<PAGE> 1
================================================================================
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 SEPTEMBER 30, 1995
[ ] 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 (214) 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 November 10, 1995 was 71,806,270 net of 1,440,896 Treasury
Shares.
================================================================================
<PAGE> 2
HARKEN ENERGY CORPORATION
INDEX TO QUARTERLY REPORT
SEPTEMBER 30, 1995
<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 . . . . . . . . . . . . . . . . . . . . . . . . . . 18
PART II. OTHER INFORMATION
Notes Concerning Other Information . . . . . . . . . . . . . . . . . . . . . 25
SIGNATURES . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 27
</TABLE>
2
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PART I - FINANCIAL INFORMATION
3
<PAGE> 4
ITEM I. CONDENSED FINANCIAL STATEMENTS
HARKEN ENERGY CORPORATION AND SUBSIDIARIES
CONSOLIDATED CONDENSED BALANCE SHEETS
(unaudited)
<TABLE>
<CAPTION>
DECEMBER 31, SEPTEMBER 30,
1994 1995
----------------- -----------------
<S> <C> <C>
ASSETS
------
Current Assets:
Cash and temporary investments . . . . . . . . . . . . . . . $ 2,828,000 $ 3,837,000
Cash available in European segregated account . . . . . . . -- 3,848,000
Accounts receivable, net . . . . . . . . . . . . . . . . . . 543,000 991,000
Investment in former subsidiary held for resale . . . . . . 2,898,000 --
Prepaid expenses and other current assets . . . . . . . . . 571,000 383,000
---------------- ----------------
Total Current Assets . . . . . . . . . . . . . . . . . 6,840,000 9,059,000
Property and Equipment, net . . . . . . . . . . . . . . . . . . 20,177,000 27,363,000
Restricted Cash in European Segregated Account . . . . . . . -- 9,674,000
Investments in Former Subsidiaries . . . . . . . . . . . . . . 1,219,000 1,219,000
Notes Receivable from Related Parties, including interest . . . 474,000 232,000
Other Assets, net . . . . . . . . . . . . . . . . . . . . . . . 250,000 1,846,000
---------------- ----------------
$ 28,960,000 $ 49,393,000
================ ================
LIABILITIES AND STOCKHOLDERS' EQUITY
------------------------------------
Current Liabilities:
Trade payables . . . . . . . . . . . . . . . . . . . . . . $ 492,000 $ 531,000
Accrued liabilities and other . . . . . . . . . . . . . . . 2,464,000 2,392,000
Notes payable . . . . . . . . . . . . . . . . . . . . . . . 900,000 787,000
Revenues and royalties payable . . . . . . . . . . . . . . . 1,277,000 846,000
---------------- ----------------
Total Current Liabilities . . . . . . . . . . . . . . 5,133,000 4,556,000
Commitments and Contingencies (Note 12)
European Convertible Notes Payable . . . . . . . . . . . . . . -- 13,300,000
Redeemable Preferred Stock . . . . . . . . . . . . . . . . . . 1,868,000 1,868,000
Stockholders' Equity:
Common stock, $0.01 par value; authorized
100,000,000 shares; issued 66,426,508 and
72,913,833 shares, respectively . . . . . . . . . . . . . 664,000 729,000
Additional paid-in capital . . . . . . . . . . . . . . . . . 132,572,000 140,696,000
Retained deficit . . . . . . . . . . . . . . . . . . . . . . (90,520,000) (90,999,000)
Treasury stock, 5,983,655 shares held . . . . . . . . . . . (20,757,000) (20,757,000)
---------------- ----------------
Total Stockholders' Equity . . . . . . . . . . . . . . 21,959,000 29,669,000
---------------- ----------------
$ 28,960,000 $ 49,393,000
================ ================
</TABLE>
The accompanying Notes to Consolidated Condensed Financial Statements
are an integral part of these Statements.
4
<PAGE> 5
HARKEN ENERGY CORPORATION AND SUBSIDIARIES
CONSOLIDATED CONDENSED STATEMENTS OF OPERATIONS
(unaudited)
<TABLE>
<CAPTION>
THREE MONTHS ENDED NINE MONTHS ENDED
SEPTEMBER 30, SEPTEMBER 30,
------------------------------ ------------------------------
1994 1995 1994 1995
------------- ------------- ------------- -------------
<S> <C> <C> <C> <C>
Revenues:
Oil and gas operations . . . . . . . . . . . . $ 919,000 $ 1,476,000 $ 2,817,000 $ 4,189,000
Interest income . . . . . . . . . . . . . . . 23,000 234,000 67,000 437,000
Other income . . . . . . . . . . . . . . . . . 194,000 90,000 562,000 555,000
------------- ------------- ------------- -------------
1,136,000 1,800,000 3,446,000 5,181,000
Costs and Expenses:
Oil and gas operating expenses . . . . . . . . 328,000 463,000 991,000 1,343,000
General and administrative expenses, net . . . 875,000 774,000 2,372,000 2,285,000
Depreciation and amortization . . . . . . . . 515,000 672,000 1,444,000 1,810,000
Interest expense and other . . . . . . . . . . 22,000 173,000 68,000 322,000
------------- ------------- ------------- -------------
1,740,000 2,082,000 4,875,000 5,760,000
Loss before income taxes . . . . . . . . . . (604,000) (282,000) (1,429,000) (579,000)
Income tax expense . . . . . . . . . . . . . . . -- -- -- --
------------- ------------- ------------- -------------
Loss from continuing operations . . . . . . (604,000) (282,000) (1,429,000) (579,000)
Discontinued Operations:
Income (loss) from operations of discontinued well
service and contract drilling segment . . . (127,000) -- (507,000) --
Gain on sale of contract drilling rigs . . . . 14,000 -- 286,000 --
------------- ------------- ------------- -------------
(113,000) -- (221,000) --
------------- ------------- -------------- -------------
Net loss . . . . . . . . . . . . . . . . . . $ (717,000) $ (282,000) $ (1,650,000) $ (579,000)
============= ============= ============= =============
Income (loss) per common share:
Loss from continuing operations . . . . . . . $ (0.01) $ (0.01) $ (0.03) $ (0.01)
Discontinued operations . . . . . . . . . . . (0.00) -- (0.00) --
------------- ------------- -------------- -------------
Net loss . . . . . . . . . . . . . . . . . . $ (0.01) $ (0.01) $ (0.03) $ (0.01)
============= ============= ============= =============
Weighted average shares outstanding . . . . . . . 59,482,853 65,674,626 59,482,853 63,052,443
============= ============= ============= =============
</TABLE>
The accompanying Notes to Consolidated Condensed Financial Statements
are an integral part of these Statements.
5
<PAGE> 6
HARKEN ENERGY CORPORATION AND SUBSIDIARIES
CONSOLIDATED CONDENSED STATEMENTS OF STOCKHOLDERS' EQUITY
(unaudited)
<TABLE>
<CAPTION>
ADDITIONAL
COMMON PAID-IN RETAINED TREASURY
STOCK CAPITAL DEFICIT STOCK
------------- --------------- --------------- ---------------
<S> <C> <C> <C> <C>
Balance, December 31, 1993 . . . . . . . $ 654,000 $ 131,052,000 $ (81,986,000) $ (20,757,000)
Issuance of common stock, net . . . . 10,000 1,520,000 -- --
Adjustment for unrealized gains (losses)
on available-for-sale securities . -- -- (100,000) --
Net loss . . . . . . . . . . . . . . . -- -- (8,434,000) --
------------- --------------- --------------- ---------------
Balance, December 31, 1994 . . . . . . . 664,000 132,572,000 (90,520,000)(A) (20,757,000)
Issuances of common stock, net . . . . 54,000 6,651,000 -- --
Adjustment for unrealized gains (losses)
on available-for-sale securities . . -- -- 100,000 --
Conversions of European notes payable . 11,000 1,473,000 -- --
Net loss . . . . . . . . . . . . . . . -- -- (579,000) --
------------- --------------- --------------- ---------------
Balance, September 30, 1995 . . . . . . . $ 729,000 $ 140,696,000 $ (90,999,000)(A) $ (20,757,000)
============= =============== ================ ===============
</TABLE>
- --------------------
(A) Includes, as a component of Retained Deficit, net unrealized gains (losses)
on available-for-sale securities of ($100,000) and $0 as of December 31,
1994 and September 30, 1995, respectively.
The accompanying Notes to Consolidated Condensed Financial Statements
are an integral part of these Statements.
6
<PAGE> 7
HARKEN ENERGY CORPORATION AND SUBSIDIARIES
CONSOLIDATED CONDENSED STATEMENTS OF CASH FLOWS
(unaudited)
<TABLE>
<CAPTION>
NINE MONTHS ENDED
SEPTEMBER 30,
-----------------------------
1994 1995
------------ ------------
<S> <C> <C>
Cash flows from operating activities:
Net loss from continuing operations . . . . . . . . . . . . . . . . . . . $ (1,429,000) $ (579,000)
Adjustments to reconcile net loss to net cash provided by (used in)
operating activities:
Depreciation and amortization . . . . . . . . . . . . . . . . . . . . 1,444,000 1,810,000
Dividend income on investments in former subsidiaries . . . . . . . . (360,000) --
Forgiveness of related party note receivable . . . . . . . . . . . . . 232,000 232,000
Provision for doubtful accounts . . . . . . . . . . . . . . . . . . . 18,000 (180,000)
(Gain) loss on sales of assets and other . . . . . . . . . . . . . . . (107,000) (628,000)
Interest income on restricted cash . . . . . . . . . . . . . . . . . . -- (294,000)
Income (loss) from discontinued operations . . . . . . . . . . . . . . . (221,000) --
Adjustment to reconcile income (loss) to net cash used in
operating activities:
Depreciation and amortization . . . . . . . . . . . . . . . . . . . 77,000 --
Gain on sales of assets . . . . . . . . . . . . . . . . . . . . . . (286,000) --
Change in assets and liabilities:
Decrease (increase) in accounts receivable . . . . . . . . . . . . . . 833,000 3,000
Increase (decrease) in trade payables and other . . . . . . . . . . . (843,000) (1,145,000)
------------- -------------
Net cash provided by (used in) operating activities . . . . . . . . (642,000) (781,000)
------------- -------------
Cash flows from investing activities:
Cash from acquired subsidiary . . . . . . . . . . . . . . . . . . . . . . -- 190,000
Proceeds from sales of assets . . . . . . . . . . . . . . . . . . . . . . 2,249,000 3,304,000
Capital expenditures . . . . . . . . . . . . . . . . . . . . . . . . . . (1,766,000) (4,505,000)
------------- -------------
Net cash provided by investing activities . . . . . . . . . . . . . 483,000 (1,011,000)
------------- -------------
Cash flows from financing activities:
Proceeds from issuances of common stock . . . . . . . . . . . . . . . . . -- 2,801,000
------------- -------------
Net cash provided by financing activities . . . . . . . . . . . . . -- 2,801,000
------------- -------------
Net increase (decrease) in cash and temporary investments . . . . . . . . . . (159,000) 1,009,000
Cash and temporary investments at beginning of period . . . . . . . . . . . . 3,299,000 2,828,000
------------- -------------
Cash and temporary investments at end of period . . . . . . . . . . . . . . . $ 3,140,000 $ 3,837,000
============= =============
Supplemental disclosures of cash flow information:
Cash paid during the period for:
Interest . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 68,000 $ --
Income taxes . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . -- --
Significant non-cash transactions, excluding effects of mergers:
Cash available in European segregated account . . . . . . . . . . . . . $ -- $ 3,848,000
Restricted cash in European segregated account . . . . . . . . . . . . . -- 9,674,000
Property and equipment . . . . . . . . . . . . . . . . . . . . . . . . . 400,000 --
Current liabilities . . . . . . . . . . . . . . . . . . . . . . . . . . (400,000) --
European convertible notes payable . . . . . . . . . . . . . . . . . . . -- (15,000,000)
Conversions of European notes payable to common stock . . . . . . . . . -- 1,700,000
</TABLE>
The accompanying Notes to Consolidated Condensed Financial Statements
are an integral part of these Statements.
7
<PAGE> 8
HARKEN ENERGY CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS
SEPTEMBER 30, 1994 AND 1995
(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, 1994 and September 30, 1995 and the results of its operations and changes
in its cash flows for all periods presented as of September 30, 1994 and 1995.
These adjustments represent normal recurring items. Certain prior year amounts
have been reclassified to conform with the 1995 presentations.
The accompanying unaudited consolidated condensed financial statements
have been prepared pursuant to the rules and regulations of the Securities and
Exchange Commission. 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 consolidated 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, 1994.
The results of operations for the nine month period ended September
30, 1995 are not necessarily indicative of the results to be expected for the
full year.
(2) ACQUISITIONS
Acquisition of CHAP Joint Venture Interests - In October 1994, Harken
acquired additional joint venture interests in the CHAP Joint Venture ("CHAP")
which was formed for the exploration and production of oil and gas on the
Navajo Indian Reservation ("the Reservation"). This acquisition resulted in
Harken increasing its ownership in the Reservation reserves, exploration
acreage, development drilling locations and the Aneth Gas Plant. The
acquisition of the sellers' interest raised Harken's total interest in CHAP
from 50% to approximately 70% and increased Harken's share of daily production
by approximately 40% over its previous interest. As consideration for this
acquisition, Harken issued a total of 960,000 shares of restricted Harken
common stock to the sellers, assumed certain liabilities of the sellers
relating to the properties, and the sellers in turn retained responsibility for
certain contingent operational and environmental liabilities related to the
interests as well as retaining certain distributions made by CHAP prior to the
actual date of closing.
In May 1995, Harken again acquired an additional interest in CHAP,
raising Harken's total interest in CHAP from approximately 70% to approximately
82%. The purchase consideration paid by Harken to the seller consisted of
$300,000 cash plus the issuance of 534,000 shares of restricted Harken common
stock. Harken also assumed certain liabilities of the seller relating to the
properties, and the seller in turn retained responsibility for certain
contingent operational and environmental liabilities related to the interests
purchased. The above acquisitions of the additional interests in CHAP have
been accounted for under the purchase method of accounting.
Merger with Search Exploration, Inc. - In November 1994, Harken
announced the signing of an Agreement and Plan of Merger (the "Merger
Agreement") with Search Exploration, Inc. ("Search"). Search is primarily
engaged in the domestic exploration for, and development and production of oil
and gas reserves. Pursuant to the
8
<PAGE> 9
Merger Agreement, Search merged with and into Search Acquisition Corp., a
wholly owned subsidiary of Harken (the "Merger"). Upon the consummation of
the Merger, (a) each outstanding share of Search common stock was converted
into the right to receive that number of shares of Harken common stock
determined by dividing $0.8099 by the average of the closing sales price of a
share of Harken common stock on the American Stock Exchange over the 30 days
immediately preceding the date that is five trading days prior to the
consummation of the Merger, subject to certain restrictions ("the Average
Trading Price"); (b) each outstanding share of Search Series 1993 Redeemable
Preferred Stock was converted into the right to receive that number of shares
of Harken common stock determined by dividing $1.00 by the Average Trading
Price; and (c) certain promissory notes to be issued by Search were, by their
terms, converted into the right to receive that number of shares of Harken
common stock determined by dividing the principal amount of each note by the
Average Trading Price. In addition, the holders of Search common stock,
certain notes and overriding royalty interests in certain properties of Search
received a non-transferable right to receive additional shares in the future,
if any, of Harken common stock or, under certain circumstances, cash, based
upon the increase that may subsequently be realized in the value of a group of
undeveloped leases and properties of Search. The Merger was consummated
following a vote held at a Search stockholders meeting on May 22, 1995 and has
been accounted for under the purchase method of accounting.
As of December 31, 1994, Search had proved reserves of approximately
19,000 barrels of oil and 1,298,000 mcf of gas with a net present value of
approximately $1,513,000 and had gross revenue interests in 42 productive
wells, none of which were operated by Search.
Acquisition of Texas Panhandle Producing Properties - In October 1995,
a wholly owned subsidiary of Harken acquired certain interests in non-operated
producing properties located in the panhandle region of Texas. As
consideration for the purchase of these interests, Harken issued three million
shares of restricted Harken common stock, one million warrants to purchase
additional shares of restricted Harken common stock at $2 per share, and
assumed $750,000 of short term notes payable. Harken made payments totalling
approximately $417,000 on these notes payable at closing and the remaining
balance is scheduled to be paid in monthly installments through March 1996.
Also, Harken issued an additional 82,759 shares of restricted Harken common
stock to a financial advisor as a fee in connection with the acquisition.
Pursuant to the acquisition, if at the expiration of three years, or earlier
upon certain conditions, the aggregate proceeds received by the sellers upon
the sale of all three million shares of Harken common stock issued is less than
$4 million, the sellers have the right to receive from Harken, at their
election, property having a value of, or a promissory note in the principal
amount equal to, the difference between $4 million and the proceeds received by
the sellers upon the sale of the three million shares of Harken common stock.
Harken estimates that as of June 30, 1995, the acquired interests in
these producing properties represent approximately 1.3 million barrels of oil
and 534,000 mcf of gas. The purchase price of this acquisition will be
allocated entirely to the producing properties.
(3) INVESTMENTS IN FORMER SUBSIDIARIES
E-Z Serve Preferred Stock -- At December 31, 1994, Harken held
79,754 shares of E-Z Serve $6.00 Convertible Preferred Stock, Series C ("E-Z
Serve Series C Preferred") which it acquired at a cost of $100 per share. The
E-Z Serve Series C Preferred was to pay a cumulative dividend of $6.00 per
share per annum, payable semi-annually as declared by the E-Z Serve Board of
Directors, and payable in legally available cash or in additional shares of E-Z
Serve Series C Preferred. Each share of E-Z Serve Series C Preferred was
convertible at the option of either E-Z Serve or Harken into 52.63 common
shares of E-Z Serve, such rate to be adjusted under certain conditions. The
E-Z Serve Series C Preferred was subordinated to all E-Z Serve bank credit
facilities.
During 1994, Harken converted a portion of its shares of E-Z Serve
Series C Preferred into E-Z Serve common stock and sold certain of its E-Z
Serve common stock. During the fourth quarter of 1994, Harken also
9
<PAGE> 10
began reviewing the potential for a sale to other parties of some or all of its
remaining investment in E-Z Serve Series C Preferred and related accrued
dividends. Based on the terms and consideration of these potential
transactions, the market price of E-Z Serve common stock, the conversion terms
and limited marketability of the E-Z Serve Series C Preferred and the overall
capital structure of E-Z Serve, Harken deemed that a decline in value that was
other than temporary had occurred with respect to its investment in E-Z Serve
Series C Preferred. Accordingly, Harken reclassified its investment in E-Z
Serve Series C Preferred and its related accrued dividends receivable from E-Z
Serve to current assets at December 31, 1994, at a total estimated realizable
value of $2,898,000. Such amount is reflected as Investment in Former
Subsidiary Held for Resale in the accompanying consolidated balance sheet. In
connection with this determination, Harken recorded a decline in value of
$5,831,000 at December 31, 1994. In March 1995, Harken sold its investment in
E-Z Serve Series C Preferred and its related accrued dividends receivable from
E-Z Serve and received cash proceeds of approximately $2,779,000, an amount
approximately equal to Harken's recorded value.
Harken recorded dividend income of $360,000 during the nine months
ended September 30, 1994 related to the E-Z Serve Series C Preferred and has
included such dividends in Other Income in the accompanying financial
statements. No dividend income was recorded during the nine months ended
September 30, 1995.
Tejas Preferred Stock -- Harken holds 1,000 shares of Tejas Power
Corporation Series B Preferred Stock, $.01 par value per share ("Tejas
Preferred Stock"), which it acquired at a purchase price of $1,200,000.
(4) MARKETABLE EQUITY SECURITIES
At December 31, 1994, and during the first six months of 1995, Harken
carried an investment in the common stock of E-Z Serve, including shares of E-Z
Serve common stock resulting from the conversion of certain shares of E-Z Serve
Series C Preferred in June 1994 and January 1995. Harken's investment in E-Z
Serve Series C Preferred was not accounted for pursuant to Statement of
Financial Accounting Standards No. 115, "Accounting For Certain Investments in
Debt and Equity Securities" ("SFAS 115"), as it is not a readily marketable
security. Beginning in 1994 pursuant to SFAS 115, Harken classified its
investment in E-Z Serve common stock as available for sale. The following is a
summary of Harken's marketable equity securities at December 31, 1994 and
September 30, 1995, which are included in Prepaid Expenses and Other Current
Assets in the accompanying balance sheet. Harken sold its investment in the
common stock of E-Z Serve during the third quarter of 1995.
<TABLE>
<CAPTION>
DECEMBER 31, SEPTEMBER 30,
AVAILABLE-FOR-SALE 1994 1995
------------------ ----------------- ------------------
<S> <C> <C>
Cost $ 210,000 $ --
Gross Unrealized Gains -- --
Gross Unrealized Losses (100,000) --
-------------- ------------
Estimated Fair Value $ 110,000 $ --
============== ============
</TABLE>
<TABLE>
<CAPTION>
NINE MONTHS ENDED
SEPTEMBER 30,
------------------------------------------
AVAILABLE-FOR-SALE 1994 1995
------------------ --------------- --------------
<S> <C> <C>
Gross Realized Gains $ 101,000 $ 81,000
Gross Realized Losses -- --
</TABLE>
An unrealized gain (loss) on available-for-sale securities of
($100,000) was recognized at December 31, 1994 and included as a component of
stockholders' equity.
10
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(5) PROPERTY AND EQUIPMENT
A summary of property and equipment follows:
<TABLE>
<CAPTION>
DECEMBER 31, SEPTEMBER 30,
1994 1995
---------------- --------------
<S> <C> <C>
Oil and gas properties --
Evaluated . . . . . . . . . . . . . . . . . . . . . . . $ 13,944,000 $ 18,077,000
Unevaluated . . . . . . . . . . . . . . . . . . . . . . 7,446,000 12,363,000
Gas plants and other property . . . . . . . . . . . . . . . . 6,646,000 6,392,000
Less accumulated depreciation
and amortization . . . . . . . . . . . . . . . . . . . . (7,859,000) (9,469,000)
-------------- -------------
$ 20,177,000 $ 27,363,000
============== =============
</TABLE>
Costs of unevaluated oil and gas properties at December 31, 1994 include
$5,820,000 and $1,626,000 of domestic properties and international properties,
respectively. Costs of unevaluated oil and gas properties at September 30,
1995 include $7,906,000 and $4,457,000 of domestic properties and international
properties, respectively.
(6) NOTES PAYABLE
In March 1994, a lawsuit was settled whereby a Harken subsidiary
executed a non-interest bearing note payable in the principal amount of
$500,000 which was paid to the subsidiary's former stockholder on January 5,
1995. This obligation is included in Notes Payable in the accompanying
December 31, 1994 balance sheet.
Further, under the terms of this March 1994 agreement, the subsidiary
purchased the former stockholder's 3% working interest in the wells drilled by
Harken Southwest Corporation ("HSW"), a wholly-owned subsidiary, as well as all
rights held by the former stockholder to participate in future wells drilled by
HSW on the Navajo Reservation, effective January 1, 1994. As consideration for
such purchase, the subsidiary issued a 10% note payable in the amount of
$400,000 which is due and payable to the subsidiary's former stockholder on or
before January 3, 1996. This note is included in Notes Payable in the
accompanying balance sheets. The balance is included as a current liability as
HSW is obligated under this agreement to pay 75% of the monthly net cash flow
(as defined) from the acquired interest to an escrow account which will serve
as collateral for the above notes payable until the notes are fully paid.
As part of the acquisition of Search, in May 1995, Harken assumed
approximately $442,000 of notes payable to former partners in certain limited
partnerships managed by a subsidiary of Search. Such notes bear interest at
10% per annum and are payable in semiannual installments beginning June 30,
1995 through June 30, 1998. Such notes are included in Notes Payable in the
accompanying balance sheet. See further discussion of the Search acquisition
at Note 2 - Acquisitions.
(7) EUROPEAN CONVERTIBLE NOTES PAYABLE
During the second quarter of 1995, Harken issued to qualified purchasers
a total of $15 million in 8% Senior Convertible Notes (the "Notes") which
mature in May 1998. Interest on these notes is payable semi-annually in May
and November of each year to maturity or until the Notes are converted. Such
Notes are convertible by the holders into shares of Harken common stock at an
exercise price of $1.50 per share ("the Conversion Price"). Such 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 the closing
price for each day during such period shall have equaled or exceeded 140% of
the Conversion Price (or $2.10 per share of Harken common stock). The
Conversion Price
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of the Notes was established as the average of the daily low and closing market
prices of Harken common stock for the three trading days prior to April 27,
1995, which was the date of the final offering memorandum for the Notes, and is
subject to adjustment upon the occurrence of certain events.
The Notes are collateralized by a negative pledge from Harken of certain
defined categories of assets. Upon closing, all proceeds from the sale of the
Notes were paid to a paying and conversion agent and are held in a separate
interest bearing bank account (the "Segregated Account") to be maintained in
Harken's name, until the paying and conversion agent is presented with evidence
of sufficient collateral held by Harken to permit an advance of a portion of
the proceeds.
Upon conversion, any proceeds attributable to the Notes converted which
remain in the Segregated Account will be released and paid to Harken without
regard to the value of any collateral then existing. As of September 30,
1995, Harken had received notification that holders of Notes totalling
$1,700,000 had exercised their conversion option and were issued 1,133,328
shares of Harken common stock. Subsequent to September 30, 1995, additional
notifications of exercise of conversion options have been received from holders
of Notes totalling $500,000, which has resulted in the additional issuance of
333,333 shares of Harken common stock.
The Notes were sold strictly to non-U.S. purchasers and are convertible
in $50,000 increments. The Notes and the Harken common stock issuable upon
conversion of the 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.
In connection with the sale and issuance of the Notes, Harken paid
approximately $1,750,000 from the Note proceeds for commissions and issuance
costs. Such costs have been deferred and are included in Other Assets in the
accompanying Financial Statements and are being amortized over the period until
conversion or maturity of the Notes. In addition, at closing of the Notes,
Harken issued to the placement agents certain non-transferrable stock purchase
warrants to purchase one million shares of Harken common stock which are
exercisable by the holders thereof at any time following six months after
closing at an exercise price equal to the Conversion Price described above, and
expiring in May 1999. Also, Harken paid an additional fee in the form of
92,308 shares of Harken common stock to another financial advisor in connection
with the Notes.
To the extent that proceeds invested in the Segregated Account at the
balance sheet date are available under the above discussed collateral-based
limitations, such cash is included as a current asset in Cash Available in
European Segregated Account in the accompanying balance sheet. Segregated
Account cash that is not available as of the balance sheet date, due to the
collateral based limitations, is reflected as Restricted Cash in European
Segregated Account in the accompanying balance sheet, as a non-current asset.
The cash proceeds of the Notes are not included in the Statement of Cash Flows
because the proceeds are not considered to be cash equivalents.
(8) DISCONTINUED OPERATIONS
In May 1994, Harken announced that it had discontinued its well
servicing operations which it had conducted through Supreme Well Service
Company ("Supreme"), a wholly-owned subsidiary. Harken has sold the equipment
assets of Supreme and has utilized the proceeds toward developing Harken's
exploration and production operations, both domestically and internationally.
As a result of this decision, Harken has reflected the revenues and expenses of
Harken's well servicing and contract drilling segment as discontinued
operations in the accompanying financial statements. Such discontinued
operations include revenues of $1,039,000 as of September 30, 1994. This
revenue amount includes $272,000 of gain on the sale of Harken's contract
drilling assets which occurred during the first quarter of 1994.
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(9) STOCKHOLDERS' EQUITY
Common Stock - Harken currently has authorized 100,000,000 shares of
$.01 par common stock. At December 31, 1994 and September 30, 1995, Harken had
issued 66,426,508 and 72,913,833 shares, respectively, and held 5,983,655
shares as treasury stock at a cost of $20,757,000.
Acquisition of CHAP Interests -- In October 1994, Harken acquired an
additional interest of approximately 20% in CHAP in exchange for, among other
consideration, 960,000 restricted shares of Harken common stock. In May 1995,
Harken acquired an additional interest of approximately 12% in CHAP in exchange
for, among other consideration, 534,000 restricted shares of Harken common
stock.
Acquisition of Search Exploration, Inc. -- In May 1995, Harken
consummated the Merger with Search. See Note 2- Acquisitions for further
discussion. Pursuant to the terms of the Merger Agreement, a total of
approximately 2.2 million shares of Harken common stock were issued to the
common stockholders of Search, preferred stockholders of Search and certain
note holders of Search. Up to approximately 8.8 million additional shares of
Harken common stock may be issued in connection with the Merger, including (i)
up to 732,771 shares of Harken common stock upon the exercise of certain
warrants issued by Harken, and (ii) up to 8.1 million shares of Harken common
stock ("Contingent Shares"), if any, may be issued on or about September 30,
1996 to the holders of record at the effective time of the Merger of certain
Search securities issued by Search and overriding royalty interests in certain
properties held by Search, based in part upon the increase that may
subsequently be realized in the value of a group of undeveloped leases and
properties of Search. As of the most recent valuation date required under the
terms of the Merger Agreement, no Contingent Shares would be issuable based
upon the value of this group of undeveloped leases and properties of Search.
Issuance of European Convertible Notes -- In connection with the
issuance of $15 million in European 8% Senior Convertible Notes in May 1995,
Harken issued to the placement agents for the Notes certain non-registered non-
transferrable stock purchase warrants to purchase one million shares of Harken
common stock which are exercisable by the holders thereof at any time following
six months after closing at an exercise price of $1.50 per share, and expiring
in May 1999. In addition, the Notes are convertible under certain terms into
up to approximately 10,000,000 shares of Harken common stock. See Note 7 -
European Convertible Notes Payable for further discussion. Also, Harken paid
an additional fee of 92,308 shares of Harken common stock to a financial
advisor in connection with the Notes and the market value of such shares as of
the date issued is included as deferred debt issuance costs in Other Assets in
the accompanying Balance Sheet.
Private Placements of Common Stock -- On March 1, 1995, Harken sold
600,000 shares of newly issued Harken common stock to an institutional
purchaser in exchange for net proceeds of $657,000. Harken subsequently
entered into an agreement on April 7, 1995 to sell to this same institutional
purchaser an additional 600,000 shares of Harken common stock in exchange for
net proceeds of $747,000.
In July and August of 1995, Harken received additional net proceeds of
$654,000 and $757,000, respectively, related to the sale of a combined total of
1,300,000 shares of Harken common stock to certain institutional and/or
accredited purchasers. In November 1995, Harken received an additional
$1,633,000 related to the sale of 1,460,000 shares of Harken common stock
previously held as treasury stock to certain institutional and/or accredited
purchasers. In connection with certain of these placements, Harken issued to
certain financial advisors an aggregate total of 206,000 warrants to purchase
shares of Harken common stock at an average exercise price of $1.67 per share.
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Acquisition of Texas Panhandle Producing Properties -- In October 1995,
a wholly owned subsidiary of Harken issued 3,000,000 shares of restricted
Harken common stock previously held as treasury stock in exchange for certain
non- operated producing properties located in the panhandle region of Texas.
As part of the purchase of these interests, Harken also issued 1,000,000
warrants to purchase additional shares of restricted Harken common stock at $2
per share, and also issued 82,759 shares of restricted Harken common stock
previously held as treasury stock to a financial advisor as a fee in connection
with the acquisition.
(10) PER SHARE DATA
Per share data has been computed based on the weighted average number of
shares of common stock outstanding during each period.
(11) INCOME TAXES
At September 30, 1995, 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 1997 through 2010,
alternative minimum tax NOL carryforward of approximately $53,000,000 which
expires in 1997 through 2010, investment tax credit carryforward of
approximately $860,000 which expires in 1995 through 2002, contribution
carryforward of approximately $57,000 which expires in 2000 through 2009,
statutory depletion carryforward of approximately $1,150,000 which does not
have an expiration date, jobs tax credit carryforward of approximately $57,000
which expires in 1995 and a net capital loss carryforward of approximately
$6,100,000 which expires in 2007. Approximately $14,000,000 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 and total deferred tax assets as of
September 30, 1995, computed under the provisions of the Statement of Financial
Accounting Standard No. 109, "Accounting for Income Taxes", were approximately
$7,616,000 and $20,400,000, respectively. The total net deferred tax asset is
offset by the valuation allowance of approximately $12,784,000 at September 30,
1995.
(12) COMMITMENTS AND CONTINGENCIES
Colombian Operations-Alcaravan Contract-During the third quarter of
1992, Harken, through a subsidiary, Harken de Colombia, Ltd., was awarded the
exclusive right to explore for, develop and produce oil and gas throughout
approximately 350,000 acres within the Alcaravan area ("Alcaravan") of
Colombia. Alcaravan is located in Colombia's Llanos Basin and is located
approximately 140 miles east of Santafe De Bogota. Harken and Empresa
Colombiana de Petroleos ("Ecopetrol") have entered into an Association Contract
("Alcaravan Contract") which requires Harken to conduct a seismic and
exploratory drilling program in the Alcaravan area ("work program") over the
initial six (6) years. At the end of each of the six years in the work
program, Harken has the option to withdraw from the Alcaravan Contract or to
commit to the next year's work requirements, and Harken has committed to the
second year of the work program under this contract.
In September 1994, Harken announced that Huffco Group, Inc. ("Huffco")
of Houston, Texas joined Harken in the drilling of its first exploratory well
under the Alcaravan Contract. Under the terms of this joint venture agreement,
which was approved by Ecopetrol, Harken served as operator and retained a 50%
interest in the well. The well, the Alcaravan #1, was spudded in early
February 1995 and was drilled to a depth of 10,550 feet to test for commercial
quantities of oil in the oil prone zones prevalent in the Llanos Basin; the
Carbonera, Mirador, Guadalupe and the basal Cretaceous formations. In April
1995, Harken announced that the Alcaravan #1 well failed to produce commercial
quantities of oil. In addition, Huffco elected to not participate in the
further exploration and development of the Alcaravan acreage, therefore, Harken
will seek a new partner for the continued development of the Alcaravan acreage.
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Bocachico Contract - In January 1994, Harken announced that Harken de
Colombia, Ltd. had signed its second Association Contract ("Bocachico
Contract") with Ecopetrol, covering the Bocachico contract area. Under the
Bocachico Contract, Harken has acquired the exclusive rights to conduct
exploration activities and drilling on this area, which covers approximately
192,000 acres in the Middle Magdalena Valley of Central Colombia.
During the first year of the Bocachico Contract, Harken conducted
seismic activities on the land covered by this contract including the
reprocessing of at least 250 kilometers of existing seismic data and the
acquisition of at least 35 kilometers of new seismic data. During each of the
2nd through the 6th contract years, Harken may elect to continue the contract
by committing to the drilling of at least one well during each contract year.
During the initial six year term, called the Exploration Period under
either the Alcaravan or Bocachico Contracts, if Harken has discovered the
existence of commercial production in the contract area, the contract will be
further extended for a period of 22 years from the date of any commercial
discovery of oil and/or gas. If Harken makes a commercial discovery of oil
and/or gas which is approved by Ecopetrol, the standard terms of the Alcaravan
or Bocachico Contracts will apply. Such terms provide for Ecopetrol to
reimburse Harken for 50% of its successful well costs expended up to the point
of commercial discovery and to receive a 20% royalty interest and for both
Ecopetrol and Harken to each have a 50% working interest.
In addition to reprocessing and acquiring seismic data during the first
contract year of the Bocachico Contract, Harken has also conducted engineering
studies to evaluate the potential for recovering existing oil reserves in the
Rio Negro area, which is located in the northern portion of the Bocachico
Contract area. Three wells were drilled over 30 years ago in this area by
another contractor who produced and subsequently abandoned the wells. Well
information and data, including production rates, well logs and pressure tests,
has been utilized by Harken in its studies to evaluate the feasibility of
applying modern production and recovery techniques in this area. Harken is
also acquiring a minimum of 35 kilometers of seismic data on the Bocachico
Contract area in 1995. On January 19, 1995, after completing the engineering
feasibility study, Harken notified Ecopetrol of Harken's commitment to drill a
well under the Bocachico Contract, and thereby extended the contract into its
second year.
In October 1995, Harken entered into a Development Finance Agreement
(the "Development Agreement") with Arbco Associates L.P., Offense Group
Associates L.P., Kayne Anderson Nontraditional Investments L.P. and Opportunity
Associates L.P. (collectively, the "Investors"), pursuant to which the
Investors agreed to provide up to $3,500,000 to Harken to finance the drilling
of two wells on the Rio Negro prospect in the Bocachico Contract area in
exchange for the right 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 "Participation") if the
planned drilling on that prospect is successful. Pursuant to the Development
Agreement, Harken has agreed to drill two wells on the Rio Negro prospect.
Harken has selected its first well site and currently anticipates beginning
site preparation and rig mobilization upon receipt of final environmental and
drilling permits during the fourth quater of 1995.
Pursuant to the Development Agreement, the Investors have the right at
any time prior to October 12, 1997 (the "Commitment Date"), to convert all or
part of the Participation into shares of a newly created series of preferred
stock of Harken (the "Preferred Stock"), and Harken likewise has the right,
exercisable at the Commitment Date, to convert up to 75% of the Participation
into shares of Preferred Stock if the Investors have not previously elected to
convert all of such Participation. If Harken exercises its right to convert
the Participation into Preferred Stock, the Investors at that time can elect to
receive cash instead of Preferred Stock or elect to further convert any
remaining portion of the Participation into additional shares of Preferred
Stock. The shares of Preferred Stock which may be issued would be constituted
as the Series D Preferred and would pay dividends at an annual rate of 15% and
are redeemable by Harken without premium except for accrued unpaid dividends at
any time after the Commitment Date, and must be redeemed by Harken no later
than October 12, 2000. A failure
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by Harken to timely pay dividends due under this preferred stock for three
quarters or to redeem such preferred stock when due would give rise to a right
exercisable on behalf of the Investors to elect one director to Harken's board.
Playero Contract - In December 1994, Harken announced that Harken de
Colombia, Ltd. had signed its third Association Contract ("Playero Contract")
with Ecopetrol, covering the Playero contract area. Under the Playero
Contract, Harken has acquired the exclusive rights to conduct exploration
activities and drilling on this area, which covers approximately 10,000 acres
in the Llanos Basin of Colombia, contiguous to Harken's Alcaravan Contract
area.
During the first year of the Playero Contract, Harken will acquire at
least 12 kilometers of new seismic data in the Playero Contract area. During
each of the 2nd through the 6th contract years, Harken may elect to continue
the contract by committing to the drilling of at least one well during each
contract year.
Cambulos Contract - In September 1995, Harken announced that Harken de
Colombia, Ltd. had signed its fourth Association Contract with Ecopetrol,
covering the Cambulos contract area. Under the Cambulos Contract, Harken has
acquired the exclusive rights to conduct exploration activities in the Cambulos
Contract area, which covers approximately 300,000 acres in the Middle Magdalena
Valley of Central Colombia.
During the first two years of the Cambulos Contract, Harken will conduct
geologic studies on the lands covered by this contract, including reprocessing
of at least 400 km of existing seismic data and the acquisition of at least 90
km of new seismic data. During each of the third through the sixth contract
years, Harken may elect to continue the contract by committing to the drilling
of at least one well during each contract year.
During this initial six year term, called the Exploration Period under
both the Playero and Cambulos Contracts, if Harken has discovered the existence
of commercial production in the Playero or Cambulos Contract area, the
contracts will be further extended for a period of 22 years from the date of
termination of the Exploration Period with a total term not to exceed 28 years.
If Harken makes a commercial discovery of oil and/or gas which is approved by
Ecopetrol, the standard terms of the Playero or Cambulos Contracts will apply.
The Playero and Cambulos Contracts were granted by Ecopetrol under a new form
of Association Contract which has modified various standard terms from the
previous form of Association Contract which was used on the Alcaravan and
Bocachico Contracts. Such terms provide for Ecopetrol to reimburse Harken for
50% of its successful well costs expended up to the point of a commercial
discovery and to receive a 20% royalty interest. Although both Ecopetrol and
Harken each would have a 50% working interest, production net of royalty would
be allocated 50% to each party until accumulated production from the Playero or
Cambulos Contract area reaches a cumulative total of 60 million barrels of oil.
After that cumulative production level is achieved, production net of royalty
is allocated at rates to Harken from 50% to 25% based upon the relative
profitability of the project with Ecopetrol receiving the remaining 50% to 75%
of such additional production.
Bahrain Operations - At present, Harken holds approximately 500,000
acres under its production sharing agreement with the Bahrain National Oil
Company ("BANOCO"). In January 1995, Harken completed reprocessing of
approximately 500 kilometers of seismic data and has reviewed the results of
that work with BANOCO. In July 1995, Harken announced that BANOCO had granted
an extension to the production sharing agreement for an additional six months,
with an additional six months extension should certain conditions be met.
Unless Harken obtains a joint venture partner, Harken will not proceed to
either acquire additional seismic data or drill another well on the acreage.
Other - 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. Accidental discharge of such materials as oil,
natural gas or drilling
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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 $787,000 at September 30, 1995 relating
to other operational or regulatory liabilities. Harken and its subsidiaries
currently are involved in various lawsuits and other contingencies, including
the guarantee of certain lease obligations, which in management's opinion, will
not result in significant loss exposure to Harken.
Search Acquisition Corp., a wholly-owned subsidiary of Harken, has been
named as a defendant in a lawsuit by certain parties. Harken cannot predict
the outcome of this litigation, but it believes that Search Acquisition Corp.
has numerous meritorious defenses to this lawsuit and is vigorously defending
this lawsuit.
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ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
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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. Consolidated results of operations were consistent with
management's expectations for the nine month period ended September 30, 1995.
<TABLE>
<CAPTION>
NINE MONTHS ENDED
SEPTEMBER 30,
------------------------------
EXPLORATION AND PRODUCTION 1994 1995
-------------------------- --------------- --------------
<S> <C> <C>
OPERATIONS
----------
REVENUES
--------
Oil sales revenues $ 1,734,000 $ 2,688,000
Oil volumes in barrels 109,000 143,000
Oil price per barrel $ 15.91 $ 18.80
Gas sales revenues $ 500,000 $ 909,000
Gas volumes in mcf 279,000 634,000
Gas price per mcf $ 1.79 $ 1.43
Gas plant revenues $ 583,000 $ 592,000
OTHER REVENUES
--------------
Interest income $ 67,000 $ 437,000
Other income $ 562,000 $ 555,000
</TABLE>
OVERVIEW
In October 1994, and again in May 1995, Harken acquired additional
joint venture interests in the CHAP Joint Venture ("CHAP") which was formed for
the exploration and production of oil and gas. These acquisitions resulted in
Harken increasing its ownership in the Navajo Indian Reservation reserves,
exploration acreage, development drilling locations and the Aneth Gas Plant.
The acquisition of the sellers' interests raised Harken's total interest in
CHAP from 50% to approximately 82% and increased Harken's share of daily
production by approximately 64% over its previous interest. As consideration
for the October 1994 acquisition, Harken issued a total of 960,000 restricted
shares of Harken common stock to the sellers in exchange for approximately 20%
additional interest in CHAP and, assumed certain liabilities of the sellers
relating to the properties, and the sellers in turn retained responsibility for
certain contingent operational and environmental liabilities related to the
interests as well as retaining certain distributions made by CHAP prior to the
actual date of closing. As consideration for the May 1995 acquisition, Harken
issued 534,000 restricted shares of Harken common stock and paid $300,000 in
cash in exchange for approximately 12% additional interest in CHAP. Harken
also assumed certain liabilities of the seller relating to the properties, and
the seller in turn retained responsibility for certain contingent operational
and environmental liabilities related to the interest purchased. The
acquisitions of the additional interests in CHAP have been accounted for under
the purchase method of accounting.
Oil and gas revenues, primarily from HSW's operations, reflect the low
price for oil experienced during the first nine months of 1994 compared to a
stronger oil price during the first nine months of 1995, as well as the
increased 1995 production volumes from the above acquired interests. Harken
drilled five wells during the first half of 1995 on acreage it holds in the
Paradox Basin area, in an effort to offset the production declines typically
experienced in the region and increase revenues and cash flow from its oil and
gas operations. Gas revenues
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increased during the first nine months of 1995 compared to 1994, partly due to
the increase in CHAP ownership, and due to the adjustment to certain gas
related liabilities, and in spite of the sharp decrease in gas prices
experienced during the first quarter of 1995, with no subsequent improvement
occurring so far during 1995. Gas plant revenues remained fairly even despite
the increased ownership in CHAP due to a reduction from the prior year in
CHAP's ownership in the Aneth Gas Plant as calculated based on each owner's
throughput volume.
In November 1994, Harken announced the signing of a Merger Agreement
with Search Exploration, Inc. ("Search"), and upon consummation of the Merger
on May 22, 1995, approximately 2.2 million shares of Harken common stock were
issued. Search is primarily engaged in the domestic exploration for,
development and production of oil and gas reserves. The Merger with Search was
accounted for under the purchase method of accounting and has had minimal
impact on Harken's results of operations for the nine months ended September
30, 1995.
Other income during the first nine months of 1994 consisted primarily of
$360,000 of dividend income related to the E-Z Serve Series C Preferred. Other
income during the first nine months of 1995 consisted primarily of gains of
approximately $309,000 on the sales of Harken's investments in E-Z Serve Series
C Preferred Stock and E-Z Serve common stock. Interest income increased during
the first nine months of 1995 compared to the prior year due to the interest
earned on invested Segregated Account cash pursuant to the May 1995 receipt of
proceeds from the European Convertible Notes.
Oil and gas operating expenses increased during the first nine months of
1995 compared to 1994 due to the additional CHAP ownership resulting from the
above described acquisition of CHAP interests in October 1994 and May 1995.
Interest expense increased due to the accrual of interest incurred on
the $15,000,000 European Convertible Notes beginning in May 1995.
In May 1994, Harken announced the discontinuance of its well servicing
operations which it had conducted through Supreme Well Service Company
("Supreme"), a wholly-owned subsidiary. As a result of this decision, Harken
has reflected the revenues and expenses of its well service and contract
drilling segment as discontinued operations in the accompanying financial
statements.
OTHER COSTS AND EXPENSES
General and administrative expenses have remained fairly constant
despite the growth in operating revenues during the first nine months of 1995
compared to 1994 due to Harken's continuing efforts to minimize administrative
expenses, and due to the fact that such growth has consisted mainly of
acquisitions of additional interests in Harken's CHAP operations. Also, during
the second quarter of 1995, Harken adjusted certain valuation allowance
accounts by approximately $230,000, to more accurately reflect these accounts
in its balance sheet.
At December 31, 1993, Harken included in notes receivable from related
parties a loan to an officer in the amount of $520,000, plus accrued interest.
Subsequent to December 31, 1993, an agreement was reached with the officer
whereby the note, together with accrued interest, is scheduled to be forgiven
equally over three installments dated April 1994, July 1995 and December 1996
with each installment of such forgiveness contingent upon the officer's
continued employment through the date of each such installment. Harken has
included the first installment of this forgiveness totalling $232,000 in
general and administrative expenses during the first quarter of 1994, and has
included the second installment of this forgiveness totalling $232,000 in
general and administrative expenses during the second quarter of 1995.
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LIQUIDITY AND CAPITAL RESOURCES
During the first nine months of 1995, cash and temporary investments
increased by $1,009,000 primarily from $2,779,000 of cash proceeds received
from the sale of Harken's investment in E-Z Serve Series C Preferred and the
receipt of $2,801,000 in net proceeds from the issuance of 2,500,000 shares of
Harken common stock in private placements. Capital expenditures during the
first nine months of 1995 totalled approximately $4,505,000 related to drilling
activities both domestically and in Colombia. Cash used by operations during
the first nine months of 1995 totalled $781,000. Additional capital
expenditures will be incurred only to the extent that cash flow from operations
or additional funds are available. Harken believes that cash flow from
operations, including the October 1995 acquired interest in certain Texas
panhandle producing properties, will be sufficient to meet its operating cash
requirements for the remainder of 1995 and throughout 1996.
Capital expenditures related to Harken's Colombian operations are
expected to total a minimum of approximately $3.2 million during 1996, with a
majority of such costs related to the Rio Negro prospect on the Bocachico
Contract area. In October 1995, Harken entered into a Development Finance
Agreement with a certain group of investors to provide up to $3.5 million to
Harken to finance the drilling of two wells on the Rio Negro prospect. See
further discussion below. Generally, amounts required to fund international
activities, including Colombia and Bahrain, as well as domestic drilling costs
and other capital expenditures, including acquisitions, will be funded from
existing cash balances (including available European segregated account cash),
asset sales, stock or debt issuances, operating cash flows and potentially from
industry partners. Any acreage on the Navajo Indian Reservation which was not
held by production as of July 31, 1995, has now expired pursuant to the
operating agreements with the Navajo Tribe of Indians. Harken did not record
an impairment associated with this expiration, as no value had been allocated
to this exploratory acreage.
Excluded from the above cash and temporary investments balances and
activity is the net proceeds totalling approximately $13,250,000 generated from
the sale of a total of $15,000,000 in European 8% Senior Convertible Notes (the
"Notes") in May 1995, which mature in May 1998. Such notes are convertible by
the holders into shares of Harken common stock at an exercise price of $1.50
per share, and convertible by Harken into shares of Harken common stock after
one year following issuance, if for any period of thirty consecutive days the
closing price for each day during such period shall have equalled or exceeded
140% of the Conversion Price (or $2.10 per share of Harken common stock). The
Notes are collateralized by a negative pledge from Harken of certain defined
categories of assets. Upon closing, all proceeds from the sale of the Notes
were paid to a paying and conversion agent and are held in a separate interest
bearing bank account (the "Segregated Account") to be maintained in Harken's
name, until the paying and conversion agent is presented with evidence of
sufficient collateral held by Harken to permit an advance of a portion of the
proceeds.
Upon a conversion, any proceeds attributable to the Notes converted
which remain in the Segregated Account will be released and paid to Harken
without regard to the value of any collateral then existing. As of September
30, 1995, Harken had received notification that holders of notes totalling
$1,700,000 had exercised their conversion option and were to receive 1,133,328
shares of unrestricted Harken common stock. Subsequent to September 30, 1995,
additional notifications of exercise of conversion options have been received
from holders of notes totalling $500,000, which has resulted in the additional
issuance of 333,333 shares of unrestricted Harken common stock.
To the extent that proceeds invested in the Segregated Account at the
balance sheet date are available under the above collateral-based 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.
21
<PAGE> 22
Interest incurred on the Notes is payable semi-annually in May and
November of each year to maturity or until the Notes are converted. Interest
payments will be funded from cash flow from operations, existing cash balances
or from available proceeds.
In October 1995, Harken acquired interests in certain non-operated
producing properties located in the panhandle region of Texas. As consideration
for the purchase of these interests, Harken issued three million shares of
restricted Harken common stock, one million warrants to purchase additional
shares of restricted Harken common stock at $2 per share, and assumed $750,000
of short term notes payable. Harken made payments totalling approximately
$413,000 on these notes payable at closing and the remaining balance is
scheduled to be paid in monthly installments through March 1996. Harken
anticipates additional cash flow as a result of this acquisition, with a
minimal increase in internal general and administrative expenses.
Since obtaining the production sharing agreement discussed below between
Harken and the Bahrain National Oil Company in January 1990, Harken management
has increased its focus on pursuing international opportunities in oil and gas
exploration and development. Harken considers that the opportunities to
profitably deploy Harken's expertise and assets internationally are generally
greater than those available domestically. Harken continues to pursue other
international opportunities during 1995, such as the Colombian opportunities
discussed below, through its wholly-owned subsidiary, Harken International,
Ltd.
Colombian Operations-Alcaravan Contract-During the third quarter of
1992, Harken, through a subsidiary, Harken de Colombia, Ltd., was awarded the
exclusive right to explore for, develop and produce oil and gas throughout
approximately 350,000 acres within the Alcaravan area ("Alcaravan") of
Colombia. Alcaravan is located in Colombia's Llanos Basin and is located
approximately 140 miles east of Santafe De Bogota. Harken and Empresa
Colombiana de Petroleos ("Ecopetrol") have entered into an Association Contract
("Alcaravan Contract") which requires Harken to conduct a seismic and
exploratory drilling program in the Alcaravan area ("work program") over the
initial six (6) years. At the end of each of the six years in the work
program, Harken has the option to withdraw from the Alcaravan Contract or to
commit to the next year's work requirements, and Harken has committed to the
second year of the work program under this contract.
In September 1994, Harken announced that Huffco Group, Inc. ("Huffco")
of Houston, Texas joined Harken in the drilling of its first exploratory well
under the Alcaravan Contract. Under the terms of this joint venture agreement,
which was approved by Ecopetrol, Harken served as operator and retained a 50%
interest in the well. The well, the Alcaravan #1, was spudded in early
February 1995 and was drilled to a depth of 10,550 feet to test for commercial
quantities of oil in the oil prone zones prevalent in the Llanos Basin; the
Carbonera, Mirador, Guadalupe and the basal Cretaceous formations. In April
1995, Harken announced that the Alcaravan #1 well failed to produce commercial
quantities of oil. In addition, Huffco elected to not participate in the
further exploration and development of the Alcaravan acreage, therefore, Harken
will seek a new partner for the continued development of the Alcaravan acreage.
Bocachico Contract - In January 1994, Harken announced that Harken de
Colombia, Ltd. had signed its second Association Contract ("Bocachico
Contract") with Ecopetrol, covering the Bocachico contract area. Under the
Bocachico Contract, Harken has acquired the exclusive rights to conduct
exploration activities and drilling on this area, which covers approximately
192,000 acres in the Middle Magdalena Valley of Central Colombia.
During the first year of the Bocachico Contract, Harken conducted
seismic activities on the land covered by this contract including the
reprocessing of at least 250 kilometers of existing seismic data and the
acquisition of at least 35 kilometers of new seismic data. During each of the
2nd through the 6th contract years, Harken may elect to continue the contract
by committing to the drilling of at least one well during each contract year.
During the initial six year term, called the Exploration Period under
either the Alcaravan or Bocachico Contracts, if Harken has discovered the
existence of commercial production in the contract area, the contract will
22
<PAGE> 23
be further extended for a period of 22 years from the date of any commercial
discovery of oil and/or gas. If Harken makes a commercial discovery of oil
and/or gas which is approved by Ecopetrol, the standard terms of the Alcaravan
or Bocachico Contracts will apply. Such terms provide for Ecopetrol to
reimburse Harken for 50% of its successful well costs expended up to the point
of commercial discovery and to receive a 20% royalty interest and for both
Ecopetrol and Harken to each have a 50% working interest.
In addition to reprocessing and acquiring seismic data during the first
contract year of the Bocachico Contract, Harken has also conducted engineering
studies to evaluate the potential for recovering existing oil reserves in the
Rio Negro area, which is located in the northern portion of the Bocachico
Contract area. Three wells were drilled over 30 years ago in this area by
another contractor who produced and subsequently abandoned the wells. Well
information and data, including production rates, well logs and pressure tests,
has been utilized by Harken in its studies to evaluate the feasibility of
applying modern production and recovery techniques in this area. Harken is
also acquiring a minimum of 35 kilometers of seismic data on the Bocachico
Contract area in 1995. On January 19, 1995, after completing the engineering
feasibility study, Harken notified Ecopetrol of Harken's commitment to drill a
well under the Bocachico Contract, and thereby extended the contract into its
second year.
In October 1995, Harken entered into a Development Finance Agreement
(the "Development Agreement") with Arbco Associates L.P., Offense Group
Associates L.P., Kayne Anderson Nontraditional Investments L.P. and Opportunity
Associates L.P. (collectively, the "Investors"), pursuant to which the
Investors agreed to provide up to $3,500,000 to Harken to finance the drilling
of two wells on the Rio Negro prospect in the Bocachico Contract area in
exchange for the right 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 "Participation") if the
planned drilling on that prospect is successful. Pursuant to the Development
Agreement, Harken has agreed to drill two wells on the Rio Negro prospect.
Harken has selected its first well site and currently anticipates beginning
site preparation and rig mobilization upon receipt of final environmental and
drilling permits during the fourth quarter of 1995.
Pursuant to the Development Agreement, the Investors have the right at
any time prior to October 12, 1997 (the "Commitment Date"), to convert all or
part of the Participation into shares of a newly created series of preferred
stock of Harken (the "Preferred Stock"), and Harken likewise has the right,
exercisable at the Commitment Date, to convert up to 75% of the Participation
into shares of Preferred Stock if the Investors have not previously elected to
convert all of such Participation. If Harken exercises its right to convert
the Participation into Preferred Stock, the Investors at that time can elect to
receive cash instead of Preferred Stock or elect to further convert any
remaining portion of the Participation into additional shares of Preferred
Stock. The shares of Preferred Stock which may be issued would be constituted
as the Series D Preferred and would pay dividends at an annual rate of 15% and
are redeemable by Harken without premium except for accrued unpaid dividends at
any time after the Commitment Date, and must be redeemed by Harken no later
than October 12, 2000. A failure by Harken to timely pay dividends due under
this preferred stock for three quarters or to redeem such preferred stock when
due would give rise to a right exercisable on behalf of the Investors to elect
one director to Harken's board.
Playero Contract - In December 1994, Harken announced that Harken de
Colombia, Ltd. had signed its third Association Contract ("Playero Contract")
with Ecopetrol, covering the Playero contract area. Under the Playero
Contract, Harken has acquired the exclusive rights to conduct exploration
activities and drilling on this area, which covers approximately 10,000 acres
in the Llanos Basin of Colombia, contiguous to Harken's Alcaravan Contract
area.
During the first year of the Playero Contract, Harken will acquire at
least 12 kilometers of new seismic data in the Playero Contract area. During
each of the 2nd through the 6th contract years, Harken may elect to continue
the contract by committing to the drilling of at least one well during each
contract year.
23
<PAGE> 24
Cambulos Contract - In September 1995, Harken announced that Harken de
Colombia, Ltd. had signed its fourth Association Contract with Ecopetrol,
covering the Cambulos contract area. Under the Cambulos Contract, Harken has
acquired the exclusive rights to conduct exploration activities in the Cambulos
Contract area, which covers approximately 300,000 acres in the Middle Magdalena
Valley of Central Colombia.
During the first two years of the Cambulos Contract, Harken will conduct
geologic studies on the lands covered by this contract, including reprocessing
of at least 400 km of existing seismic data and the acquisition of at least 90
km of new seismic data. During each of the third through the sixth contract
years, Harken may elect to continue the contract by committing to the drilling
of at least one well during each contract year.
During this initial six year term, called the Exploration Period under
both the Playero and Cambulos Contracts, if Harken has discovered the existence
of commercial production in the Playero or Cambulos Contract area, the
contracts will be further extended for a period of 22 years from the date of
termination of the Exploration Period with a total term not to exceed 28 years.
If Harken makes a commercial discovery of oil and/or gas which is approved by
Ecopetrol, the standard terms of the Playero or Cambulos Contracts will apply.
The Playero and Cambulos Contracts were granted by Ecopetrol under a new form
of Association Contract which has modified various standard terms from the
previous form of Association Contract which was used on the Alcaravan and
Bocachico Contracts. Such terms provide for Ecopetrol to reimburse Harken for
50% of its successful well costs expended up to the point of a commercial
discovery and to receive a 20% royalty interest. Although both Ecopetrol and
Harken each would have a 50% working interest, production net of royalty would
be allocated 50% to each party until accumulated production from the Playero or
Cambulos Contract area reaches a cumulative total of 60 million barrels of oil.
After that cumulative production level is achieved, production net of royalty
is allocated at rates to Harken from 50% to 25% based upon the relative
profitability of the project with Ecopetrol receiving the remaining 50% to 75%
of such additional production.
Bahrain Operations - At present, Harken holds approximately 500,000
acres under its production sharing agreement with the Bahrain National Oil
Company ("BANOCO"). In January 1995, Harken completed reprocessing of
approximately 500 kilometers of seismic data and has reviewed the results of
that work with BANOCO. In July 1995, Harken announced that BANOCO had granted
an extension to the production sharing agreement for an additional six months,
with an additional six months extension should certain conditions be met.
Unless Harken obtains a joint venture partner, Harken will not proceed to
either acquire additional seismic data or drill another well on the acreage.
Other - 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. 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 $787,000 at September 30, 1995 relating
to other operational or regulatory liabilities. Harken and its subsidiaries
currently are involved in various lawsuits and other contingencies, including
the guarantee of certain lease obligations, which in management's opinion, will
not result in significant loss exposure to Harken.
Search Acquisition Corp., a wholly-owned subsidiary of Harken, has been
named as a defendant in a lawsuit by certain parties. Harken cannot predict
the outcome of this litigation, but it believes that Search Acquisition Corp.
has numerous meritorious defenses to this lawsuit and is vigorously defending
this lawsuit.
24
<PAGE> 25
PART II - OTHER INFORMATION
Item 1. Legal Proceedings.
Search Acquisition Corp. ("Search Acquisition"), a wholly-owned
subsidiary of Harken, has been named as a defendant in a lawsuit by
Petrochemical Corporation of America and Lorken Investments
Corporation (together, "Petrochemical"). This lawsuit arises out
of an attempt by Petrochemical to enforce a judgement entered in
1993 against, among other parties, a group of 20 limited
partnerships known as the "Odyssey limited partnerships". In 1989,
Search Exploration, Inc. ("Search") acquired all of the assets of
eight of the 20 Odyssey limited partnerships. Petrochemical claims
that Search is liable for payment of the judgement as the
successor-in-interest to the 8 Odyssey limited partnerships.
Search Acquisition was the surviving corporation in the merger with
Search. Harken cannot predict the outcome of this litigation, but
believes that its subsidiary, Search Acquisition, has numerous
meritorious defenses to this lawsuit and is vigorously defending
this lawsuit.
Item 2. Changes in Securities.
Not applicable.
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.)
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 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.)
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<PAGE> 26
4.2 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.)
*4.3 Certificate of the Designations of Series D Preferred
Stock, $1.00 par value of Harken Energy Corporation.
*10.1 Association Contract, dated September 17, 1995 and
effective as November 17, 1995, by and between Harken de
Colombia, Ltd., and Empresa Colombiana de Petroleos.
*10.2 Development Finance Agreement, dated October 12, 1995, by
and among Harken Energy Corporation, Arbco Associates
L.P., Offense Group Associates L.P., Kayne Anderson
Nontraditional Investments L.P., and Opportunity
Associates L.P.
*27 Financial Data Schedules.
(b) REPORTS ON FORM 8-K.
August 3, 1995 - Amendment on Form 8-K/A amending the Form 8-K
dated June 2, 1995, and including updated pro forma information
and financial statements of Search Exploration, Inc. as of March
31, 1995.
October 11, 1995 - Disclosure of acquisition of Texas
panhandle producing properties.
October 16, 1995 - Disclosure of Development Agreement with
certain Investors to provide up to $3.5 million in financing for
Colombian drilling efforts.
26
<PAGE> 27
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: November 14, 1995 By: /s/ Bruce N. Huff
----------------------- ----------------------------------------
Bruce N. Huff, Senior Vice President and
Chief Financial Officer
27
<PAGE> 28
EXHIBIT INDEX
<TABLE>
<CAPTION>
EXHIBIT
NUMBER EXHIBIT DESCRIPTION PAGE
- -----------------------------------------------------------------------------------------------
<S> <C> <C>
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 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 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.)
*4.3 Certificate of the Designations of Series D Preferred Stock, $1.00
par value of Harken Energy Corporation.
*10.1 Association Contract, dated September 17, 1995 and effective as
November 17, 1995, by and between Harken de Colombia, Ltd., and
Empresa Colombiana de Petroleos.
*10.2 Development Finance Agreement, dated October 12, 1995, by and among
Harken Energy Corporation, Arbco Associates L.P., Offense Group
Associates L.P., Kayne Anderson Nontraditional Investments L.P.,
and Opportunity Associates L.P.
*27 Financial Data Schedules.
</TABLE>
<PAGE> 1
EXHIBIT 4.3
CERTIFICATE OF DESIGNATIONS
OF
SERIES D PREFERRED STOCK
(PAR VALUE $1.00 PER SHARE)
OF
HARKEN ENERGY CORPORATION
____________________________
PURSUANT TO SECTION 151
OF THE GENERAL CORPORATION LAW OF THE STATE OF DELAWARE
____________________________
HARKEN ENERGY CORPORATION, a corporation organized and existing under
the laws of the State of Delaware (the "Corporation"), DOES HEREBY CERTIFY
that, pursuant to the authority conferred on the Board of Directors of the
Corporation by the Certificate of Incorporation, as amended, of the Corporation
and in accordance with Section 151 of the General Corporation Law of the State
of Delaware, the Board of Directors of the Corporation on September 27, 1995
duly adopted the following resolution establishing and creating a series of
6,000 shares of Preferred Stock, par value $1.00 per share, of the Corporation:
RESOLVED, that, pursuant to the authority conferred on the
Board of Directors of the Corporation by the Certificate of
Incorporation, as amended, of the Corporation, a series of Preferred
Stock, par value $1.00 per share, of the Corporation is hereby
established and created, and that the designation and number of shares
thereof and the voting and other powers, preferences and relative,
participating, optional or other rights of the shares of such series,
and the qualifications, limitations and restrictions thereof, are as
follows:
SERIES D PREFERRED STOCK
Section 1. Number of Shares and Designation. 6,000 shares of
the Preferred Stock, par value $1.00 per share, of the Corporation are hereby
constituted as a series of the Preferred Stock designated as "Series D
Preferred Stock" (hereinafter referred to as the "Series D Preferred Stock").
Section 2. Definitions. For purposes of the Series D Preferred
Stock, the following terms shall have the meanings indicated:
1
<PAGE> 2
"Board of Directors" shall mean the Board of Directors of the
Corporation or, except for purposes of Section 8 hereof, any committee
authorized by such Board of Directors to perform any of its
responsibilities with respect to the Series D Preferred Stock.
"Business Day" shall mean any day other than a Saturday,
Sunday or a day on which banking institutions in Dallas, Texas are
authorized or obligated by law or executive order to close.
"Common Stock" shall mean the Common Stock of the Corporation,
par value $.01 per share.
"dividend payment date" shall have the meaning set forth in
paragraph (a) of Section 3 hereof.
"dividend payment record date" shall have the meaning set
forth in paragraph (a) of Section 3 hereof.
"Dividend Periods" shall mean quarterly dividend periods
commencing on the first day of January, April, July and October of
each year and ending on and including the day preceding the first day
of the next succeeding quarterly dividend period (other than the
initial Dividend Period, which, for each original issuance of shares
of Series D Preferred Stock, shall commence on the date of original
issue of such shares and end on and include the day preceding the
first day of the quarterly dividend period next following the
quarterly dividend period that includes such date of original issue).
"Junior Stock" shall have the meaning set forth in paragraph
(a)(iii) of Section 7 hereof.
"mandatory redemption date" shall have the meaning set forth
in paragraph (b) of Section 5 hereof.
"Parity Stock" shall have the meaning set forth in paragraph
(a)(ii) of Section 7 hereof.
"Redemption Price" shall have the meaning set forth in
paragraph (a) of Section 5 hereof.
"Senior Stock" shall have the meaning set forth in paragraph
(a)(i) of Section 7 hereof.
"Series C Preferred Stock" shall mean the Series C Cumulative
Convertible Preferred Stock, par value $1.00 per share, of the
Corporation.
2
<PAGE> 3
"Transfer Agent" means such agent or agents of the Corporation
as may be designated by the Board of Directors as the transfer agent
for the Series D Preferred Stock.
Section 3. Dividends.
(a) The holders of shares of the Series D Preferred Stock shall be
entitled to receive, when and as declared by the Board of Directors out of
funds of the Corporation at the time legally available therefor, cumulative
cash dividends at an annual rate of 15% (equal to one hundred and fifty dollars
($150.00) per share of Series D Preferred Stock); provided, however, that if,
at the time of the first issuance of shares of Series D Preferred Stock, any
shares of Series C Preferred Stock remain outstanding and the consent of the
holders of all such outstanding shares of Series C Preferred Stock referred to
in Section 7(b) hereof has not been obtained, the annual dividend rate of the
Series D Preferred Stock shall be 17.5% (equal to one hundred and seventy-five
dollars ($175.00) per share of Series D Preferred Stock). Such dividends shall
be payable quarterly, when and as declared by the Board of Directors, on March
31, June 30, September 30 and December 31 in each year (each a "dividend
payment date"), commencing, for each original issuance of shares of Series D
Preferred Stock, on the last day of the Dividend Period next following the
initial Dividend Period with respect to such shares. If any dividend payment
date shall otherwise be on a day other than a Business Day, then the dividend
payment date shall be on the next succeeding Business Day. Each such dividend
shall be payable in arrears to the holders of record of shares of the Series D
Preferred Stock, as they appear on the stock records of the Corporation at the
close of business on those dates (each such date, a "dividend payment record
date"), not less than 10 days nor more than 60 days preceding the dividend
payment dates thereof, as shall be fixed by the Board of Directors. Dividends
on shares of Series D Preferred Stock shall accrue (whether or not declared and
whether or not there shall be funds of the Corporation legally available for
the payment of such dividends) on a daily basis from and including the date of
original issue of such shares. Accrued dividends shall be cumulative, whether
or not in any Dividend Period or Periods there shall be funds of the
Corporation legally available for the payment of such dividends and whether or
not such dividends are declared, as follows: (i) accrued dividends for an
initial Dividend Period shall accumulate to the extent not paid on the dividend
payment date occurring on the last day of the Dividend Period next following
such initial Dividend Period; and (ii) accrued dividends for each other
Dividend Period shall accumulate to the extent not paid on the dividend payment
date occurring on the last day of the Dividend Period for which they accrue.
Arrearages in the payment of dividends on the Series D Preferred Stock, whether
or not such dividends are declared and whether or not there shall be funds of
the Corporation legally available for the payment of such dividends, shall
accrue interest at a rate per annum which is equal to the lesser of (a) a rate
which is two percent (2%) above the prime rate of interest of First Interstate
Bank of Texas, N.A., as announced or published by such bank from time to time
or a similar rate of interest if a prime rate is not announced or published by
such bank, or (b) the maximum rate from time to time permitted by applicable
law, until paid. As used herein, the term "cumulative" with respect to
dividends includes accumulated dividends, whether or not such dividends are
declared and whether or not there shall be funds of the Corporation legally
available for the payment of such dividends, and any interest accrued thereon.
Cumulative and unpaid dividends for any past Dividend Periods may be declared
and paid at any time, without reference to any regular dividend payment date,
to holders of record on such date,
3
<PAGE> 4
not exceeding 45 days preceding the payment date thereof, as may be fixed by
the Board of Directors.
(b) The amount of dividends payable for each full Dividend Period
for the Series D Preferred Stock shall be computed by dividing the annual
dividend amount by four (rounded down to the nearest cent). The amount of
dividends payable for any period shorter or longer than a full Dividend Period
on the Series D Preferred Stock shall be computed on the basis of a 360-day
year consisting of twelve 30-day months. Holders of shares of Series D
Preferred Stock called for redemption on a redemption date falling between the
close of business on a dividend payment record date and the opening of business
on the corresponding dividend payment date shall, in lieu of receiving such
dividend on the dividend payment date fixed therefor, receive the Redemption
Price of such shares on the date fixed for redemption in accordance with the
provisions of Section 5 hereof, which shall include all accrued and unpaid
dividends thereon to the date fixed for redemption. Holders of shares of
Series D Preferred Stock shall not be entitled to any dividends, whether
payable in cash, property or securities, in excess of cumulative dividends, as
herein provided, on the Series D Preferred Stock. Except as expressly provided
in paragraph (a) of this Section 3, no interest, or sum of money in lieu of
interest, shall be payable in respect of any dividend payment or payments on
the Series D Preferred Stock which are in arrears.
(c) So long as any shares of the Series D Preferred Stock are
outstanding, no dividends, except as described in the next succeeding sentence,
shall be declared or paid or set apart for payment on any Parity Stock ranking,
as to dividends, on a parity with the Series D Preferred Stock, for any period
unless full cumulative dividends on all outstanding shares of Series D
Preferred Stock have been or contemporaneously are declared and paid or
declared and a sum sufficient for the payment thereof set apart for such
payment for all Dividend Periods terminating on or prior to the date of
payment, or setting apart for payment, of such full cumulative dividends on
such Parity Stock. When dividends are not paid in full or a sum sufficient for
such payment is not set apart, as aforesaid, upon the shares of the Series D
Preferred Stock and any Parity Stock ranking on a parity as to dividends with
the Series D Preferred Stock, all dividends declared upon such Parity Stock
shall be declared and paid pro rata, as nearly as practicable, so that the
amounts of dividends per share declared and paid on the Series D Preferred
Stock and such Parity Stock shall in all cases bear to each other the same
ratio, as nearly as practicable, that accrued and unpaid dividends per share on
the shares of the Series D Preferred Stock and on such Parity Stock bear to
each other.
(d) So long as any shares of the Series D Preferred Stock are
outstanding, no Parity Stock shall be redeemed, purchased or otherwise acquired
for any consideration (or any moneys be paid to or made available for a sinking
fund or otherwise for the purchase or redemption of any shares of any such
stock) by the Corporation (except by conversion into or exchange for Junior
Stock ranking junior to the Series D Preferred Stock as to dividends and upon
liquidation, dissolution or winding up) unless the full cumulative dividends,
if any, accrued on all outstanding shares of the Series D Preferred Stock shall
have been paid or set apart for payment for all past Dividend Periods and
sufficient funds shall have been set apart for the payment of the dividend for
the current Dividend Period with respect to the Series D Preferred Stock. The
foregoing provisions of this Section 3(d) shall not apply to any mandatory
redemption by the Corporation
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of the Series C Preferred Stock on or after the mandatory redemption date (as
defined in Section 5(b) hereof).
(e) Subject to Section 5(c) hereof, so long as any shares of the
Series D Preferred Stock are outstanding, no dividends (other than dividends or
distributions paid in shares of, or in rights to acquire shares of, Junior
Stock ranking junior to the Series D Preferred Stock as to dividends and upon
liquidation, dissolution or winding up of the Corporation) shall be declared or
paid or set apart for payment and no other distribution shall be declared or
made or set apart for payment, in each case upon any Junior Stock, nor shall
any Junior Stock be redeemed, purchased or otherwise acquired for any
consideration (or any moneys be paid to or made available for a sinking fund or
otherwise for the purchase or redemption of any shares of any such stock) by
the Corporation (except by conversion into or exchange for Junior Stock ranking
junior to the Series D Preferred Stock as to dividends and upon liquidation,
dissolution or winding up), unless, in each case (i) the full cumulative
dividends, if any, accrued on all outstanding shares of the Series D Preferred
Stock and any Parity Stock ranking on a parity with the Series D Preferred
Stock as to dividends shall have been paid or set apart for payment for all
past Dividend Periods and all past dividend periods with respect to such Parity
Stock and (ii) sufficient funds shall have been set apart for the payment of
the dividend for the current Dividend Period with respect to the Series D
Preferred Stock and for the current dividend period with respect to such Parity
Stock.
Section 4. Liquidation Preference.
(a) In the event of any liquidation, dissolution or winding up of
the Corporation, whether voluntary or involuntary, before any payment or
distribution of the assets of the Corporation (whether capital or surplus)
shall be made to or set apart for the holders of Junior Stock ranking junior to
the Series D Preferred Stock upon liquidation, dissolution or winding up, the
holders of the shares of Series D Preferred Stock shall be entitled to receive
one thousand dollars ($1,000) per share plus an amount per share equal to all
dividends (whether or not earned or declared) (including cumulative dividends)
accrued and unpaid thereon to the date of final distribution to such holders;
but such holders shall not be entitled to any further payment. No payment on
account of any liquidation, dissolution or winding up of the Corporation shall
be made to the holders of any Parity Stock ranking on a parity with the Series
D Preferred Stock in respect of the distribution of assets upon liquidation,
dissolution, or winding up unless there shall likewise be paid at the same time
to the holders of the Series D Preferred Stock like proportionate amounts
determined ratably in proportion to the full amounts to which the holders of
all outstanding shares of Series D Preferred Stock and the holders of all
outstanding shares of such Parity Stock are respectively entitled with respect
to such distribution. If, upon any liquidation, dissolution or winding up of
the Corporation, the assets of the Corporation, or proceeds thereof,
distributable among the holders of the shares of Series D Preferred Stock shall
be insufficient to pay in full the preferential amount aforesaid and
liquidating payments on any shares of Parity Stock ranking, as to liquidation,
dissolution or winding up, on a parity with the Series D Preferred Stock, then
such assets, or the proceeds thereof, shall be distributed among the holders of
shares of Series D Preferred Stock and any such Parity Stock ratably in
accordance with the respective amounts that would be payable on such shares of
Series D Preferred Stock and any such Parity Stock if all amounts payable
thereon were paid in full. For the purposes of this Section 4, neither a
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consolidation or merger of the Corporation with one or more corporations or
other entities nor a sale, lease, exchange or transfer of all or any part of
the Corporation's assets for cash, securities or other property shall be deemed
to be a liquidation, dissolution or winding up, voluntary or involuntary.
(b) Subject to the rights of the holders of Parity Stock or Senior
Stock ranking on a parity with or prior to the Series D Preferred Stock upon
liquidation, dissolution or winding up, upon any liquidation, dissolution or
winding up of the Corporation, after payment shall have been made in full to
the holders of Series D Preferred Stock, as provided in this Section 4, any
holders of any Junior Stock ranking junior to the Series D Preferred Stock upon
liquidation, dissolution or winding up shall, subject to the respective terms
and provisions (if any) applicable thereto, be entitled to receive any and all
assets remaining to be paid or distributed, and the holders of Series D
Preferred Stock shall not be entitled to share therein.
(c) Written notice of any liquidation, dissolution or winding up
of the Corporation, stating the payment date or dates when and the place or
places where the amounts distributable in such circumstances shall be payable,
shall be given by first class mail, postage prepaid, not less than 15 days
prior to any payment date stated therein, to the holders of record of the
Series D Preferred Stock at their respective addresses as the same shall appear
on the stock records of the Corporation.
Section 5. Redemption.
(a) At any time and from time to time on or after October 12,
1997, the Corporation may, at its option, redeem, out of funds of the
Corporation legally available therefor, all (but not less than all) of the
shares of Series D Preferred Stock at the time outstanding at a redemption
price equal to one thousand dollars ($1,000) per share plus an amount per share
equal to all dividends (whether or not earned or declared) (including
cumulative dividends) accrued and unpaid thereon to the date fixed for
redemption (the "Redemption Price"). Such redemption shall be made in
accordance with the notice and other provisions of Section 5(d) hereof.
(b) On October 12, 2000 (the "mandatory redemption date"), the
Corporation shall, subject to the further provisions of this paragraph (b),
redeem all shares of Series D Preferred Stock at the time outstanding at a
price per share equal to the Redemption Price. If the funds of the Corporation
legally available for redemption of the Series D Preferred Stock on the
mandatory redemption date are insufficient to redeem the total number of shares
of Series D Preferred Stock to be redeemed on such date, those funds that are
legally available shall be used to redeem the maximum possible number of such
shares. At any time or times thereafter when additional funds of the
Corporation are legally available for the redemption of Series D Preferred
Stock, such funds shall promptly be used to redeem at the Redemption Price the
balance of the shares (or, if such funds are insufficient to redeem all
outstanding shares, the maximum possible number of shares) of Series D
Preferred Stock that the Corporation has become obligated to redeem but which
it has not redeemed. Such redemption or redemptions shall be made in
accordance with the notice and other provisions of this Section 5.
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(c) At any time after the mandatory redemption date, if the
Corporation shall not have redeemed all of the issued and outstanding shares of
Series D Preferred Stock required to be redeemed pursuant to Section 5(b)
hereof, then, until all such shares have been so redeemed, no dividends (other
than dividends or distributions paid in shares of, or in rights to acquire
shares of, Junior Stock) shall be declared or paid or set apart for payment, or
other distribution declared or made or set apart for payment, upon any Junior
Stock, nor shall any Junior Stock be redeemed, purchased or otherwise acquired
for any consideration (or any moneys be paid to or made available for a sinking
fund or otherwise for the purchase or redemption of any shares of any such
stock) by the Corporation (except by conversion into or in exchange for Junior
Stock), nor shall any Parity Stock be redeemed, purchased or otherwise acquired
for any consideration (or any moneys be paid to or made available for a sinking
fund for the purchase or redemption of any shares of any Parity Stock) by the
Corporation (except by conversion into or in exchange for Junior Stock),
unless, in the case of the mandatory redemption of, repurchase of or
fulfillment of a sinking fund obligation in respect of, any other series of
Parity Stock, payments made in respect of the mandatory redemption of,
repurchase of, or fulfillment of a sinking fund obligation in respect of, the
Series D Preferred Stock and all other series of Parity Stock then issued and
outstanding and entitled to such mandatory payments are made pro rata, as
nearly as practicable, so that the amounts of such payments made on the Series
D Preferred Stock and such other series of Parity Stock shall in all cases bear
to each other the same ratio, as nearly as practicable, that such mandatory
payments required to be made on the Series D Preferred Stock and such other
series of Parity Stock bear to each other. Accrued and unpaid dividends on
outstanding shares of Parity Stock need not be paid or set apart for payment as
a condition to, or in connection with, any mandatory redemption of the Series D
Preferred Stock.
(d) Notice of redemption shall be given by first class mail,
postage prepaid, mailed not less than 15 nor more than 60 days prior to the
redemption date, to each holder of record of shares of Series D Preferred Stock
at such holder's address as the same appears on the stock records of the
Corporation. Each such notice shall state: (i) the redemption date; (ii) the
number of shares of Series D Preferred Stock to be redeemed and, if less than
all the shares held by such holder are to be redeemed, the number of shares to
be redeemed from such holder; (iii) the Redemption Price; (iv) the place or
places where certificates for such shares are to be surrendered for payment of
the Redemption Price; and (v) that dividends on the shares to be redeemed shall
cease to accrue on such redemption date. If, on the redemption date, funds
necessary for the redemption of shares of Series D Preferred Stock shall be
available therefor and shall have been irrevocably deposited or set aside,
then, notwithstanding that the certificates evidencing such shares of Series D
Preferred Stock so called for redemption shall not have been surrendered, the
dividends with respect to such shares so called shall cease to accrue after the
redemption date, such shares shall no longer be deemed outstanding, all rights
of the holders of such shares as stockholders of the Corporation shall cease,
and all rights whatsoever with respect to such shares so called for redemption
(except the right of the holders to receive the applicable Redemption Price
without interest (except for interest accrued on dividend arrearages pursuant
to Section 3(a) hereof) upon surrender of their certificates therefor) shall
terminate, and such shares shall be deemed to be redeemed. Upon surrender in
accordance with said notice of the certificates for any such shares so redeemed
(properly endorsed or assigned for transfer, if the Board of Directors shall so
require and the notice shall so state), such shares shall be redeemed by the
Corporation at the applicable Redemption Price aforesaid.
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(e) If fewer than all the outstanding shares of Series D Preferred
Stock are to be redeemed, shares to be redeemed shall be selected by the
Corporation from outstanding shares of Series D Preferred Stock pro rata (as
near as may be). If fewer than all the shares represented by any certificate
are redeemed, a new certificate shall be issued representing the unredeemed
shares without cost to the holder thereof.
Section 6. Shares to be Retired. All shares of Series D
Preferred Stock purchased, redeemed or exchanged by the Corporation shall be
retired and cancelled and shall be restored to the status of authorized but
unissued shares of preferred stock, without designation as to series, and may
thereafter be reissued.
Section 7. Ranking.
(a) Any series or class or classes of stock of the Corporation
shall be deemed to be:
(i) Senior Stock, as to dividends or as to the
distribution of assets upon liquidation, dissolution or winding up, if
the holders of such series or class shall be entitled to the receipt
of dividends or of amounts distributable upon liquidation, dissolution
or winding up, as the case may be, in preference or priority to the
holders of Series D Preferred Stock;
(ii) Parity Stock, as to dividends or as to the
distribution of assets upon liquidation, dissolution or winding up,
whether or not the dividend rates, dividend payment dates or
redemption or liquidation prices per share thereof be different from
those of the Series D Preferred Stock, if the holders of such series
or class of stock and of the Series D Preferred Stock shall be
entitled to the receipt of dividends or of amounts distributable upon
liquidation, dissolution or winding up, as the case may be, in
proportion to their respective amounts of accrued and unpaid dividends
per share or liquidation prices, without preference or priority of one
over the other; and
(iii) Junior Stock, as to dividends or as to the
distribution of assets upon liquidation, dissolution or winding up, if
such stock shall be the Common Stock or if the holders of Series D
Preferred Stock shall be entitled to receipt of dividends or of
amounts distributable upon liquidation, dissolution or winding up, as
the case may be, in preference or priority to the holders of shares of
such stock.
(b) For purposes of dividends and the distribution of assets upon
liquidation, dissolution or winding up of the Corporation, the shares of the
Series C Preferred Stock shall be deemed to be Parity Stock, provided that the
holders of all outstanding shares of Series C Preferred Stock shall have duly
consented thereto and to the changes in the rights and preferences of the
Series C Preferred Stock effected hereby prior to the first issuance of shares
of Series D Preferred Stock. In the absence of such consent, the shares of the
Series C Preferred Stock shall be deemed to be Senior Stock.
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Section 8. Voting.
(a) Except as otherwise required by law and as specified in this
Section 8, the holders of shares of Series D Preferred Stock shall not have any
right or power to vote on or consent with respect to any matter or in any
proceeding or to be represented at any meeting of stockholders. Holders of
shares of Series D Preferred Stock shall be entitled to receive all annual
reports, proxy statements or other information required by law to be provided
by the Corporation to all holders of Common Stock. On any matters on which the
holders of shares of Series D Preferred Stock shall be entitled to vote, they
shall be entitled to one vote for each share held.
(b) So long as any shares of Series D Preferred Stock remain
outstanding, the affirmative vote or consent of the holders of a majority of
the shares of Series D Preferred Stock outstanding at the time, given in person
or by proxy, either in writing or at a meeting, shall be necessary to permit,
effect or validate (i) the authorization, creation or issuance, or any increase
in the authorized or issued amount, of any class or series of Senior Stock or
(ii) the amendment, alteration or repeal of any of the provisions of the
Certificate of Incorporation, as amended, of the Corporation which would
materially and adversely affect any right, preference, privilege or voting
power of shares of Series D Preferred Stock or of the holders thereof. The
increase in the amount of authorized preferred stock of the Corporation or the
creation and issuance, or increase in amount of authorized shares, of other
series of Parity Stock or Junior Stock shall not be deemed to affect materially
and adversely such rights, preferences, privileges or voting power.
(c) Whenever, at any time or times, dividends payable on the
shares of Series D Preferred Stock at the time outstanding have not been paid
and remain unpaid in an aggregate amount equal to at least three full quarterly
dividends on such shares (whether or not consecutive), or if the Corporation
shall have failed to redeem all outstanding shares of Series D Preferred Stock
on the mandatory redemption date as required by Section 5(b) hereof, the
holders of the outstanding shares of Series D Preferred Stock shall have the
right, voting separately as a class, to elect one director of the Corporation
at the Corporation's next annual meeting of stockholders and at each subsequent
annual meeting of stockholders; provided, however, that if such voting rights
shall become vested more than 90 days or less than 20 days before the date
prescribed for the annual meeting of stockholders, thereupon the holders of the
shares of Series D Preferred Stock shall be entitled to exercise their voting
rights at a special meeting of the holders of shares of Series D Preferred
Stock as set forth in Section 8(d) hereof. Upon the vesting of such rights of
the holders of Series D Preferred Stock, the then authorized number of members
of the Board of Directors shall automatically be increased by one and the
vacancy so created shall be filled by vote of the holders of outstanding Series
D Preferred Stock as hereinafter set forth. If such voting rights shall become
vested as a result of a default in the payment of dividends, as aforesaid, the
right of holders of Series D Preferred Stock, voting separately as a class, to
elect a member of the Board of
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Directors as aforesaid shall continue until such time as all dividends
accumulated on Series D Preferred Stock shall have been paid, or declared and
funds set aside for payment in full, at which time such right shall terminate,
except as herein or by law expressly provided, subject to revesting in the
event of each and every subsequent default of the character above mentioned in
the first sentence of this paragraph (a). If such voting rights shall become
vested as a result of a default in the redemption of shares of Series D
Preferred Stock, as aforesaid, the right of holders of Series D Preferred
Stock, voting separately as a class, to elect a member of the Board of
Directors as aforesaid shall continue for so long as any such shares of Series
D Preferred Stock remain outstanding. As long as any shares of Series D
Preferred Stock shall remain outstanding, the number of directors of the
Corporation (excluding any director elected by vote of the holders of shares of
Series D Preferred Stock) elected at any meeting of stockholders of the
Corporation at which directors are to be elected shall not be such as would
cause the number of directors in office after such meeting (excluding any
director elected by vote of the holders of shares of Series D Preferred Stock)
to exceed the number which is one less than the maximum number of directors
permitted by the Certificate of Incorporation, as amended, of the Corporation.
Whenever such voting right shall have vested, such right may be exercised
initially either at a special meeting of the holders of shares of Series D
Preferred Stock called as hereinafter provided, or at any annual meeting of
stockholders held for the purpose of electing directors, and thereafter at such
meetings, or by the written consent of such holders pursuant to Section 228 of
the General Corporation Law of the State of Delaware.
(d) At any time when the right to elect a director pursuant to
Section 8(c) hereof shall have vested in the holders of shares of Series D
Preferred Stock entitled to vote thereon, and if such right shall not already
have been initially exercised, an officer of the Corporation shall, upon the
written request of the holders of record of not less than 10% of the shares of
Series D Preferred Stock then outstanding, addressed to the Secretary of the
Corporation, call a special meeting of holders of shares of Series D Preferred
Stock. Such meeting shall be held at the earliest practicable date upon the
notice to holders of Series D Preferred Stock given as required for annual
meetings of stockholders at the place for holding annual meetings of
stockholders of the Corporation or, if none, at a place designated by the
Secretary of the Corporation. If such meeting shall not be called by the
proper officers of the Corporation within 10 days after the personal service of
such written request upon the Secretary of the Corporation, or within 15 days
after mailing the same within the United States, by registered mail, addressed
to the Secretary of the Corporation at its principal office (such mailing to be
evidenced by the registry receipt issued by the postal authorities), then the
holders of record of not less than 10% of the shares of Series D Preferred
Stock then outstanding may designate in writing any person to call such meeting
at the expense of the Corporation, and such meeting may be called by such
person so designated upon the notice to holders of Series D Preferred Stock
given as required for annual meetings of stockholders and shall be held at the
same place as is elsewhere provided in this paragraph. Any holder of shares of
Series D Preferred Stock then outstanding that would be entitled to vote at
such meeting shall have access to the stock books of the Corporation for the
purpose of causing a meeting of stockholders to be called pursuant to the
provisions of this paragraph. Notwithstanding the provisions of this
paragraph, however, no such special meeting shall be called or held during a
period within 30 days immediately preceding the date fixed for the next annual
meeting of stockholders.
(e) The director elected as provided in Section 8(c) hereof shall
serve until the next annual meeting or until his successor shall be elected and
shall qualify; any director elected by the holders of Series D Preferred Stock
may be removed without cause by, and shall not be removed without cause
otherwise than by, the vote of the holders of a majority of the outstanding
shares of the Series D Preferred Stock who are entitled to participate in such
election of directors, voting separately as a class, at a meeting called for
such purpose or by written consent as permitted by law and the Certificate of
Incorporation, as amended, and Bylaws of the Corporation. If the office
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of any director elected by the holders of Series D Preferred Stock, voting
separately as a class, becomes vacant by reason of death, resignation,
retirement, disqualification or removal from office or otherwise, the holders
of Series D Preferred Stock, voting separately as a class, may choose a
successor who shall hold office for the unexpired term in respect of which such
vacancy occurred. Upon any termination of the right of the holders of Series D
Preferred Stock to vote for directors as herein provided, the term of office of
the director then in office elected by the holders of Series D Preferred Stock,
voting separately as a class, shall terminate immediately. Whenever the term
of office of the director elected by the holders of Series D Preferred Stock,
voting separately as a class, shall so terminate and the special voting powers
vested in the holders of Series D Preferred Stock shall have expired, the
number of directors shall be reduced by one.
Section 9. No Re-Issuance of Senior Preferred Stock. The
Corporation shall not issue any additional shares of Series C Preferred Stock
or reissue any shares of its Series A Cumulative Convertible Preferred Stock or
Series B Cumulative Convertible Preferred Stock in each case in preference to
the Series D Preferred Stock unless the holders of a majority of the shares of
the Series D Preferred Stock shall have duly approved such issuance or
reissuance.
Section 10. Record Holders. The Corporation and the Transfer
Agent may deem and treat the record holder of any shares of Series D Preferred
Stock as the true and lawful owner thereof for all purposes, and neither the
Corporation nor the Transfer Agent shall be affected by any notice to the
contrary.
Section 11. Notices. Except as may otherwise be provided by law
or provided for herein, all notices referred to herein shall be in writing, and
all notices hereunder shall be deemed to have been given upon the earlier of
receipt of such notice or three Business Days after the mailing of such notice
if sent by registered mail (unless first- class mail shall be specifically
permitted for such notice under the terms hereof) with postage prepaid,
addressed: if to the Corporation, to its offices at 5605 N. MacArthur
Boulevard, Suite 400, Irving, Texas 75038 (Attention: Corporate Secretary) or
other agent of the Corporation designated as permitted hereby; or, if to any
holder of the Series D Preferred Stock, to such holder at the address of such
holder of the Series D Preferred Stock as listed in the stock record books of
the Corporation (which shall include the records of the Transfer Agent), or to
such other address as the Corporation or holder, as the case may be, shall have
designated by notice similarly given.
IN WITNESS WHEREOF, this Certificate has been signed on behalf of the
Corporation by the undersigned officer as of the 12th day of October, 1995.
HARKEN ENERGY CORPORATION
By: /s/ Larry E. Cummings
------------------------------
Larry E. Cummings,
Vice President
11
<PAGE> 1
EXHIBIT 10.1
ASSOCIATION CONTRACT
ASSOCIATE : HARKEN DE COLOMBIA, LTD.----------
SECTOR : CAMBULOS-------------------------
EFFECTIVE DATE : 17 November 1995 ---------------
The contracting parties, namely: on the one hand, Empresa Colombiana de
Petroleos, hereinafter called ECOPETROL, a State owned industrial and
commercial company authorized by Law 165 of 1948, currently governed by its
articles, the reform of which was approved by Decree 1209 of June 15, 1994,
with principal domicile in Santa Fe de Bogota, represented by LUIS BERNARDO
FLOREZ ENCISO, of legal age, identified by citizenship card No. 19.092.255,
issued in Santa Fe de Bogota, domiciled in Santa Fe de Bogota, who states: 1.
That in his capacity as President of ECOPETROL he acts on behalf of this
Company, and 2. That he has been authorized to enter into this Contract by the
Board of Directors of ECOPETROL, as recorded in Minutes No. 2112 of September
12, 1995, and, for the other Party, HARKEN DE COLOMBIA, LTD., a company
organized under the laws of the British Dominion of the Cayman Islands,
hereinafter called THE ASSOCIATE, with a branch established in Colombia, and
with principal domicile in Santa Fe de Bogota, by virtue of Public Document No.
406 of February 19, 1993, authorized in the Eleventh Notarial Circuit of Santa
Fe de Bogota, represented by MIKEL D. FAULKNER, of legal age, a North American
citizen, identified by passport no. HG930148, who states: 1. That he is the
President of the Board of Directors of the company HARKEN DE COLOMBIA, LTD.,
and 2. That he acts in exercise of the power conferred on him by Mr. GONZALO
VELASCO in his capacity as Legal Representative of the Colombian branch, as
evidenced in the attached documents. Upon the foregoing conditions, ECOPETROL
and THE ASSOCIATE hereby declare that they have entered into the Contract
contained in the following clauses:
CHAPTER I - GENERAL PROVISIONS
CLAUSE 1 - PURPOSE OF THIS CONTRACT
1.1. The purpose of this Contract is the exploration of the Contracted
Area and the Exploitation of the Petroleum belonging to the Nation which may be
found in said area, described in Clause 3.
1.2. Pursuant to article 1 of Decree No. 2310 of 1974 the exploration
and exploitation of hydrocarbons belonging to the Nation is incumbent upon
ECOPETROL, which may carry out said activities directly or through contracts
with private parties. Based on the foregoing provision ECOPETROL has agreed
with THE ASSOCIATE to explore the Contracted Area and to exploit the Petroleum
which may be found therein upon the terms and conditions set forth in this
document, Exhibit "A" and Exhibit "B" (Operation Agreement) which form an
integral part hereof.
1.3. Without prejudice to the provisions of this contract, it is
understood that THE ASSOCIATE will have over the Petroleum produced in the
Contracted Area and in the part which corresponds to it, the same rights and
obligations which those who exploit Petroleum belonging to the Nation inside
the Country have before Colombian law.
1.4. ECOPETROL and THE ASSOCIATE agree that they will carry out
exploration and exploitation work in the lands of the Contracted Area, that
they will distribute between themselves the costs and risks thereof in the
proportion and upon the terms contemplated in this Contract and that the
properties acquired and the Petroleum produced and stored will belong to each
Party in the stipulated proportions.
CLAUSE 2 - APPLICATION OF THE CONTRACT
This contract applies to the Contracted Area, delimited in Clause 3, or to the
part thereof, subject to its terms when Clause 8 has been applied.
CLAUSE 3 - CONTRACTED AREA
<PAGE> 2
The Contracted Area is called "CAMBULOS", and consists of an area of one
hundred and twenty thousand six hundred and sixty two (120.662) hectares and
seven thousand and twelve (7,012) square meters and is located within the
municipal jurisdictions of Chaguani, San Juan de Rio Seco, Viani, Beltran,
Puli, Quipile, Anapoima, Apulo, Tocaima, Jerusalen, Guataqui and Narino, in the
department of Cundinamarca, Piedras y Venadillo in the department of Tolima.
This area is described below and, as shown in the map attached hereto as
Exhibit "A", which forms part of this contract, as well as the corresponding
calculation charts: the reference point used is the AUXILIARY POINT "AIR-215"
of the Instituto Geografico Agustin Codazzi, the plane Gauss coordinates of
which, with origin in Bogota, are; N-1'00.069.96 meters, E-912,937,88 meters
and the geographic coordinates of which are: Latitude 04 Degrees 39' 12". 602
North of the Equator and Longitude 74 Degrees 51' 55".883 West of Greenwich.
From this reference point it continues in a direction S 86 Degrees 13' 53".293
E and for a distance of 1,062.12 meters to point "A", the Gauss coordinates of
which are: N-1'006,000.00 meters, E-914,000.00 meters. From this point "A" the
boundary line continues N47 Degrees 29' 22".391E for a distance of 16.278.82
meters until arriving at point "B", the coordinates of which are N-1'017.000.00
meters, E-926,000,00 meters. From this reference point B, it continues in a
direction N 39 Degrees 48' 20".056 E for a distance of 7,810.25 meters to point
"C", the coordinates of which are: N-1'023.000.00 meters, E-931,000.00 meters.
From this point "C" it continues in a northerly direction for a distance of
15,000.00 meters until point "D", the coordinates of which are: N-1'038,000.00
meters, E-931,000.00 meters. The lines "A-B", "B-C", "C-D" share a common
boundary in their entirety with the lines "E-D", "D-C" and "C-B" of the
Association Contract "Lagunillas" entered into with the American International
Petroleum Corporation. From point "D" it follows in an easterly direction for
1,400.00 meters to point "E", the coordinates of which are: N-1'038,000.00
meters, E-932,400.00 meters. From this point "E" it follows in an easterly
direction for 11.300.00 meters to arrive at point "F", the coordinates of which
are: N-1'038.000.00 meters, E-943,700.00 meters. The line "E-F" shares a common
boundary in its entirety with the line "F-E" of the Association Contract "Rio
Seco" entered into with G.H.K. Company Colombia. From this point "F" it follows
in an easterly direction for 5.800.00 meters to point "G", whose coordinates
are: N-1'038.000.00 meters, E949.500.00 meters. The line "F-G" shares a common
boundary in its entirety with the line "I-H" of the Association Contract
"Dindal", entered into with G.H.K. Company Colombia. From point "G" it
continues in a southerly direction for 31.000.00 meters to arrive at point "H"
whose coordinates are : N-1'007.000.00 meters, E-949.500.00 meters. From point
"H" it continues in direction S 41 Degrees 36' 23".994 W for 35.945.22 meters
to arrive at point "I", the coordinates of which are: N-980.123.01 meters,
E-925.631.90 meters. The line "H-I" shares a common boundary for its entirety
with the line "E-D" of the Association Contract "Apulo" entered into with
Petroleos del Norte S.A.. From Point "I" it follows in direction S 28 Degrees
32' 23".720 W for a distance of 140.02 meters to arrive at point "J" the
coordinates of which are: N-980.000.00 meters, E-925.565.00 meters. The line
"I-J" shares a common boundary for its entirety with the line "D-C" of the
Association Contract "Apulo" entered into with Petroleos del Norte S.A.. From
point "J" it continues in a westerly direction for 9.565 meters to arrive at
point "K", the coordinates of which are: N-980.000.00 meters, E-916.000.00
meters. From point "K" it continues in a northerly direction for 15.177.03
meters to point "L", the coordinates of which are: N-955.177.03 meters,
E-916.000.00 meters. From this point "L" it continues in direction N 78 Degrees
54' 03".893 E for a distance of 4.534.83 meters, to arrive at point "M", the
coordinates of which are: N-996.050.00 E-920.450.00 meters. From this point
"M" it continues in a direction N 32 Degrees 57' 10".690W for a distance of
11.857.70 meters to arrive at point "A", the starting and ending point of the
boundary. The lines "L-M" and "M-A" share a common boundary with lines "C-B"
and "B-A" of the Association Contract "Puli-C" entered into with the American
International Petroleum Company. The above area excludes block "B" of the
Association Contract "Puli" entered into with the American International
Petroleum Company with an area of 5.445 hectares and 407 square meters and with
the following boundaries: Starting Point "A" with coordinates N 1.007.450.00
meters, E-926.200.00 meters. From this point following in a direction of N 20
Degrees 13' 29".290 E for a distance of 2.000.00 meters to point "B" with
coordinates: N-1.009.326.69 meters, E-926.891.41 meters. From this point B,
following in a direction S 64 Degrees 18' 26".123 E for a distance of 4.559.37
meters to arrive at point "C" with coordinates: N-1'007.350.00 meters,
E-931.000.00 meters. From this point "C" following in a southerly direction for
3.150.00 meters to arrive at point "D" with coordinates: N-1'004.200.00 meters,
E-931.000.00 meters. From this point it continues in a direction of S32 Degrees
59' 51".616W for a distance of 8.430.00 meters to point "E" with coordinates:
N-997.129.82 meters, E-926-408-98 meters. From this point "E" continuing in
direction N 73 Degrees 29' 43".639 W for a distance of 3.664.84 meters to
arrive at point "F" with coordinates: N-998.170.97 meters, E-922.895.14
meters. From point "F" continuing in direction N 19 Degrees 36' 14".717 E for a
distance of 9.850.00 meters to arrive at point A, the starting and ending point
of the boundary.
<PAGE> 3
Paragraph 1.- In the event that any person should claim to be the title-holder
of the subsoil within the Contracted Area, ECOPETROL shall assume the attention
of the case and the pertinent obligations.
Paragraph 2.- Within the Contracted Area are the abandoned wells: Quina-1,
Gautaqui-1 and 2, Bituima-1 and Pitaya-1, which show evidence of hydrocarbons.
To commence work on such wells, THE ASSOCIATE must obtain the prior written
permission of ECOPETROL and the Ministry of Mines and Energy.
CLAUSE 4 - DEFINITIONS
For the purposes of this contract, the expressions listed below shall have the
following meaning:
4.1 Contracted Area: Is the land defined in Clause 3 above, subject
to Clause 8.
4.2 Commercial Field: Is that portion of the Contracted Area which
can produce Petroleum in a quantity and of a quality which are economically
exploitable.
4.3 Executive Committee: Is the body formed within thirty (30) days
following the acceptance of a Commercial Field, to supervise, control and
approve all operations and actions performed during the term of the contract.
4.4. Direct Exploration Costs: Are those expenses incurred by THE
ASSOCIATE for the drilling of Wildcat Wells which have turned out to be
productive, as well as for locations, completion, equipment and tests of said
wells, flow lines and separators. The Direct Exploration Costs do not include
administrative or technical support from the head office, or the Company's
central offices.
4.5 Joint Account: The records that will be kept through books of
account, in accordance with Colombian law, in order to credit or charge the
Parties for their participation in the Joint Venture.
4.6 Budget Performance: Are the resources actually spent and/or
committed in each one of the programs and projects approved for any given
calendar year.
4.7 Effective Date: Shall be the calendar day on which the term of
sixty (60) calendar days counted as from the signing date of this contract
expires. All terms stipulated herein shall be counted as from that date,
subject to the validity of the contract itself.
4.8 Cash Flow: Is constituted by the physical movement of cash
(receipts and disbursements) which must be made by the Joint Account in order
to attend to the various obligations contracted by the Association in the
course of its normal operations.
4.9 Natural Gas: Mixture of hydrocarbons in a gaseous state, composed
by the more volatile members of the parafin series of hydrocarbons.
4.10 Direct Expenses: Are all those outlays charged to the Joint
Account for the expenses of personnel directly employed by the Association,
purchase of materials and supplies, contracting of services with third parties
and other general expenses demanded by the Joint Venture in the normal course
of its activities.
4.11 Indirect Expenses: Are those outlays charged to the Joint Account
for technical and/or administrative support eventually furnished, with its own
organization, by the Operator to the Joint Venture.
4.12 Commercial Interest: For operations in pesos, shall be the
current interest rate certified by the Superintendency of Banks for the
corresponding period; for operations in dollars of the United States of
America, shall be the prime rate fixed by CITIBANK in New York.
<PAGE> 4
4.13 Interest in the Operation: Is the participation in the
obligations and rights which each one of the Parties acquires in the
exploration and exploitation of the Contracted Area.
4.14 Development Investments: Refer to the amount of money invested in
goods and equipment capitalized as assets for the Joint Venture in a Commercial
Field once its existence is accepted by the Parties.
4.15 Production Objectives: Are the formations, layers or sands with a
possible accumulation of hydrocarbons.
4.16 Joint Venture: The activities and work executed or in the process
of execution on behalf of the Parties and for their account.
4.17 Operator: The person appointed by the parties to carry out
directly, for their account, the necessary operations to explore and exploit
the Petroleum found in the Contracted Area.
4.18 Parties: On the Effective Date, ECOPETROL and THE ASSOCIATE.
Subsequently, and at any time, ECOPETROL for one party and THE ASSOCIATE and/or
its assignees, for the other.
4.19 Exploration Period: Is the term which THE ASSOCIATE has to
fulfill the obligations stipulated in Clause 5 of this contract and which shall
not exceed six (6) years counted as from the Effective Date, with the exception
of the cases contemplated in Clauses 9 (subsections 9.3 and 9.8) and 34.
4.20 Exploitation Period: The time which elapses from the end of the
Exploration Period to the end of this contract.
4.21 Petroleum: The natural mixture of hydrocarbons in a liquid or
gaseous state under normal conditions, as well as those substances which
accompany or derive from them, with the exception of helium and rare gases.
4.22 Wildcat Well: Is any well designated as such by THE ASSOCIATE to
be drilled or deepened for its account in the Contracted Area in search of
Petroleum. For the fulfillment of the obligations stipulated in Clause 5 of
this contract, the pertinent Wildcat Well will be previously rated between
ECOPETROL and THE ASSOCIATE.
4.23 Exploitation (or Development) Well: Is any well previously
programmed by the Executive Committee for the production of Petroleum within
the Commercial Area.
4.24 Budget: Is the basic planning instrument whereby resources are
assigned for specific projects to be applied within a calendar year or a
portion thereof in order to achieve the goals and objectives proposed by THE
ASSOCIATE or the Operator.
4.25 Extensive Production Tests: Are the operation carried out at one
or several productive Wildcat wells, in order to evaluate the production
conditions and behavior of the field.
4.26 Reimbursement: Is the payment of 50% of the Direct Exploration
Costs incurred by THE ASSOCIATE.
4.27 Exploration Work: Are those operations executed by THE ASSOCIATE
in relation to the search and discovery of Petroleum within the area of the
contract.
CHAPTER II - EXPLORATION
CLAUSE 5 - TERMS AND CONDITIONS
5.1.1. During the first year, counted as from the Effective Date of this
contract, THE ASSOCIATE undertakes to process approximately four hundred (400)
kilometers of seismic and carry out studies of the evaluation and preparation
of maps based on the existing information, photography and/or interpretation
simulated via satellite integrated with surface geology for the interpretation
of the block and design of the seismic program corresponding to
<PAGE> 5
the second contractual year. During the second year, THE ASSOCIATE will carry
out the acquisition of a seismic program of a minimum length of ninety (90)
kilometers. At the end of the second contractual year, THE ASSOCIATE will have
the option to renounce the contract, always provided that it has complied with
its obligations during the first and second years. If, on the the contrary, it
decides to continue to the third year, it must return areas so that it retains
up to seventy (70.000) thousand hectares.
5.1.2. During the third year THE ASSOCIATE will drill one (1) Wildcat
Well until it penetrates the formations which might be Petroleum bearing in the
area. At the expiration of this third year the Contract will end, if its
extension has not been requested and authorized pursuant to subsection 5.2
below or a Commercial Field has not been discovered
5.2. If THE ASSOCIATE has complied satisfactorily with the obligations
set forth in Clause 5, ECOPETROL, at the request of THE ASSOCIATE, will extend
yearly for up to three (3) additional years, the Exploration Period, and during
each year of extension THE ASSOCIATE will be obligated to carry out Exploration
Work in the Contracted Area, consisting of the drilling of one (1) Wildcat Well
until it penetrates the formations which might be Petroleum bearing in the
area.
5.3. If during any year of the Exploration Period THE ASSOCIATE
decides to carry out work corresponding to its obligations for the following
year, it may request ECOPETROL's approval to carry out said work. If the
request is accepted by ECOPETROL, it shall determine the manner and amount in
which the mentioned obligations will be transferred.
5.4. During the term of this Contract, THE ASSOCIATE may carry out
Exploration Work in the areas which it retains pursuant to clause 8 and THE
ASSOCIATE will be the only one responsible for the risks and costs of these
activities and, therefore, shall have the full and exclusive control thereof
without the maximum duration of the contract being modified for this reason.
CLAUSE 6- FURNISHING OF INFORMATION DURING THE EXPLORATION
6.1. ECOPETROL will furnish to THE ASSOCIATE, when it so requires, all
the information in its possession within the Contracted Area. The costs related
to the reproduction and furnishing of such information shall be for the account
of THE ASSOCIATE.
6.2. During the Exploration Period THE ASSOCIATE will deliver to
ECOPETROL, as it is obtained, all the geological and geophysical information,
edited magnetic tapes, processed seismic sections and all the field information
supporting it, magnetic and gravimetric profiles, all in reproducible
originals, copies of the geophysical reports, reproducible originals of all
records of the wells drilled by THE ASSOCIATE, including the final composited
graph of each well and copies of the final drilling report including core
sample analysis, the results of production tests and any other information
related to the drilling, study or interpretation of nay nature made by THE
ASSOCIATE for the Contracted Area without limitation. ECOPETROL is entitled, at
any time and through the procedures it deems appropriate, to witness all the
operations and verify the information listed above.
6.3 The Parties agree that during the term of this Contract, all the
information obtained in furtherance thereof, is of a confidential nature.
Likewise, the Parties agree that in each case they may make exchanges with
companies associated or not associated to ECOPETROL. It is understood that what
is agreed herein will take place without prejudice to the obligation to supply
to the Ministry of Mines and Energy all the information it may request in
accordance with the prevailing legal and statutory provisions. Nevertheless, it
is understood and agreed that THE ASSOCIATE may provide at its sole discretion
the information required by its affiliates, consultants, contractors, financial
institutions, and which may be required by competent authorities with
jurisdiction over THE ASSOCIATE or its affiliates, or by the regulations of any
stock exchange where the stock of THE ASSOCIATE or related corporations are
listed.
CLAUSE 7 - BUDGET AND EXPLORATION PROGRAMS
<PAGE> 6
THE ASSOCIATE will be under the obligation to prepare, observing the provisions
of this Contract, the necessary programs and Budgets to effect the exploration
in the Contracted Area. Said Budgets and programs shall be presented promptly
TO ECOPETROL
CLAUSE 8 - RETURN OF AREAS
8.1 At the end of the initial exploration period or of the extensions
which THE ASSOCIATE may have obtained, or at the latest at the expiration of
the sixth (6th) year, if a Commercial Field has been discovered in the
Contracted Area, said area shall be reduced to fifty percent (50%) of the
original area: two (2) years later, the area shall be reduced to an extent
equal to fifty percent (50%) of the initially Contracted Area and two (2) years
later said area will be reduced to the area of the Commercial Field or
Commercial Fields which are in production or development, plus a reserve zone
five (5) kilometers wide around each field. The Commercial Fields plus the zone
surrounding each field shall be called the exploitation area and this shall be
the only part of the Contracted Area that will remain subject to the terms of
this contract.
8.2 THE ASSOCIATE shall determine the areas that it will return to
ECOPETROL in lots with a minimum extent of five thousand (5,000) hectares each,
unless THE ASSOCIATES demonstrates that this is not possible. Despite the
obligation to return the areas referred to in Clause 8 (subsection 8.1), THE
ASSOCIATE is not obligated to return areas which are under development or in
production, including the reserve zones, five (5) kilometers wide, surrounding
said areas, except in the event that, for reasons attributable to THE
ASSOCIATE, the development or production operations are suspended for more than
a year, continuously, without just cause, in which case said areas shall be
returned to ECOPETROL and the Contract shall terminate for said areas or part
of an area. What is contemplated herein applies equally to exploitation under
the sole risk mode.
CHAPTER III - EXPLOITATION
CLAUSE 9 - TERMS AND CONDITIONS
9.1 In order to commence the Joint Venture under the terms of this
contract, it is considered that the exploitation work will begin on the date on
which the Parties acknowledge the existence of a Commercial Field or when the
provisions of Clause 9 (subsection 9.5). The existence of a Commercial Field
will be determined through the drilling, by THE ASSOCIATE, within the proposed
Commercial Field, of a sufficient number of wells to allow a reasonable
determination of the area and Commercial potential of the field. In this case,
THE ASSOCIATE shall inform ECOPETROL in writing of the finding of a Commercial
Field, supplying the studies on which it has based this conclusion. ECOPETROL,
within the term of ninety (90) calendar days as from the date on which THE
ASSOCIATE delivers all the supporting information, shall accept or object the
existence of the Commercial Field. ECOPETROL may request the additional
information it deems necessary within thirty (30) days following the date of
presentation of the first supporting information.
9.2.1. If ECOPETROL accepts the existence of the Commercial Field, it
shall notify THE ASSOCIATE accordingly within the term on ninety (90) calendar
days referred to in Clause 9 (subsection 9.1.) and shall begin to participate,
upon the terms of this contract, in the development of the Commercial Field,
discovered by THE ASSOCIATE.
9.2.2. ECOPETROL shall reimburse THE ASSOCIATE for fifty percent (50%)
of the Direct Exploration Cost of:
9.2.2.1 The drilling by THE ASSOCIATE of Wildcat Wells which have turned
out to be commercially productive.
9.2.2.2 The seismic acquisition and drilling of a stratigraphic mine
carried out prior to the date on which ECOPETROL makes an announcement in
respect of the existence of each Commercial Field.
<PAGE> 7
9.2.2.3 The drilling of Wildcat Wells A-1, according to the Lahee
classification, which are dry, drilled by the ASSOCIATE prior to the date on
which ECOPETROL has made an announcement with regard to the existence of a
Commercial Field.
9.2.2.4 The drilling of Wildcat Wells which are dry and have been drilled
by the ASSOCIATE prior to the discovery well of each Commercial Field.
9.2.3 The amount of these costs shall be determined in dollars of the
United States of America, using as a reference date that on which THE ASSOCIATE
has made such payments: therefore the costs incurred in pesos will be paid at
the representative market exchange rate certified by the Bank of the Republic
on the above date.
9.2.4. The reimbursement of the Direct Exploration Costs in accordance
with that stipulated in Clause 9 (subsection 9.2.2.) will be made by ECOPETROL
to THE ASSOCIATE, from the moment in which the field is put into production by
the Operator, with the amount in dollars equivalent to fifty per cent (50%) in
the direct participation in the total production of the respective field, after
deducting the percentage corresponding to royalties.
9.3. If ECOPETROL does not accept the existence of the Commercial
Field referred to in clause 9 (subsection 9.1.) it may indicate to THE
ASSOCIATE the additional work it considers necessary in order to demonstrate
the existence of a Commercial Field, which work may not have a cost in excess
of TWO MILLION DOLLARS (US$2.000.000.oo), nor may it require for its execution
a term of more than one (1) year, in which case, the Exploration Period for the
Contracted Are shall be automatically extended for a length of time equal to
that agreed upon between the Parties as necessary in order to perform the
additional work requested by ECOPETROL in this clause, but without prejudice to
the provisions regarding the reduction of areas in Clause 8 (subsection 8.1.).
9.4. If ECOPETROL, after the additional work requested by it pursuant
to clause 9 (subsection 9.3) has been executed, accepts the existence of the
Commercial Field referred to in clause 9 (subsection 9.1.), it shall begin to
participate in the development operations of the aforementioned field upon the
terms established in this contract and shall reimburse THE ASSOCIATE in the
manner established in clause 9 (subsection 9.2.3. and 9.2.4), for fifty percent
(50%) of the cost of the additional work requested, as mentioned in Clause 9
(subsection 9.3) and the work executed shall become the property of the Joint
Account.
9.5. If ECOPETROL does not accept the existence of a Commercial Field
after the additional work referred to in clause 9 (subsection 9.3) has been
performed, THE ASSOCIATE shall be entitled to execute the work it deems
necessary for the exploitation of said field and to reimburse itself for two
hundred percent (200%) of the total cost of the work executed for its account
and risk, in the respective field and up to fifty percent of the Direct
Exploration Costs which THE ASSOCIATE has carried out prior to the discovery
pursuant to clause 9 (subsection 9.2.2) For the purposes of this clause the
reimbursement will be made on the value of the Petroleum produced, less the
royalties referred to in Clause 13, deducting the costs of production,
gathering, transportation and sale. If THE ASSOCIATE is using the sole risk
method, it is understood that the term for exploitation commences counted from
the date on which ECOPETROL communicates to THE ASSOCIATE that it does no
accept the commerciality. For the purposes of calculating the dollar value of
the disbursements made in pesos, the exchange rate for the date on which
ECOPETROL made such payments shall be used. For the purposes of this clause,
the value of each barrel of Petroleum produced in said field during a calendar
month shall be the average price per barred received by THE ASSOCIATE from the
sale of its participation in the Petroleum produced in the Contracted Area
during he same month. When THE ASSOCIATE has been reimbursed in the percentage
established in this clause, all the wells drilled, the facilities and goods of
all types acquired by THE ASSOCIATES for the exploitation of the field and paid
as indicated in this clause, shall become the property of the Joint Account at
no cost, upon the acceptance by ECOPETROL of participating in the development
of that field.
9.6. ECOPETROL may begin at any time to participate in the operation
of the field discovered and developed by THE ASSOCIATE without prejudice to the
right of THE ASSOCIATE to reimburse itself for the investments it has made for
its own account in the manner and percentage stipulated in Clause 9 (subsection
9.5). Once THE ASSOCIATE has recovered such amounts, ECOPETROL shall begin to
participate in the economic results of the wells developed exclusively for the
account of THE ASSOCIATE.
<PAGE> 8
9.7. In order to delimit a Commercial Field, all the geological and
geophysical information and the information pertaining to the wells drilled
within said field or related to it shall be considered.
9.8. If at the end of the Exploration Period of six (6) years referred
to in Clause 5 (subsection 5.2.) THE ASSOCIATE has drilled one or several
Wildcat Wells which indicate the possible existence of a Commercial Field,
ECOPETROL, at the request of THE ASSOCIATE, shall extend the Exploration Period
for the necessary time, which shall not exceed one (1) year, to give THE
ASSOCIATE the opportunity to demonstrate the existence of said Commercial
Field, without prejudice to the provisions of Clause 8.
CLAUSE 10 - TECHNICAL CONTROL OF THE OPERATIONS
10.1. The parties agree that THE ASSOCIATE is the Operator and, as
such, with the limitations contemplated in this contract, will have the control
of all the operations and activities it considers necessary for a technical,
efficient and economical exploitation of the Petroleum found within the area of
the Commercial Field.
10.2. The Operator is under the obligation to carry out all the
development and production operations in accordance with the known industrial
regulations and practices, using the best technical methods and systems
required for the economic and efficient exploitation of the Petroleum and
applying the legal and statutory provisions on the matter.
10.3. For all purposes of this Contract, the Operator shall be
considered a distinct entity from the Parties, and likewise for the application
of the civil, labor and administrative legislation and for its relations with
the personnel in its service, in accordance with Clause 32.
10.4. The Operator shall be entitled to resign from said position, by
written notice to the Parties given six (6) months in advance of the date on
which it wishes its resignation to take effect. The executive Committee shall
designate the new Operator in accordance with Clause 19 (subsection 19.3.2).
CLAUSE 11 - EXPLOITATION PROGRAMS AND BUDGETS
11.1. Within three (3) months following the acceptance of a Commercial
Field in the Contracted Area, the Operator shall submit to the Parties and
activity program and a Budget for the remainder of the pertinent calendar. In
the event that there area less than six and a half (6-1/2) left before the end
of that year the Operator shall prepare and submit a Budget and programs for
the following calendar year, within a term of three (3) months.
The future Budgets and programs shall be submitted to the Parties at the
ordinary meeting of the Executive Committee scheduled for the month of July of
the immediately preceding year. Within twenty (20) days following the receipt
of the Budgets and programs, the Parties shall inform the Operator in writing
of the changes they wish to propose. When this occurs, the Operator shall take
into account the observations and modifications proposed by the Parties in the
preparation of the Budget and of the programs which shall be submitted for the
final approval of the Executive Committee, at the ordinary meeting held in
November of each year, except in the event that there are less than six and a
half (6-1/2) months left before the end of the year in which the existence of
the Commercial Field is recognized. In the event that the total Budget has not
been approved before the month of November, those aspects of the Budget as to
which an agreement has been reached shall be approved by the Executive
Committee, and those aspects which are not approved shall be submitted
immediately to the Parties for further study and a final decision as provided
in Clause 20.
11.2. The Parties may propose additions or revisions to the Budget and
to the approved programs, but, except in case of emergency, these must not be
made with a frequency of less than three (3) months. The executive Committee
shall decide on the additions and revisions proposed at a meeting, which shall
be called within thirty (39) days following the submission thereof.
11.3. The purpose of the programs and Budgets is mainly:
11.3.1. To determine the operations which are to be carried out during
the following calendar year; and
<PAGE> 9
11.3.2. To determine the expenditures and investments which the Operator
is empowered to make.
11.4. The terms program and Budget mean the indicated work plan and the
estimated expenditures and investments to be made by the Operator in the
different aspects of the operation, such as:
11.4.1. Capital investments in production: drilling for the development
of fields, workover or rehabilitation of wells and specific constructions for
production.
11.4.2. General construction and equipment: industrial and campsite
facilities, transportation and construction equipment, drilling and production
equipment. Other constructions and equipment.
11.4.3. Maintenance and operation expenses: production expenses,
geological expenses and administration expenses for the operation.
11.4.4. Working capital requirements.
11.4.5. Contingency funds.
11.5. The Operator shall make all the expenditures and investments and
shall complete the development and production operations in accordance with the
programs and Budgets referred to in Clause 11 (subsection 11.1), without
exceeding ten percent (10%) of the total Budget for each year, except with the
authorization of the Parties in special cases.
11.6. The Operator shall not, on its own decision, commence any
project, nor shall it charge to the Joint Account expenses not approved in the
Budget, which exceed the sum of forty thousand dollars of the United States of
America (US$40.000) or its equivalent in Colombian currency, by project or by
quarter.
11.7. The Operator is authorized to make expenditures imputable to the
Joint Account without the prior authorization of the Executive Committee, in
the case of emergency measures intended to safeguard the personnel or property
of the Parties, emergency expenditures originating from fire, floods, storms
and other disasters; emergency expenditures necessary for the operation and the
maintenance of the production facilities, including the maintenance of the
wells in a condition to produce with the maximum efficiency; emergency
expenditures indispensable for the protection and preservation of materials and
equipment necessary in the operations. In these cases the Operator must call a
special meeting of the Executive Committee as soon as possible, in order to
obtain its approval to continue with the emergency measures.
CLAUSE 12 - PRODUCTION
12.1. With the frequency which may be necessary, the Operator shall
determine, with the approval of the Executive Committee, the Maximum Degree of
Productive Efficiency (MER) for each Commercial Field. This Maximum Degree of
Productive Efficiency (MER) shall be the maximum rate of production of
Petroleum which may be extracted from a field in order to obtain the maximum
final recovery of the reserves. The estimated production shall be reduced in
the manner necessary to compensate the actual or anticipated conditions of the
operation, such as wells under repair which are not producing, capacity
limitations in the collector lines, in the pumps, in the separators, in the
tanks, in the pipelines and in other facilities.
12.2. Periodically, at least once a year, the Operator shall determine,
with the approval of the Executive Committee, the area considered capable of
producing Petroleum in a commercial quantity in each field and shall propose a
spacing and schedule for the drilling of Development Wells under conditions of
economy and efficiency.
12.3 The Operator shall prepare and deliver to each of the Parties, at
regular three-month intervals, a program indicating the participation in the
production and another showing the distribution of the production of each Party
for the next six (6) months. The production forecast shall be made based on
the Maximum Degree of Productive Efficiency (MER) as stipulated in Clause 12
(subsection 12.1) and adjusted to the rights of each Party, in accordance with
this
<PAGE> 10
contract. The production distribution program shall be determined bases on the
periodic petitions of each Party, and in accordance with Clause 14 (subsection
14.2) with the corrections which might be necessary to ensure that neither one
of the Parties, being capable of withdrawing, will receive less than the amount
to which it is entitled as provided in Clause 14 without prejudice to the
provisions in Clauses 21 (subsection 21.2) and 22 (subsection 22.5).
12.4. If either one of the Parties anticipates a reduction in its
capacity to receive Petroleum with respect to the forecast furnished to the
Operator, it must inform the latter thereof as soon as possible, and if such a
reduction is due to an emergency situation, it shall notify the Operator within
twelve (12) hours following the occurrence of the event which causes the
reduction. Therefore, said party shall furnish a new receipt program to the
Operator, taking into account the pertinent reduction.
12.5 The Operator may use the crude oil and the gas consumed in
carrying out the production operations in the Contracted Area and these
consumptions are exempt from the royalties referred to in Clause 13
(subsections 13.1 and 13.2).
CLAUSE 13 - ROYALTIES
13.1. During the exploitation of the Contract Are, prior to the
distribution of the production corresponding to the Parties, the Operator shall
deliver to ECOPETROL by way of a royalty twenty percent (20%) of the verified
production of liquid hydrocarbons of said area. ECOPETROL, for its account and
risk, shall take in kind from the tanks belonging to the Joint Account the
production percentage corresponding to the royalty.
13.2. By way of a royalty, the Operator shall deliver to ECOPETROL
twenty percent (20%) of the gas production.
13.3. Of the production percentage corresponding to the royalty,
ECOPETROL, in the manner and upon the terms established by the law, shall pay
the Nation, Departments and Municipalities, the royalties corresponding to the
total production of the Commercial Field, and THE ASSOCIATE shall in no case be
responsible for any payment to these entities and persons for said account.
CLAUSE 14 - DISTRIBUTION AND AVAILABILITY OF THE PETROLEUM
14.1. The Petroleum produced, with the exception of that which has been
used for the benefit of the operations under this contract and that which is
inevitably lost in these operations, shall be transported to the common tanks
of the Parties or to other measurement facilities agreed by the Parties. The
Petroleum shall be measured in accordance with the standards and methods
accepted by the oil industry and, bases on this measurement, the percentages
referred to in Clause 13 shall be determined. From that moment on, the
remaining Petroleum shall become the property of each party in the proportions
specified in this Contract.
14.2 Distribution of Production
14.2.1 After deducting the percentages corresponding to the royalty, the
remaining petroleum and gas produced from the Contracted Area shall belong to
the Parties in the proportion of fifty (50%) percent for ECOPETROL and fifty
(50%) percent for THE ASSOCIATE until the accumulated production in the
Contracted Area reaches the quantity of 60 million barrels of oil . 14.2.2
When the accumulated production is in excess of 60 million barrels of oil, the
remaining petroleum and gas produced from the Contracted Area (with the prior
deduction of the percentage corresponding to the royalty) belongs to the
Parties in the proportion resulting from the application of the factor R as
appears in the following chart:
FACTOR R Distribution of Production after deduction of Royalties
<PAGE> 11
<TABLE>
<CAPTION>
ASSOCIATE ECOPETROL
<S> <C> <C>
0.0 to 1.0 50 50
1.0 to 2.0 50/R 100-50/r
2.0 or more 25 75
</TABLE>
14.2.3 For purposes of the above mentioned chart factor R is defined in
the following terms:
R = IA
------------------------------
ID + A-B + GO
Where:
IA (Accumulated Income of THE ASSOCIATE): The valorization of the
accumulated income corresponding to the volume of hydrocarbons produced by THE
ASSOCIATE at the price of reference agreed by the parties, excluding the
hydrocarbons re-injected into the Fields of the Contracted Area, and those
consumed in the operation and the burnt off gas.
The average price of reference of the hydrocarbons will be determined by the
mutual agreement of the Parties. The Accumulated Income will be determined by
taking as a base the Monthly Income, which will itself be determined by
multiplying the average monthly price of reference by the monthly production
pursuant to Form 9 of the MME.
ID (Accumulated Development Investments): Fifty per cent (50%) of
the accumulated development investments approved by the Executive Committee of
the Association.
A: The Direct Exploration Costs incurred by THE ASSOCIATE
pursuant to Clause 9 (subsections 9.2.2, 9.2.3, and 9.2.4) of this Contract.
B: The accumulated repayment of the Direct Exploration Costs,
referred to above, pursuant to Clause 9 (subsections 9.2.2, 9.2.3 and 9.2.4) of
this Contract.
GO: The accumulated expenses of the operation, approved by the
Executive Committee of the Association, in the proportion corresponding to THE
ASSOCIATE, together with the accumulated transport costs of THE ASSOCIATE.
Transport costs are the investment and operation expenses of the transportation
of hydrocarbons, produced in the commercial fields situated in the Contracted
Area, from these commercial fields to the port of export or the place where the
price to be used in the calculation of income is to be agreed.
IA: These transport costs will be determined by the Parties by
mutual agreement once the exploitation stage of the fields which have been
accepted as commercially viable by ECOPETROL begins. Extraordinary or similar
Contributions which are directly applicable to the exploitation of
hydrocarbons in the Contracted Area are included in the Operation Expenses.
All the amounts included in the determination of factor R are to be in dollars.
To achieve this, expenses in pesos must be converted into dollars at the
representative market exchange rate, as certified by the Bank of the Republic,
on the date on which the corresponding payments have been made.
14.2.4 Calculation of Factor R: The distribution of the production
based on Factor R will be applied from the first day of the third calendar
month following the one in which the accumulated production in the Contracted
Area reaches sixty million barrels of Pertroleum. The calculation of Factor R
will be based on the accounting close corresponding to the calendar month of
the financial year in which the accumulated production in the Contracted Area
reaches sixty million barrels of Petroleum. The resulting production
distribution will apply until 30 June of the following year. From this moment,
the distribution of production to which Factor R will apply, will be made for
periods of one
<PAGE> 12
year (from 1 July to 30 June)), the payment of this, to be based on the
accumulated values at 31 December of the year immediately preceding, in
accordance with the corresponding accounting close.
14.2.5. In the event that a field produces both crude oil and gas, in
order to apply the foregoing distribution chart the total accumulated
production which shall be taken into account shall be that of the principal
hydrocarbon in accordance with the authorization granted by the Ministry of
Mines and Energy for the exploitation of said field. In order to determine the
total accumulated production, the measurement for the equivalent gas is the
amount of 7,000 standard cubic feet of gas per barrel of Petroleum.
14.3. In addition to the tanks and other jointly-owned facilities, each
Party shall have the right to build its own production facilities in the
Contracted Area for its own and exclusive use, complying with the legal
regulations. The transportation and delivery of Petroleum by each Party to the
pipeline and to other reservoirs which are not jointly owned shall be made for
the exclusive account and risk of the Party which receives the Petroleum.
14.4. In the event that production is obtained at places not connected
by pipelines, charging the Joint Account the Parties may agree to install
pipelines to the point where the Petroleum can be sold, or to a place which
connects with the pipeline. If the parties agree to build such pipelines, they
shall enter into the contracts they consider appropriate for such purpose and
shall designate the Operator in accordance with the prevailing legal
provisions.
14.5. Each Party shall be the owner of the Petroleum produced and
stored as a result of the Operation and placed at its disposal, as stipulated
in this contract, and at its cost must receive it in kind or sell or dispose of
it separately, as provided in Clause 14 (subsection 14.3).
14.6. If either one of the Parties, for any reason whatsoever, cannot
separately dispose of, or withdraw from the tanks of the Joint Account all or
part of the Petroleum corresponding to it pursuant to this contract, the
following procedure shall apply:
14.6.1. If ECOPETROL is the party which cannot withdraw, in whole or in
part, its share of Petroleum (participation plus royalty), in accordance with
Clause 12 (subsection 12.3), the Operator may continue to produce the field and
to deliver to THE ASSOCIATE, in addition to the portion representing THE
ASSOCIATE's share in the operation bases on one hundred percent (100%) of the
MER, all that Petroleum which THE ASSOCIATE chooses and is able to withdraw up
to a limit of one hundred percent (100%) of the MER, crediting to ECOPETROL,
for subsequent delivery, the volume of Petroleum which ECOPETROL was entitled
to but did not withdraw. But as regards the volume of Petroleum not withdrawn
which corresponds to ECOPETROL that month as royalties, THE ASSOCIATE, at the
request of ECOPETROL, shall pay the latter in dollars of the United States of
America, the difference between the quantity of Petroleum withdrawn and the
quantity of Petroleum corresponding to it by way of the royalty referred to in
Clause 13 (subsections 13.1 and 13.2), it being understood that any withdrawal
of Petroleum made by ECOPETROL shall be applied, in the first place, to the
payment in kind of the royalty, and that once this has been paid, the
additional withdrawals of Petroleum made shall be applied to the participation
corresponding to it according to Clause 14 (subsection 14.2).
14.6.2. In the event THE ASSOCIATE is the Party which cannot withdraw, in
whole or in part, its portion assigned under Clause 12 (subsection 12.3), the
Operator shall deliver to ECOPETROL, based on one hundred percent (100%) of the
MER, not only the participation and share corresponding to it, but also the
Petroleum which ECOPETROL is able to withdraw up to a limit to THE ASSOCIATE
for its subsequent delivery, the portion corresponding to its share which it
has not been able to withdraw.
14.7. When both parties are able to receive the Petroleum assigned
under clause 12 (subsection 12.3), the Operator shall deliver to the Party
which before was unable to receive its share of the production and, at its
request, in addition to its participation in the operation, a minimum of ten
percent (10%) per month of the monthly production corresponding to the other
Party and, by mutual agreement, up to one hundred percent (100%) of the
unreceived share, up to the time when the total quantities credited to the
Party which was unable to receive its Petroleum, have been cancelled.
<PAGE> 13
14.8. Without prejudice to the legal provisions which govern the
matter, each Party shall be free, at any time, to sell or export its share of
Petroleum obtained, under this contract, or to dispose of it in any way.
CLAUSE 15 - UTILIZATION OF GAS
In the event that one or several fields of Petroleum in liquid state with
associated gas, the Operator within two (2) years following the commencement of
commercial production in the field, shall present a project for the utilization
of the Natural Gas for the benefit of the Joint Account. The Executive
Committee shall approve the project and determine the schedule for its
execution. If the Operator does not present a project within a term of two (2)
years of fails to execute the project which has been approved within the period
established by the Executive Committee, ECOPETROL may take, free of charge, for
itself all the available gas from the fields under exploitation, insofar as it
is not required for the efficient exploitation of the field.
CLAUSE 16 - UNIFICATION
When an economically exploitable field extends in a continuous manner to a
structure located in the Contracted Area or another or other areas, the
Operator in agreement with ECOPETROL and with the other interested parties,
shall implement, with the prior approval of the Ministry of Mines and Energy, a
unit exploitation plan, which must agree with the Petroleum exploitation
engineering techniques.
CLAUSE 17 - SUPPLY OF INFORMATION AND INSPECTION DURING EXPLOITATION
17.1 The Operator shall deliver to the Parties, as they are obtained,
reproducible originals (sepias), and copies of the electrical, radioactive and
sonic records of the wells drilled, histories, core analyses, production tests
and all routine reports made or received in relation to the operations and
activities carried on in the Contracted Area.
17.2 Each one of the Parties, at its expense and for its account and
risk, shall be entitled, through authorized representatives, to inspect the
wells and facilities of the Contracted Area and the activities related
therewith. Said representatives shall be entitled to examine cores, samples,
maps, records of the wells drilled, surveys, books and any other source of
information related to the development of this contract.
17.3 In order for ECOPETROL to comply with the provisions of Clause
29, the Operator shall prepare and deliver to ECOPETROL all the reports
required by the National Government.
17.4 The information and data related to exploitation work must be
kept confidential in the same terms of Clause 6 (subsection 6.3) hereof.
CHAPTER IV - EXECUTIVE COMMITTEE
CLAUSE 18 - CONSTITUTION
18.1 Within thirty (30) calendar days following the acceptance of a
Commercial Field, each Party shall appoint a representative and its
corresponding first and second alternates, to make up the Executive Committee
and inform the other Party in writing of the names and addresses of its
representative and alternates. The Parties may change representative or
alternates at any time, but must inform the other party in writing. The vote
or decision of the representative of each one of the Parties shall bind said
Party. If the principal representative of one of the Parties cannot attend a
meeting of the Committee, he shall designate in writing the alternate who is
to attend, who shall have the same authority as the principal.
18.2 The Executive Committee shall hold ordinary meetings during the
months of March, July and November, in which the exploitation program carried
out by the Operator and the immediate plans shall be reviewed. Annually, at
the ordinary meeting held in July, the Operator shall present to the Executive
Committee the annual operating
<PAGE> 14
program and the expenditure and investment Budget for the following calendar
year, which shall be examined and approved at the ordinary meeting of the month
of November.
18.3 The Parties and the Operator may request the calling of special
meetings of Executive Committee to analyze specific conditions of the
operation. The Chairman of the Committee shall notify, ten (10) calendar days
in advance, the date of the meeting and the matters that are going to be
considered. Any matter which has not been included in the agenda of the
meeting may be taken up during it, with the prior acceptance of the
representatives of the Parties in the Committee.
18.4 The representative of each of the Parties shall have in all
matters discussed by the Executive Committee, a vote equivalent to the
percentage of its total Interests in the Joint Venture. In order to be valid,
any resolution or determination made by the Executive Committee must have the
affirmative vote of more than fifty percent (50%) of the total Interest. In
accordance with the enunciated procedure, the decisions adopted by the
Executive Committee shall be mandatory and definitive for the Parties and for
the Operator.
CLAUSE 19 - FUNCTIONS
19.1 The representatives of the Parties shall constitute the
Executive Committee, invested with full authority and responsibility to
establish and adopt exploitation, development, operating programs and Budgets
related to this contract. A representative of the Operator shall attend the
meetings of the Executive Committee.
19.2 The Executive Committee shall appoint its Secretary. The
Secretary shall keep complete and detailed records and minutes of each
meeting, as well as notes on all the discussions and determinations made by
the Committee. The copies of these minutes, in order to be valid, must be
approved and signed by the representatives of the Parties within five (5)
business days following the adjournment of the meeting and delivered to them
as soon as possible.
19.3 The functions of the Executive Committee are, among others, the
following:
19.3.1 To adopt its own regulations.
19.3.2 To designate the Operator in case of resignation or removal.
19.3.3 To designate the External Auditor of the Joint Account. -
19.3.4 To approve or disapprove the annual operating program and the
expense Budget and any amendment or revision and to authorize extraordinary
expenses.
19.3.5 To determine the expense rules and policies.
19.3.6 To approve or disapprove any recommendation regarding expenses
made by the Operator (which have not been included in the approved Budget)
when said expenses exceed the amount of forty thousand dollars of the United
States of America (US$40,000) or its equivalent in Colombian currency.
19.3.7 To advise the Operator and decide on matters submitted for its
consideration.
19.3.8 To create the subcommittees deemed necessary and establish the
functions which they are to carry out, under its direction and charging the
Joint Account.
19.3.9 To define the type and periodicity of the drilling, operation
and production reports and any other information which the Operator must
furnish to the Parties charging the Joint Account.
19.3.10 To supervise the operation of the Joint Account.
<PAGE> 15
19.3.11 To authorize the Operator to enter into contracts on behalf of
the Joint Venture in amounts exceeding forty thousand dollars of the United
States of America (US$40,000) or its equivalent in Colombian legal tender, and
19.3.12 In general, to perform all functions authorized in this contract
and which do not correspond to another entity or person pursuant to an express
clause or a legal or statutory provision.
CLAUSE 20 - DECISION IN CASE OF DISAGREEMENT IN THE OPERATION
20.1 Any project related to the Joint Venture which requires for its
execution the approval of the Executive Committee, as established in this
contract and regarding which the representatives of the Parties in said
committee are in disagreement, shall be submitted directly to the highest
executive of each of the Parties residing in Colombia, in order to make a
joint decision. If within sixty (60) calendar days following the submittal of
the consultation the Parties have reached an agreement or decision regarding
the matter in question, they shall communicate this to the Secretary of the
Executive Committee, who shall call a meeting of that body within fifteen (15)
calendar days following the receipt of the communication and the members of
said Committee shall be obligated to ratify the agreement or decision at said
meeting.
20.2 If within sixty (60) calendar days following the date of
submittal of the consultation the Parties do not reach an agreement regarding
the difference, the operations may be carried out in accordance with Clause
21.
CLAUSE 21 - OPERATIONS UNDER THE RISK OF ONE OF THE PARTIES
21.1 If at any time one of the Parties wishes to drill a Wildcat Well
not approved in the operation program, it shall notify the other Party in
writing, no less than thirty (30) calendar days in advance of the next meeting
of the Executive Committee, of its desire to drill said well, including
information such as location, recommendation to drill, depth and estimated
costs. The Operator shall include said proposal among the items to be taken
up at the next meeting of the Executive Committee. If this proposal is
approved by the Executive Committee, said well shall be drilled charging the
Joint Account. If said proposal is not accepted by the Executive Committee,
the party who wishes to drill the mentioned well, hereinafter called the
participating Party, shall have the right to drill, complete, produce or
abandon said well at its exclusive expense and risk. The Party who does not
wish to participate in the foregoing operation shall be called the
non-participating Party. The participating Party shall commence the drilling
of said well within one hundred eighty (180) days following its rejection by
the Executive Committee. If the drilling is not commenced within this period,
it must again be submitted to the consideration of the Executive Committee.
At the request of the participating Party, the Operator shall drill the
aforementioned well for the account and risk of the Participating party,
provided that in the judgment of the Operator this operation does not
interfere with the normal development of the field operations, upon the
advance to the Operator, by the participating Party, of the sums which the
Operator deems necessary in order to carry out the drilling. In the event
said well cannot be drilled by the Operator without interfering with the
normal development of the operations, the participating Party shall be
entitled to drill said well directly or through a competent service company
and, in this case, the participating Party shall be responsible for said
operation, ithout interfering with the development of the normal field
operations.
21.2 If the well referred to in Clause 21 (subsection 21.1) is
completed as productive, it shall be administrated by the Operator and the
production of said well, after deducting the royalty referred to in Clause 13,
shall be the property of the participating Party, which shall cover all the
expenses of the operation of said well until the net value of the production,
after deducting the costs of production, gathering, storage, transportation
and the like and sales, is equal to two hundred percent (200%) of the cost of
drilling and completion of said well, which from that moment on and for the
purposes of this contract shall be the property of the Joint Account, as if it
had been drilled with the approval of the Executive Committee for the account
of the Parties. For the purposes of this clause, the value of each barrel of
Petroleum produced at said well during a calendar month, before deducting the
aforementioned costs, shall be the average price per barrel received by the
participating Party from the sales of its participation in the Petroleum
produced in the Contracted Area during that same month.
21.3 If at any time one of the Parties wishes to work over, deepen or
plug a well which is not in commercial production or which is a dry well that
has been drilled by the Joint Account, and if these operations have not been
<PAGE> 16
included in a program approved by the Executive Committee, said Party shall
advise the other Party of its intention to work over, deepen or plug the
mentioned well. If there is no equipment at the location, the procedure
indicated in Clause 21 (subsections 21.1 and 21.2) shall be applied. If there
is adequate equipment at the well site to conduct the proposed operations, the
Party receiving notice of the operations which the other Party wishes to carry
out, shall have a term of forty-eight (48) hours counted as from the receipt
of the notice to approve or disapprove the operation, and if during this term
no answer is received it shall be understood that the operation will be
carried out for the account and risk of the Joint Account. If the proposed
work is carried out for the exclusive account and risk of one participating
Party, the well shall be administrated subject to Clause 21 (subsection
21.2).
21.4 If at any time one of the Parties wishes to construct new
facilities for the extraction of liquids from the gas and for the transport
and exportation of Petroleum, which shall be known as additional facilities,
said Party shall notify the other in writing providing the following
information:
21.4.1 General description, design, specifications and estimated costs
of the additional facilities.
21.4.2 Projected capacity.
21.4.3 Approximate starting date of the construction and duration
thereof. Within ninety (90) days counted as from the date of the notice, the
other Party, through a written notice, shall be entitled to decide whether it
participates in the projected additional facilities. In the event said Party
chooses not to participate in the additional facilities, or does not reply to
the proposal of the participating Party, hereinafter called the constructor
Party, the latter may proceed with the additional facilities and order the
Operator to construct, operate and maintain said facilities at the exclusive
expense and risk of the constructor Party, without prejudice to the normal
development of the Joint Operations. The constructor Party may negotiate with
the other Party the use of said facilities for the Joint Venture. During the
time that the facilities are operated for the account and risk of the
constructor Party, the Operator shall charge it for all the operating and
maintenance costs of the additional facilities in accordance with the
generally accepted accounting standards.
CHAPTER V - JOINT ACCOUNT
CLAUSE 22 - HANDLING
22.1 Without prejudice to the provisions of other Clauses of this
contract, the expenses incurred for Exploration Work shall be for the account
and risk of THE ASSOCIATE.
22.2 From the time the parties accept the existence of a Commercial
Field and subject to the provisions of Clause 5 (subsection 5.2) and Clause 13
(subsections 13.1 and 13.2), the ownership of the rights or Interest in the
Operation of the Contracted Area shall be divided as follows: ECOPETROL fifty
percent (50%) and THE ASSOCIATE fifty percent (50%). From that moment on,
all expenses, payments, investments, costs and obligations made and incurred
for the development of the operations, pursuant to this contract, and the
investments made by THE ASSOCIATE before and after the recognition of a
Commercial Field, in the drilling and termination of the wells which have
proven to be productive within the field, shall be charged to the Joint
Account. Except as provided in Clauses 14 (subsection 14.3) and 21, all
properties acquired or used thereafter for the performance of the activities
of the operation of the Commercial Field shall be paid for and shall belong to
the Parties, in the same proportion described in this clause.
22.3 In the first five (5) days of each month the Parties shall
supply to the Operator, at the bank designated by it, the share corresponding
to them in the Budget in accordance with the needs and in the currency in
which the expenses are to be made, that is, in Colombian pesos or in dollars
of the United States of America, as requested by the Operator in accordance
with the programs and Budgets approved by the Executive Committee. When THE
ASSOCIATE does not have the Colombian pesos necessary to cover the share of
its contribution in this currency, ECOPETROL shall be entitled to supply said
pesos and to receive the credit for the contributions which it must make in
dollars, converted at the market representative exchange rate certified by the
Superintendency of Banks, on the day when ECOPETROL is to make the pertinent
contribution, when said transaction is permitted by the legal provisions.
<PAGE> 17
22.4 The Operator shall present to the parties on a monthly basis,
and within thirty (30) calendar days following the end of each month, a
monthly statement in which it will show the amounts advanced, the expenditures
made, the outstanding obligations and a report on all the charges and credits
made to the Joint Account, which report shall be prepared in accordance with
Exhibit "B". If the payments referred to in Clause 22 (subsection 22.3) are
not made within the stipulated term and the Operator chooses to cover them,
the delinquent Party shall pay the Commercial Interest, in the same currency
in which the payment has been incurred, during the period of delay.
22.5 If one of the Parties should fail to contribute promptly to the
Joint Account the sums which correspond to it, as from that date said party
shall be considered a delinquent Party and the other Party, as a
non-delinquent Party. If the non-delinquent Party had made the contribution
corresponding to the delinquent Party, in addition to its own, said Party
shall have the right, after sixty (60) days of delay, to receive from the
Operator the total participation of the delinquent Party, in the Contracted
Area (excluding the percentage corresponding to the royalty), up to a quantity
of production which permits the non-delinquent Party a net earning for the
sales made equal to the amount not paid by the delinquent Party, plus an
annual interest equal to the Commercial Interest as from the sixtieth (60th)
day following the date on which the delay begins. "Net earning" is understood
to be the difference between the selling price of the crude taken by the
non-delinquent Party, less the cost of transportation, storage, loading and
other reasonable expenditures made by the non-breaching Party in the sale of
the products taken. The right of the non-breaching Party may be exercised at
any time after thirty (30) days of having notified the breaching Party in
writing of its intention to take part or all of the production corresponding
to the delinquent Party.
22.6.1 All Direct Expenses of the Joint Operation shall be charged to
the Parties in the same proportion in which the production, after payment of
royalties, is distributed.
22.6.2 The Indirect Expenses shall be charged to the Parties in the
same proportion established for the Direct Expenses in subsection 22.6.1 of
this clause. The amount of these expenses shall be the result of taking the
total annual value of the investments and expenditures (excluding technical
and administrative support) and applying to
it the equation a + m (X-b). In this equation "X" is the total value of
the annual investments and expenditures, and "a", "m" and "b" are constants
the values of which are indicated in the following table in relation to the
amount of the annual investments and expenditures:
AMOUNT OF INVESTMENTS AND VALUES OF THE CONSTANTS EXPENDITURES
<TABLE>
<CAPTION>
- ----------------------------------------------------------------------------------------------------
"X" (US$) "a" (US$) m (frac.) "b" (US$)
- ----------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
0 25,000,000 0 0.10 0
- ----------------------------------------------------------------------------------------------------
25,000,001 50,000,000 2,500,000 0.08 25,000,000
- ----------------------------------------------------------------------------------------------------
50,000,001 100,000,000 4,500,000 0.07 50,000,000
- ----------------------------------------------------------------------------------------------------
100,000,001 200,000,000 8,000,000 0.06 100,000,000
- ----------------------------------------------------------------------------------------------------
200,000,001 300,000,000 14,000,000 0.04 200,000,000
- ----------------------------------------------------------------------------------------------------
300,000,001 400,000,000 18,000,000 0.02 300,000,000
- ----------------------------------------------------------------------------------------------------
400,000,001 and above 20,000,000 0.01 400,000,000
- ----------------------------------------------------------------------------------------------------
</TABLE>
The equation shall be applied only once for each year in each case with the
value of the constants corresponding to the total value of the annual
investments and expenditures.
22.7 The monthly statements of account referred to in Clause 22
(subsection 22.4) may be revised or objected to by either one of the Parties
as from the time when they are received by them and up to two (2) years after
the end of the calendar year to which they correspond, clearly specifying the
items corrected or objected to and the pertinent
<PAGE> 18
reason. Any account which has not been corrected or objected to within this
period, shall be considered final and correct.
22.8 The Operator shall keep accounting records, vouchers and reports
for the Joint Account in Colombian pesos in accordance with Colombian laws and
any charge or credit to the Joint Account shall be made in accordance with the
accounting procedure established in Exhibit "B", which forms part of this
contract. In case of discrepancy between said accounting procedure and the
provisions of this contract, the terms of the latter shall prevail.
22.9 The Operator may effect sales of materials or equipment during
the first twenty (20) years of the Exploitation Period for the benefit of the
Joint Account, when the amount of the sale does not exceed five thousand
dollars of the United States of America (US$5,000) or its equivalent in
Colombian pesos. This type of operations, per calendar year, may not exceed
the amount of fifty thousand dollars of the United States of America
(US$50,000) or its equivalent in Colombian currency. The sales which exceed
these amounts or those of real-estate properties must be approved by the
Executive Committee. The sale of said materials or equipment shall be made at
a reasonable commercial price in accordance with the conditions for the use of
the asset.
22.10 All machinery, equipment or other assets or personal property
acquired by the Operator for the performance of this contract charged to the
Joint Account, shall belong equally to the Parties. However, in the event
that one of the Parties has decided to terminate its interest in the contract
before the expiration of the first seventeen (17) years of the Exploitation
Period, except as provided under Clause 25, said Party agrees to sell to the
other, part or all of its Interest in said items at a reasonable commercial
price or at their book value, whichever is lower. In the event that the other
Party does not wish to purchase them within ninety (90) days following the
formal offer of sale, the Party wishing to withdraw shall be entitled to assign
to a third party the Interest corresponding to it in said machinery, equipment
and items. If THE ASSOCIATE decides to withdraw after seventeen (17) years of
the Exploitation Period have elapsed, its rights in the Joint Venture shall
pass at no cost to ECOPETROL.
CHAPTER VI - DURATION OF THE CONTRACT
CLAUSE 23 - MAXIMUM DURATION
This contract shall have a maximum duration, as from its Effective Date, of
twenty-eight (28) years, distributed as follows: up to six (6) years as an
Exploration Period pursuant to Clause 5 without prejudice to the provisions of
Clause 9 (subsection 9.3 and 9.8), and twenty-two (22) years as an
Exploitation Period, counted as from the date of termination of the
Exploration Period. It is understood that in the events contemplated in this
contract, in which the Exploration Period is extended, the total term shall
not be considered as extended in any case for more than twenty-eight (28)
years.
If, once the commerciality of one or more fields has been declared, THE
ASSOCIATE continues to comply with all exploratory obligations referred to
under Clause 5, it may simultaneously carry out the exploitation of such fields
before the expiration of the Exploration Period defined in Clause 4 (subsection
4.19). Should this be the case, the Exploitation period of 22 years will only
be counted as from the expiration of the Exploration Period.
CLAUSE 24 - TERMINATION
This contract shall terminate in any of the following cases:
24.1 Upon the expiration of the Exploration Period without THE
ASSOCIATE having discovered a Commercial Field, except as provided in Clauses
9 (subsections 9.5 and 9.8) and 34.
24.2 When the duration of the contract, as stipulated in Clause 23,
has elapsed.
24.3 At any time by decision of THE ASSOCIATE, upon compliance with
its obligations referred to in Clause 5 and the others contracted pursuant to
this contract.
<PAGE> 19
24.4 For the special causes referred to in Clause 25.
CLAUSE 25 - CAUSES FOR UNILATERAL TERMINATION
25.1 Unilaterally, ECOPETROL may declare this contract terminated, at
any time before the expiration of the period stipulated in Clause 23, in the
following cases:
25.1.1 Dissolution of THE ASSOCIATE and its assignees.
25.1.2 If THE ASSOCIATE or its assignees assign this contract, in whole
or in part, without complying with the provisions of Clause 27.
25.1.3 Due to financial incapacity of THE ASSOCIATE and its assignees,
which is presumed when there is a judicial declaration of bankruptcy or a
meeting of its creditors is called.
25.1.4 Due to the failure to observe the obligations acquired by THE
ASSOCIATE under this contract.
At the expiration of each of the periods contemplated for the performance of
the exploratory obligations, THE ASSOCIATE shall submit a written report
evidencing the fulfillment of the obligations for the respective period. In
the event that it has been unable to fulfill these, the Operator shall have a
period of sixty (60) days to complete them diligently according to good
oilfield practices. If this term were insufficient, the Parties may by mutual
agreement establish an additional term for said performance. If at the end of
this period all the agreed work has still not been carried out, a default shall
be declared and ECOPETROL may proceed in accordance with the provisions of
clause 25.3.
25.2 In the event of a unilateral declaration of termination, the
rights of THE ASSOCIATE enunciated in this contract, both in its capacity as
interested Party and in its capacity as Operator, if at the time of the
unilateral declaration of termination THE ASSOCIATE is both, shall terminate.
25.3 ECOPETROL may not unilaterally declare this contract terminated,
unless sixty (60) days have elapsed after its written notice to THE ASSOCIATE
or its assignees, clearly specifying the causes invoked for said declaration
and only if the other Party has not presented satisfactory explanations to
ECOPETROL or if THE ASSOCIATE has not remedied the fault in the performance of
the contract, without prejudice to the right of THE ASSOCIATE to file the
legal remedies it deems appropriate.
CLAUSE 26 - OBLIGATIONS IN CASE OF TERMINATION
26.1 Upon termination of the contract in accordance with Clause 24,
either in the Exploration or Exploitation Period, THE ASSOCIATE shall leave in
production those wells which at the time are productive and shall deliver the
constructions, pipelines, transfer lines and other real properties of the
Joint Account (located in the Contracted Area), all of which shall become free
of charge the property of ECOPETROL, together with the easements and properties
acquired for the benefit of the contract, even if the former or the latter are
found outside the Contracted Area.
26.2 If this contract is terminated for any reason after the first
seventeen years of the Exploitation Period, all the Interest of THE ASSOCIATE
in the machinery, equipment and other assets or personal property used or
acquired by THE ASSOCIATE or by the Operator for the performance of this
contract, shall pass, free of charge, to ECOPETROL.
26.3 If this contract is terminated before the seventeen (17) years
of the Exploitation Period elapse, the provisions of Clause 22 (subsection
22.10) shall apply.
26.4 In the event that this contract terminates upon a unilateral
declaration of termination, issued at any time, all real and personal
properties acquired for the exclusive benefit of the Joint Account shall pass
free of charge to ECOPETROL.
<PAGE> 20
26.5 At the termination of this contract for any reason and at any
time, the Parties shall be obligated to perform satisfactorily their legal
obligations to each other and to third parties as well as those acquired under
this contract.
CHAPTER VII - MISCELLANEOUS PROVISIONS
CLAUSE 27 - ASSIGNMENT RIGHTS.
27.1 THE ASSOCIATE shall be entitled to assign or transfer, in whole
or in part, its interest, rights and obligations under the association
contract to another person, company or group, with the prior approval of the
Ministry of Mines and Energy, and of the President of Empresa Colombiana de
Petroleos, ECOPETROL.
Therefore, any project which involves a total or partial assignment or
transfer of the interests, rights and obligations under the contract, must be
informed to the Ministry of Mines and Energy and the President of Empresa
Colombiana de Petroleos, ECOPETROL, by means of a certified writing of THE
ASSOCIATE, indicating the essential items of the negotiation, such as possible
assignee, amount, interests, rights and obligations to be assigned, scope of
the operation, etc. Within thirty (30) business days, the Minister of Mines
and Energy and the President of Empresa Colombiana de Petroleos, ECOPETROL,
shall exercise their discretionary power to analyze the qualifications of the
potential assignees, after which they shall adopt their determination, without
being obligated to give reasons for it. In any event, the determination of the
Minister of Mines and Energy shall prevail.
27.2 If more than thirty (30) business days counted from the date of
receipt of the application by the Ministry of Mines and Energy elapse without
THE ASSOCIATE having received a reply, it shall be understood for all purposes
that the application has been approved.
27.3 The assignments made during the Exploration Period between
companies legally established in Colombia, will not be subject to the
procedure described above and will be formalized through the written
authorization of Empresa Colombiana de Petroleos, ECOPETROL, and the execution
of the pertinent document.
27.4 Any changes or modifications in the contractual relations of THE
ASSOCIATE with Empresa Colombiana de Petroleos, ECOPETROL, as a result of
total or partial direct negotiations in respect of interests, quotas or shares
in THE ASSOCIATE, shall also be subject to the approval procedure by the
Minister of Mines and Energy and the President of Empresa Colombiana de
Petroleos, ECOPETROL.
27.5 Nevertheless, said changes or modifications will not require the
authorization of the Minister of Mines and Energy and Empresa Colombiana de
Petroleos in the following cases:
27.5.1 When the transactions are carried out at a stock exchange or
open securities market.
27.5.2 In the case of assignments or transfers resulting from events
beyond the control of THE ASSOCIATE or the companies which control or direct
it, such as government decisions, legal judgments, partition and adjudication
of assets and auctions.
27.5.3 When the negotiations are carried out among the companies which
control or direct THE ASSOCIATE, or their affiliates or subsidiaries, or among
companies which form a single economic group, in which cases it shall suffice
to inform the Minister of Mines and Energy and Empresa Colombiana de
Petroleos, ECOPETROL, promptly of the assignment or transfer.
27.6 Except in the cases listed above, the carrying out of any of the
assignments, transfers, negotiations, transactions or operations referred to
in this clause, without the prior OK or approval of the Minister of Mines and
Energy and the President of Empresa Colombiana de Petroleos, ECOPETROL, when
necessary, shall result in the application of the provisions of Clause 25 of
the association contract.
<PAGE> 21
27.7 The operations carried out pursuant to this clause and which
under Colombian tax legislation are subject to tax, shall pay the pertinent
taxes.
CLAUSE 28 - DISAGREEMENTS
Whenever there is a discrepancy or contradiction in the interpretation of the
clauses of this contract in relation to those contained in Exhibit "B" entitled
"Operating Agreement", the stipulations of the former shall prevail.
28.2 Any disagreements which arise between the Parties regarding
matters of law related to the interpretation and performance of the contract
and which cannot be settled amicably, are subject to the cognizance and
decision of the jurisdictional branch of the Colombian government.
28.3 Any difference in fact or of a technical nature which may arise
between the Parties in relation to the interpretation or application of this
contract and which cannot be settled amicably, shall be submitted to the final
decision of experts appointed as follows: one by each Party and, the third
one, by mutual agreement between the principal experts appointed. If these
cannot agree on the designation of the third expert, the latter shall be
appointed at the request of either one of the Parties, by the Board of
Directors of the Colombian Society of Engineers "SCI", which has its
headquarters in Santa Fe de Bogota.
28.4 Any difference of an accounting nature which may arise between
the Parties in relation to the interpretation and performance of the contract
and which cannot be settled amicably, shall be submitted to the decision of
experts, who must be licensed public accountants appointed as follows: one
for each Party and, a third one, by the two principal experts and, in the
absence of an agreement between them and at the request of either one of the
Parties, said third party shall be appointed by the Central Board of
Accountants of Bogota.
28.5 Both Parties declare that the decision of the experts shall have
the full effect of a settlement between them and, therefore, said decision
shall be final.
28.6 In the event of a disagreement between the Parties regarding the
technical, accounting or legal nature of the controversy, this shall be
considered legal and Clause 28 (subsection 28.2), shall be applied.
CLAUSE 29 - LEGAL REPRESENTATION
Without prejudice to the rights which THE ASSOCIATE may have as a result of
legal provisions or of the clauses of this contract, ECOPETROL shall represent
the Parties before the Colombian authorities as regards the exploitation of
the Contracted Area whenever it must do so, and shall supply the officials and
government entities with all the data and reports which may be legally
required. The Operator shall be obliged to prepare and supply to ECOPETROL
the pertinent reports. The expenses incurred by ECOPETROL in attending to any
matter referred to in this clause, shall be charged to the Joint Account and
when such expenses exceed two thousand five hundred dollars of the United
States of America (US$2,500) or its equivalent in Colombian currency, the
prior approval of the Operator shall be necessary. The Parties declare, as
regards any relationship with third parties, that neither the provisions of
this clause nor those of any other clause of the contract, imply the granting
of a general power-of-attorney or that the Parties have constituted a civil or
commercial partnership or any other relationship under which either one of the
Parties can be considered jointly and severally responsible for the acts and
failures to act of the other Party or as having the authority or mandate to
bind the other Party as regards any obligation. This contract relates to the
operations within the territory of the Republic of Colombia and although
ECOPETROL is an industrial and commercial enterprise belonging to the Colombian
government, the Parties are in agreement that THE ASSOCIATE, if such were the
case, may elect to be excluded from the application of all the provisions of
subchapter K entitled PARTNERS AND PARTNERSHIPS of the Internal Revenue Code
of the United States of America. THE ASSOCIATE shall make such election in
its name in the appropriate manner.
CLAUSE 30 - RESPONSIBILITIES
<PAGE> 22
30.1 The Operator shall conduct the operations which are the subject
matter of this contract in an efficient and adequate manner and in accordance
with the practices of the oil industry internationally recognized for this
type of operations, it being understood that it shall at no time be
responsible for errors of judgment, or for losses or damages which are not the
result of the Operator's gross negligence.
30.2 The responsibilities contracted by ECOPETROL and THE ASSOCIATE
in relation to this contract with respect to third parties shall not be joint
and several and, therefore, each Party shall be separately responsible for its
participation in the expenses, investments and obligations resulting
therefrom.
30.3 From the value of the expenses incurred and the contracts
entered into by the Operator in amounts exceeding forty thousand dollars of
the United States of America (US$40,000) or its equivalent in Colombian pesos
without having been promptly authorized by the Executive Committee, except in
the cases contemplated by Clause 11 (subsection 11.7), the only one
responsible before third parties shall be the Operator, which shall therefore
assume the corresponding value in full. When the pertinent expense is
accepted by the Executive Committee, the cost of the work, study or purchase
will be recognized to the Operator, in accordance with guidelines that will be
defined by the Executive Committee. In the event that the expense or asset is
not accepted by the Executive Committee, the Operator, if possible, may
withdraw the asset in question, reimbursing the partners for any cost incurred
by the operation in relation to its withdrawal. When it is not possible for
the Operator to withdraw said assets, or he declines to do so, the benefit or
equity increase resulting from these expenses or contracts shall pertain to the
Parties in proportion to their Interest in the Operation.
30.4 Ecologic Control. THE ASSOCIATE, in conducting all the
activities of the contract, must comply with the provisions of the National
Code of Renewable Natural Resources and Environmental Protection and the
other legal provisions on the matter. To such end, THE ASSOCIATE agrees to
execute a permanent plan of a preventive nature to guarantee the preservation
and restoration of the natural resources within the zones in which the
exploration, exploitation and transportation work which is the object of this
contract is carried out.
Said plans and programs shall be communicated by THE ASSOCIATE to the
communities and entities of a national and regional order related to this
matter.
Likewise, specific contingency plans must be established to attend to the
emergencies which might arise and the pertinent remedial actions must be
carried out. To such end, THE ASSOCIATE must coordinate said plans and
actions with the competent entities.
The respective programs and Budgets must be prepared by THE ASSOCIATE in
accordance with the pertinent clauses of this contract.
All the costs incurred shall be assumed by THE ASSOCIATE during the
Exploration Period and by both Parties, charging the Joint Account, during the
Exploitation Period.
CLAUSE 31 - TAXES, LEVIES AND OTHERS
The levies and contributions which accrue after the establishment of the Joint
Venture and before the Parties receive their participation in the proceeds,
which are attributable to the exploitation of the Petroleum, shall be charged
to the Joint Account. Income, capital and supplementary taxes shall be for the
exclusive account of each one of the Parties to the extent corresponding to
each one.
CLAUSE 32 - PERSONNEL
32.1 After consulting with ECOPETROL, THE ASSOCIATE shall appoint the
Manager of the Operator.
32.2 In accordance with the terms of this contract and subject to the
regulations established, the Operator shall have autonomy to designate the
personnel required for the operations referred to in this contract, being
entitled to fix its remuneration, functions, categories, number and conditions.
The Operator shall adequately and diligently train the
<PAGE> 23
Colombian personnel required to replace the foreign personnel which the
Operator considers necessary to carry out the operations of this Contract.
In any event, the Operator shall comply with the legal provisions which
establish the proportion of national and foreign employees and workers.
32.3 Technology Transfer - THE ASSOCIATE agrees to conduct for its
account a guided training program for ECOPETROL professionals in areas related
to the development of the contract.
To comply with this obligation during the Exploration Period, the guided
training may be, among other, in the fields of geology, geophysics and related
areas, appraisal of reserves and description of fields, drilling and
production. The guided training shall be conducted throughout the initial
exploration period and its extensions, through the integration of
professionals designated by ECOPETROL into the work group which THE ASSOCIATE
shall organize for the Contracted Area or for other related activities of THE
ASSOCIATE.
In order to be able to renounce as mentioned in Clause 5 of this contract, THE
ASSOCIATE must have previously complied with the training programs
contemplated herein.
In the Exploitation Period, the scope, duration, place, participants, training
conditions and other aspects, shall be established by the Executive Committee
of the Association.
All costs of the guided training, with the exception of the labor costs
accruing in favor of the professionals who receive said training, shall be
assumed by THE ASSOCIATE in the Exploration Period and by both parties,
charging the Joint Account, during the Exploitation Period.
PARAGRAPH: In order to comply with the obligations regarding the Transfer of
Technology as provided herein, during the first three years of the Exploration
Period and for each year, THE ASSOCIATE agrees to carry out guided training
programs for ECOPETROL'S professionals, which cost is not to exceed US$30.000
per year. The subject matter of said programs as well as the type of program is
to be agreed by ECOPETROL and THE ASSOCIATE. Should the Exploration Period be
extended, the guided training program will consist of similar programs to the
ones performed during the first three years.
32.4 Pursuant to this Contract, during the Exploitation Period the
Operator shall be entitled to execute any work through contractors, subject to
the power of the Executive Committee to approve those contracts in amounts
exceeding forty thousand dollars of the United States of America (US$40,000)
or its equivalent in Colombian currency.
CLAUSE 33 - INSURANCE
The Operator shall take all the insurance required under Colombian law.
Likewise, it shall require each contractor which performs work related to this
contract, to obtain and maintain in force the insurance which the Operator
considers necessary. Likewise, the Operator shall take the other insurance
which the Executive Committee deems appropriate.
CLAUSE 34 - FORCE MAJEURE OR ACTS OF GOD
The obligations contemplated in this contract shall be suspended during the
time that either one of the Parties is unable to perform them in whole or in
part, due to unforeseen events which constitute force majeure or acts of God,
such as strikes, lockouts, wars, earthquakes, floods or other catastrophes,
laws or government regulations or decrees which prevent the obtaining of the
indispensable materials and, in general, any non-financial reason which
actually prevents the work, even if not listed above, but which affects the
Parties and is beyond their control. If one of the Parties is unable, due to
force majeure or acts of God, to perform the obligations under this contract,
it shall notify the other Party immediately, for its consideration,
specifying the reasons for the impediment. Under no circumstances may force
majeure events or acts of God extend or prolong the total exploration and
exploitation period beyond the twenty-eight calendar years counted as from the
Effective Date as stipulated in Clause 23, but any force majeure impediment
during
<PAGE> 24
the six (6) year exploration period indicated in Clause 5, the duration of
which is more than thirty (30) consecutive days, shall extend this six (6) year
period for the same duration of the impediment.
CLAUSE 35 - APPLICATION OF COLOMBIAN LAWS
For all purposes of this contract, the Parties fix as domicile the city of
Santa Fe de Bogota, Republic of Colombia. This contract is governed in all
its parts by Colombian law and THE ASSOCIATE submits to the jurisdiction of
the Colombian courts and waives any attempt at a diplomatic claim as regards
its rights and obligations arising from this contract, except in the case of
denial of justice. It is understood that there will be no denial of justice
when THE ASSOCIATE, in its capacity as Party or Operator, has had access to all
the recourses and means of action which, under Colombian law, may be used
before the jurisdictional branch of the government.
CLAUSE 36 - NOTICES
The notices or communications between the Parties in relation to this contract
will require for their effectiveness the mention of the pertinent clauses and
shall be sent to the Parties at the following addresses: To ECOPETROL:
Carrera 13 No. 36-24, Santa Fe de Bogota, Colombia. To THE ASSOCIATE:
Carrera 6 No. 115-65, Oficina 307, Santa Fe de Bogota, Colombia. Any change of
address shall be notified in advance to the other Party.
CLAUSE 37 - VALUE INCREASE OF THE PETROLEUM
The payments or reimbursements referred to in Clauses 9 (subsections 9.2 and
9.4) and 22 (subsection 22.5), shall be made in dollars of the United States
of America, or in Petroleum on the basis of the prevailing price and the
limitations established in Colombian legislation for the sale of the portion
payable in dollars, of Petroleum or Natural Gas coming from the Contracted
Area and intended for refining in the national territory.
CLAUSE 38 - PRICES FOR THE PETROLEUM
38.1 The Petroleum which corresponds to THE ASSOCIATE pursuant to
this contract, intended for refining or internal supply, shall be paid for
delivered to the refinery where it is to be processed or to the receiving
station agreed upon by the Parties, as follows:
38.1.1 The gas shall be paid for in accordance with Resolution number
61 of 1983, issued by the Commission of Petroleum and Natural Gas Prices and
Decree number 196 of January 17, 1986, issued by the President of the
Republic, or the government regulations which substitute it.
38.1.2 The crude oil shall be paid for in accordance with Resolution
number 013 of December 14, 1992, issued by the National Energy Commission or
the government regulations which may substitute them.
38.2 The differences which arise from the application of this clause
shall be settled by the systems established in this contract.
CLAUSE 39 - DELEGATION AND ADMINISTRATION
The PRESIDENT OF THE EMPRESA COLOMBIANA DE PETROLEOS - ECOPETROL- delegates to
the Vicepresident of Associated Operations the administration of this Contract,
pursuant to the laws and regulatory provisions of ECOPETROL, with capacity to
exercise all the measures required for the performance of this contract.
CLAUSE 40 - EFFECTIVENESS
This contract requires for its effectiveness the approval of the Ministry of
Mines and Energy.
<PAGE> 25
In witness whereof, this contract is signed in Santa Fe de Bogota, before
witnesses, on the eighteenth (18) day of September, nineteen hundred and
ninety-five (1995).
EMPRESA COLOMBIANA DE PETROLEOS HARKEN DE COLOMBIA, LTD.
ECOPETROL
(Signed) /s/ LUIS BERNARDO FLOREZ ENCISO (Signed) /s/ MIKEL D. FAULKNER
LUIS BERNARDO FLOREZ ENCISO MIKEL D. FAULKNER
President President of the Board of Directors
Witnesses
<PAGE> 26
EXHIBIT 10.2
DEVELOPMENT FINANCE AGREEMENT
____________________________________________________
Harken Energy Corporation
and
Arbco Associates L.P.,
Offense Group Associates L.P.,
Kayne, Anderson Nontraditional Investments L.P.,
Opportunity Associates L.P.
____________________________________________________
October 12, 1995
<PAGE> 27
TABLE OF CONTENTS
<TABLE>
<CAPTION>
PAGE
<S> <C>
ARTICLE I Definitions and References . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1
Section 1.1. Defined Terms . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1
Section 1.2. References and Titles . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 4
ARTICLE II Advancement of Capital . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 5
Section 2.1. Advances . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 5
Section 2.2. Requests for Advances . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 5
Section 2.3. Use of Proceeds . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 5
ARTICLE III Rio Negro NPI . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 6
Section 3.1. Rio Negro NPI . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 6
Section 3.2. Establishment . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 6
Section 3.3. Credits . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 6
Section 3.4. Debits . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 8
Section 3.5. Additional Account Matters . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 10
Section 3.6. Accounting . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 10
Section 3.7. Payments . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 11
Section 3.8. Overpayments and Underpayments . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 11
Section 3.9. Prudent Operator Standard . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 12
Section 3.10. Sales of Subject Hydrocarbons . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 12
Section 3.11. Insurance . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 12
Section 3.12. Contracts with Affiliates . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 13
Section 3.13. Government Regulation . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 13
Section 3.14. Abandonments . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 13
Section 3.15. Pooling and Unitization . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 13
Section 3.16. Non-consent Operations . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 14
Section 3.17. No Personal Liability; Indemnification . . . . . . . . . . . . . . . . . . . . . . . . . . . 14
Section 3.18. Assignment by Harken Colombia or Owner . . . . . . . . . . . . . . . . . . . . . . . . . . . 15
Section 3.19. Assignment by Investors . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 16
Section 3.20. Access to Books and Records . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 16
ARTICLE IV Investors Conversion . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 16
Section 4.1. Exercise of Investors' Option . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 16
Section 4.2. Number of Preferred Shares . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 17
Section 4.3. Issuance of Preferred Shares . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 17
</TABLE>
<PAGE> 28
<TABLE>
<S> <C>
Section 4.4. Reduction of Designated Percentage . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 17
ARTICLE V Owner Conversion . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 18
Section 5.1. Exercise of Owner's Option . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 18
Section 5.2. Exercise of Investors' Second Option . . . . . . . . . . . . . . . . . . . . . . . . . . . . 18
Section 5.3. Number of Preferred Shares . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 19
Section 5.4. Issuance of Preferred Shares . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 20
Section 5.5. Reduction of Designated Percentage . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 20
Section 5.6. Investors' Cash Option . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 20
Section 5.7. Payment of Cash Option . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 20
ARTICLE VI Automatic Conversion . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 21
Section 6.1. Conversion Upon Abandonment . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 21
Section 6.2. Notice of Abandonment . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 21
Section 6.3. Number of Preferred Shares . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 21
Section 6.4. Issuance of Preferred Shares . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 22
Section 6.5. Elimination of Designated Percentage . . . . . . . . . . . . . . . . . . . . . . . . . . . . 22
ARTICLE VII Owner Representations, Warranties and Agreements . . . . . . . . . . . . . . . . . . . . . . . . . . . . 22
Section 7.1. Organization and Corporate Authority . . . . . . . . . . . . . . . . . . . . . . . . . . . . 22
Section 7.2. Qualification to do Business. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 22
Section 7.3. Charter, Bylaws, Etc. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 23
Section 7.4. Capitalization. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 23
Section 7.5. Finders' Fees . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 23
Section 7.6. Authority of Owner. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 23
Section 7.7. Non-Contravention. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 24
Section 7.8. Governmental Consents . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 24
Section 7.9. Reports and Financial Statements of Owner . . . . . . . . . . . . . . . . . . . . . . . . . . 24
Section 7.10. Disclosure . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 25
Section 7.11. Certificate of Designations . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 25
Section 7.12. Owner's Preferred Shares . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 25
Section 7.13. Association Contract . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 25
Section 7.14. Ownership of Harken Colombia . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 26
Section 7.15. Absence of Bankruptcy Proceedings . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 26
Section 7.16. Offering . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 26
Section 7.17. No Defaults . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 26
Section 7.18. Litigation . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 26
Section 7.19. Compliance with Laws . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 27
Section 7.20. Compliance with Environmental Laws . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 27
Section 7.21. Continuing Representations and Warranties . . . . . . . . . . . . . . . . . . . . . . . . . . 27
</TABLE>
<PAGE> 29
<TABLE>
<S> <C>
ARTICLE VIII Investors Representations, Warranties and Agreements . . . . . . . . . . . . . . . . . . . . . . . . . 28
Section 8.1. Organization and Corporate Authority. . . . . . . . . . . . . . . . . . . . . . . . . . . . 28
Section 8.2. Finders' Fees . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 28
Section 8.3. Authority of Investor . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 28
Section 8.4. Non-Contravention . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 28
Section 8.5. Governmental Consents. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 29
Section 8.6. Investment Intent . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 29
Section 8.7. Disclosure of Information . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 29
Section 8.8. Accredited Investors and Experience. . . . . . . . . . . . . . . . . . . . . . . . . . . . 29
Section 8.9. Restricted Securities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 29
Section 8.10. Legends . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 29
Section 8.11. Continuing Representations and Warranties . . . . . . . . . . . . . . . . . . . . . . . . . 30
ARTICLE IX Conditions . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 30
Section 9.1. Investors' Conditions . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 30
Section 9.2. Conditions of Owner . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 31
Section 9.3. Taking of Necessary Action . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 31
Section 9.4. Issuance of Preferred Shares . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 31
ARTICLE X Miscellaneous . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 31
Section 10.1. Indemnification . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 31
Section 10.2. Public Announcements. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 32
Section 10.3. Brokers . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 32
Section 10.4. Notices . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 32
Section 10.5. Waivers and Amendments . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 33
Section 10.6. Governing Law . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 33
Section 10.7. Binding Effect; No Assignment; No Third Party Benefit . . . . . . . . . . . . . . . . . . . 33
Section 10.8. Entire Agreement . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 33
Section 10.9. Severability . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 33
Section 10.10. United States Dollars . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 34
Section 10.11. Survival of Representations and Warranties . . . . . . . . . . . . . . . . . . . . . . . . 34
Section 10.12. Counterparts . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 34
</TABLE>
<PAGE> 1
DEVELOPMENT FINANCE AGREEMENT
RIO NEGRO PROJECT
THIS DEVELOPMENT FINANCE AGREEMENT (this "Agreement") is made as of
the 12th day of October, 1995, by and between HARKEN ENERGY CORPORATION, a
Delaware corporation (herein called "Owner"), and Arbco Associates L.P.,
Offense Group Associates L.P., Kayne, Anderson Nontraditional Investments L.P.
and Opportunity Associates L.P., (herein collectively called "Investors"). In
consideration of the mutual covenants and agreements contained herein, the
parties hereto hereby agree as follows:
ARTICLE I
Definitions and References
Section 1.1. Defined Terms. As used in this Agreement, each of the
following terms has the meaning given it in this Section 1.1 or in the sections
or subsections referred to below:
"Account" shall have the meaning assigned to it in Section 3.2.
"Advances" shall have the meaning assigned to it in Section 2.1.
"Affiliate" shall mean any person directly or indirectly controlling,
controlled by or under common control with Owner and/or Harken Colombia, with
the concept of control in such context meaning the possession of the power to
direct or cause the direction of the management and policies of another,
through the ownership of voting securities, by contract or otherwise.
"Agreed Rate" shall mean a rate per annum which is equal to the lesser
of (a) a rate which is three percent (3%) above the prime rate of interest of
First Interstate Bank of Texas, N.A., as announced or published by such bank
from time to time or a similar rate of interest if a prime rate is not
announced or published by such bank (adjusted from time to time to reflect any
changes in such rate determined hereunder), or (b) the maximum rate from time
to time permitted by applicable law.
"Association Contract" shall mean that certain Bocachica Association
Contract executed January 6, 1994, between Ecopetrol and Harken Colombia,
together with the operating agreement attached thereto and all modifications,
amendments and/or supplements heretofore or hereafter made in accordance with
Section 7.13 with respect to such Association Contract or operating agreement.
"Business Day" shall mean any day other than a Saturday, a Sunday or a
day in which banks in the State of Texas or California are closed.
<PAGE> 2
"Certificate of Designations" shall mean the Certificate of
Designations of the Series D Preferred Stock (par value $1.00 per share) of
Owner attached hereto as Exhibit A.
"Code" shall mean the Internal Revenue Code of 1986, as amended, and
the rules and regulations thereunder as in effect on the date hereof.
"Commitment" shall have the meaning assigned to it in Section 2.1.
"Commitment Period" shall mean the 27-month period from and including
the date hereof; provided, that if Owner has not drilled two wells on the
Subject Interests within such 27-month period, the Commitment Period shall be
extended until a date which is 90 days after the date on which two wells have
been drilled on the Subject Interests.
"Conversion" shall mean the conversion of all or part of the Rio Negro
NPI into Preferred Shares pursuant to Investors' Option as provided for in
Article IV, pursuant to Investors' Second Option and/or Owner's Option as
provided for in Article V, or pursuant to Article VI.
"Designated Percentage" shall mean the percentage set forth opposite
each Investor's name on Annex 1 hereto, subject to reduction upon Conversion as
provided for in Section 4.4 or Section 5.5.
"Ecopetrol" shall mean Empresa Colombiana de Petroleos, an industrial
and commercial company owned by the Republic of Colombia.
"Effective Date" shall mean the date of this Agreement.
"Environmental Laws" shall have the meaning assigned to it in Section
7.20.
"ERISA" shall mean the Employee Retirement Income Security Act of
1974, as amended.
"Exchange Act" shall mean the Securities Exchange Act of 1934, as
amended.
"GAAP" shall mean generally accepted accounting principles, as set
forth in the opinions of the Accounting Principles Board of the American
Institute of Certified Public Accountants and statements of the Financial
Accounting Standards Board or in such opinions and statements of such other
entities as shall be approved by a significant segment of the accounting
profession in the United States of America.
"Governmental Authority" shall mean (i) the United States of America
or any state within the United States of America, (ii) Colombia or any
political subdivision of Colombia, (iii) any court or any governmental
department, commission, board, bureau, agency or other instrumentality of the
United States of America or of any state within the United States of America
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<PAGE> 3
or (iv) any court or any governmental department, commission, board, bureau,
agency or other instrumentality of Colombia or of any political subdivision of
Colombia.
"Gross Proceeds" shall have the meaning assigned to it in Section 3.3.
"Harken Colombia" shall mean Harken de Colombia, Ltd., a Cayman
Islands corporation and wholly owned subsidiary of Owner, and/or, when
appropriate, its branch established in Santa Fe de Bogota, D.C., Colombia and
its successors and assigns.
"Investors" shall have the meaning assigned to it in the preamble of
this Agreement.
"Investors' Option" shall have the meaning assigned to it in Article
IV.
"Investors' Second Option" shall have the meaning assigned to it in
Article V.
"Law" shall mean any applicable statute, law, ordinance, regulation,
rule, ruling, order, restriction, requirement, writ, injunction, decree or
other official act of or by any Governmental Authority.
"Non-Affiliate" shall mean with respect to Owner and Harken Colombia,
any person who is not an Affiliate of Owner or Harken Colombia.
"Owner" shall mean Harken Energy Corporation, a Delaware corporation,
and its successors and assigns.
"Owner's Option" shall have the meaning assigned to it in Article V.
"Owner's SEC Filings" shall have the meaning assigned to it in Section
7.9.
A "person" shall mean an individual, an estate, a corporation, a
partnership, a joint venture, a limited liability company, an association, a
joint stock company, a government or any department or agency of a government,
a trust and/or any other entity.
"Pollutants" has the meaning given such term in Section 7.20.
"Preferred Shares" shall mean shares of Series D Preferred Stock, par
value $1.00 per share, of Owner, as described in the Certificate of
Designations.
"Processing" shall mean the manufacture, fractionation, refining or
other treating or transportation of Subject Hydrocarbons prior to their sale or
disposition, and "Processed" shall have the meaning correlative to the
foregoing.
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<PAGE> 4
"Production Sales Contracts" shall mean all contracts, agreements and
arrangements for the sale or disposition of Subject Hydrocarbons that may be
produced from or attributable to the Subject Interests, whether presently
existing or hereafter created.
"Releases" has the meaning given such term in Section 7.20.
"Rio Negro NPI" shall have the meaning assigned to it in Section 3.1.
"Securities Act" shall mean the Securities Act of 1933, as amended.
"Subject Hydrocarbons" shall mean (except to the extent otherwise
expressly provided in this Agreement) all oil, gas and other minerals in and
under and that may be produced, from and after the Effective Date, from the
lands and depths covered by and/or included in the Subject Interests. There
shall not be included in the Subject Hydrocarbons any oil, gas or other
minerals (a) attributable to royalties or other similar obligations deducted or
paid in kind pursuant to the Association Contract or pursuant to any applicable
Law, and (b) deducted, paid in kind or otherwise taken out of Harken Colombia's
share of such oil, gas or minerals and delivered to another person as
reimbursement to such person for oil, gas or other minerals of such other
person which was previously taken by Harken Colombia relating to the Rio Negro
prospect.
"Subject Interests" shall mean the interest of Harken Colombia and its
successors and assigns in the Association Contract to the extent such interest
relates to that area described on Exhibit B hereto as the Rio Negro prospect.
As provided in the Association Contract, the areal extent of the Rio Negro
prospect under the Association Contract may be reduced and the percentage
interest of Harken Colombia and its successors and assigns in the oil, gas and
mineral production thereunder may be reduced, and in each such case the
"Subject Interests" shall be reduced to the same extent as the Association
Contract and/or the interest of Harken Colombia and its successors and assigns
thereunder is so reduced. No reduction shall occur, however, in the Subject
Interests as a result of any sale or disposition of all or any portion of the
Association Contract or the Subject Interests by Harken Colombia, and in such
event all credits and debits to the Account under Article III shall be made as
if no such sale or disposition had occurred and Harken Colombia was still the
owner of all of the Association Contract.
Section 1.2. References and Titles. All references in this Agreement
to articles, sections, subsections and other subdivisions refer to the
articles, sections, subsections and other subdivisions of this Agreement unless
expressly provided otherwise. Titles appearing at the beginning of any
subdivisions are for convenience only and do not constitute any part of such
subdivisions and shall be disregarded in construing the language contained in
such subdivisions. The words "this Agreement", "this instrument", "herein",
"hereof", "hereby", "hereunder" and words of similar import refer to this
Agreement as a whole and not to any particular subdivision unless expressly so
limited. The phrases "this Section" and "this subsection" and similar phrases
refer only to the sections or subsections hereof in which such phrases occur.
Pronouns in masculine, feminine and neuter genders shall be construed to
include any other gender, and words
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<PAGE> 5
in the singular form shall be construed to include the plural and vice versa,
unless the context otherwise requires.
ARTICLE II
Advancement of Capital
Section 2.1. Advances. Each Investor agrees and commits to make
advances to Owner of the amounts set forth opposite such Investor's name on
Annex 1 hereto (herein called "Advances") from time to time during the
Commitment Period (and whether or not any Conversion has occurred) so long as
the aggregate amount of Advances of all of the Investors combined does not
exceed Three Million Five Hundred Thousand and no/100 Dollars ($3,500,000.00)
(herein called the "Commitment"). Each Advance must be greater than or equal
to $500,000 in the aggregate for all Investors or must equal the unadvanced
portion of the Commitment. Each Advance requested shall be made pro rata by
the Investors in the proportion that the respective amounts set forth opposite
their names in Annex 1 hereto bear to $3,500,000. The Commitment is not a loan
or direct ownership interest in Harken Colombia, the Association Contract or
the Subject Interests. Instead, the Commitment and all Advances thereof shall
constitute consideration for the right to receive payments measured by the
Account provided for in Article III, the right to convert or have converted the
Rio Negro NPI into Preferred Shares pursuant to Articles IV and VI and
Preferred Shares and/or cash pursuant to Article V and the other rights and
benefits provided by this Agreement.
Section 2.2. Requests for Advances. Owner must give at least five
Business Days' prior written notice to each Investor of any requested Advance,
which notice shall be accompanied by a certificate of the chief executive
officer or the chief financial officer of Owner certifying that such Advance
shall be expended by Owner in accordance with Section 2.3 of this Agreement.
The Investors shall on the date requested make such Advance to Owner by wire
transfer of the amount of such Advance in immediately available funds to the
bank account specified by Owner in such notice.
Section 2.3. Use of Proceeds. Owner shall use all funds from
Advances to finance geological, geophysical and engineering operations and
studies of the Subject Interests and the drilling, completing and equipping or
abandonment of two wells and related facilities on the Subject Interests.
Owner hereby represents, warrants and covenants that it will drill two wells on
the Subject Interests within 24 months of the date hereof. Prior to or
contemporaneously with requesting the first Advance that will be expended on
either of such wells, Owner shall deliver to each Investor for its information
a copy of Owner's internal authority for expenditure (a.f.e.) for such well.
All parties to this Agreement acknowledge that the drilling of two wells on the
Subject Interests has substantial value to Investors. If Owner has not drilled
or caused to be drilled two wells on the Subject Interests within 24 months of
the date hereof, Investor may any time after the expiration of such 24-month
period and prior to the expiration of the Commitment
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<PAGE> 6
Period, notify owner that it is withdrawing the Commitment. Upon receipt of
such notice from Investors, Owner shall pay to each Investor an amount in cash
equal to the aggregate amount of the Advances previously made by such Investor
together with an amount equal to interest on the amount of each such Advance
from and including the date such Advance was received by Owner to but not
including the date such payment is made at the rate of fifteen percent (15%)
per annum, compounded semi-annually.
ARTICLE III
Rio Negro NPI
Section 3.1. Rio Negro NPI. In consideration for the payment by
Investors to Owner of Advances, Investors shall have the rights provided for in
this Article III and elsewhere in this Agreement with respect to the Account,
including without limitation the rights to receive payments from Owner measured
by the Account pursuant to Section 3.7 (all of such rights are herein
collectively called the "Rio Negro NPI"). The Rio Negro NPI is intended to
provide to Investors substantially the same economic benefit as if each
Investor was the owner of a direct net profits overriding royalty interest in
the Association Contract to the extent it relates to the Designated Percentage
of the Subject Interests and on the terms otherwise provided for herein;
provided, however, that no rights or interest of any nature whatsoever in the
Association Contract, the Subject Interests or Harken Colombia are intended to
be, or are hereby, assigned or conveyed to Investors, it being understood and
agreed that the Rio Negro NPI is solely a contractual obligation of Owner (and
not of Harken Colombia, the party to the Association Contract) as expressed in
this Agreement.
Section 3.2. Establishment. Owner shall establish and maintain a
bookkeeping account (herein called the "Account") in accordance with sound,
accurate and comprehensive accounting practices and consistent with the various
provisions of this Agreement and at all times shall keep true and correct books
and records with respect thereto.
Section 3.3. Credits. Except as otherwise provided herein, with
respect to each sale or other disposition of Subject Hydrocarbons, the Account
shall be credited with the gross proceeds from the sale of such Subject
Hydrocarbons. The amount of gross proceeds (herein called "Gross Proceeds") to
be credited to the Account with respect to any sale or disposition of Subject
Hydrocarbons shall be subject to the following:
(a) Gross Proceeds shall include all consideration
received, directly or indirectly, by Harken Colombia or any Affiliate
for sales or other dispositions of (i) Subject Hydrocarbons, or (ii)
if any Subject Hydrocarbons are Processed by or for the benefit of
Harken Colombia before sale or disposition, the products of such
Subject Hydrocarbons after such Processing;
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<PAGE> 7
(b) If any proceeds are withheld from Harken Colombia by
a Non-Affiliate for any reason (other than at the request of Harken
Colombia or due to Harken Colombia's negligence), such proceeds shall
not be considered to be Gross Proceeds until such proceeds are
actually received by Harken Colombia; provided, however, that Gross
Proceeds shall include any interest, penalty, or other amount that is
derived from the sale of Subject Hydrocarbons or the proceeds thereof
when and if received;
(c) Gross Proceeds shall not include any amounts for
Subject Hydrocarbons unavoidably lost in production or used by Harken
Colombia in conformity with good oil field practices for drilling and
production operations (including without limitation gas injection,
fuel, secondary or tertiary recovery, pressure maintenance,
repressuring or recycling, Processing and transportation) conducted
solely for the purpose of producing Subject Hydrocarbons from the
Subject Interests, but only so long as such Subject Hydrocarbons are
so used;
(d) In the event Subject Hydrocarbons are used by Harken
Colombia outside of the Subject Interests and for purposes not
primarily associated with, or primarily for the benefit of, the
Subject Interests or the production, Processing or marketing of
Subject Hydrocarbons, Gross Proceeds shall include the then current
market value at the wellhead of such Subject Hydrocarbons;
(e) Gross Proceeds shall include all proceeds
attributable to Subject Interests which are received by Harken
Colombia from the sale, after the Effective Date, of (or, if disposed
of after the Effective Date by Harken Colombia other than by sale, the
then current market value of) any materials, supplies, equipment and
other personal property or fixtures, or any part thereof or interest
therein, located on or used in connection with the Subject Interests;
(f) Gross Proceeds shall include all proceeds
attributable to Subject Interests of all insurance received by Harken
Colombia, Owner or any of their Affiliates (i) the cost of which is
charged to the Account, directly or indirectly, and (ii) that accrue
to Harken Colombia as a consequence of the loss or damage which occurs
after the Effective Date with respect to Harken Colombia's interest in
the Subject Interests, any materials, supplies, equipment or other
personal property or fixtures located on or used in connection with
any of the Subject Interests, or any Subject Hydrocarbons;
(g) Gross Proceeds shall include all proceeds
attributable to Subject Interests of all judgments and claims received
by Harken Colombia or Owner for any loss or damage which occurs after
the Effective Date with respect to Harken Colombia's interest in the
Subject Interests, any materials, supplies, equipment or other
personal property or fixtures located on or used in connection with
any of the Subject Interests, or any Subject Hydrocarbons;
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<PAGE> 8
(h) Gross Proceeds shall include all advance payments and
payments under take-or-pay and similar provisions of Production Sales
Contracts;
(i) Gross Proceeds shall include any amounts received by
Harken Colombia from production of Subject Hydrocarbons at levels
greater than Harken Colombia's interest in the Subject Interests and
shall include any payments received by Harken Colombia from joint
interest owners as settlement for production of Subject Hydrocarbons
at levels less than Harken Colombia's interest in the Subject
Interests; and
(j) Gross Proceeds shall include all other monies and
things of value which are received by Harken Colombia by virtue of the
ownership after the Effective Date of the Subject Interests and/or any
materials, supplies, equipment and other personal property and
fixtures located on or used in connection with the Subject Interests;
provided that this Section 3.3 shall not operate to provide any credits on
account of (i) any amounts paid by third parties (including Ecopetrol) to
Harken Colombia as operator under the Association Contract or any operating
agreement now or hereafter in force covering any of the Subject Interests to
reimburse or compensate Harken Colombia as operator for costs incurred or
services performed for the account or benefit of such third parties, (ii) any
amounts received by Harken Colombia upon any sale or disposition in accordance
with Section 3.18 of any portion of the Association Contract or the Subject
Interests, or (iii) any amounts received by Harken Colombia as reimbursement by
Ecopetrol of Direct Exploration Costs provided for under the Association
Contract.
Section 3.4. Debits. Except as otherwise provided herein, the
Account shall be debited with the following:
(a) All direct costs (and those indirect costs expressly
permitted in subsection (x) below) which are attributable to the
Subject Interests after the Effective Date for exploring, developing,
operating, producing, reworking, maintaining and restoring the Subject
Interests, including without limitation any direct costs (and those
indirect costs expressly permitted in subsection (x) below) for (i)
geological and geophysical operations and studies (and related
computer processing and modeling) with respect to the Subject
Interests and drilling, completing, testing, equipping, plugging back,
reworking, recompleting and plugging and abandoning any wells on the
Subject Interests, (ii) constructing, maintaining and operating any
gathering facilities, tanks and other production, delivery and
transportation facilities on or for use in connection with the Subject
Interests, (iii) Processing any Subject Hydrocarbons and acquiring,
constructing, operating and maintaining any facility, plant, equipment
or pipeline for Processing any Subject Hydrocarbons, (iv) secondary
recovery, pressure maintenance, repressuring, recycling and other
operations conducted for the purpose of enhancing production of the
Subject Hydrocarbons, (v) wages, salaries, fringe benefits and
expenses of local employees and contract personnel, consultants and
professionals necessary for operating, producing
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and maintaining the Subject Interests, (vi) local offices, camps,
warehouses, housing and other facilities paid for by Harken Colombia,
relocation of employees and their families, travel, telephone,
training of Colombian personnel, rental and use or damage to the real
and personal property of others, community relations, protection,
peaceful operations and similar matters, and otherwise doing business
in Colombia, (vii) insurance, (viii) payments made in cash as
compensation for or in settlement of any Subject Hydrocarbons taken by
Harken Columbia at levels greater than Harken Colombia's interest in
the Subject Interests, (ix) royalties required to be paid in cash
pursuant to the Association Contract or any applicable Law and other
charges and payments required under the Association Contract and (x)
general, administrative and overhead expenses incurred by Owner and
Harken Colombia which are permitted to be charged under the
Association Contract or any operating agreement applicable to any of
the Subject Interests, but not otherwise; provided, however, that the
debits made to the Account pursuant to this subsection with respect to
any Subject Interest shall be made in accordance with customary
industry practices and applicable accounting standards.
(b) All Colombian taxes and similar charges incurred by
Harken Colombia with respect to the ownership of the Subject Interests
after the Effective Date, including without limitation (i) income,
transfer, remittance, franchise, occupation, sales and use and like
taxes based on or relating to the Subject Interests, the sale or
production of the Subject Hydrocarbons, or the proceeds, value or
income therefrom, (ii) production, severance, excise and other taxes
assessed against, and/or measured by, the production of (or the
proceeds or value of production of) Subject Hydrocarbons, and (iii) ad
valorem and other taxes assessed against or attributable to the
Subject Interests or any Processing or other equipment or property
located on or related to the Subject Interests; provided, however,
that if any taxes relate to the Subject Interests and to other
property owned by Harken Colombia or to Subject Hydrocarbons and to
other production of Harken Colombia, such taxes shall be allocated to
the Subject Interests or the Subject Hydrocarbons and debited
hereunder on a proportionate or other equitable basis in accordance
with applicable accounting, tax or industry standards;
(c) Amounts attributable to currency conversions,
exchange control obligations and similar costs and losses with respect
to currencies used to pay expenses charged to the Account, currencies
credited to the Account or currencies paid by Harken Colombia to Owner
for the purpose (directly or indirectly) of making payments to
Investors pursuant to Section 3.7 (excluding in each case any costs
for currency hedges, swaps and similar instruments); and any such
amounts shall be calculated or determined in a manner consistent with
the treatment of such amounts on the books of Owner for financial
reporting to governmental entities; and
(d) Except as otherwise provided elsewhere in this
Agreement, all other reasonable, direct expenditures attributable to
the Subject Interests paid or incurred by Harken Colombia after the
Effective Date with respect to the Subject Interests;
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provided that this Section 3.4 shall not operate to permit any debits (i) by
duplication or on account of any amount which has also been used to reduce the
amount of the Subject Hydrocarbons, Gross Proceeds and/or payments to Investors
pursuant to Section 3.7 or has otherwise not been included therein (including,
by way of example and without limitation, royalties, production, severance,
excise and other taxes and any other amounts deducted, withheld or paid by any
other person), (ii) on account of any expenses and any penalties, interest or
other similar charges which result from the failure of Harken Colombia to
properly discharge all costs and expenses (including taxes) of developing,
operating and maintaining the Subject Interests, (iii) on account of any
damages, penalties, interest or other similar charges paid by Harken Colombia
to any person arising from any conduct or omission by Harken Colombia in its
capacity as operator of any of the Subject Interests and any costs and expenses
(including attorneys' fees) in defending any such action unless such charges,
costs and expenses are properly chargeable under the Association Contract or to
all working interest owners under an operating agreement to which all or part
of the Subject Interests are subject, and (iv) any interest or principal
payments on any indebtedness of Harken Colombia unless the incurrence of such
indebtedness by Harken Colombia and the debit of the Account for such interest
or principal payments has been specifically approved by Investors.
Section 3.5. Additional Account Matters. Notwithstanding the
provisions of Section 3.4 (or any other provision of this Agreement) which may
appear to the contrary, an amount equal to the aggregate amount of the Advances
at the time paid to Owner pursuant to Article II, of the costs incurred by
Harken Colombia in conducting the operations described in Section 2.3 which are
attributable to Subject Interests and which would otherwise be charged or
debited to the Account under Section 3.4 shall not be charged or debited to the
Account and shall be borne solely by Harken Colombia.
Section 3.6. Accounting. All debits to the Account which are
attributable to costs and expenses paid by Harken Colombia during a calendar
quarter up to and including the last day of such calendar quarter shall be
debited against the Account as of the last day of such calendar quarter;
provided that any such debits which do not (and will not) result from payments
to third parties or to Harken Colombia shall be debited against the Account as
of the last day of the calendar quarter in which they arise. After such debits
have been so made for a given calendar quarter, all credits to the Account
which are actually received by Harken Colombia during a calendar quarter up to
and including the last day of such calendar quarter shall be credited to the
Account as of the last day of such calendar quarter; provided that any such
credits which do not (and will not) result from credits given by or payments
from third parties shall be credited to the Account as of the last day of the
calendar quarter in which they arise. The total net profits realized from the
Subject Interests (or the total net losses, as the case may be) shall be
determined after the applications and calculations provided for above have been
made by Owner. If, after all such debits and credits have been made to the
Account for a given calendar quarter, there remains a deficit balance in the
Account, then an amount shall be computed equal to interest on the amount of
such deficit balance at the Agreed Rate for the period between the last day of
such calendar quarter and the last day of the next calendar quarter, which
amount shall, on the last day of the
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next calendar quarter, be charged to the Account in the same manner as other
charges to the Account for such calendar quarter. Investors shall participate
in the Designated Percentage of the net profits derived from the Subject
Interests, as provided in this Agreement, only after and while all debits
properly debited against the Account shall have been offset by credits to the
Account and a credit balance shall exist in the Account.
Section 3.7. Payments. On or before 60 days after the end of each
calendar quarter, Owner shall furnish to Investors a detailed statement clearly
reflecting the condition of the Account as of the close of business on the last
day of such calendar quarter, and clearly reflecting those items which gave
rise to debits and credits to the Account during such quarter and clearly
reflecting for the Subject Interests, the quantities of Subject Hydrocarbons
produced therefrom during the quarter covered by such statement, the volumes of
such production sold, the prices at which such volumes were sold, and the taxes
paid with respect to such sales. Any deficit reflected by any such statement
shall be carried forward for the next and succeeding months until such deficit
has been wiped out and liquidated. In case a net profit is reflected by any
such statement, payment to Investors of the Designated Percentage of the amount
of such net profit shall be enclosed with the statement rendered to Investors
(or, if requested at any time by Investors, paid by bank wire transfer to such
bank and account designated in writing by Investors); provided, however, that
(a) Owner may elect to cause Harken Colombia (instead of Owner) to make any
payment required under this Section to Investors in U.S. dollars, (b) any
payment to Investors under this Section shall be reduced by any costs or losses
from currency conversions, compliance with exchange control obligations,
withholding obligations and remittance and other taxes which are properly
chargeable to the Account pursuant to Section 3.4(b) or (c) and (i) are
incurred by Harken Colombia in connection with such payment to Investors or any
payment of an amount equivalent to such payment by Harken Colombia to Owner, or
(ii) in the event such payment is made by Owner from its U.S. funds without any
equivalent payment by Harken Colombia to Owner, would have been so incurred if
Harken Colombia had paid to Owner an amount equivalent to such payment, and (c)
Owner may retain up to one-third of Investors' share of any such net profit in
the event and to the extent that the debits that Owner reasonably projects will
be charged to the Account during the next three months will exceed the credits
that Owner reasonably projects will be made to the Account during such
three-month period and apply such retained amount to the payment of Investors'
share of such debits. Any such retained amount that is subsequently determined
to be unnecessary for the payment of Investors' share of such debits shall be
paid promptly to Investors. In the event any amount is deducted from any
payment pursuant to subsections (a), (b) or (c) above, such amount shall not
thereafter be charged to the Account to the extent it would cause any direct or
indirect double charge to the Account or the Investors for such amount.
Section 3.8. Overpayments and Underpayments. If at any time Owner
inadvertently pays Investors more or less than the amount then due with respect
to the Rio Negro NPI, the amount or amounts otherwise payable for any
subsequent period or periods shall be reduced or increased by such overpayment
or underpayment, plus an amount equal to interest (computed at the Agreed
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Rate) on the unrecovered balance of such overpayment or underpayment during the
period of such overpayment or underpayment.
Section 3.9. Prudent Operator Standard. Harken Colombia (subject to
the terms and provisions of the Association Contract and any applicable
operating agreements) shall have exclusive charge, management and control of
all operations to be conducted on the Subject Interests and may take any and
all actions which a reasonably prudent operator would deem necessary or
advisable in the management, operation and control thereof. Owner shall cause
Harken Colombia to operate and maintain the Subject Interests as would a
prudent operator under similar circumstances in accordance with good oil field
practices. Owner shall cause Harken Colombia to promptly (and, unless the same
are being contested in good faith and by appropriate proceedings before the
same are delinquent) pay or cause to be paid all costs and expenses (including
without limitation all taxes and all costs, expenses and liabilities for labor,
materials and equipment incurred in connection with the Subject Interests and
all obligations to the holders of interests affecting the Subject Interests)
incurred from and after the Effective Date in developing, operating and
maintaining the Subject Interests. As to those of the Subject Interests as to
which Harken Colombia hereafter may not be the operator, Owner shall cause
Harken Colombia to take all such action and exercise all such rights and
remedies as are reasonably available to Harken Colombia to cause the operator
to so maintain and operate such Subject Interests (provided that Harken
Colombia shall never be obligated to pay any costs or expenses attributable to
any interest other than the Subject Interests and all royalties related
thereto).
Section 3.10. Sales of Subject Hydrocarbons. Owner shall have the
obligation to cause Harken Colombia to market or cause to be marketed, subject
to the terms of the Association Contract, the Subject Hydrocarbons in
accordance with reasonable and prudent business judgment and sound oil field
practices and on such terms and conditions as Harken Colombia shall determine
to be in the best interests of Investors; provided, however, that all such
sales of Subject Hydrocarbons (a) shall be upon terms and conditions which are
the best terms and conditions available as determined in good faith by Harken
Colombia taking into account all relevant circumstances, including without
limitation, price, quality of production, access to markets or lack thereof,
minimum purchase guarantees, identity of purchaser and length of commitment,
(b) shall be on terms and conditions at least as favorable as Harken Colombia
obtains for oil, gas and/or minerals not subject to this Agreement which are of
comparable type and quality and in the same or similar location, except where
such terms and conditions cannot be made available to sales of the Subject
Hydrocarbons under pre-existing contracts, and (c) shall be made to
Non-Affiliates of Owner or Harken Colombia except that sales of Subject
Hydrocarbons may be made to an Affiliate of Owner or Harken Colombia that is
owned in part by a Governmental Authority and that owns or operates a pipeline
or other Processing facility if the price paid by such Affiliate is no less
favorable than the prices then being paid by a Non-Affiliate for oil, gas
and/or minerals which are of comparable type and quality and in the same or
similar locations.
Section 3.11. Insurance. Owner shall cause Harken Colombia to obtain
or cause to be obtained (and maintain or cause to be maintained during the
economic life of the Subject Interests)
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insurance coverage in such amounts, with provisions for such deductible amounts
and for such purposes as Harken Colombia shall determine to be appropriate
(and, because of cost, availability and other factors, Harken Colombia may
determine not to acquire any such insurance).
Section 3.12. Contracts with Affiliates. Except as provided
otherwise in the Association Contract or any applicable operating agreement,
Owner, Harken Colombia and/or their Affiliates may perform services and furnish
supplies and equipment with respect to the Subject Interests, provided that the
amount of compensation, price or rental that can be charged to the Account
therefor must be no less favorable than those available from Non-Affiliates in
the area engaged in the business of rendering comparable services or selling or
leasing comparable equipment and supplies which could reasonably be made
available to the Subject Interests.
Section 3.13. Government Regulation. All obligations of Owner and/or
Harken Colombia hereunder shall be subject to and limited by (i) all applicable
Laws and (ii) the Association Contract as it may be modified, amended and/or
supplemented from time to time. Where the price at which Subject Hydrocarbons
are sold is limited by applicable Laws, the price so permitted to be paid for
Subject Hydrocarbons shall be controlling if lower than prices established in
Production Sales Contracts or required hereunder.
Section 3.14. Abandonments. After the Commitment Period, Harken
Colombia shall have the right without the consent of Investors to release,
surrender and/or abandon its interest in the Subject Interests and/or the
Association Contract, or any part thereof, or interest therein, even though the
effect of such release, surrender or abandonment may be to affect adversely the
Rio Negro NPI; provided, however, that (a) Investors' interest in the Rio Negro
NPI shall automatically be converted into Preferred Shares pursuant to Article
VI if, within two years after the expiration of the Commitment Period, Harken
Colombia has released, surrendered and/or abandoned any portion of its interest
in the Subject Interests and/or the Association Contract other than that
required to be released, surrendered and/or abandoned for Harken Colombia to
comply with the terms and conditions of the Association Contract and if Article
VI shall otherwise then be applicable and (b) during the Commitment Period,
Harken Colombia shall have the right without the consent of Investors to
release, surrender and/or abandon that portion of the Subject Interests as
shall be necessary for Harken Colombia to comply with the terms and conditions
of the Association Contract.
Section 3.15. Pooling and Unitization. Without the prior written
consent of Investors, Harken Colombia shall have the right and power to
unitize, pool or combine the lands covered by the Subject Interests, or any
portion or portions thereof, as to oil, gas and/or other minerals, with any
other land or contract or contracts so as to create one or more unitized areas
(or, with respect to unitized or pooled areas theretofore created, to dissolve
the same or to amend and/or reconfigure the same to include additional acreage
or substances or to exclude acreage or substances); provided, however, that
Owner shall not permit Harken Colombia to unitize, pool or combine the lands
covered by the Subject Interests, or any portion or portions thereof, if the
effect thereof is to benefit Harken Colombia or any of its Affiliates to the
detriment of the
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Investors. If any of the Subject Interests are pooled or unitized in any
manner, the Rio Negro NPI insofar as it affects such Subject Interest shall be
considered to be pooled and unitized, and in any such event the Rio Negro NPI
shall apply to (and the term "Subject Hydrocarbons" shall include) the
production which accrues to such Subject Interest under and by virtue of such
pooling and unitization arrangements and the Account shall be computed giving
consideration to such production and costs, expenses, charges and credits
attributable to such Subject Interest.
Section 3.16. Non-consent Operations.
(a) If Harken Colombia elects to be a non-participating
party (whether pursuant to the Association Contract or an operating
agreement or other agreement or requirement) with respect to any
drilling, deepening, plugging back, reworking, sidetracking or
completion (or other) operation on any Subject Interest or elects to
be an abandoning party with respect to a well located on any Subject
Interest, the consequence of which election is that Harken Colombia's
interest in such Subject Interest or part thereof is temporarily
(i.e., during a recoupment period) or permanently forfeited to the
parties participating in such operations, or electing not to abandon
such well, then the costs and proceeds attributable to such forfeited
interest shall not, for the period of such forfeiture (which may be a
continuous and permanent period), be debited or credited to the
Account and such forfeited interest shall not, for the period of such
forfeiture, be subject to the Rio Negro NPI.
(b) If Harken Colombia elects to be a participating party
to such a drilling, deepening, plugging back, reworking, sidetracking
or completing (or other) operation, or elects to be a non-abandoning
party with respect to such a well, and any other party or parties have
elected not to participate in such operation (or have elected to
abandon such well) with the result that (pursuant to the Association
Contract or an operating agreement or other agreement or requirement)
Harken Colombia becomes entitled to receive, either temporarily (i.e.,
through a period of recoupment) or permanently, interests belonging to
such other party or parties, the costs and proceeds attributable to
such non-participating parties' interests to which Harken Colombia
becomes so entitled shall not be debited and credited to the Account
and instead shall be for the account of Harken Colombia.
Section 3.17. No Personal Liability; Indemnification.
Notwithstanding anything to the contrary contained in this Agreement, Investors
shall never personally be responsible for payment of any part of the costs,
expenses or liabilities incurred in connection with the exploring, developing,
operating, owning and/or maintaining of the Subject Interests or the
Association Contract (including without limitation, any costs, expenses or
liabilities related to damage to or remediation of the environment, including
any of the same arising out of ownership of an interest in property), and Owner
agrees to indemnify and hold Investors harmless from and against all such
costs, expenses and liabilities (with such indemnity to also cover all costs
and expenses of Investors, including reasonable legal fees and expenses, which
are incurred incident to the matters indemnified against); provided, however,
all such costs and expenses shall, to the extent the same
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relate to periods after the Effective Date, nevertheless be charged against the
Account if such costs and expenses are expressly permitted elsewhere in this
Agreement to be charged to the Account. The foregoing indemnifications shall
extend to Investors and their successors and assigns, all their respective
affiliates and all their respective officers, directors, agents, attorneys and
employees. THE FOREGOING INDEMNITIES SHALL APPLY WHETHER OR NOT ARISING OUT OF
THE SOLE, JOINT OR CONCURRENT NEGLIGENCE, FAULT OR STRICT LIABILITY OF
INVESTORS OR ANY OTHER PERSON OR ENTITY INDEMNIFIED HEREUNDER AND SHALL APPLY,
WITHOUT LIMITATION, TO ANY LIABILITY IMPOSED UPON ANY PERSON INDEMNIFIED
HEREUNDER AS A RESULT OF ANY STATUTE, RULE, REGULATION, THEORY OF STRICT
LIABILITY OR OTHERWISE.
Section 3.18. Assignment by Harken Colombia or Owner.
(a) Without the prior written consent of Investors (which
consent shall not be unreasonably withheld), Harken Colombia shall not
assign, sell, transfer, convey, mortgage or pledge the Association
Contract or the Subject Interests; provided, however, that Harken
Colombia shall be permitted (i) to assign or otherwise transfer all or
part of its interest in the Association Contract and the Subject
Interests to an Affiliate of Owner for so long as such assignee shall
remain an Affiliate of Owner and provided that Owner shall remain
personally obligated for its duties and obligations hereunder, and
(ii) to assign, sell, transfer, convey, mortgage or pledge at any time
to any person a portion of Harken Colombia's interest in the
Association Contract and the Subject Interests if after any such
assignment, sale, transfer, conveyance, mortgage or pledge the product
of (A) the percentage interest in the Association Contract and the
Subject Interests which would then be owned by Harken Colombia and not
mortgaged or pledged, multiplied by (B) the percentage of the
outstanding shares of capital stock of Harken Colombia that is then
owned by Owner and is not mortgaged or pledged, shall equal or exceed
the sum of the total Designated Percentage of all Investors at the
time in effect plus 10%, and provided that Harken Colombia shall
remain the operator of record of the Subject Interests.
(b) Without the prior written consent of Investors (which
consent shall not be unreasonably withheld), (i) Owner shall not
assign, sell, transfer, convey, mortgage or pledge any shares of stock
of Harken Colombia owned by it, nor shall Owner cause or allow Harken
Colombia to merge or consolidate with any other Person, unless Harken
Colombia shall be the surviving Person resulting from such merger or
consolidation and (ii) Harken Colombia shall not issue any additional
shares of capital stock or any securities convertible into or
exchangeable for shares of capital stock to any person other than
Owner; provided, however, that in any such case Owner shall be
permitted (A) to assign or otherwise transfer all or part of its
shares of capital stock in Harken Colombia, or permit Harken Colombia
to issue additional shares of its capital stock, to an Affiliate of
Owner for so long as such assignee shall remain an Affiliate of Owner
and provided that Owner shall remain personally obligated for its
duties and obligations hereunder, and (B) to assign, sell, transfer,
convey, mortgage or pledge at any time to any person a portion of the
capital stock of Harken Colombia if after any such assignment, sale,
transfer,
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conveyance, mortgage or pledge the product of (1) the percentage of
the outstanding shares of capital stock of Harken Colombia which would
then be owned by Owner and not mortgaged or pledged, multiplied by (2)
the percentage interest in the Association Contract and the Subject
Interests which is then owned by Harken Colombia and is not mortgaged
or pledged, shall equal or exceed the sum of the total Designated
Percentage of all Investors at the time in effect plus 10%.
Section 3.19. Assignment by Investors. Investors shall have the
right to freely assign any or all of the Rio Negro NPI to any person who is an
Accredited Investor within the meaning of the Securities Act; provided that in
no event shall the Rio Negro NPI be assigned to more than five persons at any
time.
Section 3.20. Access to Books and Records. In addition to any
reports and information specifically required by the terms of this Agreement,
Owner agrees to furnish to Investors full information pertaining to the
operation of the Subject Interests, at all reasonable times, and in such form,
as Investors may reasonably request. Subject to any restrictions on Harken
Colombia's right to do so under the Association Contract or applicable
operating agreements or similar contracts, Owner will cause Harken Colombia to
permit representatives designated by Investors, including independent
accountants, agents, attorneys, and other persons, to visit and inspect the
Subject Interests and Owner's and Harken Colombia's books and records
pertaining to the Subject Interests and the Account (and to make copies and
photocopies from such records and to write down and record such information as
such representatives may request), and Owner and Harken Colombia shall permit
Investors and their designated representatives reasonably to investigate and
verify the accuracy of information furnished to Investors hereunder or in
connection herewith and to discuss all such matters with their officers,
employees and representatives. During the Commitment Period, Owner shall
deliver to Investors copies of all definitive public reports and registration
statements filed by Owner with the Securities and Exchange Commission and all
reports and proxy material furnished to holders of common stock of Owner, in
each case promptly after such reports, statements and material are so filed or
furnished.
ARTICLE IV
Investors Conversion
Owner hereby grants to Investors the option (herein called the
"Investors' Option") to convert all or part of Investors' interest in the Rio
Negro NPI into Preferred Shares on the following terms and conditions (herein
called "Conversion"):
Section 4.1. Exercise of Investors' Option. The Investors' Option
can only be exercised by the delivery to Owner within the Commitment Period of
a written notice stating that Investors thereby elect to exercise the
Investors' Option and specifying the percentage of the Rio Negro NPI that
Investors desire to convert into Preferred Shares. If such notice is not
delivered to Owner
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within the Commitment Period, the Investors' Option shall terminate and
Investors shall have no further right or option to convert the Rio Negro NPI
into Preferred Shares pursuant to the Investors' Option. Investors can only
exercise the Investors' Option once during the Commitment Period.
Section 4.2. Number of Preferred Shares. The number of Preferred
Shares to be issued to each Investor upon Conversion pursuant to this Article
IV shall be determined pursuant to the following formula:
PS = (AV x CP) / PV
where, for purposes of this Article IV:
"PS" shall mean the number of Preferred Shares to be issued upon
Conversion.
"AV" shall mean the remainder of (a) the aggregate amount of the
Advances previously made by such Investor pursuant to Article
II minus (b) the aggregate amount of the payments received by
such Investor pursuant to Section 3.7, together with an amount
equal to interest on the positive balance of such remainder as
it exists from time to time at the rate of fifteen percent
(15%) per annum, compounded semi-annually.
"CP" shall mean the percentage of the Rio Negro NPI that Investors
have elected to convert into Preferred Shares pursuant to this
Article IV.
"PV" shall mean $1,000, the liquidation value of each Preferred
Share.
"Conversion Date" shall mean, with respect to any Conversion pursuant
to this Article IV, the date of receipt by Owner of Investors'
notice delivered pursuant to Section 4.1.
The number of Preferred Shares determined pursuant to such formula shall be
rounded up or down to the next whole number, and no fractional Preferred Shares
shall be issued. If any Advance is made after Conversion, the amount of
Preferred Shares to be issued with respect to such Conversion shall be
increased by an amount equal to the amount of such Advance divided by the PV,
and any such additional Preferred Shares shall be promptly delivered to such
Investor.
Section 4.3. Issuance of Preferred Shares. The closing and
consummation of any Conversion pursuant to this Article IV shall occur not
later than five Business Days following the Conversion Date. At such closing,
Owner shall issue or cause to be issued to Investors the number of Preferred
Shares required for such Conversion pursuant to Section 4.2.
Section 4.4. Reduction of Designated Percentage. As of the
Conversion Date, the Designated Percentage for each Investor shall be reduced
by subtracting therefrom the product of
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the CP and the Designated Percentage listed opposite such Investor's name on
Annex 1 hereto. If all of the Rio Negro NPI has been converted into Preferred
Shares upon Conversion, the Rio Negro NPI shall terminate and no payments shall
be made to Investors with respect to the Rio Negro NPI pursuant to Section 3.7
or otherwise. If less than all of the Rio Negro NPI has been so converted, all
payments from and after the Conversion Date made by Owner to Investors pursuant
to Section 3.7 shall be made based on the Designated Percentage as reduced in
accordance with this Section.
ARTICLE V
Owner Conversion
Investors hereby grant to Owner the option (herein called the "Owner's
Option") exercisable within ten Business Days after the Commitment Period to
convert seventy-five percent (75%) of Investors' interest in the Rio Negro NPI
into Preferred Shares on the terms and conditions set forth below; provided,
however, that if Conversion of less than one hundred percent (100%) of the Rio
Negro NPI has occurred pursuant to Article IV, the percentage of the Rio Negro
NPI that shall be converted to Preferred Shares pursuant to Owner's Option
shall be the lesser of (a) seventy-five percent (75%) of the original amount of
the Rio Negro NPI or (b) the percentage of the original amount of the Rio Negro
NPI that has not been converted to Preferred Shares pursuant to Article IV.
Owner hereby grants to Investors the option (herein called the "Investors'
Second Option") to convert the remainder of Investors' interest in the Rio
Negro NPI (i.e., that amount that otherwise would be owned by Investors after
exercise of the Owner's Option) into Preferred Shares on the terms and
conditions set forth below if Owner exercises the Owner's Option. The
conversion of all or part of Investors' interest in the Rio Negro NPI into
Preferred Shares pursuant to this Article V is also herein called "Conversion".
Section 5.1. Exercise of Owner's Option. The Owner's Option can only
be exercised by the delivery to Investors (within ten Business Days after the
Commitment Period) of a written notice stating that Owner thereby elects to
exercise the Owner's Option. If such notice is not delivered to Investors
within ten Business Days after the Commitment Period, the Owner's Option shall
terminate and Owner shall have no further right or option to convert the Rio
Negro NPI into Preferred Shares. Owner can only exercise the Owner's Option
once within the ten Business Days after the Commitment Period and only with
respect to the percentage described in the first sentence of this Article V.
Section 5.2. Exercise of Investors' Second Option. The Investors'
Second Option can only be exercised by the delivery to Owner (within a period
of fifteen days following the date of receipt by Investors of Owner's written
notice of exercise of Owner's Option pursuant to Section 5.1) of a written
notice stating that Investors thereby elect to exercise the Investors' Second
Option. If such notice is not delivered to Owner within such fifteen-day
period, the Investors' Second Option shall terminate and Investors shall have
no further right or option to convert the
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Rio Negro NPI into Preferred Shares pursuant to the Investors' Second Option.
Investors can only exercise the Investors' Second Option once during such
fifteen-day period and only with respect to the remainder of Investors'
interest in the Rio Negro NPI.
Section 5.3. Number of Preferred Shares. The number of Preferred
Shares to be issued to each Investor upon Conversion pursuant to this Article V
shall be determined pursuant to the following formula:
PS = (AV x CP) / PV
where, for purposes of this Article IV:
"PS" shall mean the number of Preferred Shares to be issued upon
Conversion.
"AV" shall mean the remainder of (a) the aggregate amount of the
Advances previously made by such Investor pursuant to Article
II minus (b) the aggregate amount of the payments received by
such Investor pursuant to Section 3.7, together with an amount
equal to interest on the positive balance of such remainder as
it exists from time to time at the rate of twenty-five percent
(25%) per annum, compounded semi-annually.
"CP" shall mean (a) if Investors have not exercised the Investors'
Second Option, seventy-five percent (75%) or, if Conversion of
less than one hundred percent (100%) of the Rio Negro NPI has
occurred pursuant to Article IV, the lesser of (i)
seventy-five percent (75%) or (ii) one hundred percent (100%)
minus the percentage of the original amount of the Rio Negro
NPI that was converted to Preferred Shares pursuant to Article
IV, or (b) if Investors have exercised the Investors' Second
Option, the remainder of one hundred percent (100%) minus the
percentage (if any) of the original amount of the Rio Negro
NPI that was converted to Preferred Shares pursuant to Article
IV.
"PV" shall mean $1,000, the liquidation value of each Preferred
Share.
"Conversion Date" shall mean, with respect to any Conversion pursuant
to this Article V, the date of receipt by Investors of Owner's
notice delivered pursuant to Section 5.1.
The number of Preferred Shares determined pursuant to such formula shall be
rounded up or down to the next whole number, and no fractional Preferred Shares
shall be issued. If any Advance is made after Conversion, the amount of
Preferred Shares to be issued with respect to such Conversion shall be
increased by an amount equal to the amount of such Advance divided by the PV,
and any such additional Preferred Shares shall be promptly delivered to such
Investor.
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Section 5.4. Issuance of Preferred Shares. The closing and
consummation of any Conversion pursuant to this Article V shall occur not later
than five Business Days following the earlier of (a) the date of receipt by
Owner of Investors' notice (if any) delivered pursuant to Section 5.2 and (b)
the expiration of the fifteen-day period provided for in Section 5.2. At such
closing, Owner shall issue or cause to be issued to each Investor the number of
Preferred Shares required for such Conversion pursuant to Section 5.3.
Section 5.5. Reduction of Designated Percentage. As of the
Conversion Date, the Designated Percentage for each Investor (as reduced
pursuant to Section 4.4, if applicable) shall be reduced by subtracting
therefrom the product of the CP and the Designated Percentage listed opposite
such Investors' name on Annex 1 hereto. If all of the Rio Negro NPI has been
converted into Preferred Shares upon Conversion, the Rio Negro NPI shall
terminate and no payments shall be made to Investors with respect to the Rio
Negro NPI pursuant to Section 3.7 or otherwise. If less than all of the Rio
Negro NPI has been so converted, all payments from and after the Conversion
Date made by Owner to Investors pursuant to Section 3.7 shall be made based on
a Designated Percentage as reduced in accordance with this Section.
Section 5.6. Investors' Cash Option. Investors shall have the
additional option to receive cash rather than Preferred Shares upon any
Conversion pursuant to this Article V. The amount of cash to be received in
lieu of Preferred Shares shall be equal to the aggregate liquidation value of
the Preferred Shares that would otherwise have been issued to Investors upon
such Conversion as calculated pursuant to Section 5.3. The option of Investors
provided for in this Section can only be exercised by delivery to Owner (within
a period of fifteen days following the date of receipt by Investors of Owner's
written notice of exercise of Owner's Option pursuant to Section 5.1) of a
written notice stating that Investors thereby elect to exercise the option
provided for in this Section. If such notice is not delivered to Owner within
such fifteen-day period, the Investors' cash option provided for in this
Section shall terminate and Investors shall have no further right or option to
receive cash rather than Preferred Shares upon any Conversion pursuant to this
Article V.
Section 5.7. Payment of Cash Option. The closing and consummation
of the exercise of Investors' cash option pursuant to Section 5.6 shall occur
not later than five Business Days following the earlier of (a) the date of
receipt by Owner of Investors' notice (if any) delivered pursuant to Section
5.6 and (b) the expiration of the fifteen-day period provided for in Section
5.2. At such closing, Owner shall pay or cause to be paid to Investors the
amount of cash determined in accordance Sections 5.3 and 5.6.
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ARTICLE VI
Automatic Conversion
Section 6.1. Conversion Upon Abandonment. If, within two years
after the expiration of the Commitment Period, Harken Colombia exercises its
right pursuant to Section 3.14 to abandon any portion of the Subject Interests
and/or the Association Contract other than that required to be released,
surrendered and/or abandoned for Harken Colombia to comply with the terms and
conditions of the Association Contract and, at such time, the interest so
released, surrendered and/or abandoned by Harken Colombia contains material
proved reserves which hereafter are discovered as described below and are
capable of being developed and/or produced in a commercially reasonable manner
considering all relevant circumstances, any interest of Investors in the Rio
Negro NPI which has not been previously converted pursuant to Investors'
Option, Owner's Option or Investors' Second Option shall automatically be
converted into Preferred Shares pursuant to this Article VI. The conversion of
Investors' interest in the Rio Negro NPI into Preferred Shares pursuant to this
Article VI is also herein called "Conversion" and is intended to compensate the
Investors in the event Owner and/or Harken Colombia is unable or unwilling to
develop and/or produce a commercial discovery on the Subject Interests that was
discovered by a well drilled by Harken Colombia on the Subject Interests after
the date of this Agreement and that a prudent operator would develop and/or
produce.
Section 6.2. Notice of Abandonment. Not less than fifteen days
prior to any release, surrender and/or abandonment of the Subject Interests
and/or the Association Contract pursuant to Section 3.14 other than that
required to be released, surrendered and/or abandoned for Harken Colombia to
comply with the terms and conditions of the Association Contract, Owner shall
deliver to Investors a notice stating that Owner has determined to release,
surrender and/or abandon the Subject Interests and/or the Association Contract
and whether or not the Investors' remaining interest in the Rio Negro NPI shall
be automatically converted into Preferred Shares effective the date of such
release, surrender and/or abandonment pursuant to this Article VI.
Section 6.3. Number of Preferred Shares. The number of Preferred
Shares to be issued to each Investor upon Conversion pursuant to this Article
VI shall be determined pursuant to the following formula:
PS = (AV x CP) / PV
where, for purposes of this Article VI:
"PS" shall mean the number of Preferred Shares to be issued upon
Conversion.
"AV" shall mean the remainder of (a) the aggregate amount of the
Advances previously made by such Investor pursuant to Article
II minus (b) the aggregate amount of the payments received by
such Investor pursuant to Section 3.7, together with an
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amount equal to interest on the positive balance of such
remainder as it exists from time to time at the rate of
fifteen percent (15%) per annum, compounded semi-annually.
"CP" shall mean the remainder of one hundred percent (100%) minus
the percentage (if any) of the original amount of the Rio
Negro NPI that has been converted to Preferred Shares pursuant
to Articles IV and V.
"PV" shall mean $1,000, the liquidation value of each Preferred
Share.
"Conversion Date" shall mean, with respect to any Conversion pursuant
to this Article VI, the date stated on the notice delivered to
Investors pursuant to Section 6.2 as the date the Subject
Interests and/or the Association Contract will be abandoned.
The number of Preferred Shares determined pursuant to such formula shall be
rounded up or down to the next whole number, and no fractional Preferred Shares
shall be issued.
Section 6.4. Issuance of Preferred Shares. The closing and
consummation of any Conversion pursuant to this Article VI shall occur not
later than five Business Days following the Conversion Date. At such closing,
Owner shall issue or cause to be issued to each Investor the number of
Preferred Shares required for such Conversion pursuant to Section 6.3.
Section 6.5. Elimination of Designated Percentage. As of the
Conversion Date, the Designated Percentage for each Investor will be reduced to
zero, and the Rio Negro NPI shall terminated and no payments shall be made to
Investors with respect to the Rio Negro NPI pursuant to Section 3.7 or
otherwise.
ARTICLE VII
Owner Representations, Warranties and Agreements
Owner hereby represents and warrants to, and covenants and agrees
with, Investors as follows:
Section 7.1. Organization and Corporate Authority. Each of Owner and
Harken Colombia is a corporation duly incorporated, validly existing and in
good standing under the laws of the jurisdiction of its incorporation, with
corporate power and authority to carry on its business as now conducted and to
own, lease and operate all properties and assets now owned, leased or operated
by it.
Section 7.2. Qualification to do Business. Each of Owner and Harken
Colombia is duly qualified to do business as a foreign corporation and in good
standing in each jurisdiction in which
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its ownership of property or the conduct of its business requires such
qualification, except jurisdictions in which the failure so to qualify would
not have a material adverse effect on Owner's or Harken Colombia's business,
properties, financial condition or results of operations.
Section 7.3. Charter, Bylaws, Etc.. Owner has caused to be delivered
to Investors true, correct and complete copies of the charter and bylaws of
Owner and Harken Colombia as now in effect and the minutes of all meetings of
Owner's and Harken Colombia's Board of Directors (and all consents in lieu of
such meetings) at which action was taken concerning the execution and delivery
of this Agreement or the authorization, execution, delivery and performance of
the Association Contract.
Section 7.4. Capitalization. The authorized capital stock of
Owner consists of 100,000,000 shares of common stock, par value $.01 per share
("Common Stock"), of which 65,759,681 are issued and outstanding, and
10,000,000 shares of preferred stock, par value $1.00 per share, of which there
are 186,760 shares of Series C Cumulative Convertible Preferred Stock issued
and outstanding. Owner has 30,067,823 shares of Common Stock reserved for
issuance upon exercise of stock options, warrants and other rights to acquire
shares of Common Stock and holds 5,983, 655 shares of Common Stock as treasury
shares. All of the outstanding shares of capital stock of Owner are duly
authorized, validly issued, fully paid, nonassessable and free of preemptive
rights, with no personal liability attaching to the ownership thereof. Except
for the foregoing, there are no outstanding subscriptions, options, warrants,
rights, convertible securities or other agreements or commitments of any
character obligating Owner to purchase, redeem, issue, transfer or deliver any
shares of preferred stock.
Section 7.5. Finders' Fees. Except for EnCap Investments L.C., no
broker or finder has acted on behalf of Owner in connection with this Agreement
or the transactions contemplated herein. Any and all fees of EnCap Investments
L.C. in connection with this Agreement and the transactions contemplated herein
will be paid by Owner.
Section 7.6. Authority of Owner. Owner has the corporate power to
enter into, and be bound by the terms and conditions of, this Agreement and to
carry out its obligations hereunder, and the execution and delivery by Owner of
this Agreement and the performance by Owner of its obligations hereunder have
been duly authorized by all necessary corporate action of Owner. This
Agreement has been duly executed and delivered by Owner and constitutes, and
each other agreement or document executed or to be executed by Owner in
connection with the transactions contemplated hereby has been, or when
executed, will be, duly executed and delivered by Owner and constitutes, or
when executed and delivered will constitute, a valid and legally binding
obligation of Owner enforceable against Owner in accordance with their
respective terms, except to the extent enforcement may be limited (a) by
applicable bankruptcy, insolvency, moratorium, reorganization or similar laws
from time to time in effect which affect creditors' rights generally, and (b)
by legal and equitable limitations on the availability of equitable remedies,
including without limitation specific performance against Owner under or by
virtue of this Agreement.
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Section 7.7. Non-Contravention. The execution, delivery and
performance of this Agreement and the issuance of the Preferred Shares by Owner
in accordance with this Agreement will not, (a) conflict with or result in a
violation of any provision of Owner's charter or bylaws, (b) conflict with or
result in a violation of any provision of, or constitute (with or without the
giving of notice or the passage of time or both) a default under, or give rise
(with or without the giving of notice or the passage of time or both) to any
right of termination, cancellation, or acceleration under, any bond, debenture,
note, mortgage, indenture, lease, agreement or other instrument or obligation
to which Owner or Harken Colombia is a party or by which either of them or any
of their properties or assets may be bound, (c) result in the creation or
imposition of any lien or incumbrance upon the properties or assets of Owner or
Harken Colombia, or (d) result in a violation by Owner or Harken Colombia of
any Law or any judgment, order, decree, rule or regulation of any Governmental
Authority to which Owner or Harken Colombia is subject. Owner represents,
warrants and covenants that it will not, and it will cause its subsidiaries not
to, during the Commitment Period, enter into any bond, debenture, note,
mortgage, indenture, lease, agreement or other instrument or obligation which
would contractually restrict or otherwise prohibit Owner from complying with
its obligations under this Agreement to issue Preferred Shares, to pay cash to
the Investors pursuant to Section 5.6 or with respect to similar matters or
which would contractually restrict or otherwise prohibit Conversion under this
Agreement.
Section 7.8. Governmental Consents. Except for those that have been
duly obtained and except for routine filings and orders that may be required
under Regulation D promulgated under the Securities Act or under any applicable
state securities or Blue Sky laws in connection with future issuance of
Preferred Shares upon Conversion, no consent, order, approval or authorization
of, or declaration, filing, or registration with, any Governmental Authority is
required to be obtained or made by Owner in connection with the execution,
delivery or performance by Owner of this Agreement.
Section 7.9. Reports and Financial Statements of Owner. Owner has
filed all registration statements, proxy statements, reports and other
documents required to be filed by it under the Securities Act or the Exchange
Act, and all amendments thereto. Owner has heretofore delivered to Investors
true and complete copies of all reports, registration statements and other
filings made by Owner with the Securities and Exchange Commission during the
prior fifteen (15) months (herein collectively called "Owner's SEC Filings").
As of their respective dates, Owner's SEC Filings did not contain any untrue
statement of a material fact or omit to state a material fact required to be
stated therein or necessary to make the statements therein, in light of the
circumstances under which they were made, not misleading. Owner does not have
any debts, liabilities, or obligations, whether accrued, contingent, unasserted
or otherwise, and whether due or to become due, which are not reflected in the
financial statements contained in Owner's SEC Filings and would be required to
be so reflected under GAAP, except those incurred in the ordinary course of
business since the date of the most recent audited financial statements
contained in Owner's SEC Filings. Since such date and except as otherwise
disclosed in Owner's SEC Filings, Owner has conducted its business in the
ordinary course consistent with past practice and there has not been any
material adverse change in the business, assets, liabilities, results of
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operations, financial condition or prospects of Owner or in its relationship
with lenders, suppliers, customers, employees or others, whether such changes
have incurred in the ordinary course of business or otherwise.
Section 7.10. Disclosure. Owner has fully provided Investors with
all the information that Investors have requested in writing in connection with
the transactions provided for in this Agreement. All such written information
has been prepared in good faith by Owner and does not contain any untrue
statement of a material fact or, considered in its entirety along with Owner's
SEC Filings, omit to state therein a material fact necessary to make the
statements made therein not misleading. Owner does not know of any facts
(other than those facts generally recognized to be industry risks normally
associated with the oil and gas business) related to its properties, business,
financial condition or results of operations which have not been disclosed
orally or in writing to Investors and which presently or will materially and
adversely affect such properties, business, financial condition or results of
operations or the ability of Owner to perform its obligations under this
Agreement.
Section 7.11. Certificate of Designations. The Certificate of
Designations has been duly adopted by the Board of Directors of Owner in
accordance with Section 151 of the Delaware General Corporation Law, has been
duly filed with the Secretary of State of Delaware so as to constitute a valid
amendment to the Certificate of Incorporation of Owner and is in full force and
effect, and no action of Owner's stockholders was necessary in respect to the
adoption of the Certificate of Designations. Owner shall not amend,
supplement, terminate or otherwise modify the Certificate of Designations
during or within two years after the Commitment Period or, if any Preferred
Shares are issued pursuant to this Agreement, thereafter, except in accordance
with such Certificate of Designations and applicable Delaware law.
Section 7.12. Owner's Preferred Shares. The Preferred Shares that
may be issued to Investors upon Conversion have been duly authorized for such
issuance pursuant to this Agreement and, when issued and delivered by Owner
upon Conversion, will be validly issued, fully paid and non-assessable. The
issuance of Preferred Shares under this Agreement is not subject to any
preemptive rights. Owner shall at all times reserve and keep available, out of
its authorized and unissued stock, solely for the purpose of Articles IV, V and
VI, such number of Preferred Shares as shall from time to time be sufficient
for Owner to comply with its obligations under Articles IV, V and VI upon any
Conversion.
Section 7.13. Association Contract. English translations of the
Association Contract in force as of the date hereof have been furnished by
Owner to Investors. Each of such translations is a fair and reasonable
translation of the original document constituting part of the Association
Contract. The Association Contract and any related agreements are in full
force and effect as of the date hereof. Harken Colombia has complied in all
respects with its obligations under or relating to the Association Contract and
any related agreements, and no claim or penalty presently exists with respect
to the Association Contract and any related agreements between Harken Colombia
and Ecopetrol or any other governmental entity, agency or authority and, to the
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knowledge of Owner, no other party to the Association Contract is presently in
default thereunder. Owner and Harken Colombia have obtained all consents
required on or prior to the date hereof which may be necessary for the
performance of the Association Contract and any related agreements. Owner
warrants ownership and title to the Association Contract against all persons
free and clear of all liens, claims or other encumbrances. Without the prior
written consent of Investors, Owner shall not, and shall not permit Harken
Colombia to, amend, alter or supplement the Association Contract in any manner
which would adversely affect Investors' interest in the Subject Interest or
Investors' rights under this Agreement if such amendment, alternation or
supplement would benefit Owner or Harken Colombia to the detriment of
Investors.
Section 7.14. Ownership of Harken Colombia. All of the issued and
outstanding shares of capital stock of Harken Colombia have been duly and
validly issued, are fully paid and nonassessable and are owned by Owner, free
and clear of all liens, encumbrances, equities or claims, and no options,
warrants or other rights to purchase, agreements or other obligations to issue
or other rights to convert any obligations into shares of capital stock or
ownership interests in Harken Colombia are outstanding.
Section 7.15. Absence of Bankruptcy Proceedings. There are no
bankruptcy, reorganization or arrangement proceedings pending against, being
contemplated by, or to the knowledge of Owner, threatened against, Owner.
Section 7.16. Offering. Subject to the accuracy of Investors'
representations in Sections 8.6 and 8.8, the offer, sale and issuance of the
Preferred Shares as contemplated by this Agreement is and will be exempt from
the registration requirements of the Securities Act and the securities laws of
any state having jurisdiction with respect to the transactions contemplated by
this Agreement, and neither Owner nor anyone acting on its behalf has taken or
will take any action that would cause the loss of such exemption.
Section 7.17. No Defaults. Neither Owner nor Harken Colombia is (a)
in violation of any provision of its charter or bylaws, (b) in breach,
violation or default, in any material respect, of or under any material
contract, lease, commitment or instrument to which it is a party or by which it
is bound or to which any of its properties or assets are subject, and no event
has occurred which (whether with or without notice, lapse of time or the
happening or occurrence of any other event) would constitute such a breach,
violation or default or (c) in material violation of any Law.
Section 7.18. Litigation. There is no action, suit, proceeding or
investigation pending or, to the knowledge of Owner, threatened against or
affecting Owner or Harken Colombia or any properties or rights of any of them
by or before any Governmental Authority that (i) relates to or challenges the
legality of this Agreement, the Association Contract or the Preferred Shares,
(ii) would reasonably be expected to have a material adverse effect upon the
business, properties, financial condition, results of operations or prospects
of Owner or Harken Colombia (except as disclosed in Owner's SEC filings) or
(iii) would reasonably be expected to impair the ability of
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Owner or Harken Colombia to perform fully on a timely basis any obligations
that it has under this Agreement, the Association Contract or any documents
related hereto.
Section 7.19. Compliance with Laws. Owner and Harken Colombia are in
compliance in all material respects with all laws and regulations in all
jurisdictions in which Owner or Harken Colombia is presently doing business and
where the failure to effect such compliance would reasonably be expected to
have a material adverse effect upon the business, properties, financial
condition, results of operations or prospects of Owner or Harken Colombia.
Section 7.20. Compliance with Environmental Laws. The business and
properties of Owner and Harken Colombia have been operated in compliance with
all applicable federal, state or local laws, rules, regulations or orders
(collectively, "Environmental Laws") relating to pollution or protection of the
environment including, without limitation, any law, rule, regulation or order
relating to emissions, discharges, releases or threatened releases ("Releases")
of chemicals, pollutants, contaminants, wastes, petroleum or petroleum
products, toxic substances or hazardous substances ("Pollutants") for which
noncompliance would have a material adverse effect upon the business,
properties, financial condition or result of operations of Owner or Harken
Colombia. Except as disclosed in Owner's SEC Filings, neither Owner nor
Harken Colombia has received any written communication, whether from a
Governmental Authority, citizens' group, landowner, employee or otherwise, nor,
to the knowledge of Owner, has Owner or Harken Colombia received any oral
communication from a Governmental Authority, alleging that (i) Owner or Harken
Colombia is not in compliance with any Environmental Law applicable to it and
its business and properties, or (ii) any employee or third party has suffered
bodily injury or property damage as a result of one or more Releases of
Pollutants arising out of or resulting from the operations of Owner, Harken
Colombia, or prior owners and operators of their business or property, which
allegation, if true, would have a material adverse effect upon the business,
properties, financial condition or result of operations of Owner or Harken
Colombia. Except as disclosed in Owner's SEC Filings, neither Owner nor Harken
Colombia has any material obligation to remediate, repair or replace any
property, whether real or personal, owned by Owner, Harken Colombia or any
third party, as a result of one or more Releases of Pollutants arising out of
or resulting from the operations of Owner, Harken Colombia, or prior owners and
operators of their business or properties.
Section 7.21. Continuing Representations and Warranties. Except for
a change of law over which Owner has no control (and Owner shall immediately
notify Investors when Owner learns of such occurrence), the representations and
warranties of Owner made in Sections 7.1, 7.2, 7.3, 7.5, 7.6, 7.11, 7.12 and
7.16, in the last sentences of Section 7.7 and 7.13 and in Section 7.14
(provided that Owner shall have the right to pledge and/or grant a security
interest in its shares of capital stock of Harken Colombia to the extend
permitted in Section 3.18) shall remain true and accurate during and for two
years after the Commitment Period, and Owner shall not take any action nor
permit any action to be taken which would cause any of such representations and
warranties to become untrue, inaccurate or breached. Owner acknowledges and
agrees that Investors may rely on this Section in connection with any election
of Investors' Option or Investors'
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Second Option and agrees to take all action in connection therewith required to
cause Investors' representations and warranties contained in Section 8.7 to be
true and correct at the time of any such election.
ARTICLE VIII
Investors Representations, Warranties and Agreements
Each Investor hereby severally represents and warrants to, and
covenants and agrees with, Owner as follows:
Section 8.1. Organization and Corporate Authority. Each Investor is
a limited partnership duly organized, validly existing and in good standing
under the laws of the state of its organization, with requisite power and
authority to carry on its business as now conducted and to own, lease and
operate all properties and assets now owned, leased or operated by it.
Section 8.2. Finders' Fees. No broker or finder has acted on behalf
of Investors in connection with this Agreement or the transactions contemplated
herein.
Section 8.3. Authority of Investor. Each Investor is authorized to
enter into, and be bound by the terms and conditions of, this Agreement and to
carry out its obligations hereunder, and the execution and delivery by such
Investor of this Agreement and the performance by such Investor of its
obligations hereunder have been duly authorized by all requisite partnership
action of such Investor. This Agreement has been duly executed and delivered
by each Investor and constitutes, and each other agreement or document executed
or to be executed by such Investor in connection with the transactions
contemplated hereby has been, or when executed, will be, duly executed and
delivered by such Investor and constitutes, or when executed and delivered will
constitute, a valid and legally binding obligation of such Investor enforceable
against such Investor in accordance with their respective terms, except to the
extent enforcement may be limited (a) by applicable bankruptcy, insolvency,
moratorium, reorganization or similar laws from time to time in effect which
affect creditors' rights generally, and (b) by legal and equitable limitations
on the availability of equitable remedies, including without limitations
specific performance against Investors under or by virtue of this Agreement.
Section 8.4. Non-Contravention. The execution, delivery and
performance of this Agreement by each Investor will not, (a) conflict with or
result in a violation of any provision of such Investor's partnership
agreement, (b) conflict with or result in a violation of any provision of, or
constitute (with or without the giving of notice or the passage of time or
both) a default under, or give rise (with or without the giving of notice or
the passage of time or both) to any right of termination, cancellation, or
acceleration under, any bond, debenture, note, mortgage, indenture, lease,
agreement or other instrument or obligation to which such Investor is a party
or by which it or any of its properties or assets may be bound, (c) result in
the creation or imposition
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of any lien or incumbrance upon the properties or assets of such Investor, or
(d) result in a violation by such Investor of any Law or any judgment, order,
decree, rule or regulation of any Governmental Authority to which Investors are
subject.
Section 8.5. Governmental Consents. Except for those that have been
duly obtained, no consent, order, approval or authorization of, or declaration,
filing, or registration with, any Governmental Authority is required to be
obtained or made by Investors in connection with the execution, delivery or
performance by Investors of this Agreement.
Section 8.6. Investment Intent. Upon Conversion, each Investor will
acquire the Preferred Shares for its own account for investment and not with a
view to, or for sale or other disposition in connection with, any distribution
of all or any part of the Preferred Shares, except (a) in an offering covered
by a registration statement filed with the Securities and Exchange Commission
under the Securities Act covering the Preferred Shares, or (b) pursuant to an
applicable exemption under the Securities Act. In any acquisition of Preferred
Shares upon Conversion, Investors will not offer or sell for Owner in
connection with any distribution of such shares, and Investors do not have a
participation and will not participate in any such undertaking or in any
underwriting of such an undertaking.
Section 8.7. Disclosure of Information. Each Investor represents
that it has had an opportunity to ask questions of and receive answers from
Owner regarding the Preferred Shares, Owner and Harken Colombia, their
respective businesses, properties, financial conditions, operations and plans
of business, and the Subject Interests and all matters relating thereto.
Section 8.8. Accredited Investors and Experience. Each Investor
acknowledges that it is an Accredited Investor, within the meaning of
Regulation D of the Securities Act, can bear the economic risk of its
investment and has such knowledge and experience in financial and business
matters, that it is capable of evaluating the merits and risks of the
investment in the Rio Negro NPI and any investment in Preferred Shares. Each
Investor represents that it has not been organized for the purpose of acquiring
the Rio Negro NPI or any Preferred Shares.
Section 8.9. Restricted Securities. Each Investor understands that
any Preferred Shares that are issued upon Conversion pursuant to this Agreement
will not have been registered pursuant to the Securities Act, any other federal
securities law or any applicable state securities or Blue Sky law, that such
shares will be characterized as "restricted securities" under the United States
securities laws and that under such laws and applicable regulations such shares
cannot be sold or otherwise disposed of without registration under the
Securities Act or an exemption therefrom.
Section 8.10. Legends. Each Investor understands and agrees that the
certificates representing any Preferred Shares issued pursuant to this
Agreement shall each conspicuously set forth on the face or back thereof a
legend in substantially the following form:
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"THE SHARES REPRESENTED BY THIS CERTIFICATE HAVE NOT BEEN
REGISTERED UNDER THE SECURITIES ACT OF 1933, AS AMENDED, AND
MAY NOT BE SOLD OR OTHERWISE TRANSFERRED UNLESS SUCH SHARES
ARE FIRST REGISTERED UNDER SUCH ACT OR UNLESS AN EXEMPTION
FROM SUCH REGISTRATION IS AVAILABLE."
Section 8.11. Continuing Representations and Warranties. Except for
a change of law over which Investors have no control (and Investors shall
immediately notify Owner when any Investor learns of such occurrence), the
representations and warranties of Investors made in this Article VIII shall
remain true and accurate during the Commitment Period (provided, with respect
to those in Section 8.7, Owner meets its obligations under Section 7.21), and
Investors shall not take any action nor permit any action to be taken which
would cause any of such representations and warranties to become untrue,
inaccurate or breached. Each Investor acknowledges and agrees that Owner may
rely on this Section in connection with any issuance of Preferred Shares as a
consequence of any Conversion.
ARTICLE IX
Conditions
Section 9.1. Investors' Conditions. Owner shall deliver the
following to Investors on the Effective Date:
(a) Counterparts of this Agreement duly executed by Owner;
(b) A certificate of the Secretary or the Assistant
Secretary of the Owner certifying, among other things, as to the due
authorization of the transactions contemplated hereby;
(c) The legal opinion of Thompson & Knight, P.C., counsel
to Owner, substantially in the form attached hereto as Exhibit C;
(d) The legal opinion of Milbank, Tweed, Hadley & McCloy,
special California counsel to Owner, substantially in the form
attached hereto as Exhibit D;
(e) The legal opinion of Baker & McKenzie, special
Colombian counsel to Owner, substantially in the form attached hereto
as Exhibit E;
(f) A copy of the Certificate of Incorporation, as
amended to the date hereof, of Owner, certified by the Secretary of
Owner.
30
<PAGE> 31
(g) Certificates of existence and good standing for Owner
in the jurisdiction of its incorporation and listing all charter
documents of Owner on file;
(h) A copy of any required written consent and waiver to
the transactions contemplated hereby executed by the third party or
appropriate Governmental Authority; and
(i) Evidence satisfactory to Investors of the filing of
the Certificate of Designations with the Secretary of State of the
State of Delaware.
Section 9.2. Conditions of Owner. The obligations of Owner under
this Agreement are subject to the delivery herewith of counterparts of this
Agreement duly executed by Investors.
Section 9.3. Taking of Necessary Action. Subject to the terms and
conditions of this Agreement and to applicable Law, each of the parties to this
Agreement shall use all reasonable efforts promptly to take or cause to be
taken all action and promptly to do or cause to be done all things necessary,
proper or advisable under applicable Laws to consummate and make effective the
transactions contemplated by this Agreement.
Section 9.4. Issuance of Preferred Shares. If, at the time for
any Conversion, a "Conversion Condition" has not occurred, each Investor shall
have the option to either (a) receive cash in lieu of Preferred Shares in an
amount equal to $1,000 times the number of Preferred Shares that otherwise
would have been issued to such Investor upon such Conversion pursuant to this
Agreement, or (b) receive the Preferred Shares to be issued to such Investor
upon such Conversion and receive dividends on such Preferred Shares at the rate
of 17.5% per annum (rather than 15% per annum) as provided for in the
Certificate of Designations. As used in this Section, a "Conversion Condition"
shall mean either (i) the holders of all of the shares of Series C Cumulative
Convertible Preferred Stock of Owner shall have duly consented to such shares
being on a parity with the Preferred Shares as contemplated in the Certificate
of Designations, which consent shall be satisfactory in form and substance to
Investors, or (ii) Owner shall have fully redeemed all of the outstanding
shares of Series C Cumulative Convertible Preferred Stock of Owner or converted
such shares into shares of common stock of Owner and none of such shares shall
then be outstanding.
ARTICLE X
Miscellaneous
Section 10.1. Indemnification. Owner shall indemnify and hold
harmless Investors, and Investors shall indemnify and hold harmless Owner, from
and against any and all claims, losses, damages and liabilities (and actions in
respect thereof) and any and all costs and expenses (including reasonable
attorneys' fees and expenses) that such person may sustain or incur as a
31
<PAGE> 32
result of any misrepresentation or breach of warranty or the nonperformance of
any obligation on the part of the other under this Agreement.
Section 10.2. Public Announcements. Except as set forth in the
following sentence, the parties to this Agreement agree that prior to making
any public announcement or statement with respect to the transactions
contemplated by this Agreement, the party desiring to make such public
announcement or statement shall consult with the other party and exercise
reasonable efforts to (i) agree upon the text of a joint public announcement or
statement to be made by both of such parties or (ii) obtain approval of the
other party to the text of a public announcement or statement to be made solely
by Owner or Investors, as the case may be. Nothing contained in this Section
10.2 shall be construed to require either party to obtain approval of the other
party to disclose information with respect to any disclosure (i) required by
applicable law or by any applicable rules, regulations or orders of any
Governmental Authority having jurisdiction or (ii) necessary to comply with
disclosure requirements of any applicable stock exchange.
Section 10.3. Brokers. Without limiting the parties' respective
representations in Sections 7.5 and 8.2, each party agrees to indemnify and
hold the other harmless from and against any claim for a brokerage or finder's
fee or commission in connection with this Agreement or the transactions
contemplated by this Agreement to the extent such claim arises from or is
attributable to the actions of such indemnifying party.
Section 10.4. Notices. Any notice or other communication required or
permitted hereunder shall be in writing and shall be delivered by (a) personal
delivery, (b) expedited delivery service, (c) certified or registered mail,
postage prepaid, or (d) telex, facsimile or similar method of electronic
communications. Any such notice shall be deemed given upon its receipt at the
following address:
(i) if to Owner, at:
Harken Energy Corporation
MacArthur Center II
5605 N. MacArthur Blvd., Suite 400
Irving, Texas 75038
Attention: Mr. Mikel D. Faulkner, Chairman
with a copy to:
Harken Energy Corporation
MacArthur Center II
5605 N. MacArthur Blvd., Suite 400
Irving, Texas 75038
Attention: Mr. Larry E. Cummings
Vice President and General Counsel
32
<PAGE> 33
(ii) if to Investors, at:
1800 Avenue of the Stars
No. 1425
Los Angeles, California 90067
Attention: Alvin J. Portnoy
with a copy to:
1800 Avenue of the Stars
No. 1425
Los Angeles, California 90067
Attention: Robert V. Sinnott
Section 10.5. Waivers and Amendments. This Agreement may be amended
or supplemented only by a written instrument signed by the parties hereto. The
terms of this Agreement may be waived only by a written instrument signed by
the party waiving compliance. No delay on the part of either party in
exercising any right, power or privilege hereunder shall operate as a waiver
thereof, nor shall any waiver on the part of any party of any such right, power
or privilege, or any single or partial exercise of any such right, power or
privilege, preclude any further exercise thereof or the exercise of any other
such right, power or privilege. The rights and remedies herein provided are
cumulative and are not exclusive of any rights or remedies that any party may
otherwise have at law or in equity.
Section 10.6. Governing Law. This Agreement shall be governed by,
and construed and enforced in accordance with, the laws of the State of
California, without regard to the principles of conflicts of laws.
Section 10.7. Binding Effect; No Assignment; No Third Party Benefit.
This Agreement shall be binding upon and inure to the benefit to the parties
and their respective successors and permitted assigns. Unless otherwise
expressly provided herein, no rights or obligations under this Agreement are
assignable. Nothing in this Agreement, whether expressed or implied, is
intended to confer any rights or remedies under or by reason of this Agreement
on any person other than the parties to this Agreement and their respective
successors and permitted assigns.
Section 10.8. Entire Agreement. This Agreement constitutes the full
and complete agreement of the parties hereto with respect to the subject matter
hereof, and supersedes all previous oral and written and all contemporaneous
oral negotiations, commitments, writings and understandings.
Section 10.9. Severability. Every provision of this Agreement is
intended to be severable. If any term or provision hereof is determined to be
invalid, illegal, or unenforceable for any
33
<PAGE> 34
reason whatsoever, such invalidity, illegality, or unenforceability shall not
affect the validity, legality and enforceability of the remainder of this
Agreement.
Section 10.10. United States Dollars. All references in this
Agreement to dollar amounts are to United States dollars.
Section 10.11. Survival of Representations and Warranties. The
representations and warranties of the parties made herein shall survive the
execution and delivery of this Agreement.
Section 10.12. Counterparts. This Agreement may be executed in one
or more Counterparts (and separately by each party hereto), each of which shall
be an original and all of which shall constitute but one and the same document.
IN WITNESS WHEREOF, the parties have caused this Agreement to be
executed by the respective officers hereunto duly authorized as of the date
first above written.
HARKEN ENERGY CORPORATION
By: /s/ Larry E. Cummings
-----------------------------------
Larry E. Cummings,
Vice President
ARBCO ASSOCIATES L.P.
By: KAIM Non-Traditional, L.P.
Its Co-General Partner
By: /s/ Alvin J. Portnoy
-----------------------------------
Alvin J. Portnoy,
Executive V.P. of Corp. General Partner
OFFENSE GROUP ASSOCIATES, L.P.
By: KAIM Non-Traditional, L.P.
Its sole General Partner
By: /s/ Alvin J. Portnoy
-----------------------------------
Alvin J. Portnoy,
Executive V.P. of Corp. General Partner
34
<PAGE> 35
KAYNE, ANDERSON NON-TRADITIONAL
INVESTMENTS L.P.
By: KAIM Non-Traditional, L.P.
Its sole General Partner
By: /s/ Alvin J. Portnoy
-----------------------------------
Alvin J. Portnoy,
Executive V.P. of Corp. General Partner
OPPORTUNITY ASSOCIATES L.P.
By: KAIM Non-Traditional, L.P.
Its sole General Partner
By: /s/ Alvin J. Portnoy
-----------------------------------
Alvin J. Portnoy,
Executive V.P. of Corp. General Partner
35
<PAGE> 36
EXHIBITS
Annex 1 - Designated Percentage and Advances
Exhibit A - Certificate of Designations
Exhibit B - Description of Rio Negro Prospect
Exhibit C - Opinion of Thompson & Knight, P.C.
Exhibit D - Opinion of Milbank, Tweed, Hadley & McCloy
Exhibit E - Opinion of Baker & McKenzie
36
<PAGE> 37
ANNEX 1
<TABLE>
<CAPTION>
Designated Advance
Investor Percentage Commitment
- -------- ---------- -------------
<S> <C> <C>
Arbco Associates L.P. 12.57144% $1,100,000.00
Offense Group Associates L.P. 12.57144% 1,100,000.00
Kayne, Anderson Nontraditional
Investments L.P. 12.57144% 1,100,000.00
Opportunity Associates L.P. 2.28568% 200,000.00
-------- -------------
Totals 40.0000% $3,500,000.00
======== =============
</TABLE>
<TABLE> <S> <C>
<ARTICLE> 5
<S> <C>
<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> DEC-31-1995
<PERIOD-START> JAN-01-1995
<PERIOD-END> SEP-30-1995
<CASH> 7,685,000
<SECURITIES> 0
<RECEIVABLES> 1,364,000
<ALLOWANCES> (373,000)
<INVENTORY> 0
<CURRENT-ASSETS> 9,059,000
<PP&E> 36,832,000
<DEPRECIATION> (9,469,000)
<TOTAL-ASSETS> 49,393,000
<CURRENT-LIABILITIES> 4,556,000
<BONDS> 13,300,000
<COMMON> 729,000
1,868,000
0
<OTHER-SE> 28,940,000
<TOTAL-LIABILITY-AND-EQUITY> 49,393,000
<SALES> 4,189,000
<TOTAL-REVENUES> 5,181,000
<CGS> 1,343,000
<TOTAL-COSTS> 1,343,000
<OTHER-EXPENSES> 4,275,000
<LOSS-PROVISION> (180,000)
<INTEREST-EXPENSE> 322,000
<INCOME-PRETAX> (579,000)
<INCOME-TAX> 0
<INCOME-CONTINUING> (579,000)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (579,000)
<EPS-PRIMARY> (0.01)
<EPS-DILUTED> (0.01)
</TABLE>
