Three Months Ended Nine Months Ended September 30, September 30, 2004 2005 2004 2005 ----------- ----------- ----------- ----------- Total revenues and other: 8,341,000 11,568,000 22,873,000 30,516,000 Oil and gas operating expenses 1,901,000 3,113,000 5,956,000 7,962,000 General and administrative expenses, net 1,853,000 2,912,000 5,500,000 8,692,000 ----------- ----------- ----------- ----------- Operating Margin (Non-GAAP; see reconciliation below) 4,587,000 5,543,000 11,417,000 13,862,000 Depreciation and amortization 2,804,000 3,199,000 8,387,000 9,095,000 Share-based compensation expense* 4,167,000 6,907,000 4,167,000 11,375,000 Increase in Global warrant liability (1,120,000) 5,099,000 11,361,000 13,297,000 Accretion expense 97,000 100,000 304,000 285,000 Interest expense and other, net 137,000 (17,000) (23,000) 541,000 Gain on exercise of Global warrants - (28,341,000) - (28,341,000) Gains from extinguishments of debt - - (325,000) - Gain on sale of subsidiary shares - (11,841,000) - (32,185,000) Gain on investment - - (990,000) - Income tax expense 171,000 179,000 494,000 586,000 Minority interest of subsidiary (395,000) (2,552,000) (170,000) (3,073,000) ----------- ----------- ----------- ----------- Net income/(loss) $(1,274,000) $32,810,000 $(11,788,000) $42,282,000 =========== =========== =========== =========== Accrual of dividends related to preferred stock (911,000) (255,000) (2,554,000) (858,000) Exchange of preferred stock - - 337,000 - Payment of preferred stock dividends (565,000) 111,000 3,173,000 323,000 ----------- ----------- ----------- ----------- Net income / (loss) attributed to common stock $(2,750,000) $32,666,000 $(10,832,000) $41,747,000 =========== =========== =========== =========== Basic net income / (loss) per common share $ (0.01) $ 0.15 $ (0.05) $ 0.19 Basic weighted average common shares outstanding 205,765,217 217,251,270 198,424,912 218,041,835 Diluted net income / (loss) per common share $ (0.01) $ 0.14 $ (0.05) $ 0.17 Diluted weighted average common shares outstanding 205,765,217 242,904,248 198,424,912 247,087,405 * For reporting in our Quarterly Report on Form 10-Q, for the period ended September 30, 2005, Share-Based Compensation Expense is included with General and Administrative Expenses, net.
Global Stock Sales, Global Warrant Liability Extinguished, Conversion of Convertible Notes
During the three months ended September 30, 2005, Harken sold a portion of its equity interest in Global Energy Development PLC (Global). With the sales of these shares (along with the exercise of Global warrants and share options), Harken's equity interest in Global was approximately 34% at September 30, 2005. Harken recognized gains totaling $11.9 million equal to the amount by which the total sale proceeds exceeded the net book value of its Global shares sold. Harken does not anticipate recognizing similar gains in the future.
The global warrant liability on Harken's balance sheet was extinguished with the exercise of all outstanding Global Minority Owner warrants and the exercise of the Global Warrants held by Lyford Investments Enterprises. Harken recognized a gain of $28 million representing the difference between the cash proceeds received plus the fair value of the Global Warrant liability extinguished and the net book value of Harken's shares in Global sold as of the date of exercise. Harken does not anticipate recognizing similar gains in the future.
Share-based liability related to Global's stock option plan increased due primarily to the increase in Global's common share price along with the continued vesting of Global's outstanding options. During the third quarter of 2005, Global recorded share-based compensation expense of approximately $6.9 million associated with the increased common share price and vesting.
Holders of $3.325 million of 5% Convertible Notes voluntarily converted the debt into approximately 6.5 million shares of Harken common stock, during the three months ended September 30, 2005. The conversion had no effect on profit and loss.
Redemption of Preferred Shares
Harken redeemed all of the outstanding 50,000 shares of Series J Preferred in exchange for $5.0 million in cash, and recorded a non-cash accounting loss to preferred holders of approximately $225,000 related to this transaction.
The Company redeemed 11,825 shares of Series G1 Preferred in exchange for $65,000 in cash. Only 1,600 shares of Series G1 Preferred remain outstanding. Harken recorded a non-cash accounting gain from preferred holders of approximately $489,000.
Harken redeemed 1,000 shares of Series G2 Preferred in exchange for $24,000 in cash. Only 1,000 shares of Series G2 Preferred remain outstanding. A small non-cash accounting gain from preferred holders of approximately $53,000 was recorded.
The Company redeemed 67,715 shares of Series G4 Preferred in exchange for $3.7 million in cash. The Series G4 Preferred is no longer outstanding. Harken recorded a non-cash accounting loss from preferred holders of approximately $204,000.
Gulf Energy Management Company (GEM)
During the quarter ended September 30, 2005, GEM's Louisiana operations were affected by one tropical storm and two hurricanes that interrupted both production and certain drilling operations. As much as 75% of GEM's domestic production was shut in during September and approximately 40% of its pre-storm production level remains curtailed. GEM continues to inspect and repair damage to its eastern Gulf operations that remain shut-in which include Main Pass, Point a la Hache and non-operated properties at Branville Bay, Backridge, Port Arthur (TX) and Abbeyville. Restoration of remaining curtailed production is also dependent on resumption of downstream infrastructure and the availability of service and equipment contractors necessary for over-water transportation and repairs. As of September 30, 2005, GEM properties were producing at approximately 4.4 million cubic feet equivalent per day.
During the quarter ended September 30, 2005, GEM's oil and gas revenues decreased 11% to approximately $4.1 million compared to $4.7 million for the prior year period primarily due to the decrease in sales and production volumes in the third quarter of 2005 as compared to the prior year period. The company reported accelerated declines in certain field productivity in the Raymondville field as well as lost production due to hurricanes Katrina and Rita. The decrease in sales volume was partially mitigated by an increase in average oil and gas commodity prices received, as compared to the prior year third quarter.
GEM's oil and gas operating expense increased 25% to approximately $1.5 million during the third quarter of 2005 compared to approximately $1.2 million during the third quarter 2004 primarily due to property insurance deductibles and other related items for the repair and restoration of damages from Hurricanes Katrina and Rita.
Regarding GEM's Indiana Posey Coalbed Methane Prospect, in September 2005, after the submission of a Phase I core evaluation report, GEM has elected to proceed and fund pilot well drilling under Phase II of the agreement. On GEM's Ohio Cumberland Coalbed Methane Prospect, the coring phase is continuing and expected to be completed in the fourth quarter of 2005. In addition, GEM is actively evaluating other strategic coalbed methane opportunities in pursuit of long-lived reserve prospects to complement our current oil and gas portfolio.
Global Energy Development PLC (Global)
During the third quarter 2005 as compared to the third quarter 2004, Global reported increased oil revenues, operating expenses and oil volumes. Global's oil revenues increased to approximately $6.6 million during third quarter 2005 as compared to $3.5 million in the third quarter 2004. Oil sales volumes increased 34% to approximately 134,000 net barrels (after royalties and Cajaro's working interest allocation) during the three months ended September 30, 2005 from approximately 100,000 net barrels during the third quarter of 2004. Increased oil sales volumes were a result of improved well performance and successful workovers. Global's average oil commodity prices increased 39% to $49.33 during the third quarter 2005 compared to $35.48 during the third quarter 2004.
Global's operating expenses have increased 135% from approximately $671,000 for third quarter 2004 to approximately $1.6 million for third quarter 2005, primarily due to equipment rentals and diesel fuel costs and workovers due to increased production volumes from certain wells in the second quarter of 2005. These wells include the Tilodiran, the Macarenas, and the Estero #4 and Estero #5 wells. Diesel fuel costs have risen with the increase in price of crude oil.
International Business Associates (IBA)
IBA incurred net trading gains of approximately $536,000 for the quarter ended September 30, 2005. IBA's net loss for the same period was approximately $116,000. During the period ended September 30, 2005, IBA has had a low volume of trading activities and has been unsuccessful in obtaining trading contract overseas. Harken is currently pursuing strategic alternatives regarding its investment in IBA.
Balance Sheet Summary
As the ratios below show, Harken has improved its Working Capital by over 100% since year-end 2004 to approximately $45.9 million at September 30, 2005. Harken reduced its debt by 77.6% during the nine months ended September 30, 2005, ending the period with over $46.8 million in cash less debt as detailed below:
December 31, September 30, 2004 2005 ----------- ----------- * (unaudited) Current ratio (1) 2.54 to 1 5.03 to 1 Total debt to equity 0.17 to 1 .02 to 1 Working capital (2) $21,845,000 $45,896,000 Cash $28,632,000 $48,738,000 Total debt $8,578,000 $1,920,000 Total cash less debt $20,054,000 $46,818,000 Stockholders' equity $51,102,000 $91,814,000
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