-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, R9QlaTHODlLKcCp/RNX7kkyNge9e5FHzVxx0yX47Hzobk5tfUbbUylIZm+AtEfFn 2d0vtDPzrsmYhAfUHhUqKw== 0000899243-02-001621.txt : 20020515 0000899243-02-001621.hdr.sgml : 20020515 20020515142509 ACCESSION NUMBER: 0000899243-02-001621 CONFORMED SUBMISSION TYPE: 10-Q PUBLIC DOCUMENT COUNT: 2 CONFORMED PERIOD OF REPORT: 20020331 FILED AS OF DATE: 20020515 FILER: COMPANY DATA: COMPANY CONFORMED NAME: HARKEN ENERGY CORP CENTRAL INDEX KEY: 0000313478 STANDARD INDUSTRIAL CLASSIFICATION: CRUDE PETROLEUM & NATURAL GAS [1311] IRS NUMBER: 952841597 STATE OF INCORPORATION: DE FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: 10-Q SEC ACT: 1934 Act SEC FILE NUMBER: 001-10262 FILM NUMBER: 02650903 BUSINESS ADDRESS: STREET 1: 16285 PARK TEN PLACE SUITE 600 CITY: HOUSTON STATE: TX ZIP: 77084 BUSINESS PHONE: 2817171300 MAIL ADDRESS: STREET 1: 16285 PARK TEN PLACE STREET 2: STE 600 CITY: HOUSTON STATE: TX ZIP: 77084 FORMER COMPANY: FORMER CONFORMED NAME: HARKEN OIL & GAS INC DATE OF NAME CHANGE: 19890109 10-Q 1 d10q.txt FORM 10-Q FOR PERIOD ENDING 3/31/2002 SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549 Form 10-Q |X| QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15 (d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the quarterly period ended March 31, 2002 |_| 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.) 580 WestLake Park Boulevard, Suite 600 77079 Houston, Texas (Zip Code) (Address of principal executive offices) Registrant's telephone number, including area code (281) 504-4000 Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes |X| No [ ] The number of shares of Common Stock, par value $0.01 per share, outstanding as of May 1, 2002 was 20,996,546. HARKEN ENERGY CORPORATION INDEX TO QUARTERLY REPORT March 31, 2002 Page ---- PART I. FINANCIAL INFORMATION Item 1. Condensed Financial Statements Consolidated Condensed Balance Sheets...................... 4 Consolidated Condensed Statements of Operations............ 5 Consolidated Condensed Statement of Stockholders' Equity... 6 Consolidated Condensed Statements of Cash Flows............ 7 Notes to Consolidated Condensed Financial Statements....... 8 Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations....................... 15 PART II. OTHER INFORMATION ............................................... 23 SIGNATURES................................................................ 27 2 PART I - FINANCIAL INFORMATION 3 ITEM 1. CONDENSED FINANCIAL STATEMENTS HARKEN ENERGY CORPORATION AND SUBSIDIARIES CONSOLIDATED CONDENSED BALANCE SHEETS (Unaudited)
December 31, March 31, 2001 2002 ------------ ---------- Assets Current Assets: Cash and temporary investments $ 8,523,000 $ 6,334,000 Restricted cash 944,000 954,000 Accounts receivable, net 3,248,000 4,013,000 Related party notes receivable 169,000 105,000 Prepaid expenses and other current assets 1,361,000 951,000 ------------- ------------- Total Current Assets 14,245,000 12,357,000 Property and Equipment, net 78,335,000 74,403,000 Other Assets, net 3,226,000 2,503,000 ------------- ------------- $ 95,806,000 $ 89,263,000 ============= ============= Liabilities and Stockholders' Equity Current Liabilities: Trade payables $ 2,664,000 $ 770,000 Accrued liabilities and other 6,197,000 5,680,000 Revenues and royalties payable 2,006,000 1,242,000 Current portion of long-term debt -- 450,000 ------------- ------------- Total Current Liabilities 10,867,000 8,142,000 Convertible Notes Payable 51,388,000 51,457,000 Bank Credit Facilities 7,937,000 7,487,000 Accrued Preferred Stock Dividends 3,942,000 4,987,000 Other Long-Term Obligations 5,458,000 5,594,000 Commitments and Contingencies (Note 10) Minority Interest in Consolidated Subsidiary -- 1,995,000 Stockholders' Equity: Series G1 Preferred Stock, $1.00 par value; $100 liquidation value; 700,000 shares authorized; 446,417 and 438,647 shares outstanding, respectively 446,000 438,000 Series G2 Preferred Stock, $1.00 par value; $100 liquidation value; 400,000 shares authorized; 95,300 and 94,300 shares outstanding, respectively 95,000 94,000 Common stock, $0.01 par value; 225,000,000 shares authorized; 18,713,038 and 18,816,730 shares issued, respectively 187,000 188,000 Additional paid-in capital 385,710,000 384,219,000 Accumulated deficit (369,087,000) (373,688,000) Accumulated other comprehensive income 296,000 (217,000) Treasury stock, at cost, 542,900 shares held (1,433,000) (1,433,000) ------------- ------------- Total Stockholders' Equity 16,214,000 9,601,000 ------------- ------------- $ 95,806,000 $ 89,263,000 ============= =============
The accompanying Notes to Consolidated Condensed Financial Statements are an integral part of these Statements. 4 HARKEN ENERGY CORPORATION AND SUBSIDIARIES CONSOLIDATED CONDENSED STATEMENTS OF OPERATIONS (Unaudited)
Three Months Ended March 31, ------------------------------------ 2001 2002 ------ ------ Revenues: Oil and gas operations $ 8,915,000 $ 5,426,000 Interest and other income 277,000 66,000 ------------ ------------ 9,192,000 5,492,000 ------------ ------------ Costs and Expenses: Oil and gas operating expenses 3,254,000 2,320,000 General and administrative expenses, net 2,480,000 2,409,000 Depreciation and amortization 3,249,000 3,266,000 Interest expense and other, net 1,712,000 972,000 ------------ ------------ 10,695,000 8,967,000 ------------ ------------ Loss before income taxes (1,503,000) (3,475,000) Income tax expense 15,000 90,000 ------------ ------------ Loss before extraordinary items and minority interest (1,518,000) (3,565,000) Minority interest in loss of subsidiary -- 9,000 ------------ ------------ Loss before extraordinary item (1,518,000) (3,556,000) Extraordinary item-gain on repurchase of European Notes 106,000 -- ------------ ------------ Net loss $ (1,412,000) $ (3,556,000) ============ ============ Preferred stock dividends (316,000) (1,045,000) ------------ ------------ Net loss attributed to common stock $ (1,728,000) $ (4,601,000) ============ ============ Basic and diluted loss per common share: Loss per common share before extraordinary items $ (0.10) $ (0.25) Extraordinary item-gain on repurchase of European Notes 0.00 -- ------------ ------------ Loss per common share $ (0.10) $ (0.25) ============ ============ Weighted average common shares outstanding 17,855,827 18,233,676 ============ ============
The accompanying Notes to Consolidated Condensed Financial Statements are an integral part of these Statements. 5 HARKEN ENERGY CORPORATION AND SUBSIDIARIES CONSOLIDATED CONDENSED STATEMENT OF STOCKHOLDERS' EQUITY (Unaudited)
Additional G1 Preferred G2 Preferred Common Paid-In Treasury Stock Stock Stock Capital Stock ------------ ------------ -------- ------------ ----------- Balance, December 31, 2001 $446,000 $95,000 $187,000 $385,710,000 $(1,433,000) Issuance of common stock -- -- -- (4,000) -- Conversions of preferred stock (8,000) (1,000) 1,000 8,000 -- Preferred stock dividends -- -- -- -- -- Issuance of stock of subsidiary -- -- -- (1,495,000) -- Comprehensive income: Net change in derivative fair value -- -- -- -- -- Reclassification of derivative fair value into earnings -- -- -- -- -- Net loss -- -- -- -- -- Total comprehensive (loss) -------- ------- -------- ------------ ----------- Balance, March 31, 2002 $438,000 $94,000 $188,000 $384,219,000 $(1,433,000) ======== ======= ======== ============ =========== Accumulated Other Accumulated Comprehensive Deficit Income (Loss) Total ------------- ------------- ----------- Balance, December 31, 2001 $(369,087,000) $ 296,000 $16,214,000 Issuance of common stock -- -- (4,000) Conversions of preferred stock -- -- -- Preferred stock dividends (1,045,000) -- (1,045,000) Issuance of stock of subsidiary -- -- (1,495,000) Comprehensive income: Net change in derivative fair value -- (423,000) Reclassification of derivative fair value into earnings -- (90,000) Net loss (3,556,000) -- Total comprehensive (loss) (4,069,000) ------------- --------- ----------- Balance, March 31, 2002 $(373,688,000) $(217,000) $ 9,601,000 ============= ========= ===========
The accompanying Notes to Consolidated Condensed Financial Statements are an integral part of these Statements. 6 HARKEN ENERGY CORPORATION AND SUBSIDIARIES CONSOLIDATED CONDENSED STATEMENTS OF CASH FLOWS (Unaudited)
Three Months Ended March 31, -------------------------- 2001 2002 ------ ------ Cash flows from operating activities: Net loss $ (1,412,000) $ (3,556,000) Adjustment to reconcile net loss to net cash provided by operating activities: Depreciation and amortization 3,249,000 3,266,000 Amortization of issuance costs 679,000 117,000 Extraordinary items (106,000) -- Minority interest in loss of subsidiary -- (9,000) Change in assets and liabilities: (Increase) decrease in accounts receivable 1,101,000 (701,000) Increase (decrease) in trade payables and other 326,000 (1,088,000) ------------ ------------ Net cash provided by (used in) operating activities 3,837,000 (1,971,000) ------------ ------------ Cash flows from investing activities: Proceeds from sales of assets 1,815,000 936,000 Capital expenditures, net (9,020,000) (2,322,000) ------------ ------------ Net cash used in investing activities (7,205,000) (1,386,000) ------------ ------------ Cash flows from financing activities: Proceeds from issuances of stock -- 1,425,000 Transaction costs -- (257,000) Repayments of long-term debt (140,000) -- Collection of note receivable 140,000 -- ------------ ------------ Net cash provided by financing activities -- 1,168,000 ------------ ------------ Net decrease in cash and temporary investments (3,368,000) (2,189,000) Cash and temporary investments at beginning of period 19,763,000 8,523,000 ------------ ------------ Cash and temporary investments at end of period $ 16,395,000 $ 6,334,000 ============ ============ Supplemental disclosures of cash flow information: Cash paid during the period for: Interest $ 220,000 $ 88,000 Income taxes -- --
The accompanying Notes to Consolidated Condensed Financial Statements are an integral part of these Statements. 7 HARKEN ENERGY CORPORATION AND SUBSIDIARIES NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS March 31, 2001 and 2002 (Unaudited) (1) BASIS OF PRESENTATION The accompanying unaudited consolidated condensed financial statements of Harken Energy Corporation ("Harken") have been prepared pursuant to the rules and regulations of the Securities and Exchange Commission ("SEC"). Certain information and note disclosures normally included in annual financial statements prepared in accordance with generally accepted accounting principles have been condensed or omitted pursuant to these rules and regulations, although Harken believes that the disclosures made are adequate to make the information presented not misleading. In the opinion of Harken, these financial statements contain all adjustments necessary to present fairly its financial position as of December 31, 2001 and March 31, 2002 and the results of its operations and changes in its cash flows for all periods presented as of March 31, 2001 and 2002. All such adjustments represent normal recurring items. These condensed financial statements should be read in conjunction with the financial statements and the notes thereto included in Harken's Annual Report on Form 10-K for the year ended December 31, 2001. Certain prior year amounts have been reclassified to conform with the 2002 presentation. The preparation of financial statements in conformity with generally accepted accounting principles requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reported period. Actual results could differ from these estimates. The results of operations for the three month period ended March 31, 2002 are not necessarily indicative of the results to be expected for the full year. Comprehensive (Loss) Comprehensive loss includes changes in stockholders' equity during the periods that do not result from transactions with stockholders. The Company's total comprehensive income (loss) is as follows: Three Months Ended March 31, --------------------- 2001 2002 -------- -------- (in thousands) Net (Loss) $ (1,412) $ (3,556) Change in fair value of derivative 280 (423) Reclassification of derivative fair value into earnings 1,010 (90) Cumulative effect of change in accounting principle (3,025) -- -------- -------- Total Comprehensive (Loss) $ (3,147) $ (4,069) ======== ======== (2) ACQUISITIONS AND DISPOSITIONS Sales of Certain Producing Interests - During 2001, certain wholly-owned subsidiaries of Harken sold certain interests in oil and gas producing properties located in Texas, Arkansas, New Mexico and Louisiana for approximately $13,090,000 cash, which was used in part to support Harken's exploration and development activities. During the first quarter of 2002, Harken sold an additional interest in an oil and gas producing property located in Texas for approximately $910,000. Subsequent to March 31, 2002, Harken sold additional producing property interests for approximately $214,000. Acquisition of Republic Properties - On January 30, 2002, a wholly-owned subsidiary of Harken signed an agreement to acquire certain property interests (the "Republic Properties") from Republic Resources, Inc., ("Republic"). Such acquisition was closed on April 4, 2002 following approval by Republic stockholders and debenture holders. The Republic Properties consist of 15 producing property interests located in southern Louisiana and the Texas Gulf Coast region. The Republic Properties were acquired by Harken in exchange for 2,645,500 shares of Harken common stock valued at $2,380,500 based on the average reported price for Harken common stock for the 20 trading days prior to the Closing Date. In addition, the Purchase and Sale Agreement also provides for contingent additional consideration of cash or additional shares of Harken common stock or any combination 8 of the two as Harken may decide, to be paid within 45 days after December 31, 2003, based on a defined calculation to measure the appreciation, if any, of the reserve value of the Republic Properties. (3) PROPERTY AND EQUIPMENT A summary of property and equipment follows: December 31, March 31, 2001 2002 ------------ --------- Unevaluated oil and gas properties: Unevaluated Colombian properties $ 68,000 $ 103,000 Unevaluated Peru properties 635,000 671,000 Unevaluated Panama properties 166,000 189,000 Unevaluated domestic properties 2,603,000 2,189,000 Evaluated oil and gas properties: Evaluated Colombian properties 182,945,000 183,043,000 Evaluated domestic properties 154,495,000 154,029,000 Facilities and other property 25,000,000 25,011,000 Less accumulated depreciation and amortization (287,577,000) (290,832,000) ------------- ------------- $ 78,335,000 $ 74,403,000 ============= ============= (4) MIDDLE AMERICAN OPERATIONS Harken's Middle American operations are conducted through Global Energy Development PLC ("Global", a United Kingdom company listed on the AIM Exchange in London). Effective March 25, 2002, Harken's ownership in Global decreased to 92.77%, as Global placed 7.23% of its stock in a placement to investors, including certain affiliates of Harken and Global, in exchange for approximately $1,425,000 cash. Global is seeking additional financing and acquisition activities using shares of its newly listed common stock. In addition, the sale, by Harken, of additional shares of Global common stock which would reduce Harken's ownership to 90% was previously approved by Harken's Board of Directors. The issuance of stock by Global has been accounted for by Harken within stockholders' equity, by reducing additional paid-in capital by $2,004,000 related to the corresponding minority interest and offsetting proceeds received from transaction costs of $916,000, of which $257,000 were incurred in 2002. Colombian Operations - Global's Colombian operations are conducted through Harken de Colombia, Ltd., a wholly-owned subsidiary of Global, which held four exclusive Colombian Association Contracts with Empresa Colombiana de Petroleos ("Ecopetrol") as of March 31, 2002. Terms of each of the Association Contracts commit Global to perform certain activities in accordance with a prescribed timetable. As of May 14, 2002, Global was in compliance with the requirements of each of the Association Contracts. Costa Rica Operations - Global's participation in Costa Rica is structured whereby a wholly-owned Global subsidiary owns a 40% share of Harken Costa Rica Holdings LLC ("HCRH", a Nevada limited liability 9 company), with an affiliate of MKJ Xploration, Inc. ("MKJ") owning the remaining stock of HCRH. MKJ is the operator of this Costa Rica project. In March 2002, the Costa Rica environmental agency SETENA denied its approval of the requested environmental permit related to Harken's Costa Rica Contract. HCRH has filed an appeal related to this ruling by SETENA. In January 2002, the Costa Rica Constitutional Court rendered a published opinion in a suit that had been filed against another oil and gas operator and the Costa Rican Ministry of Environment and Energy ("MINAE") by certain environmental groups. In its opinion, in this case, the Constitutional Court of Costa Rica found, among other issues, that SETENA did not have the current authority to grant environmental permits. In addition, proposed legislation pending in the Costa Rica legislature seeks to abolish the Costa Rica government's rights to grant hydrocarbon exploration contracts. Due to the Costa Rica Constitutional Court decision discussed above, even though it did not directly involve HCRH or the Moin #2 well, as well as the pending legislation described above, Harken and Global believe that HCRH's appeal to SETENA for reconsideration of its denial of the requested permit, or any similar recourse, will be unsuccessful. Further, recent political developments in Costa Rica, in the opinion of Harken and Global, severely limit the opportunity for future oil and gas exploration in Costa Rica. These significant adverse developments resulted in Harken and Global fully impairing its investment in the Costa Rica project in its Consolidated Balance Sheet as of December 31, 2001. Peru Operations - In April 2001, Harken, through a wholly-owned subsidiary of Global, signed a Technical Evaluation Agreement ("Peru TEA") with PeruPetro, the national oil company of Peru. The Peru TEA covers an area of approximately 6.8 million gross acres in northeastern Peru. Under the terms of the Peru TEA, Global has the option to convert the Peru TEA to a seven year exploration contract, with a twenty-two year production period. Terms of the Peru TEA allow Global to conduct a study of the area that will include the reprocessing of seismic data and evaluation of previous well data. Panama Operations - In September 2001, Harken, through a wholly-owned subsidiary of Global, signed a Technical Evaluation Agreement ("Panama TEA") with the Ministry of Commerce and Industry for the Republic of Panama. The Panama TEA covers an area approximately 2.7 million gross acres divided into three blocks in and offshore Panama. Under the terms of this Panama TEA, which extends for a period of 24 months, Global is to perform certain work program procedures and studies to be submitted to the Panamanian government with an option to negotiate and enter into one or more Contracts for the Exploration and Exploitation of Hydrocarbons with the Ministry of Commerce and Industry. (5) BANK CREDIT FACILITY OBLIGATION Certain Harken subsidiaries (the "Borrowers") entered into a three year loan facility with Bank One, N.A. ("Bank One") which is secured by certain of Harken's domestic oil and gas properties and a guarantee from Harken. The Bank One facility provides borrowings limited by a borrowing base (as defined by the Bank One facility) which was approximately $7,937,000 as of March 31, 2002 and as of May 14, 2002. Such borrowing base, which is net of outstanding letters of credit, will be reduced by $225,000 per month beginning September 1, 2002 until the borrowing base is redetermined by Bank One on November 1 and May 1 in accordance with the facility agreement. The Bank One facility provides for interest based on LIBOR plus a margin of 2.350% (4.23% as of March 31, 2002), payable at the underlying LIBOR maturities or lender's prime rate, and provides for a commitment fee of 0.375 % on the unused amount. At December 31, 2001 and March 31, 2002 Harken had $7,937,000 outstanding pursuant to the facility. 10 The Bank One facility requires the Borrowers, as well as Harken, to maintain certain financial covenant ratios and requirements as calculated on a quarterly basis. Harken and the Borrowers are in compliance with all requirements under the Bank One facility, as amended, as of March 31, 2002. The Borrowers received a waiver of the debt service coverage ratio covenant for the quarter ended March 31, 2002. Such financial covenant ratios and requirements for the Borrowers include a current ratio, as defined, of not less than 1.0 to 1.0 and a total liabilities to net capital investment ratio, as defined, of not more than 1.15 to 1.0. Effective beginning in the second quarter of 2002, such requirements will also include a debt service coverage ratio, as defined, for the Borrower of not less than 1.15 to 1.00. Required financial covenants for Harken include a ratio of total liabilities to net worth, as defined, of not more than 0.6 to 1.0, and a current ratio, as defined, of not less than 1.15 to 1.0. (6) CONVERTIBLE NOTES PAYABLE A summary of convertible notes payable is as follows: December 31, March 31, 2001 2002 ----------- ----------- 5% European Notes $40,980,000 $40,980,000 Benz Convertible Notes 10,408,000 10,477,000 ----------- ----------- 51,388,000 51,457,000 Less: Current portion -- -- ----------- ----------- $51,388,000 $51,457,000 =========== =========== 5% European Notes -- On May 26, 1998, Harken issued to qualified purchasers certain 5% Senior Convertible Notes (the "5% European Notes") which mature on May 26, 2003. 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. 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 redemption price based on an average market price of Harken common stock. At maturity, on May 26, 2003, Harken may similarly redeem all remaining 5% European Notes for shares of Harken common stock. The 5% European Notes are listed on the Luxembourg Stock Exchange. (7) RELATED PARTY TRANSACTIONS During 1997, 1998 and 1999, Harken made secured short-term loans to certain members of Harken's Management, certain of whom also served on the Board of Directors. Such notes receivable are reflected in Harken's Consolidated Balance Sheet at December 31, 2000 and December 31, 2001 as Related Party Notes Receivable. In January 2001, Harken forgave the repayment of a short-term loan to a former director and former member of management and reflected the forgiveness as a charge to earnings in 2000. In May 2002, Harken entered into an agreement to forgive the repayment of a short-term loan to a member of management and reflected the forgiveness as a charge to earnings during the first quarter of 2002. 11 (8) HEDGING ACTIVITIES Harken holds certain commodity derivative instruments which are effective in mitigating commodity price risk associated with a portion of its future monthly natural gas production and related cash flows. Harken's oil and gas operating revenues and cash flows are impacted by changes in commodity product prices, which are volatile and cannot be accurately predicted. Harken's objective for holding these commodity derivatives is to protect the operating revenues and cash flows related to a portion of its future natural gas sales from the risk of significant declines in commodity prices. As of March 31, 2002, Harken, holds natural gas zero cost collar contracts consisting of a fixed price floor option of $2.75 per MMBTU and a fixed price cap option of $3.47 per MMBTU, covering 135,000 MMBTUs per month over the period of the contract through December 31, 2002. In addition, Harken also holds zero cost collar contracts consisting of a fixed price floor option of $2.75 per MMBTU and a fixed price cap option of $5.12 per MMBTU, covering 60,000 MMBTUs per month over a period from January 1, 2003 through December 31, 2003. Such natural gas collar contracts are reflected in accrued liabilities at March 31, 2002 with a market value of approximately $351,000. Each of the above derivatives have been designated as cash flow hedges of the exposure from the variability of cash flows from future specified production from certain of Harken's domestic property operations. Gains and losses from commodity derivative instruments are reclassified into earnings when the associated hedged production occurs. Harken holds no derivative instruments which are designated as either fair value hedges or foreign currency hedges. 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 natural gas production prices compared to New York Mercantile Exchange prices to assure its commodity derivatives are effective hedges in mitigating its commodity price risk. Risk management policies established by Harken management limit Harken's derivative instrument activities to those derivative instruments which are effective in mitigating certain operating risks, including commodity price risk. In addition to other restrictions, the extent and terms of any derivative instruments are required to be reviewed and approved by executive management of Harken. (9) SEGMENT INFORMATION Harken's accounting policies for each of its operating segments are the same as those for its consolidated financial statements. There are no intersegment sales or transfers. Revenues and expenses not directly identifiable with either segment, such as certain general and administrative expenses, are allocated by Harken based on various internal and external criteria including an assessment of the relative benefit to each segment. During the periods presented below, none of Harken's Middle American segment operating revenues related to Costa Rica, Peru or Panama. 12 Harken's financial information for each of its operating segments is as follows for the periods ended March 31, 2001 and 2002:
North Middle America America Total ------- ------- ----- For the three months ended March 31, 2001: Operating revenues $ 7,008,000 $ 1,907,000 $ 8,915,000 Interest and other income 119,000 158,000 277,000 Depreciation and amortization 1,819,000 1,430,000 3,249,000 Interest expense and other, net 876,000 836,000 1,712,000 Income tax expense 15,000 - 15,000 Segment income (loss) before extraordinary items 766,000 (2,284,000) (1,518,000) Capital expenditures 2,737,000 8,212,000 10,949,000 Total assets at end of period 99,434,000 47,613,000 147,047,000 For the three months ended March 31, 2002: Operating revenues $ 3,788,000 $ 1,638,000 $ 5,426,000 Interest and other income 21,000 45,000 66,000 Depreciation and amortization 2,123,000 1,143,000 3,266,000 Interest expense and other, net 664,000 308,000 972,000 Income tax expense 15,000 75,000 90,000 Segment loss before extraordinary items (2,382,000) (1,174,000) (3,556,000) Capital expenditures 107,000 192,000 299,000 Total assets at end of period 60,030,000 29,233,000 89,263,000
(10) COMMITMENTS AND CONTINGENCIES Search Acquisition Corp. ("Search Acquisition"), also known as Harken Texas Acquisition Corp., 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 judgment of joint and several liability 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 judgment as the successor-in-interest to eight Odyssey limited partnerships. Search Acquisition was the surviving corporation in Harken's 1995 acquisition of Search Exploration, Inc. On February 28, 1996, the court granted Search Acquisition's motion for summary judgment in this case. 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. In late 2001, a jury trial was held in this matter. The jury returned a verdict finding for Petrochemical in the amount of $1.1 million of actual damages and $3 million in punitive damages. In April 2002, the court upheld the verdict rendered by the jury. Search Acquisition will file with this court post-judgment motions for a new trial with regard to this case and anticipates that it will appeal if these motions are not granted. This lawsuit solely involves Search Acquisition and does not involve harken directly. In Harken management's opinion at this time, the ultimate outcome of this matter against Search Acquisition will not have a material adverse effect upon Harken's financial condition or operations taken as a whole due in part to this suit solely involving Search Acquisition, a subsidiary of Harken, which entity has minimal remaining reserves, operations and assets. 13 420 Energy Investment, Inc. and ERI Investments, Inc. (collectively "420 Energy") filed a lawsuit against 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. Harken has relied on an indemnity provision in the XPLOR merger agreement to tender the costs of defense in this matter to certain third parties. 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. In February 2002, 420 Energy filed a new lawsuit against XPLOR, Harken and other defendants in state court in Dallas, Texas. Harken intends to pursue and enforce, through whatever steps are necessary, the indemnification from the third parties discussed above with regard to the extension of this suit also. In Harken management's opinion, the ultimate outcome of this litigation will not have a material adverse effect on Harken's financial condition. Harken has accrued approximately $6,888,000 at March 31, 2002 relating to certain other operational or regulatory liabilities related to Harken's domestic operations. A significant majority of this accrued amount relates to future abandonment costs of certain producing properties owned by XPLOR, a wholly owned subsidiary of Harken, which will be incurred at the end of the properties' productive life. Harken and its subsidiaries currently are involved in other various lawsuits and contingencies, any of which in management's opinion, will not result in significant loss exposure to Harken. 14 ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (Unaudited) Certain statements contained in this Quarterly Report, including statements of Harken management's current expectations, intentions, plans and beliefs, are "forward-looking statements", as defined in Section 21D of the Securities Exchange Act of 1934 and the Private Securities Litigation Reform Act of 1995: . statements before, after or including the words "may", "will", "could", "should", "believe", "expect", "future", "potential", "anticipate", "intend", "plan", "estimate", or "continue" or the negative or other variations of these words; and . other statements about matters that are not historical facts. Such forward-looking statements involve known and unknown risk, uncertainties and other factors which may cause the actual results, performance, timing or achievements of Harken to be materially different from any results, performance, timing or achievements expressed or implied by such forward-looking statements. Such factors include, among others, the risks described in Harken's Annual Report on Form 10-K for the fiscal year ended December 31, 2001 filed with the Securities and Exchange Commission. Overview Harken's domestic operating segment has completed a period of significant successful drilling activity over the past two years, and in light of recent reduced prices for oil and natural gas, has reduced its exploration and development activity at this time in favor of pursuing oil and gas reserve growth through merger and acquisition activity. In April 2002, Harken, along with a wholly-owned subsidiary, acquired certain producing property interests (the "Republic Properties") in exchange for Harken common stock. Harken's ability to make future acquisition transactions may be affected, however, by the market value of Harken common stock. If the price of Harken common stock remains low or decreases, Harken's ability to utilize its stock in acquisition transactions could be negatively affected. Harken's Middle American operations are conducted through Global Energy Development PLC ("Global", a United Kingdom company listed on the AIM Exchange in London). Effective March 25, 2002, Harken's ownership in Global decreased to 92.77%, as Global placed 7.23% of its stock in a placement to investors, including certain affiliates of Harken and Global, in exchange for approximately $1,425,000 cash. Global is seeking additional financing and acquisition activities using shares of its newly listed common stock. In addition, the sale, by Harken, of additional shares of Global common stock which would reduce Harken's ownership to 90% was previously approved by Harken's Board of Directors. As a part of Harken's business strategy, Harken has taken steps to maximize its cash flow by decreasing its administrative costs through reductions in personnel, reductions in salaries, increasing efficiencies in its production operations, and by reducing its long-term debt obligations. Harken's continued steps in these areas should continue to increase operating efficiency and cash flow during 2002. Harken reported a net loss for the three months ended March 31, 2002 of $3,556,000 compared to a net loss of $1,412,000 for the prior year period due primarily to lower commodity prices compared to the prior year. Because of lower product prices for both natural gas and crude oil, Harken worldwide oil and gas revenues have decreased 39% during the first quarter of 2002 compared to the prior year period, despite increased production volumes both domestically and in Colombia. Gross profit before depreciation and amortization, general and administrative and interest expenses totaled approximately $3.1 million during the three months ended March 31, 2002 compared to approximately $5.7 million for the prior year period. 15 Critical Accounting Policies Full cost accounting method -- Harken accounts for the costs incurred in the acquisition, exploration, development and production of oil and gas reserves using the full cost accounting method. Under full cost accounting rules, the net capitalized costs of evaluated oil and gas properties shall not exceed an amount (the "cost ceiling") equal to the present value of future net cash flows from estimated production of proved oil and gas reserves, based on current economic and operating conditions, including the use of oil and gas prices as of the end of each quarter. Given the volatility of oil and gas prices, it is reasonably possible that the estimate of discounted future net cash flows from proved oil and gas reserves could change in the near term. If oil and gas prices decline in the future, even if only for a short period of time, it is possible that additional impairments of oil and gas properties could occur. In addition, it is reasonably possible that additional impairments could occur if costs are incurred in excess of any increases in the cost ceiling, revisions to proved oil and gas reserves occur, or if properties are sold for proceeds less than the discounted present value of the related proved oil and gas reserves. Colombia operations -- During the quarter ended March 31, 2002, approximately 30% of Harken's consolidated revenues were generated from sales to Ecopetrol, the state-owned Colombian oil company. The country of Colombia is currently experiencing heightened security issues which could affect Harken's Colombian operations as well as the strength and operations of Ecopetrol. If Ecopetrol experiences significant adverse conditions in its operations, it may not be able to meet its ongoing financial obligations to Harken for delivered production or be able to purchase future production under the terms of existing contract provisions. Harken's Colombian operations could also be directly affected by guerilla activity or other instances or threats of violence, preventing or interrupting Harken from producing, transporting or delivering future production volumes. Valuation of accounts receivable -- Harken sells its domestic oil and gas production to a broad and diverse group of industry partners, many of which are major oil and gas companies, and as a whole, do not represent a significant credit risk. In addition, Harken charges certain industry partners, who participate in Harken-operated wells, with their share of drilling costs and operating expenses. In determining a reserve for potential losses in collection of its accounts receivable, Harken considers, among other factors, the current financial condition of its industry partners in light of current industry conditions. In the event of a significant decline in oil and gas prices, many of our industry partners may not be able to meet their ongoing financial obligations to Harken or be able to meet the terms of existing contract provisions. Classification of long-term debt -- Harken's bank credit facility with Bank One, N.A. ("Bank One") requires Harken, as well as certain of its subsidiaries (the "Borrowers") to maintain certain financial covenant ratios and requirements, as calculated on a quarterly basis. If Harken or the Borrowers are not in compliance with their bank financial covenant ratios or requirements in the future and are unable to obtain a waiver or amendment to the facility requirements, the credit facility would be in default and callable by Bank One. In addition, due to cross-default provisions in Harken's 5% European Note agreement, a majority of Harken's debt obligations would become due in full if any debt is in default. The classification of Harken's long-term debt obligations at March 31, 2002 reflects Harken's expectations that future operating results will result in Harken and the Borrowers being in compliance with the bank financial covenant ratios and requirements in future quarters. However, expectations of future operating results and continued compliance with financial covenants cannot be assured and our lenders' actions are not controllable by Harken. If Harken's projections of future operating results are not achieved and its debt is placed in default, Harken could experience a material 16 adverse impact on its financial position and results of operations. Accounting for derivatives - Harken holds commodity derivative financial instruments designed to mitigate commodity price risk associated with a portion of its future monthly natural gas production and related cash flows. These commodity derivatives qualify for hedge accounting as discussed in Note 8 - Hedging Activities in the Notes to Consolidated Condensed Financial Statements. Harken does not participate in speculative derivatives trading. Hedge accounting requires that commodity derivative instruments be designated as hedges and that fluctuations in their market value are effective in mitigating the hedged commodity price risk, and that such effectiveness be documented and monitored. While Harken intends to continue to meet the conditions to qualify for hedge accounting, if hedges are not highly effective, or if the forecasted hedged production does not occur, the changes in the fair value of the commodity derivative instruments would be reflected in earnings. RESULTS OF OPERATIONS The following is management's discussion and analysis of certain significant factors which have affected Harken's earnings and balance sheet during the periods included in the accompanying consolidated financial statements. Three Months Ended March 31, --------------------------- 2001 2002 ----------- ------------ (unaudited) Operating Revenues Domestic Exploration and Production Operations Gas sales revenues $5,552,000 $2,467,000 Gas volumes in mcf 969,000 975,000 Gas price per mcf $ 5.73 $ 2.53 Oil sales revenues $1,456,000 $1,321,000 Oil volumes in barrels 54,000 65,000 Oil price per barrel $ 26.96 $ 20.32 Colombian Exploration and Production Operations Oil sales revenues $1,907,000 $1,638,000 Oil volumes in barrels 94,000 131,000 Oil price per barrel $ 20.29 $ 12.50 Other Revenues Interest income $ 245,000 $ 33,000 Other income $ 32,000 $ 33,000 17 For the quarter ended March 31, 2002 compared with the corresponding prior period. North American Operations Domestic gross oil and gas revenues during the first quarter of 2002 relate to the operations in the onshore and offshore areas of the Texas and Louisiana Gulf Coast and the Western and Panhandle regions of Texas. During 2001, certain wholly-owned subsidiaries of Harken sold certain interests in oil and gas producing properties located in Texas, Arkansas, Louisiana and New Mexico for approximately $13.1 million cash. In February 2002, another wholly owned subsidiary of Harken sold interests in oil and gas producing properties located in Texas for approximately $910,000. Subsequent to March 31, 2002, Harken sold additional producing property interests for approximately $214,000. Domestic gas revenues decreased 56% to $2,467,000 for the three months ended March 31, 2002 compared to $5,552,000 for the prior year period due to the decrease in average gas prices received during the first quarter of 2002, as Harken received an overall average price of $2.53 per mcf of gas during the first quarter of 2002 compared to $5.73 per mcf received during the first quarter of 2001. Such decreases in natural gas prices offset a slight increase in gas production volumes compared to the prior year period, as the production during the quarter from wells drilled and / or completed during 2001 offset the decrease in production caused by the sales of producing properties discussed above. Domestic oil revenues decreased 9% to $1,321,000 during the first quarter of 2002 compared to $1,456,000 during the first quarter of 2001 primarily due to reduced oil prices, which averaged $20.32 during the current year quarter compared to $26.96 during the prior year. Despite the sales of producing properties discussed above, Harken's domestic oil production volumes increased during the quarter compared to the prior year period, as Harken's Gulf Coast oil production was reduced by temporary operational curtailments during the first quarter of 2001 at Harken's Main Pass area offshore Louisiana. Overall, domestic oil production volumes increased 20% during the first quarter of 2002 compared to the prior year period. Domestic oil and gas operating expenses consist of lease operating expenses and a number of production and reserve based taxes. Domestic oil and gas operating expenses decreased 24% to $1,885,000 during the first quarter of 2001 compared to $2,491,000 during the prior year period primarily due to the above mentioned sale of properties. Oil and gas operating expenses increased, however, as a percentage of related oil and gas revenues due primarily to the decrease in oil and gas prices during the first quarter of 2002 compared to the prior year period. Oil and gas operating expenses decreased per unit of production due to the replacement of sold producing fields with newly completed gas production. Harken continues to seek to sell a specific domestic field operation with high operating costs per barrel. Such efforts are intended to further reduce Harken's overall domestic operating expenses per unit of production beginning later in 2002. Harken expects that oil and gas production volumes generated as a result of drilling activities in late 2001 and continuing workover activities together with the acquisition of the Republic Properties discussed above will continue to help to mitigate the production decreases as a result of the sales of producing properties discussed above. Harken's oil and gas production volumes are expected to increase beginning in April 2002 from the Republic Properties, but could decrease if Harken sells additional producing properties. Harken continues to pursue opportunities to acquire additional producing properties, which would also further increase domestic production. Through May 14, 2002, average second quarter oil and gas prices have remained lower than prices received in the prior year period. Harken's oil and gas revenues are highly dependent upon product prices, which Harken is unable to predict. 18 Middle American Operations Harken's Colombian oil revenues have decreased 14% from $1,907,000 during the first quarter of 2001 to $1,638,000 during the first quarter of 2002. During the first quarter of 2001 and 2002, Harken's Colombian operating revenues consisted of production from Global's Bolivar and Alcaravan Association Contract areas. During the first quarter of 2001, sales of production from Global's Estero #1 well on the Alcaravan Contract area were limited to approximately 1,000 gross barrels of oil per day due to pipeline constraints and pumping capacity. During the second quarter of 2001, Global took steps to resolve such limitations and, though it is currently producing 1,500 gross barrels of oil per day, is now allowed to transport up to approximately 3,000 gross barrels of oil per day from both Estero #1 and Estero #2 wells. Estero #2 was completed during the first quarter of 2001, and has mitigated the production declines related to Global's Bolivar Contract area production, as the Bolivar Contract production has been temporarily shut-in during the first quarter of 2002, pending recently completed workover procedures. Harken's production volumes during the remainder of 2002 will continue to remain dependent on existing well production and pumping efficiency. Middle American operating expenses have decreased from $763,000 during the first quarter of 2001 to $435,000 for the first quarter of 2002, as Global has taken steps to reduce operating expenses related to its producing fields in Colombia. Interest and Other Income Interest and other income decreased during the first quarter of 2002 compared to the prior year period due to Harken's usage of cash during 2001 for capital expenditures. Harken generated approximately $245,000 of interest income during the first quarter of 2001, compared to approximately $33,000 of interest income during the first quarter of 2002. Additional decreases in Harken's cash balances could be mitigated or offset by additional capital sources. Other Costs and Expenses General and administrative expenses decreased during the first quarter of 2002 compared to the first quarter of 2001 despite certain one time employee severance costs during the quarter related to staff reductions. Harken has taken additional steps to further reduce personnel costs through personnel reductions, salary reductions and other methods and to achieve other administrative cost reductions beginning in the second quarter of 2002. Depreciation and amortization expense increased slightly during the first quarter of 2002 compared to the prior year period primarily due to increased production volumes during the quarter. Depreciation and amortization on oil and gas properties is calculated on a unit of production basis in accordance with the full cost method of accounting for oil and gas properties. Interest expense and other decreased during the first quarter of 2002 compared to the prior year period primarily due to the decrease in the amount of outstanding 5% European Notes from early 2001. In addition, during the first quarter of 2001, Harken expensed the remaining unamortized issuance costs related to the IFC project loan finance facility, which was terminated in May 2001. 19 LIQUIDITY AND CAPITAL RESOURCES Harken's working capital at March 31, 2002 was approximately $4.2 million, compared to approximately $3.4 million at December 31, 2001. Harken's operations used approximately $1.9 million of cash flow during the first quarter of 2002, primarily due to the timing of certain working capital payments and collections during the quarter. Harken's cash resources at March 31, 2002 totaled approximately $6.3 million. Considering its existing cash resources and the potential additional capital sources listed below, Harken believes that it will have sufficient cash resources to fund all of its planned capital expenditures during 2002. Harken's ongoing exploration, development and acquisition efforts are expected to be funded through a combination of cash on hand, cash flows from operations, issuances or exchanges of debt or equity securities, or through cash provided by either existing or newly established financing arrangements. Harken's Middle American operations are conducted through Global Energy Development PLC ("Global", a United Kingdom company listed on the AIM Exchange in London). Effective March 25, 2002, Harken's ownership in Global decreased to 92.77%, as Global placed 7.23% of its stock in a placement to investors, including certain affiliates of Harken and Global in exchange for approximately $1,425,000 cash. Global is seeking additional financing and acquisition activities using its shares of its newly listed common stock. In addition, the sale, by Harken, of additional shares of Global common stock which would reduce Harken's ownership to 90% was previously approved by Harken's Board of Directors. Capital Sources During 2001, sales of certain domestic producing property interests generated cash proceeds of approximately $13.1 million. In February 2002, Harken sold certain additional domestic producing property interests for approximately $910,000. Subsequent to March 31, 2002, Harken sold additional producing property interests for approximately $214,000. Harken is currently considering additional sales of producing properties that could generate additional cash proceeds. Harken's operating cash flows from its domestic oil and gas properties are being strengthened by successful drilling activity in late 2001 in southern Louisiana, which have begun to partially offset the reductions following the sales of producing properties consummated in late 2000 and during the first half of 2001. Recently completed wells, including the Thomas Cenac #1, the State Lease 1480 #2, the State Lease 14589 #3 and the State Lease 1480 #3, all began production in the last four months of 2001. In April 2002, a wholly-owned subsidiary of Harken acquired the Republic Properties from Republic Resources, Inc., upon receiving approval by Republic's shareholders and debenture holders. The Republic Properties consist of 15 producing property interests located in southern Louisiana and the Texas Gulf Coast region. The Republic Properties were acquired by the Harken subsidiary in exchange for 2,645,500 shares of Harken common stock. In addition, the Purchase and Sale Agreement also provides for contingent additional consideration of cash or additional shares of Harken common stock to be paid within 45 days after December 31, 2003, based on a defined calculation to measure the appreciation, if any, of the reserve value of the Republic Properties. The acquisition of the Republic Properties will supplement Harken's domestic operating cash flows beginning in the second quarter of 2002. Harken's domestic operating cash flows are particularly dependent on the price of natural gas, which Harken is unable to predict. Certain Harken subsidiaries entered into a three-year loan facility with Bank One, N.A. ("Bank One"), which is secured by certain of those subsidiaries domestic oil and gas properties and a guarantee from Harken. The Bank One facility provides borrowings subject to a borrowing base (as defined by the Bank One 20 facility), which was $7,937,000 as of March 31, 2002 and as of May 14, 2002. Such borrowing base, which is net of outstanding letters of credit will be reduced by $225,000 per month beginning September 1, 2002 until the borrowing base is redetermined by Bank One on November 1 and May 1 in accordance with the facility agreement. The Bank One facility requires the Borrowers, as well as Harken, to maintain certain financial covenant ratios and requirements. Such borrowing base is scheduled to be re-determined by Bank One on May 1 and November 1 of each year in accordance with the facility agreement. Global's operating cash flows continue to be provided by ongoing production from its Alcaravan and Bolivar Contract areas in Colombia. Global anticipates that cash flows from its Colombian assets will be adequate to fund the capital needs, as well as the operating, administrative and management costs of its Middle American operations. As described above, approval of the March 2002 application by Global for its common shares to trade on the AIM Exchange in London enables Harken, through Global, to seek additional financing and acquisition activities using shares of Global PLC common stock. Global PLC's ability to effectively use its common stock will be dependent upon the market value of its shares on the AIM Exchange. Global is also pursuing raising additional capital through potential sales of assets. Additional capital raised by Global would be used exclusively for Global's capital needs, as transfers to Harken would be limited or restricted. Harken had previously received authorization from its Board of Directors to sell Global shares held by Harken up to an amount which would reduce Harken's ownership in Global to 90%. In addition to the above sources, Harken has and may continue to raise capital through the issuance of equity and convertible debt instruments, or through the exchange of existing instruments through transactions that provide Harken with additional capital. Such transactions may be impacted, however, by the market value of Harken common stock. If the price of Harken common stock remains low or decreases, Harken's ability to utilize its common stock either directly or indirectly through convertible instruments for raising capital could be negatively affected. Capital Commitments In light of recent reduced oil and gas prices, Harken's domestic operating strategy now includes efforts to increase its oil and gas reserves in North America through acquisitions, with a decreased emphasis on exploration and development drilling activities. Accordingly, Harken's domestic capital expenditure plans have been greatly reduced compared to the prior two year period. However, Harken's prospect inventory includes acreage which may hold up to 170 billion cubic feet equivalent of risked net reserve potential. Certain of these prospects may be drilled through joint venture arrangements, which Harken is currently pursuing in order to reduce its capital commitment, while maintaining its exposure to the reserve potential. Harken is actively pursuing various North American acquisition opportunities. Harken has focused its operating strategy to acquire, explore, and produce oil and gas properties located in the Gulf Coast region of Texas and Louisiana. Harken's primary need for capital is to fund these planned domestic exploration and development efforts. Harken anticipates domestic capital expenditures will total approximately $1.5 million during 2002. A majority of Harken's planned domestic capital expenditures are discretionary and, as a result, will be curtailed if sufficient funds are not available. Such expenditure curtailments, however, could result in Harken losing certain prospect acreage or reducing its interest in future exploration and development projects. On May 26, 1998, Harken issued to qualified purchasers certain 5% Senior Convertible Notes (the "5% European Notes") which mature on May 26, 2003. 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. 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, 21 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. At maturity, Harken may, at its option, similarly redeem all remaining 5% European Notes for shares of Harken common stock. The 5% European Notes are listed on the Luxembourg Stock Exchange. Harken continues to consider additional transactions with the 5% European Note holders whereby Harken may retire additional 5% European Notes in exchange for shares of Harken common stock, cash, convertible securities or other consideration. Operational Contingencies -- Harken has accrued approximately $6.9 million at March 31, 2002 relating to operational or regulatory liabilities related to Harken's domestic operations. Harken and its subsidiaries currently are involved in various lawsuits and other contingencies, which in management's opinion, will not result in a material adverse effect upon Harken's financial condition or operations taken as a whole. Harken's operations are subject to stringent and complex environmental laws and regulations governing the discharge of materials into the environment or otherwise relating to environmental protection. These laws and regulations are subject to changes that may result in more restrictive or costly operations. Failure to comply with applicable environmental laws and regulations may result in the imposition of administrative, civil and criminal penalties or injunctive relief. Global's international oil and gas exploration and production operations, including well drilling and seismic activities, require specific governmental environmental licenses and permits, the acquisition of which in the past have been subject to extensive delays. Global may continue to experience similar delays in the future. Failure to obtain these licenses and permits in a timely manner may prevent or delay Harken's and Global's operational plans. International Commitments--Terms of certain of the Association Contracts entered into between Global's subsidiary Harken de Colombia, Ltd. and Ecopetrol commit Global to perform certain activities in Colombia in accordance with a prescribed timetable. In addition, Global has certain scheduled capital expenditure commitments related to its TEA Agreements in Peru and Panama. Failure by Global to perform these activities as required could result in Global losing its rights under the particular contract, which could potentially have a material adverse effect on Harken's business. As of May 14, 2002, Global was in compliance with the requirements of each of the Association and TEA Contracts, as amended. In light of political and regulatory developments in Costa Rica, Global is projecting no capital expenditure plans during 2002 with regard to the Costa Rica Contract. 22 PART II - OTHER INFORMATION Item 6. Exhibits and Reports on Form 8-K. 9a) EXHIBIT INDEX Exhibit 3.1 Certificate of Incorporation of Harken Energy Corporation as amended (filed as Exhibit 3.1 to Harken's Annual Report on Form 10-K for fiscal year ended December 31, 1989, File No. 0-9207, and incorporated by reference herein). 3.2 Amendment to the Certificate of Incorporation of Harken Energy Corporation (filed as Exhibit 28.8 to the Registration Statement on Form S-1 of Tejas Power Corporation, file No. 33-37141, and incorporated by reference herein.) 3.3 Amendment to the Certificate of Incorporation of Harken Energy Corporation (filed as Exhibit 3 to Harken's Quarterly Report on Form 10-Q for fiscal quarter ended March 31, 1991, File No. 0-9207, and incorporated by reference herein.) 3.4 Amendments to the Certificate of Incorporation of Harken Energy Corporation (filed as Exhibit 3 to Harken's Quarterly Report on Form 10-Q for fiscal quarter ended June 30,1991, File No. 0-9207, and incorporated by reference herein.) 3.5 Amendments to the Certificate of Incorporation of Harken Energy Corporation (filed as Exhibit 3.5 to Harken's Annual Report on Form 10-K for the fiscal year ended December 31, 1996, File No. 0-9207, and incorporated herein by reference). 3.6 Amendment to the Certificate of Incorporation of Harken Energy Corporation (filed as Exhibit 3.6 to Harken's Annual Report on Form 10-K for the fiscal year ended December 31, 1997, File No. 0-9207 and incorporated by reference herein). 3.7 Amendment to the Certificate of Incorporation of Harken Energy Corporation (filed as Exhibit 3.6 to Harken's Quarterly Report on Form 10-Q for the fiscal quarter ended June 30, 1998, File No. 0-9207, and incorporated by reference herein). 3.8 Bylaws of Harken Energy Corporation, as amended (filed as Exhibit 3.2 to Harken's Annual Report on Form 10-K for fiscal year ended December 31, 1989, File No. 0-9207, and incorporated by reference herein). 4.1 Form of certificate representing shares of Harken common stock, par value $.01 per share (filed as Exhibit 1 to Harken's Registration Statement on Form 8-A, File No. 0-9027, and incorporated by reference herein.) 4.2 Certificate of Designations, Powers, Preferences and Rights of Series A Cumulative Convertible Preferred Stock, $1.00 par value, of Harken Energy Corporation (filed as Exhibit 4.1 to Harken's Annual Report on Form 10-K for the fiscal year ended December 31,1989, File No. 0-9207, and incorporated by reference herein). 23 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, 1999, by and between Harken Energy Corporation and ChaseMellon Shareholder Services L.L.C., as Rights Agent (filed as Exhibit 4 to Harken's Current Report on Form 8-K dated April 7, 1998, File No. 0-9207, and incorporated by reference herein). 4.7 Certificate of Designations of Series E Junior Participating Preferred Stock (filed as Exhibit B to Exhibit 4 to Harken's Current Report on Form 8-K dated April 7, 1998, File No. 0-9207, and incorporated by reference herein). 4.8 Certificate of Designations, Preferences and Rights of Series F Convertible Preferred Stock (filed as Exhibit 4.8 to Harken's Quarterly Report on Form 10-Q for the period ended June 30, 1998, File No. 0-9207, and incorporated by reference herein). 4.9 Certificate of Designations of Series G1 Convertible Preferred Stock (filed as Exhibit 4.9 to Harken's Annual Report on Form 10-K for fiscal year ended December 31, 2000, File No. 0-9207, and incorporated by reference herein). 4.10 Certificate of Designations of Series G2 Convertible Preferred Stock (filed as Exhibit 4.10 to Harken's Annual Report on Form 10-K for fiscal year ended December 31, 2001, 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). 24 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 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). 10.5 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). 10.6 Association Contract (Bolivar) by and between Harken de Colombia, Ltd. and Empresa Colombia de Petroleos (filed as Exhibit 10.4 to Harken's Quarterly Report on Form 10-Q for the quarterly period ended June 30, 1996, and incorporated herein by reference). 10.7 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). 10.8 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). 10.9 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). 10.10 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). 10.11 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). 10.12 Credit Agreement between Harken Exploration Company, XPLOR Energy, Inc. Harken Energy West Texas, Inc., Harken Southwest Corporation, South Coast Exploration Co., Xplor Energy SPV-1, Inc., McCulloch Energy, Inc. and Bank One, Texas, N.A. dated August 11, 2000 and as amended December 21, 2000 and December 31, 2000 (filed as Exhibit 10.12 to Harken's Annual Report on Form 10-K for fiscal year ended December 31, 2000, File No. 09207, and incorporated by reference herein). 25 10.13 Third Amendment to Credit Agreement between Harken Exploration Company, XPLOR Energy, Inc., Harken Energy West Texas, Inc., South Coast Exploration Co., XPLOR Energy SPV-1, Inc., McCulloch Energy, Inc., Harken Gulf Exploration Company, and Bank One, N.A. dated May 11, 2001 (Filed as Exhibit 10.13 to Harken's Quarterly Report on Form 10-Q for the quarter ended June 30, 2001, File No. 0-9207, and incorporated herein by reference). 10.14 Association Contract (Cajaro) dated as of December 2001, but effective as of February 2002, by and between Harken de Colombia, Ltd. and Empresa Colombia de Petroleos. 10.15 Purchase and Sale Agreement dated January 31, 2002 between Republic Resources, Inc. and Harken Energy Corporation. 10.16 Letter from Arthur Andersen LLP pursuant to Item 304(a)(3) of Regulation S-K (filed as Exhibit 16.1 in Harken's current report on Form 8-K, filed on September 5, 2001, File No. 0-9207, and incorporated by reference herein). *10.17 Waiver and Fourth Amendment to Credit Agreement between Harken Exploration Company, XPLOR Energy, Inc., Harken Energy West Texas, Inc., XPLOR Energy SPV-1, Inc., Harken Gulf Exploration Company, and Bank One, N.A. dated March 21, 2002. * Filed herewith (b) REPORTS ON FORM 8-K None filed. 26 HARKEN ENERGY CORPORATION SIGNATURES Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized. Harken Energy Corporation ------------------------- (Registrant) Date: May 15, 2002 By: /s/Anna M. Williams ---------------------- -------------------------- Executive Vice President-Finance and Chief Financial Officer 27 EX-10.17 3 dex1017.txt WAIVER TO CREDIT AGREEMENT WAIVER AND FOURTH AMENDMENT TO CREDIT AGREEMENT BETWEEN HARKEN EXPLORATION COMPANY, XPLOR ENERGY, INC. HARKEN ENERGY WEST TEXAS, INC., SOUTH COAST EXPLORATION CO., XPLOR ENERGY SPV-1, INC., HARKEN GULF EXPLORATION COMPANY AND BANK ONE, NA, AS AGENT AND LENDER AND THE LENDERS SIGNATORY HERETO Effective as of March 21, 2002 REDUCING REVOLVING LINE OF CREDIT OF UP TO $100,000,000 TABLE OF CONTENTS PAGE ARTICLE I DEFINITIONS.........................................1 1.01 Terms Defined Above.................................1 1.02 Terms Defined in Agreement..........................1 1.03 References..........................................1 1.04 Articles and Sections...............................2 1.05 Number and Gender...................................2 ARTICLE II WAIVERS.............................................2 2.01 Waivers.............................................2 2.02 Limitation on Waivers...............................2 ARTICLE III AMENDMENTS..........................................2 3.01 Amendment of Section 2.9(a).........................2 3.02 Addition of Section 6.13............................2 3.03 Deletion of Section 6.16............................3 3.04 Amendment of Section 6.19...........................3 3.05 Amendment of Exhibit I..............................3 ARTICLE IV CONDITIONS..........................................3 4.01 Receipt of Documents................................3 4.02 Accuracy of Representations and Warranties..........3 4.03 Matters Satisfactory to Lenders.....................3 ARTICLE V REPRESENTATIONS AND WARRANTIES......................3 ARTICLE VI RATIFICATION........................................3 ARTICLE VII MISCELLANEOUS.......................................4 7.01 Scope of Amendment..................................4 7.02 Agreement as Amended................................4 7.03 Parties in Interest.................................4 7.04 Rights of Third Parties.............................4 7.05 ENTIRE AGREEMENT....................................4 7.06 GOVERNING LAW.......................................4 7.07 JURISDICTION AND VENUE..............................4 i EXHIBIT I [FORM OF NOTE] PROMISSORY NOTE $100,000,000 Houston, Texas March 21, 2002 FOR VALUE RECEIVED and WITHOUT GRACE, the undersigned ("Maker") promises to pay to the order of BANK ONE, TEXAS, NATIONAL ASSOCIATION ("Payee"), at its banking quarters in Houston, Harris County, Texas, the sum of ONE HUNDRED MILLION DOLLARS ($100,000,000), or so much thereof as may be advanced against this Note pursuant to the Credit Agreement dated of even date herewith by and between Maker and Payee (as amended, restated, or supplemented from time to time, the "Credit Agreement"), together with interest at the rates and calculated as provided in the Credit Agreement. Reference is hereby made to the Credit Agreement for matters governed thereby, including, without limitation, certain events which will entitle the holder hereof to accelerate the maturity of all amounts due hereunder. Capitalized terms used but not defined in this Note shall have the meanings assigned to such terms in the Credit Agreement. This Note is issued pursuant to, is one of the "Notes" under, and is payable as provided in the Credit Agreement. Subject to compliance with applicable provisions of the Credit Agreement, Maker may at any time pay the full amount or any part of this Note without the payment of any premium or fee, but such payment shall not, until this Note is fully paid and satisfied, excuse the payment as it becomes due of any payment on this Note provided for in the Credit Agreement. Without being limited thereto or thereby, this Note is secured by the Security Instruments. This Note is issued, in whole or in part, in renewal and extension, but not in novation or discharge, of the remaining principal balance of the Existing Note. THIS NOTE SHALL BE GOVERNED AND CONTROLLED BY THE LAWS OF THE STATE OF TEXAS WITHOUT GIVING EFFECT TO PRINCIPLES THEREOF RELATING TO CONFLICTS OF LAW; PROVIDED, HOWEVER, THAT CHAPTER 345 OF THE TEXAS FINANCE CODE (WHICH REGULATES CERTAIN REVOLVING CREDIT LOAN ACCOUNTS AND REVOLVING TRIPARTY ACCOUNTS) SHALL NOT APPLY TO THIS NOTE. [Page One of Two Page Note] ii BORROWER: HARKEN EXPLORATION COMPANY XPLOR ENERGY, INC. HARKEN ENERGY WEST TEXAS, INC. SOUTH COAST EXPLORATION CO. XPLOR ENERGY SPV-1, INC. By: ---------------------------------------------- Anna Williams Senior Vice President and Chief Financial Officer [Page Two of Two Page Note] iii WAIVER AND FOURTH AMENDMENT TO CREDIT AGREEMENT This WAIVER AND FOURTH AMENDMENT TO CREDIT AGREEMENT (this "Fourth Amendment") is made and entered into effective as of March 21, 2002, between HARKEN EXPLORATION COMPANY, a Delaware corporation, XPLOR ENERGY, INC., a Texas corporation, HARKEN ENERGY WEST TEXAS, INC., a Delaware corporation, XPLOR ENERGY SPV-1, INC., an Oklahoma corporation, and HARKEN GULF EXPLORATION COMPANY, a Delaware corporation (collectively the "Borrower"), each lender that is signatory hereto or becomes a signatory hereto as provided in Section 9.1, (individually, together with its successors and assigns, a "Lender", and collectively together with their respective successors and assigns, the "Lenders"), and BANK ONE, NA, a national banking association, as agent for the Lenders (in such capacity, together with its successors in such capacity pursuant to the terms hereof, the "Agent") (as successor by merger to Bank One, Texas, National Association). W I T N E S S E T H WHEREAS, the above named parties did execute and exchange counterparts of that certain Credit Agreement dated August 11, 2000, as amended by First Amendment to Credit Agreement dated December 21, 2000, as further amended by Second Amendment to Credit Agreement dated December 31, 2000, and as further amended by Third Amendment to Credit Agreement dated May 11, 2001 (the "Agreement"), to which reference is here made for all purposes; WHEREAS, McCulloch Energy, Inc. is hereby released from the Agreement; WHEREAS, the parties subject to and bound by the Agreement are desirous of amending the Agreement in the particulars hereinafter set forth; NOW, THEREFORE, in consideration of the mutual covenants and agreements of the parties to the Agreement, as set forth therein, and the mutual covenants and agreements of the parties hereto, as set forth in this Fourth Amendment, the parties hereto agree as follows: ARTICLE I DEFINITIONS 1.01 Terms Defined Above. As used herein, each of the terms "Agent," "Agreement," "Borrower," "Fourth Amendment," "Lender," and "Lenders" shall have the meaning assigned to such term hereinabove. 1.02 Terms Defined in Agreement. As used herein, each term defined in the Agreement shall have the meaning assigned thereto in the Agreement, unless expressly provided herein to the contrary. 1.03 References. References in this Fourth Amendment to Article or Section numbers shall be to Articles and Sections of this Fourth Amendment, unless expressly stated herein to the contrary. References in this Fourth Amendment to "hereby," "herein," hereinafter," hereinabove," "hereinbelow," "hereof," and "hereunder" shall be to this Fourth Amendment in its entirety and not only to the particular Article or Section in which such reference appears. 1 1.04 Articles and Sections. This Fourth Amendment, for convenience only, has been divided into Articles and Sections and it is understood that the rights, powers, privileges, duties, and other legal relations of the parties hereto shall be determined from this Fourth Amendment as an entirety and without regard to such division into Articles and Sections and without regard to headings prefixed to such Articles and Sections. 1.05 Number and Gender. Whenever the context requires, reference herein made to the single number shall be understood to include the plural and likewise the plural shall be understood to include the singular. Words denoting sex shall be construed to include the masculine, feminine, and neuter, when such construction is appropriate, and specific enumeration shall not exclude the general, but shall be construed as cumulative. Definitions of terms defined in the singular and plural shall be equally applicable to the plural or singular, as the case may be. ARTICLE II WAIVERS 2.01 Waivers. In consideration of the Borrower entering into a commodity hedge agreement, the Lenders hereby waive any Default or Event of Default arising under the Agreement or any other Loan Document solely as a result of violations of Section 6.19 for the quarter ending December 31, 2001, and projected noncompliance for the quarter ending March 31, 2002, and Guarantors violations of Section 6.16 for the quarter ending December 31, 2001. 2.02 Limitation on Waivers. The scope of the waivers set forth in Section 2.1 are expressly limited to their terms and do not extend to any other or future breaches, Defaults, violations or Events of Default under the Agreement or any other Loan Document. ARTICLE III AMENDMENTS The Borrower and the Lenders hereby amend the Agreement in the following particulars: 3.01 Amendment of Section 2.9(a). Section 2.9(a) of the Agreement is hereby amended as follows: "2.9 Borrowing Base Determinations. (a) The Borrowing Base is acknowledged by the Borrower and the Lenders to be $7,937,000. Borrowing Base reductions are eliminated until the next Borrowing Base redetermination. In the event the Borrowing Base review is not completed by June 1, 2002, the Borrowing Base shall be reduced on June 1, 2002, by $300,000 and on the first day of each month thereafter until the Borrowing Base and the amount of monthly reduction has been redetermined." 3.02 Addition of Section 6.13. Section 6.13 is hereby added to the Agreement to read as follows: "6.13 Current Ratio. Guarantor shall not permit its ratio of Current Assets to Current Liabilities to be less than 1.15 to 1.00 at any time." 2 3.03 Deletion of Section 6.16. Section 6.16 is hereby deleted from the Agreement. 3.04 Amendment of Section 6.19. Section 6.19 of the Agreement is hereby amended as follows: "6.19 Debt Service Coverage Ratio of the Borrower. Permit, as of the close of any fiscal quarter, the ratio of (a) EBITDA for any fiscal quarter to (b) Debt Service for such quarter to be less than 1.15 to 1.00." 3.05 Amendment of Exhibit I. Exhibit I, i.e. the Form of Promissory Note, is as set forth on Exhibit I to this Fourth Amendment. ARTICLE IV CONDITIONS The obligation of the Lenders to amend the Agreement as provided herein is subject to the fulfillment of the following conditions precedent: 4.01 Receipt of Documents. The Lenders shall have received, reviewed, and approved the following documents and other items, appropriately executed when necessary and in form and substance satisfactory to the Agent: (a) multiple counterparts of this Fourth Amendment, as requested by the Agent; and (b) such other agreements, documents, items, instruments, opinions, certificates, waivers, consents, and evidence as the Agent may reasonably request. 4.02 Accuracy of Representations and Warranties. The representations and warranties contained in Article IV of the Agreement and this Fourth Amendment shall be true and correct. 4.03 Matters Satisfactory to Lenders. All matters incident to the consummation of the transactions contemplated hereby shall be satisfactory to the Lenders. ARTICLE V REPRESENTATIONS AND WARRANTIES The Borrower hereby expressly re-makes, in favor of the Lenders, all of the representations and warranties set forth in Article IV of the Agreement, and represents and warrants that all such representations and warranties remain true and unbreached. ARTICLE VI RATIFICATION Each of the parties hereto does hereby adopt, ratify, and confirm the Agreement and the other Loan Documents, in all things in accordance with the terms and provisions thereof, as amended by this Fourth Amendment. 3 ARTICLE VII MISCELLANEOUS 7.01 Scope of Amendment. The scope of this Fourth Amendment is expressly limited to the matters addressed herein and this Fourth Amendment shall not operate as a waiver of any past, present, or future breach, Default, or Event of Default under the Agreement. except to the extent, if any, that any such breach, Default, or Event of Default is remedied by the effect of this Fourth Amendment. 7.02 Agreement as Amended. All references to the Agreement in any document heretofore or hereafter executed in connection with the transactions contemplated in the Agreement shall be deemed to refer to the Agreement as amended by this Fourth Amendment. 7.03 Parties in Interest. All provisions of this Fourth Amendment shall be binding upon and shall inure to the benefit of the Borrower, the Agent and the Lenders and their respective successors and assigns. 7.04 Rights of Third Parties. All provisions herein are imposed solely and exclusively for the benefit of the Agent, Lenders and the Borrower, and no other Person shall have standing to require satisfaction of such provisions in accordance with their terms and any or all of such provisions may be freely waived in whole or in part by the Lenders at any time if in their sole discretion it deems it advisable to do so. 7.05 ENTIRE AGREEMENT. THIS FOURTH AMENDMENT CONSTITUTES THE ENTIRE AGREEMENT BETWEEN THE PARTIES HERETO WITH RESPECT TO THE SUBJECT HEREOF AND SUPERSEDES ANY PRIOR AGREEMENT, WHETHER WRITTEN OR ORAL, BETWEEN SUCH PARTIES REGARDING THE SUBJECT HEREOF. FURTHERMORE IN THIS REGARD, THIS FOURTH AMENDMENT, THE AGREEMENT, THE NOTE, THE SECURITY INSTRUMENTS, AND THE OTHER WRITTEN DOCUMENTS REFERRED TO IN THE AGREEMENT OR EXECUTED IN CONNECTION WITH OR AS SECURITY FOR THE NOTE REPRESENT, COLLECTIVELY, THE FINAL AGREEMENT AMONG THE PARTIES THERETO AND MAY NOT BE CONTRADICTED BY EVIDENCE OF PRIOR, CONTEMPORANEOUS, OR SUBSEQUENT ORAL AGREEMENTS OF THE PARTIES. THERE ARE NO UNWRITTEN ORAL AGREEMENTS AMONG THE PARTIES. 7.06 GOVERNING LAW. THIS FOURTH AMENDMENT, THE AGREEMENT AND THE NOTE SHALL BE DEEMED TO BE CONTRACTS MADE UNDER AND SHALL BE CONSTRUED IN ACCORDANCE WITH AND GOVERNED BY THE LAWS OF THE STATE OF TEXAS. THE PARTIES ACKNOWLEDGE AND AGREE THAT THIS AGREEMENT AND THE NOTE AND THE TRANSACTIONS CONTEMPLATED HEREBY BEAR A NORMAL, REASONABLE, AND SUBSTANTIAL RELATIONSHIP TO THE STATE OF TEXAS. 7.07 JURISDICTION AND VENUE. ALL ACTIONS OR PROCEEDINGS WITH RESPECT TO, ARISING DIRECTLY OR INDIRECTLY IN CONNECTION WITH, OUT OF, RELATED TO, OR FROM THIS FOURTH AMENDMENT, THE AGREEMENT OR 4 ANY OTHER LOAN DOCUMENT MAY BE LITIGATED IN COURTS HAVING SITUS IN HARRIS COUNTY, TEXAS. EACH OF THE BORROWER AND THE LENDERS HEREBY SUBMITS TO THE JURISDICTION OF ANY LOCAL, STATE, OR FEDERAL COURT LOCATED IN HARRIS COUNTY, TEXAS, AND HEREBY WAIVES ANY RIGHTS IT MAY HAVE TO TRANSFER OR CHANGE THE JURISDICTION OR VENUE OF ANY LITIGATION BROUGHT AGAINST IT BY THE BORROWER OR THE LENDERS IN ACCORDANCE WITH THIS SECTION. IN WITNESS WHEREOF, this Fourth Amendment to Credit Agreement is executed effective the date first hereinabove written. BORROWER HARKEN EXPLORATION COMPANY XPLOR ENERGY, INC. HARKEN ENERGY WEST TEXAS, INC. SOUTH COAST EXPLORATION CO. XPLOR ENERGY SPV-1, INC. HARKEN GULF EXPLORATION COMPANY By: ----------------------------------------- Anna Williams Senior Vice President and Chief Financial Officer GUARANTOR HARKEN ENERGY CORPORATION By: ------------------------------------------ Anna Williams Senior Vice President and Chief Financial Officer 5 AGENT AND LENDER BANK ONE, NA (Main Office Chicago) By: ------------------------------------------ Jonathan Gregory Vice President 6 -----END PRIVACY-ENHANCED MESSAGE-----