-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, G7l+Rmnjo2a7O9AuTJj+QPRPlX59BwFBY3J7bokXh2Y+lu6Rb0p+OMx8NCQj42v/ 3OStV+Ag7En2B3qkLGlzag== 0000899243-02-002326.txt : 20020814 0000899243-02-002326.hdr.sgml : 20020814 20020814181134 ACCESSION NUMBER: 0000899243-02-002326 CONFORMED SUBMISSION TYPE: 10-Q PUBLIC DOCUMENT COUNT: 5 CONFORMED PERIOD OF REPORT: 20020630 FILED AS OF DATE: 20020814 FILER: COMPANY DATA: COMPANY CONFORMED NAME: HARKEN ENERGY CORP CENTRAL INDEX KEY: 0000313478 STANDARD INDUSTRIAL CLASSIFICATION: CRUDE PETROLEUM & NATURAL GAS [1311] IRS NUMBER: 952841597 STATE OF INCORPORATION: DE FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: 10-Q SEC ACT: 1934 Act SEC FILE NUMBER: 001-10262 FILM NUMBER: 02738178 BUSINESS ADDRESS: STREET 1: 16285 PARK TEN PLACE SUITE 600 CITY: HOUSTON STATE: TX ZIP: 77084 BUSINESS PHONE: 2817171300 MAIL ADDRESS: STREET 1: 16285 PARK TEN PLACE STREET 2: STE 600 CITY: HOUSTON STATE: TX ZIP: 77084 FORMER COMPANY: FORMER CONFORMED NAME: HARKEN OIL & GAS INC DATE OF NAME CHANGE: 19890109 10-Q 1 d10q.txt FOR THE PERIOD 6/30/2002 SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549 Form 10-Q [X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15 (d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the quarterly period ended June 30, 2002 [_] 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.) 580 WestLake Park Boulevard, Suite 600 77079 Houston, Texas (Zip Code) (Address of principal executive offices) Registrant's telephone number, including area code (281) 504-4000 Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes [X] No [_] The number of shares of Common Stock, par value $0.01 per share, outstanding as of August 1, 2002 was 23,731,407. HARKEN ENERGY CORPORATION INDEX TO QUARTERLY REPORT June 30, 2002
Page ---- PART I. FINANCIAL INFORMATION Item 1 Condensed Financial Statements Consolidated Condensed Balance Sheets 4 Consolidated Condensed Statements of Operations 5 Consolidated Condensed Statement of Stockholders' Equity 6 Consolidated Condensed Statements of Cash Flows 7 Notes to Consolidated Condensed Financial Statements 8 Item 2 Management's Discussion and Analysis of Financial Condition and Results of Operations 17 PART II. OTHER INFORMATION 31 Item 1. Legal Proceedings 31 Item 2. Changes in Securities and Use of Proceeds 31 Item 6. Exhibits and Reports on Form 8-K 32 SIGNATURES 37
2 ITEM 1. CONDENSED FINANCIAL STATEMENTS HARKEN ENERGY CORPORATION AND SUBSIDIARIES CONSOLIDATED CONDENSED BALANCE SHEETS (Unaudited)
December 31, June 30, 2001 2002 ------------- ------------- Assets Current Assets: Cash and temporary investments $ 8,523,000 $ 7,723,000 Restricted cash 944,000 -- Accounts receivable, net 3,248,000 4,505,000 Related party notes receivable 169,000 105,000 Prepaid expenses and other current assets 1,361,000 576,000 ------------- ------------- Total Current Assets 14,245,000 12,909,000 Property and Equipment, net 78,335,000 73,878,000 Other Assets, net 3,226,000 2,747,000 ------------- ------------- $ 95,806,000 $ 89,534,000 ============= ============= Liabilities and Stockholders' Equity Current Liabilities: Trade payables $ 2,664,000 $ 784,000 Accrued liabilities and other 6,197,000 5,824,000 Revenues and royalties payable 2,006,000 1,422,000 Bank credit facilities -- 6,737,000 Convertible notes payable -- 41,211,000 ------------- ------------- Total Current Liabilities 10,867,000 55,978,000 Convertible Notes Payable 51,388,000 12,318,000 Bank Credit Facilities 7,937,000 -- Accrued Preferred Stock Dividends 3,942,000 5,629,000 Other Long-Term Obligations 5,458,000 4,856,000 Commitments and Contingencies (Note 11) Minority Interest in Consolidated Subsidiary -- 1,948,000 Stockholders' Equity: Series G1 Preferred Stock, $1.00 par value; $100 liquidation value; 700,000 shares authorized; 446,417 and 424,597 shares outstanding, respectively 446,000 424,000 Series G2 Preferred Stock, $1.00 par value; $100 liquidation value; 400,000 shares authorized; 95,300 and 94,300 shares outstanding, respectively 95,000 94,000 Common stock, $0.01 par value; 225,000,000 shares authorized; 18,713,038 and 21,541,595 shares issued, respectively 187,000 215,000 Additional paid-in capital 385,710,000 386,880,000 Accumulated deficit (369,087,000) (377,108,000) Accumulated other comprehensive income 296,000 (267,000) Treasury stock, at cost, 542,900 shares held (1,433,000) (1,433,000) ------------- ------------- Total Stockholders' Equity 16,214,000 8,805,000 ============= ============= $ 95,806,000 $ 89,534,000 ============= =============
The accompanying Notes to Consolidated Condensed Financial Statements are an integral part of these Statements. 3 HARKEN ENERGY CORPORATION AND SUBSIDIARIES CONSOLIDATED CONDENSED STATEMENTS OF OPERATIONS (Unaudited)
Three Months Ended Six Months Ended June 30, June 30, ----------------------------- ---------------------------- 2001 2002 2001 2002 ------------- ------------ ------------ ------------ Revenues: Oil and gas operations $ 10,792,000 $ 7,516,000 $ 19,707,000 $ 12,942,000 Interest and other income 190,000 196,000 467,000 262,000 ------------ ------------ ------------ ------------ 10,982,000 7,712,000 20,174,000 13,204,000 ------------ ------------ ------------ ------------ Costs and Expenses: Oil and gas operating expenses 3,327,000 2,393,000 6,581,000 4,713,000 General and administrative expenses, net 2,892,000 2,453,000 5,372,000 4,862,000 Depreciation and amortization 4,834,000 3,365,000 8,083,000 6,631,000 Litigation and contingent liability settlements, net -- 1,168,000 -- 1,168,000 Interest expense and other, net 986,000 953,000 2,698,000 1,925,000 ------------ ------------ ------------ ------------ 12,039,000 10,332,000 22,734,000 19,299,000 ------------ ------------ ------------ ------------ Loss before income taxes (1,057,000) (2,620,000) (2,560,000) (6,095,000) Income tax expense 15,000 90,000 30,000 180,000 ------------ ------------ ------------ ------------ Loss before extraordinary items and minority interest (1,072,000) (2,710,000) (2,590,000) (6,275,000) Minority interest in loss of subsidiary -- 20,000 -- 29,000 ------------ ------------ ------------ ------------ Loss before extraordinary item $ (1,072,000) $ (2,690,000) $ (2,590,000) $ (6,246,000) Extraordinary item-gain on repurchase/exchange of European Notes 1,147,000 340,000 1,253,000 340,000 ------------ ------------ ------------ ------------ Net income (loss) $ 75,000 $ (2,350,000) $ (1,337,000) $ (5,906,000) ============ ============ ============ ============ Preferred stock dividends (633,000) (1,070,000) (949,000) (2,115,000) ------------ ------------ ------------ ------------ Net loss attributed to common stock $ (558,000) $ (3,420,000) $ (2,286,000) $ (8,021,000) ============ ============ ============ ============ Basic and diluted income (loss) per common share: Loss before extraordinary items $ (0.09) $ (0.18) $ (0.20) $ (0.42) Extraordinary item-gain on repurchase/exchange of European Notes 0.06 0.02 0.07 0.02 ------------ ------------ ------------ ------------ Loss per common share $ (0.03) $ (0.16) $ (0.13) $ (0.40) ============ ============ ============ ============ Weighted average shares outstanding 18,124,805 20,968,751 17,991,060 19,608,768 ============ ============ ============ ============
The accompanying Notes to Consolidated Condensed Financial Statements are an integral part of these Statements. 4 HARKEN ENERGY CORPORATION AND SUBSIDIARIES CONSOLIDATED CONDENSED STATEMENT OF STOCKHOLDERS' EQUITY (Unaudited)
Accumulated G1 G2 Additional Other Preferred Preferred Common Paid-In Treasury Accumulated Comprehensive Stock Stock Stock Capital Stock Deficit Income (Loss) Total --------- -------- -------- ------------ ----------- ------------- ------------- ---------- Balance, December 31, 2001 $446,000 $95,000 $187,000 $385,710,000 $(1,433,000) $(369,087,000) $ 296,000 $16,214,000 Issuance of common stock -- -- 27,000 2,689,000 -- -- -- 2,716,000 Exchange of preferred stock (13,000) -- -- (49,000) -- -- -- (62,000) Conversions of preferred stock (8,000) (1,000) 1,000 257,000 -- -- -- 249,000 Repurchase of preferred stock (1,000) -- -- (8,000) -- -- -- (9,000) Preferred stock dividends -- -- -- -- -- (2,115,000) -- (2,115,000) Issuance of stock of subisidiary -- -- -- (1,719,000) -- -- -- (1,719,000) Comprehensive income: Net change in derivative fair value -- -- -- -- -- -- (473,000) Reclassification of derivative fair value into earnings -- -- -- -- -- -- (90,000) Net loss -- -- -- -- -- (5,906,000) -- Total comprehensive income (loss) (6,469,000) -------- ------- -------- ------------ ----------- ------------- ----------- ----------- Balance, June 30, 2002 $424,000 $94,000 $215,000 $386,880,000 $(1,433,000) $(377,108,000) $ (267,000) $ 8,805,000 ======== ======= ======== ============ =========== ============= =========== ===========
The accompanying Notes to Consolidated Condensed Financial Statements are an integral part of these Statements. 5 HARKEN ENERGY CORPORATION AND SUBSIDIARIES CONSOLIDATED CONDENSED STATEMENTS OF CASH FLOWS (Unaudited)
Six Months Ended June 30, ----------------------------------- 2001 2002 ------------ ------------ Cash flows from operating activities: Net loss $(1,337,000) $(5,906,000) Adjustment to reconcile net loss to net cash provided (used) by operating activities: Depreciation and amortization 8,083,000 6,631,000 Amortization of issuance costs 837,000 238,000 Minority interest -- (29,000) Litigation and contingent liability settlements, net -- 1,168,000 Extraordinary items (1,253,000) (340,000) Other 294,000 121,000 Change in assets and liabilities: (Increase) decrease in accounts receivable (840,000) (1,791,000) Increase (decrease) in trade payables and other (1,396,000) (2,031,000) ----------- ----------- Net cash provided by (used in) operating activities 4,388,000 (1,939,000) ----------- ----------- Cash flows from investing activities: Proceeds from sales of assets 9,620,000 2,606,000 Capital expenditures, net (18,384,000) (2,903,000) ----------- ----------- Net cash used in investing activities (8,764,000) (297,000) ----------- ----------- Cash flows from financing activities: Repayments of long-term debt (207,000) (1,894,000) Proceeds from issuances of common stock, net of issuances costs -- 921,000 Collection of note receivable 140,000 -- Proceeds from issuances of European Notes, net -- 2,418,000 Purchase of preferred stock -- (9,000) ----------- ----------- Net cash (used in) provided by financing activities (67,000) 1,436,000 ----------- ----------- Net decrease in cash and temporary investments (4,443,000) (800,000) Cash and temporary investments at beginning of period 20,673,000 8,523,000 ----------- ----------- Cash and temporary investments at end of period $16,230,000 $ 7,723,000 =========== =========== Supplemental disclosures of cash flow information: Cash paid during the period for: Interest $ 2,046,000 $ 1,410,000 Income taxes -- 333,000
The accompanying Notes to Consolidated Condensed Financial Statements are an integral part of these Statements. 6 HARKEN ENERGY CORPORATION AND SUBSIDIARIES NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS June 30, 2001 and 2002 (Unaudited) (1) BASIS OF PRESENTATION The accompanying unaudited consolidated condensed financial statements of Harken Energy Corporation ("Harken") have been prepared pursuant to the rules and regulations of the Securities and Exchange Commission ("SEC"). Certain information and note disclosures normally included in annual financial statements prepared in accordance with generally accepted accounting principles have been condensed or omitted pursuant to these rules and regulations, although Harken believes that the disclosures made are adequate to make the information presented not misleading. In the opinion of Harken, these financial statements contain all adjustments necessary to present fairly its financial position as of December 31, 2001 and June 30, 2002 and the results of its operations and changes in its cash flows for all periods presented as of June 30, 2001 and 2002. All such adjustments represent normal recurring items. These condensed financial statements should be read in conjunction with the financial statements and the notes thereto included in Harken's Annual Report on Form 10-K for the year ended December 31, 2001. Certain prior year amounts have been reclassified to conform with the 2002 presentation. The preparation of financial statements in conformity with generally accepted accounting principles requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reported period. Actual results could differ from these estimates. Management has begun a series of transactions to repurchase, refinance and redeem certain convertible notes. See Note 7--Convertible Notes Payable, for further discussion. If this process is not successful, there could be a material adverse effect to Harken. The results of operations for the six month period ended June 30, 2002 are not necessarily indicative of the results to be expected for the full year. Comprehensive Loss - Comprehensive loss includes changes in stockholders' equity during the periods that do not result from transactions with stockholders. Harken's total comprehensive loss is as follows:
Six Months Ended June 30, ------------------------ 2001 2002 ---------- ---------- (in thousands) Net loss $(1,337) $(5,906) Change in fair value of derivative 1,153 (473) Reclassification of derivative fair value into earnings 1,525 (90) Cumulative effect of change in accounting principle (3,025) -- ------- ------- Total comprehensive loss $(1,684) $(6,469) ======= =======
7 (2) ACQUISITIONS AND DISPOSITIONS Sales of Certain Producing Interests -During 2001, certain wholly-owned subsidiaries of Harken sold certain interests in oil and gas producing properties located in Texas, Arkansas, New Mexico and Louisiana for approximately $13,090,000 in cash, which was used in part to support Harken's exploration and development activities. During the first quarter of 2002, a wholly-owned subsidiary of Harken sold interests in oil and gas producing properties located in Texas for approximately $910,000. During the second quarter of 2002, a wholly-owned subsidiary of Harken sold additional interests in oil and gas producing properties for approximately $1,614,000. Acquisition of Republic Properties - On January 30, 2002, a wholly-owned subsidiary of Harken signed an agreement to acquire certain property interests (the "Republic Properties") from Republic Resources, Inc. ("Republic"). This acquisition was closed on April 4, 2002 following approval by Republic stockholders and debenture holders. The Republic Properties consist of interests in 16 oil and gas wells in 9 fields plus interests in additional prospect acreage located in southern Louisiana and the Texas Gulf Coast region. The Republic Properties were acquired by Harken in exchange for 2,645,500 shares of Harken common stock, plus 79,365 shares issued as a transaction fee in this acquisition. In addition, the Purchase and Sale Agreement also provides for contingent additional consideration of cash or additional shares of Harken common stock, or any combination of the two as Harken may decide, to be paid within 45 days after December 31, 2003, based on a defined calculation to measure the appreciation, if any, of the reserve value of the Republic Properties. (3) PROPERTY AND EQUIPMENT A summary of property and equipment follows:
December 31, June 30, 2001 2002 ------------- ------------- Unevaluated oil and gas properties: Unevaluated Colombian properties $ 68,000 $ 104,000 Unevaluated Peru properties 635,000 784,000 Unevaluated Panama properties 166,000 274,000 Unevaluated domestic properties 2,603,000 2,303,000 Evaluated oil and gas properties: Evaluated Colombian properties 182,945,000 183,432,000 Evaluated domestic properties 154,495,000 156,087,000 Facilities and other property 25,000,000 25,084,000 Less accumulated depreciation and amortization (287,577,000) (294,190,000) ------------- ------------- $ 78,335,000 $ 73,878,000 ============= =============
(4) MIDDLE AMERICAN OPERATIONS Harken's Middle American operations are conducted through its ownership in Global Energy Development PLC ("Global," a public limited company registered in England and Wales under the Companies 8 Act (1985) of the United Kingdom). Global's ordinary shares are admitted for trading on the Alternative Investment Market of the London Stock Exchange. Effective March 25, 2002, Harken's ownership in Global decreased from 100% to 92.77% when Global sold 7.23% of its shares to 22 investors, including certain affiliates of Harken and Global, for approximately $1,435,000 in cash. Global is seeking additional financing and may effect acquisitions using shares of its newly listed ordinary shares. In addition, Harken may elect to sell or otherwise dispose of additional shares of Global owned by it, for cash or otherwise. The issuance of shares by Global has been accounted for by Harken within stockholders' equity, by reducing additional paid-in capital by $1,977,000 related to the corresponding minority interest and offsetting proceeds received from transaction costs of $1,177,000, of which $516,000 were incurred in 2002. Colombian Operations - Global's Colombian operations are conducted through Harken de Colombia, Ltd., a wholly-owned subsidiary of Global, which held four exclusive Colombian Association Contracts with Empresa Colombiana de Petroleos ("Ecopetrol") as of June 30, 2002. Terms of each of the Association Contracts commit Global to perform certain activities in accordance with a prescribed timetable. As of August 14, 2002, Global was in compliance with the requirements of each of the Association Contracts. Costa Rica Operations - Global's Costa Rican operations have been conducted through Harken Costa Rica Holdings LLC ("HCRH", a Nevada limited liability company) that is owned 40% by a wholly-owned subsidiary of Global and 60% by an affiliate of MKJ Xploration, Inc. ("MKJ"). MKJ is the operator of this Costa Rica project. In March 2002, the Costa Rica environmental agency SETENA denied its approval of the requested environmental permit related to HCRH's Costa Rica contract. HCRH has filed an appeal related to this ruling by SETENA. In January 2002, the Costa Rica Constitutional Court rendered a published opinion in a suit that had been filed against another oil and gas operator and the Costa Rican Ministry of Environment and Energy ("MINAE") by certain environmental groups. In its opinion in this case, the Constitutional Court of Costa Rica found, among other issues, that SETENA did not have the current authority to grant environmental permits. In addition, proposed legislation pending in the Costa Rica legislature seeks to abolish the Costa Rica government's rights to grant hydrocarbon exploration contracts. These significant adverse developments resulted in Harken and Global fully impairing its investment in the Costa Rica project in its Consolidated Balance Sheet as of December 31, 2001. Consistent with the Costa Rica Constitutional Court decision discussed above, even though it did not directly involve HCRH or the Moin #2 well, as well as the pending legislation described above, HCRH's initial appeal to SETENA for reconsideration of its denial of the requested permit was rejected. Denial of HCRH's appeal and recent political developments in Costa Rica, in the opinion of Harken and Global, severely limit the opportunity for future oil and gas exploration in Costa Rica. Following denial of its appeal, HCRH initiated discussions with the Costa Rica government to address HCRH's rights under the concession contract. Peru Operations - In April 2001, a wholly-owned subsidiary of Global signed a Technical Evaluation Agreement ("Peru TEA") with PeruPetro, the national oil company of Peru. The Peru TEA covers approximately 6.8 million gross acres in northeastern Peru. Under the terms of the Peru TEA, Global has the option to convert the Peru TEA to a seven year exploration contract, with a twenty-two year production period. Terms of the Peru TEA allow Global to conduct a study of the area that will include the reprocessing of seismic data and evaluation of previous well data. Panama Operations - In September 2001, a wholly-owned subsidiary of Global signed a Technical Evaluation Agreement ("Panama TEA") with the Ministry of Commerce and Industry for the Republic of Panama. The Panama TEA covers approximately 2.7 million gross acres divided into three blocks in and 9 offshore Panama. Under the terms of the Panama TEA, which extends through September 2003, Global is to perform certain work program procedures and studies to be submitted to the Panamanian government, and has an option to negotiate and enter into one or more Contracts for the Exploration and Exploitation of Hydrocarbons with the Ministry of Commerce and Industry. (5) BANK CREDIT FACILITY OBLIGATION Certain Harken subsidiaries (the "Borrowers") entered into a three year loan facility with Bank One, N.A. ("Bank One") that is secured by certain of Harken's domestic oil and gas properties and guaranteed by Harken. The Bank One facility provides borrowings limited by a borrowing base (as defined by the Bank One facility) that was approximately $6,737,000 as of June 30, 2002 and as of August 14, 2002. The borrowing base will be reduced by $225,000 per month beginning September 1, 2002 until the borrowing base is redetermined by Bank One on November 1 and May 1 in accordance with the facility agreement. The Bank One facility provides for interest based on LIBOR plus a margin of 2.350% (4.22% as of June 30, 2002), payable at the underlying LIBOR maturities or lender's prime rate, and provides for a commitment fee of 0.375 % on any unused amount. At December 31, 2001 and June 30, 2002, Harken had $7,937,000 and $6,737,000, respectively, outstanding pursuant to the facility. The Bank One facility requires the Borrowers, as well as Harken, to maintain certain financial covenant ratios and requirements as calculated on a quarterly basis. The financial covenant ratios and requirements for the Borrowers include a current ratio, as defined, of not less than 1.0 to 1.0 and a total liabilities to net capital investment ratio, as defined, of not more than 1.15 to 1.0. Effective beginning in the second quarter of 2002, the Borrowers also are required to maintain a debt service coverage ratio, as defined, of not less than 1.15 to 1.00. Required financial covenants for Harken include a ratio of total liabilities to net worth, as defined, of not more than 0.6 to 1.0, and a current ratio, as defined, of not less than 1.15 to 1.0. Harken and the Borrowers are in compliance with all requirements under the Bank One facility, as amended or waived, as of June 30, 2002. Harken received a waiver of the current ratio covenant for the quarter ended June 30, 2002. Due to the uncertainty of Bank One's November 1, 2002 borrowing base redetermination and whether additional waivers of Harken's current ratio requirement can be obtained from Bank One, the balance of the Bank One facility has been reflected as a current liability as of June 30, 2002. (6) INVESTOR TERM LOAN In July 2002, Harken issued a 10% Term Loan Payable (the "10% Term Loan") in the principal amount of $3,000,000 to a private investor in exchange for cash in the principal amount of the loan. The 10% Term Loan earns interest at 10% per annum with interest payable quarterly through maturity, beginning in December 2002. The 10% Term Loan is unsecured and matures July 15, 2005. The 10% Term Loan may be prepaid at any time without penalty and is subject to a mandatory prepayment (i) in whole or in part from up to 60% of the proceeds derived from the sale by Harken of its common stock for cash, and (ii) in whole if certain changes occur in the composition of Harken's board of directors or if an event of default occurs under the 10% Term Loan, as defined. As additional consideration for the 10% Term Loan, Harken agreed to issue to the investor warrants to purchase up to 4.2 million shares of Global ordinary shares owned by Harken, at a price of 50 pence per share. These warrants constitute 16.2% of Harken's holdings of Global shares. At August 14, 2002, the market price of Global ordinary shares on the Alternative Investment Market of the London Stock Exchange was 52 pence per share. The warrants will expire on October 13, 2005, 90 days after the scheduled maturity date of the 10% Term Loan, however, if the maturity of the 10% Term Loan occurs as the result of an 10 event of default, then the warrants will expire on October 13, 2008. The 10% Term Loan also provides that in the event of a default that is not subsequently cured by Harken, the investor may elect to release the amounts due under the 10% Term Loan in exchange for purchasing an amount of shares of Global common stock determined by dividing such amounts due by a price which is the lesser of 25 pence or 70% of the closing bid price of Global shares on the Alternative Investment Market of the London Stock Exchange. (7) CONVERTIBLE NOTES PAYABLE A summary of convertible notes payable is as follows:
December 31, June 30, 2001 2002 ----------- ----------- 5% European Notes $40,980,000 $39,980,000 7% European Notes -- 3,003,000 Benz Convertible Notes 10,408,000 10,546,000 ----------- ----------- 51,388,000 53,529,000 Less: Current portion -- 41,211,000 ----------- ----------- $51,388,000 $12,318,000 =========== ===========
See "Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations - Liquidity and Capital Resources - Convertible Note Commitments and Proposed Capital Restructuring." Although Harken management is actively pursuing negotiated transactions to restructure the 5% Notes, no assurance can be given that Harken will be able to redeem them for cash pursuant to their terms or repurchase them for cash and/or other securities or property. In this event, Harken presently intends to satisfy its obligations under the 5% Notes by redeeming them in exchange for Harken common stock. Under the terms of the 5% Notes, if Harken elected to redeem the 5% Notes for shares of its common stock, each note would be converted into a number of shares of Harken common stock equal to 115% of the face value of the note to be redeemed, plus accrued and unpaid interest thereon, divided by the average market price of the stock over the 30 calendar days immediately preceding the date of the notice of redemption. The redemption of 5% Notes by converting them into common stock could result in substantial dilution of the existing Harken common stock. In addition, the number of new shares to be issued could result in a change of control of Harken. For example, if notes had been converted on August 14, with an estimated conversion price of $0.30, for every $1,000,000 of 5% Notes converted at this price, Harken would have been required to issue to the noteholders approximately 3.8 million shares of common stock. If all of the 5% Notes had been converted at this price, the noteholders would have received an aggregate of approximately 151.8 million shares of common stock and, collectively, would control over 86% of Harken's common stock. The number of shares that might be issued in this regard will vary significantly depending upon the average market price of Harken's common stock over the 30 days preceding the redemption notice, and the amount of 5% Notes to be redeemed. In connection with the issuance of Harken common stock in redemption of 5% Notes, Harken intends to request stockholder approval in accordance with guidelines of the American Stock Exchange that apply to transactions involving the potential issuance below market value of at least 20% of a company's outstanding shares. If shareholder approval was required under the American Stock Exchange Guidelines and was not obtained, Harken could apply for an exemption from the shareholder approval requirement or be subject to delisting of its common stock if it issued the shares without shareholder approval. The potential delisting of Harken common stock could adversely affect Harken's ability to raise capital in the future by issuing common stock or securities convertible into common stock. In addition, if Harken's stock price were to decline significantly, Harken's ability to convert a substantial amount of the 5% Notes into common stock could be limited by the number of authorized but unissued shares of Harken common stock. If there were an insufficient number of shares of common stock to redeem all of the then-outstanding 5% Notes, Harken would have to obtain shareholder approval to increase its authorized common stock before it could redeem all such 5% Notes into common stock. Absent such shareholder approval, Harken would have to otherwise restructure the then-outstanding 5% Notes, or pay such 5% Notes at maturity. There can be no assurance that, in such an event, Harken would be successful in restructuring its obligations under the then-outstanding 5% Notes, or would have available sufficient funds to pay such 5% Notes, in cash, upon maturity. 5% European Notes -- On May 26, 1998, Harken issued to qualified purchasers a total of $85 million of its 5% Senior Convertible Notes due 2003 (the "5% European Notes"), which mature on May 26, 2003. Since April 1, 2002 and as of August 14, 2002, Harken has repurchased approximately $6 million in principal amount of the 5% European Notes for cash and/or in exchange for its 7% Senior Convertible Notes (the "7% European Notes"), the terms of which are described below. Since issuance, Harken has repurchased or exchanged to date an aggregate of approximately $51,050,000 principal amount of the 5% European Notes. As of August 14, 2002, the outstanding principal balance of 5% European Notes was approximately $33,950,000. Interest incurred on the 5% European Notes is payable semi-annually in May and November of each year to maturity or until the 5% European Notes are redeemed, converted or purchased by Harken prior to their maturity. The 5% European Notes may be redeemed for cash, at Harken's option, at par, in whole or in part, at any time after May 26, 2002, upon not less than 30 days notice to the holders. In addition, beginning November 26, 2002, Harken may redeem up to 50% of the 5% European Notes then outstanding in exchange for shares of Harken common stock. At maturity, on May 26, 2003, Harken may similarly redeem all remaining outstanding 5% European Notes for shares of Harken common stock. If Harken elects to redeem the 5% European Notes for shares of its common stock, each note will be redeemed for a number of shares of Harken common stock equal to 115% of the principal value of the note to be redeemed, plus accrued and unpaid interest thereon, divided by the average market price of the stock over the 30 calendar days immediately preceding the date of the notice of redemption. During the three months ended June 30, 2002, Harken repurchased $1,000,000 in principal amount of the 5% European Notes from certain holders thereof in exchange for approximately $650,000 in cash, plus 11 transaction costs. Harken has reflected an extraordinary item gain from the cash purchase of outstanding 5% European Notes in the accompanying consolidated condensed statements of operations. In July 2002, Harken repurchased an additional $1,120,000 principal amount of the 5% European Notes from certain holders thereof in exchange for approximately $696,000 in cash. Also in July 2002, Harken repurchased $700,000 in principal amount of the 5% European Notes from a holder in exchange for cash of approximately $444,000 plus an agreement to exchange an additional $2,210,000 principal amount of the 5% European Notes for $2,210,000 principal amount of Harken's 7% European Notes. Such notes were exchanged in August 2002. Other holders of $2,000,000 principal amount of the 5% European Notes agreed to exchange their notes in August 2002 for $800,000 principal amount of the 7% European Notes and $800,000 in cash paid by Harken. 7% European Notes --- On June 18, 2002, Harken issued to certain holders of Harken's securities $2,025,000 principal amount of its 7% Senior Convertible Notes Due 2007 (the "7% European Notes") in exchange for approximately $1,025,000 in cash and 10,000 shares of Harken's Series G1 Preferred Stock owned by such holders. On June 19, 2002, Harken issued to certain holders of Harken's securities an additional $2,025,000 principal amount of the 7% European Notes in exchange for approximately $1,725,000 in cash and 3,000 shares of Harken's Series G1 Preferred Stock owned by such holders. In August 2002, Harken issued or agreed to issue an additional $3,010,000 principal amount of the 7% European Notes in connection with the exchange transactions involving certain of the 5% European Notes described in the preceding paragraph. The 7% European Notes mature on March 31, 2007 and rank equal to the 5% European Notes. Interest incurred on the 7% European Notes is payable semi-annually in March and September of each year to maturity or until the 7% European Notes are redeemed, converted or purchased by Harken prior to their maturity. Upon the registration of the underlying Harken common stock issuable upon conversion, the 7% European Notes are convertible into shares of Harken common stock at an initial conversion price of $0.50 per share, subject to adjustment in certain circumstances (the "7% European Note Conversion Price"). The 7% European Notes are also convertible by Harken into shares of Harken common stock if, for any period of thirty consecutive days commencing on or after June 19, 2002, the average of the closing prices of Harken common stock for each trading day during such thirty-day period shall have equaled or exceeded 125% of the 7% European Note Conversion Price (or $0.625 per share of Harken common stock). The 7% European Notes may be redeemed at Harken's option, at any time and from time to time, in whole or in part, for cash equal to the outstanding principal and accrued interest to the date of redemption, upon not less than 30 days notice to the noteholders. In addition, beginning March 31, 2006, Harken may redeem up to 50% of the outstanding 7% European Notes for shares of Harken common stock, and at maturity, on March 31, 2007, Harken may similarly redeem all remaining outstanding 7% European Notes for shares of Harken common stock, in each case upon not less than 30 days notice to the noteholders. If Harken elects to redeem the 7% European Notes for shares of its common stock, each note will be redeemed for a number of shares of Harken common stock equal to 110% of the principal value of the Notes to be redeemed, plus accrued and unpaid interest thereon, divided by the average market price of the stock over the 120 business days immediately preceding the date of the notice of redemption. Benz Convertible Notes --- On December 30, 1999, Harken issued $12,000,000 principal amount of 5% Convertible Notes Due 2003 (the "Benz Convertible Notes") in exchange for certain prospects acquired from Benz Energy, Incorporated ("Benz"). The Benz Convertible Notes originally were to mature on May 26, 2003. In March 2000, the maturity date of certain of the Benz Convertible Notes was extended to November 12 26, 2003. Harken has repurchased or redeemed to date approximately $6.3 million principal amount of the Benz Convertible Notes for cash and/or common stock. As of August 14, 2002, the outstanding principal balance of Benz Convertible Notes was approximately $5,669,000 and has a November 26, 2003 maturity date. The Benz Convertible Notes bear interest at 5% per annum, payable semi-annually in May and November of each year until maturity or until the Benz Convertible Notes are redeemed, converted or purchased by Harken prior to their maturity. The notes may be redeemed for cash, or shares of Harken common stock, at Harken's option, at par, in whole or in part, at any time after May 26, 2002, upon not less than 30 days notice to the holders. In addition, beginning November 26, 2002, Harken may redeem up to 50% of the Benz Convertible Notes then outstanding in exchange for shares of Harken common stock. At maturity, on November 26, 2003, Harken may similarly redeem all remaining outstanding Benz Convertible Notes for shares of Harken common stock. If Harken elects to redeem the Benz Convertible Notes for shares of its common stock beginning November 26, 2002, each note will be redeemed for a number of shares of Harken common stock equal to 115% of the principal value of the note to be redeemed, plus accrued and unpaid interest thereon, divided by the average market price of the stock over the 30 calendar days immediately preceding the date of the notice of redemption. No Benz Convertible Notes were repurchased or redeemed by Harken during the three months ended June 30, 2002. In July 2002, pursuant to the terms of the Benz Convertible Notes, Harken elected to redeem Benz Convertible Notes with a face amount of approximately $1,135,000 for 2,000,000 shares of Harken common stock. In August 2002, Harken entered into an agreement with a holder of approximately $4,071,000 of Benz Convertible Notes to exchange those notes for $1,231,000 in cash. (8) RELATED PARTY TRANSACTIONS During 1997, 1998 and 1999, Harken made secured short-term loans to certain members of Harken's Management, certain of whom also served on the Board of Directors. Such notes receivable are reflected in Harken's Consolidated Condensed Balance Sheets at December 31, 2001 and June 30, 2002 as related party notes receivable. In May 2002, Harken entered into an agreement to forgive the repayment of a short-term loan in the amount of $64,000 to a member of management and reflected the forgiveness as a charge to earnings during the first quarter of 2002. (9) HEDGING ACTIVITIES Harken holds certain commodity derivative instruments which are effective in mitigating commodity price risk associated with a portion of its future monthly natural gas production and related cash flows. Harken's oil and gas operating revenues and cash flows are impacted by changes in commodity product prices, which are volatile and cannot be accurately predicted. Harken's objective for holding these commodity derivatives is to protect the operating revenues and cash flows related to a portion of its future natural gas sales from the risk of significant declines in commodity prices. As of June 30, 2002, Harken holds natural gas zero cost collar contracts consisting of a fixed price floor option of $2.75 per MMBTU and a fixed price cap option of $3.47 per MMBTU, covering 135,000 13 MMBTUs per month over the period of the contract through December 31, 2002. In addition, Harken also holds zero cost collar contracts consisting of a fixed price floor option of $2.75 per MMBTU and a fixed price cap option of $5.12 per MMBTU, covering 60,000 MMBTUs per month over a period from January 1, 2003 through December 31, 2003. Such natural gas collar contracts are reflected in accrued liabilities at June 30, 2002 with a market value of approximately $261,000. Each of the above derivatives have been designated as cash flow hedges of the exposure from the variability of cash flows from future specified production from certain of Harken's domestic property operations. Gains and losses from commodity derivative instruments are reclassified into earnings when the associated hedged production occurs. Harken holds no derivative instruments which are designated as either fair value hedges or foreign currency hedges. Settlements of oil and gas commodity derivatives are based on the difference between fixed swap or option prices and the New York Mercantile Exchange closing prices for each month during the life of the contracts. Harken monitors its natural gas production prices compared to New York Mercantile Exchange prices to assure its commodity derivatives are effective hedges in mitigating its commodity price risk. Risk management policies established by Harken management limit Harken's derivative instrument activities to those derivative instruments which are effective in mitigating certain operating risks, including commodity price risk. In addition to other restrictions, the extent and terms of any derivative instruments are required to be reviewed and approved by executive management of Harken. (10) SEGMENT INFORMATION Harken's accounting policies for each of its operating segments are the same as those for its consolidated financial statements. There are no intersegment sales or transfers. Revenues and expenses not directly identifiable with either segment, such as certain general and administrative expenses, are allocated by Harken based on various internal and external criteria including an assessment of the relative benefit to each segment. During the periods presented below, none of Harken's Middle American segment operating revenues related to Costa Rica, Peru or Panama. Harken's financial information for each of its operating segments is as follows for the periods ended June 30, 2001 and 2002:
Three Months Ended June 30, 2001 Six Months Ended June 30, 2001 -------------------------------------------- -------------------------------------------- North Middle North Middle America America Total America America Total ----------- ------------- ------------ ----------- ------------ ------------ Operating revenues $ 8,139,000 $ 2,653,000 $ 10,792,000 $15,147,000 $ 4,560,000 $19,707,000 Interest and other income 85,000 105,000 190,000 204,000 263,000 467,000 Depreciation and amortization 2,581,000 2,253,000 4,834,000 4,400,000 3,683,000 8,083,000 Interest expense and other, net 673,000 313,000 986,000 1,549,000 1,149,000 2,698,000 Income tax expense 15,000 -- 15,000 30,000 -- 30,000 Segment income (loss) before extraordinary items 1,383,000 (2,455,000) (1,072,000) 2,149,000 (4,739,000) (2,590,000) Segment income (loss) 1,956,000 (1,881,000) 75,000 2,775,000 (4,112,000) (1,337,000) Capital expenditures 3,176,000 1,046,000 4,222,000 5,913,000 9,258,000 15,171,000 Total assets at end of period 92,266,000 47,280,000 139,546,000 92,266,000 47,280,000 139,546,000
14 Three Months Ended June 30, 2002 Six Months Ended June 30, 2002 -------------------------------------------- -------------------------------------------- North Middle North Middle America America Total America America Total ----------- ------------- ------------ ----------- ------------ ------------ Operating revenues $ 5,173,000 $ 2,343,000 $ 7,516,000 $ 8,961,000 $ 3,981,000 $ 12,942,000 Interest and other income 158,000 38,000 196,000 179,000 83,000 262,000 Depreciation and amortization 2,160,000 1,205,000 3,365,000 4,283,000 2,348,000 6,631,000 Interest expense and other, net 1,274,000 (321,000) 953,000 1,938,000 (13,000) 1,925,000 Income tax expense 15,000 75,000 90,000 30,000 150,000 180,000 Segment income (loss) before extraordinary items (2,669,000)* (21,000) (2,690,000) (5,051,000)* (1,195,000) (6,246,000) Segment income (loss) (2,329,000) (21,000) (2,350,000) (4,711,000) (1,195,000) (5,906,000) Capital expenditures 3,189,000 588,000 3,777,000 3,296,000 780,000 4,076,000 Total assets at end of period 61,572,000 27,962,000 89,534,000 61,572,000 27,962,000 89,534,000
- ------------ * Includes Litigation and Contingent Liability Settlements, net (11) COMMITMENTS AND CONTINGENCIES Search Acquisition Corp. ("Search Acquisition"), also known as Harken Texas Acquisition Corp., a wholly-owned subsidiary of Harken, is a defendant in a lawsuit filed by Petrochemical Corporation of America and Lorken Investments Corporation (together, "Petrochemical"). This lawsuit arises out of Petrochemical's attempt to enforce a judgment of joint and several liability entered in 1993 against a group of twenty limited partnerships known as the "Odyssey limited partnerships." Petrochemical claims that Search Exploration, Inc. is liable for payment of the judgment as the successor-in-interest to eight Odyssey limited partnerships. Search Acquisition was the surviving corporation in Harken's 1995 acquisition of Search Exploration, Inc. On February 28, 1996, the court granted Search Acquisition's motion for summary judgment in this case. On July 3, 1998, the Fifth District Court of Appeals for the State of Texas reversed the trial court's summary judgment and remanded the case to the trial court. In late 2001, a jury trial was held in this matter. The jury returned a verdict finding for Petrochemical in the amount of $1.1 million of actual damages and $3 million in punitive damages. In April 2002, the court entered judgment on the verdict rendered by the jury. Search Acquisition promptly appealed this judgment. In June 2002, Petrochemical filed with the U.S. Bankruptcy Court in Dallas, Texas an involuntary petition in bankruptcy against Search Acquisition, under Chapter 7 of the Bankruptcy Code, and moved for the appointment of an interim trustee. Search Acquisition agreed to the entry of an order for relief under Chapter 7, as well as to the appointment of the interim trustee. These actions resulted in a stay of Search Acquisition's appeal of the Court's judgment on the jury verdict totaling $4.1 million. Thereafter, McCulloch Energy, Inc. ("McCulloch"), a wholly-owned subsidiary of Search Acquisition, filed a voluntary petition in bankruptcy under Chapter 7 of the Bankruptcy Code in the U.S. Bankruptcy Court in Houston, Texas. The stay of Search Acquisition's appeal and the related bankruptcy filings led to negotiations in bankruptcy and mediation relating to the Petrochemical suit and judgment. As a result of these events, on August 1, 2002, pursuant to a mediated settlement, Petrochemical and the bankruptcy trustees agreed to release their claims against Harken in exchange for a payment of $2 million to be distributed to Petrochemical, and a payment of approximately $189,000 to pay administrative expenses and other creditors of the bankruptcy estates. This amount has been fully accrued as of June 30, 2002 and is included in accrued liabilities in the accompanying Consolidated Condensed Balance Sheet at June 30, 2002. Pursuant to the mediation agreement signed on August 1, 2002, Petrochemical may also elect to receive the stock of six non-operating subsidiaries 15 of Harken that are not material to Harken's operations. The mediation agreement is subject to approval by the Bankruptcy Courts in Dallas and Houston. 420 Energy Investment, Inc. and ERI Investments, Inc. (collectively "420 Energy") filed a lawsuit against XPLOR Energy, Inc., a wholly-owned subsidiary of Harken, on December 21, 1999 in the New Castle County Court of Chancery of the State of Delaware. 420 Energy alleges that they are entitled to appraisal and payment of the fair value of their common stock in XPLOR as of the date XPLOR merged with Harken. Harken has relied on an indemnity provision in the XPLOR merger agreement to tender the costs of defense in this matter to certain third parties. Although the outcome of this litigation is uncertain, Harken believes that any liability to Harken as a result of this litigation will not have a material adverse effect on Harken's financial condition. In February 2002, 420 Energy filed a new lawsuit against XPLOR, Harken and other defendants in state court in Dallas, Texas. Harken intends to pursue and enforce, through whatever steps are necessary, the indemnification from the third parties discussed above with regard to this suit. In Harken management's opinion, the ultimate outcome of this litigation will not have a material adverse effect on Harken's financial condition. Harken has accrued approximately $5,275,000 at June 30, 2002 relating to certain other operational or regulatory liabilities related to Harken's domestic operations. A significant majority of this accrued amount relates to future abandonment costs of certain producing properties owned by XPLOR, which will be incurred at the end of the properties' productive life. Harken and its subsidiaries currently are involved in other various lawsuits and contingencies, any of which in management's opinion, will not result in significant loss exposure to Harken. 16 ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (Unaudited) The following is a discussion and analysis of Harken's financial condition and results of operations and should be read in conjunction with the consolidated condensed financial statements and related notes contained in this Quarterly Report. Certain statements contained in this discussion, and elsewhere in this Quarterly Report, including statements of Harken management's current expectations, intentions, plans and beliefs, are "forward-looking statements," as defined in Section 21D of the Securities Exchange Act of 1934 and the Private Securities Litigation Reform Act of 1995: o statements before, after or including the words "may," "will," "could," "should," "believe," "expect," "future," "potential," "anticipate," "intend," "plan," "estimate," or "continue" or the negative or other variations of these words; and o other statements about matters that are not historical facts. Harken believes that it is important to communicate its future expectations to its shareholders. Forward-looking statements reflect the current view of management with regard to future events and are subject to numerous known and unknown risks, uncertainties and other factors that 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. These risks, uncertainties and other factors include, among others, the risks described in Harken's Annual Report on Form 10-K for the fiscal year ended December 31, 2001 filed with the Securities and Exchange Commission as well as other risks described in the Quarterly Report. Although Harken believes that the expectations reflected in the forward-looking statements are reasonable, it can give no assurance that such expectations will prove to be correct or that unforeseen developments will not occur. Harken undertakes no duty to update or revise any forward-looking statements. Overview Harken is engaged in oil and gas exploration, development and production operations both domestically and internationally through its various subsidiaries. Harken's domestic operations currently include oil and gas exploration, development and production in the onshore and offshore Gulf Coast regions of South Texas and Louisiana, and in portions of West Texas and the Texas Panhandle region. Harken's international operations currently include Global's activities in Colombia, Costa Rica, Panama and Peru. Harken's domestic operating segment has completed a period of significant successful drilling activity over the past two years. Harken has recently temporarily reduced its exploratory drilling activity, however, in order to conserve capital resources to repurchase convertible debt obligations pursuant to a proposed capital restructuring, as described below under "Liquidity and Capital Resources." Harken does, however, intend to continue to pursue domestic oil and gas reserve growth through acquisitions. Harken's ability to make future acquisition transactions may be affected, however, by the market value of Harken common stock. If the price of Harken common stock remains low or decreases, Harken's ability to utilize its stock in acquisition transactions could be negatively affected. Harken also continues to include development operations as part of its capital expenditure plans. In April 2002, Harken, along with a wholly-owned subsidiary, acquired certain producing property interests (the "Republic Properties") in exchange for Harken common stock. 17 Harken's Middle American operations are conducted through its ownership of 92.77% of Global Energy Development PLC ("Global,") a public limited company registered in England and Wales under the Companies Act (1985) of the United Kingdom with its ordinary shares admitted for trading on the Alternative Investment Market of the London Stock Exchange. All of the Middle American operating revenues during the first half of 2002 have been generated from Global's Colombian operations and have declined from the comparable period last year, due to lower commodity prices and slightly reduced production volumes. Global has substantially reduced operating expenses and capital expenditures in the Middle American segment during 2002. As a part of Harken's business strategy, Harken has taken steps to maximize its cash flow by decreasing its administrative costs through reductions in personnel, reductions in salaries, increasing efficiencies in its production operations, and reducing its long-term debt obligations. Harken's continued steps in these areas should continue to increase operating efficiency and cash flow during 2002. Harken reported a net loss for the six months ended June 30, 2002 of $5,906,000 compared to a net loss of $1,337,000 for the prior year period due primarily to lower commodity prices compared to the prior year. Harken's worldwide oil and gas revenues have decreased 34% during the first six months of 2002 compared to the prior year period, due to lower commodity prices and decreased domestic production volumes resulting from sales of producing properties during 2001 and 2002. Gross operating profit before depreciation and amortization, general and administrative and interest expenses totaled approximately $8.2 million during the six months ended June 30, 2002 compared to approximately $13.1 million for the prior year period. Critical Accounting Policies Full cost accounting method -- Harken accounts for the costs incurred in the acquisition, exploration, development and production of oil and gas reserves using the full cost accounting method. Under full cost accounting rules, the net capitalized costs of evaluated oil and gas properties shall not exceed an amount (the "cost ceiling") equal to the present value of future net cash flows from estimated production of proved oil and gas reserves, based on current economic and operating conditions, including the use of oil and gas prices as of the end of each quarter. Given the volatility of oil and gas prices, it is reasonably possible that the estimate of discounted future net cash flows from proved oil and gas reserves could change in the near term. If oil and gas prices decline in the future, even if only for a short period of time, it is possible that additional impairments of oil and gas properties could occur. In addition, it is reasonably possible that additional impairments could occur if costs are incurred in excess of any increases in the cost ceiling, revisions to proved oil and gas reserves occur, or if properties are sold for proceeds less than the discounted present value of the related proved oil and gas reserves. Colombian operations -- During the six months ended June 30, 2002, approximately 30% of Harken's consolidated operating revenues were generated from Global's sales to Ecopetrol, the state-owned Colombian oil company. The country of Colombia is currently experiencing heightened security issues which could affect Global's Colombian operations as well as the strength and operations of Ecopetrol. If Ecopetrol experiences significant adverse conditions in its operations, it may not be able to meet its ongoing financial obligations to Global for delivered production or be able to purchase future production under the terms of existing contract provisions. Global's Colombian operations could also be directly affected by guerilla activity or other instances or threats of violence, preventing or interrupting Global from producing, transporting or delivering future production volumes. 18 Valuation of accounts receivable -- Harken sells its domestic oil and gas production to a broad and diverse group of industry partners, many of which are major oil and gas companies, and as a whole, do not represent a significant credit risk. In addition, Harken charges certain industry partners, who participate in Harken-operated wells, with their share of drilling costs and operating expenses. In determining a reserve for potential losses in collection of its accounts receivable, Harken considers, among other factors, the current financial condition of its industry partners in light of current industry conditions. In the event of a significant decline in oil and gas prices, many of our industry partners may not be able to meet their ongoing financial obligations to Harken or be able to meet the terms of existing contract provisions. Classification of long-term debt -- Harken's bank credit facility with Bank One, N.A. ("Bank One") requires Harken, as well as certain of its subsidiaries ("Borrowers") to maintain certain financial covenant ratios and requirements, as calculated on a quarterly basis. Harken received a waiver of the current ratio covenant for the quarter ended June 30, 2002. If Harken or the Borrowers are not in compliance with their bank financial covenant ratios or requirements in the future and are unable to obtain a waiver or amendment to the facility requirements, the credit facility would be in default and callable by Bank One. In addition, due to cross-default provisions in Harken's 5% and 7% European Note agreements, a majority of Harken's debt obligations would become due in full if any debt is in default. Expectations of continued compliance with financial covenants cannot be assured and our lenders' actions are not controllable by Harken. If Harken's projections of future operating results are not achieved and future waivers or amendments of Harken's current ratio covenant under the Bank One credit facility are not received and its debt is placed in default, Harken could experience a material adverse impact on its financial position and results of operations. Accounting for derivatives - Harken holds commodity derivative financial instruments designed to mitigate commodity price risk associated with a portion of its future monthly natural gas production and related cash flows. These commodity derivatives qualify for hedge accounting as discussed in Note 9 - Hedging Activities in the notes to the accompanying Consolidated Condensed Financial Statements contained in Part 1, Item 1. Harken does not participate in speculative derivatives trading. Hedge accounting requires that commodity derivative instruments be designated as hedges and that fluctuations in their market value are effective in mitigating the hedged commodity price risk, and that such effectiveness be documented and monitored. While Harken intends to continue to meet the conditions to qualify for hedge accounting, to the extent hedges are not highly effective, or if the forecasted hedged production does not occur, the changes in the fair value of the commodity derivative instruments are reflected in earnings. RESULTS OF OPERATIONS The following table presents information regarding Harken's revenues and oil and gas production volumes during the periods included in the accompanying consolidated condensed financial statements: 19
Three Months Ended Six Months Ended June 30, June 30, ------------------------ ------------------------ 2001 2002 2001 2002 ----------- ---------- ----------- ---------- Operating Revenues (unaudited) (unaudited) - ------------------ Domestic Exploration and Production Operations Gas sales revenues $ 5,748,000 $ 3,244,000 $11,300,000 $ 5,711,000 Gas volumes in mcf 1,132,000 925,000 2,101,000 1,900,000 Gas price per mcf $ 5.08 $ 3.51 $ 5.38 $ 3.00 Oil sales revenues $ 2,391,000 $ 1,929,000 $ 3,847,000 $ 3,250,000 Oil volumes in barrels 90,000 77,000 144,000 142,000 Oil price per barrel $ 26.57 $ 25.05 $ 26.72 $ 22.89 Colombian Exploration and Production Operations Oil sales revenues $ 2,653,000 $ 2,343,000 $ 4,560,000 $ 3,981,000 Oil volumes in barrels 143,000 136,000 $ 237,000 267,000 Oil price per barrel $ 18.55 $ 17.23 $ 19.24 $ 14.91 Other Revenues Interest income $ 174,000 $ 31,000 $ 419,000 $ 64,000 Other income $ 16,000 $ 164,000 $ 48,000 $ 198,000
For the quarter ended June 30, 2002 compared with the corresponding prior period. North American Operations Domestic gross oil and gas revenues during the second quarter of 2002 relate to the operations in the onshore and offshore areas of the Texas and Louisiana Gulf Coast and the Western and Panhandle regions of Texas. Beginning April 2002, Harken's domestic operations include the Republic Properties, which were acquired effective April 4, 2002 and consist of interests in 16 oil and gas wells in 9 fields plus interests in additional prospect acreage located in southern Louisiana and the Texas Gulf Coast region. During 2001, certain wholly-owned subsidiaries of Harken sold certain interests in oil and gas producing properties located in Texas, Arkansas, Louisiana and New Mexico for approximately $13.1 million in cash. During the first quarter of 2002, another wholly-owned subsidiary of Harken sold interests in oil and gas producing properties located in Texas for approximately $910,000. During the second quarter of 2002, a wholly-owned subsidiary of Harken sold additional interests in oil and gas producing properties for approximately $1,614,000. Domestic gas revenues decreased 44% to $3,244,000 for the three months ended June 30, 2002 compared to $5,748,000 for the prior year period principally due to the decrease in average gas prices received during the second quarter of 2002, as Harken received an overall average price of $3.51 per mcf of gas during the second quarter of 2002 compared to $5.08 per mcf received during the second quarter of 2001. Gas revenues also declined due to reduced production volumes during the second quarter of 2002, despite the acquisition of the Republic Properties, as a result of sales of domestic producing properties during 2001 and 2002. Domestic oil revenues decreased 19% to $1,929,000 during the second quarter of 2002 compared to $2,391,000 during the second quarter of 2001 due to reduced oil prices and decreased production volume. Harken's oil price per barrel averaged $25.05 during the current year quarter compared to $26.57 during the 20 comparable period last year. Harken's domestic oil production volumes also decreased during the quarter compared to the prior year period, due to sales of domestic producing properties during 2001 and 2002. Domestic oil and gas operating expenses consist of lease operating expenses and a number of production and reserve based taxes. Domestic oil and gas operating expenses decreased 16% to $1,870,000 during the second quarter of 2002 compared to $2,228,000 during the prior year period primarily due to the above-mentioned sales of properties. Oil and gas operating expenses increased, however, as a percentage of related oil and gas revenues due primarily to the decrease in oil and gas prices during the second quarter of 2002 compared to the prior year period. Oil and gas operating expenses decreased per unit of production due to the replacement of sold producing fields with newly completed gas production. Harken expects that oil and gas production volumes generated as a result of drilling activities in late 2001 and continuing workover activities together with the acquisition of the Republic Properties discussed above will continue to help to mitigate the production decreases resulting from the sales of producing properties discussed above. Harken's oil and gas production volumes increased beginning in April 2002 from the Republic Properties, but could decrease if Harken sells additional producing properties. Harken continues to pursue opportunities to acquire additional producing properties, which would also further increase domestic production. Harken's oil and gas revenues are highly dependent upon product prices, which Harken is unable to predict. Middle American Operations Middle American gross revenues during the second quarter of 2002 relate to Global's oil operations in Colombia. During the second quarter of 2001 and 2002, Global's Colombian operating revenues consisted of production from its Bolivar and Alcaravan Association Contract areas. Global's Colombian oil revenues decreased 12% from $2,653,000 during the second quarter of 2001 to $2,343,000 during the second quarter of 2002, partially due to reduced oil prices, which averaged $17.23 per barrel during the current year quarter compared to $18.55 per barrel during the prior year quarter. In addition, production volumes decreased compared to the prior year quarter. Global's production volumes during the remainder of 2002 will continue to remain dependent on existing well production and pumping efficiency. Middle American operating expenses decreased 52% from $1,099,000 during the second quarter of 2001 to $523,000 for the second quarter of 2002, as Global has successfully reduced field contract labor, equipment rental and pipeline tariff costs in order to reduce operating expenses related to its producing fields in Colombia. Interest and Other Income Interest and other income increased 4% during the second quarter of 2002 compared to the prior year period due to a gain recognized from the ineffective portion of Harken's natural gas 2002 zero cost collar contract, which offset an 82% decrease in interest income over the same periods. Harken generated approximately $174,000 of interest income during the second quarter of 2001, compared to approximately $32,000 of interest income during the second quarter of 2002, due primarily to decreased cash balances. Other Costs and Expenses General and administrative expenses decreased 15% during the second quarter of 2002 compared to the second quarter of 2001, despite certain one time employee severance costs, as Harken has taken steps to 21 reduce personnel costs through personnel reductions, salary reductions and other methods to achieve other administrative cost reductions. Depreciation and amortization expense decreased 30% during the second quarter of 2002 compared to the prior year period primarily due to decreased production volumes during the quarter as a result of Harken's sales of certain producing properties. 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 3% during the second quarter of 2002 compared to the prior year period primarily due to the decrease in the amount of outstanding 5% European Notes compared to the prior year. See "Liquidity and Capital Resources," below. Harken also recorded a $1.2 million expense during the second quarter of 2002 relating to the settlement of certain liabilities and contingencies resolved during the second quarter of 2002. As discussed further in the Notes to the Consolidated Condensed Financial Statements, Note 11--Commitments and Contingencies, Harken accrued and charged to expense approximately $2.2 million related to its mediation agreement signed on August 1, 2002 to resolve the Petrochemical litigation. Such amount was reduced by approximately $1 million related to other accrued liabilities which were settled during the second quarter of 2002 for amounts less than the amounts previously accrued. Extraordinary Item During 2001 and 2002, Harken repurchased or exchanged certain of its 5% European Notes for cash and/or other securities of Harken. During the second quarter of 2002, Harken recorded an extraordinary gain of $340,000 relating to the acquisition of $1,000,000 principal amount of 5% European Notes. An extraordinary gain of $1,147,000 was recorded for the comparable period of 2001 relating to Harken's exchange of $9,000,000 principal amount of 5% European Notes. For the six months ended June 30, 2002 compared with the corresponding prior period. North American Operations Domestic gas revenues decreased 50% to $5,711,000 for the six months ended June 30, 2002 compared to $11,300,000 for the prior year period due to the decrease in average gas prices received during the first half of 2002, as Harken received an overall average price of $3.00 per mcf of gas during the first six months of 2002 compared to $5.38 per mcf received during the first half of 2001. In addition, gas revenues also declined due to reduced production volumes during the first six months of 2002, despite the acquisition of the Republic Properties, due to sales of domestic producing properties during 2001 and 2002. Domestic oil revenues decreased 16% to $3,250,000 during the first six months of 2002 compared to $3,847,000 during the first six months of 2001 primarily due to reduced oil prices, which averaged $22.89 per barrel during the current year period compared to $26.72 per barrel during the prior year. Despite the sales of producing properties discussed above, Harken's domestic oil production volumes remained flat during the first six months of 2002 compared to the prior year period, as Harken's Gulf Coast oil production was reduced by temporary operational curtailments during the first quarter of 2001 at Harken's Main Pass area offshore Louisiana. 23 22 Domestic oil and gas operating expenses decreased 20% to $3,755,000 during the first six months of 2002 compared to $4,719,000 during the prior year period primarily due to the above-mentioned sales of properties. Oil and gas operating expenses increased, however, as a percentage of related oil and gas revenues due primarily to the decrease in oil and gas prices during the first six months of 2002 compared to the prior year period. Oil and gas operating expenses decreased per unit of production due to the replacement of sold producing fields with newly completed gas production. Harken expects that oil and gas production volumes generated as a result of drilling activities in late 2001 and early 2002 and continuing workover activities together with the acquisition of the Republic Properties discussed above will continue to help to mitigate the production decreases as a result of the sales of producing properties discussed above. Harken's oil and gas production volumes increased beginning in April 2002 from the Republic Properties, but could decrease if Harken sells additional producing properties. Harken's oil and gas revenues are highly dependent upon product prices, which Harken is unable to predict. Middle American Operations Middle American gross revenues during the first six months of 2002 relate to Global's oil operations in Colombia.Global's Colombian oil revenues decreased 13% from $4,560,000 during the first six months of 2001 to $3,981,000 during the first six months of 2002, primarily due to reduced oil prices, which averaged $14.91 per barrel during the first six months this year compared to $19.24 per barrel during the first six months of 2001. During the first six months of 2001 and 2002, Global's Colombian operating revenues consisted of production from its Bolivar and Alcaravan Association Contract areas. Global's Colombia production volumes increased during the first six months of 2002, compared to the prior year period, as during the first quarter of 2001, sales of production from Global's Estero #1 well on the Alcaravan Contract area were limited to approximately 1,000 gross barrels of oil per day due to pipeline constraints and pumping capacity. During the second quarter of 2001, Global took steps to resolve such limitations. Estero #2 was completed during the first quarter of 2001, and has mitigated the production declines related to Global's Bolivar Contract area production, as Bolivar Contract production was temporarily shut-in during the first quarter of 2002, pending recently completed workover procedures. Harken's production volumes during the remainder of 2002 will continue to remain dependent on existing well production and pumping efficiency. Middle American operating expenses have decreased 49% from $1,862,000 during the first six months of 2001 to $958,000 for the first six months of 2002, as Global has successfully reduced field contract labor equipment rental and pipeline tariff costs in order to reduce operating expenses related to its producing fields in Colombia. Interest and Other Income Interest and other income decreased 44% during the first six months of 2002 compared to the prior year period due to Harken's usage of cash during 2001 for capital expenditures, which decreased its interest-bearing cash balances. Harken generated approximately $419,000 of interest income during the first six months of 2001, compared to approximately $64,000 of interest income during the first six months of 2002. Other income during the first six months of 2002 primarily relates to the gain recognized from the ineffective portion of Harken's natural gas 2002 zero cost collar contract. 23 Other Costs and Expenses General and administrative expenses decreased 9% during the first six months of 2002 compared to the first six months of 2001, despite certain one time employee severance costs during the period related to staff reductions. Harken took steps to reduce personnel costs through personnel reductions, salary reductions and other methods during the second quarter of 2002, and continues to seek additional administrative cost reductions. Depreciation and amortization expense decreased 18% during the first six months of 2002 compared to the prior year period primarily due to decreased production volumes during the period as a result of Harken's sales of certain producing properties. 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 29% during the first six months of 2002 compared to the prior year period primarily due to the decrease in the amount of outstanding 5% European Notes from early 2001. See "Liquidity and Capital Resources," below. In addition, during the first quarter of 2001, Harken expensed the remaining unamortized issuance costs related to the IFC project loan finance facility, which was terminated in May 2001. Harken also recorded a $1.2 million expense during the second quarter of 2002 relating to the settlement of certain liabilities and contingencies resolved during the second quarter of 2002. As discussed further in the Notes to the Consolidated Condensed Financial Statements, Note 11--Commitments and Contingencies, Harken accrued and charged to expense approximately $2.2 million related to its mediation agreement signed on August 1, 2002 to resolve the Petrochemical litigation. Such amount was reduced by approximately $1 million related to other accrued liabilities which were settled during the second quarter of 2002 for amounts less than the amounts previously accrued. Extraordinary Item During 2001 and 2002, Harken repurchased or exchanged certain of its 5% European Notes for cash and/or other securities of Harken. During the first six months of 2002, Harken recorded an extraordinary gain of $340,000 relating to the acquisition of $1,000,000 principal amount of 5% European Notes. An extraordinary gain of $1,253,000 was recorded for the comparable period of 2001 relating to Harken's acquisitions of $9,250,000 principal amount of 5% European Notes. LIQUIDITY AND CAPITAL RESOURCES Harken's negative working capital at June 30, 2002 was approximately $43.1 million, compared to positive working capital of approximately $3.4 million at December 31, 2001. Working capital is the difference between current assets and current liabilities. Harken's working capital was negative at June 30, 2002 because approximately $41.2 million of Harken's outstanding convertible notes are due in May 2003 and therefore are classified as current liabilities at June 30, 2002. These obligations were long-term liabilities and did not reduce working capital at December 31, 2001. Harken received a waiver of the current ratio covenant for the quarter ended June 30, 2002 under the Bank One credit facility. Due to the uncertainty of Bank One's November 1, 2002 borrowing base redetermination and whether additional waivers of Harken's current ratio requirement can be obtained from Bank One, the balance of the Bank One facility has been reflected as a current liability as of June 30, 2002. 24 Harken's operations used approximately $1.9 million of cash flow during the first six months of 2002, primarily due to the timing of certain working capital payments and collections during the six-month period. Harken's cash resources at June 30, 2002 totaled approximately $7.7 million. Considering its existing cash resources, the cash resources generated subsequent to June 30, 2002 and the potential additional capital sources listed below, Harken believes that it will have sufficient cash resources to fund all of its planned capital expenditures during 2002. Harken's future exploration, development and acquisition efforts are expected to be funded through a combination of cash on hand, cash flows from operations, issuances or exchanges of debt or equity securities, and cash provided by either existing or newly established financing arrangements. During the six months ended June 30, 2002, the approximately $1.9 million of net cash used in Harken's operations was funded from existing cash resources, sales of producing properties, and the issuance of convertible notes. Net cash from financing activities during this period totaled approximately $1.7 million and consisted of $2.4 million raised through the issuance of Harken's 7% European Notes, which are described below and in Note 7 to the accompanying Consolidated Condensed Financial Statements contained in Part 1, Item 1, and $900,000 in net cash proceeds from the issuance of subsidiary common stock, offset by $1.9 million in repayment of long-term debt. Net cash used in investing activities for the first half of 2002 totaled $297,000 and was comprised of $2.6 million received upon the sale of producing domestic oil and gas properties, offset by $2.9 million in capital expenditures. Convertible Note Commitments and Proposed Capital Restructuring 5% European Notes -- On May 26, 1998, Harken issued to qualified purchasers a total of $85 million of its 5% Senior Convertible Notes due 2003 (the "5% European Notes"), which mature on May 26, 2003. Since April 1, 2002 and as of August 14, 2002, Harken has repurchased approximately $6 million in principal amount of the 5% European Notes for cash and/or in exchange for its 7% Senior Convertible Notes (the "7% European Notes"), the terms of which are described in Note 7 to the Notes to the Consolidated Condensed Financial Statements contained in Part 1, Item 1. Since issuance and as of August 14, 2002, Harken has repurchased or exchanged to date an aggregate of approximately $51,050,000 million principal amount of the 5% European Notes. As of August 14, 2002, the remaining principal balance of 5% European Notes was approximately $33,950,000. Interest incurred on the 5% European Notes is payable semi-annually in May and November of each year to maturity or until the 5% European Notes are redeemed, converted or purchased by Harken prior to their maturity. The 5% European Notes may be redeemed for cash, at Harken's option, at par, in whole or in part, at any time after May 26, 2002, upon not less than 30 days notice to the holders. In addition, beginning November 26, 2002, Harken may redeem up to 50% of the 5% European Notes then outstanding in exchange for shares of Harken common stock. At maturity, on May 26, 2003, Harken may similarly redeem all remaining outstanding 5% European Notes for shares of Harken common stock. If Harken elects to redeem the 5% European Notes for shares of its common stock, each note will be redeemed for a number of shares of Harken common stock equal to 115% of the principal value of the note to be redeemed, plus accrued and unpaid interest thereon, divided by the average market price of the stock over the 30 calendar days immediately preceding the date of the notice of redemption. Benz Convertible Notes -- On December 30, 1999, Harken issued $12,000,000 principal amount of 5% Convertible Notes Due 2003 (the "Benz Convertible Notes") in exchange for certain prospects acquired from Benz Energy, Incorporated ("Benz"). The Benz Convertible Notes originally were to mature on May 26, 2003. In March 2000, the maturity date of certain of the Benz Convertible Notes was extended to November 26, 2003. As of August 14, 2002, Harken has repurchased or redeemed approximately $6.3 million principal 25 amount of the Benz Convertible Notes for cash and/or Harken common stock. As of August 14, 2002, the outstanding principal balance of Benz Convertible Notes was approximately $5,669,000 and had a maturity date of November 26, 2003. The Benz Convertible Notes bear interest at 5% per annum, payable semi-annually in May and November of each year until maturity or until the Benz Convertible Notes are redeemed, converted or purchased by Harken prior to their maturity. The notes may be redeemed for cash, or shares of Harken common stock, at Harken's option, at par, in whole or in part, at any time after May 26, 2002, upon not less than 30 days notice to the holders. In addition, beginning November 26, 2002, Harken may redeem up to 50% of the Benz Convertible Notes then outstanding in exchange for shares of Harken common stock. At maturity on November 26, 2003, Harken may similarly redeem all remaining outstanding Benz Convertible Notes for shares of Harken common stock. If Harken elects to redeem the Benz Convertible Notes for shares of its common stock, beginning November 26, 2002, each note will be redeemed for a number of shares of Harken common stock equal to 115% of the principal value of the note to be redeemed, plus accrued and unpaid interest thereon, divided by the average market price of the stock over the 30 calendar days immediately preceding the date of the notice of redemption. Capital Restructuring - Harken management has been actively working to restructure the indebtedness represented by the 5% European Notes and Benz Convertible Notes (collectively, the "5% Notes") in advance of their scheduled maturity next year. As of August 14, 2002, Harken has repurchased or redeemed approximately $57.3 million principal amount of such notes. During the three months ended June 30, 2002, Harken repurchased $1,000,000 in principal amount of the 5% European Notes from certain holders thereof in exchange for approximately $650,000 in cash, plus transaction costs. In July 2002, Harken repurchased an additional $1,120,000 principal amount of the 5% European Notes from certain holders thereof in exchange for approximately $696,000 in cash. Also in July 2002, Harken repurchased $700,000 in principal amount of the 5% European Notes from a holder in exchange for cash of approximately $444,000 plus an agreement to exchange an additional $2,210,000 principal amount of the 5% European Notes for $2,210,000 principal amount of Harken's 7% European Notes. Such notes were exchanged in August 2002. Other holders of $2,000,000 principal amount of the 5% European Notes agreed to exchange their notes in August 2002 for $800,000 principal amount of the 7% European Notes and $800,000 in cash paid by Harken. No Benz Convertible Notes were repurchased or redeemed by Harken during the three months ended June 30, 2002. In July 2002, pursuant to the terms of the Benz Convertible Notes, Harken elected to redeem Benz Convertible Notes with a principal amount of approximately $1,135,000 for 2,000,000 shares of Harken common stock. In August 2002, Harken entered into an agreement with a holder of approximately $4,071,000 of Benz Convertible Notes to repurchase those notes for $1,231,000 in cash. As of August 14, 2002, after giving effect to the above transactions, the aggregate indebtedness outstanding under the 5% Notes was approximately $39.6 million. In order to satisfy its remaining obligations under the 5% Notes, Harken must: (i) raise additional capital to redeem the 5% Notes for cash, (ii) repurchase the 5% Notes from the holders thereof for cash and/or securities (such as the 7% European Notes or Harken common stock) or other property, (iii) redeem the 5% Notes by issuing Harken common stock on or before maturity, or (iv) redeem, repurchase or convert the 5% Notes using any combination of the foregoing methods. Although Harken management is actively pursuing negotiated transactions to restructure the 5% Notes, no assurance can be given that Harken will be able to redeem them for cash pursuant to their terms or repurchase them for cash and/or other securities or property. In this event, Harken presently intends to satisfy 26 its obligations under the 5% Notes by redeeming them in exchange for Harken common stock. Under the terms of the 5% Notes, if Harken elected to redeem the 5% Notes for shares of its common stock, each note would be converted into a number of shares of Harken common stock equal to 115% of the face value of the note to be redeemed, plus accrued and unpaid interest thereon, divided by the average market price of the stock over the 30 calendar days immediately preceding the date of the notice of redemption. The redemption of 5% Notes by converting them into common stock could result in substantial dilution of the existing Harken common stock. In addition, the number of new shares to be issued could result in a change of control of Harken. For example, if notes had been converted on August 14, with an estimated conversion price of $0.30, for every $1,000,000 of 5% Notes converted at this price, Harken would have been required to issue to the noteholders approximately 3.8 million shares of common stock. If all of the 5% Notes had been converted at this price, the noteholders would have received an aggregate of approximately 151.8 million shares of common stock and, collectively, would control over 86% of Harken's common stock. The number of shares that might be issued in this regard will vary significantly depending upon the average market price of Harken's common stock over the 30 days preceding the redemption notice, and the amount of 5% Notes to be redeemed. In connection with the issuance of Harken common stock in redemption of 5% Notes, Harken intends to request stockholder approval in accordance with guidelines of the American Stock Exchange that apply to transactions involving the potential issuance below market value of at least 20% of a company's outstanding shares. If shareholder approval was required under the American Stock Exchange Guidelines and was not obtained, Harken could apply for an exemption from the shareholder approval requirement or be subject to delisting of its common stock if it issued the shares without shareholder approval. The potential delisting of Harken common stock could adversely affect Harken's ability to raise capital in the future by issuing common stock or securities convertible into common stock. In addition, if Harken's stock price were to decline significantly, Harken's ability to convert a substantial amount of the 5% Notes into common stock could be limited by the number of authorized but unissued shares of Harken common stock. If there were an insufficient number of shares of common stock to redeem all of the then-outstanding 5% Notes, Harken would have to obtain shareholder approval to increase its authorized common stock before it could redeem all such 5% Notes into common stock. Absent such shareholder approval, Harken would have to otherwise restructure the then-outstanding 5% Notes, or pay such 5% Notes at maturity. There can be no assurance that, in such an event, Harken would be successful in restructuring its obligations under the then-outstanding 5% Notes, or would have available sufficient funds to pay such 5% Notes, in cash, upon maturity. Other Capital Commitments In light of recent reduced oil and gas prices, and as a result of Harken's ongoing capital restructuring discussed above, Harken's domestic operating strategy now includes efforts to increase its oil and gas reserves in North America through acquisitions and development, with a decreased emphasis on exploration drilling activities. Accordingly, Harken's domestic capital expenditure plans have been reduced compared to the prior two-year period. Harken is, however, actively pursuing various North American acquisition and development opportunities. Harken anticipates domestic capital expenditures will total approximately $1.5 million during 2002. A majority of Harken's planned domestic capital expenditures are discretionary and, as a result, will be curtailed if sufficient funds are not available. Such expenditure curtailments, however, could result in Harken losing certain prospect acreage or reducing its interest in future development projects. 27 On June 18, 2002, Harken issued to certain holders of Harken's securities $2,025,000 principal amount of its 7% European Notes in exchange for approximately $1,025,000 in cash and 10,000 shares of Harken's Series G1 Preferred Stock owned by such holders. On June 19, 2002, Harken issued to certain holders of Harken's securities an additional $2,025,000 principal amount of the 7% European Notes in exchange for approximately $1,725,000 in cash and 3,000 shares of Harken's Series G1 Preferred Stock owned by such holders. In August 2002, Harken issued or agreed to issue an additional $3,010,000 principal amount of the 7% European Notes in connection with the exchange transactions involving certain of the 5% European Notes described above. For a description of the 7% European Notes, see Note 7 to the accompanying consolidated condensed financial statements contained in Part 1, Item 1. Operational Contingencies -- Harken has accrued approximately $7.4 million at June 30, 2002 relating to operational or regulatory 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 a material adverse effect upon Harken's financial condition or operations taken as a whole. See Item 2, Part 1 for description of a certain litigation. Harken's operations are subject to stringent and complex environmental laws and regulations governing the discharge of materials into the environment or otherwise relating to environmental protection. These laws and regulations are subject to changes that may result in more restrictive or costly operations. Failure to comply with applicable environmental laws and regulations may result in the imposition of administrative, civil and criminal penalties or injunctive relief. Global's international oil and gas exploration and production operations, including well drilling and seismic activities, require specific governmental environmental licenses and permits, the acquisition of which in the past have been subject to extensive delays. Global may continue to experience similar delays in the future. Failure to obtain these licenses and permits in a timely manner may prevent or delay Harken's and Global's operational plans. International Commitments--Terms of certain of the Association Contracts entered into between Global's subsidiary Harken de Colombia, Ltd. and Ecopetrol commit Global to perform certain activities in Colombia in accordance with a prescribed timetable. In addition, Global has certain scheduled capital expenditure commitments related to its TEA Agreements in Peru and Panama. Failure by Global to perform these activities as required could result in Global losing its rights under the particular contract, which could potentially have a material adverse effect on Harken's business. As of August 14, 2002, Global was in compliance with the requirements of each of the Association and TEA Contracts, as amended. In light of political and regulatory developments in Costa Rica, Global is projecting no capital expenditure plans during 2002 with regard to the Costa Rica Contract. Capital Sources During 2001, sales of certain domestic producing property interests generated cash proceeds of approximately $13.1 million. During the first six months of 2002, Harken sold certain additional domestic producing property interests for approximately $2,524,000. Harken's operating cash flows from its domestic oil and gas properties were strengthened by successful drilling activity in late 2001 in southern Louisiana, which have partially offset the reductions following the recent sales of producing properties. Wells completed in 2001, including the Thomas Cenac #1, the State Lease 1480 #2, the State Lease 14589 #3 and the State Lease 1480 #3, all began production in the last four months of 2001. In 2002, Harken has participated in the drilling of three exploratory wells and three development wells with a total of four of these wells being commercially successful. In April 2002, Harken 28 acquired the Republic Properties which consist of interests in 16 oil and gas wells in 9 fields plus interests in additional prospect acreage located in southern Louisiana and the Texas Gulf Coast region. The acquisition of the Republic Properties began supplementing Harken's domestic operating cash flows beginning in the second quarter of 2002. Harken's domestic operating cash flows are particularly dependent on the price of natural gas, which Harken is unable to predict. Certain Harken subsidiaries entered into a three-year loan facility with Bank One, N.A. ("Bank One"), which is secured by certain of those subsidiaries' domestic oil and gas properties and a guarantee from Harken. The Bank One facility provides borrowings subject to a borrowing base (as defined by the Bank One facility), which was $6,737,000 as of June 30, 2002 and as of August 14, 2002. Such borrowing base will be reduced by $225,000 per month beginning September 1, 2002 until the borrowing base is redetermined by Bank One on November 1 and May 1 in accordance with the facility agreement. The Bank One facility requires the Borrowers, as well as Harken, to maintain certain financial covenant ratios and requirements. Global's operating cash flows continue to be provided by ongoing production from its Alcaravan and Bolivar Contract areas in Colombia. Global anticipates that cash flows from its Colombian assets will be adequate to fund the capital needs, as well as the operating, administrative and management costs of its Middle American operations. Global's ordinary shares are admitted for trading on the Alternative Investment Market of the London Stock Exchange. This may enable Harken, through its ownership in Global, to seek additional financing and effect acquisition activities using shares of Global stock. Global's ability to effectively use its common stock will be dependent upon the market value and liquidity of its shares on the AIM Exchange. Global is also pursuing raising additional capital through potential sales of pipe inventory and net operating losses. Additional capital raised by Global would be used exclusively for Global's capital needs, as cash dividends to Harken would be limited by tax restrictions. In addition to the above sources, Harken has and may continue to raise capital through the issuance of debt, equity and convertible debt instruments, or through the exchange of existing instruments through transactions that provide Harken with additional capital. Such transactions may be impacted, however, by the market value of Harken common stock and/or Global ordinary shares. If the price of Harken common stock and/or Global ordinary shares remains low or decreases, Harken's ability to utilize such stock either directly or indirectly through convertible instruments for raising capital could be negatively affected. Adequacy of Capital Sources Management believes funds on hand and available sources of financing will enable Harken to meet its liquidity needs for the remainder of 2002. The continuation of Harken's business plan is dependent upon a number of factors, including Harken's efforts to restructure its capital structure through the repurchase, redemption and restructuring of its 5% Notes. As discussed above, such restructuring efforts are dependent upon the ability of Harken to raise funds through the issuance of debt or equity securities, or if necessary though the sale of producing properties. Management is presently investigating potential financing transactions that it believes can provide additional cash for these purposes. Additional cash may be available from production operations, though Harken has had reduced operating cash flows during 2002 due to lower commodity prices compared to the prior year. The use of a significant number of shares of Harken common stock toward the redemption of 5% Notes is also dependent on various factors, including the future market price of Harken common stock, the approval by Harken shareholders to issue the required number of shares necessary, and the limitation of authorized common shares available for such redemptions, as discussed 29 above. Accordingly, there can be no assurance that such capital restructuring plans will be successful. 30 PART II - OTHER INFORMATION Item 1. Legal Proceedings. Search Acquisition Corp. ("Search Acquisition"), also known as Harken Texas Acquisition Corp., a wholly-owned subsidiary of Harken, is a defendant in a lawsuit filed by Petrochemical Corporation of America and Lorken Investments Corporation (together, "Petrochemical"). This lawsuit arises out of Petrochemical's attempt to enforce a judgment of joint and several liability entered in 1993 against a group of twenty limited partnerships known as the "Odyssey limited partnerships." Petrochemical claims that Search Exploration, Inc. is liable for payment of the judgment as the successor-in-interest to eight Odyssey limited partnerships. Search Acquisition was the surviving corporation in Harken's 1995 acquisition of Search Exploration, Inc. On February 28, 1996, the court granted Search Acquisition's motion for summary judgment in this case. On July 3, 1998, the Fifth District Court of Appeals for the State of Texas reversed the trial court's summary judgment and remanded the case to the trial court. In late 2001, a jury trial was held in this matter. The jury returned a verdict finding for Petrochemical in the amount of $1.1 million of actual damages and $3 million in punitive damages. In April 2002, the court entered judgment on the verdict rendered by the jury. Search Acquisition promptly appealed this judgment. In June 2002, Petrochemical filed with the U.S. Bankruptcy Court in Dallas, Texas an involuntary petition in bankruptcy against Search Acquisition, under Chapter 7 of the Bankruptcy Code, and moved for the appointment of an interim trustee. Search Acquisition agreed to the entry of an order for relief under Chapter 7, as well as to the appointment of the interim trustee. These actions resulted in a stay of Search Acquisition's appeal of the Court's judgment on the jury verdict totaling $4.1 million. Thereafter, McCulloch Energy, Inc. ("McCulloch"), a wholly-owned subsidiary of Search Acquisition, filed a voluntary petition in bankruptcy under Chapter 7 of the Bankruptcy Code in the U.S. Bankruptcy Court in Houston, Texas. The stay of Search Acquisition's appeal and the related bankruptcy filings led to negotiations in bankruptcy and mediation relating to the Petrochemical suit and judgment. As a result of these events, on August 1, 2002, pursuant to a mediated settlement, Petrochemical and the bankruptcy trustees agreed to release their claims against Harken in exchange for a payment of $2 million to be distributed to Petrochemical, and a payment of approximately $189,000 to pay administrative expenses and other creditors of the bankruptcy estates. This amount has been fully accrued as of June 30, 2002 and is included in accrued liabilities in the accompanying consolidated condensed balance sheet at June 30, 2002. Pursuant to the mediation agreement signed on August 1, 2002, Petrochemical may also elect to receive the stock of six non-operating subsidiaries of Harken that are not material to Harken's operations. The mediation agreement is subject to approval by the Bankruptcy Courts in Dallas and Houston. Item 2. Changes in Securities and Use of Proceeds The following is a description of the unregistered securities Harken has issued during the period covered by this report and during the subsequent period through the date of this report: 1. On June 18, 2002, Harken issued to certain holders of Harken's securities, who represented to Harken that they were accredited investors as defined in Rule 501 of Regulation D, $2,025,000 in principal amount of its 7% Senior Convertible Notes Due 2007 (the "7% European Notes") in exchange for $1,025,000 in cash and 10,000 shares of Harken's Series G1 Preferred Stock. The 7% European Notes are convertible as described in Sections 6 and 7 of the Note, which Note is Exhibit 10.19 to this Report, and which Sections of the Note are incorporated herein by reference. 2. On June 19, 2002, Harken issued an additional $2,025,000 in principal amount of its 7% European Notes to certain holders of Harken's securities, who represented to Harken that they were accredited investors as defined 31 in Rule 501 of Regulation D, in exchange for 3,000 shares of Harken's Series G1 Preferred Stock and approximately $1,725,000 in cash. The 7% European Notes are convertible as described in Sections 6 and 7 of the Note, which Note is Exhibit 10.20 to this Report, and which Sections of the Note are incorporated herein by reference. 3. On July 15, 2002, Harken issued a 10% Term Loan Payable to a certain holder of Harken's securities, who represented to Harken that he was an accredited investor as defined in Rule 501 of Regulation D, in exchange for $3,000,000 in cash. 4. On August 13, 2002, Harken issued an additional $2,210,000 in principal amount of its 7% European Notes to certain holders of Harken's securities, who represented to Harken that they were accredited investors as defined in Rule 501 of Regulation D, in exchange for $2,210,000 principal amount of Harken's 5% Senior Convertible Notes Due 2003. The 7% European Notes are convertible as described in Sections 6 and 7 of the Note. 5. On April 4, 2002, Harken issued a total of 2,724,865 shares of unregistered Harken common stock in connection with the acquisition of the Republic Properties. Such shares were registered in June 2002 through the filing of an S-3 registration statement with the Securities and Exchange Commission. All of the securities issued in the transactions described above were issued without registration under the Securities Act of 1933 in reliance upon the exemption provided in Section 4(2) of such Act. The recipients of securities in each such transaction acquired the securities for investment only and not with a view to or for sale in connection with any distribution thereof and appropriate legends were affixed to the instruments issued in such transactions. Harken believes the recipients were all accredited investors within the meaning of Rule 501 of Regulation D, or had such knowledge and experience in financial and business matters as to be able to evaluate the merits and risks of an investment in Harken's securities. All receipients were existing holders of Harken securities, and none of the transactions described above involved general solicitation or general advertising. Item 6. Exhibits and Reports on Form 8-K. 9a) EXHIBIT INDEX Exhibit 3.1 Certificate of Incorporation of Harken Energy Corporation as amended (filed as Exhibit 3.1 to Harken's Annual Report on Form 10-K for fiscal year ended December 31, 1989, File No. 0-9207, and incorporated by reference herein). 3.2 Amendment to the Certificate of Incorporation of Harken Energy Corporation (filed as Exhibit 28.8 to the Registration Statement on Form S-1 of Tejas Power Corporation, file No. 33-37141, and incorporated by reference herein.) 3.3 Amendment to the Certificate of Incorporation of Harken Energy Corporation (filed as Exhibit 3 to Harken's Quarterly Report on Form 10-Q for fiscal quarter ended March 31, 1991, File No. 0-9207, and incorporated by reference herein.) 3.4 Amendments to the Certificate of Incorporation of Harken Energy Corporation (filed as Exhibit 3 to Harken's Quarterly Report on Form 10-Q for fiscal quarter ended June 30,1991, File No. 0-9207, and incorporated by reference herein.) 32 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 (filed as Exhibit 3.6 to Harken's Annual Report on Form 10-K for the fiscal year ended December 31, 1997, File No. 0-9207 and incorporated by reference herein). 3.7 Amendment to the Certificate of Incorporation of Harken Energy Corporation (filed as Exhibit 3.6 to Harken's Quarterly Report on Form 10-Q for the fiscal quarter ended June 30, 1998, File No. 0-9207, and incorporated by reference herein). 3.8 Bylaws of Harken Energy Corporation, as amended (filed as Exhibit 3.2 to Harken's Annual Report on Form 10-K for fiscal year ended December 31, 1989, File No. 0-9207, and incorporated by reference herein). 4.1 Form of certificate representing shares of Harken common stock, par value $.01 per share (filed as Exhibit 1 to Harken's Registration Statement on Form 8-A, File No. 0-9027, and incorporated by reference herein.) 4.2 Certificate of Designations, Powers, Preferences and Rights of Series A Cumulative Convertible Preferred Stock, $1.00 par value, of Harken Energy Corporation (filed as Exhibit 4.1 to Harken's Annual Report on Form 10-K for the fiscal year ended December 31,1989, File No. 0-9207, and incorporated by reference herein). 4.3 Certificate of Designations, Powers, Preferences and Rights of Series B Cumulative Convertible Preferred Stock, $1.00 par value, of Harken Energy Corporation (filed as Exhibit 4.2 to Harken's Annual Report on Form 10-K for the fiscal year ended December 31, 1989, File No. 0-9207, and incorporated by reference herein.). 4.4 Certificate of the Designations, Powers, Preferences and Rights of Series C Cumulative Convertible Preferred Stock, $1.00 par value of Harken Energy Corporation (filed as Exhibit 4.3 to Harken's Annual Report on Form 10-K for fiscal year ended December 31,1989, File No. 0-9207, and incorporated by reference herein). 4.5 Certificate of the Designations of Series D Preferred Stock, $1.00 par value of Harken Energy Corporation (filed as Exhibit 4.3 to Harken's Quarterly Report on Form 10-Q for the fiscal quarter ended September 30,1995, File No. 0-9207, and incorporated by reference herein). 4.6 Rights Agreement, dated as of April 6, 1999, by and between Harken Energy Corporation and ChaseMellon Shareholder Services L.LC., as Rights Agent (filed as Exhibit 4 to Harken's Current Report on Form 8-K dated April 7, 1998, File No. 0-9207, and incorporated by reference herein). 33 4.7 Certificate of Designations of Series E Junior Participating Preferred Stock (filed as Exhibit B to Exhibit 4 to Harken's Current Report on Form 8-K dated April 7, 1998, File No. 0-9207, and incorporated by reference herein). 4.8 Certificate of Designations, Preferences and Rights of Series F Convertible Preferred Stock (filed as Exhibit 4.8 to Harken's Quarterly Report on Form 10-Q for the period ended June 30, 1998, File No. 0-9207, and incorporated by reference herein). 4.9 Certificate of Designations of Series G1 Convertible Preferred Stock (filed as Exhibit 4.9 to Harken's Annual Report on Form 10-K for fiscal year ended December 31, 2000, File No. 0-9207, and incorporated by reference herein). 4.10 Certificate of Designations of Series G2 Convertible Preferred Stock (filed as Exhibit 4.10 to Harken's Annual Report on Form 10-K for fiscal year ended December 31, 2001, 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). 10.4 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). 10.5 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). 10.6 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). 10.7 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). 10.8 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 34 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). 10.9 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). 10.10 Trust Indenture dated May 26, 1998, 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, 1998, File No. 0-9207, and incorporated herein by reference). 10.11 Credit Agreement between Harken Exploration Company, XPLOR Energy, Inc. Harken Energy West Texas, Inc., Harken Southwest Corporation, South Coast Exploration Co., Xplor Energy SPV-1, Inc., McCulloch Energy, Inc. and Bank One, Texas, N.A. dated August 11, 2000 and as amended December 21, 2000 and December 31, 2000 (filed as Exhibit 10.12 to Harken's Annual Report on Form 10-K for fiscal year ended December 31, 2000, File No. 09207, and incorporated by reference herein). 10.12 Third Amendment to Credit Agreement between Harken Exploration Company, XPLOR Energy, Inc., Harken Energy West Texas, Inc., South Coast Exploration Co., XPLOR Energy SPV-1, Inc., McCulloch Energy, Inc., Harken Gulf Exploration Company, and Bank One, N.A. dated May 11, 2001 (Filed as Exhibit 10.13 to Harken's Quarterly Report on Form 10-Q for the quarter ended June 30, 2001, File No. 0-9207, and incorporated herein by reference). 10.14 Association Contract (Cajaro) dated as of December 2001, but effective as of February 2002, by and between Harken de Colombia, Ltd. and Empresa Colombia de Petroleos. (Filed as Exhibit 10.14 to Harken's Annual Report on Form 10-K for fiscal year ended December 31, 2001, File No. 0-9207, and incorporated herein by reference). 10.15 Purchase and Sale Agreement dated January 31, 2002 between Republic Resources, Inc. and Harken Energy Corporation. (Filed as Exhibit 10.15 to Harken's Annual Report on Form 10-K for fiscal year ended December 31, 2001, File No. 0-9207, and incorporated by reference herein). 10.16 Letter from Arthur Andersen LLP pursuant to Item 304(a)(3) of Regulation S-K (Filed as Exhibit 16.1 in Harken's current report on Form 8-K, filed on September 5, 2001, File No. 0-9207, and incorporated by reference herein). 10.17 Waiver and Fourth Amendment to Credit Agreement between Harken Exploration Company, XPLOR Energy, Inc., Harken Energy West Texas, Inc., XPLOR Energy SPV-1, Inc., Harken Gulf Exploration Company, and Bank One, N.A. dated March 21, 2002. (Filed as Exhibit 10.17 to Harken's Quarterly Report on Form 10-Q for the quarter ended March 31, 2002, File No. 0-9207, and incorporated herein by reference.) *10.18 Loan Agreement dated July 15, 2002 between Harken Energy Corporation and Lyford Investments Enterprises Ltd. *10.19 Harken Energy Corporation 7% Senior Convertible Notes Due 2007 in the principal sum of $2,025,000 dated June 18, 2002. 35 *10.20 Harken Energy Corporation 7% Senior Convertible Notes Due 2007 in the principal sum of $2,025,000 dated June 19, 2002. *10.21 Harken Energy Corporation 5% Convertible Notes Due 2003 between Harken and Benz Energy, Inc. and Texstar Petroleum, Inc. in the principal amounts of $6,803,679.26 and $4,071,320.74 dated December 30, 1999. * Filed herewith (b) REPORTS ON FORM 8-K None filed. 36 HARKEN ENERGY CORPORATION SIGNATURES Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized. Harken Energy Corporation ----------------------------------------- (Registrant) Date: August 14, 2002 By: /s/Anna M. Williams ---------------------- -------------------------------------- Executive Vice President-Finance and Chief Financial Officer 37 EX-10.18 3 dex1018.txt LOAN AGREEMENT DATED 7/15/2002 Exhibit 10.18 LOAN AGREEMENT THIS LOAN AGREEMENT (the "Agreement") is made and entered into as of July 15, 2002, by and between Harken Energy Corporation, a Delaware corporation (the "Borrower"), and Lyford Investments Enterprises Ltd., a British Virgin Islands company (the "Lender"). R E C I T A L S: WHEREAS, Borrower is seeking to borrow, and Lender has agreed to lend, the sum of Three Million Dollars ($3,000,000) through a term loan on the terms and conditions hereinafter set forth; NOW THEREFORE, in consideration of the mutual covenants, agreements and undertakings herein contained, the parties hereto agree as follows: 1. DEFINITIONS. As used in this Agreement, the following terms have the following meanings: "Affiliate" means, with respect to a specified entity or person, any other entity or person that directly, or indirectly through one or more intermediaries, controls or is controlled by, or is under common control with, the specified entity or person. For purposes of this definition, "control" means the possession, directly or indirectly, of the power to direct or cause the direction of the management and policies of an entity or person, whether through the ownership of voting securities, by contract or otherwise. "Board Change" shall mean a change in the majority of the members of Borrower's Board of Directors or a change in the office of the Chairman of the Board of Borrower. "Business Day" means any day on which commercial banks are not authorized or required to close in Houston, Texas. "Cure Period" has the meaning specified in Section 8(b)(i). "Default Option Period" has the meaning specified in Section 8(b)(iii). "Default Rate" has the meaning specified in Section 8(b)(ii). "Default Rate Period" has the meaning specified in Section 8(b)(ii). "Equity Financing Transaction" has the meaning specified in Section 3(c). "Event of Default" has the meaning specified in Section 8(a). "GED" refers to Global Energy Development PLC, a subsidiary of Borrower. "GED Option Price" has the meaning specified in Section 8(b)(iii). "GED Warrant" has the meaning as specified in Section 7(a). "Interest Rate" means the rate of ten percent (10%) per annum, with no compounding. "Maturity Date" means July 15, 2005. "Non-Payment Default" has the meaning specified in Section 8(c). "Note" means the Promissory Note issued by Borrower, payable in accordance with the terms hereof and thereof, evidencing the indebtedness hereunder substantially in the form of Exhibit A hereto, as the same may be amended, supplemented or modified. "Payment Default" has the meaning specified in Section 8(b). "Securities Act" means the Securities Act of 1933, as amended. "Term Loan" has the meaning specified in Section 2(a). 2. LOAN TERMS. (a) Term Loan. Subject to the terms and conditions hereof, the Lender will lend the amount of Three Million Dollars ($3,000,000.00) (the "Term Loan") to Borrower. The Term Loan shall be evidenced by, and payable in accordance with the terms of the Note. The proceeds of the Term Loan shall be used by Borrower for general corporate purposes, including working capital needs or to refinance or pay long-term or short-term debt obligations. (b) Interest. Except as otherwise provided in this Agreement or in the Note, the unpaid principal amount of the Term Loan outstanding from time to time shall bear interest from the date hereof until fully paid at the Interest Rate. All interest shall be computed on the basis of a year of 360 days and the actual number of days elapsed (including the first day but excluding the last day). 3. PAYMENTS. (a) Terms of Payment. All payments of principal, interest or other amounts to be made by Borrower shall be made in accordance with the terms of this Agreement and the Note. (b) Method of Payment. All payments of principal, interest or other amounts to be made by Borrower shall be made in accordance with the terms of the this Agreement and the Note and shall be made to Lender at its designated office, without setoff, deduction or counterclaim in immediately available funds. Whenever any payment under this Agreement, the Note or any other documents executed in connection herewith shall be stated to be due on a day that is not a Business Day, such payment may be made on the next Business Day, and interest shall continue to accrue during such extension. -2- (c) Prepayment. (i) Voluntary Prepayment. Prepayment of the Term Loan, and the corresponding Note, may be made at any time without the consent of the Lender and without penalty. (ii) Mandatory Prepayment. Notwithstanding the other provisions of this Agreement or the Note, Borrower shall be obligated to make the following prepayments: (A) In the event that Borrower is subject to a Board Change, Borrower shall immediately prepay the entire amount owed under the Term Loan, including any principal and any accrued but unpaid interest on the Term Loan; and (B) In the event that Borrower receives cash proceeds upon an Equity Financing Transaction, Borrower shall, within thirty (30) days of Borrower's receipt of such cash proceeds, use such cash proceeds to prepay any remaining principal amount of this Loan to Lender; provided that, such prepayment obligation shall not exceed sixty percent (60%) of the aggregate cash proceeds received by Borrower upon closing of the Equity Financing Transaction. As used herein the term "Equity Financing Transaction" shall include any sale of Borrower's common stock for cash other than (i) issuances of securities upon the exercise of options or warrants, (ii) issuances of stock bonuses or stock awards or under any plan to issue securities as compensation to employees, directors or consultants of the Borrower or any Affiliate of Borrower, (iii) issuances of securities upon the conversion of any other security of Borrower, (iv) issuances of securities in a merger or acquisition, or (v) securities issued in connection with any stock split, stock dividend, recapitalization or similar event. 4. ABSENCE OF SECURITY. Repayment of the Term Loan is not secured by any of the assets or properties of the Borrower, by any liens or encumbrances on any assets or property of Borrower, or in any other manner. Lender expressly agrees and represents that nothing in this Agreement or the Note shall create or constitute any security interest, pledge or lien upon any of the securities of GED held by Borrower. 5. REPRESENTATIONS OF BORROWER. Borrower represents, warrants and acknowledges to the Lender that: (a) Due Organization and Qualification. Borrower is a corporation duly existing under the laws of its state of incorporation and qualified and licensed to do business in any state in which the conduct of its business or its ownership of property requires that it be so qualified. (b) Due Authorization; No Conflict. The execution, delivery, and performance of this Agreement are within Borrower's powers, have been duly authorized, and are not in conflict with nor constitute a breach of any provision contained in Borrower's Certificate of Incorporation or Bylaws, nor will such events constitute an event of default under any material agreement to which Borrower is a party or by which Borrower is bound. This Agreement when executed and delivered by the Borrower will constitute a valid and legally binding obligation of the Borrower, enforceable in -3- accordance with its terms, and subject to the laws of general application relating to bankruptcy, insolvency and the relief of debtors and rules of law governing specific performance, injunctive relief or other equitable remedies. (c) Litigation. There is no action, suit or proceeding pending or currently threatened against the Borrower which questions the validity of this Agreement or the Note or the right of the Borrower to enter into this Agreement or the Note or to consummate the transactions contemplated hereby or thereby. (d) Solvency, Payment of Debts. Borrower is solvent and able to pay its debts (including trade debts) as they mature. 6. REPRESENTATIONS OF LENDER. Lender represents, warrants and acknowledges to the Borrower as follows: (a) Accredited Investor. Lender is an accredited investor, as defined in Rule 501(a) of Regulations D promulgated under the Securities Act, and has such knowledge and experience in financial and business matters that it is capable of evaluating the merits and risks of an investment in this Term Loan, and making an informed investment decision. Lender has not been organized solely for the purpose of investing in the Term Loan. (b) Investment. This Term Loan, and any securities of the Borrower acquired by Lender as a result of this transaction, is solely for the account of Lender, for investment purposes only, not as a nominee or agent, and not with a view to the resale, distribution or assignment thereof or of dividing or allowing others to participate in this investment. (c) Access to Data. Lender has had a reasonable opportunity to ask questions or and receive answers from the Borrower and its executive officers concerning the Borrower and all such questions, if any, have been answered to the full satisfaction of Lender. Lender has had the opportunity to obtain from the Borrower any information, to the extent possessed by Borrower or obtainable without unreasonable effort and expense, necessary to evaluate the merits and risks of this investment and has concluded, based on the information presented to Lender, Lender's own understanding of investments of this nature and of an investment in any of the Borrower's securities in particular, and the advice of such consultants or counsel as Lender has deemed appropriate, that Lender wishes to make this investment. (d) Rule 144. Lender understands that the Note is characterized as a "restricted security" under the federal securities laws inasmuch as it is being acquired from the Borrower in a transaction not involving a public offering and that under such laws and applicable regulations such security may only be resold without registration under the Securities Act only in certain limited circumstances. In this connection, Lender represents that it is familiar with Securities and Exchange Commission Rule 144, as presently in effect, and understands the resale limitations imposed thereby and by the Securities Act. Lender also understands that no public market now exists for the Note or of any other securities that may be issued by the Borrower hereunder and that the Borrower has made -4- no assurances that a public market will ever exist for the Note or any other securities that may be issued by the Borrower hereunder. (e) Due Authorization; No Conflict. The execution, delivery, and performance of this Agreement are within Lender's powers, have been duly authorized, and are not in conflict with nor constitute a breach of any provision contained in Lender's Certificate of Incorporation or Bylaws, nor will such events constitute an event of default under any material agreement to which Lender is a party or by which Lender is bound. This Agreement when executed and delivered by the Lender will constitute a valid and legally binding obligation of the Lender, enforceable in accordance with its terms, and subject to the laws of general application relating to bankruptcy, insolvency and the relief of debtors and rules of law governing specific performance, injunctive relief or other equitable remedies. 7. COVENANTS. (a) GED Warrant. As further consideration for Lender's agreement to enter into the Agreement, Borrower covenants that it shall, within 30 days after the date of this Agreement, deliver to Lender a non-transferable non-registered stock purchase warrant granting Borrower a right to purchase up to 4.2 million shares of GED at an exercise price of 50 pence per share (the "GED Warrant"). The Warrant shall expire, and shall no longer be exercisable by Lender, on or after 90 days after the Maturity Date of the Note, provided that, if an Event of Default occurs, the Warrant shall continue to be exercisable for a period of three years after the original expiration date. (b) Voting Restriction. Borrower covenants that, so long as the Term Loan remains outstanding, it will not vote any of its GED shares in favor of any financing transaction involving the issuance of GED shares at a price less than 25 pence per share; provided that, this restriction shall not apply to (in each case referring to issuances of GED securities): (i) issuances of securities upon the exercise of options or warrants, (ii) issuances of stock bonuses or stock awards or under any plan to issue stock as compensation to employees, directors or consultants of GED or any Affiliate of GED, (iii) issuances of securities for non-cash consideration, (iv) issuances of securities upon the conversion of any other security, (v) issuances under a direct stock purchase plan, dividend reinvestment plan or similar plan, (vi) issuances of securities in a merger or acquisition, (vii) securities issued in connection with any stock split, stock dividend, recapitalization or similar event or (viii) any similar issuances of securities that are not made primarily for the purpose of raising additional capital. 8. DEFAULT. (a) Events of Default. Each of the following shall be deemed an "Event of Default:" (i) Borrower shall fail to pay when due any of the obligations under this Agreement or Note; -5- (ii) Borrower shall fail to comply with any covenant contained in this Agreement; (iii) The insolvency or bankruptcy of the Borrower; (iv) The commission of any act of bankruptcy by the Borrower; (v) The filing by or against the Borrower of a petition in bankruptcy or any petition for relief under the federal or state bankruptcy laws or the continuation of such petition without dismissal for a period of ninety (90) days or more; (vi) The appointment of, or the Borrower applies for the appointment of, a receiver or trustee or similar person, to take possession of the property or assets of the Borrower; or (vii) The Borrower shall file a certificate of dissolution under applicable state law or shall be liquidated, dissolved or wound-up or shall commence or have commenced against it any action or proceeding for dissolution, winding-up or liquidation, or shall take any corporate action in furtherance thereof. (b) Remedies Upon Payment Default. Notwithstanding the provisions of this Agreement or of the Note, if any Event of Default as described in subsection (i) of Section 8(a) above (hereinafter a "Payment Default") shall occur, then Lender may exercise any and all legal and equitable rights and remedies set forth in this Agreement or the Note, including the following: (i) Cure Period. For a period of 30 days following the due date of any payment giving rise to a Payment Default (the "Cure Period"), Borrower shall have an opportunity to cure such default by making full payment of all amounts due to Lender, including the payment of all interest that accrues under the terms of the Note through the date of payment. (ii) Default Rate Period. For an additional period beginning on the date following the expiration of the Cure Period and continuing for 30 days thereafter (the "Default Rate Period"), Borrower shall have an opportunity to cure any Payment Default by making full payment of all amounts then due to Lender, including the payment of all interest that accrues under the terms of the Note through the date of payment; provided that the rate of interest applied to such default payment shall increase to a rate equal to 200% times the Interest Rate (hereinafter, the "Default Rate"). (iii) Default Option Period. In the event that Borrower fails to cure a Payment Default on or before the expiration of the Default Rate Period, Lender shall, thereafter and for a period continuing until such time as Maker has made full payment of all amounts then due to Lender (the "Default Option Period"), have the option, in lieu of exercising any other remedies that may be available to Lender, to purchase from Borrower a number of shares of GED (as determined herein) in exchange for the release by Holder of Borrower's obligation to pay any such amounts then due to Lender. Holder may exercise such option by delivering a notice of exercise to Maker at any -6- time during a Default Option Period; provided that, such notice is received by Maker prior to payment by Maker of the amounts then due to Lender. The total number of shares subject to the option shall be determined by dividing the total amount of the debt then due and payable to Lender (converted into British Pounds) by the GED Option Price (defined below). The conversion of indebtedness to British Pounds shall be computed using the currency exchange rate (U.S. Dollars to British Pounds) as reported in the Wall Street Journal as of the close of business on the Business Day immediately preceding the date of Lender's notice of exercise of such option. The parties agree to use best efforts to close the sale of GED shares as contemplated herein within 30 days of Lender's notice to Borrower and to execute and provide such documents as necessary to effect the transfer of the GED shares to Lender and the release of indebtedness contemplated herein. During the Default Option Period, interest will continue to accrue and be payable at the Default Rate. As used herein, the "GED Option Price" shall mean the lesser of (i) 25 pence or (ii) 70% of the closing bid price of GED shares as quoted on the London Stock Exchange on the Business Day immediately preceding the delivery of a notice of exercise of the option by Lender. (c) Remedies Upon Non-Payment Default. If any Event of Default as described in subsections (ii) through (ix) of Section 8(a) above (hereinafter a "Non-Payment Default") shall occur and such Non-Payment Default has not been cured by Borrower, then Lender may exercise any and all legal and equitable rights and remedies set forth in this Agreement or the Note including, without limitation, declaring all principal and accrued interest under the Note immediately due and payable. (d) Obligations Continue. The obligations of Borrower and the rights of Lender under this Agreement and the Note shall continue in full force and effect until the Term Loan has been paid in full. 9. MISCELLANEOUS. (a) Expenses. Borrower agrees to pay Lender for the reasonable fees and expenses of counsel for Lender; such fees are agreed to be $50,000. Except as otherwise provided herein, each party shall bear its own legal expenses related to this transaction. (b) Transfer; Successors and Assigns. The terms and conditions of this Agreement shall inure to the benefit of and be binding upon the respective successors and assigns of the parties. Notwithstanding the foregoing, Lender may not assign, pledge, or otherwise transfer its obligations or rights under this Agreement without the prior written consent of Borrower. (c) Amendments and Waivers. Any term of this Agreement may be amended only with the written consent of the Lender and the Borrower. Any amendment or waiver effected in accordance with this Section 9(c) shall be binding upon the Lender, the Borrower and each transferee of the Agreement. Any waiver by the Lender or the Borrower of a breach of any provision of this Agreement shall not operate as or be construed to be a waiver of any other breach of such provision or of any breach of any other provision of this Agreement. The failure of the Lender or the Borrower to insist upon strict adherence to any term of this Agreement on one or more occasions shall not be -7- considered a waiver or deprive that party of the right thereafter to insist upon strict adherence to that term or any other term of this Agreement. (d) Notices. All notices, consents, waivers and other communications under this Agreement must be in writing and will be deemed to have been duly given when (a) delivered by hand (with written confirmation of receipt), (b) sent by facsimile (with written confirmation of receipt), or (c) when received by the addressee, if sent by U.S. mail or a nationally recognized overnight delivery service, in each case to the appropriate addresses and facsimile numbers set forth below (or to such other addresses and facsimile numbers as a party may designate by notice to the other party): To Lender: Lyford Investments Enterprises Ltd. c/o Quadrant Management Inc. 720 Fifth Ave., 9th Floor New York, NY 10019 Attn: Alan Quasha Facsimile No.: (212) 231-3939 To Borrower: Harken Energy Corporation 580 WestLake Park Boulevard, Suite 600 Houston, Texas 77079 Attention: A. Wayne Hennecke, Secretary Facsimile No.: (281) 504-4104 with a required copy to: James W. Ryan Porter & Hedges, L.L.P. 700 Louisiana, 35th Floor Houston, Texas 77002-2764 Facsimile No.: (713) 226-0290 (e) Governing Law. Unless otherwise specified therein, this Agreement shall be governed by and construed in accordance with the laws of the State of New York and the United States of America. Each party hereby irrevocably agrees that any legal proceeding arising out of or in connection with this Agreement shall be brought in the district courts of Harris County, Texas, or in the United States District Court for the Southern District of Texas, Houston Division. (f) Counterparts. This Agreement may be executed in several identical counterparts, and by the parties hereto on separate counterparts, and each counterpart, when so -8- executed and delivered, shall constitute an original instrument, and all such separate counterparts shall constitute but one and the same instrument. (g) Captions. The headings and captions appearing in this Agreement have been included solely for convenience and shall not be considered in construing the Agreement. (h) Entire Agreement. This Agreement, together with the Note and any other document executed in connection herewith, embody the entire agreement between the Borrower and the Lender and supersede all prior proposals, agreements and understandings relating to the subject matter hereof and thereof. (i) Invalidity. If any provision of this Agreement is invalid, illegal or unenforceable, the balance of this Agreement shall remain in effect, and if any provision is inapplicable to any person or circumstance, it shall nevertheless remain applicable to all other persons and circumstances. In such an event, the parties will in good faith attempt to effect the business agreement represented by such invalidated term to the fullest extent permitted by law. [Remainder of page left blank intentionally] -9- IN WITNESS WHEREOF, the parties hereto have executed this Agreement as of the date set forth above. BORROWER: HARKEN ENERGY CORPORATION By: ------------------------------------- Bruce N. Huff President and Chief Operating Officer LENDER: LYFORD INVESTMENTS ENTERPRISES LTD. By: ------------------------------------- Alan Quasha Title: ------------------------------- -10- EXHIBIT A PROMISSORY NOTE THIS NOTE HAS NOT BEEN REGISTERED UNDER THE SECURITIES ACT OF 1933, AS AMENDED, AND HAS BEEN ACQUIRED FOR INVESTMENT AND NOT WITH A VIEW TO, OR IN CONNECTION WITH, THE SALE OR DISTRIBUTION THEREOF. NO SUCH SALE OR DISTRIBUTION MAY BE EFFECTED WITHOUT AN EFFECTIVE REGISTRATION STATEMENT RELATED THERETO OR AN EXEMPTION FROM REGISTRATION AVAILABLE SO THAT SUCH REGISTRATION IS NOT REQUIRED UNDER THE SECURITIES ACT OF 1933, AS AMENDED. $3,000,000 July 15, 2002 PROMISSORY NOTE FOR VALUE RECEIVED, Harken Energy Corporation, a Delaware corporation (the "Maker"), promises to pay to the order of Lyford Investments Enterprises Ltd., a British Virgin Islands company (the "Holder"), the principal amount of Three Million Dollars ($3,000,000) together with interest thereon calculated from the date hereof in accordance with the provisions of this Note. Terms not defined herein, shall have the meaning given them in the Loan Agreement among the Maker and the Holder dated as of July 15, 2002 (the "Loan Agreement"). 1. LOAN AGREEMENT. This Note (the "Note") is issued under the terms of the Loan Agreement. The Holder is entitled to the benefits and subject to certain obligations under the Loan Agreement and may enforce the agreements of the Maker contained therein and exercise the remedies provided for thereby. The benefits and rights of the Holder are subject to certain conditions and restrictions also set forth in the Loan Agreement, which conditions and restrictions may be enforced against the Holder. 2. MATURITY. Except as otherwise provided in this Agreement or the Loan Agreement, all accrued but unpaid interest and outstanding principal under this Note shall be due and payable on July 15, 2005 (the "Maturity Date"). Notwithstanding the foregoing, Holder may declare the entire unpaid principal sum of this Note, together with accrued and unpaid interest thereon, immediately due and payable in advance of the Maturity Date upon the occurrence of a Non-Payment Default under the terms of the Loan Agreement. Prepayments may be made on this Note at any time, and without penalty. In accordance with the Loan Agreement, Maker may also be required to prepay this Note in certain circumstances as described therein. 3. INTEREST. (a) Rate. Except as otherwise provided in this Note or in the Loan Agreement, the unpaid principal amount of the Note outstanding from time to time shall bear interest from the date hereof until fully paid at the Interest Rate (as defined in the Loan Agreement). All interest shall be computed and paid in accordance with the Loan Agreement. (b) Payments. All accrued interest on the Note shall be due and payable on a quarterly basis in arrears beginning with an initial payment of accrued interest on December 15, 2002 and continuing thereafter on March 15, June 15, September 15 and December 15 of each year until the Maturity Date. 4. DEFAULT. In the event of a Payment Default or Non-Payment Default (as defined in the Loan Agreement, this Note shall be subject to the remedies and conditions set forth in the Loan Agreement. 5. ABSENCE OF SECURITY. Repayment of this Note is not secured by any of the assets or properties of the Maker, by any liens or encumbrances on any assets or property of Maker, or in any other manner. Holder expressly agrees and represents that nothing in this Note or in the Loan Agreement shall create or constitute any security interest, pledge or lien upon any of the securities of GED held by Maker. 6. MISCELLANEOUS. (a) Transfer; Successors and Assigns. The terms and conditions of this Note shall inure to the benefit of and be binding upon the respective successors and assigns of the parties. Notwithstanding the foregoing, Holder may not assign, pledge, or otherwise transfer this Note without the prior written consent of Maker. (b) Amendments and Waivers. Any term of this Note may be amended only with the written consent of the Holder and the Maker. Any amendment or waiver effected in accordance with this Section 5(c) shall be binding upon the Holder, the Maker and each transferee of the Agreement. Any waiver by the Holder or the Maker of a breach of any provision of this Note shall not operate as or be construed to be a waiver of any other breach of such provision or of any breach of any other provision of this Note. The failure of the Holder or the Maker to insist upon strict adherence to any term of this Note on one or more occasions shall not be considered a waiver or deprive that party of the right thereafter to insist upon strict adherence to that term or any other term of this Note. (c) Notices. All notices, consents, waivers and other communications under this Note must be in writing and will be deemed to have been duly given when (a) delivered by hand (with written confirmation of receipt), (b) sent by facsimile (with written confirmation of receipt), or (c) when received by the addressee, if sent by U.S. mail or a nationally recognized overnight delivery service, in each case to the appropriate addresses and facsimile numbers set forth below (or to such other addresses and facsimile numbers as a party may designate by notice to the other party): To Holder: Lyford Investments Enterprises Ltd. c/o Quadrant Management Inc. 720 Fifth Ave., 9th Floor New York, NY 10019 Attn: Alan Quasha -2- Facsimile No.: (212) 231-3939 To Maker: Harken Energy Corporation 580 WestLake Park Boulevard, Suite 600 Houston, Texas 77079 Attention: A. Wayne Hennecke, Secretary Facsimile No.: (281) 504-4110 with a required copy to: James W. Ryan Porter & Hedges, L.L.P. 700 Louisiana, 35th Floor Houston, Texas 77002-2764 Facsimile No.: (713) 226-0290 (d) Governing Law. Unless otherwise specified therein, this Note shall be governed by and construed in accordance with the laws of the State of New York and the United States of America. Each party hereby irrevocably agrees that any legal proceeding arising out of or in connection with this Note shall be brought in the district courts of Harris County, Texas, or in the United States District Court for the Southern District of Texas, Houston Division. (e) Counterparts. This Note may be executed in several identical counterparts, and by the parties hereto on separate counterparts, and each counterpart, when so executed and delivered, shall constitute an original instrument, and all such separate counterparts shall constitute but one and the same instrument. (f) Captions. The headings and captions appearing in this Note have been included solely for convenience and shall not be considered in construing the Note. (g) Entire Agreement. This Note, together with the Loan Agreement and any other document executed in connection with the Loan Agreement, embody the entire agreement between the Holder and the Maker and supersede all prior proposals, agreements and understandings relating to the subject matter hereof and thereof. (h) Invalidity. If any provision of this Note is invalid, illegal or unenforceable, the balance of this Note shall remain in effect, and if any provision is inapplicable to any person or circumstance, it shall nevertheless remain applicable to all other persons and circumstances. In such an event, the parties will in good faith attempt to effect the business agreement represented by such invalidated term to the fullest extent permitted by law. [Remainder of page left blank intentionally] -3- IN WITNESS WHEREOF, the parties hereto have executed this Note as of the date set forth above. MAKER: HARKEN ENERGY CORPORATION By: ------------------------------------- Bruce N. Huff President and Chief Operating Officer HOLDER: LYFORD INVESTMENTS ENTERPRISES LTD. By: ------------------------------------- Alan Quasha Title: ------------------------------- -4- EX-10.19 4 dex1019.txt SENIOR NOTES DATED 6/18/2002 Exhibit 10.19 ISIN XS0145719737 SWISS IDENTIFICATION NO. 1389060 CERTIFICATE NO. 2 NEITHER THIS NOTE NOR THE SHARES OF COMMON STOCK ISSUABLE ON CONVERSION OF THIS NOTE (THE "SHARES") HAVE BEEN REGISTERED UNDER THE SECURITIES ACT OF 1933, AS AMENDED (THE "SECURITIES ACT"), OR THE SECURITIES LAWS OF ANY STATE. THE HOLDER HEREOF, BY PURCHASING THIS NOTE, AGREES FOR THE BENEFIT OF THE COMPANY THAT THIS NOTE AND THE SHARES MAY NOT BE RESOLD, PLEDGED OR OTHERWISE TRANSFERRED OR DISPOSED OF UNLESS THE NOTE OR THE SHARES AS THE CASE MAY BE, HAS BEEN REGISTERED UNDER THE SECURITIES ACT AND ANY APPLICABLE STATE SECURITIES OR BLUE SKY LAWS OR EXEMPTIONS FROM THE REGISTRATION REQUIREMENTS OF SUCH LAWS ARE AVAILABLE. IF THE HOLDER OF THIS NOTE WAS AN AFFILIATE OF THE COMPANY AT ANY TIME DURING THE THREE MONTHS PRECEDING THE DATE OF ANY SUCH TRANSFER, THE FOREGOING CONDITIONS MUST BE COMPLIED WITH REGARDLESS OF WHEN SUCH TRANSFER IS MADE. ANY UNITED STATES PERSON WHO HOLDS THIS OBLIGATION WILL BE SUBJECT TO LIMITATIONS UNDER THE U.S. INCOME TAX LAWS, INCLUDING THE LIMITATIONS PROVIDED IN SECTIONS 165(j) AND 1287(a) OF THE UNITED STATES INTERNAL REVENUE CODE OF 1986, AS AMENDED. THIS OBLIGATION IS NOT A DEPOSIT AND IS NOT INSURED BY ANY AGENCY OF THE UNITED STATES GOVERNMENT. HARKEN ENERGY CORPORATION 7% SENIOR CONVERTIBLE NOTES DUE 2007 GLOBAL NOTE Harken Energy Corporation, a Delaware corporation (hereinafter, the "Company," which term includes any successor to the Company), for value received, hereby promises to pay to The Bank of New York Depository (Nominees) Limited, upon presentation and surrender of this Global Note (the "Global Note") the principal sum of Two Million Twenty-Five Thousand Dollars (U.S. $2,025,000) (the "Principal Amount") on March 31, 2007, and to pay interest thereon from and including June 19, 2002, semi-annually in arrears on March 31 and September 30 in each year, commencing September 30, 2002, at the rate of 7% per annum, calculated on the basis of a 360-day year consisting of twelve 30-day months, until the principal hereof is paid or payment thereof is duly provided for; provided, however, that the Principal Amount payable upon presentation and surrender may be reduced from time to time in connection with conversions, redemptions, purchase and cancellations and similar events described in the Terms and Conditions hereof, and such reductions shall be duly noted on Schedule A hereto (which is incorporated herein by this reference as if set out in full); and provided further that interest accruing after the date of a reduction in Principal Amount shall be calculated with reference to the new Principal Amount. 1 Upon failure of the Company to make any payment of interest or principal on the date when due and payable, the outstanding principal balance of the Notes and, to the extent permitted by law, interest thereon will bear interest at the Default Rate beginning on the date such payment was due until the default is cured. Notwithstanding any other provision of the Notes to the contrary, in no event shall the interest contracted for, charged or received in connection with the Notes (including any other costs or considerations that constitute interest under applicable law which are contracted for, charged or received pursuant to the Notes) exceed the maximum rate of nonusurious interest allowed under applicable law as presently in effect and to the extent an increase is allowable by such laws, but in no event shall any amount ever be paid or payable greater than the amount contracted for in the Notes, and all amounts paid by the Company which constitute usurious interest under the applicable law shall be applied in the manner described herein. To the extent permitted by law, interest contracted for, charged or received on the Notes shall be allocated over the entire term of this the Notes, to the end that interest paid on the Notes does not exceed the maximum amount permitted to be paid thereon by law. The principal and interest on the definitive Notes shall be payable at the office or agency of the Company maintained for such purpose in the City of London and the City of New York, New York, or at such other office of agency of the Company as may be maintained for such purpose. This Global Note has been issued pursuant to resolutions adopted by the Board of Directors of the Company effective on June 18, 2002. This Global Note is a permanent security and is exchangeable in whole for definitive Notes in bearer form, with interest coupons attached, upon the event specified in the Terms and Conditions herein. Until transferred in full for the definitive Notes, this Global Note shall in all respects be ratably entitled to the same benefits under, and subject to the same Terms and Conditions of the definitive Notes authenticated and delivered hereunder. This Global Note, the definitive Notes, the Coupons, and the Terms and Conditions shall be governed by and construed in accordance with the laws of the State of New York. Unless the certificate of authentication hereon has been executed by the Authenticating Agent by manual signature of one of its authorized signatories, this Global Note shall not be entitled to any benefit under the Terms and Conditions and shall not be valid or obligatory for any purpose. 2 IN WITNESS WHEREOF, the Company has caused this book-entry Note to be duly executed in its corporate name by the manual or facsimile signatures of the undersigned duly authorized officers of the Company. Dated as of June 19, 2002. HARKEN ENERGY CORPORATION By: --------------------------------------- Bruce N. Huff, President and Chief Operating Officer [Corporate Seal] ATTEST: By: ----------------------------------------- Wayne Hennecke, Vice President Finance CERTIFICATE OF AUTHENTICATION This Global Note is the Note referred to in the within mentioned Terms and Conditions. THE BANK OF NEW YORK, Authenticating Agent By: -------------------------------------- Name: ------------------------------------ Title: ----------------------------------- 3 TERMS AND CONDITIONS OF THE NOTES The U.S. $ 2,025,000 of 7% Senior Convertible Notes Due 2007 (the "Notes") of Harken Energy Corporation, a Delaware corporation (the "Company") are constituted by, and authorized to be issued pursuant to these Terms and Conditions and resolutions of the Board of Directors of the Company adopted by the Board held on June 18, 2002. Copies of a paying and conversion agency agreement dated as of June 18, 2002 (the "Agency Agreement"), made between the Company and The Bank of New York, as paying and conversion agent (the "Paying Agent and "Conversion Agent," respectively, which expressions shall include any successors and assigns) are available for inspection during normal business hours by the holders of the Notes ("Noteholders") and the Couponholders at the specified office of the Paying Agent. The Noteholders and the Couponholders are entitled to the benefit of, are bound by, and are deemed to have notice of all the provisions of the Agency Agreement. Certain terms not otherwise defined in the text hereof are defined in Condition 19 herein. 1. FORM, DENOMINATIONS, AND TITLE, AND CERTAIN ADMINISTRATIVE PROVISIONS (A) The Notes if issued in definitive bearer form will be serially numbered, in denominations of U.S. $5,000 or multiples thereof (the "Authorized Denomination"), each with Coupons attached on issue, and with such numerical and other identification designation as the Company shall deem desirable. (B) Title to the Notes and to the Coupons will pass by delivery. The Company and the Paying Agent and Conversion Agent may (to the fullest extent permitted by applicable laws) deem and treat the Holder of any Note and the Holder of any Coupon as the absolute owner thereof for all purposes (whether or not the Note or Coupon shall be overdue and notwithstanding any notice to the contrary). Beneficial interests in the Notes will be represented by a global note (the "Global Note"), without interest coupons, which will be deposited with a common depository (the "Common Depository") and held on behalf of Morgan Guaranty Trust Company of New York, as operator of the Euroclear System ("Euroclear"), and Clearstream, societe anonyme ("Clearstream"), for credit to the accounts designated by the Noteholders at Euroclear and Clearstream. Except as provided herein, certificates will not be issued in exchange for beneficial interests in this Global Note. (C) The Notes shall be executed on behalf of the Company by its President and Chief Operating Offer under a facsimile of its corporate seal reproduced thereon and attested by its Vice President, Finance. The signature of any of these officers on the Notes may be manual or facsimile signatures of the present or any future such authorized officer and may be imprinted or otherwise reproduced on the Notes. Notes bearing the manual or facsimile signatures of individuals who were at any time the proper officers of the Company shall bind the Company, notwithstanding that such individuals or any of them have ceased to hold such offices prior to the authentication and delivery of such Notes or did not hold such offices at the date of such Notes. At any time and from time to time hereafter, the Company may deliver Notes executed by the Company to the Authenticating Agent for authentication, together with a Company order for the authentication and delivery of such Notes, and the Authenticating Agent in accordance with such Company order shall authenticate and deliver such Notes. Such Company order shall specify the amount of Notes to be authenticated and the date on which the original issue of Notes is to be authenticated. The Global Note shall be dated as of the date of authentication No Note shall be entitled to any benefit hereunder or be valid or obligatory for any purpose unless there appears on such Note a certificate of authentication substantially in the form hereto is duly executed by the Authenticating Agent by manual signature of an authorized signatory, and such certificate upon any Note shall be 4 conclusive evidence, and the only evidence, that such Note has been duly authenticated and delivered hereunder and is entitled to the benefits of these Terms and Conditions. In case the Company, pursuant to Conditions 3(B) and 3(C), shall be consolidated or merged with or into any other Person or shall convey, transfer, lease or otherwise dispose of its Properties and assets substantially as an entirety to any Person, and the successor Person resulting from such consolidation, or surviving such merger, or into which the Company shall have been merged, or the Person which shall have received a conveyance, transfer, lease or other disposition as aforesaid, shall have entered into an amendment hereto, any of the Notes authenticated or delivered prior to such consolidation, merger, conveyance, transfer, lease or other disposition may, from time to time, at the request of the successor Person, be exchanged for other Notes executed in the name of the successor Person with such changes in phraseology and form as may be appropriate, but otherwise in substance of like tenor as the Notes surrendered for such exchange and of like principal amount; and the Authenticating Agent, upon Company order of the successor Person, shall authenticate and deliver Notes as specified in such request for the purpose of such exchange. (D) If the Common Depository referred to in Condition 1(F) notifies the Company that it is unwilling or unable to continue as Common Depository for this Global Note, the Company shall use its best efforts to identify and appoint a successor depository within 90 days of such notice. Pending the preparation of definitive Notes, if required herein, the Company may execute, and upon Company order the Authenticating Agent shall authenticate and deliver, temporary Notes which are printed, lithographed, typewritten, mimeographed or otherwise produced and in the Authorized Denomination, substantially of the tenor of the definitive Notes in lieu of which they are issued and with such appropriate insertions, omissions, substitutions and other variations as the officers executing such Notes may determine, as conclusively evidenced by their execution of such Notes. If temporary Notes are required to be issued pursuant to these Conditions, the Company will cause definitive Notes to be prepared thereafter without unreasonable delay. After the preparation of definitive Notes, the temporary Notes shall be exchangeable for definitive Notes upon surrender of the temporary Notes at the office or agency of the Company designated for such purpose without charge to the Noteholder. Upon surrender for cancellation of any one or more temporary Notes, the Company shall execute and the Authenticating Agent shall authenticate and deliver in exchange therefor a like principal amount of definitive Notes of the Authorized Denomination or multiples thereof. Until so exchanged, the temporary Notes shall in all respects be entitled to the same benefits under these Terms and Conditions as the definitive Notes. (E) Upon surrender for exchange of any Note at the office or agency of the Company designated pursuant to these Conditions, the Company shall execute, and the Authenticating Agent shall authenticate and deliver, in the name of the designated transferee or transferees, one or more new Notes of the Authorized Denomination or denominations of a like aggregate principal amount. Furthermore, any Holder of this Global Note, by acceptance of this Global Note, agrees that transfers of beneficial interest in such Global Note may be effected only through a book-entry system maintained by the Holder of the Global Note (or its agent), and that ownership of a beneficial interest in this Global Note shall be required to be reflected by way of book entry. All Notes issued upon any exchange of Notes shall be the valid obligations of the Company, evidencing the same debt, and entitled to the same benefits hereunder, as the Notes surrendered upon such exchange. Every Note presented or surrendered for exchange shall (if so required by the Company) be duly endorsed, or be accompanied by a written instrument of transfer, in form satisfactory to the Company, duly executed by the Noteholder thereof or such Noteholder's attorney duly authorized in writing. Except as otherwise provided herein, no service charge shall be made for any exchange, conversion or redemption of Notes, but the Company may require payment of a sum sufficient to cover any tax or other governmental charge that may be imposed in connection with any exchange of Notes. 5 The Company shall not be required (i) to issue or exchange any Note during a period beginning at the opening of business 15 days before the selection of Notes to be redeemed hereunder and ending at the close of business on the day of such mailing of the relevant notice of redemption, (ii) to exchange any Note so selected for redemption in whole or in part, except the unredeemed portion of any Note being redeemed in part, or (iii) to register the transfer of or exchange of any Note during a period beginning five days before the date of Maturity and ending on such date of Maturity. (F) (1) This Global Note shall be delivered to the Common Depository. Members of, or participants in, Euroclear and Clearstream ("Agent Members") shall have no direct rights hereunder with respect to any Global Note held on their behalf by the Common Depository, or under such Global Note. The Common Depository may be treated by the Company, and any agent of the Company, as the absolute owner of such Global Note for all purposes whatsoever. Notwithstanding the foregoing, nothing herein shall prevent the Company or any agent of the Company from giving effect to any written certification, proxy or other authorization furnished by the Common Depository or shall impair, as between the Common Depository and the Agent Members, the operation of customary practices governing the exercise of the rights of a Noteholder. (2) Transfers of the Global Note shall be limited to transfers of the Global Note in whole, but not in part, to the Common Depository, its successors or their respective nominees. Interests of beneficial owners in the Global Note may be transferred in accordance with the rules and procedures of the Common Depository, Euroclear, Clearstream, and the provisions hereof. Definitive Notes in bearer form shall be transferred to all beneficial holders in exchange for their beneficial interests in the Global Note in accordance with the Common Depository's procedures only if the Common Depository notifies the Company that it is unwilling or unable to continue as Common Depository for the Global Note and a successor depository is not appointed by the Company within 90 days of such notice, or an Event of Default has occurred and is continuing and the Company has received a request from any owner of a beneficial interest in the Global Note for such a transfer or the Common Depository. (3) In connection with any transfer of beneficial interests in this Global Note to beneficial owners pursuant to subsection (2) of this Condition, the Common Depository shall reflect on its books and records the date and a decrease in the Principal Amount of this Global Note in an amount equal to the principal amount of the beneficial interests in this Global Note to be transferred, and the Company shall execute, and the Authenticating Agent shall authenticate and deliver, one or more definitive Notes in bearer from of like tenor and amount. (4) In connection with the transfer of the beneficial interests in the entire Global Note to beneficial owners pursuant to subsection (2) of this Condition, this Global Note shall be deemed to be surrendered to the Conversion and Paying Agent for cancellation, and the Company shall execute, and the Authenticating Agent shall authenticate and deliver, to each beneficial owner identified by the Common Depository, in exchange for its beneficial interest in this Global Note, an equal aggregate principal amount of definitive Notes in bearer form. (5) Any definitive Note in bearer form delivered in exchange for an interest in this Global Note pursuant to subsection (2) or subsection (3) of this Condition shall bear the applicable legend regarding transfer restrictions applicable to the bearer Note as counsel to the Company shall advise the Company. (6) The Holder of this Global Note may grant proxies and otherwise authorize any person, including Agent Members and persons that may hold interests through Agent Members, to take any action which a Noteholder is entitled to take under these Terms and Conditions or the Notes. (7) Any definitive Note in bearer form delivered in exchange for an interest in this Global Note pursuant to subsection (2) or (3) of this Condition will prior to delivery to the Noteholder have all matured Coupons as of such delivery date, which are attached to such bearer Note, cancelled and voided by the Authenticating Agent. (8) Nothing contained herein shall be deemed to authorize any transfers (by book-entry or otherwise) of this Global Note otherwise than in accordance with the Securities Act. Unless otherwise required by applicable law, neither the Company nor the Common Depository shall recognize or give effect to any attempt to transfer (by book entry or otherwise) or convert any Note or any interest therein in violation of the Securities Act. 6 (G) The Noteholders by acceptance of the Notes hereby covenant and agree that neither the Notes nor the Conversion Shares will be offered, sold, transferred, pledged, converted or otherwise disposed of unless the Notes and/ or the Conversion Shares have been registered under the Securities Act or any applicable state securities or blue sky laws or exemptions from the registration requirements of such laws are available. (H) If (i) any mutilated Note or Coupon is surrendered to the Authenticating Agent, or (ii) the Company and the Authentication Agent receive evidence to their satisfaction of the destruction, loss or theft of any Note or Coupon, and there is delivered to the Company and the Authenticating Agent such security and/or indemnity as may be required by them to save each of them harmless, then, in the absence of notice to the Company or the Authenticating Agent that such Note or Coupon has been acquired by a bona fide purchaser, the Company shall execute and upon Company order the Authenticating Agent shall authenticate and deliver, in exchange for any such mutilated Note or Coupon or in lieu of any such destroyed, lost or stolen Note or Coupon, a new Note or Coupon of like tenor and principal amount, bearing a number not contemporaneously Outstanding. In case any such mutilated, destroyed, lost or stolen Note or Coupon has become or is about to become due and payable, the Company in its discretion may, instead of issuing a new Note or Coupon, pay such Note or Coupon, as the case may be. Upon the issuance of any new Note or Coupon under this Section, the Company may require the payment of a sum sufficient to cover any tax or other governmental charge that may be imposed in relation thereto and any other expenses (including the fees and expenses of the Authenticating Agent) connected therewith. Every new Note or Coupon issued pursuant to this Section in lieu of any destroyed, lost or stolen Note or Coupon shall constitute an original additional contractual obligation of the Company, whether or not the destroyed, lost or stolen Note or Coupon shall be at any time enforceable by anyone, and shall be entitled to all benefits hereunder equally and proportionately with any and all other Notes or Coupons duly issued hereunder. The provisions of this Condition are exclusive and shall preclude (to the extent lawful) all other rights and remedies with respect to the replacement or payment of mutilated, destroyed, lost or stolen Note or Coupon. Any new Note issued under this Condition 1(H) in lieu of any destroyed, lost or stolen Note shall be issued by the Authenticating Agent with all matured Coupons as of such date of issuance cancelled or voided. 2. STATUS The Notes and any Coupons are direct, unconditional and unsecured obligations of the Company and will rank pari passu, without any preference among themselves. The Notes and any Coupons will rank senior to all Subordinated Obligations of the Company, present and future, but, in the event of bankruptcy or insolvency of the Company, only to the extent permitted by the applicable laws relating to creditors' rights. The Notes will not be secured by any assets or property of the Company. The Notes and any Coupons will rank pari passu with all other present and future Indebtedness of the Company (including the Company's 5.0% Senior Notes due 2003) other than Subordinated Obligations. The Notes will rank senior to all existing and future Subordinated Obligations. 3. COVENANTS (A) The Company will do or cause to be done all things necessary to preserve and keep in full force and effect its corporate existence, rights (charter and statutory) and franchises of the Company; provided, however, that the Company shall not be required to preserve any such right or franchise if the Board of Directors shall determine that the preservation thereof is no longer in the best interests of the Company and the conduct of its business, and that the loss thereof is not disadvantageous in any material respect to the Noteholders; and provided, further, that nothing contained in this Condition 3(A) shall prohibit any transaction permitted by Condition 3(B) or Condition 3(C) herein. 7 (B) The Company will not merge or consolidate with or sell, convey, transfer or lease or otherwise dispose of all, or substantially all of its Properties and assets substantially as an entirety to any Person, unless: (a) either (i) the Company shall be the surviving Person or (ii) the Person (if other than the Company) formed by such consolidation or into which the Company is merged or the Person which acquired by conveyance or transfer, or which leases, the Properties and assets of the Company substantially as an entirety (1) shall be a Person organized and validly existing under the laws of the United States of America, any state thereof or the District of Columbia and (2) shall expressly assume, by a written instrument, the Company's obligation for the due and punctual payment of the principal of and interest on all the Notes and the performance and observance of every Term and Condition contained herein and in the Agency Agreement. (C) Upon any consolidation of the Company with or merger of the Company with or into any other Person or any conveyance, transfer or lease of the Properties and assets of the Company substantially as an entirety to any person, the successor Person formed by such consolidation or into which the Company is merged or to which such conveyance, transfer or lease is made shall succeed to, and be substituted for, and may exercise every right and power of, the Company under the Terms and Conditions contained herein with the same effect as if such successor Person had been named as the Company herein, and in the event of any such conveyance or transfer, the Company, except in the case of a lease, shall be discharged of all obligations and covenants under the Notes and may be dissolved and liquidated. (D) The Company will maintain in at least one European city an office or agency where Notes may be presented or surrendered for payment, where Notes may be surrendered for conversion or exchange and where notices and demands to or upon the Company in respect of the Notes may be served. The corporate trust office of the Paying Agent at One Canada Square, 48th Floor, London, E14 5AL, England shall be such office or agency of the Company, unless the Company shall designate and maintain some other offices or agencies for one or more of such purposes pursuant to the terms of the Agency Agreement. The Company will give prompt written notice to the Noteholders of any change in the location of any such offices or agencies. The Company may also from time to time designate one or more other offices or agencies (in or outside of Europe) where the Notes may be presented or surrendered for any or all such purposes and may from time to time rescind any such designation; provided, that no such designation or rescission shall in any manner relieve the Company of its obligation to maintain an office or agency in Europe for such purposes. The Company will give prompt written notice to the Noteholders of any such designation or rescission and any change in the location of any such other office or agency. (E) The Company will pay or discharge or cause to be paid or discharged, before the same shall become delinquent, (a) all taxes, assessments and governmental charges levied or imposed upon the Company or upon the income, profits or Property of the Company and (b) all lawful claims for labour, materials and supplies which, if unpaid, might by law become a Lien upon the Property of the Company; provided, however, that the Company shall not be required to pay or discharge or cause to be paid or discharged any such tax, assessment, charge or claim whose amount, applicability or validity is being contested in good faith by appropriate proceedings. (F) The Company will not amend its Certificate of Incorporation or Bylaws except as required by law, except in respect to such amendments that the Board of Directors reasonably determines do not materially adversely affect the rights of the Noteholder, or except to the extent that such amendment would not have a material adverse effect on (a) the ability of the Company to perform its obligations under the Notes or (b) the rights of the Noteholders, except that neither (i) increases in the number of Shares and issuance thereof with related securities, nor (ii) designations of Preferred Stock of the Company, modifications of the terms of such designations and issuance thereof with related securities, nor (iii) modification or expansion of the indemnity provisions provided by the Company to its directors and officers, nor (iv) change of the Company's registered agent shall be deemed an amendment hereunder. (G) To the extent permitted by law, the Company will provide to the Paying Agent or to any Noteholder such statements, certificates or other documentation concerning the organization or operations of the Company as may be reasonably necessary to establish any exceptions or exemptions from United States federal income tax withholding and reporting requirements. 8 (H) The Company shall file a registration statement on Form S-3 (or such other form as the Company may determine is appropriate), within ninety (90) days following the Dated Date in respect of all Shares that may be issuable at any time upon the conversion and/or redemption of the Notes. The Company shall use its best efforts to cause the Commission to declare such registration statement (and any necessary amendments thereto) effective. The Company shall also use its best efforts to maintain the effectiveness of such registration statement, and to refile such a registration statement from time to time in the event its effectiveness lapses, until all such Shares that either are issued or that may be issued are Freely Tradable in the United States. While any Conversion Right remains exercisable, the Company will use its best efforts to list and maintain a listing of all Shares issued upon conversion or redemption of the Note on a Stock Exchange. In the Event a Stock Exchange requires stockholder approval in order to complete the listing of the Shares to be so issued upon conversion or redemption of the Note, then the Company will use its best efforts to obtain such stockholder approval at the earliest possible stockholder meeting. In this event, the, the conversion or redemption in Shares will occur only if and when stockholder approval has been obtained. If the Company is unable to obtain or maintain such listing of Shares, it will forthwith give not less than 30 calendar days notice to the Noteholder of the listing, de-listing or quotation or lack of quotation of the Shares (as a class) by any such Stock Exchange. (I) If the Company shall at any time act as its own Paying Agent, it will, on or before each due date of the principal of or interest on any of the Notes, segregate and hold in trust for the benefit of the Persons entitled thereto a sum sufficient to pay the principal or interest so becoming due until such sums shall be paid to such Persons or otherwise disposed of as herein provided and will promptly notify the Paying Agent of its action or failure so to act. Whenever the Company shall have one or more Paying Agents for the Notes, it will, on or before 3:00 p.m. (London time) on the Business Day immediately preceding each due date of the principal of or interest on any Notes, deposit with a Paying Agent a sum sufficient to pay the principal or interest so becoming due, such sum to be held in trust for the benefit of the Persons entitled to such principal or interest. Pursuant to the terms of the Agency Agreement, the Paying Agent shall agree with the Company, subject to the provisions of this Condition, that such Paying Agent will: (1) hold all sums held by it for the payment of the principal of or interest on Notes in trust for the benefit of the Persons entitled thereto until such sums shall be paid to such Persons or otherwise disposed of as herein provided; and (2) notify the Company by facsimile transmission or by telex if the Paying Agent has not, by the due date for the payment of any principal and/or interest in respect of the Notes or Coupons received unconditionally the full amount of such principal and interest due. Any money deposited with the Paying Agent, or then held by the Company, in trust for the payment of the principal of or interest on any Note and remaining unclaimed for two years after such principal or interest has become due and payable shall be paid to the Company on the Company order, or (if then held by the Company) shall be discharged from such trust; and the Holder of such Note shall thereafter, as an unsecured general creditor, look only to the Company for payment thereof, and all liability of the such Paying Agent with respect to such trust money, and all liability of the Company as trustee thereof, shall thereupon cease; provided, however, that the Paying Agent, before being required to make any such repayment, may at the expense of the Company cause to be published once, in the Authorized Newspapers, notice that such money remains unclaimed and that, after a date specified therein, which shall not be less than 30 days from the date of such publication, any unclaimed balance of such money then remaining will be repaid to the Company. 4. INTEREST The Notes bear interest from (and including) June 19, 2002 (the "Dated Date"), at the rate of seven percent (7%) per annum, payable semi-annually in arrears on March 31 and September 30 in each year (each an "Interest 9 Payment Date"), the first such payment to be made on September 30, 2002, in respect of the period from (and including) June 19, 2002 to (but excluding) September 30, 2002, and this interest payable will equal U.S. $175 per U.S. $5,000 principal amount of the Notes for each complete semi-annual interest period. Each Note will cease to bear interest (i) from its due date for redemption unless the Company shall default in the payment of the Redemption Price, in which event interest shall continue to accrue as provided in herein, or (ii) where the Conversion Right shall have been voluntarily exercised by the Noteholder, from the Conversion Date, or (iii) in the case of a Mandatory Conversion, from the Mandatory Conversion Date. Interest is calculated on the basis of a 360 day year consisting of 12 months of 30 days each and, in the case of an incomplete month, the number of days elapsed. 5. PAYMENTS For so long as the Notes are represented by a Global Note, beneficial interests in this Global Note will be shown on, and transfers thereof will be effected only through, records maintained by, and in accordance with the rules and procedures of, Euroclear or Clearstream, as the case may be. In case of certificated Notes, payments of principal in respect of each Note and any net proceeds payable under Condition 6(D) will only be made, against presentation and surrender (or, in the case of part payment only, endorsement) of the relevant Note at the specified office of the Paying Agent. Payments of interest due on the Notes on an Interest Payment Date will be made against presentation and surrender (or, in the case of part payment only, endorsement) of the relevant Coupons at the specified office of the Paying Agent. All payments of principal and interest shall be made in U.S. dollars. Each such payment and any payment of the net proceeds of the sale of Shares pursuant to Condition 6(D) will be made at the specified office of any Paying Agent, at the option of the Holder, by U.S. dollar cheque mailed to an address, or delivered in accordance with the Holder's instructions, or by transfer to a U.S. dollar account maintained by the Holder in accordance with the holder's instructions, subject in all cases to any applicable fiscal or other laws and regulations, but without prejudice to the provisions of Condition 9. If, at any time, in the opinion of the Company or of the Paying Agent, payments in U.S. dollars cannot be so made, payments will be made in U.S. dollars in such other manner as may be approved by the Company and the Paying Agent and notice of the alternative manner of payment will be given to the Noteholders in accordance with Condition 15. Each Note must be presented for redemption together with all unmatured Coupons relating to such Note, failing which the full amount of any missing unmatured Coupon (or, in the case of payment not being made in full, that proportion of the full amount of the missing unmatured Coupons which the amount so paid bears to the total amount due) will be deducted from the amount due for payment. Each amount so deducted will be paid in the manner mentioned above against presentation and surrender (or, in the case of part payment only, endorsement) of such missing Coupon at any time before the expiry of six (6) years after the Relevant Date in respect of the relevant Note (whether or not such Coupon would otherwise have become void pursuant to Condition 10), or, if later, five (5) years after the date on which such Coupon would have become due, but not thereafter. All monies paid by the Company to the Paying Agent for the payment of principal or interest on any Note which remain unclaimed at the end of two (2) years after the principal on such Note will have become due and payable will be repaid to the Company and the Holder of such Note or any Coupon appertaining thereto will thereafter have only the rights of a creditor of the Company as described in these Terms and Conditions or such rights as may be otherwise provided by applicable law. A Holder shall be entitled to present a Note or Coupon for payment only on a Presentation Date and shall not be entitled to any further interest or other payment if a Presentation Date is after the due date. When making payments to Noteholders or Couponholders, fractions of one cent will be rounded down to the nearest whole cent. 10 The name of the initial Paying Agent and Conversion Agent and its initial specified office is set out at the end of these Terms and Conditions. The Company reserves the right at any time to vary or terminate the appointment of the Paying Agent or Conversion Agent and to appoint additional or other Paying Agents or Conversion Agents. Notice of any termination or appointment and of any changes in specified offices will be given to the Noteholders promptly by the Company in accordance with Condition 15. 6. CONVERSION (A) Optional Conversion by the Noteholders; Conversion Period and Price (i) Noteholders have the right, subject as provided herein and to any applicable laws and regulations, to require the Company to convert all or any of their Notes at their principal amount into Shares at any time during the Conversion Period ("Conversion Right"). The Conversion Period begins after the earlier to occur of (I) the close of the effective date of a Registration Statement filed by the Company with the Commission with respect to the Shares or (II) the date such Shares may be sold pursuant to the exemption from registration under the Securities Act provided by Rule 144 or other exemption from registration under the Securities Act, and ends upon the earliest to occur of (A) the second Business Day prior to the later of March 31, 2007, or the date on which all principal and interest on the Note is repaid in full, (B) if such Notes shall have been called for redemption pursuant to Condition 7, the close of the second Business Day prior to the Redemption Date, or (C) the effective date of a Mandatory Conversion. Upon conversion, the right of the converting Noteholder to repayment of the principal amount of the Note to be converted (and, subject as provided in Condition 6(B)(iv), accrued and unpaid interest thereon) shall be extinguished and released, and in consideration and in exchange therefor the Company shall allot and issue Shares credited as paid up in full as provided in this Condition 6. The number of Shares to be issued on conversion of a Note will be determined by dividing the principal amount of the Note to be converted, plus accrued and unpaid interest thereon, by the Conversion Price, (as defined below) in effect on the Conversion Date, with the result being rounded down to the nearest whole number. (ii) A Conversion Right may only be exercised in respect of the Authorized Denomination or multiples thereof of Notes. If more than one Note is converted at any one time by the same Holder, the number of Shares to be issued upon such conversion will be calculated on the basis of the aggregate principal amount of the Notes to be converted. Fractions of Shares will not be issued on conversion and no cash adjustments will be made in respect thereof. (iii) Except for conversions pursuant to Condition 7(B)(iii), the price at which Shares will be issued upon the exercise of a Conversion Right (the "Conversion Price") initially will be U.S. $0.50. The Conversion Price will be subject to adjustment in accordance with the manner provided in Condition 6(C). The Company shall give notice of any adjustment of the Conversion Price in accordance with Condition 15 within ten (10) Business Days with effective date of such adjustment. (iv) Notwithstanding the provisions of paragraph (i) of this Condition 6(A), if the Company shall default in making payment in full in respect of any Note which shall have been called for redemption or shall fail to issue Shares in respect of any Conversion or redemption, then, from the Relevant Date, interest shall continue to accrue on such Note and the Conversion Right attaching to such Note will continue to be exercisable (unless already exercised by the Company pursuant to Condition 6(D)) up to, and including the close of business (at the place where the Note is deposited in connection with the exercise of the Conversion Right) on the date upon which the full amount of the monies payable in respect of such Note has been duly received by the Paying Agent or, or the date of the issuance of the Conversion Shares or redemption Shares. (B) Procedure for Conversion (i) To exercise the Conversion Right attaching to any Note, the Holder thereof must complete, execute and deposit at his own expense during normal business hours at the specified office of the Conversion Agent, a notice of conversion (a "Conversion Notice") in the form for the time being currently obtainable from the specified office such Conversion Agent, together with the relevant Note and any amount to be 11 paid by the Noteholder pursuant to this Condition 6(B)(i). The form of Conversion Notice is attached hereto as Exhibit A. The Conversion Date must fall at a time when the Conversion Right attaching to that Note is expressed in these Conditions to be exercisable and will be deemed to be the date of the surrender of the Note and delivery of such Conversion Notice and, if applicable, any payment to be made or indemnity given under these Conditions in connection with the exercise of such Conversion Right. A Noteholder delivering a Note for conversion must pay any taxes and capital, stamp, issue and registration duties arising on conversion (other than any taxes or capital, or stamp duties payable in the U.S. or required by any Stock Exchange, by the Company in respect of the allotment and issue of Shares and listing of the Shares on conversion). A Conversion Notice delivered shall be irrevocable. (ii) As soon as practicable, and in any event not later than fourteen (14) calendar days after the Conversion Date, the Company will in the case of Notes converted on exercise of the Conversion Right or a Note being converted in accordance with Condition 6(D) and in respect of which a Conversion Notice or has been delivered and the relevant Note, together with all Outstanding Coupons, and amounts payable by the relevant Noteholder deposited as permitted by sub-paragraph (i) above, cause the person or persons designated for the purpose in the Conversion Notice to be registered as holder(s) of the relevant number of Shares and will make a certificate or certificates for the relevant Shares available for collection at the Company's principal office in Houston, Texas or at the Company's transfer agent in New York, New York, or, if so requested in the relevant Conversion Notice, will deliver such certificate or certificates to the person and at the place specified in the Conversion Notice, at the risk of the Noteholder, together with any other securities, property or cash required to be delivered upon conversion and such assignments and other documents (if any) as may be required by law to effect the transfer thereof. (iii) The person or persons specified for that purpose will be deemed for all purposes to be the Holder of record of the number of Shares issuable upon conversion with effect from the Conversion Date or Mandatory Conversion Date, as the case may be. The Shares issued upon conversion of the Notes will in all respects rank pari passu with the issued and outstanding Shares of Common Stock in issue on the relevant Conversion Date or Mandatory Conversion Date, as the case may be, except for any right excluded by mandatory provisions of applicable law. A Holder of Shares issued on conversion of Notes shall not be entitled to any rights for any record date which precedes the relevant Conversion Date or Mandatory Conversion Date, as the case may be. (iv) If any notice requiring the redemption of any Notes is given pursuant to Condition 7(B) on or after the fifteenth (15th) calendar day prior to the record date in respect of any dividend payable in respect of the Shares and such notice specifies a date for redemption falling on or prior to the next following Interest Payment Date, interest shall (subject as hereinafter provided) accrue on Notes which shall have been delivered for conversion on or after such record date from the preceding Interest Payment Date; provided, that the relevant Noteholder's entitlement to interest on any Note, in the event that the Shares allotted on conversion thereof shall carry an entitlement to receive such dividend, shall be limited to the amount by which the interest such Noteholder would have received had no conversion taken place exceeds the amount of the dividend received on such Shares. Any such interest shall be paid by the Company not later than fourteen (14) calendar days after the relevant Conversion Date by U.S. dollar cheque drawn on, or by transfer to U.S. dollar account maintained by the payee with, a bank outside the United States in accordance with instructions given by the relevant Noteholder. (C) Adjustment of Conversion Price (i) Dividends or Distributions of Common Stock. In case the Company shall pay or make a dividend or other distribution on its Common Stock exclusively in Common Stock or shall pay or make a dividend or other distribution on any other class of capital stock of the Company which dividend or distribution includes Common Stock, the Conversion Price in effect at the opening of business on the day next following the date fixed for the determination of stockholders entitled to receive such dividend or other distribution shall be reduced by multiplying such Conversion Price by a fraction of which the numerator shall be the number of shares of Common Stock outstanding at the close of business on the date fixed for such determination and the denominator shall be the 12 sum of such number of shares and the total number of shares constituting such dividend or other distribution, such reduction to become effective immediately after the opening of business on the day next following the date fixed for such determination. For the purposes of this Condition 6(C)(i), the number of shares of Common Stock at any time outstanding shall not include shares held in the treasury of the Company. For the avoidance of doubt, this Condition does not apply to dividends or other distributions in shares of the Common Stock pursuant to the terms of the securities to which such dividend or other distribution may be made. (ii) Dividends or Distributions of Rights, Warrants or Options to Purchase Common Stock. In case the Company shall pay or make a dividend or other distribution on its Common Stock consisting exclusively of, or shall otherwise issue to all holders of its Common Stock, rights, warrants or options entitling the holders thereof to subscribe for or purchase shares of Common Stock at a price per share less than the Market Price per share (determined as provided in paragraph (vii) of this Condition 6(C)) of the Common Stock on the date fixed for the determination of stockholders entitled to receive such rights, warrants or options, the Conversion Price in effect at the opening of business on the day following the date fixed for such determination shall be reduced by multiplying such Conversion Price by a fraction of which the numerator shall be the number of shares of Common Stock outstanding at the close of business on the date fixed for such determination plus the number of shares of Common Stock which the aggregate of the offering price of the total number of shares of Common Stock so offered for subscription or purchase would purchase at such Market Price and the denominator shall be the number of shares of Common Stock outstanding at the close of business on the date fixed for such determination plus the number of shares of Common Stock so offered for subscription or purchase, outstanding at the close of business on the date fixed for such reduction to become effective immediately after the opening of business on the day following the date fixed for such determination. For the purposes of this paragraph (ii), the number of shares of Common Stock at any time outstanding shall not include shares held in the treasury of the Company. The Company shall not issue any rights, warrants or options in respect of shares of Common Stock held in the treasury of the Company. (iii) Dividends or Distributions in Cash. In case the Company shall, by dividend or otherwise, make a distribution to all holders of its Common Stock exclusively in cash in an aggregate amount that, together with (1) the aggregate amount of any other distributions to all holders of its Common Stock made exclusively in cash within the 12 months preceding the date of payment of such distribution and in respect of which no Conversion Price adjustment pursuant to this 6(C)(iii) has been made and (2) the aggregate of any cash plus the fair market value (as determined in good faith by the Board of Directors, whose determination shall be conclusive and described in a resolution of the Company's Board of Directors), as of the expiration of the tender or exchange offer referred to below, of consideration payable in respect of any tender or exchange offer by the Company or a Subsidiary for all or any portion of the Common Stock concluded within the 12 months preceding the date of payment of such distribution and in respect of which no Conversion Price adjustment pursuant to paragraph (vi) of this Condition 6(C) has been made, exceeds five percent (5%) of the product of the Market Price per share (determined as provided in Condition 6(C)(vi) below) of the Common Stock on the date fixed for stockholders entitled to receive such distribution times the number of shares of Common Stock outstanding on such date, the Conversion Price shall be reduced so that the same shall equal the price determined by multiplying the Conversion Price in effect immediately prior to the effectiveness of the Conversion Price reduction contemplated by this paragraph (iii) by a fraction of which the numerator shall be the Market Price per share (determined as provided Section Condition 6(C)(vi)) of the Common Stock on the date of such effectiveness less the amount of cash so distributed applicable to one share of Common Stock and the denominator shall be such Market Price per share of the Common Stock, such reduction to become effective immediately prior to the opening of business on the day following the date fixed for the payment of such distribution. (iv) All Other Distributions or Dividends. Subject to the last sentence of this paragraph (iv), in case the Company shall, by dividend or otherwise, distribute to all holders of its Common Stock evidences of its indebtedness, shares of any class of capital stock, securities, cash or Property (excluding any rights, warrants or options referred to in Condition 6(C)(ii), any dividend or distribution paid exclusively in cash and any dividend or distribution referred to in Condition 6(C)(i), the Conversion Price shall be reduced so that the same shall equal the price determined by multiplying the Conversion Price in effect immediately prior to the effectiveness of the Conversion Price reduction contemplated by this paragraph (iv) by a fraction of which the numerator shall be the Market Price per share (determined as provided in paragraph (vi) of this Condition 6(C)) of the Common Stock on the date of such effectiveness less the fair market value (as determined in good faith by the Board of Directors, 13 whose determination shall be conclusive and described in a resolution of the Company's Board of Directors and shall, in the case of securities being distributed for which prior thereto there is an actual or when issued trading market, be no less than the value determined by reference to the average of the Market Price over the period specified in the succeeding sentence), on the date of such effectiveness, of the portion of the evidences of indebtedness, shares of capital stock, securities, cash and Property so distributed applicable to one share of Common Stock and the denominator shall be such Market Price per share of the Common Stock, such reduction to become effective immediately prior to the opening of business on the day next following the date fixed for the payment of such distribution (such date to being referred to as the "Reference Date"). If the Board of Directors determines the fair market value of any distribution for purposes of this paragraph (iv) by reference to the actual or when issued trading market for any securities comprising such distribution, it must in doing so consider the prices in such market over the same period used in computing the Market Price per share pursuant to paragraph (vi) of this Condition 6(C). For purposes of this paragraph (iv), any dividend or distribution that includes shares of Common Stock or rights, warrants or options to subscribe for or purchase shares of Common Stock shall be deemed instead to be (1) a dividend or distribution of the evidences of indebtedness, cash, Property, shares of capital stock or securities other than such shares of Common Stock or such rights, warrants or options (making any Conversion Price reduction required by this paragraph (iv)) immediately followed by (2) a dividend or distribution of such shares of Common Stock or such rights, warrants or options (making any further Conversion Price reduction required by Condition 6(C)(i) or (ii)), except (A) the Reference Date of such dividend or distribution as defined in this Condition 6(C)(iv) shall be substituted as "the date fixed for the determination of stockholders entitled to receive such dividend or other distribution," "the date fixed for the determination of stockholders entitled to receive such rights, warrants or options," and "the date fixed for such determination" within the meaning of Condition 6(C)(i) and Condition 6(C)(ii) and (2) any shares of Common Stock included in such dividend or distribution shall not be deemed "outstanding at the close of business on the date fixed for such determination" within the meaning of Condition 6(C)(i)). (v) Subdivision of Common Stock. In case outstanding shares of Common Stock shall be subdivided into a greater number of shares of Common Stock, the Conversion Price in effect at the opening of business on the day following the day upon which such subdivision becomes effective shall be proportionately reduced, and, conversely, in case outstanding shares of Common Stock shall each be combined into a smaller number of shares of Common Stock, the Conversion Price in effect at the opening of business on the day following the day upon which such combination becomes effective shall be proportionately increased, such reduction or increase, as the case may be, to become effective immediately after the opening of business on the day following the day upon which such subdivision or combination becomes effective. (vi) Tender or Exchange Offer for Common Stock. In case a tender or exchange offer made by the Company or any Subsidiary for all or any portion of the Common Stock shall expire and such tender or exchange offer shall involve an aggregate consideration having a fair market value (as determined in good faith by the Board of Directors, whose determination shall be conclusive and described in a resolution of the Company's Board of Directors) at the last time (the "Expiration Time") tenders or exchanges may be made pursuant to such tender or exchange offer (as it may be amended) that, together with (A) the aggregate of the cash plus the fair market value (as determined in good faith by the Board of Directors, whose determination shall be conclusive and described in a resolution of the Company's Board of Directors), as of the expiration of the other tender or exchange offer referred to below, of consideration payable in respect of any other tender or exchange offer by the Company or a Subsidiary for all or any portion of the Common Stock concluded within the preceding 12 months and in respect of which no Conversion Price adjustment pursuant to this paragraph (vi) has been made and (B) the aggregate amount of any distributions to all holders of the Common Stock made exclusively in cash within the preceding 12 months and in respect of which no Conversion Price adjustment pursuant to Condition 6(C)(v) has been made, exceeds five percent (5%) of the product of the Market Price per share (determined as provided in Condition 6(C)(vii)) of the Common Stock on the Expiration Time times the number of shares of Common Stock outstanding (including any tendered shares) on the Expiration Time, the Conversion Price shall be reduced (but not increased) so that the same shall equal the price determined by multiplying the Conversion Price in effect immediately prior to the Expiration Time by a fraction of which the numerator shall be (1) the product of the Market Price per share (determined as provided in Condition 6(C)(vii)) of the Common Stock at the Expiration Time times the number of shares of Common Stock outstanding (including any tendered or exchanged shares) at the Expiration Time minus (2) the fair market value (determined as aforesaid) of the aggregate consideration payable to stockholders based on the acceptance (up to any maximum specified in the terms of the tender or exchange offer) of all shares validly tendered 14 or exchanged and not withdrawn as of the Expiration Time (the shares deemed so accepted, up to any such maximum, being referred to as the "Purchased Shares") and the denominator shall be the product of (1) such Market Price per share at the Expiration Time times (2) such number of outstanding shares at the Expiration Time less the number of Purchased Shares, such reduction to become effective immediately prior to the opening of business on the day following the Expiration Time. (vii) Determination of Market Price. For the purpose of any computation of the Market Price under this paragraph (vii) and Conditions 6(C)(ii), (iv) and (v), (A) if the "ex" date (as hereinafter defined) for any event (other than the issuance or distribution requiring such computation) that requires an adjustment to the Conversion Price pursuant to paragraphs (i), (ii), (iii), (iv), (v) or (vi) above ("Other Event") occurs on or after the tenth Stock Exchange Business Day prior to the date in question and prior to the "ex" date for the issuance or distribution requiring such computation (the "Current Event"), the closing price for each Stock Exchange Business Day prior to the "ex" date for such Other Event shall be adjusted by multiplying such closing price by the same fraction by which the Conversion Price is so required to be adjusted as a result of such Other Event, (B) if the "ex" date for any Other Event occurs after the "ex" date for the Current Event and on or prior to the date in question, the closing price for each Stock Exchange Business Day on and after the "ex" date for such Other Event shall be adjusted by multiplying such closing price by the reciprocal of the fraction by which the Conversion Price is so required to be adjusted as a result of such Other Event, (C) if the "ex" date for any Other Event occurs on the "ex" date for the Current Event, one of those events shall be deemed for purposes of clauses (A) and (B) of this proviso to have an "ex" date occurring prior to the "ex" date for the other event, and (C) if the "ex" date for the Current Event is on or prior to the date in question, after taking into account any adjustment required pursuant to clause (B) of this proviso, the closing price for each Stock Exchange Business Day on or after such "ex" date shall be adjusted by adding thereto the amount of any cash and the fair market value on the date in question (as determined in good faith by the Board of Directors in a manner consistent with any determination of such value for purposes of Condition 6(C)(iii) or Condition 6(C)(iv) or (C), whose determination shall be conclusive and described in a resolution of the Company's Board of Directors) of the portion of the rights, warrants, options, evidences of indebtedness, shares of capital stock, securities, cash or Property being distributed applicable to one share of Common Stock. For the purpose of any computation under Condition 6(C)(vi), the Market Price per share of Common Stock on any date in question shall be deemed to be the Market Price on the date selected by the Company commencing on or after the latest (the "Commencement Date") of (A) the date 20 Stock Exchange Business Days before the date in question, (B) the date of commencement of the tender or exchange offer requiring such computation, and (C) the date of the last amendment, if any, of such tender or exchange offer involving a change in the maximum number of shares for which tenders are sought or a change in the consideration offered, and ending not later than the date of the Expiration Time of such tender or exchange offer (or, if such Expiration Time occurs before the close of trading on a Stock Exchange Business Day, not later than the Stock Exchange Business Day immediately preceding the date of such Expiration Time); provided, however, that if the "ex" date for any Other Event (other than the tender or exchange offer requiring such computation) occurs on or after the Commencement Date and on or prior to the date of the Expiration Time for the tender or exchange offer requiring such computation, the closing price for each Stock Exchange Business Day prior to the "ex" date for such Other Event shall be adjusted by multiplying such closing price by the same fraction by which the Conversion Price is so required to be adjusted as a result of such other event. For purposes of this paragraph, the term "ex" date, (A) when used with respect to any issuance or distribution, means the first date on which the Common Stock trades regular way on the relevant exchange or in the relevant market from which the closing price was obtained without the right to receive such issuance or distribution, (B) when used with respect to any subdivision or combination of shares of Common Stock, means the first date on which the Common Stock trades regular way on such exchange, or in such market after the time at which such subdivision or combination becomes effective, and (C) when used with respect to any tender or exchange offer means the first date on which the Common Stock trades regular way on such exchange or in such market after the Expiration Time of such tender or exchange offer. (viii) Further Reductions for Federal Income Tax. The Company may make such reductions in the Conversion Price, in addition to those required by Conditions 6(C) (i), (ii), (iii), (iv), (v), and (vi), as it considers to be advisable in order that any event treated for Federal income tax purposes as a dividend of stock or stock rights shall not be taxable to the recipients. 15 (ix) Adjustments to be Carried Forward. No adjustment in the Conversion Price shall be required unless such adjustment would require an increase or decrease of at least five percent (5%) in the Conversion Price; provided, however, that any adjustments which by reason of this paragraph (ix) are not required to be made shall be carried forward and taken into account in any subsequent adjustment. (x) Notice of Adjustments of Conversion Price Whenever the Conversion Price is adjusted as herein provided the Company shall compute the adjusted Conversion Price in accordance with Section Condition 6(C) and shall prepare a certificate signed by the chief financial officer of the Company setting forth the adjusted Conversion Price and showing in reasonable detail the facts upon which such adjustment is based, and such certificate shall forthwith be delivered to the Paying Agent and the Conversion Agent, and the Company shall cause notice thereof to be published in accordance with Condition 15 at least ten (10) Business Days in advance of the effective date of such adjustment. (D) Mandatory Conversion (i) Each Noteholder acknowledges and agrees that provided the Shares into which the Notes would be converted are Freely Tradeable and listed on a Stock Exchange, the Company may, at its own cost (save those expenses or taxes referred to in Condition 6(D)(iii)), at any time following ninety days from the Effective Date, elect to exercise the Conversion Right on behalf of each and every Noteholder in respect of all of the Notes Outstanding at the Conversion Price applicable as of the date fixed by the Company for such conversion (the "Mandatory Conversion Date"), provided that the average of the Market Price of the Shares over the Stock Exchange Business Days in any thirty (30) consecutive calendar day period following the Effective Date, is equal to or greater than one hundred twenty-five percent (125%) of the Conversion Price. The Company will give notice in the manner set out in Condition 15 that the criteria for Mandatory Conversion under this Condition 6(D) has been met within 30 days of having met such criteria. The form of Company Conversion Notice is attached hereto as Exhibit B. (ii) At least 45 calendar days prior to the Mandatory Conversion Date, the Company shall cause written notice of the Mandatory Conversion Date to be given to the Paying and Conversion Agent. Not less than 30 and not more than 60 calendar days prior to the Mandatory Conversion Date, the Company shall cause written notice of the Mandatory Conversion Date to be given to the Paying Agent, the Conversion Agent and the Noteholders (in accordance with Condition 15). Following such notice, each of the Noteholders will be required on or before the Mandatory Conversion Date to deliver or procure delivery of its Notes with all unmatured Coupons relating to such Notes together with a duly completed Conversion Notice to the specified office of the Conversion Agent, during its usual business hours for such purposes and perform together with the Company, the obligations applicable to it on conversion specified in this Condition 6. Failure to deliver the Conversion Notice shall not affect the conversion of such Notes pursuant to the terms of this Condition 6(D). (iii) If any Noteholder with respect to whose Notes Mandatory Conversion (pursuant to this Condition 6) is to take place shall fail to perform its obligations specified in this Condition 6 or shall have a registered address in any territory where, in the absence of any registration statement or other special formalities or legal requirements, the issue, allotment, transfer or delivery of the Shares arising on Mandatory Conversion in the reasonable opinion of the Company, is or could be unlawful or impracticable, subject to applicable law, Company shall make arrangements for the sale of such Shares to a third party at the best consideration reasonably obtainable by the Company and arrange for the Paying Agent to pay to such Noteholder the consideration received by it in respect of such Shares (after any deduction required to reimburse any reasonable and proper expenses incurred in arranging any such sale or any taxes payable in connection therewith arising solely as a result of the Noteholder's failure to perform its obligations under this Condition 6(D)). (iv) From and after the Mandatory Conversion Date and upon compliance by the Company of its obligations hereunder with respect to such conversion, the Notes shall cease to constitute Indebtedness of the Company and shall thereafter be only deemed to represent the right to receive Shares. (E) Notice of Certain Corporate Action 16 In case of the occurrence of one or more of the events that are listed herein, the Company shall cause to be mailed to the Paying Agent and the Conversion Agent and to be published in the manner provided under Condition 15 hereof within ten (10) Business Days after the date on which notice is sent to the holders of the Company's Common Stock. Such events are: (i) the Company shall declare a dividend (or any other distribution) on its Common Stock payable (1) otherwise than exclusively in cash, or (2) exclusively in cash in an amount that would require a Conversion Price adjustment pursuant to Condition6(C)(iii); or (ii) the Company shall authorize the granting to the holders of its Common Stock of rights, warrants or options to subscribe for or purchase any shares of capital stock of any class or of any other rights (excluding employee stock options); or (iii) of any reclassification of the Common Stock of the Company (other than a subdivision or combination of its outstanding shares of Common Stock), or of any consolidation or merger to which the Company is a party and for which approval of any stockholders of the Company is required, or of the sale or transfer of all or substantially all of the assets of the Company; or (iv) of the voluntary or involuntary dissolution, liquidation or winding up of the Company; or (v) the Company or any Subsidiary of the Company shall commence a tender or exchange offer for all or a portion of the Company's outstanding shares of Common Stock (or shall amend any such tender or exchange offer); The Notice shall state (i) the date on which a record is to be taken for the purpose of such dividend, distribution or granting of rights, warrants or options, or, if a record is not to be taken, the date as of which the holders of Common Stock of record to be entitled to such dividend, distribution, rights, warrants or options are to be determined, or (ii) the date on which such reclassification, consolidation, merger, sale, transfer, dissolution, liquidation or winding up is expected to become effective, and the date as of which it is expected that holders of Common Stock of record shall be entitled to exchange their shares of Common Stock for securities, cash or other Property deliverable upon such re-classification, consolidation, merger, sale, transfer, dissolution, liquidation or winding up, or (iii) the date on which such tender offer commenced, the date on which such tender offer is scheduled to expire unless extended, the consideration offered and the other material terms thereof (or the material terms of any amendment thereto). (F) Consolidation, Amalgamation or Merger In the event that the Company shall be a party to any transaction, including without limitation any (i) recapitalization or reclassification of the Common Stock (other than a change in par value, or from par value to no par value, or from no par value to par value, or as a result of a subdivision or combination of the Common Stock), (ii) any consolidation of the Company with, or merger of the Company into, any other person, any merger of another person into the Company (other than a merger which does not result in a reclassification, conversion, exchange or cancellation of all of the outstanding shares of Common Stock of the Company), (iii) any sale or transfer of all or substantially all of the assets of the Company, or (iv) any compulsory share exchange pursuant to which the Common Stock is converted into the right to receive other securities, cash or other Property, the Company will forthwith notify the Noteholders of such event in accordance with Condition 15 and, then lawful provision shall be made as part of the terms of such transaction whereby the Holder of each Note then Outstanding shall have the right (during the period in which such Note is convertible) to convert such Note into the class and amount of shares and other securities and property receivable upon such transaction by a holder of such number of shares of Common Stock which would have been liable to be issued upon conversion of such Note immediately prior to the transaction. So far as legally possible, the Company shall cause the Person formed by such consolidation or resulting from such merger or which acquired such assets or which acquired the Company's Shares, as the case may be, to execute and deliver the Paying Agent on behalf of each of the Noteholders an amendment to these Terms and Conditions as provided for under Condition 17. Such amendment shall provide for adjustments which, for events subsequent to the effective date of such amendment, shall be as nearly equivalent as may be practicable to the adjustments provided for in this Condition. The above provisions of this Condition 6(F) shall similarly apply to successive transactions of the foregoing type. (G) Conversion Prohibited Under Certain Circumstances The Note shall not be convertible into Conversion Shares as provided in this Condition 6 or nor may it be redeemed for Shares as provided in Condition 7(B)(iii) herein if the Stock Exchange on which the Shares are listed requires the approval by the stockholders of the Company of the issuance of the Shares which may be issued upon the exercise of the conversion rights contained in this Condition 6 or issued pursuant to Condition 7(B)(iii) and the stockholders fail to approve such issuances of the Shares at an annual meeting or special meeting held to approve such issuances. 17 7. REDEMPTION AND PURCHASE (A) Unless previously redeemed, converted or purchased and canceled as provided herein, the Company will redeem the Notes at their principal amount on March 31, 2007. (B) (i) If as a result of any change in, or amendment to, the laws or regulations of the U.S. or any political sub-division of, or any authority in, or of, the U.S. having power to tax, or any change in the application or official interpretation of such laws or regulations, which change or amendment becomes effective after March 31, 2002, the Company has or will become obliged to pay additional amounts as provided or referred to in Condition 8 (and such amendment or change has been evidenced by the delivery by the Company to the Paying Agent (who shall, in the absence of manifest error, accept such certificate and opinion as sufficient evidence thereof) of (x) a certificate signed by two officers of the Company on behalf of the Company stating that such amendment or change has occurred (irrespective of whether such amendment or change is then effective), describing the facts leading thereto and stating that such obligation cannot be avoided by the Company taking reasonable measures available to it and (y) an opinion of independent legal advisers of recognized standing to the effect that such amendment or change has occurred (irrespective of whether such amendment or change is then effective), the Company may at its option, having given not less than 30 nor more than 60 calendar days' notice to the Noteholders in accordance with Condition 15 (which notice shall be irrevocable), redeem all the Notes but not some only, at their principal amount together with interest (if any) accrued to (but excluding) the Redemption Date, provided that no notice of redemption shall be given earlier than 90 calendar days before the earliest date on which the Company would be required to pay such additional amounts were a payment in respect of the Notes then due. (ii) The Company may, at its option and after having given not less than 30 nor more than 60 calendar days' notice to the Noteholders in accordance with Condition 15 (which notice shall be irrevocable), redeem the Notes for cash, in whole or in part, at their principal amount together with interest (if any) accrued to (but excluding) the Redemption Date. If the Company elects to redeem less than all the Notes, Company will select which Notes to redeem by lot, random, or such other method as it shall deem fair and appropriate. Upon expiry of any such notice period as is referred to in this Condition 7(B) (and subject as provided above), the Company shall be bound to redeem Notes at their principal amount, together with interest accrued to but excluding the Redemption Date. (iii) Provided that the Shares which may be issued pursuant to this paragraph shall be Freely Tradeable and listed on a Stock Exchange, commencing March 31, 2006, the Company may redeem upon not less than 30 nor more than 60 days notice, pursuant and subject the Conditions listed above, up to 50% of the Outstanding Notes for Shares and, on March 31, 2007, the scheduled Maturity Date, the Company may redeem upon not less than 30 nor more than 60 days notice any Outstanding Notes for Shares. If the Company elects to redeem the Notes for Shares, each Note will be redeemed for the number of shares of Common Stock equal to 110% of the sum of the face value of the Note plus interest accrued and unpaid thereon divided by the average of the Market Price of the Shares over the 120 Stock Exchange Business Day period immediately preceding the date of notice of such redemption. If the Company elects to redeem less than all the Notes, the Company will select which Notes to redeem by lot, random, or such other method as it shall deem fair and appropriate. Upon expiry of any such notice period as is referred to in this Condition 7(B) (and subject as provided above), the Company shall be bound to redeem Notes as described above. (C) Subject to applicable law, the Company or any of its Subsidiaries may at any time purchase Notes together with unmatured Coupons in any manner and at any price in the open market or by private treaty. If purchases are made by tender, tenders must be available to all Noteholders alike. Notes purchased by the Company or any of its Subsidiaries will forthwith be surrendered for cancellation and shall no longer be deemed Outstanding. (D) All Notes which are redeemed by the Company will forthwith be canceled (together with all related unmatured Coupons attached to or surrendered with the Notes) and may not be reissued or resold. 18 8. TAXATION All payments in respect of the Notes by the Company shall be made without withholding or deduction for, or on account of, any present or future taxes, duties, assessments or governmental charges of whatever nature ("Taxes") imposed or levied by or on behalf of the U.S. or any political sub-division of, or any authority in, or of, the U.S. having power to tax, unless the withholding or deduction of the Taxes is required by law. In that event, the Company will pay such additional amounts as may be necessary in order that the net amounts received by the Noteholders and Couponholders after the withholding or deduction shall equal the respective amounts which would have been receivable in respect of the Notes or, as the case may be, Coupons in the absence of the withholding or deduction; except that no additional amounts shall be payable in relation to any payment in respect of any Note or Coupon: (A) to, or to a third party on behalf of, a Holder who is liable for the Taxes in respect of the Note or Coupon by reason of such Holder having some connection with the U.S. other than the mere holding of the Note or Coupon; and (B) presented for payment more than 30 calendar days after the Relevant Date except to the extent that a Holder would have been entitled to additional amounts on presenting the same for payment on the last day of such period of 30 calendar days; or (C) to, or to a third party on behalf of, a Holder who would not be liable or subject to the withholding or deduction by making a declaration of non-residence or other similar claim for exemption to the relevant tax authority. Any reference in these Terms and Conditions to any amounts in respect of the Notes shall be deemed also to refer to any additional amounts which may be payable under this Condition. 9. ADDITIONAL COVENANTS While any Conversion Right remains exercisable, the Company will, save with the approval of an Extraordinary Resolution: (1) at all times keep available for issuance free from any preemptive rights out of its authorized but unissued capital such number of Shares as would enable the Conversion Rights and all other rights of subscription and exchange for and conversion into Shares to be satisfied in full; (2) maintain a listing for all the issued Shares and all Shares to be issued on the exercise of the Conversion Rights on a Stock Exchange, it being understood that if the Company is unable to obtain or maintain such listing of Shares and will forthwith give notice to the Noteholders in accordance with Condition 15 of the listing, de-listing or quotation or lack of quotation of the Shares (as a class) by any such Stock Exchange; and (3) not in any way modify the rights attaching to the Shares with respect to voting, dividends or liquidation. 10. PRESCRIPTION Notes and Coupons will become void unless presented for payment within periods of ten (10) years (in the case of principal) and five (5) years (in the case of interest) from the Relevant Date in respect of the Notes or the Coupons, as the case may be, subject to the provisions of Condition 5. 11. EVENTS OF DEFAULT AND ENFORCEMENT (A) Event of Default 19 "Event of Default," wherever used in these Terms and Conditions, means any one of the following events (whatever the reason for such Event of Default, whether voluntary or involuntary or effected by operation of law or pursuant to any judgment, decree or order of any court or any order, rule or regulation of any administrative or governmental body) which shall have occurred and is continuing: (1) if default is made for a period of five (5) Business Days or more in the payment of interest or principal due in respect of the Notes or any of them; or (2) if the Company fails to perform or observe any of its other obligations, covenants, conditions or provisions under the Notes, these Terms and Conditions, the Company's 5.0% Senior Notes due 2003, or the trust indenture pursuant to which such 5.0% Senior Notes due 2003 were issued, and such failure continues for the period of 30 calendar days (or such longer period as the Majority Holders may in their absolute discretion permit) next following the service by the one or more of the Holders on the Company of notice requiring the same to be remedied; or (3) if (i) any other Indebtedness of the Company becomes due and payable prior to its Stated Maturity by reason of an event of default (howsoever defined) or (ii) any such Indebtedness of the Company is not paid when due or, as the case may be, within any applicable grace period or (iii) the Company fails to pay when due (or, as the case may be, within any applicable grace period) any amount payable by it under any present or future guarantee for, or indemnity in respect of, any Indebtedness of any Person or (iv) any security given by the Company or any subsidiary for any Indebtedness of any Person or any guarantee or indemnity of Indebtedness of any Person by the Company becomes enforceable by reason of default in relation thereto and steps are taken to enforce such security save in any such case where there is a bona fide dispute as to whether the relevant Indebtedness or any such guarantee or indemnity as aforesaid shall be due and payable (following any applicable grace period); provided, however, that in each such case the Indebtedness exceeds in the aggregate U.S. $2,000,000 and in each such case such event continues unremedied for a period of 30 calendar days (or such longer period as the Majority Holders may in their sole discretion consent to in writing upon receipt of written notice from the Company); or (4) if the Company shall generally fail to pay its debts as such debts come due (except debts which the Company may contest in good faith generally) or shall be declared or adjudicated by a competent court to be insolvent or bankrupt, shall consent to the entry of an order of relief against it in an involuntary bankruptcy case, shall enter into any assignment or other similar arrangement for the benefit of its creditors or shall consent to the appointment of a custodian (including, without limitation, a receiver, liquidator or Company); or (5) if a receiver, administrative receiver, administrator or other similar official shall be appointed in relation to the Company or in relation to the whole or a substantial part its undertaking or assets or a distress, execution or other process shall be levied or enforced upon or sued out against, or an encumbrancer shall take possession of, the whole or a substantial part of the assets of any of them and in any of the foregoing cases is not paid out or discharged within 90 calendar days (or such longer period as the Majority Holders may in their absolute discretion consent to in writing upon receipt of written notice from the Company); or (6) if the Company institutes proceedings to be adjudicated a voluntary bankrupt, or shall consent to the filing of a bankruptcy proceeding against it, or shall file a petition or answer or consent seeking organization under the laws of the Federal Bankruptcy Code or any similar applicable U.S. federal, state or foreign law, or shall consent to the filing of any such petition, or shall consent to the appointment of a receiver or liquidator or trustee or assignee (or other similar official) in bankruptcy or insolvency of it or its Property, or shall make an assignment for the benefit of creditors, or shall admit in writing its inability to pay its debts generally as they come due; or (7) if a decree or order by a court having jurisdiction in the premises shall have been entered adjudging the Company a bankrupt or insolvent, or approving as properly filed a petition seeking the reorganization of the Company under the Federal Bankruptcy Code or any other similar applicable U.S. federal, state or foreign law, and such decree or order shall have continued undischarged or unstayed for a period of 90 calendar days; or a decree or order of a court having jurisdiction in the premises for the appointment of a receiver or liquidator or trustee or assignee (or other similar official) in bankruptcy or insolvency of the Company or of all or substantially all of its 20 Property, or for the winding up or liquidation of its affairs, shall have been entered, and such decree or order shall have continued undischarged and unstayed for a period of 90 calendar days; or (8) if a warranty, representation, or other statement made by or on behalf of the Company contained herein or any certificate or other agreement furnished in compliance herewith is false in any material respect when made and such falsity continues for a period of 30 calendar days (or such longer period as the Majority Holders may in their absolute discretion permit) next following the service by one or more of the Holders on the Company of notice requiring the same to be remedied; or (9) if there is any final judgment or judgments for the payment of money exceeding in the aggregate U.S. $2,000,000 outstanding against the Company which has been outstanding for more than 60 calendar days from the date of its entry and shall not have otherwise been discharged in full or stayed by appeal, bond or otherwise. (B) Acceleration of Maturity; Rescission and Annulment If an Event of Default (other than an Event of Default specified in Condition 11(A)(6) or 11(A)(7)) occurs and is continuing, then and in every such case the Majority Holders may declare the principal amount of all the Notes and accrued and unpaid interest thereon to be due and payable immediately, by a notice in writing to the Company, and upon any such declaration such principal amount and accrued and unpaid interest shall become immediately due and payable. If an Event of Default specified in Condition 11(A)(6) or Condition 11(A)(7) occurs and is continuing, then the principal amount of all the Notes and all accrued and unpaid interest thereon shall ipso facto become and be immediately due and payable without any declaration or other act on the part of any Noteholder. At any time after a declaration of acceleration has been made and before a judgment or decree for payment of the money due has been obtained by the Majority Holders as hereinafter in this Condition provided, the Majority Holders, with written notice to the Company, may rescind and annul such declaration and its consequences if (1) the Company has paid or deposited in a manner satisfactory to such Holders a sum sufficient to pay (i) all overdue interest on all Outstanding Notes, (ii) all unpaid principal of any Outstanding Notes which has become due otherwise than by such declaration of acceleration, and interest on such unpaid principal at the rate prescribed therefor in the Notes, (iii) to the extent that payment of such interest is legally enforceable, interest on overdue interest at the rate prescribed therefor in the Notes, and (iv) all reasonable sums paid or advanced by the such Holders hereunder; and (2) all Events of Default, other than the non-payment of amounts of principal of or interest on Notes which have become due solely by such declaration of acceleration, have been cured or waived as provided in Condition 11(K) No such rescission shall affect any subsequent default or impair any right consequent thereon. (C) Collection of Indebtedness and Suits for Enforcement by the Majority Holders The Company covenants that if 21 (1) default is made in the payment of any installment of interest on any Note when such interest becomes due and payable and such default continues for a period of five (5) Business Days, or (2) default is made in the payment of the principal of any Note at the Maturity thereof and such default continues for a period of five (5) Business Days, the Company will, upon demand of the Majority Holders, pay to the Holders of the Notes, the whole amount then due and payable on the Notes for principal and interest, and interest on any overdue principal and, to the extent that payment of such interest shall be legally enforceable, upon any overdue installment of interest, at the rate prescribed therefor in the Notes, and, in addition thereto, such further amount as shall be sufficient to cover the costs and expenses of collection, including the reasonable compensation, expenses, disbursements and advances of the Holders, their agents and counsel. If the Company fails to pay such amounts forthwith upon such demand, the Majority Holders in its their name, may institute a judicial proceeding for the collection of the sums so due and unpaid, may prosecute such proceeding to judgment or final decree and may enforce the same against the Company or any other obligor upon the Notes and collect the moneys adjudged or decreed to be payable in the manner provided by law out of the Property of the Company or any other obligor upon the Notes, wherever situated. If an Event of Default occurs and is continuing, the Majority Holders may in their discretion proceed to protect and enforce their rights and the rights of the other Noteholders by such appropriate judicial proceedings as such Holders shall deem most effectual to protect and enforce any such rights, whether for the specific enforcement of any covenant or agreement in these terms and conditions or to enforce any other proper remedy. (D) Majority Holders May File Proofs of Claim In case of the pendency of any receivership, insolvency, liquidation, bankruptcy, reorganization, arrangement, adjustment, composition or other judicial proceeding relative to the Company or any other obligor upon the Notes or the Property of the Company or of such other obligor or their creditors, the Majority Holders (irrespective of whether the principal of the Notes shall then be due and payable as therein expressed or by declaration or otherwise and irrespective of whether the Majority Holders shall have made any demand on the Company for the payment of overdue principal or interest) shall be entitled and empowered, by intervention in such proceeding or otherwise, (1) to file and prove a claim for the whole amount of principal and interest owing and unpaid in respect of the Notes and to file such other papers or documents as may be necessary or advisable in order to have the claims of the Holders (including any claim for the reasonable compensation, expenses, disbursements and advances of such Holders , their agents and counsel) and of the other Noteholders allowed in such judicial proceeding, and (2) to collect and receive any moneys or other Property payable or deliverable on any such claims and to distribute the same; and any custodian, receiver, assignee, trustee, liquidator, sequestrator or similar official in any such judicial proceeding is hereby authorized by each Noteholder to make such payments to the Majority Holders due them for the reasonable compensation, expenses, disbursements and advances of such Holders, their agents and counsel and to pay to the Paying Agent (where one is appointed) all such other sums due under the Notes. In the absence of such appointment, any such sums shall be paid for the rateable benefit of all the Noteholders. Nothing herein contained shall be deemed to authorize the Majority Holders, except as permitted by law and these Terms and Conditions, to authorize or consent to or accept or adopt on behalf of any Noteholder any plan of reorganization, arrangement, adjustment or composition affecting the Notes or the rights of any Noteholder thereof, or to authorize the such Holder to vote in respect of the claim of any Noteholder in any such proceeding, except to the extent permitted by law. 22 (E) Majority Holders May Enforce Claims Without Possession of Notes All rights of action and claims under these Terms and Conditions may be prosecuted and enforced by the Majority Holders without the possession of any of the Notes or the production thereof in any proceeding relating thereto, and any such proceeding instituted by the Majority Holders shall be brought in their own name and any recovery of judgment shall, after provision for the payment of the reasonable compensation, expenses, disbursements and advances of the Majority Holders, their agents and counsel, be paid to the Paying Agent (where one is appointed) for the rateable benefit of all the Noteholders in respect of which such judgment has been recovered. (F) Application of Money Collected Any money collected by the Majority Holder pursuant to this Condition shall be applied in the following order in case of the distribution of such money on account of principal or interest, upon presentation of the Notes and the notation thereon of the payment if only partially paid and upon surrender thereof if fully paid: FIRST: To the payment of the amounts then due and unpaid for principal of and interest on the Notes in respect of which or for the benefit of which such money has been collected, ratably, without preference or priority of any kind, according to the amounts due and payable on such Notes for principal and interest, respectively; and SECOND: The balance, if any, to the Person or Persons entitled thereto. (G) Unconditional Right of Holders to Receive Principal and Interest Notwithstanding any other provision in these Terms and Conditions, the Holder of any Note or of any Coupon, as the case may be, shall have the right, which is absolute and unconditional, to receive payment, as provided herein and in such Note of the principal of and interest on, such Note on the respective Stated Maturity or expressed in such Note (or, in the case of redemption, on the Redemption Date) or Coupon and to institute suit for the enforcement of any such payment, and such rights shall not be impaired without the consent of such Holder; provided, that all monies paid by the Company to the Paying Agent for the payment of principal or interest on any Note which remain unclaimed at the end of two (2) years after the Stated Maturity or Redemption Date of such Note will be repaid to the Company and the Holder of any Note or Coupon shall thereafter have only the rights of a creditor of the Company or such rights as may be otherwise provided by applicable law. (H) Restoration of Rights and Remedies If the Majority Holders or any Noteholder has instituted any proceeding to enforce any right or remedy under these Terms and Conditions and such proceeding has been discontinued or abandoned for any reason, or has been determined adversely to the Majority Holders or to such Noteholder, then and in every such case, subject to any determination in such proceeding, the Company, the Majority Holders and the Noteholders shall be restored severally and respectively to their former positions hereunder and thereafter all rights and remedies of the Majority Holders and the Noteholders shall continue as though no such proceeding had been instituted. (I) Rights and Remedies Cumulative Except as otherwise provided with respect to the replacement or payment of mutilated, destroyed, lost or stolen Notes as provided herein, no right or remedy herein conferred upon or reserved to the Noteholders is intended to be exclusive of any other right or remedy, and every right and remedy shall, to the extent permitted by law, be cumulative and in addition to every other right and remedy given hereunder or now or hereafter existing at law or in equity or otherwise. The assertion or employment of any right or remedy hereunder, or otherwise, shall not prevent the concurrent assertion or employment of any other appropriate right or remedy. 23 (J) Delay or Omission Not Waiver No delay or omission of the Majority Holders or Holder of any Note to exercise any right or remedy accruing upon any Event of Default shall impair any such right or remedy or constitute a waiver of any such Event of Default or an acquiescence therein. Every right and remedy given by this Article or by law to the Noteholders may be exercised from time to time, and as often as may be deemed expedient, by the Noteholders. (K) Waiver of Past Defaults Subject to Condition 11(B), the Majority Holders may on behalf of the Holders of all the Notes waive any past default hereunder and its consequences, except a default (1) in respect of the payment of the principal of or interest on any Note, or (2) in respect of a covenant or provision hereof which under Condition 17 cannot be modified or amended without the consent of the Holder of each Outstanding Note affected. Upon any such waiver, such default shall cease to exist, and any Event of Default arising therefrom shall be deemed to have been cured, for every purpose of these Terms and Conditions; but no such waiver shall extend to any subsequent or other default or Event of Default or impair any right consequent thereon. (L) Waiver of Stay or Extension Laws The Company covenants (to the extent that it may lawfully do so) that it will not at any time insist upon, or plead, or in any manner whatsoever claim or take the benefit or advantage of, any stay or extension law wherever enacted, now or at any time hereafter in force, which may affect the covenants or the performance of these Terms and Conditions; and the Company (to the extent that it may lawfully do so) hereby expressly waives all benefit or advantage of any such law. (M) Requirements Regarding Agents (1) At any time after an Event of Default has occurred and is continuing the Majority Holders shall notify in writing the Company and the Paying Agent, and may by notice in writing to the Company and the Paying Agent: (i) require the Paying Agent, until notified to the contrary by Majority Holders, to hold all Notes and Coupons and all moneys, documents and records held by it in respect of Notes and Coupons to the order of the Holders; or (ii) require the Paying Agent to deliver to the Holders on a pro rata basis all funds held by it for the benefit of the Holders, and to deliver the documents and records held by it in respect of Notes and Coupons to the Holders, provided that such notice shall be deemed not to apply to any documents or records which the relevant Paying Agent is obliged to release by any law or regulation; and (iii) require the Company to make all subsequent payments in respect of the Notes and Coupons to or to the order of the Holders and not to the Paying Agent. (2) The Majority Holders shall notify the Paying Agent immediately upon the cure or waiver of an Event of Default. Upon receipt of such notice, the provisions of this Condition 11(M) shall no longer apply. (3) Prior to taking any action under this Agreement at the direction of any Person with respect to the Notes, the Paying Agent shall be entitled to receive (and shall receive) indemnity or security satisfactory to it. 12. LIABILITY SOLELY CORPORATE 24 No recourse shall be had for the payment of the principal of or interest on any Notes or any part thereof, or for any claim based thereon or otherwise in respect thereof, or of the indebtedness represented thereby, or upon any obligation, covenant or agreement in these Terms and Conditions, against any incorporator, or against any stockholder, officer or director, as such, past, present or future, of the Company, or of any predecessor or successor Person, either directly or through the Company or any such predecessor or successor Person, whether by virtue of any constitution, statute or rule of law, or by the enforcement of any assessment or penalty or otherwise, it being expressly agreed and understood that the Notes and these Terms and Conditions which are a part thereof are solely corporate obligations, and that no personal liability whatsoever shall attach to, or be insured by, any such incorporator, stockholder, officer or director, as such, past, present or future, of the Company or of any predecessor or successor Person, either directly or through the Company or any such predecessor or successor Person, because of the indebtedness hereby authorized or under or by reason of any of the obligations, covenants, promises or agreements contained in the Notes or the these Terms and Conditions which constitute a part thereof or to be implied herefrom; and that any such personal liability is hereby expressly waived and released as a condition of, and as part of the consideration for the exchange transaction pursuant to which the Notes were issued; provided, however, that nothing herein contained shall be taken to prevent recourse to and the enforcement of the liability, if any, of any stockholder or subscriber to capital stock of the Company upon or in respect of shares of capital stock not fully paid up. 13. DEFEASANCE AND COVENANT DEFEASANCE (A) Company's Option to Effect Defeasance or Covenant Defeasance The Company may, at its option by Board Resolution, at any time, with respect to the Notes, elect to have either Condition 13(B) or Section 13(C) applied to all Outstanding Notes upon compliance with the conditions set forth below in this Condition, The Company shall promptly give notice of such election to the Holders. (B) Legal Defeasance and Discharge Upon the Company's exercise under Condition 13(A) of the option applicable to this Condition 13(B), the Company shall be deemed to have been discharged from its obligations with respect to all Outstanding Notes on the date the conditions set forth in Condition 13(D) are satisfied (hereinafter, "legal defeasance"). For this purpose, such legal defeasance means that the Company shall be deemed to have paid and discharged the entire indebtedness represented by the Outstanding Notes, which shall thereafter be deemed to be "Outstanding" only for the purposes of Condition 13(E) and the other Conditions of these Terms and Conditions referred to in (1) and (2) below, and to have satisfied all its obligations under such Notes, including the obligation to pay interest on the Notes, and these Terms and Conditions insofar as such Notes are concerned (and the Holders, at the expense of the Company, shall execute proper instruments acknowledging the same), except for the following which shall survive until otherwise terminated or discharged hereunder: (1) the rights of Holders of Outstanding Notes to receive, solely from the trust fund described in Condition 13(D) and as more fully set forth in such Condition, payments in respect of the principal of and interest on such Notes when such payments are due, and (B) the Company's obligations with respect to the Notes under Conditions 1(D), 1(E), 1(H), 3(D) or 3(L). Subject to compliance with this Condition, the Company may exercise its option under this Condition 13(B) notwithstanding the prior exercise of its option under Condition 13(C) with respect to the Notes. 25 (C) Covenant Defeasance Upon the Company's exercise under Section Condition 13(A) of the option applicable to this Condition 13(C), the Company shall be released from its obligations under any covenant contained in Condition 3 (except Condition 3(D) with respect to the Outstanding Notes on and after the date the conditions set forth in Section 13(D)) are satisfied (hereinafter, "covenant defeasance"), and the Notes shall thereafter be deemed not to be "Outstanding" for the purposes of any request, demand, authorization, direction, declaration, notice, consent, waiver or Act of Noteholders (and the consequences of any thereof) in connection with such covenants, but shall continue to be deemed "Outstanding" for all other purposes hereunder. For this purpose, such covenant defeasance means that, with respect to the Outstanding Notes, the Company may omit to comply with and shall have no liability in respect of any term, condition or limitation set forth in any such covenant, whether directly or indirectly, by reason of any reference elsewhere herein to any such covenant or by reason of any reference in any such covenant to any other provision herein or in any other document and such omission to comply shall not constitute a Default or an Event of Default under Condition 11(A)(4) , but, except as specified above, the remainder of these and the Notes shall be unaffected thereby. (D) Conditions to Legal Defeasance or Covenant Defeasance The following shall be the conditions to application of either Condition 13(B) or Section 13 (C) to the Outstanding Notes: (1) The Company shall irrevocably have deposited or caused to be deposited with the Paying Agent as trust funds in trust for the purpose of making the following payments, specifically pledged as security for, and dedicated solely to, the benefit of the Holders of such Notes, (A) money in an amount, or (B) U.S. Government Obligations which through the scheduled payment of principal and interest in respect thereof in accordance with their terms will provide, not later than one day before the due date of any payment, money in an amount, or (C) a combination thereof, sufficient, in the opinion of a nationally recognized firm of independent public accountants expressed in a written certification thereof delivered to the Paying Agent, to pay and discharge, and which shall be applied by the Paying Agent to pay and discharge, the principal of and interest on the Outstanding Notes on the Stated Maturity (or Redemption Date, if applicable) of such principal or installment of interest; provided that the Paying Agent shall have been irrevocably instructed to apply such money or the proceeds of such U.S. Government Obligations to said payments with respect to the Notes; and provided further that, upon the effectiveness of this Condition 13(D), the money or U.S. Government Obligations deposited shall not be subject to the rights of the Noteholders pursuant to the provisions of this Condition. Before or after such a deposit, the Company may give to the Paying Agent a notice of its election to redeem all of the Outstanding Notes at a future date in accordance with Condition 7, which notice shall be irrevocable. Such irrevocable redemption notice, if given, shall be given effect in applying the foregoing. (2) No Default or Event of Default with respect to the Notes shall have occurred and be continuing on the date of such deposit or, insofar as paragraphs (6) and (7) of Condition 11(A) hereof are concerned, at any time during the period ending on the 91st day after the date of such deposit (it being understood that this condition shall not be deemed satisfied until the expiration of such period). (3) No event or condition shall exist that pursuant to the provisions of Condition 13(B) or 13(C) would prevent the Company from making payments of the principal of or interest on the Notes on the date of such deposit or at any time during the period ending on the 91st day after the date of such deposit (it being understood that this condition shall not be deemed satisfied until the expiration of such period). (4) Such legal defeasance or covenant defeasance shall not result in a breach or violation of, or constitute a default under any material agreement or material instrument to which the Company is a party or by which it is bound. (5) In the case of an election under Condition 13(B), the Company shall have delivered to the Paying Agent an Opinion of Counsel stating that the Holders of the Outstanding Notes will not recognize income, gain or loss for U.S. federal income tax purposes as a result of such defeasance and will be subject to federal income 26 tax on the same amounts, in the same manner and at the same times as would have been the case if such defeasance had not occurred. (f) The Company shall have delivered to the Paying Agent an Officers' Certificate and an Opinion of Counsel, each stating that all conditions precedent provided for relating to either the legal defeasance under Section 13(B) or the covenant defeasance under Section 13(C) (as the case may be) have been complied with. (E) Deposited Money and U.S. Government Obligations to Be Held in Trust; Other Miscellaneous Provisions Subject to the provisions of the disposition of unclaimed moneys contained herein, all money and U.S. Government Obligations (including the proceeds thereof) deposited with the Paying Agent pursuant to Condition 13(D) in respect of the Outstanding Notes shall be held in trust and applied by the Paying Agent, in accordance with the provisions of these terms and conditions, to the payment, either directly or through the Paying Agent (including the Company acting as its own Paying Agent) as the to the Holders of the Notes of all sums due and to become due thereon in respect of principal and interest, but such money and U.S. Government Obligations need not be segregated from other funds except to the extent required by law. (F) Reinstatement If the Paying Agent is unable to apply any money or U.S. Government Obligations in accordance with Condition 13(E) by reason of any order or judgment of any court or governmental authority enjoining, restraining or otherwise prohibiting such application, then the Company's obligations under these Terms and Condition shall be revived and reinstated as though no deposit had occurred pursuant to Section Condition 13(B) or 13(C), as the case may be, until such time as the Paying Agent is permitted to apply all such money or U.S. Government Obligations in accordance with Condition 13(E); provided, however, that no action taken in good faith by the Company after a deposit of money or U.S. Government Obligations or both pursuant to Condition 13(E) and prior to the revival and reinstatement of obligations under these Terms and Conditions pursuant to this Condition 13(F) shall constitute the basis for the assertion of an Event of Default pursuant to Condition 11; and provided, further, that if the Company makes any payment of principal of or interest on any Note following the reinstatement of its obligations, the Company shall be subrogated to the rights of the Holders of such Notes to receive such payment from the money or U.S. Government Obligations held the Paying Agent. 14. REPLACEMENT OF NOTES AND COUPONS As provided in Conditions 1(H), should any Note or Coupon be lost, stolen, mutilated, defaced or destroyed, it may be replaced at the specified office of the Paying Agent upon payment by the claimant of the expenses incurred in connection with the replacement and on such terms as to evidence indemnity and security as the Company may reasonably require. Mutilated or defaced Notes or Coupons must be surrendered before replacements will be issued. 15. NOTICES (A) Notices to all the Noteholders will be valid if published in one Authorized Newspaper (unless another form of notice is permitted by these Terms and Conditions) with a written copy provided to RP&C International, Limited. Any notice shall be deemed to have been given on the date of publication or, if so published more than once, on the date of the first publication. If publication as provided above is not practicable, notice will be given in such other manner, and shall be deemed to have been given on such date, as the Company may approve. (B) Couponholders will be deemed for all purposes to have notice of the contents of any notice given to the Noteholders in accordance with this Condition. (C) Any request, demand, authorization, direction, declaration, notice, consent, waiver, Extraordinary Resolution or Act of Noteholders or other document provided or pertained by these Terms and Conditions (herein collectively called "Notice") to be made upon, given or furnished to, or filed with the Company by any Noteholder 27 shall be sufficient for every purpose hereunder (unless otherwise herein expressly provided) if made, given, furnished or filed in writing to or with the Company addressed to it at the address of its principal office which shall initially be: Harken Energy Corporation, 580 WestLake Park Boulevard, Suite 600, Houston, Texas 77079, Attention: Mikel D. Faulkner, Chairman of the Board and Chief Executive Officer Tel. (281) 504-4000, Fax, (281) 504-4100; with a copy to Wayne Hennecke, Vice President, Finance: Tel. (281) 504-4040, Fax. (281) 504-4110. 16. ACTS OF NOTEHOLDERS, MEETINGS OF NOTEHOLDERS (A) Any Extraordinary Resolution, request, demand, authorization, direction, declaration, notice, consent, waiver or other action provided by these Terms and Conditions to be given or taken by Noteholders may be embodied in and evidenced by one or more instruments of substantially similar tenor signed by such Noteholders in person or by agents duly appointed in writing; and, except as herein otherwise expressly provided, such action shall become effective when such instrument or instruments are delivered to the Company. Such instrument or instruments (and the action embodied therein and evidenced thereby) are herein sometimes referred to as the "Act" of the Noteholders signing such instrument or instruments. Proof of execution of any such instrument or of a writing appointing any such agent shall be sufficient for any purpose of these Terms and Conditions and conclusive in favor of the Company, if made in the manner provided in this Condition (B) The fact and date of the execution by any Person of any such instrument or writing may be proved by the affidavit of a witness of such execution or by a certificate of a notary public or other officer authorized by law to take acknowledgments of deeds, certifying that the individual signing such instrument or writing acknowledged to such witness, notary public or other such officer the execution thereof. Where such execution is by a signer acting in a capacity other than such signer's individual capacity, such certificate or affidavit shall also constitute sufficient proof of authority. The fact and date of the execution of any such instrument or writing, or the authority of the Person executing the same, may also be proved in any other manner which the Company deems sufficient. (C) Any Extraordinary Resolution, request, demand, authorization, direction, notice, consent, waiver or other Act of the Holders of any Note shall bind every future Holder of the same Note and the Holder of every Note issued upon conversion or redemption thereof or in exchange therefor or in lieu thereof in respect of anything done, omitted or suffered to be done the Company or any Paying or Conversion Agent in reliance thereon, whether or not notation of such action is made upon such Note. (D) The Noteholders may convene a meeting at any time and from time to time to consider any matter affecting the Holders of the Notes, including the modification of the Terms and Conditions and to make, give or take any request, demand, authorization, direction, notice, consent, waiver or other action provided by this these Terms and Conditions to be made, given or taken by Holders of the Notes. (E) Notice of every meeting of the Holders of the Notes, setting forth the time and the place of such meeting and in general terms the action proposed to be taken at such meeting, shall be given in the manner provided in Condition 15, not less than 21 nor more than 180 days prior to the date fixed for the meeting. (F) To be entitled to vote at any meeting of Holders of the Notes, a Person shall be (i) a Holder of one or more Outstanding Notes, or (ii) a Person appointed by an instrument in writing as proxy for a Holder or Holders of one or more Outstanding Notes by such Holder or Holders. The only Persons who shall be entitled to be present or to speak at any meeting of Noteholders shall be the Persons entitled to vote at such meeting and their counsel, any representatives of the Company, and their respective counsel. (G) The quorum at any meeting for passing any Extraordinary Resolution will be one or more Persons present holding or representing 50% or more in principal amount of the Outstanding Notes as of the date of the meeting, or at any adjourned such meeting one or more Persons present whatever the principal amount of the Notes held or represented by such Person and the vote required for passing an Extraordinary Resolution at such meeting will be not less than a majority of the principal amount of the Outstanding Notes and represented at such meeting or adjournment thereof; provided, that at any meeting, the business of which includes the modification of the provisions of the Terms and Conditions and the provisions of these Terms and Conditions, the necessary quorum and vote required for passing an Extraordinary Resolution will be one or more Persons present holding or representing not 28 less than a majority, or at any adjourned such meeting not less than one-third, of the principal amount of the Outstanding Notes. An Extraordinary Resolution passed at any meeting of the Holders of the Notes will be binding on all Holders of the Notes, whether or not such Noteholders are present at the meeting, and on the Holders of all Coupons. 17. AMENDMENTS TO TERMS AND CONDITIONS (A) Amendments with Consent of Noteholders With the consent of the Holders of a majority in principal amount of the Notes Outstanding, the Company, when authorized by a Board Resolution, may amend these Terms and Conditions for the purpose of adding any provisions to or changing in any manner or eliminating any of the provisions hereof or of modifying in any manner the rights of the Noteholders hereunder; provided, however, that no such amendment shall, without the consent of the Holder of each Outstanding Note affected thereby: (1) change the Stated Maturity of the principal of, or any installment of principal of or interest on, any Note, or reduce the principal amount thereof or the rate of interest thereon, or change the coin or currency in which any Note or the interest thereon is payable, or impair the right to institute suit for the enforcement of any such payment after the Stated Maturity thereof (or, in the case of redemption, on or after the Redemption Date), or (2) reduce the percentage in principal amount of the Outstanding Notes, the consent of whose Holders is required for any amendment of these terms and conditions, or the consent of whose Holders is required for any waiver of compliance with certain provisions of these Terms and Conditions or certain defaults hereunder and their consequences provided for herein, or (3) modify any of the provisions of Condition 11(K), except to increase any such percentage or to provide that certain other provisions of these Terms and Conditions be modified or waived without the consent of the Holder of each Outstanding Note affected thereby, (4) modify any of the provisions of these Terms and Conditions relating to the subordination of the Notes in a manner adverse to the Holders thereof, or (5) modify any of the provisions of these Terms and Conditions relating to Conversion Rights or redemption rights. It shall not be necessary for any Act of Noteholders under this Section to approve the particular form of any proposed amendment to the Terms and Conditions, but it shall be sufficient if such Act shall approve the substance thereof. (B) Effect of Amendments Upon the entering into of an amendment of these Terms and Conditions pursuant to the terms hereof, these Terms and Conditions shall be modified in accordance therewith, and amendment shall form a part of these Terms and Conditions for all purposes; and every Holder of Notes theretofore or thereafter delivered hereunder shall be bound thereby. 18. GOVERNING LAW The Notes, including these Terms and Conditions, the Coupons, and the Agency Agreement are governed by, and will be construed in accordance with, the laws of the State of New York. 19. DEFINITIONS OF CERTAIN TERMS "Act," when used with respect to any Noteholder, has the meaning specified in Condition 16. 29 "Affiliate" of any specified Person means any other Person directly or indirectly controlling or controlled by or under direct or indirect common control with such specified Person and the terms "controlling" and "controlled" have meanings correlative to the foregoing. "Authenticating Agent" means The Bank of New York "Authorized Denomination" means U.S. $5,000. "Authorized Newspaper" means The Financial Times (European Edition) of London, England. If such newspaper shall cease to be published, the Company shall substitute for it another newspaper in Europe, customarily published at least once a day for at least five (5) days in each calendar week, of general circulation. If, because of temporary suspension of publication or general circulation of such newspaper or for any other reason, it is impossible or, in the opinion of the Company, impracticable to make any publication of any notice required by these Conditions in the manner herein provided, such publication or other notice in lieu thereof which is made by the Company in the exercise of its reasonable discretion shall constitute a sufficient publication of such notice. "Board of Directors" means either the board of directors of the Company or any duly authorized committee of that board. "Business Day" means each Monday, Tuesday, Wednesday, Thursday and Friday which is a day on which banking institutions in the City of New York, New York, and London, England are not authorized or obliged by law, regulation or executive order to close. "Capitalized Lease Obligation" means the amount of the liability under any capital lease that, in accordance with GAAP, is required to be capitalized and reflected as a liability on the balance sheet of the relevant Person. "Clearstream" means Clearstream, societe anonyme. "Dated Date" means June 19, 2002. "Commission" means the Securities and Exchange Commission, as from time to time constituted or, if at any time after the Dated Date such Commission is not existing, then the body performing similar duties at such time. "Common Depository" means the common depository appointed by Morgan Guaranty Trust Company of New York, Brussels office, as operator of the Euroclear System, and Clearstream, societe anonyme, which shall initially be The Bank of New York, including the nominees and successors of any Common Depository. "Common Stock" means, with respect to any Person, any and all shares, interests, participation and other equivalents (however designated, whether voting or non-voting) of such Person's common stock, whether now outstanding or issued after the Dated Date, and includes, without limitation, all series and classes of such common stock. "Company" means Harken Energy Corporation, until a successor Person shall have become such pursuant to the applicable provisions of these Terms and Conditions, and thereafter "Company" shall mean such successor Person. "Conversion Agent" means any Person (including the Company acting as Conversion Agent) authorized by the Company to effect conversions of the Notes on behalf of the Company. Pursuant to the terms hereof, the Company has initially appointed The Bank of New York to act as the Conversion Agent. "Conversion Date" means the Business Day during the Conversion Period on which the Conversion Right is exercised by delivery to the Conversion Agent of the Note surrendered for conversion and the completed notice of a Noteholder's intention to exercise its Conversion Right (as set forth in Exhibit A hereto) with respect to any Note. 30 "Conversion Period" means, with respect to any Note, the period which begins after the earlier to occur of (I) the close of the effective date of a Registration Statement filed by the Company with the Commission with respect to the Shares or (II) the date such Shares may be sold pursuant to the exemption from registration under the Securities Act provided by Rule 144 or other exemption from registration under the Securities Act, and ends upon the earliest to occur of (A) the second Business Day prior to the later of March 31, 2007, or the date on which all principal and interest on the Note is repaid in full, (B) if such Notes shall have been called for redemption pursuant to Condition 7 of these Terms and Conditions, the close of the second Business Day prior to the Redemption Date, or (C) the effective date of a Mandatory Conversion. "Conversion Price" means, in respect of a Conversion Right, initially U.S. $0.50. "Conversion Right" means the right of a Holder of any Note to convert such Note into Conversion Shares. "Conversion Shares" means the Shares into which the Notes are convertible. "Corporation" includes corporations, limited liability companies, limited and general partnerships, associations, joint-stock companies and business trusts. "Coupon" means bearer interest Coupons relating to the definitive Notes in bearer form and any replacement Coupons issued therefore "Couponholder" means a Person who is the bearer of any Coupon. "Dated Date" means June 19, 2002. "Default Rate" means, with respect to the Notes, ten percent (10%) per annum. "Effective Date" means the first Business Day following the date upon which the Commission declares to be effective a registration statement filed by the Company pursuant to the Securities Act relating to the Conversion Shares. "Euroclear" means the Euroclear System. "Extraordinary Resolution" means a resolution passed at a meeting of the Noteholders duly convened and held in these Terms and Conditions. "Federal Bankruptcy Code" means the Bankruptcy Act or Title 11 of the United States Code, as amended from time to time. "Freely Tradable" means, with respect to the Notes and the Conversion Shares and redemption Shares, that under the Securities Act the holders thereof may then offer and sell any amount of such outstanding securities to the public in the United States without restrictions in transactions that are not brokers' transactions (as defined in the Securities Act) either (i) pursuant to an effective registration statement then in effect or (ii) pursuant to Rule 144(k). For purposes of determining whether such securities are Freely Tradable, it shall be assumed that no person that directly, or indirectly through one or more intermediaries, controls, or is controlled by, or is under common control with, the Company has ever held such securities from and after their issuance. "Generally Accepted Accounting Principles" or "GAAP" means generally accepted accounting principles in the United States, as applied from time to time by the Company and its Subsidiaries in the preparation of its financial statements. "Guaranty" means all obligations of any Person (other than endorsements in the ordinary course of business of negotiable instruments for deposit or collection) of such Person guaranteeing or in effect guaranteeing any Indebtedness, dividend or other obligation, of any other Person (the "primary obligor") in any manner, whether directly or indirectly, including without limitation all obligations incurred through an agreement, contingent or 31 otherwise, by such Person: (i) to purchase such Indebtedness or obligation or any Property or assets constituting security therefor, or (ii) to advance or supply funds (1) for the purchase or payment of such Indebtedness or obligation, or (2) to enable the recipient of such funds to maintain certain financial conditions (e.g. agreed amount of working capital) under loan or similar documents, or (iii) to lease Property or to purchase securities or other Property or services primarily for the purpose of assuring the owner of such Indebtedness or obligation of the ability of the primary obligor to make payment of the Indebtedness or obligation, or (iv) otherwise to assure the owner of the Indebtedness or obligation of the primary obligor against loss in respect thereof. For the purposes of all computations made under these Terms and Conditions, a Guaranty in respect of any Indebtedness shall be deemed to be Indebtedness equal to the principal amount and accrued interest of such Indebtedness which has been guaranteed, and a Guaranty in respect of any other obligation or liability or any dividend shall be deemed to be Indebtedness equal to the maximum aggregate amount of such obligation, liability or dividend. "Holder" means a Person who is a bearer of a Note or Coupon, as the case may be. "Indebtedness" of any Person means and includes all present and future obligations of such Person, which shall include all obligations (i) which in accordance with generally accepted accounting principles in the United States shall be classified upon a balance sheet of such Person as liabilities of such Person, (ii) for borrowed money, (iii) which have been incurred in connection with the acquisition of Property (including, without limitation, all obligations of such Person evidenced by any debenture, bond, note, commercial paper or other similar security, but excluding, in any case, obligations arising from the endorsement in the ordinary course of business of negotiable instruments for deposit or collection), (iv) secured by any Lien existing on Property owned by such Person, even though such Person has not assumed or become liable for the payment of such obligations, (v) created or arising under any conditional sale or other title retention agreement with respect to Property acquired by such Person, notwithstanding the fact that the rights and remedies of the seller, lender or lessor under such agreement in the event of default are limited to repossession or sale of such Property, (vi) which are Capitalized Lease Obligations, (vii) for all Guaranties, whether or not reflected in the balance sheet of such Person and (viii) which are all reimbursement and other payment obligations (whether contingent, matured or otherwise) of such Person in respect of any acceptance or documentary credit. Notwithstanding the foregoing, Indebtedness shall not include (i) Indebtedness incidental to the operation of the business of the Person in the ordinary course and in the aggregate not material to the business and operations of the Person, (ii) Indebtedness for which the Company or any of its Subsidiaries are the sole obligors and obligees, and (iii) Indebtedness represented by purchase, rental or lease obligations not to exceed $1,000,000 in any period of 12 months for any Person and its Subsidiaries. "Interest Payment Date" means the Stated Maturity of an installment of interest on the Notes. "Lien" means any mortgage, charge, pledge, lien, security interest or encumbrance of any kind whatsoever, including any interest in Property securing an obligation owed to, or a claim by, a Person other than the owner of the Property, whether such interest is based on the common law, statute or contract, and including but not limited to the security interest lien arising from a mortgage, encumbrance, pledge, conditional sale or trust receipt or a lease, consignment or bailment for security purposes. The term "Lien" shall include reservations, exceptions, encroachments, easements, rights-of-way, covenants, conditions, restrictions, leases and other title exceptions and encumbrances affecting Property. For the purposes of these Terms and Conditions, the Company or its Subsidiary shall be deemed to be the owner of any Property which it has acquired or holds subject to a conditional sale agreement, financing lease or other arrangement pursuant to which title to the Property has been retained by or vested in some other Person for security purposes. "Majority Holders" means the Holders of a majority of the principal amount of Notes Outstanding. "Mandatory Conversion" means conversion of the Notes at the option of the Company pursuant to Condition 6D. "Market Price" means the daily closing sale price of the Shares for a Stock Exchange Business Day on a Stock Exchange. 32 "Maturity," when used with respect to any Note, means the date on which the principal of such Note becomes due and payable as therein or herein provided, whether at the Stated Maturity or the Redemption Date and whether by declaration of acceleration, call for redemption or otherwise. "Noteholder" or "Holder" means a Person who is the bearer of any Note. "Outstanding," when used with respect to Notes, means, as of the date of determination, all Notes theretofore issued, except: (1) Notes heretofore cancelled by the Paying and Conversion Agent or delivered to the Paying and Conversion Agent for cancellation; (2) Notes, or portions thereof, for whose payment or redemption money in the necessary amount has been theretofore deposited any Paying Agent (other than the Company) in trust or set aside and segregated in trust by the Company (if the Company shall act as its own Paying Agent) for the Holders of such Notes; provided that, if such Notes are to be redeemed, notice of such redemption has been duly given or provision therefor satisfactory to the a Paying Agent has been made; (3) Notes, except to the extent provided in Conditions 13 (B) and 13(C), with respect to which the Company has effected defeasance and/or covenant defeasance as provided in Condition 13; and (4) Notes which have been paid pursuant to or in exchange for or in lieu of which other Notes have been issued, however, that in determining whether the Holders of the requisite principal amount of Outstanding Notes have taken any Act or given or made any Extraordinary Resolution, Notes owned by the Company or any other obligor upon the Notes or any Affiliate of the Company (other than Persons whose Affiliate relationship arises solely from ownership of Conversion Shares) or such other obligor shall be disregarded and deemed not to be Outstanding. "Paying Agent" means any Person (including the Company acting as Paying Agent) authorized by the Company to pay the principal of or interest on any Notes on behalf of the Company. Pursuant to the terms and conditions hereof, the Company has initially appointed The Bank of New York as the Paying Agent "Person" means any individual, corporation, limited liability company, limited or general partnership, joint venture, association, joint-stock company, trust, unincorporated organization or government or any agency or political subdivision thereof. "Preferred Stock" means, with respect to any Person, any and all shares, interests, participation or other equivalents (however designated) of such Person's preferred or preference stock whether now outstanding or issued on or after the Dated Date, and includes, without limitation, all classes and series of preferred or preference stock. "Presentation Date" means the date on which a Note is presented by a Noteholder for payment of principal or a Coupon is presented by the Couponholder for payment of interest, as the case may be, or if such date is not a Business Day in London and New York, the next date which is a Business Day in each of the foregoing cities. "Property" or "Properties" means any kind of property or asset, whether real, personal or mixed, or tangible or intangible, and any interest therein. "Redemption Date," when used with respect to any Note to be redeemed, in whole or in part, means the date fixed for such redemption by or pursuant to these Terms and Conditions. "Redemption Price," when used with respect to any Note and Coupons to be redeemed, means the price at which they are to be redeemed pursuant to the terms hereof, plus accrued interest to the Redemption Date, if applicable expressed in a number of Conversion Shares into which such Note shall be converted in the event the Notes and/or Coupons are to be redeemed for Shares and, in the event of any other redemption, a cash amount. "Relevant Date" means the date on which the payment first becomes due; provided, that if the full amount of the money payable has not been received by the Paying Agent on or before the due date, it shall mean the date on which, the full amount of the money having been so received, notice to that effect shall have been duly given to the Noteholders by the Company in accordance with Condition 15. "Rule 144A" means Rule 144A, as amended, promulgated by the Commission pursuant to the Securities Act. 33 "Rule 144" means Rule 144, as amended, promulgated by the Commission pursuant to the Securities Act. "Securities Act" means the Securities Act of 1933, as amended, and the rules and regulations promulgated from time to time by the Commission pursuant thereto. "Shares" means the common stock, par value U.S. $0.01, of the Company (and all other (if any) shares or stock resulting from any sub-division, consolidation or reclassification of such shares). "Stated Maturity," when used with respect to any Indebtedness or any installment of principal thereof or interest thereon, means the date specified in such Indebtedness as the fixed date on which the principal of such Indebtedness or such installment of principal or interest is due and payable. "Stock Exchange" means any United States national or regional stock exchange or quotation service such as NASDAQ National Market System or any similar quotation service maintained by the National Quotation Bureau or any successor thereto. "Stock Exchange Business Day" means any day (other than a Saturday or Sunday) on which the a Stock Exchange is open for business. "Subordinated Obligation" means any Indebtedness of the Company outstanding on such date which is contractually subordinate or junior in right of payment to the Notes. "Subsidiary" of any Person means any Corporation of which at least a majority of the shares of stock having by the terms thereof ordinary voting power to elect a majority of the Board of Directors of such Corporation (irrespective of whether or not at the time stock of any other class or classes of such Corporation shall have or might have voting power by reason of the happening of any contingency) is directly or indirectly owned or controlled by the Person. "U.S. Government Obligations" means securities that are (x) direct obligations of the United States of America for the timely payment of which its full faith and credit is pledged or (y) obligations of a Person controlled or supervised by and acting as an agency or instrumentality of the United States of America the timely payment of which is unconditionally guaranteed as a full faith and credit obligation by the United States of America, which, in either case, are not callable or redeemable at the option of the issuer thereof, and shall also include a depository receipt issued by a bank (as defined in Section 3(a)(2) of the Securities Act), as custodian with respect to any such U.S. Government Obligation or a specific payment of principal of or interest on any such U.S. Government Obligation held by such custodian for the account of the holder of such depository receipt, provided that (except as required by law) such custodian is not authorized to make any deduction from the amount payable to the holder of such depository receipt from any amount received by the custodian in respect of the U.S. Government Obligation or the specific payment of principal of or interest on the U.S. Government Obligation evidenced by such depository receipt. The Paying Agent and Conversion Agent is: The Bank of New York Attention: Global Finance Unit 101 Barclay, Floor 21W New York, New York 10286 34 SCHEDULE A Principal Amount of this Global Note The aggregate principal amount of this Global Note is as shown by the latest entry made by or on behalf of the Paying Agent in the fourth column below. Reductions in the outstanding principal amount of this Global Note following redemption, conversion into shares of Common Stock, or the purchase and cancellation of Notes are entered in the second and third columns below.
- ------------------------------------------------------------------------------------------------------------- Reasons for Outstanding change in principal The outstanding Amount of this Notation made by or on Principal amount Global Behalf of the Paying of Note following Agent (other than Global Amount of such In respect of the initial Date Note Such change Change Principal amount - ------------------------------------------------------------------------------------------------------------- [ ] , 2002 Not applicable Not applicable Not applicable - ------------------------------------------------------------------------------------------------------------- - ------------------------------------------------------------------------------------------------------------- - ------------------------------------------------------------------------------------------------------------- - ------------------------------------------------------------------------------------------------------------- - ------------------------------------------------------------------------------------------------------------- - ------------------------------------------------------------------------------------------------------------- - ------------------------------------------------------------------------------------------------------------- - ------------------------------------------------------------------------------------------------------------- - -------------------------------------------------------------------------------------------------------------
35 SCHEDULE B Interest Payments in respect of this Global Note The following payments of interest in respect of this Global Note have been made: - ------------------------------------------------------------------------------- Notation made by Amounts of interest and on behalf of Date made Due and payable Amount of interest paid the Paying Agent - ------------------------------------------------------------------------------- - ------------------------------------------------------------------------------- - ------------------------------------------------------------------------------- - ------------------------------------------------------------------------------- - ------------------------------------------------------------------------------- - ------------------------------------------------------------------------------- - ------------------------------------------------------------------------------- - ------------------------------------------------------------------------------- - ------------------------------------------------------------------------------- - ------------------------------------------------------------------------------- 36 EXHIBIT A HOLDER'S CONVERSION NOTICE To: [Conversion Agent] The undersigned Holder of the 7% Senior Convertible Notes Due 2007 (the "Notes") in the aggregate principal amount of U.S. $_______________ tendered herewith hereby irrevocably exercises the option to convert such Note(s) into shares of Common Stock in accordance with the Terms and Conditions of the Notes relating to the issuance by Harken Energy Corporation of an aggregate of U.S. $2,025,000 of the Notes and directs that the Conversion Shares issuable and deliverable upon such conversion be issued and delivered to the undersigned in the name and at the address set forth below. If the Conversion Shares are to be issued in the name of a Person other than the undersigned, the undersigned will pay all transfer taxes payable with respect thereto and is delivering herewith a certificate in proper form certifying that the applicable restrictions on transfer have been complied with. All terms used and not otherwise defined herein have the respective meanings set forth in the Terms and Conditions. DATE:_______________ ----------------------------------- Name of Holder ----------------------------------- Signature(s) of Holder Address for Delivery of Share Certificates ----------------------------------- ----------------------------------- ----------------------------------- Name for Registration of Share Certificates (if Different than Holder): ----------------------------------- A-1 EXHIBIT B COMPANY'S CONVERSION NOTICE To: Conversion Agent Harken Energy Corporation (the "Company") hereby irrevocably exercises the option to convert all of the 7% Senior Convertible Notes Due 2007 (the "Notes") of the Company that have not been previously converted and are Outstanding at the date of this notice into shares of its Common Stock, in accordance with the Terms and Conditions, pursuant to which the Company has issued an aggregate of U.S. $2,025,000 of the Notes, and confirms that the Conversion Shares issuable and deliverable upon conversion shall be issued and delivered to the Noteholders in accordance with the instructions for registration and delivery of the Conversion Shares to each Holder, to be provided by each Holder to the Conversion Agent. The Company is entitled to exercise its option to convert because (i) ninety (90) days has elapsed from the Effective Date, (ii) the average of the Market Price of the Common Stock over the Stock Exchange Business Days during the thirty (30) consecutive calendar day period beginning on ________________ and ending on ___________ (being a date after the Effective Date) equaled or exceeded 125% of the Conversion Price, and (iii) the Conversion Shares were Freely Tradeable on the date such threshold was met and for the 30 calendar day period after such date. All terms used and not otherwise defined herein shall have the respective meanings set forth in the Terms and Conditions. DATE:_____________________ HARKEN ENERGY CORPORATION By: -------------------------------- Name: ------------------------------ Title: ----------------------------- B-1 EXHIBIT C COMPANY'S NOTICE OF REDEMPTION FOR SHARES To: [Paying and Conversion Agent] Harken Energy Corporation (the "Company") hereby irrevocably exercises the option to convert ________________________ United States dollars (U.S. $_____________) principal amount of the 7% Senior Convertible Notes Due 2007 (the "Notes") of the Company that have not been previously converted and are Outstanding at the date of this notice into shares of its Common Stock, in accordance with the Terms and Conditions, pursuant to which the Company has issued an aggregate of U.S. $2,025,000 of the Notes, and confirms that the Conversion Shares issuable and deliverable upon conversion shall be issued and delivered to the Noteholders in accordance with the instructions for registration and delivery of the Conversion Shares to each Holder, to be provided by each Holder to the Conversion Agent. Each Note so redeemed will be redeemed for the number of Shares of Common Stock equal to 110% of the face value of the Note plus interest accrued and unpaid thereon divided by US $ [ ], which represents the average of the Market Price of the Common Stock over the 120 Stock Exchange Days day period immediately preceding the pricing date. All terms used and not otherwise defined herein shall have the respective meanings set forth in the Terms and Conditions. DATE:_____________________ HARKEN ENERGY CORPORATION By: -------------------------------- Name: ------------------------------ Title: ----------------------------- C-1 EX-10.20 5 dex1020.txt SENIOR NOTES DATED 6/19/2002 Exhibit 10.20 ISIN XS0145719737 SWISS IDENTIFICATION NO. 1389060 CERTIFICATE NO. 1 NEITHER THIS NOTE NOR THE SHARES OF COMMON STOCK ISSUABLE ON CONVERSION OF THIS NOTE (THE "SHARES") HAVE BEEN REGISTERED UNDER THE SECURITIES ACT OF 1933, AS AMENDED (THE "SECURITIES ACT"), OR THE SECURITIES LAWS OF ANY STATE. THE HOLDER HEREOF, BY PURCHASING THIS NOTE, AGREES FOR THE BENEFIT OF THE COMPANY THAT THIS NOTE AND THE SHARES MAY NOT BE RESOLD, PLEDGED OR OTHERWISE TRANSFERRED OR DISPOSED OF UNLESS THE NOTE OR THE SHARES AS THE CASE MAY BE, HAS BEEN REGISTERED UNDER THE SECURITIES ACT AND ANY APPLICABLE STATE SECURITIES OR BLUE SKY LAWS OR EXEMPTIONS FROM THE REGISTRATION REQUIREMENTS OF SUCH LAWS ARE AVAILABLE. IF THE HOLDER OF THIS NOTE WAS AN AFFILIATE OF THE COMPANY AT ANY TIME DURING THE THREE MONTHS PRECEDING THE DATE OF ANY SUCH TRANSFER, THE FOREGOING CONDITIONS MUST BE COMPLIED WITH REGARDLESS OF WHEN SUCH TRANSFER IS MADE. ANY UNITED STATES PERSON WHO HOLDS THIS OBLIGATION WILL BE SUBJECT TO LIMITATIONS UNDER THE U.S. INCOME TAX LAWS, INCLUDING THE LIMITATIONS PROVIDED IN SECTIONS 165(j) AND 1287(a) OF THE UNITED STATES INTERNAL REVENUE CODE OF 1986, AS AMENDED. THIS OBLIGATION IS NOT A DEPOSIT AND IS NOT INSURED BY ANY AGENCY OF THE UNITED STATES GOVERNMENT. HARKEN ENERGY CORPORATION 7% SENIOR CONVERTIBLE NOTES DUE 2007 GLOBAL NOTE Harken Energy Corporation, a Delaware corporation (hereinafter, the "Company," which term includes any successor to the Company), for value received, hereby promises to pay to The Bank of New York Depository (Nominees) Limited, upon presentation and surrender of this Global Note (the "Global Note") the principal sum of Two Million Twenty-Five Thousand Dollars (U.S. $2,025,000) (the "Principal Amount") on March 31, 2007, and to pay interest thereon from and including June 19, 2002, semi-annually in arrears on March 31 and September 30 in each year, commencing September 30, 2002, at the rate of 7% per annum, calculated on the basis of a 360-day year consisting of twelve 30-day months, until the principal hereof is paid or payment thereof is duly provided for; provided, however, that the Principal Amount payable upon presentation and surrender may be reduced from time to time in connection with conversions, redemptions, purchase and cancellations and similar events described in the Terms and Conditions hereof, and such reductions shall be duly noted on Schedule A hereto (which is incorporated herein by this reference as if set out in full); and provided further that interest accruing after the date of a reduction in Principal Amount shall be calculated with reference to the new Principal Amount. 1 Upon failure of the Company to make any payment of interest or principal on the date when due and payable, the outstanding principal balance of the Notes and, to the extent permitted by law, interest thereon will bear interest at the Default Rate beginning on the date such payment was due until the default is cured. Notwithstanding any other provision of the Notes to the contrary, in no event shall the interest contracted for, charged or received in connection with the Notes (including any other costs or considerations that constitute interest under applicable law which are contracted for, charged or received pursuant to the Notes) exceed the maximum rate of nonusurious interest allowed under applicable law as presently in effect and to the extent an increase is allowable by such laws, but in no event shall any amount ever be paid or payable greater than the amount contracted for in the Notes, and all amounts paid by the Company which constitute usurious interest under the applicable law shall be applied in the manner described herein. To the extent permitted by law, interest contracted for, charged or received on the Notes shall be allocated over the entire term of this the Notes, to the end that interest paid on the Notes does not exceed the maximum amount permitted to be paid thereon by law. The principal and interest on the definitive Notes shall be payable at the office or agency of the Company maintained for such purpose in the City of London and the City of New York, New York, or at such other office of agency of the Company as may be maintained for such purpose. This Global Note has been issued pursuant to resolutions adopted by the Board of Directors of the Company effective on June 18, 2002. This Global Note is a permanent security and is exchangeable in whole for definitive Notes in bearer form, with interest coupons attached, upon the event specified in the Terms and Conditions herein. Until transferred in full for the definitive Notes, this Global Note shall in all respects be ratably entitled to the same benefits under, and subject to the same Terms and Conditions of the definitive Notes authenticated and delivered hereunder. This Global Note, the definitive Notes, the Coupons, and the Terms and Conditions shall be governed by and construed in accordance with the laws of the State of New York. Unless the certificate of authentication hereon has been executed by the Authenticating Agent by manual signature of one of its authorized signatories, this Global Note shall not be entitled to any benefit under the Terms and Conditions and shall not be valid or obligatory for any purpose. 2 IN WITNESS WHEREOF, the Company has caused this book-entry Note to be duly executed in its corporate name by the manual or facsimile signatures of the undersigned duly authorized officers of the Company. Dated as of June 18, 2002. HARKEN ENERGY CORPORATION By: ---------------------------------- Bruce N. Huff, President and Chief Operating Officer [Corporate Seal] ATTEST: By: -------------------------------------- Wayne Hennecke, Vice President Finance CERTIFICATE OF AUTHENTICATION This Global Note is the Note referred to in the within mentioned Terms and Conditions. THE BANK OF NEW YORK, Authenticating Agent By: ---------------------------------- Name: -------------------------------- Title: ------------------------------- 3 TERMS AND CONDITIONS OF THE NOTES The U.S. $ 2,025,000 of 7% Senior Convertible Notes Due 2007 (the "Notes") of Harken Energy Corporation, a Delaware corporation (the "Company") are constituted by, and authorized to be issued pursuant to these Terms and Conditions and resolutions of the Board of Directors of the Company adopted by the Board held on June 18, 2002. Copies of a paying and conversion agency agreement dated as of June 18, 2002 (the "Agency Agreement"), made between the Company and The Bank of New York, as paying and conversion agent (the "Paying Agent and "Conversion Agent," respectively, which expressions shall include any successors and assigns) are available for inspection during normal business hours by the holders of the Notes ("Noteholders") and the Couponholders at the specified office of the Paying Agent. The Noteholders and the Couponholders are entitled to the benefit of, are bound by, and are deemed to have notice of all the provisions of the Agency Agreement. Certain terms not otherwise defined in the text hereof are defined in Condition 19 herein. 1. FORM, DENOMINATIONS, AND TITLE, AND CERTAIN ADMINISTRATIVE PROVISIONS (A) The Notes if issued in definitive bearer form will be serially numbered, in denominations of U.S. $5,000 or multiples thereof (the "Authorized Denomination"), each with Coupons attached on issue, and with such numerical and other identification designation as the Company shall deem desirable. (B) Title to the Notes and to the Coupons will pass by delivery. The Company and the Paying Agent and Conversion Agent may (to the fullest extent permitted by applicable laws) deem and treat the Holder of any Note and the Holder of any Coupon as the absolute owner thereof for all purposes (whether or not the Note or Coupon shall be overdue and notwithstanding any notice to the contrary). Beneficial interests in the Notes will be represented by a global note (the "Global Note"), without interest coupons, which will be deposited with a common depository (the "Common Depository") and held on behalf of Morgan Guaranty Trust Company of New York, as operator of the Euroclear System ("Euroclear"), and Clearstream, societe anonyme ("Clearstream"), for credit to the accounts designated by the Noteholders at Euroclear and Clearstream. Except as provided herein, certificates will not be issued in exchange for beneficial interests in this Global Note. (C) The Notes shall be executed on behalf of the Company by its President and Chief Operating Offer under a facsimile of its corporate seal reproduced thereon and attested by its Vice President, Finance. The signature of any of these officers on the Notes may be manual or facsimile signatures of the present or any future such authorized officer and may be imprinted or otherwise reproduced on the Notes. Notes bearing the manual or facsimile signatures of individuals who were at any time the proper officers of the Company shall bind the Company, notwithstanding that such individuals or any of them have ceased to hold such offices prior to the authentication and delivery of such Notes or did not hold such offices at the date of such Notes. At any time and from time to time hereafter, the Company may deliver Notes executed by the Company to the Authenticating Agent for authentication, together with a Company order for the authentication and delivery of such Notes, and the Authenticating Agent in accordance with such Company order shall authenticate and deliver such Notes. Such Company order shall specify the amount of Notes to be authenticated and the date on which the original issue of Notes is to be authenticated. The Global Note shall be dated as of the date of authentication No Note shall be entitled to any benefit hereunder or be valid or obligatory for any purpose unless there appears on such Note a certificate of authentication substantially in the form hereto is duly executed by the Authenticating Agent by manual signature of an authorized signatory, and such certificate upon any Note shall be 4 conclusive evidence, and the only evidence, that such Note has been duly authenticated and delivered hereunder and is entitled to the benefits of these Terms and Conditions. In case the Company, pursuant to Conditions 3(B) and 3(C), shall be consolidated or merged with or into any other Person or shall convey, transfer, lease or otherwise dispose of its Properties and assets substantially as an entirety to any Person, and the successor Person resulting from such consolidation, or surviving such merger, or into which the Company shall have been merged, or the Person which shall have received a conveyance, transfer, lease or other disposition as aforesaid, shall have entered into an amendment hereto, any of the Notes authenticated or delivered prior to such consolidation, merger, conveyance, transfer, lease or other disposition may, from time to time, at the request of the successor Person, be exchanged for other Notes executed in the name of the successor Person with such changes in phraseology and form as may be appropriate, but otherwise in substance of like tenor as the Notes surrendered for such exchange and of like principal amount; and the Authenticating Agent, upon Company order of the successor Person, shall authenticate and deliver Notes as specified in such request for the purpose of such exchange. (D) If the Common Depository referred to in Condition 1(F) notifies the Company that it is unwilling or unable to continue as Common Depository for this Global Note, the Company shall use its best efforts to identify and appoint a successor depository within 90 days of such notice. Pending the preparation of definitive Notes, if required herein, the Company may execute, and upon Company order the Authenticating Agent shall authenticate and deliver, temporary Notes which are printed, lithographed, typewritten, mimeographed or otherwise produced and in the Authorized Denomination, substantially of the tenor of the definitive Notes in lieu of which they are issued and with such appropriate insertions, omissions, substitutions and other variations as the officers executing such Notes may determine, as conclusively evidenced by their execution of such Notes. If temporary Notes are required to be issued pursuant to these Conditions, the Company will cause definitive Notes to be prepared thereafter without unreasonable delay. After the preparation of definitive Notes, the temporary Notes shall be exchangeable for definitive Notes upon surrender of the temporary Notes at the office or agency of the Company designated for such purpose without charge to the Noteholder. Upon surrender for cancellation of any one or more temporary Notes, the Company shall execute and the Authenticating Agent shall authenticate and deliver in exchange therefor a like principal amount of definitive Notes of the Authorized Denomination or multiples thereof. Until so exchanged, the temporary Notes shall in all respects be entitled to the same benefits under these Terms and Conditions as the definitive Notes. (E) Upon surrender for exchange of any Note at the office or agency of the Company designated pursuant to these Conditions, the Company shall execute, and the Authenticating Agent shall authenticate and deliver, in the name of the designated transferee or transferees, one or more new Notes of the Authorized Denomination or denominations of a like aggregate principal amount. Furthermore, any Holder of this Global Note, by acceptance of this Global Note, agrees that transfers of beneficial interest in such Global Note may be effected only through a book-entry system maintained by the Holder of the Global Note (or its agent), and that ownership of a beneficial interest in this Global Note shall be required to be reflected by way of book entry. All Notes issued upon any exchange of Notes shall be the valid obligations of the Company, evidencing the same debt, and entitled to the same benefits hereunder, as the Notes surrendered upon such exchange. Every Note presented or surrendered for exchange shall (if so required by the Company) be duly endorsed, or be accompanied by a written instrument of transfer, in form satisfactory to the Company, duly executed by the Noteholder thereof or such Noteholder's attorney duly authorized in writing. Except as otherwise provided herein, no service charge shall be made for any exchange, conversion or redemption of Notes, but the Company may require payment of a sum sufficient to cover any tax or other governmental charge that may be imposed in connection with any exchange of Notes. 5 The Company shall not be required (i) to issue or exchange any Note during a period beginning at the opening of business 15 days before the selection of Notes to be redeemed hereunder and ending at the close of business on the day of such mailing of the relevant notice of redemption, (ii) to exchange any Note so selected for redemption in whole or in part, except the unredeemed portion of any Note being redeemed in part, or (iii) to register the transfer of or exchange of any Note during a period beginning five days before the date of Maturity and ending on such date of Maturity. (F) (1) This Global Note shall be delivered to the Common Depository. Members of, or participants in, Euroclear and Clearstream ("Agent Members") shall have no direct rights hereunder with respect to any Global Note held on their behalf by the Common Depository, or under such Global Note. The Common Depository may be treated by the Company, and any agent of the Company, as the absolute owner of such Global Note for all purposes whatsoever. Notwithstanding the foregoing, nothing herein shall prevent the Company or any agent of the Company from giving effect to any written certification, proxy or other authorization furnished by the Common Depository or shall impair, as between the Common Depository and the Agent Members, the operation of customary practices governing the exercise of the rights of a Noteholder. (2) Transfers of the Global Note shall be limited to transfers of the Global Note in whole, but not in part, to the Common Depository, its successors or their respective nominees. Interests of beneficial owners in the Global Note may be transferred in accordance with the rules and procedures of the Common Depository, Euroclear, Clearstream, and the provisions hereof. Definitive Notes in bearer form shall be transferred to all beneficial holders in exchange for their beneficial interests in the Global Note in accordance with the Common Depository's procedures only if the Common Depository notifies the Company that it is unwilling or unable to continue as Common Depository for the Global Note and a successor depository is not appointed by the Company within 90 days of such notice, or an Event of Default has occurred and is continuing and the Company has received a request from any owner of a beneficial interest in the Global Note for such a transfer or the Common Depository. (3) In connection with any transfer of beneficial interests in this Global Note to beneficial owners pursuant to subsection (2) of this Condition, the Common Depository shall reflect on its books and records the date and a decrease in the Principal Amount of this Global Note in an amount equal to the principal amount of the beneficial interests in this Global Note to be transferred, and the Company shall execute, and the Authenticating Agent shall authenticate and deliver, one or more definitive Notes in bearer from of like tenor and amount. (4) In connection with the transfer of the beneficial interests in the entire Global Note to beneficial owners pursuant to subsection (2) of this Condition, this Global Note shall be deemed to be surrendered to the Conversion and Paying Agent for cancellation, and the Company shall execute, and the Authenticating Agent shall authenticate and deliver, to each beneficial owner identified by the Common Depository, in exchange for its beneficial interest in this Global Note, an equal aggregate principal amount of definitive Notes in bearer form. (5) Any definitive Note in bearer from delivered in exchange for an interest in this Global Note pursuant to subsection (2) or subsection (3) of this Condition shall bear the applicable legend regarding transfer restrictions applicable to the bearer Note as counsel to the Company shall advise the Company. (6) The Holder of this Global Note may grant proxies and otherwise authorize any person, including Agent Members and persons that may hold interests through Agent Members, to take any action which a Noteholder is entitled to take under these Terms and Conditions or the Notes. (7) Any definitive Note in bearer form delivered in exchange for an interest in this Global Note pursuant to subsection (2) or (3) of this Condition will prior to delivery to the Noteholder have all matured Coupons as of such delivery date, which are attached to such bearer Note, cancelled and voided by the Authenticating Agent. (8) Nothing contained herein shall be deemed to authorize any transfers (by book-entry or otherwise) of this Global Note otherwise than in accordance with the Securities Act. Unless otherwise required by applicable law, neither the Company nor the Common Depository shall recognize or give effect to any attempt to transfer (by book entry or otherwise) or convert any Note or any interest therein in violation of the Securities Act. 6 (G) The Noteholders by acceptance of the Notes hereby covenant and agree that neither the Notes nor the Conversion Shares will be offered, sold, transferred, pledged, converted or otherwise disposed of unless the Notes and/ or the Conversion Shares have been registered under the Securities Act or any applicable state securities or blue sky laws or exemptions from the registration requirements of such laws are available. (H) If (i) any mutilated Note or Coupon is surrendered to the Authenticating Agent, or (ii) the Company and the Authentication Agent receive evidence to their satisfaction of the destruction, loss or theft of any Note or Coupon, and there is delivered to the Company and the Authenticating Agent such security and/or indemnity as may be required by them to save each of them harmless, then, in the absence of notice to the Company or the Authenticating Agent that such Note or Coupon has been acquired by a bona fide purchaser, the Company shall execute and upon Company order the Authenticating Agent shall authenticate and deliver, in exchange for any such mutilated Note or Coupon or in lieu of any such destroyed, lost or stolen Note or Coupon, a new Note or Coupon of like tenor and principal amount, bearing a number not contemporaneously Outstanding. In case any such mutilated, destroyed, lost or stolen Note or Coupon has become or is about to become due and payable, the Company in its discretion may, instead of issuing a new Note or Coupon, pay such Note or Coupon, as the case may be. Upon the issuance of any new Note or Coupon under this Section, the Company may require the payment of a sum sufficient to cover any tax or other governmental charge that may be imposed in relation thereto and any other expenses (including the fees and expenses of the Authenticating Agent) connected therewith. Every new Note or Coupon issued pursuant to this Section in lieu of any destroyed, lost or stolen Note or Coupon shall constitute an original additional contractual obligation of the Company, whether or not the destroyed, lost or stolen Note or Coupon shall be at any time enforceable by anyone, and shall be entitled to all benefits hereunder equally and proportionately with any and all other Notes or Coupons duly issued hereunder. The provisions of this Condition are exclusive and shall preclude (to the extent lawful) all other rights and remedies with respect to the replacement or payment of mutilated, destroyed, lost or stolen Note or Coupon. Any new Note issued under this Condition 1(H) in lieu of any destroyed, lost or stolen Note shall be issued by the Authenticating Agent with all matured Coupons as of such date of issuance cancelled or voided. 2. STATUS The Notes and any Coupons are direct, unconditional and unsecured obligations of the Company and will rank pari passu, without any preference among themselves. The Notes and any Coupons will rank senior to all Subordinated Obligations of the Company, present and future, but, in the event of bankruptcy or insolvency of the Company, only to the extent permitted by the applicable laws relating to creditors' rights. The Notes will not be secured by any assets or property of the Company. The Notes and any Coupons will rank pari passu with all other present and future Indebtedness of the Company (including the Company's 5.0% Senior Notes due 2003) other than Subordinated Obligations. The Notes will rank senior to all existing and future Subordinated Obligations. 3. COVENANTS (A) The Company will do or cause to be done all things necessary to preserve and keep in full force and effect its corporate existence, rights (charter and statutory) and franchises of the Company; provided, however, that the Company shall not be required to preserve any such right or franchise if the Board of Directors shall determine that the preservation thereof is no longer in the best interests of the Company and the conduct of its business, and that the loss thereof is not disadvantageous in any material respect to the Noteholders; and provided, further, that nothing contained in this Condition 3(A) shall prohibit any transaction permitted by Condition 3(B) or Condition 3(C) herein. 7 (B) The Company will not merge or consolidate with or sell, convey, transfer or lease or otherwise dispose of all, or substantially all of its Properties and assets substantially as an entirety to any Person, unless: (a) either (i) the Company shall be the surviving Person or (ii) the Person (if other than the Company) formed by such consolidation or into which the Company is merged or the Person which acquired by conveyance or transfer, or which leases, the Properties and assets of the Company substantially as an entirety (1) shall be a Person organized and validly existing under the laws of the United States of America, any state thereof or the District of Columbia and (2) shall expressly assume, by a written instrument, the Company's obligation for the due and punctual payment of the principal of and interest on all the Notes and the performance and observance of every Term and Condition contained herein and in the Agency Agreement. (C) Upon any consolidation of the Company with or merger of the Company with or into any other Person or any conveyance, transfer or lease of the Properties and assets of the Company substantially as an entirety to any person, the successor Person formed by such consolidation or into which the Company is merged or to which such conveyance, transfer or lease is made shall succeed to, and be substituted for, and may exercise every right and power of, the Company under the Terms and Conditions contained herein with the same effect as if such successor Person had been named as the Company herein, and in the event of any such conveyance or transfer, the Company, except in the case of a lease, shall be discharged of all obligations and covenants under the Notes and may be dissolved and liquidated. (D) The Company will maintain in at least one European city an office or agency where Notes may be presented or surrendered for payment, where Notes may be surrendered for conversion or exchange and where notices and demands to or upon the Company in respect of the Notes may be served. The corporate trust office of the Paying Agent at One Canada Square, 48th Floor, London, E14 5AL, England shall be such office or agency of the Company, unless the Company shall designate and maintain some other offices or agencies for one or more of such purposes pursuant to the terms of the Agency Agreement. The Company will give prompt written notice to the Noteholders of any change in the location of any such offices or agencies. The Company may also from time to time designate one or more other offices or agencies (in or outside of Europe) where the Notes may be presented or surrendered for any or all such purposes and may from time to time rescind any such designation; provided, that no such designation or rescission shall in any manner relieve the Company of its obligation to maintain an office or agency in Europe for such purposes. The Company will give prompt written notice to the Noteholders of any such designation or rescission and any change in the location of any such other office or agency. (E) The Company will pay or discharge or cause to be paid or discharged, before the same shall become delinquent, (a) all taxes, assessments and governmental charges levied or imposed upon the Company or upon the income, profits or Property of the Company and (b) all lawful claims for labour, materials and supplies which, if unpaid, might by law become a Lien upon the Property of the Company; provided, however, that the Company shall not be required to pay or discharge or cause to be paid or discharged any such tax, assessment, charge or claim whose amount, applicability or validity is being contested in good faith by appropriate proceedings. (F) The Company will not amend its Certificate of Incorporation or Bylaws except as required by law, except in respect to such amendments that the Board of Directors reasonably determines do not materially adversely affect the rights of the Noteholder, or except to the extent that such amendment would not have a material adverse effect on (a) the ability of the Company to perform its obligations under the Notes or (b) the rights of the Noteholders, except that neither (i) increases in the number of Shares and issuance thereof with related securities, nor (ii) designations of Preferred Stock of the Company, modifications of the terms of such designations and issuance thereof with related securities, nor (iii) modification or expansion of the indemnity provisions provided by the Company to its directors and officers, nor (iv) change of the Company's registered agent shall be deemed an amendment hereunder. (G) To the extent permitted by law, the Company will provide to the Paying Agent or to any Noteholder such statements, certificates or other documentation concerning the organization or operations of the Company as may be reasonably necessary to establish any exceptions or exemptions from United States federal income tax withholding and reporting requirements. 8 (H) The Company shall file a registration statement on Form S-3 (or such other form as the Company may determine is appropriate), within ninety (90) days following the Dated Date in respect of all Shares that may be issuable at any time upon the conversion and/or redemption of the Notes. The Company shall use its best efforts to cause the Commission to declare such registration statement (and any necessary amendments thereto) effective. The Company shall also use its best efforts to maintain the effectiveness of such registration statement, and to refile such a registration statement from time to time in the event its effectiveness lapses, until all such Shares that either are issued or that may be issued are Freely Tradable in the United States. While any Conversion Right remains exercisable, the Company will use its best efforts to list and maintain a listing of all Shares issued upon conversion or redemption of the Note on a Stock Exchange. In the Event a Stock Exchange requires stockholder approval in order to complete the listing of the Shares to be so issued upon conversion or redemption of the Note, then the Company will use its best efforts to obtain such stockholder approval at the earliest possible stockholder meeting. In this event, the, the conversion or redemption in Shares will occur only if and when stockholder approval has been obtained. If the Company is unable to obtain or maintain such listing of Shares, it will forthwith give not less than 30 calendar days notice to the Noteholder of the listing, de-listing or quotation or lack of quotation of the Shares (as a class) by any such Stock Exchange. (I) If the Company shall at any time act as its own Paying Agent, it will, on or before each due date of the principal of or interest on any of the Notes, segregate and hold in trust for the benefit of the Persons entitled thereto a sum sufficient to pay the principal or interest so becoming due until such sums shall be paid to such Persons or otherwise disposed of as herein provided and will promptly notify the Paying Agent of its action or failure so to act. Whenever the Company shall have one or more Paying Agents for the Notes, it will, on or before 3:00 p.m. (London time) on the Business Day immediately preceding each due date of the principal of or interest on any Notes, deposit with a Paying Agent a sum sufficient to pay the principal or interest so becoming due, such sum to be held in trust for the benefit of the Persons entitled to such principal or interest. Pursuant to the terms of the Agency Agreement, the Paying Agent shall agree with the Company, subject to the provisions of this Condition, that such Paying Agent will: (1) hold all sums held by it for the payment of the principal of or interest on Notes in trust for the benefit of the Persons entitled thereto until such sums shall be paid to such Persons or otherwise disposed of as herein provided; and (2) notify the Company by facsimile transmission or by telex if the Paying Agent has not, by the due date for the payment of any principal and/or interest in respect of the Notes or Coupons received unconditionally the full amount of such principal and interest due. Any money deposited with the Paying Agent, or then held by the Company, in trust for the payment of the principal of or interest on any Note and remaining unclaimed for two years after such principal or interest has become due and payable shall be paid to the Company on the Company order, or (if then held by the Company) shall be discharged from such trust; and the Holder of such Note shall thereafter, as an unsecured general creditor, look only to the Company for payment thereof, and all liability of the such Paying Agent with respect to such trust money, and all liability of the Company as trustee thereof, shall thereupon cease; provided, however, that the Paying Agent, before being required to make any such repayment, may at the expense of the Company cause to be published once, in the Authorized Newspapers, notice that such money remains unclaimed and that, after a date specified therein, which shall not be less than 30 days from the date of such publication, any unclaimed balance of such money then remaining will be repaid to the Company. 4. INTEREST The Notes bear interest from (and including) June 19, 2002 (the "Dated Date"), at the rate of seven percent (7%) per annum, payable semi-annually in arrears on March 31 and September 30 in each year (each an "Interest 9 Payment Date"), the first such payment to be made on September 30, 2002, in respect of the period from (and including) June 19, 2002 to (but excluding) September 30, 2002, and this interest payable will equal U.S. $175 per U.S. $5,000 principal amount of the Notes for each complete semi-annual interest period. Each Note will cease to bear interest (i) from its due date for redemption unless the Company shall default in the payment of the Redemption Price, in which event interest shall continue to accrue as provided in herein, or (ii) where the Conversion Right shall have been voluntarily exercised by the Noteholder, from the Conversion Date, or (iii) in the case of a Mandatory Conversion, from the Mandatory Conversion Date. Interest is calculated on the basis of a 360 day year consisting of 12 months of 30 days each and, in the case of an incomplete month, the number of days elapsed. 5. PAYMENTS For so long as the Notes are represented by a Global Note, beneficial interests in this Global Note will be shown on, and transfers thereof will be effected only through, records maintained by, and in accordance with the rules and procedures of, Euroclear or Clearstream, as the case may be. In case of certificated Notes, payments of principal in respect of each Note and any net proceeds payable under Condition 6(D) will only be made, against presentation and surrender (or, in the case of part payment only, endorsement) of the relevant Note at the specified office of the Paying Agent. Payments of interest due on the Notes on an Interest Payment Date will be made against presentation and surrender (or, in the case of part payment only, endorsement) of the relevant Coupons at the specified office of the Paying Agent. All payments of principal and interest shall be made in U.S. dollars. Each such payment and any payment of the net proceeds of the sale of Shares pursuant to Condition 6(D) will be made at the specified office of any Paying Agent, at the option of the Holder, by U.S. dollar cheque mailed to an address, or delivered in accordance with the Holder's instructions, or by transfer to a U.S. dollar account maintained by the Holder in accordance with the holder's instructions, subject in all cases to any applicable fiscal or other laws and regulations, but without prejudice to the provisions of Condition 9. If, at any time, in the opinion of the Company or of the Paying Agent, payments in U.S. dollars cannot be so made, payments will be made in U.S. dollars in such other manner as may be approved by the Company and the Paying Agent and notice of the alternative manner of payment will be given to the Noteholders in accordance with Condition 15. Each Note must be presented for redemption together with all unmatured Coupons relating to such Note, failing which the full amount of any missing unmatured Coupon (or, in the case of payment not being made in full, that proportion of the full amount of the missing unmatured Coupons which the amount so paid bears to the total amount due) will be deducted from the amount due for payment. Each amount so deducted will be paid in the manner mentioned above against presentation and surrender (or, in the case of part payment only, endorsement) of such missing Coupon at any time before the expiry of six (6) years after the Relevant Date in respect of the relevant Note (whether or not such Coupon would otherwise have become void pursuant to Condition 10), or, if later, five (5) years after the date on which such Coupon would have become due, but not thereafter. All monies paid by the Company to the Paying Agent for the payment of principal or interest on any Note which remain unclaimed at the end of two (2) years after the principal on such Note will have become due and payable will be repaid to the Company and the Holder of such Note or any Coupon appertaining thereto will thereafter have only the rights of a creditor of the Company as described in these Terms and Conditions or such rights as may be otherwise provided by applicable law. A Holder shall be entitled to present a Note or Coupon for payment only on a Presentation Date and shall not be entitled to any further interest or other payment if a Presentation Date is after the due date. When making payments to Noteholders or Couponholders, fractions of one cent will be rounded down to the nearest whole cent. 10 The name of the initial Paying Agent and Conversion Agent and its initial specified office is set out at the end of these Terms and Conditions. The Company reserves the right at any time to vary or terminate the appointment of the Paying Agent or Conversion Agent and to appoint additional or other Paying Agents or Conversion Agents. Notice of any termination or appointment and of any changes in specified offices will be given to the Noteholders promptly by the Company in accordance with Condition 15. 6. CONVERSION (A) Optional Conversion by the Noteholders; Conversion Period and Price (i) Noteholders have the right, subject as provided herein and to any applicable laws and regulations, to require the Company to convert all or any of their Notes at their principal amount into Shares at any time during the Conversion Period ("Conversion Right"). The Conversion Period begins after the earlier to occur of (I) the close of the effective date of a Registration Statement filed by the Company with the Commission with respect to the Shares or (II) the date such Shares may be sold pursuant to the exemption from registration under the Securities Act provided by Rule 144 or other exemption from registration under the Securities Act, and ends upon the earliest to occur of (A) the second Business Day prior to the later of March 31, 2007, or the date on which all principal and interest on the Note is repaid in full, (B) if such Notes shall have been called for redemption pursuant to Condition 7, the close of the second Business Day prior to the Redemption Date, or (C) the effective date of a Mandatory Conversion. Upon conversion, the right of the converting Noteholder to repayment of the principal amount of the Note to be converted (and, subject as provided in Condition 6(B)(iv), accrued and unpaid interest thereon) shall be extinguished and released, and in consideration and in exchange therefor the Company shall allot and issue Shares credited as paid up in full as provided in this Condition 6. The number of Shares to be issued on conversion of a Note will be determined by dividing the principal amount of the Note to be converted, plus accrued and unpaid interest thereon, by the Conversion Price, (as defined below) in effect on the Conversion Date, with the result being rounded down to the nearest whole number. (ii) A Conversion Right may only be exercised in respect of the Authorized Denomination or multiples thereof of Notes. If more than one Note is converted at any one time by the same Holder, the number of Shares to be issued upon such conversion will be calculated on the basis of the aggregate principal amount of the Notes to be converted. Fractions of Shares will not be issued on conversion and no cash adjustments will be made in respect thereof. (iii) Except for conversions pursuant to Condition 7(B)(iii), the price at which Shares will be issued upon the exercise of a Conversion Right (the "Conversion Price") initially will be U.S. $0.50. The Conversion Price will be subject to adjustment in accordance with the manner provided in Condition 6(C). The Company shall give notice of any adjustment of the Conversion Price in accordance with Condition 15 within ten (10) Business Days with effective date of such adjustment. (iv) Notwithstanding the provisions of paragraph (i) of this Condition 6(A), if the Company shall default in making payment in full in respect of any Note which shall have been called for redemption or shall fail to issue Shares in respect of any Conversion or redemption, then, from the Relevant Date, interest shall continue to accrue on such Note and the Conversion Right attaching to such Note will continue to be exercisable (unless already exercised by the Company pursuant to Condition 6(D)) up to, and including the close of business (at the place where the Note is deposited in connection with the exercise of the Conversion Right) on the date upon which the full amount of the monies payable in respect of such Note has been duly received by the Paying Agent or, or the date of the issuance of the Conversion Shares or redemption Shares. (B) Procedure for Conversion (i) To exercise the Conversion Right attaching to any Note, the Holder thereof must complete, execute and deposit at his own expense during normal business hours at the specified office of the Conversion Agent, a notice of conversion (a "Conversion Notice") in the form for the time being currently obtainable from the specified office such Conversion Agent, together with the relevant Note and any amount to be 11 paid by the Noteholder pursuant to this Condition 6(B)(i). The form of Conversion Notice is attached hereto as Exhibit A. The Conversion Date must fall at a time when the Conversion Right attaching to that Note is expressed in these Conditions to be exercisable and will be deemed to be the date of the surrender of the Note and delivery of such Conversion Notice and, if applicable, any payment to be made or indemnity given under these Conditions in connection with the exercise of such Conversion Right. A Noteholder delivering a Note for conversion must pay any taxes and capital, stamp, issue and registration duties arising on conversion (other than any taxes or capital, or stamp duties payable in the U.S. or required by any Stock Exchange, by the Company in respect of the allotment and issue of Shares and listing of the Shares on conversion). A Conversion Notice delivered shall be irrevocable. (ii) As soon as practicable, and in any event not later than fourteen (14) calendar days after the Conversion Date, the Company will in the case of Notes converted on exercise of the Conversion Right or a Note being converted in accordance with Condition 6(D) and in respect of which a Conversion Notice or has been delivered and the relevant Note, together with all Outstanding Coupons, and amounts payable by the relevant Noteholder deposited as permitted by sub-paragraph (i) above, cause the person or persons designated for the purpose in the Conversion Notice to be registered as holder(s) of the relevant number of Shares and will make a certificate or certificates for the relevant Shares available for collection at the Company's principal office in Houston, Texas or at the Company's transfer agent in New York, New York, or, if so requested in the relevant Conversion Notice, will deliver such certificate or certificates to the person and at the place specified in the Conversion Notice, at the risk of the Noteholder, together with any other securities, property or cash required to be delivered upon conversion and such assignments and other documents (if any) as may be required by law to effect the transfer thereof. (iii) The person or persons specified for that purpose will be deemed for all purposes to be the Holder of record of the number of Shares issuable upon conversion with effect from the Conversion Date or Mandatory Conversion Date, as the case may be. The Shares issued upon conversion of the Notes will in all respects rank pari passu with the issued and outstanding Shares of Common Stock in issue on the relevant Conversion Date or Mandatory Conversion Date, as the case may be, except for any right excluded by mandatory provisions of applicable law. A Holder of Shares issued on conversion of Notes shall not be entitled to any rights for any record date which precedes the relevant Conversion Date or Mandatory Conversion Date, as the case may be. (iv) If any notice requiring the redemption of any Notes is given pursuant to Condition 7(B) on or after the fifteenth (15th) calendar day prior to the record date in respect of any dividend payable in respect of the Shares and such notice specifies a date for redemption falling on or prior to the next following Interest Payment Date, interest shall (subject as hereinafter provided) accrue on Notes which shall have been delivered for conversion on or after such record date from the preceding Interest Payment Date; provided, that the relevant Noteholder's entitlement to interest on any Note, in the event that the Shares allotted on conversion thereof shall carry an entitlement to receive such dividend, shall be limited to the amount by which the interest such Noteholder would have received had no conversion taken place exceeds the amount of the dividend received on such Shares. Any such interest shall be paid by the Company not later than fourteen (14) calendar days after the relevant Conversion Date by U.S. dollar cheque drawn on, or by transfer to U.S. dollar account maintained by the payee with, a bank outside the United States in accordance with instructions given by the relevant Noteholder. (C) Adjustment of Conversion Price (i) Dividends or Distributions of Common Stock. In case the Company shall pay or make a dividend or other distribution on its Common Stock exclusively in Common Stock or shall pay or make a dividend or other distribution on any other class of capital stock of the Company which dividend or distribution includes Common Stock, the Conversion Price in effect at the opening of business on the day next following the date fixed for the determination of stockholders entitled to receive such dividend or other distribution shall be reduced by multiplying such Conversion Price by a fraction of which the numerator shall be the number of shares of Common Stock outstanding at the close of business on the date fixed for such determination and the denominator shall be the 12 sum of such number of shares and the total number of shares constituting such dividend or other distribution, such reduction to become effective immediately after the opening of business on the day next following the date fixed for such determination. For the purposes of this Condition 6(C)(i), the number of shares of Common Stock at any time outstanding shall not include shares held in the treasury of the Company. For the avoidance of doubt, this Condition does not apply to dividends or other distributions in shares of the Common Stock pursuant to the terms of the securities to which such dividend or other distribution may be made. (ii) Dividends or Distributions of Rights, Warrants or Options to Purchase Common Stock. In case the Company shall pay or make a dividend or other distribution on its Common Stock consisting exclusively of, or shall otherwise issue to all holders of its Common Stock, rights, warrants or options entitling the holders thereof to subscribe for or purchase shares of Common Stock at a price per share less than the Market Price per share (determined as provided in paragraph (vii) of this Condition 6(C)) of the Common Stock on the date fixed for the determination of stockholders entitled to receive such rights, warrants or options, the Conversion Price in effect at the opening of business on the day following the date fixed for such determination shall be reduced by multiplying such Conversion Price by a fraction of which the numerator shall be the number of shares of Common Stock outstanding at the close of business on the date fixed for such determination plus the number of shares of Common Stock which the aggregate of the offering price of the total number of shares of Common Stock so offered for subscription or purchase would purchase at such Market Price and the denominator shall be the number of shares of Common Stock outstanding at the close of business on the date fixed for such determination plus the number of shares of Common Stock so offered for subscription or purchase, outstanding at the close of business on the date fixed for such reduction to become effective immediately after the opening of business on the day following the date fixed for such determination. For the purposes of this paragraph (ii), the number of shares of Common Stock at any time outstanding shall not include shares held in the treasury of the Company. The Company shall not issue any rights, warrants or options in respect of shares of Common Stock held in the treasury of the Company. (iii) Dividends or Distributions in Cash. In case the Company shall, by dividend or otherwise, make a distribution to all holders of its Common Stock exclusively in cash in an aggregate amount that, together with (1) the aggregate amount of any other distributions to all holders of its Common Stock made exclusively in cash within the 12 months preceding the date of payment of such distribution and in respect of which no Conversion Price adjustment pursuant to this 6(C)(iii) has been made and (2) the aggregate of any cash plus the fair market value (as determined in good faith by the Board of Directors, whose determination shall be conclusive and described in a resolution of the Company's Board of Directors), as of the expiration of the tender or exchange offer referred to below, of consideration payable in respect of any tender or exchange offer by the Company or a Subsidiary for all or any portion of the Common Stock concluded within the 12 months preceding the date of payment of such distribution and in respect of which no Conversion Price adjustment pursuant to paragraph (vi) of this Condition 6(C) has been made, exceeds five percent (5%) of the product of the Market Price per share (determined as provided in Condition 6(C)(vi) below) of the Common Stock on the date fixed for stockholders entitled to receive such distribution times the number of shares of Common Stock outstanding on such date, the Conversion Price shall be reduced so that the same shall equal the price determined by multiplying the Conversion Price in effect immediately prior to the effectiveness of the Conversion Price reduction contemplated by this paragraph (iii) by a fraction of which the numerator shall be the Market Price per share (determined as provided Section Condition 6(C)(vi)) of the Common Stock on the date of such effectiveness less the amount of cash so distributed applicable to one share of Common Stock and the denominator shall be such Market Price per share of the Common Stock, such reduction to become effective immediately prior to the opening of business on the day following the date fixed for the payment of such distribution. (iv) All Other Distributions or Dividends. Subject to the last sentence of this paragraph (iv), in case the Company shall, by dividend or otherwise, distribute to all holders of its Common Stock evidences of its indebtedness, shares of any class of capital stock, securities, cash or Property (excluding any rights, warrants or options referred to in Condition 6(C)(ii), any dividend or distribution paid exclusively in cash and any dividend or distribution referred to in Condition 6(C)(i), the Conversion Price shall be reduced so that the same shall equal the price determined by multiplying the Conversion Price in effect immediately prior to the effectiveness of the Conversion Price reduction contemplated by this paragraph (iv) by a fraction of which the numerator shall be the Market Price per share (determined as provided in paragraph (vi) of this Condition 6(C)) of the Common Stock on the date of such effectiveness less the fair market value (as determined in good faith by the Board of Directors, 13 whose determination shall be conclusive and described in a resolution of the Company's Board of Directors and shall, in the case of securities being distributed for which prior thereto there is an actual or when issued trading market, be no less than the value determined by reference to the average of the Market Price over the period specified in the succeeding sentence), on the date of such effectiveness, of the portion of the evidences of indebtedness, shares of capital stock, securities, cash and Property so distributed applicable to one share of Common Stock and the denominator shall be such Market Price per share of the Common Stock, such reduction to become effective immediately prior to the opening of business on the day next following the date fixed for the payment of such distribution (such date to being referred to as the "Reference Date"). If the Board of Directors determines the fair market value of any distribution for purposes of this paragraph (iv) by reference to the actual or when issued trading market for any securities comprising such distribution, it must in doing so consider the prices in such market over the same period used in computing the Market Price per share pursuant to paragraph (vi) of this Condition 6(C). For purposes of this paragraph (iv), any dividend or distribution that includes shares of Common Stock or rights, warrants or options to subscribe for or purchase shares of Common Stock shall be deemed instead to be (1) a dividend or distribution of the evidences of indebtedness, cash, Property, shares of capital stock or securities other than such shares of Common Stock or such rights, warrants or options (making any Conversion Price reduction required by this paragraph (iv)) immediately followed by (2) a dividend or distribution of such shares of Common Stock or such rights, warrants or options (making any further Conversion Price reduction required by Condition 6(C)(i) or (ii)), except (A) the Reference Date of such dividend or distribution as defined in this Condition 6(C)(iv) shall be substituted as "the date fixed for the determination of stockholders entitled to receive such dividend or other distribution," "the date fixed for the determination of stockholders entitled to receive such rights, warrants or options," and "the date fixed for such determination" within the meaning of Condition 6(C)(i) and Condition 6(C)(ii) and (2) any shares of Common Stock included in such dividend or distribution shall not be deemed "outstanding at the close of business on the date fixed for such determination" within the meaning of Condition 6(C)(i)). (v) Subdivision of Common Stock. In case outstanding shares of Common Stock shall be subdivided into a greater number of shares of Common Stock, the Conversion Price in effect at the opening of business on the day following the day upon which such subdivision becomes effective shall be proportionately reduced, and, conversely, in case outstanding shares of Common Stock shall each be combined into a smaller number of shares of Common Stock, the Conversion Price in effect at the opening of business on the day following the day upon which such combination becomes effective shall be proportionately increased, such reduction or increase, as the case may be, to become effective immediately after the opening of business on the day following the day upon which such subdivision or combination becomes effective. (vi) Tender or Exchange Offer for Common Stock. In case a tender or exchange offer made by the Company or any Subsidiary for all or any portion of the Common Stock shall expire and such tender or exchange offer shall involve an aggregate consideration having a fair market value (as determined in good faith by the Board of Directors, whose determination shall be conclusive and described in a resolution of the Company's Board of Directors) at the last time (the "Expiration Time") tenders or exchanges may be made pursuant to such tender or exchange offer (as it may be amended) that, together with (A) the aggregate of the cash plus the fair market value (as determined in good faith by the Board of Directors, whose determination shall be conclusive and described in a resolution of the Company's Board of Directors), as of the expiration of the other tender or exchange offer referred to below, of consideration payable in respect of any other tender or exchange offer by the Company or a Subsidiary for all or any portion of the Common Stock concluded within the preceding 12 months and in respect of which no Conversion Price adjustment pursuant to this paragraph (vi) has been made and (B) the aggregate amount of any distributions to all holders of the Common Stock made exclusively in cash within the preceding 12 months and in respect of which no Conversion Price adjustment pursuant to Condition 6(C)(v) has been made, exceeds five percent (5%) of the product of the Market Price per share (determined as provided in Condition 6(C)(vii)) of the Common Stock on the Expiration Time times the number of shares of Common Stock outstanding (including any tendered shares) on the Expiration Time, the Conversion Price shall be reduced (but not increased) so that the same shall equal the price determined by multiplying the Conversion Price in effect immediately prior to the Expiration Time by a fraction of which the numerator shall be (1) the product of the Market Price per share (determined as provided in Condition 6(C)(vii)) of the Common Stock at the Expiration Time times the number of shares of Common Stock outstanding (including any tendered or exchanged shares) at the Expiration Time minus (2) the fair market value (determined as aforesaid) of the aggregate consideration payable to stockholders based on the acceptance (up to any maximum specified in the terms of the tender or exchange offer) of all shares validly tendered 14 or exchanged and not withdrawn as of the Expiration Time (the shares deemed so accepted, up to any such maximum, being referred to as the "Purchased Shares") and the denominator shall be the product of (1) such Market Price per share at the Expiration Time times (2) such number of outstanding shares at the Expiration Time less the number of Purchased Shares, such reduction to become effective immediately prior to the opening of business on the day following the Expiration Time. (vii) Determination of Market Price. For the purpose of any computation of the Market Price under this paragraph (vii) and Conditions 6(C)(ii), (iv) and (v), (A) if the "ex" date (as hereinafter defined) for any event (other than the issuance or distribution requiring such computation) that requires an adjustment to the Conversion Price pursuant to paragraphs (i), (ii), (iii), (iv), (v) or (vi) above ("Other Event") occurs on or after the tenth Stock Exchange Business Day prior to the date in question and prior to the "ex" date for the issuance or distribution requiring such computation (the "Current Event"), the closing price for each Stock Exchange Business Day prior to the "ex" date for such Other Event shall be adjusted by multiplying such closing price by the same fraction by which the Conversion Price is so required to be adjusted as a result of such Other Event, (B) if the "ex" date for any Other Event occurs after the "ex" date for the Current Event and on or prior to the date in question, the closing price for each Stock Exchange Business Day on and after the "ex" date for such Other Event shall be adjusted by multiplying such closing price by the reciprocal of the fraction by which the Conversion Price is so required to be adjusted as a result of such Other Event, (C) if the "ex" date for any Other Event occurs on the "ex" date for the Current Event, one of those events shall be deemed for purposes of clauses (A) and (B) of this proviso to have an "ex" date occurring prior to the "ex" date for the other event, and (C) if the "ex" date for the Current Event is on or prior to the date in question, after taking into account any adjustment required pursuant to clause (B) of this proviso, the closing price for each Stock Exchange Business Day on or after such "ex" date shall be adjusted by adding thereto the amount of any cash and the fair market value on the date in question (as determined in good faith by the Board of Directors in a manner consistent with any determination of such value for purposes of Condition 6(C)(iii) or Condition 6(C)(iv) or (C), whose determination shall be conclusive and described in a resolution of the Company's Board of Directors) of the portion of the rights, warrants, options, evidences of indebtedness, shares of capital stock, securities, cash or Property being distributed applicable to one share of Common Stock. For the purpose of any computation under Condition 6(C)(vi), the Market Price per share of Common Stock on any date in question shall be deemed to be the Market Price on the date selected by the Company commencing on or after the latest (the "Commencement Date") of (A) the date 20 Stock Exchange Business Days before the date in question, (B) the date of commencement of the tender or exchange offer requiring such computation, and (C) the date of the last amendment, if any, of such tender or exchange offer involving a change in the maximum number of shares for which tenders are sought or a change in the consideration offered, and ending not later than the date of the Expiration Time of such tender or exchange offer (or, if such Expiration Time occurs before the close of trading on a Stock Exchange Business Day, not later than the Stock Exchange Business Day immediately preceding the date of such Expiration Time); provided, however, that if the "ex" date for any Other Event (other than the tender or exchange offer requiring such computation) occurs on or after the Commencement Date and on or prior to the date of the Expiration Time for the tender or exchange offer requiring such computation, the closing price for each Stock Exchange Business Day prior to the "ex" date for such Other Event shall be adjusted by multiplying such closing price by the same fraction by which the Conversion Price is so required to be adjusted as a result of such other event. For purposes of this paragraph, the term "ex" date, (A) when used with respect to any issuance or distribution, means the first date on which the Common Stock trades regular way on the relevant exchange or in the relevant market from which the closing price was obtained without the right to receive such issuance or distribution, (B) when used with respect to any subdivision or combination of shares of Common Stock, means the first date on which the Common Stock trades regular way on such exchange, or in such market after the time at which such subdivision or combination becomes effective, and (C) when used with respect to any tender or exchange offer means the first date on which the Common Stock trades regular way on such exchange or in such market after the Expiration Time of such tender or exchange offer. (viii) Further Reductions for Federal Income Tax. The Company may make such reductions in the Conversion Price, in addition to those required by Conditions 6(C) (i), (ii), (iii), (iv), (v), and (vi), as it considers to be advisable in order that any event treated for Federal income tax purposes as a dividend of stock or stock rights shall not be taxable to the recipients. 15 (ix) Adjustments to be Carried Forward. No adjustment in the Conversion Price shall be required unless such adjustment would require an increase or decrease of at least five percent (5%) in the Conversion Price; provided, however, that any adjustments which by reason of this paragraph (ix) are not required to be made shall be carried forward and taken into account in any subsequent adjustment. (x) Notice of Adjustments of Conversion Price Whenever the Conversion Price is adjusted as herein provided the Company shall compute the adjusted Conversion Price in accordance with Section Condition 6(C) and shall prepare a certificate signed by the chief financial officer of the Company setting forth the adjusted Conversion Price and showing in reasonable detail the facts upon which such adjustment is based, and such certificate shall forthwith be delivered to the Paying Agent and the Conversion Agent, and the Company shall cause notice thereof to be published in accordance with Condition 15 at least ten (10) Business Days in advance of the effective date of such adjustment. (D) Mandatory Conversion (i) Each Noteholder acknowledges and agrees that provided the Shares into which the Notes would be converted are Freely Tradeable and listed on a Stock Exchange, the Company may, at its own cost (save those expenses or taxes referred to in Condition 6(D)(iii)), at any time following ninety days from the Effective Date, elect to exercise the Conversion Right on behalf of each and every Noteholder in respect of all of the Notes Outstanding at the Conversion Price applicable as of the date fixed by the Company for such conversion (the "Mandatory Conversion Date"), provided that the average of the Market Price of the Shares over the Stock Exchange Business Days in any thirty (30) consecutive calendar day period following the Effective Date, is equal to or greater than one hundred twenty-five percent (125%) of the Conversion Price. The Company will give notice in the manner set out in Condition 15 that the criteria for Mandatory Conversion under this Condition 6(D) has been met within 30 days of having met such criteria. The form of Company Conversion Notice is attached hereto as Exhibit B. (ii) At least 45 calendar days prior to the Mandatory Conversion Date, the Company shall cause written notice of the Mandatory Conversion Date to be given to the Paying and Conversion Agent. Not less than 30 and not more than 60 calendar days prior to the Mandatory Conversion Date, the Company shall cause written notice of the Mandatory Conversion Date to be given to the Paying Agent, the Conversion Agent and the Noteholders (in accordance with Condition 15). Following such notice, each of the Noteholders will be required on or before the Mandatory Conversion Date to deliver or procure delivery of its Notes with all unmatured Coupons relating to such Notes together with a duly completed Conversion Notice to the specified office of the Conversion Agent, during its usual business hours for such purposes and perform together with the Company, the obligations applicable to it on conversion specified in this Condition 6. Failure to deliver the Conversion Notice shall not affect the conversion of such Notes pursuant to the terms of this Condition 6(D). (iii) If any Noteholder with respect to whose Notes Mandatory Conversion (pursuant to this Condition 6) is to take place shall fail to perform its obligations specified in this Condition 6 or shall have a registered address in any territory where, in the absence of any registration statement or other special formalities or legal requirements, the issue, allotment, transfer or delivery of the Shares arising on Mandatory Conversion in the reasonable opinion of the Company, is or could be unlawful or impracticable, subject to applicable law, Company shall make arrangements for the sale of such Shares to a third party at the best consideration reasonably obtainable by the Company and arrange for the Paying Agent to pay to such Noteholder the consideration received by it in respect of such Shares (after any deduction required to reimburse any reasonable and proper expenses incurred in arranging any such sale or any taxes payable in connection therewith arising solely as a result of the Noteholder's failure to perform its obligations under this Condition 6(D)). (iv) From and after the Mandatory Conversion Date and upon compliance by the Company of its obligations hereunder with respect to such conversion, the Notes shall cease to constitute Indebtedness of the Company and shall thereafter be only deemed to represent the right to receive Shares. (E) Notice of Certain Corporate Action 16 In case of the occurrence of one or more of the events that are listed herein, the Company shall cause to be mailed to the Paying Agent and the Conversion Agent and to be published in the manner provided under Condition 15 hereof within ten (10) Business Days after the date on which notice is sent to the holders of the Company's Common Stock. Such events are: (i) the Company shall declare a dividend (or any other distribution) on its Common Stock payable (1) otherwise than exclusively in cash, or (2) exclusively in cash in an amount that would require a Conversion Price adjustment pursuant to Condition 6(C)(iii); or (ii) the Company shall authorize the granting to the holders of its Common Stock of rights, warrants or options to subscribe for or purchase any shares of capital stock of any class or of any other rights (excluding employee stock options); or (iii) of any reclassification of the Common Stock of the Company (other than a subdivision or combination of its outstanding shares of Common Stock), or of any consolidation or merger to which the Company is a party and for which approval of any stockholders of the Company is required, or of the sale or transfer of all or substantially all of the assets of the Company; or (iv) of the voluntary or involuntary dissolution, liquidation or winding up of the Company; or (v) the Company or any Subsidiary of the Company shall commence a tender or exchange offer for all or a portion of the Company's outstanding shares of Common Stock (or shall amend any such tender or exchange offer); The Notice shall state (i) the date on which a record is to be taken for the purpose of such dividend, distribution or granting of rights, warrants or options, or, if a record is not to be taken, the date as of which the holders of Common Stock of record to be entitled to such dividend, distribution, rights, warrants or options are to be determined, or (ii) the date on which such reclassification, consolidation, merger, sale, transfer, dissolution, liquidation or winding up is expected to become effective, and the date as of which it is expected that holders of Common Stock of record shall be entitled to exchange their shares of Common Stock for securities, cash or other Property deliverable upon such re-classification, consolidation, merger, sale, transfer, dissolution, liquidation or winding up, or (iii) the date on which such tender offer commenced, the date on which such tender offer is scheduled to expire unless extended, the consideration offered and the other material terms thereof (or the material terms of any amendment thereto). (F) Consolidation, Amalgamation or Merger In the event that the Company shall be a party to any transaction, including without limitation any (i) recapitalization or reclassification of the Common Stock (other than a change in par value, or from par value to no par value, or from no par value to par value, or as a result of a subdivision or combination of the Common Stock), (ii) any consolidation of the Company with, or merger of the Company into, any other person, any merger of another person into the Company (other than a merger which does not result in a reclassification, conversion, exchange or cancellation of all of the outstanding shares of Common Stock of the Company), (iii) any sale or transfer of all or substantially all of the assets of the Company, or (iv) any compulsory share exchange pursuant to which the Common Stock is converted into the right to receive other securities, cash or other Property, the Company will forthwith notify the Noteholders of such event in accordance with Condition 15 and, then lawful provision shall be made as part of the terms of such transaction whereby the Holder of each Note then Outstanding shall have the right (during the period in which such Note is convertible) to convert such Note into the class and amount of shares and other securities and property receivable upon such transaction by a holder of such number of shares of Common Stock which would have been liable to be issued upon conversion of such Note immediately prior to the transaction. So far as legally possible, the Company shall cause the Person formed by such consolidation or resulting from such merger or which acquired such assets or which acquired the Company's Shares, as the case may be, to execute and deliver the Paying Agent on behalf of each of the Noteholders an amendment to these Terms and Conditions as provided for under Condition 17. Such amendment shall provide for adjustments which, for events subsequent to the effective date of such amendment, shall be as nearly equivalent as may be practicable to the adjustments provided for in this Condition. The above provisions of this Condition 6(F) shall similarly apply to successive transactions of the foregoing type. (G) Conversion Prohibited Under Certain Circumstances The Note shall not be convertible into Conversion Shares as provided in this Condition 6 or nor may it be redeemed for Shares as provided in Condition 7(B)(iii) herein if the Stock Exchange on which the Shares are listed requires the approval by the stockholders of the Company of the issuance of the Shares which may be issued upon the exercise of the conversion rights contained in this Condition 6 or issued pursuant to Condition 7(B)(iii) and the stockholders fail to approve such issuances of the Shares at an annual meeting or special meeting held to approve such issuances. 17 7. REDEMPTION AND PURCHASE (A) Unless previously redeemed, converted or purchased and canceled as provided herein, the Company will redeem the Notes at their principal amount on March 31, 2007. (B) (i) If as a result of any change in, or amendment to, the laws or regulations of the U.S. or any political sub-division of, or any authority in, or of, the U.S. having power to tax, or any change in the application or official interpretation of such laws or regulations, which change or amendment becomes effective after March 31, 2002, the Company has or will become obliged to pay additional amounts as provided or referred to in Condition 8 (and such amendment or change has been evidenced by the delivery by the Company to the Paying Agent (who shall, in the absence of manifest error, accept such certificate and opinion as sufficient evidence thereof) of (x) a certificate signed by two officers of the Company on behalf of the Company stating that such amendment or change has occurred (irrespective of whether such amendment or change is then effective), describing the facts leading thereto and stating that such obligation cannot be avoided by the Company taking reasonable measures available to it and (y) an opinion of independent legal advisers of recognized standing to the effect that such amendment or change has occurred (irrespective of whether such amendment or change is then effective), the Company may at its option, having given not less than 30 nor more than 60 calendar days' notice to the Noteholders in accordance with Condition 15 (which notice shall be irrevocable), redeem all the Notes but not some only, at their principal amount together with interest (if any) accrued to (but excluding) the Redemption Date, provided that no notice of redemption shall be given earlier than 90 calendar days before the earliest date on which the Company would be required to pay such additional amounts were a payment in respect of the Notes then due. (ii) The Company may, at its option and after having given not less than 30 nor more than 60 calendar days' notice to the Noteholders in accordance with Condition 15 (which notice shall be irrevocable), redeem the Notes for cash, in whole or in part, at their principal amount together with interest (if any) accrued to (but excluding) the Redemption Date. If the Company elects to redeem less than all the Notes, Company will select which Notes to redeem by lot, random, or such other method as it shall deem fair and appropriate. Upon expiry of any such notice period as is referred to in this Condition 7(B) (and subject as provided above), the Company shall be bound to redeem Notes at their principal amount, together with interest accrued to but excluding the Redemption Date. (iii) Provided that the Shares which may be issued pursuant to this paragraph shall be Freely Tradeable and listed on a Stock Exchange, commencing March 31, 2006, the Company may redeem upon not less than 30 nor more than 60 days notice, pursuant and subject the Conditions listed above, up to 50% of the Outstanding Notes for Shares and, on March 31, 2007, the scheduled Maturity Date, the Company may redeem upon not less than 30 nor more than 60 days notice any Outstanding Notes for Shares. If the Company elects to redeem the Notes for Shares, each Note will be redeemed for the number of shares of Common Stock equal to 110% of the sum of the face value of the Note plus interest accrued and unpaid thereon divided by the average of the Market Price of the Shares over the 120 Stock Exchange Business Day period immediately preceding the date of notice of such redemption. If the Company elects to redeem less than all the Notes, the Company will select which Notes to redeem by lot, random, or such other method as it shall deem fair and appropriate. Upon expiry of any such notice period as is referred to in this Condition 7(B) (and subject as provided above), the Company shall be bound to redeem Notes as described above. (C) Subject to applicable law, the Company or any of its Subsidiaries may at any time purchase Notes together with unmatured Coupons in any manner and at any price in the open market or by private treaty. If purchases are made by tender, tenders must be available to all Noteholders alike. Notes purchased by the Company or any of its Subsidiaries will forthwith be surrendered for cancellation and shall no longer be deemed Outstanding. (D) All Notes which are redeemed by the Company will forthwith be canceled (together with all related unmatured Coupons attached to or surrendered with the Notes) and may not be reissued or resold. 18 8. TAXATION All payments in respect of the Notes by the Company shall be made without withholding or deduction for, or on account of, any present or future taxes, duties, assessments or governmental charges of whatever nature ("Taxes") imposed or levied by or on behalf of the U.S. or any political sub-division of, or any authority in, or of, the U.S. having power to tax, unless the withholding or deduction of the Taxes is required by law. In that event, the Company will pay such additional amounts as may be necessary in order that the net amounts received by the Noteholders and Couponholders after the withholding or deduction shall equal the respective amounts which would have been receivable in respect of the Notes or, as the case may be, Coupons in the absence of the withholding or deduction; except that no additional amounts shall be payable in relation to any payment in respect of any Note or Coupon: (A) to, or to a third party on behalf of, a Holder who is liable for the Taxes in respect of the Note or Coupon by reason of such Holder having some connection with the U.S. other than the mere holding of the Note or Coupon; and (B) presented for payment more than 30 calendar days after the Relevant Date except to the extent that a Holder would have been entitled to additional amounts on presenting the same for payment on the last day of such period of 30 calendar days; or (C) to, or to a third party on behalf of, a Holder who would not be liable or subject to the withholding or deduction by making a declaration of non-residence or other similar claim for exemption to the relevant tax authority. Any reference in these Terms and Conditions to any amounts in respect of the Notes shall be deemed also to refer to any additional amounts which may be payable under this Condition. 9. ADDITIONAL COVENANTS While any Conversion Right remains exercisable, the Company will, save with the approval of an Extraordinary Resolution: (1) at all times keep available for issuance free from any preemptive rights out of its authorized but unissued capital such number of Shares as would enable the Conversion Rights and all other rights of subscription and exchange for and conversion into Shares to be satisfied in full; (2) maintain a listing for all the issued Shares and all Shares to be issued on the exercise of the Conversion Rights on a Stock Exchange, it being understood that if the Company is unable to obtain or maintain such listing of Shares and will forthwith give notice to the Noteholders in accordance with Condition 15 of the listing, de-listing or quotation or lack of quotation of the Shares (as a class) by any such Stock Exchange; and (3) not in any way modify the rights attaching to the Shares with respect to voting, dividends or liquidation. 10. PRESCRIPTION Notes and Coupons will become void unless presented for payment within periods of ten (10) years (in the case of principal) and five (5) years (in the case of interest) from the Relevant Date in respect of the Notes or the Coupons, as the case may be, subject to the provisions of Condition 5. 11. EVENTS OF DEFAULT AND ENFORCEMENT (A) Event of Default 19 "Event of Default," wherever used in these Terms and Conditions, means any one of the following events (whatever the reason for such Event of Default, whether voluntary or involuntary or effected by operation of law or pursuant to any judgment, decree or order of any court or any order, rule or regulation of any administrative or governmental body) which shall have occurred and is continuing: (1) if default is made for a period of five (5) Business Days or more in the payment of interest or principal due in respect of the Notes or any of them; or (2) if the Company fails to perform or observe any of its other obligations, covenants, conditions or provisions under the Notes, these Terms and Conditions, the Company's 5.0% Senior Notes due 2003, or the trust indenture pursuant to which such 5.0% Senior Notes due 2003 were issued, and such failure continues for the period of 30 calendar days (or such longer period as the Majority Holders may in their absolute discretion permit) next following the service by the one or more of the Holders on the Company of notice requiring the same to be remedied; or (3) if (i) any other Indebtedness of the Company becomes due and payable prior to its Stated Maturity by reason of an event of default (howsoever defined) or (ii) any such Indebtedness of the Company is not paid when due or, as the case may be, within any applicable grace period or (iii) the Company fails to pay when due (or, as the case may be, within any applicable grace period) any amount payable by it under any present or future guarantee for, or indemnity in respect of, any Indebtedness of any Person or (iv) any security given by the Company or any subsidiary for any Indebtedness of any Person or any guarantee or indemnity of Indebtedness of any Person by the Company becomes enforceable by reason of default in relation thereto and steps are taken to enforce such security save in any such case where there is a bona fide dispute as to whether the relevant Indebtedness or any such guarantee or indemnity as aforesaid shall be due and payable (following any applicable grace period); provided, however, that in each such case the Indebtedness exceeds in the aggregate U.S. $2,000,000 and in each such case such event continues unremedied for a period of 30 calendar days (or such longer period as the Majority Holders may in their sole discretion consent to in writing upon receipt of written notice from the Company); or (4) if the Company shall generally fail to pay its debts as such debts come due (except debts which the Company may contest in good faith generally) or shall be declared or adjudicated by a competent court to be insolvent or bankrupt, shall consent to the entry of an order of relief against it in an involuntary bankruptcy case, shall enter into any assignment or other similar arrangement for the benefit of its creditors or shall consent to the appointment of a custodian (including, without limitation, a receiver, liquidator or Company); or (5) if a receiver, administrative receiver, administrator or other similar official shall be appointed in relation to the Company or in relation to the whole or a substantial part its undertaking or assets or a distress, execution or other process shall be levied or enforced upon or sued out against, or an encumbrancer shall take possession of, the whole or a substantial part of the assets of any of them and in any of the foregoing cases is not paid out or discharged within 90 calendar days (or such longer period as the Majority Holders may in their absolute discretion consent to in writing upon receipt of written notice from the Company); or (6) if the Company institutes proceedings to be adjudicated a voluntary bankrupt, or shall consent to the filing of a bankruptcy proceeding against it, or shall file a petition or answer or consent seeking organization under the laws of the Federal Bankruptcy Code or any similar applicable U.S. federal, state or foreign law, or shall consent to the filing of any such petition, or shall consent to the appointment of a receiver or liquidator or trustee or assignee (or other similar official) in bankruptcy or insolvency of it or its Property, or shall make an assignment for the benefit of creditors, or shall admit in writing its inability to pay its debts generally as they come due; or (7) if a decree or order by a court having jurisdiction in the premises shall have been entered adjudging the Company a bankrupt or insolvent, or approving as properly filed a petition seeking the reorganization of the Company under the Federal Bankruptcy Code or any other similar applicable U.S. federal, state or foreign law, and such decree or order shall have continued undischarged or unstayed for a period of 90 calendar days; or a decree or order of a court having jurisdiction in the premises for the appointment of a receiver or liquidator or trustee or assignee (or other similar official) in bankruptcy or insolvency of the Company or of all or substantially all of its 20 Property, or for the winding up or liquidation of its affairs, shall have been entered, and such decree or order shall have continued undischarged and unstayed for a period of 90 calendar days; or (8) if a warranty, representation, or other statement made by or on behalf of the Company contained herein or any certificate or other agreement furnished in compliance herewith is false in any material respect when made and such falsity continues for a period of 30 calendar days (or such longer period as the Majority Holders may in their absolute discretion permit) next following the service by one or more of the Holders on the Company of notice requiring the same to be remedied; or (9) if there is any final judgment or judgments for the payment of money exceeding in the aggregate U.S. $2,000,000 outstanding against the Company which has been outstanding for more than 60 calendar days from the date of its entry and shall not have otherwise been discharged in full or stayed by appeal, bond or otherwise. (B) Acceleration of Maturity; Rescission and Annulment If an Event of Default (other than an Event of Default specified in Condition 11(A)(6) or 11(A)(7)) occurs and is continuing, then and in every such case the Majority Holders may declare the principal amount of all the Notes and accrued and unpaid interest thereon to be due and payable immediately, by a notice in writing to the Company, and upon any such declaration such principal amount and accrued and unpaid interest shall become immediately due and payable. If an Event of Default specified in Condition 11(A)(6) or Condition 11(A)(7) occurs and is continuing, then the principal amount of all the Notes and all accrued and unpaid interest thereon shall ipso facto become and be immediately due and payable without any declaration or other act on the part of any Noteholder. At any time after a declaration of acceleration has been made and before a judgment or decree for payment of the money due has been obtained by the Majority Holders as hereinafter in this Condition provided, the Majority Holders, with written notice to the Company, may rescind and annul such declaration and its consequences if (1) the Company has paid or deposited in a manner satisfactory to such Holders a sum sufficient to pay (i) all overdue interest on all Outstanding Notes, (ii) all unpaid principal of any Outstanding Notes which has become due otherwise than by such declaration of acceleration, and interest on such unpaid principal at the rate prescribed therefor in the Notes, (iii) to the extent that payment of such interest is legally enforceable, interest on overdue interest at the rate prescribed therefor in the Notes, and (iv) all reasonable sums paid or advanced by the such Holders hereunder; and (2) all Events of Default, other than the non-payment of amounts of principal of or interest on Notes which have become due solely by such declaration of acceleration, have been cured or waived as provided in Condition 11(K) No such rescission shall affect any subsequent default or impair any right consequent thereon. (C) Collection of Indebtedness and Suits for Enforcement by the Majority Holders The Company covenants that if 21 (1) default is made in the payment of any installment of interest on any Note when such interest becomes due and payable and such default continues for a period of five (5) Business Days, or (2) default is made in the payment of the principal of any Note at the Maturity thereof and such default continues for a period of five (5) Business Days, the Company will, upon demand of the Majority Holders, pay to the Holders of the Notes, the whole amount then due and payable on the Notes for principal and interest, and interest on any overdue principal and, to the extent that payment of such interest shall be legally enforceable, upon any overdue installment of interest, at the rate prescribed therefor in the Notes, and, in addition thereto, such further amount as shall be sufficient to cover the costs and expenses of collection, including the reasonable compensation, expenses, disbursements and advances of the Holders, their agents and counsel. If the Company fails to pay such amounts forthwith upon such demand, the Majority Holders in its their name, may institute a judicial proceeding for the collection of the sums so due and unpaid, may prosecute such proceeding to judgment or final decree and may enforce the same against the Company or any other obligor upon the Notes and collect the moneys adjudged or decreed to be payable in the manner provided by law out of the Property of the Company or any other obligor upon the Notes, wherever situated. If an Event of Default occurs and is continuing, the Majority Holders may in their discretion proceed to protect and enforce their rights and the rights of the other Noteholders by such appropriate judicial proceedings as such Holders shall deem most effectual to protect and enforce any such rights, whether for the specific enforcement of any covenant or agreement in these terms and conditions or to enforce any other proper remedy. (D) Majority Holders May File Proofs of Claim In case of the pendency of any receivership, insolvency, liquidation, bankruptcy, reorganization, arrangement, adjustment, composition or other judicial proceeding relative to the Company or any other obligor upon the Notes or the Property of the Company or of such other obligor or their creditors, the Majority Holders (irrespective of whether the principal of the Notes shall then be due and payable as therein expressed or by declaration or otherwise and irrespective of whether the Majority Holders shall have made any demand on the Company for the payment of overdue principal or interest) shall be entitled and empowered, by intervention in such proceeding or otherwise, (1) to file and prove a claim for the whole amount of principal and interest owing and unpaid in respect of the Notes and to file such other papers or documents as may be necessary or advisable in order to have the claims of the Holders (including any claim for the reasonable compensation, expenses, disbursements and advances of such Holders , their agents and counsel) and of the other Noteholders allowed in such judicial proceeding, and (2) to collect and receive any moneys or other Property payable or deliverable on any such claims and to distribute the same; and any custodian, receiver, assignee, trustee, liquidator, sequestrator or similar official in any such judicial proceeding is hereby authorized by each Noteholder to make such payments to the Majority Holders due them for the reasonable compensation, expenses, disbursements and advances of such Holders, their agents and counsel and to pay to the Paying Agent (where one is appointed) all such other sums due under the Notes. In the absence of such appointment, any such sums shall be paid for the rateable benefit of all the Noteholders. Nothing herein contained shall be deemed to authorize the Majority Holders, except as permitted by law and these Terms and Conditions, to authorize or consent to or accept or adopt on behalf of any Noteholder any plan of reorganization, arrangement, adjustment or composition affecting the Notes or the rights of any Noteholder thereof, or to authorize the such Holder to vote in respect of the claim of any Noteholder in any such proceeding, except to the extent permitted by law. 22 (E) Majority Holders May Enforce Claims Without Possession of Notes All rights of action and claims under these Terms and Conditions may be prosecuted and enforced by the Majority Holders without the possession of any of the Notes or the production thereof in any proceeding relating thereto, and any such proceeding instituted by the Majority Holders shall be brought in their own name and any recovery of judgment shall, after provision for the payment of the reasonable compensation, expenses, disbursements and advances of the Majority Holders, their agents and counsel, be paid to the Paying Agent (where one is appointed) for the rateable benefit of all the Noteholders in respect of which such judgment has been recovered. (F) Application of Money Collected Any money collected by the Majority Holder pursuant to this Condition shall be applied in the following order in case of the distribution of such money on account of principal or interest, upon presentation of the Notes and the notation thereon of the payment if only partially paid and upon surrender thereof if fully paid: FIRST: To the payment of the amounts then due and unpaid for principal of and interest on the Notes in respect of which or for the benefit of which such money has been collected, ratably, without preference or priority of any kind, according to the amounts due and payable on such Notes for principal and interest, respectively; and SECOND: The balance, if any, to the Person or Persons entitled thereto. (G) Unconditional Right of Holders to Receive Principal and Interest Notwithstanding any other provision in these Terms and Conditions, the Holder of any Note or of any Coupon, as the case may be, shall have the right, which is absolute and unconditional, to receive payment, as provided herein and in such Note of the principal of and interest on, such Note on the respective Stated Maturity or expressed in such Note (or, in the case of redemption, on the Redemption Date) or Coupon and to institute suit for the enforcement of any such payment, and such rights shall not be impaired without the consent of such Holder; provided, that all monies paid by the Company to the Paying Agent for the payment of principal or interest on any Note which remain unclaimed at the end of two (2) years after the Stated Maturity or Redemption Date of such Note will be repaid to the Company and the Holder of any Note or Coupon shall thereafter have only the rights of a creditor of the Company or such rights as may be otherwise provided by applicable law. (H) Restoration of Rights and Remedies If the Majority Holders or any Noteholder has instituted any proceeding to enforce any right or remedy under these Terms and Conditions and such proceeding has been discontinued or abandoned for any reason, or has been determined adversely to the Majority Holders or to such Noteholder, then and in every such case, subject to any determination in such proceeding, the Company, the Majority Holders and the Noteholders shall be restored severally and respectively to their former positions hereunder and thereafter all rights and remedies of the Majority Holders and the Noteholders shall continue as though no such proceeding had been instituted. (I) Rights and Remedies Cumulative Except as otherwise provided with respect to the replacement or payment of mutilated, destroyed, lost or stolen Notes as provided herein, no right or remedy herein conferred upon or reserved to the Noteholders is intended to be exclusive of any other right or remedy, and every right and remedy shall, to the extent permitted by law, be cumulative and in addition to every other right and remedy given hereunder or now or hereafter existing at law or in equity or otherwise. The assertion or employment of any right or remedy hereunder, or otherwise, shall not prevent the concurrent assertion or employment of any other appropriate right or remedy. 23 (J) Delay or Omission Not Waiver No delay or omission of the Majority Holders or Holder of any Note to exercise any right or remedy accruing upon any Event of Default shall impair any such right or remedy or constitute a waiver of any such Event of Default or an acquiescence therein. Every right and remedy given by this Article or by law to the Noteholders may be exercised from time to time, and as often as may be deemed expedient, by the Noteholders. (K) Waiver of Past Defaults Subject to Condition 11(B), the Majority Holders may on behalf of the Holders of all the Notes waive any past default hereunder and its consequences, except a default (1) in respect of the payment of the principal of or interest on any Note, or (2) in respect of a covenant or provision hereof which under Condition 17 cannot be modified or amended without the consent of the Holder of each Outstanding Note affected. Upon any such waiver, such default shall cease to exist, and any Event of Default arising therefrom shall be deemed to have been cured, for every purpose of these Terms and Conditions; but no such waiver shall extend to any subsequent or other default or Event of Default or impair any right consequent thereon. (L) Waiver of Stay or Extension Laws The Company covenants (to the extent that it may lawfully do so) that it will not at any time insist upon, or plead, or in any manner whatsoever claim or take the benefit or advantage of, any stay or extension law wherever enacted, now or at any time hereafter in force, which may affect the covenants or the performance of these Terms and Conditions; and the Company (to the extent that it may lawfully do so) hereby expressly waives all benefit or advantage of any such law. (M) Requirements Regarding Agents (1) At any time after an Event of Default has occurred and is continuing the Majority Holders shall notify in writing the Company and the Paying Agent, and may by notice in writing to the Company and the Paying Agent: (i) require the Paying Agent, until notified to the contrary by Majority Holders, to hold all Notes and Coupons and all moneys, documents and records held by it in respect of Notes and Coupons to the order of the Holders; or (ii) require the Paying Agent to deliver to the Holders on a pro rata basis all funds held by it for the benefit of the Holders, and to deliver the documents and records held by it in respect of Notes and Coupons to the Holders, provided that such notice shall be deemed not to apply to any documents or records which the relevant Paying Agent is obliged to release by any law or regulation; and (iii) require the Company to make all subsequent payments in respect of the Notes and Coupons to or to the order of the Holders and not to the Paying Agent. (2) The Majority Holders shall notify the Paying Agent immediately upon the cure or waiver of an Event of Default. Upon receipt of such notice, the provisions of this Condition 11(M) shall no longer apply. (3) Prior to taking any action under this Agreement at the direction of any Person with respect to the Notes, the Paying Agent shall be entitled to receive (and shall receive) indemnity or security satisfactory to it. 12. LIABILITY SOLELY CORPORATE 24 No recourse shall be had for the payment of the principal of or interest on any Notes or any part thereof, or for any claim based thereon or otherwise in respect thereof, or of the indebtedness represented thereby, or upon any obligation, covenant or agreement in these Terms and Conditions, against any incorporator, or against any stockholder, officer or director, as such, past, present or future, of the Company, or of any predecessor or successor Person, either directly or through the Company or any such predecessor or successor Person, whether by virtue of any constitution, statute or rule of law, or by the enforcement of any assessment or penalty or otherwise, it being expressly agreed and understood that the Notes and these Terms and Conditions which are a part thereof are solely corporate obligations, and that no personal liability whatsoever shall attach to, or be insured by, any such incorporator, stockholder, officer or director, as such, past, present or future, of the Company or of any predecessor or successor Person, either directly or through the Company or any such predecessor or successor Person, because of the indebtedness hereby authorized or under or by reason of any of the obligations, covenants, promises or agreements contained in the Notes or the these Terms and Conditions which constitute a part thereof or to be implied herefrom; and that any such personal liability is hereby expressly waived and released as a condition of, and as part of the consideration for the exchange transaction pursuant to which the Notes were issued; provided, however, that nothing herein contained shall be taken to prevent recourse to and the enforcement of the liability, if any, of any stockholder or subscriber to capital stock of the Company upon or in respect of shares of capital stock not fully paid up. 13. DEFEASANCE AND COVENANT DEFEASANCE (A) Company's Option to Effect Defeasance or Covenant Defeasance The Company may, at its option by Board Resolution, at any time, with respect to the Notes, elect to have either Condition 13(B) or Section 13(C) applied to all Outstanding Notes upon compliance with the conditions set forth below in this Condition, The Company shall promptly give notice of such election to the Holders. (B) Legal Defeasance and Discharge Upon the Company's exercise under Condition 13(A) of the option applicable to this Condition 13(B), the Company shall be deemed to have been discharged from its obligations with respect to all Outstanding Notes on the date the conditions set forth in Condition 13(D) are satisfied (hereinafter, "legal defeasance"). For this purpose, such legal defeasance means that the Company shall be deemed to have paid and discharged the entire indebtedness represented by the Outstanding Notes, which shall thereafter be deemed to be "Outstanding" only for the purposes of Condition 13(E) and the other Conditions of these Terms and Conditions referred to in (1) and (2) below, and to have satisfied all its obligations under such Notes, including the obligation to pay interest on the Notes, and these Terms and Conditions insofar as such Notes are concerned (and the Holders, at the expense of the Company, shall execute proper instruments acknowledging the same), except for the following which shall survive until otherwise terminated or discharged hereunder: (1) the rights of Holders of Outstanding Notes to receive, solely from the trust fund described in Condition 13(D) and as more fully set forth in such Condition, payments in respect of the principal of and interest on such Notes when such payments are due, and (B) the Company's obligations with respect to the Notes under Conditions 1(D), 1(E), 1(H), 3(D) or 3(L). Subject to compliance with this Condition, the Company may exercise its option under this Condition 13(B) notwithstanding the prior exercise of its option under Condition 13(C) with respect to the Notes. 25 (C) Covenant Defeasance Upon the Company's exercise under Section Condition 13(A) of the option applicable to this Condition 13(C), the Company shall be released from its obligations under any covenant contained in Condition 3 (except Condition 3(D) with respect to the Outstanding Notes on and after the date the conditions set forth in Section 13(D)) are satisfied (hereinafter, "covenant defeasance"), and the Notes shall thereafter be deemed not to be "Outstanding" for the purposes of any request, demand, authorization, direction, declaration, notice, consent, waiver or Act of Noteholders (and the consequences of any thereof) in connection with such covenants, but shall continue to be deemed "Outstanding" for all other purposes hereunder. For this purpose, such covenant defeasance means that, with respect to the Outstanding Notes, the Company may omit to comply with and shall have no liability in respect of any term, condition or limitation set forth in any such covenant, whether directly or indirectly, by reason of any reference elsewhere herein to any such covenant or by reason of any reference in any such covenant to any other provision herein or in any other document and such omission to comply shall not constitute a Default or an Event of Default under Condition 11(A)(4) , but, except as specified above, the remainder of these and the Notes shall be unaffected thereby. (D) Conditions to Legal Defeasance or Covenant Defeasance The following shall be the conditions to application of either Condition 13(B) or Section 13 (C) to the Outstanding Notes: (1) The Company shall irrevocably have deposited or caused to be deposited with the Paying Agent as trust funds in trust for the purpose of making the following payments, specifically pledged as security for, and dedicated solely to, the benefit of the Holders of such Notes, (A) money in an amount, or (B) U.S. Government Obligations which through the scheduled payment of principal and interest in respect thereof in accordance with their terms will provide, not later than one day before the due date of any payment, money in an amount, or (C) a combination thereof, sufficient, in the opinion of a nationally recognized firm of independent public accountants expressed in a written certification thereof delivered to the Paying Agent, to pay and discharge, and which shall be applied by the Paying Agent to pay and discharge, the principal of and interest on the Outstanding Notes on the Stated Maturity (or Redemption Date, if applicable) of such principal or installment of interest; provided that the Paying Agent shall have been irrevocably instructed to apply such money or the proceeds of such U.S. Government Obligations to said payments with respect to the Notes; and provided further that, upon the effectiveness of this Condition 13(D), the money or U.S. Government Obligations deposited shall not be subject to the rights of the Noteholders pursuant to the provisions of this Condition. Before or after such a deposit, the Company may give to the Paying Agent a notice of its election to redeem all of the Outstanding Notes at a future date in accordance with Condition 7, which notice shall be irrevocable. Such irrevocable redemption notice, if given, shall be given effect in applying the foregoing. (2) No Default or Event of Default with respect to the Notes shall have occurred and be continuing on the date of such deposit or, insofar as paragraphs (6) and (7) of Condition 11(A) hereof are concerned, at any time during the period ending on the 91st day after the date of such deposit (it being understood that this condition shall not be deemed satisfied until the expiration of such period). (3) No event or condition shall exist that pursuant to the provisions of Condition 13(B) or 13(C) would prevent the Company from making payments of the principal of or interest on the Notes on the date of such deposit or at any time during the period ending on the 91st day after the date of such deposit (it being understood that this condition shall not be deemed satisfied until the expiration of such period). (4) Such legal defeasance or covenant defeasance shall not result in a breach or violation of, or constitute a default under any material agreement or material instrument to which the Company is a party or by which it is bound. (5) In the case of an election under Condition 13(B), the Company shall have delivered to the Paying Agent an Opinion of Counsel stating that the Holders of the Outstanding Notes will not recognize income, gain or loss for U.S. federal income tax purposes as a result of such defeasance and will be subject to federal income 26 tax on the same amounts, in the same manner and at the same times as would have been the case if such defeasance had not occurred. (f) The Company shall have delivered to the Paying Agent an Officers' Certificate and an Opinion of Counsel, each stating that all conditions precedent provided for relating to either the legal defeasance under Section 13(B) or the covenant defeasance under Section 13(C) (as the case may be) have been complied with. (E) Deposited Money and U.S. Government Obligations to Be Held in Trust; Other Miscellaneous Provisions Subject to the provisions of the disposition of unclaimed moneys contained herein, all money and U.S. Government Obligations (including the proceeds thereof) deposited with the Paying Agent pursuant to Condition 13(D) in respect of the Outstanding Notes shall be held in trust and applied by the Paying Agent, in accordance with the provisions of these terms and conditions, to the payment, either directly or through the Paying Agent (including the Company acting as its own Paying Agent) as the to the Holders of the Notes of all sums due and to become due thereon in respect of principal and interest, but such money and U.S. Government Obligations need not be segregated from other funds except to the extent required by law. (F) Reinstatement If the Paying Agent is unable to apply any money or U.S. Government Obligations in accordance with Condition 13(E) by reason of any order or judgment of any court or governmental authority enjoining, restraining or otherwise prohibiting such application, then the Company's obligations under these Terms and Condition shall be revived and reinstated as though no deposit had occurred pursuant to Section Condition 13(B) or 13(C), as the case may be, until such time as the Paying Agent is permitted to apply all such money or U.S. Government Obligations in accordance with Condition 13(E); provided, however, that no action taken in good faith by the Company after a deposit of money or U.S. Government Obligations or both pursuant to Condition 13(E) and prior to the revival and reinstatement of obligations under these Terms and Conditions pursuant to this Condition 13(F) shall constitute the basis for the assertion of an Event of Default pursuant to Condition 11; and provided, further, that if the Company makes any payment of principal of or interest on any Note following the reinstatement of its obligations, the Company shall be subrogated to the rights of the Holders of such Notes to receive such payment from the money or U.S. Government Obligations held the Paying Agent. 14. REPLACEMENT OF NOTES AND COUPONS As provided in Conditions 1(H), should any Note or Coupon be lost, stolen, mutilated, defaced or destroyed, it may be replaced at the specified office of the Paying Agent upon payment by the claimant of the expenses incurred in connection with the replacement and on such terms as to evidence indemnity and security as the Company may reasonably require. Mutilated or defaced Notes or Coupons must be surrendered before replacements will be issued. 15. NOTICES (A) Notices to all the Noteholders will be valid if published in one Authorized Newspaper (unless another form of notice is permitted by these Terms and Conditions) with a written copy provided to RP&C International, Limited. Any notice shall be deemed to have been given on the date of publication or, if so published more than once, on the date of the first publication. If publication as provided above is not practicable, notice will be given in such other manner, and shall be deemed to have been given on such date, as the Company may approve. (B) Couponholders will be deemed for all purposes to have notice of the contents of any notice given to the Noteholders in accordance with this Condition. (C) Any request, demand, authorization, direction, declaration, notice, consent, waiver, Extraordinary Resolution or Act of Noteholders or other document provided or pertained by these Terms and Conditions (herein collectively called "Notice") to be made upon, given or furnished to, or filed with the Company by any Noteholder 27 shall be sufficient for every purpose hereunder (unless otherwise herein expressly provided) if made, given, furnished or filed in writing to or with the Company addressed to it at the address of its principal office which shall initially be: Harken Energy Corporation, 580 WestLake Park Boulevard, Suite 600, Houston, Texas 77079, Attention: Mikel D. Faulkner, Chairman of the Board and Chief Executive Officer Tel. (281) 504-4000, Fax, (281) 504-4100; with a copy to Wayne Hennecke, Vice President, Finance: Tel. (281) 504-4040, Fax. (281) 504-4110. 16. ACTS OF NOTEHOLDERS, MEETINGS OF NOTEHOLDERS (A) Any Extraordinary Resolution, request, demand, authorization, direction, declaration, notice, consent, waiver or other action provided by these Terms and Conditions to be given or taken by Noteholders may be embodied in and evidenced by one or more instruments of substantially similar tenor signed by such Noteholders in person or by agents duly appointed in writing; and, except as herein otherwise expressly provided, such action shall become effective when such instrument or instruments are delivered to the Company. Such instrument or instruments (and the action embodied therein and evidenced thereby) are herein sometimes referred to as the "Act" of the Noteholders signing such instrument or instruments. Proof of execution of any such instrument or of a writing appointing any such agent shall be sufficient for any purpose of these Terms and Conditions and conclusive in favor of the Company, if made in the manner provided in this Condition (B) The fact and date of the execution by any Person of any such instrument or writing may be proved by the affidavit of a witness of such execution or by a certificate of a notary public or other officer authorized by law to take acknowledgments of deeds, certifying that the individual signing such instrument or writing acknowledged to such witness, notary public or other such officer the execution thereof. Where such execution is by a signer acting in a capacity other than such signer's individual capacity, such certificate or affidavit shall also constitute sufficient proof of authority. The fact and date of the execution of any such instrument or writing, or the authority of the Person executing the same, may also be proved in any other manner which the Company deems sufficient. (C) Any Extraordinary Resolution, request, demand, authorization, direction, notice, consent, waiver or other Act of the Holders of any Note shall bind every future Holder of the same Note and the Holder of every Note issued upon conversion or redemption thereof or in exchange therefor or in lieu thereof in respect of anything done, omitted or suffered to be done the Company or any Paying or Conversion Agent in reliance thereon, whether or not notation of such action is made upon such Note. (D) The Noteholders may convene a meeting at any time and from time to time to consider any matter affecting the Holders of the Notes, including the modification of the Terms and Conditions and to make, give or take any request, demand, authorization, direction, notice, consent, waiver or other action provided by this these Terms and Conditions to be made, given or taken by Holders of the Notes. (E) Notice of every meeting of the Holders of the Notes, setting forth the time and the place of such meeting and in general terms the action proposed to be taken at such meeting, shall be given in the manner provided in Condition 15, not less than 21 nor more than 180 days prior to the date fixed for the meeting. (F) To be entitled to vote at any meeting of Holders of the Notes, a Person shall be (i) a Holder of one or more Outstanding Notes, or (ii) a Person appointed by an instrument in writing as proxy for a Holder or Holders of one or more Outstanding Notes by such Holder or Holders. The only Persons who shall be entitled to be present or to speak at any meeting of Noteholders shall be the Persons entitled to vote at such meeting and their counsel, any representatives of the Company, and their respective counsel. (G) The quorum at any meeting for passing any Extraordinary Resolution will be one or more Persons present holding or representing 50% or more in principal amount of the Outstanding Notes as of the date of the meeting, or at any adjourned such meeting one or more Persons present whatever the principal amount of the Notes held or represented by such Person and the vote required for passing an Extraordinary Resolution at such meeting will be not less than a majority of the principal amount of the Outstanding Notes and represented at such meeting or adjournment thereof; provided, that at any meeting, the business of which includes the modification of the provisions of the Terms and Conditions and the provisions of these Terms and Conditions, the necessary quorum and vote required for passing an Extraordinary Resolution will be one or more Persons present holding or representing not 28 less than a majority, or at any adjourned such meeting not less than one-third, of the principal amount of the Outstanding Notes. An Extraordinary Resolution passed at any meeting of the Holders of the Notes will be binding on all Holders of the Notes, whether or not such Noteholders are present at the meeting, and on the Holders of all Coupons. 17. AMENDMENTS TO TERMS AND CONDITIONS (A) Amendments with Consent of Noteholders With the consent of the Holders of a majority in principal amount of the Notes Outstanding, the Company, when authorized by a Board Resolution, may amend these Terms and Conditions for the purpose of adding any provisions to or changing in any manner or eliminating any of the provisions hereof or of modifying in any manner the rights of the Noteholders hereunder; provided, however, that no such amendment shall, without the consent of the Holder of each Outstanding Note affected thereby: (1) change the Stated Maturity of the principal of, or any installment of principal of or interest on, any Note, or reduce the principal amount thereof or the rate of interest thereon, or change the coin or currency in which any Note or the interest thereon is payable, or impair the right to institute suit for the enforcement of any such payment after the Stated Maturity thereof (or, in the case of redemption, on or after the Redemption Date), or (2) reduce the percentage in principal amount of the Outstanding Notes, the consent of whose Holders is required for any amendment of these terms and conditions, or the consent of whose Holders is required for any waiver of compliance with certain provisions of these Terms and Conditions or certain defaults hereunder and their consequences provided for herein, or (3) modify any of the provisions of Condition 11(K), except to increase any such percentage or to provide that certain other provisions of these Terms and Conditions be modified or waived without the consent of the Holder of each Outstanding Note affected thereby, (4) modify any of the provisions of these Terms and Conditions relating to the subordination of the Notes in a manner adverse to the Holders thereof, or (5) modify any of the provisions of these Terms and Conditions relating to Conversion Rights or redemption rights. It shall not be necessary for any Act of Noteholders under this Section to approve the particular form of any proposed amendment to the Terms and Conditions, but it shall be sufficient if such Act shall approve the substance thereof. (B) Effect of Amendments Upon the entering into of an amendment of these Terms and Conditions pursuant to the terms hereof, these Terms and Conditions shall be modified in accordance therewith, and amendment shall form a part of these Terms and Conditions for all purposes; and every Holder of Notes theretofore or thereafter delivered hereunder shall be bound thereby. 18. GOVERNING LAW The Notes, including these Terms and Conditions, the Coupons, and the Agency Agreement are governed by, and will be construed in accordance with, the laws of the State of New York. 19. DEFINITIONS OF CERTAIN TERMS "Act," when used with respect to any Noteholder, has the meaning specified in Condition 16. 29 "Affiliate" of any specified Person means any other Person directly or indirectly controlling or controlled by or under direct or indirect common control with such specified Person and the terms "controlling" and "controlled" have meanings correlative to the foregoing. "Authenticating Agent" means The Bank of New York "Authorized Denomination" means U.S. $5,000. "Authorized Newspaper" means The Financial Times (European Edition) of London, England. If such newspaper shall cease to be published, the Company shall substitute for it another newspaper in Europe, customarily published at least once a day for at least five (5) days in each calendar week, of general circulation. If, because of temporary suspension of publication or general circulation of such newspaper or for any other reason, it is impossible or, in the opinion of the Company, impracticable to make any publication of any notice required by these Conditions in the manner herein provided, such publication or other notice in lieu thereof which is made by the Company in the exercise of its reasonable discretion shall constitute a sufficient publication of such notice. "Board of Directors" means either the board of directors of the Company or any duly authorized committee of that board. "Business Day" means each Monday, Tuesday, Wednesday, Thursday and Friday which is a day on which banking institutions in the City of New York, New York, and London, England are not authorized or obliged by law, regulation or executive order to close. "Capitalized Lease Obligation" means the amount of the liability under any capital lease that, in accordance with GAAP, is required to be capitalized and reflected as a liability on the balance sheet of the relevant Person. "Clearstream" means Clearstream, societe anonyme. "Dated Date" means June 19, 2002. "Commission" means the Securities and Exchange Commission, as from time to time constituted or, if at any time after the Dated Date such Commission is not existing, then the body performing similar duties at such time. "Common Depository" means the common depository appointed by Morgan Guaranty Trust Company of New York, Brussels office, as operator of the Euroclear System, and Clearstream, societe anonyme, which shall initially be The Bank of New York, including the nominees and successors of any Common Depository. "Common Stock" means, with respect to any Person, any and all shares, interests, participation and other equivalents (however designated, whether voting or non-voting) of such Person's common stock, whether now outstanding or issued after the Dated Date, and includes, without limitation, all series and classes of such common stock. "Company" means Harken Energy Corporation, until a successor Person shall have become such pursuant to the applicable provisions of these Terms and Conditions, and thereafter "Company" shall mean such successor Person. "Conversion Agent" means any Person (including the Company acting as Conversion Agent) authorized by the Company to effect conversions of the Notes on behalf of the Company. Pursuant to the terms hereof, the Company has initially appointed The Bank of New York to act as the Conversion Agent. "Conversion Date" means the Business Day during the Conversion Period on which the Conversion Right is exercised by delivery to the Conversion Agent of the Note surrendered for conversion and the completed notice of a Noteholder's intention to exercise its Conversion Right (as set forth in Exhibit A hereto) with respect to any Note. 30 "Conversion Period" means, with respect to any Note, the period which begins after the earlier to occur of (I) the close of the effective date of a Registration Statement filed by the Company with the Commission with respect to the Shares or (II) the date such Shares may be sold pursuant to the exemption from registration under the Securities Act provided by Rule 144 or other exemption from registration under the Securities Act, and ends upon the earliest to occur of (A) the second Business Day prior to the later of March 31, 2007, or the date on which all principal and interest on the Note is repaid in full, (B) if such Notes shall have been called for redemption pursuant to Condition 7 of these Terms and Conditions, the close of the second Business Day prior to the Redemption Date, or (C) the effective date of a Mandatory Conversion. "Conversion Price" means, in respect of a Conversion Right, initially U.S. $0.50. "Conversion Right" means the right of a Holder of any Note to convert such Note into Conversion Shares. "Conversion Shares" means the Shares into which the Notes are convertible. "Corporation" includes corporations, limited liability companies, limited and general partnerships, associations, joint-stock companies and business trusts. "Coupon" means bearer interest Coupons relating to the definitive Notes in bearer from and any replacement Coupons issued therefore "Couponholder" means a Person who is the bearer of any Coupon. "Dated Date" means June 19, 2002. "Default Rate" means, with respect to the Notes, ten percent (10%) per annum. "Effective Date" means the first Business Day following the date upon which the Commission declares to be effective a registration statement filed by the Company pursuant to the Securities Act relating to the Conversion Shares. "Euroclear" means the Euroclear System. "Extraordinary Resolution" means a resolution passed at a meeting of the Noteholders duly convened and held in these Terms and Conditions. "Federal Bankruptcy Code" means the Bankruptcy Act or Title 11 of the United States Code, as amended from time to time. "Freely Tradable" means, with respect to the Notes and the Conversion Shares and redemption Shares, that under the Securities Act the holders thereof may then offer and sell any amount of such outstanding securities to the public in the United States without restrictions in transactions that are not brokers' transactions (as defined in the Securities Act) either (i) pursuant to an effective registration statement then in effect or (ii) pursuant to Rule 144(k). For purposes of determining whether such securities are Freely Tradable, it shall be assumed that no person that directly, or indirectly through one or more intermediaries, controls, or is controlled by, or is under common control with, the Company has ever held such securities from and after their issuance. "Generally Accepted Accounting Principles" or "GAAP" means generally accepted accounting principles in the United States, as applied from time to time by the Company and its Subsidiaries in the preparation of its financial statements. "Guaranty" means all obligations of any Person (other than endorsements in the ordinary course of business of negotiable instruments for deposit or collection) of such Person guaranteeing or in effect guaranteeing any Indebtedness, dividend or other obligation, of any other Person (the "primary obligor") in any manner, whether directly or indirectly, including without limitation all obligations incurred through an agreement, contingent or 31 otherwise, by such Person: (i) to purchase such Indebtedness or obligation or any Property or assets constituting security therefor, or (ii) to advance or supply funds (1) for the purchase or payment of such Indebtedness or obligation, or (2) to enable the recipient of such funds to maintain certain financial conditions (e.g. agreed amount of working capital) under loan or similar documents, or (iii) to lease Property or to purchase securities or other Property or services primarily for the purpose of assuring the owner of such Indebtedness or obligation of the ability of the primary obligor to make payment of the Indebtedness or obligation, or (iv) otherwise to assure the owner of the Indebtedness or obligation of the primary obligor against loss in respect thereof. For the purposes of all computations made under these Terms and Conditions, a Guaranty in respect of any Indebtedness shall be deemed to be Indebtedness equal to the principal amount and accrued interest of such Indebtedness which has been guaranteed, and a Guaranty in respect of any other obligation or liability or any dividend shall be deemed to be Indebtedness equal to the maximum aggregate amount of such obligation, liability or dividend. "Holder" means a Person who is a bearer of a Note or Coupon, as the case may be. "Indebtedness" of any Person means and includes all present and future obligations of such Person, which shall include all obligations (i) which in accordance with generally accepted accounting principles in the United States shall be classified upon a balance sheet of such Person as liabilities of such Person, (ii) for borrowed money, (iii) which have been incurred in connection with the acquisition of Property (including, without limitation, all obligations of such Person evidenced by any debenture, bond, note, commercial paper or other similar security, but excluding, in any case, obligations arising from the endorsement in the ordinary course of business of negotiable instruments for deposit or collection), (iv) secured by any Lien existing on Property owned by such Person, even though such Person has not assumed or become liable for the payment of such obligations, (v) created or arising under any conditional sale or other title retention agreement with respect to Property acquired by such Person, notwithstanding the fact that the rights and remedies of the seller, lender or lessor under such agreement in the event of default are limited to repossession or sale of such Property, (vi) which are Capitalized Lease Obligations, (vii) for all Guaranties, whether or not reflected in the balance sheet of such Person and (viii) which are all reimbursement and other payment obligations (whether contingent, matured or otherwise) of such Person in respect of any acceptance or documentary credit. Notwithstanding the foregoing, Indebtedness shall not include (i) Indebtedness incidental to the operation of the business of the Person in the ordinary course and in the aggregate not material to the business and operations of the Person, (ii) Indebtedness for which the Company or any of its Subsidiaries are the sole obligors and obligees, and (iii) Indebtedness represented by purchase, rental or lease obligations not to exceed $1,000,000 in any period of 12 months for any Person and its Subsidiaries. "Interest Payment Date" means the Stated Maturity of an installment of interest on the Notes. "Lien" means any mortgage, charge, pledge, lien, security interest or encumbrance of any kind whatsoever, including any interest in Property securing an obligation owed to, or a claim by, a Person other than the owner of the Property, whether such interest is based on the common law, statute or contract, and including but not limited to the security interest lien arising from a mortgage, encumbrance, pledge, conditional sale or trust receipt or a lease, consignment or bailment for security purposes. The term "Lien" shall include reservations, exceptions, encroachments, easements, rights-of-way, covenants, conditions, restrictions, leases and other title exceptions and encumbrances affecting Property. For the purposes of these Terms and Conditions, the Company or its Subsidiary shall be deemed to be the owner of any Property which it has acquired or holds subject to a conditional sale agreement, financing lease or other arrangement pursuant to which title to the Property has been retained by or vested in some other Person for security purposes. "Majority Holders" means the Holders of a majority of the principal amount of Notes Outstanding. "Mandatory Conversion" means conversion of the Notes at the option of the Company pursuant to Condition 6D. "Market Price" means the daily closing sale price of the Shares for a Stock Exchange Business Day on a Stock Exchange. 32 "Maturity," when used with respect to any Note, means the date on which the principal of such Note becomes due and payable as therein or herein provided, whether at the Stated Maturity or the Redemption Date and whether by declaration of acceleration, call for redemption or otherwise. "Noteholder" or "Holder" means a Person who is the bearer of any Note. "Outstanding," when used with respect to Notes, means, as of the date of determination, all Notes theretofore issued, except: (1) Notes heretofore cancelled by the Paying and Conversion Agent or delivered to the Paying and Conversion Agent for cancellation; (2) Notes, or portions thereof, for whose payment or redemption money in the necessary amount has been theretofore deposited any Paying Agent (other than the Company) in trust or set aside and segregated in trust by the Company (if the Company shall act as its own Paying Agent) for the Holders of such Notes; provided that, if such Notes are to be redeemed, notice of such redemption has been duly given or provision therefor satisfactory to the a Paying Agent has been made; (3) Notes, except to the extent provided in Conditions 13 (B) and 13(C), with respect to which the Company has effected defeasance and/or covenant defeasance as provided in Condition 13; and (4) Notes which have been paid pursuant to or in exchange for or in lieu of which other Notes have been issued, however, that in determining whether the Holders of the requisite principal amount of Outstanding Notes have taken any Act or given or made any Extraordinary Resolution, Notes owned by the Company or any other obligor upon the Notes or any Affiliate of the Company (other than Persons whose Affiliate relationship arises solely from ownership of Conversion Shares) or such other obligor shall be disregarded and deemed not to be Outstanding. "Paying Agent" means any Person (including the Company acting as Paying Agent) authorized by the Company to pay the principal of or interest on any Notes on behalf of the Company. Pursuant to the terms and conditions hereof, the Company has initially appointed The Bank of New York as the Paying Agent "Person" means any individual, corporation, limited liability company, limited or general partnership, joint venture, association, joint-stock company, trust, unincorporated organization or government or any agency or political subdivision thereof. "Preferred Stock" means, with respect to any Person, any and all shares, interests, participation or other equivalents (however designated) of such Person's preferred or preference stock whether now outstanding or issued on or after the Dated Date, and includes, without limitation, all classes and series of preferred or preference stock. "Presentation Date" means the date on which a Note is presented by a Noteholder for payment of principal or a Coupon is presented by the Couponholder for payment of interest, as the case may be, or if such date is not a Business Day in London and New York, the next date which is a Business Day in each of the foregoing cities. "Property" or "Properties" means any kind of property or asset, whether real, personal or mixed, or tangible or intangible, and any interest therein. "Redemption Date," when used with respect to any Note to be redeemed, in whole or in part, means the date fixed for such redemption by or pursuant to these Terms and Conditions. "Redemption Price," when used with respect to any Note and Coupons to be redeemed, means the price at which they are to be redeemed pursuant to the terms hereof, plus accrued interest to the Redemption Date, if applicable expressed in a number of Conversion Shares into which such Note shall be converted in the event the Notes and/or Coupons are to be redeemed for Shares and, in the event of any other redemption, a cash amount. "Relevant Date" means the date on which the payment first becomes due; provided, that if the full amount of the money payable has not been received by the Paying Agent on or before the due date, it shall mean the date on which, the full amount of the money having been so received, notice to that effect shall have been duly given to the Noteholders by the Company in accordance with Condition 15. "Rule 144A" means Rule 144A, as amended, promulgated by the Commission pursuant to the Securities Act. 33 "Rule 144" means Rule 144, as amended, promulgated by the Commission pursuant to the Securities Act. "Securities Act" means the Securities Act of 1933, as amended, and the rules and regulations promulgated from time to time by the Commission pursuant thereto. "Shares" means the common stock, par value U.S. $0.01, of the Company (and all other (if any) shares or stock resulting from any sub-division, consolidation or reclassification of such shares). "Stated Maturity," when used with respect to any Indebtedness or any installment of principal thereof or interest thereon, means the date specified in such Indebtedness as the fixed date on which the principal of such Indebtedness or such installment of principal or interest is due and payable. "Stock Exchange" means any United States national or regional stock exchange or quotation service such as NASDAQ National Market System or any similar quotation service maintained by the National Quotation Bureau or any successor thereto. "Stock Exchange Business Day" means any day (other than a Saturday or Sunday) on which the a Stock Exchange is open for business. "Subordinated Obligation" means any Indebtedness of the Company outstanding on such date which is contractually subordinate or junior in right of payment to the Notes. "Subsidiary" of any Person means any Corporation of which at least a majority of the shares of stock having by the terms thereof ordinary voting power to elect a majority of the Board of Directors of such Corporation (irrespective of whether or not at the time stock of any other class or classes of such Corporation shall have or might have voting power by reason of the happening of any contingency) is directly or indirectly owned or controlled by the Person. "U.S. Government Obligations" means securities that are (x) direct obligations of the United States of America for the timely payment of which its full faith and credit is pledged or (y) obligations of a Person controlled or supervised by and acting as an agency or instrumentality of the United States of America the timely payment of which is unconditionally guaranteed as a full faith and credit obligation by the United States of America, which, in either case, are not callable or redeemable at the option of the issuer thereof, and shall also include a depository receipt issued by a bank (as defined in Section 3(a)(2) of the Securities Act), as custodian with respect to any such U.S. Government Obligation or a specific payment of principal of or interest on any such U.S. Government Obligation held by such custodian for the account of the holder of such depository receipt, provided that (except as required by law) such custodian is not authorized to make any deduction from the amount payable to the holder of such depository receipt from any amount received by the custodian in respect of the U.S. Government Obligation or the specific payment of principal of or interest on the U.S. Government Obligation evidenced by such depository receipt. The Paying Agent and Conversion Agent is: The Bank of New York Attention: Global Finance Unit 101 Barclay, Floor 21W New York, New York 10286 34 SCHEDULE A Principal Amount of this Global Note The aggregate principal amount of this Global Note is as shown by the latest entry made by or on behalf of the Paying Agent in the fourth column below. Reductions in the outstanding principal amount of this Global Note following redemption, conversion into shares of Common Stock, or the purchase and cancellation of Notes are entered in the second and third columns below.
- ---------------------------------------------------------------------------------------------------------------------- Outstanding Reasons for change in principal Notation made by or on The outstanding Amount of this Behalf of the Paying Agent Principal amount of Global (other than Global Amount of Note following such In respect of the initial Date Note Such change Change Principal amount - ---------------------------------------------------------------------------------------------------------------------- [ ] , 2002 Not applicable Not applicable Not applicable - ---------------------------------------------------------------------------------------------------------------------- - ---------------------------------------------------------------------------------------------------------------------- - ---------------------------------------------------------------------------------------------------------------------- - ---------------------------------------------------------------------------------------------------------------------- - ---------------------------------------------------------------------------------------------------------------------- - ---------------------------------------------------------------------------------------------------------------------- - ---------------------------------------------------------------------------------------------------------------------- - ---------------------------------------------------------------------------------------------------------------------- - ----------------------------------------------------------------------------------------------------------------------
35 SCHEDULE B Interest Payments in respect of this Global Note The following payments of interest in respect of this Global Note have been made: - -------------------------------------------------------------------------------- Amounts of interest Amount of Notation made by and on behalf Date made Due and payable interest paid of the Paying Agent - -------------------------------------------------------------------------------- - -------------------------------------------------------------------------------- - -------------------------------------------------------------------------------- - -------------------------------------------------------------------------------- - -------------------------------------------------------------------------------- - -------------------------------------------------------------------------------- - -------------------------------------------------------------------------------- - -------------------------------------------------------------------------------- - -------------------------------------------------------------------------------- - -------------------------------------------------------------------------------- 36 EXHIBIT A HOLDER'S CONVERSION NOTICE To: [Conversion Agent] The undersigned Holder of the 7% Senior Convertible Notes Due 2007 (the "Notes") in the aggregate principal amount of U.S. $_______________ tendered herewith hereby irrevocably exercises the option to convert such Note(s) into shares of Common Stock in accordance with the Terms and Conditions of the Notes relating to the issuance by Harken Energy Corporation of an aggregate of U.S. $2,025,000 of the Notes and directs that the Conversion Shares issuable and deliverable upon such conversion be issued and delivered to the undersigned in the name and at the address set forth below. If the Conversion Shares are to be issued in the name of a Person other than the undersigned, the undersigned will pay all transfer taxes payable with respect thereto and is delivering herewith a certificate in proper form certifying that the applicable restrictions on transfer have been complied with. All terms used and not otherwise defined herein have the respective meanings set forth in the Terms and Conditions. DATE:___________________ ------------------------------------- Name of Holder ------------------------------------- Signature(s) of Holder Address for Delivery of Share Certificates ------------------------------------- ------------------------------------- ------------------------------------- Name for Registration of Share Certificates (if Different than Holder): ------------------------------------- A-1 EXHIBIT B COMPANY'S CONVERSION NOTICE To: Conversion Agent Harken Energy Corporation (the "Company") hereby irrevocably exercises the option to convert all of the 7% Senior Convertible Notes Due 2007 (the "Notes") of the Company that have not been previously converted and are Outstanding at the date of this notice into shares of its Common Stock, in accordance with the Terms and Conditions, pursuant to which the Company has issued an aggregate of U.S. $2,025,000 of the Notes, and confirms that the Conversion Shares issuable and deliverable upon conversion shall be issued and delivered to the Noteholders in accordance with the instructions for registration and delivery of the Conversion Shares to each Holder, to be provided by each Holder to the Conversion Agent. The Company is entitled to exercise its option to convert because (i) ninety (90) days has elapsed from the Effective Date, (ii) the average of the Market Price of the Common Stock over the Stock Exchange Business Days during the thirty (30) consecutive calendar day period beginning on ________________ and ending on ___________ (being a date after the Effective Date) equaled or exceeded 125% of the Conversion Price, and (iii) the Conversion Shares were Freely Tradeable on the date such threshold was met and for the 30 calendar day period after such date. All terms used and not otherwise defined herein shall have the respective meanings set forth in the Terms and Conditions. DATE:___________________ HARKEN ENERGY CORPORATION By: ---------------------------------- Name: -------------------------------- Title: ------------------------------- B-1 EXHIBIT C COMPANY'S NOTICE OF REDEMPTION FOR SHARES To: [Paying and Conversion Agent] Harken Energy Corporation (the "Company") hereby irrevocably exercises the option to convert ________________________ United States dollars (U.S. $_____________) principal amount of the 7% Senior Convertible Notes Due 2007 (the "Notes") of the Company that have not been previously converted and are Outstanding at the date of this notice into shares of its Common Stock, in accordance with the Terms and Conditions, pursuant to which the Company has issued an aggregate of U.S. $2,025,000 of the Notes, and confirms that the Conversion Shares issuable and deliverable upon conversion shall be issued and delivered to the Noteholders in accordance with the instructions for registration and delivery of the Conversion Shares to each Holder, to be provided by each Holder to the Conversion Agent. Each Note so redeemed will be redeemed for the number of Shares of Common Stock equal to 110% of the face value of the Note plus interest accrued and unpaid thereon divided by US $[ ], which represents the average of the Market Price of the Common Stock over the 120 Stock Exchange Days day period immediately preceding the pricing date. All terms used and not otherwise defined herein shall have the respective meanings set forth in the Terms and Conditions. DATE:___________________ HARKEN ENERGY CORPORATION By: ---------------------------------- Name: -------------------------------- Title: ------------------------------- C-1 EX-10.21 6 dex1021.txt 5% NOTES DATED 12/30/1999 EXHIBIT 10.21 HARKEN ENERGY CORPORATION 5% CONVERTIBLE NOTE DUE 2003 Harken Energy Corporation, a Delaware corporation (hereinafter, the "Issuer" or "Company"), for value received, hereby promises to pay jointly to Benz Energy, Inc. and Texstar Petroleum, Inc. (collectively, the "Holder") upon presentation and surrender and delivery of this Convertible Note ("Note") the principal sum of Six Million Eight Hundred Three Thousand Six Hundred Seventy Nine and 26/100 United States Dollars (U.S. $ 6,803,679.26) (the "Principal Amount") on November 26, 2003 ("Maturity"), and, to pay interest thereon from the date hereof, semi-annually in arrears on May 26 and November 26 of each year, commencing November 26, 2000, at the rate of 5% per annum, calculated on the basis of a 360-day year consisting of twelve 30-day months, until the principal thereof is paid or payment thereof is duly provided for; provided, however, that the Principal Amount may be reduced from time to time in connection with puts, conversions, redemptions, purchase and cancellations (as described below); and provided further that interest accruing after the date of a reduction in the Principal Amount of the Note shall be calculated with reference to the new Principal Amount. TERMS AND CONDITIONS OF THE NOTES The following, except for the paragraphs in italics, is the text of the terms and conditions of the Note which will be endorsed on the Note: 1. Form, Denomination and Title (A) The Note will initially be registered in the name of Benz Energy, Inc. and Texstar Petroleum, Inc., whose mailing addresses are 1000 Louisiana, 15th floor, Houston, TX 77002 (B) Title to the Note will remain in the name of the Holder until a transfer request is presented to and accepted by the Company. The Notes will bear the following legends, which may be modified as the Company deems necessary to comply with the Securities Act: "THIS NOTE HAS NOT BEEN AND WILL NOT BE REGISTERED UNDER THE SECURITIES ACT OF 1933, AS AMENDED (THE "SECURITIES ACT"), OR THE SECURITIES LAWS OF ANY STATE. THE HOLDER HEREOF, BY PURCHASING THIS NOTE, AGREES FOR THE BENEFIT OF THE COMPANY THAT, EXCEPT TO PERMITTED ASSIGNEES IN ACCORDANCE WITH THE TERMS OF THE NOTE, THIS NOTE MAY NOT BE RESOLD, PLEDGED OR 1 OTHERWISE TRANSFERRED WITHOUT THE PRIOR WRITTEN CONSENT OF ISSUER AND UNLESS THE NOTE HAS BEEN REGISTERED UNDER THE SECURITIES ACT AND ANY APPLICABLE STATE SECURITIES OR BLUE SKY LAW OR EXEMPTION FROM THE REGISTRATION REQUIREMENTS OF SUCH LAWS ARE AVAILABLE." 2. Status The Note is a direct, unconditional and unsecured obligation of the Company and will rank pari passu, without any preference among other indebtedness of the Company. The Note will not be secured by any assets or property of the Company. The Note will rank pari passu with all other present and future indebtedness of the Company, except that the Company may incur and become liable with respect to indebtedness which is senior in right of payment to the Note provided (i) such indebtedness is incurred in connection with purchase money obligations in connection with the purchase of any property or assets purchased after December 30, 1999 ("the Closing Date") or to pay all or a portion of the purchase price for property or assets acquired by the Company after the Closing Date; (ii) the Company may grant a security interest in existing or hereafter acquired property or assets senior in right of payment to the Note, or (iii) such indebtedness is incurred in connection with project finance transactions by the Company, such indebtedness will be recourse only to the project and/or project assets or properties, so encumbered, except to the extent a corporate guarantee by the Company may be required in connection therewith. Notwithstanding the foregoing, all such indebtedness contemplated under (i), (ii) and (iii), to the extent it ranks senior to the Note, shall rank senior to the Note only as to the payment from the assets or property encumbered and shall rank pari passu to the Note for all other purposes. 3. Covenants (A) The Company will not merge or consolidate with or sell, convey, transfer or lease or otherwise dispose of all, or substantially all, of its assets unless: (a) either (i) the Company shall be the surviving Person in the case of a merger or (ii) the Person (if other than the Company) formed by such consolidation or into which the Company is merged or the Person(s) which acquired by conveyance or transfer, or which leases, all or substantially all of the Properties and assets of the Company (1) shall be organized and validly existing under the laws of the United States of America, any state thereof or the District of Columbia and (2) shall expressly assume the Company's obligation for the due and punctual payment of the principal of and interest on the Note and the performance and observance of every covenant on the part of the Company to be performed or observed; and (b) immediately after giving effect to such transaction (and treating any indebtedness which becomes an obligation of the Company in connection with or as a result of such transaction as having been 2 incurred at the time of such transaction), no Default or Event of Default shall have occurred and be continuing. (B) Upon any consolidation of the Company with or merger of the Company with or into any other Person or any conveyance, transfer or lease of all or substantially all of the Properties and assets of the Company to any Person(s), the successor Person formed by such consolidation or into which the Company is merged or to which such conveyance, transfer or lease is made shall succeed to, and be substituted for, and may exercise every right and power of, the Company as Issuer of the Note with the same effect as if such successor Person(s) had been named as the Company herein, and in the event of any such conveyance or transfer, the Company, except in the case of a lease, shall be discharged of all obligations and covenants under the Note. (C) The Company shall furnish to Holder, promptly upon becoming aware of the existence of any condition or event which constitutes a Default or an Event of Default, written notice specifying the nature and period of existence thereof and the action which the Company is taking or proposes to take with respect thereto. (D) The Company will immediately notify Holder of any default under the terms of any outstanding indebtedness, if such default is not waived or cured within the period provided for such cure by the relevant loan documents. (E) After an Event of Default, the Company will not purchase or redeem any of the Shares, and the Company further agrees not to pay dividends with respect to any of its Shares, other than such dividends that it is contractually obligated to pay as of the Closing Date of this Note. (F) From the Closing Date until Maturity, the Company will not amend its articles of incorporation or bylaws in such a manner that will be detrimental to the terms of this Note or to the Company's ability to perform its obligations under the Note. 4. Interest The Note shall bear interest from (and including) the May 26, 2000 until the principal thereof is paid in full, at the rate of 5 % per annum on the principal amount thereof outstanding from time to time. Except as otherwise provided herein, interest shall be due and payable semi-annually in arrears on May 26 and November 26 of each year (each an "Interest Payment Date"), the first such payment to be made on November 26, 2000. 3 The Note will cease to bear interest (i) from its due date for redemption unless the Company shall default in the payment of the Redemption Price, in which event interest shall continue to accrue, or (ii) where the Conversion Right shall have been voluntarily exercised by the Holder, from the Conversion Date, or (iii) in the case of a Mandatory Conversion, from the Mandatory Conversion Date. Interest is calculated on the basis of a 360-day year consisting of 12 months of 30 days each and, in the case of an incomplete month, the number of days elapsed. 5. Put Options (A) General For a period of nine months after the Closing Date (the "Restricted Put Period"), Holder shall have the right from time to time to compel Issuer (subject to the provisions stated herein) to redeem the Note (the "Put") into either cash or the issuance of the Company's $.01 par value common stock ("Shares") ("Put Consideration"), which form of Put Consideration shall be at the sole option of the Company, provided that (a) the Put Consideration shall be used solely for the purpose of retiring or exchanging secured obligations of Holder (including without limitation vendor notes, preferred stock and indentures of Holder) and (b) the retirement or exchange of the securities is at a discount to either or both (i) the outstanding amount of the secured obligation and/or (ii) the amount of the Put Consideration to be received pursuant to the Put, which discount will be acceptable to Company in its sole and absolute discretion. If at any time during a term of nine (9) months beginning after the nine (9) month period stated above or for a term of nine (9) months beginning during the nine (9) month period if the Letter of Intent between Company and Holder has terminated, the Put shall be freely exercisable at the sole discretion of the Holder without restriction and without approval of Company, for an amount equal to 50% of the then outstanding principal amount of the Note (plus accrued interest), payable either in cash or in Shares, at the sole election of Company; provided, however, such Put must be exercised by Holder(s) of the Note(s) aggregating not less than 50% of the then outstanding principal balance of the outstanding Note(s). Subject to the exercise of the Automatic Put described in Section 5(C) below, if such Put is not exercised within such period of time then the Put shall terminate and be null and void. (B) Put Procedure To exercise the Put right, the Holder must complete, execute and deliver at its own expense to the office of the Company at 16285 Park Ten Place, Suite 600, Houston, TX 77084, Attention: Larry E. Cummings, Secretary, a notice of put exercise (a "Put Notice"). If the Put Notice is delivered within the Restricted Put Period, the Put Notice shall set forth 4 (i) the Holder's desire to exercise the Put, (ii) the secured obligations of the Holder to be retired by, or exchanged for, the Put Consideration and (iii) the amount of the discount (A) at which the secured obligation will be retired or exchanged and/or (B) to the Put Consideration receivable on exercise of the Put. If the Company receives a Put Notice during the Restricted Put Period, the Company will have a period of 30 calendar days after the receipt of the Put Notice to accept or reject the exercise of the Put by delivering written notice to the Holder at his registered address in accordance with Section 14 hereof. Should Company elect to accept the exercise of the Put ("Company Put Acceptance Notice"), Holder shall have a period of five (5) Business Days after receipt of the Company Put Acceptance Notice to deliver the Note to Company. If the Put Notice is delivered within the nine (9) month term after the Restricted Put Period, the Put Notice shall set forth Holder's desire to exercise the Put, and shall be accompanied by the applicable Note. As soon as reasonably practicable, after (i) in the case a Put Notice is given by Holder during the Restricted Put Period, the Company's receipt of the applicable Note after the mailing of the Company Put Acceptance Notice and (ii) in the case a Put Notice is given by the Holder during the nine (9) month period after expiration of the Restricted Put Period, the Company's receipt of the Put Notice and applicable Note, but either case not later than 15 days after the Company's receipt of the applicable Note or the Put Notice and applicable Note, as applicable, the Company shall redeem the then outstanding principal balance of the Note at the agreed upon discount (plus accrued interest thereon) as set forth in Section 5(A) above. The Redemption Price shall be payable in cash or Shares at the Company's sole discretion. The date of the Put (the "Put Date") shall be deemed the delivery to the Company of the applicable Put Notice. An election by Holder to exercise the Put once made and delivered to Company shall be irrevocable by Holder regardless of whether the Put is accepted or rejected by the Company. (C) Automatic Put Notwithstanding the exercise of the Put during the time periods set out in Section 5(A) above and subject to the Company's right to reject the automatic exercise described below, if at any time from the Closing Date until Maturity the Permitted Lienholder institutes an action to foreclose on the Note, in whole or in part, such filing shall immediately cause the exercise of the Put in accordance with Section 5(A) above (but without regard to the nine month time restriction contained in the second sentence of Section 5(A)) but only to the extent it covers the share of the Note pledged by the Noteholder to the Permitted Lienholder (the "Pledged Portion"). Upon the automatic exercise of the Put as herein provided, Company shall have a period of five (5) business days from the date the foreclosure action was filed, to advise Noteholder and Permitted Lienholder whether it elects to (i) accept the exercise of the Put or (ii) reject the automatic exercise of the Put. Should Company elect to accept the automatic exercise of the Put, Noteholder shall have an additional period of five (5) business days to from the receipt of Company's notice to deliver the Note. Upon receipt of such Note, the Company shall as soon as reasonably practicable thereafter (i) redeem the Pledged Portion of the Note at the agreed upon 5 discount (plus accrued interest thereon) if such foreclosure is filed within the Restricted Put Period, otherwise such redemption will be for an amount equal to 50% of the then outstanding principal balance of the Pledged Portion of the Note (plus accrued interest thereon) and (ii) issue to Noteholder a new Note representing the difference, if any, between the principal balance of the surrendered Note and the Pledged Portion of the Note. If the Company elects to reject, or fails to timely elect to accept, the automatic exercise of the Put, the Permitted Lienholder shall become a Holder of the Pledged Portion of the Note (plus all accrued interest thereon) for all purposes of this Note without regard to further restrictions under this Section 5(c), and the Company shall be deemed to have given its prior written consent to the transfer and assignment of the Pledged Portion of the Note to the Permitted Lienholder in accordance with Section 15 hereof. (D) Payment in Shares If the Put is paid in Shares, the number of Shares to be received by the Holder on exercise of the Put shall be equal to the quotient of (i) the sum of the outstanding principal balance of the Note plus the accrued interest thereon, reduced by the applicable discount amount divided by (ii) the average Market Price of a Share during the 30 consecutive calendar day period ending as of the Put Date. 6. Payments Except as otherwise provided under this Note, the payment of principal with respect to the Note, and the semi-annual payment of interest on an Interest Payment Date, shall be paid by wire transfer in immediately available funds in accordance with payment instructions set forth on Exhibit "A" or to any account in the United States which the Holder may designate by written notice to the Company in accordance with Section 14 hereof at least Five Business Days prior to the due date. If the date for any payment due under the Note falls on a day which is not a Business Day, such payment date shall be deemed to have fallen on the next Business Day. When making payments to the Holder, fractions of one cent will be rounded down to the nearest whole cent. 7. Conversion (A) Conversion Period and Price (i) The Holder has the right, subject as provided herein and to any applicable laws and regulations, to require the Company to convert the outstanding principal amount of the Note into fully paid and non-assessable Shares at any time during the Conversion Period. The Conversion Period begins on the Closing Date hereof, and ends upon the earliest to occur of (a) the second Business Day prior to the later of Maturity or the date on which all principal and interest on the Note is repaid in full, 6 (b) if such Notes shall have been called for redemption, the close of the second Business Day prior to the Redemption Date, or (c) the effective date of a Mandatory Conversion. Upon conversion, the right of the converting Holder to repayment of the outstanding principal amount of the Note and accrued interest thereon shall be extinguished and released, and in consideration and exchange therefor the Company shall issue Shares for the outstanding principal amount of the Note plus accrued interest thereon through the Conversion Date at the Conversion Price. Upon such issuance of the Shares, the Note will be credited as paid up in full. (ii) The number of Shares to be issued on conversion of a Note will be determined by dividing the outstanding principal amount of the Note plus accrued interest by the Conversion Price (as defined below) in effect on the Conversion Date, with the result being rounded down to the nearest whole number. (iii) A Conversion Right may only be exercised as to the full outstanding principal balance of the Note held by the registered Holder. Fractions of Shares will not be issued on conversion and no cash adjustments will be made with respect thereof. (iv) The price at which Shares will be issued upon conversion (the "Conversion Price") will be U.S. $6.50 per Share but will be subject to adjustment in the manner provided in Section 7(C). The Company shall give notice of any adjustment of the Conversion Price in accordance with Section 14 within ten (10) days after the date of such adjustment. (v) Notwithstanding the provisions of paragraph (i) of this Section 7(A), if the Company shall default in making payment in full with respect to the Note which shall have been called for redemption prior to Maturity, then from the Redemption Date, interest shall continue to accrue on such Note and the Conversion Right attached to such Note will continue to be exercisable (unless already exercised by the Company pursuant to Section 7(D)) up to, and including the close of business on the date upon which the full amount of the monies payable with respect of such Note is due or, if earlier, Maturity. (B) Procedure for Conversion (i) To exercise the Conversion Right attached to the Note, the Holder must complete, execute and mail at its own expense to the office of the Company at 16285 Park Ten Place, Suite 600, Houston, TX 77084, Attention: Larry E. Cummings, Secretary, a notice of conversion (a "Conversion Notice") in the form attached hereto as Exhibit "B" and incorporated herein by reference to this Note. The Conversion Date will be deemed to be the date of such Conversion Notice. A Conversion Notice once delivered shall be irrevocable. 7 (ii) As soon as practicable, and in any event not later than fourteen (14) calendar days after the Conversion Date, the Company will in the case of the Note converted on exercise of the Conversion Right shall cause the Holder of the Note as designated in the Conversion Notice to be registered as Holder of the relevant number of Shares and will make a certificate or certificates for the relevant Shares available for collection at the Company's principal office in Houston, Texas or, if so requested in the relevant Conversion Notice, will deliver such certificate or certificates to the person and at the place specified in the Conversion Notice, at the risk of the Holder, together with any other securities, property or cash required to be delivered upon conversion and such assignments and other documents (if any) as may be required by law to effect the transfer thereof. (iii) The registered Holder of the Note being converted will be deemed for all purposes to be the holder of record of the number of Shares issuable upon conversion with effect from the Conversion Date or Mandatory Conversion Date, as the case may be. The Shares issued upon conversion of the Notes will in all respects rank pari passu with the issued and outstanding Shares issued on the relevant Conversion Date or Mandatory Conversion Date, as the case may be, except for any right excluded by mandatory provisions of applicable law. A Holder of Shares issued on conversion of Notes shall not be entitled to any rights for any record date which precedes the relevant Conversion Date or Mandatory Conversion Date, as the case may be. (iv) If any notice requiring the redemption of the Note is given pursuant to Section 8(B) on or after the fifteenth (15th) calendar day prior to the record date with respect to any dividend payable with respect to such Shares and such notice specifies a date for redemption falling on or prior to the next following Interest Payment Date, interest shall (subject as hereinafter provided) accrue on Notes which shall have been delivered for conversion on or after such record date. Any such interest shall be paid by the Company not later than fourteen (14) calendar days after the relevant Conversion Date pursuant to instructions given by the Holder. (C) Adjustments in Conversion Price The Conversion Price is subject to adjustment upon the occurrence of certain events, including: (i) stock dividends; (ii) the subdivision, combination or reclassification of outstanding shares of Common Stock; (iii) issuances to all stockholders of the Company of securities which are exercisable or convertible into Shares at a price less than the Market Price for the Shares; (iv) issuances of Shares to all stockholders of the Company for cash at a price less than the fair market value, as determined by the Board of Directors, other than issuances pursuant to the conversion of this Note or the then outstanding securities of the Company (including, but not limited to, the 5% Convertible Notes due 2003, Series G Preferred Stock and any warrants to purchase Shares, or in connection with any plan of the Company for granting rights or options to purchase stock in connection with any employee compensation or benefit plan of the Company, whether now in effect 8 or hereafter created or amended, including, but not limited to, the Company's Qualified Stock Option Plan, Non-Qualified Incentive Stock Option Plan, Directors Stock Option Plan, 1993 Stock Option and Restricted Stock Plan and 1996 Incentive and Nonstatutory Option Plan); and (v) the distribution to all holders of Common Stock of a class of debt securities of the Company or of assets or rights or warrants to purchase securities of the Company (excluding those rights and warrants referred to above and cash dividends or distributions from current or retained earnings), any one or more of such actions described in clauses (i) through (v) above referred to herein as an "Adjustment Event". The Company may at any time or from time to time reduce the Conversion Price under this Note temporarily or permanently. Upon the occurrence of an Adjustment Event under clauses (i) or (ii) above, the number of Shares issuable upon conversion of the Note immediately prior to the record date of such Adjustment Event shall be adjusted so that the Holder shall thereafter be entitled to receive the number of Shares that the Holder would have owned or have been entitled to receive after the occurrence of such Adjustment Event or any record date with respect thereto. An adjustment made pursuant to immediately preceding sentence shall become effective immediately after the effective date of such Adjustment Event retroactive to the record date, if any, for such Adjustment Event. Whenever the number of Shares issuable upon the conversion of the Note is adjusted pursuant to this paragraph, the Conversion Price for each Share shall be adjusted by multiplying such Conversion Price in effect immediately prior to such Adjustment Event by a fraction, the numerator of which shall be the number of Shares issuable upon conversion of the Note immediately prior to such Adjustment Event, and the denominator of which shall be the number of Shares so issuable immediately thereafter. Upon the occurrence of an Adjustment Event under clause (iii) or (iv) above, then the Conversion Price per Share shall be adjusted by dividing (i) the sum of (A) the product obtained by multiplying the number of Shares outstanding immediately prior to such issuance (on a fully diluted basis) by the Conversion Price per share in effect immediately prior to such issuance, plus (B) the aggregate consideration, if any, received by the Company upon such issuance, plus (C) the minimum aggregate amount of additional consideration, if any, payable to the Company upon the conversion of exercise thereof, by (ii) the number of Shares outstanding immediately after such issuance (on a fully diluted basis). Whenever the Conversion Price per share is adjusted as provided in this paragraph, the number of Shares issuable upon conversion of the Note immediately after such Adjustment Event shall be adjusted, to equal the product obtained (calculated to the nearest full share) by multiplying such number of Shares by a fraction, the numerator of which is the Conversion Price per share in effect immediately prior to such Adjustment Event and the denominator of which is the Conversion Price per share under the immediately preceding sentence, which adjusted number of Shares shall thereupon be the number of Shares issuable upon conversion of the Note until further adjusted as provided herein. For purposes of the immediately preceding paragraph, "on a fully diluted basis" means that all outstanding options, rights or warrants to subscribe for Shares and all securities convertible into or exchangeable for Shares (such options, rights, warrants and securities are collectively referred to herein as "Convertible Securities") and all options or rights to acquire Convertible Securities have been exercised, converted or exchanged. 9 Upon the occurrence of an Adjustment Event under clause (v) above, the Conversion Price and the number of Shares issuable on conversion of the Note shall be adjusted as appropriate so that the economic benefits and losses that would have accrued to the Holder of the Note upon conversion of the Note prior to such Adjustment Event shall be equal as commercially possible to the economic benefits and losses that would of accrued to such Holder upon conversion of the Note after such Adjustment Event. Such adjustments shall be effective as of the earlier of the Adjustment Event or the record date, if any, of such Adjustment Event. No adjustment will be made where such adjustment would be less than five percent (5%) of the Conversion Price then in effect. Any adjustment not so made will be carried forward and taken into account in any subsequent adjustment. On any adjustment, the resultant Conversion Price, if not an integral multiple of one cent shall be rounded up to the nearest one cent. The Conversion Price may not be reduced so that, on conversion of the Note, Shares would be issued for an amount less than their par value. (D) Mandatory Conversion (i) Holder acknowledges and agrees that the Company may elect to exercise the Conversion Right on behalf of the Holder with respect to the Note at the Conversion Price applicable as of the date fixed by the Company for such conversion (the "Mandatory Conversion Date"), provided that the average of the Market Price of the Shares over any thirty (30) consecutive calendar day period, on or after the Closing Date is equal to or greater than 125% of the Conversion Price. (ii) Not less than 30 calendar days following the Mandatory Conversion Date, the Company shall cause written notice of the Mandatory Conversion Date to be given to the Holder. Following such notice, the Holder will be required within 30 days after such date to deliver or procure delivery of the Note together with a duly completed Conversion Notice to the office of Company and to perform the obligations applicable to it on conversion specified in this Section 7(D). Failure to deliver the Conversion Notice shall not affect the conversion of the Note pursuant to the terms of this Section 7(D). (iii) From and after the Mandatory Conversion Date, the Note shall cease to constitute indebtedness of the Company and shall thereafter be only deemed to represent the right to receive Shares. (E) Consolidation, Amalgamation or Merger In the event that the Company shall be a party to any transaction, including without limitation any (i) recapitalization or reclassification of the Shares (other than 10 a change in par value, or from par value to no par value, or from no par value to par value, or as a result of subdivision or combination of the Shares ), (ii) any consolidation of the Company with, or merger of the Company into, any other person, any merger of another person into the Company (other than a merger which does not result in a reclassification, conversion, exchange or cancellation of all of the outstanding shares of Common Stock of the Company), (iii) any sale or transfer of all or substantially all of the assets of the Company, or (iv) any compulsory share exchange pursuant to which the Shares are converted into the right to receive other securities, cash or Property, the Company (and to the extent possible, the resulting entity) will forthwith notify the Holder of such event and ensure that the Holder of the Note will have the right (during the period in which such Note shall be convertible) to convert such Note into the class and amount of shares and other securities and property receivable which would have become liable to be issued upon conversion of such Note immediately prior to the transaction. 8. Payment, Redemption and Purchase (A) Unless previously redeemed, converted or purchased and canceled as provided herein, the Company will pay the Note in full in immediately available funds the outstanding principal amount plus all accrued and unpaid interest on through Maturity. (B) (i) At any time on or after May 26, 2002, but prior to November 26, 2002, the Company may at its option redeem the Note, in whole or in part, for the outstanding principal amount, together with interest (if any) accrued to (but excluding) the Redemption Date, payable in cash or Shares. If Company elects to redeem the Note for Shares, the Note will be redeemed for the number of shares of Common Stock equal to the sum of the outstanding principal amount plus accrued and unpaid interest divided by the average Market Price of the shares over the 30 calendar days immediately preceding the date of notice of such redemption. (ii) Commencing November 26, 2002 and ending on Maturity, Company may at its option redeem, pursuant and subject to the provisions set forth above, up to 50% of the Note for Shares, and, on Maturity, Company may redeem the outstanding Note for Shares. If Company elects to redeem the Note for Shares, each Note will be redeemed for the number of shares of Common Stock equal to 110% of the sum of the face value of the Note plus interest accrued and unpaid thereon divided by the average Market Price of the Shares over the 30 calendar days immediately preceding the date of notice of such redemption; provided, however, that if the average of the aggregate Market Price of all outstanding shares of Common Stock over such 30 calendar day period is less than $500 million, each Note will be redeemed for the number of shares of Common Stock equal to 115% of the sum of the face value of the Note plus interest accrued and unpaid thereon divided by 11 the average of the Market Price of the Common Stock over the 30 calendar day period immediately preceding the date of notice of such redemption. (C) To exercise the Redemption Right, the Company must timely deliver written notice (the "Redemption Notice") to the Holder of the Note in accordance with Section 14 not less than 30 days or more than 60 days prior to the Redemption Date. The Redemption Notice shall set forth (i) the principal amount of the Notes (plus accrued interest) that the Company shall redeem on the Redemption Date, (ii) the Redemption Date, (iii) the Redemption Price, (iv) the place for delivery of the Note and any other necessary transfer instruments to be executed by the Holder in order to collect the Redemption Price. The Redemption Notice once given is irrevocable by the Company. Upon the expiration of any such notice period referred to in Section 8(C), the Company shall pay the Note as provided in 8(A). (D) Subject to applicable law, the Company may at any time purchase the Note together with all accrued interest thereon from the Holder in any manner and at any price negotiated between the parties. (E) If the Note is redeemed by the Company it will be forthwith canceled and may not be reissued or resold. 9. Taxation All payments with respect to the Note by the Company shall be made without withholding or deduction for, or on account of, any present or future taxes, assessments or governmental charges of whatever nature ("Taxes") imposed or levied by or on behalf of the U.S. or any political sub-division of the U.S. having power to tax, unless the withholding or deduction of the Taxes is required by law. In that event, the Company will pay to the Holder the net amount due in connection with the Note, after the withholding or deduction of such Taxes paid (or to be paid), and Company shall not be responsible for the payment of any additional amounts to third parties on behalf of the Holder. 10. Additional Covenants While any Conversion Right remains exercisable, the Company will: (A) at all times keep available for issuance free from any preemptive rights out of its authorized but unissued capital such number of Shares as would enable the Conversion Rights to be satisfied in full; and (B) not in any way adversely modify the rights attached to the Shares with respect to voting, dividends or liquidation, except to the extent all Common Shares are equally affected. 12 11. Events of Default The Note is, and it shall accordingly become, immediately due and payable for the outstanding principal amount on the Note together with accrued interest, if any of the following events (each an "Event of Default") shall have occurred (unless such Event of Default has been remedied to the satisfaction of the Holder and waived): (A) if default is made for a period of five (5) Business Days or more in the payment of any interest due with respect to the Note; or (B) if the Company fails to perform or observe any of its other obligations, covenants, conditions or provisions under the Note or Purchase and Sale Agreement and such failure continues for a period of 30 calendar days (or such longer period as the Holder may in its absolute discretion permit) following the service by the Holder on the Company of a notice of default requiring the same to be remedied; or (C) if (i) any other indebtedness of the Company becomes due and payable prior to its stated maturity by reason of an event of default (howsoever described) or (ii) any such indebtedness of the Company is not paid when due or, as the case may be, within any applicable grace period, and in each such case such event continues unremedied for a period of 30 calendar days, provided in each such case the indebtedness exceeds $2,000,000; or (D) if the Company shall be declared or adjudicated by a competent court to be insolvent or bankrupt, consents to the entry of an order of relief against it in an involuntary bankruptcy case, shall enter into any assignment or other similar arrangement for the benefit of its creditors or consents to the appointment of a custodian (including, without limitation, a receiver, liquidator or trustee); or (E) if a receiver shall be appointed for the Company or in relation to all or substantially all of the assets of either of them, or a creditor shall levy and foreclose upon (and take possession of) all or substantially all of the assets of Company , and in any of the foregoing cases is not paid out or discharged within 90 calendar days; or (F) if the Company institutes proceedings to be adjudicated a voluntary bankrupt, or shall consent to the filing of a bankruptcy proceeding against it, or shall file a petition or answer or consent seeking organization under the laws of the Federal Bankruptcy Code or any similar applicable U.S. federal or state law, or shall consent to the filing of any such petition, or shall consent to the appointment of a receiver or liquidator or trustee or assignee (or other similar official) in bankruptcy or insolvency of it or its Property, or shall make an assignment for the benefit of creditors, or shall admit in writing its inability to pay its debts generally as they come due; or 13 (G) if a decree or order by a court of competent jurisdiction shall have been entered against the Company or any declaring either of them a bankrupt or insolvent, or approving a petition seeking the reorganization of the Company under the Federal Bankruptcy Code or any other similar applicable U.S. federal or state law, and such decree or order shall continue undischarged or unstayed for a period of 90 calendar days; or a decree or order by a court of competent jurisdiction for the appointment of a receiver or liquidator or trustee or assignee (or other similar official) in bankruptcy or insolvency of the Company, or for the winding up or liquidation of its affairs, shall have been entered, and such decree or order shall have continued undischarged and unstayed for a period of 90 calendar days; or (H) A material breach of a representation or warranty contained in the Purchase and Sale Agreement occurs and is not remedied, if curable, within 90 days after notice of such breach. 12. Replacement of Notes Should the Note be lost, stolen, mutilated, defaced or destroyed, it may be replaced at the office of the Company upon payment by the claimant of the expenses incurred in connection with the replacement and on such terms as to evidence indemnity and security as the Company may reasonably require. Mutilated or defaced Notes must be surrendered before replacements will be issued. 13. Registration Statement Company agrees that in the event Shares are issued to Holder under the terms of this Convertible Note, Company will file, or cause to be filed, a separate registration statement with the Securities and Exchange Commission for purposes of registering for resale Holder's Shares under the U. S. Securities Act of 1933, as amended, and any applicable state securities or blue sky law, within five (5) months following the issuance of such Shares, and shall use its commercially reasonable best efforts to have such registration statement declared effective as soon as reasonably possible after such filing, as more fully set forth in Section 4.11 of that certain Purchase and Sale Agreement dated contemporaneously with this Note. 14. Notices All Notices required or permitted under this Note shall be in writing and shall be personally delivered or by certified mail, postage prepaid and return receipt requested or by telecopier to the address designated by Holder. All notices given by personal delivery or mail shall be effective on the date of actual receipt. All notices by telecopier shall be confirmed in writing on the day of transmission by personal delivery or certified mail. 14 15. Transferability. Except for transfers by Noteholder to a Permitted Assignee, this Note may not be transferred, assigned, hypothecated, sold or conveyed ("Transfers" or "Transferred") in any manner, in whole or in part, by Holder or any Permitted Assignee, without Company's prior written consent, which consent may be withheld for any reason at Company's sole and absolute discretion. Any attempt transfer of the Note by Holder or Permitted Assignee in violation of this Section 15 shall be void ab initio and of no force and effect. 16. Definitions The terms set forth below shall have the meanings ascribed to them below: "Affiliate" of any specified Person means any other Person directly or indirectly controlling or controlled by or under direct or indirect common control with such specified Person and the terms "controlling" and "controlled" have meanings correlative to the foregoing. "Board of Directors" means either the board of directors of the Company or any duly authorized committee of that board. "Business Day" means each Monday, Tuesday, Wednesday, Thursday, and Friday which is a day on which banking institutions in Houston, Texas are not authorized or obliged by law, regulation or executive order to close. "Closing Date" means December 30, 1999. "Common Stock" means, with respect to any Person, any and all shares, interests, participation and other equivalents (however designated, whether voting or non-voting) of such Person's common stock, whether now outstanding or issued after the date of this Indenture, and includes, without limitation, all series and classes of such common stock. "Company" means Harken Energy Corporation. "Conversion Date" means the Business Day during the Conversion Period on which the Conversion Right is exercised by delivery to the Company of the Note surrendered for conversion and the completed "Conversion Date" means the Business Day during the Conversion Period on which the Conversion Right is exercised by delivery to the Company of the Note surrendered for conversion and the completed notice of a Holder's intention to exercise its Conversion Right with respect to the Note. 15 "Conversion Period" means, with respect to any Note, the period which is provided in Section 7(A) of this Note. "Conversion Price" means the price at which Conversion Shares shall be issued upon conversion as provided in Section 7(A) hereof, subject to adjustment as set forth herein. "Conversion Right" means the right of a Holder of the Note to convert such Note into Conversion Shares. "Conversion Shares" means the Shares into which the Notes are convertible. "Corporation" includes corporations, limited liability companies, limited and general partnerships, associations, joint-stock companies and business trusts. "Default" means any event which is, or after notice or passage of time or both would be, an Event of Default. "Event of Default" has the meaning specified in Section 11. "Holder" means a Person who is the registered holder of a Note. "Indebtedness" of any Person means and includes all present and future obligations of such Person. "Interest Payment Date" means May 26 and November 26 of each year while any portion of this Note remains outstanding, commencing November 26, 2000. "Mandatory Conversion" means conversion of the Notes at the option of the Company pursuant to Section 7(D). "Mandatory Conversion Date" means the date specified in a notice published by the Company in accordance with Section 7(D), on which the Holder is required to surrender its Note for conversion. "Market Price" of a Share on any day shall mean (i) the closing sales price on the immediately preceding business day of a Share as reported on the principal securities exchange on which Shares are then listed or admitted to trading or (ii) if not so reported, the average of the closing bid and asked prices for a Share on the immediately preceding business day as quoted on the National Association of Securities Dealers Automated Quotation System ("NASDAQ") or (iii) if not quoted on NASDAQ, the average of the closing bid and asked prices for a Share as quoted by the National Quotation Bureau's "Pink Sheets" or the National Association of Securities Dealers' OTC Bulletin Board System. If the price of a Share shall not be so reported, the Market Price of a Share shall be determined by the Company's board of directors in good faith. 16 "Maturity," when used with respect to any Note, means the date on which the principal of such Note becomes due and payable as therein or herein provided, whether at Maturity or the Redemption Date and whether by declaration of acceleration, call for redemption or otherwise. As used in this Note, Maturity is November 26, 2003. "Note" has the meaning stated in the first recital of this Convertible Note. "Permitted Assignees" means (i) Stewart Peck, in his capacity as Collateral Agent for Participating Creditors in the Debt Restructure Agreement dated August 6, 1999, for an amount up to $4,071,320.74 out of the Principal Amount of the Note plus interest accrued or thereafter payable thereon and (ii) the Permitted Lienholder for an amount up to $6,803,679.26 out of the Principal Amount of the Note plus interest accrued or thereafter payable thereon; provided, however, any Transfer to the Permitted Lienholder shall be for the sole purpose of Holder granting to Permitted Lienholder a security interest in, or lien on, the Note or subject to Section 5c foreclosing upon such security interest or lien. "Permitted Lienholder" means Encap Energy Capital Fund III, L.P. for an amount equal to $6,803,679.26 out of the Principal Amount of the Note, plus interest accrued or thereafter payable thereon. "Person" means any individual, corporation, limited liability corporation, limited or general partnership, joint venture, association, joint-stock company, trust, unincorporated organization or government entity or any agency or political subdivision thereof. "Property or Properties" means any kind of property or asset, whether real, personal or mixed, or tangible or intangible, and any interest therein. "Put Consideration" when used with respect to this Note, means the value paid, in cash or Shares, for the redemption of the Note in the manner set forth in Section 5. "Put Date" has the meaning specified in Section 5. "Put Notice" has the meaning specified in Section 5. "Redemption Date," when used with respect to any Note to be redeemed, in whole or in part, means the date fixed for such redemption by or pursuant to this Note. 17 "Redemption Price," when used with respect to any Note to be redeemed, means the price at which they are to be redeemed pursuant to the terms hereof, plus accrued interest to the Redemption Date if applicable. "Restricted Put Period" has the meaning specified in Section 5. "Securities Act" means the Securities Act of 1933, as amended, and the rules and regulations promulgated from time to time by the Commission pursuant thereto. "Shares" means the common stock, par value U.S.$0.01, of the Company (and all other (if any) shares or stock resulting from any sub-division, consolidation or reclassification or such shares). 17. Governing Law This Note is governed by, and will be construed in accordance with, the laws of the State of Texas. 18. Other Defined Terms Capitalized words and terms used in this Note that are defined elsewhere in this Note are used herein as therein defined. 19. Renewal This note is given in renewal and replacement of, but not in extinguishment or novation of, that certain promissory note dated December 30, 1999 payable jointly to the order of Benz Energy, Inc. and Texstar Petroleum, Inc. (collectively designated as the "Holder") in the original amount of $7,928,679.26. IN WITNESS WHEREOF, the Issuer has caused this Note to be duly executed in its corporate name by the signature of the undersigned duly authorized officer of the Issuer. DATED as of March ___, 2000. HARKEN ENERGY CORPORATION By: /s/ Larry E. Cummings, Vice President -------------------------------------- Larry E. Cummings, Vice President 18 [Corporate Seal] ATTEST: By: ------------------------------------- Name: ------------------------------------- Assistant Secretary ACKNOWLEDGEMENT AND ACCEPTANCE BY HOLDER Holder acknowledges and accepts this note in renewal and replacement of, but not in extinguishment or novation of, that certain promissory note dated December 30, 1999 payable jointly to the order of Benz Energy, Inc. and Texstar Petroleum, Inc. (collectively designated as the "Holder") in the original amount of $7,928,679.26. BENZ ENERGY, INC. TEXSTAR PETROLEUM, INC. BY: BY: ---------------------------------- ------------------------------ 19 HARKEN ENERGY CORPORATION 5% CONVERTIBLE NOTE DUE 2003 Harken Energy Corporation, a Delaware corporation (hereinafter, the "Issuer" or "Company"), for value received, hereby promises to pay jointly to Benz Energy, Inc. and Texstar Petroleum, Inc. (collectively, the "Holder") upon presentation and surrender and delivery of this Convertible Note ("Note") the principal sum of Four Million Seventy-One Thousand Three Hundred Twenty and Seventy-Four United States Dollars (U.S. $4,071,320.74) (the "Principal Amount") on May 26, 2003 ("Maturity"), and, to pay interest thereon from the date hereof, semi-annually in arrears on May 26 and November 26 of each year, commencing May 26, 2000, at the rate of 5% per annum, calculated on the basis of a 360-day year consisting of twelve 30-day months, until the principal thereof is paid or payment thereof is duly provided for; provided, however, that the Principal Amount may be reduced from time to time in connection with puts, conversions, redemptions, purchase and cancellations (as described below); and provided further that interest accruing after the date of a reduction in the Principal Amount of the Note shall be calculated with reference to the new Principal Amount. TERMS AND CONDITIONS OF THE NOTES The following, except for the paragraphs in italics, is the text of the terms and conditions of the Note which will be endorsed on the Note: 1. Form, Denomination and Title (A) The Note will initially be registered in the name of Benz Energy, Inc. and Texstar Petroleum, Inc., whose mailing addresses are 1000 Louisiana, 15th floor, Houston, TX 77002 (B) Title to the Note will remain in the name of the Holder until a transfer request is presented to and accepted by the Company. The Notes will bear the following legends, which may be modified as the Company deems necessary to comply with the Securities Act: "THIS NOTE HAS NOT BEEN AND WILL NOT BE REGISTERED UNDER THE SECURITIES ACT OF 1933, AS AMENDED (THE "SECURITIES ACT"), OR THE SECURITIES LAWS OF ANY STATE. THE HOLDER HEREOF, BY PURCHASING THIS NOTE, AGREES FOR THE BENEFIT OF THE COMPANY THAT, EXCEPT TO PERMITTED ASSIGNEES IN ACCORDANCE WITH THE TERMS OF THE NOTE, THIS NOTE MAY NOT BE RESOLD, PLEDGED OR 1 OTHERWISE TRANSFERRED WITHOUT THE PRIOR WRITTEN CONSENT OF ISSUER AND UNLESS THE NOTE HAS BEEN REGISTERED UNDER THE SECURITIES ACT AND ANY APPLICABLE STATE SECURITIES OR BLUE SKY LAW OR EXEMPTION FROM THE REGISTRATION REQUIREMENTS OF SUCH LAWS ARE AVAILABLE." 2. Status The Note is a direct, unconditional and unsecured obligation of the Company and will rank pari passu, without any preference among other indebtedness of the Company. The Note will not be secured by any assets or property of the Company. The Note will rank pari passu with all other present and future indebtedness of the Company, except that the Company may incur and become liable with respect to indebtedness which is senior in right of payment to the Note provided (i) such indebtedness is incurred in connection with purchase money obligations in connection with the purchase of any property or assets purchased after December 30, 1999 ("the Closing Date") or to pay all or a portion of the purchase price for property or assets acquired by the Company after the Closing Date; (ii) the Company may grant a security interest in existing or hereafter acquired property or assets senior in right of payment to the Note, or (iii) such indebtedness is incurred in connection with project finance transactions by the Company, such indebtedness will be recourse only to the project and/or project assets or properties, so encumbered, except to the extent a corporate guarantee by the Company may be required in connection therewith. Notwithstanding the foregoing, all such indebtedness contemplated under (i), (ii) and (iii), to the extent it ranks senior to the Note, shall rank senior to the Note only as to the payment from the assets or property encumbered and shall rank pari passu to the Note for all other purposes. 3. Covenants (A) The Company will not merge or consolidate with or sell, convey, transfer or lease or otherwise dispose of all, or substantially all, of its assets unless: (a) either (i) the Company shall be the surviving Person in the case of a merger or (ii) the Person (if other than the Company) formed by such consolidation or into which the Company is merged or the Person(s) which acquired by conveyance or transfer, or which leases, all or substantially all of the Properties and assets of the Company (1) shall be organized and validly existing under the laws of the United States of America, any state thereof or the District of Columbia and (2) shall expressly assume the Company's obligation for the due and punctual payment of the principal of and interest on the Note and the performance and observance of every covenant on the part of the Company to be performed or observed; and (b) immediately after giving effect to such transaction (and treating any indebtedness which becomes an obligation of the 2 Company in connection with or as a result of such transaction as having been incurred at the time of such transaction), no Default or Event of Default shall have occurred and be continuing. (B) Upon any consolidation of the Company with or merger of the Company with or into any other Person or any conveyance, transfer or lease of all or substantially all of the Properties and assets of the Company to any Person(s), the successor Person formed by such consolidation or into which the Company is merged or to which such conveyance, transfer or lease is made shall succeed to, and be substituted for, and may exercise every right and power of, the Company as Issuer of the Note with the same effect as if such successor Person(s) had been named as the Company herein, and in the event of any such conveyance or transfer, the Company, except in the case of a lease, shall be discharged of all obligations and covenants under the Note. (C) The Company shall furnish to Holder, promptly upon becoming aware of the existence of any condition or event which constitutes a Default or an Event of Default, written notice specifying the nature and period of existence thereof and the action which the Company is taking or proposes to take with respect thereto. (D) The Company will immediately notify Holder of any default under the terms of any outstanding indebtedness, if such default is not waived or cured within the period provided for such cure by the relevant loan documents. (E) After an Event of Default, the Company will not purchase or redeem any of the Shares, and the Company further agrees not to pay dividends with respect to any of its Shares, other than such dividends that it is contractually obligated to pay as of the Closing Date of this Note. (F) From the Closing Date until Maturity, the Company will not amend its articles of incorporation or bylaws in such a manner that will be detrimental to the terms of this Note or to the Company's ability to perform its obligations under the Note. 4. Interest The Note shall bear interest from (and including) the Closing Date until the principal thereof is paid in full, at the rate of 5 % per annum on the principal amount thereof outstanding from time to time. Except as otherwise provided herein, interest shall be due and payable semi-annually in arrears on May 26 and November 26 of 3 each year (each an "Interest Payment Date"), the first such payment to be made on May 26, 2000. The Note will cease to bear interest (i) from its due date for redemption unless the Company shall default in the payment of the Redemption Price, in which event interest shall continue to accrue, or (ii) where the Conversion Right shall have been voluntarily exercised by the Holder, from the Conversion Date, or (iii) in the case of a Mandatory Conversion, from the Mandatory Conversion Date. Interest is calculated on the basis of a 360 day year consisting of 12 months of 30 days each and, in the case of an incomplete month, the number of days elapsed. 5. Put Options (A) General For a period of nine months after the Closing Date (the "Restricted Put Period"), Holder shall have the right from time to time to compel Issuer (subject to the provisions stated herein) to redeem the Note (the "Put") into either cash or the issuance of the Company's $.01 par value common stock ("Shares") ("Put Consideration"), which form of Put Consideration shall be at the sole option of the Company, provided that (a) the Put Consideration shall be used solely for the purpose of retiring or exchanging secured obligations of Holder (including without limitation vendor notes, preferred stock and indentures of Holder) and (b) the retirement or exchange of the securities is at a discount to either or both (i) the outstanding amount of the secured obligation and/or (ii) the amount of the Put Consideration to be received pursuant to the Put, which discount will be acceptable to Company in its sole and absolute discretion. If at any time during a term of nine (9) months beginning after the nine (9) month period stated above or for a term of nine (9) months beginning during the nine (9) month period if the Letter of Intent between Company and Holder has terminated, the Put shall be freely exercisable at the sole discretion of the Holder without restriction and without approval of Company, for an amount equal to 50% of the then outstanding principal amount of the Note (plus accrued interest), payable either in cash or in Shares, at the sole election of Company; provided, however, such Put must be exercised by Holder(s) of the Note(s) aggregating not less than 50% of the then outstanding principal balance of the outstanding Note(s). Subject to the exercise of the Automatic Put described in Section 5(C) below, if such Put is not exercised within such period of time then the Put shall terminate and be null and void. (B) Put Procedure 4 To exercise the Put right, the Holder must complete, execute and deliver at its own expense to the office of the Company at 16285 Park Ten Place, Suite 600, Houston, TX 77084, Attention: Larry E. Cummings, Secretary, a notice of put exercise (a "Put Notice"). If the Put Notice is delivered within the Restricted Put Period, the Put Notice shall set forth (i) the Holder's desire to exercise the Put, (ii) the secured obligations of the Holder to be retired by, or exchanged for, the Put Consideration and (iii) the amount of the discount (A) at which the secured obligation will be retired or exchanged and/or (B) to the Put Consideration receivable on exercise of the Put. If the Company receives a Put Notice during the Restricted Put Period, the Company will have a period of 30 calendar days after the receipt of the Put Notice to accept or reject the exercise of the Put by delivering written notice to the Holder at his registered address in accordance with Section 14 hereof. Should Company elect to accept the exercise of the Put ("Company Put Acceptance Notice"), Holder shall have a period of five (5) Business Days after receipt of the Company Put Acceptance Notice to deliver the Note to Company. If the Put Notice is delivered within the nine (9) month term after the Restricted Put Period, the Put Notice shall set forth Holder's desire to exercise the Put, and shall be accompanied by the applicable Note. As soon as reasonably practicable, after (i) in the case a Put Notice is given by Holder during the Restricted Put Period, the Company's receipt of the applicable Note after the mailing of the Company Put Acceptance Notice and (ii) in the case a Put Notice is given by the Holder during the nine (9) month period after expiration of the Restricted Put Period, the Company's receipt of the Put Notice and applicable Note, but either case not later than 15 days after the Company's receipt of the applicable Note or the Put Notice and applicable Note, as applicable, the Company shall redeem the then outstanding principal balance of the Note at the agreed upon discount (plus accrued interest thereon) as set forth in Section 5(A) above. The Redemption Price shall be payable in cash or Shares at the Company's sole discretion. The date of the Put (the "Put Date") shall be deemed the delivery to the Company of the applicable Put Notice. An election by Holder to exercise the Put once made and delivered to Company shall be irrevocable by Holder regardless of whether the Put is accepted or rejected by the Company. (C) Automatic Put Notwithstanding the exercise of the Put during the time periods set out in Section 5(A) above and subject to the Company's right to reject the automatic exercise described below, if at any time from the Closing Date until Maturity the Permitted Lienholder institutes an action to foreclose on the Note, in whole or in part, such filing shall immediately cause the exercise of the Put in accordance with Section 5(A) above (but without regard to the nine month time restriction contained in the second sentence of Section 5(A)) but only to the extent it covers the share of the Note pledged by the Noteholder to the Permitted Lienholder (the "Pledged Portion"). Upon the automatic exercise of the Put as herein provided, Company shall have a period of five (5) business days from the date the foreclosure action was filed, to advise Noteholder and Permitted Lienholder whether it elects to (i) accept the 5 exercise of the Put or (ii) reject the automatic exercise of the Put. Should Company elect to accept the automatic exercise of the Put, Noteholder shall have an additional period of five (5) business days to from the receipt of Company's notice to deliver the Note. Upon receipt of such Note, the Company shall as soon as reasonably practicable thereafter (i) redeem the Pledged Portion of the Note at the agreed upon discount (plus accrued interest thereon) if such foreclosure is filed within the Restricted Put Period, otherwise such redemption will be for an amount equal to 50% of the then outstanding principal balance of the Pledged Portion of the Note (plus accrued interest thereon) and (ii) issue to Noteholder a new Note representing the difference, if any, between the principal balance of the surrendered Note and the Pledged Portion of the Note. If the Company elects to reject, or fails to timely elect to accept, the automatic exercise of the Put, the Permitted Lienholder shall become a Holder of the Pledged Portion of the Note (plus all accrued interest thereon) for all purposes of this Note without regard to further restrictions under this Section 5(c), and the Company shall be deemed to have given its prior written consent to the transfer and assignment of the Pledged Portion of the Note to the Permitted Lienholder in accordance with Section 15 hereof. (D) Payment in Shares If the Put is paid in Shares, the number of Shares to be received by the Holder on exercise of the Put shall be equal to the quotient of (i) the sum of the outstanding principal balance of the Note plus the accrued interest thereon, reduced by the applicable discount amount divided by (ii) the average Market Price of a Share during the 30 consecutive calendar day period ending as of the Put Date. 6. Payments Except as otherwise provided under this Note, the payment of principal with respect to the Note, and the semi-annual payment of interest on an Interest Payment Date, shall be paid by wire transfer in immediately available funds in accordance with payment instructions set forth on Exhibit "A" or to any account in the United States which the Holder may designate by written notice to the Company in accordance with Section 14 hereof at least Five Business Days prior to the due date. If the date for any payment due under the Note falls on a day which is not a Business Day, such payment date shall be deemed to have fallen on the next Business Day. When making payments to the Holder, fractions of one cent will be rounded down to the nearest whole cent. 7. Conversion (A) Conversion Period and Price 6 (i) The Holder has the right, subject as provided herein and to any applicable laws and regulations, to require the Company to convert the outstanding principal amount of the Note into fully paid and non-assessable Shares at any time during the Conversion Period. The Conversion Period begins on the Closing Date hereof, and ends upon the earliest to occur of (a) the second Business Day prior to the later of Maturity or the date on which all principal and interest on the Note is repaid in full, (b) if such Notes shall have been called for redemption, the close of the second Business Day prior to the Redemption Date, or (c) the effective date of a Mandatory Conversion. Upon conversion, the right of the converting Holder to repayment of the outstanding principal amount of the Note and accrued interest thereon shall be extinguished and released, and in consideration and exchange therefor the Company shall issue Shares for the outstanding principal amount of the Note plus accrued interest thereon through the Conversion Date at the Conversion Price. Upon such issuance of the Shares, the Note will be credited as paid up in full. (ii) The number of Shares to be issued on conversion of a Note will be determined by dividing the outstanding principal amount of the Note plus accrued interest by the Conversion Price (as defined below) in effect on the Conversion Date, with the result being rounded down to the nearest whole number. (iii) A Conversion Right may only be exercised as to the full outstanding principal balance of the Note held by the registered Holder. Fractions of Shares will not be issued on conversion and no cash adjustments will be made with respect thereof. (iv) The price at which Shares will be issued upon conversion (the "Conversion Price") will be U.S. $6.50 per Share but will be subject to adjustment in the manner provided in Section 7(C). The Company shall give notice of any adjustment of the Conversion Price in accordance with Section 14 within ten (10) days after the date of such adjustment. (v) Notwithstanding the provisions of paragraph (i) of this Section 7(A), if the Company shall default in making payment in full with respect to the Note which shall have been called for redemption prior to Maturity, then from the Redemption Date, interest shall continue to accrue on such Note and the Conversion Right attached to such Note will continue to be exercisable (unless already exercised by the Company pursuant to Section 7(D)) up to, and including the close of business on the date upon which the full amount of the monies payable with respect of such Note is due or, if earlier, Maturity. (B) Procedure for Conversion 7 (i) To exercise the Conversion Right attached to the Note, the Holder must complete, execute and mail at its own expense to the office of the Company at 16285 Park Ten Place, Suite 600, Houston, TX 77084, Attention: Larry E. Cummings, Secretary, a notice of conversion (a "Conversion Notice") in the form attached hereto as Exhibit "B" and incorporated herein by reference to this Note. The Conversion Date will be deemed to be the date of such Conversion Notice. A Conversion Notice once delivered shall be irrevocable. (ii) As soon as practicable, and in any event not later than fourteen (14) calendar days after the Conversion Date, the Company will in the case of the Note converted on exercise of the Conversion Right shall cause the Holder of the Note as designated in the Conversion Notice to be registered as Holder of the relevant number of Shares and will make a certificate or certificates for the relevant Shares available for collection at the Company's principal office in Houston, Texas or, if so requested in the relevant Conversion Notice, will deliver such certificate or certificates to the person and at the place specified in the Conversion Notice, at the risk of the Holder, together with any other securities, property or cash required to be delivered upon conversion and such assignments and other documents (if any) as may be required by law to effect the transfer thereof. (iii) The registered Holder of the Note being converted will be deemed for all purposes to be the holder of record of the number of Shares issuable upon conversion with effect from the Conversion Date or Mandatory Conversion Date, as the case may be. The Shares issued upon conversion of the Notes will in all respects rank pari passu with the issued and outstanding Shares issued on the relevant Conversion Date or Mandatory Conversion Date, as the case may be, except for any right excluded by mandatory provisions of applicable law. A Holder of Shares issued on conversion of Notes shall not be entitled to any rights for any record date which precedes the relevant Conversion Date or Mandatory Conversion Date, as the case may be. (iv) If any notice requiring the redemption of the Note is given pursuant to Section 8(B) on or after the fifteenth (15th) calendar day prior to the record date with respect to any dividend payable with respect to such Shares and such notice specifies a date for redemption falling on or prior to the next following Interest Payment Date, interest shall (subject as hereinafter provided) accrue on Notes which shall have been delivered for conversion on or after such record date. Any such interest shall be paid by the Company not later than fourteen (14) calendar days after the relevant Conversion Date pursuant to instructions given by the Holder. (C) Adjustments in Conversion Price The Conversion Price is subject to adjustment upon the occurrence of certain events, including: 8 (i) stock dividends; (ii) the subdivision, combination or reclassification of outstanding shares of Common Stock; (iii) issuances to all stockholders of the Company of securities which are exercisable or convertible into Shares at a price less than the Market Price for the Shares; (iv) issuances of Shares to all stockholders of the Company for cash at a price less than the fair market value, as determined by the Board of Directors, other than issuances pursuant to the conversion of this Note or the then outstanding securities of the Company (including, but not limited to, the 5% Convertible Notes due 2003, Series G Preferred Stock and any warrants to purchase Shares, or in connection with any plan of the Company for granting rights or options to purchase stock in connection with any employee compensation or benefit plan of the Company, whether now in effect or hereafter created or amended, including, but not limited to, the Company's Qualified Stock Option Plan, Non-Qualified Incentive Stock Option Plan, Directors Stock Option Plan, 1993 Stock Option and Restricted Stock Plan and 1996 Incentive and Nonstatutory Option Plan); and (v) the distribution to all holders of Common Stock of a class of debt securities of the Company or of assets or rights or warrants to purchase securities of the Company (excluding those rights and warrants referred to above and cash dividends or distributions from current or retained earnings), any one or more of such actions described in clauses (i) through (v) above referred to herein as an "Adjustment Event". The Company may at any time or from time to time reduce the Conversion Price under this Note temporarily or permanently. Upon the occurrence of an Adjustment Event under clauses (i) or (ii) above, the number of Shares issuable upon conversion of the Note immediately prior to the record date of such Adjustment Event shall be adjusted so that the Holder shall thereafter be entitled to receive the number of Shares that the Holder would have owned or have been entitled to receive after the occurrence of such Adjustment Event or any record date with respect thereto. An adjustment made pursuant to immediately preceding sentence shall become effective immediately after the effective date of such Adjustment Event retroactive to the record date, if any, for such Adjustment Event. Whenever the number of Shares issuable upon the conversion of the Note is adjusted pursuant to this paragraph, the Conversion Price for each Share shall be adjusted by multiplying such Conversion Price in effect immediately prior to such Adjustment Event by a fraction, the numerator of which shall be the number of Shares issuable upon conversion of the Note immediately prior to such Adjustment Event, and the denominator of which shall be the number of Shares so issuable immediately thereafter. Upon the occurrence of an Adjustment Event under clause (iii) or (iv) above, then the Conversion Price per Share shall be adjusted by dividing (i) the sum of (A) the product obtained by multiplying the number of Shares outstanding immediately prior to such issuance (on a fully diluted basis) by the Conversion Price per share in effect immediately prior to such issuance, plus (B) the aggregate consideration, if any, received by the Company upon such issuance, plus (C) the minimum aggregate amount of additional consideration, if any, payable to the Company upon the conversion of exercise thereof, by (ii) the number of Shares outstanding immediately after such issuance (on a fully diluted basis). Whenever the Conversion Price per share is adjusted as provided in this paragraph, the number of Shares issuable upon conversion of the Note immediately after such Adjustment Event shall be adjusted, to equal the product obtained (calculated to the nearest full share) by multiplying such number of Shares by a fraction, the numerator of which is the Conversion Price per share in 9 effect immediately prior to such Adjustment Event and the denominator of which is the Conversion Price per share under the immediately preceding sentence, which adjusted number of Shares shall thereupon be the number of Shares issuable upon conversion of the Note until further adjusted as provided herein. For purposes of the immediately preceding paragraph, "on a fully diluted basis" means that all outstanding options, rights or warrants to subscribe for Shares and all securities convertible into or exchangeable for Shares (such options, rights, warrants and securities are collectively referred to herein as "Convertible Securities") and all options or rights to acquire Convertible Securities have been exercised, converted or exchanged. Upon the occurrence of an Adjustment Event under clause (v) above, the Conversion Price and the number of Shares issuable on conversion of the Note shall be adjusted as appropriate so that the economic benefits and losses that would have accrued to the Holder of the Note upon conversion of the Note prior to such Adjustment Event shall be equal as commercially possible to the economic benefits and losses that would of accrued to such Holder upon conversion of the Note after such Adjustment Event. Such adjustments shall be effective as of the earlier of the Adjustment Event or the record date, if any, of such Adjustment Event. No adjustment will be made where such adjustment would be less than five percent (5%) of the Conversion Price then in effect. Any adjustment not so made will be carried forward and taken into account in any subsequent adjustment. On any adjustment, the resultant Conversion Price, if not an integral multiple of one cent shall be rounded up to the nearest one cent. The Conversion Price may not be reduced so that, on conversion of the Note, Shares would be issued for an amount less than their par value. (D) Mandatory Conversion (i) Holder acknowledges and agrees that the Company may elect to exercise the Conversion Right on behalf of the Holder with respect to the Note at the Conversion Price applicable as of the date fixed by the Company for such conversion (the "Mandatory Conversion Date"), provided that the average of the Market Price of the Shares over any thirty (30) consecutive calendar day period, on or after the Closing Date is equal to or greater than 125% of the Conversion Price. (ii) Not less than 30 calendar days following the Mandatory Conversion Date, the Company shall cause written notice of the Mandatory Conversion Date to be given to the Holder. Following such notice, the Holder will be required within 30 days after such date to deliver or procure delivery of the Note together with a duly completed Conversion Notice to the office of Company and to perform the obligations applicable to it on conversion specified in this Section 7(D). Failure to 10 deliver the Conversion Notice shall not affect the conversion of the Note pursuant to the terms of this Section 7(D). (iii) From and after the Mandatory Conversion Date, the Note shall cease to constitute indebtedness of the Company and shall thereafter be only deemed to represent the right to receive Shares. (E) Consolidation, Amalgamation or Merger In the event that the Company shall be a party to any transaction, including without limitation any (i) recapitalization or reclassification of the Shares (other than a change in par value, or from par value to no par value, or from no par value to par value, or as a result of subdivision or combination of the Shares ), (ii) any consolidation of the Company with, or merger of the Company into, any other person, any merger of another person into the Company (other than a merger which does not result in a reclassification, conversion, exchange or cancellation of all of the outstanding shares of Common Stock of the Company), (iii) any sale or transfer of all or substantially all of the assets of the Company, or (iv) any compulsory share exchange pursuant to which the Shares are converted into the right to receive other securities, cash or Property, the Company (and to the extent possible, the resulting entity) will forthwith notify the Holder of such event and ensure that the Holder of the Note will have the right (during the period in which such Note shall be convertible) to convert such Note into the class and amount of shares and other securities and property receivable which would have become liable to be issued upon conversion of such Note immediately prior to the transaction. 8. Payment, Redemption and Purchase (A) Unless previously redeemed, converted or purchased and canceled as provided herein, the Company will pay the Note in full in immediately available funds the outstanding principal amount plus all accrued and unpaid interest on through Maturity. (B) (i) At any time on or after May 26, 2002, but prior to November 26, 2002, the Company may at its option redeem the Note, in whole or in part, for the outstanding principal amount, together with interest (if any) accrued to (but excluding) the Redemption Date, payable in cash or Shares. If Company elects to redeem the Note for Shares, the Note will be redeemed for the number of shares of Common Stock equal to the sum of the outstanding principal amount plus accrued and unpaid interest divided by the average Market Price of the shares over the 30 calendar days immediately preceding the date of notice of such redemption. 11 (ii) Commencing November 26, 2002 and ending on Maturity, Company may at its option redeem, pursuant and subject to the provisions set forth above, up to 50% of the Note for Shares, and, on Maturity, Company may redeem the outstanding Note for Shares. If Company elects to redeem the Note for Shares, each Note will be redeemed for the number of shares of Common Stock equal to 110% of the sum of the face value of the Note plus interest accrued and unpaid thereon divided by the average Market Price of the Shares over the 30 calendar days immediately preceding the date of notice of such redemption; provided, however, that if the average of the aggregate Market Price of all outstanding shares of Common Stock over such 30 calendar day period is less than $500 million, each Note will be redeemed for the number of shares of Common Stock equal to 115% of the sum of the face value of the Note plus interest accrued and unpaid thereon divided by the average of the Market Price of the Common Stock over the 30 calendar day period immediately preceding the date of notice of such redemption. (C) To exercise the Redemption Right, the Company must timely deliver written notice (the "Redemption Notice") to the Holder of the Note in accordance with Section 14 not less than 30 days or more than 60 days prior to the Redemption Date. The Redemption Notice shall set forth (i) the principal amount of the Notes (plus accrued interest) that the Company shall redeem on the Redemption Date, (ii) the Redemption Date, (iii) the Redemption Price, (iv) the place for delivery of the Note and any other necessary transfer instruments to be executed by the Holder in order to collect the Redemption Price. The Redemption Notice once given is irrevocable by the Company. Upon the expiration of any such notice period referred to in Section 8(C), the Company shall pay the Note as provided in 8(A). (D) Subject to applicable law, the Company may at any time purchase the Note together with all accrued interest thereon from the Holder in any manner and at any price negotiated between the parties. (E) If the Note is redeemed by the Company it will be forthwith canceled and may not be reissued or resold. 9. Taxation All payments with respect to the Note by the Company shall be made without withholding or deduction for, or on account of, any present or future taxes, assessments or governmental charges of whatever nature ("Taxes") imposed or levied by or on behalf of the U.S. or any political sub-division of the U.S. having power to tax, unless the withholding or deduction of the Taxes is required by law. In that event, the Company will pay to the Holder the net amount due in connection with the Note, after the withholding or deduction of such Taxes paid (or to be paid), and 12 Company shall not be responsible for the payment of any additional amounts to third parties on behalf of the Holder. 10. Additional Covenants While any Conversion Right remains exercisable, the Company will: (A) at all times keep available for issuance free from any preemptive rights out of its authorized but unissued capital such number of Shares as would enable the Conversion Rights to be satisfied in full; and (B) not in any way adversely modify the rights attached to the Shares with respect to voting, dividends or liquidation, except to the extent all Common Shares are equally affected. 11. Events of Default The Note is, and it shall accordingly become, immediately due and payable for the outstanding principal amount on the Note together with accrued interest, if any of the following events (each an "Event of Default") shall have occurred (unless such Event of Default has been remedied to the satisfaction of the Holder and waived): (A) if default is made for a period of five (5) Business Days or more in the payment of any interest due with respect to the Note; or (B) if the Company fails to perform or observe any of its other obligations, covenants, conditions or provisions under the Note or Purchase and Sale Agreement and such failure continues for a period of 30 calendar days (or such longer period as the Holder may in its absolute discretion permit) following the service by the Holder on the Company of a notice of default requiring the same to be remedied; or (C) if (i) any other indebtedness of the Company becomes due and payable prior to its stated maturity by reason of an event of default (howsoever described) or (ii) any such indebtedness of the Company is not paid when due or, as the case may be, within any applicable grace period, and in each such case such event continues unremedied for a period of 30 calendar days, provided in each such case the indebtedness exceeds $2,000,000; or (D) if the Company shall be declared or adjudicated by a competent court to be insolvent or bankrupt, consents to the entry of an order of relief against it in an involuntary bankruptcy case, shall enter into any assignment or other similar arrangement for the benefit of its creditors or consents to the appointment of a custodian (including, without limitation, a receiver, liquidator or trustee); or 13 (E) if a receiver shall be appointed for the Company or in relation to all or substantially all of the assets of either of them, or a creditor shall levy and foreclose upon (and take possession of) all or substantially all of the assets of Company, and in any of the foregoing cases is not paid out or discharged within 90 calendar days; or (F) if the Company institutes proceedings to be adjudicated a voluntary bankrupt, or shall consent to the filing of a bankruptcy proceeding against it, or shall file a petition or answer or consent seeking organization under the laws of the Federal Bankruptcy Code or any similar applicable U.S. federal or state law, or shall consent to the filing of any such petition, or shall consent to the appointment of a receiver or liquidator or trustee or assignee (or other similar official) in bankruptcy or insolvency of it or its Property, or shall make an assignment for the benefit of creditors, or shall admit in writing its inability to pay its debts generally as they come due; or (G) if a decree or order by a court of competent jurisdiction shall have been entered against the Company or any declaring either of them a bankrupt or insolvent, or approving a petition seeking the reorganization of the Company under the Federal Bankruptcy Code or any other similar applicable U.S. federal or state law, and such decree or order shall continue undischarged or unstayed for a period of 90 calendar days; or a decree or order by a court of competent jurisdiction for the appointment of a receiver or liquidator or trustee or assignee (or other similar official) in bankruptcy or insolvency of the Company, or for the winding up or liquidation of its affairs, shall have been entered, and such decree or order shall have continued undischarged and unstayed for a period of 90 calendar days; or (H) A material breach of a representation or warranty contained in the Purchase and Sale Agreement occurs and is not remedied, if curable, within 90 days after notice of such breach. 12. Replacement of Notes Should the Note be lost, stolen, mutilated, defaced or destroyed, it may be replaced at the office of the Company upon payment by the claimant of the expenses incurred in connection with the replacement and on such terms as to evidence indemnity and security as the Company may reasonably require. Mutilated or defaced Notes must be surrendered before replacements will be issued. 13. Registration Statement Company agrees that in the event Shares are issued to Holder under the terms of this Convertible Note, Company will file, or cause to be filed, a separate registration statement with the Securities and Exchange Commission for purposes of 14 registering for resale Holder's Shares under the U. S. Securities Act of 1933, as amended, and any applicable state securities or blue sky law, within five (5) months following the issuance of such Shares, and shall use its commercially reasonable best efforts to have such registration statement declared effective as soon as reasonably possible after such filing, as more fully set forth in Section 4.11 of that certain Purchase and Sale Agreement dated contemporaneously with this Note. 14. Notices All Notices required or permitted under this Note shall be in writing and shall be personally delivered or by certified mail, postage prepaid and return receipt requested or by telecopier to the address designated by Holder. All notices given by personal delivery or mail shall be effective on the date of actual receipt. All notices by telecopier shall be confirmed in writing on the day of transmission by personal delivery or certified mail. 15. Transferability. Except for transfers by Noteholder to a Permitted Assignee, this Note may not be transferred, assigned, hypothecated, sold or conveyed ("Transfers" or "Transferred") in any manner, in whole or in part, by Holder or any Permitted Assignee, without Company's prior written consent, which consent may be withheld for any reason at Company's sole and absolute discretion. Any attempt transfer of the Note by Holder or Permitted Assignee in violation of this Section 15 shall be void ab initio and of no force and effect. 16. Definitions The terms set forth below shall have the meanings ascribed to them below: "Affiliate" of any specified Person means any other Person directly or indirectly controlling or controlled by or under direct or indirect common control with such specified Person and the terms "controlling" and "controlled" have meanings correlative to the foregoing. "Board of Directors" means either the board of directors of the Company or any duly authorized committee of that board. 15 "Business Day" means each Monday, Tuesday, Wednesday, Thursday, and Friday which is a day on which banking institutions in Houston, Texas are not authorized or obliged by law, regulation or executive order to close. "Closing Date" means December 30, 1999. "Common Stock" means, with respect to any Person, any and all shares, interests, participation and other equivalents (however designated, whether voting or non-voting) of such Person's common stock, whether now outstanding or issued after the date of this Indenture, and includes, without limitation, all series and classes of such common stock. "Company" means Harken Energy Corporation. "Conversion Date" means the Business Day during the Conversion Period on which the Conversion Right is exercised by delivery to the Company of the Note surrendered for conversion and the completed "Conversion Date" means the Business Day during the Conversion Period on which the Conversion Right is exercised by delivery to the Company of the Note surrendered for conversion and the completed notice of a Holder's intention to exercise its Conversion Right with respect to the Note. "Conversion Period" means, with respect to any Note, the period which is provided in Section 7(A) of this Note. "Conversion Price" means the price at which Conversion Shares shall be issued upon conversion as provided in Section 7(A) hereof, subject to adjustment as set forth herein. "Conversion Right" means the right of a Holder of the Note to convert such Note into Conversion Shares. "Conversion Shares" means the Shares into which the Notes are convertible. "Corporation" includes corporations, limited liability companies, limited and general partnerships, associations, joint-stock companies and business trusts. "Event of Default" has the meaning specified in Section 11. "Holder" means a Person who is the registered holder of a Note. "Indebtedness" of any Person means and includes all present and future obligations of such Person. "Interest Payment Date" means May 26 and November 26 of each year while any portion of this Note remains outstanding, commencing May 26, 2000. 16 "Mandatory Conversion" means conversion of the Notes at the option of the Company pursuant to Section 7(D). "Mandatory Conversion Date" means the date specified in a notice published by the Company in accordance with Section 7(D), on which the Holder is required to surrender its Note for conversion. "Market Price" of a Share on any day shall mean (i) the closing sales price on the immediately preceding business day of a Share as reported on the principal securities exchange on which Shares are then listed or admitted to trading or (ii) if not so reported, the average of the closing bid and asked prices for a Share on the immediately preceding business day as quoted on the National Association of Securities Dealers Automated Quotation System ("NASDAQ") or (iii) if not quoted on NASDAQ, the average of the closing bid and asked prices for a Share as quoted by the National Quotation Bureau's "Pink Sheets" or the National Association of Securities Dealers' OTC Bulletin Board System. If the price of a Share shall not be so reported, the Market Price of a Share shall be determined by the Company's board of directors in good faith. "Maturity," when used with respect to any Note, means the date on which the principal of such Note becomes due and payable as therein or herein provided, whether at Maturity or the Redemption Date and whether by declaration of acceleration, call for redemption or otherwise. As used in this Note, Maturity is May 26, 2003. "Note" has the meaning stated in the first recital of this Convertible Note. "Permitted Assignees" means (i) Stewart Peck, in his capacity as Collateral Agent for Participating Creditors in the Debt Restructure Agreement dated August 6, 1999, for an amount up to $4,071,320.74 out of the Principal Amount of the Note plus interest accrued or thererafter payable thereon and (ii) the Permitted Lienholder for an amount up to $7,928,679.26 out of the Principal Amount of the Note plus interest accrued or thereafter payable thereon; provided, however, any Transfer to the Permitted Lienholder shall be for the sole purpose of Holder granting to Permitted Lienholder a security interest in, or lien on, the Note. The Permitted Lienholder shall foreclose upon such security interest or pledge, provided, further, if Permitted Lienholder shall foreclose on such security interest or pledge, the Permitted Lienholder shall be subject to the Automatic Put provisions contained in Section 5(c) of the Note. "Permitted Lienholder" means Encap Energy Capital Fund III, L.P. for an amount equal to $7,928,679.26 out of the Principal Amount of the Note, plus interest accrued or thereafter payable thereon. 17 "Person" means any individual, corporation, limited liability corporation, limited or general partnership, joint venture, association, joint-stock company, trust, unincorporated organization or government entity or any agency or political subdivision thereof. "Property or Properties" means any kind of property or asset, whether real, personal or mixed, or tangible or intangible, and any interest therein. "Put Consideration" when used with respect to this Note, means the value paid, in cash or Shares, for the redemption of the Note in the manner set forth in Section 5. "Put Date" has the meaning specified in Section 5. "Put Notice" has the meaning specified in Section 5. "Redemption Date," when used with respect to any Note to be redeemed, in whole or in part, means the date fixed for such redemption by or pursuant to this Note. "Redemption Price," when used with respect to any Note to be redeemed, means the price at which they are to be redeemed pursuant to the terms hereof, plus accrued interest to the Redemption Date if applicable. "Restricted Put Period" has the meaning specified in Section 5. "Securities Act" means the Securities Act of 1933, as amended, and the rules and regulations promulgated from time to time by the Commission pursuant thereto. "Shares" means the common stock, par value U.S.$0.01, of the Company (and all other (if any) shares or stock resulting from any sub-division, consolidation or reclassification or such shares). 17. Governing Law This Note is governed by, and will be construed in accordance with, the laws of the State of Texas. 18. Other Defined Terms Capitalized words and terms used in this Note that are defined elsewhere in this Note are used herein as therein defined. 18 IN WITNESS WHEREOF, the Issuer has caused this Note to be duly executed in its corporate name by the signature of the undersigned duly authorized officer of the Issuer. DATED as of December ___, 1999. HARKEN ENERGY CORPORATION By: /s/ Larry E. Cummings --------------------------------- Larry E. Cummings, Vice President [Corporate Seal] ATTEST: By: ------------------------------------- Name: ----------------------------------- Assistant Secretary 19 -----END PRIVACY-ENHANCED MESSAGE-----