As filed with the Securities and Exchange Commission on December 23, 2002
Registration No. 333-99579
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SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
Amendment No. 1
to
Form S-3
REGISTRATION STATEMENT UNDER THE SECURITIES ACT OF 1933
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Harken Energy Corporation
(Exact name of registrant as specified in its charter)
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Delaware 580 WestLake Park Boulevard, Suite 600 95-2841597
(State or other jurisdiction of Houston, Texas 77079 (IRS Employer Identification Number)
incorporation or organization) (281) 504-4000
(Address, including zip code, and telephone number including area code, of
registrant's principal executive offices)
A. Wayne Hennecke
Senior Vice President - Finance and Secretary
Harken Energy Corporation
580 WestLake Park Boulevard, Suite 600
Houston, Texas 77079
(281) 504-4000
(Name and address, including zip code, and telephone number including area
code, of agent for service)
Copy to:
Amar Budarapu
Baker & McKenzie
2001 Ross Avenue, Suite 2300
Dallas, Texas 75201
(214) 978-3000
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Approximate date of commencement of proposed sale of securities to the
public: As soon as practicable after the effective date of this Registration
Statement.
If the only securities being registered on this Form are being offered
pursuant to dividend or interest reinvestment plans, please check the following
box.
If any of the securities being registered on this Form are to be offered on
a delayed or continuous basis pursuant to Rule 415 under the Securities Act of
1933, other than securities offered only in connection with dividend or interest
reinvestment plans, check the following box. [X]
If this Form is filed to register additional securities for an offering
pursuant to Rule 462(b) under the Securities Act, please check the following box
and list the Securities Act registration statement number of the earlier
effective registration statement for the same offering. [ ]
If this Form is a post-effective amendment filed pursuant to Rule 462(c)
under the Securities Act, check the following box and list the Securities Act
registration statement number of the earlier effective registration statement
for the same offering. [ ]
If delivery of the prospectus is expected to be made pursuant to Rule 434,
please check the following box. [ ]
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CALCULATION OF REGISTRATION FEE
=======================================================================================================================
Amount Proposed Maximum Proposed Maximum
Title of Each Class of Securities to be to be Aggregate Price Per Aggregate Offering Amount of
Registered/(1)/ Registered/(2)/ Security/(3)/ Price/(3)/ Registration Fee
--------------------------------------- --------------- ------------------- ------------------ ----------------
Nontransferable Common Stock
Subscription Rights
Common Stock, par value $0.01 per share $10,000,000 100% $10,000,000 $920/(4)/
Preferred Stock Purchase Rights
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/(1)/ This registration statement relates to (a) nontransferable subscription
rights to purchase shares of common stock of Harken Energy Corporation,
which subscription rights will be issued to holders of common stock, Series
G1 preferred stock and Series G2 preferred stock of Harken Energy
Corporation, (b) the shares of common stock deliverable upon exercise of
nontransferable subscription rights pursuant to the rights offering, and
(c) preferred stock purchase rights associated with each such share of
common stock.
/(2)/ Such indeterminate number of subscription rights, common stock and
preferred stock purchase rights as may be issued in the rights offering in
an aggregate public offering price for all securities of $10,000,000.
/(3)/ Estimated solely for the purpose of calculating the registration fee
pursuant to Rule 457(o) under the Securities Act of 1933.
/(4)/ Previously paid.
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The Registrant hereby amends this Registration Statement on such date or
dates as may be necessary to delay its effective date until the Registrant shall
file a further amendment which specifically states that this Registration
Statement shall thereafter become effective in accordance with Section 8(a) of
the Securities Act of 1933, as amended, or until the Registration Statement
shall become effective on such date as the Securities and Exchange Commission,
acting pursuant to said Section 8(a), may determine.
================================================================================
********************************************************************************
The information in this prospectus is not complete and may be changed. We may
not sell these securities until the registration statement filed with the
Securities and Exchange Commission is effective. This prospectus is not an offer
to sell these securities and we are not soliciting an offer to buy these
securities in any state where the offer or sale is not permitted.
********************************************************************************
SUBJECT TO COMPLETION, DATED DECEMBER 23, 2002
PROSPECTUS
Shares of Common Stock
--------
(And Subscription Rights to Acquire Such Shares)
------
[LOGO] HARKEN Energy Corporation
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We are distributing to holders of our common stock, Series G1 preferred
stock and Series G2 preferred stock, at no charge, nontransferable subscription
rights to purchase shares of our common stock. These shares of common stock
include preferred stock purchase rights attached to such common stock under our
stockholder rights plan. You will receive one subscription right for each share
of common stock you own (or in the case of the Series G1 preferred stock and
Series G2 preferred stock, one subscription right for each share of common stock
issuable upon conversion) as of , 2003. We are distributing
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subscription rights exercisable for up to shares of our common stock.
------
Each subscription right will entitle you to purchase shares of
---------
our common stock at a subscription price of $ per right (or $ per share).
--- ---
The subscription rights will expire if they are not exercised by 5:00 p.m., New
York City time, on , 2003, unless this offering period is extended
--------------
by us in our sole discretion. You should carefully consider whether to exercise
your subscription rights before this expiration date. Our board of directors is
making no recommendation regarding your exercise of the subscription rights. The
subscription rights may not be sold or transferred except under the very limited
circumstances described in this prospectus.
If any shares of common stock offered in the rights offering remain
unsubscribed after the rights offering, Lyford Investments Enterprises Ltd., a
creditor of ours, has agreed to purchase all such shares at the subscription
price pursuant to a standby purchase agreement. Depending on the number of
subscriptions we receive from stockholders, the rights offering could result in
a change in control of Harken because of this standby commitment of Lyford.
Shares of our common stock are traded on the American Stock Exchange under
the symbol "HEC." On , 2003, the last reported sales price for our
-------------
common stock was $ per share. We expect that the shares of common stock
------
issued in the rights offering will also be listed on the American Stock Exchange
under the same symbol.
The exercise of your subscription rights for shares of our common stock
involves risks. You should carefully consider the risk factors beginning on page
of this prospectus before exercising your subscription rights.
--
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================================================================================
Price to Underwriting Discounts Proceeds to the
Public and Commissions Company/(1)/
--------------- -------- ---------------------- ---------------
Per share.......... $ /(2)/ N/A $
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Total.............. $ N/A $
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================================================================================
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/(1)/ Before deducting expenses of the rights offering payable by the company,
estimated to be $ .
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/(2)/ This represents the subscription price for purchase of a share of common
stock upon exercise of the subscription rights.
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Neither the Securities and Exchange Commission nor any state securities
commission has approved or disapproved of these securities or determined if this
prospectus is truthful or complete. Any representation to the contrary is a
criminal offense.
The date of this prospectus is , 2003.
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TABLE OF CONTENTS
Page
----
QUESTIONS AND ANSWERS ABOUT THE RIGHTS OFFERING...............................3
RISK FACTORS..................................................................9
OUR COMPANY..................................................................27
USE OF PROCEEDS..............................................................27
CAPITALIZATION...............................................................28
THE RIGHTS OFFERING..........................................................29
CERTAIN UNITED STATES FEDERAL INCOME TAX CONSEQUENCES........................42
PRICE RANGE OF COMMON STOCK AND DIVIDEND POLICY..............................44
DESCRIPTION OF CAPITAL STOCK.................................................45
PLAN OF DISTRIBUTION.........................................................49
LEGAL MATTERS................................................................51
EXPERTS......................................................................51
WHERE YOU CAN FIND MORE INFORMATION..........................................52
FORWARD-LOOKING STATEMENTS...................................................53
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You should rely only on the information in this prospectus and the
additional information described under the heading "Where You Can Find More
Information." We have not authorized any other person to provide you with
different information. If anyone provides you with different or inconsistent
information, you should not rely on it. We are not making an offer to sell these
securities in any jurisdiction where the offer or sale is not permitted. You
should assume that the information in this prospectus and the additional
information described under the heading "Where You Can Find More Information"
were accurate on the date on the front cover of the prospectus only. Our
business, financial condition, results of operations and prospects may have
changed since that date.
2
QUESTIONS AND ANSWERS ABOUT THE RIGHTS OFFERING
Q: What is the rights offering?
A: We are distributing to holders of our common stock, Series G1 preferred
stock and Series G2 preferred stock, at no charge, nontransferable
subscription rights to purchase shares of our common stock. You will
receive one subscription right for each share of common stock you own (or
in the case of the Series G1 preferred stock and Series G2 preferred stock,
one subscription right for each share of common stock issuable upon
conversion) as of , 2003, the record date. The subscription
--------------
rights will be evidenced by rights certificates.
Q: What is a subscription right?
A: Each subscription right is a right to purchase shares of our common
-----
stock. When you "exercise" a subscription right, you choose to purchase
shares of common stock that the subscription right entitles you to
-----
purchase. You may exercise any number of your subscription rights, or you
may choose not to exercise any subscription rights. We will not distribute
any fractional shares, but will round up the aggregate number of shares you
are entitled to receive to the nearest whole number.
Q: What is the subscription price?
A: The subscription price for a subscription right is $ per right (or
------
$ per share). The per share price equals 70% of the current market price
---
of our common stock determined by averaging the closing price of our common
stock on the American Stock Exchange for the five trading days immediately
preceding the commencement of our offering.
In establishing the subscription price, our board of directors considered:
. strategic alternatives for capital raising,
. the market price of our common stock,
. our negotiations with Lyford as standby purchaser,
. the pricing of similar transactions,
. the amount of proceeds desired,
. our business prospects, and
. general conditions in the securities markets.
See "The Rights Offering - Determination of Subscription Price" on page .
--
3
Q: Where will the shares of common stock issued in the rights offering be
listed?
A: Our common stock is traded on the American Stock Exchange under the symbol
"HEC." We expect that the shares of common stock issued in the rights
offering will also be listed on the American Stock Exchange under the same
symbol. On September 12, 2002, the last trading day prior to our public
announcement of the rights offering, the closing price of our common stock
on the American Stock Exchange was $0.31 per share. On , 2003,
-----------
the last trading day before the date of this prospectus, the closing price
of our common stock on the American Stock Exchange was $ per share.
------
See "Price Range of Common Stock and Dividend Policy" on page .
---
Q: How long will the rights offering last?
A: You will be able to exercise your subscription rights only during a limited
period. If you do not exercise your subscription rights before 5:00 p.m.,
New York City time, on , 2003, your subscription rights will
--------------
expire. We may, in our sole discretion, decide to extend the rights
offering from time to time. See "The Rights Offering - Expiration Date,
Extensions and Termination" on page .
--
Q: Why are we engaging in a rights offering?
A: We are making this rights offering in order to raise $10 million in new
capital to be used as follows:
. to repay a $5 million loan, and accrued interest, made by Lyford
Investments Enterprises Ltd. (referred to as Lyford) to us during 2002
that is evidenced by promissory notes with an annual interest rate of
10%, which are due by their terms in 2005 but must be prepaid upon
completion of the rights offering (referred to as the Lyford Notes),
. to reduce our convertible debt that matures next year and/or other
indebtedness, and
. to generate additional working capital for our business.
Our board of directors believes that the rights offering will ultimately
strengthen our financial condition through generating additional cash,
reducing our indebtedness and increasing our stockholders' equity. [This
rights offering was approved by a vote of our stockholders on January 29,
2003.] See "Use of Proceeds" on page , "Capitalization" on page and
-- ---
"The Rights Offering - Reasons for the Rights Offering" on page .
--
However, our board of directors is not making any recommendation as to
whether you should exercise your subscription rights. You should decide
whether to exercise your subscription rights based upon your own assessment
of your best interests.
Q: How much money will we receive from the rights offering?
A: If we sell all the shares being offered, we will receive gross proceeds of
$10 million. We are offering shares in the rights offering with no minimum
purchase requirement. As a result, there is no assurance we will be able to
sell all of the shares being offered. However, Lyford has agreed, subject
to certain conditions, to purchase all unsubscribed shares of common stock
in the rights offering at the subscription price to provide us with gross
proceeds of $10 million. Accordingly, even if Lyford is the only
participant in the rights offering, we expect to receive gross proceeds of
$10 million and net
4
proceeds of approximately $ million. See "Use of Proceeds" on page
---- --
and "The Rights Offering - Standby Commitment of Lyford" on page .
--
Q: Am I required to subscribe in the rights offering?
A: No.
Q: What happens if I choose not to exercise my subscription rights?
A: You will retain the current number of shares of common stock held directly
by you (or indirectly by virtue of options, warrants and convertible
preferred stock) even if you do not exercise your subscription rights. If
you choose not to exercise your subscription rights, then the percentage of
the common stock held directly by you (or indirectly by virtue of
convertible preferred stock) will decrease because Lyford has agreed to act
as a standby purchaser to purchase any unsubscribed shares. However, even
if common stockholders choose to exercise their subscription rights in
full, their percentage ownership of our common stock could still decrease
because we are also providing subscription rights to holders of our
convertible preferred stock. The magnitude of the reduction of your
percentage ownership will depend upon the extent to which you subscribe in
the rights offering.
Q: How do I exercise my subscription rights?
A: You must properly complete the attached subscription certificate and
deliver it, along with the subscription price for the shares you are
subscribing, to American Stock Transfer & Trust Company, the Subscription
Agent, before 5:00 p.m., New York City time, on , 2003. The
--------------
address for the Subscription Agent is on page . See "The Rights Offering
--
- Delivery of Subscription Materials and Payment" on page .
--
Q: What should I do if I want to participate in the rights offering but my
shares are held in the name of my broker, custodian bank or other nominee?
A: If you hold shares of our common stock through a broker, custodian bank or
other nominee, we will ask your broker, custodian bank or other nominee to
notify you of the rights offering. If you wish to exercise your
subscription rights, you will need to have your broker, custodian bank or
other nominee act for you. To indicate your decision, you should complete
and return to your broker, custodian bank or other nominee the form
entitled "Beneficial Owner Election Form." You should receive this form
from your broker, custodian bank or other nominee with the other rights
offering materials. You should contact your broker, custodian bank or other
nominee if you believe you are entitled to participate in the rights
offering but you have not received this form.
Q: Will I be charged a sales commission or a fee by Harken if I exercise my
subscription rights?
A: No. We will not charge you a brokerage commission or a fee for exercising
your subscription rights. However, if you exercise your subscription rights
through a broker or nominee, you will be responsible for any fees charged
by your broker or nominee.
5
Q: Are there risks in exercising my subscription rights?
A: Yes. The exercise of your subscription rights involves risks. Exercising
your subscription rights means buying additional shares of our common stock
and should be considered as carefully as you would consider any other
equity investment. Among other things, you should carefully consider the
risks described under the heading "Risk Factors," beginning on page .
--
Q: May I transfer my subscription rights if I do not want to purchase any
shares?
A: No. Should you choose not to exercise your subscription rights, you may not
sell, give away or otherwise transfer your subscription rights. However,
subscription rights will be transferable to affiliates of the recipient and
by operation of law (for example, upon death of the recipient).
Q: Is there an over-subscription privilege?
A: No. There is no right to subscribe for additional shares of our common
stock unclaimed by other holders of subscription rights.
Q: After I exercise my subscription rights, can I change my mind and cancel my
purchase?
A: No. Once you send in your subscription certificate and payment you cannot
revoke the exercise of your subscription rights, even if you later learn
information about Harken that you consider to be unfavorable and even if
the market price of our common stock is below the subscription price. You
should not exercise your subscription rights unless you are certain that
you wish to purchase additional shares of our common stock at the
subscription price. See "The Rights Offering - No Revocation" on page .
--
Q: What is the role of Lyford in this offering?
A: If any shares of common stock offered in the rights offering remain
unsubscribed after the rights offering, Lyford has agreed to purchase all
such shares at the subscription price pursuant to a standby purchase
agreement. We refer to the commitment of Lyford to purchase shares of
common stock as the "Standby Commitment." For a more complete description
of the role of Lyford in the rights offering, see "The Rights Offering -
Standby Commitment of Lyford" on page and "Plan of Distribution" on page
--
.
--
Q: How many shares will Lyford own after the offering?
A: If no stockholders other than Lyford exercise their subscription rights,
Lyford will purchase up to shares of our common stock in the
---------
offering pursuant to its subscription rights received as a stockholder and
its Standby Commitment. This amount does not include 1,714,286 shares that
Lyford received as a fee for its Standby Commitment. See "The Rights
Offering - Standby Purchase Agreement" on page . In that case, Lyford's
--
ownership interest could be approximately %, and the ownership interest
---
of the remaining outstanding stockholders could decrease to approximately
%.
---
6
Depending on the number of subscriptions we receive from stockholders, the
rights offering could result in a change in control of Harken because of
Lyford's Standby Commitment. See "Risk Factors" on page .
--
Q: Are there any conditions to Lyford's Standby Commitment?
A: Yes. The obligation of Lyford to exercise its Standby Commitment will be
subject to a number of conditions. In the event Lyford does not close its
Standby Commitment, we intend to still consummate the rights offering. For
a more detailed description of the conditions to Lyford's Standby
Commitment, see "The Rights Offering - Standby Purchase Agreement" on page
.
--
Q: Is Lyford receiving any compensation for its Standby Commitment?
A. As compensation to Lyford for its Standby Commitment, we issued 1,714,286
shares of common stock to Lyford (referred to as the Standby Commitment
Fee).
Upon the consummation of the rights offering, we are required to repay to
Lyford the entire unpaid principal and accrued interest due under the
Lyford Notes pursuant to Lyford's Standby Commitment. In purchasing all
unsubscribed shares of common stock in the rights offering, Lyford is
entitled to offset an amount to satisfy the Lyford Notes, and accrued
interest, without any further action or approval from Harken. Even if
Lyford does not close its Standby Commitment, we are required to use 60% of
the net proceeds of the rights offering to repay the Lyford Notes within 30
days of our receipt of such proceeds. See "Use of Proceeds" on page .
--
Q: Can the board of directors withdraw the rights offering?
A: Yes. The board of directors may decide to withdraw the rights offering at
any time for any reason. If we withdraw the rights offering, any money
received from subscribing stockholders will be refunded promptly, without
interest. See "The Rights Offering - Withdrawal and Amendment" on page .
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Q: If the rights offering is not completed, will my subscription payment be
refunded to me?
A: Yes. The Subscription Agent will hold all funds it receives in a segregated
bank account until completion of the rights offering. If the rights
offering is not completed, the Subscription Agent will return promptly,
without interest, all subscription payments.
Q: What is the board of directors' recommendation regarding the rights
offering?
A: Our board of directors is not making any recommendation as to whether you
should exercise your subscription rights. You are urged to make your
decision based on your own assessment of the rights offering and Harken.
Q: How many shares will be outstanding after the rights offering?
A: As of December 2, 2002, we had approximately 24.9 million shares issued and
outstanding. We expect to issue up to shares in the rights offering.
------
After the rights offering, we anticipate that we will have shares
---------
of common stock outstanding. Your ownership percentage of our
7
common stock will likely decrease as a result of the rights offering
because we are also providing subscription rights to holders of our
convertible preferred stock. After the rights offering, we may issue
additional shares of common stock pursuant to convertible securities or to
redeem our existing convertible notes. Any such issuance will cause further
dilution in your ownership percentage of our common stock. In addition,
depending on the number of subscriptions we receive from stockholders, the
rights offering could result in a change in control of Harken because of
the Standby Commitment of Lyford. See "Risk Factors" on page .
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Q: What are the United States federal income tax consequences of exercising my
subscription rights as a holder of common stock, Series G1 preferred stock
or Series G2 preferred stock?
A: A holder of common stock generally should not recognize income or loss for
federal income tax purposes in connection with the receipt or exercise of
subscription rights in the rights offering. A holder of Series G1 or G2
preferred stock should recognize dividend income for federal income tax
purposes in connection with the receipt of subscription rights in the
rights offering. However, a holder of Series G1 or G2 preferred stock
should not recognize income or loss for federal income tax purposes in
connection with the exercise of the subscription rights. We urge you to
consult your own tax advisor with respect to the particular tax
consequences of the rights offering or the related share issuance to you.
See "Certain United States Federal Income Tax Consequences" on page .
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Q: When will I receive certificates for the shares purchased in the rights
offering?
A: We will issue certificates representing shares purchased in the rights
offering to you or to the Depository Trust Company on your behalf, as the
case may be, as soon as practicable after the expiration of the rights
offering.
Q: What should I do if I have other questions?
A: If you have questions or need assistance, please contact American Stock
Transfer & Trust Company, the Subscription Agent, at (800) - , or one
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of the following representatives of Harken at (281) 504-4000: A. Wayne
Hennecke, Senior Vice President - Finance and Secretary, Bruce N. Huff,
President and Chief Operating Officer, Anna M. Williams, Executive Vice
President and Chief Financial Officer, or Mikel D. Faulkner, Chief
Executive Officer. Our principal offices are located at 580 WestLake Park
Boulevard, Suite 600, Houston, Texas 77079.
For a more complete description of the rights offering, see "The Rights
Offering" beginning on page .
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8
RISK FACTORS
The exercise of your subscription rights for shares of our common
stock involves a high degree of risk. Prior to making an investment decision,
you should carefully consider all of the information in this prospectus and
should evaluate the following risk factors.
Unless the context otherwise requires, references to "Harken," "we,"
"us," or "our Company" refer to Harken Energy Corporation and its subsidiaries.
Risks relating to this rights offering:
The proceeds from the rights offering will not be sufficient to repay our
outstanding debt obligations and there is no assurance that we will obtain
sufficient funds prior to such debts' maturity dates
Our principal outstanding debt maturing next year consists of
approximately $29 million principal amount of our 5% Senior Convertible Notes
due 2003 (referred to as the 5% European Notes) and $5.7 million principal
amount of our 5% Convertible Notes due 2003 (referred to as the Benz Notes). If
the rights offering is approved and consummated, it will result in gross
proceeds of less than $5 million after repaying the Lyford Notes. This amount of
proceeds is not sufficient to repay our outstanding debt obligations, including
the notes. We do not have sufficient funds to pay such debt obligations in cash
upon maturity and there is no assurance we will obtain such funds prior to
maturity. To the extent we are unable to pay the notes in cash upon maturity, we
will have to redeem the notes by issuing common stock and/or otherwise
restructure the notes. There can be no assurance that we would be successful in
restructuring our obligations under the then-outstanding notes or have
sufficient authorized shares to redeem such notes.
The subscription price is not an indication of the value of Harken, and you may
not be able to sell shares purchased upon the exercise of your subscription
rights at a price equal to or greater than the subscription price.
The subscription price does not necessarily bear any relationship to
the book value of our assets, operations, cash flows, earnings, financial
condition or any other established criteria for value. As a result, you should
not consider the subscription price as an indication of the current value of
Harken or our common stock. We cannot assure you that you will be able to sell
shares purchased in this offering at a price equal to or greater than the
subscription price.
The rights offering may cause the price of our common stock to decrease
immediately, and this decrease may continue.
The subscription price equals 70% of the current market price of our
common stock determined by averaging the closing price of our common stock on
the American Stock Exchange for the five trading days immediately preceding the
commencement of our offering. This discount, along with the number of shares we
propose to issue and ultimately will issue if the rights offering is completed,
may result in an immediate decrease in the market value of the common stock.
This decrease may continue after the completion of the rights offering.
9
The rights offering may result in a change in control of Harken.
If no stockholders other than Lyford exercise their subscription
rights, Lyford will purchase shares in the offering. This amount
-------------
does not include 1,714,286 shares that Lyford received as a fee for its Standby
Commitment. See "The Rights Offering - Standby Purchase Agreement." In that
case, Lyford's ownership interest would be approximately %, and the ownership
---
interest of the remaining stockholders would decrease to approximately %.
---
Even if some stockholders other than Lyford exercise their subscription rights,
Lyford could still purchase enough shares to increase its ownership interest to
over 50%. As a result, Lyford may have the voting power to control the election
of our board of directors and the approval of other matters presented for
consideration by our stockholders, which could include amendments to our
charter, mergers, acquisitions and various corporate governance actions.
As a holder of common stock, you may suffer significant dilution of your
percentage ownership of our common stock.
If you do not exercise your subscription rights and shares are
purchased by other stockholders in the rights offering, including Lyford, your
proportionate voting and ownership interest will be reduced and the percentage
that your original shares represent of our expanded equity after exercise of the
subscription rights will be diluted. For example, if you own 500,000 shares of
common stock before the rights offering, or approximately 2.1% of Harken's
equity, and you exercise none of your subscription rights while all other
subscription rights are exercised by other stockholders, then your percentage
ownership would be reduced to approximately %. Even if our common
---
stockholders choose to exercise their subscription rights in full, their
percentage ownership of our common stock could still decrease because we are
also providing subscription rights to holders of our convertible preferred
stock. The magnitude of the reduction of your percentage ownership will depend
upon the extent to which you subscribe in the rights offering. In addition, as
of , 2003, we may be required to issue approximately million
---------- ---
shares of common stock pursuant to securities exercisable or exchangeable, or
convertible into, shares of common stock. These securities have anti-dilution or
other provisions of adjustment to their exercise price or number of shares which
will be automatically triggered by the rights offering. We may also issue shares
of common stock to redeem our existing convertible notes. Any such issuances may
further dilute your ownership percentage.
The subscription rights are not transferable and there is no market for the
subscription rights.
You may not sell, give away or otherwise transfer your subscription
rights. The subscription rights are only transferable to your affiliates and by
operation of law. Because the subscription rights are non-transferable, there is
no market or other means for you to directly realize any value associated with
the subscription rights. You must exercise the subscription rights and acquire
additional shares of our common stock to realize any such value.
If you exercise your subscription rights, you may be unable to sell any shares
you purchase at a profit and your ability to sell may be delayed by the time
required to deliver the stock certificates.
The public trading market price of our common stock may decline after
you elect to exercise your subscription rights. If that occurs, you will have
committed to buy shares of common stock at a price
10
above the prevailing market price and you will have an immediate unrealized
loss. Moreover, we cannot assure you that following the exercise of subscription
rights you will be able to sell your shares of common stock at a price equal to
or greater than the subscription price. Until shares are delivered upon
expiration of the rights offering, you may not be able to sell the shares of our
common stock that you purchase in the rights offering. Certificates representing
shares of our common stock purchased will be delivered as soon as practicable
after expiration of the rights offering. We will not pay you interest on any
funds delivered to the Subscription Agent pursuant to the exercise of
subscription rights.
You may not revoke your exercise of subscription rights and we may cancel the
rights offering.
Once you exercise your subscription rights, you may not revoke the
exercise. We may close the rights offering even if less than all of the shares
that we are offering are actually purchased. We may unilaterally withdraw or
terminate this rights offering in our discretion until the time the share
certificates are actually distributed. If we elect to withdraw or terminate the
rights offering, neither we nor the Subscription Agent will have any obligation
with respect to the subscription rights except to return, without interest or
penalty, any subscription payments.
You will incur immediate and likely substantial net asset dilution.
Regardless of whether you exercise your subscription rights to
purchase shares of our common stock, you will incur immediate and likely
substantial dilution between the net book value per share of common stock after
the offering and the subscription price. On a pro forma basis after taking into
account the effect of the rights offering (but prior to any use of the proceeds
of the rights offering other than the repayment of the $5 million principal
amount of the Lyford Notes and accrued interest thereon) our book value per
share as of September 30, 2002 would be as follows:
Net Tangible Book Value Per Share
Pro Forma as of September 30, 2002
Pro Forma
Historical as of Assuming Rights Offering at
September 30, 2002 Subscription Price
------------------ ---------------------------
Book value of Harken
(in thousands) ...................... $ 10,404 $ (1)
Number of shares of common
stock outstanding ................... 24,885,404 (2)
Net tangible book value per
common share ........................ $ 0.42 $ (3)
Increase/decrease in net tangible
book value per common share ......... $ -- $
Dilution per common share to
purchasing stockholders ............. $ -- $
----------
(1) Pro forma book value calculations assume $10 million gross offering
proceeds prior to reduction for debt balances other than the Lyford loan
balance, and accrued interest, required to be paid and $ in offering
----
expenses. Book value amounts could increase if cash proceeds are used to
repurchase debt at a discount from face value.
(2) Pro forma common stock outstanding include shares issuable in the
--------
rights offering.
11
(3) Pro forma net tangible book value per share will decrease substantially in
the event we issue shares of common stock pursuant to outstanding
convertible securities or to redeem our existing convertible notes.
United States federal income tax consequences are uncertain.
In general, holders of common stock should not recognize income or
loss for federal income tax purposes in connection with the receipt or exercise
of subscription rights in the rights offering. Holders of Series G1 or G2
preferred stock should, however, recognize dividend income on the receipt of the
subscription rights. Because these issues are subject to some uncertainty and
because we have not sought, and will not seek, an opinion of counsel or a ruling
from the Internal Revenue Service regarding any tax consequences of the rights
offering or the related share issuances under foreign, state or local tax laws,
we urge you to consult your own tax advisor with respect to the particular tax
consequences of the rights offering or the related share issuances to you.
To exercise your subscription rights, you need to act promptly and follow
subscription instructions.
If you desire to purchase shares in this rights offering, you must act
promptly to ensure that all required forms and payments are actually received by
the Subscription Agent prior to , 2003, the expiration date. If
--------------
you fail to complete and sign the required subscription forms, send an incorrect
payment amount, or otherwise fail to follow the subscription procedures that
apply to your desired transaction, the Subscription Agent may, depending on the
circumstances, reject your subscription or accept it to the extent of the
payment received. If your exercise is rejected, your payment of the exercise
price will be promptly returned. Neither we nor our Subscription Agent
undertakes to contact you concerning, or attempt to correct, an incomplete or
incorrect subscription form or payment. We have the sole discretion to determine
whether a subscription exercise properly follows the subscription procedures and
to decide all questions as to the validity, form and eligibility (including
times of receipt and beneficial ownership). Alternative, conditional or
contingent subscriptions will not be accepted. We reserve the absolute right to
reject any subscriptions not properly submitted. In addition, we may reject any
subscription if the acceptance of the subscription would be unlawful. We also
may waive any irregularities (or conditions) in the subscription. If you are
given notice of a defect in your subscription, you will have five business days
after the giving of notice to correct it. You will not, however, be allowed to
cure any defect later than 5:00 p.m., New York City time, on , 2003. We
-------
are not obligated to give you notification of defects in your subscription. We
will not consider an exercise to be made until all defects have been cured or
waived.
Risks associated with our financial condition:
If we do not continue to meet the listing requirements of the American Stock
Exchange, our common stock could be delisted
The American Stock Exchange requires companies to fulfill certain
requirements in order for their shares to continue to be listed. The securities
of a company may be considered for delisting if the company fails to meet
certain financial thresholds, including if the company has stockholders' equity
of less than $6 million and has sustained losses from continuing operations
and/or net losses in its five most recent fiscal years. As of September 30,
2002, our stockholders' equity was $10.4 million and, as discussed below, we
have sustained losses in each of our last five fiscal years. There can be no
assurance that our stockholders' equity will not be reduced or that we will not
report additional losses in the future.
12
If these aspects of our financial condition do not improve, our common stock
(including shares of common stock issued in the rights offering) may be
considered for delisting.
If our common stock is delisted from the American Stock Exchange for
any reason and we are deemed not to have used our "best efforts" to maintain
such listing, we will be in default under our 5% European Notes and, as a result
of cross-default provisions, our other debt obligations. Any default under our
debt agreements will result in a majority of our debt obligations becoming due
in full. We do not have sufficient funds to pay our debt obligations in cash and
there is no assurance we will obtain such funds if such debt became due which
would result in a material adverse effect on our financial position and results
of operations. The potential delisting of our common stock could adversely
affect our ability to raise capital in the future by issuing common stock or
securities convertible into common stock.
We have a history of losses and may suffer losses in the future.
We have reported losses in each of the last five fiscal years,
including a net loss of $41,023,000 for the year ended December 31, 2001 that
was primarily caused by the writedown of our oil and gas properties and the
impairment of our investment in Costa Rica. We have also reported a loss of $5.2
million for the nine months ended September 30, 2002. We have reported
cumulative net losses of approximately $263 million over the last five fiscal
years. Our ability to generate net income is strongly affected by, among other
factors, our ability to successfully drill our undeveloped reserves as well as
the market price of crude oil and natural gas. During the fourth quarter of
2000, we recorded a writedown of our oil and gas properties of approximately
$156 million primarily due to a significant reduction in our proved undeveloped
reserves in Colombia following the drilling of a non-productive well. If we are
unsuccessful in drilling productive wells in the future or the market price of
crude oil and natural gas declines, we may report additional losses in the
future.
If we cannot obtain stockholder approval for the issuance of shares of common
stock to redeem certain of our existing convertible notes and we are unable to
pay cash at maturity, we could be subject to potential delisting of our common
stock from the American Stock Exchange.
Currently, we do not have sufficient funds to pay our existing
convertible notes in cash upon maturity, or to otherwise redeem or repurchase
these notes. [We are seeking stockholder approval for the issuance of shares of
common stock to redeem up to $20 million principal amount of the 5% European
Notes at our annual meeting of stockholders to be held on January 29, 2003.]
Although the exact number of shares to be issued in connection with redemptions
of the approximately $29 million principal amount of the 5% European Notes due
May 26, 2003 will depend upon the amount of notes to be redeemed for common
stock and the average market price of our common stock at the time of the
redemptions, at present market prices even the redemption for common stock of a
small amount of the notes would result in the issuance of a number of shares
that is greater than 20% of our currently outstanding shares of common stock.
Consequently, the rules of the American Stock Exchange require stockholder
approval as a condition to listing such additional shares on that exchange. If
we have over $20 million of the 5% European Notes outstanding, the redemption of
the remaining principal balance could likewise require stockholder approval.
We are also pursuing negotiated transactions to repurchase or exchange
the approximately $5.7 million principal amount of the Benz Notes that also
mature in 2003. The redemption for shares of common stock of the Benz Notes
could also require additional stockholder approval.
13
We cannot assure you that we will receive the required stockholder
approval to redeem up to $20 million principal amount of the 5% European Notes.
Even if we receive such stockholder approval, we cannot assure you that we will
receive stockholder approval to redeem any remaining principal balance of the 5%
European Notes. Further, we cannot assure you that we will receive stockholder
approval to redeem the principal amount of the Benz Notes. If we do not obtain
required stockholder approvals and issue an amount of shares requiring approval,
our common stock could be subject to potential delisting from the American Stock
Exchange. See also "- If we do not continue to meet the listing requirements of
the American Stock Exchange, our common stock could be delisted."
We may have an insufficient number of authorized shares of common stock to
redeem certain of our existing convertible notes, which would cause us to
restructure the notes or to pay for the notes at maturity - neither of which we
may be able to accomplish.
We currently have 225 million shares of common stock authorized for
issuance. As of December 2, 2002, approximately 24.9 million shares were
outstanding and 34 million shares were reserved for issuance. Assuming the
maximum amount of shares are issued in our proposed rights offering, there will
be remaining 70.9 million shares of common stock available for issuance. See
"-Risks associated with market conditions - We may issue additional shares of
common stock pursuant to a rights offering that may dilute the value of our
common stock, adversely affect the market price of our common stock and result
in a change in control of Harken."
Even if stockholder approval is obtained for the issuance of shares of
common stock to redeem the 5% European Notes, the Benz Notes and our other
existing convertible notes, the redemption of these notes may result in an
issuance of shares that is in excess of the amount of shares currently
authorized for issuance. In such event, we would have to obtain stockholder
approval to increase our authorized common stock before we could redeem all such
notes. Absent such stockholder approval, we would have to otherwise restructure
the then-outstanding notes or pay cash at maturity. We cannot assure you that,
in such an event, we would be successful in restructuring our obligations under
the then-outstanding notes. We currently do not have sufficient funds to pay
such notes in cash upon maturity and it is unlikely that we will have such funds
prior to maturity.
Assuming a market price of $0.20 per share for our common stock, the
table below reflects the number of shares of common stock required to be issued
in order to redeem our existing convertible notes coming due next year:
Amount Shares of Common Stock to be
Indebtedness Outstanding Issued in Redemption Maturity Date
----------------- ----------- ---------------------------- -------------
5% European Notes $29,030,000 166,922,300 May 26, 2003
Benz Notes $ 5,668,708 32,595,071 Nov 26, 2003
Our financial condition may suffer if estimates of our oil and gas reserve
information are adjusted, and fluctuations in oil and gas prices and other
factors affect our oil and gas reserves.
Our oil and gas reserve information is based upon criteria mandated by
the Securities and Exchange Commission, or the SEC, and reflects only estimates
of the accumulation of oil and gas and the economic recoverability of those
volumes. Our future production, revenues and expenditures with respect
14
to such oil and gas reserves will likely be different from estimates, and any
material differences may negatively affect our business, financial condition and
results of operations.
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 prove to differ materially from those assumed in
estimating reserves:
. the quantities of oil and gas that are ultimately recovered,
. the production and operating costs incurred,
. the amount and timing of future development expenditures, and
. future oil and gas sales prices.
Furthermore, different reserve engineers may make different estimates of
reserves and cash flow based on the same available data.
The estimated discounted future net cash flows described in our annual
report on Form 10-K for the year ended December 31, 2001, as amended,
incorporated by reference herein, should not be considered as the current market
value of the estimated oil and gas reserves attributable to our properties from
proved reserves. Such estimates are based on prices and costs as of the date of
the estimate, in accordance with SEC requirements, while future prices and costs
may be materially higher or lower. In addition, such reserves do not reflect the
impact of sales of producing properties consummated during 2002.
For example, prices in effect for oil and natural gas at December 31,
2001 were significantly lower than the average prices a year earlier. The SEC
requires that we report our oil and natural gas reserves using the price as of
the last day of the year, and accordingly, the value of our oil and natural gas
reserves as reported in our annual report on Form 10-K for the fiscal year ended
December 31, 2001, as amended, is significantly lower than the prior year. Using
lower values in forecasting reserves will result in a shorter life being given
to producing oil and natural gas properties because such properties, as their
production levels are estimated to decline, will reach an uneconomic limit, with
lower prices, at an earlier date. There can be no assurance that a decrease in
oil and gas prices or other differences in our estimates of our reserve will not
adversely affect our financial condition and results of operations.
We may require future waivers and amendments to our bank credit facility
covenant requirements.
Our bank credit facility with Guaranty Bank, FSB requires certain of
Harken's subsidiaries (the "Borrowers"), to maintain certain financial covenant
ratios and requirements, as calculated on a quarterly basis. The Guaranty Bank
facility requires Borrowers to maintain a maximum liability to equity ratio (as
defined in the agreement) of not more than 1.0 to 1.0, a current ratio (as
defined in the agreement) of not less than 1.0 to 1.0, and a debt service
coverage ratio (as defined in the agreement) of not less than 1.25 to
15
1.0. In addition, the agreement requires that general and administrative
expenses of the Borrowers must not exceed 30% of the Borrowers' net revenue for
the quarter ended December 31, 2002, and 25% for each quarter thereafter. The
Guaranty Bank facility matures December 6, 2005.
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 Guaranty Bank facility requirements, the bank
credit facility would be in default and callable by Guaranty Bank. In addition,
due to cross-default provisions in Harken's indentures for its 5% European
Notes, 7% Notes and Benz Notes, a majority of our debt obligations would become
due in full if any debt is in default. Expectations of future operating results
and continued compliance with financial covenants cannot be assured and our
lenders' actions are not controllable by us. If our projections of future
operating results are not achieved and future waivers or amendments of the
Guaranty Bank facility are not received and our debt is placed in default, we
could experience a material adverse impact on our financial position and results
of operations.
If estimated discounted future net cash flows decrease, we may be required to
take additional writedowns.
We periodically review the carrying value of our oil and gas
properties under applicable full-cost accounting rules. These rules require a
writedown of the carrying value of oil and gas properties if the carrying value
exceeds the applicable estimated discounted future net cash flows from proved
oil and gas reserves. Given the volatility of oil and gas prices, it is
reasonably possible that the estimated discounted future net cash flows 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 writedowns of
oil and gas properties could occur. Whether we 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, property sales and capital
expenditures during such quarter.
Because of oil and gas prices as of December 31, 2001, the net
evaluated capitalized costs related to our domestic oil and gas properties
exceeded the domestic cost ceiling which resulted in a non-cash writedown of our
domestic oil and gas properties of approximately $14.4 million. Similarly, as of
December 31, 2001, the net evaluated capital costs related to our Colombian oil
properties also exceeded the Colombian cost ceiling, resulting in a non-cash
writedown of our Colombian oil properties of approximately $4.3 million.
Risks associated with market conditions:
Our stock price is volatile and the value of any investment in our common stock
may fluctuate.
Our stock price has been and is highly volatile, and we believe this
volatility is due to, among other things:
. the results of our drilling,
. current expectations of our future revenue and earnings growth rates,
. commodity prices of oil and natural gas,
16
. the progress and ultimate success of our capital plan, including our
actions with respect to our 5% European Notes, and
. the volatility of the market in general.
For example, the common stock price has fluctuated from a high of $15 per
share to a low of $0.18 per share over the last three years. This volatility may
affect the market value of our common stock in the future. See "Price Range of
Common Stock and Dividend Policy" on page .
---
Future sales of our common stock pursuant to outstanding registration statements
may affect the market price of our common stock.
There are currently several registration statements with respect to
our common stock that are or will become effective, pursuant to which certain of
our stockholders may sell up to an aggregate of 14.2 million shares of common
stock. Any such sale of stock may also decrease the market price of our common
stock.
We may issue additional shares of common stock that may dilute the value of our
common stock and adversely affect the market price of our common stock.
In addition to the shares of common stock that may be issued
-------
in the rights offering, we may issue additional shares of common stock in the
following scenarios:
. approximately 1.5 million shares of common stock may be required to be
issued pursuant to our stock options,
. approximately 6.3 million shares of common stock may be issued
pursuant to other securities exercisable or exchangeable, or
convertible into, shares of common stock,
. approximately 32.6 million shares of common stock may be issued in
connection with the redemption of the Benz Notes maturing in 2003
(assuming the market price of our common stock is $0.20 per share),
. over 166.9 million shares of common stock may be issued in connection
with the redemption of the 5% European Notes maturing in 2003
(assuming the market price of our common stock is $0.20 per share),
. over 22.9 million shares of common stock may be issued in connection
with the conversion of the 7% Notes maturing in 2007 (using the
current conversion rate of $0.50 per share), and
. a significant number of additional shares of common stock may be
issued for financing or other purposes.
A large issuance of shares of common stock in any or all of the above
scenarios will decrease the ownership percentage of current outstanding
stockholders and will likely result in a decrease in the market price of our
common stock. Any large issuance will also likely result in a change in control
of Harken.
17
In addition, we may elect to issue a significant number of additional
shares of common stock for financing or other purposes, which could result in a
decrease in the market price of our common stock.
If we redeem our existing convertible notes with shares of common stock, you
will suffer a significant dilution of your ownership percentage and a decrease
in the market value of our common stock and the redemptions will likely result
in a change in control of Harken.
Any redemptions of our existing convertible notes involving a large
issuance of shares will result in a substantial dilution of your ownership
percentage of our common stock and a decrease in the market value of our common
stock. The number of new shares to be issued will also likely result in a change
in control of Harken and, depending on the ownership of the notes, a small group
of stockholders could control the election of the board of directors and the
approval of other matters presented for consideration by the stockholders, which
could include amendments to our charter, mergers, acquisitions and various
corporate governance actions. You will also incur immediate and likely
substantial net asset dilution.
[The rights offering will trigger anti-dilution adjustments to the conversion
prices of certain of our existing convertible notes.
The rights offering will trigger anti-dilution adjustments to the
conversion prices of our 5% European Notes, Benz Notes and 7% Notes. Assuming
the maximum amount of shares are issued in the rights offering, the conversion
prices will be reduced to approximately $49 per share (as compared to $65 per
share) for the 5% European Notes, approximately $22 per share (as compared to
$65 per share) for the Benz Notes and approximately $0.38 per share (as compared
to $0.50 per share) for the 7% Notes.]
We have issued shares of preferred stock with greater rights than our common
stock and may issue additional shares of preferred stock in the future.
We are permitted under our charter to issue up to 10 million shares of
preferred stock. We can issue shares of our preferred stock in one or more
series and can set the terms of the preferred stock without seeking any further
approval from our common stockholders. Any preferred stock that we issue may
rank ahead of our common stock in terms of dividend priority or liquidation
premiums and may have greater voting rights than our common stock. As of
December 2, 2002, we had outstanding 402,688 shares of Series G1 preferred stock
and 93,150 shares of Series G2 preferred stock. These shares of preferred stock
have rights senior to our common stock with respect to dividends and
liquidation. In addition, such preferred stock may be converted into shares of
common stock, which could dilute the value of common stock to current
stockholders and could adversely affect the market price of our common stock.
Each share of Series G1 preferred stock and Series G2 preferred stock may be
converted into shares of common stock at the conversion price of $12.50 and
$3.00 per share of common stock, respectively, for each $100.00 liquidation
value of a share of such preferred stock plus the amount of any accrued and
unpaid dividends.
Our domestic operating strategic plan includes the acquisition of additional
reserves through business combinations.
Our domestic operations have shifted from primarily an exploration and
development focus to an acquisition growth strategy, with a reduced emphasis on
exploration. We are seeking additional
18
acquisition opportunities to expand our domestic operations and increase our oil
and gas reserves in North America. We may not be able to consummate future
acquisitions on favorable terms. Additionally, any such future transactions may
not achieve favorable financial results.
Future business combinations may also involve the issuance of shares
of our common stock, which could have a dilutive effect on your percentage
ownership as a stockholder. We may not have a sufficient number of authorized
shares to issue in any such business combinations and we may need to obtain
stockholder approval to authorize additional shares for issuance. If Lyford
becomes a majority stockholder as a result of this rights offering, it may be
able to control the approval of such an issuance. Further, the use of shares in
business combinations will reduce the number of shares available for the
redemption of existing convertible notes.
In addition, acquisitions may require substantial financial
expenditures that will need to be financed through cash flow from operations or
future debt and equity offerings by us and we may not be able to acquire
companies or oil and gas properties using our equity as currency. In the case of
cash acquisitions, we may not be able to generate sufficient cash flow from
operations or obtain debt or equity financing sufficient to fund future
acquisitions of reserves.
Risks associated with our operations:
Oil and gas price fluctuations in the market may adversely affect the results of
our operations.
The results of our operations are highly dependent upon the prices
received for our oil and natural gas production. Substantially all of our sales
of oil and natural gas are made in the spot market, or pursuant to contracts
based on spot market prices, and not pursuant to long-term, fixed-price
contracts. Accordingly, the prices received for our oil and natural gas
production are dependent upon numerous factors beyond our control. These factors
include the level of consumer product demand, governmental regulations and
taxes, the price and availability of alternative fuels, the level of foreign
imports of oil and natural gas and the overall economic environment. Significant
declines in prices for oil and natural gas could have a material adverse effect
on our financial condition, results of operations and quantities of reserves
recoverable on an economic basis. Any significant decline in prices of oil or
gas could have a material adverse effect on our financial condition and results
of operations. Recently, the price of oil and natural gas has been volatile. For
example, during 2001, the price for a barrel (bbl) of oil ranged from a high of
$29.25 to a low of $14.25 and the price for a thousand cubic feet (Mcf) of gas
ranged from a high of $10.53 to a low of $1.74. From January 1, 2002 through
October 31, 2002, the price for a bbl of oil ranged from a high of $27.50 to a
low of $14.75 and the price for a Mcf of gas ranged from a high of $4.33 to a
low of $1.98.
Our operations require significant expenditures of capital that may not be
recovered.
We require significant expenditures of capital in order to locate and
acquire producing properties and to drill exploratory wells. In conducting
exploration and development activities from a particular well, the presence of
unanticipated pressure or irregularities in formations, miscalculations or
accidents may cause our exploration, development and production activities to be
unsuccessful, potentially resulting in abandoning the well. This could result in
a total loss of our investment. In addition, the cost and timing of drilling,
completing and operating wells is difficult to predict.
19
The oil and gas we produce may not be readily marketable at the time of
production.
Crude oil, natural gas, condensate and other oil and gas products are
generally sold to other oil and gas companies, government agencies and other
industries. The availability of ready markets for oil and gas that we might
discover and the prices obtained for such oil and gas depend on many factors
beyond our control, including:
. the extent of local production and imports of oil and gas,
. the proximity and capacity of pipelines and other transportation
facilities,
. fluctuating demand for oil and gas,
. the marketing of competitive fuels, and
. the effects of governmental regulation of oil and gas production and
sales.
Natural gas associated with oil production is often not marketable due to demand
or transportation limitations and is often flared at the producing well site.
Pipeline facilities do not exist in certain areas of exploration and, therefore,
any actual sales of discovered oil and gas might be delayed for extended periods
until such facilities are constructed.
We may encounter operating hazards that may result in substantial losses.
We are subject to operating hazards normally associated with the
exploration and production of oil and gas, including blowouts, explosions, oil
spills, cratering, pollution, earthquakes, labor disruptions and fires. The
occurrence of any such operating hazards could result in substantial losses to
our Company due to injury or loss of life and damage to or destruction of oil
and gas wells, formations, production facilities or other properties. We
maintain insurance coverage limiting financial loss resulting from certain of
these operating hazards. We do not maintain full insurance coverage for all
matters that may adversely affect our operations, including war, terrorism,
nuclear reactions, government fines, treatment of waste, blowout expenses and
business interruptions. Losses and liabilities arising from uninsured or
underinsured events could reduce our revenues or increase our costs. There can
be no assurance that any insurance will be adequate to cover losses or
liabilities associated with operational hazards. We cannot predict the continued
availability of insurance, or its availability at premium levels that justify
its purchase.
Drilling oil and gas wells particularly in certain regions of the United States
and foreign countries could be hindered by hurricanes, earthquakes and other
weather-related operating risks.
Our operations in the Louisiana wetlands, the onshore regions of Texas
and in Colombia, Costa Rica, Peru and Panama are subject to risks from
hurricanes and other natural disasters. Damage caused by hurricanes, earthquakes
or other operating hazards could result in substantial losses to our Company. We
are not covered by insurance for any business interruption resulting from such
events and, upon the occurrence of a natural disaster, this lack of coverage
could have a material adverse effect on our financial position and results of
operations.
20
We face strong competition from larger oil and gas companies, which could result
in adverse affects on our business.
The exploration and production business is highly competitive. Many of
our competitors have substantially larger financial resources, staffs and
facilities. Our competitors in the United States include numerous major oil and
gas exploration and production companies and in Colombia, Peru and Panama
include such major oil and gas companies as BP Amoco, Exxon/Mobil, Texaco/Shell,
Conoco/Phillips and Arco. These major oil and gas companies are often better
positioned to obtain the rights to exploratory acreage that we compete for.
Our operations are subject to various litigation that could have an adverse
affect on our business.
Presently, various Harken subsidiaries are defendants in various
litigation matters. The nature of Harken and its subsidiaries' operations also
expose us to further possible litigation claims in the future. For example, we
are currently a party to the following pending proceedings:
. In September 1997, D. E. Rice and Karen Rice, as Trustees for the Rice
Family Living Trust (collectively referred to as Rice) filed a lawsuit
against Harken Exploration Company, a wholly-owned subsidiary of
Harken, in Texas state court. Rice claims damages in an amount of $40
million from Harken Exploration Company's alleged spills on Rice's
property.
. In December 1999, 420 Energy Investment, Inc. and ERI Investments,
Inc. (collectively referred to as 420 Energy) filed a lawsuit against
XPLOR Energy, Inc., a wholly-owned subsidiary of Harken (referred to
as XPLOR), in Delaware state court. 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.
. In August 2001, a new lawsuit was filed by New West Resources, Inc.
(referred to as New West), a former XPLOR stockholder, against XPLOR,
Harken and other defendants in Texas state court. New West claims that
it lost its $6 million investment in XPLOR as a result of
misrepresentations by XPLOR and breach of fiduciary duties by certain
XPLOR directors.
There is risk that any matter in litigation could be adversely decided
against Harken or its subsidiaries, regardless of their belief, opinion and
position, which could have a material adverse effect on Harken's financial
condition and results of operations. Litigation is highly costly and the costs
associated with defending litigation could also have a material adverse effect
on Harken's financial condition. For further detail concerning our pending
litigation, please see our quarterly report on Form 10-Q for the period ended
September 30, 2002 and our current report on Form 8-K dated December 10, 2002.
Compliance with, or breach of, environmental laws can be costly and could limit
our operations.
Our operations are subject to numerous and frequently changing laws
and regulations governing the discharge of materials into the environment or
otherwise relating to environmental protection. We own or lease, and have in the
past owned or leased, properties that have been used for the exploration and
production of oil and gas and these properties and the wastes disposed on these
properties may be subject to the Comprehensive Environmental Response,
Compensation and Liability Act, the Oil Pollution Act of 1990, the Resource
Conservation and Recovery Act, the Federal Water Pollution Control Act and
21
analogous state laws. Under such laws, we could be required to remove or
remediate previously released wastes or property contamination.
Laws and regulations protecting the environment have generally become
more stringent and, may in some cases, impose "strict liability" for
environmental damage. Strict liability means that we may be held liable for
damage without regard to whether we were negligent or otherwise at fault.
Environmental laws and regulations may expose us to liability for the conduct of
or conditions caused by others or for acts that were in compliance with all
applicable laws at the time they were performed. Failure to comply with these
laws and regulations may result in the imposition of administrative, civil and
criminal penalties.
While we believe that our operations are in substantial compliance
with existing requirements of governmental bodies, our ability to conduct
continued operations is subject to satisfying applicable regulatory and
permitting controls. Our current permits and authorizations and ability to get
future permits and authorizations, particularly in foreign countries, may be
susceptible, on a going forward basis, to increased scrutiny, greater complexity
resulting in increased costs, or delays in receiving appropriate authorizations.
In particular, we have experienced and may continue to experience delays in
obtaining permits and authorization in Colombia necessary for our operations. In
addition, recent judicial and political developments in Costa Rica have
significantly and adversely affected our ability to acquire necessary
environmental permits and severely limit the opportunity for future oil and gas
exploration in Costa Rica. These developments have fully impaired our investment
through our subsidiary, Global Energy Development PLC, in certain onshore and
offshore properties on the Caribbean side of Costa Rica, as reflected on our
consolidated balance sheet contained in our annual report on Form 10-K, as
amended, for the year ended December 31, 2001.
We are required to obtain an environmental permit or approval from the
governments in Colombia, Costa Rica, Peru and Panama prior to conducting seismic
operations, drilling a well or constructing a pipeline in such foreign
locations. Our operations in foreign countries have been delayed in the past and
could be delayed in the future through the process of obtaining an environmental
permit. Compliance with these laws and regulations may increase our costs of
operations, as well as further restrict our foreign operations.
Costa Rica has implemented policies and laws with a high level of
attention to the protection of its ecological areas and environment. As a
result, the operations of our indirect subsidiary, Harken Costa Rica Holdings,
in Costa Rica are subject to much greater control, scrutiny and restrictions
than are usually encountered in international exploration operations. Due to
such additional regulations and requirements in Costa Rica, as well as recent
rulings by Costa Rica government agencies, Harken Costa Rica Holdings will
likely not be able to continue operations in Costa Rica for the foreseeable
future.
Our foreign operations involve substantial costs and are subject to certain
risks because the oil and gas industries in such countries are less developed.
The oil and gas industries in Colombia, Costa Rica, Peru and Panama
are not as developed as the oil and gas industry in the United States. As a
result, our drilling and development operations in many instances take longer to
complete and often cost more than similar operations in the United States. The
availability of technical expertise, specific equipment and supplies is more
limited in Colombia, Costa
22
Rica, Peru and Panama than in the United States. We expect that such factors
will continue to subject us to economic and operating risks not experienced in
our domestic operations.
We follow the full cost method of accounting for exploration and
development of oil and gas reserves in which all of our acquisition, exploration
and development costs are capitalized. Costs related to the acquisition, holding
and initial exploration of oil and gas associated with our contracts in
countries with no proved reserves are initially capitalized, including internal
costs directly identified with acquisition, exploration and development
activities. If we abandon all exploration efforts in a country where no proved
reserves are assigned, all acquisition and exploration costs associated with the
country are expensed. From time to time, we make assessments as to whether our
investment within a country is impaired and whether exploration activities
within a country will be abandoned based on our analysis of drilling results,
seismic data and other information we believe to be relevant. Due to the
unpredictable nature of exploration drilling activities, the amount and timing
of impairment expenses are difficult to predict.
If we fail to comply with the terms of certain contracts related to our foreign
operations, we could lose our rights under each of those contracts.
The terms of each of the Colombia Association Contracts, the Costa
Rica Contract, the Peruvian Technical Evaluation Agreement and the Panamanian
Technical Evaluation Agreement require that we perform certain activities, such
as seismic interpretations and the drilling of required wells, in accordance
with those contracts and agreements. Our failure to timely perform those
activities as required could result in the loss of our rights under a particular
contract, which would likely result in a significant loss to our Company. As of
, 2003, we were in compliance with the requirements of each of the
---------
Colombia Association Contracts, the Costa Rica Contract, the Peruvian Technical
Evaluation Agreement and the Panamanian Technical Evaluation Agreement. For
further detail concerning these contracts and agreements, please see "Liquidity
and Capital Resources" contained in Part II, Item 7, Management's Discussion and
Analysis of Financial Conditions and Results of Operations in our annual report
on Form 10-K, as amended, for the year ended December 31, 2001.
We require significant additional financing for our foreign operations, which
financing may not be available.
We anticipate that full development of our existing and future oil and
gas discoveries and prospects in Colombia, Costa Rica, Peru and Panama may take
several years and require significant additional capital expenditures. If we are
unable to timely obtain adequate funds to finance these investments, our ability
to develop oil and gas reserves in these countries may be severely limited or
substantially delayed. Such limitations or delay would likely result in
substantial losses for our Company.
We anticipate that amounts required to fund our foreign activities
will be funded from our existing cash balances, asset sales, stock issuances,
production payments, operating cash flows and from joint venture partners. We
estimate a cost of $2.5 million in 2003 for the completion of a well in Colombia
required to be drilled by us pursuant to the Cajaro Association Contract with
Empresa Colombia de Petroleos. The exact usage of other future funding sources
is unknown at this time and we cannot assure you that we will have adequate
funds available to finance our foreign operations.
23
Our foreign operations are subject to political, economic and other
uncertainties.
We currently conduct significant operations in Colombia and Costa
Rica, and may also conduct operations in Peru, Panama and other foreign
countries in the future. At December 31, 2001, approximately 35% of our proved
reserves and 26% of our consolidated revenues were related to Global Energy
Development PLC's Colombian operations. Exploration and production operations in
foreign countries are subject to political, economic and other uncertainties,
including:
. the risk of war, revolution, border disputes, expropriation,
renegotiation or modification of existing contracts, import, export
and transportation regulations and tariffs resulting in loss of
revenue, property and equipment,
. taxation policies, including royalty and tax increases and retroactive
tax claims,
. exchange controls, currency fluctuations and other uncertainties
arising out of foreign government sovereignty over international
operations,
. laws and policies of the United States affecting foreign trade,
taxation and investment, and
. the possibility of being subjected to the 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 certain 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, laws or regulations 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. Any such activity could result in a
significant loss to our Company.
Guerrilla activity in Colombia could disrupt or delay our operations, and we are
concerned about safeguarding our operations and personnel in Colombia.
Colombia's 37-year armed conflict between the government and leftist
guerrilla groups has escalated in recent years. The current government's quest
for peace was unsuccessful. The breakdown of peace negotiations has resulted in
increased military action by the Colombian government directed against the rebel
groups operating in Colombia. Unless the parties determine to return to peace
negotiations, the military confrontation with the rebel groups is expected to
continue. Also, the increased activity of right-wing paramilitary groups, formed
in opposition to the left-wing FARC and ELN groups, has contributed to the
escalation in violence. The increase in violence has affected business interests
in Colombia. Targeting such enterprises as symbols of foreign exploitation,
particularly in the North of the country, the rebel groups have attempted to
hamper production of hydrocarbons. The cumulative effect of escalation in the
armed conflict and the resulting unstable political and security situation has
led to increased risks and costs and the downgrading of Colombia's country risk
rating. Our oil and gas operations are in areas outside guerrilla control and
with the exception of its increased security requirements, our operations
continue mostly unaffected, although from time to time, guerilla activity in
Colombia has delayed our projects there. This guerilla activity has increased
over the last few years, causing delays in the development of our fields in
Colombia. Guerilla activity, such as road blockades,
24
has also from time to time slowed our deployment of workers in the field and
affected our operations. In addition, guerillas could attempt to disrupt the
flow of our production through pipelines. In addition to these security issues,
we have also become the subject of media focus in Colombia that may further
compromise our security position in the country.
We cannot assure you that attempts to reduce or prevent guerilla
activity will be successful or that guerilla activity will not disrupt our
operations in the future. We also cannot assure you that we can maintain the
safety of our operations and personnel in Colombia or that this violence will
not affect our operations in the future. Continued or heightened security
concerns in Colombia could also result in a significant loss to our Company.
The United States government may impose economic or trade sanctions on Colombia
that could result in a significant loss to our Company.
Colombia is among several nations whose progress in stemming the
production and transit of illegal drugs is subject to annual certification by
the President of the United States. Although Colombia was so certified in 2001,
there can be no assurance that, in the future, Colombia will receive
certification or a national interest waiver. The failure to receive
certification or a national interest waiver may result in any of the following:
. all bilateral aid, except anti-narcotics and humanitarian aid, would
be suspended,
. the Export-Import Bank of the United States and the Overseas Private
Investment Corporation would not approve financing for new projects in
Colombia,
. United States representatives at multilateral lending institutions
would be required to vote against all loan requests from Colombia,
although such votes would not constitute vetoes, and
. the President of the United States and Congress would retain the right
to apply future trade sanctions.
Each of these consequences could result in adverse economic consequences in
Colombia and could further heighten the political and economic risks associated
with our operations there. Any changes in the holders of significant government
offices could have adverse consequences on our relationship with the Colombian
national oil company and the Colombian government's ability to control guerrilla
activities and could exacerbate the factors relating to our foreign operations
discussed above.
Any sanctions imposed on Colombia by the United States government
could threaten our ability to obtain necessary financing to develop the
Colombian properties or cause Colombia to retaliate against us, including by
nationalizing our Colombian assets. Accordingly, the imposition of the foregoing
economic and trade sanctions on Colombia would likely result in a substantial
loss to our Company and a decrease in the price of our common stock. We cannot
assure you that the United States will not impose sanctions on Colombia in the
future or predict the effect in Colombia that these sanctions might cause.
25
We may suffer losses from exchange rate fluctuations.
We account for our Colombian, Costa Rican, Peruvian and Panamanian
operations using the U.S. dollar as the functional currency. The costs
associated with our exploration efforts in Colombia, Costa Rica, Peru and Panama
have typically been denominated in U.S. dollars. We expect that a substantial
portion of our future Colombian revenues may be denominated in Colombian pesos.
To the extent that the amount of our revenues denominated in Colombian pesos is
greater than the amount of costs denominated in Colombian pesos, we could suffer
a loss if the value of the Colombian peso were to drop relative to the value of
the U.S. dollar. Any substantial currency fluctuations could have a material
adverse effect on our results of operations and in recent years the value of the
Colombian peso relative to the U.S. dollar has declined. For example, the
average exchange rate for the Colombian peso into U.S. dollars for October 2002
was 0.000354, as compared to an average of 0.000423 for June 2002, 0.000434 for
December 2001 and 0.000456 for December 2000.
Risk relating to Arthur Andersen LLP's lack of consent:
Representatives of Arthur Andersen are not available to consent to the inclusion
of their report on the financial statements of Harken in this prospectus, and
you will not be able to recover against Arthur Andersen under Section 11 of the
Securities Act of 1933, as amended.
Arthur Andersen was our independent accountant for our consolidated
financial statements for the two years ended December 31, 2000. Representatives
for Arthur Andersen are not available to provide the consent required for the
inclusion of their report on those financial statements incorporated in this
prospectus, and we have dispensed with the requirement to file their consent in
reliance upon Rule 437a of the Securities Act of 1933, as amended. Because
Arthur Andersen has not consented to the inclusion of their report in this
prospectus, you will not be able to recover against Arthur Andersen under
Section 11 of the Securities Act of 1933, as amended, for any false or
misleading statements of a material fact contained in the financial statements
audited by Arthur Andersen that are incorporated by reference or any omissions
to state a material fact required to be stated therein. Any claims against
Arthur Andersen related to any such false or misleading statements and omissions
may be limited.
26
OUR COMPANY
Our company explores for, develops and produces oil and gas both
domestically and internationally. Our domestic operations are primarily located
in the onshore and offshore Gulf Coast regions of South Texas and Louisiana, in
portions of West Texas and the Texas Panhandle. Our international operations are
primarily concentrated in Colombia, Costa Rica, Peru and Panama. For a more
detailed description of the business of our Company, see our annual report on
Form 10-K for the year ended December 31, 2001, as amended, which is
incorporated herein by reference.
Our company was incorporated in 1973 in the State of California and
reincorporated in 1979 in the State of Delaware. Our principal offices are
located at 580 WestLake Park Boulevard, Suite 600, Houston, Texas 77079, and our
telephone number is (281) 504-4000.
USE OF PROCEEDS
The maximum net proceeds to us from the sale of our common stock in
this rights offering are estimated to be approximately $9.6 million after
deducting estimated offering expenses allocable to and payable by Harken.
We are required to use the net proceeds of the rights offering to
fully repay a $5 million loan, and accrued interest, made to us by Lyford during
2002 that is evidenced by the Lyford Notes with an annual interest rate of 10%,
which are due by their terms in 2005 but must be prepaid upon completion of the
rights offering. The proceeds of the Lyford Notes were used by us for
repurchasing certain 5% European Notes and Benz Notes and for working capital
purposes. In purchasing shares pursuant to its Standby Commitment, Lyford is
entitled to offset the purchase amount to satisfy this loan without any further
action or approval from Harken.
We intend to use the remaining estimated $4.6 million of net proceeds
to reduce a portion of the indebtedness described below or as additional working
capital for our business:
Indebtedness Current Balance Interest Rate Maturity Date
----------------------------- --------------- ------------- -------------
5% European Notes $29,030,000 5% May 26, 2003
Benz Notes $ 5,668,707 5% Nov 26, 2003
Guaranty Bank Credit Facility $ 5,977,000 4.58% Dec 6, 2005
If Lyford does not close its Standby Commitment and we consummate the
rights offering, we are required to use 60% of the net proceeds of the rights
offering to repay the Lyford Notes within 30 days of our receipt of such
proceeds. Any remaining proceeds will be used to reduce the indebtedness set
forth above or for additional working capital.
See "Risk Factors - Risks relating to this rights offering - The
proceeds from the rights offering will not be sufficient to repay our
outstanding debt obligations and there is no assurance that we will obtain
sufficient funds prior to such debts' maturity dates" on page .
---
27
CAPITALIZATION
The following table shows our capitalization as of September 30, 2002 and
as adjusted for subsequent events. The table also includes our capitalization on
a pro forma basis assuming the completion of the rights offering and the use of
the entire amount of net proceeds to repay indebtedness as described under "Use
of Proceeds" above (including repayment of the Lyford Notes).
Pro Forma
September 30, 2002 for Rights Offering
------------------------------- ---------------------------
As Reported Adjustments(1) Adjustments Pro Forma
------------- -------------- ----------- -------------
Current liabilities $ 46,834,000 (6,287,000) $ 36,477,000
(4,070,000)
Long-term debt:
Convertible notes payable $ 12,525,000 4,070,000 $ 16,595,000
New bank credit facility -- 5,977,000 5,977,000
Investor term loan (Lyford) 5,000,000 -- (5,000,000) --
Accrued preferred stock dividends 6,395,000 [(6,395,000)] --
Other long-term obligations 5,414,000 -- 5,414,000
------------- ----------- -------------
Total long-term debt 29,334,000 3,652,000 27,986,000
------------- ----------- -------------
Minority interest in consolidated
subsidiary 1,915,000 1,915,000
------------- ----------- -------------
Stockholders' equity:
Series G1 preferred stock 404,000 (1,000) 403,000
Series G2 preferred stock 93,000 ______ 93,000
Common stock 254,000 9,000 952,000 1,215,000
Additional paid-in capital 388,780,000 6,394,000 [9,048,000] 404,214,000
Accumulated deficit (377,371,000) -- (377,371,000)
Accumulated other
comprehensive income (315,000) (315,000)
Treasury stock, at cost (1,441,000) -- (1,441,000)
------------- ----------- -------------
Total stockholders' equity 10,404,000 6,394,000 10,000,000 26,798,000
------------- ----------- -------------
Total capitalization $ 88,487,000 $ (311,000) $ 93,176,500
------------- ----------- -------------
----------
(1) Reflects the (i) issuance of $4,070,000 in principal amount of 5%
European Notes due 2003 exchanged for $4,070,000 in principal amount of 7% Notes
due 2007, (ii) [issuance of common stock as payment of accrued preferred stock
dividends,] (iii) refinancing of existing credit facility due 2003 with new
credit facility due 2005 and (iv) repurchase of preferred stock.
28
THE RIGHTS OFFERING
Before exercising any subscription rights, you should read carefully
the information set forth under "Risk Factors" beginning on page of this
--
prospectus.
Subscription Rights
We are distributing to the holders of record of our common stock,
Series G1 preferred stock and Series G2 preferred stock on , 2003,
--------------
at no charge, one nontransferable subscription right for each share of our
common stock they own (or, in the case of the Series G1 preferred stock and
Series G2 preferred stock, one subscription right for each share of common stock
issuable upon conversion). The subscription rights will be evidenced by rights
certificates. Each subscription right will entitle the holder to purchase
shares of our common stock. You are not required to exercise any or all
-------
of your subscription rights.
If, pursuant to your exercise of your subscription rights, the number
of shares of common stock you are entitled to receive would result in your
receipt of fractional shares, the aggregate number of shares issued to you will
be rounded up to the nearest whole number.
Subscription Price
The subscription price for a subscription right is $ per right (or
---
$ per share). The per share price equals 70% of our current market price of
--
our common stock determined by averaging the closing price of our common stock
on the American Stock Exchange for the five trading days immediately preceding
the commencement of our offering.
Determination of Subscription Price
Our board of directors set all of the terms and conditions of the
rights offering, including the subscription price. In establishing the
subscription price, our board of directors considered the following factors:
. strategic alternatives for capital raising,
. the market price of our common stock,
. our negotiations with Lyford as standby purchaser,
. the pricing of similar transactions,
. the amount of proceeds desired,
. our business prospects, and
. general conditions in the securities markets.
29
We determined the 30% discount to our current market price during
negotiations with Lyford for their Standby Commitment and after taking into
account the preceding factors. The subscription price does not necessarily bear
any relationship to our past or expected future results of operations, cash
flows, current financial condition, or any other established criteria for value.
No change will be made to the cash subscription price by reason of changes in
the trading price of our common stock prior to the closing of the rights
offering.
We did not seek or obtain any opinion of financial advisors or investment
bankers in establishing the subscription price for the offering. You should not
consider the subscription price as an indication of the value of Harken or our
common stock. We cannot assure you that you will be able to sell shares
purchased during this offering at a price equal to or greater than the
subscription price. On , 2003, the last reported sale price of
---------------
our common stock was $ per share. See "Risk Factors" on page .
--------- --
Expiration Date, Extensions and Termination
You may exercise your subscription right at any time before 5:00 p.m.,
New York City time, on , 2003, the expiration date for the rights
--------------
offering. However, we may extend the offering period for exercising your
subscription rights from time to time in our sole discretion, with such
extension not to exceed 30 business days. If you do not exercise your
subscription rights before the expiration date, your unexercised subscription
rights will be null and void. We will not be obligated to honor your exercise of
subscription rights if the Subscription Agent receives the documents relating to
your exercise after the rights offering expires, regardless of when you
transmitted the documents, except when you have timely transmitted the documents
under the guaranteed delivery procedures described below.
We have the sole discretion to extend the expiration date from time to
time by giving oral or written notice to the Subscription Agent on or before the
scheduled expiration date. If we elect to extend the expiration of the rights
offering, we will issue a press release announcing the extension no later than
9:00 a.m., New York City time, on the next business day after the most recently
announced expiration date.
We may unilaterally terminate or withdraw the rights offering until
the time the share certificates are actually distributed.
Reasons for the Rights Offering
In approving the rights offering and recommending the rights offering
to our stockholders, our board of directors carefully considered our need for
additional capital and several alternative capital raising methods. We have
already utilized some of these alternatives, including the sale of certain of
Harken's producing domestic properties, the entering into additional long-term
borrowing agreements and the attempt to sell portions of our ownership interest
in our subsidiary, Global Energy Development PLC. The board of directors also
considered the potential change in control caused by the Standby Commitment of
Lyford and the dilution of the ownership percentage of our current common
stockholders caused by the rights offering. While the ownership percentage of
our current common stockholders will decrease because holders of convertible
preferred stock will also receive subscription rights, the board of directors
considered that the magnitude of this dilution would be subject to, and
dependent upon, the decision of
30
each common stockholder whether to subscribe for additional shares in Harken in
the rights offering. In addition, the board of directors considered that the
rights offering would only occur if a majority of our stockholders approved the
transaction. Even if some stockholders other than Lyford exercise their rights,
Lyford could still obtain a majority ownership interest pursuant to its Standby
Commitment. As a result, Lyford may have the voting power to control the
election of our board of directors and the approval of other matters presented
for consideration by our stockholders, which could include amendments to our
charter, mergers, acquisitions and various corporate governance actions. Our
board of directors further considered that [the rights offering was approved by
a vote of our stockholders on January 29, 2003.]
After weighing the factors discussed above and the effect of the
rights offering of generating $10 million in additional capital for us, the
board of directors believes that the rights offering is the best alternative for
capital raising and is in the best interests of our Company and our
stockholders. As described in "Use of Proceeds" on page , the proceeds of the
--
rights offering are intended to be used to repay the Lyford Notes and to reduce
our convertible debt that matures next year and/or other indebtedness, and to
generate additional working capital for our business. To the extent we are
unable to reduce our indebtedness due next year prior to its maturity, we will
have to pay such notes in cash, redeem the notes by converting them into common
stock and/or otherwise restructure the notes. There can be no assurance that we
would be successful in restructuring its obligations under the then-outstanding
notes, have sufficient authorized shares to redeem such notes, or would have
available sufficient funds to pay such notes in cash upon maturity. See "Risk
Factors" on page .
--
Our board of directors believes that the rights offering will
ultimately strengthen our financial condition through generating additional
cash, reducing our indebtedness, and increasing our stockholders' equity. See
"Use of Proceeds" on page and "Capitalization" on page . However, our board
-- --
of directors is not making any recommendation as to whether you should exercise
your subscription rights.
Standby Commitment of Lyford
On September 6, 2002, we entered into a standby purchase agreement
with Lyford that defines our rights and obligations, and the rights and
obligations of Lyford, with respect to Lyford's Standby Commitment. This
agreement was amended on November 22, 2002. The following description of the
standby purchase agreement does not purport to be complete. A copy of the
standby purchase agreement, as amended, has been filed as an exhibit to the
registration statement (File No. 333-99579) of which this prospectus forms a
part. We urge you to carefully read that entire agreement, as amended.
The principal of Lyford is Phyllis Quasha, who's son, Alan G. Quasha,
is a former member of our board of directors and the former Chairman of Harken.
Since Mr. Quasha's resignation from our board of directors in 1994, Mr. Quasha
has continued to be a stockholder of Harken for a period of time. Prior to
entering into the standby purchase agreement, Lyford and its affiliates owned no
shares of our common stock. However an affiliate of Lyford purchased shares in
our subsidiary, Global Energy Development PLC, during that subsidiary's March
2002 offering at the offering price. These shares are listed on the AIM Exchange
in London. Harken proposed the standby purchase agreement to Lyford in early
Summer 2002, and such negotiations were finalized during September 2002. Lyford
agreed to enter into the standby purchase agreement after considering: (i) the
Lyford Notes, plus accrued interest, must be prepaid from proceeds from sales of
our common stock, including the proceeds from the rights offering; (ii) its
existing investment in Global Energy Development PLC; and (iii) the additional
common stock to be received as a Standby Commitment Fee (as defined below).
31
The standby purchase agreement obligates us to sell, and requires
Lyford to subscribe for and purchase from us, a number of shares of common stock
equal to the Shortfall divided by the subscription price per share. The
"Shortfall" is the amount by which $10,000,000 exceeds the aggregate
subscription price to be paid by our stockholders who subscribe for and purchase
shares in the offering.
As compensation to Lyford for its Standby Commitment, we paid Lyford a
Standby Commitment Fee of $600,000 by issuing 1,714,286 shares of common stock
to Lyford (the "Standby Commitment Fee Shares"), with each such share being
attributed a value of $0.35. We have also paid Lyford $50,000 in cash for its
legal fees in connection with this offering.
We will notify Lyford if the rights offering will not occur, was not
approved by the stockholders or was terminated by us. In such an event, the
standby purchase agreement will terminate, except for certain provisions
regarding indemnification and Lyford's right to retain one-half of the Standby
Commitment Fee Shares. Within 30 days from the termination date, Lyford will
either (i) return the other half of the Standby Commitment Fee Shares to us, or
(ii) retain all of the Standby Commitment Fee Shares and remit to us $300,000.
If Lyford does not close its Standby Commitment due to our not satisfying
certain of the conditions precedent and we have not terminated the rights
offering, Lyford is entitled to retain the entire Standby Commitment Fee.
The obligation of Lyford to exercise its Standby Commitment will be
subject to the following conditions:
. the registration statement, of which this prospectus forms a
part, must be declared effective, and no stop order suspending
the effectiveness of the registration statement has been issued
and no proceedings for that purpose have been instituted or
threatened,
. we have provided a certificate to Lyford, certifying, among other
things, that:
. our representations and warranties in the standby purchase
agreement were true on the date we signed the agreement and
are true on the closing date of the Standby Commitment,
. we have complied with all the agreements and satisfied all
the conditions on our part to be performed or satisfied at
or prior to the execution of the agreement or the closing
date of the Standby Commitment, as applicable,
. there is no stop order in effect (or, to our knowledge,
threatened) with respect to the registration statement, and
. there has been no material adverse change in our (and our
subsidiaries') condition (financial or other), earnings,
business, business prospects or properties, whether or not
arising from transactions in the ordinary course of
business,
. there has not been any change, or any development involving a
prospective change, in or affecting our business (including the
results of operations or management) or our properties (including
our subsidiaries) the effect of which is, in the reasonable
judgment of Lyford, so
32
material and adverse as to make it impractical or inadvisable to
proceed with the offering or the delivery of the common stock,
. we must mail the subscription certificates for the rights in a
timely fashion,
. we must advise Lyford from time to time as to the number of
shares subscribed for and the number of unsubscribed shares,
along with any other information requested by Lyford, and
. trading in the common stock has not been suspended by the SEC or
the American Stock Exchange, or trading in securities generally
on the American Stock Exchange has not been suspended or limited.
In the event that Lyford does not close its Standby Commitment, we intend to
still consummate the rights offering.
Under the terms of the standby purchase agreement, we agreed to
indemnify Lyford and its members against claims and liabilities arising out of
or based upon any untrue statement or alleged untrue statement of any material
fact contained in this prospectus, the registration statement of which it forms
a part, any amendment or supplement thereto, or claims and liabilities arising
out of the omission or alleged omission to state therein a material fact
required to be stated therein or necessary to make the statements therein not
misleading. We also agreed to reimburse Lyford and its members for any legal or
other expenses reasonably incurred by them in connection with investigating or
defending any such actions or claims asserting liabilities against them.
On July 15, 2002 and August 29, 2002, we borrowed an aggregate
principal amount of $5 million from Lyford in exchange for the issuance of the
Lyford Notes. The Lyford Notes provided that the principal was to be repaid in
two installments, consisting of a payment of $3 million due on July 15, 2005 and
a payment of $2 million due on August 29, 2005. Interest on the Lyford Notes was
to be paid quarterly, at the rate of 10% per annum, beginning December 15, 2002
and was to continue until all principal and interest was paid in full. The
Lyford Notes are unsecured. Under the terms of the Lyford Notes, we are
generally required to use 60% of the net proceeds of any sale of our common
stock for cash to repay the Lyford Notes within 30 days after our receipt of
such proceeds. Upon the consummation of this offering we are required to repay
to Lyford the entire unpaid principal and accrued interest due under the Lyford
Notes pursuant to Lyford's Standby Commitment. In purchasing shares pursuant to
its Standby Commitment, Lyford is entitled to offset an amount to satisfy the
Lyford Notes without any further subsequent action or approval from Harken. Even
if Lyford does not close its Standby Commitment, we are required to use 60% of
the net proceeds of the rights offering to repay the Lyford Notes within 30 days
of our receipt of such proceeds.
In connection with the Lyford Notes, Lyford received warrants to
purchase 7,000,000 shares of our subsidiary, Global Energy Development PLC, at a
price of 50 pence per share. These warrants expire in 2005. As of December 2,
2002, 2002, Lyford owned 1,714,286 shares of our common stock, and affiliates of
Lyford do not own any shares of our common stock.
Depending on the total amount of shares purchased in the offering by
our stockholders, Lyford may purchase up to all of the shares of our common
stock available in this offering pursuant to its subscription rights received as
a stockholder and its Standby Commitment. If our other stockholders
33
purchase all of the shares offered for sale, Lyford will not purchase any shares
pursuant to its Standby Commitment (other than pursuant to the rights that
Lyford may exercise as a stockholder) and could own up to % of the common
--
stock outstanding. If no stockholders other than Lyford exercise their
subscription rights, Lyford will purchase up to shares in the
-------------
offering. This amount does not include the Standby Commitment Fee Shares. In
that case, Lyford's ownership interest could be approximately %, and the
---
ownership interest of the outstanding remaining stockholders could decrease to
approximately %. Even if some stockholders other than Lyford exercise their
---
rights, Lyford could still obtain a majority ownership interest pursuant to its
Standby Commitment. As a result, Lyford may have the voting power to control the
election of our board of directors and the approval of other matters presented
for consideration by the stockholders, which could include amendments to our
charter, mergers, acquisitions and various corporate governance actions.
Lyford has advised us that it does not intend to resell any shares of
common stock, including any shares acquired in the rights offering, but rather
intends to retain such shares for investment purposes. Lyford has advised us
that it does not currently have any plans or proposals with respect to any
extraordinary corporate transactions involving Harken or any sale of its assets
or any change in our board of directors, management, capitalization, dividend
policy, charter or bylaws, or any other change in our business or corporate
structure or with respect to the delisting or deregistration of any of our
securities. Lyford has also advised us, however, that any determination to
retain its interest in Harken will be subject to the continuing evaluation by
the individual members of Lyford of pertinent factors related to its investment
in Harken. Depending upon the continuing assessment of these factors from time
to time, Lyford may change its present intentions and may determine to acquire
additional shares of common stock (by means of open market or privately
negotiated purchases or otherwise) or to dispose of some or all of the shares of
common stock or warrants held by Lyford and its partners. See "Plan of
Distribution" on page .
--
Non-transferability of the Subscription Rights
Except in the limited circumstances described below, only you may
exercise your subscription rights. You may not sell, give away or otherwise
transfer your subscription rights.
Notwithstanding the foregoing, you may transfer your subscription
rights to any affiliate of yours and your subscription rights also may be
transferred by operation of law; for example, a transfer of subscription rights
to the estate of the recipient upon the death of the recipient would be
permitted. If the subscription rights are transferred as permitted, evidence
satisfactory to us that the transfer was proper must be received by us prior to
the expiration date of the rights offering.
Withdrawal and Amendment
We reserve the right to withdraw or terminate this rights offering at
any time for any reason. In the event that this offering is withdrawn or
terminated, all funds received from subscriptions by stockholders will be
returned. Interest will not be payable on any returned funds.
We reserve the right to amend the terms of this rights offering. If we
make an amendment that we consider significant, we will:
. mail notice of the amendment to all stockholders of record as of the
record date;
34
. extend the expiration date by at least 10 days; and
. offer all subscribers no less than 10 days to revoke any subscription
already submitted.
The extension of the expiration date will not, in and of itself, be
treated as a significant amendment for these purposes.
Method of Subscription - Exercise of Subscription Rights
You may exercise your subscription rights by delivering the following
to the Subscription Agent, at or prior to 5:00 p.m., New York City time, on
, 2003, the date on which the subscription rights expire:
--------------
. your properly completed and executed rights certificate with any
required signature guarantees or other supplemental documentation; and
. your full subscription price payment for each share subscribed for
under your subscription right.
Certificates for Shares of Common Stock
As soon as practicable after the expiration of the rights offering and
the valid exercise of subscription rights, the Subscription Agent will mail to
each exercising subscription rights holder certificates representing shares of
our common stock purchased pursuant to the subscription right.
Method of Payment
Payment for the shares must be made by check or bank draft (cashier's
check) drawn upon a United States bank or a money order payable to "American
Stock Transfer & Trust Company, as Subscription Agent" or by wire transfer of
immediately available funds to the account maintained by the Subscription Agent
at the Chase Manhattan Bank, ABA #021000021, Account No. 323-113060. In the case
of persons acquiring shares at an aggregate subscription price of $1,000,000 or
more, an alternative payment method may be arranged with the Subscription Agent
and approved by us.
Any wire transfer of funds should clearly indicate the identity of the
subscriber who is paying the subscription price by the wire transfer. Payment
will be deemed to have been received by the Subscription Agent only upon:
. receipt and clearance of any uncertified check,
. receipt by the Subscription Agent of any certified check or bank draft
drawn upon a United States bank, any money order or any funds
transferred by wire transfers, or
. receipt of good funds in the Subscription Agent's account designated
above.
Please note that funds paid by uncertified personal check may take at
least five business days to clear. Accordingly, if you wish to pay by means of
an uncertified personal check, we urge you to make
35
payment sufficiently in advance of the expiration date of the rights offering to
ensure that the Subscription Agent receives cleared funds before that date. We
also urge you to consider payment by means of a certified or cashier's check or
money order.
Delivery of Subscription Materials and Payment
You should deliver your rights certificate and payment of the
subscription price or, if applicable, notices of guaranteed delivery, to the
Subscription Agent by mail, by hand or by overnight courier to:
American Stock Transfer & Trust Company
Attention: Rights Agent
59 Maiden Lane
New York, N.Y. 10038
The Subscription Agent's telephone number is (800) - , and its
--- ----
facsimile number is (718) 234-5001.
Your delivery to an address other than the address set forth above
will not constitute valid delivery.
Guaranteed Delivery Procedures
If you wish to exercise your subscription rights, but you do not have
sufficient time to deliver the rights certificate evidencing your subscription
rights to the Subscription Agent on or before the time your subscription rights
expire, you may exercise your subscription rights by the following guaranteed
delivery procedures:
. deliver your subscription price payment in full for each share you
subscribed for under your subscription rights in the manner set forth
under "- Delivery of Subscription Materials and Payment" on page to
--
the Subscription Agent on or prior to the expiration date,
. deliver the form entitled "Notice of Guaranteed Delivery,"
substantially in the form provided with the "Instructions as to Use of
Harken Energy Corporation Rights Certificates" distributed with your
rights certificates at or prior to the expiration date, and
. deliver the properly completed rights certificate evidencing your
subscription rights being exercised and the related nominee holder
certification, if applicable, with any required signatures guaranteed,
to the Subscription Agent within three business days following the
date of your Notice of Guaranteed Delivery.
Your Notice of Guaranteed Delivery must be delivered in substantially
the same form provided with the Instructions as to Use of Harken Energy
Corporation Rights Certificates, which will be distributed to you with your
rights certificate. Your Notice of Guaranteed Delivery must come from an
eligible institution, or other eligible guarantee institutions which are members
of, or participants in, a signature guarantee program acceptable to the
Subscription Agent.
In your Notice of Guaranteed Delivery, you must state:
36
. your name,
. the number of subscription rights represented by your rights
certificates and the number of shares of our common stock you are
subscribing for under your subscription right, and
. your guarantee that you will deliver to the Subscription Agent any
rights certificates evidencing the subscription rights you are
exercising within three business days following the date the
Subscription Agent receives your Notice of Guaranteed Delivery.
You may deliver your Notice of Guaranteed Delivery to the Subscription
Agent in the same manner as your rights certificates at the address set forth
above under "- Delivery of Subscription Materials and Payment" on page . You
--
may alternatively transmit your Notice of Guaranteed Delivery to the
Subscription Agent by facsimile transmission (Facsimile No.: (718) 234-5001). To
confirm facsimile deliveries, you may call (718) 921-8237.
The Subscription Agent will send you additional copies of the form of
Notice of Guaranteed Delivery if you need them. Please call (718) 921-8237 to
request any copies of the form of Notice of Guaranteed Delivery.
No Revocation
Once you have exercised your subscription rights, you may not revoke
your exercise. Subscription rights not exercised prior to the expiration date of
the rights offering will expire.
Calculation of Subscription Rights Exercised
If you do not indicate the number of subscription rights being
exercised, or do not forward full payment of the total subscription price for
the number of subscription rights that you indicate are being exercised, then
you will be deemed to have exercised your subscription right with respect to the
maximum number of subscription rights that may be exercised with the aggregate
subscription price payment you delivered to the Subscription Agent. If we do not
apply your full subscription price payment to your purchase of shares of our
common stock, we will return the excess amount to you by mail without interest
or deduction as soon as practicable after the expiration date of the rights
offering.
Your Funds Will be Held by the Subscription Agent Until Shares of Common Stock
are Issued
The Subscription Agent will hold your payment of the subscription
price payment in a segregated account with Chase Manhattan Bank with other
payments received from other rights holders until we issue your shares to you.
If the rights offering is not completed, the Subscription Agent will return
promptly, without interest, all subscription payments.
Signature Guarantee May be Required
Your signature on each rights certificate must be guaranteed by an
eligible institution such as a member firm of a registered national securities
exchange or a member of the National Association of
37
Securities Dealers, Inc., or from a commercial bank or trust company having an
office or correspondent in the United States, subject to standards and
procedures adopted by the Subscription Agent, unless:
. your rights certificate provides that shares are to be delivered to
you as record holder of those subscription rights, or
. you are an eligible institution.
Notice to Beneficial Holders
If you are a broker, a trustee or a depositary for securities who
holds shares of our common stock for the account of others on ,
--------------
2003, the record date for the rights offering, you should notify the respective
beneficial owners of such shares of the rights offering as soon as possible to
find out their intentions with respect to exercising their subscription rights.
You should obtain instructions from the beneficial owner with respect to the
subscription rights, as set forth in the instructions we have provided to you
for your distribution to beneficial owners. If the beneficial owner so
instructs, you should complete the appropriate rights certificates and submit
them to the Subscription Agent with the proper payment. If you hold shares of
our common stock for the account(s) of more than one beneficial owner, you may
exercise the number of subscription rights to which all such beneficial owners
in the aggregate otherwise would have been entitled had they been direct record
holders of our common stock on the record date for the rights offering, provided
that, you, as a nominee record holder, make a proper showing to the Subscription
Agent by submitting the form entitled "Nominee Holder Certification" which we
will provide to you with your rights offering materials.
Beneficial Owners
If you are a beneficial owner of shares of our common stock or will
receive your subscription rights through a broker, custodian bank or other
nominee, we will ask your broker, custodian bank or other nominee to notify you
of this rights offering. If you wish to exercise your subscription rights, you
will need to have your broker, custodian bank or other nominee act for you. If
you hold certificates of our common stock directly and would prefer to have your
broker, custodian bank or other nominee exercise your subscription rights, you
should contact your nominee and request it to effect the transaction for you. To
indicate your decision with respect to your subscription rights, you should
complete and return to your broker, custodian bank or other nominee the form
entitled "Beneficial Owners Election Form." You should receive this form from
your broker, custodian bank or other nominee with the other rights offering
materials. If you wish to obtain a separate rights certificate, you should
contact the nominee as soon as possible and request that a separate rights
certificate be issued to you.
Instructions for Completing your Rights Certificate(s)
You should read and follow the instructions accompanying the rights
certificate(s) carefully.
If you want to exercise your subscription rights, you should send your
rights certificate(s) with your subscription price payment to the Subscription
Agent. Do not send your rights certificate(s) or subscription price payment to
us.
You are responsible for the method of delivery of your rights
certificate(s) with your subscription
38
price payment to the Subscription Agent. If you send your rights certificate(s)
and subscription price payment by mail, we recommend that you send them by
registered mail, properly insured, with return receipt requested. You should
allow a sufficient number of days to ensure delivery to the Subscription Agent
prior to the time the rights offering expires.
Determinations Regarding the Exercise of your Subscription Rights
We will decide all questions concerning the timeliness, validity, form
and eligibility of your exercise of your subscription rights and our
determinations will be final and binding. We, in our sole discretion, may waive
any defect or irregularity, or permit a defect or irregularity to be corrected
within such time as we may determine. We may reject the exercise of any of your
subscription rights because of any defect or irregularity. We will not receive
or accept any subscription until all irregularities have been waived by us or
cured by you within such time as we decide, in our sole discretion.
Neither we nor the Subscription Agent will be under any duty to notify
you of any defect or irregularity in connection with your submission of rights
certificates, and we will not be liable for failure to notify you of any defect
or irregularity. We reserve the right to reject your exercise of subscription
rights if your exercise is not in accordance with the terms of the rights
offering or in proper form. We will also not accept your exercise of
subscription rights if our issuance of shares of our common stock to you could
be deemed unlawful under applicable law or is materially burdensome to us.
If you are given notice of a defect in your subscription, you will
have five business days after the giving of notice to correct it. You will not,
however, be allowed to cure any defect later than 5:00 p.m., New York City time,
on , 2003. We will not consider an exercise to be made until all defects
-------
have been cured or waived.
Regulatory Limitation
We will not be required to issue to you shares of common stock
pursuant to the rights offering if, in our opinion, you would be required to
obtain prior clearance or approval from any state or federal regulatory
authorities to own or control such shares if, at the time the subscription
rights expire, you have not obtained such clearance or approval.
Procedures for DTC Participants
We expect that your exercise of your subscription rights may be made
through the facilities of the Depository Trust Company, or DTC. If your
subscription rights are held of record through DTC, you may exercise your
subscription rights by instructing DTC to transfer your subscription rights from
your account to the account of the Subscription Agent, together with
certification as to the aggregate number of subscription rights you are
exercising and the number of shares of our common stock you are subscribing for,
and your subscription price payment for each share you subscribed for pursuant
to your subscription rights.
Foreign or Other Stockholders Located Outside the United States
Rights certificates will be mailed to rights holders whose addresses
are outside the United States or who have an Army Post Office or Fleet Post
Office address. To exercise such subscription rights, you
39
must notify the Subscription Agent, and take all other steps that are necessary
to exercise your subscription rights, on or prior to the expiration date of the
rights offering. If the procedures set forth in the preceding sentence are not
followed prior to the expiration date, your subscription rights will expire.
No Board Recommendation
An investment in shares of our common stock must be made according to
each investor's evaluation of its own best interests. Accordingly, our board of
directors makes no recommendation to rights holders regarding whether they
should exercise their rights.
Shares of Common Stock Outstanding after the Rights Offering
Upon the issuance of the shares of common stock offered in the rights
offering, shares of common stock will be issued and outstanding. This
--------
would represent an approximate % increase in the number of outstanding shares
--
of common stock. Because we are providing rights to holders of our preferred
convertible stock, the ownership percentage of common stock that you hold will
likely decrease as a result of the rights offering even if you fully exercise
your subscription rights. See "Risk Factors" on page .
--
Effects of Rights Offering on our Stock Option Plans and Other Convertible
Securities
As of December 2, 2002, there were outstanding options to purchase
approximately 1.5 million shares of common stock issued or committed to be
issued pursuant to stock options granted by Harken. None of the outstanding
options have anti-dilution or other provisions of adjustment to exercise price
or number of shares which will be automatically triggered by the rights
offering. Each outstanding and unexercised option will remain unchanged and will
be exercisable for the same number of shares of common stock and at the same
exercise price as before the rights offering. Further, as of , we may
-----------
be required to issue approximately million shares of common stock pursuant
---
to securities exercisable or convertible into shares of common stock. These
securities have anti-dilution or other provisions of adjustment to exercise
price or number of shares which will be automatically triggered by the rights
offering.
Other Matters
We are not making this rights offering in any state or other
jurisdiction in which it is unlawful to do so, nor are we selling or accepting
any offers to purchase any shares of our common stock from rights holders who
are residents of those states or other jurisdictions. We may delay the
commencement of the rights offering in those states or other jurisdictions, or
change the terms of the rights offering, in order to comply with the securities
law requirements of those states or other jurisdictions. We may decline to make
modifications to the terms of the rights offering requested by those states or
other jurisdictions, in which case, if you are a resident in those states or
jurisdictions you will not be eligible to participate in the rights offering.
Fees and Expenses
We will pay all fees charged by the Subscription Agent. You are
responsible for paying any other commissions, fees, taxes or other expenses
incurred in connection with the exercise of the subscription
40
rights. Neither Harken nor the Subscription Agent will pay such expenses.
Issuance of Stock Certificates
Stock certificates for shares purchased in this rights offering will
be issued as soon as practicable after the expiration date. Our Subscription
Agent, American Stock Transfer & Trust Company, will deliver subscription
payments to us only after consummation of this rights offering and the issuance
of stock certificates to our stockholders that exercised rights. Unless you
instruct otherwise in your subscription certificate form, shares purchased by
the exercise of subscription rights will be registered in the name of the person
exercising the rights.
Subscription Agent
We have appointed American Stock Transfer & Trust Company as
Subscription Agent for the rights offering. We will pay the fees and certain
expenses of the Subscription Agent, which we estimate will total $ .
-------------
Under certain circumstances, we may indemnify the Subscription Agent from
certain liabilities that may arise in connection with the rights offering.
Important
Please carefully read the instructions accompanying the subscription
certificate and follow those instructions in detail. Do not send subscription
certificates directly to us. You are responsible for choosing the payment and
delivery method for your subscription certificate, and you bear the risks
associated with such delivery. If you choose to deliver your subscription
certificate and payment by mail, we recommend that you use registered mail,
properly insured, with return receipt requested. We also recommend that you
allow a sufficient number of days to ensure delivery to the Subscription Agent
and clearance of payment prior to , 2003. Because uncertified
--------------
personal checks may take at least five business days to clear, we strongly urge
you to pay, or arrange for payment, by means of certified or cashier's check or
money order.
If You Have Questions
If you have questions or need assistance concerning the procedure for
exercising subscription rights, or if you would like additional copies of this
prospectus, the Instructions as to the Use of Harken Energy Corporation Rights
Certificates or the Notice of Guaranteed Delivery, you should contact either the
Subscription Agent or Harken at the following addresses and telephone numbers:
American Stock Transfer & Trust Company
Attention: Rights Agent
59 Maiden Lane
New York, N.Y. 10038
Telephone: (800) -
--- ----
or
Harken Energy Corporation
580 WestLake Park Boulevard, Suite 600
Houston, Texas 77079
41
Attention: A. Wayne Hennecke
(281) 504-4000
CERTAIN UNITED STATES FEDERAL INCOME TAX CONSEQUENCES
The following discussion is a summary of certain U.S. federal income
tax consequences of the rights offering to holders of common stock, Series G1
preferred stock and Series G2 preferred stock who hold such stock as a capital
asset for federal income tax purposes. This discussion is based on laws,
regulations, rulings and decisions in effect on the date of this prospectus, all
of which are subject to change (possibly with retroactive effect) and to
differing interpretations. This discussion applies only to holders who are U.S.
persons, which is defined as a citizen or resident of the United States, a
domestic partnership, a domestic corporation, any estate (other than a foreign
estate), and any trust so long as a court within the United States is able to
exercise primary supervision over the administration of the trust and one or
more U.S. persons have the authority to control all substantial decisions of the
trust. Generally, for federal income tax purposes an estate is classified as a
"foreign estate" based on the location of the estate assets, the country of the
estate's domiciliary administration, and the nationality and residency of the
domiciliary personal representative.
This discussion does not address all aspects of federal income
taxation that may be relevant to holders in light of their particular
circumstances or to holders who may be subject to special tax treatment under
the Internal Revenue Code of 1986, as amended, including, options or warrants,
holders who are dealers in securities or foreign currency, foreign persons
(defined as all persons other than U.S. persons), insurance companies,
tax-exempt organizations, banks, financial institutions, broker-dealers, holders
who hold stock as part of a hedge, straddle, conversion or other risk reduction
transaction, or who acquired stock pursuant to the exercise of compensatory
stock options or warrants or otherwise as compensation.
We have not sought, and will not seek, an opinion of counsel or a
ruling from the Internal Revenue Service regarding the federal income tax
consequences of the rights offering or the related share issuance. The following
summary does not address the tax consequences of the rights offering or the
related share issuance under foreign, state, or local tax laws. Accordingly, we
urge each holder of common stock, Series G1 preferred stock and Series G2
preferred stock to consult his own tax advisor with respect to the particular
tax consequences of the rights offering or the related share issuance to such
holder.
Holders of Common Stock
The federal income tax consequences to a holder of common stock on the
receipt of subscription rights under the rights offering should be as follows:
. A holder should not recognize taxable income for federal income tax
purposes in connection with the receipt of subscription rights in the
rights offering.
. Except as provided in the following sentence, the tax basis of the
subscription rights received by a holder in the rights offering should
be zero. If either (a) the fair market value of the subscription
rights on the date such subscription rights are distributed is equal
to 15% or greater of the fair market value on such date of the common
stock with respect to which the subscription rights are received or
(b) the holder irrevocably elects, by attaching a statement to its
federal income tax
42
return for the taxable year in which the subscription rights are
received, to allocate part of the tax basis of such common stock to
the subscription rights, then upon exercise of the subscription
rights, the holder's tax basis in the common stock should be allocated
between the common stock and the subscription rights in proportion to
their respective fair market values on the date the subscription
rights are distributed. A holder's holding period for the subscription
rights received in the rights offering should include the holder's
holding period for the common stock with respect to which the
subscription rights were received.
. A holder who allows the subscription rights received in the rights
offering to expire should not recognize any gain or loss, and the tax
basis of the common stock owned by such holder with respect to which
such subscription rights were distributed should be equal to the tax
basis of such common stock immediately before the receipt of the
subscription rights in the rights offering.
. A holder should not recognize any gain or loss upon the exercise of
the subscription rights received in the rights offering.
. The tax basis of the common stock acquired through exercise of the
subscription rights should equal the sum of the subscription price for
the common stock and the holder's tax basis, if any, in the
subscription rights as described above.
. The holding period for the common stock acquired through exercise of
the subscription rights should begin on the date the subscription
rights are exercised.
Holders of Series G1 Preferred Stock and Series G2 Preferred Stock
The federal income tax consequences to a holder of Series G1 or Series
G2 preferred stock on the receipt of subscription rights under the rights
offering should be as follows:
. A holder should be treated as receiving a distribution in an amount
equal to the fair market value of the subscription rights that it
receives.
. To the extent that the distribution is made out of the Company's
earnings and profits, it will be a taxable dividend to the
holder. If amount of the distribution received by the holder
exceeds the holder's proportionate share of the Company's
earnings and profits, the excess will reduce the holder's tax
basis in the stock that it holds, and to the extent that the
excess is greater than the holder's tax basis in its stock, it
will be treated as gain from the sale of the stock. If the holder
has held the stock for more than one (1) year, the gain should be
treated as long-term capital gain.
. A holder's tax basis in the subscription rights that it receives
should equal the fair market value of the subscription rights on the
date of the distribution.
. The holder's holding period in the subscription rights should begin on
the date of the distribution.
. A holder who allows the subscription rights received in the rights
offering to expire should generally recognize a taxable loss. Such
loss will be a capital loss if the common stock to which the
subscription rights relate would have been a capital asset in the
hands of such holder. In the
43
case of individual holders, if such capital loss is incurred in the
same taxable year as the rights offering, it may be used to offset any
capital gains or ordinary income recognized upon the distribution of
the subscription rights; provided, however, in the case of ordinary
income, an individual holder may only offset up to $3,000 of ordinary
income against capital losses within a taxable year.
. A holder should not recognize any gain or loss upon the exercise of
the subscription rights received in the rights offering.
. The tax basis of the common stock acquired through exercise of the
subscription rights should equal the sum of the subscription price for
the common stock and the holder's tax basis in the subscription rights
as described above.
. The holding period for the common stock acquired through exercise of
the subscription rights should begin on the date the subscription
rights are exercised.
PRICE RANGE OF COMMON STOCK AND DIVIDEND POLICY
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."
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, as restated for the effect of the
one-for-ten reverse stock split effected on November 7, 2000.
Prices
--------------
Year Quarter Ended High Low
---- ------------- ------ -----
2000 March 31.............................. $15.00 $6.25
June 30............................... 10.00 5.63
September 30.......................... 9.38 6.25
December 31........................... 6.88 2.38
2001 March 31.............................. $ 6.97 3.05
June 30............................... 3.59 2.27
September 30.......................... 2.39 1.50
December 31........................... 1.75 0.86
2002 March 31.............................. $ 1.28 $0.88
June 30............................... 0.90 0.36
September 30 ......................... 0.47 0.25
December 31........................... -- --
44
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.
DESCRIPTION OF CAPITAL STOCK
Common Stock
Our Certificate of Incorporation (as amended, the "Certificate of
Incorporation") authorizes the issuance of 225,000,000 shares of common stock,
par value $0.01 per share. As of December 2, 2002, there were 24,850,293 shares
of common stock issued and held of record by approximately 19,000 stockholders.
As of such date, there were 595,400 shares of common stock held in the treasury.
Our annual meetings of stockholders are held on the third Monday in
June of each year at 2:00 p.m., Central Standard Time (or on the next secular
day if a legal holiday), unless another day or hour is named in the notice of
the annual meeting. Special meetings of our stockholders may be called by the
chairman of our board of directors, our president or our secretary at the
written request of a majority of the board of directors or stockholders owning
at least 10% of our entire capital stock issued and outstanding and entitled to
vote. The holders of a majority of the our stock issued and outstanding and
entitled to vote, present in person or represented by proxy, constitute a quorum
at all meetings of stockholders, unless otherwise specified in our certificate
of incorporation, as amended, or the General Corporation Law of the State of
Delaware.
Each issued and outstanding share of common stock entitles the holder
thereof to one vote on all matters submitted to a vote of stockholders. The
Certificate of Incorporation permits cumulative voting of shares for any
election of directors, however, it does not permit preemptive rights to
stockholders to acquire additional shares. The Certificate of Incorporation
makes no provisions with respect to subscription or conversion rights,
redemption privileges, or sinking funds with respect to shares of common stock.
The common stock presently issued and outstanding is fully paid and
non-assessable.
The number of directors constituting the full board of directors of
Harken has been established as nine, in accordance with our Bylaws. The
Certificate of Incorporation provides that the number of directors be divided
into Classes A, B and C, with staggered terms of three years each. The Class A,
B and C terms expire in 2003, 2004 and 2005, respectively. Each of the Class A,
B and C directorships consists of three positions. As noted above, the holders
of common stock are entitled to cumulate their votes in the election of
directors by voting the total number of shares of common stock held by them
multiplied by the number of directors to be elected. Because our board of
directors is divided into classes, Harken's stockholders do not have the ability
to cumulate their vote with respect to the entire number of board members at
each annual meeting, but only with respect to the number of nominees for the
particular class of directors to be elected. Further, the classification of our
board of directors could create impediments or otherwise discourage persons from
attempting to gain control of Harken because the director terms do not all
expire at the same time, thereby making it difficult to replace all of the
directors at any one annual meeting. Further, as a result of stockholders having
the right to cumulate their votes in the election of directors, minority
stockholders might be able to elect at least one director in an election for
directors for a particular class, which also might impede or otherwise
discourage persons attempting to gain control of Harken.
45
Upon liquidation, dissolution or winding up of our affairs, holders of
common stock are entitled to receive pro rata all of our assets available for
distribution to stockholders, after payment of any liquidation preference on any
preferred stock outstanding at the time. Subject to the rights of holders of
Preferred Stock (as defined below), dividends on the common stock may be paid
if, as and when declared by the board of directors out of funds legally
available therefor. Harken does not anticipate declaring or paying any cash
dividend on the common stock in the foreseeable future.
Authorized Preferred Stock
Series G1 Preferred Stock
On August 25, 2000, our board of directors approved the authorization and
issuance of up to 700,000 shares of a new series of convertible preferred stock.
The Series G1 Convertible Preferred Stock (the "Series G1 Preferred"), 158,155
shares of which were issued in October 2000 and 325,150 shares of which were
issued in May 2001, has a liquidation value of $100 per share, 158,155 shares of
and is convertible at the holder's option into common stock at a conversion
price of $12.50 per share, subject to adjustment in certain circumstances (the
"Series G1 Preferred Conversion Price"). The Series G1 Preferred is also
convertible by us into shares of common stock if for any period of twenty
consecutive trading days, the average of the closing prices of common stock
during such period has equaled or exceeded the Target Price. The Target Price is
initially defined as the Series G1 Preferred Conversion Price multiplied by 110%
(or $13.75 per share of common stock) and is reduced by an additional $1.10 per
share on each anniversary of the closing date, but not less than a minimum
Target Price of $8.10 per share of common stock. The holders of Series G1
Preferred have no voting rights except as required by law, in which case they
are entitled to one vote per share, and there are no preemptive rights
associated with the Series G1 Preferred.
The Series G1 Preferred holders shall be entitled to receive dividends at
an annual rate equal to $8 per share when, as and if declared by our board of
directors. All dividends on the Series G1 Preferred are cumulative and payable
semi-annually in arrears, payable on June 30 and December 30. At our option,
dividends may also be payable in common stock at $12.50 per share of our common
stock. We also may redeem the Series G1 Preferred in whole or in part for cash
at any time at $100 per share plus any accrued and unpaid dividends. In
addition, on or after June 1, 2004, we may further elect, in any six-month
period, to redeem up to 50% of the outstanding Series G1 Preferred with shares
of common stock valued at an average market price, and using a redemption value
of the Series G1 Preferred that includes a 5% to 10% premium based on our market
capitalization at the time of redemption. As of December 2, 2002, there were
402,688 shares of Series G1 Preferred outstanding.
Series G2 Preferred Stock
In July 2001, we issued 95,800 shares of its Series G2 Convertible
Preferred Stock (the "Series G2 Preferred"), in exchange for our 5% Notes due
May 26, 2002, in the face amount of $9,580,000. Our board of directors approved
the authorization and issuance of up to 400,000 shares of Series G2 Preferred,
which has a liquidation value of $100 per share, and is convertible at the
holder's option into common stock at a conversion price of $3.00 per share,
subject to adjustment in certain circumstances (the "Series G2 Preferred
Conversion Price"). The Series G2 Preferred is also convertible by us into
shares of our common stock if for any period of twenty consecutive calendar
days, the average of the closing prices of our common stock during such period
shall have equaled or exceeded $3.75 per share. The holders of
46
Series G2 Preferred have no voting rights except as required by law, in which
case they are entitled to one vote per share, and there are no preemptive rights
associated with the Series G2 Preferred.
The Series G2 Preferred holders shall be entitled to receive dividends
at an annual rate equal to $8 per share when, as and if declared by our board of
directors. All dividends on the Series G2 Preferred are cumulative and payable
semi-annually in arrears, payable on June 30 and December 30. At our option,
dividends may also be payable in common stock at $3.00 per share of our common
stock. We may also redeem the Series G2 Preferred in whole or in part for cash
at any time at $100 per share plus any accrued and unpaid dividends. In
addition, on or after June 1, 2004, we may further elect, in any six month
period, to redeem up to 50% of the outstanding Series G2 Preferred with shares
of common stock valued at an average market price, and using a redemption value
of the Series G2 Preferred that includes a 5% to 10% premium based on our market
capitalization at the time of redemption. As of December 2, 2002, there were
93,150 shares of Series G2 Preferred outstanding.
Series E Junior Participating Preferred Stock
On April 6, 1998, for purposes of the Rights Agreement (discussed
below), our board of directors approved the authorization and issuance of up to
175,000 shares of Series E Junior Participating Preferred Stock, par value $1
per share (the "Series E Preferred Stock"). As of December 2, 2002, there were
no shares of Series E Preferred Stock outstanding.
Each share of Series E Preferred Stock will be entitled to a minimum
preferential quarterly dividend payment of $10 per share and will be entitled to
an aggregate dividend of 1,000 times the dividend declared per share of our
common stock. In the event of a liquidation, dissolution or winding up of
Harken, the holders of the Series E Preferred Stock will be entitled to a
minimum preferential liquidation payment of $1,000 per share (plus any accrued
but unpaid dividends) and will be entitled to an aggregate payment of 1,000
times the payment made per share of our common stock. Each share of Series E
Preferred Stock will have 1,000 votes and will vote together with the common
stock. In the event of any merger, consolidation or other transaction in which
outstanding shares of our common stock are converted or exchanged, each share of
Series E Preferred Stock will be entitled to receive 1,000 times the amount
received per share of common stock. These rights are protected by customary
anti-dilution provisions. Because of the nature of the Series E Preferred
Stock's dividend, liquidation and voting rights, the value of the one
one-thousandth interest in a share of Series E Preferred Stock purchasable upon
exercise of each Right should approximate the value of one share of common
stock.
Shares of the Series E Preferred Stock may be purchased pursuant to
the terms and conditions of the Rights Agreement.
Rights Plan
On April 6, 1998, our board of directors adopted a stockholder rights
plan and declared a dividend of one preferred share purchase right (a "Right")
for each outstanding share of common stock. The dividend was paid on April 17,
1998 to our stockholders of record on that date. For each share of common stock
received by a stockholder in this rights offering, the stockholder will also
receive one Right. Each Right entitles the holder to purchase from us one
one-thousandth of a share of Series E Preferred Stock at a price of $35.00,
subject to adjustment as set forth in the Rights Agreement (defined below). The
Rights will expire on April 6, 2008.
47
The Rights will be exercisable only if a person or group (an
"Acquiring Person") acquires beneficial ownership of 15% or more of our common
stock (with certain exceptions) or commences a tender or exchange offer to
acquire a total of 15% or more of our common stock. These Rights have certain
anti-takeover effects and may cause substantial dilution to any such person or
group that attempts to acquire Harken. Accordingly, the existence of the Rights
may deter certain acquirors from making takeover proposals or tender offers.
However, the Rights should not interfere with any merger or other business
combination approved by our board of directors since the board of directors may,
at its option, at any time prior to the Rights becoming exercisable, redeem all
but not less than all the then outstanding Rights at $0.01 per Right.
The exercise price of the Rights, the number and kind of securities
for which the Rights are exercisable, and the number of Rights are subject to
adjustment in certain circumstances, including the following scenarios:
. In the event that Harken is acquired in a merger or other business
combination transaction, or 50% or more of its consolidated assets or
earning power are sold, proper provisions will be made so that each
holder of a Right (other than Rights beneficially owned by an
Acquiring Person which will have become void) will thereafter have the
right to receive upon the exercise of a Right that number of shares of
common stock of the person with whom Harken has engaged in the
foregoing transaction (or its parent) which at the time of such
transaction have a market value of two times the exercise price of the
Right.
. At any time after any person or group becomes an Acquiring Person and
prior to the earlier of one of the events described in the previous
paragraph or the acquisition by such Acquiring Person of 50% or more
of the outstanding shares of common stock, the board of directors of
Harken may exchange the Rights (other than Rights owned by such
Acquiring Person which will have become void), in whole or in part,
for shares of common stock or Series E Preferred Stock (or a series of
Harken's preferred stock having equivalent rights, preferences and
privileges), at an exchange ratio of one share of common stock, or a
fractional share of Series E Preferred Stock (or other preferred
stock) equivalent in value thereto, per Right.
The Rights trade in tandem with our common stock on the American Stock
Exchange until they become exercisable. Once becoming exercisable, the Rights
will trade separate from the common stock and may be exchanged under the terms
of the Rights Plan for preferred stock or other securities as may be determined
by the our board of directors at that time.
The description and terms of the Rights are set forth in a Rights
Agreement, dated April 6, 1998, as amended, between Harken and American Stock
Transfer & Trust Company, as successor rights agent (the "Rights Agreement").
For so long as the Rights are redeemable, Harken may amend the Rights Agreement
in any manner except with respect to the redemption price. After the Rights are
no longer redeemable, Harken may, except with respect to the redemption price,
amend the Rights Agreement in any manner that does not adversely affect the
interests of holders of the Rights.
A copy of the Rights Agreement is filed as an exhibit to our Current
Report on Form 8-K dated April 6, 1998, which is incorporated by reference to
this prospectus. The rights and privileges of the
48
Series E Preferred Stock are set forth in the form of Certificate of Designation
which is an exhibit to the Rights Agreement.
Our board of directors has amended the Rights Agreement to allow for
an exemption from the definition of "Acquiring Person" for persons who become
holders of 15% or more of our common stock as a result of (i) holding the 5%
European Notes or the Benz Notes or any shares issued upon conversion, exchange
or redemption of such notes and (ii) rights to subscribe or the purchase of
common stock in connection with the rights offering and the Standby Commitment;
until such person, while the beneficial holder of 15% or more of our common
stock becomes the beneficial owner of additional shares of common stock
consisting of 1% or more of the then outstanding shares of common stock. These
amendments to the Rights Agreement are filed as exhibits to the registration
statement of which this prospectus forms a part.
The foregoing description of the Rights does not purport to be
complete. We urge you to carefully read the Rights Agreement, the Certificate of
Designation for the Series E Preferred Stock and the amendments to the Rights
Agreements in their entirety.
Transfer Agent and Registrar
The transfer agent and registrar for the common stock and preferred
stock is American Stock Transfer & Trust Company, and its address is 59 Maiden
Lane, Plaza Level, New York, New York 10038.
Reports to Stockholders
Harken furnishes its stockholders with annual reports containing
audited financial statements and such other periodic reports as Harken may
determine to be appropriate or as may be required by law. Copies of any such
recent reports are available upon request from American Stock Transfer & Trust
Company.
PLAN OF DISTRIBUTION
We are offering shares of our common stock directly to you pursuant to
this rights offering. We have not employed any brokers, dealers or underwriters
(other than arranging the Standby Commitment of Lyford) in connection with the
solicitation or exercise of subscription rights in this rights offering and no
commissions, fees or discounts will be paid in connection with it. Certain of
our officers and other employees may solicit responses from you, but such
officers and other employees will not receive any commissions or compensation
for such services other than their normal employment compensation.
If any shares of common stock remain unsubscribed after the rights
offering, Lyford has agreed to purchase all such shares at the subscription
price pursuant to its Standby Commitment. Depending on the total amount of
shares purchased in the offering by our stockholders other than Lyford, Lyford
may purchase up to shares of our common stock pursuant to its
------
subscription rights received as a stockholder and its Standby Commitment. The
principal of Lyford is Phyllis Quasha, who's son, Alan G. Quasha, is a former
member of our board of directors and the former Chairman of Harken. Since Mr.
Quasha's resignation from our board of directors in 1994, Mr. Quasha has
continued to be a stockholder of Harken for a period of time. Prior to entering
into the standby purchase agreement, Lyford
49
and its affiliates owned no shares of our common stock. However an affiliate of
Lyford purchased shares in our subsidiary, Global Energy Development PLC, during
that subsidiary's March 2002 offering at the offering price. For additional
details regarding Lyford's Standby Commitment. See "The Rights Offering -
Standby Commitment of Lyford" on page .
--
Lyford has advised us that it does not intend to resell any shares of
common stock acquired in the offering, but rather intends to retain such shares
for investment purposes. Lyford has advised us that it does not currently have
any plans or proposals with respect to any extraordinary corporate transactions
involving Harken or any sale of its assets or any change in its board of
directors, management, capitalization, dividend policy, charter or bylaws, or
any other change in its business or corporate structure or with respect to the
delisting or deregistration of any of its securities. Lyford has also advised
us, however, that any determination to retain its interest in Harken will be
subject to the continuing evaluation by the individual members of Lyford of
pertinent factors related to its investment in us. Depending upon the continuing
assessment of these factors from time to time, Lyford may change its present
intentions and may determine to acquire additional shares of common stock (by
means of open market or privately negotiated purchases or otherwise) or to
dispose of some or all of the shares of common stock or warrants held by Lyford
and its partners.
On July 15, 2002 and August 29, 2002, we borrowed an aggregate
principal amount of $5,000,000 from Lyford in exchange for the issuance of the
Lyford Notes. The Lyford Notes provided that the principal was to be repaid in
two installments, consisting of a payment of $3,000,000 due on July 15, 2005 and
a payment of $2,000,000 due on August 29, 2005. Interest on the promissory notes
was to be paid quarterly, at the rate of 10% per annum, beginning December 15,
2002 and was to continue until all principal and interest was paid in full. The
Lyford Notes are unsecured. Under the terms of the Lyford Notes, we are
generally required to use 60% of the net proceeds of any sale of our common
stock for cash to repay the Lyford Notes within 30 days after our receipt of
such proceeds. Upon the consummation of this offering we are required to repay
to Lyford the entire unpaid principal and accrued interest due under both the
promissory notes pursuant to Lyford's Standby Commitment. In purchasing shares
pursuant to its Standby Commitment, Lyford is entitled to offset an amount to
satisfy the Lyford Notes without any further subsequent action or approval from
Harken. Even if Lyford does not close its Standby Commitment, we are required to
use 60% of the net proceeds of the rights offering to repay the Lyford Notes
within 30 days of our receipt of such proceeds. See "The Rights Offering -
Standby Commitment of Lyford" on page .
--
In connection with the Lyford Notes, Lyford has warrants to purchase
7,000,000 shares of our subsidiary, Global Energy Development PLC, at a price of
50 pence per share. These warrants expire in 2005. As of December 2, 2002, 2002,
Lyford owned 1,714,286 shares of our common stock, and affiliates of Lyford do
not own any shares of our common stock.
We have agreed to indemnify Lyford against certain liabilities
incurred in connection with the offering, including liabilities under the
Securities Act of 1933, as amended.
As compensation to Lyford for its Standby Commitment, we paid Lyford a
Standby Commitment Fee of $600,000 by issuing to Lyford the Standby Commitment
Fee Shares, with each such share being a tributed a value of $0.35. We have also
paid Lyford $50,000 in cash for its legal fees in connection with this offering.
50
We will notify Lyford if the rights offering will not occur, was not
approved by the stockholders or was terminated by us. In such an event, the
standby purchase agreement will terminate (except for certain sections). In such
event, Lyford will be entitled to retain one-half of the Standby Commitment Fee
Shares. Within 30 days from the termination date, Lyford will either (i) return
the other half of the Standby Commitment Fee Shares to us, or (ii) retain all of
the Standby Commitment Fee Shares and remit to us $300,000. If Lyford does not
close its Standby Commitment due to our not satisfying certain of the conditions
precedent and we have not terminated the rights offering, Lyford is entitled to
retain the entire Standby Commitment Fee.
We will pay American Stock Transfer & Trust Company, as Subscription
Agent, a fee of $ plus expenses and also have agreed to indemnify
-------------
under certain circumstances the Subscription Agent from any liability they may
incur in connection with this rights offering.
We expect that shares of our common stock received through the
exercise of subscription rights will be traded on the American Stock Exchange
under the symbol "HEC" as our currently outstanding shares of common stock now
trade.
LEGAL MATTERS
The legality of the common stock offered hereby will be passed upon by
the law firm of Baker & McKenzie, Dallas, Texas. The description in this
prospectus of the U.S. federal income tax consequence of the rights offering
will be passed upon by the law firm of Haynes and Boone, LLP.
EXPERTS
The consolidated financial statements of Harken Energy Corporation, as
amended, at December 31, 2001 and for the year then ended appearing in Harken
Energy Corporation's Annual Report on Amendment No. 1 to Form 10-K/A for the
year ended December 31, 2001, have been audited by Ernst & Young LLP,
independent auditors, and at December 31, 2000, and for each of the two years in
the period ended December 31, 2000, by Arthur Andersen LLP, independent
auditors, as set forth in their respective reports thereon included therein and
incorporated herein by reference. Such consolidated financial statements are
incorporated herein by reference in reliance upon such reports given on the
authority of such firms as experts in accounting and auditing.
Our oil and gas reserves in the United States have been reviewed by
our independent reserve engineers, Netherland, Sewell & Associates, Inc., as
stated in their report thereon. Harken's disclosures of its domestic oil and gas
reserves included in its Amendment No. 1 to Form 10-K/A for the year ending
December 31, 2001, have been presented in reliance upon the authority of such
firm as experts in petroleum engineering.
Our oil and gas reserves in Colombia have been reviewed by our
independent reserve engineers, Ryder Scott Company, as stated in their report
thereon. Harken's disclosures of its oil and gas reserves in Colombia included
in its Amendment No. 1 to Form 10-K/A for the year ending December 31, 2001,
have been presented in reliance upon the authority of such firm as experts in
petroleum engineering.
We have not been able to obtain, after reasonable efforts, the written
consent of Arthur Andersen LLP to us naming it in this prospectus as having
certified our consolidated financial statements for the
51
two years ended December 31, 2000, as required by Section 7 of the Securities
Act. Accordingly, Arthur Andersen will not have any liability under Section 11
of the Securities Act of 1933 for any false and misleading statements and
omissions contained in this prospectus, including the financial statements
incorporated by reference, and any claims against Arthur Andersen related to any
such false and misleading statements and omissions may be limited.
WHERE YOU CAN FIND MORE INFORMATION
We file reports, proxy statements, and other information with the SEC.
Such reports, proxy statements and other information concerning our Company can
be read and copied at the SEC's public reference room at 450 Fifth Street, NW,
Washington, D.C. 20549. Please call the SEC at 1-800-SEC-0330 for further
information on the public reference room. The SEC maintains an Internet site at
http://www.sec.gov that contains reports, proxy statements and other information
regarding issuers that file information electronically, including our Company.
Our common stock is listed on the American Stock Exchange. These reports, proxy
statements and other information can also be read and copied at the offices of
the American Stock Exchange at 86 Trinity Place, New York, New York 10006.
The SEC allows us to "incorporate by reference" the information we
file with the SEC. This permits us to disclose important information to you by
referencing these filed documents. Any information referenced this way is
considered part of this prospectus, and any information filed with the SEC after
the date on the cover of this prospectus will automatically be deemed to update
and supercede this information. We incorporate by reference the documents listed
below and any future filings made by us with the SEC under Sections 13(a),
13(c), 14 or 15(d) of the Exchange Act of 1934, as amended, until all of the
securities described in this prospectus are sold:
. our annual report on Form 10-K for the year ended December 31, 2001,
as amended, filed with the SEC on March 29, 2002 and December 20,
2002,
. our quarterly report on Form 10-Q for the quarter ended March 31,
2002, as amended, filed with the SEC on May 15, 2002 and December 20,
2002,
. our quarterly report on Form 10-Q for the quarter ended June 30, 2002,
as amended, filed with the SEC on August 14, 2002 and December 20,
2002,
. our quarterly report on Form 10-Q for the quarter ended September 30,
2002, filed with the SEC on November 14,2002,
. our proxy statement dated December 20, 2002, filed with the SEC on
December 20, 2002,
. our current report on Form 8-K dated August 14, 2002, filed with the
SEC on August 14, 2002,
. our current report on Form 8-K dated December 6, 2002, filed with the
SEC on December 10, 2002,
. our current report on Form 8-K dated December 10, 2002, filed with the
SEC on December 20, 2002,
. the description of our common stock contained in our registration
statement on Form 8-A, filed with the SEC on June 1, 1989, including
all amendments and reports filed for the purpose of updating such
description, and
52
. the description of our preferred stock purchase rights as contained in
our registration statement on Form 8-A, filed with the SEC on April 7,
1998, including all amendments and reports filed for the purpose of
updating such description.
This prospectus is part of a registration statement filed with the
SEC. This prospectus does not contain all the information contained in the
registration statement. The full registration statement can be obtained from the
SEC. This prospectus contains a general description of our Company and the
securities being offered for sale. You should read this prospectus together with
the additional information incorporated by reference.
You can request a copy of any document incorporated by reference in
this prospectus, at no cost, by writing or telephoning us at the following:
Harken Energy Corporation
580 WestLake Park Boulevard, Suite 600
Houston, Texas 77079
Attention: A. Wayne Hennecke
Telephone: (281) 504-4000
FORWARD-LOOKING STATEMENTS
We believe that certain statements contained or incorporated by
reference in this prospectus are "forward-looking statements" within the meaning
of the Private Securities Litigation Reform Act of 1995 and are considered
prospective. The following statements are or may constitute forward-looking
statements within the meaning of 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.
We may be unable to achieve the future results covered by the
forward-looking statements. The statements are subject to risks, uncertainties
and other factors that could cause actual results to differ materially from the
future results that the statements express or imply. See "Risk Factors" on page
11. Please do not put undue reliance on these forward-looking statements, which
speak only as of the date of this prospectus.
53
PART II
INFORMATION NOT REQUIRED IN PROSPECTUS
Item 14. Other Expenses of Issuance and Distribution.
The expenses in connection with the registration of the shares of common
stock covered by this prospectus are set forth in the following table. All
amounts except the registration fee are estimated:
Securities and Exchange Commission registration fee........ $ 920
American Stock Exchange listing fee........................ 22,500
Printing and engraving expenses............................ 25,000
Accounting fees and expenses............................... 15,000
Legal fees and expenses.................................... 100,000
Subscription Agent fees and expenses....................... 15,000
Miscellaneous.............................................. 5,000
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Total................................................... $183,420
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Item 15. Indemnification of Directors and Officers.
Under Section 145 of the General Corporation Law of the State of Delaware
("Delaware Law"), a Delaware corporation may indemnify its directors, officers,
employees and agents against expenses (including attorneys' fees), judgments,
fines and settlements in nonderivative suits, actually and reasonably incurred
by them in connection with the defense of any action, suit or proceeding in
which they or any of them were or are made parties or are threatened to be made
parties by reason of their serving or having served in such capacity. Delaware
law, however, provides that such person must have acted in good faith and in a
manner they reasonably believed to be in or not opposed to the best interests of
the corporation, and in the case of a criminal action, such person must have had
no reasonable cause to believe his or her conduct was unlawful. Section 145
further provides that in connection with the defense or settlement of any action
by or in the right of the corporation, a Delaware corporation may indemnify its
directors and officers against expenses actually and reasonably incurred by them
if, in connection with the matters in issue, they acted in good faith, in a
manner they reasonably believed to be in or not opposed to the best interests of
the corporation, except that no indemnification may be made with respect to any
claim, issue or matter as to which such person has been adjudged liable for
negligence or misconduct unless the Court of Chancery or the court in which such
action or suit is brought approves such indemnification. Section 145 further
permits a Delaware corporation to grant its directors and officers additional
rights of indemnification through bylaw provisions and otherwise, and to
purchase indemnity insurance on behalf of its directors and officers.
Indemnification is mandatory to the extent a claim, issue or matter has been
successfully defended.
Article Ten of our certificate of incorporation and Article VII of our
bylaws provide, in general, that we shall indemnify our directors and officers
under certain of the circumstances defined in Section 145. We have entered into
agreements with each member of our board of directors pursuant to which it will
advance to each director costs of litigation in accordance with the
indemnification provisions of our Certificate of Incorporation and bylaws.
II-1
Item 16. Exhibits.
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, filed
with the SEC on June 1, 1989 and incorporated by reference herein).
4.2 - Certificate of Designations, Powers, Preferences and Rights of Series A Cumulative
Convertible Preferred Stock, $1.00 par value, of Harken Energy Corporation (filed as
Exhibit 4.1 to Harken's Annual Report on Form 10-K for the fiscal year ended December 31,
1989, File No. 0-9207, and incorporated by reference herein).
4.3 - Certificate of Designations, Powers, Preferences and Rights of Series B Cumulative
Convertible Preferred Stock, $1.00 par value, of Harken Energy Corporation (filed as
Exhibit 4.2 to Harken's Annual Report on Form 10-K for the fiscal year ended December 31,
1989, File No. 0-9207, and incorporated by reference herein).
4.4 - Certificate of 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, 1999, File No. 0-9207, and incorporated by
reference herein).
4.7 - Amendment to Rights Agreement of April 6, 1999 by and between Harken Energy Corporation
and American Stock Transfer and Trust Company, dated June 18, 2002 (filed as Exhibit 4.11
to Harken's Quarterly Report on Form 10-Q for the period ended September 30, 2002, File
No. 0-9207, and incorporated by reference herein).
4.8 - Amendment to Rights Agreement of April 6, 1999 by and between Harken Energy Corporation
and American Stock Transfer and Trust Company, dated August 27, 2002 (filed as Exhibit
4.12 to Harken's Quarterly Report on Form 10-Q for the period ended September 30, 2002,
File No. 0-9207, and incorporated by reference herein).
4.9 - 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, 1999, File
No. 0-9207, and incorporated by reference herein).
4.10 - 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).
4.11 - Certificate of Designations, Preferences and Rights of Series G1 Convertible Preferred
Stock (filed as Exhibit 4.9 to Harken's Annual Report on Form 10-K for the fiscal year
ended December 31, 2000, File No. 0-9207, and incorporated by reference herein).
4.12 - Certificate of Designations of Series G2 Convertible Preferred Stock (filed as Exhibit
4.10 to Harken's Annual Report on Form 10-K for the fiscal year ended December 31, 2001,
File No. 0-9207, and incorporated by reference herein).
4.13* - Form of Rights Certificate.
5.1* - Opinion of Baker & McKenzie.
23.1* - Consent of Ernst & Young LLP.
23.2* - Consent of Ryder Scott Company.
23.3* - Consent of Netherland, Sewell & Associates, Inc.
23.4* - Consent of Baker & McKenzie (included in opinion filed as Exhibit 5.1).
23.5* - Consent of Haynes & Boone, LLP.
24.1+ - Powers of Attorney.
99.1* - Form of Instructions as to Use of Rights Certificates.
99.2* - Form of Notice of Guaranteed Delivery for Rights Certificate.
99.3* - Form of Letter to Security Holders Who Are Record Holders.
99.4* - Form of Letter to Securities Dealers, Commercial Banks, Trust Companies and Other Nominees.
II-2
99.5* - Form of Letter to Clients of Security Holders Who Are Beneficial Holders.
99.6* - Form of Nominee Holder Certification Form.
99.7* - Substitute Form W-9 for Use with the Rights Offering.
99.8* - Form of Beneficial Owner Election Form.
99.9+ - Standby Purchase Agreement, dated September 6, 2002, between Harken Energy Corporation and
Lyford Investments Enterprises Ltd.
99.10* - Amendment No. 1 to Standby Purchase Agreement of September 6, 2002 between Harken Energy
Corporation and Lyford Investments Enterprises Ltd., dated November 22, 2002.
99.11* - Form of Subscription Agency Agreement between the Company and American Stock Transfer &
Trust Company, Inc.
----------
+ Filed previously
* Filed herewith
Item 17. Undertakings.
(a) The undersigned registrant hereby undertakes that, for purposes of
determining any liability under the Securities Act of 1933, each filing of the
registrant's annual report pursuant to Section 13(a) or 15(d) of the Securities
Exchange Act of 1934 (and, where applicable, each filing of an employee benefit
plan's annual report pursuant to Section 15(d) of the Securities Exchange Act of
1934) that is incorporated by reference in the Registration Statement shall be
deemed to be a new registration statement relating to the securities offered
therein, and the offering of such securities at that time shall be deemed to be
the initial bona fide offering thereof.
(b) The undersigned registrant hereby undertakes:
(1) To file, during any period in which offers or sales are being
made, a post-effective amendment to this registration statement:
(i) To include any prospectus required by Section 10(a)(3) of the
Securities Act of 1933;
(ii) To reflect in the prospectus any facts or events arising
after the effective date of the registration statement (or the most recent
post-effective amendment thereof) which, individually or in the aggregate,
represent a fundamental change in the information set forth in the registration
statement. Notwithstanding the foregoing, any increase or decrease in volume of
securities offered (if the total dollar value of securities offered would not
exceed that which was registered) and any deviation from the low or high end of
the estimated maximum offering range may be reflected in the form of prospectus
filed with the SEC pursuant to Rule 424(b) if, in the aggregate, the changes in
volume and price represent no more than a 20% change in the maximum aggregate
offering price set forth in the "Calculation of Registration Fee" table in the
effective registration statement;
(iii) To include any material information with respect to the
plan of distribution not previously disclosed in the registration statement or
any material change to such information in the registration statement;
provided, however, that paragraphs b(1)(i) and b(2)(ii) above do not apply if
the information required to be included in a post-effective amendment by those
paragraphs is contained in periodic reports filed with or furnished to the SEC
by the registrant pursuant to Section 13 or 15(d) of the Securities Exchange Act
of 1934 that are incorporated by reference in the registration statement.
(2) That, for the purpose of determining any liability under the
Securities Act of 1933, each such post-effective amendment shall be deemed to be
a new registration statement relating to the securities offered therein, and the
offering of such securities at that time shall be deemed to be the initial bona
fide offering thereof.
(3) To remove from registration by means of a post-effective amendment
any of the securities being registered which remain unsold at the termination of
the offering.
(c) Insofar as indemnification for liabilities arising under the Securities
Act of 1933 may be permitted to directors, officers and controlling persons of
the registrant pursuant to the foregoing provisions, or otherwise, the
registrant
II-3
has been advised that, in the opinion of the SEC, such indemnification is
against public policy as expressed in the Securities Act and is, therefore,
unenforceable. In the event that a claim for indemnification against such
liabilities (other than the payment by the registrant of expenses incurred or
paid by a director, officer or controlling person of the registrant in the
successful defense of any action, suit or proceeding) is asserted by such
director, officer or controlling person in connection with the securities being
registered, the registrant will, unless in the opinion of its counsel the matter
has been settled by controlling precedent, submit to a court of appropriate
jurisdiction the question whether such indemnification by it is against public
policy as expressed in the Securities Act and will be governed by the final
adjudication of such issue.
II-4
SIGNATURES
Pursuant to the requirements of the Securities Act of 1933, the registrant
certifies that it has reasonable grounds to believe that it meets all of the
requirements for filing on Form S-3 and has duly caused this registration
statement to be signed on its behalf by the undersigned, thereunto duly
authorized, in the City of Houston, State of Texas, on this 23rd day of
December, 2002.
HARKEN ENERGY CORPORATION
*
----------------------------------------
Mikel D. Faulkner, Chairman of the Board
and Chief Executive Officer
Pursuant to the requirements of the Securities Act of 1933, this
registration statement has been signed below by the following persons in the
capacities and on the dates indicated.
Signature Title Date
* Chairman of the Board and Chief December 23, 2002
--------------------------------- Executive Officer (Principal
Mikel D. Faulkner Executive Officer)
* President, Chief Operating Officer December 23, 2002
--------------------------------- and Director
Bruce N. Huff
* Vice Chairman and Director December 23, 2002
---------------------------------
Stephen C. Voss
* Director December 23, 2002
---------------------------------
J. William Petty
* Director December 23, 2002
---------------------------------
Michael M. Ameen, Jr.
* Director December 23, 2002
---------------------------------
Hobart A. Smith
* Director December 23, 2002
---------------------------------
Larry Akers
* Director December 23, 2002
---------------------------------
James H. Frizell
* Director December 23, 2002
---------------------------------
Marvin M. Chronister
/s/ Anna M. Williams Executive Vice President - Finance December 23, 2002
--------------------------------- and Chief Financial Officer
Anna M. Williams (Principal Financial Officer)
* Anna M. Williams, by signing her name
hereto, does hereby sign this
registration statement 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/ Anna M. Williams
------------------------------------
Anna M. Williams, Attorney-in-Fact
II-5
INDEX TO EXHIBITS
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, filed with the SEC on June 1,
1989 and incorporated by reference herein).
4.2 - Certificate of Designations, Powers, Preferences and Rights of
Series A Cumulative Convertible Preferred Stock, $1.00 par value, of
Harken Energy Corporation (filed as Exhibit 4.1 to Harken's Annual
Report on Form 10-K for the fiscal year ended December 31, 1989, File
No. 0-9207, and incorporated by reference herein).
4.3 - Certificate of Designations, Powers, Preferences and Rights of
Series B Cumulative Convertible Preferred Stock, $1.00 par value, of
Harken Energy Corporation (filed as Exhibit 4.2 to Harken's Annual
Report on Form 10-K for the fiscal year ended December 31, 1989, File
No. 0-9207, and incorporated by reference herein).
4.4 - Certificate of 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, 1999, File No. 0-9207, and incorporated by
reference herein).
4.7 - Amendment to Rights Agreement of April 6, 1999 by and between Harken
Energy Corporation and American Stock Transfer and Trust Company,
dated June 18, 2002 (filed as Exhibit 4.11 to Harken's Quarterly
Report on Form 10-Q for the period ended September 30, 2002, File No.
0-9207, and incorporated by reference herein).
4.8 - Amendment to Rights Agreement of April 6, 1999 by and between Harken
Energy Corporation and American Stock Transfer and Trust Company,
dated August 27, 2002 (filed as Exhibit 4.12 to Harken's Quarterly
Report on Form 10-Q for the period ended September 30, 2002, File No.
0-9207, and incorporated by reference herein).
4.9 - 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, 1999, File No. 0-9207, and
incorporated by reference herein).
4.10 - 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).
4.11 - Certificate of Designations, Preferences and Rights of Series G1
Convertible Preferred Stock (filed as Exhibit 4.9 to Harken's Annual
Report on Form 10-K for the fiscal year ended December 31, 2000, File
No. 0-9207, and incorporated by reference herein).
4.12 - Certificate of Designations of Series G2 Convertible Preferred Stock
(filed as Exhibit 4.10 to Harken's Annual Report on Form 10-K for the
fiscal year ended December 31, 2001, File No. 0-9207, and incorporated
by reference herein).
4.13* - Form of Rights Certificate.
5.1* - Opinion of Baker & McKenzie.
23.1* - Consent of Ernst & Young LLP.
23.2* - Consent of Ryder Scott Company.
23.3* - Consent of Netherland, Sewell & Associates, Inc.
23.4* - Consent of Baker & McKenzie (included in opinion filed as Exhibit
5.1).
23.5* - Consent of Haynes & Boone, LLP.
24.1+ - Powers of Attorney.
99.1* - Form of Instructions as to Use of Rights Certificates.
99.2* - Form of Notice of Guaranteed Delivery for Rights Certificate.
99.3* - Form of Letter to Security Holders Who Are Record Holders.
99.4* - Form of Letter to Securities Dealers, Commercial Banks, Trust
Companies and Other Nominees.
99.5* - Form of Letter to Clients of Security Holders Who Are Beneficial
Holders.
99.6* - Form of Nominee Holder Certification Form.
99.7* - Substitute Form W-9 for Use with the Rights Offering.
99.8* - Form of Beneficial Owner Election Form.
99.9+ - Standby Purchase Agreement, dated September 6, 2002, between Harken
Energy Corporation and Lyford Investments Enterprises Ltd.
99.10* - Amendment No. 1 to Standby Purchase Agreement of September 6, 2002
between Harken Energy Corporation and Lyford Investments Enterprises
Ltd., dated November 22, 2002.
99.11* - Form of Subscription Agency Agreement between the Company and
American Stock Transfer & Trust Company, Inc.
----------
+ Filed previously
* Filed herewith