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SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K/A
(AMENDMENT NO. 1)
[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.)
16285 PARK TEN PLACE, SUITE 600 77084
HOUSTON, TEXAS (Zip Code)
(Address of principal executive offices)
Registrant's telephone number, including area code (281) 717-1300
Securities registered pursuant to Section 12(b) of the Act:
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<CAPTION>
Title of each class: Name of each exchange on which registered:
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COMMON STOCK, PAR VALUE $0.01 PER SHARE AMERICAN STOCK EXCHANGE
</TABLE>
PREFERRED STOCK PURCHASE RIGHTS AMERICAN STOCK EXCHANGE
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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EXPLANATORY NOTE
This Form 10-K/A for the year ended December 31, 1998 is being filed, together
with Form 10-Q/A for the first quarter ended March 31, 1999, in order for Harken
Energy Corporation to report its consolidated financial statements which have
been restated to reflect the change in accounting for certain Development
Finance Agreements. The items amended are Item 6, 7, 8 and 14. Other items are
not amended and are not included in the filing. Item 7 has been revised only to
reflect the above mentioned change in accounting treatment, and does not include
an updated discussion for events occurring after March 30, 1999.
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TABLE OF CONTENTS
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PAGE
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PART II.
<S> <C> <C>
ITEM 6. Selected Financial Information and Other Data..................................... 4
ITEM 7. Management's Discussion and Analysis of Financial Condition and
Results of Operations............................................................. 5
ITEM 8. Financial Statements and Supplementary Data....................................... 17
PART IV.
ITEM 14. Exhibits, Financial Statement Schedules and Reports on Form 8-K................... 57
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PART II
ITEM 6. SELECTED FINANCIAL INFORMATION AND OTHER DATA
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<CAPTION>
1994 1995 1996 1997 1998
------------ ------------ -------------- --------------- --------------
(Restated)(4) (Restated)(4)
<S> <C> <C> <C> <C> <C>
REVENUES $ 4,895,000 $ 7,471,000 $ 13,921,000 $ 18,768,000 $ 19,770,000
Income (loss) from continuing operation $ (8,211,000) $ (1,625,000) $ (341,000) $ (284,000) $ (55,787,000)
Income (loss) from discontinued operation $ (223,000) $ -- $ -- $ -- $ --
Net income (loss) $ (8,434,000) $ (1,625,000) $ (341,000) $ (284,000) $ (55,787,000)
Basic income (loss) per common share:
Income (loss) from continuing operation $ (0.14) $ (0.02) $ (0.00) $ (0.00) $ (0.44)
Discontinued operations $ (0.00) $ -- $ -- $ -- $ --
------------ ------------ -------------- --------------- --------------
Net income (loss) $ (0.14) $ (0.02) $ (0.00) $ (0.00) $ (0.44)
============ ============ ============== =============== ==============
Diluted income (loss) per common share:
Income (loss) from continuing operation $ (0.14) $ (0.02) $ (0.00) $ (0.00) $ (0.44)
Discontinued operations $ (0.00) $ -- $ -- $ -- $ --
------------ ------------ -------------- --------------- --------------
Net income (loss) $ (0.14) $ (0.02) $ (0.00) $ (0.00) $ (0.44)
============ ============ ============== =============== ==============
Current assets $ 6,840,000 $ 10,531,000 $ 49,838,000 $ 126,392,000 $ 144,163,000
Current liabilities $ 5,133,000 $ 4,918,000 $ 6,061,000 $ 15,752,000 $ 20,426,000
------------ ------------ -------------- --------------- --------------
Working capital $ 1,707,000 $ 5,613,000 $ 43,777,000 $ 110,640,000 $ 123,737,000
============ ============ ============== =============== ==============
Total assets $ 28,960,000 $ 70,794,000 $ 123,000,000 $ 238,780,000 $ 320,116,000
Long-term obligations:
Long-term obligations and other liabilities $ -- $ 25,726,000 $ 38,600,000 $ 39,880,000 $ 85,000,000
Redeemable preferred stock $ 1,868,000 $ -- $ -- $ -- $ --
Development finance obligation $ -- $ -- $ -- $ 25,740,000 $ 38,552,000
------------ ------------ -------------- --------------- --------------
Total $ 1,868,000 $ 25,726,000 $ 38,600,000 $ 65,620,000 $ 123,552,000
============ ============ ============== =============== ==============
Stockholders' equity $ 21,959,000 $ 40,150,000 $ 78,339,000 $ 157,408,000 $ 176,138,000
Redeemable preferred stock outstanding 186,760 -- -- -- --
Series F preferred stock outstanding (3) -- -- -- -- 15,000
Weighted average common stock
outstanding (1):
Basic 59,722,853 65,041,063 85,021,894 109,087,697 130,252,727
Diluted 59,722,853 65,041,063 85,021,894 109,087,697 130,252,727
Proved reserves at end of year (2):
Bbls of oil 1,521,000 3,523,000 7,389,000 13,088,000 31,522,000
Mcf of gas 7,148,000 29,203,000 34,160,000 33,293,000 108,451,000
Future net cash inflows $ 20,178,000 $ 99,193,000 $ 234,164,000 $ 144,543,000 $ 226,974,000
Present value (discontinued at 10% per ) $ 11,712,000 $ 58,776,000 $ 142,243,000 $ 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.
(4) See "Notes to Consolidated Financial Statements, Note 15 - Restatement
of Financial Statements" contained in Part II, Item 8, for a discussion
of Harken's restatement of its consolidated financial statements.
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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 $320 million at December 31, 1998, and its total net capital
expenditures related to its Colombia oil and gas properties has totaled
approximately $129 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 $55.8 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 each 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 profitability 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
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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.
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Year Ended December 31,
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DOMESTIC EXPLORATION AND
PRODUCTION 1996 1997 1998
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<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
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Magnolia region of Arkansas and the Carlsbad region of New Mexico, and beginning
in May 1998, the southern region of Louisiana.
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.
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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 increased during 1998 compared to the prior
year period primarily due to the issuance of the Development Finance Agreements
in late 1997 and early 1998. Total interest expense related to the Development
Finance Agreements, including amortization of associated issuance costs, net of
amounts capitalized, was approximately $3,331,000 during 1998 compared to
approximately $473,000 during 1997. Net interest and amortization expense
related to the European Notes decreased during 1998 compared to the prior year
period despite the May 1998 issuance of the 5% European Notes due to the
increase in the amounts of interest capitalized to Harken's Colombian
exploration activity.
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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 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.
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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.
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 increased during 1997 compared to 1996
despite the increase in amounts of interest capitalizable to Harken's Colombian
oil and gas property costs due to the increase in European Notes and the
Development Finance Agreement entered into in October 1997. 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. The Development Finance Agreement generated
interest and amortization expenses, net of amounts capitalized, of approximately
$473,000.
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 $95 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 $84 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.
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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.
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 has sufficient
cash resources to fund all of its required capital expenditure requirements
during 1999.
Related to Harken's Costa Rica operations, under the terms of the
agreement between Harken and MKJ Xploration, Inc. ("MKJ"), Harken will pay $4.2
million to MKJ to purchase its share of the Costa Rica Contract rights from MKJ
once an agreement is signed with the Costa Rican Ministry of Environment and
Energy. 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
11
<PAGE> 12
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.
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 detailed discussion of the terms
and accounting for the Development Finance Agreements, see "Notes to
Consolidated Financial Statements, Note 6 - Development Finance and Operating
Agreements." 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
12
<PAGE> 13
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.
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
13
<PAGE> 14
$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. 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.
14
<PAGE> 15
Remediation and Implementation. In the area of technological operations
which are under Harken's exclusive control, Harken is currently involved in the
identification and remediation of affected technological functions, including
non-information technology systems. Harken has completed its assessment of Year
2000 readiness of its internal computerized systems. Harken is in the process of
installing upgrades to its off-the-shelf financial and operational software
applications, hardware and telecommunications equipment. Harken expects that
such remediation procedures will be completed by the second quarter of 1999.
Harken is in the identification and assessment phase with respect to its
non-information technology systems, which is projected to continue until the
third quarter of 1999.
Testing. Harken will begin updating and testing of the newly upgraded
systems for Year 2000 compliance, and expects that all testing will be completed
by the third quarter of 1999. Upon completion, Harken will be able to identify
any internal computer systems that remain non-compliant. At present, it is
anticipated that Harken's action plan for addressing Year 2000 problems will be
successfully completed in all material respects in advance of January 1, 2000.
Third Parties. Harken has assessed the level of Year 2000 issues
associated with its most significant vendors, suppliers, partners and major
customers. All of Harken's oil and gas sales revenues are derived from oil and
gas production from its domestic and Colombian operations. Harken's domestic
operations are dependent upon its various purchasers or pipeline operators who
transport oil or gas for its purchasers. In addition, Harken's Colombian
operations may also become dependent upon the transportation of oil through
outside owned facilities or pipelines. Harken is monitoring progress of its
various domestic purchasers and pipelines, as well as potential Colombian
outside owned facilities on their activities related to the Year 2000. At this
time, Harken expects that field operations will not be interrupted due to
improper recognition of the Year 2000 by computerized systems of its various
purchasers and pipelines.
Harken also relies on other oil and gas service providers, vendors, and
financial institutions in its daily operations. Harken believes it has
identified those third-party relationships that could have a material adverse
effect on Harken's results of operations and financial position should their
computerized systems not be compliant for the Year 2000. Harken continues with
its efforts to survey the identified third parties on their readiness for the
Year 2000 and establish appropriate alternatives, if needed, where noncompliance
may pose a risk to Harken's operations.
Although Harken is making efforts to ensure that the third parties on
which it is heavily reliant are Year 2000 compliant, it cannot predict the
likelihood of such compliance occurring nor the direct or indirect costs to
Harken of non-compliance by those third parties or of securing such services
from compliant third parties. Harken has no control over these third parties'
compliance and cannot give assurances that these third parties' representations
to Harken are accurate. Therefore, there can be no guarantee that Year 2000
problems originating with a third party will not occur and no absolute assurance
that third parties will convert their systems in a timely manner, to the extent
Harken is unable to replace the goods, services or customers with alternate
sources of supply and demand on a timely and economically equivalent basis. Such
failure would likely have a material adverse effect on Harken's business and
results of operations.
Estimated Costs. The total financial effect that Year 2000 issues will
have on Harken cannot be predicted with any certainty at this time. In fact, in
spite of all efforts being made to rectify these problems, the success of
Harken's efforts will not be known with certainty until the year 2000 actually
arrives. Based on its assessment to date, Harken does not believe that the costs
to resolve any Year 2000 issues will be
15
<PAGE> 16
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.
16
<PAGE> 17
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
The following financial statements appear on pages 18 through 57 in
this report.
PAGE
Report of Independent Public Accountants................................18
Consolidated Balance Sheets -- December 31, 1997 and 1998..............19
Consolidated Statements of Operations --
Years ended December 31, 1996, 1997 and 1998..........................20
Consolidated Statements of Stockholders' Equity --
Years ended December 31, 1996, 1997 and 1998..........................21
Consolidated Statements of Cash Flows --
Years ended December 31, 1996, 1997 and 1998..........................22
Notes to Consolidated Financial Statements.............................23
17
<PAGE> 18
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.
As explained in Note 15 to the financial statements, the Company has
restated its financial statements to give effect to the change in accounting for
certain Development Finance Agreements.
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 (except with respect to the matter
discussed in Note 15, as to which
the date is August 12, 1999)
18
<PAGE> 19
HARKEN ENERGY CORPORATION AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
ASSETS
<TABLE>
<CAPTION>
December 31,
-----------------------------------
1997 1998
------------- -------------
Current Assets: (Restated) (Restated)
<S> <C> <C>
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 27,549,000 64,534,000
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 107,154,000 166,218,000
Other Assets, net 5,234,000 9,735,000
------------- -------------
$ 238,780,000 $ 320,116,000
============= =============
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
Development Finance Obligation 25,740,000 38,552,000
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 shares issued,
respectively 1,218,000 1,348,000
Additional paid-in capital 248,770,000 327,498,000
Retained deficit and other comprehensive income (92,580,000) (150,171,000)
Treasury stock, at cost, 700,000 shares held at December 31, 1998 -- (2,552,000)
------------- -------------
Total Stockholders' Equity 157,408,000 176,138,000
------------- -------------
$ 238,780,000 $ 320,116,000
============= =============
</TABLE>
The accompanying Notes to Consolidated Financial Statements are
an integral part of these Statements.
19
<PAGE> 20
HARKEN ENERGY CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
<TABLE>
<CAPTION>
Year Ended December 31,
--------------------------------------------------------
1996 1997 1998
------------ ------------- -------------
Revenues: (Restated) (Restated)
<S> <C> <C> <C>
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 2,003,000 4,294,000
------------ ------------- -------------
14,262,000 18,989,000 75,523,000
------------ ------------- -------------
Loss before income taxes (341,000) (221,000) (55,753,000)
Income tax expense -- 63,000 34,000
------------ ------------- -------------
Net income loss $ (341,000) $ (284,000) $ (55,787,000)
============ ============= =============
Accretion related to preferred stock -- -- (1,846,000)
------------ ------------- -------------
Net loss attributed to
common stock $ (341,000) $ (284,000) $ (57,633,000)
============ ============= =============
Loss per common share:
Basic loss per common share $ (0.00) $ (0.00) $ (0.44)
============ ============= =============
Weighted average shares outstanding 85,021,894 109,087,697 130,252,727
============ ============= =============
Diluted loss per common share $ (0.00) $ (0.00) $ (0.44)
============ ============= =============
Weighted average shares outstanding 85,021,894 109,087,697 130,252,727
============ ============= =============
</TABLE>
The accompanying Notes to Consolidated Financial Statements are
an integral part of these Statements.
20
<PAGE> 21
HARKEN ENERGY CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
<TABLE>
<CAPTION>
ADDITIONAL
PREFERRED COMMON PAID-IN TREASURY RETAINED
STOCK STOCK CAPITAL STOCK DEFICIT
------------- ------------ ------------- ------------ -------------
<S> <C> <C> <C> <C> <C>
Balance, December 31, 1995 $ -- $ 759,000 $ 136,435,000 $ (4,997,000) $ (92,047,000)
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 -- -- -- -- (341,000)
Total comprehensive loss
------------- ------------ ------------- ------------ -------------
Balance, December 31, 1996 -- 939,000 171,191,000 (1,390,000) (92,388,000)
Issuance of common stock, net -- 77,000 20,208,000 -- --
Conversions of European notes -- 202,000 57,371,000 1,390,000 --
payable
Comprehensive income:
Equity adjustment from
foreign currency translation -- -- -- -- --
Net loss (restated) -- -- -- -- (284,000)
Total comprehensive loss
------------- ------------ ------------- ------------ -------------
Balance, December 31, 1997 (restated) -- 1,218,000 248,770,000 -- (92,672,000)
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 -- (1,846,000)
Conversions of European notes
payable -- 79,000 37,335,000 -- --
Comprehensive income (loss):
Equity adjustment from
foreign currency translation -- -- -- -- --
Net loss (restated) -- -- -- -- (55,787,000)
Total comprehensive loss
------------- ------------ ------------- ------------ -------------
Balance, December 31, 1998 (restated) $ 15,000 $ 1,348,000 $ 327,498,000 $ (2,552,000) $(150,305,000)
============= ============ ============= ============ =============
<CAPTION>
ACCUMULATED
OTHER
COMPREHENSIVE
INCOME (LOSS) TOTAL
------------- -------------
<S> <C> <C>
Balance, December 31, 1995 $ -- $ 40,150,000
Issuance of common stock, net -- 25,787,000
Conversions of European notes
payable -- 12,756,000
Comprehensive income:
Equity adjustment from
foreign currency translation (13,000)
Net loss --
Total comprehensive loss (354,000)
------------- -------------
Balance, December 31, 1996 (13,000) 78,339,000
Issuance of common stock, net -- 20,285,000
Conversions of European notes -- 58,963,000
payable
Comprehensive income (loss):
Equity adjustment from
foreign currency translation 105,000
Net loss (restated) --
Total comprehensive loss (179,000)
------------- -------------
Balance, December 31, 1997 (restated) 92,000 157,408,000
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 -- --
Conversions of European notes
payable -- 37,414,000
Comprehensive income (loss):
Equity adjustment from
foreign currency translation 42,000
Net loss (restated) --
Total comprehensive loss (55,745,000)
------------- -------------
Balance, December 31, 1998 (restated) $ 134,000 $ 176,138,000
============= =============
</TABLE>
The accompanying Notes to Consolidated Financial Statements are
an integral part of these Statements.
21
<PAGE> 22
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: (Restated) (Restated)
Net loss $ (341,000) $ (284,000) $ (55,787,000)
Adjustments to reconcile net 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 issuance costs 504,000 644,000 782,000
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 5,340,000 7,034,000
------------- ------------- -------------
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) (95,085,000)
Investor advances, net 5,800,000 8,453,000 2,084,000
------------- ------------- -------------
Net cash used in investing activities (11,221,000) (28,622,000) (92,947,000)
------------- ------------- -------------
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
Proceeds from development finance agreements,
net -- 24,500,000 9,798,000
Repayments of notes payable and long-term
obligations (1,258,000) -- (2,000,000)
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 93,841,000 140,386,000
------------- ------------- -------------
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.
22
<PAGE> 23
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 from a broad and
23
<PAGE> 24
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 and certain Development Finance Agreements. See Note 7
- -- European Convertible Notes Payable for further discussion. At December 31,
1997, such deferred costs totaled $4,088,000 net of $528,000 of accumulated
amortization. At December 31, 1998, such deferred costs totaled $5,937,000 net
of $1,255,000 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.
Development Finance Obligations - See further discussion of Harken's
accounting for Development Finance Agreements at Note 6 - Development Finance
and Operating Agreements.
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 $2,003,000, net of $1,772,000 of interest which was
capitalized to Harken's oil and gas properties. During 1998, Harken recorded
interest expense of $4,294,000, net of $6,353,000 of interest which was
capitalized to Harken's oil and gas properties.
General and Administrative Expenses -- Harken reflects general and
administrative expenses net of operator overhead charges and other amounts
billed to joint interest owners. General and administrative expenses are net of
$61,000, $30,000 and $22,000 for such amounts during 1996, 1997 and 1998,
respectively.
24
<PAGE> 25
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 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
25
<PAGE> 26
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.
26
<PAGE> 27
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
---------------
Harken Cal-T Bargo
Actual Properties Properties Pro Forma
(Restated) 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 2,003 -- -- 2,049(2) 4,052
------------- ------------ ----------- ------------- -------------
Total Expenses 18,989 665 1,607 3,683 24,944
------------- ------------ ----------- ------------- -------------
Income tax expense 63 -- -- (63)(3) --
------------- ------------ ----------- ------------- -------------
Net income (loss) $ (284) $ 246 $ 1,697 $ (3,620) $ (1,961)
============= ============ =========== ============= =============
Basic net loss per share
attributable to common stock $ (0.00) $ (0.02)
============= =============
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.
27
<PAGE> 28
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
----------------
Harken Bargo
Actual Properties Pro Forma
(Restated) 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 4,294 -- 2,069(2) 6,363
------------- ------------- ------------- -------------
Total Expenses 75,523 485 2,577 78,585
------------- ------------- ------------- -------------
Income tax expense 34 -- 34
============= ============= ============= =============
Net income (loss) $ (55,787) $ 693 $ (2,577) $ (57,671)
============= ============= ============= =============
Basic net loss per share attributable to
common stock $ (0.44) $ (0.45)
============= ==============
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.
28
<PAGE> 29
(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.
29
<PAGE> 30
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
$21,769,000 and $60,162,000, 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
30
<PAGE> 31
approximately 250,000 acres in the Northern Middle Magdalena Valley of Central
Colombia. The Los Olmos Contract covers approximately 374,000 acres in the Lower
Magdalena Valley of Northern Colombia.
Terms of each of the Association Contracts commit Harken to perform
certain activities in accordance with a prescribed timetable. As of 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.
31
<PAGE> 32
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-transferable stock
purchase warrants to purchase 200,000 shares of Harken common stock which are
currently exercisable by the holders thereof at any time after November 12, 1998
and on or before November 12, 2001 at an exercise price of $3.50 per share.
(6) DEVELOPMENT FINANCE AND OPERATING AGREEMENTS
Rio Negro Development Finance Agreement -- In October 1995, Harken
entered into a Development Finance Agreement (the "Rio Negro Development Finance
Agreement") with Arbco Associates L.P., Offense Group Associates L.P., Kayne
Anderson Nontraditional Investments L.P. and Opportunity Associates L.P.
(collectively, the "Rio Negro Investors"), pursuant to which the Rio Negro
Investors provided $3,500,000 to Harken to finance drilling on the Rio Negro
prospect in the Bocachico Contract area in exchange for the right to receive
future payments from Harken equal to 40% of the net profits that Harken de
Colombia, Ltd. may derive from the sale of oil and gas produced from the Rio
Negro prospect (the "Rio Negro Participation").
In March 1997, Harken and the Rio Negro Investors entered into a
Conversion Agreement whereby Harken purchased 75% of the Rio Negro Participation
relating to the Rio Negro Development Finance Agreement in exchange for 900,000
restricted shares of Harken common stock which were issued within 30 days
following closing. From the remaining 25% of the Rio Negro Participation
retained, the Rio Negro Investors have the right to receive 10% of the net
profits that Harken de Colombia, Ltd. may derive from the sale of oil and gas
produced from the Rio Negro prospect.
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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<PAGE> 33
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 the EnCap Participation will be equal to the quotient of (i) the Payment
Amount (less any distributions made
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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 European
Investors exercised their right to convert all their Institutional Participation
into shares of Harken common stock. Harken elected to pay cash of approximately
$2.3 million in lieu of issuing Harken common stock.
Accounting for Development Finance Agreements - Harken accounts for the
Development Finance Agreements Invested Amount, including the accrued 15% per
annum increase, as a long-term obligation, as such Invested Amount is payable to
the EnCap Investors, the European Investors and Faisal (the "Institutional
Investors") should the Institutional Investors elect to convert their
Institutional Participation into
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shares of Harken common stock. The 15% per annum increase in the Invested
Amount, plus the amortization of the issuance costs associated with the
Development Finance Agreements, is reflected as Interest Expense and Other, net
of amounts capitalized, in the accompanying consolidated statements of
operations. As Institutional Participation is converted into shares of Harken
common stock, a pro-rata portion of any unamortized issuance costs associated
with the Development Finance Agreements will be charged to income. For a
discussion of Harken's change in accounting for Development Finance Agreements,
see Note 15 - Restatement of Financial Statements.
(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
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Harken into shares of Harken common stock after one year following issuance, if
for any period of thirty consecutive days commencing on or after June 11, 1997,
the average of the closing prices of Harken common stock for each trading day
during such thirty-day period equaled or exceeded 130% of the 5 1/2% European
Note Conversion Price (or $6.50 per share of Harken common stock). In October
1997, Harken met the market price criteria necessary to call for mandatory
conversion of the 5 1/2% European Notes any time on or after June 11, 1998, and
provided notice to the holders as required under the Trust Indenture. Harken
formally called the 5 1/2% European Notes which remained outstanding on June 12,
1998. As of December 31, 1997, holders of 5 1/2% European Notes totaling
$30,120,000 exercised their conversion option and such holders were issued
6,325,200 shares of Harken common stock. During the first six months of 1998
additional holders of 5 1/2% European Notes totaling $610,000 exercised their
conversion option and such holders were issued an additional 122,000 shares of
Harken common stock. On June 12, 1998, Harken converted the remaining 5 1/2%
European Notes into 7,854,000 shares of Harken common stock.
Upon closing, all proceeds from the sale of the 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,
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Harken may redeem up to 50% of the 5% European Notes in exchange for shares of
Harken common stock at a defined conversion price based on an average market
price of Harken common stock. Beginning May 26, 2003, Harken may similarly
redeem all remaining 5% European Notes. The 5% European Notes are listed on the
Luxembourg Stock Exchange.
Commissions and issuance costs associated with the European Notes are
deferred and are included in Other Assets and are amortized to interest expense
over the period until conversion or maturity of the European Notes. As European
Notes are converted to Harken common stock, a pro-rata portion of these deferred
costs are charged to Additional Paid-In Capital.
(8) STOCKHOLDERS' EQUITY
Common Stock -- Harken currently has authorized 225,000,000 shares of
$.01 par common stock. At December 31, 1997 and 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
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Harken common stock. Subsequent to December 31, 1997 and as of June 11, 1998,
holders of 5 1/2% European Notes totaling an additional $610,000 exercised their
conversion option and such holders were issued 122,000 shares of Harken common
stock. On June 12, 1998, Harken formally called and converted the remaining 5
1/2% European Notes into 7,854,000 shares of Harken common stock. In connection
with the issuance of the 5 1/2% European Notes, Harken issued to the placement
agents for the 5 1/2% European Notes warrants to purchase 1,120,000 shares of
Harken common stock at any time after December 11, 1997 and on or before
December 11, 1999 at an exercise price of $5.00 per share.
In May 1998, Harken issued to qualified purchasers a total of $85
million in 5% European Notes which mature on May 26, 2003. Such 5% European
Notes are convertible into shares of Harken common stock at an initial
conversion price of $6.50 per share, subject to adjustment in certain
circumstances ("the 5% European Note Conversion Price"). The Trust Indenture
provided for a three percent premium on the number of shares of Harken common
stock issuable on conversion to holders of the 5% European Notes who convert
prior to November 25, 1998. None of the bond holders have exercised their
conversion option as of 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
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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
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
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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.
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
40
<PAGE> 41
a tender offer which would result in beneficial ownership of 15 percent or more
of such stock. When they become exercisable, each Right entitles the registered
holder to purchase from Harken one one-thousandth of one share of Series E
Junior Participating Preferred Stock ("Series E Preferred Stock"), at a price of
$35.00 per one one-thousandth of a share of Series E Preferred Stock, subject to
adjustment under certain circumstances.
Upon the occurrence of certain events specified in the Rights
Agreement, each holder of a Right (other than an Acquiring Person) will have the
right to purchase, at the Right's then current exercise price, shares of Harken
common stock having a value of twice the Right's exercise price. In addition,
if, after a person becomes an Acquiring Person, Harken is involved in a merger
or other business combination transaction with another person in which Harken is
not the surviving corporation, or under certain other circumstances, each Right
will entitle its holder to purchase, at the Right's then current exercise price,
shares of common stock of the other person having a value of twice the Right's
exercise price.
Unless redeemed by Harken earlier, the Rights will expire on April 6,
2008. Harken will generally be entitled to redeem the Rights in whole, but not
in part, at $.01 per Right, subject to adjustment. No Rights were exercisable
under the Rights Agreement at 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. 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 Development Finance Agreements and the unconverted Series F
Preferred were not included for any of the years presented 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.
41
<PAGE> 42
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.
42
<PAGE> 43
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) $ (2,486) $ (61,689)
Pro forma basic loss per share $ (0.01) $ (0.02) $ (0.47)
</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.
43
<PAGE> 44
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>
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.
44
<PAGE> 45
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 (loss) (restated) 68 46 38 (436) (284)
Basic and diluted income
per common share (restated) $ 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 loss (restated) (549) (612) (28,444) (26,182) (55,787)
Basic and diluted loss per common
share (restated) $ (0.00) $ (0.01) $ (0.22) $ (0.21) $ (0.44)
</TABLE>
See Note 15 - Restatement of Financial Statements for further
discussion of Harken's restatement of its consolidated financial statements.
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
45
<PAGE> 46
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.
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.
46
<PAGE> 47
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
--------- --------- ----------
<S> <C> <C> <C>
FOR THE YEAR ENDED
DECEMBER 31, 1996:
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(restated) 720 1,283 2,003
Income tax expense 63 -- 63
Segment profit (loss) (restated) 1,197 (1,481) (284)
Capital expenditures (restated) 6,413 35,065 41,478
Total assets at end of year (restated) 130,953 107,827 238,780
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(restated) 598 3,696 4,294
Income tax expense 34 -- 34
Segment profit (loss) (52,940) (2,847) (55,787)
Capital expenditures (restated) 23,968 84,411 108,379
Total assets at end of year (restated) 108,938 211,178 320,116
</TABLE>
47
<PAGE> 48
(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: (Restated) (Restated)
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 30,950 77,195
Development -- -- --
--------- --------- ---------
Total international costs incurred $ 9,161 $ 35,065 $ 84,411
========= ========= =========
</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: (Restated) (Restated)
Unevaluated international properties $ 3,656 $ 21,769 $ 60,162
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 76,256 117,734 226,113
Less accumulated depreciation and amortization (8,069) (12,928) (68,157)
---------- ---------- ----------
Net capitalized costs $ 68,187 $ 104,806 $ 157,956
========== ========== ==========
</TABLE>
48
<PAGE> 49
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 productibility is supported by
either actual production or conclusive formation tests. The area of a reservoir
considered proved includes that portion delineated by drilling and defined by
gas-oil and/or oil-water contacts, if any, and the immediately adjoining
portions not yet drilled, but which can be reasonably judged as economically
productive on the basis of available geological and engineering data. Reserves
which can be produced economically through application of improved recovery
techniques are included in the "proved" classification when successful testing
by a pilot project, or the operation of an installed program in the reservoir,
provides support for the engineering analysis on which the project or program
was based.
The reliability of reserve information is considerably affected by
several factors. Reserve information is imprecise due to the inherent
uncertainties in, and the limited nature of, the data base upon which the
estimating of reserve information is predicated. Moreover, the methods and data
used in estimating reserve information are often necessarily indirect or
analogical in character rather than direct or deductive. Furthermore, estimating
reserve information, by applying generally accepted petroleum engineering and
evaluation principles, involves numerous judgments based upon the engineer's
educational background, professional training and professional experience. The
extent and significance of the judgments to be made are, in themselves,
sufficient to render reserve information inherently imprecise.
"Standardized measure" relates to the estimated discounted future net
cash flows and major components of that calculation relating to proved reserves
at the end of the year in the aggregate and by geographic area, based on year
end prices, costs, and statutory tax rates and using a 10% annual discount rate.
49
<PAGE> 50
<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>
50
<PAGE> 51
Standardized Measure of Discounted Future Net Cash Flows Relating to Proved Oil
and Gas Reserves:
<TABLE>
<CAPTION>
(Unaudited)
---------------------------------------------------
Total
United States Colombia 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>
51
<PAGE> 52
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>
52
<PAGE> 53
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.
53
<PAGE> 54
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 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
54
<PAGE> 55
parties. Harken has no control over these third parties' compliance and cannot
give assurances that these third parties' representations to Harken are
accurate. Therefore, there can be no guarantee that Year 2000 problems
originating with a third party will not occur and no absolute assurance that
third parties will convert their systems in a timely manner, to the extent
Harken is unable to replace the goods, services or customers with alternate
sources of supply and demand on a timely and economically equivalent basis. Such
failure would likely have a material adverse effect on Harken's business and
results of operations.
Estimated Costs. The total financial effect that Year 2000 issues will
have on Harken cannot be predicted with any certainty at this time. In fact, in
spite of all efforts being made to rectify these problems, the success of
Harken's efforts will not be known with certainty until the year 2000 actually
arrives. Based on its assessment to date, Harken does not believe that the costs
to resolve any Year 2000 issues will be material. To date, Harken has spent less
than $100,000 on Year 2000 matters and it expects that the total cost, primarily
consulting fees and software purchases, will not exceed $200,000.
Contingency Plan. Harken has not completed its implementation and
testing of Year 2000 compliant systems. However, a reasonably likely worst case
scenario is that Harken or certain of its purchasers or other vendors fail to
correct a material Year 2000 problem, which results in an interruption of
Harken's transportation and sale of Harken's crude oil and natural gas
production sales revenues. Certain interruptions could result in a material
adverse effect on Harken's results of operations, cash flows and financial
condition. Due to the inherent uncertainties relating to the effect of the Year
2000 on Harken's operations, it is difficult to predict what impact, if any,
noncompliance with the Year 2000 issue will have on Harken's results of
operations, cash flows and financial condition. Based on the results of the
implementation and testing of Harken's Year 2000 affected systems and ongoing
assessment of the readiness of its vendors, suppliers, 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.
(15) RESTATEMENT OF FINANCIAL STATEMENTS
In August 1999, following discussions with the Securities and Exchange
Commission's accounting staff, Harken, along with its independent public
accountants, agreed to change its accounting for certain Development Finance
Agreements to reflect amounts convertible into shares of Harken common stock as
a long-term obligation and to reflect the 15% per annum increase in amounts
convertible as interest expense in Harken's consolidated financial statements.
The restatement of Harken's consolidated financial statements had no effect on
Harken's historical revenues, gross profit, net working capital, or cash flow
for any of the periods. Harken had no long-term debt compliance covenants that
were affected by the restatement. See Note 6 - Development Finance and Operating
Agreements for a discussion of Harken's Development Finance Agreements and the
accounting for those agreements. Harken had previously accounted for these
transactions as conveyances of net profits interests and had recorded the sales
proceeds as deferred revenue.
The following table summarizes certain selected financial data as of
December 31, 1997 and 1998 and for the two year period ended December 31, 1998
as originally reported and as restated to reflect the revised accounting for
certain Development Finance Agreements:
55
<PAGE> 56
<TABLE>
<CAPTION>
1997 Quarter Year
Ended Ended
December 31, 1997 December 31, 1997
-------------------------- -----------------------------
Previously Previously
Reported Restated Reported Restated
---------- --------- ---------- ----------
<S> <C> <C> <C> <C>
Revenues:
Oil and gas $ 3,761 $ 3,761 $ 14,113 $ 14,113
Interest and other 1,729 1,729 4,655 4,655
---------- ---------- --------- ---------
5,490 5,490 18,768 18,768
Costs and Expenses:
Oil and gas operating 1,573 1,573 5,581 5,581
General and administrative 2,151 2,151 6,222 6,222
Depreciation and amortization 1,571 1,571 5,183 5,183
Interest expense and other, net 95 568 1,530 2,003
---------- ---------- --------- ---------
5,390 5,863 18,516 18,989
Income tax expense 63 63 63 63
---------- ---------- --------- ---------
Net income (loss) 37 (436) 189 (284)
Net income (loss) attributed to
common stock 37 (436) 189 (284)
Basic and diluted net income 0.00 (0.00) 0.00 (0.00)
(loss) per common share
Total assets 238,513 238,780 238,513 238,780
Stockholders' equity 157,881 157,408 157,881 157,408
</TABLE>
<TABLE>
<CAPTION>
1998 Quarter Ended
--------------------------------------------------------------------------------------------------------
March 31, June 30, September 30, December 31,
---------------------- ----------------------- ---------------------- ------------------------
Previously Previously Previously Previously
Reported Restated Reported Restated Reported Restated Reported Restated
---------- --------- ---------- ---------- ---------- --------- ---------- ----------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Revenues:
Oil and gas $ 2,700 $ 2,700 $ 2,634 $ 2,634 $ 3,097 $ 3,097 $ 2,501 $ 2,501
Interest and other 1,662 1,662 2,262 2,262 2,657 2,657 2,257 2,257
--------- --------- --------- --------- --------- --------- --------- ---------
4,362 4,362 4,896 4,896 5,754 5,754 4,758 4,758
Costs and Expenses:
Oil and gas operating 1,382 1,382 1,346 1,346 1,690 1,690 1,570 1,570
General and
administrative 1,758 1,758 1,766 1,766 2,018 2,018 3,862 3,862
Depreciation and
amortization 1,130 1,130 1,286 1,286 1,462 1,462 1,441 1,441
Valuation allowance -- -- -- -- 27,787 27,787 22,731 22,731
Interest expense and
other, net 8 641 208 1,064 322 1,241 425 1,348
--------- --------- --------- --------- --------- --------- --------- ---------
4,278 4,911 4,606 5,462 33,279 34,198 30,029 30,952
Income tax expense -- -- 46 46 -- -- (12) (12)
--------- --------- --------- --------- --------- --------- --------- ---------
Net income (loss) $ 84 $ (549) $ 244 $ (612) $ (27,525) $ (28,444) $ (24,903) $ (26,182)
Net income (loss)
attributed to common
stock 84 (549) 75 (781) (27,712) (28,631) (26,749) (27,672)
Basic and diluted net 0.00 (0.00) 0.00 (0.01) (0.22) (0.22) (0.20) (0.21)
income (loss)
per common share
Total assets 247,964 248,809 365,569 368,032 331,019 337,254 304,538 320,116
Stockholders' equity 160,893 159,787 232,740 230,778 202,674 199,792 179,942 176,138
<CAPTION>
1998 Year
Ended
December 31,
-----------------------
Previously
Reported Restated
---------- ---------
<S> <C> <C>
Revenues:
Oil and gas $ 10,932 $ 10,932
Interest and other 8,838 8,838
--------- ---------
19,770 19,770
Costs and Expenses:
Oil and gas operating 5,988 5,988
General and
administrative 9,404 9,404
Depreciation and
amortization 5,319 5,319
Valuation Allowance 50,518 50,518
Interest expense and
other, net 963 4,294
--------- ---------
72,192 75,523
Income tax expense 34 34
--------- ---------
Net income (loss) $ (52,456) $ (55,787)
Net income (loss)
attributed to common
stock (54,302) (57,633)
Basic and diluted net (0.42) (0.44)
income (loss)
per common share
Total assets 304,538 320,116
Stockholders' equity 179,942 176,138
</TABLE>
56
<PAGE> 57
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............................................... 18
-- Selected Financial Information and Other Data for the five years ended
December 31, 1998..................................................................... 4
-- Consolidated Balance Sheets -- December 31, 1997 and 1998.............................. 19
-- Consolidated Statements of Operations for the three years ended
December 31, 1998 .................................................................. 20
-- Consolidated Statements of Stockholders' Equity for the three years ended
December 31, 1998................................................................... 21
-- Consolidated Statements of Cash Flows for the three years ended
December 31, 1998................................................................... 22
-- Notes to Consolidated Financial Statements............................................. 23
</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).
57
<PAGE> 58
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).
58
<PAGE> 59
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).
59
<PAGE> 60
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).
60
<PAGE> 61
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).
27 Financial Data Schedule.
(b) Reports on Form 8-K
None.
61
<PAGE> 62
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 Form 10-K/A
to be signed on its behalf by the undersigned, thereunto duly authorized, in the
City of Houston, State of Texas, on August 12, 1999.
HARKEN ENERGY CORPORATION
/s/ Bruce N. Huff
- ------------------------------------------------------------------------
Bruce N. Huff, President, Chief Financial Officer and Director
62
<PAGE> 63
EXHIBIT INDEX
<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> 64
<TABLE>
EXHIBIT
NUMBER DESCRIPTION
- ------- -----------
<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> 65
<TABLE>
EXHIBIT
NUMBER DESCRIPTION
- ------- -----------
<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> 66
<TABLE>
EXHIBIT
NUMBER DESCRIPTION
- ------- -----------
<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> 67
<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION
- ------- -----------
<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).
27 Financial Data Schedule.
</TABLE>
<TABLE> <S> <C>
<ARTICLE> 5
<RESTATED>
<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> 240,977,000
<DEPRECIATION> (74,759,000)
<TOTAL-ASSETS> 320,116,000
<CURRENT-LIABILITIES> 20,426,000
<BONDS> 123,552,000
0
15,000
<COMMON> 1,348,000
<OTHER-SE> 174,790,000
<TOTAL-LIABILITY-AND-EQUITY> 320,116,000
<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> 4,294,000
<INCOME-PRETAX> (55,753,000)
<INCOME-TAX> 34,000
<INCOME-CONTINUING> (55,787,000)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (55,787,000)
<EPS-BASIC> (.44)
<EPS-DILUTED> (.44)
</TABLE>
