<PAGE> 1
================================================================================
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15 (D)
OF THE SECURITIES EXCHANGE ACT OF 1934
FOR THE QUARTERLY PERIOD ENDED SEPTEMBER 30, 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 (972) 753-6900
INDICATE BY CHECK MARK WHETHER THE REGISTRANT (1) HAS FILED ALL REPORTS
REQUIRED TO BE FILED BY SECTION 13 OR 15(D) OF THE SECURITIES EXCHANGE ACT OF
1934 DURING THE PRECEDING 12 MONTHS (OR FOR SUCH SHORTER PERIOD THAT THE
REGISTRANT WAS REQUIRED TO FILE SUCH REPORTS), AND (2) HAS BEEN SUBJECT TO SUCH
FILING REQUIREMENTS FOR THE PAST 90 DAYS. YES X NO
--- ---
The number of shares of Common Stock, par value $0.01 per share,
outstanding as of October 31, 1996 was 93,461,370 net of 400,896 Treasury
Shares.
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<PAGE> 2
HARKEN ENERGY CORPORATION
INDEX TO QUARTERLY REPORT
SEPTEMBER 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 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 21
PART II. OTHER INFORMATION . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 32
SIGNATURES . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 34
</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, SEPTEMBER 30,
1995 1996
---------------- ----------------
<S> <C> <C>
ASSETS
------
Current Assets:
Cash and temporary investments . . . . . . . . . . . . . . . $ 4,456,000 $ 9,413,000
Cash available in European segregated account . . . . . . . 4,705,000 7,201,000
Accounts receivable, net . . . . . . . . . . . . . . . . . . 1,061,000 2,262,000
Prepaid expenses and other current assets . . . . . . . . . 309,000 202,000
---------------- ----------------
Total Current Assets . . . . . . . . . . . . . . . . . 10,531,000 19,078,000
Property and Equipment, net . . . . . . . . . . . . . . . . . . 52,142,000 68,768,000
Restricted Cash in European Segregated Account . . . . . . . 6,173,000 29,991,000
Notes Receivable from Related Parties, including interest . . . 232,000 232,000
Other Assets, net . . . . . . . . . . . . . . . . . . . . . . . 1,716,000 3,457,000
---------------- ----------------
$ 70,794,000 $ 121,526,000
================ ================
LIABILITIES AND STOCKHOLDERS' EQUITY
------------------------------------
Current Liabilities:
Trade payables . . . . . . . . . . . . . . . . . . . . . . $ 356,000 $ 966,000
Accrued liabilities and other . . . . . . . . . . . . . . . 2,722,000 3,366,000
Notes payable and current portion of long-term obligations . 868,000 --
Revenues and royalties payable . . . . . . . . . . . . . . . 972,000 1,057,000
---------------- ----------------
Total Current Liabilities . . . . . . . . . . . . . . 4,918,000 5,389,000
Long-Term Obligations . . . . . . . . . . . . . . . . . . . . . 13,176,000 --
European Convertible Notes Payable . . . . . . . . . . . . . . 12,550,000 38,600,000
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 93,363,378 shares, respectively . . 759,000 934,000
Additional paid-in capital . . . . . . . . . . . . . . . . . 136,435,000 170,223,000
Retained deficit . . . . . . . . . . . . . . . . . . . . . . (92,047,000) (92,230,000)
Treasury stock, 1,440,896 and 400,896 shares held,
respectively . . . . . . . . . . . . . . . . . . . . . . . (4,997,000) (1,390,000)
---------------- ----------------
Total Stockholders' Equity . . . . . . . . . . . . . . 40,150,000 77,537,000
---------------- ----------------
$ 70,794,000 $ 121,526,000
================ ================
</TABLE>
The accompanying Notes to Consolidated Condensed Financial Statements
are an integral part of these Statements.
4
<PAGE> 5
HARKEN ENERGY CORPORATION AND SUBSIDIARIES
CONSOLIDATED CONDENSED STATEMENTS OF OPERATIONS
(unaudited)
<TABLE>
<CAPTION>
THREE MONTHS ENDED NINE MONTHS ENDED
SEPTEMBER 30, SEPTEMBER 30,
------------------------------ ------------------------------
1995 1996 1995 1996
------------- ------------- ------------- -------------
<S> <C> <C> <C> <C>
Revenues:
Oil and gas operations . . . . . . . . . . $ 1,476,000 $ 3,679,000 $ 4,189,000 $ 8,064,000
Interest and other income . . . . . . . . 324,000 436,000 992,000 982,000
------------- ------------- ------------- -------------
1,800,000 4,115,000 5,181,000 9,046,000
Costs and Expenses:
Oil and gas operating expenses . . . . . . 463,000 1,342,000 1,343,000 2,942,000
General and administrative expenses, net . 774,000 1,103,000 2,285,000 2,900,000
Depreciation and amortization . . . . . . 543,000 1,141,000 1,608,000 2,397,000
Interest expense and other . . . . . . . . 302,000 484,000 524,000 990,000
------------- ------------- ------------- -------------
2,082,000 4,070,000 5,760,000 9,229,000
Income (loss) before income taxes . . . (282,000) 45,000 (579,000) (183,000)
Income tax expense . . . . . . . . . . . . . -- -- -- --
------------- ------------- ------------- -------------
Net income (loss) . . . . . . . . . . . $ (282,000) $ 45,000 $ (579,000) $ (183,000)
============= ============= ============= =============
Income (loss) per common share:
Net income (loss) . . . . . . . . . . . $ (0.01) $ 0.00 $ (0.01) $ (0.00)
============= ============= ============= =============
Weighted average shares outstanding . . . . . 65,674,626 92,270,516 63,052,443 83,378,170
============= ============= ============= =============
</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 . . . . . 76,000 19,456,000 -- 3,607,000
Conversions of warrants and options . . . 10,000 1,665,000 -- --
Conversions of European notes payable . . 89,000 12,667,000 -- --
Net loss . . . . . . . . . . . . . . . . -- -- (183,000) --
----------- --------------- --------------- ---------------
Balance, September 30, 1996 . . . . . . . . $ 934,000 $ 170,223,000 $ (92,230,000) $ (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
<PAGE> 7
HARKEN ENERGY CORPORATION AND SUBSIDIARIES
CONSOLIDATED CONDENSED STATEMENTS OF CASH FLOWS
(unaudited)
<TABLE>
<CAPTION>
NINE MONTHS ENDED
SEPTEMBER 30,
-----------------------------
1995 1996
------------ ------------
<S> <C> <C>
Cash flows from operating activities:
Net loss . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ (579,000) $ (183,000)
Adjustments to reconcile net loss to net cash provided by (used in)
operating activities:
Depreciation and amortization . . . . . . . . . . . . . . . . . . . . 1,608,000 2,397,000
Forgiveness of related party note receivable . . . . . . . . . . . . 232,000 --
Provision for doubtful accounts . . . . . . . . . . . . . . . . . . . (180,000) --
(Gain) loss on sales of assets and other . . . . . . . . . . . . . . (628,000) 19,000
Accretion of discount on note payable . . . . . . . . . . . . . . . . -- 234,000
Amortization of European note issuance costs . . . . . . . . . . . . 202,000 310,000
Change in assets and liabilities:
Decrease (increase) in accounts receivable . . . . . . . . . . . . . 3,000 (739,000)
Increase (decrease) in trade payables and other . . . . . . . . . . . (1,145,000) 304,000
------------ ------------
Net cash provided by (used in) operating activities . . . . . . . . (487,000) 2,342,000
------------ ------------
Cash flows from investing activities:
Cash from acquired subsidiary . . . . . . . . . . . . . . . . . . . . . . 190,000 --
Proceeds from sales of assets . . . . . . . . . . . . . . . . . . . . . . 3,304,000 177,000
Investor project advances . . . . . . . . . . . . . . . . . . . . . . . . -- 3,125,000
Capital expenditures, net . . . . . . . . . . . . . . . . . . . . . . . (4,505,000) (12,660,000)
------------ ------------
Net cash used in investing activities . . . . . . . . . . . . . . . (1,011,000) (9,358,000)
------------ ------------
Cash flows from financing activities:
Transfers from segregated account cash . . . . . . . . . . . . . . . . . -- 10,878,000
Proceeds from issuances of common stock, net of issuance costs . . . . . 2,801,000 2,964,000
Investment in segregated account cash, net . . . . . . . . . . . . . . . (294,000) (611,000)
Repayment of notes payable and long-term obligations . . . . . . . . . . -- (1,258,000)
------------ ------------
Net cash provided by financing activities . . . . . . . . . . . . . 2,507,000 11,973,000
------------ ------------
Net increase (decrease) in cash and temporary investments . . . . . . . . . . 1,009,000 4,957,000
Cash and temporary investments at beginning of period . . . . . . . . . . . . 2,828,000 4,456,000
------------ ------------
Cash and temporary investments at end of period . . . . . . . . . . . . . . . $ 3,837,000 $ 9,413,000
============ ============
Supplemental disclosures of cash flow information:
Cash paid during the period for:
Interest . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ -- $ 206,000
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
SEPTEMBER 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
September 30, 1996 and the results of its operations and changes in its cash
flows for all periods presented as of September 30, 1995 and 1996. These
adjustments represent normal recurring items. Certain prior year amounts have
been reclassified to conform with the 1996 presentation.
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 nine month period ended September 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.
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 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
8
<PAGE> 9
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 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 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. This acquisition 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 May 1995, Search Exploration, Inc.
("Search"), a company engaged primarily in the domestic exploration for, and
development and production of oil and gas, was acquired by Harken pursuant to
an Amended and Restated Agreement and Plan of Merger. Search was merged with
and into Search Acquisition Corp., a wholly-owned subsidiary of Harken. Upon
consummation of the merger, Harken issued approximately 2.2 million shares of
Harken common stock to holders of Search common stock, preferred stock and
promissory notes. In addition, the holders of Search common stock, certain
notes and overriding royalty interests in certain properties of Search received
the contingent right to receive additional shares of Harken common stock based
upon the increase in value of certain properties of Search as of June 30, 1996.
No contingent shares were ultimately required to be issued. The merger was
accounted for under the purchase method of accounting due to the above
mentioned contingently issued 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 to these properties, is
subject to adjustments for property defects identified including title defects,
environmental defects, nonproductive unplugged wells 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
restricted 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 the sale of all shares issued
to the seller. 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.
9
<PAGE> 10
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>
NINE MONTHS ENDED
SEPTEMBER 30,
-------------------------------
AVAILABLE-FOR-SALE 1995 1996
------------------ ------------- --------------
<S> <C> <C>
Gross Realized Gains $ 81,000 $ --
Gross Realized Losses -- --
</TABLE>
(4) PROPERTY AND EQUIPMENT
A summary of property and equipment follows:
<TABLE>
<CAPTION>
DECEMBER 31, SEPTEMBER 30,
1995 1996
--------------- ----------------
<S> <C> <C>
Oil and gas properties --
Unevaluated international properties not being amortized . . $ 4,866,000 $ 7,615,000
Unevaluated domestic properties not being amortized . . . . . 11,117,000 10,600,000
Evaluated domestic properties being amortized . . . . . . . . 39,526,000 55,645,000
Gas plants and other property . . . . . . . . . . . . . . . . . 6,746,000 7,429,000
Less accumulated depreciation
and amortization . . . . . . . . . . . . . . . . . . . . . . (10,113,000) (12,521,000)
-------------- ---------------
$ 52,142,000 $ 68,768,000
============== ===============
</TABLE>
10
<PAGE> 11
(5) NOTES PAYABLE AND LONG-TERM OBLIGATIONS
<TABLE>
<CAPTION>
DECEMBER 31, SEPTEMBER 30,
1995 1996
------------------ ----------------
<S> <C> <C> <C>
Note payable to seller of producing properties (A) $ 12,786,000 $ --
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 --
Less amount classified as current liability (868,000) --
------------- --------------
Total long-term obligations $ 13,176,000 $ --
============= ==============
</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. Pursuant to the Panhandle Purchase and Sale Agreement, Harken
Exploration could elect to pay the amounts due at either or both of two
prescribed maturity dates for the notes with shares of Harken common stock.
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 was included in long-term obligations at December 31, 1995.
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, and having an approximate market value of $10,429,000,
in satisfaction of all obligations owed by Harken Exploration to the seller
under the terms of the Panhandle Note. 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. 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.
(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.
11
<PAGE> 12
(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"). 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. During the last half of 1995 and up to July 30, 1996, Harken
received notifications that all holders of these 8% European Notes had
exercised their conversion options and Harken issued on aggregate total of
9,999,975 shares of Harken common stock pursuant to these conversions.
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 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 for each trading day during such period shall have equaled or exceeded
135% of the 6 1/2% European Note Conversion Price (or $3.375 per share of
Harken common stock). 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 cash on deposit in the Segregated
Account plus (i) 60% of the aggregate amount of Harken's marketable securities
plus (ii) 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 (iii) the aggregate outstanding principal amount of the 6 1/2%
European Notes. Upon a conversion, any proceeds attributable to the 6 1/2%
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European Notes converted which remain in the Segregated Account may be
withdrawn by Harken without regard to the asset value then existing.
The 6 1/2% European Notes were sold strictly to non-U.S. purchasers in
the form of bearer instruments in $50,000 increments. 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.
During the third quarter of 1996, Harken received notification that
holders of 6 1/2% European Notes totaling $1,400,000 had exercised their
conversion option and such holders were issued 560,000 shares of Harken common
stock pursuant to such conversions.
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.
(7) STOCKHOLDERS' EQUITY
Common Stock - Harken currently has authorized 125,000,000 shares of
$.01 par common stock. At December 31, 1995 and September 30, 1996, Harken had
issued 75,913,832 and 93,363,378 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.
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 September 30, 1996, 616,877 shares of
Harken common stock had been issued upon exercise of such warrants.
Issuance of European Convertible Notes Payable -- At December 31,
1995, $2,450,000 of the 8% European Notes had been converted into 1,633,327
shares of Harken common stock. In 1996, all of the remaining
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outstanding 8% European Notes were converted into 8,366,648 additional shares
of Harken common stock. In connection with the issuance of the 8% European
Notes, 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. See Note 6 - European Convertible Notes Payable for further
discussion. 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. During the third quarter of 1996,
Harken received notification that holders of 6 1/2% European Notes totaling
$1,400,000 had exercised their conversion option and such holders were issued
560,000 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.
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 the
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 acquired 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
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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 restricted 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 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 September 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 2011,
alternative minimum tax NOL carryforward of approximately $56,000,000 which
expires in 1997 through 2011, investment tax credit carryforward of
approximately $860,000 which expires in 1996 through 2002, statutory depletion
carryforward of approximately $1,800,000 which does not have an expiration
date, and a net capital loss carryforward of approximately $12,400,000 which
expires in 2007 through 2011. 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.
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Total deferred tax liabilities, relating primarily to property and
equipment, as of September 30, 1996, computed under the provisions of the
Statement of Financial Accounting Standard No. 109, "Accounting for Income
Taxes", were approximately $3,264,0000. Total deferred tax assets, primarily
related to the net operating loss carryforward, were approximately $22,867,000
at September 30, 1996. The total net deferred tax asset is offset by a
valuation allowance of approximately $19,603,000 at September 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 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 February 1995, Harken drilled its first exploratory well under the
Alcaravan Contract, the Alcaravan #1. 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 September 30, 1996, as unevaluated oil
and gas properties, pending final determination of the results of the well.
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 of up to 40% of the net profits which may
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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% 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. During July 1996 and October 1996, Harken received from
the Palo Blanco Investors the first and second scheduled advances pursuant to
the Palo Blanco Development Finance Agreements each 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 during the third quarter of 1996 and 299,994 restricted
shares of Harken common stock subsequent to September 30, 1996, leaving the
Palo Blanco Investors with an aggregate beneficial interest of up to 20% of the
net profits which may be realized by Harken de Colombia, Ltd. from the Palo
Blanco prospect. The Estero #1 well is expected to be drilled in January 1997
to a depth of 10,500 feet to test the Carbonera, Mirador, Guadalupe, Gacheta
and Ubaque formations.
During September 1996, Harken entered into an operating agreement (the
"Rochester Agreement") with Rochester Minerals, Inc. ("Rochester") pursuant to
which Rochester agreed to provide $1 million to Harken de Colombia, Ltd. for
the exploration and development of the Palo Blanco prospect area. In exchange,
Rochester will acquire a beneficial interest equal to 25% of the 100% interest
of Harken de Colombia, Ltd. in the lands within the Alcaravan prospect except
for the western portion of the block which includes the Alcaravan #1 well,
which was excluded from the Rochester Agreement. During September 1996, Harken
received from Rochester $500,000 due pursuant to the Rochester Agreement and
subsequent to September 30, 1996, Harken received an additional $500,000 due
pursuant to the Rochester Agreement.
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. 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.
On January 19, 1995, after completing an 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 on this Bocachico Contract area,
named the Torcaz #2 well, on July 18, 1996. This well was drilled to an
approximate depth of 8,500 feet and has been evaluated with a series of
electric logs and initial production testing. Harken believes
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that the Torcaz #2 well is currently producing primarily from the Upper Mugrosa
formation and that drilling mud and other solids remain in the lower
potentially productive formations. Additional work will be undertaken in an
attempt to remove any blocking debris throughout the entire section shown to be
oil bearing on well log data. Harken has committed to drilling a second well
thereby extending the Bocachico Contract into its third year, has identified
eight potential well locations and has filed applications for environmental
permits on two 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 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 September 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. Subsequent to September 30, 1996,
Harken had also requested and received the remaining $1,500,000 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 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. 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
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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
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.
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 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.
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<PAGE> 20
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 signed 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 $1,874,000 at September 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 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
21
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HARKEN ENERGY CORPORATION AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
(UNAUDITED)
Certain statements included in the following discussion and analysis
of financial condition and results of operation, including statements of Harken
management's current expectations, intentions, plans and beliefs, are forward-
looking statements, as defined in Section 21D of the Securities Exchange Act of
1934, that are dependent on certain events, risks and uncertainties that may be
outside of Harken's control. These forward-looking statements include
statements of management's plans and objectives for Harken's future operations
and statements of future economic performance, information regarding Colombian
drilling schedules, expected or planned production capabilities, Harken's
capital budget and future capital expenditures and the sufficiency and
availability of capital resources needed to fund such future capital
expenditures. Actual results and developments could differ materially from
those expressed in or implied by such statements due to a number of factors,
including general economic conditions; the timing of environmental and other
necessary administrative permits; the impact of the activities of OPEC and
other competitors; the impact of possible geopolitical occurrences world-wide;
the results of financing efforts; changes in laws and regulations; capacity,
deliverability and supply constraints or difficulties; unforeseen engineering
and mechanical or technological difficulties in drilling or working over wells;
and other risks described in Harken's filings with the Securities and Exchange
Commission.
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 NINE MONTHS ENDED
SEPTEMBER 30, SEPTEMBER 30,
----------------------------- ---------------------------
DOMESTIC EXPLORATION AND 1995 1996 1995 1996
------------- ------------- ------------ ------------
PRODUCTION OPERATIONS (UNAUDITED) (UNAUDITED)
<S> <C> <C> <C> <C>
REVENUES
Oil sales revenues $ 842,000 $ 2,444,000 $ 2,688,000 $ 5,274,000
Oil volumes in barrels 43,000 118,000 143,000 262,000
Oil price per barrel $ 19.58 $ 20.71 $ 18.80 $ 20.13
Gas sales revenues $ 403,000 $ 1,092,000 $ 909,000 $ 2,238,000
Gas volumes in mcf 263,000 459,000 634,000 949,000
Gas price per mcf $ 1.53 $ 2.38 $ 1.43 $ 2.36
Gas plant revenues $ 231,000 $ 143,000 $ 592,000 $ 552,000
OTHER REVENUES
Interest income $ 234,000 $ 432,000 $ 437,000 $ 817,000
Other income $ 90,000 $ 4,000 $ 555,000 $ 165,000
</TABLE>
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<PAGE> 23
OVERVIEW
Harken reported a net loss for the nine months ended September 30, 1996
of $183,000 compared to a net loss of $579,000 for the prior year period.
Total revenues increased from approximately $5.2 million during the first nine
months of 1995 to approximately $9.0 million for the first nine months of 1996,
primarily due to four acquisitions consummated during 1995 and 1996 that
increased Harken's domestic producing properties and oil and gas reserves.
Gross profit from oil and gas operations before depreciation and amortization,
general and administrative and interest expenses totaled approximately $5.1
million during the nine months ended September 30, 1996 compared to
approximately $2.8 million for the prior year period. Gross profit from oil
and gas operations as a percentage of oil and gas sales revenues decreased
slightly during the nine months ended September 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 and
Panhandle 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 was drilled to an approximate depth of 8,500 feet and has been evaluated
with a series of electric logs and initial production testing. Harken believes
that the Torcaz #2 well is currently producing primarily from the Upper Mugrosa
formation and that drilling mud and other solids remain in the lower
potentially productive formations. Additional work is being undertaken in an
attempt to remove any blocking debris throughout the entire section shown to be
oil bearing on well log data. As of September 30, 1996, Harken has recognized
no revenues from its Colombian operations.
Domestically, Harken expects that future production operations from its
properties will continue in 1997 at levels consistent with the third quarter of
1996 for both oil and gas, with declines in production expected to be offset by
increases generated from workover and development activities at all of Harken's
domestic operations locations. General and administrative expenses should
increase during the fourth quarter of 1996 from increases in overall
activities. General and administrative expenses during 1997 are expected to
increase slightly from the amounts recorded during the first nine months of
1996, due to the overall growth in Harken's domestic operations, and in order
to administer Harken's anticipated Colombian production operations.
Depreciation and amortization should continue to relate primarily to Harken's
domestic oil and gas operations, which approximates $5.40 per equivalent barrel
of production.
Internationally, Harken anticipates that 1997 results of operations will
include revenues and expenses from Colombian production operations. With the
successful completion of the Torcaz #2, Harken is now performing additional
procedures designed to increase production rates on this well and also is
continuing its plans to develop the Torcaz field with the spudding of the
Torcaz #3 well planned near the end of 1996.
FOR THE NINE MONTHS ENDED SEPTEMBER 30, 1996 COMPARED WITH THE CORRESPONDING
PRIOR PERIOD.
DOMESTIC OPERATIONS
Gross oil and gas revenues during the first nine months of 1995 and 1996
were generated by Harken's domestic exploration and production operations.
During the first nine months of 1995 these domestic operations consisted
primarily of the operations of Harken Southwest Corporation ("HSW"). 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.
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<PAGE> 24
During the first nine 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 has been impacted by the October 1995
acquisition of the Yellowhouse Properties in the western region of Texas, the
December 1995 acquisition of the Panhandle Properties located in the panhandle
region of Texas, and the July 1996 acquisition of the EnerVest Properties
located in Arkansas and New Mexico.
Gross oil revenues increased significantly during the first nine 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 $1,503,000 to the first nine months of 1996 oil revenues, while
the Panhandle Properties contributed approximately $158,000 to the first nine
months of 1996 oil revenues. The July 1996 acquisition of the EnerVest
Properties increased 1996 oil revenues by approximately $867,000. 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 nine months
ended September 30, 1996 compared to the prior year period, again due to the
acquisitions consummated during 1995 and 1996. The Panhandle Properties
contributed approximately $920,000 to the first nine months of 1996 gas
revenues, despite many of the properties experiencing numerous temporary
operational curtailments during the first quarter. 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 $3.88 per mcf
for Panhandle Property gas during the first nine months of 1996. Harken also
recorded approximately $428,000 of gas revenues from the acquisition of Search
and approximately $229,000 of gas revenues from the EnerVest Properties.
Gas plant revenues were impacted negatively during the third quarter of
1996 due to plant shutdowns experienced due to operational problems at the
Aneth Gas Plant. The plant has now resumed normal operations.
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 state severance taxes, state property taxes, Utah conservation taxes
and Navajo severance and possessory interest taxes. The increase in oil and
gas operating expenses during the nine months ended September 30, 1996 compared
to the prior period is as a result of the above mentioned acquisitions,
specifically resulting in approximately $581,000 from the Yellowhouse
Properties, approximately $434,000 from the Panhandle Properties, approximately
$300,000 from the EnerVest Properties, and approximately $119,000 from the
Search operations.
INTEREST AND OTHER INCOME
Other income decreased during the first nine months of 1996 compared to
the prior period as during the first nine 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. Interest income has increased
sharply during the first nine months of 1996, as Harken recognized
approximately $600,000 of interest income earned on proceeds received from the
issuance in May 1995 of $15 million of European 8% Senior Convertible Notes
Payable (the "8% European Notes") and $40 million of European 6 1/2% Senior
Convertible Notes Payable (the "6 1/2% European Notes") issued in July 1996
compared to $294,000 of such interest income during the first nine months of
1995. Such proceeds, net of issuance costs and amounts released and
transferred, are maintained and invested in a separate interest bearing bank
account (the "Segregated Account").
24
<PAGE> 25
OTHER COSTS AND EXPENSES
General and administrative expenses increased from $2,285,000 for the
first nine months of 1995 to $2,900,000 for the first nine months of 1996,
primarily as a result of increased personnel and office costs associated with
the acquisitions consummated during 1995 and 1996. General and administrative
expenses decreased as a percentage of total revenues due to Harken's efforts to
maximize efficiency and absorb much of its domestic growth with its existing
personnel and office cost structure.
Depreciation and amortization expense increased during the first nine
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
and 1996. 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 nine
months of 1996 compared to the prior year period. The May 1995 issuance of the
8% European Notes generated interest expense during the nine months ended
September 30, 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. The July 1996 issuance of the 6 1/2%
European Notes generated interest expense during the nine months ended
September 30, 1996 of $352,000, net of amounts of interest capitalized, and
approximately $132,000 of amortization of issuance costs associated with the 6
1/2% European Notes. In addition, 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 nine months of
1996 prior to the exchange of such note on July 11, 1996.
FOR THE QUARTER ENDED SEPTEMBER 30, 1996 COMPARED WITH THE CORRESPONDING PRIOR
PERIOD.
Harken reported net income of $45,000 for the three months ended
September 30, 1996 compared to a net loss of $282,000 for the third quarter of
1995. Total revenues increased from approximately $1.8 million during the
third quarter of 1995 to approximately $4.1 million for the third quarter of
1996, primarily due to the acquisitions consummated during 1995 and 1996.
Gross profit from oil and gas operations before depreciation and amortization,
general and administrative and interest expenses totaled approximately $2.3
million during the third quarter of 1996 compared to approximately $1.0 million
during the prior year period.
DOMESTIC OPERATIONS
Gross oil revenues increased significantly during the third 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 $524,000 to third quarter 1996 oil revenues, and the EnerVest
Properties contributed approximately $867,000 of third quarter oil revenues,
while the Panhandle Properties contributed approximately $51,000 to third
quarter 1996 oil revenues. Overall, oil prices were particularly strong during
the third quarter of 1996, averaging $20.71 per barrel compared to $19.58
during the third quarter of 1995.
Gross gas revenues also increased significantly for the three months
ended September 30, 1996 compared to the prior year period, due to the
acquisitions consummated during 1995 and 1996. The Panhandle Properties and
EnerVest Properties contributed approximately $384,000 and $229,000,
respectively, to third quarter 1996 gas revenues. Harken also recorded
approximately $252,000 of gas revenues from the acquisition of Search, due
25
<PAGE> 26
to newly completed gas wells, compared to only a minimal amount of revenues
from Search properties during the third quarter of 1995.
Gas plant revenues were impacted negatively during the third quarter of
1996 due to plant shutdowns experienced due to operational problems at the
Aneth Gas Plant. The plant has now resumed normal operations.
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 state severance taxes, state property taxes, Utah conservation taxes
and Navajo severance and possessory interest taxes. The increase in third
quarter 1996 oil and gas operating expenses compared to the prior year is a
result of the above mentioned acquisitions, specifically resulting in
approximately $195,000 from the Yellowhouse Properties, approximately $222,000
from the Panhandle Properties, approximately $300,000 from the EnerVest
Properties, and approximately $58,000 from the Search operations.
INTEREST AND OTHER INCOME
Interest income increased significantly during the third quarter of 1996
compared to the prior period due to the inclusion of interest income earned by
Harken on proceeds received from the July 1996 issuance of $40 million of the 6
1/2% European Notes compared to the interest earned on the $15 million proceeds
from the 8% European Notes.
OTHER COSTS AND EXPENSES
General and administrative expenses increased from $774,000 for the
third quarter of 1995 to $1,103,000 for the third quarter of 1996, primarily as
a result of increased personnel and office costs associated with the
acquisitions consummated during 1995 and 1996. General and administrative
expenses decreased as a percentage of total revenues due to Harken's efforts to
maximize efficiency and absorb much of its domestic growth with its existing
personnel and office cost structure.
Depreciation and amortization expense increased during the third 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 increased during the third quarter of 1996
compared to the prior year period due to the 6 1/2% European Notes which were
issued in July 1996 and which resulted in interest expense during the third
quarter of 1996 of approximately $352,000 net of amounts of interest
capitalized, and approximately $132,000 of amortization of issuance costs
associated with the 6 1/2% European Notes. Interest expense and other during
the third quarter of 1995 included net interest expense of approximately
$150,000 and approximately $129,000 of amortization of issuance costs
associated with the 8% European Notes.
LIQUIDITY AND CAPITAL RESOURCES
During the first nine months of 1996, Harken's working capital increased
approximately $8.1 million, primarily due to the availability of approximately
$7.2 million of unrestricted funds held in the Segregated Account relating to
the 6 1/2% European Notes issued in July 1996. In addition, proceeds of
approximately $6.2 million from the 8% European Notes which were restricted as
of December 31, 1995 became available and were transferred
26
<PAGE> 27
from the Segregated Account during the first nine months of 1996, although $5
million of these proceeds were used in the EnerVest Property acquisition as of
July 1996. Harken also generated approximately $3.0 million of net proceeds
during the first nine months of 1996 from the conversion of certain options and
warrants and from a March 1996 private placement of Harken common stock.
Partially offsetting these increases in working capital during the first nine
months of 1996 were capital expenditures relating to Harken's domestic and
international capital projects.
During the nine months ended September 30, 1996, Harken's cash and
temporary investments increased approximately $5.0 million consisting primarily
of transfers from the European Segregated Account of $10.9 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
and Rochester Agreement of $2.5 million. Such activity was sufficient to fund
capital expenditures of approximately $12.7 million and repayments of notes
payable and long-term obligations of approximately $1.3 million. Cash flow
provided by operations during the first nine months of 1996 totaled
approximately $2.3 million.
Harken believes that cash flow from operations will be sufficient to
meet its operating cash requirements in 1997. 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.
In July 1996, Harken 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 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 at closing to a Trustee pursuant to a Trust
Indenture and are held in a Segregated Account to be maintained for Harken's
benefit.
The Trust Indenture under which the 6 1/2% European Notes were issued
requires Harken to maintain an Asset Value Coverage Ratio 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 September 30,
1996, Harken was in compliance with the Asset Value Coverage Ratio test and 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 $7,201,000.
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
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<PAGE> 28
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 in the Segregated
Account.
Also during July 1996, Harken strengthened its 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 restricted 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 the sale of all shares issued to the seller. 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.
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. 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 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.
Harken's operating strategy includes efforts to find additional
opportunities to acquire domestic oil and gas reserves through merger and
acquisitions, in exchange for cash, debt or issuance of Harken common stock.
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 September 30, 1996, Harken's net investment in
its Colombian operations has totaled approximately $7.6 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".
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<PAGE> 29
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. Any costs incurred to drill these
two wells in excess of the amounts funded by the Rio Negro Investors will be
borne by Harken. As of September 30, 1996, Harken had requested and received
$2,000,000 pursuant to the Rio Negro Development Finance Agreement. Subsequent
to September 30, 1996, Harken had also requested and received the remaining
$1,500,000 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 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.
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 of up to 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
29
<PAGE> 30
regard thereto. During July 1996 and October 1996, Harken received from the
Palo Blanco Investors the first and second scheduled advances pursuant to the
Palo Blanco Development Finance Agreements each 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 during the third quarter of 1996 and 299,994 restricted shares of
Harken common stock subsequent to September 30, 1996, leaving the Palo Blanco
Investors with an aggregate beneficial interest of up to 20% of the net profits
which may be realized by Harken de Colombia, Ltd. from the Palo Blanco
prospect.
During September 1996, Harken entered into an operating agreement (the
"Rochester Agreement") with Rochester Minerals, Inc. ("Rochester") pursuant to
which Rochester agreed to provide $1 million to Harken de Colombia, Ltd. for
the exploration and development of the Palo Blanco prospect area. In exchange,
Rochester will acquire a beneficial interest equal to 25% of the 100% interest
of Harken de Colombia, Ltd. in the lands within the Alcaravan prospect except
for the western portion of this block which includes the Alcaravan #1 well,
which was excluded from the Rochester Agreement. During September 1996, Harken
received from Rochester $500,000 due pursuant to the Rochester Agreement and
subsequent to September 30, 1996, Harken received an additional $500,000 due
pursuant to the Rochester Agreement.
During the third quarter of 1996, Harken's Board of Directors approved a
three year $60 million exploration program for the Middle Magdalena and Llanos
Basins of Colombia. The program includes drilling to evaluate twelve currently
identified prospects over approximately 75,000 acres. In addition to the
drilling program, Harken plans to conduct additional new geologic and
engineering studies directed at specific prospect "leads" beginning in 1997 on
an additional 125,000 acres in compliance with the various Association Contract
work programs. Plans to evaluate the remaining 800,000 acres currently held by
Harken in Colombia will be finalized over the next twenty-four months.
The above mentioned exploration program timetable anticipates Harken
drilling, on average, one Colombian prospect per quarter beginning in 1997.
The timetable does not include new prospects that may subsequently be
identified through seismic and geologic studies nor the development wells which
would be required if an exploratory well is successful. Some of the drilling
program activities will test potential formations created by the thrust fault
tectonics which are present in the Middle Magdalena Basin of Colombia.
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. Capital
expenditures related to Harken's Colombian operations are expected to total a
minimum of approximately $15 million during 1997, including a minimum of
approximately $6 million related to total activity required under Harken's
Association Contracts. Such capital expenditures in excess of amounts required
will be incurred only to the extent that cash flows from operations or capital
resources are available. Drilling and completion operations for the Torcaz #2
were successfully completed during late August 1996. This well was drilled to
a projected depth of approximately 8,500 feet and has been evaluated with a
series of electric logs and initial production testing. Harken has already
identified eight additional well locations on the Torcaz prospect and has filed
applications for environmental permits on two well locations within the
Bocachico Contract area. The next well to be drilled in this prospect area, the
Torcaz #3, is expected to be spudded near the end of 1996.
Harken is currently negotiating with several potential industry and
financial partners with the objective of farming out a portion of its interests
in various prospects.
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 also require extensive production facilities which would require
significant additional capital
30
<PAGE> 31
expenditures. The ultimate amount of such expenditures cannot be presently
predicted. Harken anticipates that amounts required to fund its Colombian
activities, including the above mentioned exploration programs and additional
development expenditures, will be funded from existing cash balances, asset
sales, the proceeds from the 6 1/2% European Notes, future 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 Colombian activities or that industry partners can be obtained to
fund such Colombian activities.
Domestically, Harken plans to continue development of proved undeveloped
reserves on properties with minimal development risk in addition to a continual
workover program on producing properties. The targeted results of these
efforts are, at a minimum, to replace production declines to maintain cash flow
at a reasonably steady rate in 1997. Such efforts will be completed with
minimal planned increases in general and administrative expenses for 1997
compared to the level of such expenses reflected during the quarter ended
September 30, 1996.
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 $1,874,000 at September 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.
Although the outcome of the litigation matter described above is
uncertain, Harken does not believe that any liability to Harken as
a result of such matter will have a material adverse effect on
Harken's financial condition.
Harken previously reported that it had 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. In September 1996, the plaintiff dismissed
Harken from the lawsuit. The dismissal was without prejudice to
refiling.
Item 2. Changes in Securities.
Not applicable.
Item 3. Default Upon Senior Securities.
Not applicable.
Item 4. Submission of Matters to a Vote of Securities Holders.
Not applicable.
Item 5. Other Information
Not applicable.
Item 6. Exhibits and Reports on Form 8-K.
(a) EXHIBIT INDEX
Exhibit
3.1 Certificate of Incorporation of Harken Energy Corporation
as amended (filed as Exhibit 3.1 to Harken's Annual
Report on Form 10-K for fiscal year ended December 31,
1989, File No. 0-9207, and incorporated by reference
herein).
3.2 Amendment to the Certificate of Incorporation of Harken
Energy Corporation (filed as Exhibit 28.8 to the
Registration Statement on Form S-1 of Tejas Power
Corporation, file No. 33-37141, and incorporated by
reference herein.)
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<PAGE> 33
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 Harken Energy Corporation 1996 Incentive and Nonstatutory
Stock Option Plan.
*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.
______________________
*Filed herewith
33
<PAGE> 34
HARKEN ENERGY CORPORATION
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
Harken Energy Corporation
------------------------------------------
(Registrant)
Date: November 11, 1996 By: /s/ Bruce N. Huff
----------------------- -------------------------------------------
Bruce N. Huff, Senior Vice President and
Chief Financial Officer
34
<PAGE> 35
INDEX TO EXHIBITS
<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION
- ------- -----------
<S> <C>
10.1 - Harken Energy Corporation 1996 Incentive and Nonstatutory
Option Plan.
27 - Financial Data Schedule
</TABLE>
<PAGE> 1
EXHIBIT 10.1
HARKEN ENERGY CORPORATION
1996 INCENTIVE AND NONSTATUTORY OPTION PLAN
SCOPE AND PURPOSE OF PLAN
Harken Energy Corporation, a Delaware corporation (the "Corporation"),
has adopted this 1996 Incentive and Nonstatutory Option Plan (the "Plan") to
provide for the granting of:
(a) Incentive Options (hereafter defined) to certain Employees
(hereafter defined) and
(b) Nonstatutory Options (hereafter defined) to certain
Employees, members of the Board of Directors and other
persons.
The purpose of the Plan is to provide an incentive for Employees,
members of the Board of Directors, and certain consultants and advisors of the
Corporation or its Subsidiaries (hereafter defined) to remain in the service of
the Corporation or its Subsidiaries, to extend to them the opportunity to
acquire a proprietary interest in the Corporation so that they will apply their
best efforts for the benefit of the Corporation, and to aid the Corporation in
attracting able persons to enter the service of the Corporation and its
Subsidiaries.
SECTION 1. DEFINITIONS
1.1 "Acquiring Person" means any Person other than the
Corporation, any of the Corporation's Subsidiaries, any employee benefit plan
of the Corporation or of a Subsidiary of the Corporation or of a corporation
owned directly or indirectly by the stockholders of the Corporation in
substantially the same proportions as their ownership of stock of the
Corporation, or any trustee or other fiduciary holding securities under an
employee benefit plan of the Corporation or of a Subsidiary of the Corporation
or of a corporation owned directly or indirectly by the stockholders of the
Corporation in substantially the same proportions as their ownership of stock
of the Corporation.
1.2 "Award" means the grant of any form of Option, under the
Plan, to a Holder pursuant to the terms, conditions, and limitations that the
Board of Directors may establish in order to fulfill the objectives of the
Plan.
1.3 "Award Agreement" means the written agreement between the
Corporation and a Holder evidencing the terms, conditions, and limitations of
the Award granted to that Holder.
1.4 "Board of Directors" means the board of directors of the
Corporation.
1.5 "Business Day" means any day other than a Saturday, a Sunday,
or a day on which banking institutions in the State of Texas are authorized or
obligated by law or executive order to close.
1.6 "Change in Control" means the event that is deemed to have
occurred if:
(a) any Acquiring Person is or becomes the "beneficial
owner" (as defined in Rule l3d-3 under the Exchange Act), directly or
indirectly, of securities of the Corporation representing fifty
percent or more of the combined voting power of the then outstanding
Voting Securities of the Corporation; or
(b) members of the Incumbent Board cease for any reason
to constitute at least a majority of the Board of Directors; or
(c) a public announcement is made of a tender or exchange
offer by any Acquiring Person for fifty percent or more of the
outstanding Voting Securities of the Corporation, and the Board of
Directors
<PAGE> 2
approves or fails to oppose that tender or exchange offer in its
statements in Schedule 14D-9 under the Exchange Act; or
(d) the stockholders of the Corporation approve a merger
or consolidation of the Corporation with any other corporation or
partnership (or, if no such approval is required, the consummation of
such a merger or consolidation of the Corporation), other than a
merger or consolidation that would result in the Voting Securities of
the Corporation outstanding immediately before the consummation
thereof continuing to represent (either by remaining outstanding or by
being converted into Voting Securities of the surviving entity or of a
parent of the surviving entity) a majority of the combined voting
power of the Voting Securities of the surviving entity (or its parent)
outstanding immediately after that merger or consolidation; or
(e) the stockholders of the Corporation approve a plan of
complete liquidation of the Corporation or an agreement for the sale
or disposition by the Corporation of all or substantially all the
Corporation's assets (or, if no such approval is required, the
consummation of such a liquidation, sale, or disposition in one
transaction or series of related transactions) other than a
liquidation, sale or disposition of all or substantially all the
Corporation's assets in one transaction or a series of related
transactions to a corporation owned directly or indirectly by the
stockholders of the Corporation in substantially the same proportions
as their ownership of stock of the Corporation.
1.7 "Code" means the Internal Revenue Code of 1986, as amended.
1.8 "Committee" means the Compensation Committee of the Board of
Directors, or such other committee of the Board of Directors as may be
appointed by the Board of Directors from time to time to administer this Plan.
1.9 "Corporation" means Harken Energy Corporation, a Delaware
corporation.
1.10 "Date of Grant" has the meaning given it in Paragraph 4.3.
1.11 "Disability" has the meaning given it in Paragraph 7.3.
1.12 "Eligible Individuals" means (a) Employees, (b) member of the
Board of Directors and (c) any other Person that the Board of Directors
designates as eligible for an Award (other than for Incentive Options) because
the Person performs bona fide consulting or advisory services for the
Corporation or any of its Subsidiaries (other than services in connection with
the offer or sale of securities in a capital-raising transaction) and the Board
of Directors determines that the Person has a direct and significant effect on
the financial development of the Corporation or any of its Subsidiaries.
1.13 "Employee" means any employee of the Corporation or of any of
its Subsidiaries, including officers and directors of the Corporation who are
also employees of the Corporation or of any of its Subsidiaries. The
definition of "Employee" is qualified in its entirety and is subject to the
definition set forth in the Code and the regulations thereunder.
1.14 "Exchange Act" means the Securities Exchange Act of 1934, or
any successor law, as it may be amended from time to time.
1.15 "Exercise Notice" has the meaning given it in Paragraph 5.5.
1.16 "Exercise Price" has the meaning given it in Paragraph 5.4.
1.17 "Fair Market Value" means, for a particular day:
(a) If shares of Stock of the same class are listed or
admitted to unlisted trading privileges on any national or regional
securities exchange at the date of determining the Fair Market Value,
then the last
2
<PAGE> 3
reported sale price, regular way, on the composite tape of that
exchange on the last Business Day before the date in question or, if
no such sale takes place on that Business Day, the average of the
closing bid and asked prices, regular way, in either case as reported
in the principal consolidated transaction reporting system with
respect to securities listed or admitted to unlisted trading
privileges on that securities exchange; or
(b) If shares of Stock of the same class are not listed
or admitted to unlisted trading privileges as provided in Subparagraph
1.17(a) and if sales prices for shares of Stock of the same class in
the over-the- counter market are reported by the National Association
of Securities Dealers, Inc. Automated Quotations, Inc. ("NASDAQ")
National Market System (or such other system then in use) at the date
of determining the Fair Market Value, then the last reported sales
price so reported on the last Business Day before the date in question
or, if no such sale takes place on that Business Day, the average of
the high bid and low asked prices so reported; or
(c) If shares of Stock of the same class are not listed
or admitted to unlisted trading privileges as provided in subparagraph
1.17(a) and sales prices for shares of Stock of the same class are not
reported by the NASDAQ National Market System (or a similar system
then in use) as provided in subparagraph 1.17(b), and if bid and asked
prices for shares of Stock of the same class in the over-the-counter
market are reported by NASDAQ (or, if not so reported, by the National
Quotation Bureau Incorporated) at the date of determining the Fair
Market Value, then the average of the high bid and low asked prices on
the last Business Day before the date in question; or
(d) If shares of Stock of the same class are not listed
or admitted to unlisted trading privileges as provided in subparagraph
1.17(a) and sales prices or bid and asked prices therefor are not
reported by NASDAQ (or the National Quotation Bureau Incorporated) as
provided in subparagraph 1.17(b) or subparagraph 1.17(c) at the date
of determining the Fair Market Value, then the value determined in
good faith by the Board of Directors or the Committee, which
determination shall be conclusive for all purposes; or
1.18 "Holder" means an Eligible Individual to whom an Award has
been granted.
1.19 "Incentive Option" means an incentive stock option as defined
under Section 422 of the Code and regulations thereunder.
1.20 "Incumbent Board" means the individuals who, as of the date
of the adoption of the Plan by the Board of Directors, constitute the Board of
Directors and any other individual who becomes a director of the Corporation
after that date and whose election or appointment by the Board of Directors or
nomination for election by the Corporation's stockholders was approved by a
vote of at least a majority of the directors then comprising the Incumbent
Board.
1.21 "Nonstatutory Option" means a stock option that does not
satisfy the requirements of Section 422 of the Code or that is designated at
the Date of Grant or in the applicable Award Agreement to be an option other
than an Incentive Option.
1.22 "Non-Surviving Event" means an event of Restructure as
described in either subparagraph (b) or (c) of Paragraph 1.31.
1.23 "Option" means either an Incentive Option or a Nonstatutory
Option, or both.
1.24 "Person" means any person or entity of any nature whatsoever,
specifically including (but not limited to) an individual, a firm, a company, a
corporation, a partnership, a trust or other entity. A Person, together with
that Person's affiliates and associates (as those terms are defined in Rule
12b-2 under the Exchange Act for purposes of this definition only), and any
Persons acting as a partnership, limited partnership, joint venture,
association, syndicate or other group (whether or not formally organized), or
otherwise acting jointly or in concert or in a coordinated or
3
<PAGE> 4
consciously parallel manner (whether or not pursuant to any express agreement),
for the purpose of acquiring, holding, voting or disposing of securities of the
Corporation with that Person, shall be deemed a single "Person."
1.25 "Plan" means the Corporation's 1996 Incentive and
Nonstatutory Stock Option Plan, as it may be amended from time to time.
1.26 "Restructure" means the occurrence of any one or more of the
following:
(a) The merger or consolidation of the Corporation with
any Person, whether effected as a single transaction or a series of
related transactions, with the Corporation remaining the continuing or
surviving entity of that merger or consolidation and the Stock
remaining outstanding and not changed into or exchanged for stock or
other securities of any other Person or of the Corporation, cash, or
other property;
(b) The merger or consolidation of the Corporation with
any Person, whether effected as a single transaction or a series of
related transactions, with (i) the Corporation not being the
continuing or surviving entity of that merger or consolidation or (ii)
the Corporation remaining the continuing or surviving entity of that
merger or consolidation but all or a part of the outstanding shares of
Stock are changed into or exchanged for stock or other securities of
any other Person or the Corporation, cash, or other property; or
(c) The transfer, directly or indirectly, of all or
substantially all of the assets of the Corporation (whether by sale,
merger, consolidation, liquidation or otherwise) to any Person whether
effected as a single transaction or a series of related transactions.
1.27 "Securities Act" means the Securities Act of 1933, or any
successor law, as it may be amended from time to time.
1.28 "Stock" means the Corporation's authorized common stock, par
value $.01 per share, as described in the Corporation's Certificate of
Incorporation as it shall have been amended, or any other securities that are
substituted for the Stock as provided in Section 6.
1.29 "Subsidiary" means, with respect to any Person, any
corporation or other entity of which a majority of the voting power of the
voting equity securities or equity interest is owned, directly or indirectly,
by that Person.
1.30 "Total Shares" has the meaning given it in Paragraph 6.2.
1.31 "Voting Securities" means any securities that are entitled to
vote generally in the election of directors, in the admission of general
partners, or in the selection of any other similar governing body.
SECTION 2. SHARES OF STOCK SUBJECT TO THE PLAN
2.1 Maximum Amount of Shares. Subject to the provisions of
Paragraph 2.6 and Section 6 of the Plan, the aggregate number of shares of
Stock that may be issued, transferred or exercised pursuant to Awards under the
Plan shall be 670,000.
2.2 Reduction in Available Shares. In computing the total number
of shares available at a particular time for Awards under the Plan, there shall
be counted against the limitations stated in Paragraph 2.1 the number of shares
of Stock subject to issuance upon exercise or settlement of Awards and the
number of shares of Stock that have been issued upon exercise or settlement of
Awards (except as otherwise provided in Paragraph 2.3).
4
<PAGE> 5
2.3 Restoration of Unused and Surrendered Shares. If Stock
subject to any Award is not issued or transferred, or ceases to be issuable or
transferable for any reason, including (but not exclusively) because an Award
is forfeited, terminated, expires unexercised, or is exchanged for other
Awards, the shares of Stock that were subject to that Award shall no longer be
charged against the number of available shares provided for in Paragraph 2.2
and shall again be available for issue, transfer, or exercise pursuant to
Awards under the Plan to the extent of such forfeiture, termination,
expiration, or other cessation of its subjection to an Award.
2.4 Description of Shares. The shares to be delivered under the
Plan shall be made available from (a) authorized but unissued shares of Stock,
(b) Stock held in the treasury of the Corporation, or (c) previously issued
shares of Stock reacquired by the Corporation, including shares purchased on
the open market, in each situation as the Board of Directors or the Committee
may determine from time to time at its sole option.
2.5 Registration and Listing of Shares. From time to time, the
Board of Directors and appropriate officers of the Corporation shall and are
authorized to take whatever actions are necessary to file required documents
with governmental authorities, stock exchanges, and other appropriate Persons
to make shares of Stock available for issuance pursuant to Awards.
2.6 Reduction in Outstanding Shares of Stock. Nothing in this
Section 2 shall impair the right of the Corporation to reduce the number of
outstanding shares of Stock pursuant to repurchases, redemptions, or otherwise;
provided, however, that no reduction in the number of outstanding shares of
Stock shall (a) impair the validity of any outstanding Award, whether or not
that Award is fully exercisable or fully vested or (b) impair the status of any
shares of Stock previously issued pursuant to an Award or thereafter issued
pursuant to a then-outstanding Award as duly authorized, validly issued, fully
paid, and nonassessable shares.
SECTION 3. ADMINISTRATION OF THE PLAN
3.1 Powers of the Board of Directors. The Board of Directors
shall have the authority, in its sole and absolute discretion, (a) to determine
the Eligible Individuals to whom, and the time or times at which, Awards shall
be granted; (b) to determine the number of shares of Stock that shall be the
subject of each Award; (c) to determine the terms and provisions of each Award
Agreement (which need not be identical), including provisions defining or
otherwise relating to (i) the term and the period or periods and extent of
exercisability of the Options, (ii) the extent to which the transferability of
shares of Stock issued or transferred pursuant to any Award is restricted,
(iii) the effect of termination of employment on the Award, and (iv) the effect
of approved leaves of absence (consistent with any applicable regulations of
the Internal Revenue Service); (d) to accelerate the time of exercisability of
any Option that has been granted; (e) to make determinations of the Fair Market
Value of the Stock pursuant to the Plan; and (f) to delegate its duties under
the Plan to the Committee or such agents as it may appoint from time to time,
provided that the Board of Directors may not delegate its duties with respect
to making Awards to Eligible Individuals who are subject to Section 16(b) of
the Exchange Act.
3.2 Committee. Subject to the powers reserved unto the Board of
Directors in Section 3.1 hereof, the Committee shall administer the Plan. The
number of persons that shall constitute the Committee shall be determined from
time to time by a majority of all the members of the Board of Directors, and,
unless that majority of the Board of Directors determines otherwise, shall be
no less than two persons.
3.3 Duration, Removal, Etc. The members of the Committee shall
serve at the pleasure of the Board of Directors, which shall have the power, at
any time and from time to time, to remove members from or add members to the
Committee. Removal from the Committee may be with or without cause. Any
individual serving as a member of the Committee shall have the right to resign
from membership in the Committee by at least three day's written notice to the
Board of Directors. The Board of Directors, and not the remaining members of
the Committee, shall have the power and authority to fill vacancies on the
Committee, however caused.
5
<PAGE> 6
3.4 Meetings and Actions of Committee. The Board of Directors
shall designate which of the Committee members shall be the chairman of the
Committee. If the Board of Directors fails to designate a Committee chairman,
the members of the Committee shall elect one of the Committee members as
chairman, who shall act as chairman until he ceases to be a member of the
Committee or until the Board of Directors elects a new chairman. The Committee
shall hold its meetings at those times and places as the chairman of the
Committee may determine. At all meetings of the Committee, a quorum for the
transaction of business shall be required, and a quorum shall be deemed present
if at least a majority of the members of the Committee are present. At any
meeting of the Committee, each member shall have one vote. All decisions and
determinations of the Committee shall be made by the majority vote or majority
decision of all of its members present at a meeting at which a quorum is
present; provided, however, that any decision or determination reduced to
writing and signed by all of the members of the Committee shall be as fully
effective as if it had been made at a meeting that was duly called and held.
The Committee may make any rules and regulations for the conduct of its
business that are not inconsistent with the provisions of the Plan, the
Certificate of Incorporation, the by-laws of the Corporation, as the Committee
may deem advisable.
3.5 Committee's Powers. The Committee shall have the authority,
in its sole and absolute discretion, (a) to adopt, amend, and rescind
administrative and interpretive rules and regulations relating to the Plan; (b)
to construe the respective Award Agreements and the Plan; and (c) to make all
other determinations, perform all other acts, and exercise all other powers and
authority necessary or advisable for administering the Plan, including the
delegation of those ministerial acts and responsibilities as the Committee
deems appropriate. The Committee may correct any defect, supply any omission or
reconcile any inconsistency in the Plan, in any Award, or in any Award
Agreement in the manner and to the extent it deems necessary or desirable to
carry the Plan into effect, and the Committee shall be the sole and final judge
of that necessity or desirability. The determinations of the Committee on the
matters referred to in this Paragraph 3.5 shall be final and conclusive.
SECTION 4. ELIGIBILITY AND PARTICIPATION
4.1 Eligible Individuals. Awards may be granted pursuant to the
Plan only to persons who are Eligible Individuals at the time of the grant
thereof.
4.2 Grant of Awards. Subject to the express provisions of the
Plan, the Board of Directors shall determine which Eligible Individuals shall
be granted Awards from time to time. In making grants, the Board of Directors
shall take into consideration the contribution the potential Holder has made or
may make to the success of the Corporation or its Subsidiaries. The Board of
Directors shall also determine the number of shares subject to each of the
Awards and shall authorize and cause the Corporation to grant Awards in
accordance with those determinations.
4.3 Date of Grant. The date on which the Board of Directors
completes all action resolving to offer an Award to an individual, including
the specification of the number of shares of Stock to be subject to the Award,
shall be the date on which the Award covered by an Award Agreement is granted
(the "Date of Grant"), even though certain terms of the Award Agreement may not
be determined at that time and even though the Award Agreement may not be
executed until a later time. In no event shall a Holder gain any rights in
addition to those specified by the Board of Directors in its grant, regardless
of the time that may pass between the grant of the Award and the actual
execution of the Award Agreement by the Corporation and the Holder.
4.4 Award Agreements. Each Award granted under the Plan shall be
evidenced by an Award Agreement that is executed by the Corporation and the
Eligible Individual to whom the Award is granted and incorporating those terms
that the Board of Directors shall deem necessary or desirable. More than one
Award may be granted under the Plan to the same Eligible Individual and be
outstanding concurrently. In the event an Eligible Individual is granted both
one or more Incentive Options and one or more Nonstatutory Options, those
grants shall be evidenced by separate Award Agreements, one for each of the
Incentive Option grants and one for each of the Nonstatutory Option grants.
4.5 Limitation for Incentive Options. Notwithstanding any
provision contained herein to the contrary, (a) a person shall not be eligible
to receive an Incentive Option unless he is an Employee of the Corporation or a
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corporate Subsidiary (but not a partnership Subsidiary), and (b) a person shall
not be eligible to receive an Incentive Option if, immediately before the time
the Option is granted, that person owns (within the meaning of Sections 422 and
425 of the Code) stock possessing more than ten percent of the total combined
voting power or value of all classes of stock of the Corporation or a
Subsidiary. Nevertheless, subparagraph 4.5(b) shall not apply if, at the time
the Incentive Option is granted, the Exercise Price of the Incentive Option is
at least one hundred and ten percent of Fair Market Value and the Incentive
Option is not, by its terms, exercisable after the expiration of five years
from the Date of Grant.
4.6 No Right to Award. The adoption of the Plan shall not be
deemed to give any person a right to be granted an Award.
SECTION 5. TERMS AND CONDITIONS OF OPTIONS
All Options granted under the Plan shall comply with, and the related
Award Agreements shall be deemed to include and be subject to, the terms and
conditions set forth in this Section 5 (to the extent each term and condition
applies to the form of Option) and also to the terms and conditions set forth
in Section 6 and Section 7; provided, however, that the Board of Directors may
authorize an Award Agreement that expressly contains terms and provisions that
differ from the terms and provisions set forth in Paragraphs 6.2, 6.3, and 6.4
and any of the terms and provisions of Section 7 (other than Paragraphs 7.9 and
7.10).
5.1 Number of Shares. Each Award Agreement shall state the total
number of shares of Stock to which it relates.
5.2 Vesting. Unless otherwise provided in an Award Agreement,
all Options awarded under this Plan shall vest and become exercisable over a
four year period, such that on each anniversary of the Date of Grant, 25% of
the number of shares of stock subject to the Option shall vest and become
exercisable until the option is fully vested. Notwithstanding this Section
5.2, the Board of Directors may accelerate the vesting of any Option granted
under this Plan.
5.3 Expiration of Options. Nonstatutory Options and Incentive
Options may be exercised during the term determined by the Board of Directors
and set forth in the Award Agreement; provided that no Incentive Option shall
be exercised after the expiration of a period of ten years commencing on the
Date of Grant of the Incentive Option.
5.4 Exercise Price. Each Award Agreement shall state the
exercise price per share of Stock (the "Exercise Price"). The exercise price
per share of Stock subject to an Incentive Option shall not be less than the
greater of (a) the par value per share of the Stock or (b) 100% of the Fair
Market Value per share of the Stock on the Date of Grant of the Option. The
exercise price per share of Stock subject to a Nonstatutory Option shall not be
less than the par value per share of the Stock.
5.5 Method of Exercise. The Option shall be exercisable only by
written notice of exercise (the "Exercise Notice") delivered to the Corporation
during the term of the Option, which notice shall (a) state the number of
shares of Stock with respect to which the Option is being exercised, (b) be
signed by the Holder of the Option or, if the Holder is dead or Disabled, by
the person authorized to exercise the Option pursuant to Paragraph 7.3, (c) be
accompanied by the Exercise Price for all shares of Stock for which the Option
is exercised, and (d) include such other information, instruments, and
documents as may be required to satisfy any other condition to exercise
contained in the Award Agreement. The Option shall not be deemed to have been
exercised unless all of the requirements of the preceding provisions of this
Paragraph 5.5 have been satisfied.
5.6 Incentive Option Exercises. During the Holder's lifetime,
only the Holder may exercise an Incentive Option.
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5.7 Medium and Time of Payment. The Exercise Price of an Option
shall be payable in full upon the exercise of the Option (a) in cash or by an
equivalent means acceptable to the Committee, (b) on the Committee's prior
consent, with shares of Stock owned by the Holder (including shares received
upon exercise of the Option or restricted shares already held by the Holder)
and having a Fair Market Value at least equal to the aggregate Exercise Price
payable in connection with such exercise, or (c) by any combination of clauses
(a) and (b). If the Committee elects to accept shares of Stock in payment of
all or any portion of the Exercise Price, then (for purposes of payment of the
Exercise Price) those shares of Stock shall be deemed to have a cash value
equal to their aggregate Fair Market Value determined as of the date of the
delivery of the Exercise Notice. If the Committee elects to accept shares of
restricted Stock in payment of all or any portion of the Exercise Price, then
an equal number of shares issued pursuant to the exercise shall be restricted
on the same terms and for the restriction period remaining on the shares used
for payment.
5.8 Payment with Sale Proceeds. In addition, at the request of
the Holder and to the extent permitted by applicable law, the Committee may
(but shall not be required to) approve arrangements with a brokerage firm under
which that brokerage firm, on behalf of the Holder, shall pay to the
Corporation the Exercise Price of the Option being exercised, and the
Corporation shall promptly deliver the exercised shares to the brokerage firm.
To accomplish this transaction, the Holder must deliver to the Corporation an
Exercise Notice containing irrevocable instructions from the Holder to the
Corporation to deliver the stock certificates directly to the broker. Upon
receiving a copy of the Exercise Notice acknowledged by the Corporation, the
broker shall sell that number of shares of Stock or loan the Holder an amount
sufficient to pay the Exercise Price and any withholding obligations due. The
broker shall then deliver to the Corporation that portion of the sale or loan
proceeds necessary to cover the Exercise Price and any withholding obligations
due. The Committee shall not approve any transaction of this nature if the
Committee believes that the transaction would give rise to the Holder's
liability for short-swing profits under Section 16(b) of the Exchange Act.
5.9 Payment of Taxes. The Committee may, in its discretion,
require a Holder to pay to the Corporation (or the Corporation's Subsidiary if
the Holder is an employee of a Subsidiary of the Corporation), at the time of
the exercise of an Option, the amount that the Committee deems necessary to
satisfy the Corporation's or its Subsidiary's current or future obligation to
withhold federal, state or local income or other taxes that the Holder incurs
by exercising an Option. Upon the exercise of an Option requiring tax
withholding, a Holder may (a) direct the Corporation to withhold from the
shares of Stock to be issued to the Holder the number of shares necessary to
satisfy the Corporation's obligation to withhold taxes, that determination to
be based on the shares' Fair Market Value as of the date on which tax
withholding is to be made; (b) deliver to the Corporation sufficient shares of
Stock (based upon the Fair Market Value at date of withholding) to satisfy the
Corporation's tax withholding obligations, based on the shares' Fair Market
Value as of the date of exercise; or (c) deliver sufficient cash to the
Corporation to satisfy its tax withholding obligations. Holders who elect to
use such a stock withholding feature must make the election at the time and in
the manner that the Committee prescribes. The Committee may, at its sole
option, deny any Holder's request to satisfy withholding obligations through
Stock instead of cash. In the event the Committee subsequently determines that
the aggregate Fair Market Value (as determined above) of any shares of Stock
withheld as payment of any tax withholding obligation is insufficient to
discharge that tax withholding obligation, then the Holder shall pay to the
Corporation, immediately upon the Committee's request, the amount of that
deficiency.
5.10 Limitation on Aggregate Value of Shares That May Become First
Exercisable During Any Calendar Year Under an Incentive Option. Except as is
otherwise provided in Paragraph 6.2, with respect to any Incentive Option
granted under this Plan, the aggregate Fair Market Value of shares of Stock
subject to an Incentive Option and the aggregate Fair Market Value of shares of
Stock or stock of any Subsidiary subject to any other incentive stock option
(within the meaning of Section 422 of the Code) of the Corporation or its
Subsidiaries that first become purchasable by a Holder in any calender year may
not (with respect to that Holder) exceed $100,000, or such other amount as may
be prescribed under Section 422 of the Code or applicable regulations or
rulings from time to time. As used in the previous sentence, Fair Market Value
shall be determined as of the date the Incentive Option is granted. Failure to
comply with this provision shall not impair the enforceability or
exercisability of any Option, but shall cause the excess amount of shares to be
reclassified in accordance with the Code.
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5.11 No Fractional Shares. The Corporation shall not in any case
be required to sell, issue, or deliver a fractional share with respect to any
Option. In lieu of the issuance of any fractional share of Stock, the
Corporation shall pay to the Holder an amount in cash equal to the same
fraction (as the fractional Stock) of the Fair Market Value of a share of Stock
determined as of the date of the applicable Exercise Notice.
5.12 Modification, Extension and Renewal of Options. Subject to
the terms and conditions of and within the limitations of the Plan, and any
consent required by the last sentence of this Paragraph 5.12, the Board of
Directors may (a) modify, extend or renew outstanding Options granted under the
Plan, (b) accept the surrender of Options outstanding hereunder (to the extent
not previously exercised) and authorize the granting of new Options in
substitution for outstanding Options (to the extent not previously exercised),
and (c) amend the terms of an Incentive Option at any time to include
provisions that have the effect of changing the Incentive Option to a
Nonstatutory Option. Nevertheless, without the consent of the Holder, the
Board of Directors may not modify any outstanding Options so as to specify a
higher or lower Exercise Price or accept the surrender of outstanding Incentive
Options and authorize the granting of new Options in substitution therefor
specifying a higher or lower Exercise Price. In addition, no modification of an
Option granted hereunder shall, without the consent of the Holder, alter or
impair any rights or obligations under any Option theretofore granted hereunder
to such Holder under the Plan except, with respect to Incentive Options, as may
be necessary to satisfy the requirements of Section 422 of the Code or as
permitted in clause (c) of this Paragraph 5.12.
5.13 Other Agreement Provisions. The Award Agreements authorized
under the Plan shall contain such provisions in addition to those required by
the Plan (including, without limitation, restrictions or the removal of
restrictions upon the exercise of the Option and the retention or transfer of
shares thereby acquired) as the Board of Directors may deem advisable. Each
Award Agreement shall identify the Option evidenced thereby as an Incentive
Option or Nonstatutory Option, as the case may be, and no Award Agreement shall
cover both an Incentive Option and a Nonstatutory Option. Each Award Agreement
relating to an Incentive Option granted hereunder shall contain such
limitations and restrictions upon the exercise of the Incentive Option to which
it relates as shall be necessary for the Incentive Option to which such Award
Agreement relates to constitute an incentive stock option, as defined in
Section 422 of the Code.
SECTION 6. ADJUSTMENT PROVISIONS
6.1 Adjustment of Awards and Authorized Stock. The terms of an
Award and the number of shares of Stock authorized pursuant to Paragraph 2.1
for issuance under the Plan shall be subject to adjustment, from time to time,
in accordance with the following provisions:
(a) If at any time or from time to time, the Corporation
shall subdivide as a whole (by reclassification, by a stock split, by
the issuance of a distribution on Stock payable in Stock or otherwise)
the number of shares of Stock then outstanding into a greater number
of shares of Stock, then (i) the maximum number of shares of Stock
available for the Plan as provided in Paragraph 2.1 shall be increased
proportionately, and the kind of shares or other securities available
for the Plan shall be appropriately adjusted, (ii) the number of
shares of Stock (or other kind of shares or securities) that may be
acquired under any Award shall be increased proportionately, and (iii)
the price (including Exercise Price) for each share of Stock (or other
kind of shares or unit of other securities) subject to then
outstanding Awards shall be reduced proportionately, without changing
the aggregate purchase price or value as to which outstanding Awards
remain exercisable or subject to restrictions.
(b) If at any time or from time to time, the Corporation
shall consolidate as a whole (by reclassification, reverse stock
split, or otherwise) the number of shares of Stock then outstanding
into a lesser number of shares of Stock, (i) the maximum number of
shares of Stock available for the Plan as provided in Paragraph 2.1
shall be decreased proportionately, and the kind of shares or other
securities available for the Plan shall be appropriately adjusted,
(ii) the number of shares of Stock (or other kind of shares or
securities) that may be acquired under any Award shall be decreased
proportionately, and (iii) the price (including
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Exercise Price) for each share of Stock (or other kind of shares or
unit of other securities) subject to then outstanding Awards shall be
increased proportionately, without changing the aggregate purchase
price or value as to which outstanding Awards remain exercisable or
subject to restrictions.
(c) Whenever the number of shares of Stock subject to
outstanding Awards and the price for each share of Stock subject to
outstanding Awards are required to be adjusted as provided in this
Paragraph 6.1, the Committee shall promptly prepare a notice setting
forth, in reasonable detail, the event requiring adjustment, the
amount of the adjustment, the method by which such adjustment was
calculated, and the change in price and the number of shares of Stock,
other securities, cash or property purchasable subject to each Award
after giving effect to the adjustments. The Committee shall promptly
give each Holder such a notice.
(d) Adjustments under subparagraphs 6.1(a) and (b) shall
be made by the Committee, and its determination as to what adjustments
shall be made and the extent thereof shall be final, binding and
conclusive. No fractional interest shall be issued under the Plan on
account of any such adjustments.
6.2 Changes in Control. Each Award Agreement shall provide that,
upon the occurrence of a Change in Control, all outstanding Options shall
immediately become fully vested and exercisable in full, including that portion
of any Option that pursuant to the terms and provisions of the applicable Award
Agreement had not yet become exercisable (the total number of shares of Stock
as to which an Option is exercisable upon the occurrence of a Change in Control
is referred to herein as the "Total Shares"). If a Change in Control involves
a Restructure or occurs in connection with a series of related transactions
involving a Restructure and if such Restructure is in the form of a
Non-Surviving Event and as a part of such Restructure shares of stock, other
securities, cash or property shall be issuable or deliverable in exchange for
Stock, then the Holder of an Award shall be entitled to purchase (in lieu of
the Total Shares that the Holder would otherwise be entitled to purchase) the
number of shares of stock, other securities, cash or property to which that
number of Total Shares would have been entitled in connection with such
Restructure (and at an aggregate exercise price equal to the Exercise Price
that would have been payable if that number of Total Shares had been purchased
on the exercise of the Option immediately before the consummation of the
Restructure). Nothing in this Paragraph 6.2 shall impose on a Holder the
obligation to exercise any Award immediately before or upon the Change of
Control, nor shall the Holder forfeit the right to exercise the Award during
the remainder of the original term of the Award because of a Change in Control
or because the Holder's employment is terminated for any reason following a
Change in Control.
6.3 Restructure and No Change in Control. In the event a
Restructure should occur at any time while there is any outstanding Award
hereunder and that Restructure does not occur in connection with a Change in
Control or in connection with a series of related transactions involving a
Change in Control, then:
(a) no outstanding Option shall immediately become fully
vested and exercisable in full merely because of the occurrence of the
Restructure; and
(b) at the option of the Committee, the Corporation may
(but shall not be required to) take any one or more of the following
actions:
(i) accelerate in whole or in part the time of
the vesting and exercisability of any one or more of the
outstanding Options so as to provide that those Options shall
be exercisable before, upon, or after the consummation of the
Restructure;
(ii) if the Restructure is in the form of a
Non-Surviving Event, cause the surviving entity to assume in
whole or in part any one or more of the outstanding Awards
upon such terms and provisions as the Committee deems
desirable; or
(iii) redeem in whole or in part any one or more
of the outstanding Awards (whether or not then exercisable)
in consideration of a cash payment, as such payment may be
reduced for tax
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withholding obligations as contemplated in Paragraph 5.9 in
an amount equal to the excess of (1) the Fair Market Value,
determined as of a date immediately preceding the
consummation of the Restructure, of the aggregate number of
shares of Stock subject to the Award and as to which the
Award is being redeemed over (2) the Exercise Price for that
number of shares of Stock;
The Corporation shall promptly notify each Holder of any election or action
taken by the Corporation under this Paragraph 6.3. In the event of any
election or action taken by the Corporation pursuant to this Paragraph 6.3 that
requires the amendment or cancellation of any Award Agreement as may be
specified in any notice to the Holder thereof, that Holder shall promptly
deliver that Award Agreement to the Corporation in order for that amendment or
cancellation to be implemented by the Corporation and the Committee. The
failure of the Holder to deliver any such Award Agreement to the Corporation as
provided in the preceding sentence shall not in any manner effect the validity
or enforceability of any action taken by the Corporation and the Committee
under this Paragraph 6.3, including, without limitation, any redemption of an
Award as of the consummation of a Restructure. Any cash payment to be made by
the Corporation pursuant to this Paragraph 6.3 in connection with the
redemption of any outstanding Awards shall be paid to the Holder thereof
currently with the delivery to the Corporation of the Award Agreement
evidencing that Award; provided, however, that any such redemption shall be
effective upon the consummation of the Restructure notwithstanding that the
payment of the redemption price may occur subsequent to the consummation. If
all or any portion of an outstanding Award is to be exercised or accelerated to
upon or after the consummation of a Restructure that is in the form of a
Non-Surviving Event and as a part of that Restructure shares of stock, other
securities, cash or property shall be issuable or deliverable in exchange for
Stock, then the Holder of the Award shall thereafter be entitled to purchase
(in lieu of the number of shares of Stock that the Holder would otherwise be
entitled to purchase) the number of shares of stock, other securities, cash or
property to which such number of shares of Stock would have been entitled in
connection with the Restructure (and, for Options, at an aggregate exercise
price equal to the Exercise Price that would have been payable if that number
of Total Shares had been purchased on the exercise of the Option immediately
before the consummation of the Restructure).
6.4 Notice of Change in Control or Restructure. The Corporation
shall attempt to keep all Holders informed with respect to any Change in
Control or Restructure or of any potential Change in Control or Restructure to
the same extent that the Corporation's stockholders are informed by the
Corporation of any such event or potential event.
SECTION 7. ADDITIONAL PROVISIONS
7.1 Termination of Employment. If a Holder is an Eligible
Individual because Holder is an Employee and if that employment relationship is
terminated for any reason other than that Holder's death or Disability
(hereinafter defined), then any and all Awards held by such Holder in such
Holder's capacity as an Employee as of the date of the termination that are not
yet exercisable shall become null and void as of the date of such termination
and the portion, if any, of such Awards that are exercisable as of the date of
termination shall be exercisable for a period of the lesser of (a) the
remainder of the term of the Award or (b) (i) in the case of an Incentive
Option, 90 days, and (ii) in the case of a Nonstatutory Option, 180 days, after
the date of termination. If a Holder is an eligible Individual because such
Holder is an Employee and if that employment relationship is terminated as a
result of that Holder's death Disability, then any and all Awards held by such
Holder in such Holder's capacity as an Employee as of the date of termination
that are not yet exercisable shall become null and void as of such date, and
all such Awards held by that Holder as of the date of termination that are
exercisable shall be exercisable for a period of the lesser of (a) the
remainder of the term of the Award or (b) twelve (12) months after the date of
termination. Any portion of any such Award not exercised upon the expiration
of the lesser of the periods specified in (a) or (b) of the preceding two
sentences shall be null and void upon the expiration of such period, as
applicable.
7.2 Other Loss of Eligibility. If a Holder is an Eligible
Individual because Holder is serving in a capacity other than as an Employee
and if that capacity is terminated for any reason other than Holder's death or
Disability, then that portion, if any, of any and all Awards held by Holder
that were granted because of that capacity which are not yet exercisable as of
the date of the termination shall become null and void as of the date of the
termination;
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provided, however, that the portion, if any, of any and all Awards held by
Holder that are then exercisable as of the date of the termination shall
survive the termination and shall be exercisable for a period of the lesser of
(a) the remainder of the term of the Award or (b) 180 days following the date
such capacity terminated. If a Holder is an Eligible Individual because the
Holder is serving in a capacity other than as an Employee and if that capacity
is terminated by reason of the Holder's death or Disability, then the portion,
if any, of any and all Awards held by the Holder that are not yet exercisable
as of the date of that termination for death or Disability shall become null
and void as of such date and all such Awards held by that Holder as of the date
of termination that exercisable shall be exercisable for a period of the lesser
of (a) the remainder of the term of the Award or (b) twelve (12) months after
the date of termination. Any portion of an Award not exercised upon the
expiration of the lesser of the periods specified in (a) or (b) of the
preceding two sentences shall be null and void upon the expiration of such
period, as applicable.
7.3 Death or Disability. Upon the death or Disability of a
Holder, any and all Awards held by Holder that are not yet exercisable as of
the date of Holder's death or Disability may be exercisable by, in the case of
Holder's Disability, Holder, his guardian or legal representative or, in the
case of Holder's death, by Holder's legal representatives, heirs, legatees or
distributees, in each case for the periods prescribed in Subsection 7.1 or
Subsection 7.2, as applicable. "Disability" shall have the meaning given it in
the employment agreement of the Holder; provided, however, that if that Holder
has no employment agreement, "Disability" shall mean, as determined by the
Committee in their sole discretion exercised in good faith, a physical or
mental impairment of sufficient severity that, either the Holder is unable to
continue performing the duties he performed before such impairment or the
Holder's condition entitles him to disability benefits under any insurance or
employee benefit plan of the Corporation or its Subsidiaries and that
impairment or condition is cited by the Corporation as the reason for
termination of the Holder's employment.
7.4 Leave of Absence. With respect to an Award, the Committee
may, in its sole discretion, determine that any Holder who is on leave of
absence for any reason will be considered to still be in the employ of the
Corporation, provided that rights to that Award during a leave of absence will
be limited to the extent to which those rights were earned or vested when the
leave of absence began.
7.5 Transferability of Awards. In addition to such other terms
and conditions as may be included in a particular Award Agreement, an Award
requiring exercise shall be exercisable during a Holder's lifetime only by that
Holder or by that Holder's guardian or legal representative. An Award
requiring exercise shall not be transferrable other than by will or the laws of
descent and distribution.
7.6 Forfeiture and Restrictions on Transfer. Each Award
Agreement may contain or otherwise provide for conditions giving rise to the
forfeiture of the Stock acquired pursuant to an Award or otherwise and may also
provide for those restrictions on the transferability of shares of the Stock
acquired pursuant to an Award or otherwise that the Committee in its sole and
absolute discretion may deem proper or advisable. The conditions giving rise
to forfeiture may include, but need not be limited to, the requirement that the
Holder render substantial services to the Corporation or its Subsidiaries for a
specified period of time. The restrictions on transferability may include, but
need not be limited to, options and rights of first refusal in favor of the
Corporation and stockholders of the Corporation other than the Holder of such
shares of Stock who is a party to the particular Award Agreement or a
subsequent holder of the shares of Stock who is bound by that Award Agreement.
7.7 Delivery of Certificates of Stock. Subject to Paragraph 7.8,
the Corporation shall promptly issue and deliver a certificate representing the
number of shares of Stock as to which an Option has been exercised after the
Corporation receives an Exercise Notice and upon receipt by the Corporation of
the Exercise Price and any tax withholding as may be requested. The value of
the shares of Stock transferable because of an Award under the Plan shall not
bear any interest owing to the passage of time, except as may be otherwise
provided in an Award Agreement. If a Holder is entitled to receive
certificates representing Stock received for more than one form of Award under
the Plan, separate Stock certificates shall be issued with respect to Incentive
Options and Nonstatutory Stock Options separately.
7.8 Conditions to Delivery of Stock. Nothing herein or in any
Award granted hereunder or any Award Agreement shall require the Corporation to
issue any shares with respect to any Award if that issuance would, in the
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opinion of counsel for the Corporation, constitute a violation of the
Securities Act or any similar or superseding statute or statutes, any other
applicable statute or regulation, or the rules of any applicable securities
exchange or securities association, as then in effect. At the time of any
exercise of an Option, the Corporation may, as a condition precedent to the
exercise of such Option, require from the Holder of the Award (or in the event
of his death, his legal representatives, heirs, legatees, or distributees) such
written representations, if any, concerning the Holder's intentions with regard
to the retention or disposition of the shares of Stock being acquired pursuant
to the Award and such written covenants and agreements, if any, as to the
manner of disposal of such shares as, in the opinion of counsel to the
Corporation, may be necessary to ensure that any disposition by that Holder (or
in the event of the Holder's death, his legal representatives, heirs, legatees,
or distributees), will not involve a violation of the Securities Act or any
similar or superseding statute or statutes, any other applicable state or
federal statute or regulation, or any rule of any applicable securities
exchange or securities association, as then in effect.
7.9 Securities Act Legend. Certificates for shares of Stock,
when issued, may have the following legend, or statements of other applicable
restrictions, endorsed thereon, and may not be immediately transferable:
THE SHARES OF STOCK REPRESENTED BY THIS CERTIFICATE HAVE NOT BEEN
REGISTERED UNDER THE SECURITIES ACT OF 1933, AS AMENDED, OR ANY STATE
SECURITIES LAWS. THE SHARES MAY NOT BE OFFERED FOR SALE, SOLD,
PLEDGED, TRANSFERRED, OR OTHERWISE DISPOSED OF UNTIL THE HOLDER HEREOF
PROVIDES EVIDENCE SATISFACTORY TO THE ISSUER (WHICH, IN THE DISCRETION
OF THE ISSUER, MAY INCLUDE AN OPINION OF COUNSEL SATISFACTORY TO THE
ISSUER) THAT SUCH OFFER, SALE, PLEDGE, TRANSFER, OR OTHER DISPOSITION
WILL NOT VIOLATE APPLICABLE FEDERAL OR STATE LAWS.
This legend shall not be required for shares of Stock issued pursuant to an
effective registration statement under the Securities Act.
7.10 Legend for Restrictions on Transfer. Each certificate
representing shares issued to a Holder pursuant to an Award granted under the
Plan shall, if such shares are subject to any transfer restriction, including a
right of first refusal, provided for under this Plan or an Award Agreement,
bear a legend that complies with applicable law with respect to the
restrictions on transferability contained in this Paragraph 7.13, such as:
THE SHARES OF STOCK REPRESENTED BY THIS CERTIFICATE ARE SUBJECT TO
RESTRICTIONS ON TRANSFERABILITY IMPOSED BY THAT CERTAIN INSTRUMENT
ENTITLED "HARKEN ENERGY CORPORATION 1996 INCENTIVE AND NONSTATUTORY
STOCK OPTION PLAN" AS ADOPTED BY HARKEN ENERGY CORPORATION (THE
"CORPORATION") ON ____________, 1996, AND AN AGREEMENT THEREUNDER
BETWEEN THE CORPORATION AND [HOLDER] DATED ______________________,
____, AND MAY NOT BE TRANSFERRED, SOLD, OR OTHERWISE DISPOSED OF
EXCEPT AS THEREIN PROVIDED. THE CORPORATION WILL FURNISH A COPY OF
SUCH INSTRUMENT AND AGREEMENT TO THE RECORD HOLDER OF THIS CERTIFICATE
WITHOUT CHARGE ON REQUEST TO THE CORPORATION AT ITS PRINCIPAL PLACE OF
BUSINESS OR REGISTERED OFFICE.
7.11 Rights as a Stockholder. A Holder shall have no right as a
stockholder with respect to any shares covered by his Award until a certificate
representing those shares is issued in his name. No adjustment shall be made
for dividends (ordinary or extraordinary, whether in cash or other property) or
distributions or other rights for which the record date is before the date that
certificate is issued, except as contemplated by Section 6. Nevertheless,
dividends and dividend equivalent rights may be extended to and made part of
any Award denominated in Stock or units of Stock, subject to such terms,
conditions, and restrictions as the Committee may establish. The Committee may
also establish rules and procedures for the crediting of interest on deferred
cash payments and dividend equivalents for deferred payment denominated in
Stock or units of Stock.
13
<PAGE> 14
7.12 Furnish Information. Each Holder shall furnish to the
Corporation all information requested by the Corporation to enable it to comply
with any reporting or other requirement imposed upon the Corporation by or
under any applicable statute or regulation.
7.13 Obligation to Exercise. The granting of an Award hereunder
shall impose no obligation upon the Holder to exercise the same or any part
thereof.
7.14 Adjustments to Awards. Subject to the general limitations
set forth in Sections 5 and 6, the Committee may make any adjustment in the
exercise price of, the number of shares subject to or the terms of a
Nonstatutory Option by canceling an outstanding Nonstatutory Option and
regranting a Nonstatutory Option. Such adjustment shall be made by amending,
substituting or regranting an outstanding Nonstatutory Option. Such amendment,
substitution or regrant may result in terms and conditions that differ from the
terms and conditions of the original Nonstatutory Option. The Committee may
not, however, impair the rights of any Holder to previously granted
Nonstatutory Options without that Holder's consent. If such action is effected
by amendment, the effective date of such amendment shall be the date of the
original grant.
7.15 Remedies. The Corporation shall be entitled to recover from
a Holder reasonable attorneys' fees incurred in connection with the enforcement
of the terms and provisions of the Plan and any Award Agreement whether by an
action to enforce specific performance or for damages for its breach or
otherwise.
7.16 Information Confidential. As partial consideration for the
granting of each Award hereunder, the Holder shall agree with the Corporation
that he will keep confidential all information and knowledge that he has
relating to the manner and amount of his participation in the Plan; provided,
however, that such information may be disclosed as required by law and may be
given in confidence to the Holder's spouse, tax and financial advisors, or to a
financial institution to the extent that such information is necessary to
secure a loan.
7.17 Consideration. No Option shall be exercisable with respect
to a Holder unless and until the Holder shall have paid cash or property to, or
performed services for, the Corporation or any of its Subsidiaries that the
Committee believes is equal to or greater in value that the par value of the
Stock subject to such Award.
SECTION 8. DURATION AND AMENDMENT OF PLAN
8.1 Duration. No Awards may be granted hereunder after the date
that is ten (10) years from the date the Plan is adopted by the Board of
Directors.
8.2 Amendment. The Board of Directors may, insofar as permitted
by law, with respect to any shares which, at the time, are not subject to
Awards, suspend or discontinue the Plan or revise or amend it in any respect
whatsoever, and may amend any provision of the Plan or any Award Agreement to
make the Plan or the Award Agreement, or both, comply with Section 16(b) of the
Exchange Act and the exemptions from that Section in the regulations
thereunder. The Board of Directors may also amend, modify, suspend or
terminate the Plan for the purpose of meeting or addressing any changes in
other legal requirements applicable to the Corporation or the Plan or for any
other purpose permitted by law.
SECTION 9. STOCKHOLDER RATIFICATION
9.1 Ratification by Stockholders. The Board of Directors may, in
their sole and absolute discretion, submit this Plan, and any Awards made under
this Plan, to the stockholders of the Corporation for ratification
9.2 Treatment of Options. Notwithstanding any other provision
in this Plan, unless this Plan, and any awards previously made under this Plan,
shall made been submitted to the stockholders for approval within twelve (12)
months from the date this Plan is adopted by the Board of Directors, and within
such time period this Plan, and any awards previously made under this Plan, is
ratified by the vote of the holders of the majority of the total number of
14
<PAGE> 15
shares entitled to vote at a annual or special meeting of the stockholders of
the Corporation, all Options issued under this Plan shall be treated as
Nonstatutory Options, regardless of the intention of the Board of Directors or
the Committee at the Date of Grant of such Option.
SECTION 10. GENERAL
10.1 Application of Funds. The proceeds received by the
Corporation from the sale of shares pursuant to Awards may be used for any
general corporate purpose.
10.2 Right of the Corporation and Subsidiaries to Terminate
Employment. Nothing contained in the Plan, or in any Award Agreement, shall
confer upon any Holder the right to continue in the employ of the Corporation
or any Subsidiary, or interfere in any way with the rights of the Corporation
or any Subsidiary to terminate the Holder's employment at any time.
10.3 No Liability for Good Faith Determinations. Neither the
members of the Board of Directors nor any member of the Committee shall be
liable for any act, omission, or determination taken or made in good faith with
respect to the Plan or any Award granted under it, and members of the Board of
Directors and the Committee shall be entitled to indemnification and
reimbursement by the Corporation in respect of any claim, loss, damage, or
expense (including attorneys' fees, the costs of settling any suit, provided
such settlement is approved by independent legal counsel selected by the
Corporation, and amounts paid in satisfaction of a judgment, except a judgment
based on a finding of bad faith) arising therefrom to the full extent permitted
by law and under any directors and officers liability or similar insurance
coverage that may from time to time be in effect. This right to
indemnification shall be in addition to, and not a limitation on, any other
indemnification rights any member of the Board of Directors or the Committee
may have.
10.4 Other Benefits. Participation in the Plan shall not preclude
the Holder from eligibility in any other stock or stock option plan of the
Corporation or any Subsidiary or any old age benefit, insurance, pension,
profit sharing retirement, bonus, or other extra compensation plans that the
Corporation or any Subsidiary has adopted, or may, at any time, adopt for the
benefit of its Employees. Neither the adoption of the Plan by the Board of
Directors nor the submission of the Plan to the stockholders of the Corporation
for approval shall be construed as creating any limitations on the power of the
Board of Directors to adopt such other incentive arrangements as it may deem
desirable, including, without limitation, the granting of stock options and the
awarding of stock and cash otherwise than under the Plan, and such arrangements
may be either generally applicable or applicable only in specific cases.
10.5 Exclusion From Pension and Profit-Sharing Compensation. By
acceptance of an Award (whether in Stock or cash), as applicable, each Holder
shall be deemed to have agreed that the Award is special incentive compensation
that will not be taken into account in any manner as salary, compensation or
bonus in determining the amount of any payment under any pension, retirement or
other employee benefit plan of the Corporation or any Subsidiary. In addition,
each beneficiary of a deceased Holder shall be deemed to have agreed that the
Award will not affect the amount of any life insurance coverage, if any,
provided by the Corporation or a Subsidiary on the life of the Holder that is
payable to the beneficiary under any life insurance plan covering employees of
the Corporation or any Subsidiary.
10.6 Execution of Receipts and Releases. Any payment of cash or
any issuance or transfer of shares of Stock to the Holder, or to his legal
representative, heir, legatee, or distributee, in accordance with the
provisions hereof, shall, to the extent thereof, be in full satisfaction of all
claims of such persons hereunder. The Committee may require any Holder, legal
representative, heir, legatee, or distributee, as a condition precedent to such
payment, to execute a release and receipt therefor in such form as it shall
determine.
10.7 Unfunded Plan. Insofar as it provides for Awards of cash and
Stock, the Plan shall be unfunded. Although bookkeeping accounts may be
established with respect to Holders who are entitled to cash, Stock or rights
thereto under the Plan, any such accounts shall be used merely as a bookkeeping
convenience. The Corporation shall not be required to segregate any assets
that may at any time be represented by cash, Stock or rights thereto, nor shall
15
<PAGE> 16
the Plan be construed as providing for such segregation, nor shall the
Corporation nor the Board of Directors nor the Committee be deemed to be a
trustee of any cash, Stock or rights thereto to be granted under the Plan. Any
liability of the Corporation to any Holder with respect to a grant of cash,
Stock or rights thereto under the Plan shall be based solely upon any
contractual obligations that may be created by the Plan and any Award
Agreement; no such obligation of the Corporation shall be deemed to be secured
by any pledge or other encumbrance on any property of the Corporation. Neither
the Corporation nor the Board of Directors nor the Committee shall be required
to give any security or bond for the performance of any obligation that may be
created by the Plan.
10.8 No Guarantee of Interests. Neither the Committee nor the
Corporation guarantees the Stock of the Corporation from loss or depreciation.
10.9 Payment of Expenses. All expenses incident to the
administration, termination, or protection of the Plan, including, but not
limited to, legal and accounting fees, shall be paid by the Corporation or its
Subsidiaries; provided, however, the Corporation or a Subsidiary may recover
any and all damages, fees, expenses, and costs arising out of any actions taken
by the Corporation to enforce its right to purchase Stock under this Plan.
10.10 Corporation Records. Records of the Corporation or its
Subsidiaries regarding the Holder's period of employment, termination of
employment and the reason therefor, leaves of absence, re-employment, and other
matters shall be conclusive for all purposes hereunder, unless determined by
the Committee to be incorrect.
10.11 No Liability of Corporation. The Corporation assumes no
obligation or responsibility to the Holder or his legal representatives, heirs,
legatees, or distributees for any act of, or failure to act on the part of, the
Committee.
10.12 Corporation Action. Any action required of the Corporation
shall be by resolution of its Board of Directors or by a person authorized to
act by resolution of the Board of Directors.
10.13 Severability. If any provision of this Plan is held to be
illegal or invalid for any reason, the illegality or invalidity shall not
affect the remaining provisions hereof, but such provision shall be fully
severable and the Plan shall be construed and enforced as if the illegal or
invalid provision had never been included herein.
10.14 Notices. Whenever any notice is required or permitted
hereunder, such notice must be in writing and personally delivered or sent by
mail. Any notice required or permitted to be delivered hereunder shall be
deemed to be delivered on the date on which it is personally delivered, or,
whether actually received or not, on the third Business Day after it is
deposited in the United States mail, certified or registered, postage prepaid,
addressed to the person who is to receive it at the address which such person
has theretofore specified by written notice delivered in accordance herewith.
The Corporation or a Holder may change, at any time and from time to time, by
written notice to the other, the address which it or he had previously
specified for receiving notices. Until changed in accordance herewith, the
Corporation and each Holder shall specify as its and his address for receiving
notices the address set forth in the Award Agreement pertaining to the shares
to which such notice relates.
10.15 Waiver of Notice. Any person entitled to notice hereunder
may waive such notice.
10.16 Successors. The Plan shall be binding upon the Holder, his
legal representatives, heirs, legatees, and distributees, upon the Corporation,
its successors, and assigns, and upon the Committee, and its successors.
10.17 Headings. The titles and headings of Sections and Paragraphs
are included for convenience of reference only and are not to be considered in
construction of the provisions hereof.
10.18 Governing Law. All questions arising with respect to the
provisions of the Plan shall be determined by application of the laws of the
State of Delaware except to the extent Delaware law is preempted by federal
law. Questions arising with respect to the provisions of an Award Agreement
that are matters of contract law shall be governed by the laws of the state
specified in the Award Agreement, except to the extent Delaware corporate law
conflicts with the contract law of such state, in which event Delaware
corporate law shall govern. The obligation of
16
<PAGE> 17
the Corporation to sell and deliver Stock hereunder is subject to applicable
laws and to the approval of any governmental authority required in connection
with the authorization, issuance, sale, or delivery of such Stock.
10.19 Word Usage. Words used in the masculine shall apply to the
feminine where applicable, and wherever the context of this Plan dictates, the
plural shall be read as the singular and the singular as the plural.
IN WITNESS WHEREOF, Harken Energy Corporation, acting by and through
its officer hereunto duly authorized, has executed this instrument, as of the
14th day of October, 1996.
Harken Energy Corporation
By: /s/ Richard H. Schroeder
-------------------------------------
President
17
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