-----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, UAiUwTI+X/TqrqpUS4r0QKM+kq5uF2RR/ac9UfdMoQnccBj7XMT1Sm/z24kQj/Gc DFrrg+icODoIVP99AOK8Aw== 0000950134-96-003946.txt : 19960809 0000950134-96-003946.hdr.sgml : 19960809 ACCESSION NUMBER: 0000950134-96-003946 CONFORMED SUBMISSION TYPE: 10-Q PUBLIC DOCUMENT COUNT: 7 CONFORMED PERIOD OF REPORT: 19960630 FILED AS OF DATE: 19960808 SROS: AMEX 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: 96605978 BUSINESS ADDRESS: STREET 1: 5605 N MACARTHUR STE 400 CITY: IRVING STATE: TX ZIP: 75038 BUSINESS PHONE: 2147536900 MAIL ADDRESS: STREET 1: 2505 NORTH HWY 360 STREET 2: STE 800 CITY: GRAND PRAIRIE STATE: TX ZIP: 75050 FORMER COMPANY: FORMER CONFORMED NAME: HARKEN OIL & GAS INC DATE OF NAME CHANGE: 19890109 10-Q 1 FORM 10-Q FOR QUARTER ENDED JUNE 30, 1996 1 ================================================================================ SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549 FORM 10-Q [x] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15 (D) OF THE SECURITIES EXCHANGE ACT OF 1934 FOR THE QUARTERLY PERIOD ENDED JUNE 30, 1996 [ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES EXCHANGE ACT OF 1934. FOR THE TRANSITION PERIOD FROM ______ TO ______ COMMISSION FILE NUMBER 0-9207 HARKEN ENERGY CORPORATION (Exact name of registrant as specified in its charter) DELAWARE 95-2841597 (State or other jurisdiction of (I.R.S. Employer incorporation or organization) Identification No.) 5605 N. MACARTHUR BLVD., SUITE 400 75038 IRVING, TEXAS (Zip Code) (Address of principal executive offices) Registrant's telephone number, including area code (214) 753-6900 INDICATE BY CHECK MARK WHETHER THE REGISTRANT (1) HAS FILED ALL REPORTS REQUIRED TO BE FILED BY SECTION 13 OR 15(D) OF THE SECURITIES EXCHANGE ACT OF 1934 DURING THE PRECEDING 12 MONTHS (OR FOR SUCH SHORTER PERIOD THAT THE REGISTRANT WAS REQUIRED TO FILE SUCH REPORTS), AND (2) HAS BEEN SUBJECT TO SUCH FILING REQUIREMENTS FOR THE PAST 90 DAYS. YES X NO --- --- The number of shares of Common Stock, par value $0.01 per share, outstanding as of July 31, 1996 was 92,145,796 net of 400,896 Treasury Shares. ================================================================================ 2 HARKEN ENERGY CORPORATION INDEX TO QUARTERLY REPORT JUNE 30, 1996
PAGE ---- PART I. FINANCIAL INFORMATION Item 1. Condensed Financial Statements Consolidated Condensed Balance Sheets . . . . . . . . . . . . 4 Consolidated Condensed Statements of Operations . . . . . . . 5 Consolidated Condensed Statements of Stockholders' Equity . . 6 Consolidated Condensed Statements of Cash Flow . . . . . . . 7 Notes to Consolidated Condensed Financial Statements . . . . 8 Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations . . . . . . . . . . . . . . . . . . 22 PART II. OTHER INFORMATION . . . . . . . . . . . . . . . . . . . . . . . . . 32 SIGNATURES . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 35
2 3 PART I - FINANCIAL INFORMATION 3 4 ITEM 1. CONDENSED FINANCIAL STATEMENTS HARKEN ENERGY CORPORATION AND SUBSIDIARIES CONSOLIDATED CONDENSED BALANCE SHEETS (unaudited)
DECEMBER 31, JUNE 30, 1995 1996 ---------------- ---------------- ASSETS ------ Current Assets: Cash and temporary investments . . . . . . . . . . . . . . . $ 4,456,000 $ 14,888,000 Cash available in European segregated account . . . . . . . 4,705,000 871,000 Accounts receivable, net . . . . . . . . . . . . . . . . . . 1,061,000 1,237,000 Prepaid expenses and other current assets . . . . . . . . . 309,000 211,000 ---------------- ---------------- Total Current Assets . . . . . . . . . . . . . . . . . 10,531,000 17,207,000 Property and Equipment, net . . . . . . . . . . . . . . . . . . 52,142,000 51,057,000 Restricted Cash in European Segregated Account . . . . . . . 6,173,000 -- Notes Receivable from Related Parties, including interest . . . 232,000 232,000 Other Assets, net . . . . . . . . . . . . . . . . . . . . . . . 1,716,000 432,000 ---------------- ---------------- $ 70,794,000 $ 68,928,000 ================ ================ LIABILITIES AND STOCKHOLDERS' EQUITY ------------------------------------ Current Liabilities: Trade payables . . . . . . . . . . . . . . . . . . . . . . $ 356,000 $ 490,000 Accrued liabilities and other . . . . . . . . . . . . . . . 2,722,000 2,203,000 Notes payable and current portion of long-term obligations . 868,000 -- Revenues and royalties payable . . . . . . . . . . . . . . . 972,000 1,104,000 ---------------- ---------------- Total Current Liabilities . . . . . . . . . . . . . . 4,918,000 3,797,000 Long-Term Obligations . . . . . . . . . . . . . . . . . . . . . 13,176,000 10,429,000 European Convertible Notes Payable . . . . . . . . . . . . . . 12,550,000 700,000 Commitments and Contingencies (Note 10) Stockholders' Equity: Common stock, $0.01 par value; authorized 100,000,000 and 125,000,000 shares, respectively; issued 75,913,832 and 85,078,958 shares, respectively . . 759,000 851,000 Additional paid-in capital . . . . . . . . . . . . . . . . . 136,435,000 146,816,000 Retained deficit . . . . . . . . . . . . . . . . . . . . . . (92,047,000) (92,275,000) Treasury stock, 1,440,896 and 400,896 shares held, respectively . . . . . . . . . . . . . . . . . . . . . . . (4,997,000) (1,390,000) ---------------- ---------------- Total Stockholders' Equity . . . . . . . . . . . . . . 40,150,000 54,002,000 ---------------- ---------------- $ 70,794,000 $ 68,928,000 ================ ================
The accompanying Notes to Consolidated Condensed Financial Statements are an integral part of these Statements. 4 5 HARKEN ENERGY CORPORATION AND SUBSIDIARIES CONSOLIDATED CONDENSED STATEMENTS OF OPERATIONS (unaudited)
THREE MONTHS ENDED SIX MONTHS ENDED JUNE 30, JUNE 30, ------------------------------ ------------------------------- 1995 1996 1995 1996 ------------- ------------- ------------- ------------- Revenues: Oil and gas operations . . . . . . . . . . $ 1,540,000 $ 2,388,000 $ 2,713,000 $ 4,385,000 Interest and other income . . . . . . . . 242,000 202,000 668,000 546,000 ------------- ------------- ------------- ------------- 1,782,000 2,590,000 3,381,000 4,931,000 Costs and Expenses: Oil and gas operating expenses . . . . . . 458,000 840,000 880,000 1,600,000 General and administrative expenses, net . 737,000 980,000 1,511,000 1,797,000 Depreciation and amortization . . . . . . 534,000 629,000 1,065,000 1,256,000 Interest expense and other . . . . . . . . 211,000 73,000 222,000 506,000 ------------- ------------- ------------- ------------- 1,940,000 2,522,000 3,678,000 5,159,000 Income (loss) before income taxes . . . (158,000) 68,000 (297,000) (228,000) Income tax expense . . . . . . . . . . . . . -- -- -- -- ------------- ------------- ------------- ------------- Net income (loss) . . . . . . . . . . . $ (158,000) $ 68,000 $ (297,000) $ (228,000) ============= ============= ============= ============= Income (loss) per common share: Net income (loss) . . . . . . . . . . . $ (0.00) $ 0.00 $ (0.00) $ (0.00) ============= ============= ============= ============= Weighted average shares outstanding . . . . . 62,939,852 82,048,561 61,741,352 77,836,034 ============= ============= ============= =============
The accompanying Notes to Consolidated Condensed Financial Statements are an integral part of these Statements. 5 6 HARKEN ENERGY CORPORATION AND SUBSIDIARIES CONSOLIDATED CONDENSED STATEMENTS OF STOCKHOLDERS' EQUITY (unaudited)
ADDITIONAL COMMON PAID-IN RETAINED TREASURY STOCK CAPITAL DEFICIT STOCK ------------- --------------- --------------- --------------- Balance, December 31, 1994 . . . . . $ 664,000 $ 132,572,000 $ (90,520,000)(A) $ (20,757,000) Issuances of common stock, net . 79,000 1,740,000 -- 15,760,000 Conversions of European notes payable 16,000 2,123,000 -- -- Equity adjustment from foreign currency translation . . . . . . . . . . -- -- (2,000) -- Adjustment for unrealized gains (losses) on available-for-sale securities -- -- 100,000 -- Net loss . . . . . . . . . . . . . -- -- (1,625,000) -- ------------- --------------- --------------- --------------- Balance, December 31, 1995 . . . . . 759,000 136,435,000 (92,047,000) (4,997,000) Issuances of common stock, net . . 5,000 (1,549,000) -- 3,607,000 Conversions of warrants and options 7,000 1,236,000 -- -- Conversions of European notes payable 80,000 10,694,000 -- -- Net loss . . . . . . . . . . . . . -- -- (228,000) -- ------------- --------------- --------------- --------------- Balance, June 30, 1996 . . . . . . . $ 851,000 $ 146,816,000 $ (92,275,000) $ (1,390,000) ============= =============== =============== ===============
(A) Includes, as a component of Retained Deficit, net unrealized gains (losses) on available-for-sale securities of ($100,000) as of December 31, 1994. The accompanying Notes to Consolidated Condensed Financial Statements are an integral part of these Statements. 6 7 HARKEN ENERGY CORPORATION AND SUBSIDIARIES CONSOLIDATED CONDENSED STATEMENTS OF CASH FLOWS (unaudited)
SIX MONTHS ENDED JUNE 30, -------------------------------------- 1995 1996 ----------------- ----------------- Cash flows from operating activities: Net loss . . . . . . . . . . . . . . . . . . . . . . $ (297,000) $ (228,000) Adjustments to reconcile net loss to net cash provided by (used in) operating activities: Depreciation and amortization . . . . . . . . . 1,065,000 1,256,000 Forgiveness of related party note receivable . . 232,000 -- Provision for doubtful accounts . . . . . . . . (180,000) -- (Gain) loss on sales of assets and other . . . . (406,000) 19,000 Accretion of discount on note payable . . . . . -- 234,000 Amortization of European note issuance costs . . 73,000 178,000 Change in assets and liabilities: Decrease (increase) in accounts receivable . . . (8,000) (81,000) Increase (decrease) in trade payables and other (1,107,000) (420,000) ----------------- ----------------- Net cash provided by (used in) operating activities . . . . . . . . . . . . . . . . . (628,000) 958,000 ----------------- ----------------- Cash flows from investing activities: Cash from acquired subsidiary . . . . . . . . . . . . 190,000 -- Proceeds from sales of assets . . . . . . . . . . . . 2,779,000 177,000 Investor project advances . . . . . . . . . . . . . . -- 2,250,000 Capital expenditures, net . . . . . . . . . . . . . (2,983,000) (3,945,000) ----------------- ----------------- Net cash used in investing activities . . . . . (14,000) (1,518,000) ----------------- ----------------- Cash flows from financing activities: Transfers from segregated account cash . . . . . . . -- 10,000,000 Proceeds from issuances of common stock, net of issuance costs . . . . . . . . . . . . . . . . . . 1,404,000 2,492,000 Investment in segregated account cash, net . . . . . (106,000) (242,000) Repayment of notes payable and long-term obligations -- (1,258,000) ----------------- ----------------- Net cash provided by financing activities . . . 1,298,000 10,992,000 ----------------- ----------------- Net increase (decrease) in cash and temporary investments 656,000 10,432,000 Cash and temporary investments at beginning of period . . 2,828,000 4,456,000 ----------------- ----------------- Cash and temporary investments at end of period . . . . . $ 3,484,000 $ 14,888,000 ================= ================= Supplemental disclosures of cash flow information: Cash paid during the period for: Interest . . . . . . . . . . . . . . . . . . . . . $ 22,000 $ 203,000 Income taxes . . . . . . . . . . . . . . . . . . . -- --
The accompanying Notes to Consolidated Condensed Financial Statements are an integral part of these Statements. 7 8 HARKEN ENERGY CORPORATION AND SUBSIDIARIES NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS JUNE 30, 1995 AND 1996 (unaudited) (1) MANAGEMENT'S REPRESENTATIONS In the opinion of Harken Energy Corporation ("Harken"), the accompanying unaudited consolidated condensed financial statements contain all adjustments necessary to present fairly its financial position as of December 31, 1995 and June 30, 1996 and the results of its operations and changes in its cash flows for all periods presented as of June 30, 1995 and 1996. These adjustments represent normal recurring items. Certain prior year amounts have been reclassified to conform with the 1996 presentations. The accompanying unaudited condensed financial statements have been prepared pursuant to the rules and regulations of the Securities and Exchange Commission ("SEC"). Certain information and note disclosures normally included in annual financial statements prepared in accordance with generally accepted accounting principles have been condensed or omitted pursuant to these rules and regulations, although Harken believes that the disclosures made are adequate to make the information presented not misleading. It is suggested that these condensed financial statements be read in conjunction with the financial statements and the notes thereto included in Harken's Form 10-K/A for the year ended December 31, 1995. The results of operations for the six month period ended June 30, 1996 are not necessarily indicative of the results to be expected for the full year. (2) ACQUISITIONS Acquisition of Texas Properties -- In October 1995, a wholly-owned subsidiary of Harken acquired certain non- operated interests in producing properties located in the western region of Texas ("Yellowhouse Properties"). As consideration for the purchase of these interests, Harken issued three million shares of restricted Harken common stock, one million warrants to purchase additional shares of restricted Harken common stock at $2 per share, and assumed $750,000 of short-term notes payable. Harken and the seller made payments totaling approximately $417,000 on these notes payable at closing and the remaining balance was paid in monthly installments through March 1996. Also, Harken issued an additional 82,759 shares of restricted Harken common stock to a financial advisor as a fee in connection with the acquisition. On December 21, 1995, pursuant to the terms of a Purchase and Sale Agreement (the "Panhandle Purchase and Sale Agreement"), Harken Exploration Company ("Harken Exploration"), a wholly-owned subsidiary of Harken, acquired certain interests in producing properties located in the panhandle region of Texas ("Panhandle Properties"). As consideration for the purchase of these interests, Harken issued, along with other consideration, 2.5 million shares of restricted Harken common stock (the "Purchase Shares"), $2.5 million in cash and a note payable by Harken Exploration to the seller for an initial face amount of $13 million. Harken had the option over the next two years to repay all or part of this $13 million note with restricted common stock at conversion rates tied to future trading prices of Harken common stock. The $13 million note was to mature and become payable in two stages, with each maturity amount subject to certain adjustments. On July 11, 1996, Harken Exploration entered into an exchange agreement with the holder of the $13 million note, whereby it was exchanged for, among other consideration, the issuance of 5,150,000 restricted shares of Harken common stock, including 185,000 shares 8 9 held in escrow. See Note 5 -- Notes Payable and Long-Term Obligations for further discussion. The acquisition of the Panhandle Properties has been accounted for under the purchase method of accounting. Due to the note payable adjustments to be calculated, some of which were based on the future trading prices of Harken common stock, the allocation of the purchase price to the assets and liabilities related to the acquisition of the Panhandle Properties at December 31, 1995 was preliminary, with further adjustments to be reflected upon the final accounting for the $13 million note payable. With the July 11, 1996 exchange agreement resulting in the issuance of 5,150,000 restricted shares of Harken common stock with a market value of approximately $10,429,000 in full payment of the outstanding balance on the note, Harken has adjusted the purchase price of the Panhandle Properties as of June 30, 1996 to give effect to the finalization of the consideration issued in the purchase. Acquisition of CHAP Venture Interests - In May 1995, Harken acquired an additional joint venture interest in the CHAP Venture ("CHAP") which was formed for the exploration and production of oil and gas on the Navajo Indian Reservation ("the Reservation"). This acquisition resulted in Harken increasing its ownership in the Reservation reserves, exploration acreage, development drilling locations and the Aneth Gas Plant. The acquisition of the seller's interest raised Harken's total interest in CHAP from approximately 70% to approximately 82%. As consideration for this acquisition, Harken paid cash of $300,000 and issued 534,000 shares of restricted Harken common stock to the seller, assumed certain liabilities of the seller relating to the properties, and the seller in turn retained responsibility for certain contingent operational and environmental liabilities related to the interest purchased. During the second quarter of 1996, Harken acquired additional interests in CHAP, raising Harken's total interest in CHAP to approximately 94%. The purchase consideration paid by Harken to the sellers consisted of $338,000 cash plus the issuance of approximately 509,000 shares of restricted Harken common stock. Harken also assumed certain liabilities of the sellers relating to the property interests. All of the above acquisitions of the additional interests in CHAP have been accounted for under the purchase method of accounting. Merger with Search Exploration, Inc. -- In November 1994, Harken entered into an Agreement and Plan of Merger (the "Merger Agreement") with Search Exploration, Inc. ("Search"). Search is primarily engaged in the domestic exploration for, and development and production of oil and gas. Pursuant to the Merger Agreement, Search merged with and into Search Acquisition Corp., a wholly-owned subsidiary of Harken ("the Merger"). Upon the consummation of the Merger, (a) each outstanding share of Search common stock was converted into the right to receive that number of shares of Harken common stock determined by dividing $0.8099 by the average of the closing sales price of a share of Harken common stock on the American Stock Exchange over the 30 days immediately preceding the date that is five trading days prior to the consummation of the Merger, subject to certain restrictions ("the Average Trading Price"); (b) each outstanding share of Search Series 1993 Redeemable Preferred Stock was converted into the right to receive that number of shares of Harken common stock determined by dividing $1.00 by the Average Trading Price and (c) certain promissory notes to be issued by Search were, by their terms, converted into the right to receive that number of shares of Harken common stock determined by dividing the principal amount of each note by the Average Trading Price. In addition, the holders of Search common stock, certain notes and overriding royalty interests in certain properties of Search received a non-transferable right to receive additional shares in the future, if any, of Harken common stock or, under certain circumstances, cash, based upon the increase that may subsequently be realized by June 30, 1996 in the value of a group of undeveloped leases and properties of Search. The Merger was consummated following a vote held at a Search stockholders' meeting on May 22, 1995 and has been accounted for under the purchase method of accounting due to the above mentioned contingently issuable shares of Harken common stock. Acquisition of EnerVest Properties - On July 10, 1996 Harken, along with Harken Exploration, purchased working interests in certain producing oil and gas properties located in the Magnolia area of Arkansas and in the Carlsbad area of New Mexico (the "EnerVest Properties") from EnerVest Acquisition II-Limited Partnership ("EnerVest"). The purchase price of $15,200,000, plus the assumption of certain operational liabilities relating 9 10 to these properties, is subject to adjustments for property defects identified including title defects, environmental defects and product production balancing defects. This purchase price was paid in the form of $5,000,000 cash paid at closing, 1,550,000 shares of Harken common stock which were issued following closing, and 1,159,091 shares of Harken common stock to be issued at a designated time following the registration and sale by the seller of the initial shares issued following closing. Harken also issued to EnerVest warrants to purchase, over a period of three years from closing, 300,000 shares of Harken common stock at an exercise price of $2.75 per share. The agreement includes adjustment provisions pursuant to which Harken may be obligated to issue additional shares of Harken common stock if the seller does not realize at least $10,200,000 from its sales of such shares. The seller will maintain a lien on these properties until such time as it has received or recognized $7,000,000 in proceeds from the sales of these shares of Harken common stock. At May 31, 1996, the EnerVest Properties consisted of proved reserves of approximately 1,928,000 barrels of oil and approximately 4,490,000 mcf of gas, with a discounted value of future net revenues of approximately $15,936,000. (3) MARKETABLE EQUITY SECURITIES At December 31, 1994 and during the first three months of 1995, Harken carried an investment in the common stock of E-Z Serve Corporation, a former subsidiary ("E-Z Serve"), including shares of E-Z Serve common stock resulting from the conversion of certain shares of E-Z Serve Series C Preferred in June 1994 and January 1995. Harken's investment in E-Z Serve Series C Preferred was not accounted for pursuant to Statement of Financial Accounting Standards No. 115, "Accounting for Certain Investments in Debt and Equity Securities" ("SFAS 115"), as it was not a readily marketable security. Harken classified its investment in E-Z Serve common stock as available for sale. The following is a summary of Harken's activity from marketable equity securities. Harken sold its investment in the common stock of E-Z Serve during the third quarter of 1995.
SIX MONTHS ENDED JUNE 30, -------------------------------- AVAILABLE-FOR-SALE 1995 1996 ------------------ --------------- -------------- Gross Realized Gains $ 14,000 $ -- Gross Realized Losses -- --
(4) PROPERTY AND EQUIPMENT A summary of property and equipment follows:
DECEMBER 31, JUNE 30, 1995 1996 --------------- ---------------- Oil and gas properties -- Unevaluated international properties not being amortized . . $ 4,866,000 $ 5,002,000 Unevaluated domestic properties not being amortized . . . . . 11,117,000 10,578,000 Evaluated domestic properties being amortized . . . . . . . . 39,526,000 39,823,000 Gas plants and other property . . . . . . . . . . . . . . . . . 6,746,000 7,033,000 Less accumulated depreciation and amortization . . . . . . . . . . . . . . . . . . . . . . (10,113,000) (11,379,000) -------------- --------------- $ 52,142,000 $ 51,057,000 ============== ===============
10 11 (5) NOTES PAYABLE AND LONG-TERM OBLIGATIONS
DECEMBER 31, JUNE 30, 1995 1996 ------------- -------------- Note payable to seller of producing properties (A) $ 12,786,000 $ 10,429,000 Notes payable to investors (B) 132,000 -- Note payable to Tejas Power Corporation (C) 394,000 -- Notes payable to former stockholder of subsidiary (D) 400,000 -- Notes payable to former investors in Search managed limited partnerships (E) 332,000 -- ------------- -------------- Total 14,044,000 10,429,000 Less amount classified as current liability (868,000) -- ------------- -------------- Total long-term obligations $ 13,176,000 $ 10,429,000 ============= ==============
(A) As discussed in Note 2 -- Acquisitions, in December 1995 Harken Exploration issued to the seller of the Panhandle Properties a note payable in the initial face amount of $13 million (the "Panhandle Note"). The Panhandle Note bore interest at 5% per annum as to $8,000,000 in principal amount only, was secured by Harken Exploration's interest in the acquired properties and was not guaranteed by Harken. The Panhandle Note was to mature and become payable in two stages. On October 18, 1996, $8,000,000 in principal amount of the Panhandle Note, subject to adjustment as described below, was to mature, and become payable ("Maturity I"). The remaining $5,000,000 in principal amount of the Panhandle Note was non-interest bearing and, subject to adjustment, was to mature and become payable ("Maturity II") on July 15, 1997; provided, however, that if the amount due at Maturity I was paid in shares of Harken common stock ("Maturity I Shares") as described below, such principal amount was to mature and become payable on the earlier of (i) the expiration of 270 days following the date upon which the SEC declared effective a registration statement covering the resale of the shares issued at Maturity I or (ii) November 15, 1997. The initial recorded amount of the Panhandle Note was equal to the discounted fair value of the payments to be made at each maturity date, using a market rate of interest of 6.66%. As Harken's intention was always to pay the Panhandle Note with shares of Harken common stock, the entire Panhandle Note balance has been included in long-term obligations. Pursuant to the Panhandle Purchase and Sale Agreement, Harken Exploration could elect to pay the amounts due at either or both of Maturity I and Maturity II in shares of Harken common stock, with the number of shares to be issued at Maturity I to be determined by dividing the amount due at Maturity I by the average of the closing prices of Harken common stock on the American Stock Exchange during the period beginning on January 22, 1996 and ending ten (10) trading days prior to Maturity I (the "Maturity I Average Trading Price") and the number of shares to be issued at Maturity II to be determined by dividing the amount due at Maturity II by the average of the closing prices of Harken common stock on the American Stock Exchange during the period beginning upon the date which the above mentioned registration statement is declared effective and ending ten (10) trading days prior to Maturity II. On July 11, 1996, Harken Exploration entered into an exchange agreement with the seller of the Panhandle Properties, pursuant to which Harken issued 5,150,000 restricted shares of Harken common stock, including 185,000 shares held in escrow, in satisfaction of all obligations owed by Harken Exploration to the seller under the terms of the Panhandle Note. As of July 11, 1996, such restricted shares of Harken common stock had an approximate market value of $10,429,000. Under this exchange agreement, Harken Exploration agreed to pay the 11 12 seller the amount, if any, by which the proceeds from the sale of these shares of Harken common stock sold by the seller are less than $8,500,000. In connection with this exchange agreement, (a) Harken granted the seller the right to request Harken to effect up to two registrations of these shares of Harken common stock issued under the Securities Act of 1933 and (b) Harken granted to the seller a lien over the properties purchased from the seller to secure, among other things, the obligations of Harken Exploration under the exchange agreement. The 185,000 shares of Harken common stock held in escrow are held pending resolution of certain title defects relating to the properties purchased from the seller and will be released from escrow to the seller unless the decrease in value of these properties resulting from these defects exceeds $480,000. Harken has adjusted the value of the Panhandle Note as of June 30, 1996 to equal the approximate market value of the shares issued to satisfy the obligation. (B) As discussed in Note 2 -- Acquisitions, a wholly-owned subsidiary of Harken assumed $750,000 of short-term notes payable in connection with the acquisition of the Yellowhouse Properties in October 1995. Harken and the seller made payments totaling approximately $417,000 on these notes payable at closing and the remaining balance was paid in monthly installments through March 1996. Such notes bore interest at the rate of 7% per annum. (C) As part of Harken's December 1995 exchange of its shares of Tejas Preferred Stock for the shares of Harken Series C Preferred stock held by Tejas, Harken issued a note payable for $394,000 which was payable in quarterly installments through September 30, 1997, but was repaid early by Harken in March 1996. The note bore interest at a rate of 10% per annum. (D) Under the terms of a March 1994 agreement, a Harken subsidiary purchased from its former stockholder its 3% working interest in the wells drilled by the subsidiary as well as all rights held by the former stockholder to participate in future wells drilled by the subsidiary on the Navajo Reservation, effective January 1, 1994. As consideration for such purchase, the subsidiary issued a 10% note payable in the amount of $400,000 which was paid to the subsidiary's former stockholder on January 3, 1996. (E) As part of the Merger Agreement with Search in May 1995, Harken, through Search, assumed approximately $442,000 of notes payable to former partners in certain limited partnerships managed by a subsidiary of Search. Such notes bore interest at 10% per annum and were payable in semiannual installments beginning June 30, 1995 through June 30, 1998. Harken repaid these notes in April 1996. See further discussion of the Search Merger at Note 2 - Acquisitions. (6) EUROPEAN CONVERTIBLE NOTES PAYABLE During the second quarter of 1995, Harken issued to qualified purchasers a total of $15 million in 8% Senior Convertible Notes (the "8% European Notes") which were to mature in May 1998. Interest on these notes was payable semi- annually in May and November of each year to maturity or until the 8% European Notes were converted. Such 8% European Notes were convertible at any time by the holders into shares of Harken common stock at a conversion price of $1.50 per share ("the 8% European Note Conversion Price"). Such 8% European Notes were also convertible by Harken into shares of Harken common stock after one year following issuance, if for any period of thirty consecutive days the closing price for each day during such period shall have equaled or exceeded 140% of the 8% European Note Conversion Price (or $2.10 per share of Harken common stock). In connection with the sale and issuance of the 8% European Notes, Harken paid approximately $1,750,000 from the 8% European Note proceeds for commissions and issuance costs. In addition, at closing of the sale of the 8% European Notes, Harken issued to the placement agents certain non-transferable stock purchase warrants to purchase one million shares of Harken common stock which are currently exercisable by the holders thereof at any time on or before May 11, 1999 at an exercise price equal to the 8% European Note Conversion Price described above. Also, Harken paid a fee in the form of 92,308 shares of Harken common stock to another financial advisor in connection with the 8% European Notes. 12 13 As of June 30, 1996, Harken had received notification that holders of 8% European Notes totaling $14,300,000 had exercised their conversion option and had been issued 9,533,311 shares of Harken common stock. Subsequent to June 30, 1996, additional notifications of exercise of conversion options have been received from all remaining holders of 8% European Notes totaling $700,000, which has resulted in the additional issuance of 466,664 shares of Harken common stock. On July 30, 1996, Harken issued to qualified purchasers a total of $40 million in 6 1/2% Senior Convertible Notes (the "6 1/2% European Notes") which mature on July 30, 2000. Interest on these notes is payable semi-annually in January and July of each year to maturity or until the 6 1/2% European Notes are converted. Such 6 1/2% European Notes are convertible at any time following September 9, 1996 by the holders into shares of Harken common stock at a conversion price of $2.50 per share ("the 6 1/2% European Note Conversion Price"). The 6 1/2% European Notes are also convertible by Harken into shares of Harken common stock after one year following issuance, if for any period of thirty consecutive days commencing on or after November 28, 1996, the closing price of Harken common stock each trading day during such period shall have equaled or exceeded 135% of the 6 1/2% European Note Conversion Price (or $3.375 per share of Harken common stock). In connection with the sale and issuance of the 6 1/2% European Notes, Harken paid approximately $3,142,000 from the 6 1/2% European Note proceeds for commissions and issuance costs. Upon closing, all proceeds from the sale of the 6 1/2% European Notes were paid to a Trustee under the terms of a Trust Indenture and are held in a separate interest bearing Trust account (the "Segregated Account") to be maintained for Harken's benefit, until the Trustee is presented with evidence of sufficient asset value, as defined, held by Harken to permit an advance of a portion of the proceeds. Harken must maintain an Asset Value Coverage Ratio equal to or greater than 1:1 which is calculated as the ratio of the sum of 100% of the aggregate amount of Harken's's cash on deposit in the Segregated Account plus 60% of the aggregate amount of Harken's marketable securities plus 50% of the SEC value of Harken's domestic unencumbered total proved reserves of which at least 75% thereof must be proved developed producing reserves to the aggregate outstanding principal amount of the 6 1/2% European Notes. Upon a conversion, any proceeds attributable to the 6 1/2% European Notes converted which remain in the Segregated Account may be released and paid to Harken without regard to the asset value then existing. The 6 1/2% European Notes were sold strictly to non-U.S. purchasers and are convertible in $50,000 increments. Similar to the 8% European Notes, the 6 1/2% European Notes and the Harken common stock issuable upon conversion of the 6 1/2% European Notes have been or will be issued without registration under the United States Securities Act of 1933 (the "Securities Act") pursuant to an exemption contained in Regulation S promulgated under the Securities Act. Commissions and issuance costs associated with the 8% European Notes and the 6 1/2% European Notes have been deferred and are included in Other Assets and are amortized to interest expense over the period until conversion or maturity of the European Notes. As European Notes are converted to Harken common stock, a pro-rata portion of these deferred costs are charged to additional paid-in capital. To the extent that proceeds invested in the Segregated Account at the balance sheet date are available under the above discussed Asset Value Coverage Ratio limitations, such cash is included as a current asset in Cash Available in European Segregated Account in the accompanying consolidated balance sheets. Segregated Account cash that is not available as of the balance sheet date, due to the Asset Value Coverage Ratio limitations, is reflected as Restricted Cash in European Segregated Account in the accompanying consolidated balance sheets, and is a non-current asset. The initial cash proceeds from the issuance of the European Notes are not included in the Statement of Cash Flows because the proceeds are not considered to be cash equivalents. Transfers of proceeds from the Segregated Account are included in cash flows from financing activities in the Statements of Cash Flows. 13 14 (7) STOCKHOLDERS' EQUITY Common Stock - Harken currently has authorized 125,000,000 shares of $.01 par common stock. At December 31, 1995 and June 30, 1996, Harken had issued 75,913,832 and 85,078,958 shares, respectively, and held 1,440,896 and 400,896 shares, respectively, as treasury stock at a cost of $4,997,000 and $1,390,000, respectively. Subsequent to June 30, 1996 and as of July 31, 1996, Harken has issued an additional 7,467,734 shares of Harken common stock as discussed below. Acquisition of CHAP Interests -- In May 1995, Harken acquired an additional interest of approximately 12% in CHAP in exchange for, among other consideration, 534,000 restricted shares of Harken common stock. In April 1996, Harken acquired an additional interest of approximately 12% in CHAP primarily in exchange for, among other consideration, 509,000 restricted shares of Harken common stock. See Note 2 -- Acquisitions for further discussion. Acquisition of Search Exploration, Inc. -- In May 1995, Harken consummated the Merger with Search. See Note 2 -- Acquisitions for further discussion. Pursuant to the terms of the Merger Agreement, a total of approximately 2.2 million shares of Harken common stock were issued to the common stockholders of Search, preferred stockholders of Search and certain note holders of Search. In connection with the Merger, Harken issued warrants entitling the holders to purchase 732,771 shares of Harken common stock at an exercise price of $1.82 per share. As of June 30, 1996, 597,127 shares of Harken common stock had been issued upon exercise of such warrants. Up to approximately 8.1 million additional shares of Harken common stock ("Contingent Shares"), if any, may be issued on or about September 30, 1996 to the holders of record at the effective time of the Merger of certain Search securities issued by Search and overriding royalty interests in certain properties held by Search, based in part upon the increase that may subsequently be realized in the value of a group of undeveloped leases and properties of Search. As of the most recent valuation date required under the terms of the Merger Agreement, no Contingent Shares would be issuable based upon the value of this group of undeveloped leases and properties of Search. Issuance of European Convertible Notes Payable -- In connection with the issuance of $15 million in European 8% Senior Convertible Notes in May 1995, Harken issued to the placement agents for the 8% European Notes certain non- registered non-transferrable stock purchase warrants to purchase one million shares of Harken common stock which are currently exercisable by the holders thereof at any time on or before May 11, 1999 at an exercise price of $1.50 per share. In addition, the 8% European Notes were convertible into a maximum of approximately 10,000,000 shares of Harken common stock. As of June 30, 1996, Harken had received notification that holders of 8% European Notes totaling $14,300,000 had exercised their conversion option and had been issued 9,533,311 shares of Harken common stock. See Note 6 - European Convertible Notes Payable for further discussion. Subsequent to June 30,1996, additional notifications of exercise of conversion options have been received from all remaining holders of 8% European Notes totaling $700,000 which has resulted in the additional issuance of 466,664 shares of Harken common stock. Also, Harken paid a fee of 92,308 shares of Harken common stock to a financial advisor in connection with the 8% European Notes and the market value of such shares as of the date issued was included as deferred issuance costs in Other Assets in the accompanying consolidated balance sheets. In July 1996, Harken issued to qualified purchasers a total of $40 million in 6 1/2% European Notes which mature on July 30, 2000. The 6 1/2% European Notes are convertible under certain terms into approximately 16,000,000 shares of Harken common stock. In connection with the issuance of the 6 1/2% European Notes, Harken issued to the placement agents for the 6 1/2% European Notes certain non-registered non-transferrable stock purchase warrants to purchase 1,280,000 shares of Harken common stock which are currently exercisable by the holders thereof at any time on or before July 31, 1999 at an exercise price of $2.50 per share. 14 15 Private Placements of Common Stock -- On March 1, 1995, Harken sold 600,000 shares of newly-issued Harken common stock to an institutional purchaser in exchange for net proceeds of $657,000. Harken subsequently entered into an agreement on April 7, 1995 to sell to this same institutional purchaser an additional 600,000 newly-issued shares of Harken common stock in exchange for net proceeds of $747,000. In July and August of 1995, Harken received additional net proceeds of $654,000 and $757,000, respectively, related to the sale of a combined total of 1,300,000 newly-issued shares of Harken common stock to certain institutional and/or accredited purchasers. In November 1995, Harken received an additional $1,633,000 related to the sale of 1,460,000 shares of Harken common stock previously held as treasury stock to a certain institutional and/or accredited purchaser. In March 1996, Harken received $1,289,000 related to the sale of 1,040,000 shares of Harken common stock previously held as treasury stock. In connection with certain of these placements, Harken issued to certain financial advisors an aggregate total of 410,000 warrants to purchase shares of Harken common stock at an average exercise price of $1.71 per share. Acquisition of Texas Properties -- In October 1995, a wholly-owned subsidiary of Harken paid as consideration three million shares of restricted Harken common stock previously held as treasury stock in exchange for certain non- operated interests in producing properties located in the western region of Texas ("Yellowhouse Properties"). As part of the purchase of these interests, Harken also issued one million warrants to purchase additional shares of restricted Harken common stock at $2 per share, and also issued 82,759 shares of restricted Harken common stock previously held as treasury stock to a financial advisor as a fee in connection with the acquisition. In December 1995, Harken Exploration acquired certain interests in producing properties located in the panhandle region of Texas ("Panhandle Properties") in exchange for, among other consideration, 2.5 million shares of Harken common stock and a $13 million note payable which was payable, at Harken's option, in shares of Harken common stock. In July 1996, Harken Exploration entered into an exchange agreement with the seller of the Panhandle Properties, pursuant to which Harken issued 5,150,000 restricted shares of Harken common stock, including 185,000 shares held in escrow, in satisfaction of all obligations owed by the subsidiary to the seller under the terms of the Panhandle Note. See Notes 2 and 5 -- Acquisitions and Notes Payable and Long-Term Obligations for further discussion. Acquisition of EnerVest Properties - On July 10, 1996, Harken Exploration entered into an asset purchase and sale agreement (the "EnerVest Agreement') with EnerVest. Pursuant to the EnerVest Agreement, Harken Exploration acquired all of EnerVest's working interests in certain producing oil and gas leases located in Arkansas and New Mexico and property and equipment related thereto (the "EnerVest Properties"), for a purchase price valued at approximately $15,200,000 and the assumption of certain operational liabilities relating to these properties. See Note 2 -- Acquisitions for further discussion. The preliminary purchase price consisted of 1,550,000 shares of Harken common stock (the "Tranche A Shares") issued after closing, $5,000,000 in cash payable at closing, and an additional number of shares of Harken common stock to be issued in the future as described below. Harken also issued to EnerVest warrants to purchase, for a period of three (3) years from closing, 300,000 shares of Harken common stock at an exercise price of $2.75 per share. Pursuant to the EnerVest Agreement, upon the expiration of 180 days from the date the registration statement is declared effective by the SEC relating to the resale of the Tranche A Shares, Harken is required to issue an additional 1,159,091 shares of Harken common stock (the "Tranche B Shares") to EnerVest; provided, however, that if the sum of (i) the actual gross proceeds realized by EnerVest from the sale of the Tranche A Shares and (ii) the then market value of Tranche A Shares still held by EnerVest (together, the "Tranche A Realized Proceeds") is less that $4,262,500, Harken is required to issue such additional number of shares of Harken common stock (the "Deficiency Shares"), in addition to the Tranche B Shares, having a market value at the time of issuance equal to the difference between $4,262,500 and the Tranche A Realized Proceeds. In addition, at the time Harken is to issue the Tranche B Shares, it will calculate the aggregate value of all adjustments that are either identified 15 16 and agreed to under the EnerVest Agreement or identified but still contingent under the EnerVest Agreement. These adjustments will include matters such as title defects, identification of unplugged uneconomic wells, environmental matters and gas imbalances. The aggregate value of all such adjustments that have been identified and agreed to will be offset against the Tranche B Shares prior to issuance. The aggregate value, up to $500,000, of all such adjustments that have been identified but are still contingent will be evidenced by a portion of the Tranche B Shares which Harken will hold back from issuance until such contingent matters are resolved. EnerVest will also put $1,000,000 cash into an escrow account which may be offset or drawn against by Harken to satisfy other defects identified by Harken under the EnerVest Agreement. Upon the expiration of 180 days from the sale of the Tranche B Shares and the Deficiency Shares, Harken may be required to issue an additional number of shares of Harken common stock (the "Tranche C Shares') if the sum of (i) the actual proceeds realized by EnerVest from the sale of all of the shares of Harken common stock sold by EnerVest up to such time and (ii) the then market value of any shares of Harken common stock still held by EnerVest (together the "Total Realized Proceeds") is less than $10,200,000 as adjusted for the defects and adjustments raised by Harken. In such event, Harken shall be required to issue the number of Tranche C Shares having a market value at the time of issuance equal to the difference between $10,200,000 and the Total Realized Proceeds. (8) PER SHARE DATA Per share data has been computed based on the weighted average number of common shares outstanding during each period. Common stock equivalents, contingently issuable shares and other potentially dilutive securities are not included in the computation of earnings per share if the effect of inclusion would be antidilutive. For purposes of calculating earnings per share, the unconverted European Convertible Notes discussed above are considered not to be common stock equivalents. (9) INCOME TAXES At June 30, 1996, Harken had available for federal income tax reporting purposes, net operating loss (NOL) carryforward for regular tax purposes of approximately $65,000,000 which expires in 1997 through 2010, alternative minimum tax NOL carryforward of approximately $57,000,000 which expires in 1997 through 2010, investment tax credit carryforward of approximately $860,000 which expires in 1996 through 2002, statutory depletion carryforward of approximately $1,200,000 which does not have an expiration date, and a net capital loss carryforward of approximately $6,100,000 which expires in 2007 through 2008. Approximately $16,000,000 of the net operating loss carryforward has been acquired with the purchase of subsidiaries and must be used to offset future income from profitable operations within those subsidiaries. Total deferred tax liabilities, relating primarily to property and equipment, as of June 30, 1996, computed under the provisions of the Statement of Financial Accounting Standard No. 109, "Accounting for Income Taxes", were approximately $7,528,000. Total deferred tax assets, primarily related to the net operating loss carryforward, were approximately $22,364,000 at June 30, 1996. The total net deferred tax asset is offset by a valuation allowance of approximately $14,836,000 at June 30, 1996. (10) COMMITMENTS AND CONTINGENCIES Colombian Operations-Alcaravan Contract -- During the third quarter of 1992, Harken de Colombia, Ltd., a wholly-owned subsidiary of Harken, was awarded the exclusive right to explore for, develop and produce oil and gas throughout the Alcaravan area of Colombia. This Alcaravan area currently covers approximately 210,000 acres. The Alcaravan area is located in Colombia's Llanos Basin and is located approximately 140 miles east of Santafe De Bogota. Harken and Empresa Colombiana de Petroleos ("Ecopetrol") have entered into an Association 16 17 Contract (the "Alcaravan Contract") which requires Harken to conduct a seismic and exploratory drilling program in the Alcaravan area during the initial six (6) years of the Alcaravan Contract. At the end of each of the first six years of the Alcaravan Contract, Harken has the option to withdraw from the Alcaravan Contract or to commit to the next year's work requirements. If during the initial six years of the Alcaravan Contract, Harken discovers a field capable of producing oil or gas in quantities that are economically exploitable and Ecopetrol agrees that such field is economically exploitable (a "commercial discovery"), the term of the Alcaravan Contract covering such field will be extended for a period of 22 years from the date of such commercial discovery. Harken has completed all work requirements for the first, second and third years of the Alcaravan Contract. Upon a discovery of a field capable of commercial production, Ecopetrol will reimburse Harken for 50% of its successful well costs expended up to the point of declaration of a commercial discovery. Production from a field following a commercial discovery will be allocated as follows: Ecopetrol, on behalf of the Colombian government, will receive a 20% royalty interest in all production. All production (after royalty payments) will be allocated 50% to Ecopetrol and 50% to Harken until cumulative production in such field reaches 60 million barrels of oil, after which Ecopetrol's share of production will progressively increase and Harken's share will progressively decrease until cumulative production from the field reaches 150 million barrels of oil, and thereafter all production will be allocated 70% to Ecopetrol and 30% to Harken. If more than one field capable of commercial production is discovered on the Alcaravan acreage, the production sharing percentages applicable to the field with the greatest cumulative production will be applied to all fields within the Alcaravan acreage. After declaration of a commercial discovery, Harken and Ecopetrol will be responsible for all future operating expenses in direct proportion to their interest in production. In September 1994, Huffco Group, Inc. ("Huffco") of Houston, Texas joined Harken in the drilling of Harken's first exploratory well under the Alcaravan Contract. Under the terms of a joint operating agreement, Harken served as operator and retained a 50% interest in the well. The well, the Alcaravan #1, was spudded in early February 1995 and was drilled to a depth of 10,550 feet to test for commercial quantities of oil in the oil prone zones prevalent in the Llanos Basin; the Carbonera, Mirador, Guadalupe and the basal Cretaceous formations. Harken initially determined in April 1995 that the Alcaravan #1 well failed to produce commercial quantities of oil. Harken intends to re-enter the well, preferably with a joint venture partner, to finalize the evaluation of the Alcaravan #1 well's ability to produce commercial quantities of oil. As a result, the costs incurred on the Alcaravan #1 well continue to be capitalized at June 30, 1996, as unevaluated oil and gas properties, pending final determination of the results of the well. In addition, Huffco elected to not participate in the further exploration and development of the Alcaravan acreage and reassigned all interest and rights therein to Harken. On June 28, 1996, Harken along with Harken de Colombia, Ltd. entered into development finance agreements ("the Palo Blanco Development Finance Agreements") with BSR Investments, Inc. and Greyledge LLC, respectively ("the Palo Blanco Investors"), which cover the Palo Blanco prospect under the Alcaravan Contract area. Under the terms of the Palo Blanco Development Finance Agreements, the Palo Blanco Investors will provide an aggregate of $2,500,000 to Harken de Colombia, Ltd. to finance the drilling of the first well on the Palo Blanco prospect in exchange for an aggregate beneficial interest in 40% of the net profits which may be realized by Harken de Colombia, Ltd. from this prospect, subject to reduction upon exercise of an election to exchange this interest or any part thereof for shares of Harken common stock. The Palo Blanco Investors will receive as part of the consideration for this transaction an aggregate of 90,000 shares of restricted Harken common stock. Under the Palo Blanco Development Finance Agreements, both the Palo Blanco Investors and Harken have options to elect to exchange the Palo Blanco Investors' respective beneficial interests in the Palo Blanco prospect for restricted shares of Harken common stock. The Palo Blanco Investors may elect to exchange from time to time up to all of their interests for an aggregate of up to 1,109,976 restricted shares of Harken common stock, or any lesser part on a prorated basis. Harken may exercise its option to exchange on the same terms but only as to 75% 17 18 of such interests on a similar prorated basis. Harken may thereafter elect to exchange the remaining 25% of such unexchanged interests, if any, for additional shares of restricted Harken common stock based upon 50% of the independently engineered valuation of the first well drilled on this Palo Blanco prospect. Following the issuance of such Harken common stock thereunder, the Palo Blanco Investors will have certain registration rights with regard thereto. Subsequent to June 30, 1996, Harken received from the Palo Blanco Investors the initial scheduled advances pursuant to the Palo Blanco Development Finance Agreements totaling $625,000. The Palo Blanco Investors elected to exercise their option to exchange these initial interests resulting in the issuance of 299,994 restricted shares of Harken common stock. Bocachico Contract -- In January 1994, Harken de Colombia, Ltd. signed its second Association Contract (the "Bocachico Contract") with Ecopetrol, covering the Bocachico Contract area. Under the Bocachico Contract, Harken has acquired the exclusive rights to conduct exploration activities and drilling on this area, which covers approximately 192,000 acres in the Middle Magdalena Valley of Central Colombia. During the initial six year term of the Bocachico Contract, if Harken makes a commercial discovery on one or more prospect areas in the contract area, the contract covering such prospect area(s) will be further extended for a period of 22 years from the date of any commercial discovery of oil and/or gas. The production sharing arrangements under the Bocachico Contract are substantially similar to those under the Alcaravan Contract. During the first year of the Bocachico Contract, Harken conducted seismic activities on the land covered by this contract including the reprocessing of approximately 250 kilometers of existing seismic data and the acquisition of approximately 35 kilometers of new seismic data. During each of the second through the sixth contract years, Harken may elect to continue the contract by committing to the drilling of at least one well during each contract year. Harken has also conducted engineering studies to evaluate the potential for recovering existing oil reserves in the Rio Negro area, which is located in the northern portion of the Bocachico Contract area. Three wells were drilled over 30 years ago in this area by another contractor who produced and subsequently abandoned the wells. Well information and data, including production rates, well logs and pressure tests, has been utilized by Harken in its studies to evaluate the feasibility of applying modern production and recovery techniques in this area. On January 19, 1995, after completing the engineering feasibility study, Harken notified Ecopetrol of Harken's commitment to drill a well under the Bocachico Contract, and thereby extended the Bocachico Contract into its second year. Harken spudded its first well to be drilled on this Bocachico Contract area, named the Torcaz #2 well, on July 18, 1996. This well is projected to be drilled to a depth of 8,500 feet and should take approximately 22 to 25 days to reach this depth. Harken hopes to have test results available from this well by the end of August 1996. Under the original terms of the Bocachico Contract, Harken was required to complete the first well on the Bocachico acreage by June 5, 1996. Harken has obtained an extension whereby the first well on the Bocachico acreage must now be completed by September 4, 1996. In addition, Harken has committed to drilling a second well thereby extending the Bocachico Contract into its third year, and has filed applications for environmental permits on two additional well locations within the Bocachico Contract area. In October 1995, Harken entered into a Development Finance Agreement (the "Rio Negro Development Finance Agreement") with Arbco Associates L.P., Offense Group Associates L.P., Kayne Anderson Nontraditional Investments L.P. and Opportunity Associates L.P. (collectively, the "Rio Negro Investors"), pursuant to which the Rio Negro Investors agreed to provide up to $3,500,000 to Harken to finance the drilling of two wells, including the Torcaz #2 well, on the Rio Negro prospect in the Bocachico Contract area in exchange for the right to receive future payments from Harken equal to 40% of the net profits that Harken de Colombia, Ltd. may derive from the sale of oil and gas produced from the Rio Negro prospect (the "Participation") if the planned drilling on 18 19 that prospect is successful. Pursuant to the Rio Negro Development Finance Agreement, Harken has agreed to drill two wells on the Rio Negro prospect. As of June 30, 1996, Harken had requested and received $2,000,000 pursuant to the Rio Negro Development Finance Agreement, and has reflected such amount as a reduction to its investment in Colombian oil and gas properties in the accompanying consolidated balance sheet. Pursuant to the Rio Negro Development Finance Agreement, the Rio Negro Investors have the right at any time prior to October 12, 1997 (the "Commitment Date"), to convert all or part of the Participation into shares of Series D Preferred Stock of Harken (the "Preferred Stock"), and Harken likewise has the right, exercisable at the Commitment Date, to convert up to 75% of the Participation into shares of Preferred Stock if the Rio Negro Investors have not previously elected to convert all of such Participation. If Harken exercises its right to convert the Participation into Preferred Stock, the Rio Negro Investors at that time can elect to receive cash or Preferred Stock equal to the amount of the balance of the remaining Participation plus an additional amount computed at a rate of 25% per annum. In addition, the Rio Negro Investors may then elect to further convert any remaining portion of the Participation into additional shares of Preferred Stock. The shares of Preferred Stock which may be issued pay dividends at an annual rate of 15% and are redeemable by Harken without premium except for accrued unpaid dividends at any time after the Commitment Date, and must be redeemed by Harken no later than October 12, 2000. A failure by Harken to timely pay dividends due under this Preferred Stock for three quarters or to redeem such Preferred Stock when due would give rise to a right exercisable on behalf of the Rio Negro Investors to elect one director to Harken's Board of Directors. Playero Contract -- In December 1994, Harken de Colombia, Ltd. signed its third Association Contract (the "Playero Contract") with Ecopetrol, covering the Playero Contract area. Under the Playero Contract, Harken acquired the exclusive rights to conduct exploration activities and drilling on this area, which covers approximately 10,000 acres in the Llanos Basin of Colombia, contiguous to Harken's Alcaravan Contract area. During the first year of the Playero Contract, Harken acquired approximately 12 kilometers of new seismic data in the Playero Contract area. During each of the second through the sixth contract years, Harken had the option to continue the contract by committing to the drilling of at least one well during each contract year. Harken has completed the evaluation of the new seismic data and has determined that the identified prospect lies exclusively within the contiguous Alcaravan Contract area and not within the Playero Contract area. Accordingly, in May 1996, Harken elected not to commit to drill a well in the Playero Contract area, thereby allowing the Playero Contract to expire under its own terms. Harken reflected a valuation adjustment during the first quarter of 1996, representing Harken's total incremental investment in the Playero Contract. The valuation adjustment, which totals $19,000, is included in interest and other expense in the accompanying consolidated statement of operations. Cambulos Contract -- In September 1995, Harken de Colombia, Ltd. signed its fourth Association Contract with Ecopetrol, covering the Cambulos Contract area. Under the Cambulos Contract, Harken has acquired the exclusive rights to conduct exploration activities in the Cambulos Contract area, which covers approximately 300,000 acres in the Middle Magdalena Valley of Central Colombia. During the first two years of the Cambulos Contract, Harken will conduct geologic studies on the lands covered by this contract, including reprocessing of at least 400 kilometers of existing seismic data and the acquisition of at least 90 kilometers of new seismic data. During each of the third through the sixth contract years, Harken may elect to continue the contract by committing to the drilling of at least one well during each contract year. If during the initial six years of the Cambulos Contract, Harken discovers a field capable of commercial production of oil or gas, the term of the Cambulos Contract will be extended for a period of 22 years from the date of such commercial discovery. Upon a commercial discovery, Ecopetrol will reimburse Harken for 50% of its successful well costs, seismic costs and dry hole costs expended prior to the point of declaration of a commercial 19 20 discovery. Production from a commercial discovery will be allocated as follows: Ecopetrol, on behalf of the Colombian government, will receive a 20% royalty interest in all production and all production (after royalty payments) will be allocated 50% to Ecopetrol and 50% to Harken until cumulative production from all fields in the Cambulos acreage reaches 60 million barrels of oil, after which Ecopetrol's share of production will increase progressively to 75% and Harken's share will decrease progressively to 25% determined by a formula based on Harken's recovery of its total expenditures under the Cambulos Contract. After a declaration of a commercial discovery, Harken and Ecopetrol will be responsible for all future operating expenses in direct proportion to their interest in production. Bolivar Contract -- In May 1996, Harken de Colombia, Ltd. signed an additional Association Contract with Ecopetrol, covering the Bolivar Contract area. Under the Bolivar Contract, Harken has acquired the exclusive rights to conduct exploration activities in the Bolivar Contract area, which covers approximately 250,000 acres in the Northern Middle Magdalena Valley of Central Colombia. During the first two years of this Bolivar Contract, Harken's work program will consist of preparing an engineering study of the Buturama and Totumal fields located on and adjacent to this acreage, the reprocessing of 250 kilometers of seismic data and the acquisition of 100 kilometers of new seismic data on this contract area. During each of the third through the sixth contract years, Harken may elect to continue the contract by committing to the drilling of at least one well during each contract year. The production sharing arrangements under the Bolivar Contract are substantially similar to those under the Cambulos Contract. Two earlier oil fields, located in the Buturama Area and the Lebrija Area, were discovered and drilled by a major operator beginning in the early 1950's. These earlier wells were produced for a number of years and then subsequently abandoned. Harken has obtained and reviewed well data and information including well logs, and production rates from these earlier wells. Harken intends to apply modern drilling and completion techniques, including the use of horizontal drilling similar to that used in the Austin Chalk formation in Texas, in these areas. The production sharing arrangements under the Bolivar Contract are substantially similar to those under the Cambulos Contract. Bahrain Operations -- In January 1990, Harken, through its wholly-owned subsidiary, Harken Bahrain Oil Company ("HBOC"), entered into a production sharing agreement with the Bahrain National Oil Company ("BANOCO") which gave it the exclusive right to explore for, develop and produce oil and gas throughout most of Bahrain's Arabian Gulf offshore territories. In 1992 and 1993, HBOC drilled two exploratory wells, neither of which discovered commercial quantities of oil or gas. In January 1996, the term of the production sharing agreement expired of its own accord. Harken had negotiated with BANOCO to extend the term of the production sharing agreement and expand the acreage covered thereby, however, Harken was unable to identify a joint venture partner to share in the exploration of the production sharing agreement acreage. Other -- The exploration, development and production of oil and gas are subject to various Navajo, federal, state and local laws and regulations designed to protect the environment. Compliance with these regulations is part of Harken's day-to-day operating procedures. Infrequently, accidental discharge of such materials as oil, natural gas or drilling fluids can occur and such accidents can require material expenditures to correct. Harken maintains levels of insurance customary in the industry to limit its financial exposure. Management is unaware of any material capital expenditures required for environmental control during the next fiscal year. The Aneth Gas Plant facility, of which Harken Southwest Corporation ("HSW"), a wholly-owned subsidiary, is a co-owner, was in operation for many years prior to HSW's becoming an owner. The operations at the Aneth Gas Plant previously used open, unlined drip pits for storage of various waste products. The plant 20 21 owners have replaced all of the open ground pits currently being used with steel tanks. The plant owners are currently in the process of closing the open ground pits. Texaco, the plant's operator, received a letter from the EPA dated July 21, 1991 and a subsequent letter dated June 8, 1992, in which the EPA requested certain information in order to determine if there had been at the Aneth Gas Plant the release of hazardous substances to the environment. Texaco has advised HSW that certain information was supplied to the EPA pursuant to this request. Subsequently, core samples in and around certain pit areas were jointly taken by the EPA and Texaco. The EPA approved a plan dated April 12, 1996 proposed by Texaco for the remediation and closure of these pits. An agreement has been reached between the present plant owners and the previous owner concerning responsibility for and sharing of costs of pit closures in and around the Aneth Gas Plant. Harken has accrued a contingency reserve of $219,000 for its best estimate of its share of the remediation cost. Harken has accrued approximately $1,128,000 at June 30, 1996 relating to other operational or regulatory contingent liabilities related to Harken's domestic operations. Harken and its subsidiaries currently are involved in various lawsuits and other contingencies, including a certain lawsuit and the guarantee of certain lease obligations of a former subsidiary, which in management's opinion, will not result in significant loss exposure to Harken. Search Acquisition Corp., a wholly-owned subsidiary of Harken, has been named as a defendant in a lawsuit by certain parties. On February 28, 1996, the court granted Search Acquisition's motion for summary judgement. The plaintiff has appealed the decision of the trial court. Although the ultimate outcome of this litigation is uncertain, Harken believes that any liability to Harken as a result of this litigation will not have a material adverse effect on Harken's financial condition. 21 22 ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS 22 23 HARKEN ENERGY CORPORATION AND SUBSIDIARIES MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (UNAUDITED) RESULTS OF OPERATIONS The following is management's discussion and analysis of certain significant factors which have affected Harken's earnings and balance sheet during the periods included in the accompanying consolidated financial statements.
THREE MONTHS ENDED SIX MONTHS ENDED JUNE 30, JUNE 30, ------------------------------ --------------------------- DOMESTIC EXPLORATION AND 1995 1996 1995 1996 - ------------------------- ------------- ------------- ------------ ------------ PRODUCTION OPERATIONS (UNAUDITED) (UNAUDITED) - --------------------- REVENUES -------- Oil sales revenues $ 1,054,000 $ 1,496,000 $ 1,846,000 $ 2,830,000 Oil volumes in barrels 56,000 72,000 100,000 144,000 Oil price per barrel $ 18.82 $ 20.78 $ 18.46 $ 19.65 Gas sales revenues $ 310,000 $ 674,000 $ 506,000 $ 1,146,000 Gas volumes in mcf 225,000 274,000 371,000 490,000 Gas price per mcf $ 1.38 $ 2.46 $ 1.36 $ 2.34 Gas plant revenues $ 176,000 $ 218,000 $ 361,000 $ 409,000 OTHER REVENUES -------------- Interest income $ 168,000 $ 202,000 $ 203,000 $ 385,000 Other income $ 74,000 $ -- $ 465,000 $ 161,000
FOR THE SIX MONTHS ENDED JUNE 30, 1996 COMPARED WITH THE CORRESPONDING PRIOR PERIOD. OVERVIEW Harken reported a net loss for the six months ended June 30, 1996 of $228,000 compared to a net loss of $297,000 for the prior year period. Total revenues increased from approximately $3.4 million during the first six months of 1995 to approximately $4.9 million for the first six months of 1996, primarily due to four acquisitions consummated during 1995 that increased Harken's domestic producing properties and oil and gas reserves. Gross profit before depreciation and amortization, general and administrative and interest expenses totaled approximately $2.8 million during the six months ended June 30, 1996 compared to approximately $1.8 million for the prior year period. Gross profit as a percentage of oil and gas sales revenues decreased slightly during the six months ended June 30, 1996 compared to the prior year period primarily due to the normal production declines of the Four Corners properties and higher operating cost levels associated with the Yellowhouse Properties. Internationally, Harken announced in April 1996 that it had received final approval from the Environmental Ministry in Colombia to initiate drilling operations on the initial well to be drilled on the Bocachico Contract area the Torcaz #2 well. Harken spudded the Torcaz #2 well on July 18, 1996. This well is projected to be drilled to a depth of 8,500 feet and should take approximately 22 to 25 days to reach this depth. Harken hopes to have test results available from this well by the end of August 1996. 23 24 DOMESTIC OPERATIONS Gross oil and gas revenues during the first six months of 1995 and 1996 were generated by Harken's domestic exploration and production operations. During the first six months of 1995 these domestic operations consisted primarily of the operations of Harken Southwest Corporation ("HSW"), which includes production of oil and gas reserves in the Aneth Field and Blanding Sub-Basin portions of the Paradox Basin in the Four Corners area of Utah, Arizona and New Mexico, primarily on the Navajo Indian Reservation. Such operations are primarily conducted through HSW's interests in the CHAP Venture ("CHAP"). Harken also includes in oil and gas revenues certain gas plant revenues, primarily from CHAP's plant owner interest in the Aneth Gas Plant which serves many of the Utah properties. During the first six months of 1996, Harken's domestic operations also include the onshore South Texas production operations of Search Exploration, Inc. ("Search"), which was merged into a wholly-owned subsidiary of Harken in May 1995. In addition, 1996 activity includes the October 1995 acquisition of the Yellowhouse Properties in the western region of Texas as well as the December 1995 acquisition of the Panhandle Properties located in the panhandle region of Texas. Gross oil revenues increased significantly during the first six months of 1996 compared to 1995 primarily due to the additional production volumes added as a result of the above mentioned acquisitions and higher oil prices. In particular, the addition of the Yellowhouse Properties contributed approximately $979,000 to the first six months of 1996 oil revenues, while the Panhandle Properties contributed approximately $107,000 to the first six months of 1996 oil revenues. In addition, the higher price received per barrel of oil produced reflects the increasingly strong demand for crude oil, particularly in the Four Corners region. Gross gas revenues also increased significantly for the six months ended June 30, 1996 compared to the prior year period, again due to the acquisitions consummated during 1995. The Panhandle Properties contributed approximately $536,000 to first half 1996 gas revenues, despite many of the properties experiencing numerous temporary operational curtailments during the first quarter. These operational problems have been resolved during the second quarter which has resulted in the resumption of normal gas production and increased gas revenues from the Panhandle Properties. The gas produced from the Panhandle Properties, with its associated products, can be currently sold at approximately a 60% premium to posted gas prices in the region as a result of the high BTU content of such gas. Harken received an average of $3.70 per mcf for Panhandle Property gas during the first six months of 1996. Harken also recorded approximately $176,000 of gas revenues from the acquisition of Search. In addition, Harken received an average of $1.60 per mcf from Harken's Four Corners gas production during the first half of 1996 compared to $1.36 per mcf received during the first half of 1995. Oil and gas operating expenses consist of lease operating expenses and gas plant expenses, along with a number of production and reserve based taxes, including Utah and Texas severance taxes, Utah and Texas property taxes, Utah conservation taxes and Navajo severance and possessory interest taxes. The increase in oil and gas operating expenses is as a result of the above mentioned acquisitions, specifically resulting in approximately $386,000 from the Yellowhouse Properties, approximately $212,000 from the Panhandle Properties, and approximately $61,000 from the Search operations. On July 10, 1996, Harken, along with a wholly-owned subsidiary, purchased working interests in certain producing properties located in Arkansas and New Mexico (the "EnerVest Properties") for a purchase price of $15,200,000 and the assumption of certain operational liabilities related to these properties. The acquisition of the EnerVest Properties, while not impacting the results of operations for the six months ended June 30, 1996, will increase oil and gas sales revenues and gross profit before depreciation and amortization, general and administrative expenses and interest expense for the remainder of 1996 and beyond. 24 25 INTEREST AND OTHER INCOME Interest and other income decreased during the first six months of 1996 compared to the prior period as during the first six months of 1995, Harken included a gain of approximately $189,000 on the March 1995 sale of Harken's investment in E-Z Serve Corporation Series C Preferred. During the first six months of 1996, Harken recognized approximately $259,000 of interest income earned by Harken on proceeds received from the May 1995 issuance of $15 million of European 8% Senior Convertible Notes Payable (the "8% European Notes") compared to $102,000 of such interest income during the first six months of 1995. Such proceeds, net of 8% European Notes issuance costs and amounts released and transferred, are maintained and invested in a separate interest bearing bank account (the "Segregated Account"). In July 1996, Harken issued a total of $40 million in 6 1/2% European Notes which mature on July 30, 2000. As a result, in future periods Harken initially expects to reflect interest income from the net proceeds which will similarly be invested in a Segregated Account. OTHER COSTS AND EXPENSES General and administrative expenses increased from $1,511,000 for the first six months of 1995 to $1,797,000 for the first six months of 1996, primarily as a result of increased personnel and office costs associated with the acquisitions consummated during 1995. Depreciation and amortization expense increased during the first six months of 1996 compared to the prior year period consistent with the increased production levels from the acquired oil and gas property interests during 1995. Depreciation and amortization on oil and gas properties is calculated on a unit of production basis in accordance with the full cost method of accounting for oil and gas properties. Interest expense and other increased significantly during the first six months of 1996 compared to the prior year period. In December 1995, Harken issued the Panhandle Note for an initial face amount of $13 million in connection with the acquisition of the Panhandle Properties, and the accretion of interest on such note resulted in $234,000 of interest expense during the first six months of 1996. In addition, the May 1995 issuance of the 8% European Notes generated interest expense during 1996 of approximately $38,000 net of amounts of interest capitalized, and approximately $178,000 of amortization of issuance costs associated with the 8% European Notes. On July 11, 1996, Harken's wholly-owned subsidiary entered into an exchange agreement with the holder of the $13 million Panhandle Note whereby it was exchanged for, among other consideration, 5,150,000 restricted shares of Harken common stock, including 185,000 shares held in escrow. The exchange has eliminated the further accretion of interest expense related to the Panhandle Note. Also in July 1996, Harken issued a total of $40 million in 6 1/2% European Notes which mature on July 30, 2000. The 6 1/2% European Notes are convertible under certain terms into shares of Harken common stock. As a result, Harken expects to reflect interest expense associated with the 6 1/2% European Notes, net of amounts capitalized, and the amortization of issuance costs associated with the 6 1/2% European Notes over the term or until such 6 1/2% European Notes are redeemed or are converted to Harken common stock. FOR THE QUARTER ENDED JUNE 30, 1996 COMPARED WITH THE CORRESPONDING PRIOR PERIOD. Harken reported net income of $68,000 for the three months ended June 30, 1996 compared to a net loss of $158,000 for the second quarter of 1995. Total revenues increased from approximately $1.8 million during the second quarter of 1995 to approximately $2.6 million for the second quarter of 1996, primarily due to the acquisitions consummated during 1995. Gross profit before depreciation and amortization, general and 25 26 administrative and interest expenses totaled approximately $1.5 million during the second quarter of 1996 compared to approximately $1.1 million during the prior year period. DOMESTIC OPERATIONS Gross oil revenues increased significantly during the second quarter of 1996 compared to 1995 primarily due to the additional production volumes added as a result of the above mentioned acquisitions and higher oil prices. In particular, the addition of the Yellowhouse Properties contributed approximately $504,000 to second quarter 1996 oil revenues, while the Panhandle Properties contributed approximately $69,000 to second quarter 1996 oil revenues. Overall, oil prices were particularly strong during the second quarter of 1996, averaging $20.78 per barrel compared to $18.82 during the second quarter of 1995. Gross gas revenues also increased significantly for the three months ended June 30, 1996 compared to the prior year period, again due to the acquisitions consummated during 1995. The Panhandle Properties contributed approximately $339,000 to second quarter 1996 gas revenues, reflecting a significant improvement over first quarter 1996 revenues from the Panhandle Properties, which was negatively impacted by operational curtailments. Harken also recorded approximately $126,000 of gas revenues from the acquisition of Search, compared to only a minimal amount of Search revenue during the second quarter of 1995. Oil and gas operating expenses consist of lease operating expenses and gas plant expenses, along with a number of production and reserve based taxes, including Utah and Texas severance taxes, Utah and Texas property taxes, Utah conservation taxes and Navajo severance and possessory interest taxes. The increase in second quarter 1996 oil and gas operating expenses compared to the prior year is as a result of the above mentioned acquisitions, specifically resulting in approximately $171,000 from the Yellowhouse Properties, approximately $141,000 from the Panhandle Properties, and approximately $40,000 from the Search operations. INTEREST AND OTHER INCOME Interest and other income decreased slightly during the second quarter of 1996 compared to the prior period despite the inclusion for the full quarter during 1996 of interest income earned by Harken on proceeds received from the May 1995 issuance of $15 million of European 8% Senior Convertible Notes Payable (the "8% European Notes"). OTHER COSTS AND EXPENSES General and administrative expenses increased from $737,000 for the second quarter of 1995 to $980,000 for the second quarter of 1996, primarily as a result of increased personnel and office costs associated with the acquisitions consummated during 1995. Depreciation and amortization expense increased during the second quarter of 1996 compared to the prior year period consistent with the increased production levels from the acquired oil and gas property interests during 1995. Depreciation and amortization on oil and gas properties is calculated on a unit of production basis in accordance with the full cost method of accounting for oil and gas properties. Interest expense and other decreased during the second quarter of 1996 compared to the prior year period due to the significant number of conversions by holders of 8% European Notes into shares of Harken common stock, which resulted in interest expense during 1996 of approximately $15,000 net of amounts of interest capitalized, and approximately $56,000 of amortization of issuance costs associated with the 8% European Notes. Interest expense and other during the second quarter of 1995 included net interest expense of approximately $125,000 and approximately $73,000 of amortization of issuance costs associated with the 8% European Notes. 26 27 LIQUIDITY AND CAPITAL RESOURCES During the year ended December 31, 1995, Harken took significant steps to strengthen its operating cash flow and available capital resources in order to implement its overall operating strategy. Such efforts included the issuance of $15 million of 8% European Notes, the generation of approximately $4.4 million from private placements of Harken common stock, four separate acquisitions of domestic oil and gas reserves and the signing of a Rio Negro Development Finance Agreement with certain investors to provide up to $3.5 million for Colombian exploration efforts. During the first six months of 1996, Harken's working capital increased approximately $7.8 million, primarily due to the availability of the remaining approximately $6.2 million of cash proceeds from the issuance of the 8% European Notes, which were restricted as of December 31, 1995. In addition, Harken generated approximately $2.5 million of net proceeds during the first six months of 1996 from the conversion of certain options and warrants and from a March 1996 private placement of Harken common stock. In July 1996, Harken again significantly improved its available capital resources primarily through the issuance of $40 million of 6 1/2% European Notes, which generated net available proceeds, subject to limitations discussed below, of approximately $36.9 million. Such 6 1/2% European Notes mature in July 2000 and are convertible after September 9, 1996 by the holders into shares of Harken common stock at a conversion price of $2.50 per share, and convertible by Harken into shares of Harken common stock after one year following issuance, if for any period of thirty consecutive days the closing price of Harken common stock for each day during such period shall have equaled or exceeded 135% of the conversion price (or $3.375 per share of Harken common stock). All proceeds from the sale of the 6 1/2% European Notes were paid to a Trustee and are held in a Segregated Account to be maintained for Harken's benefit. Also during July 1996, Harken strengthened it operating cash flow with the acquisition of certain producing oil and gas properties located in the Magnolia area of Arkansas and in the Carlsbad area of New Mexico (the "EnerVest Properties"). The purchase price of $15,200,000 plus the assumption of certain operational liabilities related to these properties, was paid in the form of $5,000,000 cash paid at closing, 1,550,000 shares of Harken common stock issued following closing, and 1,159,091 shares of Harken common stock issued at a designated time following the registration and sale by the seller of the initial shares issued at closing. Harken also issued to the seller warrants to purchase, for a period of three years from closing, 300,000 shares of Harken common stock at an exercise price of $2.75 per share. The agreement includes adjustment provisions pursuant to which Harken may be obligated to issue additional shares of Harken common stock if the seller does not realize at least $10,200,000 from its sale of such shares. The $5,000,000 cash consideration paid in connection with the July 1996 acquisition of the EnerVest Properties was funded with proceeds attributable to the 8% European Notes, issued in May 1995. Such 8% European Notes were convertible at any time by the holders into shares of Harken common stock at a conversion price of $1.50 per share, and convertible by Harken into shares of Harken common stock after one year following issuance, if for any period of thirty consecutive days the closing price of Harken common stock for each day during such period shall have equaled or exceeded 140% of the conversion price (or $2.10 per share of Harken common stock). Upon a conversion, any proceeds attributable to the 8% European Notes converted which remained in the Segregated Account were available to be released and paid to Harken without regard to the Asset Value Coverage Ratio test (as defined below). As of June 30, 1996, holders of 8% European Notes totaling $14,300,000 had exercised their conversion option and had been issued 9,533,311 shares of Harken common stock. Subsequent to June 30, 1996 and as of July 31, 1996, additional notifications of exercise of conversion options have been received from the remaining holders of 8% European Notes totaling $700,000, which has resulted in the additional issuance of 466,664 shares of Harken common stock. 27 28 For the 8% European Notes, Harken was required to maintain an Asset Value Coverage Ratio equal to or greater than 1:1. As of June 30, 1996, Harken was in compliance with the Asset Value Coverage Ratio test. The Asset Value Coverage Ratio for the 8% European Notes was calculated as a ratio of the sum of 100% of the aggregate amount of Harken's cash on deposit in the Segregated Account plus 60% of the aggregate amount of Harken's marketable securities plus 40% of the present value of Harken's unencumbered proved developed producing reserves located in the U.S. to the aggregate outstanding principal amount of the 8% European Notes. For the 6 1/2% European Notes, the Asset Value Coverage Ratio must also be equal to or greater than 1:1, and is calculated as the ratio of the sum of 100% of the aggregate amount of Harken's cash on deposit in the Segregated Account plus 60% of the aggregate amount of Harken's marketable securities plus 50% of the SEC value of Harken's domestic unencumbered total proved reserves of which at least 75% thereof must be proved developed producing reserves to the aggregate outstanding principal amount of the 6 1/2% European Notes. As of July 31, 1996, the amount of net proceeds from the 6 1/2% European Notes that was available based on the Asset Value Coverage Ratio described above was approximately $5,467,000. In order for a specific amount of proceeds to be released from the Segregated Account, Harken must demonstrate that the Asset Value Coverage Ratio test would continue to be met after such release of funds and that no Event of Default with respect to the 6 1/2% European Notes has occurred and is continuing at the date of such release. Such request must be accompanied by an independent reserve engineering report or other independent third party valuation of Harken's unencumbered proved developed producing assets. The anticipated timing at which funds will be released from the Segregated Account is dependent upon the timing and magnitude of conversions into Harken common stock by the individual noteholders, the market price of the Harken common stock, the amount of Harken's assets which qualify for inclusion in the Asset Value Coverage Ratio test, and the decision and ability by Harken to convert the 6 1/2% European Notes into Harken common stock. Once an amount of proceeds are available to be released from the Segregated Account, Harken may submit its request for the transfer of such proceeds at its discretion and according to its capital resource requirements. Upon maturity date of the 6 1/2% European Notes, the Segregated Account cash proceeds then remaining could be used to retire any remaining unconverted 6 1/2% European Notes. To the extent that proceeds invested in the Segregated Account at the balance sheet date are available under the above Asset Value Coverage Ratio limitations, such cash is included as a current asset as it is available to Harken to fund international and domestic activities including acquisitions, drilling costs and other capital expenditures or other working capital needs. Interest incurred on the 6 1/2% European Notes is payable semi-annually in January and July of each year to maturity or until the 6 1/2% European Notes are converted. Interest payments will be funded from cash flow from operations, existing cash balances or from available proceeds. Also in July 1996, Harken entered into an exchange agreement with the seller of the Panhandle Properties, pursuant to which Harken issued 5,150,000 restricted shares of Harken common stock, including 185,000 shares to be held in escrow, in connection with the satisfaction of all obligations owed by Harken Exploration to the seller under the terms of the Panhandle Note. Harken has reflected the Panhandle Note at the $10,429,000 approximate market value of the 5,150,000 restricted shares of Harken common stock issued. Under this exchange agreement, Harken Exploration agreed to pay the seller the amount, if any, by which the proceeds from the sale of these shares of Harken common stock sold by the seller are less than $8,500,000. The $13 million Panhandle Note bore interest at 5% per annum as to $8,000,000 in principal amount only, was secured by Harken Exploration's interest in the Panhandle Properties and was not guaranteed by Harken. Pursuant to the Panhandle Purchase and Sale Agreement, Harken Exploration could elect to pay the amounts due pursuant to the Panhandle Note in shares of Harken 28 29 common stock, with the number of shares to be issued based on the average of the closing prices of the Harken common stock on the American Stock Exchange during certain periods. As Harken's intention was to pay the Panhandle Note with shares of Harken common stock, the entire Panhandle Note balance has been classified as long-term obligations on Harken's Consolidated Balance Sheet. The recorded amount of the Panhandle Note on Harken's Consolidated Balance Sheet at December 31, 1995 was equal to the discounted fair value of the payments to be made at each maturity date, using a market rate of interest. In addition to Harken's efforts to acquire domestic oil and gas reserves, Harken continues to be very active in exploration efforts internationally, particularly in Colombia. As of June 30, 1996, Harken's net investment in its Colombian operations has totaled approximately $5 million, the realizability of which is dependent upon the success of Harken's exploration efforts. In addition, terms of each of the Association Contracts entered into between Harken de Colombia, Ltd. and Ecopetrol commit Harken to perform certain activities in accordance with a prescribed timetable. Failure by Harken to perform these activities as required could result in Harken losing its rights under the particular Association Contract, which could potentially have a material adverse effect on Harken's business. For a detailed discussion of each of the Association Contracts entered into between Harken de Colombia, Ltd. and Ecopetrol, see "Notes to Consolidated Condensed Financial Statements, Note 10 -- Commitments and Contingencies". Harken anticipates that full development of Colombian reserves in the Alcaravan contract area of the Llanos Basin and the Bocachico, Cambulos and Bolivar contract areas of the Middle Magdalena Basin may take several years and may require extensive production facilities which could require significant additional capital expenditures. The ultimate amount of such expenditures cannot be presently predicted. Harken anticipates that amounts required to fund international activities, including those in Colombia, will be funded from existing cash balances, asset sales, stock issuances, production payments, operating cash flows and from industry partners; however, there can be no assurances that Harken will have adequate funds available to it to fund its international activities or that industry partners can be obtained to fund such international activities. In October 1995, Harken entered into a Development Finance Agreement (the "Rio Negro Development Finance Agreement") with Arbco Associates L.P., Offense Group Associates L.P., Kayne Anderson Nontraditional Investments L.P. and Opportunity Associates L.P. (collectively, the "Rio Negro Investors"), pursuant to which the Rio Negro Investors agreed to provide up to $3.5 million to Harken to finance the drilling of two wells, including the Torcaz #2, on the Rio Negro prospect in the Bocachico Contract area in exchange for the right to receive future payments from Harken equal to 40% of the net profits that Harken, through its wholly-owned subsidiary Harken de Colombia, Ltd., may derive from the sale of oil and gas produced from the Rio Negro prospect (the "Participation") if the planned drilling on that prospect is successful. Pursuant to the Rio Negro Development Finance Agreement, Harken has agreed to drill two wells on the Rio Negro prospect. As of June 30, 1996, Harken had requested and received $2,000,000 pursuant to the Rio Negro Development Finance Agreement. Pursuant to the Rio Negro Development Finance Agreement, the Rio Negro Investors have the right at any time prior to October 12, 1997 (the "Commitment Date"), to convert all or part of the Participation into shares of a newly created series of preferred stock of Harken (the "Preferred Stock"), and Harken likewise has the right, exercisable at the Commitment Date, to convert up to 75% of the Participation into shares of Preferred Stock if the Rio Negro Investors have not previously elected to convert all of such Participation. If Harken exercises its right to convert the Participation into Preferred Stock, the Rio Negro Investors at that time can elect to receive cash or Preferred Stock equal to the amount of the balance of the remaining Participation plus an additional amount computed at a rate of 25% per annum. In addition, the Rio Negro Investors may then elect to further convert any remaining portion of the Participation into additional shares of Preferred Stock. The shares of Preferred Stock which may be issued would be constituted as the Series D Preferred and would pay dividends at an annual rate of 15% and are redeemable by Harken without premium except for accrued unpaid dividends at any time after the 29 30 Commitment Date, and must be redeemed by Harken no later than October 12, 2000. A failure by Harken to timely pay dividends due under this Preferred Stock for three quarters or to redeem such Preferred Stock when due would give rise to a right exercisable on behalf of the Rio Negro Investors to elect one director to Harken's Board of Directors. Harken has completed all work requirements for the first, second and third years of the Alcaravan Contract. On June 28, 1996, Harken along with Harken de Colombia, Ltd. entered into development finance agreements ("the Palo Blanco Development Finance Agreements") with BSR Investments, Inc. and Greyledge LLC, respectively ("the Palo Blanco Investors"), which cover the Palo Blanco prospect under the Alcaravan Contract area. Under the terms of the Palo Blanco Development Finance Agreements, the Palo Blanco Investors will provide an aggregate of $2,500,000 to Harken de Colombia, Ltd. to finance the drilling of the first well on the Palo Blanco prospect in exchange for an aggregate beneficial interest in 40% of the net profits which may be realized by Harken de Colombia, Ltd. from this prospect, subject to reduction upon exercise of an election to exchange this interest or any part thereof for shares of Harken common stock. The Palo Blanco Investors will receive as part of the consideration for this transaction an aggregate of 90,000 shares of restricted Harken common stock. Under the Palo Blanco Development Finance Agreements, both the Palo Blanco Investors and Harken have options to elect to exchange the Palo Blanco Investors' respective beneficial interests in the Palo Blanco prospect for restricted shares of Harken common stock. The Palo Blanco Investors may elect to exchange from time to time all of their interests for an aggregate of 1,109,976 restricted shares of Harken common stock, or any lesser part on a prorated basis. Harken may exercise its option to exchange on the same terms but only as to 75% of such interests on a similar prorated basis. Harken may thereafter elect to exchange the remaining 25% of such unexchanged interests, if any, for additional shares of restricted Harken common stock based upon 50% of the independently engineered valuation of the first well drilled on this Palo Blanco prospect. Following the issuance of such Harken common stock thereunder, the Palo Blanco Investors will have certain registration rights with regard thereto. Subsequent to June 30, 1996, Harken received from the Palo Blanco Investors the initial scheduled advances pursuant to the Palo Blanco Development Finance Agreements totalling $625,000. The Palo Blanco Investors elected to exercise their option to exchange this initial interest resulting in the issuance of 299,994 restricted shares of Harken common stock. All of the steps taken by Harken during the past year, including the above mentioned Development Finance Agreements, provide Harken with additional capital resources, both internally and externally, to be used toward accomplishing Harken's exploration and development objectives during 1996 and beyond. Such capital expenditures will be incurred only to the extent that cash flows from operations or capital resources are available. Capital expenditures related to Harken's Colombian operations are expected to total a minimum of $3.2 million during 1996, with a majority of such costs related to the Rio Negro prospect on the Bocachico Contract area. Harken has selected the site of its first well, the Torcaz #2 well, and in April 1996 received the drilling permit from the Environmental Ministry in Colombia to initiate drilling operations. Harken spudded its first well to be drilled on this Bocachico Contract area, named the Torcaz #2 well, on July 18, 1996. This well is projected to be drilled to a depth of 8,500 feet and should take approximately 22 to 25 days to reach this depth. Harken hopes to have test results available from this well by the end of August 1996. In addition, Harken plans to expend at least $1 million in 1996 on domestic drilling activities. Harken anticipates that such amounts will be funded from existing cash balances (including available European Segregated Account cash), operating cash flows and funds provided by the Development Finance Agreements. During the six months ended June 30, 1996, Harken's cash and temporary investments increased approximately $10.4 million consisting primarily of transfers from the European Segregated Account of $10 million following the conversions of 8% European Notes to Harken common stock, Harken common stock private placement offering proceeds of approximately $1.3 million, and the initial advances pursuant to the Rio Negro Development Finance Agreement of $2 million. Such activity was sufficient to fund capital expenditures of 30 31 approximately $3.9 million and repayments of notes payable and long-term obligations of approximately $1.3 million. Cash flow provided by operations during the first six months of 1996 totaled $958,000. Harken believes that cash flow from operations will be sufficient to meet its operating cash requirements in 1996. Harken includes in cash and temporary investments certain balances which are restricted to use for specific project expenditures, collateral or for distribution to outside interest owners and are not available for general working capital purposes. The exploration, development and production of oil and gas are subject to various Navajo, federal, state and local laws and regulations designed to protect the environment. Compliance with these regulations is part of Harken's day-to-day operating procedures. Infrequently, accidental discharge of such materials as oil, natural gas or drilling fluids can occur and such accidents can require material expenditures to correct. Harken maintains levels of insurance customary in the industry to limit its financial exposure. Management is unaware of any material capital expenditures required for environmental control during the next fiscal year. Harken has accrued approximately $1,128,000 at June 30, 1996 relating to operational or regulatory contingent liabilities related to Harken's domestic operations. Harken and its subsidiaries currently are involved in various lawsuits and other contingencies, including a certain lawsuit and the guarantee of certain lease obligations of a former subsidiary, which in management's opinion, will not result in significant loss exposure to Harken. 31 32 PART II - OTHER INFORMATION Item 1. Legal Proceedings. Search Acquisition Corp. ("Search Acquisition"), a wholly-owned subsidiary of Harken, has been named as a defendant in a lawsuit by Petrochemical Corporation of America and Lorken Investments Corporation (together, "Petrochemical"). This lawsuit arises out of an attempt by Petrochemical to enforce a judgement entered in 1993 against, among other parties, a group of 20 limited partnerships known as the "Odyssey limited partnerships". In 1989, Search Exploration, Inc. ("Search") acquired all of the assets of eight of the 20 Odyssey limited partnerships. Petrochemical claims that Search is liable for payment of the judgement as the successor-in-interest to the eight Odyssey limited partnerships. Search Acquisition was the surviving corporation in the merger with Search. On February 28, 1996, the court granted Search Acquisition's motion for summary judgement. Petrochemical has appealed the decision of the trial court. Harken has been named as a defendant in a lawsuit styled Douglas C Kramlich vs. E-Z Serve Corp., Harken Energy Corp., Diamond Shamrock, Inc., Autotronic Systems, Inc., and Does 1-100 filed in the Superior Court of California, County of San Diego. The plaintiff has alleged that property owned by him has become contaminated with hazardous substances and further claims that the contamination was caused by a gasoline leak at a service station operated on the property by one or more of the defendants. As a result, plaintiff claims that he is entitled to damages. The property was the site of a gasoline service station operated by E-Z Serve Corp., a former subsidiary of Harken, but was never owned or operated by Harken. Harken believes that it has numerous meritorious defenses to this lawsuit and intends to defend this lawsuit vigorously. Although the outcome of the litigation matters described above are uncertain, Harken does not believe that any liability to Harken as a result of such matters will have a material adverse effect on Harken's financial condition. Item 2. Changes in Securities. Not applicable. Item 3. Default Upon Senior Securities. Not applicable. Item 4. Submission of Matters to a Vote of Securities Holders. Results of Annual Meeting of Stockholders. On June 11, 1996, Harken held its Annual Meeting of Stockholders. The stockholders of Harken voted on three separate proposals, the results of which are described below: 1. Approval of an amendment to Harken's Certificate of Incorporation increasing the authorized number of shares of Common Stock from 100,000,000 to 125,000,000. For Against Abstain ------------- ----------- --------- 61,232,052 1,793,442 199,044 32 33 2. Approval of an amendment to Harken Energy Corporation 1993 Stock Option and Restricted Stock Plan to increase the number of shares of Common Stock authorized for issuance under the plan from 3,000,000 to 4,000,000. For Against Abstain ------------ ----------- --------- 59,153,032 3,838,355 233,151 3. Election of Directors. For Withheld ------------- ---------- Donald W. Raymond 62,367,376 857,162 Richard H. Schroeder 62,462,446 762,092 Gary B. Wood, Ph.D. 62,419,851 804,687 Item 5. Other Information Not applicable. Item 6. Exhibits and Reports on Form 8-K. (a) EXHIBIT INDEX Exhibit 3.1 Certificate of Incorporation of Harken Energy Corporation as amended (filed as Exhibit 3.1 to Harken's Annual Report on Form 10-K for fiscal year ended December 31, 1989, File No. 0-9207, and incorporated by reference herein). 3.2 Amendment to the Certificate of Incorporation of Harken Energy Corporation (filed as Exhibit 28.8 to the Registration Statement on Form S-1 of Tejas Power Corporation, file No. 33-37141, and incorporated by reference herein.) 3.3 Amendment to the Certificate of Incorporation of Harken Energy Corporation (filed as Exhibit 3 to Harken's Quarterly Report on Form 10-Q for fiscal quarter ended March 31, 1991, File No. 0-9207, and incorporated by reference herein.) 3.4 Amendments to the Certificate of Incorporation of Harken Energy Corporation (filed as Exhibit 3 to Harken's Quarterly Report on Form 10-Q for fiscal quarter ended June 30, 1991, File No. 0-9207, and incorporated by reference herein.) 3.5 Bylaws of Harken Energy Corporation, as amended (filed as Exhibit 3.2 to Harken's Annual Report on Form 10-K for fiscal year ended December 31, 1989, File No. 0-9207, and incorporated by reference herein.) 4.1 Form of certificate representing shares of Harken common stock, par value $.01 per share (filed as Exhibit 1 to Harken's Registration Statement on Form 8-A, File No. 0-9027, and incorporated by reference herein.) 4.2 Certificate of Designations, Powers, Preferences and Rights of Series A Cumulative Convertible Preferred Stock, $1.00 par value, of Harken Energy Corporation (filed as Exhibit 4.1 to Harken's Annual Report on Form 10-K for the fiscal year ended December 31, 1989, File No. 0-9207, and incorporated by reference herein). 4.3 Certificate of Designations, Powers, Preferences and Rights of Series B Cumulative Convertible Preferred Stock, $1.00 par value, of Harken Energy Corporation (filed as Exhibit 4.2 to Harken's Annual Report on Form 10-K for the fiscal year ended December 31, 1989, File No. 0-9207, and incorporated by reference herein). 4.4 Certificate of the Designations, Powers, Preferences and Rights of Series C Cumulative Convertible Preferred Stock, $1.00 par value of Harken Energy Corporation (filed as Exhibit 4.3 to Harken's Annual Report on Form 10-K for fiscal year ended December 31, 1989, File No. 0-9207, and incorporated by reference herein). 33 34 4.5 Certificate of the Designations of Series D Preferred Stock, $1.00 par value of Harken Energy Corporation (filed as Exhibit 4.3 to Harken's Quarterly Report on Form 10-Q for the fiscal quarter ended September 30, 1995, File No. 0-9207, and incorporated by reference herein). *10.1 Trust Indenture dated July 30, 1996, by and between Harken and Marine Midland Bank plc. *10.2 Placing Agreement dated July 19, 1996, by and between Harken and the various signatories thereto. *10.3 Global Temporary Note dated July 30, 1996 issued by Harken in the principal amount of $40,000,000. *10.4 Association Contract (Bolivar) by and between Harken de Colombia, Ltd., and Empresa Colombia de Petroleos. *10.5 Exchange Agreement dated July 11, 1996, by and among Harken, Harken Exploration Company and Momentum Operating Co., Inc. *27 Financial Data Schedules. (b) REPORTS ON FORM 8-K. The registrant filed a Current Report on Form 8-K dated July 10, 1996 (Item 2) to report the acquisition of the EnerVest Properties. The registrant filed a Current Report on Form 8-K dated July 31, 1996 (Item (5) to report the issuance of the 6 1/2% European Notes. 34 35 HARKEN ENERGY CORPORATION SIGNATURES Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized. Harken Energy Corporation ---------------------------------------- (Registrant) Date: August 8, 1996 By: /s/ Bruce N. Huff - ------------------------------ ---------------------------------------- Bruce N. Huff, Senior Vice President and Chief Financial Officer 35 36 EXHIBIT INDEX Exhibit Description ------- ----------- 3.1 Certificate of Incorporation of Harken Energy Corporation as amended (filed as Exhibit 3.1 to Harken's Annual Report on Form 10-K for fiscal year ended December 31, 1989, File No. 0-9207, and incorporated by reference herein). 3.2 Amendment to the Certificate of Incorporation of Harken Energy Corporation (filed as Exhibit 28.8 to the Registration Statement on Form S-1 of Tejas Power Corporation, file No. 33-37141, and incorporated by reference herein.) 3.3 Amendment to the Certificate of Incorporation of Harken Energy Corporation (filed as Exhibit 3 to Harken's Quarterly Report on Form 10-Q for fiscal quarter ended March 31, 1991, File No. 0-9207, and incorporated by reference herein.) 3.4 Amendments to the Certificate of Incorporation of Harken Energy Corporation (filed as Exhibit 3 to Harken's Quarterly Report on Form 10-Q for fiscal quarter ended June 30, 1991, File No. 0-9207, and incorporated by reference herein.) 3.5 Bylaws of Harken Energy Corporation, as amended (filed as Exhibit 3.2 to Harken's Annual Report on Form 10-K for fiscal year ended December 31, 1989, File No. 0-9207, and incorporated by reference herein.) 4.1 Form of certificate representing shares of Harken common stock, par value $.01 per share (filed as Exhibit 1 to Harken's Registration Statement on Form 8-A, File No. 0-9027, and incorporated by reference herein.) 4.2 Certificate of Designations, Powers, Preferences and Rights of Series A Cumulative Convertible Preferred Stock, $1.00 par value, of Harken Energy Corporation (filed as Exhibit 4.1 to Harken's Annual Report on Form 10-K for the fiscal year ended December 31, 1989, File No. 0-9207, and incorporated by reference herein). 4.3 Certificate of Designations, Powers, Preferences and Rights of Series B Cumulative Convertible Preferred Stock, $1.00 par value, of Harken Energy Corporation (filed as Exhibit 4.2 to Harken's Annual Report on Form 10-K for the fiscal year ended December 31, 1989, File No. 0-9207, and incorporated by reference herein). 4.4 Certificate of the Designations, Powers, Preferences and Rights of Series C Cumulative Convertible Preferred Stock, $1.00 par value of Harken Energy Corporation (filed as Exhibit 4.3 to Harken's Annual Report on Form 10-K for fiscal year ended December 31, 1989, File No. 0-9207, and incorporated by reference herein). 4.5 Certificate of the Designations of Series D Preferred Stock, $1.00 par value of Harken Energy Corporation (filed as Exhibit 4.3 to Harken's Quarterly Report on Form 10-Q for the fiscal quarter ended September 30, 1995, File No. 0-9207, and incorporated by reference herein). *10.1 Trust Indenture dated July 30, 1996, by and between Harken and Marine Midland Bank plc. *10.2 Placing Agreement dated July 19, 1996, by and between Harken and the various signatories thereto. *10.3 Global Temporary Note dated July 30, 1996 issued by Harken in the principal amount of $40,000,000. *10.4 Association Contract (Bolivar) by and between Harken de Colombia, Ltd., and Empresa Colombia de Petroleos. *10.5 Exchange Agreement dated July 11, 1996, by and among Harken, Harken Exploration Company and Momentum Operating Co., Inc. *27 Financial Data Schedules. EX-10.1 2 TRUST INDENTURE 1 EXHIBIT 10.1 HARKEN ENERGY CORPORATION U.S.$40,000,000 6.5% Senior Convertible Notes Due 2000 TRUST INDENTURE 2 TRUST INDENTURE dated as of July 30, 1996 ("Indenture"), between HARKEN ENERGY CORPORATION, a corporation duly organized and existing under the laws of the State of Delaware (herein called the "Company"), and MARINE MIDLAND BANK, a banking corporation and trust company duly organized and existing under the laws of the State of New York, as Trustee (herein called the "Trustee"). WHEREAS: The Company has duly authorized the creation of an issue of up to U.S. $40,000,000 of 6.5% Senior Convertible Notes Due 2000 and the Coupons, if any, thereto appertaining (collectively, the "Notes") and to provide therefor the Company has duly authorized the execution and delivery of this Indenture. All things necessary have been done to make the Notes, when duly issued and executed by the Company and authenticated and delivered hereunder, the valid obligations of the Company and to make this Indenture a valid agreement of the Company, in accordance with their and its terms. The Trustee has agreed to act as trustee under this Indenture on the terms and conditions set forth herein. NOW, THEREFORE, THIS INDENTURE WITNESSETH: For and in consideration of the premises and the purchase of the Notes by the Holders thereof, it is mutually covenanted and agreed, for the equal and proportionate benefit of all Holders of the Notes, as follows: ARTICLE ONE DEFINITIONS AND OTHER PROVISIONS OF GENERAL APPLICATION SECTION 1.01 Definitions. "Act," when used with respect to any Noteholder, has the meaning specified in Section 1.06. "Affiliate" of any specified Person means any other Person directly or indirectly controlling or controlled by or under direct or indirect common control with such specified Person and the terms "controlling" and "controlled" have meanings correlative to the foregoing. 1 3 "Agent Members" has the meaning specified in Section 3.06. "Alternative Stock Exchange" means any other national or regional stock exchange or quotation service such as NASDAQ National Market System or any similar quotation service maintained by the National Quotation Bureau or any successor thereto. "AMEX" means The American Stock Exchange, Inc. or any successor thereto. "Asset Value Coverage Ratio" means a ratio of (a) the sum of the value of the Required Assets to (b) the aggregate principal amount of all Outstanding Notes, as set forth in Section 10.13. "Authenticating Agent" means the Person authorized pursuant to Section 6.14 to act on behalf of the Trustee to authenticate the Notes until a successor Authenticating Agent shall have become such pursuant to the applicable provisions of this Indenture, and thereafter "Authenticating Agent" shall mean such successor Authenticating Agent. Pursuant to the terms hereof, Midland Bank Plc will initially act as the Authenticating Agent. "Authorized Newspaper" means the Financial Times (European Edition) of London, England. If such newspaper shall cease to be published, the Company or the Trustee shall substitute for it another newspaper in Europe, customarily published at least once a day for at least five (5) days in each calendar week, of general circulation. If, because of temporary suspension of publication or general circulation of such newspaper or for any other reason, it is impossible or, in the opinion of the Company or the Trustee, impracticable to make any publication of any notice required by this Indenture in the manner herein provided, such publication or other notice in lieu thereof which is made by the Company or the Trustee in the exercise of its reasonable discretion shall constitute a sufficient publication of such notice. "Board of Directors" means either the board of directors of the Company or any duly authorized committee of that board. "Board Resolution" means a copy of a resolution certified by the Secretary or an Assistant Secretary of the Company to have been duly adopted by the Board of Directors and in full force and effect on the date of such certification, and delivered to the Trustee. "Business Day" means each Monday, Tuesday, Wednesday, Thursday and Friday which is a day on which banking institutions in the City of New York, New York, London, England and Lugano, Switzerland are not authorized or obliged by law, regulation or executive order to close. 2 4 "Capital Stock" means, with respect to any Person, any and all shares, interests, participation or other equivalents (however designated) of such Person's capital stock whether now outstanding or issued on or after the date of this Indenture, including, without limitation, all Common Stock and Preferred Stock. "Capitalized Lease Obligation" means the amount of the liability under any capital lease that, in accordance with GAAP, is required to be capitalized and reflected as a liability on the balance sheet. "Cedel" means Cedel Bank, societe anonyme. "Certificate of Incorporation" means the Amended and Restated Certificate of Incorporation of the Company, as in effect on the date hereof and as amended or restated from time to time hereafter. "Closing Date" means July 30, 1996. "Commission" means the Securities and Exchange Commission, as from time to time constituted or, if at any time after the execution of this Indenture such Commission is not existing, then the body performing similar duties at such time. "Common Depository" means the common depository appointed by Morgan Guaranty Trust Company of New York, Brussels office, as operator of the Euroclear System, and Cedel Bank, societe anonyme, which shall initially be Midland Bank Plc, including the nominees and successors of any Common Depository. "Common Stock" means, with respect to any Person, any and all shares, interests, participation and other equivalents (however designated, whether voting or non-voting) of such Person's common stock, whether now outstanding or issued after the date of this Indenture, and includes, without limitation, all series and classes of such common stock. "Company" means the Person named as the "Company" in the first paragraph of this Indenture, until a successor Person shall have become such pursuant to the applicable provisions of this Indenture, and thereafter "Company" shall mean such successor Person. "Company Request" or "Company Order" means a written request or order signed in the name of the Company by its Chairman, a Vice Chairman, its President, or a Vice President, by its Treasurer or its Secretary, and delivered to the Trustee. 3 5 "Conversion Agent" means any Person (including the Company acting as Conversion Agent) authorized by the Company to effect conversions of the Notes on behalf of the Company. Pursuant to the terms hereof, the Company has initially appointed Midland Bank Plc to act as the Principal Conversion Agent and Banca del Gottardo to act as a Conversion Agent for the Notes. "Conversion Date" means the Business Day on which the Conversion Right is exercisable immediately following the Business Day on which the Conversion Agent receives the Note surrendered for conversion and notice of a Noteholder's intention to exercise its Conversion Right with respect to any Note and, if applicable, any payment to be made or indemnity given pursuant to this Indenture in connection with the exercise of such Conversion Right or in the case of conversions pursuant to Section 11.09. "Conversion Price" means $2.50, the price at which Conversion Shares shall be issued upon conversion, subject to adjustment as set forth herein. "Conversion Right" means the right of a Holder of any Note to convert such Note into Conversion Shares. "Conversion Shares" means the Shares into which the Notes are convertible. "Corporate Trust Office" means the principal corporate trust office of the Trustee, at which at any particular time its corporate trust business shall be administered, which office at the date of execution of this Indenture is located at 140 Broadway, New York, New York 10005-1180, except that with respect to presentation of Notes for payment upon redemption, for conversion or exchange, such term shall mean the office or agency of the Trustee at which, at any particular time, its corporate agency business shall be conducted. "Corporation" includes corporations, limited liability companies, limited and general partnerships, associations, joint-stock companies and business trusts. "Coupon" means bearer interest Coupons relating to the Bearer Notes and any replacement Coupons issued pursuant to Section 3.08. "Couponholder" means a Person who is the bearer of any Coupon. "Default" means any event which is, or after notice or passage of time or both would be, an Event of Default. 4 6 "Designated Oil and Gas Reserves" means 50% of the SEC Value of the Proved Reserves of the Company and its Subsidiaries, of which at least 75% of the SEC Value thereof must be PDP Reserves, which the parties for purposes of clarification have agreed shall be equivalent to the lesser of (i) 50% of the SEC Value of the Proved Reserves or (ii) 66.6% of the SEC Value of the PDP Reserves as the same are reported in the Independent Reserve Report, with the understanding that the result obtained by such methods of calculation shall be the same in all cases. "Euroclear" means the Euroclear System. "Event of Default" has the meaning specified in Section 5.01. "Exchange Act" means the Securities Exchange Act of 1934, as amended. "Extraordinary Resolution" means a resolution passed at a meeting of the Noteholders duly convened and held in accordance with Section 6.13 hereof. "Federal Bankruptcy Code" means the Bankruptcy Act or Title 11 of the United States Code, as amended from time to time. "Generally Accepted Accounting Principles" or "GAAP" means generally accepted accounting principles in the United States, as applied from time to time by the Company in the preparation of its financial statements. "Good Title" means, with respect to Oil and Gas Properties, good and defensible title which is (i) evidenced by an instrument or instruments filed of record in accordance with the conveyance and recording laws of the applicable jurisdiction and is sufficient against competing claims of bona fide purchasers for value without notice and (ii) free and clear of all Liens, other than such Liens that a reasonably prudent purchaser of Oil and Gas Properties would accept in light of the value of the Oil and Gas Property affected, the improbability of assertion of the defect or irregularity or the degree of difficulty or the cost of performing curative work. "Group" means the Company and all its Principal Subsidiaries. "Guaranty" means all obligations of any Person (other than endorsements in the ordinary course of business of negotiable instruments for deposit or collection) of such Person guaranteeing or in effect guaranteeing any Indebtedness, dividend or other obligation, of any other Person (the "primary obligor") in any manner, whether directly or indirectly, including without limitation all obligations incurred through an agreement, contingent or otherwise, by such Person: (i) to purchase such Indebtedness or obligation or any Property or assets constituting security therefor, 5 7 or (ii) to advance or supply funds (1) for the purchase or payment of such Indebtedness or obligation, or (2) to enable the recipient of such funds to maintain certain financial conditions (e.g. agreed amount of working capital) under loan or similar documents, or (iii) to lease Property or to purchase securities or other Property or services primarily for the purpose of assuring the owner of such Indebtedness or obligation of the ability of the primary obligor to make payment of the Indebtedness or obligation, or (iv) otherwise to assure the owner of the Indebtedness or obligation of the primary obligor against loss in respect thereof. For the purposes of all computations made under this Indenture, a Guaranty in respect of any Indebtedness shall be deemed to be Indebtedness equal to the principal amount and accrued interest of such Indebtedness which has been guaranteed, and a Guaranty in respect of any other obligation or liability or any dividend shall be deemed to be Indebtedness equal to the maximum aggregate amount of such obligation, liability or dividend. "Holder" means a Person who is a bearer of a Note or Coupon, as the case may be. "Hydrocarbon Interests" means all rights, titles, interests and estates in and to oil and gas leases, oil, gas and mineral leases, oil and gas concession agreements, production sharing and similar agreements, or other liquid or gaseous hydrocarbon leases, mineral fee interests, overriding royalty and royalty interests, net profit interests and production payment interests, or which may arise under operating agreements, unit agreements or other contract rights, including any reserved or residual interests of whatever nature and without regard to whether such rights cover or exist with respect to lands located within or without the United States. "Hydrocarbons" means oil, gas, casing head gas, drip gasoline, natural gasoline, condensate, distillate, liquid hydrocarbons, gaseous hydrocarbons and all products refined therefrom and all other minerals. "Indebtedness" of any Person means and includes all present and future obligations of such Person, which shall include all obligations (i) which in accordance with generally accepted accounting principles in the United States shall be classified upon a balance sheet of such Person as liabilities of such Person, (ii) for borrowed money, (iii) which have been incurred in connection with the acquisition of Property (including, without limitation, all obligations of such Person evidenced by any debenture, bond, note, commercial paper or other similar security, but excluding, in any case, obligations arising from the endorsement in the ordinary course of business of negotiable instruments for deposit or collection), (iv) secured by any Lien existing on Property owned by such Person, even though such Person has not assumed or become liable for the payment of such obligations, (v) created or arising under any conditional sale or other title retention agreement with respect to Property acquired by such Person, notwithstanding the fact that the rights and remedies of the seller, lender or lessor under such agreement in the event of 6 8 default are limited to repossession or sale of such Property, (vi) Capitalized Lease Obligations, (vii) for all Guaranties, whether or not reflected in the balance sheet of such Person and (viii) all reimbursement and other payment obligations (whether contingent, matured or otherwise) of such Person in respect of any acceptance or documentary credit. Notwithstanding the foregoing, Indebtedness shall not include (i) Indebtedness incidental to the operation of the business of the Person in the ordinary course and in the aggregate not material to the business and operations of the Person, (ii) Indebtedness for which the Company or any of its Subsidiaries are the sole obligors and obligees, and (iii) Indebtedness represented by purchase, rental or lease obligations not to exceed $1,000,000 in any period of 12 months for any Person and its Subsidiaries. "Indenture" means this instrument as originally executed and as it may from time to time be supplemented or amended by one or more indentures supplemental hereto entered into pursuant to the applicable provisions hereof. "Independent Reserve Report" means an independent reservoir engineering report or other independent third party valuation of the Company's and its Subsidiaries' Oil and Gas Properties which are used in determining the Asset Value Coverage Ratio, which report shall be dated as of the end of the Company's most recent fiscal year or as of a later date, at the Company's option. "Interest Payment Date" means the Stated Maturity of an instalment of interest on the Notes. "Lien" means any mortgage, charge, pledge, lien, security interest or encumbrance of any kind whatsoever, including any interest in Property securing an obligation owed to, or a claim by, a Person other than the owner of the Property, whether such interest is based on the common law, statute or contract, and including but not limited to the security interest lien arising from a mortgage, encumbrance, pledge, conditional sale or trust receipt or a lease, consignment or bailment for security purposes. The term "Lien" shall include reservations, exceptions, encroachments, easements, rights-of-way, covenants, conditions, restrictions, leases and other title exceptions and encumbrances affecting Property. For the purposes of this Indenture, the Company or its Subsidiary shall be deemed to be the owner of any Property which it has acquired or holds subject to a conditional sale agreement, financing lease or other arrangement pursuant to which title to the Property has been retained by or vested in some other Person for security purposes. "Mandatory Conversion" means conversion of the Notes at the option of the Company pursuant to Section 12.11. 7 9 "Mandatory Conversion Date" means the date specified in a notice published by the Company in accordance with Sections 1.07, 1.08 and 12.11, on which the Noteholders are required to surrender their Notes for conversion. "Market Price" means the daily closing sale price of the Common Stock for a Stock Exchange Business Day. "Marketable Securities" means any "security" (as such term is defined in Section 2(1) of the Securities Act) of any Person listed, admitted to trading or quoted on the New York Stock Exchange, the AMEX or Alternative Stock Exchange. "Maturity," when used with respect to any Note, means the date on which the principal of such Note becomes due and payable as therein or herein provided, whether at the Stated Maturity or the Redemption Date and whether by declaration of acceleration, call for redemption or otherwise. "Noteholder" means a Person who is the bearer of any Note. "Notes" has the meaning stated in the first recital of this Indenture and more particularly means any Notes authenticated and delivered under this Indenture. "Offering Circular" means that certain Offering Circular dated July 30, 1996, together with all supplements and amendments thereto. "Officers' Certificate" means a certificate signed by the Chairman, a Vice Chairman, the President or a Vice President, and by the Treasurer, an Assistant Treasurer, the Secretary or an Assistant Secretary of the Company, and delivered to the Trustee. Any one individual holding the requisite titles may sign and deliver an Officers' Certificate without cosignature of another individual with a requisite title. "Oil and Gas Properties" means Hydrocarbon Interests; any Properties now or hereafter pooled or unitized with Hydrocarbon Interests; all presently existing or future unitization, pooling agreements and declarations of pooled units and the units created thereby (including without limitation all units created under orders, regulations and rules of any governmental body or agency having jurisdiction) which may affect all or any portion of the Hydrocarbon Interests; all operating agreements, contracts and other agreements which relate to any of the Hydrocarbon Interests or the production, sale, purchase, exchange or processing of Hydrocarbons from or attributable to such Hydrocarbon Interests; all Hydrocarbons in and under and which may be produced and saved or attributable to the Hydrocarbon Interests, the lands covered thereby and all oil in tanks and all 8 10 rents, issues, profits, proceeds, products, revenues and other income from or attributable to the Hydrocarbon Interests; all tenements, hereditaments, appurtenances and Properties in anywise appertaining, belonging, affixed or incidental to the Hydrocarbon Interests, Properties, rights, titles, interests and estates described or referred to above, including any and all Property, real or personal, now owned or hereafter acquired and situated upon, used, held for use or useful in connection with the operating, working or development of any of such Hydrocarbon Interests (excluding drilling rigs, automotive equipment or other personal property which may be on such premises for the purpose of drilling a well or for other similar temporary uses) and including any and all oil wells, gas wells, injection wells or other wells, buildings, structures, fuel separators, liquid extraction plants, plant compressors, pumps, pumping units, field gathering systems, tanks and tank batteries, fixtures, valves, fittings, machinery and parts, engines, boilers, meters, apparatus, equipment, appliances, tools, implements, cables, wires, towers, casing, tubing and rods, surface leases, rights-of-way, easements and servitudes together with all additions, substitutions, replacement, accessions and attachments to any and all of the foregoing. "Opinion of Counsel" means a written opinion of counsel, who may be counsel for the Company, including an employee of the Company, and who shall be reasonably acceptable to the Trustee. "Outstanding," when used with respect to Notes, means, as of the date of determination, all Notes theretofore authenticated and delivered under this Indenture, except: (1) Notes heretofore cancelled by the Paying and Conversion Agent or delivered to the Paying and Conversion Agent for cancellation; (2) Notes, or portions thereof, for whose payment or redemption money in the necessary amount has been theretofore deposited with the Trustee or any Paying Agent (other than the Company) in trust or set aside and segregated in trust by the Company (if the Company shall act as its own Paying Agent) for the Holders of such Notes; provided that, if such Notes are to be redeemed, notice of such redemption has been duly given pursuant to this Indenture or provision therefor satisfactory to the Trustee has been made; (3) Notes, except to the extent provided in Sections 13.02 and 13.03, with respect to which the Company has effected defeasance and/or covenant defeasance as provided in Article Thirteen; and (4) Notes which have been paid pursuant to Section 3.08 or in exchange for or in lieu of which other Notes have been authenticated and delivered pursuant to this Indenture, other than any such Notes in respect of which there shall have been presented to the Trustee proof satisfactory to it that such Notes are held by a bona fide purchaser in whose hands the Notes are valid obligations of the Company; provided, however, that in determining whether the Holders of the requisite principal amount of Outstanding Notes have taken any Act or given or made any Extraordinary Resolution or other request, demand, authorization, direction, consent, notice or waiver hereunder, Notes owned by the Company or any other obligor upon the Notes or any Affiliate of the Company or such other obligor shall be disregarded and deemed not to be Outstanding, except that, in determining whether the Trustee 9 11 shall be protected in making such calculation or in relying upon any such request, demand, authorization, direction, consent, notice or waiver, only Notes which the Trustee knows to be so owned shall be so disregarded. Notes so owned which have been pledged in good faith may be regarded as Outstanding if the pledgee establishes to the satisfaction of the Trustee the pledgee's right so to act with respect to such Notes and that the pledgee is not the Company or any other obligor upon the Notes or any Affiliate of the Company or such other obligor. "Paying Agent" means any Person (including the Company acting as Paying Agent) authorized by the Company to pay the principal of or interest on any Notes on behalf of the Company. Pursuant to the terms hereof, the Company has initially appointed Midland Bank Plc as the principal Paying Agent and Banca del Gottardo as a Paying Agent. "Permitted Investments" means: (a) cash; (b) U.S. Government Obligations; (c) any certificate of deposit, time deposit, money market account or bankers' acceptance, maturing not more than sixty days after the date of acquisition, issued by any commercial banking institution that is a member of the Federal Reserve System, including, without limitation, the Trustee and its Affiliates, and that has combined capital and surplus and undivided profits of not less than $500,000,000 whose debt has a rating, at the time as of which any investment therein is made, of "P-1" (or higher) according to Moody's Investors Service, Inc. or any successor rating agency, or "A-1" (or higher) according to Standard and Poor's Ratings Group or any successor rating agency; (d) commercial paper, maturing not more than sixty days after the date of acquisition, issued by any corporation (other than an Affiliate of any of the Obligors) organized and existing under the laws of the United States of America with a rating, at the time as of which any investment therein is made, of "P-1" (or higher) according to Moody's Investors Service, Inc. or any successor rating agency, or "A-1" (or higher) according to Standard and Poor's Ratings Group or any successor rating agency; and (e) shares of any mutual fund, including one managed by the Trustee or any of its Affiliates, that invests exclusively in the foregoing types of investment; provided that, solely for purposes of this clause (e), such investments may mature more than sixty days after the date of acquisition. 10 12 "Person" means any individual, corporation, limited liability company, limited or general partnership, joint venture, association, joint-stock company, trust, unincorporated organization or government or any agency or political subdivision thereof. "Predecessor Note" of any particular Note means every previous Note evidencing all or a portion of the same debt as that evidenced by such particular Note; and, for the purposes of this definition, any Note authenticated and delivered under Section 3.08 in exchange for or in lieu of a mutilated, lost, destroyed or stolen Note shall be deemed to evidence the same debt as the mutilated, lost, destroyed or stolen Note. "Preferred Stock" means, with respect to any Person, any and all shares, interests, participation or other equivalents (however designated) of such Person's preferred or preference stock whether now outstanding or issued on or after the date of this Indenture, and includes, without limitation, all classes and series of preferred or preference stock. "Presentation Date" means the date on which a Note is presented by a Noteholder for payment of principal or a Coupon is presented by the Couponholder for payment of interest, as the case may be. "Principal Paying and Conversion Agent" means any Person authorized by the Company to act as the principal paying and conversion agent for the Notes until a successor Principal Paying and Conversion Agent shall have become such pursuant to the applicable provisions of this Indenture, and thereafter "Principal Paying and Conversion Agent" shall mean such successor Principal Paying and Conversion Agent. Pursuant to the terms hereof, the Company has initially appointed Midland Bank Plc as the Principal Paying and Conversion Agent. "Principal Subsidiary" means a Subsidiary of the Company: (a) whose gross assets represent 10 percent or more of the consolidated gross assets of the Group as calculated by reference to the then latest audited financial statements of the Group; or (b) to which is transferred all or substantially all of the business, undertaking and assets of a Subsidiary of the Company which immediately prior to such transfer is a Principal Subsidiary, whereupon the transferor Subsidiary shall immediately cease to be a Principal Subsidiary and the transferee Subsidiary shall cease to be a Principal Subsidiary under the provisions of this sub-paragraph (b) (but without prejudice to the provisions of sub-paragraph (a) above), upon publication of its next audited financial statements. 11 13 "Property" means any interest in any kind of property or asset, whether real, personal or mixed, or tangible or intangible, and including any Oil and Gas Property. "PDP Reserves" means those Proved Reserves that can be expected to be recovered from currently producing zones under the continuation of present operating methods, all as set forth in the Independent Reserve Report. "Proved Reserves" means the estimated quantities of crude oil, natural gas and natural gas liquids, which geological and engineering data demonstrate according to engineering standards to be recoverable in future years from known reservoirs under existing economical and operating conditions, located in the United States or in territories or regions controlled by the United States, including any territorial waters, all as set forth in the Independent Reserve Report. "Redemption Date," when used with respect to any Note to be redeemed, in whole or in part, means the date fixed for such redemption by or pursuant to this Indenture. "Redemption Price," when used with respect to any Note to be redeemed, means the price at which it is to be redeemed pursuant to the terms hereof plus accrued interest to the Redemption Date. "Regulation S" means Regulation S under the Securities Act as in effect of the date hereof. "Relevant Date" means the date on which the payment first becomes due; provided, that if the full amount of the money payable has not been received by the Principal Paying Agent or the Trustee on or before the due date, it shall mean the date on which, the full amount of the money having been so received, notice to that effect shall have been duly given to the Noteholders by the Company in accordance with Section 1.08. "Required Assets" means any combination of (i) 100% of the aggregate amount then on deposit in the Segregated Account, including the aggregate amount invested in Permitted Investments, to the extent applicable, (ii) 60% of the aggregate Market Price of the Company's and its Subsidiaries' Marketable Securities, and (iii) the Designated Oil and Gas Reserves. "Responsible Officer," when used with respect to the Trustee, means any trust officer or assistant trust officer or any other officer of the Trustee customarily performing functions similar to those performed by any of the above-designated officers, and also means, with respect to a particular corporate trust matter, any other officer to whom such matter is referred because of such officer's knowledge of and familiarity with the particular subject. 12 14 "Restricted Period" means the forty (40) calendar day period after the Closing Date. "SEC Value" means the discounted present value of future net reserves attributable to Proved Reserves, as calculated under the Independent Reserve Report in accordance with the rules and regulations promulgated by the Commission from time to time in effect. "Securities Act" means the Securities Act of 1933, as amended. "Segregated Account" means a segregated non-interest bearing trust account of the Company to be maintained with the Trustee and invested and reinvested at the direction of the Company, until such time as it may be distributed to the Company in accordance with Section 6.12. "Shares" means the common stock, par value U.S.$0.01, of the Company (and all other (if any) shares or stock resulting from any sub-division, consolidation or reclassification of such shares). "Stated Maturity," when used with respect to any Indebtedness or any instalment of principal thereof or interest thereon, means the date specified in such Indebtedness as the fixed date on which the principal of such Indebtedness or such instalment of principal or interest is due and payable. "Stock Exchange Business Day" means any day (other than a Saturday or Sunday) on which the AMEX or the Alternative Stock Exchange, as the case may be, is open for business. "Subordinated Obligation" means any Indebtedness of the Company outstanding on such date which is contractually subordinate or junior in right of payment to the Notes. Notwithstanding the immediately preceding sentence, any Indebtedness and shares of Preferred Stock issued by any Subsidiary shall, for purposes of this definition, be treated as Subordinated Obligations. "Subsidiary" of any Person means any Corporation of which at least a majority of the shares of stock having by the terms thereof ordinary voting power to elect a majority of the Board of Directors of such Corporation (irrespective of whether or not at the time stock of any other class or classes of such Corporation shall have or might have voting power by reason of the happening of any contingency) is directly or indirectly owned or controlled by any one of or any combinations of the Company or one or more of the Principal Subsidiaries. 13 15 "Trustee" means the Person named as the "Trustee" in the first paragraph of this Indenture until a successor Trustee shall have become such pursuant to the applicable provisions of this Indenture, and thereafter "Trustee" shall mean such successor Trustee. "Unexercised Note" means any Note with respect to which Conversion Rights have not been exercised by the Noteholder. "U.S. Government Obligations" means securities that are (x) direct obligations of the United States of America for the timely payment of which its full faith and credit is pledged or (y) obligations of a Person controlled or supervised by and acting as an agency or instrumentality of the United States of America the timely payment of which is unconditionally guaranteed as a full faith and credit obligation by the United States of America, which, in either case, are not callable or redeemable at the option of the issuer thereof, and shall also include a depository receipt issued by a bank (as defined in Section 3(a)(2) of the Securities Act), as custodian with respect to any such U.S. Government Obligation or a specific payment of principal of or interest on any such U.S. Government Obligation held by such custodian for the account of the holder of such depository receipt, provided that (except as required by law) such custodian is not authorized to make any deduction from the amount payable to the holder of such depository receipt from any amount received by the custodian in respect of the U.S. Government Obligation or the specific payment of principal of or interest on the U.S. Government Obligation evidenced by such depository receipt. "U.S. Person" means any Person who is a "U.S. person" as defined in Regulation S. "Vice President," when used with respect to the Company or the Trustee, means any vice president, whether or not designated by a number or a word or words added before or after the title "vice president". "Voting Stock" of any Person means Capital Stock of such Person which ordinarily is entitled (without regard to the occurrence of any additional event or contingency) to vote for the election of directors (or persons performing similar functions) of such Person. SECTION 1.02 Other Definitions.
Term Defined in Section ---- ------------------ Agency Agreement 10.02 Bearer Notes 2.01 Commencement Date 12.04
14 16 Covenant defeasance 13.03 Current Event 12.04 Expiration Time 12.04 Global Note 2.01 legal defeasance 13.02 Notice 1.08 Other Event 12.04 Reference Date 12.04
SECTION 1.03 Rules of Construction. For all purposes of this Indenture, except as otherwise expressly provided or unless the context otherwise requires: (a) all the terms defined in this Article have the meanings assigned to them in this Article, and include the plural as well as the singular; (b) all accounting terms not otherwise defined herein have the meanings assigned to them in accordance with GAAP; (c) all ratios and computations based on GAAP contained in this Indenture shall be computed in accordance with the definition of GAAP set forth above; (d) the words "herein," "hereof" and "hereunder" and other words of similar import refer to this Indenture as a whole and not to any particular Article, Section or other subdivision of this Indenture; (e) "or" is not exclusive; (f) all references to $, U.S.$, dollars or United States dollars shall refer to the lawful currency of the United States of America; (g) provisions apply to successive events and transactions; (h) all references to Sections or Articles refer to Sections or Articles of this Indenture unless otherwise indicated; and (i) all references to Terms or Conditions refer to the Terms and Conditions of the Notes unless otherwise indicated. 15 17 SECTION 1.04 Compliance Certificates and Opinions. Upon any application or request by the Company to the Trustee to take any action under any provision of this Indenture, the Company shall, with respect to any application or request to make an optional redemption or Mandatory Conversion and, upon the request of the Trustee with respect to any other application or request, furnish to the Trustee an Officers' Certificate stating that all conditions precedent, if any, provided for in this Indenture (including any covenant compliance with which constitutes a condition precedent) relating to the proposed action have been complied with and an Opinion of Counsel stating that in the opinion of such counsel all such conditions precedent, if any, have been complied with, except that in the case of any such application or request as to which the furnishing of such documents is specifically required by any provision of this Indenture relating to such particular application or request, no additional certificate or opinion need be furnished. Every certificate or opinion with respect to compliance with a condition or covenant provided for in this Indenture shall include: (a) a statement that each individual signing such certificate or opinion has read such covenant or condition and the definitions herein relating thereto; (b) a brief statement as to the nature and scope of the examination or investigation upon which the statements or opinions contained in such certificate or opinion are based; (c) a statement that, in the opinion of each such individual, such individual has made such examination or investigation as is necessary to enable such individual to express an informed opinion as to whether or not such covenant or condition has been complied with; and (d) a statement as to whether, in the opinion of each such individual, such condition or covenant has been complied with. SECTION 1.05 Form of Documents Delivered to Trustee. In any case where several matters are required to be certified by, or covered by an opinion of, any specified Person, it is not necessary that all such matters be certified by, or covered by the opinion of, only one such Person, or that they be so certified or covered by only one document, but one such Person may certify or give an opinion with respect to some matters and one or more 16 18 other such Persons as to other matters, and any such Person may certify or give an opinion as to such matters in one or several documents. Any certificate or opinion of an officer of the Company may be based, insofar as it relates to legal matters, upon a certificate or opinion of, or representations by, counsel, unless such officer knows, or in the exercise of reasonable care should know, that the certificate or opinion or representations with respect to the matters upon which such officer's certificate or opinion is based are erroneous. Any such certificate or Opinion of Counsel may be based, insofar as it relates to factual matters, upon a certificate or opinion of, or representations by, an officer or officers of the Company stating that the information with respect to such factual matters is in the possession of the Company, unless such counsel knows, or in the exercise of reasonable care should know, that the certificate or opinion or representations with respect to such matters are erroneous. Where any Person is required to make, give or execute two or more applications, requests, consents, certificates, statements, opinions or other instruments under this Indenture, they may, but need not, be consolidated and form one instrument. SECTION 1.06 Acts of Noteholders. (a) Any Extraordinary Resolution, request, demand, authorization, direction, declaration, notice, consent, waiver or other action provided by this Indenture to be given or taken by Noteholders may be embodied in and evidenced by one or more instruments of substantially similar tenor signed by such Noteholders in person or by agents duly appointed in writing; and, except as herein otherwise expressly provided, such action shall become effective when such instrument or instruments are delivered to the Trustee and, where it is hereby expressly required, to the Company. Such instrument or instruments (and the action embodied therein and evidenced thereby) are herein sometimes referred to as the "Act" of the Noteholders signing such instrument or instruments. Proof of execution of any such instrument or of a writing appointing any such agent shall be sufficient for any purpose of this Indenture and conclusive in favour of the Trustee and the Company, if made in the manner provided in this Section. (b) The fact and date of the execution by any Person of any such instrument or writing may be proved by the affidavit of a witness of such execution or by a certificate of a notary public or other officer authorized by law to take acknowledgments of deeds, certifying that the individual signing such instrument or writing acknowledged to such witness, notary public or other such officer the execution thereof. Where such execution 17 19 is by a signer acting in a capacity other than such signer's individual capacity, such certificate or affidavit shall also constitute sufficient proof of authority. The fact and date of the execution of any such instrument or writing, or the authority of the Person executing the same, may also be proved in any other manner which the Trustee deems sufficient. (c) Any Extraordinary Resolution, request, demand, authorization, direction, notice, consent, waiver or other Act of the Holders of any Note shall bind every future Holder of the same Note and the Holder of every Note issued upon conversion or redemption thereof or in exchange therefor or in lieu thereof in respect of anything done, omitted or suffered to be done by the Trustee or the Company in reliance thereon, whether or not notation of such action is made upon such Note. SECTION 1.07 Notices, Etc., to Trustee and Company. Any request, demand, authorization, direction, declaration, notice, consent, waiver, Extraordinary Resolution or Act of Noteholders or other document provided or pertained by this Indenture (herein collectively called "Notice") to be made upon, given or furnished to, or filed with, (a) the Trustee by any Noteholder or by the Company shall be sufficient for every purpose hereunder if made, given, furnished or filed in writing to or with the Trustee and received at its Corporate Trust Office, Attention: Corporate Trust Services - Harken, Tel. (212) 658-1000, Fax. (212) 658-6425, or (b) the Company by the Trustee or by any Noteholder shall be sufficient for every purpose hereunder (unless otherwise herein expressly provided) if made, given, furnished or filed in writing to or with the Company addressed to it at the address of its principal office which shall initially be: Harken Energy Corporation, 5605 North MacArthur Boulevard, Suite 400, Irving, Texas 75038, Attention: Bruce N. Huff, Senior Vice President and Chief Financial Officer, Tel. (214) 753-6939, Fax. (214) 753-6926, with a copy to Larry E. Cummings, General Counsel, Tel. (214) 753-6932, Fax. (214) 753-6963. Any Notice to be given hereunder by any party to another shall be in writing and in English (by letter, telex or fax) delivered in person or by courier service requiring acknowledgment of delivery, mailed by first class mail, postage prepaid, or sent by fax or telex to the addressee (including telecopier number, if applicable) set forth herein. Except for notices to the Trustee, Notice given by mail, fax, personal delivery or courier service shall be effective upon actual receipt. Notice given by telex shall be effective upon receipt by the sender of the addressee's 18 20 answer-back at the end of transmission, provided that any such notice or other communication which would otherwise take effect after 4:00 p.m. on any particular day shall not take effect until 10:00 a.m. on the immediately succeeding Business Day in the place of the addressee. A party may change any address to which Notice is to be given to it by giving Notice as provided above of such change of address. SECTION 1.08 Notice to Noteholders; Waiver. Where this Indenture provides for notice of any event to Noteholders by the Company or the Trustee, such notice shall be sufficiently given (unless otherwise herein expressly provided) if published in an Authorised Newspaper. Neither the Trustee nor the Company need give any notice to the Couponholders and such Couponholders will be deemed to have notice of the contents of any notice given to the Noteholders in accordance with this Section. In case by reason of any cause it shall be impracticable to publish notice of any event to the Noteholders when such notice is required to be given pursuant to any provision of this Indenture, then any manner of giving such notice as shall be satisfactory to the Trustee shall constitute a sufficient notification for every purpose hereunder. SECTION 1.09 Effect of Headings and Table of Contents. The Article and Section headings herein and the Table of Contents are for convenience only and shall not affect the construction hereof. SECTION 1.10 Successors and Assigns. All covenants and agreements in this Indenture by the Company shall bind its successors and assigns, whether so expressed or not. SECTION 1.11 Separability Clause. In case any provision in this Indenture or in the Notes shall be invalid, illegal or unenforceable, the validity, legality and enforceability of the remaining provisions, to the extent permitted by law, shall not in any way be affected or impaired thereby. SECTION 1.12 Benefits of Indenture. Nothing in this Indenture or in the Notes, express or implied, shall give to any Person, other than the parties hereto, any Paying Agent, any Conversion Agent and their respective 19 21 successors hereunder, and the Noteholders any legal or equitable right, remedy or claim under this Indenture. SECTION 1.13 Governing Law. THIS INDENTURE AND THE NOTES SHALL BE GOVERNED BY, AND CONSTRUED IN ACCORDANCE WITH, THE LAW OF THE STATE OF NEW YORK WITHOUT GIVING EFFECT TO THE CONFLICTS OF LAWS PRINCIPLES THEREOF. SECTION 1.14 Legal Holidays. In any case where any Interest Payment Date, Conversion Date, Redemption Date or Stated Maturity or Maturity of any Note or Coupon shall not be a Business Day, then (notwithstanding any other provision of this Indenture or of the Notes or Coupons) payment of interest or principal or any other payment required to be made on such date need not be made on such date, but shall be made on the immediately following Business Day with the same force and effect as if made on the Interest Payment Date or Redemption Date, or at the Stated Maturity or Maturity. ARTICLE TWO FORMS OF THE NOTES SECTION 2.01 Forms Generally. The Notes and the Trustee's certificate of authentication shall be in substantially the forms set forth in this Article, with such appropriate insertions, omissions, substitutions and other variations as are required or permitted by this Indenture, and may have such letters, numbers or other marks of identification and such legends or endorsements placed thereon as may be required by applicable law or rules or regulations thereunder or as may, consistently herewith, be determined by the officer or officers executing such Notes, as evidenced by their execution of the Notes. Any portion of the text of any Note may be set forth on the reverse thereof. The definitive Notes shall be typed, printed, lithographed or engraved on steel-engraved borders or may be produced in any other manner as determined by the officers of the Company executing such Notes, as evidenced by their execution in accordance with Section 3.03 of such Notes. 20 22 The Notes shall be known as the "6.5% Senior Convertible Notes Due 2000" of the Company. The Notes and the Trustee's certificate of authentication shall be in substantially the form annexed hereto as Exhibit A. The Company shall approve the form of the Notes and any notation, legend or endorsement on the Notes. Each Note shall be dated as of July 30, 1996. The terms and provisions contained in the form of the Bearer Notes annexed hereto as Exhibit A and in the form of the Global Note annexed hereto as Exhibit B shall constitute, and are hereby expressly made, a part of this Indenture. To the extent applicable, the Company and the Trustee, by their execution and delivery of this Indenture, expressly agree to such terms and provisions and to be bound thereby. The Notes shall be issued initially in the form of a temporary global bearer note substantially in the form set forth in Exhibit B (the "Global Note") deposited with the Common Depository, duly executed by the Company and authenticated by the Trustee as hereinafter provided. The aggregate principal amount of the Global Note may from time to time be decreased by adjustments made on the records of the Common Depository or its nominee, as hereinafter provided. The Notes offered and sold, other than as described in the preceding paragraph, shall be issued in form of permanent certificated Notes in bearer form in substantially the form set forth in Exhibit A (the "Bearer Notes"). The Terms and Conditions contained in the form of the Bearer Notes annexed hereto as Exhibit A are expressly incorporated by reference herein. To the extent applicable, the Company and the Trustee, by their execution and delivery of this Indenture, expressly agree to such terms and provisions and to be bound thereby. To the extent of any conflict between the Terms and Conditions and the provisions of this Indenture, the Terms and Conditions shall control the interpretation of the terms of the Note and this Indenture. SECTION 2.02 Restrictive Legends. Each Bearer Note and each Coupon shall bear the following legend on the face thereof: NEITHER THIS NOTE NOR THE SHARES OF COMMON STOCK ISSUABLE UPON CONVERSION OF THIS NOTE HAVE BEEN OR WILL BE REGISTERED UNDER THE UNITED STATES SECURITIES ACT OF 1933, AS AMENDED (THE "SECURITIES ACT") AND MAY NOT BE OFFERED, SOLD, TRANSFERRED, PLEDGED, CONVERTED OR OTHERWISE DISPOSED OF IN THE UNITED 21 23 STATES OR TO, OR FOR THE ACCOUNT OR BENEFIT OF, ANY "U.S. PERSON" (AS DEFINED IN REGULATION S UNDER THE SECURITIES ACT) UNLESS THIS NOTE AND THE SHARES HAVE BEEN REGISTERED UNDER THE SECURITIES ACT AND ANY APPLICABLE STATE SECURITIES OR BLUE SKY LAWS OR EXEMPTIONS FROM THE REGISTRATION REQUIREMENTS OF SUCH LAWS ARE AVAILABLE. ANY UNITED STATES PERSON WHO HOLDS THIS OBLIGATION WILL BE SUBJECT TO LIMITATIONS UNDER THE U.S. INCOME TAX LAWS, INCLUDING THE LIMITATIONS PROVIDED IN SECTIONS 165(j) AND 1287(a) OF THE UNITED STATES INTERNAL REVENUE CODE OF 1986, AS AMENDED. Each Global Note shall bear the following legend on the face thereof: THIS NOTE HAS NOT BEEN AND WILL NOT BE REGISTERED UNDER THE UNITED STATES SECURITIES ACT OF 1933, AS AMENDED (THE "SECURITIES ACT") AND MAY NOT BE OFFERED, SOLD, TRANSFERRED, PLEDGED, CONVERTED OR OTHERWISE DISPOSED OF IN THE UNITED STATES OR TO, OR FOR THE ACCOUNT OR BENEFIT OF, ANY "U.S. PERSON" (AS DEFINED IN REGULATION S UNDER THE SECURITIES ACT) UNLESS THIS NOTE HAS BEEN REGISTERED UNDER THE SECURITIES ACT AND ANY APPLICABLE STATE SECURITIES OR BLUE SKY LAWS OR EXEMPTIONS FROM THE REGISTRATION REQUIREMENTS OF SUCH LAWS ARE AVAILABLE. ANY UNITED STATES PERSON WHO HOLDS THIS OBLIGATION WILL BE SUBJECT TO LIMITATIONS UNDER THE U.S. INCOME TAX LAWS, INCLUDING THE LIMITATIONS PROVIDED IN SECTIONS 165(j) AND 1287(a) OF THE UNITED STATES INTERNAL REVENUE CODE OF 1986, AS AMENDED. ARTICLE THREE THE NOTES SECTION 3.01 Terms. The aggregate principal amount of Notes which may be authenticated and delivered under this Indenture is limited to $40,000,000, except for Notes authenticated and delivered in exchange for, or in lieu of, other Notes pursuant to Section 3.03, 3.04, 3.05, 3.06, 3.08, 9.05 or 11.08. 22 24 Their Stated Maturity shall be July 30, 2000, and they shall bear interest at the rate per annum specified therein from the Closing Date or from the most recent Interest Payment Date to which interest has been paid or duly provided for, payable in arrears, and thereafter as provided in the Notes and at said Stated Maturity, until the principal thereof is paid or duly provided for. The principal of and interest on the Notes shall be payable at the office or agency of the Company maintained for such purpose in The City of London, or at such other office or agency of the Company as may be maintained for such purpose. The Notes shall be convertible as provided in Article Twelve. The Notes shall be redeemable as provided in Article Eleven. The Notes shall be senior in right of payment to Subordinated Obligations as provided in Article Fourteen. SECTION 3.02 Denominations. The Notes shall be issuable only in bearer form and, in the case of Bearer Notes, with Coupons attached thereto, and shall be issuable only in denominations of $50,000. SECTION 3.03 Execution, Authentication, Delivery and Dating. The Notes shall be executed on behalf of the Company by its Chairman, a Vice Chairman, its President or a Vice President under a facsimile of its corporate seal reproduced thereon and attested by its Secretary or an Assistant Secretary. The signature of any of these officers on the Notes may be manual or facsimile signatures of the present or any future such authorized officer and may be imprinted or otherwise reproduced on the Notes. Notes bearing the manual or facsimile signatures of individuals who were at any time the proper officers of the Company shall bind the Company, notwithstanding that such individuals or any of them have ceased to hold such offices prior to the authentication and delivery of such Notes or did not hold such offices at the date of such Notes. At any time and from time to time after the execution and delivery of this Indenture, the Company may deliver Notes executed by the Company to the Trustee for authentication, together with a Company Order for the authentication and delivery of such Notes, and the Trustee or the Authenticating Agent in accordance with such Company Order shall authenticate and deliver such Notes. Such Company Order shall specify the amount of Notes to be authenticated and the date 23 25 on which the original issue of Notes is to be authenticated. The aggregate principal amount of Notes outstanding at any time may not exceed $40,000,000 except for Notes authenticated and delivered in exchange for, or in lieu of, other Notes pursuant to Section 3.04, 3.05 or 3.08. Each Note shall be dated as of July 30, 1996. No Note shall be entitled to any benefit under this Indenture or be valid or obligatory for any purpose unless there appears on such Note a certificate of authentication substantially in the form provided for in Exhibit A duly executed by the Trustee or the Authenticating Agent by manual or facsimile signature of an authorized officer, and such certificate upon any Note shall be conclusive evidence, and the only evidence, that such Note has been duly authenticated and delivered hereunder and is entitled to the benefits of this Indenture. In case the Company, pursuant to Article Eight, shall be consolidated or merged with or into any other Person or shall convey, transfer, lease or otherwise dispose of its properties and assets substantially as an entirety to any Person, and the successor Person resulting from such consolidation, or surviving such merger, or into which the Company shall have been merged, or the Person which shall have received a conveyance, transfer, lease or other disposition as aforesaid, shall have executed an indenture supplemental hereto with the Trustee pursuant to Article Eight, any of the Notes authenticated or delivered prior to such consolidation, merger, conveyance, transfer, lease or other disposition may, from time to time, at the request of the successor Person, be exchanged for other Notes executed in the name of the successor Person with such changes in phraseology and form as may be appropriate, but otherwise in substance of like tenor as the Notes surrendered for such exchange and of like principal amount; and the Trustee or an Authenticating Agent, upon Company Request of the successor Person, shall authenticate and deliver Notes as specified in such request for the purpose of such exchange. SECTION 3.04 Temporary Notes. Pending the preparation of definitive Notes, but in no event prior to September 9, 1996, the Company may execute, and upon Company Order the Trustee or an Authenticating Agent shall authenticate and deliver, temporary Notes which are printed, lithographed, typewritten, mimeographed or otherwise produced, in any authorized denomination, substantially of the tenor of the definitive Notes in lieu of which they are issued and with such appropriate insertions, omissions, substitutions and other variations as the officers executing such Notes may determine, as conclusively evidenced by their execution of such Notes. If temporary Notes are issued, the Company will cause definitive Notes to be prepared without unreasonable delay, but in no event prior to September 9, 1996. After the preparation of 24 26 definitive Notes, the temporary Notes shall be exchangeable for definitive Notes upon surrender of the temporary Notes at the office or agency of the Company designated for such purpose pursuant to Section 10.02, without charge to the Noteholder. Upon surrender for cancellation of any one or more temporary Notes, the Company shall execute and the Trustee or an Authenticating Agent shall authenticate and deliver in exchange therefor a like principal amount of definitive Notes of authorized denominations. Until so exchanged, the temporary Notes shall in all respects be entitled to the same benefits under this Indenture as definitive Notes. SECTION 3.05 Exchange. Upon surrender for exchange of any Note at the office or agency of the Company designated pursuant to Section 10.02, the Company shall execute, and the Trustee or the Authenticating Agent shall authenticate and deliver, in the name of the designated transferee or transferees, one or more new Notes of any authorized denomination or denominations of a like aggregate principal amount. Furthermore, any Holder of the Global Note shall, by acceptance of such Global Note, agree that transfers of beneficial interest in such Global Note may be effected only through a book-entry system maintained by the Holder of such Global Note (or its agent), and that ownership of a beneficial interest in the Global Note shall be required to be reflected in a book entry. At the option of the Noteholder, Notes may be exchanged for other Notes of the Authorized Denomination and of a like aggregate principal amount, upon surrender of the Notes to be exchanged at such office or agency. Whenever any Notes are so surrendered for exchange, the Company shall execute, and the Trustee or an Authenticating Agent shall authenticate and deliver, the Notes which the Noteholder making the exchange is entitled to receive. All Notes issued upon any exchange of Notes shall be the valid obligations of the Company, evidencing the same debt, and entitled to the same benefits under this Indenture, as the Notes surrendered upon such exchange. Every Note presented or surrendered for exchange shall (if so required by the Company or the Trustee) be duly endorsed, or be accompanied by a written instrument of transfer, in form satisfactory to the Company and the Trustee, duly executed by the Noteholder thereof or such Noteholder's attorney duly authorized in writing. No service charge shall be made for any exchange, conversion or redemption of Notes, but the Company may require payment of a sum sufficient to cover any tax or other governmental 25 27 charge that may be imposed in connection with any exchange of Notes, other than exchanges pursuant to Sections 3.03, 3.04, 3.05, 3.06, 9.05, or 11.08. The Company shall not be required (i) to issue or exchange any Note during a period beginning at the opening of business 15 days before the selection of Notes to be redeemed under Section 11.04 and ending at the close of business on the day of such mailing of the relevant notice of redemption, (ii) to exchange any Note so selected for redemption in whole or in part, except the unredeemed portion of any Note being redeemed in part or (iii) to register the transfer of or exchange of any Note during a period beginning five days before the date of Maturity and ending on such date of Maturity. SECTION 3.06 Book-Entry Provisions for Global Note. (a) The Global Note initially shall be delivered to the Common Depository and shall bear the legends set forth in Section 2.02. Members of, or participants in, Euroclear and Cedel ("Agent Members") shall have no rights under this Indenture with respect to any Global Note held on their behalf by the Common Depository, or under the Global Note, and the Common Depository may be treated by the Company, the Trustee and any agent of the Company or the Trustee as the absolute owner of such Global Note for all purposes whatsoever. Notwithstanding the foregoing, nothing herein shall prevent the Company, the Trustee or any agent of the Company or the Trustee, from giving effect to any written certification, proxy or other authorization furnished by the Common Depository or shall impair, as between the Common Depository and the Agent Members, the operation of customary practices governing the exercise of the rights of a Noteholder. (b) Transfers of the Global Note shall be limited to transfers of such Global Note in whole, but not in part, to the Common Depository, its successors or their respective nominees. Interests of beneficial owners in the Global Note may be transferred in accordance with the rules and procedures of the Common Depository and the provisions of Section 3.06. Beneficial owners may obtain Bearer Notes in exchange for their beneficial interests in the Global Note upon request in accordance with the Common Depository's procedures. In addition, Bearer Notes shall be transferred to all beneficial owners in exchange for their beneficial interests in the Global Note if (i) the Common Depository notifies the Company that it is unwilling or unable to continue as Common Depository for the Global Note and a successor depository is not appointed by the Company within 90 days of such notice or (ii) an Event of Default has occurred and is continuing and the Trustee has received a request from the Common Depository. 26 28 (c) In connection with any transfer of a portion of the beneficial interest in the Global Note to beneficial owners pursuant to subsection (b) of this Section, the Common Depository shall reflect on its books and records the date and a decrease in the principal amount of the Global Note in an amount equal to the principal amount of the beneficial interest in the Global Note to be transferred, and the Company shall execute, and the Trustee or an Authenticating Agent shall authenticate and deliver, one or more Bearer Notes of like tenor and amount. (d) In connection with the transfer of the entire Global Note to beneficial owners pursuant to subsection (b) of this Section, the Global Note shall be deemed to be surrendered to the Trustee for cancellation, and the Company shall execute, and the Trustee or an Authenticating Agent shall authenticate and deliver, to each beneficial owner identified by the Common Depository in exchange for its beneficial interest in the Global Note, an equal aggregate principal amount of Bearer Notes of authorized denominations. (e) Any Bearer Note delivered in exchange for an interest in the Global Note pursuant to subsection (b) or subsection (c) of this Section shall bear the applicable legend regarding transfer restrictions applicable to the Bearer Note set forth in Section 2.02. (f) The Holder of the Global Note may grant proxies and otherwise authorize any person, including Agent Members and persons that may hold interests through Agent Members, to take any action which a Noteholder is entitled to take under this Indenture or the Notes. (g) Any Bearer Note delivered in exchange for an interest in the Global Note pursuant to subsection (b) or (c) of this Section will prior to delivery to the Noteholder have all matured Coupons as of such delivery date, which are attached to such Bearer Note, cancelled and voided by the Authenticating Agent. (h) Nothing contained herein shall be deemed to authorize any transfers (by book-entry or otherwise) of the Global Note prior to September 9, 1996, it being understood that no transfers of the Global Note or any beneficial interest may occur until after September 9, 1996. SECTION 3.07 Special Transfer Provisions. The Noteholders by acceptance of the Notes hereby covenant and agree that neither the Notes nor the Conversion Shares will be offered, sold, transferred, pledged, converted or otherwise disposed of in the United States or to, or for the account or benefit of, any U.S. Person 27 29 unless the Notes and the Conversion Shares have been registered under the Securities Act and any applicable state securities or blue sky laws or exemptions from the registration requirements of such laws are available. SECTION 3.08 Mutilated, Destroyed, Lost and Stolen Notes. If (i) any mutilated Note or Coupon is surrendered to the Trustee or the Authenticating Agent, or (ii) the Company and the Trustee receive evidence to their satisfaction of the destruction, loss or theft of any Note or Coupon, and there is delivered to the Company and the Trustee such security and/or indemnity as may be required by them to save each of them harmless, then, in the absence of notice to the Company or the Trustee that such Note or Coupon has been acquired by a bona fide purchaser, the Company shall execute and upon Company Order the Trustee or an Authenticating Agent shall authenticate and deliver, in exchange for any such mutilated Note or Coupon or in lieu of any such destroyed, lost or stolen Note or Coupon, a new Note or Coupon of like tenor and principal amount, bearing a number not contemporaneously Outstanding. In case any such mutilated, destroyed, lost or stolen Note or Coupon has become or is about to become due and payable, the Company in its discretion may, instead of issuing a new Note or Coupon, pay such Note or Coupon, as the case may be. Upon the issuance of any new Note or Coupon under this Section, the Company may require the payment of a sum sufficient to cover any tax or other governmental charge that may be imposed in relation thereto and any other expenses (including the fees and expenses of the Trustee and the Authenticating Agent) connected therewith. Every new Note or Coupon issued pursuant to this Section in lieu of any destroyed, lost or stolen Note or Coupon shall constitute an original additional contractual obligation of the Company, whether or not the destroyed, lost or stolen Note or Coupon shall be at any time enforceable by anyone, and shall be entitled to all benefits of this Indenture equally and proportionately with any and all other Notes or Coupons duly issued hereunder. The provisions of this Section are exclusive and shall preclude (to the extent lawful) all other rights and remedies with respect to the replacement or payment of mutilated, destroyed, lost or stolen Note or Coupon. Any new Note issued under this Section 3.08 in lieu of any destroyed, lost or stolen Note shall be issued by the Authenticating Agent with all matured Coupons as of such date of issuance cancelled or voided. 28 30 SECTION 3.09 Payment of Interest; Interest Rights Preserved. Interest on any Note which is payable, and is punctually paid or duly provided for, on any Interest Payment Date, shall be paid to the bearer against presentation and surrender (or in the case of part payment only, endorsement) of the relevant Coupons, outside of the United States at the corporate trust office or agency of any Paying Agent maintained for such purpose pursuant to Section 10.02. Each such payment will be made at the specified office of any Paying Agent, at the option of the Holder of such Coupon, by U.S. dollar cheque drawn on, or by transfer to a U.S. dollar account maintained by the payee with a bank in Europe subject in all cases to any applicable fiscal or other laws and regulations. Subject to the foregoing provisions of this Section, each Note delivered under this Indenture in exchange for or in lieu of any other Note shall carry the rights to interest accrued and unpaid, and to accrue, which were carried by such other Note. SECTION 3.10 Persons Deemed Owners. Subject to the provision of Section 3.14 and except with respect to any unmatured Coupon, the Company, the Trustee and any agent of the Company or the Trustee may treat the Person who is the bearer of any Note or Coupon as the owner of such Note or Coupon for the purpose of receiving payment of principal of and (subject to Sections 3.05 and 3.09) interest on such Note and for all other purposes whatsoever, whether or not such Note be overdue, and none of the Company, the Trustee or any agent of the Company or the Trustee shall be affected by notice to the contrary. SECTION 3.11 Cancellation. All Notes surrendered for payment, conversion, redemption or exchange shall, if surrendered to any Person other than the Trustee, be delivered to the Trustee and shall be promptly cancelled by it. The Company may at any time deliver to the Trustee for cancellation any Notes previously authenticated and delivered hereunder which the Company may have acquired in any manner whatsoever, and may deliver to the Trustee (or to any other Person for delivery to the Trustee) for cancellation any Notes previously authenticated hereunder which the Company has not issued and sold, and all Notes so delivered shall be promptly cancelled by the Trustee. If the Company shall so acquire any of the Notes, however, such acquisition shall not operate as a redemption or satisfaction of the indebtedness represented by such Notes unless and until the same are surrendered to the Paying and Conversion Agent for cancellation. No Notes 29 31 shall be authenticated in lieu of or in exchange for any Notes cancelled as provided in this Section, except as expressly permitted by this Indenture. All cancelled Notes held by the Paying and Conversion Agent shall be disposed of by the Paying and Conversion Agent in accordance with its customary procedures and certification of their disposal delivered to the Company unless by Company Order the Company shall direct that cancelled Notes be returned to it. SECTION 3.12 Computation of Interest. Interest on the Notes shall be computed on the basis of a 360-day year of twelve 30-day months. SECTION 3.13 ISIN, CUSIP Or Other Identifying Numbers. The Company in issuing the Notes may use "ISIN", "CUSIP" or other identifying numbers (if then generally in use), and the Trustee shall use ISIN, CUSIP or other identifying numbers in notices of redemption, conversion or exchange, and any other notice provided for the benefit of the Noteholders, as a convenience to Noteholders; provided that any such notice shall state that no representation is made as to the correctness of such numbers either as printed on the Notes or as contained in any notice of redemption, conversion or exchange or other notice. SECTION 3.14 Prescription. Notes and Coupons will become void unless presented for payment within periods of ten (10) years (in the case of principal) and five (5) years (in the case of interest) from the Relevant Date in respect of the Notes or the Coupons, as the case may be, subject to the provisions of Section 11.09. 30 32 ARTICLE FOUR SATISFACTION AND DISCHARGE SECTION 4.01 Satisfaction and Discharge of Indenture. This Indenture shall upon Company Request cease to be of further effect (except as to surviving rights of conversion or redemption of Notes herein expressly provided for and the Company's obligations to the Trustee pursuant to Section 6.06) and the Trustee, at the expense of the Company, shall execute proper instruments acknowledging satisfaction and discharge of this Indenture when (a) either (i) all Notes theretofore authenticated and delivered (other than (1) Notes which have been destroyed, lost, mutilated or stolen and which have been replaced or paid as provided in Section 3.08 and (2) Notes for whose payment money has theretofore been deposited in trust with the Trustee or any Paying Agent or segregated and held in trust by the Company and thereafter repaid to the Company or discharged from such trust, as provided in Section 10.03) have been delivered to the Trustee for cancellation; or (ii) all such Notes not theretofore delivered to the Trustee for cancellation (1) have become due and payable, or (2) will become due and payable at their Stated Maturity, within one year, or (3) are to be called for redemption within one year under arrangements satisfactory to the Trustee for the giving of notice of redemption by the Trustee in the name, and at the expense, of the Company, and the Company has irrevocably deposited or caused to be deposited with the Trustee as trust funds, which may include any amount then held in the Segregated Account which the Company designates to the Trustee shall be used for such purpose, in trust for the purpose an amount sufficient to pay and discharge the entire indebtedness on such Notes not theretofore delivered to the Trustee for cancellation, for principal and interest to the date of such deposit (in the case of Notes which have become due and payable) or to the Stated Maturity or Redemption Date, as the case may be; (b) the Company has paid or caused to be paid all other sums payable hereunder by the Company; and 31 33 (c) the Company has delivered to the Trustee an Officers' Certificate and an Opinion of Counsel, each stating that all conditions precedent herein provided for relating to the satisfaction and discharge of this Indenture have been complied with. Notwithstanding the satisfaction and discharge of this Indenture, the obligations of the Company to the Trustee under Section 6.06 and, if money shall have been deposited with the Trustee pursuant to subclause (ii) of clause (a) of this Section, the obligations of the Trustee under Section 4.02 and the last paragraph of Section 10.03 shall survive. SECTION 4.02 Application of Trust Money. Subject to the provisions of the last paragraph of Section 10.03, all money deposited with the Trustee pursuant to Section 4.01 shall be held in trust and applied by it, in accordance with the provisions of the Notes and this Indenture, to the payment, either directly or through any Paying Agent (including the Company acting as its own Paying Agent) as the Trustee may determine, to the Persons entitled thereto, of the principal and interest for whose payment such money has been deposited with the Trustee; but such money need not be segregated from other funds except to the extent required by law. ARTICLE FIVE EVENTS OF DEFAULT AND REMEDIES SECTION 5.01 Events of Default. "Event of Default," wherever used herein, means any one of the following events (whatever the reason for such Event of Default and whether it shall be occasioned by the provisions of Article Fourteen or be voluntary or involuntary or be effected by operation of law or pursuant to any judgment, decree or order of any court or any order, rule or regulation of any administrative or governmental body) which shall have occurred and is continuing: (a) if default is made for a period of five Business Days or more in the payment of interest or principal due in respect of the Notes or any of them; or (b) if the Company fails to perform or observe any of its other obligations, covenants, conditions or provisions under the Notes or this Indenture and (except where the Trustee shall have certified to the Company that it considers such failure to be incapable of remedy in which case no such notice or continuation as is hereinafter 32 34 mentioned will be required) such failure continues for the period of 30 calendar days (or such longer period as the Trustee may in its absolute discretion permit) next following the service by the Trustee on the Company of notice requiring the same to be remedied; or (c) if (i) any other Indebtedness of the Company or any Principal Subsidiary becomes due and payable prior to its Stated Maturity by reason of an event of default (howsoever defined) or (ii) any such Indebtedness of the Company or any Principal Subsidiary is not paid when due or, as the case may be, within any applicable grace period or (iii) the Company or any Principal Subsidiary fails to pay when due (or, as the case may be, within any applicable grace period) any amount payable by it under any present or future guarantee for, or indemnity in respect of, any Indebtedness of any Person or (iv) any security given by the Company or any Principal Subsidiary for any Indebtedness of any Person or any guarantee or indemnity of Indebtedness of any Person by the Company or any Principal Subsidiary becomes enforceable by reason of default in relation thereto and steps are taken to enforce such security save in any such case where there is a bona fide dispute as to whether the relevant Indebtedness or any such guarantee or indemnity as aforesaid shall be due and payable (following any applicable grace period), provided that in each such case the Indebtedness exceeds in the aggregate U.S.$1,000,000 and in each such case such event continues unremedied for a period of 30 calendar days (or such longer period as the Trustee may in its sole discretion consent to in writing upon receipt of written notice from the Company); or (d) if the Company or any Principal Subsidiary shall generally fail to pay its debts as such debts come due (except debts which the Company or such Principal Subsidiary, as the case may be, may contest in good faith generally) or shall be declared or adjudicated by a competent court to be insolvent or bankrupt, shall consent to the entry of an order of relief against it in an involuntary bankruptcy case, shall enter into any assignment or other similar arrangement for the benefit of its creditors or shall consent to the appointment of a custodian (including, without limitation, a receiver, liquidator or trustee); or (e) if a receiver, administrative receiver, administrator or other similar official shall be appointed in relation to the Company or any Principal Subsidiary or in relation to the whole or a substantial part of the undertaking or assets of any of them or a distress, execution or other process shall be levied or enforced upon or sued out against, or an encumbrancer shall take possession of, the whole or a substantial part of the assets of any of them and in any of the foregoing cases is not paid out or discharged within 90 calendar days (or such longer period as the Trustee may in its absolute discretion consent to in writing upon receipt of written notice from the Company); or 33 35 (f) if the Company or any Principal Subsidiary institutes proceedings to be adjudicated a voluntary bankrupt, or shall consent to the filing of a bankruptcy proceeding against it, or shall file a petition or answer or consent seeking organization under the laws of the Federal Bankruptcy Code or any similar applicable U.S. federal or state law, or shall consent to the filing of any such petition, or shall consent to the appointment of a receiver or liquidator or trustee or assignee (or other similar official) in bankruptcy or insolvency of it or its property, or shall make an assignment for the benefit of creditors, or shall admit in writing its inability to pay its debts generally as they come due; or (g) if a decree or order by a court having jurisdiction in the premises shall have been entered adjudging the Company or any Principal Subsidiary a bankrupt or insolvent, or approving as properly filed a petition seeking the reorganisation of the Company or any Principal Subsidiary under the Federal Bankruptcy Code or any other similar applicable U.S. federal or state law, and such decree or order shall have continued undischarged or unstayed for a period of 90 calendar days; or a decree or order of a court having jurisdiction in the premises for the appointment of a receiver or liquidator or trustee or assignee (or other similar official) in bankruptcy or insolvency of the Company or any Principal Subsidiary or of all or substantially all of its property, or for the winding up or liquidation of its affairs, shall have been entered, and such decree or order shall have continued undischarged and unstayed for a period of 90 calendar days; or (h) if a warranty, representation, or other statement made by or on behalf of the Company contained in this Indenture, the Notes or any certificate or other agreement furnished in compliance with such documents is false in any material respect when made and (except where the Trustee shall have certified to the Company that it considers such falsity to be incapable of remedy, in which case no such notice or continuation as is hereinafter mentioned will be required) such falsity continues for a period of 30 calendar days (or such longer period as the Trustee may in its absolute discretion permit) next following the service by the Trustee on the Company of notice requiring the same to be remedied; or (i) if there is any final judgment or judgments for the payment of money exceeding in the aggregate U.S.$1,000,000 outstanding against the Company or any Principal Subsidiary which has been outstanding for more than 60 calendar days from the date of its entry and shall not have otherwise been discharged in full or stayed by appeal, bond or otherwise. 34 36 SECTION 5.02 Acceleration of Maturity; Rescission and Annulment. If an Event of Default (other than an Event of Default specified in Section 5.01(f) or 5.01(g)) occurs and is continuing, then and in every such case the Trustee or the Holders of not less than 25% in principal amount of the Outstanding Notes may, and the Trustee upon the request of the Holders of not less than 25% in principal amount of the Outstanding Notes shall, declare the principal amount of all the Notes to be due and payable immediately, by a notice in writing to the Company (and to the Trustee if given by Noteholders), and upon any such declaration such principal amount shall become immediately due and payable. If an Event of Default specified in Section 5.01(f) or 5.01(g) occurs and is continuing, then the principal amount of all the Notes shall ipso facto become and be immediately due and payable without any declaration or other act on the part of the Trustee or any Noteholder. At any time after a declaration of acceleration has been made and before a judgment or decree for payment of the money due has been obtained by the Trustee as hereinafter in this Article provided, the Holders of a majority in principal amount of the Outstanding Notes, by written notice to the Company and the Trustee, may rescind and annul such declaration and its consequences if (a) the Company has paid or deposited with the Trustee a sum sufficient to pay (i) all overdue interest on all Outstanding Notes, (ii) all unpaid principal of any Outstanding Notes which has become due otherwise than by such declaration of acceleration, and interest on such unpaid principal at the rate prescribed therefor in the Notes, (iii) to the extent that payment of such interest is legally enforceable, interest on overdue interest at the rate prescribed therefor in the Notes, and (iv) all sums paid or advanced by the Trustee hereunder and the reasonable compensation, expenses, disbursements and advances of the Trustee, its agents and counsel; and (b) all Events of Default, other than the non-payment of amounts of principal of or interest on Notes which have become due solely by such declaration of acceleration, have been cured or waived as provided in Section 5.13. 35 37 No such rescission shall affect any subsequent default or impair any right consequent thereon. SECTION 5.03 Collection of Indebtedness and Suits for Enforcement by Trustee. The Company covenants that if (a) default is made in the payment of any instalment of interest on any Note when such interest becomes due and payable and such default continues for a period of five Business Days, or (b) default is made in the payment of the principal of any Note at the Maturity thereof and such default continues for a period of five Business Days, the Company will, upon demand of the Trustee, pay to the Trustee for the benefit of the Holders of such Notes, the whole amount then due and payable on such Notes for principal and interest, and interest on any overdue principal and, to the extent that payment of such interest shall be legally enforceable, upon any overdue instalment of interest, at the rate prescribed therefor in the Notes, and, in addition thereto, such further amount as shall be sufficient to cover the costs and expenses of collection, including the reasonable compensation, expenses, disbursements and advances of the Trustee, its agents and counsel. If the Company fails to pay such amounts forthwith upon such demand, the Trustee, in its own name and as trustee of an express trust, may institute a judicial proceeding for the collection of the sums so due and unpaid, may prosecute such proceeding to judgment or final decree and may enforce the same against the Company or any other obligor upon the Notes and collect the moneys adjudged or decreed to be payable in the manner provided by law out of the property of the Company or any other obligor upon the Notes, wherever situated. If an Event of Default occurs and is continuing, the Trustee may in its discretion proceed to protect and enforce its rights and the rights of the Noteholders by such appropriate judicial proceedings as the Trustee shall deem most effectual to protect and enforce any such rights, whether for the specific enforcement of any covenant or agreement in this Indenture or in aid of the exercise of any power granted herein, or to enforce any other proper remedy. SECTION 5.04 Trustee May File Proofs of Claim. In case of the pendency of any receivership, insolvency, liquidation, bankruptcy, reorganization, arrangement, adjustment, composition or other judicial proceeding relative to the Company or any other obligor upon the Notes or the property of the 36 38 Company or of such other obligor or their creditors, the Trustee (irrespective of whether the principal of the Notes shall then be due and payable as therein expressed or by declaration or otherwise and irrespective of whether the Trustee shall have made any demand on the Company for the payment of overdue principal or interest) shall be entitled and empowered, by intervention in such proceeding or otherwise, (a) to file and prove a claim for the whole amount of principal and interest owing and unpaid in respect of the Notes and to file such other papers or documents as may be necessary or advisable in order to have the claims of the Trustee (including any claim for the reasonable compensation, expenses, disbursements and advances of the Trustee, its agents and counsel) and of the Noteholders allowed in such judicial proceeding, and (b) to collect and receive any moneys or other property payable or deliverable on any such claims and to distribute the same; and any custodian, receiver, assignee, trustee, liquidator, sequestrator or similar official in any such judicial proceeding is hereby authorized by each Noteholder to make such payments to the Trustee and, in the event that the Trustee shall consent to the making of such payments directly to the Noteholders, to pay the Trustee any amount due it for the reasonable compensation, expenses, disbursements and advances of the Trustee, its agents and counsel, and any other amounts due the Trustee under Section 6.06. Nothing herein contained shall be deemed to authorize the Trustee to authorize or consent to or accept or adopt on behalf of any Noteholder any plan of reorganization, arrangement, adjustment or composition affecting the Notes or the rights of any Noteholder thereof, or to authorize the Trustee to vote in respect of the claim of any Noteholder in any such proceeding. SECTION 5.05 Trustee May Enforce Claims Without Possession of Notes. All rights of action and claims under this Indenture or the Notes may be prosecuted and enforced by the Trustee without the possession of any of the Notes or the production thereof in any proceeding relating thereto, and any such proceeding instituted by the Trustee shall be brought in its own name and as trustee of an express trust, and any recovery of judgment shall, after provision for the payment of the reasonable compensation, expenses, disbursements and advances of the Trustee, its agents and counsel, be for the ratable benefit of the Noteholders in respect of which such judgment has been recovered. 37 39 SECTION 5.06 Application of Money Collected. Any money collected by the Trustee pursuant to this Article shall be applied in the following order, at the date or dates fixed by the Trustee and, in case of the distribution of such money on account of principal or interest, upon presentation of the Notes and the notation thereon of the payment if only partially paid and upon surrender thereof if fully paid: FIRST: To the payment of all amounts due the Trustee under Section 6.06; SECOND: To the payment of the amounts then due and unpaid for principal of and interest on the Notes in respect of which or for the benefit of which such money has been collected, ratably, without preference or priority of any kind, according to the amounts due and payable on such Notes for principal and interest, respectively; and THIRD: The balance, if any, to the Person or Persons entitled thereto. SECTION 5.07 Limitation on Suits. No Noteholder shall have any right to institute any proceeding, judicial or otherwise, with respect to this Indenture, or for the appointment of a receiver or trustee, or for any other remedy hereunder, unless (a) such Noteholder has previously given written notice to the Trustee of a continuing Event of Default, with a copy of such notice to the Company; (b) the Holders of not less than 25% in principal amount of the Outstanding Notes shall have made written request to the Trustee to institute proceedings in respect of such Event of Default in its own name as Trustee hereunder; (c) such Noteholder or Noteholders have offered to the Trustee reasonable indemnity against the costs, expenses and liabilities to be incurred in compliance with such request; (d) the Trustee for 60 days after its receipt of such notice, request and offer of indemnity has failed to institute any such proceeding; and (e) no direction inconsistent with such written request has been given to the Trustee during such 60-day period by the Holders of a majority or more in principal amount of the Outstanding Notes; 38 40 it being understood and intended that no one or more Noteholders shall have any right in any manner whatever by virtue of, or by availing of, any provision of this Indenture to affect, disturb or prejudice the rights of any other Noteholders, or to obtain or to seek to obtain priority or preference over any other Noteholders or to enforce any right under this Indenture, except in the manner herein provided and for the equal and ratable benefit of all the Noteholders. SECTION 5.08 Unconditional Right of Holders to Receive Principal and Interest. Notwithstanding any other provision in this Indenture, the Holder of any Note or of any Coupon, as the case may be, shall have the right, which is absolute and unconditional, to receive payment, as provided herein (including, if applicable, Article Thirteen) and in such Note of the principal of and (subject to Section 3.09) interest on, such Note on the respective Stated Maturity or expressed in such Note (or, in the case of redemption, on the Redemption Date) or Coupon and to institute suit for the enforcement of any such payment, and such rights shall not be impaired without the consent of such Holder; provided, that all monies paid by the Company to the Paying Agent for the payment of principal or interest on any Note which remain unclaimed at the end of two (2) years after the Stated Maturity or Redemption Date of such Note will be repaid to the Company and the Holder of any Note or Coupon shall thereafter have only the rights of a creditor of the Company or such rights as may be otherwise provided by applicable law. SECTION 5.09 Restoration of Rights and Remedies. If the Trustee or any Noteholder has instituted any proceeding to enforce any right or remedy under this Indenture and such proceeding has been discontinued or abandoned for any reason, or has been determined adversely to the Trustee or to such Noteholder, then and in every such case, subject to any determination in such proceeding, the Company, the Trustee and the Noteholders shall be restored severally and respectively to their former positions hereunder and thereafter all rights and remedies of the Trustee and the Noteholders shall continue as though no such proceeding had been instituted. SECTION 5.10 Rights and Remedies Cumulative. Except as otherwise provided with respect to the replacement or payment of mutilated, destroyed, lost or stolen Notes in the last paragraph of Section 3.08, no right or remedy herein conferred upon or reserved to the Trustee or to the Noteholders is intended to be exclusive of any other right or remedy, and every right and remedy shall, to the extent permitted by law, be cumulative and in addition to every other right and remedy given hereunder or now or hereafter existing at law or in equity or otherwise. The assertion or employment of any right or remedy 39 41 hereunder, or otherwise, shall not prevent the concurrent assertion or employment of any other appropriate right or remedy. SECTION 5.11 Delay or Omission Not Waiver. No delay or omission of the Trustee or of any Holder of any Note to exercise any right or remedy accruing upon any Event of Default shall impair any such right or remedy or constitute a waiver of any such Event of Default or an acquiescence therein. Every right and remedy given by this Article or by law to the Trustee or to the Noteholders may be exercised from time to time, and as often as may be deemed expedient, by the Trustee or by the Noteholders, as the case may be. SECTION 5.12 Control by Noteholders. The Holders of not less than a majority in aggregate principal amount of the Outstanding Notes shall have the right to direct the time, method and place of conducting any proceeding for any remedy available to the Trustee, or exercising any trust or power conferred on the Trustee, provided that in each case (a) such direction shall not be in conflict with any rule of law or with this Indenture, (b) the Trustee may take any other action deemed proper by the Trustee which is not inconsistent with such direction, and (c) the Trustee need not take any action which might involve it in personal liability or be unjustly prejudicial to the Noteholders not joining in such direction. SECTION 5.13 Waiver of Past Defaults. Subject to Section 5.02, the Holders of not less than a majority in principal amount of the Outstanding Notes may on behalf of the Holders of all the Notes waive any past default hereunder and its consequences, except a default (a) in respect of the payment of the principal of or interest on any Note, or (b) in respect of a covenant or provision hereof which under Article Nine cannot be modified or amended without the consent of the Holder of each Outstanding Note affected. 40 42 Upon any such waiver, such default shall cease to exist, and any Event of Default arising therefrom shall be deemed to have been cured, for every purpose of this Indenture; but no such waiver shall extend to any subsequent or other default or Event of Default or impair any right consequent thereon. SECTION 5.14 Waiver of Stay or Extension Laws. The Company covenants (to the extent that it may lawfully do so) that it will not at any time insist upon, or plead, or in any manner whatsoever claim or take the benefit or advantage of, any stay or extension law wherever enacted, now or at any time hereafter in force, which may affect the covenants or the performance of this Indenture; and the Company (to the extent that it may lawfully do so) hereby expressly waives all benefit or advantage of any such law and covenants that it will not hinder, delay or impede the execution of any power herein granted to the Trustee, but will suffer and permit the execution of every such power as though no such law had been enacted. SECTION 5.15 Undertaking for Costs. All parties to this Indenture agree, and each Holder of any Note by such Noteholder's acceptance thereof shall be deemed to have agreed, that any court may in its discretion require, in any suit for the enforcement of any right or remedy under this Indenture, or in any suit against the Trustee for any action taken, suffered or omitted by it as Trustee, the filing by any party litigant in such suit of an undertaking to pay the costs of such suit, and that such court may in its discretion assess reasonable costs, including reasonable attorneys' fees, against any party litigant in such suit, having due regard to the merits and good faith of the claims or defenses made by such party litigant; but the provisions of this Section shall not be deemed to require any court to require an undertaking or to make such an assessment in any suit instituted by the Company except against the Trustee. ARTICLE SIX THE TRUSTEE SECTION 6.01 Notice of Defaults. Within 90 days after the occurrence of any Default hereunder, the Trustee shall publish notice of such Default hereunder known to the Trustee, unless such Default shall have been cured or waived; provided, however, that, except in the case of a Default in the payment of the principal 41 43 of or interest on any Note, the Trustee shall be protected in withholding such notice if and so long as the board of directors, the executive committee or a trust committee of directors and/or Responsible Officers of the Trustee in good faith determines that the withholding of such notice is in the interest of the Noteholders. SECTION 6.02 Certain Rights of Trustee. (a) The Trustee may request and rely and shall be protected in acting or refraining from acting upon any Extraordinary Resolution, Act, Notice or other resolution, certificate, statement, instrument, opinion, report, notice, request, direction, consent, order, bond, debenture, note, other evidence of indebtedness or other paper or document believed by it to be genuine and to have been signed or presented by the proper party or parties. (b) Any request or direction of the Company mentioned herein shall be sufficiently evidenced by a Company Request or Company Order and any resolution of the Board of Directors may be sufficiently evidenced by a Board Resolution. (c) Whenever in the administration of this Indenture the Trustee shall deem it desirable that a matter be proved or established prior to taking, suffering or omitting any action hereunder, the Trustee (unless other evidence be herein specifically prescribed) may, in the absence of bad faith on its part, rely upon an Officers' Certificate. (d) The Trustee may consult with counsel and the written advice of such counsel or any Opinion of Counsel shall be full and complete authorization and protection in respect of any action taken, suffered or omitted by it hereunder in good faith and in reliance thereon. (e) The Trustee shall be under no obligation to exercise any of the rights or powers vested in it by this Indenture at the request or direction of any of the Noteholders pursuant to this Indenture, unless such Noteholders shall have offered to the Trustee reasonable security or indemnity against the costs, expenses (including reasonable fees of Trustee's counsel), and liabilities which might be incurred by it in compliance with such request or direction. (f) The Trustee shall not be bound to make any investigation into the facts or matters stated in any Extraordinary Resolution, Act, Notice or other resolution, certificate, statement, instrument, opinion, report, notice, request, direction, consent, order, bond, debenture, note, other evidence of indebtedness or other paper or document, but the 42 44 Trustee, in its discretion, may make such further inquiry or investigation into such facts or matters as it may see fit, and, if the Trustee shall determine to make such further inquiry or investigation, it shall be entitled to examine the books, records and premises of the Company, personally or by agent or attorney. (g) The Trustee may execute any of the trusts or powers hereunder or perform any duties hereunder either directly or by or through agents or attorneys and the Trustee shall not be responsible for any misconduct or negligence on the part of any agent or attorney appointed with due care by it hereunder. (h) The Trustee shall not be liable for any action taken, suffered or omitted by it in good faith and believed by it to be authorized or within the discretion or rights or powers conferred upon it by this Indenture. (i) The permissive right of the Trustee to take or refrain from taking any actions enumerated in this Indenture shall not be confused as a duty and the Trustee shall not be answerable in such actions other than for its own negligence or wilful misconduct. The Trustee shall not be required to expend or risk its own funds or otherwise incur any financial liability in the performance of any of its duties hereunder, or in the exercise of any of its rights or powers if it shall have reasonable grounds for believing that repayment of such funds or adequate indemnity against such risk or liability is not reasonably assured to it. SECTION 6.03 Trustee Not Responsible for Recitals or Issuance of Notes. The recitals contained herein in the Notes, except for the Trustee's certificates of authentication, and in the Coupons, shall be taken as the statements of the Company, and the Trustee assumes no responsibility for their correctness. The Trustee makes no representations as to the validity or sufficiency of this Indenture or of the Notes or the Coupons or of the Conversion Shares, except that the Trustee represents that it is duly authorized to execute and deliver this Indenture, authenticate the Notes and perform its obligations hereunder. The Trustee shall not be accountable for the use or application by the Company of Notes or the proceeds thereof. SECTION 6.04 May Hold Notes. The Trustee, any Paying Agent, any Conversion Agent or any other agent of the Company or of the Trustee, in its individual or any other capacity, may become the owner or pledgee of Notes and the Coupons and may otherwise deal with the Company with the same rights it would have if it were not Trustee, Paying Agent, Conversion Agent or such other agent. 43 45 SECTION 6.05 Money Held in Trust. Money held by the Trustee in trust hereunder need not be segregated from other funds except to the extent required by law. The Trustee shall be under no liability for interest on any money received by it hereunder except as otherwise agreed with the Company. SECTION 6.06 Compensation and Reimbursement. The Company agrees: (a) to pay to the Trustee from time to time reasonable compensation for all services rendered by it hereunder (which compensation shall not be limited by any provision of law in regard to the compensation of a trustee of an express trust); (b) except as otherwise expressly provided herein, to reimburse the Trustee upon its request for all reasonable expenses, disbursements and advances incurred or made by the Trustee in accordance with any provision of this Indenture (including the reasonable compensation and the expenses and disbursements of its agents and counsel), except any such expense, disbursement or advance as may be attributable to its negligence, bad faith or wilful misconduct; and (c) to indemnify the Trustee for, and to hold it harmless against, any loss, liability or expense incurred without negligence or bad faith on its part, arising out of or in connection with the acceptance or administration of this trust, including the costs and expenses of defending itself against any claim or liability in connection with the exercise or performance of any of its powers or duties hereunder. When the Trustee incurs expenses or renders service in connection with an Event of Default specified in Section 5.01 (f) or Section 5.01 (g), the expenses (including the reasonable charges of its counsel) and the compensation for the services are intended to constitute expenses of the administration under any applicable federal or state bankruptcy, insolvency or other similar law. As security for the performance of the obligations of the Company under this Section, the Trustee shall have a claim prior to the Notes upon all property and funds held or collected by the Trustee as such, except funds held in trust for the payment of principal of or interest on particular Notes. 44 46 The provision of this Section shall survive the termination of this Indenture or the earlier resignation or removal of the Trustee. Any Paying Agent or Authenticating Agent appointed hereunder shall be entitled to the benefits of Section 6.06 (c) as if the indemnity set forth therefor were specifically afforded to such Paying Agent or Authenticating Agent. SECTION 6.07 Corporate Trustee Required; Eligibility. There shall at all times be a Trustee hereunder which shall be eligible to act as Trustee and shall have a combined capital and surplus of at least $50,000,000. If such corporation publishes reports of condition at least annually, pursuant to law or to the requirements of federal, state, territorial or District of Columbia supervising or examining authority, then for the purposes of this Section, the combined capital and surplus of such corporation shall be deemed to be its combined capital and surplus as set forth in its most recent report of condition so published. If at any time the Trustee shall cease to be eligible in accordance with the provisions of this Section, it shall resign immediately in the manner and with the effect hereinafter specified in this Article. SECTION 6.08 Resignation and Removal; Appointment of Successor. (a) No resignation or removal of the Trustee and no appointment of a successor Trustee pursuant to this Article shall become effective until the acceptance of appointment by the successor Trustee in accordance with the applicable requirements of Section 6.09. (b) The Trustee may resign at any time by giving written notice thereof to the Company. If the instrument of acceptance by a successor Trustee required by Section 6.09 shall not have been delivered to the Trustee within 30 days after the giving of such notice of resignation, the resigning Trustee may petition any court of competent jurisdiction for the appointment of a successor Trustee. (c) The Trustee may be removed at any time by Act of the Holders of not less than a majority in principal amount of the Outstanding Notes, delivered to the Trustee and to the Company. (d) If at any time: (i) the Trustee shall cease to be eligible under Section 6.07 and shall fail to resign after written request therefor by the Company or by any Noteholder who has been a bona fide Holder of a Note for at least six months, or 45 47 (ii) the Trustee shall become incapable of acting or shall be adjudged a bankrupt or insolvent or a receiver of the Trustee or of its property shall be appointed or any public officer shall take charge or control of the Trustee or of its property or affairs for the purpose of rehabilitation, conservation or liquidation, or (iii) the Trustee shall fail or refuse to timely carry out and discharge its duties hereunder, then, in any such case, (i) the Company, by a Board Resolution, may remove the Trustee, or (ii) any Noteholder who has been a bona fide Holder of a Note for at least six months may, on behalf of such Noteholder and all others similarly situated, petition any court of competent jurisdiction for the removal of the Trustee and the appointment of a successor Trustee. (e) If the Trustee shall resign, be removed or become incapable of acting, or if a vacancy shall occur in the office of Trustee for any reason, the Company, by a Board Resolution, shall promptly appoint a successor Trustee. If, within one year after such resignation, removal or incapability, or the occurrence of such vacancy, a successor Trustee shall be appointed by Act of the Holders of a majority in principal amount of the Outstanding Notes delivered to the Company and the retiring Trustee, the successor Trustee so appointed shall, forthwith upon its acceptance of such appointment, become the successor Trustee and supersede the successor Trustee appointed by the Company. If no successor Trustee shall have been so appointed by the Company or the Noteholders and accepted appointment in the manner hereinafter provided, any Noteholder who has been a bona fide Holder of a Note for at least six months may, on behalf of such Noteholder and all others similarly situated, petition any court of competent jurisdiction for the appointment of a successor Trustee. (f) The Company shall give notice of each resignation and each removal of the Trustee and each appointment of a successor Trustee to the Noteholders in the manner provided for in Section 1.08. Each notice shall include the name of the successor Trustee and the address of its Corporate Trust Office. SECTION 6.09 Acceptance of Appointment by Successor. Every successor Trustee appointed hereunder shall execute, acknowledge and deliver to the Company and to the retiring Trustee an instrument accepting such appointment, and thereupon the resignation or removal of the retiring Trustee shall become effective and such successor Trustee, without any further act, deed or conveyance, shall become vested with all the rights, 46 48 powers, trusts and duties of the retiring Trustee; but, on request of the Company or the successor Trustee, such retiring Trustee shall, upon payment of its charges, execute and deliver an instrument transferring to such successor Trustee all the rights, powers and trusts of the retiring Trustee and shall duly assign, transfer and deliver to such successor Trustee all property and money held by such retiring Trustee hereunder, including any funds held in the Segregated Account, whether or not invested. Upon request of any such successor Trustee, the Company shall execute any and all instruments for more fully and certainly vesting in and confirming to such successor Trustee all such rights, powers and trusts. No successor Trustee shall accept its appointment unless at the time of such acceptance such successor Trustee shall be qualified and eligible under this Article. SECTION 6.10 Merger, Conversion, Consolidation or Succession to Business. Any corporation into which the Trustee may be merged or converted or with which it may be consolidated, or any corporation resulting from any merger, conversion or consolidation to which the Trustee shall be a party, or any corporation succeeding to all or substantially all of the corporate trust business of the Trustee, shall be the successor of the Trustee hereunder, provided such corporation shall be otherwise qualified and eligible under this Article, without the execution or filing of any paper or any further act on the part of any of the parties hereto. In case any Notes shall have been authenticated, but not delivered, by the Trustee then in office, any successor by merger, conversion or consolidation to such authenticating Trustee may adopt such authentication and deliver the Notes so authenticated with the same effect as if such successor Trustee had itself authenticated such Notes; and in case at that time any of the Notes shall not have been authenticated, any successor Trustee may authenticate such Notes either in the name of any predecessor hereunder or in the name of the successor Trustee; and in all such cases such certificates shall have the full force which it is anywhere in the Notes or in this Indenture provided that the certificate of the Trustee shall have; provided, however, that the right to adopt the certificate of authentication of any predecessor Trustee or to authenticate Notes in the name of any predecessor Trustee shall apply only to its successor or successors by merger, conversion or consolidation. SECTION 6.11 Certain Duties and Responsibilities. (a) Except during the continuance of an Event of Default with respect to the Notes, (i) the Trustee undertakes to perform such duties and only such duties with respect to the Notes as are specifically set forth in this Indenture, and no 47 49 implied covenants or obligations with respect to the Notes shall be read into this Indenture against the Trustee; and (ii) in the absence of bad faith on its part, the Trustee may conclusively rely as to the truth of the statements and the correctness of the opinions expressed therein, upon certificates or opinions furnished to the Trustee and conforming to the requirements of this Indenture; but in the case of any such certificates or opinions which by any provision hereof are specifically required to be furnished to the Trustee, the Trustee shall be under a duty to examine the same to determine whether or not they conform to the requirements of this Indenture, but not to verify the contents thereof. (b) In case an Event of Default has occurred and is continuing of which a Responsible Officer of the Trustee has actual knowledge, the Trustee shall exercise such of the rights and powers vested in it by this Indenture with respect to the Notes, and use the same degree of care and skill in their exercise, as a prudent person would exercise or use under the circumstances in the conduct of such person's own affairs. (c) No provision of this Indenture shall be construed to relieve the Trustee from liability for its own negligent action, its own negligent failure to act, or its own wilful misconduct, except that (i) this Subsection shall not be construed to limit the effect of Subsection (a) of this Section; (ii) the Trustee shall not be liable for any error of judgment made in good faith by a Responsible Officer, unless it shall be proved that the Trustee was negligent in ascertaining the pertinent facts; (iii) the Trustee shall not be liable with respect to any action taken or omitted to be taken by it in good faith in accordance with the direction of the Noteholders, given as provided in Section 5.12, relating to the time, method and place of conducting any proceeding for any remedy available to the Trustee, or exercising any trust or power conferred upon the Trustee, under this Indenture; and (iv) no provision of this Indenture shall require the Trustee to expend or risk its own funds or otherwise incur any financial liability in the performance of any of its duties hereunder, or in the exercise of any of its rights or powers, if it 48 50 shall have reasonable grounds for believing that repayment of such funds or adequate indemnity against such risk or liability is not reasonably assured to it. (d) Whether or not therein expressly so provided, every provision of this Indenture relating to the conduct or affecting the liability of or affording protection to the Trustee shall be subject to the provisions of this Section. SECTION 6.12 Segregated Account. (a) On the Closing Date or the day immediately following the Closing Date the net proceeds received from the sale of the Notes shall be transferred to the Segregated Account to be held until such time as such proceeds may be distributed to the Company in accordance with this Section or used by the Company in accordance with the provisions of Article Four and Article Thirteen hereof. (b) On the Closing Date or the date immediately following the Closing Date, the Company will establish the Segregated Account with Trustee on behalf of the Company. The Trustee shall have a duty to invest the funds held in the Segregated Account from time to time in accordance with any Company Request received by the Trustee from the Company from time to time. Funds held by the Trustee will be invested and reinvested in Permitted Investments as directed in writing by the Company. Interest earned on investments made with the funds in the Segregated Account from time to time and on deposit in the Segregated Account will be held for the account of the Company and also invested in accordance with the instructions provided by the Company from time to time in a Company Order in Permitted Investments. The Trustee will distribute such earnings to the Company upon written request. (c) Upon conversion of any Note, whether represented by an interest in the Global Note or a Bearer Note, into Conversion Shares pursuant to Article Twelve, from time to time, the Company may request that the Trustee make a distribution to the Company of funds held in the Segregated Account in an amount equal to the principal amount of such Note. The balance of the principal amount for such Note remaining on deposit in the Segregated Account at the Conversion Date shall be distributed to the Company without regard to the then current Asset Value Coverage Ratio; provided, however, that no such distribution shall be made if an Event of Default shall have occurred and be continuing. In addition, the Company may from time to time request that the Trustee distribute to the Company any other funds held in the Segregated Account. The Trustee shall distribute to the Company such funds held in the Segregated Account to the 49 51 extent that the Company on the date of such request provides the documents specified in Section 6.12(d) to the Trustee. (d) Upon making any written request to the Trustee for a distribution of a portion of the funds, including any earnings thereon, held in the Segregated Account, the Company will present to the Trustee a certificate from the chief financial officer of the Company including items (a) through (d) of Section 1.04 and in the form set forth as Exhibit D stating that (i) the required Asset Value Coverage Ratio has (A) been met in accordance with Section 10.13 as of the date of such request and (B) will be met, following distribution of such funds from the Segregated Account (which certification may be based on assets subject to the Asset Value Coverage Ratio acquired subsequent to the end of the most recent fiscal year), (ii) to the knowledge of the Company no Event of Default with respect to any of the Notes has occurred and is continuing at the date of such certificate (except in the case of funds to be immediately deposited with Trustee pursuant to Section 4.01), and (iii) requesting a specific distribution. Such chief financial officer's certificate shall be accompanied by an Independent Reserve Report. Upon receipt of the chief financial officer's certificate and the Independent Reserve Report, the Trustee shall distribute the corresponding portion of the funds held in the Segregated Account to the Company as requested; provided that any chief financial officer's certificate delivered to the Trustee pursuant to Article Four or Article Thirteen shall not be required to contain the statements set forth in subparts (i) and (ii) above. The Trustee shall have no obligation or liability to verify the truthfulness or accuracy of the chief financial officer's certificate or the Independent Reserve Report presented and likewise will have no liability for relying exclusively on such documents to verify the permissibility of a distribution of funds from the Segregated Account to the Company as requested. (e) At any time after Maturity, the Company may request that the Trustee distribute the funds held in the Segregated Account to the Company. Upon making any such request, the Company shall present an Officer's Certificate including items (a) through (d) of Section 1.04 and stating that all principal and interest due at any time on the Notes up to and through Maturity has been paid to the Trustee. (f) The Company may at any time and from time to time deposit funds in the Segregated Account in order to meet the required Asset Value Coverage Ratio or to supplement or replace any Required Assets designated in the most recent chief financial officer's certificate as part of the Asset Value Coverage Ratio with other or additional assets eligible for inclusion as Required Assets, provided that prior to any such change in the allocation of Required Assets, the Company shall provide a substitute chief financial 50 52 officer's certificate evidencing that the required Asset Value Coverage Ratio shall be met after such deposit, supplement or replacement is effective, as the case may be. SECTION 6.13 Meetings of Noteholders. (a) The Trustee or the Noteholders may convene a meeting at any time and from time to time to consider any matter affecting the interests of the Trustee or the Holders of the Notes, including the modification of the Terms and Conditions or this Indenture and to make, give or take any request, demand, authorization, direction, notice, consent, waiver or other action provided by this Indenture to be made, given or taken by Holders of the Notes. (b) The Trustee may at any time call a meeting of the Holders of the Notes for any purpose specified in Section 6.13(a), to be held at such time and at such place in the Borough of Manhattan, The City of New York, or in the City of London, England, as the Trustee shall determine. Notice of every meeting of the Holders of the Notes, setting forth the time and the place of such meeting and in general terms the action proposed to be taken at such meeting, shall be given in the manner provided in Section 1.08, not less than 21 nor more than 180 days prior to the date fixed for the meeting. (c) In case at any time the Company, pursuant to a Board Resolution, or the Holders of at least 25% in aggregate principal amount of the Outstanding Notes shall have requested the Trustee to call a meeting of the Holder of the Notes for any purpose other than specified in Section 6.13(a), by written request setting forth in reasonable detail the action proposed to be taken at the meeting, and the Trustee shall not have made the first publication of the notice of such meeting within 21 days after receipt of such request or shall not thereafter proceed to cause the meeting to be held as provided herein, then the Company or the Holders of the Notes in the amount specified, as the case may be, may determine the time and the place in the Borough of Manhattan, The City of New York, or in the City of London, England, for such meeting and may call such meeting for such purposes by giving notice thereof as provided in Section 1.08. (d) To be entitled to vote at any meeting of Holders of the Notes, a Person shall be (i) a Holder of one or more Outstanding Notes, or (ii) a Person appointed by an instrument in writing as proxy for a Holder or Holders of one or more Outstanding Notes by such Holder or Holders. The only Persons who shall be entitled to be present or to speak at any meeting of Noteholders shall be the Persons entitled to vote at such meeting and their counsel, any representatives of the Trustee and the Company, and their respective counsel. 51 53 (e) The quorum at any meeting for passing any Extraordinary Resolution will be one or more Persons present holding or representing 50 percent or more in principal amount of the Outstanding Notes as of the date of the meeting, or at any adjourned such meeting one or more Persons present whatever the principal amount of the Notes held or represented by such Person, except that at any meeting, the business of which includes the modification of certain of the provisions of the Terms and Conditions and the provisions of this Indenture, the necessary quorum and vote required for passing an Extraordinary Resolution will be one or more Persons present holding or representing not less than a majority, or at any adjourned such meeting not less than one-third, of the principal amount of the Outstanding Notes. An Extraordinary Resolution passed at any meeting of the Holders of the Notes will be binding on all Holders of the Notes, whether or not such Noteholders are present at the meeting, and on the Holders of all Coupons. (f) The Trustee may agree, without the consent of the Holders of the Notes or the Coupons, to any modification of, or to the waiver or authorization of any breach or proposed breach of, any of the Terms and Conditions or any of the provisions of this Indenture which is not, in the opinion of the Trustee prejudicial to the interests of the Holders of the Notes or the Coupons or if necessary to correct a manifest error. SECTION 6.14 Authenticating Agents. The Principal Paying and Conversion Agent may authenticate the Global Note, the Temporary Notes and the Notes, as the Trustee's Authenticating Agent. The Trustee may, with the written consent of the Company, appoint an additional Authenticating Agent acceptable to the Company with respect to the Notes which shall be authorized to act on behalf of the Trustee to authenticate Notes issued upon exchange or substitution pursuant to this Indenture. Notes authenticated by an Authenticating Agent shall be entitled to the benefits of this Indenture and shall be valid and obligatory for all purposes as if authenticated by the Trustee hereunder, and every reference in this Indenture to the authentication and delivery of Notes by the Trustee or the Trustee's certificate of authentication shall be deemed to include authentication and delivery on behalf of the Trustee by an Authenticating Agent and a certificate of authentication executed on behalf of the Trustee by an Authenticating Agent. The Notes shall have endorsed thereon the certificate of authentication set forth in Exhibits in A and B hereto. Each Authenticating Agent shall be subject to acceptance by the Company and shall at all times be a corporation organized and dong business under the laws of the United States of America, any state thereof, the District of Columbia, or England and Wales authorised under such laws to act as Authenticating Agent and subject to supervision or examination by government or other fiscal authority. If at any time an Authenticating Agent shall cease to be eligible in accordance with the 52 54 provisions of this Section 6.14, such Authenticating Agent shall resign immediately in the manner and with the effect specified in this Section 6.14. Any corporation into which an Authenticating Agent may be merged or converted or with which it may be consolidated, or any corporation resulting from any merger, conversion or consolidation to which such Authenticating Agent shall be a party, or any corporation succeeding to the corporate agency or corporate trust business of an Authenticating Agent, shall continue to be an Authenticating Agent; provided such corporation shall be otherwise eligible under this Section 6.14, without the execution or filing of any paper or any further act on the part of the Trustee or the Authenticating Agent. An Authenticating Agent may resign at any time be giving written notice thereof to the Trustee and to the Company. The Trustee may at any time terminate the agency of an Authenticating Agent by giving written notice thereof to such Authenticating Agent and to the Company. Upon receiving such a notice of resignation or upon such a termination, or in case at any time such Authenticating Agent shall cease to be eligible in accordance with the provisions of this Section 6.14, the Trustee may appoint a successor Authenticating Agent which shall be subject to acceptance by the Company. The Company agrees to pay to each Authenticating Agent from time to time reasonable compensation for this service under Section 6.14. ARTICLE SEVEN NOTEHOLDERS' LISTS AND REPORTS BY COMPANY SECTION 7.01 Disclosure of Names and Addresses of Noteholders. Every Noteholder, by receiving and holding the same, agrees with the Company and the Trustee that neither the Company nor the Trustee nor any agent of either of them shall be held accountable by reason of the disclosure of any such information as to the names and addresses of the Noteholders regardless of the source from which such information was derived. 53 55 SECTION 7.02 Reports by Company. The Company shall: (a) file with the Trustee, within 15 days after the Company is required to file the same with the Commission, copies of the annual reports and of the information, documents and other reports (or copies of such portions of any of the foregoing as the Commission may from time to time by rules and regulations prescribe) which the Company may be required to file with the Commission pursuant to Section 13 or Section 15(d) of the Exchange Act; or, if the Company is not required to file information, documents or reports pursuant to either of said Sections, then, on the 120th day following the initial issuance of the Notes and annually thereafter, it shall file with the Trustee, in accordance with rules and regulations prescribed from time to time by the Commission, such of the supplementary and periodic information, documents and reports which may be required pursuant to Section 13 of the Exchange Act in respect of a security listed and registered on a national securities exchange as may be prescribed from time to time in such rules and regulations; (b) file with the Trustee, in accordance with rules and regulations prescribed from time to time by the Commission, such additional information, documents and reports with respect to compliance by the Company with the conditions and covenants of this Indenture as may be required from time to time by such rules and regulations; and (c) file with the Trustee within 90 days after the end of its fiscal year, a copy of an Independent Reserve Report dated as of the end of such fiscal year. ARTICLE EIGHT CONSOLIDATION, MERGER, CONVEYANCE, TRANSFER, OR LEASE SECTION 8.01 Company May Consolidate, Etc., Only on Certain Terms. The Company shall not consolidate with or merge with or into any other corporation or convey, transfer or lease its properties and assets substantially as an entirety to any Person, unless: (a) either (i) the Company shall be the surviving Person or (ii) the Person (if other than the Company) formed by such consolidation or into which the Company is merged or the Person which acquires by conveyance or transfer, or which leases, the 54 56 properties and assets of the Company substantially as an entirety (1) shall be a Person organized and validly existing under the laws of the United States of America, any state thereof or the District of Columbia and (2) shall expressly assume, by an indenture supplemental hereto, executed and delivered to the Trustee, in form satisfactory to the Trustee, the Company's obligation for the due and punctual payment of the principal of and interest on all the Notes and the performance and observance of every covenant of this Indenture on the part of the Company to be performed or observed; (b) immediately after giving effect to such transaction, no Default or Event of Default shall have occurred and be continuing; and (c) the Company or such Person shall have delivered to the Trustee an Officers' Certificate and an Opinion of Counsel, each stating that such consolidation, merger, conveyance, transfer or lease and, if a supplemental indenture is required in connection with such transaction, such supplemental indenture complies with this Article and that all conditions precedent herein provided for relating to such transaction have been complied with. SECTION 8.02 Successor Substituted. Upon any consolidation of the Company with or merger of the Company with or into any other Person or any conveyance, transfer or lease of the properties and assets of the Company substantially as an entirety to any Person in accordance with Section 8.01, the successor Person formed by such consolidation or into which the Company is merged or to which such conveyance, transfer or lease is made shall succeed to, and be substituted for, and may exercise every right and power of, the Company under this Indenture with the same effect as if such successor Person had been named as the Company herein, and in the event of any such conveyance or transfer, the Company (which term shall for this purpose mean the Person named as the "Company" in the first paragraph of this Indenture or any successor Person which shall theretofore become such in the manner described in Section 8.01), except in the case of a lease, shall be discharged of all obligations and covenants under this Indenture and the Notes and may be dissolved and liquidated. 55 57 ARTICLE NINE SUPPLEMENTAL INDENTURES SECTION 9.01 Supplemental Indentures Without Consent of Noteholders. Without the consent of any Noteholders, the Company, when authorized by a Board Resolution, and the Trustee, at any time and from time to time, may enter into one or more indentures supplemental hereto, in form satisfactory to the Trustee, for any of the following purposes: (a) to evidence the succession of another Person to the Company and the assumption by any such successor of the covenants of the Company contained herein and in the Notes; or (b) to add to the covenants of the Company for the benefit of the Noteholders or to surrender any right or power herein conferred upon the Company; or (c) to add any additional Events of Default; or (d) to evidence and provide for the acceptance of appointment hereunder by a successor Trustee pursuant to the requirements of Section 6.09; or (e) to cure any ambiguity, to correct or supplement any provision herein which may be inconsistent with any other provision herein, or to make any other provisions with respect to matters or questions arising under this Indenture; provided that such action shall not adversely affect the interests of the Noteholders in any material respect; or (f) to secure the Notes pursuant to the requirements of Section 10.11 or otherwise. SECTION 9.02 Supplemental Indentures with Consent of Noteholders. With the consent of the Noteholders of not less than a majority in principal amount of the Outstanding Notes, by Act of said Noteholders delivered to the Company and the Trustee, the Company, when authorized by a Board Resolution, and the Trustee may enter into an indenture or indentures supplemental hereto for the purpose of adding any provisions to or changing in any manner or eliminating any of the provisions of this Indenture or of modifying in any manner the 56 58 rights of the Noteholders under this Indenture; provided, however, that no such supplemental indenture shall, without the consent of the Holder of each Outstanding Note affected thereby: (a) change the Stated Maturity of the principal of, or any instalment of principal of or interest on, any Note, or reduce the principal amount thereof or the rate of interest thereon, or change the coin or currency in which any Note or the interest thereon is payable, or impair the right to institute suit for the enforcement of any such payment after the Stated Maturity thereof (or, in the case of redemption, on or after the Redemption Date), or (b) reduce the percentage in principal amount of the Outstanding Notes, the consent of whose Holders is required for any such supplemental indenture, or the consent of whose Holders is required for any waiver of compliance with certain provisions of this Indenture or certain defaults hereunder and their consequences provided for in this Indenture, or (c) modify any of the provisions of this Section or Section 5.13, except to increase any such percentage or to provide that certain other provisions of this Indenture cannot be modified or waived without the consent of the Holder of each Outstanding Note affected thereby; provided, however, that this clause shall not be deemed to require the consent of any Noteholder with respect to changes in the references to "the Trustee" and concomitant changes in this Section and elsewhere, or the deletion of this proviso, in accordance with the requirements of Section 6.09 and 9.01(d), or (d) modify any of the provisions of Section 10.11 or any of the provisions of this Indenture relating to the subordination of the Note in a manner adverse to the Holders thereof. It shall not be necessary for any Act of Noteholders under this Section to approve the particular form of any proposed supplemental indenture, but it shall be sufficient if such Act shall approve the substance thereof. SECTION 9.03 Execution of Supplemental Indentures. In executing, or accepting the additional trusts created by, any supplemental indenture permitted by this Article or the modifications thereby of the trusts created by this Indenture, the Trustee shall be entitled to receive, and (subject to Section 6.11) shall be fully protected in relying upon, an Opinion of Counsel stating that the execution of such supplemental indenture is authorized or permitted by this Indenture. The Trustee may, but shall not be obligated to, enter 57 59 into any such supplemental indenture which affects the Trustee's own rights, duties or immunities under this Indenture or otherwise. SECTION 9.04 Effect of Supplemental Indentures. Upon the execution of any supplemental indenture under this Article, this Indenture shall be modified in accordance therewith, and such supplemental indenture shall form a part of this Indenture for all purposes; and every Holder of Notes theretofore or thereafter authenticated and delivered hereunder shall be bound thereby. SECTION 9.05 Reference in Notes to Supplemental Indentures. Notes authenticated and delivered after the execution of any supplemental indenture pursuant to this Article may, and shall if required by the Trustee, bear a notation in form approved by the Trustee as to any matter provided for in such supplemental indenture. If the Company shall so determine, new Notes so modified as to conform, in the opinion of the Trustee and the Company, to any such supplemental indenture may be prepared and executed by the Company and authenticated and delivered by the Trustee in exchange for Outstanding Notes. SECTION 9.06 Notice of Supplemental Indentures. Promptly after the execution by the Company and the Trustee of any supplemental indenture pursuant to the provisions of Section 9.02, the Company shall give notice thereof to the Holders of each Outstanding Note affected, in the manner provided for in Section 1.08, setting forth in general terms the substance of such supplemental indenture. ARTICLE TEN COVENANTS SECTION 10.01 Payment of Principal and Interest. The Company covenants and agrees for the benefit of the Noteholders and the Couponholders that it will duly and punctually pay the principal of and interest on the Notes in accordance with the terms of the Notes and this Indenture. 58 60 SECTION 10.02 Maintenance of Office or Agency. The Company will maintain in not less than one European city, an office or agency where Notes may be presented or surrendered for payment, where Notes may be surrendered for conversion or exchange and where notices and demands to or upon the Company in respect of the Notes and this Indenture may be served. The corporate trust office of the Principal Paying Agent at Mariner House, Pepys Street, London EC3N 4DA, England shall be such office or agency of the Company, unless the Company shall designate and maintain some other office or agency for one or more of such purposes pursuant to the terms of that certain Paying and Conversion Agency Agreement of even date herewith (the "Agency Agreement"). The Company will give prompt written notice to the Trustee of any change in the location of any such office or agency. If at any time the Company shall fail to maintain any such required office or agency or shall fail to furnish the Trustee with the address thereof, such presentations, surrenders, notices and demands may be made or served at the Corporate Trust Office of the Trustee, and the Company hereby appoints the Trustee as its agent to receive all such presentations, surrenders, notices and demands. The Company may also from time to time designate one or more other offices or agencies (in or outside of Europe) where the Notes may be presented or surrendered for any or all such purposes and may from time to time rescind any such designation; provided, that no such designation or rescission shall in any manner relieve the Company of its obligation to maintain an office or agency in Europe for such purposes. The Company will give prompt written notice to the Trustee of any such designation or rescission and any change in the location of any such other office or agency. SECTION 10.03 Money for Payments to Be Held in Trust. If the Company shall at any time act as its own Paying Agent, it will, on or before each due date of the principal of or interest on any of the Notes, segregate and hold in trust for the benefit of the Persons entitled thereto a sum sufficient to pay the principal or interest so becoming due until such sums shall be paid to such Persons or otherwise disposed of as herein provided and will promptly notify the Trustee of its action or failure so to act. Whenever the Company shall have one or more Paying Agents for the Notes, it will, on or before 3:00 p.m. (London time) on the Business Day immediately preceding each due date of the principal of or interest on any Notes, deposit with a Paying Agent a sum sufficient to pay the principal or interest so becoming due, such sum to be held in trust for the benefit of the Persons entitled to such principal or interest, and (unless such Paying Agent is the Trustee) the Company will promptly notify the Trustee of such action or any failure so to act. 59 61 Pursuant to the terms of the Agency Agreement, each Paying Agent shall agree with the Trustee, subject to the provisions of this Section, that such Paying Agent will: (a) hold all sums held by it for the payment of the principal of or interest on Notes in trust for the benefit of the Persons entitled thereto until such sums shall be paid to such Persons or otherwise disposed of as herein provided; (b) give the Trustee notice of any Default by the Company in the making of any payment of principal or interest; and (c) at any time during the continuance of any such Default, upon the written request of the Trustee, forthwith pay to the Trustee all sums so held in trust by such Paying Agent. The Company may at any time, for the purpose of obtaining the satisfaction and discharge of this Indenture or for any other purpose, pay, or by Company Order direct any Paying Agent to pay, to the Trustee all sums held in trust by the Company or such Paying Agent, such sums to be held by the Trustee upon the same trusts as those upon which such sums were held by the Company or such Paying Agent; and, upon such payment by any Paying Agent to the Trustee, such Paying Agent shall be released from all further liability with respect to such sums. Any money deposited with the Trustee or any Paying Agent, or then held by the Company, in trust for the payment of the principal of or interest on any Note and remaining unclaimed for two years after such principal or interest has become due and payable shall be paid to the Company on Company Request, or (if then held by the Company) shall be discharged from such trust; and the Holder of such Note shall thereafter, as an unsecured general creditor, look only to the Company for payment thereof, and all liability of the Trustee or such Paying Agent with respect to such trust money, and all liability of the Company as trustee thereof, shall thereupon cease; provided, however, that the Trustee or such Paying Agent, before being required to make any such repayment, may at the expense of the Company cause to be published once, in an Authorized Newspaper, notice that such money remains unclaimed and that, after a date specified therein, which shall not be less than 30 days from the date of such publication, any unclaimed balance of such money then remaining will be repaid to the Company. SECTION 10.04 Corporate Existence. The Company will do or cause to be done all things necessary to preserve and keep in full force and effect its corporate existence, rights (charter and statutory) and franchises of the Company; provided, however, that the Company shall not be required to preserve any such right 60 62 or franchise if the Board of Directors shall determine that the preservation thereof is no longer in the best interests of the Company and its Principal Subsidiaries as a whole and the conduct of their collective businesses, and that the loss thereof is not disadvantageous in any material respect to the Noteholders; and provided, further, that nothing contained in this Section 10.04 shall prohibit any transaction permitted by Article Eight or Sections such as 10.14. SECTION 10.05 Payment of Taxes and Other Claims. The Company will pay or discharge or cause to be paid or discharged, before the same shall become delinquent, (a) all taxes, assessments and governmental charges levied or imposed upon the Company or any Principal Subsidiary or upon the income, profits or property of the Company or any Principal Subsidiary and (b) all lawful claims for labour, materials and supplies which, if unpaid, might by law become a Lien upon the property of the Company or any Principal Subsidiary; provided, however, that the Company shall not be required to pay or discharge or cause to be paid or discharged any such tax, assessment, charge or claim whose amount, applicability or validity is being contested in good faith by appropriate proceedings. SECTION 10.06 Maintenance of Properties. The Company will cause all properties owned by the Company or any Principal Subsidiary or used or held for use in the conduct of its business or the business of any Principal Subsidiary to be maintained and kept in good condition, repair and working order (ordinary wear and tear excepted) and supplied with all necessary equipment and will cause to be made all necessary repairs, renewals, replacements, betterments and improvements thereof, all as in the judgment of the Company may be necessary so that the business carried on in connection therewith may be conducted at all times; provided, however, that nothing in this Section shall prevent the Company from discontinuing the maintenance of any of such properties if such discontinuance is, in the judgment of the Company, desirable in the conduct of its business or the business of any Principal Subsidiary and not disadvantageous in any material respect to the Noteholders, and provided, further, that nothing contained in this Section 10.06 shall prohibit any transaction permitted by Article Eight or Sections such as 10.11. SECTION 10.07 Insurance. The Company will at all times keep all of the Company's and its Principal Subsidiaries' properties which are of an insurable nature insured with insurers, believed by the Company to be responsible, against loss or damage to the extent that property of similar character is usually so insured by Corporations similarly situated and owning like properties in similar geographic areas in which the Company or such Principal Subsidiary operates; provided that such insurance is 61 63 generally available at commercially reasonable rates, and provided further that the Company or such Principal Subsidiary may self-insure directly or through captive insurers or insurance cooperatives, to the extent that the Company determines that such practice is consistent with prudent business practices. Such insurance shall be in such amount, on such terms, in such forms and for such periods as are customary for similarly situated Persons in the Company's industry or in insurance markets available to the Company. SECTION 10.08 Statement by Officers as to Default. The Company will deliver to the Trustee at its Corporate Trust Office, within 120 days after the end of each fiscal year, a brief Officers' Certificate including a statement by the officer executing such certificate that in the course of performing his or her duties as an officer of the Company such officer would normally obtain knowledge of (i) whether or not any Default exists in the performance and observation of any terms, provisions and conditions of this Indenture and (ii) whether or not the Company has otherwise kept, observed, performed and fulfilled its obligations under this Indenture in all material respects. Such Officers' Certificate shall further state, as to the officer signing such certificate, to the knowledge of such officer, as of the date of such Officers' Certificate, (i) whether or not any Default exists, (ii) whether or not the Company during the preceding fiscal year kept, observed, performed and fulfilled in all material respects each and every covenant and obligation of the Company under this Indenture and (c) whether or not there was any Default in the performance and observance of any of the terms, provisions or conditions of this Indenture during such preceding fiscal year. If the officer signing the Officers' Certificate knows of such a Default, whether then existing or occurring during such preceding fiscal year, the Officers' Certificate shall describe such Default and its status with particularity. The Company shall also promptly notify the Trustee if the Company's fiscal year is changed so that the end thereof is on any date other than the then current fiscal year end date. For purposes of this Section 10.08, such compliance shall be determined without regard to any period of grace granted by the Trustee or requirement of notice under this Indenture. The Company will deliver to the Trustee, forthwith upon becoming aware of any default in the performance or observance of any covenant, agreement or condition contained in this Indenture, or any Event of Default, an Officers' Certificate specifying with particularity such Default or Event of Default and further stating what action the Company has taken or is taking or proposes to take with respect thereto. SECTION 10.09 Provision of Financial Statements. Whether or not the Company is subject to Section 13(a) or 15(d) of the Exchange Act, the Company will, to the extent permitted under the Exchange Act, file with the Trustee the annual reports, quarterly reports and other documents which the Company would have been required to file with the Commission pursuant to such Sections 13(a) or 15(d) if the Company were so subject, 62 64 such documents to be filed with the Commission on or prior to the respective dates (the "Required Filing Dates") by which the Company would have been required so to file such documents if the Company were so subject. The Company will also in any event (x) within 15 days of each Required Filing Date file with the Trustee copies of the annual reports, quarterly reports and other documents which the Company has filed with the Commission or would have been required to file with the Commission pursuant to Section 13(a) or 15(d) of the Exchange Act if the Company were subject to such Sections and (y) if filing such documents by the Company with the Commission is not permitted under the Exchange Act, promptly upon written request, supply copies of such documents to any prospective Noteholder at the Company's cost. SECTION 10.10 Limitation on Other Indebtedness. Neither the Company nor any Principal Subsidiary will create, incur, assume, guarantee or in any other manner become directly or indirectly liable for the payment of any Indebtedness that is senior in right of payment to the Notes. SECTION 10.11 Limitation on Liens. The Company will not, and will not permit any of its Principal Subsidiaries to, create, incur, assume or suffer to exist, any Lien of any kind securing any Indebtedness that is senior to, pari passu with or subordinate in right of payment to the Notes (including any assumption, guarantee or other liability with respect thereto by any of its Principal Subsidiaries) upon any Oil and Gas Properties of the Company or any of its Subsidiaries described in the Independent Reserve Report which are included in the Asset Value Coverage Ratio, unless the Notes are equally and ratably secured or rank prior to the Indebtedness secured by such Lien. SECTION 10.12 Waiver of Certain Covenants. The Company may omit in any particular instance to comply with any term, provision or condition set forth in Section 8.03 or Sections 10.05 through 10.07, 10.09 through 10.11 if before or after the time for such compliance the Holders of at least a majority in principal amount of the Outstanding Notes, by Act of such Noteholders, waive such compliance in such instance with such term, provision or condition, but no such waiver shall extend to or affect such term, provision or condition except to the extent so expressly waived, and, until such waiver shall become effective, the obligations of the Company and the duties of the Trustee in respect of any such term, provision or condition shall remain in full force and effect. 63 65 SECTION 10.13 Maintenance of Asset Value Coverage Ratio. The Company will maintain an Asset Value Coverage Ratio equal or greater than 1:1, such maintenance to be evidenced in part based on an Independent Reserve Report prepared as of the end of each fiscal year (as the same may be supplemented during such fiscal year) during the term of this Indenture. SECTION 10.14 Restrictions on Charter Amendments. The Company will not amend its Certificate of Incorporation or Bylaws except as required by law or except to the extent that such amendment would not have a material adverse effect on (a) the ability of the Company to perform its obligations under this Indenture or the Notes or (b) the rights of the Noteholders, except that neither (i) increases in the number of Shares and issuance thereof with related securities, nor (ii) designations of Preferred Stock of the Company, modifications of the terms of such designations and issuance thereof with related securities, nor (iii) modification or expansion of the indemnity provisions provided by the Company to its directors and officers, nor (iv) change of the Company's registered agent shall be deemed an amendment hereunder. SECTION 10.15 United States Withholding and Reporting Requirements. To the extent permitted by law, the Company will provide to the Trustee, the Paying Agent or to any Noteholder such statements, certificates or other documentation concerning the organization or operations of the Company as may be reasonably necessary to establish any exceptions or exemptions from United States federal income tax withholding and reporting requirements. ARTICLE ELEVEN REDEMPTION OF NOTES SECTION 11.01 Right of Redemption. At any time after July 30, 1999, the Notes may be redeemed, at the election of the Company, as a whole or from time to time in part. Redemption shall be subject to the conditions specified in the form of Note and at a Redemption Price equal to 100% of the principal amount thereof, together with accrued and unpaid interest to the Redemption Date, but only to the extent that all unmatured Coupons are attached to such Notes. 64 66 SECTION 11.02 Applicability of Article. Redemption of Notes at the election of the Company or otherwise, as permitted or required by any provision of this Indenture, shall be made in accordance with such provision and this Article. SECTION 11.03 Election to Redeem; Notice to Trustee. The action of the Company to redeem any Notes pursuant to Section 11.01 shall be evidenced by a Board Resolution. In case of any redemption pursuant to Section 11.01, the Company shall, at least 30 days and not more than 60 days prior to the Redemption Date fixed by the Company (unless a shorter notice shall be satisfactory to the Trustee), notify the Trustee of such Redemption Date and of the principal amount of Notes to be redeemed and shall deliver to the Trustee such documentation and records as shall enable the Trustee to select the Notes to be redeemed pursuant to Section 11.04. SECTION 11.04 Selection by Trustee of Notes to Be Redeemed. If less than all the Notes are to be redeemed, the particular Notes to be redeemed shall be selected not more than 60 days prior to the Redemption Date by the Trustee, from the Outstanding Notes not previously called for redemption, by such method as the Trustee shall deem fair and appropriate and which may provide for the selection for redemption of portions of the principal of Notes; provided, however, that no such partial redemption shall reduce the portion of the principal amount of a Note not redeemed to less than $50,000. The Noteholders do not have a right to a prorated redemption. The Trustee shall promptly notify the Company in writing of the Notes selected for redemption and, in the case of any Notes selected for partial redemption, the principal amount thereof to be redeemed. For all purposes of this Indenture, unless the context otherwise requires, all provisions relating to redemption of Notes shall relate, in the case of any Notes redeemed or to be redeemed only in part, to the portion of the principal amount of such Note which has been or is to be redeemed. If the Company shall so direct, Notes registered in the name of the Company or any Subsidiaries shall not be included in the Notes selected for redemption. 65 67 SECTION 11.05 Notice of Redemption. Notice of redemption shall be given in the manner provided for in Section 1.08 not less than 30 nor more than 60 days prior to the Redemption Date, to each Holder of Notes to be redeemed. All notices of redemption shall state: (a) the Redemption Date; (b) the Redemption Price; (c) if less than all Outstanding Notes are to be redeemed, the identification (and, in the case of a partial redemption, the principal amounts) of the particular Notes to be redeemed; (d) that on the Redemption Date the Redemption Price (together with accrued and unpaid interest, if any, to the Redemption Date payable as provided in Section 11.07, but only with respect to Notes with all unmatured Coupons attached) will become due and payable upon each such Note, or the portion thereof, to be redeemed, and that interest thereon will cease to accrue on and after said date; (e) the place or places where such Notes are to be surrendered for payment of the Redemption Price; and (f) pursuant to Section 3.13, any ISIN, CUSIP or other identifying numbers relating to the Notes. Notice of redemption of Notes to be redeemed at the election of the Company shall be given by the Company or, at the Company's request, by the Trustee in the name and at the expense of the Company. SECTION 11.06 Deposit of Redemption Price. Not less than one Business Day prior to any Redemption Date, the Company shall deposit with the Trustee or with a Paying Agent (or, if the Company is acting as its own Paying Agent, segregate and hold in trust as provided in Section 10.03) an amount of money sufficient to pay the Redemption Price of, and accrued and unpaid interest on, all the Notes which are to be redeemed on that date. 66 68 SECTION 11.07 Notes Payable on Redemption Date. Notice of redemption having been given as aforesaid, the Notes so to be redeemed shall, on the Redemption Date, become due and payable at the Redemption Price therein specified (together with accrued and unpaid interest, if any, to the Redemption Date, subject to the delivery of all unmatured and matured but unpaid Coupons), and from and after such date (unless the Company shall default in the payment of the Redemption Price) such Notes shall cease to bear interest. Upon surrender of any such Note for redemption in accordance with said notice, such Note shall be paid by the Company at the Redemption Price, together with accrued interest, if any, to the Redemption Date, to the extent that all matured and unpaid and unmatured Coupons, if any, are attached; provided, however, that instalments of interest whose Stated Maturity is on or prior to the Redemption Date shall be payable to the Holders of such Notes, or one or more Predecessor Notes, according to their terms. If any Note called for redemption shall not be so paid upon surrender by the Noteholder as prescribed hereunder thereof for redemption, the principal shall, until paid, bear interest from the Redemption Date at the rate prescribed therefor in the Notes. In the event that the Company shall default in making payment in full in respect of any Note which shall have been called for redemption prior to July 30, 2000, on the Redemption Dates the Conversion Right attaching to such Note will continue to be exercisable (unless previously exercised by the Trustee or the Company) up to, and including the close of business (at the place where the Note is deposited in connection with the exercise of the Conversion Right) on the date upon which the full amount of the monies payable in respect of such Note has been duly received the Trustee or the Principal Paying Agent or, if earlier, July 30, 2000. SECTION 11.08 Surrender of Notes Each Note should be presented for redemption together with all unmatured Coupons relating to such Note, failing which the full amount of any missing unmatured Coupon (or, in the case of payment not being made in full, that proportion of the full amount of the missing unmatured Coupons which the amount so paid bears to the total amount due) will be deducted from the amount due for payment. Each amount so deducted will be paid in the manner mentioned above against presentation and surrender (or, in the case of part payment only, endorsement) of such missing Coupon at any time before the expiry of six (6) years after the Relevant Date in respect of the relevant Note (whether or not such Coupon would otherwise have become void pursuant to Condition 10), or if later, five (5) years after the date on which such Coupon would have become due, but not thereafter. SECTION 11.09 Conversion on Redemption 67 69 (a) The Trustee may, at its absolute discretion (and without any responsibility for any loss occasioned thereby), within the period commencing on the date four (4) Business Days prior to, and ending at the close of business on the Business Day prior to the Redemption Date, of any of the Notes elect by notice in writing to the Company to convert as of such Redemption Date the aggregate number of Notes due for conversion on such date any Unexercised Notes into Shares at the Conversion Price applicable at such Redemption Date if all necessary consents (if any) have been obtained and the Trustee is satisfied or is advised by a reputable independent merchant bank appointed by it that the net proceeds of an immediate sale of the Shares arising from such conversion (disregarding any liability other than a liability of the Trustee for taxation or the payment of any capital, stamp, issue or registration duties consequent thereon) would be likely to exceed by 5 percent or more the amount of redemption monies and interest which would otherwise be payable in respect of interest accrued and unpaid since the Interest Payment Date immediately preceding such Redemption Date or if such date falls before the first Interest Payment Date, since the Closing Date in respect of such Unexercised Notes. (b) Subject to applicable law, the Trustee shall arrange for the sale on behalf of the Holders of the Unexercised Notes of the Shares issued on such conversion as soon as practicable, and (subject to any necessary consents being obtained and to the deduction by the Trustee of any amount which it determines to be payable in respect of its liability to taxation or the payment of any capital, stamp, issue or registration duties (if any) and any costs incurred by the Trustee in connection with that allotment and sale thereof) the net proceeds of sale together with accrued and unpaid interest payable in respect of such Unexercised Notes (if any) shall be held by the Trustee and distributed by the Principal Paying Agent rateably to the Holders of such Unexercised Notes against due presentation. The amount of such net proceeds of sale shall be treated for all purposes as the full amount due by the Company in respect of such Unexercised Notes. ARTICLE TWELVE CONVERSION SECTION 12.01 Conversion Right and Conversion Price. (a) Subject to and upon compliance with the provisions of this Article, at the option of the Noteholder, at any time from and after the first Business Day following termination of the Restricted Period and (i) up to the close of business on the second Business Day preceding July 30, 2000 (but in no event thereafter), or (ii) if such Note 68 70 shall have been called for redemption pursuant to Article Eleven, up to and including five (5) Business Days prior to the Redemption Date, provided, however, that the Company shall not have given notice of any Mandatory Conversion Date, any Note may be converted at the principal amount thereof into fully paid and non-assessable Conversion Shares at the Conversion Price. (b) The Conversion Price shall be adjusted in certain instances as provided in Section 12.04. (c) A holder of shares issued on conversion of Notes shall not be entitled to any rights for any Record Date which precedes the relevant Conversion Date or Mandatory Conversion Date, as the case may be. SECTION 12.02 Exercise of Conversion Right. (a) In order to exercise the Conversion Right, the Noteholder to be converted shall provide notice to the Conversion Agent that it intends to exercise its Conversion Right and shall surrender such Bearer Note or Notes and all unmatured Coupons, including the one for the next due interest payment, to the Conversion Agent at its corporate trust offices, or such other office of any Conversion Agent as published in an Authorized Newspaper from time to time, accompanied by written notice (as set forth in Exhibit E hereto) to the Conversion Agent that the Noteholder elects to convert such Note. A Conversion Notice once delivered shall be irrevocable. (b) Bearer Notes shall be deemed to have been converted on the Conversion Date, and at such time, except as provided in this Section 12.02 below, the rights of the Noteholders as Noteholders shall cease, and the Person or Persons entitled to receive the Common Stock issuable upon conversion shall be treated for all purposes as the record holder or holders of such Common Stock at such time. As promptly as practicable on or after the Conversion Date, the Company shall issue and shall deliver through the Conversion Agent at the Conversion Agent's office or agency a certificate or certificates for the number of full shares of Common Stock issuable upon such conversion. The Conversion Agent shall deliver the share certificate or certificates in accordance with the instructions set forth in the notice of exercise of Conversion Rights. (c) If the Conversion Date is a date other than an Interest Payment Date the Company shall not pay and the Noteholder shall not be entitled to receive any interest accrued on the Notes from the last Interest Payment Date prior to the Conversion Date. 69 71 (d) No Noteholder will be entitled upon conversion thereof to any payment or adjustment on account of interest on the Notes or dividends on the shares of Common Stock issued in connection therewith. SECTION 12.03 Fractions of Shares. The number of Shares to be issued on conversion of a Note will be determined by dividing the principal amount of the Note to be converted by the Conversion Price in effect on the Conversion Date, with the result being rounded down to the nearest whole number. No cash in lieu of or fractional shares of Common Stock shall be issued upon conversion of Notes. If more than one Note shall be surrendered for conversion at one time by the same Noteholder, the number of full shares which shall be issuable upon conversion thereof shall be computed on the basis of the aggregate principal amount of the Notes (or specified portions thereof) so surrendered. SECTION 12.04 Adjustment of Conversion Price. (a) Dividends or Distributions of Common Stock. In case the Company shall pay or make a dividend or other distribution on its Common Stock exclusively in Common Stock or shall pay or make a dividend or other distribution on any other class of capital stock of the Company which dividend or distribution includes Common Stock, the Conversion Price in effect at the opening of business on the day next following the date fixed for the determination of stockholders entitled to receive such dividend or other distribution shall be reduced by multiplying such Conversion Price by a fraction of which the numerator shall be the number of shares of Common Stock outstanding at the close of business on the date fixed for such determination and the denominator shall be the sum of such number of shares and the total number of shares constituting such dividend or other distribution, such reduction to become effective immediately after the opening of business on the day next following the date fixed for such determination. For the purposes of this Section 12.04(a), the number of shares of Common Stock at any time outstanding shall not include shares held in the treasury of the Company. (b) Dividends or Distributions of Rights, Warrants or Options to Purchase Common Stock. In case the Company shall pay or make a dividend or other distribution on its Common Stock consisting exclusively of, or shall otherwise issue to all holders of its Common Stock, rights, warrants or options entitling the holders thereof to subscribe for or purchase shares of Common Stock at a price per share less than the Market Price per share (determined as provided in Section 12.04(g)) of the Common Stock on the date fixed for the determination of stockholders entitled to receive such rights, warrants or options, 70 72 the Conversion Price in effect at the opening of business on the day following the date fixed for such determination shall be reduced by multiplying such Conversion Price by a fraction of which the numerator shall be the number of shares of Common Stock outstanding at the close of business on the date fixed for such determination plus the number of shares of Common Stock which the aggregate of the offering price of the total number of shares of Common Stock so offered for subscription or purchase would purchase at such Market Price and the denominator shall be the number of shares of Common Stock outstanding at the close of business on the date fixed for such determination plus the number of shares of Common Stock so offered for subscription or purchase, outstanding at the close of business on the date fixed for such reduction to become effective immediately after the opening of business on the day following the date fixed for such determination. For the purposes of this paragraph (b), the number of shares of Common Stock at any time outstanding shall not include shares held in the treasury of the Company. The Company shall not issue any rights, warrants or options in respect of shares of Common Stock held in the treasury of the Company. (c) Dividends or Distributions in Cash. In case the Company shall, by dividend or otherwise, make a distribution to all holders of its Common Stock exclusively in cash in an aggregate amount that, together with (i) the aggregate amount of any other distributions to all holders of its Common Stock made exclusively in cash within the 12 months preceding the date of payment of such distribution and in respect of which no Conversion Price adjustment pursuant to this Section 12.04(c) has been made and (ii) the aggregate of any cash plus the fair market value (as determined in good faith by the Board of Directors, whose determination shall be conclusive and described in a resolution of the Company's Board of Directors), as of the expiration of the tender or exchange offer referred to below, of consideration payable in respect of any tender or exchange offer by the Company or a Subsidiary for all or any portion of the Common Stock concluded within the 12 months preceding the date of payment of such distribution and in respect of which no Conversion Price adjustment pursuant to paragraph (f) of this Section 12.04 has been made, exceeds five percent (5%) of the product of the Market Price per share (determined as provided in Section 12.04(g)) of the Common Stock on the date fixed for stockholders entitled to receive such distribution times the number of shares of Common Stock outstanding on such date, the Conversion Price shall be reduced so that the same shall equal the price determined by multiplying the Conversion Price in effect immediately prior to the effectiveness of the Conversion Price reduction contemplated by this paragraph (c) by a fraction of which the numerator shall be the Market Price per share (determined as provided Section 12.04(g)) of the Common Stock on the date of such effectiveness less the amount of cash so distributed applicable to one share of Common Stock and the denominator shall be such Market Price per share of the Common Stock, such reduction 71 73 to become effective immediately prior to the opening of business on the day following the date fixed for the payment of such distribution. (d) All Other Distributions or Dividends. Subject to the last sentence of this paragraph (d), in case the Company shall, by dividend or otherwise, distribute to all holders of its Common Stock evidences of its indebtedness, shares of any class of capital stock, securities, cash or property (excluding any rights, warrants or options referred to in Section 12.04(b), any dividend or distribution paid exclusively in cash and any dividend or distribution referred to in Section 12.04(a), the Conversion Price shall be reduced so that the same shall equal the price determined by multiplying the Conversion Price in effect immediately prior to the effectiveness of the Conversion Price reduction contemplated by this paragraph (d) by a fraction of which the numerator shall be the Market Price per share (determined as provided in paragraph (g) of this Section) of the Common Stock on the date of such effectiveness less the fair market value (as determined in good faith by the Board of Directors, whose determination shall be conclusive and described in a resolution of the Company's Board of Directors and shall, in the case of securities being distributed for which prior thereto there is an actual or when issued trading market, be no less than the value determined by reference to the average of the Market Price over the period specified in the succeeding sentence), on the date of such effectiveness, of the portion of the evidences of indebtedness, shares of capital stock, securities, cash and property so distributed applicable to one share of Common Stock and the denominator shall be such Market Price per share of the Common Stock, such reduction to become effective immediately prior to the opening of business on the day next following the date fixed for the payment of such distribution (such date to being referred to as the "Reference Date"). If the Board of Directors determines the fair market value of any distribution for purposes of this paragraph (d) by reference to the actual or when issued trading market for any securities comprising such distribution, it must in doing so consider the prices in such market over the same period used in computing the Market Price per share pursuant to paragraph (g) of this Section. For purposes of this paragraph (d), any dividend or distribution that includes shares of Common Stock or rights, warrants or options to subscribe for or purchase shares of Common Stock shall be deemed instead to be (i) a dividend or distribution of the evidences of indebtedness, cash, property, shares of capital stock or securities other than such shares of Common Stock or such rights, warrants or options (making any Conversion Price reduction required by this paragraph (d)) immediately followed by (ii) a dividend or distribution of such shares of Common Stock or such rights, warrants or options (making any further Conversion Price reduction required by Section 12.04(a) or (b)), except (i) the Reference Date of such dividend or distribution as defined in this Section 12.04(d) shall be substituted as "the date fixed for the determination of stockholders entitled to receive such dividend or other distribution", 72 74 "the date fixed for the determination of stockholders entitled to receive such rights, warrants or options" and "the date fixed for such determination" within the meaning of Section 12.04(a) and (b) and (ii) any shares of Common Stock included in such dividend or distribution shall not be deemed "outstanding at the close of business on the date fixed for such determination" within the meaning of Section 12.04(a)). (e) Subdivision of Common Stock. In case outstanding shares of Common Stock shall be subdivided into a greater number of shares of Common Stock, the Conversion Price in effect at the opening of business on the day following the day upon which such subdivision becomes effective shall be proportionately reduced, and, conversely, in case outstanding shares of Common Stock shall each be combined into a smaller number of shares of Common Stock, the Conversion Price in effect at the opening of business on the day following the day upon which such combination becomes effective shall be proportionately increased, such reduction or increase, as the case may be, to become effective immediately after the opening of business on the day following the day upon which such subdivision or combination becomes effective. (f) Tender or Exchange Offer for Common Stock. In case a tender or exchange offer made by the Company or any Subsidiary for all or any portion of the Common Stock shall expire and such tender or exchange offer shall involve an aggregate consideration having a fair market value (as determined in good faith by the Board of Directors, whose determination shall be conclusive and described in a resolution of the Company's Board of Directors) at the last time (the "Expiration Time") tenders or exchanges may be made pursuant to such tender or exchange offer (as it may be amended) that, together with (i) the aggregate of the cash plus the fair market value (as determined in good faith by the Board of Directors, whose determination shall be conclusive and described in a resolution of the Company's Board of Directors), as of the expiration of the other tender or exchange offer referred to below, of consideration payable in respect of any other tender or exchange offer by the Company or a Subsidiary for all or any portion of the Common Stock concluded within the preceding 12 months and in respect of which no Conversion Price adjustment pursuant to this paragraph (f) has been made and (ii) the aggregate amount of any distributions to all holders of the Common Stock made exclusively in cash within the preceding 12 months and in respect of which no Conversion Price adjustment pursuant to Section 12.04(e) has been made, exceeds five percent (5%) of the product of the Market Price per share (determined as provided in Section 12.04(g)) of the Common Stock on the Expiration Time times the number of shares of Common Stock outstanding (including any tendered shares) on the Expiration Time, the Conversion Price shall be reduced (but not increased) so that the same shall equal the price determined by multiplying the Conversion Price in effect immediately prior to the Expiration Time by a fraction of which the 73 75 numerator shall be (i) the product of the Market Price per share (determined as provided in Section 12.04(g)) of the Common Stock at the Expiration Time times the number of shares of Common Stock outstanding (including any tendered or exchanged shares) at the Expiration Time minus (ii) the fair market value (determined as aforesaid) of the aggregate consideration payable to stockholders based on the acceptance (up to any maximum specified in the terms of the tender or exchange offer) of all shares validly tendered or exchanged and not withdrawn as of the Expiration Time (the shares deemed so accepted, up to any such maximum, being referred to as the "Purchased Shares") and the denominator shall be the product of (i) such Market Price per share at the Expiration Time times (ii) such number of outstanding shares at the Expiration Time less the number of Purchased Shares, such reduction to become effective immediately prior to the opening of business on the day following the Expiration Time. (g) Determination of Market Price. For the purpose of any computation of the Market Price under this paragraph (g) and Section 12.04(b), (d) and (e), (i) if the "ex" date (as hereinafter defined) for any event (other than the issuance or distribution requiring such computation) that requires an adjustment to the Conversion Price pursuant to paragraph (a), (b), (c), (d), (e) or (f) above ("Other Event") occurs on or after the tenth Stock Exchange Business Day prior to the date in question and prior to the "ex" date for the issuance or distribution requiring such computation (the "Current Event"), the closing price for each Stock Exchange Business Day prior to the "ex" date for such Other Event shall be adjusted by multiplying such closing price by the same fraction by which the Conversion Price is so required to be adjusted as a result of such Other Event, (ii) if the "ex" date for any Other Event occurs after the "ex" date for the Current Event and on or prior to the date in question, the closing price for each Stock Exchange Business Day on and after the "ex" date for such Other Event shall be adjusted by multiplying such closing price by the reciprocal of the fraction by which the Conversion Price is so required to be adjusted as a result of such Other Event, (iii) if the "ex" date for any Other Event occurs on the "ex" date for the Current Event, one of those events shall be deemed for purposes of clauses (i) and (ii) of this proviso to have an "ex" date occurring prior to the "ex" date for the other event, and (iv) if the "ex" date for the Current Event is on or prior to the date in question, after taking into account any adjustment required pursuant to clause (ii) of this proviso, the closing price for each Stock Exchange Business Day on or after such "ex" date shall be adjusted by adding thereto the amount of any cash and the fair market value on the date in question (as determined in good faith by the Board of Directors in a manner consistent with any determination of such value for purposes of this Section 12.04(c) or (d), whose determination shall be conclusive and described in a resolution of the Company's Board of Directors) of the portion of the rights, warrants, options, evidences of indebtedness, shares of capital stock, securities, cash or property being distributed 74 76 applicable to one share of Common Stock. For the purpose of any computation under Section 12.04(f), the Market Price per share of Common Stock on any date in question shall be deemed to be the Market Price on the date selected by the Company commencing on or after the latest (the "Commencement Date") of (i) the date 20 Stock Exchange Business Days before the date in question, (ii) the date of commencement of the tender or exchange offer requiring such computation and (iii) the date of the last amendment, if any, of such tender or exchange offer involving a change in the maximum number of shares for which tenders are sought or a change in the consideration offered, and ending not later than the date of the Expiration Time of such tender or exchange offer (or, if such Expiration Time occurs before the close of trading on a Stock Exchange Business Day, not later than the Stock Exchange Business Day immediately preceding the date of such Expiration Time); provided, however, that if the "ex" date for any Other Event (other than the tender or exchange offer requiring such computation) occurs on or after the Commencement Date and on or prior to the date of the Expiration Time for the tender or exchange offer requiring such computation, the closing price for each Stock Exchange Business Day prior to the "ex" date for such Other Event shall be adjusted by multiplying such closing price by the same fraction by which the Conversion Price is so required to be adjusted as a result of such other event. For purposes of this paragraph, the term "ex" date, (i) when used with respect to any issuance or distribution, means the first date on which the Common Stock trades regular way on the relevant exchange or in the relevant market from which the closing price was obtained without the right to receive such issuance or distribution, (ii) when used with respect to any subdivision or combination of shares of Common Stock, means the first date on which the Common Stock trades regular way on such exchange or in such market after the time at which such subdivision or combination becomes effective, and (iii) when used with respect to any tender or exchange offer means the first date on which the Common Stock trades regular way on such exchange or in such market after the Expiration Time of such tender or exchange offer. (h) Further Reductions for Federal Income Tax. The Company may make such reductions in the Conversion Price, in addition to those required by Section 12.04 (a), (b), (c), (d), (e) and (f), as it considers to be advisable in order that any event treated for Federal income tax purposes as a dividend of stock or stock rights shall not be taxable to the recipients. (i) Adjustments to be Carried Forward. No adjustment in the Conversion Price shall be required unless such adjustment would require an increase or decrease of at least five percent (5%) in the Conversion Price; provided, however, that any adjustments which by reason of this paragraph (j) are not required to be made shall be carried forward and taken into account in any subsequent adjustment. 75 77 SECTION 12.05 Notice of Adjustments of Conversion Price. Whenever the Conversion Price is adjusted as herein provided the Company shall compute the adjusted Conversion Price in accordance with Section 12.04 and shall prepare a certificate signed by the chief financial officer of the Company setting forth the adjusted Conversion Price and showing in reasonable detail the facts upon which such adjustment is based, and such certificate shall forthwith be delivered to the Trustee, the Paying Agent and the Conversion Agent, and the Company shall cause notice thereof to be published in accordance with Section 1.08 within ten (10) Business Days of the effective date of such adjustment. SECTION 12.06 Notice of Certain Corporate Action. In case: (a) the Company shall declare a dividend (or any other distribution) on its Common Stock payable (i) otherwise than exclusively in cash or (ii) exclusively in cash in an amount that would require a Conversion Price adjustment pursuant to Section 12.04(c); or (b) the Company shall authorize the granting to the holders of its Common Stock of rights, warrants or options to subscribe for or purchase any shares of capital stock of any class or of any other rights (excluding employee stock options); or (c) of any reclassification of the Common Stock of the Company (other than a subdivision or combination of its outstanding shares of Common Stock), or of any consolidation or merger to which the Company is a party and for which approval of any stockholders of the Company is required, or of the sale or transfer of all or substantially all of the assets of the Company; or (d) of the voluntary or involuntary dissolution, liquidation or winding up of the Company; or (e) the Company or any Subsidiary of the Company shall commence a tender or exchange offer for all or a portion of the Company's outstanding shares of Common Stock (or shall amend any such tender or exchange offer); then the Company shall cause to be mailed to the Trustee, the Paying Agent, the Conversion Agent and to be published in the manner provided under Section 1.08 hereof within ten (10) Business Days after the date on which notice is sent to the holders of the Company's Common Stock, a 76 78 notice stating (i) the date on which a record is to be taken for the purpose of such dividend, distribution or granting of rights, warrants or options, or, if a record is not to be taken, the date as of which the holders of Common Stock of record to be entitled to such dividend, distribution, rights, warrants or options are to be determined, or (ii) the date on which such reclassification, consolidation, merger, sale, transfer, dissolution, liquidation or winding up is expected to become effective, and the date as of which it is expected that holders of Common Stock of record shall be entitled to exchange their shares of Common Stock for securities, cash or other property deliverable upon such re- classification, consolidation, merger, sale, transfer, dissolution, liquidation or winding up, or (iii) the date on which such tender offer commenced, the date on which such tender offer is scheduled to expire unless extended, the consideration offered and the other material terms thereof (or the material terms of any amendment thereto). SECTION 12.07 Company to Reserve Common Stock. The Company shall at all times reserve and keep available, free from pre-emptive or similar rights, out of its authorized but unissued Common Stock, solely for the purpose of effecting the conversion of Notes, the whole number of Shares then issuable upon the conversion in full of all Outstanding Notes. SECTION 12.08 Taxes on Conversions. The Company will pay any and all taxes that may be payable in respect of the issue or delivery of Shares on conversion of Notes pursuant hereto. The Company shall not, however, be required to pay any tax which may be payable in respect of any transfer involved in the issue and delivery of Shares in a name other than that of the Holder of the Notes to be converted, and no such issue or delivery shall be made unless and until the Person requesting such issue has paid to the Company the amount of any such tax, or has established to the satisfaction of the Company that such tax has been paid. SECTION 12.09 Cancellation of Converted Bearer Notes. All Bearer Notes delivered for conversion to the Conversion Agent shall be cancelled by the Company, and shall not under any circumstances be reissued. 77 79 SECTION 12.10 Provisions in Case of Reclassification Consolidation, Merger or Sale of Assets. In the event that the Company shall be a party to any transaction (including without limitation any (i) recapitalization or reclassification of the Common Stock (other than a change in par value, or from par value to no par value, or from no par value to par value, or as a result of a subdivision or combination of the Common Stock), (ii) any consolidation of the Company with, or merger of the Company into, any other person, any merger of another person into the Company (other than a merger which does not result in a reclassification, conversion, exchange or cancellation of all of the outstanding shares of Common Stock of the Company), (iii) any sale or transfer of all or substantially all of the assets of the Company, or (iv) any compulsory share exchange pursuant to which the Common Stock is converted into the right to receive other securities, cash or other property, then lawful provision shall be made as part of the terms of such transaction whereby the Holder of each Note then outstanding shall have the right thereafter to convert such Note only into the kind of common stock receivable upon such transaction by a holder of Common Stock (at an adjusted Conversion Price equal to (a) the Conversion Price determined pursuant to Section 12.04 as though all such securities, cash or property (other than common stock) had been distributed in a dividend covered by Section 12.04(d) with an "ex" date on the date of such transaction divided by (b) the number of shares (or fraction thereof) of common stock receivable upon such transaction in respect of each share of Common Stock). The Person formed by such consolidation or resulting from such merger or which acquired such assets or which acquired the Company's Shares, as the case may be, shall execute and deliver to each of the Noteholders an amendment to this Indenture as provided for under Article Nine. Such amendment shall provide for adjustments which, for events subsequent to the effective date of such amendment, shall be as nearly equivalent as may be practicable to the adjustments provided for in this Article and shall provide for the assumption by such other Person, if any, of the Company's obligations under this Indenture and the Notes. The above provisions of this Section 12.10 shall similarly apply to successive transactions of the foregoing type. SECTION 12.11 Mandatory Conversion. At any time after July 30, 1997, the Notes may be converted in whole, at the Company's option, if at any time the Market Price of the Common Stock shall have equalled or exceeded 135% of the Conversion Price in effect on such Stock Exchange Business Day on each Stock Exchange Business Day in any 30 consecutive calendar day period, the first day of which falls on or after November 28, 1996. In the event that the Company has met the criteria for Mandatory Conversion at any time, the Company shall give notice to the Noteholders in the manner provided for in Section 1.08 within 30 calendar days of the date on which such criteria has been met. 78 80 At any time after July 30, 1997, the Company may require such Noteholders to convert all of such Notes otherwise pursuant to the terms of this Article. The Company shall deliver to the Trustee a notice in the form of Exhibit F hereto and the Company shall cause to be published once in accordance with Section 1.08 hereof a notice of Mandatory Conversion not less than thirty (30) and not more than (60) calendar days prior to the Mandatory Conversion Date. Such notice shall specify the Mandatory Conversion Date. After the Mandatory Conversion Date, the Notes will no longer represent Indebtedness of the Company and will no longer accrue interest or require the Company to make any payment of principal; and the Company's obligations to make any further payments with respect to the Notes will terminate (except for this Section 12.11 and the Section 12.02(c)); and the only rights of a Holder of a Note not surrendered for conversion pursuant to the preceding sentence will be to (i) receive the number of Conversion Shares such Noteholder would have received had the Holder's Note or Notes been surrendered for conversion as required hereby, (ii) the payment referred to in Section 12.02(c) and (iii) the payment referred to in Section 12.03. Any notice which is published in the manner herein provided shall be conclusively presumed to be given and any defect in such notice to the Noteholder designated for required conversion shall not affect the validity of the proceedings for the required conversion of any other Bearer Note. ARTICLE THIRTEEN DEFEASANCE AND COVENANT DEFEASANCE SECTION 13.01 Company's Option to Effect Defeasance or Covenant Defeasance. The Company may, at its option by Board Resolution, at any time, with respect to the Notes, elect to have either Section 13.02 or Section 13.03 be applied to all Outstanding Notes upon compliance with the conditions set forth below in this Article. The Company shall promptly give notice of such election to the Trustee. SECTION 13.02 Legal Defeasance and Discharge. Upon the Company's exercise under Section 13.01 of the option applicable to this Section 13.02, the Company shall be deemed to have been discharged from its obligations with respect to all Outstanding Notes on the date the conditions set forth in Section 13.04 are satisfied (hereinafter, "legal defeasance"). For this purpose, such legal defeasance means that the Company shall be deemed to have paid and discharged the entire indebtedness represented by the Outstanding Notes, which shall thereafter be deemed to be "Outstanding" only for the purposes of Section 13.05 and the other Sections of this Indenture referred to in (A) and (B) below, and to 79 81 have satisfied all its obligations under such Notes, including the obligation to pay interest on the Notes, and this Indenture insofar as such Notes are concerned (and the Trustee, at the expense of the Company, shall execute proper instruments acknowledging the same), except for the following which shall survive until otherwise terminated or discharged hereunder: (A) the rights of Holders of Outstanding Notes to receive, solely from the trust fund described in Section 13.04 and as more fully set forth in such Section, payments in respect of the principal of and interest on such Notes when such payments are due, (B) the Company's obligations with respect to such Notes under Sections 3.04, 3.05, 3.08, 10.02 and 10.03 and with respect to the Trustee under Section 6.06, (C) the rights, powers, trusts, duties and immunities of the Trustee hereunder and (D) this Article. Subject to compliance with this Article, the Company may exercise its option under this Section 13.02 notwithstanding the prior exercise of its option under Section 13.03 with respect to the Notes. SECTION 13.03 Covenant Defeasance. Upon the Company's exercise under Section 13.01 of the option applicable to this Section 13.03, the Company shall be released from its obligations under any covenant contained in Sections 10.04 through 10.15 with respect to the Outstanding Notes on and after the date the conditions set forth in Section 13.04 are satisfied (hereinafter, "covenant defeasance"), and the Notes shall thereafter be deemed not to be "Outstanding" for the purposes of any request, demand, authorization, direction, declaration, notice, consent, waiver or Act of Noteholders (and the consequences of any thereof) in connection with such covenants, but shall continue to be deemed "Outstanding" for all other purposes hereunder. For this purpose, such covenant defeasance means that, with respect to the Outstanding Notes, the Company may omit to comply with and shall have no liability in respect of any term, condition or limitation set forth in any such covenant, whether directly or indirectly, by reason of any reference elsewhere herein to any such covenant or by reason of any reference in any such covenant to any other provision herein or in any other document and such omission to comply shall not constitute a Default or an Event of Default under Section 5.01(d), but, except as specified above, the remainder of this Indenture and such Notes shall be unaffected thereby. SECTION 13.04 Conditions to Legal Defeasance or Covenant Defeasance. The following shall be the conditions to application of either Section 13.02 or Section 13.03 to the Outstanding Notes: (a) The Company shall irrevocably have deposited or caused to be deposited with the Trustee (or another trustee satisfying the requirements of Section 6.07 who shall agree to comply with the provisions of this Article applicable to it) as trust funds in trust 80 82 for the purpose of making the following payments, specifically pledged as security for, and dedicated solely to, the benefit of the Holders of such Notes, (A) money, which may include funds distributed from the Seggregated Account, in an amount, or (B) U.S. Government Obligations which through the scheduled payment of principal and interest in respect thereof in accordance with their terms will provide, not later than one day before the due date of any payment, money in an amount, or (C) a combination thereof, sufficient, in the opinion of a nationally recognized firm of independent public accountants expressed in a written certification thereof delivered to the Trustee, to pay and discharge, and which shall be applied by the Trustee (or other qualifying trustee) to pay and discharge, the principal of and interest on the Outstanding Notes on the Stated Maturity (or Redemption Date, if applicable) of such principal or instalment of interest; provided that the Trustee shall have been irrevocably instructed to apply such money or the proceeds of such U.S. Government Obligations to said payments with respect to the Notes; and provided further that, upon the effectiveness of this Section 13.04, the money or U.S. Government Obligations deposited shall not be subject to the rights of the Noteholders pursuant to the provisions of this Article. Before or after such a deposit, the Company may give to the Trustee, in accordance with Section 11.03 hereof, a notice of its election to redeem all of the Outstanding Notes at a future date in accordance with Article Eleven hereof, which notice shall be irrevocable. Such irrevocable redemption notice, if given, shall be given effect in applying the foregoing. (b) No Default or Event of Default with respect to the Notes shall have occurred and be continuing on the date of such deposit or, insofar as paragraphs (h) and (i) of Section 5.01 hereof are concerned, at any time during the period ending on the 91st day after the date of such deposit (it being understood that this condition shall not be deemed satisfied until the expiration of such period). (c) No event or condition shall exist that pursuant to the provisions of Section 13.02 or 13.03 would prevent the Company from making payments of the principal of or interest on the Notes on the date of such deposit or at any time during the period ending on the 91st day after the date of such deposit (it being understood that this condition shall not be deemed satisfied until the expiration of such period). (d) Such legal defeasance or covenant defeasance shall not result in a breach or violation of, or constitute a default under any material agreement or instrument to which the Company is a party or by which it is bound. (e) In the case of an election under Section 13.02, the Company shall have delivered to the Trustee an Opinion of Counsel stating that the Holders of the Outstanding 81 83 Notes will not recognize income, gain or loss for federal income tax purposes as a result of such defeasance and will be subject to federal income tax on the same amounts, in the same manner and at the same times as would have been the case if such defeasance had not occurred. (f) The Company shall have delivered to the Trustee an Officers' Certificate and an Opinion of Counsel, each stating that all conditions precedent provided for relating to either the legal defeasance under Section 13.02 or the covenant defeasance under Section 13.03 (as the case may be) have been complied with. SECTION 13.05 Deposited Money and U.S. Government Obligations to Be Held in Trust; Other Miscellaneous Provisions. Subject to the provisions of the last paragraph of Section 10.03, all money and U.S. Government Obligations (including the proceeds thereof) deposited with the Trustee (or other qualifying trustee--collectively for purposes of this Section 13.05, the "Trustee") pursuant to Section 13.04 in respect of the Outstanding Notes shall be held in trust and applied by the Trustee, in accordance with the provisions of such Notes and this Indenture, to the payment, either directly or through any Paying Agent (including the Company acting as its own Paying Agent) as the Trustee may determine, to the Holders of such Notes of all sums due and to become due thereon in respect of principal and interest, but such money and U.S. Government Obligations need not be segregated from other funds except to the extent required by law. The Company shall pay and indemnify the Trustee against any tax, fee or other charge imposed on or assessed against the U.S. Government Obligations deposited pursuant to Section 13.04 or the principal and interest received in respect thereof other than any such tax, fee or other charge which by law is for the account of the Holders of the Outstanding Notes. Anything in this Article to the contrary notwithstanding, the Trustee shall deliver or pay to the Company from time to time upon Company Request any money or U.S. Government Obligations held by it as provided in Section 13.04 which, in the opinion of a nationally recognized firm of independent public accountants expressed in a written certification thereof delivered to the Trustee, are in excess of the amount thereof which would then be required to be deposited to effect an equivalent legal defeasance or covenant defeasance, as applicable, in accordance with this Article. 82 84 SECTION 13.06 Reinstatement. If the Trustee or any Paying Agent is unable to apply any money or U.S. Government Obligations in accordance with Section 13.05 by reason of any order or judgment of any court or governmental authority enjoining, restraining or otherwise prohibiting such application, then the Company's obligations under this Indenture and the Notes shall be revived and reinstated as though no deposit had occurred pursuant to Section 13.02 or 13.03, as the case may be, until such time as the Trustee or Paying Agent is permitted to apply all such money or U.S. Government Obligations in accordance with Section 13.05; provided, however, that no action taken in good faith by the Company after a deposit of money or U.S. Government Obligations or both pursuant to Section 13.05 and prior to the revival and reinstatement of obligations under this Indenture and the Notes pursuant to this Section 13.06 shall constitute the basis for the assertion of an Event of Default pursuant to Section 5.01; and provided, further, that if the Company makes any payment of principal of or interest on any Note following the reinstatement of its obligations, the Company shall be subrogated to the rights of the Holders of such Notes to receive such payment from the money or U.S. Government Obligations held by the Trustee or Paying Agent. ARTICLE FOURTEEN SENIORITY OF NOTES SECTION 14.01 Seniority of the Notes. The Company's obligations under the Notes and the Coupons and hereunder do and will rank at all times at least pari passu with all other present and future Indebtedness of the Company and shall be superior in rank to all existing and future Subordinated Obligations. The Company covenants and agrees that, except with respect to any Lien, the Indebtedness represented by the Notes and the Coupons and the payment of the principal of and interest on each and all of the Notes and Coupons are hereby expressly made pari passu to all other present and future Indebtedness other than all Subordinated Obligations. 83 85 ARTICLE FIFTEEN IMMUNITY OF INCORPORATORS, STOCKHOLDERS, OFFICERS AND DIRECTORS SECTION 15.01 Liability Solely Corporate. No recourse shall be had for the payment of the principal of or interest on any Notes or any part thereof, or for any claim based thereon or otherwise in respect thereof, or of the indebtedness represented thereby, or upon any obligation, covenant or agreement of this Indenture, against any incorporator, or against any stockholder, officer or director, as such, past, present or future, of the Company, or of any predecessor or successor Person, either directly or through the Company or any such predecessor or successor Person, whether by virtue of any constitution, statute or rule of law, or by the enforcement of any assessment or penalty or otherwise, it being expressly agreed and understood that this Indenture and all the Notes are solely corporate obligations, and that no personal liability whatsoever shall attach to, or be insured by, any such incorporator, stockholder, officer or director, as such, past, present or future, of the Company or of any predecessor or successor Person, either directly or through the Company or any such predecessor or successor Person, because of the indebtedness hereby authorized or under or by reason of any of the obligations, covenants, promises or agreements contained in this Indenture or in any of the Notes or to be implied herefrom or therefrom; and that any such personal liability is hereby expressly waived and released as a condition of, and as part of the consideration for, the execution of this Indenture and the issue of the Notes; provided, however, that nothing herein or in the Notes contained shall be taken to prevent recourse to and the enforcement of the liability, if any, of any stockholder or subscriber to capital stock of the Company upon or in respect of shares of capital stock not fully paid up. This Indenture may be signed in any number of counterparts each of which so executed shall be deemed to be an original, but all such counterparts shall together constitute but one and the same Indenture. 84 86 IN WITNESS WHEREOF, the parties hereto have caused this Indenture to be duly executed, all as of the day and year first above written. HARKEN ENERGY CORPORATION By: /s/ Larry E. Cummings Name: Larry E. Cummings Title: Vice President MARINE MIDLAND BANK, as Trustee By: /s/ Julian M. Doull Name: Julian M. Doull Title: Supervisor 85 EX-10.2 3 PLACING AGREEMENT 1 EXHIBIT 10.2 HARKEN ENERGY CORPORATION Up to US$40,000,000 6.5% Senior Convertible Notes Due 2000 PLACING AGREEMENT July 19, 1996 2 CONTENTS
Clause Heading Page - ------ ------- ---- 1. Interpretation . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1 -------------- 2. Release of the Press Announcement and Delivery of Documents . . . . . . . . . . . . . . . . . . . . . . . . 3 ----------------------------------------------------------- 3. Placing of the Notes . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 3 -------------------- 4. Representations and Warranties of the Company . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 4 --------------------------------------------- 5. The Placing . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 9 ----------- 6. Undertakings of the Company . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 10 --------------------------- 7. Indemnification and Contribution . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 11 -------------------------------- 8. Fees and Expenses . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 13 ----------------- 9. Closing . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 14 ------- 10. Termination . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 16 ----------- 11. Survival . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 16 -------- 12. Time . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 17 ---- 13. Notices . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 17 ------- 14. Governing Law . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 18 ------------- The Schedule . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 21 - ------------
2 3 THIS AGREEMENT is made on July 19, 1996, BETWEEN (1) HARKEN ENERGY CORPORATION (the "Company"); (2) RAUSCHER PIERCE & CLARK, INC. and RAUSCHER PIERCE & CLARK LIMITED (together "RPC") and HSBC INVESTMENT BANK PLC ("HSBC") (together with RPC, the "Lead Managers"); and (3) BANCA DEL GOTTARDO, J. HENRY SCHRODER BANK AG, JEFFERIES INTERNATIONAL LTD, INVESTMENTBANK AUSTRIA AG and D.E. SHAW SECURITIES INTERNATIONAL (together with the Lead Managers, the "Managers"). WHEREAS (A) The Company has authorised the creation and issue of up to US$40,000,000 in aggregate principal amount of 6.5% Senior Convertible Notes Due 2000 (the "Notes"). The Notes will be in bearer form and are to be convertible into shares of the common stock (the "Common Stock") of the Company (the "Shares") at the Conversion Price of $2.50. (B) The Notes will be in the denominations of U.S. $50,000 and integral multiples thereof. The Notes will initially be represented by a temporary global bearer note (the "Global Note") which will be exchangeable for bearer notes in definitive form ("Bearer Notes"), with interest coupons ("Coupons") attached, in the circumstances specified in the Global Note. (C) The Notes will be subject to and have the benefit of a trust indenture (the "Trust Indenture"), a draft of which is in the agreed form and to which will be scheduled the forms of the Global Note and the Bearer Notes. The Trust Indenture, will be made between the Company and Marine Midland Bank N.A. (the "Trustee") as trustee for the holders of the Notes from time to time. (D) The Company will, in relation to the Notes, enter into a paying and conversion agency agreement (the "Agency Agreement") with Midland Bank plc (the "Principal Paying Agent" and "Principal Conversion Agent") and Banca Del Gottardo (a "Paying Agent" and "Conversion Agent") and the Trustee, a draft of which is in the agreed form. (E) The Lead Managers have conditionally agreed on and subject to the terms hereof to act as agent for the Company to use their best efforts to procure Placees for all the Notes. The Issue is not underwritten. IT IS AGREED as follows: 1. Interpretation 1.1 Definitions: In this Agreement, in addition to the definitions contained in the recitals, the following expressions have the following meanings: 1 4 "agreed form" means that the form of the document in question has been agreed between the proposed parties thereto and by the parties hereto prior to the Closing Date and (for the purposes of identification signed by or on behalf of) each of such parties and that either a copy thereof has been signed for the purpose of identification on behalf of Bracewell & Patterson, L.L.P. or such document has been signed on behalf of the parties thereto and delivered to Bracewell & Patterson, L.L.P. to be held in escrow pending release on the Closing Date; "Cedel" means Cedel Bank, societe anonyme; "Closing Date" means, subject to Clause 9.2, July 30, 1996; "Conditions" means the terms and conditions of the Notes as scheduled to the agreed form of the Trust Indenture as the same may be modified prior to the Closing Date, and any reference to a numbered "Condition" is to a correspondingly numbered provision thereof; "Conversion Price" has the meaning given to it in Condition 6; "Euroclear" means Morgan Guaranty Trust Company of New York, Brussels office, as operator of the Euroclear System; "Event of Default" means one of those events specified in Condition 11; "Issue" means the proposed issue of the Notes described in the Offering Circular; "Issue Documents" means the Trust Indenture and the Agency Agreement; "Issue Price" means 100 percent of the aggregate principal amount of the Notes; "Lien" has the meaning given to it in the Trust Indenture; "Offering" means the offering of the Notes pursuant to the Offering Circular; "Offering Circular" means the final offering circular, including all documents incorporated by reference therein to the extent such documents are not superseded in the Offering Circular prepared in connection with the Issue, as the same may be amended or supplemented on or before the Closing Date; "Placees" has the meaning given to it in Clause 5.1; "Placement" means the offering of Notes made pursuant to the Offering Circular; "Person" has the meaning given to it in the Trust Indenture; "Press Announcement" means the press announcement to be mutually agreed by the Company and the Lead Managers; "Principal Subsidiary" has the meaning given to it in the Trust Indenture; 2 5 "Securities Act" means the United States Securities Act of 1933, as amended; "Stabilising Manager" means HSBC, acting in the capacity as stabilising manager; "Subsidiary" has the meaning given to it in the Trust Indenture; "U.S.$" and "U.S. dollars" denote the lawful currency for the time being of the United States of America; and "Warrant Shares" means the shares of Common Stock of the Company issuable upon exercise of the Lead Manager Warrants and the EnCap Warrants. 1.2 Clauses and Schedules: Any reference in this Agreement to a Clause or a Schedule is, unless otherwise stated, to a clause hereof or a schedule hereto. 1.3 Headings: Headings and sub-headings are for ease of reference only and shall not affect the construction of this Agreement. 2. Release of the Press Announcement and Delivery of Documents 2.1 On or immediately following the Closing Date, the Company shall release the Press Announcement in the agreed form to the press in compliance with Regulation S of the Securities Act. 2.2 The Company shall as soon as practicable following execution of this Agreement and in any event, subject to Clause 2.3, by no later than 2.00 p.m. (London time) on the Closing Date, deliver, or procure that there are delivered, to the Lead Managers, in the agreed form: (a) the Issue Documents; (b) a legal opinion of Haynes and Boone, L.L.P.; (c) the closing certificates of the Company; and (d) the auditors comfort letter. 2.3 The Lead Managers may, in their discretion, waive the requirement that the Company deliver to them any of the documents listed in Clause 2.2 or may extend the time for delivery of any of the documents. Any waiver or extension may be granted by the Lead Managers subject to such conditions as they determine. 3. Placing of the Notes 3.1 The Company undertakes to the Managers that: 3 6 (a) subject to and in accordance with the provisions of this Agreement, the Company will issue the Notes on the Closing Date, in accordance with this Agreement and the Trust Indenture; and (b) the Company will, execute and deliver the Issue Documents on the Closing Date. 3.2 In connection with this issue, the Stabilising Manager may over-allot or effect transactions which stabilise or maintain the market price of the Notes at a level which might not otherwise prevail. Such stabilising, if commenced, may be discontinued at any time. Such stabilising shall be conducted in accordance with all applicable laws and rules. Any loss or profit sustained as a consequence of any such over-allotment or stabilising shall, as against the Company, be for the account of the Managers. The Managers acknowledge that the Company has not authorised the creation and issue of Notes in excess of U.S.$40,000,000 in aggregate principal amount. 3.3 Each Manager warrants and represents to the Company and each other Manager that each contract Note in the agreed form executed by such Manager selling the Notes shall contain the following legend: "Neither the Notes nor the Shares of Common Stock issuable upon conversion of the Notes have been or will be registered under the United States Securities Act of 1933, as amended (the "Securities Act"), and the Notes and the Shares may not be offered, sold, transferred, pledged, converted or otherwise disposed of in the U.S. or to, or for the account or benefit of, any "U.S. person" unless the Notes and the Shares have been registered under the Securities Act and any applicable state securities or blue sky laws or exemptions from the registration requirements of such laws are available. Any United States person who holds this obligation will be subject to limitations under the U.S. income tax laws, including the limitations provided in Sections 165(j) and 1287(a) of the United States Internal Revenue Code of 1986, as amended". 4. Representations and Warranties of the Company 4.1 The Company represents and warrants to the Managers, in their capacity as Managers and as representatives of each of the Holders of the Notes, that: (a) the Company is duly incorporated and in good standing under the laws of the State of Delaware and has the requisite power and authority to create, issue, offer and sell the Notes, to execute this Agreement and the Issue Documents and to undertake and perform its obligations herein and therein; (b) each Principal Subsidiary of the Company is (i) a corporation duly organized, validly existing and in good standing under the laws of its jurisdiction of incorporation, (ii) has all requisite power and authority and all necessary licenses and permits to own and operate its Properties and to carry on its business as now conducted and as presently proposed to be conducted, except as would not have a material adverse effect on the Company and the Subsidiaries taken as a whole, and (iii) is duly licensed or qualified and is authorized to do 4 7 business and is in good standing as a foreign corporation in each jurisdiction where the character of its Properties or the nature of its activities makes such licensing or qualification necessary, except as would not have a material adverse effect on the Company and the Subsidiaries taken as a whole. (c) The authorized and outstanding capital stock of the Company is as set out in the Offering Circular, and all of the issued Shares have been duly and validly authorized and issued and are fully paid and non-assessable. All of the outstanding shares of capital stock of the Subsidiaries have been duly and validly authorized and issued and are fully paid and non-assessable. All of the outstanding shares of capital stock of each Principal Subsidiary are owned directly or indirectly by the Company free and clear of any Liens. Except as disclosed in the Offering Circular, the Company does not own, directly or indirectly, any equity or debt securities of any other company, corporation, partnership, joint venture or other entity which are material to the business or operations of the Company. (d) the execution, delivery and performance of this Agreement and the Issue Documents has been duly authorized by all requisite corporate action of the Company; (e) the creation, offer, sale and issue of the Notes, the execution of this Agreement and the Issue Documents and the undertaking and performance by the Company of the obligations expressed to be assumed by it herein and therein will not violate: (i) the Certificate of Incorporation or By-laws of the Company ; (ii) assuming compliance by the Managers with the United States securities Law requirements set forth in the Schedule, any law applicable to the Company or any Principal Subsidiary or any rule, regulation or order of any court or governmental agency or body having jurisdiction over the Company or any Principal Subsidiary or; (iii) any provision of any indenture, mortgage, agreement, contract, or other instrument to which the Company or any Principal Subsidiary is a party or by which the Company or any Principal Subsidiary is bound or to which any of the properties or assets of the Company or any Principal Subsidiary are subject, or be in conflict with, or result in a breach of or constitute (upon notice or lapse of time or both) a default under any such indenture, mortgage, agreement, contract or other instrument or result in the creation or imposition of any Lien upon any of the properties or assets of the Company or any Principal Subsidiary (except any such violation or conflict described in herein which would not have a material adverse effect on the Company and its Subsidiaries, taken as a whole). (f) (i) this Agreement constitutes; (ii) upon due execution by or on behalf of the Company and the other parties thereto, the Issue Documents will constitute; and 5 8 (iii) upon due execution of the Trust Indenture, the Global Note and the Bearer Notes by or on behalf of the Company and the other parties thereto and due authentication of the Global Note and the Bearer Notes and the other parties thereto, the Notes will constitute legal, valid, binding and enforceable obligations of the Company, enforceable against the Company in accordance with their respective terms, except that the enforceability thereof may be limited by any applicable bankruptcy, insolvency, reorganisation or other similar laws relating to or affecting the enforcement of creditors' rights generally and by equitable principles regardless of whether such enforceability is considered in a proceeding in equity or at law and except as rights to indemnity or contribution may be limited under applicable law; (g) Each of the Global Note, the Bearer Notes, the Coupons and the Shares conform in all material respects to the description of such Global Note, Bearer Notes, the Coupons and Shares contained in the Offering Circular, and the Shares conform to the terms of the Common Stock contained in the Certificate of Incorporation; and (h) upon issuance of the Notes in accordance with the Trust Indenture, the Notes will constitute direct, general and unconditional obligations of the Company which: (i) rank pari passu among themselves and with all present and future Indebtedness other than Subordinated Obligations and Indebtedness secured by Liens (all as defined in the Trust Indenture) of the Company; and (ii) will rank senior to all existing and future Subordinated Obligations (all as defined in the Trust Indenture), except to the extent permitted by the applicable laws relating to creditors' rights; (i) the Shares, as and when issued by the Company from time to time pursuant to conversion of the Notes in accordance with the terms of the Issue Documents, will be validly issued and outstanding, fully paid and non-assessable and will not be subject to any pre-emptive or similar right, and the Holder of each Note will receive good and valid title to the Shares upon conversion of such Note in accordance with the terms of the Issue Documents, free and clear of any Lien, except such as may have been created by the Holder of the Note and such restrictions on transfer as may be imposed under United States federal or state securities or blue sky laws. No consent or approval by the stockholders of the Company or any other Person is required to be obtained by the Company for the consummation of the issuance of the Shares by the Company pursuant to conversion of the Notes. As and from the expiry of the Restricted Period (i) each stock certificate representing any of the Shares shall be free of any type of restrictive legend, (ii) the Shares represented by each such stock certificate shall not be subject to any "stop transfer" or similar order at the Company's transfer agent for its Common Stock, and (iii) the Company shall have filed with the AMEX or Alternative Stock Exchange all necessary filings in respect of the inclusion of the Shares in the shares of Common Stock of the Company listed for trading on the AMEX or Alternative Stock Exchange. 6 9 (j) upon delivery to the Lead Managers and EnCap, respectively, the Lead Manager Warrants and the EnCap Warrants (as defined in Clause 8.2 hereof) will be duly issued and will constitute the legal, valid and binding obligations of the Company, enforceable against the Company in accordance with their terms, except as the enforceability thereof may be limited by any applicable bankruptcy, insolvency, reorganization or other similar laws relating to or affecting the enforcement of creditors' rights, regardless of whether such enforceablilty is considered in a proceeding in equity or at law. The shares of Common Stock issuable upon exercise of any of the Lead Manager Warrants and the EnCap Warrants have been duly and validly authorized and reserved for issuance. The shares of Common Stock issuable upon exercise of Lead Manager Warrants and the EnCap Warrants, as and when issued and delivered in accordance with the terms thereof, and upon receipt by the Company of the exercise price therefor, will be duly and validly issued and outstanding, fully paid and non-assessable, and will not be subject to any pre-emptive or similar right. (k) assuming compliance by the Managers with the United States securities law requirements as set out in the Schedule, all authorizations, consents and approvals required by the Company for or in connection with the creation and issue of the Notes, the execution of this Agreement and the Issue Documents, the performance by the Company of the obligations undertaken by it herein and therein and the distribution of the Offering Circular in accordance with the provisions set out in the Schedule have been obtained and are in full force and effect; (l) neither the nature of the Company or of any Subsidiary, or of any of their respective businesses or Properties, nor any relationship between the Company or any Subsidiary and any other Person, nor any circumstance in connection with the execution and delivery of the Indenture or the offer, issue, sale or delivery of the Global Note, or the Bearer Notes, or the Shares is such as to require a consent, approval or authorization of, or filing, registration or qualification with, any governmental authority on the part of the Company as a condition to the execution and delivery of this Indenture or the offer, issue, sale or delivery of the Global Note or the Bearer Notes or the issuance of Shares pursuant to conversion of the Notes. (m) the Offering Circular sets forth a description of the business conducted and proposed to be conducted as of the date thereof by the Company and its Principal Subsidiaries and the principal Properties of the Company and its Principal Subsidiaries, which description is true and correct in all material respects. (n) each of the Company and its Principal Subsidiaries has (i) Good Title to its Oil and Gas Properties and (ii) good and defensible title to all other material Properties and assets described in the Offering Circular as owned by it, in the case of such other Properties and assets free and clear of all Liens, except as disclosed in the Offering Circular or which are not material to the business of the Company and its Subsidiaries taken as a whole or which will not conflict with the obligations of the Company under this Agreement, the Issue Documents and the Notes. Each of the Company and its Subsidiaries has a valid, subsisting lease for the real Property (other than its Oil and Gas Properties, subject to clause (i) of this sentence) described in the Offering Circular as leased by it. To the knowledge of the Company's management, except as otherwise disclosed in the Offering Circular, the Company and each of its Subsidiaries owns or possesses or is the valid licensee of all patents, trademarks, service marks, trade names, copyrights and other intellectual property necessary to carry on its business as described in the Offering Circular, and 7 10 neither the Company nor any Subsidiary has received any notice of infringement of or conflict with asserted rights of others with respect to any of the foregoing which, if the subject of an unfavourable decision, ruling or finding, would result, individually or in the aggregate, in any material adverse change in, or which would materially and adversely affect the business, operations, financial position or business prospects of, the Company and its Subsidiaries taken as a whole. (o) based on the laws currently in effect and subject to the provisos set forth in the Offering Circular, all payments of principal and interest in respect of the Notes and the Coupons, and all other payments that may become due and payable under the terms of the Notes or the Coupons may be made free and clear of, and without withholding or deduction for, any taxes, duties, assessments or governmental charges of any nature whatsoever imposed, levied, collected, withheld or assessed by United States federal and state taxing authorities or any political subdivision or authority thereof or therein having power to tax other than in the case of payments to be made by the Company to U.S. persons in circumstances where the Company is obliged to withhold payments due to U.S. back-up withholding tax but not gross-up under Condition 8; (p) the Offering Circular is true and accurate in all material respects and is not misleading in any material respect; any opinions, predictions or intentions expressed in the Offering Circular are honestly held or made and are not misleading in any material respect; the Offering Circular does not omit to state any material fact necessary to make such information not misleading in any material respect; provided that this representation and warranty shall not apply to any statement or omission relating to matters of foreign law or made in reliance and in conformity with information furnished in writing to the Company by any Manager for use in the Offering Circular; (q) the Company will use the proceeds from the sale of the Notes for the purposes described in the Offering Circular. (r) neither the Company nor any of its Subsidiaries is, directly or indirectly, controlled by, or acting on behalf of any Person which is, an "investment company" or an "affiliated person" of, "promoter" or "principal" of an "investment company," within the meaning of the Investment Company Act of 1940, as amended. (s) neither the Company nor any of its Subsidiaries is a "holding company" within the meaning of the Public Utility Holding Company Act of 1935, as amended or a "public utility" within the meaning of the Federal Power Act, as amended. (t) except as disclosed in the Offering Circular at the date hereof or at the date when this representation is deemed to be repeated, as the case may be, there are no actions, suits, investigations or proceedings pending to which the Company or any Principal Subsidiary is a party before or by any court or governmental agency or body, which would result, individually or in the aggregate, in any material adverse change in the financial condition or results of operations of the Company and its Subsidiaries, taken as a whole, or which would materially and adversely affect the properties or assets of the Company, and to the knowledge of the Company, no such actions, suits, investigations or proceedings are threatened by any Person; 8 11 (u) except as disclosed in the Offering Circular and since December 31, 1995 there has been no adverse change, or any development reasonably likely to involve an adverse change, in the condition (financial or otherwise) or general affairs of the Company that is material in the context of the issue of the Notes; and (v) to the knowledge of the Company, no event has occurred which is or would (with the passage of time, the giving of notice, the making of any determination or otherwise) become an Event of Default. 4.2 The Company's consolidated audited financial statements including its statement of operations for its three fiscal years ended December 31, 1993, December 31, 1994 and December 31, 1995, respectively, and its balance sheets at December 31, 1993, December 31, 1994 and December 31, 1995, and the related consolidated statements of operations, stockholders' equity and cash flows of the Company and its Subsidiaries for the fiscal years ended on such dates were prepared in accordance with generally accepted accounting principles in the United States consistently applied and present fairly (in conjunction with the notes thereto) the financial condition of the Company and its Subsidiaries (taken as a whole) as at the date they were prepared and the results of the operations of the Company and its Subsidiaries (taken as a whole) during the respective fiscal years then ended. Except as set forth in the Offering Circular, since December 31, 1995, there has been no change in the properties, business, profits or condition (financial or otherwise) of the Company and its Subsidiaries except changes in the ordinary course of business, none of which individually or in the aggregate have had a material adverse effect on the properties, business, assets, profits or financial condition of the Company and its Subsidiaries taken as a whole. 4.3 The Company shall forthwith notify the Lead Managers of anything which at any time prior to payment of the net proceeds into the Segregated Account of the issue of the Notes to the Company on the Closing Date has or may have rendered, or will or may render, untrue or incorrect in any respect any representation and warranty by the Company in this Agreement as if it had been made or given at such time with reference to the facts and circumstances then subsisting. 4.4 The representations and warranties in Clause 4.1 which refer to the Offering Circular shall be deemed to be repeated (with reference to the relevant text of the Offering Circular and to the facts and circumstances then subsisting) on each date falling on or before the Closing Date on which the Offering Circular is amended or supplemented and distributed by the Managers. 5. The Placing 5.1 The Lead Managers, relying on the representations and warranties given by the Company herein, hereby undertake to the Company that, subject to and in accordance with the provisions of this Agreement they will act as agent for the Company (which appointment the Company hereby confirms) to use their best efforts to procure qualified subscribers ("Placees") to subscribe for all of the Notes on the Closing Date at the Issue Price free from all Liens and with all rights attached thereto. Neither of the Lead Managers shall have any obligations themselves to subscribe for any Notes. 9 12 5.2 The Company hereby confirms that the foregoing appointment confers on the Lead Managers all powers, authorities and discretions on behalf of the Company which are reasonably necessary for or reasonably incidental to the making of the Issue on the basis set out in this Agreement, the Offering Circular and the Trust Indenture and hereby agrees to ratify and confirm everything which the Lead Managers shall lawfully and properly do in the exercise of, or in accordance with, such appointment, powers, authorities and discretions. 5.3 The Lead Managers shall by no later than July 30, 1996 (or such later date as the Lead Managers and the Company may agree) notify the Company of the number of Notes, with an aggregate principal amount of up to U.S.$40,000,000, in respect of which subscription commitments have been obtained ("Placed Notes"). 5.4 Sums payable pursuant to this Clause 5 shall be paid by the Company not later than the second business day following the date of termination of this Agreement (other than for the surviving clauses). 6. Undertakings of the Company 6.1 The Company shall deliver to the Managers on the date hereof and hereafter from time to time as requested as many copies of the Offering Circular as the Lead Managers may reasonably request. 6.2 Without prejudice to their obligations under applicable law, the Company shall at the request of the Lead Managers at any time prior to payment of the net proceeds of the issue of the Notes to the Company on the Closing Date amend or supplement the Offering Circular in order to correct any untrue statement of a material fact required to be stated therein or necessary to make the statements therein in the light of the circumstances under which they were made not misleading and the Company shall deliver to the Managers from time to time as many copies of the relevant amendment or supplement as the Managers may reasonably request. 6.3 Except as requested by the Managers in connection with the sale of the Notes, neither the Company or any affiliate of the Company nor anyone acting on behalf of the Company or any such affiliate, other than the Managers shall, directly or indirectly, offer or sell, or attempt to offer, sell or dispose of, any of the Notes, or solicit any offer to buy, or otherwise approach or negotiate in respect of, any of the Notes. 6.4 The Company shall furnish such information, execute such instruments and take such action, if any, as may be required to effect the placement of the Notes under the securities laws of each jurisdiction in which the Notes are offered for sale or sold; provided, however, that the Company shall not be required to qualify to do business in any jurisdiction where it is not now so qualified or which would subject the Company to taxation or to take any action that would subject it to general or unlimited service of process in any jurisdiction where it is not now so subject. 6.5 The Company shall furnish or make available to the Lead Managers or their counsel such additional documents and information regarding the Company and its affairs as the Lead Managers may from time to time request, including any and all documentation reasonably 10 13 requested in connection with their due diligence efforts regarding information in the Offering Circular and in order to evidence the accuracy or completeness of any of the conditions contained in this Agreement; and all actions taken by the Company to authorize the issuance and sale of the Notes and to reserve for issuance the shares of Common Stock issuable upon exercise of the Lead Manager Warrants and the EnCap Warrants shall be reasonably satisfactory in form and substance to the Lead Managers. 6.6 The Company shall, at all times upon reasonable request from the date hereof through the Closing Date, (i) make available to each purchaser or its advisers, or both, prior to acceptance of its subscription, such information (in addition to that contained in the Offering Circular concerning the Offering, the Company and any other relevant matters as it possesses or can acquire without unreasonable effort or expense, and (ii) provide each purchaser or its advisers, or both, the opportunity to ask questions of, and receive answers from, the Company with respect to such matters. 6.7 The Company shall not offer or sell any securities of the same class as the Notes until a period of six (6) months has elapsed from the Closing Date of the Offering, unless the Company shall have provided the Lead Managers with a satisfactory opinion from the Company's legal counsel to the effect that the proposed offer or sale will not result in any violation of the Securities Act, any state securities or blue sky laws, and any rules or regulations promulgated thereunder. 6.8 From the date hereof to and including the Closing Date, the Company shall not, make any press release or other public announcement (i) without the prior written consent of the Lead Managers, (ii) prior to having furnished each of the Lead Managers with a copy of the proposed form of the press release or public announcement and giving the Lead Managers and their counsel a reasonable opportunity to review and comment upon the same or (iii) in a manner to which the Lead Managers or their counsel shall reasonably object, unless the Company is required to do so by applicable law. 6.9 The Company shall make arrangements reasonably satisfactory to the Lead Managers to ensure that the Bearer Notes are delivered to the Trustee or the Authenticating Agent for authentication in the form required by, and otherwise in accordance with, the Issue Documents. 6.10 The Company shall use all reasonable endeavours to procure the listing of the Shares and for the Warrant Shares on the American Stock Exchange and to maintain the same until none of the Notes are outstanding. 7. Indemnification and Contribution 7.1 The Company agrees to defend, indemnify, and hold each of the Managers and their respective officers, directors, agents, employees and controlling persons (each, an "Indemnified Person") harmless from and against any losses, claims, damages, or liabilities (including, without limitation, court costs and reasonable attorneys' fees) to which any Indemnified Person may become subject insofar as the same arises from an action which alleges or is based upon: 11 14 (a) any alleged untrue statement of a material fact contained in the Offering Circular, or omission of a material fact, or any other violation of applicable securities or other laws, rules and regulations; (b) the performance by each of the Managers of its obligations and services, or the performance by any other Indemnified Person on behalf of the Managers of any obligations hereunder in accordance with this Agreement or otherwise in connection with the subject matter hereof, including the issue of any material provided by the Company, or after having been approved by, the Managers; or (c) any breach or alleged breach of or failure to comply with, the laws or regulations of the United States or of any other State thereof by the Company or any Affiliate resulting from the release of the Press Announcement, and the preparation and distribution of the Offering Circular; or (d) any material breach or alleged material breach of any of the representations and warranties, or any of the undertakings or obligations of the Company; or (e) the creation, allotment, offer, sale, issue and placing of the Notes irrespective of the role or concurrent negligence of such Indemnified Person, by the Company or its officers, directors, agents, employees and controlling persons and to reimburse such Indemnified Person for any legal or other expenses reasonably incurred by them in connection with investigating, settling or defending any action or claim in connection therewith (including, without limitation, court costs and reasonable attorneys' fees) up until such time as the Company assumes the defense of any such action or claim; provided, however, that the Company shall not be liable in any such case to the extent that any such loss, claim, damage or liability (i) directly or indirectly results from any untrue statement of a material fact or omission of a material fact made in the Offering Circular in reliance upon and in conformity with written information provided to the Company by or on behalf of the Managers specifically for inclusion in such Offering Circular or (ii) is found in a final judgment of a court of competent jurisdiction to have resulted from the Indemnified Person's gross negligence or bad faith in performing their services hereunder. If for any reason the foregoing indemnification is unavailable to the Indemnified Person or insufficient to hold the Indemnified Person harmless, then the Company shall contribute to the amount paid or payable by the Indemnified Person as a result of such loss, claim, damage, or liability in such proportion as is appropriate to reflect not only the relative benefits received by the Company on the one hand and the Indemnified Person on the other hand but also the relative fault of the Company and the Indemnified Person, as well as any relevant equitable considerations. The Company agrees to reimburse the Indemnified Person within ten days after presentation of any statement by the Indemnified Person of all reasonable expenses (including without limitation of the generality of the foregoing, the reasonable fees and expenses of attorneys selected by the Indemnified Person) incurred in connection with any testimony the Indemnified Person or its employees are required to give (in court, before a regulatory agency, by deposition or otherwise) in any regulatory or court proceeding (including depositions), whether or not the Indemnified Person is a party, and which related directly or indirectly to the proposed Placement. This indemnity shall be without prejudice to any other rights of any other Indemnified Person. 12 15 7.2 With respect to the foregoing Clause 7.1 of the indemnification, the Company agrees that an Indemnified Person shall not be deemed to have been grossly negligent for reasonably relying upon any written untrue statement or alleged omission of a material fact necessary to make the statements, in light of the circumstances in which such statements were made, not misleading, contained in or omitted from any information provided to the Indemnified Person by or on behalf of the Company (including, without limitation of the generality of the foregoing, any accountant or attorney employed or retained by the Company). The indemnification provided in the foregoing Clause 7.1 hereof shall extend upon the same terms and conditions to each Person, if any, who may be deemed to control the Indemnified Person and shall be applicable, to the extent set forth herein, whether or not negligence of the person entitled to indemnification is alleged or proven. 7.3 Each Indemnified Person shall, in the event any action (with respect to which indemnity or reimbursement from the Company may be sought by the Indemnified Person on account of agreements contained herein) shall be brought or threatened against such Indemnified Person, prompt notice will be given to the Company in writing of such action, together with a copy of all papers served on, or received by, the Indemnified Person in connection with such action provided that failure to give such notice shall not affect the Indemnified Person's right under these indemnification provisions, unless, and only to the extent that, such failure results in the Company's forfeiture of substantive rights or defenses. If such an event occurs the Company shall assume the defense of such action, including the employment of counsel and the payment of all expenses. The Indemnified Person shall have the right to employ separate counsel in any such action and to participate in the defense thereof, but the fees and expenses of such counsel shall be at the expense of the Indemnified Person unless (a) the employment thereof has been specifically authorized by the Company in writing; (b) the Company has failed to assume the defense and employ counsel; or (c) the named parties, or parties threatened to be named, to any such action (including any impleaded parties or parties threatened to be impleaded) include both the Indemnified Person and the Company, and the Indemnified Person has been advised by such counsel that there may be one or more legal defenses available to the Indemnified Person which are different from or additional to those available to the Company (in which cases the Indemnified Person shall have the right to employ their own counsel and in such cases any reasonable fees and expenses of such counsel shall be paid by the Company). 7.4 The obligations under this Clause 7 shall survive any termination of this Agreement, in whole or in part. 8. Fees and Expenses 8.1 The Company shall, on the Closing Date, pay to HSBC: (i) for the account of the Managers a placement fee of six percent (6%) of the aggregate principal amount of the Placed Notes, which shall be allocated as between themselves, and any Managers of the Issue as the Lead Managers see fit; and (ii) for the account of EnCap a fee of one percent (1%) of the aggregate principal amount of the Placed Notes. 13 16 Such commissions and fees shall be deducted from the Issue Price. 8.2 The Company shall issue to the Lead Managers or their respective designees on the Closing Date warrants (the "Lead Manager Warrants") pursuant to Regulation S to purchase an aggregate number of shares of Common Stock equal in number to eight percent (8%) of the total number of Shares issuable upon conversion of the Notes less fifty thousand (50,000) shares, at an initial exercise price equal to $2.50, which shall be issued in the form of Lead Manager warrant certificates (the "Lead Manager Warrant Certificates"), a draft of which is in the agreed form. The Company shall issue to EnCap or its designee on the Closing Date warrants (the "EnCap Warrants") to purchase fifty thousand (50,000) shares of Common Stock, which shall be issued in the form of a warrant certificate (the "EnCap Warrant Certificate"), a draft of which is in the agreed form. Each Lead Manager Warrant and EnCap Warrant shall entitle the holder to purchase one share at an initial exercise price equal to the Conversion Price of the Notes, and having a term of three (3) years, and may be exercised as to all or any lesser number of shares of Common Stock covered thereby, commencing six months after the date of issuance. 8.3 The Company is responsible for paying: (a) the fees and expenses of the legal, accountancy and other professional advisers instructed by the Company in connection with the creation and issue of the Notes and the preparation of the Offering Circular; (b) the costs incurred in connection with the preparation and execution of this Agreement and the Issue Documents; (c) the cost of setting, proofing, printing and delivering the Offering Circular, the Global Note and the Bearer Notes; (d) the fees and expenses of the other parties to the Issue Documents; and (e) the cost of any advertising agreed between the Company, RPC and HSBC. 8.4 In addition, the Company shall reimburse RPC and HSBC for all legal fees and expenses and any travelling, communication, courier, postage and other out-of-pocket expenses incurred by them in connection with the management of the issue of the Notes and any amount due to RPC or HSBC under this sub-clause may be deducted from the Issue Price or paid direct by the Company to any third party to whom such moneys are payable; provided, however, that such expenses are estimated not to exceed U.S.$200,000 (including the cost of printing described in Clause 8.3(c), two due diligence visits by the Lead Managers, costs associated with production of a research report on the Company to be issued following the Closing, roadshow expenses, and post-closing advertisements, but excluding the fees and expenses of the Company's legal counsel). Such reimbursement is not contingent upon the successful completion of the Placement. 8.5 All payments in respect of the obligations of the Company hereunder shall be made free and clear of and without withholding or deduction for, any taxes, duties, assessments or governmental charges of whatsoever nature imposed, levied, collected, withheld or assessed by United States federal or state taxing authorities or any political subdivision or any authority 14 17 thereof or therein having power to tax, unless such withholding or deduction is required by law. In that event, the Company shall pay such additional amounts as will result in the receipt by the relevant Person of such amounts as would have been received by it if no such withholding or deduction had been required provided that such Person is not a U.S. Person or entity. 8.6 The Company shall pay all stamp, registration and other taxes and duties (including any interest and penalties thereon or in connection therewith) which may be payable upon or in connection with the creation, sale and issue of the Notes, and the execution of this Agreement and the Issue Documents, and the Company shall indemnify each Manager against any claim, demand, action, liability, damages, cost, loss or expense (including, without limitation, legal fees) which it may incur as a result or arising out of or in relation to any failure to pay or delay in paying any of the same. 9. Closing 9.1 Subject to this Agreement not having been terminated pursuant to Clause 10 and subject to Clause 9.3, the closing of the Issue shall take place on the Closing Date, whereupon, subject to and in accordance with the terms of this Agreement and the Trust Indenture: (a) the Company shall deliver the Global Note (in respect of the number of Bearer Notes), duly executed on behalf of the Company and authenticated in accordance with the Trust Indenture, to a common depositary designated for the purpose by Euroclear and Cedel for credit on the Closing Date to the accounts of Euroclear and Cedel with such common depositary; and (b) against such delivery of the Global Note referred to in Clause 9.1 the Lead Managers shall upon receipt of moneys from each Placee make payment of such net proceeds received from the issue of the Notes (namely the Issue Price less the fees and expenses that are to be deducted pursuant to Clause 8) to the Segregated Account by wire transfer in U.S. dollars either for same day value or on the business day immediately thereafter together with interest at an annual rate of six and one-half percent (6.5%) to such account as the Company has designated to the Lead Managers. 9.2 The Company and the Lead Managers may agree to postpone the Closing Date to another date not later than August 8, 1996, whereupon all references herein to the Closing Date shall be construed as being to that later date. 9.3 The Lead Managers shall only be under obligation to proceed with the foregoing if: (a) the Lead Managers receive on or before the Closing Date: (i) a legal opinion dated the Closing Date and addressed to the Lead Managers and the Trustee from Haynes and Boone, L.L.P in substantially the agreed form; (ii) closing certificates dated the Closing Date, addressed to the Lead Managers and signed by a duly authorised signatory on behalf of the Company in substantially the agreed form; and 15 18 (iii) a closing auditors comfort letter dated the Closing Date and addressed to the Managers from Arthur Andersen L.L.P. in substantially the agreed form. (b) the Issue Documents are executed on or before the Closing Date by or on behalf of all parties thereto in substantially the agreed form; (c) there has, since the date of this Agreement, been no adverse change, or any development reasonably likely to involve an adverse change, in the condition (financial or otherwise) or general affairs of the Company, or any Subsidiary that is material in the context of the offer, sale or issue of the Notes; and (d) the representations and warranties by the Company in this Agreement are true and correct on the date of this Agreement in all material respects and on each date on which they are deemed to be repeated and would be true and correct if they were repeated on the Closing Date with reference to the facts and circumstances then subsisting. 10. Termination 10.1 Either of the Lead Managers may give a termination notice to the Company at any time prior to the Closing if: (a) any representation and warranty by the Company in this Agreement is or proves to be untrue or incorrect in any material respect (in the opinion of the Lead Managers) after consultation with their legal counsel on the date of this Agreement or on any date on which it is deemed to be repeated; (b) the Company fails to perform any of its obligations hereunder which in the opinion of the Lead Managers after consultation with their legal counsel is material; (c) any of the conditions in Clause 9.3 is not satisfied or waived by the Lead Managers on the Closing Date; or (d) since the date of this Agreement there has been, in the opinion of either of the Lead Managers (after such consultation with the Company as may be reasonably practicable in the circumstances), such a change in national or international financial, political or economic conditions, currency exchange rates or exchange controls on the U.S. or international oil and gas markets as would in its view be likely to prejudice materially the success of the offering and distribution of the Notes or dealings in the Notes in the secondary market. 10.2 The Company may give a termination notice to the Lead Managers at any time prior to the delivery by the Company of the Global Note to the common depositary on the Closing Date, if any of the Lead Managers fails to perform any of its obligations hereunder or comply with any of the terms hereof which in either case is material in the opinion of the Company after consultation with its legal counsel. 10.3 Upon the giving of a termination notice under Clause 10.1 or 10.2 and subject to Clause 10.4: 16 19 (a) the Company shall be discharged from performance of its obligations under Clauses 3. 1 and 7. 1; (b) the Managers shall be discharged from performance of their respective obligations hereunder; and (c) the provisions of Clauses 1, 7, 8.4, 13 and 14 shall continue in full force and effect. 10.4 A discharge pursuant to Clause 10.2 shall not affect the other obligations of the parties hereto and shall be without prejudice to accrued liabilities. 11. Survival The provisions of this Agreement shall continue in full force and effect notwithstanding the completion of the arrangements set out herein for the issue of the Notes and regardless of any investigation by any party hereto. 12. Time Any date or period specified herein may be postponed or extended by mutual written agreement among the parties but as regards any date or period originally fixed or so postponed or extended, time shall be of the essence. 13. Notices 13.1 All notices and other communications hereunder shall be made in writing and in English (by letter, telex or fax) and shall be sent as follows: (a) if to the Company, to it at: 5605 North MacArthur Boulevard Suite 400 Irving, Texas 75038 Attention: Bruce N. Huff Senior Vice President and Chief Financial Officer Fax: (214) 753 6926 With a copy to: Larry E. Cummings Vice President, Secretary and General Counsel Fax: (214) 753 6963 17 20 (b) if to RPC, to it at: 56 Green Street London WlY 3RH Fax: 0171 491 9081 Attention: David P. Quint Managing Director (c) if to HSBC, to it at: Thames Exchange 10 Queen Street Place London EC4R 1BL Telex: 888866 Fax: 0171 929 1520 Attention: Simon Eagles Equity Capital Markets 13.2 Every notice or other communication sent in accordance with Clause 13.1 shall be effective as follows: (a) if sent by letter or fax, upon receipt by the addressee; and (b) if sent by telex, upon receipt by the sender of the addressee's answerback at the end of transmission; provided that any such notice or other communication which would otherwise take effect after 4.00 p.m. on any particular day shall not take effect until 10.00 a.m. on the immediately succeeding business day in the place of the addressee. 14. Governing Law This Agreement shall be governed by and construed in accordance with the laws of the State of New York without regard to the conflict of laws provisions thereof. 18 21 IN WITNESS WHEREOF, the parties hereto have caused this Agreement to be executed by their duly authorised representatives as of the day and year first above written. HARKEN ENERGY CORPORATION By: ---------------------------- Name: ---------------------------- Title: ---------------------------- HSBC INVESTMENT BANK PLC By: ---------------------------- Name: ---------------------------- Title: ---------------------------- RAUSCHER PIERCE & CLARK, INC. By: ---------------------------- Name: ---------------------------- Title: ---------------------------- RAUSCHER PIERCE & CLARK LIMITED By: ---------------------------- Name: ---------------------------- Title: ---------------------------- 19 22 BANCA DEL GOTTARDO By: ---------------------------- Name: ---------------------------- Title: ---------------------------- INVESTMENTBANK AUSTRIA AG By: ---------------------------- Name: ---------------------------- Title: ---------------------------- D.E. SHAW SECURITIES INTERNATIONAL By: ---------------------------- Name: ---------------------------- Title: ---------------------------- J. HENRY SCHRODER BANK AG By: ---------------------------- Name: ---------------------------- Title: ---------------------------- 20 23 JEFFERIES INTERNATIONAL LTD By: ---------------------------- Name: ---------------------------- Title: ---------------------------- 21 24 The Schedule Selling Restrictions 1. General 1.1 Each Manager acknowledges that no action has been or will be taken in any jurisdiction by the Company that would permit a public offering of the Notes, or possession or distribution of any offering material in relation thereto, in any country or jurisdiction where action for that purpose is required. 1.2 Each Manager undertakes to the Company that it will comply with all applicable laws and regulations in each country or jurisdiction in which it purchases, offers, sells or delivers Notes or has in its possession or distributes such offering material, in all cases at its own expense including, without limitation, in the United Kingdom, the provisions of the Criminal Justice Act 1993 and the Money Laundering Regulations (1993). 2. United States 2.1 The Notes have not been and will not be registered under the Securities Act and may not be offered or sold within the United States except pursuant to an exemption from the registration requirements of the Securities Act. The Shares have not been registered under the Securities Act and may not be offered or sold within the United States unless registered under the Securities Act or in a transaction pursuant to an exemption from the registration requirements of the Securities Act. 2.2 The offers and sales of the Notes are to be effected pursuant to the exemption from the registration requirements of the Securities Act pursuant to Regulation S thereunder. The Company and the Managers have established the following procedures in connection with the offer, sale and resale of the Notes: (a) Each offer and sale of the Notes shall be made only in an "offshore transaction" (as defined in Regulation S) and to investors who are not "U.S. persons" (as defined in Regulation S); (b) no offer or sale of any of the Notes shall be made in the United States or to, or for the account or benefit of, any "U.S. person" (as defined in Regulation S); (c) no "direct selling efforts" (as defined in Regulation S) in respect of the Notes shall be made in or directed toward the United States; (d) "offering restrictions" (as defined in Regulation S) in respect of the Notes shall be implemented; (e) each purchaser of the Notes shall be furnished with the Offering Circular prepared by the Company together with any amendments thereof and supplements thereto as shall have 22 25 been prepared by the Company, which described, among other things, (i) the Notes, (ii) such summary financial and business information concerning the Company as is considered appropriate; and (iii) the restrictions on resale of the Notes; (f) no Offering Circular (or any revision or amendment thereof or supplement thereto) shall be delivered to any "U.S. person" (as defined in Regulation S); and (g) the Company agrees to furnish the Managers with such number of copies of the Offering Circular and any revision or amendment thereof or supplement thereto as the Managers may require in connection with the offer and sale of the Notes; and (h) each purchaser of the Notes shall be required to confirm (i) by means of written certification, (ii) by acceptance of their subscription allotment, or (iii) by other means of confirmation acceptable to the Company and the Lead Managers that it is not a "U.S. person" (as defined in Regulation S) and that such purchaser will not offer or sell the Notes otherwise than in compliance with the Securities Act and the rules and regulations of the Securities and Exchange Commission thereunder. 2.3 Each Manager hereby represents, warrants and covenants with the Company: that the Manager, its affiliates, and any person acting on behalf of, or as agent of, any of the foregoing, shall, whether as principal or agent: (a) comply with the procedures set forth in Sections 2.2 and 3 hereof; (b) offer and sell the Notes to the purchasers only in "offshore transactions" (as defined in Regulation S); (c) not engage with respect to the Notes in any "direct selling efforts" (as defined in Regulation S) in or directed toward the United States; (d) comply with all "offering restrictions" (as defined in Regulation S) in respect of the Notes; (e) not deliver any Offering Circular or any revision or amendment thereof or supplement thereto to any "U.S. person" (as defined in Regulation S); (f) not make any offers or sales of any of the Notes or any interest therein in the United States or to, or for the account or benefit of, any "U.S. person" (as defined in Regulation S); (g) comply with all laws and regulations of those jurisdictions in which the Notes are offered or sold which are applicable to the offer and sale of the Notes; and (h) on or prior to the Closing Date, send to each person who is acting on behalf of the Manager a written confirmation or other notice to the effect that such person is subject to the same restrictions on offers and sales that apply to the Manager. 23 26 2.4 The Company hereby represents, warrants and covenants with the Managers that the Company its affiliates, and any person acting on behalf of, or as agent of, any of the foregoing, shall, whether as principal or agent: (a) comply with the procedures set forth in Section 2.2 hereof; (b) offer and sell the Notes to the purchasers only in "offshore transactions" (as defined in Regulation S); (c) not engage with respect to the Notes in any "direct selling efforts" (as defined in Regulation S) in or directed toward the United States; (d) comply with all "offering restrictions" (as defined in Regulation S) in respect of the Notes; (e) not deliver any Offering Circular or any revision or amendment thereof or supplement thereto to any "U.S. person" (as defined in Regulation S); (f) not make any offers or sales of any of the Notes or any interest therein in the United States or to, or for the account or benefit of, any "U.S. person" (as defined in Regulation S); and (g) not make any sales of any of the Notes or any interest therein to any person other than the purchasers; provided however, that insofar as this representation and warranty involves any participating broker-dealers in the offering, any affiliate of such broker-dealer or any officer, director, employee or agent of such broker- dealer, to the extent such broker-dealer is acting as Manager for the offering of the Notes, such representation is made by the Company solely on the basis of and in reliance upon the representations and warranties of such broker-dealer. 3. United Kingdom Each Manager represents, warrants and undertakes to the Company that: (a) it has not offered or sold and prior to the expiry of the period of six months from the Closing Date will not offer or sell any Notes to persons in the United Kingdom, except to persons whose ordinary activities involve them in acquiring, holding, managing or disposing of investments (as principal or agent) for the purposes of their businesses in circumstances which have not resulted in an offer to the public within the meaning of the Public Offer of Securities Regulations 1995; (b) it has complied and will comply with all applicable provisions of the Financial Services Act 1986 with respect to anything done by it in relation to the Notes in, from or otherwise involving the United Kingdom; and (c) it has only issued or passed on and will only issue or pass on to any person in the United Kingdom any document received by it in connection with the issue of the Notes, if that person is of a kind described in Article 11(3) of the Financial Services Act 1986 (Investment Advertisements) (Exemptions) Order 1995 or is a person to whom such document may otherwise lawfully be issued or passed on. 24 EX-10.3 4 GLOBAL TEMPORARY NOTE 1 EXHIBIT 10.3 THIS NOTE HAS NOT BEEN AND WILL NOT BE REGISTERED UNDER THE UNITED STATES SECURITIES ACT OF 1933, AS AMENDED (THE "SECURITIES ACT") AND MAY NOT BE OFFERED, SOLD, PLEDGED, CONVERTED OR OTHERWISE DISPOSED OF IN THE UNITED STATES OR TO, OR FOR THE ACCOUNT OR BENEFIT OF, ANY "U.S. PERSON" (AS DEFINED IN REGULATION S UNDER THE SECURITIES ACT) UNLESS THE NOTE HAS BEEN REGISTERED UNDER THE SECURITIES ACT AND ANY APPLICABLE STATE SECURITIES OR BLUE SKY LAWS OR EXEMPTIONS FROM THE REGISTRATION REQUIREMENTS OF SUCH LAWS ARE AVAILABLE. ANY UNITED STATES PERSON WHO HOLDS THIS OBLIGATION WILL BE SUBJECT TO LIMITATIONS UNDER THE UNITED STATES INCOME TAX LAWS, INCLUDING THE LIMITATIONS PROVIDED IN SECTIONS 165(J) AND 1287(A) OF THE UNITED STATES INTERNAL REVENUE CODE OF 1986, AS AMENDED. THIS OBLIGATION IS NOT A DEPOSIT AND IS NOT INSURED BY ANY AGENCY OF THE UNITED STATES GOVERNMENT. HARKEN ENERGY CORPORATION 6.5% SENIOR CONVERTIBLE NOTES DUE 2000 TEMPORARY GLOBAL NOTE Harken Energy Corporation, a Delaware corporation (hereinafter, the "Issuer," which term includes any successor corporation under the Trust Indenture hereinafter referred to), for value received, hereby promises to pay to bearer upon presentation and surrender of this Temporary Global Note (the "Global Note") the principal sum of Forty Million United States Dollars (U.S. $40,000,000) on July 30, 2000, and, to pay interest thereon from the date hereof, semi-annually in arrears on January 30 and July 30 in each year, commencing January 30, 1997, at the rate of 6.5% per annum, calculated on the basis of a 360-day year consisting of twelve 30-day months, until the principal hereof is paid or payment thereof is duly provided for. This Global Note is one of a duly authorized issue of notes designated as the 6.5% Senior Convertible Notes Due 2000 (the "Notes") of the Issuer issued and to be issued under the Trust Indenture dated as of July 30, 1996 (herein called the "Trust Indenture"), between the Issuer and Marine Midland Bank, as Trustee. It is a temporary security and is exchangeable in whole or in part without charge for definitive Notes in bearer form, with interest coupons attached, on or after the end of the Restricted Period, as defined in the Trust Indenture, as promptly as practicable following presentation of election by any of the beneficial owner or owners of this Global Note. 1 2 Global Note Page 2 Until exchanged in full for definitive Notes this Global Note shall in all respects be ratably entitled to the same benefits under, and subject to the same Terms and Conditions of, the Trust Indenture as definitive Notes authenticated and delivered thereunder, except that the holder of this Global Note shall not be entitled to receive payment of principal or interest hereon, and this Note shall not be convertible into Shares of the Issuer's Common Stock. This Global Note, the definitive Notes and the Trust Indenture shall be governed by and construed in accordance with the laws of the State of New York. All terms used in this Global Note which are defined in the Trust Indenture shall have the respective meanings assigned to them in the Trust Indenture. Unless the certificate of authentication hereon has been executed by the Trustee or on behalf of the Trustee by the Authenticating Agent by manual signature of one of its authorized signatories, this Global Note shall not be entitled to any benefit under the Trust Indenture and shall not be valid or obligatory for any purpose. IN WITNESS WHEREOF, the Issuer has caused this Global Note to be duly executed in its corporate name by the manual or facsimile signatures of the undersigned duly authorized officers of the Issuer. Dated as of July 30, 1996 HARKEN ENERGY CORPORATION By: /s/ Mikel D. Faulkner ------------------------------------- Mikel D. Faulkner, Chairman and Chief Executive Officer [Corporate Seal] ATTEST: By: /s/ Larry E. Cummings ------------------------------ Larry E. Cummings, Secretary 2 3 Global Note Page 3 TRUSTEE'S CERTIFICATE OF AUTHENTICATION This Global Note is one of the Notes referred to in the within mentioned Trust Indenture. MIDLAND BANK PLC, as Authenticating Agent for Marine Midland Bank, as Trustee By: /s/ Julian M. Doull ------------------------------------- Name: Julian M. Doull ----------------------------------- Title: Supervisor ---------------------------------- 3 EX-10.4 5 ASSOCIATION CONTRACT 1 EXHIBIT 10.4 ASSOCIATION CONTRACT ASSOCIATE : HARKEN DE COLOMBIA, LTD. SECTOR : BOLIVAR EFFECTIVE DATE : ------------------------ The contracting parties, namely: on the one hand, Empresa Colombiana de Petroleos, hereinafter called ECOPETROL, a State owned industrial and commercial company authorized by Law 165 of 1948, currently governed by its articles, the reform of which was approved by Decree 1209 of June 15, 1994, with principal domicile in Santa Fe de Bogota, represented by LUIS BERNARDO FLOREZ ENCISO, of legal age, identified by citizenship card No. 19.092.255, issued in Santa Fe de Bogota, domiciled in Santa Fe de Bogota, who states: 1. That in his capacity as President of ECOPETROL he acts on behalf of this Company, and 2. That he has been authorized to enter into this Contract by the Board of Directors of ECOPETROL, as recorded in Minutes No. 2131 of April 16, 1996, and, on the other hand, HARKEN DE COLOMBIA, LTD., a company organized under the laws of the Cayman Islands, hereinafter called THE ASSOCIATE, with a branch established in Colombia, and with principal domicile in Santa Fe de Bogota, by virtue of Public Deed No. 406 of February 19, 1993, authorized in the Eleventh Notarial Circuit of Santa Fe de Bogota, represented by GONZALO VELASCO, of legal age, identified by citizenship card No. 17.034.989, issued in Santa Fe de Bogota, domiciled in Santa Fe de Bogota, who declares that in his capacity as Legal Representative, he acts on behalf of the company HARKEN DE COLOMBIA, LTD. MIKEL D. FAULKNER, of legal age, a North American citizen, identified by passport no. HG930148, who declares that in his capacity as the President of the Board of Directors, he acts on behalf of the company HARKEN ENERGY CORPORATION, also enters into this contract in acknowledgment that it assumes and recognizes severally the obligations that its Branch in Colombia acquires by signing this contract. Upon the foregoing conditions, ECOPETROL and THE ASSOCIATE hereby declare that they have entered into the Contract contained in the following clauses: CHAPTER I - GENERAL PROVISIONS CLAUSE 1 - PURPOSE OF THIS CONTRACT 1.1. The purpose of this Contract is the exploration of the Contracted Area and the Exploitation of the Petroleum belonging to the Nation which may be found in said area, described in Clause 3. 1.2. Pursuant to article 1 of Decree No. 2310 of 1974 the exploration and exploitation of hydrocarbons belonging to the Nation is incumbent upon ECOPETROL, which may carry out said activities directly or through contracts with private parties. Based on the foregoing provision ECOPETROL has agreed with THE ASSOCIATE to explore the Contracted Area and to exploit the Petroleum which may be found therein upon the terms and conditions set forth in this document, Exhibit "A" and Exhibit "B" (Operation Agreement) which form an integral part hereof. 1.3. Without prejudice to the provisions of this contract, it is understood that THE ASSOCIATE will have over the Petroleum produced in the Contracted Area and in the part which 2 corresponds to it, the same rights and obligations which those who exploit Petroleum belonging to the Nation inside the Country have before Colombian law. 1.4. ECOPETROL and THE ASSOCIATE agree that they will carry out exploration and exploitation work in the lands of the Contracted Area, that they will distribute between themselves the costs and risks thereof in the proportion and upon the terms contemplated in this Contract and that the properties acquired and the Petroleum produced and stored will belong to each Party in the stipulated proportions. CLAUSE 2 - APPLICATION OF THE CONTRACT This contract applies to the Contracted Area, delimited in Clause 3, or to the part thereof, subject to its terms when Clause 8 has been applied. CLAUSE 3 - CONTRACTED AREA The Contracted Area is called "BOLIVAR", and consists of an area of one hundred and three thousand, three hundred and fourteen (103.314) hectares and eight thousand seven hundred and thirty eight (8,738) square meters and is located within the municipal jurisdictions of San Martin, Rio de Oro, Aguachica and Gamarra in the department of Cesar, the municipal jurisdiction of Morales in the department of Bolivar and the municipal jurisdiction of Puerto Wilches in the department of Santander. This area is described below and, as shown in the map attached hereto as Exhibit "A", which forms part of this contract, as well as the corresponding calculation charts: the reference point used is the AUXILIARY POINT "VOLADOR-689" of the Instituto Geografico Agustin Codazzi, the plane Gauss coordinates of which, with origin in Bogota, are; N-1'412.969.89 meters, E-1'047,110,80 meters and the geographic coordinates of which are: Latitude 8 degrees 19' 59".018 North of the Equator and Longitude 73 degrees 39' 11".693 West of Greenwich. From this reference point it continues in a direction S 39 degrees 7' 45".742 W for a distance of 12,852.38 meters to the starting point "A", the Gauss coordinates of which are: N-1'403,000.00 meters, E-1'039,000.00 meters. From this point "A" the boundary line continues N 8 degrees 11' 16".895 W for a distance of 18.185.38 meters until arriving at point "B", the coordinates of which are N-1'421.000.00 meters, E-1'036,410,00 meters. From this reference point B, it continues in a direction N 1 degree 36' 13".906 E for a distance of 4,001.57 meters to point "C", the coordinates of which are: N-1'425.000.00 meters, E-1'036,522.00 meters. From this point "C" it continues in an easterly direction for a distance of 15,478.00 meters until point "D", the coordinates of which are: N-1'425,000.00 meters, E-1'052,000.00 meters. From point "D" it follows in a direction S 21 degrees 03' 07".469 E for 26,787.98 meters to point "E", the coordinates of which are: N-1'400,000.00 meters, E-1'061,622.68 meters. From this point "E" it follows in a westerly direction for 7.500.00 meters to arrive at point "F", the coordinates of which are: N-1'400.000.00 meters, E-1'054,122.68 meters. From this point "F" it follows in a southerly direction for 2.667.90 meters to point "G", whose coordinates are: N-1'397.332.10 meters, E-1'054.122.68 meters. From point "G" it continues in a westerly direction for 10.000.00 meters to arrive at point "H" whose coordinates are : N-1'397.332.10 meters, E-1'044.122.68 meters. From point "H" it continues in a southerly direction for 5.000.00 meters to arrive at point "I", the coordinates of which are: N-1'392.332.10 meters, E-1'044.122.68 meters. From Point "I" it follows in an easterly direction for a distance of 10.000.00 3 meters to arrive at point "J" the coordinates of which are: N-1'392.332.10 meters, E-1'054.122.68 meters. From point "J" it continues in a direction S 16 degrees 1' 54".451 E for a distance of 1.884.74 meters to arrive at point "K", the coordinates of which are: N-1'390.520.66 meters, E-1'054.643.19 meters. From point "K" it continues in a westerly direction for 3.273.60 meters to point "L", the coordinates of which are: N-1'390.520.66 meters, E-1'051.369.59 meters. From this point "L" it continues in direction S 11 degrees 31' 54".402 E for a distance of 6.655.00 meters, to arrive at point "M", the coordinates of which are: N-1'384.000.00 E-1'052.700.00 meters. From this point "M" it continues in a direction S 51 degrees 42' 35".412 W for a distance of 484.15 meters to arrive at point "N", the coordinates of which are: N-1'383.700.00 meters, E-1'052.320.00 meters. From Point "N" it follows in a southerly direction for a distance of 8.000.00 meters to arrive at point "O" the coordinates of which are: N-1'375.700.00 meters, E-1'052.320.00 meters. From point "O" it continues in a westerly direction for a distance of 23.120.00 meters to arrive at point "P" the coordinates of which are: N-1'375.700.00 meters, E-1'029.200.00 meters. From Point "P" it follows in an northerly direction for a distance of 27.200.00 meters to arrive at point "Q" the coordinates of which are: N-1'402.900.00 meters, E-1'029.200.00 meters. From point "Q" it continues in a direction S 89 degrees 24' 55".330 E for a distance of 9800.51 meters to arrive at point "A", the starting and ending point of the boundary. The extension of the area described is 103.521 Hectares, 2.428 square meters, from which the area of the Association Contract "Lebrija" with an area of 206 Hectares, 3.690 square meters, is excluded. Paragraph 1.- In the event that any person should claim to be the title-holder of the subsoil within the Contracted Area, ECOPETROL shall assume the attention of the case and the pertinent obligations. Paragraph 2.- Should any part of the Contracted Area extend to areas which are or have been reserved and declared as being included within the National Park system, pursuant to that agreed in Clause 30 (section 30.4) of this contract, THE ASSOCIATE must comply with the conditions imposed by the competent authorities, without it being considered that this Contract has been modified and without any claim against ECOPETROL. CLAUSE 4 - DEFINITIONS For the purposes of this contract, the expressions listed below shall have the following meaning: 4.1 Contracted Area: Is the land defined in Clause 3 above, subject to Clause 8. 4.2 Commercial Field: Is that portion of the Contracted Area which can produce Petroleum in a quantity and of a quality which are economically exploitable. 4.3 Executive Committee: Is the body formed within thirty (30) days following the acceptance of a Commercial Field, to supervise, control and approve all operations and actions performed during the term of the contract. 4.4. Direct Exploration Costs: Are those expenses incurred by THE ASSOCIATE for the acquisition of the seismic, the drilling of the Stratigraphic Wells and the Wildcat Wells, as well as for locations, completion, equipment and tests of said wells, flow lines and separators. The Direct Exploration Costs do not include administrative or technical support from the head office, or the Company's central offices. 4 4.5 Joint Account: The records that will be kept through accounting books, in accordance with Colombian law, in order to credit or charge the Parties for their participation in the Joint Venture. 4.6 Budget Performance: Are the resources actually spent and/or committed in each one of the programs and projects approved for any given calendar year. 4.7 Effective Date: Shall be the calendar day on which the term of sixty (60) calendar days counted as from the signing date of this contract expires. All terms stipulated herein shall be counted as from that date, subject to the validity of the contract itself. 4.8 Cash Flow: Is constituted by the physical movement of cash (receipts and disbursements) which must be made by the Joint Account in order to attend to the various obligations contracted by the Association in the course of its normal operations. 4.9 Natural Gas: Mixture of hydrocarbons in a gaseous state, composed by the more volatile members of the paraffin series of hydrocarbons. 4.10 Direct Expenses: Are all those outlays charged to the Joint Account for the expenses of personnel directly employed by the Association, purchase of materials and supplies, contracting of services with third parties and other general expenses demanded by the Joint Venture in the normal course of its activities. 4.11 Indirect Expenses: Are those outlays charged to the Joint Account for technical and/or administrative support eventually furnished, with its own organization, by the Operator to the Joint Venture. 4.12 Commercial Interest: For operations in pesos, shall be the current interest rate certified by the Superintendency of Banks for the corresponding period; for operations in dollars of the United States of America, shall be the prime rate fixed by CITIBANK in New York. 4.13 Interest in the Operation: Is the participation in the obligations and rights which each one of the Parties acquires in the exploration and exploitation of the Contracted Area. 4.14 Development Investments: Refer to the amount of money invested in goods and equipment capitalized as assets for the Joint Venture in a Commercial Field once its existence is accepted by the Parties. 4.15 Production Objectives: Are the formations, layers or sands with a possible accumulation of hydrocarbons. 4.16 Joint Venture: The activities and work executed or in the process of execution on behalf of the Parties and for their account. 4.17 Operator: The person appointed by the parties to carry out directly, for their account, the necessary operations to explore and exploit the Petroleum found in the Contracted Area. 5 4.18 Parties: On the Effective Date, ECOPETROL and THE ASSOCIATE. Subsequently, and at any time, ECOPETROL for one party and THE ASSOCIATE and/or its assignees, for the other. 4.19 Exploration Period: Is the term which THE ASSOCIATE has to fulfill the obligations stipulated in Clause 5 of this contract and which shall not exceed six (6) years counted as from the Effective Date, with the exception of the cases contemplated in Clauses 9 (subsections 9.3 and 9.8) and 34. 4.20 Exploitation Period: The time which elapses from the end of the Exploration Period to the end of this contract. 4.21 Petroleum: The natural mixture of hydrocarbons in a liquid or gaseous state under normal conditions, as well as those substances which accompany or derive from them, with the exception of helium and rare gases. 4.22 Wildcat Well: Is any well designated as such by THE ASSOCIATE to be drilled or deepened for its account in the Contracted Area in search of Petroleum. For the fulfillment of the obligations stipulated in Clause 5 of this contract, the pertinent Wildcat Well will be previously rated between ECOPETROL and THE ASSOCIATE. 4.23 Exploitation (or Development) Well: Is any well previously programmed by the Executive Committee for the production of Petroleum within the Commercial Area. 4.24 Budget: Is the basic planning instrument whereby resources are assigned for specific projects to be applied within a calendar year or a portion thereof in order to achieve the goals and objectives proposed by THE ASSOCIATE or the Operator. 4.25 Extensive Production Tests: Are the operations carried out at one or several productive Wildcat wells, in order to evaluate the production conditions and behavior of the field. 4.26 Reimbursement: Is the payment of 50% of the Direct Exploration Costs incurred by THE ASSOCIATE. 4.27 Exploration Work: Are those operations executed by THE ASSOCIATE in relation to the search and discovery of Petroleum within the area of the contract. CHAPTER II - EXPLORATION CLAUSE 5 - TERMS AND CONDITIONS 5.1.1. During the first year, counted as from the Effective Date of this contract, THE ASSOCIATE must carry out the evaluation and preparation of maps based on the existing information, Engineering Studies on the "Buturama" and "Totumal" fields in order to analyze the mechanisms of production and the improvement of recovery in the formations in the area, the reprocessing of at least 350 kilometers of seismic and the design of a seismic program corresponding 6 to the second contractual year. During the second year, THE ASSOCIATE will carry out the acquisition of a seismic program of a minimum length of one hundred (100) kilometers and the reprocessing and integration of the seismic acquired for its interpretation. At the end of the second contractual year, THE ASSOCIATE will have the option to renounce the contract, always provided that it has complied with its obligations during the first and second years. 5.1.2. During the third year THE ASSOCIATE will drill one (1) Wildcat Well until it penetrates the formations which might be Petroleum bearing in the area. At the expiration of this third year the Contract will end, if its extension has not been requested and authorized pursuant to subsection 5.2 below or a Commercial Field has not been discovered. PARAGRAPH During the first year counted from the effective date of this contract, THE ASSOCIATE will carry out the environmental studies required for the acquisition of the seismic study corresponding to the second contractual year and to proceed with the respective Environmental Licence. During the second year, THE ASSOCIATE will carry out the environmental studies required for the drilling of the well corresponding to the third contractual year and proceed with the respective Environmental Licence. 5.2. If THE ASSOCIATE has complied satisfactorily with the obligations set forth in Clause 5, ECOPETROL, at the request of THE ASSOCIATE, will extend yearly for up to three (3) additional years, the Exploration Period, and during each year of extension THE ASSOCIATE will be obligated to carry out Exploration Work in the Contracted Area, consisting of the drilling of one (1) Wildcat Well until it penetrates the formations which might be Petroleum bearing in the area. 5.3. If during any year of the Exploration Period THE ASSOCIATE decides to carry out work corresponding to its obligations for the following year, it may request ECOPETROL's approval to carry out said work. If the request is accepted by ECOPETROL, it shall determine the manner and amount in which the mentioned obligations will be transferred. 5.4. During the term of this Contract, THE ASSOCIATE may carry out Exploration Work in the areas which it retains pursuant to clause 8 and THE ASSOCIATE will be the only one responsible for the risks and costs of these activities and, therefore, shall have the full and exclusive control thereof without the maximum duration of the contract being modified for this reason. CLAUSE 6- FURNISHING OF INFORMATION DURING THE EXPLORATION 6.1. ECOPETROL will furnish to THE ASSOCIATE, when it so requires, all the information in its possession within the Contracted Area. The costs related to the reproduction and furnishing of such information shall be for the account of THE ASSOCIATE. 6.2. During the Exploration Period THE ASSOCIATE will deliver to ECOPETROL, as it is obtained, all the geological and geophysical information, edited magnetic tapes, processed seismic sections and all the field information supporting it, magnetic and gravimetric profiles, all in reproducible originals, copies of the geophysical reports, reproducible originals of all records of the wells drilled by THE ASSOCIATE, including the final composited graph of each well and copies 7 of the final drilling report including core sample analysis, the results of production tests and any other information related to the drilling, study or interpretation of any nature made by THE ASSOCIATE for the Contracted Area without limitation. ECOPETROL is entitled, at any time and through the procedures it deems appropriate, to witness all the operations and verify the information listed above. 6.3 The Parties agree that during the term of this Contract, all the information obtained in furtherance thereof, is of a confidential nature. Likewise, the Parties agree that in each case they may make exchanges with companies associated or not associated to ECOPETROL. It is understood that what is agreed herein will take place without prejudice to the obligation to supply to the Ministry of Mines and Energy all the information it may request in accordance with the prevailing legal and statutory provisions. Nevertheless, it is understood and agreed that THE ASSOCIATE may provide at its sole discretion the information required by its affiliates, consultants, contractors, financial institutions, and which may be required by competent authorities with jurisdiction over THE ASSOCIATE or its affiliates, or by the regulations of any stock exchange where the stock of THE ASSOCIATE or related corporations are listed. CLAUSE 7 - BUDGET AND EXPLORATION PROGRAMS THE ASSOCIATE will be under the obligation to prepare, observing the provisions of this Contract, the necessary programs and Budgets to effect the exploration in the Contracted Area. Said Budgets and programs shall be presented promptly TO ECOPETROL CLAUSE 8 - RETURN OF AREAS 8.1 At the end of the initial exploration period or of the extensions which THE ASSOCIATE may have obtained, or at the latest at the expiration of the sixth (6th) year, if a Commercial Field has been discovered in the Contracted Area, said area shall be reduced to fifty percent (50%) of the original area: two (2) years later, the area shall be reduced to an extent equal to fifty percent (50%) of the initially Contracted Area and two (2) years later said area will be reduced to the area of the Commercial Field or Commercial Fields which are in production or development, plus a reserve zone five (5) kilometers wide around each field. The Commercial Fields plus the zone surrounding each field shall be called the exploitation area and this shall be the only part of the Contracted Area that will remain subject to the terms of this contract. 8.2 THE ASSOCIATE shall determine the areas that it will return to ECOPETROL in lots with a minimum area of five thousand (5,000) hectares each, unless THE ASSOCIATES demonstrates that this is not possible. Despite the obligation to return the areas referred to in Clause 8 (subsection 8.1), THE ASSOCIATE is not obligated to return areas which are under development or in production, including the reserve zones, five (5) kilometers wide, surrounding said areas, except in the event that, for reasons attributable to THE ASSOCIATE, the development or production operations are suspended for more than a year, continuously, without just cause, in which case said areas shall be returned to ECOPETROL and the Contract shall terminate for said areas or part of an area. What is contemplated herein applies equally to exploitation under the sole risk mode. 8 CHAPTER III - EXPLOITATION CLAUSE 9 - TERMS AND CONDITIONS 9.1 In order to commence the Joint Venture under the terms of this contract, it is considered that the exploitation work will begin on the date on which the Parties acknowledge the existence of a Commercial Field or when the provisions of Clause 9 (subsection 9.5) are complied with. The existence of a Commercial Field will be determined through the drilling, by THE ASSOCIATE, within the proposed Commercial Field, of a sufficient number of wells to allow a reasonable determination of the area and Commercial potential of the field. In this case, THE ASSOCIATE shall inform ECOPETROL in writing of the finding of a Commercial Field, supplying the studies on which it has based this conclusion. ECOPETROL, within the term of ninety (90) calendar days as from the date on which THE ASSOCIATE delivers all the supporting information, shall accept or object the existence of the Commercial Field. ECOPETROL may request the additional information it deems necessary within thirty (30) days following the date of presentation of the first supporting information. 9.2.1. If ECOPETROL accepts the existence of the Commercial Field, it shall notify THE ASSOCIATE accordingly within the term on ninety (90) calendar days referred to in Clause 9 (subsection 9.1.) and shall begin to participate, upon the terms of this contract, in the development of the Commercial Field, discovered by THE ASSOCIATE. 9.2.2. ECOPETROL shall reimburse THE ASSOCIATE for fifty percent (50%) of the Direct Exploration Cost of: 9.2.2.1 The drilling by THE ASSOCIATE of Wildcat Wells which have turned out to be commercially productive. 9.2.2.2 The seismic acquisition and drilling of a stratigraphic well carried out prior to the date on which ECOPETROL makes an announcement in respect of the existence of each Commercial Field. 9.2.2.3 The drilling of Wildcat Wells A-1, according to the Lahee classification, which are dry, drilled by the ASSOCIATE prior to the date on which ECOPETROL has made an announcement with regard to the existence of a Commercial Field. 9.2.2.4 The drilling of Wildcat Wells which are dry and have been drilled by the ASSOCIATE prior to the discovery well of each Commercial Field. 9.2.3 The amount of these costs shall be determined in dollars of the United States of America, using as a reference date that on which THE ASSOCIATE has made such payments: therefore the costs incurred in pesos will be paid at the representative market exchange rate certified by the Bank of the Republic on the above date. 9.2.4. The reimbursement of the Direct Exploration Costs in accordance with that stipulated in Clause 9 (subsection 9.2.2.) will be made by ECOPETROL to THE ASSOCIATE, from the 9 moment in which the field is put into production by the Operator, with the amount in dollars equivalent to fifty per cent (50%) in the direct participation in the total production of the respective field, after deducting the percentage corresponding to royalties. 9.3. If ECOPETROL does not accept the existence of the Commercial Field referred to in clause 9 (subsection 9.1.) it may indicate to THE ASSOCIATE the additional work it considers necessary in order to demonstrate the existence of a Commercial Field, which work may not cost in excess of TWO MILLION DOLLARS (US$2.000.000.00), nor may it require for its execution a term of more than one (1) year, in which case, the Exploration Period for the Contracted Area shall be automatically extended for a length of time equal to that agreed upon between the Parties as necessary in order to perform the additional work requested by ECOPETROL in this clause, but without prejudice to the provisions regarding the reduction of areas in Clause 8 (subsection 8.1.). 9.4. If ECOPETROL, after the additional work requested by it pursuant to clause 9 (subsection 9.3) has been executed, accepts the existence of the Commercial Field referred to in clause 9 (subsection 9.1.), it shall begin to participate in the development operations of the aforementioned field upon the terms established in this contract and shall reimburse THE ASSOCIATE in the manner established in clause 9 (subsection 9.2.3. and 9.2.4), for fifty percent (50%) of the cost of the additional work requested, as mentioned in Clause 9 (subsection 9.3) and the work executed shall become the property of the Joint Account. 9.5. If ECOPETROL does not accept the existence of a Commercial Field after the additional work referred to in clause 9 (subsection 9.3) has been performed, THE ASSOCIATE shall be entitled to execute the work it deems necessary for the exploitation of said field and to reimburse itself for two hundred percent (200%) of the total cost of the work executed for its account and risk, in the respective field and up to fifty percent of the Direct Exploration Costs which THE ASSOCIATE has carried out prior to the discovery pursuant to clause 9 (subsection 9.2.2) For the purposes of this clause the reimbursement will be made on the value of the Petroleum produced, less the royalties referred to in Clause 13, deducting the costs of production, gathering, transportation and sale. If THE ASSOCIATE is using the sole risk method, it is understood that the term for exploitation commences counted from the date on which ECOPETROL communicates to THE ASSOCIATE that it does not accept the commerciality. For the purposes of calculating the dollar value of the disbursements made in pesos, the exchange rate for the date on which ECOPETROL made such payments shall be used. For the purposes of this clause, the value of each barrel of Petroleum produced in said field during a calendar month shall be the average price per barrel received by THE ASSOCIATE from the sale of its participation in the Petroleum produced in the Contracted Area during he same month. When THE ASSOCIATE has been reimbursed in the percentage established in this clause, all the wells drilled, the facilities and goods of all types acquired by THE ASSOCIATES for the exploitation of the field and paid as indicated in this clause, shall become the property of the Joint Account at no cost, upon the acceptance by ECOPETROL of participating in the development of that field. 9.6. ECOPETROL may begin at any time to participate in the operation of the field discovered and developed by THE ASSOCIATE without prejudice to the right of THE ASSOCIATE to reimburse itself for the investments it has made for its own account in the manner and percentage stipulated in Clause 9 (subsection 9.5). Once THE ASSOCIATE has recovered such amounts, 10 ECOPETROL shall begin to participate in the economic results of the wells developed exclusively for the account of THE ASSOCIATE. 9.7. In order to delimit a Commercial Field, all the geological and geophysical information and the information pertaining to the wells drilled within said field or related to it shall be considered. 9.8. If at the end of the Exploration Period of six (6) years referred to in Clause 5 (subsection 5.2.) THE ASSOCIATE has drilled one or several Wildcat Wells which indicate the possible existence of a Commercial Field, ECOPETROL, at the request of THE ASSOCIATE, shall extend the Exploration Period for the necessary time, which shall not exceed one (1) year, to give THE ASSOCIATE the opportunity to demonstrate the existence of said Commercial Field, without prejudice to the provisions of Clause 8. 9.9 If after acceptance of the commercial viability of one or more fields, THE ASSOCIATE continues to comply with the exploratory obligations agreed under Clause 5, it may simultaneously carry out the exploitation of the said fields before the termination of the Exploration Period as defined in Clause 4, subsection 4.19. However only as from the date of expiry of the latter, will the Period of Exploitation be counted. CLAUSE 10 - TECHNICAL CONTROL OF THE OPERATIONS 10.1. The parties agree that THE ASSOCIATE is the Operator and, as such, with the limitations contemplated in this contract, will have the control of all the operations and activities it considers necessary for a technical, efficient and economical exploitation of the Petroleum found within the area of the Commercial Field. 10.2. The Operator is under the obligation to carry out all the development and production operations in accordance with the known industrial regulations and practices, using the best technical methods and systems required for the economic and efficient exploitation of the Petroleum and applying the legal and statutory provisions on the matter. 10.3. For all purposes of this Contract, the Operator shall be considered a distinct entity from the Parties, and likewise for the application of the civil, labor and administrative legislation and for its relations with the personnel in its service, in accordance with Clause 32. 10.4. The Operator shall be entitled to resign from said position, by written notice to the Parties given six (6) months in advance of the date on which it wishes its resignation to take effect. The Executive Committee shall designate the new Operator in accordance with Clause 19 (subsection 19.3.2). CLAUSE 11 - EXPLOITATION PROGRAMS AND BUDGETS 11.1. Within three (3) months following the acceptance of a Commercial Field in the Contracted Area, the Operator shall submit to the Parties and activity program and a Budget for the remainder of the pertinent calendar. In the event that there are less than six and a half (6-1/2) left 11 before the end of that year the Operator shall prepare and submit a Budget and programs for the following calendar year, within a term of three (3) months. The future Budgets and programs shall be submitted to the Parties at the ordinary meeting of the Executive Committee scheduled for the month of July of the immediately preceding year. Within twenty (20) days following the receipt of the Budgets and programs, the Parties shall inform the Operator in writing of the changes they wish to propose. When this occurs, the Operator shall take into account the observations and modifications proposed by the Parties in the preparation of the Budget and of the programs which shall be submitted for the final approval of the Executive Committee, at the ordinary meeting held in November of each year, except in the event that there are less than six and a half (6-1/2) months left before the end of the year in which the existence of the Commercial Field is recognized. In the event that the total Budget has not been approved before the month of November, those aspects of the Budget as to which an agreement has been reached shall be approved by the Executive Committee, and those aspects which are not approved shall be submitted immediately to the Parties for further study and a final decision as provided in Clause 20. 11.2. The Parties may propose additions or revisions to the Budget and to the approved programs, but, except in case of emergency, these must not be made with a frequency of less than three (3) months. The Executive Committee shall decide on the additions and revisions proposed at a meeting, which shall be called within thirty (30) days following the submission thereof. 11.3. The purpose of the programs and Budgets is mainly: 11.3.1. To determine the operations which are to be carried out during the following calendar year; and 11.3.2. To determine the expenditures and investments which the Operator is empowered to make. 11.4. The terms program and Budget mean the indicated work plan and the estimated expenditures and investments to be made by the Operator in the different aspects of the operation, such as: 11.4.1. Capital investments in production: drilling for the development of fields, workover or rehabilitation of wells and specific constructions for production. 11.4.2. General construction and equipment: industrial and campsite facilities, transportation and construction equipment, drilling and production equipment. Other constructions and equipment. 11.4.3. Maintenance and operation expenses: production expenses, geological expenses and administration expenses for the operation. 11.4.4. Working capital requirements. 11.4.5. Contingency funds. 12 11.5. The Operator shall make all the expenditures and investments and shall complete the development and production operations in accordance with the programs and Budgets referred to in Clause 11 (subsection 11.1), without exceeding ten percent (10%) of the total Budget for each year, except with the authorization of the Parties in special cases. 11.6. The Operator shall not, on its own decision, commence any project, nor shall it charge to the Joint Account expenses not approved in the Budget, which exceed the sum of forty thousand dollars of the United States of America (US$40.000) or its equivalent in Colombian currency, by project or by quarter. 11.7. The Operator is authorized to make expenditures imputable to the Joint Account without the prior authorization of the Executive Committee, in the case of emergency measures intended to safeguard the personnel or property of the Parties, emergency expenditures originating from fire, floods, storms and other disasters; emergency expenditures necessary for the operation and the maintenance of the production facilities, including the maintenance of the wells in a condition to produce with the maximum efficiency; emergency expenditures indispensable for the protection and preservation of materials and equipment necessary in the operations. In these cases the Operator must call a special meeting of the Executive Committee as soon as possible, in order to obtain its approval to continue with the emergency measures. CLAUSE 12 - PRODUCTION 12.1. With the frequency which may be necessary, the Operator shall determine, with the approval of the Executive Committee, the Maximum Degree of Productive Efficiency (MER) for each Commercial Field. This Maximum Degree of Productive Efficiency (MER) shall be the maximum rate of production of Petroleum which may be extracted from a field in order to obtain the maximum final recovery of the reserves. The estimated production shall be reduced in the manner necessary to compensate the actual or anticipated conditions of the operation, such as wells under repair which are not producing, capacity limitations in the collector lines, in the pumps, in the separators, in the tanks, in the pipelines and in other facilities. 12.2. Periodically, at least once a year, the Operator shall determine, with the approval of the Executive Committee, the area considered capable of producing Petroleum in a commercial quantity in each field and shall propose a spacing and schedule for the drilling of Development Wells under conditions of economy and efficiency. 12.3 The Operator shall prepare and deliver to each of the Parties, at regular three-month intervals, a program indicating the participation in the production and another showing the distribution of the production of each Party for the next six (6) months. The production forecast shall be made based on the Maximum Degree of Productive Efficiency (MER) as stipulated in Clause 12 (subsection 12.1) and adjusted to the rights of each Party, in accordance with this contract. The production distribution program shall be determined bases on the periodic petitions of each Party, and in accordance with Clause 14 (subsection 14.2) with the corrections which might be necessary to ensure that neither one of the Parties, being capable of withdrawing, will receive less than the amount to which it is entitled as provided in Clause 14 without prejudice to the provisions in Clauses 21 (subsection 21.2) and 22 (subsection 22.5). 13 12.4. If either one of the Parties anticipates a reduction in its capacity to receive Petroleum with respect to the forecast furnished to the Operator, it must inform the latter thereof as soon as possible, and if such a reduction is due to an emergency situation, it shall notify the Operator within twelve (12) hours following the occurrence of the event which causes the reduction. Therefore, said party shall furnish a new receipt program to the Operator, taking into account the pertinent reduction. 12.5 The Operator may use the crude oil and the gas consumed in carrying out the production operations in the Contracted Area and these consumptions are exempt from the royalties referred to in Clause 13 (subsections 13.1 and 13.2). CLAUSE 13 - ROYALTIES 13.1. During the exploitation of the Contract Area, prior to the distribution of the production corresponding to the Parties, the Operator shall deliver to ECOPETROL by way of a royalty twenty percent (20%) of the verified production of liquid hydrocarbons of said area. ECOPETROL, for its account and risk, shall take in kind from the tanks belonging to the Joint Account the production percentage corresponding to the royalty. 13.2. By way of a royalty, the Operator shall deliver to ECOPETROL twenty percent (20%) of the gas production. 13.3. Of the production percentage corresponding to the royalty, ECOPETROL, in the manner and upon the terms established by the law, shall pay the Nation, Departments and Municipalities, the royalties corresponding to the total production of the Commercial Field, and THE ASSOCIATE shall in no case be responsible for any payment to these entities and persons for said account. CLAUSE 14 - DISTRIBUTION AND AVAILABILITY OF THE PETROLEUM 14.1. The Petroleum produced, with the exception of that which has been used for the benefit of the operations under this contract and that which is inevitably lost in these operations, shall be transported to the common tanks of the Parties or to other measurement facilities agreed by the Parties. The Petroleum shall be measured in accordance with the standards and methods accepted by the oil industry and, bases on this measurement, the percentages referred to in Clause 13 shall be determined. From that moment on, the remaining Petroleum shall become the property of each party in the proportions specified in this Contract. 14.2 Distribution of Production 14.2.1 After deducting the percentages corresponding to the royalty, the remaining petroleum and gas produced from the Contracted Area shall belong to the Parties in the proportion of fifty (50%) percent for ECOPETROL and fifty (50%) percent for THE ASSOCIATE until the accumulated production in the Contracted Area reaches the quantity of 60 million barrels of oil. 14.2.2 When the accumulated production is in excess of 60 million barrels of oil, the remaining petroleum and gas produced from the Contracted Area (with the prior deduction of the percentage 14 corresponding to the royalty) belongs to the Parties in the proportion resulting from the application of the factor R as appears in the following chart: FACTOR R Distribution of Production after deduction of Royalties
ASSOCIATE ECOPETROL 0.0 to 1.0 50 50 1.0 to 2.0 50/R 100-50/R 2.0 or more 25 75
14.2.3 For purposes of the above mentioned chart factor R is defined in the following terms: R= IA ------------------- ID + A-B + GO Where: IA (Accumulated Income of THE ASSOCIATE): The valorization of the accumulated income corresponding to the volume of hydrocarbons produced by THE ASSOCIATE at the price of reference agreed by the parties, excluding the hydrocarbons re-injected into the Fields of the Contracted Area, and those consumed in the operation and the burnt off gas. The average price of reference of the hydrocarbons will be determined by the mutual agreement of the Parties. The Accumulated Income will be determined by taking as a base the Monthly Income, which will itself be determined by multiplying the average monthly price of reference by the monthly production pursuant to Form 9 of the MME. ID (Accumulated Development Investments): Fifty per cent (50%) of the accumulated development investments approved by the Executive Committee of the Association. A: The Direct Exploration Costs incurred by THE ASSOCIATE pursuant to Clause 9 (subsections 9.2.2, 9.2.3, and 9.2.4) of this Contract. B: The accumulated repayment of the Direct Exploration Costs, referred to above, pursuant to Clause 9 (subsections 9.2.2, 9.2.3 and 9.2.4) of this Contract. GO: The accumulated expenses of the operation, approved by the Executive Committee of the Association, in the proportion corresponding to THE ASSOCIATE, together with the accumulated transport costs of THE ASSOCIATE. Transport costs are the investment and operation expenses of the transportation of hydrocarbons, produced in the commercial fields situated in the Contracted Area, from these commercial fields to the port of export or the place where the price to be used in the calculation of income is to be agreed. 15 IA: These transport costs will be determined by the Parties by mutual agreement once the exploitation stage of the fields which have been accepted as commercially viable by ECOPETROL begins. Extraordinary or similar Contributions which are directly applicable to the exploitation of hydrocarbons in the Contracted Area are included in the Operation Expenses. All the amounts included in the determination of factor R are to be in dollars. To achieve this, expenses in pesos must be converted into dollars at the representative market exchange rate, as certified by the Bank of the Republic, on the date on which the corresponding payments have been made. 14.2.4 Calculation of Factor R: The distribution of the production based on Factor R will be applied from the first day of the third calendar month following the one in which the accumulated production in the Contracted Area reaches sixty million barrels of Petroleum. The calculation of Factor R will be based on the accounting close corresponding to the calendar month of the financial year in which the accumulated production in the Contracted Area reaches sixty million barrels of Petroleum. The resulting production distribution will apply until 30 June of the following year. From this moment, the distribution of production to which Factor R will apply, will be made for periods of one year (from 1 July to 30 June)), the payment of this, to be based on the accumulated values at 31 December of the year immediately preceding, in accordance with the corresponding accounting close. 14.2.5. In the event that a field produces both crude oil and gas, in order to apply the foregoing distribution chart the total accumulated production which shall be taken into account shall be that of the principal hydrocarbon in accordance with the authorization granted by the Ministry of Mines and Energy for the exploitation of said field. In order to determine the total accumulated production, the measurement for the equivalent gas is the amount of 7,000 standard cubic feet of gas per barrel of Petroleum. 14.3. In addition to the tanks and other jointly-owned facilities, each Party shall have the right to build its own production facilities in the Contracted Area for its own and exclusive use, complying with the legal regulations. The transportation and delivery of Petroleum by each Party to the pipeline and to other reservoirs which are not jointly owned shall be made for the exclusive account and risk of the Party which receives the Petroleum. 14.4. In the event that production is obtained at places not connected by pipelines, charging the Joint Account, the Parties may agree to install pipelines to the point where the Petroleum can be sold, or to a place which connects with the pipeline. If the Parties agree to build such pipelines, they shall enter into the contracts they consider appropriate for such purpose and shall designate the Operator in accordance with the prevailing legal provisions. 14.5. Each Party shall be the owner of the Petroleum produced and stored as a result of the Operation and placed at its disposal, as stipulated in this contract, and at its cost must receive it in kind or sell or dispose of it separately, as provided in Clause 14 (subsection 14.3). 16 14.6. If either one of the Parties, for any reason whatsoever, cannot separately dispose of, or withdraw from the tanks of the Joint Account all or part of the Petroleum corresponding to it pursuant to this contract, the following procedure shall apply: 14.6.1. If ECOPETROL is the party which cannot withdraw, in whole or in part, its share of Petroleum (participation plus royalty), in accordance with Clause 12 (subsection 12.3), the Operator may continue to produce the field and to deliver to THE ASSOCIATE, in addition to the portion representing THE ASSOCIATE's share in the operation bases on one hundred percent (100%) of the MER, all that Petroleum which THE ASSOCIATE chooses and is able to withdraw up to a limit of one hundred percent (100%) of the MER, crediting to ECOPETROL, for subsequent delivery, the volume of Petroleum which ECOPETROL was entitled to but did not withdraw. But as regards the volume of Petroleum not withdrawn which corresponds to ECOPETROL that month as royalties, THE ASSOCIATE, at the request of ECOPETROL, shall pay the latter in dollars of the United States of America, the difference between the quantity of Petroleum withdrawn and the quantity of Petroleum corresponding to it by way of the royalty referred to in Clause 13 (subsections 13.1 and 13.2), it being understood that any withdrawal of Petroleum made by ECOPETROL shall be applied, in the first place, to the payment in kind of the royalty, and that once this has been paid, the additional withdrawals of Petroleum made shall be applied to the participation corresponding to it according to Clause 14 (subsection 14.2). 14.6.2. In the event THE ASSOCIATE is the Party which cannot withdraw, in whole or in part, its portion assigned under Clause 12 (subsection 12.3), the Operator shall deliver to ECOPETROL, based on one hundred percent (100%) of the MER, not only the participation and share corresponding to it, but also the Petroleum which ECOPETROL is able to withdraw up to a limit to THE ASSOCIATE for its subsequent delivery, the portion corresponding to its share which it has not been able to withdraw. 14.7. When both parties are able to receive the Petroleum assigned under clause 12 (subsection 12.3), the Operator shall deliver to the Party which before was unable to receive its share of the production and, at its request, in addition to its participation in the operation, a minimum of ten percent (10%) per month of the monthly production corresponding to the other Party and, by mutual agreement, up to one hundred percent (100%) of the unreceived share, up to the time when the total quantities credited to the Party which was unable to receive its Petroleum, have been canceled. 14.8. Without prejudice to the legal provisions which govern the matter, each Party shall be free, at any time, to sell or export its share of Petroleum obtained, under this contract, or to dispose of it in any way. CLAUSE 15 - UTILIZATION OF GAS In the event that one or several fields of Petroleum in liquid state with associated gas, the Operator within two (2) years following the commencement of commercial production in the field, shall present a project for the utilization of the Natural Gas for the benefit of the Joint Account. The Executive Committee shall approve the project and determine the schedule for its execution. If the Operator does not present a project within a term of two (2) years of fails to execute the project 17 which has been approved within the period established by the Executive Committee, ECOPETROL may take, free of charge, for itself all the available gas from the fields under exploitation, insofar as it is not required for the efficient exploitation of the field. CLAUSE 16 - UNIFICATION When an economically exploitable field extends in a continuous manner to a structure located in the Contracted Area or another or other areas, the Operator in agreement with ECOPETROL and with the other interested parties, shall implement, with the prior approval of the Ministry of Mines and Energy, a unit exploitation plan, which must agree with the Petroleum exploitation engineering techniques. CLAUSE 17 - SUPPLY OF INFORMATION AND INSPECTION DURING EXPLOITATION 17.1 The Operator shall deliver to the Parties, as they are obtained, reproducible originals (sepias), and copies of the electrical, radioactive and sonic records of the wells drilled, histories, core analyses, production tests and all routine reports made or received in relation to the operations and activities carried on in the Contracted Area. 17.2 Each one of the Parties, at its expense and for its account and risk, shall be entitled, through authorized representatives, to inspect the wells and facilities of the Contracted Area and the activities related therewith. Said representatives shall be entitled to examine cores, samples, maps, records of the wells drilled, surveys, books and any other source of information related to the development of this contract. 17.3 In order for ECOPETROL to comply with the provisions of Clause 29, the Operator shall prepare and deliver to ECOPETROL all the reports required by the National Government. 17.4 The information and data related to exploitation work must be kept confidential in the same terms of Clause 6 (subsection 6.3) hereof. CHAPTER IV - EXECUTIVE COMMITTEE CLAUSE 18 - CONSTITUTION 18.1 Within thirty (30) calendar days following the acceptance of a Commercial Field, each Party shall appoint a representative and its corresponding first and second alternates, to make up the Executive Committee and inform the other Party in writing of the names and addresses of its representative and alternates. The Parties may change representative or alternates at any time, but must inform the other party in writing. The vote or decision of the representative of each one of the Parties shall bind said Party. If the principal representative of one of the Parties cannot attend a meeting of the Committee, he shall designate in writing the alternate who is to attend, who shall have the same authority as the principal. 18.2 The Executive Committee shall hold ordinary meetings during the months of March, July and November, in which the exploitation program carried out by the Operator and the 18 immediate plans shall be reviewed. Annually, at the ordinary meeting held in July, the Operator shall present to the Executive Committee the annual operating program and the expenditure and investment Budget for the following calendar year, which shall be examined and approved at the ordinary meeting of the month of November. 18.3 The Parties and the Operator may request the calling of special meetings of Executive Committee to analyze specific conditions of the operation. The Chairman of the Committee shall notify, ten (10) calendar days in advance, the date of the meeting and the matters that are going to be considered. Any matter which has not been included in the agenda of the meeting may be taken up during it, with the prior acceptance of the representatives of the Parties in the Committee. 18.4 The representative of each of the Parties shall have in all matters discussed by the Executive Committee, a vote equivalent to the percentage of its total Interests in the Joint Venture. In order to be valid, any resolution or determination made by the Executive Committee must have the affirmative vote of more than fifty percent (50%) of the total Interest. In accordance with the enunciated procedure, the decisions adopted by the Executive Committee shall be mandatory and definitive for the Parties and for the Operator. CLAUSE 19 - FUNCTIONS 19.1 The representatives of the Parties shall constitute the Executive Committee, invested with full authority and responsibility to establish and adopt exploitation, development, operating programs and Budgets related to this contract. A representative of the Operator shall attend the meetings of the Executive Committee. 19.2 The Executive Committee shall appoint its Secretary. The Secretary shall keep complete and detailed records and minutes of each meeting, as well as notes on all the discussions and determinations made by the Committee. The copies of these minutes, in order to be valid, must be approved and signed by the representatives of the Parties within five (5) business days following the adjournment of the meeting and delivered to them as soon as possible. 19.3 The functions of the Executive Committee are, among others, the following: 19.3.1 To adopt its own regulations. 19.3.2 To designate the Operator in case of resignation or removal. 19.3.3 To designate the External Auditor of the Joint Account. - 19.3.4 To approve or disapprove the annual operating program and the expense Budget and any amendment or revision and to authorize extraordinary expenses. 19.3.5 To determine the expense rules and policies. 19.3.6 To approve or disapprove any recommendation regarding expenses made by the Operator (which have not been included in the approved Budget) when said expenses exceed the 19 amount of forty thousand dollars of the United States of America (US$40,000) or its equivalent in Colombian currency. 19.3.7 To advise the Operator and decide on matters submitted for its consideration. 19.3.8 To create the subcommittees deemed necessary and establish the functions which they are to carry out, under its direction and charging the Joint Account. 19.3.9 To define the type and periodicity of the drilling, operation and production reports and any other information which the Operator must furnish to the Parties charging the Joint Account. 19.3.10 To supervise the operation of the Joint Account. 19.3.11 To authorize the Operator to enter into contracts on behalf of the Joint Venture in amounts exceeding forty thousand dollars of the United States of America (US$40,000) or its equivalent in Colombian legal tender, and 19.3.12 In general, to perform all functions authorized in this contract and which do not correspond to another entity or person pursuant to an express clause or a legal or statutory provision. CLAUSE 20 - DECISION IN CASE OF DISAGREEMENT IN THE OPERATION 20.1 Any project related to the Joint Venture which requires for its execution the approval of the Executive Committee, as established in this contract and regarding which the representatives of the Parties in said committee are in disagreement, shall be submitted directly to the highest executive of each of the Parties residing in Colombia, in order to make a joint decision. If within sixty (60) calendar days following the submittal of the consultation the Parties have reached an agreement or decision regarding the matter in question, they shall communicate this to the Secretary of the Executive Committee, who shall call a meeting of that body within fifteen (15) calendar days following the receipt of the communication and the members of said Committee shall be obligated to ratify the agreement or decision at said meeting. 20.2 If within sixty (60) calendar days following the date of submittal of the consultation the Parties do not reach an agreement regarding the difference, the operations may be carried out in accordance with Clause 21. CLAUSE 21 - OPERATIONS UNDER THE RISK OF ONE OF THE PARTIES 21.1 If at any time one of the Parties wishes to drill a Wildcat Well not approved in the operation program, it shall notify the other Party in writing, no less than thirty (30) calendar days in advance of the next meeting of the Executive Committee, of its desire to drill said well, including information such as location, recommendation to drill, depth and estimated costs. The Operator shall include said proposal among the items to be taken up at the next meeting of the Executive Committee. If this proposal is approved by the Executive Committee, said well shall be drilled charging the Joint Account. If said proposal is not accepted by the Executive Committee, the party who wishes to drill the mentioned well, hereinafter called the participating Party, shall have the right 20 to drill, complete, produce or abandon said well at its exclusive expense and risk. The Party who does not wish to participate in the foregoing operation shall be called the non-participating Party. The participating Party shall commence the drilling of said well within one hundred eighty (180) days following its rejection by the Executive Committee. If the drilling is not commenced within this period, it must again be submitted to the consideration of the Executive Committee. At the request of the participating Party, the Operator shall drill the aforementioned well for the account and risk of the Participating party, provided that in the judgment of the Operator this operation does not interfere with the normal development of the field operations, upon the advance to the Operator, by the participating Party, of the sums which the Operator deems necessary in order to carry out the drilling. In the event said well cannot be drilled by the Operator without interfering with the normal development of the operations, the participating Party shall be entitled to drill said well directly or through a competent service company and, in this case, the participating Party shall be responsible for said operation, without interfering with the development of the normal field operations. 21.2 If the well referred to in Clause 21 (subsection 21.1) is completed as productive, it shall be administrated by the Operator and the production of said well, after deducting the royalty referred to in Clause 13, shall be the property of the participating Party, which shall cover all the expenses of the operation of said well until the net value of the production, after deducting the costs of production, gathering, storage, transportation and the like and sales, is equal to two hundred percent (200%) of the cost of drilling and completion of said well, which from that moment on and for the purposes of this contract shall be the property of the Joint Account, as if it had been drilled with the approval of the Executive Committee for the account of the Parties. For the purposes of this clause, the value of each barrel of Petroleum produced at said well during a calendar month, before deducting the aforementioned costs, shall be the average price per barrel received by the participating Party from the sales of its participation in the Petroleum produced in the Contracted Area during that same month. 21.3 If at any time one of the Parties wishes to work over, deepen or plug a well which is not in commercial production or which is a dry well that has been drilled by the Joint Account, and if these operations have not been included in a program approved by the Executive Committee, said Party shall advise the other Party of its intention to work over, deepen or plug the mentioned well. If there is no equipment at the location, the procedure indicated in Clause 21 (subsections 21.1 and 21.2) shall be applied. If there is adequate equipment at the well site to conduct the proposed operations, the Party receiving notice of the operations which the other Party wishes to carry out, shall have a term of forty-eight (48) hours counted as from the receipt of the notice to approve or disapprove the operation, and if during this term no answer is received it shall be understood that the operation will be carried out for the account and risk of the Joint Account. If the proposed work is carried out for the exclusive account and risk of one participating Party, the well shall be administrated subject to Clause 21 (subsection 21.2). 21.4 If at any time one of the Parties wishes to construct new facilities for the extraction of liquids from the gas and for the transport and exportation of Petroleum, which shall be known as additional facilities, said Party shall notify the other in writing providing the following information: 21.4.1 General description, design, specifications and estimated costs of the additional facilities. 21 21.4.2 Projected capacity. 21.4.3 Approximate starting date of the construction and duration thereof. Within ninety (90) days counted as from the date of the notice, the other Party, through a written notice, shall be entitled to decide whether it participates in the projected additional facilities. In the event said Party chooses not to participate in the additional facilities, or does not reply to the proposal of the participating Party, hereinafter called the constructor Party, the latter may proceed with the additional facilities and order the Operator to construct, operate and maintain said facilities at the exclusive expense and risk of the constructor Party, without prejudice to the normal development of the Joint Operations. The constructor Party may negotiate with the other Party the use of said facilities for the Joint Venture. During the time that the facilities are operated for the account and risk of the constructor Party, the Operator shall charge it for all the operating and maintenance costs of the additional facilities in accordance with the generally accepted accounting standards. CHAPTER V - JOINT ACCOUNT CLAUSE 22 - HANDLING 22.1 Without prejudice to the provisions of other Clauses of this contract, the expenses incurred for Exploration Work shall be for the account and risk of THE ASSOCIATE. 22.2 From the time the Parties accept the existence of a Commercial Field and subject to the provisions of Clause 5 (subsection 5.2) and Clause 13 (subsections 13.1 and 13.2), the ownership of the rights or Interest in the Operation of the Contracted Area shall be divided as follows: ECOPETROL fifty percent (50%) and THE ASSOCIATE fifty percent (50%). From that moment on, all expenses, payments, investments, costs and obligations made and incurred for the development of the operations, pursuant to this contract, and the investments made by THE ASSOCIATE before and after the recognition of a Commercial Field, in the drilling and termination of the wells which have proven to be productive within the field, shall be charged to the Joint Account. Except as provided in Clauses 14 (subsection 14.3) and 21, all properties acquired or used thereafter for the performance of the activities of the operation of the Commercial Field shall be paid for and shall belong to the Parties, in the same proportion described in this clause. 22.3 In the first five (5) days of each month the Parties shall supply to the Operator, at the bank designated by it, the share corresponding to them in the Budget in accordance with the needs and in the currency in which the expenses are to be made, that is, in Colombian pesos or in dollars of the United States of America, as requested by the Operator in accordance with the programs and Budgets approved by the Executive Committee. When THE ASSOCIATE does not have the Colombian pesos necessary to cover the share of its contribution in this currency, ECOPETROL shall be entitled to supply said pesos and to receive the credit for the contributions which it must make in dollars, converted at the market representative exchange rate certified by the Superintendency of Banks, on the day when ECOPETROL is to make the pertinent contribution, when said transaction is permitted by the legal provisions. 22.4 The Operator shall present to the parties on a monthly basis, and within thirty (30) calendar days following the end of each month, a monthly statement in which it will show the 22 amounts advanced, the expenditures made, the outstanding obligations and a report on all the charges and credits made to the Joint Account, which report shall be prepared in accordance with Exhibit "B". If the payments referred to in Clause 22 (subsection 22.3) are not made within the stipulated term and the Operator chooses to cover them, the breaching Party shall pay the Commercial Interest, in the same currency in which the payment has been incurred, during the period of delay. 22.5 If one of the Parties should fail to contribute promptly to the Joint Account the sums which correspond to it, as from that date said party shall be considered a breaching Party and the other Party, as a non-breaching Party. If the non-breaching Party had made the contribution corresponding to the breaching Party, in addition to its own, said Party shall have the right, after sixty (60) days of delay, to receive from the Operator the total participation of the breaching Party, in the Contracted Area (excluding the percentage corresponding to the royalty), up to a quantity of production which permits the non-breaching Party a net earning for the sales made equal to the amount not paid by the breaching Party, plus an annual interest equal to the Commercial Interest as from the sixtieth (60th) day following the date on which the delay begins. "Net earning" is understood to be the difference between the selling price of the crude taken by the non-breaching Party, less the cost of transportation, storage, loading and other reasonable expenditures made by the non-breaching Party in the sale of the products taken. The right of the non-breaching Party may be exercised at any time after thirty (30) days of having notified the breaching Party in writing of its intention to take part or all of the production corresponding to the breaching Party. 22.6.1 All Direct Expenses of the Joint Operation shall be charged to the Parties in the same proportion in which the production, after payment of royalties, is distributed. 22.6.2 The Indirect Expenses shall be charged to the Parties in the same proportion established for the Direct Expenses in subsection 22.6.1 of this clause. The amount of these expenses shall be the result of taking the total annual value of the investments and expenditures (excluding technical and administrative support) and applying to it the equation a + m (X-b). In this equation "X" is the total value of the annual investments and expenditures, and "a", "m" and "b" are constants the values of which are indicated in the following table in relation to the amount of the annual investments and expenditures:
AMOUNT OF INVESTMENTS AND EXPENDITURES VALUES OF THE CONSTANTS --------------------------------- ---------------------------------------------- "X" (US$) "a" (US$) m (frac) "b" (US$) --------------------------------- ---------- -------- ----------- 1. 0 25,000,000 0 0.10 0 2. 25,000,001 50,000,000 2,500,000 0.08 25,000,000 3. 50,000,001 100,000,000 4,500,000 0.07 50,000,000 4. 100,000,001 200,000,000 8,000,000 0.06 100,000,000 5. 200,000,001 300,000,000 14,000,000 0.04 200,000,000 6. 300,000,001 400,000,000 18,000,000 0.02 300,000,000 7. 400,000,001 and above 20,000,000 0.01 400,000,000
23 The equation shall be applied only once for each year in each case with the value of the constants corresponding to the total value of the annual investments and expenditures. 22.7 The monthly statements of account referred to in Clause 22 (subsection 22.4) may be revised or objected to by either one of the Parties as from the time when they are received by them and up to two (2) years after the end of the calendar year to which they correspond, clearly specifying the items corrected or objected to and the pertinent reason. Any account which has not been corrected or objected to within this period, shall be considered final and correct. 22.8 The Operator shall keep accounting records, vouchers and reports for the Joint Account in Colombian pesos in accordance with Colombian laws and any charge or credit to the Joint Account shall be made in accordance with the accounting procedure established in Exhibit "B", which forms part of this contract. In case of discrepancy between said accounting procedure and the provisions of this contract, the terms of the latter shall prevail. 22.9 The Operator may effect sales of materials or equipment during the first twenty (20) years of the Exploitation Period for the benefit of the Joint Account, when the amount of the sale does not exceed five thousand dollars of the United States of America (US$5,000) or its equivalent in Colombian pesos. This type of operations, per calendar year, may not exceed the amount of fifty thousand dollars of the United States of America (US$50,000) or its equivalent in Colombian currency. The sales which exceed these amounts or those of real-estate properties must be approved by the Executive Committee. The sale of said materials or equipment shall be made at a reasonable commercial price in accordance with the conditions for the use of the asset. 22.10 All machinery, equipment or other assets or personal property acquired by the Operator for the performance of this contract charged to the Joint Account, shall belong equally to the Parties. However, in the event that one of the Parties has decided to terminate its interest in the contract before the expiration of the first seventeen (17) years of the Exploitation Period, except as provided under Clause 25, said Party agrees to sell to the other, part or all of its Interest in said items at a reasonable commercial price or at their book value, whichever is lower. In the event that the other Party does not wish to purchase them within ninety (90) days following the formal offer of sale, the Party wishing to withdraw shall be entitled to assign to a third party the Interest corresponding to it in said machinery, equipment and items. If THE ASSOCIATE decides to withdraw after seventeen (17) years of the Exploitation Period have elapsed, its rights in the Joint Venture shall pass at no cost to ECOPETROL, on its prior acceptance. CHAPTER VI - DURATION OF THE CONTRACT CLAUSE 23 - MAXIMUM DURATION This contract shall have a maximum duration, as from its Effective Date, of twenty-eight (28) years, distributed as follows: up to six (6) years as an Exploration Period pursuant to Clause 5 without prejudice to the provisions of Clause 9 (subsection 9.3 and 9.8), and twenty-two (22) years as an Exploitation Period, counted as from the date of termination of the Exploration Period. It is understood that in the events contemplated in this contract, in which the Exploration Period is 24 extended, the total term shall not be considered as extended in any case for more than twenty-eight (28) years. If, once the commercial viability of one or more fields has been declared, THE ASSOCIATE continues to comply with all exploratory obligations referred to under Clause 5, it may simultaneously carry out the exploitation of such fields before the expiration of the Exploration Period defined in Clause 4 (subsection 4.19). Should this be the case, the Exploitation period of 22 years will only be counted as from the expiration of the Exploration Period. CLAUSE 24 - TERMINATION This contract shall terminate in any of the following cases: 24.1 Upon the expiration of the Exploration Period without THE ASSOCIATE having discovered a Commercial Field, except as provided in Clauses 9 (subsections 9.5 and 9.8) and 34. 24.2 When the duration of the contract, as stipulated in Clause 23, has elapsed. 24.3 At any time by decision of THE ASSOCIATE, upon compliance with its obligations referred to in Clause 5 and the others contracted pursuant to this contract. 24.4 For the special causes referred to in Clause 25. CLAUSE 25 - CAUSES FOR UNILATERAL TERMINATION 25.1 Unilaterally, ECOPETROL may declare this contract terminated, at any time before the expiration of the period stipulated in Clause 23, in the following cases: 25.1.1 Dissolution of THE ASSOCIATE and its assignees. 25.1.2 If THE ASSOCIATE or its assignees assign this contract, in whole or in part, without complying with the provisions of Clause 27. 25.1.3 Due to financial incapacity of THE ASSOCIATE and its assignees, which is presumed when there is a judicial declaration of bankruptcy or a meeting of its creditors is called. 25.1.4 Due to the failure to observe the obligations acquired by THE ASSOCIATE under this contract. At the expiration of each of the periods contemplated for the performance of the exploratory obligations, THE ASSOCIATE shall submit a written report evidencing the fulfillment of the obligations for the respective period. In the event that it has been unable to fulfill these, the Operator shall have a period of sixty (60) days to complete them diligently according to good oilfield practices. If this term were insufficient, the Parties may by mutual agreement establish an additional term for said performance. If at the end of this period all the agreed work has still not been carried 25 out, a default shall be declared and ECOPETROL may proceed in accordance with the provisions of clause 25.3. 25.2 In the event of a unilateral declaration of termination, the rights of THE ASSOCIATE enunciated in this contract, both in its capacity as interested Party and in its capacity as Operator, if at the time of the unilateral declaration of termination THE ASSOCIATE is both, shall terminate. 25.3 ECOPETROL may not unilaterally declare this contract terminated, unless sixty (60) days have elapsed after its written notice to THE ASSOCIATE or its assignees, clearly specifying the causes invoked for said declaration and only if the other Party has not presented satisfactory explanations to ECOPETROL or if THE ASSOCIATE has not remedied the fault in the performance of the contract, without prejudice to the right of THE ASSOCIATE to file the legal remedies it deems appropriate. CLAUSE 26 - OBLIGATIONS IN CASE OF TERMINATION 26.1 Upon termination of the contract in accordance with Clause 24, either in the Exploration or Exploitation Period, THE ASSOCIATE shall leave in production those wells which at the time are productive and shall deliver the constructions, pipelines, transfer lines and other real properties of the Joint Account (located in the Contracted Area), all of which shall become free of charge the property of ECOPETROL, together with the easements and properties acquired for the benefit of the contract, even if the former or the latter are found outside the Contracted Area. 26.2 If this contract is terminated for any reason after the first seventeen years of the Exploitation Period, all the Interest of THE ASSOCIATE in the machinery, equipment and other assets or personal property used or acquired by THE ASSOCIATE or by the Operator for the performance of this contract, shall pass, free of charge, to ECOPETROL. 26.3 If this contract is terminated before the seventeen (17) years of the Exploitation Period elapse, the provisions of Clause 22 (subsection 22.10) shall apply. 26.4 In the event that this contract terminates upon a unilateral declaration of termination, issued at any time, all real and personal properties acquired for the exclusive benefit of the Joint Account shall pass free of charge to ECOPETROL. 26.5 At the termination of this contract for any reason and at any time, the Parties shall be obligated to perform satisfactorily their legal obligations to each other and to third parties as well as those acquired under this contract. CHAPTER VII - MISCELLANEOUS PROVISIONS CLAUSE 27 - ASSIGNMENT RIGHTS. 27.1 THE ASSOCIATE shall be entitled to assign or transfer, in whole or in part, its interest, rights and obligations under the association contract to another person, company or group, with the 26 prior approval of the Ministry of Mines and Energy, and of the President of Empresa Colombiana de Petroleos, ECOPETROL. Therefore, any project which involves a total or partial assignment or transfer of the interests, rights and obligations under the contract, must be informed to the Ministry of Mines and Energy and the President of Empresa Colombiana de Petroleos, ECOPETROL, by means of a certified document of THE ASSOCIATE, indicating the essential items of the negotiation, such as possible assignee, amount, interests, rights and obligations to be assigned, scope of the operation, etc. Within thirty (30) business days, the Minister of Mines and Energy and the President of Empresa Colombiana de Petroleos, ECOPETROL, shall exercise their discretionary power to analyze the qualifications of the potential assignees, after which they shall adopt their determination, without being obligated to give reasons for it. In any event, the determination of the Minister of Mines and Energy shall prevail. 27.2 If more than thirty (30) business days counted from the date of receipt of the application by the Ministry of Mines and Energy elapse without THE ASSOCIATE having received a reply, it shall be understood for all purposes that the application has been approved. 27.3 The assignments made during the Exploration Period between companies legally established in Colombia, will not be subject to the procedure described above and will be formalized through the written authorization of Empresa Colombiana de Petroleos, ECOPETROL, and the execution of the pertinent document. 27.4 Any changes or modifications in the contractual relations of THE ASSOCIATE with Empresa Colombiana de Petroleos, ECOPETROL, as a result of total or partial direct negotiations in respect of interests, quotas or shares in THE ASSOCIATE, shall also be subject to the approval procedure by the Minister of Mines and Energy and the President of Empresa Colombiana de Petroleos, ECOPETROL. 27.5 Nevertheless, said changes or modifications will not require the authorization of the Minister of Mines and Energy and Empresa Colombiana de Petroleos in the following cases: 27.5.1 When the transactions are carried out at a stock exchange or open securities market. 27.5.2 In the case of assignments or transfers resulting from events beyond the control of THE ASSOCIATE or the companies which control or direct it, such as government decisions, legal judgments, partition and adjudication of assets and auctions. 27.5.3 When the negotiations are carried out among the companies which control or direct THE ASSOCIATE, or their affiliates or subsidiaries, or among companies which form a single economic group, in which cases it shall suffice to inform the Minister of Mines and Energy and Empresa Colombiana de Petroleos, ECOPETROL, promptly of the assignment or transfer. 27.6 Except in the cases listed above, the carrying out of any of the assignments, transfers, negotiations, transactions or operations referred to in this clause, without the prior approval of the Minister of Mines and Energy and the President of Empresa Colombiana de Petroleos, 27 ECOPETROL, when necessary, shall result in the application of the provisions of Clause 25 of the association contract. 27.7 The operations carried out pursuant to this clause and which under Colombian tax legislation are subject to tax, shall pay the pertinent taxes. CLAUSE 28 - DISAGREEMENTS Whenever there is a discrepancy or contradiction in the interpretation of the clauses of this contract in relation to those contained in Exhibit "B" entitled "Operating Agreement", the stipulations of the former shall prevail. 28.2 Any disagreements which arise between the Parties regarding matters of law related to the interpretation and performance of the contract and which cannot be settled amicably, are subject to the cognizance and decision of the jurisdictional branch of the Colombian government. 28.3 Any difference in fact or of a technical nature which may arise between the Parties in relation to the interpretation or application of this contract and which cannot be settled amicably, shall be submitted to the final decision of experts appointed as follows: one by each Party and, the third one, by mutual agreement between the principal experts appointed. If these cannot agree on the designation of the third expert, the latter shall be appointed at the request of either one of the Parties, by the Board of Directors of the Colombian Society of Engineers "SCI", which has its headquarters in Santa Fe de Bogota. 28.4 Any difference of an accounting nature which may arise between the Parties in relation to the interpretation and performance of the contract and which cannot be settled amicably, shall be submitted to the decision of experts, who must be licensed public accountants appointed as follows: one for each Party and, a third one, by the two principal experts and, in the absence of an agreement between them and at the request of either one of the Parties, said third party shall be appointed by the Central Board of Accountants of Bogota. 28.5 Both Parties declare that the decision of the experts shall have the full effect of a settlement between them and, therefore, said decision shall be final. 28.6 In the event of a disagreement between the Parties regarding the technical, accounting or legal nature of the controversy, this shall be considered legal and Clause 28 (subsection 28.2), shall be applied. CLAUSE 29 - LEGAL REPRESENTATION Without prejudice to the rights which THE ASSOCIATE may have as a result of legal provisions or of the clauses of this contract, ECOPETROL shall represent the Parties before the Colombian authorities as regards the exploitation of the Contracted Area whenever it must do so, and shall supply the officials and government entities with all the data and reports which may be legally required. The Operator shall be obliged to prepare and supply to ECOPETROL the pertinent reports. The expenses incurred by ECOPETROL in attending to any matter referred to in this 28 clause, shall be charged to the Joint Account and when such expenses exceed two thousand five hundred dollars of the United States of America (US$2,500) or its equivalent in Colombian currency, the prior approval of the Operator shall be necessary. The Parties declare, as regards any relationship with third parties, that neither the provisions of this clause nor those of any other clause of the contract, imply the granting of a general power-of-attorney or that the Parties have constituted a civil or commercial partnership or any other relationship under which either one of the Parties can be considered jointly and severally responsible for the acts and failures to act of the other Party or as having the authority or mandate to bind the other Party as regards any obligation. This contract relates to the operations within the territory of the Republic of Colombia and although ECOPETROL is an industrial and commercial enterprise belonging to the Colombian government, the Parties are in agreement that THE ASSOCIATE, if such were the case, may elect to be excluded from the application of all the provisions of subchapter K entitled PARTNERS AND PARTNERSHIPS of the Internal Revenue Code of the United States of America. THE ASSOCIATE shall make such election in its name in the appropriate manner. CLAUSE 30 - RESPONSIBILITIES 30.1 The Operator shall conduct the operations which are the subject matter of this contract in an efficient and adequate manner and in accordance with the practices of the oil industry internationally recognized for this type of operations, it being understood that it shall at no time be responsible for errors of judgment, or for losses or damages which are not the result of the Operator's gross negligence. 30.2 The responsibilities contracted by ECOPETROL and THE ASSOCIATE in relation to this contract with respect to third parties shall not be joint and several and, therefore, each Party shall be separately responsible for its participation in the expenses, investments and obligations resulting therefrom. 30.3 From the value of the expenses incurred and the contracts entered into by the Operator in amounts exceeding forty thousand dollars of the United States of America (US$40,000) or its equivalent in Colombian pesos without having been promptly authorized by the Executive Committee, except in the cases contemplated by Clause 11 (subsection 11.7), the only one responsible before third parties shall be the Operator, which shall therefore assume the corresponding value in full. When the pertinent expense is accepted by the Executive Committee, the cost of the work, study or purchase will be recognized to the Operator, in accordance with guidelines that will be defined by the Executive Committee. In the event that the expense or asset is not accepted by the Executive Committee, the Operator, if possible, may withdraw the asset in question, reimbursing the partners for any cost incurred by the operation in relation to its withdrawal. When it is not possible for the Operator to withdraw said assets, or he declines to do so, the benefit or equity increase resulting from these expenses or contracts shall pertain to the Parties in proportion to their Interest in the Operation. 30.4 Ecologic Control. THE ASSOCIATE, in conducting all the activities of the contract, must comply with the provisions of the National Code of Renewable Natural Resources and Environmental Protection and the other legal provisions on the matter. To such end, THE ASSOCIATE agrees to execute a permanent plan of a preventive nature to guarantee the preservation 29 and restoration of the natural resources within the zones in which the exploration, exploitation and transportation work which is the object of this contract is carried out. Said plans and programs shall be communicated by THE ASSOCIATE to the communities and entities of a national and regional order related to this matter. Likewise, specific contingency plans must be established to attend to the emergencies which might arise and the pertinent remedial actions must be carried out. To such end, THE ASSOCIATE must coordinate said plans and actions with the competent entities. The respective programs and Budgets must be prepared by THE ASSOCIATE in accordance with the pertinent clauses of this contract. All the costs incurred shall be assumed by THE ASSOCIATE during the Exploration Period and by both Parties, charging the Joint Account, during the Exploitation Period. CLAUSE 31 - TAXES, LEVIES AND OTHERS The levies and contributions which accrue after the establishment of the Joint Venture and before the Parties receive their participation in the proceeds, which are attributable to the exploitation of the Petroleum, shall be charged to the Joint Account. Income, capital and supplementary taxes shall be for the exclusive account of each one of the Parties to the extent corresponding to each one. CLAUSE 32 - PERSONNEL 32.1 After consulting with ECOPETROL, THE ASSOCIATE shall appoint the Manager of the Operator. 32.2 In accordance with the terms of this contract and subject to the regulations established, the Operator shall have autonomy to designate the personnel required for the operations referred to in this contract, being entitled to fix its remuneration, functions, categories, number and conditions. The Operator shall adequately and diligently train the Colombian personnel required to replace the foreign personnel which the Operator considers necessary to carry out the operations of this Contract. In any event, the Operator shall comply with the legal provisions which establish the proportion of national and foreign employees and workers. 32.3 Technology Transfer - THE ASSOCIATE agrees to conduct for its account a guided training program for ECOPETROL professionals in areas related to the development of the contract. To comply with this obligation during the Exploration Period, the guided training may be, among other, in the fields of geology, geophysics and related areas, appraisal of reserves and description of fields, drilling and production. The guided training shall be conducted throughout the initial exploration period and its extensions, through the integration of professionals designated by 30 ECOPETROL into the work group which THE ASSOCIATE shall organize for the Contracted Area or for other related activities of THE ASSOCIATE. In order to be able to renounce as mentioned in Clause 5 of this contract, THE ASSOCIATE must have previously complied with the training programs contemplated herein. In the Exploitation Period, the scope, duration, place, participants, training conditions and other aspects, shall be established by the Executive Committee of the Association. All costs of the guided training, with the exception of the labor costs accruing in favor of the professionals who receive said training, shall be assumed by THE ASSOCIATE in the Exploration Period and by both parties, charging the Joint Account, during the Exploitation Period. PARAGRAPH: In order to comply with the obligations regarding the Transfer of Technology as provided herein, during the first three years of the Exploration Period and for each year, THE ASSOCIATE agrees to carry out guided training programs for ECOPETROL'S professionals, which cost is not to exceed US$50.000 per year. The subject matter of said programs as well as the type of program is to be agreed by ECOPETROL and THE ASSOCIATE. Should the Exploration Period be extended, the guided training program will consist of similar programs to the ones performed during the first three years. 32.4 Pursuant to this Contract, during the Exploitation Period the Operator shall be entitled to execute any work through contractors, subject to the power of the Executive Committee to approve those contracts in amounts exceeding forty thousand dollars of the United States of America (US$40,000) or its equivalent in Colombian currency. CLAUSE 33 - INSURANCE The Operator shall take all the insurance required under Colombian law. Likewise, it shall require each contractor which performs work related to this contract, to obtain and maintain in force the insurance which the Operator considers necessary. Likewise, the Operator shall take the other insurance which the Executive Committee deems appropriate. CLAUSE 34 - FORCE MAJEURE OR ACTS OF GOD The obligations contemplated in this contract shall be suspended during the time that either one of the Parties is unable to perform them in whole or in part, due to unforeseen events which constitute force majeure or acts of God, such as strikes, lockouts, wars, earthquakes, floods or other catastrophes, laws or government regulations or decrees which prevent the obtaining of the indispensable materials and, in general, any non-financial reason which actually prevents the work, even if not listed above, but which affects the Parties and is beyond their control. If one of the Parties is unable, due to force majeure or acts of God, to perform the obligations under this contract, it shall notify the other Party immediately, for its consideration, specifying the reasons for the impediment. Under no circumstances may force majeure events or acts of God extend or prolong the total exploration and exploitation period beyond the twenty-eight calendar years counted as from the Effective Date as stipulated in Clause 23, but any force majeure impediment during the six (6) year 31 exploration period indicated in Clause 5, the duration of which is more than thirty (30) consecutive days, shall extend this six (6) year period for the same duration of the impediment. CLAUSE 35 - APPLICATION OF COLOMBIAN LAWS For all purposes of this contract, the Parties fix as domicile the city of Santa Fe de Bogota, Republic of Colombia. This contract is governed in all its parts by Colombian law and THE ASSOCIATE submits to the jurisdiction of the Colombian courts and waives any attempt at a diplomatic claim as regards its rights and obligations arising from this contract, except in the case of denial of justice. It is understood that there will be no denial of justice when THE ASSOCIATE, in its capacity as Party or Operator, has had access to all the recourses and means of action which, under Colombian law, may be used before the jurisdictional branch of the government. CLAUSE 36 - NOTICES The notices or communications between the Parties in relation to this contract will require for their effectiveness the mention of the pertinent clauses and shall be sent to the Parties at the following addresses: To ECOPETROL: Carrera 13 No. 36-24, Santa Fe de Bogota, Colombia. To THE ASSOCIATE: Carrera 6 No. 115-65, Oficina 307, Santa Fe de Bogota, Colombia. Any change of address shall be notified in advance to the other Party. CLAUSE 37 - VALUE INCREASE OF THE PETROLEUM The payments or reimbursements referred to in Clauses 9 (subsections 9.2 and 9.4) and 22 (subsection 22.5), shall be made in dollars of the United States of America, or in Petroleum on the basis of the prevailing price and the limitations established in Colombian legislation for the sale of the portion payable in dollars, of Petroleum or Natural Gas coming from the Contracted Area and intended for refining in the national territory. CLAUSE 38 - PRICES FOR THE PETROLEUM 38.1 The Petroleum which corresponds to THE ASSOCIATE pursuant to this contract, intended for refining or internal supply, shall be paid for delivered to the refinery where it is to be processed or to the receiving station agreed upon by the Parties, as follows: 38.1.1 The gas shall be paid for in accordance with Resolution number 61 of 1983, issued by the Commission of Petroleum and Natural Gas Prices and Decree number 196 of January 17, 1986, issued by the President of the Republic, or the government regulations which substitute it. 38.1.2 The crude oil shall be paid for in accordance with Resolution number 013 of December 14, 1992, issued by the National Energy Commission or the government regulations which may substitute them. 38.2 The differences which arise from the application of this clause shall be settled by the systems established in this contract. 32 CLAUSE 39 - DELEGATION AND ADMINISTRATION The PRESIDENT OF THE EMPRESA COLOMBIANA DE PETROLEOS - ECOPETROL- delegates to the Vice President of Associated Operations the administration of this Contract, pursuant to the laws and regulatory provisions of ECOPETROL, with capacity to exercise all the measures required for the performance of this contract. CLAUSE 40. EFFECTIVENESS This contract requires for its effectiveness the approval of the Ministry of Mines and Energy. In witness whereof, this contract is signed in Santa Fe de Bogota, before witnesses, by the Legal Representative of HARKEN DE COLOMBIA, LTD. on the __________ (__) day of _________, nineteen hundred and ninety-six (1996) and by the Representative of ECOPETROL on the __________ (__) day of _________, nineteen hundred and ninety-six (1996). HARKEN DE COLOMBIA, LTD. GONZALO VELASCO Legal Representative HARKEN ENERGY CORPORATION MIKEL D. FAULKNER President of the Board of Directors In Houston, Date: ____________ EMPRESA COLOMBIANA DE PETROLEOS ECOPETROL LUIS BERNARDO FLOREZ ENCISO President Witnesses EX-10.5 6 EXCHANGE AGREEMENT 1 EXHIBIT 10.5 EXCHANGE AGREEMENT This EXCHANGE AGREEMENT (this "Exchange Agreement") is made and entered into this 11th day of July, 1996, but effective as of the 30th day of June, 1996, by and among Momentum Operating Co., Inc. ("Momentum"), Harken Energy Corporation ("HEC") and Harken Exploration Company ("HEX"). RECITALS: A. On December 15, 1995, Momentum, HEC and HEX entered into that certain Purchase and Sale Agreement (the "Original Agreement"), pursuant to which, in exchange for the consideration described in the Original Agreement, Momentum sold the Properties (as defined in the Original Agreement) to HEX. B. On December 20, 1995, upon the closing of the transactions contemplated by the Original Agreement and among other actions: (1) HEX issued to Momentum a promissory note dated December 20, 1995 in the original principal amount of $13,000,000 (the "Note"); (2) HEC and Momentum entered into that certain Registration Rights Agreement (the "Original Registration Rights Agreement"); and (3) HEX executed that certain Deed of Trust, Security Agreement, Assignment of Production and Financing Statement in favor of John Huffman, Trustee, for the benefit of Momentum Operating Co., Inc. (the "Deed of Trust"). C. Momentum wishes to exchange the Note for shares of common stock, $.01 par value per share (the "Common Stock") of HEC and certain obligations of HEX and HEC is willing to issue shares of its Common Stock in exchange for the Note and HEX is willing to so obligate itself, and Momentum, HEX and HEC desire to amend certain terms of, the Original Registration Rights Agreement and the Deed of Trust, all on the terms and conditions contained herein. NOW, THEREFORE, in consideration of the mutual premises and the mutual covenants herein, the parties hereto agree as follows: 2 AGREEMENT 1. EXCHANGE. (a) Subject to the terms of this Exchange Agreement, the parties hereto agree to exchange the Note for the shares of Common Stock described in paragraph (b) below and the obligations of HEX described in Section 3 below. HEC will use its reasonable best efforts to deliver the shares of Common Stock described in paragraph (b)(i) below to Momentum within 15 business days following the execution of this Exchange Agreement. HEC shall deliver additional shares of Common Stock pursuant to the terms of the letter agreement described in paragraph (b)(viii) below. The date upon which the shares of Common Stock are delivered to Momentum shall be referred to as the "Issuance Date." (b) Upon the Issuance Date, the following actions shall take place, each of which shall be deemed to occur simultaneously and each of which shall be a condition precedent to each of the others: (i) HEC shall deliver to Momentum a stock certificate registered in the name of Momentum and representing 4,965,000 shares of Common Stock; (ii) Momentum shall deliver the Note to HEX, marked "paid in full, except as provided in that certain Exchange Agreement dated July 11, 1996, among Seller, Buyer and the Company"; (iii) HEC and Momentum shall execute and deliver the Registration Rights Agreement in the form attached hereto as Exhibit A. Momentum agrees to waive any and all registration rights granted to Momentum pursuant to the Original Registration Rights Agreement insofar as the Original Registration Rights Agreement might otherwise apply to the registration of the shares of Common Stock delivered pursuant to this Exchange Agreement; (iv) HEC and Momentum shall execute and deliver the Supplemental Deed of Trust, Security Agreement, Assignment of Production and Financing Statement, in the form attached hereto as Exhibit B; (v) HEC shall deliver to Momentum a release of the HEC Mortgage (as defined in the Original Agreement) executed by HEC, HEX and Larry E. Cummings, Trustee; 2 3 (vi) HEC and HEX shall deliver to Momentum the opinions of counsel in the forms attached hereto as Exhibit C.1 and Exhibit C.2; (vii) HEC and HEX shall deliver to Momentum the Officer's Certificates in the forms attached hereto as Exhibit D.1 and Exhibit D.2; and (viii) HEX, HEC and Momentum will enter into the letter agreement attached hereto as Exhibit E. 2. EFFECT OF EXCHANGE. Except for the contingent payment described in Section 3 below, tender of full performance by HEC and HEX of their obligations contained in Section 1(b) above shall constitute full payment of all amounts due under the Note. In addition any and all obligations of Momentum, HEX or HEC pursuant to Section 7.1 of the Original Agreement shall also be deemed to have been satisfied. 3. CONTINGENT PAYMENT. (a) Momentum shall calculate the gross proceeds, before deducting any commissions and other costs of sale, received by Momentum on or before the Contingent Payment Date which are attributable to the sale of the shares of Common Stock issued to Momentum pursuant to this Exchange Agreement ("the Proceeds"). The Contingent Payment Date shall be the earlier to occur of (i) the expiration of 270 days following the date the registration statement filed by HEC pursuant to Momentum's second Demand Registration (as defined in the Registration Rights Agreement) is declared effective by the Securities and Exchange Commission, or (ii) the date on which Momentum has sold all of the shares of Common Stock issued to Momentum pursuant to this Exchange Agreement. If the Contingent Payment Date falls on a day which is not a trading day on the American Stock Exchange, the Contingent Payment Date shall be deemed to be the next trading day. If Momentum has not sold all of the shares of the Common Stock as of the close of trading on the American Stock Exchange on the Contingent Payment Date, the Proceeds shall be deemed to include an amount equal to the product of the number of shares of Common Stock held by Momentum at the close of trading on the Contingent Payment Date multiplied by the arithmetic mean of the daily closing sales prices of the Common Stock on the American Stock Exchange, as reported in the Wall Street Journal, for the sixty (60) trading days that Momentum was entitled to sell shares of Common Stock pursuant to the Registration Rights Agreement immediately preceding the Contingent Payment Date. If the Proceeds are less than U.S. $8,500,000, HEX shall pay to Momentum an amount in cash equal to the difference between U.S. $8,500,000 and the Proceeds. HEX shall make such payment within five business days after receipt of Momentum's notice that the additional payment is due, accompanied by documentation supporting Momentum's calculation of the Proceeds. 3 4 (b) If there is any dispute concerning the payment required by paragraph (a) above, HEX shall pay to Momentum the undisputed portion and shall submit the disputed portion to binding arbitration. Momentum and HEX shall each select a mutually acceptable person as an arbitrator and the two arbitrators so chosen shall mutually select a third arbitrator. The group of three arbitrators shall determine the amount of the payment required by paragraph (a) above. If the two arbitrators selected by Momentum and HEX cannot agree on a third arbitrator, or successor arbitrator if necessary, the parties shall request the American Arbitration Association to appoint the third arbitrator or successor arbitrator. All arbitration hearings shall be held in Abilene, Texas and shall begin within thirty days after delivery of written notice from one party to the other party and the arbitrators stating the grounds for submitting an issue to arbitration. The arbitrators shall arbitrate the dispute in accordance with the terms of this Exchange Agreement, the Texas General Arbitration Act, and the Rules of the American Arbitration Association to the extent such rules are not in conflict with the terms of this Exchange Agreement or the Act. The arbitrators shall issue a written decision which shall be final and binding on Momentum and HEX and may be enforced in any court having jurisdiction. Momentum and HEX shall bear their own legal fees and other costs incurred in connection with presenting their respective cases. The costs and expenses of the arbitrators shall be shared equally by Momentum and HEX. In fulfilling their duties, the arbitrators shall be bound by the terms of this Exchange Agreement and may consider other matters which, in the opinion of the arbitrators, are necessary or helpful to make a proper decision. 4.1 MOMENTUM'S REPRESENTATIONS. Momentum represents to HEC and HEX that as of the date hereof and as of the Issuance Date: (a) Momentum is a corporation duly organized, validly existing and in good standing under the laws of the State of Texas. Momentum is qualified to do business in the State of Texas. (b) Momentum has the power and authority to carry on its business as presently conducted, to enter into this Exchange Agreement and to perform its obligations under this Exchange Agreement. (c) Execution and delivery of this Exchange Agreement, consummation of the transactions contemplated by this Exchange Agreement, and performance of all obligations under this Exchange Agreement have been authorized by all necessary action, corporate and otherwise, on the part of Momentum. Execution and delivery of this Exchange Agreement does not, and the consummation of the transactions contemplated by this Exchange Agreement will not, violate or be in conflict with any agreement, instrument, judgment, order, decree, law, rule or regulation by which Momentum is bound. 4 5 (d) Subject to laws and equitable principles affecting the rights of creditors generally, this Exchange Agreement is a binding obligation of Momentum enforceable according to its terms. (e) No suit, claim, demand or investigation is pending or, to Momentum's knowledge, is threatened, that would effect Momentum's interest in the Note. There are no bankruptcy or reorganization proceedings pending or, to Momentum's knowledge, threatened against Momentum. As used in this Exchange Agreement, the term "knowledge" means actual awareness of relevant facts and actual awareness of facts which would cause a person exercising reasonable prudence to discover relevant facts. (f) With respect to the shares of Common Stock which Momentum may receive pursuant to Section 1 hereof: (1) Momentum is acquiring the Common Stock for its own account, and for the account of certain Momentum affiliates, for investment only and not with a view toward the public sale or distribution of the Common Stock in contravention of any laws, rules or regulations; (2) Momentum is an "Accredited Investor" as that term is defined in Rule 501 of Regulation D by reason of Rule 501(a)(3) of the Securities Act of 1933, as amended (the "1933 Act"); (3) Momentum has engaged its own advisors for advice and counsel concerning Momentum's acquisition of the Common Stock, so that it is capable of evaluating the merits and risks of its investment in the Company and has the capability to protect its own interests; (4) all subsequent offers and sales of the Common Stock by Momentum shall be made pursuant to registration of the Common Stock under the 1933 Act or pursuant to a valid exemption from registration; (5) Momentum understands that the Common Stock is being offered and sold to it in reliance on specific exemptions from the registration requirements of United States federal and state securities laws and that HEC and HEX are relying upon the truth and accuracy of and Momentum's compliance with the representations, warranties, agreements, acknowledgments and understandings of the Momentum in this Section 4.1(f) in order to determine the availability of such exemptions and the eligibility of Momentum to acquire the Common Stock; 5 6 (6) Momentum and/or its advisors have been furnished with all materials relating to the business, management, finances and operations of the Company and materials relating to the offer and sale of the Common Stock which have been requested by Momentum. Momentum and its advisors have been afforded the opportunity to ask questions of the officers of the Company and have received satisfactory answers to any such inquiries. Without limiting the generality of the foregoing, Momentum has had the opportunity to obtain and to review the Company's (i) Annual Report on Form 10-K/A for the year ended December 31, 1995, (ii) Quarterly Report on Form 10-Q for the quarter ended March 31, 1996, and (iii) Proxy Statement for the Annual Meeting of Stockholders of Harken held June 11, 1996; (7) Momentum understands that no United States federal or state agency or any other government or governmental agency has passed on or made any recommendation or endorsement of the Common Stock; and (8) Momentum acknowledges that the Common Stock must be held indefinitely unless subsequently registered under the 1933 Act or unless an exemption from such registration is available. It is aware of the provisions of Rule 144 promulgated under the 1933 Act which permit limited resale of shares purchased in a private placement subject to the satisfaction of certain conditions, including, among other things, the existence of a public market for the shares, the availability of certain current public information about the Company, the resale occurring not less than two years after a party has purchased and paid for the security to be sold, the sale being effected through a "brokers transaction" or in transactions directly with a "market maker" and the number of shares being sold during any three-month period not exceeding specified limitations. 4.2 HEX'S REPRESENTATIONS. HEX represents to Momentum that, as of the date hereof, and as of the Issuance Date: (a) HEX is a corporation duly organized, validly existing and in good standing under the laws of the State of Delaware. HEX is qualified to do business in the State of Texas. HEX is qualified under all applicable laws, rules and regulations to own and operate its properties. (b) HEX has the power and authority to carry on its business as presently conducted, to enter into this Exchange Agreement and to perform its obligations under this Exchange Agreement. (c) Execution and delivery of this Exchange Agreement, consummation of the transactions contemplated by this Exchange Agreement, and performance of all 6 7 obligations under this Exchange Agreement have been authorized by all necessary action, corporate and otherwise, on the part of HEX. Execution and delivery of this Exchange Agreement does not, and the consummation of the transactions contemplated by this Exchange Agreement will not, violate or be in conflict with any agreement, instrument, judgment, order, decree, law, rule or regulation by which HEX is bound. (d) Subject to laws and equitable principles generally affecting the rights of creditors, this Exchange Agreement is a binding obligation of HEX enforceable according to its terms. (e) None of HEX's statements or representations in this Exchange Agreement contains any untrue statement of any material fact or omits to state any material fact necessary to be stated in order to make the statements or representations made not misleading. (f) As of the date of this Exchange Agreement, HEX in not in material breach of, or default under, the Original Agreement or any other agreement or instrument described in the Original Agreement or executed in connection with the Original Agreement. 4.3 HEC'S REPRESENTATIONS. HEC represents to Momentum that, as of the date hereof and as of the Issuance Date: (a) HEC is a corporation duly organized, validly existing and in good standing under the laws of the State of Delaware. HEC is qualified to do business in the State of Texas. HEC is qualified under all applicable laws, rules and regulations to own and operate its properties. (b) HEC has the power and authority to carry on its business as presently conducted, to enter into this Exchange Agreement and to perform its obligations under this Exchange Agreement. (c) Execution and delivery of this Exchange Agreement, consummation of the transactions contemplated by this Exchange Agreement, and performance of all of its obligations under this Exchange Agreement have been authorized by all necessary action, corporate and otherwise, on the part of HEC. Execution and delivery of this Exchange Agreement does not, and the consummation of the transactions contemplated for it by this Exchange Agreement will not, violate or be in conflict with any agreement, instrument, judgment, order, decree, law or regulation by which HEC is bound. 7 8 (d) Subject to laws and equitable principles generally affecting the rights of creditors, this Exchange Agreement is a binding obligation of HEC enforceable according to its terms. (e) All shares of capital stock of HEC have been duly and validly authorized and issued and are fully paid and nonassessable. The Common Stock when issued, sold and delivered in accordance with the terms of this Exchange Agreement, will be duly and validly issued, fully paid and nonassessable. As of the date hereof, the authorized capital stock of HEC is 125,000,000 shares of common stock, par value $.01, of which 84,712,471 shares are issued and outstanding and 10,000,000 shares of Preferred Stock, par value $1.00, of which no shares are issued or outstanding. Except as disclosed in Schedule 4.3(e), (i) there are no outstanding subscriptions, warrants, options, calls or commitments of any character relating to or entitling any person to purchase or otherwise acquire from HEC any capital stock of HEC, (ii) there are no obligations or securities convertible into or exchangeable for any shares of capital stock of HEC or any commitments of any character relating to or entitling any person to purchase or otherwise acquire any such obligations or securities, and (iii) there are no preemptive or similar rights to subscribe for or to purchase any capital stock of HEC. (f) HEC's (i) unaudited consolidated balance sheet as at March 31, 1996 and the related consolidated statement of income, cash flows and shareholders' equity for the three months then ended and (ii) audited consolidated balance sheet as at December 31, 1995 and the related audited consolidated statement of income, cash flows and shareholders' equity for the fiscal year then ended (including in all cases the notes thereto) (collectively, the "Financial Statements") have been prepared in accordance with generally accepted accounting principles consistently applied except as noted therein and except, in the case of unaudited interim financial statements, for normal year-end adjustments, and fairly present the consolidated financial position of HEC and its consolidated subsidiaries as of the respective dates set forth therein and the results of operations and cash flows for HEC and its consolidated subsidiaries for the respective fiscal periods set forth therein. (g) Neither HEC nor any of its subsidiaries has sustained since the date of the March 31, 1996 Financial Statements any adverse change in its businesses, financial condition or results of operations that would be material to HEC and its subsidiaries on a consolidated basis. (h) Assuming the accuracy of the representations of Momentum in Section 4.1(f) and except for the approval of the American Stock Exchange with respect to the issuance of the shares of Common Stock required to be issued pursuant to this Exchange Agreement, no consent, approval, authorization, order, registration or qualification of or with 8 9 any court or governmental agency or body is required by or on behalf of HEC which has not been obtained as of the date hereof, for the valid execution and delivery of, or for the performance by HEC of its obligations under, this Exchange Agreement. (i) There are no legal or governmental proceedings pending to which HEC or any of its subsidiaries is a party or to which any of its or their properties is subject, or which challenge the validity or legality of HEC's obligations under this Exchange Agreement or the transactions contemplated thereby which, individually or in the aggregate, would be reasonably expected to have a material adverse effect on the business of HEC and any of its subsidiaries taken as a whole; and, to HEC's knowledge, no such proceedings are threatened by any governmental authority or by any other person. (j) Each of HEC and its subsidiaries is in material compliance with all statutes, laws, ordinances, governmental rules or regulations or any judgment, order or decree to which it is subject and possesses such certificates, authorizations and permits issued by the appropriate regulatory agencies or bodies necessary to conduct the business now operated by it, except for such violations which, and except for such certificates, authorizations and permits which if not possessed, would not be reasonably expected to have a material adverse effect on the business of HEC and its subsidiaries taken as a whole; and neither HEC nor any such subsidiary has received any notice of proceedings related to any such violation or the revocation or modification of any of the same which, individually or in the aggregate, if the subject of any unfavorable decision, ruling or finding, would be reasonably expected to have a material adverse effect on the business of HEC and its subsidiaries taken as a whole. (k) Except (i) as and to the extent disclosed or reserved against in the Financial Statements, or (ii) for liabilities and obligations incurred after March 31, 1996, that would not be reasonably expected to have a material adverse effect on the business of HEC and any of its subsidiaries taken as a whole, neither HEC nor any of its subsidiaries has any liabilities or obligations of any nature, whether due or to become due, including, without limitation, liabilities or obligations on account of taxes or other governmental charges or penalties, interest or funds thereon or in respect thereof and HEC does not know of any basis for any assertion against HEC or any of its subsidiaries of any debt, liability or obligation in any amount not reflected or reserved against in the Financial Statements which would be required to be set forth therein in accordance with generally accepted accounting principles. (l) Except as disclosed in HEC's Annual Report on Form 10-K/A for the year ended December 31, 1995 or HEC's Quarterly Report on Form 10-Q for the quarter ended March 31, 1996, (i) neither HEC nor any of its subsidiaries has received any written complaint, or notice of violation, alleged violation, investigation, advisory action, potential liability or potential responsibility, regarding environmental protection matters or permit 9 10 compliance with regard to any of its or their properties, nor does HEC have knowledge that any governmental authority or third party is contemplating delivering to HEC or any of its subsidiaries any such notice, (ii) there are no governmental, administrative or judicial actions or proceedings pending under any Environmental Laws to which HEC or any of its subsidiaries is or, to HEC's knowledge, is likely to be named as a party with respect to any of its or their properties, nor are there any consent decrees, other decrees, consent orders, administrative orders or other orders, or other administrative or judicial requirements, outstanding under any Environmental Law with respect to any of such properties, and (iii) neither HEC nor any of its subsidiaries is an owner or operator of any facility or operation which is in violation of any Environmental Law or at which there has been or exists a release or threatened release of Hazardous Materials to the environment. The terms "Environmental Laws" and "Hazardous Materials" shall have the meanings given to such terms in the Original Agreement. (m) HEC and each of its subsidiaries has caused to be duly filed in a timely manner, including any applicable extensions, with the appropriate governmental authorities all returns, statements and reports with respect to any taxes that are required to be filed by or with respect to it. Except for tax liens securing the payment of taxes not yet due and payable, there are no tax liens upon any assets of HEC or any of its subsidiaries and no claim for assessment or collection of any material taxes has been asserted against HEC or any of its subsidiaries, except for claims being challenged by HEC in good faith which are listed in Schedule 4.3(m) to this Agreement. (n) Each Material Contract is valid and binding on the parties thereto and in full force and effect and neither HEC nor any of its subsidiaries is in breach of a Material Contract, which breach would reasonably be expected to have a material adverse effect on HEC or any of its subsidiaries. To HEC's knowledge, no other party to any Material Contract is in material breach thereof. For the purposes of this Section, Material Contract shall mean: (i) all contracts requiring payment, or being reasonably likely to result in payment, by any party thereto of more than $50,000.00 annually; (ii) all material contracts with any governmental authority; (iii) all contracts not made in the ordinary course of business, which are material to HEC or any of its subsidiaries; and (iv) all contracts relating to indebtedness of HEC or any of its subsidiaries of a principal amount in excess of $250,000.00. (o) None of HEC's statements or representations in this Exchange Agreement contains any untrue statement of any material fact or omits to state any material fact necessary to be stated in order to make the statements or representations made not misleading. 10 11 (p) HEC is the legal owner and holder of the HEC Mortgage and the Note (as defined in the HEC Mortgage) and of all rights arising under the HEC Mortgage or such Note. (q) As of the date of this Exchange Agreement, HEC in not in material breach of, or default under, the Original Agreement or any other agreement or instrument described in the Original Agreement or executed in connection with the Original Agreement. 5. TERMINATION. (a) This Exchange Agreement and the transactions contemplated by his Exchange Agreement may be terminated in the following situations: (i) by Momentum if (x) the conditions to its performance described in Section 1(b) are not satisfied within 15 business days from the execution of this Exchange Agreement, or (y) any of HEX's or HEC's representations are untrue in any material respect; or (ii) by HEX or HEC if (x) the conditions to its performance described in Section 1(b) are not satisfied within 15 business days from the execution of this Exchange Agreement, or (y) any of Momentum's representations are untrue in any material respect. (b) Except as provided in this Section 5(b), if this Agreement is terminated, neither party shall have any liability to any other party arising under this Exchange Agreement. Following termination of this Exchange Agreement, the Original Agreement shall govern the rights and obligations of the parties. If any party breaches this Exchange Agreement, or willfully fails to fulfill a condition to any other party's performance, nothing in this Exchange Agreement shall be construed as limiting a non-breaching party's legal or equitable rights and remedies arising under this Exchange Agreement. 6. AMENDMENT TO ORIGINAL AGREEMENT. The Original Agreement is hereby amended by deleting Section 7.13 thereof in its entirety. 7. NOTICES. All notices required or permitted under this Exchange Agreement shall be effective upon receipt if personally delivered, if mailed by registered or certified mail, postage prepaid, or if delivered by telegram, fax or telecopy if directed to the parties as follows: To Momentum: 11 12 Momentum Operating Co., Inc. 232 South Main P.O. Box 578 Albany, Texas 76430 Attn: Michael J. Parsons, President To HEX or HEC: Harken Exploration HEC Harken Energy Corporation 5605 N. MacArthur Blvd., Suite 400 Irving, Texas 75038 Attn: Richard H. Schroeder, President Copy to: Gregory S. Porter, Vice President - Legal Any party may give written notice of a change in the address or individual to which delivery shall be made. 8. EXPENSES. Except as otherwise provided in this Exchange Agreement, all fees, costs and expenses incurred by the parties in negotiating this Exchange Agreement and in consummating the transactions contemplated by this Exchange Agreement shall be paid by the party which incurred them. 9. AMENDMENT. The provisions of this Exchange Agreement may be altered, amended or waived only by a written agreement executed by the party to be charged. No waiver of any provision of this Exchange Agreement shall be construed as a continuing waiver of the provision. 10. ASSIGNMENT. Neither HEX nor HEC may assign all or any portion of its rights or delegate all or any portion of its duties under this Exchange Agreement without Momentum's prior written consent. To the extent permitted by law, Momentum shall have the right to assign all or any portion of its rights under this Exchange Agreement to any Momentum affiliate at any time. Momentum affiliate shall have the same meaning given the term of "Seller affiliate" in the Original Agreement. 11. HEADINGS. The headings are for convenience only and do not limit or otherwise affect the provisions of this Exchange Agreement. 12 13 12. COUNTERPARTS. This Exchange Agreement may be executed in counterparts, each of which shall be an original and which, taken together, shall constitute the same agreement. 13. REFERENCES. References, including use of a pronoun, shall include, where applicable, masculine, feminine, singular or plural individuals or legal entities. 14. GOVERNING LAW. This Exchange Agreement and the transactions contemplated by this agreement shall be governed and construed under the laws of the State of Texas without giving effect to any rules of law which might require application of the law of another jurisdiction. Venue of any action arising under this Exchange Agreement shall be in Abilene, Texas. 15. ANNOUNCEMENTS. Except as otherwise required by law or applicable regulation, neither Momentum, HEX nor HEC shall announce or otherwise publicize this Exchange Agreement or the transactions contemplated by this Exchange Agreement without the prior written consent of the other party. 16. ENTIRE EXCHANGE AGREEMENT. This Exchange Agreement is the entire understanding between Momentum, HEX and HEC concerning the subject matter of this Exchange Agreement. This Exchange Agreement supersedes all negotiations, discussions, representations, prior agreements and understandings, whether oral or written, including, without limitation, all letters or expressions of intent between the parties, concerning the subject matter of this Exchange Agreement. Except as expressly amended by the Supplemental Deed of Trust, or the Registration Rights Agreement, the Original Agreement and all agreements and instrument executed in connection with the Original Agreement remain unaffected by this Exchange Agreement. 17. PARTIES IN INTEREST. This Exchange Agreement is binding upon and shall inure to the benefit of Momentum, HEX and HEC and, except where prohibited, their successors, representatives and assigns. Unless expressly stated to the contrary, no other person is intended to have any benefits, rights or remedies under this Exchange Agreement. 18. SCHEDULES AND EXHIBITS. All schedules and exhibits attached to this Exchange Agreement are incorporated into this Exchange Agreement for all purposes. Reference to the "Exchange Agreement" includes all agreements and instruments attached as schedules or exhibits to this Exchange Agreement or executed in connection with the transactions contemplated by this Exchange Agreement. 13 14 19. SEVERANCE. If any provision of this Exchange Agreement is found to be illegal or unenforceable, the other terms of this Exchange Agreement shall remain in effect and this Exchange Agreement shall be construed as if the illegal or unenforceable provision had not been included. 20. TIME. Time is of the essence of this Exchange Agreement. 14 15 IN WITNESS WHEREOF, the parties hereto have executed this Exchange Agreement on the 11th day of July, 1996. MOMENTUM OPERATING CO., INC. By: /s/ Michael J. Parsons ---------------------------------- Name: Michael J. Parsons ---------------------------------- Title: President ---------------------------------- HARKEN EXPLORATION COMPANY By: /s/ Gregory S. Porter ---------------------------------- Name: Gregory S. Porter ---------------------------------- Title: Vice President - Legal ---------------------------------- HARKEN ENERGY CORPORATION By: /s/ Gregory S. Porter ---------------------------------- Name: Gregory S. Porter ---------------------------------- Title: Vice President - Legal ---------------------------------- 15 EX-27 7 FINANCIAL DATA SCHEDULE
5 6-MOS DEC-31-1996 JAN-01-1996 JUN-30-1996 15,759,000 0 1,614,000 (377,000) 0 17,207,000 62,436,000 (11,379,000) 68,928,000 3,797,000 11,129,000 851,000 0 0 53,151,000 68,928,000 4,385,000 4,931,000 1,600,000 1,600,000 3,053,000 0 506,000 (228,000) 0 (228,000) 0 0 0 (228,000) (0.00) (0.00)
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