<PAGE> 1
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SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
FOR THE QUARTERLY PERIOD ENDED MARCH 31, 1998
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
FOR THE TRANSITION PERIOD FROM TO
--------- --------
COMMISSION FILE NUMBER 0-9207
HARKEN ENERGY CORPORATION
(Exact name of registrant as specified in its charter)
DELAWARE 95-2841597
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
5605 N. MACARTHUR BLVD., SUITE 400 75038
IRVING, TEXAS (Zip Code)
(Address of principal executive offices)
Registrant's telephone number, including area code (972) 753-6900
INDICATE BY CHECK MARK WHETHER THE REGISTRANT (1) HAS FILED ALL REPORTS
REQUIRED TO BE FILED BY SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF
1934 DURING THE PRECEDING 12 MONTHS (OR FOR SUCH SHORTER PERIOD THAT THE
REGISTRANT WAS REQUIRED TO FILE SUCH REPORTS), AND (2) HAS BEEN SUBJECT TO SUCH
FILING REQUIREMENTS FOR THE PAST 90 DAYS. YES [X] NO
----- -----
The number of shares of Common Stock, par value $0.01 per share,
outstanding as of April 30, 1998 was 122,823,347.
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HARKEN ENERGY CORPORATION
INDEX TO QUARTERLY REPORT
MARCH 31, 1998
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
PART I. FINANCIAL INFORMATION
Item 1. Condensed Financial Statements
Consolidated Condensed Balance Sheets.............................................. 4
Consolidated Condensed Statements of Operations.................................... 5
Consolidated Condensed Statements of Stockholders' Equity.......................... 6
Consolidated Condensed Statements of Cash Flow..................................... 7
Notes to Consolidated Condensed Financial Statements............................... 8
Item 2. Management's Discussion and Analysis of Financial Condition
and Results of Operations.......................................................... 20
PART II. OTHER INFORMATION
Notes Concerning Other Information................................................. 27
SIGNATURES........................................................................................ 30
</TABLE>
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PART I - FINANCIAL INFORMATION
3
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ITEM 1. CONSOLIDATED FINANCIAL STATEMENTS
HARKEN ENERGY CORPORATION AND SUBSIDIARIES
CONSOLIDATED CONDENSED BALANCE SHEETS
(unaudited)
<TABLE>
<CAPTION>
DECEMBER 31, MARCH 31,
1997 1998
----------------- ---------------
<S> <C> <C>
ASSETS
Current Assets:
Cash and temporary investments $ 85,740,000 $ 80,280,000
Cash in segregated accounts 37,771,000 38,293,000
Accounts receivable, net 2,175,000 1,692,000
Related party notes receivable 295,000 355,000
Prepaid expenses and other current assets 411,000 444,000
------------- -------------
Total Current Assets 126,392,000 121,064,000
Property and Equipment, net 106,798,000 119,941,000
Other Assets, net 5,323,000 6,959,000
------------- -------------
$ 238,513,000 $ 247,964,000
============= =============
LIABILITIES AND STOCKHOLDERS' EQUITY
Current Liabilities:
Trade payables $ 6,268,000 $ 5,076,000
Accrued liabilities and other 8,668,000 6,890,000
Revenues and royalties payable 816,000 835,000
------------- -------------
Total Current Liabilities 15,752,000 12,801,000
European Convertible Notes Payable 39,880,000 39,270,000
Deferred Revenue 25,000,000 35,000,000
Commitments and Contingencies (Note 12)
Stockholders' Equity:
Common stock, $0.01 par value; 175,000,000 shares authorized;
121,811,534 and 122,799,347 shares issued, respectively 1,218,000 1,228,000
Additional paid-in capital 248,770,000 251,646,000
Retained deficit and other comprehensive income (92,107,000) (91,981,000)
------------- -------------
Total Stockholders' Equity 157,881,000 160,893,000
------------- -------------
$ 238,513,000 $ 247,964,000
============= =============
</TABLE>
The accompanying Notes to Consolidated Financial Statements are
an integral part of these Statements.
4
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HARKEN ENERGY CORPORATION AND SUBSIDIARIES
CONSOLIDATED CONDENSED STATEMENTS OF OPERATIONS
(unaudited)
<TABLE>
<CAPTION>
THREE MONTHS ENDED
March 31,
--------------------------------
1997 1998
-------------- --------------
<S> <C> <C>
Revenues:
Oil and gas operations $ 3,680,000 $ 2,700,000
Interest and other income 571,000 1,662,000
------------ ------------
4,251,000 4,362,000
------------ ------------
Costs and Expenses:
Oil and gas operating expenses 1,239,000 1,382,000
General and administrative expenses, net 1,334,000 1,758,000
Depreciation and amortization 1,091,000 1,130,000
Interest expense and other, net 519,000 8,000
------------ ------------
4,183,000 4,278,000
------------ ------------
Income before income taxes 68,000 84,000
Income tax expense -- --
------------ ------------
Net income $ 68,000 $ 84,000
============ ============
Income per common share:
Basic income per common share $ 0.00 $ 0.00
============ ============
Weighted average shares outstanding 97,053,054 122,441,279
============ ============
Diluted income per common share $ 0.00 $ 0.00
============ ============
Weighted average shares outstanding 100,033,496 133,093,340
============ ============
</TABLE>
The accompanying Notes to Consolidated Financial Statements are
an integral part of these Statements.
5
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HARKEN ENERGY CORPORATION AND SUBSIDIARIES
CONSOLIDATED CONDENSED STATEMENTS OF STOCKHOLDERS' EQUITY
(unaudited)
<TABLE>
<CAPTION>
ACCUMULATED
ADDITIONAL OTHER
COMMON PAID-IN TREASURY RETAINED COMPREHENSIVE
STOCK CAPITAL STOCK DEFICIT INCOME TOTAL
----------- ------------- ------------- ------------- -------------- -------------
<S> <C> <C> <C> <C> <C> <C>
Balance, December 31, 1996 $ 939,000 $ 171,191,000 $ (1,390,000) $ (92,386,000) $ (15,000) $ 78,339,000
Issuance of common stock, net 77,000 20,208,000 -- -- -- 20,285,000
Conversions of European notes
payable 202,000 57,371,000 1,390,000 -- -- 58,963,000
Comprehensive income:
Equity adjustment from
foreign currency translation -- -- -- -- 105,000
Net income -- -- -- 189,000 --
Total comprehensive
income 294,000
------------ ------------- ------------- ------------- ----------- -------------
Balance, December 31, 1997 1,218,000 248,770,000 -- (92,197,000) 90,000 157,881,000
Issuance of common stock, net 9,000 2,305,000 -- -- -- 2,314,000
Conversions of European notes
payable 1,000 571,000 -- -- -- 572,000
Comprehensive income:
Equity adjustment from
foreign currency translation -- -- -- -- 42,000
Net income -- -- -- 84,000 --
Total comprehensive
income 126,000
------------ ------------- ------------- ------------- ----------- -------------
Balance, March 31, 1998 $ 1,228,000 $ 251,646,000 $ -- $ (92,113,000) $ 132,000 $ 160,893,000
============ ============= ============= ============= =========== =============
</TABLE>
The accompanying Notes to Consolidated Financial Statements are
an integral part of these Statements.
6
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HARKEN ENERGY CORPORATION AND SUBSIDIARIES
CONSOLIDATED CONDENSED STATEMENTS OF CASH FLOWS
(unaudited)
<TABLE>
<CAPTION>
THREE MONTHS ENDED
MARCH 31,
---------------------------------
1997 1998
--------------- --------------
<S> <C> <C>
Cash flows from operating activities:
Net income $ 68,000 $ 84,000
Adjustment to reconcile net income to net cash provided by
operating activities:
Depreciation and amortization 1,091,000 1,130,000
Amortization of European note issuance costs 166,000 --
Provision for doubtful accounts -- 15,000
Change in assets and liabilities:
Decrease in accounts receivable 42,000 408,000
Decrease in trade payables and other (478,000) (915,000)
------------ ------------
Net cash provided by operating activities 889,000 722,000
------------ ------------
Cash flows from investing activities:
Investor advances, net 2,623,000 9,798,000
Capital expenditures, net (5,394,000) (16,865,000)
------------ ------------
Net cash used in investing activities (2,771,000) (7,067,000)
------------ ------------
Cash flows from financing activities:
Transfer from segregated account cash 15,295,000 --
Proceeds from issuances of common stock, net of issuance costs 2,051,000 1,945,000
Investment in segregated account cash, net 758,000 (1,060,000)
------------ ------------
Net cash provided by financing activities 18,104,000 885,000
------------ ------------
Net increase in cash and temporary investments 16,222,000 (5,460,000)
Cash and temporary investments at beginning of period 9,855,000 85,740,000
------------ ------------
Cash and temporary investments at end of period $ 26,077,000 $ 80,280,000
============ ============
Supplemental disclosures of cash flow information:
Cash paid during the quarter for:
Interest $ -- $ --
Income taxes -- --
</TABLE>
The accompanying Notes to Consolidated Financial Statements are
an integral part of these Statements.
7
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HARKEN ENERGY CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS
MARCH 31, 1997 AND 1998
(unaudited)
(1) MANAGEMENT'S REPRESENTATIONS
In the opinion of Harken Energy Corporation ("Harken"), the
accompanying unaudited consolidated condensed financial statements contain all
adjustments necessary to present fairly its financial position as of December
31, 1997 and March 31, 1998 and the results of its operations and changes in its
cash flows for all periods presented as of March 31, 1997 and 1998. These
adjustments represent normal recurring items.
The accompanying unaudited condensed financial statements have been
prepared pursuant to the rules and regulations of the Securities and Exchange
Commission ("SEC"). Certain information and note disclosures normally included
in annual financial statements prepared in accordance with generally accepted
accounting principles have been condensed or omitted pursuant to these rules and
regulations, although Harken believes that the disclosures made are adequate to
make the information presented not misleading. It is suggested that these
condensed financial statements be read in conjunction with the financial
statements and the notes thereto included in Harken's Form 10-K for the year
ended December 31, 1997.
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the financial
statements and the reported amounts of revenues and expenses during the reported
period. Actual results could differ from these estimates.
The results of operations for the three month period ended March 31,
1998 are not necessarily indicative of the results to be expected for the full
year.
(2) ACQUISITION
On August 29, 1997, Harken, along with Harken Exploration Company, a
wholly-owned subsidiary, purchased working interests in oil and gas properties
located in the panhandle region of Texas (the "Cal-T Properties"). The purchase
price of approximately $3,416,000 consisted primarily of 565,000 shares of
Harken common stock.
(3) MARKETABLE SECURITIES
Included within cash and temporary investments and cash in segregated
accounts at December 31, 1997 and March 31, 1998 are certain investments in
marketable debt securities having maturities of sixty days or less. Harken
management determines the appropriate classification of such debt securities at
the time of purchase and reevaluates such designation as of each balance sheet
date. Such debt securities are classified as held-to-maturity as Harken has the
positive intent and ability to hold the securities to maturity. Held-to-maturity
securities are stated at amortized cost, adjusted for amortization of premiums
and accretion
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of discounts to maturity. Such amortization is included in interest and other
income. Harken holds no securities which are classified as available-for-sale or
trading.
The following is a summary of held-to-maturity securities:
<TABLE>
<CAPTION>
December 31, March 31,
1997 1998
--------------- ----------------
<S> <C> <C>
Included in cash and temporary investments:
Cost $ 50,906,000 $ 50,973,000
Estimated fair value $ 50,973,000 $ 58,396,000
Included in segregated accounts:
Cost $ 37,184,000 $ 38,154,000
Estimated fair value $ 37,242,000 $ 38,270,000
</TABLE>
Harken includes in cash and temporary investments and cash in
segregated accounts other cash and cash equivalent amounts in addition to the
above marketable debt securities.
(4) PROPERTY AND EQUIPMENT
A summary of property and equipment follows:
<TABLE>
<CAPTION>
December 31, March 31,
1997 1998
------------------ ------------------
<S> <C> <C>
Unevaluated oil and gas properties--
Unevaluated international properties $ 21,413,000 $ 19,765,000
Unevaluated domestic properties 5,780,000 5,745,000
Evaluated oil and gas properties--
Evaluated international properties 22,754,000 37,794,000
Evaluated domestic properties 67,431,000 68,304,000
Gas plant and other property 8,325,000 8,387,000
Less accumulated depreciation and amortization (18,905,000) (20,054,000)
------------------ ------------------
$ 106,798,000 $ 119,941,000
================== ==================
</TABLE>
9
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(5) COLOMBIAN OPERATIONS
Harken's Colombian operations are conducted through Harken de Colombia,
Ltd., a wholly-owned subsidiary of Harken, which held six exclusive Colombian
Association Contracts with Empresa Colombiana de Petroleos ("Ecopetrol") as of
March 31, 1998. These Association Contracts include the Alcaravan Contract,
awarded in 1992, the Bocachico Contract, awarded in 1994, the Cambulos Contract,
awarded in 1995, the Bolivar Contract, awarded in 1996, the Miradores Contract,
awarded in December 1997, and the Los Olmos Contract, awarded in March 1998. The
Alcaravan and Miradores Contracts currently cover a combined area of
approximately 242,000 acres in the Llanos Basin of Eastern Colombia. The
Bocachico and Cambulos Contracts cover a combined area of approximately 492,000
acres in the Middle Magdalena Valley of Central Colombia and the Bolivar
Contract covers an area of approximately 250,000 acres in the Northern Middle
Magdalena Valley of Central Colombia. The Los Olmos Contract covers
approximately 374,000 acres in the Lower Magdalena Valley of Northern Colombia.
Terms of each of the Association Contracts commit Harken to perform certain
activities in accordance with a prescribed timetable. As of March 31, 1998,
Harken was in compliance with the requirements of each of the Association
Contracts, as amended.
Under the terms of the Association Contracts, if, during the first six years of
each contract, Harken discovers one or more fields of producing oil or gas in
quantities that are economically exploitable and Ecopetrol agrees that such
field is economically exploitable (a "commercial discovery"), the term of that
contract will be extended for a period of 22 years from the date of such
commercial discovery. Upon discovery of a field capable of commercial
production, and upon commencement of production from that commercial field,
Ecopetrol will reimburse Harken for 50% of Harken's successful well costs
expended up to the point of declaration of a commercial discovery plus, in the
case of the Cambulos, Bolivar, Miradores and Los Olmos Contracts, 50% of all
seismic and dry well costs incurred prior to the point of declaration of a
commercial discovery. Production from a commercial discovery will be allocated
as follows: Ecopetrol, on behalf of the Colombian government, will receive a 20%
royalty interest in all production, and all production (after royalty payments)
will be allocated 50% to Ecopetrol and 50% to Harken until cumulative production
from all fields in the Association Contract acreage reaches 60 million barrels
of oil. As cumulative production increases in excess of 60 million barrels of
oil, Ecopetrol's share of production will increase progressively (to a maximum
of 75% under certain of the Association Contracts) with a corresponding decrease
in Harken's share of production. After a declaration of a commercial discovery,
Harken and Ecopetrol will be responsible for all future development costs and
operating expenses in direct proportion to their interest in production. For any
fields that are not declared by Ecopetrol to be a commercial discovery, Harken
would retain the rights to all production after royalty.
Harken has entered into certain development finance and operating
agreements with outside parties whereby such parties have received a beneficial
interest in certain of Harken's Colombian operations. For further discussion see
Note 6 -- Development Finance and Operating Agreements.
(6) DEVELOPMENT FINANCE AND OPERATING AGREEMENTS
Rio Negro Development Finance Agreement -- In October 1995, Harken
entered into a Development Finance Agreement (the "Rio Negro Development Finance
Agreement") with Arbco Associates L.P., Offense Group Associates L.P., Kayne
Anderson Nontraditional Investments L.P. and Opportunity Associates L.P.
(collectively, the "Rio Negro Investors"), pursuant to which the Rio Negro
Investors provided $3,500,000 to Harken to finance drilling on the Rio Negro
prospect in the Bocachico Contract area in exchange for the right
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to receive future payments from Harken equal to 40% of the net profits that
Harken de Colombia, Ltd. may derive from the sale of oil and gas produced from
the Rio Negro prospect (the "Rio Negro Participation").
In March 1997, Harken and the Rio Negro Investors entered into a
Conversion Agreement whereby Harken purchased 75% of the Rio Negro Participation
in exchange for 900,000 restricted shares of Harken common stock. From the
remaining 25% of the Rio Negro Participation retained, the Rio Negro Investors
have the right to receive 10% of the net profits that Harken de Colombia, Ltd.
may derive from the sale of oil and gas produced from the Rio Negro prospect.
Palo Blanco Development Finance Agreements -- In June 1996, Harken,
along with Harken de Colombia, Ltd., entered into separate Development Finance
Agreements with two investors. Under the terms of the agreements, the two
investors provided an aggregate of $2,500,000 to finance the drilling of a well
on the Palo Blanco prospect in the Alcaravan Association Contract area. In
return for the $2,500,000, the investors were initially granted a beneficial
interest in 40% of the net profits from the Palo Blanco prospect which might
have been received by Harken de Colombia, Ltd. In 1996, the investors exercised
their rights under the agreement to convert one-half of their beneficial
interest into 599,988 shares of restricted Harken common stock. During the first
quarter of 1997, the investors exercised their right to convert the remaining
portion of their beneficial interest into an additional 599,988 shares of
restricted Harken common stock.
Rochester Agreement -- Harken de Colombia, Ltd. has entered into an
operating agreement (the "Rochester Agreement") with Rochester Energy
Corporation ("Rochester", a Canadian corporation) pursuant to which Rochester
has paid 33-1/3% of the aggregate costs of the Estero #1 well and related
production facilities on the Palo Blanco prospect, 25% of the aggregate costs
related to the Estero #3 well, and 25% of the aggregate costs of the initial
well drilled on the Anteojos prospect, the Canacabare #1, all of which are
located within the Alcaravan Contract area, along with 25% of the aggregate
costs related to the Miradores Association Contract. In exchange, Rochester
acquired a beneficial interest equal to 25% of the interest held by Harken de
Colombia, Ltd. in the Palo Blanco and Anteojos prospect operations.
Parkcrest Financing Agreement -- Harken de Colombia, Ltd. has entered
into a financing agreement (the "Parkcrest Financing Agreement") with Parkcrest
Explorations, Ltd. ("Parkcrest", a Canadian corporation) pursuant to which
Parkcrest has paid 33-1/3% of the aggregate costs of the Estero #1 well and
related production facilities on the Palo Blanco prospect, 33-1/3% of the
aggregate costs of the initial well to be drilled on the Anteojos prospect, the
Canacabare #1, and 25% of the aggregate costs related to the Estero #3 well, all
of which are located within the Alcaravan Contract area. In addition, Parkcrest
will pay 33-1/3% of the aggregate costs of the initial well to be drilled under
the Miradores Association Contract. Parkcrest is also responsible for their
contracted percentage share of costs related to seismic on the Alcaravan and
Miradores Contract areas. In exchange, Parkcrest, upon its full performance,
will acquire a beneficial interest equal to 25% of the interest held by Harken
de Colombia, Ltd. in these prospects.
In April 1998, Harken and Parkcrest entered into a Loan and Security
Agreement (the "Parkcrest Loan Agreement") whereby Harken will provide up to
$2,600,000 to Parkcrest to be used as needed by Parkcrest to finance its share
of costs under the Parkcrest Financing Agreement. Under the terms of the
Parkcrest Loan Agreement, any outstanding loans bear interest at 6% per annum in
addition to a monthly management fee payable to Harken of $37,500 per month. Any
outstanding balance pursuant to the Parkcrest Loan Agreement is due and payable
by Parkcrest on November 30, 1998 and is secured by 50% of Parkcrest's
beneficial interest in the Palo Blanco prospect. In April 1998, Parkcrest
borrowed approximately $1,483,000 pursuant to the Parkcrest Loan Agreement.
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EnCap Development Finance Agreement -- In October 1997, Harken entered
into a Development Finance Agreement (the "EnCap Development Finance Agreement")
with EnCap Energy Capital Fund III, L.P., EnCap Energy Capital Fund III-B, L.P.,
BOCP Energy Partners, L.P. and Energy Capital Investment Company PLC
(collectively the "EnCap Investors"), pursuant to which the EnCap Investors
provided $25 million (the "Payment Amount"), less a 2% investment banking fee,
to Harken to finance the planned drilling of the initial wells on three
unexplored oil and gas prospects in the Middle Magdalena Basin of Colombia. As
part of the transaction, Harken issued 150,000 shares of Harken common stock to
the EnCap Investors. The three well exploratory program contemplates the
drilling of one prospect on Harken's Bocachico Contract area and the drilling of
two prospects on Harken's Cambulos Contract area. In exchange, the EnCap
Investors received the right to receive future payments from Harken equal to 5%
of the net profits that Harken de Colombia, Ltd. may derive from the sale of oil
and gas produced from each of the three prospects if the planned drilling on the
prospect is successful (the "EnCap Participation"). Pursuant to the EnCap
Development Finance Agreement, Harken is obligated to drill each of the three
wells prior to October 2000.
Pursuant to the EnCap Development Finance Agreement, the EnCap
Investors have the right, for a period of two years beginning in October 1998,
to convert all or part of the EnCap Participation into shares of Harken common
stock. The number of shares of Harken common stock to be issued upon conversion
of the EnCap Participation will be equal to the quotient of (i) the Payment
Amount (less any distributions made in respect of the EnCap Participation) plus
an amount equal to 15% interest per annum on the net Payment Amount compounded
monthly (the "Invested Amount"), divided by (ii) the market price of Harken
common stock at the time of conversion. During the same two year period, Harken
also has the right to convert the EnCap Participation into shares of Harken
common stock with the number of shares of Harken common stock to be issued to be
equal to the quotient of (i) the Payment Amount (less any distribution made in
respect of the EnCap Participation) plus an amount equal to 25% interest per
annum on the net Payment Amount compounded monthly, divided by (ii) the market
price of Harken common stock at the time of conversion. Harken can also elect to
pay cash upon any conversion of the EnCap Participation in lieu of issuing
Harken common stock. The EnCap Development Finance Agreement also provides for
additional shares of Harken common stock to be issued by Harken in the event of
a conversion to the extent that the EnCap Investors do not, under certain
circumstances, realize the Invested Amount from the sale of shares of Harken
common stock issued at the conversion. See Note 11 -- Related Party Transactions
for a discussion of the relationship between Harken and the EnCap Investors.
European Development Finance Agreements -- In December 1997, Harken
entered into a Development Finance Agreement and other related agreements (the
"European Development Finance Agreement") whereby Sidro S.A., Lambertine
Holdings, Ltd. and Rauscher Pierce and Clark (collectively the "European
Investors") purchased all of the outstanding common stock of Harken Capital
Corporation, ("HCC", a newly-formed U.S. corporation) for $7 million. Pursuant
to the European Development Finance Agreement, HCC then provided the $7 million
to Harken in January 1998 to finance a portion of the cost of the three-well
exploratory program discussed above pursuant to the EnCap Development Finance
Agreement. In exchange, HCC received the right to receive future payments from
Harken equal to 1.4% of the net profits that Harken de Colombia, Ltd. may derive
from the sale of oil and gas produced from each of the three prospects if the
planned drilling on the prospect is successful. Beginning in December 1998, the
European Investors have the right to convert their shares of HCC into shares of
Harken common stock with terms substantially identical to the EnCap Development
Finance Agreement. As part of the transaction, Harken issued 42,000 shares of
Harken common stock to the European Investors and paid a cash fee of $175,000 to
one of the European Investors.
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<PAGE> 13
In March 1998, Harken received directly an additional $3 million
pursuant to a Development Finance Agreement with Faisal Finance ("Faisal"),
which contains terms substantially identical to the EnCap Development Finance
Agreement, including conversion provisions which begin in March 1999. In
exchange, Faisal received the right to receive future payments from Harken equal
to 0.6% of the net profits that Harken de Colombia, Ltd. may derive from the
sale of oil and gas produced from each of the three prospects discussed above
pursuant to the EnCap Development Finance Agreement if the planned drilling on
the prospect is successful. As part of this transaction, Harken issued 18,000
shares of Harken common stock and paid a cash fee of $75,000 to a financial
advisor.
(7) EUROPEAN CONVERTIBLE NOTES PAYABLE
6 1/2% European Notes -- On July 30, 1996, Harken issued to qualified
purchasers a total of $40 million in 6 1/2% Senior Convertible Notes (the "6
1/2% European Notes") which were to mature on July 30, 2000. In connection with
the sale and issuance of the 6 1/2% European Notes, Harken paid approximately
$3,142,000 from the 6 1/2% European Note proceeds for commissions and issuance
costs. Interest incurred on these notes was payable semi-annually in January and
July of each year to maturity or until the 6 1/2% European Notes were converted.
Such 6 1/2% European Notes were convertible at any time by the holders into
shares of Harken common stock at a conversion price of $2.50 per share ("the 6
1/2% European Note Conversion Price"). The 6 1/2% European Notes were also
convertible by Harken into shares of Harken common stock after one year
following issuance, if for any period of thirty consecutive days commencing on
or after November 28, 1996, the closing price of Harken common stock for each
trading day during such period shall have equaled or exceeded 135% of the 6 1/2%
European Note Conversion Price (or $3.375 per share of Harken common stock).
During the last half of 1996, holders of 6 1/2% European Notes totaling
$1,400,000 exercised their conversion option and such holders were issued
560,000 shares of Harken common stock. In February 1997, Harken gave notice as
required under the Trust Indenture that it had met the market price criteria
necessary to call for mandatory conversion of the 6 1/2% European Notes and on
June 2, 1997 formally called the 6 1/2% European Notes for conversion on July
31, 1997. During the first six months of 1997, holders of 6 1/2% European Notes
totaling $19,300,000 exercised their conversion option and such holders were
issued 7,720,000 shares of Harken common stock. On July 31, 1997, Harken
converted the remaining 6 1/2% European Notes into 7,720,000 shares of Harken
common stock.
5 1/2% European Notes -- On June 11, 1997, Harken issued to qualified
purchasers a total of $70 million in 5 1/2% Senior Convertible Notes ( the "5
1/2% European Notes") which mature on June 10, 2002. In connection with the sale
and issuance of the 5 1/2% European Notes, Harken paid approximately $5,174,000
from the 5 1/2% European Notes proceeds for commissions and issuance costs.
Interest incurred on these notes is payable semi-annually in June and December
of each year to maturity or until the 5 1/2% European Notes are converted. Such
5 1/2% European Notes are convertible into shares of Harken common stock at an
initial conversion price of $5.00 per share, subject to adjustment in certain
circumstances ("the 5 1/2% European Note Conversion Price"). The Trust Indenture
provided for a five percent premium on the number of shares of Harken common
stock issuable on conversion that was paid to holders converting the 5 1/2%
European Notes prior to December 11, 1997. The 5 1/2% European Notes are also
convertible by Harken into shares of Harken common stock after one year
following issuance, if for any period of thirty consecutive days commencing on
or after June 11, 1997, the average of the closing prices of Harken common stock
for each trading day during such thirty day period shall have equaled or
exceeded 130% of the 5 1/2% European Note Conversion Price (or $6.50 per share
of Harken common stock). In October 1997, Harken met the market price criteria
necessary to call for mandatory conversion of the 5 1/2% European Notes any time
on or after June 11, 1998, and provided
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<PAGE> 14
notice to the holders as required under the Trust Indenture. In May 1998, Harken
formally called the 5 1/2% European Notes which remain outstanding for
conversion on June 12, 1998. As of December 31, 1997, holders of 5 1/2% European
Notes totaling $30,120,000 have exercised their conversion option and such
holders were issued 6,325,200 shares of Harken common stock. Subsequent to
December 31, 1997, and as of April 30, 1998, additional holders of 5 1/2%
European Notes totaling $610,000 have exercised their conversion option and such
holders were issued an additional 122,000 shares of Harken common stock. The 5
1/2% European Notes are listed on the Luxembourg Stock Exchange.
Upon closing, all proceeds from the sale of each of the European Notes
issuances were each initially paid to a Trustee under the terms of a Trust
Indenture covering each issue and held in separate interest bearing Trust
accounts (the "Segregated Accounts") to be maintained for Harken's benefit,
until the Trustee is presented with evidence of sufficient asset value, as
defined in the Trust Indenture, held by Harken to permit an advance of a portion
of the proceeds. Until all of the 5 1/2% European Notes are converted, Harken
must maintain an Asset Value Coverage Ratio equal to or greater than 1:1 which
is calculated as the ratio of (i) the sum of (x) 100% of the aggregate amount of
Harken's cash on deposit in the Segregated Accounts plus (y) 50% of the net
present value of Harken's domestic unencumbered total proved reserves plus (z)
25% of the net present value of Harken's total proved Colombian reserves to (ii)
the aggregate outstanding principal amount of the 5 1/2% European Notes. Upon a
conversion, any proceeds attributable to the 5 1/2% European Notes converted
which remain in the Segregated Accounts may be withdrawn by Harken without
regard to the asset value then existing. Harken was in compliance with the Asset
Value Coverage Ratio at March 31, 1998.
The 5 1/2% European Notes were sold strictly to non-U.S. purchasers in
the form of bearer instruments in $10,000 and $50,000 increments. The 5 1/2%
European Notes and the Harken common stock issuable upon conversion of the 5
1/2% European Notes have been or will be issued without registration under the
United States Securities Act of 1933 (the "Securities Act") pursuant to an
exemption contained in Regulation S promulgated under the Securities Act.
Commissions and issuance costs associated with the European Notes are
deferred and are included in Other Assets and are amortized to interest expense
over the period until conversion or maturity of the European Notes. As European
Notes are converted to Harken common stock, a pro-rata portion of these deferred
costs are charged to Additional Paid-In Capital.
All Segregated Account cash related to the 5 1/2% European Notes is
reflected as a current asset at December 31, 1997 and March 31, 1998 as all such
cash is available according to the Trust Indenture. The initial cash proceeds
from the issuance of the European Notes are not included in the Statement of
Cash Flows because the proceeds are not considered to be cash equivalents.
Transfers of proceeds from the Segregated Accounts are included in cash flows
from financing activities in the accompanying consolidated statements of cash
flows.
(8) STOCKHOLDERS' EQUITY
Common Stock -- Harken currently has authorized 175,000,000 shares of
$.01 par common stock. At December 31, 1997 and March 31, 1998, Harken had
issued 121,811,534 and 122,799,347 shares, respectively.
14
<PAGE> 15
Issuance of European Convertible Notes Payable -- In July 1996, Harken
issued to qualified purchasers a total of $40 million in 6 1/2% European Notes
which were to mature on July 30, 2000. The 6 1/2% European Notes were
convertible under certain terms into approximately 16,000,000 shares of Harken
common stock. During the last half of 1996, holders of 6 1/2% European Notes
totaling $1,400,000 exercised their conversion option and such holders were
issued 560,000 shares of Harken common stock. In February 1997, Harken gave
notice as required under the Trust Indenture that it had met the market price
criteria necessary to call for mandatory conversion of the 6 1/2% European Notes
and on June 2, 1997, formally called the 6 1/2% European Notes for conversion on
July 31, 1997. (see Note 7 -- European Convertible Notes Payable for further
discussion). During the first six months of 1997, holders of 6 1/2% European
Notes totaling an additional $19,300,000 exercised their conversion option and
such holders were issued 7,720,000 shares of Harken common stock. On July 31,
1997, Harken converted the remaining 6 1/2% European Notes into 7,720,000 shares
of Harken common stock.
In connection with the issuance of the 6 1/2% European Notes, Harken
issued to the placement agents for the 6 1/2% European Notes certain
non-registered non-transferrable stock purchase warrants to purchase 1,280,000
shares of Harken common stock which are currently exercisable by the holders
thereof at any time on or before July 31, 1999 at an exercise price of $2.50 per
share. As of March 31, 1998, all but approximately 60,000 of such warrants had
been exercised for shares of Harken common stock.
In June 1997, Harken issued to qualified purchasers a total of $70
million in 5 1/2% European Notes which mature on June 11, 2002. The 5 1/2%
European Notes are convertible under certain terms into a maximum of
approximately 14,700,000 shares of Harken common stock. In connection with the
issuance of the 5 1/2% European Notes, Harken issued to the placement agents for
the 5 1/2% European Notes warrants to purchase 1,120,000 shares of Harken common
stock at any time after December 11, 1997 and on or before December 11, 1999 at
an exercise price of $5.00 per share. As of December 31, 1997, holders of 5 1/2%
European Notes totaling $30,120,000 have exercised their conversion option and
such holders were issued 6,325,200 shares of Harken common stock. Subsequent to
December 31, 1997 and as of April 30, 1998, holders of 5 1/2% European Notes
totaling an additional $610,000 have exercised their conversion option and such
holders were issued 122,000 shares of Harken common stock.
Acquisition of Cal-T Properties -- In August 1997, Harken acquired
working interests in the Cal-T Properties in exchange for 565,000 shares of
Harken common stock. See Note 2-- Acquisition for further discussion.
Acquisition of EnerVest Properties -- In March 1997, Harken and
EnerVest Acquisition - II Limited Partnership ("EnerVest") entered into a
Resolution and Settlement Agreement whereby in addition to the 1,550,000 shares
of Harken common stock previously issued to EnerVest at the July 10, 1996
acquisition closing date, Harken issued 1,400,000 shares of Harken common stock
as final consideration for the purchase of the EnerVest Properties.
Palo Blanco Development Finance Agreements -- In June 1996, Harken,
along with Harken de Colombia, Ltd. entered into separate Development Finance
Agreements with two investors. In 1996, the investors exercised their rights
under the agreement to convert one-half of their beneficial interest into
599,988 shares of restricted Harken common stock. During the first quarter of
1997, the investors exercised their right to convert the remaining portion of
their beneficial interest into an additional 599,988 shares of restricted Harken
common stock. See Note 6 -- Development Finance and Operating Agreements.
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<PAGE> 16
Rio Negro Development Finance Agreement -- In March 1997, Harken and
the Rio Negro Investors entered into a Conversion Agreement whereby Harken
purchased 75% of the Participation relating to the Rio Negro Development Finance
Agreement for 900,000 restricted shares of Harken common stock. These shares
were issued in April 1997. See Note 6 -- Development Finance and Operating
Agreements for further discussion.
EnCap Development Finance Agreement -- In October 1997, Harken and the
EnCap Investors entered into a Development Finance Agreement under which the
EnCap Investors funded approximately $25 million to finance the drilling of
three wells in the Middle Magdalena Basin of Colombia. Pursuant to the EnCap
Development Finance Agreement, both Harken and the EnCap Investors have the
right under certain circumstances to convert all or part of the EnCap
Participation into shares of Harken common stock. Harken also issued 150,000
shares of Harken common stock to the EnCap Investors. See Note 6 -- Development
Finance and Operating Agreements for further discussion of the EnCap Development
Finance Agreement and Note 11 -- Related Party Transactions for further
discussion of the EnCap Investors.
European Development Finance Agreements -- In December 1997, Harken,
HCC and the European Investors entered into a Development Finance Agreement
under which HCC funded $7 million in January 1998 to finance the drilling of
three wells in the Middle Magdalena Basin of Colombia. Pursuant to the European
Development Finance Agreement, both Harken and HCC have the right under certain
circumstances to convert some or all of the shares of HCC common stock into
shares of Harken common stock. In addition, Harken issued 42,000 shares of
Harken common stock to the European Investors. In March 1998, Harken entered
into an additional Development Finance Agreement with Faisal, which also
contained terms whereby both Harken and Faisal have the right under certain
circumstances to convert part of the Participation into shares of Harken common
stock. In addition, Harken issued 18,000 shares of Harken common stock to a
financial advisor in connection with the Development Finance Agreement with
Faisal. See Note 6 -- Development Finance and Operating Agreements for further
discussion.
Series F Preferred Stock -- On April 9, 1998, Harken entered into a
Securities Purchase Agreement with RGC International Investors, LDC ("RGC"),
pursuant to which Harken issued to RGC 15,000 shares of its Series F Convertible
Preferred Stock (the "Series F Preferred") in exchange for $15,000,000. The
Series F Preferred is convertible into shares of Harken common stock at a
conversion price based upon the market price of Harken common stock at the time
of conversion. The number of shares of Harken common stock issuable upon
conversion of the Series F Preferred will also include a premium amount equal to
an increase calculated on the face value of the Series F Preferred at 5% per
annum. The Series F Preferred does not pay dividends.
During the first six months following the issuance of the Series F
Preferred, RGC can elect to convert the shares of the Series F Preferred into
Harken common stock on any day that the closing sales price of the Harken common
stock on the American Stock Exchange is equal to or greater than 115% of the
"Market Price." The Market Price is equal to the lower of (a) the average of the
closing bid prices of Harken common stock for any five consecutive trading days
during the 22 trading days ending one trading day prior to the conversion date,
or (b) the low closing bid price of Harken common stock over the five trading
days ending one trading day prior to the conversion date.
During the first nine months following the issuance of the Series F
Preferred, the conversion price will be equal to 103% of the Market Price on the
conversion date. On January 9, 1999, the conversion price will be fixed at 90%
of the average of the closing bid prices of Harken common stock for the previous
22 trading days. Beginning February 9, 1999, the conversion price will be fixed
at 90% of the average of the closing bid
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<PAGE> 17
prices of Harken common stock for the previous 22 trading days if it would
result in a lower conversion price than that calculated on January 9, 1999. Any
shares of Series F Preferred outstanding on April 9, 1999, will automatically be
converted into shares of Harken common stock at the then applicable conversion
price.
Harken has the option to redeem for cash any shares of Series F
Preferred presented for conversion if (a) prior to January 9, 1999, the closing
price of Harken common stock on the conversion date is less than $4.80, or (b)
on or after January 9, 1999, the then applicable conversion price is less than
$4.80, for an amount equal to the number of shares of Harken common stock that
would otherwise be issuable upon conversion multiplied by the closing price of
Harken common stock on the conversion date.
At each election to convert shares of Series F Preferred into Harken
common stock, RGC will have the option to purchase from Harken for cash
additional shares of Harken common stock equal to the number of shares issued on
such conversion (less any shares issued in respect of the premium amount) at a
purchase price equal to the then applicable conversion price.
Stockholder Rights Plan -- In April 1998, Harken adopted a rights
agreement (the "Rights Agreement") whereby a dividend of one preferred share
purchase right (a "Right") was paid for each outstanding share of Harken common
stock. The Rights will be exercisable only if a person acquires beneficial
ownership of 15 percent or more of Harken common stock (an "Acquiring Person"),
or commences a tender offer which would result in beneficial ownership of 15
percent or more of such stock. When they become exercisable, each Right entitles
the registered holder to purchase from Harken one one-thousandth of one share of
Series E Junior Participating Preferred Stock ("Series E Preferred Stock"), at a
price of $35.00 per one one-thousandth of a share of Series E Preferred Stock,
subject to adjustment under certain circumstances.
Upon the occurrence of certain events specified in the Rights
Agreement, each holder of a Right (other than an Acquiring Person) will have the
right to purchase, at the Right's then current exercise price, shares of Harken
common stock having a value of twice the Right's exercise price. In addition,
if, after a person becomes an Acquiring Person, Harken is involved in a merger
or other business combination transactions with another person in which Harken
is not the surviving corporation, or under certain other circumstances, each
Right will entitle its holder to purchase, at the Right's then current exercise
price, shares of common stock of the other person having a value of twice the
Right's exercise price.
Unless redeemed by Harken earlier, the Rights will expire on April 6,
2008. Harken will generally be entitled to redeem the Rights in whole, but not
in part, at $.01 per Right, subject to adjustment. No Rights were exercisable
under the Rights Agreement at March 31, 1998.
The terms of the Rights generally may be amended by Harken without the
approval of the holders of the Rights prior to the public announcement by Harken
or an Acquiring Person that a person has become an Acquiring Person.
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<PAGE> 18
(9) PER SHARE DATA
Basic earnings per common share was computed by dividing net income or
loss by the weighted average number of shares of Harken common stock outstanding
during the year. Diluted earnings per common share for 1997 and 1998 was
determined by including the effect of outstanding options and warrants using the
treasury stock method to the extent that the average share price exceeds the
exercise price. The impact of unconverted European Convertible Notes was not
included for the three months ended March 31, 1997 as their effect would have
been antidilutive. Harken has adopted Statement of Financial Accounting
Standards No. 128, "Earnings per Share", effective December 15, 1997, and as a
result has restated 1997 weighted average shares outstanding calculations,
although there was no impact on prior year income per share amounts. A
reconciliation of the calculations of diluted earnings per common share is as
follows:
<TABLE>
<CAPTION>
Three Months Ended March 31, 1997
-----------------------------------------
Weighted Average
Income Shares Per Share
------------ ------------- ---------
<S> <C> <C> <C>
Basic earnings per common share $ 68,000 97,053,054 $0.00
Treasury stock method effect of:
Outstanding employee stock options -- 1,385,894 --
Outstanding warrants -- 1,594,548 --
----------- ----------- -----
Diluted earnings per common share $ 68,000 100,033,496 $0.00
=========== =========== =====
</TABLE>
<TABLE>
<CAPTION>
Three Months Ended March 31, 1998
------------------------------------------
Weighted Average
Income Shares Per Share
------------ ------------- ----------
<S> <C> <C> <C>
Basic earnings per common share $ 84,000 122,441,279 $0.00
Treasury stock method effect of:
Outstanding employee stock options -- 2,352,875 --
Outstanding warrants -- 400,853 --
Effect of conversion of outstanding
5 1/2% European Notes -- 7,898,333 --
----------- ----------- -----
Diluted earnings per common share $ 84,000 133,093,340 $0.00
=========== =========== =====
</TABLE>
Beginning in April 1998, Harken's calculation of diluted earnings per
share will be affected by the issuance of the Series F Preferred Stock which are
convertible into shares of Harken common stock. See Note 8 -- Stockholders'
Equity for further discussion of the Series F Preferred Stock.
(10) INCOME TAXES
At March 31, 1998, Harken had available for federal income tax
reporting purposes, net operating loss (NOL) carryforward for regular tax
purposes of approximately $60,000,000 which expires in 1998 through 2012,
alternative minimum tax NOL carryforward of approximately $51,000,000 which
expires in 1998 through 2011, investment tax credit carryforward of
approximately $842,000 which expires in 1998 through 2002, statutory depletion
carryforward of approximately $2,400,000 which does not have an expiration date,
and a net capital loss carryforward of approximately $12,400,000 which expires
in 2007 through 2011.
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<PAGE> 19
Approximately $16,000,000 of the net operating loss carryforward has been
acquired with the purchase of subsidiaries and must be used to offset future
income from profitable operations within those subsidiaries.
Total deferred tax liabilities, relating primarily to property and
equipment, as of March 31, 1998 were approximately $680,000. Total deferred tax
assets, primarily related to the net operating loss carryforward, were
approximately $20,538,000 at March 31, 1998. The total net deferred tax asset is
offset by the valuation allowance of approximately $19,858,000 at March 31,
1998.
(11) RELATED PARTY TRANSACTIONS
In June 1997, Harken added to its Board of Directors a new director who
is also a managing director of EnCap Investments L.C. ("EnCap"). EnCap has
historically provided financial consulting and investment banking services to
Harken. In connection with the June 1997 placement of the 5 1/2% European Notes,
EnCap received as a financial consulting fee, $466,667 in cash, and a warrant to
purchase 50,000 shares of Harken common stock at any time after December 11,
1997 and on or before December 11, 1999 at an exercise price of $5.00 per share.
As described in Note 6 -- Development Finance and Operating Agreements, in
October 1997, Harken entered into a Development Finance Agreement with the EnCap
Investors. EnCap serves as the general partner of three of the EnCap Investors
and the new Harken director serves as a director of the fourth EnCap Investor.
In connection with the EnCap Development Finance Agreement, EnCap received an
investment banking fee of $500,000.
During 1997 and 1998, Harken made short-term loans totaling $355,000 to
certain members of Harken's Board of Directors and Management. Such notes
receivable are reflected in Harken's consolidated balance sheet at December 31,
1997 and March 31, 1998 as Related Party Notes Receivable.
(12) COMMITMENTS AND CONTINGENCIES
Harken has accrued approximately $1,681,000 at March 31, 1998 relating
to operational or regulatory contingent liabilities related to Harken's domestic
operations. Harken and its subsidiaries currently are involved in various
lawsuits and other contingencies, including the guarantee of certain lease
obligations of a former subsidiary, which in management's opinion, will not
result in significant loss exposure to Harken.
The exploration, development and production of oil and gas are subject
to various Navajo, federal and state laws and regulations designed to protect
the environment. Compliance with these regulations is part of Harken's
day-to-day operating procedures. Infrequently, accidental discharge of such
materials as oil, natural gas or drilling fluids can occur and such accidents
can require material expenditures to correct. Harken maintains levels of
insurance customary in the industry to limit its financial exposure. Management
is unaware of any material capital expenditures required for environmental
control during the next fiscal year.
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<PAGE> 20
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
(UNAUDITED)
Certain statements included in the accompanying condensed financial
statements and in the following discussion and analysis of financial condition
and results of operation, including statements of Harken management's current
expectations, intentions, plans and beliefs, and statements containing the words
"believes", "anticipates", "estimates", "expects", or "may" are forward-looking
statements, as defined in Section 21D of the Securities Exchange Act of 1934.
Such forward-looking statements involve known and unknown risk, uncertainties
and other factors which may cause the actual results, performance, timing or
achievements of Harken to be materially different for any results, performance,
timing or achievements expressed or implied by such forward-looking statements.
Such factors include, among others, the risks described in Harken's filings with
the Securities and Exchange Commission.
OVERVIEW
Harken reported net income for the three months ended March 31, 1998 of
$84,000 compared to a net income of $68,000 for the prior year period. Total
revenues increased from approximately $4.25 million during the first quarter of
1997 to approximately $4.36 million for the first quarter of 1998, primarily due
to increased interest income as a result of net proceeds received from the
issuance of the 5 1/2% European Notes and from the EnCap Development Finance
Agreement. Gross profit before depreciation and amortization, general and
administrative and interest expenses totaled approximately $1.3 million during
the three months ended March 31, 1998 compared to approximately $2.4 million for
the prior year period.
Internationally, during March 1998, Harken signed an additional
Association Contract in Colombia with Ecopetrol, bringing the total number of
Association Contracts to six and increasing the total number of acres currently
operated in Colombia by Harken to approximately 1,358,000. Harken has continued
its Colombian exploration efforts during the first part of 1998 with the
drilling of the Estero #3 and Canacabare #1 wells on the Alcaravan Contract
area, and the completion of the Catalina #1 well and the spudding and completion
of the Olivo #1 well on the Bolivar Contract area.
Harken plans to continue its Colombian exploration program during 1998,
expecting to spud ten additional exploratory wells as well as certain pipeline
and facility installation efforts.
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<PAGE> 21
RESULTS OF OPERATIONS
The following is management's discussion and analysis of certain
significant factors which have affected Harken's earnings and balance sheet
during the periods included in the accompanying consolidated financial
statements.
<TABLE>
<CAPTION>
Three Months Ended March 31,
-----------------------------
DOMESTIC EXPLORATION AND PRODUCTION OPERATIONS 1997 1998
- ---------------------------------------------- ------------- ------------
(Unaudited)
<S> <C> <C>
REVENUES
Oil sales revenues $2,160,000 $1,379,000
Oil volumes in barrels 100,000 95,000
Oil price per barrel $ 21.60 $ 14.52
Gas sales revenues $1,307,000 $1,189,000
Gas volumes in mcf 394,000 502,000
Gas price per mcf $ 3.32 $ 2.37
Gas plant revenues $ 213,000 $ 132,000
OTHER REVENUES
Interest Income $ 560,000 $1,656,000
Other Income $ 11,000 $ 6,000
</TABLE>
For the quarter ended March 31, 1998 compared with the corresponding prior
period.
DOMESTIC OPERATIONS
Gross oil and gas revenues during the first quarter of 1998 and 1997
were generated by Harken's domestic exploration and production operations. These
domestic operations consisted primarily of the operations in the Four Corners
area of Utah, Arizona and New Mexico, primarily on the Navajo Indian Reservation
(the "Four Corners Properties"), onshore South Texas, and in the Western and
Panhandle regions of Texas, as well as Harken's operations in the Magnolia
region of Arkansas and the Carlsbad region of New Mexico.
Gross oil revenues decreased 36% to $1,379,000 during the first quarter
of 1998 compared to $2,160,000 during the first quarter of 1997 primarily due to
the sharp decline in oil prices, which averaged $7.08 less per barrel during the
first quarter of 1998 compared to the prior year period. Prices have continued
to remain lower than prices received during 1997 during the first half of the
second quarter of 1998.
Gross gas revenues decreased 9% to $1,189,000 for the three months
ended March 31, 1998 compared to $1,307,000 for the prior year period, despite
the increased production resulting from the acquisition of the Cal-T Properties
in August 1997. The decrease in gas revenues was caused by the decrease in
average gas prices received during the first quarter of 1998, as Harken received
an overall average price of $3.32 per mcf of gas production during the first
quarter of 1997 compared to only $2.37 per mcf received during the first quarter
of 1998. Harken also reflected decreased gas production from certain of its
Texas Panhandle properties
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<PAGE> 22
during the first quarter of 1998 as many of the properties experienced numerous
temporary operational curtailments.
Oil and gas operating expenses consist of lease operating expenses and
gas plant expenses, along with a number of production and reserve based taxes,
including severance taxes, property taxes, Utah conservation taxes and Navajo
severance and possessory interest taxes. The increase in oil and gas operating
expenses compared to the prior year is primarily a result of the above mentioned
acquisition of the Cal-T Properties.
COLOMBIAN OPERATIONS
Harken reflected no oil and gas revenues or operating expenses from its
Colombian operations during the first quarter of 1998. Harken expects, however,
that production from its Estero #1, Torcaz #2, Torcaz #3 and Catalina #1 wells
will commence during 1998 as trucking operations from these well sites are
initiated. In addition, 1998 production operations could further increase if the
current and planned drilling activities in Colombia are successful.
In April 1998, Harken initiated trucking operations from its Torcaz #2
and Torcaz #3 wells on the Bocachico Contract area. In the Alcaravan Contract
area, Harken's operations have been affected by the rainy season in the Llanos
Basin, which has affected the completion and testing of the recently drilled
Estero #3 and Canacabare #1 wells, as well as the construction of the Phase I
Pipeline connecting the Estero wells to the closest existing pipeline. Harken
anticipates that results of the Estero #3 will be available in mid-May 1998.
Harken is currently attempting to mobilize light equipment in order to test the
Canacabare #1 well, and hopes to have results available in May 1998, if weather
conditions do not impede these efforts. Harken now expects to initiate a 90-day
production test of the Estero #1 and, if successful, the Estero #3 well, in June
1998. Construction of the Phase I Pipeline, pending weather conditions and
receipt of required approvals, is scheduled to begin in July 1998. The Olivo #1
well, drilled on the Bolivar Contract area, was completed and tested at a
production rate of 10,800 barrels of oil per day with no water from the Middle
Cretaceous naturally fractured Salada (Lower La Luna) Formation. Harken believes
the production rate was limited by the size of pump and production equipment
used. An independent reservoir engineering firm estimates the Olivo #1 and the
previously completed Catalina #1 are each capable of producing at rates in
excess of 20,000 barrels of oil per day with larger production equipment. Harken
anticipates initiating a 90-day production test from the Catalina #1 in July
1998. In the Cambulos Contract area, Harken anticipates drilling its first well
on the Cambulos acreage, on the Emerald Mountain prospect, in June 1998. For a
detailed discussion of all of Harken's operations in Colombia, see Harken's
Annual Report on Form 10-K for the year ended December 31, 1997.
INTEREST AND OTHER INCOME
Interest and other income increased significantly during the first
quarter of 1998 compared to the prior year period due to interest earned by
Harken on its invested funds, including the net proceeds from the June 1997
issuance of $70 million of 5 1/2% European Notes, which are initially maintained
and invested in separate interest bearing bank accounts (the "Segregated
Accounts"), and from proceeds from the EnCap Development Finance Agreement and
the European Development Finance Agreements. Harken generated approximately $1.7
million of interest income during the first quarter of 1998, compared to
approximately $560,000 of interest income during the prior year period. Harken's
cash balances, which include investments in short-term marketable debt
securities, are expected to decrease in 1998 as such funds are used to support
Harken's capital expenditure plans. Harken intends to continue to pursue other
financing arrangements during 1998 and the decrease in existing cash balances
and related interest income could be mitigated or offset if such efforts are
successful.
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<PAGE> 23
OTHER COSTS AND EXPENSES
General and administrative expenses increased 32% from $1,334,000 for
the first quarter of 1997 to $1,758,000 for the first quarter of 1998, related
to Harken's increased executive, corporate and administrative personnel costs
associated with Harken's expanding overall operations.
Depreciation and amortization expense increased during the first
quarter of 1998 compared to the prior year period consistent with the increased
equivalent barrel production levels during the quarter. Depreciation and
amortization on oil and gas properties is calculated on a unit of production
basis in accordance with the full cost method of accounting for oil and gas
properties. In addition, Harken's depreciation on other property has increased
as a result of Harken's expanding operations.
Interest expense and other decreased significantly during the first
quarter of 1998 compared to the prior year period despite the June 1997 issuance
of the 5 1/2% European Notes due to the increase in the amounts of interest
capitalized to Harken's Colombian exploration activity.
LIQUIDITY AND CAPITAL RESOURCES
Harken's working capital at March 31, 1998 was approximately $108.3
million, versus approximately $110.6 million at December 31, 1997. Cash and
temporary investments, including segregated account cash, at March 31, 1998
totaled $118.6 million, a decrease of $4.9 million from December 31, 1997. The
decrease in cash and working capital resulted primarily from approximately $16.9
million of capital expenditures during the first quarter, primarily related to
Harken's Colombia operations. The effect of such capital expenditures was
partially offset by the receipt of approximately $9.8 million pursuant to
Development Finance Agreements. In addition, Harken's operations provided
approximately $722,000 of cash flow during the first quarter of 1998.
Harken's primary need for capital is to fund the planned exploration
and development efforts in Colombia. In 1997, Harken's capital expenditures
totaled approximately $37 million, including $30 million related to exploration
and development in Colombia. Harken anticipates that its 1998 Colombian capital
expenditures will total approximately $113 million, including exploration costs
of approximately $85 million. Harken believes that it will have sufficient cash
resources to fund all of its planned capital expenditures for 1998. In addition,
Harken intends to pursue domestic acquisition opportunities during 1998. Harken
intends to fund such acquisitions, if any are consummated, through a combination
of cash on hand, issuances of debt or equity securities.
Harken anticipates that full development of its Colombian reserves will
take several years and will also require extensive production facilities,
transportation pipelines and development activity which would require
significant additional capital expenditures. The ultimate amount of such
expenditures cannot be presently predicted. As a result of its recent successes
in Colombia from its exploratory drilling program, Harken's current business
plan includes estimated total capital expenditures in Colombia for the years
1998 through 2001 that approximate $1 billion. Harken estimates that
approximately 75 to 80% of external funds applicable to these capital
expenditures will be provided from non-recourse project finance and other
similar forms of debt which can be identified to specific development projects.
Harken anticipates it would put this type of debt facility in place after
establishing ongoing production rates from its recently announced discoveries.
The remaining 20 to 25% of the total anticipated expenditures in Colombia apply
to continued exploration efforts including seismic acquisition and exploratory
drilling. In the past, Harken has addressed its exploration capital needs in
Colombia through European convertible note offerings. Although Harken will
continue to seek some
23
<PAGE> 24
of its exploration capital from Europe, Harken anticipates that a portion of its
1998 and 1999 exploration capital needs will also be satisfied by placements in
the United States. There can be no assurances, however, that Harken will have
adequate funds available to it to fund all of its Colombian activities.
Terms of each of the Association Contracts entered into between Harken
de Colombia, Ltd. and Ecopetrol commit Harken to perform certain activities in
accordance with a prescribed timetable. Failure by Harken to perform these
activities as required could result in Harken losing its rights under the
particular Association Contract, which could potentially have a material adverse
effect on Harken's business.
Harken's domestic operating strategy includes efforts to acquire
additional oil and gas reserves through drilling activities in North America and
through acquisitions. Harken plans to continue development of proved undeveloped
reserves on its North American properties in addition to a continual workover
program on producing properties. Harken expects such drilling and workover costs
to total approximately $4 million in 1998. The targeted results of these efforts
are to maintain North American production levels during 1998.
On June 11, 1997, Harken issued a total of $70 million in 5 1/2% Senior
Convertible Notes (the "5 1/2% European Notes") which mature on June 10, 2002.
In connection with the sale and issuance of the 5 1/2% European Notes, Harken
paid approximately $5,174,000 from the 5 1/2% European Notes proceeds for
commission and issuance costs. Interest incurred on these notes is payable
semi-annually in June and December of each year to maturity or until the 5 1/2%
European Notes are converted. Such 5 1/2% European Notes are convertible into
shares of Harken common stock at a conversion price of $5.00 per share, subject
to adjustment in certain circumstances. Harken also has the right to require
conversion of the 5 1/2% European Notes into shares of Harken common stock at
any time on or after June 11, 1998. In May 1998, Harken formally called the 5
1/2% European Notes which remain outstanding for conversion on June 12, 1998.
Between June 11, 1997 and December 31, 1997, $30,120,000 in principal amount of
the 5 1/2% European Notes converted into Harken common stock.
All proceeds from the sale of the 5 1/2% European Notes were initially
paid to a Trustee pursuant to a Trust Indenture and held in Segregated Accounts
to be maintained for Harken's benefit. Until all of the 5 1/2% European Notes
are converted, Harken must maintain an Asset Value Coverage Ratio equal to or
greater than 1:1, which is calculated as the ratio of (i) the sum of (x) 100% of
the aggregate amount of Harken's cash on deposit in the Segregated Accounts plus
(y) 50% of the net present value of Harken's domestic unencumbered total proved
reserves plus (z) 25% of the net present value of Harken's total proved
Colombian reserves to (ii) the aggregate outstanding principal amount of the 5
1/2% European Notes. As of March 31, 1998, Harken was in compliance with the
Asset Value Coverage Ratio test. In order for any of the proceeds to be released
from the Segregated Accounts, Harken must demonstrate that the Asset Value
Coverage Ratio (as defined in the Trust Indenture) test would continue to be met
after such release of funds and that no Event of Default with respect to the 5
1/2% European Notes has occurred and is continuing at the date of such release.
Such request must be accompanied by an independent reserve engineering report or
other independent third party valuation of Harken's unencumbered proved
reserves. At March 31, 1998, all proceeds held in the Segregated Accounts were
available to be released. For a detailed discussion of the 5 1/2% European Notes
see "Notes to Consolidated Financial Statements, Note 7 -- European Convertible
Notes Payable."
To the extent that proceeds invested in the Segregated Accounts at the
balance sheet date are available under the above Asset Value Coverage Ratio
limitations, such cash is included as a current asset as it is available to
Harken to fund international and domestic activities including acquisitions,
drilling costs and other capital expenditures or other working capital needs.
Interest payments will be funded from cash flow from operations, existing cash
balances or from available proceeds in the Segregated Accounts.
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<PAGE> 25
In October 1997, December 1997, and March 1998, Harken entered into
separate Development Finance Agreements with institutional investors
(collectively the "Institutional Investors"), pursuant to which the
Institutional Investors provided approximately $34.5 million (the "Payment
Amount") of net proceeds to Harken to finance the drilling of the initial wells
on three unexplored oil and gas prospects in the Middle Magdalena Basin of
Colombia. Approximately $24.5 million of net proceeds was received in October
1997 and approximately $10 million of net proceeds was received during the first
quarter of 1998. In exchange, the Institutional Investors received the right to
receive future payments from Harken equal to 7% of the net profits that Harken
de Colombia, Ltd. may derive from the sale of oil and gas produced from each of
the three prospects if the planned drilling on the prospect is successful (the
"Institutional Participation"). Pursuant to the Development Finance Agreements,
Harken is obligated to drill each of the three wells prior to October 2000.
Pursuant to the Development Finance Agreements, the Institutional
Investors have the right, for a period of two years beginning in October 1998,
to convert all or part of the Institutional Participation into shares of Harken
common stock. The number of shares of Harken common stock to be issued upon
conversion of the Institutional Participation will be equal to the quotient of
(i) the Payment Amount (less any distributions made in respect of the
Institutional Participation) plus an amount equal to 15% interest per annum on
the net Payment Amount compounded monthly (the "Invested Amount"), divided by
(ii) the market price of the Harken common stock at the time of conversion.
During the same two year period, Harken also has the right to convert the
Institutional Participation into shares of Harken common stock with the number
of shares of Harken common stock to be issued to be equal to the quotient of (i)
the Payment Amount (less any distribution made in respect of the Institutional
Participation) plus an amount equal to 25% interest per annum on the net Payment
Amount compounded monthly, divided by (ii) the market price of Harken common
stock at the time of conversion. Harken can also elect to pay cash upon any
conversion of the Institutional Participation in lieu of issuing Harken common
stock. The Development Finance Agreements also provide for additional shares of
Harken common stock to be issued by Harken in the event of a conversion to the
extent that the Institutional Investors do not, under certain circumstances,
realize the Invested Amount from the sale of shares of Harken common stock
issued at the conversion.
At the present time, it is not known whether the Institutional
Investors or Harken will exercise their rights to convert the Institutional
Interest into Harken common stock, nor can Harken determine the number of shares
of Harken common stock which would be required to be issued in the event that
Harken or the Institutional Investors elect to convert the Institutional
Participation into shares of Harken common stock.
On April 9, 1998, Harken entered into a Securities Purchase Agreement
with RGC International Investors, LDC ("RGC"), pursuant to which Harken issued
to RGC 15,000 shares of its Series F Convertible Preferred Stock (the "Series F
Preferred") in exchange for $15,000,000. The Series F Preferred is convertible
into shares of Harken common stock at a conversion price based upon the market
price of Harken common stock at the time of conversion. The number of shares of
Harken common stock issuable upon conversion of the Series F Preferred will also
include a premium amount equal to an increase calculated on the face value of
the Series F Preferred at 5% per annum. The Series F Preferred does not pay
dividends.
Harken has the option to redeem for cash any shares of Series F
Preferred presented for conversion if (a) prior to January 9, 1999, the closing
price of Harken common stock on the conversion date is less than $4.80, or (b)
on or after January 9, 1999, the then applicable conversion price is less than
$4.80, for an amount equal to the number of shares of Harken common stock that
would otherwise be issuable upon conversion multiplied by the closing price of
Harken common stock on the conversion date.
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<PAGE> 26
At each election to convert shares of Series F Preferred into Harken
common stock, RGC will have the option to purchase from Harken for cash
additional shares of Harken common stock equal to the number of shares issued on
such conversion (less any shares issued in respect of the premium amount) at a
purchase price equal to the then applicable conversion price.
The exploration, development and production of oil and gas are subject
to various Colombian, Navajo, federal, state and local laws and regulations
designed to protect the environment. Compliance with these regulations is part
of Harken's day-to-day operating procedures. Accidental discharge of such
materials as oil, natural gas or drilling fluids can occur and such accidents
can require material expenditures to correct. Harken maintains levels of
insurance customary in the industry to limit its financial exposure. Management
is unaware of any material capital expenditures required for environmental
control during the next fiscal year.
Harken has accrued approximately $1.7 million at March 31, 1998
relating to operational or regulatory contingent liabilities related to Harken's
domestic operations. Harken and its subsidiaries currently are involved in
various lawsuits and other contingencies, which in management's opinion, will
not result in significant loss exposure to Harken.
26
<PAGE> 27
PART II - OTHER INFORMATION
Item 1. Legal Proceedings.
In September 1997, Harken Exploration Company, a wholly owned
subsidiary of Harken, was served with a lawsuit filed in Amarillo,
Texas in Federal District Court for the Northern District of Texas
styled D. E. Rice and Karen Rice, as Trustees for the Rice Family
Living Trust vs. Harken Exploration Company. The Rice Family Living
Trust ("Rice") is a surface land owner in Hutchinson County, Texas.
Rice has alleged that oil and saltwater spills from Harken Exploration
Company's equipment and wells have polluted and otherwise damaged its
property. Rice is seeking payment of costs to prevent, minimize and
mitigate the alleged oil pollution, costs to restore and repair the
land and vegetation, costs to decontaminate the ground and surface
water, interest, attorneys' fees, and punitive damages. Furthermore,
Rice has requested that Harken Exploration Company be enjoined from
producing any oil or gas from its lands. Rice has alleged that
remediation of all of the pollution on its land will cost approximately
$40,000,000. Harken believes that this lawsuit is wholly without merit.
Harken has filed a Motion to Dismiss for Failure to State a Claim and
has asserted numerous other defenses, all of which Harken believes are
meritorious. Harken intends to defend itself vigorously.
Harken and its subsidiaries currently are involved in various other
lawsuits and other contingencies, which in management's opinion, will
not have a material adverse effect on Harken's financial position.
Item 2. Changes in Securities.
In April 1998, Harken adopted a Stockholder Rights Plan. For further
discussion, see Harken's Current Report on Form 8-K dated April 6,
1998.
Item 3. Default Upon Senior Securities.
Not applicable.
Item 4. Submission of Matters to a Vote of Securities Holders.
Not applicable.
Item 5. Other Information
Not applicable.
Item 6. Exhibits and Reports on Form 8-K.
(a) EXHIBIT INDEX
Exhibit
3.1 Certificate of Incorporation of Harken Energy
Corporation as amended (filed as Exhibit 3.1 to
Harken's Annual Report on Form 10-K for fiscal year
ended December 31,1989, File No. 0-9207, and
incorporated by reference herein).
3.2 Amendment to the Certificate of Incorporation of
Harken Energy Corporation (filed as Exhibit 28.8 to
the Registration Statement on Form S-1 of Tejas Power
Corporation, file No. 33-37141, and incorporated by
reference herein.)
3.3 Amendment to the Certificate of Incorporation of
Harken Energy Corporation (filed as Exhibit 3 to
Harken's Quarterly Report on Form 10-Q for fiscal
quarter ended March 31, 1991, File No. 0-9207, and
incorporated by reference herein.)
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<PAGE> 28
3.4 Amendments to the Certificate of Incorporation of
Harken Energy Corporation (filed as Exhibit 3 to
Harken's Quarterly Report on Form 10-Q for fiscal
quarter ended June 30, 1991, File No. 0-9207, and
incorporated by reference herein.)
3.5 Amendments to the Certificate of Incorporation of
Harken Energy Corporation.
3.6 Bylaws of Harken Energy Corporation, as amended
(filed as Exhibit 3.2 to Harken's Annual Report on
Form 10-K for fiscal year ended December 31, 1989,
File No. 0-9207, and incorporated by reference
herein.)
4.1 Form of certificate representing shares of Harken
common stock, par value $.01 per share (filed as
Exhibit 1 to Harken's Registration Statement on Form
8-A, File No. 0-9027, and incorporated by reference
herein.)
4.2 Certificate of Designations, Powers, Preferences and
Rights of Series A Cumulative Convertible Preferred
Stock, $1.00 par value, of Harken Energy Corporation
(filed as Exhibit 4.1 to Harken's Annual Report on
Form 10-K for the fiscal year ended December 31,
1989, File No. 0-9207, and incorporated by reference
herein).
4.3 Certificate of Designations, Powers, Preferences and
Rights of Series B Cumulative Convertible Preferred
Stock, $1.00 par value, of Harken Energy Corporation
(filed as Exhibit 4.2 to Harken's Annual Report on
Form 10-K for the fiscal year ended December 31,
1989, File No. 0-9207, and incorporated by reference
herein).
4.4 Certificate of the Designations, Powers, Preferences
and Rights of Series C Cumulative Convertible
Preferred Stock, $1.00 par value of Harken Energy
Corporation (filed as Exhibit 4.3 to Harken's Annual
Report on Form 10-K for fiscal year ended December
31, 1989, File No. 0-9207, and incorporated by
reference herein).
4.5 Certificate of the Designations of Series D Preferred
Stock, $1.00 par value of Harken Energy Corporation
(filed as Exhibit 4.3 to Harken's Quarterly Report on
Form 10-Q for the fiscal quarter ended September 30,
1995, File No. 0-9207, and incorporated by reference
herein).
4.6 Rights Agreement, dated as of April 6, 1998, by and
between Harken Energy Corporation And ChaseMellon
Shareholder Services L.L.C., as Rights Agent (filed
as Exhibit 4 to Harken's Current Report on Form 8-K
dated April 7, 1998, file No. 0-9207, and
incorporated by reference herein).
4.7 Certificate of Designations of Series E Junior
Participating Preferred Stock (filed as Exhibit B to
Exhibit 4 to Harken's Current Report on Form 8-K
dated April 7, 1998, file No. 0- 9207, and
incorporated by reference herein).
*4.8 Certificate of Designations, Preferences and Rights
of Series F Convertible Preferred Stock.
*10.1 Securities Purchase Agreement dated as of April 9,
1998, by and between Harken Energy Corporation and
RGC International Investors, LDC.
*27 Financial Data Schedules.
28
<PAGE> 29
(b) REPORTS ON FORM 8-K.
Current Report on Form 8-K dated April 6, 1998, reporting
Harken's adoption of a Stockholder Rights Plan.
29
<PAGE> 30
HARKEN ENERGY CORPORATION
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
Harken Energy Corporation
--------------------------------------
(Registrant)
Date: May 7, 1998 By: /s/ WAYNE HENNECKE
--------------------------- --------------------------------------
Wayne Hennecke, Vice President of
Finance and Chief Financial Officer
30
<PAGE> 31
EXHIBIT INDEX
Exhibit
-------
3.1 Certificate of Incorporation of Harken Energy
Corporation as amended (filed as Exhibit 3.1 to
Harken's Annual Report on Form 10-K for fiscal year
ended December 31,1989, File No.
0-9207, and incorporated by reference herein).
3.2 Amendment to the Certificate of Incorporation of
Harken Energy Corporation (filed as Exhibit 28.8 to
the Registration Statement on Form S-1 of Tejas Power
Corporation, file No. 33-37141, and incorporated by
reference herein.)
3.3 Amendment to the Certificate of Incorporation of
Harken Energy Corporation (filed as Exhibit 3 to
Harken's Quarterly Report on Form 10-Q for fiscal
quarter ended March 31, 1991, File No. 0-9207, and
incorporated by reference herein.)
3.4 Amendments to the Certificate of Incorporation of
Harken Energy Corporation (filed as Exhibit 3 to
Harken's Quarterly Report on Form 10-Q for fiscal
quarter ended June 30, 1991, File No. 0-9207, and
incorporated by reference herein.)
3.5 Amendments to the Certificate of Incorporation of
Harken Energy Corporation.
3.6 Bylaws of Harken Energy Corporation, as amended
(filed as Exhibit 3.2 to Harken's Annual Report on
Form 10-K for fiscal year ended December 31, 1989,
File No. 0-9207, and incorporated by reference
herein.)
4.1 Form of certificate representing shares of Harken
common stock, par value $.01 per share (filed as
Exhibit 1 to Harken's Registration Statement on Form
8-A, File No. 0-9027, and incorporated by reference
herein.)
4.2 Certificate of Designations, Powers, Preferences and
Rights of Series A Cumulative Convertible Preferred
Stock, $1.00 par value, of Harken Energy Corporation
(filed as Exhibit 4.1 to Harken's Annual Report on
Form 10-K for the fiscal year ended December 31,
1989, File No. 0-9207, and incorporated by reference
herein).
4.3 Certificate of Designations, Powers, Preferences and
Rights of Series B Cumulative Convertible Preferred
Stock, $1.00 par value, of Harken Energy Corporation
(filed as Exhibit 4.2 to Harken's Annual Report on
Form 10-K for the fiscal year ended December 31,
1989, File No. 0-9207, and incorporated by reference
herein).
4.4 Certificate of the Designations, Powers, Preferences
and Rights of Series C Cumulative Convertible
Preferred Stock, $1.00 par value of Harken Energy
Corporation (filed as Exhibit 4.3 to Harken's Annual
Report on Form 10-K for fiscal year ended December
31, 1989, File No. 0-9207, and incorporated by
reference herein).
4.5 Certificate of the Designations of Series D Preferred
Stock, $1.00 par value of Harken Energy Corporation
(filed as Exhibit 4.3 to Harken's Quarterly Report on
Form 10-Q for the fiscal quarter ended September 30,
1995, File No. 0-9207, and incorporated by reference
herein).
4.6 Rights Agreement, dated as of April 6, 1998, by and
between Harken Energy Corporation And ChaseMellon
Shareholder Services L.L.C., as Rights Agent (filed
as Exhibit 4 to Harken's Current Report on Form 8-K
dated April 7, 1998, file No. 0-9207, and
incorporated by reference herein).
4.7 Certificate of Designations of Series E Junior
Participating Preferred Stock (filed as Exhibit B to
Exhibit 4 to Harken's Current Report on Form 8-K
dated April 7, 1998, file No. 0- 9207, and
incorporated by reference herein).
*4.8 Certificate of Designations, Preferences and Rights
of Series F Convertible Preferred Stock.
*10.1 Securities Purchase Agreement dated as of April 9,
1998, by and between Harken Energy Corporation and
RGC International Investors, LDC.
*27 Financial Data Schedules.
<PAGE> 1
EXHIBIT 4.8
CERTIFICATE OF
DESIGNATIONS, PREFERENCES, AND RIGHTS
OF
SERIES F CONVERTIBLE PREFERRED STOCK
OF
HARKEN ENERGY CORPORATION
(Pursuant to Section 151 of the
Delaware General Corporation Law)
Harken Energy Corporation, a corporation organized and existing under
the Delaware General Corporation Law (the "Corporation"), hereby certifies that
the following resolutions were adopted by the Board of Directors of the
Corporation on March 31, 1998 pursuant to authority of the Board of Directors
as required by Section 151(g) of the Delaware General Corporation Law:
RESOLVED, that pursuant to the authority granted to and vested in the
Board of Directors of this Corporation (the "Board of Directors" or the
"Board") in accordance with the provisions of its Certificate of Incorporation,
the Board of Directors hereby authorizes a series of the Corporation's
previously authorized Preferred Stock, par value $1.00 per share (the
"Preferred Stock"), and hereby states the designation and number of shares, and
fixes the relative rights, preferences, privileges, powers and restrictions
thereof as follows:
Series F Convertible Preferred Stock:
-1-
<PAGE> 2
I. Designation and Amount
The designation of this series, which consists of 15,000
shares of Preferred Stock, is Series F Convertible Preferred Stock (the "Series
F Preferred Stock") and the stated value shall be One Thousand Dollars ($1,000)
per share (the "Stated Value").
II. Rank
The Series F Preferred Stock shall rank (i) prior to the
Corporation's common stock, par value $.01 per share (the "Common Stock"); (ii)
prior to any class or series of capital stock of the Corporation hereafter
created that, by its terms, ranks junior to the Series F Preferred Stock and
prior to the Corporation's Series E Junior Participating Preferred Stock
(collectively, with the Common Stock, "Junior Securities"); (iii) junior to any
class or series of capital stock of the Corporation hereafter created (with the
consent of the holders of Series F Preferred Stock obtained in accordance with
Article IX hereof) specifically ranking, by its terms, senior to the Series F
Preferred Stock ("Senior Securities"); and (iv) pari passu with any other class
or series of capital stock of the Corporation hereafter created (as permitted
by Article IX(c) below), in each case as to distribution of assets upon
liquidation, dissolution or winding up of the Corporation, whether voluntary or
involuntary.
III. Dividends
The Series F Preferred Stock shall not bear any dividends. In
no event, so long as any Series F Preferred Stock shall remain outstanding,
shall any dividend whatsoever be declared or paid upon, nor shall any
distribution be made upon, any Junior Securities, nor shall any shares of
Junior Securities be purchased or redeemed by the Corporation nor shall any
moneys be paid to or made available for a sinking fund for the purchase or
redemption of any Junior Securities (other than a distribution of Junior
Securities or rights pursuant to that certain Rights Agreement dated April 6,
1998 (the "Rights Plan") between the Corporation and the Rights Agent named
therein), without, in each such case, the written consent of the holders of a
majority of the outstanding shares of Series F Preferred Stock, voting together
as a class.
IV. Liquidation Preference
A. If the Corporation shall commence a voluntary case
under the Federal bankruptcy laws or any other applicable Federal or State
bankruptcy, insolvency or similar law, or consent to the entry of an order for
relief in an involuntary case under any law or to the appointment of a
receiver, liquidator, assignee, custodian, trustee, sequestrator (or other
similar official) of the Corporation or of any substantial part of its
property, or make an assignment for the benefit of its creditors, or admit in
writing its inability to pay its debts generally as they become due, or if a
decree or order for relief in respect of the Corporation shall be entered by a
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<PAGE> 3
court having jurisdiction in the premises in an involuntary case under the
Federal bankruptcy laws or any other applicable Federal or state bankruptcy,
insolvency or similar law resulting in the appointment of a receiver,
liquidator, assignee, custodian, trustee, sequestrator (or other similar
official) of the Corporation or of any substantial part of its property, or
ordering the winding up or liquidation of its affairs, and any such decree or
order shall be unstayed and in effect for a period of thirty (30) consecutive
days and, on account of any such event, the Corporation shall liquidate,
dissolve or wind up, or if the Corporation shall otherwise liquidate, dissolve
or wind up (each such event being considered a "Liquidation Event"), no
distribution shall be made to the holders of any shares of capital stock of the
Corporation (other than Senior Securities) upon liquidation, dissolution or
winding up unless prior thereto, the holders of shares of Series F Preferred
Stock, subject to Article VI, shall have received the Liquidation Preference
(as defined in Article IV.C) with respect to each share. If upon the
occurrence of a Liquidation Event, the assets and funds available for
distribution among the holders of the Series F Preferred Stock and holders of
Pari Passu Securities shall be insufficient to permit the payment to such
holders of the preferential amounts payable thereon, then the entire assets and
funds of the Corporation legally available for distribution to the Series F
Preferred Stock and the Pari Passu Securities shall be distributed ratably
among such shares in proportion to the ratio that the liquidation preference
payable on each such share bears to the aggregate liquidation preference
payable on all such shares.
B. At the option of any holder of Series F Preferred
Stock, the sale, conveyance or disposition of all or substantially all of the
assets of the Corporation, the effectuation by the Corporation of a transaction
or series of related transactions in which more than 50% of the voting power of
the Corporation is disposed of, or the consolidation, merger or other business
combination of the Corporation with or into any other Person (as defined below)
or Persons when the Corporation is not the survivor shall either: (i) be deemed
to be a liquidation, dissolution or winding up of the Corporation pursuant to
which the Corporation shall be required to distribute upon consummation of such
transaction an amount equal to 115% of the Liquidation Preference with respect
to each outstanding share of Series F Preferred Stock in accordance with and
subject to the terms of this Article IV or (ii) be treated pursuant to Article
VI.C(b) hereof. "Person" shall mean any individual, corporation, limited
liability company, partnership, association, trust or other entity or
organization.
C. For purposes hereof, the "Liquidation Preference"
with respect to a share of the Series F Preferred Stock shall mean an amount
equal to the sum of (i) the Stated Value thereof plus (ii) an amount equal to
five percent (5%) per annum of such Stated Value for the period beginning on
the date of issuance of the Series F Preferred Stock (the "Issue Date") and
ending on the date of final distribution to the holder thereof (prorated for
any portion of such period). The liquidation preference with respect to any
Pari Passu Securities shall be as set forth in the Certificate of Designation
filed in respect thereof.
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<PAGE> 4
V. Redemption
A. If any of the following events (each, a "Mandatory
Redemption Event") shall occur:
(i) The Corporation fails to issue shares of
Common Stock to the holders of Series F Preferred Stock upon exercise by the
holders of their conversion rights in accordance with the terms of this
Certificate of Designation (for a period of at least sixty (60) days if such
failure is solely as a result of the circumstances governed by the second
paragraph of Article VI.F below and the Corporation is using all commercially
reasonable efforts to authorize a sufficient number of shares of Common Stock
as soon as practicable), fails to transfer or to cause its transfer agent to
transfer (electronically or in certificated form) any certificate for shares of
Common Stock issued to the holders upon conversion of the Series F Preferred
Stock as and when required by this Certificate of Designation or the
Registration Rights Agreement, dated as of April 9, 1998, by and among the
Corporation and the other party thereto (the "Registration Rights Agreement"),
fails to remove any restrictive legend (or to withdraw any stop transfer
instructions in respect thereof) on any certificate or any shares of Common
Stock issued to the holders of Series F Preferred Stock upon conversion of the
Series F Preferred Stock as and when required by this Certificate of
Designation, the Securities Purchase Agreement dated as of April 9, 1998, by
and between the Corporation and the other signatories thereto (the "Purchase
Agreement") or the Registration Rights Agreement, or fails to fulfill its
obligations pursuant to Sections 4(c), 4(e), 4(h), 4(i), 4(j) or 5 of the
Purchase Agreement (or makes any announcement, statement or threat that it does
not intend to honor the obligations described in this paragraph) and any such
failure shall continue uncured (or any announcement, statement or threat not to
honor its obligations shall not be rescinded in writing) for ten (10) business
days;
(ii) The Corporation fails to obtain effectiveness
with the Securities and Exchange Commission (the "SEC") of the Registration
Statement (as defined in the Registration Rights Agreement) filed pursuant to
Section 2(a) of the Registration Rights Agreement prior to two hundred (200)
days from the date of issuance of the Series F Preferred Stock (the "Issue
Date") or such Registration Statement lapses in effect (or sales otherwise
cannot be made thereunder, whether by reason of the Corporation's failure to
amend or supplement the prospectus included therein in accordance with the
Registration Rights Agreement or otherwise) for more than thirty (30)
consecutive days or sixty (60) days in any twelve (12) month period after the
Registration Statement becomes effective;
(iii) The Corporation shall make an assignment for
the benefit of creditors, or apply for or consent to the appointment of a
receiver or trustee for it or for all or substantially all of its property or
business;
(iv) Bankruptcy, insolvency, reorganization or
liquidation proceedings or other proceedings for relief under any bankruptcy
law or any law for the relief of debtors shall be instituted by or against the
Corporation or any material subsidiary of the Corporation, provided that any
such proceeding against the Corporation is not dismissed or discharged within
thirty (30) days;
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<PAGE> 5
(v) The Corporation shall fail to maintain the
listing of the Common Stock on the Nasdaq National Market, the Nasdaq SmallCap
Market, the New York Stock Exchange or the American Stock Exchange ("AMEX") and
such failure shall remain uncured for at least ten (10) business days,
then, upon the occurrence and during the continuation of any Mandatory
Redemption Event specified in subparagraphs (i), (ii) or (v) at the option of
the holders of at least 50% of the then outstanding shares of Series F
Preferred Stock by written notice (the "Mandatory Redemption Notice") to the
Corporation of such Mandatory Redemption Event, or upon the occurrence of any
Mandatory Redemption Event specified in subparagraphs (iii) or (iv), the
Corporation shall purchase each holder's shares of Series F Preferred Stock for
an amount per share equal to the greater of (1) 115% multiplied by the sum of
(a) the Stated Value of the shares to be redeemed plus (b) an amount equal to
five percent (5%) per annum of such Stated Value for the period beginning on
the Issue Date and ending on the date of payment of the Mandatory Redemption
Amount (the "Mandatory Redemption Date"), and (2) the "parity value" of the
shares to be redeemed, where parity value means the product of (a) the number
of shares of Common Stock issuable upon conversion of such shares in accordance
with Article VI below (without giving any effect to any limitations on
conversions of shares set forth in Article VI.A(b) below, and treating the
Trading Day (as defined below) immediately preceding the Mandatory Redemption
Date as the "Conversion Date" (as defined in Article VI.B(a)) unless the
Mandatory Redemption Event arises as a result of a breach in respect of a
specific Conversion Date in which case such Conversion Date shall be the
Conversion Date), multiplied by (b) the Closing Price (as defined in Article
VI.A(b)) for the Common Stock on such "Conversion Date" (the greater of such
amounts being referred to as the "Mandatory Redemption Amount"). "Trading Day"
shall mean any day on which the Common Stock is traded for any period on AMEX,
or on the principal securities exchange or other securities market on which the
Common Stock is then being traded.
In the case of a Mandatory Redemption Event, if the
Corporation fails to pay the Mandatory Redemption Amount for each share within
ten (10) business days of written notice that such amount is due and payable,
then (to the extent permitted by law and assuming there are sufficient
authorized shares) in addition to all other available remedies, each holder of
Series F Preferred Stock shall have the right at any time, so long as the
Mandatory Redemption Event continues, to require the Corporation, upon written
notice, to immediately issue (in accordance with and subject to the terms of
Article VI below), in lieu of the Mandatory Redemption Amount, with respect to
each outstanding share of Series F Preferred Stock held by such holder, the
number of shares of Common Stock of the Corporation equal to the Mandatory
Redemption Amount divided by the Conversion Price then in effect.
B. If the Series F Preferred Stock ceases to be
convertible as a result of the limitations described in the second paragraph of
Article VI.A below (a "19.99% Redemption Event"), and the Corporation has not
prior to, or within forty (40) days of, the date that such 19.99% Redemption
Event arises, (i) obtained approval of the issuance of the additional shares of
Common Stock by the requisite vote of the holders of the then-outstanding
Common Stock (not including any shares of Common Stock held by present or
former holders of Series F Preferred Stock that were issued upon conversion of
Series F Preferred Stock and exercise of the Investment
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<PAGE> 6
Options (as defined in the Purchase Agreement)) or (ii) received other
permission pursuant to AMEX Rule 713 allowing the Corporation to resume
issuances of shares of Common Stock upon conversion of Series F Preferred Stock
and exercise of the Investment Options, then the Corporation shall be obligated
to redeem immediately all of the then outstanding Series F Preferred Stock, in
accordance with this Article V.B. An irrevocable Redemption Notice shall be
delivered promptly to the holders of Series F Preferred Stock at their
registered address appearing on the records of the Corporation and shall state
(1) that 19.99% of the Outstanding Common Amount (as defined in Article VI.A)
has been issued upon conversion of the Series F Preferred Stock and exercise of
the Investment Options, (2) that the Corporation is obligated to redeem all of
the outstanding Series F Preferred Stock and (3) the Mandatory Redemption Date,
which shall be a date within five (5) business days of the date of the
Redemption Notice. On the Mandatory Redemption Date, the Corporation shall
make payment of the Mandatory Redemption Amount (as defined in Article V.A.
above) in cash. If the Corporation fails to redeem in accordance with this
Article V.B., then, in addition to all other remedies available to the holders
of the Series F Preferred Stock, upon request of a majority-in-interest of the
Series F Preferred Stock, the Corporation shall terminate the listing of its
Common Stock on AMEX (and any other exchange or quotation system with a rule
substantially similar to Rule 713) and cause its Common Stock to be eligible
for trading on the over-the-counter electronic bulletin board.
C. Notwithstanding anything to the contrary contained in
this Article V, so long as (i) no Mandatory Redemption Event shall have
occurred and be continuing, (ii) the Registration Statement is then in effect
and has been in effect and sales can be made thereunder for at least twenty
(20) days prior to the Optional Redemption Date (as defined below) and (iii)
the Fixed Conversion Price (as defined below) or Revised Fixed Conversion Price
(as defined below), whichever is applicable, is less than the Trigger Price (as
defined below), then at any time and from time to time after the Fixed
Conversion Price is established, the Corporation shall have the right,
exercisable on not less than twenty (20) calendar days prior written notice to
the holders of Series F Preferred Stock (which notice may not be sent to the
holders of the Series F Preferred Stock until the Corporation is permitted to
redeem the Series F Preferred Stock pursuant to this Article V.C.) to redeem
any or all of the outstanding shares of Series F Preferred Stock in accordance
with this Article V. Any notice of redemption hereunder (an "Optional
Redemption") shall be delivered to the holders of Series F Preferred Stock at
their registered addresses appearing on the books and records of the
Corporation and shall state (1) that the Corporation is exercising its right to
redeem any or all of the outstanding shares of Series F Preferred Stock and (2)
the date of redemption (the "Optional Redemption Notice"). On the date fixed
for redemption (the "Optional Redemption Date"), the Corporation shall make
payment of the Optional Redemption Amount (as defined below) to or upon the
order of the holders as specified by the holders in writing to the Corporation
at least one (1) business day prior to the Optional Redemption Date; provided
that the Corporation shall not be required to make payment of the Optional
Redemption Amount unless and until certificates representing the shares of
Series F Preferred Stock to be redeemed have been delivered to the Corporation,
and from and after the Optional Redemption Date such shares shall no longer be
deemed outstanding. If the Corporation exercises its right to redeem the
Series F Preferred Stock, the Corporation shall make payment to the holders of
an amount in cash (the "Optional Redemption Amount") equal to the sum of (i)
115% multiplied by the Stated Value of a share of Series F Preferred Stock and
(ii) an amount equal to five percent
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<PAGE> 7
(5%) per annum of such Stated Value for the period beginning on the Issue Date
and ending on the Optional Redemption Date, for each share of Series F
Preferred Stock to be redeemed. Notwithstanding notice of an Optional
Redemption, the holders shall at all times prior to the Optional Redemption
Date maintain the right to convert all or any shares of Series F Preferred
Stock in accordance with Article VI and any shares of Series F Preferred Stock
so converted after receipt of an Optional Redemption Notice and prior to the
Optional Redemption Date set forth in such notice and payment of the aggregate
Optional Redemption Amount, shall be deducted from the shares of Series F
Preferred Stock which are otherwise subject to redemption pursuant to such
notice.
VI. Conversion at the Option of the Holder
A. (a) Subject to the conversion limitations set
forth in Article VI.A(b) below, each holder of shares of Series F Preferred
Stock may, at its option at any time and from time to time, upon surrender of
the certificates therefor, convert any or all of its shares of Series F
Preferred Stock into Common Stock as follows (an "Optional Conversion"). Each
share of Series F Preferred Stock shall be convertible into such number of
fully paid and nonassessable shares of Common Stock as is determined by
dividing (1) the sum of (a) the Stated Value thereof plus (b) the Premium
Amount (as defined below), by (2) the then effective Conversion Price (as
defined below); provided, however, that, unless the holder delivers a waiver in
accordance with the immediately following sentence, in no event (other than
pursuant to the Automatic Conversion (as defined herein)) shall a holder of
shares of Series F Preferred Stock be entitled to convert any such shares in
excess of that number of shares upon conversion of which the sum of (x) the
number of shares of Common Stock beneficially owned by the holder and its
affiliates (other than shares of Common Stock which may be deemed beneficially
owned through the ownership of the unconverted portion of the shares of Series
F Preferred Stock and the unexercised Investment Options (as defined in the
Purchase Agreement)) and (y) the number of shares of Common Stock issuable upon
the conversion of the shares of Series F Preferred Stock with respect to which
the determination of this proviso is being made, would result in beneficial
ownership by a holder and such holder's affiliates of more than 4.9% of the
outstanding shares of Common Stock. For purposes of the proviso to the
immediately preceding sentence, (i) beneficial ownership shall be determined in
accordance with Section 13(d) of the Securities Exchange Act of 1934, as
amended, and Regulation 13D-G thereunder, except as otherwise provided in
clause (x) of such proviso and (ii) a holder may waive the limitations set
forth therein by written notice to the Corporation upon not less than sixty-one
(61) days prior written notice (with such waiver taking effect only upon the
expiration of such sixty-one (61) day notice period). The "Premium Amount"
means the product of the Stated Value, multiplied by .05, multiplied by
(N/365), where "N" equals the number of days elapsed from the Issue Date to and
including the Conversion Date (as defined in Article VI.B, below).
(b) Subject to the exceptions set forth below,
each holder of shares of Series F Preferred Stock may only convert shares of
Series F Preferred Stock on or after one hundred eighty (180) days from the
Issue Date; provided, however, that the restrictions on conversion set forth
above shall not apply to conversions taking place on any Conversion Date (i)
if, on the Conversion Date, the Closing Price (as defined below) is greater
than or equal to 115%
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<PAGE> 8
of the then applicable Market Price (as defined in Article VI.B.(a) below) or
(ii) occurring on or after the date the Corporation makes a public announcement
that it intends to merge or consolidate with any other corporation or sell or
transfer substantially all of the assets of the Corporation or (iii) occurring
on or after the date any person, group or entity (including the Corporation)
commences a tender offer to purchase 50% or more of the Corporation's Common
Stock or (iv) occurring on or after the date that there is a material adverse
change in the business, operations, assets or financial condition of the
Corporation and its subsidiaries, taken as a whole. "Closing Price," as of any
date, means the last sale price of the Common Stock on the AMEX as reported by
Bloomberg Financial Markets or an equivalent reliable reporting service
mutually acceptable to and hereafter designated by the holders of a majority in
interest of the shares of Series F Preferred Stock and the Corporation
("Bloomberg") or, if AMEX is not the principal trading market for such
security, the last sale price of such security on the principal securities
exchange or trading market where such security is listed or traded as reported
by Bloomberg, or if the foregoing do not apply, the last sale price of such
security in the over-the-counter market on the electronic bulletin board for
such security as reported by Bloomberg, or, if no last sale price of such
security in the over-the-counter market on the electronic bulletin board for
such security in any of the foregoing manners the average of the bid prices of
any market makers for such security as reported in the "pink sheets" by the
National Quotation Bureau, Inc. If the Closing Price cannot be calculated for
such security on such date in the manner provided above, the Closing Price
shall be the fair market value as mutually determined by the Corporation and
the holders of a majority in interest of shares of Series F Preferred Stock
being converted for which the calculation of the Closing Price is required in
order to determine the Conversion Price of such Series F Preferred Stock.
(c) So long as the Common Stock is listed for
trading on AMEX or an exchange or quotation system with a rule substantially
similar to Rule 713 then, notwithstanding anything to the contrary contained
herein, if, at any time, the aggregate number of shares of Common Stock then
issued upon conversion of the Series F Preferred Stock (including any shares of
capital stock or rights to acquire shares of capital stock issued by the
Corporation which are aggregated or integrated with the Common Stock issued or
issuable upon conversion of the Series F Preferred Stock and exercise of the
Investment Options for purposes of such rule) equals 19.99% of the "Outstanding
Common Amount" (as hereinafter defined), the Series F Preferred Stock shall,
from that time forward, cease to be convertible into Common Stock in accordance
with the terms of this Article VI and Article VII below, unless the Corporation
(i) has obtained approval of the issuance of the Common Stock upon conversion
of the Series F Preferred Stock and exercise of the Investment Options by a
majority of the total votes cast on such proposal, in person or by proxy, by
the holders of the then-outstanding Common Stock (not including any shares of
Common Stock held by present or former holders of Series F Preferred Stock that
were issued upon conversion of Series F Preferred Stock and exercise of the
Investment Options) ("Stockholder Approval"), or (ii) shall have otherwise
obtained permission to allow such issuances from AMEX in accordance with AMEX
Rule 713. If the Corporation's Common Stock is not then listed on AMEX or an
exchange or quotation system that has a rule substantially similar to Rule 713,
the limitations set forth herein shall be inapplicable and of no force and
effect. For purposes of this paragraph, "Outstanding Common Amount" means (i)
the number of shares of the Common Stock outstanding on the date of issuance of
the Series F Preferred Stock pursuant to the Purchase
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<PAGE> 9
Agreement plus (ii) any additional shares of Common Stock issued thereafter in
respect of such shares pursuant to a stock dividend, stock split or similar
event. The maximum number of shares of Common Stock issuable as a result of
the 19.99% limitation set forth herein is hereinafter referred to as the
"Maximum Share Amount." With respect to each holder of Series F Preferred
Stock, the Maximum Share Amount shall refer to such holder's pro rata share
thereof determined in accordance with Article X below. In the event that
Corporation obtains Stockholder Approval or the approval of AMEX, by reason of
the inapplicability of the rules of AMEX or otherwise and concludes that it is
able to increase the number of shares to be issued above the Maximum Share
Amount (such increased number being the "New Maximum Share Amount"), the
references to Maximum Share Amount, above, shall be deemed to be, instead,
references to the greater New Maximum Share Amount. In the event that
Stockholder Approval is obtained, there are insufficient reserved or authorized
shares or a registration statement covering the additional shares of Common
Stock which constitute the New Maximum Share Amount is not effective prior to
the Maximum Share Amount being issued (if such registration statement is
necessary to allow for the public resale of such securities), the Maximum Share
Amount shall remain unchanged; provided, however, that the holder may grant an
extension to obtain a sufficient reserved or authorized amount of shares or of
the effective date of such registration statement. In the event that (a) the
aggregate number of shares of Common Stock issued pursuant to the outstanding
Series F Preferred Stock and exercise of the Investment Options represents at
least twenty percent (20%) of the Maximum Share Amount and (b) the sum of (x)
the aggregate number of shares of Common Stock issued upon conversion of Series
F Preferred Stock and exercise of the Investment Options plus (y) the aggregate
number of shares of Common Stock that remain issuable upon conversion of Series
F Preferred Stock, represents at least one hundred percent (100%) of the
Maximum Share Amount (the "Triggering Event"), the Corporation will use its
best efforts to seek and obtain Stockholder Approval (or obtain such other
relief as will allow conversions hereunder in excess of the Maximum Share
Amount) as soon as practicable following the Triggering Event and before the
Mandatory Redemption Date.
(d) In the event that (i) on or prior to the
Fixed Conversion Price Date (as defined in Article VI.B(c) below), the Closing
Price is below 80% of the Closing Bid Price on the Trading Day immediately
prior to the Issue Date (the "Trigger Price") or (ii) after the Fixed
Conversion Price Date, the Fixed Conversion Price (as defined below) or the
Revised Fixed Conversion Price (as defined below), whichever is applicable, is
below the Trigger Price, the Corporation shall have the right, in lieu of
issuing shares of Common Stock to the holder of Series F Preferred Stock, to
redeem the shares of Series F Preferred Stock submitted for conversion for an
amount equal to the number of shares that would have otherwise been issued upon
conversion of the Series F Preferred Stock, multiplied by the Redemption Market
Price (as hereinafter defined). The "Redemption Market Price" shall be equal
to the Closing Price of the Common Stock on the Conversion Date. If the
Closing Price of the Common Stock is at any time below the Trigger Price, the
Corporation must promptly notify the holders of the Series F Preferred Stock as
to whether the Corporation will issue shares of Common Stock or redeem the
shares of Series F Preferred Stock at any time thereafter submitted for
conversion pursuant to this Article VI on a Conversion Date when the Closing
price is below the Trigger Price. The Corporation will be bound by such notice
for a period of twenty (20) days from the date of its notice after which time,
the Corporation may elect to renew such notice. A failure of the Corporation
to renew such
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<PAGE> 10
notice shall be deemed to be an election by the Corporation to issue shares of
Common Stock upon conversion of the Series F Preferred Stock. Any redemption
amounts payable hereunder shall be paid to the holder within five (5) Trading
Days of the Conversion Date or within two (2) Trading Days of receipt of
certificates representing the shares to be redeemed, whichever is later. The
Fixed Conversion Price Date and the Revised Fixed Conversion Price Date (as
defined in Article IV.B (a)) shall be delayed by one (1) Trading Day for each
Trading Day occurring prior thereto and prior to full conversion of the Series
F Preferred Stock that (i) sales cannot be made pursuant to the Registration
Statement after the earlier of the effective date thereof and one hundred
twenty (120) days from the Issue Date (whether by reason of the Corporation's
failure to properly supplement or amend the prospectus included therein in
accordance with the terms of the Registration Rights Agreement or otherwise) or
(ii) any Mandatory Redemption Event (as defined in Article V.A.) exists,
without regard to whether any cure periods shall have run.
B. (a) Subject to subparagraph (b) below, the
"Conversion Price" shall be (i) on or prior to the Fixed Conversion Price Date,
103% of the Market Price (as defined herein) or (ii) after the Fixed Conversion
Price Date, the Fixed Conversion Price (as defined herein); provided, however,
that if, after the Revised Fixed Conversion Price Date (as defined in Article
VI.B(c) below), 90% of the average Closing Bid Prices for the twenty-two (22)
Trading Days ending on the Revised Fixed Conversion Price Date, (the "Revised
Fixed Conversion Price") is less than the Fixed Conversion Price (as defined
herein), for all conversions taking place thereafter the Conversion Price shall
equal the Revised Fixed Conversion Price. "Market Price" shall mean the lesser
of (a) the average Closing Bid Prices for any five (5) consecutive Trading Days
during the twenty-two (22) Trading Day period ending one (1) Trading Day prior
to the date (the "Conversion Date") the Conversion Notice is sent by a holder
to the Corporation via facsimile (the "Pricing Period") and (b) the lowest
Closing Bid Price during the last five (5) Trading Days of the Pricing Period.
"Fixed Conversion Price" shall mean 90% of the average Closing Bid Prices
during the twenty-two (22) Trading Day period ending on the Fixed Conversion
Price Date. "Closing Bid Price" means, for any security as of any date, the
closing bid price on AMEX as reported by Bloomberg or, if AMEX is not the
principal trading market for such security, the closing bid price of such
security on the principal securities exchange or trading market where such
security is listed or traded as reported by Bloomberg, or if the foregoing do
not apply, the closing bid price of such security in the over-the-counter
market on the electronic bulletin board for such security as reported by
Bloomberg, or, if no closing bid price of such security in the over-the-counter
market on the electronic bulletin board for such security or in any of the
foregoing manners, the average of the bid prices of any market makers for such
security or as reported in the "pink sheets" by the National Quotation Bureau,
Inc. If the Closing Bid Price cannot be calculated for such security on such
date in the manner provided above, the Closing Bid Price shall be the fair
market value as mutually determined by the Corporation and the holders of a
majority in interest of shares of Series F Preferred Stock being converted for
which the calculation of the Closing Bid Price is required in order to
determine the Conversion Price of such Series F Preferred Stock.
(b) Notwithstanding anything contained in
subparagraph (a) of this Paragraph B to the contrary, in the event the
Corporation (i) makes a public announcement that it intends to consolidate or
merge with any other corporation (other than a merger in which the
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<PAGE> 11
Corporation is the surviving or continuing corporation and its capital stock is
unchanged) or sell or transfer all or substantially all of the assets of the
Corporation or (ii) any person, group or entity (including the Corporation)
commences a tender offer to purchase 50% or more of the Corporation's Common
Stock (the date of the announcement or commencement referred to in clause (i)
or (ii) is hereinafter referred to as the "Announcement Date"), then the
Conversion Price shall, effective upon the Announcement Date and continuing
through the Adjusted Conversion Price Termination Date (as defined below), be
equal to the lower of (x) the Conversion Price which would have been applicable
for an Optional Conversion occurring on the Announcement Date and (y) the
Conversion Price that would otherwise be in effect. From and after the Adjusted
Conversion Price Termination Date, the Conversion Price shall be determined as
set forth in subparagraph (a) of this Article VI.B. For purposes hereof,
"Adjusted Conversion Price Termination Date" shall mean, with respect to any
proposed transaction or tender offer which a public announcement as
contemplated by this subparagraph (b) has been made, the date upon which the
Corporation (in the case of clause (i) above) or the person, group or entity
(in the case of clause (ii) above) publicly announces the termination,
abandonment or consummation of the proposed transaction or tender offer which
caused this subparagraph (b) to become operative.
(c) The "Fixed Conversion Price Date" means the
date which is nine (9) months after the Issue Date and the "Revised Fixed
Conversion Price Date" means the date which is ten (10) months after the Issue
Date, provided, however, that in the event that (1) the Corporation fails to
obtain effectiveness with the SEC of the Registration Statement prior to one
hundred twenty (120) days following the Issue Date, or (2) after such
Registration Statement becomes effective, such Registration Statement lapses in
effect, or sales otherwise cannot be made thereunder, whether by reason of the
Corporation's failure or inability to amend or supplement the prospectus
included therein in accordance with the Registration Rights Agreement or
otherwise, then the Fixed Conversion Price Date and the Revised Fixed
Conversion Price Date shall each be extended on a day-for-day basis for each
day beyond the 120th day during which the Registration Statement is not
declared effective, such effectiveness has lapsed, or sales cannot be made
thereunder (including during any Allowed Delays (as defined in the Registration
Rights Agreement)).
C. The Conversion Price shall be subject to adjustment
from time to time as follows:
(a) Adjustment to Conversion Price Due to Stock
Split, Stock Dividend, Etc. If at any time when Series F Preferred Stock is
issued and outstanding, the number of outstanding shares of Common Stock is
increased or decreased by a stock split, stock dividend, combination,
reclassification, rights offering (other than pursuant to the Rights Plan)
below the Trading Price (as defined below) to all holders of Common Stock or
other similar event, which event shall have taken place during the reference
period for determination of the Conversion Price for any Optional Conversion or
Automatic Conversion of the Series F Preferred Stock or taking place after the
fixing of the Fixed Conversion Price, then the Conversion Price shall be
calculated giving appropriate effect to the stock split, stock dividend,
combination, reclassification or other similar event. In such event, the
Corporation shall notify the Transfer Agent of such change on or before the
effective date thereof.
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<PAGE> 12
(b) Adjustment Due to Merger, Consolidation, Etc.
If, at any time when Series F Preferred Stock is issued and outstanding and
prior to the conversion of all Series F Preferred Stock, there shall be any
merger, consolidation, exchange of shares, recapitalization, reorganization, or
other similar event, as a result of which shares of Common Stock of the
Corporation shall be changed into the same or a different number of shares of
another class or classes of stock or securities of the Corporation or another
entity, or in case of any sale or conveyance of all or substantially all of the
assets of the Corporation other than in connection with a plan of complete
liquidation of the Corporation, then the holders of Series F Preferred Stock
shall thereafter have the right to receive upon conversion of the Series F
Preferred Stock, upon the bases and upon the terms and conditions specified
herein and in lieu of the shares of Common Stock immediately theretofore
issuable upon conversion, such stock, securities or assets which the holders of
Series F Preferred Stock would have been entitled to receive in such
transaction had the Series F Preferred Stock been converted in full (without
regard to any limitations on conversion contained herein) immediately prior to
such transaction, and in any such case appropriate provisions shall be made
with respect to the rights and interests of the holders of Series F Preferred
Stock to the end that the provisions hereof (including, without limitation,
provisions for adjustment of the Conversion Price and of the number of shares
of Common Stock issuable upon conversion of the Series F Preferred Stock) shall
thereafter be applicable, as nearly as may be practicable in relation to any
securities or assets thereafter deliverable upon the conversion of Series F
Preferred Stock. The Corporation shall not effect any transaction described in
this subsection (b) unless (a) it first gives, to the extent practical, thirty
(30) days' prior written notice (but in any event at least fifteen (15)
business days prior written notice) of such merger, consolidation, exchange of
shares, recapitalization, reorganization or other similar event or sale of
assets (during which time the holders of Series F Preferred Stock shall be
entitled to convert the Series F Preferred Stock) and (b) the resulting
successor or acquiring entity (if not the Corporation) assumes by written
instrument the obligations of this subsection (b). The above provisions shall
similarly apply to successive consolidations, mergers, sales, transfers or
share exchanges.
(c) Adjustment Due to Distribution. Subject to
Article III, if the Corporation shall declare or make any distribution of its
assets (or rights to acquire its assets) to holders of Common Stock as a
dividend, stock repurchase, by way of return of capital or otherwise (including
any dividend or distribution to the Corporation's shareholders in cash or
shares (or rights to acquire shares) of capital stock of a subsidiary (i.e., a
spin-off)) (a "Distribution"), then the holders of Series F Preferred Stock
shall be entitled, upon any conversion of shares of Series F Preferred Stock
after the date of record for determining shareholders entitled to such
Distribution, to receive the amount of such assets which would have been
payable to the holder with respect to the shares of Common Stock issuable upon
such conversion had such holder been the holder of such shares of Common Stock
on the record date for the determination of shareholders entitled to such
Distribution.
(d) Purchase Rights. Subject to Article III, if
the Corporation shall issue any convertible securities or rights to purchase
stock, warrants, securities or other property (the "Purchase Rights") pro rata
to the record holders of any class of Common Stock (including, without
limitation, shares of the Corporation's Series E Junior Participating Preferred
Stock), then
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<PAGE> 13
the holders of Series F Preferred Stock will, upon conversion of shares of such
Series F Preferred Stock, be entitled to acquire, upon the terms applicable to
such Purchase Rights, the aggregate Purchase Rights which such holder could
have acquired if such holder had held the number of shares of Common Stock
acquirable upon complete conversion of the then issued and outstanding Series F
Preferred Stock (without regard to any limitations on conversion contained
herein and excluding any shares of Series F Preferred Stock that are redeemed
and not converted, whether such redemption takes place before or after the
record date for such Purchase Rights) immediately before the date on which a
record is taken for the grant, issuance or sale of such Purchase Rights, or, if
no such record is taken, the date as of which the record holders of Common
Stock are to be determined for the grant, issue or sale of such Purchase
Rights; provided that, notwithstanding the foregoing, in no event will a holder
of shares of Series F Preferred Stock be entitled to receive more than one
right issued under the Rights Plan per share of Common Stock issued upon such
conversion as such amount may be adjusted in accordance with the Rights Plan.
(e) Adjustment for Restricted Periods. In the
event that (1) the Corporation fails to obtain effectiveness with the SEC of
the Registration Statement (as defined in the Registration Rights Agreement)
prior to one hundred-twenty (120) days following the Issue Date, or (2) after
such Registration Statement becomes effective, such Registration Statement
lapses in effect, or sales otherwise cannot be made thereunder, whether by
reason of the Corporation's failure or inability to amend or supplement the
prospectus (the "Prospectus") included therein in accordance with the
Registration Rights Agreement or otherwise (including during any Allowed
Delay), then the Pricing Period shall be comprised of (provided that a
Conversion Notice is sent to the Corporation no later than the day after such
period), (i) in the case of an event described in clause (1), the twenty-two
(22) Trading Days preceding the 120th day following the Issue Date plus all
Trading Days through and including the third Trading Day following the date of
effectiveness of the Registration Statement; and (ii) in the case of an event
described in clause (2), the number of Trading Days preceding the date on which
the holder of the Series F Preferred Stock is first notified that sales may not
be made under the Prospectus that would otherwise then be included in the
Pricing Period in accordance with the definition thereof set forth in Article
VI.B(a), plus all Trading Days through and including the third Trading Day
following the date on which the Holder is first notified that such sales may
again be made under the Prospectus. If a holder of Series F Preferred Stock
determines that sales may not be made pursuant to the Prospectus (whether by
reason of the Corporation's failure or inability to amend or supplement the
Prospectus) it shall so notify the Corporation in writing and, unless the
Corporation provides such holder with a written opinion of the Corporation's
counsel to the contrary, such determination shall be binding for purposes of
this paragraph.
(f) Notice of Adjustments. Upon the occurrence
of each adjustment or readjustment of the Conversion Price pursuant to this
Article VI.C, the Corporation, at its expense, shall promptly compute such
adjustment or readjustment and prepare and furnish to each holder of Series F
Preferred Stock a certificate setting forth such adjustment or readjustment and
showing in detail the facts upon which such adjustment or readjustment is
based. The Corporation shall, upon the written request at any time of any
holder of Series F Preferred Stock, furnish to such holder a like certificate
setting forth (i) such adjustment or readjustment, (ii) the Conversion Price at
the time in effect and (iii) the number of shares of Common Stock and the
amount, if any,
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<PAGE> 14
of other securities or property which at the time would be received upon
conversion of a share of Series F Preferred Stock.
D. For purposes of Article VI.C(a) above, "Trading
Price," which shall be measured as of the record date in respect of the rights
offering means (i) the average of the last reported sale prices for the shares
of Common Stock on AMEX as reported by Bloomberg, as applicable, for the five
(5) Trading Days immediately preceding such date, or (ii) if AMEX is not the
principal trading market for the shares of Common Stock, the average of the
last reported sale prices on the principal trading market for the Common Stock
during the same period as reported by Bloomberg, or (iii) if market value
cannot be calculated as of such date on any of the foregoing bases, the Trading
Price shall be the fair market value as reasonably determined in good faith by
(a) the Board of Directors of the Corporation or, (b) at the option of a
majority-in-interest of the holders of the outstanding Series F Preferred Stock
by an independent investment bank of nationally recognized standing in the
valuation of businesses similar to the business of the Corporation.
E. In order to convert Series F Preferred Stock into
full shares of Common Stock, a holder of Series F Preferred Stock shall: (i)
submit a copy of the fully executed notice of conversion in the form attached
hereto as Exhibit A ("Notice of Conversion") to the Corporation by facsimile
dispatched on the Conversion Date (or by other means resulting in notice to the
Corporation on the Conversion Date) at the office of the Corporation or its
designated Transfer Agent for the Series F Preferred Stock that the holder
elects to convert the same, which notice shall specify the number of shares of
Series F Preferred Stock to be converted, the applicable Conversion Price and a
calculation of the number of shares of Common Stock issuable upon such
conversion (together with a copy of the first page of each certificate to be
converted) prior to 7:00 p.m., New York City time (the "Conversion Notice
Deadline") on the date of conversion specified on the Notice of Conversion; and
(ii) surrender the original certificates representing the Series F Preferred
Stock being converted (the "Preferred Stock Certificates"), duly endorsed,
along with a copy of the Notice of Conversion to the office of the Corporation
or the Transfer Agent for the Series F Preferred Stock as soon as practicable
thereafter. The Corporation shall not be obligated to issue certificates
evidencing the shares of Common Stock issuable upon such conversion, unless
either the Preferred Stock Certificates are delivered to the Corporation or its
Transfer Agent as provided above, or the holder notifies the Corporation or its
Transfer Agent that such certificates have been lost, stolen or destroyed
(subject to the requirements of subparagraph (a) below). In the case of a
dispute as to the calculation of the Conversion Price, the Corporation shall
promptly issue such number of shares of Common Stock that are not disputed in
accordance with subparagraph (b) below and shall submit the disputed
calculations to its outside accountant via facsimile within three (3) business
days of receipt of the Notice of Conversion. The accountant shall audit the
calculations and notify the Corporation and the holder of the results no later
than 48 hours from the time it receives the disputed calculations. The
accountant's calculation shall be deemed conclusive absent manifest error.
(a) Lost or Stolen Certificates. Upon receipt by
the Corporation of evidence of the loss, theft, destruction or mutilation of
any Preferred Stock Certificates representing shares of Series F Preferred
Stock, and (in the case of loss, theft or destruction) of
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<PAGE> 15
indemnity reasonably satisfactory to the Corporation, and upon surrender and
cancellation of the Preferred Stock Certificate(s), if mutilated, the
Corporation shall execute and deliver new Preferred Stock Certificate(s) of
like tenor and date.
(b) Delivery of Common Stock Upon Conversion.
Upon the surrender of certificates as described above together with a Notice of
Conversion, the Corporation shall issue and, within two (2) business days after
such surrender (or, in the case of lost, stolen or destroyed certificates,
after provision of agreement and indemnification pursuant to subparagraph (a)
above) (the "Delivery Period"), deliver (or cause its Transfer Agent to so
issue and deliver) to or upon the order of the holder (i) that number of shares
of Common Stock for the portion of the shares of Series F Preferred Stock
converted as shall be determined in accordance herewith and (ii) a certificate
representing the balance of the shares of Series F Preferred Stock not
converted, if any.
In lieu of delivering physical certificates representing the
Common Stock issuable upon conversion, provided the Corporation's Transfer
Agent is participating in the Depository Trust Company ("DTC") Fast Automated
Securities Transfer ("FAST") program, upon request of the holder and its
compliance with the provisions contained in Article VI.A. and in this Article
VI.E., the Corporation shall use its best efforts to cause its Transfer Agent
to electronically transmit the Common Stock issuable upon conversion to the
holder by crediting the account of holder's Prime Broker with DTC through its
Deposit Withdrawal Agent Commission ("DWAC") system. The time periods for
delivery and payments described in the immediately preceding paragraph shall
apply to the electronic transmittals described herein.
(c) No Fractional Shares. If any conversion of
Series F Preferred Stock would result in a fractional share of Common Stock or
the right to acquire a fractional share of Common Stock, such fractional share
shall be disregarded and the number of shares of Common Stock issuable upon
Conversion of the Series F Preferred Stock shall be rounded up or down to the
nearest whole share, it being understood that .5 of one share shall be rounded
up to the next highest share.
(d) Conversion Date. The "Conversion Date" shall
be the date specified in the Notice of Conversion, provided that the Notice of
Conversion is submitted by facsimile (or by other means resulting in notice) to
the Corporation or its Transfer Agent before 7:00 p.m., New York City time, on
the Conversion Date. The person or persons entitled to receive the shares of
Common Stock issuable upon conversion shall be treated for all purposes as the
record holder or holders of such securities as of the Conversion Date and all
rights with respect to the shares of Series F Preferred Stock surrendered shall
forthwith terminate except the right to receive the shares of Common Stock or
other securities or property issuable on such conversion and except that, to
the extent permitted by law, the holders preferential rights as a holder of
Series F Preferred Stock shall survive to the extent the corporation fails to
deliver such securities.
F. As of the date of issuance of the Series F Preferred
Stock, 2,500,000 authorized and unissued shares of Common Stock have been duly
reserved for issuance upon conversion of the Series F Preferred Stock (the
"Reserved Amount"). The Reserved Amount shall be increased from time to time
in accordance with the Corporation's obligations pursuant to
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<PAGE> 16
Section 4(h) of the Purchase Agreement. In addition, if the Corporation shall
issue any securities or make any change in its capital structure which would
change the number of shares of Common Stock into which each share of the Series
F Preferred Stock shall be convertible at the then current Conversion Price,
the Corporation shall at the same time also make proper provision so that
thereafter there shall be a sufficient number of shares of Common Stock
authorized and reserved, free from preemptive rights, for conversion of the
outstanding Series F Preferred Stock.
If at any time a holder of shares of Series F Preferred Stock
submits a Notice of Conversion, and the Corporation does not have sufficient
authorized but unissued shares of Common Stock available to effect such
conversion in accordance with the provisions of this Article VI (a "Conversion
Default"), the Corporation shall issue to the holder (or holders, if more than
one holder submits a Notice of Conversion in respect of the same Conversion
Date, pro rata based on the ratio that the number of shares of Series F
Preferred Stock then held by each such holder bears to the aggregate number of
such shares held by such holders) all of the shares of Common Stock which are
available to effect such conversion. The number of shares of Series F
Preferred Stock included in the Notice of Conversion which exceeds the amount
which is then convertible into available shares of Common Stock (the "Excess
Amount") shall, notwithstanding anything to the contrary contained herein, not
be convertible into Common Stock in accordance with the terms hereof until (and
at the holder's option at any time after) the date additional shares of Common
Stock are authorized by the Corporation to permit such conversion, at which
time the Conversion Price in respect thereof shall be the lesser of (i) the
Conversion Price on the day the holder submits a Notice of Conversion giving
rise to a Conversion Default (the "Conversion Default Date") and (ii) the
Conversion Price on the Conversion Date elected by the holder in respect
thereof. The Corporation shall use its best efforts to effect an increase in
the authorized number of shares of Common Stock as soon as possible following a
Conversion Default. In addition, the Corporation shall pay to the holder
payments ("Conversion Default Payments") for a Conversion Default in the amount
of (a) (N/365), multiplied by (b) the sum of the Stated Value plus the Premium
Amount per share of Series F Preferred Stock through the Authorization Date (as
defined below), multiplied by (c) the Excess Amount on the Conversion Default
Date, multiplied by (d) .20, where (i) N = the number of days from the
Conversion Default Date to the date (the "Authorization Date") that the
Corporation authorizes a sufficient number of shares of Common Stock to effect
conversion of the full number of shares of Series F Preferred Stock. The
Corporation shall send notice to the holder of the authorization of additional
shares of Common Stock, the Authorization Date and the amount of holder's
accrued Conversion Default Payments. The accrued Conversion Default Payment
for each calendar month shall be paid in cash. If such payment is not paid in
cash within thirty (30) days of the end of a calendar month, such amount shall
be convertible, at the option of the holder, into Common Stock at the
Conversion Price (as in effect at the time of Conversion) at any time after the
fifth day of the month following the month in which it has accrued in
accordance with the terms of this Article VI (so long as there is then a
sufficient number of authorized shares).
Nothing herein shall limit the holder's right to pursue actual
damages for the Corporation's failure to maintain a sufficient number of
authorized shares of Common Stock, and each holder shall have the right to
pursue all remedies available at law or in equity (including a decree of
specific performance and/or injunctive relief).
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<PAGE> 17
G. Upon the occurrence of each adjustment or
readjustment of the Conversion Price pursuant to Article VI.F, the Corporation,
at its expense, shall promptly compute such adjustment or readjustment in
accordance with the terms hereof and prepare and furnish to each holder of
Series F Preferred Stock a certificate setting forth such adjustment or
readjustment and showing in detail the facts upon which such adjustment or
readjustment is based. The Corporation shall, upon the written request at any
time of any holder of Series F Preferred Stock, furnish or cause to be
furnished to such holder a like certificate setting forth (i) such adjustment
or readjustment, (ii) the Conversion Price at the time in effect and (iii) the
number of shares of Common Stock and the amount, if any, of other securities or
property which at the time would be received upon conversion of a share of
Series F Preferred Stock.
H. Upon submission of a Notice of Conversion by a holder
of Series F Preferred Stock, (i) the shares covered thereby (other than the
shares, if any, which cannot be issued because their issuance would exceed such
holder's allocated portion of the Reserved Amount) shall be deemed converted
into shares of Common Stock and (ii) the holder's rights as a holder of such
converted shares of Series F Preferred Stock shall cease and terminate,
excepting only the right to receive certificates for such shares of Common
Stock and to any remedies provided herein or otherwise available at law or in
equity to such holder because of a failure by the Corporation to comply with
the terms of this Certificate of Designation. Notwithstanding the foregoing,
insofar as permitted under the Delaware General Corporation Law (the "DGCL"),
if a holder has not received certificates for all shares of Common Stock prior
to the tenth (10th) business day after the expiration of the Delivery Period
with respect to a conversion of shares of Series F Preferred Stock for any
reason, then (unless the holder otherwise elects to retain its status as a
holder of Common Stock by so notifying the Corporation) the holder shall regain
the rights of a holder of such shares of Series F Preferred Stock with respect
to such unconverted shares of Series F Preferred Stock and the Corporation
shall, as soon as practicable, return such unconverted shares of Series F
Preferred Stock to the holder or, if such shares of Series F Preferred Stock
have not been surrendered, adjust its records to reflect that such shares of
Series F Preferred Stock have not been converted. In all cases, the holder
shall retain all of its rights and remedies (including, without limitation, the
right to receive Conversion Default Payments pursuant to Article IV.E. to the
extent required thereby for such Conversion Default and any subsequent
Conversion Default).
VII. Automatic Conversion
So long as the Registration Statement is effective and there
is not then a continuing Mandatory Redemption Event, each share of Series F
Preferred Stock issued and outstanding on April 9, 1999, subject to any
adjustment pursuant to Article V.A.(ii) (the "Automatic Conversion Date"),
automatically shall be converted into shares of Common Stock on such date at
the then effective Conversion Price in accordance with, and subject to, the
provisions of Article VI hereof (the "Automatic Conversion"). The Automatic
Conversion Date shall be delayed by one (1) Trading Day each for each Trading
Day occurring prior thereto and prior to the full conversion of the Series F
Preferred Stock that (i) sales cannot be made pursuant to the Registration
Statement after the earlier of the effective date thereof and one hundred
twenty (120) days from the Issue
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<PAGE> 18
Date (whether by reason of the Corporation's failure to properly supplement or
amend the prospectus included therein in accordance with the terms of the
Registration Rights Agreement or otherwise) or (ii) any Mandatory Redemption
Event (as defined in Article V.A.) exists, without regard to whether any cure
periods shall have run. The Automatic Conversion Date shall be the Conversion
Date for purposes of determining the Conversion Price and the time within which
certificates representing the Common Stock must be delivered to the holder.
VIII. Voting Rights
The holders of the Series F Preferred Stock have no voting
power whatsoever, except as otherwise provided by the DGCL and in Article IX
below.
Notwithstanding the above, the Corporation shall provide each
holder of Series F Preferred Stock with prior notification of any meeting of
the shareholders (and copies of proxy materials and other information sent to
shareholders). In the event of any taking by the Corporation of a record of
its shareholders for the purpose of determining shareholders who are entitled
to receive payment of any dividend or other distribution, any right to
subscribe for, purchase or otherwise acquire (including by way of merger,
consolidation or recapitalization) any share of any class or any other
securities or property, or to receive any other right other than pursuant to
the Rights Plan, or for the purpose of determining shareholders who are
entitled to vote in connection with any proposed sale, lease or conveyance of
all or substantially all of the assets of the Corporation, or any proposed
liquidation, dissolution or winding up of the Corporation, the Corporation
shall mail a notice to each holder, at least ten (10) days prior to the record
date specified therein (or thirty (30) days prior to the consummation of the
transaction or event, whichever is earlier), of the date on which any such
record is to be taken for the purpose of such dividend, distribution, right or
other event, and a brief statement regarding the amount and character of such
dividend, distribution, right or other event to the extent known at such time.
To the extent that under the DGCL the vote of the holders of
the Series F Preferred Stock, voting separately as a class or series as
applicable, is required to authorize a given action of the Corporation, the
affirmative vote or consent of the holders of at least a majority of the shares
of the Series F Preferred Stock represented at a duly held meeting at which a
quorum is present or by written consent of a majority of the shares of Series F
Preferred Stock (except as otherwise may be required under the DGCL) shall
constitute the approval of such action by the class. To the extent that under
the DGCL holders of the Series F Preferred Stock are entitled to vote on a
matter with holders of Common Stock, voting together as one class, each share
of Series F Preferred Stock shall be entitled to a number of votes equal to the
number of shares of Common Stock into which it is then convertible using the
record date for the taking of such vote of shareholders as the date as of which
the Conversion Price is calculated. Holders of the Series F Preferred Stock
shall be entitled to notice of all shareholder meetings or written consents
(and copies of proxy materials and other information sent to shareholders) with
respect to which they would be entitled to vote, which notice would be provided
pursuant to the Corporation's bylaws and the DGCL.
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<PAGE> 19
IX. Protective Provisions
So long as shares of Series F Preferred Stock are outstanding,
the Corporation shall not, without first obtaining the approval (by vote or
written consent, as provided by the DGCL) of the holders of at least a majority
of the then outstanding shares of Series F Preferred Stock:
(a) alter or change the rights, preferences or
privileges of the Series F Preferred Stock or any Senior Securities so as to
affect adversely the Series F Preferred Stock;
(b) create any new class or series of capital
stock having a preference over the Series F Preferred Stock as to distribution
of assets upon liquidation, dissolution or winding up of the Corporation (as
previously defined in Article II hereof, "Senior Securities");
(c) create any new class or series of capital
stock ranking pari passu with the Series F Preferred Stock as to distribution
of assets upon liquidation, dissolution or winding up of the Corporation (as
previously defined in Article II hereof, "Pari Passu Securities"), provided,
however, that notwithstanding this subsection (c), approval of the holders of
the Series F Preferred Stock shall not be required if the Closing Bid Price of
the Common Stock, adjusted for any stock splits, recapitalizations or similar
events, is in excess of $6.00 per share for each of the last ten (10) Trading
Days prior to the issuance of Pari Passu Securities.
(d) increase the authorized number of shares of
Series F Preferred Stock; or
(e) do any act or thing not authorized or
contemplated by this Certificate of Designation which would result in taxation
of the holders of shares of the Series F Preferred Stock under Section 305 of
the Internal Revenue Code of 1986, as amended (or any comparable provision of
the Internal Revenue Code as hereafter from time to time amended).
In the event holders of at least a majority of the then
outstanding shares of Series F Preferred Stock agree to allow the Corporation
to alter or change the rights, preferences or privileges of the shares of
Series F Preferred Stock, pursuant to subsection (a) above, so as to affect the
Series F Preferred Stock, then the Corporation will deliver notice of such
approved change to the holders of the Series F Preferred Stock that did not
agree to such alteration or change (the "Dissenting Holders") and Dissenting
Holders shall have the right for a period of thirty (30) days to convert
pursuant to the terms of this Certificate of Designation as they exist prior to
such alteration or change or continue to hold their shares of Series F
Preferred Stock.
X. Pro Rata Allocations
The Maximum Share Amount and the Reserved Amount (including
any increases thereto) shall be allocated by the Corporation pro rata among the
holders of Series F Preferred Stock based on the number of shares of Series F
Preferred Stock then held by each holder relative to the total aggregate number
of shares of Series F Preferred Stock then outstanding.
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<PAGE> 20
IN WITNESS WHEREOF, this Certificate of Designation is
executed on behalf of the Corporation this 9th day of April, 1998.
HARKEN ENERGY CORPORATION
By: /s/ Larry E. Cummings
----------------------------------------
Name: Larry E. Cummings
Title: Vice President and Secretary
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<PAGE> 21
EXHIBIT A
NOTICE OF CONVERSION
(To be Executed by the Registered Holder
in order to Convert the Series F Preferred Stock)
The undersigned hereby irrevocably elects to convert ______
shares of Series F Preferred Stock, represented by stock certificate No(s).
__________ (the "Preferred Stock Certificates") into shares of common stock
("Common Stock") of Harken Energy Corporation (the "Corporation") according to
the conditions of the Certificate of Designation of Series F Preferred Stock,
as of the date written below. If securities are to be issued in the name of a
person other than the undersigned, the undersigned will pay all transfer taxes
payable with respect thereto and is delivering herewith such certificates. No
fee will be charged to the Holder for any conversion, except for transfer
taxes, if any. A copy of each Preferred Stock Certificate is attached hereto
(or evidence of loss, theft or destruction thereof).
The undersigned hereby irrevocably elects to exercise its
Investment Option to purchase _____________ shares of Common Stock of the
Corporation (up to the number of shares of Common Stock issuable pursuant to
the conversion of the Preferred Stock Certificate) at the Applicable Conversion
price set forth below and shall make payment of $__________ for such shares by
wire transfer of such amount to the Corporation simultaneously upon transfer of
the shares of Common Stock electronically by crediting the account of the
undersigned's Prime Broker with the Depository Trust Company through its
Deposit Withdrawal Agreement Conversion System.
The undersigned represents and warrants that all offers and
sales by the undersigned of the securities issuable to the undersigned upon
conversion of the Series F Preferred Stock shall be made pursuant to
registration of the securities under the Securities Act of 1933, as amended
(the "Act"), or pursuant to an exemption from registration under the Act.
Date of Conversion:____________________________
Applicable Conversion Price:____________________
Number of Shares of Common Stock
to be Issued pursuant to conversion of
the Series F Preferred Stock:__________________
Number of Shares of Common Stock to be Issued
pursuant to Investment Option:___________________
<PAGE> 22
Signature:____________________________________
Name:_______________________________________
Address:______________________________________
*The Corporation is not required to issue shares of Common Stock until the
original Series F Preferred Stock Certificate(s) (or evidence of loss, theft or
destruction thereof reasonably acceptable to the Corporation) to be converted
are received by the Corporation or its Transfer Agent and, in the case of
shares issuable upon exercise of Investment Options, it has received payment
for such shares. The Corporation shall issue and deliver shares of Common
Stock to an overnight courier not later than two (2) business days following
receipt of the original Preferred Stock Certificate(s) to be converted.
<PAGE> 1
EXHIBIT 10.1
SECURITIES PURCHASE AGREEMENT
SECURITIES PURCHASE AGREEMENT (this "AGREEMENT"), dated as of April 9,
1998, by and among Harken Energy Corporation, a Delaware corporation, with
headquarters located at 5605 N. MacArthur Boulevard, Suite 400, Irving, Texas
75038 ("COMPANY"), and RGC International Investors, LDC (the "BUYER").
WHEREAS:
A. The Company and the Buyer are executing and delivering this
Agreement in reliance upon the exemption from securities registration afforded
by Rule 506 under Regulation D ("REGULATION D") as promulgated by the United
States Securities and Exchange Commission (the "SEC") under the Securities Act
of 1933, as amended (the "1933 ACT");
B. The Company has authorized a new series of preferred stock,
designated as Series F Convertible Preferred Stock (the "PREFERRED STOCK"),
having the rights, preferences and privileges set forth in the Certificate of
Designations, Rights and Preferences attached hereto as EXHIBIT "A" (the
"CERTIFICATE OF DESIGNATION");
C. The Preferred Stock is convertible into shares of common
stock, $.01 par value per share, of the Company (the "COMMON STOCK"), upon the
terms and subject to the limitations and conditions set forth in the
Certificate of Designation;
D. The Buyer desires to purchase and the Company desires to issue
and sell, upon the terms and conditions set forth in this Agreement, an
aggregate of Fifteen Thousand (15,000) shares of Preferred Stock, for an
aggregate purchase price of Fifteen Million Dollars ($15,000,000); and
E. Contemporaneous with the execution and delivery of this
Agreement, the parties hereto are executing and delivering a Registration
Rights Agreement, in the form attached hereto as EXHIBIT "B" (the "REGISTRATION
RIGHTS AGREEMENT"), pursuant to which the Company has agreed to provide certain
registration rights under the 1933 Act and the rules and regulations
promulgated thereunder, and applicable state securities laws; and
NOW, THEREFORE, the Company and the Buyer hereby agree as follows:
1. PURCHASE AND SALE OF PREFERRED SHARES.
a. Purchase of Preferred Shares. Subject to the
terms and conditions hereof, the Company shall issue and sell to the Buyer and
the Buyer agrees to purchase from the
<PAGE> 2
Company 15,000 shares of Series F Convertible Preferred Stock (collectively,
together with any Preferred Stock issued in replacement thereof or otherwise
with respect thereto in accordance with the terms thereof, the "PREFERRED
SHARES") for the aggregate purchase price of Fifteen Million United States
Dollars ($15,000,000) (the "Purchase Price").
b. Form of Payment. On the Closing Date (as
defined below), (i) the Buyer shall pay the Purchase Price for the Preferred
Shares to be issued and sold to it at the closing by wire transfer of
immediately available funds to the Company, in accordance with the Company's
written wiring instructions, against delivery of duly executed certificates
representing such number of Preferred Shares which the Buyer is purchasing and
(ii) the Company shall deliver such certificates duly executed on behalf of the
Company, to the Buyer, against delivery of such Purchase Price.
c. Closing Date. Subject to the satisfaction
(or waiver) of the conditions thereto set forth in Section 6 and Section 7
below, the date and time of the issuance and sale of the Preferred Shares
pursuant to this Agreement (the "CLOSING DATE") shall be 12:00 noon Eastern
Standard Time on April 9, 1998, or such other mutually agreed upon time. The
closing shall occur on the Closing Date at the offices of the Company, or at
such other location as may be agreed to be the parties.
2. BUYER'S REPRESENTATIONS AND WARRANTIES. The Buyer
represents and warrants to the Company that:
a. Investment Purpose. As of the date hereof,
the Buyer is purchasing the Preferred Shares, the Investment Options described
in Section 4(e) below (the "Investment Options") and the shares of Common Stock
(i) issuable upon conversion of the Preferred Shares and (ii) issuable upon
exercise of the Investment Options (collectively, the "CONVERSION SHARES" and,
together with the Preferred Shares and the Investment Options, the
"SECURITIES") for its own account for investment only and not with a view
towards the public sale or distribution thereof, except pursuant to sales
registered or exempted from registration under the 1933 Act.
b. Accredited Investor Status. The Buyer is an
"accredited investor" as that term is defined in Rule 501(a) of Regulation D.
c. Reliance on Exemptions. The Buyer
understands that the Securities are being offered and sold to it in reliance
upon specific exemptions from the registration requirements of United States
federal and state securities laws and that the Company is relying upon the
truth and accuracy of, and the Buyer's compliance with, the representations,
warranties, agreements, acknowledgments and understandings of the Buyer set
forth herein in order to determine the availability of such exemptions and the
eligibility of the Buyer to acquire the Securities.
2
<PAGE> 3
d. Information. The Buyer and its advisors, if
any, have been furnished with all materials relating to the business, finances
and operations of the Company and materials relating to the offer and sale of
the Securities which have been requested by the Buyer or its advisors. The
Buyer and its advisors, if any, have been afforded the opportunity to ask
questions of the Company and have received what the Buyer believes to be
satisfactory answers to any such inquiries. Neither such inquiries nor any
other due diligence investigation conducted by Buyer or any of its advisors or
representatives shall modify, amend or affect Buyer's right to rely on the
Company's representations and warranties contained in Section 3 below. The
Buyer understands that its investment in the Securities involves a significant
degree of risk.
e. Governmental Review. The Buyer understands
that no United States federal or state agency or any other government or
governmental agency has passed upon or made any recommendation or endorsement
of the Securities.
f. Transfer or Resale. The Buyer understands
that (i) except as provided in the Registration Rights Agreement, the
Securities have not been and are not being registered under the 1933 Act or any
applicable state securities laws, and may not be transferred unless (a)
subsequently included in an effective registration statement thereunder, (b)
the Buyer shall have delivered to the Company an opinion of counsel (which
opinion shall be reasonably acceptable to the Company) to the effect that the
Securities to be sold or transferred may be sold or transferred pursuant to an
exemption from such registration, or (c) sold pursuant to Rule 144 promulgated
under the 1933 Act (or a successor rule) ("RULE 144")); (ii) any sale of such
Securities made in reliance on Rule 144 may be made only in accordance with the
terms of said Rule and further, if said Rule is not applicable, any resale of
such Securities under circumstances in which the seller (or the person through
whom the sale is made) may be deemed to be an underwriter (as that term is
defined in the 1933 Act) may require compliance with some other exemption under
the 1933 Act or the rules and regulations of the SEC thereunder; and (iii)
neither the Company nor any other person is under any obligation to register
such Securities under the 1933 Act or any state securities laws or to comply
with the terms and conditions of any exemption thereunder (in each case, other
than pursuant to the Registration Rights Agreement). Notwithstanding the
foregoing or anything else contained herein to the contrary, the Securities may
be pledged as collateral in connection with a bona fide margin account or other
lending arrangement, provided that such transaction complies with applicable
securities laws.
g. Legends. The Buyer understands that the
Preferred Shares and, until such time as the Conversion Shares have been
registered under the 1933 Act as contemplated by the Registration Rights
Agreement, the Conversion Shares, may bear a restrictive legend in
substantially the following form (and a stop-transfer order may be placed
against transfer of the certificates for such Securities):
"The securities represented by this certificate have not been
registered under the Securities Act of 1933, as amended. The
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securities have been acquired for investment and may not be
sold, transferred or assigned in the absence of an effective
registration statement for the securities under said Act, or
an opinion of counsel, in form, substance and scope reasonably
acceptable to the Company, that registration is not required
under said Act or unless sold pursuant to Rule 144 under said
Act."
The legend set forth above shall be removed and the Company
shall issue a certificate without such legend to the holder of any Security
upon which it is stamped, if, unless otherwise required by applicable state
securities laws, (a) such Security is registered for sale under an effective
registration statement filed under the 1933 Act, or (b) such holder provides
the Company with an opinion of counsel, in form, substance and scope reasonably
acceptable to the Company, to the effect that a public sale or transfer of such
Security may be made without registration under the 1933 Act and such sale or
transfer is effected or (c) such holder provides the Company with reasonable
assurances that such Security can be sold pursuant to Rule 144 under the 1933
Act (or a successor rule thereto) without any restriction as to the number of
Securities acquired as of a particular date that can then be immediately sold.
The Buyer agrees to sell all Securities, including those represented by a
certificate(s) from which the legend has been removed, in compliance with
applicable prospectus delivery requirements, if any.
h. Authorization; Enforcement. This Agreement
and the Registration Rights Agreement have been duly and validly authorized,
executed and delivered on behalf of the Buyer and are valid and binding
agreements of the Buyer enforceable in accordance with their terms.
i. Residency. The Buyer is a resident of the
jurisdiction set forth immediately below such Buyer's name on the signature
page hereto.
3. REPRESENTATIONS AND WARRANTIES OF THE COMPANY. The
Company represents and warrants to each Buyer that, except as described in the
Schedules hereto and except as set forth in any document filed by the Company
(not including the exhibits thereto) with the SEC since March 31, 1997 pursuant
to the reporting requirements of the Securities Exchange Act of 1934, as
amended (the "1934 ACT"):
a. Organization and Qualification. The Company
and each of its Subsidiaries (as defined below), if any, is a corporation duly
organized, validly existing and in good standing under the laws of the
jurisdiction in which it is incorporated, with full power and authority
(corporate and other) to own, lease, use and operate its properties and to
carry on its business as and where now owned, leased, used, operated and
conducted. SCHEDULE 3(A) sets forth a list of all of the Subsidiaries of the
Company and the jurisdiction in which each is incorporated. The Company and
each of its Subsidiaries is duly qualified as a foreign corporation to do
business and is in good standing in every jurisdiction in which the nature of
the business conducted by it
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makes such qualification necessary except where the failure to be so qualified
or in good standing could not reasonably be expected to have a Material Adverse
Effect. "MATERIAL ADVERSE EFFECT" means any material adverse effect on the
business, operations, assets, or financial condition of the Company and its
Subsidiaries taken as a whole, or on the transactions contemplated hereby or by
the agreements or instruments to be entered into in connection herewith.
"SUBSIDIARIES" means any corporation or other organization, whether
incorporated or unincorporated, in which the Company owns, directly or
indirectly, a majority equity or other ownership interest.
b. Authorization; Enforcement. (i) The Company
has all requisite corporate power and authority to file and perform its
obligations under the Certificate of Designation and to enter into and perform
this Agreement and the Registration Rights Agreement and to consummate the
transactions contemplated hereby and thereby and to issue the Securities, in
accordance with the terms hereof and thereof, (ii) the execution and delivery
of this Agreement and the Registration Rights Agreement by the Company and the
consummation by it of the transactions contemplated hereby and thereby
(including without limitation, the issuance of the Preferred Shares and the
issuance and reservation for issuance of the Conversion Shares issuable upon
conversion thereof) have been duly authorized by the Company's Board of
Directors and no further consent or authorization of the Company, its Board of
Directors, or its shareholders is required (except for any shareholder approval
that may be required pursuant to Section 4(h) hereof), (iii) this Agreement has
been duly executed and delivered and the Certificate of Designation has been
duly filed by the Company, and (iv) this Agreement and the Certificate of
Designation constitutes, and upon execution and delivery by the Company of the
Registration Rights Agreement such instrument will constitute, a legal, valid
and binding obligation of the Company enforceable against the Company in
accordance with its terms.
c. Capitalization. As of the date hereof, the
authorized capital stock of the Company consists of (i) 175,000,000 shares of
Common Stock of which 122,823,347 shares are issued and outstanding, 8,960,499
shares are reserved for issuance pursuant to the Company's stock option plans,
12,234,624 shares are reserved for issuance pursuant to securities (other than
the Preferred Shares) exercisable for, or convertible into or exchangeable for
shares of Common Stock and 4,897,959 shares are reserved for issuance upon
conversion of the Preferred Shares (subject to adjustment pursuant to the
Company's covenant set forth in Section 4(h) below) and exercise of the
Investment Options; and (ii) 10,000,000 shares of preferred stock, none of
which shares are issued and outstanding. All of such outstanding shares of
capital stock are, or upon issuance will be, duly authorized, validly issued,
fully paid and nonassessable. No shares of capital stock of the Company are
subject to preemptive rights or any other similar rights of the stockholders of
the Company or any liens or encumbrances imposed through the actions or failure
to act of the Company. Except as disclosed in SCHEDULE 3(C), as of the date of
this Agreement, (i) there are no outstanding options, warrants, scrip, rights
to subscribe for, puts, calls, rights of first refusal, agreements,
understandings, claims or other commitments or rights of any character
whatsoever relating to, or securities or rights convertible into or
exchangeable for any shares of capital stock of the Company or any of its
Subsidiaries, or arrangements by which the Company
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<PAGE> 6
or any of its Subsidiaries is or may become bound to issue additional shares of
capital stock of the Company or any of its Subsidiaries, and (ii) there are no
agreements or arrangements under which the Company or any of its Subsidiaries
is obligated to register the sale of any of its or their securities under the
1933 Act (except the Registration Rights Agreement) and (iii) there are no
anti-dilution or price adjustment provisions contained in any security issued
by the Company (or in any agreement providing rights to security holders) that
will be triggered by the issuance of the Preferred Shares or the Conversion
Shares. The Company has furnished or made available to the Buyer true and
correct copies of the Company's Certificate of Incorporation as in effect on
the date hereof ("CERTIFICATE OF INCORPORATION"), the Company's By-laws, as in
effect on the date hereof (the "BY-LAWS"), and the terms of all securities
convertible into or exercisable for Common Stock of the Company and the
material rights of the holders thereof in respect thereto.
d. Issuance of Shares. The Preferred Shares and
Conversion Shares are duly authorized and, upon issuance in accordance with the
terms of this Agreement (including the issuance of the Conversion Shares upon
(i) conversion of the Preferred Shares in accordance with the Certificate of
Designation and (ii) exercise of the Investment Options in accordance with
Section 4(e) of this Agreement) will be validly issued, fully paid and non-
assessable, and free from all taxes, liens and charges with respect to the
issue thereof and shall not be subject to preemptive rights or other similar
rights of stockholders of the Company (provided that the Company may be
required to obtain shareholder approval to authorize additional shares pursuant
to Section 4(h) hereof). The term Conversion Shares includes the shares of
Common Stock issuable upon conversion of the Preferred Shares, including
without limitation, such additional shares, if any, as are issuable pursuant to
the Certificate of Designation. The Company understands and acknowledges the
potentially dilutive effect to the Common Stock upon the issuance of the
Conversion Shares upon conversion of the Preferred Shares and exercise of the
Investment Options. The Company further acknowledges that its obligation to
issue Conversion Shares upon conversion of the Preferred Shares and exercise of
the Investment Options in accordance with this Agreement and the Certificate of
Designation is absolute and unconditional regardless of the dilutive effect
that such issuance may have on the ownership interests of other stockholders of
the Company.
e. No Conflicts. The execution, delivery and
performance of this Agreement and the Registration Rights Agreement by the
Company and the consummation by the Company of the transactions contemplated
hereby and thereby (including, without limitation, the filing of the
Certificate of Designation and the issuance and reservation for issuance of the
Conversion Shares; provided that the Company may be required to obtain
shareholder approval to authorize additional shares pursuant to Section 4(h)
hereof) will not (i) conflict with or result in a violation of any provision of
the Certificate of Incorporation or By-laws or (ii) violate or conflict with,
or result in a breach of any provision of, or constitute a default (or an event
which with notice or lapse of time or both could become a default) under, or
give to others any rights of termination, amendment, acceleration or
cancellation of, any agreement, indenture or instrument to which the Company or
any of its Subsidiaries is a party, or result in a violation of any law, rule,
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<PAGE> 7
regulation, order, judgment or decree (including federal and state securities
laws and regulations) applicable to the Company or any of its Subsidiaries or
by which any property or asset of the Company or any of its Subsidiaries is
bound or affected (except for such conflicts, defaults, terminations,
amendments, accelerations, cancellations and violations as could not reasonably
be expected to, individually or in the aggregate, have a Material Adverse
Effect). Neither the Company nor any of its Subsidiaries is in violation of
its Certificate of Incorporation, By-laws or other organizational documents and
neither the Company nor any of its Subsidiaries is in default (and no event has
occurred which with notice or lapse of time or both could put the Company or
any of its Subsidiaries in default) under, and neither the Company nor any of
its Subsidiaries has taken any action or failed to take any action that would
give to others any rights of termination, amendment, acceleration or
cancellation of, any agreement, indenture or instrument to which the Company or
any of its Subsidiaries is a party or by which any property or assets of the
Company or any of its Subsidiaries is bound or affected, except for possible
defaults and rights as could not reasonably be expected to, individually or in
the aggregate, have a Material Adverse Effect. The businesses of the Company
and its Subsidiaries, if any, are not being conducted, and shall not be
conducted so long as the Buyer owns any of the Preferred Shares, in violation
of any law, ordinance or regulation of any governmental entity, except as could
not reasonably be expected to have a Material Adverse Effect. Except as
specifically contemplated by this Agreement and as required under the 1933 Act
and any applicable state securities laws, the Company is not required to obtain
any consent, authorization or order of, or make any filing or registration
with, any court or governmental agency or any regulatory or self regulatory
agency in order for it to execute, deliver or perform any of its obligations
under this Agreement or the Registration Rights Agreement in accordance with
the terms hereof or thereof. Except as disclosed in SCHEDULE 3(E), all
consents, authorizations, orders, filings and registrations which the Company
is required to obtain pursuant to the preceding sentence have been obtained or
effected on or prior to the date hereof. The Company is not in violation of
the listing requirements of the American Stock Exchange (the "AMEX") and does
not reasonably anticipate that the Common Stock will be delisted by the AMEX in
the foreseeable future. The Company and its Subsidiaries are unaware of any
facts or circumstances which might give rise to any of the foregoing.
f. SEC Documents, Financial Statements. Since
December 31, 1994, the Company has timely filed all reports, schedules, forms,
statements and other documents required to be filed by it with the SEC pursuant
to the reporting requirements of the 1934 Act (all of the foregoing filed prior
to the date hereof and all exhibits included therein and financial statements
and schedules thereto and documents (other than exhibits) incorporated by
reference therein, being hereinafter referred to herein as the "SEC
DOCUMENTS"). The Company has delivered or made available to the Buyer true and
complete copies of the SEC Documents. As of their respective dates, the SEC
Documents complied in all material respects with the requirements of the 1934
Act and the rules and regulations of the SEC promulgated thereunder applicable
to the SEC Documents, and none of the SEC Documents, at the time they were
filed with the SEC, contained any untrue statement of a material fact or
omitted to state a material fact required to be stated therein or necessary in
order to make the statements therein, in light of the circumstances
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<PAGE> 8
under which they were made, not misleading. As of their respective dates, the
financial statements of the Company included in the SEC Documents complied as
to form in all material respects with applicable accounting requirements and
the published rules and regulations of the SEC with respect thereto. Such
financial statements have been prepared in accordance with generally accepted
accounting principles, consistently applied, during the periods involved
(except (i) as may be otherwise indicated in such financial statements or the
notes thereto, or (ii) in the case of unaudited interim statements, to the
extent they may not include footnotes or may be condensed or summary
statements) and fairly present in all material respects the consolidated
financial position of the Company and its consolidated Subsidiaries as of the
dates thereof and the consolidated results of their operations and cash flows
for the periods then ended (subject, in the case of unaudited statements, to
normal year-end audit adjustments). Except as set forth in the financial
statements of the Company included in the SEC Documents, the Company has no
liabilities, contingent or otherwise, other than (i) liabilities incurred in
the ordinary course of business subsequent to December 31, 1996 and (ii)
obligations under contracts and commitments incurred in the ordinary course of
business and not required under generally accepted accounting principles to be
reflected in such financial statements, which, individually or in the
aggregate, are not material to the financial condition or operating results of
the Company.
g. Absence of Certain Changes. Since December
31, 1997 (the date of the Company's last audited financial statements), there
has been no material adverse change and no material adverse development in the
assets, liabilities, business, properties, operations, financial condition or
results of operations of the Company or any of its Subsidiaries.
h. Absence of Litigation. There is no action,
suit, claim, proceeding, inquiry or investigation before or by any court,
public board, government agency, self-regulatory organization or body pending
or, to the knowledge of the Company or any of its Subsidiaries, threatened
against or affecting the Company or any of its Subsidiaries that could
reasonably be expected to have a Material Adverse Effect. SCHEDULE 3(H)
contains a complete list and summary description of any pending or threatened
proceeding against or affecting the Company or any of its Subsidiaries, without
regard to whether it would have a Material Adverse Effect. The Company and its
Subsidiaries are unaware of any facts or circumstances which might give rise to
any of the foregoing.
i. Patents, Copyrights, etc. The Company and
each of its Subsidiaries owns or possesses the requisite licenses or rights to
use all patents, patent rights, inventions, know-how, trade secrets,
trademarks, service marks, service names, trade names and copyrights
("INTELLECTUAL PROPERTY") necessary to enable it to conduct its business as now
operated (and, except as set forth in SCHEDULE 3(I) hereof, to the best of the
Company's knowledge, as presently contemplated to be operated in the future);
there is no claim or action by any person pertaining to, or proceeding pending,
or to the Company's knowledge threatened which challenges the right of the
Company or of a Subsidiary with respect to any Intellectual Property necessary
to enable it to conduct its business as now operated (and, except as set forth
in SCHEDULE 3(I) hereof, to the
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best of the Company's knowledge, as presently contemplated to be operated in
the future); to the best of the Company's knowledge, the Company's or its
Subsidiaries, current and intended products, services and processes do not
infringe on any Intellectual Property or other rights held by any person; and
the Company is unaware of any facts or circumstances which might give rise to
any of the foregoing. The Company and each of its Subsidiaries have taken
reasonable security measures to protect the secrecy, confidentiality and value
of their Intellectual Property.
j. [Intentionally Omitted]
k. Tax Status. Except as set forth on SCHEDULE
3(K), the Company and each of its Subsidiaries has made or filed all federal
and state income and all other tax returns, reports and declarations required
by any jurisdiction to which it is subject (unless and only to the extent that
the Company and each of its Subsidiaries has set aside on its books provisions
reasonably adequate for the payment of all unpaid and unreported taxes) and has
paid all taxes and other governmental assessments and charges that are material
in amount, shown or determined to be due on such returns, reports and
declarations, except those being contested in good faith and has set aside on
its books provisions reasonably adequate for the payment of all taxes for
periods subsequent to the periods to which such returns, reports or
declarations apply, except for filings and payments that could not reasonably
be expected to have a Material Adverse Effect. There are no unpaid taxes in
any material amount claimed to be due by the taxing authority of any
jurisdiction, and the officers of the Company know of no basis for any such
claim.
l. Certain Transactions. Except as set forth on
SCHEDULE 3(L) and except for arm's length transactions pursuant to which the
Company or any of its Subsidiaries makes payments in the ordinary course of
business upon terms no less favorable than the Company or any of its
Subsidiaries could obtain from third parties and other than the grant of stock
options disclosed on SCHEDULE 3(C), none of the officers or directors of the
Company is presently a party to any transaction or transactions (which are,
individually or in the aggregate, material to the Company) with the Company or
any of its Subsidiaries (other than for services as employees, officers and
directors), including any contract, agreement or other arrangement providing
for the furnishing of services to or by, providing for rental of real or
personal property to or from, or otherwise requiring payments to or from any
officer, director or such employee or, to the knowledge of the Company, any
corporation, partnership, trust or other entity in which any officer or
director has a substantial interest or is an officer, director, trustee or
partner.
m. Disclosure. All information relating to or
concerning the Company or any of its Subsidiaries set forth in this Agreement
and provided to the Buyer pursuant to Section 2(d) hereof and otherwise in
connection with the transactions contemplated hereby is true and correct in all
material respects and the Company has not omitted to state any material fact
necessary in order to make the statements made herein or therein, in light of
the circumstances under which they were made, not misleading. No event or
circumstance has occurred or exists
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with respect to the Company or any of its Subsidiaries or its or their
business, properties, operations or financial conditions, which, under
applicable law, rule or regulation, requires public disclosure or announcement
by the Company on or before the date hereof but which has not been so publicly
announced or disclosed (assuming for this purpose that the Company's reports
filed under the 1934 Act are being incorporated into an effective registration
statement filed by the Company under the 1933 Act).
n. Acknowledgment Regarding Buyer's Purchase of
Securities. The Company acknowledges and agrees that the Buyer is acting
solely in the capacity of an arm's length purchaser with respect to this
Agreement and the transactions contemplated hereby. The Company further
acknowledges that the Buyer is not acting as a financial advisor or fiduciary
of the Company (or in any similar capacity) with respect to this Agreement and
the transactions contemplated hereby and any advice given by the Buyer or any
of its respective representatives or agents in connection with this Agreement
and the transactions contemplated hereby is merely incidental to the Buyer's
purchase of the Securities. The Company further represents to the Buyer that
the Company's decision to enter into this Agreement has been based solely on
the independent evaluation by the Company and its representatives.
o. No Integrated Offering. Neither the Company,
nor any of its affiliates, nor any person acting on its or their behalf, has
directly or indirectly made any offers or sales in any security or solicited
any offers to buy any security under circumstances that would require
registration under the 1933 Act of the issuance of the Securities to the Buyer.
The issuance of the Securities to the Buyer will not be integrated with any
other issuance of the Company's securities (past, current or future) which
requires stockholder approval under the rules of the AMEX.
p. No Brokers. The Company has taken no action
which would give rise to any claim by any person for brokerage commissions,
finder's fees or similar payments relating to this Agreement or the
transactions contemplated hereby, except for dealings with Shimono Group
Incorporated, whose commissions and fees will be paid for by the Company.
q. Permits; Compliance. The Company and each of
its Subsidiaries is in possession of all franchises, grants, authorizations,
licenses, permits, easements, variances, exemptions, consents, certificates,
approvals and orders necessary to own, lease and operate its properties and to
carry on its business as it is now being conducted (collectively, the "COMPANY
PERMITS"), and there is no action pending or, to the knowledge of the Company,
threatened regarding suspension or cancellation of any of the Company Permits,
except such Company Permits and actions which could not reasonably be expected
to have a Material Adverse Effect. Neither the Company nor any of its
Subsidiaries is in conflict with, or in default or violation of, any of the
Company Permits, except for any such conflicts, defaults or violations which,
individually or in the aggregate, would not reasonably be expected to have a
Material Adverse Effect. Since December 31, 1997, neither the Company nor any
of its Subsidiaries has received
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any notification with respect to possible conflicts, defaults or violations of
applicable laws, except for notices relating to possible conflicts, defaults or
violations, which conflicts, defaults or violations could not reasonably be
expected to have a Material Adverse Effect.
r. Environmental Matters.
(i) Except as set forth in SCHEDULE
3(R), there are, to the Company's knowledge, with respect to the Company or any
of its Subsidiaries or any predecessor of the Company, no past or present
violations of Environmental Laws (as defined below), releases of any material
into the environment, actions, activities, circumstances, conditions, events,
incidents, or contractual obligations which may give rise to any common law
environmental liability or any liability under the Comprehensive Environmental
Response, Compensation and Liability Act of 1980 or similar federal, state,
local or foreign laws and neither the Company nor any of its Subsidiaries has
received any notice with respect to any of the foregoing, nor is any action
pending or, to the Company's knowledge, threatened in connection with any of
the foregoing except, in each case, as could not reasonably be expected to have
a Material Adverse Effect. The term "ENVIRONMENTAL LAWS" means all federal,
state, local or foreign laws relating to pollution or protection of human
health or the environment (including, without limitation, ambient air, surface
water, groundwater, land surface or subsurface strata), including, without
limitation, laws relating to emissions, discharges, releases or threatened
releases of chemicals, pollutants contaminants, or toxic or hazardous
substances or wastes (collectively, "HAZARDOUS MATERIALS") into the
environment, or otherwise relating to the manufacture, processing,
distribution, use, treatment, storage, disposal, transport or handling of
Hazardous Materials, as well as all authorizations, codes, decrees, demands or
demand letters, injunctions, judgments, licenses, notices or notice letters,
orders, permits, plans or regulations issued, entered, promulgated or approved
thereunder.
(ii) Other than those that are or were
stored, used or disposed of in compliance with applicable law, no Hazardous
Materials are contained on or about any real property currently owned, leased
or used by the Company or any of its Subsidiaries, and no Hazardous Materials
were released on or about any real property previously owned, leased or used by
the Company or any of its Subsidiaries during the period the property was
owned, leased or used by the Company or any of its Subsidiaries, except in the
normal course of the Company's or any of its Subsidiaries' business or could
not reasonably be expected to have a Material Adverse Effect.
(iii) Except as set forth in SCHEDULE
3(R), there are no underground storage tanks on or under any real property
owned, leased or used by the Company or any of its Subsidiaries that are not in
compliance with applicable law.
s. Title to Property. The Company and its
Subsidiaries have marketable title to all real property and good and marketable
title to all personal property owned
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by them which is material to the business of the Company and its Subsidiaries,
in each case free and clear of all liens, encumbrances and defects except such
as are described in SCHEDULE 3(S) or such as would not have a Material Adverse
Effect (it being understood that marketable title as used herein shall mean
such title to real property as is customarily held in the oil and gas
business). Any real property and facilities held under lease by the Company
and its Subsidiaries are held by them under valid, subsisting and enforceable
leases with such exceptions as would not have a Material Adverse Effect.
t. Insurance. The Company and each of its
Subsidiaries are insured by insurers of recognized financial responsibility
against such losses and risks and in such amounts as management of the Company
believes to be prudent and customary in the businesses in which the Company and
its Subsidiaries are engaged. Neither the Company nor any such Subsidiary has
any reason to believe that it will not be able to renew its existing insurance
coverage as and when such coverage expires or to obtain similar coverage from
similar insurers as may be necessary to continue its business at a cost that
would not have a Material Adverse Effect.
u. Internal Accounting Controls. The Company
and each of its Subsidiaries maintain a system of internal accounting controls
sufficient, in the judgment of the Company's board of directors, to provide
reasonable assurance that (i) transactions are executed in accordance with
management's general or specific authorizations, (ii) transactions are recorded
as necessary to permit preparation of financial statements in conformity with
generally accepted accounting principles and to maintain asset accountability,
(iii) access to assets is permitted only in accordance with management's
general or specific authorization and (iv) the recorded accountability for
assets is compared with the existing assets at reasonable intervals and
appropriate action is taken with respect to any differences.
v. Foreign Corrupt Practices. Since December
31, 1994, neither the Company, nor any of its Subsidiaries, nor any director,
officer, agent, employee or other person acting on behalf of the Company or any
Subsidiary has, in the course of his actions for, or on behalf of, the Company,
used any corporate funds for any unlawful contribution, gift, entertainment or
other unlawful expenses relating to political activity; made any direct or
indirect unlawful payment to any foreign or domestic government official or
employee from corporate funds; violated or is in violation of any provision of
the U.S. Foreign Corrupt Practices Act of 1977; or made any bribe, rebate,
payoff, influence payment, kickback or other unlawful payment to any foreign or
domestic government official or employee.
4. COVENANTS.
a. Best Efforts. The parties shall use their
best efforts to satisfy timely each of the conditions described in Section 6
and 7 of this Agreement.
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b. Form D; Blue Sky Laws. The Company agrees to
file a Form D with respect to the Securities as required under Regulation D and
to provide a copy thereof to each Buyer promptly after such filing. The
Company shall, on or before the Closing Date, take such action as the Company
shall reasonably determine is necessary to qualify the Securities for sale to
the Buyer at the applicable closing pursuant to this Agreement under applicable
securities or "blue sky" laws of the states of the United States (or to obtain
an exemption from such qualification), and shall provide evidence of any such
action so taken to each Buyer on or prior to the Closing Date.
c. Reporting Status; Eligibility to Use Form
S-3. The Company's Common Stock is registered under Section 12(b) of the 1934
Act. So long as any Buyer beneficially owns any of the Securities, the Company
shall timely file all reports required to be filed with the SEC pursuant to the
1934 Act, and the Company shall not terminate its status as an issuer required
to file reports under the 1934 Act even if the 1934 Act or the rules and
regulations thereunder would permit such termination. The Company currently
meets, and will use its commercially reasonable best efforts to continue to
meet, the "registrant eligibility" requirements set forth in the general
instructions to Form S-3.
d. Use of Proceeds. The Company shall use the
proceeds from the sale of the Preferred Shares and the shares of Common Stock
issued pursuant to the Investment Options (as defined below) in the manner set
forth in SCHEDULE 4(D) attached hereto and made a part hereof and shall not,
directly or indirectly, use such proceeds for any loan to or investment in any
other corporation, partnership, enterprise or other person (except in
connection with its currently existing direct or indirect Subsidiaries).
e. Investment Options. At the time of each
conversion of Preferred Stock by Buyer, Buyer shall have the option (the
"Investment Options") to purchase one additional share of Common Stock for
every share of Common Stock issuable as a result of such conversion of the
Preferred Stock (not including shares of Common Stock issuable as a result of
the Premium Amount (as defined in the Certificate of Designation)) on the
applicable Conversion Date (as defined in the Certificate of Designation), at a
purchase price equal to the applicable Conversion Price (as defined in the
Certificate of Designation). In order to exercise the Investment Option that
arises on a Conversion Date, the Buyer must make the appropriate election
included on the Notice of Conversion (as defined in the Certificate of
Designation) in respect of such Conversion Date and pay to the Company, in
immediately available funds, on or within one business day following the
Conversion Date, the aggregate purchase price for the shares of Common Stock
issuable as a result of the exercise of such Investment Option. Failure to
make such election or payment in accordance with the immediately preceding
sentence will result in expiration of the Investment Option in respect of such
Conversion Date.
Notwithstanding anything in this Section 4(e) to the
contrary, unless the Buyer delivers a waiver in accordance with the immediately
following sentence, in no event (other than pursuant to the Automatic
Conversion (as defined in the Certificate of Designation)) shall the
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Buyer be entitled to exercise a number of Investment Options (or portions
thereof) in excess of the number of Investment Options (or portions thereof)
upon exercise of which the sum of (i) the number of shares of Common Stock
beneficially owned by the Buyer and its affiliates (other than shares of Common
Stock which may be deemed beneficially owned through the ownership of the
unexercised Investment Options and unconverted Preferred Shares) and (ii) the
number of shares of Common Stock issuable upon exercise of the Investment
Options (or portions thereof) with respect to which the determination described
herein is being made, would result in beneficial ownership by the Buyer and its
affiliates of more than 4.9% of the outstanding shares of Common Stock. For
purposes of the immediately preceding sentence, beneficial ownership shall be
determined in accordance with Section 13(d) of the 1934 Act, and Regulation
13D-G thereunder, except as otherwise provided in clause (i) hereof and the
Buyer may waive the limitations set forth therein by written notice to the
Company upon not less than sixty-one (61) days prior written notice (with such
waiver taking effect only upon the expiration of such sixty-one (61) day notice
period).
f. Expenses. At the closing, the Company shall
pay to Rose Glen Capital Management, L.P. ("RGC") a nonaccountable expense
allowance equal to Thirty Thousand Dollars ($30,000).
g. Financial Information. The Company agrees to
send the following reports to each Buyer until such Buyer transfers, assigns,
or sells all of the Securities: (i) within ten (10) days after the filing with
the SEC, a copy of its Annual Report on Form 10-K, its Quarterly Reports on
Form 10-Q and any Current Reports on Form 8-K; (ii) within one (1) day after
release, copies of all press releases issued by the Company or any of its
Subsidiaries; and (iii) contemporaneously with the making available or giving
to the stockholders of the Company, copies of any notices or other information
the Company makes available or gives to such stockholders.
h. Reservation of Shares. The Company shall not
reduce the number of shares of Common Stock reserved for issuance upon
conversion of Preferred Shares without the consent of each Buyer. The Company
shall use its best efforts at all times to maintain the number of shares of
Common Stock so reserved for issuance at no less than the full number that is
then actually issuable upon full conversion of the Preferred Shares (based on
the Conversion Price of the Preferred Shares in effect from time to time) and
the full exercise of the Investment Options. If at any time the number of
shares of Common Stock authorized and remaining reserved for issuance is below
the number of Conversion Shares issuable upon conversion of the Preferred
Shares and exercise of the Investment Options (based on the Conversion Price of
the Preferred Shares then in effect), the Company will promptly take all
corporate action necessary to authorize and reserve a sufficient number of
shares, including, without limitation, calling a special meeting of
shareholders to authorize additional shares to meet the Company's obligations
under this Section 4(h), in the case of an insufficient number of authorized
shares, and using its best efforts to obtain shareholder approval of an
increase in such authorized number of shares.
14
<PAGE> 15
i. Listing. The Company shall promptly secure
the listing of the Conversion Shares upon each national securities exchange or
automated quotation system, if any, upon which shares of Common Stock are then
listed (subject to official notice of issuance) and shall maintain, so long as
any other shares of Common Stock shall be so listed, such listing of all
Conversion Shares from time to time issuable upon conversion of the Preferred
Shares and the exercise of the Investment Options. The Company will obtain and
maintain the listing and trading of its Common Stock on the AMEX, the Nasdaq
National Market ("NASDAQ"), the Nasdaq SmallCap Market ("NASDAQ SMALLCAP") or
the New York Stock Exchange ("NYSE"), and will comply in all respects with the
Company's reporting, filing and other obligations under the bylaws or rules of
the National Association of Securities Dealers ("NASD") and such exchanges, as
applicable. The Company shall promptly provide to each Buyer copies of any
notices it receives from the AMEX and any other exchanges or quotation systems
on which the Common Stock is then listed regarding the continued eligibility of
the Common Stock for listing on such exchanges and quotation systems.
j. Corporate Existence. So long as a Buyer
beneficially owns any Preferred Shares, the Company shall maintain its
corporate existence and shall not sell all or substantially all of the
Company's assets, except in the event of a merger or consolidation or sale of
all or substantially all of the Company's assets, where the surviving or
successor entity in such transaction (i) assumes the Company's obligations
hereunder and under the agreements and instruments entered into in connection
herewith and (ii) is a publicly traded corporation whose Common Stock is listed
for trading on the AMEX, Nasdaq or NYSE.
k. No Integration. The Company will not conduct
any future offering that will be integrated with the issuance of the Securities
solely for purposes of Rule 713 of the AMEX.
l. Solvency. The Company (both before and after
giving effect to the transactions contemplated by this Agreement) is solvent
(i.e., its assets have a fair market value in excess of the amount required to
pay its probable liabilities on its existing debts as they become absolute and
matured) and currently the Company has no information that would lead it to
reasonably conclude that the Company would not have, nor does it intend to take
any action that would impair, its ability to pay its debts from time to time
incurred in connection therewith as such debts mature. The Company did not
receive a qualified opinion from its auditors with respect to its most recent
fiscal year end and does not anticipate or know of any basis upon which its
auditors might issue a qualified opinion in respect of its current fiscal year.
5. TRANSFER AGENT INSTRUCTIONS. The Company shall
issue irrevocable instructions to its transfer agent to issue certificates,
registered in the name of the Buyer or, after registration of the Conversion
Shares under the 1933 Act, its nominee, for the Conversion Shares in such
amounts as specified from time to time by the Buyer to the Company upon
conversion of the Preferred Shares in accordance with the terms thereof upon
receipt by the Company of a properly completed and executed notice of
conversion in accordance with the
15
<PAGE> 16
Certificate of Designation (the "IRREVOCABLE TRANSFER AGENT INSTRUCTIONS").
Prior to registration of the Conversion Shares under the 1933 Act, all such
certificates shall bear the restrictive legend specified in Section 2(g) of
this Agreement. The Company warrants that no instruction other than the
Irrevocable Transfer Agent Instructions referred to in this Section 5, and stop
transfer instructions to give effect to Section 2(f) hereof (in the case of the
Conversion Shares, prior to registration of the Conversion Shares under the
1933 Act), will be given by the Company to its transfer agent and that the
Securities shall otherwise be freely transferable on the books and records of
the Company as and to the extent provided in this Agreement and the
Registration Rights Agreement. Nothing in this Section shall affect in any way
the Buyer's obligations and agreement set forth in Section 2(g) hereof to
comply with all applicable prospectus delivery requirements, if any, upon
resale of the Securities. If the Buyer provides the Company with an opinion of
counsel, reasonably satisfactory to the Company in form, substance and scope,
that registration of a resale by the Buyer of any of the Securities is not
required under the 1933 Act, the Company shall permit the transfer, and, in the
case of the Conversion Shares, promptly instruct its transfer agent to issue
one or more certificates in such name and in such denominations as specified by
the Buyer. The Company acknowledges that a breach by it of its obligations
hereunder will cause irreparable harm to the Buyer, by vitiating the intent and
purpose of the transaction contemplated hereby. Accordingly, the Company
acknowledges that the remedy at law for a breach of its obligations under this
Section 5 will be inadequate and agrees, in the event of a breach or threatened
breach by the Company of the provisions of this Section, that the Buyer shall
be entitled, in addition to all other available remedies, to an injunction
restraining any breach and requiring immediate transfer, without the necessity
of showing economic loss and without any bond or other security being required.
6. CONDITIONS TO THE COMPANY'S OBLIGATION TO SELL. The
obligation of the Company hereunder to issue and sell the Preferred Shares to
the Buyer at the closing is subject to the satisfaction, at or before the
Closing Date, of each of the following conditions thereto, provided that these
conditions are for the Company's sole benefit and may be waived by the Company
at any time in its sole discretion:
a. The Buyer shall have executed this Agreement
and the Registration Rights Agreement, and delivered the same to the Company.
b. The Buyer shall have delivered the Purchase
Price in accordance with Section 1(b) above.
c. The Certificate of Designation shall have
been accepted for filing with the Secretary of State of the State of Delaware.
d. The representations and warranties of the
Buyer shall be true and correct in all material respects as of the date when
made and as of the Closing Date as though made at that time (except for
representations and warranties that speak as of a specific date), and the Buyer
shall have performed, satisfied and complied in all material respects with the
covenants,
16
<PAGE> 17
agreements and conditions required by this Agreement to be performed, satisfied
or complied with by the Buyer at or prior to the Closing Date.
e. No litigation, statute, rule, regulation,
executive order, decree, ruling or injunction shall have been enacted, entered,
promulgated or endorsed by or in any court or governmental authority of
competent jurisdiction or any self-regulatory organization having authority
over the matters contemplated hereby which prohibits the consummation of any of
the transactions contemplated by this Agreement.
7. CONDITIONS TO THE BUYER'S OBLIGATION TO PURCHASE.
The obligation of the Buyer hereunder to purchase the Preferred Shares at the
closing is subject to the satisfaction, at or before the Closing Date, of each
of the following conditions, provided that these conditions are for such
Buyer's sole benefit and may be waived by the Buyer at any time in its sole
discretion:
a. The Company shall have executed this
Agreement and the Registration Rights Agreement, and delivered the same to the
Buyer.
b. The Company shall have delivered to the Buyer
duly executed certificates (in such denominations as the Buyer shall request)
representing the Preferred Shares in accordance with Section 1(b) above.
c. The Certificate of Designation shall have
been accepted for filing with the Secretary of Sate of the State of Delaware,
and a copy thereof certified by such Secretary of State shall have been
delivered to the Buyer.
d. The Irrevocable Transfer Agent Instructions,
in form and substance satisfactory to the Buyer, shall have been delivered to
and acknowledged in writing by the Company's Transfer Agent.
e. The representations and warranties of the
Company shall be true and correct in all material respects as of the date when
made and as of the Closing Date as though made at such time (except for
representations and warranties that speak as of a specific date) and the
Company shall have performed, satisfied and complied in all material respects
with the covenants, agreements and conditions required by this Agreement to be
performed, satisfied or complied with by the Company at or prior to the Closing
Date. The Buyer shall have received a certificate or certificates, executed by
the chief executive officer of the Company, dated as of the Closing Date, to
the foregoing effect and as to such other matters as may be reasonably
requested by the Buyer including, but not limited to certificates with respect
to the Company's Certificate of Incorporation, By-laws and Board of Directors'
resolutions relating to the transactions contemplated hereby.
17
<PAGE> 18
f. No litigation, statute, rule, regulation,
executive order, decree, ruling or injunction shall have been enacted, entered,
promulgated or endorsed by or in any court or governmental authority of
competent jurisdiction or any self-regulatory organization having authority
over the matters contemplated hereby which prohibits the consummation of any of
the transactions contemplated by this Agreement.
g. Trading in the Common Stock on the AMEX shall
not have been suspended by the SEC or the AMEX.
h. The Buyer shall have received an opinion of
the Company's general counsel, dated as of the Closing Date, in form, scope and
substance reasonably satisfactory to the Buyer and in substantially the same
form as EXHIBIT "C" attached hereto.
8. GOVERNING LAW; MISCELLANEOUS.
a. Governing Law. This Agreement shall be
governed by and interpreted in accordance with the laws of the State of
Delaware without regard to the principles of conflict of laws. The parties
hereto hereby submit to the exclusive jurisdiction of the United States Federal
Courts located in Delaware with respect to any dispute arising under this
Agreement, the agreements entered into in connection herewith or the
transactions contemplated hereby or thereby.
b. Counterparts; Signatures by Facsimile. This
Agreement may be executed in two or more counterparts, all of which shall be
considered one and the same agreement and shall become effective when
counterparts have been signed by each party and delivered to the other party.
This Agreement, once executed by a party, may be delivered to the other party
hereto by facsimile transmission of a copy of this Agreement bearing the
signature of the party so delivering this Agreement.
c. Headings. The headings of this Agreement are
for convenience of reference and shall not form part of, or affect the
interpretation of, this Agreement.
d. Severability. If any provision of this
Agreement shall be invalid or unenforceable in any jurisdiction, such
invalidity or unenforceability shall not affect the validity or enforceability
of the remainder of this Agreement or the validity or enforceability of this
Agreement in any other jurisdiction.
e. Entire Agreement; Amendments. This Agreement
and the instruments referenced herein contain the entire understanding of the
parties with respect to the matters covered herein and therein and, except as
specifically set forth herein or therein, neither the Company nor the Buyer
makes any representation, warranty, covenant or undertaking with respect to
such matters. No provision of this Agreement may be waived or amended other
than by an instrument in writing signed by the party to be charged with
enforcement.
18
<PAGE> 19
f. Notices. Any notices required or permitted
to be given under the terms of this Agreement shall be sent by certified or
registered mail (return receipt requested) or delivered personally or by
courier (including a recognized overnight delivery service) or by facsimile and
shall be effective five days after being placed in the mail, if mailed by
regular U.S. mail, or upon receipt, if delivered personally or by courier
(including a recognized overnight delivery service) or upon telephone
confirmation of receipt by the addressee if by facsimile, in each case
addressed to a party. The addresses for such communications shall be:
If to the Company:
Harken Energy Corporation
5605 N. MacArthur Boulevard
Suite 400
Irving, Texas 75038
Attention: Mikel D. Faulkner
Facsimile: (972) 753-6944
With copy to:
Harken Energy Corporation
5605 N. MacArthur Boulevard
Suite 400
Irving, Texas 75038
Attention: Larry E. Cummings
Facsimile: (972) 753-6963
If to the Buyer: To the address set forth immediately below
the Buyer's name on the signature pages hereto.
Each party shall provide notice to the other party of any
change in address.
g. Successors and Assigns. This Agreement shall
be binding upon and inure to the benefit of the parties and their successors
and permitted assigns. Neither the Company nor the Buyer shall assign this
Agreement or any rights or obligations hereunder without the prior written
consent of the other, which consent will not be unreasonably withheld; provided
that, in the event of a proposed assignment to a competitor of the Company or
to a purchaser seeking to acquire control of the Company without the consent of
the Board of Directors of the Company, such consent may be withheld for any
reason or for no reason. Notwithstanding the foregoing, subject to Section
2(f), the Buyer may assign its rights hereunder to any holder of an interest in
the Buyer upon a liquidation of the Buyer's assets in accordance with its
governing documents or to any of its "affiliates," as that term is defined
under the 1934 Act, without the consent of the Company.
19
<PAGE> 20
h. Third Party Beneficiaries. This Agreement is
intended for the benefit of the parties hereto and their respective permitted
successors and assigns, and is not for the benefit of, nor may any provision
hereof be enforced by, any other person.
i. Survival. The representations and warranties
of the Company and the Buyer and the agreements and covenants set forth in
Sections 2, 3, 4, 5 and 8 shall survive the closing hereunder for two (2) years
notwithstanding any due diligence investigation conducted by or on behalf of
the other party. The Company agrees to indemnify and hold harmless the Buyer
and all their officers, directors, employees and agents for loss or damage
arising as a result of or related to any material breach by the Company of any
of its representations, warranties and covenants set forth in Sections 3 and 4
hereof or any of its covenants and obligations under this Agreement or the
Registration Rights Agreement, including advancement of expenses as they are
incurred.
j. Publicity. The Company and the Buyer shall
have the right to review a reasonable period of time before issuance of any
press releases, SEC, the AMEX or NASD filings, or any other public statements
with respect to the transactions contemplated hereby; provided, however, that
the Company shall be entitled, without the prior approval of the Buyer, to make
any press release or SEC, the AMEX or NASD filings with respect to such
transactions as is required by applicable law and regulations.
k. Further Assurances. Each party shall do and
perform, or cause to be done and performed, all such further acts and things,
and shall execute and deliver all such other agreements, certificates,
instruments and documents, as the other party may reasonably request in order
to carry out the intent and accomplish the purposes of this Agreement and the
consummation of the transactions contemplated hereby.
l. No Strict Construction. The language used in
this Agreement will be deemed to be the language chosen by the parties to
express their mutual intent, and no rules of strict construction will be
applied against any party.
20
<PAGE> 21
IN WITNESS WHEREOF, the Buyer and the Company have caused this
Agreement to be duly executed as of the date first above written.
HARKEN ENERGY CORPORATION
By: /s/ Larry E. Cummings
------------------------------------------------
Larry E. Cummings
Vice President and Secretary
RGC INTERNATIONAL INVESTORS, LDC
By: Rose Glen Capital Management, L.P., Investment Manager
By: RGC General Partner Corp., as General Partner
By: /s/ Wayne D. Bloch
------------------------------------------------
Wayne D. Bloch
Managing Director
RESIDENCE: Cayman Islands
ADDRESS:
c/o Rose Glen Capital Management, L.P.
3 Bala Plaza East, Suite 200
251 St. Asaphs Road
Bala Cynwyd, PA 19004
Facsimile: (610) 617-0570
Telephone: (610) 617-5900
AGGREGATE SUBSCRIPTION AMOUNT:
Number of Shares of Preferred Stock: 15,000
Aggregate Purchase Price: $15,000,000
21
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<ARTICLE> 5
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> DEC-31-1998
<PERIOD-START> JAN-01-1998
<PERIOD-END> MAR-31-1998
<CASH> 21,907,000
<SECURITIES> 96,666,000
<RECEIVABLES> 2,389,000
<ALLOWANCES> (342,000)
<INVENTORY> 0
<CURRENT-ASSETS> 121,064,000
<PP&E> 139,995,000
<DEPRECIATION> (20,054,000)
<TOTAL-ASSETS> 247,964,000
<CURRENT-LIABILITIES> 12,801,000
<BONDS> 39,270,000
0
0
<COMMON> 1,228,000
<OTHER-SE> 159,665,000
<TOTAL-LIABILITY-AND-EQUITY> 247,964,000
<SALES> 2,700,000
<TOTAL-REVENUES> 4,362,000
<CGS> 1,382,000
<TOTAL-COSTS> 1,382,000
<OTHER-EXPENSES> 2,873,000
<LOSS-PROVISION> 15,000
<INTEREST-EXPENSE> 8,000
<INCOME-PRETAX> 84,000
<INCOME-TAX> 0
<INCOME-CONTINUING> 84,000
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 84,000
<EPS-PRIMARY> 0.00
<EPS-DILUTED> 0.00
</TABLE>
