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SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
FOR THE FISCAL YEAR ENDED DECEMBER 31, 1999
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
FOR THE TRANSITION PERIOD FROM ______ TO ______
COMMISSION FILE NUMBER 0-9207
HARKEN ENERGY CORPORATION
(Exact name of registrant as specified in its charter)
DELAWARE 95-2841597
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
16285 PARK TEN PLACE, SUITE 600 77084
HOUSTON, TEXAS (Zip Code)
(Address of principal executive offices)
Registrant's telephone number, including area code (281) 717-1300
Securities registered pursuant to Section 12(b) of the Act:
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Title of each class: Name of each exchange on which registered:
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COMMON STOCK, PAR VALUE $0.01 PER SHARE AMERICAN STOCK EXCHANGE
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Securities registered pursuant to Section 12(g) of the Act: NONE
INDICATE BY CHECK MARK WHETHER THE REGISTRANT (1) HAS FILED ALL REPORTS
REQUIRED TO BE FILED BY SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF
1934 DURING THE PRECEDING 12 MONTHS (OR FOR SUCH SHORTER PERIOD THAT THE
REGISTRANT WAS REQUIRED TO FILE SUCH REPORTS), AND (2) HAS BEEN SUBJECT TO SUCH
FILING REQUIREMENTS FOR THE PAST 90 DAYS. YES [X] NO
INDICATE BY CHECK MARK IF DISCLOSURE OF DELINQUENT FILERS PURSUANT TO ITEM
405 OF REGULATION S-K IS NOT CONTAINED HEREIN, AND WILL NOT BE CONTAINED, TO THE
BEST OF REGISTRANT'S KNOWLEDGE, IN DEFINITIVE PROXY INFORMATION STATEMENTS
INCORPORATED BY REFERENCE IN PART III OF THIS FORM 10-K OR ANY AMENDMENT TO THIS
FORM 10-K. [X]
The aggregate market value of the voting Common Stock, par value $0.01 per
share, held by nonaffiliates of the Registrant as of February 23, 2000 was
approximately $130,050,000. 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 15, 2000 was 153,338,248.
DOCUMENTS INCORPORATED BY REFERENCE: DEFINITIVE PROXY MATERIALS FOR THE
2000 ANNUAL MEETING OF STOCKHOLDERS -- PART III, ITEMS 10, 11, 12, AND 13.
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TABLE OF CONTENTS
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PART I.
ITEM 1. Business.......................................................................... 3
ITEM 2. Properties........................................................................ 23
ITEM 3. Legal Proceedings................................................................. 23
ITEM 4. Submission of Matters to a Vote of Security Holders............................... 24
PART II.
ITEM 5. Market for Registrant's Common Equity and Related Stockholder Matters............. 24
ITEM 6. Selected Financial Information and Other Data..................................... 25
ITEM 7. Management's Discussion and Analysis of Financial Condition and
Results of Operations............................................................. 26
ITEM 8. Financial Statements and Supplementary Data....................................... 37
ITEM 9. Changes in and Disagreements with Accountants on Accounting and
Financial Disclosure.............................................................. 80
PART III.
ITEM 10. Directors and Executive Officers of the Registrant................................ 80
ITEM 11. Executive Compensation............................................................ 80
ITEM 12. Security Ownership of Certain Beneficial Owners................................... 80
ITEM 13. Certain Relationships and Related Transactions.................................... 80
PART IV.
ITEM 14. Exhibits, Financial Statement Schedules and Reports on Form 8-K................... 81
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PART I
ITEM 1. BUSINESS
OVERVIEW
Harken Energy Corporation (together with its wholly-owned or controlled
subsidiaries, "Harken") is engaged in oil and gas exploration, development and
production operations both domestically and internationally through its various
subsidiaries. Harken's domestic operations include oil and gas exploration,
development and production operations in the Four Corners area of Utah, Arizona
and New Mexico, in the onshore region of South Texas, in portions of West Texas
and the Texas Panhandle region, in the Magnolia region of Arkansas, in the
Carlsbad region of New Mexico, and the onshore and offshore regions of Southern
Louisiana. Harken's international operations include five exclusive Association
Contracts with the state-owned oil company in the Republic of Colombia and
Harken's contract to participate in an Exploration and Production Contract to be
signed with the Republic of Costa Rica.
Harken was incorporated in 1973 in the state of California and
reincorporated in 1979 in the state of Delaware. Harken's principal offices are
currently located at 16285 Park Ten Place, Suite 600, Houston, Texas 77084 and
its telephone number is (281) 717-1300.
INTERNATIONAL EXPLORATION AND DEVELOPMENT OPERATIONS - COLOMBIA
Harken's international operations consist primarily of its exploration
operations in the Republic of Colombia. Harken, through its wholly-owned
subsidiary Harken de Colombia, Ltd. ("Harken Colombia"), currently holds five
exclusive Association Contracts with Empresa Colombiana de Petroleos
("Ecopetrol"), the state-owned Colombian oil company.
Alcaravan Contract -- During the fourth quarter of 1992, Harken
Colombia and Ecopetrol entered into an Association Contract covering the
Alcaravan area (the "Alcaravan Contract"). The Alcaravan Contract originally
granted to Harken Colombia the exclusive right to explore for, develop and
produce oil and gas throughout approximately 210,000 acres in the Alcaravan area
of Colombia. Subsequently, the Alcaravan Contract area has been reduced to its
current size of approximately 101,000 acres. The Alcaravan area is located in
Colombia's Llanos Basin and is located approximately 140 miles east of Santafe
de Bogota. Harken Colombia is required to conduct a seismic and exploratory
drilling program during the initial six years of the Alcaravan Contract (the
"Exploration Period"). At the end of each of the first six years of the
Alcaravan Contract, Harken Colombia has the option to withdraw from the
Alcaravan Contract or to commit to the next year's work requirements. If during
the Exploration Period of the Alcaravan Contract, Harken Colombia discovers one
or more fields capable of producing oil or gas in quantities that are
economically exploitable and Ecopetrol elects to participate in the development
of the field by declaring it commercial or Harken chooses to proceed with the
development on a sole-risk basis, the term of the Alcaravan Contract related to
the areas of commerciality will be extended for a period of 22 years from the
date of such discovery.
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Upon a discovery of an economically exploitable field, the election by
Ecopetrol to participate in the commercial field and upon commencement of
production from that commercial field, Ecopetrol will reimburse Harken Colombia
for 50% of Harken Colombia's successful well costs expended up to the point of
declaration of a commercial discovery out of Ecopetrol's share of production,
net of royalties. Reimbursement by Ecopetrol to Harken Colombia may either be
directly, or through allowing its share of production to apply to Harken
Colombia's cost recovery. Production from the field following a commercial
discovery will be allocated as follows: Ecopetrol, on behalf of the Colombian
government, will receive a 20% royalty interest in all production and all
production (after royalty payments) will be allocated 50% to Ecopetrol and 50%
to Harken Colombia until cumulative production in such field reaches 60 million
barrels of oil, after which Ecopetrol's share of production will progressively
increase and Harken Colombia's share will progressively decrease until
cumulative production from the field reaches 150 million barrels of oil, and
thereafter all production will be allocated 70% to Ecopetrol and 30% to Harken
Colombia. If more than one commercially declared field is discovered on the
Alcaravan area, the production sharing percentages applicable to the field with
the greatest cumulative production will be applied to all fields within the
Alcaravan area. After declaration of a commercial discovery, Harken Colombia and
Ecopetrol will be responsible for all future development costs and operating
expenses in direct proportion to their interest in production.
The Alcaravan Contract provides that at the end of the Exploration
Period if a field capable of producing hydrocarbons in commercial quantities has
been discovered, the Alcaravan Contract area will be reduced by 50%. As
discussed below, effective December 1999, Harken Colombia has relinquished
certain Alcaravan Contract area acreage pursuant to this requirement. Two years
following the end of the Exploration Period, the Alcaravan Contract area will be
further reduced to 25% of the original area. Two years thereafter, the Alcaravan
Contract area will be reduced to the area of the commercial field that is in
production or development, plus a reserve zone of five kilometers in width
around the productive boundary of such field. The commercial field plus the zone
surrounding such field will become the area of exploitation. Harken Colombia
will designate the acreage to be released subject to acceptance by Ecopetrol.
Harken Colombia has completed all of the work requirements of the first
five years of the Alcaravan Contract. Effective December 29, 1999, Ecopetrol
accepted Harken's relinquishment of 52% of the Alcaravan Contract area as
required under the Alcaravan Contract. During September 1999, Ecopetrol granted
a six-month extension until March 31, 2000 to Harken Colombia for drilling the
exploratory well required in the sixth year of the Alcaravan Contract. Harken
Colombia does not currently have any plans to drill an additional well on the
Alcaravan Contract area acreage until December 2000. In February 2000, Harken
Colombia was granted by Ecopetrol a further extension until January 31, 2001 to
drill this sixth year exploratory well of the Alcaravan Contract. In exchange,
Harken Colombia relinquished all Alcaravan Contract area acreage to Ecopetrol
except for the approximately 24,000 acres covering those structure areas
associated with the Palo Blanco and Anteojos discoveries. Accordingly, the
acreage relinquishments had no effect on Harken Colombia proved reserves. See
"Negotiations with Ecopetrol" for further discussion.
In June 1999, Harken Colombia submitted a request to Ecopetrol for
commerciality relating to the Palo Blanco Prospect area. Pursuant to the terms
of the Alcaravan Contract, Ecopetrol has ninety days after the acceptance of the
commerciality application to submit their response back to Harken Colombia.
Ecopetrol has requested additional time to study the reservoir before completing
their analysis of commerciality. The Alcaravan Contract provides that if
Ecopetrol declares the existence of the commercial field, Ecopetrol would begin
to participate, upon the terms of the Alcaravan Contract, in the development of
the commercial field. If Ecopetrol does not elect to participate, Harken
Colombia would then have the choice to proceed with the development of the
prospect area on a sole-risk basis. If Harken Colombia does proceed on a
sole-risk basis, it will be entitled to receive Ecopetrol's share of production
after royalty, until
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Harken Colombia has recovered 200% of its costs, after which time Ecopetrol
would receive its share of production.
Harken Colombia has to date drilled four wells on the Alcaravan
acreage. The first well, the Alcaravan #1, was drilled in February 1995, and did
not find commercial quantities of oil or gas. In February 1997, Harken Colombia
drilled the Estero #1 well located on the Palo Blanco prospect. The Estero #1
well was drilled to a depth of 8,608 feet to test the Carbonera, Mirador,
Guadalupe, Gacheta and Ubaque formations. During initial production testing of
the Ubaque formation, the Estero #1 well produced at the rate of 4,116 gross
barrels of oil per day. In December 1997 and early 1998, Harken Colombia drilled
and completed the Estero #3, also located on the Palo Blanco Prospect. Although
the Estero #3 well initially produced oil from the Upper and Middle Ubaque
during preliminary production testing, the well subsequently produced
significant water from the Middle Ubaque. Harken also tested the Mirador,
Guadalupe and the deeper Paleozoic formations and found them to be
noncommercial. Through December 31, 1999, Harken Colombia has expended
approximately $26.1 million of net oil and gas exploration and development costs
related to the Alcaravan Association Contract.
In April 1999, Harken Colombia commenced pipeline transportation on the
Alcaravan Contract Area through its newly completed flowline connecting the Palo
Blanco field to an existing crude oil pipeline system. During portions of the
most recent production test which began in November 1999, Harken Colombia has
produced at rates in excess of 3,000 gross barrels of oil per day from the
Estero #1 well, although sales of production have been temporarily limited to
approximately 1,000 gross barrels of oil per day due to pipeline constraints and
pumping capacity. Harken Colombia is considering trucking oil from time to time
from the well to supplement pipeline sales unless and until additional pipeline
capacity is available.
During the second quarter of 1998, Harken Colombia drilled and
completed the Canacabare #1, the first exploratory well to be drilled on the
Anteojos prospect. The Canacabare #1 was drilled vertically into the Paleozoic
formation to a total depth of 8,410 feet. Due to the Colombian rainy season and
resulting operating conditions in the Llanos Basin area in Colombia, the
drilling rig was moved off the location prior to the production test on the
well. Wireline log data analysis of the Canacabare #1 well indicated a net
productive thickness of approximately 90 feet in the three formations to be
tested in this well. During January 2000, equipment was mobilized to the well
site of the Canacabare #1 well and preliminary production test flows have
resulted in approximately 500 gross barrels of oil per day.
In 1996, Harken Colombia entered into two separate agreements with
industry partners, whereby each industry partner paid 1/3 of the cost of the
Estero #1 well, plus certain additional costs and fees and acquired a 25%
beneficial interest in the Palo Blanco Prospect. In addition, the industry
partners obtained certain rights to acquire a beneficial interest in any other
prospect on the Alcaravan acreage by paying a portion of the costs associated
with such prospect. Each industry partner also acquired a 25% beneficial
interest in the Anteojos prospect. Effective December 31, 1998, Harken entered
into an agreement with one of the industry partners pursuant to which Harken
reacquired all of its beneficial interest in the Alcaravan and Miradores
Contract areas. In May 1999, Harken purchased all of the interests held by the
second industry partner in the Alcaravan and Miradores Contract areas.
Harken's net revenue interest in production from the Alcaravan Contract
will depend upon whether or not Ecopetrol elects to participate. Assuming that
Ecopetrol elects to participate in the development of the Alcaravan Contract,
Harken will initially receive 40% of the gross revenues from production from the
Alcaravan Contract area. To the extent that a field produces in excess of 60
million barrels, Harken's net revenue interest will decrease as described above.
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Bocachico Contract -- In January 1994, Harken Colombia signed its
second Association Contract (the "Bocachico Contract") with Ecopetrol, covering
the Bocachico Contract area. Under the Bocachico Contract, Harken Colombia
acquired the exclusive rights to conduct exploration and production activities
and drilling on this area, which covers approximately 192,000 acres in the
Middle Magdalena Valley of Central Colombia. During the exploratory period of
the Bocachico Contract, if Harken Colombia makes a commercial discovery on one
or more prospect areas in the contract area, the contract covering such prospect
area(s) will be further extended for a period of 22 years from the date of any
commercial discovery of oil and/or gas. The production sharing and acreage
relinquishment arrangements under the Bocachico Contract are substantially
similar to those under the Alcaravan Contract.
Harken Colombia has fulfilled all of the work requirements for the
first four years of the Bocachico Contract. The work requirements for the fifth
year required Harken Colombia to drill one exploratory well by May 6, 1999, and
the sixth year work obligation required an additional exploratory well to be
drilled by March 6, 2000. Harken Colombia did not drill the fifth year
exploratory well, and Harken Colombia does not currently have any plans to drill
a well on the Bocachico Contract area acreage during 2000. Harken Colombia is
currently negotiating with Ecopetrol for a modification of the fifth and sixth
year work obligations, and management believes that it will be successful in
negotiating such modifications. Such negotiations include a proposal to
relinquish all but approximately 53,000 acres of Bocachico Contract area
acreage, although Harken Colombia's proposal to Ecopetrol includes retaining the
structure area associated with the Rio Negro Prospect. Such proposed
relinquishment would not affect Harken Colombia's proved reserves. Ecopetrol has
advised Harken that during these negotiations, Ecopetrol will consider the
contract to be in full compliance. See "Negotiations with Ecopetrol" for further
discussion.
In October 1995, Harken Colombia entered into a Development Finance
Agreement (the "Rio Negro Development Finance Agreement") with four
institutional investors (the "Rio Negro Investors"), pursuant to which the Rio
Negro Investors provided up to $3,500,000 to Harken Colombia to finance a
portion of the drilling of two wells on the Rio Negro prospect in the Bocachico
Contract area in exchange for the right to receive future payments from Harken
Colombia equal to 40% of the net profits that Harken Colombia may derive from
the sale of oil and gas produced from the Rio Negro prospect (the
"Participation") if the planned drilling on that prospect is successful. In
March 1997, Harken entered into an agreement with the Rio Negro Investors
pursuant to which the Participation was reduced to 10% from 40% in exchange for
900,000 shares of Harken common stock.
Harken Colombia has drilled three wells on the Bocachico Contract area
in the Rio Negro Prospect. The Torcaz #2 well was drilled in 1996, and then
recompleted in 1997, and the Torcaz #3 was spudded in April 1997. During the
second quarter of 1998, Harken Colombia initiated sales of production from both
the Torcaz #2 and Torcaz #3 wells to a local purchaser at the wellsites and for
most of 1998 these wells produced in excess of 100 gross barrels of oil per day.
During the second half of 1998, Harken Colombia drilled the third exploratory
well on the Rio Negro prospect, the Torcaz #5. The well tested with similar
results to Torcaz #2 and Torcaz #3. Harken did not produce from the Torcaz wells
during 1999, and Harken Colombia is currently studying the wells in order to
determine the optimum production method with which to economically produce the
heavy crude encountered in such wells. Through December 31, 1999, Harken
Colombia has expended approximately $30.7 million of net oil and gas exploration
and development costs related to the Bocachico Association Contract.
Harken submitted a Commerciality Application for the Rio Negro field in
December 1999. Ecopetrol has requested additional information and additional
time in excess of the customary ninety days to review this application. Harken's
net revenue interest in production from the Bocachico Contract will depend upon
whether or not Ecopetrol elects to participate. If Ecopetrol does not elect to
participate, Harken Colombia
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would then have the choice to proceed with the development of the prospect area
on a sole-risk basis. If Harken Colombia does proceed on a sole-risk basis, it
will be entitled to receive Ecopetrol's share of production after royalty, until
Harken Colombia has recovered 200% of its costs, after which time Ecopetrol
would receive its share of production. Assuming that Ecopetrol elects to
participate in the development of the Bocachico Contract, Harken will initially
receive 40% of the gross revenues from production from the Bocachico Contract
area. To the extent that a field produces in excess of 60 million barrels,
Harken's net revenue interest will decrease as described above.
Cambulos Contract -- In September 1995, Harken Colombia signed an
additional Association Contract (the "Cambulos Contract") with Ecopetrol,
covering the Cambulos Contract area. Under the Cambulos Contract, Harken
Colombia has acquired the exclusive rights to conduct exploration and production
activities in the Cambulos Contract area, which covers approximately 300,000
acres in the Middle Magdalena Valley of Central Colombia.
During the first two years of the Cambulos Contract, Harken Colombia
was required to conduct geologic studies on the lands covered by this contract,
including reprocessing of at least 400 kilometers of existing seismic data and
the acquisition of at least 90 kilometers of new seismic data. Harken Colombia
has completed the work program for the first two years of the Cambulos Contract.
The Cambulos Contract originally required that the Cambulos Contract acreage be
reduced to 173,000 acres at the end of the second contract year, but in May
1998, Ecopetrol agreed to defer relinquishment of the acreage in exchange for
Harken Colombia drilling two exploratory wells within the third contract year.
During May 1999, Harken Colombia received approval from Ecopetrol to allow for
the additional well depth drilled during the Islero #1 well to substitute for
the obligation to drill a second exploratory well within the third contract
year. During September 1999, Ecopetrol conditionally granted a six month
extension from November 1999 until May 16, 2000 to Harken Colombia for the
drilling of the exploratory well required in the fourth year of the Cambulos
Contract. Harken Colombia does not currently have any plans to drill an
additional well on the Cambulos Contract area acreage during 2000 and Harken
Colombia is currently in negotiations with Ecopetrol regarding this well
requirement for the fourth contract year. Harken Colombia's proposal includes
the relinquishing of all but approximately 41,000 acres of its Cambulos Contract
acreage and transferring the obligation to acreage on another Association
Contract in order to meet the conditions required by Ecopetrol in granting
Harken Colombia an extension. Such relinquishment would not affect Harken
Colombia's proved reserves. See "Negotiations with Ecopetrol" for further
discussion.
If during the exploratory period of the Cambulos Contract, Harken
Colombia discovers a field capable of commercial production of oil or gas, the
term of the Cambulos Contract will be extended for a period of 22 years from the
date of such commercial discovery. Upon a commercial discovery and at the
initiation of production from the commercial field, Harken Colombia will be
reimbursed by Ecopetrol for 50% of all seismic costs and direct exploratory well
costs (including costs related to dry holes) incurred prior to the point at
which a declaration of a commercial discovery is made. Production from a
commercial discovery will be allocated as follows: Ecopetrol, on behalf of the
Colombian government, will receive a 20% royalty interest in all production, and
all production (after royalty payments) will be allocated 50% to Ecopetrol and
50% to Harken Colombia until cumulative production from all fields in the
Cambulos acreage reaches 60 million barrels of oil, after which Ecopetrol's
share of production will increase progressively to 75% and Harken Colombia's
share will decrease progressively to 25%, determined by a formula based on
Harken Colombia's recovery of its total expenditures under the Cambulos
Contract. After a declaration of a commercial discovery, Harken Colombia and
Ecopetrol will be responsible for all future development costs and operating
expenses in direct proportion to their interest in production. The acreage
relinquishment provisions of the Cambulos Contract are substantially similar to
those contained in the Alcaravan Contract.
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In August 1998, Harken Colombia spudded its first well on the Cambulos
Contract area, the Islero #1, located in the Middle Magdalena Basin. During the
drilling of the Islero #1, Harken Colombia encountered multiple highly fractured
and faulted zones which led to various mechanical problems. Ultimately, the
fourth sidetrack on the well was drilled into the Cimarrona formation at 7,726
feet and was drilled into the structure. Initially, the formation had good shows
of high quality oil and gas throughout the Cimarrona, but the well subsequently
produced large volumes of water and did not sustain oil production levels during
the short-term testing. Harken Colombia has determined that the Cimarrona
formation did not have adequate thickness or fracturing to economically produce.
Through December 31, 1999, Harken Colombia has expended approximately $46.1
million of net oil and gas exploration and development costs related to the
Cambulos Association Contract.
Harken Colombia's net revenue interest in any production from the
Cambulos Contract will depend upon whether or not Ecopetrol elects to
participate. Assuming that Ecopetrol elects to participate in the development of
the Cambulos Contract, Harken Colombia will initially receive 40% of the gross
revenues from production from the Cambulos Contract area. To the extent that a
field produces in excess of 60 million barrels, Harken Colombia's net revenue
interest will decrease as described above.
Bolivar Contract -- In May 1996, Harken Colombia signed an additional
Association Contract (the "Bolivar Contract") with Ecopetrol, covering the
Bolivar Contract area. Under the Bolivar Contract, Harken Colombia has acquired
the exclusive rights to conduct exploration and production activities in the
Bolivar Contract area, which covers approximately 250,000 acres in the Northern
Middle Magdalena Valley of Central Colombia.
Harken Colombia has completed all of the work obligations ahead of the
required schedule for the first four years of the Bolivar Contract. During each
of the fifth and sixth contract years, Harken Colombia may elect to continue the
contract by committing to the drilling of at least one well during each contract
year. Under the terms of the Bolivar Association Contract, Harken must drill the
next exploratory well by July 2001 in order to continue this contract in full.
The production sharing and acreage relinquishment arrangements under the Bolivar
Contract are substantially similar to those under the Cambulos Contract. See
"Negotiations with Ecopetrol" for further discussion.
In November 1997, Harken spudded its first well on the Bolivar Contract
acreage, the Catalina #1. The Catalina #1 well was drilled as a horizontal well
to test the Rosa Blanca formation. During initial production testing, the
Catalina #1 well produced at rates averaging 7,073 barrels of oil per day and
11.5 million cubic feet of gas per day or 9,680 barrels of oil equivalent per
day. The well was designed to be drilled a horizontal distance of up to 6,000
feet. Harken Colombia elected to end the horizontal drilling at approximately
1,265 feet upon achieving significant production rates. In March 1998, Harken
Colombia spudded the Olivo #1. The Olivo #1 was drilled from the same surface
location as the Catalina #1 to a total horizontal distance of approximately
6,000 feet using underbalanced horizontal drilling. Overall total length of the
well bore is 10,215 feet. The well initially tested at a production rate of
10,800 gross barrels of oil per day with no water from the Middle Cretaceous
naturally fractured Salada (Lower La Luna) formation.
In May 1999, Harken Colombia spudded its third exploratory well, the
Laurel #1, on the Bolivar Contract Acreage. The Rosa Blanca formation in the
Laurel #1 had log results similar to the Catalina #1 well, which is
approximately six kilometers to the northwest of the Laurel #1 location. During
the drilling process, Harken did see intermittent shows of oil and gas, but did
not encounter the expected high volume formation fluid flows from the wellbore.
A portion of the drill string was lost in the Laurel #1 well, and Harken was
unable to perform a conclusive production test through the lost pipe and bit.
Initial testing on the Laurel #1 showed rates of up to 650 barrels of fluid per
day with 15% to 75% oil content. Harken Colombia is initiating further testing
operations on the Laurel #1, with current plans calling for the
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installation of a new rod pump assembly to further test the Rosa Blanca
formation in this well. If the test does not prove successful, Harken Colombia
plans to move up hole and test the La Luna formation, which was present in this
well based on log analysis. Results of this study should provide information
useful in determining if the well's production was limited due to mechanical or
geological reasons.
During 1999, Catalina # 1 and Olivo #1 produced a total of 405,000
gross barrels of oil. Production of the two wells was interrupted during the
year due to the expiration and eventual renewal of the long term production test
permit and the installation of new artificial lift equipment for both wells. The
Olivo #1 well in the La Luna formation has stabilized and is currently producing
approximately 1,000 gross barrels of oil per day. The Rosa Blanca formation
Catalina #1 well has currently stabilized at approximately 450 gross barrels of
oil per day. Harken Colombia is currently trucking all oil production from the
field. Harken Colombia has received construction and environmental permits for
two five-mile flowlines for the Bolivar area and plans are underway for the
installation of a field flowline over the next few months. Harken Colombia had
earlier planned to construct the flowline during late 1999 or early 2000, but
decided to delay the actual construction of the flowline following the initial
results of the Laurel #1 well. Harken Colombia will continue to truck 100% of
daily field production while the flowline is being installed.
In March 1999, Harken Colombia filed a request with Ecopetrol to
declare the Catalina field to be commercial. Ecopetrol has requested additional
time to study the reservoir before completing their analysis of commerciality.
The commerciality process is similar to the process provided under the Alcaravan
Contract, and within 90 days after the acceptance of the commerciality
application, Ecopetrol is required to submit their response back to Harken
Colombia. With Ecopetrol's request for additional time and information related
to this application, the timetable for their response has been delayed.
Ecopetrol may approve the commerciality request or require Harken Colombia to
proceed on a sole-risk basis for its development plans. If Harken Colombia
proceeds on a sole-risk basis, it will be entitled to receive Ecopetrol's share
of production after royalty, until Harken Colombia has recovered 200% of its
costs, after which time Ecopetrol would receive its share of production. As
discussed further in "Item 7A. Management's Discussion and Analysis, Liquidity
and Capital Resources", Harken is reviewing certain aspects of the Catalina
field development project in light of the above current production information,
Harken's drilling and development plans and the status of its project finance
facility. Through December 31, 1999, Harken Colombia has expended approximately
$61.3 million of net oil and gas exploration and development costs related to
the Bolivar Association Contract.
Harken's net revenue interest in production from the Bolivar Contract
will depend upon whether or not Ecopetrol elects to participate. Assuming that
Ecopetrol elects to participate in the development of the Bolivar Contract,
Harken will initially receive 40% of the gross revenues from production from the
Bolivar Contract area. To the extent that a field produces in excess of 60
million barrels, Harken's net revenue interest will decrease as described above.
Miradores Contract -- In December 1997, Harken Colombia signed an
additional Association Contract (the "Miradores Contract") with Ecopetrol,
covering the Miradores Contract area. Under the Miradores Contract, Harken
Colombia acquired the exclusive rights to conduct exploration activities in the
Miradores Contract area, which covers approximately 32,000 acres in the Llanos
Basin which are contiguous with the Alcaravan acreage. In August 1999, Harken
Colombia decided not to elect to continue the Miradores Contract into its second
year, thus the contract acreage was relinquished back to Ecopetrol.
Los Olmos Contract -- In March 1998, Harken Colombia signed the Los
Olmos Association Contract (the "Los Olmos Contract") with Ecopetrol, covering
the Los Olmos Contract area. Under the Los Olmos Contract, Harken Colombia has
acquired the exclusive rights to conduct exploration activities in the Los Olmos
Contract area, which covers approximately 374,000 acres in the Lower Magdalena
Valley.
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<PAGE> 10
During the first two years of the Los Olmos Contract, and before May
24, 2000, Harken Colombia is required to reprocess at least 500 kilometers of
existing seismic data and acquire at least 120 kilometers of new seismic data
and 2,000 kilometers of aeromagnetic data, and prepare an engineering study of
the contract areas. During each of the third through the sixth contract years,
Harken Colombia may elect to continue the contract by committing to the drilling
of at least one well during each contract year. Harken Colombia is currently in
negotiations with Ecopetrol which could result in delaying the above work
requirements or transferring certain of the seismic obligations to another
Association Contract. See "Negotiations with Ecopetrol" for further discussion.
The production sharing and acreage relinquishment provisions of the Los Olmos
Contract are substantially similar to those contained in the Cambulos Contract.
Through December 31, 1999, Harken Colombia has expended approximately $501,000
of net oil and gas exploration and development costs related to the Los Olmos
Association Contract.
Harken Colombia's net revenue interest in production from the Los Olmos
Contract will depend upon whether or not Ecopetrol elects to participate.
Assuming that Ecopetrol elects to participate in the development of the Los
Olmos Contract, Harken Colombia will initially receive 40% of the gross revenues
from production from the Los Olmos Contract area. To the extent that a field
produces in excess of 60 million barrels, Harken Colombia's net revenue interest
will decrease as described above.
Negotiations with Ecopetrol - As discussed above, Harken Colombia is
currently involved in discussions and negotiations with Ecopetrol on certain
Association Contracts regarding certain contractual work requirements or the
timing under which such requirements are to be performed. Harken Colombia's
negotiations include the potential exchange of work requirements among one or
more Association Contracts. If Harken Colombia is unsuccessful in negotiating a
modification of the existing work obligations prior to the specified date for a
particular Association Contract, Harken Colombia will not be in compliance with
the Association Contract terms. Failure to comply with the terms of an
Association Contract could result in its termination, which could have a
material adverse effect on Harken's business.
Effective January 1, 2000, Ecopetrol formally adopted new Association
Contract terms which would be effective for new Association Contracts issued by
Ecopetrol and for certain new exploration work performed under existing
Association Contracts. Under the new terms, among other changes, Ecopetrol's 20%
royalty interest on behalf of the Colombian government would change to a
flexible percentage ranging from 5% to a maximum of 25%, and Ecopetrol's 50%
interest in all production after royalty would be reduced to 30%. Once
cumulative production reaches 60 million barrels of oil, Ecopetrol's share of
production would increase progressively to no more than 65% under the new
Association Contract terms, compared to a maximum 75% interest under the
previous terms. Harken Colombia is awaiting notice from Ecopetrol as to which of
its future work program obligations under its existing Association Contracts
would qualify as "new exploration" and therefore be subject to the new
Association Contract terms.
INTERNATIONAL EXPLORATION AND DEVELOPMENT OPERATIONS - COSTA RICA
In August 1999, the Exploration and Production concession contract with
the Republic of Costa Rica ("Costa Rica Contract") was signed by MKJ Xploration,
Inc. ("MKJ"), which was originally awarded the concession under Costa Rica's
bidding process that was finalized in October 1997. In the fourth quarter of
1998, Harken had announced an agreement to participate in this anticipated Costa
Rica Contract. The Contract covers approximately 1.4 million acres in the North
and South Limon Back Arc Basin onshore and offshore Costa Rica in Central
America.
The Costa Rican project is a logical extension of Harken's prior
exploratory success in Colombia. Indicated source rocks for the Costa Rican
structures are Middle Cretaceous black shales which are
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<PAGE> 11
equivalent to the La Luna/Querecual/Villeta oil source rocks of Northern South
America in the Magdalena, Llanos, Maracaibo and Maturin Basins. If the
geological interpretation is confirmed, it is expected that similar source rock
characteristics that Harken has encountered in its Colombian exploration program
will also be found in Costa Rica.
The Costa Rica Contract area is comprised of Blocks 2, 3, 4 and 12 from
Costa Rica's initial bidding round in October of 1997. Two of the Blocks are
located onshore and two are located offshore within Costa Rica's Caribbean
territorial waters. In November 1999, Harken and MKJ received Costa Rican
Ministry of Environment and Energy approval of its 1999-2000 budget and work
plan for the Costa Rica Contract. As part of this approved work plan, in late
November 1999, Harken commenced its offshore seismic acquisition program on
Block 12 in Costa Rica to collect approximately 100 square kilometers of 3-D
seismic information. Acquisition of the seismic data was completed in January
2000, and processing and interpretation of the data to develop the drilling
plans for the first exploratory well has already begun and is expected to be
completed early second quarter 2000. Drilling of the first exploratory well is
planned for the latter part of 2000.
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 owns the remaining 20% of the stock of this subsidiary. Under the terms of
the agreement between Harken and MKJ, Harken will pay $4.2 million to MKJ to
purchase its share of the Costa Rica Contract rights from MKJ after an agreement
and approval of the assignment is signed and ratified with the Republic of Costa
Rica. Application for assignment of the contract has been presented to the Costa
Rican government for final approval. Harken anticipates that assigning of these
contractual rights will be finalized during the second quarter of 2000.
Additionally, up to $8 million may be committed by Harken over the next two
years to fund the initial minimum work program obligations under the proposed
Costa Rica Contract.
DOMESTIC EXPLORATION AND PRODUCTION OPERATIONS
Harken operates or owns a non-operating working interest in 419 oil
wells and 222 gas wells in the U.S. Harken's operations are located in the
Paradox Basin in the Four Corners area of Arizona, Utah and New Mexico, portions
of West Texas and the Texas Panhandle region, the onshore South Texas region,
the Carlsbad region of New Mexico, the Magnolia region of Arkansas, and the
onshore and offshore regions of Southern Louisiana. During 1997, domestic oil
sales to Giant Refining, Inc., a purchaser of Harken's Four Corners production,
represented 15% of Harken's consolidated revenues. There was no customer during
1998 or 1999 which individually represented 10% or more of Harken's consolidated
revenues.
Four Corners Operations -- Harken operates a total of 23 oil wells and
6 gas wells in the Four Corners area of Arizona, Utah, and New Mexico. Harken
also owns an interest in the Aneth Gas Plant, a gas processing plant located in
the Paradox Basin (Harken's interest in the Aneth Gas Plant and the Four Corners
area oil and gas wells are hereinafter referred to as the "Four Corners
Properties"). Harken's activities in the Four Corners area are carried out
primarily through Harken Southwest Corporation ("HSW"), a wholly-owned
subsidiary.
HSW's operations in the Paradox Basin are primarily concentrated on the
16 million acre Navajo Indian Reservation, which comprises portions of Arizona,
New Mexico and Utah. HSW currently has two operating agreements with the Navajo
Tribe of Indians (the "Navajo Nation") allowing oil and gas exploration and
development on an aggregate of 16,036 acres of Navajo tribal lands on the
Reservation (the "Navajo Nation Lands"). HSW has the right to explore for,
produce, and sell oil, natural gas, and other specified gases until July 20,
2012, under the Tribal Agreement effective July 20, 1987 (the "1987 Tribal
11
<PAGE> 12
Agreement") and until August 26, 2003, under the Tribal Agreement effective
August 26, 1983 (the "1983 Tribal Agreement").
The Navajo Nation receives 30% of gross revenues from the sale of
production of oil and gas under the 1983 Tribal Agreement and 20% under the 1987
Tribal Agreement (23% with respect to proceeds from oil production in excess of
$22 per barrel). Under both Tribal Agreements, the Navajo Nation is entitled to
receive 50% of all gross proceeds recovered over $35 per barrel of oil. Under
the 1983 Tribal Agreement, the Navajo Nation receives 50% of all gross proceeds
over $4 per Mcf of gas. Under the 1987 Tribal Agreement, the Navajo Nation
receives 40% of all gross proceeds over $8 per Mcf of gas.
Texas Operations -- Harken operates or owns a non-operated interest in
224 oil wells and 198 gas wells in Texas. Harken operates 185 oil wells and 38
gas wells in Hutchinson and Gray Counties, owns non-operated interests in 34 oil
wells in Hockley County, and owns non-operated interests in 50 gas wells in
various counties of the Texas Gulf Coast region. Harken acquired its Texas
properties as a result of five acquisitions.
On August 29, 1997, Harken, along with Harken Exploration, purchased
working interests in oil and gas properties located in the Panhandle region of
Texas (the "Cal-T Properties"). The purchase price of approximately $3,416,000
consisted primarily of 565,000 shares of Common Stock.
On August 19, 1999, Harken merged with XPLOR Energy, Inc. ("XPLOR")
whereby XPLOR became a wholly-owned subsidiary of Harken. Through XPLOR, Harken
owns operated and non-operated interests in 5 oil wells and 110 gas wells in
various counties in South and West Texas.
New Mexico Operations -- Harken, through Harken Exploration, owns
non-operated interests in 20 oil wells in the Carlsbad region of New Mexico.
These properties were acquired as a part of the acquisition of the EnerVest
Properties described below.
Arkansas Operations -- Harken, through Harken Exploration, operates 27
oil wells and owns non-operated interests in 32 oil wells in Arkansas. On July
10, 1996, Harken Exploration purchased working interests in certain producing
oil and gas properties located in the Magnolia area of Arkansas and in the
Carlsbad area of New Mexico (the "EnerVest Properties") from EnerVest
Acquisition-II Limited Partnership ("EnerVest").
Louisiana Operations - Harken, through Harken Exploration and XPLOR,
owns operated and non-operated interests in southern Louisiana. In the St.
Martinville area, Harken has 17 oil wells, 1 gas well and 3 overriding royalty
interests. In the South Bayou Boeuf area, Harken has 7 oil wells. Through XPLOR,
Harken also owns interests in 68 oil wells and 17 gas wells in Southern
Louisiana, consisting of operated interests in the Lake Raccourci, Lapeyrouse,
Lake Boeuf and Main Pass areas.
EXECUTIVE OFFICERS OF HARKEN
The officers of Harken are elected annually by the Board of Directors
following each Annual Meeting of Stockholders, or as soon thereafter as
necessary and convenient. Each officer holds office until the earlier of such
time as his or her successor is duly elected and qualified, his or her death or
he or she resigns or is removed from office. Any officer elected or appointed by
the Board of Directors may be removed by the Board of Directors whenever, in its
judgement, the best interests of Harken will be served thereby, but such removal
will be without prejudice to the contract rights, if any, of the person so
removed.
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<PAGE> 13
The executive officers of Harken as of December 31, 1999, their ages
and positions held with Harken and their business experience for the past five
years are listed below.
<TABLE>
<CAPTION>
NAME AGE POSITION HELD WITH HARKEN
- ---- --- -------------------------
<S> <C> <C>
Mikel D. Faulkner 50 Chairman of the Board of Directors and
Chief Executive Officer
Bruce N. Huff 49 President, Chief Financial Officer and Director
Stephen C. Voss 51 Executive Vice President, Chief Operating Officer and Director
Larry E. Cummings 47 Vice President, Secretary and General Counsel
Richard O. Cottle 44 Executive Vice President, Production Operations
James W. Denny, III 52 Executive Vice President, Exploration Operations
A. Wayne Hennecke 41 Vice President - Finance
Anna M. Williams 29 Vice President - International Finance
J. Marc Lewis 46 Vice President
Rodger L. Ehrlish 47 Treasurer
Guillermo Sanchez 58 President, Harken de Colombia, Ltd.
</TABLE>
Mikel D. Faulkner has served as Chairman of the Board of Harken since
February 1991 and Chief Executive Officer of Harken since 1982. Mr. Faulkner
previously served as President of Harken between 1982 and 1993.
Bruce N. Huff has served as a Director of Harken since August 1996. Mr.
Huff has served as President of Harken since April 1998. Mr. Huff had previously
served as Senior Vice President and Chief Financial Officer since 1990.
Stephen C. Voss has served as a Director of Harken since July 1997. Mr.
Voss has served as Executive Vice President and Chief Operating Officer of
Harken since December 1998. Mr. Voss had previously served as Senior Vice
President of Harken since 1990. Mr. Voss has also served since 1990 as President
of Harken International, Ltd., a wholly-owned subsidiary of Harken.
Larry E. Cummings has served as Vice President, Secretary and General
Counsel of Harken since 1983. Mr. Cummings previously served as Senior Legal
Counsel and Vice President of Land for Harken from 1978 to 1983.
Richard O. Cottle has served as Executive Vice President, Production
Operations since October 1999. Since joining Harken in 1994, Mr. Cottle has
served as Vice President of Operations and as Operations Manager for Harken
Southwest Corporation, a wholly-owned subsidiary of Harken.
James W. Denny, III has served as Executive Vice President, Exploration
Operations since October 1999. From 1998 to October 1999, Mr. Denny served as
Senior Engineer/Operations Manager for XPLOR Energy, Inc. From 1995 to 1998, Mr.
Denny served as Vice President, Operations & Exploration for Polaris Exploration
Corporation.
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<PAGE> 14
Wayne Hennecke has been employed with Harken since 1988. Mr. Hennecke
has served as Vice President - Finance of Harken since January 1999. Mr.
Hennecke had previously served as Vice President - Finance and Chief Financial
Officer of Harken since April 1998 and Vice President and Treasurer of Harken
since June 1995. Mr. Hennecke also previously served as Vice President - Finance
for Harken's subsidiaries.
Anna M. Williams has served as Vice President - International Finance
since 1998. Ms. Williams has served as International Finance Manager since 1996.
Prior to joining Harken, Ms. Williams worked with Arthur Andersen, LLP in the
audit division.
J. Marc Lewis has served as Vice President since August 1998. From
November 1984 to August 1998, Mr. Lewis was President of Petrosource Capital
Corporation, an investment banking group with activities in the U.S. and Latin
America.
Rodger L. Ehrlish has served as Treasurer of Harken since April 1998.
Mr. Ehrlish has been employed by Harken since 1996 and previously served as Tax
Manager. Prior to 1996, Mr. Ehrlish was a C.P.A. in private practice.
Guillermo Sanchez has served as President of Harken de Colombia, Ltd.
since November, 1994.
CAUTIONARY STATEMENTS
Certain statements contained in this Annual Report, including
statements of Harken management's current expectations, intentions, plans and
beliefs, and statements containing the words "believes," "anticipates,"
"estimates," "expects," or "may," are forward-looking statements, as defined in
Section 21D of the Securities Exchange Act of 1934. Such forward-looking
statements involve known and unknown risk, uncertainties and other factors which
may cause the actual results, performance, timing or achievements of Harken to
be materially different from any results, performance, timing or achievements
expressed or implied by such forward-looking statements. Such factors include,
among others, the following:
The trading price of Harken common stock may be significantly affected by the
results of drilling activity in Colombia and Costa Rica
Harken believes that the price of its common stock may fluctuate
significantly based upon the success or failure of each well that Harken drills
in Colombia and Costa Rica. Based in part on the results of such drilling
activity and on the significant decline in the market price of crude oil, the
market price of Harken's common stock declined significantly in 1999. During
this period, Harken's common stock ranged from a high of $2.375 per share to a
low of $0.75 per share.
Pending SEC Review of Reserve Report
In connection with Harken's recent filing of a registration statement on Form
S-3, the Securities and Exchange Commission (the "SEC") has issued a comment
letter disagreeing with Harken's classification of its reserves in Colombia as
proved. Gaffney, Cline & Associates, Harken's independent reserve engineers,
classified these reserves as proved in the reserve report for the year ended
December 31, 1999 issued for Harken, which was used in the preparation of the
financial statements included herein. Harken has reviewed the SEC comments with
Gaffney Cline & Associates and both Gaffney Cline & Associates and Harken
believe that such reserves are properly classified as proved. However, if these
reserves are ultimately reclassified as not proved, Harken's Colombian proved
reserves will be materially reduced.
If estimates of Harken's oil and gas reserve information are inaccurate,
Harken's financial condition may suffer
Harken's proved oil and gas reserve information is based upon criteria
mandated by the SEC and represents only estimates. Harken's actual production,
revenues and expenditures with respect to such oil and gas reserves will likely
be different from estimates and the differences may be material. If estimates of
oil and gas reserves are greater than actual amounts, or if actual production
costs and expenditures are greater than estimates, Harken's business, financial
condition, and results of operations may be negatively affected.
Petroleum engineering is a subjective process of estimating underground
accumulations of oil and gas that cannot be measured in an exact manner.
Estimates of economically recoverable oil and gas reserves and of future net
cash flows necessarily depend upon a number of variable factors and assumptions.
Because all reserve estimates are to some degree subjective, each of the
following items may differ materially from those assumed in estimating reserves:
o the quantities of oil and gas that are ultimately recovered;
o the production and operating costs incurred;
o the amount and timing of future development expenditures; and
o future oil and gas sales prices.
Harken has a history of losses and may suffer losses in the future
Harken has reported losses in each of the last five years including a
loss of $12.7 million for the year ended December 31, 1999. Harken has
cumulative losses of $70.7 million over the last five years. Harken's ability
to generate net income is strongly affected by the market price of crude oil
and natural gas. If the market price of crude oil and natural gas declines,
Harken may report additional losses in the future.
Status of Compliance with the Terms of Colombian Association Contracts
Terms of each of the Association Contracts commit Harken to perform
certain activities in accordance with a prescribed timetable. Failure by Harken
to perform these activities as required could result in Harken losing its
rights under the particular Association Contract, which could potentially have
a material adverse effect on Harken's business. As of March 30, 2000, Harken
was in compliance with the requirements of each of the Association Contracts,
as amended and/or waived.
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<PAGE> 15
Harken may be unable to obtain additional financing for its international
activities, which could restrict its operations
Harken anticipates that full development of its existing and future oil
and gas discoveries in Colombia and Costa Rica will take several years and may
require extensive production and transportation facilities requiring significant
additional capital expenditures. If Harken is unable to timely obtain adequate
funds to finance these investments, it could limit or substantially delay
Harken's ability to develop its oil and gas reserves. In such a case, Harken's
business and results of operations could suffer.
Harken cannot predict the ultimate amount of expenditures for its
international operations. Harken anticipates that amounts required to fund its
international activities will be funded from its existing cash balances, asset
sales, stock issuances, production payments, operating cash flows and
potentially from industry partners. Harken can not assure you that it will have
adequate funds available to it to fund its international activities.
Harken may issue additional shares of common stock which may dilute the value of
Harken common stock to current stockholders and may adversely affect the market
price of Harken's common stock
Harken may be required to issue up to approximately 37 million shares
of common stock as a result of its outstanding warrants, stock options, and
convertible notes. If Harken issues additional shares, it could result in
significant dilution in your ownership position in Harken. In addition, the
issuance of a significant number of additional shares of common stock could have
an adverse effect on the market price of the common stock.
There are currently several registration statements with respect to the
common stock that are effective, pursuant to which certain selling stockholders
of the Company may sell up to an aggregate of 14,778,718 shares of common stock.
If the selling stockholders named in such registration statements sell all of
the shares of common stock registered pursuant to such registration statements,
such sales could cause an adverse effect on the market price of the common
stock.
Harken's operations in Colombia, Costa Rica and other foreign countries will be
subject to political, economic and other uncertainties
Harken conducts significant operations in Colombia and Costa Rica, and
will conduct operations in other foreign countries. At December 31, 1999,
approximately 69 % of Harken's proved reserves were related to Harken's
Colombian operations. Harken may also operate in other countries in the future.
Operations in foreign countries, particularly in the oil and gas business, are
subject to political, economic and other uncertainties, including:
o the risk of war, revolution, border disputes, expropriation,
renegotiation or modification of existing contracts, import, export
and transportation regulations and tariffs;
o taxation policies, including royalty and tax increases and
retroactive tax claims;
o exchange controls, currency fluctuations and other uncertainties
arising out of foreign government sovereignty over Harken's
international operations;
o laws and policies of the United States affecting foreign trade,
taxation and investment; and
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<PAGE> 16
o the possibility of having to be subject to the exclusive jurisdiction
of foreign courts in connection with legal disputes and the possible
inability to subject foreign persons to the jurisdiction of courts in
the United States.
Central and South America and other regions of the world have a history
of political and economic instability. This instability could result in new
governments or the adoption of new policies that might assume a substantially
more hostile attitude toward foreign investment. In an extreme case, such a
change could result in termination of contract rights and expropriation of
foreign-owned assets. These uncertainties could adversely affect Harken's
interests.
If oil and gas prices decrease, Harken may be required to take additional
writedowns
Harken must periodically review the carrying value of its oil and gas
properties under applicable accounting rules. These rules require a writedown of
the carrying value of oil and gas properties if the carrying value exceeds the
applicable estimated future net revenues. Whether Harken will be required to
take such a charge will depend on the prices for oil and gas at the end of any
quarter and the effect of reserve additions or revisions and capital
expenditures during such quarter.
As a result of the sharp decline in world-wide oil prices experienced
during 1998, at September 30, 1998, Harken recognized a non-cash charge in the
amount of approximately $27 million. Additionally, at December 31, 1998, Harken
recognized an additional non-cash charge in the amount of approximately $23
million.
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<PAGE> 17
Furthermore, different reserve engineers may make different estimates of
reserves and cash flows based on the same available data.
The estimated discounted future net cash flows should not be considered
as the current market value of the estimated oil and gas reserves attributable
to Harken's properties from proved reserves because such estimates are based on
prices and costs as of the date of the estimate, while actual future prices and
costs may be materially higher or lower.
If the United States imposes economic or trade sanctions on Colombia, Harken's
operations in Colombia may be adversely affected
The United States has imposed economic and trade sanction on Colombia in
the past, and may impose sanctions on Colombia in the future. The President of
the United States is required to determine whether foreign countries have
cooperated with the United States to prevent drug trafficking. In 1995, 1996 and
1997, the President determined that Colombia had not taken sufficient steps to
prevent drug trafficking. As a result, the United States imposed economic
sanctions on Colombia, including withholding bilateral economic assistance,
blocking Export-Import Bank and Overseas Private Investment Corporation loans
and political risk insurance, and voting against multilateral assistance to
Colombia in the World Bank and the InterAmerican Development Bank. In 1998, the
President determined that Colombia had taken sufficient steps to prevent drug
trafficking and the economic sanctions were lifted and have not been reinstated.
If the United States were to impose sanctions on Colombia, it could
affect Harken's ability to obtain the financing it needs in order to develop its
Colombian properties. The imposition of sanctions on Colombia could also cause
Colombia to retaliate against Harken by nationalizing Harken's Colombian assets.
Accordingly, imposition of the foregoing economic and trade sanctions on
Colombia could materially affect the performance of Harken's common stock and
its long-term financial results. We can not assure you the United States will
not impose sanctions on Colombia in the future.
Harken could suffer losses from exchange rate fluctuations
Harken accounts for its Colombian operations using the U.S. dollar as its
functional currency. The costs associated with Harken's exploration efforts in
Colombia have typically been denominated in U.S. dollars. Harken expects that a
substantial portion of its future Colombian revenues may be denominated in
Colombian pesos. To the extent that the amount of Harken's revenues denominated
in Colombian pesos is greater than the amount of costs denominated in Colombian
pesos, Harken could suffer a loss if the value of the Colombian peso were to
drop relative to the value of the U.S. dollar, which could have a material
adverse effect on Harken's results of operations.
Harken's oil and gas operations in less developed oil and gas industries such as
Colombia and Costa Rica involve substantial costs and are subject to various
economic risks
The oil and gas industries in Colombia and Costa Rica are not as
developed as the oil and gas industry in the U.S. As a result, Harken's drilling
and development operations may take longer to complete and may cost more than
similar operations in the U.S.
Harken's oil and gas operations will be subject to the economic risks
typically associated with exploration, development and production activities,
including the necessity of significant expenditures to locate and acquire
producing properties and to drill exploratory wells. In conducting exploration
and development activities, the presence of unanticipated pressure or
irregularities in formations, miscalculations or accidents may cause Harken's
exploration, development and production activities to be unsuccessful. This
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<PAGE> 18
could result in a total loss of Harken's investment. In addition, the cost and
timing of drilling, completing and operating wells is often uncertain.
Drilling oil and gas wells in Colombia and Costa Rica could be hindered by
hurricanes and other operating risks
Harken's operations in Colombia and Costa Rica are subject to risks from
hurricanes. Damage caused by hurricanes or other operating hazards could result
in substantial losses to Harken. The occurrence of such an event that is not
fully covered by insurance could have a material adverse effect on the financial
position and results of operations of Harken.
Harken may issue shares of preferred stock with greater rights than its common
stock
Harken is permitted under its charter to issue up to ten million shares
of preferred stock. Harken can issue shares of its preferred stock in one or
more series and can set the terms of the preferred stock without seeking any
further approval from you. Any preferred stock that is issued by Harken may rank
ahead of its common stock in terms of dividend priority or liquidation premiums
and may have greater voting rights than its common stock. Harken does not
currently have any shares of preferred stock outstanding.
Future acquisitions may dilute your percentage ownership in Harken or require
substantial expenditures
Harken's strategic plan includes the acquisition of additional reserves,
including through business combination transactions. Harken may not be able to
consummate future acquisitions on favorable terms. Additionally, future
acquisitions may not achieve favorable financial results.
Future acquisitions may involve the issuance of shares of Harken common
stock, which could have a dilutive effect on the current stockholders of Harken.
Furthermore, acquisitions may require substantial financial expenditures that
will need to be financed through cash flow from operations or future debt and
equity offerings by Harken. Harken may not be able to acquire companies or oil
and gas properties using its equity as currency. In the case of cash
acquisitions, Harken may not be able to generate sufficient cash flow from
operations or obtain debt or equity financing sufficient to fund future
acquisitions of reserves.
Harken faces strong competition from larger oil and gas companies
The exploration and production business is highly competitive. Many of
Harken's competitors have substantially larger financial resources, staffs and
facilities than Harken. Harken's competitors in Colombia and Costa Rica include
such major oil and gas companies as Amoco BP, Exxon, Mobil, Texaco, Conoco,
Shell and Arco. These major oil and gas companies are often better positioned to
obtain the rights to exploratory acreage that Harken competes for.
Government agencies in Colombia and Costa Rica can increase Harken's costs and
can terminate or suspend operations
In Costa Rica and Colombia, the laws governing the oil and gas industry
require Harken to obtain an environmental permit or approval prior to conducting
seismic operations, drilling a well or constructing a pipeline. The process of
obtaining an environmental permit has delayed Harken's operations in the past,
and could do so again in the future. Compliance with these laws and regulations
may increase Harken's costs of operations, as well as further restricting its
activities.
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PROPERTIES AND LOCATIONS
Production and Revenues -- The following table shows, for the periods
indicated, operating information attributable to Harken's oil and gas interests:
DOMESTIC
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
-------------------------------------------------------------------
1995 1996 1997 1998 1999
----------- ----------- ----------- ----------- -----------
<S> <C> <C> <C> <C> <C>
Production:
Oil (Bbls) 217,000 370,000 416,000 433,000 510,000
Natural Gas (Mcf) 810,000 1,409,000 1,922,000 2,063,000 2,847,000
Revenues:
Oil $ 3,985,000 $ 7,863,000 $ 8,029,000 $ 5,508,000 $ 9,188,000
Natural Gas $ 1,188,000 $ 3,611,000 $ 5,331,000 $ 4,373,000 $ 6,879,000
----------- ----------- ----------- ----------- -----------
Total $ 5,173,000 $11,474,000 $13,360,000 $ 9,881,000 $16,067,000
=========== =========== =========== =========== ===========
Unit Prices:
Oil (per Bbl) $ 18.36 $ 21.25 $ 19.30 $ 12.72 $ 18.02
Natural Gas (per Mcf) $ 1.47 $ 2.56 $ 2.77 $ 2.12 $ 2.42
Production costs per
equivalent barrel $ 6.06 $ 7.33 $ 7.58 $ 7.36 $ 7.84
Amortization per
equivalent barrel $ 5.68 $ 5.58 $ 6.60 $ 6.03 $ 5.41
</TABLE>
19
<PAGE> 20
INTERNATIONAL - COLOMBIA
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
-------------------------
1998 1999
----------- -----------
<S> <C> <C>
Production:
Oil (Bbls) 61,000 248,000
Natural Gas (Mcf) -- --
Revenues:
Oil $ 538,000 $ 3,026,000
Natural Gas $ -- $ --
----------- -----------
Total $ 538,000 $ 3,026,000
=========== ===========
Unit Prices:
Oil (per Bbl) $ 8.82 $ 12.20
Natural Gas (per Mcf) $ -- $ --
Production and transportation costs per
equivalent barrel $ 4.39 $ 4.90
Amortization per equivalent barrel $ 1.04 $ 2.97
</TABLE>
Acreage and Wells -- At December 31, 1999, Harken owned interests in
the following oil and gas wells and acreage.
DOMESTIC
<TABLE>
<CAPTION>
Undeveloped
Gross Wells Net Wells Developed Acreage Acreage
--------------------- --------------------- --------------------- ---------------------
STATE Oil Gas Oil Gas Gross Net Gross Net
--------- --------- --------- --------- --------- --------- --------- ---------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Alabama 1 -- 0.30 -- 320 75 -- --
Arizona -- 6 -- 6.00 4,690 4,417 -- --
Arkansas 59 -- 31.10 -- 4,040 2,256 -- --
Mississippi -- -- -- -- -- -- 17,156 16,493
New Mexico 20 -- 6.60 -- 1,430 718 -- --
Texas 224 198 205.00 138.75 49,159 34,038 39,190 14,792
Louisiana 92 18 60.54 4.22 10,411 4,642 13,622 4,867
Utah 23 -- 19.50 -- 8,836 8,306 433 408
--------- --------- --------- --------- --------- --------- --------- ---------
Total 419 222 323.04 148.97 78,886 54,452 70,401 36,560
========= ========= ========= ========= ========= ========= ========= =========
</TABLE>
20
<PAGE> 21
INTERNATIONAL - COLOMBIA
<TABLE>
<CAPTION>
Gross Wells Net Wells Developed Acreage Undeveloped Acreage
--------------------- --------------------- --------------------- ---------------------
CONTRACT AREA Oil Gas Oil Gas Gross Net Gross Net
--------- --------- --------- --------- --------- --------- --------- ---------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Alcaravan 1 -- 0.80 -- 2,253 1,127 98,747 49,374
Bocachico 3 -- 2.16 -- 7,835 3,918 184,165 92,083
Bolivar 2 -- 1.60 -- 1,800 900 248,200 124,100
Cambulos -- -- -- -- -- -- 300,000 150,000
Los Olmos -- -- -- -- -- -- 374,000 187,000
--------- --------- --------- --------- --------- --------- --------- ---------
Total 6 -- 4.56 -- 11,888 5,945 1,205,112 602,557
========= ========= ========= ========= ========= ========= ========= =========
</TABLE>
Drilling Activity -- A well is considered "drilled" when it is
completed. A productive well is completed when permanent equipment is installed
for the production of oil or gas. A dry hole is completed when it has been
plugged as required and its abandonment is reported to the appropriate
government agency. International activity relates to Harken's Colombian
operations. International net wells drilled information is reflected net of
certain development finance and operating agreements, and does not consider any
potential future participation by Ecopetrol. The following tables summarize
certain information concerning Harken's drilling activity:
DOMESTIC
<TABLE>
<CAPTION>
NUMBER OF GROSS WELLS DRILLED
---------------------------------------------------------------------------------------------
Exploratory Developmental Total
---------------------------- ---------------------------- -----------------------------
Productive Drilled Productive Drilled Productive Drilled
-------------- ---------- --------------- --------- -------------- -----------
<S> <C> <C> <C> <C> <C> <C>
1997 9 9 10 10 19 19
1998 2 2 8 8 10 10
1999 4 4 3 3 7 7
-------------- ---------- --------------- --------- -------------- -----------
Total 15 15 21 21 36 36
============== ========== =============== ========= ============== ===========
</TABLE>
21
<PAGE> 22
<TABLE>
<CAPTION>
NUMBER OF NET WELLS DRILLED
---------------------------------------------------------------------------------------------
Exploratory Developmental Total
---------------------------- ---------------------------- -----------------------------
Productive Drilled Productive Drilled Productive Drilled
-------------- ---------- --------------- --------- -------------- -----------
<S> <C> <C> <C> <C> <C> <C>
1997 0.19 0.19 3.41 3.41 3.60 3.60
1998 0.02 0.02 1.00 1.00 1.02 1.02
1999 0.94 0.94 0.41 0.41 1.35 1.35
-------------- ---------- --------------- --------- -------------- -----------
Total 1.15 1.15 4.82 4.82 5.97 5.97
============== ========== =============== ========= ============== ===========
</TABLE>
INTERNATIONAL - COLOMBIA
<TABLE>
<CAPTION>
NUMBER OF GROSS WELLS DRILLED
---------------------------------------------------------------------------------------------
Exploratory Developmental Total
---------------------------- ---------------------------- -----------------------------
Productive Drilled Productive Drilled Productive Drilled
-------------- ---------- --------------- --------- -------------- -----------
<S> <C> <C> <C> <C> <C> <C>
1997 2 2 -- -- 2 2
1998 3 4 -- -- 3 4
1999 -- 1 -- -- -- 1
-------------- ---------- --------------- --------- -------------- -----------
Total 5 7 -- -- 5 7
============== ========== =============== ========= ============== ===========
</TABLE>
<TABLE>
<CAPTION>
NUMBER OF NET WELLS DRILLED
---------------------------------------------------------------------------------------------
Exploratory Developmental Total
---------------------------- ---------------------------- -----------------------------
Productive Drilled Productive Drilled Productive Drilled
-------------- ---------- --------------- --------- -------------- -----------
<S> <C> <C> <C> <C> <C> <C>
1997 1.24 1.24 -- -- 1.24 1.24
1998 3.00 3.50 -- -- 3.00 3.50
1999 -- 1.00 -- -- -- 1.00
-------------- ---------- --------------- --------- -------------- -----------
Total 4.24 5.74 -- -- 4.24 5.74
============== ========== =============== ========= ============== ===========
</TABLE>
EMPLOYEES
As of December 31, 1999, Harken had 117 employees. Harken has
experienced no work stoppages or strikes as a result of labor disputes and
considers relations with its employees to be satisfactory. Harken maintains
group life, medical, dental, surgical and hospital insurance plans for its
employees.
22
<PAGE> 23
ITEM 2. PROPERTIES
See "Item 1. Business" for discussion of oil and gas properties and
locations.
Harken has offices in Houston, Texas and Bogota, Colombia. Harken
leases approximately 26,900 square feet of office space in Houston, Texas, which
lease runs through July 2004, and approximately 15,000 square feet of office
space in Bogota, Colombia, which lease runs through April 2000.
ITEM 3. LEGAL PROCEEDINGS
In September 1997, Harken Exploration Company, a wholly-owned
subsidiary of Harken, was served with a lawsuit filed in U.S. District Court for
the Northern District of Texas, Amarillo Division, styled D. E. Rice and Karen
Rice, as Trustees for the Rice Family Living Trust ("Rice") vs. Harken
Exploration Company. In the lawsuit, Rice alleges damages resulting from Harken
Exploration Company's alleged spills on Rice's property and has claimed that the
Oil Pollution Act ("OPA") should be applied in this circumstance. Harken
believes that this position as well as the lawsuit in total is wholly without
merit. In October 1999, the trial court granted Harken's Motion for Summary
Judgment that the OPA did not apply and dismissed the Rice claim under it. Rice
has appealed the trial court's summary judgement to the U.S. Fifth Circuit Court
of Appeals. The appeal is not expected to be heard before the fourth quarter of
2001. In Harken management's opinion, the results of the lawsuit and appeal will
not have a material adverse effect on Harken's financial position.
Search Acquisition Corp. ("Search Acquisition"), a wholly-owned
subsidiary of Harken, is a defendant in a lawsuit filed by Petrochemical
Corporation of America and Lorken Investments Corporation (together,
"Petrochemical"). This lawsuit arises out of Petrochemical's attempt to enforce
a judgement entered in 1993 against a group of twenty limited partnerships known
as the "Odyssey limited partnerships." Petrochemical claims that Search
Exploration, Inc. is liable for payment of the judgement as the
successor-in-interest to eight Odyssey limited partnerships. Search Acquisition
was the surviving corporation in the 1995 merger with Search Exploration, Inc.
On February 28, 1996, the court granted Search Acquisition's motion for summary
judgment. On July 3, 1998, the Fifth District Court of Appeals for the State of
Texas reversed the trial court's summary judgment and remanded the case to the
trial court. It is estimated that this trial will take place in the fourth
quarter of 2000. Although the ultimate outcome of this litigation is uncertain,
Harken believes that any liability to Harken as a result of this litigation will
not have a material adverse effect on Harken's financial condition.
420 Energy Investment, Inc. and ERI Investments, Inc. (collectively
"420 Energy") filed a lawsuit against XPLOR Energy, Inc., ("XPLOR") a
wholly-owned subsidiary of Harken, on December 21, 1999 in the New Castle County
Court of Chancery of the State of Delaware. 420 Energy alleges that they are
entitled to appraisal and payment of the fair value of their common stock in
XPLOR as of the date XPLOR merged with Harken. Although the outcome of this
litigation is uncertain, Harken believes that any liability to Harken as a
result of this litigation will not have a material adverse effect on Harken's
financial condition.
On March 8, 2000, the Company was named as a third party defendant in
an action styled State of Texas vs. Amber Refining, Inc., Paradigm Properties
Management, Inc., Amber Terminal, Inc., Texas 150 Business Park, Inc., Edward A.
Shaw, ESCM & Associates, Restructure Petroleum Marketing, Inc., and EZ Serve
Corporation, Inc.; Case No. 97-05966 pending in the 261st District Court for
Travis County, Texas. This is an action brought by the State of Texas against
the owners of a refinery and refined products terminal facility located in Fort
Worth, Texas. The Company believes that it has no liability in this matter.
23
<PAGE> 24
Harken and its subsidiaries currently are involved in various other
lawsuits and other contingencies, which in management's opinion, will not have a
material adverse effect on Harken's financial position.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
None.
PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS
PRICE RANGE OF COMMON STOCK
Since March 18, 1991, Harken common stock has been listed on the
American Stock Exchange and traded under the symbol HEC. At December 31, 1999,
there were approximately 3,443 holders of record of Harken common stock.
The following table sets forth, for the periods indicated, the reported
high and low closing sales prices of Harken common stock on the American Stock
Exchange Composite Tape.
<TABLE>
<CAPTION>
Prices
-----------------------------------
High Low
-------- ---------
<S> <C> <C>
1998 -- First Quarter $7.18 $5.87
Second Quarter 6.43 4.56
Third Quarter 4.69 3.06
Fourth Quarter 3.93 1.81
1999 -- First Quarter 2.13 1.44
Second Quarter 2.38 1.63
Third Quarter 1.94 1.00
Fourth Quarter 1.19 0.75
</TABLE>
DIVIDENDS
Harken has not paid any cash dividends on common stock since its
organization and it is not contemplated that any cash dividends will be paid on
shares of common stock in the foreseeable future.
24
<PAGE> 25
ITEM 6. SELECTED FINANCIAL INFORMATION AND OTHER DATA
ITEM 6. SELECTED FINANCIAL INFORMATION AND OTHER DATA
<TABLE>
<CAPTION>
1995 1996 1997 1998 1999
------------- ------------- ------------- -------------- -------------
<S> <C> <C> <C> <C> <C>
Revenues $ 7,471,000 $ 13,921,000 $ 18,768,000 $ 19,770,000 $ 23,456,000
Loss before extraordinary item $ (1,625,000) $ (341,000) $ (284,000) $ (55,787,000) $ (12,160,000)
Net loss $ (1,625,000) $ (341,000) $ (284,000) $ (55,787,000) $ (12,710,000)
Basic loss per common share:
Loss before extraordinary item $ (0.02) $ (0.00) $ (0.00) $ (0.44) $ (0.15)
------------- ------------- ------------- -------------- -------------
Net loss $ (0.02) $ (0.00) $ (0.00) $ (0.44) $ (0.15)
============= ============= ============= ============== =============
Diluted loss per common share:
Loss before extraordinary item $ (0.02) $ (0.00) $ (0.00) $ (0.44) $ (0.15)
------------- ------------- ------------- -------------- -------------
Net loss $ (0.02) $ (0.00) $ (0.00) $ (0.40) $ (0.15)
============= ============= ============= ============== =============
Current assets $ 10,531,000 $ 49,838,000 $ 126,392,000 $ 144,163,000 $ 32,178,000
Current liabilities $ 4,918,000 $ 6,061,000 $ 15,752,000 $ 20,426,000 $ 11,202,000
------------- ------------- ------------- -------------- -------------
Working capital $ 5,613,000 $ 43,777,000 $ 110,640,000 $ 123,737,000 $ 20,976,000
============= ============= ============= ============== =============
Total assets $ 70,794,000 $ 123,000,000 $ 238,780,000 $ 320,116,000 $ 298,920,000
Long-term obligations:
Convertible notes $ 25,726,000 $ 38,600,000 $ 39,880,000 $ 85,000,000 $ 95,869,000
Development finance obligation $ -- $ -- $ 25,740,000 $ 38,552,000 $ 1,302,000
Bank credit facilities $ -- $ -- $ -- $ -- $ 10,500,000
Other long-term obligations $ -- $ -- $ -- $ -- $ 5,078,000
------------- ------------- ------------- -------------- -------------
Total $ 25,726,000 38,600,000 $ 65,620,000 $ 123,552,000 $ 112,749,000
============= ============= ============= ============== =============
Stockholders' equity $ 40,150,000 78,339,000 $ 157,408,000 $ 176,138,000 $ 174,969,000
Series F preferred stock outstanding (3) $ -- -- -- 15,000 --
Weighted average common stock outstanding (1):
Basic 65,041,063 85,021,894 109,087,697 130,252,727 144,135,167
Diluted 65,041,063 85,021,894 109,087,697 130,252,727 144,135,167
Proved reserves at end of year (2):
Bbls of oil 3,523,000 7,389,000 13,088,000 31,522,000 33,497,000
Mcf of gas 29,203,000 34,160,000 33,293,000 108,451,000 97,218,000
Future net cash inflows $ 99,193,000 $ 234,164,000 $ 144,543,000 $ 226,974,000 $ 530,870,000
Present value (discounted at 10% per year) $ 58,776,000 $ 142,243,000 $ 90,580,000 $ 144,851,000 $ 304,413,000
</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, 1999, Harken has included proved oil
and gas reserve information related to its Colombian operations specifically
associated with a portion of its Alcaravan and Bolivar Contract areas. (See
"Notes to Consolidated Financial Statements, Note 5 - Middle American
Operations" contained in Part II, Item 8.)
(3) See "Notes to Consolidated Financial Statements, Note 9 - Stockholders'
Equity" contained in Part II, Item 8, for a discussion of Harken Series F
Preferred Stock.
25
<PAGE> 26
ITEM 7A. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS.
OVERVIEW
During 1999, Harken continued to implement its business strategy of
focusing on acquiring and producing proven domestic operations, while increasing
its investment in higher potential international operations in Colombia and
Costa Rica. In addition, Harken has also expanded its domestic exploration and
development efforts during the year. This strategy continued to result in growth
for Harken that has been reflected over the past several years. Harken's
Colombian proved reserves have grown from a present value of $33.6 million at
December 31, 1997 to a present value of $208.9 million at December 31, 1999.
Domestic proved reserves have also increased from a present value of $56.9
million at December 31, 1997 to a present value of $95.5 million at December 31,
1999. Harken's total revenues have increased each year for the past six years,
and given current production levels from its Colombian operations, Harken's
Colombian revenues are expected to continue increasing during the coming year.
During 1999, Harken recorded increased crude oil sales from its Colombia
operations, consisting of oil revenues from Harken's Bolivar and Alcaravan
Contract areas. Such Colombian operation revenues increased from $538,000 during
1998 to $3,026,000 during 1999.
Harken continues to manage and expand its domestic oil and gas
operations. With the August 1999 merger with XPLOR Energy, Inc. ("XPLOR"),
Harken added significant proved production to its existing presence in the Gulf
Coast areas of Texas and Louisiana. The XPLOR merger, plus the acquisition of
selected South Texas and Mississippi prospect acreage in December 1999, give
Harken a portfolio of exploration and development program opportunities, which
Harken has begun to capitalize on beginning in late 1999, with additional
drilling planned throughout 2000. Harken also continues to pursue additional
domestic acquisition opportunities. Domestic oil and gas revenues increased from
$10.4 million to $16.7 million during the years ended December 31, 1998 and
1999, respectively, due to increases in equivalent barrel production volumes
during 1999 from the XPLOR merger, and due to a recovery of crude oil prices
during the year.
Harken reported a net loss of approximately $12.7 million for the year
ended December 31, 1999. 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 increasingly 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 net deferred
tax assets on its balance sheets with a valuation allowance.
26
<PAGE> 27
RESULTS OF OPERATIONS
The following table presents certain data for Harken's continuing
operations for the years ended December 31, 1997, 1998 and 1999. A discussion
follows of certain significant factors which have affected Harken's operating
results during such periods. This discussion should be read in conjunction with
Harken's Consolidated Financial Statements and related footnotes contained in
Part II, Item 8.
<TABLE>
<CAPTION>
Year Ended December 31,
------------------------------------
DOMESTIC EXPLORATION AND
PRODUCTION OPERATIONS 1997 1998 1999
---------- ---------- ----------
<S> <C> <C> <C>
Oil sales revenues $8,029,000 $5,508,000 $9,188,000
Oil volumes in barrels 416,000 433,000 510,000
Oil price per barrel $ 19.30 $ 12.72 $ 18.02
Gas sales revenues $5,331,000 $4,373,000 $6,879,000
Gas volumes in Mcf 1,922,000 2,063,000 2,847,000
Gas price per Mcf $ 2.77 $ 2.12 $ 2.42
Gas plant revenues $ 753,000 $ 513,000 $ 652,000
</TABLE>
<TABLE>
<CAPTION>
MIDDLE AMERICAN EXPLORATION AND
PRODUCTION OPERATIONS
<S> <C> <C> <C>
Oil sales revenues $ -- $ 538,000 $ 3,026,000
Oil volumes in barrels -- 61,000 248,000
Oil price per barrel $ -- $ 8.82 $ 12.20
OTHER REVENUES
Interest Income $ 4,626,000 $ 8,454,000 $ 3,693,000
Other Income $ 29,000 $ 384,000 $ 18,000
</TABLE>
27
<PAGE> 28
FOR THE YEAR ENDED DECEMBER 31, 1999 COMPARED WITH THE PRIOR YEAR
DOMESTIC OPERATIONS
Gross oil and gas revenues during 1998 and 1999 were generated by
Harken's domestic exploration and production operations, consisting of the
onshore and offshore areas of the Texas and Louisiana Gulf Coast, the Western
and Panhandle regions of Texas, the Four Corners area primarily on the Navajo
Indian Reservation, the Magnolia region of Arkansas and the Carlsbad region of
New Mexico.
Gross oil revenues increased 67% to $9.2 million in 1999 compared to
$5.5 million in 1998 primarily due to the sharp increase in oil prices, which
averaged $5.30 more per barrel during 1999 compared to the prior year period.
During the first quarter of 2000, prices have continued to remain higher than
average prices received during 1999. Oil revenues also increased due to the
increased production volumes (18% increase) from the August 1999 merger with
XPLOR and the acquisition of the Bargo Properties in May 1998.
Gross gas revenues increased 57% to $6.9 million in 1999 compared to
$4.4 million for the prior year period due to the increased production resulting
from the August 1999 merger with XPLOR and the increased South Texas production
as a result of new discoveries. The increase in gas revenues was also due to the
increase in average gas prices received during 1999, as Harken received an
overall average price of $2.12 per Mcf of gas production during 1998 compared to
$2.42 per Mcf received during 1999. 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 increased from $513,000 in 1998 to $652,000 in 1999
due to increased product prices and despite 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.
Domestic oil and gas operating expenses increased 34% to $7.7 million during
1999 compared to $5.7 million for the prior year period primarily as a result of
the above mentioned merger and acquisition activity. Oil and gas operating
expenses decreased as a percentage of related oil and gas revenues due primarily
to the increase in oil and gas prices during 1999. Harken is reviewing its
existing domestic operations to identify specific properties for which operating
expenses can be reduced.
Harken expects that oil and gas production volumes from its existing
domestic operations will remain flat or increase slightly in 2000 as compared to
1999 due to the inclusion of XPLOR operations during the full year and as normal
production declines experienced in its operating areas are expected to be
minimized by Harken's continuing workover efforts and exploration and
development drilling during 2000. Harken expects that 2000 domestic oil revenues
will further increase from 1999 levels if crude oil prices remain at late 1999
and early 2000 levels. Harken's oil and gas revenues are highly dependent upon
product prices, which Harken is unable to predict.
28
<PAGE> 29
MIDDLE AMERICAN OPERATIONS
During 1999, Harken's Middle American production operations consisted
of production testing conducted on Harken's Bolivar and Alcaravan Association
Contract areas in Colombia. All of Harken's Middle American production through
the first quarter of 1999 was transported by trucking operations, however, in
April 1999, Harken commenced pipeline transportation on the Alcaravan
Association Contract area through its newly completed Palo Blanco flowline.
Middle American oil revenues increased from $538,000 during 1998 to $3,026,000
for 1999. The higher revenues are the result of increased production testing
volumes on the Bolivar Contract area coupled with sales of production in the
Alcaravan Contract area, which did not begin production until September 1998.
Due to the increased production, Middle American operations expenses have also
risen from $268,000 during 1998 to $1,214,000 in 1999. All of Harken's Middle
American revenues and operating expenses have come from its Colombian
operations.
During portions of the most recent production test which began in
November 1999, Harken's Estero #1 well on the Alcaravan Contract area has
produced at rates in excess of 3,000 gross barrels of oil per day, although
sales of production have been temporarily limited to approximately 1,000 gross
barrels of oil per day due to pipeline constraints and pumping capacity. Harken
is considering trucking additional oil from the well to supplement sales
capacity until such problems are resolved. Harken's Catalina #1 and Olivo #1
wells on the Bolivar Contract area have averaged a combined 1,450 gross barrels
of oil per day during recent production testing. Harken did not produce from its
Bocachico Contract area during 1999. Harken's Middle American production and
revenues are expected to increase during 2000 as Alcaravan and Bolivar Contract
area production increases.
INTEREST AND OTHER INCOME
Interest and other income decreased during 1999 compared to the prior
year due to a portion of Harken's invested cash being utilized for Colombian
capital expenditures, for the January 1999 redemption of the Series F Preferred
for approximately $25.3 million, and due to the October 1999 purchase of certain
development finance interests for $20 million. Harken generated approximately
$8.5 million of interest income during 1998, compared to approximately $3.7
million of interest income during 1999. Harken's cash balances, which include
investments in short-term marketable debt securities, are expected to continue
to decrease in 2000 as additional funds are used to support Harken's capital
expenditure plans. Harken intends to pursue other financing arrangements during
2000 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 approximately $1.6
million (17% increase) during 1999 compared to 1998, primarily due to
administrative expenses associated with Harken's growing Colombian operations.
Also contributing to the increased expense are the costs associated with
Harken's May 1999 relocation of its corporate headquarters location to Houston,
Texas, which resulted in employee severance and relocation expenses, in addition
to the physical moving costs to relocate its offices. The relocation allowed
Harken to consolidate its corporate offices with existing Houston office
personnel, thereby gaining additional administrative efficiencies in the future.
Harken also has taken steps during the last half of 1998 and during 1999 to
reduce future general and administrative expenses by reducing staff. Also,
Harken has taken steps to minimize the amount of administrative expenses added
as a result of the increased operations relating to the above-mentioned XPLOR
merger.
29
<PAGE> 30
Depreciation and amortization expense increased during 1999 compared to
the prior year period due to increases in equivalent barrel production during
the year both from domestic acquisitions and increased Colombian operations.
Domestic oil and gas depreciation and amortization decreased on a per equivalent
barrel basis, however, to $5.41 during 1999 compared to $6.03 during 1998.
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 1998. In accordance with the full
cost method of accounting for oil and gas properties, on a country-by-country
basis, net capitalized costs in excess of the present value of the related
reserves are charged to expense.
During the fourth quarter of 1999, Harken identified certain oilfield
equipment assets in Colombia that would not be utilized during 2000 due to
changes in Harken's Colombian drilling plans. In addition, Harken has made the
decision to sell such oilfield equipment during 2000, beginning in the first
quarter of 2000. Accordingly, Harken has reflected a provision for asset
impairment of $1,599,000 during 1999 to reduce the carrying value of such
oilfield equipment assets to its current fair value of approximately $4,167,000.
Interest expense and other increased during 1999 compared to the prior
year period primarily due to the decrease in the amounts of interest capitalized
to Harken's Colombian exploration activity, due to reduced drilling activity
during 1999. In addition, Harken added interest expense during 1999 related to
the long-term bank debt facility associated with XPLOR. Interest expense is
expected to decrease during 2000, despite the issuance of the Benz Convertible
Notes in December 1999, due to the repurchase of the EnCap Development Finance
Obligation in October 1999.
FOR THE YEAR ENDED DECEMBER 31, 1998 COMPARED WITH THE PRIOR YEAR
DOMESTIC OPERATIONS
Oil revenues decreased 31% from $8.0 million in 1997 to $5.5 million in
1998, although oil production volumes reflected a 4% increase in 1998 compared
to 1997 as a result of the May 1998 acquisition of the Bargo Properties. The
decrease in the average oil price from $19.30 per barrel during 1997 to $12.72
per barrel during 1998 had a negative impact on revenues and cash flow from oil
production.
Gas revenues decreased 18% from $5.3 million in 1997 to $4.4 million in
1998. The decrease was despite the increased production (7% 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 decrease in gas revenues in 1998 was primarily
caused by the decrease in average gas prices received during 1998. The average
price of gas sold in 1998 decreased to $2.12 per Mcf from $2.77 per Mcf in 1997.
Gas plant revenues decreased 32% from $753,000 in 1997 to $513,000 in
1998 due to an annual redetermination whereby HSW's interest in the Aneth Gas
Plant was slightly reduced based on each owner's throughput volume and due to
reduced prices.
30
<PAGE> 31
Oil and gas operating expenses consist of lease operating expenses and
gas plant expenses, along with a number of production and reserve-based 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, which reflects the
acquisitions of additional oil and gas properties, particularly the acquisition
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 of oil
and gas prices during 1998.
MIDDLE AMERICAN 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 reflected no oil and gas revenues or operating expenses from its
Colombian operations prior to the second quarter of 1998.
INTEREST AND OTHER INCOME
Interest and other income increased significantly during 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.
OTHER COSTS AND EXPENSES
General and administrative expense 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 increased its corporate office space to
accommodate the growth in personnel. Harken took 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. 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 significantly during 1998 compared
to the prior year period due to the June 1997 issuance of the 5 1/2 % European
Notes and the May 1998 issuance of the 5% European Notes and due to the issuance
of the Development Finance Agreements in late 1997 and early 1998.
31
<PAGE> 32
LIQUIDITY AND CAPITAL RESOURCES
Harken's working capital at December 31, 1999 was approximately $21.0
million, versus approximately $123.7 million at December 31, 1998. The decrease
in cash and working capital resulted primarily from approximately $48.8 million
of capital expenditures, which included the drilling costs of the Islero #1 and
Laurel #1 wells during 1999, and from the January redemption of the Series F
Preferred for approximately $25.3 million. In October 1999, Harken utilized $20
million of its cash resources to purchase all the interests and rights held by
the EnCap Investors pursuant to the EnCap Development Finance Agreement. In
addition, Harken's operations required approximately $17.8 million of cash flow
in 1999, primarily due to the payment of accounts payable at December 31, 1998
related to Harken's exploration activities. Harken's cash resources at December
31, 1999 totaled approximately $25.6 million. Harken's remaining cash resources
are available for its ongoing exploration, development and acquisition efforts
both internationally and in North America.
Harken's primary need for capital is to fund its planned exploration
and development efforts domestically as well as in Colombia and Costa Rica.
Harken anticipates worldwide capital expenditures will total approximately $29
million during 2000, and plans to seek joint venture partner participation to
fund a portion of the cost for all of its significant exploration projects.
Harken believes that it will have sufficient cash resources to fund all of its
planned capital expenditures during 2000. In addition, Harken intends to
continue to pursue North American and international acquisition opportunities
and plans to fund such acquisitions, if any are consummated, through a
combination of cash on hand, issuances of debt or equity securities.
Harken anticipates that full development of its Middle American
reserves will take several years and will also require extensive production
facilities, transportation flowlines and development activity which will require
significant additional capital expenditures. The ultimate amount of such
expenditures cannot be presently predicted.
During the third quarter of 1999, Harken announced the non-recourse
project finance loan agreement facility with the International Finance
Corporation ("IFC"), the private sector subsidiary of the World Bank Group.
Loans under this facility were to be available for the development of the
Bolivar Association Contract in Colombia. Currently, and as of December 31,
1999, Harken de Colombia, Ltd. and Harken do not meet certain of the financial
covenants required in order to draw down funds under the project finance
facility. Additionally, Harken is reviewing certain aspects of the Bolivar
development project in light of current Bolivar production information and
Harken's drilling and development plans for 2000. As of March 30, 2000, no
modifications to the project finance facility have been made with IFC. The
current plans for the development of the Bolivar Contract area call for further
testing of the Laurel #1 well, with the installation of a new rod pump assembly
to further test the Rosa Blanca formation in this well. If the test does not
prove successful, Harken plans to move up hole and test the La Luna formation,
which was present in this well based on log analysis. While the analysis will
provide helpful information, a full understanding of the complex field geology
may only be obtained as Harken drills the additional planned wells.
Harken is making plans now for the installation of a Bolivar Contract
area flowline over the next few months. Harken will continue to truck 100% of
daily field production while the flowline is being installed. Harken had earlier
planned to construct the flowline during late 1999 or early 2000, but decided to
delay the actual construction of the flowline following the initial results of
the Laurel #1 well. In March 1999,
32
<PAGE> 33
Harken de Colombia, Ltd. filed a request with Ecopetrol to declare the Catalina
field to be commercial. In June 1999, Harken de Colombia, Ltd. filed a request
with Ecopetrol to declare the Palo Blanco field to be commercial. As of March
30, 2000, both commerciality applications are in process of being reviewed by
Ecopetrol. Ecopetrol may approve the commerciality requests or require Harken de
Colombia, Ltd. to proceed on a sole-risk basis for its development plans. If
Harken de Colombia, Ltd. proceeds on a sole-risk basis, it will be entitled to
receive Ecopetrol's share of production after royalty, until Harken de Colombia,
Ltd. has recovered 200% of its development costs, after which time Ecopetrol
would receive its share of production.
Harken's cash flows from operations have been enhanced by the current
production tests at its Alcaravan and Bolivar Contract areas. In addition,
beginning in December 1999, Harken is receiving Ecopetrol's working interest
share of monthly Bolivar Contract area production as reimbursement for a portion
of Ecopetrol's share of historical Bolivar Contract area costs.
Terms of each of the Association Contracts entered into between Harken
de Colombia, Ltd. and Ecopetrol commit Harken to perform certain activities in
Colombia in accordance with a prescribed timetable. Failure by Harken to perform
these activities as required could result in Harken losing its rights under the
particular Association Contract, which could potentially have a material adverse
effect on Harken's business. Certain of the required activities are currently
being discussed and negotiated with Ecopetrol, which could impact the timing and
amount of capital expenditures to be required during 2000.
Related to Harken's Costa Rica operations, under the terms of the
agreement between Harken and MKJ Xploration, Inc. ("MKJ"), Harken will pay $4.2
million to MKJ to purchase its share of the Costa Rica Contract rights from MKJ
after an agreement and approval of the assignment is signed and ratified with
the Republic of Costa Rica. Application for assignment of the contract has been
presented to the Costa Rican government for final approval. Additionally, up to
$8 million may be committed by Harken over the next two years to fund the
initial minimum work program obligations under the proposed Costa Rica Contract.
Harken's North American operating strategy includes efforts to acquire
additional oil and gas reserves through exploration and development drilling
activities in North America, particularly on selected properties acquired
through the August 1999 merger with XPLOR Energy, Inc., the additional prospects
acquired in December 1999, and through acquisitions. Harken also plans to
continue selected development of proved undeveloped reserves on its North
American properties in addition to a continual workover program on producing
properties. The targeted results of these workover efforts are to maintain North
American production levels during 2000. During 1999, Harken generated proceeds
of approximately $2.4 million from the sale of selected domestic oil and gas
properties. Harken continues to review its domestic properties for other
non-strategic assets which can be negotiated for possible sale.
European Convertible Notes Payable -- On May 26, 1998, Harken issued a
total of $85 million in 5% Senior Convertible Notes (the "European Notes") which
mature on May 26, 2003. In connection with the sale and issuance of the 5%
European Notes, Harken paid approximately $4,256,000 from the 5% European Notes
proceeds for commission and issuance costs. Interest incurred on these notes is
payable semi-annually in May and November of each year to maturity or until the
5% European Notes are converted. Such European Notes are convertible into shares
of Harken common stock at a conversion price of $6.50 per share, subject to
adjustment in certain circumstances. Harken also has the right to require
conversion of the 5% European Notes into shares of Harken common stock at any
time on or after May 26, 1999, if for any period of thirty consecutive days
commencing on or after May 26, 1998, the average of the closing prices of Harken
common stock for each trading day during such thirty-day period shall have
equaled or exceeded
33
<PAGE> 34
$8.125 per share. Interest payments related to the 5% European Notes will be
funded from cash flow from operations or existing cash balances. For a detailed
discussion of the 5% European Notes see "Notes to Consolidated Financial
Statements, Note 8 -- Convertible Notes Payable."
In February 2000, Harken entered into an agreement with a holder of
$6,000,000 of the European Notes where the holder exchanged all his Notes, plus
accrued interest, for 3,000,000 shares of Harken common stock plus a cash
payment of $50,000. As a result of this transaction, Harken will include a
charge to earnings of approximately $2,100,000 related to the fair value of the
shares of Harken common stock issued in excess of the number of shares which
would have been issued pursuant to the $6.50 per share conversion price of the
European Notes.
Benz Convertible Notes -- On December 30, 1999 (the "Closing Date"),
Harken issued the Benz Convertible Notes in exchange for certain prospects
acquired from Benz. See Note 2 - Mergers and Acquisitions for further discussion
of the acquisition of the Benz Prospects. The Benz Convertible Notes mature May
26, 2003 and bear interest at 5% per annum, payable semi-annually in May and
November of each year to maturity or until the Benz Convertible Notes are
converted. Such Benz Convertible Notes are convertible into shares of Harken
common stock at a conversion price of $6.50 per share, subject to adjustment in
certain circumstances (the "Benz Notes Conversion Price"). The Benz Convertible
Notes are also convertible by Harken into shares of Harken common stock, if for
any period of thirty consecutive days 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 Benz Notes Conversion Price (or $8.125 per
share of Harken common stock). The Benz Convertible 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 Benz Convertible Notes in
exchange for shares of Harken common stock at a conversion price to be
calculated based on an average market price of Harken common stock.
For a period of nine months following the Closing Date (the "Restricted
Put Period"), Benz may require Harken to redeem the Benz Convertible Notes into
Harken's option of either cash or shares of Harken common stock, provided that
such consideration is used to retire secured obligations of Benz at a discount,
which is acceptable to Harken at Harken's sole discretion, to the face amount of
such obligations. In addition, for a period of nine months, beginning no later
than the end of the Restricted Put Period, the Benz Convertible Notes may be
redeemed at Benz's option for an amount equal to 50% of the then outstanding
principal amount, plus accrued interest, payable at Harken's option either in
cash or shares of Harken common stock.
Harken has reflected the Benz Convertible Notes on its consolidated
balance sheet at the fair value of the Notes on the Closing Date. The difference
between the fair value and the face amount of the Benz Convertible Notes
outstanding will be accreted into interest expense over the term of the notes.
Development Finance Agreements -- Following the October 1999 purchase
of the EnCap Development Finance Agreement, only the $1 million principal amount
from Faisal Finance ("Faisal"), along with related accrued interest, remained
outstanding as a Development Finance Obligation as of December 31, 1999. For a
detailed discussion of the terms of the Development Finance Agreement, see
"Notes to Consolidated Financial Statements, Note 7 -Development Finance and
Operating Agreements."
34
<PAGE> 35
In April and May 1999, certain Institutional Investors, including
Faisal, exercised their individual rights to convert either a portion or all of
their Institutional Participation into shares of Harken common stock. In
February 2000, Harken issued additional shares of Harken common stock to Faisal
as full settlement for the additional shares issuable to Faisal related to their
April 1999 conversion under the terms of the Development Finance Agreement. In
March 2000, Harken issued to other Institutional Investors the remaining shares
of Harken common stock issuable to the extent the Institutional Investors did
not realize the Invested Amount from the sale of Harken common stock previously
issued at conversion. In addition, in March 2000, Faisal exercised its rights to
convert the remaining portion of its Institutional Participation into shares of
Harken common stock. Harken continues to be committed to provide additional
shares of Harken common stock to Faisal to the extent that Faisal does not,
under certain circumstances, realize the Invested Amount from the sale of shares
of Harken common stock issued at their March 2000 conversion.
Operational Contingencies -- The exploration, development and
production of oil and gas are subject to various Colombian, Costa Rican, Navajo,
federal, state and local laws and regulations designed to protect the
environment. Compliance with these regulations is part of Harken's day-to-day
operating procedures. Accidental discharge of such materials as oil, natural gas
or drilling fluids can occur and such accidents can require material
expenditures to correct. Harken maintains levels of insurance customary in the
industry to limit its financial exposure. Management is unaware of any material
capital expenditures required for environmental control during the next fiscal
year.
Harken has accrued approximately $6.1 million at December 31, 1999
relating to operational or regulatory liabilities related to Harken's North
American operations. Harken and its subsidiaries currently are involved in
various lawsuits and other contingencies, which in management's opinion, will
not result in significant loss exposure to Harken.
Pending SEC Review of Reserve Report -- In connection with Harken's
recent filing of a registration statement on Form S-3, the Securities and
Exchange Commission (the "SEC") has issued a comment letter disagreeing with
Harken's classification of its reserves in Colombia as proved. Gaffney, Cline &
Associates, Harken's independent reserve engineers, classified these reserves as
proved in the reserve report for the year ended December 31, 1999 issued for
Harken, which was used in the preparation of the financial statements included
herein. Harken has reviewed the SEC comments with Gaffney Cline & Associates and
both Gaffney Cline & Associates and Harken believe that such reserves are
properly classified as proved. However, if these reserves are ultimately
reclassified as not proved, Harken's Colombian proved reserves will be
materially reduced.
Year 2000 Update -- Over the past two years, Harken has prepared for
the potential impact of the Year 2000 on the processing of date-sensitive
information by Harken's computer systems. The Year 2000 issue involves
circumstances where a computerized system may not properly recognize or process
date-sensitive information on or after January 1, 2000. The Year 2000 problem is
the result of computer programs being written using two digits, rather than
four, to define the applicable year. The problem is not limited to computer
systems. Year 2000 issues potentially could have affected 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 were not Year 2000 compliant, prioritize those
business-critical computerized systems that needed remediation or replacement,
test compliance once the appropriate corrective measures had been implemented,
and develop any contingency plans where considered necessary. In addition,
Harken conducted a survey to verify the Year 2000 readiness status of key
purchasers, vendors and customers that potentially could have had an impact on
Harken's material business operations.
As of March 30, 2000, Harken has experienced no interruption in any of
its computerized systems or any other non-information technology system related
to the Year 2000 issue. In addition, Harken has noted no material impact to any
of its key purchasers, vendors or customers as a result of the Year 2000 issue.
Harken continues to be alert for any potential Year 2000-related problems and
maintains appropriate contingency plans to address any remaining potential
disruption related to the Year 2000 issue.
35
<PAGE> 36
ITEM 7B. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
Market risk generally represents the risk that losses may occur in the
values of financial instruments as a result of movements in commodity prices,
interest rates and foreign currency exchange rates. As part of an overall risk
management strategy, Harken considers the use of derivative financial
instruments to manage and reduce risks associated with these factors.
Commodity Price Risk -- Harken is a producer of hydrocarbon
commodities, including crude oil, condensate and natural gas. Harken uses oil
and gas derivative financial instruments, limited to swaps and options with
maturities of 24 months or less, to mitigate its exposure to fluctuations in oil
and gas commodity prices on future crude oil and natural gas production. Harken
enters into no commodity derivative financial instruments other than those
effective in mitigating commodity price risk of Harken's oil and gas production.
Harken uses the sensitivity analysis method to disclose its quantitative
disclosure of commodity price risk exposure. Accordingly, Harken has evaluated
the potential effect that near term changes in commodity prices would have had
on the fair value of its commodity price risk sensitive financial instruments at
year end 1999. Assuming a 20% increase in natural gas prices, the potential
increase in the fair value of Harken's natural gas swap contract obligations at
December 31, 1999 would have been approximately $86,000. Harken faces no
financial instrument risk exposure related to increases or decreases in crude
oil prices. Harken had no risk exposure for commodity price derivative financial
instruments at December 31, 1998.
Interest Rate Risk -- Harken invests cash in interest-bearing temporary
investments of high quality issuers. Due to the short time the investments are
outstanding and their general liquidity, these instruments are classified as
cash equivalents in the consolidated balance sheet and do not represent a
material interest rate risk to Harken. Harken considers its interest rate risk
exposure related to long-term debt obligations is also minimal, as at December
31, 1999, all but approximately $10,500,000 of Harken's financing obligations
carry a fixed interest rate per annum. Harken had no interest rate sensitive
debt obligations as of December 31, 1998. Harken has no open interest rate swaps
agreements.
Foreign Currency Exchange Rate Risk -- Harken conducts international
business in Colombia and Costa Rica and is subject to foreign currency exchange
rate risk on cash flows related to sales, expenses, and capital expenditures.
However, because predominately all material transactions in Harken's existing
foreign operations are denominated in U.S. dollars, the U.S. dollar is the
functional currency for all operations. Exposure from transactions in currencies
other than U.S. dollars is not considered material.
36
<PAGE> 37
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
The following financial statements appear on pages 39 through 79 in
this report.
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
Report of Independent Public Accountants...........................................................38
Consolidated Balance Sheets -- December 31, 1998 and 1999.........................................39
Consolidated Statements of Operations --
Years ended December 31, 1997, 1998 and 1999.....................................................40
Consolidated Statements of Stockholders' Equity --
Years ended December 31, 1997, 1998 and 1999.....................................................41
Consolidated Statements of Cash Flows --
Years ended December 31, 1997, 1998 and 1999.....................................................42
Notes to Consolidated Financial Statements........................................................43
</TABLE>
37
<PAGE> 38
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,
1998 and 1999, and the related consolidated statements of operations,
stockholders' equity and cash flows for each of the three years in the period
ended December 31, 1999. 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 auditing standards generally
accepted in the United States. Those standards require that we plan and perform
the audit to obtain reasonable assurance about whether the financial statements
are free of material misstatement. An audit includes examining, on a test basis,
evidence supporting the amounts and disclosures in the financial statements. An
audit also includes assessing the accounting principles used and significant
estimates made by management, as well as evaluating the overall financial
statement presentation. We believe that our audits provide a reasonable basis
for our opinion.
In our opinion, the financial statements referred to above present
fairly, in all material respects, the financial position of Harken Energy
Corporation and subsidiaries as of December 31, 1998 and 1999, and the results
of their operations and their cash flows for each of the three years in the
period ended December 31, 1999, in conformity with accounting principles
generally accepted in the United States.
ARTHUR ANDERSEN LLP
Dallas, Texas,
March 2, 2000
38
<PAGE> 39
HARKEN ENERGY CORPORATION AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
ASSETS
<TABLE>
<CAPTION>
December 31,
------------------------------
1998 1999
------------- -------------
<S> <C> <C>
Current Assets:
Cash and temporary investments $ 141,545,000 $ 25,612,000
Accounts receivable, net 1,605,000 5,312,000
Related party notes receivable 398,000 466,000
Prepaid expenses and other current assets 615,000 788,000
------------- -------------
Total Current Assets 144,163,000 32,178,000
Property and Equipment:
Oil and gas properties, using the full cost method of accounting:
Evaluated 161,579,000 272,123,000
Unevaluated 64,534,000 44,302,000
Facilities, gas plants and other property 14,864,000 21,320,000
Less accumulated depreciation and amortization (74,759,000) (81,477,000)
------------- -------------
Total Property and Equipment, net 166,218,000 256,268,000
Other Assets, net 9,735,000 10,474,000
------------- -------------
$ 320,116,000 $ 298,920,000
============= =============
LIABILITIES AND STOCKHOLDERS' EQUITY
Current Liabilities:
Trade payables $ 12,496,000 $ 2,981,000
Accrued liabilities and other 7,350,000 7,692,000
Revenues and royalties payable 580,000 529,000
------------- -------------
Total Current Liabilities 20,426,000 11,202,000
Convertible Notes Payable 85,000,000 95,869,000
Bank Credit Facilities -- 10,500,000
Development Finance Obligation 38,552,000 1,302,000
Other Long-Term Obligations -- 5,078,000
Commitments and Contingencies (Note 16)
Stockholders' Equity:
Series F Preferred Stock, $1.00 par value; 15,000 shares 15,000 --
Common stock, $0.01 par value; 225,000,000 shares authorized;
134,758,830 and 155,707,548 shares issued, respectively 1,348,000 1,557,000
Additional paid-in capital 327,498,000 349,236,000
Retained deficit and other comprehensive income (150,171,000) (171,308,000)
Treasury stock, at cost, 700,000 and 2,153,000 shares held, respectively (2,552,000) (4,516,000)
------------- -------------
Total Stockholders' Equity 176,138,000 174,969,000
------------- -------------
$ 320,116,000 $ 298,920,000
============= =============
</TABLE>
The accompanying Notes to Consolidated Financial Statements are
an integral part of these Statements.
39
<PAGE> 40
HARKEN ENERGY CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
<TABLE>
<CAPTION>
Year Ended December 31,
-----------------------------------------------
1997 1998 1999
------------- ------------- -------------
<S> <C> <C> <C>
Revenues:
Oil and gas operations $ 14,113,000 $ 10,932,000 $ 19,745,000
Interest and other income 4,655,000 8,838,000 3,711,000
------------- ------------- -------------
18,768,000 19,770,000 23,456,000
------------- ------------- -------------
Costs and Expenses:
Oil and gas operating expenses 5,581,000 5,988,000 8,935,000
General and administrative expenses, net 6,222,000 9,404,000 11,043,000
Depreciation and amortization 5,183,000 5,319,000 6,713,000
Valuation allowance -- 50,518,000 --
Provision for asset impairments -- -- 1,599,000
Interest expense and other, net 2,003,000 4,294,000 7,296,000
------------- ------------- -------------
18,989,000 75,523,000 35,586,000
------------- ------------- -------------
Loss before income taxes (221,000) (55,753,000) (12,130,000)
Income tax expense 63,000 34,000 30,000
------------- ------------- -------------
Net loss before extraordinary item (284,000) (55,787,000) (12,160,000)
Extraordinary item - charge for reduction of
unamortized issuance costs -- -- (550,000)
------------- ------------- -------------
Net loss $ (284,000) $ (55,787,000) $ (12,710,000)
============= ============= =============
Accretion related to preferred stock -- (1,846,000) (8,427,000)
------------- ------------- -------------
Net loss attributed to common stock $ (284,000) $ (57,633,000) $ (21,137,000)
============= ============= =============
Loss per common share:
Basic loss per common share $ (0.00) $ (0.44) $ (0.15)
============= ============= =============
Weighted average shares outstanding 109,087,697 130,252,727 144,135,167
============= ============= =============
Diluted loss per common share $ (0.00) $ (0.44) $ (0.15)
============= ============= =============
Weighted average shares outstanding 109,087,697 130,252,727 144,135,167
============= ============= =============
</TABLE>
The accompanying Notes to Consolidated Financial Statements are
an integral part of these Statements.
40
<PAGE> 41
HARKEN ENERGY CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF 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, 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
payable -- 202,000 57,371,000 1,390,000 --
Comprehensive income (loss):
Equity adjustment from
foreign currency translation -- -- -- -- --
Net loss -- -- -- -- (284,000)
Total comprehensive loss
------------ ------------- ------------- ------------- -------------
Balance, December 31, 1997 -- 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 -- -- -- -- (55,787,000)
Total comprehensive loss
------------ ------------- ------------- ------------- -------------
Balance, December 31, 1998 $ 15,000 $ 1,348,000 $ 327,498,000 $ (2,552,000) $(150,305,000)
Issuance of common stock, net -- 101,000 20,566,000 -- --
Conversions of Develoment
Finance Obligation -- 108,000 21,999,000 -- --
Accretion of preferred stock -- -- 8,427,000 -- (8,427,000)
Treasury shares purchased -- -- -- (1,964,000) --
Redemption of preferred stock (15,000) -- (25,269,000) -- --
Settlement of property purchase
acquisition -- -- (3,985,000) -- --
Comprehensive income (loss):
Net loss -- -- -- -- (12,710,000)
Total comprehensive loss
------------ ------------- ------------- ------------- -------------
Balance, December 31, 1999 $ -- $ 1,557,000 $ 349,236,000 $ (4,516,000) $(171,442,000)
============ ============= ============= ============= =============
<CAPTION>
ACCUMULATED
OTHER
COMPREHENSIVE
INCOME (LOSS) TOTAL
------------- -------------
<S> <C> <C>
Balance, December 31, 1996 $ (13,000) $ 78,339,000
Issuance of common stock, net -- 20,285,000
Conversions of European notes
payable -- 58,963,000
Comprehensive income (loss):
Equity adjustment from
foreign currency translation 105,000
Net loss --
Total comprehensive loss (179,000)
------------- -------------
Balance, December 31, 1997 92,000 157,408,000
Issuance of common stock, net -- 25,161,000
Treasury shares purchased -- (2,552,000)
Issuance of preferred stock 15,000 -- 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 --
Total comprehensive loss (55,745,000)
------------- -------------
Balance, December 31, 1998 $ 134,000 $ 176,138,000
Issuance of common stock, net -- 20,667,000
Conversions of Develoment
Finance Obligation -- 22,107,000
Accretion of preferred stock -- --
Treasury shares purchased -- (1,964,000)
Redemption of preferred stock -- (25,284,000)
Settlement of property purchase
acquisition -- (3,985,000)
Comprehensive income (loss):
Net loss --
Total comprehensive loss (12,710,000)
------------- -------------
Balance, December 31, 1999 $ 134,000 $ 174,969,000
============= =============
</TABLE>
The accompanying Notes to Consolidated Financial Statements are
an integral part of these Statements.
41
<PAGE> 42
HARKEN ENERGY CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
Year Ended December 31,
-----------------------------------------------
1997 1998 1999
------------- ------------- -------------
<S> <C> <C> <C>
Cash flows from operating activities:
Net loss $ (284,000) $ (55,787,000) $ (12,710,000)
Adjustments to reconcile net loss to net cash provided by
Operating activities:
Depreciation and amortization 5,183,000 5,319,000 6,713,000
Valuation allowance -- 50,518,000 --
Provision for asset impairments -- -- 1,599,000
Provision for doubtful accounts -- 26,000 --
Amortization of issuance and finance costs 644,000 782,000 765,000
Extraordinary item -- -- 550,000
Change in assets and liabilities, net of companies acquired:
(Increase) decrease in accounts receivable (217,000) 474,000 (1,780,000)
Increase (decrease) in trade payables and other 5,340,000 7,034,000 (12,911,000)
------------- ------------- -------------
Net cash provided (used) by operating activities 10,666,000 8,366,000 (17,774,000)
------------- ------------- -------------
Cash flows from investing activities:
Proceeds from sales of assets 7,000 54,000 2,358,000
Capital expenditures, net (37,082,000) (95,085,000) (48,751,000)
Cash received from acquired subsidiary -- -- 261,000
Proceeds from collection of notes receivable -- -- 98,000
Investor advances, net 8,453,000 2,084,000 --
------------- ------------- -------------
Net cash used in investing activities (28,622,000) (92,947,000) (46,034,000)
------------- ------------- -------------
Cash flows from financing activities:
Transfer from segregated account cash 64,564,000 37,615,000 --
Proceeds from issuances of common stock, net 5,680,000 2,075,000 47,000
Proceeds from development finance agreements, net 24,500,000 9,798,000 --
Repayments of notes payable and long-term obligations -- (2,000,000) (23,750,000)
Proceeds from issuance of preferred stock, net -- 14,452,000 --
Redemption of preferred stock -- -- (25,284,000)
Proceeds from issuance of European notes, net -- 81,800,000 --
Treasury shares purchased -- (2,552,000) (1,964,000)
Payments for financing costs -- -- (1,174,000)
Investment in segregated account cash, net (903,000) (802,000) --
------------- ------------- -------------
Net cash provided (used) by financing activities 93,841,000 140,386,000 (52,125,000)
------------- ------------- -------------
Net increase (decrease) in cash and temporary investments 75,885,000 55,805,000 (115,933,000)
Cash and temporary investments at beginning of year 9,855,000 85,740,000 141,545,000
------------- ------------- -------------
Cash and temporary investments at end of year $ 85,740,000 $ 141,545,000 $ 25,612,000
============= ============= =============
</TABLE>
The accompanying Notes to Consolidated Financial Statements are
an integral part of these Statements.
42
<PAGE> 43
HARKEN ENERGY CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1997, 1998 AND 1999
(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. 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 1999 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 1998 and 1999 totaled $2,656,105,000 and $611,688,000, respectively.
Gross cash inflows for maturities of such investments during 1998 and 1999
totaled $2,615,072,000 and $595,893,000, respectively. Harken paid cash for
interest in the amounts of $0, $2,138,000 and $4,508,000 during 1997, 1998 and
1999, respectively. All significant non-cash investing and financing activities
are discussed in Notes 2, 7, 8, and 9 - Mergers and Acquisitions, Development
Finance and Operating Agreements, 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
$2,891,000 and $2,286,000 at December 31, 1998 and 1999, respectively.
Accounts Receivable -- Harken maintains a reserve for potential losses
in collection of its accounts receivable. The allowance for doubtful accounts
was $380,000 and $1,314,000 as of December 31, 1998 and 1999, respectively.
Concentrations of Credit Risk -- Although Harken's cash and temporary
investments, commodity derivative instruments and accounts receivables are
exposed to potential credit loss, Harken does not believe such risk to be
significant. Cash and temporary investments 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 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.
43
<PAGE> 44
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 as well as
oilfield material and equipment inventory. See Note 8 -- Convertible Notes
Payable for further discussion. At December 31, 1998, other assets included
$5,937,000 of deferred issuance costs net of $1,255,000 of accumulated
amortization and $2,800,000 of oilfield material and equipment inventory. At
December 31, 1999, such deferred issuance costs totaled $3,078,000 net of
$1,376,000 of accumulated amortization. At December 31, 1999, other assets also
included $1,143,000 of project finance facility net issuance costs, $1,153,000
of escrowed cash, and $4,167,000 of oilfield material and equipment inventory.
Accrued Liabilities and Other -- Accrued liabilities and other at
December 31, 1998 includes an amount of $725,000 related to prepaid investor
advances, $2,714,000 related to certain operational, legal or regulatory
liabilities related to Harken's domestic operations and other accrued expense
liabilities of $3,911,000. The December 31, 1999 balance includes an amount of
$1,237,000 of accrued exploration and development costs, $1,278,000 related to
certain operational, legal or regulatory liabilities associated with Harken's
domestic operations and other accrued expense liabilities of $5,177,000.
Development Finance Obligations -- See further discussion of Harken's
accounting for Development Finance Agreements at Note 7 - Development Finance
and Operating Agreements.
Middle American 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 - Middle American
Operations. Harken accounts for its activities in Colombia and Costa Rica using
the United States dollar as the functional currency as significant exploration
expenditures have typically been denominated in U.S. dollars. At December 31,
1998 and 1999, Harken reflects its exploration activities in Colombia and Costa
Rica primarily as a capitalized cost of oil and gas properties. See further
discussion at Notes 4 and 15 -- 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 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. During 1999, Harken recorded
interest expense of $7,169,000, net of $4,133,000 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
$30,000, $22,000 and $108,000 for such amounts during 1997, 1998 and 1999,
respectively.
Commodity Derivative Financial Instruments --Harken has entered into
certain commodity derivative instruments which are effective in mitigating
commodity price risk associated with a portion of its crude oil and natural gas
production and cash flows. Accordingly, Harken applies hedge accounting for
those commodity derivative instruments whereby monthly cash settlements of oil
and gas price swaps or the
44
<PAGE> 45
amortization of oil and gas option premiums paid are reported as a component of
revenue and cash flows from operations. Settlements of oil and gas price swaps
are based on the difference between the fixed swap price and the New York
Mercantile Exchange closing prices for each month during the life of the
contracts. Gains or losses attributable to the termination of a swap or option
contract are deferred and recognized in revenue when the hedged crude oil or
natural gas is sold.
Provision for Asset Impairments -- Assets that are used in Harken's
operations, or are not held for resale, are carried at cost, less any
accumulated depreciation. Harken reviews its long-lived assets, other than its
investment in oil and gas properties, whenever events or changes in
circumstances indicate that the carrying amount of an asset may not be
recoverable. When evidence indicates that operations will not produce sufficient
cash flows to cover the carrying amount of the related asset, and when the
carrying amount of the related asset cannot be realized through sale, a
permanent impairment is recorded and the asset value is written down to
recoverable fair value.
During the fourth quarter of 1999, Harken identified certain oilfield
equipment assets in Colombia that would not be utilized during 2000 due to
changes in Harken's Colombian drilling plans. In addition, Harken has made the
decision to sell such oilfield equipment during 2000, beginning in the first
quarter of 2000. Accordingly, Harken has reflected a provision for asset
impairment of $1,599,000 during 1999 to reduce the carrying value of such
oilfield equipment assets to its current fair value of approximately $4,167,000.
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.
Recently Issued Accounting Pronouncements -- In June 1998, the
Financial Accounting Standards Board issued Statement of Financial Accounting
Standards ("SFAS") No. 133, Accounting for Derivative Instruments and Hedging
Activities. The Statement establishes accounting and reporting standards
requiring that every derivative instrument, including certain derivative
instruments embedded in other contracts, be recorded in the balance sheet as
either an asset or liability measured at its fair value. The Statement requires
that changes in the derivative's fair value be recognized currently in earnings
unless specific hedge accounting criteria are met. Special accounting for
qualifying hedges allows a derivative's gains and losses to offset related
results on the hedged item in the income statement, and requires that a company
must formally document, designate, and assess the effectiveness of transactions
that receive hedge accounting.
SFAS 133, as amended by SFAS 137, is effective for fiscal years
beginning after January 1, 2001. A company may also implement the Statement as
of the beginning of any fiscal quarter after issuance. Statement No. 133 cannot
be applied retroactively. Statement No. 133 must be applied to (a) derivative
instruments and (b) certain derivative instruments embedded in hybrid contracts
that were issued, acquired,
45
<PAGE> 46
or substantively modified after December 31, 1998. Upon adoption, it is not
anticipated that Statement No. 133 will have a significant impact on Harken's
results of operations or financial position.
(2) MERGERS AND ACQUISITIONS
Acquisition of Texas Properties -- On August 29, 1997, Harken, along
with Harken Exploration Company ("Harken Exploration"), a wholly-owned
subsidiary of Harken, purchased working interests in oil and gas properties
located in the panhandle region of Texas (the "Cal-T Properties"). The purchase
price of approximately $3,416,000 consisted primarily of 565,000 shares of
Harken common stock. The acquisition of the Cal-T Properties has been accounted
for under the purchase method of accounting.
Acquisition of 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 of up to $4,000,000 was
payable by Harken to the sellers if the sellers are able to obtain new or
renewal leases for certain of the Bargo Properties. In July 1999, Harken
obtained sufficient assignments of new and/or renewed leases related to the
Bargo Properties and paid cash of approximately $4,000,000 to the sellers. See
Note 12 - Related Party Transactions for a discussion of the relationship
between Harken and the sellers.
Merger with XPLOR -- On August 19, 1999, Harken executed a merger
agreement with XPLOR Energy, Inc. ("XPLOR") whereby XPLOR became a wholly-owned
subsidiary of Harken. XPLOR explores for, develops and produces oil and gas
reserves domestically. The assets of XPLOR consisted primarily of oil and gas
property interests located along the Texas and Louisiana Gulf Costs and having
an estimated 42 BCFE of proved reserves with a significant amount of additional
exploratory acreage. Under the terms of the merger agreement, the holders of the
outstanding shares of the preferred stock of XPLOR converted their stock into
7,500,000 shares of Harken common stock, and also received 2,336,066 warrants
for the purchase of Harken common stock at $2.50 per share. Additionally, Harken
assumed $14,200,000 of bank debt secured by the oil and gas properties of XPLOR.
See Note 6 -- Bank Credit Facility Obligations for further discussion of the
XPLOR bank debt. No further consideration was issuable under this transaction to
any other class of stock of XLPOR and all outstanding shares of XPLOR stock were
cancelled under the merger agreement. The merger with XPLOR has been accounted
for under the purchase method of accounting.
Acquisition of Benz Prospects -- On December 30, 1999, pursuant to a
Purchase and Sale Agreement and other related agreements, Harken, along with
Harken Gulf Exploration Company, a newly formed wholly-owned subsidiary,
purchased oil and gas leases covering nine exploration prospect areas (the "Benz
Prospects") covering approximately 51,000 net acres plus certain other assets
from Benz Energy, Incorporated ("Benz"). The prospects include interests in
acreage in the Cotton Valley Reef, Wilcox and Frio Trends in Texas and the Salt
Dome and Salt Ridge Basins of Mississippi. In exchange for the prospects, Harken
issued 5% subordinated notes (the "Benz Convertible Notes") with a face value of
$12 million, which are convertible into Harken common stock at a conversion
price of $6.50 per share and mature on May 26, 2003. See Note 8 - Convertible
Notes Payable for further discussion of the Benz Convertible Notes. Benz
retained a 20% reversionary interest, subject to the Benz Prospects achieving
payout as defined in the Purchase and Sale Agreement. Such reversionary interest
shall increase to 40% in the event that Benz merges into or is otherwise
acquired by Harken. In addition, in connection with the acquisition of the Benz
Prospects, Harken entered into a consulting agreement with a former officer of
Benz whereby Harken would pay a monthly consulting fee of $100,000 through
December 31, 2000 in exchange for consulting services
46
<PAGE> 47
related to the Benz Prospects. See Note 12 -- Related Party Transactions for a
discussion of the relationship between Harken and Benz.
Pro Forma Information -- 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, the merger with XPLOR, the
issuance of the Benz Convertible Notes and the issuance of the European 5%
Senior Convertible Notes Payable (See Note 8 -- Convertible Notes Payable for
further discussion) as if each had been consummated at January 1, 1998. The
following unaudited pro forma combined condensed statement of operations for the
year ended December 31, 1999 gives effect to the merger with XPLOR, and the
issuance of the Benz Convertible Notes as if each had been consummated at
January 1, 1999.
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 capitalization of certain amounts of interest on
the Benz Convertible Notes or the European Notes or the interest income earned
from investment of the European Note proceeds.
47
<PAGE> 48
PRO FORMA COMBINED CONDENSED STATEMENT OF OPERATIONS
FOR THE YEAR ENDED DECEMBER 31, 1998
(UNAUDITED)
<TABLE>
<CAPTION>
Period from
January 1,
1998 to
Closing
Date of
Acquisition
------------
Bargo
Harken Properties XPLOR Pro Forma
Actual Actual Actual Adjustments Pro Forma
------------ ------------ ----------- ------------ ------------
<S> <C> <C> <C> <C> <C>
Oil and gas revenue $ 10,932 $ 1,178 $ 9,589 $ $ 21,699
Other revenues 8,838 -- 348 9,186
------------ ------------ ----------- ------------ ------------
Total Revenues 19,770 1,178 9,937 30,885
------------ ------------ ----------- ------------ ------------
Oil and gas operating expenses 5,988 485 3,557 10,030
General and administrative expenses, net 9,404 -- 2,244 11,648
Depreciation and amortization 5,319 -- 5,066 331 (1) 10,716
Valuation allowance 50,518 -- 35,871 (331)(1) 86,058
Interest expense and other, net 4,294 -- 2,355 2,069 (2) 9,318
600 (3)
------------ ------------ ----------- ------------ ------------
Total Expenses 75,523 485 49,093 2,669 127,770
------------ ------------ ----------- ------------ ------------
Income tax expense 34 -- -- 34
------------ ------------ ----------- ------------ ------------
Net income (loss) from continuing operations $ (55,787) $ 693 $ (39,156) $ (2,669) $ (96,919)
------------ ------------ ----------- ------------ ------------
Accretion related to preferred stock (1,846) (1,846)
------------ ------------ ----------- ------------ ------------
Net loss attributed to common stock $ (57,633) $ 693 $ (39,156) $ (2,669) $ (98,765)
============ ============ =========== ============ ============
Basic net loss per share attributable to
common stock $ (0.44) $ (0.72)
============ ============
Basic weighted average shares outstanding 130,252,727 137,752,423
============ ============
</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.
(3) Pro forma entry to reflect interest expense incurred on the Benz
Convertible Notes.
48
<PAGE> 49
PRO FORMA COMBINED CONDENSED STATEMENT OF OPERATIONS
FOR THE YEAR ENDED DECEMBER 31, 1999
(UNAUDITED)
<TABLE>
<CAPTION>
Period from
January 1,
1999 to
Closing Date
of Merger
-------------
Harken Pro Forma
Actual XPLOR Actual Adjustments Pro Forma
------------- ------------- ------------- -------------
<S> <C> <C> <C> <C>
Oil and gas revenue $ 19,745 $ 5,261 $ $ 25,006
Other revenues 3,711 79 3,790
------------- ------------- ------------- -------------
Total Revenues 23,456 5,340 28,796
------------- ------------- ------------- -------------
Oil and gas operating expenses 8,935 2,535 11,470
General and administrative expenses, net 11,043 1,543 12,586
Depreciation and amortization 6,713 2,735 (596)(1) 8,852
Provision for asset impairments 1,599 -- 1,599
Interest expense and other, net 7,296 708 600(2) 8,604
------------- ------------- ------------- -------------
Total Expenses 35,586 7,521 4 43,111
------------- ------------- ------------- -------------
Income tax expense 30 -- 30
------------- ------------- ------------- -------------
Net loss from continuing operations
before extraordinary item $ (12,160) $ (2,181) $ (4) $ (14,345)
------------- ------------- ------------- -------------
Extraordinary item (550) (550)
------------- ------------- ------------- -------------
Net loss from continuing operations $ (12,710) $ (2,181) $ (4) $ (14,895)
------------- ------------- ------------- -------------
Accretion related to preferred stock (8,427) (8,427)
------------- ------------- ------------- -------------
Net loss attributed to common stock $ (21,137) $ (2,181) $ (4) $ (23,322)
============= ============= ============= =============
Basic net loss per share attributable to
common stock $ (0.15) $ (0.16)
============= =============
Basic weighted average shares
outstanding 144,135,167 148,861,194
============= =============
</TABLE>
PRO FORMA ADJUSTMENTS-PRO FORMA COMBINED CONDENSED STATEMENT OF OPERATIONS -
YEAR ENDED DECEMBER 31, 1999
(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 expense incurred on the Benz
Convertible Notes.
49
<PAGE> 50
(3) INVESTMENTS
Investments are classified by Harken management at the time of purchase
as either held-to-maturity, available-for-sale or trading. Such classification
is reevaluated as of each balance sheet date. Included within cash and temporary
investments as of December 31, 1998 and 1999 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 1998 and 1999, 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,
---------------------
1998 1999
--------- --------
<S> <C> <C>
Included in cash and temporary investments
Cost $ 124,398 $ 18,459
Estimated Fair Value $ 124,914 $ 18,530
</TABLE>
Harken includes in cash and temporary investments 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 $3,126,000, $6,781,000 and
$5,411,000 of internal costs, net of reimbursements from joint interest owners,
directly related to these activities in 1997, 1998 and 1999, 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 15 -- 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 $6.60, $6.03 and $5.41
per equivalent barrel of oil produced during 1997, 1998 and 1999, respectively.
50
<PAGE> 51
Amortization of certain Colombia oil and gas properties was $1.04 and
$2.97 per equivalent barrel of oil produced during 1998 and 1999, respectively.
The evaluated costs, net of accumulated depreciation, depletion and
amortization, at December 31, 1998 and 1999 include $68,742,000 and
$140,198,000, respectively, related to Colombia (see Note 5 - Middle American
Operations for a discussion of Colombian operations).
The unevaluated property costs at December 31, 1998 and 1999 includes
$60,162,000 and $25,154,000, respectively, related to Colombia and $4,372,000
and $17,111,000, respectively, related to U.S. domestic prospects. The
unevaluated costs at December 31, 1999 also includes $2,037,000 related to Costa
Rica. 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, such as for a
relinquishment of Association Contract acreage. 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) MIDDLE AMERICAN OPERATIONS
Colombian Operations -- Harken's Colombian operations are conducted
through Harken de Colombia, Ltd., a wholly-owned subsidiary of Harken, which
held five exclusive Colombian Association Contracts with Empresa Colombiana de
Petroleos ("Ecopetrol") as of December 31, 1999. These Association Contracts
include the Alcaravan Contract, awarded in 1992, the Bocachico Contract, awarded
in 1994, the Cambulos Contract, awarded in 1995, the Bolivar Contract, awarded
in 1996 and the Los Olmos Contract, awarded in 1998. As of December 31, 1999,
the Alcaravan Contract covers an area of approximately 101,000 acres in the
Llanos Basin of Eastern Colombia. The Bocachico and Cambulos Contracts cover a
combined area of approximately 492,000 acres in the Middle Magdalena Valley of
Central Colombia and the Bolivar Contract covers an area of approximately
250,000 acres in the Northern Middle
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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 March 30,
2000, Harken was in compliance with the requirements of each of the Association
Contracts, as amended and/or waived. Harken has completed all of the work
requirements of the first five years of the Alcaravan Contract. During September
1999, Ecopetrol granted a six-month extension until March 31, 2000 to Harken for
drilling the exploratory well required in the sixth year of the Alcaravan
Contract. Harken does not currently have any plans to drill an additional well
on the Alcaravan Contract area acreage until December 2000. Effective December
29, 1999, Ecopetrol accepted Harken's relinquishment of 52% of the Alcaravan
Contract Area as required under the Alcaravan Contract. In February 2000, Harken
was granted by Ecopetrol a further extension until January 31, 2001 to drill
this sixth year exploratory well of the Alcaravan Contract. In exchange, Harken
Colombia relinquished all Alcaravan Contract area acreage to Ecopetrol except
for the approximately 24,000 acres covering those structure areas associated
with the Palo Blanco and Anteojos discoveries. Accordingly, the acreage
relinquishments had no effect on Harken Colombia proved reserves.
Harken has fulfilled all of the work requirements for the first four
years of the Bocachico Contract. The work requirements for the fifth year
required Harken to drill one exploratory well by May 6, 1999, and the sixth year
work obligation required an additional exploratory well to be drilled by March
6, 2000. Harken did not drill the fifth year exploratory well, and Harken does
not currently have any plans to drill a well on the Bocachico Contract area
acreage during 2000. Harken is currently negotiating with Ecopetrol for a
modification of the fifth and sixth year work obligations, and management
believes that it will be successful in negotiating such modifications. Such
negotiations include a proposal to relinquish all but approximately 53,000 acres
of Bocachico Contract area acreage, although Harken's proposal to Ecopetrol
includes retaining the structure area associated with the Rio Negro Prospect.
Such proposed relinquishment would not affect Harken's proved reserves.
Ecopetrol has advised Harken that during these negotiations, Ecopetrol will
consider the contract to be in full compliance.
The Cambulos Contract originally required that the Cambulos Contract
acreage be reduced to 173,000 acres at the end of the second contract year, but
in May 1998, Ecopetrol agreed to defer relinquishment of the acreage in exchange
for Harken drilling two exploratory wells within the third contract year. During
May 1999, Harken received approval from Ecopetrol to allow for the additional
well depth drilled during the Islero #1 well to substitute for the obligation to
drill a second exploratory well within the third contract year. During September
1999, Ecopetrol conditionally granted a six month extension from November 1999
until May 16, 2000 to Harken for the drilling of the exploratory well required
in the fourth year of the Cambulos Contract. Harken does not currently have any
plans to drill an additional well on the Cambulos Contract area acreage during
2000 and Harken is currently in negotiations with Ecopetrol regarding this well
requirement for the fourth contract year. Harken's proposal includes the
relinquishing of all but approximately 41,000 acres of its Cambulos acreage and
transferring the obligation to acreage on another Association Contract in order
to meet the conditions required by Ecopetrol in granting Harken an extension.
Such relinquishment would not affect Harken's proved reserves.
During the first two years of the Los Olmos Contract, and before May
24, 2000, Harken is required to reprocess at least 500 kilometers of existing
seismic data and acquire at least 120 kilometers of new seismic data and 2,000
kilometers of aeromagnetic data, and prepare an engineering study of the
contract areas. Harken is currently in negotiations with Ecopetrol which could
result in delaying the above work requirements or transferring certain of the
seismic obligations to another Association Contract.
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Under the terms of the Association Contracts, if, during the first six
years of each contract, Harken discovers one or more fields capable of producing
oil or gas in quantities that are economically exploitable and Ecopetrol elects
to participate in the development of the field by declaring it commercial or
Harken chooses to proceed with the development on a sole-risk basis, the term of
that contract will be extended for a period of 22 years from the date of such
discovery. Upon discovery of a field capable of commercial production, the
election by Ecopetrol to participate in the commercial field and upon
commencement of production from that commercial field, Ecopetrol will begin to
reimburse Harken for 50% of Harken's successful well costs expended up to the
point of declaration of a commercial discovery plus, in the case of the
Cambulos, Bolivar, and Los Olmos Contracts, 50% of all seismic and dry well
costs incurred prior to the point of declaration of a commercial discovery.
Production from a commercial discovery will be allocated as follows: Ecopetrol,
on behalf of the Colombian government, will receive a 20% royalty interest in
all 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.
Reimbursement by Ecopetrol to Harken may either be directly, or through
allowing its share of production to apply to Harken's cost recovery. During the
last part of 1999, Harken began receiving Ecopetrol's working interest share of
monthly Bolivar Contract area production as reimbursement for a portion of
Ecopetrol's share of historical Bolivar Contract area costs. Harken has
reflected such reimbursement production as revenues during 1999.
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 7 - Development Finance and Operating Agreements.
Costa Rica Operations -- In August 1999, the Exploration and Production
concession contract with the Republic of Costa Rica ("Costa Rica Contract") was
signed by MKJ Xploration, Inc. ("MKJ"), which was originally awarded the
concession under Costa Rica's bidding process that was finalized in October
1997. In the fourth quarter of 1998, Harken had announced an agreement to
participate in this anticipated Costa Rica Contract. The Contract covers
approximately 1.4 million acres in the North and South Limon Back Arc Basin
onshore and offshore Costa Rica Central America. The formal Costa Rica Contract
was signed by the President of Costa Rica and became effective October 1999. The
Costa Rica Contract area is comprised of Blocks 2, 3, 4 and 12 from Costa Rica's
initial bidding round in October of 1997. Two of the Blocks are located onshore
and two are located offshore within Costa Rica's Caribbean territorial waters.
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 owns the remaining 20% of the stock of this subsidiary. Under the terms of
the agreement between Harken and MKJ, Harken will pay $4.2 million to MKJ to
purchase its share of the Costa Rica Contract rights from MKJ after an agreement
and approval of the assignment is signed and ratified with the Republic of Costa
Rica. Application for assignment of the contract has been presented to the Costa
Rican
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government for final approval. Harken anticipates that assigning of these
contractual rights will be finalized during the second quarter of 2000.
Additionally, up to $8 million may be committed by Harken over the next two
years to fund the initial minimum work program obligations under the proposed
Costa Rica Contract. 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) BANK CREDIT FACILITY OBLIGATIONS
A summary of long-term bank obligations follows:
<TABLE>
<CAPTION>
December 31, December 31,
1998 1999
------------- -------------
<S> <C> <C>
Subsidiary notes payable to bank (A) $ -- $ 10,500,000
Subsidiary project finance facility (B) -- --
------------- -------------
-- 10,500,000
Less: Current portion -- --
------------- -------------
$ -- $ 10,500,000
============= =============
</TABLE>
(A) XPLOR, a wholly-owned subsidiary of Harken, has a three-year
loan facility with Christiania og Kreditkasse ("Christiania")
which is solely secured by the oil and gas properties and
subsidiaries of XPLOR. The Christiania facility matures on
September 30, 2002 and provides up to $50,000,000 in
borrowings limited by a borrowing base (as defined by the
Christiania facility) which was $10,500,000 at December 31,
1999. The outstanding balance under the Christiania facility
was $14,200,000 at the August 19, 1999 merger of XPLOR with
Harken, and was paid down by Harken to $10,500,000 subsequent
to the merger. The Christiania facility provides for interest
based on the Short-term Interbank Offered Rates ("LIBOR") plus
a margin of 1.125% to 1.875%, payable at the underlying LIBOR
maturities, or lender's prime rate plus 0.25% (8.3% at
December 31, 1999) and provides for a commitment fee of 0.375%
on the unused amount. At December 31, 1999, Harken was in
compliance with all financial covenants related to the
facility. The borrowing base is subject to a review by
Christiania on a semi-annual basis and may be adjusted subject
to the provisions of the Christiania facility.
(B) Effective September 1, 1999, Harken de Colombia, Ltd. entered
into a project finance loan agreement with the International
Finance Corporation ("IFC") to be utilized in the development
of the Bolivar Association Contract block in Colombia ("the
Project"). As of March 30, 2000, no borrowings have been drawn
down by Harken de Colombia, Ltd. under the facility.
The project finance facility consists of an A Loan of
$20,000,000, a syndicated B loan of $25,000,000 and a C Loan
of $10,000,000. The A and B Loans will bear interest at LIBOR
plus a margin of 3.50% and will be repayable in equal
semi-annual installments beginning one year after initial
disbursement of funds and continuing for five years. The
syndicated B Loan has been jointly arranged by Dresdner
Kleinwort Benson, and fully underwritten by Dresdner Bank
Lateinamerika AG. The C Loan will bear interest at LIBOR with
a quasi-
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equity income participation and is repayable in full at the
end of the sixth year of maturity. The C Loan will be
convertible into Harken common stock under certain conditions
at a conversion price of $3.00 per share. All loans are
extendable for up to two years from the initial term if
certain Project performance conditions are achieved. All loans
will be secured by the Project. Funding under the facility is
subject to certain conditions, including Harken maintaining
certain capital commitments to Harken de Colombia, Ltd. to be
dedicated to the Project. Harken has incurred approximately
$1,174,000 of issuance costs associated with the project
finance facility and such costs are being amortized over the
term of the facility.
Currently, and as of December 31, 1999, Harken de Colombia,
Ltd. and Harken do not meet certain of the financial covenants
required in order to draw down funds under the project finance
facility. Additionally, Harken is reviewing certain aspects of
the Project in light of current Bolivar production information
and Harken's drilling and development plans for 2000. As of
March 30, 2000, no modifications to the project finance
facility have been made with IFC.
(7) DEVELOPMENT FINANCE AND OPERATING AGREEMENTS
Rio Negro Development Finance Agreement -- In October 1995, Harken
entered into a Development Finance Agreement (the "Rio Negro Development Finance
Agreement") with Arbco Associates L.P., Offense Group Associates L.P., Kayne
Anderson Nontraditional Investments L.P. and Opportunity Associates L.P.
(collectively, the "Rio Negro Investors"), pursuant to which the Rio Negro
Investors provided $3,500,000 to Harken to finance drilling on the Rio Negro
prospect in the Bocachico Contract area in exchange for the right to receive
future payments from Harken equal to 40% of the net profits that Harken de
Colombia, Ltd. may derive from the sale of oil and gas produced from the Rio
Negro prospect (the "Rio Negro Participation").
In March 1997, Harken and the Rio Negro Investors entered into a
Conversion Agreement whereby Harken purchased 75% of the Rio Negro Participation
relating to the Rio Negro Development Finance Agreement in exchange for 900,000
restricted shares of Harken common stock which were issued within 30 days
following closing. From the remaining 25% of the Rio Negro Participation
retained, the Rio Negro Investors have the right to receive 10% of the net
profits that Harken de Colombia, Ltd. may derive from the sale of oil and gas
produced from the Rio Negro prospect.
Rochester Agreement -- Harken de Colombia, Ltd. entered into an
operating agreement (the "Rochester Agreement") with Rochester Energy
Corporation ("Rochester", a Canadian corporation) pursuant to which Rochester
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. 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.
In May 1999, Harken signed a definitive purchase and sale agreement
pursuant to which Harken purchased all of the interests held by Rochester in the
Alcaravan and Miradores Association Contract areas.
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<PAGE> 56
Under the terms of the purchase and sale agreement entered into between Harken
and Rochester, Harken forgave all amounts owed by Rochester to Harken and issued
2,600,000 shares of Harken common stock. The purchase and sale agreement with
Rochester was closed in July 1999.
Parkcrest Financing Agreement -- In January 1997, Harken de Colombia,
Ltd. entered into a financing agreement ("the Parkcrest Financing Agreement")
with Parkcrest Explorations, Ltd. ("Parkcrest", a Canadian corporation) pursuant
to which Parkcrest paid 33 1/3% of the aggregate costs of the Estero #1 well and
related production facilities on the Palo Blanco prospect, 33 1/3% of the
aggregate costs of the initial well drilled on the Anteojos prospect, the
Canacabare #1, and 25% of the aggregate costs related to the Estero #3 well, all
of which are located within the Alcaravan Contract area. In addition, Parkcrest
was to pay 33 1/3% of the aggregate costs of the initial well to be drilled
under the Miradores Association Contract. Parkcrest was also responsible for
their contracted percentage share of costs related to seismic on the Alcaravan
and Miradores Contract areas. In exchange, Parkcrest, upon its full performance,
was to acquire a beneficial interest equal to 25% of the interest held by Harken
de Colombia, Ltd. in these prospects.
In April 1998, Harken and Parkcrest entered into a Loan and Security
Agreement (the "Parkcrest Loan Agreement") whereby Harken agreed to provide up
to $2,600,000 to Parkcrest to be used as needed by Parkcrest to finance its
share of costs under the Parkcrest Financing Agreement. Under the terms of the
Parkcrest Loan Agreement, any outstanding loans 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 contemplated 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 was successful (the "EnCap Participation"). Pursuant to the EnCap
Development Finance Agreement, Harken was obligated to drill each of the three
wells prior to October 2000.
Pursuant to the EnCap Development Finance Agreement, the EnCap
Investors had the right, for a period of two years beginning in October 1998, to
convert all or part of the EnCap Participation into shares of Harken common
stock. The number of shares of Harken common stock to be issued upon conversion
of the EnCap Participation was equal to the quotient of (i) the Payment Amount
(less any distributions made in respect of the EnCap Participation) plus an
amount equal to 15% interest per annum on the net Payment Amount compounded
monthly (the "Invested Amount"), divided by (ii) the market price of Harken
common
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<PAGE> 57
stock at the time of conversion. During the same two year period, Harken also
had the right to convert the EnCap Participation into shares of Harken common
stock with the number of shares of Harken common stock to be issued to be equal
to the quotient of (i) the Payment Amount (less any distribution made in respect
of the EnCap Participation) plus an amount equal to 25% interest per annum on
the net Payment Amount compounded monthly, divided by (ii) the market price of
Harken common stock at the time of conversion. Harken could also elect to pay
cash upon any conversion of the EnCap Participation in lieu of issuing Harken
common stock. The EnCap Development Finance Agreement also provided for
additional shares of Harken common stock ("Deficiency Shares") to be issued by
Harken in the event of a conversion to the extent that the EnCap Investors do
not, under certain circumstances, realize the Invested Amount from the sale of
shares of Harken common stock issued at the conversion. See Note 12 -- Related
Party Transactions for a discussion of the relationship between Harken and the
EnCap Investors.
In April 1999, Harken received notice from EnCap Investments L.C. that
the EnCap Investors elected to exercise their option to convert a 40% portion of
the EnCap Participation into shares of Harken common stock. Pursuant to the
EnCap Development Finance Agreement, the EnCap Investors received 6,481,512
shares of Harken common stock.
On October 28, 1999, Harken and the EnCap Investors entered into a
repurchase agreement whereby Harken paid cash of $20 million to EnCap
Investments L.C. on behalf of the EnCap Investors as full settlement of the
remaining Development Finance Obligations to the EnCap Investors. Such
repurchase and settlement included the extinguishment of Harken's contingent
obligation to issue Deficiency Shares of Harken common stock to the extent that
the EnCap Investors did not realize the Invested Amount from the sale of shares
issued to the EnCap Investors in April 1999.
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 terms identical to the EnCap
Development Finance Agreement. In exchange, HCC received the right to receive
future payments from Harken equal to 1.4% of the net profits that Harken de
Colombia, Ltd. may derive from the sale of oil and gas produced from each of the
three prospects if the planned drilling on the prospect is successful. As part
of the transaction, Harken issued 42,000 shares of Harken common stock to the
European Investors and paid a cash fee of $175,000 to one of the European
Investors.
In March 1998, Harken received directly an additional $3 million
pursuant to a Development Finance Agreement with Faisal Finance ("Faisal"),
which contains terms substantially identical to the EnCap Development Finance
Agreement, including conversion provisions which began in March 1999. In
exchange, Faisal received the right to receive future payments from Harken equal
to 0.6% of the net profits that Harken de Colombia, Ltd. may derive from the
sale of oil and gas produced from each of the three prospects discussed above
pursuant to the EnCap Development Finance Agreement if the planned drilling on
the prospect is successful. As part of this transaction, Harken issued 18,000
shares of Harken common stock to Faisal and paid a cash fee of $75,000 to a
financial advisor.
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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. Pursuant to the European Development
Finance Agreements, the European Investors, including Faisal, are entitled to
Deficiency Shares of Harken common stock in the event of a conversion to the
extent that the Investors do not, under certain circumstances, realize the
Invested Amount from the sale of Harken common stock issued at conversion.
In December 1998, one of the European Investors exercised their right
to convert all their Institutional Participation into shares of Harken common
stock. Harken elected to pay cash of approximately $2.3 million in lieu of
issuing Harken common stock. In April and May 1999, respectively, Harken
received notice from the remaining European Investors that they had elected to
exercise their option to convert all of their Institutional Participation into
shares of Harken common stock. Pursuant to the European Development Finance
Agreement, the European Investors received 1,908,637 and 1,121,738 shares,
respectively, of Harken common stock. In November 1999, Harken and these
European Investors entered into an agreement to extend the calculation of the
Invested Amount from the date of conversion to September 30, 1999 and also
extended the period in which these European Investors could sell their shares of
Harken common stock received at conversion. In March 2000, Harken issued to
these European Investors 2,398,400 and 1,739,730 shares, respectively, of
Deficiency Shares of Harken common stock pursuant to the European Development
Finance Agreement as modified.
Also, in April 1999, Harken received notice from Faisal that it had
elected to exercise its option to convert a two-thirds portion of its
Institutional Participation into shares of Harken common stock. Pursuant to the
Development Finance Agreement with Faisal, Faisal received 1,316,829 shares of
Harken common stock. In February 2000, Harken entered into an agreement with
Faisal whereby Harken issued 1,457,390 shares of Harken common stock to Faisal
as full settlement for any additional shares payable to Faisal related to its
April 1999 conversion of its Institutional Participation. In March 2000, Harken
received notice from Faisal that it had elected to exercise its option to
convert the remaining portion of its Institutional Participation into shares of
Harken common stock. Pursuant to the Development Finance Agreement with Faisal,
Faisal was issued 1,282,741 shares of Harken common stock. Harken continues to
be committed to provide potential additional Deficiency Shares of Harken common
stock to Faisal related to the sale of these shares issued.
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 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. Harken records as Interest Expense and
Other the fair value of the obligation to issue Deficiency Shares related to
conversions of Development Finance Agreements at the time they are converted. In
addition, Harken has reflected Interest Expense and Other related to the
November 1999 agreement discussed above. 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 is
also charged to income as an extraordinary item.
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(8) CONVERTIBLE NOTES PAYABLE
6 1/2% European Notes -- On July 30, 1996, Harken issued to qualified
purchasers a total of $40 million in 6 1/2% Senior Convertible Notes (the "6
1/2% European Notes") which were to mature on July 30, 2000. Such 6 1/2%
European Notes were convertible at any time by the holders into shares of Harken
common stock at a conversion price of $2.50 per share ("the 6 1/2% European Note
Conversion Price"). The 6 1/2% European Notes were also convertible by Harken
into shares of Harken common stock after one year following issuance, if for any
period of thirty consecutive days commencing on or after November 28, 1996, the
closing price of Harken common stock for each trading day during such period
shall have equaled or exceeded 135% of the 6 1/2% European Note Conversion Price
(or $3.375 per share of Harken common stock).
During the last half of 1996, holders of 6 1/2% European Notes totaling
$1,400,000 exercised their conversion option and such holders were issued
560,000 shares of Harken common stock. In February 1997, Harken gave notice as
required under the Trust Indenture that it had met the market price criteria
necessary to call for mandatory conversion of the 6 1/2% European Notes and on
June 2, 1997 formally called the 6 1/2% European Notes for conversion on July
31, 1997. During the first six months of 1997, holders of 6 1/2% European Notes
totaling $19,300,000 exercised their conversion option and such holders were
issued 7,720,000 shares of Harken common stock. On July 31, 1997, Harken
converted the remaining 6 1/2% European Notes into 7,720,000 shares of Harken
common stock.
5 1/2% European Notes -- On June 11, 1997, Harken issued to qualified
purchasers a total of $70 million in 5 1/2% Senior Convertible Notes (the "5
1/2% European Notes") which were to mature on June 10, 2002. In connection with
the sale and issuance of the 5 1/2% European Notes, Harken paid approximately
$5,174,000 from the 5 1/2% European Notes proceeds for commissions and issuance
costs. Interest incurred on these notes was payable semi-annually in June and
December of each year to maturity or until the 5 1/2% European Notes were
converted. Such 5 1/2% European Notes were convertible into shares of Harken
common stock at an initial conversion price of $5.00 per share, subject to
adjustment in certain circumstances ("the 5 1/2% European Note Conversion
Price"). The Trust Indenture provided for a five percent premium on the number
of shares of Harken common stock issuable on conversion that was paid to holders
converting the 5 1/2% European Notes prior to December 11, 1997. The 5 1/2%
European Notes were also convertible by Harken into shares of Harken common
stock after one year following issuance, if for any period of thirty consecutive
days commencing on or after June 11, 1997, the average of the closing prices of
Harken common stock for each trading day during such thirty-day period equaled
or exceeded 130% of the 5 1/2% European Note Conversion Price (or $6.50 per
share of Harken common stock). In October 1997, Harken met the market price
criteria necessary to call for mandatory conversion of the 5 1/2% European Notes
any time on or after June 11, 1998, and provided notice to the holders as
required under the Trust Indenture. Harken formally called the 5 1/2% European
Notes which remained outstanding on June 12, 1998. As of December 31, 1997,
holders of 5 1/2% European Notes totaling $30,120,000 exercised their conversion
option and such holders were issued 6,325,200 shares of Harken common stock.
During the first six months of 1998 additional holders of 5 1/2% European Notes
totaling $610,000 exercised their conversion option and such holders were issued
an additional 122,000 shares of Harken common stock. On June 12, 1998, Harken
converted the remaining 5 1/2% European Notes into 7,854,000 shares of Harken
common stock.
Upon closing, all proceeds from the sale of the 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
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<PAGE> 60
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.
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. Other than the February 2000 transaction discussed below, none of the
bondholders have exercised their conversion option as of March 30, 2000. The 5%
European Notes are also convertible by Harken into shares of Harken common stock
after May 26, 1999, if for any period of thirty consecutive days commencing on
or after May 26, 1998, the average of the closing prices of Harken common stock
for each trading day during such thirty-day period shall have equaled or
exceeded 125% of the 5% European Note Conversion Price (or $8.125 per share of
Harken common stock). The 5% European Notes may be redeemed for cash, at
Harken's option, at par, in whole or in part, at any time after May 26, 2002,
upon not less than 30 days notice to the holders. In addition, beginning
November 26, 2002, Harken may redeem up to 50% of the 5% European Notes in
exchange for shares of Harken common stock at a defined conversion price based
on an average market price of Harken common stock. Beginning May 26, 2003,
Harken may similarly redeem all remaining 5% European Notes. The 5% European
Notes are listed on the Luxembourg Stock Exchange.
In February 2000, Harken entered into an agreement with a holder of the
European Notes where the holder exchanged Notes in the face amount of
$6,000,000, plus accrued interest, for 3,000,000 shares of Harken common stock.
As a result of this transaction, Harken will include a charge to earnings of
approximately $2,100,000 related to the fair value of the shares of Harken
common stock issued in excess of the number of shares which would have been
issued pursuant to the $6.50 per share conversion price of the European Notes.
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.
Benz Convertible Notes -- On December 30, 1999 (the "Closing Date"),
Harken issued the Benz Convertible Notes in exchange for certain prospects
acquired from Benz. (See Note 2 - Mergers and Acquisitions for further
discussion of the acquisition of the Benz Prospects) The Benz Convertible Notes
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<PAGE> 61
mature May 26, 2003 and bear interest at 5% per annum, payable semi-annually in
May and November of each year to maturity or until the Benz Convertible Notes
are converted. Such Benz Convertible Notes are convertible into shares of Harken
common stock at a conversion price of $6.50 per share, subject to adjustment in
certain circumstances (the "Benz Notes Conversion Price"). The Benz Convertible
Notes are also convertible by Harken into shares of Harken common stock, if for
any period of thirty consecutive days 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 Benz Notes Conversion Price (or $8.125 per
share of Harken common stock). The Benz Convertible 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 Benz Convertible Notes in
exchange for shares of Harken common stock at a conversion price to be
calculated based on an average market price of Harken common stock.
For a period of nine months following the Closing Date (the "Restricted
Put Period"), Benz may require Harken to redeem the Benz Convertible Notes into
Harken's option of either cash or Harken common stock, provided that such
consideration is used to retire obligations of Benz at a discount, which is
acceptable to Harken at Harken's sole discretion, to the face amount of such
obligations. In addition, for a period of nine months, beginning no later than
the end of the Restricted Put Period, the Benz Convertible Notes may be redeemed
at Benz's option for an amount equal to 50% of the then outstanding principal
amount, plus accrued interest, of the related Benz Convertible Notes, payable at
Harken's option either in cash or Harken common stock.
Harken has reflected the Benz Convertible Notes on its consolidated
balance sheet at the fair value of the Notes on the Closing date. The difference
between the fair value and the face amount of the Benz Convertible Notes
outstanding will be accreted into interest expense over the term of the notes.
(9) STOCKHOLDERS' EQUITY
Common Stock -- Harken currently has authorized 225,000,000 shares of
$.01 par common stock. At December 31, 1998 and 1999, Harken had issued
134,758,830 shares and 155,707,548 shares, respectively.
Treasury Stock -- At December 31, 1998 and 1999, Harken had 700,000 and
2,153,000 shares, respectively, of treasury stock. During 1999, Harken purchased
1,453,000 shares of Harken common stock in the open market at a cost of
approximately $1,964,000.
Issuance of Convertible Notes Payable -- In July 1996, Harken issued to
qualified purchasers a total of $40 million in 6 1/2% European Notes which were
to mature on July 30, 2000. The 6 1/2% European Notes were convertible under
certain terms into approximately 16,000,000 shares of Harken common stock.
During the last half of 1996, holders of 6 1/2% European Notes totaling
$1,400,000 exercised their conversion option and such holders were issued
560,000 shares of Harken common stock. 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
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<PAGE> 62
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.
In June 1997, Harken issued to qualified purchasers a total of $70
million in 5 1/2% European Notes which were to mature on June 11, 2002. As of
December 31, 1997, holders of 5 1/2% European Notes totaling $30,120,000 had
exercised their conversion option and such holders were issued 6,325,200 shares
of Harken common stock. Subsequent to December 31, 1997 and as of June 11, 1998,
holders of 5 1/2% European Notes totaling an additional $610,000 exercised their
conversion option and such holders were issued 122,000 shares of Harken common
stock. On June 12, 1998, Harken formally called and converted the remaining 5
1/2% European Notes into 7,854,000 shares of Harken common stock. In connection
with the issuance of the 5 1/2% European Notes, Harken issued to the placement
agents for the 5 1/2% European Notes warrants to purchase 1,120,000 shares of
Harken common stock at any time after December 11, 1997 and on or before
December 11, 1999 at an exercise price of $5.00 per share.
In May 1998, Harken issued to qualified purchasers a total of $85
million in 5% European Notes which mature on May 26, 2003. Such 5% European
Notes are convertible into shares of Harken common stock at an initial
conversion price of $6.50 per share, subject to adjustment in certain
circumstances ("the 5% European Note Conversion Price"). Other than the February
2000 transaction discussed below, none of the bond holders have exercised their
conversion option as of March 30, 2000. 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.
In February 2000, Harken entered into an agreement with a holder of the
European Notes where the holder exchanged Notes in the face amount of
$6,000,000, plus accrued interest, for 3,000,000 shares of Harken common stock.
On December 30, 1999 (the "Closing Date"), Harken issued the Benz
Convertible Notes in exchange for certain prospects acquired from Benz. (See
Note 2 - Mergers and Acquisitions for further discussion of the acquisition of
the Benz Prospects) The Benz Convertible Notes mature May 26, 2003 and bear
interest at 5% per annum, payable semi-annually in May and November of each year
to maturity or until the Benz Convertible Notes are converted. Such Benz
Convertible Notes are convertible into shares of Harken common stock at a
conversion price of $6.50 per share, subject to adjustment in certain
circumstances (the "Benz Notes Conversion Price"). The Benz Convertible Notes
are also convertible by Harken into shares of Harken common stock, if for any
period of thirty consecutive days 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 Benz Notes Conversion Price (or $8.125 per share
of Harken common stock). The Benz Convertible Notes may be redeemed for cash, at
Harken's option, at par, in whole or in part, at any time after
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<PAGE> 63
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 Benz Convertible
Notes in exchange for shares of Harken common stock at a conversion price to be
calculated based on an average market price of Harken common stock.
Acquisition of Texas Properties -- In August, 1997, Harken acquired
working interests in the Cal-T Properties in exchange for 565,000 shares of
Harken common stock. See Note 2 - Mergers and Acquisitions for further
discussion.
Acquisition of EnerVest Properties -- On July 10, 1996, Harken
Exploration acquired working interests in certain producing oil and gas
properties in Arkansas and New Mexico, (the "EnerVest Properties") for a
purchase price valued at approximately $15,200,000 and the assumption of certain
operational liabilities relating to these properties. 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 approximately $4,000,000 was paid by Harken
to the sellers in cash during July 1999. See Note 2 - Mergers and Acquisitions
for further discussion.
Merger with XPLOR-- In August 1999, Harken entered into a merger
agreement with XPLOR whereby XPLOR became a wholly-owned subsidiary of Harken.
As consideration for the merger, Harken issued 7,500,000 shares of Harken common
stock and issued 2,336,066 warrants for the purchase of shares of Harken common
stock at $2.50 per share, exercisable through February 2001 . See Note 2 -
Mergers and Acquisitions for further discussion.
Development Finance Agreements -- Harken entered into development
finance agreements relating to certain of its Colombian operations. Pursuant to
these development finance agreements, certain investors have the option, or have
previously exercised their options, to convert their beneficial interest in a
specific operating area into shares of Harken common stock. In addition, certain
of these investors were issued shares of Harken common stock at the time of
entering into a development finance agreement with Harken. In October 1999,
Harken repurchased for cash a significant majority of the remaining development
finance agreements. For a complete discussion of each of the various development
finance agreements, and further discussions of certain conversions of beneficial
interests exercised in April and May 1999, and March 2000, as well as a
discussion of the October 1999 repurchase, see Note 7 - Development Finance and
Operating Agreements.
Series F Preferred Stock -- On April 9, 1998, Harken entered into a
Securities Purchase Agreement with RGC International Investors, LDC ("RGC"),
pursuant to which Harken issued to RGC 15,000 shares of its Series F Convertible
Preferred Stock (the "Series F Preferred") in exchange for $15,000,000. The
Series F Preferred was convertible into shares of Harken common stock at a
conversion price based upon the market price of Harken common stock at the time
of conversion. The number of shares of Harken common stock issuable upon
conversion of the Series F Preferred also included a premium amount equal to an
increase calculated on the face value of the Series F Preferred at 5% per annum.
Harken reflected this
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<PAGE> 64
5% per annum increase throughout 1998 as accretion related to preferred stock in
the accompanying Consolidated Statements of Operations. Such accretion amount is
reflected in Harken's calculation of net loss attributable to common stock. The
Series F Preferred did not pay dividends.
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 and has reflected the additional accretion
amount of approximately $8,427,000 in 1999 which represents the ultimate
redemption value generated in the first quarter of 1999.
Stockholder Rights Plan -- In April 1998, Harken adopted a rights
agreement (the "Rights Agreement") whereby a dividend of one preferred share
purchase right (a "Right") was paid for each outstanding share of Harken common
stock. The Rights will be exercisable only if a person acquires beneficial
ownership of 15 percent or more of Harken common stock (an "Acquiring Person"),
or commences a tender offer which would result in beneficial ownership of 15
percent or more of such stock. When they become exercisable, each Right entitles
the registered holder to purchase from Harken one one-thousandth of one share of
Series E Junior Participating Preferred Stock ("Series E Preferred Stock"), at a
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 loss per common share was computed by dividing
net loss attributed to common stock by the weighted average number of shares of
Harken common stock outstanding during the year. The impact of unconverted
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.
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Summary of Outstanding Warrants -- At December 31, 1999, 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>
1998 400,000 400,000 $3.50 to $6.50 2000 - 2001
1999 2,336,066 2,336,066 $2.50 2001
</TABLE>
(10) 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 18,525,000 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 1997, 1998 and
1999, respectively: risk-free interest rates of 5 1/2%, 5% and 5%; dividend
yields of 0%; volatility factors of the expected market price of Harken common
stock of .588, .665, and .898; and a weighted-average expected life to the
option of 4 years.
The Black-Scholes option valuation model was developed for use in
estimating the fair value of traded options which have no vesting restrictions
and are fully transferable. In addition, option valuation models require the
input of highly subjective assumptions including the expected stock price
volatility. Because Harken's employee stock options have characteristics
significantly different from those of traded options, and because changes in the
subjective input assumptions can materially affect the fair value estimate, in
management's opinion, the existing models do not necessarily provide a reliable
single measure of the fair value of its employee stock options.
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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,
------------------------------------
1997 1998 1999
---------- ---------- ----------
<S> <C> <C> <C>
Pro forma net loss attributed to
common stock $ (2,486) $ (61,689) $ (25,461)
Pro forma basic loss per share $ (0.02) $ (0.47) $ (0.18)
</TABLE>
The weighted average fair value of the options issued in 1997, 1998 and
1999 was $2.63, $2.33, and $0.83 per share, respectively, underlying such
option.
A summary of Harken's stock option activity, and related information
for the years ended December 31, 1997, 1998 and 1999 follows (not in thousands):
<TABLE>
<CAPTION>
Year Ended December 31,
------------------------------------------------------------------------------------------------
1997 1998 1999
----------------------------- ------------------------------- ------------------------------
Weighted- Weighted- Weighted-
Average Average Average
Options Exercise Price Options Exercise Price Options Exercise Price
------------ -------------- ------------- -------------- ------------ --------------
<S> <C> <C> <C> <C> <C> <C>
Outstanding-beginning of year 5,224,300 $ 2.15 8,376,999 $ 3.34 11,176,749 $ 3.58
Granted 3,320,000 $ 2.92 2,979,500 $ 4.28 3,382,375 $ 1.38
Exercised (114,051) $ 1.90 (81,500) $ 2.54 -- --
Forfeited (53,250) $ 2.28 (98,250) $ 4.83 (511,628) $ 3.11
------------ -------------- ------------- -------------- ------------ --------------
Outstanding-end of year 8,376,999 $ 3.34 11,176,749 $ 3.58 14,047,496 $ 3.06
Exercisable-end of year 2,773,999 $ 1.93 4,627,294 $ 2.53 6,703,621 $ 3.03
</TABLE>
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. Exercise prices for options outstanding as of
December 31, 1999 ranged from $0.8125 to $6.4375.
(11) INCOME TAXES
At December 31, 1999, Harken had available for federal income tax
reporting purposes, net operating loss (NOL) carryforward for regular tax
purposes of approximately $101,000,000 which expires in 2000 through 2019,
alternative minimum tax NOL carryforward of approximately $88,000,000 which
expires in 2000 through 2019, statutory depletion carryforward of approximately
$2,000,000 which does not have an expiration date, and a net capital loss
carryforward of approximately $6,000,000 which expires in 2000. Approximately
$5,000,000 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.
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The following is a reconciliation of the reported amount of income tax
expense for the years ended December 31, 1997, 1998 and 1999 to the amount of
income tax expense that would result from applying domestic federal statutory
tax rates to pretax income:
<TABLE>
<CAPTION>
Year Ended December 31,
---------------------------------------
1997 1998 1999
---------- ---------- ----------
<S> <C> <C> <C>
Tax expense using statutory rate $ -- $ -- $ --
Alternative minimum tax provision 27 -- --
State income taxes 36 34 30
---------- ---------- ----------
Current tax expense $ 63 $ 34 $ 30
========== ========== ==========
</TABLE>
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.
There were no deferred tax liabilities as of December 31, 1999. Total
deferred tax assets, primarily related to the net operating loss carryforward,
were approximately $34,000,000 at December 31, 1999. The total deferred tax
asset is offset by a valuation allowance of approximately $34,000,000 at
December 31, 1999, resulting in no impact to Harken's results of operations.
(12) RELATED PARTY TRANSACTIONS
Harken has on its Board of Directors a director who is also a managing
director of EnCap Investments L.C. ("EnCap"). EnCap has historically provided
financial consulting and investment banking services to Harken. In connection
with the June 1997 placement of the 5 1/2% European Notes, EnCap received as a
financial consulting fee, $466,667 in cash, and a warrant to purchase 50,000
shares of Harken common stock at any time after December 11, 1997 and on or
before December 11, 1999 at an exercise price of $5.00 per share. As described
in Note 7 -- Development Finance and Operating Agreements, in October 1997,
Harken entered into a Development Finance Agreement with the EnCap Investors.
EnCap serves as the general partner of three of the EnCap Investors and the 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. In October 1999, Harken purchased all the interests and
rights held by the EnCap Investors for $20,000,000 cash. As described in Note 2
- - Mergers and Acquisitions, in May 1998 Harken acquired the Bargo Properties
from St. Martinville Partners, Ltd. and Bargo Energy Company, which are
affiliates of EnCap. In addition, in December 1999, Harken acquired the Benz
Prospects from Benz, which is an affiliate of EnCap. Harken believes that the
above transactions were made at terms at least as favorable to Harken as those
that could have been secured with an unrelated party.
During 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, 1998 and
December 31, 1999 as Related Party Notes Receivable.
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<PAGE> 68
(13) HEDGING ACTIVITIES
During 1999, Harken entered into certain commodity derivative
instruments, which are effective in mitigating commodity price risk associated
with a portion of its monthly crude oil and natural gas production and cash
flow. With the August 19, 1999 merger with XPLOR, Harken held natural gas price
swaps entered into by XPLOR. At December 31, 1999, such natural gas price swaps
result in XPLOR receiving fixed prices of approximately $2.20 per MMBTU covering
a total of 1,800,000 MMBTUs over the life of the swaps, through December 2001.
Harken allocated a portion of the XPLOR purchase price to the fair value of
these swap contracts as of the date of the merger. At December 31, 1999, the
remaining deferred obligation relating to these natural gas swap contracts of
approximately $679,000, and having a market value of approximately $428,000, is
reflected in accrued liabilities and will be recognized in revenue over the life
of the contracts as the hedged natural gas is sold. At December 31, 1999, Harken
also held a put option for crude oil with a fixed price of $15 per barrel
covering 185,000 barrels over the life of the option, through October 31, 2000.
At December 31, 1999,the remaining unamortized premium of approximately $75,000
relating to the crude oil put option is included in other current assets and
will be recognized in revenue over the life of the option as the hedged crude
oil is sold.
Settlements of oil and gas commodity derivatives are based on the
difference between fixed swap or option prices and the New York Mercantile
Exchange closing prices for each month during the life of the contracts. Harken
monitors its crude oil and gas production prices compared to New York Mercantile
Exchange prices to assure its commodity derivatives are effective hedges in
mitigating its commodity price risk.
68
<PAGE> 69
(14) OTHER INFORMATION
Quarterly Data -- (Unaudited) -- The following tables summarize
selected quarterly financial data for 1998 and 1999 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>
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 (549) (612) (28,444) (26,182) (55,787)
Basic and diluted loss
per common share $ (0.00) $ (0.01) $ (0.22) $ (0.21) $ (0.44)
1999
Revenues $ 4,336 $ 5,100 $ 6,587 $ 7,433 $ 23,456
Gross profit 1,622 2,366 3,400 3,422 10,810
Net loss (1,648) (2,795) (1,645) (6,622) (12,710)
Basic and diluted loss per
common share $ (0.08) $ (0.01) $ (0.01) $ (0.05) $ (0.15)
</TABLE>
Significant Customers -- In 1997, one oil purchaser represented 15% of
consolidated revenues. In 1998 and 1999, no individual purchaser represented 10%
or more of consolidated revenues. Harken has secured and maintains letters of
credit with significant purchasers. In addition, management does not feel that
the loss of a significant purchaser would significantly impact the operations of
Harken due to the availability of other potential purchasers for its oil and gas
production.
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
operates 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 Middle American operating
segment currently relates to Harken's exploration, development, production and
acquisition efforts in Colombia and Costa Rica. Middle American segment
production cash flows are discovered through extensive drilling operations
conducted under Association Contract or Concession arrangements with the
state-owned oil and gas companies/ministries in the respective countries.
Harken's Middle 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 Middle American
operations are heavily capital intensive in the exploration and development
phases due to remote well locations and the general need for
69
<PAGE> 70
the construction of Harken's own flowline connections and production facilities.
During the three-year period ended December 31, 1999, none of Harken's Middle
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.
70
<PAGE> 71
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, 1999:
<TABLE>
<CAPTION>
NORTH MIDDLE
AMERICA AMERICA TOTAL
------------ ------------ ------------
<S> <C> <C> <C>
FOR THE YEAR ENDED
DECEMBER 31, 1997:
Operating revenues $ 14,113 $ -- $ 14,113
Interest and other income 2,327 2,328 4,655
Depreciation and amortization 5,102 81 5,183
Interest expense and other, net 720 1,283 2,003
Income tax expense 63 -- 63
Segment profit (loss) 1,197 (1,481) (284)
Capital expenditures 6,413 35,065 41,478
Total assets at end of year 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 598 3,696 4,294
Income tax expense 34 -- 34
Segment loss (52,940) (2,847) (55,787)
Capital expenditures 23,968 84,411 108,379
Total assets at end of year 108,938 211,178 320,116
FOR THE YEAR ENDED
DECEMBER 31, 1999:
Operating revenues $ 16,719 $ 3,026 $ 19,745
Interest and other income 1,831 1,880 3,711
Depreciation and amortization 5,591 1,122 6,713
Provision for asset impairments -- 1,599 1,599
Interest expense and other, net 2,918 4,378 7,296
Income tax expense 30 -- 30
Segment loss (2,811) (9,899) (12,710)
Capital expenditures 53,448 44,005 97,453
Total assets at end of year 99,534 199,386 298,920
</TABLE>
71
<PAGE> 72
(15) OIL AND GAS DISCLOSURES
Costs Incurred in Property Acquisition, Exploration and Development
Activities:
<TABLE>
<CAPTION>
Year Ended December 31,
-------------------------------------------------
1997 1998 1999
------------- -------------- --------------
<S> <C> <C> <C>
DOMESTIC COSTS INCURRED:
Acquisition of properties
Evaluated $ 3,896 $ 11,744 $ 34,720
Unevaluated -- 8,778 14,481
Exploration 170 2,577 815
Development 2,347 869 3,432
------------ ------------ --------
Total domestic costs incurred $ 6,413 $ 23,968 $ 53,448
============ ============ ========
INTERNATIONAL COSTS INCURRED:
Acquisition of properties
Evaluated $ 4,115 $ 903 $ 3,761
Unevaluated -- 6,313 72
Exploration 30,950 77,195 40,172
Development -- -- --
------------ ------------ --------
Total international costs incurred $ 35,065 $ 84,411 $ 44,005
============ ============ ========
</TABLE>
International costs incurred during 1997 and 1998 relate to Harken's
Colombian operations. International costs incurred during 1999 include
$2,037,000 of Costa Rica costs.
72
<PAGE> 73
Capitalized Costs Relating to Oil and Gas Producing Activities:
<TABLE>
<CAPTION>
December 31,
-----------------------------------
1997 1998 1999
--------- --------- ---------
<S> <C> <C> <C>
CAPITALIZED COSTS:
Unevaluated Colombia properties $ 21,769 $ 60,162 $ 25,154
Unevaluated Costa Rica properties -- -- 2,037
Unevaluated domestic properties 5,780 4,372 17,111
Evaluated Colombia properties 22,754 68,772 140,964
Evaluated domestic properties 67,431 92,807 131,159
--------- --------- ---------
Total capitalized costs 117,734 226,113 316,425
Less accumulated depreciation and
amortization (12,928) (68,157) (74,217)
--------- --------- ---------
Net capitalized costs $ 104,806 $ 157,956 $ 242,208
========= ========= =========
</TABLE>
Oil and Gas Reserve Data -- (Unaudited) -- The following information is
presented with regard to Harken's proved oil and gas reserves. The reserve
values and cash flow amounts reflected in the following reserve disclosures are
based on prices received as of year end. As of December 31, 1999, Harken has
reflected proved reserves in Colombia related to its Alcaravan and Bolivar
Association Contracts. As Harken identifies proved reserves associated with
other Association Contracts, or identifies proved reserves from additional
prospects within its Alcaravan and Bolivar Association Contracts, such reserves
will be added in the year of their discovery. During 1999, Harken applied to
Ecopetrol for a declaration of commercial discovery related to the Palo Blanco
field on the Alcaravan Association Contract and the Catalina field on the
Bolivar Association Contract. Correspondence from Ecopetrol indicates that it is
probable that in the event Ecopetrol declares these fields to be commercial,
Harken will be reimbursed for Ecopetrol's share of historical costs through
Ecopetrol's share of future production volumes. As such, beginning December 31,
1999, Harken has reflected the additional reserve volumes relating to future
historical cost reimbursements from Ecopetrol. Such treatment of cost recovery
volumes has resulted in an increase of proved reserves of approximately 911,000
barrels of oil. If Ecopetrol does not elect to approve Harken's commerciality
application and participate in the development of any of Harken's producing
fields, Harken could choose to develop the fields pursuant to a sole-risk
operation and Harken's share of such reserves could additionally be increased
accordingly. All Colombian proved reserves are net of Ecopetrol's 20% royalty
pursuant to each related Association Contract. Harken's Colombian reserves have
been reviewed by Gaffney, Cline & Associates. For further discussion of Harken's
Colombian operations, see Note 5 - Middle American Operations. Harken has
reflected no reserves related to its Costa Rica operations.
Harken's domestic reserves reflect proved reserves added as a result of
certain merger and acquisition activities consummated during 1997, 1998 and
1999. See Note 2 - Mergers and Acquisitions for further discussion. Harken's
domestic 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.
Harken's domestic reserves have been prepared by either DeGolyer and MacNaughton
or Netherland, Sewell & Associates, Inc.
73
<PAGE> 74
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.
Pending SEC Review of Reserve Report--In connection with Harken's
recent filing of a registration statement on Form S-3, the Securities and
Exchange Commission (the "SEC") has issued a comment letter disagreeing with
Harken's classification of its reserves in Colombia as proved. Gaffney, Cline &
Associates, Harken's independent reserve engineers, classified these reserves as
proved in the reserve report for the year ended December 31, 1999 issued for
Harken, which was used in the preparation of the financial statements included
herein. Harken has reviewed the SEC comments with Gaffney Cline & Associates and
both Gaffney Cline & Associates and Harken believe that such reserves are
properly classified as proved. However, if these reserves are ultimately
reclassified as not proved, Harken's Colombian proved reserves will be
materially reduced, which could result in a write-down of Harken's Colombian
capitalized property costs.
74
<PAGE> 75
<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, 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
Extensions and discoveries 1 3,814 3,855 -- 3,856 3,814
Revisions 842 (2,621) (5,492) (35,720) (4,648) (38,341)
Production (510) (2,847) (248) -- (760) (2,847)
Sales of reserves in place (119) (2,734) -- -- (119) (2,734)
Purchases of reserves in place 2,504 28,875 1,142 -- 3,646 28,875
----------- ----------- ----------- ----------- ----------- -----------
AS OF DECEMBER 31, 1999 6,358 52,818 27,139 44,400 33,497 97,218
=========== =========== =========== =========== =========== ===========
PROVED DEVELOPED RESERVES AT:
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
December 31, 1999 3,777 28,289 5,001 -- 8,778 28,289
</TABLE>
75
<PAGE> 76
Standardized Measure of Discounted Future Net Cash Flows Relating to Proved Oil
and Gas Reserves:
<TABLE>
<CAPTION>
(Unaudited)
-------------------------------------------------
United States Colombia Total Worldwide
------------- ------------- ---------------
(in thousands)
<S> <C> <C> <C>
DECEMBER 31, 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
============= ============= ===============
DECEMBER 31, 1999:
Future cash inflows $ 282,323 $ 680,930 $ 963,253
Production costs (89,569) (145,940) (235,509)
Development costs (29,948) (51,030) (80,978)
------------- ------------- ---------------
Future net inflows before income tax 162,806 483,960 646,766
Future income taxes (3,068) (112,828) (115,896)
------------- ------------- ---------------
Future net cash flows 159,738 371,132 530,870
10% discount factor (64,265) (162,192) (226,457)
------------- ------------- ---------------
Standardized measure of discounted future
net cash flows $ 95,473 $ 208,940 $ 304,413
============= ============= ===============
</TABLE>
76
<PAGE> 77
Changes In Standardized Measure of Discounted Future Net Cash Flows Relating to
Proved Oil and Gas Reserves:
<TABLE>
<CAPTION>
(Unaudited)
-----------------------------------
1997 1998 1999
--------- --------- ---------
<S> <C> <C> <C>
WORLDWIDE (in thousands)
Standardized measure -- beginning of year $ 142,243 $ 90,580 $ 144,851
Increase (decrease)
Sales, net of production costs (8,195) (4,759) (10,470)
Net change in prices, net of production costs (67,852) (53,357) 246,698
Development costs incurred 5,345 11,159 11,098
Change in future development costs 2,901 18,243 (7,125)
Change in future income taxes (4,898) (9,404) (38,402)
Revisions of quantity estimates (3,931) (19,929) (107,793)
Accretion of discount 14,224 9,058 14,485
Changes in production rates, timing and other (14,051) (11,756) (35,005)
Extensions and discoveries, net of future costs 16,007 82,230 40,035
Sales of reserves-in-place -- (42) (2,789)
Purchases of reserves-in-place 8,787 32,828 48,830
--------- --------- ---------
Standardized measure -- end of year $ 90,580 $ 144,851 $ 304,413
========= ========= =========
</TABLE>
(16) COMMITMENTS AND CONTINGENCIES
Operating Leases -- Harken leases its corporate and certain other
office space and certain field operating offices. Total office and operating
lease payments during 1997, 1998 and 1999 were $551,000, $1,054,000, and
$1,437,000 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, 1999, net of sublease arrangements, are as follows:
<TABLE>
<CAPTION>
Year Amount
---------------- ----------
<S> <C>
2000 $ 745
2001 655
2002 631
2003 587
2004 337
Thereafter --
----------
Total minimum payments required $ 2,955
==========
</TABLE>
77
<PAGE> 78
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 U.S. District Court for
the Northern District of Texas, Amarillo Division, styled D. E. Rice and Karen
Rice, as Trustees for the Rice Family Living Trust ("Rice") vs. Harken
Exploration Company. In the lawsuit, Rice alleges damages resulting from Harken
Exploration Company's alleged spills on Rice's property and has claimed that the
Oil Pollution Act ("OPA") should be applied in this circumstance. Harken
believes that this position as well as the lawsuit in total is wholly without
merit. In October 1999, the trial court granted Harken's Motion for Summary
Judgment that the OPA did not apply and dismissed the Rice claim under it. Rice
has appealed the trial court's summary judgement to the U.S. Fifth Circuit Court
of Appeals. The appeal is not expected to be heard before the fourth quarter of
2001. In Harken management's opinion, the results of the lawsuit and appeal will
not have a material adverse effect on Harken's financial position.
Search Acquisition Corp. ("Search Acquisition"), a wholly-owned
subsidiary of Harken, is a defendant in a lawsuit filed by Petrochemical
Corporation of America and Lorken Investments Corporation (together,
"Petrochemical"). This lawsuit arises out of Petrochemical's attempt to enforce
a judgement entered in 1993 against a group of twenty limited partnerships known
as the "Odyssey limited partnerships." Petrochemical claims that Search
Exploration, Inc. is liable for payment of the judgement as the
successor-in-interest to eight Odyssey limited partnerships. Search Acquisition
was the surviving corporation in the 1995 merger with Search Exploration, Inc.
On February 28, 1996, the court granted Search Acquisition's motion for summary
judgment. On July 3, 1998, the Fifth District Court of Appeals for the State of
Texas reversed the trial court's summary judgment and remanded the case to the
trial court. It is estimated that this trial will take place in the fourth
quarter of 2000. Although the ultimate outcome of this litigation is uncertain,
Harken believes that any liability to Harken as a result of this litigation will
not have a material adverse effect on Harken's financial condition.
420 Energy Investment, Inc. and ERI Investments, Inc. (collectively
"420 Energy") filed a lawsuit against XPLOR Energy, Inc., ("XPLOR") a
wholly-owned subsidiary of Harken, on December 21, 1999 in the New Castle County
Court of Chancery of the State of Delaware. 420 Energy alleges that they are
entitled to appraisal and payment of the fair value of their common stock in
XPLOR as of the date XPLOR merged with Harken. Although the outcome of this
litigation is uncertain, Harken believes that any liability to Harken as a
result of this litigation will not have a material adverse effect on Harken's
financial condition.
On March 8, 2000, the Company was named as a third party defendant in
an action styled State of Texas vs. Amber Refining, Inc., Paradigm Properties
Management, Inc., Amber Terminal, Inc., Texas 150 Business Park, Inc., Edward A.
Shaw, ESCM & Associates, Restructure Petroleum Marketing, Inc., and EZ Serve
Corporation, Inc.; Case No. 97-05966 pending in the 261st District Court for
Travis County, Texas. This is an action brought by the State of Texas against
the owners of a refinery and refined products terminal facility located in Fort
Worth, Texas. The Company believes that it has no liability in this matter.
78
<PAGE> 79
Harken and its subsidiaries currently are involved in various other
lawsuits and other contingencies, which in management's opinion, will not have a
material adverse effect on Harken's financial position.
Harken has accrued approximately $6,063,000 at December 31, 1999
relating to certain other operational or regulatory liabilities related to
Harken's domestic operations. Harken and its subsidiaries currently are involved
in various lawsuits and other contingencies, which in management's opinion, will
not result in significant loss exposure to Harken.
Year 2000 Update -- Over the past two years, Harken has prepared for
the potential impact of the Year 2000 on the processing of date-sensitive
information by Harken's computer systems. The Year 2000 issue involves
circumstances where a computerized system may not properly recognize or process
date-sensitive information on or after January 1, 2000. The Year 2000 problem is
the result of computer programs being written using two digits, rather than
four, to define the applicable year. The problem is not limited to computer
systems. Year 2000 issues potentially could have affected 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 were not Year 2000 compliant, prioritize those
business-critical computerized systems that needed remediation or replacement,
test compliance once the appropriate corrective measures had been implemented,
and develop any contingency plans where considered necessary. In addition,
Harken conducted a survey to verify the Year 2000 readiness status of key
purchasers, vendors and customers that potentially could have had an impact on
Harken's material business operations.
As of March 30, 2000, Harken has experienced no interruption in any of
its computerized systems or any other non-information technology system related
to the Year 2000 issue. In additional, Harken has noted no material impact to
any of its key purchasers, vendors or customers as a result of the Year 2000
issue. Harken continues to be alert for any potential Year 2000-related problems
and maintains appropriate contingency plans to address any remaining potential
disruption related to the Year 2000 issue.
79
<PAGE> 80
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
None.
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
See "Item 1. Business" above for a discussion of the Executive
Officers of Harken. Reference is made to the material under the caption
"Election of Directors" in the Registrant's definitive Proxy Statement to be
filed on or before April 30, 2000 pursuant to Regulation 14A in connection with
its Annual Meeting of Stockholders to be held in June 2000, which is
incorporated herein by reference.
ITEM 11. EXECUTIVE COMPENSATION
Reference is made to the material under the caption "Compensation of
Executive Officers" in the Registrant's definitive Proxy Statement to be filed
on or before April 30, 2000 pursuant to Regulation 14A in connection with its
Annual Meeting of Stockholders to be held in June 2000, which is incorporated
herein by reference.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS
Reference is made to the material under the caption "Ownership of
Common Stock" in the Registrant's definitive Proxy Statement to be filed on or
before April 30, 2000 pursuant to Regulation 14A in connection with its Annual
Meeting of Stockholders to be held in June 2000, which is incorporated herein by
reference.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
Reference is made to the material under the caption "Certain
Transactions" in the Registrant's definitive Proxy Statement to be filed on or
before April 30, 2000 pursuant to Regulation 14A in connection with its Annual
Meeting of Stockholders to be held in June 2000, which is incorporated herein by
reference.
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<PAGE> 81
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............................................... 38
-- Selected Financial Information and Other Data for the five years ended
December 31, 1999...................................................................... 25
-- Consolidated Balance Sheets -- December 31, 1998 and 1999.............................. 39
-- Consolidated Statements of Operations for the three years ended
December 31, 1999 ..................................................................... 40
-- Consolidated Statements of Stockholders' Equity for the three years ended
December 31, 1999...................................................................... 41
-- Consolidated Statements of Cash Flows for the three years ended
December 31, 1999...................................................................... 42
-- Notes to Consolidated Financial Statements............................................. 43
</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).
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<PAGE> 82
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 by
reference herein).
4.4 Certificate of the Designations, Powers, Preferences and Rights
of Series C Cumulative Convertible Preferred Stock, $1.00 par
value of Harken Energy Corporation (filed as Exhibit 4.3 to
Harken's Annual Report on Form 10-K for fiscal year ended
December 31, 1989, File No. 0-9207, and incorporated by reference
herein).
4.5 Certificate of the Designations of Series D Preferred Stock,
$1.00 par value of Harken Energy Corporation (filed as Exhibit
4.3 to Harken's Quarterly Report on Form 10-Q for the fiscal
quarter ended September 30, 1995, File No. 0-9207, and
incorporated by reference herein).
4.6 Rights Agreement, dated as of April 6, 1998, by and between
Harken Energy Corporation And ChaseMellon Shareholder Services
L.L.C., as Rights Agent (filed as Exhibit 4 to Harken's Current
Report on Form 8-K dated April 7, 1998, file No. 0-9207, and
incorporated by reference herein).
4.7 Certificate of Designations of Series E Junior Participating
Preferred Stock (filed as Exhibit B to Exhibit 4 to Harken's
Current Report on Form 8-K dated April 7, 1998, file No. 0-9207,
and incorporated by reference herein).
82
<PAGE> 83
4.8 Certificate of Designations, Preferences and Rights of Series F
Convertible Preferred Stock (filed as Exhibit 4.8 to Harken's
Quarterly Report on Form 10-Q for the period ended June 30, 1998,
File No. 0-9207, and incorporated by reference herein).
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).
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).
83
<PAGE> 84
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).
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
84
<PAGE> 85
10-Q for the quarterly period ended June 30, 1997, File No.
0-9207, and incorporated herein by reference).
21 Subsidiaries of Harken.
23 Consents of Independent Accountants and Independent Reserve
Engineers.
24 Power of Attorney.
27 Financial Data Schedule.
(b) Reports on Form 8-K
On September 3, 1999, Harken filed a Form 8-K to announce the merger with
XPLOR Energy, Inc.
On October 15, 1999, Harken filed a Form 8-K to announce an update with
regard to its Bolivar Association Contract block.
On November 1, 1999, Harken filed a Form 8-K/A to report certain
financial information related to the merger with XPLOR Energy, Inc.
On November 8, 1999, Harken filed a Form 8-K to announce a general update
on its operations, including the purchase of certain development finance
agreement interests.
85
<PAGE> 86
SIGNATURES
Pursuant to the requirements of the Section 13 or 15(d) of the Securities
Exchange Act of 1934, the Registrant has duly caused this Report to be signed on
its behalf by the undersigned, thereunto duly authorized, in the City of
Houston, State of Texas, on March 30, 2000.
HARKEN ENERGY CORPORATION
*
--------------------------------
Mikel D. Faulkner, Chairman of the Board of Directors and
Chief Executive Officer
Pursuant to the requirements of the Securities Exchange Act of 1934, this
Report has been signed below by the following persons on behalf of the
Registrant and in the capacities and on the dates indicated.
<TABLE>
<CAPTION>
Signature Title Date
--------- ----- ----
<S> <C> <C>
* Chairman of the Board of Directors and March 30, 2000
- ------------------------------- Chief Executive Officer (Principal
Mikel D. Faulkner Executive Officer)
/s/ Bruce N. Huff President, Chief Financial Officer and March 30, 2000
- ---------------------------- Director
Bruce N. Huff
* Executive Vice President, Chief March 30, 2000
- ------------------------------- Operating Officer and Director
Stephen C. Voss
* Director March 30, 2000
- -------------------------------
Michael M. Ameen, Jr.
</TABLE>
86
<PAGE> 87
<TABLE>
<S> <C> <C>
* Director March 30, 2000
- ----------------------------
Larry G. Akers
* Director March 30, 2000
- --------------------------------
Gary R. Peterson
* Director March 30, 2000
- --------------------------------
Donald W. Raymond
* Director March 30, 2000
- --------------------------------
Hobart A. Smith
* Director March 30, 2000
- ------------------------------
Gary B. Wood
</TABLE>
*Bruce N. Huff, by signing his name hereto, does hereby sign this Annual Report
on Form 10-K for the year ended December 31, 1999 on behalf of Harken Energy
Corporation and each of the above-named officers and directors of such Company
pursuant to powers of attorney, executed on behalf of the Company and each
officer and director.
/s/ Bruce N. Huff
- ---------------------------------
Bruce N. Huff,
Attorney-in-Fact
87
<PAGE> 88
INDEX TO EXHIBITS
<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION
- ------- -----------
<S> <C>
3.1 Certificate of Incorporation of Harken Energy Corporation as
amended (filed as Exhibit 3.1 to Harken's Annual Report on Form
10-K for fiscal year ended December 31, 1989, File No. 0-9207,
and incorporated by reference herein).
3.2 Amendment to 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> 89
<TABLE>
<S> <C>
3.5 Amendments to the Certificate of Incorporation of Harken Energy
Corporation (filed as Exhibit 3.5 to Harken's Annual Report on
Form 10-K for the fiscal year ended December 31, 1996, File No.
0-9207, and incorporated herein by reference).
3.6 Amendment to the Certificate of Incorporation of Harken Energy
Corporation (filed as Exhibit 3.6 to Harken's Annual Report on
Form 10-K for the fiscal year ended December 31, 1997, File No.
0-9207, and incorporated by reference herein).
3.7 Amendment to the Certificate of Incorporation of Harken Energy
Corporation (filed as Exhibit 3.6 to Harken's Quarterly Report
on Form 10-Q for the fiscal quarter ended June 30, 1998, File
No. 0-9207, and incorporated by reference herein).
3.8 Bylaws of Harken Energy Corporation, as amended (filed as
Exhibit 3.2 to Harken's Annual Report on Form 10-K for fiscal
year ended December 31, 1989, File No. 0-9207, and incorporated
by reference herein).
4.1 Form of certificate representing shares of Harken common stock,
par value $.01 per share (filed as Exhibit 1 to Harken's
Registration Statement on Form 8-A, File No. 0-9207, and
incorporated by reference herein).
4.2 Certificate of Designations, Powers, Preferences and Rights of
Series A Cumulative Convertible Preferred Stock, $1.00 par
value, of Harken Energy Corporation (filed as Exhibit 4.1 to
Harken's Annual Report on Form 10-K for the fiscal year ended
December 31, 1989, File No. 0-9207, and incorporated herein by
reference).
4.3 Certificate of Designations, Powers, Preferences and Rights of
Series B Cumulative Convertible Preferred Stock, $1.00 par
value, of Harken Energy Corporation (filed as Exhibit 4.2 to
Harken's Annual Report on Form 10-K for the fiscal year ended
December 31, 1989, File No. 0-9207, and incorporated by
reference herein).
4.4 Certificate of the Designations, Powers, Preferences and Rights
of Series C Cumulative Convertible Preferred Stock, $1.00 par
value of Harken Energy Corporation (filed as Exhibit 4.3 to
Harken's Annual Report on Form 10-K for fiscal year ended
December 31, 1989, File No. 0-9207, and incorporated by reference
herein).
4.5 Certificate of the Designations of Series D Preferred Stock,
$1.00 par value of Harken Energy Corporation (filed as Exhibit
4.3 to Harken's Quarterly Report on Form 10-Q for the fiscal
quarter ended September 30, 1995, File No. 0-9207, and
incorporated by reference herein).
4.6 Rights Agreement, dated as of April 6, 1998, by and between
Harken Energy Corporation And ChaseMellon Shareholder Services
L.L.C., as Rights Agent (filed as Exhibit 4 to Harken's Current
Report on Form 8-K dated April 7, 1998, file No. 0-9207, and
incorporated by reference herein).
4.7 Certificate of Designations of Series E Junior Participating
Preferred Stock (filed as Exhibit B to Exhibit 4 to Harken's
Current Report on Form 8-K dated April 7, 1998, file No. 0-9207,
and incorporated by reference herein).
</TABLE>
<PAGE> 90
<TABLE>
<S> <C>
4.8 Certificate of Designations, Preferences and Rights of Series F
Convertible Preferred Stock (filed as Exhibit 4.8 to Harken's
Quarterly Report on Form 10-Q for the period ended June 30, 1998,
File No. 0-9207, and incorporated by reference herein).
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).
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).
</TABLE>
<PAGE> 91
<TABLE>
<S> <C>
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).
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
</TABLE>
<PAGE> 92
<TABLE>
<S> <C>
10-Q for the quarterly period ended June 30, 1997, File No.
0-9207, and incorporated herein by reference).
21 Subsidiaries of Harken.
23 Consents of Independent Accountants and Independent Reserve
Engineers.
24 Power of Attorney.
27 Financial Data Schedule.
</TABLE>
(b) Reports on Form 8-K
On September 3, 1999, Harken filed a Form 8-K to announce the merger with
XPLOR Energy, Inc.
On October 15, 1999, Harken filed a Form 8-K to announce an update with
regard to its Bolivar Association Contract block.
On November 1, 1999, Harken filed a Form 8-K/A to report certain
financial information related to the merger with XPLOR Energy, Inc.
On November 8, 1999, Harken filed a Form 8-K to announce a general update
on its operations, including the purchase of certain development finance
agreement interests.
<PAGE> 1
EXHIBIT 21
SUBSIDIARIES OF HARKEN ENERGY CORPORATION
1. AEX, Inc.
2. Burns Drilling Company
3. Chuska Resources Corporation
4. D-FW Resources Management, Inc.
5. Faulkinberry Oil & Gas Company, Inc.
6. Fisher-Webb, Inc.
7. Harken Bahrain Oil Company
8. Harken Canada, Ltd.
9. Harken Capitol Corporation
10. Harken Costa Rica Holdings L.L.C.
11. Harken de Colombia, Ltd.
12. Harken Energy West Texas Inc.
13. Harken Exploration Company
14. Harken Focus Production Company
15. Harken Gulf Exploration Company
16. Harken International Ltd.
17. Harken Operating Company
18. Harken South America, Ltd.
19. Harken Southwest Corporation
20. Kendrick & Mulligan Oil & Gas Incorporated
21. Kennedy & Mitchell, Inc.
22. KMI Acquisition Corporation
23. KMI Capital Corporation
24. McCulloch Energy, Inc.
25. Search Acquisition Corp.
26. South Coast Exploration Company
27. Sunfield Energy Company
28. Supreme Well Service Company
29. XPLOR Energy Holding Company
30. XPLOR Energy, Inc.
31. XPLOR Energy Operating Company
32. XPLOR Energy SPV-I, Inc.
<PAGE> 1
EXHIBIT 23
CONSENT OF INDEPENDENT RESERVE ENGINEERS
As Harken Energy Corporation's (Harken's) independent reserve
engineers, Gaffney, Cline & Associates, Inc. (GCA) consents to the reference to
GCA's reserve report dated December 31, 1999, as included in Harken's Annual
Report on Form 10-K. We also hereby consent to the incorporation by reference
of our report in Registration Statements on Form S-8 (Nos. 333-33953 and
333-08593) and on Form S-3 (Nos. 333-53713, 333-57047, 333-57909, 333-71751,
333-78859, 333-79281, 333-79617, 333-80031, 333-85057) of Harken Energy
Corporation.
GAFFNEY, CLINE & ASSOCIATES
<PAGE> 2
EXHIBIT 23
CONSENT OF INDEPENDENT RESERVE ENGINEERS
We hereby consent to the use of our name in "Item 8. Financial
Statements and Supplementary Data" of the Annual Report on Form 10-K of Harken
Energy Corporation for the year ended December 31, 1999 (the "Form 10-K"). We
also hereby consent to the incorporation by reference of our report in
Registration Statements on Form S-8 (Nos. 333-33953 and 333-08593) and on Form
S-3 (Nos. 333-53713, 333-57047, 333-57909, 333-71751, 333-78859, 333-79281,
333-79617, 333-80031, 333-85057) of Harken Energy Corporation.
NETHERLAND, SEWELL & ASSOCIATES, INC.
PETROLEUM ENGINEERS
<PAGE> 3
EXHIBIT 23
CONSENT OF INDEPENDENT RESERVE ENGINEERS
We hereby consent to the reference to our firm and to our reserves
estimates in the Annual Report on Form 10-K (the Annual Report) of Harken Energy
Corporation (Harken) for the year ended December 31, 1999; and to the
incorporation by reference of our report in Registration Statements on Form S-8
(Nos. 333-33953 and 333-08593) and on Form S-3 (Nos. 333-53713, 333-57047,
333-57909, 333-71751, 333-78859, 333-79281, 333-79617, 333-80031, 333-85057) of
Harken Energy Corporation provided, however, since in the Annual Report the
estimates of reserves, revenue, and discounted present worth set forth in our
report mentioned below have been combined with estimates of reserves, revenue,
and discounted present worth prepared by another petroleum consultant, in
providing our consent we have necessarily relied on a letter dated March 10,
2000, from Harken with respect to the estimates of such other petroleum
consultant to verify that the Annual Report correctly reflects our estimates.
Our estimates of the oil, condensate, natural gas liquids, and natural gas
reserves of certain of the properties owned by Harken in the United States are
contained in our report entitled "Appraisal Report as of December 31,1999, on
Proved Reserves of Certain Properties owned by Harken Energy Corporation - SEC
Case."
DeGOLYER AND MacNAUGHTON
PETROLEUM ENGINEERS
Dallas, Texas
March 30, 2000
<PAGE> 4
EXHIBIT 23
INDEPENDENT PUBLIC ACCOUNTANT'S CONSENT
As independent public accountants, we hereby consent to the incorporation of
our report included in this Form 10-K, into the Company's previously filed
Registration Statements on Form S-8 (Nos. 333-33953 and 333-08593) and on Form
S-3 (Nos. 333-53713, 333-57047, 333-57909, 333-71751, 333-78859, 333-79281,
333-79617, 333-80031, 333-85057).
ARTHUR ANDERSEN LLP
Dallas, Texas
March 28, 2000
<PAGE> 1
EXHIBIT 24
HARKEN ENERGY CORPORATION
FORM 10-K POWER OF ATTORNEY
KNOW ALL MEN BY THESE PRESENTS, that the undersigned, an Officer and/or
Director of HARKEN ENERGY CORPORATION, a Delaware corporation (the
"Corporation"), hereby constitutes and appoints Mikel D. Faulkner, Bruce N.
Huff, Larry E. Cummings and Karen S. Bustamente and each of them (with full
power to each of them to act alone), his true and lawful attorney-in-fact and
agent with full power of substitution for him and on his behalf in his name,
place and stead in any and all capacities (whether on behalf of the corporation
or as an Officer or Director or both thereof or by attesting the seal of the
Corporation or otherwise), to sign, execute and file an Annual Report on Form
10-K for the fiscal year ended December 31, 1999, under the Securities Exchange
Act of 1934, as amended with all exhibits and any and all documents required to
be filed with respect thereto with the Securities and Exchange Commission or
any state or other regulatory authority, and granting unto said
attorneys-in-fact and agents and each of them full power and authority to do
and perform each and every act and thing requisite and necessary to be done in
and about the premises in order to effectuate the same as fully to all intents
and purposes as he himself might or could do it personally present, hereby
ratifying and confirming all that said attorneys-in-fact and agents or any of
them or their substitute or substitutes, may lawfully do or cause to be done.
IN WITNESS WHEREOF, the undersigned have executed this Power of Attorney
effective as of March 2, 2000.
<TABLE>
<CAPTION>
NAME CAPACITIES
---- ----------
<S> <C>
/s/ MIKEL D. FAULKNER
- ------------------------------------------------- Chairman of the Board of Directors
Mikel D. Faulkner and Chief Executive Officer
(Principal Executive Officer)
/s/ BRUCE N. HUFF
- ------------------------------------------------- President, Chief Financial Officer
Bruce N. Huff and Director
(Principal Financial Officer and
Principal Accounting Officer)
/s/ STEPHEN C. VOSS
- ------------------------------------------------- Executive Vice President,
Stephen C. Voss Chief Executive Officer and
Director
/s/ MICHAEL M. AMEEN, JR.
- ------------------------------------------------- Director
Michael M. Ameen, Jr.
/s/ LARRY G. AKERS
- ------------------------------------------------- Director
Larry G. Akers
/s/ GARY R. PETERSON
- ------------------------------------------------- Director
Gary R. Peterson
/s/ DONALD W. RAYMOND
- ------------------------------------------------- Director
Donald W. Raymond
/s/ HOBART A. SMITH
- ------------------------------------------------- Director
Hobart A. Smith
/s/ GARY B. WOOD
- ------------------------------------------------- Director
Gary B. Wood
</TABLE>
<TABLE> <S> <C>
<ARTICLE> 5
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> DEC-31-1999
<PERIOD-START> JAN-01-1999
<PERIOD-END> DEC-31-1999
<CASH> 7,153,000
<SECURITIES> 18,459,000
<RECEIVABLES> 7,092,000
<ALLOWANCES> (1,314,000)
<INVENTORY> 0
<CURRENT-ASSETS> 32,178,000
<PP&E> 337,745,000
<DEPRECIATION> (81,477,000)
<TOTAL-ASSETS> 298,920,000
<CURRENT-LIABILITIES> 11,202,000
<BONDS> 107,671,000
0
0
<COMMON> 1,557,000
<OTHER-SE> 173,412,000
<TOTAL-LIABILITY-AND-EQUITY> 298,920,000
<SALES> 19,745,000
<TOTAL-REVENUES> 23,456,000
<CGS> 8,935,000
<TOTAL-COSTS> 8,935,000
<OTHER-EXPENSES> 19,355,000
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 7,296,000
<INCOME-PRETAX> (12,130,000)
<INCOME-TAX> 30,000
<INCOME-CONTINUING> (12,160,000)
<DISCONTINUED> 0
<EXTRAORDINARY> (550,000)
<CHANGES> 0
<NET-INCOME> (12,710,000)
<EPS-BASIC> (0.15)
<EPS-DILUTED> (0.15)
</TABLE>
