{"id":41000,"date":"2015-09-17T11:25:58","date_gmt":"2015-09-17T16:25:58","guid":{"rendered":"https:\/\/content.findlaw-admin.com\/ability-legal\/contracts\/uncategorized\/development-finance-agreement-harken-energy-corp-arbco.html"},"modified":"2015-09-17T11:25:58","modified_gmt":"2015-09-17T16:25:58","slug":"development-finance-agreement-harken-energy-corp-arbco","status":"publish","type":"corporate_contracts","link":"https:\/\/corporate.findlaw.com\/contracts\/finance\/development-finance-agreement-harken-energy-corp-arbco.html","title":{"rendered":"Development Finance Agreement – Harken Energy Corp., Arbco Associates LP, Offense Group Associates LP, Kayne, Anderson Nontraditional Investments LP and Opportunity Associates LP"},"content":{"rendered":"\n DEVELOPMENT FINANCE AGREEMENT\n\n RIO NEGRO PROJECT\n\n\n THIS DEVELOPMENT FINANCE AGREEMENT (this \"Agreement\") is made as of\nthe 12th day of October, 1995, by and between HARKEN ENERGY CORPORATION, a\nDelaware corporation (herein called \"Owner\"), and Arbco Associates L.P.,\nOffense Group Associates L.P., Kayne, Anderson Nontraditional Investments L.P.\nand Opportunity Associates L.P., (herein collectively called \"Investors\"). In\nconsideration of the mutual covenants and agreements contained herein, the\nparties hereto hereby agree as follows:\n\n\n ARTICLE I\n\n Definitions and References\n\n Section 1.1. Defined Terms. As used in this Agreement, each of the\nfollowing terms has the meaning given it in this Section 1.1 or in the sections\nor subsections referred to below:\n\n \"Account\" shall have the meaning assigned to it in Section 3.2.\n\n \"Advances\" shall have the meaning assigned to it in Section 2.1.\n\n \"Affiliate\" shall mean any person directly or indirectly controlling,\ncontrolled by or under common control with Owner and\/or Harken Colombia, with\nthe concept of control in such context meaning the possession of the power to\ndirect or cause the direction of the management and policies of another,\nthrough the ownership of voting securities, by contract or otherwise.\n\n \"Agreed Rate\" shall mean a rate per annum which is equal to the lesser\nof (a) a rate which is three percent (3%) above the prime rate of interest of\nFirst Interstate Bank of Texas, N.A., as announced or published by such bank\nfrom time to time or a similar rate of interest if a prime rate is not\nannounced or published by such bank (adjusted from time to time to reflect any\nchanges in such rate determined hereunder), or (b) the maximum rate from time\nto time permitted by applicable law.\n\n \"Association Contract\" shall mean that certain Bocachica Association\nContract executed January 6, 1994, between Ecopetrol and Harken Colombia,\ntogether with the operating agreement attached thereto and all modifications,\namendments and\/or supplements heretofore or hereafter made in accordance with\nSection 7.13 with respect to such Association Contract or operating agreement.\n\n \"Business Day\" shall mean any day other than a Saturday, a Sunday or a\nday in which banks in the State of Texas or California are closed.\n 2\n \"Certificate of Designations\" shall mean the Certificate of\nDesignations of the Series D Preferred Stock (par value $1.00 per share) of\nOwner attached hereto as Exhibit A.\n\n \"Code\" shall mean the Internal Revenue Code of 1986, as amended, and\nthe rules and regulations thereunder as in effect on the date hereof.\n\n \"Commitment\" shall have the meaning assigned to it in Section 2.1.\n\n \"Commitment Period\" shall mean the 27-month period from and including\nthe date hereof; provided, that if Owner has not drilled two wells on the\nSubject Interests within such 27-month period, the Commitment Period shall be\nextended until a date which is 90 days after the date on which two wells have\nbeen drilled on the Subject Interests.\n\n \"Conversion\" shall mean the conversion of all or part of the Rio Negro\nNPI into Preferred Shares pursuant to Investors' Option as provided for in\nArticle IV, pursuant to Investors' Second Option and\/or Owner's Option as\nprovided for in Article V, or pursuant to Article VI.\n\n \"Designated Percentage\" shall mean the percentage set forth opposite\neach Investor's name on Annex 1 hereto, subject to reduction upon Conversion as\nprovided for in Section 4.4 or Section 5.5.\n\n \"Ecopetrol\" shall mean Empresa Colombiana de Petroleos, an industrial\nand commercial company owned by the Republic of Colombia.\n\n \"Effective Date\" shall mean the date of this Agreement.\n\n \"Environmental Laws\" shall have the meaning assigned to it in Section\n7.20.\n\n \"ERISA\" shall mean the Employee Retirement Income Security Act of\n1974, as amended.\n\n \"Exchange Act\" shall mean the Securities Exchange Act of 1934, as\namended.\n\n \"GAAP\" shall mean generally accepted accounting principles, as set\nforth in the opinions of the Accounting Principles Board of the American\nInstitute of Certified Public Accountants and statements of the Financial\nAccounting Standards Board or in such opinions and statements of such other\nentities as shall be approved by a significant segment of the accounting\nprofession in the United States of America.\n\n \"Governmental Authority\" shall mean (i) the United States of America\nor any state within the United States of America, (ii) Colombia or any\npolitical subdivision of Colombia, (iii) any court or any governmental\ndepartment, commission, board, bureau, agency or other instrumentality of the\nUnited States of America or of any state within the United States of America\n\n\n\n\n\n 2\n 3\nor (iv) any court or any governmental department, commission, board, bureau,\nagency or other instrumentality of Colombia or of any political subdivision of\nColombia.\n\n \"Gross Proceeds\" shall have the meaning assigned to it in Section 3.3.\n\n \"Harken Colombia\" shall mean Harken de Colombia, Ltd., a Cayman\nIslands corporation and wholly owned subsidiary of Owner, and\/or, when\nappropriate, its branch established in Santa Fe de Bogota, D.C., Colombia and\nits successors and assigns.\n\n \"Investors\" shall have the meaning assigned to it in the preamble of\nthis Agreement.\n\n \"Investors' Option\" shall have the meaning assigned to it in Article\nIV.\n\n \"Investors' Second Option\" shall have the meaning assigned to it in\nArticle V.\n\n \"Law\" shall mean any applicable statute, law, ordinance, regulation,\nrule, ruling, order, restriction, requirement, writ, injunction, decree or\nother official act of or by any Governmental Authority.\n\n \"Non-Affiliate\" shall mean with respect to Owner and Harken Colombia,\nany person who is not an Affiliate of Owner or Harken Colombia.\n\n \"Owner\" shall mean Harken Energy Corporation, a Delaware corporation,\nand its successors and assigns.\n\n \"Owner's Option\" shall have the meaning assigned to it in Article V.\n\n \"Owner's SEC Filings\" shall have the meaning assigned to it in Section\n7.9.\n\n A \"person\" shall mean an individual, an estate, a corporation, a\npartnership, a joint venture, a limited liability company, an association, a\njoint stock company, a government or any department or agency of a government,\na trust and\/or any other entity.\n\n \"Pollutants\" has the meaning given such term in Section 7.20.\n\n \"Preferred Shares\" shall mean shares of Series D Preferred Stock, par\nvalue $1.00 per share, of Owner, as described in the Certificate of\nDesignations.\n\n \"Processing\" shall mean the manufacture, fractionation, refining or\nother treating or transportation of Subject Hydrocarbons prior to their sale or\ndisposition, and \"Processed\" shall have the meaning correlative to the\nforegoing.\n\n\n\n\n\n 3\n 4\n \"Production Sales Contracts\" shall mean all contracts, agreements and\narrangements for the sale or disposition of Subject Hydrocarbons that may be\nproduced from or attributable to the Subject Interests, whether presently\nexisting or hereafter created.\n\n \"Releases\" has the meaning given such term in Section 7.20.\n\n \"Rio Negro NPI\" shall have the meaning assigned to it in Section 3.1.\n\n \"Securities Act\" shall mean the Securities Act of 1933, as amended.\n\n \"Subject Hydrocarbons\" shall mean (except to the extent otherwise\nexpressly provided in this Agreement) all oil, gas and other minerals in and\nunder and that may be produced, from and after the Effective Date, from the\nlands and depths covered by and\/or included in the Subject Interests. There\nshall not be included in the Subject Hydrocarbons any oil, gas or other\nminerals (a) attributable to royalties or other similar obligations deducted or\npaid in kind pursuant to the Association Contract or pursuant to any applicable\nLaw, and (b) deducted, paid in kind or otherwise taken out of Harken Colombia's\nshare of such oil, gas or minerals and delivered to another person as\nreimbursement to such person for oil, gas or other minerals of such other\nperson which was previously taken by Harken Colombia relating to the Rio Negro\nprospect.\n\n \"Subject Interests\" shall mean the interest of Harken Colombia and its\nsuccessors and assigns in the Association Contract to the extent such interest\nrelates to that area described on Exhibit B hereto as the Rio Negro prospect.\nAs provided in the Association Contract, the areal extent of the Rio Negro\nprospect under the Association Contract may be reduced and the percentage\ninterest of Harken Colombia and its successors and assigns in the oil, gas and\nmineral production thereunder may be reduced, and in each such case the\n\"Subject Interests\" shall be reduced to the same extent as the Association\nContract and\/or the interest of Harken Colombia and its successors and assigns\nthereunder is so reduced. No reduction shall occur, however, in the Subject\nInterests as a result of any sale or disposition of all or any portion of the\nAssociation Contract or the Subject Interests by Harken Colombia, and in such\nevent all credits and debits to the Account under Article III shall be made as\nif no such sale or disposition had occurred and Harken Colombia was still the\nowner of all of the Association Contract.\n\n Section 1.2. References and Titles. All references in this Agreement\nto articles, sections, subsections and other subdivisions refer to the\narticles, sections, subsections and other subdivisions of this Agreement unless\nexpressly provided otherwise. Titles appearing at the beginning of any\nsubdivisions are for convenience only and do not constitute any part of such\nsubdivisions and shall be disregarded in construing the language contained in\nsuch subdivisions. The words \"this Agreement\", \"this instrument\", \"herein\",\n\"hereof\", \"hereby\", \"hereunder\" and words of similar import refer to this\nAgreement as a whole and not to any particular subdivision unless expressly so\nlimited. The phrases \"this Section\" and \"this subsection\" and similar phrases\nrefer only to the sections or subsections hereof in which such phrases occur.\nPronouns in masculine, feminine and neuter genders shall be construed to\ninclude any other gender, and words\n\n\n\n\n\n 4\n 5\nin the singular form shall be construed to include the plural and vice versa,\nunless the context otherwise requires.\n\n\n ARTICLE II\n\n Advancement of Capital\n\n Section 2.1. Advances. Each Investor agrees and commits to make\nadvances to Owner of the amounts set forth opposite such Investor's name on\nAnnex 1 hereto (herein called \"Advances\") from time to time during the\nCommitment Period (and whether or not any Conversion has occurred) so long as\nthe aggregate amount of Advances of all of the Investors combined does not\nexceed Three Million Five Hundred Thousand and no\/100 Dollars ($3,500,000.00)\n(herein called the \"Commitment\"). Each Advance must be greater than or equal\nto $500,000 in the aggregate for all Investors or must equal the unadvanced\nportion of the Commitment. Each Advance requested shall be made pro rata by\nthe Investors in the proportion that the respective amounts set forth opposite\ntheir names in Annex 1 hereto bear to $3,500,000. The Commitment is not a loan\nor direct ownership interest in Harken Colombia, the Association Contract or\nthe Subject Interests. Instead, the Commitment and all Advances thereof shall\nconstitute consideration for the right to receive payments measured by the\nAccount provided for in Article III, the right to convert or have converted the\nRio Negro NPI into Preferred Shares pursuant to Articles IV and VI and\nPreferred Shares and\/or cash pursuant to Article V and the other rights and\nbenefits provided by this Agreement.\n\n Section 2.2. Requests for Advances. Owner must give at least five\nBusiness Days' prior written notice to each Investor of any requested Advance,\nwhich notice shall be accompanied by a certificate of the chief executive\nofficer or the chief financial officer of Owner certifying that such Advance\nshall be expended by Owner in accordance with Section 2.3 of this Agreement.\nThe Investors shall on the date requested make such Advance to Owner by wire\ntransfer of the amount of such Advance in immediately available funds to the\nbank account specified by Owner in such notice.\n\n Section 2.3. Use of Proceeds. Owner shall use all funds from\nAdvances to finance geological, geophysical and engineering operations and\nstudies of the Subject Interests and the drilling, completing and equipping or\nabandonment of two wells and related facilities on the Subject Interests.\nOwner hereby represents, warrants and covenants that it will drill two wells on\nthe Subject Interests within 24 months of the date hereof. Prior to or\ncontemporaneously with requesting the first Advance that will be expended on\neither of such wells, Owner shall deliver to each Investor for its information\na copy of Owner's internal authority for expenditure (a.f.e.) for such well.\nAll parties to this Agreement acknowledge that the drilling of two wells on the\nSubject Interests has substantial value to Investors. If Owner has not drilled\nor caused to be drilled two wells on the Subject Interests within 24 months of\nthe date hereof, Investor may any time after the expiration of such 24-month\nperiod and prior to the expiration of the Commitment\n\n\n\n\n\n 5\n 6\nPeriod, notify owner that it is withdrawing the Commitment. Upon receipt of\nsuch notice from Investors, Owner shall pay to each Investor an amount in cash\nequal to the aggregate amount of the Advances previously made by such Investor\ntogether with an amount equal to interest on the amount of each such Advance\nfrom and including the date such Advance was received by Owner to but not\nincluding the date such payment is made at the rate of fifteen percent (15%)\nper annum, compounded semi-annually.\n\n ARTICLE III\n\n Rio Negro NPI\n\n Section 3.1. Rio Negro NPI. In consideration for the payment by\nInvestors to Owner of Advances, Investors shall have the rights provided for in\nthis Article III and elsewhere in this Agreement with respect to the Account,\nincluding without limitation the rights to receive payments from Owner measured\nby the Account pursuant to Section 3.7 (all of such rights are herein\ncollectively called the \"Rio Negro NPI\"). The Rio Negro NPI is intended to\nprovide to Investors substantially the same economic benefit as if each\nInvestor was the owner of a direct net profits overriding royalty interest in\nthe Association Contract to the extent it relates to the Designated Percentage\nof the Subject Interests and on the terms otherwise provided for herein;\nprovided, however, that no rights or interest of any nature whatsoever in the\nAssociation Contract, the Subject Interests or Harken Colombia are intended to\nbe, or are hereby, assigned or conveyed to Investors, it being understood and\nagreed that the Rio Negro NPI is solely a contractual obligation of Owner (and\nnot of Harken Colombia, the party to the Association Contract) as expressed in\nthis Agreement.\n\n\n Section 3.2. Establishment. Owner shall establish and maintain a\nbookkeeping account (herein called the \"Account\") in accordance with sound,\naccurate and comprehensive accounting practices and consistent with the various\nprovisions of this Agreement and at all times shall keep true and correct books\nand records with respect thereto.\n\n Section 3.3. Credits. Except as otherwise provided herein, with\nrespect to each sale or other disposition of Subject Hydrocarbons, the Account\nshall be credited with the gross proceeds from the sale of such Subject\nHydrocarbons. The amount of gross proceeds (herein called \"Gross Proceeds\") to\nbe credited to the Account with respect to any sale or disposition of Subject\nHydrocarbons shall be subject to the following:\n\n (a) Gross Proceeds shall include all consideration\n received, directly or indirectly, by Harken Colombia or any Affiliate\n for sales or other dispositions of (i) Subject Hydrocarbons, or (ii)\n if any Subject Hydrocarbons are Processed by or for the benefit of\n Harken Colombia before sale or disposition, the products of such\n Subject Hydrocarbons after such Processing;\n\n\n\n\n\n 6\n 7\n (b) If any proceeds are withheld from Harken Colombia by\n a Non-Affiliate for any reason (other than at the request of Harken\n Colombia or due to Harken Colombia's negligence), such proceeds shall\n not be considered to be Gross Proceeds until such proceeds are\n actually received by Harken Colombia; provided, however, that Gross\n Proceeds shall include any interest, penalty, or other amount that is\n derived from the sale of Subject Hydrocarbons or the proceeds thereof\n when and if received;\n\n (c) Gross Proceeds shall not include any amounts for\n Subject Hydrocarbons unavoidably lost in production or used by Harken\n Colombia in conformity with good oil field practices for drilling and\n production operations (including without limitation gas injection,\n fuel, secondary or tertiary recovery, pressure maintenance,\n repressuring or recycling, Processing and transportation) conducted\n solely for the purpose of producing Subject Hydrocarbons from the\n Subject Interests, but only so long as such Subject Hydrocarbons are\n so used;\n\n (d) In the event Subject Hydrocarbons are used by Harken\n Colombia outside of the Subject Interests and for purposes not\n primarily associated with, or primarily for the benefit of, the\n Subject Interests or the production, Processing or marketing of\n Subject Hydrocarbons, Gross Proceeds shall include the then current\n market value at the wellhead of such Subject Hydrocarbons;\n\n (e) Gross Proceeds shall include all proceeds\n attributable to Subject Interests which are received by Harken\n Colombia from the sale, after the Effective Date, of (or, if disposed\n of after the Effective Date by Harken Colombia other than by sale, the\n then current market value of) any materials, supplies, equipment and\n other personal property or fixtures, or any part thereof or interest\n therein, located on or used in connection with the Subject Interests;\n\n (f) Gross Proceeds shall include all proceeds\n attributable to Subject Interests of all insurance received by Harken\n Colombia, Owner or any of their Affiliates (i) the cost of which is\n charged to the Account, directly or indirectly, and (ii) that accrue\n to Harken Colombia as a consequence of the loss or damage which occurs\n after the Effective Date with respect to Harken Colombia's interest in\n the Subject Interests, any materials, supplies, equipment or other\n personal property or fixtures located on or used in connection with\n any of the Subject Interests, or any Subject Hydrocarbons;\n\n (g) Gross Proceeds shall include all proceeds\n attributable to Subject Interests of all judgments and claims received\n by Harken Colombia or Owner for any loss or damage which occurs after\n the Effective Date with respect to Harken Colombia's interest in the\n Subject Interests, any materials, supplies, equipment or other\n personal property or fixtures located on or used in connection with\n any of the Subject Interests, or any Subject Hydrocarbons;\n\n\n\n\n\n 7\n 8\n (h) Gross Proceeds shall include all advance payments and\n payments under take-or-pay and similar provisions of Production Sales\n Contracts;\n\n (i) Gross Proceeds shall include any amounts received by\n Harken Colombia from production of Subject Hydrocarbons at levels\n greater than Harken Colombia's interest in the Subject Interests and\n shall include any payments received by Harken Colombia from joint\n interest owners as settlement for production of Subject Hydrocarbons\n at levels less than Harken Colombia's interest in the Subject\n Interests; and\n\n (j) Gross Proceeds shall include all other monies and\n things of value which are received by Harken Colombia by virtue of the\n ownership after the Effective Date of the Subject Interests and\/or any\n materials, supplies, equipment and other personal property and\n fixtures located on or used in connection with the Subject Interests;\n\nprovided that this Section 3.3 shall not operate to provide any credits on\naccount of (i) any amounts paid by third parties (including Ecopetrol) to\nHarken Colombia as operator under the Association Contract or any operating\nagreement now or hereafter in force covering any of the Subject Interests to\nreimburse or compensate Harken Colombia as operator for costs incurred or\nservices performed for the account or benefit of such third parties, (ii) any\namounts received by Harken Colombia upon any sale or disposition in accordance\nwith Section 3.18 of any portion of the Association Contract or the Subject\nInterests, or (iii) any amounts received by Harken Colombia as reimbursement by\nEcopetrol of Direct Exploration Costs provided for under the Association\nContract.\n\n Section 3.4. Debits. Except as otherwise provided herein, the\nAccount shall be debited with the following:\n\n (a) All direct costs (and those indirect costs expressly\n permitted in subsection (x) below) which are attributable to the\n Subject Interests after the Effective Date for exploring, developing,\n operating, producing, reworking, maintaining and restoring the Subject\n Interests, including without limitation any direct costs (and those\n indirect costs expressly permitted in subsection (x) below) for (i)\n geological and geophysical operations and studies (and related\n computer processing and modeling) with respect to the Subject\n Interests and drilling, completing, testing, equipping, plugging back,\n reworking, recompleting and plugging and abandoning any wells on the\n Subject Interests, (ii) constructing, maintaining and operating any\n gathering facilities, tanks and other production, delivery and\n transportation facilities on or for use in connection with the Subject\n Interests, (iii) Processing any Subject Hydrocarbons and acquiring,\n constructing, operating and maintaining any facility, plant, equipment\n or pipeline for Processing any Subject Hydrocarbons, (iv) secondary\n recovery, pressure maintenance, repressuring, recycling and other\n operations conducted for the purpose of enhancing production of the\n Subject Hydrocarbons, (v) wages, salaries, fringe benefits and\n expenses of local employees and contract personnel, consultants and\n professionals necessary for operating, producing\n\n\n\n\n\n 8\n 9\n and maintaining the Subject Interests, (vi) local offices, camps,\n warehouses, housing and other facilities paid for by Harken Colombia,\n relocation of employees and their families, travel, telephone,\n training of Colombian personnel, rental and use or damage to the real\n and personal property of others, community relations, protection,\n peaceful operations and similar matters, and otherwise doing business\n in Colombia, (vii) insurance, (viii) payments made in cash as\n compensation for or in settlement of any Subject Hydrocarbons taken by\n Harken Columbia at levels greater than Harken Colombia's interest in\n the Subject Interests, (ix) royalties required to be paid in cash\n pursuant to the Association Contract or any applicable Law and other\n charges and payments required under the Association Contract and (x)\n general, administrative and overhead expenses incurred by Owner and\n Harken Colombia which are permitted to be charged under the\n Association Contract or any operating agreement applicable to any of\n the Subject Interests, but not otherwise; provided, however, that the\n debits made to the Account pursuant to this subsection with respect to\n any Subject Interest shall be made in accordance with customary\n industry practices and applicable accounting standards.\n\n (b) All Colombian taxes and similar charges incurred by\n Harken Colombia with respect to the ownership of the Subject Interests\n after the Effective Date, including without limitation (i) income,\n transfer, remittance, franchise, occupation, sales and use and like\n taxes based on or relating to the Subject Interests, the sale or\n production of the Subject Hydrocarbons, or the proceeds, value or\n income therefrom, (ii) production, severance, excise and other taxes\n assessed against, and\/or measured by, the production of (or the\n proceeds or value of production of) Subject Hydrocarbons, and (iii) ad\n valorem and other taxes assessed against or attributable to the\n Subject Interests or any Processing or other equipment or property\n located on or related to the Subject Interests; provided, however,\n that if any taxes relate to the Subject Interests and to other\n property owned by Harken Colombia or to Subject Hydrocarbons and to\n other production of Harken Colombia, such taxes shall be allocated to\n the Subject Interests or the Subject Hydrocarbons and debited\n hereunder on a proportionate or other equitable basis in accordance\n with applicable accounting, tax or industry standards;\n\n (c) Amounts attributable to currency conversions,\n exchange control obligations and similar costs and losses with respect\n to currencies used to pay expenses charged to the Account, currencies\n credited to the Account or currencies paid by Harken Colombia to Owner\n for the purpose (directly or indirectly) of making payments to\n Investors pursuant to Section 3.7 (excluding in each case any costs\n for currency hedges, swaps and similar instruments); and any such\n amounts shall be calculated or determined in a manner consistent with\n the treatment of such amounts on the books of Owner for financial\n reporting to governmental entities; and\n\n (d) Except as otherwise provided elsewhere in this\n Agreement, all other reasonable, direct expenditures attributable to\n the Subject Interests paid or incurred by Harken Colombia after the\n Effective Date with respect to the Subject Interests;\n\n\n\n\n\n 9\n 10\nprovided that this Section 3.4 shall not operate to permit any debits (i) by\nduplication or on account of any amount which has also been used to reduce the\namount of the Subject Hydrocarbons, Gross Proceeds and\/or payments to Investors\npursuant to Section 3.7 or has otherwise not been included therein (including,\nby way of example and without limitation, royalties, production, severance,\nexcise and other taxes and any other amounts deducted, withheld or paid by any\nother person), (ii) on account of any expenses and any penalties, interest or\nother similar charges which result from the failure of Harken Colombia to\nproperly discharge all costs and expenses (including taxes) of developing,\noperating and maintaining the Subject Interests, (iii) on account of any\ndamages, penalties, interest or other similar charges paid by Harken Colombia\nto any person arising from any conduct or omission by Harken Colombia in its\ncapacity as operator of any of the Subject Interests and any costs and expenses\n(including attorneys' fees) in defending any such action unless such charges,\ncosts and expenses are properly chargeable under the Association Contract or to\nall working interest owners under an operating agreement to which all or part\nof the Subject Interests are subject, and (iv) any interest or principal\npayments on any indebtedness of Harken Colombia unless the incurrence of such\nindebtedness by Harken Colombia and the debit of the Account for such interest\nor principal payments has been specifically approved by Investors.\n\n Section 3.5. Additional Account Matters. Notwithstanding the\nprovisions of Section 3.4 (or any other provision of this Agreement) which may\nappear to the contrary, an amount equal to the aggregate amount of the Advances\nat the time paid to Owner pursuant to Article II, of the costs incurred by\nHarken Colombia in conducting the operations described in Section 2.3 which are\nattributable to Subject Interests and which would otherwise be charged or\ndebited to the Account under Section 3.4 shall not be charged or debited to the\nAccount and shall be borne solely by Harken Colombia.\n\n Section 3.6. Accounting. All debits to the Account which are\nattributable to costs and expenses paid by Harken Colombia during a calendar\nquarter up to and including the last day of such calendar quarter shall be\ndebited against the Account as of the last day of such calendar quarter;\nprovided that any such debits which do not (and will not) result from payments\nto third parties or to Harken Colombia shall be debited against the Account as\nof the last day of the calendar quarter in which they arise. After such debits\nhave been so made for a given calendar quarter, all credits to the Account\nwhich are actually received by Harken Colombia during a calendar quarter up to\nand including the last day of such calendar quarter shall be credited to the\nAccount as of the last day of such calendar quarter; provided that any such\ncredits which do not (and will not) result from credits given by or payments\nfrom third parties shall be credited to the Account as of the last day of the\ncalendar quarter in which they arise. The total net profits realized from the\nSubject Interests (or the total net losses, as the case may be) shall be\ndetermined after the applications and calculations provided for above have been\nmade by Owner. If, after all such debits and credits have been made to the\nAccount for a given calendar quarter, there remains a deficit balance in the\nAccount, then an amount shall be computed equal to interest on the amount of\nsuch deficit balance at the Agreed Rate for the period between the last day of\nsuch calendar quarter and the last day of the next calendar quarter, which\namount shall, on the last day of the\n\n\n\n\n\n 10\n 11\nnext calendar quarter, be charged to the Account in the same manner as other\ncharges to the Account for such calendar quarter. Investors shall participate\nin the Designated Percentage of the net profits derived from the Subject\nInterests, as provided in this Agreement, only after and while all debits\nproperly debited against the Account shall have been offset by credits to the\nAccount and a credit balance shall exist in the Account.\n\n Section 3.7. Payments. On or before 60 days after the end of each\ncalendar quarter, Owner shall furnish to Investors a detailed statement clearly\nreflecting the condition of the Account as of the close of business on the last\nday of such calendar quarter, and clearly reflecting those items which gave\nrise to debits and credits to the Account during such quarter and clearly\nreflecting for the Subject Interests, the quantities of Subject Hydrocarbons\nproduced therefrom during the quarter covered by such statement, the volumes of\nsuch production sold, the prices at which such volumes were sold, and the taxes\npaid with respect to such sales. Any deficit reflected by any such statement\nshall be carried forward for the next and succeeding months until such deficit\nhas been wiped out and liquidated. In case a net profit is reflected by any\nsuch statement, payment to Investors of the Designated Percentage of the amount\nof such net profit shall be enclosed with the statement rendered to Investors\n(or, if requested at any time by Investors, paid by bank wire transfer to such\nbank and account designated in writing by Investors); provided, however, that\n(a) Owner may elect to cause Harken Colombia (instead of Owner) to make any\npayment required under this Section to Investors in U.S. dollars, (b) any\npayment to Investors under this Section shall be reduced by any costs or losses\nfrom currency conversions, compliance with exchange control obligations,\nwithholding obligations and remittance and other taxes which are properly\nchargeable to the Account pursuant to Section 3.4(b) or (c) and (i) are\nincurred by Harken Colombia in connection with such payment to Investors or any\npayment of an amount equivalent to such payment by Harken Colombia to Owner, or\n(ii) in the event such payment is made by Owner from its U.S. funds without any\nequivalent payment by Harken Colombia to Owner, would have been so incurred if\nHarken Colombia had paid to Owner an amount equivalent to such payment, and (c)\nOwner may retain up to one-third of Investors' share of any such net profit in\nthe event and to the extent that the debits that Owner reasonably projects will\nbe charged to the Account during the next three months will exceed the credits\nthat Owner reasonably projects will be made to the Account during such\nthree-month period and apply such retained amount to the payment of Investors'\nshare of such debits. Any such retained amount that is subsequently determined\nto be unnecessary for the payment of Investors' share of such debits shall be\npaid promptly to Investors. In the event any amount is deducted from any\npayment pursuant to subsections (a), (b) or (c) above, such amount shall not\nthereafter be charged to the Account to the extent it would cause any direct or\nindirect double charge to the Account or the Investors for such amount.\n\n Section 3.8. Overpayments and Underpayments. If at any time Owner\ninadvertently pays Investors more or less than the amount then due with respect\nto the Rio Negro NPI, the amount or amounts otherwise payable for any\nsubsequent period or periods shall be reduced or increased by such overpayment\nor underpayment, plus an amount equal to interest (computed at the Agreed\n\n\n\n\n\n 11\n 12\nRate) on the unrecovered balance of such overpayment or underpayment during the\nperiod of such overpayment or underpayment.\n\n Section 3.9. Prudent Operator Standard. Harken Colombia (subject to\nthe terms and provisions of the Association Contract and any applicable\noperating agreements) shall have exclusive charge, management and control of\nall operations to be conducted on the Subject Interests and may take any and\nall actions which a reasonably prudent operator would deem necessary or\nadvisable in the management, operation and control thereof. Owner shall cause\nHarken Colombia to operate and maintain the Subject Interests as would a\nprudent operator under similar circumstances in accordance with good oil field\npractices. Owner shall cause Harken Colombia to promptly (and, unless the same\nare being contested in good faith and by appropriate proceedings before the\nsame are delinquent) pay or cause to be paid all costs and expenses (including\nwithout limitation all taxes and all costs, expenses and liabilities for labor,\nmaterials and equipment incurred in connection with the Subject Interests and\nall obligations to the holders of interests affecting the Subject Interests)\nincurred from and after the Effective Date in developing, operating and\nmaintaining the Subject Interests. As to those of the Subject Interests as to\nwhich Harken Colombia hereafter may not be the operator, Owner shall cause\nHarken Colombia to take all such action and exercise all such rights and\nremedies as are reasonably available to Harken Colombia to cause the operator\nto so maintain and operate such Subject Interests (provided that Harken\nColombia shall never be obligated to pay any costs or expenses attributable to\nany interest other than the Subject Interests and all royalties related\nthereto).\n\n Section 3.10. Sales of Subject Hydrocarbons. Owner shall have the\nobligation to cause Harken Colombia to market or cause to be marketed, subject\nto the terms of the Association Contract, the Subject Hydrocarbons in\naccordance with reasonable and prudent business judgment and sound oil field\npractices and on such terms and conditions as Harken Colombia shall determine\nto be in the best interests of Investors; provided, however, that all such\nsales of Subject Hydrocarbons (a) shall be upon terms and conditions which are\nthe best terms and conditions available as determined in good faith by Harken\nColombia taking into account all relevant circumstances, including without\nlimitation, price, quality of production, access to markets or lack thereof,\nminimum purchase guarantees, identity of purchaser and length of commitment,\n(b) shall be on terms and conditions at least as favorable as Harken Colombia\nobtains for oil, gas and\/or minerals not subject to this Agreement which are of\ncomparable type and quality and in the same or similar location, except where\nsuch terms and conditions cannot be made available to sales of the Subject\nHydrocarbons under pre-existing contracts, and (c) shall be made to\nNon-Affiliates of Owner or Harken Colombia except that sales of Subject\nHydrocarbons may be made to an Affiliate of Owner or Harken Colombia that is\nowned in part by a Governmental Authority and that owns or operates a pipeline\nor other Processing facility if the price paid by such Affiliate is no less\nfavorable than the prices then being paid by a Non-Affiliate for oil, gas\nand\/or minerals which are of comparable type and quality and in the same or\nsimilar locations.\n\n Section 3.11. Insurance. Owner shall cause Harken Colombia to obtain\nor cause to be obtained (and maintain or cause to be maintained during the\neconomic life of the Subject Interests)\n\n\n\n\n\n 12\n 13\ninsurance coverage in such amounts, with provisions for such deductible amounts\nand for such purposes as Harken Colombia shall determine to be appropriate\n(and, because of cost, availability and other factors, Harken Colombia may\ndetermine not to acquire any such insurance).\n\n Section 3.12. Contracts with Affiliates. Except as provided\notherwise in the Association Contract or any applicable operating agreement,\nOwner, Harken Colombia and\/or their Affiliates may perform services and furnish\nsupplies and equipment with respect to the Subject Interests, provided that the\namount of compensation, price or rental that can be charged to the Account\ntherefor must be no less favorable than those available from Non-Affiliates in\nthe area engaged in the business of rendering comparable services or selling or\nleasing comparable equipment and supplies which could reasonably be made\navailable to the Subject Interests.\n\n Section 3.13. Government Regulation. All obligations of Owner and\/or\nHarken Colombia hereunder shall be subject to and limited by (i) all applicable\nLaws and (ii) the Association Contract as it may be modified, amended and\/or\nsupplemented from time to time. Where the price at which Subject Hydrocarbons\nare sold is limited by applicable Laws, the price so permitted to be paid for\nSubject Hydrocarbons shall be controlling if lower than prices established in\nProduction Sales Contracts or required hereunder.\n\n Section 3.14. Abandonments. After the Commitment Period, Harken\nColombia shall have the right without the consent of Investors to release,\nsurrender and\/or abandon its interest in the Subject Interests and\/or the\nAssociation Contract, or any part thereof, or interest therein, even though the\neffect of such release, surrender or abandonment may be to affect adversely the\nRio Negro NPI; provided, however, that (a) Investors' interest in the Rio Negro\nNPI shall automatically be converted into Preferred Shares pursuant to Article\nVI if, within two years after the expiration of the Commitment Period, Harken\nColombia has released, surrendered and\/or abandoned any portion of its interest\nin the Subject Interests and\/or the Association Contract other than that\nrequired to be released, surrendered and\/or abandoned for Harken Colombia to\ncomply with the terms and conditions of the Association Contract and if Article\nVI shall otherwise then be applicable and (b) during the Commitment Period,\nHarken Colombia shall have the right without the consent of Investors to\nrelease, surrender and\/or abandon that portion of the Subject Interests as\nshall be necessary for Harken Colombia to comply with the terms and conditions\nof the Association Contract.\n\n Section 3.15. Pooling and Unitization. Without the prior written\nconsent of Investors, Harken Colombia shall have the right and power to\nunitize, pool or combine the lands covered by the Subject Interests, or any\nportion or portions thereof, as to oil, gas and\/or other minerals, with any\nother land or contract or contracts so as to create one or more unitized areas\n(or, with respect to unitized or pooled areas theretofore created, to dissolve\nthe same or to amend and\/or reconfigure the same to include additional acreage\nor substances or to exclude acreage or substances); provided, however, that\nOwner shall not permit Harken Colombia to unitize, pool or combine the lands\ncovered by the Subject Interests, or any portion or portions thereof, if the\neffect thereof is to benefit Harken Colombia or any of its Affiliates to the\ndetriment of the\n\n\n\n\n\n 13\n 14\nInvestors. If any of the Subject Interests are pooled or unitized in any\nmanner, the Rio Negro NPI insofar as it affects such Subject Interest shall be\nconsidered to be pooled and unitized, and in any such event the Rio Negro NPI\nshall apply to (and the term \"Subject Hydrocarbons\" shall include) the\nproduction which accrues to such Subject Interest under and by virtue of such\npooling and unitization arrangements and the Account shall be computed giving\nconsideration to such production and costs, expenses, charges and credits\nattributable to such Subject Interest.\n\n Section 3.16. Non-consent Operations.\n\n (a) If Harken Colombia elects to be a non-participating\n party (whether pursuant to the Association Contract or an operating\n agreement or other agreement or requirement) with respect to any\n drilling, deepening, plugging back, reworking, sidetracking or\n completion (or other) operation on any Subject Interest or elects to\n be an abandoning party with respect to a well located on any Subject\n Interest, the consequence of which election is that Harken Colombia's\n interest in such Subject Interest or part thereof is temporarily\n (i.e., during a recoupment period) or permanently forfeited to the\n parties participating in such operations, or electing not to abandon\n such well, then the costs and proceeds attributable to such forfeited\n interest shall not, for the period of such forfeiture (which may be a\n continuous and permanent period), be debited or credited to the\n Account and such forfeited interest shall not, for the period of such\n forfeiture, be subject to the Rio Negro NPI.\n\n (b) If Harken Colombia elects to be a participating party\n to such a drilling, deepening, plugging back, reworking, sidetracking\n or completing (or other) operation, or elects to be a non-abandoning\n party with respect to such a well, and any other party or parties have\n elected not to participate in such operation (or have elected to\n abandon such well) with the result that (pursuant to the Association\n Contract or an operating agreement or other agreement or requirement)\n Harken Colombia becomes entitled to receive, either temporarily (i.e.,\n through a period of recoupment) or permanently, interests belonging to\n such other party or parties, the costs and proceeds attributable to\n such non-participating parties' interests to which Harken Colombia\n becomes so entitled shall not be debited and credited to the Account\n and instead shall be for the account of Harken Colombia.\n\n Section 3.17. No Personal Liability; Indemnification.\nNotwithstanding anything to the contrary contained in this Agreement, Investors\nshall never personally be responsible for payment of any part of the costs,\nexpenses or liabilities incurred in connection with the exploring, developing,\noperating, owning and\/or maintaining of the Subject Interests or the\nAssociation Contract (including without limitation, any costs, expenses or\nliabilities related to damage to or remediation of the environment, including\nany of the same arising out of ownership of an interest in property), and Owner\nagrees to indemnify and hold Investors harmless from and against all such\ncosts, expenses and liabilities (with such indemnity to also cover all costs\nand expenses of Investors, including reasonable legal fees and expenses, which\nare incurred incident to the matters indemnified against); provided, however,\nall such costs and expenses shall, to the extent the same\n\n\n\n\n\n 14\n 15\nrelate to periods after the Effective Date, nevertheless be charged against the\nAccount if such costs and expenses are expressly permitted elsewhere in this\nAgreement to be charged to the Account. The foregoing indemnifications shall\nextend to Investors and their successors and assigns, all their respective\naffiliates and all their respective officers, directors, agents, attorneys and\nemployees. THE FOREGOING INDEMNITIES SHALL APPLY WHETHER OR NOT ARISING OUT OF\nTHE SOLE, JOINT OR CONCURRENT NEGLIGENCE, FAULT OR STRICT LIABILITY OF\nINVESTORS OR ANY OTHER PERSON OR ENTITY INDEMNIFIED HEREUNDER AND SHALL APPLY,\nWITHOUT LIMITATION, TO ANY LIABILITY IMPOSED UPON ANY PERSON INDEMNIFIED\nHEREUNDER AS A RESULT OF ANY STATUTE, RULE, REGULATION, THEORY OF STRICT\nLIABILITY OR OTHERWISE.\n\n Section 3.18. Assignment by Harken Colombia or Owner.\n\n (a) Without the prior written consent of Investors (which\n consent shall not be unreasonably withheld), Harken Colombia shall not\n assign, sell, transfer, convey, mortgage or pledge the Association\n Contract or the Subject Interests; provided, however, that Harken\n Colombia shall be permitted (i) to assign or otherwise transfer all or\n part of its interest in the Association Contract and the Subject\n Interests to an Affiliate of Owner for so long as such assignee shall\n remain an Affiliate of Owner and provided that Owner shall remain\n personally obligated for its duties and obligations hereunder, and\n (ii) to assign, sell, transfer, convey, mortgage or pledge at any time\n to any person a portion of Harken Colombia's interest in the\n Association Contract and the Subject Interests if after any such\n assignment, sale, transfer, conveyance, mortgage or pledge the product\n of (A) the percentage interest in the Association Contract and the\n Subject Interests which would then be owned by Harken Colombia and not\n mortgaged or pledged, multiplied by (B) the percentage of the\n outstanding shares of capital stock of Harken Colombia that is then\n owned by Owner and is not mortgaged or pledged, shall equal or exceed\n the sum of the total Designated Percentage of all Investors at the\n time in effect plus 10%, and provided that Harken Colombia shall\n remain the operator of record of the Subject Interests.\n\n (b) Without the prior written consent of Investors (which\n consent shall not be unreasonably withheld), (i) Owner shall not\n assign, sell, transfer, convey, mortgage or pledge any shares of stock\n of Harken Colombia owned by it, nor shall Owner cause or allow Harken\n Colombia to merge or consolidate with any other Person, unless Harken\n Colombia shall be the surviving Person resulting from such merger or\n consolidation and (ii) Harken Colombia shall not issue any additional\n shares of capital stock or any securities convertible into or\n exchangeable for shares of capital stock to any person other than\n Owner; provided, however, that in any such case Owner shall be\n permitted (A) to assign or otherwise transfer all or part of its\n shares of capital stock in Harken Colombia, or permit Harken Colombia\n to issue additional shares of its capital stock, to an Affiliate of\n Owner for so long as such assignee shall remain an Affiliate of Owner\n and provided that Owner shall remain personally obligated for its\n duties and obligations hereunder, and (B) to assign, sell, transfer,\n convey, mortgage or pledge at any time to any person a portion of the\n capital stock of Harken Colombia if after any such assignment, sale,\n transfer,\n\n\n\n\n\n 15\n 16\n conveyance, mortgage or pledge the product of (1) the percentage of\n the outstanding shares of capital stock of Harken Colombia which would\n then be owned by Owner and not mortgaged or pledged, multiplied by (2)\n the percentage interest in the Association Contract and the Subject\n Interests which is then owned by Harken Colombia and is not mortgaged\n or pledged, shall equal or exceed the sum of the total Designated\n Percentage of all Investors at the time in effect plus 10%.\n\n Section 3.19. Assignment by Investors. Investors shall have the\nright to freely assign any or all of the Rio Negro NPI to any person who is an\nAccredited Investor within the meaning of the Securities Act; provided that in\nno event shall the Rio Negro NPI be assigned to more than five persons at any\ntime.\n\n Section 3.20. Access to Books and Records. In addition to any\nreports and information specifically required by the terms of this Agreement,\nOwner agrees to furnish to Investors full information pertaining to the\noperation of the Subject Interests, at all reasonable times, and in such form,\nas Investors may reasonably request. Subject to any restrictions on Harken\nColombia's right to do so under the Association Contract or applicable\noperating agreements or similar contracts, Owner will cause Harken Colombia to\npermit representatives designated by Investors, including independent\naccountants, agents, attorneys, and other persons, to visit and inspect the\nSubject Interests and Owner's and Harken Colombia's books and records\npertaining to the Subject Interests and the Account (and to make copies and\nphotocopies from such records and to write down and record such information as\nsuch representatives may request), and Owner and Harken Colombia shall permit\nInvestors and their designated representatives reasonably to investigate and\nverify the accuracy of information furnished to Investors hereunder or in\nconnection herewith and to discuss all such matters with their officers,\nemployees and representatives. During the Commitment Period, Owner shall\ndeliver to Investors copies of all definitive public reports and registration\nstatements filed by Owner with the Securities and Exchange Commission and all\nreports and proxy material furnished to holders of common stock of Owner, in\neach case promptly after such reports, statements and material are so filed or\nfurnished.\n\n\n ARTICLE IV\n\n Investors Conversion\n\n Owner hereby grants to Investors the option (herein called the\n\"Investors' Option\") to convert all or part of Investors' interest in the Rio\nNegro NPI into Preferred Shares on the following terms and conditions (herein\ncalled \"Conversion\"):\n\n Section 4.1. Exercise of Investors' Option. The Investors' Option\ncan only be exercised by the delivery to Owner within the Commitment Period of\na written notice stating that Investors thereby elect to exercise the\nInvestors' Option and specifying the percentage of the Rio Negro NPI that\nInvestors desire to convert into Preferred Shares. If such notice is not\ndelivered to Owner\n\n\n\n\n\n 16\n 17\nwithin the Commitment Period, the Investors' Option shall terminate and\nInvestors shall have no further right or option to convert the Rio Negro NPI\ninto Preferred Shares pursuant to the Investors' Option. Investors can only\nexercise the Investors' Option once during the Commitment Period.\n\n Section 4.2. Number of Preferred Shares. The number of Preferred\nShares to be issued to each Investor upon Conversion pursuant to this Article\nIV shall be determined pursuant to the following formula:\n\n PS = (AV x CP) \/ PV\n\nwhere, for purposes of this Article IV:\n\n \"PS\" shall mean the number of Preferred Shares to be issued upon\n Conversion.\n\n \"AV\" shall mean the remainder of (a) the aggregate amount of the\n Advances previously made by such Investor pursuant to Article\n II minus (b) the aggregate amount of the payments received by\n such Investor pursuant to Section 3.7, together with an amount\n equal to interest on the positive balance of such remainder as\n it exists from time to time at the rate of fifteen percent\n (15%) per annum, compounded semi-annually.\n\n \"CP\" shall mean the percentage of the Rio Negro NPI that Investors\n have elected to convert into Preferred Shares pursuant to this\n Article IV.\n\n \"PV\" shall mean $1,000, the liquidation value of each Preferred\n Share.\n\n \"Conversion Date\" shall mean, with respect to any Conversion pursuant\n to this Article IV, the date of receipt by Owner of Investors'\n notice delivered pursuant to Section 4.1.\n\nThe number of Preferred Shares determined pursuant to such formula shall be\nrounded up or down to the next whole number, and no fractional Preferred Shares\nshall be issued. If any Advance is made after Conversion, the amount of\nPreferred Shares to be issued with respect to such Conversion shall be\nincreased by an amount equal to the amount of such Advance divided by the PV,\nand any such additional Preferred Shares shall be promptly delivered to such\nInvestor.\n\n Section 4.3. Issuance of Preferred Shares. The closing and\nconsummation of any Conversion pursuant to this Article IV shall occur not\nlater than five Business Days following the Conversion Date. At such closing,\nOwner shall issue or cause to be issued to Investors the number of Preferred\nShares required for such Conversion pursuant to Section 4.2.\n\n Section 4.4. Reduction of Designated Percentage. As of the\nConversion Date, the Designated Percentage for each Investor shall be reduced\nby subtracting therefrom the product of\n\n\n\n\n\n 17\n 18\nthe CP and the Designated Percentage listed opposite such Investor's name on\nAnnex 1 hereto. If all of the Rio Negro NPI has been converted into Preferred\nShares upon Conversion, the Rio Negro NPI shall terminate and no payments shall\nbe made to Investors with respect to the Rio Negro NPI pursuant to Section 3.7\nor otherwise. If less than all of the Rio Negro NPI has been so converted, all\npayments from and after the Conversion Date made by Owner to Investors pursuant\nto Section 3.7 shall be made based on the Designated Percentage as reduced in\naccordance with this Section.\n\n\n ARTICLE V\n\n Owner Conversion\n\n Investors hereby grant to Owner the option (herein called the \"Owner's\nOption\") exercisable within ten Business Days after the Commitment Period to\nconvert seventy-five percent (75%) of Investors' interest in the Rio Negro NPI\ninto Preferred Shares on the terms and conditions set forth below; provided,\nhowever, that if Conversion of less than one hundred percent (100%) of the Rio\nNegro NPI has occurred pursuant to Article IV, the percentage of the Rio Negro\nNPI that shall be converted to Preferred Shares pursuant to Owner's Option\nshall be the lesser of (a) seventy-five percent (75%) of the original amount of\nthe Rio Negro NPI or (b) the percentage of the original amount of the Rio Negro\nNPI that has not been converted to Preferred Shares pursuant to Article IV.\nOwner hereby grants to Investors the option (herein called the \"Investors'\nSecond Option\") to convert the remainder of Investors' interest in the Rio\nNegro NPI (i.e., that amount that otherwise would be owned by Investors after\nexercise of the Owner's Option) into Preferred Shares on the terms and\nconditions set forth below if Owner exercises the Owner's Option. The\nconversion of all or part of Investors' interest in the Rio Negro NPI into\nPreferred Shares pursuant to this Article V is also herein called \"Conversion\".\n\n Section 5.1. Exercise of Owner's Option. The Owner's Option can only\nbe exercised by the delivery to Investors (within ten Business Days after the\nCommitment Period) of a written notice stating that Owner thereby elects to\nexercise the Owner's Option. If such notice is not delivered to Investors\nwithin ten Business Days after the Commitment Period, the Owner's Option shall\nterminate and Owner shall have no further right or option to convert the Rio\nNegro NPI into Preferred Shares. Owner can only exercise the Owner's Option\nonce within the ten Business Days after the Commitment Period and only with\nrespect to the percentage described in the first sentence of this Article V.\n\n Section 5.2. Exercise of Investors' Second Option. The Investors'\nSecond Option can only be exercised by the delivery to Owner (within a period\nof fifteen days following the date of receipt by Investors of Owner's written\nnotice of exercise of Owner's Option pursuant to Section 5.1) of a written\nnotice stating that Investors thereby elect to exercise the Investors' Second\nOption. If such notice is not delivered to Owner within such fifteen-day\nperiod, the Investors' Second Option shall terminate and Investors shall have\nno further right or option to convert the\n\n\n\n\n\n 18\n 19\nRio Negro NPI into Preferred Shares pursuant to the Investors' Second Option.\nInvestors can only exercise the Investors' Second Option once during such\nfifteen-day period and only with respect to the remainder of Investors'\ninterest in the Rio Negro NPI.\n\n Section 5.3. Number of Preferred Shares. The number of Preferred\nShares to be issued to each Investor upon Conversion pursuant to this Article V\nshall be determined pursuant to the following formula:\n\n PS = (AV x CP) \/ PV\n\nwhere, for purposes of this Article IV:\n\n \"PS\" shall mean the number of Preferred Shares to be issued upon\n Conversion.\n\n \"AV\" shall mean the remainder of (a) the aggregate amount of the\n Advances previously made by such Investor pursuant to Article\n II minus (b) the aggregate amount of the payments received by\n such Investor pursuant to Section 3.7, together with an amount\n equal to interest on the positive balance of such remainder as\n it exists from time to time at the rate of twenty-five percent\n (25%) per annum, compounded semi-annually.\n\n \"CP\" shall mean (a) if Investors have not exercised the Investors'\n Second Option, seventy-five percent (75%) or, if Conversion of\n less than one hundred percent (100%) of the Rio Negro NPI has\n occurred pursuant to Article IV, the lesser of (i)\n seventy-five percent (75%) or (ii) one hundred percent (100%)\n minus the percentage of the original amount of the Rio Negro\n NPI that was converted to Preferred Shares pursuant to Article\n IV, or (b) if Investors have exercised the Investors' Second\n Option, the remainder of one hundred percent (100%) minus the\n percentage (if any) of the original amount of the Rio Negro\n NPI that was converted to Preferred Shares pursuant to Article\n IV.\n\n \"PV\" shall mean $1,000, the liquidation value of each Preferred\n Share.\n\n \"Conversion Date\" shall mean, with respect to any Conversion pursuant\n to this Article V, the date of receipt by Investors of Owner's\n notice delivered pursuant to Section 5.1.\n\nThe number of Preferred Shares determined pursuant to such formula shall be\nrounded up or down to the next whole number, and no fractional Preferred Shares\nshall be issued. If any Advance is made after Conversion, the amount of\nPreferred Shares to be issued with respect to such Conversion shall be\nincreased by an amount equal to the amount of such Advance divided by the PV,\nand any such additional Preferred Shares shall be promptly delivered to such\nInvestor.\n\n\n\n\n\n 19\n 20\n Section 5.4. Issuance of Preferred Shares. The closing and\nconsummation of any Conversion pursuant to this Article V shall occur not later\nthan five Business Days following the earlier of (a) the date of receipt by\nOwner of Investors' notice (if any) delivered pursuant to Section 5.2 and (b)\nthe expiration of the fifteen-day period provided for in Section 5.2. At such\nclosing, Owner shall issue or cause to be issued to each Investor the number of\nPreferred Shares required for such Conversion pursuant to Section 5.3.\n\n Section 5.5. Reduction of Designated Percentage. As of the\nConversion Date, the Designated Percentage for each Investor (as reduced\npursuant to Section 4.4, if applicable) shall be reduced by subtracting\ntherefrom the product of the CP and the Designated Percentage listed opposite\nsuch Investors' name on Annex 1 hereto. If all of the Rio Negro NPI has been\nconverted into Preferred Shares upon Conversion, the Rio Negro NPI shall\nterminate and no payments shall be made to Investors with respect to the Rio\nNegro NPI pursuant to Section 3.7 or otherwise. If less than all of the Rio\nNegro NPI has been so converted, all payments from and after the Conversion\nDate made by Owner to Investors pursuant to Section 3.7 shall be made based on\na Designated Percentage as reduced in accordance with this Section.\n\n Section 5.6. Investors' Cash Option. Investors shall have the\nadditional option to receive cash rather than Preferred Shares upon any\nConversion pursuant to this Article V. The amount of cash to be received in\nlieu of Preferred Shares shall be equal to the aggregate liquidation value of\nthe Preferred Shares that would otherwise have been issued to Investors upon\nsuch Conversion as calculated pursuant to Section 5.3. The option of Investors\nprovided for in this Section can only be exercised by delivery to Owner (within\na period of fifteen days following the date of receipt by Investors of Owner's\nwritten notice of exercise of Owner's Option pursuant to Section 5.1) of a\nwritten notice stating that Investors thereby elect to exercise the option\nprovided for in this Section. If such notice is not delivered to Owner within\nsuch fifteen-day period, the Investors' cash option provided for in this\nSection shall terminate and Investors shall have no further right or option to\nreceive cash rather than Preferred Shares upon any Conversion pursuant to this\nArticle V.\n\n Section 5.7. Payment of Cash Option. The closing and consummation\nof the exercise of Investors' cash option pursuant to Section 5.6 shall occur\nnot later than five Business Days following the earlier of (a) the date of\nreceipt by Owner of Investors' notice (if any) delivered pursuant to Section\n5.6 and (b) the expiration of the fifteen-day period provided for in Section\n5.2. At such closing, Owner shall pay or cause to be paid to Investors the\namount of cash determined in accordance Sections 5.3 and 5.6.\n\n\n\n\n\n 20\n 21\n ARTICLE VI\n\n Automatic Conversion\n\n Section 6.1. Conversion Upon Abandonment. If, within two years\nafter the expiration of the Commitment Period, Harken Colombia exercises its\nright pursuant to Section 3.14 to abandon any portion of the Subject Interests\nand\/or the Association Contract other than that required to be released,\nsurrendered and\/or abandoned for Harken Colombia to comply with the terms and\nconditions of the Association Contract and, at such time, the interest so\nreleased, surrendered and\/or abandoned by Harken Colombia contains material\nproved reserves which hereafter are discovered as described below and are\ncapable of being developed and\/or produced in a commercially reasonable manner\nconsidering all relevant circumstances, any interest of Investors in the Rio\nNegro NPI which has not been previously converted pursuant to Investors'\nOption, Owner's Option or Investors' Second Option shall automatically be\nconverted into Preferred Shares pursuant to this Article VI. The conversion of\nInvestors' interest in the Rio Negro NPI into Preferred Shares pursuant to this\nArticle VI is also herein called \"Conversion\" and is intended to compensate the\nInvestors in the event Owner and\/or Harken Colombia is unable or unwilling to\ndevelop and\/or produce a commercial discovery on the Subject Interests that was\ndiscovered by a well drilled by Harken Colombia on the Subject Interests after\nthe date of this Agreement and that a prudent operator would develop and\/or\nproduce.\n\n Section 6.2. Notice of Abandonment. Not less than fifteen days\nprior to any release, surrender and\/or abandonment of the Subject Interests\nand\/or the Association Contract pursuant to Section 3.14 other than that\nrequired to be released, surrendered and\/or abandoned for Harken Colombia to\ncomply with the terms and conditions of the Association Contract, Owner shall\ndeliver to Investors a notice stating that Owner has determined to release,\nsurrender and\/or abandon the Subject Interests and\/or the Association Contract\nand whether or not the Investors' remaining interest in the Rio Negro NPI shall\nbe automatically converted into Preferred Shares effective the date of such\nrelease, surrender and\/or abandonment pursuant to this Article VI.\n\n Section 6.3. Number of Preferred Shares. The number of Preferred\nShares to be issued to each Investor upon Conversion pursuant to this Article\nVI shall be determined pursuant to the following formula:\n\n PS = (AV x CP) \/ PV\n\nwhere, for purposes of this Article VI:\n\n \"PS\" shall mean the number of Preferred Shares to be issued upon\n Conversion.\n\n \"AV\" shall mean the remainder of (a) the aggregate amount of the\n Advances previously made by such Investor pursuant to Article\n II minus (b) the aggregate amount of the payments received by\n such Investor pursuant to Section 3.7, together with an\n\n\n\n\n\n 21\n 22\n amount equal to interest on the positive balance of such\n remainder as it exists from time to time at the rate of\n fifteen percent (15%) per annum, compounded semi-annually.\n\n \"CP\" shall mean the remainder of one hundred percent (100%) minus\n the percentage (if any) of the original amount of the Rio\n Negro NPI that has been converted to Preferred Shares pursuant\n to Articles IV and V.\n\n \"PV\" shall mean $1,000, the liquidation value of each Preferred\n Share.\n\n \"Conversion Date\" shall mean, with respect to any Conversion pursuant\n to this Article VI, the date stated on the notice delivered to\n Investors pursuant to Section 6.2 as the date the Subject\n Interests and\/or the Association Contract will be abandoned.\n\nThe number of Preferred Shares determined pursuant to such formula shall be\nrounded up or down to the next whole number, and no fractional Preferred Shares\nshall be issued.\n\n Section 6.4. Issuance of Preferred Shares. The closing and\nconsummation of any Conversion pursuant to this Article VI shall occur not\nlater than five Business Days following the Conversion Date. At such closing,\nOwner shall issue or cause to be issued to each Investor the number of\nPreferred Shares required for such Conversion pursuant to Section 6.3.\n\n Section 6.5. Elimination of Designated Percentage. As of the\nConversion Date, the Designated Percentage for each Investor will be reduced to\nzero, and the Rio Negro NPI shall terminated and no payments shall be made to\nInvestors with respect to the Rio Negro NPI pursuant to Section 3.7 or\notherwise.\n\n\n ARTICLE VII\n\n Owner Representations, Warranties and Agreements\n\n Owner hereby represents and warrants to, and covenants and agrees\nwith, Investors as follows:\n\n Section 7.1. Organization and Corporate Authority. Each of Owner and\nHarken Colombia is a corporation duly incorporated, validly existing and in\ngood standing under the laws of the jurisdiction of its incorporation, with\ncorporate power and authority to carry on its business as now conducted and to\nown, lease and operate all properties and assets now owned, leased or operated\nby it.\n\n Section 7.2. Qualification to do Business. Each of Owner and Harken\nColombia is duly qualified to do business as a foreign corporation and in good\nstanding in each jurisdiction in which\n\n\n\n\n\n 22\n 23\nits ownership of property or the conduct of its business requires such\nqualification, except jurisdictions in which the failure so to qualify would\nnot have a material adverse effect on Owner's or Harken Colombia's business,\nproperties, financial condition or results of operations.\n\n Section 7.3. Charter, Bylaws, Etc.. Owner has caused to be delivered\nto Investors true, correct and complete copies of the charter and bylaws of\nOwner and Harken Colombia as now in effect and the minutes of all meetings of\nOwner's and Harken Colombia's Board of Directors (and all consents in lieu of\nsuch meetings) at which action was taken concerning the execution and delivery\nof this Agreement or the authorization, execution, delivery and performance of\nthe Association Contract.\n\n Section 7.4. Capitalization. The authorized capital stock of\nOwner consists of 100,000,000 shares of common stock, par value $.01 per share\n(\"Common Stock\"), of which 65,759,681 are issued and outstanding, and\n10,000,000 shares of preferred stock, par value $1.00 per share, of which there\nare 186,760 shares of Series C Cumulative Convertible Preferred Stock issued\nand outstanding. Owner has 30,067,823 shares of Common Stock reserved for\nissuance upon exercise of stock options, warrants and other rights to acquire\nshares of Common Stock and holds 5,983, 655 shares of Common Stock as treasury\nshares. All of the outstanding shares of capital stock of Owner are duly\nauthorized, validly issued, fully paid, nonassessable and free of preemptive\nrights, with no personal liability attaching to the ownership thereof. Except\nfor the foregoing, there are no outstanding subscriptions, options, warrants,\nrights, convertible securities or other agreements or commitments of any\ncharacter obligating Owner to purchase, redeem, issue, transfer or deliver any\nshares of preferred stock.\n\n Section 7.5. Finders' Fees. Except for EnCap Investments L.C., no\nbroker or finder has acted on behalf of Owner in connection with this Agreement\nor the transactions contemplated herein. Any and all fees of EnCap Investments\nL.C. in connection with this Agreement and the transactions contemplated herein\nwill be paid by Owner.\n\n Section 7.6. Authority of Owner. Owner has the corporate power to\nenter into, and be bound by the terms and conditions of, this Agreement and to\ncarry out its obligations hereunder, and the execution and delivery by Owner of\nthis Agreement and the performance by Owner of its obligations hereunder have\nbeen duly authorized by all necessary corporate action of Owner. This\nAgreement has been duly executed and delivered by Owner and constitutes, and\neach other agreement or document executed or to be executed by Owner in\nconnection with the transactions contemplated hereby has been, or when\nexecuted, will be, duly executed and delivered by Owner and constitutes, or\nwhen executed and delivered will constitute, a valid and legally binding\nobligation of Owner enforceable against Owner in accordance with their\nrespective terms, except to the extent enforcement may be limited (a) by\napplicable bankruptcy, insolvency, moratorium, reorganization or similar laws\nfrom time to time in effect which affect creditors' rights generally, and (b)\nby legal and equitable limitations on the availability of equitable remedies,\nincluding without limitation specific performance against Owner under or by\nvirtue of this Agreement.\n\n\n\n\n\n 23\n 24\n Section 7.7. Non-Contravention. The execution, delivery and\nperformance of this Agreement and the issuance of the Preferred Shares by Owner\nin accordance with this Agreement will not, (a) conflict with or result in a\nviolation of any provision of Owner's charter or bylaws, (b) conflict with or\nresult in a violation of any provision of, or constitute (with or without the\ngiving of notice or the passage of time or both) a default under, or give rise\n(with or without the giving of notice or the passage of time or both) to any\nright of termination, cancellation, or acceleration under, any bond, debenture,\nnote, mortgage, indenture, lease, agreement or other instrument or obligation\nto which Owner or Harken Colombia is a party or by which either of them or any\nof their properties or assets may be bound, (c) result in the creation or\nimposition of any lien or incumbrance upon the properties or assets of Owner or\nHarken Colombia, or (d) result in a violation by Owner or Harken Colombia of\nany Law or any judgment, order, decree, rule or regulation of any Governmental\nAuthority to which Owner or Harken Colombia is subject. Owner represents,\nwarrants and covenants that it will not, and it will cause its subsidiaries not\nto, during the Commitment Period, enter into any bond, debenture, note,\nmortgage, indenture, lease, agreement or other instrument or obligation which\nwould contractually restrict or otherwise prohibit Owner from complying with\nits obligations under this Agreement to issue Preferred Shares, to pay cash to\nthe Investors pursuant to Section 5.6 or with respect to similar matters or\nwhich would contractually restrict or otherwise prohibit Conversion under this\nAgreement.\n\n Section 7.8. Governmental Consents. Except for those that have been\nduly obtained and except for routine filings and orders that may be required\nunder Regulation D promulgated under the Securities Act or under any applicable\nstate securities or Blue Sky laws in connection with future issuance of\nPreferred Shares upon Conversion, no consent, order, approval or authorization\nof, or declaration, filing, or registration with, any Governmental Authority is\nrequired to be obtained or made by Owner in connection with the execution,\ndelivery or performance by Owner of this Agreement.\n\n Section 7.9. Reports and Financial Statements of Owner. Owner has\nfiled all registration statements, proxy statements, reports and other\ndocuments required to be filed by it under the Securities Act or the Exchange\nAct, and all amendments thereto. Owner has heretofore delivered to Investors\ntrue and complete copies of all reports, registration statements and other\nfilings made by Owner with the Securities and Exchange Commission during the\nprior fifteen (15) months (herein collectively called \"Owner's SEC Filings\").\nAs of their respective dates, Owner's SEC Filings did not contain any untrue\nstatement of a material fact or omit to state a material fact required to be\nstated therein or necessary to make the statements therein, in light of the\ncircumstances under which they were made, not misleading. Owner does not have\nany debts, liabilities, or obligations, whether accrued, contingent, unasserted\nor otherwise, and whether due or to become due, which are not reflected in the\nfinancial statements contained in Owner's SEC Filings and would be required to\nbe so reflected under GAAP, except those incurred in the ordinary course of\nbusiness since the date of the most recent audited financial statements\ncontained in Owner's SEC Filings. Since such date and except as otherwise\ndisclosed in Owner's SEC Filings, Owner has conducted its business in the\nordinary course consistent with past practice and there has not been any\nmaterial adverse change in the business, assets, liabilities, results of\n\n\n\n\n\n 24\n 25\noperations, financial condition or prospects of Owner or in its relationship\nwith lenders, suppliers, customers, employees or others, whether such changes\nhave incurred in the ordinary course of business or otherwise.\n\n Section 7.10. Disclosure. Owner has fully provided Investors with\nall the information that Investors have requested in writing in connection with\nthe transactions provided for in this Agreement. All such written information\nhas been prepared in good faith by Owner and does not contain any untrue\nstatement of a material fact or, considered in its entirety along with Owner's\nSEC Filings, omit to state therein a material fact necessary to make the\nstatements made therein not misleading. Owner does not know of any facts\n(other than those facts generally recognized to be industry risks normally\nassociated with the oil and gas business) related to its properties, business,\nfinancial condition or results of operations which have not been disclosed\norally or in writing to Investors and which presently or will materially and\nadversely affect such properties, business, financial condition or results of\noperations or the ability of Owner to perform its obligations under this\nAgreement.\n\n Section 7.11. Certificate of Designations. The Certificate of\nDesignations has been duly adopted by the Board of Directors of Owner in\naccordance with Section 151 of the Delaware General Corporation Law, has been\nduly filed with the Secretary of State of Delaware so as to constitute a valid\namendment to the Certificate of Incorporation of Owner and is in full force and\neffect, and no action of Owner's stockholders was necessary in respect to the\nadoption of the Certificate of Designations. Owner shall not amend,\nsupplement, terminate or otherwise modify the Certificate of Designations\nduring or within two years after the Commitment Period or, if any Preferred\nShares are issued pursuant to this Agreement, thereafter, except in accordance\nwith such Certificate of Designations and applicable Delaware law.\n\n Section 7.12. Owner's Preferred Shares. The Preferred Shares that\nmay be issued to Investors upon Conversion have been duly authorized for such\nissuance pursuant to this Agreement and, when issued and delivered by Owner\nupon Conversion, will be validly issued, fully paid and non-assessable. The\nissuance of Preferred Shares under this Agreement is not subject to any\npreemptive rights. Owner shall at all times reserve and keep available, out of\nits authorized and unissued stock, solely for the purpose of Articles IV, V and\nVI, such number of Preferred Shares as shall from time to time be sufficient\nfor Owner to comply with its obligations under Articles IV, V and VI upon any\nConversion.\n\n Section 7.13. Association Contract. English translations of the\nAssociation Contract in force as of the date hereof have been furnished by\nOwner to Investors. Each of such translations is a fair and reasonable\ntranslation of the original document constituting part of the Association\nContract. The Association Contract and any related agreements are in full\nforce and effect as of the date hereof. Harken Colombia has complied in all\nrespects with its obligations under or relating to the Association Contract and\nany related agreements, and no claim or penalty presently exists with respect\nto the Association Contract and any related agreements between Harken Colombia\nand Ecopetrol or any other governmental entity, agency or authority and, to the\n\n\n\n\n\n 25\n 26\nknowledge of Owner, no other party to the Association Contract is presently in\ndefault thereunder. Owner and Harken Colombia have obtained all consents\nrequired on or prior to the date hereof which may be necessary for the\nperformance of the Association Contract and any related agreements. Owner\nwarrants ownership and title to the Association Contract against all persons\nfree and clear of all liens, claims or other encumbrances. Without the prior\nwritten consent of Investors, Owner shall not, and shall not permit Harken\nColombia to, amend, alter or supplement the Association Contract in any manner\nwhich would adversely affect Investors' interest in the Subject Interest or\nInvestors' rights under this Agreement if such amendment, alternation or\nsupplement would benefit Owner or Harken Colombia to the detriment of\nInvestors.\n\n Section 7.14. Ownership of Harken Colombia. All of the issued and\noutstanding shares of capital stock of Harken Colombia have been duly and\nvalidly issued, are fully paid and nonassessable and are owned by Owner, free\nand clear of all liens, encumbrances, equities or claims, and no options,\nwarrants or other rights to purchase, agreements or other obligations to issue\nor other rights to convert any obligations into shares of capital stock or\nownership interests in Harken Colombia are outstanding.\n\n Section 7.15. Absence of Bankruptcy Proceedings. There are no\nbankruptcy, reorganization or arrangement proceedings pending against, being\ncontemplated by, or to the knowledge of Owner, threatened against, Owner.\n\n Section 7.16. Offering. Subject to the accuracy of Investors'\nrepresentations in Sections 8.6 and 8.8, the offer, sale and issuance of the\nPreferred Shares as contemplated by this Agreement is and will be exempt from\nthe registration requirements of the Securities Act and the securities laws of\nany state having jurisdiction with respect to the transactions contemplated by\nthis Agreement, and neither Owner nor anyone acting on its behalf has taken or\nwill take any action that would cause the loss of such exemption.\n\n Section 7.17. No Defaults. Neither Owner nor Harken Colombia is (a)\nin violation of any provision of its charter or bylaws, (b) in breach,\nviolation or default, in any material respect, of or under any material\ncontract, lease, commitment or instrument to which it is a party or by which it\nis bound or to which any of its properties or assets are subject, and no event\nhas occurred which (whether with or without notice, lapse of time or the\nhappening or occurrence of any other event) would constitute such a breach,\nviolation or default or (c) in material violation of any Law.\n\n Section 7.18. Litigation. There is no action, suit, proceeding or\ninvestigation pending or, to the knowledge of Owner, threatened against or\naffecting Owner or Harken Colombia or any properties or rights of any of them\nby or before any Governmental Authority that (i) relates to or challenges the\nlegality of this Agreement, the Association Contract or the Preferred Shares,\n(ii) would reasonably be expected to have a material adverse effect upon the\nbusiness, properties, financial condition, results of operations or prospects\nof Owner or Harken Colombia (except as disclosed in Owner's SEC filings) or\n(iii) would reasonably be expected to impair the ability of\n\n\n\n\n\n 26\n 27\nOwner or Harken Colombia to perform fully on a timely basis any obligations\nthat it has under this Agreement, the Association Contract or any documents\nrelated hereto.\n\n Section 7.19. Compliance with Laws. Owner and Harken Colombia are in\ncompliance in all material respects with all laws and regulations in all\njurisdictions in which Owner or Harken Colombia is presently doing business and\nwhere the failure to effect such compliance would reasonably be expected to\nhave a material adverse effect upon the business, properties, financial\ncondition, results of operations or prospects of Owner or Harken Colombia.\n\n Section 7.20. Compliance with Environmental Laws. The business and\nproperties of Owner and Harken Colombia have been operated in compliance with\nall applicable federal, state or local laws, rules, regulations or orders\n(collectively, \"Environmental Laws\") relating to pollution or protection of the\nenvironment including, without limitation, any law, rule, regulation or order\nrelating to emissions, discharges, releases or threatened releases (\"Releases\")\nof chemicals, pollutants, contaminants, wastes, petroleum or petroleum\nproducts, toxic substances or hazardous substances (\"Pollutants\") for which\nnoncompliance would have a material adverse effect upon the business,\nproperties, financial condition or result of operations of Owner or Harken\nColombia. Except as disclosed in Owner's SEC Filings, neither Owner nor\nHarken Colombia has received any written communication, whether from a\nGovernmental Authority, citizens' group, landowner, employee or otherwise, nor,\nto the knowledge of Owner, has Owner or Harken Colombia received any oral\ncommunication from a Governmental Authority, alleging that (i) Owner or Harken\nColombia is not in compliance with any Environmental Law applicable to it and\nits business and properties, or (ii) any employee or third party has suffered\nbodily injury or property damage as a result of one or more Releases of\nPollutants arising out of or resulting from the operations of Owner, Harken\nColombia, or prior owners and operators of their business or property, which\nallegation, if true, would have a material adverse effect upon the business,\nproperties, financial condition or result of operations of Owner or Harken\nColombia. Except as disclosed in Owner's SEC Filings, neither Owner nor Harken\nColombia has any material obligation to remediate, repair or replace any\nproperty, whether real or personal, owned by Owner, Harken Colombia or any\nthird party, as a result of one or more Releases of Pollutants arising out of\nor resulting from the operations of Owner, Harken Colombia, or prior owners and\noperators of their business or properties.\n\n Section 7.21. Continuing Representations and Warranties. Except for\na change of law over which Owner has no control (and Owner shall immediately\nnotify Investors when Owner learns of such occurrence), the representations and\nwarranties of Owner made in Sections 7.1, 7.2, 7.3, 7.5, 7.6, 7.11, 7.12 and\n7.16, in the last sentences of Section 7.7 and 7.13 and in Section 7.14\n(provided that Owner shall have the right to pledge and\/or grant a security\ninterest in its shares of capital stock of Harken Colombia to the extend\npermitted in Section 3.18) shall remain true and accurate during and for two\nyears after the Commitment Period, and Owner shall not take any action nor\npermit any action to be taken which would cause any of such representations and\nwarranties to become untrue, inaccurate or breached. Owner acknowledges and\nagrees that Investors may rely on this Section in connection with any election\nof Investors' Option or Investors'\n\n\n\n\n\n 27\n 28\nSecond Option and agrees to take all action in connection therewith required to\ncause Investors' representations and warranties contained in Section 8.7 to be\ntrue and correct at the time of any such election.\n\n\n ARTICLE VIII\n\n Investors Representations, Warranties and Agreements\n\n Each Investor hereby severally represents and warrants to, and\ncovenants and agrees with, Owner as follows:\n\n Section 8.1. Organization and Corporate Authority. Each Investor is\na limited partnership duly organized, validly existing and in good standing\nunder the laws of the state of its organization, with requisite power and\nauthority to carry on its business as now conducted and to own, lease and\noperate all properties and assets now owned, leased or operated by it.\n\n Section 8.2. Finders' Fees. No broker or finder has acted on behalf\nof Investors in connection with this Agreement or the transactions contemplated\nherein.\n\n Section 8.3. Authority of Investor. Each Investor is authorized to\nenter into, and be bound by the terms and conditions of, this Agreement and to\ncarry out its obligations hereunder, and the execution and delivery by such\nInvestor of this Agreement and the performance by such Investor of its\nobligations hereunder have been duly authorized by all requisite partnership\naction of such Investor. This Agreement has been duly executed and delivered\nby each Investor and constitutes, and each other agreement or document executed\nor to be executed by such Investor in connection with the transactions\ncontemplated hereby has been, or when executed, will be, duly executed and\ndelivered by such Investor and constitutes, or when executed and delivered will\nconstitute, a valid and legally binding obligation of such Investor enforceable\nagainst such Investor in accordance with their respective terms, except to the\nextent enforcement may be limited (a) by applicable bankruptcy, insolvency,\nmoratorium, reorganization or similar laws from time to time in effect which\naffect creditors' rights generally, and (b) by legal and equitable limitations\non the availability of equitable remedies, including without limitations\nspecific performance against Investors under or by virtue of this Agreement.\n\n Section 8.4. Non-Contravention. The execution, delivery and\nperformance of this Agreement by each Investor will not, (a) conflict with or\nresult in a violation of any provision of such Investor's partnership\nagreement, (b) conflict with or result in a violation of any provision of, or\nconstitute (with or without the giving of notice or the passage of time or\nboth) a default under, or give rise (with or without the giving of notice or\nthe passage of time or both) to any right of termination, cancellation, or\nacceleration under, any bond, debenture, note, mortgage, indenture, lease,\nagreement or other instrument or obligation to which such Investor is a party\nor by which it or any of its properties or assets may be bound, (c) result in\nthe creation or imposition\n\n\n\n\n\n 28\n 29\nof any lien or incumbrance upon the properties or assets of such Investor, or\n(d) result in a violation by such Investor of any Law or any judgment, order,\ndecree, rule or regulation of any Governmental Authority to which Investors are\nsubject.\n\n Section 8.5. Governmental Consents. Except for those that have been\nduly obtained, no consent, order, approval or authorization of, or declaration,\nfiling, or registration with, any Governmental Authority is required to be\nobtained or made by Investors in connection with the execution, delivery or\nperformance by Investors of this Agreement.\n\n Section 8.6. Investment Intent. Upon Conversion, each Investor will\nacquire the Preferred Shares for its own account for investment and not with a\nview to, or for sale or other disposition in connection with, any distribution\nof all or any part of the Preferred Shares, except (a) in an offering covered\nby a registration statement filed with the Securities and Exchange Commission\nunder the Securities Act covering the Preferred Shares, or (b) pursuant to an\napplicable exemption under the Securities Act. In any acquisition of Preferred\nShares upon Conversion, Investors will not offer or sell for Owner in\nconnection with any distribution of such shares, and Investors do not have a\nparticipation and will not participate in any such undertaking or in any\nunderwriting of such an undertaking.\n\n Section 8.7. Disclosure of Information. Each Investor represents\nthat it has had an opportunity to ask questions of and receive answers from\nOwner regarding the Preferred Shares, Owner and Harken Colombia, their\nrespective businesses, properties, financial conditions, operations and plans\nof business, and the Subject Interests and all matters relating thereto.\n\n Section 8.8. Accredited Investors and Experience. Each Investor\nacknowledges that it is an Accredited Investor, within the meaning of\nRegulation D of the Securities Act, can bear the economic risk of its\ninvestment and has such knowledge and experience in financial and business\nmatters, that it is capable of evaluating the merits and risks of the\ninvestment in the Rio Negro NPI and any investment in Preferred Shares. Each\nInvestor represents that it has not been organized for the purpose of acquiring\nthe Rio Negro NPI or any Preferred Shares.\n\n Section 8.9. Restricted Securities. Each Investor understands that\nany Preferred Shares that are issued upon Conversion pursuant to this Agreement\nwill not have been registered pursuant to the Securities Act, any other federal\nsecurities law or any applicable state securities or Blue Sky law, that such\nshares will be characterized as \"restricted securities\" under the United States\nsecurities laws and that under such laws and applicable regulations such shares\ncannot be sold or otherwise disposed of without registration under the\nSecurities Act or an exemption therefrom.\n\n Section 8.10. Legends. Each Investor understands and agrees that the\ncertificates representing any Preferred Shares issued pursuant to this\nAgreement shall each conspicuously set forth on the face or back thereof a\nlegend in substantially the following form:\n\n\n\n\n\n 29\n 30\n \"THE SHARES REPRESENTED BY THIS CERTIFICATE HAVE NOT BEEN\n REGISTERED UNDER THE SECURITIES ACT OF 1933, AS AMENDED, AND\n MAY NOT BE SOLD OR OTHERWISE TRANSFERRED UNLESS SUCH SHARES\n ARE FIRST REGISTERED UNDER SUCH ACT OR UNLESS AN EXEMPTION\n FROM SUCH REGISTRATION IS AVAILABLE.\"\n\n Section 8.11. Continuing Representations and Warranties. Except for\na change of law over which Investors have no control (and Investors shall\nimmediately notify Owner when any Investor learns of such occurrence), the\nrepresentations and warranties of Investors made in this Article VIII shall\nremain true and accurate during the Commitment Period (provided, with respect\nto those in Section 8.7, Owner meets its obligations under Section 7.21), and\nInvestors shall not take any action nor permit any action to be taken which\nwould cause any of such representations and warranties to become untrue,\ninaccurate or breached. Each Investor acknowledges and agrees that Owner may\nrely on this Section in connection with any issuance of Preferred Shares as a\nconsequence of any Conversion.\n\n\n ARTICLE IX\n\n Conditions\n\n Section 9.1. Investors' Conditions. Owner shall deliver the\nfollowing to Investors on the Effective Date:\n\n (a) Counterparts of this Agreement duly executed by Owner;\n\n (b) A certificate of the Secretary or the Assistant\n Secretary of the Owner certifying, among other things, as to the due\n authorization of the transactions contemplated hereby;\n\n (c) The legal opinion of Thompson & Knight, P.C., counsel\n to Owner, substantially in the form attached hereto as Exhibit C;\n\n (d) The legal opinion of Milbank, Tweed, Hadley & McCloy,\n special California counsel to Owner, substantially in the form\n attached hereto as Exhibit D;\n\n (e) The legal opinion of Baker & McKenzie, special\n Colombian counsel to Owner, substantially in the form attached hereto\n as Exhibit E;\n\n (f) A copy of the Certificate of Incorporation, as\n amended to the date hereof, of Owner, certified by the Secretary of\n Owner.\n\n\n\n\n\n 30\n 31\n (g) Certificates of existence and good standing for Owner\n in the jurisdiction of its incorporation and listing all charter\n documents of Owner on file;\n\n (h) A copy of any required written consent and waiver to\n the transactions contemplated hereby executed by the third party or\n appropriate Governmental Authority; and\n\n (i) Evidence satisfactory to Investors of the filing of\n the Certificate of Designations with the Secretary of State of the\n State of Delaware.\n\n Section 9.2. Conditions of Owner. The obligations of Owner under\nthis Agreement are subject to the delivery herewith of counterparts of this\nAgreement duly executed by Investors.\n\n Section 9.3. Taking of Necessary Action. Subject to the terms and\nconditions of this Agreement and to applicable Law, each of the parties to this\nAgreement shall use all reasonable efforts promptly to take or cause to be\ntaken all action and promptly to do or cause to be done all things necessary,\nproper or advisable under applicable Laws to consummate and make effective the\ntransactions contemplated by this Agreement.\n\n Section 9.4. Issuance of Preferred Shares. If, at the time for\nany Conversion, a \"Conversion Condition\" has not occurred, each Investor shall\nhave the option to either (a) receive cash in lieu of Preferred Shares in an\namount equal to $1,000 times the number of Preferred Shares that otherwise\nwould have been issued to such Investor upon such Conversion pursuant to this\nAgreement, or (b) receive the Preferred Shares to be issued to such Investor\nupon such Conversion and receive dividends on such Preferred Shares at the rate\nof 17.5% per annum (rather than 15% per annum) as provided for in the\nCertificate of Designations. As used in this Section, a \"Conversion Condition\"\nshall mean either (i) the holders of all of the shares of Series C Cumulative\nConvertible Preferred Stock of Owner shall have duly consented to such shares\nbeing on a parity with the Preferred Shares as contemplated in the Certificate\nof Designations, which consent shall be satisfactory in form and substance to\nInvestors, or (ii) Owner shall have fully redeemed all of the outstanding\nshares of Series C Cumulative Convertible Preferred Stock of Owner or converted\nsuch shares into shares of common stock of Owner and none of such shares shall\nthen be outstanding.\n\n\n ARTICLE X\n\n Miscellaneous\n\n Section 10.1. Indemnification. Owner shall indemnify and hold\nharmless Investors, and Investors shall indemnify and hold harmless Owner, from\nand against any and all claims, losses, damages and liabilities (and actions in\nrespect thereof) and any and all costs and expenses (including reasonable\nattorneys' fees and expenses) that such person may sustain or incur as a\n\n\n\n\n\n 31\n 32\nresult of any misrepresentation or breach of warranty or the nonperformance of\nany obligation on the part of the other under this Agreement.\n\n Section 10.2. Public Announcements. Except as set forth in the\nfollowing sentence, the parties to this Agreement agree that prior to making\nany public announcement or statement with respect to the transactions\ncontemplated by this Agreement, the party desiring to make such public\nannouncement or statement shall consult with the other party and exercise\nreasonable efforts to (i) agree upon the text of a joint public announcement or\nstatement to be made by both of such parties or (ii) obtain approval of the\nother party to the text of a public announcement or statement to be made solely\nby Owner or Investors, as the case may be. Nothing contained in this Section\n10.2 shall be construed to require either party to obtain approval of the other\nparty to disclose information with respect to any disclosure (i) required by\napplicable law or by any applicable rules, regulations or orders of any\nGovernmental Authority having jurisdiction or (ii) necessary to comply with\ndisclosure requirements of any applicable stock exchange.\n\n Section 10.3. Brokers. Without limiting the parties' respective\nrepresentations in Sections 7.5 and 8.2, each party agrees to indemnify and\nhold the other harmless from and against any claim for a brokerage or finder's\nfee or commission in connection with this Agreement or the transactions\ncontemplated by this Agreement to the extent such claim arises from or is\nattributable to the actions of such indemnifying party.\n\n Section 10.4. Notices. Any notice or other communication required or\npermitted hereunder shall be in writing and shall be delivered by (a) personal\ndelivery, (b) expedited delivery service, (c) certified or registered mail,\npostage prepaid, or (d) telex, facsimile or similar method of electronic\ncommunications. Any such notice shall be deemed given upon its receipt at the\nfollowing address:\n\n (i) if to Owner, at:\n\n Harken Energy Corporation\n MacArthur Center II\n 5605 N. MacArthur Blvd., Suite 400\n Irving, Texas 75038\n Attention: Mr. Mikel D. Faulkner, Chairman\n\n with a copy to:\n\n Harken Energy Corporation\n MacArthur Center II\n 5605 N. MacArthur Blvd., Suite 400\n Irving, Texas 75038\n Attention: Mr. Larry E. Cummings\n Vice President and General Counsel\n\n\n\n\n\n 32\n 33\n (ii) if to Investors, at:\n\n 1800 Avenue of the Stars\n No. 1425\n Los Angeles, California 90067\n Attention: Alvin J. Portnoy\n\n with a copy to:\n\n 1800 Avenue of the Stars\n No. 1425\n Los Angeles, California 90067\n Attention: Robert V. Sinnott\n\n\n Section 10.5. Waivers and Amendments. This Agreement may be amended\nor supplemented only by a written instrument signed by the parties hereto. The\nterms of this Agreement may be waived only by a written instrument signed by\nthe party waiving compliance. No delay on the part of either party in\nexercising any right, power or privilege hereunder shall operate as a waiver\nthereof, nor shall any waiver on the part of any party of any such right, power\nor privilege, or any single or partial exercise of any such right, power or\nprivilege, preclude any further exercise thereof or the exercise of any other\nsuch right, power or privilege. The rights and remedies herein provided are\ncumulative and are not exclusive of any rights or remedies that any party may\notherwise have at law or in equity.\n\n Section 10.6. Governing Law. This Agreement shall be governed by,\nand construed and enforced in accordance with, the laws of the State of\nCalifornia, without regard to the principles of conflicts of laws.\n\n Section 10.7. Binding Effect; No Assignment; No Third Party Benefit.\nThis Agreement shall be binding upon and inure to the benefit to the parties\nand their respective successors and permitted assigns. Unless otherwise\nexpressly provided herein, no rights or obligations under this Agreement are\nassignable. Nothing in this Agreement, whether expressed or implied, is\nintended to confer any rights or remedies under or by reason of this Agreement\non any person other than the parties to this Agreement and their respective\nsuccessors and permitted assigns.\n\n Section 10.8. Entire Agreement. This Agreement constitutes the full\nand complete agreement of the parties hereto with respect to the subject matter\nhereof, and supersedes all previous oral and written and all contemporaneous\noral negotiations, commitments, writings and understandings.\n\n Section 10.9. Severability. Every provision of this Agreement is\nintended to be severable. If any term or provision hereof is determined to be\ninvalid, illegal, or unenforceable for any\n\n\n\n\n\n 33\n 34\nreason whatsoever, such invalidity, illegality, or unenforceability shall not\naffect the validity, legality and enforceability of the remainder of this\nAgreement.\n\n Section 10.10. United States Dollars. All references in this\nAgreement to dollar amounts are to United States dollars.\n\n Section 10.11. Survival of Representations and Warranties. The\nrepresentations and warranties of the parties made herein shall survive the\nexecution and delivery of this Agreement.\n\n Section 10.12. Counterparts. This Agreement may be executed in one\nor more Counterparts (and separately by each party hereto), each of which shall\nbe an original and all of which shall constitute but one and the same document.\n\n\n IN WITNESS WHEREOF, the parties have caused this Agreement to be\nexecuted by the respective officers hereunto duly authorized as of the date\nfirst above written.\n\n HARKEN ENERGY CORPORATION\n \n \n By: \/s\/ Larry E. Cummings\n -----------------------------------\n Larry E. Cummings,\n Vice President\n \n \n ARBCO ASSOCIATES L.P.\n \n By: KAIM Non-Traditional, L.P.\n Its Co-General Partner\n \n By: \/s\/ Alvin J. Portnoy\n -----------------------------------\n Alvin J. Portnoy,\n Executive V.P. of Corp. General Partner\n \n \n OFFENSE GROUP ASSOCIATES, L.P.\n \n By: KAIM Non-Traditional, L.P.\n Its sole General Partner\n \n By: \/s\/ Alvin J. Portnoy\n -----------------------------------\n Alvin J. Portnoy,\n Executive V.P. of Corp. General Partner\n \n \n\n\n\n\n 34\n 35\n KAYNE, ANDERSON NON-TRADITIONAL\n INVESTMENTS L.P.\n \n By: KAIM Non-Traditional, L.P.\n Its sole General Partner\n \n By: \/s\/ Alvin J. Portnoy\n -----------------------------------\n Alvin J. Portnoy,\n Executive V.P. of Corp. General Partner\n \n \n \n OPPORTUNITY ASSOCIATES L.P.\n \n By: KAIM Non-Traditional, L.P.\n Its sole General Partner\n \n By: \/s\/ Alvin J. Portnoy\n -----------------------------------\n Alvin J. Portnoy,\n Executive V.P. of Corp. General Partner\n \n \n \n\n\n 35\n 36\n EXHIBITS\n\n\n Annex 1 - Designated Percentage and Advances\n\n Exhibit A - Certificate of Designations\n\n Exhibit B - Description of Rio Negro Prospect\n\n Exhibit C - Opinion of Thompson & Knight, P.C.\n\n Exhibit D - Opinion of Milbank, Tweed, Hadley & McCloy\n\n Exhibit E - Opinion of Baker & McKenzie\n\n\n\n\n\n 36\n 37\n ANNEX 1\n\n<\/pre>\n
\n\n Designated Advance
\nInvestor Percentage Commitment
\n– ——– ———- ————-
\n
\nArbco Associates L.P. 12.57144% $1,100,000.00<\/p>\nOffense Group Associates L.P. 12.57144% 1,100,000.00<\/p>\n
Kayne, Anderson Nontraditional
\n Investments L.P. 12.57144% 1,100,000.00<\/p>\n
Opportunity Associates L.P. 2.28568% 200,000.00
\n ——– ————-
\n Totals 40.0000% $3,500,000.00
\n ======== =============
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