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SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
FOR THE FISCAL YEAR ENDED DECEMBER 31, 1997
[ ] 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
Securities registered pursuant to Section 12(b) of the Act:
Name of each exchange
Title of each class: on which registered:
COMMON STOCK, PAR VALUE $0.01 PER SHARE American Stock Exchange
Securities registered pursuant to Section 12(g) of the Act: NONE
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
--- ---
INDICATE BY CHECK MARK IF DISCLOSURE OF DELINQUENT FILERS PURSUANT TO ITEM
405 OF REGULATION S-K IS NOT CONTAINED HEREIN, AND WILL NOT BE CONTAINED, TO THE
BEST OF REGISTRANT'S KNOWLEDGE, IN DEFINITIVE PROXY INFORMATION STATEMENTS
INCORPORATED BY REFERENCE IN PART III OF THIS FORM 10-K OR ANY AMENDMENT TO THIS
FORM 10-K. [X]
The aggregate market value of the voting Common Stock, par value $0.01 per
share, held by nonaffiliates of the Registrant as of March 16, 1998 was
approximately $640,000,000. For purposes of the determination of the above
stated amount only, all directors, executive officers and 5% or more
shareholders of the Registrant are presumed to be affiliates.
The number of shares of Common Stock, par value $0.01 per share,
outstanding as of March 16, 1998 was 122,781,347.
DOCUMENTS INCORPORATED BY REFERENCE: DEFINITIVE PROXY MATERIALS FOR THE
1998 ANNUAL MEETING OF STOCKHOLDERS -- PART III, ITEMS 10, 11, 12, AND 13.
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TABLE OF CONTENTS
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PART I.
ITEM 1. Business.......................................................................... 3
ITEM 2. Properties........................................................................ 18
ITEM 3. Legal Proceedings................................................................. 18
ITEM 4. Submission of Matters to a Vote of Security Holders............................... 18
PART II.
ITEM 5. Market for Registrant's Common Equity and Related Stockholder Matters............. 19
ITEM 6. Selected Financial Information and Other Data..................................... 20
ITEM 7. Management's Discussion and Analysis of Financial Condition and
Results of Operations............................................................. 21
ITEM 8. Financial Statements and Supplementary Data....................................... 29
ITEM 9. Changes in and Disagreements with Accountants on Accounting and
Financial Disclosure.............................................................. 61
PART III.
ITEM 10. Directors and Executive Officers of the Registrant................................ 61
ITEM 11. Executive Compensation............................................................ 61
ITEM 12. Security Ownership of Certain Beneficial Owners................................... 61
ITEM 13. Certain Relationships and Related Transactions.................................... 61
PART IV.
ITEM 14. Exhibits, Financial Statement Schedules and Reports on Form 8-K................... 62
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PART I
ITEM 1. BUSINESS
OVERVIEW
Harken Energy Corporation (together with its wholly-owned subsidiaries,
"Harken") is engaged in oil and gas exploration, development and production
operations both domestically and internationally through its various
wholly-owned subsidiaries. Harken's domestic operations include oil and gas
exploration, development and production operations in the Four Corners area of
Utah, Arizona and New Mexico, in the onshore region of South Texas, in the Texas
Panhandle region, in the Magnolia region of Arkansas and the Carlsbad region of
New Mexico. Harken's international operations include six exclusive Colombian
Association Contracts with the state-owned Colombian oil company.
Harken's corporate strategy is to expand its domestic reserve base
through acquisitions and additional exploration and developmental drilling on
its existing oil and gas properties and to reinvest a substantial portion of the
cash flow generated from its domestic assets, along with funds generated from
traditional and other sources of financing, towards developing its higher
potential, and higher risk, international prospects.
Harken was incorporated in 1973 in the state of California and
reincorporated in 1979 in the state of Delaware. Harken's principal offices are
located at 5605 N. MacArthur Blvd., Suite 400, Irving, Texas 75038 and its
telephone number is (972) 753-6900.
INTERNATIONAL EXPLORATION AND DEVELOPMENT OPERATIONS
Harken's international operations consist primarily of its exploration
operations in the Republic of Colombia. Harken, through its wholly-owned
subsidiary Harken de Colombia, Ltd. ("Harken Colombia"), currently holds six
exclusive Association Contracts with Empresa Colombiana de Petroleos
("Ecopetrol"), the state-owned Colombian oil company.
Alcaravan Contract -- During the fourth quarter of 1992, Harken
Colombia and Ecopetrol entered into an Association Contract covering the
Alcaravan area (the "Alcaravan Contract"). The Alcaravan Contract grants Harken
Colombia the exclusive right to explore for, develop and produce oil and gas
throughout approximately 210,000 acres in the Alcaravan area of Colombia. The
Alcaravan area is located in Colombia's Llanos Basin and is located
approximately 140 miles east of Santafe De Bogota. Harken Colombia is required
to conduct a seismic and exploratory drilling program during the initial six
years of the Alcaravan Contract (the "Exploration Period"). At the end of each
of the first six years of the Alcaravan Contract, Harken Colombia has the option
to withdraw from the Alcaravan Contract or to commit to the next year's work
requirements. If during the Exploration Period of the Alcaravan Contract, Harken
Colombia discovers one or more fields 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 related to the areas of commerciality will be extended for a
period of 22 years from the date of such commercial discovery.
Upon a discovery of a field capable of commercial production, and upon
commencement of production from that commercial field, Ecopetrol will reimburse
Harken Colombia for 50% of Harken
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Colombia's successful well costs expended up to the point of declaration of a
commercial discovery out of Ecopetrol's share of production. Production from the
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 and all production (after royalty payments) will be allocated 50%
to Ecopetrol and 50% to Harken Colombia until cumulative production in such
field reaches 60 million barrels of oil, after which Ecopetrol's share of
production will progressively increase and Harken Colombia'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 Colombia. If more than one commercially declared
field is discovered on the Alcaravan area, the production sharing percentages
applicable to the field with the greatest cumulative production will be applied
to all fields within the Alcaravan area. After declaration of a commercial
discovery, Harken Colombia and Ecopetrol will be responsible for all future
development costs and operating expenses in direct proportion to their interest
in production.
The Alcaravan Contract provides that at the end of the Exploration
Period in February 1999, if a field capable of producing hydrocarbons in
commercial quantities has been discovered, the Alcaravan Contract area will be
reduced by 50%. Two years thereafter, the Alcaravan Contract area will be
further reduced to 25% of the original area. Two years thereafter, the Alcaravan
Contract area will be reduced to the area of the commercial field that is in
production or development, plus a reserve zone of five kilometers in width
around the productive boundary of such field. The commercial field plus the zone
surrounding such field will become the area of exploitation. Harken Colombia
will designate the acreage to be released.
Harken Colombia has completed all of the work requirements of the first
four years of the Alcaravan Contract. Harken Colombia has committed to drill an
additional exploratory well, the Canacabare #1, thereby extending the Alcaravan
Contract into the fifth year.
In 1996, Harken Colombia entered into two separate agreements with
industry partners, whereby each industry partner paid 1/3 of the cost of the
Estero #1 well, plus certain additional costs and fees and acquired a 25%
beneficial interest in the Palo Blanco Prospect. In addition, the industry
partners have certain rights to acquire a beneficial interest in any other
prospect on the Alcaravan acreage by paying a portion of the costs associated
with such prospect. Each industry partner has acquired a 25% beneficial interest
in the Anteojos prospect.
Harken Colombia has to date drilled three wells on the Alcaravan
acreage. The first well, the Alcaravan #1, was drilled in February 1995, and did
not find commercial quantities of oil or gas.
In February 1997, Harken Colombia drilled the Estero #1 well located on
the Palo Blanco prospect. The Estero #1 well was drilled to a depth of 8,608
feet to test the Carbonera, Mirador, Guadalupe, Gacheta and Ubaque formations.
During initial production testing of the Ubaque formation, the Estero #1 well
produced at the rate of 4,116 barrels of oil per day. Harken Colombia believes
that the production rate was limited by the capacity of the submersible pump and
surface storage facilities at the location. In December 1997, Harken Colombia
spudded the Estero #3, also located on the Palo Blanco Prospect. The Estero #3
has been drilled and completed and is currently being tested. Results are
anticipated in late March or early April.
Harken Colombia anticipates that it will initiate a 90 day production
test (which period may be extended by the Colombian Mines and Energy Ministry)
of the Estero #1 and, if successful, the Estero #3, in April 1998. Oil produced
during the long-term test is anticipated to be sold and trucked to a pumping
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station approximately 20 miles away. It is anticipated that Harken Colombia will
initially be able to truck and sell up to 1,000 barrels of oil per day.
In order to produce and sell volumes in excess of the 1,000 barrels of
oil per day which can be trucked from the two Estero wells, it will be necessary
for Harken Colombia to construct a pipeline from the Estero wells to the closest
existing pipeline approximately 6 kilometers from the Estero wells (the "Phase I
Pipeline"). Construction of the Phase I Pipeline is anticipated to begin in
April 1998 and is expected take approximately two months to complete. If,
however, the Phase I Pipeline is not completed by the beginning of the rainy
season, construction of the Phase I Pipeline will be suspended until the
beginning of the next dry season in approximately December 1998. Upon completion
of the Phase I Pipeline, it is anticipated that the Phase I Pipeline will be
able to carry up to 2,200 barrels of oil per day. Harken Colombia is currently
investigating methods to produce and sell volumes in excess of the capacity of
the Phase I Pipeline.
Harken Colombia anticipates that it will request Ecopetrol to declare
the Palo Blanco field to be commercial in the second half of 1998. Under the
terms of the Alcaravan Contract, Ecopetrol will have 90 days to decide whether
or not to declare the field to be commercial. In the event a discovery is made
and is not deemed to be commercially feasible by Ecopetrol, Ecopetrol may
require Harken Colombia to expend up to $2 million over a one-year period to
further develop the field, 50% of which will be reimbursed if Ecopetrol
subsequently accepts the commercial feasibility thereof. If Ecopetrol does not
declare the field commercial, Harken Colombia may continue to develop the field
at its own expense. In such event, Ecopetrol will have the right to acquire a
50% interest after recovery by Harken Colombia of 200% of the amounts expended
by Harken Colombia.
On March 10, 1998, Harken Colombia spudded the Canacabare #1, the first
exploratory well to be drilled on the Anteojos prospect. Harken Colombia
anticipates that results on the well will be available in late April 1998.
Harken Colombia plans to drill an additional exploratory well on the
Alcaravan acreage, the Curi #1 located on the La Ceiba prospect in the first
half of 1999.
Bocachico Contract -- In January 1994, Harken Colombia signed its
second Association Contract (the "Bocachico Contract") with Ecopetrol, covering
the Bocachico Contract area. Under the Bocachico Contract, Harken Colombia 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 exploratory period of the Bocachico
Contract, if Harken Colombia 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 and acreage
relinquishment arrangements under the Bocachico Contract are substantially
similar to those under the Alcaravan Contract.
Harken Colombia has fulfilled all of the work requirements for the
first three years of the Bocachico Contract. The work requirements for the
fourth year require Harken Colombia to drill one exploratory well by September
6, 1998. In addition, Harken Colombia has committed to drill an additional
exploratory well, thereby extending the Bocachico Contract into its fifth year.
In October 1995, Harken Colombia entered into a Development Finance
Agreement (the "Rio Negro Development Finance Agreement") with four
institutional investors (the "Rio Negro Investors"), pursuant
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to which the Rio Negro Investors provided up to $3,500,000 to Harken Colombia to
finance a portion of the drilling of two wells on the Rio Negro prospect in the
Bocachico Contract area in exchange for the right to receive future payments
from Harken Colombia equal to 40% of the net profits that Harken Colombia 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. In
March 1997, Harken entered into an agreement with the Rio Negro Investors
pursuant to which the Participation was reduced to 10% from 40% in exchange for
900,000 shares of Common Stock.
Harken Colombia spudded its first well on the Bocachico Contract area,
the Torcaz #2 located on the Rio Negro Prospect, in July 1996. This well was
completed and initially tested at the rate of 635 barrels per day. Harken
Colombia encountered numerous mechanical problems with the down-hole submersible
electric pump compounded by apparent reservoir formation damage which may have
occurred in the completion process. In October 1997, Harken Colombia recompleted
this well, which produced at initial test rates in excess of 650 barrels per
day. Harken Colombia believes that problems initially encountered with this well
have now been corrected. In April 1997, Harken Colombia spudded the second well
on the Rio Negro Prospect, the Torcaz #3. The well initially tested at the rate
of 643 barrels per day. Harken Colombia anticipates initiating a 120 day
production test (which period may be extended by the Colombian Mines and Energy
Ministry) of the Torcaz #2 and Torcaz #3 wells. Production will be sold to a
local purchaser at the well site. Harken Colombia will study the production from
the Torcaz #2 and Torcaz #3 wells in order to determine the optimum equipment
with which to produce the heavy crude encountered in such wells. Harken Colombia
plans to drill a third well on the Rio Negro prospect, the Torcaz #5, in the
second half of 1998.
Harken Colombia is currently investigating methods to efficiently
develop and produce the Rio Negro field, and plans to request Ecopetrol to
declare the Rio Negro field to be commercial in the second half of 1998. The
commerciality process is similar to the process provided under the Alcaravan
Contract.
In October and December 1997, Harken entered into two separate
Development Finance Agreements with institutional investors (collectively the
"Institutional Investors"), pursuant to which the Institutional Investors
provided $31.5 million of net proceeds to Harken to finance the drilling of the
initial wells on three unexplored oil and gas prospects in the Middle Magdalena
Basin of Colombia, including one prospect on the Bocachico acreage. In exchange,
the Institutional Investors received the right to receive future payments from
Harken equal to 6.4% of the net profits that Harken Colombia may derive from the
sale of oil and gas produced from each of the three prospects if the planned
drilling on the prospect is successful.
Cambulos Contract -- In September 1995, Harken Colombia signed an
additional Association Contract (the "Cambulos Contract") with Ecopetrol,
covering the Cambulos Contract area. Under the Cambulos Contract, Harken
Colombia 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 Colombia
was required to conduct geologic studies on the lands covered by this contract,
including reprocessing of at least 400 kilometers of existing seismic data and
the acquisition of at least 90 kilometers of new seismic data. Harken Colombia
has completed the work program for the first two years of the Cambulos Contract,
and is required to submit a proposal to Ecopetrol by May 16, 1998 to reduce the
acreage covered by the Cambulos Contract to approximately 173,000 acres. Harken
is currently negotiating an arrangement with Ecopetrol whereby
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Harken Colombia would agree to drill an additional well in exchange for the
obligation to return acreage. During each of the third through the sixth
contract years, Harken Colombia may elect to continue the contract by committing
to the drilling of at least one well during each contract year. Harken has
committed to drill a well on the Cambulos acreage, which must be drilled by
September 1998, thereby extending the Cambulos Contract into its third year.
If during the exploratory period of the Cambulos Contract, Harken
Colombia 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 and at the
initiation of production from the commercial field, Harken Colombia will be
reimbursed by Ecopetrol for 50% of all seismic costs and direct exploratory well
costs (including costs related to dry holes) incurred prior to the point at
which a declaration of a commercial discovery is made. 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 Colombia 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 Colombia's
share will decrease progressively to 25%, determined by a formula based on
Harken Colombia's recovery of its total expenditures under the Cambulos
Contract. After a declaration of a commercial discovery, Harken Colombia and
Ecopetrol will be responsible for all future development costs and operating
expenses in direct proportion to their interest in production. The acreage
relinquishment provisions of the Cambulos Contract are substantially similar to
those contained in the Alcaravan Contract.
Harken Colombia currently plans to drill its first well on the Cambulos
acreage, on the Emerald Mountain prospect, in May 1998. The Emerald Mountain
prospect will be one of the three prospects covered by the Development Finance
Agreement described above.
Harken Colombia also plans to drill three additional wells to test
three other prospects on the Cambulos acreage in the second half of 1998.
Bolivar Contract -- In May 1996, Harken Colombia signed an additional
Association Contract (the "Bolivar Contract") with Ecopetrol, covering the
Bolivar Contract area. Under the Bolivar Contract, Harken Colombia 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.
Harken Colombia has completed all of the work obligations for the first
two years of the Bolivar Contract. During each of the third through the sixth
contract years, Harken Colombia may elect to continue the contract by committing
to the drilling of at least one well during each contract year. The production
sharing and acreage relinquishment arrangements under the Bolivar Contract are
substantially similar to those under the Cambulos Contract.
In November 1997, Harken spudded its first well on the Bolivar Contract
acreage, the Catalina #1. The Catalina #1 well was drilled as a horizontal well
to test the Rosa Blanca formation. During initial production testing, the
Catalina #1 well produced at rates averaging 7,073 barrels of oil per day and
11.5 million cubic feet of gas per day or 9,680 barrels of oil equivalent per
day. Harken Colombia believes that production rates were limited by surface
facilities, wellbore configurations and recovery of drilling fluids during the
test. The well was designed to be drilled a horizontal distance of up to 6,000
feet. Harken Colombia elected to end the horizontal drilling at approximately
1,265 feet upon achieving significant production rates.
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On March 2, 1998, Harken Colombia spudded the Olivo #1. The Olivo #1 is
being drilled from the same surface location as the Catalina #1 and will test
the La Luna formation. The Olivo #1 well is planned to be drilled as a
horizontal well, with a 1,500 to 6,000 foot horizontal section. Harken Colombia
anticipates that results from the Olivo #1 will be available in May 1998.
Following completion of the Olivo #1, Harken Colombia anticipates
initiating a 90-day production test from the Catalina #1 and, if successful, the
Olivo #1 (which period may be extended by the Colombian Mines and Energy
Ministry). Oil produced during the production test will initially be sold and
trucked to a pumping station approximately 32 miles away. It is expected that up
to 3,000 barrels of oil can be trucked and sold per day. In order to produce and
sell volumes in excess of the 3,000 barrels of oil per day which can be trucked
from the two wells, it will be necessary for Harken Colombia to construct a
pipeline from the two wells to the closest existing pipeline approximately five
miles from the two wells. Subject to the timely receipt of environmental
permits, construction of the pipeline is anticipated to begin in the second half
of 1998 and is expected to be completed in 1999.
Harken Colombia anticipates that it will request Ecopetrol to declare
the Catalina field to be commercial in the second half of 1998. The
commerciality process is similar to the process provided under the Alcaravan
Contract. Harken Colombia also plans to drill two additional exploration wells
on two additional prospects, the Palenque #1 and the Laurel #1, on the Bolivar
acreage in the second half of 1998.
Miradores Contract -- In December 1997, Harken Colombia signed an
additional Association Contract (the "Miradores Contract") with Ecopetrol,
covering the Miradores Contract area. Under the Miradores Contract, Harken
Colombia has acquired the exclusive rights to conduct exploration activities in
the Miradores Contract area, which covers approximately 32,000 acres in the
Llanos Basin which are contiguous with the Alcaravan acreage.
During the first year of the Miradores Contract, Harken Colombia is
required to reprocess at least 165 kilometers of existing seismic data and
acquire at least 25 kilometers of new seismic data. During each of the second
through the sixth contract years, Harken Colombia may elect to continue the
contract by committing to the drilling of at least one well during each contract
year. The production sharing and acreage relinquishment provisions of the
Miradores Contract are substantially similar to those contained in the Cambulos
Contract.
Each of the two industry partners who have acquired beneficial
interests in the Alcaravan Contract have also acquired a similar 25% beneficial
interest in the Miradores Contract.
Harken Colombia anticipates drilling the first well on the Miradores
acreage in late 1998. The well, the Miradores Norte #1, is located on the Palo
Blanco prospect described above.
Los Olmos Contract -- In March 1998, Harken Colombia signed the Los
Olmos Association Contract (the "Los Olmos Contract") with Ecopetrol, covering
the Los Olmos Contract area. Under the Los Olmos Contract, Harken Colombia has
acquired the exclusive rights to conduct exploration activities in the Los Olmos
Contract area, which covers approximately 374,000 acres in the Lower Magdalena
Valley.
During the first two years of the Los Olmos Contract, Harken Colombia
is required to reprocess at least 500 kilometers of existing seismic data and
acquire at least 120 kilometers of new seismic data and 2,000 kilometers of
aeromagnetic data, and prepare an engineering study of the contract areas.
During each
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of the third through the sixth contract years, Harken Colombia may elect to
continue the contract by committing to the drilling of at least one well during
each contract year. The production sharing and acreage relinquishment provisions
of the Los Olmos Contract are substantially similar to those contained in the
Cambulos Contract.
DOMESTIC EXPLORATION AND PRODUCTION OPERATIONS
Harken operates or owns a non-operating working interest in 338 oil
wells and 87 gas wells in the U.S. Harken's operations are located in the
Paradox Basin in the Four Corners area of Arizona, Utah and New Mexico, the
Texas Panhandle region, the onshore South Texas region, the Carlsbad region of
New Mexico and the Magnolia region of Arkansas.
Four Corners Operations -- Harken operates a total of 39 oil wells and
6 gas wells in the Four Corners area of Arizona, Utah, and New Mexico. Harken
also owns an interest in the Aneth Gas Plant, a gas processing plant located in
the Paradox Basin (Harken's interest in the Aneth Gas Plant and the Four Corners
area oil and gas wells are hereinafter referred to as the "Four Corners
Properties"). Harken acquired its initial 50% interest in these properties as a
result of the February 1993 acquisition of Chuska Resources Corporation
("Chuska"). Harken's activities in the Four Corners area are carried out
primarily through Harken Southwest Corporation ("HSW"), a wholly-owned
subsidiary.
HSW's operations in the Paradox Basin are primarily concentrated on the
16 million acre Navajo Indian Reservation, which comprises portions of Arizona,
New Mexico and Utah. HSW currently has two operating agreements with the Navajo
Tribe of Indians (the "Navajo Nation") allowing oil and gas exploration and
development on an aggregate of 13,724 acres of Navajo tribal lands on the
Reservation (the "Navajo Nation Lands"). HSW has the right to explore for,
produce, and sell oil, natural gas, and other specified gases until July 20,
2012, under the Tribal Agreement effective July 20, 1987 (the "1987 Tribal
Agreement") and until August 26, 2003, under the Tribal Agreement effective
August 26, 1983 (the "1983 Tribal Agreement").
The Navajo Nation receives 30% of gross revenues from the sale of
production of oil and gas under the 1983 Tribal Agreement and 20% under the 1987
Tribal Agreement (23% with respect to proceeds from oil production in excess of
$22 per barrel). Under both Tribal Agreements, the Navajo Nation is entitled to
receive 50% of all gross proceeds recovered over $35 per barrel of oil. Under
the 1983 Tribal Agreement, the Navajo Nation receives 50% of all gross proceeds
over $4 per MCF of gas. Under the 1987 Tribal Agreement, the Navajo Nation
receives 40% of all gross proceeds over $8 per MCF of gas.
In order to develop the Navajo Nation Lands, in 1988, HSW entered into
an operating agreement pursuant to which a group of investors acquired an
undivided 50% interest in the gross proceeds receivable by HSW under the 1983
Tribal Agreement and the 1987 Tribal Agreement. Between 1994 and 1997, HSW
reacquired the interests of all of these investors.
Texas Operations -- Harken operates or owns a non-operated interest in
219 oil wells and 81 gas wells in Texas. Harken operates 185 oil wells and 38
gas wells in Hutchinson and Gray Counties, owns non-operated interests in 34 oil
wells in Hockley County, and owns non-operated interests in 43 gas wells in
various counties of the Texas Gulf Coast region. Harken acquired its Texas
properties as a result of four acquisitions.
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On May 22, 1995, Harken acquired Search Exploration, Inc., a
publicly-held oil and gas exploration and production company ("Search
Exploration"), through a merger between Search Exploration and Search
Acquisition Corp., a wholly-owned subsidiary of Harken ("Search Acquisition").
At the effective time of the merger, each of the outstanding shares of common
stock, preferred stock and certain outstanding promissory notes of Search
Exploration were converted into approximately 2.2 million shares of Common
Stock. Harken also issued warrants exercisable for 732,771 shares of common
stock of Harken ("Common Stock") in exchange for certain outstanding warrants of
Search Exploration.
In October 1995, Harken Energy West Texas, Inc., a wholly-owned
subsidiary of Harken, acquired certain non-operated interests in producing
properties located in Hockley County, Texas (the "Yellowhouse Properties"). As
consideration for the purchase of these interests, Harken issued three million
shares of Common Stock, warrants to purchase an additional one million shares of
Common Stock at $2 per share, and assumed $750,000 of short-term notes payable.
On December 21, 1995, pursuant to a Purchase and Sale Agreement (the
"Panhandle Purchase and Sale Agreement"), Harken Exploration Company, a
wholly-owned subsidiary of Harken ("Harken Exploration"), acquired working
interests in certain producing oil and gas leases located on approximately 6,800
acres in Hutchinson County, Texas, a gas gathering system located thereon,
property and equipment related thereto and the surface rights to a 161 acre
tract of land (the "Panhandle Properties"), in exchange for 2,500,000 shares of
Common Stock (the "Purchase Shares"), $2,500,000 in cash and a promissory note
of Harken Exploration in the principal amount of $13,000,000.
On August 29, 1997, Harken, along with Harken Exploration, purchased
working interests in oil and gas properties located in the panhandle region of
Texas (the "Cal-T Properties"). The purchase price of approximately $3,416,000
consisted primarily of 565,000 shares of Harken common stock.
New Mexico Operations -- Harken, through Harken Exploration, owns
non-operated interests in 18 oil wells in the Carlsbad region of New Mexico.
These properties were acquired as a part of the acquisition of the EnerVest
Properties described below.
Arkansas Operations -- Harken, through Harken Exploration, operates 26
oil wells and owns non-operated interests in 31 oil wells in Arkansas. On July
10, 1996 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 was approximately
$15,200,000. Harken paid $5,000,000 cash at closing and issued 1,550,000 shares
of Common Stock. Harken also issued to EnerVest warrants to purchase, over a
period of three years from closing, 300,000 shares of Common Stock at an
exercise price of $2.75 per share. Subsequently, Harken issued 1,400,000 shares
of Common Stock in satisfaction of all remaining obligations to EnerVest.
10
<PAGE> 11
EXECUTIVE OFFICERS OF HARKEN
The officers of Harken are elected annually by the Board of Directors
following each Annual Meeting of Stockholders, or as soon thereafter as
necessary and convenient. Each officer holds office until the earlier of such
time as his or her successor is duly elected and qualified, his or her death or
he or she resigns or is removed from office. Any officer elected or appointed by
the Board of Directors may be removed by the Board of Directors whenever, in its
judgement, the best interests of Harken will be served thereby, but such removal
will be without prejudice to the contract rights, if any, of the person so
removed.
The executive officers of Harken as of December 31, 1997, their ages
and positions held with Harken and their business experience for the past five
years are listed below.
<TABLE>
<CAPTION>
NAME AGE POSITION HELD WITH HARKEN
- ---- --- -------------------------
<S> <C> <C>
Mikel D. Faulkner 48 Chairman of the Board of Directors and
Chief Executive Officer
Richard H. Schroeder 53 President, Chief Operating Officer and Director
Bruce N. Huff 47 Senior Vice President, Chief Financial Officer
and Director
Stephen C. Voss 47 Senior Vice President and Director
Joseph H. Clark 66 Senior Vice President - Operations
Larry E. Cummings 45 Vice President, Secretary and General Counsel
A. Wayne Hennecke 39 Vice President and Treasurer
Gregory S. Porter 32 Vice President - Legal
</TABLE>
Mikel D. Faulkner has served as Chairman of the Board of Harken since
February 1991 and Chief Executive Officer of Harken since 1982. Mr. Faulkner
previously served as President of Harken between 1982 and 1993.
Richard H. Schroeder has served as President, Chief Operating Officer
and Director of Harken since March 1994. From November 1990 to March 1994, Mr.
Schroeder was President and owner of RHS Management, a management consulting
firm, and from January 1983 to November 1990, Mr. Schroeder was President of
Rosewood Resources, Inc., a privately-owned oil and gas exploration and
production company.
Bruce N. Huff has served as a Director of Harken since August 1996. Mr.
Huff has served as Senior Vice President and Chief Financial Officer since 1990.
Stephen C. Voss has served as a Director of Harken since July 1997. Mr.
Voss has served as Senior Vice President of Harken since 1990. Mr. Voss has also
served since 1990 as President of Harken International, Ltd., a wholly-owned
subsidiary of Harken.
11
<PAGE> 12
Joseph H. Clark has served as Senior Vice President of Operations of
Harken since April 1996. From December 1990 to April 1996, Mr. Clark served as
Vice President of Production for Marsh Operating Company of Dallas, Texas. Mr.
Clark is a registered Professional Engineer.
Larry E. Cummings has served as Vice President, Secretary and General
Counsel of Harken since 1983. Mr. Cummings previously served as Senior Legal
Counsel and Vice President of Land for Harken from 1978 to 1983.
A. Wayne Hennecke has been employed with Harken since 1988. Mr.
Hennecke has served as Vice President and Treasurer of Harken since June 1995.
Mr. Hennecke previously served as Vice President - Finance for Harken's
subsidiaries.
Gregory S. Porter has served as Vice President - Legal of Harken since
September 1995. From April 1994 to September 1995, Mr. Porter was an attorney
with the law firm of Baker & McKenzie and from September 1992 to April 1994, Mr.
Porter was an attorney with the law firm of Johnson & Gibbs.
CAUTIONARY STATEMENTS
Certain statements contained in this Annual Report, including
statements of Harken management's current expectations, intentions, plans and
beliefs, and statements containing the words "believes," "anticipates,"
"estimates," "expects," or "may," are forward-looking statements, as defined in
Section 21D of the Securities Exchange Act of 1934. Such forward-looking
statements involve known and unknown risk, uncertainties and other factors which
may cause the actual results, performance, timing or achievements of Harken to
be materially different from any results, performance, timing or achievements
expressed or implied by such forward-looking statements. Such factors include,
among others, the following:
Price Volatility -- The revenues generated by Harken are highly
dependent upon the prices of crude oil and natural gas. Fluctuations in the
energy market make it difficult to estimate future prices of crude oil and
natural gas. Fluctuations in energy prices are caused by a number of factors,
including regional, domestic and international demand, energy legislation,
federal or state taxes (if any) on sales of crude oil and natural gas,
production guidelines established by the Organization of Petroleum Exporting
Countries ("OPEC"), and the relative abundance of supplies of alternative fuel
such as coal. Additionally, changing international economic and political
conditions may have a substantial impact upon crude oil and natural gas prices.
All of these factors are beyond the control of Harken.
Business Risks -- Harken must continually acquire or explore for and
develop new oil and gas reserves to replace those being depleted by production.
Without successful drilling or acquisition ventures, Harken's oil and gas
assets, properties and the revenues derived therefrom will decline over time. To
the extent Harken engages in drilling activities, such activities carry the risk
that no commercially viable oil or gas production will be obtained. The cost of
drilling, completing and operating wells is often uncertain. Moreover, drilling
may be curtailed, delayed or canceled as a result of many factors, including
shortage of available working capital, title problems, weather conditions,
environmental concerns, shortages of or delays in delivery of equipment, as well
as the financial instability of well operators, major working interest owners
and drilling and well servicing companies. The availability of a ready market
for Harken's oil and gas depends on numerous factors beyond its control,
including the demand for and supply of oil and gas, the proximity of Harken's
crude oil and natural gas reserves to pipelines, the capacity of such pipelines,
fluctuations in seasonal demand, the effects of inclement weather, and
government regulation. New oil and
12
<PAGE> 13
gas wells may be shut-in for lack of a market until a gas pipeline or gathering
system with available capacity is extended into the area.
International Operations -- Harken presently conducts significant
operations in Colombia and anticipates that it will continue to conduct
operations in Colombia and other foreign countries in the future. Foreign
properties, operations or investments may be adversely affected by local
political and economic developments, exchange controls, currency fluctuations,
royalty and tax increases, retroactive tax claims, renegotiation of contracts
with governmental entities, expropriation, import and export regulations and
other foreign laws or policies governing operations of foreign-based companies,
as well as by laws and policies of the United States affecting foreign trade,
taxation and investment. In addition, as certain of Harken's operations are
governed by foreign laws, in the event of a dispute, Harken may be subject to
the exclusive jurisdiction of foreign courts or may not be successful in
subjecting foreign persons to the jurisdiction of courts in the United States.
Harken may also be hindered or prevented from enforcing its rights with respect
to a governmental instrumentality because of the doctrine of sovereign immunity.
Exploration and production activities in areas outside the United States are
also subject to the risks inherent in foreign operations, including loss of
revenue, and property and equipment as a result of hazards such as
expropriation, nationalization, war, insurrection and other political risks.
Pursuant to the Foreign Assistance Act of 1961, the President of the
United States is required to determine whether to certify that certain countries
have cooperated with the United States, or taken adequate steps on their own, to
achieve the goals of the United Nations Convention Against Illicit Traffic in
Narcotic Drugs and Psychotropic Substances. In 1995, 1996, 1997 and 1998, the
President did not certify Colombia. The 1995 and 1998 decertifications were
subject to a so-called "national interest" waiver, effectively nullifying its
statutory effects. Based on the 1996 and 1997 Presidential decertification, the
United States imposed substantial economic sanctions on Colombia, including the
withholding of bilateral economic assistance, the blocking of Export-Import Bank
and Overseas Private Investment Corporation loans and political risk insurance,
and the entry of the United States votes against multilateral assistance to
Colombia in the World Bank and the InterAmerican Development Bank.
The consequences of continued and successive United States
decertifications of Colombian activities are not fully known, but may include
the imposition of additional economic sanctions on Colombia in 1998 and
succeeding years. The President also has authority to impose far-reaching
economic, trade and investment sanctions on Colombia pursuant to the
International Emergency Economic Powers Act of 1978, which powers were exercised
in 1988 and 1989 against Panama in a dispute over narcotics trafficking
activities by the Panamanian government. The Colombian government's reaction to
United States sanctions could potentially include, among other things,
restrictions on the repatriation of profits and the nationalization of Colombian
assets owned by United States entities. Accordingly, imposition of the foregoing
economic and trade sanctions on Colombia could materially affect the performance
of the Common Stock and the Company's long-term financial results.
Operating Hazards and Uninsured Risks -- The operations of Harken are
subject to the inherent risks normally associated with exploration for and
production of oil and gas, including blowouts, cratering, pollution,
environmental liabilities and fires, each of which could result in damage to or
destruction of oil and gas wells or production facilities or damage to persons
and property. As is common in the oil and gas industry, Harken is not fully
insured against all of these risks, either because insurance is not available or
because Harken has elected to self-insure due to high premium costs. The
occurrence of a significant event that is not fully insured against could have a
material adverse effect on Harken's financial condition.
13
<PAGE> 14
Environmental Regulation -- Harken's domestic activities are subject to
various Navajo Nation, federal, state, and local laws and regulations covering
the discharge of material into the environment or otherwise relating to
protection of the environment. In particular, Harken's oil and gas exploration,
development, production, its activities in connection with storage and
transportation of liquid hydrocarbons and its use of facilities for treating,
processing, recovering, or otherwise handling hydrocarbons and wastes therefrom
are subject to stringent environmental regulation by governmental authorities.
In addition to these domestic laws and regulations, Harken's international
operations are subject to the laws, regulations and governmental approvals of
each foreign country in which it conducts activities including, but not limited
to, environmental laws and regulations governing oil and gas operations. Such
domestic and foreign laws and regulations have increased the costs of planning,
designing, drilling, installing, operating and abandoning Harken's oil and gas
wells and other facilities.
Harken has expended significant resources, both financial and
managerial, to comply with environmental regulations and permitting requirements
and anticipates that it will continue to do so in the future. Although Harken
believes that its respective operations and facilities are in general compliance
with applicable environmental laws and regulations, risks of substantial costs
and liabilities are inherent in oil and gas operations, and there can be no
assurance that significant costs and liabilities will not be incurred in the
future. Moreover, it is possible that other developments, such as increasingly
strict environmental laws, regulations and enforcement policies thereunder, and
claims for damages to property, employees, other persons and the environment
resulting from Harken's operations, could result in substantial costs and
liabilities in the future.
Imprecise Nature of Reserve Estimates -- Reserve estimates are
imprecise and may be expected to change as additional information becomes
available. Furthermore, estimates of crude oil and natural gas reserves, of
necessity, are projections based on engineering data, and there are
uncertainties inherent in the interpretation of such data as well as the
projection of future rates of production and the timing of development
expenditures. Reserve engineering is a subjective process of estimating
underground accumulations of oil and gas that cannot be measured in an exact
way, and the accuracy of any reserve estimate is a function of the quality of
available data and of engineering and geological interpretation and judgment.
Accordingly, there can be no assurance that the information regarding reserves
set forth herein will ultimately be produced.
Competitive Factors in the Oil and Gas Industry -- The oil and gas
industry is highly competitive in all its phases. Competition is particularly
intense with respect to the acquisition of desirable producing properties and
the sale of crude oil and natural gas production. Harken's competitors in oil
and gas exploration, development and production include major oil companies and
numerous independent oil and gas companies, and individual producers and
operators. Many of Harken's competitors possess and employ financial and
personnel resources substantially greater than those which are available to
Harken and may, therefore, be able to pay greater amounts for desirable leases
and to define, evaluate, bid for and purchase a greater number of producing
prospects than the financial or personnel resources of Harken will permit.
Extensive Regulation -- The production of oil and gas is subject to
extensive Navajo, federal and state laws, rules, orders and regulations
governing a wide variety of matters, including the drilling and spacing of
wells, allowable rates of production, prevention of waste and pollution and
protection of the environment. In addition to the direct costs borne in
complying with such regulations, operations and revenues may be impacted to the
extent that certain regulations increase the costs of oil and gas production to
below economic levels. Although the particular regulations applicable in each
state in which operations
14
<PAGE> 15
are conducted vary, such regulations are generally designed to ensure that oil
and gas operations are carried out in a safe and efficient manner and to ensure
that similarly-situated operators are provided with reasonable opportunities to
produce their respective fair shares of available crude oil and natural gas
reserves. However, since these regulations generally apply to all oil and gas
producers, management of Harken believes that these regulations should not put
Harken at a material disadvantage to other oil and gas producers.
Certain sales, transportation, and resales of natural gas by Harken are
subject to Navajo, federal and state laws and regulations, including, but not
limited to, the Natural Gas Act (the "NGA"), the Natural Gas Policy Act (the
"NGPA") and regulations promulgated by the Federal Energy Regulatory Commission
under the NGA, the NGPA and other statutes. The provisions of the NGA and NGPA,
as well as the regulations thereunder, are complex, and can affect all who
produce, resell, transport, purchase or consume natural gas.
PROPERTIES AND LOCATIONS
Production and Revenues -- The following table shows for the periods
indicated operating information attributable to Harken's oil and gas interests:
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
-------------------------------------------------------------------------------
1993 1994 1995 1996 1997
----------- ----------- ----------- ----------- -----------
<S> <C> <C> <C> <C> <C>
Production:
Oil (Bbls) 185,000 158,000 217,000 370,000 416,000
Natural Gas (Mcf) 429,000 426,000 810,000 1,409,000 1,922,000
Revenues:
Oil $ 2,989,000 $ 2,552,000 $ 3,985,000 $ 7,863,000 $ 8,029,000
Natural Gas $ 792,000 $ 806,000 $ 1,188,000 $ 3,611,000 $ 5,331,000
----------- ----------- ----------- ----------- -----------
Total $ 3,781,000 $ 3,358,000 $ 5,173,000 $11,474,000 $13,360,000
=========== =========== =========== =========== ===========
Unit Prices:
Oil (per Bbl) $ 16.16 $ 16.15 $ 18.36 $ 21.25 $ 19.30
Natural Gas (per Mcf) $ 1.85 $ 1.89 $ 1.47 $ 2.56 $ 2.77
Production costs per
equivalent barrel $ 7.12 $ 6.70 $ 6.06 $ 7.33 $ 7.58
Amortization per
equivalent barrel $ 5.58 $ 6.31 $ 5.68 $ 5.58 $ 6.60
</TABLE>
15
<PAGE> 16
Acreage and Wells -- At December 31, 1997, Harken owned interests in
the following oil and gas wells and acreage. In March 1998, Harken Colombia
signed an additional Association Contract in Colombia with Ecopetrol, the Los
Olmos Association Contract, which consists of approximately 374,000 gross acres.
DOMESTIC
<TABLE>
<CAPTION>
a Gross Wells Net Wells Developed Acreage Undeveloped Acreage
-------------------- -------------------- --------------------- ---------------------
STATE Oil Gas Oil Gas Gross Net Gross Net
------ ------ ------ ------ --------- ------- -------- ------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Arizona 1 5 1.00 5.00 4,690 4,417 0 0
Arkansas 57 0 42.80 0.00 4,040 2,256 0 0
New Mexico 25 0 13.08 0.00 1,430 718 0 0
Texas 219 81 204.70 39.23 27,482 19,133 2,520 242
Utah 36 1 33.90 1.00 9,916 4,007 11,253 3,942
------ ------ ------ ------ ------ ------ ------ ------
Total 338 87 295.48 45.23 47,558 30,531 13,773 4,184
====== ====== ====== ====== ====== ====== ====== ======
</TABLE>
INTERNATIONAL - COLOMBIA
<TABLE>
<CAPTION>
Contract Area Gross Undeveloped Acreage
-------------------- ---------------------------
<S> <C>
Alcaravan 210,000
Bocachico 192,000
Bolivar 250,000
Cambulos 300,000
Miradores 32,000
-------
Total 984,000
=======
</TABLE>
16
<PAGE> 17
Drilling Activity -- A well is considered "drilled" when it is
completed. A productive well is completed when permanent equipment is installed
for the production of oil or gas. A dry hole is completed when it has been
plugged as required and its abandonment is reported to the appropriate
government agency. International activity relates to Harken's Colombian
operations. International net wells drilled information is reflected net of
certain development finance and operating agreements, and does not consider any
potential future participation by Ecopetrol. The following tables summarize
certain information concerning Harken's drilling activity:
DOMESTIC
<TABLE>
<CAPTION>
NUMBER OF GROSS WELLS DRILLED
------------------------------------------------------------------------------------------------------
Exploratory Developmental Total
------------------------------- ------------------------------- -------------------------------
Productive Drilled Productive Drilled Productive Drilled
------------- ------------- ------------- -------------- ------------- -------------
<S> <C> <C> <C> <C> <C> <C>
1995 1 2 2 2 3 4
1996 8 11 7 7 15 18
1997 9 9 10 10 19 19
------------- ------------- ------------- ------------- ------------- -------------
Total 18 22 19 19 37 41
============= ============= ============= ============= ============= =============
</TABLE>
<TABLE>
<CAPTION>
NUMBER OF NET WELLS DRILLED
--------------------------------------------------------------------------------------------------------
Exploratory Developmental Total
------------------------------- -------------------------------- -------------------------------
Productive Drilled Productive Drilled Productive Drilled
------------- ------------- ------------- -------------- ------------- -------------
<S> <C> <C> <C> <C> <C> <C>
1995 0.59 1.59 1.59 1.59 2.18 3.18
1996 0.19 0.53 1.25 1.25 1.44 1.78
1997 0.19 0.19 3.41 3.41 3.60 3.60
------------- ------------- ------------- ------------- ------------- -------------
Total 0.97 2.31 6.25 6.25 7.22 8.56
============= ============= ============= ============= ============= =============
</TABLE>
17
<PAGE> 18
INTERNATIONAL - COLOMBIA
<TABLE>
<CAPTION>
NUMBER OF GROSS WELLS DRILLED
-------------------------------------------------------------------------------------------------------
Exploratory Developmental Total
------------------------------ ------------------------------- -------------------------------
Productive Drilled Productive Drilled Productive Drilled
------------- ------------- ------------- -------------- ------------- -------------
<S> <C> <C> <C> <C> <C> <C>
1995 0 1 -- -- 0 1
1996 1 1 -- -- 1 1
1997 2 2 -- -- 2 2
------------- ------------- ------------- ------------- ------------- -------------
Total 3 4 -- -- 3 4
============= ============= ============= ============= ============= =============
</TABLE>
<TABLE>
<CAPTION>
NUMBER OF NET WELLS DRILLED
-------------------------------------------------------------------------------------------------------
Exploratory Developmental Total
------------------------------- ------------------------------- -------------------------------
Productive Drilled Productive Drilled Productive Drilled
------------- ------------ ------------- ------------- ------------- -------------
<S> <C> <C> <C> <C> <C> <C>
1995 .00 .50 -- -- .00 .50
1996 .60 .60 -- -- .60 .60
1997 1.24 1.24 -- -- 1.24 1.24
------------- ------------- ------------- ------------- ------------- -------------
Total 1.84 2.34 -- -- 1.84 2.34
============= ============= ============= ============= ============= =============
</TABLE>
EMPLOYEES
As of December 31, 1997, Harken had 106 employees. Harken has
experienced no work stoppages or strikes as a result of labor disputes and
considers relations with its employees to be satisfactory. Harken maintains
group life, medical, dental, surgical and hospital insurance plans for its
employees.
ITEM 2. PROPERTIES
See "Item 1. Business" for discussion of oil and gas properties and
locations.
ITEM 3. LEGAL PROCEEDINGS
Harken and its subsidiaries currently are involved in various lawsuits
and other contingencies, which in management's opinion, will not have a material
adverse effect on Harken's financial position.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
On December 9, 1997, Harken held a special meeting of its stockholders.
At the Special Meeting, the stockholders approved an amendment to Harken's
Certificate of Incorporation increasing the number of authorized shares of
common stock from 150,000,000 to 175,000,000. The total number of votes cast
were
18
<PAGE> 19
as follows: 87,091,670 voting in favor of the proposal, 17,541,325 voting
against the proposal, and 459,662 abstaining.
PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER
MATTERS
PRICE RANGE OF COMMON STOCK
Since March 18, 1991, the Common Stock has been listed on the American
Stock Exchange and traded under the symbol HEC. At December 31, 1997, there were
approximately 3,600 holders of record of Common Stock.
The following table sets forth, for the periods indicated, the reported
high and low sales prices of the Common Stock on the American Stock Exchange
Composite Tape.
<TABLE>
<CAPTION>
Prices
--------------------------------------------
High Low
----------------- ---------------
<S> <C> <C> <C>
1996 -- First Quarter $2.00 $1.56
Second Quarter 3.13 1.81
Third Quarter 3.13 1.94
Fourth Quarter 3.00 2.25
1997 -- First Quarter $5.44 $2.88
Second Quarter 7.13 4.00
Third Quarter 7.00 5.25
Fourth Quarter 7.50 4.50
</TABLE>
DIVIDENDS
Harken has not paid any cash dividends on the Common Stock since its
organization and it is not contemplated that any cash dividends will be paid on
shares of Common Stock in the foreseeable future.
19
<PAGE> 20
ITEM 6. SELECTED FINANCIAL INFORMATION AND OTHER DATA
<TABLE>
<CAPTION>
1993(1) 1994 1995 1996 1997
------------- ------------- ------------- ------------- -------------
<S> <C> <C> <C> <C> <C>
Revenues $ 6,601,000 $ 4,895,000 $ 7,471,000 $ 13,921,000 $ 18,768,000
Income (loss) from continuing operations $ (1,797,000) $ (8,211,000) $ (1,625,000) $ (341,000) $ 189,000
Income (loss) from discontinued operations $ (3,697,000) $ (223,000) $ -- $ -- $ --
Net income (loss) $ (5,494,000) $ (8,434,000) $ (1,625,000) $ (341,000) $ 189,000
Basic net income (loss) per common share:
Income (loss) from continuing operations $ (0.03) $ (0.14) $ (0.02) $ (0.00) $ 0.00
Discontinued operations $ (0.06) $ (0.00) $ -- $ -- $ --
------------- ------------- ------------- ------------- -------------
Net income (loss) $ (0.09) $ (0.14) $ (0.02) $ (0.00) $ 0.00
============= ============= ============= ============= =============
Diluted income (loss) per common share:
Income (loss) from continuing operations $ (0.03) $ (0.14) $ (0.02) $ (0.00) $ 0.00
Discontinued operations $ (0.06) $ (0.00) $ -- $ -- $ --
------------- ------------- ------------- ------------- -------------
Net income (loss) $ (0.09) $ (0.14) $ (0.02) $ (0.00) $ 0.00
============= ============= ============= ============= =============
Current assets $ 7,677,000 $ 6,840,000 $ 10,531,000 $ 49,838,000 $ 126,392,000
Current liabilities $ 6,533,000 $ 5,133,000 $ 4,918,000 $ 6,061,000 $ 15,752,000
------------- ------------- ------------- ------------- -------------
Working capital $ 1,144,000 $ 1,707,000 $ 5,613,000 $ 43,777,000 $ 110,640,000
============= ============= ============= ============= =============
Total assets $ 37,731,000 $ 28,960,000 $ 70,794,000 $ 123,000,000 $ 238,513,000
Long-term obligations:
Long-term obligations and other liabilities $ -- $ -- $ 25,726,000 $ 38,600,000 $ 39,880,000
Redeemable preferred stock (2) $ 1,868,000 $ 1,868,000 $ -- $ -- $ --
------------- ------------- ------------- ------------- -------------
Total $ 1,868,000 $ 1,868,000 $ 25,726,000 $ 38,600,000 $ 39,880,000
============= ============= ============= ============= =============
Stockholders' equity $ 28,963,000 $ 21,959,000 $ 40,150,000 $ 78,339,000 $ 157,881,000
Redeemable preferred stock outstanding (2) 186,760 186,760 -- -- --
Weighted average common stock outstanding(3):
Basic 58,392,901 59,722,853 65,041,063 85,021,894 109,087,697
Diluted 58,392,901 59,722,853 65,041,063 85,021,894 111,933,589
Proved reserves at end of year (4):
Bbls of oil 1,035,000 1,521,000 3,523,000 7,389,000 13,088,000
Mcf of gas 4,970,000 7,148,000 29,203,000 34,160,000 33,293,000
Future net cash inflows $ 13,707,000 $ 20,178,000 $ 99,193,000 $ 234,164,000 $ 144,543,000
Present value (discounted at 10% per year) $ 8,230,000 $ 11,712,000 $ 58,776,000 $ 142,243,000 $ 90,580,000
</TABLE>
(1) Financial information for this period has been restated to present the
operations of Harken's well servicing and contract drilling operations
as discontinued operations.
(2) See "Notes to Consolidated Financial Statements, Note 8 -- Redeemable
Preferred Stock" contained in Part II, Item 8, for a discussion of
Harken Series C Preferred Stock.
(3) Harken has adopted Statement of Financial Accounting Standards No. 128,
"Earnings per Share", effective December 15, 1997 , and as a result
restated certain prior year weighted average shares outstanding
calculations.
(4) These estimated reserve quantities, future net revenues and present
value figures are related to proved reserves located in the United
States and Colombia. No consideration has been given to probable or
possible reserves. Oil and gas year end prices were held constant
except where future price increases were fixed and determinable under
existing contracts and government regulations. At December 31, 1997,
Harken has included proved oil and gas reserve information related to
its Colombian operations, specifically associated with a portion of its
Alcaravan, Bocachico and Bolivar Contract areas. (See "Notes to
Consolidated Financial Statements, Note 5 -- Colombian Operations"
contained in Part II, Item 8.)
20
<PAGE> 21
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS.
OVERVIEW
During the three year period ended December 31, 1997, Harken has made
significant progress towards implementing its overall business strategy. During
this period, Harken expanded its base domestic operations, providing a growing
and stable cash flow which has contributed to Harken's increasing investment in
its higher-potential international operations in Colombia. Harken's total assets
have increased from approximately $29 million at December 31, 1994 to
approximately $239 million at December 31, 1997, and its total net capital
expenditures related to its Colombia oil and gas properties has totaled
approximately $47 million over the past three years. Harken's proved oil and gas
reserves have increased from a present value of $11.7 million at December 31,
1994 to $90.6 million at December 31, 1997, including approximately $33.6
million of proved reserves in Colombia. During 1995, Harken placed $15 million
of 8% European Notes, all of which converted to Common Stock during 1995 and
1996. In July 1996, Harken placed $40 million of 6 1/2% European Notes, all of
which converted to Common Stock during 1996 and 1997. In June 1997, Harken
placed $70 million of 5 1/2% European Notes, which Harken will have the option
of converting into Common Stock beginning in June 1998. Largely as a result of
the European Note issuances as well as other financing efforts, Harken's working
capital has increased to approximately $111 million at December 31, 1997.
Domestically, Harken has completed several acquisitions during the past
three years. These acquisitions have greatly increased Harken's cash flow from
operations and have diversified Harken's base of domestic oil and gas operations
to include properties in Texas, New Mexico and Arkansas in addition to Harken's
Four Corners area operations. Total oil and gas operating revenues have
increased from $6.0 million to $12.3 million to $14.1 million during the years
ended December 31, 1995, 1996 and 1997, respectively. In addition, Harken's
profitability has increased, as Harken has reported a net loss of $1.6 million
and $341,000 for the years ended December 31, 1995 and 1996, respectively, and a
net income of $189,000 for the year ended December 31, 1997.
Internationally, during March 1998, Harken signed an additional
Association Contract in Colombia with Ecopetrol, bringing the total number of
Association Contracts to six and increasing the total number of acres currently
operated in Colombia by Harken to approximately 1,358,000. Following the
drilling of the Alcaravan #1 well during 1995 and the Torcaz #2 well on its
Bocachico Contract area during 1996, Harken has continued its Colombian
exploration efforts during 1997 with the completion of the Estero #1 well on the
Alcaravan Contract area, the sidetrack/recompletion of the Torcaz #2 well and
the completion of the Torcaz #3 well. In addition, in late 1997 Harken spudded
two additional wells which were then completed in early 1998, the Estero #3 well
and the Catalina #1, which is Harken's initial well on the Bolivar Contract
area.
Harken plans to continue its Colombian exploration program during 1998,
expecting to spud eleven exploratory wells and three development wells as well
as certain pipeline and facility installation efforts.
21
<PAGE> 22
RESULTS OF OPERATIONS
The following table presents certain data for Harken's continuing
operations for the years ended December 31, 1995, 1996 and 1997. A discussion
follows of certain significant factors which have affected Harken's operating
results during such periods. This discussion should be read in conjunction with
Harken's Consolidated Financial Statements and related footnotes contained in
Part II, Item 8.
<TABLE>
<CAPTION>
Year Ended December 31,
----------------------------------------
DOMESTIC EXPLORATION AND
PRODUCTION OPERATIONS 1995 1996 1997
---------- ---------- ----------
<S> <C> <C> <C>
Oil sales revenues $3,985,000 $7,863,000 $8,029,000
Oil volumes in barrels 217,000 370,000 416,000
Oil price per barrel $ 18.36 $ 21.25 $ 19.30
Gas sales revenues $1,188,000 $3,611,000 $5,331,000
Gas volumes in mcf 810,000 1,409,000 1,922,000
Gas price per mcf $ 1.47 $ 2.56 $ 2.77
Gas plant revenues $ 787,000 $ 867,000 $ 753,000
OTHER REVENUES
Interest Income $ 667,000 $1,401,000 $4,626,000
Other Income $ 844,000 $ 179,000 $ 29,000
</TABLE>
FOR THE YEAR ENDED DECEMBER 31, 1997 COMPARED WITH THE PRIOR YEAR
DOMESTIC OPERATIONS
Gross oil and gas revenues during 1996 and 1997 were generated by
Harken's domestic exploration and production operations, consisting of the Four
Corners area operations primarily on the Navajo Indian Reservation, the onshore
areas of the Texas Gulf Coast, the Western and Panhandle regions of Texas and,
beginning in July 1996, the Magnolia region of Arkansas and the Carlsbad region
of New Mexico.
Oil revenues increased 2% from $7.9 million in 1996 to $8.0 million in
1997, although oil production volumes reflected a 12% increase in 1997 compared
to 1996. The decrease in the average oil price to $19.30 per barrel during 1997
has had a negative impact on revenues and cash flow from oil production,
particularly in December 1997, where average oil prices were $16.76 per barrel.
During early 1998, oil prices have continued to decline and remained
significantly below average oil prices received during 1997.
Gas revenues increased 48% from $3.6 million in 1996 to $5.3 million in
1997. The increase was due primarily to increased production (36% increase)
attributable to the acquisition of the Cal-T Properties which were acquired in
August 1997 and additional production from several successful wells drilled in
the Texas Gulf Coast region. The Cal-T Properties contributed gas revenues of
approximately $374,000 and Texas Gulf Coast gas revenues increased $494,000
during 1997 compared to 1996. The increase in gas
22
<PAGE> 23
revenues in 1997 also reflected higher natural gas prices in 1997 as compared to
1996. The average price of gas sold in 1997 increased to $2.77 per mcf from
$2.56 per mcf in 1996.
Gas plant revenues decreased 13% from $867,000 to $753,000 in 1997 due
to an annual redetermination whereby HSW's interest in the Aneth Gas Plant was
slightly reduced based on each owner's throughput volume. At year end 1997, the
Aneth Gas Plant experienced a temporary plant shutdown due to a series of
explosions and fires that caused damage to a portion of the Plant. This shutdown
has reduced gas plant revenues for the first quarter of 1998.
Oil and gas operating expenses consist of lease operating expenses and
gas plant expenses, along with a number of production and reserve-based taxes,
including severance, conservation, and property taxes and Navajo severance and
possessory interest taxes. The increase in oil and gas operating expenses during
1997 compared to 1996 reflects the acquisitions of additional oil and gas
properties, particularly the acquisition of the Cal-T Properties, which has
increased oil and gas operating expenses by approximately $242,000, and due to
the inclusion of twelve months of expenses associated with the July 1996
acquisition of the EnerVest Properties, which increased oil and gas operating
expenses by approximately $535,000.
Harken expects that oil and gas production volumes and operating
expenses from its existing domestic operations will remain flat or decrease
slightly in 1998 as compared to 1997 due to the normal production declines
experienced in its operating areas. Such declines are expected to be minimized
by Harken's continuing workover efforts and exploration and development drilling
during 1998. Harken expects that 1998 domestic oil revenues will decrease
significantly from 1997 levels if crude oil prices remain at early 1998 levels.
Harken's oil and gas revenues are highly dependent upon product prices, which
Harken is unable to predict.
COLOMBIAN OPERATIONS
Harken reflected no oil and gas revenues or operating expenses from its
Colombian operations during 1996 and 1997. Harken expects, however, that
production from its Estero #1, Estero #3, Torcaz #2, Torcaz #3 and Catalina #1
wells will commence during 1998 as trucking operations from these wellsites are
initiated. In addition, 1998 production operations could further increase if the
current and planned drilling activities in Colombia are successful.
INTEREST AND OTHER INCOME
Interest and other income increased significantly during 1997 compared
to 1996 due to the interest earned by Harken on its invested funds, including
the net proceeds from the issuance of European Notes, which are initially
maintained and invested in separate interest bearing bank accounts (the
"Segregated Accounts") and from cash received from a development finance
agreement related to Harken's Colombian operations. Harken generated
approximately $4.6 million of interest income during 1997, compared to
approximately $1.4 million of interest income in 1996.
Harken's cash balances, which include investments in short-term
marketable debt securities, are expected to decrease in 1998 as such funds are
used to support Harken's capital expenditure plans. Harken intends to continue
to pursue other financing arrangements during 1998 and the decrease in existing
cash balances and related interest income could be mitigated or offset if such
efforts are successful.
23
<PAGE> 24
OTHER COSTS AND EXPENSES
General and administrative expenses have increased 37% during 1997
compared to 1996 and have also increased as a percentage of oil and gas
revenues. General and administrative expenses remained constant, however, as a
percentage of consolidated revenues at 33% in 1996 and 1997, as such general and
administrative expense increases have related to Harken's executive, corporate
and administrative personnel costs associated with Harken's expanding overall
operations. Harken anticipates that general and administrative expenses will
continue to increase as Harken's Colombian operations continue to grow.
Depreciation and amortization expense increased during 1997 compared to
1996 consistent with the increased production levels during 1997 and due to a
decrease in Harken's domestic oil and gas reserve volumes at December 31, 1997.
The decrease in reserve volumes was primarily caused by the decrease in crude
oil prices in December 1997. As a result, oil and gas depreciation and
amortization increased on a per equivalent barrel basis to $6.60 during 1997
compared to $5.58 during 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 decreased slightly during 1997 compared to
1996 despite the increase in European Notes due to the increasing amounts of
interest capitalizable to Harken's Colombian oil and gas property costs.
European Notes generated interest expense of approximately $964,000, net of
amounts of interest capitalized, and approximately $455,000 of net amortization
of issuance costs associated with the European Notes.
FOR THE YEAR ENDED DECEMBER 31, 1996 COMPARED WITH THE PRIOR YEAR
DOMESTIC OPERATIONS
Oil revenues increased 97% to $7.9 million in 1996 from $4.0 million in
1995. The increase was due primarily to increased production attributable to the
acquisition of the Yellowhouse Properties, which were acquired in late 1995 but
which had little impact on 1995 revenues, and the acquisition of the EnerVest
Properties, which was consummated in July 1996. In 1996, Harken recognized
$2,069,000 in oil revenues attributable to the Yellowhouse Properties. Harken
also recorded $1,798,000 in oil revenues attributable to the EnerVest
Properties. Oil revenues were further increased by an increase in average oil
price per barrel of $2.89 in 1996 as compared to 1995.
Gas revenues increased 204% to $3.6 million in 1996 from $1.2 million
in 1995. The increase was due primarily to increased production attributable to
the acquisition of the Panhandle Properties, which were acquired in late 1995
but which had little impact on 1995 gas revenues, and the acquisition of the
EnerVest Properties. In 1996, Harken recognized $1,394,000 in gas revenues
attributable to the December 1995 acquisition of the Panhandle Properties and
$539,000 attributable to the EnerVest Properties. The increase in gas production
was also the result of additional production from several successful wells
drilled in the Texas Gulf Coast region. The increase in gas revenues in 1996
also reflected significantly higher natural gas prices in 1996 as compared to
1995. The average price of gas sold in 1996 increased to $2.56 per mcf from
$1.47 per mcf in 1995. The increase in gas prices is due in part to the overall
increase in the market price of natural gas. In addition, the gas produced from
the Panhandle Properties is extremely rich in BTU content and sells for a
significant premium on a BTU adjusted basis to spot market prices.
24
<PAGE> 25
Gas plant revenues increased from $787,000 in 1995 to $867,000 in 1996
despite an annual redetermination whereby HSW's interest in the Aneth Gas Plant
was slightly reduced based on each owner's throughput volume and despite a
temporary plant shutdown experienced during 1996. Higher prices for plant
liquids, particularly during the fourth quarter of 1996, and the acquisition of
additional interests in the Four Corners Properties contributed to the increase.
The increase in oil and gas operating expenses during 1996 compared to
1995 reflects the acquisitions of additional oil and gas properties,
particularly the acquisition of the Panhandle Properties, which increased oil
and gas operating expenses by approximately $746,000 and the acquisition of the
EnerVest Properties, which increased oil and gas operating expenses by
approximately $639,000.
INTEREST AND OTHER INCOME
Interest and other income increased during 1996 compared to 1995 due to
the interest earned by Harken on proceeds received from the July 1996 issuance
of $40 million of European 6 1/2% Senior Convertible Notes Payable (the "6 1/2%
European Notes"). Such proceeds, net of issuance costs on the European Notes
earned approximately $803,000 during the last half of 1996.
OTHER COSTS AND EXPENSES
General and administrative expenses have increased during 1996 compared
to 1995 due to the increase in Harken's corporate and administrative personnel
costs associated with its expanding domestic operations. General and
administrative expenses decreased significantly, however, as a percentage of oil
and gas revenues from 56.6% in 1995 to 36.7% in 1996 reflecting Harken's ability
to minimize increases in administrative staff and office costs despite its
growth in domestic oil and gas operations.
Depreciation and amortization expense increased during 1996 compared to
1995 consistent with the increased production levels from the acquired oil and
gas property interests during 1995 and 1996. Oil and gas depreciation and
amortization decreased slightly on a per equivalent barrel basis to $5.58 during
1996 compared to $5.68 during 1995.
Interest expense and other increased significantly during 1996 compared
to 1995 due to the July 1996 issuance of the 6 1/2% European Notes, which
generated interest expense of approximately $851,000, net of amounts of interest
capitalized, and approximately $326,000 of amortization of issuance costs
associated with the 6 1/2% European Notes. In December 1995, Harken issued a
note payable for an initial face amount of $13 million in connection with the
acquisition of the Panhandle Properties, and such note payable generated
interest expense of $234,000 prior to it being exchanged for Common Stock during
1996.
Provision for asset impairments during 1995 consisted of $457,000
primarily related to Harken's decision to record a valuation adjustment for the
full investment amount in its Bahrain operations, as a result of the January
1996 expiration of the term of the production sharing agreement with the Bahrain
state-owned oil company.
25
<PAGE> 26
LIQUIDITY AND CAPITAL RESOURCES
Harken's working capital at December 31, 1997 was approximately $110.6
million, versus approximately $43.8 million at December 31, 1996. Cash and
temporary investments, including segregated account cash, at December 31, 1997
totaled $123.5 million, an increase of $76 million from December 31, 1996. The
increase in cash and working capital resulted primarily from the issuance in
June 1997 of $70 million of 5 1/2% European Notes (see discussion below), and
approximately $24.5 million of net proceeds received from the sale of beneficial
interest in certain wells to be drilled by Harken Colombia on the Cambulos and
Bocachico acreage. In addition, Harken's operations provided approximately $10.7
million of cash flow.
Harken's primary need for capital is to fund the planned exploration
and development efforts in Colombia. In 1997, Harken's capital expenditures
totaled approximately $37 million, including $30 million related to exploration
and development in Colombia. Harken anticipates that its 1998 Colombian capital
expenditures will total approximately $113 million, including exploration costs
of approximately $85 million. Harken believes that it will have sufficient cash
resources to fund all of its planned capital expenditures for 1998. In addition,
Harken intends to pursue a number of domestic acquisition opportunities in 1998.
Harken intends to fund such acquisitions, if any are consummated, through a
combination of cash on hand, and issuances of debt or equity securities.
Harken anticipates that full development of its Colombian reserves will
take several years and will also require extensive production facilities,
transportation pipelines and development activity which would require
significant additional capital expenditures. The ultimate amount of such
expenditures cannot be presently predicted. Harken anticipates that amounts
required to fund its Colombian activities will be funded from existing cash
balances, asset sales, future issuances of debt and/or equity securities,
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 all of its Colombian activities. Terms of each of the Association
Contracts entered into between Harken Colombia 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 Colombia and Ecopetrol,
see "Item 1. Business -- International Exploration and Development Operations."
Harken's domestic operating strategy includes efforts to acquire
additional oil and gas reserves through drilling activities in North America and
through acquisitions. Harken plans to continue development of proved undeveloped
reserves on its North American properties in addition to a continual workover
program on producing properties. Harken expects such drilling and workover costs
to total approximately $4 million in 1998. The targeted results of these efforts
are to maintain North American production and cash flow levels during 1998.
On June 11, 1997, Harken issued a total of $70 million in 5 1/2% Senior
Convertible Notes (the "5 1/2% European Notes") which mature on June 10, 2002.
In connection with the sale and issuance of the 5 1/2% European Notes, Harken
paid approximately $5,174,000 from the 5 1/2% European Notes proceeds for
commission and issuance costs. Interest incurred on these notes is payable
semi-annually in June and December of each year to maturity or until the 5 1/2%
European Notes are converted. Such 5 1/2% European Notes are convertible into
shares of Common Stock at a conversion price of $5.00 per share, subject to
26
<PAGE> 27
adjustment in certain circumstances. Harken also has the right to require
conversion of the 5 1/2% European Notes into shares of Common Stock at any time
on or after June 11, 1998. Harken intends to mandatorily convert all of the 5
1/2% European Notes which remain outstanding on June 11, 1998. Between June 11,
1997 and December 31, 1997, $30,120,000 in principal amount of the 5 1/2%
European Notes converted into Common Stock.
All proceeds from the sale of the 5 1/2% European Notes were initially
paid to a Trustee pursuant to a Trust Indenture and held in Segregated Accounts
to be maintained for Harken's benefit. Until all of the 5 1/2% European Notes
are converted, Harken must maintain an Asset Value Coverage Ratio equal to or
greater than 1:1, which is calculated as the ratio of (i) the sum of (x) 100% of
the aggregate amount of Harken's cash on deposit in the Segregated Accounts plus
(y) 50% of the net present value of Harken's domestic unencumbered total proved
reserves plus (z) 25% of the net present value of Harken's total proved
Colombian reserves to (ii) the aggregate outstanding principal amount of the 5
1/2% European Notes. As of December 31, 1997, Harken was in compliance with the
Asset Value Coverage Ratio test. In order for any of the proceeds to be released
from the Segregated Accounts, Harken must demonstrate that the Asset Value
Coverage Ratio (as defined in the Trust Indenture) test would continue to be met
after such release of funds and that no Event of Default with respect to the 5
1/2% European Notes has occurred and is continuing at the date of such release.
Such request must be accompanied by an independent reserve engineering report or
other independent third party valuation of Harken's unencumbered proved
reserves. At December 31, 1997, all proceeds held in the Segregated Accounts
were available to be released. For a detailed discussion of the 5 1/2% European
Notes see "Notes to Consolidated Financial Statements, Note 7 -- European
Convertible Notes Payable."
To the extent that proceeds invested in the Segregated Accounts at the
balance sheet date are available under the above Asset Value Coverage Ratio
limitations, such cash is included as a current asset as it is available to
Harken to fund international and domestic activities including acquisitions,
drilling costs and other capital expenditures or other working capital needs.
Interest payments will be funded from cash flow from operations, existing cash
balances or from available proceeds in the Segregated Accounts.
In October and December 1997, Harken entered into two separate
Development Finance Agreements with institutional investors (collectively the
"Institutional Investors"), pursuant to which the Institutional Investors
provided $31.5 million (the "Payment Amount") of net proceeds to Harken to
finance the drilling of the initial wells on three unexplored oil and gas
prospects in the Middle Magdalena Basin of Colombia, $24.5 million of net
proceeds was received in October 1997 and the remaining $7 million of net
proceeds was received in January 1998. In exchange, the Institutional Investors
received the right to receive future payments from Harken equal to 6.4% of the
net profits that Harken Colombia may derive from the sale of oil and gas
produced from each of the three prospects if the planned drilling on the
prospect is successful (the "Institutional Participation"). Pursuant to the
Development Finance Agreements, Harken is obligated to drill each of the three
wells prior to October 2000.
Pursuant to the Development Finance Agreements, the Institutional
Investors have the right, for a period of two years beginning in October 1998,
to convert all or part of the Institutional Participation into shares of Common
Stock. The number of shares of Common Stock to be issued upon conversion of the
Institutional Participation will be equal to the quotient of (i) the Payment
Amount (less any distributions made in respect of the Institutional
Participation) plus an amount equal to 15% interest per annum on the net Payment
Amount compounded monthly (the "Invested Amount"), divided by (ii) the market
price of the Common Stock at the time of conversion. During the same two year
period, Harken also has the right to
27
<PAGE> 28
convert the Institutional Participation into shares of Common Stock with the
number of shares of Common Stock to be issued to be equal to the quotient of (i)
the Payment Amount (less any distribution made in respect of the Institutional
Participation) plus an amount equal to 25% interest per annum on the net Payment
Amount compounded monthly, divided by (ii) the market price of Common Stock at
the time of conversion. Harken can also elect to pay cash upon any conversion of
the Institutional Participation in lieu of issuing Common Stock. The Development
Finance Agreements also provide for additional shares of Common Stock to be
issued by Harken in the event of a conversion to the extent that the
Institutional Investors do not, under certain circumstances, realize the
Invested Amount from the sale of shares of Common Stock issued at the
conversion.
At the present time, it is not known whether the Institutional
Investors or Harken will exercise their rights to convert the Institutional
Interest into Common Stock, nor can Harken determine the number of shares of
Common Stock which would be required to be issued in the event that Harken or
the Institutional Investors elect to convert the Institutional Participation
into shares of Common Stock.
The exploration, development and production of oil and gas are subject
to various Colombian, Navajo, federal, state and local laws and regulations
designed to protect the environment. Compliance with these regulations is part
of Harken's day-to-day operating procedures. Accidental discharge of such
materials as oil, natural gas or drilling fluids can occur and such accidents
can require material expenditures to correct. Harken maintains levels of
insurance customary in the industry to limit its financial exposure. Management
is unaware of any material capital expenditures required for environmental
control during the next fiscal year.
Harken has accrued approximately $1.8 million at December 31, 1997
relating to operational or regulatory contingent liabilities related to Harken's
domestic operations. Harken and its subsidiaries currently are involved in
various lawsuits and other contingencies, which in management's opinion, will
not result in significant loss exposure to Harken.
Harken has completed an assessment of its core financial and
operational software systems, all of which are purchased from outside software
vendors, and has found them to have anticipated the issues associated with the
year 2000 date change. Year 2000 issues result from the inability of computer
programs or computerized equipment to accurately calculate, store or use a date
subsequent to December 31, 1999. This could result in a system failure or
miscalculations causing disruptions of operations, including, among other
things, a temporary inability to process transactions, send invoices, or engage
in similar normal business. Assessment of other less critical software systems
and various types of equipment is continuing and should be completed during
1998. Harken believes that the potential impact, if any, of these systems not
being Year 2000 compliant will at most require employees to manually complete
otherwise automated tasks or calculations.
Following the completion of the aforementioned assessment, Harken will
initiate formal communication with its significant suppliers, business partners
and customers to determine the extent to which Harken is vulnerable to those
third parties' failure to correct their own Year 2000 issues. However, there can
be no guarantee that the systems of other companies on which Harken's systems
rely will be timely converted, or that a failure to convert by another company,
or a conversion that is incompatible with Harken's systems would not have a
material adverse effect on Harken.
28
<PAGE> 29
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
The following financial statements appear on pages 30 through 61 in
this report.
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
Report of Independent Public Accountants...........................................................30
Consolidated Balance Sheets -- December 31, 1996 and 1997.........................................31
Consolidated Statements of Operations --
Years ended December 31, 1995, 1996 and 1997.....................................................32
Consolidated Statements of Stockholders' Equity --
Years ended December 31, 1995, 1996 and 1997.....................................................33
Consolidated Statements of Cash Flows --
Years ended December 31, 1995, 1996 and 1997.....................................................34
Notes to Consolidated Financial Statements........................................................35
</TABLE>
29
<PAGE> 30
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
To the Stockholders and Board of Directors of Harken Energy Corporation:
We have audited the accompanying consolidated balance sheets of Harken
Energy Corporation (a Delaware corporation) and subsidiaries as of December 31,
1996 and 1997, and the related consolidated statements of operations,
stockholders' equity and cash flows for each of the three years in the period
ended December 31, 1997. These financial statements are the responsibility of
the Company's management. Our responsibility is to express an opinion on these
financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present
fairly, in all material respects, the financial position of Harken Energy
Corporation and subsidiaries as of December 31, 1996 and 1997, and the results
of their operations and their cash flows for each of the three years in the
period ended December 31, 1997, in conformity with generally accepted accounting
principles.
ARTHUR ANDERSEN LLP
Dallas, Texas,
March 17, 1998
30
<PAGE> 31
HARKEN ENERGY CORPORATION AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
ASSETS
DECEMBER 31,
--------------------------------
1996 1997
------------- -------------
<S> <C> <C>
Current Assets:
Cash and temporary investments $ 9,855,000 $ 85,740,000
Cash in segregated accounts 37,662,000 37,771,000
Accounts receivable, net 2,058,000 2,175,000
Related party notes receivable -- 295,000
Prepaid expenses and other current assets 263,000 411,000
------------- -------------
Total Current Assets 49,838,000 126,392,000
Property and Equipment:
Oil and gas properties, using the full cost method of accounting:
Evaluated 65,990,000 90,185,000
Unevaluated 10,266,000 27,193,000
Gas plants and other property 7,500,000 8,325,000
Less accumulated depreciation and amortization (13,721,000) (18,905,000)
------------- -------------
Total Property and Equipment, net 70,035,000 106,798,000
Other Assets, net 3,127,000 5,323,000
------------- -------------
$ 123,000,000 $ 238,513,000
============= =============
LIABILITIES AND STOCKHOLDERS' EQUITY
Current Liabilities:
Trade payables $ 1,272,000 $ 6,268,000
Accrued liabilities and other 3,889,000 8,668,000
Revenues and royalties payable 900,000 816,000
------------- -------------
Total Current Liabilities 6,061,000 15,752,000
European Convertible Notes Payable 38,600,000 39,880,000
Deferred Revenue -- 25,000,000
Commitments and Contingencies (Note 15)
Stockholders' Equity:
Common stock, $0.01 par value; 150,000,000 and 175,000,000 shares
authorized, respectively; 93,862,266 and 121,811,534 shares issued,
respectively 939,000 1,218,000
Additional paid-in capital 171,191,000 248,770,000
Retained deficit (92,401,000) (92,107,000)
Treasury stock, 440,896 shares held at December 31, 1996 (1,390,000) --
------------- -------------
Total Stockholders' Equity 78,339,000 157,881,000
------------- -------------
$ 123,000,000 $ 238,513,000
============= =============
</TABLE>
The accompanying Notes to Consolidated Financial Statements
are an integral part of these Statements.
31
<PAGE> 32
HARKEN ENERGY CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
------------------------------------------------
1995 1996 1997
------------ ------------ ------------
<S> <C> <C> <C>
Revenues:
Oil and gas operations $ 5,960,000 $ 12,341,000 $ 14,113,000
Interest and other income 1,511,000 1,580,000 4,655,000
------------ ------------ ------------
7,471,000 13,921,000 18,768,000
------------ ------------ ------------
Costs and Expenses:
Oil and gas operating expenses 2,135,000 4,438,000 5,581,000
General and administrative expenses, net 3,376,000 4,537,000 6,222,000
Depreciation and amortization 2,251,000 3,595,000 5,183,000
Provision for asset impairments 457,000 -- --
Interest expense and other, net 877,000 1,692,000 1,530,000
------------ ------------ ------------
9,096,000 14,262,000 18,516,000
------------ ------------ ------------
Income (loss) before income taxes (1,625,000) (341,000) 252,000
Income tax expense -- -- 63,000
------------ ------------ ------------
Net income (loss) $ (1,625,000) $ (341,000) $ 189,000
============ ============ ============
Income (loss) per common share:
Basic income (loss) per common share $ (0.02) $ (0.00) $ 0.00
============ ============ ============
Weighted average shares outstanding 65,041,063 85,021,894 109,087,697
============ ============ ============
Diluted income (loss) per common share $ (0.02) $ (0.00) $ 0.00
============ ============ ============
Weighted average shares outstanding 65,041,063 85,021,894 111,933,589
============ ============ ============
</TABLE>
The accompanying Notes to Consolidated Financial Statements
are an integral part of these Statements.
32
<PAGE> 33
HARKEN ENERGY CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
<TABLE>
<CAPTION>
ADDITIONAL
COMMON PAID-IN RETAINED TREASURY
STOCK CAPITAL DEFICIT STOCK TOTAL
------------- ------------- ----------------- -------------- -------------
<S> <C> <C> <C> <C> <C>
Balance, December 31, 1994 $ 664,000 $ 132,572,000 $ (90,520,000)(A) $ (20,757,000) $ 21,959,000
Issuance of common stock, net 79,000 1,740,000 -- 15,760,000 17,579,000
Conversions of European notes
payable 16,000 2,123,000 -- -- 2,139,000
Adjustment for unrealized losses
on available-for-sale securities -- -- 100,000 -- 100,000
Equity adjustment from foreign
currency translation -- -- (2,000) -- (2,000)
Net loss -- -- (1,625,000) -- (1,625,000)
------------- ------------- ------------- ------------- -------------
Balance, December 31, 1995 759,000 136,435,000 (92,047,000) (4,997,000) 40,150,000
Issuance of common stock, net 90,000 22,090,000 -- 3,607,000 25,787,000
Conversions of European notes
payable 90,000 12,666,000 -- -- 12,756,000
Equity adjustment from foreign
currency translation -- -- (13,000) -- (13,000)
Net loss -- -- (341,000) -- (341,000)
------------- ------------- ------------- ------------- -------------
Balance, December 31, 1996 939,000 171,191,000 (92,401,000) (1,390,000) 78,339,000
Issuance of common stock, net 77,000 20,208,000 -- -- 20,285,000
Conversions of European notes
payable 202,000 57,371,000 -- 1,390,000 58,963,000
Equity adjustment from foreign
currency translation -- -- 105,000 -- 105,000
Net income -- -- 189,000 -- 189,000
------------- ------------- ------------- ------------- -------------
Balance, December 31, 1997 $ 1,218,000 $ 248,770,000 $ (92,107,000) $ -- $ 157,881,000
============= ============= ============= ============= =============
</TABLE>
(A) Includes, as a component of Retained Deficit, net unrealized losses on
available-for-sale securities of $100,000 as of December 31, 1994. See
Note 3 -- Investments for further discussion.
The accompanying Notes to Consolidated Financial Statements
are an integral part of these Statements.
33
<PAGE> 34
HARKEN ENERGY CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
Year Ended December 31,
------------------------------------------------
1995 1996 1997
------------ ------------ ------------
<S> <C> <C> <C>
Cash flows from operating activities:
Net income (loss) $ (1,625,000) $ (341,000) $ 189,000
Adjustment to reconcile net income (loss) to net cash provided by
operating activities:
Depreciation and amortization 2,251,000 3,595,000 5,183,000
Forgiveness of related party note receivable 232,000 232,000 --
Provision for asset impairments 457,000 -- --
Provision for doubtful accounts (180,000) 25,000 --
Accretion of note payable 27,000 234,000 --
(Gain) loss on sales of assets and other (832,000) 72,000 --
Amortization of European note issuance costs 337,000 504,000 555,000
Change in assets and liabilities, net of effect of companies acquired:
(Increase) decrease in accounts receivable 43,000 (592,000) (217,000)
Increase (decrease) in trade payables and other (339,000) 1,169,000 4,956,000
------------ ------------ ------------
Net cash provided by operating activities 371,000 4,898,000 10,666,000
------------ ------------ ------------
Cash flows from investing activities:
Proceeds from sales of assets 3,423,000 192,000 7,000
Cash from acquired subsidiary 190,000 -- --
Capital expenditures (7,908,000) (17,213,000) (37,082,000)
Investor advances -- 5,800,000 32,953,000
------------ ------------ ------------
Net cash used in investing activities (4,295,000) (11,221,000) (4,122,000)
------------ ------------ ------------
Cash flows from financing activities:
Transfer from segregated account cash 2,500,000 10,877,000 64,564,000
Proceeds from issuances of common stock, net of issuance costs 4,409,000 3,276,000 5,680,000
Repayments of notes payable and long-term obligations (1,025,000) (1,258,000) --
Investment in segregated account cash, net (332,000) (1,173,000) (903,000)
------------ ------------ ------------
Net cash provided by financing activities 5,552,000 11,722,000 69,341,000
------------ ------------ ------------
Net increase in cash and temporary investments 1,628,000 5,399,000 75,885,000
Cash and temporary investments at beginning of year 2,828,000 4,456,000 9,855,000
------------ ------------ ------------
Cash and temporary investments at end of year $ 4,456,000 $ 9,855,000 $ 85,740,000
============ ============ ============
</TABLE>
The accompanying Notes to Consolidated Financial Statements
are an integral part of these Statements.
34
<PAGE> 35
HARKEN ENERGY CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1995, 1996 AND 1997
(1) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Principles of Consolidation and Presentation -- The Consolidated
Financial Statements include the accounts of Harken Energy Corporation (a
Delaware corporation) and all of its wholly-owned subsidiaries ("Harken") after
elimination of significant intercompany balances and transactions. Interests in
oil and gas properties jointly owned and operated pursuant to a Joint Operations
Agreement are proportionately consolidated. Data is as of December 31 of each
year or for the year then ended and dollar amounts in tables are in thousands
unless otherwise indicated.
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the financial
statements and the reported amounts of revenues and expenses during the reported
period. Actual results could differ from those estimates. Certain prior year
amounts have been reclassified to conform with the 1997 presentation.
Cash and Temporary Investments -- For purposes of the Consolidated
Statements of Cash Flows, Harken considers all highly liquid investments
purchased with an original maturity of three months or less to be cash
equivalents. Gross cash outflows for purchases of held-to-maturity investments
during 1997 totaled $446,328,000. Gross cash inflows for maturities of such
investments during 1997 totaled $365,124,000. Harken paid cash for interest in
the amounts of $246,000, $464,000 and $0 during 1995, 1996 and 1997,
respectively. All significant noncash investing and financing activities are
discussed in Notes 2, 6, 7, 8 and 9 -- Acquisitions, Development Finance and
Operating Agreements, European Convertible Notes Payable, Redeemable Preferred
Stock and Stockholders' Equity.
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. Such restricted cash amounts totaled approximately
$3,355,000 and $6,861,000 at December 31, 1996 and 1997, respectively. In
addition, Harken excludes from cash and temporary investments certain proceeds
received from the issuance of European Convertible Notes Payable that remain in
the Segregated Accounts. See Note 7 -- European Convertible Notes Payable for
further discussion.
Accounts Receivable -- Harken maintains a reserve for potential losses
in collection of its accounts receivable. The allowance for doubtful accounts
was $405,000 and $327,000 as of December 31, 1996 and 1997, respectively.
Concentrations of Credit Risk -- Although Harken's cash and temporary
investments and accounts receivables are exposed to credit loss, Harken does not
believe such risk to be significant. Cash and temporary investments, including
cash in Segregated Accounts, includes investments in high-grade, short-term
securities, placed with highly rated financial institutions. Most of Harken's
accounts receivable are from a broad and diverse group of oil and gas companies
and, accordingly, do not represent a significant credit risk.
35
<PAGE> 36
Property and Equipment -- Harken follows the full cost accounting
method to account for the costs incurred in the acquisition, exploration,
development and production of oil and gas reserves. Gas plants and other
property are depreciated on the straight-line method over their estimated useful
lives ranging from four to twenty years.
Other Assets -- Harken includes in other assets certain deferred
commissions and issuance costs associated with the issuance of European
Convertible Notes Payable and certain development finance agreements. See Notes
6 and 7 -- Development Finance and Operating Agreements and European Convertible
Notes Payable for further discussion. At December 31, 1996, such deferred costs
totaled $2,725,000 net of $323,000 of accumulated amortization. At December 31,
1997, such deferred costs totaled $4,088,000 net of $439,000 of accumulated
amortization.
Accrued Liabilities and Other -- Accrued liabilities and other at
December 31, 1996, includes an amount of $1,605,000 related to certain
operational or regulatory contingent liabilities related to Harken's domestic
operations and other accrued expense liabilities of $2,284,000. The December 31,
1997 balance includes an amount of $4,255,000 related to prepaid investor
advances, $1,785,000 related to certain operational or regulatory contingent
liabilities associated with Harken's domestic operations and other accrued
expense liabilities of $2,628,000.
Colombian Operations -- Harken's operations include oil and gas
exploration and development efforts in Colombia pursuant to certain Colombian
Association Contracts. See further discussion at Note 5 -- Colombian Operations.
Harken accounts for its activities in Colombia using the Colombian peso as the
functional currency. Any foreign currency translation adjustment relating to the
translation to U.S. dollars of Harken's investment in Colombian operations is
accounted for as an equity adjustment from foreign currency translation and is
included as a component of stockholders' equity in the accompanying consolidated
financial statements. At December 31, 1996 and 1997, Harken reflects its
exploration activities in Colombia primarily as a capitalized cost of oil and
gas properties. See further discussion at Notes 4 and 14 -- Oil and Gas
Properties and Oil and Gas Disclosures.
Capitalization of Interest -- Harken capitalizes interest on certain
oil and gas exploration and development costs which are classified as
unevaluated costs, or which have not yet begun production. During 1995, Harken
recorded interest expense of $540,000, net of $204,000 of interest which was
capitalized to Harken's oil and gas properties. During 1996, Harken recorded
interest expense of $1,673,000, net of $370,000 of interest which was
capitalized to Harken's oil and gas properties. During 1997, Harken recorded
interest expense of $1,530,000, net of $1,416,000 of interest which was
capitalized to Harken's oil and gas properties.
General and Administrative Expenses -- Harken reflects general and
administrative expenses net of operator overhead charges and other amounts
billed to joint interest owners. General and administrative expenses are net of
$94,000, $61,000 and $30,000 for such amounts during 1995, 1996 and 1997,
respectively.
Provision for Asset Impairments -- Assets which are used in Harken's
operations, or are not held for resale, are carried at cost, less any
accumulated depreciation. Harken reviews its long-lived assets, other than its
investment in oil and gas properties, whenever events or changes in
circumstances indicate that the carrying amount of an asset may not be
recoverable. When evidence indicates that operations will not produce sufficient
cash flows to cover the carrying amount of the related asset, and when the
carrying
36
<PAGE> 37
amount of the related asset cannot be realized through sale, a permanent
impairment is recorded and the asset value is written down to recoverable fair
value. Harken reflected a provision for asset impairments from continuing
operations in the amount of $457,000 during 1995.
(2) ACQUISITIONS
Acquisitions of Additional Four Corners Property Interests -- In May
1995, Harken acquired additional interests in its oil and gas operations in the
Four Corners area of Arizona, Utah and New Mexico (the "Four Corners
Properties"). The acquisition of the seller's interest raised Harken's total
interest in the Four Corners Properties from approximately 70% to approximately
82% of Harken's total operated interest. As consideration for this acquisition,
Harken paid $300,000 in cash, issued a total of 534,000 shares of restricted
Harken common stock and assumed certain liabilities of the seller relating to
the properties, and the seller in turn retained responsibility for certain
contingent operational and environmental liabilities related to the interests
purchased. During the second quarter of 1996, Harken acquired additional
interests in the Four Corners Properties, raising Harken's total interest to
approximately 94% of the total interest operated by Harken. 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. On June 30, 1997, Harken acquired the remaining operating interest in
the Four Corners Properties for approximately $450,000 cash. Harken also assumed
certain liabilities of the seller relating to the property interests. All of the
above acquisitions of the additional interests in the Four Corners Properties
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 issuable shares of Harken common stock.
Acquisition of Texas Properties -- In October 1995, Harken Energy West
Texas, Inc., a wholly-owned subsidiary of Harken, acquired certain non-operated
interests in producing properties located in Hockley County, Texas ("Yellowhouse
Properties"). As consideration for the purchase of these interests, Harken
issued three million shares of restricted Harken common stock, warrants to
purchase one million additional shares of restricted Harken common stock at $2
per share, and assumed $750,000 of short-term notes payable. Harken and the
seller made payments totaling approximately $417,000 on these notes payable at
closing and the remaining balance was repaid in full by Harken during the first
quarter of 1996. The acquisition of the Yellowhouse Properties has been
accounted for under the purchase method of accounting.
On December 21, 1995, pursuant to a Purchase and Sale Agreement (the
"Panhandle Purchase and Sale Agreement"), Harken Exploration Company ("Harken
Exploration"), a wholly-owned subsidiary of Harken, acquired working interests
in certain producing properties located in the panhandle region of Texas
37
<PAGE> 38
("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 following two years to repay all or part
of this $13 million note with restricted Harken 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. The acquisition of the Panhandle Properties has
been accounted for under the purchase method of accounting. 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 adjusted the recording of
the initial purchase price of the Panhandle Properties to give effect to the
finalization of the consideration issued in the purchase.
On August 29, 1997, Harken, along with Harken Exploration, purchased
working interests in oil and gas properties located in the panhandle region of
Texas (the "Cal-T Properties"). The purchase price of approximately $3,416,000
consisted primarily of 565,000 shares of Harken common stock. The acquisition of
the Cal-T Properties has been accounted for under the purchase method of
accounting.
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 region of Arkansas and in the
Carlsbad region of New Mexico (the "EnerVest Properties") from EnerVest
Acquisition- II Limited Partnership ("EnerVest"). The purchase price of
approximately $15,200,000, plus the assumption of certain operational
liabilities relating to these properties, 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 1,400,000 shares of Harken common stock which were issued
in March 1997 pursuant to a Resolution and Settlement Agreement, whereby the
contingent issuance of additional shares of Harken common stock provided for in
the Asset Purchase and Sale Agreement was eliminated. 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.
Pro Forma Information -- The following unaudited pro forma combined
condensed statement of operations for the year ended December 31, 1996 gives
effect to the acquisitions of the EnerVest Properties and the Cal-T Properties
and the issuance of the European 6 1/2% Senior Convertible Notes Payable (See
Note 7 -- European Convertible Notes Payable for further discussion) as if each
had been consummated at January 1, 1996. The following unaudited pro forma
combined condensed statement of operations for the year ended December 31, 1997
gives effect to the acquisition of the Cal-T Properties and the issuance of the
European 5 1/2% Senior Convertible Notes Payable as if each had been consummated
at January 1, 1997.
The unaudited pro forma data is presented for illustrative purposes
only and is not necessarily indicative of the operating results that would have
occurred had the transactions been consummated at the dates indicated, nor are
they indicative of future operating results. The unaudited pro forma data does
not reflect the effect of the various conversions of European Notes, the
capitalization of certain amounts of interest on the European Notes or the
interest income earned from investment of the European Note proceeds.
38
<PAGE> 39
PRO FORMA COMBINED CONDENSED STATEMENT OF OPERATIONS
FOR THE YEAR ENDED DECEMBER 31, 1996
(UNAUDITED)
<TABLE>
<CAPTION>
Period from
January 1, 1996
to Closing Date
of Acquisition
----------------
EnerVest Cal-T
Harken Properties Properties Pro Forma
Actual Actual Actual Adjustments Pro Forma
------------- ------------ ----------- ---------------- ------------
<S> <C> <C> <C> <C> <C>
Oil and gas revenue $ 12,341 $ 2,173 $ 1,417 $ 15,931
Other revenues 1,580 -- -- (125)(1) 1,455
------------ ------------ ------------ ------------ ------------
Total Revenues 13,921 2,173 1,417 (125) 17,386
------------ ------------ ------------ ------------ ------------
Oil and gas operating expenses 4,438 710 818 5,966
General and administrative expenses, net 4,537 -- -- 60(3) 4,597
Depreciation and amortization 3,595 -- -- 1,010(2) 4,605
Interest expense and other, net 1,692 -- -- 1,967(4) 3,425
(234)(5)
------------ ------------ ------------ ------------ ------------
Total Expenses 14,262 710 818 2,803 18,593
------------ ------------ ------------ ------------ ------------
Income tax expense -- -- -- --
------------ ------------ ------------ ------------ ------------
Net income (loss) $ (341) $ 1,463 $ 599 (2,928) $ (1,207)
============ ============ ============ ============ ============
Basic net loss per share attributable to
common stock $ (0.00) $ (0.01)
============ ============
Basic Weighted Average Shares
Outstanding 85,021,894 92,984,625
============ ============
</TABLE>
PRO FORMA ADJUSTMENTS-PRO FORMA COMBINED CONDENSED STATEMENT OF OPERATIONS -
YEAR ENDED DECEMBER 31, 1996
(1) Pro forma entry to reflect the reduction in interest income earned due
to the $5,000,000 cash consideration paid in connection with the
acquisition of the EnerVest Properties.
(2) Pro forma entry to adjust actual depreciation and amortization expense
on oil and gas properties for the acquired interests to the
depreciation and amortization expense calculated on a consolidated
basis.
(3) Pro forma entry to record additional general and administrative
expenses expected to be incurred by Harken related to the EnerVest
Properties. The additional general and administrative expenses consist
of $10,000 per month, net of overhead reimbursements, for additional
necessary operating and administrative employees to serve the EnerVest
Properties.
(4) Pro forma entry to reflect interest and amortization expense incurred
on the 6 1/2% European Notes Payable.
(5) Pro forma entry to reflect the reduction in the accretion of interest
expense related to the July 1996 exchange of the note payable issued by
Harken as part of the acquisition of the Panhandle Properties.
39
<PAGE> 40
PRO FORMA COMBINED CONDENSED STATEMENT OF OPERATIONS
FOR THE YEAR ENDED DECEMBER 31, 1997
(UNAUDITED)
<TABLE>
<CAPTION>
Period from
January 1, 1997
to Closing Date
of Acquisition
----------------
Cal-T
Harken Properties Pro Forma
Actual Actual Adjustments Pro Forma
------------- -------------- -------------- -------------
<S> <C> <C> <C> <C>
Oil and gas revenue $ 14,113 $ 911 $ 15,024
Other revenues 4,655 -- 4,655
------------- ------------- ------------- -------------
Total Revenues 18,768 911 19,679
------------- ------------- ------------- -------------
Oil and gas operating expenses 5,581 665 6,246
General and administrative expenses, net 6,222 -- 6,222
Depreciation and amortization 5,183 -- 333(1) 5,516
Interest expense and other, net 1,530 -- 2,049(2) 3,579
------------- ------------- ------------- -------------
Total Expenses 18,516 665 2,382 21,563
------------- ------------- ------------- -------------
Income tax expense 63 -- (63)(3) --
------------- ------------- ------------- -------------
Net income (loss) $ 189 $ 246 (2,319) $ (1,884)
============= ============= ============= =============
Basic net income (loss) per share attributable
to common stock $ 0.00 $ (0.02)
============= =============
Basic Weighted Average Shares Outstanding 109,087,697 109,460,752
============= =============
</TABLE>
PRO FORMA ADJUSTMENTS-PRO FORMA COMBINED CONDENSED STATEMENT OF OPERATIONS -
YEAR ENDED DECEMBER 31, 1997
(1) Pro forma entry to adjust actual depreciation and amortization expense
on oil and gas properties for the acquired interests to the
depreciation and amortization expense calculated on a consolidated
basis.
(2) Pro forma entry to reflect interest and amortization expense incurred
on the 5 1/2% European Notes Payable.
(3) Pro forma entry to eliminate federal and state income tax expense.
40
<PAGE> 41
(3) INVESTMENTS
Investments are classified by Harken management at the time of purchase
as either held-to-maturity, available-for-sale or trading. Such classification
is reevaluated as of each balance sheet date. Included within cash and temporary
investments and cash in segregated accounts as of December 31, 1997 are certain
investments in marketable debt securities having maturities of sixty days or
less. Such debt securities are classified as held-to-maturity as Harken has the
positive intent and ability to hold the securities to maturity. Held-to-maturity
securities are stated at amortized cost, adjusted for amortization of premiums
and accretion of discounts to maturity. Such amortization is included in
interest and other income. During 1996 and 1997, Harken held no securities which
were classified as available-for-sale or trading.
During a portion 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 June 1994 and January 1995
conversions of certain shares of E-Z Serve $6.00 Convertible Preferred Stock,
Series C. Harken classified its investment in E-Z Serve common stock as
available-for-sale. Harken sold its investment in the common stock of E-Z Serve
during the third quarter of 1995.
Held-to-maturity securities -- The amortized cost and estimated fair
value of the marketable debt securities are as follows:
<TABLE>
<CAPTION>
December 31,
--------------------
1996 1997
---------- -------
<S> <C> <C>
Included in cash and temporary investments
Cost $ -- $50,906
Estimated Fair Value $ -- $50,973
Included in Segregated Accounts
Cost $ -- $37,184
Estimated Fair Value $ -- $37,242
</TABLE>
Harken includes in cash and temporary investments and cash in
segregated accounts other cash and cash equivalent amounts in addition to the
above marketable debt securities.
Available-for-sale securities -- The gross realized gains and gross
realized losses on the investment in the common stock of E-Z Serve are as
follows:
<TABLE>
<CAPTION>
Year Ended December 31,
------------------------
1995 1996 1997
----- ----- -----
<S> <C> <C> <C>
Gross Realized Gains $ 309 $-- $--
Gross Realized Losses -- -- --
</TABLE>
41
<PAGE> 42
(4) OIL AND GAS PROPERTIES
Harken follows the full cost accounting method to account for the costs
incurred in the acquisition, exploration, development and production of oil and
gas reserves. Under this method, all costs, including internal costs, directly
related to acquisition, exploration and development activities are capitalizable
as oil and gas property costs. Harken capitalized $1,182,000, $2,167,000 and
$3,126,000 of internal costs, net of reimbursements from joint interest owners,
directly related to these activities in 1995, 1996 and 1997, respectively. Such
costs include office and personnel costs of Harken's international and domestic
exploration field offices and does not include any corporate overhead. Harken
also accrues costs of dismantlement, restoration and abandonment to the extent
that such costs, in the aggregate, are anticipated to exceed the aggregate
salvage value of equipment and facilities removed from producing wells and other
facilities. See Note 14 -- Oil and Gas Disclosures for further discussion.
The capitalized costs of oil and gas properties, excluding unevaluated
properties, are amortized on a country-by-country basis using a unit of
production method (equivalent physical units of 6 mcf of gas to each barrel of
oil) based on estimated proved recoverable oil and gas reserves. Such
amortization of domestic oil and gas properties was $5.68, $5.58 and $6.60 per
equivalent barrel of oil produced during 1995, 1996 and 1997, respectively. The
evaluated costs at December 31, 1996 and 1997 also include $5,802,000 and
$22,754,000, respectively, related to Colombia which have not yet begun to be
amortized (see Note 5 -- Colombian Operations for a discussion of Colombian
operations).
The unevaluated property costs at December 31, 1996 and 1997 includes
$3,656,000 and $21,413,000, respectively, related to Colombia and $6,610,000 and
$5,780,000, respectively, related to domestic prospects. Amortization of
unevaluated property costs will begin when the properties become proved or their
values become impaired. Harken assesses realizability of unevaluated properties
on at least an annual basis or when there has been an indication that an
impairment in value may have occurred. Fair value of unevaluated prospects is
determined based on management's intention with regard to future exploration and
development of individually significant properties and the ability of Harken to
obtain funds to finance such exploration and development.
Under full cost accounting rules, for each cost center, capitalized
costs, less accumulated amortization and related deferred income taxes, shall
not exceed an amount ("the cost ceiling") equal to the sum of (a) the present
value of future net revenues from estimated production of proved oil and gas
reserves discounted at 10%, plus (b) the cost of properties not being amortized,
plus (c) the lower of cost or estimated fair value of any unproved properties
included in the costs being amortized, less (d) any income tax effects related
to differences between the book and tax basis of the properties involved.
(5) COLOMBIAN OPERATIONS
Harken's Colombian operations are conducted through Harken de Colombia,
Ltd., a wholly-owned subsidiary of Harken, which held five exclusive Colombian
Association Contracts with Empresa Colombiana de Petroleos ("Ecopetrol") as of
December 31, 1997. These Association Contracts include the Alcaravan Contract,
awarded in 1992, the Bocachico Contract, awarded in 1994, the Cambulos Contract,
awarded in 1995, the Bolivar Contract, awarded in 1996 and the Miradores
Contract, awarded in December 1997. The Alcaravan and Miradores Contracts
currently cover a combined area of approximately 242,000 acres in the Llanos
Basin of Eastern Colombia. The Bocachico and Cambulos Contracts cover a combined
area of approximately 492,000 acres in the Middle Magdalena Valley of Central
Colombia and the Bolivar Contract
42
<PAGE> 43
covers an area of approximately 250,000 acres in the Northern Middle Magdalena
Valley of Central Colombia. In March 1998, Harken de Colombia, Ltd. signed its
sixth Association Contract with Ecopetrol, the Los Olmos Contract, which covers
approximately 374,000 acres in the Lower Magdalena Valley of Northern Colombia.
Terms of each of the Association Contracts commit Harken to perform certain
activities in accordance with a prescribed timetable. As of December 31, 1997,
Harken was in compliance with the requirements of each of the Association
Contracts, as amended.
Under the terms of the Association Contracts, if, during the first six
years of each contract, Harken discovers one or more fields of producing oil or
gas in quantities that are economically exploitable and Ecopetrol agrees that
such field is economically exploitable (a "commercial discovery"), the term of
that contract will be extended for a period of 22 years from the date of such
commercial discovery. Upon discovery of a field capable of commercial
production, and upon commencement of production from that commercial field,
Ecopetrol will reimburse Harken for 50% of Harken's successful well costs
expended up to the point of declaration of a commercial discovery plus, in the
case of the Cambulos, Bolivar, Miradores and Los Olmos Contracts, 50% of all
seismic and dry well costs incurred prior to the point of declaration of a
commercial discovery. Production from a commercial discovery will be allocated
as follows: Ecopetrol, on behalf of the Colombian government, will receive a 20%
royalty interest in all production, and all production (after royalty payments)
will be allocated 50% to Ecopetrol and 50% to Harken until cumulative production
from all fields in the Association Contract acreage reaches 60 million barrels
of oil. As cumulative production increases in excess of 60 million barrels of
oil, Ecopetrol's share of production will increase progressively (to a maximum
of 75% under certain of the Association Contracts) with a corresponding decrease
in Harken's share of production. After a declaration of a commercial discovery,
Harken and Ecopetrol will be responsible for all future development costs and
operating expenses in direct proportion to their interest in production. For any
fields that are not declared by Ecopetrol to be a commercial discovery, Harken
would retain the rights to all production after royalty.
Harken has entered into certain development finance and operating
agreements with outside parties whereby such parties have received a beneficial
interest in certain of Harken's Colombian operations. For further discussion see
Note 6 -- Development Finance and Operating Agreements.
(6) DEVELOPMENT FINANCE AND OPERATING AGREEMENTS
Rio Negro Development Finance Agreement -- In October 1995, Harken
entered into a Development Finance Agreement (the "Rio Negro Development Finance
Agreement") with Arbco Associates L.P., Offense Group Associates L.P., Kayne
Anderson Nontraditional Investments L.P. and Opportunity Associates L.P.
(collectively, the "Rio Negro Investors"), pursuant to which the Rio Negro
Investors provided $3,500,000 to Harken to finance drilling on the Rio Negro
prospect in the Bocachico Contract area in exchange for the right to receive
future payments from Harken equal to 40% of the net profits that Harken de
Colombia, Ltd. may derive from the sale of oil and gas produced from the Rio
Negro prospect (the "Rio Negro Participation").
In March 1997, Harken and the Rio Negro Investors entered into a
Conversion Agreement whereby Harken purchased 75% of the Rio Negro Participation
relating to the Rio Negro Development Finance Agreement in exchange for 900,000
restricted shares of Harken common stock which were issued within 30 days
following closing. From the remaining 25% of the Rio Negro Participation
retained, the Rio Negro Investors have the right to receive 10% of the net
profits that Harken de Colombia, Ltd. may derive from the sale of oil and gas
produced from the Rio Negro prospect.
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Palo Blanco Development Finance Agreements -- In June 1996, Harken,
along with Harken de Colombia, Ltd., entered into separate Development Finance
Agreements with two investors. Under the terms of the agreements, the two
investors provided an aggregate of $2,500,000 to finance the drilling of a well
on the Palo Blanco prospect in the Alcaravan Association Contract area. In
return for the $2,500,000, the investors were initially granted a beneficial
interest in 40% of the net profits from the Palo Blanco prospect which might
have been received by Harken de Colombia, Ltd. In 1996, the investors exercised
their rights under the agreement to convert one-half of their beneficial
interest into 599,988 shares of restricted Harken common stock. During the first
quarter of 1997, the investors exercised their right to convert the remaining
portion of their beneficial interest into an additional 599,988 shares of
restricted Harken common stock.
Rochester Agreement -- Harken de Colombia, Ltd. has entered into an
operating agreement (the "Rochester Agreement") with Rochester Energy
Corporation ("Rochester", a Canadian corporation) pursuant to which Rochester
has paid 331/3% of the aggregate costs of the Estero #1 well and related
production facilities on the Palo Blanco prospect, 25% of the aggregate costs
related to the Estero #3 well, and 25% of the aggregate costs of the initial
well to be drilled on the Anteojos prospect, the Canacabare #1, all of which are
located within the Alcaravan Contract area, along with 25% of the aggregate
costs related to the Miradores Association Contract. In exchange, Rochester
acquired a beneficial interest equal to 25% of the interest held by Harken de
Colombia, Ltd. in the Palo Blanco and Anteojos prospect operations. The Estero
#1 well was drilled in the first half of 1997 and Estero #3 was spudded in
December 1997. The Canacabare #1 well is scheduled to begin drilling in early
1998.
Parkcrest Financing Agreement -- Harken de Colombia, Ltd. has entered
into a financing agreement ("the Parkcrest Financing Agreement") with Parkcrest
Explorations, Ltd. ("Parkcrest", a Canadian corporation) pursuant to which
Parkcrest has paid 331/3% of the aggregate costs of the Estero #1 well and
related production facilities on the Palo Blanco prospect, 331/3% of the
aggregate costs of the initial well to be drilled on the Anteojos prospect, the
Canacabare #1, and 25% of the aggregate costs related to the Estero #3 well, all
of which are located within the Alcaravan Contract area. In addition, Parkcrest
will pay 331/3% of the aggregate costs of the initial well to be drilled under
the Miradores Association Contract. Parkcrest is also responsible for their
contracted percentage share of costs related to seismic on the Alcaravan and
Miradores Contract areas. In exchange, Parkcrest, upon its full performance,
will acquire a beneficial interest equal to 25% of the interest held by Harken
de Colombia, Ltd. in these prospects.
EnCap Development Finance Agreement -- In October 1997, Harken entered
into a Development Finance Agreement (the "EnCap Development Finance Agreement")
with EnCap Energy Capital Fund III, L.P., EnCap Energy Capital Fund III-B, L.P.,
BOCP Energy Partners, L.P. and Energy Capital Investment Company PLC
(collectively the "EnCap Investors"), pursuant to which the EnCap Investors
provided $25 million (the "Payment Amount"), less a 2% investment banking fee,
to Harken to finance the planned drilling of the initial wells on three
unexplored oil and gas prospects in the Middle Magdalena Basin of Colombia. As
part of the transaction, Harken issued 150,000 shares of Harken common stock to
the EnCap Investors. The three well exploratory program contemplates the
drilling of one prospect on Harken's Bocachico Contract area and the drilling of
two prospects on Harken's Cambulos Contract area. In exchange, the EnCap
Investors received the right to receive future payments from Harken equal to 5%
of the net profits that Harken de Colombia, Ltd. may derive from the sale of oil
and gas produced from each of the three prospects if the planned drilling on the
prospect is successful (the "EnCap Participation"). Pursuant to the EnCap
Development Finance Agreement, Harken is obligated to drill each of the three
wells prior to October 2000.
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Pursuant to the EnCap Development Finance Agreement, the EnCap
Investors have the right, for a period of two years beginning in October 1998,
to convert all or part of the EnCap Participation into shares of Harken common
stock. The number of shares of Harken common stock to be issued upon conversion
of the EnCap Participation will be equal to the quotient of (i) the Payment
Amount (less any distributions made in respect of the EnCap Participation) plus
an amount equal to 15% interest per annum on the net Payment Amount compounded
monthly (the "Invested Amount"), divided by (ii) the market price of Harken
common stock at the time of conversion. During the same two year period, Harken
also has the right to convert the EnCap Participation into shares of Harken
common stock with the number of shares of Harken common stock to be issued to be
equal to the quotient of (i) the Payment Amount (less any distribution made in
respect of the EnCap Participation) plus an amount equal to 25% interest per
annum on the net Payment Amount compounded monthly, divided by (ii) the market
price of Harken common stock at the time of conversion. Harken can also elect to
pay cash upon any conversion of the EnCap Participation in lieu of issuing
Harken common stock. The EnCap Development Finance Agreement also provides for
additional shares of Harken common stock to be issued by Harken in the event of
a conversion to the extent that the EnCap Investors do not, under certain
circumstances, realize the Invested Amount from the sale of shares of Harken
common stock issued at the conversion. See Note 12 -- Related Party Transactions
for a discussion of the relationship between Harken and the EnCap Investors.
European Development Finance Agreement -- In December 1997, Harken
entered into a Development Finance Agreement and other related agreements (the
"European Development Finance Agreement") whereby Sidro S.A., Lambertine
Holdings, Ltd. and Rauscher Pierce and Clark (collectively the "European
Investors") purchased all of the outstanding common stock of Harken Capital
Corporation, ("HCC", a newly-formed U.S. corporation) for $7 million. Pursuant
to the European Development Finance Agreement, HCC then provided the $7 million
to Harken in January 1998 to finance a portion of the cost of the three-well
exploratory program discussed above pursuant to the EnCap Development Finance
Agreement. In exchange, HCC received the right to receive future payments from
Harken equal to 1.4% of the net profits that Harken de Colombia, Ltd. may derive
from the sale of oil and gas produced from each of the three prospects if the
planned drilling on the prospect is successful. As part of the transaction,
Harken issued 42,000 shares of Harken common stock to the European Investors and
paid a cash fee of $175,000 to one of the European Investors.
Pursuant to the European Development Finance Agreement, the European
Investors and Harken each have the right to convert the European Investors
interest into shares of common stock of Harken pursuant to conversion rights
terms identical to those terms related to the EnCap Development Finance
Agreement, for a period of two years beginning in December 1998.
(7) EUROPEAN CONVERTIBLE NOTES PAYABLE
8% European Notes -- 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. Between September 30, 1995 and July 31, 1996, all holders of
these 8% European Notes exercised
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their conversion options and Harken issued an aggregate total of 9,999,975
shares of Harken common stock pursuant to these conversions.
6 1/2% European Notes -- On July 30, 1996, Harken issued to qualified
purchasers a total of $40 million in 6 1/2% Senior Convertible Notes (the "6
1/2% European Notes") which were to mature on July 30, 2000. In connection with
the sale and issuance of the 6 1/2% European Notes, Harken paid approximately
$3,142,000 from the 6 1/2% European Note proceeds for commissions and issuance
costs. Interest incurred on these notes was payable semi-annually in January and
July of each year to maturity or until the 6 1/2% European Notes were converted.
Such 6 1/2% European Notes were convertible at any time by the holders into
shares of Harken common stock at a conversion price of $2.50 per share ("the 6
1/2% European Note Conversion Price"). The 6 1/2% European Notes were also
convertible by Harken into shares of Harken common stock after one year
following issuance, if for any period of thirty consecutive days commencing on
or after November 28, 1996, the closing price of Harken common stock for each
trading day during such period shall have equaled or exceeded 135% of the 6 1/2%
European Note Conversion Price (or $3.375 per share of Harken common stock).
During the last half of 1996, holders of 6 1/2% European Notes totaling
$1,400,000 exercised their conversion option and such holders were issued
560,000 shares of Harken common stock. In February 1997, Harken gave notice as
required under the Trust Indenture that it had met the market price criteria
necessary to call for mandatory conversion of the 6 1/2% European Notes and on
June 2, 1997 formally called the 6 1/2% European Notes for conversion on July
31, 1997. During the first six months of 1997, holders of 6 1/2% European Notes
totaling $19,300,000 exercised their conversion option and such holders were
issued 7,720,000 shares of Harken common stock. On July 31, 1997, Harken
converted the remaining 6 1/2% European Notes into 7,720,000 shares of Harken
common stock.
5 1/2% European Notes -- On June 11, 1997, Harken issued to qualified
purchasers a total of $70 million in 5 1/2% Senior Convertible Notes ( the "5
1/2% European Notes") which mature on June 10, 2002. In connection with the sale
and issuance of the 5 1/2% European Notes, Harken paid approximately $5,174,000
from the 5 1/2% European Notes proceeds for commissions and issuance costs.
Interest incurred on these notes is payable semi-annually in June and December
of each year to maturity or until the 5 1/2% European Notes are converted. Such
5 1/2% European Notes are convertible into shares of Harken common stock at an
initial conversion price of $5.00 per share, subject to adjustment in certain
circumstances ("the 5 1/2% European Note Conversion Price"). The Trust Indenture
provided for a five percent premium on the number of shares of Harken common
stock issuable on conversion that was paid to holders converting the 5 1/2%
European Notes prior to December 11, 1997. The 5 1/2% European Notes are also
convertible by Harken into shares of Harken common stock after one year
following issuance, if for any period of thirty consecutive days commencing on
or after June 11, 1997, the average of the closing prices of Harken common stock
for each trading day during such thirty day period shall have equaled or
exceeded 130% of the 5 1/2% European Note Conversion Price (or $6.50 per share
of Harken common stock). In October 1997, Harken met the market price criteria
necessary to call for mandatory conversion of the 5 1/2% European Notes any time
on or after June 11, 1998, and provided notice to the holders as required under
the Trust Indenture. Harken intends to mandatorily convert all of the 5 1/2%
European Notes which remain outstanding on June 11, 1998. As of December 31,
1997, holders of 5 1/2% European Notes totaling $30,120,000 have exercised their
conversion option and such holders were issued 6,325,200 shares of Harken common
stock. Subsequent to December 31, 1997, and as of March 17, 1998, additional
holders of 5 1/2% European Notes totaling $610,000 have exercised their
conversion option and such holders were issued an additional 122,000 shares of
Harken common stock. The 5 1/2% European Notes are listed on the Luxembourg
Stock Exchange.
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Upon closing, all proceeds from the sale of each of the European Notes
issuances were each initially paid to a Trustee under the terms of a Trust
Indenture covering each issue and held in separate interest bearing Trust
accounts (the "Segregated Accounts") to be maintained for Harken's benefit,
until the Trustee is presented with evidence of sufficient asset value, as
defined in the Trust Indenture, held by Harken to permit an advance of a portion
of the proceeds. Until all of the 5 1/2% European Notes are converted, Harken
must maintain an Asset Value Coverage Ratio equal to or greater than 1:1 which
is calculated as the ratio of (i) the sum of (x) 100% of the aggregate amount of
Harken's cash on deposit in the Segregated Accounts plus (y) 50% of the net
present value of Harken's domestic unencumbered total proved reserves plus (z)
25% of the net present value of Harken's total proved Colombian reserves to (ii)
the aggregate outstanding principal amount of the 5 1/2% European Notes. Upon a
conversion, any proceeds attributable to the 5 1/2% European Notes converted
which remain in the Segregated Accounts may be withdrawn by Harken without
regard to the asset value then existing. Harken was in compliance with the Asset
Value Coverage Ratio at December 31, 1997.
The 5 1/2% European Notes were sold strictly to non-U.S. purchasers in
the form of bearer instruments in $10,000 and $50,000 increments. The 5 1/2%
European Notes and the Harken common stock issuable upon conversion of the 5
1/2% European Notes have been or will be issued without registration under the
United States Securities Act of 1933 (the "Securities Act") pursuant to an
exemption contained in Regulation S promulgated under the Securities Act.
Commissions and issuance costs associated with the European Notes are
deferred and are included in Other Assets and are amortized to interest expense
over the period until conversion or maturity of the European Notes. As European
Notes are converted to Harken common stock, a pro-rata portion of these deferred
costs are charged to Additional Paid-In Capital.
All Segregated Account cash related to the 6 1/2% European Notes is
reflected as a current asset at December 31, 1996 as Harken had the intent and
ability to convert all outstanding 6 1/2% European Notes to Harken common stock
prior to December 31, 1997. During March 1997, Harken transferred approximately
$15.3 million of 6 1/2% European Note proceeds from the Segregated Accounts to
Harken's operating cash account due to the conversions of the 6 1/2% European
Notes. On July 31, 1997, Harken transferred the remaining approximately $21.3
million of 6 1/2% European Notes proceeds from the Segregated Accounts to
Harken's operating cash account. All Segregated Account cash related to the 5
1/2% European Notes is reflected as a current asset at December 31, 1997 as all
such cash is available according to the Trust Indenture. During December 1997,
Harken transferred approximately $28 million of the 5 1/2% European Note
proceeds from the Segregated Accounts to Harken's operating cash account due to
the conversions of the 5 1/2% European Notes. The initial cash proceeds from the
issuance of the European Notes are not included in the Statement of Cash Flows
because the proceeds are not considered to be cash equivalents. Transfers of
proceeds from the Segregated Accounts are included in cash flows from financing
activities in the accompanying consolidated statements of cash flows.
(8) REDEEMABLE PREFERRED STOCK
During 1988, Harken completed the private placement of 3,000,000 shares
of newly-issued Series C 12% $1 par value cumulative convertible redeemable
preferred stock ("Series C Preferred") for $30,000,000. Each share of preferred
stock was convertible into 1.667 shares of common stock at the option of the
holder and was mandatorily redeemable at $10 per share over a five year period
beginning in 1993.
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At December 31, 1994, 186,760 shares of Series C Preferred outstanding
were held by Tejas Power Corporation, a former subsidiary ("Tejas") and
represented the only remaining Series C Preferred shares outstanding. In
connection with the issuance of 1,000 shares of Tejas Series B Preferred Stock
("Tejas Preferred Stock") to Harken, Tejas agreed to waive certain of the
provisions under the terms of the Harken Series C Preferred, including the
payment of the 12% annual dividend. In December 1995, Harken entered into a
purchase, sale and exchange agreement in which it exchanged the 1,000 shares of
Tejas Preferred Stock it held along with a note payable for $394,000 to Tejas
for the 186,760 shares of Series C Preferred. At December 31, 1995 there were no
remaining outstanding shares of Series C Preferred.
(9) STOCKHOLDERS' EQUITY
Common Stock -- Harken currently has authorized 175,000,000 shares of
$.01 par common stock. At December 31, 1996 and 1997, Harken had issued
93,862,266 shares and 121,811,534 shares, respectively. Harken held 400,896
shares as treasury stock at a cost of $1,390,000 at December 31, 1996.
Acquisition of Additional Four Corners Property Interests -- In May
1995, Harken acquired an additional interest in the Four Corners Properties
primarily in exchange for, among other consideration, 534,000 restricted shares
of Harken common stock. In April 1996, Harken again acquired an additional
interest in the Four Corners Properties 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
noteholders of Search. In connection with the Merger, Harken issued warrants
entitling the holders to purchase up to 732,771 shares of Harken common stock at
the exercise price of $1.82 per share. As of the October 30, 1996 expiration
date for these warrants, 713,021 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 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 were exercisable by the holders thereof at any time on
or before May 11, 1999 at an exercise price of $1.50 per share. As of December
31, 1997, only approximately 37,000 of such warrants remained outstanding and
were subsequently exercised for shares of Harken common stock in February 1998.
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 were to mature on July 30, 2000. The 6
1/2% European Notes were convertible under certain terms into approximately
16,000,000 shares of Harken common stock. During 1996, holders of 6 1/2%
European Notes totaling $1,400,000 exercised their conversion option and such
holders were issued 560,000 shares of Harken common stock. In February 1997,
Harken gave notice as required under the Trust Indenture that it had met
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the market price criteria necessary to call for mandatory conversion of the 6
1/2% European Notes and on June 2, 1997, formally called the 6 1/2% European
Notes for conversion on July 31, 1997 (see Note 7 -- European Convertible Notes
Payable for further discussion). During the first six months of 1997, holders of
6 1/2% European Notes totaling an additional $19,300,000 exercised their
conversion option and such holders were issued 7,720,000 shares of Harken common
stock. On July 31, 1997, Harken converted the remaining 6 1/2% European Notes
into 7,720,000 shares of Harken common stock.
In connection with the issuance of the 6 1/2% European Notes, Harken
issued to the placement agents for the 6 1/2% European Notes certain
non-registered non-transferrable stock purchase warrants to purchase 1,280,000
shares of Harken common stock which are currently exercisable by the holders
thereof at any time on or before July 31, 1999 at an exercise price of $2.50 per
share. As of December 31, 1997, all but approximately 787,000 of such warrants
had been exercised for shares of Harken common stock and as of March 17, 1998,
all but approximately 60,000 of such warrants had been exercised for shares of
Harken common stock.
In June 1997, Harken issued to qualified purchasers a total of $70
million in 5 1/2% European Notes which mature on June 11, 2002. The 5 1/2%
European Notes are convertible under certain terms into a maximum of
approximately 14,700,000 shares of Harken common stock. In connection with the
issuance of the 5 1/2% European Notes, Harken issued to the placement agents for
the 5 1/2% European Notes warrants to purchase 1,120,000 shares of Harken common
stock at any time after December 11, 1997 and on or before December 11, 1999 at
an exercise price of $5.00 per share. As of December 31, 1997, holders of 5 1/2%
European Notes totaling $30,120,000 have exercised their conversion option and
such holders were issued 6,325,200 shares of Harken common stock. Subsequent to
December 31, 1997 and as of March 17, 1998, holders of 5 1/2% European Notes
totaling an additional $610,000 have exercised their conversion option and such
holders were issued 122,000 shares of Harken common stock.
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 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
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 warrants to purchase an aggregate total of 410,000 shares of
Harken common stock at an average exercise price of $1.71 per share. During
1997, these warrants were exercised for shares of Harken common stock.
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 warrants to purchase one million additional shares of restricted Harken
common stock at $2 per share. During 1997, these warrants were exercised for
shares of Harken common stock.
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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 in satisfaction of all obligations owed by the subsidiary to
the seller under the terms of the Panhandle Note. See Note 2 -- Acquisitions 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.
As partial consideration for the properties, Harken issued 1,550,000 in shares
of Harken common stock issued after closing. Pursuant to a Resolution and
Settlement Agreement in March 1997, Harken issued an additional 1,400,000 shares
of common stock as final consideration for the properties. Harken also issued to
EnerVest 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. During the third quarter of 1997, the holder exercised warrants to
purchase 100,000 shares of Harken common stock.
Acquisition of Cal-T Properties -- In August, 1997, Harken acquired
working interests in the Cal-T Properties in exchange for 565,000 shares of
Harken common stock. See Note 2 -- Acquisitions for further discussion.
Rio Negro Development Finance Agreement -- In October 1995, Harken and
the Rio Negro Investors entered into the Rio Negro Development Finance
Agreement. Related to the Agreement, Harken issued to a financial advisor 82,759
shares of restricted Harken common stock as well as warrants to purchase 100,000
additional shares of restricted Harken common stock. In March 1997, Harken and
the Rio Negro Investors entered into a Conversion Agreement whereby Harken
purchased 75% of the Participation relating to the Rio Negro Development Finance
Agreement for 900,000 restricted shares of Harken common stock. These shares
were issued in April 1997. See Note 6 -- Development Finance and Operating
Agreements for further discussion of the Rio Negro Development Finance
Agreement.
Palo Blanco Development Finance Agreements -- In June 1996, Harken,
along with Harken de Colombia, Ltd., entered into two separate Development
Finance Agreements with two investors. In 1996, the investors exercised their
rights under the agreements to convert one-half of their beneficial interest
into 599,988 shares of restricted Harken common stock, and during the first
quarter of 1997, exercised their rights to convert the remaining portion of
their beneficial interest into 599,988 shares of restricted Harken common stock.
See Note 6 -- Development Finance and Operating Agreements for further
discussion.
EnCap Development Finance Agreement -- In October 1997, Harken and the
EnCap Investors entered into a Development Finance Agreement under which the
EnCap Investors funded approximately $25 million to finance the drilling of
three wells in the Middle Magdalena Basin of Colombia. Pursuant to the EnCap
Development Finance Agreement, both Harken and the EnCap Investors have the
right under certain circumstances to convert all or part of the EnCap
Participation into shares of Harken common stock. Harken also issued 150,000
shares of Harken common stock to the EnCap Investors. See Note 6 -- Development
Finance and Operating Agreements for further discussion of the EnCap Development
Finance Agreement and Note 12 -- Related Party Transactions for further
discussion of the EnCap Investors.
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European Development Finance Agreement -- In December 1997, Harken, HCC
and the European Investors entered into a Development Finance Agreement under
which HCC funded $7 million in January 1998 to finance the drilling of three
wells in the Middle Magdalena Basin of Colombia. Pursuant to the European
Development Finance Agreement, both Harken and HCC have the right under certain
circumstances to convert some or all of the shares of HCC common stock into
shares of Harken common stock. In addition, Harken issued 42,000 shares of
Harken common stock to the European Investors. See Note 6 -- Development Finance
and Operating Agreements for further discussion.
Per Share Data -- Basic earnings per common share was computed by
dividing net income or loss by the weighted average number of shares of Harken
common stock outstanding during the year. Diluted earnings per common share for
1997 was determined by including the effect of outstanding options and warrants
using the treasury stock method to the extent that the average share price
exceeds the exercise price. The impact of unconverted European Convertible Notes
was not included in any of the years presented as their effect would have been
antidilutive. Harken has adopted Statement of Financial Accounting Standards No.
128, "Earnings per Share", effective December 15, 1997, and as a result has
restated certain prior year weighted average shares outstanding calculations,
although there was no impact on prior year loss per share amounts. A
reconciliation of the 1997 calculation of diluted earnings per common share is
as follows (not in thousands):
<TABLE>
<CAPTION>
Year Ended December 31, 1997
------------------------------------------------------
Weighted Average
Income Shares Per Share
-------------- --------------------- --------------
<S> <C> <C> <C>
Basic earnings per common share $ 189,000 109,087,697 $ 0.00
Treasury stock method effect of:
Outstanding employee stock options -- 1,654,970 --
Outstanding warrants -- 1,190,922 --
-------------- --------------------- --------------
Diluted earnings per common share $ 189,000 111,933,589 $ 0.00
============== ===================== ==============
</TABLE>
Summary of Outstanding Warrants -- At December 31, 1997, Harken has the
following outstanding warrants available to be exercised (not in thousands):
<TABLE>
<CAPTION>
Year of Issuance Number of Shares Exercisable Price Expiration Date
- ---------------------- ---------------------- --------------------- ---------------------- ---------------------
<S> <C> <C> <C> <C> <C> <C>
1995 2,083,000 2,083,000 $1.50 to $2.00 1997 - 1999
1996 1,784,000 1,784,000 $1.50 to $2.75 1998 - 1999
1997 2,143,937 2,143,937 $1.50 to $5.00 1999
</TABLE>
(10) STOCK OPTION PLAN
Harken has elected to follow Accounting Principles Board Opinion No.
25, "Accounting for Stock Issued to Employees" ("APB 25") and related
Interpretations in accounting for its employee stock options because, as
discussed below, the alternative fair value accounting provided for under
Statement of Financial Accounting Standards No. 123, "Accounting for Stock-Based
Compensation", ("FAS 123") requires use of option valuation models that were not
developed for use in valuing employee stock options. Under APB 25,
51
<PAGE> 52
because the exercise price of Harken's employee stock options equals or exceeds
the market price of the underlying stock on the date of grant, no compensation
expense is recognized.
Harken's 1993 Stock Option and Restricted Plan has authorized the grant
of options to Harken employees and directors for up to 4,000,000 shares of
Harken common stock. Harken's 1996 Stock Option and Restricted Stock Plan has
authorized the grant of 4,270,000 shares of Harken common stock. All options
granted have 10-year terms and vest and become fully exercisable at the end of 4
years of continued employment.
Pro forma information regarding net loss and loss per share is required
by FAS 123, and has been determined as if Harken had accounted for its employee
stock options under the fair value method of that Statement. The fair value for
these options was estimated at the date of grant using a Black-Scholes option
pricing model with the following weighted-average assumptions for 1995, 1996 and
1997, respectively: risk- free interest rates of 7%, 6% and 5 1/2%; dividend
yields of 0%; volatility factors of the expected market price of Harken common
stock of .779, .614 and .588; and a weighted-average expected life to the option
of 4 years.
The Black-Scholes option valuation model was developed for use in
estimating the fair value of traded options which have no vesting restrictions
and are fully transferable. In addition, option valuation models require the
input of highly subjective assumptions including the expected stock price
volatility. Because Harken's employee stock options have characteristics
significantly different from those of traded options, and because changes in the
subjective input assumptions can materially affect the fair value estimate, in
management's opinion, the existing models do not necessarily provide a reliable
single measure of the fair value of its employee stock options.
For purposes of pro forma disclosures, the estimated fair value of the
options is amortized to expense over the options' vesting period. Harken's pro
forma information follows (in thousands except for earnings per share
information):
<TABLE>
<CAPTION>
Year Ended December 31,
----------------------------------------------
1995 1996 1997
--------- --------- ---------
<S> <C> <C> <C>
Pro forma net loss $ (1,958) $ (929) $ (2,013)
Pro forma basic loss per share $ (0.03) $ (0.01) $ (0.02)
</TABLE>
The weighted average fair value of the options issued in 1996 and 1997
was $1.30 and $2.63 per share, respectively, underlying such option.
52
<PAGE> 53
A summary of the Company's stock option activity, and related
information for the year ended December 31, 1996 and 1997 follows (not in
thousands):
<TABLE>
<CAPTION>
Year Ended December 31,
-------------------------------------------------------------------------
1996 1997
---------------------------------- ----------------------------------
Weighted-Average Weighted-Average
Options Exercise Price Options Exercise Price
---------- ------------------ ---------- ------------------
<S> <C> <C> <C> <C>
Outstanding-beginning of year 3,484,300 $ 1.76 5,224,300 $ 2.15
Granted 1,740,000 $ 2.92 3,320,000 $ 5.14
Exercised -- (114,051) $ 1.90
Forfeited -- (53,250) $ 2.28
---------- ----------- ---------- -----------
Outstanding-end of year 5,224,300 $ 2.15 8,376,999 $ 3.34
Exercisable-end of year 1,739,300 $ 1.77 2,773,999 $ 1.93
</TABLE>
Exercise prices for options outstanding as of December 31, 1996 ranged
from $1.00 to $5.625. Exercise prices for options outstanding as of December 31,
1997 ranged from $1.00 to $6.00.
(11) INCOME TAXES
At December 31, 1997, Harken had available for federal income tax
reporting purposes, net operating loss (NOL) carryforward for regular tax
purposes of approximately $60,000,000 which expires in 1998 through 2012,
alternative minimum tax NOL carryforward of approximately $51,000,000 which
expires in 1998 through 2011, investment tax credit carryforward of
approximately $842,000 which expires in 1998 through 2002, statutory depletion
carryforward of approximately $2,400,000 which does not have an expiration date,
and a net capital loss carryforward of approximately $12,400,000 which expires
in 2007 through 2011. 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.
The following is a reconciliation of the reported amount of income tax
expense for the year ended December 31, 1997 to the amount of income tax expense
that would result from applying domestic federal statutory tax rates to pretax
income:
<TABLE>
<CAPTION>
1997
----
<S> <C>
Tax expense using statutory rate $ 86
Application of net operating loss carryforward (86)
Alternative minimum tax provision 27
State income taxes 36
----
Current tax expense $ 63
====
</TABLE>
53
<PAGE> 54
At December 31, 1995, total deferred tax liabilities, relating
primarily to property and equipment, increased to approximately $7,528,000 while
total deferred tax assets increased to approximately $22,364,000. The resulting
decrease in net deferred tax assets was offset by a corresponding decrease in
the valuation allowance to approximately $14,836,000 at December 31, 1995,
resulting in no impact to Harken's results of operations.
At December 31, 1996, total deferred tax liabilities, relating
primarily to property and equipment, decreased to approximately $3,216,000 while
total deferred tax assets, primarily related to the net operating loss
carryforward, increased to approximately $23,136,000. The resulting increase in
net deferred tax assets was offset by a corresponding increase in the valuation
allowance to approximately $19,920,000 at December 31, 1996, resulting in no
impact to Harken's results of operations.
Total deferred tax liabilities, relating primarily to property and
equipment as of December 31, 1997, were approximately $680,000. Total deferred
tax assets, primarily related to the net operating loss carryforward, were
approximately $20,538,000 at December 31, 1997. The total net deferred tax asset
is offset by a valuation allowance of approximately $19,858,000 at December 31,
1997, resulting in no impact to Harken's results of operations.
The Tax Reform Act of 1986 made substantial changes with regard to NOL
carryforwards. After an "ownership change," the taxable income of a loss
corporation is limited annually to a prescribed rate times the value of the loss
corporation's stock immediately before the ownership change. In general, an
ownership change occurs if ownership of more than 50% in value of the stock of
the loss corporation changes during the three-year period preceding the test
date.
(12) RELATED PARTY TRANSACTIONS
In June 1997, Harken added to its Board of Directors a new director who
is also a managing director of EnCap Investments L.C. ("EnCap"). EnCap has
historically provided financial consulting and investment banking services to
Harken. In connection with the June 1997 placement of the 5 1/2% European Notes,
EnCap received as a financial consulting fee, $466,667 in cash, and a warrant to
purchase 50,000 shares of Harken common stock at any time after December 11,
1997 and on or before December 11, 1999 at an exercise price of $5.00 per share.
As described in Note 6 -- Development Finance and Operating Agreements, in
October 1997, Harken entered into a Development Finance Agreement with the EnCap
Investors. EnCap serves as the general partner of three of the EnCap Investors
and the new Harken director serves as a director of the fourth EnCap Investor.
In connection with the EnCap Development Finance Agreement, EnCap received an
investment banking fee of $500,000.
During 1997, Harken made short-term loans totaling $295,000 to certain
members of Harken's Board of Directors and Management. Such notes receivable are
reflected in Harken's consolidated balance sheet at December 31, 1997 as Related
Party Notes Receivable.
During 1994, an agreement was reached with an officer whereby a certain
note receivable from the officer for $520,000, together with accrued interest,
was forgiven equally over three installments dated April 1994, July 1995 and
December 1996 with each installment of such forgiveness contingent upon the
officer's continued employment through the date of each such installment. Harken
included an installment of this forgiveness totaling $232,000 per year in
general and administrative expense during the years ended December 31, 1995 and
1996.
54
<PAGE> 55
(13) OTHER INFORMATION
Quarterly Data -- (Unaudited) -- The following tables summarize
selected quarterly financial data for 1996 and 1997 expressed in thousands,
except per share amounts.
<TABLE>
<CAPTION>
Quarter Ended
---------------------------------------------------------- Total
March 31 June 30 September 30 December 31 Year
---------- ----------- -------------- ------------- -----------
<S> <C> <C> <C> <C> <C>
1996
Revenues $ 2,341 $ 2,590 $ 4,115 $ 4,875 $ 13,921
Gross profit 1,237 1,548 2,337 2,781 7,903
Net income (loss) (296) 68 45 (158) (341)
Basic and diluted income (loss)
per common share $ (0.00) $ 0.00 $ 0.00 $ (0.00) $ (0.00)
1997
Revenues $ 4,251 $ 4,027 $ 5,000 $ 5,490 $ 18,768
Gross profit 2,441 1,917 1,986 2,188 8,532
Net income 68 46 38 37 189
Basic and diluted income
per common share $ 0.00 $ 0.00 $ 0.00 $ 0.00 $ 0.00
</TABLE>
Significant Customers -- In 1995, a single oil purchaser represented
47% of consolidated revenues. In 1996, two oil purchasers and a gas purchaser
represented 27%, 16% and 10%, respectively, of consolidated revenues. In 1997,
one oil purchaser represented 15% of consolidated revenues. Harken has secured
and maintains letters of credit with significant purchasers. In addition,
management does not feel that the loss of a significant purchaser would
significantly impact the operations of Harken due to the availability of other
potential purchasers for its oil and gas production.
55
<PAGE> 56
Geographic Segment Information -- For the three years ended December
31, 1997, Harken has reflected no revenues or operating profit from its
Colombian operations. Identifiable net asset and capital expenditure information
for each of the three years ended December 31, 1997 is as follows:
<TABLE>
<CAPTION>
December 31,
--------------------------------------
IDENTIFIABLE NET ASSETS: 1995 1996 1997
-------- -------- --------
<S> <C> <C> <C>
United States $ 65,858 $113,437 $193,448
Colombia 4,936 9,563 45,065
-------- -------- --------
Total $ 70,794 $123,000 $238,513
======== ======== ========
</TABLE>
<TABLE>
<CAPTION>
Year Ended December 31,
-----------------------------------
CAPITAL EXPENDITURES: 1995 1996 1997
------- ------- -------
<S> <C> <C> <C>
United States $30,879 $18,896 $ 6,413
Colombia 3,354 9,161 34,709
Other International 303 -- --
------- ------- -------
Total $34,536 $28,057 $41,122
======= ======= =======
</TABLE>
(14) OIL AND GAS DISCLOSURES
Costs Incurred in Property Acquisition, Exploration and Development
Activities:
<TABLE>
<CAPTION>
Year Ended December 31,
-----------------------------------
1995 1996 1997
------- ------- -------
<S> <C> <C> <C>
DOMESTIC COSTS INCURRED:
Acquisition of properties
Evaluated $22,054 $16,316 $ 3,896
Unevaluated 6,313 -- --
Exploration 696 162 170
Development 1,816 2,418 2,347
------- ------- -------
Total domestic costs incurred $30,879 $18,896 $ 6,413
======= ======= =======
INTERNATIONAL COSTS INCURRED:
Acquisition of properties
Evaluated $ -- $ -- $ 4,115
Unevaluated -- -- --
Exploration 3,657 9,161 30,594
Development -- -- --
------- ------- -------
Total international costs incurred $ 3,657 $ 9,161 $34,709
======= ======= =======
</TABLE>
International costs incurred during 1995, 1996 and 1997 relates to
Harken's Colombian operations, with the exception of approximately $303,000
during 1995 related to Harken's Bahrain operations.
56
<PAGE> 57
Capitalized Costs Relating to Oil and Gas Producing Activities:
<TABLE>
<CAPTION>
December 31,
-------------------------------------------
1995 1996 1997
--------- --------- ---------
<S> <C> <C> <C>
CAPITALIZED COSTS:
Unevaluated international properties $ 4,866 $ 3,656 $ 21,413
Unevaluated domestic properties 11,117 6,610 5,780
Evaluated international properties -- 5,802 22,754
Evaluated domestic properties 39,526 60,188 67,431
--------- --------- ---------
Total capitalized costs 55,509 76,256 117,378
Less accumulated depreciation and amortization (4,691) (8,069) (12,928)
--------- --------- ---------
Net capitalized costs $ 50,818 $ 68,187 $ 104,450
========= ========= =========
</TABLE>
Oil and Gas Reserve Data -- (Unaudited) -- The following information is
presented with regard to Harken's proved oil and gas reserves. Such reserve
information excludes Harken's share of the future cash flows from the Aneth Gas
Plant, which is part of Harken's Four Corners Properties. The reserve values
reflected in the following reserve disclosures are based on prices received as
of year end. During 1995 and 1996, Harken consummated certain acquisition
transactions resulting in significant additions to its domestic proved oil and
gas reserves. (See Note 2 -- Acquisitions for further discussion). The majority
of all Colombian reserves represent proved undeveloped reserves to be developed
by Harken in the future. As of December 31, 1997, Harken has included no proved
reserves related to its Cambulos or Miradores Association Contracts. As Harken
identifies proved reserves associated with its Cambulos or Miradores Association
Contracts, or identifies proved reserves from additional prospects within its
Alcaravan, Bocachico or Bolivar Association Contracts, such reserves will be
added in the year of their discovery. Colombian reserves reflect Harken's net
interest after consideration for certain development finance and operating
agreements and additionally reflect the net Harken interest assuming full
participation by Ecopetrol. If any of Harken's producing fields are considered
by Ecopetrol not to be a commercial discovery, Harken's share of such reserves
could be increased accordingly. As of December 31, 1997, Harken has not applied
to Ecopetrol for a declaration of a commercial discovery relating to any of its
proved Colombian reserves. For further discussion of Harken's Colombian
operations, see Note 5 -- Colombian Operations.
57
<PAGE> 58
<TABLE>
<CAPTION>
(UNAUDITED)
----------------------------------------------------------------------
United States Colombia Total Worldwide
--------------------- --------------------- ---------------------
Oil Gas Oil Gas Oil Gas
(Barrels) (Mcf) (Barrels) (Mcf) (Barrels) (Mcf)
---------- -------- ----------- ------- ----------- -------
(IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C>
PROVED RESERVES:
AS OF DECEMBER 31, 1994 1,521 7,148 -- -- 1,521 7,148
Extensions and discoveries 70 20 -- -- 70 20
Revisions (43) (3,241) -- -- (43) (3,241)
Production (217) (615) -- -- (217) (615)
Purchases of reserves in place 2,192 25,891 -- -- 2,192 25,891
------- ------- ------- ------- ------- -------
AS OF DECEMBER 31, 1995 3,523 29,203 -- -- 3,523 29,203
Extensions and discoveries 5 2,401 1,426 257 1,431 2,658
Revisions (22) (3,117) -- -- (22) (3,117)
Production (370) (1,409) -- -- (370) (1,409)
Purchases of reserves in place 2,216 4,770 611 2,055 2,827 6,825
------- ------- ------- ------- ------- -------
AS OF DECEMBER 31, 1996 5,352 31,848 2,037 2,312 7,389 34,160
Extensions and discoveries 95 3,977 3,922 134 4,017 4,111
Revisions (546) (8,437) 1,586 1,067 1,040 (7,370)
Production (416) (1,922) -- -- (416) (1,922)
Purchases of reserves in place 345 4,185 713 129 1,058 4,314
------- ------- ------- ------- ------- -------
AS OF DECEMBER 31, 1997 4,830 29,651 8,258 3,642 13,088 33,293
======= ======= ======= ======= ======= =======
PROVED DEVELOPED RESERVES AT:
December 31, 1995 2,147 8,466 -- -- 2,147 8,466
December 31, 1996 3,757 11,822 252 45 4,009 11,867
December 31, 1997 3,002 15,080 1,599 167 4,601 15,247
</TABLE>
58
<PAGE> 59
Standardized Measure of Discounted Future Net Cash Flows Relating to Proved Oil
and Gas Reserves:
<TABLE>
<CAPTION>
(UNAUDITED)
--------------------------------------------
Total
United States Colombia Worldwide
------------- -------- ---------
(IN THOUSANDS)
<S> <C> <C> <C>
DECEMBER 31, 1996:
Future cash inflows $ 309,820 $ 41,859 $ 351,679
Production costs (80,869) (6,770) (87,639)
Development costs (13,398) (8,737) (22,135)
--------- --------- ---------
Future net inflows before income tax 215,553 26,352 241,905
Future income taxes -- (7,741) (7,741)
--------- --------- ---------
Future net cash flows 215,553 18,611 234,164
10% discount factor (85,750) (6,171) (91,921)
--------- --------- ---------
Standardized measure of discounted future
net cash flows $ 129,803 $ 12,440 $ 142,243
========= ========= =========
DECEMBER 31, 1997:
Future cash inflows $ 176,308 $ 118,825 $ 295,133
Production costs (60,213) (24,996) (85,209)
Development costs (14,874) (29,083) (43,957)
--------- --------- ---------
Future net inflows before income tax 101,221 64,746 165,967
Future income taxes -- (21,424) (21,424)
--------- --------- ---------
Future net cash flows 101,221 43,322 144,543
10% discount factor (44,244) (9,719) (53,963)
--------- --------- ---------
Standardized measure of discounted future
net cash flows $ 56,977 $ 33,603 $ 90,580
========= ========= =========
</TABLE>
59
<PAGE> 60
Changes In Standardized Measure of Discounted Future Net Cash Flows Relating to
Proved Oil and Gas Reserves:
<TABLE>
<CAPTION>
(UNAUDITED)
---------------------------------------
1995 1996 1997
--------- --------- ---------
(IN THOUSANDS)
<S> <C> <C> <C>
Worldwide
Standardized measure -- beginning of year $ 11,712 $ 58,776 $ 142,243
Increase (decrease)
Sales, net of production costs (3,224) (7,577) (8,195)
Net change in prices, net of production costs 1,045 51,070 (67,852)
Development costs incurred 391 949 5,345
Change in future development costs 1,858 209 2,901
Change in future income taxes -- (5,465) (4,898)
Revisions of quantity estimates (3,420) (7,791) (3,931)
Accretion of discount 1,171 5,878 14,224
Changes in production rates, timing and other (1,361) 1,227 (14,051)
Extensions and discoveries, net of future costs 792 12,475 16,007
Purchases of reserves-in-place 49,812 32,492 8,787
--------- --------- ---------
Standardized measure -- end of year $ 58,776 $ 142,243 $ 90,580
========= ========= =========
</TABLE>
(15) COMMITMENTS AND CONTINGENCIES
Operating Leases -- Harken leases its corporate and certain other
office space and certain field operating offices. Total office and operating
lease expense during 1995, 1996 and 1997 was $442,000, $359,000 and $551,000,
respectively. Future minimum rental payments required under all leases that have
initial or remaining noncancellable lease terms in excess of one year as of
December 31, 1997, net of sublease arrangements, are as follows:
<TABLE>
<CAPTION>
Year Amount
- --------------- ---------------
<S> <C>
1998 $ 399
1999 399
2000 115
2001 --
2002 --
Thereafter --
---------------
Total minimum payments required $ 913
===============
</TABLE>
60
<PAGE> 61
Operational Contingencies -- The exploration, development and
production of oil and gas are subject to various Navajo, federal and state laws
and regulations designed to protect the environment. Compliance with these
regulations is part of Harken's day-to-day operating procedures. Infrequently,
accidental discharge of such materials as oil, natural gas or drilling fluids
can occur and such accidents can require material expenditures to correct.
Harken maintains levels of insurance customary in the industry to limit its
financial exposure. Management is unaware of any material capital expenditures
required for environmental control during the next fiscal year.
Harken has accrued approximately $1,785,000 at December 31, 1997
relating to certain operational or regulatory contingent liabilities related to
Harken's domestic operations. Harken and its subsidiaries currently are involved
in various lawsuits and other contingencies, which in management's opinion, will
not result in significant loss exposure to Harken.
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
None.
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
See "Item 1. Business" above for a discussion of the Executive Officers
of Harken. Reference is made to the material under the caption "Election of
Directors" in the Registrant's definitive Proxy Statement to be filed on or
before April 30, 1998 pursuant to Regulation 14A in connection with its Annual
Meeting of Stockholders to be held in June 1998, which is incorporated herein by
reference.
ITEM 11. EXECUTIVE COMPENSATION
Reference is made to the material under the caption "Compensation of
Executive Officers" in the Registrant's definitive Proxy Statement to be filed
on or before April 30, 1998 pursuant to Regulation 14A in connection with its
Annual Meeting of Stockholders to be held in June 1998, which is incorporated
herein by reference.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS
Reference is made to the material under the caption "Ownership of
Common Stock" in the Registrant's definitive Proxy Statement to be filed on or
before April 30, 1998 pursuant to Regulation 14A in connection with its Annual
Meeting of Stockholders to be held in June 1998, which is incorporated herein by
reference.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
Reference is made to the material under the caption "Certain
Transactions" in the Registrant's definitive Proxy Statement to be filed on or
before April 30, 1998 pursuant to Regulation 14A in connection with its Annual
Meeting of Stockholders to be held in June 1998, which is incorporated herein by
reference.
61
<PAGE> 62
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K
(a) The following documents are filed as a part of this report:
(1) Financial Statements included in PART II of this report:
<TABLE>
<CAPTION>
PAGE
----
Harken Energy Corporation and Subsidiaries
<S> <C>
-- Report of Independent Public Accountants............................................... 30
-- Selected Financial Information and Other Data for the five years ended
December 31, 1997 ..................................................................... 20
-- Consolidated Balance Sheets -- December 31, 1996 and 1997.............................. 31
-- Consolidated Statements of Operations for the three years ended
December 31, 1997 ..................................................................... 32
-- Consolidated Statements of Stockholders' Equity for the three years ended
December 31, 1997 ..................................................................... 33
-- Consolidated Statements of Cash Flows for the three years ended
December 31, 1997 ..................................................................... 34
-- Notes to Consolidated Financial Statements............................................. 35
</TABLE>
(2) The information required by Schedule I is either provided in the
related financial statements or in a note thereto, or is not
applicable to the Company. The information required by all other
Schedules is not applicable to the Company.
(3) Exhibits
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 Certificate of Incorporation of Harken Energy
Corporation (filed as Exhibit 28.8 to the Registration Statement
on Form S-1 of Tejas Power Corporation, file No. 33- 37141, and
incorporated by reference herein).
3.3 Amendment to the Certificate of Incorporation of Harken Energy
Corporation (filed as Exhibit 3 to Harken's Quarterly Report on
Form 10-Q for fiscal quarter ended March 31, 1991, File No.
0-9207, and incorporated by reference herein).
3.4 Amendments to the Certificate of Incorporation of Harken Energy
Corporation (filed as Exhibit 3 to Harken's Quarterly Report on
Form 10-Q for fiscal quarter ended June 30, 1991, File No.
0-9207, and incorporated by reference herein).
62
<PAGE> 63
3.5 Amendments to the Certificate of Incorporation of Harken Energy
Corporation (filed as Exhibit 3.5 to Harken's Annual Report on
Form 10-K for the fiscal year ended December 31, 1996, File No.
0-9207, and incorporated herein by reference).
3.6 Amendment to the Certificate of Incorporation of Harken Energy
Corporation.
3.7 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. 0-9207, 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 herein by
reference).
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 herein by
reference).
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 Seventh Amendment and Restatement of Harken's Amended Stock
Option Plan (filed as Exhibit 10.1 to Harken's Annual Report on
Form 10-K for the fiscal year ended December 31, 1991, File No.
0-9207, and incorporated by reference herein).
10.2 Amended and Restated Non-Qualified Incentive Stock Option Plan
of Harken adopted by Harken's stockholders on February 18, 1991
(filed as Exhibit 10.2 to Harken's Annual Report on Form 10-K
for the fiscal year ended December 31, 1991, File No. 0-9207,
and incorporated by reference herein).
10.3 Form of Advancement Agreement dated September 13, 1990, between
Harken and each director of Harken (filed as Exhibit 10.38 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).
63
<PAGE> 64
10.4 Operating Agreement between Chuska Energy Corporation and the
Navajo Tribe of Indians dated February 18, 1987, and effective
July 20, 1987 (filed as Exhibit 10(b) to Chuska Energy
Corporation's Form 10 - General Form for Registration of
Securities (the "Chuska Form 10"), and incorporated by reference
herein).
10.5 Operating Agreement between Chuska Energy Corporation and the
Navajo Tribe of Indians dated July 28, 1983, and effective
August 26, 1983 and First Addendum thereto (filed as Exhibit
10(a) to Chuska's Form 10, and incorporated by reference
herein).
10.6 Association Contract (Cambulos), dated September 17, 1995, and
effective as of November 17, 1995, by and between Harken de
Colombia, Ltd., and Empresa Colombiana de Petroleos (filed as
Exhibit 10.1 to Harken's Quarterly Report on Form 10-Q for the
quarterly period ended September 30, 1995, File No. 0-9207, and
incorporated by reference herein).
10.7 Development Finance Agreement, dated October 12, 1995, by and
among Harken Energy Corporation, Arbco Associates L.P., Offense
Group Associates L.P., Kayne Anderson Nontraditional Investments
L.P. and Opportunity Associates L.P. (filed as Exhibit 10.2 to
Harken's Quarterly Report on Form 10-Q for the quarterly period
ended September 30, 1995, File No. 0-9207, and incorporated by
reference herein).
10.8 Harken Energy Corporation's 1993 Stock Option and Restricted
Stock Plan (filed as Exhibit 4.3 to Harken's Registration
Statement on Form S-8, and incorporated by reference herein).
10.9 Harken Energy Corporation's Directors Stock Option Plan (filed
as Exhibit 4.3 to Harken's Registration Statement on Form S-8,
and incorporated herein by reference).
10.10 Association Contract (Bolivar) by and between Harken de
Colombia, Ltd. and Empresa Colombia de Petroleos (filed as
Exhibit 10.4 to Harken's Quarterly Report on Form 10-Q for the
quarterly period ended June 30, 1996, and incorporated herein by
reference).
10.11 Harken Energy Corporation 1996 Incentive and Nonstatutory Stock
Option Plan (filed as Exhibit 10.1 to Harken's Quarterly Report
on Form 10-Q for the quarterly period ended September 30, 1996,
and incorporated herein by reference).
10.12 Association Contract (Alcaravan) dated as of December 13, 1992,
but effective as of February 13, 1993, by and between Empresa
Colombia de Petroleos (filed as Exhibit 10.1 to Harken's Annual
Report on Form 10-K for the fiscal year ended December 31, 1992,
File No. 0-9207, and incorporated herein by reference).
10.13 Association Contract (Bocachico) dated as of January 1994, but
effective as of April 1994, by and between Empresa Colombia de
Petroleos (filed as Exhibit 10.1 to Harken's Quarterly Report on
Form 10-Q for the quarterly period ended March 31, 1994, File
No. 0-9207, and incorporated herein by reference).
10.14 Association Contract (Miradores) dated as of December 1997, but
effective as of February 1998, by and between Empresa Colombia
de Petroleos.
64
<PAGE> 65
10.15 Development Finance Agreement dated as of October 17, 1997, by
and among Harken, Harken Capital Corporation and the other
signatories thereto (filed as Exhibit 10.1 to Harken's Quarterly
Report on Form 10-Q for the quarterly period ended September 30,
1997, File No.
0-9207, and incorporated herein by reference).
10.16 Development Finance Agreement dated as of December 24, 1997, by
and among Harken and the other signatories thereto.
10.17 Exchange Agreement dated as of December 24, 1997, by and among
Harken, Harken Capital Corporation and the other signatories
thereto.
10.18 Trust Indenture dated June 11, 1997, by and between Harken and
Marine Midland Bank plc (filed as Exhibit 10.1 to Harken's
Quarterly Report on Form 10-Q for the quarterly period ended
June 30, 1997, File No. 0-9207, and incorporated herein by
reference).
10.19 Placing Agreement Dated June 3, 1997, by and among Harken and
the other signatories thereto (filed as Exhibit 10.2 to Harken's
Quarterly Report on Form 10-Q for the quarterly period ended
June 30, 1997, File No. 0-9207, and incorporated herein by
reference).
10.20 Drilling Contract dated as of July 22, 1997, between Harken de
Colombia, Ltd., and Parker Drilling Company International Ltd.
(filed as Exhibit 10.4 to Harken's Quarterly Report on Form 10-Q
for the quarterly period ended June 30, 1997, File No. 0-9207,
and incorporated herein by reference).
10.21 Drilling Contract dated as of May 15, 1997, between Harken de
Colombia, Ltd., and Marlin Colombia Drilling Company, Inc.
(filed as Exhibit 10.5 to Harken's Quarterly Report on Form 10-Q
for the quarterly period ended June 30, 1997, File No. 0-9207,
and incorporated herein by reference).
22 Subsidiaries of Harken.
24 Power of Attorney.
27 Financial Data Schedule.
(b) Reports on Form 8-K
None.
65
<PAGE> 66
SIGNATURES
Pursuant to the requirements of the Section 13 or 15(d) 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, in the City of Irving,
State of Texas, on March 23, 1998.
HARKEN ENERGY CORPORATION
*
----------------------------------------
Mikel D. Faulkner, Chairman of the Board and Chief Executive Officer
Pursuant to the requirements of the Securities Exchange Act of 1934,
this Report has been signed below by the following persons on behalf of the
Registrant and in the capacities and on the dates indicated.
<TABLE>
<CAPTION>
Signature Title Date
- ------------------------------- ----------------------------------------- ----------------------------
<S> <C> <C>
* Chairman of the Board and Chief March 23, 1998
- ------------------------------- Executive Officer (Principal
Mikel D. Faulkner Executive Officer)
* President and Chief Operating March 23, 1998
- ------------------------------- Officer and Director
Richard H. Schroeder
/s/ Bruce N. Huff Senior Vice President, Chief March 23, 1998
- ------------------------------- Financial Officer and Director
Bruce N. Huff (Principal Accounting Officer and
Principal Financial Officer)
* Senior Vice President and Director March 23, 1998
- -------------------------------
Stephen C. Voss
</TABLE>
66
<PAGE> 67
<TABLE>
<S> <C> <C>
* Director March 23, 1998
- -------------------------------
Michael M. Ameen, Jr.
* Director March 23, 1998
- -------------------------------
Michael R. Eisenson
* Director March 23, 1998
- --------------------------------
Gary R. Peterson
* Director March 23, 1998
- --------------------------------
Donald W. Raymond
Director March 23, 1998
- --------------------------------
Hobart A. Smith
* Director March 23, 1998
- -------------------------------
Gary B. Wood
</TABLE>
*Bruce N. Huff, by signing his name hereto, does hereby sign this Annual Report
on Form 10-K for the year ended December 31, 1997 on behalf of Harken Energy
Corporation and each of the above-named officers and directors of such Company
pursuant to powers of attorney, executed on behalf of the Company and each
officer and director.
/s/ Bruce N. Huff
- -----------------------------------------
Bruce N. Huff,
Attorney-in-Fact
67
<PAGE> 68
INDEX TO EXHIBITS
<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION PAGE
-------- ----------- ----
<S> <C> <C>
3.1 Certificate of Incorporation of Harken Energy Corporation as
amended (filed as Exhibit 3.1 to Harken's Annual Report on Form
10-K for fiscal year ended December 31, 1989, File No.
0-9207, and incorporated by reference herein).
3.2 Amendment to Certificate of Incorporation of Harken Energy
Corporation (filed as Exhibit 28.8 to the Registration Statement
on Form S-1 of Tejas Power Corporation, file No. 33- 37141, and
incorporated by reference herein).
3.3 Amendment to the Certificate of Incorporation of Harken Energy
Corporation (filed as Exhibit 3 to Harken's Quarterly Report on
Form 10-Q for fiscal quarter ended March 31, 1991, File No.
0-9207, and incorporated by reference herein).
3.4 Amendments to the Certificate of Incorporation of Harken Energy
Corporation (filed as Exhibit 3 to Harken's Quarterly Report on
Form 10-Q for fiscal quarter ended June 30, 1991, File No.
0-9207, and incorporated by reference herein).
3.5 Amendments to the Certificate of Incorporation of Harken Energy
Corporation (filed as Exhibit 3.5 to Harken's Annual Report on
Form 10-K for the fiscal year ended December 31, 1996, File No.
0-9207, and incorporated herein by reference).
3.6 Amendment to the Certificate of Incorporation of Harken Energy
Corporation.
3.7 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. 0-9207, 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 herein by
reference).
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 herein by
reference).
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 Seventh Amendment and Restatement of Harken's Amended Stock
Option Plan (filed as Exhibit 10.1 to Harken's Annual Report on
Form 10-K for the fiscal year ended December 31, 1991, File No.
0-9207, and incorporated by reference herein).
10.2 Amended and Restated Non-Qualified Incentive Stock Option Plan
of Harken adopted by Harken's stockholders on February 18, 1991
(filed as Exhibit 10.2 to Harken's Annual Report on Form 10-K
for the fiscal year ended December 31, 1991, File No. 0-9207,
and incorporated by reference herein).
10.3 Form of Advancement Agreement dated September 13, 1990, between
Harken and each director of Harken (filed as Exhibit 10.38 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).
</TABLE>
<PAGE> 69
<TABLE>
<S> <C> <C>
10.4 Operating Agreement between Chuska Energy Corporation and the
Navajo Tribe of Indians dated February 18, 1987, and effective
July 20, 1987 (filed as Exhibit 10(b) to Chuska Energy
Corporation's Form 10 - General Form for Registration of
Securities (the "Chuska Form 10"), and incorporated by reference
herein).
10.5 Operating Agreement between Chuska Energy Corporation and the
Navajo Tribe of Indians dated July 28, 1983, and effective
August 26, 1983 and First Addendum thereto (filed as Exhibit
10(a) to Chuska's Form 10, and incorporated by reference
herein).
10.6 Association Contract (Cambulos), dated September 17, 1995, and
effective as of November 17, 1995, by and between Harken de
Colombia, Ltd., and Empresa Colombiana de Petroleos (filed as
Exhibit 10.1 to Harken's Quarterly Report on Form 10-Q for the
quarterly period ended September 30, 1995, File No. 0-9207, and
incorporated by reference herein).
10.7 Development Finance Agreement, dated October 12, 1995, by and
among Harken Energy Corporation, Arbco Associates L.P., Offense
Group Associates L.P., Kayne Anderson Nontraditional Investments
L.P. and Opportunity Associates L.P. (filed as Exhibit 10.2 to
Harken's Quarterly Report on Form 10-Q for the quarterly period
ended September 30, 1995, File No. 0-9207, and incorporated by
reference herein).
10.8 Harken Energy Corporation's 1993 Stock Option and Restricted
Stock Plan (filed as Exhibit 4.3 to Harken's Registration
Statement on Form S-8, and incorporated by reference herein).
10.9 Harken Energy Corporation's Directors Stock Option Plan (filed
as Exhibit 4.3 to Harken's Registration Statement on Form S-8,
and incorporated herein by reference).
10.10 Association Contract (Bolivar) by and between Harken de
Colombia, Ltd. and Empresa Colombia de Petroleos (filed as
Exhibit 10.4 to Harken's Quarterly Report on Form 10-Q for the
quarterly period ended June 30, 1996, and incorporated herein by
reference).
10.11 Harken Energy Corporation 1996 Incentive and Nonstatutory Stock
Option Plan (filed as Exhibit 10.1 to Harken's Quarterly Report
on Form 10-Q for the quarterly period ended September 30, 1996,
and incorporated herein by reference).
10.12 Association Contract (Alcaravan) dated as of December 13, 1992,
but effective as of February 13, 1993, by and between Empresa
Colombia de Petroleos (filed as Exhibit 10.1 to Harken's Annual
Report on Form 10-K for the fiscal year ended December 31, 1992,
File No. 0-9207, and incorporated herein by reference).
10.13 Association Contract (Bocachico) dated as of January 1994, but
effective as of April 1994, by and between Empresa Colombia de
Petroleos (filed as Exhibit 10.1 to Harken's Quarterly Report on
Form 10-Q for the quarterly period ended March 31, 1994, File
No. 0-9207, and incorporated herein by reference).
10.14 Association Contract (Miradores) dated as of December 1997, but
effective as of February 1998, by and between Empresa Colombia
de Petroleos.
</TABLE>
<PAGE> 70
<TABLE>
<S> <C> <C>
10.15 Development Finance Agreement dated as of October 17, 1997, by
and among Harken, Harken Capital Corporation and the other
signatories thereto (filed as Exhibit 10.1 to Harken's Quarterly
Report on Form 10-Q for the quarterly period ended September 30,
1997, File No.
0-9207, and incorporated herein by reference).
10.16 Development Finance Agreement dated as of December 24, 1997, by
and among Harken and the other signatories thereto.
10.17 Exchange Agreement dated as of December 24, 1997, by and among
Harken, Harken Capital Corporation and the other signatories
thereto.
10.18 Trust Indenture dated June 11, 1997, by and between Harken and
Marine Midland Bank plc (filed as Exhibit 10.1 to Harken's
Quarterly Report on Form 10-Q for the quarterly period ended
June 30, 1997, File No. 0-9207, and incorporated herein by
reference).
10.19 Placing Agreement Dated June 3, 1997, by and among Harken and
the other signatories thereto (filed as Exhibit 10.2 to Harken's
Quarterly Report on Form 10-Q for the quarterly period ended
June 30, 1997, File No. 0-9207, and incorporated herein by
reference).
10.20 Drilling Contract dated as of July 22, 1997, between Harken de
Colombia, Ltd., and Parker Drilling Company International Ltd.
(filed as Exhibit 10.4 to Harken's Quarterly Report on Form 10-Q
for the quarterly period ended June 30, 1997, File No. 0-9207,
and incorporated herein by reference).
10.21 Drilling Contract dated as of May 15, 1997, between Harken de
Colombia, Ltd., and Marlin Colombia Drilling Company, Inc.
(filed as Exhibit 10.5 to Harken's Quarterly Report on Form 10-Q
for the quarterly period ended June 30, 1997, File No. 0-9207,
and incorporated herein by reference).
22 Subsidiaries of Harken.
24 Power of Attorney.
27 Financial Data Schedule.
</TABLE>
<PAGE> 1
EXHIBIT 3.6
CERTIFICATE OF AMENDMENT
TO
CERTIFICATE OF INCORPORATION
OF
HARKEN ENERGY CORPORATION
Harken Energy Corporation, a corporation organized and exiting under
and by virtue of the General Corporation Law of the State of Delaware (the
"Corporation"), does hereby certify that:
FIRST: The name of the Corporation is Harken Energy
Corporation.
SECOND: The first paragraph of Article Four of the Certificate
of Incorporation is hereby amended in its entirety as
follows:
"The aggregate number of shares which the Corporation shall
have the authority to issue is one hundred eighty-five million
(185,000,000), of which one hundred seventy-five million
(175,000,000) shall be designated as Common Stock of the par
value of One Cent ($.01) per share and ten million
(10,000,000) shall be designated as Preferred Stock of the par
value of One Dollar ($1.00) per share."
THIRD: The foregoing amendment to Article Four of the
Certificate of Incorporation was duly adopted by the
Corporation in accordance with the provisions of
Section 242 of the General Corporation Law of the
State of Delaware.
IN WITNESS WHEREOF, Harken Energy Corporation has caused this
Certificate of Amendment to be signed by Larry E. Cummings, its Vice President,
General Counsel and Secretary this 16th day of December, 1997.
HARKEN ENERGY CORPORATION
/s/ Larry E. Cummings
---------------------------------------------
Larry E. Cummings
Vice President, General Counsel and Secretary
<PAGE> 1
EXHIBIT 10.14
SWORN TRANSLATION NO. 30154 OF A DOCUMENT WRITTEN IN SPANISH TO WHICH,
FOR IDENTIFICATION PURPOSES, THE SEAL OF THIS OFFICE IS AFFIXED, AS
WELL AS TO THIS TRANSLATION.
EMPRESA COLOMBIANA DE PETROLEOS ECOPETROL
" MIRADORES" ASSOCIATION CONTRACT - WITH GAS INCENTIVES
ASSOCIATION CONTRACT
ASSOCIATE: HARKEN DE COLOMBIA,
LTD.
SECTOR: MIRADORES
EFFECTIVE DATE: FEBRUARY 22ND, 1998
The contracting parties namely: Empresa Colombiana de Petroleos, hereinafter
referred to as ECOPETROL, an industrial and commercial State owned enterprise,
with its own corporate existence, created by means of Act 165 of 1948, and
currently governed by its by-laws amended by Decree 1209 of June 15th, 1994,
with its main office in Santafe de Bogota, represented by ENRIQUE AMOROCHO
CORTES, of legal age, bearer of citizenship card No. 5.555.193
<PAGE> 2
issued in Bucaramanga, resident of Santafe de Bogota, who states: 1. That in his
capacity as President of ECOPETROL he acts in representation of the Company and
2. That for the execution of this Contract he has been authorized by the Board
of Directors of ECOPETROL under Minutes No. 2169 of October 16th, 1997 and on
the other hand, HARKEN DE COLOMBIA, LTD., a company organized under the laws of
Cayman Islands, with main domicile in Santafe de Bogota, hereinafter referred to
as THE ASSOCIATE , with a branch established in Colombia and main domicile in
Santafe de Bogota, under Public Deed 406 of February 19th, 1993, issued by the
Eleventh Notary Public's Office of the Circuit of Santafe de Bogota, herein
represented by GABRIEL GUSTAVO CANO VELASQUEZ, of legal age, bearer of the
citizenship card No. 8'265.559 issued in Medellin, who states: 1. That in his
capacity as Legal Representative, he acts on behalf and representation of HARKEN
DE COLOMBIA, LTD. and 2. That in order to enter into this Contract he has been
fully authorized as verified in the certificate of existence and representation
issued by the Chamber of Commerce of Santafe de Bogota. Under the mentioned
conditions, ECOPETROL and the ASSOCIATE hereby verify that they have entered
into a contract contained in the following clauses:
<PAGE> 3
SWORN TRANSLATION No.30154/Err
CHAPTER I - GENERAL PROVISIONS
CLAUSE 1 - OBJECT OF THIS CONTRACT
1.1 The purpose of this Contract is the exploration of the Contract Area and the
exploitation of the nationally-owned hydrocarbons as may be found therein, as
described in Clause 3 hereinbelow:
1.2 According to article 1 of Decree No. 2310 of 1974, the exploration and
exploitation of nationally owned hydrocarbons is entrusted to ECOPETROL , who
may carry out these activities directly or under contracts with Private Parties.
Based on said provision, ECOPETROL has agreed with the ASSOCIATE to explore the
Contract Area and to exploit the Hydrocarbons which may be found in the area
under the terms and conditions provided hereunder, in Annex A and Annex B B
(Operating Agreement) which are part of this contract.
1.3 Without affecting the provisions hereunder, it is agreed THE
ASSOCIATE shall have the same rights and obligations in respect to the
Hydrocarbons produced in the Contract Area and to its share of the same as are
assigned under Colombian law to anyone exploiting nationally-owned Hydrocarbons
in this country.
1.4 ECOPETROL and the ASSOCIATE agree that they will carry out the exploration
and exploitation operations in the Contract Area; that they will split between
themselves the
<PAGE> 4
SWORN TRANSLATION No.30154/Err
costs and risks thereof in the proportion and under the terms contemplated in
this Contract and that the properties acquired and Hydrocarbons produced and
stored shall be property of each Party in the proportions set forth hereunder.
CLAUSE 2 - APPLICATION OF THE CONTRACT
This contract applies to the Contract Area, as defined in Clause 3 hereinbelow
or when Clause 8 has been applied, to such portion thereof as in subject to the
terms of this Agreement.
CLAUSE 3 - CONTRACT AREA
The Contract Area is called "MIRADORES" with an extension of twelve thousand
nine hundred and thirty eight ( 12.938) hectares five hundred and sixty five
(565) square meters, located within the jurisdiction of the municipalities of
Mani, Department of Casanare. All points of the polygon, where Cusiana flows,
the right bank was taken as boundary of the contract. Therefore, 104 square
meters were deducted from such polygon, formed by vertex ( 13.168 hectares ),
the area measured with planimeter (229 hectares 9.539 square meters ). This area
is described below according to the map attached as Annex "A", which makes part
of this contract, as well as the corresponding charts : "ASIVA-1567" Geodesic
Vertex from Instituto Geografico Agustin Codazzi has been taken as reference
whose Gauss plane coordinates with 3o
<PAGE> 5
SWORN TRANSLATION No.30154/Err
East Origin are: N-981.664.04 meters, E-886.281.72 meters, corresponding to
geographical coordinates Latitude 4o 25'57".086 North of Equator, longitude 69o
06'19".493 to the West of Greenwich. From this vertex continuing N 46o 41"
53".956 W direction 22.373.97 meters to reach point "A", departure point to mark
boundaries whose coordinates are N-997,009.00 meters, E-869,999.00 meters. From
this point, N 37o 17'12".094 E for a distance of 14.492.01 meters until reaching
point "B", whose coordinates are N-1'008,539.05 meters, E-878,778.31 meters.
From this point, S30o 54'58".169 E , 1,793.93 meters until reaching point "C"
whose coordinates are N-1'007,000.00 meters, E-879,700.00 meters. Line "B-C" has
a S 30o 54'58".169 E direction and a longitude of 1,793.93 meters and it is
totally adjacent to a section of "C-B" line from Alcaravan sector of Harken de
Colombia Ltd. From point "C" continuing to reach point "D" whose coordinates are
N-1'004, 171.12 meters, E-886,467.14 meters. Line C-D totally adjoins a section
of line "B-A" from Alcaravan Sector of Harken de Colombia Ltd., with a S
67o18'48".529 E direction and 7,334.62 meters distance. From this point,
continuing S 36o 20'11".348 W for a distance of 15,979.27 meters, until reaching
point "E" whose coordinates are N-991,299.00 meters, E-876,999.00 meters. From
this point, continuing N 50o 47'43".379 W , 9,033.50 meters until reaching point
"A" departure point and closing of the boundary.
<PAGE> 6
SWORN TRANSLATION No.30154/Err
PARAGRAPH 1: In the event that any person files a claim with the pretense that
he owns the hydrocarbons of the subsoil of the Contract Area, ECOPETROL shall be
in charge of the case and of the obligations arising thereto.
PARAGRAPH 2- In the event that part of the Contract Area is extended on areas
that are or have been reserved and declared included in the National Parks
system, THE ASSOCIATE, agrees to abide the conditions imposed by competent
authorities,
without implying an amendment of this Contract and without any right to claim
against ECOPETROL pursuant to clause 30 paragraph 30.4 hereunder.
CLAUSE 4 - DEFINITIONS
For purposes of this Contract, the terms mentioned below shall have the
following meaning:
4.1 CONTRACT AREA: The land defined in Clause 3 above, subject to Clause 8.
4.2 FIELD: Such portion of the Contract Area in which there are one or more
totally or partially overlapped Structures, with one or more hydrocarbon
reservoirs- or capable of producing Hydrocarbons . Such reservoirs could be
found
<PAGE> 7
SWORN TRANSLATION No.30154/Err
separated by geological reasons such as: synclinal, faults, wedging of
reservoir rocks, changes in porosity and permeability; they can also be of
different geological ages, separated by relatively impervious strata, totally or
partially overlapping or not overlapping at all.
4.3 COMMERCIAL FIELD: It is the field that ECOPETROL accepts as capable of
producing Hydrocarbon in economically exploitable quantity and quality in one or
more Production Targets defined by ECOPETROL.
4.4 GAS FIELD: It is the field, that based on the information supplied by THE
ASSOCIATE, will be rated by ECOPETROL as Non Associated Natural Gas Producer (
or free natural Gas) in the definition of its commercial nature.
4.5 EXECUTIVE COMMITTEE: The body formed within thirty (30) days following
acceptance of the first Commercial Field to supervise, control, and approve all
the operations and actions performed during the life of the contract.
4.6. DIRECT EXPLORATION COSTS Expenses reasonably incurred by the Associate for
the acquisition of seismic, drilling of exploration wells as well as for
locations, completion, equipment, and tests of such wells. Direct Exploration
Costs do not include administrative or technical support from the headquarters
and local offices of the Company.
4.7. JOINT ACCOUNT The records to be kept by means of accounting books, in
<PAGE> 8
SWORN TRANSLATION No.30154/Err
accordance with Colombian Law for crediting or debiting the Parties for their
Participation in the Joint Operation of each Commercial Field.
4.8 BUDGET PERFORMANCE The funds actually spent and committed in each of the
programs and projects approved for a given period of time.
4.9 STRUCTURE: It is the geometric form with geological closure ( anticlinal,
synclinal, etc) which the formations present, in which there is accumulation of
fluids.
4.10 EFFECTIVE DATE: The calendar day on which the term of sixty (60) days
counting from the signing date the contract ends and as of which, all the
contract terms are counted subject to the validity of the contract.
4.11. CASH FLOW Constituted by the physical movement of money (income and
expenditure) that the Joint account must undertake in order to take care of the
various obligations contracted by The Association.
4.12 ASSOCIATED NATURAL GAS Mixture of light hydrocarbons as a gas cap or in
solution in the reservoir and produced jointly with liquid hydrocarbons.
4.13 NON ASSOCIATED NATURAL GAS ( PRODUCTION OF): Hydrocarbons produced in a
gaseous state on the surface under standard conditions, with average values
(weighted per production), with an initial Gas/Oil ratio above 15.000 standard
cubic feet per barrel of liquid Hydrocarbon and a
<PAGE> 9
SWORN TRANSLATION No.30154/Err
molar composition of heptane plus ( C7+) lower than 4.0%.
4.14 DIRECT EXPENSES All those expenses of a monetary nature on the Joint
Account to pay for personnel directly involved in the Association, of goods and
supplies, service contract with third parties as well as procurement for general
expenses required for the joint operation within the normal development of its
activities.
4.15 INDIRECT
EXPENSES Refers to the administrative and technical support that the associated
operation demands from the Operators's own organization, occasionally.
4.16 COMMERCIAL INTEREST When referring to Colombian Pesos, the current interest
for ninety (90) days Fixed Term Deposits ( FTD) certified by the Bank
Superintendency or the corresponding body for the corresponding period; if
applicable to US Dollars, it is the prime rate as fixed by The City Bank of New
York or entity approved for such purpose.
4.17 INTEREST IN THE OPERATION Each Party's share of the obligations and rights
in the exploration and exploitation of the Contract Area.
4.18 DEVELOPMENT INVESTMENTS Refers to the amount of money invested in assets
and equipment which are capitalized as a Joint Operation's assets in a
Commercial Field after declaring the commercial value of the same.
<PAGE> 10
SWORN TRANSLATION No.30154/Err
4.19 HYDROCARBONS: any organic compound mainly formed of the natural mixture of
carbon and hydrogen as well as any substances accompanying or deriving
therefrom, with the exception of helium and rare gases.
4.20 GASEOUS HYDROCARBONS: This includes all hydrocarbons produced in gaseous
state on the surface and reported under standard conditions ( 1 absolute
pressure atmosphere and a temperature of 60o F).
4.21 LIQUID HYDROCARBONS: This consists of crude
oil and condensates, as well as those produced in such state as a result of gas
treatment when necessary, reported under standard conditions.
4.22 PRODUCTION TARGETS The reservoirs located within the discovered Commercial
Field and defined as commercial producers.
4.23 JOINT OPERATION The activities and works performed or in the process of
being performed, on behalf of the Parties and on their own account.
4.24 OPERATOR The person designated by the Parties to perform directly, on their
behalf, the operations necessary for the exploration and exploitation of the
Hydrocarbons found in the Contract Area.
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4.25 PARTIES: On the effective Date, ECOPETROL and THE ASSOCIATE. Subsequently
and at any time, ECOPETROL as Party of the first part and THE ASSOCIATE or its
assignees as Party of the second part.
4.26 EXPLORATION PERIOD: The period of time available THE ASSOCIATE to comply
with the obligations stipulated in Clause 5 hereinbelow, which shall not exceed
six (6) years as from the Effective Date, except in the cases contemplated under
Clauses 9 (paragraphs 9.3 and 9.8) and 34.
4.27. EXPLOITATION PERIOD: The time elapsing from the end of the Exploration
Period or the Retention Period, should there be any, until the end of this
contract.
4.28 RETENTION PERIOD: A period of time that might be requested by THE ASSOCIATE
and granted by ECOPETROL to initiate the Exploitation Period of each Gas Field
discovered within the Contract Area, that due to its specific conditions does
not make feasible its development at a short term and therefore an additional
time for construction of infrastructure and/or development of the market is
required.
4.29 EXPLORATION WELL: Any well designated as such by THE ASSOCIATE,
to be drilled or deepened on its own account in the Contract Area, in search of
new reservoirs or to verify the extension of an reservoir or to determine the
stratigraphy of an area. In order to fulfill the obligations agreed in Clause 5
hereunder, the respective Exploration
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Well will be determined by ECOPETROL and THE ASSOCIATE.
4.30 EXPLORATORY (OR DEVELOPMENT) WELL: It is any well previously scheduled by
the Executive Committee for production of Hydrocarbons discovered in the
Production Targets within each Commercial Area.
4.31 BUDGET: The basic planning tool by means of which money resources are
assigned for specific projects to be applied within a calendar year, or part of
a year, so as to accomplish the goals and objectives proposed by THE ASSOCIATE
of the Operator.
4.32 EXTENSIVE PRODUCTION TESTS The operations performed on one or several
producing exploratory wells, to evaluate their production conditions and
reservoir behavior.
4.33 REIMBURSEMENT The Payment of fifty per cent (50%) of the direct exploration
expenses in which THE ASSOCIATE has incurred.
4.34 EXPLORATION ACTIVITIES Operations carried out by THE ASSOCIATE which are
related to the search of Hydrocarbons and the discovery thereof inside the
Contract Area.
4.35 RESERVOIR: This is any rock under the surface in which hydrocarbons
are accumulated in their pore space, under production or capable of producing
Hydrocarbons and behaving as an independent unit in terms of its petrophysical
and fluid properties, and having a common pressure system throughout.
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CHAPTER II- EXPLORATION
CLAUSE 5. TERMS AND CONDITIONS
5.1.1 During the first (1st) year as of the Effective Date of this Contract, the
ASSOCIATE agrees to reprocess one hundred and sixty five (165) kilometers of
available seismic and to acquire a new seismic program consisting of a minimum
of twenty five (25) kilometers. During the second year THE ASSOCIATE shall drill
one (1) Exploratory Well until reaching the formations that may produce
hydrocarbons in the area. At the end of the first year THE ASSOCIATE shall have
the option of relinquishing the Contract providing it has complied with the
above-mentioned obligations.
5.1.2 During the third year, THE ASSOCIATE shall drill one (1) Exploratory Well
until reaching those formations apt to produce Hydrocarbons in the area. At the
end of said year the Contract will terminate, if its extension has not been
requested and authorized pursuant to paragraph 5.2 of this Clause or if a
commercial field has not been discovered, except for the provisions of Clause 9
paragraph 9.5.
5.2 If THE ASSOCIATE has complied satisfactorily with the obligations set forth
in Clause 5, ECOPETROL shall, on THE ASSOCIATE's request, extend the Exploration
Period year-by-year for up to an additional three (3) years, and during
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each annual extension THE ASSOCIATE shall be under obligation to carry out
Exploration Operations in the Contract Area, consisting of the drilling of one
(1) Exploratory Well until penetrating the formations that may produce
Hydrocarbons in the area.
5.3 If during any one year of the Exploration Period THE ASSOCIATE should decide
to carry out work covering the following year's obligations, it shall request
ECOPETROL's approval to perform such operations. If the request is accepted,
ECOPETROL shall determine how and for what amount such obligations are to be
transferred.
5.4 During the life of this Contract, THE ASSOCIATE may carry out Exploration
Activities in such areas as it may retain pursuant to Clause 8 and THE ASSOCIATE
shall be solely responsible for the risks and costs of such operations and
therefore, shall have full, sole control over the same, although the maximum
length of the Contract shall not be changed for this reason.
CLAUSE 6. SUPPLY OF INFORMATION DURING EXPLORATION
6.1 ECOPETROL shall supply THE ASSOCIATE, whenever the latter may so request,
with any information on its possession within the Contract Area. The costs of
reproduction and supply of such information shall be charged to THE ASSOCIATE.
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6.2 During the Exploration Period, THE ASSOCIATE shall deliver to ECOPETROL once
obtained, and in accordance with ECOPETROL's data supply manual, all the
geological and geophysical information, cores, edited magnetic tapes, processed
seismic sections and all the field information supporting it, magnetic and
gravimetric profiles (logs) , all of it in reproducible original copies of
geophysical data, reproducible originals of all the records on the wells drilled
by THE ASSOCIATE, including the Final Composite Chart on each well, and copies
of the Final Drilling Report, including analyses of core samples, results of
production tests and any other information relating to the drilling, study or
interpretation of any kind whatever made by THE ASSOCIATE for the Contract Area,
to ECOPETROL, without any limitation whatsoever. ECOPETROL has the right at any
time and through such procedures as it may consider appropriate, to witness any
operations and verify the information listed above.
6.3 The Parties agree that any geological, geophysical and engineering
information obtained hereunder is of confidential nature during three (3) years
following obtainment of said information. From said moment, such information
will be available except for the interpretations made by the Parties on said
information. The released information mainly consists of seismic information,
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potential methods, remote sensors, and geochemistry, with their respective
supports, soil and sub-soil mapping, well logs, electric logs, formation tests,
biostratigraphic , petrophysical and fluid analyzes, and production histories.
By agreement between the Parties in each case, information may be exchanged with
companies associated or not associated with ECOPETROL. It is understood that
this agreement is without prejudice to the obligation to furnish the Ministry of
Mines and Energy with any information it may request under current legal and
regulatory provisions. It is understood and agreed that The Parties may, at its
sole discretion, supply such information as may be required by its affiliates,
consultants, contractors, finance institutions, and as required by the competent
authorities with jurisdiction over the associates or its affiliates, or under
regulations of any stock exchange in which capital stock of the Parties or
related corporations is listed.
CLAUSE 7: EXPLORATION BUDGET AND PROGRAMS
THE ASSOCIATE shall have the obligation, in accordance with the provisions of
this Contract, to prepare the programs,the time chart for activities to be
developed and the budget to be executed at a short term ( for the next calendar
year) and the projection for the next two (2) years with the estimated budget,
necessary for the
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exploration of the Contract Area. Such projection, programs, time chart and
Budget shall be submitted to ECOPETROL for the first time, within sixty (60)
calendar days from the date of execution of this contract and thereafter, within
the first ten (10) calendar days of each year. On a quarterly basis, THE
ASSOCIATE, shall deliver ECOPETROL a technical and financial report, listing the
different exploratory activities carried out, prospects for the area based on
the information obtained, the allocated budget and the exploration costs
incurred until the date of the report, commenting for each case the causes
originating the main deviations . At ECOPETROL's request, the ASSOCIATE shall
give the explanations on the report, during meetings to be scheduled on a
half-year basis. Information submitted by THE ASSOCIATE in the reports and
explanations dealt with herein shall in no case be considered as accepted by
ECOPETROL. Financial information shall be subject to auditing by ECOPETROL under
the terms set forth in Clause 22 of Annex "B" (Operating Agreement) hereunder.
CLAUSE 8: RESTITUTION OF AREAS
8.1 If, at the end of the initial Exploration period of three years or of such
extensions as may have been obtained by THE ASSOCIATE, pursuant to Clause 5,
paragraph 5.2, a commercial field has been discovered in the Contract Area, such
an area shall be reduced to fifty per cent (50%); two (2) years later, the area
shall be reduced to an extension
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equal to fifty per cent (50%) of the remaining Contract Area, and two (2) years
thereafter, such area shall be reduced to that of the Commercial Field or
Commercial Fields then in production or under development, plus a two and a half
(2.5 ) kilometer-wide reserve zone surrounding each Field and it shall be the
only part of the Contract Area to remain subject to the terms of this contract.
In order to enforce this Clause, an imaginary mesh or grid will be overlapped to
the initially contracted area divided in ten rows and columns in a north-south
direction, whose boundaries will be given by the north and east coordinates,
maximum and minimum of marking of the boundaries, defining the base cells for
restitution of the area dealt with herein. Every time a restitution of areas is
made, the imaginary grid or mesh, will be adjusted based on the new coordinates
of the Contract Area.
8.2 THE ASSOCIATE shall determine the areas which it will hand back to
ECOPETROL, based on the above-mentioned imaginary mesh or grid . For this
purpose, it will hand back up to two lots made up of one or more adjoining cells
trying to keep a sole polygon, unless THE ASSOCIATE proves that this is not
possible or convenient, for which it will require ECOPETROL's approval.
Notwithstanding the obligation of returning the areas dealt with in Clause 8
(paragraph 8.1) THE ASSOCIATE is not bound to restitute areas under development
or production including two and a half (2.5)
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kilometer wide reserve zones surrounding such areas, except in the event that,
for reasons attributable to THE ASSOCIATE, the development or production
operations are suspended continuously for more than one year without justified
cause, in which case THE ASSOCIATE shall relinquish such areas to ECOPETROL and
the Contract shall terminate in respect to said areas or part of an area. The
provisions of this clause shall also apply to the Exploitation under the sole
risk mode.
8.3 RETENTION PERIOD: If THE ASSOCIATE has discovered a Gas Field and files a
request for definition of the commercial nature for such field dealt with in
clause 9 paragraph 9.1; with said request it shall ask ECOPETROL granting of a
Retention Period ; fully justifying the reasons to be granted said period of
retention.
8.3.1 THE RETENTION PERIOD shall be requested by THE ASSOCIATE and granted by
ECOPETROL prior to the date on which the last restitution of areas dealt with in
paragraph 8.1 of this clause is to be made.
8.3.2 The Retention period shall not exceed four (4) years. If the term
initially granted as Retention Period were not sufficient, upon a written and
justified request from THE ASSOCIATE, ECOPETROL may extend the Retention Period
for an additional term, the addition of the initial period and its extension
shall not exceed four (4) years.
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CHAPTER III- EXPLOITATION
CLAUSE 9. TERMS AND CONDITIONS
9.1 To commence the Joint Operation hereunder, it is considered that the
exploitation operations shall start on the date when the Parties acknowledge the
existence of a Commercial Field or when the events provided for in Clause 9
(paragraph 9.5) have occurred. The existence of a Commercial field will be
determined by means of THE ASSOCIATE's drilling a number of wells within the
proposed Commercial Field, sufficient to allow for the area capable of producing
Hydrocarbons and the commercial nature of the field to be reasonably defined. In
this case THE ASSOCIATE shall notify ECOPETROL in writing on the discovery of a
Commercial Field, furnishing the studies on which such conclusions are based.
ECOPETROL, within a ninety (90) calendar days as of the date on which THE
ASSOCIATE delivers all the support information and carries out the technical
presentation to ECOPETROL, shall accept or object the existence of the
Commercial Field. ECOPETROL may request any additional information that it deems
necessary within the next thirty (30) days following the date of submission of
the first support information.
9.2.1 If ECOPETROL accepts the existence of the Commercial Field, it shall give
notice to THE ASSOCIATE, within the ninety (90) calendar days referred to in
Clause 9 (paragraph
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9.1) , specifying the area of the Commercial Field and will then start to
participate, in the development of the Commercial Field discovered by THE
ASSOCIATE under the terms of this contract.
9.2.2 ECOPETROL shall reimburse THE ASSOCIATE fifty per cent (50%) of Direct
Exploration Costs covered by THE ASSOCIATE under its account and risk within the
Contract Area, prior to the date of submission of the studies to define the
commercial nature of each new discovered Commercial Field, pursuant to paragraph
9.1 of this Clause.
9.2.3 The amount of these costs shall be determined in US dollars taking as
reference the date on which THE ASSOCIATE has made such reimbursements;
therefore, costs incurred in Colombian pesos shall be liquidated at the exchange
rate certified by the Bank Superintendency or other competent body, effective on
the date fixed herein.
PARAGRAPH: Once the amount of the direct Exploration Costs to be reimbursed in
US dollars has been defined, this value shall be adjusted from the time of its
reimbursement, per each year or fraction of year, until the date determined by
the Ministry of Mines and Energy as initiation date for exploitation of the
respective Field, with the international inflation rate of the respective year,
and in its absence, with the one of the preceding year. The international
inflation value to be used shall be the annual percentual variation of the
consumer price index of industrialized
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countries taken from " International Financial Statistics" of the
International Monetary Fund ( page S63 or as amended) and in its absence, the
publication agreed by the Parties.
9.2.4 Reimbursement of direct exploration costs as mentioned in Clause 9
(paragraph 9.2.2) shall be made by ECOPETROL to THE ASSOCIATE as from the time
the field is placed in production by Operator with the amount in dollars
equivalent to fifty per cent (50%) of its direct participation in the total
production of the corresponding field, after deducting the percentage
corresponding to royalties. PARAGRAPH: If dealing with a Gas Commercial Field,
said reimbursement shall be made by ECOPETROL to THE ASSOCIATE, as from the time
the field is placed in production by Operator with the amount in dollars
equivalent to one hundred per cent ( 100%) of its direct participation in the
total production of the corresponding Field, after deducting the percentage
corresponding to royalties.
9.3 If ECOPETROL does not accept the existence of the Commercial Field referred
to in Clause 9 ( paragraph 9.1), it may indicate to THE ASSOCIATE the additional
works it may consider necessary to demonstrate the existence of a Commercial
Field, the cost of such work not to exceed TWO MILLION DOLLARS (US$2.000.000),
nor to require a period of more than (1) one year for its completion, and in
that case the Exploration Period for the Contract Area shall be automatically
extended by a period of time equal to that
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agreed upon between the Parties as necessary for the completion of the
additional work requested by ECOPETROL under this Clause, without affecting the
provisions on reduction of areas in Clause 8 ( paragraph 8.1.)
9.4 If after the completion of the additional work requested thereby under
Clause 9 (paragraph 9.3) , ECOPETROL accepts the existence of the Commercial
Field referred to in Clause 9 (paragraph 9.1), it will start to participate in
the development operations in the field under the terms set forth in this
Contract, and shall reimburse THE ASSOCIATE in the manner provided in Clause 9 (
9.2.3, 9.2.4) for fifty per cent (50%) of the cost of the additional work
requested, pursuant to Clause 9 (paragraph 9.3) , and the works performed will
become the property of the Joint Account.
9.5 If ECOPETROL does not accept the existence of a Commercial Field after
completion of the additional work under Clause 9 (paragraph 9.3) THE ASSOCIATE
has the right to perform such work as it may deem necessary for the exploitation
of the field and to reimburse itself for two hundred per cent (200%) of the
total cost of the work performed on its own account and risk in the respective
field for purposes of this Clause , and up to fifty per cent (50%) of the Direct
Exploration Costs, incurred by the ASSOCIATE before the date of submission of
the studies to allow for the commercial nature of the respective field to be
defined. For purposes of this Clause, reimbursement
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shall be made with the value of the produced Hydrocarbons, minus the royalties
dealt with in Clause 13, deducting the production , gathering, transportation
and sale costs. If the ASSOCIATE selects the sole risk mode, it is understood
that the exploitation terms, commences as of the date on which ECOPETROL gives
notice to THE ASSOCIATE that it does not accept the commercial nature. For the
purpose of the liquidation of the value in dollars of the reimbursements made in
pesos, they shall be liquidated at the exchange rate certified by the Bank
Superintendency or other competent body, effective on the date on which THE
ASSOCIATE has made such reimbursements. For purposes of this Clause, the value
of each barrel of Hydrocarbon produced in such a field during a calendar month
shall be the average per-barrel price received by THE ASSOCIATE from sales of
its share of the Hydrocarbons produced in the Contract Area during the same
month. Regarding reimbursement of the Direct Exploration Costs, the provisions
of paragraph of Clause 9 (paragraph 9.2.3) shall apply.
Once THE ASSOCIATE has reimbursed itself according to the percentage set forth
in this Clause, all wells drilled, facilities and any kind of assets acquired by
THE ASSOCIATE for exploitation of the field and paid for as indicated in this
Clause, shall become property of the Joint Account, free of charge, upon
acceptance by ECOPETROL of participating in the development of such field.
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9.6 ECOPETROL may at any time start to participate in the operation of the field
discovered and developed by THE ASSOCIATE, without prejudice to ASSOCIATE's
right to reimburse itself for the investment it may have made on its own account
in the manner and for the percentage indicated in Clause 9 (paragraph 9.5). Once
THE ASSOCIATE has obtained this recovery, ECOPETROL shall start to share in the
economic results of the fields developed on THE ASSOCIATE's exclusive account.
9.7 The boundaries of a Commercial Field shall take into consideration all the
geological and geophysical information and that of the wells drilled within such
a field or relating to it.
9.8 If upon expiry of the six (6) year Exploration Period referred to in Clause
5 (paragraph 5.2) THE ASSOCIATE has drilled any or several Exploratory Wells
which indicate the possible existence of a Commercial Field, ECOPETROL, at THE
ASSOCIATE's request, shall extend the Exploration Period by the length of time,
not exceeding one year, required by THE ASSOCIATE in order to prove the
existence of such a Commercial Field, without prejudice as to the provisions of
Clause 8.
9.9. If after accepting the commercial nature of
one or more fields, THE ASSOCIATE continues meeting the exploratory obligations
agreed in Clause 5, at the same time it may
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carry out the exploitation of said fields before ending of the exploration
period defined in Clause 4, paragraph 4.26, but only as of the date of
expiration of this period, shall commence to count the exploitation period. When
dealing with Gas Fields and ECOPETROL has granted the Retention Period, the
Exploitation Period for each Field shall commence as of the date of expiration
of the respective Retention Period.
9.10 If as a result of the drilling of Exploration Wells after defining the
existence of a Commercial Field, THE ASSOCIATE proves the presence of additional
accumulations of Hydrocarbons related to said Field, it shall request ECOPETROL
enlargement of the Commercial Field and determination of its commercial nature,
following the procedure set forth in Clause 9 (paragraphs 9.1 and 9.2.1). If
ECOPETROL accepts the commercial nature, it shall reimburse THE ASSOCIATE fifty
per cent (50%) of the Direct Exploration Costs exclusively related to the
enlargement of the area of the Commercial Field, under the terms of paragraphs
9.2.3 and 9.2.4. If ECOPETROL does not accept the existence of a Commercial
Field, THE ASSOCIATE shall have the right to reimburse itself up to two hundred
per cent (200%) of the total of the work performed on its own account and risk
for exploitation of Exploration Wells resulting producers and up to fifty per
cent (50%) of the Direct Exploration Costs incurred by THE ASSOCIATE exclusively
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related to definition of the commercial nature . Such reimbursement shall be
made out of the value of the Exploration Wells resulting producers, minus the
Royalties, under Clause 21 ( paragraph 21.2 ) until the percentages defined
hereunder.
CLAUSE 10 - TECHNICAL CONTROL OF THE OPERATIONS
10.1 The parties agree that THE ASSOCIATE is the Operator and, as such, with the
limitations set forth in this contract, have control of all the technical
operations and activities it may considered necessary for an efficient and
profitable exploitation of Hydrocarbons found within the area of the Commercial
Field.
10.2 The Operator is under obligation to carry out the development and
production operations in accordance with known industrial standards and
practices using the best technical methods and systems required for an economic
and efficient exploitation of Hydrocarbons, and fulfilling any legal and
regulatory provisions on the subject.
10.3 The Operator shall be considered to be an enterprise distinct from the
Parties hereto for any purposes hereunder, as well as for the application of
civil, labor and administrative legislation and for Operator's relations with
personnel in its employment, under Clause 32.
10.4 Operator will have the right to resign as such, by
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means of a written notice given to the Parties six (6) months in advance of the
effective date of such resignation. The Executive Committee shall then designate
a new Operator, pursuant to Clause 19 (paragraph 19.3.2).
CLAUSE 11 - EXPLOITATION PROGRAMS AND BUDGETS
11.1 Within three (3) months following the acceptance of a Commercial Field in
the Contract Area, the Operator shall submit an operating program plus a Budget
for the rest of the current calendar year and a development plan , to be agreed
in the Executive Committee. If less than six an a half months are left to the
end of the year, the Operator shall prepare and submit a Budget and programs for
the following calendar year within a period of three (3) months.
11.1.1 Future budgets and programs shall be submitted to the Parties during the
month of May of each calendar year, for which the Operator shall send to the
Parties their proposal within the first ten (10) days of the month of May.
Within twenty (20) days from the receipt of the Budgets and programs, the
Parties shall advise the Operator in writing on any changes they may wish to
propose. When this happens, the Operator shall take into account any
recommendations and changes proposed by the Parties in drawing up the Budget
and programs, which will be submitted for the Executive Committee's final
approval at an ordinary meeting called for
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the purpose, held on July of each year. In the event the total Budget has not
been approved before the month of July, those aspects of the Budget on which an
agreement has not been reached, shall be approved by the Executive Committee,
and those aspects not approved shall be immediately submitted to the parties for
further review and final decision in the manner set forth in Clause 20.
11.1.2 The development plan shall become the guide document to carry out the
technical, efficient and economic exploitation of each Field and shall contain
the description of the activities to be developed and an estimate of the
investments and expenses for the next five years, detailing the annual
operations program and the Budget for the next calendar year.
11.2 The Parties may propose additions or revisions to the approved Budget and
programs but, excepting cases of emergency, shall not be proposed with more
frequency than every three (3) months. The Executive Committee shall decide on
the proposed additions and revisions at a meeting, to be held within thirty (30)
days from the submittal of same.
11.3 The main purpose of the programs, Budgets and development plan is:
11.3.1 to determine the operations to be carried out and the expenses and
investments (Budget) that the Operator is authorized to undertake during the
calendar day immediately following.
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11.3.2 To keep a projection of the development of each Field within a medium to
long term horizon.
11.4 The terms program and Budget are understood to mean the work schedule and
estimated expenses plus investments to be effected by the Operator in the
various aspects of the operation, such as:
11.4.1 Capital investments in Production: drilling for the development of
reservoirs; reconditioning or overhauling of wells; specific construction for
production.
11.4.2 General Construction and Equipment: Industrial and camp facilities,
transportation and construction equipment; drilling and production equipment;
other construction and equipment.
11.4.3 Maintenance and Operating Expenses: Production expenses, geological
expenses; administrative expenses for the operation.
11.4.4 Working Capital requirements
11.4.5 Contingency Funds
11.5 The Operator shall pay all the expenses and investments and carry out the
development and production operations in accordance with the programs and
Budgets referred to in Clause 11 (Paragraph 11.1), without exceeding the total
Budget for each year by ten per cent (10%) , except if so authorized by the
Parties in special cases.
11.6 The Operator shall not, of its own will, initiate any project or charge the
Joint Account for any expenses not
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approved under the Budget, that exceed the amount of Forty Thousand US dollars
(US$40.000) or its equivalent in Colombian currency per project or per quarter.
11.7 The Operator is authorized to incur expenses chargeable to the
Joint Account without the Executive Committee's prior authorization in cases of
emergency measures designed to safeguard the Parties' personnel or property;
emergency expenses arising from fires, floods, storms or other disasters;
emergency expenses indispensable for the operation and maintenance of production
facilities, including the maintenance of wells in conditions to produce with
maximum efficiency; emergency expenses indispensable for the protection and
preservation of materials and equipment required in the operations. In these
cases the Operator shall call a special meeting of the Executive Committee as
soon as possible in order to obtain its approval to continue with the emergency
measures.
CLAUSE 12. PRODUCTION
12.1 The Operator shall, with the approval of the Executive Committee, determine
as required, or as necessary, the Maximum Efficiency Rate (MER) For each
Commercial Field. This Maximum Efficiency Rate (MER) shall be the maximum rate
or production of oil that may be extracted from a reservoir in order to obtain
the Maximum final recovery of the reserves. Estimated production shall be
decreased as necessary to compensate for actual or anticipated operating
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conditions, such as wells under repairs which are not producing, capacity
limitations in collection lines, in pumps, separators, tanks, pipelines and
other facilities.
12.2 The Operator shall determine periodically, at least once a year, with the
Executive committee's approval, any area considered capable of producing
Hydrocarbons in commercial quantity in each field.
12.3 The Operator shall prepare and deliver to each Party, at regular three (3)
month intervals, a program showing each Party's share of the production and
another showing each Party's production distribution for the following six (6)
months. The production forecast shall be based on the Maximum Efficiency Rate
(MER), as set forth in Clause 12 (paragraph 12.1) and adjusted to each Party's
interests hereunder. The Production Distribution Program shall be based on each
Party's periodic requests and, in accordance with Clause 14 (paragraph 14.2),
with such corrections as may be necessary to ensure that neither Party, while
able to withdraw, receives less than the quantity to which it is entitled under
the provisions of Clause 14, without prejudice as to the provisions of Clause 21
( paragraphs 21.2) and Clause 22 (paragraph 22.5)
12.4 If either Party foresees a reduction in its capacity to receive
Hydrocarbons against the forecast supplied to the Operator, it must so advise
the latter in the least time possible, and if such a reduction is due to an
emergency
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situation, it shall notify the Operator within twelve (12) hours from the
occurrence which gives rise to the reduction. Consequently, such a Party shall
furnish the Operator with a new receipt schedule as based on the appropriate
reduction.
12.5 The Operator may use the Hydrocarbons consumed in the production
operations in the Contract Area, and such consumption shall be exempt from
royalties referred to in Clause 13 (paragraphs 13.1 and 13.2)
CLAUSE 13. ROYALTIES
13.1 Liquid Hydrocarbons: During the exploitation of the Contract Area, prior to
the distribution of the production corresponding to the parties, the Operator
shall deliver to ECOPETROL, as a Royalty, twenty per cent (20%) of the
supervised production of liquid hydrocarbons from such an area. ECOPETROL on its
account and risk, shall take in kind from the tanks of the Joint Account the
percentage of production corresponding to the royalty.
13.2 Gaseous Hydrocarbons: The Operator shall deliver to ECOPETROL as a Royalty,
twenty per cent (20%) of the production of gaseous hydrocarbons, under normal
conditions. Should said hydrocarbons require treatment in gas plants, the volume
of hydrocarbons with royalties equivalent to twenty percent (20%) of the
production shall be determined as the addition of the dry gas produced in the
gas plants plus the equivalent in dry gas of the liquid products produced, using
the conversion factors established in the
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current legal provisions. For Exploitation Fields under the sole risk mode, THE
ASSOCIATE shall deliver ECOPETROL the percentage of Hydrocarbons corresponding
to the royalties.
13.3 Out of the production percentage which accounts for the Royalty , ECOPETROL
shall pay the entities legally appointed the royalties in favor of the
Government, corresponding to the total production of the Commercial Field, but
in no case shall THE ASSOCIATE be liable for any payment to such entities for
this reason.
CLAUSE 14 - DISTRIBUTION AND AVAILABILITY OF HYDROCARBONS
14.1 Hydrocarbons produced, except for the hydrocarbons used for operations
hereunder, and the hydrocarbons inevitably wasted in the operations shall be
transported to the joint tanks of the parties or to other measurement facilities
agreed by the Parties. Should an agreement not be reached, dealing with gaseous
hydrocarbons the measurement point shall be : I) In the gas line of each
separator when said gaseous Hydrocarbons do not require treatment in gas plants,
or II) At the exit of gas plants when treatment is required in said plants.
Hydrocarbons shall be measured in accordance with oil industry standards and
methods, and such measurement shall be the basis for determining the percentages
referred to in Clause 13, and the remaining
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hydrocarbons shall, from said moment on, be property of each Party in the
proportions specified hereunder.
14.2 PRODUCTION DISTRIBUTION
14.2.1 After deducting the percentages covering royalty, the remaining
hydrocarbons produced in each Commercial Field is property of the Parties in the
proportion of fifty per cent (50%) for ECOPETROL AND FIFTY PER CENT (50%) FOR
THE ASSOCIATE until the accumulated production of each Commercial Field reaches
60 million barrels of liquid Hydrocarbons or the amount of 420 cubic gigafeet of
gaseous hydrocarbons under normal conditions, whichever occurs first ( 1 cubic
gigafeet = 1 x 10 9 cubic feet).
14.2.2 Regardless of the classification of the Commercial Field given by
ECOPETROL in the definition of the commercial nature, exceeding the limits set
forth in paragraph 14.2.1 , the production distribution of each Commercial Field
( upon deducting the percentage corresponding to the royalty) shall be property
of the Parties in the proportion resulting from the application of the R factor,
as follows:
14.2.2.1 If the Hydrocarbon reaching in the first place the limit set forth in
paragraph 14.2.1 of this Clause was liquid Hydrocarbon, the following table will
be applied:
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<TABLE>
<CAPTION>
R FACTOR PRODUCTION DISTRIBUTIONS AFTER ROYALTIES %
ASSOCIATE ECOPETROL
<S> <C> <C>
0.0 to 1.050 50
1.0 to 2.050/R 100-50/R
2.0 or more 25 75
</TABLE>
14.2.2.2 If the Hydrocarbon reaching in first place the limit stated in
paragraph 14.2.1 of this Clause was the gaseous Hydrocarbon, the following table
will be applied:
<TABLE>
<CAPTION>
R FACTOR PRODUCTION DISTRIBUTIONS AFTER ROYALTIES %
ASSOCIATE ECOPETROL
<S> <C> <C>
0.0 to 2.050 50
2.0 to 3.050/(R-1) 100- [50/(R-1)]
3.0 or more 25 75
</TABLE>
14.2.3 For the purposes of the preceding tables, R Factor shall be defined as
the ratio of the income accumulated over the corresponding accumulated expenses
corresponding to THE ASSOCIATE for each Commercial Field under the following
terms:
R = IA
---------
ID+A-B+GO
Where:
IA (Accumulated Income of the ASSOCIATE): It is the value increase of the
accumulated income corresponding to the volume of hydrocarbons produced of the
ASSOCIATE after deducting royalties, at the price of reference agreed by the
Parties, excluding hydrocarbons re-injected to the Contract
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Area Fields, hydrocarbons consumed in the operation and burnt gas.
The average reference price of the hydrocarbons shall be determined by mutual
agreement of the parties. In order to determine the Accumulated Income, the
basis shall be the monthly income which will be determined by multiplying the
average reference price times the monthly production according to the forms
designed by the Ministry of Mines and Energy for said purpose.
ID== (ACCUMULATED DEVELOPMENT INVESTMENTS): These are fifty per cent (50%) of
the accumulated development investments approved by the Executive Committee of
the Association. Accumulated Development investments made before the initiation
exploitation date defined by the Ministry of Mines and Energy for the respective
field, shall be adjusted to said date in the same manner as Direct Exploration
Costs are adjusted under paragraph of Clause 9 ( subparagraph 9.2.3).
A: Exploration Direct Costs in which the ASSOCIATE incurs under Clause 9
hereunder and adjusted pursuant to the provisions of Clause 9 ( paragraph
9.2.3).
B: It is the accumulated refund of the aforementioned Direct Exploration Costs
according to Clause 9 hereunder.
GO (Accumulated Operational Expenses): These are the accumulated operation
expenses approved by the Executive Committee of the Association in the
proportion corresponding
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to the ASSOCIATE, plus accumulated transportation costs of the
ASSOCIATE. It is understood that the transport costs are the investment and
operation expenses incurred to transport the hydrocarbons produced in the
commercial fields located in the Contract Area, and from the Contract Area to
the export port or to the place agreed to take the price to be used for
estimation of IA income . (Such transport cost shall be determined by mutual
agreement of the parties once the exploitation stage commences whose existence
of the Commercial field has been accepted by ECOPETROL.
The Operation Expenses include Special Contributions or of similar nature
directly applied to exploitation of hydrocarbons in the Contract Area.
All values included in the determination of R factor after the date for
commencement of the exploitation defined by the Ministry of Mines and Energy,
shall be taken in current dollars.
For this purpose the expenses in pesos must be converted into dollars at the
Market's Representative Rate of Exchange certified by the Bank Superintendency
or authorized entity, effective force on the date when the corresponding
disbursements took place.
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14.2.4 ESTIMATION OF THE R FACTOR: The production distribution based on the R
factor shall be effective as of the first day of the third calendar month after
such month when the accumulated production in the contract area reached 60
million barrels of liquid hydrocarbons or the amount of 420 cubic gigafeet of
gaseous Hydrocarbons under normal conditions, in agreement with paragraph
14.2.1.
Computation of R factor will be carried out based on the accounting closing date
corresponding to the calendar month in which the accumulated production reached
60 million barrels of liquid hydrocarbons or the amount of 420 cubic gigafeet of
gaseous hydrocarbons under normal conditions, in agreement with paragraph
14.2.1.
The resulting production distribution shall apply until June 30th of the
following year. As of such date, the production distribution applying R Factor
shall be estimated for one year periods (from July 1st to June 30th) based on
the values accumulated on December 31st of the immediately preceding according
to the corresponding accounting closing date.
14.3 In addition to the jointly-owned tanks and other facilities, each party
will have the right to build its own production facilities in the Contract Area
for its own sole exclusive use, upon the fulfillment of any legal requirements.
The transport and delivery of each Party's
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Hydrocarbon to such a pipeline or other storage facilities that are not jointly
owned, shall be made on the sole account and risk of the Party receiving the
Hydrocarbons.
14.4 Should production be obtained in places not connected with pipelines, for
the Joint Account, the Parties may agree to install their own pipelines up to a
point where Hydrocarbons can be sold, or to a place connecting with a public
pipeline. If the parties agree to construct such pipelines, they shall execute
the contracts that they deem suitable for this purpose, and they shall appoint
the Operator in agreement with standing legal provisions.
14.5 Each party shall own the Hydrocarbons produced and stored as a result of
the Operation and which are placed at its disposal, as set forth hereunder, and
it must receive it in kind or sell it or dispose of it separately, at its own
expense, as provided in Clause 14 ( paragraph 14.3).
14.6 If either Party cannot, for whatever reason, separately dispose of or lift
all or part of its share of Hydrocarbons hereunder, from the Joint-Account-tanks
the following provisions shall apply:
14.6.1 If it is ECOPETROL which is unable to lift its Hydrocarbons quota, in
other words, (share plus royalty), in whole or in part, in accordance with
Clause 12 ( paragraph 12.3) hereunder, the Operator may continue to produce the
field and deliver to the ASSOCIATE, in addition to the portion representing THE
ASSOCIATE's share on the basis of
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one hundred per cent (100%) of the MER, all such Hydrocarbons as the ASSOCIATE
may elect and be able to lift, up to a limit of one hundred per cent (100%) of
the MER, crediting ECOPETROL, for subsequent delivery, for the volume of
Hydrocarbons that ECOPETROL was entitled but did not lift. But with respect to
the volume of Hydrocarbons not lifted which covers ECOPETROL's royalties for the
month, THE ASSOCIATE, at ECOPETROL's request shall pay ECOPETROL in United State
dollars the difference between the quantity of hydrocarbons actually lifted by
ECOPETROL and the quantity of Hydrocarbons ECOPETROL is entitled to for the
Royalty referred to i Clause 13 ( paragraphs 13.1 and 13.2); providing however,
that any Hydrocarbons lifted by ECOPETROL shall be applied firstly to the
payment in kind of the Royalty and any lifting thereafter shall be applied to
ECOPETROL's share under Clause 14 ( paragraph 14.2).
14.6.2 If it is THE ASSOCIATE who is unable to lift is assigned portion under
Clause 12 (paragraph 12.3), in whole or in part, the Operator shall deliver
ECOPETROL, based on one hundred per cent (100%) of the MER not only the royalty
and ECOPETROL's share, but also such Hydrocarbons as ECOPETROL may be capable of
lifting, up to a limit of one hundred per cent (100%) of the MER , crediting THE
ASSOCIATE for subsequent delivery for such portion of its share as it has been
unable to lift.
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14.7 When both parties are able to receive the Hydrocarbons assigned to them
under Clause 12 (paragraph 12.3) hereunder, the Operator shall deliver to the
Party who had been previously unable to receive its share of the production, at
such parties' request, not only its share in the Operation but a minimum of ten
per cent (10%) per month of the other Party's production entitlement, by mutual
agreement of up to one hundred per cent (100%) of the share not received, until
such time as the total quantities credited to the Party which had been unable to
receive its Hydrocarbons have been cancelled out.
14.8 Without prejudice as to the legal provisions governing the matter, each
Party shall be free, at any time, to sell or export its share of the
Hydrocarbons obtained hereunder, or to dispose of same in any way.
CLAUSE 15. USE OF ASSOCIATED GAS
In the case of discovery of one or more fields of Petroleum in liquid state with
associated gas, the Operator within the two (2) years from the commencement of
the commercial production of the field defined by the Ministry of Mines and
Energy, shall submit a Project to use the Natural Gas, for the benefit of the
Joint Account. The Executive Committee will approve the project and will
determine the period necessary for the implementation of such plans. If the
Operator does not submit any project within two( years) or does not perform the
approved plan within the terms determined by the Executive Committee, ECOPETROL
may take
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for itself, on a free-of-charge basis all the associated gas available from the
exploitation reservoirs to an extent that is not required for efficient
operation of the field.
CLAUSE 16. UNITIZATION
When an economically exploitable reservoir extends continuously in a structure
located in another or others areas, Operator shall implement, in agreement with
ECOPETROL and in any other Party concerned, upon approval of the Ministry of
Mines and Energy, a joint exploitation plan which must conform to Hydrocarbons
exploitation engineering techniques.
CLAUSE 17. INFORMATION AND INSPECTION UNDER EXPLOITATION
17.1 The Operator shall deliver to the Parties, at the same time it becomes
available, reproducible originals (sepia) and copies of the electric,
radioactive and sonic logs of well drilled, history, core analyses, production
tests, surveys of reservoirs, and any routine reports made or received in
connection with the operations and activities carried out in the Contract Area.
17.2 Each Party shall have the right , at its own cost, expense and risk, to
inspect through authorized representatives, the wells and facilities of the
Contract Area and the activities related thereto. Such representatives shall
have the right to examine cores,
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samples, maps, well-drilling logs, surveys, books, and any other source of
information connected with the performance of this Contract.
17.3 To enable ECOPETROL to comply with the provisions of Clause 29, the
Operator shall prepare and deliver to ECOPETROL all reports required by the
National Government.
17.4 The information and data connected with exploitation operations shall be
treated as confidential, in the same way as set forth in Clause 6 (paragraph
6.3) hereinabove.
CHAPTER IV- EXECUTIVE COMMITTEE
CLAUSE 18. FORMATION
18.1 Within thirty (30) calendar days from the acceptance of a Commercial Field,
each Party shall name a representative as well as the respective first and
second alternates, who shall form the Executive Committee, notifying the other
Party in writing of the names and addresses of its representative and
alternates. Each Party may change its representative or alternate at any time,
but shall give written notice thereof to the other Party. The vote or decision
of each Party's representative shall be binding upon the respective Party. If
the principal representative of either Party is unable to attend a Committee
meeting, he shall designate in writing the alternate who is to attend the
meeting and such alternate shall have the same authority as the principal.
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18.2 The Executive Committee shall hold ordinary meetings during the months of
March, July and November, at which the exploitation program carried out by the
Operator, the development plan as well as immediate plans, shall be reviewed.
Annually, in the ordinary meeting of July, the Executive Committee shall discuss
and approve the annual Operating Program and Budget of the expenditure and
investment for the following calendar year.
18.3 The Parties and the Operator may request that special meetings of the
Executive Committee be called to analyze specific conditions of the operation.
The representative of the Committee shall give ten (10) calendar days advance
notice of the meeting , stating the date and subjects to be discussed. Any
subject not included in the Agenda of the meeting may be discussed upon
acceptance thereof by the Parties' representatives on the Committee.
18.4 The representative of each Party shall have a vote in all matters discussed
in the Executive Committee, equivalent to the percentage of the total interests
in the Joint Operation. Any decision or resolution taken by the Executive
Committee, in order to be valid, must have the affirmative vote of over fifty
per cent (50%) of the total Interests. Any decisions taken by the Executive
Committee in accordance with this procedure shall be binding and final upon the
Parties and the Operator.
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CLAUSE 19. FUNCTIONS
19.1 The Parties' representatives shall form the Executive Committee which shall
have full authority and responsibility to formulate and adopt Exploitation,
Development and Operations Programs and Budgets under the Contract. A
representative of the Operator shall attend meetings of the Executive Committee.
19.2 The Executive Committee shall designate its Secretary. The Secretary shall
carry full, detailed records and minutes of all the meetings, as well as notes
on any discussions and on the decisions taken by the Committee. Copies of the
minutes, in order to be valid, shall be approved and signed by the Parties'
representatives within ten (10) working days after meeting adjourns and shall be
delivered to them as soon as possible.
19.3 The Executive Committee's responsibilities are, among others, as follows:
19.3.1 To adopt its own regulations
19.3.2 To designate Operator, in case of resignation or dismissal, and to
determine the rules that the latter must fulfill when it is a person different
from the Parties, stating the causes for his dismissal.
19.3.3 To designate an outside Auditor of the Joint Account
19.3.4 To approve or disapprove the annual Operations Program and Budget of
expenditures, and any modification or revision thereto, and to authorize
extraordinary expenditure.
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19.3.5 To determine policies and rules on expenditure
19.3.6 To approve or disapprove any recommendation of expenses made by Operator
( not included in the approved Budget), when such expenditure exceeds the sum of
forty thousand US dollars ( US$40.000) or its equivalent in Colombian currency.
19.3.7 To provide assistance to the Operator and to decide on matters referred
for the Committee's consideration.
19.3.8 To create any sub-committees that it may deem necessary and set the
functions to be performed by same, under the direction of the Executive
Committee.
19.3.9 To define the type and frequency of drilling, operation and production
reports, and any other information to be furnished by Operator to the Parties,
chargeable to the Joint Account.
19.3.10 To supervise the operation of the Joint Account.
19.3.11 To authorize Operator to execute contracts on behalf of the Joint
Operation for amounts in excess of forty US dollars US$40.000.oo or its
equivalent in legal Colombian currency and,
19.3.12 In general, to carry out all the functions authorized hereunder that are
not the responsibility of any other entity or individual pursuant to a specific
clause hereof or a legal or regulatory provision.
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CLAUSE 20- DECISION IN CASE OF DISAGREEMENT IN THE OPERATION
20.1 Any project relating to the Joint Operation, which requires the Executive
Committee's approval for its implementation, as established hereunder, and on
which the Parties' representatives on said Committee fail to reach an agreement,
shall be submitted directly to the highest executive of each Party resident in
Colombia, in order that they may take a joint decision. If the Parties reach an
agreement or decision on the matter under discussion within sixty (60) calendar
days from the date of submittal of the consultation, they shall so advise the
Secretary of the Executive Committee, who shall call a Committee meeting within
fifteen (15) calendar days following the receipt of the pertinent advice, and
the members of the Committee are obliged to adopt such decision at said meeting.
20.2 If the Parties fail to reach an agreement on the matter under discussion
within sixty (60) calendar days from the date of presentation of the
consultation, the operations may be carried on pursuant to Clause 21.
CLAUSE 21. OPERATIONS UNDER THE RISK OF ONE OF THE PARTIES 21.1 If at any time
one of the Parties wishes to drill an exploitation well not approved under the
operations program, it shall give written notice to the other party, at least
thirty (30) days in advance of the next Executive Committee
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meeting, of its wish to drill such well, including information such as location,
recommendation to drill, estimated depth and costs. Operator shall include such
proposal among the items to be discussed at the next Executive Committee
meeting. If such proposal is approved by the Executive Committee, the well shall
be drilled at the expense of the Joint Account. If said proposal is not accepted
by the Executive Committee, the Party wishing to drill such well, hereinafter
called the Participating Party, shall have the right to drill, complete, produce
or abandon such well as its sole cost and risk. The Party not wishing to
participate in the operation shall be called the Non-Participating Party. The
Participating Party must start the drilling of such well within one hundred and
eighty (180) days following its rejection by the Executive Committee. If
drilling is not started within said period, the question must be submitted again
for the Executive Committee's consideration. Upon request of the Participating
Party, Operator shall drill the well for the account and at the risk of the
Participating Party, provided that in Operator's opinion such operation does not
interfere with the normal progress of the operations of the field, and provided
the Participating Party has advanced to the Operator the sums deemed necessary
by the Operator for the drilling. In case the said well cannot be drilled by the
Operator without interfering with the normal progress of the operations, the
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Participating Party shall be entitled to drill such well directly or through a
competent service company, and in that case, the Participating Party shall be
responsible for the operation, without interfering with the performance of the
normal operations of the field.
21.2 If the well referred to in Clause 21 ( 21.1) is completed as a producing
well, it will be administered by the Operator and the production of such well,
after deducting the Royalty referred to in Clause 13, shall be property of the
Participating Party, which shall pay all the costs of the operations of such
well until such time as the net value of the production, after deducting
production, gathering, storage, transport and other similar costs and sales is
equal to two hundred per cent (200%) of the cost of drilling and completion of
said well which, thereupon, and for the purposes of this Contract, shall become
property of the Joint Account, as if it had been drilled with the Executive
Committee's approval for the account of both Parties. For purposes of this
clause, the value of each barrel of Hydrocarbons produced from the above-said
well during any calendar month, before deducting the above-said costs, shall be
the average per-barrel price received by the Participating Party from sales of
its share of the Hydrocarbons produced in the Contract Area during the same
month.
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21.3 If at any time one of the Parties wishes to recondition, deepen to the
Production Targets or plug a well which is not in commercial production or is a
dry hole drilled by the Joint Account, and if these operation have not been
included in a program approved by the Executive Committee, such Party shall
advise the other Party of its intention to recondition, deepen o plug such well.
If there is no adequate equipment on the location, the procedure provided for in
clause 21 (paragraph 21.1 and 21.2) shall be applied. If there is adequate
equipment on the well-site to carry out the proposed operation, the Party
receiving notice of the operation to be carried out by the other Party shall
have a period of forty-eight (48) hours following receipt of the notice, in
which to approve or disapprove the operation and, and if no answer is received
during this period, it will be understood that the operation will be carried out
for the account and at the risk of the Joint Account. If the proposed work is
performed for the sole account and risk of a Participating Party, the well shall
be administered in accordance with Clause 21 (paragraph 21.2)
21.4 If at any time, one of the Parties wishes to build new facilities for
the extraction of liquids from the gaseous hydrocarbons and for transport and
exportation of produced Hydrocarbons- which will be called Additional
Facilities-, such Party shall so advise the other, in writing, giving the
following information:
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21.4.1 General description, design, specifications and estimated costs of the
Additional Facilities;
21.4.2 Projected capacity
21.4.3 Approximate date of commencement and length of the construction . Within
ninety (90) days from the date of notice, the other Party has the right to
decide whether or not it will participate in the proposed additional facilities,
by means of a written notice. If such Party elects not to participate in the
additional facilities, or fails to reply to the Participating Party's Proposal-
which Party shall hereinafter be called the Constructing Party , the latter may
proceed with the additional facilities and request Operator to construct,
operate and maintain such Facilities at the sole cost and risk of the
Constructing Party, without prejudice to the normal performance of the Joint
Operations. The constructing Party may negotiate with the other Party for the
use of said facilities for the Joint Operation. During the time the facilities
are operated for the Constructing Party's sole account and risk, Operator shall
charge to the latter all the costs of operation and maintenance of the
additional facilities, in accordance with generally accepted accounting rules.
CHAPTER V- JOINT ACCOUNT
CLAUSE 22 - HANDLING
22.1 Without prejudice to any provisions hereunder, expenses covering
exploration operations shall be for ASSOCIATE's account and risk.
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22.2 As from the time the Parties accept the existence of a Commercial Field,
and subject to the provisions of Clause 5 (paragraph 5.2), Clause 13 (paragraphs
13.1 and 13.2), the ownership of the rights or Interest in the Operation of the
Contract Area shall be divided as follows: ECOPETROL fifty per cent (50%) and
THE ASSOCIATE fifty per cent (50%). From then on any expenses, payments,
investments, costs and obligations incurred and contracted for the performance
of the operations hereunder, as well as Direct Exploration Costs made by THE
ASSOCIATE before and after the recognition of the existence of each Commercial
Field and its extensions, in agreement with Clause 9 (paragraph 9.10), shall be
charged to the Joint Account. Except as set forth in Clause 14 (paragraph 14.3)
and 21, all properties acquired or used from then on for the performance of the
operation of the Commercial Field shall be paid by, and belong to, the Parties
in the same proportion as described in this Clause.
22.3 The Parties shall provide Operator, within the first five (5) days of each
month, at the Bank designated by Operator, with their shares of the Budget, in
accordance with the requirements and in the currency in which the expenses are
to be incurred, i.e, in Colombian Pesos or in US dollars, as requested by
Operator under programs and Budgets approved by the Executive Committee. Should
THE
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ASSOCIATE not have available the Pesos necessary to cover its share of the Peso
contribution, ECOPETROL shall have the right to furnish such Pesos and receive
appropriate credit against the dollar contribution payable by ECOPETROL at the
official rate of purchase by the Bank Superintendency or the pertinent
authorized entity, on the date ECOPETROL is to pay said contribution, provided
this transaction is permitted under the legal regulations.
22.4 Operator shall present to the Parties monthly, within thirty (15) calendar
days following the end of each month, a monthly statement showing the funds
advanced, expenses incurred, outstanding liabilities, and a report on all debits
and credits made to the Joint Account, which report shall be made out in
accordance with Annex "B" hereto. If payments under Clause 22 (paragraph 22.3)
are not made within the term set forth and Operator elects to cover same,
delinquent Party shall pay Commercial Interest in the same currency in which
payment has been incurred during the period of the delay in payment.
22.5 Should either Party fail to timely contribute with the Joint Account with
the sums due and payable within the term set therefore, as from the due date
such Party shall be considered as the "Delinquent Party", and the other Party as
the "Prompt Party". If the Prompt Party had paid the Delinquent Party's share,
in addition to its own, the former shall have the right, after sixty (60) days'
delay, to have
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Operator deliver to it the Delinquent party's total participation in the
Contract Area (excluding the Royalty percentage), up to such amount of
production as will give the Prompt Party a net income from sales equal to the
sum not paid by the Delinquent Party, plus an annual interest equal to the
commercial interest, as from sixty (60) days after the date of commencement of
default. "Net Income" is understood to mean the difference between the sales
price of the crude taken by the Prompt Party, less cost of transport, storage,
loading and other reasonable expenses incurred by the Prompt Party in the sale
of the products taken. The Prompt Party's right may be exercised at any time
after thirty (30) days from having giving notice the Delinquent Party, in
writing, of its intention to take all or part of the Delinquent Party's share of
the production.
22.6.1 Direct Expenses of the Joint Operation shall be charged to the Parties in
the same proportion that the production is distributed after royalties.
22.6.2 Indirect expenses shall be charged to the Parties on the same proportion
set forth for Direct Expenses in paragraph 22.6.1 above. The amount of said
expenses shall be the result from taking the total annual value of the
investments and expenses ( excluding technical and administrative support) and
applying a+m (X-b) equation. In this equation "X" is the total value of annual
investments and expenses, and "a" , "m" and "b" are constants whose
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values are shown in the following table with respect to annual investments and
expenses:
AMOUNT OF INVESTMENTS AND EXPENSES CONSTANT VALUES
<TABLE>
<CAPTION>
"X" (US$) " to" (US$) m(frac) "b" (US$)
<S> <C> <C> <C> <C> <C>
1. 0 25.000.000 0 0.10 0
2. 25.000.001 50.000.000 2.500.000 0.08 25.000.000
3. 50.000.001 100.000.000 4.500.000 0.07 50.000.000
4. 100.000.001 200.000.000 8.000.000 0.06 100.000.000
5. 200.000.001 300.000.000 14.000.000 0.04 200.000.000
6. 300.000.001 400.000.000 18.000.000 0.02 300.000.000
7. 400.000.001 or more 20.000.000 0.01 400.000.000
</TABLE>
The equation shall be applied only once per year in each case with the value of
the constants corresponding to the total value of the annual investments and
expenses.
22.7 The monthly statements of account referred to in Clause 22 (paragraph 22.4)
may be revised or challenged by either Party from the time they are received by
them, up to two (2) years after the end of the calendar year covered by such
statements, clearly specifying the corrected or challenged items and the reason
given for the objections. Any account not corrected or challenged within the
said period shall be considered as final and correct.
22.8 Operator shall carry account records, vouchers and reports for the Joint
Account in Colombian Pesos, in
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conformity with Colombian law, and every debit or credit to the Joint Account
shall be made in accordance with the accounting procedure , Exhibit "B", made a
part of this contract. In case of any discrepancy between the accounting
procedure and the provisions hereunder, the latter shall prevail.
22.9 Operator may sale materials or equipment during the first twenty (20) years
of the Exploitation Period or the first twenty eight (28) years of the
Exploitation Period, if dealing with a Gas Field, for the benefit of the Joint
Account, provided the amount of any one sale does not exceed five thousand
United States dollars (US$5.000) or its equivalent in Colombian pesos. Any sales
in excess of these amounts or sales or real property shall have to be approved
by the Executive Committee. Sale of such materials or equipment shall be made at
a commercial reasonable price according to the conditions of use of the good.
22.10 Any machinery, equipment or other personal property or facilities acquired
by Operator for the performance of this Contract, charged to the Joint Account,
shall belong to the Parties by equal shares. However, if one of the Parties
decides to terminate its interest in the Contract prior to the end of the first
seventeen (17) years of the Exploitation period, except for the case under
Clause 25, such Party agrees to sell part or all of its interest in
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the said items to the other Party at reasonable commercial price or at their
book value, whichever is lower. In case the other Party should not wish to
purchase such items within ninety (90) days following a formal offer of same
made to it, the Party wishing to terminate shall have the right to assign to a
third party its interest in such equipment and facilities. Should THE ASSOCIATE
decide to withdraw after seventeen (17) years of the Exploitation Period have
elapsed, its interest in the Joint Operation shall pass on to ECOPETROL on a
free-of-charge basis, upon its acceptance.
CHAPTER VI-LENGTH OF THE CONTRACT
CLAUSE 23. MAXIMUM LENGTH
This Contract shall have a maximum duration of twenty eight (28) years counted
as from the Effective Date, divided up as follows: Up to six (6) years as the
Exploration Period, under Clause 5, without prejudice to the provisions of
Clause 9 (paragraphs 9.3 and 9.8); and twenty two (22) years as the Exploitation
Period, counted as from the date of the termination of the Exploration period.
It is understood that in the events contemplated hereunder in respect to the
extension of the Exploration Period, it is considered that such events shall in
no case extend the total term of duration beyond twenty eight (28) years, except
as provided in paragraph 1 of this Clause.
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PARAGRAPH 1. The Exploitation Period for Gas Fields discovered inside the
Contract Area shall have a maximum duration of thirty (30) years as of
expiration of the Exploration Period or the Retention Period granted. In no case
the total term of duration shall extend beyond forty (40) years counted as from
the Effective Date.
PARAGRAPH 2. Notwithstanding the preceding, ECOPETROL and THE ASSOCIATE, at
least five (5) years in advance to the date of exploration of each Field, will
revise the conditions to continue the operation after the term mentioned in this
clause. In case that the parties agree to continue the operation, they shall
define the terms and conditions under which they will carry them out.
CLAUSE 24. TERMINATION
This Contract shall terminate in any of the following cases:
24.1 Due to the expiration of the Exploration Period without THE ASSOCIATE'S
having discovered a Commercial Field, except as provided in Clauses 9
(paragraphs 9.5, and 9.8 ) and Clause 34.
24.2 Upon expiration of the term of duration of the Contract , as set forth in
Clause 23.
24.3 At any time at THE ASSOCIATE's discretion, upon fulfillment of its
obligations as set forth in Clause 5, and of any others entered into hereunder.
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24.4 Due to the special causes set forth in Clause 25.
CLAUSE 25. UNILATERAL TERMINATION CAUSES
25.1 ECOPETROL may terminate the Contract hereunder unilaterally at any time
before expiration of the term agreed in Clause 23, in any of the following
cases:
25.1.1. Due to the dissolution of THE ASSOCIATE and its assignees
25.1.2. In the event THE ASSOCIATE or its assignees were to assign this Contract
in whole or in part without complying with the requirements under Clauses 27.
25.1.3. Due to the financial incapacity of THE ASSOCIATE and its assignees,
which incapacity is presumed to exist when a Court declares bankruptcy or
creditors' proceedings are opened against them.
25.1.4 Due to failure to comply with the obligations entered into by THE
ASSOCIATE hereunder. Upon expiration of each one of the periods contemplated for
fulfillment of the exploratory obligations, THE ASSOCIATE shall furnish a
written report evidencing compliance with the obligations of the respective
period. In the event that said obligations have not been fulfilled, THE OPERATOR
shall have sixty (60) calendar days to fulfill them diligently according to good
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Petroleum practices. Should this term not be enough , the parties may by common
agreement determine an additional term to fulfill said obligations. If after
said term the agreed works have not been completed, a default will be
constituted and therefore, Ecopetrol may proceed pursuant to Clause 25.3.
25.2 In case of a declaration of Unilateral Termination , THE ASSOCIATE's rights
as set forth in this Contract shall cease both in its capacity as Party thereto
and as Operator, if at the time of such declaration of unilateral termination,
THE ASSOCIATE has both capacities.
25.3 ECOPETROL may only declare the
Unilateral Termination of this Contract after sixty (60) calendar days have
elapsed from its having given written notice to THE ASSOCIATE or its assignees,
clearly specifying the grounds invoked for making such a declaration, and only
if the other Party has failed to present explanations satisfactory to ECOPETROL
or if THE ASSOCIATE has failed to correct the failure in the performance of the
contract without prejudice of the ASSOCIATE's right to file the legal remedies
as it may consider advisable.
CLAUSE 26. OBLIGATIONS IN CASE OF TERMINATION
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26.1 Upon termination of the Contract pursuant to Clause 24 during the
Exploration, Retention or Exploitation Period, THE ASSOCIATE shall leave in
production any wells that are then producing and shall turn over all
constructions , pipelines, transference lines and other real property of the
Joint Account ( located in the Contract Area), all of which shall pass
free-of-charge to ECOPETROL, with any rights-of way and assets acquired in
benefit of the Contract, even though either the former or the latter be located
outside the Contract Area.
26.2 If this Contract terminates for any reason after the expiration of the
first seventeen (17) years of the Exploitation Period, all of THE ASSOCIATE's
interest in the machinery, equipment, and other personal property or facilities
used or acquired by THE ASSOCIATE or by Operator for the performance of this
Contract shall pass to ECOPETROL on a free-of-charge basis.
26.3 If the Contract terminates before the end of seventeen (17) years of the
Exploitation Period, the provisions of Clause 22 ( paragraph 22.10) shall apply.
26.4 In case this Contract is terminated due to the declaration of Unilateral
Termination, made at any time, all the real or personal property acquired for
the sole benefit of the Joint Account shall pass to ECOPETROL on a free-of
charge basis.
26.5 Upon termination of this Contract for whatever reason and at whatever time,
the Parties are obliged to
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fulfill satisfactorily their legal obligations between each other and with third
Parties, as well as those contracted hereunder.
CHAPTER VII- MISCELLANEOUS PROVISIONS
CLAUSE 27. RIGHT OF ASSIGNMENT
27.1 THE ASSOCIATE shall have the right, upon prior written approval by the
Minister of Mines and Energy and the President of Empresa Colombiana de
Petroleos ECOPETROL, to assign or transfer all of part of its interest, rights
and obligations hereunder to any person, company or group.
Consequently, any project involving assignment or total or partial assignment of
the interests, rights and obligations in the contract, shall be informed to the
Minister of Mines and Energy and to the President of Empresa Colombiana de
Petroleos , Ecopetrol, through a written communication of THE ASSOCIATE
indicating the essential elements of the negotiation, such as prospective
assignee , value, interests, rights and obligations to be assigned, scope of the
operation, etc. Within the next thirty (30) working days , the Minister of Mines
and Energy and the President of Empresa Colombiana de Petroleos Ecopetrol, shall
exercise the
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discretionary power to analyze qualifications of the prospective assignees,
after which they will adopt their decision without being bound to justify their
reasons. In all cases, the opinion of the Minister of Mines and Energy shall
prevail.
27.2 Should more than thirty (30) working days elapsed, as of the date of
reception of the request by the Minister of Mines of Energy without THE
ASSOCIATE having received an answer, it is understood for all purposes that the
request has been accepted.
27.3 Assignments made during the Exploration Period among companies legally
established in Colombia, will not be subject to the above-mentioned procedure
and shall be formalized through a written authorization by Empresa Colombiana de
Petroleos, ECOPETROL, and signing of the respective instrument.
27.4 Any amendment or modifications in the contract relations of THE ASSOCIATE
and Empresa Colombiana de Petroleos ECOPETROL, resulting from total or partial
direct negotiations with respect to interests, quotas or stock in THE ASSOCIATE
shall also subject to the approval procedure by the Ministry of Mines and Energy
and of the President of Empresa Colombiana de Petroleos ECOPETROL.
27.5 However, said changes or amendments shall not require authorization by the
Minister of Mines and Energy and Empresa Colombiana de Petroleos, in the
following cases:
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27.5.1 When transactions are carried out at the stock exchange or open stock
market.
27.5.2 If dealing with assignments or transfers resulting from events beyond the
will of THE ASSOCIATE or of the companies supervising or directing it, such as
government orders, legal judgement, partition and awarding of assets and
auctions. 27.5.3 When negotiations are carried out among companies supervising
or directing the ASSOCIATE, or its affiliates or subsidiaries, or among
companies forming a same economic group, in whose cases it will be enough to
give timely notice on said assignment to the Minister of Mines and Energy and to
Empresa Colombiana de Petroleos ECOPETROL.
27.6 Except for the above mentioned exceptions, assignments, transfers,
negotiations, transactions or operations dealt with herein, not having approval
of the Ministry of Mines and Energy and of the President of Empresa Colombiana
de Petroleos, ECOPETROL, shall give rise to application of Clause 25 of the
Association Contract.
27.7 Operations carried out for the development of this clause and that
according to the Colombian tax law are assessable , shall pay the corresponding
taxes.
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CLAUSE 28. DISAGREEMENTS
28.1 In all cases of disagreement or contradiction in the interpretation of the
Clauses of this Contract in relation to those contained in Annex "B " called
"Operating Agreement", the provisions of the contract shall prevail.
28.2 Any cases of disagreement between the Parties on matters of law relating to
the interpretation and performance of the Contract, which cannot be settled
amicably, shall be submitted for the cognizance and decision of the
jurisdictional branch of Colombian public power.
28.3 Any difference as to operational or technical matters between the Parties
hereto by reason of the interpretation or application of this contract, that
cannot be settled amicably, shall be referred for the final decision of experts
, appointed as follows: one by each Party, and a third one, or umpire, appointed
by mutual agreement of the two so designated. Should these two fail to reach an
agreement as to the appointment of the third expert, the latter shall be
designated, upon request of either party, by the Board of Directors of the
Colombian Association of Engineers,"SCI", with headquarters in Bogota.
28.4 Any difference of an accounting nature between the Parties hereto by reason
of the interpretation and
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implementation of the Contract, that cannot be settled amicably, shall be
referred for the decision of experts, who shall be Chartered Public Accountants,
designated as follows: one by each Party, and a third one, or umpire, appointed
by the two principal experts. Should these two fail to reach an agreement, such
third expert shall be designated, upon request of either Party, by the Central
Board of Accountants of Bogota.
28.5 Both Parties declare that the experts' decision shall have the full effects
of a settlement between them, and in consequence, such decision shall be final.
28.6 In case of disagreement between the Parties as to the technical, accounting
or legal nature of the controversy, the same shall be considered to be legal and
clause 28 (paragraph 28.2) shall apply.
CLAUSE 29. LEGAL REPRESENTATION
Without prejudice to THE ASSOCIATE's legal rights as a consequence of legal
regulations or of the clauses of this Contract, ECOPETROL shall represent the
parties before Colombian authorities on any matters concerning the exploitation
of the Contract Area, whenever it be applicable to do so, and shall furnish
Government officials and departments with any data and reports that may be
legally required. Operator shall be obliged to prepare and furnish ECOPETROL
with the pertinent reports. Any expenses incurred by ECOPETROL to attend to any
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matter referred to this Clause shall be charged to the Joint Account, and where
such expenses exceed five thousand United States Dollars ( US$5.000) or its
equivalent in Colombian currency, the Operator's prior approval shall be
necessary. The Parties represent, for purposes of their relations with Third
Parties, that neither the provisions of this Clause nor any other contained
elsewhere in this Contract implies the granting of a general power of attorney
or the fact that the Parties have formed a civil or commercial partnership or
any other relationship whereby either Party might be considered together liable
for the acts or omissions of the other party or as having authority or powers
that might be binding upon the other Party in relation to any obligations. This
Contract is related to operations within the Republic of Colombia and although
ECOPETROL is a Colombian industrial and Commercial State owned enterprise, the
Parties agree that THE ASSOCIATE , should it be the case, may decide to be
excluded from all the provisions of Sub-chapter K entitled PARTNERS AND
PARTNERSHIPS of the Internal Revenue Code of the United States of America. THE
ASSOCIATE shall make said election on its behalf in an appropriate manner.
CLAUSE 30 LIABILITIES
30.1 Operator shall carry our the operations subject matter of this Contract in
an efficient an adequate
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manner, in accordance with Petroleum industry practices internationally accepted
for these type of operations, it being understood that Operator shall at no time
be liable for errors of judgement or for any loss or damage that is not due to
the Operator's gross negligence.
30.2 The liabilities contracted hereunder by ECOPETROL and THE ASSOCIATE in
relation to Third Parties shall not be joint and, in consequence each Party is
separately liable for its share of the expenses, investments or obligations
resulting as a consequence of such liabilities.
30.3 Out of the value of the expenses incurred and the contracts entered by the
Operator for a value exceeding forty thousand dollars of the United States of
America (US$40.000) or its equivalent in colombian pesos which have not been
timely authorized by the Executive Committee, except for the assumptions of
Clause 11 (Paragraph 11.7) , the only party liable before third Parties shall be
the Operator, who shall assume the total corresponding value. When such expense
is accepted by the Executive Committee, the Operator will be refunded the value
of the work, study or purchase, according to the guidelines defined by the
Executive Committee. In case that the good or asset is not accepted by the
Executive Committee, the Operator, if possible, may withdraw such good
reimbursing the partners any cost that said withdrawal may cause to the
operation. If it is not possible that the Operator withdraws such good, or that
it declines to so, the resulting benefit or increase in equity resulting from
said expenses or contracts, shall
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belong to the Parties in proportion to their participation in the Operation.
30.4 ECOLOGICAL CONTROL. THE ASSOCIATE, in the development of all contract
activities, shall timely comply with the provisions of the National Code of
Renewable Natural Resources and of Environmental Protection and remaining legal
provisions on the subject. For said purpose, THE ASSOCIATE agrees to permanently
execute a preventive plan to guarantee conservation and restoration of natural
resources in the areas where Exploration, exploitation and transportation works
under this contract are carried out.
Said plans and programs shall be disclosed by THE ASSOCIATE to national and
regional entities related to this matter. Also, specific contingency plans shall
be established for emergencies and remedial actions. For said purpose, THE
ASSOCIATE shall coordinate said plans and actions with competent authorities.
The respective programs and budgets shall be prepared by THE ASSOCIATE in
agreement with the pertinent clauses of this contract.
All costs incurred shall be on the ASSOCIATE's account in the Exploration Period
and in the Exploitation under the sole risk modality, and by both Parties
charged to the Joint Account during the Exploitation Period.
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CLAUSE 31. TAXES, CHARGES AND OTHERS
Any taxes and charges accruing after the establishment of the Joint Account and
before the Parties receive their share of the production, that are chargeable to
the exploitation of Hydrocarbons, shall be charged to the Joint Account. Income,
patrimony and supplementary taxes shall be for the sole account of each Party,
as applicable to each of them.
CLAUSE 32. PERSONNEL
32.1 When THE ASSOCIATE is the Operator, appointment of the Operator's Manager
shall be made after consultation with ECOPETROL.
32.2 Pursuant to the terms of this Contract and subject to the norms to be
established, Operator shall have autonomy in appointing the personnel required
for the operations hereunder, being able to fix their remuneration, functions,
rank, number and conditions. Operator shall adequately and diligently train such
Colombian personnel as be required to replace the foreign personnel that
Operator may consider necessary for the performance of the operations hereunder.
In any case, Operator shall comply with the legal regulations setting the
proportion of national and foreign employees and laborers.
32.3 TECHNOLOGICAL TRANSFERENCE. THE ASSOCIATE agrees to carry out on its
account a training program for ECOPETROL professionals in areas related to the
development of the contract.
In order to meet this obligation during the Exploration Period, supervised
training may include among other subjects, the areas of geology, geophysical
and the like,
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evaluation of reserves and characterization of oil reservoirs, drilling and
production. Supervised training shall be carried out during all the initial
exploration period and its extensions, through integration of professionals
appointed by ECOPETROL, to the work group that THE ASSOCIATE organizes for the
Contract Area or for other activities related to THE ASSOCIATE.
In order to opt for the waiver dealt with in Clause 5 hereunder, THE ASSOCIATE
must have complied with the training programs herein contemplated.
During the Exploitation period, the scope, duration, place, participants,
training conditions and other aspects shall be established by the Executive
Committee of the Association.
All supervised training costs, except for labor costs caused in favor the
professionals receiving them, shall be assumed by THE ASSOCIATE during the
Exploration Period and by both Parties charged to the Joint Account during the
Exploitation Period.
PARAGRAPH: In order to meet the obligations on Technology Transference in
agreement with the provisions hereunder, during the first three years of the
Exploration Period and for each year, THE ASSOCIATE agrees to carry out
supervised training programs to Ecopetrol Professionals for thirty thousand ( US
$30.000.oo) dollars of the United States of America per year. The subject and
type of program shall be previously approved by ECOPETROL and THE ASSOCIATE. In
the event that the Exploration Period is extended, supervised training shall
consist of similar programs to those set forth herein.
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32.4 According to this contract, the Operator during the Exploitation Period,
shall have the right to carry out any operations hereunder through contractors,
subject to the authority of the Executive Committee to approve contracts whose
value exceeds forty thousand dollars of the United States of America (US$40.000)
or its equivalent in Colombian pesos.
CLAUSE 33. INSURANCE The Operator shall be covered by all
the insurance required by Colombian law. The Operator shall likewise demand that
each contractor performing any work hereunder must obtain and maintain
up-to-date such insurance as be deemed necessary by the Operator. The Operator
shall further provide any other insurance considered necessary by the Executive
Committee.
CLAUSE 34. FORCE MAJEURE OR ACTS OF GOD
The Obligations referred to in this Contract shall be suspended for the entire
duration of time in which either Party is unable to meet them, in whole or in
part, due to unforeseen events constituting force majeure or Acts of God such as
strikes, lockouts, war, earthquake, floods or other catastrophes; government
laws or regulations, or decrees hindering the provision of essential material
and, in general, any no-financial reason that actually prevents the operations
even though not listed herein but
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that affects the parties and is outside their control. Should either Party be
unable due to force majeure or Acts of God to comply with the obligations
hereunder, it shall promptly give notice thereof to the other Party, for its
consideration, specifying the reasons which are preventing it. In no case shall
occurrences of force majeure extend the total Exploration, Retention and
Exploitation Period beyond the twenty eight (28) calendar years as from the
Effective Date, as set forth in Clause 23, but any impediment of force majeure
during the six (6) year Exploration Period referred to in Clause 5, which lasts
over thirty (30) consecutive days, shall extend this six (6) year period by the
same time as the length of such impediment.
CLAUSE 35. APPLICATION OF COLOMBIAN LAW
The Parties set the city of Santa Fe de Bogota, Republic of Colombia, as the
domicile for any purposes hereunder. This Contract is governed throughout by
Colombian law, and THE ASSOCIATE submits to the jurisdiction of Colombian Courts
and waives any diplomatic claim in respect to its rights and obligations
hereunder, except in the case of denial of justice. Denial of justice shall not
be deemed to exist when THE ASSOCIATE in its condition as Party hereto or as
Operator, has had access to all the resources and means of action which may be
used under Colombian law before the jurisdictional branch of public power.
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CLAUSE 36. NOTICES Notices or communications between the Parties, connected with
this Contract shall require, in order to be valid, the mention of the pertinent
Clauses, and sent to the Parties at the following addresses:
TO ECOPETROL: Carrera 13 No.36-24 Santafe de
Bogota, Colombia.
TO THE ASSOCIATE: Carrera 6A No. 115-65 Of 514 F
Santafe de Bogota, Colombia.
Any change of address shall be notified in advance to the other party.
CLAUSE 37. VALUE OF THE HYDROCARBONS
Payments or reimbursements under Clauses 9 (paragraphs 9.2 and 9.4) and 22
(paragraph 22.5), shall be made in United States Dollars, or in Hydrocarbons, on
the basis of the current price and the limitations established under Colombian
legislation for the sale of the dollar portion of the Hydrocarbons from the
Contract Area destined for refining in national territory.
CLAUSE 38. PRICES FOR CRUDE HYDROCARBONS
38.1 THE ASSOCIATE's share of hydrocarbons hereunder, destined for refining or
internal use, shall be paid delivered to the refineries where Hydrocarbons are
to be processed or at the reception site, as agreed by the Parties, abiding the
standing government rules or regulations or those replacing them.
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38.2 Any difference arising from the application of this clause shall be settled
by the method provided for in this Contract.
CLAUSE 39. DELEGATION AND MANAGEMENT
THE PRESIDENT of EMPRESA COLOMBIANA DE PETROLEOS-ECOPETROL delegates to the
Exploration and Production Vice President management of this contract, pursuant
to ECOPETROL'S rules and provisions, with power to execute all procedures
related to the Contract development. The Exploration and Production Vice
President may exercise this delegation through the Associate Operation Assistant
Vice-President.
CLAUSE 40. VALIDITY
To take legal effect, this contract requires the approval of the Ministry of
Mines and Energy.
IN WITNESS WHEREOF, the parties sign, before witnesses, in Bogota, on the twenty
fourth (24th) day of the month of December , nineteen hundred and ninety seven
(1997).
EMPRESA COLOMBIANA DE PETROLEOS
ECOPETROL
SIGNED,
ENRIQUE AMOROCHO CORTES
President
HARKEN DE COLOMBIA, LTD
SIGNED,
GABRIEL GUSTAVO CANO VELASQUEZ
Legal Representative
Witnesses
Signed, Illegible signature
- ---------------------------
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INDEX
<TABLE>
<S> <C>
CHAPTER I..........................................................................................2
GENERAL PROVISIONS
CLAUSE 1. Object of this contract..................................................................2
CLAUSE 2. Application of the Contract .............................................................3
CLAUSE 3. Contract Area............................................................................4
CLAUSE 4. Definitions..............................................................................6
CHAPTER II
EXPLORATION
CLAUSE 5. Terms and conditions ..................................................12
CLAUSE 6. Supply of Information during Exploration...............................14
CLAUSE 7. Exploration Budget and Programs........................................16
CLAUSE 8. Restitution of Areas...................................................17
CHAPTER III
EXPLOITATION
CLAUSE 9. Terms and Conditions...................................................19
CLAUSE 10. Technical Control of the Operations....................................26
CLAUSE 11. Exploitation Programs and Budgets......................................27
CLAUSE 12. Production.............................................................30
CLAUSE 13. Royalties..............................................................32
CLAUSE 14. Distribution and Availability of
Hydrocarbons...........................................................33
CLAUSE 15. Use of Associated Gas..................................................41
CLAUSE 16. Unitization............................................................41
CLAUSE 17. Information and Inspection under
Exploitation...........................................................42
CHAPTER IV
EXECUTIVE COMMITTEE
CLAUSE 18. Formation .............................................................43
</TABLE>
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<TABLE>
<S> <C>
CHAPTER V
EXPLORATION
CLAUSE 19. Functions.............................................................44
CLAUSE 20. Decision in case of disagreement
in the Operation.......................................................46
CLAUSE 21. Operations under the risk of one of the
Parties ...............................................................47
CLAUSE 22. Handling ..............................................................51
CLAUSE 23. Maximum Length ........................................................56
CLAUSE 24. Termination............................................................57
CLAUSE 25. Unilateral Termination Causes..........................................58
CLAUSE 26. Obligations in case of Termination.....................................59
CLAUSE 27. Right of Assignment....................................................61
CLAUSE 28. Disagreements..........................................................63
CLAUSE 29. Legal Representation...................................................65
CLAUSE 30. Liabilities ...........................................................66
CLAUSE 31. Taxes, charges and others .............................................68
CLAUSE 32. Personnel..............................................................68
CLAUSE 33. Insurance..............................................................70
CLAUSE 34. Force Majeure or Acts of God ..........................................71
CLAUSE 35. Application of Colombian Law...........................................71
CLAUSE 36. Notices................................................................72
CLAUSE 37. Value of the Hydrocarbons..............................................72
CLAUSE 38. Prices for Crude Hydrocarbons..........................................72
CLAUSE 39. Delegation and Management..............................................73
CLAUSE 40. VALIDITY...............................................................73
</TABLE>
CERTIFIED TO BE A TRUE AND COMPLETE TRANSLATION DONE BY TERESA JIMENEZ DE
MONTES. SWORN TRANSLATOR AND INTERPRETER. RES.220 ISSUED BY THE MINISTRY OF
JUSTICE OF COLOMBIA. SANTAFE DE BOGOTA, D.C., FEBRUARY 20TH, 1998.
Certified to be a true and complete translation done by Teresa Jimenez de
Montes. Sworn Translator and Interpreter. Res. 220 issued by the Ministry of
Justice of Colombia. Santafe de Bogota, D.C.,February 20th, 1998.
<PAGE> 1
EXHIBIT 10.16
DEVELOPMENT FINANCE AGREEMENT
____________________________________________________
Harken Energy Corporation
and
Harken Capital Corporation
____________________________________________________
December 24, 1997
<PAGE> 2
TABLE OF CONTENTS
Page
<TABLE>
<S> <C>
ARTICLE I -- Definitions and References . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1
Section 1.1. Defined Terms . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1
Section 1.2. References and Titles . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 5
ARTICLE II -- Advancement of Capital . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 6
Section 2.1. Advance . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 6
Section 2.2. Use of Proceeds . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 6
ARTICLE III -- Net Profits Interest . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 7
Section 3.1. Net Profits Interest . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 7
Section 3.2. Establishment . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 7
Section 3.3. Credits . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 7
Section 3.4. Debits . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 9
Section 3.5. Additional Account Matters . . . . . . . . . . . . . . . . . . . . . . . . . . . 11
Section 3.6. Accounting . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 11
Section 3.7. Payments . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 12
Section 3.8. Overpayments and Underpayments . . . . . . . . . . . . . . . . . . . . . . . . . 13
Section 3.9. Prudent Operator Standard . . . . . . . . . . . . . . . . . . . . . . . . . . . . 13
Section 3.10. Sales of Subject Hydrocarbons . . . . . . . . . . . . . . . . . . . . . . . . . . 13
Section 3.11. Insurance . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 14
Section 3.12. Contracts with Affiliates . . . . . . . . . . . . . . . . . . . . . . . . . . . . 14
Section 3.13. Government Regulation . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 14
Section 3.14. Abandonments . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 14
Section 3.15. Pooling and Unitization . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 15
Section 3.16. Non-consent Operations . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 15
Section 3.17. No Personal Liability; Indemnification . . . . . . . . . . . . . . . . . . . . . 16
Section 3.18. Access to Books and Records . . . . . . . . . . . . . . . . . . . . . . . . . . . 16
ARTICLE IV -- Owner Representations, Warranties and Covenants . . . . . . . . . . . . . . . . . . . . . . . 17
Section 4.1. Organization and Corporate Authority . . . . . . . . . . . . . . . . . . . . . . 17
Section 4.2. Qualification to do Business . . . . . . . . . . . . . . . . . . . . . . . . . . 17
Section 4.3. Finders= Fees . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 17
Section 4.4. Authority of Owner . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 17
Section 4.5. Non-Contravention . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 17
Section 4.6. Governmental Consents . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 18
Section 4.7. Reports and Financial Statements of Owner . . . . . . . . . . . . . . . . . . . . 18
Section 4.8. Disclosure . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 18
Section 4.9. Owner=s Common Shares . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 19
Section 4.10. Association Contracts . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 19
Section 4.11. Ownership of Harken Colombia . . . . . . . . . . . . . . . . . . . . . . . . . . 19
</TABLE>
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<PAGE> 3
<TABLE>
<S> <C>
Section 4.12. Certain Tax Matters . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 20
Section 4.13. No Defaults . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 20
Section 4.14. Litigation . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 20
Section 4.15. Compliance with Laws . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 20
Section 4.16. Harken Colombia Organization and Corporate Authority . . . . . . . . . . . . . . 20
Section 4.17. Harken Colombia Qualification to do Business . . . . . . . . . . . . . . . . . . 20
Section 4.18. Harken Colombia Non-Contravention . . . . . . . . . . . . . . . . . . . . . . . . 21
Section 4.19. Harken Colombia Governmental Consents . . . . . . . . . . . . . . . . . . . . . . 21
Section 4.20. Harken Colombia Disclosure . . . . . . . . . . . . . . . . . . . . . . . . . . . 21
ARTICLE V -- Investor Representations, Warranties and Covenants . . . . . . . . . . . . . . . . . . . . . . 22
Section 5.1. Organization and Corporate Authority . . . . . . . . . . . . . . . . . . . . . . 22
Section 5.2. Finders= Fees . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 22
Section 5.3. Authority of Investor . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 22
Section 5.4. Non-Contravention . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 22
Section 5.5. Governmental Consents . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 23
Section 5.6. Investment Intent . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 23
Section 5.7. Disclosure of Information . . . . . . . . . . . . . . . . . . . . . . . . . . . . 23
Section 5.8. Accredited Investor and Experience . . . . . . . . . . . . . . . . . . . . . . . 23
Section 5.9. Restricted Securities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 23
Section 5.10. Legend . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 23
ARTICLE VI -- Miscellaneous . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 24
Section 6.1. Assignment by Harken Colombia . . . . . . . . . . . . . . . . . . . . . . . . . . 24
Section 6.2. Assignment by Investor . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 24
Section 6.3. Commitment Fees . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 24
Section 6.4. Indemnification . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 24
Section 6.5. Public Announcements . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 25
Section 6.6. Brokers . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 25
Section 6.7. Notices . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 25
Section 6.8. Waivers and Amendments . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 26
Section 6.9. Governing Law . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 27
Section 6.10. Binding Effect; No Assignment; No Third Party Benefit . . . . . . . . . . . . . . 27
Section 6.11. Entire Agreement . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 27
Section 6.12. Severability . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 27
Section 6.13. United States Dollars . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 27
Section 6.14. Survival of Representations and Warranties . . . . . . . . . . . . . . . . . . . 27
Section 6.15. Counterparts . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 27
Section 6.16. Arbitration . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 27
Section 6.17. Consent to Jurisdiction . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 28
Section 6.18. Guaranty of Owner . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 28
Section 6.19. No Partnership . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 28
Section 6.20. Expenses . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 29
</TABLE>
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<PAGE> 4
EXHIBITS
<TABLE>
<S> <C>
Exhibit A-1 Bocachico Block
Exhibit A-2 Cambulos Block
</TABLE>
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<PAGE> 5
DEVELOPMENT FINANCE AGREEMENT
THIS DEVELOPMENT FINANCE AGREEMENT (this "Agreement") is made as of
the 24th day of December, 1997, by and between HARKEN ENERGY CORPORATION, a
Delaware corporation (herein called "Owner"), and HARKEN CAPITAL CORPORATION, a
Delaware corporation (herein called "Investor"). In consideration of the
mutual covenants and agreements contained herein, the parties hereto hereby
agree as follows:
ARTICLE I
Definitions and References
Section 1.1. Defined Terms. As used in this Agreement, each of
the following terms has the meaning given it in this Section 1.1 or in the
sections or subsections referred to below:
"Account" shall have the meaning assigned to it in Section 3.2.
"Advance" shall have the meaning assigned to it in Section 2.1.
"Affiliate" shall mean any person directly or indirectly controlling,
controlled by or under common control with Owner and/or Harken Colombia, with
the concept of control in such context meaning the possession of the power to
direct or cause the direction of the management and policies of another,
through the ownership of voting securities, by contract or otherwise, it being
understood and agreed for the purposes of this Agreement that Owner and Harken
Colombia are Affiliates of one another.
"Agreed Rate" shall mean a rate of interest per annum which is equal
to the lesser of (a) a rate which is two percent (2%) above the prime rate of
interest of Wells Fargo and Company, as announced or published by such bank
from time to time or a similar rate if a prime rate is not announced or
published by such bank (adjusted from time to time to reflect any changes in
such rate determined hereunder), or (b) the maximum rate from time to time
permitted by applicable law.
"Association Contract" shall mean (a) with respect to the Bocachico
Prospect, the Bocachico Association Contract, and (b) with respect to the
Cambulos A Prospect and the Cambulos B Prospect, the Cambulos Association
Contract.
"Bocachico Association Contract" shall mean that certain Bocachico
Association Contract executed January 6, 1994, between Ecopetrol and Harken
Colombia, together with the operating agreement attached thereto and all
modifications, amendments and/or
<PAGE> 6
supplements heretofore or hereafter made with respect to such Association
Contract or operating agreement.
"Bocachico Prospect" shall mean the Initial Bocachico Prospect Area;
provided, however, that, upon establishment of a Commercial Field, as described
below, resulting from a productive Initial Well drilled on the Bocachico
Prospect under the terms of this Agreement, the term "Bocachico Prospect" shall
mean and include, effective as of the Effective Date on a retroactive basis,
that portion of the lands covered by the Bocachico Association Contract which
are included within the Commercial Field surrounding the Initial Bocachico Well
or any other wells drilled by Owner or its Affiliates to explore for or develop
hydrocarbons that are part of a common source of supply.
"Business Day" shall mean any day other than a Saturday, a Sunday or a
day in which banks in the State of Texas are closed.
"Cambulos A Prospect" shall mean the Initial Cambulos A Prospect Area;
provided, however, that, upon establishment of a Commercial Field, as described
below, resulting from a productive Initial Well drilled on the Cambulos A
Prospect under the terms of this Agreement, the term "Cambulos A Prospect"
shall mean and include, effective as of the Effective Date on a retroactive
basis, that portion of the lands covered by the Cambulos Association Contract
which are included within the Commercial Field surrounding the Initial Cambulos
A Well or any other wells drilled by Owner or its Affiliates to explore for or
develop hydrocarbons that are part of a common source of supply.
"Cambulos Association Contract" shall mean that certain Cambulos
Association Contract effective November 17, 1995, between Ecopetrol and Harken
Colombia, together with the operating agreement attached thereto and all
modifications, amendments and/or supplements heretofore or hereafter made with
respect to such Association Contract or operating agreement.
"Cambulos B Prospect" shall mean the Initial Cambulos B Prospect Area;
provided, however, that, upon establishment of a Commercial Field, as described
below, resulting from a productive Initial Well drilled on the Cambulos B
Prospect under the terms of this Agreement, the term "Cambulos B Prospect"
shall mean and include, effective as of the Effective Date on a retroactive
basis, that portion of the lands covered by the Cambulos Association Contract
which are included within the Commercial Field surrounding the Initial Cambulos
B Well or any other wells drilled by Owner or its Affiliates to explore for or
develop hydrocarbons that are part of a common source of supply.
"Commercial Field" shall mean a commercial field designated or
accepted by Ecopetrol, or, in the absence of such a designation or acceptance
by Ecopetrol, by Harken Colombia or its Affiliates, pursuant to an Association
Contract. A Commercial Field shall be deemed established for purposes of this
Agreement upon such designation or acceptance.
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<PAGE> 7
"Commitment" shall have the meaning assigned to it in Section 2.1.
"Common Shares" shall mean shares of the Common Stock, par value $.01
per share, of Owner.
"Designated Percentage" shall mean 1.4%.
"Ecopetrol" shall mean Empresa Colombiana de Petroleos, an industrial
and commercial company owned by the Republic of Colombia.
"Effective Date" shall mean the date of this Agreement.
"Governmental Authority" shall mean (a) the United States of America
or any state within the United States of America, (b) Colombia or any political
subdivision of Colombia, (c) any court or any governmental department,
commission, board, bureau, agency or other instrumentality of the United States
of America or of any state within the United States of America, and (d) any
court or any governmental department, commission, board, bureau, agency or
other instrumentality of Colombia or of any political subdivision of Colombia.
"Gross Proceeds" shall have the meaning assigned to it in Section 3.3.
"Harken Colombia" shall mean Harken de Colombia, Ltd., a Cayman
Islands corporation and wholly owned subsidiary of Owner, and/or, when
appropriate, its branch established in Santa Fe de Bogota, D.C., Colombia, and
its successors and permitted assigns.
"Initial Bocachico Prospect Area" shall have the meaning assigned to
it in Section 2.2.
"Initial Bocachico Well" shall mean the first well drilled by Owner or
its Affiliates on the Bocachico Prospect.
"Initial Cambulos A Prospect Area" shall have the meaning assigned to
it in Section 2.2.
"Initial Cambulos A Well" shall mean the first well drilled by Owner
or its Affiliates on the Cambulos A Prospect.
"Initial Cambulos B Prospect Area" shall have the meaning assigned to
it in Section 2.2.
"Initial Cambulos B Well" shall mean the first well drilled by Owner
or its Affiliates on the Cambulos B Prospect.
"Initial Wells" shall mean the Initial Bocachico Well, the Initial
Cambulos A Well and the Initial Cambulos B Well.
-3-
<PAGE> 8
"Investor" shall mean Harken Capital Corporation, a Delaware
corporation, and its successors and permitted assigns.
"Law" shall mean any applicable statute, law, ordinance, regulation,
rule, ruling, order, restriction, requirement, writ, injunction, decree or
other official act of or by any Governmental Authority.
"Non-Affiliate" shall mean, with respect to Owner and Harken Colombia,
any person who is not an Affiliate of Owner or Harken Colombia.
"Net Profits Interest" shall have the meaning assigned to it in
Section 3.1.
"Owner" shall mean Harken Energy Corporation, a Delaware corporation,
and its successors and permitted assigns.
"Owner's SEC Filings" shall have the meaning assigned to it in Section
4.7.
A "person" shall mean an individual, an estate, a corporation, a
partnership, a joint venture, a limited liability company, an association, a
joint stock company, a government or any department or agency of a government,
a trust and/or any other entity.
"Processing" shall mean the manufacture, fractionation, refining or
other treating or transportation of Subject Hydrocarbons prior to their sale or
disposition, and "Processed" shall have the meaning correlative to the
foregoing.
"Production Sales Contracts" shall mean all contracts, agreements and
arrangements for the sale or disposition of Subject Hydrocarbons that may be
produced from or attributable to Subject Interests, whether presently existing
or hereafter created.
The Bocachico Prospect, the Cambulos A Prospect and the Cambulos B
Prospect are herein collectively called the "Prospects" and sometimes
individually called a "Prospect".
"SEC" shall mean the Securities and Exchange Commission.
"Securities Act" shall mean the Securities Act of 1933, as amended.
"Subject Hydrocarbons" shall mean (except to the extent otherwise
expressly provided in this Agreement), with respect to each Prospect, all oil,
gas and other minerals in and under and that may be produced, from and after
the Effective Date, from the lands and depths covered by and/or included in the
Subject Interests relating to such Prospect. There shall not be included in
the Subject Hydrocarbons any oil, gas or other minerals (a) attributable to
royalties or other similar obligations deducted or paid in kind to or for the
benefit of third parties pursuant to the related Association Contract or
pursuant to any applicable Law, (b)
-4-
<PAGE> 9
deducted, paid in kind or otherwise taken out of Harken Colombia's share of
such oil, gas or other minerals and delivered to another person as
reimbursement to such person for oil, gas or other minerals of such other
person (i) which were previously taken by Harken Colombia relating to the
Prospect and (ii) the Gross Proceeds of which were credited to the related
Account or otherwise accrued to the benefit of Investor in accordance with the
provisions of Section 3.3, or (c) attributable to the interest of Ecopetrol as
provided for under the terms of the related Association Contract.
"Subject Interests" shall mean (a) with respect to the Bocachico
Prospect, the interest of Harken Colombia and its successors and assigns in the
Bocachico Association Contract to the extent such interest covers and is
attributable to the Bocachico Prospect, (b) with respect to the Cambulos A
Prospect, the interest of Harken Colombia and its successors and assigns in the
Cambulos Association Contract to the extent such interest covers and is
attributable to the Cambulos A Prospect, and (c) with respect to the Cambulos B
Prospect, the interest of Harken Colombia and its successors and assigns in the
Cambulos Association Contract to the extent such interest covers and is
attributable to the Cambulos B Prospect. As provided in an Association
Contract, the areal extent of the related Prospect under the Association
Contract may be reduced and/or the percentage interest of Harken Colombia and
its successors and assigns in the oil, gas and mineral production thereunder
may be reduced, and in each such case the "Subject Interests" relating to such
Prospect shall be reduced to the same extent as the areal extent of such
Prospect under the Association Contract and/or the interest of Harken Colombia
and its successors and assigns thereunder is so reduced. No reduction shall
occur, however, in the Subject Interests as a result of any sale, exchange,
transfer or other disposition of all or any portion of the Subject Interests or
the related Association Contract by Harken Colombia, and in such event all
credits and debits to the Prospect's Account under Article III shall be made as
if no such sale, exchange, transfer or other disposition had occurred and
Harken Colombia was still the owner of all of the Association Contract and the
Subject Interests.
Section 1.2. References and Titles. All references in this
Agreement to articles, sections, subsections and other subdivisions refer to
the articles, sections, subsections and other subdivisions of this Agreement
unless expressly provided otherwise. Titles appearing at the beginning of any
subdivisions are for convenience only and do not constitute any part of such
subdivisions and shall be disregarded in construing the language contained in
such subdivisions. The words "this Agreement", "this instrument", "herein",
"hereof", "hereby", "hereunder" and words of similar import refer to this
Agreement as a whole and not to any particular subdivision unless expressly so
limited. The phrases "this Section" and "this subsection" and similar phrases
refer only to the sections or subsections hereof in which such phrases occur.
Pronouns in masculine, feminine and neuter genders shall be construed to
include any other gender, and words in the singular form shall be construed to
include the plural and vice versa, unless the context otherwise requires.
-5-
<PAGE> 10
ARTICLE II
Advancement of Capital
Section 2.1. Advance. Investor unconditionally and irrevocably
agrees and commits (herein collectively called the "Commitment") to advance to
Owner, on the Business Day next following the Effective Date, the amount of
Seven Million Dollars ($7,000,000) (herein called the "Advance"). The Advance
shall be made to Owner by wire transfer of the full amount of the Advance in
immediately available funds to a bank account designated by Owner. The
Commitment is not in the nature of a loan to any party or a direct ownership
interest in Harken Colombia, an Association Contract or any Subject Interests.
Instead, the Commitment and the Advance thereof shall constitute consideration
for the right to receive payments measured by the Accounts provided for in
Article III and the other rights and benefits provided by this Agreement.
Section 2.2. Use of Proceeds. Owner shall use all funds from
the Advance to finance (a) geological, geophysical and engineering operations
and studies of each Prospect, (b) the drilling, completing and equipping or
abandonment of one well and related facilities on each Prospect and (c) other
related exploitation of the Prospects, in each case solely in respect of the
Subject Interests. Prior to drilling any wells pursuant to this Agreement,
Owner shall fix and determine, and promptly after such determination shall
advise Investor in writing of, (a) the initial areal extent of the lands
covered by the Bocachico Prospect, which lands shall be located within the
boundaries of the lands covered by the Bocachico Association Contract (the
"Initial Bocachico Prospect Area"), (b) the initial areal extent of the lands
covered by the Cambulos A Prospect, which lands shall be located within the
boundaries of the lands covered by the Cambulos Association Contract (the
"Initial Cambulos A Prospect Area"), and (c) the initial areal extent of the
lands covered by the Cambulos B Prospect, which lands shall be located within
the boundaries of the lands covered by the Cambulos Association Contract (the
"Initial Cambulos B Prospect Area"); provided, however, that the Cambulos A
Prospect and the Cambulos B Prospect shall be separate exploratory prospects
and shall not overlap. Owner hereby represents, warrants and covenants to
Investor that Owner will drill one well on each Prospect within three years of
the Effective Date. Each Initial Well shall be drilled on a turnkey basis.
Prior to drilling any Initial Well, Owner shall deliver to Investor for its
information a copy of Owner's internal authority for expenditure (a.f.e.) for
such Initial Well. Owner shall give prompt written notice to Investor of the
commencement of drilling and the completing and equipping or abandonment, as
the case may be, of each Initial Well. Owner shall also furnish to Investor
such other public information regarding each Initial Well and the progress of
drilling thereof as Investor may from time to time reasonably request in
accordance with the notice provisions of Section 6.7.
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<PAGE> 11
ARTICLE III
Net Profits Interest
Section 3.1. Net Profits Interest. In consideration for the
payment by Investor to Owner of the Advance, Investor shall have the rights
provided for in this Article III and elsewhere in this Agreement with respect
to the Accounts, including without limitation the rights to receive payments
from Owner measured by each Account pursuant to Section 3.7 (all of such rights
are herein collectively called the "Net Profits Interest"). The Net Profits
Interest is intended to provide to Investor substantially the same economic
benefit as if Investor was the owner of a direct net profits interest in each
Association Contract to the extent it relates to the Designated Percentage of
the related Subject Interests and on the terms otherwise provided for herein;
provided, however, that no rights or interest of any nature whatsoever in an
Association Contract, any Subject Interests or Harken Colombia are intended to
be, or are hereby, assigned or conveyed to Investor, it being understood and
agreed that the Net Profits Interest is solely a contractual obligation of
Owner as expressed in this Agreement.
Section 3.2. Establishment. Owner shall establish and maintain
a separate bookkeeping account for each Prospect (herein called an "Account")
in accordance with sound, accurate and comprehensive accounting practices and
consistent with the various provisions of this Agreement and at all times shall
keep true and correct books and records with respect thereto.
Section 3.3. Credits. Except as otherwise provided herein, with
respect to each sale or other disposition of Subject Hydrocarbons attributable
to a Prospect, the Account for such Prospect shall be credited with the gross
proceeds from the sale of such Subject Hydrocarbons. The amount of gross
proceeds (herein called "Gross Proceeds") to be credited to an Account with
respect to any sale or disposition of Subject Hydrocarbons shall be subject to
the following:
(a) Gross Proceeds shall include all consideration
received, directly or indirectly, by Harken Colombia or any Affiliate
for sales or other dispositions of (i) Subject Hydrocarbons, or (ii)
if any Subject Hydrocarbons are Processed by or for the benefit of
Harken Colombia or any Affiliate before sale or disposition, the
products of such Subject Hydrocarbons after such Processing;
(b) If any proceeds are withheld from Harken Colombia
or an Affiliate by a Non-Affiliate for any reason (other than at the
request of Harken Colombia or any Affiliate or due to Harken
Colombia's or an Affiliate's negligence or willful misconduct), such
proceeds shall not be considered to be Gross Proceeds until such
proceeds are actually received by Harken Colombia or an Affiliate;
provided, however, that Gross Proceeds shall include any interest,
penalty or other amount that is derived from the sale of Subject
Hydrocarbons or the proceeds thereof when and if received;
-7-
<PAGE> 12
(c) Gross Proceeds shall not include any amounts for
Subject Hydrocarbons unavoidably lost in production or used by Harken
Colombia or any Affiliate in conformity with good oil field practices
for drilling and production operations (including without limitation
gas injection, fuel, secondary or tertiary recovery, pressure
maintenance, repressuring or recycling, Processing and transportation)
conducted solely for the purpose of producing Subject Hydrocarbons
from the related Subject Interests, but only so long as such Subject
Hydrocarbons are so used;
(d) In the event Subject Hydrocarbons are used by
Harken Colombia or any Affiliate outside of the related Subject
Interests and for purposes not primarily associated with, or primarily
for the benefit of, the related Subject Interests or the production,
Processing or marketing of Subject Hydrocarbons, Gross Proceeds shall
include the then current market value at the wellhead of such Subject
Hydrocarbons;
(e) Gross Proceeds shall include all proceeds (or, if
the consideration received is other than cash, the then current market
value of such non-cash consideration) attributable to Subject
Interests which are received by Harken Colombia or any Affiliate from
the sale, after the Effective Date, of any materials, supplies,
equipment and other personal property or fixtures, or any part thereof
or interest therein, located on or used in connection with the Subject
Interests or any Subject Hydrocarbons;
(f) Gross Proceeds shall include all proceeds
attributable to Subject Interests of all insurance received by Harken
Colombia or any Affiliate the cost of which is charged to the Account,
directly or indirectly;
(g) Gross Proceeds shall include all proceeds
attributable to Subject Interests of all judgments and claims received
by Harken Colombia or any Affiliate for any loss or damage which
occurs after the Effective Date with respect to Harken Colombia's or
any Affiliate's interest in the Subject Interests, any materials,
supplies, equipment or other personal property or fixtures located on
or used in connection with any of the Subject Interests, or any
Subject Hydrocarbons;
(h) Gross Proceeds shall include all payments,
including advance payments, under take-or-pay and similar provisions
of Production Sales Contracts;
(i) Gross Proceeds shall include any amounts received
by Harken Colombia or any Affiliate from production of Subject
Hydrocarbons at levels greater than Harken Colombia's interest in the
Subject Interests and shall include any payments received by Harken
Colombia from joint interest owners as settlement for production of
Subject Hydrocarbons at levels less than Harken Colombia's interest in
the Subject Interests or any Subject Hydrocarbons; and
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(j) Gross Proceeds shall include all other monies and
things of value which are received by Harken Colombia or any Affiliate
by virtue of the ownership after the Effective Date of the Subject
Interests and/or any materials, supplies, equipment and other personal
property and fixtures located on or used in connection with the
Subject Interests or any Subject Hydrocarbons the cost of which was
charged against the Account;
provided that this Section 3.3 shall not operate to provide any credits on
account of (i) any amounts paid by third parties (including Ecopetrol) to
Harken Colombia as operator under the applicable Association Contract or
operating agreement now or hereafter in force covering any of the Subject
Interests to reimburse or compensate Harken Colombia as operator for costs
incurred or services performed for the account or benefit of such third
parties, (ii) any amounts received by Harken Colombia upon any sale or other
disposition in accordance with Section 6.1 of any portion of the applicable
Association Contract or Subject Interests, or (iii) any amounts received by
Harken Colombia as reimbursement by Ecopetrol of Direct Exploration Costs
provided for under the applicable Association Contract.
Section 3.4. Debits. Except as otherwise provided herein, each
Account shall be debited with the following:
(a) All direct costs (and those indirect costs
expressly permitted in subsection (x) below) which are attributable
solely to the related Subject Interests (i.e., the Subject Interests
relating to the Prospect for which the Account was established) after
the Effective Date for exploring, developing, operating, producing,
reworking, maintaining and restoring the related Subject Interests,
including without limitation any direct costs (and those indirect
costs expressly permitted in subsection (x) below) after the Effective
Date for (i) geological and geophysical operations and studies (and
related computer processing and modeling) with respect to the related
Subject Interests and drilling, completing, testing, equipping,
plugging back, reworking, recompleting and plugging and abandoning any
wells on the related Subject Interests, (ii) constructing, maintaining
and operating any gathering facilities, tanks and other production,
delivery and transportation facilities on or for use in connection
with the related Subject Interests, (iii) Processing any Subject
Hydrocarbons attributable to the Prospect for which the Account was
established and acquiring, constructing, operating and maintaining any
facility, plant, equipment or pipeline for Processing any such Subject
Hydrocarbons, (iv) secondary recovery, pressure maintenance,
repressuring, recycling and other operations conducted for the purpose
of enhancing production of such Subject Hydrocarbons, (v) wages,
salaries, fringe benefits and expenses of officers, employees and
contract personnel, consultants and professionals necessary or
appropriate for operating, producing and maintaining the related
Subject Interests, (vi) local offices, camps, warehouses, housing and
other facilities paid for by Harken Colombia, relocation of employees
and their families, travel, telephone, training of Colombian
personnel, rental and use or damage to the real and personal property
of others,
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community relations, protection, peaceful operations and similar
matters, and otherwise doing business in Colombia, (vii) insurance,
(viii) payments made in cash as compensation for or in settlement of
any Subject Hydrocarbons taken by Harken Colombia at levels greater
than Harken Colombia's interest in the related Subject Interests, (ix)
royalties required to be paid pursuant to the applicable Association
Contract or any applicable Law and other charges and payments required
under the applicable Association Contract and (x) general,
administrative and overhead expenses incurred by Harken Colombia which
are necessary or appropriate to support the activities described in
this subsection and fairly allocated to the related Subject Interests;
provided, however, that the debits made to the Account pursuant to
this subsection with respect to any Subject Interest shall be made in
accordance with customary industry practices and applicable accounting
standards;
(b) All Colombian taxes and similar charges incurred by
Harken Colombia with respect to the ownership of the related Subject
Interests for periods after the Effective Date, including without
limitation (i) Colombian income, transfer, franchise, occupation,
sales and use, value-added and like taxes based on or relating to the
related Subject Interests, the sale or production of the Subject
Hydrocarbons attributable to the Prospect for which the Account was
established, or the proceeds, value or income therefrom, (ii)
Colombian production, severance, excise and other taxes assessed
against, and/or measured by, the production of (or the proceeds or
value of production of) such Subject Hydrocarbons, and (iii) Colombian
ad valorem and other taxes assessed against or attributable to the
related Subject Interests or any Processing or other equipment or
property located on or related to the related Subject Interests;
provided, however, that if any such taxes relate to the related
Subject Interests and to other property owned by Harken Colombia or to
such Subject Hydrocarbons and to other production of Harken Colombia,
such taxes shall be allocated to the related Subject Interests or such
Subject Hydrocarbons and debited hereunder on a proportionate or other
equitable basis in accordance with applicable accounting, tax and
industry standards;
(c) Amounts attributable to currency conversions,
exchange control obligations and similar costs and losses with respect
to currencies used to pay expenses charged to the Account, currencies
credited to the Account or currencies paid by Harken Colombia to Owner
for the purpose (directly, indirectly or accrued) of making payments
to Investor pursuant to Section 3.7 (excluding in each case any costs
for currency hedges, swaps and similar instruments); and any such
amounts shall be calculated or determined in a manner consistent with
the treatment of such amounts on the books of Owner for financial
reporting to governmental entities;
(d) All interest payments on any indebtedness of Harken
Colombia or any Affiliate incurred after the Effective Date for the
benefit of the Subject Interests (provided that if any such
indebtedness shall be incurred for the benefit of other
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properties owned by Harken Colombia besides the Subject Interests,
then an allocation of such interest shall be made to the Subject
Interests based upon the portion of the indebtedness that was utilized
for the benefit of the Subject Interests); and
(e) Except as otherwise provided elsewhere in this
Agreement, all other reasonable, direct expenditures attributable to
the related Subject Interests paid or incurred by Harken Colombia
after the Effective Date with respect to the related Subject
Interests;
provided that this Section 3.4 shall not operate to permit any debits (i) by
duplication or on account of any amount which has also been used to reduce the
amount of the Subject Hydrocarbons, Gross Proceeds and/or payments to Investor
pursuant to Section 3.7 or has otherwise not been included therein (including,
by way of example and without limitation, royalties, production, severance,
excise and other taxes and any other amounts deducted, withheld or paid by any
other person), (ii) on account of any expenses and any penalties, interest or
other similar charges which result from the failure of Harken Colombia to
properly discharge all costs and expenses (including taxes) of developing,
operating and maintaining the related Subject Interests and (iii) excluded
pursuant to Section 3.5.
Section 3.5. Additional Account Matters.
(a) Notwithstanding the provisions of Section 3.4 (or any other
provision of this Agreement) which may appear to the contrary, with respect to
the Accounts taken as a whole:
(i) costs and expenses equaling the aggregate amount
of the Advance paid to Owner which would otherwise be charged or
debited to the Accounts under Section 3.4 shall not be charged or
debited to the Accounts and shall be borne solely by Owner and Harken
Colombia (i.e., the first $7,000,000 of costs and expenses that would
otherwise be charged or debited to the Accounts under Section 3.4
shall not be so charged or debited and shall be borne solely by Owner
and Harken Colombia); and
(ii) in no event shall any costs and expenses of
drilling and completing the Initial Wells, constructing and completing
associated facilities and hooking the Initial Wells up to a pipeline
or pipelines, so as to make the Initial Wells capable of production,
in excess of an aggregate of $7,000,000 be charged or debited to the
Accounts, it being agreed and understood by Owner that any such costs
and expenses in excess of an aggregate of $7,000,000 shall be borne
solely by Owner and Harken Colombia.
(b) Upon the reconfiguration of the areal extent of a Prospect
to correspond to a Commercial Field established under the related Association
Contract, as provided in the respective definitions of the Prospects in Section
1.1, the net profits realized from the related Subject Interests shall be
recomputed, retroactive to the Effective Date, to take into account
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and fully reflect the reconfiguration of the Prospect as if such Prospect had
always included the Commercial Field, and an appropriate accounting and payment
shall be made to Investor with respect to the recomputed net profits in the
Prospect's Account.
Section 3.6. Accounting. All debits to an Account which are
attributable to costs and expenses paid by Harken Colombia during a calendar
quarter up to and including the last day of such calendar quarter shall be
debited against the Account as of the last day of such calendar quarter;
provided that any such debits which do not (and will not) result from payments
to third parties or to Harken Colombia shall be debited against the Account as
of the last day of the calendar quarter in which they arise. After such debits
have been so made for a given calendar quarter, all credits to the Account
which are actually received by Harken Colombia during a calendar quarter up to
and including the last day of such calendar quarter shall be credited to the
Account as of the last day of such calendar quarter; provided that any such
credits which do not (and will not) result from credits given by or payments
from third parties shall be credited to the Account as of the last day of the
calendar quarter in which they arise. For each Account, the total net profits
realized from the Subject Interests relating to the Account (or the total net
losses, as the case may be) shall be determined after the applications and
calculations provided for above have been made by Owner. Subject to the
provisions of Section 3.7, Investor shall participate in the Designated
Percentage of the net profits derived from the Subject Interests relating to
the Account, as provided in this Agreement, only after and while all debits
properly debited against the Account shall have been offset by credits to the
Account and a credit balance shall exist in the Account.
Section 3.7. Payments. On or before 60 days after the end of
each calendar quarter, Owner shall furnish to Investor detailed statement(s)
covering each Account clearly reflecting the condition of each Account as of
the close of business on the last day of such calendar quarter, and clearly
reflecting those items which gave rise to debits and credits to each Account
during such quarter and clearly reflecting the quantities of Subject
Hydrocarbons produced from the Subject Interests relating to such Account
during the quarter covered by such statement. Any deficit reflected by any
such statement shall be carried forward for the next and succeeding months
until such deficit has been wiped out and liquidated. In case a net profit is
reflected by any such statement, payment to Investor in U.S. dollars of the
Designated Percentage of the amount of such net profit shall be enclosed with
the statement rendered to Investor (or, if requested at any time by Investor,
paid by bank wire transfer to such bank and account designated in writing by
Investor); provided, however, that (a) Owner may elect to cause Harken Colombia
(instead of Owner) to make any payment required under this Section to Investor
in U.S. dollars, (b) any payment to Investor under this Section shall be
reduced by any costs or losses from currency conversions, compliance with
exchange control obligations, withholding obligations and remittance and other
taxes which are properly chargeable to the Account pursuant to Section 3.4(b)
or (c) and (i) are incurred by Harken Colombia in connection with such payment
to Investor or any payment of an amount equivalent to such payment by Harken
Colombia to Owner (provided that this clause (a) (i) shall not operate to
permit any double charge to the Account with respect to such costs or losses)
or (ii) in the
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event such payment is made by Owner from its U.S. funds without any equivalent
payment by Harken Colombia to Owner, would have been so incurred at such time
if Harken Colombia had paid to Owner an amount equivalent to such payment, and
(c) Owner may retain up to one-third of Investor's share of any such net profit
in the event and to the extent that the debits that Owner reasonably projects
will be charged to the Account during the next three months will exceed the
credits that Owner reasonably projects will be made to the Account during such
three-month period and apply such retained amount to the payment of Investor's
share of such debits. Any such retained amount that is subsequently determined
to be unnecessary for the payment of Investor's share of such debits shall be
paid promptly to Investor. In the event any amount is deducted from any
payment pursuant to subsection (a), (b) or (c) above, such amount shall not
thereafter be charged to the Account to the extent it would cause any direct or
indirect double charge to the Account or Investor for such amount.
Section 3.8. Overpayments and Underpayments. If at any time
Owner inadvertently pays Investor more or less than the amount then due with
respect to an Account, the amount or amounts otherwise payable with respect to
such Account for any subsequent period or periods shall be reduced or increased
by such overpayment or underpayment, plus an amount equal to interest (computed
at the Agreed Rate) on the unrecovered balance of such overpayment or
underpayment during the period of such overpayment or underpayment; provided,
however, that if the amount of any such overpayment or underpayment exceeds
$5,000, the party owing such amount shall promptly pay such amount (together
with interest on such amount as calculated above) to the other party.
Section 3.9. Prudent Operator Standard. Harken Colombia
(subject to the terms and provisions of the applicable Association Contract and
any applicable operating agreements) shall have exclusive charge, management
and control of all operations to be conducted on the Subject Interests and may
take any and all actions which a reasonably prudent operator would deem
necessary or advisable in the management, operation and control thereof.
Harken Colombia shall operate and maintain the Subject Interests as would a
prudent operator under similar circumstances in accordance with good oil field
practices. Harken Colombia shall promptly (and, unless the same are being
contested in good faith and by appropriate proceedings, before the same are
delinquent) pay or cause to be paid all costs and expenses (including without
limitation all taxes and all costs, expenses and liabilities for labor,
materials and equipment incurred in connection with the Subject Interests and
all obligations to the holders of interests affecting the Subject Interests)
incurred from and after the Effective Date in developing, operating and
maintaining the Subject Interests. As to those of the Subject Interests, if
any, as to which Harken Colombia hereafter may not be the operator, Harken
Colombia shall take all such action and exercise all such rights and remedies
as are reasonably available to Harken Colombia to cause the operator to so
maintain and operate such Subject Interests (provided that Harken Colombia
shall never be obligated to pay any costs or expenses attributable to any
interest other than the Subject Interests and all royalties related thereto).
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<PAGE> 18
Section 3.10. Sales of Subject Hydrocarbons. Harken Colombia
shall market or cause to be marketed, subject to the terms of the applicable
Association Contract, the Subject Hydrocarbons in accordance with reasonable
and prudent business judgment and sound oil field practices and on such terms
and conditions as Harken Colombia shall determine to be in the best interests
of Investor; provided, however, that all such sales of Subject Hydrocarbons (a)
shall be upon terms and conditions which are the best terms and conditions
available as determined in good faith by Harken Colombia taking into account
all relevant circumstances, including without limitation, price, quality of
production, access to markets or lack thereof, minimum purchase guarantees,
identity of purchaser and length of commitment, and (b) shall be made to
Non-Affiliates of Owner or Harken Colombia, except that sales of Subject
Hydrocarbons may be made to an Affiliate of Owner or Harken Colombia that is
owned in part by a Governmental Authority and that owns or operates a pipeline
or other Processing facility if the price paid by such Affiliate is no less
favorable to Harken Colombia than the prices then being paid by a Non-Affiliate
for oil, gas and/or minerals which are of comparable type and quality and in
the same or similar locations.
Section 3.11. Insurance. Harken Colombia shall obtain or cause
to be obtained (and maintain or cause to be maintained during the economic life
of the Subject Interests) insurance coverage relating to the ownership,
operation and maintenance of the Subject Interests, the cost of which shall be
charged against the related Account, in such amounts, with provisions for such
deductible amounts and for such purposes as Harken Colombia shall determine to
be appropriate (and, because of cost, availability and other factors, Harken
Colombia may determine not to acquire any such insurance).
Section 3.12. Contracts with Affiliates. Harken Colombia and/or
its Affiliates may perform services and furnish supplies and equipment with
respect to the Subject Interests, provided that the amount of compensation,
price or rental that can be charged to the related Account therefor must be no
less favorable to the Account than would be the compensation, price or rental
payable to Non-Affiliates in the area engaged in the business of rendering
comparable services or selling or leasing comparable equipment and supplies
which could reasonably be made available to the Subject Interests.
Section 3.13. Government Regulation. All obligations of Owner
and Harken Colombia under this Article III shall be subject to and limited by
(a) all applicable Laws and (b) the applicable Association Contract as it may
be modified, amended and/or supplemented from time to time; provided, that
Owner and Harken Colombia shall act in good faith with respect to the interests
of Investor and in accordance with the best interests of Investor under this
Agreement as reasonably determined by Owner and Harken Colombia. Where the
price at which Subject Hydrocarbons are sold is limited by applicable Laws, the
price so permitted to be paid for Subject Hydrocarbons shall be controlling if
lower than prices established in Production Sales Contracts or required
hereunder.
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Section 3.14. Abandonments. After the Effective Date, Harken
Colombia shall have the right without the consent of Investor to release,
surrender and/or abandon its interest in the Subject Interests and/or any
Association Contract, or any part thereof, or interest therein, in order to
comply with the relinquishment provisions of the applicable Association
Contract, even though the effect of such release, surrender or abandonment may
be to affect adversely the Net Profits Interest. In the event of any
relinquishment of acreage under an Association Contract, Harken Colombia shall
have the exclusive authority to determine the acreage to be relinquished, which
may be acreage within the Subject Interests or acreage outside the Subject
Interests or both; provided, that, in taking any of the actions described in
this Section 3.14, Harken Colombia shall act in good faith with respect to the
interests of Investor and in accordance with the best interests of Investor
under this Agreement as reasonably determined by Harken Colombia.
Section 3.15. Pooling and Unitization. Without the prior written
consent of Investor, Harken Colombia shall have the right and power to unitize,
pool or combine the lands covered by the Subject Interests, or any portion or
portions thereof, as to oil, gas and/or other minerals, with any other land or
contract or contracts so as to create one or more unitized areas (or, with
respect to unitized or pooled areas theretofore created, to dissolve the same
or to amend and/or reconfigure the same to include additional acreage or
substances or to exclude acreage or substances). If any of the Subject
Interests are pooled or unitized in any manner, the Net Profits Interest
insofar as it affects such Subject Interests shall be considered to be pooled
and unitized, and in any such event the Net Profits Interest shall apply to
(and the term "Subject Hydrocarbons" shall include) the production which
accrues to such Subject Interests under and by virtue of such pooling and
unitization arrangements and the applicable Account shall be computed giving
consideration to such production and costs, expenses, charges and credits
attributable to such Subject Interests.
Section 3.16. Non-consent Operations.
(a) If Harken Colombia elects to be a non-participating
party (whether pursuant to an Association Contract or operating
agreement or other agreement or requirement) with respect to any
drilling, deepening, plugging back, reworking, sidetracking or
completion (or other) operation on any Subject Interest or elects to
be an abandoning party with respect to a well located on any Subject
Interest, the consequence of which election is that Harken Colombia's
interest in such Subject Interest or part thereof is temporarily
(i.e., during a recoupment period) or permanently forfeited to the
parties participating in such operations, or electing not to abandon
such well, then the costs and proceeds attributable to such forfeited
interest shall not, for the period of such forfeiture (which may be a
continuous and permanent period), be debited or credited to the
applicable Account and such forfeited interest shall not, for the
period of such forfeiture, be subject to the Net Profits Interest.
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(b) If Harken Colombia elects to be a participating
party to such a drilling, deepening, plugging back, reworking,
sidetracking or completing (or other) operation, or elects to be a
non-abandoning party with respect to such a well, and any other party
or parties have elected not to participate in such operation (or have
elected to abandon such well) with the result that (pursuant to an
Association Contract or operating agreement or other agreement or
requirement) Harken Colombia becomes entitled to receive, either
temporarily (i.e., through a period of recoupment) or permanently,
interests belonging to such other party or parties, the costs and
proceeds attributable to such non-participating parties' interests to
which Harken Colombia becomes so entitled shall not be debited and
credited to the applicable Account and instead shall be for the
account of Harken Colombia.
Section 3.17. No Personal Liability; Indemnification.
Notwithstanding anything to the contrary contained in this Agreement, Investor
shall never personally be responsible for payment of any part of the costs,
expenses or liabilities incurred in connection with the exploring, developing,
operating, owning and/or maintaining of the Subject Interests or an Association
Contract (including without limitation, any costs, expenses or liabilities
related to damage to or remediation of the environment, including any of the
same arising out of ownership of an interest in property), and Owner agrees to
indemnify and hold Investor harmless from and against all such costs, expenses
and liabilities (with such indemnity to also cover all costs and expenses of
Investor, including reasonable legal fees and expenses, which are incurred
incident to the matters indemnified against); provided, however, all such
costs, expenses and liabilities shall, to the extent the same relate to periods
after the Effective Date, nevertheless be charged against the applicable
Account if such costs, expenses and liabilities are expressly permitted
elsewhere in this Agreement to be charged to such Account. The foregoing
indemnifications shall extend to Investor and its successors and permitted
assigns, all their respective affiliates and all their respective officers,
directors, agents, attorneys, representatives and employees. THE FOREGOING
INDEMNITIES SHALL APPLY WHETHER OR NOT ARISING OUT OF THE SOLE, JOINT OR
CONCURRENT NEGLIGENCE, FAULT OR STRICT LIABILITY OF INVESTOR OR ANY OTHER
PERSON OR ENTITY INDEMNIFIED HEREUNDER AND SHALL APPLY, WITHOUT LIMITATION, TO
ANY LIABILITY IMPOSED UPON ANY PERSON INDEMNIFIED HEREUNDER AS A RESULT OF ANY
STATUTE, RULE, REGULATION, THEORY OF STRICT LIABILITY OR OTHERWISE. THE
PROVISIONS OF THIS SECTION 3.17 SHALL SURVIVE THE TERMINATION OF THIS AGREEMENT
AND SHALL CONTINUE IN EFFECT FOR A PERIOD OF THREE YEARS THEREAFTER, AT WHICH
TIME SUCH PROVISIONS SHALL TERMINATE.
Section 3.18. Access to Books and Records. In addition to any
reports and information specifically required by the terms of this Agreement,
Owner agrees to furnish to Investor full information pertaining to the
Prospects (or potential Prospects) or the ownership, operation and maintenance
of the Subject Interests, at all reasonable times, and in such form, as
Investor may reasonably request. Owner and Harken Colombia will permit
representatives designated by Investor, including independent accountants,
agents, attorneys, and other persons, to inspect Owner's and Harken Colombia's
respective books and records pertaining to
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the Subject Interests and each Account (and to make copies and photocopies from
such records and to write down and record such information as such
representatives may request), and each of Owner and Harken Colombia shall
permit Investor and its designated representatives reasonably to investigate
and verify the accuracy of information furnished by it to Investor hereunder or
in connection herewith and to discuss all such matters with their officers,
employees and representatives. If for any reason Harken Colombia is unable to
provide to Investor the information, access to information and inspection
rights referred to in the immediately preceding sentences of this Section 3.18,
Owner shall cause such information, access to information and inspection rights
to be provided to Investor.
ARTICLE IV
Owner Representations, Warranties and Covenants
Owner hereby represents and warrants to and covenants with Investor as
follows:
Section 4.1. Organization and Corporate Authority. Owner is a
corporation duly incorporated, validly existing and in good standing under the
laws of the jurisdiction of its incorporation, with corporate power and
authority to carry on its business as now conducted and to own, lease and
operate all properties and assets now owned, leased or operated by it.
Section 4.2. Qualification to do Business. Owner is duly
qualified to do business as a foreign corporation and in good standing in each
jurisdiction in which its ownership of property or the conduct of its business
requires such qualification, except jurisdictions in which the failure so to
qualify would not have a material adverse effect on Owner's business,
properties, financial condition or results of operations.
Section 4.3. Finders' Fees. No broker or finder has acted on
behalf of Owner or Harken Colombia in connection with this Agreement or the
transactions contemplated herein.
Section 4.4. Authority of Owner. Owner has the corporate power
to enter into, and be bound by the terms and conditions of, this Agreement and
to carry out its obligations hereunder, and the execution and delivery by Owner
of this Agreement and the performance by Owner of its obligations hereunder
have been duly authorized by all necessary corporate action of Owner. This
Agreement has been duly executed and delivered by Owner and constitutes, and
each other agreement or document executed or to be executed by Owner in
connection with the transactions contemplated hereby has been, or when
executed, will be, duly executed and delivered by Owner and constitutes, or
when executed and delivered will constitute, a valid and legally binding
obligation of Owner enforceable against Owner in accordance with their
respective terms, except to the extent enforcement may be limited (a) by
applicable bankruptcy, insolvency, moratorium, reorganization or similar laws
from time to time in effect which affect creditors' rights generally, and (b)
by legal and equitable limitations
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on the availability of equitable remedies, including without limitation
specific performance against Owner under or by virtue of this Agreement.
Section 4.5. Non-Contravention. The execution, delivery and
performance of this Agreement by Owner will not (a) conflict with or result in
a violation of any provision of Owner's charter or bylaws, (b) conflict with or
result in a violation of any provision of, or constitute (with or without the
giving of notice or the passage of time or both) a default under, or give rise
(with or without the giving of notice or the passage of time or both) to any
right of termination, cancellation, or acceleration under, any bond, debenture,
note, mortgage, indenture, lease, agreement or other instrument or obligation
to which Owner is a party or by which Owner or any of its properties or assets
may be bound, which conflict, violation, default, termination, cancellation or
acceleration could reasonably have a material adverse effect on Owner's
business, properties, financial condition or results of operations, (c) result
in the creation or imposition of any lien or incumbrance upon the properties or
assets of Owner, or (d) result in a violation by Owner of any Law or any
judgment, order, decree, rule or regulation of any Governmental Authority to
which Owner is subject; provided, however, that no such representations or
warranties are made by Owner with respect to compliance with any foreign
securities laws or with respect to any Association Contract (it being
understood that representations and warranties with respect to the Association
Contracts are being made by Owner under Section 4.10).
Section 4.6. Governmental Consents. Except for (a) those that
have been duly obtained, and (b) the approval by the American Stock Exchange of
the listing on such exchange of the Common Shares issuable pursuant to Section
6.3 (which Owner will obtain prior to the issuance of such shares), no consent,
order, approval or authorization of, or declaration, filing, or registration
with, any Governmental Authority is required to be obtained or made by Owner in
connection with the execution, delivery or performance by Owner of this
Agreement; provided, however, that no such representations or warranties are
made by Owner with respect to compliance with any foreign securities laws.
Section 4.7. Reports and Financial Statements of Owner. Owner
has heretofore delivered to Investor true and complete copies of all definitive
Form 10-K annual reports, Form 10-Q quarterly reports and proxy statements
filed by Owner with the SEC from and after January 1, 1997 (herein collectively
called "Owner's SEC Filings"). As of their respective dates, Owner's SEC
Filings did not contain any untrue statement of a material fact or omit to
state a material fact required to be stated therein or necessary to make the
statements therein, in light of the circumstances under which they were made,
not misleading. Owner does not have any debts, liabilities, or obligations,
whether accrued, contingent, unasserted or otherwise, and whether due or to
become due, which are not reflected in the financial statements contained in
Owner's SEC Filings and would be required to be so reflected under generally
accepted accounting principles, except those incurred in the ordinary course of
business since the date of the most recent audited financial statements
contained in Owner's SEC Filings. Since such date and except as otherwise
disclosed in Owner's SEC Filings,
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Owner has conducted its business in the ordinary course consistent with past
practice and there has not been any material adverse change in the business,
properties, financial condition or results of operations of Owner or in its
relationship with lenders, suppliers, customers, employees or others, whether
such changes have occurred in the ordinary course of business or otherwise.
Section 4.8. Disclosure. All written information provided by
Owner and its officers, directors, agents, representatives and employees to
Investor in connection with this Agreement which is not part of Owner's SEC
Filings has been prepared in good faith by Owner and does not contain any
untrue statement of a material fact or, considered in its entirety along with
Owner's SEC Filings, omit to state therein a material fact (other than those
facts generally recognized to be industry risks normally associated with the
oil and gas business) necessary to make the statements made therein not
misleading. Owner does not know of any facts (other than those facts generally
recognized to be industry risks normally associated with the oil and gas
business) related to its business, properties, financial condition or results
of operations or the potential Prospects which have not been disclosed orally
or in writing to Investor and which presently or will materially and adversely
affect such business, properties, financial condition, results of operations or
potential Prospects or the ability of Owner to perform its obligations under
this Agreement.
Section 4.9. Owner's Common Shares. The Common Shares issuable
pursuant to Section 6.3 have been, or when issued hereunder, will have been,
duly authorized for issuance pursuant hereto and, when issued and delivered by
Owner pursuant hereto, will be validly issued, fully paid and non-assessable
and will be free and clear of any claim, lien, pledge, option, charge, security
interest or encumbrance of any nature whatsoever created by Owner. The
issuance of Common Shares under this Agreement is not subject to any preemptive
rights. Owner shall, prior to the issuance of Common Shares pursuant to this
Agreement, cause such Common Shares to be listed on each securities exchange or
quotation system on which outstanding Common Shares are then listed.
Section 4.10. Association Contracts. English translations of the
main body of, and the operating agreement attached as an exhibit to, each
Association Contract in force as of the date hereof have been furnished by
Owner to Investor. Each of such translations is a fair and reasonable
translation of the original document constituting part of the Association
Contract. Any and all amendments to an Association Contract in force as of the
date hereof of which English translations were not furnished by Owner to
Investor do not contain any provisions that could adversely affect the rights
and interests of Investor under this Agreement. Each Association Contract is
in full force and effect as of the date hereof. Harken Colombia is in
compliance in all material respects with its obligations under or relating to
each Association Contract in force as of the date hereof, and, to the best
knowledge of Owner and Harken Colombia after due inquiry, no other party to an
Association Contract is presently in default thereunder. The execution,
delivery and performance of this Agreement by Owner, and the performance of
this Agreement by Harken Colombia, will not breach or result in a violation of
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<PAGE> 24
any provision of an Association Contract in force as of the date hereof.
Exhibit A-1 hereto contains an accurate description of the areal extent of the
lands covered by the Bocachico Association Contract (which lands are designated
as the Bocachico Block on such Exhibit A-1) as of the date hereof. Exhibit A-2
hereto contains an accurate description of the areal extent of the lands
covered by the Cambulos Association Contract (which lands are designated as the
Cambulos Block on such Exhibit A-2) as of the date hereof. Owner agrees to
furnish to Investor written English translations of any and all amendments made
to any Association Contract or related operating agreement after the Effective
Date as promptly as practicable after each such amendment is made.
Section 4.11. Ownership of Harken Colombia. All of the issued
and outstanding shares of capital stock of Harken Colombia have been duly and
validly issued, are fully paid and nonassessable and are owned by Owner, free
and clear of all liens, encumbrances, equities or claims. No options,
warrants or other rights to purchase, agreements or other obligations to issue
or other rights to convert any obligations into shares of capital stock or
ownership interests in Harken Colombia are outstanding.
Section 4.12. Certain Tax Matters. All amounts payable under
this Agreement shall be free of Colombian taxes, and Owner shall hold Investor
harmless from, and indemnify Investor against, any and all Colombian taxes
arising due to the transactions contemplated hereby, other than any Colombian
taxes that would not have been incurred but for activities of Investor in
Colombia unrelated to the transactions contemplated hereby, it being further
understood and agreed, however, that it shall be permissible for taxes incurred
by Harken Colombia in connection with its operations to be taken into account
for purposes of calculation of the Net Profits Interest as provided in this
Agreement.
Section 4.13. No Defaults. Neither Owner nor Harken Colombia is
(a) in violation of any provision of its charter or bylaws, (b) in breach,
violation or default, in any material respect, of or under any material
contract, lease, commitment or instrument to which it is a party or by which it
is bound or to which any of its properties or assets are subject, and no event
has occurred which (whether with or without notice, lapse of time or the
happening or occurrence of any other event) would constitute such a breach,
violation or default or (c) in material violation of any Law.
Section 4.14. Litigation. There is no action, suit, proceeding
or investigation pending or, to the knowledge of Owner, threatened against or
affecting Owner or Harken Colombia or any properties or rights of any of them
by or before any Governmental Authority that (a) relates to or challenges the
legality of this Agreement or any Association Contract, (b) would reasonably be
expected to have a material adverse effect upon the business, properties,
financial condition or results of operations of Owner or Harken Colombia
(except as disclosed in Owner's SEC Filings) or (c) would reasonably be
expected to impair the ability of Owner or Harken Colombia to perform fully on
a timely basis any obligations that it has, or any actions specified to be
taken by it, under this Agreement or any Association Contract.
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<PAGE> 25
Section 4.15. Compliance with Laws. Owner and Harken Colombia
are in compliance in all material respects with all Laws in all jurisdictions
in which Owner or Harken Colombia is presently doing business and where the
failure to effect such compliance would reasonably be expected to have a
material adverse effect upon the business, properties, financial condition or
results of operations of Owner or Harken Colombia.
Section 4.16. Harken Colombia Organization and Corporate
Authority. Harken Colombia is a corporation duly incorporated, validly
existing and in good standing under the laws of the jurisdiction of its
incorporation, with corporate power and authority to carry on its business as
now conducted and to own, lease and operate all properties and assets now
owned, leased or operated by it.
Section 4.17. Harken Colombia Qualification to do Business.
Harken Colombia is duly qualified to do business as a foreign corporation and
in good standing in each jurisdiction in which its ownership of property or the
conduct of its business requires such qualification, except jurisdictions in
which the failure so to qualify would not have a material adverse effect on
Harken Colombia's business, properties, financial condition or results of
operations.
Section 4.18. Harken Colombia Non-Contravention. The performance
of this Agreement by Owner, and the performance by Harken Colombia of the
actions to be taken by it under this Agreement, will not (a) conflict with or
result in a violation of any provision of Harken Colombia's charter or bylaws,
(b) conflict with or result in a violation of any provision of, or constitute
(with or without the giving of notice or the passage of time or both) a default
under, or give rise (with or without the giving of notice or the passage of
time or both) to any right of termination, cancellation, or acceleration under,
any bond, debenture, note, mortgage, indenture, lease, agreement or other
instrument or obligation to which Harken Colombia is a party or by which Harken
Colombia or any of its properties or assets may be bound, which conflict,
violation, default, termination, cancellation or acceleration could reasonably
have a material adverse effect on Harken Colombia's business, properties,
financial condition or results of operations, (c) result in the creation or
imposition of any lien or incumbrance upon the properties or assets of Harken
Colombia, or (d) result in a violation by Harken Colombia of any Law or any
judgment, order, decree, rule or regulation of any Governmental Authority to
which Harken Colombia is subject; provided, however, that no such
representations or warranties are made by Owner with respect to compliance with
any foreign securities laws or with respect to any Association Contract (it
being understood that representations and warranties with respect to the
Association Contracts are being made by Owner under Section 4.10).
Section 4.19. Harken Colombia Governmental Consents. Except for
those that have been duly obtained, no consent, order, approval or
authorization of, or declaration, filing, or registration with, any
Governmental Authority is required to be obtained or made by Harken Colombia in
connection with the performance by Owner of this Agreement or the performance
by Harken Colombia of the actions to be taken by it under this Agreement;
provided,
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<PAGE> 26
however, that no such representations or warranties are made by Owner with
respect to compliance with any foreign securities laws.
Section 4.20. Harken Colombia Disclosure. Owner, either directly
or indirectly through its subsidiary, Harken Colombia, does not know of any
facts (other than those facts generally recognized to be industry risks
normally associated with the oil and gas business) related to the potential
Prospects or the Subject Interests which have not been disclosed orally or in
writing to Investor and which presently or will materially and adversely affect
a potential Prospect, any Subject Interests or the ability of Harken Colombia
to perform this Agreement.
ARTICLE V
Investor Representations, Warranties and Covenants
Investor hereby represents and warrants to and covenants with Owner as
follows:
Section 5.1. Organization and Corporate Authority. Investor is
a corporation duly organized, validly existing and in good standing under the
laws of the State of Delaware, with corporate power and authority to carry on
its business as now conducted and to own, lease and operate all properties and
assets now owned, leased or operated by it.
Section 5.2. Finders' Fees. No broker or finder has acted on
behalf of Investor in connection with this Agreement or the transactions
contemplated herein.
Section 5.3. Authority of Investor. Investor has the corporate
power to enter into, and be bound by the terms and conditions of, this
Agreement and to carry out its obligations hereunder, and the execution and
delivery by Investor of this Agreement and the performance by Investor of its
obligations hereunder have been duly authorized by all necessary corporate
action of Investor. This Agreement has been duly executed and delivered by
Investor and constitutes, and each other agreement or document executed or to
be executed by Investor in connection with the transactions contemplated hereby
has been, or when executed, will be, duly executed and delivered by Investor
and constitutes, or when executed and delivered will constitute, a valid and
legally binding obligation of Investor enforceable against Investor in
accordance with their respective terms, except to the extent enforcement may be
limited (a) by applicable bankruptcy, insolvency, moratorium, reorganization or
similar laws from time to time in effect which affect creditors' rights
generally and (b) by legal and equitable limitations on the availability of
equitable remedies, including without limitations specific performance against
Investor under or by virtue of this Agreement.
Section 5.4. Non-Contravention. The execution, delivery and
performance of this Agreement by Investor will not (a) conflict with or result
in a violation of any provision of Investor's charter or bylaws, (b) conflict
with or result in a violation of any provision of, or
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<PAGE> 27
constitute (with or without the giving of notice or the passage of time or
both) a default under, or give rise (with or without the giving of notice or
the passage of time or both) to any right of termination, cancellation, or
acceleration under, any bond, debenture, note, mortgage, indenture, lease,
agreement or other instrument or obligation to which Investor is a party or by
which it or any of its properties or assets may be bound, which conflict,
violation, default, termination, cancellation, or acceleration would have a
material adverse effect on the ability of Investor to perform its obligations
hereunder, (c) result in the creation or imposition of any lien or incumbrance
upon the properties or assets of Investor, which lien or incumbrance would have
a material adverse effect on the ability of Investor to perform its obligations
hereunder, or (d) result in a violation by Investor of any Law or any judgment,
order, decree, rule or regulation of any Governmental Authority to which
Investor is subject; provided, however, that no such representations or
warranties are made by Investor with respect to compliance with any foreign
securities laws.
Section 5.5. Governmental Consents. Except for those that have
been duly obtained, no consent, order, approval or authorization of, or
declaration, filing, or registration with, any Governmental Authority is
required to be obtained or made by Investor in connection with the execution,
delivery or performance by Investor of this Agreement; provided, however, that
no such representations or warranties are made by Investor with respect to
compliance with any foreign securities laws.
Section 5.6. Investment Intent. Upon issuance pursuant to this
Agreement, the stockholders of Investor will acquire the Common Shares issuable
pursuant to Section 6.3 for their own account for investment and not with a
view to, or for sale or other disposition in connection with, any distribution
of all or any part of the Common Shares, except (a) in an offering covered by a
registration statement filed with the SEC under the Securities Act covering the
Common Shares or (b) pursuant to an applicable exemption under the Securities
Act.
Section 5.7. Disclosure of Information. Investor represents
that it has had an opportunity to ask questions of and receive answers from
Owner regarding Owner and Harken Colombia, their respective businesses,
properties, financial conditions, operations and plans of business, the Common
Shares, and the Subject Interests and all matters relating thereto.
Section 5.8. Accredited Investor and Experience. Investor
acknowledges that it, and each of its stockholders, is an Accredited Investor
within the meaning of Regulation D under the Securities Act, can bear the
economic risk of the investment in the Net Profits Interest and any investment
in Common Shares and has such knowledge and experience in financial and
business matters that it is capable of evaluating the merits and risks of the
investment in the Net Profits Interest and any investment in Common Shares.
Section 5.9. Restricted Securities. Investor and its
stockholders understand that the Common Shares that are issued pursuant to this
Agreement will not have been registered
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<PAGE> 28
pursuant to the Securities Act, any other federal securities law, any
applicable foreign securities law or any applicable state securities or Blue
Sky law, that such shares will be characterized as "restricted securities"
under the United States securities laws and that under such laws and applicable
regulations such shares cannot be sold or otherwise disposed of without
registration under the Securities Act or an exemption therefrom.
Section 5.10. Legend. Investor and its stockholders understand
and agree that the certificates representing the Common Shares issued pursuant
to this Agreement shall each conspicuously set forth on the face or back
thereof a legend in substantially the following form:
"THE SHARES REPRESENTED BY THIS CERTIFICATE HAVE NOT BEEN
REGISTERED UNDER THE SECURITIES ACT OF 1933, AS AMENDED, AND
MAY NOT BE SOLD OR OTHERWISE TRANSFERRED UNLESS SUCH SHARES
ARE FIRST REGISTERED UNDER SUCH ACT OR UNLESS AN EXEMPTION
FROM SUCH REGISTRATION IS AVAILABLE."
ARTICLE VI
Miscellaneous
Section 6.1. Assignment by Harken Colombia. Harken Colombia may
at any time assign, sell, transfer, convey, mortgage or pledge all or any
portion of any Association Contract or the Subject Interests; provided, that
Owner shall remain fully liable to perform all of their respective duties and
obligations hereunder, including, without limitation, the obligations of Owner
to provide access to information relating to the Subject Interests as set forth
in Section 3.18.
Section 6.2. Assignment by Investor. Investor shall not assign,
sell, transfer, convey, mortgage or pledge all or any part of the Net Profits
Interest or its rights and obligations hereunder or create a security interest
therein without the prior written consent of Owner.
Section 6.3. Commitment Fees. Concurrently (except as provided
in clause (b)) with the payment by Investor to Owner of the Advance pursuant to
Section 2.1, and as additional compensation for the Commitment, Owner shall (a)
pay to Rauscher Pierce & Clark Limited a cash fee of $175,000 by wire transfer
of immediately available funds and (b) issue and deliver to the stockholders of
Investor, immediately upon receipt of listing approval by the American Stock
Exchange, an aggregate of 42,000 Common Shares, as follows: 18,000 Common
Shares to Sidro S.A.; 12,000 Common Shares to Lambertine Holdings Ltd.; and
12,000 Common Shares to Rauscher Pierce & Clark (Guernsey) Ltd. It is
expressly
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<PAGE> 29
acknowledged by the parties hereto that the representations, warranties and
covenants made in Article V with respect to the Common Shares issued pursuant
to this Agreement, including without limitation the representations and
warranties made in Sections 5.9 and 5.10, apply to the Common Shares issued
pursuant to this Section 6.3.
Section 6.4. Indemnification.
(a) Owner agrees to indemnify and hold harmless
Investor and its directors, officers, employees, agents, partners,
shareholders and affiliates from and against any and all claims,
damages, losses, liabilities, penalties and expenses (including
without limitation reasonable fees and disbursements of counsel) that
may be incurred by or asserted against any such person, in each case
arising out of or in connection with or by reason of any breach of any
representation, warranty, covenant or agreement of Owner contained in
this Agreement or any failure of Harken Colombia to take any actions
specified to be taken by it under, or to otherwise act in accordance
with the provisions of, this Agreement. The obligations of Owner
under this Section 6.4(a) shall survive the termination of this
Agreement.
(b) Investor agrees to indemnify and hold harmless
Owner and Harken Colombia and their respective directors, officers,
employees, agents, partners, shareholders and Affiliates from and
against any and all claims, damages, losses, liabilities, penalties
and expenses (including without limitation reasonable fees and
disbursements of counsel) that may be incurred by or asserted against
any such person, in each case arising out of or in connection with or
by reason of any breach of any representation, warranty, covenant or
agreement of Investor contained in this Agreement. The obligations of
Investor under this Section 6.4(b) shall survive the termination of
this Agreement.
Section 6.5. Public Announcements. Except as set forth in the
following sentence, the parties to this Agreement agree that prior to making
any public announcement or statement with respect to the transactions
contemplated by this Agreement, the party desiring to make such public
announcement or statement shall consult with the other party and exercise
reasonable efforts to (a) agree upon the text of a joint public announcement or
statement to be made by the parties or (b) obtain approval of the other party
to the text of a public announcement or statement to be made solely by Owner or
Investor, as the case may be. Nothing contained in this Section shall be
construed to require any party to obtain approval of the other party to
disclose information with respect to any disclosure (a) required by applicable
Law or by any applicable rules, regulations or orders of any Governmental
Authority having jurisdiction or (b) necessary to comply with disclosure
requirements of any applicable stock exchange. Owner agrees that, prior to
making any public announcement or statement with respect to the transactions
contemplated by this Agreement that names any stockholder or stockholders of
Investor, Owner will notify such stockholder or stockholders and furnish it or
them with a copy of the text of the proposed public announcement or statement.
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<PAGE> 30
Section 6.6. Brokers. Without limiting the parties' respective
representations in Sections 4.3 and 5.2, each party agrees to indemnify and
hold the others harmless from and against any claim for a brokerage or finder's
fee or commission in connection with this Agreement or the transactions
contemplated by this Agreement to the extent such claim arises from or is
attributable to the actions of such indemnifying party.
Section 6.7. Notices. All notices, requests, demands, consents
and other communications required or permitted to be given or made hereunder
shall be in writing and shall be deemed to have been duly given or made if
delivered personally, or sent by a nationally recognized overnight delivery
service or by telecopy or similar facsimile transmission, or mailed by prepaid
registered or certified mail, return receipt requested, to the other party at
the respective address set forth below (or to such other address as a party
shall designate for itself by written notice given or made in accordance
herewith):
(a) if to Owner, at:
Harken Energy Corporation
MacArthur Center II
5605 N. MacArthur Blvd., Suite 400
Irving, Texas 75038
Telephone: (972)753-6900
Telecopy: (972) 753-6963
Attention: Mr. Bruce N. Huff, Senior Vice President and
Mr. Larry E. Cummings, Vice President and
General Counsel
(b) if to Investor or any stockholder of Investor, at:
Rauscher Pierce & Clark Limited
56 Green Street
London W1Y 3RH
Telephone: 0171 491 2434
Telecopy: 0171 491 9081
Attention: David P. Quint
Any such notice, request, demand, consent or other communication shall
be deemed delivered and given or made on the third Business Day after the date
of mailing, if mailed by registered or certified mail, or on the first Business
Day after the date of transmittal, if sent by overnight delivery service or by
telecopy or similar facsimile transmission (provided such telecopy or
transmission is followed promptly by the mailing of the original of such
notice), or on the date of delivery, if delivered personally.
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<PAGE> 31
Section 6.8. Waivers and Amendments. This Agreement may be
amended or supplemented only by a written instrument signed by the parties
hereto. The terms of this Agreement may be waived only by a written instrument
signed by the party waiving compliance. No delay on the part of any party in
exercising any right, power or privilege hereunder shall operate as a waiver
thereof, nor shall any waiver on the part of any party of any such right, power
or privilege, or any single or partial exercise of any such right, power or
privilege, preclude any further exercise thereof or the exercise of any other
such right, power or privilege. The rights and remedies herein provided are
cumulative and are not exclusive of any rights or remedies that any party may
otherwise have at law or in equity.
Section 6.9. Governing Law. This Agreement and all actions,
proceedings or matters arising out of this Agreement shall be governed by, and
construed and enforced in accordance with, the laws of the State of Texas,
without regard to the principles of conflicts of laws.
Section 6.10. Binding Effect; No Assignment; No Third Party
Benefit. This Agreement shall be binding upon and inure to the benefit of the
parties and their respective successors and permitted assigns. Unless
otherwise expressly provided herein, no rights or obligations under this
Agreement are assignable. Except as expressly provided in Sections 3.17, 6.3
and 6.4, nothing in this Agreement, whether expressed or implied, is intended
to confer any rights or remedies under or by reason of this Agreement on any
person other than the parties to this Agreement and their respective successors
and permitted assigns.
Section 6.11. Entire Agreement. This Agreement constitutes the
full and complete agreement of the parties hereto with respect to the subject
matter hereof, and supersede all previous oral and written and all
contemporaneous oral negotiations, commitments, writings and understandings.
Section 6.12. Severability. Every provision of this Agreement is
intended to be severable. If any term or provision hereof is determined to be
invalid, illegal, or unenforceable for any reason whatsoever, such invalidity,
illegality, or unenforceability shall not affect the validity, legality and
enforceability of the remainder of this Agreement.
Section 6.13. United States Dollars. All references in this
Agreement to dollar amounts are to United States dollars.
Section 6.14. Survival of Representations and Warranties. The
representations and warranties of the parties made herein shall survive the
execution and delivery of this Agreement.
Section 6.15. Counterparts. This Agreement may be executed in
one or more counterparts (and separately by each party hereto), each of which
shall be an original and all of which shall constitute but one and the same
document.
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<PAGE> 32
Section 6.16. Arbitration. Owner and Investor agree to submit to
final and binding arbitration any and all disputes, claims, and/or
disagreements concerning the interpretation or application of this Agreement.
Any dispute, claim, and/or disagreement subject to arbitration pursuant to the
terms of this Section shall be resolved by arbitration in New York, New York by
three arbitrators in accordance with the Commercial Arbitration Rules of the
American Arbitration Association or any successor organization (the
"Association") then in effect. Within 10 days of the initiation of an
arbitration hereunder, Owner will designate one arbitrator and the stockholders
of Investor, acting together, will designate one arbitrator, in accordance with
the Association's rules. The appointed arbitrators will appoint a neutral
arbitrator in the manner prescribed in the Association's rules. Owner and
Investor agree that the decision of the three arbitrators selected hereunder
will be final and binding on all parties. A judgment on the award rendered by
the arbitrator may be entered in any court having jurisdiction, or application
may be made to such court for judicial acceptance of the award and an order of
enforcement, as the case may be.
Section 6.17. Consent to Jurisdiction. Subject to the provisions
of Section 6.16, Owner and Investor agree that, in addition to any other courts
that may have jurisdiction under applicable laws, any action or proceeding to
enforce or arising out of this Agreement may be commenced in the Court of the
State of Texas for Dallas County, or in the United States District Court for
the Northern District of Texas, and Owner and Investor consent and submit in
advance to such jurisdiction and agree that venue will be proper in such courts
on any such matter. Owner and Investor each hereby waives personal service of
process and agrees that a summons and complaint commencing an action or
proceeding in any such court shall be properly served and shall confer personal
jurisdiction if served by registered or certified mail to it. The choice of
forum set forth in this Section shall not be deemed to preclude the enforcement
of any judgment obtained in such forum, or the taking of any action under this
Agreement to enforce the same, in any appropriate jurisdiction.
Section 6.18. Guaranty of Owner. Owner agrees to cause Harken
Colombia to take the actions specified to be taken by Harken Colombia under,
and to cause Harken Colombia to otherwise act in accordance with the provisions
of, this Agreement. Furthermore, Owner hereby irrevocably, absolutely and
unconditionally guarantees, as principal and not as surety (this being a
guarantee of payment and not of collection), to and for the benefit of
Investor, prompt and complete payment and performance by Harken Colombia of any
and all obligations of or actions specified to be taken by Harken Colombia
under or arising out of or in connection with this Agreement, including any
liabilities arising from a failure by Harken Colombia to take any actions
specified to be taken by it under this Agreement (the "Obligations"), and
agrees to pay any and all expenses (including reasonable counsel fees and
expenses) which may be paid or incurred by Investor in collecting any or all of
the Obligations and/or enforcing their rights under this Agreement. The
obligations of Owner hereunder shall not be (i) subject to any reduction,
limitation, impairment or termination for any reason, including any claim of
waiver, release, surrender, alteration or compromise, and shall not be subject
to any set-off, counterclaim or recoupment whatsoever, or (ii) conditioned or
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<PAGE> 33
contingent upon the pursuit by Investor or any other person at any time of any
right or remedy against Harken Colombia or any other person which may become
liable in respect of all or any part of the Obligations or against any
collateral or security or guarantee therefor or right of set-off with respect
thereto. Owner shall not exercise any rights it may acquire by way of
subrogation under this Section, whether acquired by any payment made hereunder,
by any set-off or application of funds of Owner by Investor or otherwise, until
(i) the payment in full of the Obligations and (ii) the payment of all other
expenses to be paid by Owner pursuant hereto.
Section 6.19. No Partnership. The parties hereto do not intend
by entering into this Agreement to form a partnership, joint venture or similar
arrangement for tax purposes or otherwise and shall not take any action
inconsistent with the foregoing statement of intent.
Section 6.20. Expenses. All fees and expenses (including legal
fees and expenses) incurred by a party hereto in connection with the
negotiation, preparation and execution of this Agreement shall be the
responsibility of such party.
IN WITNESS WHEREOF, the parties have caused this Agreement to be
executed by the respective officers hereunto duly authorized as of the date
first above written.
HARKEN ENERGY CORPORATION
By:
-----------------------------------
Name: Larry E. Cummings
Title: Vice President and Secretary
HARKEN CAPITAL CORPORATION
By:
------------------------------------
Name: Larry E. Cummings
Title: Vice President and Secretary
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<PAGE> 34
EXHIBIT A-1
BOCACHICO BLOCK
<PAGE> 35
EXHIBIT A-2
CAMBULOS BLOCK
<PAGE> 1
EXHIBIT 10.17
EXCHANGE AGREEMENT
----------------------------------------------------
Harken Energy Corporation,
Harken Capital Corporation
and
Sidro S.A.,
Lambertine Holdings Ltd, and
Rauscher Pierce & Clark (Guernsey) Ltd.
----------------------------------------------------
December 24, 1997
<PAGE> 2
TABLE OF CONTENTS
<TABLE>
<CAPTION>
Page
<S> <C>
ARTICLE I -- Definitions and References . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1
Section 1.1. Defined Terms . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1
Section 1.2. References and Titles . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 3
ARTICLE II -- Restrictions on Transfer of Company Shares . . . . . . . . . . . . . . . . . . . . . . . . . 3
Section 2.1. Restrictions on Transfer . . . . . . . . . . . . . . . . . . . . . . . . . . . . 3
Section 2.2. Legend . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 3
Section 2.4. Improper Transfers . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 4
ARTICLE III -- Investors Exchange . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 4
Section 3.1. Exercise of Investors' Option . . . . . . . . . . . . . . . . . . . . . . . . . . 4
Section 3.2. Number of Harken Shares . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 5
Section 3.3. Closing of Exchange . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 5
Section 3.4. Harken's Cash Option . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 5
ARTICLE IV -- Harken Exchange . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 6
Section 4.1. Exercise of Harken's Option . . . . . . . . . . . . . . . . . . . . . . . . . . . 6
Section 4.2. Number of Harken Shares . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 6
Section 4.3. Amount of Cash . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 7
Section 4.4. Closing of Exchange . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 7
ARTICLE V -- Issuance of Additional Harken Shares . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 7
Section 5.1. Issuance of Additional Shares . . . . . . . . . . . . . . . . . . . . . . . . . . 7
Section 5.2. Certain Definitions . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 8
ARTICLE VI -- Harken Representations, Warranties and Covenants . . . . . . . . . . . . . . . . . . . . . . 9
Section 6.1. Organization and Corporate Authority . . . . . . . . . . . . . . . . . . . . . . 9
Section 6.2. Qualification to do Business . . . . . . . . . . . . . . . . . . . . . . . . . . 9
Section 6.3. Capitalization . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 10
Section 6.4. Finders' Fees . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 10
Section 6.5. Authority of Harken . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 10
Section 6.6. Non-Contravention . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 10
Section 6.7. Governmental Consents . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 11
Section 6.8. Reports and Financial Statements of Harken . . . . . . . . . . . . . . . . . . . 11
Section 6.9. Disclosure . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 11
Section 6.10. Harken Shares . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 12
Section 6.11. Absence of Bankruptcy Proceedings . . . . . . . . . . . . . . . . . . . . . . . . 12
Section 6.12. No Defaults . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 12
Section 6.13. Litigation . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 12
Section 6.14. Compliance with Laws . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 12
</TABLE>
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<PAGE> 3
<TABLE>
<S> <C>
ARTICLE VII -- Investors Representations, Warranties and Covenants . . . . . . . . . . . . . . . . . . . . 13
Section 7.1. Organization and Corporate Authority . . . . . . . . . . . . . . . . . . . . . . 13
Section 7.2. Finders' Fees . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 13
Section 7.3. Authority of Investor . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 13
Section 7.4. Non-Contravention . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 13
Section 7.5. Governmental Consents . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 14
Section 7.6. Investment Intent . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 14
Section 7.7. Disclosure of Information . . . . . . . . . . . . . . . . . . . . . . . . . . . . 14
Section 7.8. Accredited Investor and Experience . . . . . . . . . . . . . . . . . . . . . . . 14
Section 7.9. Restricted Securities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 14
Section 7.10. Legend . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 15
Section 7.11. Title to Company Shares . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 15
Section 7.12. Organization and Corporate Authority of Company . . . . . . . . . . . . . . . . . 15
Section 7.13. Qualification of Company to Business . . . . . . . . . . . . . . . . . . . . . . 15
Section 7.14. Company Charter and Bylaws . . . . . . . . . . . . . . . . . . . . . . . . . . . 15
Section 7.15. Capitalization of the Company . . . . . . . . . . . . . . . . . . . . . . . . . . 16
Section 7.16. No Prior or Future Activities . . . . . . . . . . . . . . . . . . . . . . . . . . 16
Section 7.17. Continuing Representations and Warranties . . . . . . . . . . . . . . . . . . . . 16
ARTICLE VIII -- Miscellaneous . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 17
Section 8.1. Assignment by Investors . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 17
Section 8.2. Adjustments for Consolidation, Merger, Sale of Assets, Reorganization, etc. . . . 17
Section 8.3. Indemnification . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 17
Section 8.4. Public Announcements . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 18
Section 8.5. Brokers . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 18
Section 8.6. Notices . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 18
Section 8.7. Waivers and Amendments . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 19
Section 8.8. Governing Law . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 19
Section 8.9. Binding Effect; No Assignment; No Third Party Benefit . . . . . . . . . . . . . . 19
Section 8.10. Entire Agreement . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 20
Section 8.11. Severability . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 20
Section 8.12. United States Dollars . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 20
Section 8.13. Survival of Representations and Warranties . . . . . . . . . . . . . . . . . . . 20
Section 8.14. Rights as Stockholder . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 20
Section 8.15. Counterparts . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 20
Section 8.16. Arbitration . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 20
Section 8.17. Consent to Jurisdiction . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 21
Section 8.18. Further Assurances . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 21
Section 8.19. Expenses . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 21
</TABLE>
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<PAGE> 4
EXCHANGE AGREEMENT
THIS EXCHANGE AGREEMENT (this "Agreement") is made as of the 24th day
of December, 1997, by and among HARKEN ENERGY CORPORATION, a Delaware
corporation (herein called "Harken"), HARKEN CAPITAL CORPORATION, a Delaware
corporation (herein called the "Company"), and SIDRO S.A., LAMBERTINE HOLDINGS
LTD, and RAUSCHER PIERCE & CLARK (GUERNSEY) LTD.,who are as of the date hereof
the sole stockholders of the Company (such stockholders herein collectively
called "Investors"). In consideration of the mutual covenants and agreements
contained herein, the parties hereto hereby agree as follows:
ARTICLE I
Definitions and References
Section 1.1. Defined Terms. As used in this Agreement, each of
the following terms has the meaning given it in this Section 1.1 or in the
sections or subsections referred to below:
"Allocated NPI Payments" shall mean, with respect to an Exchange by an
Investor pursuant to Article III or IV, the aggregate amount of the payments
received by the Company pursuant to Section 3.7 of the Development Finance
Agreement that have been distributed by the Company to such Investor through
the Exchange Date of such Exchange.
"Business Day" shall mean any day other than a Saturday, a Sunday or a
day in which banks in the State of Texas are closed.
"Capital Contribution" shall mean, with respect to an Investor, the
capital contribution made by such Investor in cash to the Company in exchange
for the issuance by the Company to such Investor of Company Shares, the amount
of such capital contribution and the number of such Company Shares being set
forth opposite such Investor's name on Annex I hereto.
"Company Shares" shall mean shares of the Common Stock, par value $.01
per share, of the Company.
The "Current Market Price" of the Harken Shares on any date shall be
deemed to be the average of the daily closing prices for the Harken Shares for
the 10 Trading Days immediately preceding the day in question. The closing
price for each such Trading Day shall be the closing sales price on the
principal national stock exchange or stock market on which the Harken Shares
are then listed, or, if not reported for such exchange or market, on the
composite tape, or, in case no such sale takes place on such Trading Day, the
average of the
<PAGE> 5
reported closing bid and asked quotations on such exchange or market, or, if
the Harken Shares are not listed on any national stock exchange or stock
market, or no such quotations are available, the average of the high bid and
low asked quotations in the over-the-counter market as reported by the National
Association of Securities Dealers" Automated Quotations System or a similar
organization. Such closing prices shall be appropriately adjusted to take into
account any stock split, reverse stock split or stock dividend with respect to
the Harken Shares that occurs within such 10- Trading Day period.
"Development Finance Agreement" shall mean the Development Finance
Agreement dated the Effective Date between Harken and the Company, entered into
in connection with this Agreement.
"Effective Date" shall mean the date of this Agreement.
"Exchange" shall mean the exchange of Company Shares for (a) Harken
Shares or cash pursuant to Investors" Option as provided for in Article III or
(b) Harken Shares or cash pursuant to Harken's Option as provided for in
Article IV.
"Exchange Date" shall have the respective meanings assigned to it in Sections
3.1 and 4.1.
"Exchange Period" shall mean the period from and including the first
anniversary of the Effective Date to and including the third anniversary of the
Effective Date.
"Governmental Authority" shall mean (a) the United States of America
or any state within the United States of America, (b) any court or any
governmental department, commission, board, bureau, agency or other
instrumentality of the United States of America or of any state within the
United States of America, and (c) in the case of the representations,
warranties and covenants of an Investor, the jurisdiction of organization of
such Investor or any political subdivision of such jurisdiction or any court or
any governmental department, commission, board, bureau, agency or other
instrumentality of such jurisdiction or political subdivision thereof.
"Harken Shares" shall mean shares of the Common Stock, par value $.01
per share, of Harken, or shares of any class or classes of capital stock of
Harken resulting from any reclassification or reclassifications thereof.
"Harken's Option" shall have the meaning assigned to it in Article IV.
"Harken's SEC Filings" shall have the meaning assigned to it in
Section 6.8.
"Investors" Option" shall have the meaning assigned to it in Article
III.
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<PAGE> 6
"Law" shall mean any applicable statute, law, ordinance, regulation,
rule, ruling, order, restriction, requirement, writ, injunction, decree or
other official act of or by any Governmental Authority.
"Registration Rights Agreement" shall mean the Registration Rights
Agreement dated the Effective Date between Harken and Investors, entered into
in connection with this Agreement.
"SEC" shall mean the Securities and Exchange Commission.
"Securities Act" shall mean the Securities Act of 1933, as amended.
"Trading Day" shall mean any day on which the principal securities
exchange or quotation system on which the Harken Shares are then listed is open
for trading on a regular basis.
Section 1.2. References and Titles. All references in this
Agreement to articles, sections, subsections and other subdivisions refer to
the articles, sections, subsections and other subdivisions of this Agreement
unless expressly provided otherwise. Titles appearing at the beginning of any
subdivisions are for convenience only and do not constitute any part of such
subdivisions and shall be disregarded in construing the language contained in
such subdivisions. The words "this Agreement", "this instrument", "herein",
"hereof", "hereby", "hereunder" and words of similar import refer to this
Agreement as a whole and not to any particular subdivision unless expressly so
limited. The phrases "this Section" and "this subsection" and similar phrases
refer only to the sections or subsections hereof in which such phrases occur.
Pronouns in masculine, feminine and neuter genders shall be construed to
include any other gender, and words in the singular form shall be construed to
include the plural and vice versa, unless the context otherwise requires.
ARTICLE II
Restrictions on Transfer of Company Shares
Section 2.1. Restrictions on Transfer. Each Investor agrees
that, during the period commencing on the Effective Date and ending on the
Business Day next following the later of (a) the termination of the Exchange
Period and (b) the consummation of any Exchange made by such Investor pursuant
to Article III or IV, such Investor will not, directly or indirectly, offer,
sell, assign, transfer, grant a participation in, pledge, or otherwise dispose
of any of its Company Shares except in accordance with the terms of this
Agreement.
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<PAGE> 7
Section 2.2. Legend. Each Investor agrees that the
certificates representing all Company Shares owned by such Investor shall each
conspicuously set forth on the face or back thereof a legend in substantially
the following form:
"THE SHARES OF THE CORPORATION REPRESENTED BY THIS CERTIFICATE ARE
SUBJECT TO RESTRICTIONS ON THE TRANSFER THEREOF AS SET FORTH IN AN
EXCHANGE AGREEMENT DATED DECEMBER ____, 1997, BY AND AMONG HARKEN
ENERGY CORPORATION, HARKEN CAPITAL CORPORATION AND THE STOCKHOLDERS
OF HARKEN CAPITAL CORPORATION, A COPY OF WHICH HAS BEEN DEPOSITED WITH
HARKEN CAPITAL CORPORATION AT ITS PRINCIPAL PLACE OF BUSINESS. A COPY
OF THE EXCHANGE AGREEMENT MAY BE OBTAINED BY THE REGISTERED HOLDER OF
SUCH SHARES FROM HARKEN CAPITAL CORPORATION, WITHOUT CHARGE, UPON
REQUEST TO HARKEN CAPITAL CORPORATION AT ITS PRINCIPAL PLACE OF
BUSINESS OR REGISTERED OFFICE."
Section 2.3. Permitted Transfers to Subsidiaries.
Notwithstanding any other provision of this Agreement, each Investor shall have
the right, without the prior consent of Harken or the Company, to assign or
otherwise transfer all (but not less than all) of its Company Shares to a
wholly-owned subsidiary of such Investor for so long as such subsidiary shall
remain a wholly-owned subsidiary of such Investor and provided that such
Investor shall remain personally obligated for its duties and obligations
hereunder. Any assignee pursuant to a permitted assignment or transfer of
Company Shares under this Section 2.3 must execute, prior to such assignment or
transfer, a written acknowledgment, in form and substance satisfactory to
Harken, that such assignee has become a party to this Agreement as if it had
been the original "Investor" hereto and that it agrees to be bound by all the
terms and provisions hereof.
Section 2.4. Improper Transfers. Any attempt by an Investor to
transfer or encumber any of its Company Shares not in accordance with the terms
of this Agreement shall be void and ineffective, and the Company shall not give
any effect to such attempted transfer or encumbrance in its stock transfer
records or otherwise.
ARTICLE III
Investors Exchange
Harken hereby grants to each Investor the option (herein called the
"Investors" Option") to exchange all (but not less than all) of the Company
Shares owned by such Investor for Harken Shares on the following terms and
conditions (herein called "Exchange"):
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<PAGE> 8
Section 3.1. Exercise of Investors' Option. The Investors"
Option can only be exercised by the delivery to Harken within the Exchange
Period of a written notice from an Investor, which notice shall be in the form
of Exhibit A hereto, stating that such Investor thereby elects to exercise the
Investors" Option. An Investor may exercise the Investors" Option at any time
during the Exchange Period, provided, however, that such exercise must be for
the exchange of 100% of the Company Shares owned by such Investor. Such
exercise shall be irrevocable. Each Investor shall have the right to exercise
the Investors' Option individually and without the joinder of any other
Investor. Upon termination of the Exchange Period, the Investors" Option shall
terminate and Investors shall have no further right or option to exchange their
Company Shares for Harken Shares pursuant to the Investors" Option. For
purposes of this Article III, the term "Exchange Date" shall mean, with respect
to any Exchange by an Investor pursuant to this Article III, the date of
delivery to Harken of Investor's notice of such Exchange pursuant to this
Section 3.1.
Section 3.2. Number of Harken Shares. The aggregate number of
Harken Shares to be issued to an Investor upon an Exchange by such Investor
pursuant to this Article III shall be determined pursuant to the following
formula:
HS = CC / CMP
where, for purposes of this Article III:
"HS" shall mean the aggregate number of Harken Shares to be
issued to such Investor upon such Exchange.
"CC" shall mean the remainder of (a) the Capital Contribution of
such Investor minus (b) such Investor's Allocated NPI
Payments, together with an amount equal to interest on the
positive balance of such remainder as it exists from time to
time during the period commencing on the Business Day next
following the Effective Date and ending on and including the
Exchange Date at the rate of fifteen percent (15%) per
annum, compounded monthly on the first day of each calendar
month.
"CMP" shall mean the Current Market Price per share of the Harken
Shares as of the Exchange Date.
The number of Harken Shares determined pursuant to such formula shall be
rounded up or down to the next whole number, and no fractional Harken Shares
shall be issued.
Section 3.3. Closing of Exchange. The closing and consummation
of any Exchange by an Investor pursuant to this Article III shall occur not
later than three Business Days following the Exchange Date of such Exchange.
At such closing, such Investor shall
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<PAGE> 9
transfer and deliver all of its Company Shares to Harken, and as soon as
possible after such closing (but in any event not later than 30 days after such
closing) Harken shall issue and deliver to such Investor the number of Harken
Shares required for such Exchange pursuant to Section 3.2.
Section 3.4. Harken's Cash Option. Notwithstanding anything to
the contrary contained in this Article III, Harken shall have the option to pay
cash to an Investor upon any Exchange by such Investor pursuant to this Article
III in lieu of issuing Harken Shares. If, in connection with such an Exchange,
Harken determines to pay cash to an Investor in lieu of issuing Harken Shares,
(a) it must pay cash for all the Company Shares owned by such Investor and (b)
it must notify such Investor of such determination within three Business Days
following Harken's receipt of such Investor's notice of such Exchange. The
aggregate amount of cash to be paid to such Investor upon such Exchange shall
be equal to such Investor's CC for such Exchange. Such payment shall be made
to such Investor at the closing of such Exchange by wire transfer in
immediately available funds to a bank account designated by such Investor.
ARTICLE IV
Harken Exchange
Investors hereby grant to Harken the option (herein called "Harken's
Option") to exchange, on a one-time basis, all (but not less than all) of the
Company Shares owned by all Investors for Harken Shares or cash on the
following terms and conditions (herein also called "Exchange"):
Section 4.1. Exercise of Harken's Option. Harken's Option can
only be exercised by the delivery within the Exchange Period to all Investors
who have not previously elected to make an Exchange pursuant to Article III of
a written notice from Harken stating that Harken thereby elects to exercise
Harken's Option and specifying whether such Exchange will be made for Harken
Shares or cash. Such exercise shall be irrevocable. Harken may make an
Exchange pursuant to this Article IV solely for Harken Shares or solely for
cash but not for a combination of Harken Shares and cash (i.e., all such
Investors shall receive in such Exchange the same type of consideration). Upon
termination of the Exchange Period, Harken's Option shall terminate and Harken
shall have no further right or option to exchange Company Shares for Harken
Shares or cash pursuant to Harken's Option. For purposes of this Article IV,
the term "Exchange Date" shall mean, with respect to any Exchange pursuant to
this Article IV, the date of delivery to Investors of Harken's notice of such
Exchange pursuant to this Section 4.1.
Section 4.2. Number of Harken Shares. The aggregate number of
Harken Shares to be issued to an Investor making an Exchange pursuant to this
Article IV (if such Exchange
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<PAGE> 10
involves the delivery to Investors of Harken Shares) shall be determined
pursuant to the following formula:
HS = CC / CMP
where, for purposes of this Article IV:
"HS" shall mean the aggregate number of Harken Shares to be
issued to such Investor upon such Exchange.
"CC" shall mean the remainder of (a) the Capital Contribution of
such Investor minus (b) such Investor's Allocated NPI
Payments, together with an amount equal to interest on the
positive balance of such remainder as it exists from time to
time during the period commencing on the Business Day next
following the Effective Date and ending on and including the
Exchange Date at the rate of twenty-five percent (25%) per
annum, compounded monthly on the first day of each calendar
month.
"CMP" shall mean the Current Market Price per share of the Harken
Shares as of the Exchange Date.
The number of Harken Shares determined pursuant to such formula shall be
rounded up or down to the next whole number, and no fractional Harken Shares
shall be issued.
Section 4.3. Amount of Cash. The aggregate amount of cash to be
paid to an Investor making an Exchange pursuant to this Article IV (if such
Exchange involves the payment to Investors of cash) shall be equal to such
Investor's CC for such Exchange.
Section 4.4. Closing of Exchange. The closing and consummation
of any Exchange pursuant to this Article IV shall occur not later than three
Business Days following the Exchange Date of such Exchange. At such closing,
all Investors who have not previously elected to make an Exchange pursuant to
Article III shall transfer and deliver all their Company Shares to Harken, and
as soon as possible after such closing (but in any event not later than 30 days
after such closing) Harken shall issue and deliver to such Investors the number
of Harken Shares or pay or cause to be paid to such Investors the amount of
cash required for such Exchange pursuant to Section 4.2 or 4.3. Harken's cash
payment shall be made by wire transfer in immediately available funds to a bank
account or accounts designated by Investors.
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<PAGE> 11
ARTICLE V
Issuance of Additional Harken Shares
As additional consideration for the grant by Investors to Harken of
Harken's Option, Harken hereby agrees to issue additional Harken Shares to
Investors on the following terms and conditions:
Section 5.1. Issuance of Additional Shares. The following
provisions shall apply with respect to any Investor that makes an Exchange for
Harken Shares pursuant to Article III or IV:
(a) If, as of such Investor's Deficiency Determination Date, the
Realized Proceeds with respect to such Investor's Exchange Shares are less than
the Invested Amount with respect to such Exchange Shares, then, within 30
Business Days after such Investor's Deficiency Determination Date, Harken shall
issue and deliver to such Investor additional Harken Shares in an amount equal
to A divided by B, where "A" is equal to the Deficiency Amount with respect to
such Exchange Shares, and where "B" is equal to the Current Market Price per
share of the Harken Shares as of such Investor's Deficiency Determination Date.
The number of additional Harken Shares determined pursuant to such formula
shall be rounded up or down to the next whole number, and no fractional Harken
Shares shall be issued.
(b) Notwithstanding the foregoing, provided Harken complies with
all its obligations under the Registration Rights Agreement, an Investor shall
not be entitled to receive any additional Harken Shares pursuant to Section
5.1(a) unless each Exchange Share issued to such Investor is sold by such
Investor in an open market transaction prior to the end of the Selling Period
applicable to such Exchange Share. Each Investor shall use its reasonable best
efforts to sell its Exchange Shares in an orderly manner designed not to
materially disrupt the public market for the Harken Shares; provided, however,
that public sales by Investors, on a combined basis, of up to an aggregate of
50,000 Exchange Shares per Trading Day shall not be subject to such manner of
sale restriction.
(c) If the combined public sales by Investors of Exchange Shares
in any one Trading Day exceeds an aggregate of 50,000 shares, then (i) the
Realized Proceeds with respect to the Exchange Shares sold on such Trading Day
in excess of 50,000 shares which are sold by an Investor at a price per share
(prior to any commissions, fees or costs) less than the Current Market Price at
which such Exchange Shares were issued to such Investor and (ii) that portion
of such Investor's Invested Amount that is attributable to such Exchange
Shares, shall not be taken into account in determining the number of additional
Harken Shares issuable to such Investor pursuant to Section 5.1(a).
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<PAGE> 12
Section 5.2. Certain Definitions. As used in this Article V:
(a) "Deficiency Amount" shall mean, with respect to an
Investor's Exchange Shares, A minus B, where "A" is equal to the Invested
Amount with respect to such Exchange Shares, and where "B" is equal to the
Realized Proceeds with respect to such Exchange Shares.
(b) "Deficiency Determination Date" shall mean, with respect to
an Investor, the Business Day next following the expiration of the Selling
Period applicable to such Investor's Exchange Shares.
(c) "Exchange Shares" shall mean all Harken Shares issued to an
Investor as a result of an Exchange pursuant to this Agreement.
(d) "Invested Amount" shall mean, with respect to an Investor's
Exchange Shares, the aggregate amount of such Investor's CC (as defined in
Articles III and IV, respectively) for the Exchange pursuant to which such
Exchange Shares were issued.
(e) "Realized Proceeds" shall mean, with respect to an
Investor's Exchange Shares, the aggregate gross proceeds actually received by
such Investor (prior to any commissions, fees or costs) from the sale or sales
of such Exchange Shares.
(f) "Selling Period" shall mean, with respect to the Harken
Shares issued to an Investor pursuant to an Exchange, the period of 120 Trading
Days following the later of (i) the date the Securities Act registration
statement covering such Harken Shares filed by Harken pursuant to the
Registration Rights Agreement first became effective and (ii) the date of
issuance of such Harken Shares; provided, however, that if the quotient
obtained by dividing (x) the total number of Harken Shares issued to all
Investors pursuant to such Exchange by (y) 120, is greater than 50,000, then
such 120-Trading Day period shall be extended to equal the number of Trading
Days (rounded up to the next whole number) determined by dividing (x) the total
number of Harken Shares issued to all Investors pursuant to such Exchange by
(y) 50,000; and provided, further, that the Selling Period shall be subject to
further extension as provided in Section 5 of the Registration Rights
Agreement. If the Selling Period applicable to Harken Shares issued pursuant
to an Exchange (a "Later Exchange") overlaps with the Selling Period applicable
to Harken Shares issued pursuant to a prior Exchange (a "Prior Exchange"), the
calculation called for by the first proviso contained in the immediately
preceding sentence with respect to the Harken Shares issued pursuant to the
Later Exchange shall be made by taking into account under each clause (x) of
such proviso, in addition to the Harken Shares issued pursuant to the Later
Exchange, the number of Harken Shares issued pursuant to the Prior Exchange
that remain unsold by Investors at the commencement of the Selling Period
applicable to the Harken Shares issued pursuant to the Later Exchange.
Notwithstanding the foregoing, in no event shall the Selling Period applicable
to the Harken Shares issued to an Investor pursuant to an Exchange extend
beyond the closing date of the sale of the last of such
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Harken Shares to be sold by such Investor. An Investor shall notify Harken
when such last sale occurs.
ARTICLE VI
Harken Representations, Warranties and Covenants
Harken hereby represents and warrants to and covenants with Investors
as follows:
Section 6.1. Organization and Corporate Authority. Harken is a
corporation duly incorporated, validly existing and in good standing under the
laws of the jurisdiction of its incorporation, with corporate power and
authority to carry on its business as now conducted and to own, lease and
operate all properties and assets now owned, leased or operated by it.
Section 6.2. Qualification to do Business. Harken is duly
qualified to do business as a foreign corporation and in good standing in each
jurisdiction in which its ownership of property or the conduct of its business
requires such qualification, except jurisdictions in which the failure so to
qualify would not have a material adverse effect on Harken's business,
properties, financial condition or results of operations.
Section 6.3. Capitalization. The authorized capital stock of
Harken consists of 150,000,000 Harken Shares, of which 117,725,284 are issued
and outstanding, and 10,000,000 shares of preferred stock, par value $1.00 per
share, none of which is outstanding. Harken has 22,822,236 Harken Shares
reserved for issuance upon exercise of stock options, warrants and other rights
to acquire Harken Shares. All of the outstanding shares of capital stock of
Harken are duly authorized, validly issued, fully paid, nonassessable and free
of preemptive rights, with no personal liability attaching to the ownership
thereof.
Section 6.4. Finders' Fees. No broker or finder has acted on
behalf of Harken in connection with this Agreement or the transactions
contemplated herein.
Section 6.5. Authority of Harken. Harken has the corporate
power to enter into, and be bound by the terms and conditions of, this
Agreement and the Registration Rights Agreement and to carry out its
obligations hereunder and thereunder, and the execution and delivery by Harken
of this Agreement and the Registration Rights Agreement and the performance by
Harken of its obligations hereunder and thereunder have been duly authorized by
all necessary corporate action of Harken. This Agreement has been duly
executed and delivered by Harken and constitutes, and each other agreement or
document executed or to be executed by Harken in connection with the
transactions contemplated hereby has been, or when executed, will be, duly
executed and delivered by Harken and constitutes, or when executed and
delivered will constitute, a valid and legally binding obligation of Harken
enforceable against Harken in accordance with their respective terms, except to
the extent
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enforcement may be limited (a) by applicable bankruptcy, insolvency,
moratorium, reorganization or similar laws from time to time in effect which
affect creditors" rights generally, (b) by legal and equitable limitations on
the availability of equitable remedies, including without limitation specific
performance against Harken under or by virtue of this Agreement and (c) by
public policy considerations with respect to the rights of indemnification
under the Registration Rights Agreement.
Section 6.6. Non-Contravention. The execution, delivery and
performance of this Agreement and the Registration Rights Agreement by Harken,
and the issuance of Harken Shares by Harken in accordance with this Agreement,
will not (a) conflict with or result in a violation of any provision of
Harken's charter or bylaws, (b) conflict with or result in a violation of any
provision of, or constitute (with or without the giving of notice or the
passage of time or both) a default under, or give rise (with or without the
giving of notice or the passage of time or both) to any right of termination,
cancellation, or acceleration under, any bond, debenture, note, mortgage,
indenture, lease, agreement or other instrument or obligation to which Harken
is a party or by which Harken or any of its properties or assets may be bound,
which conflict, violation, default, termination, cancellation or acceleration
could reasonably have a material adverse effect on Harken's business,
properties, financial condition or results of operations, (c) result in the
creation or imposition of any lien or incumbrance upon the properties or assets
of Harken, or (d) result in a violation by Harken of any Law or any judgment,
order, decree, rule or regulation of any Governmental Authority to which Harken
is subject; provided, however, that no such representations or warranties are
made by Harken with respect to compliance with any foreign securities laws.
Section 6.7. Governmental Consents. Except for (a) those that
have been duly obtained, (b) routine filings and orders that may be required
under Regulation D promulgated under the Securities Act or under any applicable
state securities or Blue Sky laws in connection with the future issuance of
Harken Shares pursuant to this Agreement, and the approval by the American
Stock Exchange of the listing of such Harken Shares on such exchange (which
Harken will obtain prior to the issuance of such shares), and (c) those
required under the Securities Act and any applicable state securities or Blue
Sky laws in connection with the performance by Harken of its obligations under
the Registration Rights Agreement, no consent, order, approval or authorization
of, or declaration, filing, or registration with, any Governmental Authority is
required to be obtained or made by Harken in connection with the execution,
delivery or performance by Harken of this Agreement or the Registration Rights
Agreement; provided, however, that no such representations or warranties are
made by Harken with respect to compliance with any foreign securities laws.
Section 6.8. Reports and Financial Statements of Harken. Harken
has heretofore delivered to Investors true and complete copies of all
definitive Form 10-K annual reports, Form 10-Q quarterly reports and proxy
statements filed by Harken with the SEC from and after January 1, 1997 (herein
collectively called "Harken's SEC Filings"). As of their respective dates,
Harken's SEC Filings did not contain any untrue statement of a material fact
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<PAGE> 15
or omit to state a material fact required to be stated therein or necessary to
make the statements therein, in light of the circumstances under which they
were made, not misleading. Harken does not have any debts, liabilities, or
obligations, whether accrued, contingent, unasserted or otherwise, and whether
due or to become due, which are not reflected in the financial statements
contained in Harken's SEC Filings and would be required to be so reflected
under generally accepted accounting principles, except those incurred in the
ordinary course of business since the date of the most recent audited financial
statements contained in Harken's SEC Filings. Since such date and except as
otherwise disclosed in Harken's SEC Filings, Harken has conducted its business
in the ordinary course consistent with past practice and there has not been any
material adverse change in the business, properties, financial condition or
results of operations of Harken or in its relationship with lenders, suppliers,
customers, employees or others, whether such changes have occurred in the
ordinary course of business or otherwise.
Section 6.9. Disclosure. All written information provided by
Harken and its officers, directors, agents, representatives and employees to
Investors in connection with this Agreement which is not part of Harken's SEC
Filings has been prepared in good faith by Harken and does not contain any
untrue statement of a material fact or, considered in its entirety along with
Harken's SEC Filings, omit to state therein a material fact (other than those
facts generally recognized to be industry risks normally associated with the
oil and gas business) necessary to make the statements made therein not
misleading. Harken does not know of any facts (other than those facts
generally recognized to be industry risks normally associated with the oil and
gas business) related to its business, properties, financial condition or
results of operations which have not been disclosed orally or in writing to
Investors and which presently or will materially and adversely affect such
business, properties, financial condition or results of operations or the
ability of Harken to perform its obligations under this Agreement or the
Registration Rights Agreement.
Section 6.10. Harken Shares. The Harken Shares issuable to
Investors pursuant to this Agreement have been, or when issued hereunder, will
have been, duly authorized for issuance pursuant hereto and, when issued and
delivered by Harken pursuant hereto, will be validly issued, fully paid and
non-assessable and will be free and clear of any claim, lien, pledge, option,
charge, security interest or encumbrance of any nature whatsoever created by
Harken. The issuance of Harken Shares under this Agreement is not subject to
any preemptive rights. Harken shall, prior to the issuance of Harken Shares
pursuant to this Agreement, cause such Harken Shares to be listed on each
securities exchange or quotation system on which outstanding Harken Shares are
then listed.
Section 6.11. Absence of Bankruptcy Proceedings. There are no
bankruptcy, reorganization or arrangement proceedings pending against, being
contemplated by or, to the knowledge of Harken, threatened against Harken or
any of its subsidiaries that are named in the audited financial statements
contained in Harken's SEC Filings.
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Section 6.12. No Defaults. Harken is not (a) in violation of any
provision of its charter or bylaws, (b) in breach, violation or default, in any
material respect, of or under any material contract, lease, commitment or
instrument to which it is a party or by which it is bound or to which any of
its properties or assets are subject, and no event has occurred which (whether
with or without notice, lapse of time or the happening or occurrence of any
other event) would constitute such a breach, violation or default or (c) in
material violation of any Law.
Section 6.13. Litigation. There is no action, suit, proceeding
or investigation pending or, to the knowledge of Harken, threatened against or
affecting Harken or any properties or rights of Harken by or before any
Governmental Authority that (a) relates to or challenges the legality of this
Agreement or the Registration Rights Agreement, (b) would reasonably be
expected to have a material adverse effect upon the business, properties,
financial condition or results of operations of Harken (except as disclosed in
Harken's SEC Filings) or (c) would reasonably be expected to impair the ability
of Harken to perform fully on a timely basis any obligations that it has under
this Agreement or the Registration Rights Agreement.
Section 6.14. Compliance with Laws. Harken is in compliance in
all material respects with all Laws in all jurisdictions in which Harken is
presently doing business and where the failure to effect such compliance would
reasonably be expected to have a material adverse effect upon the business,
properties, financial condition or results of operations of Harken.
Section 6.15. Company Board. During the Exchange Period, Harken
will furnish representatives to serve on the Board of Directors of the Company
and will cause such representatives to so serve, if elected by the stockholders
of the Company.
ARTICLE VII
Investors Representations, Warranties and Covenants
A. Each Investor hereby severally represents and warrants to
and covenants with Harken as follows:
Section 7.1. Organization and Corporate Authority. Such
Investor is a corporation duly organized, validly existing and in good standing
under the laws of its jurisdiction of organization, with corporate power and
authority to carry on its business as now conducted and to own, lease and
operate all properties and assets now owned, leased or operated by it.
Section 7.2. Finders' Fees. No broker or finder has acted on
behalf of Investor in connection with this Agreement or the transactions
contemplated herein.
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Section 7.3. Authority of Investor. Investor has the corporate
power to enter into, and be bound by the terms and conditions of, this
Agreement and the Registration Rights Agreement and to carry out its
obligations hereunder and thereunder, and the execution and delivery by
Investor of this Agreement and the Registration Rights Agreement and the
performance by Investor of its obligations hereunder and thereunder have been
duly authorized by all necessary corporate action of Investor. This Agreement
has been duly executed and delivered by Investor and constitutes, and each
other agreement or document executed or to be executed by Investor in
connection with the transactions contemplated hereby has been, or when
executed, will be, duly executed and delivered by Investor and constitutes, or
when executed and delivered will constitute, a valid and legally binding
obligation of Investor enforceable against Investor in accordance with their
respective terms, except to the extent enforcement may be limited (a) by
applicable bankruptcy, insolvency, moratorium, reorganization or similar laws
from time to time in effect which affect creditors" rights generally, (b) by
legal and equitable limitations on the availability of equitable remedies,
including without limitations specific performance against Investor under or by
virtue of this Agreement and (c) by public policy considerations with respect
to the rights of indemnification under the Registration Rights Agreement.
Section 7.4. Non-Contravention. The execution, delivery and
performance of this Agreement and the Registration Rights Agreement by Investor
will not (a) conflict with or result in a violation of any provision of
Investor's organizational documents, (b) conflict with or result in a violation
of any provision of, or constitute (with or without the giving of notice or the
passage of time or both) a default under, or give rise (with or without the
giving of notice or the passage of time or both) to any right of termination,
cancellation, or acceleration under, any bond, debenture, note, mortgage,
indenture, lease, agreement or other instrument or obligation to which Investor
is a party or by which it or any of its properties or assets may be bound,
which conflict, violation, default, termination, cancellation, or acceleration
would have a material adverse effect on the ability of Investor to perform its
obligations hereunder, (c) result in the creation or imposition of any lien or
incumbrance upon the properties or assets of Investor, which lien or
incumbrance would have a material adverse effect on the ability of Investor to
perform its obligations hereunder, or (d) result in a violation by Investor of
any Law or any judgment, order, decree, rule or regulation of any Governmental
Authority to which Investor is subject.
Section 7.5. Governmental Consents. Except for those that have
been duly obtained, no consent, order, approval or authorization of, or
declaration, filing, or registration with, any Governmental Authority is
required to be obtained or made by Investor in connection with the execution,
delivery or performance by Investor of this Agreement.
Section 7.6. Investment Intent. Upon issuance pursuant to this
Agreement, Investor will acquire the Harken Shares for its own account for
investment and not with a view to, or for sale or other disposition in
connection with, any distribution of all or any part of the Harken Shares,
except (a) in an offering covered by a registration statement filed with the
SEC
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<PAGE> 18
under the Securities Act covering the Harken Shares or (b) pursuant to an
applicable exemption under the Securities Act.
Section 7.7. Disclosure of Information. Investor represents
that it has had an opportunity to ask questions of and receive answers from
Harken regarding Harken, its businesses, properties, financial condition,
operations and plan of business, the Harken Shares and all matters relating
thereto.
Section 7.8. Accredited Investor and Experience. Investor
acknowledges that it is an Accredited Investor within the meaning of Regulation
D under the Securities Act, can bear the economic risk of any investment in
Harken Shares and has such knowledge and experience in financial and business
matters that it is capable of evaluating the merits and risks of any investment
in Harken Shares. Investor represents that it has not been organized for the
purpose of acquiring any Harken Shares.
Section 7.9. Restricted Securities. Investor understands that
any Harken Shares that are issued pursuant to this Agreement will not have been
registered pursuant to the Securities Act, any other federal securities law,
any applicable foreign securities law or any applicable state securities or
Blue Sky law, that such shares will be characterized as "restricted securities"
under the United States securities laws and that under such laws and applicable
regulations such shares cannot be sold or otherwise disposed of without
registration under the Securities Act or an exemption therefrom.
Section 7.10. Legend. Investor understands and agrees that the
certificates representing any Harken Shares issued pursuant to this Agreement
shall each conspicuously set forth on the face or back thereof a legend in
substantially the following form:
"THE SHARES REPRESENTED BY THIS CERTIFICATE HAVE NOT BEEN
REGISTERED UNDER THE SECURITIES ACT OF 1933, AS AMENDED, AND
MAY NOT BE SOLD OR OTHERWISE TRANSFERRED UNLESS SUCH SHARES
ARE FIRST REGISTERED UNDER SUCH ACT OR UNLESS AN EXEMPTION
FROM SUCH REGISTRATION IS AVAILABLE."
Section 7.11. Title to Company Shares. Investor is (and at the
closing of any Exchange by Investor pursuant to Article III or IV will be) the
sole record and beneficial owner of, and upon consummation of any such Exchange
Harken will acquire good, valid and marketable title to, the number of Company
Shares set for opposite the name of such Investor on Annex I, free and clear of
all liens, charges, pledges, options, security interests, claims, restrictions
and other encumbrances of any type or description. Investor has made to the
Company the Capital Contribution set forth opposite its name on Annex I hereto.
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<PAGE> 19
B. Each Investor hereby severally represents and warrants to
and covenants with Harken that it has not authorized, approved or taken and
will not authorize, approve or take, directly or indirectly, in its capacity as
a stockholder of the Company or otherwise, any action that would make any of
the following statements in Sections 7.12, 7.13, 7.14, 7.15 and 7.16 inaccurate
or untrue, and, to the best knowledge of such Investor, all such statements are
true and correct:
Section 7.12. Organization and Corporate Authority of Company.
The Company is a corporation duly organized, validly existing and in good
standing under the laws of the State of Delaware, with corporate power and
authority to carry on its business as now conducted and to own, lease and
operate all properties and assets now owned, leased or operated by it.
Section 7.13. Qualification of Company to Business. The Company
is duly qualified to do business as a foreign corporation and in good standing
in each jurisdiction in which its ownership of property or the conduct of its
business requires such qualification.
Section 7.14. Company Charter and Bylaws. The Company has
delivered to Harken accurate and complete copies of (i) the Certificate of
Incorporation and Bylaws of the Company as currently in effect, (ii) the stock
records of the Company and (iii) the minutes of all meetings of the Company's
Board of Directors, any committees of such Board and the Company's stockholders
(and all consents in lieu of such meetings). Such records, minutes and
consents accurately reflect the stock ownership of the Company and all actions
taken by the Company's Board, any committees of such Board and the Company's
stockholders.
Section 7.15. Capitalization of the Company. The authorized
capital stock of the Company consists of 10,000 shares of Common Stock, par
value $.01 per share, of which 7,000 shares are outstanding. All outstanding
shares of capital stock of the Company have been validly issued and are fully
paid and nonassessable, and no shares of capital stock of the Company are
subject to, nor have any been issued in violation of, preemptive or similar
rights. All issuances and sales by the Company of shares of its capital stock
have been effected in compliance with all applicable Laws. The Company Shares
set forth on Annex I constitute (and at the closing of any Exchange pursuant to
Article III or IV will constitute) all the outstanding shares of capital stock
of the Company. Except as set forth on Annex I, there are (and as of the
closing of any Exchange pursuant to Article III or IV there will be)
outstanding (i) no shares of capital stock or other voting securities of the
Company, (ii) no securities of the Company convertible into or exchangeable for
shares of capital stock or other voting securities of the Company, (iii) no
options or other rights to acquire from the Company, and no obligation of the
Company to issue or sell, any shares of capital stock or other voting
securities of the Company or any securities of the Company convertible into or
exchangeable for such capital stock or voting securities and (iv) no equity
equivalents, interests in the ownership or earnings of or other similar rights
of or with respect to the Company.
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Section 7.16. No Prior or Future Activities. The Company was
formed solely for the purpose of entering into the Development Finance
Agreement, and, except for liabilities or obligations incurred in connection
with its incorporation and maintaining its corporate status and good standing,
has not incurred and will not incur, and does not have, any liabilities or
obligations, has not engaged in and will not engage in any business, activities
or transactions, and has not entered into and will not enter into any
contracts, agreements or arrangements, in each case of any type or kind
whatsoever, except for this Agreement and the Development Finance Agreement and
its obligations and the performance thereof hereunder and thereunder.
C. Each Investor agrees that:
Section 7.17. Continuing Representations and Warranties. The
representations, warranties and covenants of Investor made in this Article VII
shall remain true and accurate during the period commencing on the Effective
Date and ending on the Business Day next following the later of (a) the
termination of the Exchange Period and (b) the consummation of any Exchange
made pursuant to Article III or IV, and Investor shall not take any action nor
permit any action to be taken which would cause any of such representations,
warranties and covenants to become untrue, inaccurate or breached. Investor
acknowledges and agrees that Harken may rely on this Section in connection with
any issuance of Harken Shares pursuant to this Agreement.
ARTICLE VIII
Miscellaneous
Section 8.1. Assignment by Investors. Investors shall not
assign, sell, transfer, convey, mortgage or pledge all or any part of its
rights and obligations hereunder or create a security interest therein without
the prior written consent of Harken.
Section 8.2. Adjustments for Consolidation, Merger, Sale of
Assets, Reorganization, etc. In case Harken after the Effective Date (a) shall
consolidate with or merge into any other person and shall not be the continuing
or surviving corporation of such consolidation or merger, or (b) shall permit
any other person to consolidate with or merge into Harken and Harken shall be
the continuing or surviving person but, in connection with such consolidation
or merger, the Harken Shares shall be changed into or exchanged for stock or
other securities of any other person or cash or any other property, or (c)
shall transfer all or substantially all of its properties or assets to any
other person, or (d) shall effect a capital reorganization or reclassification
of the Harken Shares (other than a subdivision or combination of the
outstanding Harken Shares into a greater or lesser number of Harken Shares),
then, and in the case of each such transaction, proper provision shall be made
so that, upon the basis and the terms and in the manner provided in this
Agreement, Investors upon an Exchange for Harken Shares at any time after the
consummation of such transaction, shall be
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<PAGE> 21
entitled to receive, in lieu of the Harken Shares issuable upon such Exchange
prior to such consummation, the amount of securities, cash or other property to
which Investors would actually have been entitled as a stockholder upon such
consummation if such Exchange had occurred immediately prior thereto; provided,
however, that if the transaction described in clauses (a) through (d) hereof
provides an election to receive cash, securities or property, Investors shall,
within 10 Business Days following written request from Harken, notify Harken of
the election Investors would have made had they been stockholders of Harken,
which notice shall govern the consideration to be received upon Exchange, and
if no such notice is received within such 10 Business Days, Harken in its
discretion may determine the consideration to which Investors are entitled as
if Investors had made any of such elections. The provisions of this Section
8.2 shall apply mutatis mutandis to the issuance of Harken Shares pursuant to
Article V.
Section 8.3. Indemnification.
(a) Harken agrees to indemnify and hold harmless
Investors and their directors, officers, employees, agents, partners,
shareholders and affiliates from and against any and all claims,
damages, losses, liabilities, penalties and expenses (including
without limitation reasonable fees and disbursements of counsel) that
may be incurred by or asserted against any such person, in each case
arising out of or in connection with or by reason of any breach of any
representation, warranty, covenant or agreement of Harken contained in
this Agreement. The obligations of Harken under this Section 8.3(a)
shall survive the termination of this Agreement and shall continue in
effect for a period of three years thereafter, at which time such
obligations shall terminate.
(b) Each Investor agrees to indemnify and hold harmless
Harken and its directors, officers, employees, agents, partners,
shareholders and affiliates from and against any and all claims,
damages, losses, liabilities, penalties and expenses (including
without limitation reasonable fees and disbursements of counsel) that
may be incurred by or asserted against any such person, in each case
arising out of or in connection with or by reason of any breach of any
representation, warranty, covenant or agreement of such Investor
contained in this Agreement. The obligations of Investors under this
Section 8.3(b) shall survive the termination of this Agreement and
shall continue in effect for a period of three years thereafter, at
which time such obligations shall terminate.
Section 8.4. Public Announcements. Except as set forth in the
following sentence, the parties to this Agreement agree that prior to making
any public announcement or statement with respect to the transactions
contemplated by this Agreement, the party desiring to make such public
announcement or statement shall consult with the other parties and exercise
reasonable efforts to (a) agree upon the text of a joint public announcement or
statement to be made by all the parties or (b) obtain approval of the other
parties to the text of a public
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<PAGE> 22
announcement or statement to be made solely by Harken or Investors, as the case
may be. Nothing contained in this Section shall be construed to require any
party to obtain approval of the other parties to disclose information with
respect to any disclosure (a) required by applicable Law or by any applicable
rules, regulations or orders of any Governmental Authority having jurisdiction
or (b) necessary to comply with disclosure requirements of any applicable stock
exchange. Harken agrees that, prior to making any public announcement or
statement with respect to the transactions contemplated by this Agreement that
names any Investor, Harken will notify such Investor and furnish it with a copy
of the text of the proposed public announcement or statement.
Section 8.5. Brokers. Without limiting the parties" respective
representations in Sections 6.4 and 7.2, each party agrees to indemnify and
hold the others harmless from and against any claim for a brokerage or finder's
fee or commission in connection with this Agreement or the transactions
contemplated by this Agreement to the extent such claim arises from or is
attributable to the actions of such indemnifying party.
Section 8.6. Notices. All notices, requests, demands, consents
and other communications required or permitted to be given or made hereunder
shall be in writing and shall be deemed to have been duly given or made if
delivered personally, or sent by a nationally recognized overnight delivery
service or by telecopy or similar facsimile transmission, or mailed by prepaid
registered or certified mail, return receipt requested, to the other parties at
the respective address set forth below (or to such other address as a party
shall designate for itself by written notice given or made in accordance
herewith):
(a) if to Harken, at:
Harken Energy Corporation
MacArthur Center II
5605 N. MacArthur Blvd., Suite 400
Irving, Texas 75038
Telephone: (972)753-6900
Telecopy: (972) 753-6963
Attention: Mr. Bruce N. Huff, Senior Vice President and
Mr. Larry E. Cummings, Vice President and
General Counsel
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(b) if to an Investor or Investors, at:
Rauscher Pierce & Clark Limited
56 Green Street, London W1Y 3RH
Telephone: 0171 491 2434
Telecopy: 0171 491 9081
Attention: David P. Quint
Any such notice, request, demand, consent or other communication shall
be deemed delivered and given or made on the third Business Day after the date
of mailing, if mailed by registered or certified mail, or on the first Business
Day after the date of transmittal, if sent by overnight delivery service or by
telecopy or similar facsimile transmission (provided such telecopy or
transmission is followed promptly by the mailing of the original of such
notice), or on the date of delivery, if delivered personally.
Section 8.7. Waivers and Amendments. This Agreement may be
amended or supplemented only by a written instrument signed by the parties
hereto. The terms of this Agreement may be waived only by a written instrument
signed by the party waiving compliance. No delay on the part of any party in
exercising any right, power or privilege hereunder shall operate as a waiver
thereof, nor shall any waiver on the part of any party of any such right, power
or privilege, or any single or partial exercise of any such right, power or
privilege, preclude any further exercise thereof or the exercise of any other
such right, power or privilege. The rights and remedies herein provided are
cumulative and are not exclusive of any rights or remedies that any party may
otherwise have at law or in equity.
Section 8.8. Governing Law. This Agreement and all actions,
proceedings and matters arising out of this Agreement shall be governed by, and
construed and enforced in accordance with, the laws of the State of Texas,
without regard to the principles of conflicts of laws.
Section 8.9. Binding Effect; No Assignment; No Third Party
Benefit. This Agreement shall be binding upon and inure to the benefit of the
parties and their respective successors and permitted assigns. Unless
otherwise expressly provided herein, no rights or obligations under this
Agreement are assignable. Except as expressly provided in Section 8.3, nothing
in this Agreement, whether expressed or implied, is intended to confer any
rights or remedies under or by reason of this Agreement on any person other
than the parties to this Agreement and their respective successors and
permitted assigns.
Section 8.10. Entire Agreement. This Agreement and the
Registration Rights Agreement constitute the full and complete agreement of the
parties hereto with respect to the subject matter hereof, and supersede all
previous oral and written and all contemporaneous oral negotiations,
commitments, writings and understandings.
-20-
<PAGE> 24
Section 8.11. Severability. Every provision of this Agreement is
intended to be severable. If any term or provision hereof is determined to be
invalid, illegal, or unenforceable for any reason whatsoever, such invalidity,
illegality, or unenforceability shall not affect the validity, legality and
enforceability of the remainder of this Agreement.
Section 8.12. United States Dollars. All references in this
Agreement to dollar amounts are to United States dollars.
Section 8.13. Survival of Representations and Warranties. The
representations and warranties of the parties made herein shall survive the
execution and delivery of this Agreement, the termination of the Exchange
Period and the closing of any Exchange.
Section 8.14. Rights as Stockholder. No adjustment shall be made
for dividends on any Harken Shares issued upon an Exchange. An Investor shall
have none of the rights of a stockholder of Harken until Harken Shares are
actually issued to it.
Section 8.15. Counterparts. This Agreement may be executed in
one or more counterparts (and separately by each party hereto), each of which
shall be an original and all of which shall constitute but one and the same
document.
Section 8.16. Arbitration. Harken and Investors agree to submit
to final and binding arbitration any and all disputes, claims, and/or
disagreements concerning the interpretation or application of this Agreement or
the Registration Rights Agreement. Any dispute, claim, and/or disagreement
subject to arbitration pursuant to the terms of this Section shall be resolved
by arbitration in New York, New York by three arbitrators in accordance with
the Commercial Arbitration Rules of the American Arbitration Association or any
successor organization (the "Association") then in effect. Within 10 days of
the initiation of an arbitration hereunder, Harken will designate one
arbitrator and Investors, acting as a group, will designate one arbitrator, in
accordance with the Association's rules. The appointed arbitrators will
appoint a neutral arbitrator in the manner prescribed in the Association's
rules. Harken and Investors agree that the decision of the three arbitrators
selected hereunder will be final and binding on all parties. A judgment on the
award rendered by the arbitrator may be entered in any court having
jurisdiction, or application may be made to such court for judicial acceptance
of the award and an order of enforcement, as the case may be.
Section 8.17. Consent to Jurisdiction. Subject to the provisions
of Section 8.16, Harken and Investors agree that, in addition to any other
courts that may have jurisdiction under applicable laws, any action or
proceeding to enforce or arising out of this Agreement or the Registration
Rights Agreement may be commenced in the Court of the State of Texas for Dallas
County, or in the United States District Court for the Northern District of
Texas, and Harken and Investors consent and submit in advance to such
jurisdiction and agree that venue will be proper in such courts on any such
matter. Harken and Investors each hereby waives personal service of process
and agrees that a summons and complaint commencing an action or
-21-
<PAGE> 25
proceeding in any such court shall be properly served and shall confer personal
jurisdiction if served by registered or certified mail to it. The choice of
forum set forth in this Section shall not be deemed to preclude the enforcement
of any judgment obtained in such forum, or the taking of any action under this
Agreement or the Registration Rights Agreement to enforce the same, in any
appropriate jurisdiction.
Section 8.18. Further Assurances. At any closing of any Exchange
pursuant to Article III or IV, Investors shall execute and deliver to Harken
such assignments, instruments and documents as may be reasonably requested by
Harken to carry out the intent and purposes of this Agreement.
Section 8.19. Expenses. All fees and expenses (including legal
fees and expenses) incurred by a party in connection with the negotiation,
preparation and execution of this Agreement and the Registration Rights
Agreement shall be the responsibility of such party.
-22-
<PAGE> 26
IN WITNESS WHEREOF, the parties have caused this Agreement to be
executed by the respective officers hereunto duly authorized as of the date
first above written.
HARKEN ENERGY CORPORATION
By:
-----------------------------------------
Name: Larry E. Cummings
Title: Vice President and Secretary
HARKEN CAPITAL CORPORATION
By:
-----------------------------------------
Name: Larry E. Cummings
Title: Vice President and Secretary
SIDRO S.A.
By:
-----------------------------------------
Name:
------------------------------------
Title:
-----------------------------------
LAMBERTINE HOLDINGS LTD
By:
-----------------------------------------
Name:
------------------------------------
Title:
-----------------------------------
-23-
<PAGE> 27
RAUSCHER PIERCE & CLARK (GUERNSEY) LTD.
By:
-----------------------------------------
Name:
------------------------------------
Title:
-----------------------------------
-24-
<PAGE> 28
ANNEX I
<TABLE>
<CAPTION>
Capital Number of
Investor Contribution Company Shares
-------- --------------- --------------
<S> <C> <C>
Sidro S.A. . . . . . . . . . . . . . . . . . . . . . . $ 3,000,000 3,000
Lambertine Holdings Ltd. . . . . . . . . . . . . . . . $ 2,000,000 2,000
Rauscher Pierce & Clark (Guernsey) Ltd. . . . . . . . . $ 2,000,000 2,000
--------------- ------------
Totals . . . . . . . . . . . . . . . . . . . . $ 7,000,000 7,000
</TABLE>
<PAGE> 1
EXHIBIT 22
HARKEN ENERGY CORPORATION
SUBSIDIARIES
March 23, 1998
AEX, INC.
BURNS DRILLING COMPANY
CHUSKA RESOURCES CORPORATION
D-FW RESOURCE MANAGEMENT, INC.
FISHER-WEBB, INC.
HARKEN BAHRAIN OIL COMPANY
HARKEN DE COLOMBIA, LTD.
HARKEN DE MEXICO, S.A. DE C.V.
HARKEN ENERGY WEST TEXAS, INC.
HARKEN EXPLORATION COMPANY
HARKEN INTERNATIONAL, LTD.
HARKEN SOUTHWEST CORPORATION
KMI ACQUISITION CORPORATION
KMI CAPITAL CORPORATION
KENDRICK & MULLIGAN OIL & GAS, INCORPORATED
KENNEDY & MITCHELL, INC.
MCCULLOCH ENERGY, INC.
SEARCH ACQUISITION CORP.
SUNFIELD ENERGY COMPANY
SUPREME WELL SERVICE COMPANY
HARKEN CANADA, LTD.
<PAGE> 1
Exhibit 24
HARKEN ENERGY CORPORATION
FORM 10-K POWER OF ATTORNEY
KNOW ALL MEN BY THESE PRESENTS, that the undersigned, an Officer and/or
Director of HARKEN ENERGY CORPORATION, a Delaware corporation (the
"Corporation"), hereby constitutes and appoints Mikel D. Faulkner, Bruce N.
Huff, Larry E. Cummings and Gregory S. Porter and each of them (with full power
to each of them to act alone), his true and lawful attorney-in-fact and agent
with full power of substitution for him and on his behalf in his name, place and
stead in any and all capacities (whether on behalf of the corporation or as an
Officer or Director or both thereof or by attesting the seal of the Corporation
or otherwise), to sign, execute and file an Annual Report on Form 10-K for the
fiscal year ended December 31, 1997, under the Securities Exchange Act of 1934,
as amended with all exhibits and any and all documents required to be filed with
respect thereto with the Securities and Exchange Commission or any state or
other regulatory authority, and granting unto said attorneys-in-fact and agents
and each of them full power and authority to do and perform each and every act
and thing requisite and necessary to be done in and about the premises in order
to effectuate the same as fully to all intents and purposes as he himself might
or could do if personally present, hereby ratifying and confirming all that said
attorneys-in-fact and agents or any of them or their substitute or substitutes,
may lawfully do or cause to be done.
IN WITNESS WHEREOF, the undersigned have executed this Power of
Attorney effective as of March 17, 1998.
<TABLE>
<CAPTION>
NAME CAPACITIES
---- ----------
<S> <C>
/s/ Mikel D. Faulkner Chairman of the Board of Directors
- ------------------------------- and Chief Executive Officer
Mikel D. Faulkner (Principal Executive Officer)
/s/ Richard H. Schroeder Director, President and
- ------------------------------- Chief Operating Officer
Richard H. Schroeder
/s/ Bruce N. Huff Director, Senior Vice President and
- ------------------------------- Chief Financial Officer
Bruce N. Huff (Principal Financial Officer and
Principal Accounting Officer)
/s/ Stephen C. Voss Director and Senior Vice President
- -------------------------------
Stephen C. Voss
</TABLE>
<PAGE> 2
Harken Energy Corporation
Form 10-K Power of Attorney
March 17, 1998
<TABLE>
<S> <C>
/s/ Michael M. Ameen, Jr. Director
- -------------------------------
Michael M. Ameen, Jr.
/s/ Michael R. Eisenson Director
- -------------------------------
Michael R. Eisenson
/s/ Gary R. Peterson Director
- -------------------------------
Gary R. Peterson
/s/ Donald W. Raymond Director
- -------------------------------
Donald W. Raymond
Director
- -------------------------------
Hobart A. Smith
/s/ Gary B. Wood Director
- -------------------------------
Gary B. Wood
</TABLE>
<TABLE> <S> <C>
<ARTICLE> 5
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> DEC-31-1997
<PERIOD-START> JAN-01-1997
<PERIOD-END> DEC-31-1997
<CASH> 35,421,000
<SECURITIES> 88,090,000
<RECEIVABLES> 2,502,000
<ALLOWANCES> (327,000)
<INVENTORY> 0
<CURRENT-ASSETS> 126,392,000
<PP&E> 125,703,000
<DEPRECIATION> (18,905,000)
<TOTAL-ASSETS> 238,513,000
<CURRENT-LIABILITIES> 15,752,000
<BONDS> 39,880,000
0
0
<COMMON> 1,218,000
<OTHER-SE> 156,663,000
<TOTAL-LIABILITY-AND-EQUITY> 238,513,000
<SALES> 14,113,000
<TOTAL-REVENUES> 18,768,000
<CGS> 5,581,000
<TOTAL-COSTS> 5,581,000
<OTHER-EXPENSES> 11,405,000
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 1,530,000
<INCOME-PRETAX> 252,000
<INCOME-TAX> 63,000
<INCOME-CONTINUING> 189,000
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 189,000
<EPS-PRIMARY> 0.00
<EPS-DILUTED> 0.00
</TABLE>
