<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 JUNE 30, 1996
[ ] 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 July 31, 1996 was 92,145,796 net of 400,896 Treasury Shares.
================================================================================
<PAGE> 2
HARKEN ENERGY CORPORATION
INDEX TO QUARTERLY REPORT
JUNE 30, 1996
<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 . . . . . . . . . . . . . . . . . . 22
PART II. OTHER INFORMATION . . . . . . . . . . . . . . . . . . . . . . . . . 32
SIGNATURES . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 35
</TABLE>
2
<PAGE> 3
PART I - FINANCIAL INFORMATION
3
<PAGE> 4
ITEM 1. CONDENSED FINANCIAL STATEMENTS
HARKEN ENERGY CORPORATION AND SUBSIDIARIES
CONSOLIDATED CONDENSED BALANCE SHEETS
(unaudited)
<TABLE>
<CAPTION>
DECEMBER 31, JUNE 30,
1995 1996
---------------- ----------------
<S> <C> <C>
ASSETS
------
Current Assets:
Cash and temporary investments . . . . . . . . . . . . . . . $ 4,456,000 $ 14,888,000
Cash available in European segregated account . . . . . . . 4,705,000 871,000
Accounts receivable, net . . . . . . . . . . . . . . . . . . 1,061,000 1,237,000
Prepaid expenses and other current assets . . . . . . . . . 309,000 211,000
---------------- ----------------
Total Current Assets . . . . . . . . . . . . . . . . . 10,531,000 17,207,000
Property and Equipment, net . . . . . . . . . . . . . . . . . . 52,142,000 51,057,000
Restricted Cash in European Segregated Account . . . . . . . 6,173,000 --
Notes Receivable from Related Parties, including interest . . . 232,000 232,000
Other Assets, net . . . . . . . . . . . . . . . . . . . . . . . 1,716,000 432,000
---------------- ----------------
$ 70,794,000 $ 68,928,000
================ ================
LIABILITIES AND STOCKHOLDERS' EQUITY
------------------------------------
Current Liabilities:
Trade payables . . . . . . . . . . . . . . . . . . . . . . $ 356,000 $ 490,000
Accrued liabilities and other . . . . . . . . . . . . . . . 2,722,000 2,203,000
Notes payable and current portion of long-term obligations . 868,000 --
Revenues and royalties payable . . . . . . . . . . . . . . . 972,000 1,104,000
---------------- ----------------
Total Current Liabilities . . . . . . . . . . . . . . 4,918,000 3,797,000
Long-Term Obligations . . . . . . . . . . . . . . . . . . . . . 13,176,000 10,429,000
European Convertible Notes Payable . . . . . . . . . . . . . . 12,550,000 700,000
Commitments and Contingencies (Note 10)
Stockholders' Equity:
Common stock, $0.01 par value; authorized
100,000,000 and 125,000,000 shares, respectively;
issued 75,913,832 and 85,078,958 shares, respectively . . 759,000 851,000
Additional paid-in capital . . . . . . . . . . . . . . . . . 136,435,000 146,816,000
Retained deficit . . . . . . . . . . . . . . . . . . . . . . (92,047,000) (92,275,000)
Treasury stock, 1,440,896 and 400,896 shares held,
respectively . . . . . . . . . . . . . . . . . . . . . . . (4,997,000) (1,390,000)
---------------- ----------------
Total Stockholders' Equity . . . . . . . . . . . . . . 40,150,000 54,002,000
---------------- ----------------
$ 70,794,000 $ 68,928,000
================ ================
</TABLE>
The accompanying Notes to Consolidated Condensed Financial Statements
are an integral part of these Statements.
4
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HARKEN ENERGY CORPORATION AND SUBSIDIARIES
CONSOLIDATED CONDENSED STATEMENTS OF OPERATIONS
(unaudited)
<TABLE>
<CAPTION>
THREE MONTHS ENDED SIX MONTHS ENDED
JUNE 30, JUNE 30,
------------------------------ -------------------------------
1995 1996 1995 1996
------------- ------------- ------------- -------------
<S> <C> <C> <C> <C>
Revenues:
Oil and gas operations . . . . . . . . . . $ 1,540,000 $ 2,388,000 $ 2,713,000 $ 4,385,000
Interest and other income . . . . . . . . 242,000 202,000 668,000 546,000
------------- ------------- ------------- -------------
1,782,000 2,590,000 3,381,000 4,931,000
Costs and Expenses:
Oil and gas operating expenses . . . . . . 458,000 840,000 880,000 1,600,000
General and administrative expenses, net . 737,000 980,000 1,511,000 1,797,000
Depreciation and amortization . . . . . . 534,000 629,000 1,065,000 1,256,000
Interest expense and other . . . . . . . . 211,000 73,000 222,000 506,000
------------- ------------- ------------- -------------
1,940,000 2,522,000 3,678,000 5,159,000
Income (loss) before income taxes . . . (158,000) 68,000 (297,000) (228,000)
Income tax expense . . . . . . . . . . . . . -- -- -- --
------------- ------------- ------------- -------------
Net income (loss) . . . . . . . . . . . $ (158,000) $ 68,000 $ (297,000) $ (228,000)
============= ============= ============= =============
Income (loss) per common share:
Net income (loss) . . . . . . . . . . . $ (0.00) $ 0.00 $ (0.00) $ (0.00)
============= ============= ============= =============
Weighted average shares outstanding . . . . . 62,939,852 82,048,561 61,741,352 77,836,034
============= ============= ============= =============
</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, 1994 . . . . . $ 664,000 $ 132,572,000 $ (90,520,000)(A) $ (20,757,000)
Issuances of common stock, net . 79,000 1,740,000 -- 15,760,000
Conversions of European notes payable 16,000 2,123,000 -- --
Equity adjustment from foreign currency
translation . . . . . . . . . . -- -- (2,000) --
Adjustment for unrealized gains (losses)
on available-for-sale securities -- -- 100,000 --
Net loss . . . . . . . . . . . . . -- -- (1,625,000) --
------------- --------------- --------------- ---------------
Balance, December 31, 1995 . . . . . 759,000 136,435,000 (92,047,000) (4,997,000)
Issuances of common stock, net . . 5,000 (1,549,000) -- 3,607,000
Conversions of warrants and options 7,000 1,236,000 -- --
Conversions of European notes payable 80,000 10,694,000 -- --
Net loss . . . . . . . . . . . . . -- -- (228,000) --
------------- --------------- --------------- ---------------
Balance, June 30, 1996 . . . . . . . $ 851,000 $ 146,816,000 $ (92,275,000) $ (1,390,000)
============= =============== =============== ===============
</TABLE>
(A) Includes, as a component of Retained Deficit, net unrealized gains (losses)
on available-for-sale securities of ($100,000) as of December 31, 1994.
The accompanying Notes to Consolidated Condensed Financial Statements
are an integral part of these Statements.
6
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HARKEN ENERGY CORPORATION AND SUBSIDIARIES
CONSOLIDATED CONDENSED STATEMENTS OF CASH FLOWS
(unaudited)
<TABLE>
<CAPTION>
SIX MONTHS ENDED
JUNE 30,
--------------------------------------
1995 1996
----------------- -----------------
<S> <C> <C>
Cash flows from operating activities:
Net loss . . . . . . . . . . . . . . . . . . . . . . $ (297,000) $ (228,000)
Adjustments to reconcile net loss to net cash
provided by (used in)
operating activities:
Depreciation and amortization . . . . . . . . . 1,065,000 1,256,000
Forgiveness of related party note receivable . . 232,000 --
Provision for doubtful accounts . . . . . . . . (180,000) --
(Gain) loss on sales of assets and other . . . . (406,000) 19,000
Accretion of discount on note payable . . . . . -- 234,000
Amortization of European note issuance costs . . 73,000 178,000
Change in assets and liabilities:
Decrease (increase) in accounts receivable . . . (8,000) (81,000)
Increase (decrease) in trade payables and other (1,107,000) (420,000)
----------------- -----------------
Net cash provided by (used in) operating
activities . . . . . . . . . . . . . . . . . (628,000) 958,000
----------------- -----------------
Cash flows from investing activities:
Cash from acquired subsidiary . . . . . . . . . . . . 190,000 --
Proceeds from sales of assets . . . . . . . . . . . . 2,779,000 177,000
Investor project advances . . . . . . . . . . . . . . -- 2,250,000
Capital expenditures, net . . . . . . . . . . . . . (2,983,000) (3,945,000)
----------------- -----------------
Net cash used in investing activities . . . . . (14,000) (1,518,000)
----------------- -----------------
Cash flows from financing activities:
Transfers from segregated account cash . . . . . . . -- 10,000,000
Proceeds from issuances of common stock, net of
issuance costs . . . . . . . . . . . . . . . . . . 1,404,000 2,492,000
Investment in segregated account cash, net . . . . . (106,000) (242,000)
Repayment of notes payable and long-term obligations -- (1,258,000)
----------------- -----------------
Net cash provided by financing activities . . . 1,298,000 10,992,000
----------------- -----------------
Net increase (decrease) in cash and temporary investments 656,000 10,432,000
Cash and temporary investments at beginning of period . . 2,828,000 4,456,000
----------------- -----------------
Cash and temporary investments at end of period . . . . . $ 3,484,000 $ 14,888,000
================= =================
Supplemental disclosures of cash flow information:
Cash paid during the period for:
Interest . . . . . . . . . . . . . . . . . . . . . $ 22,000 $ 203,000
Income taxes . . . . . . . . . . . . . . . . . . . -- --
</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
JUNE 30, 1995 AND 1996
(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, 1995 and June 30, 1996 and the results of its operations and changes in its
cash flows for all periods presented as of June 30, 1995 and 1996. These
adjustments represent normal recurring items. Certain prior year amounts have
been reclassified to conform with the 1996 presentations.
The accompanying unaudited condensed financial statements have been
prepared pursuant to the rules and regulations of the Securities and Exchange
Commission ("SEC"). Certain information and note disclosures normally included
in annual financial statements prepared in accordance with generally accepted
accounting principles have been condensed or omitted pursuant to these rules
and regulations, although Harken believes that the disclosures made are
adequate to make the information presented not misleading. It is suggested
that these condensed financial statements be read in conjunction with the
financial statements and the notes thereto included in Harken's Form 10-K/A for
the year ended December 31, 1995.
The results of operations for the six month period ended June 30, 1996
are not necessarily indicative of the results to be expected for the full year.
(2) ACQUISITIONS
Acquisition of Texas Properties -- In October 1995, a wholly-owned
subsidiary of Harken acquired certain non- operated interests in producing
properties located in the western region of Texas ("Yellowhouse Properties").
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 and the seller made
payments totaling approximately $417,000 on these notes payable at closing and
the remaining balance was 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.
On December 21, 1995, pursuant to the terms of a Purchase and Sale
Agreement (the "Panhandle Purchase and Sale Agreement"), Harken Exploration
Company ("Harken Exploration"), a wholly-owned subsidiary of Harken, acquired
certain interests in producing properties located in the panhandle region of
Texas ("Panhandle Properties"). As consideration for the purchase of these
interests, Harken issued, along with other consideration, 2.5 million shares of
restricted Harken common stock (the "Purchase Shares"), $2.5 million in cash
and a note payable by Harken Exploration to the seller for an initial face
amount of $13 million. Harken had the option over the next two years to repay
all or part of this $13 million note with restricted common stock at conversion
rates tied to future trading prices of Harken common stock. The $13 million
note was to mature and become payable in two stages, with each maturity amount
subject to certain adjustments. On July 11, 1996, Harken Exploration entered
into an exchange agreement with the holder of the $13 million note, whereby it
was exchanged for, among other consideration, the issuance of 5,150,000
restricted shares of Harken common stock, including 185,000 shares
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<PAGE> 9
held in escrow. See Note 5 -- Notes Payable and Long-Term Obligations for
further discussion. The acquisition of the Panhandle Properties has been
accounted for under the purchase method of accounting. Due to the note payable
adjustments to be calculated, some of which were based on the future trading
prices of Harken common stock, the allocation of the purchase price to the
assets and liabilities related to the acquisition of the Panhandle Properties
at December 31, 1995 was preliminary, with further adjustments to be reflected
upon the final accounting for the $13 million note payable. With the July 11,
1996 exchange agreement resulting in the issuance of 5,150,000 restricted
shares of Harken common stock with a market value of approximately $10,429,000
in full payment of the outstanding balance on the note, Harken has adjusted the
purchase price of the Panhandle Properties as of June 30, 1996 to give effect
to the finalization of the consideration issued in the purchase.
Acquisition of CHAP Venture Interests - In May 1995, Harken acquired
an additional joint venture interest in the CHAP 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
seller's interest raised Harken's total interest in CHAP from approximately 70%
to approximately 82%. As consideration for this acquisition, Harken paid cash
of $300,000 and issued 534,000 shares of restricted Harken common stock to the
seller, 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.
During the second quarter of 1996, Harken acquired additional
interests in CHAP, raising Harken's total interest in CHAP to approximately
94%. The purchase consideration paid by Harken to the sellers consisted of
$338,000 cash plus the issuance of approximately 509,000 shares of restricted
Harken common stock. Harken also assumed certain liabilities of the sellers
relating to the property interests. All of 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
entered into 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.
Pursuant to the 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 by June 30, 1996 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 due
to the above mentioned contingently issuable shares of Harken common stock.
Acquisition of EnerVest Properties - On July 10, 1996 Harken, along
with Harken Exploration, purchased working interests in certain producing oil
and gas properties located in the Magnolia area of Arkansas and in the Carlsbad
area of New Mexico (the "EnerVest Properties") from EnerVest Acquisition
II-Limited Partnership ("EnerVest"). The purchase price of $15,200,000, plus
the assumption of certain operational liabilities relating
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to these properties, is subject to adjustments for property defects identified
including title defects, environmental defects and product production balancing
defects. This purchase price was paid in the form of $5,000,000 cash paid at
closing, 1,550,000 shares of Harken common stock which were issued following
closing, and 1,159,091 shares of Harken common stock to be issued at a
designated time following the registration and sale by the seller of the
initial shares issued following closing. Harken also issued to EnerVest
warrants to purchase, over a period of three years from closing, 300,000 shares
of Harken common stock at an exercise price of $2.75 per share. The agreement
includes adjustment provisions pursuant to which Harken may be obligated to
issue additional shares of Harken common stock if the seller does not realize
at least $10,200,000 from its sales of such shares. The seller will maintain a
lien on these properties until such time as it has received or recognized
$7,000,000 in proceeds from the sales of these shares of Harken common stock.
At May 31, 1996, the EnerVest Properties consisted of proved reserves
of approximately 1,928,000 barrels of oil and approximately 4,490,000 mcf of
gas, with a discounted value of future net revenues of approximately
$15,936,000.
(3) MARKETABLE EQUITY SECURITIES
At December 31, 1994 and during the first three months of 1995, Harken
carried an investment in the common stock of E-Z Serve Corporation, a former
subsidiary ("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 was not a readily marketable security. Harken classified its
investment in E-Z Serve common stock as available for sale. The following is a
summary of Harken's activity from marketable equity securities. Harken sold
its investment in the common stock of E-Z Serve during the third quarter of
1995.
<TABLE>
<CAPTION>
SIX MONTHS ENDED
JUNE 30,
--------------------------------
AVAILABLE-FOR-SALE 1995 1996
------------------ --------------- --------------
<S> <C> <C>
Gross Realized Gains $ 14,000 $ --
Gross Realized Losses -- --
</TABLE>
(4) PROPERTY AND EQUIPMENT
A summary of property and equipment follows:
<TABLE>
<CAPTION>
DECEMBER 31, JUNE 30,
1995 1996
--------------- ----------------
<S> <C> <C>
Oil and gas properties --
Unevaluated international properties not being amortized . . $ 4,866,000 $ 5,002,000
Unevaluated domestic properties not being amortized . . . . . 11,117,000 10,578,000
Evaluated domestic properties being amortized . . . . . . . . 39,526,000 39,823,000
Gas plants and other property . . . . . . . . . . . . . . . . . 6,746,000 7,033,000
Less accumulated depreciation
and amortization . . . . . . . . . . . . . . . . . . . . . . (10,113,000) (11,379,000)
-------------- ---------------
$ 52,142,000 $ 51,057,000
============== ===============
</TABLE>
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(5) NOTES PAYABLE AND LONG-TERM OBLIGATIONS
<TABLE>
<CAPTION>
DECEMBER 31, JUNE 30,
1995 1996
------------- --------------
<S> <C> <C>
Note payable to seller of producing properties (A) $ 12,786,000 $ 10,429,000
Notes payable to investors (B) 132,000 --
Note payable to Tejas Power Corporation (C) 394,000 --
Notes payable to former stockholder of subsidiary (D) 400,000 --
Notes payable to former investors in Search managed
limited partnerships (E) 332,000 --
------------- --------------
Total 14,044,000 10,429,000
Less amount classified as current liability (868,000) --
------------- --------------
Total long-term obligations $ 13,176,000 $ 10,429,000
============= ==============
</TABLE>
(A) As discussed in Note 2 -- Acquisitions, in December 1995 Harken
Exploration issued to the seller of the Panhandle Properties a note payable in
the initial face amount of $13 million (the "Panhandle Note"). The Panhandle
Note bore interest at 5% per annum as to $8,000,000 in principal amount only,
was secured by Harken Exploration's interest in the acquired properties and was
not guaranteed by Harken. The Panhandle Note was to mature and become payable
in two stages. On October 18, 1996, $8,000,000 in principal amount of the
Panhandle Note, subject to adjustment as described below, was to mature, and
become payable ("Maturity I"). The remaining $5,000,000 in principal amount of
the Panhandle Note was non-interest bearing and, subject to adjustment, was to
mature and become payable ("Maturity II") on July 15, 1997; provided, however,
that if the amount due at Maturity I was paid in shares of Harken common stock
("Maturity I Shares") as described below, such principal amount was to mature
and become payable on the earlier of (i) the expiration of 270 days following
the date upon which the SEC declared effective a registration statement
covering the resale of the shares issued at Maturity I or (ii) November 15,
1997. The initial recorded amount of the Panhandle Note was equal to the
discounted fair value of the payments to be made at each maturity date, using a
market rate of interest of 6.66%. As Harken's intention was always to pay the
Panhandle Note with shares of Harken common stock, the entire Panhandle Note
balance has been included in long-term obligations.
Pursuant to the Panhandle Purchase and Sale Agreement, Harken
Exploration could elect to pay the amounts due at either or both of Maturity I
and Maturity II in shares of Harken common stock, with the number of shares to
be issued at Maturity I to be determined by dividing the amount due at Maturity
I by the average of the closing prices of Harken common stock on the American
Stock Exchange during the period beginning on January 22, 1996 and ending ten
(10) trading days prior to Maturity I (the "Maturity I Average Trading Price")
and the number of shares to be issued at Maturity II to be determined by
dividing the amount due at Maturity II by the average of the closing prices of
Harken common stock on the American Stock Exchange during the period beginning
upon the date which the above mentioned registration statement is declared
effective and ending ten (10) trading days prior to Maturity II.
On July 11, 1996, Harken Exploration entered into an exchange
agreement with the seller of the Panhandle Properties, pursuant to which Harken
issued 5,150,000 restricted shares of Harken common stock, including 185,000
shares held in escrow, in satisfaction of all obligations owed by Harken
Exploration to the seller under the terms of the Panhandle Note. As of July
11, 1996, such restricted shares of Harken common stock had an approximate
market value of $10,429,000. Under this exchange agreement, Harken Exploration
agreed to pay the
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seller the amount, if any, by which the proceeds from the sale of these shares
of Harken common stock sold by the seller are less than $8,500,000. In
connection with this exchange agreement, (a) Harken granted the seller the
right to request Harken to effect up to two registrations of these shares of
Harken common stock issued under the Securities Act of 1933 and (b) Harken
granted to the seller a lien over the properties purchased from the seller to
secure, among other things, the obligations of Harken Exploration under the
exchange agreement. The 185,000 shares of Harken common stock held in escrow
are held pending resolution of certain title defects relating to the properties
purchased from the seller and will be released from escrow to the seller unless
the decrease in value of these properties resulting from these defects exceeds
$480,000. Harken has adjusted the value of the Panhandle Note as of June 30,
1996 to equal the approximate market value of the shares issued to satisfy the
obligation.
(B) As discussed in Note 2 -- Acquisitions, a wholly-owned subsidiary
of Harken assumed $750,000 of short-term notes payable in connection with the
acquisition of the Yellowhouse Properties in October 1995. Harken and the
seller made payments totaling approximately $417,000 on these notes payable at
closing and the remaining balance was paid in monthly installments through
March 1996. Such notes bore interest at the rate of 7% per annum.
(C) As part of Harken's December 1995 exchange of its shares of Tejas
Preferred Stock for the shares of Harken Series C Preferred stock held by
Tejas, Harken issued a note payable for $394,000 which was payable in quarterly
installments through September 30, 1997, but was repaid early by Harken in
March 1996. The note bore interest at a rate of 10% per annum.
(D) Under the terms of a March 1994 agreement, a Harken subsidiary
purchased from its former stockholder its 3% working interest in the wells
drilled by the subsidiary as well as all rights held by the former stockholder
to participate in future wells drilled by the subsidiary 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 was
paid to the subsidiary's former stockholder on January 3, 1996.
(E) As part of the Merger Agreement with Search in May 1995, Harken,
through Search, assumed approximately $442,000 of notes payable to former
partners in certain limited partnerships managed by a subsidiary of Search.
Such notes bore interest at 10% per annum and were payable in semiannual
installments beginning June 30, 1995 through June 30, 1998. Harken repaid
these notes in April 1996. See further discussion of the Search Merger at Note
2 - Acquisitions.
(6) 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 "8%
European Notes") which were to mature in May 1998. Interest on these notes was
payable semi- annually in May and November of each year to maturity or until
the 8% European Notes were converted. Such 8% European Notes were convertible
at any time by the holders into shares of Harken common stock at a conversion
price of $1.50 per share ("the 8% European Note Conversion Price"). Such 8%
European Notes were also convertible by Harken into shares of Harken common
stock after one year following issuance, if for any period of thirty
consecutive days the closing price for each day during such period shall have
equaled or exceeded 140% of the 8% European Note Conversion Price (or $2.10
per share of Harken common stock). In connection with the sale and issuance of
the 8% European Notes, Harken paid approximately $1,750,000 from the 8%
European Note proceeds for commissions and issuance costs. In addition, at
closing of the sale of the 8% European Notes, Harken issued to the placement
agents certain non-transferable stock purchase warrants to purchase one million
shares of Harken common stock which are currently exercisable by the holders
thereof at any time on or before May 11, 1999 at an exercise price equal to the
8% European Note Conversion Price described above. Also, Harken paid a fee in
the form of 92,308 shares of Harken common stock to another financial advisor
in connection with the 8% European Notes.
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As of June 30, 1996, Harken had received notification that holders
of 8% European Notes totaling $14,300,000 had exercised their conversion option
and had been issued 9,533,311 shares of Harken common stock. Subsequent to
June 30, 1996, additional notifications of exercise of conversion options have
been received from all remaining holders of 8% European Notes totaling
$700,000, which has resulted in the additional issuance of 466,664 shares of
Harken common stock.
On July 30, 1996, Harken issued to qualified purchasers a total of $40
million in 6 1/2% Senior Convertible Notes (the "6 1/2% European Notes") which
mature on July 30, 2000. Interest on these notes is payable semi-annually in
January and July of each year to maturity or until the 6 1/2% European Notes
are converted. Such 6 1/2% European Notes are convertible at any time
following September 9, 1996 by the holders into shares of Harken common stock
at a conversion price of $2.50 per share ("the 6 1/2% European Note Conversion
Price"). The 6 1/2% European Notes are also convertible by Harken into shares
of Harken common stock after one year following issuance, if for any period of
thirty consecutive days commencing on or after November 28, 1996, the closing
price of Harken common stock each trading day during such period shall have
equaled or exceeded 135% of the 6 1/2% European Note Conversion Price (or
$3.375 per share of Harken common stock). In connection with the sale and
issuance of the 6 1/2% European Notes, Harken paid approximately $3,142,000
from the 6 1/2% European Note proceeds for commissions and issuance costs.
Upon closing, all proceeds from the sale of the 6 1/2% European Notes
were paid to a Trustee under the terms of a Trust Indenture and are held in a
separate interest bearing Trust account (the "Segregated Account") to be
maintained for Harken's benefit, until the Trustee is presented with evidence
of sufficient asset value, as defined, held by Harken to permit an advance of a
portion of the proceeds. Harken must maintain an Asset Value Coverage Ratio
equal to or greater than 1:1 which is calculated as the ratio of the sum of
100% of the aggregate amount of Harken's's cash on deposit in the Segregated
Account plus 60% of the aggregate amount of Harken's marketable securities plus
50% of the SEC value of Harken's domestic unencumbered total proved reserves of
which at least 75% thereof must be proved developed producing reserves to the
aggregate outstanding principal amount of the 6 1/2% European Notes. Upon a
conversion, any proceeds attributable to the 6 1/2% European Notes converted
which remain in the Segregated Account may be released and paid to Harken
without regard to the asset value then existing.
The 6 1/2% European Notes were sold strictly to non-U.S. purchasers
and are convertible in $50,000 increments. Similar to the 8% European Notes,
the 6 1/2% European Notes and the Harken common stock issuable upon conversion
of the 6 1/2% European Notes have been or will be issued without registration
under the United States Securities Act of 1933 (the "Securities Act") pursuant
to an exemption contained in Regulation S promulgated under the Securities Act.
Commissions and issuance costs associated with the 8% European Notes
and the 6 1/2% European Notes have been deferred and are included in Other
Assets and are amortized to interest expense over the period until conversion
or maturity of the European Notes. As European Notes are converted to Harken
common stock, a pro-rata portion of these deferred costs are charged to
additional paid-in capital.
To the extent that proceeds invested in the Segregated Account at the
balance sheet date are available under the above discussed Asset Value Coverage
Ratio limitations, such cash is included as a current asset in Cash Available
in European Segregated Account in the accompanying consolidated balance sheets.
Segregated Account cash that is not available as of the balance sheet date, due
to the Asset Value Coverage Ratio limitations, is reflected as Restricted Cash
in European Segregated Account in the accompanying consolidated balance sheets,
and is a non-current asset. The initial cash proceeds from the issuance of the
European Notes are not included in the Statement of Cash Flows because the
proceeds are not considered to be cash equivalents. Transfers of proceeds from
the Segregated Account are included in cash flows from financing activities in
the Statements of Cash Flows.
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(7) STOCKHOLDERS' EQUITY
Common Stock - Harken currently has authorized 125,000,000 shares of
$.01 par common stock. At December 31, 1995 and June 30, 1996, Harken had
issued 75,913,832 and 85,078,958 shares, respectively, and held 1,440,896 and
400,896 shares, respectively, as treasury stock at a cost of $4,997,000 and
$1,390,000, respectively. Subsequent to June 30, 1996 and as of July 31, 1996,
Harken has issued an additional 7,467,734 shares of Harken common stock as
discussed below.
Acquisition of CHAP Interests -- 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. In April
1996, Harken acquired an additional interest of approximately 12% in CHAP
primarily in exchange for, among other consideration, 509,000 restricted shares
of Harken common stock. See Note 2 -- Acquisitions for further discussion.
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. In connection with the Merger, Harken issued warrants
entitling the holders to purchase 732,771 shares of Harken common stock at an
exercise price of $1.82 per share. As of June 30, 1996, 597,127 shares of
Harken common stock had been issued upon exercise of such warrants. Up to
approximately 8.1 million additional 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 Payable -- 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 8% European Notes certain
non- registered non-transferrable stock purchase warrants to purchase one
million shares of Harken common stock which are currently exercisable by the
holders thereof at any time on or before May 11, 1999 at an exercise price of
$1.50 per share. In addition, the 8% European Notes were convertible into a
maximum of approximately 10,000,000 shares of Harken common stock. As of June
30, 1996, Harken had received notification that holders of 8% European Notes
totaling $14,300,000 had exercised their conversion option and had been issued
9,533,311 shares of Harken common stock. See Note 6 - European Convertible
Notes Payable for further discussion. Subsequent to June 30,1996, additional
notifications of exercise of conversion options have been received from all
remaining holders of 8% European Notes totaling $700,000 which has resulted in
the additional issuance of 466,664 shares of Harken common stock. Also, Harken
paid a fee of 92,308 shares of Harken common stock to a financial advisor in
connection with the 8% European Notes and the market value of such shares as of
the date issued was included as deferred issuance costs in Other Assets in the
accompanying consolidated balance sheets.
In July 1996, Harken issued to qualified purchasers a total of $40
million in 6 1/2% European Notes which mature on July 30, 2000. The 6 1/2%
European Notes are convertible under certain terms into approximately
16,000,000 shares of Harken common stock. In connection with the issuance of
the 6 1/2% European Notes, Harken issued to the placement agents for the 6 1/2%
European Notes certain non-registered non-transferrable stock purchase warrants
to purchase 1,280,000 shares of Harken common stock which are currently
exercisable by the holders thereof at any time on or before July 31, 1999 at an
exercise price of $2.50 per share.
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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 newly-issued 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 newly-issued 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 a
certain institutional and/or accredited purchaser. In March 1996, Harken
received $1,289,000 related to the sale of 1,040,000 shares of Harken common
stock previously held as treasury stock. In connection with certain of these
placements, Harken issued to certain financial advisors an aggregate total of
410,000 warrants to purchase shares of Harken common stock at an average
exercise price of $1.71 per share.
Acquisition of Texas Properties -- In October 1995, a wholly-owned
subsidiary of Harken paid as consideration three million shares of restricted
Harken common stock previously held as treasury stock in exchange for certain
non- operated interests in producing properties located in the western region
of Texas ("Yellowhouse Properties"). As part of the purchase of these
interests, Harken also issued one million 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.
In December 1995, Harken Exploration acquired certain interests in
producing properties located in the panhandle region of Texas ("Panhandle
Properties") in exchange for, among other consideration, 2.5 million shares of
Harken common stock and a $13 million note payable which was payable, at
Harken's option, in shares of Harken common stock. In July 1996, Harken
Exploration entered into an exchange agreement with the seller of the Panhandle
Properties, pursuant to which Harken issued 5,150,000 restricted shares of
Harken common stock, including 185,000 shares held in escrow, in satisfaction
of all obligations owed by the subsidiary to the seller under the terms of the
Panhandle Note. See Notes 2 and 5 -- Acquisitions and Notes Payable and
Long-Term Obligations for further discussion.
Acquisition of EnerVest Properties - On July 10, 1996, Harken
Exploration entered into an asset purchase and sale agreement (the "EnerVest
Agreement') with EnerVest. Pursuant to the EnerVest Agreement, Harken
Exploration acquired all of EnerVest's working interests in certain producing
oil and gas leases located in Arkansas and New Mexico and property and
equipment related thereto (the "EnerVest Properties"), for a purchase price
valued at approximately $15,200,000 and the assumption of certain operational
liabilities relating to these properties. See Note 2 -- Acquisitions for
further discussion. The preliminary purchase price consisted of 1,550,000
shares of Harken common stock (the "Tranche A Shares") issued after closing,
$5,000,000 in cash payable at closing, and an additional number of shares of
Harken common stock to be issued in the future as described below. Harken also
issued to EnerVest warrants to purchase, for a period of three (3) years from
closing, 300,000 shares of Harken common stock at an exercise price of $2.75
per share.
Pursuant to the EnerVest Agreement, upon the expiration of 180 days
from the date the registration statement is declared effective by the SEC
relating to the resale of the Tranche A Shares, Harken is required to issue an
additional 1,159,091 shares of Harken common stock (the "Tranche B Shares") to
EnerVest; provided, however, that if the sum of (i) the actual gross proceeds
realized by EnerVest from the sale of the Tranche A Shares and (ii) the then
market value of Tranche A Shares still held by EnerVest (together, the "Tranche
A Realized Proceeds") is less that $4,262,500, Harken is required to issue such
additional number of shares of Harken common stock (the "Deficiency Shares"),
in addition to the Tranche B Shares, having a market value at the time of
issuance equal to the difference between $4,262,500 and the Tranche A Realized
Proceeds. In addition, at the time Harken is to issue the Tranche B Shares, it
will calculate the aggregate value of all adjustments that are either
identified
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and agreed to under the EnerVest Agreement or identified but still contingent
under the EnerVest Agreement. These adjustments will include matters such as
title defects, identification of unplugged uneconomic wells, environmental
matters and gas imbalances. The aggregate value of all such adjustments that
have been identified and agreed to will be offset against the Tranche B Shares
prior to issuance. The aggregate value, up to $500,000, of all such
adjustments that have been identified but are still contingent will be
evidenced by a portion of the Tranche B Shares which Harken will hold back from
issuance until such contingent matters are resolved. EnerVest will also put
$1,000,000 cash into an escrow account which may be offset or drawn against by
Harken to satisfy other defects identified by Harken under the EnerVest
Agreement. Upon the expiration of 180 days from the sale of the Tranche B
Shares and the Deficiency Shares, Harken may be required to issue an additional
number of shares of Harken common stock (the "Tranche C Shares') if the sum of
(i) the actual proceeds realized by EnerVest from the sale of all of the shares
of Harken common stock sold by EnerVest up to such time and (ii) the then
market value of any shares of Harken common stock still held by EnerVest
(together the "Total Realized Proceeds") is less than $10,200,000 as adjusted
for the defects and adjustments raised by Harken. In such event, Harken shall
be required to issue the number of Tranche C Shares having a market value at
the time of issuance equal to the difference between $10,200,000 and the Total
Realized Proceeds.
(8) PER SHARE DATA
Per share data has been computed based on the weighted average number
of common shares outstanding during each period. Common stock equivalents,
contingently issuable shares and other potentially dilutive securities are not
included in the computation of earnings per share if the effect of inclusion
would be antidilutive. For purposes of calculating earnings per share, the
unconverted European Convertible Notes discussed above are considered not to be
common stock equivalents.
(9) INCOME TAXES
At June 30, 1996, Harken had available for federal income tax
reporting purposes, net operating loss (NOL) carryforward for regular tax
purposes of approximately $65,000,000 which expires in 1997 through 2010,
alternative minimum tax NOL carryforward of approximately $57,000,000 which
expires in 1997 through 2010, investment tax credit carryforward of
approximately $860,000 which expires in 1996 through 2002, statutory depletion
carryforward of approximately $1,200,000 which does not have an expiration
date, and a net capital loss carryforward of approximately $6,100,000 which
expires in 2007 through 2008. Approximately $16,000,000 of the net operating
loss carryforward has been acquired with the purchase of subsidiaries and must
be used to offset future income from profitable operations within those
subsidiaries.
Total deferred tax liabilities, relating primarily to property and
equipment, as of June 30, 1996, computed under the provisions of the Statement
of Financial Accounting Standard No. 109, "Accounting for Income Taxes", were
approximately $7,528,000. Total deferred tax assets, primarily related to the
net operating loss carryforward, were approximately $22,364,000 at June 30,
1996. The total net deferred tax asset is offset by a valuation allowance of
approximately $14,836,000 at June 30, 1996.
(10) COMMITMENTS AND CONTINGENCIES
Colombian Operations-Alcaravan Contract -- During the third quarter
of 1992, Harken de Colombia, Ltd., a wholly-owned subsidiary of Harken, was
awarded the exclusive right to explore for, develop and produce oil and gas
throughout the Alcaravan area of Colombia. This Alcaravan area currently
covers approximately 210,000 acres. The Alcaravan area 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
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Contract (the "Alcaravan Contract") which requires Harken to conduct a seismic
and exploratory drilling program in the Alcaravan area during the initial six
(6) years of the Alcaravan Contract. At the end of each of the first six years
of the Alcaravan Contract, Harken has the option to withdraw from the Alcaravan
Contract or to commit to the next year's work requirements. If during the
initial six years of the Alcaravan Contract, Harken discovers a field capable
of producing oil or gas in quantities that are economically exploitable and
Ecopetrol agrees that such field is economically exploitable (a "commercial
discovery"), the term of the Alcaravan Contract covering such field will be
extended for a period of 22 years from the date of such commercial discovery.
Harken has completed all work requirements for the first, second and third
years of the Alcaravan Contract.
Upon a discovery of a field capable of commercial production,
Ecopetrol will reimburse Harken for 50% of its successful well costs expended
up to the point of declaration of a commercial discovery. Production from a
field following a commercial discovery will be allocated as follows: Ecopetrol,
on behalf of the Colombian government, will receive a 20% royalty interest in
all production. All production (after royalty payments) will be allocated 50%
to Ecopetrol and 50% to Harken until cumulative production in such field
reaches 60 million barrels of oil, after which Ecopetrol's share of production
will progressively increase and Harken's share will progressively decrease
until cumulative production from the field reaches 150 million barrels of oil,
and thereafter all production will be allocated 70% to Ecopetrol and 30% to
Harken. If more than one field capable of commercial production is discovered
on the Alcaravan acreage, the production sharing percentages applicable to the
field with the greatest cumulative production will be applied to all fields
within the Alcaravan acreage. After declaration of a commercial discovery,
Harken and Ecopetrol will be responsible for all future operating expenses in
direct proportion to their interest in production.
In September 1994, Huffco Group, Inc. ("Huffco") of Houston, Texas
joined Harken in the drilling of Harken's first exploratory well under the
Alcaravan Contract. Under the terms of a joint operating agreement, 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. Harken initially determined in April 1995 that the
Alcaravan #1 well failed to produce commercial quantities of oil. Harken
intends to re-enter the well, preferably with a joint venture partner, to
finalize the evaluation of the Alcaravan #1 well's ability to produce
commercial quantities of oil. As a result, the costs incurred on the Alcaravan
#1 well continue to be capitalized at June 30, 1996, as unevaluated oil and gas
properties, pending final determination of the results of the well. In
addition, Huffco elected to not participate in the further exploration and
development of the Alcaravan acreage and reassigned all interest and rights
therein to Harken.
On June 28, 1996, Harken along with Harken de Colombia, Ltd. entered
into development finance agreements ("the Palo Blanco Development Finance
Agreements") with BSR Investments, Inc. and Greyledge LLC, respectively ("the
Palo Blanco Investors"), which cover the Palo Blanco prospect under the
Alcaravan Contract area. Under the terms of the Palo Blanco Development
Finance Agreements, the Palo Blanco Investors will provide an aggregate of
$2,500,000 to Harken de Colombia, Ltd. to finance the drilling of the first
well on the Palo Blanco prospect in exchange for an aggregate beneficial
interest in 40% of the net profits which may be realized by Harken de Colombia,
Ltd. from this prospect, subject to reduction upon exercise of an election to
exchange this interest or any part thereof for shares of Harken common stock.
The Palo Blanco Investors will receive as part of the consideration for this
transaction an aggregate of 90,000 shares of restricted Harken common stock.
Under the Palo Blanco Development Finance Agreements, both the Palo
Blanco Investors and Harken have options to elect to exchange the Palo Blanco
Investors' respective beneficial interests in the Palo Blanco prospect for
restricted shares of Harken common stock. The Palo Blanco Investors may elect
to exchange from time to time up to all of their interests for an aggregate of
up to 1,109,976 restricted shares of Harken common stock, or any lesser part on
a prorated basis. Harken may exercise its option to exchange on the same terms
but only as to 75%
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of such interests on a similar prorated basis. Harken may thereafter elect to
exchange the remaining 25% of such unexchanged interests, if any, for
additional shares of restricted Harken common stock based upon 50% of the
independently engineered valuation of the first well drilled on this Palo
Blanco prospect. Following the issuance of such Harken common stock
thereunder, the Palo Blanco Investors will have certain registration rights
with regard thereto. Subsequent to June 30, 1996, Harken received from the
Palo Blanco Investors the initial scheduled advances pursuant to the Palo
Blanco Development Finance Agreements totaling $625,000. The Palo Blanco
Investors elected to exercise their option to exchange these initial interests
resulting in the issuance of 299,994 restricted shares of Harken common stock.
Bocachico Contract -- In January 1994, Harken de Colombia, Ltd. signed
its second Association Contract (the "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 initial six year term of the Bocachico Contract, if Harken
makes a commercial discovery on one or more prospect areas in the contract
area, the contract covering such prospect area(s) will be further extended for
a period of 22 years from the date of any commercial discovery of oil and/or
gas. The production sharing arrangements under the Bocachico Contract are
substantially similar to those under the Alcaravan Contract.
During the first year of the Bocachico Contract, Harken conducted
seismic activities on the land covered by this contract including the
reprocessing of approximately 250 kilometers of existing seismic data and the
acquisition of approximately 35 kilometers of new seismic data. During each of
the second 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.
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. 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
Bocachico Contract into its second year. Harken spudded its first well to be
drilled on this Bocachico Contract area, named the Torcaz #2 well, on July 18,
1996. This well is projected to be drilled to a depth of 8,500 feet and should
take approximately 22 to 25 days to reach this depth. Harken hopes to have
test results available from this well by the end of August 1996.
Under the original terms of the Bocachico Contract, Harken was
required to complete the first well on the Bocachico acreage by June 5, 1996.
Harken has obtained an extension whereby the first well on the Bocachico
acreage must now be completed by September 4, 1996. In addition, Harken has
committed to drilling a second well thereby extending the Bocachico Contract
into its third year, and has filed applications for environmental permits on
two additional well locations within the Bocachico Contract area.
In October 1995, Harken entered into a Development Finance Agreement
(the "Rio Negro Development Finance Agreement") with Arbco Associates L.P.,
Offense Group Associates L.P., Kayne Anderson Nontraditional Investments L.P.
and Opportunity Associates L.P. (collectively, the "Rio Negro Investors"),
pursuant to which the Rio Negro Investors agreed to provide up to $3,500,000 to
Harken to finance the drilling of two wells, including the Torcaz #2 well, 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
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that prospect is successful. Pursuant to the Rio Negro Development Finance
Agreement, Harken has agreed to drill two wells on the Rio Negro prospect. As
of June 30, 1996, Harken had requested and received $2,000,000 pursuant to the
Rio Negro Development Finance Agreement, and has reflected such amount as a
reduction to its investment in Colombian oil and gas properties in the
accompanying consolidated balance sheet.
Pursuant to the Rio Negro Development Finance Agreement, the Rio Negro
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 Series D
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 Rio Negro Investors have
not previously elected to convert all of such Participation. If Harken
exercises its right to convert the Participation into Preferred Stock, the Rio
Negro Investors at that time can elect to receive cash or Preferred Stock equal
to the amount of the balance of the remaining Participation plus an additional
amount computed at a rate of 25% per annum. In addition, the Rio Negro
Investors may then 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 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 Rio Negro Investors
to elect one director to Harken's Board of Directors.
Playero Contract -- In December 1994, Harken de Colombia, Ltd. signed
its third Association Contract (the "Playero Contract") with Ecopetrol,
covering the Playero Contract area. Under the Playero Contract, Harken
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 acquired
approximately 12 kilometers of new seismic data in the Playero Contract area.
During each of the second through the sixth contract years, Harken had the
option to continue the contract by committing to the drilling of at least one
well during each contract year. Harken has completed the evaluation of the new
seismic data and has determined that the identified prospect lies exclusively
within the contiguous Alcaravan Contract area and not within the Playero
Contract area. Accordingly, in May 1996, Harken elected not to commit to drill
a well in the Playero Contract area, thereby allowing the Playero Contract to
expire under its own terms. Harken reflected a valuation adjustment during the
first quarter of 1996, representing Harken's total incremental investment in
the Playero Contract. The valuation adjustment, which totals $19,000, is
included in interest and other expense in the accompanying consolidated
statement of operations.
Cambulos Contract -- In September 1995, Harken de Colombia, Ltd.
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 kilometers of existing seismic data and the
acquisition of at least 90 kilometers 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.
If during the initial six years of the Cambulos Contract, Harken
discovers a field capable of commercial production of oil or gas, the term of
the Cambulos Contract will be extended for a period of 22 years from the date
of such commercial discovery. Upon a commercial discovery, Ecopetrol will
reimburse Harken for 50% of its successful well costs, seismic costs and dry
hole costs expended prior to the point of declaration of a commercial
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<PAGE> 20
discovery. Production from a commercial discovery will be allocated as
follows: Ecopetrol, on behalf of the Colombian government, will receive a 20%
royalty interest in all production and all production (after royalty payments)
will be allocated 50% to Ecopetrol and 50% to Harken until cumulative
production from all fields in the Cambulos acreage reaches 60 million barrels
of oil, after which Ecopetrol's share of production will increase progressively
to 75% and Harken's share will decrease progressively to 25% determined by a
formula based on Harken's recovery of its total expenditures under the Cambulos
Contract. After a declaration of a commercial discovery, Harken and Ecopetrol
will be responsible for all future operating expenses in direct proportion to
their interest in production.
Bolivar Contract -- In May 1996, Harken de Colombia, Ltd. signed an
additional Association Contract with Ecopetrol, covering the Bolivar Contract
area. Under the Bolivar Contract, Harken has acquired the exclusive rights to
conduct exploration activities in the Bolivar Contract area, which covers
approximately 250,000 acres in the Northern Middle Magdalena Valley of Central
Colombia.
During the first two years of this Bolivar Contract, Harken's work
program will consist of preparing an engineering study of the Buturama and
Totumal fields located on and adjacent to this acreage, the reprocessing of 250
kilometers of seismic data and the acquisition of 100 kilometers of new seismic
data on this contract area. 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. The production
sharing arrangements under the Bolivar Contract are substantially similar to
those under the Cambulos Contract.
Two earlier oil fields, located in the Buturama Area and the Lebrija
Area, were discovered and drilled by a major operator beginning in the early
1950's. These earlier wells were produced for a number of years and then
subsequently abandoned. Harken has obtained and reviewed well data and
information including well logs, and production rates from these earlier wells.
Harken intends to apply modern drilling and completion techniques, including
the use of horizontal drilling similar to that used in the Austin Chalk
formation in Texas, in these areas.
The production sharing arrangements under the Bolivar Contract are
substantially similar to those under the Cambulos Contract.
Bahrain Operations -- In January 1990, Harken, through its
wholly-owned subsidiary, Harken Bahrain Oil Company ("HBOC"), entered into a
production sharing agreement with the Bahrain National Oil Company ("BANOCO")
which gave it the exclusive right to explore for, develop and produce oil and
gas throughout most of Bahrain's Arabian Gulf offshore territories. In 1992
and 1993, HBOC drilled two exploratory wells, neither of which discovered
commercial quantities of oil or gas. In January 1996, the term of the
production sharing agreement expired of its own accord. Harken had negotiated
with BANOCO to extend the term of the production sharing agreement and expand
the acreage covered thereby, however, Harken was unable to identify a joint
venture partner to share in the exploration of the production sharing agreement
acreage.
Other -- The exploration, development and production of oil and gas
are subject to various Navajo, federal, state and local laws and regulations
designed to protect the environment. Compliance with these regulations is part
of Harken's day-to-day operating procedures. Infrequently, accidental discharge
of such materials as oil, natural gas or drilling fluids can occur and such
accidents can require material expenditures to correct. Harken maintains levels
of insurance customary in the industry to limit its financial exposure.
Management is unaware of any material capital expenditures required for
environmental control during the next fiscal year.
The Aneth Gas Plant facility, of which Harken Southwest Corporation
("HSW"), a wholly-owned subsidiary, is a co-owner, was in operation for many
years prior to HSW's becoming an owner. The operations at the Aneth Gas Plant
previously used open, unlined drip pits for storage of various waste products.
The plant
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<PAGE> 21
owners have replaced all of the open ground pits currently being used with
steel tanks. The plant owners are currently in the process of closing the open
ground pits.
Texaco, the plant's operator, received a letter from the EPA dated
July 21, 1991 and a subsequent letter dated June 8, 1992, in which the EPA
requested certain information in order to determine if there had been at the
Aneth Gas Plant the release of hazardous substances to the environment. Texaco
has advised HSW that certain information was supplied to the EPA pursuant to
this request. Subsequently, core samples in and around certain pit areas were
jointly taken by the EPA and Texaco. The EPA approved a plan dated April 12,
1996 proposed by Texaco for the remediation and closure of these pits.
An agreement has been reached between the present plant owners
and the previous owner concerning responsibility for and sharing of costs of
pit closures in and around the Aneth Gas Plant. Harken has accrued a
contingency reserve of $219,000 for its best estimate of its share of the
remediation cost.
Harken has accrued approximately $1,128,000 at June 30, 1996 relating
to other operational or regulatory contingent liabilities related to Harken's
domestic operations. Harken and its subsidiaries currently are involved in
various lawsuits and other contingencies, including a certain lawsuit and the
guarantee of certain lease obligations of a former subsidiary, 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. On February 28,
1996, the court granted Search Acquisition's motion for summary judgement. The
plaintiff has appealed the decision of the trial court. Although the ultimate
outcome of this litigation is uncertain, Harken believes that any liability to
Harken as a result of this litigation will not have a material adverse effect
on Harken's financial condition.
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ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
22
<PAGE> 23
HARKEN ENERGY CORPORATION AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
(UNAUDITED)
RESULTS OF OPERATIONS
The following is management's discussion and analysis of certain
significant factors which have affected Harken's earnings and balance sheet
during the periods included in the accompanying consolidated financial
statements.
<TABLE>
<CAPTION>
THREE MONTHS ENDED SIX MONTHS ENDED
JUNE 30, JUNE 30,
------------------------------ ---------------------------
DOMESTIC EXPLORATION AND 1995 1996 1995 1996
- ------------------------- ------------- ------------- ------------ ------------
PRODUCTION OPERATIONS (UNAUDITED) (UNAUDITED)
- ---------------------
<S> <C> <C> <C> <C>
REVENUES
--------
Oil sales revenues $ 1,054,000 $ 1,496,000 $ 1,846,000 $ 2,830,000
Oil volumes in barrels 56,000 72,000 100,000 144,000
Oil price per barrel $ 18.82 $ 20.78 $ 18.46 $ 19.65
Gas sales revenues $ 310,000 $ 674,000 $ 506,000 $ 1,146,000
Gas volumes in mcf 225,000 274,000 371,000 490,000
Gas price per mcf $ 1.38 $ 2.46 $ 1.36 $ 2.34
Gas plant revenues $ 176,000 $ 218,000 $ 361,000 $ 409,000
OTHER REVENUES
--------------
Interest income $ 168,000 $ 202,000 $ 203,000 $ 385,000
Other income $ 74,000 $ -- $ 465,000 $ 161,000
</TABLE>
FOR THE SIX MONTHS ENDED JUNE 30, 1996 COMPARED WITH THE CORRESPONDING PRIOR
PERIOD.
OVERVIEW
Harken reported a net loss for the six months ended June 30, 1996 of
$228,000 compared to a net loss of $297,000 for the prior year period. Total
revenues increased from approximately $3.4 million during the first six months
of 1995 to approximately $4.9 million for the first six months of 1996,
primarily due to four acquisitions consummated during 1995 that increased
Harken's domestic producing properties and oil and gas reserves. Gross profit
before depreciation and amortization, general and administrative and interest
expenses totaled approximately $2.8 million during the six months ended June
30, 1996 compared to approximately $1.8 million for the prior year period.
Gross profit as a percentage of oil and gas sales revenues decreased slightly
during the six months ended June 30, 1996 compared to the prior year period
primarily due to the normal production declines of the Four Corners properties
and higher operating cost levels associated with the Yellowhouse Properties.
Internationally, Harken announced in April 1996 that it had received
final approval from the Environmental Ministry in Colombia to initiate drilling
operations on the initial well to be drilled on the Bocachico Contract area the
Torcaz #2 well. Harken spudded the Torcaz #2 well on July 18, 1996. This well
is projected to be drilled to a depth of 8,500 feet and should take
approximately 22 to 25 days to reach this depth. Harken hopes to have test
results available from this well by the end of August 1996.
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<PAGE> 24
DOMESTIC OPERATIONS
Gross oil and gas revenues during the first six months of 1995 and 1996
were generated by Harken's domestic exploration and production operations.
During the first six months of 1995 these domestic operations consisted
primarily of the operations of Harken Southwest Corporation ("HSW"), which
includes production of oil and gas reserves in the Aneth Field and Blanding
Sub-Basin portions of the Paradox Basin in the Four Corners area of Utah,
Arizona and New Mexico, primarily on the Navajo Indian Reservation. Such
operations are primarily conducted through HSW's interests in the CHAP Venture
("CHAP"). Harken also includes in oil and gas revenues certain gas plant
revenues, primarily from CHAP's plant owner interest in the Aneth Gas Plant
which serves many of the Utah properties.
During the first six months of 1996, Harken's domestic operations also
include the onshore South Texas production operations of Search Exploration,
Inc. ("Search"), which was merged into a wholly-owned subsidiary of Harken in
May 1995. In addition, 1996 activity includes the October 1995 acquisition of
the Yellowhouse Properties in the western region of Texas as well as the
December 1995 acquisition of the Panhandle Properties located in the panhandle
region of Texas.
Gross oil revenues increased significantly during the first six months
of 1996 compared to 1995 primarily due to the additional production volumes
added as a result of the above mentioned acquisitions and higher oil prices.
In particular, the addition of the Yellowhouse Properties contributed
approximately $979,000 to the first six months of 1996 oil revenues, while the
Panhandle Properties contributed approximately $107,000 to the first six months
of 1996 oil revenues. In addition, the higher price received per barrel of oil
produced reflects the increasingly strong demand for crude oil, particularly in
the Four Corners region.
Gross gas revenues also increased significantly for the six months ended
June 30, 1996 compared to the prior year period, again due to the acquisitions
consummated during 1995. The Panhandle Properties contributed approximately
$536,000 to first half 1996 gas revenues, despite many of the properties
experiencing numerous temporary operational curtailments during the first
quarter. These operational problems have been resolved during the second
quarter which has resulted in the resumption of normal gas production and
increased gas revenues from the Panhandle Properties. The gas produced from
the Panhandle Properties, with its associated products, can be currently sold
at approximately a 60% premium to posted gas prices in the region as a result
of the high BTU content of such gas. Harken received an average of $3.70 per
mcf for Panhandle Property gas during the first six months of 1996. Harken
also recorded approximately $176,000 of gas revenues from the acquisition of
Search. In addition, Harken received an average of $1.60 per mcf from Harken's
Four Corners gas production during the first half of 1996 compared to $1.36 per
mcf received during the first half of 1995.
Oil and gas operating expenses consist of lease operating expenses and
gas plant expenses, along with a number of production and reserve based taxes,
including Utah and Texas severance taxes, Utah and Texas property taxes, Utah
conservation taxes and Navajo severance and possessory interest taxes. The
increase in oil and gas operating expenses is as a result of the above
mentioned acquisitions, specifically resulting in approximately $386,000 from
the Yellowhouse Properties, approximately $212,000 from the Panhandle
Properties, and approximately $61,000 from the Search operations.
On July 10, 1996, Harken, along with a wholly-owned subsidiary,
purchased working interests in certain producing properties located in Arkansas
and New Mexico (the "EnerVest Properties") for a purchase price of $15,200,000
and the assumption of certain operational liabilities related to these
properties. The acquisition of the EnerVest Properties, while not impacting
the results of operations for the six months ended June 30, 1996, will increase
oil and gas sales revenues and gross profit before depreciation and
amortization, general and administrative expenses and interest expense for the
remainder of 1996 and beyond.
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<PAGE> 25
INTEREST AND OTHER INCOME
Interest and other income decreased during the first six months of 1996
compared to the prior period as during the first six months of 1995, Harken
included a gain of approximately $189,000 on the March 1995 sale of Harken's
investment in E-Z Serve Corporation Series C Preferred. During the first six
months of 1996, Harken recognized approximately $259,000 of interest income
earned by Harken on proceeds received from the May 1995 issuance of $15 million
of European 8% Senior Convertible Notes Payable (the "8% European Notes")
compared to $102,000 of such interest income during the first six months of
1995. Such proceeds, net of 8% European Notes issuance costs and amounts
released and transferred, are maintained and invested in a separate interest
bearing bank account (the "Segregated Account").
In July 1996, Harken issued a total of $40 million in 6 1/2% European
Notes which mature on July 30, 2000. As a result, in future periods Harken
initially expects to reflect interest income from the net proceeds which will
similarly be invested in a Segregated Account.
OTHER COSTS AND EXPENSES
General and administrative expenses increased from $1,511,000 for the
first six months of 1995 to $1,797,000 for the first six months of 1996,
primarily as a result of increased personnel and office costs associated with
the acquisitions consummated during 1995.
Depreciation and amortization expense increased during the first six
months of 1996 compared to the prior year period consistent with the increased
production levels from the acquired oil and gas property interests during 1995.
Depreciation and amortization on oil and gas properties is calculated on a unit
of production basis in accordance with the full cost method of accounting for
oil and gas properties.
Interest expense and other increased significantly during the first six
months of 1996 compared to the prior year period. In December 1995, Harken
issued the Panhandle Note for an initial face amount of $13 million in
connection with the acquisition of the Panhandle Properties, and the accretion
of interest on such note resulted in $234,000 of interest expense during the
first six months of 1996. In addition, the May 1995 issuance of the 8%
European Notes generated interest expense during 1996 of approximately $38,000
net of amounts of interest capitalized, and approximately $178,000 of
amortization of issuance costs associated with the 8% European Notes.
On July 11, 1996, Harken's wholly-owned subsidiary entered into an
exchange agreement with the holder of the $13 million Panhandle Note whereby it
was exchanged for, among other consideration, 5,150,000 restricted shares of
Harken common stock, including 185,000 shares held in escrow. The exchange has
eliminated the further accretion of interest expense related to the Panhandle
Note.
Also in July 1996, Harken issued a total of $40 million in 6 1/2%
European Notes which mature on July 30, 2000. The 6 1/2% European Notes are
convertible under certain terms into shares of Harken common stock. As a
result, Harken expects to reflect interest expense associated with the 6 1/2%
European Notes, net of amounts capitalized, and the amortization of issuance
costs associated with the 6 1/2% European Notes over the term or until such 6
1/2% European Notes are redeemed or are converted to Harken common stock.
FOR THE QUARTER ENDED JUNE 30, 1996 COMPARED WITH THE CORRESPONDING PRIOR
PERIOD.
Harken reported net income of $68,000 for the three months ended June
30, 1996 compared to a net loss of $158,000 for the second quarter of 1995.
Total revenues increased from approximately $1.8 million during the second
quarter of 1995 to approximately $2.6 million for the second quarter of 1996,
primarily due to the acquisitions consummated during 1995. Gross profit before
depreciation and amortization, general and
25
<PAGE> 26
administrative and interest expenses totaled approximately $1.5 million during
the second quarter of 1996 compared to approximately $1.1 million during the
prior year period.
DOMESTIC OPERATIONS
Gross oil revenues increased significantly during the second quarter of
1996 compared to 1995 primarily due to the additional production volumes added
as a result of the above mentioned acquisitions and higher oil prices. In
particular, the addition of the Yellowhouse Properties contributed
approximately $504,000 to second quarter 1996 oil revenues, while the Panhandle
Properties contributed approximately $69,000 to second quarter 1996 oil
revenues. Overall, oil prices were particularly strong during the second
quarter of 1996, averaging $20.78 per barrel compared to $18.82 during the
second quarter of 1995.
Gross gas revenues also increased significantly for the three months
ended June 30, 1996 compared to the prior year period, again due to the
acquisitions consummated during 1995. The Panhandle Properties contributed
approximately $339,000 to second quarter 1996 gas revenues, reflecting a
significant improvement over first quarter 1996 revenues from the Panhandle
Properties, which was negatively impacted by operational curtailments. Harken
also recorded approximately $126,000 of gas revenues from the acquisition of
Search, compared to only a minimal amount of Search revenue during the second
quarter of 1995.
Oil and gas operating expenses consist of lease operating expenses and
gas plant expenses, along with a number of production and reserve based taxes,
including Utah and Texas severance taxes, Utah and Texas property taxes, Utah
conservation taxes and Navajo severance and possessory interest taxes. The
increase in second quarter 1996 oil and gas operating expenses compared to the
prior year is as a result of the above mentioned acquisitions, specifically
resulting in approximately $171,000 from the Yellowhouse Properties,
approximately $141,000 from the Panhandle Properties, and approximately $40,000
from the Search operations.
INTEREST AND OTHER INCOME
Interest and other income decreased slightly during the second quarter
of 1996 compared to the prior period despite the inclusion for the full quarter
during 1996 of interest income earned by Harken on proceeds received from the
May 1995 issuance of $15 million of European 8% Senior Convertible Notes
Payable (the "8% European Notes").
OTHER COSTS AND EXPENSES
General and administrative expenses increased from $737,000 for the
second quarter of 1995 to $980,000 for the second quarter of 1996, primarily as
a result of increased personnel and office costs associated with the
acquisitions consummated during 1995.
Depreciation and amortization expense increased during the second
quarter of 1996 compared to the prior year period consistent with the increased
production levels from the acquired oil and gas property interests during 1995.
Depreciation and amortization on oil and gas properties is calculated on a unit
of production basis in accordance with the full cost method of accounting for
oil and gas properties.
Interest expense and other decreased during the second quarter of 1996
compared to the prior year period due to the significant number of conversions
by holders of 8% European Notes into shares of Harken common stock, which
resulted in interest expense during 1996 of approximately $15,000 net of
amounts of interest capitalized, and approximately $56,000 of amortization of
issuance costs associated with the 8% European Notes. Interest expense and
other during the second quarter of 1995 included net interest expense of
approximately $125,000 and approximately $73,000 of amortization of issuance
costs associated with the 8% European Notes.
26
<PAGE> 27
LIQUIDITY AND CAPITAL RESOURCES
During the year ended December 31, 1995, Harken took significant steps
to strengthen its operating cash flow and available capital resources in order
to implement its overall operating strategy. Such efforts included the issuance
of $15 million of 8% European Notes, the generation of approximately $4.4
million from private placements of Harken common stock, four separate
acquisitions of domestic oil and gas reserves and the signing of a Rio Negro
Development Finance Agreement with certain investors to provide up to $3.5
million for Colombian exploration efforts.
During the first six months of 1996, Harken's working capital increased
approximately $7.8 million, primarily due to the availability of the remaining
approximately $6.2 million of cash proceeds from the issuance of the 8%
European Notes, which were restricted as of December 31, 1995. In addition,
Harken generated approximately $2.5 million of net proceeds during the first
six months of 1996 from the conversion of certain options and warrants and from
a March 1996 private placement of Harken common stock. In July 1996, Harken
again significantly improved its available capital resources primarily through
the issuance of $40 million of 6 1/2% European Notes, which generated net
available proceeds, subject to limitations discussed below, of approximately
$36.9 million. Such 6 1/2% European Notes mature in July 2000 and are
convertible after September 9, 1996 by the holders into shares of Harken common
stock at a conversion price of $2.50 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 of Harken common stock for
each day during such period shall have equaled or exceeded 135% of the
conversion price (or $3.375 per share of Harken common stock). All proceeds
from the sale of the 6 1/2% European Notes were paid to a Trustee and are held
in a Segregated Account to be maintained for Harken's benefit.
Also during July 1996, Harken strengthened it operating cash flow with
the acquisition of certain producing oil and gas properties located in the
Magnolia area of Arkansas and in the Carlsbad area of New Mexico (the "EnerVest
Properties"). The purchase price of $15,200,000 plus the assumption of certain
operational liabilities related to these properties, was paid in the form of
$5,000,000 cash paid at closing, 1,550,000 shares of Harken common stock issued
following closing, and 1,159,091 shares of Harken common stock issued at a
designated time following the registration and sale by the seller of the
initial shares issued at closing. Harken also issued to the seller warrants to
purchase, for a period of three years from closing, 300,000 shares of Harken
common stock at an exercise price of $2.75 per share. The agreement includes
adjustment provisions pursuant to which Harken may be obligated to issue
additional shares of Harken common stock if the seller does not realize at
least $10,200,000 from its sale of such shares.
The $5,000,000 cash consideration paid in connection with the July 1996
acquisition of the EnerVest Properties was funded with proceeds attributable to
the 8% European Notes, issued in May 1995. Such 8% European Notes were
convertible at any time by the holders into shares of Harken common stock at a
conversion 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 of Harken common stock 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). Upon a conversion, any proceeds
attributable to the 8% European Notes converted which remained in the
Segregated Account were available to be released and paid to Harken without
regard to the Asset Value Coverage Ratio test (as defined below). As of June
30, 1996, holders of 8% European Notes totaling $14,300,000 had exercised their
conversion option and had been issued 9,533,311 shares of Harken common stock.
Subsequent to June 30, 1996 and as of July 31, 1996, additional notifications
of exercise of conversion options have been received from the remaining holders
of 8% European Notes totaling $700,000, which has resulted in the additional
issuance of 466,664 shares of Harken common stock.
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<PAGE> 28
For the 8% European Notes, Harken was required to maintain an Asset
Value Coverage Ratio equal to or greater than 1:1. As of June 30, 1996, Harken
was in compliance with the Asset Value Coverage Ratio test. The Asset Value
Coverage Ratio for the 8% European Notes was calculated as a ratio of the sum
of 100% of the aggregate amount of Harken's cash on deposit in the Segregated
Account plus 60% of the aggregate amount of Harken's marketable securities plus
40% of the present value of Harken's unencumbered proved developed producing
reserves located in the U.S. to the aggregate outstanding principal amount of
the 8% European Notes.
For the 6 1/2% European Notes, the Asset Value Coverage Ratio must also
be equal to or greater than 1:1, and is calculated as the ratio of the sum of
100% of the aggregate amount of Harken's cash on deposit in the Segregated
Account plus 60% of the aggregate amount of Harken's marketable securities plus
50% of the SEC value of Harken's domestic unencumbered total proved reserves of
which at least 75% thereof must be proved developed producing reserves to the
aggregate outstanding principal amount of the 6 1/2% European Notes. As of
July 31, 1996, the amount of net proceeds from the 6 1/2% European Notes that
was available based on the Asset Value Coverage Ratio described above was
approximately $5,467,000.
In order for a specific amount of proceeds to be released from the
Segregated Account, Harken must demonstrate that the Asset Value Coverage Ratio
test would continue to be met after such release of funds and that no Event of
Default with respect to the 6 1/2% European Notes has occurred and is
continuing at the date of such release. Such request must be accompanied by an
independent reserve engineering report or other independent third party
valuation of Harken's unencumbered proved developed producing assets.
The anticipated timing at which funds will be released from the
Segregated Account is dependent upon the timing and magnitude of conversions
into Harken common stock by the individual noteholders, the market price of the
Harken common stock, the amount of Harken's assets which qualify for inclusion
in the Asset Value Coverage Ratio test, and the decision and ability by Harken
to convert the 6 1/2% European Notes into Harken common stock. Once an amount
of proceeds are available to be released from the Segregated Account, Harken
may submit its request for the transfer of such proceeds at its discretion and
according to its capital resource requirements. Upon maturity date of the 6
1/2% European Notes, the Segregated Account cash proceeds then remaining could
be used to retire any remaining unconverted 6 1/2% European Notes.
To the extent that proceeds invested in the Segregated Account at the
balance sheet date are available under the above Asset Value Coverage Ratio
limitations, such cash is included as a current asset as it is available to
Harken to fund international and domestic activities including acquisitions,
drilling costs and other capital expenditures or other working capital needs.
Interest incurred on the 6 1/2% European Notes is payable semi-annually in
January and July of each year to maturity or until the 6 1/2% European Notes
are converted. Interest payments will be funded from cash flow from
operations, existing cash balances or from available proceeds.
Also in July 1996, Harken entered into an exchange agreement with the
seller of the Panhandle Properties, pursuant to which Harken issued 5,150,000
restricted shares of Harken common stock, including 185,000 shares to be held
in escrow, in connection with the satisfaction of all obligations owed by
Harken Exploration to the seller under the terms of the Panhandle Note. Harken
has reflected the Panhandle Note at the $10,429,000 approximate market value of
the 5,150,000 restricted shares of Harken common stock issued. Under this
exchange agreement, Harken Exploration agreed to pay the seller the amount, if
any, by which the proceeds from the sale of these shares of Harken common stock
sold by the seller are less than $8,500,000. The $13 million Panhandle Note
bore interest at 5% per annum as to $8,000,000 in principal amount only, was
secured by Harken Exploration's interest in the Panhandle Properties and was
not guaranteed by Harken. Pursuant to the Panhandle Purchase and Sale
Agreement, Harken Exploration could elect to pay the amounts due pursuant to
the Panhandle Note in shares of Harken
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<PAGE> 29
common stock, with the number of shares to be issued based on the average of
the closing prices of the Harken common stock on the American Stock Exchange
during certain periods.
As Harken's intention was to pay the Panhandle Note with shares of
Harken common stock, the entire Panhandle Note balance has been classified as
long-term obligations on Harken's Consolidated Balance Sheet. The recorded
amount of the Panhandle Note on Harken's Consolidated Balance Sheet at December
31, 1995 was equal to the discounted fair value of the payments to be made at
each maturity date, using a market rate of interest.
In addition to Harken's efforts to acquire domestic oil and gas
reserves, Harken continues to be very active in exploration efforts
internationally, particularly in Colombia. As of June 30, 1996, Harken's net
investment in its Colombian operations has totaled approximately $5 million,
the realizability of which is dependent upon the success of Harken's
exploration efforts. In addition, terms of each of the Association Contracts
entered into between Harken de Colombia, Ltd. and Ecopetrol commit Harken to
perform certain activities in accordance with a prescribed timetable. Failure
by Harken to perform these activities as required could result in Harken losing
its rights under the particular Association Contract, which could potentially
have a material adverse effect on Harken's business. For a detailed discussion
of each of the Association Contracts entered into between Harken de Colombia,
Ltd. and Ecopetrol, see "Notes to Consolidated Condensed Financial Statements,
Note 10 -- Commitments and Contingencies".
Harken anticipates that full development of Colombian reserves in the
Alcaravan contract area of the Llanos Basin and the Bocachico, Cambulos and
Bolivar contract areas of the Middle Magdalena Basin may take several years and
may require extensive production facilities which could require significant
additional capital expenditures. The ultimate amount of such expenditures
cannot be presently predicted. Harken anticipates that amounts required to
fund international activities, including those in Colombia, will be funded from
existing cash balances, asset sales, stock issuances, production payments,
operating cash flows and from industry partners; however, there can be no
assurances that Harken will have adequate funds available to it to fund its
international activities or that industry partners can be obtained to fund such
international activities.
In October 1995, Harken entered into a Development Finance Agreement
(the "Rio Negro Development Finance Agreement") with Arbco Associates L.P.,
Offense Group Associates L.P., Kayne Anderson Nontraditional Investments L.P.
and Opportunity Associates L.P. (collectively, the "Rio Negro Investors"),
pursuant to which the Rio Negro Investors agreed to provide up to $3.5 million
to Harken to finance the drilling of two wells, including the Torcaz #2, 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, through its wholly-owned subsidiary 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 Rio Negro Development Finance Agreement, Harken has agreed to
drill two wells on the Rio Negro prospect. As of June 30, 1996, Harken had
requested and received $2,000,000 pursuant to the Rio Negro Development Finance
Agreement.
Pursuant to the Rio Negro Development Finance Agreement, the Rio Negro
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 Rio Negro
Investors have not previously elected to convert all of such Participation. If
Harken exercises its right to convert the Participation into Preferred Stock,
the Rio Negro Investors at that time can elect to receive cash or Preferred
Stock equal to the amount of the balance of the remaining Participation plus an
additional amount computed at a rate of 25% per annum. In addition, the Rio
Negro Investors may then 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
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<PAGE> 30
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 Rio Negro Investors to elect one director to
Harken's Board of Directors.
Harken has completed all work requirements for the first, second and
third years of the Alcaravan Contract. On June 28, 1996, Harken along with
Harken de Colombia, Ltd. entered into development finance agreements ("the Palo
Blanco Development Finance Agreements") with BSR Investments, Inc. and
Greyledge LLC, respectively ("the Palo Blanco Investors"), which cover the Palo
Blanco prospect under the Alcaravan Contract area. Under the terms of the Palo
Blanco Development Finance Agreements, the Palo Blanco Investors will provide
an aggregate of $2,500,000 to Harken de Colombia, Ltd. to finance the drilling
of the first well on the Palo Blanco prospect in exchange for an aggregate
beneficial interest in 40% of the net profits which may be realized by Harken
de Colombia, Ltd. from this prospect, subject to reduction upon exercise of an
election to exchange this interest or any part thereof for shares of Harken
common stock. The Palo Blanco Investors will receive as part of the
consideration for this transaction an aggregate of 90,000 shares of restricted
Harken common stock.
Under the Palo Blanco Development Finance Agreements, both the Palo
Blanco Investors and Harken have options to elect to exchange the Palo Blanco
Investors' respective beneficial interests in the Palo Blanco prospect for
restricted shares of Harken common stock. The Palo Blanco Investors may elect
to exchange from time to time all of their interests for an aggregate of
1,109,976 restricted shares of Harken common stock, or any lesser part on a
prorated basis. Harken may exercise its option to exchange on the same terms
but only as to 75% of such interests on a similar prorated basis. Harken may
thereafter elect to exchange the remaining 25% of such unexchanged interests,
if any, for additional shares of restricted Harken common stock based upon 50%
of the independently engineered valuation of the first well drilled on this
Palo Blanco prospect. Following the issuance of such Harken common stock
thereunder, the Palo Blanco Investors will have certain registration rights
with regard thereto. Subsequent to June 30, 1996, Harken received from the
Palo Blanco Investors the initial scheduled advances pursuant to the Palo
Blanco Development Finance Agreements totalling $625,000. The Palo Blanco
Investors elected to exercise their option to exchange this initial interest
resulting in the issuance of 299,994 restricted shares of Harken common stock.
All of the steps taken by Harken during the past year, including the
above mentioned Development Finance Agreements, provide Harken with additional
capital resources, both internally and externally, to be used toward
accomplishing Harken's exploration and development objectives during 1996 and
beyond. Such capital expenditures will be incurred only to the extent that
cash flows from operations or capital resources are available. Capital
expenditures related to Harken's Colombian operations are expected to total a
minimum of $3.2 million during 1996, with a majority of such costs related to
the Rio Negro prospect on the Bocachico Contract area. Harken has selected the
site of its first well, the Torcaz #2 well, and in April 1996 received the
drilling permit from the Environmental Ministry in Colombia to initiate
drilling operations. Harken spudded its first well to be drilled on this
Bocachico Contract area, named the Torcaz #2 well, on July 18, 1996. This well
is projected to be drilled to a depth of 8,500 feet and should take
approximately 22 to 25 days to reach this depth. Harken hopes to have test
results available from this well by the end of August 1996. In addition,
Harken plans to expend at least $1 million in 1996 on domestic drilling
activities. Harken anticipates that such amounts will be funded from existing
cash balances (including available European Segregated Account cash), operating
cash flows and funds provided by the Development Finance Agreements.
During the six months ended June 30, 1996, Harken's cash and temporary
investments increased approximately $10.4 million consisting primarily of
transfers from the European Segregated Account of $10 million following the
conversions of 8% European Notes to Harken common stock, Harken common stock
private placement offering proceeds of approximately $1.3 million, and the
initial advances pursuant to the Rio Negro Development Finance Agreement of $2
million. Such activity was sufficient to fund capital expenditures of
30
<PAGE> 31
approximately $3.9 million and repayments of notes payable and long-term
obligations of approximately $1.3 million. Cash flow provided by operations
during the first six months of 1996 totaled $958,000.
Harken believes that cash flow from operations will be sufficient to
meet its operating cash requirements in 1996. Harken includes in cash and
temporary investments certain balances which are restricted to use for specific
project expenditures, collateral or for distribution to outside interest owners
and are not available for general working capital purposes.
The exploration, development and production of oil and gas are subject
to various Navajo, federal, state and local laws and regulations designed to
protect the environment. Compliance with these regulations is part of Harken's
day-to-day operating procedures. Infrequently, accidental discharge of such
materials as oil, natural gas or drilling fluids can occur and such accidents
can require material expenditures to correct. Harken maintains levels of
insurance customary in the industry to limit its financial exposure. Management
is unaware of any material capital expenditures required for environmental
control during the next fiscal year.
Harken has accrued approximately $1,128,000 at June 30, 1996 relating to
operational or regulatory contingent liabilities related to Harken's domestic
operations. Harken and its subsidiaries currently are involved in various
lawsuits and other contingencies, including a certain lawsuit and the guarantee
of certain lease obligations of a former subsidiary, which in management's
opinion, will not result in significant loss exposure to Harken.
31
<PAGE> 32
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 eight Odyssey limited partnerships.
Search Acquisition was the surviving corporation in the merger with
Search. On February 28, 1996, the court granted Search
Acquisition's motion for summary judgement. Petrochemical has
appealed the decision of the trial court.
Harken has been named as a defendant in a lawsuit styled Douglas C
Kramlich vs. E-Z Serve Corp., Harken Energy Corp., Diamond
Shamrock, Inc., Autotronic Systems, Inc., and Does 1-100 filed in
the Superior Court of California, County of San Diego. The
plaintiff has alleged that property owned by him has become
contaminated with hazardous substances and further claims that the
contamination was caused by a gasoline leak at a service station
operated on the property by one or more of the defendants. As a
result, plaintiff claims that he is entitled to damages. The
property was the site of a gasoline service station operated by E-Z
Serve Corp., a former subsidiary of Harken, but was never owned or
operated by Harken. Harken believes that it has numerous
meritorious defenses to this lawsuit and intends to defend this
lawsuit vigorously.
Although the outcome of the litigation matters described above are
uncertain, Harken does not believe that any liability to Harken as
a result of such matters will have a material adverse effect on
Harken's financial condition.
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.
Results of Annual Meeting of Stockholders.
On June 11, 1996, Harken held its Annual Meeting of Stockholders.
The stockholders of Harken voted on three separate proposals, the
results of which are described below:
1. Approval of an amendment to Harken's Certificate of
Incorporation increasing the authorized number of shares of
Common Stock from 100,000,000 to 125,000,000.
For Against Abstain
------------- ----------- ---------
61,232,052 1,793,442 199,044
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<PAGE> 33
2. Approval of an amendment to Harken Energy Corporation 1993
Stock Option and Restricted Stock Plan to increase the number
of shares of Common Stock authorized for issuance under the
plan from 3,000,000 to 4,000,000.
For Against Abstain
------------ ----------- ---------
59,153,032 3,838,355 233,151
3. Election of Directors.
For Withheld
------------- ----------
Donald W. Raymond 62,367,376 857,162
Richard H. Schroeder 62,462,446 762,092
Gary B. Wood, Ph.D. 62,419,851 804,687
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.)
4.2 Certificate of Designations, Powers, Preferences and
Rights of Series A Cumulative Convertible Preferred
Stock, $1.00 par value, of Harken Energy Corporation
(filed as Exhibit 4.1 to Harken's Annual Report on Form
10-K for the fiscal year ended December 31, 1989, File
No. 0-9207, and incorporated by reference herein).
4.3 Certificate of Designations, Powers, Preferences and
Rights of Series B Cumulative Convertible Preferred
Stock, $1.00 par value, of Harken Energy Corporation
(filed as Exhibit 4.2 to Harken's Annual Report on Form
10-K for the fiscal year ended December 31, 1989, File
No. 0-9207, and incorporated by reference herein).
4.4 Certificate of the Designations, Powers, Preferences and
Rights of Series C Cumulative Convertible Preferred
Stock, $1.00 par value of Harken Energy Corporation
(filed as Exhibit 4.3 to Harken's Annual Report on Form
10-K for fiscal year ended December 31, 1989, File No.
0-9207, and incorporated by reference herein).
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<PAGE> 34
4.5 Certificate of the Designations of Series D Preferred
Stock, $1.00 par value of Harken Energy Corporation
(filed as Exhibit 4.3 to Harken's Quarterly Report on
Form 10-Q for the fiscal quarter ended September 30,
1995, File No. 0-9207, and incorporated by reference
herein).
*10.1 Trust Indenture dated July 30, 1996, by and between
Harken and Marine Midland Bank plc.
*10.2 Placing Agreement dated July 19, 1996, by and between
Harken and the various signatories thereto.
*10.3 Global Temporary Note dated July 30, 1996 issued by
Harken in the principal amount of $40,000,000.
*10.4 Association Contract (Bolivar) by and between Harken de
Colombia, Ltd., and Empresa Colombia de Petroleos.
*10.5 Exchange Agreement dated July 11, 1996, by and among
Harken, Harken Exploration Company and Momentum Operating
Co., Inc.
*27 Financial Data Schedules.
(b) REPORTS ON FORM 8-K.
The registrant filed a Current Report on Form 8-K dated July 10,
1996 (Item 2) to report the acquisition of the EnerVest
Properties.
The registrant filed a Current Report on Form 8-K dated July 31,
1996 (Item (5) to report the issuance of the 6 1/2% European
Notes.
34
<PAGE> 35
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: August 8, 1996 By: /s/ Bruce N. Huff
- ------------------------------ ----------------------------------------
Bruce N. Huff, Senior Vice President and
Chief Financial Officer
35
<PAGE> 36
EXHIBIT INDEX
Exhibit Description
------- -----------
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 Designations, Powers, Preferences and Rights of
Series A Cumulative Convertible Preferred Stock, $1.00 par value,
of Harken Energy Corporation (filed as Exhibit 4.1 to Harken's
Annual Report on Form 10-K for the fiscal year ended December 31,
1989, File No. 0-9207, and incorporated by reference herein).
4.3 Certificate of Designations, Powers, Preferences and Rights of
Series B Cumulative Convertible Preferred Stock, $1.00 par value,
of Harken Energy Corporation (filed as Exhibit 4.2 to Harken's
Annual Report on Form 10-K for the fiscal year ended December 31,
1989, File No. 0-9207, and incorporated by reference herein).
4.4 Certificate of the Designations, Powers, Preferences and Rights of
Series C Cumulative Convertible Preferred Stock, $1.00 par value of
Harken Energy Corporation (filed as Exhibit 4.3 to Harken's Annual
Report on Form 10-K for fiscal year ended December 31, 1989, File
No. 0-9207, and incorporated by reference herein).
4.5 Certificate of the Designations of Series D Preferred Stock, $1.00
par value of Harken Energy Corporation (filed as Exhibit 4.3 to
Harken's Quarterly Report on Form 10-Q for the fiscal quarter ended
September 30, 1995, File No. 0-9207, and incorporated by reference
herein).
*10.1 Trust Indenture dated July 30, 1996, by and between Harken and
Marine Midland Bank plc.
*10.2 Placing Agreement dated July 19, 1996, by and between Harken and
the various signatories thereto.
*10.3 Global Temporary Note dated July 30, 1996 issued by Harken in the
principal amount of $40,000,000.
*10.4 Association Contract (Bolivar) by and between Harken de Colombia,
Ltd., and Empresa Colombia de Petroleos.
*10.5 Exchange Agreement dated July 11, 1996, by and among Harken, Harken
Exploration Company and Momentum Operating Co., Inc.
*27 Financial Data Schedules.
<PAGE> 1
EXHIBIT 10.1
HARKEN ENERGY CORPORATION
U.S.$40,000,000
6.5% Senior Convertible Notes Due 2000
TRUST INDENTURE
<PAGE> 2
TRUST INDENTURE dated as of July 30, 1996 ("Indenture"), between
HARKEN ENERGY CORPORATION, a corporation duly organized and existing under the
laws of the State of Delaware (herein called the "Company"), and MARINE MIDLAND
BANK, a banking corporation and trust company duly organized and existing under
the laws of the State of New York, as Trustee (herein called the "Trustee").
WHEREAS:
The Company has duly authorized the creation of an issue of up to U.S.
$40,000,000 of 6.5% Senior Convertible Notes Due 2000 and the Coupons, if any,
thereto appertaining (collectively, the "Notes") and to provide therefor the
Company has duly authorized the execution and delivery of this Indenture.
All things necessary have been done to make the Notes, when duly
issued and executed by the Company and authenticated and delivered hereunder,
the valid obligations of the Company and to make this Indenture a valid
agreement of the Company, in accordance with their and its terms.
The Trustee has agreed to act as trustee under this Indenture on the
terms and conditions set forth herein.
NOW, THEREFORE, THIS INDENTURE WITNESSETH:
For and in consideration of the premises and the purchase of the Notes
by the Holders thereof, it is mutually covenanted and agreed, for the equal and
proportionate benefit of all Holders of the Notes, as follows:
ARTICLE ONE
DEFINITIONS AND OTHER PROVISIONS OF GENERAL APPLICATION
SECTION 1.01 Definitions.
"Act," when used with respect to any Noteholder, has the meaning
specified in Section 1.06.
"Affiliate" of any specified Person means any other Person directly or
indirectly controlling or controlled by or under direct or indirect common
control with such specified Person and the terms "controlling" and "controlled"
have meanings correlative to the foregoing.
1
<PAGE> 3
"Agent Members" has the meaning specified in Section 3.06.
"Alternative Stock Exchange" means any other national or regional
stock exchange or quotation service such as NASDAQ National Market System or
any similar quotation service maintained by the National Quotation Bureau or
any successor thereto.
"AMEX" means The American Stock Exchange, Inc. or any successor
thereto.
"Asset Value Coverage Ratio" means a ratio of (a) the sum of the value
of the Required Assets to (b) the aggregate principal amount of all Outstanding
Notes, as set forth in Section 10.13.
"Authenticating Agent" means the Person authorized pursuant to Section
6.14 to act on behalf of the Trustee to authenticate the Notes until a
successor Authenticating Agent shall have become such pursuant to the
applicable provisions of this Indenture, and thereafter "Authenticating Agent"
shall mean such successor Authenticating Agent. Pursuant to the terms hereof,
Midland Bank Plc will initially act as the Authenticating Agent.
"Authorized Newspaper" means the Financial Times (European Edition) of
London, England. If such newspaper shall cease to be published, the Company or
the Trustee shall substitute for it another newspaper in Europe, customarily
published at least once a day for at least five (5) days in each calendar week,
of general circulation. If, because of temporary suspension of publication or
general circulation of such newspaper or for any other reason, it is impossible
or, in the opinion of the Company or the Trustee, impracticable to make any
publication of any notice required by this Indenture in the manner herein
provided, such publication or other notice in lieu thereof which is made by the
Company or the Trustee in the exercise of its reasonable discretion shall
constitute a sufficient publication of such notice.
"Board of Directors" means either the board of directors of the
Company or any duly authorized committee of that board.
"Board Resolution" means a copy of a resolution certified by the
Secretary or an Assistant Secretary of the Company to have been duly adopted by
the Board of Directors and in full force and effect on the date of such
certification, and delivered to the Trustee.
"Business Day" means each Monday, Tuesday, Wednesday, Thursday and
Friday which is a day on which banking institutions in the City of New York,
New York, London, England and Lugano, Switzerland are not authorized or obliged
by law, regulation or executive order to close.
2
<PAGE> 4
"Capital Stock" means, with respect to any Person, any and all shares,
interests, participation or other equivalents (however designated) of such
Person's capital stock whether now outstanding or issued on or after the date
of this Indenture, including, without limitation, all Common Stock and
Preferred Stock.
"Capitalized Lease Obligation" means the amount of the liability under
any capital lease that, in accordance with GAAP, is required to be capitalized
and reflected as a liability on the balance sheet.
"Cedel" means Cedel Bank, societe anonyme.
"Certificate of Incorporation" means the Amended and Restated
Certificate of Incorporation of the Company, as in effect on the date hereof
and as amended or restated from time to time hereafter.
"Closing Date" means July 30, 1996.
"Commission" means the Securities and Exchange Commission, as from
time to time constituted or, if at any time after the execution of this
Indenture such Commission is not existing, then the body performing similar
duties at such time.
"Common Depository" means the common depository appointed by Morgan
Guaranty Trust Company of New York, Brussels office, as operator of the
Euroclear System, and Cedel Bank, societe anonyme, which shall initially be
Midland Bank Plc, including the nominees and successors of any Common
Depository.
"Common Stock" means, with respect to any Person, any and all shares,
interests, participation and other equivalents (however designated, whether
voting or non-voting) of such Person's common stock, whether now outstanding or
issued after the date of this Indenture, and includes, without limitation, all
series and classes of such common stock.
"Company" means the Person named as the "Company" in the first
paragraph of this Indenture, until a successor Person shall have become such
pursuant to the applicable provisions of this Indenture, and thereafter
"Company" shall mean such successor Person.
"Company Request" or "Company Order" means a written request or order
signed in the name of the Company by its Chairman, a Vice Chairman, its
President, or a Vice President, by its Treasurer or its Secretary, and
delivered to the Trustee.
3
<PAGE> 5
"Conversion Agent" means any Person (including the Company acting as
Conversion Agent) authorized by the Company to effect conversions of the Notes
on behalf of the Company. Pursuant to the terms hereof, the Company has
initially appointed Midland Bank Plc to act as the Principal Conversion Agent
and Banca del Gottardo to act as a Conversion Agent for the Notes.
"Conversion Date" means the Business Day on which the Conversion Right
is exercisable immediately following the Business Day on which the Conversion
Agent receives the Note surrendered for conversion and notice of a Noteholder's
intention to exercise its Conversion Right with respect to any Note and, if
applicable, any payment to be made or indemnity given pursuant to this
Indenture in connection with the exercise of such Conversion Right or in the
case of conversions pursuant to Section 11.09.
"Conversion Price" means $2.50, the price at which Conversion Shares
shall be issued upon conversion, subject to adjustment as set forth herein.
"Conversion Right" means the right of a Holder of any Note to convert
such Note into Conversion Shares.
"Conversion Shares" means the Shares into which the Notes are
convertible.
"Corporate Trust Office" means the principal corporate trust office of
the Trustee, at which at any particular time its corporate trust business shall
be administered, which office at the date of execution of this Indenture is
located at 140 Broadway, New York, New York 10005-1180, except that with
respect to presentation of Notes for payment upon redemption, for conversion or
exchange, such term shall mean the office or agency of the Trustee at which, at
any particular time, its corporate agency business shall be conducted.
"Corporation" includes corporations, limited liability companies,
limited and general partnerships, associations, joint-stock companies and
business trusts.
"Coupon" means bearer interest Coupons relating to the Bearer Notes
and any replacement Coupons issued pursuant to Section 3.08.
"Couponholder" means a Person who is the bearer of any Coupon.
"Default" means any event which is, or after notice or passage of time
or both would be, an Event of Default.
4
<PAGE> 6
"Designated Oil and Gas Reserves" means 50% of the SEC Value of the
Proved Reserves of the Company and its Subsidiaries, of which at least 75% of
the SEC Value thereof must be PDP Reserves, which the parties for purposes of
clarification have agreed shall be equivalent to the lesser of (i) 50% of the
SEC Value of the Proved Reserves or (ii) 66.6% of the SEC Value of the PDP
Reserves as the same are reported in the Independent Reserve Report, with the
understanding that the result obtained by such methods of calculation shall be
the same in all cases.
"Euroclear" means the Euroclear System.
"Event of Default" has the meaning specified in Section 5.01.
"Exchange Act" means the Securities Exchange Act of 1934, as amended.
"Extraordinary Resolution" means a resolution passed at a meeting of
the Noteholders duly convened and held in accordance with Section 6.13 hereof.
"Federal Bankruptcy Code" means the Bankruptcy Act or Title 11 of the
United States Code, as amended from time to time.
"Generally Accepted Accounting Principles" or "GAAP" means generally
accepted accounting principles in the United States, as applied from time to
time by the Company in the preparation of its financial statements.
"Good Title" means, with respect to Oil and Gas Properties, good and
defensible title which is (i) evidenced by an instrument or instruments filed
of record in accordance with the conveyance and recording laws of the
applicable jurisdiction and is sufficient against competing claims of bona fide
purchasers for value without notice and (ii) free and clear of all Liens, other
than such Liens that a reasonably prudent purchaser of Oil and Gas Properties
would accept in light of the value of the Oil and Gas Property affected, the
improbability of assertion of the defect or irregularity or the degree of
difficulty or the cost of performing curative work.
"Group" means the Company and all its Principal Subsidiaries.
"Guaranty" means all obligations of any Person (other than
endorsements in the ordinary course of business of negotiable instruments for
deposit or collection) of such Person guaranteeing or in effect guaranteeing
any Indebtedness, dividend or other obligation, of any other Person (the
"primary obligor") in any manner, whether directly or indirectly, including
without limitation all obligations incurred through an agreement, contingent or
otherwise, by such Person: (i) to purchase such Indebtedness or obligation or
any Property or assets constituting security therefor,
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<PAGE> 7
or (ii) to advance or supply funds (1) for the purchase or payment of such
Indebtedness or obligation, or (2) to enable the recipient of such funds to
maintain certain financial conditions (e.g. agreed amount of working capital)
under loan or similar documents, or (iii) to lease Property or to purchase
securities or other Property or services primarily for the purpose of assuring
the owner of such Indebtedness or obligation of the ability of the primary
obligor to make payment of the Indebtedness or obligation, or (iv) otherwise to
assure the owner of the Indebtedness or obligation of the primary obligor
against loss in respect thereof. For the purposes of all computations made
under this Indenture, a Guaranty in respect of any Indebtedness shall be deemed
to be Indebtedness equal to the principal amount and accrued interest of such
Indebtedness which has been guaranteed, and a Guaranty in respect of any other
obligation or liability or any dividend shall be deemed to be Indebtedness
equal to the maximum aggregate amount of such obligation, liability or
dividend.
"Holder" means a Person who is a bearer of a Note or Coupon, as the
case may be.
"Hydrocarbon Interests" means all rights, titles, interests and
estates in and to oil and gas leases, oil, gas and mineral leases, oil and gas
concession agreements, production sharing and similar agreements, or other
liquid or gaseous hydrocarbon leases, mineral fee interests, overriding royalty
and royalty interests, net profit interests and production payment interests,
or which may arise under operating agreements, unit agreements or other
contract rights, including any reserved or residual interests of whatever
nature and without regard to whether such rights cover or exist with respect to
lands located within or without the United States.
"Hydrocarbons" means oil, gas, casing head gas, drip gasoline, natural
gasoline, condensate, distillate, liquid hydrocarbons, gaseous hydrocarbons and
all products refined therefrom and all other minerals.
"Indebtedness" of any Person means and includes all present and future
obligations of such Person, which shall include all obligations (i) which in
accordance with generally accepted accounting principles in the United States
shall be classified upon a balance sheet of such Person as liabilities of such
Person, (ii) for borrowed money, (iii) which have been incurred in connection
with the acquisition of Property (including, without limitation, all
obligations of such Person evidenced by any debenture, bond, note, commercial
paper or other similar security, but excluding, in any case, obligations
arising from the endorsement in the ordinary course of business of negotiable
instruments for deposit or collection), (iv) secured by any Lien existing on
Property owned by such Person, even though such Person has not assumed or
become liable for the payment of such obligations, (v) created or arising under
any conditional sale or other title retention agreement with respect to
Property acquired by such Person, notwithstanding the fact that the rights and
remedies of the seller, lender or lessor under such agreement in the event of
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<PAGE> 8
default are limited to repossession or sale of such Property, (vi) Capitalized
Lease Obligations, (vii) for all Guaranties, whether or not reflected in the
balance sheet of such Person and (viii) all reimbursement and other payment
obligations (whether contingent, matured or otherwise) of such Person in
respect of any acceptance or documentary credit. Notwithstanding the
foregoing, Indebtedness shall not include (i) Indebtedness incidental to the
operation of the business of the Person in the ordinary course and in the
aggregate not material to the business and operations of the Person, (ii)
Indebtedness for which the Company or any of its Subsidiaries are the sole
obligors and obligees, and (iii) Indebtedness represented by purchase, rental
or lease obligations not to exceed $1,000,000 in any period of 12 months for
any Person and its Subsidiaries.
"Indenture" means this instrument as originally executed and as it may
from time to time be supplemented or amended by one or more indentures
supplemental hereto entered into pursuant to the applicable provisions hereof.
"Independent Reserve Report" means an independent reservoir
engineering report or other independent third party valuation of the Company's
and its Subsidiaries' Oil and Gas Properties which are used in determining the
Asset Value Coverage Ratio, which report shall be dated as of the end of the
Company's most recent fiscal year or as of a later date, at the Company's
option.
"Interest Payment Date" means the Stated Maturity of an instalment of
interest on the Notes.
"Lien" means any mortgage, charge, pledge, lien, security interest or
encumbrance of any kind whatsoever, including any interest in Property securing
an obligation owed to, or a claim by, a Person other than the owner of the
Property, whether such interest is based on the common law, statute or
contract, and including but not limited to the security interest lien arising
from a mortgage, encumbrance, pledge, conditional sale or trust receipt or a
lease, consignment or bailment for security purposes. The term "Lien" shall
include reservations, exceptions, encroachments, easements, rights-of-way,
covenants, conditions, restrictions, leases and other title exceptions and
encumbrances affecting Property. For the purposes of this Indenture, the
Company or its Subsidiary shall be deemed to be the owner of any Property which
it has acquired or holds subject to a conditional sale agreement, financing
lease or other arrangement pursuant to which title to the Property has been
retained by or vested in some other Person for security purposes.
"Mandatory Conversion" means conversion of the Notes at the option of
the Company pursuant to Section 12.11.
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<PAGE> 9
"Mandatory Conversion Date" means the date specified in a notice
published by the Company in accordance with Sections 1.07, 1.08 and 12.11, on
which the Noteholders are required to surrender their Notes for conversion.
"Market Price" means the daily closing sale price of the Common Stock
for a Stock Exchange Business Day.
"Marketable Securities" means any "security" (as such term is defined
in Section 2(1) of the Securities Act) of any Person listed, admitted to
trading or quoted on the New York Stock Exchange, the AMEX or Alternative Stock
Exchange.
"Maturity," when used with respect to any Note, means the date on
which the principal of such Note becomes due and payable as therein or herein
provided, whether at the Stated Maturity or the Redemption Date and whether by
declaration of acceleration, call for redemption or otherwise.
"Noteholder" means a Person who is the bearer of any Note.
"Notes" has the meaning stated in the first recital of this Indenture
and more particularly means any Notes authenticated and delivered under this
Indenture.
"Offering Circular" means that certain Offering Circular dated July
30, 1996, together with all supplements and amendments thereto.
"Officers' Certificate" means a certificate signed by the Chairman, a
Vice Chairman, the President or a Vice President, and by the Treasurer, an
Assistant Treasurer, the Secretary or an Assistant Secretary of the Company,
and delivered to the Trustee. Any one individual holding the requisite titles
may sign and deliver an Officers' Certificate without cosignature of another
individual with a requisite title.
"Oil and Gas Properties" means Hydrocarbon Interests; any Properties
now or hereafter pooled or unitized with Hydrocarbon Interests; all presently
existing or future unitization, pooling agreements and declarations of pooled
units and the units created thereby (including without limitation all units
created under orders, regulations and rules of any governmental body or agency
having jurisdiction) which may affect all or any portion of the Hydrocarbon
Interests; all operating agreements, contracts and other agreements which
relate to any of the Hydrocarbon Interests or the production, sale, purchase,
exchange or processing of Hydrocarbons from or attributable to such Hydrocarbon
Interests; all Hydrocarbons in and under and which may be produced and saved or
attributable to the Hydrocarbon Interests, the lands covered thereby and all
oil in tanks and all
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<PAGE> 10
rents, issues, profits, proceeds, products, revenues and other income from or
attributable to the Hydrocarbon Interests; all tenements, hereditaments,
appurtenances and Properties in anywise appertaining, belonging, affixed or
incidental to the Hydrocarbon Interests, Properties, rights, titles, interests
and estates described or referred to above, including any and all Property,
real or personal, now owned or hereafter acquired and situated upon, used, held
for use or useful in connection with the operating, working or development of
any of such Hydrocarbon Interests (excluding drilling rigs, automotive
equipment or other personal property which may be on such premises for the
purpose of drilling a well or for other similar temporary uses) and including
any and all oil wells, gas wells, injection wells or other wells, buildings,
structures, fuel separators, liquid extraction plants, plant compressors,
pumps, pumping units, field gathering systems, tanks and tank batteries,
fixtures, valves, fittings, machinery and parts, engines, boilers, meters,
apparatus, equipment, appliances, tools, implements, cables, wires, towers,
casing, tubing and rods, surface leases, rights-of-way, easements and
servitudes together with all additions, substitutions, replacement, accessions
and attachments to any and all of the foregoing.
"Opinion of Counsel" means a written opinion of counsel, who may be
counsel for the Company, including an employee of the Company, and who shall be
reasonably acceptable to the Trustee.
"Outstanding," when used with respect to Notes, means, as of the date
of determination, all Notes theretofore authenticated and delivered under this
Indenture, except: (1) Notes heretofore cancelled by the Paying and Conversion
Agent or delivered to the Paying and Conversion Agent for cancellation; (2)
Notes, or portions thereof, for whose payment or redemption money in the
necessary amount has been theretofore deposited with the Trustee or any Paying
Agent (other than the Company) in trust or set aside and segregated in trust by
the Company (if the Company shall act as its own Paying Agent) for the Holders
of such Notes; provided that, if such Notes are to be redeemed, notice of such
redemption has been duly given pursuant to this Indenture or provision therefor
satisfactory to the Trustee has been made; (3) Notes, except to the extent
provided in Sections 13.02 and 13.03, with respect to which the Company has
effected defeasance and/or covenant defeasance as provided in Article Thirteen;
and (4) Notes which have been paid pursuant to Section 3.08 or in exchange for
or in lieu of which other Notes have been authenticated and delivered pursuant
to this Indenture, other than any such Notes in respect of which there shall
have been presented to the Trustee proof satisfactory to it that such Notes are
held by a bona fide purchaser in whose hands the Notes are valid obligations of
the Company; provided, however, that in determining whether the Holders of the
requisite principal amount of Outstanding Notes have taken any Act or given or
made any Extraordinary Resolution or other request, demand, authorization,
direction, consent, notice or waiver hereunder, Notes owned by the Company or
any other obligor upon the Notes or any Affiliate of the Company or such other
obligor shall be disregarded and deemed not to be Outstanding, except that, in
determining whether the Trustee
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<PAGE> 11
shall be protected in making such calculation or in relying upon any such
request, demand, authorization, direction, consent, notice or waiver, only
Notes which the Trustee knows to be so owned shall be so disregarded. Notes so
owned which have been pledged in good faith may be regarded as Outstanding if
the pledgee establishes to the satisfaction of the Trustee the pledgee's right
so to act with respect to such Notes and that the pledgee is not the Company or
any other obligor upon the Notes or any Affiliate of the Company or such other
obligor.
"Paying Agent" means any Person (including the Company acting as
Paying Agent) authorized by the Company to pay the principal of or interest on
any Notes on behalf of the Company. Pursuant to the terms hereof, the Company
has initially appointed Midland Bank Plc as the principal Paying Agent and
Banca del Gottardo as a Paying Agent.
"Permitted Investments" means:
(a) cash;
(b) U.S. Government Obligations;
(c) any certificate of deposit, time deposit, money
market account or bankers' acceptance, maturing not more than sixty
days after the date of acquisition, issued by any commercial banking
institution that is a member of the Federal Reserve System, including,
without limitation, the Trustee and its Affiliates, and that has
combined capital and surplus and undivided profits of not less than
$500,000,000 whose debt has a rating, at the time as of which any
investment therein is made, of "P-1" (or higher) according to Moody's
Investors Service, Inc. or any successor rating agency, or "A-1" (or
higher) according to Standard and Poor's Ratings Group or any
successor rating agency;
(d) commercial paper, maturing not more than sixty days
after the date of acquisition, issued by any corporation (other than
an Affiliate of any of the Obligors) organized and existing under the
laws of the United States of America with a rating, at the time as of
which any investment therein is made, of "P-1" (or higher) according
to Moody's Investors Service, Inc. or any successor rating agency, or
"A-1" (or higher) according to Standard and Poor's Ratings Group or
any successor rating agency; and
(e) shares of any mutual fund, including one managed by
the Trustee or any of its Affiliates, that invests exclusively in the
foregoing types of investment; provided that, solely for purposes of
this clause (e), such investments may mature more than sixty days
after the date of acquisition.
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<PAGE> 12
"Person" means any individual, corporation, limited liability company,
limited or general partnership, joint venture, association, joint-stock
company, trust, unincorporated organization or government or any agency or
political subdivision thereof.
"Predecessor Note" of any particular Note means every previous Note
evidencing all or a portion of the same debt as that evidenced by such
particular Note; and, for the purposes of this definition, any Note
authenticated and delivered under Section 3.08 in exchange for or in lieu of a
mutilated, lost, destroyed or stolen Note shall be deemed to evidence the same
debt as the mutilated, lost, destroyed or stolen Note.
"Preferred Stock" means, with respect to any Person, any and all
shares, interests, participation or other equivalents (however designated) of
such Person's preferred or preference stock whether now outstanding or issued
on or after the date of this Indenture, and includes, without limitation, all
classes and series of preferred or preference stock.
"Presentation Date" means the date on which a Note is presented by a
Noteholder for payment of principal or a Coupon is presented by the
Couponholder for payment of interest, as the case may be.
"Principal Paying and Conversion Agent" means any Person authorized by
the Company to act as the principal paying and conversion agent for the Notes
until a successor Principal Paying and Conversion Agent shall have become such
pursuant to the applicable provisions of this Indenture, and thereafter
"Principal Paying and Conversion Agent" shall mean such successor Principal
Paying and Conversion Agent. Pursuant to the terms hereof, the Company has
initially appointed Midland Bank Plc as the Principal Paying and Conversion
Agent.
"Principal Subsidiary" means a Subsidiary of the Company:
(a) whose gross assets represent 10 percent or more of
the consolidated gross assets of the Group as calculated by reference
to the then latest audited financial statements of the Group; or
(b) to which is transferred all or substantially all of
the business, undertaking and assets of a Subsidiary of the Company
which immediately prior to such transfer is a Principal Subsidiary,
whereupon the transferor Subsidiary shall immediately cease to be a
Principal Subsidiary and the transferee Subsidiary shall cease to be a
Principal Subsidiary under the provisions of this sub-paragraph (b)
(but without prejudice to the provisions of sub-paragraph (a) above),
upon publication of its next audited financial statements.
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<PAGE> 13
"Property" means any interest in any kind of property or asset,
whether real, personal or mixed, or tangible or intangible, and including any
Oil and Gas Property.
"PDP Reserves" means those Proved Reserves that can be expected to be
recovered from currently producing zones under the continuation of present
operating methods, all as set forth in the Independent Reserve Report.
"Proved Reserves" means the estimated quantities of crude oil, natural
gas and natural gas liquids, which geological and engineering data demonstrate
according to engineering standards to be recoverable in future years from known
reservoirs under existing economical and operating conditions, located in the
United States or in territories or regions controlled by the United States,
including any territorial waters, all as set forth in the Independent Reserve
Report.
"Redemption Date," when used with respect to any Note to be redeemed,
in whole or in part, means the date fixed for such redemption by or pursuant to
this Indenture.
"Redemption Price," when used with respect to any Note to be redeemed,
means the price at which it is to be redeemed pursuant to the terms hereof plus
accrued interest to the Redemption Date.
"Regulation S" means Regulation S under the Securities Act as in
effect of the date hereof.
"Relevant Date" means the date on which the payment first becomes due;
provided, that if the full amount of the money payable has not been received by
the Principal Paying Agent or the Trustee on or before the due date, it shall
mean the date on which, the full amount of the money having been so received,
notice to that effect shall have been duly given to the Noteholders by the
Company in accordance with Section 1.08.
"Required Assets" means any combination of (i) 100% of the aggregate
amount then on deposit in the Segregated Account, including the aggregate
amount invested in Permitted Investments, to the extent applicable, (ii) 60% of
the aggregate Market Price of the Company's and its Subsidiaries' Marketable
Securities, and (iii) the Designated Oil and Gas Reserves.
"Responsible Officer," when used with respect to the Trustee, means
any trust officer or assistant trust officer or any other officer of the
Trustee customarily performing functions similar to those performed by any of
the above-designated officers, and also means, with respect to a particular
corporate trust matter, any other officer to whom such matter is referred
because of such officer's knowledge of and familiarity with the particular
subject.
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<PAGE> 14
"Restricted Period" means the forty (40) calendar day period after the
Closing Date.
"SEC Value" means the discounted present value of future net reserves
attributable to Proved Reserves, as calculated under the Independent Reserve
Report in accordance with the rules and regulations promulgated by the
Commission from time to time in effect.
"Securities Act" means the Securities Act of 1933, as amended.
"Segregated Account" means a segregated non-interest bearing trust
account of the Company to be maintained with the Trustee and invested and
reinvested at the direction of the Company, until such time as it may be
distributed to the Company in accordance with Section 6.12.
"Shares" means the common stock, par value U.S.$0.01, of the Company
(and all other (if any) shares or stock resulting from any sub-division,
consolidation or reclassification of such shares).
"Stated Maturity," when used with respect to any Indebtedness or any
instalment of principal thereof or interest thereon, means the date specified
in such Indebtedness as the fixed date on which the principal of such
Indebtedness or such instalment of principal or interest is due and payable.
"Stock Exchange Business Day" means any day (other than a Saturday or
Sunday) on which the AMEX or the Alternative Stock Exchange, as the case may
be, is open for business.
"Subordinated Obligation" means any Indebtedness of the Company
outstanding on such date which is contractually subordinate or junior in right
of payment to the Notes. Notwithstanding the immediately preceding sentence,
any Indebtedness and shares of Preferred Stock issued by any Subsidiary shall,
for purposes of this definition, be treated as Subordinated Obligations.
"Subsidiary" of any Person means any Corporation of which at least a
majority of the shares of stock having by the terms thereof ordinary voting
power to elect a majority of the Board of Directors of such Corporation
(irrespective of whether or not at the time stock of any other class or classes
of such Corporation shall have or might have voting power by reason of the
happening of any contingency) is directly or indirectly owned or controlled by
any one of or any combinations of the Company or one or more of the Principal
Subsidiaries.
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<PAGE> 15
"Trustee" means the Person named as the "Trustee" in the first
paragraph of this Indenture until a successor Trustee shall have become such
pursuant to the applicable provisions of this Indenture, and thereafter
"Trustee" shall mean such successor Trustee.
"Unexercised Note" means any Note with respect to which Conversion
Rights have not been exercised by the Noteholder.
"U.S. Government Obligations" means securities that are (x) direct
obligations of the United States of America for the timely payment of which its
full faith and credit is pledged or (y) obligations of a Person controlled or
supervised by and acting as an agency or instrumentality of the United States
of America the timely payment of which is unconditionally guaranteed as a full
faith and credit obligation by the United States of America, which, in either
case, are not callable or redeemable at the option of the issuer thereof, and
shall also include a depository receipt issued by a bank (as defined in Section
3(a)(2) of the Securities Act), as custodian with respect to any such U.S.
Government Obligation or a specific payment of principal of or interest on any
such U.S. Government Obligation held by such custodian for the account of the
holder of such depository receipt, provided that (except as required by law)
such custodian is not authorized to make any deduction from the amount payable
to the holder of such depository receipt from any amount received by the
custodian in respect of the U.S. Government Obligation or the specific payment
of principal of or interest on the U.S. Government Obligation evidenced by such
depository receipt.
"U.S. Person" means any Person who is a "U.S. person" as defined in
Regulation S.
"Vice President," when used with respect to the Company or the
Trustee, means any vice president, whether or not designated by a number or a
word or words added before or after the title "vice president".
"Voting Stock" of any Person means Capital Stock of such Person which
ordinarily is entitled (without regard to the occurrence of any additional
event or contingency) to vote for the election of directors (or persons
performing similar functions) of such Person.
SECTION 1.02 Other Definitions.
<TABLE>
<CAPTION>
Term Defined in Section
---- ------------------
<S> <C>
Agency Agreement 10.02
Bearer Notes 2.01
Commencement Date 12.04
</TABLE>
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<PAGE> 16
<TABLE>
<S> <C>
Covenant defeasance 13.03
Current Event 12.04
Expiration Time 12.04
Global Note 2.01
legal defeasance 13.02
Notice 1.08
Other Event 12.04
Reference Date 12.04
</TABLE>
SECTION 1.03 Rules of Construction.
For all purposes of this Indenture, except as otherwise expressly
provided or unless the context otherwise requires:
(a) all the terms defined in this Article have the
meanings assigned to them in this Article, and include the plural as
well as the singular;
(b) all accounting terms not otherwise defined herein
have the meanings assigned to them in accordance with GAAP;
(c) all ratios and computations based on GAAP contained
in this Indenture shall be computed in accordance with the definition
of GAAP set forth above;
(d) the words "herein," "hereof" and "hereunder" and
other words of similar import refer to this Indenture as a whole and
not to any particular Article, Section or other subdivision of this
Indenture;
(e) "or" is not exclusive;
(f) all references to $, U.S.$, dollars or United States
dollars shall refer to the lawful currency of the United States of
America;
(g) provisions apply to successive events and
transactions;
(h) all references to Sections or Articles refer to
Sections or Articles of this Indenture unless otherwise indicated; and
(i) all references to Terms or Conditions refer to the
Terms and Conditions of the Notes unless otherwise indicated.
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<PAGE> 17
SECTION 1.04 Compliance Certificates and Opinions.
Upon any application or request by the Company to the Trustee to take
any action under any provision of this Indenture, the Company shall, with
respect to any application or request to make an optional redemption or
Mandatory Conversion and, upon the request of the Trustee with respect to any
other application or request, furnish to the Trustee an Officers' Certificate
stating that all conditions precedent, if any, provided for in this Indenture
(including any covenant compliance with which constitutes a condition
precedent) relating to the proposed action have been complied with and an
Opinion of Counsel stating that in the opinion of such counsel all such
conditions precedent, if any, have been complied with, except that in the case
of any such application or request as to which the furnishing of such documents
is specifically required by any provision of this Indenture relating to such
particular application or request, no additional certificate or opinion need be
furnished.
Every certificate or opinion with respect to compliance with a
condition or covenant provided for in this Indenture shall include:
(a) a statement that each individual signing such
certificate or opinion has read such covenant or condition and the
definitions herein relating thereto;
(b) a brief statement as to the nature and scope of the
examination or investigation upon which the statements or opinions
contained in such certificate or opinion are based;
(c) a statement that, in the opinion of each such
individual, such individual has made such examination or investigation
as is necessary to enable such individual to express an informed
opinion as to whether or not such covenant or condition has been
complied with; and
(d) a statement as to whether, in the opinion of each
such individual, such condition or covenant has been complied with.
SECTION 1.05 Form of Documents Delivered to Trustee.
In any case where several matters are required to be certified by, or
covered by an opinion of, any specified Person, it is not necessary that all
such matters be certified by, or covered by the opinion of, only one such
Person, or that they be so certified or covered by only one document, but one
such Person may certify or give an opinion with respect to some matters and one
or more
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<PAGE> 18
other such Persons as to other matters, and any such Person may certify or give
an opinion as to such matters in one or several documents.
Any certificate or opinion of an officer of the Company may be based,
insofar as it relates to legal matters, upon a certificate or opinion of, or
representations by, counsel, unless such officer knows, or in the exercise of
reasonable care should know, that the certificate or opinion or representations
with respect to the matters upon which such officer's certificate or opinion is
based are erroneous. Any such certificate or Opinion of Counsel may be based,
insofar as it relates to factual matters, upon a certificate or opinion of, or
representations by, an officer or officers of the Company stating that the
information with respect to such factual matters is in the possession of the
Company, unless such counsel knows, or in the exercise of reasonable care
should know, that the certificate or opinion or representations with respect to
such matters are erroneous.
Where any Person is required to make, give or execute two or more
applications, requests, consents, certificates, statements, opinions or other
instruments under this Indenture, they may, but need not, be consolidated and
form one instrument.
SECTION 1.06 Acts of Noteholders.
(a) Any Extraordinary Resolution, request, demand,
authorization, direction, declaration, notice, consent, waiver or
other action provided by this Indenture to be given or taken by
Noteholders may be embodied in and evidenced by one or more
instruments of substantially similar tenor signed by such Noteholders
in person or by agents duly appointed in writing; and, except as
herein otherwise expressly provided, such action shall become
effective when such instrument or instruments are delivered to the
Trustee and, where it is hereby expressly required, to the Company.
Such instrument or instruments (and the action embodied therein and
evidenced thereby) are herein sometimes referred to as the "Act" of
the Noteholders signing such instrument or instruments. Proof of
execution of any such instrument or of a writing appointing any such
agent shall be sufficient for any purpose of this Indenture and
conclusive in favour of the Trustee and the Company, if made in the
manner provided in this Section.
(b) The fact and date of the execution by any Person of
any such instrument or writing may be proved by the affidavit of a
witness of such execution or by a certificate of a notary public or
other officer authorized by law to take acknowledgments of deeds,
certifying that the individual signing such instrument or writing
acknowledged to such witness, notary public or other such officer the
execution thereof. Where such execution
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<PAGE> 19
is by a signer acting in a capacity other than such signer's
individual capacity, such certificate or affidavit shall also
constitute sufficient proof of authority. The fact and date of the
execution of any such instrument or writing, or the authority of the
Person executing the same, may also be proved in any other manner
which the Trustee deems sufficient.
(c) Any Extraordinary Resolution, request, demand,
authorization, direction, notice, consent, waiver or other Act of the
Holders of any Note shall bind every future Holder of the same Note
and the Holder of every Note issued upon conversion or redemption
thereof or in exchange therefor or in lieu thereof in respect of
anything done, omitted or suffered to be done by the Trustee or the
Company in reliance thereon, whether or not notation of such action is
made upon such Note.
SECTION 1.07 Notices, Etc., to Trustee and Company.
Any request, demand, authorization, direction, declaration, notice,
consent, waiver, Extraordinary Resolution or Act of Noteholders or other
document provided or pertained by this Indenture (herein collectively called
"Notice") to be made upon, given or furnished to, or filed with,
(a) the Trustee by any Noteholder or by the Company shall
be sufficient for every purpose hereunder if made, given, furnished or
filed in writing to or with the Trustee and received at its Corporate
Trust Office, Attention: Corporate Trust Services - Harken, Tel. (212)
658-1000, Fax. (212) 658-6425, or
(b) the Company by the Trustee or by any Noteholder shall
be sufficient for every purpose hereunder (unless otherwise herein
expressly provided) if made, given, furnished or filed in writing to
or with the Company addressed to it at the address of its principal
office which shall initially be: Harken Energy Corporation, 5605 North
MacArthur Boulevard, Suite 400, Irving, Texas 75038, Attention: Bruce
N. Huff, Senior Vice President and Chief Financial Officer, Tel. (214)
753-6939, Fax. (214) 753-6926, with a copy to Larry E. Cummings,
General Counsel, Tel. (214) 753-6932, Fax. (214) 753-6963.
Any Notice to be given hereunder by any party to another shall be in
writing and in English (by letter, telex or fax) delivered in person or by
courier service requiring acknowledgment of delivery, mailed by first class
mail, postage prepaid, or sent by fax or telex to the addressee (including
telecopier number, if applicable) set forth herein. Except for notices to the
Trustee, Notice given by mail, fax, personal delivery or courier service shall
be effective upon actual receipt. Notice given by telex shall be effective
upon receipt by the sender of the addressee's
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answer-back at the end of transmission, provided that any such notice or other
communication which would otherwise take effect after 4:00 p.m. on any
particular day shall not take effect until 10:00 a.m. on the immediately
succeeding Business Day in the place of the addressee. A party may change any
address to which Notice is to be given to it by giving Notice as provided above
of such change of address.
SECTION 1.08 Notice to Noteholders; Waiver.
Where this Indenture provides for notice of any event to Noteholders
by the Company or the Trustee, such notice shall be sufficiently given (unless
otherwise herein expressly provided) if published in an Authorised Newspaper.
Neither the Trustee nor the Company need give any notice to the Couponholders
and such Couponholders will be deemed to have notice of the contents of any
notice given to the Noteholders in accordance with this Section.
In case by reason of any cause it shall be impracticable to publish
notice of any event to the Noteholders when such notice is required to be given
pursuant to any provision of this Indenture, then any manner of giving such
notice as shall be satisfactory to the Trustee shall constitute a sufficient
notification for every purpose hereunder.
SECTION 1.09 Effect of Headings and Table of Contents.
The Article and Section headings herein and the Table of Contents are
for convenience only and shall not affect the construction hereof.
SECTION 1.10 Successors and Assigns.
All covenants and agreements in this Indenture by the Company shall
bind its successors and assigns, whether so expressed or not.
SECTION 1.11 Separability Clause.
In case any provision in this Indenture or in the Notes shall be
invalid, illegal or unenforceable, the validity, legality and enforceability of
the remaining provisions, to the extent permitted by law, shall not in any way
be affected or impaired thereby.
SECTION 1.12 Benefits of Indenture.
Nothing in this Indenture or in the Notes, express or implied, shall
give to any Person, other than the parties hereto, any Paying Agent, any
Conversion Agent and their respective
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successors hereunder, and the Noteholders any legal or equitable right, remedy
or claim under this Indenture.
SECTION 1.13 Governing Law.
THIS INDENTURE AND THE NOTES SHALL BE GOVERNED BY, AND CONSTRUED IN
ACCORDANCE WITH, THE LAW OF THE STATE OF NEW YORK WITHOUT GIVING EFFECT TO THE
CONFLICTS OF LAWS PRINCIPLES THEREOF.
SECTION 1.14 Legal Holidays.
In any case where any Interest Payment Date, Conversion Date,
Redemption Date or Stated Maturity or Maturity of any Note or Coupon shall not
be a Business Day, then (notwithstanding any other provision of this Indenture
or of the Notes or Coupons) payment of interest or principal or any other
payment required to be made on such date need not be made on such date, but
shall be made on the immediately following Business Day with the same force and
effect as if made on the Interest Payment Date or Redemption Date, or at the
Stated Maturity or Maturity.
ARTICLE TWO
FORMS OF THE NOTES
SECTION 2.01 Forms Generally.
The Notes and the Trustee's certificate of authentication shall be in
substantially the forms set forth in this Article, with such appropriate
insertions, omissions, substitutions and other variations as are required or
permitted by this Indenture, and may have such letters, numbers or other marks
of identification and such legends or endorsements placed thereon as may be
required by applicable law or rules or regulations thereunder or as may,
consistently herewith, be determined by the officer or officers executing such
Notes, as evidenced by their execution of the Notes. Any portion of the text
of any Note may be set forth on the reverse thereof.
The definitive Notes shall be typed, printed, lithographed or engraved
on steel-engraved borders or may be produced in any other manner as determined
by the officers of the Company executing such Notes, as evidenced by their
execution in accordance with Section 3.03 of such Notes.
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The Notes shall be known as the "6.5% Senior Convertible Notes Due
2000" of the Company. The Notes and the Trustee's certificate of
authentication shall be in substantially the form annexed hereto as Exhibit A.
The Company shall approve the form of the Notes and any notation, legend or
endorsement on the Notes. Each Note shall be dated as of July 30, 1996.
The terms and provisions contained in the form of the Bearer Notes
annexed hereto as Exhibit A and in the form of the Global Note annexed hereto
as Exhibit B shall constitute, and are hereby expressly made, a part of this
Indenture. To the extent applicable, the Company and the Trustee, by their
execution and delivery of this Indenture, expressly agree to such terms and
provisions and to be bound thereby.
The Notes shall be issued initially in the form of a temporary global
bearer note substantially in the form set forth in Exhibit B (the "Global
Note") deposited with the Common Depository, duly executed by the Company and
authenticated by the Trustee as hereinafter provided. The aggregate principal
amount of the Global Note may from time to time be decreased by adjustments
made on the records of the Common Depository or its nominee, as hereinafter
provided.
The Notes offered and sold, other than as described in the preceding
paragraph, shall be issued in form of permanent certificated Notes in bearer
form in substantially the form set forth in Exhibit A (the "Bearer Notes").
The Terms and Conditions contained in the form of the Bearer Notes
annexed hereto as Exhibit A are expressly incorporated by reference herein. To
the extent applicable, the Company and the Trustee, by their execution and
delivery of this Indenture, expressly agree to such terms and provisions and to
be bound thereby. To the extent of any conflict between the Terms and
Conditions and the provisions of this Indenture, the Terms and Conditions shall
control the interpretation of the terms of the Note and this Indenture.
SECTION 2.02 Restrictive Legends.
Each Bearer Note and each Coupon shall bear the following legend on
the face thereof:
NEITHER THIS NOTE NOR THE SHARES OF COMMON STOCK ISSUABLE UPON
CONVERSION OF THIS NOTE HAVE BEEN OR WILL BE REGISTERED UNDER THE
UNITED STATES SECURITIES ACT OF 1933, AS AMENDED (THE "SECURITIES
ACT") AND MAY NOT BE OFFERED, SOLD, TRANSFERRED, PLEDGED, CONVERTED OR
OTHERWISE DISPOSED OF IN THE UNITED
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STATES OR TO, OR FOR THE ACCOUNT OR BENEFIT OF, ANY "U.S. PERSON" (AS
DEFINED IN REGULATION S UNDER THE SECURITIES ACT) UNLESS THIS NOTE AND
THE SHARES HAVE BEEN REGISTERED UNDER THE SECURITIES ACT AND ANY
APPLICABLE STATE SECURITIES OR BLUE SKY LAWS OR EXEMPTIONS FROM THE
REGISTRATION REQUIREMENTS OF SUCH LAWS ARE AVAILABLE.
ANY UNITED STATES PERSON WHO HOLDS THIS OBLIGATION WILL BE SUBJECT TO
LIMITATIONS UNDER THE U.S. INCOME TAX LAWS, INCLUDING THE LIMITATIONS
PROVIDED IN SECTIONS 165(j) AND 1287(a) OF THE UNITED STATES INTERNAL
REVENUE CODE OF 1986, AS AMENDED.
Each Global Note shall bear the following legend on the face thereof:
THIS NOTE HAS NOT BEEN AND WILL NOT BE REGISTERED UNDER THE UNITED
STATES SECURITIES ACT OF 1933, AS AMENDED (THE "SECURITIES ACT") AND
MAY NOT BE OFFERED, SOLD, TRANSFERRED, PLEDGED, CONVERTED OR OTHERWISE
DISPOSED OF IN THE UNITED STATES OR TO, OR FOR THE ACCOUNT OR BENEFIT
OF, ANY "U.S. PERSON" (AS DEFINED IN REGULATION S UNDER THE SECURITIES
ACT) UNLESS THIS NOTE HAS BEEN REGISTERED UNDER THE SECURITIES ACT AND
ANY APPLICABLE STATE SECURITIES OR BLUE SKY LAWS OR EXEMPTIONS FROM
THE REGISTRATION REQUIREMENTS OF SUCH LAWS ARE AVAILABLE.
ANY UNITED STATES PERSON WHO HOLDS THIS OBLIGATION WILL BE SUBJECT TO
LIMITATIONS UNDER THE U.S. INCOME TAX LAWS, INCLUDING THE LIMITATIONS
PROVIDED IN SECTIONS 165(j) AND 1287(a) OF THE UNITED STATES INTERNAL
REVENUE CODE OF 1986, AS AMENDED.
ARTICLE THREE
THE NOTES
SECTION 3.01 Terms.
The aggregate principal amount of Notes which may be authenticated and
delivered under this Indenture is limited to $40,000,000, except for Notes
authenticated and delivered in exchange for, or in lieu of, other Notes
pursuant to Section 3.03, 3.04, 3.05, 3.06, 3.08, 9.05 or 11.08.
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Their Stated Maturity shall be July 30, 2000, and they shall bear interest at
the rate per annum specified therein from the Closing Date or from the most
recent Interest Payment Date to which interest has been paid or duly provided
for, payable in arrears, and thereafter as provided in the Notes and at said
Stated Maturity, until the principal thereof is paid or duly provided for.
The principal of and interest on the Notes shall be payable at the
office or agency of the Company maintained for such purpose in The City of
London, or at such other office or agency of the Company as may be maintained
for such purpose.
The Notes shall be convertible as provided in Article Twelve.
The Notes shall be redeemable as provided in Article Eleven.
The Notes shall be senior in right of payment to Subordinated
Obligations as provided in Article Fourteen.
SECTION 3.02 Denominations.
The Notes shall be issuable only in bearer form and, in the case of
Bearer Notes, with Coupons attached thereto, and shall be issuable only in
denominations of $50,000.
SECTION 3.03 Execution, Authentication, Delivery and Dating.
The Notes shall be executed on behalf of the Company by its Chairman,
a Vice Chairman, its President or a Vice President under a facsimile of its
corporate seal reproduced thereon and attested by its Secretary or an Assistant
Secretary. The signature of any of these officers on the Notes may be manual
or facsimile signatures of the present or any future such authorized officer
and may be imprinted or otherwise reproduced on the Notes.
Notes bearing the manual or facsimile signatures of individuals who
were at any time the proper officers of the Company shall bind the Company,
notwithstanding that such individuals or any of them have ceased to hold such
offices prior to the authentication and delivery of such Notes or did not hold
such offices at the date of such Notes.
At any time and from time to time after the execution and delivery of
this Indenture, the Company may deliver Notes executed by the Company to the
Trustee for authentication, together with a Company Order for the
authentication and delivery of such Notes, and the Trustee or the
Authenticating Agent in accordance with such Company Order shall authenticate
and deliver such Notes. Such Company Order shall specify the amount of Notes
to be authenticated and the date
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on which the original issue of Notes is to be authenticated. The aggregate
principal amount of Notes outstanding at any time may not exceed $40,000,000
except for Notes authenticated and delivered in exchange for, or in lieu of,
other Notes pursuant to Section 3.04, 3.05 or 3.08.
Each Note shall be dated as of July 30, 1996.
No Note shall be entitled to any benefit under this Indenture or be
valid or obligatory for any purpose unless there appears on such Note a
certificate of authentication substantially in the form provided for in Exhibit
A duly executed by the Trustee or the Authenticating Agent by manual or
facsimile signature of an authorized officer, and such certificate upon any
Note shall be conclusive evidence, and the only evidence, that such Note has
been duly authenticated and delivered hereunder and is entitled to the benefits
of this Indenture.
In case the Company, pursuant to Article Eight, shall be consolidated
or merged with or into any other Person or shall convey, transfer, lease or
otherwise dispose of its properties and assets substantially as an entirety to
any Person, and the successor Person resulting from such consolidation, or
surviving such merger, or into which the Company shall have been merged, or the
Person which shall have received a conveyance, transfer, lease or other
disposition as aforesaid, shall have executed an indenture supplemental hereto
with the Trustee pursuant to Article Eight, any of the Notes authenticated or
delivered prior to such consolidation, merger, conveyance, transfer, lease or
other disposition may, from time to time, at the request of the successor
Person, be exchanged for other Notes executed in the name of the successor
Person with such changes in phraseology and form as may be appropriate, but
otherwise in substance of like tenor as the Notes surrendered for such exchange
and of like principal amount; and the Trustee or an Authenticating Agent, upon
Company Request of the successor Person, shall authenticate and deliver Notes
as specified in such request for the purpose of such exchange.
SECTION 3.04 Temporary Notes.
Pending the preparation of definitive Notes, but in no event prior to
September 9, 1996, the Company may execute, and upon Company Order the Trustee
or an Authenticating Agent shall authenticate and deliver, temporary Notes
which are printed, lithographed, typewritten, mimeographed or otherwise
produced, in any authorized denomination, substantially of the tenor of the
definitive Notes in lieu of which they are issued and with such appropriate
insertions, omissions, substitutions and other variations as the officers
executing such Notes may determine, as conclusively evidenced by their
execution of such Notes.
If temporary Notes are issued, the Company will cause definitive Notes
to be prepared without unreasonable delay, but in no event prior to September
9, 1996. After the preparation of
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definitive Notes, the temporary Notes shall be exchangeable for definitive
Notes upon surrender of the temporary Notes at the office or agency of the
Company designated for such purpose pursuant to Section 10.02, without charge
to the Noteholder. Upon surrender for cancellation of any one or more
temporary Notes, the Company shall execute and the Trustee or an Authenticating
Agent shall authenticate and deliver in exchange therefor a like principal
amount of definitive Notes of authorized denominations. Until so exchanged,
the temporary Notes shall in all respects be entitled to the same benefits
under this Indenture as definitive Notes.
SECTION 3.05 Exchange.
Upon surrender for exchange of any Note at the office or agency of the
Company designated pursuant to Section 10.02, the Company shall execute, and
the Trustee or the Authenticating Agent shall authenticate and deliver, in the
name of the designated transferee or transferees, one or more new Notes of any
authorized denomination or denominations of a like aggregate principal amount.
Furthermore, any Holder of the Global Note shall, by acceptance of
such Global Note, agree that transfers of beneficial interest in such Global
Note may be effected only through a book-entry system maintained by the Holder
of such Global Note (or its agent), and that ownership of a beneficial interest
in the Global Note shall be required to be reflected in a book entry.
At the option of the Noteholder, Notes may be exchanged for other
Notes of the Authorized Denomination and of a like aggregate principal amount,
upon surrender of the Notes to be exchanged at such office or agency. Whenever
any Notes are so surrendered for exchange, the Company shall execute, and the
Trustee or an Authenticating Agent shall authenticate and deliver, the Notes
which the Noteholder making the exchange is entitled to receive.
All Notes issued upon any exchange of Notes shall be the valid
obligations of the Company, evidencing the same debt, and entitled to the same
benefits under this Indenture, as the Notes surrendered upon such exchange.
Every Note presented or surrendered for exchange shall (if so required
by the Company or the Trustee) be duly endorsed, or be accompanied by a written
instrument of transfer, in form satisfactory to the Company and the Trustee,
duly executed by the Noteholder thereof or such Noteholder's attorney duly
authorized in writing.
No service charge shall be made for any exchange, conversion or
redemption of Notes, but the Company may require payment of a sum sufficient to
cover any tax or other governmental
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charge that may be imposed in connection with any exchange of Notes, other than
exchanges pursuant to Sections 3.03, 3.04, 3.05, 3.06, 9.05, or 11.08.
The Company shall not be required (i) to issue or exchange any Note
during a period beginning at the opening of business 15 days before the
selection of Notes to be redeemed under Section 11.04 and ending at the close
of business on the day of such mailing of the relevant notice of redemption,
(ii) to exchange any Note so selected for redemption in whole or in part,
except the unredeemed portion of any Note being redeemed in part or (iii) to
register the transfer of or exchange of any Note during a period beginning five
days before the date of Maturity and ending on such date of Maturity.
SECTION 3.06 Book-Entry Provisions for Global Note.
(a) The Global Note initially shall be delivered to the
Common Depository and shall bear the legends set forth in Section
2.02. Members of, or participants in, Euroclear and Cedel ("Agent
Members") shall have no rights under this Indenture with respect to
any Global Note held on their behalf by the Common Depository, or
under the Global Note, and the Common Depository may be treated by the
Company, the Trustee and any agent of the Company or the Trustee as
the absolute owner of such Global Note for all purposes whatsoever.
Notwithstanding the foregoing, nothing herein shall prevent the
Company, the Trustee or any agent of the Company or the Trustee, from
giving effect to any written certification, proxy or other
authorization furnished by the Common Depository or shall impair, as
between the Common Depository and the Agent Members, the operation of
customary practices governing the exercise of the rights of a
Noteholder.
(b) Transfers of the Global Note shall be limited to
transfers of such Global Note in whole, but not in part, to the Common
Depository, its successors or their respective nominees. Interests of
beneficial owners in the Global Note may be transferred in accordance
with the rules and procedures of the Common Depository and the
provisions of Section 3.06. Beneficial owners may obtain Bearer Notes
in exchange for their beneficial interests in the Global Note upon
request in accordance with the Common Depository's procedures. In
addition, Bearer Notes shall be transferred to all beneficial owners
in exchange for their beneficial interests in the Global Note if (i)
the Common Depository notifies the Company that it is unwilling or
unable to continue as Common Depository for the Global Note and a
successor depository is not appointed by the Company within 90 days of
such notice or (ii) an Event of Default has occurred and is continuing
and the Trustee has received a request from the Common Depository.
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(c) In connection with any transfer of a portion of the
beneficial interest in the Global Note to beneficial owners pursuant
to subsection (b) of this Section, the Common Depository shall reflect
on its books and records the date and a decrease in the principal
amount of the Global Note in an amount equal to the principal amount
of the beneficial interest in the Global Note to be transferred, and
the Company shall execute, and the Trustee or an Authenticating Agent
shall authenticate and deliver, one or more Bearer Notes of like tenor
and amount.
(d) In connection with the transfer of the entire Global
Note to beneficial owners pursuant to subsection (b) of this Section,
the Global Note shall be deemed to be surrendered to the Trustee for
cancellation, and the Company shall execute, and the Trustee or an
Authenticating Agent shall authenticate and deliver, to each
beneficial owner identified by the Common Depository in exchange for
its beneficial interest in the Global Note, an equal aggregate
principal amount of Bearer Notes of authorized denominations.
(e) Any Bearer Note delivered in exchange for an interest
in the Global Note pursuant to subsection (b) or subsection (c) of
this Section shall bear the applicable legend regarding transfer
restrictions applicable to the Bearer Note set forth in Section 2.02.
(f) The Holder of the Global Note may grant proxies and
otherwise authorize any person, including Agent Members and persons
that may hold interests through Agent Members, to take any action
which a Noteholder is entitled to take under this Indenture or the
Notes.
(g) Any Bearer Note delivered in exchange for an interest
in the Global Note pursuant to subsection (b) or (c) of this Section
will prior to delivery to the Noteholder have all matured Coupons as
of such delivery date, which are attached to such Bearer Note,
cancelled and voided by the Authenticating Agent.
(h) Nothing contained herein shall be deemed to authorize
any transfers (by book-entry or otherwise) of the Global Note prior to
September 9, 1996, it being understood that no transfers of the Global
Note or any beneficial interest may occur until after September 9,
1996.
SECTION 3.07 Special Transfer Provisions.
The Noteholders by acceptance of the Notes hereby covenant and agree
that neither the Notes nor the Conversion Shares will be offered, sold,
transferred, pledged, converted or otherwise disposed of in the United States
or to, or for the account or benefit of, any U.S. Person
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unless the Notes and the Conversion Shares have been registered under the
Securities Act and any applicable state securities or blue sky laws or
exemptions from the registration requirements of such laws are available.
SECTION 3.08 Mutilated, Destroyed, Lost and Stolen Notes.
If (i) any mutilated Note or Coupon is surrendered to the Trustee or
the Authenticating Agent, or (ii) the Company and the Trustee receive evidence
to their satisfaction of the destruction, loss or theft of any Note or Coupon,
and there is delivered to the Company and the Trustee such security and/or
indemnity as may be required by them to save each of them harmless, then, in
the absence of notice to the Company or the Trustee that such Note or Coupon
has been acquired by a bona fide purchaser, the Company shall execute and upon
Company Order the Trustee or an Authenticating Agent shall authenticate and
deliver, in exchange for any such mutilated Note or Coupon or in lieu of any
such destroyed, lost or stolen Note or Coupon, a new Note or Coupon of like
tenor and principal amount, bearing a number not contemporaneously Outstanding.
In case any such mutilated, destroyed, lost or stolen Note or Coupon
has become or is about to become due and payable, the Company in its discretion
may, instead of issuing a new Note or Coupon, pay such Note or Coupon, as the
case may be.
Upon the issuance of any new Note or Coupon under this Section, the
Company may require the payment of a sum sufficient to cover any tax or other
governmental charge that may be imposed in relation thereto and any other
expenses (including the fees and expenses of the Trustee and the Authenticating
Agent) connected therewith.
Every new Note or Coupon issued pursuant to this Section in lieu of
any destroyed, lost or stolen Note or Coupon shall constitute an original
additional contractual obligation of the Company, whether or not the destroyed,
lost or stolen Note or Coupon shall be at any time enforceable by anyone, and
shall be entitled to all benefits of this Indenture equally and proportionately
with any and all other Notes or Coupons duly issued hereunder.
The provisions of this Section are exclusive and shall preclude (to
the extent lawful) all other rights and remedies with respect to the
replacement or payment of mutilated, destroyed, lost or stolen Note or Coupon.
Any new Note issued under this Section 3.08 in lieu of any destroyed,
lost or stolen Note shall be issued by the Authenticating Agent with all
matured Coupons as of such date of issuance cancelled or voided.
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SECTION 3.09 Payment of Interest; Interest Rights Preserved.
Interest on any Note which is payable, and is punctually paid or duly
provided for, on any Interest Payment Date, shall be paid to the bearer against
presentation and surrender (or in the case of part payment only, endorsement)
of the relevant Coupons, outside of the United States at the corporate trust
office or agency of any Paying Agent maintained for such purpose pursuant to
Section 10.02.
Each such payment will be made at the specified office of any Paying
Agent, at the option of the Holder of such Coupon, by U.S. dollar cheque drawn
on, or by transfer to a U.S. dollar account maintained by the payee with a bank
in Europe subject in all cases to any applicable fiscal or other laws and
regulations.
Subject to the foregoing provisions of this Section, each Note
delivered under this Indenture in exchange for or in lieu of any other Note
shall carry the rights to interest accrued and unpaid, and to accrue, which
were carried by such other Note.
SECTION 3.10 Persons Deemed Owners.
Subject to the provision of Section 3.14 and except with respect to
any unmatured Coupon, the Company, the Trustee and any agent of the Company or
the Trustee may treat the Person who is the bearer of any Note or Coupon as the
owner of such Note or Coupon for the purpose of receiving payment of principal
of and (subject to Sections 3.05 and 3.09) interest on such Note and for all
other purposes whatsoever, whether or not such Note be overdue, and none of the
Company, the Trustee or any agent of the Company or the Trustee shall be
affected by notice to the contrary.
SECTION 3.11 Cancellation.
All Notes surrendered for payment, conversion, redemption or exchange
shall, if surrendered to any Person other than the Trustee, be delivered to the
Trustee and shall be promptly cancelled by it. The Company may at any time
deliver to the Trustee for cancellation any Notes previously authenticated and
delivered hereunder which the Company may have acquired in any manner
whatsoever, and may deliver to the Trustee (or to any other Person for delivery
to the Trustee) for cancellation any Notes previously authenticated hereunder
which the Company has not issued and sold, and all Notes so delivered shall be
promptly cancelled by the Trustee. If the Company shall so acquire any of the
Notes, however, such acquisition shall not operate as a redemption or
satisfaction of the indebtedness represented by such Notes unless and until the
same are surrendered to the Paying and Conversion Agent for cancellation. No
Notes
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shall be authenticated in lieu of or in exchange for any Notes cancelled as
provided in this Section, except as expressly permitted by this Indenture. All
cancelled Notes held by the Paying and Conversion Agent shall be disposed of by
the Paying and Conversion Agent in accordance with its customary procedures and
certification of their disposal delivered to the Company unless by Company
Order the Company shall direct that cancelled Notes be returned to it.
SECTION 3.12 Computation of Interest.
Interest on the Notes shall be computed on the basis of a 360-day year
of twelve 30-day months.
SECTION 3.13 ISIN, CUSIP Or Other Identifying Numbers.
The Company in issuing the Notes may use "ISIN", "CUSIP" or other
identifying numbers (if then generally in use), and the Trustee shall use ISIN,
CUSIP or other identifying numbers in notices of redemption, conversion or
exchange, and any other notice provided for the benefit of the Noteholders, as
a convenience to Noteholders; provided that any such notice shall state that no
representation is made as to the correctness of such numbers either as printed
on the Notes or as contained in any notice of redemption, conversion or
exchange or other notice.
SECTION 3.14 Prescription.
Notes and Coupons will become void unless presented for payment within
periods of ten (10) years (in the case of principal) and five (5) years (in the
case of interest) from the Relevant Date in respect of the Notes or the
Coupons, as the case may be, subject to the provisions of Section 11.09.
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ARTICLE FOUR
SATISFACTION AND DISCHARGE
SECTION 4.01 Satisfaction and Discharge of Indenture.
This Indenture shall upon Company Request cease to be of further
effect (except as to surviving rights of conversion or redemption of Notes
herein expressly provided for and the Company's obligations to the Trustee
pursuant to Section 6.06) and the Trustee, at the expense of the Company, shall
execute proper instruments acknowledging satisfaction and discharge of this
Indenture when
(a) either
(i) all Notes theretofore authenticated and
delivered (other than (1) Notes which have been destroyed, lost,
mutilated or stolen and which have been replaced or paid as provided
in Section 3.08 and (2) Notes for whose payment money has theretofore
been deposited in trust with the Trustee or any Paying Agent or
segregated and held in trust by the Company and thereafter repaid to
the Company or discharged from such trust, as provided in Section
10.03) have been delivered to the Trustee for cancellation; or
(ii) all such Notes not theretofore delivered to
the Trustee for cancellation (1) have become due and payable, or (2)
will become due and payable at their Stated Maturity, within one year,
or (3) are to be called for redemption within one year under
arrangements satisfactory to the Trustee for the giving of notice of
redemption by the Trustee in the name, and at the expense, of the
Company, and the Company has irrevocably deposited or caused to be
deposited with the Trustee as trust funds, which may include any
amount then held in the Segregated Account which the Company
designates to the Trustee shall be used for such purpose, in trust for
the purpose an amount sufficient to pay and discharge the entire
indebtedness on such Notes not theretofore delivered to the Trustee
for cancellation, for principal and interest to the date of such
deposit (in the case of Notes which have become due and payable) or to
the Stated Maturity or Redemption Date, as the case may be;
(b) the Company has paid or caused to be paid all other
sums payable hereunder by the Company; and
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(c) the Company has delivered to the Trustee an Officers'
Certificate and an Opinion of Counsel, each stating that all
conditions precedent herein provided for relating to the satisfaction
and discharge of this Indenture have been complied with.
Notwithstanding the satisfaction and discharge of this Indenture, the
obligations of the Company to the Trustee under Section 6.06 and, if money
shall have been deposited with the Trustee pursuant to subclause (ii) of clause
(a) of this Section, the obligations of the Trustee under Section 4.02 and the
last paragraph of Section 10.03 shall survive.
SECTION 4.02 Application of Trust Money.
Subject to the provisions of the last paragraph of Section 10.03, all
money deposited with the Trustee pursuant to Section 4.01 shall be held in
trust and applied by it, in accordance with the provisions of the Notes and
this Indenture, to the payment, either directly or through any Paying Agent
(including the Company acting as its own Paying Agent) as the Trustee may
determine, to the Persons entitled thereto, of the principal and interest for
whose payment such money has been deposited with the Trustee; but such money
need not be segregated from other funds except to the extent required by law.
ARTICLE FIVE
EVENTS OF DEFAULT AND REMEDIES
SECTION 5.01 Events of Default.
"Event of Default," wherever used herein, means any one of the
following events (whatever the reason for such Event of Default and whether it
shall be occasioned by the provisions of Article Fourteen or be voluntary or
involuntary or be effected by operation of law or pursuant to any judgment,
decree or order of any court or any order, rule or regulation of any
administrative or governmental body) which shall have occurred and is
continuing:
(a) if default is made for a period of five Business Days
or more in the payment of interest or principal due in respect of the
Notes or any of them; or
(b) if the Company fails to perform or observe any of its
other obligations, covenants, conditions or provisions under the Notes
or this Indenture and (except where the Trustee shall have certified
to the Company that it considers such failure to be incapable of
remedy in which case no such notice or continuation as is hereinafter
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mentioned will be required) such failure continues for the period of
30 calendar days (or such longer period as the Trustee may in its
absolute discretion permit) next following the service by the Trustee
on the Company of notice requiring the same to be remedied; or
(c) if (i) any other Indebtedness of the Company or any
Principal Subsidiary becomes due and payable prior to its Stated
Maturity by reason of an event of default (howsoever defined) or (ii)
any such Indebtedness of the Company or any Principal Subsidiary is
not paid when due or, as the case may be, within any applicable grace
period or (iii) the Company or any Principal Subsidiary fails to pay
when due (or, as the case may be, within any applicable grace period)
any amount payable by it under any present or future guarantee for, or
indemnity in respect of, any Indebtedness of any Person or (iv) any
security given by the Company or any Principal Subsidiary for any
Indebtedness of any Person or any guarantee or indemnity of
Indebtedness of any Person by the Company or any Principal Subsidiary
becomes enforceable by reason of default in relation thereto and steps
are taken to enforce such security save in any such case where there
is a bona fide dispute as to whether the relevant Indebtedness or any
such guarantee or indemnity as aforesaid shall be due and payable
(following any applicable grace period), provided that in each such
case the Indebtedness exceeds in the aggregate U.S.$1,000,000 and in
each such case such event continues unremedied for a period of 30
calendar days (or such longer period as the Trustee may in its sole
discretion consent to in writing upon receipt of written notice from
the Company); or
(d) if the Company or any Principal Subsidiary shall
generally fail to pay its debts as such debts come due (except debts
which the Company or such Principal Subsidiary, as the case may be,
may contest in good faith generally) or shall be declared or
adjudicated by a competent court to be insolvent or bankrupt, shall
consent to the entry of an order of relief against it in an
involuntary bankruptcy case, shall enter into any assignment or other
similar arrangement for the benefit of its creditors or shall consent
to the appointment of a custodian (including, without limitation, a
receiver, liquidator or trustee); or
(e) if a receiver, administrative receiver, administrator
or other similar official shall be appointed in relation to the
Company or any Principal Subsidiary or in relation to the whole or a
substantial part of the undertaking or assets of any of them or a
distress, execution or other process shall be levied or enforced upon
or sued out against, or an encumbrancer shall take possession of, the
whole or a substantial part of the assets of any of them and in any
of the foregoing cases is not paid out or discharged within 90
calendar days (or such longer period as the Trustee may in its
absolute discretion consent to in writing upon receipt of written
notice from the Company); or
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(f) if the Company or any Principal Subsidiary institutes
proceedings to be adjudicated a voluntary bankrupt, or shall consent
to the filing of a bankruptcy proceeding against it, or shall file a
petition or answer or consent seeking organization under the laws of
the Federal Bankruptcy Code or any similar applicable U.S. federal or
state law, or shall consent to the filing of any such petition, or
shall consent to the appointment of a receiver or liquidator or
trustee or assignee (or other similar official) in bankruptcy or
insolvency of it or its property, or shall make an assignment for the
benefit of creditors, or shall admit in writing its inability to pay
its debts generally as they come due; or
(g) if a decree or order by a court having jurisdiction
in the premises shall have been entered adjudging the Company or any
Principal Subsidiary a bankrupt or insolvent, or approving as properly
filed a petition seeking the reorganisation of the Company or any
Principal Subsidiary under the Federal Bankruptcy Code or any other
similar applicable U.S. federal or state law, and such decree or order
shall have continued undischarged or unstayed for a period of 90
calendar days; or a decree or order of a court having jurisdiction in
the premises for the appointment of a receiver or liquidator or
trustee or assignee (or other similar official) in bankruptcy or
insolvency of the Company or any Principal Subsidiary or of all or
substantially all of its property, or for the winding up or
liquidation of its affairs, shall have been entered, and such decree
or order shall have continued undischarged and unstayed for a period
of 90 calendar days; or
(h) if a warranty, representation, or other statement
made by or on behalf of the Company contained in this Indenture, the
Notes or any certificate or other agreement furnished in compliance
with such documents is false in any material respect when made and
(except where the Trustee shall have certified to the Company that it
considers such falsity to be incapable of remedy, in which case no
such notice or continuation as is hereinafter mentioned will be
required) such falsity continues for a period of 30 calendar days (or
such longer period as the Trustee may in its absolute discretion
permit) next following the service by the Trustee on the Company of
notice requiring the same to be remedied; or
(i) if there is any final judgment or judgments for the
payment of money exceeding in the aggregate U.S.$1,000,000 outstanding
against the Company or any Principal Subsidiary which has been
outstanding for more than 60 calendar days from the date of its entry
and shall not have otherwise been discharged in full or stayed by
appeal, bond or otherwise.
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SECTION 5.02 Acceleration of Maturity; Rescission and Annulment.
If an Event of Default (other than an Event of Default specified in
Section 5.01(f) or 5.01(g)) occurs and is continuing, then and in every such
case the Trustee or the Holders of not less than 25% in principal amount of the
Outstanding Notes may, and the Trustee upon the request of the Holders of not
less than 25% in principal amount of the Outstanding Notes shall, declare the
principal amount of all the Notes to be due and payable immediately, by a
notice in writing to the Company (and to the Trustee if given by Noteholders),
and upon any such declaration such principal amount shall become immediately
due and payable.
If an Event of Default specified in Section 5.01(f) or 5.01(g) occurs
and is continuing, then the principal amount of all the Notes shall ipso facto
become and be immediately due and payable without any declaration or other act
on the part of the Trustee or any Noteholder.
At any time after a declaration of acceleration has been made and
before a judgment or decree for payment of the money due has been obtained by
the Trustee as hereinafter in this Article provided, the Holders of a majority
in principal amount of the Outstanding Notes, by written notice to the Company
and the Trustee, may rescind and annul such declaration and its consequences if
(a) the Company has paid or deposited with the Trustee a
sum sufficient to pay
(i) all overdue interest on all Outstanding
Notes,
(ii) all unpaid principal of any Outstanding Notes
which has become due otherwise than by such declaration of
acceleration, and interest on such unpaid principal at the
rate prescribed therefor in the Notes,
(iii) to the extent that payment of such interest
is legally enforceable, interest on overdue interest at the
rate prescribed therefor in the Notes, and
(iv) all sums paid or advanced by the Trustee
hereunder and the reasonable compensation, expenses,
disbursements and advances of the Trustee, its agents and
counsel; and
(b) all Events of Default, other than the non-payment of
amounts of principal of or interest on Notes which have become due
solely by such declaration of acceleration, have been cured or waived
as provided in Section 5.13.
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No such rescission shall affect any subsequent default or impair any
right consequent thereon.
SECTION 5.03 Collection of Indebtedness and Suits for Enforcement
by Trustee.
The Company covenants that if
(a) default is made in the payment of any instalment of
interest on any Note when such interest becomes due and payable and
such default continues for a period of five Business Days, or
(b) default is made in the payment of the principal of
any Note at the Maturity thereof and such default continues for a
period of five Business Days,
the Company will, upon demand of the Trustee, pay to the Trustee for the
benefit of the Holders of such Notes, the whole amount then due and payable on
such Notes for principal and interest, and interest on any overdue principal
and, to the extent that payment of such interest shall be legally enforceable,
upon any overdue instalment of interest, at the rate prescribed therefor in the
Notes, and, in addition thereto, such further amount as shall be sufficient to
cover the costs and expenses of collection, including the reasonable
compensation, expenses, disbursements and advances of the Trustee, its agents
and counsel.
If the Company fails to pay such amounts forthwith upon such demand,
the Trustee, in its own name and as trustee of an express trust, may institute
a judicial proceeding for the collection of the sums so due and unpaid, may
prosecute such proceeding to judgment or final decree and may enforce the same
against the Company or any other obligor upon the Notes and collect the moneys
adjudged or decreed to be payable in the manner provided by law out of the
property of the Company or any other obligor upon the Notes, wherever situated.
If an Event of Default occurs and is continuing, the Trustee may in
its discretion proceed to protect and enforce its rights and the rights of the
Noteholders by such appropriate judicial proceedings as the Trustee shall deem
most effectual to protect and enforce any such rights, whether for the specific
enforcement of any covenant or agreement in this Indenture or in aid of the
exercise of any power granted herein, or to enforce any other proper remedy.
SECTION 5.04 Trustee May File Proofs of Claim.
In case of the pendency of any receivership, insolvency, liquidation,
bankruptcy, reorganization, arrangement, adjustment, composition or other
judicial proceeding relative to the Company or any other obligor upon the Notes
or the property of the
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Company or of such other obligor or their creditors, the Trustee (irrespective
of whether the principal of the Notes shall then be due and payable as therein
expressed or by declaration or otherwise and irrespective of whether the
Trustee shall have made any demand on the Company for the payment of overdue
principal or interest) shall be entitled and empowered, by intervention in such
proceeding or otherwise,
(a) to file and prove a claim for the whole amount of
principal and interest owing and unpaid in respect of the Notes and to
file such other papers or documents as may be necessary or advisable
in order to have the claims of the Trustee (including any claim for
the reasonable compensation, expenses, disbursements and advances of
the Trustee, its agents and counsel) and of the Noteholders allowed in
such judicial proceeding, and
(b) to collect and receive any moneys or other property
payable or deliverable on any such claims and to distribute the same;
and any custodian, receiver, assignee, trustee, liquidator, sequestrator or
similar official in any such judicial proceeding is hereby authorized by each
Noteholder to make such payments to the Trustee and, in the event that the
Trustee shall consent to the making of such payments directly to the
Noteholders, to pay the Trustee any amount due it for the reasonable
compensation, expenses, disbursements and advances of the Trustee, its agents
and counsel, and any other amounts due the Trustee under Section 6.06.
Nothing herein contained shall be deemed to authorize the Trustee to
authorize or consent to or accept or adopt on behalf of any Noteholder any plan
of reorganization, arrangement, adjustment or composition affecting the Notes
or the rights of any Noteholder thereof, or to authorize the Trustee to vote in
respect of the claim of any Noteholder in any such proceeding.
SECTION 5.05 Trustee May Enforce Claims Without Possession of
Notes.
All rights of action and claims under this Indenture or the Notes may
be prosecuted and enforced by the Trustee without the possession of any of the
Notes or the production thereof in any proceeding relating thereto, and any
such proceeding instituted by the Trustee shall be brought in its own name and
as trustee of an express trust, and any recovery of judgment shall, after
provision for the payment of the reasonable compensation, expenses,
disbursements and advances of the Trustee, its agents and counsel, be for the
ratable benefit of the Noteholders in respect of which such judgment has been
recovered.
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SECTION 5.06 Application of Money Collected.
Any money collected by the Trustee pursuant to this Article shall be
applied in the following order, at the date or dates fixed by the Trustee and,
in case of the distribution of such money on account of principal or interest,
upon presentation of the Notes and the notation thereon of the payment if only
partially paid and upon surrender thereof if fully paid:
FIRST: To the payment of all amounts due the Trustee under
Section 6.06;
SECOND: To the payment of the amounts then due and unpaid for
principal of and interest on the Notes in respect of which or for the
benefit of which such money has been collected, ratably, without
preference or priority of any kind, according to the amounts due and
payable on such Notes for principal and interest, respectively; and
THIRD: The balance, if any, to the Person or Persons entitled
thereto.
SECTION 5.07 Limitation on Suits.
No Noteholder shall have any right to institute any proceeding,
judicial or otherwise, with respect to this Indenture, or for the appointment
of a receiver or trustee, or for any other remedy hereunder, unless
(a) such Noteholder has previously given written notice
to the Trustee of a continuing Event of Default, with a copy of such
notice to the Company;
(b) the Holders of not less than 25% in principal amount
of the Outstanding Notes shall have made written request to the
Trustee to institute proceedings in respect of such Event of Default
in its own name as Trustee hereunder;
(c) such Noteholder or Noteholders have offered to the
Trustee reasonable indemnity against the costs, expenses and
liabilities to be incurred in compliance with such request;
(d) the Trustee for 60 days after its receipt of such
notice, request and offer of indemnity has failed to institute any
such proceeding; and
(e) no direction inconsistent with such written request
has been given to the Trustee during such 60-day period by the Holders
of a majority or more in principal amount of the Outstanding Notes;
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it being understood and intended that no one or more Noteholders shall
have any right in any manner whatever by virtue of, or by availing of,
any provision of this Indenture to affect, disturb or prejudice the
rights of any other Noteholders, or to obtain or to seek to obtain
priority or preference over any other Noteholders or to enforce any
right under this Indenture, except in the manner herein provided and
for the equal and ratable benefit of all the Noteholders.
SECTION 5.08 Unconditional Right of Holders to Receive Principal
and Interest.
Notwithstanding any other provision in this Indenture, the Holder of
any Note or of any Coupon, as the case may be, shall have the right, which is
absolute and unconditional, to receive payment, as provided herein (including,
if applicable, Article Thirteen) and in such Note of the principal of and
(subject to Section 3.09) interest on, such Note on the respective Stated
Maturity or expressed in such Note (or, in the case of redemption, on the
Redemption Date) or Coupon and to institute suit for the enforcement of any
such payment, and such rights shall not be impaired without the consent of such
Holder; provided, that all monies paid by the Company to the Paying Agent for
the payment of principal or interest on any Note which remain unclaimed at the
end of two (2) years after the Stated Maturity or Redemption Date of such Note
will be repaid to the Company and the Holder of any Note or Coupon shall
thereafter have only the rights of a creditor of the Company or such rights as
may be otherwise provided by applicable law.
SECTION 5.09 Restoration of Rights and Remedies.
If the Trustee or any Noteholder has instituted any proceeding to
enforce any right or remedy under this Indenture and such proceeding has been
discontinued or abandoned for any reason, or has been determined adversely to
the Trustee or to such Noteholder, then and in every such case, subject to any
determination in such proceeding, the Company, the Trustee and the Noteholders
shall be restored severally and respectively to their former positions
hereunder and thereafter all rights and remedies of the Trustee and the
Noteholders shall continue as though no such proceeding had been instituted.
SECTION 5.10 Rights and Remedies Cumulative.
Except as otherwise provided with respect to the replacement or
payment of mutilated, destroyed, lost or stolen Notes in the last paragraph of
Section 3.08, no right or remedy herein conferred upon or reserved to the
Trustee or to the Noteholders is intended to be exclusive of any other right or
remedy, and every right and remedy shall, to the extent permitted by law, be
cumulative and in addition to every other right and remedy given hereunder or
now or hereafter existing at law or in equity or otherwise. The assertion or
employment of any right or remedy
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hereunder, or otherwise, shall not prevent the concurrent assertion or
employment of any other appropriate right or remedy.
SECTION 5.11 Delay or Omission Not Waiver.
No delay or omission of the Trustee or of any Holder of any Note to
exercise any right or remedy accruing upon any Event of Default shall impair
any such right or remedy or constitute a waiver of any such Event of Default or
an acquiescence therein. Every right and remedy given by this Article or by
law to the Trustee or to the Noteholders may be exercised from time to time,
and as often as may be deemed expedient, by the Trustee or by the Noteholders,
as the case may be.
SECTION 5.12 Control by Noteholders.
The Holders of not less than a majority in aggregate principal amount
of the Outstanding Notes shall have the right to direct the time, method and
place of conducting any proceeding for any remedy available to the Trustee, or
exercising any trust or power conferred on the Trustee, provided that in each
case
(a) such direction shall not be in conflict with any rule
of law or with this Indenture,
(b) the Trustee may take any other action deemed proper
by the Trustee which is not inconsistent with such direction, and
(c) the Trustee need not take any action which might
involve it in personal liability or be unjustly prejudicial to the
Noteholders not joining in such direction.
SECTION 5.13 Waiver of Past Defaults.
Subject to Section 5.02, the Holders of not less than a majority in
principal amount of the Outstanding Notes may on behalf of the Holders of all
the Notes waive any past default hereunder and its consequences, except a
default
(a) in respect of the payment of the principal of or
interest on any Note, or
(b) in respect of a covenant or provision hereof which
under Article Nine cannot be modified or amended without the consent
of the Holder of each Outstanding Note affected.
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Upon any such waiver, such default shall cease to exist, and any Event
of Default arising therefrom shall be deemed to have been cured, for every
purpose of this Indenture; but no such waiver shall extend to any subsequent or
other default or Event of Default or impair any right consequent thereon.
SECTION 5.14 Waiver of Stay or Extension Laws.
The Company covenants (to the extent that it may lawfully do so) that
it will not at any time insist upon, or plead, or in any manner whatsoever
claim or take the benefit or advantage of, any stay or extension law wherever
enacted, now or at any time hereafter in force, which may affect the covenants
or the performance of this Indenture; and the Company (to the extent that it
may lawfully do so) hereby expressly waives all benefit or advantage of any
such law and covenants that it will not hinder, delay or impede the execution
of any power herein granted to the Trustee, but will suffer and permit the
execution of every such power as though no such law had been enacted.
SECTION 5.15 Undertaking for Costs.
All parties to this Indenture agree, and each Holder of any Note by
such Noteholder's acceptance thereof shall be deemed to have agreed, that any
court may in its discretion require, in any suit for the enforcement of any
right or remedy under this Indenture, or in any suit against the Trustee for
any action taken, suffered or omitted by it as Trustee, the filing by any party
litigant in such suit of an undertaking to pay the costs of such suit, and that
such court may in its discretion assess reasonable costs, including reasonable
attorneys' fees, against any party litigant in such suit, having due regard to
the merits and good faith of the claims or defenses made by such party
litigant; but the provisions of this Section shall not be deemed to require any
court to require an undertaking or to make such an assessment in any suit
instituted by the Company except against the Trustee.
ARTICLE SIX
THE TRUSTEE
SECTION 6.01 Notice of Defaults.
Within 90 days after the occurrence of any Default hereunder, the
Trustee shall publish notice of such Default hereunder known to the Trustee,
unless such Default shall have been cured or waived; provided, however, that,
except in the case of a Default in the payment of the principal
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of or interest on any Note, the Trustee shall be protected in withholding such
notice if and so long as the board of directors, the executive committee or a
trust committee of directors and/or Responsible Officers of the Trustee in good
faith determines that the withholding of such notice is in the interest of the
Noteholders.
SECTION 6.02 Certain Rights of Trustee.
(a) The Trustee may request and rely and shall be
protected in acting or refraining from acting upon any Extraordinary
Resolution, Act, Notice or other resolution, certificate, statement,
instrument, opinion, report, notice, request, direction, consent,
order, bond, debenture, note, other evidence of indebtedness or other
paper or document believed by it to be genuine and to have been signed
or presented by the proper party or parties.
(b) Any request or direction of the Company mentioned
herein shall be sufficiently evidenced by a Company Request or Company
Order and any resolution of the Board of Directors may be sufficiently
evidenced by a Board Resolution.
(c) Whenever in the administration of this Indenture the
Trustee shall deem it desirable that a matter be proved or established
prior to taking, suffering or omitting any action hereunder, the
Trustee (unless other evidence be herein specifically prescribed) may,
in the absence of bad faith on its part, rely upon an Officers'
Certificate.
(d) The Trustee may consult with counsel and the written
advice of such counsel or any Opinion of Counsel shall be full and
complete authorization and protection in respect of any action taken,
suffered or omitted by it hereunder in good faith and in reliance
thereon.
(e) The Trustee shall be under no obligation to exercise
any of the rights or powers vested in it by this Indenture at the
request or direction of any of the Noteholders pursuant to this
Indenture, unless such Noteholders shall have offered to the Trustee
reasonable security or indemnity against the costs, expenses
(including reasonable fees of Trustee's counsel), and liabilities
which might be incurred by it in compliance with such request or
direction.
(f) The Trustee shall not be bound to make any
investigation into the facts or matters stated in any Extraordinary
Resolution, Act, Notice or other resolution, certificate, statement,
instrument, opinion, report, notice, request, direction, consent,
order, bond, debenture, note, other evidence of indebtedness or other
paper or document, but the
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Trustee, in its discretion, may make such further inquiry or
investigation into such facts or matters as it may see fit,
and, if the Trustee shall determine to make such further inquiry or
investigation, it shall be entitled to examine the books, records and
premises of the Company, personally or by agent or attorney.
(g) The Trustee may execute any of the trusts or powers
hereunder or perform any duties hereunder either directly or by or
through agents or attorneys and the Trustee shall not be responsible
for any misconduct or negligence on the part of any agent or attorney
appointed with due care by it hereunder.
(h) The Trustee shall not be liable for any action taken,
suffered or omitted by it in good faith and believed by it to be
authorized or within the discretion or rights or powers conferred upon
it by this Indenture.
(i) The permissive right of the Trustee to take or
refrain from taking any actions enumerated in this Indenture shall not
be confused as a duty and the Trustee shall not be answerable in such
actions other than for its own negligence or wilful misconduct.
The Trustee shall not be required to expend or risk its own funds or
otherwise incur any financial liability in the performance of any of its duties
hereunder, or in the exercise of any of its rights or powers if it shall have
reasonable grounds for believing that repayment of such funds or adequate
indemnity against such risk or liability is not reasonably assured to it.
SECTION 6.03 Trustee Not Responsible for Recitals or Issuance of
Notes.
The recitals contained herein in the Notes, except for the Trustee's
certificates of authentication, and in the Coupons, shall be taken as the
statements of the Company, and the Trustee assumes no responsibility for their
correctness. The Trustee makes no representations as to the validity or
sufficiency of this Indenture or of the Notes or the Coupons or of the
Conversion Shares, except that the Trustee represents that it is duly
authorized to execute and deliver this Indenture, authenticate the Notes and
perform its obligations hereunder. The Trustee shall not be accountable for
the use or application by the Company of Notes or the proceeds thereof.
SECTION 6.04 May Hold Notes.
The Trustee, any Paying Agent, any Conversion Agent or any other agent
of the Company or of the Trustee, in its individual or any other capacity, may
become the owner or pledgee of Notes and the Coupons and may otherwise deal
with the Company with the same rights it would have if it were not Trustee,
Paying Agent, Conversion Agent or such other agent.
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SECTION 6.05 Money Held in Trust.
Money held by the Trustee in trust hereunder need not be segregated
from other funds except to the extent required by law. The Trustee shall be
under no liability for interest on any money received by it hereunder except as
otherwise agreed with the Company.
SECTION 6.06 Compensation and Reimbursement.
The Company agrees:
(a) to pay to the Trustee from time to time reasonable
compensation for all services rendered by it hereunder (which
compensation shall not be limited by any provision of law in regard to
the compensation of a trustee of an express trust);
(b) except as otherwise expressly provided herein, to
reimburse the Trustee upon its request for all reasonable expenses,
disbursements and advances incurred or made by the Trustee in
accordance with any provision of this Indenture (including the
reasonable compensation and the expenses and disbursements of its
agents and counsel), except any such expense, disbursement or advance
as may be attributable to its negligence, bad faith or wilful
misconduct; and
(c) to indemnify the Trustee for, and to hold it harmless
against, any loss, liability or expense incurred without negligence or
bad faith on its part, arising out of or in connection with the
acceptance or administration of this trust, including the costs and
expenses of defending itself against any claim or liability in
connection with the exercise or performance of any of its powers or
duties hereunder.
When the Trustee incurs expenses or renders service in connection with
an Event of Default specified in Section 5.01 (f) or Section 5.01 (g), the
expenses (including the reasonable charges of its counsel) and the compensation
for the services are intended to constitute expenses of the administration
under any applicable federal or state bankruptcy, insolvency or other similar
law.
As security for the performance of the obligations of the Company
under this Section, the Trustee shall have a claim prior to the Notes upon all
property and funds held or collected by the Trustee as such, except funds held
in trust for the payment of principal of or interest on particular Notes.
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The provision of this Section shall survive the termination of this
Indenture or the earlier resignation or removal of the Trustee. Any Paying
Agent or Authenticating Agent appointed hereunder shall be entitled to the
benefits of Section 6.06 (c) as if the indemnity set forth therefor were
specifically afforded to such Paying Agent or Authenticating Agent.
SECTION 6.07 Corporate Trustee Required; Eligibility.
There shall at all times be a Trustee hereunder which shall be
eligible to act as Trustee and shall have a combined capital and surplus of at
least $50,000,000. If such corporation publishes reports of condition at least
annually, pursuant to law or to the requirements of federal, state, territorial
or District of Columbia supervising or examining authority, then for the
purposes of this Section, the combined capital and surplus of such corporation
shall be deemed to be its combined capital and surplus as set forth in its most
recent report of condition so published. If at any time the Trustee shall
cease to be eligible in accordance with the provisions of this Section, it
shall resign immediately in the manner and with the effect hereinafter
specified in this Article.
SECTION 6.08 Resignation and Removal; Appointment of Successor.
(a) No resignation or removal of the Trustee and no
appointment of a successor Trustee pursuant to this Article shall
become effective until the acceptance of appointment by the successor
Trustee in accordance with the applicable requirements of Section
6.09.
(b) The Trustee may resign at any time by giving written
notice thereof to the Company. If the instrument of acceptance by a
successor Trustee required by Section 6.09 shall not have been
delivered to the Trustee within 30 days after the giving of such
notice of resignation, the resigning Trustee may petition any court of
competent jurisdiction for the appointment of a successor Trustee.
(c) The Trustee may be removed at any time by Act of the
Holders of not less than a majority in principal amount of the
Outstanding Notes, delivered to the Trustee and to the Company.
(d) If at any time:
(i) the Trustee shall cease to be eligible under
Section 6.07 and shall fail to resign after written request
therefor by the Company or by any Noteholder who has been a
bona fide Holder of a Note for at least six months, or
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(ii) the Trustee shall become incapable of acting
or shall be adjudged a bankrupt or insolvent or a receiver of
the Trustee or of its property shall be appointed or any
public officer shall take charge or control of the Trustee or
of its property or affairs for the purpose of rehabilitation,
conservation or liquidation, or
(iii) the Trustee shall fail or refuse to timely
carry out and discharge its duties hereunder,
then, in any such case, (i) the Company, by a Board Resolution, may
remove the Trustee, or (ii) any Noteholder who has been a bona fide
Holder of a Note for at least six months may, on behalf of such
Noteholder and all others similarly situated, petition any court of
competent jurisdiction for the removal of the Trustee and the
appointment of a successor Trustee.
(e) If the Trustee shall resign, be removed or become
incapable of acting, or if a vacancy shall occur in the office of
Trustee for any reason, the Company, by a Board Resolution, shall
promptly appoint a successor Trustee. If, within one year after such
resignation, removal or incapability, or the occurrence of such
vacancy, a successor Trustee shall be appointed by Act of the Holders
of a majority in principal amount of the Outstanding Notes delivered
to the Company and the retiring Trustee, the successor Trustee so
appointed shall, forthwith upon its acceptance of such appointment,
become the successor Trustee and supersede the successor Trustee
appointed by the Company. If no successor Trustee shall have been so
appointed by the Company or the Noteholders and accepted appointment
in the manner hereinafter provided, any Noteholder who has been a bona
fide Holder of a Note for at least six months may, on behalf of such
Noteholder and all others similarly situated, petition any court of
competent jurisdiction for the appointment of a successor Trustee.
(f) The Company shall give notice of each resignation and
each removal of the Trustee and each appointment of a successor
Trustee to the Noteholders in the manner provided for in Section 1.08.
Each notice shall include the name of the successor Trustee and the
address of its Corporate Trust Office.
SECTION 6.09 Acceptance of Appointment by Successor.
Every successor Trustee appointed hereunder shall execute, acknowledge
and deliver to the Company and to the retiring Trustee an instrument accepting
such appointment, and thereupon the resignation or removal of the retiring
Trustee shall become effective and such successor Trustee, without any further
act, deed or conveyance, shall become vested with all the rights,
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powers, trusts and duties of the retiring Trustee; but, on request of the
Company or the successor Trustee, such retiring Trustee shall, upon payment of
its charges, execute and deliver an instrument transferring to such successor
Trustee all the rights, powers and trusts of the retiring Trustee and shall
duly assign, transfer and deliver to such successor Trustee all property and
money held by such retiring Trustee hereunder, including any funds held in the
Segregated Account, whether or not invested. Upon request of any such
successor Trustee, the Company shall execute any and all instruments for more
fully and certainly vesting in and confirming to such successor Trustee all
such rights, powers and trusts.
No successor Trustee shall accept its appointment unless at the time
of such acceptance such successor Trustee shall be qualified and eligible under
this Article.
SECTION 6.10 Merger, Conversion, Consolidation or Succession to
Business.
Any corporation into which the Trustee may be merged or converted or
with which it may be consolidated, or any corporation resulting from any
merger, conversion or consolidation to which the Trustee shall be a party, or
any corporation succeeding to all or substantially all of the corporate trust
business of the Trustee, shall be the successor of the Trustee hereunder,
provided such corporation shall be otherwise qualified and eligible under this
Article, without the execution or filing of any paper or any further act on the
part of any of the parties hereto. In case any Notes shall have been
authenticated, but not delivered, by the Trustee then in office, any successor
by merger, conversion or consolidation to such authenticating Trustee may adopt
such authentication and deliver the Notes so authenticated with the same effect
as if such successor Trustee had itself authenticated such Notes; and in case
at that time any of the Notes shall not have been authenticated, any successor
Trustee may authenticate such Notes either in the name of any predecessor
hereunder or in the name of the successor Trustee; and in all such cases such
certificates shall have the full force which it is anywhere in the Notes or in
this Indenture provided that the certificate of the Trustee shall have;
provided, however, that the right to adopt the certificate of authentication of
any predecessor Trustee or to authenticate Notes in the name of any predecessor
Trustee shall apply only to its successor or successors by merger, conversion
or consolidation.
SECTION 6.11 Certain Duties and Responsibilities.
(a) Except during the continuance of an Event of Default
with respect to the Notes,
(i) the Trustee undertakes to perform such duties
and only such duties with respect to the Notes as are
specifically set forth in this Indenture, and no
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implied covenants or obligations with respect to the Notes
shall be read into this Indenture against the Trustee; and
(ii) in the absence of bad faith on its part, the
Trustee may conclusively rely as to the truth of the
statements and the correctness of the opinions expressed
therein, upon certificates or opinions furnished to the
Trustee and conforming to the requirements of this Indenture;
but in the case of any such certificates or opinions which by
any provision hereof are specifically required to be furnished
to the Trustee, the Trustee shall be under a duty to examine
the same to determine whether or not they conform to the
requirements of this Indenture, but not to verify the contents
thereof.
(b) In case an Event of Default has occurred and is
continuing of which a Responsible Officer of the Trustee has actual
knowledge, the Trustee shall exercise such of the rights and powers
vested in it by this Indenture with respect to the Notes, and use the
same degree of care and skill in their exercise, as a prudent person
would exercise or use under the circumstances in the conduct of such
person's own affairs.
(c) No provision of this Indenture shall be construed to
relieve the Trustee from liability for its own negligent action, its
own negligent failure to act, or its own wilful misconduct, except
that
(i) this Subsection shall not be construed to
limit the effect of Subsection (a) of this Section;
(ii) the Trustee shall not be liable for any error
of judgment made in good faith by a Responsible Officer,
unless it shall be proved that the Trustee was negligent in
ascertaining the pertinent facts;
(iii) the Trustee shall not be liable with respect
to any action taken or omitted to be taken by it in good faith
in accordance with the direction of the Noteholders, given as
provided in Section 5.12, relating to the time, method and
place of conducting any proceeding for any remedy available to
the Trustee, or exercising any trust or power conferred upon
the Trustee, under this Indenture; and
(iv) no provision of this Indenture shall require
the Trustee to expend or risk its own funds or otherwise incur
any financial liability in the performance of any of its
duties hereunder, or in the exercise of any of its rights or
powers, if it
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shall have reasonable grounds for believing that repayment of
such funds or adequate indemnity against such risk or
liability is not reasonably assured to it.
(d) Whether or not therein expressly so provided, every
provision of this Indenture relating to the conduct or affecting the
liability of or affording protection to the Trustee shall be subject
to the provisions of this Section.
SECTION 6.12 Segregated Account.
(a) On the Closing Date or the day immediately following
the Closing Date the net proceeds received from the sale of the Notes
shall be transferred to the Segregated Account to be held until such
time as such proceeds may be distributed to the Company in accordance
with this Section or used by the Company in accordance with the
provisions of Article Four and Article Thirteen hereof.
(b) On the Closing Date or the date immediately following
the Closing Date, the Company will establish the Segregated Account
with Trustee on behalf of the Company. The Trustee shall have a duty
to invest the funds held in the Segregated Account from time to time
in accordance with any Company Request received by the Trustee from
the Company from time to time. Funds held by the Trustee will be
invested and reinvested in Permitted Investments as directed in
writing by the Company. Interest earned on investments made with the
funds in the Segregated Account from time to time and on deposit in
the Segregated Account will be held for the account of the Company and
also invested in accordance with the instructions provided by the
Company from time to time in a Company Order in Permitted Investments.
The Trustee will distribute such earnings to the Company upon written
request.
(c) Upon conversion of any Note, whether represented by
an interest in the Global Note or a Bearer Note, into Conversion
Shares pursuant to Article Twelve, from time to time, the Company may
request that the Trustee make a distribution to the Company of funds
held in the Segregated Account in an amount equal to the principal
amount of such Note. The balance of the principal amount for such
Note remaining on deposit in the Segregated Account at the Conversion
Date shall be distributed to the Company without regard to the then
current Asset Value Coverage Ratio; provided, however, that no such
distribution shall be made if an Event of Default shall have occurred
and be continuing. In addition, the Company may from time to time
request that the Trustee distribute to the Company any other funds
held in the Segregated Account. The Trustee shall distribute to the
Company such funds held in the Segregated Account to the
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extent that the Company on the date of such request provides the
documents specified in Section 6.12(d) to the Trustee.
(d) Upon making any written request to the Trustee for a
distribution of a portion of the funds, including any earnings
thereon, held in the Segregated Account, the Company will present to
the Trustee a certificate from the chief financial officer of the
Company including items (a) through (d) of Section 1.04 and in the
form set forth as Exhibit D stating that (i) the required Asset Value
Coverage Ratio has (A) been met in accordance with Section 10.13 as of
the date of such request and (B) will be met, following distribution
of such funds from the Segregated Account (which certification may be
based on assets subject to the Asset Value Coverage Ratio acquired
subsequent to the end of the most recent fiscal year), (ii) to the
knowledge of the Company no Event of Default with respect to any of
the Notes has occurred and is continuing at the date of such
certificate (except in the case of funds to be immediately deposited
with Trustee pursuant to Section 4.01), and (iii) requesting a
specific distribution. Such chief financial officer's certificate
shall be accompanied by an Independent Reserve Report. Upon receipt
of the chief financial officer's certificate and the Independent
Reserve Report, the Trustee shall distribute the corresponding portion
of the funds held in the Segregated Account to the Company as
requested; provided that any chief financial officer's certificate
delivered to the Trustee pursuant to Article Four or Article Thirteen
shall not be required to contain the statements set forth in subparts
(i) and (ii) above. The Trustee shall have no obligation or liability
to verify the truthfulness or accuracy of the chief financial
officer's certificate or the Independent Reserve Report presented and
likewise will have no liability for relying exclusively on such
documents to verify the permissibility of a distribution of funds from
the Segregated Account to the Company as requested.
(e) At any time after Maturity, the Company may request
that the Trustee distribute the funds held in the Segregated Account
to the Company. Upon making any such request, the Company shall
present an Officer's Certificate including items (a) through (d) of
Section 1.04 and stating that all principal and interest due at any
time on the Notes up to and through Maturity has been paid to the
Trustee.
(f) The Company may at any time and from time to time
deposit funds in the Segregated Account in order to meet the required
Asset Value Coverage Ratio or to supplement or replace any Required
Assets designated in the most recent chief financial officer's
certificate as part of the Asset Value Coverage Ratio with other or
additional assets eligible for inclusion as Required Assets, provided
that prior to any such change in the allocation of Required Assets,
the Company shall provide a substitute chief financial
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officer's certificate evidencing that the required Asset Value
Coverage Ratio shall be met after such deposit, supplement or
replacement is effective, as the case may be.
SECTION 6.13 Meetings of Noteholders.
(a) The Trustee or the Noteholders may convene a meeting
at any time and from time to time to consider any matter affecting the
interests of the Trustee or the Holders of the Notes, including the
modification of the Terms and Conditions or this Indenture and to
make, give or take any request, demand, authorization, direction,
notice, consent, waiver or other action provided by this Indenture to
be made, given or taken by Holders of the Notes.
(b) The Trustee may at any time call a meeting of the
Holders of the Notes for any purpose specified in Section 6.13(a), to
be held at such time and at such place in the Borough of Manhattan,
The City of New York, or in the City of London, England, as the
Trustee shall determine. Notice of every meeting of the Holders of
the Notes, setting forth the time and the place of such meeting and in
general terms the action proposed to be taken at such meeting, shall
be given in the manner provided in Section 1.08, not less than 21 nor
more than 180 days prior to the date fixed for the meeting.
(c) In case at any time the Company, pursuant to a Board
Resolution, or the Holders of at least 25% in aggregate principal
amount of the Outstanding Notes shall have requested the Trustee to
call a meeting of the Holder of the Notes for any purpose other than
specified in Section 6.13(a), by written request setting forth in
reasonable detail the action proposed to be taken at the meeting, and
the Trustee shall not have made the first publication of the notice of
such meeting within 21 days after receipt of such request or shall not
thereafter proceed to cause the meeting to be held as provided herein,
then the Company or the Holders of the Notes in the amount specified,
as the case may be, may determine the time and the place in the
Borough of Manhattan, The City of New York, or in the City of London,
England, for such meeting and may call such meeting for such purposes
by giving notice thereof as provided in Section 1.08.
(d) To be entitled to vote at any meeting of Holders of
the Notes, a Person shall be (i) a Holder of one or more Outstanding
Notes, or (ii) a Person appointed by an instrument in writing as proxy
for a Holder or Holders of one or more Outstanding Notes by such
Holder or Holders. The only Persons who shall be entitled to be
present or to speak at any meeting of Noteholders shall be the Persons
entitled to vote at such meeting and their counsel, any
representatives of the Trustee and the Company, and their respective
counsel.
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(e) The quorum at any meeting for passing any
Extraordinary Resolution will be one or more Persons present holding
or representing 50 percent or more in principal amount of the
Outstanding Notes as of the date of the meeting, or at any adjourned
such meeting one or more Persons present whatever the principal amount
of the Notes held or represented by such Person, except that at any
meeting, the business of which includes the modification of certain of
the provisions of the Terms and Conditions and the provisions of this
Indenture, the necessary quorum and vote required for passing an
Extraordinary Resolution will be one or more Persons present holding
or representing not less than a majority, or at any adjourned such
meeting not less than one-third, of the principal amount of the
Outstanding Notes. An Extraordinary Resolution passed at any meeting
of the Holders of the Notes will be binding on all Holders of the
Notes, whether or not such Noteholders are present at the meeting, and
on the Holders of all Coupons.
(f) The Trustee may agree, without the consent of the
Holders of the Notes or the Coupons, to any modification of, or to the
waiver or authorization of any breach or proposed breach of, any of
the Terms and Conditions or any of the provisions of this Indenture
which is not, in the opinion of the Trustee prejudicial to the
interests of the Holders of the Notes or the Coupons or if necessary
to correct a manifest error.
SECTION 6.14 Authenticating Agents.
The Principal Paying and Conversion Agent may authenticate the
Global Note, the Temporary Notes and the Notes, as the Trustee's Authenticating
Agent. The Trustee may, with the written consent of the Company, appoint an
additional Authenticating Agent acceptable to the Company with respect to the
Notes which shall be authorized to act on behalf of the Trustee to authenticate
Notes issued upon exchange or substitution pursuant to this Indenture.
Notes authenticated by an Authenticating Agent shall be
entitled to the benefits of this Indenture and shall be valid and obligatory
for all purposes as if authenticated by the Trustee hereunder, and every
reference in this Indenture to the authentication and delivery of Notes by the
Trustee or the Trustee's certificate of authentication shall be deemed to
include authentication and delivery on behalf of the Trustee by an
Authenticating Agent and a certificate of authentication executed on behalf of
the Trustee by an Authenticating Agent. The Notes shall have endorsed thereon
the certificate of authentication set forth in Exhibits in A and B hereto.
Each Authenticating Agent shall be subject to acceptance by the Company and
shall at all times be a corporation organized and dong business under the laws
of the United States of America, any state thereof, the District of Columbia,
or England and Wales authorised under such laws to act as Authenticating Agent
and subject to supervision or examination by government or other fiscal
authority. If at any time an Authenticating Agent shall cease to be eligible
in accordance with the
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provisions of this Section 6.14, such Authenticating Agent shall resign
immediately in the manner and with the effect specified in this Section 6.14.
Any corporation into which an Authenticating Agent may be merged or
converted or with which it may be consolidated, or any corporation resulting
from any merger, conversion or consolidation to which such Authenticating Agent
shall be a party, or any corporation succeeding to the corporate agency or
corporate trust business of an Authenticating Agent, shall continue to be an
Authenticating Agent; provided such
corporation shall be otherwise eligible under this Section 6.14, without the
execution or filing of any paper or any further act on the part of the Trustee
or the Authenticating Agent.
An Authenticating Agent may resign at any time be giving written
notice thereof to the Trustee and to the Company. The Trustee may at any time
terminate the agency of an Authenticating Agent by giving written notice
thereof to such Authenticating Agent and to the Company. Upon receiving such a
notice of resignation or upon such a termination, or in case at any time such
Authenticating Agent shall cease to be eligible in accordance with the
provisions of this Section 6.14, the Trustee may appoint a successor
Authenticating Agent which shall be subject to acceptance by the Company.
The Company agrees to pay to each Authenticating Agent from time to
time reasonable compensation for this service under Section 6.14.
ARTICLE SEVEN
NOTEHOLDERS' LISTS AND REPORTS BY COMPANY
SECTION 7.01 Disclosure of Names and Addresses of Noteholders.
Every Noteholder, by receiving and holding the same, agrees with the
Company and the Trustee that neither the Company nor the Trustee nor any agent
of either of them shall be held accountable by reason of the disclosure of any
such information as to the names and addresses of the Noteholders regardless of
the source from which such information was derived.
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SECTION 7.02 Reports by Company.
The Company shall:
(a) file with the Trustee, within 15 days after the
Company is required to file the same with the Commission, copies of
the annual reports and of the information, documents and other reports
(or copies of such portions of any of the foregoing as the Commission
may from time to time by rules and regulations prescribe) which the
Company may be required to file with the Commission pursuant to
Section 13 or Section 15(d) of the Exchange Act; or, if the Company is
not required to file information, documents or reports pursuant to
either of said Sections, then, on the 120th day following the initial
issuance of the Notes and annually thereafter, it shall file with the
Trustee, in accordance with rules and regulations prescribed from time
to time by the Commission, such of the supplementary and periodic
information, documents and reports which may be required pursuant to
Section 13 of the Exchange Act in respect of a security listed and
registered on a national securities exchange as may be prescribed from
time to time in such rules and regulations;
(b) file with the Trustee, in accordance with rules and
regulations prescribed from time to time by the Commission, such
additional information, documents and reports with respect to
compliance by the Company with the conditions and covenants of this
Indenture as may be required from time to time by such rules and
regulations; and
(c) file with the Trustee within 90 days after the end of
its fiscal year, a copy of an Independent Reserve Report dated as of
the end of such fiscal year.
ARTICLE EIGHT
CONSOLIDATION, MERGER, CONVEYANCE, TRANSFER, OR LEASE
SECTION 8.01 Company May Consolidate, Etc., Only on Certain Terms.
The Company shall not consolidate with or merge with or into any other
corporation or convey, transfer or lease its properties and assets
substantially as an entirety to any Person, unless:
(a) either (i) the Company shall be the surviving Person
or (ii) the Person (if other than the Company) formed by such
consolidation or into which the Company is merged or the Person which
acquires by conveyance or transfer, or which leases, the
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properties and assets of the Company substantially as an entirety (1)
shall be a Person organized and validly existing under the laws of the
United States of America, any state thereof or the District of
Columbia and (2) shall expressly assume, by an indenture supplemental
hereto, executed and delivered to the Trustee, in form satisfactory to
the Trustee, the Company's obligation for the due and punctual payment
of the principal of and interest on all the Notes and the performance
and observance of every covenant of this Indenture on the part of the
Company to be performed or observed;
(b) immediately after giving effect to such transaction,
no Default or Event of Default shall have occurred and be continuing;
and
(c) the Company or such Person shall have delivered to
the Trustee an Officers' Certificate and an Opinion of Counsel, each
stating that such consolidation, merger, conveyance, transfer or lease
and, if a supplemental indenture is required in connection with such
transaction, such supplemental indenture complies with this Article
and that all conditions precedent herein provided for relating to such
transaction have been complied with.
SECTION 8.02 Successor Substituted.
Upon any consolidation of the Company with or merger of the Company
with or into any other Person or any conveyance, transfer or lease of the
properties and assets of the Company substantially as an entirety to any Person
in accordance with Section 8.01, the successor Person formed by such
consolidation or into which the Company is merged or to which such conveyance,
transfer or lease is made shall succeed to, and be substituted for, and may
exercise every right and power of, the Company under this Indenture with the
same effect as if such successor Person had been named as the Company herein,
and in the event of any such conveyance or transfer, the Company (which term
shall for this purpose mean the Person named as the "Company" in the first
paragraph of this Indenture or any successor Person which shall theretofore
become such in the manner described in Section 8.01), except in the case of a
lease, shall be discharged of all obligations and covenants under this
Indenture and the Notes and may be dissolved and liquidated.
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ARTICLE NINE
SUPPLEMENTAL INDENTURES
SECTION 9.01 Supplemental Indentures Without Consent of
Noteholders.
Without the consent of any Noteholders, the Company, when authorized
by a Board Resolution, and the Trustee, at any time and from time to time, may
enter into one or more indentures supplemental hereto, in form satisfactory to
the Trustee, for any of the following purposes:
(a) to evidence the succession of another Person to the
Company and the assumption by any such successor of the covenants of
the Company contained herein and in the Notes; or
(b) to add to the covenants of the Company for the
benefit of the Noteholders or to surrender any right or power herein
conferred upon the Company; or
(c) to add any additional Events of Default; or
(d) to evidence and provide for the acceptance of
appointment hereunder by a successor Trustee pursuant to the
requirements of Section 6.09; or
(e) to cure any ambiguity, to correct or supplement any
provision herein which may be inconsistent with any other provision
herein, or to make any other provisions with respect to matters or
questions arising under this Indenture; provided that such action
shall not adversely affect the interests of the Noteholders in any
material respect; or
(f) to secure the Notes pursuant to the requirements of
Section 10.11 or otherwise.
SECTION 9.02 Supplemental Indentures with Consent of Noteholders.
With the consent of the Noteholders of not less than a majority in
principal amount of the Outstanding Notes, by Act of said Noteholders delivered
to the Company and the Trustee, the Company, when authorized by a Board
Resolution, and the Trustee may enter into an indenture or indentures
supplemental hereto for the purpose of adding any provisions to or changing in
any manner or eliminating any of the provisions of this Indenture or of
modifying in any manner the
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rights of the Noteholders under this Indenture; provided, however, that no such
supplemental indenture shall, without the consent of the Holder of each
Outstanding Note affected thereby:
(a) change the Stated Maturity of the principal of, or
any instalment of principal of or interest on, any Note, or reduce the
principal amount thereof or the rate of interest thereon, or change
the coin or currency in which any Note or the interest thereon is
payable, or impair the right to institute suit for the enforcement of
any such payment after the Stated Maturity thereof (or, in the case of
redemption, on or after the Redemption Date), or
(b) reduce the percentage in principal amount of the
Outstanding Notes, the consent of whose Holders is required for any
such supplemental indenture, or the consent of whose Holders is
required for any waiver of compliance with certain provisions of this
Indenture or certain defaults hereunder and their consequences
provided for in this Indenture, or
(c) modify any of the provisions of this Section or
Section 5.13, except to increase any such percentage or to provide
that certain other provisions of this Indenture cannot be modified or
waived without the consent of the Holder of each Outstanding Note
affected thereby; provided, however, that this clause shall not be
deemed to require the consent of any Noteholder with respect to
changes in the references to "the Trustee" and concomitant changes in
this Section and elsewhere, or the deletion of this proviso, in
accordance with the requirements of Section 6.09 and 9.01(d), or
(d) modify any of the provisions of Section 10.11 or any
of the provisions of this Indenture relating to the subordination of
the Note in a manner adverse to the Holders thereof.
It shall not be necessary for any Act of Noteholders under this
Section to approve the particular form of any proposed supplemental indenture,
but it shall be sufficient if such Act shall approve the substance thereof.
SECTION 9.03 Execution of Supplemental Indentures.
In executing, or accepting the additional trusts created by, any
supplemental indenture permitted by this Article or the modifications thereby
of the trusts created by this Indenture, the Trustee shall be entitled to
receive, and (subject to Section 6.11) shall be fully protected in relying
upon, an Opinion of Counsel stating that the execution of such supplemental
indenture is authorized or permitted by this Indenture. The Trustee may, but
shall not be obligated to, enter
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into any such supplemental indenture which affects the Trustee's own rights,
duties or immunities under this Indenture or otherwise.
SECTION 9.04 Effect of Supplemental Indentures.
Upon the execution of any supplemental indenture under this Article,
this Indenture shall be modified in accordance therewith, and such supplemental
indenture shall form a part of this Indenture for all purposes; and every
Holder of Notes theretofore or thereafter authenticated and delivered hereunder
shall be bound thereby.
SECTION 9.05 Reference in Notes to Supplemental Indentures.
Notes authenticated and delivered after the execution of any
supplemental indenture pursuant to this Article may, and shall if required by
the Trustee, bear a notation in form approved by the Trustee as to any matter
provided for in such supplemental indenture. If the Company shall so
determine, new Notes so modified as to conform, in the opinion of the Trustee
and the Company, to any such supplemental indenture may be prepared and
executed by the Company and authenticated and delivered by the Trustee in
exchange for Outstanding Notes.
SECTION 9.06 Notice of Supplemental Indentures.
Promptly after the execution by the Company and the Trustee of any
supplemental indenture pursuant to the provisions of Section 9.02, the Company
shall give notice thereof to the Holders of each Outstanding Note affected, in
the manner provided for in Section 1.08, setting forth in general terms the
substance of such supplemental indenture.
ARTICLE TEN
COVENANTS
SECTION 10.01 Payment of Principal and Interest.
The Company covenants and agrees for the benefit of the Noteholders
and the Couponholders that it will duly and punctually pay the principal of and
interest on the Notes in accordance with the terms of the Notes and this
Indenture.
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SECTION 10.02 Maintenance of Office or Agency.
The Company will maintain in not less than one European city, an
office or agency where Notes may be presented or surrendered for payment, where
Notes may be surrendered for conversion or exchange and where notices and
demands to or upon the Company in respect of the Notes and this Indenture may
be served. The corporate trust office of the Principal Paying Agent at Mariner
House, Pepys Street, London EC3N 4DA, England shall be such office or agency of
the Company, unless the Company shall designate and maintain some other office
or agency for one or more of such purposes pursuant to the terms of that
certain Paying and Conversion Agency Agreement of even date herewith (the
"Agency Agreement"). The Company will give prompt written notice to the
Trustee of any change in the location of any such office or agency. If at any
time the Company shall fail to maintain any such required office or agency or
shall fail to furnish the Trustee with the address thereof, such presentations,
surrenders, notices and demands may be made or served at the Corporate Trust
Office of the Trustee, and the Company hereby appoints the Trustee as its agent
to receive all such presentations, surrenders, notices and demands.
The Company may also from time to time designate one or more other
offices or agencies (in or outside of Europe) where the Notes may be presented
or surrendered for any or all such purposes and may from time to time rescind
any such designation; provided, that no such designation or rescission shall in
any manner relieve the Company of its obligation to maintain an office or
agency in Europe for such purposes. The Company will give prompt written
notice to the Trustee of any such designation or rescission and any change in
the location of any such other office or agency.
SECTION 10.03 Money for Payments to Be Held in Trust.
If the Company shall at any time act as its own Paying Agent, it will,
on or before each due date of the principal of or interest on any of the Notes,
segregate and hold in trust for the benefit of the Persons entitled thereto a
sum sufficient to pay the principal or interest so becoming due until such sums
shall be paid to such Persons or otherwise disposed of as herein provided and
will promptly notify the Trustee of its action or failure so to act.
Whenever the Company shall have one or more Paying Agents for the
Notes, it will, on or before 3:00 p.m. (London time) on the Business Day
immediately preceding each due date of the principal of or interest on any
Notes, deposit with a Paying Agent a sum sufficient to pay the principal or
interest so becoming due, such sum to be held in trust for the benefit of the
Persons entitled to such principal or interest, and (unless such Paying Agent
is the Trustee) the Company will promptly notify the Trustee of such action or
any failure so to act.
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Pursuant to the terms of the Agency Agreement, each Paying Agent shall
agree with the Trustee, subject to the provisions of this Section, that such
Paying Agent will:
(a) hold all sums held by it for the payment of the
principal of or interest on Notes in trust for the benefit of the
Persons entitled thereto until such sums shall be paid to such Persons
or otherwise disposed of as herein provided;
(b) give the Trustee notice of any Default by the Company
in the making of any payment of principal or interest; and
(c) at any time during the continuance of any such
Default, upon the written request of the Trustee, forthwith pay to the
Trustee all sums so held in trust by such Paying Agent.
The Company may at any time, for the purpose of obtaining the
satisfaction and discharge of this Indenture or for any other purpose, pay, or
by Company Order direct any Paying Agent to pay, to the Trustee all sums held
in trust by the Company or such Paying Agent, such sums to be held by the
Trustee upon the same trusts as those upon which such sums were held by the
Company or such Paying Agent; and, upon such payment by any Paying Agent to the
Trustee, such Paying Agent shall be released from all further liability with
respect to such sums.
Any money deposited with the Trustee or any Paying Agent, or then held
by the Company, in trust for the payment of the principal of or interest on any
Note and remaining unclaimed for two years after such principal or interest has
become due and payable shall be paid to the Company on Company Request, or (if
then held by the Company) shall be discharged from such trust; and the Holder
of such Note shall thereafter, as an unsecured general creditor, look only to
the Company for payment thereof, and all liability of the Trustee or such
Paying Agent with respect to such trust money, and all liability of the Company
as trustee thereof, shall thereupon cease; provided, however, that the Trustee
or such Paying Agent, before being required to make any such repayment, may at
the expense of the Company cause to be published once, in an Authorized
Newspaper, notice that such money remains unclaimed and that, after a date
specified therein, which shall not be less than 30 days from the date of such
publication, any unclaimed balance of such money then remaining will be repaid
to the Company.
SECTION 10.04 Corporate Existence.
The Company will do or cause to be done all things necessary to
preserve and keep in full force and effect its corporate existence, rights
(charter and statutory) and franchises of the Company; provided, however, that
the Company shall not be required to preserve any such right
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or franchise if the Board of Directors shall determine that the preservation
thereof is no longer in the best interests of the Company and its Principal
Subsidiaries as a whole and the conduct of their collective businesses, and
that the loss thereof is not disadvantageous in any material respect to the
Noteholders; and provided, further, that nothing contained in this Section
10.04 shall prohibit any transaction permitted by Article Eight or Sections
such as 10.14.
SECTION 10.05 Payment of Taxes and Other Claims.
The Company will pay or discharge or cause to be paid or discharged,
before the same shall become delinquent, (a) all taxes, assessments and
governmental charges levied or imposed upon the Company or any Principal
Subsidiary or upon the income, profits or property of the Company or any
Principal Subsidiary and (b) all lawful claims for labour, materials and
supplies which, if unpaid, might by law become a Lien upon the property of the
Company or any Principal Subsidiary; provided, however, that the Company shall
not be required to pay or discharge or cause to be paid or discharged any such
tax, assessment, charge or claim whose amount, applicability or validity is
being contested in good faith by appropriate proceedings.
SECTION 10.06 Maintenance of Properties.
The Company will cause all properties owned by the Company or any
Principal Subsidiary or used or held for use in the conduct of its business or
the business of any Principal Subsidiary to be maintained and kept in good
condition, repair and working order (ordinary wear and tear excepted) and
supplied with all necessary equipment and will cause to be made all necessary
repairs, renewals, replacements, betterments and improvements thereof, all as
in the judgment of the Company may be necessary so that the business carried on
in connection therewith may be conducted at all times; provided, however, that
nothing in this Section shall prevent the Company from discontinuing the
maintenance of any of such properties if such discontinuance is, in the
judgment of the Company, desirable in the conduct of its business or the
business of any Principal Subsidiary and not disadvantageous in any material
respect to the Noteholders, and provided, further, that nothing contained in
this Section 10.06 shall prohibit any transaction permitted by Article Eight or
Sections such as 10.11.
SECTION 10.07 Insurance.
The Company will at all times keep all of the Company's and its
Principal Subsidiaries' properties which are of an insurable nature insured
with insurers, believed by the Company to be responsible, against loss or
damage to the extent that property of similar character is usually so insured
by Corporations similarly situated and owning like properties in similar
geographic areas in which the Company or such Principal Subsidiary operates;
provided that such insurance is
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generally available at commercially reasonable rates, and provided further that
the Company or such Principal Subsidiary may self-insure directly or through
captive insurers or insurance cooperatives, to the extent that the Company
determines that such practice is consistent with prudent business practices.
Such insurance shall be in such amount, on such terms, in such forms and for
such periods as are customary for similarly situated Persons in the Company's
industry or in insurance markets available to the Company.
SECTION 10.08 Statement by Officers as to Default.
The Company will deliver to the Trustee at its Corporate Trust Office,
within 120 days after the end of each fiscal year, a brief Officers'
Certificate including a statement by the officer executing such certificate
that in the course of performing his or her duties as an officer of the Company
such officer would normally obtain knowledge of (i) whether or not any Default
exists in the performance and observation of any terms, provisions and
conditions of this Indenture and (ii) whether or not the Company has otherwise
kept, observed, performed and fulfilled its obligations under this Indenture in
all material respects. Such Officers' Certificate shall further state, as to
the officer signing such certificate, to the knowledge of such officer, as of
the date of such Officers' Certificate, (i) whether or not any Default exists,
(ii) whether or not the Company during the preceding fiscal year kept,
observed, performed and fulfilled in all material respects each and every
covenant and obligation of the Company under this Indenture and (c) whether or
not there was any Default in the performance and observance of any of the
terms, provisions or conditions of this Indenture during such preceding fiscal
year. If the officer signing the Officers' Certificate knows of such a
Default, whether then existing or occurring during such preceding fiscal year,
the Officers' Certificate shall describe such Default and its status with
particularity. The Company shall also promptly notify the Trustee if the
Company's fiscal year is changed so that the end thereof is on any date other
than the then current fiscal year end date. For purposes of this Section
10.08, such compliance shall be determined without regard to any period of
grace granted by the Trustee or requirement of notice under this Indenture.
The Company will deliver to the Trustee, forthwith upon becoming aware of any
default in the performance or observance of any covenant, agreement or
condition contained in this Indenture, or any Event of Default, an Officers'
Certificate specifying with particularity such Default or Event of Default and
further stating what action the Company has taken or is taking or proposes to
take with respect thereto.
SECTION 10.09 Provision of Financial Statements.
Whether or not the Company is subject to Section 13(a) or 15(d) of the
Exchange Act, the Company will, to the extent permitted under the Exchange Act,
file with the Trustee the annual reports, quarterly reports and other documents
which the Company would have been required to file with the Commission pursuant
to such Sections 13(a) or 15(d) if the Company were so subject,
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such documents to be filed with the Commission on or prior to the respective
dates (the "Required Filing Dates") by which the Company would have been
required so to file such documents if the Company were so subject. The Company
will also in any event (x) within 15 days of each Required Filing Date file
with the Trustee copies of the annual reports, quarterly reports and other
documents which the Company has filed with the Commission or would have been
required to file with the Commission pursuant to Section 13(a) or 15(d) of the
Exchange Act if the Company were subject to such Sections and (y) if filing
such documents by the Company with the Commission is not permitted under the
Exchange Act, promptly upon written request, supply copies of such documents to
any prospective Noteholder at the Company's cost.
SECTION 10.10 Limitation on Other Indebtedness.
Neither the Company nor any Principal Subsidiary will create, incur,
assume, guarantee or in any other manner become directly or indirectly liable
for the payment of any Indebtedness that is senior in right of payment to the
Notes.
SECTION 10.11 Limitation on Liens.
The Company will not, and will not permit any of its Principal
Subsidiaries to, create, incur, assume or suffer to exist, any Lien of any kind
securing any Indebtedness that is senior to, pari passu with or subordinate in
right of payment to the Notes (including any assumption, guarantee or other
liability with respect thereto by any of its Principal Subsidiaries) upon any
Oil and Gas Properties of the Company or any of its Subsidiaries described in
the Independent Reserve Report which are included in the Asset Value Coverage
Ratio, unless the Notes are equally and ratably secured or rank prior to the
Indebtedness secured by such Lien.
SECTION 10.12 Waiver of Certain Covenants.
The Company may omit in any particular instance to comply with any
term, provision or condition set forth in Section 8.03 or Sections 10.05
through 10.07, 10.09 through 10.11 if before or after the time for such
compliance the Holders of at least a majority in principal amount of the
Outstanding Notes, by Act of such Noteholders, waive such compliance in such
instance with such term, provision or condition, but no such waiver shall
extend to or affect such term, provision or condition except to the extent so
expressly waived, and, until such waiver shall become effective, the
obligations of the Company and the duties of the Trustee in respect of any such
term, provision or condition shall remain in full force and effect.
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SECTION 10.13 Maintenance of Asset Value Coverage Ratio.
The Company will maintain an Asset Value Coverage Ratio equal or
greater than 1:1, such maintenance to be evidenced in part based on an
Independent Reserve Report prepared as of the end of each fiscal year (as the
same may be supplemented during such fiscal year) during the term of this
Indenture.
SECTION 10.14 Restrictions on Charter Amendments.
The Company will not amend its Certificate of Incorporation or Bylaws
except as required by law or except to the extent that such amendment would not
have a material adverse effect on (a) the ability of the Company to perform its
obligations under this Indenture or the Notes or (b) the rights of the
Noteholders, except that neither (i) increases in the number of Shares and
issuance thereof with related securities, nor (ii) designations of Preferred
Stock of the Company, modifications of the terms of such designations and
issuance thereof with related securities, nor (iii) modification or expansion
of the indemnity provisions provided by the Company to its directors and
officers, nor (iv) change of the Company's registered agent shall be deemed an
amendment hereunder.
SECTION 10.15 United States Withholding and Reporting Requirements.
To the extent permitted by law, the Company will provide to the
Trustee, the Paying Agent or to any Noteholder such statements, certificates or
other documentation concerning the organization or operations of the Company as
may be reasonably necessary to establish any exceptions or exemptions from
United States federal income tax withholding and reporting requirements.
ARTICLE ELEVEN
REDEMPTION OF NOTES
SECTION 11.01 Right of Redemption.
At any time after July 30, 1999, the Notes may be redeemed, at the
election of the Company, as a whole or from time to time in part. Redemption
shall be subject to the conditions specified in the form of Note and at a
Redemption Price equal to 100% of the principal amount thereof, together with
accrued and unpaid interest to the Redemption Date, but only to the extent that
all unmatured Coupons are attached to such Notes.
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SECTION 11.02 Applicability of Article.
Redemption of Notes at the election of the Company or otherwise, as
permitted or required by any provision of this Indenture, shall be made in
accordance with such provision and this Article.
SECTION 11.03 Election to Redeem; Notice to Trustee.
The action of the Company to redeem any Notes pursuant to Section
11.01 shall be evidenced by a Board Resolution. In case of any redemption
pursuant to Section 11.01, the Company shall, at least 30 days and not more
than 60 days prior to the Redemption Date fixed by the Company (unless a
shorter notice shall be satisfactory to the Trustee), notify the Trustee of
such Redemption Date and of the principal amount of Notes to be redeemed and
shall deliver to the Trustee such documentation and records as shall enable the
Trustee to select the Notes to be redeemed pursuant to Section 11.04.
SECTION 11.04 Selection by Trustee of Notes to Be Redeemed.
If less than all the Notes are to be redeemed, the particular Notes to
be redeemed shall be selected not more than 60 days prior to the Redemption
Date by the Trustee, from the Outstanding Notes not previously called for
redemption, by such method as the Trustee shall deem fair and appropriate and
which may provide for the selection for redemption of portions of the principal
of Notes; provided, however, that no such partial redemption shall reduce the
portion of the principal amount of a Note not redeemed to less than $50,000.
The Noteholders do not have a right to a prorated redemption.
The Trustee shall promptly notify the Company in writing of the Notes
selected for redemption and, in the case of any Notes selected for partial
redemption, the principal amount thereof to be redeemed.
For all purposes of this Indenture, unless the context otherwise
requires, all provisions relating to redemption of Notes shall relate, in the
case of any Notes redeemed or to be redeemed only in part, to the portion of
the principal amount of such Note which has been or is to be redeemed.
If the Company shall so direct, Notes registered in the name of the
Company or any Subsidiaries shall not be included in the Notes selected for
redemption.
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SECTION 11.05 Notice of Redemption.
Notice of redemption shall be given in the manner provided for in
Section 1.08 not less than 30 nor more than 60 days prior to the Redemption
Date, to each Holder of Notes to be redeemed.
All notices of redemption shall state:
(a) the Redemption Date;
(b) the Redemption Price;
(c) if less than all Outstanding Notes are to be
redeemed, the identification (and, in the case of a partial
redemption, the principal amounts) of the particular Notes to be
redeemed;
(d) that on the Redemption Date the Redemption Price
(together with accrued and unpaid interest, if any, to the Redemption
Date payable as provided in Section 11.07, but only with respect to
Notes with all unmatured Coupons attached) will become due and payable
upon each such Note, or the portion thereof, to be redeemed, and that
interest thereon will cease to accrue on and after said date;
(e) the place or places where such Notes are to be
surrendered for payment of the Redemption Price; and
(f) pursuant to Section 3.13, any ISIN, CUSIP or other
identifying numbers relating to the Notes.
Notice of redemption of Notes to be redeemed at the election of the
Company shall be given by the Company or, at the Company's request, by the
Trustee in the name and at the expense of the Company.
SECTION 11.06 Deposit of Redemption Price.
Not less than one Business Day prior to any Redemption Date, the
Company shall deposit with the Trustee or with a Paying Agent (or, if the
Company is acting as its own Paying Agent, segregate and hold in trust as
provided in Section 10.03) an amount of money sufficient to pay the Redemption
Price of, and accrued and unpaid interest on, all the Notes which are to be
redeemed on that date.
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SECTION 11.07 Notes Payable on Redemption Date.
Notice of redemption having been given as aforesaid, the Notes so to
be redeemed shall, on the Redemption Date, become due and payable at the
Redemption Price therein specified (together with accrued and unpaid interest,
if any, to the Redemption Date, subject to the delivery of all unmatured and
matured but unpaid Coupons), and from and after such date (unless the Company
shall default in the payment of the Redemption Price) such Notes shall cease to
bear interest. Upon surrender of any such Note for redemption in accordance
with said notice, such Note shall be paid by the Company at the Redemption
Price, together with accrued interest, if any, to the Redemption Date, to the
extent that all matured and unpaid and unmatured Coupons, if any, are attached;
provided, however, that instalments of interest whose Stated Maturity is on or
prior to the Redemption Date shall be payable to the Holders of such Notes, or
one or more Predecessor Notes, according to their terms.
If any Note called for redemption shall not be so paid upon surrender
by the Noteholder as prescribed hereunder thereof for redemption, the principal
shall, until paid, bear interest from the Redemption Date at the rate
prescribed therefor in the Notes. In the event that the Company shall default
in making payment in full in respect of any Note which shall have been called
for redemption prior to July 30, 2000, on the Redemption Dates the Conversion
Right attaching to such Note will continue to be exercisable (unless previously
exercised by the Trustee or the Company) up to, and including the close of
business (at the place where the Note is deposited in connection with the
exercise of the Conversion Right) on the date upon which the full amount of the
monies payable in respect of such Note has been duly received the Trustee or
the Principal Paying Agent or, if earlier, July 30, 2000.
SECTION 11.08 Surrender of Notes
Each Note should be presented for redemption together with all
unmatured Coupons relating to such Note, failing which the full amount of any
missing unmatured Coupon (or, in the case of payment not being made in full,
that proportion of the full amount of the missing unmatured Coupons which the
amount so paid bears to the total amount due) will be deducted from the amount
due for payment. Each amount so deducted will be paid in the manner mentioned
above against presentation and surrender (or, in the case of part payment only,
endorsement) of such missing Coupon at any time before the expiry of six (6)
years after the Relevant Date in respect of the relevant Note (whether or not
such Coupon would otherwise have become void pursuant to Condition 10), or if
later, five (5) years after the date on which such Coupon would have become
due, but not thereafter.
SECTION 11.09 Conversion on Redemption
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(a) The Trustee may, at its absolute discretion (and
without any responsibility for any loss occasioned thereby), within
the period commencing on the date four (4) Business Days prior to, and
ending at the close of business on the Business Day prior to the
Redemption Date, of any of the Notes elect by notice in writing to the
Company to convert as of such Redemption Date the aggregate number of
Notes due for conversion on such date any Unexercised Notes into
Shares at the Conversion Price applicable at such Redemption Date if
all necessary consents (if any) have been obtained and the Trustee is
satisfied or is advised by a reputable independent merchant bank
appointed by it that the net proceeds of an immediate sale of the
Shares arising from such conversion (disregarding any liability other
than a liability of the Trustee for taxation or the payment of any
capital, stamp, issue or registration duties consequent thereon) would
be likely to exceed by 5 percent or more the amount of redemption
monies and interest which would otherwise be payable in respect of
interest accrued and unpaid since the Interest Payment Date
immediately preceding such Redemption Date or if such date falls
before the first Interest Payment Date, since the Closing Date in
respect of such Unexercised Notes.
(b) Subject to applicable law, the Trustee shall arrange
for the sale on behalf of the Holders of the Unexercised Notes of the
Shares issued on such conversion as soon as practicable, and (subject
to any necessary consents being obtained and to the deduction by the
Trustee of any amount which it determines to be payable in respect of
its liability to taxation or the payment of any capital, stamp, issue
or registration duties (if any) and any costs incurred by the Trustee
in connection with that allotment and sale thereof) the net proceeds of
sale together with accrued and unpaid interest payable in respect of
such Unexercised Notes (if any) shall be held by the Trustee and
distributed by the Principal Paying Agent rateably to the Holders of
such Unexercised Notes against due presentation. The amount of such
net proceeds of sale shall be treated for all purposes as the full
amount due by the Company in respect of such Unexercised Notes.
ARTICLE TWELVE
CONVERSION
SECTION 12.01 Conversion Right and Conversion Price.
(a) Subject to and upon compliance with the provisions of
this Article, at the option of the Noteholder, at any time from and
after the first Business Day following termination of the Restricted
Period and (i) up to the close of business on the second Business Day
preceding July 30, 2000 (but in no event thereafter), or (ii) if such
Note
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shall have been called for redemption pursuant to Article Eleven, up
to and including five (5) Business Days prior to the Redemption Date,
provided, however, that the Company shall not have given notice of any
Mandatory Conversion Date, any Note may be converted at the principal
amount thereof into fully paid and non-assessable Conversion Shares at
the Conversion Price.
(b) The Conversion Price shall be adjusted in certain
instances as provided in Section 12.04.
(c) A holder of shares issued on conversion of Notes
shall not be entitled to any rights for any Record Date which precedes
the relevant Conversion Date or Mandatory Conversion Date, as the case
may be.
SECTION 12.02 Exercise of Conversion Right.
(a) In order to exercise the Conversion Right, the
Noteholder to be converted shall provide notice to the Conversion
Agent that it intends to exercise its Conversion Right and shall
surrender such Bearer Note or Notes and all unmatured Coupons,
including the one for the next due interest payment, to the Conversion
Agent at its corporate trust offices, or such other office of any
Conversion Agent as published in an Authorized Newspaper from time to
time, accompanied by written notice (as set forth in Exhibit E hereto)
to the Conversion Agent that the Noteholder elects to convert such
Note. A Conversion Notice once delivered shall be irrevocable.
(b) Bearer Notes shall be deemed to have been converted
on the Conversion Date, and at such time, except as provided in this
Section 12.02 below, the rights of the Noteholders as Noteholders
shall cease, and the Person or Persons entitled to receive the Common
Stock issuable upon conversion shall be treated for all purposes as
the record holder or holders of such Common Stock at such time. As
promptly as practicable on or after the Conversion Date, the Company
shall issue and shall deliver through the Conversion Agent at the
Conversion Agent's office or agency a certificate or certificates for
the number of full shares of Common Stock issuable upon such
conversion. The Conversion Agent shall deliver the share certificate
or certificates in accordance with the instructions set forth in the
notice of exercise of Conversion Rights.
(c) If the Conversion Date is a date other than an
Interest Payment Date the Company shall not pay and the Noteholder
shall not be entitled to receive any interest accrued on the Notes
from the last Interest Payment Date prior to the Conversion Date.
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(d) No Noteholder will be entitled upon conversion
thereof to any payment or adjustment on account of interest on the
Notes or dividends on the shares of Common Stock issued in connection
therewith.
SECTION 12.03 Fractions of Shares.
The number of Shares to be issued on conversion of a Note will
be determined by dividing the principal amount of the Note to be
converted by the Conversion Price in effect on the Conversion Date,
with the result being rounded down to the nearest whole number. No
cash in lieu of or fractional shares of Common Stock shall be issued
upon conversion of Notes. If more than one Note shall be surrendered
for conversion at one time by the same Noteholder, the number of full
shares which shall be issuable upon conversion thereof shall be
computed on the basis of the aggregate principal amount of the Notes
(or specified portions thereof) so surrendered.
SECTION 12.04 Adjustment of Conversion Price.
(a) Dividends or Distributions of Common Stock. In case
the Company shall pay or make a dividend or other distribution on its
Common Stock exclusively in Common Stock or shall pay or make a
dividend or other distribution on any other class of capital stock of
the Company which dividend or distribution includes Common Stock, the
Conversion Price in effect at the opening of business on the day next
following the date fixed for the determination of stockholders
entitled to receive such dividend or other distribution shall be
reduced by multiplying such Conversion Price by a fraction of which
the numerator shall be the number of shares of Common Stock
outstanding at the close of business on the date fixed for such
determination and the denominator shall be the sum of such number of
shares and the total number of shares constituting such dividend or
other distribution, such reduction to become effective immediately
after the opening of business on the day next following the date fixed
for such determination. For the purposes of this Section 12.04(a),
the number of shares of Common Stock at any time outstanding shall not
include shares held in the treasury of the Company.
(b) Dividends or Distributions of Rights, Warrants or
Options to Purchase Common Stock. In case the Company shall pay or
make a dividend or other distribution on its Common Stock consisting
exclusively of, or shall otherwise issue to all holders of its Common
Stock, rights, warrants or options entitling the holders thereof to
subscribe for or purchase shares of Common Stock at a price per share
less than the Market Price per share (determined as provided in
Section 12.04(g)) of the Common Stock on the date fixed for the
determination of stockholders entitled to receive such rights,
warrants or options,
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the Conversion Price in effect at the opening of business on the day
following the date fixed for such determination shall be reduced by
multiplying such Conversion Price by a fraction of which the numerator
shall be the number of shares of Common Stock outstanding at the close
of business on the date fixed for such determination plus the number
of shares of Common Stock which the aggregate of the offering price of
the total number of shares of Common Stock so offered for subscription
or purchase would purchase at such Market Price and the denominator
shall be the number of shares of Common Stock outstanding at the close
of business on the date fixed for such determination plus the number
of shares of Common Stock so offered for subscription or purchase,
outstanding at the close of business on the date fixed for such
reduction to become effective immediately after the opening of
business on the day following the date fixed for such determination.
For the purposes of this paragraph (b), the number of shares of Common
Stock at any time outstanding shall not include shares held in the
treasury of the Company. The Company shall not issue any rights,
warrants or options in respect of shares of Common Stock held in the
treasury of the Company.
(c) Dividends or Distributions in Cash. In case the
Company shall, by dividend or otherwise, make a distribution to all
holders of its Common Stock exclusively in cash in an aggregate amount
that, together with (i) the aggregate amount of any other
distributions to all holders of its Common Stock made exclusively in
cash within the 12 months preceding the date of payment of such
distribution and in respect of which no Conversion Price adjustment
pursuant to this Section 12.04(c) has been made and (ii) the aggregate
of any cash plus the fair market value (as determined in good faith by
the Board of Directors, whose determination shall be conclusive and
described in a resolution of the Company's Board of Directors), as of
the expiration of the tender or exchange offer referred to below, of
consideration payable in respect of any tender or exchange offer by
the Company or a Subsidiary for all or any portion of the Common Stock
concluded within the 12 months preceding the date of payment of such
distribution and in respect of which no Conversion Price adjustment
pursuant to paragraph (f) of this Section 12.04 has been made, exceeds
five percent (5%) of the product of the Market Price per share
(determined as provided in Section 12.04(g)) of the Common Stock on
the date fixed for stockholders entitled to receive such distribution
times the number of shares of Common Stock outstanding on such date,
the Conversion Price shall be reduced so that the same shall equal the
price determined by multiplying the Conversion Price in effect
immediately prior to the effectiveness of the Conversion Price
reduction contemplated by this paragraph (c) by a fraction of which
the numerator shall be the Market Price per share (determined as
provided Section 12.04(g)) of the Common Stock on the date of such
effectiveness less the amount of cash so distributed applicable to one
share of Common Stock and the denominator shall be such Market Price
per share of the Common Stock, such reduction
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to become effective immediately prior to the opening of business on
the day following the date fixed for the payment of such distribution.
(d) All Other Distributions or Dividends. Subject to the
last sentence of this paragraph (d), in case the Company shall, by
dividend or otherwise, distribute to all holders of its Common Stock
evidences of its indebtedness, shares of any class of capital stock,
securities, cash or property (excluding any rights, warrants or
options referred to in Section 12.04(b), any dividend or distribution
paid exclusively in cash and any dividend or distribution referred to
in Section 12.04(a), the Conversion Price shall be reduced so that the
same shall equal the price determined by multiplying the Conversion
Price in effect immediately prior to the effectiveness of the
Conversion Price reduction contemplated by this paragraph (d) by a
fraction of which the numerator shall be the Market Price per share
(determined as provided in paragraph (g) of this Section) of the
Common Stock on the date of such effectiveness less the fair market
value (as determined in good faith by the Board of Directors, whose
determination shall be conclusive and described in a resolution of the
Company's Board of Directors and shall, in the case of securities
being distributed for which prior thereto there is an actual or when
issued trading market, be no less than the value determined by
reference to the average of the Market Price over the period specified
in the succeeding sentence), on the date of such effectiveness, of the
portion of the evidences of indebtedness, shares of capital stock,
securities, cash and property so distributed applicable to one share
of Common Stock and the denominator shall be such Market Price per
share of the Common Stock, such reduction to become effective
immediately prior to the opening of business on the day next following
the date fixed for the payment of such distribution (such date to
being referred to as the "Reference Date"). If the Board of Directors
determines the fair market value of any distribution for purposes of
this paragraph (d) by reference to the actual or when issued trading
market for any securities comprising such distribution, it must in
doing so consider the prices in such market over the same period used
in computing the Market Price per share pursuant to paragraph (g) of
this Section. For purposes of this paragraph (d), any dividend or
distribution that includes shares of Common Stock or rights, warrants
or options to subscribe for or purchase shares of Common Stock shall
be deemed instead to be (i) a dividend or distribution of the
evidences of indebtedness, cash, property, shares of capital stock or
securities other than such shares of Common Stock or such rights,
warrants or options (making any Conversion Price reduction required by
this paragraph (d)) immediately followed by (ii) a dividend or
distribution of such shares of Common Stock or such rights, warrants
or options (making any further Conversion Price reduction required by
Section 12.04(a) or (b)), except (i) the Reference Date of such
dividend or distribution as defined in this Section 12.04(d) shall be
substituted as "the date fixed for the determination of stockholders
entitled to receive such dividend or other distribution",
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"the date fixed for the determination of stockholders entitled to
receive such rights, warrants or options" and "the date fixed for such
determination" within the meaning of Section 12.04(a) and (b) and (ii)
any shares of Common Stock included in such dividend or distribution
shall not be deemed "outstanding at the close of business on the date
fixed for such determination" within the meaning of Section 12.04(a)).
(e) Subdivision of Common Stock. In case outstanding
shares of Common Stock shall be subdivided into a greater number of
shares of Common Stock, the Conversion Price in effect at the opening
of business on the day following the day upon which such subdivision
becomes effective shall be proportionately reduced, and, conversely,
in case outstanding shares of Common Stock shall each be combined into
a smaller number of shares of Common Stock, the Conversion Price in
effect at the opening of business on the day following the day upon
which such combination becomes effective shall be proportionately
increased, such reduction or increase, as the case may be, to become
effective immediately after the opening of business on the day
following the day upon which such subdivision or combination becomes
effective.
(f) Tender or Exchange Offer for Common Stock. In case a
tender or exchange offer made by the Company or any Subsidiary for all
or any portion of the Common Stock shall expire and such tender or
exchange offer shall involve an aggregate consideration having a fair
market value (as determined in good faith by the Board of Directors,
whose determination shall be conclusive and described in a resolution
of the Company's Board of Directors) at the last time (the "Expiration
Time") tenders or exchanges may be made pursuant to such tender or
exchange offer (as it may be amended) that, together with (i) the
aggregate of the cash plus the fair market value (as determined in
good faith by the Board of Directors, whose determination shall be
conclusive and described in a resolution of the Company's Board of
Directors), as of the expiration of the other tender or exchange offer
referred to below, of consideration payable in respect of any other
tender or exchange offer by the Company or a Subsidiary for all or any
portion of the Common Stock concluded within the preceding 12 months
and in respect of which no Conversion Price adjustment pursuant to
this paragraph (f) has been made and (ii) the aggregate amount of any
distributions to all holders of the Common Stock made exclusively in
cash within the preceding 12 months and in respect of which no
Conversion Price adjustment pursuant to Section 12.04(e) has been
made, exceeds five percent (5%) of the product of the Market Price per
share (determined as provided in Section 12.04(g)) of the Common Stock
on the Expiration Time times the number of shares of Common Stock
outstanding (including any tendered shares) on the Expiration Time,
the Conversion Price shall be reduced (but not increased) so that the
same shall equal the price determined by multiplying the Conversion
Price in effect immediately prior to the Expiration Time by a fraction
of which the
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numerator shall be (i) the product of the Market Price per share
(determined as provided in Section 12.04(g)) of the Common Stock at
the Expiration Time times the number of shares of Common Stock
outstanding (including any tendered or exchanged shares) at the
Expiration Time minus (ii) the fair market value (determined as
aforesaid) of the aggregate consideration payable to stockholders
based on the acceptance (up to any maximum specified in the terms of
the tender or exchange offer) of all shares validly tendered or
exchanged and not withdrawn as of the Expiration Time (the shares
deemed so accepted, up to any such maximum, being referred to as the
"Purchased Shares") and the denominator shall be the product of (i)
such Market Price per share at the Expiration Time times (ii) such
number of outstanding shares at the Expiration Time less the number of
Purchased Shares, such reduction to become effective immediately prior
to the opening of business on the day following the Expiration Time.
(g) Determination of Market Price. For the purpose of
any computation of the Market Price under this paragraph (g) and
Section 12.04(b), (d) and (e), (i) if the "ex" date (as hereinafter
defined) for any event (other than the issuance or distribution
requiring such computation) that requires an adjustment to the
Conversion Price pursuant to paragraph (a), (b), (c), (d), (e) or (f)
above ("Other Event") occurs on or after the tenth Stock Exchange
Business Day prior to the date in question and prior to the "ex" date
for the issuance or distribution requiring such computation (the
"Current Event"), the closing price for each Stock Exchange Business
Day prior to the "ex" date for such Other Event shall be adjusted by
multiplying such closing price by the same fraction by which the
Conversion Price is so required to be adjusted as a result of such
Other Event, (ii) if the "ex" date for any Other Event occurs after
the "ex" date for the Current Event and on or prior to the date in
question, the closing price for each Stock Exchange Business Day on
and after the "ex" date for such Other Event shall be adjusted by
multiplying such closing price by the reciprocal of the fraction by
which the Conversion Price is so required to be adjusted as a result
of such Other Event, (iii) if the "ex" date for any Other Event occurs
on the "ex" date for the Current Event, one of those events shall be
deemed for purposes of clauses (i) and (ii) of this proviso to have an
"ex" date occurring prior to the "ex" date for the other event, and
(iv) if the "ex" date for the Current Event is on or prior to the date
in question, after taking into account any adjustment required
pursuant to clause (ii) of this proviso, the closing price for each
Stock Exchange Business Day on or after such "ex" date shall be
adjusted by adding thereto the amount of any cash and the fair market
value on the date in question (as determined in good faith by the
Board of Directors in a manner consistent with any determination of
such value for purposes of this Section 12.04(c) or (d), whose
determination shall be conclusive and described in a resolution of the
Company's Board of Directors) of the portion of the rights, warrants,
options, evidences of indebtedness, shares of capital stock,
securities, cash or property being distributed
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applicable to one share of Common Stock. For the purpose of any
computation under Section 12.04(f), the Market Price per share of
Common Stock on any date in question shall be deemed to be the Market
Price on the date selected by the Company commencing on or after the
latest (the "Commencement Date") of (i) the date 20 Stock Exchange
Business Days before the date in question, (ii) the date of
commencement of the tender or exchange offer requiring such
computation and (iii) the date of the last amendment, if any, of such
tender or exchange offer involving a change in the maximum number of
shares for which tenders are sought or a change in the consideration
offered, and ending not later than the date of the Expiration Time of
such tender or exchange offer (or, if such Expiration Time occurs
before the close of trading on a Stock Exchange Business Day, not
later than the Stock Exchange Business Day immediately preceding the
date of such Expiration Time); provided, however, that if the "ex"
date for any Other Event (other than the tender or exchange offer
requiring such computation) occurs on or after the Commencement Date
and on or prior to the date of the Expiration Time for the tender or
exchange offer requiring such computation, the closing price for each
Stock Exchange Business Day prior to the "ex" date for such Other
Event shall be adjusted by multiplying such closing price by the same
fraction by which the Conversion Price is so required to be adjusted
as a result of such other event. For purposes of this paragraph, the
term "ex" date, (i) when used with respect to any issuance or
distribution, means the first date on which the Common Stock trades
regular way on the relevant exchange or in the relevant market from
which the closing price was obtained without the right to receive such
issuance or distribution, (ii) when used with respect to any
subdivision or combination of shares of Common Stock, means the first
date on which the Common Stock trades regular way on such exchange or
in such market after the time at which such subdivision or combination
becomes effective, and (iii) when used with respect to any tender or
exchange offer means the first date on which the Common Stock trades
regular way on such exchange or in such market after the Expiration
Time of such tender or exchange offer.
(h) Further Reductions for Federal Income Tax. The
Company may make such reductions in the Conversion Price, in addition
to those required by Section 12.04 (a), (b), (c), (d), (e) and (f), as
it considers to be advisable in order that any event treated for
Federal income tax purposes as a dividend of stock or stock rights
shall not be taxable to the recipients.
(i) Adjustments to be Carried Forward. No adjustment in
the Conversion Price shall be required unless such adjustment would
require an increase or decrease of at least five percent (5%) in the
Conversion Price; provided, however, that any adjustments which by
reason of this paragraph (j) are not required to be made shall be
carried forward and taken into account in any subsequent adjustment.
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SECTION 12.05 Notice of Adjustments of Conversion Price.
Whenever the Conversion Price is adjusted as herein provided the
Company shall compute the adjusted Conversion Price in accordance with Section
12.04 and shall prepare a certificate signed by the chief financial officer of
the Company setting forth the adjusted Conversion Price and showing in
reasonable detail the facts upon which such adjustment is based, and such
certificate shall forthwith be delivered to the Trustee, the Paying Agent and
the Conversion Agent, and the Company shall cause notice thereof to be
published in accordance with Section 1.08 within ten (10) Business Days of the
effective date of such adjustment.
SECTION 12.06 Notice of Certain Corporate Action.
In case:
(a) the Company shall declare a dividend (or any other
distribution) on its Common Stock payable (i) otherwise than
exclusively in cash or (ii) exclusively in cash in an amount that
would require a Conversion Price adjustment pursuant to Section
12.04(c); or
(b) the Company shall authorize the granting to the
holders of its Common Stock of rights, warrants or options to
subscribe for or purchase any shares of capital stock of any class or
of any other rights (excluding employee stock options); or
(c) of any reclassification of the Common Stock of the
Company (other than a subdivision or combination of its outstanding
shares of Common Stock), or of any consolidation or merger to which
the Company is a party and for which approval of any stockholders of
the Company is required, or of the sale or transfer of all or
substantially all of the assets of the Company; or
(d) of the voluntary or involuntary dissolution,
liquidation or winding up of the Company; or
(e) the Company or any Subsidiary of the Company shall
commence a tender or exchange offer for all or a portion of the
Company's outstanding shares of Common Stock (or shall amend any such
tender or exchange offer);
then the Company shall cause to be mailed to the Trustee, the Paying Agent, the
Conversion Agent and to be published in the manner provided under Section 1.08
hereof within ten (10) Business Days after the date on which notice is sent to
the holders of the Company's Common Stock, a
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notice stating (i) the date on which a record is to be taken for the purpose of
such dividend, distribution or granting of rights, warrants or options, or, if
a record is not to be taken, the date as of which the holders of Common Stock
of record to be entitled to such dividend, distribution, rights, warrants or
options are to be determined, or (ii) the date on which such reclassification,
consolidation, merger, sale, transfer, dissolution, liquidation or winding up
is expected to become effective, and the date as of which it is expected that
holders of Common Stock of record shall be entitled to exchange their shares of
Common Stock for securities, cash or other property deliverable upon such re-
classification, consolidation, merger, sale, transfer, dissolution, liquidation
or winding up, or (iii) the date on which such tender offer commenced, the date
on which such tender offer is scheduled to expire unless extended, the
consideration offered and the other material terms thereof (or the material
terms of any amendment thereto).
SECTION 12.07 Company to Reserve Common Stock.
The Company shall at all times reserve and keep available, free from
pre-emptive or similar rights, out of its authorized but unissued Common Stock,
solely for the purpose of effecting the conversion of Notes, the whole number
of Shares then issuable upon the conversion in full of all Outstanding Notes.
SECTION 12.08 Taxes on Conversions.
The Company will pay any and all taxes that may be payable in respect
of the issue or delivery of Shares on conversion of Notes pursuant hereto. The
Company shall not, however, be required to pay any tax which may be payable in
respect of any transfer involved in the issue and delivery of Shares in a name
other than that of the Holder of the Notes to be converted, and no such issue
or delivery shall be made unless and until the Person requesting such issue has
paid to the Company the amount of any such tax, or has established to the
satisfaction of the Company that such tax has been paid.
SECTION 12.09 Cancellation of Converted Bearer Notes.
All Bearer Notes delivered for conversion to the Conversion Agent
shall be cancelled by the Company, and shall not under any circumstances be
reissued.
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SECTION 12.10 Provisions in Case of Reclassification Consolidation,
Merger or Sale of Assets.
In the event that the Company shall be a party to any transaction
(including without limitation any (i) recapitalization or reclassification of
the Common Stock (other than a change in par value, or from par value to no par
value, or from no par value to par value, or as a result of a subdivision or
combination of the Common Stock), (ii) any consolidation of the Company with,
or merger of the Company into, any other person, any merger of another person
into the Company (other than a merger which does not result in a
reclassification, conversion, exchange or cancellation of all of the
outstanding shares of Common Stock of the Company), (iii) any sale or transfer
of all or substantially all of the assets of the Company, or (iv) any
compulsory share exchange pursuant to which the Common Stock is converted into
the right to receive other securities, cash or other property, then lawful
provision shall be made as part of the terms of such transaction whereby the
Holder of each Note then outstanding shall have the right thereafter to convert
such Note only into the kind of common stock receivable upon such transaction
by a holder of Common Stock (at an adjusted Conversion Price equal to (a) the
Conversion Price determined pursuant to Section 12.04 as though all such
securities, cash or property (other than common stock) had been distributed in
a dividend covered by Section 12.04(d) with an "ex" date on the date of such
transaction divided by (b) the number of shares (or fraction thereof) of common
stock receivable upon such transaction in respect of each share of Common
Stock). The Person formed by such consolidation or resulting from such merger
or which acquired such assets or which acquired the Company's Shares, as the
case may be, shall execute and deliver to each of the Noteholders an amendment
to this Indenture as provided for under Article Nine. Such amendment shall
provide for adjustments which, for events subsequent to the effective date of
such amendment, shall be as nearly equivalent as may be practicable to the
adjustments provided for in this Article and shall provide for the assumption
by such other Person, if any, of the Company's obligations under this Indenture
and the Notes. The above provisions of this Section 12.10 shall similarly
apply to successive transactions of the foregoing type.
SECTION 12.11 Mandatory Conversion.
At any time after July 30, 1997, the Notes may be converted in whole,
at the Company's option, if at any time the Market Price of the Common Stock
shall have equalled or exceeded 135% of the Conversion Price in effect on such
Stock Exchange Business Day on each Stock Exchange Business Day in any 30
consecutive calendar day period, the first day of which falls on or after
November 28, 1996. In the event that the Company has met the criteria for
Mandatory Conversion at any time, the Company shall give notice to the
Noteholders in the manner provided for in Section 1.08 within 30 calendar days
of the date on which such criteria has been met.
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At any time after July 30, 1997, the Company may require such
Noteholders to convert all of such Notes otherwise pursuant to the terms of
this Article. The Company shall deliver to the Trustee a notice in the form of
Exhibit F hereto and the Company shall cause to be published once in accordance
with Section 1.08 hereof a notice of Mandatory Conversion not less than thirty
(30) and not more than (60) calendar days prior to the Mandatory Conversion
Date. Such notice shall specify the Mandatory Conversion Date. After the
Mandatory Conversion Date, the Notes will no longer represent Indebtedness of
the Company and will no longer accrue interest or require the Company to make
any payment of principal; and the Company's obligations to make any further
payments with respect to the Notes will terminate (except for this Section
12.11 and the Section 12.02(c)); and the only rights of a Holder of a Note not
surrendered for conversion pursuant to the preceding sentence will be to (i)
receive the number of Conversion Shares such Noteholder would have received had
the Holder's Note or Notes been surrendered for conversion as required hereby,
(ii) the payment referred to in Section 12.02(c) and (iii) the payment referred
to in Section 12.03. Any notice which is published in the manner herein
provided shall be conclusively presumed to be given and any defect in such
notice to the Noteholder designated for required conversion shall not affect
the validity of the proceedings for the required conversion of any other Bearer
Note.
ARTICLE THIRTEEN
DEFEASANCE AND COVENANT DEFEASANCE
SECTION 13.01 Company's Option to Effect Defeasance or Covenant
Defeasance.
The Company may, at its option by Board Resolution, at any time, with
respect to the Notes, elect to have either Section 13.02 or Section 13.03 be
applied to all Outstanding Notes upon compliance with the conditions set forth
below in this Article. The Company shall promptly give notice of such election
to the Trustee.
SECTION 13.02 Legal Defeasance and Discharge.
Upon the Company's exercise under Section 13.01 of the option
applicable to this Section 13.02, the Company shall be deemed to have been
discharged from its obligations with respect to all Outstanding Notes on the
date the conditions set forth in Section 13.04 are satisfied (hereinafter,
"legal defeasance"). For this purpose, such legal defeasance means that the
Company shall be deemed to have paid and discharged the entire indebtedness
represented by the Outstanding Notes, which shall thereafter be deemed to be
"Outstanding" only for the purposes of Section 13.05 and the other Sections of
this Indenture referred to in (A) and (B) below, and to
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have satisfied all its obligations under such Notes, including the obligation
to pay interest on the Notes, and this Indenture insofar as such Notes are
concerned (and the Trustee, at the expense of the Company, shall execute proper
instruments acknowledging the same), except for the following which shall
survive until otherwise terminated or discharged hereunder: (A) the rights of
Holders of Outstanding Notes to receive, solely from the trust fund described
in Section 13.04 and as more fully set forth in such Section, payments in
respect of the principal of and interest on such Notes when such payments are
due, (B) the Company's obligations with respect to such Notes under Sections
3.04, 3.05, 3.08, 10.02 and 10.03 and with respect to the Trustee under Section
6.06, (C) the rights, powers, trusts, duties and immunities of the Trustee
hereunder and (D) this Article. Subject to compliance with this Article, the
Company may exercise its option under this Section 13.02 notwithstanding the
prior exercise of its option under Section 13.03 with respect to the Notes.
SECTION 13.03 Covenant Defeasance.
Upon the Company's exercise under Section 13.01 of the option
applicable to this Section 13.03, the Company shall be released from its
obligations under any covenant contained in Sections 10.04 through 10.15 with
respect to the Outstanding Notes on and after the date the conditions set forth
in Section 13.04 are satisfied (hereinafter, "covenant defeasance"), and the
Notes shall thereafter be deemed not to be "Outstanding" for the purposes of
any request, demand, authorization, direction, declaration, notice, consent,
waiver or Act of Noteholders (and the consequences of any thereof) in
connection with such covenants, but shall continue to be deemed "Outstanding"
for all other purposes hereunder. For this purpose, such covenant defeasance
means that, with respect to the Outstanding Notes, the Company may omit to
comply with and shall have no liability in respect of any term, condition or
limitation set forth in any such covenant, whether directly or indirectly, by
reason of any reference elsewhere herein to any such covenant or by reason of
any reference in any such covenant to any other provision herein or in any
other document and such omission to comply shall not constitute a Default or an
Event of Default under Section 5.01(d), but, except as specified above, the
remainder of this Indenture and such Notes shall be unaffected thereby.
SECTION 13.04 Conditions to Legal Defeasance or Covenant
Defeasance.
The following shall be the conditions to application of either Section
13.02 or Section 13.03 to the Outstanding Notes:
(a) The Company shall irrevocably have deposited or
caused to be deposited with the Trustee (or another trustee satisfying
the requirements of Section 6.07 who shall agree to comply with the
provisions of this Article applicable to it) as trust funds in trust
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for the purpose of making the following payments, specifically
pledged as security for, and dedicated solely to, the benefit of the
Holders of such Notes, (A) money, which may include funds distributed
from the Seggregated Account, in an amount, or (B) U.S. Government
Obligations which through the scheduled payment of principal and
interest in respect thereof in accordance with their terms will
provide, not later than one day before the due date of any payment,
money in an amount, or (C) a combination thereof, sufficient, in the
opinion of a nationally recognized firm of independent public
accountants expressed in a written certification thereof delivered to
the Trustee, to pay and discharge, and which shall be applied by the
Trustee (or other qualifying trustee) to pay and discharge, the
principal of and interest on the Outstanding Notes on the Stated
Maturity (or Redemption Date, if applicable) of such principal or
instalment of interest; provided that the Trustee shall have been
irrevocably instructed to apply such money or the proceeds of such
U.S. Government Obligations to said payments with respect to the
Notes; and provided further that, upon the effectiveness of this
Section 13.04, the money or U.S. Government Obligations deposited
shall not be subject to the rights of the Noteholders pursuant to the
provisions of this Article. Before or after such a deposit, the
Company may give to the Trustee, in accordance with Section 11.03
hereof, a notice of its election to redeem all of the Outstanding
Notes at a future date in accordance with Article Eleven hereof, which
notice shall be irrevocable. Such irrevocable redemption notice, if
given, shall be given effect in applying the foregoing.
(b) No Default or Event of Default with respect to the
Notes shall have occurred and be continuing on the date of such
deposit or, insofar as paragraphs (h) and (i) of Section 5.01 hereof
are concerned, at any time during the period ending on the 91st day
after the date of such deposit (it being understood that this
condition shall not be deemed satisfied until the expiration of such
period).
(c) No event or condition shall exist that pursuant to
the provisions of Section 13.02 or 13.03 would prevent the Company
from making payments of the principal of or interest on the Notes on
the date of such deposit or at any time during the period ending on
the 91st day after the date of such deposit (it being understood that
this condition shall not be deemed satisfied until the expiration of
such period).
(d) Such legal defeasance or covenant defeasance shall
not result in a breach or violation of, or constitute a default under
any material agreement or instrument to which the Company is a party
or by which it is bound.
(e) In the case of an election under Section 13.02, the
Company shall have delivered to the Trustee an Opinion of Counsel
stating that the Holders of the Outstanding
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Notes will not recognize income, gain or loss for federal income tax
purposes as a result of such defeasance and will be subject to federal
income tax on the same amounts, in the same manner and at the same
times as would have been the case if such defeasance had not occurred.
(f) The Company shall have delivered to the Trustee an
Officers' Certificate and an Opinion of Counsel, each stating that all
conditions precedent provided for relating to either the legal
defeasance under Section 13.02 or the covenant defeasance under
Section 13.03 (as the case may be) have been complied with.
SECTION 13.05 Deposited Money and U.S. Government Obligations to Be
Held in Trust; Other Miscellaneous Provisions.
Subject to the provisions of the last paragraph of Section 10.03, all
money and U.S. Government Obligations (including the proceeds thereof)
deposited with the Trustee (or other qualifying trustee--collectively for
purposes of this Section 13.05, the "Trustee") pursuant to Section 13.04 in
respect of the Outstanding Notes shall be held in trust and applied by the
Trustee, in accordance with the provisions of such Notes and this Indenture, to
the payment, either directly or through any Paying Agent (including the Company
acting as its own Paying Agent) as the Trustee may determine, to the Holders of
such Notes of all sums due and to become due thereon in respect of principal
and interest, but such money and U.S. Government Obligations need not be
segregated from other funds except to the extent required by law.
The Company shall pay and indemnify the Trustee against any tax, fee
or other charge imposed on or assessed against the U.S. Government Obligations
deposited pursuant to Section 13.04 or the principal and interest received in
respect thereof other than any such tax, fee or other charge which by law is
for the account of the Holders of the Outstanding Notes.
Anything in this Article to the contrary notwithstanding, the Trustee
shall deliver or pay to the Company from time to time upon Company Request any
money or U.S. Government Obligations held by it as provided in Section 13.04
which, in the opinion of a nationally recognized firm of independent public
accountants expressed in a written certification thereof delivered to the
Trustee, are in excess of the amount thereof which would then be required to be
deposited to effect an equivalent legal defeasance or covenant defeasance, as
applicable, in accordance with this Article.
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SECTION 13.06 Reinstatement.
If the Trustee or any Paying Agent is unable to apply any money or
U.S. Government Obligations in accordance with Section 13.05 by reason of any
order or judgment of any court or governmental authority enjoining, restraining
or otherwise prohibiting such application, then the Company's obligations under
this Indenture and the Notes shall be revived and reinstated as though no
deposit had occurred pursuant to Section 13.02 or 13.03, as the case may be,
until such time as the Trustee or Paying Agent is permitted to apply all such
money or U.S. Government Obligations in accordance with Section 13.05;
provided, however, that no action taken in good faith by the Company after a
deposit of money or U.S. Government Obligations or both pursuant to Section
13.05 and prior to the revival and reinstatement of obligations under this
Indenture and the Notes pursuant to this Section 13.06 shall constitute the
basis for the assertion of an Event of Default pursuant to Section 5.01; and
provided, further, that if the Company makes any payment of principal of or
interest on any Note following the reinstatement of its obligations, the
Company shall be subrogated to the rights of the Holders of such Notes to
receive such payment from the money or U.S. Government Obligations held by the
Trustee or Paying Agent.
ARTICLE FOURTEEN
SENIORITY OF NOTES
SECTION 14.01 Seniority of the Notes.
The Company's obligations under the Notes and the Coupons and
hereunder do and will rank at all times at least pari passu with all other
present and future Indebtedness of the Company and shall be superior in rank to
all existing and future Subordinated Obligations. The Company covenants and
agrees that, except with respect to any Lien, the Indebtedness represented by
the Notes and the Coupons and the payment of the principal of and interest on
each and all of the Notes and Coupons are hereby expressly made pari passu to
all other present and future Indebtedness other than all Subordinated
Obligations.
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ARTICLE FIFTEEN
IMMUNITY OF INCORPORATORS,
STOCKHOLDERS, OFFICERS AND DIRECTORS
SECTION 15.01 Liability Solely Corporate.
No recourse shall be had for the payment of the principal of or
interest on any Notes or any part thereof, or for any claim based thereon or
otherwise in respect thereof, or of the indebtedness represented thereby, or
upon any obligation, covenant or agreement of this Indenture, against any
incorporator, or against any stockholder, officer or director, as such, past,
present or future, of the Company, or of any predecessor or successor Person,
either directly or through the Company or any such predecessor or successor
Person, whether by virtue of any constitution, statute or rule of law, or by
the enforcement of any assessment or penalty or otherwise, it being expressly
agreed and understood that this Indenture and all the Notes are solely
corporate obligations, and that no personal liability whatsoever shall attach
to, or be insured by, any such incorporator, stockholder, officer or director,
as such, past, present or future, of the Company or of any predecessor or
successor Person, either directly or through the Company or any such
predecessor or successor Person, because of the indebtedness hereby authorized
or under or by reason of any of the obligations, covenants, promises or
agreements contained in this Indenture or in any of the Notes or to be implied
herefrom or therefrom; and that any such personal liability is hereby expressly
waived and released as a condition of, and as part of the consideration for,
the execution of this Indenture and the issue of the Notes; provided, however,
that nothing herein or in the Notes contained shall be taken to prevent
recourse to and the enforcement of the liability, if any, of any stockholder or
subscriber to capital stock of the Company upon or in respect of shares of
capital stock not fully paid up.
This Indenture may be signed in any number of counterparts each of
which so executed shall be deemed to be an original, but all such counterparts
shall together constitute but one and the same Indenture.
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IN WITNESS WHEREOF, the parties hereto have caused this Indenture to
be duly executed, all as of the day and year first above written.
HARKEN ENERGY CORPORATION
By: /s/ Larry E. Cummings
Name: Larry E. Cummings
Title: Vice President
MARINE MIDLAND BANK,
as Trustee
By: /s/ Julian M. Doull
Name: Julian M. Doull
Title: Supervisor
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<PAGE> 1
EXHIBIT 10.2
HARKEN ENERGY CORPORATION
Up to US$40,000,000
6.5% Senior Convertible Notes Due 2000
PLACING AGREEMENT
July 19, 1996
<PAGE> 2
CONTENTS
<TABLE>
<CAPTION>
Clause Heading Page
- ------ ------- ----
<S> <C>
1. Interpretation . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1
--------------
2. Release of the Press Announcement and Delivery of Documents . . . . . . . . . . . . . . . . . . . . . . . . 3
-----------------------------------------------------------
3. Placing of the Notes . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 3
--------------------
4. Representations and Warranties of the Company . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 4
---------------------------------------------
5. The Placing . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 9
-----------
6. Undertakings of the Company . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 10
---------------------------
7. Indemnification and Contribution . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 11
--------------------------------
8. Fees and Expenses . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 13
-----------------
9. Closing . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 14
-------
10. Termination . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 16
-----------
11. Survival . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 16
--------
12. Time . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 17
----
13. Notices . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 17
-------
14. Governing Law . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 18
-------------
The Schedule . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 21
- ------------
</TABLE>
2
<PAGE> 3
THIS AGREEMENT is made on July 19, 1996, BETWEEN
(1) HARKEN ENERGY CORPORATION (the "Company");
(2) RAUSCHER PIERCE & CLARK, INC. and RAUSCHER PIERCE & CLARK
LIMITED (together "RPC") and HSBC INVESTMENT BANK PLC ("HSBC")
(together with RPC, the "Lead Managers"); and
(3) BANCA DEL GOTTARDO, J. HENRY SCHRODER BANK AG, JEFFERIES
INTERNATIONAL LTD, INVESTMENTBANK AUSTRIA AG and D.E. SHAW
SECURITIES INTERNATIONAL (together with the Lead Managers, the
"Managers").
WHEREAS
(A) The Company has authorised the creation and issue of up to
US$40,000,000 in aggregate principal amount of 6.5% Senior Convertible
Notes Due 2000 (the "Notes"). The Notes will be in bearer form and
are to be convertible into shares of the common stock (the "Common
Stock") of the Company (the "Shares") at the Conversion Price of
$2.50.
(B) The Notes will be in the denominations of U.S. $50,000 and
integral multiples thereof. The Notes will initially be represented
by a temporary global bearer note (the "Global Note") which will be
exchangeable for bearer notes in definitive form ("Bearer Notes"),
with interest coupons ("Coupons") attached, in the circumstances
specified in the Global Note.
(C) The Notes will be subject to and have the benefit of a trust
indenture (the "Trust Indenture"), a draft of which is in the agreed
form and to which will be scheduled the forms of the Global Note and
the Bearer Notes. The Trust Indenture, will be made between the
Company and Marine Midland Bank N.A. (the "Trustee") as trustee for
the holders of the Notes from time to time.
(D) The Company will, in relation to the Notes, enter into a
paying and conversion agency agreement (the "Agency Agreement") with
Midland Bank plc (the "Principal Paying Agent" and "Principal
Conversion Agent") and Banca Del Gottardo (a "Paying Agent" and
"Conversion Agent") and the Trustee, a draft of which is in the agreed
form.
(E) The Lead Managers have conditionally agreed on and subject to
the terms hereof to act as agent for the Company to use their best
efforts to procure Placees for all the Notes. The Issue is not
underwritten.
IT IS AGREED as follows:
1. Interpretation
1.1 Definitions: In this Agreement, in addition to the definitions
contained in the recitals, the following expressions have the
following meanings:
1
<PAGE> 4
"agreed form" means that the form of the document in question has been
agreed between the proposed parties thereto and by the parties hereto
prior to the Closing Date and (for the purposes of identification
signed by or on behalf of) each of such parties and that either a copy
thereof has been signed for the purpose of identification on behalf of
Bracewell & Patterson, L.L.P. or such document has been signed on
behalf of the parties thereto and delivered to Bracewell & Patterson,
L.L.P. to be held in escrow pending release on the Closing Date;
"Cedel" means Cedel Bank, societe anonyme;
"Closing Date" means, subject to Clause 9.2, July 30, 1996;
"Conditions" means the terms and conditions of the Notes as scheduled
to the agreed form of the Trust Indenture as the same may be modified
prior to the Closing Date, and any reference to a numbered "Condition"
is to a correspondingly numbered provision thereof;
"Conversion Price" has the meaning given to it in Condition 6;
"Euroclear" means Morgan Guaranty Trust Company of New York, Brussels
office, as operator of the Euroclear System;
"Event of Default" means one of those events specified in Condition
11;
"Issue" means the proposed issue of the Notes described in the
Offering Circular;
"Issue Documents" means the Trust Indenture and the Agency Agreement;
"Issue Price" means 100 percent of the aggregate principal amount of
the Notes;
"Lien" has the meaning given to it in the Trust Indenture;
"Offering" means the offering of the Notes pursuant to the Offering
Circular;
"Offering Circular" means the final offering circular, including all
documents incorporated by reference therein to the extent such
documents are not superseded in the Offering Circular prepared in
connection with the Issue, as the same may be amended or supplemented
on or before the Closing Date;
"Placees" has the meaning given to it in Clause 5.1;
"Placement" means the offering of Notes made pursuant to the Offering
Circular;
"Person" has the meaning given to it in the Trust Indenture;
"Press Announcement" means the press announcement to be mutually
agreed by the Company and the Lead Managers;
"Principal Subsidiary" has the meaning given to it in the Trust
Indenture;
2
<PAGE> 5
"Securities Act" means the United States Securities Act of 1933, as
amended;
"Stabilising Manager" means HSBC, acting in the capacity as
stabilising manager;
"Subsidiary" has the meaning given to it in the Trust Indenture;
"U.S.$" and "U.S. dollars" denote the lawful currency for the time
being of the United States of America; and
"Warrant Shares" means the shares of Common Stock of the Company
issuable upon exercise of the Lead Manager Warrants and the EnCap
Warrants.
1.2 Clauses and Schedules: Any reference in this Agreement to a
Clause or a Schedule is, unless otherwise stated, to a clause hereof
or a schedule hereto.
1.3 Headings: Headings and sub-headings are for ease of reference
only and shall not affect the construction of this Agreement.
2. Release of the Press Announcement and Delivery of Documents
2.1 On or immediately following the Closing Date, the Company
shall release the Press Announcement in the agreed form to the press
in compliance with Regulation S of the Securities Act.
2.2 The Company shall as soon as practicable following execution
of this Agreement and in any event, subject to Clause 2.3, by no later
than 2.00 p.m. (London time) on the Closing Date, deliver, or procure
that there are delivered, to the Lead Managers, in the agreed form:
(a) the Issue Documents;
(b) a legal opinion of Haynes and Boone, L.L.P.;
(c) the closing certificates of the Company; and
(d) the auditors comfort letter.
2.3 The Lead Managers may, in their discretion, waive the
requirement that the Company deliver to them any of the documents
listed in Clause 2.2 or may extend the time for delivery of any of the
documents. Any waiver or extension may be granted by the Lead
Managers subject to such conditions as they determine.
3. Placing of the Notes
3.1 The Company undertakes to the Managers that:
3
<PAGE> 6
(a) subject to and in accordance with the provisions of this
Agreement, the Company will issue the Notes on the Closing Date, in
accordance with this Agreement and the Trust Indenture; and
(b) the Company will, execute and deliver the Issue Documents on
the Closing Date.
3.2 In connection with this issue, the Stabilising Manager may
over-allot or effect transactions which stabilise or maintain the
market price of the Notes at a level which might not otherwise
prevail. Such stabilising, if commenced, may be discontinued at any
time. Such stabilising shall be conducted in accordance with all
applicable laws and rules. Any loss or profit sustained as a
consequence of any such over-allotment or stabilising shall, as
against the Company, be for the account of the Managers. The Managers
acknowledge that the Company has not authorised the creation and issue
of Notes in excess of U.S.$40,000,000 in aggregate principal amount.
3.3 Each Manager warrants and represents to the Company and each
other Manager that each contract Note in the agreed form executed by
such Manager selling the Notes shall contain the following legend:
"Neither the Notes nor the Shares of Common Stock issuable upon
conversion of the Notes have been or will be registered under the
United States Securities Act of 1933, as amended (the "Securities
Act"), and the Notes and the Shares may not be offered, sold,
transferred, pledged, converted or otherwise disposed of in the U.S.
or to, or for the account or benefit of, any "U.S. person" unless the
Notes and the Shares have been registered under the Securities Act and
any applicable state securities or blue sky laws or exemptions from
the registration requirements of such laws are available.
Any United States person who holds this obligation will be subject to
limitations under the U.S. income tax laws, including the limitations
provided in Sections 165(j) and 1287(a) of the United States Internal
Revenue Code of 1986, as amended".
4. Representations and Warranties of the Company
4.1 The Company represents and warrants to the Managers, in their
capacity as Managers and as representatives of each of the Holders of
the Notes, that:
(a) the Company is duly incorporated and in good standing under
the laws of the State of Delaware and has the requisite power and
authority to create, issue, offer and sell the Notes, to execute this
Agreement and the Issue Documents and to undertake and perform its
obligations herein and therein;
(b) each Principal Subsidiary of the Company is (i) a corporation
duly organized, validly existing and in good standing under the laws
of its jurisdiction of incorporation, (ii) has all requisite power and
authority and all necessary licenses and permits to own and operate
its Properties and to carry on its business as now conducted and as
presently proposed to be conducted, except as would not have a
material adverse effect on the Company and the Subsidiaries taken as a
whole, and (iii) is duly licensed or qualified and is authorized to do
4
<PAGE> 7
business and is in good standing as a foreign corporation in each
jurisdiction where the character of its Properties or the nature of
its activities makes such licensing or qualification necessary, except
as would not have a material adverse effect on the Company and the
Subsidiaries taken as a whole.
(c) The authorized and outstanding capital stock of the Company is
as set out in the Offering Circular, and all of the issued Shares have
been duly and validly authorized and issued and are fully paid and
non-assessable. All of the outstanding shares of capital stock of the
Subsidiaries have been duly and validly authorized and issued and are
fully paid and non-assessable. All of the outstanding shares of
capital stock of each Principal Subsidiary are owned directly or
indirectly by the Company free and clear of any Liens. Except as
disclosed in the Offering Circular, the Company does not own, directly
or indirectly, any equity or debt securities of any other company,
corporation, partnership, joint venture or other entity which are
material to the business or operations of the Company.
(d) the execution, delivery and performance of this Agreement and
the Issue Documents has been duly authorized by all requisite
corporate action of the Company;
(e) the creation, offer, sale and issue of the Notes, the
execution of this Agreement and the Issue Documents and the
undertaking and performance by the Company of the obligations
expressed to be assumed by it herein and therein will not violate:
(i) the Certificate of Incorporation or By-laws of the
Company ;
(ii) assuming compliance by the Managers with the United
States securities Law requirements set forth in the
Schedule, any law applicable to the Company or any
Principal Subsidiary or any rule, regulation or order
of any court or governmental agency or body having
jurisdiction over the Company or any Principal
Subsidiary or;
(iii) any provision of any indenture, mortgage, agreement,
contract, or other instrument to which the Company or
any Principal Subsidiary is a party or by which the
Company or any Principal Subsidiary is bound or to
which any of the properties or assets of the Company
or any Principal Subsidiary are subject, or be in
conflict with, or result in a breach of or constitute
(upon notice or lapse of time or both) a default
under any such indenture, mortgage, agreement,
contract or other instrument or result in the
creation or imposition of any Lien upon any of the
properties or assets of the Company or any Principal
Subsidiary (except any such violation or conflict
described in herein which would not have a material
adverse effect on the Company and its Subsidiaries,
taken as a whole).
(f) (i) this Agreement constitutes;
(ii) upon due execution by or on behalf of the Company and
the other parties thereto, the Issue Documents will
constitute; and
5
<PAGE> 8
(iii) upon due execution of the Trust Indenture, the Global
Note and the Bearer Notes by or on behalf of the
Company and the other parties thereto and due
authentication of the Global Note and the Bearer
Notes and the other parties thereto, the Notes will
constitute
legal, valid, binding and enforceable obligations of the Company,
enforceable against the Company in accordance with their respective
terms, except that the enforceability thereof may be limited by any
applicable bankruptcy, insolvency, reorganisation or other similar
laws relating to or affecting the enforcement of creditors' rights
generally and by equitable principles regardless of whether such
enforceability is considered in a proceeding in equity or at law and
except as rights to indemnity or contribution may be limited under
applicable law;
(g) Each of the Global Note, the Bearer Notes, the Coupons and the
Shares conform in all material respects to the description of such
Global Note, Bearer Notes, the Coupons and Shares contained in the
Offering Circular, and the Shares conform to the terms of the Common
Stock contained in the Certificate of Incorporation; and
(h) upon issuance of the Notes in accordance with the Trust
Indenture, the Notes will constitute direct, general and unconditional
obligations of the Company which:
(i) rank pari passu among themselves and with all present
and future Indebtedness other than Subordinated
Obligations and Indebtedness secured by Liens (all as
defined in the Trust Indenture) of the Company; and
(ii) will rank senior to all existing and future
Subordinated Obligations (all as defined in the Trust
Indenture), except to the extent permitted by the
applicable laws relating to creditors' rights;
(i) the Shares, as and when issued by the Company from time to
time pursuant to conversion of the Notes in accordance with the terms
of the Issue Documents, will be validly issued and outstanding, fully
paid and non-assessable and will not be subject to any pre-emptive or
similar right, and the Holder of each Note will receive good and valid
title to the Shares upon conversion of such Note in accordance with
the terms of the Issue Documents, free and clear of any Lien, except
such as may have been created by the Holder of the Note and such
restrictions on transfer as may be imposed under United States federal
or state securities or blue sky laws. No consent or approval by the
stockholders of the Company or any other Person is required to be
obtained by the Company for the consummation of the issuance of the
Shares by the Company pursuant to conversion of the Notes. As and
from the expiry of the Restricted Period (i) each stock certificate
representing any of the Shares shall be free of any type of
restrictive legend, (ii) the Shares represented by each such stock
certificate shall not be subject to any "stop transfer" or similar
order at the Company's transfer agent for its Common Stock, and (iii)
the Company shall have filed with the AMEX or Alternative Stock
Exchange all necessary filings in respect of the inclusion of the
Shares in the shares of Common Stock of the Company listed for trading
on the AMEX or Alternative Stock Exchange.
6
<PAGE> 9
(j) upon delivery to the Lead Managers and EnCap, respectively,
the Lead Manager Warrants and the EnCap Warrants (as defined in Clause
8.2 hereof) will be duly issued and will constitute the legal, valid
and binding obligations of the Company, enforceable against the
Company in accordance with their terms, except as the enforceability
thereof may be limited by any applicable bankruptcy, insolvency,
reorganization or other similar laws relating to or affecting the
enforcement of creditors' rights, regardless of whether such
enforceablilty is considered in a proceeding in equity or at law. The
shares of Common Stock issuable upon exercise of any of the Lead
Manager Warrants and the EnCap Warrants have been duly and validly
authorized and reserved for issuance. The shares of Common Stock
issuable upon exercise of Lead Manager Warrants and the EnCap
Warrants, as and when issued and delivered in accordance with the
terms thereof, and upon receipt by the Company of the exercise price
therefor, will be duly and validly issued and outstanding, fully paid
and non-assessable, and will not be subject to any pre-emptive or
similar right.
(k) assuming compliance by the Managers with the United States
securities law requirements as set out in the Schedule, all
authorizations, consents and approvals required by the Company for or
in connection with the creation and issue of the Notes, the execution
of this Agreement and the Issue Documents, the performance by the
Company of the obligations undertaken by it herein and therein and the
distribution of the Offering Circular in accordance with the
provisions set out in the Schedule have been obtained and are in full
force and effect;
(l) neither the nature of the Company or of any Subsidiary, or of
any of their respective businesses or Properties, nor any relationship
between the Company or any Subsidiary and any other Person, nor any
circumstance in connection with the execution and delivery of the
Indenture or the offer, issue, sale or delivery of the Global Note, or
the Bearer Notes, or the Shares is such as to require a consent,
approval or authorization of, or filing, registration or qualification
with, any governmental authority on the part of the Company as a
condition to the execution and delivery of this Indenture or the
offer, issue, sale or delivery of the Global Note or the Bearer Notes
or the issuance of Shares pursuant to conversion of the Notes.
(m) the Offering Circular sets forth a description of the business
conducted and proposed to be conducted as of the date thereof by the
Company and its Principal Subsidiaries and the principal Properties of
the Company and its Principal Subsidiaries, which description is true
and correct in all material respects.
(n) each of the Company and its Principal Subsidiaries has (i)
Good Title to its Oil and Gas Properties and (ii) good and defensible
title to all other material Properties and assets described in the
Offering Circular as owned by it, in the case of such other Properties
and assets free and clear of all Liens, except as disclosed in the
Offering Circular or which are not material to the business of the
Company and its Subsidiaries taken as a whole or which will not
conflict with the obligations of the Company under this Agreement, the
Issue Documents and the Notes. Each of the Company and its
Subsidiaries has a valid, subsisting lease for the real Property
(other than its Oil and Gas Properties, subject to clause (i) of this
sentence) described in the Offering Circular as leased by it. To the
knowledge of the Company's management, except as otherwise disclosed
in the Offering Circular, the Company and each of its Subsidiaries
owns or possesses or is the valid licensee of all patents, trademarks,
service marks, trade names, copyrights and other intellectual property
necessary to carry on its business as described in the Offering
Circular, and
7
<PAGE> 10
neither the Company nor any Subsidiary has received any notice of
infringement of or conflict with asserted rights of others with
respect to any of the foregoing which, if the subject of an
unfavourable decision, ruling or finding, would result, individually
or in the aggregate, in any material adverse change in, or which would
materially and adversely affect the business, operations, financial
position or business prospects of, the Company and its Subsidiaries
taken as a whole.
(o) based on the laws currently in effect and subject to the
provisos set forth in the Offering Circular, all payments of principal
and interest in respect of the Notes and the Coupons, and all other
payments that may become due and payable under the terms of the Notes
or the Coupons may be made free and clear of, and without withholding
or deduction for, any taxes, duties, assessments or governmental
charges of any nature whatsoever imposed, levied, collected, withheld
or assessed by United States federal and state taxing authorities or
any political subdivision or authority thereof or therein having power
to tax other than in the case of payments to be made by the Company to
U.S. persons in circumstances where the Company is obliged to withhold
payments due to U.S. back-up withholding tax but not gross-up under
Condition 8;
(p) the Offering Circular is true and accurate in all material
respects and is not misleading in any material respect; any opinions,
predictions or intentions expressed in the Offering Circular are
honestly held or made and are not misleading in any material respect;
the Offering Circular does not omit to state any material fact
necessary to make such information not misleading in any material
respect; provided that this representation and warranty shall not
apply to any statement or omission relating to matters of foreign law
or made in reliance and in conformity with information furnished in
writing to the Company by any Manager for use in the Offering
Circular;
(q) the Company will use the proceeds from the sale of the Notes
for the purposes described in the Offering Circular.
(r) neither the Company nor any of its Subsidiaries is, directly
or indirectly, controlled by, or acting on behalf of any Person which
is, an "investment company" or an "affiliated person" of, "promoter"
or "principal" of an "investment company," within the meaning of the
Investment Company Act of 1940, as amended.
(s) neither the Company nor any of its Subsidiaries is a "holding
company" within the meaning of the Public Utility Holding Company Act
of 1935, as amended or a "public utility" within the meaning of the
Federal Power Act, as amended.
(t) except as disclosed in the Offering Circular at the date
hereof or at the date when this representation is deemed to be
repeated, as the case may be, there are no actions, suits,
investigations or proceedings pending to which the Company or any
Principal Subsidiary is a party before or by any court or governmental
agency or body, which would result, individually or in the aggregate,
in any material adverse change in the financial condition or results
of operations of the Company and its Subsidiaries, taken as a whole,
or which would materially and adversely affect the properties or
assets of the Company, and to the knowledge of the Company, no such
actions, suits, investigations or proceedings are threatened by any
Person;
8
<PAGE> 11
(u) except as disclosed in the Offering Circular and since
December 31, 1995 there has been no adverse change, or any development
reasonably likely to involve an adverse change, in the condition
(financial or otherwise) or general affairs of the Company that is
material in the context of the issue of the Notes; and
(v) to the knowledge of the Company, no event has occurred which
is or would (with the passage of time, the giving of notice, the
making of any determination or otherwise) become an Event of Default.
4.2 The Company's consolidated audited financial statements
including its statement of operations for its three fiscal years ended
December 31, 1993, December 31, 1994 and December 31, 1995,
respectively, and its balance sheets at December 31, 1993, December
31, 1994 and December 31, 1995, and the related consolidated
statements of operations, stockholders' equity and cash flows of the
Company and its Subsidiaries for the fiscal years ended on such dates
were prepared in accordance with generally accepted accounting
principles in the United States consistently applied and present
fairly (in conjunction with the notes thereto) the financial condition
of the Company and its Subsidiaries (taken as a whole) as at the date
they were prepared and the results of the operations of the Company
and its Subsidiaries (taken as a whole) during the respective fiscal
years then ended. Except as set forth in the Offering Circular, since
December 31, 1995, there has been no change in the properties,
business, profits or condition (financial or otherwise) of the Company
and its Subsidiaries except changes in the ordinary course of
business, none of which individually or in the aggregate have had a
material adverse effect on the properties, business, assets, profits
or financial condition of the Company and its Subsidiaries taken as a
whole.
4.3 The Company shall forthwith notify the Lead Managers of
anything which at any time prior to payment of the net proceeds into
the Segregated Account of the issue of the Notes to the Company on the
Closing Date has or may have rendered, or will or may render, untrue
or incorrect in any respect any representation and warranty by the
Company in this Agreement as if it had been made or given at such time
with reference to the facts and circumstances then subsisting.
4.4 The representations and warranties in Clause 4.1 which refer
to the Offering Circular shall be deemed to be repeated (with
reference to the relevant text of the Offering Circular and to the
facts and circumstances then subsisting) on each date falling on or
before the Closing Date on which the Offering Circular is amended or
supplemented and distributed by the Managers.
5. The Placing
5.1 The Lead Managers, relying on the representations and
warranties given by the Company herein, hereby undertake to the
Company that, subject to and in accordance with the provisions of this
Agreement they will act as agent for the Company (which appointment
the Company hereby confirms) to use their best efforts to procure
qualified subscribers ("Placees") to subscribe for all of the Notes on
the Closing Date at the Issue Price free from all Liens and with all
rights attached thereto. Neither of the Lead Managers shall have any
obligations themselves to subscribe for any Notes.
9
<PAGE> 12
5.2 The Company hereby confirms that the foregoing appointment
confers on the Lead Managers all powers, authorities and discretions
on behalf of the Company which are reasonably necessary for or
reasonably incidental to the making of the Issue on the basis set out
in this Agreement, the Offering Circular and the Trust Indenture and
hereby agrees to ratify and confirm everything which the Lead Managers
shall lawfully and properly do in the exercise of, or in accordance
with, such appointment, powers, authorities and discretions.
5.3 The Lead Managers shall by no later than July 30, 1996 (or
such later date as the Lead Managers and the Company may agree) notify
the Company of the number of Notes, with an aggregate principal amount
of up to U.S.$40,000,000, in respect of which subscription commitments
have been obtained ("Placed Notes").
5.4 Sums payable pursuant to this Clause 5 shall be paid by the
Company not later than the second business day following the date of
termination of this Agreement (other than for the surviving clauses).
6. Undertakings of the Company
6.1 The Company shall deliver to the Managers on the date hereof
and hereafter from time to time as requested as many copies of the
Offering Circular as the Lead Managers may reasonably request.
6.2 Without prejudice to their obligations under applicable law,
the Company shall at the request of the Lead Managers at any time
prior to payment of the net proceeds of the issue of the Notes to the
Company on the Closing Date amend or supplement the Offering Circular
in order to correct any untrue statement of a material fact required
to be stated therein or necessary to make the statements therein in
the light of the circumstances under which they were made not
misleading and the Company shall deliver to the Managers from time to
time as many copies of the relevant amendment or supplement as the
Managers may reasonably request.
6.3 Except as requested by the Managers in connection with the
sale of the Notes, neither the Company or any affiliate of the
Company nor anyone acting on behalf of the Company or any such
affiliate, other than the Managers shall, directly or indirectly,
offer or sell, or attempt to offer, sell or dispose of, any of the
Notes, or solicit any offer to buy, or otherwise approach or negotiate
in respect of, any of the Notes.
6.4 The Company shall furnish such information, execute such
instruments and take such action, if any, as may be required to effect
the placement of the Notes under the securities laws of each
jurisdiction in which the Notes are offered for sale or sold;
provided, however, that the Company shall not be required to qualify
to do business in any jurisdiction where it is not now so qualified or
which would subject the Company to taxation or to take any action that
would subject it to general or unlimited service of process in any
jurisdiction where it is not now so subject.
6.5 The Company shall furnish or make available to the Lead
Managers or their counsel such additional documents and information
regarding the Company and its affairs as the Lead Managers may from
time to time request, including any and all documentation reasonably
10
<PAGE> 13
requested in connection with their due diligence efforts regarding
information in the Offering Circular and in order to evidence the
accuracy or completeness of any of the conditions contained in this
Agreement; and all actions taken by the Company to authorize the
issuance and sale of the Notes and to reserve for issuance the shares
of Common Stock issuable upon exercise of the Lead Manager Warrants
and the EnCap Warrants shall be reasonably satisfactory in form and
substance to the Lead Managers.
6.6 The Company shall, at all times upon reasonable request from
the date hereof through the Closing Date, (i) make available to each
purchaser or its advisers, or both, prior to acceptance of its
subscription, such information (in addition to that contained in the
Offering Circular concerning the Offering, the Company and any other
relevant matters as it possesses or can acquire without unreasonable
effort or expense, and (ii) provide each purchaser or its advisers, or
both, the opportunity to ask questions of, and receive answers from,
the Company with respect to such matters.
6.7 The Company shall not offer or sell any securities of the same
class as the Notes until a period of six (6) months has elapsed from
the Closing Date of the Offering, unless the Company shall have
provided the Lead Managers with a satisfactory opinion from the
Company's legal counsel to the effect that the proposed offer or sale
will not result in any violation of the Securities Act, any state
securities or blue sky laws, and any rules or regulations promulgated
thereunder.
6.8 From the date hereof to and including the Closing Date, the
Company shall not, make any press release or other public announcement
(i) without the prior written consent of the Lead Managers, (ii) prior
to having furnished each of the Lead Managers with a copy of the
proposed form of the press release or public announcement and giving
the Lead Managers and their counsel a reasonable opportunity to review
and comment upon the same or (iii) in a manner to which the Lead
Managers or their counsel shall reasonably object, unless the Company
is required to do so by applicable law.
6.9 The Company shall make arrangements reasonably satisfactory to
the Lead Managers to ensure that the Bearer Notes are delivered to the
Trustee or the Authenticating Agent for authentication in the form
required by, and otherwise in accordance with, the Issue Documents.
6.10 The Company shall use all reasonable endeavours to procure the
listing of the Shares and for the Warrant Shares on the American Stock
Exchange and to maintain the same until none of the Notes are
outstanding.
7. Indemnification and Contribution
7.1 The Company agrees to defend, indemnify, and hold each of the
Managers and their respective officers, directors, agents, employees
and controlling persons (each, an "Indemnified Person") harmless from
and against any losses, claims, damages, or liabilities (including,
without limitation, court costs and reasonable attorneys' fees) to
which any Indemnified Person may become subject insofar as the same
arises from an action which alleges or is based upon:
11
<PAGE> 14
(a) any alleged untrue statement of a material fact contained in
the Offering Circular, or omission of a material fact, or any other
violation of applicable securities or other laws, rules and
regulations;
(b) the performance by each of the Managers of its obligations and
services, or the performance by any other Indemnified Person on behalf
of the Managers of any obligations hereunder in accordance with this
Agreement or otherwise in connection with the subject matter hereof,
including the issue of any material provided by the Company, or after
having been approved by, the Managers; or
(c) any breach or alleged breach of or failure to comply with, the
laws or regulations of the United States or of any other State thereof
by the Company or any Affiliate resulting from the release of the
Press Announcement, and the preparation and distribution of the
Offering Circular; or
(d) any material breach or alleged material breach of any of the
representations and warranties, or any of the undertakings or
obligations of the Company; or
(e) the creation, allotment, offer, sale, issue and placing of the
Notes irrespective of the role or concurrent negligence of such
Indemnified Person, by the Company or its officers, directors, agents,
employees and controlling persons and to reimburse such Indemnified
Person for any legal or other expenses reasonably incurred by them in
connection with investigating, settling or defending any action or
claim in connection therewith (including, without limitation, court
costs and reasonable attorneys' fees) up until such time as the
Company assumes the defense of any such action or claim; provided,
however, that the Company shall not be liable in any such case to the
extent that any such loss, claim, damage or liability (i) directly or
indirectly results from any untrue statement of a material fact or
omission of a material fact made in the Offering Circular in reliance
upon and in conformity with written information provided to the
Company by or on behalf of the Managers specifically for inclusion in
such Offering Circular or (ii) is found in a final judgment of a court
of competent jurisdiction to have resulted from the Indemnified
Person's gross negligence or bad faith in performing their services
hereunder. If for any reason the foregoing indemnification is
unavailable to the Indemnified Person or insufficient to hold the
Indemnified Person harmless, then the Company shall contribute to the
amount paid or payable by the Indemnified Person as a result of such
loss, claim, damage, or liability in such proportion as is appropriate
to reflect not only the relative benefits received by the Company on
the one hand and the Indemnified Person on the other hand but also the
relative fault of the Company and the Indemnified Person, as well as
any relevant equitable considerations. The Company agrees to
reimburse the Indemnified Person within ten days after presentation of
any statement by the Indemnified Person of all reasonable expenses
(including without limitation of the generality of the foregoing, the
reasonable fees and expenses of attorneys selected by the Indemnified
Person) incurred in connection with any testimony the Indemnified
Person or its employees are required to give (in court, before a
regulatory agency, by deposition or otherwise) in any regulatory or
court proceeding (including depositions), whether or not the
Indemnified Person is a party, and which related directly or
indirectly to the proposed Placement. This indemnity shall be without
prejudice to any other rights of any other Indemnified Person.
12
<PAGE> 15
7.2 With respect to the foregoing Clause 7.1 of the
indemnification, the Company agrees that an Indemnified Person shall
not be deemed to have been grossly negligent for reasonably relying
upon any written untrue statement or alleged omission of a material
fact necessary to make the statements, in light of the circumstances
in which such statements were made, not misleading, contained in or
omitted from any information provided to the Indemnified Person by or
on behalf of the Company (including, without limitation of the
generality of the foregoing, any accountant or attorney employed or
retained by the Company). The indemnification provided in the
foregoing Clause 7.1 hereof shall extend upon the same terms and
conditions to each Person, if any, who may be deemed to control the
Indemnified Person and shall be applicable, to the extent set forth
herein, whether or not negligence of the person entitled to
indemnification is alleged or proven.
7.3 Each Indemnified Person shall, in the event any action (with
respect to which indemnity or reimbursement from the Company may be
sought by the Indemnified Person on account of agreements contained
herein) shall be brought or threatened against such Indemnified
Person, prompt notice will be given to the Company in writing of such
action, together with a copy of all papers served on, or received by,
the Indemnified Person in connection with such action provided that
failure to give such notice shall not affect the Indemnified Person's
right under these indemnification provisions, unless, and only to the
extent that, such failure results in the Company's forfeiture of
substantive rights or defenses. If such an event occurs the Company
shall assume the defense of such action, including the employment of
counsel and the payment of all expenses. The Indemnified Person shall
have the right to employ separate counsel in any such action and to
participate in the defense thereof, but the fees and expenses of such
counsel shall be at the expense of the Indemnified Person unless (a)
the employment thereof has been specifically authorized by the Company
in writing; (b) the Company has failed to assume the defense and
employ counsel; or (c) the named parties, or parties threatened to be
named, to any such action (including any impleaded parties or parties
threatened to be impleaded) include both the Indemnified Person and
the Company, and the Indemnified Person has been advised by such
counsel that there may be one or more legal defenses available to the
Indemnified Person which are different from or additional to those
available to the Company (in which cases the Indemnified Person shall
have the right to employ their own counsel and in such cases any
reasonable fees and expenses of such counsel shall be paid by the
Company).
7.4 The obligations under this Clause 7 shall survive any
termination of this Agreement, in whole or in part.
8. Fees and Expenses
8.1 The Company shall, on the Closing Date, pay to HSBC:
(i) for the account of the Managers a placement fee of six
percent (6%) of the aggregate principal amount of the Placed Notes,
which shall be allocated as between themselves, and any Managers of
the Issue as the Lead Managers see fit; and
(ii) for the account of EnCap a fee of one percent (1%) of the
aggregate principal amount of the Placed Notes.
13
<PAGE> 16
Such commissions and fees shall be deducted from the Issue Price.
8.2 The Company shall issue to the Lead Managers or their
respective designees on the Closing Date warrants (the "Lead Manager
Warrants") pursuant to Regulation S to purchase an aggregate number of
shares of Common Stock equal in number to eight percent (8%) of the
total number of Shares issuable upon conversion of the Notes less
fifty thousand (50,000) shares, at an initial exercise price equal to
$2.50, which shall be issued in the form of Lead Manager warrant
certificates (the "Lead Manager Warrant Certificates"), a draft of
which is in the agreed form. The Company shall issue to EnCap or its
designee on the Closing Date warrants (the "EnCap Warrants") to
purchase fifty thousand (50,000) shares of Common Stock, which shall
be issued in the form of a warrant certificate (the "EnCap Warrant
Certificate"), a draft of which is in the agreed form. Each Lead
Manager Warrant and EnCap Warrant shall entitle the holder to purchase
one share at an initial exercise price equal to the Conversion Price
of the Notes, and having a term of three (3) years, and may be
exercised as to all or any lesser number of shares of Common Stock
covered thereby, commencing six months after the date of issuance.
8.3 The Company is responsible for paying:
(a) the fees and expenses of the legal, accountancy and other
professional advisers instructed by the Company in connection with the
creation and issue of the Notes and the preparation of the Offering
Circular;
(b) the costs incurred in connection with the preparation and
execution of this Agreement and the Issue Documents;
(c) the cost of setting, proofing, printing and delivering the
Offering Circular, the Global Note and the Bearer Notes;
(d) the fees and expenses of the other parties to the Issue
Documents; and
(e) the cost of any advertising agreed between the Company, RPC
and HSBC.
8.4 In addition, the Company shall reimburse RPC and HSBC for all
legal fees and expenses and any travelling, communication, courier,
postage and other out-of-pocket expenses incurred by them in
connection with the management of the issue of the Notes and any
amount due to RPC or HSBC under this sub-clause may be deducted from
the Issue Price or paid direct by the Company to any third party to
whom such moneys are payable; provided, however, that such expenses
are estimated not to exceed U.S.$200,000 (including the cost of
printing described in Clause 8.3(c), two due diligence visits by the
Lead Managers, costs associated with production of a research report
on the Company to be issued following the Closing, roadshow expenses,
and post-closing advertisements, but excluding the fees and expenses
of the Company's legal counsel). Such reimbursement is not contingent
upon the successful completion of the Placement.
8.5 All payments in respect of the obligations of the Company
hereunder shall be made free and clear of and without withholding or
deduction for, any taxes, duties, assessments or governmental charges
of whatsoever nature imposed, levied, collected, withheld or assessed
by United States federal or state taxing authorities or any political
subdivision or any authority
14
<PAGE> 17
thereof or therein having power to tax, unless such withholding or
deduction is required by law. In that event, the Company shall pay
such additional amounts as will result in the receipt by the relevant
Person of such amounts as would have been received by it if no such
withholding or deduction had been required provided that such Person
is not a U.S. Person or entity.
8.6 The Company shall pay all stamp, registration and other taxes
and duties (including any interest and penalties thereon or in
connection therewith) which may be payable upon or in connection with
the creation, sale and issue of the Notes, and the execution of this
Agreement and the Issue Documents, and the Company shall indemnify
each Manager against any claim, demand, action, liability, damages,
cost, loss or expense (including, without limitation, legal fees)
which it may incur as a result or arising out of or in relation to any
failure to pay or delay in paying any of the same.
9. Closing
9.1 Subject to this Agreement not having been terminated pursuant
to Clause 10 and subject to Clause 9.3, the closing of the Issue shall
take place on the Closing Date, whereupon, subject to and in
accordance with the terms of this Agreement and the Trust Indenture:
(a) the Company shall deliver the Global Note (in respect of the
number of Bearer Notes), duly executed on behalf of the Company and
authenticated in accordance with the Trust Indenture, to a common
depositary designated for the purpose by Euroclear and Cedel for
credit on the Closing Date to the accounts of Euroclear and Cedel with
such common depositary; and
(b) against such delivery of the Global Note referred to in Clause
9.1 the Lead Managers shall upon receipt of moneys from each Placee
make payment of such net proceeds received from the issue of the Notes
(namely the Issue Price less the fees and expenses that are to be
deducted pursuant to Clause 8) to the Segregated Account by wire
transfer in U.S. dollars either for same day value or on the business
day immediately thereafter together with interest at an annual rate of
six and one-half percent (6.5%) to such account as the Company has
designated to the Lead Managers.
9.2 The Company and the Lead Managers may agree to postpone the
Closing Date to another date not later than August 8, 1996, whereupon
all references herein to the Closing Date shall be construed as being
to that later date.
9.3 The Lead Managers shall only be under obligation to proceed
with the foregoing if:
(a) the Lead Managers receive on or before the Closing Date:
(i) a legal opinion dated the Closing Date and addressed
to the Lead Managers and the Trustee from Haynes and
Boone, L.L.P in substantially the agreed form;
(ii) closing certificates dated the Closing Date,
addressed to the Lead Managers and signed by a duly
authorised signatory on behalf of the Company in
substantially the agreed form; and
15
<PAGE> 18
(iii) a closing auditors comfort letter dated the Closing
Date and addressed to the Managers from Arthur
Andersen L.L.P. in substantially the agreed form.
(b) the Issue Documents are executed on or before the Closing Date
by or on behalf of all parties thereto in substantially the agreed
form;
(c) there has, since the date of this Agreement, been no adverse
change, or any development reasonably likely to involve an adverse
change, in the condition (financial or otherwise) or general affairs
of the Company, or any Subsidiary that is material in the context of
the offer, sale or issue of the Notes; and
(d) the representations and warranties by the Company in this
Agreement are true and correct on the date of this Agreement in all
material respects and on each date on which they are deemed to be
repeated and would be true and correct if they were repeated on the
Closing Date with reference to the facts and circumstances then
subsisting.
10. Termination
10.1 Either of the Lead Managers may give a termination notice to
the Company at any time prior to the Closing if:
(a) any representation and warranty by the Company in this
Agreement is or proves to be untrue or incorrect in any material
respect (in the opinion of the Lead Managers) after consultation with
their legal counsel on the date of this Agreement or on any date on
which it is deemed to be repeated;
(b) the Company fails to perform any of its obligations hereunder
which in the opinion of the Lead Managers after consultation with
their legal counsel is material;
(c) any of the conditions in Clause 9.3 is not satisfied or waived
by the Lead Managers on the Closing Date; or
(d) since the date of this Agreement there has been, in the
opinion of either of the Lead Managers (after such consultation with
the Company as may be reasonably practicable in the circumstances),
such a change in national or international financial, political or
economic conditions, currency exchange rates or exchange controls on
the U.S. or international oil and gas markets as would in its view be
likely to prejudice materially the success of the offering and
distribution of the Notes or dealings in the Notes in the secondary
market.
10.2 The Company may give a termination notice to the Lead Managers
at any time prior to the delivery by the Company of the Global Note to
the common depositary on the Closing Date, if any of the Lead Managers
fails to perform any of its obligations hereunder or comply with any
of the terms hereof which in either case is material in the opinion of
the Company after consultation with its legal counsel.
10.3 Upon the giving of a termination notice under Clause 10.1 or
10.2 and subject to Clause 10.4:
16
<PAGE> 19
(a) the Company shall be discharged from performance of its
obligations under Clauses 3. 1 and 7. 1;
(b) the Managers shall be discharged from performance of their
respective obligations hereunder; and
(c) the provisions of Clauses 1, 7, 8.4, 13 and 14 shall continue
in full force and effect.
10.4 A discharge pursuant to Clause 10.2 shall not affect the other
obligations of the parties hereto and shall be without prejudice to
accrued liabilities.
11. Survival
The provisions of this Agreement shall continue in full force and
effect notwithstanding the completion of the arrangements set out
herein for the issue of the Notes and regardless of any investigation
by any party hereto.
12. Time
Any date or period specified herein may be postponed or extended by
mutual written agreement among the parties but as regards any date or
period originally fixed or so postponed or extended, time shall be of
the essence.
13. Notices
13.1 All notices and other communications hereunder shall be made
in writing and in English (by letter, telex or fax) and shall be sent
as follows:
(a) if to the Company, to it at:
5605 North MacArthur Boulevard
Suite 400
Irving, Texas 75038
Attention: Bruce N. Huff
Senior Vice President and Chief
Financial Officer
Fax: (214) 753 6926
With a copy
to: Larry E. Cummings
Vice President, Secretary and General Counsel
Fax: (214) 753 6963
17
<PAGE> 20
(b) if to RPC, to it at:
56 Green Street
London WlY 3RH
Fax: 0171 491 9081
Attention: David P. Quint
Managing Director
(c) if to HSBC, to it at:
Thames Exchange
10 Queen Street Place
London EC4R 1BL
Telex: 888866
Fax: 0171 929 1520
Attention: Simon Eagles
Equity Capital Markets
13.2 Every notice or other communication sent in accordance with
Clause 13.1 shall be effective as follows:
(a) if sent by letter or fax, upon receipt by the addressee; and
(b) if sent by telex, upon receipt by the sender of the
addressee's answerback at the end of transmission;
provided that any such notice or other communication which would
otherwise take effect after 4.00 p.m. on any particular day shall not
take effect until 10.00 a.m. on the immediately succeeding business
day in the place of the addressee.
14. Governing Law
This Agreement shall be governed by and construed in accordance with
the laws of the State of New York without regard to the conflict of
laws provisions thereof.
18
<PAGE> 21
IN WITNESS WHEREOF, the parties hereto have caused this Agreement to
be executed by their duly authorised representatives as of the day and year
first above written.
HARKEN ENERGY CORPORATION
By:
----------------------------
Name:
----------------------------
Title:
----------------------------
HSBC INVESTMENT BANK PLC
By:
----------------------------
Name:
----------------------------
Title:
----------------------------
RAUSCHER PIERCE & CLARK, INC.
By:
----------------------------
Name:
----------------------------
Title:
----------------------------
RAUSCHER PIERCE & CLARK LIMITED
By:
----------------------------
Name:
----------------------------
Title:
----------------------------
19
<PAGE> 22
BANCA DEL GOTTARDO
By:
----------------------------
Name:
----------------------------
Title:
----------------------------
INVESTMENTBANK AUSTRIA AG
By:
----------------------------
Name:
----------------------------
Title:
----------------------------
D.E. SHAW SECURITIES INTERNATIONAL
By:
----------------------------
Name:
----------------------------
Title:
----------------------------
J. HENRY SCHRODER BANK AG
By:
----------------------------
Name:
----------------------------
Title:
----------------------------
20
<PAGE> 23
JEFFERIES INTERNATIONAL LTD
By:
----------------------------
Name:
----------------------------
Title:
----------------------------
21
<PAGE> 24
The Schedule
Selling Restrictions
1. General
1.1 Each Manager acknowledges that no action has been or will be
taken in any jurisdiction by the Company that would permit a public
offering of the Notes, or possession or distribution of any offering
material in relation thereto, in any country or jurisdiction where
action for that purpose is required.
1.2 Each Manager undertakes to the Company that it will comply
with all applicable laws and regulations in each country or
jurisdiction in which it purchases, offers, sells or delivers Notes or
has in its possession or distributes such offering material, in all
cases at its own expense including, without limitation, in the United
Kingdom, the provisions of the Criminal Justice Act 1993 and the Money
Laundering Regulations (1993).
2. United States
2.1 The Notes have not been and will not be registered under the
Securities Act and may not be offered or sold within the United States
except pursuant to an exemption from the registration requirements of
the Securities Act. The Shares have not been registered under the
Securities Act and may not be offered or sold within the United States
unless registered under the Securities Act or in a transaction
pursuant to an exemption from the registration requirements of the
Securities Act.
2.2 The offers and sales of the Notes are to be effected pursuant
to the exemption from the registration requirements of the Securities
Act pursuant to Regulation S thereunder. The Company and the Managers
have established the following procedures in connection with the
offer, sale and resale of the Notes:
(a) Each offer and sale of the Notes shall be made only in an
"offshore transaction" (as defined in Regulation S) and to investors
who are not "U.S. persons" (as defined in Regulation S);
(b) no offer or sale of any of the Notes shall be made in the
United States or to, or for the account or benefit of, any "U.S.
person" (as defined in Regulation S);
(c) no "direct selling efforts" (as defined in Regulation S) in
respect of the Notes shall be made in or directed toward the United
States;
(d) "offering restrictions" (as defined in Regulation S) in
respect of the Notes shall be implemented;
(e) each purchaser of the Notes shall be furnished with the
Offering Circular prepared by the Company together with any amendments
thereof and supplements thereto as shall have
22
<PAGE> 25
been prepared by the Company, which described, among other things, (i)
the Notes, (ii) such summary financial and business information
concerning the Company as is considered appropriate; and (iii) the
restrictions on resale of the Notes;
(f) no Offering Circular (or any revision or amendment thereof or
supplement thereto) shall be delivered to any "U.S. person" (as
defined in Regulation S); and
(g) the Company agrees to furnish the Managers with such number of
copies of the Offering Circular and any revision or amendment thereof
or supplement thereto as the Managers may require in connection with
the offer and sale of the Notes; and
(h) each purchaser of the Notes shall be required to confirm (i)
by means of written certification, (ii) by acceptance of their
subscription allotment, or (iii) by other means of confirmation
acceptable to the Company and the Lead Managers that it is not a "U.S.
person" (as defined in Regulation S) and that such purchaser will not
offer or sell the Notes otherwise than in compliance with the
Securities Act and the rules and regulations of the Securities and
Exchange Commission thereunder.
2.3 Each Manager hereby represents, warrants and covenants with
the Company: that the Manager, its affiliates, and any person acting
on behalf of, or as agent of, any of the foregoing, shall, whether as
principal or agent:
(a) comply with the procedures set forth in Sections 2.2 and 3 hereof;
(b) offer and sell the Notes to the purchasers only in "offshore
transactions" (as defined in Regulation S);
(c) not engage with respect to the Notes in any "direct selling
efforts" (as defined in Regulation S) in or directed toward the United
States;
(d) comply with all "offering restrictions" (as defined in Regulation
S) in respect of the Notes;
(e) not deliver any Offering Circular or any revision or amendment
thereof or supplement thereto to any "U.S. person" (as defined in
Regulation S);
(f) not make any offers or sales of any of the Notes or any interest
therein in the United States or to, or for the account or benefit of,
any "U.S. person" (as defined in Regulation S);
(g) comply with all laws and regulations of those jurisdictions in
which the Notes are offered or sold which are applicable to the offer
and sale of the Notes; and
(h) on or prior to the Closing Date, send to each person who is acting
on behalf of the Manager a written confirmation or other notice to the
effect that such person is subject to the same restrictions on offers
and sales that apply to the Manager.
23
<PAGE> 26
2.4 The Company hereby represents, warrants and covenants with the
Managers that the Company its affiliates, and any person acting on
behalf of, or as agent of, any of the foregoing, shall, whether as
principal or agent:
(a) comply with the procedures set forth in Section 2.2 hereof;
(b) offer and sell the Notes to the purchasers only in "offshore
transactions" (as defined in Regulation S);
(c) not engage with respect to the Notes in any "direct selling
efforts" (as defined in Regulation S) in or directed toward the United
States;
(d) comply with all "offering restrictions" (as defined in Regulation
S) in respect of the Notes;
(e) not deliver any Offering Circular or any revision or amendment
thereof or supplement thereto to any "U.S. person" (as defined in
Regulation S);
(f) not make any offers or sales of any of the Notes or any interest
therein in the United States or to, or for the account or benefit of,
any "U.S. person" (as defined in Regulation S); and
(g) not make any sales of any of the Notes or any interest therein to
any person other than the purchasers; provided however, that insofar
as this representation and warranty involves any participating
broker-dealers in the offering, any affiliate of such broker-dealer or
any officer, director, employee or agent of such broker- dealer, to
the extent such broker-dealer is acting as Manager for the offering of
the Notes, such representation is made by the Company solely on the
basis of and in reliance upon the representations and warranties of
such broker-dealer.
3. United Kingdom
Each Manager represents, warrants and undertakes to the Company that:
(a) it has not offered or sold and prior to the expiry of the
period of six months from the Closing Date will not offer or sell any
Notes to persons in the United Kingdom, except to persons whose
ordinary activities involve them in acquiring, holding, managing or
disposing of investments (as principal or agent) for the purposes of
their businesses in circumstances which have not resulted in an offer
to the public within the meaning of the Public Offer of Securities
Regulations 1995;
(b) it has complied and will comply with all applicable provisions
of the Financial Services Act 1986 with respect to anything done by it
in relation to the Notes in, from or otherwise involving the United
Kingdom; and
(c) it has only issued or passed on and will only issue or pass on
to any person in the United Kingdom any document received by it in
connection with the issue of the Notes, if that person is of a kind
described in Article 11(3) of the Financial Services Act 1986
(Investment Advertisements) (Exemptions) Order 1995 or is a person to
whom such document may otherwise lawfully be issued or passed on.
24
<PAGE> 1
EXHIBIT 10.3
THIS NOTE HAS NOT BEEN AND WILL NOT BE REGISTERED UNDER THE UNITED STATES
SECURITIES ACT OF 1933, AS AMENDED (THE "SECURITIES ACT") AND MAY NOT BE
OFFERED, SOLD, PLEDGED, CONVERTED OR OTHERWISE DISPOSED OF IN THE UNITED STATES
OR TO, OR FOR THE ACCOUNT OR BENEFIT OF, ANY "U.S. PERSON" (AS DEFINED IN
REGULATION S UNDER THE SECURITIES ACT) UNLESS THE NOTE HAS BEEN REGISTERED
UNDER THE SECURITIES ACT AND ANY APPLICABLE STATE SECURITIES OR BLUE SKY LAWS
OR EXEMPTIONS FROM THE REGISTRATION REQUIREMENTS OF SUCH LAWS ARE AVAILABLE.
ANY UNITED STATES PERSON WHO HOLDS THIS OBLIGATION WILL BE SUBJECT TO
LIMITATIONS UNDER THE UNITED STATES INCOME TAX LAWS, INCLUDING THE LIMITATIONS
PROVIDED IN SECTIONS 165(J) AND 1287(A) OF THE UNITED STATES INTERNAL REVENUE
CODE OF 1986, AS AMENDED.
THIS OBLIGATION IS NOT A DEPOSIT AND IS NOT INSURED BY ANY AGENCY OF THE UNITED
STATES GOVERNMENT.
HARKEN ENERGY CORPORATION
6.5% SENIOR CONVERTIBLE NOTES DUE 2000
TEMPORARY GLOBAL NOTE
Harken Energy Corporation, a Delaware corporation (hereinafter, the
"Issuer," which term includes any successor corporation under the Trust
Indenture hereinafter referred to), for value received, hereby promises to pay
to bearer upon presentation and surrender of this Temporary Global Note (the
"Global Note") the principal sum of Forty Million United States Dollars (U.S.
$40,000,000) on July 30, 2000, and, to pay interest thereon from the date
hereof, semi-annually in arrears on January 30 and July 30 in each year,
commencing January 30, 1997, at the rate of 6.5% per annum, calculated on the
basis of a 360-day year consisting of twelve 30-day months, until the principal
hereof is paid or payment thereof is duly provided for.
This Global Note is one of a duly authorized issue of notes designated
as the 6.5% Senior Convertible Notes Due 2000 (the "Notes") of the Issuer
issued and to be issued under the Trust Indenture dated as of July 30, 1996
(herein called the "Trust Indenture"), between the Issuer and Marine Midland
Bank, as Trustee. It is a temporary security and is exchangeable in whole or
in part without charge for definitive Notes in bearer form, with interest
coupons attached, on or after the end of the Restricted Period, as defined in
the Trust Indenture, as promptly as practicable following presentation of
election by any of the beneficial owner or owners of this Global Note.
1
<PAGE> 2
Global Note
Page 2
Until exchanged in full for definitive Notes this Global Note shall in
all respects be ratably entitled to the same benefits under, and subject to the
same Terms and Conditions of, the Trust Indenture as definitive Notes
authenticated and delivered thereunder, except that the holder of this Global
Note shall not be entitled to receive payment of principal or interest hereon,
and this Note shall not be convertible into Shares of the Issuer's Common
Stock.
This Global Note, the definitive Notes and the Trust Indenture shall
be governed by and construed in accordance with the laws of the State of New
York.
All terms used in this Global Note which are defined in the Trust
Indenture shall have the respective meanings assigned to them in the Trust
Indenture.
Unless the certificate of authentication hereon has been executed by
the Trustee or on behalf of the Trustee by the Authenticating Agent by manual
signature of one of its authorized signatories, this Global Note shall not be
entitled to any benefit under the Trust Indenture and shall not be valid or
obligatory for any purpose.
IN WITNESS WHEREOF, the Issuer has caused this Global Note to be duly
executed in its corporate name by the manual or facsimile signatures of the
undersigned duly authorized officers of the Issuer.
Dated as of July 30, 1996
HARKEN ENERGY CORPORATION
By: /s/ Mikel D. Faulkner
-------------------------------------
Mikel D. Faulkner, Chairman and
Chief Executive Officer
[Corporate Seal]
ATTEST:
By: /s/ Larry E. Cummings
------------------------------
Larry E. Cummings, Secretary
2
<PAGE> 3
Global Note
Page 3
TRUSTEE'S CERTIFICATE OF AUTHENTICATION
This Global Note is one of the Notes referred to in the within
mentioned Trust Indenture.
MIDLAND BANK PLC, as Authenticating
Agent for Marine Midland
Bank, as Trustee
By: /s/ Julian M. Doull
-------------------------------------
Name: Julian M. Doull
-----------------------------------
Title: Supervisor
----------------------------------
3
<PAGE> 1
EXHIBIT 10.4
ASSOCIATION CONTRACT
ASSOCIATE : HARKEN DE COLOMBIA, LTD.
SECTOR : BOLIVAR
EFFECTIVE DATE :
------------------------
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. 2131 of April 16,
1996, and, on the other hand, HARKEN DE COLOMBIA, LTD., a company organized
under the laws 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 Deed No. 406 of February 19, 1993, authorized in
the Eleventh Notarial Circuit of Santa Fe de Bogota, represented by GONZALO
VELASCO, of legal age, identified by citizenship card No. 17.034.989, issued in
Santa Fe de Bogota, domiciled in Santa Fe de Bogota, who declares that in his
capacity as Legal Representative, he acts on behalf of the company HARKEN DE
COLOMBIA, LTD. MIKEL D. FAULKNER, of legal age, a North American citizen,
identified by passport no. HG930148, who declares that in his capacity as the
President of the Board of Directors, he acts on behalf of the company HARKEN
ENERGY CORPORATION, also enters into this contract in acknowledgment that it
assumes and recognizes severally the obligations that its Branch in Colombia
acquires by signing this contract. 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
<PAGE> 2
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
The Contracted Area is called "BOLIVAR", and consists of an area of one hundred
and three thousand, three hundred and fourteen (103.314) hectares and eight
thousand seven hundred and thirty eight (8,738) square meters and is located
within the municipal jurisdictions of San Martin, Rio de Oro, Aguachica and
Gamarra in the department of Cesar, the municipal jurisdiction of Morales in
the department of Bolivar and the municipal jurisdiction of Puerto Wilches in
the department of Santander.
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
"VOLADOR-689" of the Instituto Geografico Agustin Codazzi, the plane Gauss
coordinates of which, with origin in Bogota, are; N-1'412.969.89 meters,
E-1'047,110,80 meters and the geographic coordinates of which are: Latitude 8
degrees 19' 59".018 North of the Equator and Longitude 73 degrees 39' 11".693
West of Greenwich. From this reference point it continues in a direction S 39
degrees 7' 45".742 W for a distance of 12,852.38 meters to the starting point
"A", the Gauss coordinates of which are: N-1'403,000.00 meters, E-1'039,000.00
meters. From this point "A" the boundary line continues N 8 degrees 11' 16".895
W for a distance of 18.185.38 meters until arriving at point "B", the
coordinates of which are N-1'421.000.00 meters, E-1'036,410,00 meters. From
this reference point B, it continues in a direction N 1 degree 36' 13".906 E
for a distance of 4,001.57 meters to point "C", the coordinates of which are:
N-1'425.000.00 meters, E-1'036,522.00 meters. From this point "C" it continues
in an easterly direction for a distance of 15,478.00 meters until point "D",
the coordinates of which are: N-1'425,000.00 meters, E-1'052,000.00 meters.
From point "D" it follows in a direction S 21 degrees 03' 07".469 E for
26,787.98 meters to point "E", the coordinates of which are: N-1'400,000.00
meters, E-1'061,622.68 meters. From this point "E" it follows in a westerly
direction for 7.500.00 meters to arrive at point "F", the coordinates of which
are: N-1'400.000.00 meters, E-1'054,122.68 meters. From this point "F" it
follows in a southerly direction for 2.667.90 meters to point "G", whose
coordinates are: N-1'397.332.10 meters, E-1'054.122.68 meters. From point "G"
it continues in a westerly direction for 10.000.00 meters to arrive at point
"H" whose coordinates are : N-1'397.332.10 meters, E-1'044.122.68 meters. From
point "H" it continues in a southerly direction for 5.000.00 meters to arrive
at point "I", the coordinates of which are: N-1'392.332.10 meters,
E-1'044.122.68 meters. From Point "I" it follows in an easterly direction for a
distance of 10.000.00
<PAGE> 3
meters to arrive at point "J" the coordinates of which are: N-1'392.332.10
meters, E-1'054.122.68 meters. From point "J" it continues in a direction S 16
degrees 1' 54".451 E for a distance of 1.884.74 meters to arrive at point "K",
the coordinates of which are: N-1'390.520.66 meters, E-1'054.643.19 meters.
From point "K" it continues in a westerly direction for 3.273.60 meters to
point "L", the coordinates of which are: N-1'390.520.66 meters, E-1'051.369.59
meters. From this point "L" it continues in direction S 11 degrees 31' 54".402
E for a distance of 6.655.00 meters, to arrive at point "M", the coordinates of
which are: N-1'384.000.00 E-1'052.700.00 meters. From this point "M" it
continues in a direction S 51 degrees 42' 35".412 W for a distance of 484.15
meters to arrive at point "N", the coordinates of which are: N-1'383.700.00
meters, E-1'052.320.00 meters. From Point "N" it follows in a southerly
direction for a distance of 8.000.00 meters to arrive at point "O" the
coordinates of which are: N-1'375.700.00 meters, E-1'052.320.00 meters. From
point "O" it continues in a westerly direction for a distance of 23.120.00
meters to arrive at point "P" the coordinates of which are: N-1'375.700.00
meters, E-1'029.200.00 meters. From Point "P" it follows in an northerly
direction for a distance of 27.200.00 meters to arrive at point "Q" the
coordinates of which are: N-1'402.900.00 meters, E-1'029.200.00 meters. From
point "Q" it continues in a direction S 89 degrees 24' 55".330 E for a distance
of 9800.51 meters to arrive at point "A", the starting and ending point of the
boundary. The extension of the area described is 103.521 Hectares, 2.428 square
meters, from which the area of the Association Contract "Lebrija" with an area
of 206 Hectares, 3.690 square meters, is excluded. 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.- Should any part of the Contracted Area
extend to areas which are or have been reserved and declared as being included
within the National Park system, pursuant to that agreed in Clause 30 (section
30.4) of this contract, THE ASSOCIATE must comply with the conditions imposed
by the competent authorities, without it being considered that this Contract
has been modified and without any claim against ECOPETROL.
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 acquisition of the seismic, the drilling of the Stratigraphic
Wells and the Wildcat Wells, 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.
<PAGE> 4
4.5 Joint Account: The records that will be kept through accounting
books, 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 paraffin 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.
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.
<PAGE> 5
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 operations 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 must carry out the evaluation and preparation of maps
based on the existing information, Engineering Studies on the "Buturama" and
"Totumal" fields in order to analyze the mechanisms of production and the
improvement of recovery in the formations in the area, the reprocessing of at
least 350 kilometers of seismic and the design of a seismic program
corresponding
<PAGE> 6
to the second contractual year. During the second year, THE ASSOCIATE will
carry out the acquisition of a seismic program of a minimum length of one
hundred (100) kilometers and the reprocessing and integration of the seismic
acquired for its interpretation. 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.
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.
PARAGRAPH During the first year counted from the effective date of this
contract, THE ASSOCIATE will carry out the environmental studies required for
the acquisition of the seismic study corresponding to the second contractual
year and to proceed with the respective Environmental Licence. During the
second year, THE ASSOCIATE will carry out the environmental studies required
for the drilling of the well corresponding to the third contractual year and
proceed with the respective Environmental Licence.
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
<PAGE> 7
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 any 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
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 area 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.
<PAGE> 8
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) are complied with. 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 well
carried out prior to the date on which ECOPETROL makes an announcement in
respect of the existence of each Commercial Field.
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
<PAGE> 9
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 cost in excess of TWO
MILLION DOLLARS (US$2.000.000.00), nor may it require for its execution a term
of more than one (1) year, in which case, the Exploration Period for the
Contracted Area 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 not
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 barrel 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,
<PAGE> 10
ECOPETROL shall begin to participate in the economic results of the wells
developed exclusively for the account of THE ASSOCIATE.
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.
9.9 If after acceptance of the commercial viability of one or more
fields, THE ASSOCIATE continues to comply with the exploratory obligations
agreed under Clause 5, it may simultaneously carry out the exploitation of the
said fields before the termination of the Exploration Period as defined in
Clause 4, subsection 4.19. However only as from the date of expiry of the
latter, will the Period of Exploitation be counted.
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 are less than six and a half (6-1/2) left
<PAGE> 11
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 (30) 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
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.
<PAGE> 12
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 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).
<PAGE> 13
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 Area, 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
<PAGE> 14
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
<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.
<PAGE> 15
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 Petroleum. 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 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).
<PAGE> 16
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 canceled.
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
<PAGE> 17
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
<PAGE> 18
immediate plans shall be reviewed. Annually, at the ordinary meeting held in
July, the Operator shall present to the Executive Committee the annual
operating 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
<PAGE> 19
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.
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
<PAGE> 20
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, without 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
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.
<PAGE> 21
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.
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
<PAGE> 22
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 breaching 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 breaching Party and the other Party, as a non-breaching
Party. If the non-breaching Party had made the contribution corresponding to
the breaching 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 breaching Party, in the Contracted Area (excluding the
percentage corresponding to the royalty), up to a quantity of production which
permits the non-breaching Party a net earning for the sales made equal to the
amount not paid by the breaching 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-breaching 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 breaching 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:
<TABLE>
<CAPTION>
AMOUNT OF INVESTMENTS
AND EXPENDITURES VALUES OF THE CONSTANTS
--------------------------------- ----------------------------------------------
"X" (US$) "a" (US$) m (frac) "b" (US$)
--------------------------------- ---------- -------- -----------
<S> <C> <C> <C> <C> <C>
1. 0 25,000,000 0 0.10 0
2. 25,000,001 50,000,000 2,500,000 0.08 25,000,000
3. 50,000,001 100,000,000 4,500,000 0.07 50,000,000
4. 100,000,001 200,000,000 8,000,000 0.06 100,000,000
5. 200,000,001 300,000,000 14,000,000 0.04 200,000,000
6. 300,000,001 400,000,000 18,000,000 0.02 300,000,000
7. 400,000,001 and above 20,000,000 0.01 400,000,000
</TABLE>
<PAGE> 23
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 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, on its prior acceptance.
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
<PAGE> 24
extended, the total term shall not be considered as extended in any case for
more than twenty-eight (28) years.
If, once the commercial viability 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.
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
<PAGE> 25
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.
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
<PAGE> 26
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 document 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 approval of the Minister of Mines and Energy and
the President of Empresa Colombiana de Petroleos,
<PAGE> 27
ECOPETROL, when necessary, shall result in the application of the provisions of
Clause 25 of the association contract.
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
<PAGE> 28
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
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
<PAGE> 29
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 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
<PAGE> 30
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$50.000
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 the six (6)
year
<PAGE> 31
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.
<PAGE> 32
CLAUSE 39 - DELEGATION AND ADMINISTRATION
The PRESIDENT OF THE EMPRESA COLOMBIANA DE PETROLEOS - ECOPETROL- delegates to
the Vice President 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.
In witness whereof, this contract is signed in Santa Fe de Bogota, before
witnesses, by the Legal Representative of HARKEN DE COLOMBIA, LTD. on the
__________ (__) day of _________, nineteen hundred and ninety-six (1996) and by
the Representative of ECOPETROL on the __________ (__) day of _________,
nineteen hundred and ninety-six (1996).
HARKEN DE COLOMBIA, LTD.
GONZALO VELASCO
Legal Representative
HARKEN ENERGY CORPORATION
MIKEL D. FAULKNER
President of the Board of Directors
In Houston, Date: ____________
EMPRESA COLOMBIANA DE PETROLEOS
ECOPETROL
LUIS BERNARDO FLOREZ ENCISO
President
Witnesses
<PAGE> 1
EXHIBIT 10.5
EXCHANGE AGREEMENT
This EXCHANGE AGREEMENT (this "Exchange Agreement") is made and
entered into this 11th day of July, 1996, but effective as of the 30th day of
June, 1996, by and among Momentum Operating Co., Inc. ("Momentum"), Harken
Energy Corporation ("HEC") and Harken Exploration Company ("HEX").
RECITALS:
A. On December 15, 1995, Momentum, HEC and HEX entered into that
certain Purchase and Sale Agreement (the "Original Agreement"), pursuant to
which, in exchange for the consideration described in the Original Agreement,
Momentum sold the Properties (as defined in the Original Agreement) to HEX.
B. On December 20, 1995, upon the closing of the transactions
contemplated by the Original Agreement and among other actions:
(1) HEX issued to Momentum a promissory note dated
December 20, 1995 in the original principal amount of $13,000,000 (the "Note");
(2) HEC and Momentum entered into that certain
Registration Rights Agreement (the "Original Registration Rights Agreement");
and
(3) HEX executed that certain Deed of Trust, Security
Agreement, Assignment of Production and Financing Statement in favor of John
Huffman, Trustee, for the benefit of Momentum Operating Co., Inc. (the "Deed of
Trust").
C. Momentum wishes to exchange the Note for shares of common
stock, $.01 par value per share (the "Common Stock") of HEC and certain
obligations of HEX and HEC is willing to issue shares of its Common Stock in
exchange for the Note and HEX is willing to so obligate itself, and Momentum,
HEX and HEC desire to amend certain terms of, the Original Registration Rights
Agreement and the Deed of Trust, all on the terms and conditions contained
herein.
NOW, THEREFORE, in consideration of the mutual premises and the mutual
covenants herein, the parties hereto agree as follows:
<PAGE> 2
AGREEMENT
1. EXCHANGE.
(a) Subject to the terms of this Exchange Agreement, the
parties hereto agree to exchange the Note for the shares of Common Stock
described in paragraph (b) below and the obligations of HEX described in
Section 3 below. HEC will use its reasonable best efforts to deliver the
shares of Common Stock described in paragraph (b)(i) below to Momentum within
15 business days following the execution of this Exchange Agreement. HEC shall
deliver additional shares of Common Stock pursuant to the terms of the letter
agreement described in paragraph (b)(viii) below. The date upon which the
shares of Common Stock are delivered to Momentum shall be referred to as the
"Issuance Date."
(b) Upon the Issuance Date, the following actions shall
take place, each of which shall be deemed to occur simultaneously and each of
which shall be a condition precedent to each of the others:
(i) HEC shall deliver to Momentum a stock
certificate registered in the name of Momentum and representing 4,965,000
shares of Common Stock;
(ii) Momentum shall deliver the Note to HEX,
marked "paid in full, except as provided in that certain Exchange Agreement
dated July 11, 1996, among Seller, Buyer and the Company";
(iii) HEC and Momentum shall execute and deliver
the Registration Rights Agreement in the form attached hereto as Exhibit A.
Momentum agrees to waive any and all registration rights granted to Momentum
pursuant to the Original Registration Rights Agreement insofar as the Original
Registration Rights Agreement might otherwise apply to the registration of the
shares of Common Stock delivered pursuant to this Exchange Agreement;
(iv) HEC and Momentum shall execute and deliver
the Supplemental Deed of Trust, Security Agreement, Assignment of Production
and Financing Statement, in the form attached hereto as Exhibit B;
(v) HEC shall deliver to Momentum a release of
the HEC Mortgage (as defined in the Original Agreement) executed by HEC, HEX
and Larry E. Cummings, Trustee;
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(vi) HEC and HEX shall deliver to Momentum the
opinions of counsel in the forms attached hereto as Exhibit C.1 and Exhibit
C.2;
(vii) HEC and HEX shall deliver to Momentum the
Officer's Certificates in the forms attached hereto as Exhibit D.1 and Exhibit
D.2; and
(viii) HEX, HEC and Momentum will enter into the
letter agreement attached hereto as Exhibit E.
2. EFFECT OF EXCHANGE. Except for the contingent payment
described in Section 3 below, tender of full performance by HEC and HEX of
their obligations contained in Section 1(b) above shall constitute full payment
of all amounts due under the Note. In addition any and all obligations of
Momentum, HEX or HEC pursuant to Section 7.1 of the Original Agreement shall
also be deemed to have been satisfied.
3. CONTINGENT PAYMENT.
(a) Momentum shall calculate the gross proceeds, before
deducting any commissions and other costs of sale, received by Momentum on or
before the Contingent Payment Date which are attributable to the sale of the
shares of Common Stock issued to Momentum pursuant to this Exchange Agreement
("the Proceeds"). The Contingent Payment Date shall be the earlier to occur of
(i) the expiration of 270 days following the date the registration statement
filed by HEC pursuant to Momentum's second Demand Registration (as defined in
the Registration Rights Agreement) is declared effective by the Securities and
Exchange Commission, or (ii) the date on which Momentum has sold all of the
shares of Common Stock issued to Momentum pursuant to this Exchange Agreement.
If the Contingent Payment Date falls on a day which is not a trading day on the
American Stock Exchange, the Contingent Payment Date shall be deemed to be the
next trading day. If Momentum has not sold all of the shares of the Common
Stock as of the close of trading on the American Stock Exchange on the
Contingent Payment Date, the Proceeds shall be deemed to include an amount
equal to the product of the number of shares of Common Stock held by Momentum
at the close of trading on the Contingent Payment Date multiplied by the
arithmetic mean of the daily closing sales prices of the Common Stock on the
American Stock Exchange, as reported in the Wall Street Journal, for the sixty
(60) trading days that Momentum was entitled to sell shares of Common Stock
pursuant to the Registration Rights Agreement immediately preceding the
Contingent Payment Date. If the Proceeds are less than U.S. $8,500,000, HEX
shall pay to Momentum an amount in cash equal to the difference between U.S.
$8,500,000 and the Proceeds. HEX shall make such payment within five business
days after receipt of Momentum's notice that the additional payment is due,
accompanied by documentation supporting Momentum's calculation of the Proceeds.
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(b) If there is any dispute concerning the payment
required by paragraph (a) above, HEX shall pay to Momentum the undisputed
portion and shall submit the disputed portion to binding arbitration. Momentum
and HEX shall each select a mutually acceptable person as an arbitrator and the
two arbitrators so chosen shall mutually select a third arbitrator. The group
of three arbitrators shall determine the amount of the payment required by
paragraph (a) above. If the two arbitrators selected by Momentum and HEX
cannot agree on a third arbitrator, or successor arbitrator if necessary, the
parties shall request the American Arbitration Association to appoint the third
arbitrator or successor arbitrator. All arbitration hearings shall be held in
Abilene, Texas and shall begin within thirty days after delivery of written
notice from one party to the other party and the arbitrators stating the
grounds for submitting an issue to arbitration. The arbitrators shall
arbitrate the dispute in accordance with the terms of this Exchange Agreement,
the Texas General Arbitration Act, and the Rules of the American Arbitration
Association to the extent such rules are not in conflict with the terms of this
Exchange Agreement or the Act. The arbitrators shall issue a written decision
which shall be final and binding on Momentum and HEX and may be enforced in any
court having jurisdiction. Momentum and HEX shall bear their own legal fees
and other costs incurred in connection with presenting their respective cases.
The costs and expenses of the arbitrators shall be shared equally by Momentum
and HEX. In fulfilling their duties, the arbitrators shall be bound by the
terms of this Exchange Agreement and may consider other matters which, in the
opinion of the arbitrators, are necessary or helpful to make a proper decision.
4.1 MOMENTUM'S REPRESENTATIONS. Momentum represents to HEC and
HEX that as of the date hereof and as of the Issuance Date:
(a) Momentum is a corporation duly organized, validly
existing and in good standing under the laws of the State of Texas. Momentum
is qualified to do business in the State of Texas.
(b) Momentum has the power and authority to carry on its
business as presently conducted, to enter into this Exchange Agreement and to
perform its obligations under this Exchange Agreement.
(c) Execution and delivery of this Exchange Agreement,
consummation of the transactions contemplated by this Exchange Agreement, and
performance of all obligations under this Exchange Agreement have been
authorized by all necessary action, corporate and otherwise, on the part of
Momentum. Execution and delivery of this Exchange Agreement does not, and the
consummation of the transactions contemplated by this Exchange Agreement will
not, violate or be in conflict with any agreement, instrument, judgment, order,
decree, law, rule or regulation by which Momentum is bound.
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(d) Subject to laws and equitable principles affecting
the rights of creditors generally, this Exchange Agreement is a binding
obligation of Momentum enforceable according to its terms.
(e) No suit, claim, demand or investigation is pending
or, to Momentum's knowledge, is threatened, that would effect Momentum's
interest in the Note. There are no bankruptcy or reorganization proceedings
pending or, to Momentum's knowledge, threatened against Momentum. As used in
this Exchange Agreement, the term "knowledge" means actual awareness of
relevant facts and actual awareness of facts which would cause a person
exercising reasonable prudence to discover relevant facts.
(f) With respect to the shares of Common Stock which
Momentum may receive pursuant to Section 1 hereof:
(1) Momentum is acquiring the Common Stock for
its own account, and for the account of certain Momentum affiliates, for
investment only and not with a view toward the public sale or distribution of
the Common Stock in contravention of any laws, rules or regulations;
(2) Momentum is an "Accredited Investor" as that
term is defined in Rule 501 of Regulation D by reason of Rule 501(a)(3) of the
Securities Act of 1933, as amended (the "1933 Act");
(3) Momentum has engaged its own advisors for
advice and counsel concerning Momentum's acquisition of the Common Stock, so
that it is capable of evaluating the merits and risks of its investment in the
Company and has the capability to protect its own interests;
(4) all subsequent offers and sales of the Common
Stock by Momentum shall be made pursuant to registration of the Common Stock
under the 1933 Act or pursuant to a valid exemption from registration;
(5) Momentum understands that the Common Stock is
being offered and sold to it in reliance on specific exemptions from the
registration requirements of United States federal and state securities laws
and that HEC and HEX are relying upon the truth and accuracy of and Momentum's
compliance with the representations, warranties, agreements, acknowledgments
and understandings of the Momentum in this Section 4.1(f) in order to determine
the availability of such exemptions and the eligibility of Momentum to acquire
the Common Stock;
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(6) Momentum and/or its advisors have been
furnished with all materials relating to the business, management, finances and
operations of the Company and materials relating to the offer and sale of the
Common Stock which have been requested by Momentum. Momentum and its advisors
have been afforded the opportunity to ask questions of the officers of the
Company and have received satisfactory answers to any such inquiries. Without
limiting the generality of the foregoing, Momentum has had the opportunity to
obtain and to review the Company's (i) Annual Report on Form 10-K/A for the
year ended December 31, 1995, (ii) Quarterly Report on Form 10-Q for the
quarter ended March 31, 1996, and (iii) Proxy Statement for the Annual Meeting
of Stockholders of Harken held June 11, 1996;
(7) Momentum understands that no United States
federal or state agency or any other government or governmental agency has
passed on or made any recommendation or endorsement of the Common Stock; and
(8) Momentum acknowledges that the Common Stock
must be held indefinitely unless subsequently registered under the 1933 Act or
unless an exemption from such registration is available. It is aware of the
provisions of Rule 144 promulgated under the 1933 Act which permit limited
resale of shares purchased in a private placement subject to the satisfaction
of certain conditions, including, among other things, the existence of a public
market for the shares, the availability of certain current public information
about the Company, the resale occurring not less than two years after a party
has purchased and paid for the security to be sold, the sale being effected
through a "brokers transaction" or in transactions directly with a "market
maker" and the number of shares being sold during any three-month period not
exceeding specified limitations.
4.2 HEX'S REPRESENTATIONS. HEX represents to Momentum that, as
of the date hereof, and as of the Issuance Date:
(a) HEX is a corporation duly organized, validly existing
and in good standing under the laws of the State of Delaware. HEX is qualified
to do business in the State of Texas. HEX is qualified under all applicable
laws, rules and regulations to own and operate its properties.
(b) HEX has the power and authority to carry on its
business as presently conducted, to enter into this Exchange Agreement and to
perform its obligations under this Exchange Agreement.
(c) Execution and delivery of this Exchange Agreement,
consummation of the transactions contemplated by this Exchange Agreement, and
performance of all
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obligations under this Exchange Agreement have been authorized by all necessary
action, corporate and otherwise, on the part of HEX. Execution and delivery of
this Exchange Agreement does not, and the consummation of the transactions
contemplated by this Exchange Agreement will not, violate or be in conflict
with any agreement, instrument, judgment, order, decree, law, rule or
regulation by which HEX is bound.
(d) Subject to laws and equitable principles generally
affecting the rights of creditors, this Exchange Agreement is a binding
obligation of HEX enforceable according to its terms.
(e) None of HEX's statements or representations in this
Exchange Agreement contains any untrue statement of any material fact or omits
to state any material fact necessary to be stated in order to make the
statements or representations made not misleading.
(f) As of the date of this Exchange Agreement, HEX in not
in material breach of, or default under, the Original Agreement or any other
agreement or instrument described in the Original Agreement or executed in
connection with the Original Agreement.
4.3 HEC'S REPRESENTATIONS. HEC represents to Momentum that, as of
the date hereof and as of the Issuance Date:
(a) HEC is a corporation duly organized, validly existing
and in good standing under the laws of the State of Delaware. HEC is qualified
to do business in the State of Texas. HEC is qualified under all applicable
laws, rules and regulations to own and operate its properties.
(b) HEC has the power and authority to carry on its
business as presently conducted, to enter into this Exchange Agreement and to
perform its obligations under this Exchange Agreement.
(c) Execution and delivery of this Exchange Agreement,
consummation of the transactions contemplated by this Exchange Agreement, and
performance of all of its obligations under this Exchange Agreement have been
authorized by all necessary action, corporate and otherwise, on the part of
HEC. Execution and delivery of this Exchange Agreement does not, and the
consummation of the transactions contemplated for it by this Exchange Agreement
will not, violate or be in conflict with any agreement, instrument, judgment,
order, decree, law or regulation by which HEC is bound.
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(d) Subject to laws and equitable principles generally
affecting the rights of creditors, this Exchange Agreement is a binding
obligation of HEC enforceable according to its terms.
(e) All shares of capital stock of HEC have been duly and
validly authorized and issued and are fully paid and nonassessable. The Common
Stock when issued, sold and delivered in accordance with the terms of this
Exchange Agreement, will be duly and validly issued, fully paid and
nonassessable. As of the date hereof, the authorized capital stock of HEC is
125,000,000 shares of common stock, par value $.01, of which 84,712,471 shares
are issued and outstanding and 10,000,000 shares of Preferred Stock, par value
$1.00, of which no shares are issued or outstanding. Except as disclosed in
Schedule 4.3(e), (i) there are no outstanding subscriptions, warrants, options,
calls or commitments of any character relating to or entitling any person to
purchase or otherwise acquire from HEC any capital stock of HEC, (ii) there are
no obligations or securities convertible into or exchangeable for any shares of
capital stock of HEC or any commitments of any character relating to or
entitling any person to purchase or otherwise acquire any such obligations or
securities, and (iii) there are no preemptive or similar rights to subscribe
for or to purchase any capital stock of HEC.
(f) HEC's (i) unaudited consolidated balance sheet as at
March 31, 1996 and the related consolidated statement of income, cash flows and
shareholders' equity for the three months then ended and (ii) audited
consolidated balance sheet as at December 31, 1995 and the related audited
consolidated statement of income, cash flows and shareholders' equity for the
fiscal year then ended (including in all cases the notes thereto)
(collectively, the "Financial Statements") have been prepared in accordance
with generally accepted accounting principles consistently applied except as
noted therein and except, in the case of unaudited interim financial
statements, for normal year-end adjustments, and fairly present the
consolidated financial position of HEC and its consolidated subsidiaries as of
the respective dates set forth therein and the results of operations and cash
flows for HEC and its consolidated subsidiaries for the respective fiscal
periods set forth therein.
(g) Neither HEC nor any of its subsidiaries has sustained
since the date of the March 31, 1996 Financial Statements any adverse change in
its businesses, financial condition or results of operations that would be
material to HEC and its subsidiaries on a consolidated basis.
(h) Assuming the accuracy of the representations of
Momentum in Section 4.1(f) and except for the approval of the American Stock
Exchange with respect to the issuance of the shares of Common Stock required to
be issued pursuant to this Exchange Agreement, no consent, approval,
authorization, order, registration or qualification of or with
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<PAGE> 9
any court or governmental agency or body is required by or on behalf of HEC
which has not been obtained as of the date hereof, for the valid execution and
delivery of, or for the performance by HEC of its obligations under, this
Exchange Agreement.
(i) There are no legal or governmental proceedings
pending to which HEC or any of its subsidiaries is a party or to which any of
its or their properties is subject, or which challenge the validity or legality
of HEC's obligations under this Exchange Agreement or the transactions
contemplated thereby which, individually or in the aggregate, would be
reasonably expected to have a material adverse effect on the business of HEC
and any of its subsidiaries taken as a whole; and, to HEC's knowledge, no such
proceedings are threatened by any governmental authority or by any other
person.
(j) Each of HEC and its subsidiaries is in material
compliance with all statutes, laws, ordinances, governmental rules or
regulations or any judgment, order or decree to which it is subject and
possesses such certificates, authorizations and permits issued by the
appropriate regulatory agencies or bodies necessary to conduct the business now
operated by it, except for such violations which, and except for such
certificates, authorizations and permits which if not possessed, would not be
reasonably expected to have a material adverse effect on the business of HEC
and its subsidiaries taken as a whole; and neither HEC nor any such subsidiary
has received any notice of proceedings related to any such violation or the
revocation or modification of any of the same which, individually or in the
aggregate, if the subject of any unfavorable decision, ruling or finding, would
be reasonably expected to have a material adverse effect on the business of HEC
and its subsidiaries taken as a whole.
(k) Except (i) as and to the extent disclosed or reserved
against in the Financial Statements, or (ii) for liabilities and obligations
incurred after March 31, 1996, that would not be reasonably expected to have a
material adverse effect on the business of HEC and any of its subsidiaries
taken as a whole, neither HEC nor any of its subsidiaries has any liabilities
or obligations of any nature, whether due or to become due, including, without
limitation, liabilities or obligations on account of taxes or other
governmental charges or penalties, interest or funds thereon or in respect
thereof and HEC does not know of any basis for any assertion against HEC or any
of its subsidiaries of any debt, liability or obligation in any amount not
reflected or reserved against in the Financial Statements which would be
required to be set forth therein in accordance with generally accepted
accounting principles.
(l) Except as disclosed in HEC's Annual Report on Form
10-K/A for the year ended December 31, 1995 or HEC's Quarterly Report on Form
10-Q for the quarter ended March 31, 1996, (i) neither HEC nor any of its
subsidiaries has received any written complaint, or notice of violation,
alleged violation, investigation, advisory action, potential liability or
potential responsibility, regarding environmental protection matters or permit
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compliance with regard to any of its or their properties, nor does HEC have
knowledge that any governmental authority or third party is contemplating
delivering to HEC or any of its subsidiaries any such notice, (ii) there are no
governmental, administrative or judicial actions or proceedings pending under
any Environmental Laws to which HEC or any of its subsidiaries is or, to HEC's
knowledge, is likely to be named as a party with respect to any of its or their
properties, nor are there any consent decrees, other decrees, consent orders,
administrative orders or other orders, or other administrative or judicial
requirements, outstanding under any Environmental Law with respect to any of
such properties, and (iii) neither HEC nor any of its subsidiaries is an owner
or operator of any facility or operation which is in violation of any
Environmental Law or at which there has been or exists a release or threatened
release of Hazardous Materials to the environment. The terms "Environmental
Laws" and "Hazardous Materials" shall have the meanings given to such terms in
the Original Agreement.
(m) HEC and each of its subsidiaries has caused to be
duly filed in a timely manner, including any applicable extensions, with the
appropriate governmental authorities all returns, statements and reports with
respect to any taxes that are required to be filed by or with respect to it.
Except for tax liens securing the payment of taxes not yet due and payable,
there are no tax liens upon any assets of HEC or any of its subsidiaries and no
claim for assessment or collection of any material taxes has been asserted
against HEC or any of its subsidiaries, except for claims being challenged by
HEC in good faith which are listed in Schedule 4.3(m) to this Agreement.
(n) Each Material Contract is valid and binding on the
parties thereto and in full force and effect and neither HEC nor any of its
subsidiaries is in breach of a Material Contract, which breach would reasonably
be expected to have a material adverse effect on HEC or any of its
subsidiaries. To HEC's knowledge, no other party to any Material Contract is
in material breach thereof. For the purposes of this Section, Material
Contract shall mean: (i) all contracts requiring payment, or being reasonably
likely to result in payment, by any party thereto of more than $50,000.00
annually; (ii) all material contracts with any governmental authority; (iii)
all contracts not made in the ordinary course of business, which are material
to HEC or any of its subsidiaries; and (iv) all contracts relating to
indebtedness of HEC or any of its subsidiaries of a principal amount in excess
of $250,000.00.
(o) None of HEC's statements or representations in this
Exchange Agreement contains any untrue statement of any material fact or omits
to state any material fact necessary to be stated in order to make the
statements or representations made not misleading.
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(p) HEC is the legal owner and holder of the HEC Mortgage
and the Note (as defined in the HEC Mortgage) and of all rights arising under
the HEC Mortgage or such Note.
(q) As of the date of this Exchange Agreement, HEC in not
in material breach of, or default under, the Original Agreement or any other
agreement or instrument described in the Original Agreement or executed in
connection with the Original Agreement.
5. TERMINATION.
(a) This Exchange Agreement and the transactions
contemplated by his Exchange Agreement may be terminated in the following
situations:
(i) by Momentum if (x) the conditions to its
performance described in Section 1(b) are not satisfied within 15 business days
from the execution of this Exchange Agreement, or (y) any of HEX's or HEC's
representations are untrue in any material respect; or
(ii) by HEX or HEC if (x) the conditions to its
performance described in Section 1(b) are not satisfied within 15 business days
from the execution of this Exchange Agreement, or (y) any of Momentum's
representations are untrue in any material respect.
(b) Except as provided in this Section 5(b), if this
Agreement is terminated, neither party shall have any liability to any other
party arising under this Exchange Agreement. Following termination of this
Exchange Agreement, the Original Agreement shall govern the rights and
obligations of the parties. If any party breaches this Exchange Agreement, or
willfully fails to fulfill a condition to any other party's performance,
nothing in this Exchange Agreement shall be construed as limiting a
non-breaching party's legal or equitable rights and remedies arising under this
Exchange Agreement.
6. AMENDMENT TO ORIGINAL AGREEMENT. The Original Agreement is
hereby amended by deleting Section 7.13 thereof in its entirety.
7. NOTICES. All notices required or permitted under this
Exchange Agreement shall be effective upon receipt if personally delivered, if
mailed by registered or certified mail, postage prepaid, or if delivered by
telegram, fax or telecopy if directed to the parties as follows:
To Momentum:
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Momentum Operating Co., Inc.
232 South Main
P.O. Box 578
Albany, Texas 76430
Attn: Michael J. Parsons, President
To HEX or HEC:
Harken Exploration HEC
Harken Energy Corporation
5605 N. MacArthur Blvd., Suite 400
Irving, Texas 75038
Attn: Richard H. Schroeder, President
Copy to: Gregory S. Porter, Vice President - Legal
Any party may give written notice of a change in the address or individual to
which delivery shall be made.
8. EXPENSES. Except as otherwise provided in this Exchange
Agreement, all fees, costs and expenses incurred by the parties in negotiating
this Exchange Agreement and in consummating the transactions contemplated by
this Exchange Agreement shall be paid by the party which incurred them.
9. AMENDMENT. The provisions of this Exchange Agreement may be
altered, amended or waived only by a written agreement executed by the party to
be charged. No waiver of any provision of this Exchange Agreement shall be
construed as a continuing waiver of the provision.
10. ASSIGNMENT. Neither HEX nor HEC may assign all or any portion
of its rights or delegate all or any portion of its duties under this Exchange
Agreement without Momentum's prior written consent. To the extent permitted by
law, Momentum shall have the right to assign all or any portion of its rights
under this Exchange Agreement to any Momentum affiliate at any time. Momentum
affiliate shall have the same meaning given the term of "Seller affiliate" in
the Original Agreement.
11. HEADINGS. The headings are for convenience only and do not
limit or otherwise affect the provisions of this Exchange Agreement.
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12. COUNTERPARTS. This Exchange Agreement may be executed in
counterparts, each of which shall be an original and which, taken together,
shall constitute the same agreement.
13. REFERENCES. References, including use of a pronoun, shall
include, where applicable, masculine, feminine, singular or plural individuals
or legal entities.
14. GOVERNING LAW. This Exchange Agreement and the transactions
contemplated by this agreement shall be governed and construed under the laws
of the State of Texas without giving effect to any rules of law which might
require application of the law of another jurisdiction. Venue of any action
arising under this Exchange Agreement shall be in Abilene, Texas.
15. ANNOUNCEMENTS. Except as otherwise required by law or
applicable regulation, neither Momentum, HEX nor HEC shall announce or
otherwise publicize this Exchange Agreement or the transactions contemplated by
this Exchange Agreement without the prior written consent of the other party.
16. ENTIRE EXCHANGE AGREEMENT. This Exchange Agreement is the
entire understanding between Momentum, HEX and HEC concerning the subject
matter of this Exchange Agreement. This Exchange Agreement supersedes all
negotiations, discussions, representations, prior agreements and
understandings, whether oral or written, including, without limitation, all
letters or expressions of intent between the parties, concerning the subject
matter of this Exchange Agreement. Except as expressly amended by the
Supplemental Deed of Trust, or the Registration Rights Agreement, the Original
Agreement and all agreements and instrument executed in connection with the
Original Agreement remain unaffected by this Exchange Agreement.
17. PARTIES IN INTEREST. This Exchange Agreement is binding upon
and shall inure to the benefit of Momentum, HEX and HEC and, except where
prohibited, their successors, representatives and assigns. Unless expressly
stated to the contrary, no other person is intended to have any benefits,
rights or remedies under this Exchange Agreement.
18. SCHEDULES AND EXHIBITS. All schedules and exhibits attached
to this Exchange Agreement are incorporated into this Exchange Agreement for
all purposes. Reference to the "Exchange Agreement" includes all agreements
and instruments attached as schedules or exhibits to this Exchange Agreement or
executed in connection with the transactions contemplated by this Exchange
Agreement.
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19. SEVERANCE. If any provision of this Exchange Agreement is
found to be illegal or unenforceable, the other terms of this Exchange
Agreement shall remain in effect and this Exchange Agreement shall be construed
as if the illegal or unenforceable provision had not been included.
20. TIME. Time is of the essence of this Exchange Agreement.
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IN WITNESS WHEREOF, the parties hereto have executed this Exchange
Agreement on the 11th day of July, 1996.
MOMENTUM OPERATING CO., INC.
By: /s/ Michael J. Parsons
----------------------------------
Name: Michael J. Parsons
----------------------------------
Title: President
----------------------------------
HARKEN EXPLORATION COMPANY
By: /s/ Gregory S. Porter
----------------------------------
Name: Gregory S. Porter
----------------------------------
Title: Vice President - Legal
----------------------------------
HARKEN ENERGY CORPORATION
By: /s/ Gregory S. Porter
----------------------------------
Name: Gregory S. Porter
----------------------------------
Title: Vice President - Legal
----------------------------------
15
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<ARTICLE> 5
<S> <C>
<PERIOD-TYPE> 6-MOS
<FISCAL-YEAR-END> DEC-31-1996
<PERIOD-START> JAN-01-1996
<PERIOD-END> JUN-30-1996
<CASH> 15,759,000
<SECURITIES> 0
<RECEIVABLES> 1,614,000
<ALLOWANCES> (377,000)
<INVENTORY> 0
<CURRENT-ASSETS> 17,207,000
<PP&E> 62,436,000
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<COMMON> 851,000
0
0
<OTHER-SE> 53,151,000
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<CGS> 1,600,000
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<NET-INCOME> (228,000)
<EPS-PRIMARY> (0.00)
<EPS-DILUTED> (0.00)
</TABLE>
