. that
the EnCap Investors have 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 are to receive
6,481,512 shares of Harken common stock.
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 begin in March 1999. In
exchange, Faisal received the right to receive future payments from Harken
equal to 0.6% of the net profits that Harken de Colombia, Ltd. may derive from
the sale of oil and gas produced from each of the three prospects discussed
above pursuant to the EnCap Development Finance Agreement if the planned
drilling on the prospect is successful. As part of this transaction, Harken
issued 18,000 shares of Harken common stock and paid a cash fee of $75,000 to a
financial advisor.
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 are to receive 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 is to receive 1,316,829 shares of Harken common stock.
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<PAGE> 14
(7) 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 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
May 10, 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
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<PAGE> 15
common stock). The 5% European Notes may be redeemed for cash, at Harken's
option, at par, in whole or in part, at any time after May 26, 2002, upon not
less than 30 days notice to the holders. In addition, beginning November 26,
2002, Harken may redeem up to 50% of the 5% European Notes in exchange for
shares of Harken common stock at a defined conversion price based on an average
market price of Harken common stock. Beginning May 26, 2003, Harken may
similarly redeem all remaining 5% European Notes. The 5% European Notes are
listed on the Luxembourg Stock Exchange.
Commissions and issuance costs associated with the European Notes are
deferred and are included in Other Assets and are amortized to interest expense
over the period until conversion or maturity of the European Notes. As European
Notes are converted to Harken common stock, a pro-rata portion of these
deferred costs are charged to Additional Paid-In Capital.
(8) STOCKHOLDERS' EQUITY
Common Stock -- Harken currently has authorized 225,000,000 shares of
$.01 par common stock. At December 31, 1998 and March 31, 1999, Harken had
issued 134,758,830 shares and 134,778,830 shares, respectively.
Treasury Stock -- At December 31, 1998 and March 31, 1999, Harken held
700,000 shares of Harken common stock purchased in the open market at a cost of
$2,552,000. In April 1999, Harken acquired 518,000 additional shares of Harken
common stock at a cost of $960,000.
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
which were to mature on June 11, 2002. 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"). The Trust Indenture
provided for a three percent premium on the number of shares of Harken common
stock issuable on conversion to holders of the 5% European Notes who convert
prior to November 25, 1998. None of the bond holders have exercised their
conversion option as of May 10, 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%
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<PAGE> 16
European Notes. 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.
Acquisition of Bargo Properties -- In May 1998, Harken acquired
working interests in the Bargo Properties in exchange for 2,716,483 shares
issuable at closing. Additional consideration of up to $4,000,000 is payable by
Harken to the sellers in the form of additional shares of Harken common stock
or cash under certain circumstances. See Note 2 - Acquisitions for further
discussion.
Development Finance Agreements -- Harken has entered into development
finance agreements relating to certain of its Colombian operations. Pursuant to
these development finance agreements, certain investors have the option, or
have previously exercised their options, to convert their beneficial interest
in a specific operating area into shares of Harken common stock. In addition,
certain of these investors were issued shares of Harken common stock at the
time of entering into a development finance agreement with Harken. For a
complete discussion of each of the various development finance agreements, and
further discussions of certain conversions of beneficial interests exercised in
April and May 1999, see Note 6 - Development Finance and Operating Agreements.
Series F Preferred Stock -- On April 9, 1998, Harken entered into a
Securities Purchase Agreement with RGC International Investors, LDC ("RGC"),
pursuant to which Harken issued to RGC 15,000 shares of its Series F Convertible
Preferred Stock (the "Series F Preferred") in exchange for $15,000,000. The
Series F Preferred 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
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<PAGE> 17
$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 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 during 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 $.01 per Right, subject to adjustment. No Rights were exercisable
under the Rights Agreement at March 31, 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.
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(9) 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. Diluted earnings per common share for 1998 was
determined by including the effect of outstanding options and warrants using
the treasury stock method to the extent that the average share price exceeds
the exercise price. The impact of unconverted European Convertible Notes was
not included for three months ended March 31, 1999 as their effect would have
been antidilutive. A reconciliation of the calculation of diluted earnings per
common share is as follows:
<TABLE>
<CAPTION>
Three Months ended March 31, 1998
------------------------------------------------------------------
Average
Income Shares Per share
-------------------- -------------------- ------------------
<S> <C> <C> <C>
Basic earnings per common share $ 84,000 122,441,279 $ 0.00
Treasury stock method effect of:
Outstanding employee stock options - 2,352,875 -
Outstanding warrants - 400,853 -
Effect of conversion of outstanding
5 1/2% European Notes - 7,898,333 -
--------- ------------ ----------
Diluted income per common share $ 84,000 133,093,340 $ 0.00
========= ============ ==========
</TABLE>
(10) INCOME TAXES
At March 31, 1999, Harken had available for federal income tax
reporting purposes, net operating loss (NOL) carryforward for regular tax
purposes of approximately $62,000,000 which expires in 1999 through 2019,
alternative minimum tax NOL carryforward of approximately $49,000,000 which
expires in 1999 through 2019, investment tax credit carryforward of
approximately $809,000 which expires in 1999 through 2002, 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 $8,000,000 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 March 31, 1999 were approximately $753,000. Total deferred tax
assets, primarily related to the net operating loss carryforward, were
approximately $20,538,000 at March 31, 1999. The total net deferred tax asset is
offset by a valuation allowance of approximately $19,785,000 at March 31, 1999.
(11) RELATED PARTY TRANSACTIONS
In June 1997, Harken added to its Board of Directors a new director
who is also a managing director of EnCap Investments L.C. ("EnCap"). EnCap has
historically provided financial consulting and investment banking services to
Harken. In connection with the June 1997 placement of the 5 1/2% European
Notes, EnCap received as a financial consulting fee, $466,667 in cash, and a
warrant to purchase 50,000 shares of Harken common stock at any time after
December 11, 1997 and on or before December 11, 1999 at an exercise price of
$5.00 per share. As described in Note 6 - Development Finance and Operating
Agreements,
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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. As described in Note 2 --
Acquisition, 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 March 31, 1999 as Related Party Notes Receivable.
(12) 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 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 pipeline
connections and production facilities. During the periods presented below, 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.
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Harken's financial information for each of its operating segments is
as follows for the periods ended March 31, 1998 and March 31, 1999:
<TABLE>
<CAPTION>
NORTH SOUTH
AMERICA AMERICA TOTAL
-------------- ------------ -------------
<S> <C> <C> <C>
FOR THE THREE MONTHS ENDED
MARCH 31, 1998:
Operating revenues 2,700,000 -- 2,700,000
Interest and other income 834,000 828,000 1,662,000
Depreciation and amortization 1,105,000 25,000 1,130,000
Interest expense and other, net 8,000 -- 8,000
Income tax expense -- -- --
Segment profit (loss) (183,000) 267,000 84,000
Capital expenditures 993,000 15,872,000 16,865,000
Total assets at end of period 126,770,000 121,194,000 247,964,000
FOR THE THREE MONTHS ENDED
MARCH 31, 1999:
Operating revenues 2,402,000 678,000 3,080,000
Interest and other income 611,000 645,000 1,256,000
Depreciation and amortization 1,163,000 195,000 1,358,000
Interest expense and other, net 216,000 197,000 413,000
Income tax expense -- -- --
Segment profit (loss) (443,000) (239,000) (682,000)
Capital expenditures 534,000 13,494,000 14,028,000
Total assets at end of period 82,013,000 180,486,000 262,499,000
</TABLE>
(13) COMMITMENTS AND CONTINGENCIES
Operational Contingencies -- The exploration, development and
production of oil and gas are subject to various Navajo, federal and state laws
and regulations designed to protect the environment. Compliance with these
regulations is part of Harken's day-to-day operating procedures. Infrequently,
accidental discharge of such materials as oil, natural gas or drilling fluids
can occur and such accidents can require material expenditures to correct.
Harken maintains levels of insurance customary in the industry to limit its
financial exposure. Management is unaware of any material capital expenditures
required for environmental control during the next fiscal year.
In September 1997, Harken Exploration Company, a wholly-owned
subsidiary of Harken, was served with a lawsuit filed in Amarillo, Texas in
Federal District Court for the Northern District of Texas styled D. E. Rice and
Karen Rice, as Trustees for the Rice Family Living Trust vs. Harken Exploration
Company. The Rice Family Living Trust ("Rice") is a surface land owner in
Hutchinson County, Texas. Rice has alleged that oil and saltwater spills from
Harken Exploration Company's equipment and wells have polluted and otherwise
damaged its property. Rice is seeking payment of costs to prevent, minimize and
mitigate the alleged oil pollution, costs to restore and repair the land and
vegetation, costs to decontaminate the ground and surface water, interest,
attorneys' fees, and punitive damages. Furthermore, Rice has requested that
Harken Exploration Company be enjoined from producing any oil or gas from its
lands. Rice
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has alleged that remediation of all of the pollution on its land will cost
approximately $40,000,000. Harken believes that this lawsuit is wholly without
merit. Harken has asserted numerous defenses, all of which Harken believes are
meritorious. Harken intends to defend itself vigorously. The lawsuit is
expected to go to trial in 1999. In Harken management's opinion, the results of
the lawsuit will not have a material adverse effect on Harken's financial
position.
Harken has accrued approximately $2,442,000 at March 31, 1999 relating
to certain other operational or regulatory liabilities related to Harken's
domestic operations. Harken and its subsidiaries currently are involved in
various lawsuits and other contingencies, which in management's opinion, will
not result in significant loss exposure to Harken.
Year 2000 Issues -- Harken is currently working to resolve 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 is continuing to conduct a survey of purchasers, vendors and customers
that Harken believes 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 completed
its assessment of Year 2000 readiness of its internal computerized systems.
Harken is in the process of installing upgrades to its off-the-shelf financial
and operational software applications, hardware and telecommunications
equipment. Harken expects that such remediation procedures will be completed by
the second quarter of 1999. Harken is in the identification and assessment
phase with respect to its non-information technology systems, which is
projected to continue until the third quarter of 1999.
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<PAGE> 22
Testing. Harken will begin updating and testing of the newly upgraded
systems for Year 2000 compliance, and expects that all testing will be
completed by the third quarter of 1999. 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 in advance of January
1, 2000.
Third Parties. Harken has assessed 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 domestic and Colombian operations. Harken's domestic
operations are dependent upon its various purchasers or pipeline operators who
transport oil or gas for its purchasers. In addition, Harken's Colombian
operations may also become dependent upon the transportation of oil through
outside owned facilities or pipelines. Harken is monitoring progress of its
various domestic purchasers and pipelines, as well as potential Colombian
outside owned facilities on their activities related to the Year 2000. At this
time, Harken expects that field operations will not be 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 is making 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 would likely 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 less than $100,000 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 not 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,
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<PAGE> 23
partners and major customers, Harken will develop appropriate contingency plans
that address the most reasonably likely worst case scenarios. Harken expects to
have such contingency plans in place by the end of the third quarter of 1999. A
failure to address Year 2000 issues successfully could have a material adverse
effect on Harken's business, financial condition or results of operations.
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<PAGE> 24
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
(UNAUDITED)
Certain statements included in the accompanying condensed financial
statements and in the following discussion and analysis of financial condition
and results of operations, including statements of Harken management's current
expectations, intentions, plans and beliefs, and statements containing the
words "believes", "anticipates", "estimates", "expects", or "may" are
forward-looking statements, as defined in Section 21D of the Securities
Exchange Act of 1934. Such forward-looking statements involve known and unknown
risk, uncertainties and other factors which may cause the actual results,
performance, timing or achievements of Harken to be materially different from
any results, performance, timing or achievements expressed or implied by such
forward-looking statements. Such factors include, among others, the risks
described in Harken's Annual Report on Form 10-K for the fiscal year ended
December 31, 1998 filed with the Securities and Exchange Commission.
OVERVIEW
Harken reported a net loss for the three months ended March 31, 1999
of $682,000 compared to a net income of $84,000 for the prior year period.
Despite lower oil and gas prices, total oil and gas operating revenues
increased from approximately $2.70 million during the first quarter of 1998 to
approximately $3.08 million for the first quarter of 1999, primarily due to
increased oil and gas operating revenue from Harken's Colombian operations.
Gross profit before depreciation and amortization, general and administrative
and interest expenses totaled approximately $1.6 million during the three
months ended March 31, 1999 compared to approximately $1.3 million for the
prior year period.
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<PAGE> 25
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 March 31,
------------------------------
1998 1999
-------------- -------------
(Unaudited)
<S> <C> <C>
REVENUES
Domestic Exploration and Production Operations
Oil sales revenues $ 1,379,000 $ 1,350,000
Oil volumes in barrels 95,000 121,000
Oil price per barrel $ 14.52 $ 11.16
Gas sales revenues $ 1,189,000 $ 979,000
Gas volumes in mcf 502,000 570,000
Gas price per mcf $ 2.37 $ 1.72
Gas plant revenues $ 132,000 $ 73,000
Colombian Exploration and Production Operations
Oil sales revenues $ -- $ 678,000
Oil volumes in barrels -- 77,000
Oil price per barrel $ -- $ 8.81
OTHER REVENUES
Interest income $ 1,656,000 $ 1,248,000
Other income $ 6,000 $ 8,000
</TABLE>
For the quarter ended March 31, 1999 compared with the corresponding prior
period.
DOMESTIC OPERATIONS
Domestic gross oil and gas revenues during the first quarter of 1999
and 1998 relate primarily to the operations in the Four Corners area of Utah,
Arizona and New Mexico, the Navajo Indian reservation (the "Four Corners
Properties"), onshore South Texas, and in the Western and Panhandle regions of
Texas, the Magnolia region of Arkansas and the Carlsbad region of New Mexico,
and beginning in May 1998, the southern region of Louisiana.
Gross domestic oil revenues decreased 2% to $1,350,000 during the
first quarter of 1999 compared to $1,379,000 during the first quarter of 1998
primarily due to the sharp decline in oil prices, which averaged $3.36 less per
barrel during the first quarter of 1999 compared to the prior year period. Oil
prices have increased during March 1999 and have continued to remain higher
during the second quarter of 1999
25
<PAGE> 26
compared to prices received during the first quarter. Oil production volumes
increased 27% during the first quarter of 1999 compared to the prior year period
primarily due to the acquisition of the Bargo Properties in May 1998.
Gross domestic gas revenues decreased 18% to $979,000 for the three
months ended March 31, 1999 compared to $1,189,000 for the prior year period due
to the decrease in average gas prices received during the first quarter of 1999,
as Harken received an overall average price of $1.72 per mcf of gas production
during the first quarter of 1999 compared to $2.37 per mcf received during the
first quarter of 1998. Domestic gas production increased 14% during the first
quarter of 1999 compared to the prior year period as Harken reflected decreased
gas production from certain of its Texas Panhandle properties during the first
quarter of 1998 as many of the properties experienced numerous temporary
operational curtailments.
Domestic oil and gas operating expenses consist of lease operating
expenses and gas plant expenses, along with a number of production and reserve
based taxes, including severance taxes, property taxes, Utah conservation taxes
and Navajo severance and possessory interest taxes. Domestic oil and gas
operating expenses decreased 8% to $1,273,000 during the first quarter of 1999
compared to $1,382,000 during the prior year as the increase in operating
expenses from the above mentioned acquisition of the Bargo Properties were
offset by efforts to reduce operating expenses.
COLOMBIAN OPERATIONS
During the first quarter of 1999, Harken's Colombian production
operations consisted of production testing conducted primarily on Harken's
Bolivar Association contract area. All of Harken's Colombian production during
the first quarter of 1999 was transported by trucking operations, however, in
April 1999, Harken commenced pipeline transportation on its newly completed Palo
Blanco pipeline on the Alcaravan Association contract area. During April 1999,
production from Harken's Estero #1 well on the Alcaravan Contract area has
averaged 300 gross barrels of oil per day, and Harken's Catalina #1 and Olivo #1
wells on the Bolivar Contract area have averaged a combined 1,855 gross barrels
of oil per day. Harken's Colombian production and revenues are expected to
increase during the remainder of 1999 as Palo Blanco pipeline throughput
increases, and as Bolivar Contract area production increases. Harken reflected
no oil and gas revenues or operating expenses from its Colombian operations
during the first quarter of 1998, as such operation commenced during the second
quarter of 1998.
INTEREST AND OTHER INCOME
Interest and other income decreased during the first 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 $1.66 million of interest income during the first
quarter of 1998, compared to approximately $1.25 million of interest income
during the first quarter of 1999. Harken's cash balances, which include
investments in short-term marketable debt securities, are expected to decrease
in 1999 as such funds are used to support Harken's capital expenditure plans,
although Harken intends to continue to pursue financing arrangements for its
Bolivar pipeline facility project during 1999 and the decrease in existing cash
balances and related interest income could be mitigated or offset if such
efforts are successful.
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<PAGE> 27
OTHER COSTS AND EXPENSES
General and administrative expenses remained level during the first
quarter of 1999 compared to the first quarter of 1998, despite Harken's
expanding overall operations. Harken has taken steps during the last half of
1998 and first half of 1999 to reduce general and administrative expenses by
reducing staff. In addition, in May 1999, Harken consolidated its corporate
office locations, which will result in additional administrative efficiencies
later in 1999.
Depreciation and amortization expense increased during the first
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 first quarter of 1999
compared to the prior year period due to the decrease in the amounts of
interest capitalized to Harken's Colombian exploration activity, as such
activity during the first quarter of 1999 has decreased compared to the prior
year period.
27
<PAGE> 28
LIQUIDITY AND CAPITAL RESOURCES
Harken's working capital at March 31, 1999 was approximately $84.6
million, versus approximately $123.7 million at December 31, 1998. The decrease
in cash and working capital resulted primarily from approximately $14.0 million
of capital expenditures during the quarter and from the January redemption of
the Series F Preferred for approximately $25.3 million. Harken's operations
required approximately $10.8 million of cash flow during the first quarter.
Harken's cash resources at March 31, 1999 totaled approximately $91.5 million
and are available for its ongoing exploration, development and acquisition
efforts both internationally and domestically. 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.
Harken's primary need for capital is to fund the planned exploration
and development efforts in Colombia and Costa Rica. Harken's 1998 Colombian
capital expenditures totaled approximately $68 million and Harken anticipates
that its 1999 Colombian capital expenditures will be in excess of $50 million,
primarily related to the Bolivar Contract area. Harken believes that it will
have sufficient cash resources to fund all of its planned capital expenditures
for 1999, however, Harken plans to obtain additional resources through project
debt financing related to the development of the Bolivar Contract
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<PAGE> 29
area. In addition, Harken intends to continue to pursue domestic and
international acquisition opportunities. Harken intends to fund such
acquisitions, if any are consummated, through a combination of cash on hand,
issuances of debt or equity securities.
Harken anticipates that full development of its Colombian reserves will
take several years and will also require extensive production facilities,
transportation pipelines and development activity which will require significant
additional capital expenditures. The ultimate amount of such expenditures cannot
be presently predicted. There can be no assurances that Harken will have
adequate funds available to it to fund all of its long-term Colombian
activities.
The current plans for the development of the Bolivar Contract area
call for a number of wells to be drilled over the next three years. As a part
of this process, Harken is currently in discussions with sources of project
finance to provide debt funding for the development of the area. Such a credit
facility could enable Harken to accelerate its development of the field while
still preserving its working capital position for its exploration efforts. As a
part of this financing plan, and in order to include Ecopetrol in the future
planning process, Harken has decided to reevaluate its drilling schedule in
anticipation of obtaining long-term financing. In March 1999, Harken de
Colombia, Ltd. filed a request with Ecopetrol to declare the Catalina field to
be commercial. Within 90 days after the submission of the commerciality
application, Ecopetrol is required to submit their response back to Harken de
Colombia, Ltd. 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 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 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. However, as mentioned above, Harken has sufficient cash resources
to fund all of its required capital expenditure requirements during 1999.
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 Rican 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 domestic operating strategy includes efforts to acquire
additional oil and gas reserves through drilling activities in North America
and through acquisitions. Harken plans to continue 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 efforts are to maintain North American production levels during 1999 and
2000. Harken considers that its acquisition efforts may increase in light of
the recent depressed pricing environment.
29
<PAGE> 30
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 7 -- European Convertible
Notes Payable."
Development Finance Agreements -- In October 1997, December 1997 and
March 1998, Harken entered into separate Development Finance Agreements with
institutional investors (collectively the "Institutional Investors") pursuant to
which the Institutional Investors provided approximately $34.5 million (the
"Payment Amount") of net proceeds to Harken to finance the drilling of the
initial wells on three unexplored oil and gas prospects in the Middle Magdalena
Basin of Colombia. Approximately $24.5 million of net proceeds was received in
October 1997 from a related party and approximately $10 million of net proceeds
was received during the first quarter of 1998. In exchange, the Institutional
Investors obtained the right to receive future payments from Harken equal to 7%
of the net profits that Harken de Colombia, Ltd. may derive from the sale of oil
and gas produced from each of the three prospects if the planned drilling on the
prospect is successful (the "Institutional Participation"). Pursuant to the
Development Finance Agreements, Harken is obligated to drill each of the three
wells prior to October 2000. Harken has satisfied the first well obligation
pursuant to the Development Finance Agreements with the drilling of the Islero
#1 well on the Cambulos Contract area. For a discussion of the relationship
between Harken and one of the Institutional Investors, see "Notes to
Consolidated Condensed Financial Statements, Note 11 - Related Party
Transactions."
Pursuant to the Development Finance Agreements, the Institutional
Investors have the right, for a period of two years beginning in October 1998,
to convert all or part of the Institutional Participation into shares of Harken
common stock. The number of shares of Harken common stock to be issued upon
conversion of the Institutional Participation will be equal to the quotient of
(i) the Payment Amount (less any distributions made in respect of the
Institutional Participation) plus an amount equal to 15% interest per annum on
the net Payment Amount compounded monthly (the "Invested Amount"), divided by
(ii) the market price of the Harken common stock at the time of conversion.
During the same two year period, Harken also has the right to convert the
Institutional Participation into shares of Harken common stock with the number
of shares of Harken common stock to be issued to be equal to the quotient of
(i) the Payment Amount (less any distribution made in respect of the
Institutional Participation) plus an amount equal to 25% interest per annum on
the net Payment Amount compounded monthly, divided by (ii) the market price of
Harken common stock at the time of conversion. Harken can also elect to pay
cash upon any conversion of the Institutional Participation in lieu of issuing
Harken common stock. The Development Finance Agreements also provide for
additional shares of Harken common stock to be issued by Harken in the event of
a conversion to the extent that the Institutional Investors do not, under
certain circumstances, realize the Invested Amount from the sale of shares of
Harken common stock issued at the conversion.
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<PAGE> 31
In December 1998, one of the Institutional 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, certain of the
Institutional Investors exercised their right to convert a certain portion of
their Institutional Participation into shares of Harken common stock. See "Notes
to Consolidated Condensed Financial Statements, Note 6 -- Development Finance
and Operating Agreements" for further discussion.
At the present time, it is not known whether the remaining
Institutional Investor or Harken will exercise their rights to convert the
remaining Institutional Interest into Harken common stock, nor can Harken
determine the number of shares of Harken common stock which would be required to
be issued in the event that Harken or the remaining Institutional Investor
elects to convert the Institutional Participation into shares of Harken common
stock.
Operational Contingencies -- The exploration, development and
production of oil and gas are subject to various Colombian, Navajo, federal,
state and local laws and regulations designed to protect the environment.
Compliance with these regulations is part of Harken's day-to-day operating
procedures. Accidental discharge of such materials as oil, natural gas or
drilling fluids can occur and such accidents can require material expenditures
to correct. Harken maintains levels of insurance customary in the industry to
limit its financial exposure. Management is unaware of any material capital
expenditures required for environmental control during the next fiscal year.
Harken has accrued approximately $2.4 million at March 31, 1999
relating to operational or regulatory liabilities related to Harken's domestic
operations. Harken and its subsidiaries currently are involved in various
lawsuits and other contingencies, which in management's opinion, will not
result in significant loss exposure to Harken.
Year 2000 Issues -- Harken is currently working to resolve 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 is continuing to conduct a survey of purchasers, vendors and customers
that Harken believes 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
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<PAGE> 32
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 completed
its assessment of Year 2000 readiness of its internal computerized systems.
Harken is in the process of installing upgrades to its off-the-shelf financial
and operational software applications, hardware and telecommunications
equipment. Harken expects that such remediation procedures will be completed by
the second quarter of 1999. Harken is in the identification and assessment
phase with respect to its non-information technology systems, which is
projected to continue until the third quarter of 1999.
Testing. Harken will begin updating and testing of the newly upgraded
systems for Year 2000 compliance, and expects that all testing will be
completed by the third quarter of 1999. 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 in advance of January
1, 2000.
Third Parties. Harken has assessed 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 domestic and Colombian operations. Harken's domestic
operations are dependent upon its various purchasers or pipeline operators who
transport oil or gas for its purchasers. In addition, Harken's Colombian
operations may also become dependent upon the transportation of oil through
outside owned facilities or pipelines. Harken is monitoring progress of its
various domestic purchasers and pipelines, as well as potential Colombian
outside owned facilities on their activities related to the Year 2000. At this
time, Harken expects that field operations will not be 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 is making 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
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<PAGE> 33
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 would likely 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 less than $100,000 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 not 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 will develop appropriate contingency plans that address the
most reasonably likely worst case scenarios. Harken expects to have such
contingency plans in place by the end of the third quarter of 1999. A failure
to address Year 2000 issues successfully could have a material adverse effect
on Harken's business, financial condition or results of operations.
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PART II - OTHER INFORMATION
Item 1. Legal Proceedings.
In September 1997, Harken Exploration Company, a wholly-owned
subsidiary of Harken, was served with a lawsuit filed in Amarillo,
Texas in Federal District court for the Northern district of Texas
styled D. E. Rice and Karen Rice, as Trustees for the Rice Family
Living Trust vs. Harken Exploration Company. The Rice Family Living
Trust ("Rice") is a surface land owner in Hutchinson County, Texas.
Rice has alleged that oil and saltwater spills from Harken Exploration
Company's equipment and wells have polluted and otherwise damaged its
property. Rice is seeking payment of costs to prevent, minimize and
mitigate the alleged oil pollution, costs to restore and repair the
land and vegetation, costs to decontaminate the ground and surface
water, interest, attorney's fees, and punitive damages. Furthermore,
Rice has requested that Harken Exploration Company be enjoined from
producing any oil or gas from its lands. Rice has alleged that
remediation of all of the pollution on its land will cost
approximately $40,000,000. Harken believes that this lawsuit is wholly
without merit. Harken has asserted numerous defenses, all of which
Harken believes are meritorious. Harken intends to defend itself
vigorously. The lawsuit is expected to go to trial in 1999. In Harken
management's opinion, the results of the lawsuit will not have a
materials adverse effect on Harken's financial position.
Harken and its subsidiaries currently are involved in various other
lawsuits and other contingencies, which in management's opinion, will
not have a material adverse effect on Harken's financial position.
Item 2. Changes in Securities.
Not applicable.
Item 3. Default Upon Senior Securities.
Not applicable.
Item 4. Submission of Matters to a Vote of Securities Holders.
Not applicable.
Item 5. Other Information.
Not applicable.
Item 6. Exhibits and Reports on Form 8-K.
(a) EXHIBIT INDEX
Exhibit
<TABLE>
<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).
</TABLE>
34
<PAGE> 35
<TABLE>
<S> <C>
3.2 Amendment to the Certificate of Incorporation of
Harken Energy Corporation (filed as Exhibit 28.8 to
the Registration Statement on Form S-1 of Tejas
Power Corporation, file No. 33-37141, and
incorporated by reference herein.)
3.3 Amendment to the Certificate of Incorporation of
Harken Energy Corporation (filed as Exhibit 3 to
Harken's Quarterly Report on Form 10-Q for fiscal
quarter ended March 31, 1991, File No. 0-9207, and
incorporated by reference herein.)
3.4 Amendments to the Certificate of Incorporation of
Harken Energy Corporation (filed as Exhibit 3 to
Harken's Quarterly Report on Form 10-Q for fiscal
quarter ended June 30, 1991, File No. 0-9207, and
incorporated by reference herein.)
3.5 Amendments to the Certificate of Incorporation of
Harken Energy Corporation (filed as Exhibit 3.5 to
Harken's Annual Report on Form 10-K for the fiscal
year ended December 31, 1996, File No. 0-9207, and
incorporated herein by reference).
3.6 Amendment to the Certificate of Incorporation of
Harken Energy Corporation (filed as Exhibit 3.6 to
Harken's Annual Report on Form 10-K for the fiscal
year ended December 31, 1997, File No. 0-9207, and
incorporated by reference herein).
3.7 Amendment to the Certificate of Incorporation of
Harken Energy Corporation (filed as Exhibit 3.6 to
Harken's Quarterly Report on Form 10-Q for the fiscal
quarter ended June 30, 1998, File No. 0-9207, and
incorporated by reference herein).
3.8 Bylaws of Harken Energy Corporation, as amended
(filed as Exhibit 3.2 to Harken's Annual Report on
Form 10-K for fiscal year ended December 31, 1989,
File No. 0-9207, and incorporated by reference
herein).
4.1 Form of certificate representing shares of Harken
common stock, par value $.01 per share (filed as
Exhibit 1 to Harken's Registration Statement on Form
8-A, File No. 0-9027, and incorporated by reference
herein).
4.2 Certificate of Designations, Powers, Preferences and
Rights of Series A Cumulative Convertible Preferred
Stock, $1.00 par value, of Harken Energy Corporation
(filed as Exhibit 4.1 to Harken's Annual Report on
Form 10-K for the fiscal year ended December 31,
1989, File No. 0-9207, and incorporated by reference
herein).
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 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).
</TABLE>
35
<PAGE> 36
<TABLE>
<S> <C>
4.7 Certificate of Designations of Series E Junior
Participating Preferred Stock (filed as Exhibit B to
Exhibit 4 to Harken's Current Report on Form 8-K
dated April 7, 1998, file No. 0-9207, and
incorporated by reference herein).
4.8 Certificate of Designations, Preferences and Rights
of Series F Convertible Preferred Stock (filed as
Exhibit 4.8 to Harken's Quarterly Report on Form 10-Q
for the period ended March 31, 1998, File No. 0-9207,
and incorporated by reference herein).
*27 Financial Data Schedules.
</TABLE>
(b) REPORTS ON FORM 8-K.
None filed.
36
<PAGE> 37
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: May 13, 1999 By: /s/ Bruce N. Huff
------------------- -------------------------------
Bruce N. Huff, President, Chief Financial
Officer and Director
37
<PAGE> 38
INDEX TO EXHIBITS
<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION
- ------- -----------
<S> <C>
27 Financial Data Schedule
</TABLE>
<TABLE> <S> <C>
<ARTICLE> 5
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> DEC-31-1999
<PERIOD-START> JAN-01-1999
<PERIOD-END> MAR-31-1999
<CASH> 15,317,000
<SECURITIES> 76,137,000
<RECEIVABLES> 2,833,000
<ALLOWANCES> (379,000)
<INVENTORY> 0
<CURRENT-ASSETS> 95,192,000
<PP&E> 232,225,000
<DEPRECIATION> (76,121,000)
<TOTAL-ASSETS> 262,499,000
<CURRENT-LIABILITIES> 10,627,000
<BONDS> 85,000,000
0
0
<COMMON> 1,348,000
<OTHER-SE> 152,675,000
<TOTAL-LIABILITY-AND-EQUITY> 262,499,000
<SALES> 3,080,000
<TOTAL-REVENUES> 4,336,000
<CGS> 1,458,000
<TOTAL-COSTS> 1,458,000
<OTHER-EXPENSES> 3,147,000
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 413,000
<INCOME-PRETAX> (682,000)
<INCOME-TAX> 0
<INCOME-CONTINUING> (682,000)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (682,000)
<EPS-PRIMARY> (.07)
<EPS-DILUTED> 0
</TABLE>
