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SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
FOR THE FISCAL YEAR ENDED DECEMBER 31, 1998
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
FOR THE TRANSITION PERIOD FROM _________ TO _________
COMMISSION FILE NUMBER 0-9207
HARKEN ENERGY CORPORATION
(Exact name of registrant as specified in its charter)
DELAWARE 95-2841597
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
5605 N. MACARTHUR BLVD., SUITE 400 75038
IRVING, TEXAS (Zip Code)
(Address of principal executive offices)
Registrant's telephone number, including area code (972) 753-6900
Securities registered pursuant to Section 12(b) of the Act:
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Title of each class: Name of each exchange on which registered:
COMMON STOCK, PAR VALUE $0.01 PER SHARE AMERICAN STOCK EXCHANGE
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Securities registered pursuant to Section 12(g) of the Act: NONE
INDICATE BY CHECK MARK WHETHER THE REGISTRANT (1) HAS FILED ALL REPORTS
REQUIRED TO BE FILED BY SECTION 13 OR 15(D) OF THE SECURITIES EXCHANGE ACT OF
1934 DURING THE PRECEDING 12 MONTHS (OR FOR SUCH SHORTER PERIOD THAT THE
REGISTRANT WAS REQUIRED TO FILE SUCH REPORTS), AND (2) HAS BEEN SUBJECT TO SUCH
FILING REQUIREMENTS FOR THE PAST 90 DAYS. YES [X] NO [ ]
INDICATE BY CHECK MARK IF DISCLOSURE OF DELINQUENT FILERS PURSUANT TO ITEM
405 OF REGULATION S-K IS NOT CONTAINED HEREIN, AND WILL NOT BE CONTAINED, TO
THE BEST OF REGISTRANT'S KNOWLEDGE, IN DEFINITIVE PROXY INFORMATION STATEMENTS
INCORPORATED BY REFERENCE IN PART III OF THIS FORM 10-K OR ANY AMENDMENT TO
THIS FORM 10-K.[X]
The aggregate market value of the voting Common Stock, par value $0.01 per
share, held by nonaffiliates of the Registrant as of March 9, 1999 was
approximately $244,400,000. For purposes of the determination of the above
stated amount only, all directors, executive officers and 5% or more
shareholders of the Registrant are presumed to be affiliates.
The number of shares of Common Stock, par value $0.01 per share,
outstanding as of March 26, 1999 was 134,078,830.
DOCUMENTS INCORPORATED BY REFERENCE: DEFINITIVE PROXY MATERIALS FOR THE
1999 ANNUAL MEETING OF STOCKHOLDERS -- PART III, ITEMS 10, 11, 12, AND 13.
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TABLE OF CONTENTS
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PART I.
ITEM 1. Business.......................................................................... 3
ITEM 2. Properties........................................................................ 22
ITEM 3. Legal Proceedings................................................................. 23
ITEM 4. Submission of Matters to a Vote of Security Holders............................... 23
PART II.
ITEM 5. Market for Registrant's Common Equity and Related Stockholder Matters............. 23
ITEM 6. Selected Financial Information and Other Data..................................... 25
ITEM 7. Management's Discussion and Analysis of Financial Condition and
Results of Operations............................................................. 26
ITEM 8. Financial Statements and Supplementary Data....................................... 38
ITEM 9. Changes in and Disagreements with Accountants on Accounting and
Financial Disclosure.............................................................. 77
PART III.
ITEM 10. Directors and Executive Officers of the Registrant................................ 77
ITEM 11. Executive Compensation............................................................ 77
ITEM 12. Security Ownership of Certain Beneficial Owners................................... 77
ITEM 13. Certain Relationships and Related Transactions.................................... 77
PART IV.
ITEM 14. Exhibits, Financial Statement Schedules and Reports on Form 8-K................... 78
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PART I
ITEM 1. BUSINESS
OVERVIEW
Harken Energy Corporation (together with its wholly-owned or
controlled subsidiaries, "Harken") is engaged in oil and gas exploration,
development and production operations both domestically and internationally
through its various subsidiaries. Harken's domestic operations include oil and
gas exploration, development and production operations in the Four Corners area
of Utah, Arizona and New Mexico, in the onshore region of South Texas, in the
Texas Panhandle region, in the Magnolia region of Arkansas, in the Carlsbad
region of New Mexico, and beginning in May 1998, the onshore region of Southern
Louisiana. Harken's international operations include six exclusive Association
Contracts with the state-owned oil company in the Republic of Colombia and
Harken's contract to participate in an Exploration and Production Contract to
be signed with the Republic of Costa Rica.
Harken's corporate strategy is to expand its domestic reserve base
through acquisitions and additional exploration and developmental drilling on
its existing oil and gas properties and to reinvest a substantial portion of
the cash flow generated from its domestic assets, along with funds generated
from traditional and other sources of financing, towards developing its higher
potential, and higher risk, international prospects.
Harken was incorporated in 1973 in the state of California and
reincorporated in 1979 in the state of Delaware. Harken's principal offices are
currently located at 5605 N. MacArthur Blvd., Suite 400, Irving, Texas 75038
and its telephone number is (972) 753-6900.
INTERNATIONAL EXPLORATION AND DEVELOPMENT OPERATIONS - COLOMBIA
Harken's international operations consist primarily of its exploration
operations in the Republic of Colombia. Harken, through its wholly-owned
subsidiary Harken de Colombia, Ltd. ("Harken Colombia"), currently holds six
exclusive Association Contracts with Empresa Colombiana de Petroleos
("Ecopetrol"), the state-owned Colombian oil company.
Alcaravan Contract -- During the fourth quarter of 1992, Harken
Colombia and Ecopetrol entered into an Association Contract covering the
Alcaravan area (the "Alcaravan Contract"). The Alcaravan Contract grants Harken
Colombia the exclusive right to explore for, develop and produce oil and gas
throughout approximately 210,000 acres in the Alcaravan area of Colombia. The
Alcaravan area is located in Colombia's Llanos Basin and is located
approximately 140 miles east of Santafe De Bogota. Harken Colombia is required
to conduct a seismic and exploratory drilling program during the initial six
years of the Alcaravan Contract (the "Exploration Period"). At the end of each
of the first six years of the Alcaravan Contract, Harken Colombia has the
option to withdraw from the Alcaravan Contract or to commit to the next year's
work requirements. If during the Exploration Period of the Alcaravan Contract,
Harken Colombia discovers one or more fields capable 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 the
Alcaravan Contract related to the areas of commerciality will be extended for a
period of 22 years from the date of such commercial discovery.
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Upon a discovery of a field capable of commercial production, and upon
commencement of production from that commercial field, Ecopetrol will reimburse
Harken Colombia for 50% of Harken Colombia's successful well costs expended up
to the point of declaration of a commercial discovery out of Ecopetrol's share
of production. Production from the field following 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 Colombia
until cumulative production in such field reaches 60 million barrels of oil,
after which Ecopetrol's share of production will progressively increase and
Harken Colombia's share will progressively decrease until cumulative production
from the field reaches 150 million barrels of oil, and thereafter all
production will be allocated 70% to Ecopetrol and 30% to Harken Colombia. If
more than one commercially declared field is discovered on the Alcaravan area,
the production sharing percentages applicable to the field with the greatest
cumulative production will be applied to all fields within the Alcaravan area.
After declaration of a commercial discovery, Harken Colombia and Ecopetrol will
be responsible for all future development costs and operating expenses in
direct proportion to their interest in production.
The Alcaravan Contract provides that at the end of the Exploration
Period in June 1999, if a field capable of producing hydrocarbons in commercial
quantities has been discovered, the Alcaravan Contract area will be reduced by
50%. Two years thereafter, the Alcaravan Contract area will be further reduced
to 25% of the original area. Two years thereafter, the Alcaravan Contract area
will be reduced to the area of the commercial field that is in production or
development, plus a reserve zone of five kilometers in width around the
productive boundary of such field. The commercial field plus the zone
surrounding such field will become the area of exploitation. Harken Colombia
will designate the acreage to be released.
Harken Colombia has completed all of the work requirements of the
first five years of the Alcaravan Contract. Harken Colombia is required to drill
an additional well by June 1999 in order to satisfy the work requirements for
the sixth year of the contract. Harken Colombia does not currently have any
plans to drill an additional well on the Alcaravan Contract area acreage during
1999. Harken Colombia is currently negotiating with Ecopetrol for a modification
of the work obligations, and management believes that it will be successful in
negotiating such a modification. Such negotiations could include the
relinquishment of a portion of Alcaravan Contract area acreage. See
"Negotiations with Ecopetrol" for further discussion. Prior to June 1999, Harken
Colombia plans to submit a request to Ecopetrol for commerciality relating to
the Palo Blanco Prospect Area following the completion of a long-term production
test. The Alcaravan Contract provides that if Ecopetrol accepts the existence of
the commercial field, Ecopetrol would begin to participate, upon the terms of
the Alcaravan Contract, in the development of the commercial field. If Ecopetrol
does not accept the existence of the commercial field, Harken Colombia would
then have the choice to proceed with the development of the prospect area on a
sole-risk basis or perform additional work as may be indicated by Ecopetrol, to
demonstrate the existence of a commercial field. If Harken Colombia does proceed
on a sole-risk basis, it will be entitled to receive Ecopetrol's share of
production after royalty, until Harken Colombia has recovered 200% of its costs,
after which time Ecopetrol would receive its share of production.
Harken Colombia has to date drilled three wells on the Alcaravan
acreage. The first well, the Alcaravan #1, was drilled in February 1995, and
did not find commercial quantities of oil or gas. In February 1997, Harken
Colombia drilled the Estero #1 well located on the Palo Blanco prospect. The
Estero #1 well was drilled to a depth of 8,608 feet to test the Carbonera,
Mirador, Guadalupe, Gacheta and Ubaque formations. During initial production
testing of the Ubaque formation, the Estero #1 well produced at the rate of
4,116 gross barrels of oil per day. Harken Colombia believes that the
production rate was limited by
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the capacity of the submersible pump and surface storage facilities at the
location. In December 1997 and early 1998, Harken Colombia drilled and completed
the Estero #3, also located on the Palo Blanco Prospect. Although the Estero #3
well initially produced oil from the Upper and Middle Ubaque during preliminary
production testing, the well subsequently produced significant water from the
Middle Ubaque. Harken is reviewing the production information from the Upper and
Middle Ubaque to determine if, by performing additional work, these formations
might be commercial. Harken also tested the Mirador, Guadalupe and the deeper
Paleozoic formations and found them to be noncommercial. Through December 31,
1998, Harken Colombia has expended approximately $22.4 million of net oil and
gas exploration and development costs related to the Alcaravan Association
Contract.
During the third quarter of 1998, Harken Colombia initiated trucking
operations of crude oil from its long-term production tests of the Estero #1
well on the Alcaravan Contract area. During the last half of 1998, Harken had
periods where it has trucked up to 500 gross barrels of oil per day from the
Estero wellsite to a pumping station approximately 20 miles away. In order to
maximize the production and sales volume of oil which can be sold from the
Estero wellsite, Harken Colombia has constructed and completed a 2.3 mile oil
pipeline connecting the Palo Blanco field to an existing crude oil pipeline
system. Initial plans for the 12-inch pipeline calls for the introduction of
small amounts of crude into the new line, gradually increasing to pipeline
capacity of up to 4,000 gross barrels of oil per day. Harken Colombia has
received the environmental permit to tie-in to the existing pipeline and
anticipates completing the tie-in during the first quarter of 1999. During late
1998, trucking operations have been suspended pending completion of the pipeline
tie-in.
During the second quarter of 1998, Harken Colombia drilled and
completed the Canacabare #1, the first exploratory well to be drilled on the
Anteojos prospect. The Canacabare #1 was drilled vertically into the Paleozoic
formation to a total depth of 8,410 feet. Due to the Colombian rainy season and
resulting operating conditions in the Llanos Basin area in Colombia, the
drilling rig was moved off the location prior to the production test on the
well. Wireline log data analysis of the Cancabare #1 well indicated a net
productive thickness of approximately 90 feet in the three formations to be
tested in this well. Production tests are planned for late 1999 or early 2000
following the Colombian rainy season.
In 1996, Harken Colombia entered into two separate agreements with
industry partners, whereby each industry partner paid 1/3 of the cost of the
Estero #1 well, plus certain additional costs and fees and acquired a 25%
beneficial interest in the Palo Blanco Prospect. In addition, the industry
partners obtained certain rights to acquire a beneficial interest in any other
prospect on the Alcaravan acreage by paying a portion of the costs associated
with such prospect. Each industry partner also acquired a 25% beneficial
interest in the Anteojos prospect. Effective December 31, 1998, Harken entered
into an agreement with one of the industry partners pursuant to which Harken
reacquired all of its beneficial interest in the Alcaravan and Miradores
Contract areas.
Harken's net revenue interest in production from the Alcaravan
Contract will depend upon whether or not Ecopetrol elects to participate.
After payment of industry partner participation, and assuming that Ecopetrol
elects to participate in the development of the Alcaravan Contract, Harken will
initially receive 30% of the gross revenues from production from the Alcaravan
Contract area. To the extent that a field produces in excess of 60 million
barrels, Harken's net revenue interest will decrease as described above.
Bocachico Contract -- In January 1994, Harken Colombia signed its
second Association Contract (the "Bocachico Contract") with Ecopetrol, covering
the Bocachico Contract area. Under the Bocachico
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Contract, Harken Colombia acquired the exclusive rights to conduct exploration
and production activities and drilling on this area, which covers approximately
192,000 acres in the Middle Magdalena Valley of Central Colombia. During the
exploratory period of the Bocachico Contract, if Harken Colombia makes a
commercial discovery on one or more prospect areas in the contract area, the
contract covering such prospect area(s) will be further extended for a period of
22 years from the date of any commercial discovery of oil and/or gas. The
production sharing and acreage relinquishment arrangements under the Bocachico
Contract are substantially similar to those under the Alcaravan Contract.
Harken Colombia has fulfilled all of the work requirements for the
first four years of the Bocachico Contract. The work requirements for the fifth
year require Harken Colombia to drill one exploratory well by May 6, 1999.
Harken Colombia does not currently have any plans to drill an additional well
on the Bocachico Contract area acreage during 1999. Harken Colombia is
currently negotiating with Ecopetrol for a modification of the work
obligations, and management believes that it will be successful in negotiating
such a modification. Such negotiations could include the relinquishment of a
portion of Bocachico Contract area acreage. See "Negotiations with Ecopetrol"
for further discussion.
In October 1995, Harken Colombia entered into a Development Finance
Agreement (the "Rio Negro Development Finance Agreement") with four
institutional investors (the "Rio Negro Investors"), pursuant to which the Rio
Negro Investors provided up to $3,500,000 to Harken Colombia to finance a
portion of the drilling of two wells on the Rio Negro prospect in the Bocachico
Contract area in exchange for the right to receive future payments from Harken
Colombia equal to 40% of the net profits that Harken Colombia may derive from
the sale of oil and gas produced from the Rio Negro prospect (the
"Participation") if the planned drilling on that prospect is successful. In
March 1997, Harken entered into an agreement with the Rio Negro Investors
pursuant to which the Participation was reduced to 10% from 40% in exchange for
900,000 shares of Common Stock.
Harken Colombia has drilled three wells on the Bocachico Contract area
in the Rio Negro Prospect. The Torcaz #2 well was drilled in 1996, and then
recompleted in 1997, and the Torcaz #3 was spudded in April 1997. During the
second quarter of 1998, Harken Colombia initiated sales of production from both
the Torcaz #2 and Torcaz #3 wells to a local purchaser at the wellsites and for
most of 1998 these wells produced in excess of 100 gross barrels of oil per
day. Harken Colombia will study the production from the Torcaz #2 and Torcaz #3
wells in order to determine the optimum production method with which to further
produce the heavy crude encountered in such wells. During the second half of
1998, Harken Colombia drilled the third exploratory well on the Rio Negro
prospect, the Torcaz #5. The well tested with similar results to Torcaz #2 and
Torcaz #3. Although still undergoing evaluation, the well initially tested at
approximately 500 gross barrels of oil per day while maintaining high fluid
level from the Lower Mugrosa "B" formation. Through December 31, 1998, Harken
Colombia has expended approximately $29.7 million of net oil and gas
exploration and development costs related to the Bocachico Association Contract.
In October and December 1997 and March 1998, Harken entered into three
separate Development Finance Agreements with institutional investors
(collectively the "Institutional Investors"), pursuant to which the
Institutional Investors provided a total of $31.5 million of net proceeds to
Harken to finance the drilling of the initial wells on three unexplored oil and
gas prospects to be identified in the Middle Magdalena Basin of Colombia,
including one prospect on the Bocachico acreage. In exchange, the Institutional
Investors received the right to receive future payments from Harken equal to 7%
of the net profits that Harken Colombia 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.
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Harken's net revenue interest in production from the Bocachico Contract
will depend upon whether or not Ecopetrol elects to participate. Assuming that
Ecopetrol elects to participate in the development of the Bocachico Contract,
Harken will initially receive 40% of the gross revenues from production from
the Bocachico Contract area, except for production which is subject to the
Development Finance Agreements, in which case Harken will initially receive
approximately 33% of the gross revenues associated with such production. To
the extent that a field produces in excess of 60 million barrels, Harken's net
revenue interest will decrease as described above.
Cambulos Contract -- In September 1995, Harken Colombia signed an
additional Association Contract (the "Cambulos Contract") with Ecopetrol,
covering the Cambulos Contract area. Under the Cambulos Contract, Harken
Colombia has acquired the exclusive rights to conduct exploration and production
activities in the Cambulos Contract area, which covers approximately 300,000
acres in the Middle Magdalena Valley of Central Colombia.
During the first two years of the Cambulos Contract, Harken Colombia
was required to conduct geologic studies on the lands covered by this contract,
including reprocessing of at least 400 kilometers of existing seismic data and
the acquisition of at least 90 kilometers of new seismic data. Harken Colombia
has completed the work program for the first two years of the Cambulos Contract.
The Cambulos Contract originally required that the Cambulos Contract acreage be
reduced to 173,000 acres at the end of the second contract year. In May 1998,
Ecopetrol agreed to defer relinquishment of the acreage until the fourth
contract year in exchange for Harken Colombia drilling two exploratory wells
within the third contract year.
If during the exploratory period of the Cambulos Contract, Harken
Colombia discovers a field capable of commercial production of oil or gas, the
term of the Cambulos Contract will be extended for a period of 22 years from
the date of such commercial discovery. Upon a commercial discovery and at the
initiation of production from the commercial field, Harken Colombia will be
reimbursed by Ecopetrol for 50% of all seismic costs and direct exploratory
well costs (including costs related to dry holes) incurred prior to the point
at which a declaration of a commercial discovery is made. 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 Colombia until cumulative production from all fields in the
Cambulos acreage reaches 60 million barrels of oil, after which Ecopetrol's
share of production will increase progressively to 75% and Harken Colombia's
share will decrease progressively to 25%, determined by a formula based on
Harken Colombia's recovery of its total expenditures under the Cambulos
Contract. After a declaration of a commercial discovery, Harken Colombia and
Ecopetrol will be responsible for all future development costs and operating
expenses in direct proportion to their interest in production. The acreage
relinquishment provisions of the Cambulos Contract are substantially similar to
those contained in the Alcaravan Contract.
In August 1998, Harken Colombia spudded its first well on the Cambulos
Contract area, the Islero #1, located in the Middle Magdalena Basin. During the
drilling of the Islero #1, Harken Colombia encountered multiple highly
fractured and faulted zones which led to various mechanical problems.
Consequently, drilling proceeded at a reduced pace. Ultimately, the fourth
sidetrack on the well was drilled into the Cimarrona formation at 7,726 feet
and was drilled into the structure. Initially, the formation had good shows of
high quality oil and gas throughout the Cimarrona, but the well subsequently
produced large volumes of water and did not sustain oil production levels
during the short-term testing. Harken Colombia has determined that the
Cimarrona formation did not have adequate thickness or fracturing to
economically produce. Preliminary analysis, however, indicates that the source
of the oil and gas might be in the deeper
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Olini (Villeta) formation that is located approximately 1,200 feet below the
Cimarrona. Through December 31, 1998, Harken Colombia has expended approximately
$21.3 million of net oil and gas exploration and development costs related to
the Cambulos Association Contract.
Given the cost and time spent associated with the drilling of the
Islero #1, Harken Colombia has submitted a request to Ecopetrol to allow the
additional well depths drilled during Islero #1 to substitute for the
obligation to drill a second exploratory well within the third contract year.
Ecopetrol has granted an extension of the third contract year to April 16, 1999
to consider this request. Ecopetrol's approval of this requested substitution
would allow Harken Colombia to satisfy its third year obligation with the
drilling of Islero #1. Harken Colombia's proposal to Ecopetrol also
contemplates the relinquishment of certain acreage in the Cambulos Contract
area and its commitment to the fourth contract year work obligations. Should
Ecopetrol not approve this request or an alternative proposal, Harken would
have the obligation to drill an additional well, which would require obtaining
an additional extension of time from Ecopetrol. Should Ecopetrol deny Harken
Colombia's request to allow the Islero#1 to satisfy the third year work
obligations and should Ecopetrol deny Harken Colombia's request for an
extension to satisfy the third year work obligations, Harken Colombia would not
be in compliance with the terms of the Cambulos Contract. See "Negotiations
with Ecopetrol" for further discussion.
Harken's net revenue interest in production from the Cambulos Contract
will depend upon whether or not Ecopetrol elects to participate. Assuming that
Ecopetrol elects to participate in the development of the Cambulos Contract,
Harken will initially receive 40% of the gross revenues from production from
the Cambulos Contract area, except for production which is subject to the
Development Finance Agreements, in which case Harken will initially receive
approximately 37% of the gross revenues associated with such production. To
the extent that a field produces in excess of 60 million barrels, Harken's net
interest will decrease as described above.
Bolivar Contract -- In May 1996, Harken Colombia signed an additional
Association Contract (the "Bolivar Contract") with Ecopetrol, covering the
Bolivar Contract area. Under the Bolivar Contract, Harken Colombia has acquired
the exclusive rights to conduct exploration and production activities in the
Bolivar Contract area, which covers approximately 250,000 acres in the Northern
Middle Magdalena Valley of Central Colombia.
Harken Colombia has completed all of the work obligations for the
first three years of the Bolivar Contract. During each of the fourth through
the sixth contract years, Harken Colombia may elect to continue the contract by
committing to the drilling of at least one well during each contract year. The
production sharing and acreage relinquishment arrangements under the Bolivar
Contract are substantially similar to those under the Cambulos Contract.
In November 1997, Harken spudded its first well on the Bolivar
Contract acreage, the Catalina #1. The Catalina #1 well was drilled as a
horizontal well to test the Rosa Blanca formation. During initial production
testing, the Catalina #1 well produced at rates averaging 7,073 barrels of oil
per day and 11.5 million cubic feet of gas per day or 9,680 barrels of oil
equivalent per day. Harken Colombia believes that production rates were limited
by surface facilities, wellbore configurations and recovery of drilling fluids
during the test. The well was designed to be drilled a horizontal distance of
up to 6,000 feet. Harken Colombia elected to end the horizontal drilling at
approximately 1,265 feet upon achieving significant production rates.
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In March 1998, Harken Colombia spudded the Olivo #1. The Olivo #1 was
drilled from the same surface location as the Catalina #1 to a total horizontal
distance of approximately 6,000 feet using underbalanced horizontal drilling.
Overall total length of the well bore is 10,215 feet. The well tested at a
production rate of 10,800 gross barrels of oil per day with no water from the
Middle Cretaceous naturally fractured Salada (Lower La Luna) formation. Harken
believes the production rate was limited by the size of the pump and production
equipment used.
During 1998, Harken Colombia began trucking sales of oil production
generated during the production tests of the Catalina #1 and Olivo #1 wells.
Harken Colombia is currently trucking approximately 2,500 gross barrels of oil
per day from the entire field. Additionally, Harken Colombia has received the
required construction and environmental permits for two five-mile pipelines for
the Bolivar area. These two pipelines will have an initial capacity of up to
30,000 barrels of oil per day and 150 million cubic feet of gas per day,
respectively. Through December 31, 1998, Harken Colombia has expended
approximately $42.2 million of net oil and gas exploration and development
costs related to the Bolivar Association Contract.
In March 1999, Harken Colombia filed a request with Ecopetrol to
declare the Catalina field to be commercial. The commerciality process is
similar to the process provided under the Alcaravan Contract, and within 90 days
after the submission of the commerciality application, Ecopetrol is required to
submit their response back to Harken Colombia. Ecopetrol may approve the
commerciality request or require Harken Colombia to proceed on a sole-risk basis
for its development plans. If Harken Colombia proceeds on a sole-risk basis, it
will be entitled to receive Ecopetrol's share of production after royalty, until
Harken Colombia has recovered 200% of its costs, after which time Ecopetrol
would receive its share of production. Harken Colombia is currently in
discussions with sources of project finance to provide debt funding for the
development of the area, including the Bolivar area pipelines discussed above.
Such a credit facility could enable Harken Colombia to accelerate its
development of the field, while still preserving its working capital position
for its exploration efforts. The results of a financing would affect the timing
of the development of the area. Harken Colombia plans to drill approximately
four wells on the Bolivar acreage during 1999 and early 2000.
Harken's net revenue interest in production from the Bolivar Contract
will depend upon whether or not Ecopetrol elects to participate. Assuming that
Ecopetrol elects to participate in the development of the Bolivar Contract,
Harken will initially receive 40% of the gross revenues from production from the
Bolivar Contract area. To the extent that a field produces in excess of 60
million barrels, Harken's net revenue interest will decrease as described above.
Miradores Contract -- In December 1997, Harken Colombia signed an
additional Association Contract (the "Miradores Contract") with Ecopetrol,
covering the Miradores Contract area. Under the Miradores Contract, Harken
Colombia has acquired the exclusive rights to conduct exploration activities in
the Miradores Contract area, which covers approximately 32,000 acres in the
Llanos Basin which are contiguous with the Alcaravan acreage.
During the first year of the Miradores Contract, Harken Colombia was
required to reprocess at least 165 kilometers of existing seismic data and
acquire at least 25 kilometers of new seismic data, which it accomplished
during 1998. During each of the second through the sixth contract years, Harken
Colombia may elect to continue the contract by committing to the drilling of at
least one well during each contract year. Harken Colombia has received from
Ecopetrol a six-month extension (until August 22, 1999) to the first year of
the Miradores Contract in order to consider whether to elect to continue the
contract into its second year.
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Harken Colombia is currently attempting to determine whether it will be
necessary to drill a well on the Miradores Contract acreage, or if all of the
reserves related to the Palo Blanco field can be recovered from wells drilled on
the Alcaravan Contract acreage. The production sharing and acreage
relinquishment provisions of the Miradores Contract are substantially similar to
those contained in the Cambulos Contract. Through December 31, 1998, Harken
Colombia has expended approximately $837,000 of net oil and gas exploration and
development costs related to the Miradores Association Contract.
An industry partner who currently owns a beneficial interest in the
Alcaravan Contract also acquired a similar 25% beneficial interest in the
Miradores Contract.
Harken's net revenue interest in production from the Miradores Contract
will depend upon whether or not Ecopetrol elects to participate. After payment
of industry partner participation, and assuming that Ecopetrol elects to
participate in the development of the Miradores Contract, Harken will initially
receive 30% of the gross revenues from production from the Miradores Contract
area. To the extent that a field produces in excess of 60 million barrels,
Harken's net revenue interest will decrease as described above.
Los Olmos Contract -- In March 1998, Harken Colombia signed the Los
Olmos Association Contract (the "Los Olmos Contract") with Ecopetrol, covering
the Los Olmos Contract area. Under the Los Olmos Contract, Harken Colombia has
acquired the exclusive rights to conduct exploration activities in the Los
Olmos Contract area, which covers approximately 374,000 acres in the Lower
Magdalena Valley.
During the first two years of the Los Olmos Contract, Harken Colombia
is required to reprocess at least 500 kilometers of existing seismic data and
acquire at least 120 kilometers of new seismic data and 2,000 kilometers of
aeromagnetic data, and prepare an engineering study of the contract areas.
During each of the third through the sixth contract years, Harken Colombia may
elect to continue the contract by committing to the drilling of at least one
well during each contract year. The production sharing and acreage
relinquishment provisions of the Los Olmos Contract are substantially similar
to those contained in the Cambulos Contract. Through December 31, 1998, Harken
Colombia has expended approximately $632,000 of net oil and gas exploration and
development costs related to the Los Olmos Association Contract.
Harken's net revenue interest in production from the Los Olmos Contract
will depend upon whether or not Ecopetrol elects to participate. Assuming that
Ecopetrol elects to participate in the development of the Los Olmos Contract,
Harken will initially receive 40% of the gross revenues from production from the
Los Olmos Contract area. To the extent that a field produces in excess of 60
million barrels, Harken's net revenue interest will decease as described above.
Negotiations with Ecopetrol - As discussed above, Harken Colombia is
currently involved in discussions and negotiations with Ecopetrol on certain
Association Contracts regarding certain contractual work requirements or the
timing under which such requirements are to be performed. If Harken Colombia is
unsuccessful in negotiating a modification of the existing work obligations
prior to the specified date for a particular Association Contract, Harken
Colombia will not be in compliance with the Association Contract terms. Failure
to comply with the terms of an Association Contract could result in its
termination, which could have a material adverse effect on Harken's business.
10
<PAGE> 11
INTERNATIONAL EXPLORATION AND DEVELOPMENT OPERATIONS - COSTA RICA
In the fourth quarter of 1998, Harken announced that it signed an
agreement to participate in an Exploration and Production Contract anticipated
to be signed during the first half of 1999 with the Republic of Costa Rica
("Costa Rica Contract") covering approximately 1.4 million acres in the North
and South Limon Back Arc Basin onshore and offshore Costa Rica, Central
America.
The Costa Rican project is a logical extension of Harken's prior
exploratory success in Colombia. Indicated source rocks for the Costa Rican
structures are Middle Cretaceous black shales which are equivalent to the La
Luna/Querecual/Villeta oil source rocks of Northern South America in the
Magdalena, Llanos, Maracaibo and Maturin Basins. If the geological
interpretation is confirmed, it is expected that similar source rock
characteristics that Harken has encountered in its Colombian exploration
program will also be found in Costa Rica.
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 issuance and execution of the Costa Rica Contract is
subject only to the completion of environmental impact studies and final
agreements including Harken's participation with the Costa Rican Ministry of
Environment and Energy and is expected to be signed in the first half of 1999.
Harken's participation in Costa Rica is being structured whereby a
wholly-owned Harken subsidiary owns 80% of the stock of a newly formed Nevada
limited liability corporation, Harken Costa Rica Holdings LLC ("HCRH"). An
affiliate of MKJ Xploration, Inc. ("MKJ") owns the remaining 20% of the stock of
this 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 approval of the assignment is
signed with the Republic of Costa Rica. Additionally, up to $8 million may be
committed by Harken to fund the initial minimum work program obligations under
the proposed Exploration and Production Contract.
DOMESTIC EXPLORATION AND PRODUCTION OPERATIONS
Harken operates or owns a non-operating working interest in 355 oil
wells and 95 gas wells in the U.S. Harken's operations are located in the
Paradox Basin in the Four Corners area of Arizona, Utah and New Mexico, the
Texas Panhandle region, the onshore South Texas region, the Carlsbad region of
New Mexico, the Magnolia region of Arkansas, and beginning in May 1998, the
onshore region of Southern Louisiana. During 1997, domestic oil sales to Giant
Refining, Inc. represented 15% of Harken's consolidated revenues. There was no
customer during 1998 which individually represented 10% or more of Harken's
consolidated revenues.
Four Corners Operations -- Harken operates a total of 34 oil wells and
6 gas wells in the Four Corners area of Arizona, Utah, and New Mexico. Harken
also owns an interest in the Aneth Gas Plant, a gas processing plant located in
the Paradox Basin (Harken's interest in the Aneth Gas Plant and the Four
Corners area oil and gas wells are hereinafter referred to as the "Four Corners
Properties"). Harken acquired its initial 50% interest in these properties as a
result of the February 1993 acquisition of Chuska Resources Corporation
("Chuska"). Harken's activities in the Four Corners area are carried out
primarily through Harken Southwest Corporation ("HSW"), a wholly-owned
subsidiary.
11
<PAGE> 12
HSW's operations in the Paradox Basin are primarily concentrated on
the 16 million acre Navajo Indian Reservation, which comprises portions of
Arizona, New Mexico and Utah. HSW currently has two operating agreements with
the Navajo Tribe of Indians (the "Navajo Nation") allowing oil and gas
exploration and development on an aggregate of 16,036 acres of Navajo tribal
lands on the Reservation (the "Navajo Nation Lands"). HSW has the right to
explore for, produce, and sell oil, natural gas, and other specified gases
until July 20, 2012, under the Tribal Agreement effective July 20, 1987 (the
"1987 Tribal Agreement") and until August 26, 2003, under the Tribal Agreement
effective August 26, 1983 (the "1983 Tribal Agreement").
The Navajo Nation receives 30% of gross revenues from the sale of
production of oil and gas under the 1983 Tribal Agreement and 20% under the
1987 Tribal Agreement (23% with respect to proceeds from oil production in
excess of $22 per barrel). Under both Tribal Agreements, the Navajo Nation is
entitled to receive 50% of all gross proceeds recovered over $35 per barrel of
oil. Under the 1983 Tribal Agreement, the Navajo Nation receives 50% of all
gross proceeds over $4 per Mcf of gas. Under the 1987 Tribal Agreement, the
Navajo Nation receives 40% of all gross proceeds over $8 per Mcf of gas.
In order to develop the Navajo Nation Lands, in 1988, Chuska entered
into an operating agreement pursuant to which a group of investors acquired an
undivided 50% interest in the gross proceeds receivable by Chuska under the
1983 Tribal Agreement and the 1987 Tribal Agreement. Between 1994 and 1997, HSW
reacquired the interests of all of these investors.
Texas Operations -- Harken operates or owns a non-operated interest in
219 oil wells and 88 gas wells in Texas. Harken operates 185 oil wells and 38
gas wells in Hutchinson and Gray Counties, owns non-operated interests in 34
oil wells in Hockley County, and owns non-operated interests in 50 gas wells in
various counties of the Texas Gulf Coast region. Harken acquired its Texas
properties as a result of four acquisitions.
On May 22, 1995, Harken acquired Search Exploration, Inc., a
publicly-held oil and gas exploration and production company ("Search
Exploration"), through a merger between Search Exploration and Search
Acquisition Corp., a wholly-owned subsidiary of Harken ("Search Acquisition").
In October 1995, Harken Energy West Texas, Inc., a wholly-owned
subsidiary of Harken, acquired certain non-operated interests in producing
properties located in Hockley County, Texas (the "Yellowhouse Properties").
On December 21, 1995, pursuant to a Purchase and Sale Agreement (the
"Panhandle Purchase and Sale Agreement"), Harken Exploration Company, a
wholly-owned subsidiary of Harken ("Harken Exploration"), acquired working
interests in certain producing oil and gas leases located on approximately
6,800 acres in Hutchinson County, Texas, a gas gathering system located
thereon, property and equipment related thereto and the surface rights to a 161
acre tract of land (the "Panhandle Properties").
On August 29, 1997, Harken, along with Harken Exploration, purchased
working interests in oil and gas properties located in the panhandle region of
Texas (the "Cal-T Properties"). The purchase price of approximately $3,416,000
consisted primarily of 565,000 shares of Common Stock.
12
<PAGE> 13
New Mexico Operations -- Harken, through Harken Exploration, owns
non-operated interests in 20 oil wells in the Carlsbad region of New Mexico.
These properties were acquired as a part of the acquisition of the EnerVest
Properties described below.
Arkansas Operations -- Harken, through Harken Exploration, operates 26
oil wells and owns non-operated interests in 32 oil wells in Arkansas. On July
10, 1996, Harken Exploration purchased working interests in certain producing
oil and gas properties located in the Magnolia area of Arkansas and in the
Carlsbad area of New Mexico (the "EnerVest Properties") from EnerVest
Acquisition-II Limited Partnership ("EnerVest"). The purchase price was
approximately $15,200,000. Harken paid $5,000,000 cash at closing and issued
1,550,000 shares of Common Stock. Harken also issued to EnerVest warrants to
purchase, over a period of three years from closing, 300,000 shares of Common
Stock at an exercise price of $2.75 per share. Subsequently, Harken issued
1,400,000 shares of Common Stock in satisfaction of all remaining obligations to
EnerVest.
Louisiana Operations - Harken, through Harken Exploration, owns
non-operated interests in southern Louisiana (the "Bargo Properties"). These
properties are located in St. Martin Parish and the South Bayou Boeuf area in
LaFourche Parish. In the St. Martinville area, Harken has 17 oil wells, 1 gas
well and 3 overriding royalty interests. In the South Bayou Boeuf area, Harken
has 7 oil wells and 3 salt water disposal wells. On May 19, 1998, Harken, along
with Harken Exploration purchased working interests in oil and gas properties
from St. Martinville Partners, Ltd. and Bargo Energy Company. The purchase
price consisted of 2,716,483 shares of Common Stock, having an approximate
value of $16,250,000, which were issuable at closing. Pursuant to the Asset
Purchase and Sale Agreement, additional consideration of up to $4,000,000 is
payable by Harken to the sellers. The amount of the additional consideration
that is payable under this transaction is currently being negotiated with the
sellers and is payable at Harken's option in the form of additional shares of
Common Stock or cash. The properties are operated by Bargo Energy Company,
however, in the purchase and sale agreement, Harken has the option, for a
period of one year from May 19, 1998, to purchase from the sellers all of the
seller's remaining interests in the St. Martinville area and the South Bayou
Boeuf area for a predetermined purchase price. This also includes the right to
operate both areas.
EXECUTIVE OFFICERS OF HARKEN
The officers of Harken are elected annually by the Board of Directors
following each Annual Meeting of Stockholders, or as soon thereafter as
necessary and convenient. Each officer holds office until the earlier of such
time as his or her successor is duly elected and qualified, his or her death or
he or she resigns or is removed from office. Any officer elected or appointed
by the Board of Directors may be removed by the Board of Directors whenever, in
its judgement, the best interests of Harken will be served thereby, but such
removal will be without prejudice to the contract rights, if any, of the person
so removed.
13
<PAGE> 14
The executive officers of Harken as of December 31, 1998, their ages
and positions held with Harken and their business experience for the past five
years are listed below.
<TABLE>
<CAPTION>
NAME AGE POSITION HELD WITH HARKEN
- ---- --- -------------------------
<S> <C> <C>
Mikel D. Faulkner 49 Chairman of the Board of Directors and
Chief Executive Officer
Richard H. Schroeder 54 Vice Chairman of the Board of Directors
Bruce N. Huff 48 President and Director
Stephen C. Voss 48 Executive Vice President, Chief Operating Officer
and Director
Larry E. Cummings 46 Vice President, Secretary and General Counsel
A. Wayne Hennecke 40 Vice President - Finance and Chief Financial Officer
Gregory S. Porter 33 Vice President - Legal and Assistant Secretary
J. Marc Lewis 45 Vice President
Rodger L. Ehrlish 46 Treasurer
Guillermo Sanchez 57 President, Harken de Colombia, Ltd.
</TABLE>
Mikel D. Faulkner has served as Chairman of the Board of Harken since
February 1991 and Chief Executive Officer of Harken since 1982. Mr. Faulkner
previously served as President of Harken between 1982 and 1993.
Richard H. Schroeder has served as a Director of Harken since March
1994. Mr. Schroeder has served as Vice Chairman of the Board of Directors of
Harken since April 1998. Mr. Schroeder previously served as President and Chief
Operating Officer of Harken between March 1994 and May 1998. From November 1990
to March 1994, Mr. Schroeder was President and owner of RHS Management, a
management consulting firm, and from January 1983 to November 1990, Mr.
Schroeder was President of Rosewood Resources, Inc., a privately-owned oil and
gas exploration and production company.
Bruce N. Huff has served as a Director of Harken since August 1996.
Mr. Huff has served as President of Harken since April 1998. Mr. Huff had
previously served as Senior Vice President and Chief Financial Officer since
1990.
Stephen C. Voss has served as a Director of Harken since July 1997.
Mr. Voss has served as Executive Vice President and Chief Operating Officer of
Harken since December 1998. Mr. Voss had previously served as Senior Vice
President of Harken since 1990. Mr. Voss has also served since 1990 as
President of Harken International, Ltd., a wholly-owned subsidiary of Harken.
Larry E. Cummings has served as Vice President, Secretary and General
Counsel of Harken since 1983. Mr. Cummings previously served as Senior Legal
Counsel and Vice President of Land for Harken from 1978 to 1983.
14
<PAGE> 15
A. Wayne Hennecke has been employed with Harken since 1988. Mr.
Hennecke has served as Vice President - Finance and Chief Financial Officer of
Harken since April 1998. Mr. Hennecke had previously served as Vice President
and Treasurer of Harken since June 1995. Mr. Hennecke also previously served as
Vice President - Finance for Harken's subsidiaries.
Gregory S. Porter has served as Vice President - Legal and Assistant
Secretary of Harken since September 1995. From April 1994 to September 1995,
Mr. Porter was an attorney with the law firm of Baker & McKenzie and from
September 1992 to April 1994, Mr. Porter was an attorney with the law firm of
Johnson & Gibbs.
J. Marc Lewis has served as Vice President since August 1998. From
November 1984 to August 1998, Mr. Lewis was President of Petrosource Capital
Corporation, an investment banking group with activities in the U.S. and Latin
America.
Rodger L. Ehrlish has served as Treasurer of Harken since April 1998.
Mr. Ehrlish has been employed by Harken since 1996 and previously served as Tax
Manager. Prior to 1996, Mr. Ehrlish was a C.P.A. in private practice.
Guillermo Sanchez has served as President of Harken de Colombia, Ltd.
since November, 1994.
CAUTIONARY STATEMENTS
Certain statements contained in this Annual Report, 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 following:
Price Volatility -- The revenues generated by Harken are highly
dependent upon the prices of crude oil and natural gas. Fluctuations in the
energy market make it difficult to estimate future prices of crude oil and
natural gas. Fluctuations in energy prices are caused by a number of factors,
including regional, domestic and international demand, energy legislation,
federal or state taxes (if any) on sales of crude oil and natural gas,
production guidelines established by the Organization of Petroleum Exporting
Countries ("OPEC"), and the relative abundance of supplies of alternative fuel
such as coal. Additionally, changing international economic and political
conditions may have a substantial impact upon crude oil and natural gas prices.
All of these factors are beyond the control of Harken.
Business Risks -- Harken must continually acquire or explore for and
develop new oil and gas reserves to replace those being depleted by production.
Without successful drilling or acquisition ventures, Harken's oil and gas
assets, properties and the revenues derived therefrom will decline over time.
To the extent Harken engages in drilling activities, such activities carry the
risk that no commercially viable oil or gas production will be obtained. The
cost of drilling, completing and operating wells is often uncertain. Moreover,
drilling may be curtailed, delayed or canceled as a result of many factors,
including shortage of available working capital, title problems, weather
conditions, environmental concerns, shortages of or delays in delivery of
equipment, as well as the financial instability of well operators, major
working interest owners
15
<PAGE> 16
and drilling and well servicing companies. The availability of a ready market
for Harken's oil and gas depends on numerous factors beyond its control,
including the demand for and supply of oil and gas, the proximity of Harken's
crude oil and natural gas reserves to pipelines, the capacity of such pipelines,
fluctuations in seasonal demand, the effects of inclement weather, and
government regulation. New oil and gas wells may be shut-in for lack of a market
until a gas pipeline or gathering system with available capacity is extended
into the area.
International Operations -- Harken presently conducts significant
operations in Colombia and anticipates that it will continue to conduct
operations in Colombia and other foreign countries in the future. Foreign
properties, operations or investments may be adversely affected by local
political and economic developments, exchange controls, currency fluctuations,
royalty and tax increases, retroactive tax claims, renegotiation of contracts
with governmental entities, expropriation, import and export regulations and
other foreign laws or policies governing operations of foreign-based companies,
as well as by laws and policies of the United States affecting foreign trade,
taxation and investment. In addition, as certain of Harken's operations are
governed by foreign laws, in the event of a dispute, Harken may be subject to
the exclusive jurisdiction of foreign courts or may not be successful in
subjecting foreign persons to the jurisdiction of courts in the United States.
Harken may also be hindered or prevented from enforcing its rights with respect
to a governmental instrumentality because of the doctrine of sovereign immunity.
Exploration and production activities in areas outside the United States are
also subject to the risks inherent in foreign operations, including loss of
revenue, and property and equipment as a result of hazards such as
expropriation, nationalization, war, insurrection, guerilla attack and other
political risks, some of which types of losses may not be covered by insurance.
The terms of Harken Colombia's Association Contracts with Ecopetrol
require Harken Colombia to complete certain activities by specified dates. See
"International Exploration and Development Operations - Colombia" for
additional details regarding Harken Colombia's contract obligations. If Harken
Colombia failed to comply with the terms of Association Contracts, Harken
Colombia could face termination of one or more Association Contracts by
Ecopetrol, which could have a material adverse effect on the business of
Harken.
Pursuant to the Foreign Assistance Act of 1961, the President of the
United States is required to determine whether to certify that certain
countries have cooperated with the United States, or taken adequate steps on
their own, to achieve the goals of the United Nations Convention Against
Illicit Traffic in Narcotic Drugs and Psychotropic Substances. In 1995, 1996,
1997 and 1998, the President did not certify Colombia. The 1995 and 1998
decertifications were subject to a so-called "national interest" waiver,
effectively nullifying its statutory effects. Based on the 1996 and 1997
Presidential decertification, the United States imposed substantial economic
sanctions on Colombia, including the withholding of bilateral economic
assistance, the blocking of Export-Import Bank and Overseas Private Investment
Corporation loans and political risk insurance, and the entry of the United
States votes against multilateral assistance to Colombia in the World Bank and
the InterAmerican Development Bank.
The consequences of continued and successive United States
decertifications of Colombian activities are not fully known, but may include
the imposition of additional economic sanctions on Colombia in 1999 and
succeeding years. The President also has authority to impose far-reaching
economic, trade and investment sanctions on Colombia pursuant to the
International Emergency Economic Powers Act of 1978, which powers were
exercised in 1988 and 1989 against Panama in a dispute over narcotics
trafficking activities by the Panamanian government. The Colombian government's
reaction to United States sanctions
16
<PAGE> 17
could potentially include, among other things, restrictions on the repatriation
of profits and the nationalization of Colombian assets owned by United States
entities. Accordingly, imposition of the foregoing economic and trade sanctions
on Colombia could materially affect the performance of the Common Stock and the
Company's long-term financial results.
Operating Hazards and Uninsured Risks -- The operations of Harken are
subject to the inherent risks normally associated with exploration for and
production of oil and gas, including blowouts, cratering, pollution,
environmental liabilities and fires, each of which could result in damage to or
destruction of oil and gas wells or production facilities or damage to persons
and property. As is common in the oil and gas industry, Harken is not fully
insured against all of these risks, either because insurance is not available
or because Harken has elected to self-insure due to high premium costs. The
occurrence of a significant event that is not fully insured against could have
a material adverse effect on Harken's financial condition.
Environmental Regulation -- Harken's domestic activities are subject
to various Navajo Nation, federal, state, and local laws and regulations
covering the discharge of material into the environment or otherwise relating
to protection of the environment. In particular, Harken's oil and gas
exploration, development, production, its activities in connection with storage
and transportation of liquid hydrocarbons and its use of facilities for
treating, processing, recovering, or otherwise handling hydrocarbons and wastes
therefrom are subject to stringent environmental regulation by governmental
authorities. In addition to these domestic laws and regulations, Harken's
international operations are subject to the laws, regulations and governmental
approvals of each foreign country in which it conducts activities including,
but not limited to, environmental laws and regulations governing oil and gas
operations. Such domestic and foreign laws and regulations have increased the
costs of planning, designing, drilling, installing, operating and abandoning
Harken's oil and gas wells and other facilities.
Harken has expended significant resources, both financial and
managerial, to comply with environmental regulations and permitting
requirements and anticipates that it will continue to do so in the future.
Although Harken believes that its respective operations and facilities are in
general compliance with applicable environmental laws and regulations, risks of
substantial costs and liabilities are inherent in oil and gas operations, and
there can be no assurance that significant costs and liabilities will not be
incurred in the future. Moreover, it is possible that other developments, such
as increasingly strict environmental laws, regulations and enforcement policies
thereunder, and claims for damages to property, employees, other persons and
the environment resulting from Harken's operations, could result in substantial
costs and liabilities in the future.
Imprecise Nature of Reserve Estimates -- Reserve estimates are
imprecise and may be expected to change as additional information becomes
available. Furthermore, estimates of crude oil and natural gas reserves, of
necessity, are projections based on engineering data, and there are
uncertainties inherent in the interpretation of such data as well as the
projection of future rates of production and the timing of development
expenditures. Reserve engineering is a subjective process of estimating
underground accumulations of oil and gas that cannot be measured in an exact
way, and the accuracy of any reserve estimate is a function of the quality of
available data and of engineering and geological interpretation and judgment.
Accordingly, there can be no assurance that the information regarding reserves
set forth herein will ultimately be produced. Furthermore, the value of
Harken's reserves are based on the prices Harken received for sales of oil and
gas as of December 31, 1998. The prices at which Harken was able to sell its
oil and gas on December 31, 1998, may not be reflective of the market price for
oil and gas at the time Harken ultimately produces its reserves. The market
price of oil and gas decreased substantially in 1998 and
17
<PAGE> 18
could decrease further in 1999 and subsequent years. If the market price of oil
and gas decreases from the prices Harken received on December 31, 1998, it could
have a material adverse effect on the value of Harken's reserves.
Competitive Factors in the Oil and Gas Industry -- The oil and gas
industry is highly competitive in all its phases. Competition is particularly
intense with respect to the acquisition of desirable producing properties and
the sale of crude oil and natural gas production. Harken's competitors in oil
and gas exploration, development and production include major oil companies and
numerous independent oil and gas companies, and individual producers and
operators. Many of Harken's competitors possess and employ financial and
personnel resources substantially greater than those which are available to
Harken and may, therefore, be able to pay greater amounts for desirable leases
and to define, evaluate, bid for and purchase a greater number of producing
prospects than the financial or personnel resources of Harken will permit.
Extensive Regulation -- The production of oil and gas is subject to
extensive Navajo, federal and state laws, rules, orders and regulations
governing a wide variety of matters, including the drilling and spacing of
wells, allowable rates of production, prevention of waste and pollution and
protection of the environment. In addition to the direct costs borne in
complying with such regulations, operations and revenues may be impacted to the
extent that certain regulations increase the costs of oil and gas production to
below economic levels. Although the particular regulations applicable in each
state in which operations are conducted vary, such regulations are generally
designed to ensure that oil and gas operations are carried out in a safe and
efficient manner and to ensure that similarly-situated operators are provided
with reasonable opportunities to produce their respective fair shares of
available crude oil and natural gas reserves. However, since these regulations
generally apply to all oil and gas producers, management of Harken believes
that these regulations should not put Harken at a material disadvantage to
other oil and gas producers.
Certain sales, transportation, and resales of natural gas by Harken
are subject to Navajo, federal and state laws and regulations, including, but
not limited to, the Natural Gas Act (the "NGA"), the Natural Gas Policy Act
(the "NGPA") and regulations promulgated by the Federal Energy Regulatory
Commission under the NGA, the NGPA and other statutes. The provisions of the
NGA and NGPA, as well as the regulations thereunder, are complex, and can
affect all who produce, resell, transport, purchase or consume natural gas.
18
<PAGE> 19
PROPERTIES AND LOCATIONS
Production and Revenues -- The following table shows, for the periods
indicated, operating information attributable to Harken's oil and gas
interests:
DOMESTIC
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
---------------------------------------------------------------------------------
1994 1995 1996 1997 1998
--------------- -------------- --------------- --------------- ---------------
<S> <C> <C> <C> <C> <C>
Production:
Oil (Bbls) 158,000 217,000 370,000 416,000 433,000
Natural Gas (Mcf) 426,000 810,000 1,409,000 1,922,000 2,063,000
Revenues:
Oil $ 2,552,000 $ 3,985,000 $ 7,863,000 $ 8,029,000 $ 5,508,000
Natural Gas $ 806,000 $ 1,188,000 $ 3,611,000 $ 5,331,000 $ 4,373,000
----------- ----------- ----------- ----------- -----------
Total $ 3,358,000 $ 5,173,000 $11,474,000 $13,360,000 $ 9,881,000
=========== =========== =========== =========== ===========
Unit Prices:
Oil (per Bbl) $ 16.15 $ 18.36 $ 21.25 $ 19.30 $ 12.72
Natural Gas (per Mcf) $ 1.89 $ 1.47 $ 2.56 $ 2.77 $ 2.12
Production costs per
equivalent barrel $ 6.70 $ 6.06 $ 7.33 $ 7.58 $ 7.36
Amortization per
equivalent barrel $ 6.31 $ 5.68 $ 5.58 $ 6.60 $ 6.03
</TABLE>
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<PAGE> 20
INTERNATIONAL - COLOMBIA
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
-----------------------
1998
-----------
<S> <C>
Production:
Oil (Bbls) 61,000
Natural Gas (Mcf) --
Revenues:
Oil $ 538,000
Natural Gas $ --
-----------
Total $ 538,000
===========
Unit Prices:
Oil (per Bbl) $ 8.82
Natural Gas (per Mcf) $ --
Production and transportation
costs per equivalent barrel $ 4.39
Amortization per
equivalent barrel $ 1.04
</TABLE>
Acreage and Wells -- At December 31, 1998, Harken owned interests in
the following oil and gas wells and acreage.
DOMESTIC
<TABLE>
<CAPTION>
Gross Wells Net Wells Developed Acreage Undeveloped Acreage
-------------------- -------------------- -------------------- --------------------
STATE Oil Gas Oil Gas Gross Net Gross Net
------ ------ ------ ------ ------ ------ ------ ------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Arizona 1 5 1.00 5.00 4,690 4,417 -- --
Arkansas 58 -- 30.94 -- 4,040 2,256 -- --
New Mexico 20 -- 6.60 -- 1,430 718 -- --
Texas 219 88 204.70 39.50 28,442 19,143 2,520 242
Louisiana 24 1 13.54 0.72 2,430 -- 1,822 1,367
Utah 33 1 27.80 1.00 9,916 4,007 433 408
------ ------ ------ ------ ------ ------ ------ ------
Total 355 95 284.58 46.22 50,948 30,541 4,775 2,017
====== ====== ====== ====== ====== ====== ====== ======
</TABLE>
20
<PAGE> 21
INTERNATIONAL - COLOMBIA
<TABLE>
<CAPTION>
Gross Wells Net Wells
-------------------------- -------------------------- Gross
Contract Area Oil Gas Oil Gas Undeveloped Acreage
--------- --------- --------- --------- -------------------
<S> <C> <C> <C> <C> <C>
Alcaravan 2 -- 1.20 -- 210,000
Bocachico 3 -- 2.16 -- 192,000
Bolivar 2 -- 1.60 -- 250,000
Cambulos -- -- -- -- 300,000
Los Olmos -- -- -- -- 374,000
Miradores -- -- -- -- 32,000
--------- --------- --------- --------- ---------
Total 7 -- 4.96 -- 1,358,000
========= ========= ========= ========= =========
</TABLE>
Drilling Activity -- A well is considered "drilled" when it is
completed. A productive well is completed when permanent equipment is installed
for the production of oil or gas. A dry hole is completed when it has been
plugged as required and its abandonment is reported to the appropriate
government agency. International activity relates to Harken's Colombian
operations. International net wells drilled information is reflected net of
certain development finance and operating agreements, and does not consider any
potential future participation by Ecopetrol. The following tables summarize
certain information concerning Harken's drilling activity:
DOMESTIC
<TABLE>
<CAPTION>
NUMBER OF GROSS WELLS DRILLED
-------------------------------------------------------------------------------------
Exploratory Developmental Total
---------------------------- ---------------------------- -------------------------
Productive Drilled Productive Drilled Productive Drilled
---------- ------- ---------- ------- ---------- -------
<S> <C> <C> <C> <C> <C> <C>
1996 8 11 7 7 15 18
1997 9 9 10 10 19 19
1998 2 2 8 8 10 10
---------- ------- ---------- ------- ---------- -------
Total 19 22 25 25 44 47
========== ======= ========== ======= ========== =======
</TABLE>
<TABLE>
<CAPTION>
NUMBER OF NET WELLS DRILLED
-------------------------------------------------------------------------------------
Exploratory Developmental Total
---------------------------- ---------------------------- -------------------------
Productive Drilled Productive Drilled Productive Drilled
---------- ------- ---------- ------- ---------- -------
<S> <C> <C> <C> <C> <C> <C>
1996 0.19 0.53 1.25 1.25 1.44 1.78
1997 0.19 0.19 3.41 3.41 3.60 3.60
1998 0.02 0.02 1.00 1.00 1.02 1.02
---------- ------- ---------- ------- ---------- -------
Total 0.40 0.74 5.66 5.66 6.06 6.40
========== ======= ========== ======= ========== =======
</TABLE>
21
<PAGE> 22
INTERNATIONAL - COLOMBIA
<TABLE>
<CAPTION>
NUMBER OF GROSS WELLS DRILLED
-------------------------------------------------------------------------------------
Exploratory Developmental Total
---------------------------- ---------------------------- -------------------------
Productive Drilled Productive Drilled Productive Drilled
---------- ------- ---------- ------- ---------- -------
<S> <C> <C> <C> <C> <C> <C>
1996 1 1 -- -- 1 1
1997 2 2 -- -- 2 2
1998 3 4 -- -- 3 4
---------- ------- ---------- ------- ---------- -------
Total 6 7 -- -- 6 7
========== ======= ========== ======= ========== =======
</TABLE>
<TABLE>
<CAPTION>
NUMBER OF NET WELLS DRILLED
-------------------------------------------------------------------------------------
Exploratory Developmental Total
---------------------------- ---------------------------- -------------------------
Productive Drilled Productive Drilled Productive Drilled
---------- ------- ---------- ------- ---------- -------
<S> <C> <C> <C> <C> <C> <C>
1996 .60 .60 -- -- .60 .60
1997 1.24 1.24 -- -- 1.24 1.24
1998 3.00 3.50 -- -- 3.00 3.50
---------- ------- ---------- ------- ---------- -------
Total 4.84 5.34 -- -- 4.84 5.34
========== ======= ========== ======= ========== =======
</TABLE>
EMPLOYEES
As of December 31, 1998, Harken had 132 employees. Harken has
experienced no work stoppages or strikes as a result of labor disputes and
considers relations with its employees to be satisfactory. Harken maintains
group life, medical, dental, surgical and hospital insurance plans for its
employees.
ITEM 2. PROPERTIES
See "Item 1. Business" for discussion of oil and gas properties and
locations.
Harken currently leases approximately 26,100 square feet of office
space for use as its corporate headquarters in Irving Texas. The facilities are
leased through February 2003.
Harken has two additional offices in Houston, Texas and Bogota
Colombia. Harken leases approximately 16,900 square feet of office space in
Houston, Texas, which lease runs through September 2001, and approximately
15,000 square feet of office space in Bogota, Colombia, which lease runs
through April 2000.
Harken expects to move its corporate headquarters to Houston, Texas in
May 1999. Harken has leased approximately 26,900 square feet of office space
for use as its new corporate headquarters, which lease runs through July 2004.
22
<PAGE> 23
ITEM 3. LEGAL PROCEEDINGS
In September 1997, Harken Exploration Company, a wholly-owned
subsidiary of Harken, was served with a lawsuit filed in Amarillo, Texas in
Federal District Court for the Northern District of Texas styled D. E. Rice and
Karen Rice, as Trustees for the Rice Family Living Trust vs. Harken Exploration
Company. The Rice Family Living Trust ("Rice") is a surface land owner in
Hutchinson County, Texas. Rice has alleged that oil and saltwater spills from
Harken Exploration Company's equipment and wells have polluted and otherwise
damaged its property. Rice is seeking payment of costs to prevent, minimize and
mitigate the alleged oil pollution, costs to restore and repair the land and
vegetation, costs to decontaminate the ground and surface water, interest,
attorneys' fees, and punitive damages. Furthermore, Rice has requested that
Harken Exploration Company be enjoined from producing any oil or gas from its
lands. Rice has alleged that remediation of all of the pollution on its land
will cost approximately $40,000,000. Harken believes that this lawsuit is wholly
without merit. Harken has asserted numerous defenses, all of which Harken
believes are meritorious. Harken intends to defend itself vigorously. The
lawsuit is expected to go to trial in 1999. In Harken management's opinion, the
results of the lawsuit will not have a material 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 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
None.
PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS
PRICE RANGE OF COMMON STOCK
Since March 18, 1991, the Common Stock has been listed on the American
Stock Exchange and traded under the symbol HEC. At December 31, 1998, there
were approximately 3,600 holders of record of Common Stock.
23
<PAGE> 24
The following table sets forth, for the periods indicated, the
reported high and low closing sales prices of the Common Stock on the American
Stock Exchange Composite Tape.
<TABLE>
<CAPTION>
Prices
-------------------------------------------
High Low
---------------- -----------------
<S> <C> <C> <C>
1997 -- First Quarter $ 5.44 $ 2.88
Second Quarter 7.13 4.00
Third Quarter 7.00 5.25
Fourth Quarter 7.50 4.50
1998 -- First Quarter $ 7.18 $ 5.87
Second Quarter 6.43 4.56
Third Quarter 4.69 3.06
Fourth Quarter 3.93 1.81
</TABLE>
DIVIDENDS
Harken has not paid any cash dividends on the Common Stock since its
organization and it is not contemplated that any cash dividends will be paid on
shares of Common Stock in the foreseeable future.
24
<PAGE> 25
ITEM 6. SELECTED FINANCIAL INFORMATION AND OTHER DATA
<TABLE>
<CAPTION>
1994 1995 1996
------------ ------------ ------------
<S> <C> <C> <C>
Revenues $ 4,895,000 $ 7,471,000 $ 13,921,000
Income (loss) from continuing operations $ (8,211,000) $ (1,625,000) $ (341,000)
Income (loss) from discontinued operations $ (223,000) $ -- $ --
Net income (loss) $ (8,434,000) $ (1,625,000) $ (341,000)
Basic income (loss) per common share:
Income (loss) from continuing operations $ (0.14) $ (0.02) $ (0.00)
Discontinued operations (0.00) -- --
------------ ------------ ------------
Net income (loss) $ (0.14) $ (0.02) $ (0.00)
============ ============ ============
Diluted income (loss) per common share:
Income (loss) from continuing operations $ (0.14) $ (0.02) $ (0.00)
Discontinued operations (0.00) -- --
------------ ------------ ------------
Net income (loss) $ (0.14) $ (0.02) $ (0.00)
============ ============ ============
Current assets $ 6,840,000 $ 10,531,000 $ 49,838,000
Current liabilities $ 5,133,000 $ 4,918,000 $ 6,061,000
------------ ------------ ------------
Working capital $ 1,707,000 $ 5,613,000 $ 43,777,000
============ ============ ============
Total assets $ 28,960,000 $ 70,794,000 $123,000,000
Long-term obligations:
Long-term obligations and other liabilities $ -- $ 25,726,000 $ 38,600,000
Redeemable preferred stock $ 1,868,000 $ -- $ --
------------ ------------ ------------
Total $ 1,868,000 $ 25,726,000 $ 38,600,000
============ ============ ============
Stockholders' equity $ 21,959,000 $ 40,150,000 $ 78,339,000
Redeemable preferred stock outstanding 186,760 -- --
Series F preferred stock outstanding (3) -- -- --
Weighted average common stock outstanding (1):
Basic 59,722,853 65,041,063 85,021,894
Diluted 59,722,853 65,041,063 85,021,894
Proved reserves at end of year (2):
Bbls of oil 1,521,000 3,523,000 7,389,000
Mcf of gas 7,148,000 29,203,000 34,160,000
Future net cash inflows $ 20,178,000 $ 99,193,000 $234,164,000
Present value (discounted at 10% per year) $ 11,712,000 $ 58,776,000 $142,243,000
<CAPTION>
1997 1998
------------ ------------
<S> <C> <C>
Revenues $ 18,768,000 $ 19,770,000
Income (loss) from continuing operations $ 189,000 $(52,456,000)
Income (loss) from discontinued operations $ -- --
Net income (loss) $ 189,000 $(52,456,000)
Basic income (loss) per common share:
Income (loss) from continuing operations $ 0.00 $ (0.42)
Discontinued operations $ -- $ --
------------ ------------
Net income (loss) $ 0.00 $ (0.42)
============ ============
Diluted income (loss) per common share:
Income (loss) from continuing operations $ 0.00 $ (0.42)
Discontinued operations $ -- $ --
------------ ------------
Net income (loss) $ 0.00 $ (0.42)
============ ============
Current assets $126,392,000 $144,163,000
Current liabilities $ 15,752,000 $ 20,426,000
------------ ------------
Working capital $110,640,000 $123,737,000
============ ============
Total assets $238,513,000 $304,538,000
Long-term obligations:
Long-term obligations and other liabilities $ 39,880,000 $ 85,000,000
Redeemable preferred stock $ -- $ --
------------ ------------
Total $ 39,880,000 $ 85,000,000
============ ============
Stockholders' equity $157,881,000 $179,942,000
Redeemable preferred stock outstanding -- --
Series F preferred stock outstanding (3) -- 15,000
Weighted average common stock outstanding (1):
Basic 109,087,697 130,252,727
Diluted 111,933,589 130,252,727
Proved reserves at end of year (2):
Bbls of oil 13,088,000 31,522,000
Mcf of gas 33,293,000 108,451,000
Future net cash inflows $144,543,000 $226,974,000
Present value (discounted at 10% per year) $ 90,580,000 $144,851,000
</TABLE>
(1) Harken has adopted Statement of Financial Accounting Standards No.
128, "Earnings per Share", effective December 15, 1997, and as a
result restated certain prior year weighted average shares outstanding
calculations.
(2) These estimated reserve quantities, future net revenues and present
value figures are related to proved reserves located in the United
States and Colombia. No consideration has been given to probable or
possible reserves. Oil and gas year end prices were held constant
except where future price increases were fixed and determinable under
existing contracts and government regulations. At December 31, 1998,
Harken has included proved oil and gas reserve information related to
its Colombian operations, specifically associated with a portion of
its Alcaravan, Bocachico, Bolivar and Los Olmos Contract areas. (See
"Notes to Consolidated Financial Statements, Note 5 - International
Operations" contained in Part II, Item 8.)
(3) See "Notes to Consolidated Financial Statements, Note 8 --
Stockholders' Equity" contained in Part II, Item 8, for a discussion
of Harken Series F Preferred Stock.
25
<PAGE> 26
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS.
OVERVIEW
During the three year period ended December 31, 1998, Harken has
significantly expanded its exploration, development and production operations
in both the United States and Colombia and now additionally has an agreement to
initiate operations in Costa Rica. Despite recent downturns in crude oil and
natural gas prices, Harken remains financially strong, with a growing asset
base and significant cash reserves available for future investment
opportunities. Harken has reflected an increase in total revenues, total
assets, net working capital and stockholders' equity for each of the past four
years. Harken's total assets have increased from approximately $71 million at
December 31, 1995 to approximately $305 million at December 31, 1998, and its
total net capital expenditures related to its Colombia oil and gas properties
has totaled approximately $112 million over the past 3 years. Harken's proved
oil and gas reserves have increased from a present value of $58.8 million at
December 31, 1995 to $144.9 million at December 31, 1998, including
approximately $120.2 million of proved reserves in Colombia. In May 1998,
Harken placed $85 million of 5% European Notes, which mature in 2003. Largely
as a result of the 5% European Notes issuance, as well as other financing
efforts, Harken's working capital has increased during the year to
approximately $123.7 million at December 31, 1998. Harken's strategy continues
to focus on acquiring and producing proven domestic operations, while
increasing its investment in higher potential international operations in
Colombia, and beginning in 1999, Costa Rica.
Harken continues to manage and expand its diversified domestic oil and
gas operations. With the May 1998 acquisition of the Bargo Properties, Harken
now has operations in southern Louisiana in addition to its existing operations
in Texas, New Mexico, Arkansas and the Four Corners area. Harken continues to
pursue additional domestic acquisition opportunities, particularly during this
period of depressed prices. Domestic oil and gas revenues decreased from $14.1
million to $10.4 million during the years ended December 31, 1997 and 1998,
respectively, despite increases in equivalent barrel production volumes during
each year, due to a sharp decline in oil and gas prices during 1998.
Harken reported a net loss of approximately $52.5 million for the year
ended December 31, 1998, as Harken recorded a total non-cash valuation allowance
of its U.S. domestic oil and gas properties of approximately $50.5 million
during the year. The valuation allowance was caused by the decline in oil and
gas prices in addition to downward reserve revisions. These factors together
resulted in a reduction in the present value of Harken's net cash flows from
U.S. domestic proved reserves causing a writedown of capitalized costs in excess
of this value. Harken has reflected net losses in four of the last five years
due to a number of factors, including the writedown or impairment of oil and
gas properties or other assets, the fluctuating nature of crude oil and natural
gas prices, and the administrative and executive expenses associated with
Harken's emerging international operations. While Harken expects that oil and
gas revenues from its Colombian operations will contribute to its total
revenues, Harken's operating results will continue to remain dependent upon the
prices of crude oil and natural gas. Accordingly, as Harken's future
profitablilty cannot yet be assured, Harken has offset all of its deferred tax
assets on its balance sheets with a valuation allowance.
Internationally, during 1998, Harken recorded its initial crude oil
sales from its Colombia operations, consisting of oil revenues from Harken's
Bolivar, Bocachico and Alcaravan Contract areas. During March 1998, Harken
signed an additional Association Contract in Colombia with Ecopetrol, bringing
the total
26
<PAGE> 27
number of Association Contracts to six and increasing the total number of acres
operated in Colombia by Harken as of December 31, 1998 to approximately
1,358,000.
RESULTS OF OPERATIONS
The following table presents certain data for Harken's continuing
operations for the years ended December 31, 1996, 1997 and 1998. A discussion
follows of certain significant factors which have affected Harken's operating
results during such periods. This discussion should be read in conjunction with
Harken's Consolidated Financial Statements and related footnotes contained in
Part II, Item 8.
<TABLE>
<CAPTION>
Year Ended December 31,
----------------------------------------
DOMESTIC EXPLORATION AND
PRODUCTION OPERATIONS 1996 1997 1998
---- ---- ----
<S> <C> <C> <C>
Oil sales revenues $7,863,000 $8,029,000 $5,508,000
Oil volumes in barrels 370,000 416,000 433,000
Oil price per barrel $ 21.25 $ 19.30 $ 12.72
Gas sales revenues $3,611,000 $5,331,000 $4,373,000
Gas volumes in mcf 1,409,000 1,922,000 2,063,000
Gas price per mcf $ 2.56 $ 2.77 $ 2 .12
Gas plant revenues $ 867,000 $ 753,000 $ 513,000
COLOMBIAN EXPLORATION AND
PRODUCTION OPERATIONS
Oil sales revenues $ -- $ -- $ 538,000
Oil volumes in barrels -- -- 61,000
Oil price per barrel $ -- $ -- $ 8.82
OTHER REVENUES
Interest Income $1,401,000 $4,626,000 $8,454,000
Other Income $ 179,000 $ 29,000 $ 384,000
</TABLE>
FOR THE YEAR ENDED DECEMBER 31, 1998 COMPARED WITH THE PRIOR YEAR
DOMESTIC OPERATIONS
Gross oil and gas revenues during 1997 and 1998 were generated by
Harken's domestic exploration and production operations, consisting of the Four
Corners area operations primarily on the Navajo Indian Reservation, the onshore
areas of the Texas Gulf Coast, 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.
27
<PAGE> 28
Gross oil revenues decreased 31% to $5.5 million in 1998 compared to
$8.0 million in 1997 primarily due to the sharp decline in oil prices, which
averaged $6.58 less per barrel during 1998 compared to the prior year period.
During the first quarter of 1999, prices have continued to remain lower than
prices received during 1998. Oil revenues decreased despite the increased
production volumes from the acquisition of the Bargo Properties in May 1998.
Gross gas revenues decreased 18% to $4.4 million in 1998 compared to
$5.3 million for the prior year period despite the increased production
resulting from the acquisition of the Cal-T Properties in August 1997 and
increased South Texas production. The decrease in gas revenues was primarily
caused by the decrease in average gas prices received during 1998, as Harken
received an overall average price of $2.77 per mcf of gas production during
1997 compared to $2.12 per mcf received during 1998. Harken also reflected
decreased gas production from certain of its Texas Panhandle properties during
the first quarter of 1998 as many of the properties experienced numerous
temporary operational curtailments.
Gas plant revenues decreased from $753,000 in 1997 to $513,000 in 1998
due to an annual re-determination whereby HSW's interest in the Aneth Gas Plant
was slightly reduced based on each owner's throughput volume.
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
increased 2% to $5.7 million during 1998 compared to $5.6 million for the prior
year period primarily as a result of the above mentioned acquisitions of the
Cal-T and Bargo Properties. Oil and gas operating expenses increased as a
percentage of related oil and gas revenues due primarily to the decline in oil
and gas prices during 1998.
Harken expects that oil and gas production volumes from its existing
domestic operations will remain flat or decrease slightly in 1999 as compared
to 1998 due to the normal production declines experienced in its operating
areas. Such declines are expected to be minimized by Harken's continuing
workover efforts and exploration and development drilling during 1999. Harken
expects that 1999 domestic oil revenues will further decrease from 1998 levels
if crude oil prices remain at late 1998 and early 1999 levels. Harken's oil and
gas revenues are highly dependent upon product prices, which Harken is unable
to predict. Harken is reviewing its existing domestic operations to identify
specific properties for which operating expenses can be reduced, or which are
uneconomic in the current price environment.
COLOMBIAN OPERATIONS
During the second quarter of 1998, Harken initiated trucking
operations from its Bocachico Contract operations and also began sales of
trucked volumes produced during the drilling of the Catalina #1 and Olivo #1
wells on the Bolivar Contract area. Harken initiated trucking of long-term test
production from its Bolivar and Alcaravan Contract operations in the third
quarter of 1998. Harken's Colombian oil revenues are expected to increase
throughout 1999, particularly with the expected first half of 1999 connection
of the Estero wells in the Alcaravan Contract area to the Phase I Pipeline, and
the anticipated construction and late 1999 completion of the Bolivar pipeline
and facility project. Harken reflected no oil and gas revenues or operating
expenses from its Colombian operations prior to the second quarter of 1998.
28
<PAGE> 29
INTEREST AND OTHER INCOME
Interest and other income increased significantly during 1998 compared
to the prior year period due to interest earned by Harken on its invested
funds, including the net proceeds from the June 1997 issuance of $70 million of
5 1/2% European Notes, and the May 1998 issuance of $85 million of 5% European
Notes, and from proceeds from the EnCap Development Finance Agreement and the
European Development Finance Agreements. Harken generated approximately $8.5
million of interest income during 1998, compared to approximately $4.6 million
of interest income during the prior year period. Harken's cash balances, which
include investments in short-term marketable debt securities, are expected to
decrease during 1999 and 2000 as such funds are used to support Harken's capital
expenditure plans. Harken intends to pursue other financing arrangements during
1999 and the decrease in existing cash balances and related interest income
could be mitigated or offset if such efforts are successful.
OTHER COSTS AND EXPENSES
General and administrative expenses increased 51% from $6.2 million
for 1997 to $9.4 million in 1998, related to Harken's increased executive,
corporate and administrative personnel costs associated with Harken's expanding
overall operations. In addition, Harken has increased its corporate office
space to accommodate the growth in personnel. Harken has taken steps during the
last half of 1998 to reduce general and administrative expenses, including
reducing staff and making plans to consolidate its corporate office locations.
Depreciation and amortization expense increased during 1998 compared
to the prior year period due to increases in equivalent barrel production
during the year related to domestic acquisitions. Domestic oil and gas
depreciation and amortization decreased on a per equivalent barrel basis,
however, to $6.03 during 1998 compared to $6.60 during 1997. Depreciation and
amortization on oil and gas properties is calculated on a unit of production
basis in accordance with the full cost method of accounting for oil and gas
properties. In addition, Harken's depreciation on other property has increased
as a result of Harken's expanding operations. During the third and fourth
quarters of 1998, Harken recorded non-cash valuation allowances on its U.S.
domestic oil and gas properties totaling approximately $50.5 million. The
valuation allowances were based upon the present value, discounted at ten
percent, of Harken's domestic reserves, which declined primarily due to the
lower oil and gas prices being received during the year. In accordance with the
full cost method of accounting for oil and gas properties, on a
country-by-country basis, net capitalized costs in excess of the present value
of the related reserves are charged to expense.
Interest expense and other decreased significantly during 1998
compared to the prior year period despite the June 1997 issuance of the 5 1/2%
European Notes and the May 1998 issuance of the 5% European Notes due to the
increase in the amounts of interest capitalized to Harken's Colombian
exploration activity.
FOR THE YEAR ENDED DECEMBER 31, 1997 COMPARED WITH THE PRIOR YEAR
DOMESTIC OPERATIONS
Oil revenues increased 2% from $7.9 million in 1996 to $8.0 million in
1997, although oil production volumes reflected a 12% increase in 1997 compared
to 1996. The decrease in the average oil
29
<PAGE> 30
price to $19.30 per barrel during 1997 had a negative impact on revenues and
cash flow from oil production, particularly in December 1997, where average oil
prices were $16.76 per barrel.
Gas revenues increased 48% from $3.6 million in 1996 to $5.3 million
in 1997. The increase was due primarily to increased production (36% increase)
attributable to the acquisition of the Cal-T Properties which were acquired in
August 1997 and additional production from several successful wells drilled in
the Texas Gulf Coast region. The Cal-T Properties contributed gas revenues of
approximately $374,000 and Texas Gulf Coast gas revenues increased $494,000
during 1997 compared to 1996. The increase in gas revenues in 1997 also
reflected higher natural gas prices in 1997 as compared to 1996. The average
price of gas sold in 1997 increased to $2.77 per mcf from $2.56 per mcf in
1996.
Gas plant revenues decreased 13% from $867,000 to $753,000 in 1997 due
to an annual redetermination whereby HSW's interest in the Aneth Gas Plant was
slightly reduced based on each owner's throughput volume. At year end 1997, the
Aneth Gas Plant experienced a temporary plant shutdown due to a series of
explosions and fires that caused damage to a portion of the Plant.
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, conservation, and property taxes and Navajo severance and
possessory interest taxes. Domestic oil and gas operating expenses increased 26%
to $5.6 million during 1997 compared to $4.4 million for the prior year period
which reflects the acquisitions of additional oil and gas properties,
particularly the acquisition of the Cal-T Properties, which has increased oil
and gas operating expenses by approximately $242,000, and due to the inclusion
of twelve months of expenses associated with the July 1996 acquisition of the
EnerVest Properties, which increased oil and gas operating expenses by
approximately $535,000.
COLOMBIAN OPERATIONS
Harken reflected no oil and gas revenues or operating expenses from
its Colombian operations during 1996 or 1997.
INTEREST AND OTHER INCOME
Interest and other income increased significantly during 1997 compared
to 1996 due to the interest earned by Harken on its invested funds, including
the net proceeds from the issuance of European Notes, which are initially
maintained and invested in separate interest bearing bank accounts (the
"Segregated Accounts") and from cash received from a development finance
agreement related to Harken's Colombian operations. Harken generated
approximately $4.6 million of interest income during 1997, compared to
approximately $1.4 million of interest income in 1996.
OTHER COSTS AND EXPENSES
General and administrative expenses increased 37% during 1997 compared
to 1996 and also increased as a percentage of oil and gas revenues. General and
administrative expenses remained constant, however, as a percentage of
consolidated revenues at 33% in 1996 and 1997, as such general and
administrative expense increases have related to Harken's executive, corporate
and administrative personnel costs associated with Harken's expanding overall
operations.
30
<PAGE> 31
Depreciation and amortization expense increased during 1997 compared
to 1996 consistent with the increased production levels during 1997 and due to
a decrease in Harken's domestic oil and gas reserve volumes at December 31,
1997. The decrease in reserve volumes was primarily caused by the decrease in
crude oil prices in December 1997. As a result, oil and gas depreciation and
amortization increased on a per equivalent barrel basis to $6.60 during 1997
compared to $5.58 during 1996. Depreciation and amortization on oil and gas
properties is calculated on a unit of production basis in accordance with the
full cost method of accounting for oil and gas properties.
Interest expense and other decreased slightly during 1997 compared to
1996 despite the increase in European Notes due to the increasing amounts of
interest capitalizable to Harken's Colombian oil and gas property costs.
European Notes generated interest expense of approximately $964,000, net of
amounts of interest capitalized, and approximately $455,000 of net amortization
of issuance costs associated with the European Notes.
LIQUIDITY AND CAPITAL RESOURCES
Harken's working capital at December 31, 1998 was approximately $123.7
million, versus approximately $110.6 million at December 31, 1997. The increase
in cash and working capital resulted primarily from approximately $81.8 million
of net proceeds from the 5% European Notes issued in May 1998 and from the
receipt of approximately $9.8 million pursuant to Development Finance
Agreements. In addition, Harken's operations provided approximately $8.4
million of cash flow during 1998. Such activity was sufficient to fund capital
expenditures of approximately $97 million during 1998. Harken's cash resources
at December 31, 1998 totaled approximately $141 million and are available for
its ongoing exploration, development and acquisition efforts both
internationally and domestically. In January 1999, Harken elected to redeem all
of its Series F Preferred stock for approximately $25.2 million, as the holder
presented its shares of the Series F Preferred stock for conversion to Harken
common stock. 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. In 1997, Harken's cash
capital expenditures totaled approximately $37 million, including $30 million
related to exploration and development in Colombia. Harken's 1998 Colombian
capital expenditures totaled approximately $68 million. Harken also 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 area. In
addition, Harken intends to continue to pursue domestic acquisition
opportunities. Harken intends to fund such acquisitions, if any are consummated,
through a combination of cash on hand, issuances of debt or equity securities.
Harken anticipates that full development of its Colombian reserves
will take several years and will also require extensive production facilities,
transportation pipelines and development activity which will require
significant additional capital expenditures. The ultimate amount of such
expenditures cannot be presently predicted. There can be no assurances that
Harken will have adequate funds available to it to fund all of its Colombian
activities.
31
<PAGE> 32
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. Also, Harken believes that lower
oil prices have increased the availability of rigs at attractive prices. As a
result, Harken has decided not to renew the long-term contract for two of its
leased rigs in anticipation of more favorable short-term alternatives. While
this might temporarily slow down the drilling pace on the Bolivar Contract
area, it is anticipated that drilling would accelerate once such a credit
facility is active.
Terms of each of the Association Contracts entered into between Harken
de Colombia, Ltd. and Ecopetrol commit Harken to perform certain activities in
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. For a detailed discussion of each Association
Contract and its required work obligations, see Part I, Item 1. "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 will have
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. Additionally, up to $8 million will be committed by Harken to fund the
initial work program obligations 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 current depressed pricing environment.
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.
32
<PAGE> 33
All proceeds from the sale of previous European Notes issuances were
initially paid to a Trustee pursuant to a Trust Indenture and held in
Segregated Accounts to be maintained for Harken's benefit. In order for any of
the proceeds to be released from the Segregated Accounts, Harken was required
to demonstrate that an Asset Value Coverage Ratio (as defined in the Trust
Indenture) test would continue to be met after such release of funds. During
June 1998, all proceeds held in the Segregated Accounts were released following
the conversion of these European Notes into shares of Harken common stock.
There is no Segregated Account requirement related to the proceeds from the 5%
European Notes. For a detailed discussion of the 5% European Notes see "Notes
to Consolidated Financial Statements, Note 7 -- European Convertible Notes
Payable."
Interest payments related to the 5% European Notes will be funded from
cash flow from operations or existing cash balances.
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 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.
33
<PAGE> 34
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.
At the present time, it is not known whether the remaining
Institutional Investors or Harken will exercise their rights to convert the
Institutional Interest into Harken common stock, nor can Harken determine the
number of shares of Harken common stock which would be required to be issued in
the event that Harken or the remaining Institutional Investors elect to convert
the Institutional Participation into shares of Harken common stock.
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 has reflected this 5% per annum increase
throughout 1998 as accretion related to preferred stock in its Consolidated
Statements of Operations. Such accretion amount is reflected in Harken's
calculation of net income (loss) attributed to common stock.
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 is less than $4.80, or (b)
on or after January 9, 1999, the then applicable conversion price is less than
$4.80, for an amount equal to the number of shares of Harken common stock that
would otherwise be issuable upon conversion multiplied by the closing price of
Harken common stock on the conversion date.
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 the
Series F Preferred. Under the terms of the new agreement with RGC, Harken was
to issue shares of a new Series G Convertible Preferred Stock (the "Series G
Preferred") in exchange for the outstanding Series F Preferred. The closing of
the exchange was subject to Harken filing a registration statement with the
Securities and Exchange Commission. The terms of the new Series G Preferred
were to be substantially the same as the Series F Preferred, except that the
fixed price conversion dates and the mandatory conversion date were to be
extended one year. As discussed above, prior to the closing of the exchange,
the holder of the Series F Preferred presented its shares for conversion to
Harken common stock, and Harken elected to redeem the issue for approximately
$25.2 million rather than issue additional shares of Harken common stock.
Harken has reflected an additional amount of approximately $1.3 million of
accretion related to preferred stock which represents the portion of the
ultimate redemption value generated in December 1998. Harken will reflect the
additional accretion amount of approximately $8.4 million in the calculation of
net income (loss) attributed to common stock during the first quarter of 1999.
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.
34
<PAGE> 35
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 $2.7 million at December 31, 1998
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, servers and UNIX based computers 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
35
<PAGE> 36
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 these 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 Harkens 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 convent their systems in a timely
manner. Assuming that such third parties are not or do not become Year 2000
compliant 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
36
<PAGE> 37
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.
37
<PAGE> 38
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
The following financial statements appear on pages 39 through 76 in
this report.
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
Report of Independent Public Accountants...........................................................39
Consolidated Balance Sheets -- December 31, 1997 and 1998.........................................40
Consolidated Statements of Operations --
Years ended December 31, 1996, 1997 and 1998.....................................................41
Consolidated Statements of Stockholders' Equity --
Years ended December 31, 1996, 1997 and 1998.....................................................42
Consolidated Statements of Cash Flows --
Years ended December 31, 1996, 1997 and 1998.....................................................43
Notes to Consolidated Financial Statements........................................................44
</TABLE>
38
<PAGE> 39
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
To the Stockholders and Board of Directors of Harken Energy Corporation:
We have audited the accompanying consolidated balance sheets of Harken
Energy Corporation (a Delaware corporation) and subsidiaries as of December 31,
1997 and 1998, and the related consolidated statements of operations,
stockholders' equity and cash flows for each of the three years in the period
ended December 31, 1998. These financial statements are the responsibility of
the Company's management. Our responsibility is to express an opinion on these
financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of
material misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements. An audit
also includes assessing the accounting principles used and significant
estimates made by management, as well as evaluating the overall financial
statement presentation. We believe that our audits provide a reasonable basis
for our opinion.
In our opinion, the financial statements referred to above present
fairly, in all material respects, the financial position of Harken Energy
Corporation and subsidiaries as of December 31, 1997 and 1998, and the results
of their operations and their cash flows for each of the three years in the
period ended December 31, 1998, in conformity with generally accepted
accounting principles.
ARTHUR ANDERSEN LLP
Dallas, Texas,
February 19, 1999
39
<PAGE> 40
HARKEN ENERGY CORPORATION AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
ASSETS
December 31,
--------------------------------
1997 1998
------------- -------------
<S> <C> <C>
Current Assets:
Cash and temporary investments $ 85,740,000 $ 141,545,000
Cash in segregated accounts 37,771,000 --
Accounts receivable, net 2,175,000 1,605,000
Related party notes receivable 295,000 398,000
Prepaid expenses and other current assets 411,000 615,000
------------- -------------
Total Current Assets 126,392,000 144,163,000
Property and Equipment:
Oil and gas properties, using the full cost method of accounting:
Evaluated 90,185,000 161,579,000
Unevaluated 27,193,000 48,216,000
Facilities, gas plants and other property 8,325,000 14,864,000
Less accumulated depreciation and amortization (18,905,000) (74,759,000)
------------- -------------
Total Property and Equipment, net 106,798,000 149,900,000
Other Assets, net 5,323,000 10,475,000
------------- -------------
$ 238,513,000 $ 304,538,000
============= =============
LIABILITIES AND STOCKHOLDERS' EQUITY
Current Liabilities:
Trade payables $ 6,268,000 $ 12,496,000
Accrued liabilities and other 8,668,000 7,350,000
Revenues and royalties payable 816,000 580,000
------------- -------------
Total Current Liabilities 15,752,000 20,426,000
European Convertible Notes Payable 39,880,000 85,000,000
Deferred Revenue 25,000,000 19,170,000
Commitments and Contingencies (Note 14)
Stockholders' Equity:
Series F Preferred Stock, $1.00 par value; 15,000 shares authorized and
issued at December 31, 1998 -- 15,000
Common stock, $0.01 par value; 175,000,000 and 225,000,000 shares
authorized, respectively; 121,811,534 and 134,758,830 1,218,000 1,348,000
shares issued, respectively
Additional paid-in capital 248,770,000 327,498,000
Retained deficit and other comprehensive income (92,107,000) (146,367,000)
Treasury stock, at cost, 700,000 shares held at December 31, 1998 -- (2,552,000)
------------- -------------
Total Stockholders' Equity 157,881,000 179,942,000
------------- -------------
$ 238,513,000 $ 304,538,000
============= =============
</TABLE>
The accompanying Notes to Consolidated Financial Statements
are an integral part of these Statements.
40
<PAGE> 41
HARKEN ENERGY CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
<TABLE>
<CAPTION>
Year Ended December 31,
--------------------------------------------------
1996 1997 1998
------------- ------------- -------------
<S> <C> <C> <C>
Revenues:
Oil and gas operations $ 12,341,000 $ 14,113,000 $ 10,932,000
Interest and other income 1,580,000 4,655,000 8,838,000
------------- ------------- -------------
13,921,000 18,768,000 19,770,000
------------- ------------- -------------
Costs and Expenses:
Oil and gas operating expenses 4,438,000 5,581,000 5,988,000
General and administrative expenses, net 4,537,000 6,222,000 9,404,000
Depreciation and amortization 3,595,000 5,183,000 5,319,000
Valuation allowance -- -- 50,518,000
Interest expense and other, net 1,692,000 1,530,000 963,000
------------- ------------- -------------
14,262,000 18,516,000 72,192,000
------------- ------------- -------------
Income (loss) before income taxes (341,000) 252,000 (52,422,000)
Income tax expense -- 63,000 34,000
------------- ------------- -------------
Net income (loss) $ (341,000) $ 189,000 $ (52,456,000)
============= ============= =============
Accretion related to preferred stock -- -- (1,846,000)
------------- ------------- -------------
Net income (loss) attributed to
common stock $ (341,000) $ 189,000 $ (54,302,000)
============= ============= =============
Income (loss) per common share:
Basic income (loss) per common share $ (0.00) $ 0.00 $ (0.42)
============= ============= =============
Weighted average shares outstanding 85,021,894 109,087,697 130,252,727
============= ============= =============
Diluted income (loss) per common share $ (0.00) $ 0.00 $ (0.42)
============= ============= =============
Weighted average shares outstanding 85,021,894 111,933,589 130,252,727
============= ============= =============
</TABLE>
The accompanying Notes to Consolidated Financial Statements are
an integral part of these Statements.
41
<PAGE> 42
HARKEN ENERGY CORPORATION AND SUBSIDIARIES
CONSOLIDATED CONDENSED STATEMENTS OF STOCKHOLDERS' EQUITY
<TABLE>
<CAPTION>
Additional
Preferred Common Paid-In Treasury
Stock Stock Capital Stock
------------- ------------- ------------- -------------
<S> <C> <C> <C> <C>
Balance, December 31, 1995 $ -- $ 759,000 $ 136,435,000 $ (4,997,000)
Issuance of common stock, net -- 90,000 22,090,000 3,607,000
Conversions of European notes
payable -- 90,000 12,666,000 --
Comprehensive income (loss):
Equity adjustment from
foreign currency translation -- -- -- --
Net loss -- -- -- --
Total comprehensive loss
------------- ------------- ------------- -------------
Balance, December 31, 1996 -- 939,000 171,191,000 (1,390,000)
Issuance of common stock, net -- 77,000 20,208,000 --
Conversions of European notes
payable -- 202,000 57,371,000 1,390,000
Comprehensive income:
Equity adjustment from
foreign currency translation -- -- -- --
Net income -- -- -- --
Total comprehensive income
------------- ------------- ------------- -------------
Balance, December 31, 1997 -- 1,218,000 248,770,000 --
Issuance of common stock, net -- 51,000 25,110,000 --
Treasury shares purchased -- -- -- (2,552,000)
Issuance of preferred stock 15,000 -- 14,437,000 --
Accretion of preferred stock -- -- 1,846,000 --
Conversions of European notes
payable -- 79,000 37,335,000 --
Comprehensive income (loss):
Equity adjustment from
foreign currency translation -- -- -- --
Net loss -- -- -- --
Total comprehensive loss
------------- ------------- ------------- -------------
Balance, December 31, 1998 $ 15,000 $ 1,348,000 $ 327,498,000 $ (2,552,000)
============= ============= ============= =============
</TABLE>
<TABLE>
<CAPTION>
Accumulated
Other
Retained Comprehensive
Deficit Income (Loss) Total
------------- ------------- -------------
<S> <C> <C> <C>
Balance, December 31, 1995 $ (92,047,000) $ -- $ 40,150,000
Issuance of common stock, net -- -- 25,787,000
Conversions of European notes
payable -- -- 12,756,000
Comprehensive income (loss):
Equity adjustment from
foreign currency translation -- (13,000)
Net loss (341,000) --
Total comprehensive loss (354,000)
------------- ------------- -------------
Balance, December 31, 1996 (92,388,000) (13,000) 78,339,000
Issuance of common stock, net -- -- 20,285,000
Conversions of European notes
payable -- -- 58,963,000
Comprehensive income:
Equity adjustment from
foreign currency translation -- 105,000
Net income 189,000 --
Total comprehensive income 294,000
------------- ------------- -------------
Balance, December 31, 1997 (92,199,000) 92,000 157,881,000
Issuance of common stock, net -- -- 25,161,000
Treasury shares purchased -- -- (2,552,000)
Issuance of preferred stock -- -- 14,452,000
Accretion of preferred stock (1,846,000) -- --
Conversions of European notes
payable -- -- 37,414,000
Comprehensive income (loss):
Equity adjustment from
foreign currency translation -- 42,000
Net loss (52,456,000) --
Total comprehensive loss (52,414,000)
------------- ------------- -------------
Balance, December 31, 1998 $(146,501,000) $ 134,000 $ 179,942,000
============= ============= =============
</TABLE>
The accompanying Notes to Consolidated Financial Statements are
an integral part of these Statements.
42
<PAGE> 43
HARKEN ENERGY CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
Year Ended December 31,
---------------------------------------------
1996 1997 1998
------------- ------------- -------------
<S> <C> <C> <C>
Cash flows from operating activities:
Net income (loss) $ (341,000) $ 189,000 $ (52,456,000)
Adjustments to reconcile net income (loss) to net cash provided by
operating activities:
Depreciation and amortization 3,595,000 5,183,000 5,319,000
Forgiveness of related party note receivable 232,000 -- --
Valuation allowance -- -- 50,518,000
Provision for doubtful accounts 25,000 -- 26,000
Accretion of note payable 234,000 -- --
(Gain) loss on sales of assets and other 72,000 -- --
Amortization of European note issuance costs 504,000 555,000 131,000
Change in assets and liabilities:
(Increase) decrease in accounts receivable (592,000) (217,000) 474,000
Increase (decrease) in trade payables and other 1,169,000 4,956,000 4,354,000
------------- ------------- -------------
Net cash provided by operating activities 4,898,000 10,666,000 8,366,000
------------- ------------- -------------
Cash flows from investing activities:
Proceeds from sales of assets 192,000 7,000 54,000
Capital expenditures, net (17,213,000) (37,082,000) (97,085,000)
Investor advances, net 5,800,000 32,953,000 11,882,000
------------- ------------- -------------
Net cash used in investing activities (11,221,000) (4,122,000) (85,149,000)
------------- ------------- -------------
Cash flows from financing activities:
Transfer from segregated account cash 10,877,000 64,564,000 37,615,000
Proceeds from issuances of common stock, net of issuance costs 3,276,000 5,680,000 2,075,000
Repayments of notes payable and long-term obligations (1,258,000) -- --
Proceeds from issuance of preferred stock, net -- -- 14,452,000
Proceeds from issuance of European notes, net -- -- 81,800,000
Treasury shares purchased -- -- (2,552,000)
Investment in segregated account cash, net (1,173,000) (903,000) (802,000)
------------- ------------- -------------
Net cash provided by financing activities 11,722,000 69,341,000 132,588,000
------------- ------------- -------------
Net increase in cash and temporary investments 5,399,000 75,885,000 55,805,000
Cash and temporary investments at beginning of year 4,456,000 9,855,000 85,740,000
------------- ------------- -------------
Cash and temporary investments at end of year $ 9,855,000 $ 85,740,000 $ 141,545,000
============= ============= =============
</TABLE>
The accompanying Notes to Consolidated Financial Statements are
an integral part of these Statements.
43
<PAGE> 44
HARKEN ENERGY CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1996, 1997 AND 1998
(1) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Principles of Consolidation and Presentation -- The Consolidated
Financial Statements include the accounts of Harken Energy Corporation (a
Delaware corporation) and all of its wholly-owned subsidiaries ("Harken") after
elimination of significant intercompany balances and transactions. Interests in
oil and gas properties jointly owned and operated pursuant to a Joint
Operations Agreement are proportionately consolidated. Data is as of December
31 of each year or for the year then ended and dollar amounts in tables are in
thousands unless otherwise indicated.
The 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 those estimates. Certain
prior year amounts have been reclassified to conform with the 1998
presentation.
Cash and Temporary Investments -- For purposes of the Consolidated
Statements of Cash Flows, Harken considers all highly liquid investments
purchased with an original maturity of three months or less to be cash
equivalents. Gross cash outflows for purchases of held-to-maturity investments
during 1997 and 1998 totaled $446,328,000 and $2,656,105,000, respectively.
Gross cash inflows for maturities of such investments during 1997 and 1998
totaled $365,124,000 and $2,615,072,000, respectively. Harken paid cash for
interest in the amounts of $464,000, $0 and $2,138,000 during 1996, 1997 and
1998, respectively. All significant non-cash investing and financing activities
are discussed in Notes 2, 6, 7, and 8 -- Acquisitions, Development Finance and
Operating Agreements, European Convertible Notes Payable and Stockholders'
Equity.
Harken includes in cash and temporary investments certain balances
which are restricted to use for specific project expenditures, collateral or
for distribution to outside interest owners and are not available for general
working capital purposes. Such restricted cash amounts totaled approximately
$6,861,000 and $2,891,000 at December 31, 1997 and 1998, respectively. In
addition, Harken excludes from cash and temporary investments certain proceeds
received from the issuance of European Convertible Notes Payable that remain in
the Segregated Accounts. See Note 7 -- European Convertible Notes Payable for
further discussion.
Accounts Receivable -- Harken maintains a reserve for potential losses
in collection of its accounts receivable. The allowance for doubtful accounts
was $327,000 and $380,000 as of December 31, 1997 and 1998, respectively.
Concentrations of Credit Risk -- Although Harken's cash and temporary
investments and accounts receivables are exposed to credit loss, Harken does
not believe such risk to be significant. Cash and temporary investments,
including cash in Segregated Accounts, includes investments in high-grade,
short-term securities, placed with highly rated financial institutions. Most of
Harken's accounts receivable are
44
<PAGE> 45
from a broad and diverse group of industry partners, many of which are major
oil and gas companies and, as a whole, do not in total represent a significant
credit risk.
Property and Equipment -- Harken follows the full cost accounting
method to account for the costs incurred in the acquisition, exploration,
development and production of oil and gas reserves. Facilities, gas plants and
other property are depreciated on the straight-line method over their estimated
useful lives ranging from four to twenty years.
Other Assets -- Harken includes in other assets certain deferred
commissions and issuance costs associated with the issuance of European
Convertible Notes Payable. See Note 7 -- European Convertible Notes Payable for
further discussion. At December 31, 1997, such deferred costs totaled
$4,088,000 net of $439,000 of accumulated amortization. At December 31, 1998,
such deferred costs totaled $5,937,000 net of $515,000 of accumulated
amortization. At December 31, 1998, other assets also included $2,800,000 of
oilfield material and equipment inventory.
Accrued Liabilities and Other -- Accrued liabilities and other at
December 31, 1997, includes an amount of $4,255,000 related to prepaid investor
advances, $1,785,000 related to certain operational or regulatory contingent
liabilities related to Harken's domestic operations and other accrued expense
liabilities of $2,628,000. The December 31, 1998 balance includes an amount of
$725,000 related to prepaid investor advances, $2,714,000 related to certain
operational or regulatory contingent liabilities associated with Harken's
domestic operations and other accrued expense liabilities of $3,911,000.
Deferred Revenue -- In connection with certain Development Finance
Agreements, Harken has received approximately $35 million in exchange for net
profits interests in three prospects to be drilled in Colombia. See Note 6 --
Development Finance and Operating Agreements for further discussion. Consistent
with the provisions of Statement of Financial Accounting Standards #19,
"Financial Accounting and Reporting by Oil and Gas Producing Companies", Harken
has accounted for these transactions as conveyances of net profits interests
and has recorded the sales proceeds as deferred revenue. As Harken drills these
prospects, the cost capitalized in the depletion base is reduced by an
applicable amount of deferred revenue.
Colombian Operations -- Harken's operations include oil and gas
exploration and development efforts in Colombia pursuant to certain Colombian
Association Contracts. See further discussion at Note 5 -- International
Operations. Harken accounts for its activities in Colombia using the United
States dollar as the functional currency. At December 31, 1997 and 1998, Harken
reflects its exploration activities in Colombia primarily as a capitalized cost
of oil and gas properties. See further discussion at Notes 4 and 13 -- Oil and
Gas Properties and Oil and Gas Disclosures.
Capitalization of Interest -- Harken capitalizes interest on certain
oil and gas exploration and development costs which are classified as
unevaluated costs, or which have not yet begun production, and certain costs
associated with facilities under construction. During 1996, Harken recorded
interest expense of $1,673,000, net of $370,000 of interest which was
capitalized to Harken's oil and gas properties. During 1997, Harken recorded
interest expense of $1,530,000, net of $1,416,000 of interest which was
capitalized to Harken's oil and gas properties. During 1998, Harken recorded
interest expense of $963,000, net of $3,543,000 of interest which was
capitalized to Harken's oil and gas properties.
45
<PAGE> 46
General and Administrative Expenses -- Harken reflects general and
administrative expenses net of operator overhead charges and other amounts
billed to joint interest owners. General and administrative expenses are net of
$61,000, $30,000 and $22,000 for such amounts during 1996, 1997 and 1998,
respectively.
Valuation Allowance on Oil and Gas Properties -- The capitalized costs
of proved oil and gas properties are subject to a "ceiling test", which limits
such costs on a country-by-country basis to the estimated present value,
discounted at a ten percent interest rate, of future net cash flows from
related proved reserves, based on current economic and operating conditions. If
capitalized costs exceed this limit, the excess is charged to depreciation,
depletion and amortization. Application of these rules during periods of
relatively low oil and gas prices, even if of short-term duration, may result
in write-downs.
In the last half of 1998, Harken recorded a non-cash valuation
allowance on its U.S. domestic oil and gas properties of $50,518,000 due to the
significant decline in its estimated present value of future net cash flows as
a result of low oil and gas prices and downward U.S. domestic reserve revisions
during the last half of 1998.
(2) ACQUISITIONS
Acquisitions of Additional Four Corners Property Interests -- During
the second quarter of 1996, Harken acquired additional interests in its oil and
gas operations in the Four Corners area of Arizona, Utah and New Mexico (the
"Four Corners Properties"). The acquisition of the seller's interest raised
Harken's total interest in the Four Corners Properties from approximately 82%
to approximately 94% of Harken's total operated interest. The purchase
consideration paid by Harken to the sellers consisted of $338,000 cash plus the
issuance of approximately 509,000 shares of restricted Harken common stock.
Harken also assumed certain liabilities of the sellers relating to the property
interests. On June 30, 1997, Harken acquired the remaining operating interest
in the Four Corners Properties for approximately $450,000 cash. Harken also
assumed certain liabilities of the seller relating to the property interests.
All of the above acquisitions of the additional interests in the Four Corners
Properties have been accounted for under the purchase method of accounting.
Acquisitions of Texas Properties -- On December 21, 1995, pursuant to
a Purchase and Sale Agreement (the "Panhandle Purchase and Sale Agreement"),
Harken Exploration Company ("Harken Exploration"), a wholly-owned subsidiary of
Harken, acquired working interests in certain producing properties located in
the panhandle region of Texas ("Panhandle Properties"). As consideration for
the purchase of these interests, Harken issued, along with other consideration,
2.5 million shares of restricted Harken common stock (the "Purchase Shares"),
$2.5 million in cash and a note payable by Harken Exploration to the seller for
an initial face amount of $13 million. Harken had the option over the following
two years to repay all or part of this $13 million note with restricted Harken
common stock at conversion rates tied to future trading prices of Harken common
stock. The $13 million note was to mature and become payable in two stages,
with each maturity amount subject to certain adjustments. On July 11, 1996,
Harken Exploration entered into an exchange agreement with the holder of the
$13 million note, whereby it was exchanged for, among other consideration, the
issuance of 5,150,000 restricted shares of Harken common stock. The acquisition
of the Panhandle Properties has been accounted for under the purchase method of
accounting. With the July 11, 1996 exchange agreement resulting in the issuance
of 5,150,000 restricted shares of Harken common stock with a market value of
approximately $10,429,000 in full payment of the
46
<PAGE> 47
outstanding balance on the note, Harken adjusted the recording of the initial
purchase price of the Panhandle Properties to give effect to the finalization of
the consideration issued in the purchase.
On August 29, 1997, Harken, along with Harken Exploration, purchased
working interests in oil and gas properties located in the panhandle region of
Texas (the "Cal-T Properties"). The purchase price of approximately $3,416,000
consisted primarily of 565,000 shares of Harken common stock. The acquisition
of the Cal-T Properties has been accounted for under the purchase method of
accounting.
Acquisition of EnerVest Properties -- On July 10, 1996, Harken, along
with Harken Exploration, purchased working interests in certain producing oil
and gas properties located in the Magnolia region of Arkansas and in the
Carlsbad region of New Mexico (the "EnerVest Properties") from EnerVest
Acquisition-II Limited Partnership ("EnerVest"). The purchase price of
approximately $15,200,000, plus the assumption of certain operational
liabilities relating to these properties, was paid in the form of $5,000,000
cash paid at closing, 1,550,000 shares of Harken common stock which were issued
following closing, and 1,400,000 shares of Harken common stock which were
issued in March 1997 pursuant to a Resolution and Settlement Agreement, whereby
the contingent issuance of additional shares of Harken common stock provided
for in the Asset Purchase and Sale Agreement was eliminated. Harken also issued
to EnerVest warrants to purchase, over a period of three years from closing,
300,000 restricted shares of Harken common stock at an exercise price of $2.75
per share.
Acquisition of Bargo Properties -- On May 19, 1998, Harken, along with
Harken Exploration Company, 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
$4,000,000 less certain adjustments, is payable by Harken to the sellers if the
sellers are able to obtain new or renewal leases for certain of the Bargo
Properties. Such adjustments may include unresolved title issues on certain
leases and an allowance of up to a maximum of $750,000 for environmental and
regulatory compliance. The amount of the additional consideration is currently
being negotiated with the sellers and is payable at Harken's option in the form
of additional shares of Harken common stock or cash. See Note 11 - Related
Party Transactions for a discussion of the relationship between Harken and the
sellers.
Pro Forma Information -- The following unaudited pro forma combined
condensed statement of operations for the year ended December 31, 1997 gives
effect to the acquisition of the Cal-T Properties and the Bargo Properties and
the issuance of the European 5 1/2% Senior Convertible Notes Payable (See Note
7 -- European Convertible Notes Payable for further discussion) as if each had
been consummated at January 1, 1997. The following unaudited pro forma combined
condensed statement of operations for the year ended December 31, 1998 gives
effect to the acquisition of the Bargo Properties and the issuance of the
European 5% Senior Convertible Notes Payable as if each had been consummated at
January 1, 1998.
The unaudited pro forma data is presented for illustrative purposes
only and is not necessarily indicative of the operating results that would have
occurred had the transactions been consummated at the dates indicated, nor are
they indicative of future operating results. The unaudited pro forma data does
not reflect the effect of the various conversions of European Notes, the
capitalization of certain amounts of interest on the European Notes or the
interest income earned from investment of the European Note proceeds.
47
<PAGE> 48
PRO FORMA COMBINED CONDENSED STATEMENT OF OPERATIONS
FOR THE YEAR ENDED DECEMBER 31, 1997
(UNAUDITED)
<TABLE>
<CAPTION>
Period from
January 1,
1997
to Closing
Date of
Acquisition
---------------
Cal-T Bargo
Harken Properties Properties Pro Forma
Actual Actual Actual Adjustments Pro Forma
----------- ------------- ----------- ------------ -----------
<S> <C> <C> <C> <C> <C>
Oil and gas revenue $ 14,113 $ 911 $ 3,304 $ $ 18,328
Other revenues 4,655 -- -- 4,655
----------- ------------- ----------- ------------ -----------
Total Revenues 18,768 911 3,304 22,983
----------- ------------- ----------- ------------ -----------
Oil and gas operating expenses 5,581 665 1,607 7,853
General and administrative expenses, net 6,222 -- -- 6,222
Depreciation and amortization 5,183 -- -- 1,634(1) 6,817
Interest expense and other, net 1,530 -- -- 2,049(2) 3,579
----------- ------------- ----------- ------------ -----------
Total Expenses 18,516 665 1,607 3,683 24,471
----------- ------------- ----------- ------------ -----------
Income tax expense 63 -- -- (63)(3) --
----------- ------------- ----------- ------------ -----------
Net income (loss) $ 189 $ 246 $ 1,697 $ (3,620) $ (1,488)
=========== ============= =========== ============ ===========
Basic net income (loss) per share
attributable to common stock $ 0.00 $ (0.01)
=========== ===========
Basic weighted average shares
outstanding 109,087,697 112,177,235
=========== ===========
</TABLE>
PRO FORMA ADJUSTMENTS-PRO FORMA COMBINED CONDENSED STATEMENT OF OPERATIONS -
YEAR ENDED DECEMBER 31, 1997
(1) Pro forma entry to adjust actual depreciation and amortization expense on
oil and gas properties for the acquired interests to the depreciation and
amortization expense calculated on a consolidated basis.
(2) Pro forma entry to reflect interest and amortization expense incurred on
the 5 1/2% European Notes Payable.
(3) Pro forma entry to eliminate federal and state income tax expense.
48
<PAGE> 49
PRO FORMA COMBINED CONDENSED STATEMENT OF OPERATIONS
FOR THE YEAR ENDED DECEMBER 31, 1998
(UNAUDITED)
<TABLE>
<CAPTION>
Period from
January 1,
1998 to
Closing Date
of Acquisition
---------------
Bargo
Harken Properties Pro Forma
Actual Actual Adjustments Pro Forma
----------- --------------- ----------- -------------
<S> <C> <C> <C> <C>
Oil and gas revenue $ 10,932 $ 1,178 $ $ 12,110
Other revenues 8,838 -- 8,838
----------- --------------- ----------- -------------
Total Revenues 19,770 1,178 20,948
----------- --------------- ----------- -------------
Oil and gas operating expenses 5,988 485 6,473
General and administrative expenses, net 9,404 -- 9,404
Depreciation and amortization 5,319 -- 508(1) 5,827
Valuation allowance 50,518 -- 50,518
Interest expense and other, net 963 -- 2,069(2) 3,032
----------- --------------- ----------- -------------
Total Expenses 72,192 485 2,577 75,254
----------- --------------- ----------- -------------
Income tax expense 34 -- 34
----------- --------------- ----------- -------------
Net income (loss) $ (52,456) $ 693 $ (2,577) $ (54,340)
=========== =============== =========== =============
Basic net income (loss) per share
attributable to common stock $ (0.42) $ (0.43)
=========== =============
Basic weighted average shares
outstanding 130,252,727 131,778,423
=========== =============
</TABLE>
PRO FORMA ADJUSTMENTS-PRO FORMA COMBINED CONDENSED STATEMENT OF OPERATIONS -
YEAR ENDED DECEMBER 31, 1998
(1) Pro forma entry to adjust actual depreciation and amortization expense on
oil and gas properties for the acquired interests to the depreciation and
amortization expense calculated on a consolidated basis.
(2) Pro forma entry to reflect interest and amortization expense incurred on
the 5% European Notes Payable.
49
<PAGE> 50
(3) INVESTMENTS
Investments are classified by Harken management at the time of
purchase as either held-to-maturity, available-for-sale or trading. Such
classification is reevaluated as of each balance sheet date. Included within
cash and temporary investments and cash in segregated accounts as of December
31, 1997 and 1998 are certain investments in marketable debt securities having
maturities of sixty days or less. 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. During
1997 and 1998, Harken held no securities which were classified as
available-for-sale or trading.
Held-to-maturity securities -- The amortized cost and estimated fair
value of the marketable debt securities are as follows:
<TABLE>
<CAPTION>
December 31,
----------------------------------------
1997 1998
------------------ ------------------
<S> <C> <C>
Included in cash and temporary investments
Cost $ 50,906 $ 124,398
Estimated Fair Value $ 50,973 $ 124,914
Included in Segregated Accounts
Cost $ 37,184 $ --
Estimated Fair Value $ 37,242 $ --
</TABLE>
Harken includes in cash and temporary investments and cash in
segregated accounts other cash and cash equivalent amounts in addition to the
above marketable debt securities.
(4) OIL AND GAS PROPERTIES
Harken follows the full cost accounting method to account for the
costs incurred in the acquisition, exploration, development and production of
oil and gas reserves. Under this method, all costs, including internal costs,
directly related to acquisition, exploration and development activities are
capitalizable as oil and gas property costs. Harken capitalized $2,167,000,
$3,126,000 and $6,781,000 of internal costs, net of reimbursements from joint
interest owners, directly related to these activities in 1996, 1997 and 1998,
respectively. Such costs include office and personnel costs of Harken's
international and domestic exploration field offices and does not include any
corporate overhead. Harken also accrues costs of dismantlement, restoration and
abandonment to the extent that such costs, in the aggregate, are anticipated to
exceed the aggregate salvage value of equipment and facilities removed from
producing wells and other facilities. See Note 13 -- Oil and Gas Disclosures
for further discussion.
The capitalized costs of oil and gas properties, excluding unevaluated
properties, are amortized on a country-by-country basis using a unit of
production method (equivalent physical units of 6 mcf of gas to each barrel of
oil) based on estimated proved recoverable oil and gas reserves. Such
amortization of U.S. domestic oil and gas properties was $5.58, $6.60 and $6.03
per equivalent barrel of oil produced during 1996, 1997 and 1998, respectively.
50
<PAGE> 51
Beginning in 1998, amortization of certain Colombia oil and gas
properties was $1.04 per equivalent barrel of oil produced in 1998. The
evaluated costs, net of accumulated depreciation, depletion and amortization,
at December 31, 1997 and 1998 include $22,754,000 and $68,742,000,
respectively, related to Colombia (see Note 5 -- International Operations for a
discussion of Colombian operations).
The unevaluated property costs at December 31, 1997 and 1998 includes
$21,413,000 and $43,844,000, respectively, related to Colombia and $5,780,000
and $4,372,000, respectively, related to U.S. domestic prospects. Amortization
of unevaluated property costs will begin when the properties become proved or
their values become impaired. Harken assesses realizability of unevaluated
properties on at least an annual basis or when there has been an indication
that an impairment in value may have occurred. Fair value of unevaluated
prospects is determined based on management's intention with regard to future
exploration and development of individually significant properties and the
ability of Harken to obtain funds to finance such exploration and development.
Under full cost accounting rules for each cost center, capitalized
costs, less accumulated amortization and related deferred income taxes, shall
not exceed an amount ("the cost ceiling") equal to the sum of (a) the present
value of future net revenues from estimated production of proved oil and gas
reserves discounted at 10%, plus (b) the cost of properties not being
amortized, plus (c) the lower of cost or estimated fair value of any unproved
properties included in the costs being amortized, less (d) any income tax
effects related to differences between the book and tax basis of the properties
involved.
The capitalized costs of proved oil and gas properties are subject to
a "ceiling test", which limits such costs, on a country-by-country basis, to
the estimated present value, discounted at a ten percent interest rate, of
future net cash flows from related proved reserves, based on current economic
and operating conditions. If capitalized costs exceed this limit, the excess is
charged to depreciation, depletion and amortization. Application of these rules
during periods of relatively low oil and gas prices, even if of short-term
duration, may result in write-downs.
In the last half of 1998, Harken recorded a non-cash valuation
allowance on its U.S. domestic oil and gas properties of approximately
$50,518,000 due to the significant decline in its estimated present value of
future net cash flows as a result of low oil and gas prices at December 31,
1998 and downward U.S. domestic reserve revisions during the last half of 1998.
Such valuation allowance on the U.S. domestic oil and gas properties was $65.03
per equivalent barrel of domestic oil produced during 1998.
(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. These Association Contracts
include the Alcaravan Contract, awarded in 1992, the Bocachico Contract,
awarded in 1994, the Cambulos Contract, awarded in 1995, the Bolivar Contract,
awarded in 1996, the Miradores Contract, awarded in December 1997, and the Los
Olmos Contract, awarded in March 1998. The Alcaravan and Miradores Contracts
currently cover a combined area of approximately 242,000 acres in the Llanos
Basin of Eastern Colombia. The Bocachico and Cambulos Contracts cover a
combined area of approximately 492,000 acres in the Middle Magdalena Valley of
Central Colombia and the Bolivar Contract covers an area of approximately
250,000 acres in the Northern Middle Magdalena Valley of Central
51
<PAGE> 52
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 February
19, 1999, Harken was in compliance with the requirements of each of the
Association Contracts, as amended. The Cambulos Association Contract requires
Harken to have drilled two wells to a depth sufficient to test productive
formations for oil and/or gas by April 16, 1999. Harken has submitted a request
to Ecopetrol to allow for the additional well depth drilled during the Islero
#1 well to substitute for the obligation to drill a second exploratory well
within the third contract year. If Harken is unable to obtain such an
extension, Harken may be required to select and relinquish a portion of the
acreage within the Cambulos Contract area, which event, in the opinion of
Harken management, would not have a material adverse effect on Harken's
business.
Under the terms of the Association Contracts, if, during the first six
years of each contract, Harken discovers one or more fields of producing oil or
gas in quantities that are economically exploitable and Ecopetrol agrees that
such field is economically exploitable (a "commercial discovery"), the term of
that contract will be extended for a period of 22 years from the date of such
commercial discovery. Upon discovery of a field capable of commercial
production, and upon commencement of production from that commercial field,
Ecopetrol will begin to reimburse Harken for 50% of Harken's successful well
costs expended up to the point of declaration of a commercial discovery plus,
in the case of the Cambulos, Bolivar, Miradores and Los Olmos Contracts, 50% of
all seismic and dry well costs incurred prior to the point of declaration of a
commercial discovery. Production from a commercial discovery will be allocated
as follows: Ecopetrol, on behalf of the Colombian government, will receive a
20% royalty interest in all production, and all production (after royalty
payments) will be allocated 50% to Ecopetrol and 50% to Harken until cumulative
production from all fields (or the particular productive field under certain of
the Association Contracts) in the Association Contract acreage reaches 60
million barrels of oil. As cumulative production increases in excess of 60
million barrels of oil, Ecopetrol's share of production will increase
progressively (to a maximum of 75% under certain of the Association Contracts)
with a corresponding decrease in Harken's share of production. After a
declaration of a commercial discovery, Harken and Ecopetrol will be responsible
for all future development costs and operating expenses in direct proportion to
their interest in production. For any fields that are not declared by Ecopetrol
to be a commercial discovery, Harken would retain the rights to all production
after royalty.
Harken has entered into certain development finance and operating
agreements with outside parties whereby such parties have received a beneficial
interest in certain of Harken's Colombian operations. For further discussion,
see Note 6 - Development Finance and Operating Agreements.
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 including the assignment to Harken with the Republic of Costa
Rica and is expected to be signed in the first half of 1999.
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<PAGE> 53
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, up to $8 million may be committed by Harken to fund the initial
minimum work program obligations 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-transferrable 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.
Palo Blanco Development Finance Agreements -- In June 1996, Harken,
along with Harken de Colombia, Ltd., entered into separate Development Finance
Agreements with two investors. Under the terms of the agreements, the two
investors provided an aggregate of $2,500,000 to finance the drilling of a well
on the Palo Blanco prospect in the Alcaravan Association Contract area. In
return for the $2,500,000, the investors were initially granted a beneficial
interest in 40% of the net profits from the Palo Blanco prospect which might
have been received by Harken de Colombia, Ltd. In 1996, the investors exercised
their rights under the agreement to convert one-half of their beneficial
interest into 599,988 shares of restricted Harken common stock. During the
first quarter of 1997, the investors exercised their right to convert the
remaining portion of their beneficial interest into an additional 599,988
shares of restricted Harken common stock.
Rochester Agreement -- Harken de Colombia, Ltd. has entered into an
operating agreement (the "Rochester Agreement") with Rochester Energy
Corporation ("Rochester", a Canadian corporation) pursuant to which Rochester
has paid 33 1/3% of the aggregate costs of the Estero #1 well and related
production facilities on the Palo Blanco prospect, 25% of the aggregate costs
related to the Estero #3 well, and 25% of the aggregate costs of the initial
well drilled on the Anteojos prospect, the Canacabare #1, all of which are
located within the Alcaravan Contract area, along with 25% of the aggregate
costs related to the Miradores
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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.
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
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the EnCap Participation will be equal to the quotient of (i) the Payment Amount
(less any distributions made in respect of the EnCap Participation) plus an
amount equal to 15% interest per annum on the net Payment Amount compounded
monthly (the "Invested Amount"), divided by (ii) the market price of Harken
common stock at the time of conversion. During the same two year period, Harken
also has the right to convert the EnCap Participation into shares of Harken
common stock with the number of shares of Harken common stock to be issued to
be equal to the quotient of (i) the Payment Amount (less any distribution made
in respect of the EnCap Participation) plus an amount equal to 25% interest per
annum on the net Payment Amount compounded monthly, divided by (ii) the market
price of Harken common stock at the time of conversion. Harken can also elect
to pay cash upon any conversion of the EnCap Participation in lieu of issuing
Harken common stock. The EnCap Development Finance Agreement also provides for
additional shares of Harken common stock to be issued by Harken in the event of
a conversion to the extent that the EnCap Investors do not, under certain
circumstances, realize the Invested Amount from the sale of shares of Harken
common stock issued at the conversion. See Note 11 -- Related Party
Transactions for a discussion of the relationship between Harken and the EnCap
Investors.
European Development Finance 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
Institutional Investors exercised their right to convert all their
Institutional Participation into shares of Harken common stock. Harken elected
by pay cash of approximately $2.3 million in lieu of issuing Harken common
stock.
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(7) EUROPEAN CONVERTIBLE NOTES PAYABLE
8% European Notes -- During the second quarter of 1995, Harken issued
to qualified purchasers a total of $15 million in 8% Senior Convertible Notes
(the "8% European Notes") which were to mature in May 1998. Interest on these
notes was payable semi-annually in May and November of each year to maturity or
until the 8% European Notes were converted. Such 8% European Notes were
convertible at any time by the holders into shares of Harken common stock at a
conversion price of $1.50 per share ("the 8% European Note Conversion Price").
Between September 30, 1995 and July 31, 1996, all holders of these 8% European
Notes exercised their conversion options and Harken issued an aggregate total
of 9,999,975 shares of Harken common stock pursuant to these conversions.
6 1/2% European Notes -- On July 30, 1996, Harken issued to qualified
purchasers a total of $40 million in 6 1/2% Senior Convertible Notes (the "6
1/2% European Notes") which were to mature on July 30, 2000. Such 6 1/2%
European Notes were convertible at any time by the holders into shares of
Harken common stock at a conversion price of $2.50 per share ("the 6 1/2%
European Note Conversion Price"). The 6 1/2% European Notes were also
convertible by Harken into shares of Harken common stock after one year
following issuance, if for any period of thirty consecutive days commencing on
or after November 28, 1996, the closing price of Harken common stock for each
trading day during such period shall have equaled or exceeded 135% of the 6
1/2% European Note Conversion Price (or $3.375 per share of Harken common
stock).
During the last half of 1996, holders of 6 1/2% European Notes
totaling $1,400,000 exercised their conversion option and such holders were
issued 560,000 shares of Harken common stock. In February 1997, Harken gave
notice as required under the Trust Indenture that it had met the market price
criteria necessary to call for mandatory conversion of the 6 1/2% European
Notes and on June 2, 1997 formally called the 6 1/2% European Notes for
conversion on July 31, 1997. During the first six months of 1997, holders of 6
1/2% European Notes totaling $19,300,000 exercised their conversion option and
such holders were issued 7,720,000 shares of Harken common stock. On July 31,
1997, Harken converted the remaining 6 1/2% European Notes into 7,720,000
shares of Harken common stock.
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
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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 6 1/2% European Notes
and 5 1/2% European Notes, net of commissions and issuance costs, were each
initially paid to a Trustee under the terms of a Trust Indenture covering each
issue and held in separate interest bearing Trust accounts (the "Segregated
Accounts") to be maintained for Harken's benefit until the Trustee was
presented with evidence of sufficient asset value, as defined in the Trust
Indenture, held by Harken to permit an advance of a portion of the proceeds.
Until all of the 5 1/2% European Notes were converted, Harken was to maintain
an Asset Value Coverage Ratio as defined in the Trust Indenture. Upon the June
1998 conversion of the 5 1/2% European Notes which remained outstanding, Harken
transferred the approximately $37.6 million in the Segregated Accounts to its
main operating account.
All Segregated Account cash related to the 5 1/2% European Notes is
reflected as a current asset at December 31, 1997 as all such cash was
available according to the Trust Indenture. The initial cash proceeds received
in 1997 from the issuance of the 5 1/2% European Notes are not included in the
Statement of Cash Flows during that period because the proceeds are not
considered to be cash equivalents due to the Segregated Account requirement of
these notes. Transfers of proceeds from the Segregated Accounts are included in
cash flows from financing activities in the accompanying consolidated
statements of cash flows.
5% European Notes -- On May 26, 1998, Harken issued to qualified
purchasers a total of $85 million in 5% Senior Convertible Notes (the "5%
European Notes") which mature on May 26, 2003. In connection with the sale and
issuance of the 5% European Notes, Harken paid approximately $4,256,000 from
the 5% European Notes proceeds for commissions and issuance costs. Interest
incurred on these notes is payable semi-annually in May and November of each
year to maturity or until the 5% European Notes are converted. Such 5% European
Notes are convertible into shares of Harken common stock at an initial
conversion price of $6.50 per share, subject to adjustment in certain
circumstances ("the 5% European Note Conversion Price"). The Trust Indenture
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 February 19, 1999. The 5% European Notes are also
convertible by Harken into shares of Harken common stock after May 26, 1999, if
for any period of thirty consecutive days commencing on or after May 26, 1998,
the average of the closing prices of Harken common stock for each trading day
during such thirty-day period shall have equaled or exceeded 125% of the 5%
European Note Conversion Price (or $8.125 per share of Harken common stock).
The 5% European Notes may be redeemed for cash, at Harken's option, at par, in
whole or in part, at any time after May 26, 2002, upon not less than 30 days
notice to the holders. In addition, beginning November 26, 2002, Harken may
redeem up to 50% of the 5% European Notes in exchange for shares of Harken
common stock at a defined conversion price based on an average market price of
Harken common stock. Beginning May 26, 2003, Harken may similarly redeem all
remaining 5% European Notes. The 5% European Notes are listed on the Luxembourg
Stock Exchange.
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
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European Notes. As European Notes are converted to Harken common stock, a
pro-rata portion of these deferred costs are charged to Additional Paid-In
Capital.
(8) STOCKHOLDERS' EQUITY
Common Stock -- Harken currently has authorized 225,000,000 shares of
$.01 par common stock. At December 31, 1997 and 1998, Harken had issued
121,811,534 shares and 134,758,830 shares, respectively.
Treasury Stock -- During the third quarter of 1998, Harken purchased
700,000 shares of Harken common stock in the open market at a cost of
approximately $2,552,000. Such shares are held as treasury stock.
Issuance of European Convertible Notes Payable -- At December 31,
1995, $2,450,000 of the 8% European Notes had been converted into 1,633,327
shares of Harken common stock. In 1996, all of the remaining outstanding 8%
European Notes were converted into 8,366,648 additional shares of Harken common
stock. In connection with the issuance of the 8% European Notes, Harken issued
to the placement agents for the 8% European Notes certain non-registered
non-transferrable stock purchase warrants to purchase one million shares of
Harken common stock which were exercisable by the holders thereof at any time
on or before May 11, 1999 at an exercise price of $1.50 per share. As of
December 31, 1997, only approximately 37,000 of such warrants remained
outstanding and were subsequently exercised for shares of Harken common stock
in February 1998.
In July 1996, Harken issued to qualified purchasers a total of $40
million in 6 1/2% European Notes which were to mature on July 30, 2000. The 6
1/2% European Notes were convertible under certain terms into approximately
16,000,000 shares of Harken common stock. During the last half of 1996, holders
of 6 1/2% European Notes totaling $1,400,000 exercised their conversion option
and such holders were issued 560,000 shares of Harken common stock. During the
first six months of 1997, holders of 6 1/2% European Notes totaling an
additional $19,300,000 exercised their conversion option and such holders were
issued 7,720,000 shares of Harken common stock. On July 31, 1997, Harken
converted the remaining 6 1/2% European Notes into 7,720,000 shares of Harken
common stock. In connection with the issuance of the 6 1/2% European Notes,
Harken issued to the placement agents for the 6 1/2% European Notes certain
non-registered non-transferrable stock purchase warrants to purchase 1,280,000
shares of Harken common stock which are currently exercisable by the holders
thereof at any time on or before July 31, 1999 at an exercise price of $2.50
per share. As of December 31, 1998, all but approximately 60,000 of such
warrants had been exercised for shares of Harken common stock.
In June 1997, Harken issued to qualified purchasers a total of $70
million in 5 1/2% European Notes which were to mature on June 11, 2002. 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
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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 February 19, 1999. The 5% European Notes are also
convertible by Harken into shares of Harken common stock after May 26, 1999, if
for any period of thirty consecutive days commencing on or after May 26, 1998,
the average of the closing prices of Harken common stock for each trading day
during such thirty-day period shall have equaled or exceeded 125% of the 5%
European Note Conversion Price (or $8.125 per share of Harken common stock).
The 5% European Notes may be redeemed for cash, at Harken's option, at par, in
whole or in part, at any time after May 26, 2002, upon not less than 30 days
notice to the holders. In addition, beginning November 26, 2002, Harken may
redeem up to 50% of the 5% European Notes in exchange for shares of Harken
common stock at a defined conversion price based on an average market price of
Harken common stock. Beginning May 26, 2003, Harken may similarly redeem all
remaining 5% European Notes. 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.
Private Placements of Common Stock -- In March 1996, Harken received
$1,289,000 related to the sale of 1,040,000 shares of Harken common stock
previously held as treasury stock. In connection with certain of these
placements, Harken issued to certain financial advisors warrants to purchase an
aggregate total of 204,000 shares of Harken common stock at an average exercise
price of $1.75 per share. During 1997, these warrants were exercised for shares
of Harken common stock.
Acquisition of Texas Properties -- In December 1995, Harken
Exploration acquired certain interests in producing properties located in the
panhandle region of Texas ("Panhandle Properties") in exchange for, among other
consideration, 2.5 million shares of Harken common stock and a $13 million note
payable which was payable, at Harken's option, in shares of Harken common
stock. In July 1996, Harken Exploration entered into an exchange agreement with
the seller of the Panhandle Properties, pursuant to which Harken issued
5,150,000 restricted shares of Harken common stock in satisfaction of all
obligations owed by the subsidiary to the seller under the terms of the
Panhandle Note. On December 21, 1995, pursuant to a Purchase and Sale Agreement
(the "Panhandle Purchase and Sale Agreement"), Harken Exploration Company
("Harken Exploration"), a wholly-owned subsidiary of Harken, acquired working
interests in certain producing properties located in the panhandle region of
Texas ("Panhandle Properties"). As consideration for the purchase of these
interests, Harken issued, along with other consideration, 2.5 million shares of
restricted Harken common stock (the "Purchase Shares"), $2.5 million in cash
and a note payable by Harken Exploration to the seller for an initial face
amount of $13 million. Harken had the option over the following two years to
repay all or part of this $13 million note with restricted Harken common stock
at conversion rates tied to future trading prices of Harken common stock. The
$13 million note was to mature and become payable in two stages, with each
maturity amount subject to certain adjustments. On July 11, 1996, Harken
Exploration entered into an exchange agreement with the holder of the $13
million
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note, whereby it was exchanged for, among other consideration, the issuance of
5,150,000 restricted shares of Harken common stock. The acquisition of the
Panhandle Properties has been accounted for under the purchase method of
accounting. With the July 11, 1996 exchange agreement resulting in the issuance
of 5,150,000 restricted shares of Harken common stock with a market value of
approximately $10,429,000 in full payment of the outstanding balance on the
note, Harken adjusted the recording of the initial purchase price of the
Panhandle Properties to give effect to the finalization of the consideration
issued in the purchase. See Note 2 -- Acquisitions for further discussion.
In August, 1997, Harken acquired working interests in the Cal-T
Properties in exchange for 565,000 shares of Harken common stock. See Note 2
- -Acquisitions for further discussion.
Acquisition of EnerVest Properties -- On July 10, 1996, Harken
Exploration acquired the EnerVest Properties for a purchase price valued at
approximately $15,200,000 and the assumption of certain operational liabilities
relating to these properties. See Note 2 -- Acquisitions for further
discussion. As partial consideration for the properties, Harken issued
1,550,000 in shares of Harken common stock issued after closing. Pursuant to a
Resolution and Settlement Agreement in March 1997, Harken issued an additional
1,400,000 shares of common stock as final consideration for the properties.
Harken also issued to EnerVest warrants to purchase, for a period of three
years from closing, 300,000 restricted shares of Harken common stock at an
exercise price of $2.75 per share. During the third quarter of 1997, the holder
exercised warrants to purchase 100,000 shares of Harken common stock.
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, 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 has reflected this 5% per annum increase
throughout 1998 as accretion related to preferred stock in the accompanying
Consolidated Statements of Operations. 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.
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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 is less than $4.80, or (b)
on or after January 9, 1999, the then applicable conversion price is less than
$4.80, for an amount equal to the number of shares of Harken common stock that
would otherwise be issuable upon conversion multiplied by the closing price of
Harken common stock on the conversion date.
At each election to convert shares of Series F Preferred into Harken
common stock, RGC 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
$25,273,000 to RGC in lieu of issuing shares of Harken common stock. Harken has
reflected an additional amount of approximately $1,302,000 of accretion related
to Series F Preferred which represents the portion of the ultimate redemption
value generated in December 1998. Harken will reflect 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.
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
61
<PAGE> 62
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 December 31, 1998.
The terms of the Rights generally may be amended by Harken without
the approval of the holders of the Rights prior to the public announcement by
Harken or an Acquiring Person that a person has become an Acquiring Person.
Per Share Data -- Basic earnings per common share was computed by
dividing net income or loss attributed to common stock by the weighted average
number of shares of Harken common stock outstanding during the year. Diluted
earnings per common share for 1997 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 in any of the years
presented as their effect would have been antidilutive. The impact of the
unconverted European Investors interest and the unconverted Series F Preferred
were not included in December 31, 1998 as their effect would have been
antidilutive. Harken has adopted Statement of Financial Accounting Standards
No. 128, "Earnings per Share", effective December 15, 1997, and as a result has
restated certain prior year weighted average shares outstanding calculations,
although there was no impact on prior year loss per share amounts. A
reconciliation of the 1997 calculation of diluted earnings per common share is
as follows (not in thousands):
<TABLE>
<CAPTION>
Year Ended December 31, 1997
------------------------------------------
Weighted
Average
Income Shares Per Share
----------- ----------- ----------
<S> <C> <C> <C>
Basic earnings per common share $ 189,000 109,087,697 $ 0.00
Treasury stock method effect of:
Outstanding employee stock options -- 1,654,970 --
Outstanding warrants -- 1,190,922 --
----------- ----------- ----------
Diluted earnings per common share $ 189,000 111,933,589 $ 0.00
=========== =========== ==========
</TABLE>
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<PAGE> 63
Summary of Outstanding Warrants -- At December 31, 1998, Harken has
the following outstanding warrants available to be exercised (not in
thousands):
<TABLE>
<CAPTION>
Year of Issuance Number of Shares Exercisable Price Expiration Date
---------------- ---------------- ----------- -------------- ---------------
<S> <C> <C> <C> <C>
1996 1,784,000 1,784,000 $1.50 to $2.75 1999
1997 2,143,937 2,143,937 $1.50 to $5.00 1999
1998 1,830,624 1,830,624 $2.50 to $6.50 1999 - 2001
</TABLE>
(9) STOCK OPTION PLAN
Harken has elected to follow Accounting Principles Board Opinion No.
25, "Accounting for Stock Issued to Employees" ("APB 25") and related
Interpretations in accounting for its employee stock options because, as
discussed below, the alternative fair value accounting provided for under
Statement of Financial Accounting Standards No. 123, "Accounting for
Stock-Based Compensation", ("FAS 123") requires use of option valuation models
that were not developed for use in valuing employee stock options. Under APB
25, because the exercise price of Harken's employee stock options equals or
exceeds the market price of the underlying stock on the date of grant, no
compensation expense is recognized.
Harken's 1993 Stock Option and Restricted Plan has authorized the
grant of options to Harken employees and directors for up to 4,000,000 shares
of Harken common stock. Harken's 1996 Stock Option and Restricted Stock Plan
has authorized the grant of 8,290,000 shares of Harken common stock. All
options granted have 10-year terms and vest and become fully exercisable at the
end of 4 years of continued employment.
Pro forma information regarding net loss and loss per share is
required by FAS 123, and has been determined as if Harken had accounted for its
employee stock options under the fair value method of that Statement. The fair
value for these options was estimated at the date of grant using a
Black-Scholes option pricing model with the following weighted-average
assumptions for 1996, 1997 and 1998, respectively: risk-free interest rates of
6%, 5 1/2% and 5%; dividend yields of 0%; volatility factors of the expected
market price of Harken common stock of .614, .588 and .665; and a
weighted-average expected life to the option of 4 years.
The Black-Scholes option valuation model was developed for use in
estimating the fair value of traded options which have no vesting restrictions
and are fully transferable. In addition, option valuation models require the
input of highly subjective assumptions including the expected stock price
volatility. Because Harken's employee stock options have characteristics
significantly different from those of traded options, and because changes in
the subjective input assumptions can materially affect the fair value estimate,
in management's opinion, the existing models do not necessarily provide a
reliable single measure of the fair value of its employee stock options.
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<PAGE> 64
For purposes of pro forma disclosures, the estimated fair value of the
options is amortized to expense over the options' vesting period. Harken's pro
forma information follows (in thousands except for earnings per share
information):
<TABLE>
<CAPTION>
Year Ended December 31,
-------------------------------------------------
1996 1997 1998
---------- ---------- -----------
<S> <C> <C> <C>
Pro forma net loss attributed to
common stock $ (929) $ (2,013) $ (58,358)
Pro forma basic loss per share $ (0.01) $ (0.02) $ (0.45)
</TABLE>
The weighted average fair value of the options issued in 1996, 1997
and 1998 was $1.30, $2.63 and $2.33 per share, respectively, underlying such
option.
A summary of Harken's stock option activity, and related information
for the years ended December 31, 1996, 1997 and 1998 follows (not in
thousands):
<TABLE>
<CAPTION>
Year Ended December 31,
-----------------------------------------------------------------------------
1996 1997 1998
----------------------- ------------------------- -------------------------
Weighted- Weighted- Weighted-
Average Average Average
Exercise Exercise Exercise
Options Price Options Price Options Price
----------- ----- ----------- ----- ----------- -----
<S> <C> <C> <C> <C> <C> <C>
Outstanding-beginning of year 3,484,300 $1.76 5,224,300 $2.15 8,376,999 $3.34
Granted 1,740,000 $2.92 3,320,000 $2.92 2,979,500 $4.28
Exercised -- -- (114,051) $1.90 (81,500) $2.54
Forfeited -- -- (53,250) $2.28 (98,250) $4.83
----------- ----- ----------- ----- ----------- -----
Outstanding-end of year 5,224,300 $2.15 8,376,999 $3.34 11,176,749 $3.58
Exercisable-end of year 1,739,300 $1.77 2,773,999 $1.93 4,627,294 $2.53
</TABLE>
Exercise prices for options outstanding as of December 31, 1996 ranged
from $1.00 to $5.625. Exercise prices for options outstanding as of December
31, 1997 ranged from $1.00 to $6.00. Exercise prices for options outstanding as
of December 31, 1998 ranged from $1.00 to $6.4375.
(10) INCOME TAXES
At December 31, 1998, 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.
64
<PAGE> 65
The following is a reconciliation of the reported amount of income tax
expense for the years ended December 31, 1997 and December 31, 1998 to the
amount of income tax expense that would result from applying domestic federal
statutory tax rates to pretax income:
<TABLE>
<CAPTION>
1997 1998
---- ----
<S> <C> <C>
Tax expense using statutory rate $ 86 $ --
Application of net operating loss carryforward (86) --
Alternative minimum tax provision 27 --
State income taxes 36 34
---- ----
Current tax expense $ 63 $ 34
==== ====
</TABLE>
At December 31, 1996, total deferred tax liabilities, relating
primarily to property and equipment, decreased to approximately $3,216,000
while total deferred tax assets, primarily related to the net operating loss
carryforward, increased to approximately $23,136,000. The resulting increase in
net deferred tax assets was offset by a corresponding increase in the valuation
allowance to approximately $19,920,000 at December 31, 1996, resulting in no
impact to Harken's results of operations.
Total deferred tax liabilities, relating primarily to property and
equipment as of December 31, 1997, were approximately $680,000. Total deferred
tax assets, primarily related to the net operating loss carryforward, were
approximately $20,538,000 at December 31, 1997. The total net deferred tax
asset is offset by a valuation allowance of approximately $19,858,000 at
December 31, 1997, resulting in no impact to Harken's results of operations.
Total deferred tax liabilities, relating primarily to property and
equipment as of December 31, 1998, were approximately $753,000. Total deferred
tax assets, primarily related to the net operating loss carryforward, were
approximately $20,538,000 at December 31, 1998. The total net deferred tax
asset is offset by a valuation allowance of approximately $19,785,000 at
December 31, 1998, resulting in no impact to Harken's results of operations.
(11) RELATED PARTY TRANSACTIONS
In June 1997, Harken added to its Board of Directors a new director
who is also a managing director of EnCap Investments L.C. ("EnCap"). EnCap has
historically provided financial consulting and investment banking services to
Harken. In connection with the June 1997 placement of the 5 1/2% European
Notes, EnCap received as a financial consulting fee, $466,667 in cash, and a
warrant to purchase 50,000 shares of Harken common stock at any time after
December 11, 1997 and on or before December 11, 1999 at an exercise price of
$5.00 per share. As described in Note 6 -- Development Finance and Operating
Agreements, in October 1997, Harken entered into a Development Finance
Agreement with the EnCap Investors. EnCap serves as the general partner of
three of the EnCap Investors and the new Harken director serves as a director
of the fourth EnCap Investor. In connection with the EnCap Development Finance
Agreement, EnCap received an investment banking fee of $500,000. As described
in Note 2 - Acquisitions, in May 1998 Harken acquired the Bargo Properties from
St. Martinville Partners, Ltd. and Bargo Energy Company, which are affiliates
of EnCap. 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.
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<PAGE> 66
During 1997 and 1998, Harken 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, 1997 and
December 31, 1998 as Related Party Notes Receivable.
During 1994, an agreement was reached with an officer whereby a
certain note receivable from the officer for $520,000, together with accrued
interest, was forgiven equally over three installments dated April 1994, July
1995 and December 1996 with each installment of such forgiveness contingent
upon the officer's continued employment through the date of each such
installment. Harken included an installment of this forgiveness totaling
$232,000 per year in general and administrative expense during the year ended
December 31, 1996.
(12) OTHER INFORMATION
Quarterly Data -- (Unaudited) -- The following tables summarize
selected quarterly financial data for 1997 and 1998 expressed in thousands,
except per share amounts:
<TABLE>
<CAPTION>
Quarter Ended
----------------------------------------------- Total
March 31 June 30 September 30 December 31 Year
-------- -------- -------- -------- --------
<S> <C> <C> <C> <C> <C>
1997
Revenues $ 4,251 $ 4,027 $ 5,000 $ 5,490 $ 18,768
Gross profit 2,441 1,917 1,986 2,188 8,532
Net income 68 46 38 37 189
Basic and diluted income
per common share $ 0.00 $ 0.00 $ 0.00 $ 0.00 $ 0.00
1998
Revenues $ 4,362 $ 4,896 $ 5,754 $ 4,758 $ 19,770
Gross profit 1,318 1,288 1,407 931 4,944
Net income (loss) 84 75 (27,712) (24,903) (52,456)
Basic and diluted income (loss)
per common share $ 0.00 $ 0.00 $ (0.22) $ (0.20) $ (0.42)
</TABLE>
Significant Customers -- In 1996, two oil purchasers and a gas
purchaser represented 27%, 16% and 10%, respectively, of consolidated revenues.
In 1997, one oil purchaser represented 15% of consolidated revenues. In 1998, no
individual purchaser represented 10% or more of consolidated revenues. Harken
has secured and maintains letters of credit with significant purchasers. In
addition, management does not feel that the loss of a significant purchaser
would significantly impact the operations of Harken due to the availability of
other potential purchasers for its oil and gas production.
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<PAGE> 67
Operating 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
operate 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
production is currently sold to local purchasers with anticipated future
production levels requiring export marketing operations to purchasers outside
of the originating country. 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 three-year period ended
December 31, 1998, 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 described in Note 1 Summary of Significant Accounting
Policies. 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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<PAGE> 68
Harken's financial information for each of its operating segments is
as follows for each of the three years in the period ended December 31, 1998:
<TABLE>
<CAPTION>
NORTH SOUTH
AMERICA AMERICA TOTAL
------- ------- -----
FOR THE YEAR ENDED
DECEMBER 31, 1996:
<S> <C> <C> <C>
Operating revenues $ 12,341 $ -- $ 12,341
Interest and other income 898 682 1,580
Depreciation and amortization 3,540 55 3,595
Interest expense and other, net 970 722 1,692
Income tax expense -- -- --
Segment profit (loss) 697 (1,038) (341)
Capital expenditures 18,896 9,161 28,057
Total assets at end of year 90,331 32,669 123,000
FOR THE YEAR ENDED
DECEMBER 31, 1997:
Operating revenues $ 14,113 $ -- $ 14,113
Interest and other income 2,327 2,328 4,655
Depreciation and amortization 5,102 81 5,183
Interest expense and other, net 720 810 1,530
Income tax expense 63 -- 63
Segment profit (loss) 1,197 (1,008) 189
Capital expenditures 6,413 34,709 41,122
Total assets at end of year 130,953 107,560 238,513
FOR THE YEAR ENDED
DECEMBER 31, 1998:
Operating revenues $ 10,394 $ 538 $ 10,932
Interest and other income 4,611 4,227 8,838
Depreciation and amortization 5,136 183 5,319
Valuation allowance 50,518 -- 50,518
Interest expense and other, net 598 365 963
Income tax expense 34 -- 34
Segment profit (loss) (52,940) 484 (52,456)
Capital expenditures 23,968 68,449 92,417
Total assets at end of year 108,938 195,600 304,538
</TABLE>
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<PAGE> 69
(13) OIL AND GAS DISCLOSURES
Costs Incurred in Property Acquisition, Exploration and Development
Activities:
<TABLE>
<CAPTION>
Year Ended December 31,
-----------------------------------------
1996 1997 1998
---- ---- ----
<S> <C> <C> <C>
DOMESTIC COSTS INCURRED:
Acquisition of properties
Evaluated $16,316 $ 3,896 $11,744
Unevaluated -- -- 8,778
Exploration 162 170 2,577
Development 2,418 2,347 869
------- ------- -------
Total domestic costs incurred $18,896 $ 6,413 $23,968
======= ======= =======
INTERNATIONAL COSTS INCURRED:
Acquisition of properties
Evaluated $ -- $ 4,115 $ 903
Unevaluated -- -- 6,313
Exploration 9,161 30,594 61,233
Development -- -- --
------- ------- -------
Total international costs incurred $ 9,161 $34,709 $68,449
======= ======= =======
</TABLE>
International costs incurred during 1996, 1997 and 1998 relate to
Harken's Colombian operations.
Capitalized Costs Relating to Oil and Gas Producing Activities:
<TABLE>
<CAPTION>
December 31,
-------------------------------------------------
1996 1997 1998
--------- --------- ---------
<S> <C> <C> <C>
CAPITALIZED COSTS:
Unevaluated international properties $ 3,656 $ 21,413 $ 43,844
Unevaluated domestic properties 6,610 5,780 4,372
Evaluated international properties 5,802 22,754 68,772
Evaluated domestic properties 60,188 67,431 92,807
--------- --------- ---------
Total capitalized costs 76,256 117,378 209,795
Less accumulated depreciation and
amortization (8,069) (12,928) (68,157)
--------- --------- ---------
Net capitalized costs $ 68,187 $ 104,450 $ 141,638
========= ========= =========
</TABLE>
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<PAGE> 70
Oil and Gas Reserve Data -- (Unaudited) -- The following information is
presented with regard to Harken's proved oil and gas reserves. Such reserve
information excludes Harken's share of the future cash flows from the Aneth Gas
Plant, which is part of Harken's Four Corners Properties. The reserve values and
cash flow amounts reflected in the following reserve disclosures are based on
prices received as of year end. During 1996, 1997 and 1998, Harken consummated
certain acquisition transactions resulting in additions to its domestic proved
oil and gas reserves. (See Note 2 -- Acquisitions for further discussion). As of
December 31, 1998, Harken has included no proved reserves related to its
Cambulos or Miradores Association Contracts. As Harken identifies proved
reserves associated with its Cambulos or Miradores Association Contracts, or
identifies proved reserves from additional prospects within its Alcaravan,
Bocachico, Bolivar or Los Olmos Association Contracts, such reserves will be
added in the year of their discovery. Colombian reserves reflect Harken's net
interest after consideration for certain development finance and operating
agreements and additionally reflect the net Harken interest assuming full
participation by Ecopetrol. If any of Harken's producing fields are considered
by Ecopetrol not to be a commercial discovery, Harken's share of such reserves
could be increased accordingly. As of December 31, 1998, Harken has not applied
to Ecopetrol for a declaration of a commercial discovery relating to any of its
proved Colombian reserves. For further discussion of Harken's Colombian
operations, see Note 5 -- International Operations. Harken has reflected no
reserves related to its Costa Rica operations.
Proved oil and gas reserves are defined as the estimated quantities of
crude oil, natural gas, and natural gas liquids which geological and
engineering data demonstrate with reasonable certainty to be recoverable in
future years from known reservoirs under existing economic and operating
conditions. Reservoirs are considered proved if economic productivity is
supported by either actual production or conclusive formation tests. The area
of a reservoir considered proved includes that portion delineated by drilling
and defined by gas-oil and/or oil-water contacts, if any, and the immediately
adjoining portions not yet drilled, but which can be reasonably judged as
economically productive on the basis of available geological and engineering
data. Reserves which can be produced economically through application of
improved recovery techniques are included in the "proved" classification when
successful testing by a pilot project, or the operation of an installed program
in the reservoir, provides support for the engineering analysis on which the
project or program was based.
The reliability of reserve information is considerably affected by several
factors. Reserve information is imprecise due to the inherent uncertainties in,
and the limited nature of, the data base upon which the estimating of reserve
information is predicated. Moreover, the methods and data used in estimating
reserve information are often necessarily indirect or analogical in character
rather than direct or deductive. Furthermore, estimating reserve information, by
applying generally accepted petroleum engineering and evaluation principles,
involves numerous judgements based upon the engineer's educational background,
professional training and professional experience. The extent and significance
of the judgements to be made are, in themselves, sufficient to render reserve
information inherently imprecise.
"Standardized measure" relates to the estimated discounted future net cash
flows and major components of that calculation relating to proved reserves at
the end of the year in the aggregate and by geographic area, based on year end
prices, costs, and statutory tax rates and using a 10% annual discount rate.
70
<PAGE> 71
<TABLE>
<CAPTION>
(Unaudited)
------------------------------------------------------------------------------
United States Colombia Total Worldwide
---------------------- ---------------------- ----------------------
Oil Gas Oil Gas Oil Gas
(Barrels) (Mcf) (Barrels) (Mcf) (Barrels) (Mcf)
-------- -------- -------- -------- --------- --------
(in thousands)
<S> <C> <C> <C> <C> <C> <C>
PROVED RESERVES:
AS OF DECEMBER 31, 1995 3,523 29,203 -- -- 3,523 29,203
Extensions and discoveries 5 2,401 1,426 257 1,431 2,658
Revisions (22) (3,117) -- -- (22) (3,117)
Production (370) (1,409) -- -- (370) (1,409)
Purchases of reserves in place 2,216 4,770 611 2,055 2,827 6,825
-------- -------- -------- -------- -------- --------
AS OF DECEMBER 31, 1996 5,352 31,848 2,037 2,312 7,389 34,160
Extensions and discoveries 95 3,977 3,922 134 4,017 4,111
Revisions (546) (8,437) 1,586 1,067 1,040 (7,370)
Production (416) (1,922) -- -- (416) (1,922)
Purchases of reserves in place 345 4,185 713 129 1,058 4,314
-------- -------- -------- -------- -------- --------
AS OF DECEMBER 31, 1997 4,830 29,651 8,258 3,642 13,088 33,293
Extensions and discoveries 103 2,871 18,144 41,866 18,247 44,737
Revisions (2,180) (7,824) (1,310) (145) (3,490) (7,969)
Production (433) (2,063) (61) -- (494) (2,063)
Sales of reserves in place (5) (27) -- -- (5) (27)
Purchases of reserves in place 1,325 5,723 2,851 34,757 4,176 40,480
-------- -------- -------- -------- -------- --------
AS OF DECEMBER 31, 1998 3,640 28,331 27,882 80,120 31,522 108,451
======== ======== ======== ======== ======== ========
PROVED DEVELOPED RESERVES AT:
December 31, 1996 3,757 11,822 252 45 4,009 11,867
December 31, 1997 3,002 15,080 1,599 167 4,601 15,247
December 31, 1998 1,859 13,804 9,642 3,026 11,501 16,830
</TABLE>
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<PAGE> 72
Standardized Measure of Discounted Future Net Cash Flows Relating to Proved Oil
and Gas Reserves:
<TABLE>
<CAPTION>
(Unaudited)
------------------------------------------------------
United States Colombia Total Worldwide
------------- --------- ---------------
(in thousands)
<S> <C> <C> <C>
DECEMBER 31, 1997:
Future cash inflows $ 176,308 $ 118,825 $ 295,133
Production costs (60,213) (24,996) (85,209)
Development costs (14,874) (29,083) (43,957)
--------- --------- ---------
Future net inflows before income tax 101,221 64,746 165,967
Future income taxes -- (21,424) (21,424)
--------- --------- ---------
Future net cash flows 101,221 43,322 144,543
10% discount factor (44,244) (9,719) (53,963)
--------- --------- ---------
Standardized measure of discounted future
net cash flows $ 56,977 $ 33,603 $ 90,580
========= ========= =========
DECEMBER 31, 1998:
Future cash inflows $ 92,210 $ 286,934 $ 379,144
Production costs (29,689) (24,571) (54,260)
Development costs (17,239) (41,757) (58,996)
--------- --------- ---------
Future net inflows before income tax 45,282 220,606 265,888
Future income taxes -- (38,914) (38,914)
--------- --------- ---------
Future net cash flows 45,282 181,692 226,974
10% discount factor (20,602) (61,521) (82,123)
--------- --------- ---------
Standardized measure of discounted future
net cash flows $ 24,680 $ 120,171 $ 144,851
========= ========= =========
</TABLE>
72
<PAGE> 73
Changes In Standardized Measure of Discounted Future Net Cash Flows Relating to
Proved Oil and Gas Reserves:
<TABLE>
<CAPTION>
(Unaudited)
---------------------------------------
1996 1997 1998
--------- --------- ---------
WORLDWIDE (in thousands)
<S> <C> <C> <C>
Standardized measure -- beginning of year $ 58,776 $ 142,243 $ 90,580
Increase (decrease)
Sales, net of production costs (7,577) (8,195) (4,759)
Net change in prices, net of production costs 51,070 (67,852) (53,357)
Development costs incurred 949 5,345 11,159
Change in future development costs 209 2,901 18,243
Change in future income taxes (5,465) (4,898) (9,404)
Revisions of quantity estimates (7,791) (3,931) (19,929)
Accretion of discount 5,878 14,224 9,058
Changes in production rates, timing and other 1,227 (14,051) (11,756)
Extensions and discoveries, net of future costs 12,475 16,007 82,230
Sales of reserves-in-place -- -- (42)
Purchases of reserves-in-place 32,492 8,787 32,828
--------- --------- ---------
Standardized measure -- end of year $ 142,243 $ 90,580 $ 144,851
========= ========= =========
</TABLE>
(14) COMMITMENTS AND CONTINGENCIES
Operating Leases -- Harken leases its corporate and certain other
office space and certain field operating offices. Total office and operating
lease expense during 1996, 1997 and 1998 was $359,000, $551,000, and $1,054,000
respectively. Future minimum rental payments required under all leases that
have initial or remaining noncancellable lease terms in excess of one year as
of December 31, 1998, net of sublease arrangements, are as follows:
<TABLE>
<CAPTION>
Year Amount
- ---- ------
<S> <C>
1999 $1,220
2000 1,110
2001 801
2002 575
2003 98
Thereafter --
------
Total minimum payments required $3,804
======
</TABLE>
73
<PAGE> 74
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 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 $2,714,000 at December 31, 1998
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.
74
<PAGE> 75
Harken's information technology infrastructure consists of desktop
Pentium class Intel based PC systems, servers and UNIX based computers 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.
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 these 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
75
<PAGE> 76
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 Harkens 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 convent their systems in a timely
manner. Assuming that such third parties are not or do not become Year 2000
compliant 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.
76
<PAGE> 77
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
None.
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
See "Item 1. Business" above for a discussion of the Executive
Officers of Harken. Reference is made to the material under the caption
"Election of Directors" in the Registrant's definitive Proxy Statement to be
filed on or before April 30, 1999 pursuant to Regulation 14A in connection with
its Annual Meeting of Stockholders to be held in June 1999, which is
incorporated herein by reference.
ITEM 11. EXECUTIVE COMPENSATION
Reference is made to the material under the caption "Compensation of
Executive Officers" in the Registrant's definitive Proxy Statement to be filed
on or before April 30, 1999 pursuant to Regulation 14A in connection with its
Annual Meeting of Stockholders to be held in June 1999, which is incorporated
herein by reference.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS
Reference is made to the material under the caption "Ownership of
Common Stock" in the Registrant's definitive Proxy Statement to be filed on or
before April 30, 1999 pursuant to Regulation 14A in connection with its Annual
Meeting of Stockholders to be held in June 1999, which is incorporated herein
by reference.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
Reference is made to the material under the caption "Certain
Transactions" in the Registrant's definitive Proxy Statement to be filed on or
before April 30, 1999 pursuant to Regulation 14A in connection with its Annual
Meeting of Stockholders to be held in June 1999, which is incorporated herein
by reference.
77
<PAGE> 78
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K
(a) The following documents are filed as a part of this report:
(1) Financial Statements included in PART II of this report:
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
Harken Energy Corporation and Subsidiaries
-- Report of Independent Public Accountants............................................... 39
-- Selected Financial Information and Other Data for the five years ended
December 31, 1998................................................................... 25
-- Consolidated Balance Sheets -- December 31, 1997 and 1998.............................. 40
-- Consolidated Statements of Operations for the three years ended
December 31, 1998 .................................................................. 41
-- Consolidated Statements of Stockholders' Equity for the three years ended
December 31, 1998................................................................... 42
-- Consolidated Statements of Cash Flows for the three years ended
December 31, 1998................................................................... 43
-- Notes to Consolidated Financial Statements............................................. 44
</TABLE>
(2) The information required by Schedule I is either provided in the
related financial statements or in a note thereto, or is not
applicable to the Company. The information required by all other
Schedules is not applicable to the Company.
(3) Exhibits
3.1 Certificate of Incorporation of Harken Energy Corporation as
amended (filed as Exhibit 3.1 to Harken's Annual Report on Form
10-K for fiscal year ended December 31, 1989, File No. 0-9207,
and incorporated by reference herein).
3.2 Amendment to 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).
78
<PAGE> 79
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. 0-9207, 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 herein by
reference).
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 herein by
reference).
4.4 Certificate of the Designations, Powers, Preferences and Rights
of Series C Cumulative Convertible Preferred Stock, $1.00 par
value of Harken Energy Corporation (filed as Exhibit 4.3 to
Harken's Annual Report on Form 10-K for fiscal year ended
December 31, 1989, File No. 0-9207, and incorporated by
reference herein).
4.5 Certificate of the Designations of Series D Preferred Stock,
$1.00 par value of Harken Energy Corporation (filed as Exhibit
4.3 to Harken's Quarterly Report on Form 10-Q for the fiscal
quarter ended September 30, 1995, File No. 0-9207, and
incorporated by reference herein).
4.6 Rights Agreement, dated as of April 6, 1998, by and between
Harken Energy Corporation And ChaseMellon Shareholder Services
L.L.C., as Rights Agent (filed as Exhibit 4 to Harken's Current
Report on Form 8-K dated April 7, 1998, file No. 0-9207, and
incorporated by reference herein).
79
<PAGE> 80
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).
10.1 Seventh Amendment and Restatement of Harken's Amended Stock
Option Plan (filed as Exhibit 10.1 to Harken's Annual Report on
Form 10-K for the fiscal year ended December 31, 1991, File No.
0-9207, and incorporated by reference herein).
10.2 Amended and Restated Non-Qualified Incentive Stock Option Plan
of Harken adopted by Harken's stockholders on February 18, 1991
(filed as Exhibit 10.2 to Harken's Annual Report on Form 10-K
for the fiscal year ended December 31, 1991, File No. 0-9207,
and incorporated by reference herein).
10.3 Form of Advancement Agreement dated September 13, 1990, between
Harken and each director of Harken (filed as Exhibit 10.38 to
Harken's Annual Report on Form 10-K for the fiscal year ended
December 31, 1989, File No. 0-9207, and incorporated by
reference herein).
10.4 Operating Agreement between Chuska Energy Corporation and the
Navajo Tribe of Indians dated February 18, 1987, and effective
July 20, 1987 (filed as Exhibit 10(b) to Chuska Energy
Corporation's Form 10 - General Form for Registration of
Securities (the "Chuska Form 10"), and incorporated by
reference herein).
10.5 Operating Agreement between Chuska Energy Corporation and the
Navajo Tribe of Indians dated July 28, 1983, and effective
August 26, 1983 and First Addendum thereto (filed as Exhibit
10(a) to Chuska's Form 10, and incorporated by reference
herein).
10.6 Association Contract (Cambulos), dated September 17, 1995, and
effective as of November 17, 1995, by and between Harken de
Colombia, Ltd., and Empresa Colombiana de Petroleos (filed as
Exhibit 10.1 to Harken's Quarterly Report on Form 10-Q for the
quarterly period ended September 30, 1995, File No. 0-9207, and
incorporated by reference herein).
10.7 Development Finance Agreement, dated October 12, 1995, by and
among Harken Energy Corporation, Arbco Associates L.P., Offense
Group Associates L.P., Kayne Anderson Nontraditional
Investments L.P. and Opportunity Associates L.P. (filed as
Exhibit 10.2 to Harken's Quarterly Report on Form 10-Q for the
quarterly period ended September 30, 1995, File No. 0-9207, and
incorporated by reference herein).
10.8 Harken Energy Corporation's 1993 Stock Option and Restricted
Stock Plan (filed as Exhibit 4.3 to Harken's Registration
Statement on Form S-8, and incorporated by reference herein).
10.9 Harken Energy Corporation's Directors Stock Option Plan (filed
as Exhibit 4.3 to Harken's Registration Statement on Form S-8,
and incorporated herein by reference).
80
<PAGE> 81
10.10 Association Contract (Bolivar) by and between Harken de
Colombia, Ltd. and Empresa Colombia de Petroleos (filed as
Exhibit 10.4 to Harken's Quarterly Report on Form 10-Q for the
quarterly period ended June 30, 1996, and incorporated herein
by reference).
10.11 Harken Energy Corporation 1996 Incentive and Nonstatutory Stock
Option Plan (filed as Exhibit 10.1 to Harken's Quarterly Report
on Form 10-Q for the quarterly period ended September 30, 1996,
and incorporated herein by reference).
10.12 Association Contract (Alcaravan) dated as of December 13, 1992,
but effective as of February 13, 1993, by and between Empresa
Colombia de Petroleos (filed as Exhibit 10.1 to Harken's Annual
Report on Form 10-K for the fiscal year ended December 31,
1992, File No. 0-9207, and incorporated herein by reference).
10.13 Association Contract (Bocachico) dated as of January 1994, but
effective as of April 1994, by and between Empresa Colombia de
Petroleos (filed as Exhibit 10.1 to Harken's Quarterly Report
on Form 10-Q for the quarterly period ended March 31, 1994,
File No. 0-9207, and incorporated herein by reference).
10.14 Association Contract (Miradores) dated as of December 1997, but
effective as of February 1998, by and between Empresa Colombia
de Petroleos (filed as Exhibit 10.14 to Harken's Annual Report
on Form 10-K for the year ended December 31, 1997, File No.
0-9207, and incorporated herein by reference).
10.15 Development Finance Agreement dated as of October 17, 1997, by
and among Harken, Harken Capital Corporation and the other
signatories thereto (filed as Exhibit 10.1 to Harken's
Quarterly Report on Form 10-Q for the quarterly period ended
September 30, 1997, File No. 0-9207, and incorporated herein by
reference).
10.16 Development Finance Agreement dated as of December 24, 1997, by
and among Harken and the other signatories thereto (filed as
Exhibit 10.16 To Harken's Annual Report on Form 10-K for the
year ended December 31, 1998, File No. 0-9207, and incorporated
herein by reference).
10.17 Exchange Agreement dated as of December 24, 1997, by and among
Harken, Harken Capital Corporation and the other signatories
thereto (filed as Exhibit 10.17 To Harken's Annual Report on
Form 10-K for the year ended December 31, 1998, File No.
0-9207, and incorporated herein by reference).
10.18 Trust Indenture dated June 11, 1997, by and between Harken and
Marine Midland Bank plc (filed as Exhibit 10.1 to Harken's
Quarterly Report on Form 10-Q for the quarterly period ended
June 30, 1997, File No. 0-9207, and incorporated herein by
reference).
10.19 Placing Agreement Dated June 3, 1997, by and among Harken and
the other signatories thereto (filed as Exhibit 10.2 to
Harken's Quarterly Report on Form 10-Q for the quarterly period
ended June 30, 1997, File No. 0-9207, and incorporated herein
by reference).
81
<PAGE> 82
10.20 Drilling Contract dated as of July 22, 1997, between Harken de
Colombia, Ltd., and Parker Drilling Company International Ltd.
(filed as Exhibit 10.4 to Harken's Quarterly Report on Form
10-Q for the quarterly period ended June 30, 1997, File No.
0-9207, and incorporated herein by reference).
10.21 Drilling Contract dated as of May 15, 1997, between Harken de
Colombia, Ltd., and Marlin Colombia Drilling Company, Inc.
(filed as Exhibit 10.5 to Harken's Quarterly Report on Form
10-Q for the quarterly period ended June 30, 1997, File No.
0-9207, and incorporated herein by reference).
22 Subsidiaries of Harken.
24 Power of Attorney.
27 Financial Data Schedule.
(b) Reports on Form 8-K
None.
82
<PAGE> 83
SIGNATURES
Pursuant to the requirements of the Section 13 or 15(d) of the
Securities Exchange Act of 1934, the Registrant has duly caused this Report to
be signed on its behalf by the undersigned, thereunto duly authorized, in the
City of Irving, State of Texas, on March 30, 1999.
HARKEN ENERGY CORPORATION
*
------------------------------------------------------
Mikel D. Faulkner, Chairman of the Board of Directors
and Chief Executive Officer
Pursuant to the requirements of the Securities Exchange Act of 1934,
this Report has been signed below by the following persons on behalf of the
Registrant and in the capacities and on the dates indicated.
<TABLE>
<CAPTION>
Signature Title Date
- -------------------------------- ---------------------------------------- ----------------------------
<S> <C> <C>
*
- ------------------------------- Chairman of the Board of Directors and March 30, 1999
Mikel D. Faulkner Chief Executive Officer (Principal
Executive Officer)
*
- ------------------------------- Vice Chairman of the Board of Directors March 30, 1999
Richard H. Schroeder
/s/ Bruce N. Huff
- ---------------------------- President, Chief Financial Officer and Director March 30, 1999
Bruce N. Huff
*
- ------------------------------- Executive Vice President, Chief March 30, 1999
Stephen C. Voss Operating Officer and Director
</TABLE>
83
<PAGE> 84
<TABLE>
<S> <C> <C>
* Director March 30, 1999
- ------------------------------
Michael M. Ameen, Jr.
Director March 30, 1999
- ------------------------------
Michael R. Eisenson
* Director March 30, 1999
- ------------------------------
Gary R. Peterson
* Director March 30, 1999
- ------------------------------
Donald W. Raymond
* Director March 30, 1999
- ------------------------------
Hobart A. Smith
* Director March 30, 1999
- ------------------------------
Gary B. Wood
</TABLE>
*Bruce N. Huff, by signing his name hereto, does hereby sign this Annual Report
on Form 10-K for the year ended December 31, 1998 on behalf of Harken Energy
Corporation and each of the above-named officers and directors of such Company
pursuant to powers of attorney, executed on behalf of the Company and each
officer and director.
/s/ Bruce N. Huff
- ------------------------------
Bruce N. Huff,
Attorney-in-Fact
84
<PAGE> 85
<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION
------ -----------
<S> <C>
3.1 Certificate of Incorporation of Harken Energy Corporation as
amended (filed as Exhibit 3.1 to Harken's Annual Report on Form
10-K for fiscal year ended December 31, 1989, File No. 0-9207,
and incorporated by reference herein).
3.2 Amendment to 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).
</TABLE>
<PAGE> 86
<TABLE>
<S> <C>
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. 0-9207, 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 herein by
reference).
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 herein by
reference).
4.4 Certificate of the Designations, Powers, Preferences and Rights
of Series C Cumulative Convertible Preferred Stock, $1.00 par
value of Harken Energy Corporation (filed as Exhibit 4.3 to
Harken's Annual Report on Form 10-K for fiscal year ended
December 31, 1989, File No. 0-9207, and incorporated by
reference herein).
4.5 Certificate of the Designations of Series D Preferred Stock,
$1.00 par value of Harken Energy Corporation (filed as Exhibit
4.3 to Harken's Quarterly Report on Form 10-Q for the fiscal
quarter ended September 30, 1995, File No. 0-9207, and
incorporated by reference herein).
4.6 Rights Agreement, dated as of April 6, 1998, by and between
Harken Energy Corporation And ChaseMellon Shareholder Services
L.L.C., as Rights Agent (filed as Exhibit 4 to Harken's Current
Report on Form 8-K dated April 7, 1998, file No. 0-9207, and
incorporated by reference herein).
</TABLE>
<PAGE> 87
<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).
10.1 Seventh Amendment and Restatement of Harken's Amended Stock
Option Plan (filed as Exhibit 10.1 to Harken's Annual Report on
Form 10-K for the fiscal year ended December 31, 1991, File No.
0-9207, and incorporated by reference herein).
10.2 Amended and Restated Non-Qualified Incentive Stock Option Plan
of Harken adopted by Harken's stockholders on February 18, 1991
(filed as Exhibit 10.2 to Harken's Annual Report on Form 10-K
for the fiscal year ended December 31, 1991, File No. 0-9207,
and incorporated by reference herein).
10.3 Form of Advancement Agreement dated September 13, 1990, between
Harken and each director of Harken (filed as Exhibit 10.38 to
Harken's Annual Report on Form 10-K for the fiscal year ended
December 31, 1989, File No. 0-9207, and incorporated by
reference herein).
10.4 Operating Agreement between Chuska Energy Corporation and the
Navajo Tribe of Indians dated February 18, 1987, and effective
July 20, 1987 (filed as Exhibit 10(b) to Chuska Energy
Corporation's Form 10 - General Form for Registration of
Securities (the "Chuska Form 10"), and incorporated by
reference herein).
10.5 Operating Agreement between Chuska Energy Corporation and the
Navajo Tribe of Indians dated July 28, 1983, and effective
August 26, 1983 and First Addendum thereto (filed as Exhibit
10(a) to Chuska's Form 10, and incorporated by reference
herein).
10.6 Association Contract (Cambulos), dated September 17, 1995, and
effective as of November 17, 1995, by and between Harken de
Colombia, Ltd., and Empresa Colombiana de Petroleos (filed as
Exhibit 10.1 to Harken's Quarterly Report on Form 10-Q for the
quarterly period ended September 30, 1995, File No. 0-9207, and
incorporated by reference herein).
10.7 Development Finance Agreement, dated October 12, 1995, by and
among Harken Energy Corporation, Arbco Associates L.P., Offense
Group Associates L.P., Kayne Anderson Nontraditional
Investments L.P. and Opportunity Associates L.P. (filed as
Exhibit 10.2 to Harken's Quarterly Report on Form 10-Q for the
quarterly period ended September 30, 1995, File No. 0-9207, and
incorporated by reference herein).
10.8 Harken Energy Corporation's 1993 Stock Option and Restricted
Stock Plan (filed as Exhibit 4.3 to Harken's Registration
Statement on Form S-8, and incorporated by reference herein).
10.9 Harken Energy Corporation's Directors Stock Option Plan (filed
as Exhibit 4.3 to Harken's Registration Statement on Form S-8,
and incorporated herein by reference).
</TABLE>
<PAGE> 88
<TABLE>
<S> <C>
10.10 Association Contract (Bolivar) by and between Harken de
Colombia, Ltd. and Empresa Colombia de Petroleos (filed as
Exhibit 10.4 to Harken's Quarterly Report on Form 10-Q for the
quarterly period ended June 30, 1996, and incorporated herein
by reference).
10.11 Harken Energy Corporation 1996 Incentive and Nonstatutory Stock
Option Plan (filed as Exhibit 10.1 to Harken's Quarterly Report
on Form 10-Q for the quarterly period ended September 30, 1996,
and incorporated herein by reference).
10.12 Association Contract (Alcaravan) dated as of December 13, 1992,
but effective as of February 13, 1993, by and between Empresa
Colombia de Petroleos (filed as Exhibit 10.1 to Harken's Annual
Report on Form 10-K for the fiscal year ended December 31,
1992, File No. 0-9207, and incorporated herein by reference).
10.13 Association Contract (Bocachico) dated as of January 1994, but
effective as of April 1994, by and between Empresa Colombia de
Petroleos (filed as Exhibit 10.1 to Harken's Quarterly Report
on Form 10-Q for the quarterly period ended March 31, 1994,
File No. 0-9207, and incorporated herein by reference).
10.14 Association Contract (Miradores) dated as of December 1997, but
effective as of February 1998, by and between Empresa Colombia
de Petroleos (filed as Exhibit 10.14 to Harken's Annual Report
on Form 10-K for the year ended December 31, 1997, File No.
0-9207, and incorporated herein by reference).
10.15 Development Finance Agreement dated as of October 17, 1997, by
and among Harken, Harken Capital Corporation and the other
signatories thereto (filed as Exhibit 10.1 to Harken's
Quarterly Report on Form 10-Q for the quarterly period ended
September 30, 1997, File No. 0-9207, and incorporated herein by
reference).
10.16 Development Finance Agreement dated as of December 24, 1997, by
and among Harken and the other signatories thereto (filed as
Exhibit 10.16 To Harken's Annual Report on Form 10-K for the
year ended December 31, 1998, File No. 0-9207, and incorporated
herein by reference).
10.17 Exchange Agreement dated as of December 24, 1997, by and among
Harken, Harken Capital Corporation and the other signatories
thereto (filed as Exhibit 10.17 To Harken's Annual Report on
Form 10-K for the year ended December 31, 1998, File No.
0-9207, and incorporated herein by reference).
10.18 Trust Indenture dated June 11, 1997, by and between Harken and
Marine Midland Bank plc (filed as Exhibit 10.1 to Harken's
Quarterly Report on Form 10-Q for the quarterly period ended
June 30, 1997, File No. 0-9207, and incorporated herein by
reference).
10.19 Placing Agreement Dated June 3, 1997, by and among Harken and
the other signatories thereto (filed as Exhibit 10.2 to
Harken's Quarterly Report on Form 10-Q for the quarterly period
ended June 30, 1997, File No. 0-9207, and incorporated herein
by reference).
</TABLE>
<PAGE> 89
<TABLE>
<S> <C>
10.20 Drilling Contract dated as of July 22, 1997, between Harken de
Colombia, Ltd., and Parker Drilling Company International Ltd.
(filed as Exhibit 10.4 to Harken's Quarterly Report on Form
10-Q for the quarterly period ended June 30, 1997, File No.
0-9207, and incorporated herein by reference).
10.21 Drilling Contract dated as of May 15, 1997, between Harken de
Colombia, Ltd., and Marlin Colombia Drilling Company, Inc.
(filed as Exhibit 10.5 to Harken's Quarterly Report on Form
10-Q for the quarterly period ended June 30, 1997, File No.
0-9207, and incorporated herein by reference).
22 Subsidiaries of Harken.
24 Power of Attorney.
27 Financial Data Schedule.
</TABLE>
<PAGE> 1
HARKEN ENERGY CORPORATION
SUBSIDIARIES
EXHIBIT 22
AEX, INC.
BURNS DRILLING COMPANY
CHUSKA RESOURCES CORPORATION
D-FW RESOURCE MANAGEMENT, INC.
FISHER-WEBB, INC.
HARKEN BAHRAIN OIL COMPANY
HARKEN DE COLOMBIA, LTD.
HARKEN DE MEXICO, S.A. DE C.V.
HARKEN ENERGY WEST TEXAS, INC.
HARKEN EXPLORATION COMPANY
HARKEN INTERNATIONAL, LTD.
HARKEN SOUTHWEST CORPORATION
KMI ACQUISITION CORPORATION
KMI CAPITAL CORPORATION
KENDRICK & MULLIGAN OIL & GAS, INCORPORATED
KENNEDY & MITCHELL, INC.
MCCULLOCH ENERGY, INC.
SEARCH ACQUISITION CORP.
SUNFIELD ENERGY COMPANY
SUPREME WELL SERVICE COMPANY
HARKEN CANADA, LTD.
HARKEN SOUTH AMERICA, LTD.
HARKEN COSTA RICA HOLDINGS, LLC
<PAGE> 1
HARKEN ENERGY CORPORATION
FORM 10-K POWER OF ATTORNEY
KNOW ALL MEN BY THESE PRESENTS, that the undersigned, an Officer and/or
Director of HARKEN ENERGY CORPORATION, a Delaware corporation (the
"Corporation"), hereby constitutes and appoints Mikel D. Faulkner, Bruce N.
Huff, Larry E. Cummings and Gregory S. Porter and each of them (with full power
to each of them to act alone), his true and lawful attorney-in-fact and agent
with full power of substitution for him and on his behalf in his name, place and
stead in any and all capacities (whether on behalf of the corporation or as an
Officer or Director or both thereof or by attesting the seal of the Corporation
or otherwise), to sign, execute and file an Annual Report on Form 10-K for the
fiscal year ended December 31, 1998, under the Securities Exchange Act of 1934,
as amended with all exhibits and any and all documents required to be filed with
respect thereto with the Securities and Exchange Commission or any state or
other regulatory authority, and granting unto said attorneys-in-fact and agents
and each of them full power and authority to do and perform each and every act
and thing requisite and necessary to be done in and about the premises in order
to effectuate the same as fully to all intents and purposes as he himself might
or could do if personally present, hereby ratifying and confirming all that said
attorneys-in-fact and agents or any of them or their substitute or substitutes,
may lawfully do or cause to be done.
IN WITNESS WHEREOF, the undersigned have executed this Power of
Attorney effective as of February 24, 1999.
NAME CAPACITIES
---- ----------
/s/ Mikel D. Faulkner Chairman of the Board of Directors
- ----------------------------- and Chief Executive Officer
Mikel D. Faulkner (Principal Executive Officer)
/s/ Richard H. Schroeder Vice Chairman and
- ----------------------------- Director
Richard H. Schroeder
/s/ Bruce N. Huff President, Chief Financial Officer
- ----------------------------- and Director
Bruce N. Huff (Principal Financial Officer and
Principal Accounting Officer)
/s/ Stephen C. Voss Executive Vice President,
- ----------------------------- Chief Operating Officer and
Stephen C. Voss Director
<PAGE> 2
Harken Energy Corporation
Form 10-K Power of Attorney
February 24, 1999
/s/ Michael M. Ameen, Jr. Director
- -----------------------------
Michael M. Ameen, Jr.
Director
- -----------------------------
Michael R. Eisenson
/s/ Gary R. Peterson Director
- -----------------------------
Gary R. Peterson
/s/ Donald W. Raymond Director
- -----------------------------
Donald W. Raymond
/s/ Hobart A. Smith Director
- -----------------------------
Hobart A. Smith
/s/ Gary B. Wood Director
- -----------------------------
Gary B. Wood
<TABLE> <S> <C>
<ARTICLE> 5
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> DEC-31-1998
<PERIOD-START> JAN-01-1998
<PERIOD-END> DEC-31-1998
<CASH> 17,147,000
<SECURITIES> 124,398,000
<RECEIVABLES> 2,383,000
<ALLOWANCES> (380,000)
<INVENTORY> 0
<CURRENT-ASSETS> 144,163,000
<PP&E> 224,659,000
<DEPRECIATION> (74,759,000)
<TOTAL-ASSETS> 304,538,000
<CURRENT-LIABILITIES> 20,426,000
<BONDS> 85,000,000
0
15,000
<COMMON> 1,348,000
<OTHER-SE> 178,579,000
<TOTAL-LIABILITY-AND-EQUITY> 304,538,000
<SALES> 10,932,000
<TOTAL-REVENUES> 19,770,000
<CGS> 5,988,000
<TOTAL-COSTS> 5,988,000
<OTHER-EXPENSES> 65,215,000
<LOSS-PROVISION> 26,000
<INTEREST-EXPENSE> 963,000
<INCOME-PRETAX> (52,422,000)
<INCOME-TAX> 34,000
<INCOME-CONTINUING> (52,456,000)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (52,456,000)
<EPS-PRIMARY> (0.42)
<EPS-DILUTED> (0.42)
</TABLE>
