"Aloha Petroleum, a retail gasoline subsidiary in Hawaii, was picked up in 1986 as part of Harken's purchase of Aloha's parent company, E-Z Serve Inc., which had about 900 retail outlets. The deal gave Harken numerous tax advantages. By 1989, Harken had financial problems. E. Stuart Watson, then a Harken board member, said he thought the Harken executives "were nuts."
"They were engaging in hedging operations, trying to protect themselves in the purchase and sale of gasoline and oil, and man, they were losing millions," he said.
Eager to "redeploy assets," as the company later put it in a report to the SEC, Harken sold for $12 million an 80 percent interest in Aloha to a company that was one of its major shareholders. The purchaser, Intercontinental Mining and Resources Ltd., two of whose directors were also on Harken's board, paid $1 million in cash and submitted an $11 million IOU.
The first installment on the loan, for $1 million, wasn't due until mid-1992, three years after the purchase, but Harken accounted for the sale as a $7.9 million capital gain for 1989. The move enabled it to keep its losses down to $3.3 million that year. Harken's outside auditors, Arthur Andersen LLP, approved the company's annual report to the SEC as a fair presentation of Harken's financial position.
The SEC's accountants didn't see it that way and told the company to restate its earnings. In 1991, Harken filed an amended report for 1989, stating that as a result of "discussions with the Securities and Exchange Commission's accounting staff," it was no longer counting the $7.9 million as a gain for 1989. As a result of "the change in accounting method" and other restatements, Harken said in a footnote, its losses for that year were actually $12.6 million." |
